Professional Documents
Culture Documents
1) Transfield Philippines, Inc. vs. Luzon Hydro Corporation
1) Transfield Philippines, Inc. vs. Luzon Hydro Corporation
1) Transfield Philippines, Inc. vs. Luzon Hydro Corporation
307
_______________
*
SECOND DIVISION.
308
308
309
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. First published in 1933, the UCP for Documentary Credits has
undergone several revisions, the latest of which was in 1993. In Bank of the
Philippine Islands v. De Reny Fabric Industries, Inc., this Court ruled that
the observance of the UCP is justied 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, this Court ruled that there being no specic
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.
Same; Same; Same; Independence Principle; Under the
independence principle, banks assume no liability or responsibility for
the form, sufciency, accuracy, genuineness, falsication 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.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 fulll 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 beneciary. A
beneciary 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 beneciary
of the credit once the draft and the required documents are presented to it.
The so-called independence principle assures the seller or the
310
310
311
312
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.
Same; Same; Same; Same; Contracts; A contract once perfected, binds
the parties not only to the fulllment of what has been expressly stipulated
but also to all the consequences which according to their nature, may be in
keeping with good faith, usage, and law. A contract once perfected, binds
the parties not only to the fulllment of what has been expressly stipulated
but also to all the consequences which according to their nature, may be in
keeping with good faith, usage, and law. 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.
Same; Same; Same; Same; Injunction; Requisites; Most writers agree
that fraud is an exception to the independence principle; The remedy for
fraudulent abuse is an injunction.Most writers agree that fraud is an
exception to the independence principle. Professor Dolan opines that the
untruthfulness of a certicate accompanying a demand for payment under a
standby credit may qualify as fraud sufcient to support an injunction
against payment. 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.
Same; Same; Same; Same; Same; 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.Generally, injunction is a preservative remedy for the
protection of ones substantive right or interest;
313
313
314
315
316
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.
1
Petitioner has appealed from the Decision of the Court of
Appeals in CA-G.R. SP No. 61901 entitled Transeld Philippines,
Inc. v. Hon. Oscar Pimentel, et al., promulgated on 31 January
2
2001.
On 26 March 1997, petitioner and respondent Luzon Hydro3
Corporation (hereinafter, LHC) entered into a Turnkey Contract
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 prov_______________
1
317
If at anytime any dispute or difference shall arise between the Employer and the
Contractor in connection with or arising out of this Contract or the carrying out of the
Works, the parties together shall in good faith exert all efforts to resolve such dispute
or difference by whatever means they deem appropriate, including conciliation,
mediation and seeking the assistance of technical, accounting or other experts. At the
request of any party, the chief executives of the Employer and the Contractor shall
meet in a good-faith effort to reach an amicable settlement of the dispute or
difference. Any dispute or difference that the parties are unable to resolve within a
reasonable time may, at the option of either party, be referred to arbitration in
accordance with Clause 20.4. (Id., at p. 179)
318
318
10
11
12
Turnkey Contract, Clause 4.2.5, Rollo, p. 94, in relation to Clause 8.7.1., Rollo,
p. 132.
13
319
Clause 8.2. Time for Completion. The Contractor shall complete all the Works,
including the Tests on Completion, in accordance with the Program on or before the
Target Completion Date. (Rollo, p. 125)
15
16
8.7.1. If the Contractor fails to comply with Clause 8.2, the Contractor shall pay
to the Employer by way of liquidated damages (Liquidated Damages for Delay) the
amount of US$75,000 for each and every day or part of a day that shall elapse
between the Target Completion Date and the Completion Date, provided that
Liquidated Damages for Delay payable by the Contractor shall in the aggregate not
exceed 20% of the Contract Price. The Contractor shall pay Liq
320
320
18
19
321
Dissatised with the trial courts 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
20
injunction. Petitioner submitted to the appellate court that LHCs
call on the Securities was premature considering that the issue of its
default had not yet been resolved with nality 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 petitioners 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 certicates or the declarants 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
courts decision that LHC could call on the Se_______________
20
322
curities pursuant to the rst principle in credit law that the credit
itself is independent of the underlying transaction and that as long as
the beneciary 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 courts denial of
petitioners 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.
_______________
21
323
23
24
324
26
325
same time seeking the suit for enforcement of the arbitral award
before the Makati court.
27
Respondent SBC in its Memorandum, dated 10 March 2003
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
certication submitted by respondent LHC or into the latters
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
28
dated 13 March 2003 posits that its actions could not be regarded
as unjustied in view of the prevailing independence principle under
which it had no obligation to ascertain the truth of LHCs 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, petitioners 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 beneciary 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 beneciary
contract, because the issuer must honor drafts drawn against a letter
regardless of
_______________
27
28
326
Bank of America v. Court of Appeals, G.R. No. 105395, 10 December 1993, 228
31
Circuit Court, S.D. New York) No. 96 Civ. 7098 (RLC), 19 October 1998
<http://www.westlaw.com>.
327
327
33
34
Ibid.
35
ed.).
36
328
38
329
40
286-287 (1985).
330
330
sented and the conditions of the credit are complied with. Precisely,
the independence principle liberates the issuing bank from the duty
of ascertaining compliance by the parties in the main contract. As
the principles nomenclature clearly suggests, the obligation under
the letter of credit is independent of the related and originating
contract. In brief, the letter of credit is separate and distinct from the
underlying transaction.
Given the nature of letters of credit, petitioners 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
331
distinction between surety contracts and credits merits some reection. The
two commercial devices share a common purpose. Both ensure against the
obligors nonperformance. They function, however, in distinctly different
ways.
Traditionally, upon the obligors default, the surety undertakes to
complete the obligors 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
beneciary often litigate) plus the cost of performance. The benet of the
surety contract to the beneciary is obvious. He knows that the surety, often
an insurance company, is a strong nancial institution that will perform if
the obligor does not. The beneciary also should understand that such
performance must await the sometimes lengthy and costly determination
that the obligor has defaulted. In addition, the suretys performance takes
time.
332
332
333
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
43
the call for payment.
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 conrmed standby letters of
credit (the Securities), each in the amount of
US$8,988,907, issued and conrmed by banks or nancial
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
44
basis.
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
44
45
46
334
335
this Court is not called upon to rule upon the issue of defaultsuch
issue having been submitted by the parties to the jurisdiction of the
arbitral tribunals
pursuant to the terms embodied in their
47
agreement.
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
certicate accompanying a demand for payment under a standby
credit may
qualify as fraud sufcient to support an injunction against
48
payment. 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
49
seriously damaged.
In its complaint for injunction before the trial court, petitioner
alleged that it is entitled to a total extension of two hundred ftythree (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
50
damages.
Generally, injunction is a preservative remedy for the protection
of ones 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
_______________
47
48
49
Rollo, p. 391.
336
336
the court taking cognizance of the case, the only limitation being
that this discretion should be exercised based upon the grounds and
51
in the manner provided by law.
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
52
are violative of the said right. 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
53
damage. Moreover, an injunctive remedy may only be resorted to
when there is a pressing necessity to avoid injurious consequences
54
which cannot be remedied under any standard compensation.
In the instant case, petitioner failed to show that it has a clear and
unmistakable right to restrain LHCs call on the Securities which
would justify the issuance of preliminary injunction. By petitioners
own admission, the right of LHC to call on the Securities was
contractually rooted
and subject to the express stipulations in the
55
Turnkey Contract. Indeed, the Turnkey Contract is plain and
unequivocal in that it conferred upon LHC the right to draw upon
the Securities in case
_______________
51
Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga, 415 Phil. 43; 362
Shin v. Court of Appeals, G.R. No. 113627, 6 February 2001, 351 SCRA 257.
53
Zabat v. Court of Appeals, G.R. No. 122089, 23 August 2000, 338 SCRA 551;
Philippine Economic Zone Authority v. Vianzon, G.R. No. 131020, 20 July 2000, 336
SCRA 309; Valencia v. Court of Appeals, G.R. No. 119118, 19 February 2001, 352
SCRA 72; Crystal v. Cebu International School, G.R. No. 135433, 4 April 2001, 356
SCRA 296; Ong Ching Kian Chuan v. Court of Appeals, 415 Phil. 365; 363 SCRA
145 (2001).
54
Philippine National Bank v. Ritratto Group, Inc., 414 Phil. 494; 362 SCRA 216
(2001).
55
Rollo, p. 31.
337
337
57
Id., at p. 132.
58
Vide Annex L, Rollo. pp. 392-399; Petition for Certiorari, CA Rollo, pp. 7-43.
338
338
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
59
the rst time on appeal. The lower courts could thus not be faulted
59
the rst time on appeal. 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 led in
the courts below. At any rate, petitioner utterly failed to show that it
had a clear and unmistakable right to prevent LHCs 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
60
contracting parties and should be complied with in good faith.
More importantly, pursuant to the principle of61autonomy of contracts
embodied in Article 1306 of the Civil Code, petitioner could have
incorporated in its Contract with LHC, a proviso that only the nal
determination by the arbitral tribunals that default had occurred
would justify the enforcement of the
_______________
59
300 SCRA 469 (1998); Ruby Industrial Corporation v. Court of Appeals, 348 Phil.
480; 284 SCRA 445 (1998); Victorias Milling Co., Inc. v. Court of Appeals, 389 Phil.
184; 333 SCRA 663 (2000).
60
61
terms and conditions as they may deem convenient, provided they are not contrary to
law, morals, good customs, public order, or public policy.
339
339
Rollo, p. 493.
63
Aznar Brothers Realty Company v. Court of Appeals, G.R. No. 128102, 7 March
2000, 327 SCRA 359; Soriano v. Court of Appeals, 416 Phil. 226; 363 SCRA 725
(2001); Rodil Enterprises v. Court of Appeals, G.R. No. 129609, 29 November 2001,
371 SCRA 79; Unionbank of the Philippines v. Court of Appeals, 370 Phil. 837; 311
SCRA 795 (1999).
64
340
341
founded on the same transactions and the same essential facts and
circumstances, and all raising substantially the same issues either
67
pending in, or already resolved adversely, by some other court. 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 that68one or the other court might look with favor upon
the other party. 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 69a nal judgment in one case
will amount to res judicata in another. Forum shopping constitutes
improper conduct and may be punished with summary dismissal of
70
the multiple petitions and direct contempt of court.
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 denitive 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.
Tantoy, Sr. v. Court of Appeals, G.R. No. 141427, April 20, 2001, 357 SCRA
329.
68
Bangko Silangan Development Bank v. Court of Appeals, 412 Phil. 755; 360
Tirona v. Alejo, G.R. No. 129313, October 10, 2001, 367 SCRA 17; Manalo v.
Court of Appeals, G.R. No. 141297, October 8, 2001, 366 SCRA 752.
70
Tantoy, Sr. v. Court of Appeals, supra note 67; Caviles v. Seventeenth Division,
Court of Appeals, G.R. No. 126857, September 18, 2002, 389 SCRA 306.
342
342
SO ORDERED.
Puno (Chairman), Austria-Martinez, Callejo, Sr. and ChicoNazario, JJ., concur.
Petition denied.
Notes.Being a product of international commerce, it is not
uncommon to nd a dearth of national law that can adequately
provide for the governance of letters of credit. (Bank of America, NT
& SA vs. Court of Appeals, 228 SCRA 357 [1993])
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 rst time on appeal. (Salafranca v.
Philamlife (Pamplona) Village Homeowners Association, Inc., 300
SCRA 469 [1998])
o0o