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1 Transfield Phils., Inc. vs. Luzon Hydro Corp., Et. Al.
1 Transfield Phils., Inc. vs. Luzon Hydro Corp., Et. Al.
Petitioner is hereby required to answer the charge of forum-shopping within fifteen (15) days from notice.
RATIO:
- At the core of the present controversy is the applicability of the "independence principle" and "fraud exception rule" in
letters of credit. Thus, a discussion of the nature and use of letters of credit, also referred to simply as "credits," would
provide a better perspective of the case.
- The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is to recognize that it is
an entity unto itself. The relationship between the beneficiary and the issuer of a letter of credit is not strictly contractual,
because both privity and a meeting of the minds are lacking, yet strict compliance with its terms is an enforceable right.
Nor is it a third-party beneficiary contract, because the issuer must honor drafts drawn against a letter regardless of
problems subsequently arising in the underlying contract. Since the bank's customer cannot draw on the letter, it does not
function as an assignment by the customer to the beneficiary. Nor, if properly used, is it a contract of suretyship or
guarantee, because it entails a primary liability following a default. Finally, it is not in itself a negotiable instrument,
because it is not payable to order or bearer and is generally conditional, yet the draft presented under it is often negotiable.
- 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.3A
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.
- 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
- 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.
- Given the nature of letters of credit, petitioner's argument—that it is only the issuing bank that may invoke the
independence principle on letters of credit—does not impress this Court. To say that the independence principle may only
be invoked by the issuing banks would render nugatory the purpose for which the letters of credit are used in commercial
transactions. As it is, the independence doctrine works to the benefit of both the issuing bank and the beneficiary.
- While it is the bank which is bound to honor the credit, it is the beneficiary who has the right to ask the bank to honor the
credit by allowing him to draw thereon. The situation itself emasculates petitioner's posture that LHC cannot invoke the
independence principle and highlights its puerility, more so in this case where the banks concerned were impleaded as
parties by petitioner itself.
- Respondent banks had squarely raised the independence principle to justify their releases of the amounts due under
the Securities. Owing to the nature and purpose of the standby letters of credit, this Court rules that the respondent
banks were left with little or no alternative but to honor the credit and both of them in fact submitted that it was
"ministerial" for them to honor the call for payment.
- petitioner failed to show that it has a clear and unmistakable right to restrain LHC's call on the Securities which would
justify the issuance of preliminary injunction. By petitioner's own admission, the right of LHC to call on the Securities
was contractually rooted and subject to the express stipulations in the Turnkey Contract. Indeed, the Turnkey Contract
is plain and unequivocal in that it conferred upon LHC the right to draw upon the Securities in case of default,