G.R. No.

94209 April 30, 1991

FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING CORPORATION), petitioner,
vs.
THE COURT OF APPEALS, and BERNARDO E. VILLALUZ, respondents.
Pelaez, Adriano & Gregorio for petitioner.
Ezequiel S. Consulta for private respondent.

GUTIERREZ, JR., J .:p
This is a petition for review seeking the reversal of the decision of the Court of Appeals dated June 29, 1990 which
affirmed the decision of the Regional Trial Court of Rizal dated October 20, 1986 ordering the defendants Christiansen
and the petitioner, to pay various sums to respondent Villaluz, jointly and severally.
The facts of the case are as follows:
On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant Axel Christiansen 2,000 cubic meters of lauan
logs at $27.00 per cubic meter FOB.
After inspecting the logs, Christiansen issued purchase order No. 76171.
On the arrangements made and upon the instructions of the consignee, Hanmi Trade Development, Ltd., de Santa Ana,
California, the Security Pacific National Bank of Los Angeles, California issued Irrevocable Letter of Credit No. IC-46268
available at sight in favor of Villaluz for the sum of $54,000.00, the total purchase price of the lauan logs.
The letter of credit was mailed to the Feati Bank and Trust Company (now Citytrust) with the instruction to the latter that it
"forward the enclosed letter of credit to the beneficiary." (Records, Vol. I, p. 11)
The letter of credit further provided that the draft to be drawn is on Security Pacific National Bank and that it be
accompanied by the following documents:
1. Signed Commercial Invoice in four copies showing the number of the purchase order and certifying that

a. All terms and conditions of the purchase order have been complied with and that all
logs are fresh cut and quality equal to or better than that described in H.A. Christiansen's
telex #201 of May 1, 1970, and that all logs have been marked "BEV-EX."
b. One complete set of documents, including 1/3 original bills of lading was airmailed to
Consignee and Parties to be advised by Hans-Axel Christiansen, Ship and Merchandise
Broker.
c. One set of non-negotiable documents was airmailed to Han Mi Trade Development
Company and one set to Consignee and Parties to be advised by Hans-Axel
Christiansen, Ship and Merchandise Broker.
2. Tally sheets in quadruplicate.
3. 2/3 Original Clean on Board Ocean Bills of Lading with Consignee and Parties to be advised by Hans
Axel Christiansen, showing Freight Prepaid and marked Notify:
Han Mi Trade Development Company, Ltd., Santa Ana, California.
Letter of Credit No. 46268 dated June 7, 1971
Han Mi Trade Development Company, Ltd., P.O. Box 10480, Santa Ana, California 92711 and Han Mi
Trade Development Company, Ltd., Seoul, Korea.
4. Certification from Han-Axel Christiansen, Ship and Merchandise Broker, stating that logs have been
approved prior to shipment in accordance with terms and conditions of corresponding purchase Order.
(Record, Vol. 1 pp. 11-12)
Also incorporated by reference in the letter of credit is the Uniform Customs and Practice for Documentary Credits (1962
Revision).
The logs were thereafter loaded on the vessel "Zenlin Glory" which was chartered by Christiansen. Before its loading, the
logs were inspected by custom inspectors Nelo Laurente, Alejandro Cabiao, Estanislao Edera from the Bureau of
Customs (Records, Vol. I, p. 124) and representatives Rogelio Cantuba and Jesus Tadena of the Bureau of Forestry
(Records, Vol. I, pp. 16-17) all of whom certified to the good condition and exportability of the logs.
After the loading of the logs was completed, the Chief Mate, Shao Shu Wang issued a mate receipt of the cargo which
stated the same are in good condition (Records, Vol. I, p. 363). However, Christiansen refused to issue the certification as
required in paragraph 4 of the letter of credit, despite several requests made by the private respondent.
Because of the absence of the certification by Christiansen, the Feati Bank and Trust Company refused to advance the
payment on the letter of credit.
The letter of credit lapsed on June 30, 1971, (extended, however up to July 31, 1971) without the private respondent
receiving any certification from Christiansen.
The persistent refusal of Christiansen to issue the certification prompted the private respondent to bring the matter before
the Central Bank. In a memorandum dated August 16, 1971, the Central Bank ruled that:
. . . pursuant to the Monetary Board Resolution No. 1230 dated August 3, 1971, in all log exports, the
certification of the lumber inspectors of the Bureau of Forestry . . . shall be considered final for purposes
of negotiating documents. Any provision in any letter of credit covering log exports requiring certification
of buyer's agent or representative that said logs have been approved for shipment as a condition
precedent to negotiation of shipping documents shall not be allowed. (Records, Vol. I, p. 367)
Meanwhile, the logs arrived at Inchon, Korea and were received by the consignee, Hanmi Trade Development Company,
to whom Christiansen sold the logs for the amount of $37.50 per cubic meter, for a net profit of $10 per cubic meter.
Hanmi Trade Development Company, on the other hand sold the logs to Taisung Lumber Company at Inchon, Korea.
(Rollo, p. 39)
Since the demands by the private respondent for Christiansen to execute the certification proved futile, Villaluz, on
September 1, 1971, instituted an action for mandamus and specific performance against Christiansen and the Feati Bank
and Trust Company (now Citytrust) before the then Court of First Instance of Rizal. The petitioner was impleaded as
defendant before the lower court only to afford complete relief should the court a quo order Christiansen to execute the
required certification.
The complaint prayed for the following:
1. Christiansen be ordered to issue the certification required of him under the Letter of Credit;
2. Upon issuance of such certification, or, if the court should find it unnecessary, FEATI BANK be ordered
to accept negotiation of the Letter of Credit and make payment thereon to Villaluz;
3. Order Christiansen to pay damages to the plaintiff. (Rollo, p. 39)
On or about 1979, while the case was still pending trial, Christiansen left the Philippines without informing the Court and
his counsel. Hence, Villaluz, filed an amended complaint to make the petitioner solidarily liable with Christiansen.
The trial court, in its order dated August 29, 1979, admitted the amended complaint.
After trial, the lower court found:
The liability of the defendant CHRISTIANSEN is beyond dispute, and the plaintiffs right to demand
payment is absolute. Defendant CHRISTIANSEN having accepted delivery of the logs by having them
loaded in his chartered vessel the "Zenlin Glory" and shipping them to the consignee, his buyer Han Mi
Trade in Inchon, South Korea (Art. 1585, Civil Code), his obligation to pay the purchase order had clearly
arisen and the plaintiff may sue and recover the price of the goods (Art. 1595, Id).
The Court believes that the defendant CHRISTIANSEN acted in bad faith and deceit and with intent to
defraud the plaintiff, reflected in and aggravated by, not only his refusal to issue the certification that
would have enabled without question the plaintiff to negotiate the letter of credit, but his accusing the
plaintiff in his answer of fraud, intimidation, violence and deceit. These accusations said defendant did not
attempt to prove, as in fact he left the country without even notifying his own lawyer. It was to the Court's
mind a pure swindle.
The defendant Feati Bank and Trust Company, on the other hand, must be held liable together with his
(sic) co-defendant for having, by its wrongful act, i.e., its refusal to negotiate the letter of credit in the
absence of CHRISTIANSEN's certification (in spite of the Central Bank's ruling that the requirement was
illegal), prevented payment to the plaintiff. The said letter of credit, as may be seen on its face,
is irrevocable and the issuing bank, the Security Pacific National Bank in Los Angeles, California,
undertook by its terms that the same shall be honored upon its presentment. On the other hand, the
notifying bank, the defendant Feati Bank and Trust Company, by accepting the instructions from the
issuing bank, itself assumed the very same undertaking as the issuing bank under the terms of the letter
of credit.
xxx xxx xxx
The Court likewise agrees with the plaintiff that the defendant BANK may also be held liable under the
principles and laws on both trust and estoppel. When the defendant BANK accepted its role as the
notifying and negotiating bank for and in behalf of the issuing bank, it in effect accepted a trust reposed
on it, and became a trustee in relation to plaintiff as the beneficiary of the letter of credit. As trustee, it was
then duty bound to protect the interests of the plaintiff under the terms of the letter of credit, and must be
held liable for damages and loss resulting to the plaintiff from its failure to perform that obligation.
Furthermore, when the defendant BANK assumed the role of a notifying and negotiating BANK it in effect
represented to the plaintiff that, if the plaintiff complied with the terms and conditions of the letter of credit
and presents the same to the BANK together with the documents mentioned therein the said BANK will
pay the plaintiff the amount of the letter of credit. The Court is convinced that it was upon the strength of
this letter of credit and this implied representation of the defendant BANK that the plaintiff delivered the
logs to defendant CHRISTIANSEN, considering that the issuing bank is a foreign bank with whom plaintiff
had no business connections and CHRISTIANSEN had not offered any other Security for the payment of
the logs. Defendant BANK cannot now be allowed to deny its commitment and liability under the letter of
credit:
A holder of a promissory note given because of gambling who indorses the same to an
innocent holder for value and who assures said party that the note has no legal defect, is
in estoppel from asserting that there had been an illegal consideration for the note, and
so, he has to pay its value. (Rodriguez v. Martinez, 5 Phil. 67).
The defendant BANK, in insisting upon the certification of defendant CHRISTIANSEN as a condition
precedent to negotiating the letter of credit, likewise in the Court's opinion acted in bad faith, not only
because of the clear declaration of the Central Bank that such a requirement was illegal, but because the
BANK, with all the legal counsel available to it must have known that the condition was void since it
depended on the sole will of the debtor, the defendant CHRISTIANSEN. (Art. 1182, Civil Code) (Rollo,
pp. 29-31)
On the basis of the foregoing the trial court on October 20, 1986, ruled in favor of the private respondent. The dispositive
portion of its decision reads:
WHEREFORE, judgment is hereby rendered for the plaintiff, ordering the defendants to pay the plaintiff,
jointly and severally, the following sums:
a) $54,000.00 (US), or its peso equivalent at the prevailing rate as of the time payment is actually made,
representing the purchase price of the logs;
b) P17,340.00, representing government fees and charges paid by plaintiff in connection with the logs
shipment in question;
c) P10,000.00 as temperate damages (for trips made to Bacolod and Korea).
All three foregoing sums shall be with interest thereon at 12% per annum from September 1, 1971, when
the complaint was filed, until fully paid:
d) P70,000.00 as moral damages;
e) P30,000.00 as exemplary damages; and
f) P30,000.00 as attorney's fees and litigation expense.
(Rollo, p. 28)
The petitioner received a copy of the decision on November 3, 1986. Two days thereafter, or on November 5, 1986, it filed
a notice of appeal.
On November 10, 1986, the private respondent filed a motion for the immediate execution of the judgment on the ground
that the appeal of the petitioner was frivolous and dilatory.
The trial court ordered the immediate execution of its judgment upon the private respondent's filing of a bond.
The petitioner then filed a motion for reconsideration and a motion to suspend the implementation of the writ of execution.
Both motions were, however, denied. Thus, petitioner filed before the Court of Appeals a petition forcertiorari and
prohibition with preliminary injunction to enjoin the immediate execution of the judgment.
The Court of Appeals in a decision dated April 9, 1987 granted the petition and nullified the order of execution, the
dispositive portion of the decision states:
WHEREFORE, the petition for certiorari is granted. Respondent Judge's order of execution dated
December 29, 1986, as well as his order dated January 14, 1987 denying the petitioner's urgent motion to
suspend the writ of execution against its properties are hereby annulled and set aside insofar as they are
sought to be enforced and implemented against the petitioner Feati Bank & Trust Company, now Citytrust
Banking Corporation, during the pendency of its appeal from the adverse decision in Civil Case No.
15121. However, the execution of the same decision against defendant Axel Christiansen did not appeal
said decision may proceed unimpeded. The Sheriff s levy on the petitioner's properties, and the notice of
sale dated January 13, 1987 (Annex M), are hereby annulled and set aside. Rollo p. 44)
A motion for reconsideration was thereafter filed by the private respondent. The Court of Appeals, in a resolution dated
June 29, 1987 denied the motion for reconsideration.
In the meantime, the appeal filed by the petitioner before the Court of Appeals was given due course. In its decision dated
June 29, 1990, the Court of Appeals affirmed the decision of the lower court dated October 20, 1986 and ruled that:
1. Feati Bank admitted in the "special and negative defenses" section of its answer that it was the bank to
negotiate the letter of credit issued by the Security Pacific National Bank of Los Angeles, California.
(Record, pp. 156, 157). Feati Bank did notify Villaluz of such letter of credit. In fact, as such negotiating
bank, even before the letter of credit was presented for payment, Feati Bank had already made an
advance payment of P75,000.00 to Villaluz in anticipation of such presentment. As the negotiating bank,
Feati Bank, by notifying Villaluz of the letter of credit in behalf of the issuing bank (Security Pacific),
confirmed such letter of credit and made the same also its own obligation. This ruling finds support in the
authority cited by Villaluz:
A confirmed letter of credit is one in which the notifying bank gives its assurance also that the opening
bank's obligation will be performed. In such a case, the notifying bank will not simply transmit but will
confirm the opening bank's obligation by making it also its own undertaking, or commitment, or guaranty
or obligation. (Ward & Hatfield, 28-29, cited in Agbayani, Commercial Laws, 1978 edition, p. 77).
Feati Bank argues further that it would be considered as the negotiating bank only upon negotiation of the
letter of credit. This stance is untenable. Assurance, commitments or guaranties supposed to be made by
notifying banks to the beneficiary of a letter of credit, as defined above, can be relevant or meaningful
only with respect to a future transaction, that is, negotiation. Hence, even before actual negotiation, the
notifying bank, by the mere act of notifying the beneficiary of the letter of credit, assumes as of that
moment the obligation of the issuing bank.
2. Since Feati Bank acted as guarantor of the issuing bank, and in effect also of the latter's principal or
client, i.e. Hans Axel-Christiansen. (sic) Such being the case, when Christiansen refused to issue the
certification, it was as though refusal was made by Feati Bank itself. Feati Bank should have taken steps
to secure the certification from Christiansen; and, if the latter should still refuse to comply, to hale him to
court. In short, Feati Bank should have honored Villaluz's demand for payment of his logs by virtue of the
irrevocable letter of credit issued in Villaluz's favor and guaranteed by Feati Bank.
3. The decision promulgated by this Court in CA-G.R. Sp No. 11051, which contained the statement
"Since Villaluz" draft was not drawn strictly in compliance with the terms of the letter of credit, Feati
Bank's refusal to negotiate it was justified," did not dispose of this question on the merits. In that case, the
question involved was jurisdiction or discretion, and not judgment. The quoted pronouncement should not
be taken as a preemptive judgment on the merits of the present case on appeal.
4. The original action was for "Mandamus and/or specific performance." Feati Bank may not be a party to
the transaction between Christiansen and Security Pacific National Bank on the one hand, and Villaluz on
the other hand; still, being guarantor or agent of Christiansen and/or Security Pacific National Bank which
had directly dealt with Villaluz, Feati Bank may be sued properly on specific performance as a procedural
means by which the relief sought by Villaluz may be entertained. (Rollo, pp. 32-33)
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, the decision appealed from is affirmed; and accordingly, the appeal is hereby dismissed.
Costs against the petitioner. (Rollo, p. 33)
Hence, this petition for review.
The petitioner interposes the following reasons for the allowance of the petition.
First Reason
THE RESPONDENT COURT ERRONEOUSLY CONCLUDED FROM THE ESTABLISHED FACTS AND
INDEED, WENT AGAINST THE EVIDENCE AND DECISION OF THIS HONORABLE COURT, THAT
PETITIONER BANK IS LIABLE ON THE LETTER OF CREDIT DESPITE PRIVATE RESPONDENTS
NON-COMPLIANCE WITH THE TERMS THEREOF,
Second Reason
THE RESPONDENT COURT COMMITTED AN ERROR OF LAW WHEN IT HELD THAT PETITIONER
BANK, BY NOTIFYING PRIVATE RESPONDENT OF THE LETTER OF CREDIT, CONFIRMED SUCH
CREDIT AND MADE THE SAME ALSO ITS OBLIGATION AS GUARANTOR OF THE ISSUING BANK.
Third Reason
THE RESPONDENT COURT LIKEWISE COMMITTED AN ERROR OF LAW WHEN IT AFFIRMED THE
TRIAL COURT'S DECISION. (Rollo, p. 12)
The principal issue in this case is whether or not a correspondent bank is to be held liable under the letter of credit despite
non-compliance by the beneficiary with the terms thereof?
The petition is impressed with merit.
It is a settled rule in commercial transactions involving letters of credit that the documents tendered must strictly conform
to the terms of the letter of credit. The tender of documents by the beneficiary (seller) must include all documents required
by the letter. A correspondent bank which departs from what has been stipulated under the letter of credit, as when it
accepts a faulty tender, acts on its own risks and it may not thereafter be able to recover from the buyer or the issuing
bank, as the case may be, the money thus paid to the beneficiary Thus the rule of strict compliance.
In the United States, commercial transactions involving letters of credit are governed by the rule of strict compliance. In
the Philippines, the same holds true. The same rule must also be followed.
The case of Anglo-South America Trust Co. v. Uhe et al. (184 N.E. 741 [1933]) expounded clearly on the rule of strict
compliance.
We have heretofore held that these letters of credit are to be strictly complied with which documents, and
shipping documents must be followed as stated in the letter. There is no discretion in the bank or trust
company to waive any requirements. The terms of the letter constitutes an agreement between the
purchaser and the bank. (p. 743)
Although in some American decisions, banks are granted a little discretion to accept a faulty tender as when the other
documents may be considered immaterial or superfluous, this theory could lead to dangerous precedents. Since a bank
deals only with documents, it is not in a position to determine whether or not the documents required by the letter of credit
are material or superfluous. The mere fact that the document was specified therein readily means that the document is of
vital importance to the buyer.
Moreover, the incorporation of the Uniform Customs and Practice for Documentary Credit (U.C.P. for short) in the letter of
credit resulted in the applicability of the said rules in the governance of the relations between the parties.
And even if the U.C.P. was not incorporated in the letter of credit, we have already ruled in the affirmative as to the
applicability of the U.C.P. in cases before us.
In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the observance of the U.C.P. in this jurisdiction is
justified by Article 2 of the Code of Commerce. Article 2 of the Code of Commerce enunciates that in the absence of any
particular provision in the Code of Commerce, commercial transactions shall be governed by the usages and customs
generally observed.
There being no specific provision which governs the legal complexities arising from transactions involving letters of credit
not only between the banks themselves but also between banks and seller and/or buyer, the applicability of the U.C.P. is
undeniable.
The pertinent provisions of the U.C.P. (1962 Revision) are:
Article 3.
An irrevocable credit is a definite undertaking on the part of the issuing bank and constitutes the
engagement of that bank to the beneficiary and bona fide holders of drafts drawn and/or documents
presented thereunder, that the provisions for payment, acceptance or negotiation contained in the credit
will be duly fulfilled, provided that all the terms and conditions of the credit are complied with.
An irrevocable credit may be advised to a beneficiary through another bank (the advising bank) without
engagement on the part of that bank, but when an issuing bank authorizes or requests another bank to
confirm its irrevocable credit and the latter does so, such confirmation constitutes a definite undertaking of
the confirming bank. . . .
Article 7.
Banks must examine all documents with reasonable care to ascertain that they appear on their face to be
in accordance with the terms and conditions of the credit,"
Article 8.
Payment, acceptance or negotiation against documents which appear on their face to be in accordance
with the terms and conditions of a credit by a bank authorized to do so, binds the party giving the
authorization to take up documents and reimburse the bank which has effected the payment, acceptance
or negotiation. (Emphasis Supplied)
Under the foregoing provisions of the U.C.P., the bank may only negotiate, accept or pay, if the documents tendered to it
are on their face in accordance with the terms and conditions of the documentary credit. And since a correspondent bank,
like the petitioner, principally deals only with documents, the absence of any document required in the documentary credit
justifies the refusal by the correspondent bank to negotiate, accept or pay the beneficiary, as it is not its obligation to look
beyond the documents. It merely has to rely on the completeness of the documents tendered by the beneficiary.
In regard to the ruling of the lower court and affirmed by the Court of Appeals that the petitioner is not a notifying bank but
a confirming bank, we find the same erroneous.
The trial court wrongly mixed up the meaning of an irrevocable credit with that of a confirmed credit. In its decision, the
trial court ruled that the petitioner, in accepting the obligation to notify the respondent that the irrevocable credit has been
transmitted to the petitioner on behalf of the private respondent, has confirmed the letter.
The trial court appears to have overlooked the fact that an irrevocable credit is not synonymous with a confirmed credit.
These types of letters have different meanings and the legal relations arising from there varies. A credit may be
an irrevocable credit and at the same time a confirmed credit or vice-versa.
An irrevocable credit refers to the duration of the letter of credit. What is simply means is that the issuing bank may not
without the consent of the beneficiary (seller) and the applicant (buyer) revoke his undertaking under the letter. The
issuing bank does not reserve the right to revoke the credit. On the other hand, a confirmed letter of credit pertains to the
kind of obligation assumed by the correspondent bank. In this case, the correspondent bank gives an absolute assurance
to the beneficiary that it will undertake the issuing bank's obligation as its own according to the terms and conditions of the
credit. (Agbayani, Commercial Laws of the Philippines, Vol. 1, pp. 81-83)
Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply that the correspondent bank in
accepting the instructions of the issuing bank has also confirmed the letter of credit. Another error which the lower court
and the Court of Appeals made was to confuse the obligation assumed by the petitioner.
In commercial transactions involving letters of credit, the functions assumed by a correspondent bank are classified
according to the obligations taken up by it. The correspondent bank may be called a notifying bank, a negotiating bank, or
a confirming bank.
In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to the beneficiary
the existence of the letter of credit. (Kronman and Co., Inc. v. Public National Bank of New York, 218 N.Y.S. 616 [1926];
Shaterian, Export-Import Banking, p. 292, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76). A
negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft under the letter of credit. Its
liability is dependent upon the stage of the negotiation. If before negotiation, it has no liability with respect to the seller but
after negotiation, a contractual relationship will then prevail between the negotiating bank and the seller. (Scanlon v. First
National Bank of Mexico, 162 N.E. 567 [1928]; Shaterian, Export-Import Banking, p. 293, cited in Agbayani, Commercial
Laws of the Philippines, Vol. 1, p. 76)
In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability is a
primary one as if the correspondent bank itself had issued the letter of credit. (Shaterian, Export-Import Banking, p. 294,
cited in Agbayani Commercial Laws of the Philippines, Vol. 1, p. 77)
In this case, the letter merely provided that the petitioner "forward the enclosed original credit to the beneficiary."
(Records, Vol. I, p. 11) Considering the aforesaid instruction to the petitioner by the issuing bank, the Security Pacific
National Bank, it is indubitable that the petitioner is only a notifying bank and not a confirming bank as ruled by the courts
below.
If the petitioner was a confirming bank, then a categorical declaration should have been stated in the letter of credit that
the petitioner is to honor all drafts drawn in conformity with the letter of credit. What was simply stated therein was the
instruction that the petitioner forward the original letter of credit to the beneficiary.
Since the petitioner was only a notifying bank, its responsibility was solely to notify and/or transmit the documentary of
credit to the private respondent and its obligation ends there.
The notifying bank may suggest to the seller its willingness to negotiate, but this fact alone does not imply that the
notifying bank promises to accept the draft drawn under the documentary credit.
A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is only with that of
the issuing bank and not with the beneficiary to whom he assumes no liability. It follows therefore that when the petitioner
refused to negotiate with the private respondent, the latter has no cause of action against the petitioner for the
enforcement of his rights under the letter. (See Kronman and Co., Inc. v. Public National Bank of New York, supra)
In order that the petitioner may be held liable under the letter, there should be proof that the petitioner confirmed the letter
of credit.
The records are, however, bereft of any evidence which will disclose that the petitioner has confirmed the letter of credit.
The only evidence in this case, and upon which the private respondent premised his argument, is the P75,000.00 loan
extended by the petitioner to him.
The private respondent relies on this loan to advance his contention that the letter of credit was confirmed by the
petitioner. He claims that the loan was granted by the petitioner to him, "in anticipation of the presentment of the letter of
credit."
The proposition advanced by the private respondent has no basis in fact or law. That the loan agreement between them
be construed as an act of confirmation is rather far-fetched, for it depends principally on speculative reasoning.
As earlier stated, there must have been an absolute assurance on the part of the petitioner that it will undertake the
issuing bank's obligation as its own. Verily, the loan agreement it entered into cannot be categorized as an emphatic
assurance that it will carry out the issuing bank's obligation as its own.
The loan agreement is more reasonably classified as an isolated transaction independent of the documentary credit.
Of course, it may be presumed that the petitioner loaned the money to the private respondent in anticipation that it would
later be paid by the latter upon the receipt of the letter. Yet, we would have no basis to rule definitively that such "act"
should be construed as an act of confirmation.
The private respondent no doubt was in need of money in loading the logs on the ship "Zenlin Glory" and the only way to
satisfy this need was to borrow money from the petitioner which the latter granted. From these circumstances, a logical
conclusion that can be gathered is that the letter of credit was merely to serve as a collateral.
At the most, when the petitioner extended the loan to the private respondent, it assumed the character of a negotiating
bank. Even then, the petitioner will still not be liable, for a negotiating bank before negotiation has no contractual
relationship with the seller.
The case of Scanlon v. First National Bank (supra) perspicuously explained the relationship between the seller and the
negotiating bank, viz:
It may buy or refuse to buy as it chooses. Equally, it must be true that it owes no contractual duty toward
the person for whose benefit the letter is written to discount or purchase any draft drawn against the
credit. No relationship of agent and principal, or of trustee and cestui, between the receiving bank and the
beneficiary of the letter is established. (P.568)
Whether therefore the petitioner is a notifying bank or a negotiating bank, it cannot be held liable. Absent any definitive
proof that it has confirmed the letter of credit or has actually negotiated with the private respondent, the refusal by the
petitioner to accept the tender of the private respondent is justified.
In regard to the finding that the petitioner became a "trustee in relation to the plaintiff (private respondent) as the
beneficiary of the letter of credit," the same has no legal basis.
A trust has been defined as the "right, enforceable solely in equity, to the beneficial enjoyment of property the legal title to
which is vested to another." (89 C.J.S. 712)
The concept of a trust presupposes the existence of a specific property which has been conferred upon the person for the
benefit of another. In order therefore for the trust theory of the private respondent to be sustained, the petitioner should
have had in its possession a sum of money as specific fund advanced to it by the issuing bank and to be held in trust by it
in favor of the private respondent. This does not obtain in this case.
The mere opening of a letter of credit, it is to be noted, does not involve a specific appropriation of a sum of money in
favor of the beneficiary. It only signifies that the beneficiary may be able to draw funds upon the letter of credit up to the
designated amount specified in the letter. It does not convey the notion that a particular sum of money has been
specifically reserved or has been held in trust.
What actually transpires in an irrevocable credit is that the correspondent bank does not receive in advance the sum of
money from the buyer or the issuing bank. On the contrary, when the correspondent bank accepts the tender and pays
the amount stated in the letter, the money that it doles out comes not from any particular fund that has been advanced by
the issuing bank, rather it gets the money from its own funds and then later seeks reimbursement from the issuing bank.
Granting that a trust has been created, still, the petitioner may not be considered a trustee. As the petitioner is only a
notifying bank, its acceptance of the instructions of the issuing bank will not create estoppel on its part resulting in the
acceptance of the trust. Precisely, as a notifying bank, its only obligation is to notify the private respondent of the
existence of the letter of credit. How then can such create estoppel when that is its only duty under the law?
We also find erroneous the statement of the Court of Appeals that the petitioner "acted as a guarantor of the issuing bank
and in effect also of the latter's principal or client, i.e., Hans Axel Christiansen."
It is a fundamental rule that an irrevocable credit is independent not only of the contract between the buyer and the seller
but also of the credit agreement between the issuing bank and the buyer. (See Kingdom of Sweden v. New York Trust
Co., 96 N.Y.S. 2d 779 [1949]). The relationship between the buyer (Christiansen) and the issuing bank (Security Pacific
National Bank) is entirely independent from the letter of credit issued by the latter.
The contract between the two has no bearing as to the non-compliance by the buyer with the agreement between the
latter and the seller. Their contract is similar to that of a contract of services (to open the letter of credit) and not that of
agency as was intimated by the Court of Appeals. The unjustified refusal therefore by Christiansen to issue the
certification under the letter of credit should not likewise be charged to the issuing bank.
As a mere notifying bank, not only does the petitioner not have any contractual relationship with the buyer, it has also
nothing to do with the contract between the issuing bank and the buyer regarding the issuance of the letter of credit.
The theory of guarantee relied upon by the Court of Appeals has to necessarily fail. The concept of guarantee vis-a-
vis the concept of an irrevocable credit are inconsistent with each other.
In the first place, the guarantee theory destroys the independence of the bank's responsibility from the contract upon
which it was opened. In the second place, the nature of both contracts is mutually in conflict with each other. In contracts
of guarantee, the guarantor's obligation is merely collateral and it arises only upon the default of the person primarily
liable. On the other hand, in an irrevocable credit the bank undertakes a primary obligation. (SeeNational Bank of Eagle
Pass, Tex v. American National Bank of San Francisco, 282 F. 73 [1922])
The relationship between the issuing bank and the notifying bank, on the contrary, is more similar to that of an agency and
not that of a guarantee. It may be observed that the notifying bank is merely to follow the instructions of the issuing bank
which is to notify or to transmit the letter of credit to the beneficiary. (See Kronman v. Public National Bank of New
York, supra). Its commitment is only to notify the beneficiary. It does not undertake any assurance that the issuing bank
will perform what has been mandated to or expected of it. As an agent of the issuing bank, it has only to follow the
instructions of the issuing bank and to it alone is it obligated and not to buyer with whom it has no contractual relationship.
In fact the notifying bank, even if the seller tenders all the documents required under the letter of credit, may refuse to
negotiate or accept the drafts drawn thereunder and it will still not be held liable for its only engagement is to notify and/or
transmit to the seller the letter of credit.
Finally, even if we assume that the petitioner is a confirming bank, the petitioner cannot be forced to pay the amount
under the letter. As we have previously explained, there was a failure on the part of the private respondent to comply with
the terms of the letter of credit.
The failure by him to submit the certification was fatal to his case. The U.C.P. which is incorporated in the letter of credit
ordains that the bank may only pay the amount specified under the letter if all the documents tendered are on their face in
compliance with the credit. It is not tasked with the duty of ascertaining the reason or reasons why certain documents
have not been submitted, as it is only concerned with the documents. Thus, whether or not the buyer has performed his
responsibility towards the seller is not the bank's problem.
We are aware of the injustice committed by Christiansen on the private respondent but we are deciding the controversy
on the basis of what the law is, for the law is not meant to favor only those who have been oppressed, the law is to govern
future relations among people as well. Its commitment is to all and not to a single individual. The faith of the people in our
justice system may be eroded if we are to decide not what the law states but what we believe it should declare. Dura lex
sed lex.
Considering the foregoing, the materiality of ruling upon the validity of the certificate of approval required of the private
respondent to submit under the letter of credit, has become insignificant.
In any event, we affirm the earlier ruling of the Court of Appeals dated April 9, 1987 in regard to the petition before it
for certiorari and prohibition with preliminary injunction, to wit:
There is no merit in the respondent's contention that the certification required in condition No. 4 of the
letter of credit was "patently illegal." At the time the letter of credit was issued there was no Central Bank
regulation prohibiting such a condition in the letter of credit. The letter of credit (Exh. C) was issued on
June 7, 1971, more than two months before the issuance of the Central Bank Memorandum on August
16, 1971 disallowing such a condition in a letter of credit. In fact the letter of credit had already expired on
July 30, 1971 when the Central Bank memorandum was issued. In any event, it is difficult to see how
such a condition could be categorized as illegal or unreasonable since all that plaintiff Villaluz, as seller of
the logs, could and should have done was to refuse to load the logs on the vessel "Zenlin Glory", unless
Christiansen first issued the required certification that the logs had been approved by him to be in
accordance with the terms and conditions of his purchase order. Apparently, Villaluz was in too much
haste to ship his logs without taking all due precautions to assure that all the terms and conditions of the
letter of credit had been strictly complied with, so that there would be no hitch in its negotiation. (Rollo, p.
8)
WHEREFORE, the COURT RESOLVED to GRANT the petition and hereby NULLIFIES and SETS ASIDE the decision of
the Court of Appeals dated June 29, 1990. The amended complaint in Civil Case No. 15121 is DISMISSED.
SO ORDERED.






G.R. No. L-24821 October 16, 1970
BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee,
vs.
DE RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO and AURORA CARCERENY alias AURORA C.
GONZALES, defendants-appellants.
Aviado and Aranda for plaintiff-appellee.
S. Emiliano Calma for defendants-appellants.

CASTRO, J .:.
This is an appeal from the decision of the Court of First Instance of Manila ordering the defendants-appellants to pay to
the Bank of the Philippine Islands (hereinafter referred to as the Bank), jointly and severally, the value of the credit it
extended to them in several letters of credit which the Bank opened at the behest of the defendants appellants to finance
their importation of dyestuffs from the United States, which however turned out to be mere colored chalk upon arrival and
inspection thereof at the port of Manila.
The record shows that on four (4) different occasions in 1961, the De Reny Fabric Industries, Inc., a Philippine corporation
through its co-defendants-appellants, Aurora Carcereny alias Aurora C. Gonzales, and Aurora T. Tuyo, president and
secretary, respectively of the corporation, applied to the Bank for four (4) irrevocable commercial letters of credit to cover
the purchase by the corporation of goods described in the covering L/C applications as "dyestuffs of various colors" from
its American supplier, the J.B. Distributing Company. All the applications of the corporation were approved, and the
corresponding Commercial L/C Agreements were executed pursuant to banking procedures. Under these agreements,
the aforementioned officers of the corporation bound themselves personally as joint and solidary debtors with the
corporation. Pursuant to banking regulations then in force, the corporation delivered to the Bank peso marginal deposits
as each letter of credit was opened.
The dates and amounts of the L/Cs applied for and approved as well as the peso marginal deposits made were,
respectively, as follows:.
Date Application Amount Marginal
& L/C No. Deposit
Oct. 10, 1961 61/1413 $57,658.38 P43,407.33
Oct. 23, 1961 61/1483 $25,867.34 19,473.64
Oct. 30, 1961 61/1495 $19,408.39 14,610.88
Nov. 10, 1961 61/1564 $26,687.64 20,090.90
TOTAL .... $129,621.75 P97,582.75
By virtue of the foregoing transactions, the Bank issued irrevocable commercial letters of credit addressed to its
correspondent banks in the United States, with uniform instructions for them to notify the beneficiary thereof, the J.B.
Distributing Company, that they have been authorized to negotiate the latter's sight drafts up to the amounts mentioned
the respectively, if accompanied, upon presentation, by a full set of negotiable clean "on board" ocean bills of lading
covering the merchandise appearing in the LCs that is, dyestuffs of various colors. Consequently, the J.B. Distributing
Company drew upon, presented to and negotiated with these banks, its sight drafts covering the amounts of the
merchandise ostensibly being exported by it, together with clean bills of lading, and collected the full value of the drafts up
to the amounts appearing in the L/Cs as above indicated. These correspondent banks then debited the account of the
Bank of the Philippine Islands with them up to the full value of the drafts presented by the J.B. Distributing Company, plus
commission thereon, and, thereafter, endorsed and forwarded all documents to the Bank of the Philippine Islands.
In the meantime, as each shipment (covered by the above-mentioned letters of credit) arrived in the Philippines, the De
Reny Fabric Industries, Inc. made partial payments to the Bank amounting, in the aggregate, to P90,000. Further
payments were, however, subsequently discontinued by the corporation when it became established, as a result of a
chemical test conducted by the National Science Development Board, that the goods that arrived in Manila were colored
chalks instead of dyestuffs.
The corporation also refused to take possession of these goods, and for this reason, the Bank caused them to be
deposited with a bonded warehouse paying therefor the amount of P12,609.64 up to the filing of its complaint with the
court below on December 10, 1962.
On October 24, 1963 the lower court rendered its decision ordering the corporation and its co-defendants (the herein
appellants) to pay to the plaintiff-appellee the amount of P291,807.46, with interest thereon, as provided for in the L/C
Agreements, at the rate of 7% per annum from October 31, 1962 until fully paid, plus costs.
It is the submission of the defendants-appellants that it was the duty of the foreign correspondent banks of the Bank of the
Philippine Islands to take the necessary precaution to insure that the goods shipped under the covering L/Cs conformed
with the item appearing therein, and, that the foregoing banks having failed to perform this duty, no claim for recoupment
against the defendants-appellants, arising from the losses incurred for the non-delivery or defective delivery of the articles
ordered, could accrue.
We can appreciate the sweep of the appellants' argument, but we also find that it is nestled hopelessly inside a salient
where the valid contract between the parties and the internationally accepted customs of the banking trade must prevail.
1

Under the terms of their Commercial Letter of Credit Agreements with the Bank, the appellants agreed that the Bank shall
not be responsible for the "existence, character, quality, quantity, conditions, packing, value, or delivery of the property
purporting to be represented by documents; for any difference in character, quality, quantity, condition, or value of the
property from that expressed in documents," or for "partial or incomplete shipment, or failure or omission to ship any or all
of the property referred to in the Credit," as well as "for any deviation from instructions, delay, default or fraud by the
shipper or anyone else in connection with the property the shippers or vendors and ourselves [purchasers] or any of us."
Having agreed to these terms, the appellants have, therefore, no recourse but to comply with their covenant. 2
But even without the stipulation recited above, the appellants cannot shift the burden of loss to the Bank on account of the
violation by their vendor of its prestation.
It was uncontrovertibly proven by the Bank during the trial below that banks, in providing financing in international
business transactions such as those entered into by the appellants, do not deal with the property to be exported or
shipped to the importer, but deal only with documents. The Bank introduced in evidence a provision contained in the
"Uniform Customs and Practices for Commercial Documentary Credits Fixed for the Thirteenth Congress of International
Chamber of Commerce," to which the Philippines is a signatory nation. Article 10 thereof provides: .
In documentary credit operations, all parties concerned deal in documents and not in goods. Payment,
negotiation or acceptance against documents in accordance with the terms and conditions of a credit by a
Bank authorized to do so binds the party giving the authorization to take up the documents and reimburse
the Bank making the payment, negotiation or acceptance.
The existence of a custom in international banking and financing circles negating any duty on the part of a bank to verify
whether what has been described in letters of credits or drafts or shipping documents actually tallies with what was loaded
aboard ship, having been positively proven as a fact, the appellants are bound by this established usage. They were, after
all, the ones who tapped the facilities afforded by the Bank in order to engage in international business.
ACCORDINGLY, the judgment a quo is affirmed, at defendants-appellants' cost. This is without prejudice to the Bank, in
proper proceedings in the court below in this same case proving and being reimbursed additional expenses, if any, it has
incurred by virtue of the continued storage of the goods in question up to the time this decision becomes final and
executory.


G.R. No. 146717 November 22, 2004
TRANSFIELD PHILIPPINES, INC., petitioner,
vs.
LUZON HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND BANKING GROUP LIMITED and SECURITY
BANK CORPORATION, respondents.


D E C I S I O N


TINGA, J .:
Subject of this case is the letter of credit which has evolved as the ubiquitous and most important device in international
trade. A creation of commerce and businessmen, the letter of credit is also unique in the number of parties involved and
its supranational character.
Petitioner has appealed from the Decision
1
of the Court of Appeals in CA-G.R. SP No. 61901 entitled "Transfield
Philippines, Inc. v. Hon. Oscar Pimentel, et al.," promulgated on 31 January 2001.
2

On 26 March 1997, petitioner and respondent Luzon Hydro Corporation (hereinafter, LHC) entered into a Turnkey
Contract
3
whereby petitioner, as Turnkey Contractor, undertook to construct, on a turnkey basis, a seventy (70)-Megawatt
hydro-electric power station at the Bakun River in the provinces of Benguet and Ilocos Sur (hereinafter, the Project).
Petitioner was given the sole responsibility for the design, construction, commissioning, testing and completion of the
Project.
4

The Turnkey Contract provides that: (1) the target completion date of the Project shall be on 1 June 2000, or such later
date as may be agreed upon between petitioner and respondent LHC or otherwise determined in accordance with the
Turnkey Contract; and (2) petitioner is entitled to claim extensions of time (EOT) for reasons enumerated in the Turnkey
Contract, among which are variations, force majeure, and delays caused by LHC itself.
5
Further, in case of dispute, the
parties are bound to settle their differences through mediation, conciliation and such other means enumerated under
Clause 20.3 of the Turnkey Contract.
6

To secure performance of petitioner's obligation on or before the target completion date, or such time for completion as
may be determined by the parties' agreement, petitioner opened in favor of LHC two (2) standby letters of credit both
dated 20 March 2000 (hereinafter referred to as "the Securities"), to wit: Standby Letter of Credit No. E001126/8400 with
the local branch of respondent Australia and New Zealand Banking Group Limited (ANZ Bank)
7
and Standby Letter of
Credit No. IBDIDSB-00/4 with respondent Security Bank Corporation (SBC)
8
each in the amount of US$8,988,907.00.
9

In the course of the construction of the project, petitioner sought various EOT to complete the Project. The extensions
were requested allegedly due to several factors which prevented the completion of the Project on target date, such as
force majeure occasioned by typhoon Zeb, barricades and demonstrations. LHC denied the requests, however. This gave
rise to a series of legal actions between the parties which culminated in the instant petition.
The first of the actions was a Request for Arbitration which LHC filed before the Construction Industry Arbitration
Commission (CIAC) on 1 June 1999.
10
This was followed by another Request for Arbitration, this time filed by petitioner
before the International Chamber of Commerce (ICC)
11
on 3 November 2000. In both arbitration proceedings, the common
issues presented were: [1) whether typhoon Zeb and any of its associated events constituted force majeure to justify the
extension of time sought by petitioner; and [2) whether LHC had the right to terminate the Turnkey Contract for failure of
petitioner to complete the Project on target date.
Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent provisions of the Turnkey
Contract,
12
petitionerin two separate letters
13
both dated 10 August 2000advised respondent banks of the arbitration
proceedings already pending before the CIAC and ICC in connection with its alleged default in the performance of its
obligations. Asserting that LHC had no right to call on the Securities until the resolution of disputes before the arbitral
tribunals, petitioner warned respondent banks that any transfer, release, or disposition of the Securities in favor of LHC or
any person claiming under LHC would constrain it to hold respondent banks liable for liquidated damages.
As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner that pursuant to Clause 8.2
14
of the Turnkey
Contract, it failed to comply with its obligation to complete the Project. Despite the letters of petitioner, however, both
banks informed petitioner that they would pay on the Securities if and when LHC calls on them.
15

LHC asserted that additional extension of time would not be warranted; accordingly it declared petitioner in default/delay
in the performance of its obligations under the Turnkey Contract and demanded from petitioner the payment of
US$75,000.00 for each day of delay beginning 28 June 2000 until actual completion of the Project pursuant to Clause
8.7.1 of the Turnkey Contract. At the same time, LHC served notice that it would call on the securities for the payment of
liquidated damages for the delay.
16

On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction, with prayer for temporary restraining order and
writ of preliminary injunction, against herein respondents as defendants before the Regional Trial Court (RTC) of
Makati.
17
Petitioner sought to restrain respondent LHC from calling on the Securities and respondent banks from
transferring, paying on, or in any manner disposing of the Securities or any renewals or substitutes thereof. The RTC
issued a seventy-two (72)-hour temporary restraining order on the same day. The case was docketed as Civil Case No.
00-1312 and raffled to Branch 148 of the RTC of Makati.
After appropriate proceedings, the trial court issued an Order on 9 November 2000, extending the temporary restraining
order for a period of seventeen (17) days or until 26 November 2000.
18

The RTC, in its Order
19
dated 24 November 2000, denied petitioner's application for a writ of preliminary injunction. It ruled
that petitioner had no legal right and suffered no irreparable injury to justify the issuance of the writ. Employing the
principle of "independent contract" in letters of credit, the trial court ruled that LHC should be allowed to draw on the
Securities for liquidated damages. It debunked petitioner's contention that the principle of "independent contract" could be
invoked only by respondent banks since according to it respondent LHC is the ultimate beneficiary of the Securities. The
trial court further ruled that the banks were mere custodians of the funds and as such they were obligated to transfer the
same to the beneficiary for as long as the latter could submit the required certification of its claims.
Dissatisfied with the trial court's denial of its application for a writ of preliminary injunction, petitioner elevated the case to
the Court of Appeals via a Petition for Certiorari under Rule 65, with prayer for the issuance of a temporary restraining
order and writ of preliminary injunction.
20
Petitioner submitted to the appellate court that LHC's call on the Securities was
premature considering that the issue of its default had not yet been resolved with finality by the CIAC and/or the ICC. It
asserted that until the fact of delay could be established, LHC had no right to draw on the Securities for liquidated
damages.
Refuting petitioner's contentions, LHC claimed that petitioner had no right to restrain its call on and use of the Securities
as payment for liquidated damages. It averred that the Securities are independent of the main contract between them as
shown on the face of the two Standby Letters of Credit which both provide that the banks have no responsibility to
investigate the authenticity or accuracy of the certificates or the declarant's capacity or entitlement to so certify.
In its Resolution dated 28 November 2000, the Court of Appeals issued a temporary restraining order, enjoining LHC from
calling on the Securities or any renewals or substitutes thereof and ordering respondent banks to cease and desist from
transferring, paying or in any manner disposing of the Securities.
However, the appellate court failed to act on the application for preliminary injunction until the temporary restraining order
expired on 27 January 2001. Immediately thereafter, representatives of LHC trooped to ANZ Bank and withdrew the total
amount of US$4,950,000.00, thereby reducing the balance in ANZ Bank to US$1,852,814.00.
On 2 February 2001, the appellate court dismissed the petition for certiorari. The appellate court expressed conformity
with the trial court's decision that LHC could call on the Securities pursuant to the first principle in credit law that the credit
itself is independent of the underlying transaction and that as long as the beneficiary complied with the credit, it was of no
moment that he had not complied with the underlying contract. Further, the appellate court held that even assuming that
the trial court's denial of petitioner's application for a writ of preliminary injunction was erroneous, it constituted only an
error of judgment which is not correctible by certiorari, unlike error of jurisdiction.
Undaunted, petitioner filed the instant Petition for Review raising the following issues for resolution:
WHETHER THE "INDEPENDENCE PRINCIPLE" ON LETTERS OF CREDIT MAY BE INVOKED BY A
BENEFICIARY THEREOF WHERE THE BENEFICIARY'S CALL THEREON IS WRONGFUL OR FRAUDULENT.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES BEFORE THE RESOLUTION
OF PETITIONER'S AND LHC'S DISPUTES BY THE APPROPRIATE TRIBUNAL.
WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN RELEASING THE AMOUNTS DUE UNDER
THE SECURITIES DESPITE BEING NOTIFIED THAT LHC'S CALL THEREON IS WRONGFUL.
WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND IRREPARABLE DAMAGE IN THE EVENT
THAT:
A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND SECURITY BANK ARE
ALLOWED TO RELEASE, THE REMAINING BALANCE OF THE SECURITIES PRIOR TO THE
RESOLUTION OF THE DISPUTES BETWEEN PETITIONER AND LHC.
B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY DRAWN FROM THE
SECURITIES.
21

Petitioner contends that the courts below improperly relied on the "independence principle" on letters of credit when this
case falls squarely within the "fraud exception rule." Respondent LHC deliberately misrepresented the supposed
existence of delay despite its knowledge that the issue was still pending arbitration, petitioner continues.
Petitioner asserts that LHC should be ordered to return the proceeds of the Securities pursuant to the principle against
unjust enrichment and that, under the premises, injunction was the appropriate remedy obtainable from the competent
local courts.
On 25 August 2003, petitioner filed a Supplement to the Petition
22
and Supplemental Memorandum,
23
alleging that in the
course of the proceedings in the ICC Arbitration, a number of documentary and testimonial evidence came out through
the use of different modes of discovery available in the ICC Arbitration. It contends that after the filing of the petition facts
and admissions were discovered which demonstrate that LHC knowingly misrepresented that petitioner had incurred
delays notwithstanding its knowledge and admission that delays were excused under the Turnkey Contractto be able
to draw against the Securities. Reiterating that fraud constitutes an exception to the independence principle, petitioner
urges that this warrants a ruling from this Court that the call on the Securities was wrongful, as well as contrary to law and
basic principles of equity. It avers that it would suffer grave irreparable damage if LHC would be allowed to use the
proceeds of the Securities and not ordered to return the amounts it had wrongfully drawn thereon.
In its Manifestation dated 8 September 2003,
24
LHC contends that the supplemental pleadings filed by petitioner present
erroneous and misleading information which would change petitioner's theory on appeal.
In yet another Manifestation dated 12 April 2004,
25
petitioner alleges that on 18 February 2004, the ICC handed down its
Third Partial Award, declaring that LHC wrongfully drew upon the Securities and that petitioner was entitled to the return
of the sums wrongfully taken by LHC for liquidated damages.
LHC filed a Counter-Manifestation dated 29 June 2004,
26
stating that petitioner's Manifestation dated 12 April 2004
enlarges the scope of its Petition for Review of the 31 January 2001 Decision of the Court of Appeals. LHC notes that the
Petition for Review essentially dealt only with the issue of whether injunction could issue to restrain the beneficiary of an
irrevocable letter of credit from drawing thereon. It adds that petitioner has filed two other proceedings, to wit: (1) ICC
Case No. 11264/TE/MW, entitled "Transfield Philippines Inc. v. Luzon Hydro Corporation," in which the parties made
claims and counterclaims arising from petitioner's performance/misperformance of its obligations as contractor for LHC;
and (2) Civil Case No. 04-332, entitled "Transfield Philippines, Inc. v. Luzon Hydro Corporation" before Branch 56 of the
RTC of Makati, which is an action to enforce and obtain execution of the ICC's partial award mentioned in petitioner's
Manifestation of 12 April 2004.
In its Comment to petitioner's Motion for Leave to File Addendum to Petitioner's Memorandum, LHC stresses that the
question of whether the funds it drew on the subject letters of credit should be returned is outside the issue in this appeal.
At any rate, LHC adds that the action to enforce the ICC's partial award is now fully within the Makati RTC's jurisdiction in
Civil Case No. 04-332. LHC asserts that petitioner is engaged in forum-shopping by keeping this appeal and at the same
time seeking the suit for enforcement of the arbitral award before the Makati court.
Respondent SBC in its Memorandum, dated 10 March 2003
27
contends that the Court of Appeals correctly dismissed the
petition for certiorari. Invoking the independence principle, SBC argues that it was under no obligation to look into the
validity or accuracy of the certification submitted by respondent LHC or into the latter's capacity or entitlement to so certify.
It adds that the act sought to be enjoined by petitioner was already fait accompli and the present petition would no longer
serve any remedial purpose.
In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 2003
28
posits that its actions could not be
regarded as unjustified in view of the prevailing independence principle under which it had no obligation to ascertain the
truth of LHC's allegations that petitioner defaulted in its obligations. Moreover, it points out that since the Standby Letter of
Credit No. E001126/8400 had been fully drawn, petitioner's prayer for preliminary injunction had been rendered moot and
academic.
At the core of the present controversy is the applicability of the "independence principle" and "fraud exception rule" in
letters of credit. Thus, a discussion of the nature and use of letters of credit, also referred to simply as "credits," would
provide a better perspective of the case.
The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is to recognize that it is
an entity unto itself. The relationship between the beneficiary and the issuer of a letter of credit is not strictly contractual,
because both privity and a meeting of the minds are lacking, yet strict compliance with its terms is an enforceable right.
Nor is it a third-party beneficiary contract, because the issuer must honor drafts drawn against a letter regardless of
problems subsequently arising in the underlying contract. Since the bank's customer cannot draw on the letter, it does not
function as an assignment by the customer to the beneficiary. Nor, if properly used, is it a contract of suretyship or
guarantee, because it entails a primary liability following a default. Finally, it is not in itself a negotiable instrument,
because it is not payable to order or bearer and is generally conditional, yet the draft presented under it is often
negotiable.
29

In commercial transactions, a letter of credit is a financial device developed by merchants as a convenient and relatively
safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part
with his goods before he is paid, and a buyer, who wants to have control of the goods before paying.
30
The use of credits
in commercial transactions serves to reduce the risk of nonpayment of the purchase price under the contract for the sale
of goods. However, credits are also used in non-sale settings where they serve to reduce the risk of nonperformance.
Generally, credits in the non-sale settings have come to be known as standby credits.
31

There are three significant differences between commercial and standby credits. First, commercial credits involve the
payment of money under a contract of sale. Such credits become payable upon the presentation by the seller-beneficiary
of documents that show he has taken affirmative steps to comply with the sales agreement. In the standby type, the credit
is payable upon certification of a party's nonperformance of the agreement. The documents that accompany the
beneficiary's draft tend to show that the applicant has not performed. The beneficiary of a commercial credit must
demonstrate by documents that he has performed his contract. The beneficiary of the standby credit must certify that his
obligor has not performed the contract.
32

By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the addressee to pay
money or deliver goods to a third person and assumes responsibility for payment of debt therefor to the addressee.
33
A
letter of credit, however, changes its nature as different transactions occur and if carried through to completion ends up as
a binding contract between the issuing and honoring banks without any regard or relation to the underlying contract or
disputes between the parties thereto.
34

Since letters of credit have gained general acceptability in international trade transactions, the ICC has published from
time to time updates on the Uniform Customs and Practice (UCP) for Documentary Credits to standardize practices in the
letter of credit area. The vast majority of letters of credit incorporate the UCP.
35
First published in 1933, the UCP for
Documentary Credits has undergone several revisions, the latest of which was in 1993.
36

In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,
37
this Court ruled that the observance of the UCP is
justified by Article 2 of the Code of Commerce which provides that in the absence of any particular provision in the Code
of Commerce, commercial transactions shall be governed by usages and customs generally observed. More recently, in
Bank of America, NT & SA v. Court of Appeals,
38
this Court ruled that there being no specific provisions which govern the
legal complexities arising from transactions involving letters of credit, not only between or among banks themselves but
also between banks and the seller or the buyer, as the case may be, the applicability of the UCP is undeniable.
Article 3 of the UCP provides that credits, by their nature, are separate transactions from the sales or other contract(s) on
which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference
whatsoever to such contract(s) is included in the credit. Consequently, the undertaking of a bank to pay, accept and pay
draft(s) or negotiate and/or fulfill any other obligation under the credit is not subject to claims or defenses by the applicant
resulting from his relationships with the issuing bank or the beneficiary. A beneficiary can in no case avail himself of the
contractual relationships existing between the banks or between the applicant and the issuing bank.
Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft and the required
documents are presented to it. The so-called "independence principle" assures the seller or the beneficiary of prompt
payment independent of any breach of the main contract and precludes the issuing bank from determining whether the
main contract is actually accomplished or not. Under this principle, banks assume no liability or responsibility for the form,
sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or particular
conditions stipulated in the documents or superimposed thereon, nor do they assume any liability or responsibility for the
description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any
documents, or for the good faith or acts and/or omissions, solvency, performance or standing of the consignor, the
carriers, or the insurers of the goods, or any other person whomsoever.
39

The independent nature of the letter of credit may be: (a) independence in toto where the credit is independent from the
justification aspect and is a separate obligation from the underlying agreement like for instance a typical standby; or (b)
independence may be only as to the justification aspect like in a commercial letter of credit or repayment standby, which is
identical with the same obligations under the underlying agreement. In both cases the payment may be enjoined if in the
light of the purpose of the credit the payment of the credit would constitute fraudulent abuse of the credit.
40

Can the beneficiary invoke the independence principle?
Petitioner insists that the independence principle does not apply to the instant case and assuming it is so, it is a defense
available only to respondent banks. LHC, on the other hand, contends that it would be contrary to common sense to deny
the benefit of an independent contract to the very party for whom the benefit is intended. As beneficiary of the letter of
credit, LHC asserts it is entitled to invoke the principle.
As discussed above, in a letter of credit transaction, such as in this case, where the credit is stipulated as irrevocable,
there is a definite undertaking by the issuing bank to pay the beneficiary provided that the stipulated documents are
presented and the conditions of the credit are complied with.
41
Precisely, the independence principle liberates the issuing
bank from the duty of ascertaining compliance by the parties in the main contract. As the principle's nomenclature clearl y
suggests, the obligation under the letter of credit is independent of the related and originating contract. In brief, the letter
of credit is separate and distinct from the underlying transaction.
Given the nature of letters of credit, petitioner's argumentthat it is only the issuing bank that may invoke the
independence principle on letters of creditdoes not impress this Court. To say that the independence principle may only
be invoked by the issuing banks would render nugatory the purpose for which the letters of credit are used in commercial
transactions. As it is, the independence doctrine works to the benefit of both the issuing bank and the beneficiary.
Letters of credit are employed by the parties desiring to enter into commercial transactions, not for the benefit of the
issuing bank but mainly for the benefit of the parties to the original transactions. With the letter of credit from the issuing
bank, the party who applied for and obtained it may confidently present the letter of credit to the beneficiary as a security
to convince the beneficiary to enter into the business transaction. On the other hand, the other party to the business
transaction, i.e., the beneficiary of the letter of credit, can be rest assured of being empowered to call on the letter of credit
as a security in case the commercial transaction does not push through, or the applicant fails to perform his part of the
transaction. It is for this reason that the party who is entitled to the proceeds of the letter of credit is appropriately called
"beneficiary."
Petitioner's argument that any dispute must first be resolved by the parties, whether through negotiations or arbitration,
before the beneficiary is entitled to call on the letter of credit in essence would convert the letter of credit into a mere
guarantee. Jurisprudence has laid down a clear distinction between a letter of credit and a guarantee in that the
settlement of a dispute between the parties is not a pre-requisite for the release of funds under a letter of credit. In other
words, the argument is incompatible with the very nature of the letter of credit. If a letter of credit is drawable only after
settlement of the dispute on the contract entered into by the applicant and the beneficiary, there would be no practical and
beneficial use for letters of credit in commercial transactions.
Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the issue:
The standby credit is an attractive commercial device for many of the same reasons that commercial credits are
attractive. Essentially, these credits are inexpensive and efficient. Often they replace surety contracts, which tend
to generate higher costs than credits do and are usually triggered by a factual determination rather than by the
examination of documents.
Because parties and courts should not confuse the different functions of the surety contract on the one hand and
the standby credit on the other, the distinction between surety contracts and credits merits some reflection. The
two commercial devices share a common purpose. Both ensure against the obligor's nonperformance. They
function, however, in distinctly different ways.
Traditionally, upon the obligor's default, the surety undertakes to complete the obligor's performance, usually by
hiring someone to complete that performance. Surety contracts, then, often involve costs of determining whether
the obligor defaulted (a matter over which the surety and the beneficiary often litigate) plus the cost of
performance. The benefit of the surety contract to the beneficiary is obvious. He knows that the surety, often an
insurance company, is a strong financial institution that will perform if the obligor does not. The beneficiary also
should understand that such performance must await the sometimes lengthy and costly determination that the
obligor has defaulted. In addition, the surety's performance takes time.
The standby credit has different expectations. He reasonably expects that he will receive cash in the event of
nonperformance, that he will receive it promptly, and that he will receive it before any litigation with the obligor
(the applicant) over the nature of the applicant's performance takes place. The standby credit has this opposite
effect of the surety contract: it reverses the financial burden of parties during litigation.
In the surety contract setting, there is no duty to indemnify the beneficiary until the beneficiary establishes the fact
of the obligor's performance. The beneficiary may have to establish that fact in litigation. During the litigation, the
surety holds the money and the beneficiary bears most of the cost of delay in performance.
In the standby credit case, however, the beneficiary avoids that litigation burden and receives his money promptly
upon presentation of the required documents. It may be that the applicant has, in fact, performed and that the
beneficiary's presentation of those documents is not rightful. In that case, the applicant may sue the beneficiary in
tort, in contract, or in breach of warranty; but, during the litigation to determine whether the applicant has in fact
breached the obligation to perform, the beneficiary, not the applicant, holds the money. Parties that use a standby
credit and courts construing such a credit should understand this allocation of burdens. There is a tendency in
some quarters to overlook this distinction between surety contracts and standby credits and to reallocate burdens
by permitting the obligor or the issuer to litigate the performance question before payment to the beneficiary.
42

While it is the bank which is bound to honor the credit, it is the beneficiary who has the right to ask the bank to honor the
credit by allowing him to draw thereon. The situation itself emasculates petitioner's posture that LHC cannot invoke the
independence principle and highlights its puerility, more so in this case where the banks concerned were impleaded as
parties by petitioner itself.
Respondent banks had squarely raised the independence principle to justify their releases of the amounts due under the
Securities. Owing to the nature and purpose of the standby letters of credit, this Court rules that the respondent banks
were left with little or no alternative but to honor the credit and both of them in fact submitted that it was "ministerial" for
them to honor the call for payment.
43

Furthermore, LHC has a right rooted in the Contract to call on the Securities. The relevant provisions of the Contract read,
thus:
4.2.1. In order to secure the performance of its obligations under this Contract, the Contractor at its cost shall on
the Commencement Date provide security to the Employer in the form of two irrevocable and confirmed standby
letters of credit (the "Securities"), each in the amount of US$8,988,907, issued and confirmed by banks or
financial institutions acceptable to the Employer. Each of the Securities must be in form and substance
acceptable to the Employer and may be provided on an annually renewable basis.
44

8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the Employer by way of
liquidated damages ("Liquidated Damages for Delay") the amount of US$75,000 for each and every day or part of
a day that shall elapse between the Target Completion Date and the Completion Date, provided that Liquidated
Damages for Delay payable by the Contractor shall in the aggregate not exceed 20% of the Contract Price. The
Contractor shall pay Liquidated Damages for Delay for each day of the delay on the following day without need of
demand from the Employer.
8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such damages
from any monies due, or to become due to the Contractor and/or by drawing on the Security."
45

A contract once perfected, binds the parties not only to the fulfillment of what has been expressly stipulated but also to al l
the consequences which according to their nature, may be in keeping with good faith, usage, and law.
46
A careful perusal
of the Turnkey Contract reveals the intention of the parties to make the Securities answerable for the liquidated damages
occasioned by any delay on the part of petitioner. The call upon the Securities, while not an exclusive remedy on the part
of LHC, is certainly an alternative recourse available to it upon the happening of the contingency for which the Securities
have been proffered. Thus, even without the use of the "independence principle," the Turnkey Contract itself bestows
upon LHC the right to call on the Securities in the event of default.
Next, petitioner invokes the "fraud exception" principle. It avers that LHC's call on the Securities is wrongful because it
fraudulently misrepresented to ANZ Bank and SBC that there is already a breach in the Turnkey Contract knowing fully
well that this is yet to be determined by the arbitral tribunals. It asserts that the "fraud exception" exists when the
beneficiary, for the purpose of drawing on the credit, fraudulently presents to the confirming bank, documents that contain,
expressly or by implication, material representations of fact that to his knowledge are untrue. In such a situation, petitioner
insists, injunction is recognized as a remedy available to it.
Citing Dolan's treatise on letters of credit, petitioner argues that the independence principle is not without limits and it is
important to fashion those limits in light of the principle's purpose, which is to serve the commercial function of the credit. If
it does not serve those functions, application of the principle is not warranted, and the commonlaw principles of contract
should apply.
It is worthy of note that the propriety of LHC's call on the Securities is largely intertwined with the fact of default which is
the self-same issue pending resolution before the arbitral tribunals. To be able to declare the call on the Securities
wrongful or fraudulent, it is imperative to resolve, among others, whether petitioner was in fact guilty of delay in the
performance of its obligation. Unfortunately for petitioner, this Court is not called upon to rule upon the issue of default
such issue having been submitted by the parties to the jurisdiction of the arbitral tribunals pursuant to the terms embodied
in their agreement.
47

Would injunction then be the proper remedy to restrain the alleged wrongful draws on the Securities?
Most writers agree that fraud is an exception to the independence principle. Professor Dolan opines that the
untruthfulness of a certificate accompanying a demand for payment under a standby credit may qualify as fraud sufficient
to support an injunction against payment.
48
The remedy for fraudulent abuse is an injunction. However, injunction should
not be granted unless: (a) there is clear proof of fraud; (b) the fraud constitutes fraudulent abuse of the independent
purpose of the letter of credit and not only fraud under the main agreement; and (c) irreparable injury might follow if
injunction is not granted or the recovery of damages would be seriously damaged.
49

In its complaint for injunction before the trial court, petitioner alleged that it is entitled to a total extension of two hundred
fifty-three (253) days which would move the target completion date. It argued that if its claims for extension would be
found meritorious by the ICC, then LHC would not be entitled to any liquidated damages.
50

Generally, injunction is a preservative remedy for the protection of one's substantive right or interest; it is not a cause of
action in itself but merely a provisional remedy, an adjunct to a main suit. The issuance of the writ of preliminary injunction
as an ancillary or preventive remedy to secure the rights of a party in a pending case is entirely within the discretion of the
court taking cognizance of the case, the only limitation being that this discretion should be exercised based upon the
grounds and in the manner provided by law.
51

Before a writ of preliminary injunction may be issued, there must be a clear showing by the complaint that there exists a
right to be protected and that the acts against which the writ is to be directed are violative of the said right.
52
It must be
shown that the invasion of the right sought to be protected is material and substantial, that the right of complainant is clear
and unmistakable and that there is an urgent and paramount necessity for the writ to prevent serious damage.
53
Moreover,
an injunctive remedy may only be resorted to when there is a pressing necessity to avoid injurious consequences which
cannot be remedied under any standard compensation.
54

In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain LHC's call on the
Securities which would justify the issuance of preliminary injunction. By petitioner's own admission, the right of LHC to call
on the Securities was contractually rooted and subject to the express stipulations in the Turnkey Contract.
55
Indeed, the
Turnkey Contract is plain and unequivocal in that it conferred upon LHC the right to draw upon the Securities in case of
default, as provided in Clause 4.2.5, in relation to Clause 8.7.2, thus:
4.2.5 The Employer shall give the Contractor seven days' notice of calling upon any of the Securities, stating the
nature of the default for which the claim on any of the Securities is to be made, provided that no notice will be
required if the Employer calls upon any of the Securities for the payment of Liquidated Damages for Delay or for
failure by the Contractor to renew or extend the Securities within 14 days of their expiration in accordance with
Clause 4.2.2.
56

8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such damages
from any monies due, or to become due, to the Contractor and/or by drawing on the Security.
57

The pendency of the arbitration proceedings would not per se make LHC's draws on the Securities wrongful or fraudulent
for there was nothing in the Contract which would indicate that the parties intended that all disputes regarding delay
should first be settled through arbitration before LHC would be allowed to call upon the Securities. It is therefore
premature and absurd to conclude that the draws on the Securities were outright fraudulent given the fact that the ICC
and CIAC have not ruled with finality on the existence of default.
Nowhere in its complaint before the trial court or in its pleadings filed before the appellate court, did petitioner invoke the
fraud exception rule as a ground to justify the issuance of an injunction.
58
What petitioner did assert before the courts
below was the fact that LHC's draws on the Securities would be premature and without basis in view of the pending
disputes between them. Petitioner should not be allowed in this instance to bring into play the fraud exception rule to
sustain its claim for the issuance of an injunctive relief. Matters, theories or arguments not brought out in the proceedings
below will ordinarily not be considered by a reviewing court as they cannot be raised for the first time on appeal.
59
The
lower courts could thus not be faulted for not applying the fraud exception rule not only because the existence of fraud
was fundamentally interwoven with the issue of default still pending before the arbitral tribunals, but more so, because
petitioner never raised it as an issue in its pleadings filed in the courts below. At any rate, petitioner utterly failed to show
that it had a clear and unmistakable right to prevent LHC's call upon the Securities.
Of course, prudence should have impelled LHC to await resolution of the pending issues before the arbitral tribunals prior
to taking action to enforce the Securities. But, as earlier stated, the Turnkey Contract did not require LHC to do so and,
therefore, it was merely enforcing its rights in accordance with the tenor thereof. Obligations arising from contracts have
the force of law between the contracting parties and should be complied with in good faith.
60
More importantly, pursuant to
the principle of autonomy of contracts embodied in Article 1306 of the Civil Code,
61
petitioner could have incorporated in
its Contract with LHC, a proviso that only the final determination by the arbitral tribunals that default had occurred would
justify the enforcement of the Securities. However, the fact is petitioner did not do so; hence, it would have to live with its
inaction.
With respect to the issue of whether the respondent banks were justified in releasing the amounts due under the
Securities, this Court reiterates that pursuant to the independence principle the banks were under no obligation to
determine the veracity of LHC's certification that default has occurred. Neither were they bound by petitioner's declaration
that LHC's call thereon was wrongful. To repeat, respondent banks' undertaking was simply to pay once the required
documents are presented by the beneficiary.
At any rate, should petitioner finally prove in the pending arbitration proceedings that LHC's draws upon the Securities
were wrongful due to the non-existence of the fact of default, its right to seek indemnification for damages it suffered
would not normally be foreclosed pursuant to general principles of law.
Moreover, in a Manifestation,
62
dated 30 March 2001, LHC informed this Court that the subject letters of credit had been
fully drawn. This fact alone would have been sufficient reason to dismiss the instant petition.
Settled is the rule that injunction would not lie where the acts sought to be enjoined have already become fait accompli or
an accomplished or consummated act.
63
In Ticzon v. Video Post Manila, Inc.
64
this Court ruled that where the period within
which the former employees were prohibited from engaging in or working for an enterprise that competed with their former
employerthe very purpose of the preliminary injunction has expired, any declaration upholding the propriety of the writ
would be entirely useless as there would be no actual case or controversy between the parties insofar as the preliminary
injunction is concerned.
In the instant case, the consummation of the act sought to be restrained had rendered the instant petition mootfor any
declaration by this Court as to propriety or impropriety of the non-issuance of injunctive relief could have no practical
effect on the existing controversy.
65
The other issues raised by petitioner particularly with respect to its right to recover the
amounts wrongfully drawn on the Securities, according to it, could properly be threshed out in a separate proceeding.
One final point. LHC has charged petitioner of forum-shopping. It raised the charge on two occasions. First, in its Counter-
Manifestation dated 29 June 2004
66
LHC alleges that petitioner presented before this Court the same claim for money
which it has filed in two other proceedings, to wit: ICC Case No. 11264/TE/MW and Civil Case No. 04-332 before the RTC
of Makati. LHC argues that petitioner's acts constitutes forum-shopping which should be punished by the dismissal of the
claim in both forums. Second, in its Comment to Petitioner's Motion for Leave to File Addendum to Petitioner's
Memorandum dated 8 October 2004, LHC alleges that by maintaining the present appeal and at the same time pursuing
Civil Case No. 04-332wherein petitioner pressed for judgment on the issue of whether the funds LHC drew on the
Securities should be returnedpetitioner resorted to forum-shopping. In both instances, however, petitioner has
apparently opted not to respond to the charge.
Forum-shopping is a very serious charge. It exists when a party repetitively avails of several judicial remedies in different
courts, simultaneously or successively, all substantially founded on the same transactions and the same essential facts
and circumstances, and all raising substantially the same issues either pending in, or already resolved adversely, by some
other court.
67
It may also consist in the act of a party against whom an adverse judgment has been rendered in one forum,
of seeking another and possibly favorable opinion in another forum other than by appeal or special civil action of certiorari,
or the institution of two or more actions or proceedings grounded on the same cause on the supposition that one or the
other court might look with favor upon the other party.
68
To determine whether a party violated the rule against forum-
shopping, the test applied is whether the elements of litis pendentia are present or whether a final judgment in one case
will amount to res judicata in another.
69
Forum-shopping constitutes improper conduct and may be punished with summary
dismissal of the multiple petitions and direct contempt of court.
70

Considering the seriousness of the charge of forum-shopping and the severity of the sanctions for its violation, the Court
will refrain from making any definitive ruling on this issue until after petitioner has been given ample opportunity to
respond to the charge.
WHEREFORE, the instant petition is DENIED, with costs against petitioner.
Petitioner is hereby required to answer the charge of forum-shopping within fifteen (15) days from notice.
SO ORDERED.











G.R. No. 160732 June 21, 2004
METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner,
vs.
HON. REYNALDO B. DAWAY, in his capacity as Presiding Judge of the Regional Trial Court of Quezon City,
Branch 90 and Maynilad Water Services, Inc., respondents
D E C I S I O N
AZCUNA, J .:
On November 17, 2003, the Regional Trial Court (RTC) of Quezon City, Branch 90, made a determination that the Petition
for Rehabilitation with Prayer for Suspension of Actions and Proceedings filed by Maynilad Water Services, Inc.
(Maynilad) conformed substantially to the provisions of Sec. 2, Rule 4 of the Interim Rules of Procedure on Corporate
Rehabilitation (Interim Rules). It forthwith issued a Stay Order
1
which states, in part, that the court was thereby:
x x x x x x x x x
2. Staying enforcement of all claims, whether for money or otherwise and whether such enforcement is by court
action or otherwise, against the petitioner, its guarantors and sureties not solidarily liable with the petitioner;
3. Prohibiting the petitioner from selling, encumbering, transferring, or disposing in any manner any of its
properties except in the ordinary course of business;
4. Prohibiting the petitioner from making any payment of its liabilities, outstanding as at the date of the filing of the
petition;
x x x x x x x x x
Subsequently, on November 27, 2003, public respondent, acting on two Urgent Ex Parte motions
2
filed by respondent
Maynilad, issued the herein questioned Order
3
which stated that it thereby:
"1. DECLARES that the act of MWSS in commencing on November 24, 2003 the process for the payment by the
banks of US$98 million out of the US$120 million standby letter of credit so the banks have to make good such
call/drawing of payment of US$98 million by MWSS not later than November 27, 2003 at 10:00 P. M. or any
similar act for that matter, is violative of the above-quoted sub-paragraph 2.) of the dispositive portion of this
Courts Stay Order dated November 17, 2003.
2. ORDERS MWSS through its officers/officials to withdraw under pain of contempt the written certification/notice
of draw to Citicorp International Limited dated November 24, 2003 and DECLARES void any payment by the
banks to MWSS in the event such written certification/notice of draw is not withdrawn by MWSS and/or MWSS
receives payment by virtue of the aforesaid standby letter of credit."
Aggrieved by this Order, petitioner Manila Waterworks & Sewerage System (MWSS) filed this petition for review by way
of certiorari under Rule 65 of the Rules of Court questioning the legality of said order as having been issued without or in
excess of the lower courts jurisdiction or that the court a quo acted with grave abuse of discretion amounting to lack or
excess of jurisdiction.
4

ANTECEDENTS OF THE CASE
On February 21, 1997, MWSS granted Maynilad under a Concession Agreement a twenty-year period to manage,
operate, repair, decommission and refurbish the existing MWSS water delivery and sewerage services in the West Zone
Service Area, for which Maynilad undertook to pay the corresponding concession fees on the dates agreed upon in said
agreement
5
which, among other things, consisted of payments of petitioners mostly foreign loans.
To secure the concessionaires performance of its obligations under the Concession Agreement, Maynilad was required
under Section 6.9 of said contract to put up a bond, bank guarantee or other security acceptable to MWSS.
In compliance with this requirement, Maynilad arranged on July 14, 2000 for a three-year facility with a number of foreign
banks, led by Citicorp International Limited, for the issuance of an Irrevocable Standby Letter of Credit
6
in the amount of
US$120,000,000 in favor of MWSS for the full and prompt performance of Maynilads obligations to MWSS as
aforestated.
Sometime in September 2000, respondent Maynilad requested MWSS for a mechanism by which it hoped to recover the
losses it had allegedly incurred and would be incurring as a result of the depreciation of the Philippine Peso against the
US Dollar. Failing to get what it desired, Maynilad issued a Force Majeure Notice on March 8, 2001 and unilaterally
suspended the payment of the concession fees. In an effort to salvage the Concession Agreement, the parties entered
into a Memorandum of Agreement (MOA)
7
on June 8, 2001 wherein Maynilad was allowed to recover foreign exchange
losses under a formula agreed upon between them. Sometime in August 2001 Maynilad again filed another Force
Majeure Notice and, since MWSS could not agree with the terms of said Notice, the matter was referred on August 30,
2001 to the Appeals Panel for arbitration. This resulted in the parties agreeing to resolve the issues through an
amendment of the Concession Agreement on October 5, 2001, known as Amendment No. 1,
8
which was based on the
terms set down in MWSS Board of Trustees Resolution No. 457-2001, as amended by MWSS Board of Trustees
Resolution No. 487-2001,
9
which provided inter alia for a formula that would allow Maynilad to recover foreign exchange
losses it had incurred or would incur under the terms of the Concession Agreement.
As part of this agreement, Maynilad committed, among other things, to:
a) infuse the amount of UD$80.0 million as additional funding support from its stockholders;
b) resume payment of the concession fees; and
c) mutually seek the dismissal of the cases pending before the Court of Appeals and with Minor Dispute Appeals
Panel.
However, on November 5, 2002, Maynilad served upon MWSS a Notice of Event of Termination, claiming that MWSS
failed to comply with its obligations under the Concession Agreement and Amendment No. 1 regarding the adjustment
mechanism that would cover Maynilads foreign exchange losses. On December 9, 2002, Maynilad filed a Notice of Early
Termination of the concession, which was challenged by MWSS. This matter was eventually brought before the Appeals
Panel on January 7, 2003 by MWSS.
10
On November 7, 2003, the Appeals Panel ruled that there was no Event of
Termination as defined under Art. 10.2 (ii) or 10.3 (iii) of the Concession Agreement and that, therefore, Maynilad should
pay the concession fees that had fallen due.
The award of the Appeals Panel became final on November 22, 2003. MWSS, thereafter, submitted a written notice
11
on
November 24, 2003, to Citicorp International Limited, 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 Irrevocable Standby Letter of
Credit and thereby demanded payment in the amount of US$98,923,640.15.
Prior to this, however, Maynilad had filed on November 13, 2003, a petition for rehabilitation before the court a quowhich
resulted in the issuance of the Stay Order of November 17, 2003 and the disputed Order of November 27, 2003.
12

PETITIONERS CASE
Petitioner hereby raises the following issues:
1. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR AND/OR ACT PATENTLY WITHOUT
JURISDICTION OR IN EXCESS OF JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION AMOUNTING
TO LACK OR EXCESS OF JURISDICTION IN CONSIDERING THE PERFORMANCE BOND OR ASSETS OF
THE ISSUING BANKS AS PART OR PROPERTY OF THE ESTATE OF THE PRIVATE RESPONDENT
MAYNILAD SUBJECT TO REHABILITATION.
2. DID THE HONORABLE PRESIDING JUDGE ACT WITH LACK OR EXCESS OF JURISDICTION OR COMMIT
A GRAVE ERROR OF LAW IN HOLDING THAT THE PERFORMANCE BOND OBLIGATIONS OF THE BANKS
WERE NOT SOLIDARY IN NATURE.
3. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR IN ALLOWING MAYNILAD TO IN EFFECT
SEEK A REVIEW OR APPEAL OF THE FINAL AND BINDING DECISION OF THE APPEALS PANEL.
In support of the first issue, petitioner maintains that as a matter of law, the US$120 Million Standby Letter of Credit and
Performance Bond are not property of the estate of the debtor Maynilad and, therefore, not subject to the in
rem rehabilitation jurisdiction of the trial court.
Petitioner argues that a call made on the Standby Letter of Credit does not involve any asset of Maynilad but only assets
of the banks. Furthermore, a call on the Standby Letter of Credit cannot also be considered a "claim" falling under the
purview of the stay order as alleged by respondent as it is not directed against the assets of respondent Maynilad.
Petitioner concludes that the public respondent erred in declaring and holding that the commencement of the process for
the payment of US$98 million is a violation of the order issued on November 17, 2003.
RESPONDENT MAYNILADS CASE
Respondent Maynilad seeks to refute this argument by alleging that:
a) the order objected to was strictly and precisely worded and issued after carefully considering/evaluating the
import of the arguments and documents referred to by Maynilad, MWSS and/or creditors Chinatrust Commercial
Bank and Suez in relation to admissions, pleadings and/or pertinent records
13
and that public respondent had the
authority to issue the same;
b) public respondent never considered nor held that the Performance bond or assets of the issuing banks are part
or property of the estate of respondent Maynilad subject to rehabilitation and which respondent Maynilad has not
and has never claimed to be;
14

c) what is relevant is not whether the performance bond or assets of the issuing banks are part of the estate of
respondent Maynilad but whether the act of petitioner in commencing the process for the payment by the banks of
US$98 million out of the US$120 million performance bond is covered and/or prohibited under sub-paragraphs 2.)
and 4.) of the stay order dated November 17, 2003;
d) the jurisdiction of public respondent extends not only to the assets of respondent Maynilad but also over
persons and assets of "all those affected by the proceedings x x x upon publication of the notice of
commencement;
15
" and
e) the obligations under the Standby Letter of Credit are not solidary and are not exempt from the coverage of the
stay order.
OUR RULING
We will discuss the first two issues raised by petitioner as these are interrelated and make up the main issue of the
petition before us which is, did the rehabilitation court sitting as such, act in excess of its authority or jurisdiction when it
enjoined herein petitioner from seeking the payment of the concession fees from the banks that issued the Irrevocable
Standby Letter of Credit in its favor and for the account of respondent Maynilad?
The public respondent relied on Sec. 1, Rule 3 of the Interim Rules on Corporate Rehabilitation to support its jurisdiction
over the Irrevocable Standby Letter of Credit and the banks that issued it. The section reads in part "that jurisdiction over
those affected by the proceedings is considered acquired upon the publication of the notice of commencement of
proceedings in a newspaper of general circulation" and goes further to define rehabilitation as an in rem proceeding. This
provision is a logical consequence of the in rem nature of the proceedings, where jurisdiction is acquired by publication
and where it is necessary that the assets of the debtor come within the courts jurisdiction to secure the same for the
benefit of creditors. The reference to "all those affected by the proceedings" covers creditors or such other persons or
entities holding assets belonging to the debtor under rehabilitation which should be reflected in its audited financial
statements. The banks do not hold any assets of respondent Maynilad that would be material to the rehabilitation
proceedings nor is Maynilad liable to the banks at this point.
Respondent Maynilads Financial Statement as of December 31, 2001 and 2002 do not show the Irrevocable Standby
Letter of Credit as part of its assets or liabilities, and by respondent Maynilads own admission it is not. In issuing the
clarificatory order of November 27, 2003, enjoining petitioner from claiming from an asset that did not belong to the debtor
and over which it did not acquire jurisdiction, the rehabilitation court acted in excess of its jurisdiction.
Respondent Maynilad insists, however, that it is Sec. 6 (b), Rule 4 of the Interim Rules that supports its claim that the
commencement of the process to draw on the Standby Letter of Credit is an enforcement of claim prohibited by and under
the Interim Rules and the order of public respondent.
Respondent Maynilad would persuade us that the above provision justifies a leap to the conclusion that such an
enforcement is prohibited by said section because it is a "claim against the debtor, its guarantors and sureties not
solidarily liable with the debtor" and that there is nothing in the Standby Letter of Credit nor in law nor in the nature of the
obligation that would show or require the obligation of the banks to be solidary with the respondent Maynilad.
We disagree.
First, the claim is not one against the debtor but against an entity that respondent Maynilad has procured to answer for its
non-performance of certain terms and conditions of the Concession Agreement, particularly the payment of concession
fees.
Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all claims against guarantors and
sureties, but only those claims against guarantors and sureties who are not solidarily liable with the debtor.
Respondent Maynilads claim that the banks are not solidarily liable with the debtor does not find support in jurisprudence.
We held in Feati Bank & Trust Company v. Court of Appeals
16
that the concept of guarantee vis--vis the concept of an
irrevocable letter of credit are inconsistent with each other. The guarantee theory destroys the independence of the banks
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 guarantors 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.
17

Letters of credit were developed for the purpose of insuring to a seller payment of a definite amount upon the presentation
of documents
18
and is thus a commitment by the issuer that the party in whose favor it is issued and who can collect upon
it will have his credit against the applicant of the letter, duly paid in the amount specified in the letter.
19
They are in
effect absolute undertakings to pay the money advanced or the amount for which credit is given on the faith of the
instrument. They are primary obligations and not accessory contracts and while they are security arrangements, they are
not converted thereby into contracts of guaranty.
20
What distinguishes letters of credit from other accessory contracts, is
the engagement of the issuing bank to pay the seller once the draft and other required shipping documents are presented
to it.
21
They are definite undertakings to pay at sight once the documents stipulated therein are presented.
Letters of Credits have long been and are still governed by the provisions of the Uniform Customs and Practice for
Documentary Credits of the International Chamber of Commerce. In the 1993 Revision it provides in Art. 2 that "the
expressions Documentary Credit(s) and Standby Letter(s) of Credit mean any arrangement, however made or described,
whereby a bank acting at the request and on instructions of a customer or on its own behalf is to make payment against
stipulated document(s)" and Art. 9 thereof defines the liability of the issuing banks on an irrevocable letter of credit as a
"definite undertaking of the issuing bank, provided that the stipulated documents are presented to the nominated bank or
the issuing bank and the terms and conditions of the Credit are complied with, to pay at sight if the Credit provides for
sight payment."
22

We have accepted, in Feati Bank and Trust Company v. Court of Appeals
23
and Bank of America NT & SA v. Court of
Appeals,
24
to the extent that they are pertinent, the application in our jurisdiction of the international credit regulatory set of
rules known as the Uniform Customs and Practice for Documentary Credits (U.C.P) issued by the International Chamber
of Commerce, which we said in Bank of the Philippine Islands v. Nery
25
was justified under Art. 2 of the Code of
Commerce, which states:
"Acts of commerce, whether those who execute them be merchants or not, and whether specified in this Code or
not should be governed by the provisions contained in it; in their absence, by the usages of commerce generally
observed in each place; and in the absence of both rules, by those of the civil law."
The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to herein petitioner as the prohibition is on
the enforcement of claims against guarantors or sureties of the debtors whose obligations are not solidary with the debtor.
The participating banks obligation 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.
Being solidary, the claims against them can be pursued separately from and independently of the rehabilitation case, as
held in Traders Royal Bank v. Court of Appeals
26
and reiterated in Philippine Blooming Mills, Inc. v. Court of
Appeals,
27
where we said that property of the surety cannot be taken into custody by the rehabilitation receiver (SEC) and
said surety can be sued separately to enforce his liability as surety for the debts or obligations of the debtor. The debts or
obligations for which a surety may be liable include future debts, an amount which may not be known at the time the
surety is given.
The terms of the Irrevocable Standby Letter of Credit do not show that the obligations of the banks are not solidary with
those of respondent Maynilad. On the contrary, it is issued at the request of and for the account of Maynilad Water
Services, Inc., in favor of the Metropolitan Waterworks and Sewerage System, as a bond for the full and prompt
performance of the obligations by the concessionaire under the Concession Agreement
28
and herein petitioner is
authorized by the banks to draw on it by the simple act of delivering to the agent a written certification substantially in the
form Annex "B" of the Letter of Credit. It provides further in Sec. 6, that for as long as the Standby Letter of Credit is valid
and subsisting, the Banks shall honor any written Certification made by MWSS in accordance with Sec. 2, of the Standby
Letter of Credit regardless of the date on which the event giving rise to such Written Certification arose.
29

Taking into consideration our own rulings on the nature of letters of credit and the customs and usage developed over the
years in the banking and commercial practice of letters of credit, we hold that except when a letter of credit specifically
stipulates otherwise, the obligation of the banks issuing letters of credit are solidary with that of the person or entity
requesting for its issuance, the same being a direct, primary, absolute and definite undertaking to pay the beneficiary
upon the presentation of the set of documents required therein.
The public respondent, therefore, exceeded his jurisdiction, in holding that he was competent to act on the obligation of
the banks under the Letter of Credit under the argument that this was not a solidary obligation with that of the debtor.
Being a solidary obligation, the letter of credit is excluded from the jurisdiction of the rehabilitation court and therefore in
enjoining petitioner from proceeding against the Standby Letters of Credit to which it had a clear right under the law and
the terms of said Standby Letter of Credit, public respondent acted in excess of his jurisdiction.
ADDITIONAL ISSUES
We proceed to consider the other issues raised in the oral arguments and included in the parties memoranda:
1. Respondent Maynilad argues that petitioner had a plain, speedy and adequate remedy under the Interim Rules
itself which provides in Sec. 12, Rule 4 that the court may on motion or motu proprio, terminate, modify or set
conditions for the continuance of the stay order or relieve a claim from coverage thereof. We find, however, that
the public respondent had already accomplished this during the hearing set for the two Urgent Ex Parte motions
filed by respondent Maynilad on November 21 and 24, 2003,
30
where the parties including the creditors, Suez and
Chinatrust Commercial "presented their respective arguments."
31
The public respondent then ruled, "after carefully
considering/evaluating the import of the arguments and documents referred to by Maynilad, MWSS and/or the
creditors Chinatrust Commercial Bank and Suez in relation to the admissions, the pleadings, and/or pertinent
portions of the records, this court is of the considered and humble view that the issue must perforce be resolved
in favor of Maynilad."
32
Hence to pursue their opposition before the same court would result in the presentation of
the same arguments and issues passed upon by public respondent.
Furthermore, Sec. 5, Rule 3 of the Interim Rules would preclude any other effective remedy questioning the
orders of the rehabilitation court since they are immediately executory and a petition for review or an appeal
therefrom shall not stay the execution of the order unless restrained or enjoined by the appellate court." In this
situation, it had no other remedy but to seek recourse to us through this petition for certiorari.
In Silvestre v. Torres and Oben,
33
we said that it is not enough that a remedy is available to prevent a party from
making use of the extraordinary remedy of certiorari but that such remedy be an adequate remedy which is
equally beneficial, speedy and sufficient, not only a remedy which at some time in the future may offer relief but a
remedy which will promptly relieve the petitioner from the injurious acts of the lower tribunal. It is the inadequacy -
- not the mere absence -- of all other legal remedies and the danger of failure of justice without the writ, that must
usually determine the propriety of certiorari.
34

2. Respondent Maynilad argues that by commencing the process for payment under the Standby Letter of Credit,
petitioner violated an immediately executory order of the court and, therefore, comes to Court with unclean hands
and should therefore be denied any relief.
It is true that the stay order is immediately executory. It is also true, however, that the Standby Letter of Credit and
the banks that issued it were not within the jurisdiction of the rehabilitation court. The call on the Standby Letter of
Credit, therefore, could not be considered a violation of the Stay Order.
3. Respondents claim that the filing of the petition pre-empts the original jurisdiction of the lower court is without
merit. The purpose of the initial hearing is to determine whether the petition for rehabilitation has merit or not. The
propriety of the stay order as well as the clarificatory order had already been passed upon in the hearing
previously had for that purpose. The determination of whether the public respondent was correct in enjoining the
petitioner from drawing on the Standby Letter of Credit will have no bearing on the determination to be made by
public respondent whether the petition for rehabilitation has merit or not. Our decision on the instant petition does
not pre-empt the original jurisdiction of the rehabilitation court.
WHEREFORE, the petition for certiorari is granted. The Order of November 27, 2003 of the Regional Trial Court of
Quezon City, Branch 90, is hereby declared NULL AND VOID and SET ASIDE. The status quo Order herein previously
issued is hereby LIFTED. In view of the urgency attending this case, this decision is immediately executory.
No costs.
SO ORDERED.