THE HONGKONG & SHANGHAI BANKING CORPORATION,
LIMITED, Petitioner, v. NATIONAL STEEL CORPORATION AND CITYTRUST BANKING
CORPORATION (NOW BANK OF THE PHILIPPINE ISLANDS), Respondent.
G.R. No. 183486; February 24, 2016.
The Nature of a Letter of Credit
 a commercial instrument developed to address the unique needs of certain
commercial transactions.
 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.
 a buyer obtains the credit of a third party, usually a bank, to provide assurance of
payment.66 This, in turn, convinces a seller to part with his or her goods even before
he or she is paid, as he or she is insured by the third party that he or she will be paid
as soon as he or she presents the documents agreed upon.
 generally arises out of a separate contract requiring the assurance of payment of a
third party.
 there are usually three transactions and three parties.
The first transaction, which constitutes the underlying transaction in a letter of credit, is
a contract of sale between the buyer and the seller. The contract may require that the
buyer obtain a letter of credit from a third party acceptable to the seller. The
obligations of the parties under this contract are governed by our law on sales.
The second transaction is the issuance of a letter of credit between the buyer and the
issuing bank. The buyer requests the issuing bank to issue a letter of credit naming
the seller as the beneficiary. In this transaction, the issuing bank undertakes to pay the
seller upon presentation of the documents identified in the letter of credit. The buyer,
on the other hand, obliges himself or herself to reimburse the issuing bank for the
payment made. In addition, this transaction may also include a fee for the issuing
bank's services.68 This transaction constitutes an obligation on the part of the issuing
bank to perform a service in consideration of the buyer's payment. The obligations of
the parties and their remedies in cases of breach are governed by the letter of credit
itself and by our general law on obligations, as our civil law finds suppletory
application in commercial documents.69
The third transaction takes place between the seller and the issuing bank. The issuing
bank issues the letter of credit for the benefit of the seller. The seller may agree to
ship the goods to the buyer even before actual payment provided that the issuing bank
informs him or her that a letter of credit has been issued for his or her benefit. This
means that the seller can draw drafts from the issuing bank upon presentation of
certain documents identified in the letter of credit. The relationship between the
issuing bank and the seller is not strictly contractual since there is no privity of contract
nor meeting of the minds between them.70 It also does not constitute a stipulation pour
autrui in favor of the seller since the issuing bank must honor the drafts drawn against
the letter of credit regardless of any defect in the underlying contract.71 Neither can it
be considered as an assignment by the buyer to the seller-beneficiary as the buyer
himself cannot draw on the letter.72 From its inception, only the seller can demand
payment under the letter of credit. It is also not a contract of suretyship or guaranty
since it involves primary liability in the event of default. 73 Nevertheless, while the
relationship between the seller-beneficiary and the issuing bank is not strictly
contractual, strict payment under the terms of a letter of credit is an enforceable
right.74 This enforceable right finds two legal underpinnings. First, letters of credit, as
will be further explained, are governed by recognized international norms which
dictate strict compliance with its terms. Second, the issuing bank has an existing
agreement with the buyer to pay the seller upon proper presentation of documents.
Thus, as the law on obligations applies even in commercial documents, 75 the issuing
bank has a duty to the buyer to honor in good faith its obligation under their
agreement. As will be seen in the succeeding discussion, this transaction is also
governed by international customs which this Court has recognized in this
jurisdiction.76
In simpler terms, the various transactions that give rise to a letter of credit proceed as
follows: Once the seller ships the goods, he or she obtains the documents required
under the letter of credit. He or she shall then present these documents to the issuing
bank which must then pay the amount identified under the letter of credit after it
ascertains that the documents are complete. The issuing bank then holds on to these
documents which the buyer needs in order to claim the goods shipped. The buyer
reimburses the issuing bank for its payment at which point the issuing bank releases
the documents to the buyer. The buyer is then able to present these documents in
order to claim the goods. At this point, all the transactions are completed. The seller
received payment for his or her performance of his obligation to deliver the goods. The
issuing bank is reimbursed for the payment it made to the seller. The buyer received
the goods purchased.
FACTS:
Respondent National Steel Corporation (NSC) entered into an Export Sales Contract (the
Contract) with Klockner East Asia Limited (Klockner) on October 12, 1993. 1 NSC sold 1,200
metric tons of prime cold rolled coils to Klockner under FOB ST Iligan terms. In accordance with
the requirements in the Contract, Klockner applied for an irrevocable letter of credit with HSBC in
favor of NSC as the beneficiary in the amount of US$468,000. On October 22, 1993, HSBC
issued an irrevocable and onsight letter of credit no. HKH 239409 (the Letter of Credit) in favor
of NSC.2 The Letter of Credit stated that it is governed by the International Chamber of
Commerce Uniform Customs and Practice for Documentary Credits, Publication No. 400 (UCP
400). Under UCP 400, HSBC as the issuing bank, has the obligation to immediately pay NSC
upon presentment of the documents listed in the Letter of Credit.3 These documents are: (1) one
original commercial invoice; (2) one packing list; (3) one non-negotiable copy of clean on board
ocean bill of lading made out to order, blank endorsed marked 'freight collect and notify
applicant;' (4) copy of Mill Test Certificate made out 'to whom it may concern;' (5) copy of
beneficiary's telex to applicant (Telex No. 86660 Klock HX) advising shipment details including
D/C No., shipping marks, name of vessel, port of shipment, port of destination, bill of lading date,
sailing and ETA dates, description of goods, size, weight, number of packages and value of
goods latest two days after shipment date; and (6) beneficiary's certificate certifying that (a) one
set of non-negotiable copies of documents (being those listed above) have been faxed to
applicant (FAX No. 5294987) latest two days after shipment date; and (b) one set of documents
including one copy each of invoice and packing list, 3/3 original bills of lading plus one non-
negotiable copy and three original Mill Test Certificates have been sent to applicant by air
courier service latest two days after shipment date.4
The Letter of Credit was amended twice to reflect changes in the terms of delivery. On
November 2, 1993, the Letter of Credit was first amended to change the delivery terms from
FOB ST Iligan to FOB ST Manila and to increase the amount to US$488,400. 5 It was
subsequently amended on November 18, 1993 to extend the expiry and shipment date to
December 8, 1993.6 On November 21, 1993, NSC, through Emerald Forwarding Corporation,
loaded and shipped the cargo of prime cold rolled coils on board MV Sea Dragon under China
Ocean Shipping Company Bill of Lading No. HKG 266001. The cargo arrived in Hongkong on
November 25, 1993.7
NSC coursed the collection of its payment from Klockner through City Trust Banking Corporation
(City Trust). NSC had earlier obtained a loan from City Trust secured by the proceeds of the
Letter of Credit issued by HSBC.8
On November 29, 1993, City Trust sent a collection order (Collection Order) to HSBC respecting
the collection of payment from Klockner. The Collection Order instructed as follows: (1) deliver
documents against payment; (2) cable advice of non-payment with reason; (3) cable advice
payment; and (4) remit proceeds via TELEX.9 The Collection Order also contained the following
statement: "Subject to Uniform Rules for the Collection of Commercial Paper Publication No.
322."10 Further, the Collection Order stated that proceeds should be remitted to Standard
Chartered Bank of Australia, Ltd., Offshore Branch Manila (SCB-M) which was, in turn, in charge
of remitting the amount to City Trust.11 On the same date, City Trust also presented to HSBC the
following documents: (1) Letter of Credit; (2) Bill of Lading; (3) Commercial Invoice; (4) Packing
List; (5) Mill Test Certificate; (6) NSC's TELEX to Klockner on shipping details; (7) Beneficiary's
Certificate of facsimile transmittal of documents; (8) Beneficiary's Certificate of air courier
transmittal of documents; and (9) DHL Receipt No. 669988911 and Certificate of Origin. 12
On December 2, 1993, HSBC sent a cablegram to City Trust acknowledging receipt of the
Collection Order. It also stated that the documents will be presented to "the drawee against
payment subject to UCP 322 [Uniform Rules for Collection (URC) 322] as instructed..." 13 SCB-M
then sent a cablegram to HSBC requesting the latter to urgently remit the proceeds to its
account. It further asked that HSBC inform it "if unable to pay"14 and of the "reasons
thereof."15 Neither CityTrust nor SCB-M objected to HSBC's statement that the collection will be
handled under the Uniform Rules for Collection (URC 322).
On December 7, 1993, HSBC responded to SCB-M and sent a cablegram where it repeated that
"this bill is being handled subject to [URC] 322 as instructed by [the] collecting bank." 16 It also
informed SCB-M that it has referred the matter to Klockner for payment and that it will revert
upon the receipt of the amount.17 On December 8, 1993, the Letter of Credit expired.18
On December 10, 1993, HSBC sent another cablegram to SCB-M advising it that Klockner had
refused payment. It then informed SCB-M that it intends to return the documents to NSC with all
the banking charges for its account.19 In a cablegram dated December 14, 1993, CityTrust
requested HSBC to inform it of Klockner's reason for refusing payment so that it may refer the
matter to NSC.20 HSBC did not respond and City Trust thus sent a follow-up cablegram to HSBC
on December 17, 1993. In this cablegram, City Trust insisted that a demand for payment must
be made from Kloclaier since the documents "were found in compliance with LC terms and
conditions."21 HSBC replied on the same day stating that in accordance with CityTrust's
instruction in its Collection Order, HSBC treated the transaction as a matter under URC 322.
Thus, it demanded payment from Klockner which unfortunately refused payment for unspecified
reasons. It then noted that under URC 322, Kloclaier has no duty to provide a reason for the
refusal. Hence, HSBC requested for further instructions as to whether it should continue to press
for payment or return the documents.22 City Trust responded that as advised by its client, HSBC
should continue to press for payment.23
Klockner continued to refuse payment and HSBC notified City Trust in a cablegram dated
January 7, 1994, that should Kloclaier still refuse to accept the bill by January 12, 1994, it will
return the full set of documents to City Trust with all the charges for the account of the drawer. 24
Meanwhile, on January 12, 1994, City Trust sent a letter to NSC stating that it executed NSC's
instructions "to send, ON COLLECTION BASIS, the export documents..."25 City Trust also
explained that its act of sending the export documents on collection basis has been its usual
practice in response to NSC's instructions in its transactions. 26
NSC responded to this in a letter dated January 18, 1994.27 NSC expressed its disagreement
with CityTrust's contention that it sent the export documents to HSBC on collection basis. It
highlighted that it "negotiated with City Trust the export documents pertaining to LC No. HKH
239409 of HSBC and it was City Trust, which wrongfully treated the negotiation, as 'on collection
basis.'"28 NSC further claimed that City Trust used its own mistake as an excuse against
payment under the Letter of Credit. Thus, NSC argued that City Trust remains liable under the
Letter of Credit. It also stated that it presumes that City Trust has preserved whatever right of
reimbursement it may have against HSBC.29
On January 13, 1994, CityTrust notified HSBC that it should continue to press for payment and
to hold on to the document until further notice.30
However, Klockner persisted in its refusal to pay. Thus, on February 17, 1994, HSBC returned
the documents to CityTrust.31 In a letter accompanying the returned documents, HSBC stated
that it considered itself discharged of its duty under the transaction. It also asked for payment of
handling charges.32 In response, CityTrust sent a cablegram to HSBC dated February 21, 1994
stating that it is "no longer possible for beneficiary to wait for you to get paid by applicant."33 It
explained that since the documents required under the Letter of Credit have been properly sent
to HSBC, Citytrust demanded payment from it. CityTrust also stated, for the first time in all of its
correspondence with HSBC, that "re your previous telexes, ICC Publication No. 322 is not
applicable."34 HSBC responded in cablegram dated February 28, 1994.35 It insisted that
CityTrust sent documents which clearly stated that the collection was being made under URC
322. Thus, in accordance with its instructions, HSBC, in the next three months, demanded
payment from Klockner which the latter eventually refused. Flence, HSBC stated that it opted to
return the documents. It then informed CityTrust that it considered the transaction closed save
for the latter's obligation to pay the handling charges.36
Disagreeing with HSBC's position, CityTrust sent a cablegram dated March 9, 1994. 37 It insisted
that HSBC should pay it in accordance with the terms of the Letter of Credit which it issued on
October 22, 1993. Under the Letter of Credit, HSBC undertook to reimburse the presenting bank
under "ICC 400 upon the presentment of all necessary documents."38 CityTrust also stated that
the reference to URC 322 in its Collection Order was merely in fine print. The Collection Order
itself was only pro-forma. CityTrust emphasized that the reference to URC 322 has been
"obviously superseded by our specific instructions to 'deliver documents against payment/cable
advice non-payment with reason/cable advice payment/remit proceeds via telex' which was
typed in on said form."39 CityTrust also claimed that the controlling document is the Letter of
Credit and not the mere fine print on the Collection Order.40 HSBC replied on March 10,
1994.41 It argued that CityTrust clearly instructed it to collect payment under URC 322, thus,
CityTrust can no longer claim a contrary position three months after it made its request. HSBC
repeated that the transaction is closed except for City Trust's obligation to pay for the expenses
which HSBC incurred.42
Meanwhile, on March 3, 1994, NSC sent a letter to HSBC where it, for the first time, demanded
payment under the Letter of Credit.43 On March 11, 1994, the NSC sent another letter to HSBC
through the Office of the Corporate Counsel which served as its final demand. These demands
were made after approximately four months from the expiration of the Letter of Credit.
Unable to collect from HSBC, NSC filed a complaint against it for collection of sum of money
(Complaint)44 docketed as Civil Case No. 94-2122 (Collection Case) of the RTC Makati. In its
Complaint, NSC alleged that it coursed the collection of the Letter of Credit through CityTrust.
However, notwithstanding CityTrust's complete presentation of the documents in accordance
with the requirements in the Letter of Credit, HSBC unreasonably refused to pay its obligation in
the amount of US$485, 767.93.45
HSBC filed its Answer46 on January 6, 1995. HSBC denied any liability under the Letter of Credit.
It argued in its Answer that CityTrust modified the obligation when it stated in its Collection Order
that the transaction is subject to URC 322 and not under UCP 400. 47 It also filed a Motion to
Admit Attached Third-Party Complaint48 against CityTrust on November 21, 1995.49 It claimed
that CityTrust instructed it to collect payment under URC 322 and never raised that it intended to
collect under the Letter of Credit.50 HSBC prayed that in the event that the court finds it liable to
NSC, CityTrust should be subrogated in its place and be made directly liable to NSC.51 The RTC
Makati granted the motion and admitted the third party complaint. CityTrust filed its Answer52 on
January 8, 1996. CityTrust denied that it modified the obligation. It argued that as a mere agent,
it cannot modify the terms of the Letter of Credit without the consent of all the parties. 53 Further,
it explained that the supposed instruction that the transaction is subject to URC 322 was merely
in fine print in a pro forma document and was superimposed and pasted over by a large pink
sticker with different remittance instructions.54
RTC: 1. URC 322 governs. 2. HSBC not liable to NSC.
CA: 1. UCP governs. 2. HSBC is liable to NSC.
ISSUES:
1. Which between Uniform Customs and Practice for Documentary Credits Publication No. 400
(UCP 400) and Uniform Rules for Collection 322 (URC 322) govern the transaction?
2. Who among HSBC and CityTrust bear the liability to pay the amount stated in the letter of
credit?
RULINGS:
1. UCP 400.
Letters of credit are defined and their incidences regulated by Articles 567 to 57285 of the Code
of Commerce. These provisions must be read with Article 286 of the same code which states that
acts of commerce are governed by their provisions, by the usages and customs generally
observed in the particular place and, in the absence of both rules, by civil law. In addition, Article
5087 also states that commercial contracts shall be governed by the Code of Commerce and
special laws and in their absence, by general civil law.
The International Chamber of Commerce (ICC)88 drafted a set of rules to govern transactions
involving letters of credit. This set of rules is known as the Uniform Customs and Practice for
Documentary Credits (UCP). Since its first issuance in 1933, the UCP has seen several
revisions, the latest of which was in 2007, known as the UCP 600. However, for the period
relevant to this case, the prevailing version is the 1993 revision called the UCP 400. Throughout
the years, the UCP has grown to become the worldwide standard in transactions involving letters
of credit.89 It has enjoyed near universal application with an estimated 95% of worldwide letters
of credit issued subject to the UCP.90
In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,91 this Court applied a
provision from the UCP in resolving a case pertaining to a letter of credit transaction. This Court
explained that the use of international custom in our jurisdiction is justified by Article 2 of the
Code of Commerce which provides that acts of commerce are governed by, among others,
usages and customs generally observed. Further, in Feati Bank & Trust Company v. Court of
Appeals,92 this Court ruled that the UCP should be applied in cases where the letter of credit
expressly states that it is the governing rule.93 This Court also held in Feati that the UCP applies
even if it is not incorporated into the letter of the credit.94 The application of the UCP in Bank of
Philippine Islands and in Feati was further affirmed in Metropolitan Waterworks and Sewerage
System v. Daway95 where this Court held that "[l]etters of credit have long been and are still
governed by the provisions of the Uniform Customs and Practice for Documentary Credit[s] of
the International Chamber of Commerce."96 These precedents highlight the binding nature of the
UCP in our jurisdiction.
Thus, for the purpose of clarity, letters of credit are governed primarily by their own
provisions,97 by laws specifically applicable to them,98 and by usage and custom.99 Consistent
with our rulings in several cases,100 usage and custom refers to UCP 400. When the particular
issues are not covered by the provisions of the letter of credit, by laws specifically applicable to
them and by UCP 400, our general civil law finds suppletory application. 101
Applying this set of laws and rules, this Court rules that HSBC is liable under the provisions of
the Letter of Credit, in accordance with usage and custom as embodied in UCP 400, and under
the provisions of general civil law.
2. HSBC.
The Letter of Credit categorically stated that it is subject to UCP 400, to wit:
Except so far as otherwise expressly stated, this documentary credit is subject to uniform
Customs and Practice for Documentary Credits (1983 Revision), International Chamber of
Commerce Publication No. 400.102
From the moment that HSBC agreed to the terms of the Letter of Credit - which states that UCP
400 applies - its actions in connection with the transaction automatically became bound by the
rules set in UCP 400. Even assuming that URC 322 is an international custom that has been
recognized in commerce, this does not change the fact that HSBC, as the issuing bank of a
letter of credit, undertook certain obligations dictated by the terms of the Letter of Credit itself
and by UCP 400. In Feati, this Court applied UCP 400 even when there is no express stipulation
in the letter of credit that it governs the transaction.103 On the strength of our ruling in Feati, we
have the legal duty to apply UCP 400 in this case independent of the parties' agreement to be
bound by it.
UCP 400 states that an irrevocable credit payable on sight, such as the Letter of Credit in this
case, constitutes a definite undertaking of the issuing bank to pay, provided that the stipulated
documents are presented and that the terms and conditions of the credit are complied
with.104 Further, UCP 400 provides that an issuing bank has the obligation to examine the
documents with reasonable care.105Thus, when City Trust forwarded the Letter of Credit with the
attached documents to HSBC, it had the duty to make a determination of whether its obligation
to pay arose by properly examining the documents.
In its petition, HSBC argues that it is not UCP 400 but URC 322 that should govern the
transaction.106URC 322 is a set of norms compiled by the ICC.107 It was drafted by international
experts and has been adopted by the ICC members. Owing to the status of the ICC and the
international representation of its membership, these rules have been widely observed by
businesses throughout the world. It prescribes the collection procedures, technology, and
standards for handling collection transactions for banks.108Under the facts of this case, a bank
acting in accordance with the terms of URC 322 merely facilitates collection. Its duty is to
forward the letter of credit and the required documents from the entity seeking payment to
another entity which has the duty to pay. The bank incurs no obligation other than as a collecting
agent. This is different in the case of an issuing bank acting in accordance with UCP 400. In this
case, the issuing bank has the duty to pay the amount stated in the letter of credit upon due
presentment. HSBC claims that while UCP 400 applies to letters of credit, it is also common for
beneficiaries of such letters to seek collection under URC 322. HSBC further claims that URC
322 is an accepted custom in commerce.109
HSBC's argument is without merit. We note that HSBC failed to present evidence to prove that
URC 322 constitutes custom and usage recognized in commerce. Neither was there sufficient
evidence to prove that beneficiaries under a letter of credit commonly resort to collection under
URC 322 as a matter of industry practice. HSBC claims that the testimony of its witness Mr.
Lincoln MacMahon (Mr. MacMahon) suffices for this purpose.110 However, Mr. MacMahon was
not presented as an expert witness capable of establishing the existing banking and commercial
practice relating to URC 322 and letters of credit. Thus, this Court cannot hold that URC 322 and
resort to it by beneficiaries of letters of credit are customs that demand application in this
case.111
HSBC's position that URC 322 applies, thus allowing it, the issuing bank, to disregard the Letter
of Credit, and merely demand collection from Klockner cannot be countenanced. Such an
argument effectively asks this Court to give imprimatur to a practice that undermines the value
and reliability of letters of credit in trade and commerce. The entire system of letters of credit rely
on the assurance that upon presentment of the proper documents, the beneficiary has an
enforceable right and the issuing bank a demandable obligation, to pay the amount agreed
upon. Were a party to the transaction allowed to simply set this aside by the mere invocation of
another set of norms related to commerce - one that is not established as a custom that is
entitled to recognition by this Court - the sanctity of letters of credit will be jeopardized. To
repeat, any law or custom governing letters of credit should have, at its core, an emphasis on
the imperative that issuing banks respect their obligation to pay and that seller-beneficiaries
may reasonably expect payment in accordance with the terms of a letter of credit. Thus, the CA
correctly ruled, to wit:

At this juncture, it is significant to stress that an irrevocable letter of credit cannot, during its
lifetime, be cancelled or modified without the express permission of the beneficiary. Not even
partial payment of the obligation by the applicant-buyer would amend or modify the obligation of
the issuing bank. The subsequent correspondences of [CityTrust] to HSBC, thus, could not in
any way affect or amend the letter of credit, as it was not a party thereto. As a notifying bank, it
has nothing to do with the contract between the issuing bank and the buyer regarding the
issuance of the letter of credit.112 (Citations omitted)

The provisions in the Civil Code and our jurisprudence apply suppletorily in this case. 113 When a
party knowingly and freely binds himself or herself to perform an act, a juridical tie is created and
he or she becomes bound to fulfill his or her obligation. In this case, HSBC's obligation arose
from two sources. First, it has a contractual duty to Klockner whereby it agreed to pay NSC upon
due presentment of the Letter of Credit and the attached documents. Second, it has an
obligation to NSC to honor the Letter of Credit. In complying with its obligation, HSBC had the
duty to perform all acts necessary. This includes a proper examination of the documents
presented to it and making a judicious inquiry of whether City Trust, in behalf of NSC, made a
due presentment of the Letter of Credit.

Further, as a bank, HSBC has the duty to observe the highest degree of diligence. In all of its
transactions, it must exercise the highest standard of care and must fulfill its obligations with
utmost fidelity to its clients. Thus, upon receipt of City Trust's Collection Order with the Letter of
Credit, HSBC had the obligation to carefully examine the documents it received. Had it observed
the standard of care expected of it, HSBC would have discovered that the Letter of Credit is the
very same document which it issued upon the request of Klockner, its client. Had LISBC taken
the time to perform its duty with the highest degree of diligence, it would have been alerted by
the fact that the documents presented to it corresponded with the documents stated in the Letter
of Credit, to which HSBC freely and knowingly agreed. HSBC ought to have noticed the
discrepancy between City Trust's request for collection under URC 322 and the terms of the
Letter of Credit. Notwithstanding any statements by City Trust in the Collection Order as to the
applicable rules, HSBC had the independent duty of ascertaining whether the presentment of the
Letter of Credit and the attached documents gave rise to an obligation which it had to Klockner
(its client) and NSC (the beneficiary). Regardless of any error that City Trust may have
committed, the standard of care expected of HSBC dictates that it should have made a separate
determination of the significance of the presentment of the Letter of Credit and the attached
documents. A bank exercising the appropriate degree of diligence would have, at the very least,
inquired if NSC was seeking payment under the Letter of Credit or merely seeking collection
under URC 322. In failing to do so, HSBC fell below the standard of care imposed upon it.
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.
G.R. No. L-24821; October 16, 1970.
FACTS:
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.
ISSUE:
Whether DeReny Fabric Inudstries, Inc. is liable to BPI.
RULING:
Yes.
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.
FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING
CORPORATION), petitioner,
vs.
THE COURT OF APPEALS, and BERNARDO E. VILLALUZ, respondents.
G.R. No. 94209; April 30, 1991.
Nature of Letters of Credit
The mere opening of a letter of credit 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.
Special Relations Created;
It is a fundamental rule that an irrevocable credit is independent not only of the contract between
the buyer-applicant and the seller-beneficiary, but also of the credit agreement between the
issuing bank and the buyer-applicant. The non-compliance by buyer with its contract with issuing
bank has no bearing with the agreement between the buyer and the seller. The relationship
between the issuing bank and the notifying bank, on the other hand is more similar to that of an
agency and not that of a guarantee, since the latter is merely to follow the instructions of the
issuing bank, which is to notify or to transmit the letter of credit to the beneficiary.
Rule of Strict Compliance
It is a settled rule in commercial transactions involving letters of credit that the documents
tendered must strictly conform to the terms of the letter of credit. The tender of documents by the
beneficiary (seller) must include all documents required, and that 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.
Irrevocable Letter of Credit v. Confirmed Letter of Credit
An irrevocable credit refers to the duration of the letter of credit and simply means that the
issuing bank may not without the consent of the beneficiary (seller) and the applicant (buyer)
revoke his undertaking under the letter, because the issuing bank does not reserve the right to
revoke the credit.
A confirmed letter of credit pertains to the kind of obligation assumed by the correspondent
bank, which means that 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.
Obligations of Correspondent Bank
In commercial transactions involving letters of credit, the functions assumed by a correspondent
bank are classified according to the obligations taken up by it: whether as a notifying bank, a
negotiating bank, or as a confirming bank.
a) As advising or notifying bank, the correspondent bank assumes no liability except to
notify and/or transmit to the beneficiary the existence of the letter of credit, thus:
1. a notifying bank is not liable to pay the drafts drawn against the letter of credit;
2. suggest to 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; and
3. it has no privity to the sale between buyer and seller, and its relationship is only with
that of the issuing bank;
b) A negotiating bank buys or discounts a draft under the letter of credit and 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.
c) As 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.
FACTS:
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 (FEATI Bank) solidarily liable with Christiansen.
ISSUE:
1. Whether a correspondent bank (FEATI Bank) is liable under the letter of credit despite the
non-compliance by the beneficiary with the terms thereof.
2. Whether FEATI Bank is a notifying bank, a confirming bank, or a negotiating bank.
RULING:
1. No.
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.
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.
2. FEATI Bank may be considered as a notifying bank and/or a negotiating bank.
In this case, the letter merely provided that the petitioner "forward the enclosed original credit to
the beneficiary." 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.
Transfield Philippines v. Luzon Hydro Corp.
GR No. 146717, November 22, 2004
Facts:
On March 26, 1997, petitioner Transfield Philippines and respondent Luzon Hydro Corporation
(LHC) entered into a Turnkey Contract, whereby Transfield, undertook to construct, on a
turnkey basis, a seventy Megawatt hydro-electric power station (project) at the Bakun River in
Benguet and Ilocos Sure. The Turnkey Contract provided that: the target completion date of the
project shall be on June 1 2000, or any later date that may be agreed upon between petitioner
and respondent or otherwise determined in accordance with the Turnkey Contract; and
petitioner is entitled to claim extensions of time (EOT) for reasons enumerated in the Turnkey
Contract which includes variations, force majeure, and delays caused by LHC itself. In case of
dispute, the parties are to settle their differences through mediation, conciliation and other
means enumerated under the Turnkey Contract.
To secure performance of petitioner’s obligation, it opened in favor of LHC, two standby letters
of credit (Securities) both dated March 20, 2000 with respondent banks Australia and New
Zealand Banking Group and Security Bank Corporation, each amounting to $8,988,907.00.
Before completing the project, petitioner sought various EOT allegedly due to several factors
such as force majeure occasioned by typhoon Zeb, barricades and demonstrations. LHC,
however, denied the request, giving rise to a series of legal actions between the parties.
On June 1, 1999, LHC filed a request for Arbitration before the Construction Industry Arbitration
Commission (CIAC). Petitioner also filed a request for arbitration before the International
Chamber of Commerce (ICC) on November 3, 2000. Both proceedings sought to answer the
issues on whether typhoon Zeb and any of its associated events constituted force majeure to
justify the EOTs; and whether LHC had the right to terminate the Turnkey Contract for failure of
petitioner to complete the project on target date.
Meanwhile, Transfield sent two letters advising respondent banks of the arbitration proceedings
that are pending and asserted that LHC had no right to call on the Securities until the resolution
of the arbitration proceedings. Petitioner warned the banks that any transfer, release, or
disposition of Securities to LHC would constrain it to hold respondent banks liable for liquidated
damages.
LHC on June 27, 2000 sent notice to petitioner that it failed to comply with its obligation to
complete the Project. Despite of the letters of the petitioner, both banks informed petitioner that
they would pay on the Securities if and when LHC calls on them.
LHC on the other hand asserted that additional extension of time would not be warranted;
accordingly, LHC declared petitioner in default and demanded payment from petitioner of
$75,000.00 for each delay beginning June 28, 2000 until actual completion of the project. LHC
also notified petitioner that it would call on the securities for payment of liquidated damages for
the delay.
Petitioner then filed a Complaint for Injuction with prayer for TPO and writ of preliminary
injunction against LHC before the RTC, seeking to restrain LHC from calling on the securities and
respondent banks from transferring, paying on, or in any manner disposing of the Securities. A
72-hour TPO was issued by the RTC of Makati. After appropriate proceedings, the RTC issued an
order extending the TPO for a period of 17 days or until November 26, 2000.
RTC in its Order dated November 24, 2000 denied petitioner’s application for a writ of PI ruling
that it had no legal right and suffered no irreparable injury. The RTC employed the principle of
independent contract in letters of credit.
The case was elevated to the CA via certiorari under Rule 65. In a resolution, the CA issued a
TPO. The CA however failed to act on writ of PI until the TPO was expired. LHC then withdrew
the total amount of $4,950,000.00 from respondent banks. The CA later on dismissed the
petition for certiorari and expressed its conformity with the RTC’s decision. Hence, this petition.
Issue: Whether LHC can rightfully call on the Securities, despite the disputes between the
parties in the arbitral tribunals.
Ruling:
Yes.
Letter of Credit
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. 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.
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.
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.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.
Applicability of UCP
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. It has been settled that
absent any specific provisions governing legal complexities arising from transactions involving
LC, not only between or among banks but also between banks and the seller of buyer, the UCP
is applicable.
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.

Independence Principle

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.

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.

Respondent can rightfully invoke the independence principle, contrary to the assertions of the
petitioner. To say otherwise would render the purpose of the LC inutile. The independence
doctrine works for 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.

Also wrong is the argument of the petitioner that the dispute must be resolved before the
beneficiary is entitled to call on the letters of credit. This would in essence turn the LC to a mere
guarantee. It has been made clear by jurisprudence that in LC transactions, the settlement of a
dispute is not a pre-requisite for the release of funds under the LC.
MWSS v. Hon. Reynaldo B. Daway
GR No. 160732, June 21, 2004 | J: Azcuna,
Facts:
On February 1997, MWSS granted Maynilad under a Concession Agreement with a 20-year
period to manage, operate, repair and refurbish the existing MWSS water delivery and sewerage
services in the West Zone Service Area. To secure Maynilad’s performance of its obligation, it
was required to put up a bond, bank guarantee or other security acceptable to MWSS. Maynilad
then arranged for a three-year facility with a number of foreign banks, led by Citicorp
International, for the issuance of an Irrevocable Standby Letter of Credit in the amount of
$120M in favor of MWSS for the full and prompt performance of Maynilad’s obligations.
Sometime in September 2000, because of the peso’s depreciation against the US dollar,
Maynilad asked MWSS for a mechanism to allow it to recover its losses which was however
denied. Because of this, Maynilad issued a Force Majeure Notice and suspended payment of the
concession fees. The parties, tried to salvage the agreement and thus entered into a
Memorandum of Agreement to allow Maynila to recover foreign exchange losses. However,
Maynilad again posted a Force Majeure Notice and the parties entered into an amended
agreement of the Concession Agreement which shall be referred to as Amendment No. 1.
However, in November 2002, Maynilad served MWSS with 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 Maynilad’s foreign
exchange losses. Maynilad then filed a Notice of Early Termination of the concession but the
Appeals panel found that there was no Event of Termination as defined under the Concession
Agreement and that therefore, Maynilad should pay the concession fees that had fallen due.
This decision of the Appeals Panel became final and hence, MWSS submitted a written notice on
November 24, 2003 to Citicorp International Limited as agent for the participating banks to draw
on the Irrevocable Standby Letter of Credit and demanded payment in the amount of $98M.
Prior to this however, Maynilad filed a petition for rehabilitation before the RTC which issued a
Stay Order on November 27, 2003.
Respondent Maynilad primarily argues that the claim under the Standby Letter of Credit is a
claim against the debtor, its guarantors and sureties not solidarily liable with the debtor and
hence prohibited under the Interim Rules on Corporate Rehabilitation.
Issue: Did the RTC err in enjoining MWSS 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?
Ruling:
Yes, the Court erred.
1) The claim is not a claim against a 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
2) The Interim Rules on Corporate Rehabilitation 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. As held in Feati Bank v. CA, the concept of guarantee vis- à -
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 guaranty, the guarantor’s
obligation is merely collateral and it arises only upon the default of the person primarily liable.
On the other hand, in an irrevocable letter of credit, the bank undertakes a primary obligation. A
letter of credit has been defined 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.
Letters of credit were developed for the purpose of insuring to a seller payment of a definite
amount upon the presentation of documents 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. 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. 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.
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 ICC. In the 1993 Revision, it provides in
Art. 2 that the expression Documentary Credit and Standby Letter 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
documents. Art. 9 therefore 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.
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. Being a solidary obligation, the LC is excluded from the
jurisdiction of the rehabilitation court and therefore the Court erred in enjoining MWSS from
proceeding against the Standby Letters of Credit.
BANK OF AMERICA v. CA Furthermore, bringing the letter of credit to the attention of the seller is the primordial obligation of an
advising bank. The view that Bank of America should have first checked the authenticity of the letter of
credit with bank of Ayudhya, by using advanced mode of business communications, before dispatching
FACTS: the same to Inter-Resin finds no real support.

Bank of America received an Irrevocable Letter of Credit issued by Bank of Ayudhya for the Account of
General Chemicals Ltd., Inc. for the sale of plastic ropes and agricultural files. Under the letter of credit,
Bank of America acted as an advising bank and Inter-Resin Industrial Corp. (IR) acted as the beneficiary.
Upon receipt of the letter advice, Inter- Resin told Bank of America to confirm the letter of credit.

Notwithstanding such instruction, Bank of America failed to confirm the letter of credit. Inter-Resin made
a partial availment of the Letter of Credit after presentment of the required documents to Bank of
America. After confirmation of all the documents Bank of America issued a check in favor of IR. BA
advised Bank of Ayudhya of IR’s availment under the letter of credit and asked for the corresponding
reimbursement. IR presented documents for the second availment under the same letter of credit.
However, BA stopped the processing of such after they received a telex from Bank of Ayudhya delaring
that the LC fraudulent. BA sued IR for the recovery of the first LC payment.

The IR contended that Bank of America should have first checked the authenticity of the letter of credit
with bank of Ayudhya

ISSUE:

Whether or not Bank of America may recover what it has paid under the letter of credit to Inter-Resin

RULING:

May Bank of America then recover what it has paid under the letter of credit when the corresponding draft

There would at least be three (3) parties: (a) the buyer, who procures the letter of credit and obliges
himself to reimburse the issuing bank upon receipts of the documents of title; (b) the bank issuing the
letter of credit, which undertakes to pay the seller upon receipt of the draft and proper document of titles
and to surrender the documents to the buyer upon reimbursement; and, (c) the seller, who in compliance
with the contract of sale ships the goods to the buyer and delivers the documents of title and draft to the
issuing bank to recover payment.

The services of an advising (notifying) bank may be utilized to convey to the seller the existence of the
credit; or, of a confirming bank 16 which will lend credence to the letter of credit issued by a lesser known
issuing bank; or, of a paying bank, which undertakes to encash the drafts drawn by the exporter. Further,
instead of going to the place of the issuing bank to claim payment, the buyer may approach another bank,
termed the negotiating bank, 18 to have the draft discounted.

Bank of America has acted independently as a negotiating bank, thus saving Inter-Resin from the hardship
of presenting the documents directly to Bank of Ayudhya to recover payment. As a negotiating bank,
Bank of America has a right to recourse against the issuer bank and until reimbursement is obtained, Inter-
Resin, as the drawer of the draft, continues to assume a contingent liability thereon.
PNB v. SAN MIGUEL CORP.
FACTS:
Respondent San Miguel Corporation (SMC, for brevity) entered into an Exclusive Dealership Agreement
with a certain Rodolfo R. Goroza (Goroza, hereafter), wherein the latter was given by SMC the right to
trade, deal, market or otherwise sell its various beer products.
Goroza applied for a credit line with SMC, but one of the requirements for the credit line was a letter of
credit. Thus, Goroza applied for and was granted a letter of credit by the PNB in the amount of two
million pesos (P2,000,000.00). Under the credit agreement, the PNB has the obligation to release the
proceeds of Goroza's credit line to SMC upon presentation of the invoices and official receipts of Goroza's
purchases of SMC beer products to the PNB, Butuan Branch.
Goroza availed of his credit line with PNB and started selling SMC's beer products. When Goroza applied
for an additional credit line with the PNB, the latter granted Goroza a one (1) year revolving credit line in
the amount not exceeding two million four hundred thousand pesos (P2,400,000.00). Thus, Goroza's total
credit line reached four million four hundred thousand pesos (P4,400,000.00). Initially, Goroza was able
to pay his credit purchases with SMC. Sometime, however, Goroza started to become delinquent with his
accounts.
Demands to pay the amount of three million seven hundred twenty-two thousand four hundred forty pesos
and 88/100 (P3,722,440.88) were made by SMC against Goroza and PNB, but neither of them paid. Thus,
SMC filed a Complaint for collection of sum of money against PNB and Goroza with the respondent
Regional Trial Court Branch 3, Butuan City.3
After summons, PNB filed its Answer, while Goroza did not. Upon respondent's Motion to Declare
Defendant in Default, Goroza was declared in default.
Trial ensued insofar as Goroza was concerned and respondent presented its evidence ex parte against the
former. Respondent SMC made a formal offer of its exhibits and the trial court admitted them.
RTC ordered Goroza to pay SMC the principal amount of P3,722,440.00 plus interest, attorney’s fees and
litigation expenses.
In the meantime, trial continued with respect to PNB who filed an Urgent Motion to Terminate
Proceedings14 on the ground that a decision was already rendered finding Goroza solely liable.
The RTC denied PNB's motion in its Resolution.
Aggrieved, PNB filed an appeal to the CA. CA affirmed RTC’s Decision for the continuance of the
hearing on the other defendant PNB who was not declared in default.
ISSUE:
(1) Whether the CA erred in holding that proceedings may continue against PNB despite the complete
adjudication of relief in favour of SMC
(2) Whether the RTC’s judgment against Goroza did not make any determination as to whether or not
PNB is liable under the letter of credit it issued and, if so, up to what extent is its liability
RULING: NO. Petition lacks merit. Decision of the CA is affirmed.
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. 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.
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.
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. Precisely,
the independence principle liberates the issuing bank from the duty of ascertaining compliance by
the parties in the main contract. As the principle's nomenclature clearly suggests, the obligation
under the letter of credit is independent of the related and originating contract. In brief, the letter of
credit is separate and distinct from the underlying transaction.27
In other words, PNB cannot evade responsibility on the sole ground that the RTC judgment found
Goroza liable and ordered him to pay the amount sought to be recovered by SMC. PNB's liability, if
any, under the letter of credit is yet to be determined.

(1) NO. CA did not err. Proceedings against PNB may continue.

The procedure adopted the RTC is, nonetheless, allowed under Section 4, Rule 36 of the Rules of Court,
which provides that "in an action against several defendants, the court may, when a several judgment is
proper, render judgment against one or more of them, leaving the action to proceed against the others.
Thus, the appeal of Goroza, assailing the judgment of the RTC finding him liable, will not prevent the
continuation of the ongoing trial between SMC and PNB. The RTC retains jurisdiction insofar as PNB is
concerned, because the appeal made by Goroza was only with respect to his own liability. In fact, PNB
itself, in its Reply to respondent's Comment, admitted that the May 10, 2005 judgment of the RTC was
"decided solely against defendant Rodolfo Goroza."

(2) YES. RTC’s judgment against Goroza did not make any determination as to whether or not
PNB is liable under the letter of credit it issued.

In this regard, this Court's disquisition on the import of a letter of credit, in the case ofTransfield
Philippines, Inc. v. Luzon Hydro Corporation,26 as correctly cited by the CA, is instructive, to wit:
People of the Philippines and Allied Banking Corp.
vs.
Hon. Judge David Nitafan and Betty Sia Ang
(G.R. No. 81559-60 April 6, 1992)
Facts:
Allied banking Corporation (ABC) charged Betty Sia Ang, for estafa for willfully, unlawfully and
feloniously defrauds ABC. Betty Sia Ang received in trust from ABC Gordon plastics, plastic sheeting
and Hook Chromed amounting toP398,000 covered by a domestic letter of credit, under the express
obligation to sell the same and account for the proceeds of the sale, if sold, or to return the
merchandise, if not sold. Upon demand, private respondent paid only P283,115.78. ABC charged
Betty Sia Ang with estafa. Betty Sia Ang filed a motion to quash the information on the ground that
the facts charged do not constitute an offense.
Trial court: Respondent judge granted the motion to quash. The order was anchored on the
premise that:
1. A trust receipt transaction is an evidence of a loan being secured so that there is, as
between the parties to it, a creditor-debtor relationship.
2. The court ruled that the penal clause of Presidential Decree No. 15 on the Trust Receipts
Law is inoperative because it does not actually punish an offense mala prohibita. The law
only refers to the relevant estafa provision in the Revised Penal Code.
3. The Court relied on the judicial pronouncements in People v. Cuevo, where, for lack of the
required number of votes, the SC upheld the dismissal of a charge for estafa for a violation
of a trust receipt agreement; and in Sia v. People, where the SC held that the violation
merely gives rise to a civil obligation.
Betty Sia Ang’s Contentions:
1. A trust receipt is an evidence of loan being secured, so that there is, between the parties
to it, a creditor-debtor relationship;
2. The violation merely gives rise to a civil obligation;
3. PD 115 is unconstitutional as it violates constitutional prohibition against imprisonment
for non-payment of debt.
4. Where no malice exists in a breach of a purely commercial undertaking, P.D. 115 imputes
it.
Issue:
Whether an entrustee in a trust receipt agreement who fails to deliver the proceeds of the sale or to
return the goods if not sold to the entruster-bank is liable for the crime of estafa.
Held:
Yes.
a. Violation under PD 115 makes the accused criminally liable for estafa
The SC have held in the latter cases that acts involving the violation of trust receipt agreements
occurring after 29 January 1973 (date of enactment of P.D. 115) would make the accused criminally
liable for estafa under paragraph 1 (b), Article 315 of the Revised Penal Code (RPC) pursuant to the
explicit provision in Section 13 of P.D. 115.
The relevant penal provision of P.D. 115 provides:
Sec. 13 of P.D. No. 115 provides:
. . . Penalty clause. — The failure of an entrustee to turn over the proceeds of the sale of
the goods, documents or instruments covered by a trust receipt to the extent of the
amount owing to the entruster or as appears in the trust receipt or to return said goods,
documents or instruments if they were not sold or disposed of in accordance with the
terms of the trust receipt shall constitute the crime of estafa, punishable under the
provisions of Article Three Hundred and Fifteen, paragraph one (b) of Act Numbered
Three Thousand Eight Hundred and Fifteen, as amended, otherwise known as the Revised
Penal Code. If the violation or offense is committed by a corporation, partnership,
association or other juridical entities, the penalty provided for in this Decree shall be
imposed upon the directors, officers, employees or other officials or persons therein
responsible for the offense, without prejudice to the civil liabilities arising from the
criminal offense.
Section 1 (b), Article 315 of the RPC under which the violation is made to fall, states:
. . . Swindling (estafa). — Any person who shall defraud another by any of the means
mentioned herein below . . . :
xxx xxx xxx
b. By misappropriating or converting, to the prejudice of another, money, goods, or any
other personal property received by the offender in trust or on commission, or for
administration, or under any other obligation involving the duty to make delivery of or to
return the same, even though such obligation be totally or partially guaranteed by a bond;
or by denying having received such money, good, or other property.
The factual circumstances in the present case show that the alleged violation was committed
sometime in 1980 or during the effectivity of P.D. 115. The failure, therefore, to account for the
P114,884.22 balance is what makes the accused-respondent criminally liable for estafa. The Court
reiterates its definitive ruling that, in the Cuevo and Sia (1983) cases relied upon by the accused,
P.D. 115 was not applied because the questioned acts were committed before its effectivity.
b. PD 115 does not violate the constitutional right against imprisonment for non-payment of a debt
Contrary to the reasoning of the respondent court and the accused, a trust receipt arrangement does
not involve a simple loan transaction between a creditor and debtor-importer.
Apart from a loan feature, the trust receipt arrangement has a security feature that is covered by the
trust receipt itself. That second feature is what provides the much needed financial assistance to our
traders in the importation or purchase of goods or merchandise through the use of those goods or
merchandise as collateral for the advancements made by a bank. The title of the bank to the security
is the one sought to be protected and not the loan which is a separate and distinct agreement.
The Trust Receipts Law punishes the dishonesty and abuse of confidence in the handling of money
or goods to the prejudice of another regardless of whether the latter is the owner or not. The law
does not seek to enforce payment of the loan. Thus, there can be no violation of a right against
imprisonment for non-payment of a debt.

Trust receipts are indispensable contracts in international and domestic business transactions. The
prevalent use of trust receipts, the danger of their misuse and/or misappropriation of the goods or
proceeds realized from the sale of goods, documents or instruments held in trust for entruster-
banks, and the need for regulation of trust receipt transactions to safeguard the rights and enforce
the obligations of the parties involved are the main thrusts of P.D. 115.

As correctly observed by the Solicitor General, P.D. 115, like Batas Pambansa Blg. 22, punishes the
act "not as an offense against property, but as an offense against public order. . . ." The misuse of
trust receipts therefore should be deterred to prevent any possible havoc in trade circles and the
banking community. It is in the context of upholding public interest that the law now specifically
designates a breach of a trust receipt agreement to be an act that "shall" make one liable for estafa.

c. Enactment of PD 115 is a valid exercise of police power

The offense is punished as a malum prohibitum regardless of the existence of intent or malice. A
mere failure to deliver the proceeds of the sale or the goods if not sold, constitutes a criminal offense
that causes prejudice not only to another, but more to the public interest.

The SC is continually re-evaluating the opposite view which insists that the violation of a trust
receipt agreement should result only in a civil action for collection. The respondent contends that
there is no malice involved. She cites the dissent of the late Chief Justice Claudio Teehankee in Ong v.
Court of Appeals, (124 SCRA 578 [1983]) to wit:

The old capitalist orientation of putting importers in jail for supposed estafa or swindling
for non-payment of the price of the imported goods released to them under trust receipts
(a purely commercial transaction) under the fiction of the trust receipt device, should no
longer be permitted in this day and age.

As earlier stated, however, the law punishes the dishonesty and abuse of confidence in the handling
of money or goods to the prejudice of the bank.

The Court reiterates that the enactment of P.D. 115 is a valid exercise of the police power of the
State and is, thus, constitutional. The arguments of the respondent are appropriate for a repeal or
modification of the law and should be directed to Congress. But until the law is repealed, we are
constrained to apply it.

Dispositive:

WHEREFORE, the petition is hereby GRANTED. The Order of the respondent Regional Trial Court of
Manila, Branch 52 dated January 7, 1988 is SET ASIDE. Let this case be remanded to the said court
for disposition in accordance with this decision.
Land Bank of the Phils v. Perez, G.R. No. 166884, 13 June 2012
receipts in this case do not contain (1) a description of the goods placed in trust, (2) their

invoice values, and (3) their maturity dates, in violation of Section 5(a) of P.D. 115.
FACTS:

 Moreover, they alleged that ACDC acted as a subcontractor for government projects such
 Petitioner Land Bank of the Philippines (LBP) is a government financial institution and as the Metro Rail Transit, the Clark Centennial Exposition and the Quezon Power Plant in
the official depository of the Philippines. Respondents are the officers and Mauban, Quezon. Its clients for the construction projects, which were the general
representatives of Asian Construction and Development Corporation (ACDC), a contractors of these projects, have not yet paid them; thus, ACDC had yet to receive the
corporation incorporated under Philippine law and engaged in the construction business. proceeds of the materials that were the subject of the trust receipts and were allegedly

used for these constructions. As there were no proceeds received from these clients, no
 On June 7, 1999, LBP filed a complaint for estafa or violation of Article 315, paragraph misappropriation thereof could have taken place.
1(b) of the Revised Penal Code, in relation to P.D. 115, against the respondents before the

City Prosecutors Office in Makati City.  The prosecutor issued a Resolution dismissing the complaint. He pointed out that the

evidence presented by LBP failed to state the date when the goods described in the letters
 In the affidavit-complaint of June 7, 1999, the LBPs Account Officer for the Account of credit were actually released to the possession of the respondents.
Management Development, Edna L. Juan, stated that LBP extended a credit

accommodation to ACDC through the execution of an Omnibus Credit Line Agreement  Section 4 of P.D. 115 requires that the goods covered by trust receipts be released to the
(Agreement)between LBP and ACDC on October 29, 1996. possession of the entrustee after the latter’s execution and delivery to the entruster of a

signed trust receipt. He adds that LBPs evidence also fails to show the date when the trust
 In various instances, ACDC used the Letters of Credit/Trust Receipts Facility of the receipts were executed since all the trust receipts are undated.
Agreement to buy construction materials. The respondents, as officers and

representatives of ACDC, executed trust receipts in connection with the construction  LBP filed a motion for reconsideration which the Makati Assistant City Prosecutor denied

materials, with a total principal amount of P52,344,096.32. in his order of January 7, 2000.

 On appeal, the Secretary of Justice reversed the Resolution of the Assistant City
 The trust receipts matured, but ACDC failed to return to LBP the proceeds of the
Prosecutor. The trust receipts contained maturity dates and clearly set out their
construction projects or the construction materials subject of the trust receipts. LBP sent
stipulations. He further rejected the respondents defense that ACDC failed to remit the
ACDC a demand letter, dated May 4, 1999, for the payment of its debts, including those
payments to LBP due to the failure of the clients of ACDC to pay them. The dispositive
under the Trust Receipts Facility in the amount of P66,425,924.39. When ACDC failed to
portion of the resolution reads.
comply with the demand letter, LBP filed the affidavit-complaint.

 The respondents filed a motion for reconsideration of the resolution dated August 1,
 The respondents filed a joint affidavit wherein they stated that they signed the trust 2002, which the Secretary of Justice denied. He explained that in Colinares, the building
receipt documents on or about the same time LBP and ACDC executed the loan materials were delivered to the accused before they applied to the bank for a loan to pay
documents; their signatures were required by LBP for the release of the loans. The trust for the merchandise; thus, the ownership of the merchandise had already been

transferred to the entrustees before the trust receipts agreements were entered into.In
the present case, the parties have already entered into the Agreement before the
construction materials were delivered to ACDC.
 Subsequently, the respondents filed a petition for review before the Court of Appeals.
After both parties submitted their respective Memoranda, the Court of Appeals
promulgated the assailed decision of January 20, 2005. Applying the doctrine in Colinares,
it ruled that this case did not involve a trust receipt transaction, but a mere loan.
ISSUE: Whether or not the transactions entered into by the two parties are Trust Receipts?
RULING:
 The disputed transactions are not trust receipts. There are two obligations in a trust
receipt transaction. The first is covered by the provision that refers to money under the
obligation to deliver it (entregarla) to the owner of the merchandise sold. The second is
covered by the provision referring to merchandise received under the obligation to
return it (devolvera) to the owner. Thus, under the Trust Receipts Law,] intent to defraud
is presumed when (1) the entrustee fails to turn over the proceeds of the sale of goods
covered by the trust receipt to the entruster; or (2) when the entrustee fails to return the
goods under trust, if they are not disposed of in accordance with the terms of the trust
receipts.
4, 1999 sought the payment of the balance but failed to ask, as an alternative, for the
return of the construction materials or the buildings where these materials had been
used.
 The fact that LBP had knowingly authorized the delivery of construction materials to a
construction site of two government projects, as well as unspecified construction sites,
repudiates the idea that LBP intended to be the owner of those construction materials. As
a government financial institution, LBP should have been aware that the materials were
to be used for the construction of an immovable property, as well as a property of the
public domain. As an immovable property, the ownership of whatever was constructed
with those materials would presumably belong to the owner of the land, under Article
445 of the Civil Code.
 Even if we consider the vague possibility that the materials, consisting of cement, bolts
and reinforcing steel bars, would be used for the construction of a movable property, the
ownership of these properties would still pertain to the government and not remain with
the bank as they would be classified as property of the public domain, which is defined by
the Civil Code as:
 In contrast with the present situation, it is fundamental in a trust receipt transaction that
the person who advanced payment for the merchandise becomes the absolute owner of
said merchandise and continues as owner until he or she is paid in full, or if the goods had
already been sold, the proceeds should be turned over to him or to her.

 In all trust receipt transactions, both obligations on the part of the trustee exist in the
alternative the return of the proceeds of the sale or the return or recovery of the goods,
whether raw or processed. When both parties enter into an agreement knowing that the
return of the goods subject of the trust receipt is not possible even without any fault on
the part of the trustee, it is not a trust receipt transaction penalized under Section 13 of
P.D. 115; the only obligation actually agreed upon by the parties would be the return of
the proceeds of the sale transaction. This transaction becomes a mere loan, where the
borrower is obligated to pay the bank the amount spent for the purchase of the goods.
 Article 1371 of the Civil Code provides that [i]n order to judge the intention of the
contracting parties, their contemporaneous and subsequent acts shall be principally
considered. Under this provision, we can examine the contemporaneous actions of the
parties rather than rely purely on the trust receipts that they signed in order to
understand the transaction through their intent.
 We note in this regard that at the onset of these transactions, LBP knew that ACDC was in
the construction business and that the materials that it sought to buy under the letters of
credit were to be used for the following projects: the Metro Rail Transit Project and the
Clark Centennial Exposition Project. LBP had in fact authorized the delivery of the
materials on the construction sites for these projects, as seen in the letters of credit it
attached to its complaint. Clearly, they were aware of the fact that there was no way they
could recover the buildings or constructions for which the materials subject of the alleged
trust receipts had been used. Notably, despite the allegations in the affidavit-complaint
wherein LBP sought the return of the construction materials, its demand letter dated May
Ng v. People, G.R. No. 173905, 23 April 2010
Facts:
 Sometime in the early part of 1997, petitioner Anthony Ng, then engaged in the business
of building and fabricating telecommunication towers under the trade name "Capitol
Blacksmith and Builders," applied for a credit line of PhP 3,000,000 with Asiatrust
Development Bank, Inc. (Asiatrust).
 Petitioner was then required to sign several documents, among which are the
Credit Line Agreement, Application and Agreement for Irrevocable L/C, Trust Receipt
Agreements, and Promissory Notes.
 Though the Promissory Notes matured on September 18, 1997, the two (2)
aforementioned Trust Receipt Agreements did not bear any maturity dates as they were
left unfilled or in blank by Asiatrust.
 After petitioner received the goods, consisting of chemicals and metal plates from his
suppliers, he utilized them to fabricate the communication towers ordered from him by
his clients which were installed in three project sites, namely: Isabel, Leyte; Panabo,
Davao; and Tongonan.
 As petitioner realized difficulty in collecting from his client Islacom, he failed to pay his
loan to Asiatrust. Asiatrust then conducted a surprise ocular inspection of petitioner’s
business through Villarva S. Linga, Asiatrust’s representative appraiser.
 Linga thereafter reported to Asiatrust that he found that approximately 97% of the
subject goods of the Trust Receipts were "sold-out and that only 3 % of the goods
pertaining to PN No. 1963 remained."
 Asiatrust then endorsed petitioner’s account to its Account Management Division for the
possible restructuring of his loan. The parties thereafter held a series of conferences to
work out the problem and to determine a way for petitioner to pay his debts. However,
efforts towards a settlement failed to be reached.
 On March 16, 1999, Remedial Account Officer Ma. Girlie C. Bernardez filed a Complaint-
Affidavit before the Office of the City Prosecutor of Quezon City.
 Consequently, on September 12, 1999, an Information for Estafa, as defined and
penalized under Art. 315, par. 1(b) of the RPC in relation to Sec. 3, PD 115 or the Trust
Receipts Law, was filed with the RTC.
Upon arraignment, petitioner pleaded not guilty to the charges. Thereafter, a full-blown
trial ensued.
During the pendency of the abovementioned case, conferences between petitioner and
Asiatrust’s Remedial Account Officer, Daniel Yap, were held.
 Afterward, a Compromise Agreement was drafted by Asiatrust. One of the requirements
of the Compromise Agreement was for petitioner to issue six (6) postdated checks.
 Petitioner, in good faith, tried to comply by issuing two or three checks, which were
deposited and made good. The remaining checks, however, were not deposited as the
Compromise Agreement did not push through.
 Ruling of the Trial Court. After trial on the merits, the RTC, on May 29, 2001, rendered a
Decision, finding petitioner guilty of the crime of Estafa. The petitioner is further ordered
to return to the Asiatrust Development Bank Inc. the amount of Two Million, Nine
Hundred Seventy One and Six Hundred Fifty Pesos (P2,971,650.00) with legal rate of
interest computed from the filing of the information on September 21,1999 until the
amount is fully paid.
 Finally, the trial court declared that petitioner, being the entrustee stated in the Trust
Receipts issued by Asiatrust, is thus obliged to hold the goods in trust for the entruster
and shall dispose of them strictly in accordance with the terms and conditions of the trust
receipts; otherwise, he is obliged to return the goods in the event of non-sale or upon
demand of the entruster, failing thus, he evidently violated the Trust Receipts Law.
 Ruling of the Appellate Court . On August 29, 2003, the CA rendered a Decision affirming
that of the RTC
 The CA held that during the course of the trial, petitioner knew that the complainant
Bernardez and the other co-witnesses are all employees of Asiatrust and that she is suing
in behalf of the bank.
 Since petitioner transacted with the same employees for the issuance of the subject Trust
Receipts, he cannot feign ignorance that Asiatrust is not the offended party in the instant
case. The CA further stated that the change in the name of the complainant will not
prejudice and alter the fact that petitioner was being charged with the crime of Estafa in
relation to the Trust Receipts Law, since the information clearly set forth the essential
elements of the crime charged, and the constitutional right of petitioner to be informed of
the nature and cause of his accusations is not violated.
 As to the alleged error in the appreciation of facts by the trial court, the CA stated that it
was undisputed that petitioner entered into a trust receipt agreement with Asiatrust and
he failed to pay the bank his obligation when it became due.
 With regard to the failure of the RTC to consider the fact that petitioner’s outstanding
receivables are sufficient to cover his indebtedness and that no written demand was
made upon him hence his obligation has not yet become due and demandable, the CA
stated that the mere query as to the whereabouts of the goods and/or money is
tantamount to a demand.
 Concerning the alleged bias, hostility, and prejudice of the RTC against petitioner, the CA
said that petitioner failed to present any substantial proof to support the aforementioned
allegations against the RTC.
 After the receipt of the CA Decision, petitioner moved for its reconsideration, which was
denied by the CA in its Resolution dated July 25, 2006.
ISSUE: Whether the petitioner is liable for Estafa under Art. 315, par. 1(b) of the RPC in relation to
PD 115.
RULING:
 A trust receipt transaction is one where the entrustee has the obligation to deliver to the
entruster the price of the sale, or if the merchandise is not sold, to return the merchandise
to the entruster.
 There are, therefore, two obligations in a trust receipt transaction: the first refers to
money received under the obligation involving the duty to turn it over (entregarla) to the
owner of the merchandise sold, while the second refers to the merchandise received
under the obligation to return it (devolvera) to the owner. A violation of any of these
undertakings constitutes Estafa defined under Art. 315, par. 1(b) of the RPC, as provided
in Sec. 13 of PD 115, viz:
 Section 13. Penalty Clause.The failure of an entrustee to turn over the proceeds of the sale
of the goods, documents or instruments covered by a trust receipt to the extent of the
amount owing to the entruster or as appears in the trust receipt or to return said goods,
 documents or instruments if they were not sold or disposed of in accordance with the
terms of the trust receiptshall constitute the crime of estafa, punishable under the
provisions of Article Three hundred fifteen, paragraph one (b) of Act Numbered Three
thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal
Code.

 A trust receipt is considered a security transaction intended to aid in financing importers

and retail dealers who do not have sufficient funds or resources to finance the
importation or purchase of merchandise, and who may not be able to acquire credit
except throughutilization, as collateral, of the merchandise imported or purchased.The
principle is of course not limited in its application to financing importations, since the
principle is equally applicable to domestic transactions. Regardless of whether the
transaction is foreign or domestic, it is important to note that the transactions discussed
in relation to trust receipts mainly involved sales.

 The release of such goods to the entrustee is conditioned upon his execution and delivery
to the entruster of a trust receipt wherein the former binds himself to hold the specific
goods in trust for the entruster and to sell or otherwise dispose of the goods with the
obligation to turn over to the entruster the proceeds to the extent of the amount owing to
the entruster or the goods themselves if they are unsold.

 Considering that the goods in this case were never intended for sale but for use in the
fabrication of steel communication towers, the trial court erred in ruling that the
agreement is a trust receipt transaction.

 Petitioner is correct that there was no misappropriation or conversion on his part,

because his liability for the amount of the goods subject of the trust receipts arises and
becomes due only upon receipt of the proceeds of the sale and not prior to the receipt of
the full price of the goods. PD 115 provides that an entrustee is only liable for Estafa
when he fails to turn over the proceeds of the sale of the goods covered by a trust receipt
to the extent of the amount owing to the entruster or as appears in the trust receipt in
accordance with the terms of the trust receipt.