FEATI BANK vs. COURT OF APPEALS, G.R. No.

94209, April 30, 1991

FACTS:

Villaluz sold lauan logs to Christiansen. After inspecting the logs, buyer issued a purchase order. Christiansen later
on made arrangements with Hanmi Trade. Hanmi caused Security Pacific National Bank to issue an Irrevocable
Letter of Credit available at sight in favor of Villaluz for the logs. The LOC was mailed to FEATI with the instruction
that the enclosed letter of credit be forwarded to the beneficiary. The LOC further provided that the draft to be
drawn should be accompanied with certain documents (i.e. Signed Commercial Invoice, Tally sheets. Ocean Bills of
Lading; Certification by Christiansen). The logs, as loaded on the shipping vessel were inspected and found to be in
good condition. But Christiansen refused to issue a certification despite the requests of Villaluz. And because of the
absence of this certification, FEATI refused to advance the payment on the LOC. The logs arrived in Korea and were
received by Hanmi. It later sold the logs to Taisung Lumber. Meanwhile, Villaluz instituted an action for mandamus
and specific performance against Christiansen and FEATI.

While the case is pending, Christiansen left the country so Villaluz sought to have FEATI be solidarily liable.

RATIO DECIDENDI:

FEATI cannot be held liable on the LOC due to the non-compliance with the terms by the beneficiary.

In commercial transactions involving letters of credit, the documents tendered must strictly conform to the terms
of the LOC. The tender of documents by the beneficiary (seller) must include all documents required by the letter.
The Uniform Customs and Practice for Documentary Credit (UCP) further provided that 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. The absence of any required document justifies a refusal of payment.

FEATI was just a notifying bank (in contrast to being a confirming bank). When FEATI accepted the obligation to
notify Villaluz that the irrevocable credit has been transmitted to it, such does not amount to a confirmation of the
letter. An irrevocable credit is not synonymous to a confirmed credit. The former refers to the duration of the
letter of credit—it simply means that the issuing bank may not without the consent of the beneficiary and the
buyer revoke his undertaking under the letter. Whereas a confirmed credit pertains to the kind of obligation
assumed by the correspondent

bank—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. A notifying bank assumes no
liability except to notify and/or transmit to the beneficiary the existence of the LOC. A negotiating bank, buys or
discounts a draft under the LOC. Whereas a confirming bank assumes a direct obligation to the seller and its
liability is a primary one as is it in itself issued the LOC. The instructions upon FEATI clearly indicate that it is merely
a notifying bank. Since FEATI is merely a notifying bank, it is not a privy to the contract between buyer and
seller. Unless it is shown that FEATI has confirmed the LOC, Villaluz has no cause of action against it. In any
event, even if Villaluz tenders all the documents required under the LOC, FEATI may refuse to negotiate or accept
the draft drawn thereunder and it will not be held liable for its only engagement is to notify and/or transmit to the
seller the LOC. If however, FEATI is a confirming bank, it still cannot pay the amount as there was a failure on the
part of Villaluz to comply with the terms of the LOC. Though there is injustice caused to seller, the court is
constrained to apply what the law is...dura lex sed lex