Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 105395 December 10, 1993

BANK OF AMERICA, NT & SA, petitioners,

vs.
COURT OF APPEALS, INTER-RESIN INDUSTRIAL CORPORATION, FRANCISCO TRAJANO, JOHN DOE AND
JANE DOE, respondents.

Agcaoili & Associates for petitioner.

Valenzuela Law Center, Victor Fernandez and Ramon Guevarra for private respondents.

VITUG, J.:

A "fiasco," involving an irrevocable letter of credit, has found the distressed parties coming to court as adversaries in
seeking a definition of their respective rights or liabilities thereunder.

On 05 March 1981, petitioner Bank of America, NT & SA, Manila, received by registered mail an Irrevocable Letter of
Credit No. 20272/81 purportedly issued by Bank of Ayudhya, Samyaek Branch, for the account of General Chemicals,
Ltd., of Thailand in the amount of US$2,782,000.00 to cover the sale of plastic ropes and "agricultural files," with the
petitioner as advising bank and private respondent Inter-Resin Industrial Corporation as beneficiary.

On 11 March 1981, Bank of America wrote Inter-Resin informing the latter of the foregoing and transmitting, along with the
bank's communication,
the latter of credit. Upon receipt of the letter-advice with the letter of credit, Inter-Resin sent Atty. Emiliano Tanay to Bank
of America to have the letter of credit confirmed. The bank did not. Reynaldo Dueñas, bank employee in charge of letters
of credit, however, explained to Atty. Tanay that there was no need for confirmation because the letter of credit would not
have been transmitted if it were not genuine.

Between 26 March to 10 April 1981, Inter-Resin sought to make a partial availment under the letter of credit by submitting
to Bank of America invoices, covering the shipment of 24,000 bales of polyethylene rope to General Chemicals valued at
US$1,320,600.00, the corresponding packing list, export declaration and bill of lading. Finally, after being satisfied that
Inter-Resin's documents conformed with the conditions expressed in the letter of credit, Bank of America issued in favor of
Inter-Resin a Cashier's Check for P10,219,093.20, "the Peso equivalent of the draft (for) US$1,320,600.00 drawn by Inter-
Resin, after deducting the costs for documentary stamps, postage and mail issuance." 1 The check was picked up by
Inter-Resin's Executive Vice-President Barcelina Tio. On 10 April 1981, Bank of America wrote Bank of Ayudhya advising
the latter of the availment under the letter of credit and sought the corresponding reimbursement therefor.

Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of America the documents for the second availment under the
same letter of credit consisting of a packing list, bill of lading, invoices, export declaration and bills in set, evidencing the
second shipment of goods. Immediately upon receipt of a telex from the Bank of Ayudhya declaring the letter of credit
fraudulent, 2 Bank of America stopped the processing of Inter-Resin's documents and sent a telex to its branch office in
Bangkok, Thailand, requesting assistance in determining the authenticity of the letter of credit. 3 Bank of America kept
Inter-Resin informed of the developments. Sensing a fraud, Bank of America sought the assistance of the National Bureau
of Investigation (NBI). With the help of the staff of the Philippine Embassy at Bangkok, as well as the police and customs
personnel of Thailand, the NBI agents, who were sent to Thailand, discovered that the vans exported by Inter-Resin did
not contain ropes but plastic strips, wrappers, rags and waste materials. Here at home, the NBI also investigated Inter-
Resin's President Francisco Trajano and Executive Vice President Barcelina Tio, who, thereafter, were criminally charged
for estafa through falsification of commercial documents. The case, however, was eventually dismissed by the Rizal
Provincial Fiscal who found no prima facie evidence to warrant prosecution.

Bank of America sued Inter-Resin for the recovery of P10,219,093.20, the peso equivalent of the draft for
US$1,320,600.00 on the partial availment of the now disowned letter of credit. On the other hand, Inter-Resin claimed that
not only was it entitled to retain P10,219,093.20 on its first shipment but also to the balance US$1,461,400.00 covering
the second shipment.

On 28 June 1989, the trial court ruled for Inter-Resin, 4 holding that:

(a) Bank of America made assurances that enticed Inter-Resin to send the merchandise to Thailand; (b) the telex
declaring the letter of credit fraudulent was unverified and self-serving, hence, hearsay, but even assuming that the letter
of credit was fake, "the fault should be borne by the BA which was careless and negligent" 5 for failing to utilize its modern
means of communication to verify with Bank of Ayudhya in Thailand the authenticity of the letter of credit before sending
the same to Inter-Resin; (c) the loading of plastic products into the vans were under strict supervision, inspection and
verification of government officers who have in their favor the presumption of regularity in the performance of official
functions; and (d) Bank of America failed to prove the participation of Inter-Resin or its employees in the alleged fraud as,
in fact, the complaint for estafa through falsification of documents was dismissed by the Provincial Fiscal of Rizal. 6

On appeal, the Court of Appeals 7 sustained the trial court; hence, this present recourse by petitioner Bank of America.

The following issues are raised by Bank of America: (a) whether it has warranted the genuineness and authenticity of the
letter of credit and, corollarily, whether it has acted merely as an advising bank or as a confirming bank; (b) whether Inter-
Resin has actually shipped the ropes specified by the letter of credit; and (c) following the dishonor of the letter of credit by
Bank of Ayudhya, whether Bank of America may recover against Inter-Resin under the draft executed in its partial
availment of the letter of credit.8

In rebuttal, Inter-Resin holds that: (a) Bank of America cannot, on appeal, belatedly raise the issue of being only an
advising bank; (b) the findings of the trial court that the ropes have actually been shipped is binding on the Court; and, (c)
Bank of America cannot recover from Inter-Resin because the drawer of the letter of credit is the Bank of Ayudhya and not
Inter-Resin.

If only to understand how the parties, in the first place, got themselves into the mess, it may be well to start by recalling
how, in its modern use, a letter of credit is employed in trade 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. 9 To break the impasse, the buyer may be
required to contract a bank to issue a letter of credit in favor of the seller so that, by virtue of the latter of credit, the issuing
bank can authorize the seller to draw drafts and engage to pay them upon their presentment simultaneously with the
tender of documents required by the letter of credit. 10 The buyer and the seller agree on what documents are to be
presented for payment, but ordinarily they are documents of title evidencing or attesting to the shipment of the goods to
the buyer.

Once the credit is established, the seller ships the goods to the buyer and in the process secures the required shipping
documents or documents of title. To get paid, the seller executes a draft and presents it together with the required
documents to the issuing bank. The issuing bank redeems the draft and pays cash to the seller if it finds that the
documents submitted by the seller conform with what the letter of credit requires. The bank then obtains possession of the
documents upon paying the seller. The transaction is completed when the buyer reimburses the issuing bank and
acquires the documents entitling him to the goods. Under this arrangement, the seller gets paid only if he delivers the
documents of title over the goods, while the buyer acquires said documents and control over the goods only after
reimbursing the bank.

What characterizes letters of credit, as distinguished from other accessory contracts, is the engagement of the issuing
bank to pay the seller of the draft and the required shipping documents are presented to it. In turn, this arrangement
assures the seller of prompt payment, independent of any breach of the main sales contract. By this so-called
"independence principle," the bank determines compliance with the letter of credit only by examining the shipping
documents presented; it is precluded from determining whether the main contract is actually accomplished or not. 11

There would at least be three (3) parties: (a) the buyer, 12 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, 13 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, 14 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 number of the parties, not infrequently and almost invariably in international trade practice, may be increased. Thus,
the services of an advising (notifying) bank 15 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, 17 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.

Being a product of international commerce, the impact of this commercial instrument transcends national boundaries, and
it is thus not uncommon to find a dearth of national law that can adequately provide for its governance. This country is no
exception. Our own Code of Commerce basically introduces only its concept under Articles 567-572, inclusive, thereof. It
is no wonder then why great reliance has been placed on commercial usage and practice, which, in any case, can be
justified by the universal acceptance of the autonomy of contract rules. The rules were later developed into what is now
known as the Uniform Customs and Practice for Documentary Credits ("U.C.P.") issued by the International Chamber of
Commerce. It is by no means a complete text by itself, for, to be sure, there are other principles, which, although part
of lex mercatoria, are not dealt with the U.C.P.

In FEATI Bank and Trust Company v.  Court of Appeals, 19 we have accepted, to the extent of their pertinency, the
application in our jurisdiction of this international commercial credit regulatory set of rules. 20 In Bank of Phil. Islands v. De
Nery, 21 we have said that the observances of the U.C.P. is justified by Article 2 of the Code of Commerce which
expresses that, in the absence of any particular provision in the Code of Commerce, commercial transactions shall be
governed by usages and customs generally observed. We have further observed that there being no specific provisions
which govern the legal complexities arising from transactions involving letters of credit not only between or among banks
themselves but also between banks and the seller or the buyer, as the case may be, the applicability of the U.C.P. is
undeniable.

The first issue raised with the petitioner, i.e., that it has in this instance merely been advising bank, is outrightly rejected by
Inter-Resin and is thus sought to be discarded for having been raised only on appeal. We cannot agree. The crucial point
of dispute in this case is whether under the "letter of credit," Bank of America has incurred any liability to the "beneficiary"
thereof, an issue that largely is dependent on the bank's participation in that transaction; as a mere advising or notifying
bank, it would not be liable, but as a confirming bank, had this been the case, it could be considered as having incurred
that liability. 22

In Insular Life Assurance Co.  Ltd. Employees Association — Natu vs.  Insular Life Assurance Co., Ltd., 23 the Court said:
Where the issues already raised also rest on other issues not specifically presented, as long as the latter issues bear
relevance and close relation to the former and as long as they arise from the matters on record, the court has the authority
to include them in its discussion of the controversy and to pass upon them just as well. In brief, in those cases where
questions not particularly raised by the parties surface as necessary for the complete adjudication of the rights and
obligations of the parties, the interests of justice dictate that the court should consider and resolve them. The rule that only
issues or theories raised in the initial proceedings may be taken up by a party thereto on appeal should only refer to
independent, not concomitant matters, to support or oppose the cause of action or defense. The evil that is sought to be
avoided, i.e., surprise to the adverse party, is in reality not existent on matters that are properly litigated in the lower court
and appear on record.

It cannot seriously be disputed, looking at this case, that Bank of America has, in fact, only been an advising, not
confirming, bank, and this much is clearly evident, among other things, by the provisions of the letter of credit itself, the
petitioner bank's letter of advice, its request for payment of advising fee, and the admission of Inter-Resin that it has paid
the same. That Bank of America has asked Inter-Resin to submit documents required by the letter of credit and eventually
has paid the proceeds thereof, did not obviously make it a confirming bank. The fact, too, that the draft required by the
letter of credit is to be drawn under the account of General Chemicals (buyer) only means the same had to be presented
to Bank of Ayudhya (issuing bank) for payment. It may be significant to recall that the letter of credit is an engagement of
the issuing bank, not the advising bank, to pay the draft.

No less important is that Bank of America's letter of 11 March 1981 has expressly stated that "[t]he enclosure is solely an
advise of credit opened by the abovementioned correspondent and conveys no engagement by us." 24 This written
reservation by Bank of America in limiting its obligation only to being an advising bank is in consonance with the
provisions of U.C.P.

As an advising or notifying bank, Bank of America did not incur any obligation more than just notifying Inter-Resin of the
letter of credit issued in its favor, let alone to confirm the letter of credit. 25 The bare statement of the bank employees,
aforementioned, in responding to the inquiry made by Atty. Tanay, Inter-Resin's representative, on the authenticity of the
letter of credit certainly did not have the effect of novating the letter of credit and Bank of America's letter of advise, 26 nor
can it justify the conclusion that the bank must now assume total liability on the letter of credit. Indeed, Inter-Resin itself
cannot claim to have been all that free from fault. As the seller, the issuance of the letter of credit should have obviously
been a great concern to it. 27 It would have, in fact, been strange if it did not, prior to the letter of credit, enter into a
contract, or negotiated at the every least, with General Chemicals. 28 In the ordinary course of business, the perfection of
contract precedes the issuance of a letter of credit.

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 the same to Inter-Resin finds no real support in U.C.P. Article 18 of the
U.C.P. states that: "Banks assume no liability or responsibility for the consequences arising out of the delay and/or loss in
transit of any messages, letters or documents, or for delay, mutilation or other errors arising in the transmission of any
telecommunication . . ." As advising bank, Bank of America is bound only to check the "apparent authenticity" of the letter
of credit, which it did. 29 Clarifying its meaning, Webster's Ninth New Collegiate Dictionary 30 explains that the word
"APPARENT suggests appearance to unaided senses that is not or may not be borne out by more rigorous examination
or greater knowledge."

May Bank of America then recover what it has paid under the letter of credit when the corresponding draft for partial
availment thereunder and the required documents were later negotiated with it by Inter-Resin? The answer is yes. This
kind of transaction is what is commonly referred to as a discounting arrangement. This time, 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. (Inter-Resin, of course, could have chosen other banks with which to negotiate the
draft and the documents.) 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. 31

While bank of America has indeed failed to allege material facts in its complaint that might have likewise warranted the
application of the Negotiable Instruments Law and possible then allowed it to even go after the indorsers of the draft, this
failure, 32/ nonetheless, does not preclude petitioner bank's right (as negotiating bank) of recovery from Inter-Resin itself.
Inter-Resin admits having received P10,219,093.20 from bank of America on the letter of credit and in having executed
the corresponding draft. The payment to Inter-Resin has given, as aforesaid, Bank of America the right of reimbursement
from the issuing bank, Bank of Ayudhya which, in turn, would then seek indemnification from the buyer (the General
Chemicals of Thailand). Since Bank of Ayudhya disowned the letter of credit, however, Bank of America may now turn to
Inter-Resin for restitution.
 Between the seller and the negotiating bank there is the usual relationship existing between a drawer and
purchaser of drafts. Unless drafts drawn in pursuance of the credit are indicated to be without recourse
therefore, the negotiating bank has the ordinary right of recourse against the seller in the event of
dishonor by the issuing bank . . . The fact that the correspondent and the negotiating bank may be one
and the same does not affect its rights and obligations in either capacity, although a special agreement is
always a possibility . . . 33

The additional ground raised by the petitioner, i.e., that Inter-Resin sent waste instead of its products, is really of no
consequence. In the operation of a letter of credit, the involved banks deal only with documents and not on goods
described in those documents. 34

The other issues raised in then instant petition, for instance, whether or not Bank of Ayudhya did issue the letter of credit
and whether or not the main contract of sale that has given rise to the letter of credit has been breached, are not relevant
to this controversy. They are matters, instead, that can only be of concern to the herein parties in an appropriate recourse
against those, who, unfortunately, are not impleaded in these proceedings.

In fine, we hold that —

First, given the factual findings of the courts below, we conclude that petitioner Bank of America has acted merely as
a notifying bank and did not assume the responsibility of a confirming bank; and

Second, petitioner bank, as a negotiating bank, is entitled to recover on Inter-Resin's partial availment as beneficiary of
the letter of credit which has been disowned by the alleged issuer bank.

No judgment of civil liability against the other defendants, Francisco Trajano and other unidentified parties, can be made,
in this instance, there being no sufficient evidence to warrant any such finding.

WHEREFORE, the assailed decision is SET ASIDE, and respondent Inter-Resin Industrial Corporation is ordered to
refund to petitioner Bank of America NT & SA the amount of P10,219,093.20 with legal interest from the filing of the
complaint until fully paid.

No costs.

SO ORDERED.
G.R. No. 160732             June 21, 2004

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner,

vs.
HON. REYNALDO B. DAWAY, in his capacity as Presiding Judge of the Regional Trial Court of Quezon City,
Branch 90 and Maynilad Water Services, Inc., respondents

DECISION

AZCUNA, J.:

On November 17, 2003, the Regional Trial Court (RTC) of Quezon City, Branch 90, made a determination that the Petition
for Rehabilitation with Prayer for Suspension of Actions and Proceedings filed by Maynilad Water Services, Inc.
(Maynilad) conformed substantially to the provisions of Sec. 2, Rule 4 of the Interim Rules of Procedure on Corporate
Rehabilitation (Interim Rules). It forthwith issued a Stay Order 1 which states, in part, that the court was thereby:

xxx     xxx     xxx

2. Staying enforcement of all claims, whether for money or otherwise and whether such enforcement is by court
action or otherwise, against the petitioner, its guarantors and sureties not solidarily liable with the petitioner;

3. Prohibiting the petitioner from selling, encumbering, transferring, or disposing in any manner any of its
properties except in the ordinary course of business;

4. Prohibiting the petitioner from making any payment of its liabilities, outstanding as at the date of the filing of the
petition;

xxx     xxx     xxx

Subsequently, on November 27, 2003, public respondent, acting on two Urgent Ex Parte motions2 filed by respondent
Maynilad, issued the herein questioned Order3 which stated that it thereby:

"1. DECLARES that the act of MWSS in commencing on November 24, 2003 the process for the payment by the
banks of US$98 million out of the US$120 million standby letter of credit so the banks have to make good such
call/drawing of payment of US$98 million by MWSS not later than November 27, 2003 at 10:00 P. M. or any
similar act for that matter, is violative of the above-quoted sub-paragraph 2.) of the dispositive portion of this
Court’s Stay Order dated November 17, 2003.

2. ORDERS MWSS through its officers/officials to withdraw under pain of contempt the written certification/notice
of draw to Citicorp International Limited dated November 24, 2003 and DECLARES void any payment by the
banks to MWSS in the event such written certification/notice of draw is not withdrawn by MWSS and/or MWSS
receives payment by virtue of the aforesaid standby letter of credit."

Aggrieved by this Order, petitioner Manila Waterworks & Sewerage System (MWSS) filed this petition for review by way
of certiorari under Rule 65 of the Rules of Court questioning the legality of said order as having been issued without or in
excess of the lower court’s jurisdiction or that the court a quo acted with grave abuse of discretion amounting to lack or
excess of jurisdiction.4

ANTECEDENTS OF THE CASE

On February 21, 1997, MWSS granted Maynilad under a Concession Agreement a twenty-year period to manage,
operate, repair, decommission and refurbish the existing MWSS water delivery and sewerage services in the West Zone
Service Area, for which Maynilad undertook to pay the corresponding concession fees on the dates agreed upon in said
agreement5 which, among other things, consisted of payments of petitioner’s mostly foreign loans.

To secure the concessionaire’s performance of its obligations under the Concession Agreement, Maynilad was required
under Section 6.9 of said contract to put up a bond, bank guarantee or other security acceptable to MWSS.

In compliance with this requirement, Maynilad arranged on July 14, 2000 for a three-year facility with a number of foreign
banks, led by Citicorp International Limited, for the issuance of an Irrevocable Standby Letter of Credit 6 in the amount of
US$120,000,000 in favor of MWSS for the full and prompt performance of Maynilad’s obligations to MWSS as
aforestated.

Sometime in September 2000, respondent Maynilad requested MWSS for a mechanism by which it hoped to recover the
losses it had allegedly incurred and would be incurring as a result of the depreciation of the Philippine Peso against the
US Dollar. Failing to get what it desired, Maynilad issued a Force Majeure Notice on March 8, 2001 and unilaterally
suspended the payment of the concession fees. In an effort to salvage the Concession Agreement, the parties entered
into a Memorandum of Agreement (MOA)7 on June 8, 2001 wherein Maynilad was allowed to recover foreign exchange
losses under a formula agreed upon between them. Sometime in August 2001 Maynilad again filed another Force
Majeure Notice and, since MWSS could not agree with the terms of said Notice, the matter was referred on August 30,
2001 to the Appeals Panel for arbitration. This resulted in the parties agreeing to resolve the issues through an
amendment of the Concession Agreement on October 5, 2001, known as Amendment No. 1, 8 which was based on the
terms set down in MWSS Board of Trustees Resolution No. 457-2001, as amended by MWSS Board of Trustees
Resolution No. 487-2001,9 which provided inter alia for a formula that would allow Maynilad to recover foreign exchange
losses it had incurred or would incur under the terms of the Concession Agreement.

As part of this agreement, Maynilad committed, among other things, to:

a) infuse the amount of UD$80.0 million as additional funding support from its stockholders;

b) resume payment of the concession fees; and

c) mutually seek the dismissal of the cases pending before the Court of Appeals and with Minor Dispute Appeals
Panel.

However, on November 5, 2002, Maynilad served upon MWSS a Notice of Event of Termination, claiming that MWSS
failed to comply with its obligations under the Concession Agreement and Amendment No. 1 regarding the adjustment
mechanism that would cover Maynilad’s foreign exchange losses. On December 9, 2002, Maynilad filed a Notice of Early
Termination of the concession, which was challenged by MWSS. This matter was eventually brought before the Appeals
Panel on January 7, 2003 by MWSS.10 On November 7, 2003, the Appeals Panel ruled that there was no Event of
Termination as defined under Art. 10.2 (ii) or 10.3 (iii) of the Concession Agreement and that, therefore, Maynilad should
pay the concession fees that had fallen due.

The award of the Appeals Panel became final on November 22, 2003. MWSS, thereafter, submitted a written notice 11 on
November 24, 2003, to Citicorp International Limited, as agent for the participating banks, that by virtue of Maynilad’s
failure to perform its obligations under the Concession Agreement, it was drawing on the Irrevocable Standby Letter of
Credit and thereby demanded payment in the amount of US$98,923,640.15.

Prior to this, however, Maynilad had filed on November 13, 2003, a petition for rehabilitation before the court a quo which
resulted in the issuance of the Stay Order of November 17, 2003 and the disputed Order of November 27, 2003. 12

PETITIONER’S CASE

Petitioner hereby raises the following issues:

1. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR AND/OR ACT PATENTLY WITHOUT
JURISDICTION OR IN EXCESS OF JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION AMOUNTING
TO LACK OR EXCESS OF JURISDICTION IN CONSIDERING THE PERFORMANCE BOND OR ASSETS OF
THE ISSUING BANKS AS PART OR PROPERTY OF THE ESTATE OF THE PRIVATE RESPONDENT
MAYNILAD SUBJECT TO REHABILITATION.

2. DID THE HONORABLE PRESIDING JUDGE ACT WITH LACK OR EXCESS OF JURISDICTION OR COMMIT
A GRAVE ERROR OF LAW IN HOLDING THAT THE PERFORMANCE BOND OBLIGATIONS OF THE BANKS
WERE NOT SOLIDARY IN NATURE.

3. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR IN ALLOWING MAYNILAD TO IN EFFECT
SEEK A REVIEW OR APPEAL OF THE FINAL AND BINDING DECISION OF THE APPEALS PANEL.

In support of the first issue, petitioner maintains that as a matter of law, the US$120 Million Standby Letter of Credit and
Performance Bond are not property of the estate of the debtor Maynilad and, therefore, not subject to the in
rem rehabilitation jurisdiction of the trial court.

Petitioner argues that a call made on the Standby Letter of Credit does not involve any asset of Maynilad but only assets
of the banks. Furthermore, a call on the Standby Letter of Credit cannot also be considered a "claim" falling under the
purview of the stay order as alleged by respondent as it is not directed against the assets of respondent Maynilad.

Petitioner concludes that the public respondent erred in declaring and holding that the commencement of the process for
the payment of US$98 million is a violation of the order issued on November 17, 2003.

RESPONDENT MAYNILAD’S CASE

Respondent Maynilad seeks to refute this argument by alleging that:

a) the order objected to was strictly and precisely worded and issued after carefully considering/evaluating the
import of the arguments and documents referred to by Maynilad, MWSS and/or creditors Chinatrust Commercial
Bank and Suez in relation to admissions, pleadings and/or pertinent records 13 and that public respondent had the
authority to issue the same;

b) public respondent never considered nor held that the Performance bond or assets of the issuing banks are part
or property of the estate of respondent Maynilad subject to rehabilitation and which respondent Maynilad has not
and has never claimed to be;14
 c) what is relevant is not whether the performance bond or assets of the issuing banks are part of the estate of
respondent Maynilad but whether the act of petitioner in commencing the process for the payment by the banks of
US$98 million out of the US$120 million performance bond is covered and/or prohibited under sub-paragraphs 2.)
and 4.) of the stay order dated November 17, 2003;

d) the jurisdiction of public respondent extends not only to the assets of respondent Maynilad but also over
persons and assets of "all those affected by the proceedings x x x upon publication of the notice of
commencement;15" and

e) the obligations under the Standby Letter of Credit are not solidary and are not exempt from the coverage of the
stay order.

OUR RULING

We will discuss the first two issues raised by petitioner as these are interrelated and make up the main issue of the
petition before us which is, did the rehabilitation court sitting as such, act in excess of its authority or jurisdiction when it
enjoined herein petitioner from seeking the payment of the concession fees from the banks that issued the Irrevocable
Standby Letter of Credit in its favor and for the account of respondent Maynilad?

The public respondent relied on Sec. 1, Rule 3 of the Interim Rules on Corporate Rehabilitation to support its jurisdiction
over the Irrevocable Standby Letter of Credit and the banks that issued it. The section reads in part "that jurisdiction over
those affected by the proceedings is considered acquired upon the publication of the notice of commencement of
proceedings in a newspaper of general circulation" and goes further to define rehabilitation as an in rem proceeding. This
provision is a logical consequence of the in rem nature of the proceedings, where jurisdiction is acquired by publication
and where it is necessary that the assets of the debtor come within the court’s jurisdiction to secure the same for the
benefit of creditors. The reference to "all those affected by the proceedings" covers creditors or such other persons or
entities holding assets belonging to the debtor under rehabilitation which should be reflected in its audited financial
statements. The banks do not hold any assets of respondent Maynilad that would be material to the rehabilitation
proceedings nor is Maynilad liable to the banks at this point.

Respondent Maynilad’s Financial Statement as of December 31, 2001 and 2002 do not show the Irrevocable Standby
Letter of Credit as part of its assets or liabilities, and by respondent Maynilad’s own admission it is not. In issuing the
clarificatory order of November 27, 2003, enjoining petitioner from claiming from an asset that did not belong to the debtor
and over which it did not acquire jurisdiction, the rehabilitation court acted in excess of its jurisdiction.

Respondent Maynilad insists, however, that it is Sec. 6 (b), Rule 4 of the Interim Rules that supports its claim that the
commencement of the process to draw on the Standby Letter of Credit is an enforcement of claim prohibited by and under
the Interim Rules and the order of public respondent.

Respondent Maynilad would persuade us that the above provision justifies a leap to the conclusion that such an
enforcement is prohibited by said section because it is a "claim against the debtor, its guarantors and sureties not
solidarily liable with the debtor" and that there is nothing in the Standby Letter of Credit nor in law nor in the nature of the
obligation that would show or require the obligation of the banks to be solidary with the respondent Maynilad.

We disagree.

First, the claim is not one against the debtor but against an entity that respondent Maynilad has procured to answer for its
non-performance of certain terms and conditions of the Concession Agreement, particularly the payment of concession
fees.

Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all claims against guarantors and
sureties, but only those claims against guarantors and sureties who are not solidarily liable with the debtor.
Respondent Maynilad’s claim that the banks are not solidarily liable with the debtor does not find support in jurisprudence.

We held in Feati Bank & Trust Company v. Court of Appeals16 that 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 bank’s
responsibility from the contract upon which it was opened and the nature of both contracts is mutually in conflict with each
other. In contracts of guarantee, the 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. We
have also defined a letter of credit as an engagement by a bank or other person made at the request of a customer that
the issuer shall honor drafts or other demands of payment upon compliance with the conditions specified in the credit. 17

Letters of credit were developed for the purpose of insuring to a seller payment of a definite amount upon the presentation
of documents18 and is thus a commitment by the issuer that the party in whose favor it is issued and who can collect upon
it will have his credit against the applicant of the letter, duly paid in the amount specified in the letter. 19 They are in
effect absolute undertakings to pay the money advanced or the amount for which credit is given on the faith of the
instrument. They are primary obligations and not accessory contracts and while they are security arrangements, they are
not converted thereby into contracts of guaranty.20 What distinguishes letters of credit from other accessory contracts, is
the engagement of the issuing bank to pay the seller once the draft and other required shipping documents are presented
to it.21 They are definite undertakings to pay at sight once the documents stipulated therein are presented.
Letters of Credits have long been and are still governed by the provisions of the Uniform Customs and Practice for
Documentary Credits of the International Chamber of Commerce. In the 1993 Revision it provides in Art. 2 that "the
expressions Documentary Credit(s) and Standby Letter(s) of Credit mean any arrangement, however made or described,
whereby a bank acting at the request and on instructions of a customer or on its own behalf is to make payment against
stipulated document(s)" and Art. 9 thereof defines the liability of the issuing banks on an irrevocable letter of credit as a
"definite undertaking of the issuing bank, provided that the stipulated documents are presented to the nominated bank or
the issuing bank and the terms and conditions of the Credit are complied with, to pay at sight if the Credit provides for
sight payment."22

We have accepted, in Feati Bank and Trust Company v. Court of Appeals23 and  Bank of America NT & SA v. Court of
Appeals,24 to the extent that they are pertinent, the application in our jurisdiction of the international credit regulatory set of
rules known as the Uniform Customs and Practice for Documentary Credits (U.C.P) issued by the International Chamber
of Commerce, which we said in Bank of the Philippine Islands v. Nery25 was justified under Art. 2 of the Code of
Commerce, which states:

"Acts of commerce, whether those who execute them be merchants or not, and whether specified in this Code or
not should be governed by the provisions contained in it; in their absence, by the usages of commerce generally
observed in each place; and in the absence of both rules, by those of the civil law."

The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to herein petitioner as the prohibition is on
the enforcement of claims against guarantors or sureties of the debtors whose obligations are not solidary with the debtor.
The participating banks’ obligation are solidary with respondent Maynilad in that it is a primary, direct, definite and an
absolute undertaking to pay and is not conditioned on the prior exhaustion of the debtor’s assets. These are the same
characteristics of a surety or solidary obligor.

Being solidary, the claims against them can be pursued separately from and independently of the rehabilitation case, as
held in Traders Royal Bank v. Court of Appeals26 and reiterated in Philippine Blooming Mills, Inc. v. Court of
Appeals,27 where we said that property of the surety cannot be taken into custody by the rehabilitation receiver (SEC) and
said surety can be sued separately to enforce his liability as surety for the debts or obligations of the debtor. The debts or
obligations for which a surety may be liable include future debts, an amount which may not be known at the time the
surety is given.

The terms of the Irrevocable Standby Letter of Credit do not show that the obligations of the banks are not solidary with
those of respondent Maynilad. On the contrary, it is issued at the request of and for the account of Maynilad Water
Services, Inc., in favor of the Metropolitan Waterworks and Sewerage System, as a bond for the full and prompt
performance of the obligations by the concessionaire under the Concession Agreement 28 and herein petitioner is
authorized by the banks to draw on it by the simple act of delivering to the agent a written certification substantially in the
form Annex "B" of the Letter of Credit. It provides further in Sec. 6, that for as long as the Standby Letter of Credit is valid
and subsisting, the Banks shall honor any written Certification made by MWSS in accordance with Sec. 2, of the Standby
Letter of Credit regardless of the date on which the event giving rise to such Written Certification arose. 29

Taking into consideration our own rulings on the nature of letters of credit and the customs and usage developed over the
years in the banking and commercial practice of letters of credit, we hold that except when a letter of credit specifically
stipulates otherwise, the obligation of the banks issuing letters of credit are solidary with that of the person or entity
requesting for its issuance, the same being a direct, primary, absolute and definite undertaking to pay the beneficiary
upon the presentation of the set of documents required therein.

The public respondent, therefore, exceeded his jurisdiction, in holding that he was competent to act on the obligation of
the banks under the Letter of Credit under the argument that this was not a solidary obligation with that of the debtor.
Being a solidary obligation, the letter of credit is excluded from the jurisdiction of the rehabilitation court and therefore in
enjoining petitioner from proceeding against the Standby Letters of Credit to which it had a clear right under the law and
the terms of said Standby Letter of Credit, public respondent acted in excess of his jurisdiction.

ADDITIONAL ISSUES

We proceed to consider the other issues raised in the oral arguments and included in the parties’ memoranda:

1. Respondent Maynilad argues that petitioner had a plain, speedy and adequate remedy under the Interim Rules
itself which provides in Sec. 12, Rule 4 that the court may on motion or motu proprio, terminate, modify or set
conditions for the continuance of the stay order or relieve a claim from coverage thereof. We find, however, that
the public respondent had already accomplished this during the hearing set for the two Urgent Ex Parte motions
filed by respondent Maynilad on November 21 and 24, 2003, 30 where the parties including the creditors, Suez and
Chinatrust Commercial "presented their respective arguments."31 The public respondent then ruled, "after carefully
considering/evaluating the import of the arguments and documents referred to by Maynilad, MWSS and/or the
creditors Chinatrust Commercial Bank and Suez in relation to the admissions, the pleadings, and/or pertinent
portions of the records, this court is of the considered and humble view that the issue must perforce be resolved in
favor of Maynilad."32 Hence to pursue their opposition before the same court would result in the presentation of
the same arguments and issues passed upon by public respondent.

Furthermore, Sec. 5, Rule 3 of the Interim Rules would preclude any other effective remedy questioning the
orders of the rehabilitation court since they are immediately executory and a petition for review or an appeal
 therefrom shall not stay the execution of the order unless restrained or enjoined by the appellate court." In this
situation, it had no other remedy but to seek recourse to us through this petition for certiorari.

In Silvestre v. Torres and Oben,33 we said that it is not enough that a remedy is available to prevent a party from
making use of the extraordinary remedy of certiorari but that such remedy be an adequate remedy which is
equally beneficial, speedy and sufficient, not only a remedy which at some time in the future may offer relief but a
remedy which will promptly relieve the petitioner from the injurious acts of the lower tribunal. It is the inadequacy --
not the mere absence -- of all other legal remedies and the danger of failure of justice without the writ, that must
usually determine the propriety of certiorari.34

2. Respondent Maynilad argues that by commencing the process for payment under the Standby Letter of Credit,
petitioner violated an immediately executory order of the court and, therefore, comes to Court with unclean hands
and should therefore be denied any relief.

It is true that the stay order is immediately executory. It is also true, however, that the Standby Letter of Credit and
the banks that issued it were not within the jurisdiction of the rehabilitation court. The call on the Standby Letter of
Credit, therefore, could not be considered a violation of the Stay Order.

3. Respondent’s claim that the filing of the petition pre-empts the original jurisdiction of the lower court is without
merit. The purpose of the initial hearing is to determine whether the petition for rehabilitation has merit or not. The
propriety of the stay order as well as the clarificatory order had already been passed upon in the hearing
previously had for that purpose. The determination of whether the public respondent was correct in enjoining the
petitioner from drawing on the Standby Letter of Credit will have no bearing on the determination to be made by
public respondent whether the petition for rehabilitation has merit or not. Our decision on the instant petition does
not pre-empt the original jurisdiction of the rehabilitation court.

WHEREFORE, the petition for certiorari is granted. The Order of November 27, 2003 of the Regional Trial Court of
Quezon City, Branch 90, is hereby declared NULL AND VOID and SET ASIDE. The status quo Order herein previously
issued is hereby LIFTED. In view of the urgency attending this case, this decision is immediately executory.

No costs.

SO ORDERED.
 February 24, 2016

G.R. No. 183486

THE HONGKONG & SHANGHAI BANKING CORPORATION, LIMITED, Petitioner,

vs.
NATIONAL STEEL CORPORATION and CITYTRUST BANKING CORPORATION (NOW BANK OF THE PHILIPPINE
ISLANDS), Respondents.

DECISION

JARDELEZA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court. Petitioner The Hongkong & Shanghai
Banking Corporation, Limited (HSBC) filed this petition to assail the Decision of the Court of Appeals (CA) dated
November 19, 2007 (Assailed Decision) which reversed the ruling of the Regional Trial Court, Branch 62 of Makati City
(RTC Makati) and its Resolution denying HSBC's Motion for Reconsideration dated June 23, 2008 (Assailed Resolution).

The 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 DIC  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 CityTrust Banking Corporation (CityTrust). NSC had
earlier obtained a loan from CityTrust secured by the proceeds of the Letter of Credit issued by HSBC. 8

On November 29, 1993, CityTrust 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 CityTrust. 11 On the same
date, CityTrust 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 CityTrust 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 CityTrust thus sent a follow-up cablegram to HSBC on
December 17, 1993. In this cablegram, CityTrust insisted that a demand for payment must be made from Klockner 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, Klockner 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 CityTrust responded that as
advised by its client, HSBC should continue to press for payment. 23

Klockner continued to refuse payment and HSBC notified CityTrust in a cablegram dated January 7, 1994, that should
Klockner still refuse to accept the bill by January 12, 1994, it will return the full set of documents to CityTrust with all the
charges for the account of the drawer. 24

Meanwhile, on January 12, 1994, CityTrust sent a letter to NSC stating that it executed NSC's instructions "to send, ON
COLLECTION BASIS, the export documents ... "25 CityTrust 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 CityTrust the export
documents pertaining to LC No. HKH 239409 of HSBC and it was CityTrust, which wrongfully treated the negotiation, as
'on collection basis."' 28 NSC further claimed that CityTrust used its own mistake as an excuse against payment under the
Letter of Credit. Thus, NSC argued that CityTrust remains liable under the Letter of Credit. It also stated that it presumes
that CityTrust 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. Hence, 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
CityTrust'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 Complaint 48 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

After a full-blown trial,55 the RTC Makati rendered a decision (RTC Decision) dated February 23, 2000. 56 It found that
HSBC is not liable to pay NSC the amount stated in the Letter of Credit. It ruled that the applicable law is URC 322 as it
was the law which CityTrust intended to apply to the transaction. Under URC 322, HSBC has no liability to pay when
Klockner refused payment. The dispositive portion states -

WHEREFORE, premises considered, judgment is hereby rendered as follows:

1. Plaintiffs Complaint against HSBC is DISMISSED; and, HSBC's Counterclaims against NSC are DENIED.

2. Ordering Third-Party Defendant CityTrust to pay Third-Party Plaintiff HSBC the following:

2.1 US$771.21 as actual and consequential damages; and

2.2 Pl00,000 as attorney's fees.

3. No pronouncement as to costs.

SO ORDERED.57

NSC and CityTrust appealed the RTC Decision before the CA. In its Assailed Decision dated November 19, 2007, 58 the
CA reversed the RTC Makati. The CA found that it is UCP 400 and not URC 322 which governs the transaction.
According to the CA, the terms of the Letter of Credit clearly stated that UCP 400 shall apply. Further, the CA explained
that even if the Letter of Credit did not state that UCP 400 governs, it nevertheless finds application as this Court has
consistently recognized it under Philippine jurisdiction. Thus, applying UCP 400 and principles concerning letters of credit,
the CA explained that the obligation of the issuing bank is to pay the seller or beneficiary of the credit once the draft and
the required documents are properly presented. Under the independence principle, the issuing bank's obligation to pay
under the letter of credit is separate from the compliance of the parties in the main contract. The dispositive portion held -

WHEREFORE, in view of the foregoing, the assailed decision is hereby REVERSED and SET ASIDE. HSBC is ordered
to pay its obligation under the irrevocable letter of credit in the amount of US$485,767.93 to NSC with legal interest of six
percent (6%) per annum from the filing of the complaint until the amount is fully paid, plus attorney's fees equivalent to
10% of the principal. Costs against appellee HSBC.

SO ORDERED.59

HSBC filed a Motion for Reconsideration of the Assailed Decision which the CA denied in its Assailed Resolution dated
June 23, 2008.60

Hence, HSBC filed this Petition for Review on Certiorari61 before this Court, seeking a reversal of the CA' s Assailed
Decision and Resolution. In its petition, HSBC contends that CityTrust's order to collect under URC 322 did not modify nor
contradict the Letter of Credit. In fact, it is customary practice in commercial transactions for entities to collect under URC
322 even if there is an underlying letter of credit. Further, CityTrust acted as an agent of NSC in collecting payment and
as such, it had the authority to instruct HSBC to proceed under URC 322 and not under UCP 400. Having clearly and
expressly instructed HSBC to collect under URC 322 and having fully intended the transaction to proceed under such rule
as shown by the series of correspondence between CityTrust and HSBC, CityTrust is estopped from now claiming that the
collection was made under UCP 400 in accordance with the Letter of Credit.

NSC, on the other hand, claims that HSBC's obligation to pay is clear from the terms of the Letter of Credit and under
UCP 400. It asserts that the applicable rule is UCP 400 and HSBC has no basis to argue that CityTrust's presentment of
the documents allowed HSBC to vary the terms of their agreement. 62

The Issues

The central question in this case is who among the parties bears the liability to pay the amount stated in the Letter of
Credit. This requires a determination of which between UCP 400 and URC 322 governs the transaction. The obligations of
the parties under the proper applicable rule will, in turn, determine their liability.

The Ruling of the Court

We uphold the CA.

The nature of a letter of credit

A letter of credit is a commercial instrument developed to address the unique needs of certain commercial transactions. It
is recognized in our jurisdiction and is sanctioned under Article 567 63 of the Code of Commerce and in numerous
jurisprudence defining a letter of credit, the principles relating to it, and the obligations of parties arising from it.
In Bank of America, NT & SA v. Court of Appeals,64 this Court defined a letter of credit as " ... 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."65 Through a letter of credit, 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. 67

A letter of credit generally arises out of a separate contract requiring the assurance of payment of a third party. In a
transaction involving a letter of credit, 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.

Owing to the complexity of these contracts, there may be a correspondent bank which facilitates the ease of completing
the transactions. A correspondent bank may be a notifying bank, a negotiating bank or a confirming bank depending on
the nature of the obligations assumed. 77 A notifying bank undertakes to inform the seller-beneficiary that a letter of credit
exists. It may also have the duty of transmitting the letter of credit. As its obligation is limited to this duty, it assumes no
liability to pay under the letter of credit. 78 A negotiating bank, on the other hand, purchases drafts at a discount from the
seller-beneficiary and presents them to the issuing bank for payment. 79 Prior to negotiation, a negotiating bank has no
obligation. A contractual relationship between the negotiating bank and the seller-beneficiary arises only after the
negotiating bank purchases or discounts the drafts. 80 Meanwhile, a confirming bank may honor the letter of credit issued
by another bank or confirms that the letter of credit will be honored by the issuing bank. 81 A confirming bank essentially
insures that the credit will be paid in accordance with the terms of the letter of credit. 82 It therefore assumes a direct
obligation to the seller-beneficiary. 83

Parenthetically, when banks are involved in letters of credit transactions, the standard of care imposed on banks engaged
in business imbued with public interest applies to them. Banks have the duty to act with the highest degree of diligence in
dealing with clients. 84 Thus, in dealing with the parties in a letter of credit, banks must also observe this degree of care.

The value of letters of credit in commerce hinges on an important aspect of such a commercial transaction. Through a
letter of credit, a seller-beneficiary is assured of payment regardless of the status of the underlying transaction.
International contracts of sales are perfected and consummated because of the certainty that the seller will be paid thus
making him or her willing to part with the goods even prior to actual receipt of the amount agreed upon. The legally
demandable obligation of an issuing bank to pay under the letter of credit, and the enforceable right of the seller-
beneficiary to demand payment, are indispensable essentials for the system of letters of credit, if it is to serve its purpose
of facilitating commerce. Thus, a touchstone of any law or custom governing letters of credit is 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.

Rules applicable to letters of credit

Letters of credit are defined and their incidences regulated by Articles 567 to 572 85 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 app1ication. 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.

HSBC 's Liability

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. 105 Thus, when CityTrust 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. 106 URC 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. 108 Under 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
CityTrust, 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
CityTrust'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 HSBC 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 CityTrust's request for collection under URC 322 and the terms of the Letter of
Credit. Notwithstanding any statements by CityTrust 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 CityTrust may
have committed, the standard of care expected of HSBC dictates that it should have made a separate detennination 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.

This Court therefore rules that CityTrust's presentment of the Letter of Credit with the attached documents in behalf of
NSC, constitutes due presentment.1avvphi1 Under the terms of the Letter of Credit, HSBC undertook to pay the amount
of US$485,767.93 upon presentment of the Letter of Credit and the required documents. 114 In accordance with this
agreement, NSC, through CityTrust, presented the Letter of Credit and 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. 115

In transactions where the letter of credit is payable on sight, as in this case, the issuer must pay upon due presentment.
This obligation is imbued with the character of definiteness in that not even the defect or breach in the underlying
transaction will affect the issuing bank's liability. 116 This is the Independence Principle in the law on letters of credit. Article
17 of UCP 400 explains that under this principle, an issuing bank assumes 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 ... " Thus, as long as the proper documents are
presented, the issuing bank has an obligation to pay even if the buyer should later on refuse payment. Hence, Klockner's
refusal to pay carries no effect whatsoever on HSBC's obligation to pay under the Letter of Credit. To allow HSBC to
refuse to honor the Letter of Credit simply because it could not collect first from Klockner is to countenance a breach of
the Independence Principle.

HSBC's persistent refusal to comply with its obligation notwithstanding due presentment constitutes delay contemplated in
Article 1169 of the Civil Code. 117 This provision states that a party to an obligation incurs in delay from the time the other
party makes a judicial or extrajudicial demand for the fulfillment of the obligation. We rule that the due presentment of the
Letter of Credit and the attached documents is tantamount to a demand. HSBC incurred in delay when it failed to fulfill its
obligation despite such a demand.

Under Article 1170 of the Civil Code, 118 a party in delay is liable for damages. The extent of these damages pertains to
the pecuniary loss duly proven. 119 In this case, such damage refers to the losses which NSC incurred in the amount of
US$485,767.93 as stated in the Letter of Credit. We also award interest as indemnity for the damages incurred in the
amount of six percent (6%) from the date of NSC's extrajudicial demand. 120 An interest in the amount of six percent (6%)
is also awarded from the time of the finality of this decision until full payment. 121

Having been remiss in its obligations under the applicable law, rules and jurisprudence, HSBC only has itself to blame for
its consequent liability to NSC.

However, this Court finds that there is no basis for the CA's grant of attorney's fees in favor of NSC. Article 2208 of the
Civil Code122 enumerates the grounds for the award of attorney's fees. This Court has explained that the award of
attorney's fees is an exception rather than the rule. 123 The winning party is not automatically entitled to attorney's fees as
there should be no premium on the right to litigate. 124 While courts may exercise discretion in granting attorney's fees, this
Court has stressed that the grounds used as basis for its award must approximate as closely as possible the enumeration
in Article 2208. 125 Its award must have sufficient factual and legal justifications. 126 This Court rules that none of the
grounds stated in Article 2208 are present in this case. NSC has not cited any specific ground nor presented any
particular fact to warrant the award of attorney's fees.

CityTrust's Liability

When NSC obtained the services of CityTrust in collecting under the Letter of Credit, it constituted CityTrust as its agent.
Article 1868 of the Civil Code states that a contract of agency exists when a person binds himself or herself "to render
some service or to do something in representation or on behalf of another, with the consent or authority of the latter." In
this case, CityTrust bound itself to collect under the Letter of Credit in behalf of NSC.

One of the obligations of an agent is to carry out the agency in accordance with the instructions of the principal. 127 In
ascertaining NSC's instructions to CityTrust, its letter dated January 18, 1994 is determinative. In this letter, NSC clearly
stated that it "negotiated with CityTrust the export documents pertaining to LC No. HKH 239409 of HSBC and it was
CityTrust which wrongfully treated the negotiation as 'on collection basis."' 128 HSBC persistently communicated with
CityTrust and consistently repeated that it will proceed with collection under URC 322. At no point did CityTrust correct
HSBC or seek clarification from NSC. In insisting upon its course of action, CityTrust failed to act in accordance with the
instructions given by NSC, its principal. Nevertheless while this Court recognizes that CityTrust committed a breach of its
obligation to NSC, this carries no implications on the clear liability of HSBC. As this Court already mentioned, HSBC had a
separate obligation that it failed to perform by reason of acts independent of CityTrust's breach of its obligation under its
contract of agency. If CityTrust has incurred any liability, it is to its principal NSC. However, NSC has not raised any claim
against CityTrust at any point in these proceedings. Thus, this Court cannot make any finding of liability against CityTrust
in favor of NSC.

WHEREFORE, in view of the foregoing, the Assailed Decision dated November 19, 2007 is AFFIRMED to the extent that
it orders HSBC to pay NSC the amount of US$485,767.93. HSBC is also liable to pay legal interest of six percent (6%)
per annum from the time of extrajudicial demand. An interest of six percent (6%) is also awarded from the time of the
finality of this decision until the amount is fully paid. We delete the award of attorney's fees. No pronouncement as to cost.

SO ORDERED
G.R. No. 94209             April 30, 1991

FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING CORPORATION), petitioner,

vs.
THE COURT OF APPEALS, and BERNARDO E. VILLALUZ, respondents.

Pelaez, Adriano & Gregorio for petitioner.

Ezequiel S. Consulta for private respondent.

GUTIERREZ, JR., J.:

This is a petition for review seeking the reversal of the decision of the Court of Appeals dated June 29, 1990 which
affirmed the decision of the Regional Trial Court of Rizal dated October 20, 1986 ordering the defendants Christiansen
and the petitioner, to pay various sums to respondent Villaluz, jointly and severally.

The facts of the case are as follows:

On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant Axel Christiansen 2,000 cubic meters of lauan
logs at $27.00 per cubic meter FOB.

After inspecting the logs, Christiansen issued purchase order No. 76171.

On the arrangements made and upon the instructions of the consignee, Hanmi Trade Development, Ltd., de Santa Ana,
California, the Security Pacific National Bank of Los Angeles, California issued Irrevocable Letter of Credit No. IC-46268
available at sight in favor of Villaluz for the sum of $54,000.00, the total purchase price of the lauan logs.

The letter of credit was mailed to the Feati Bank and Trust Company (now Citytrust) with the instruction to the latter that it
"forward the enclosed letter of credit to the beneficiary." (Records, Vol. I, p. 11)

The letter of credit further provided that the draft to be drawn is on Security Pacific National Bank and that it be
accompanied by the following documents:

1. Signed Commercial Invoice in four copies showing the number of the purchase order and certifying that —

a. All terms and conditions of the purchase order have been complied with and that all logs are fresh cut
and quality equal to or better than that described in H.A. Christiansen's telex #201 of May 1, 1970, and
that all logs have been marked "BEV-EX."

b. One complete set of documents, including 1/3 original bills of lading was airmailed to Consignee and
Parties to be advised by Hans-Axel Christiansen, Ship and Merchandise Broker.

c. One set of non-negotiable documents was airmailed to Han Mi Trade Development Company and one
set to Consignee and Parties to be advised by Hans-Axel Christiansen, Ship and Merchandise Broker.

2. Tally sheets in quadruplicate.

3. 2/3 Original Clean on Board Ocean Bills of Lading with Consignee and Parties to be advised by Hans Axel
Christiansen, showing Freight Prepaid and marked Notify:

Han Mi Trade Development Company, Ltd., Santa Ana, California.

Letter of Credit No. 46268 dated June 7, 1971

Han Mi Trade Development Company, Ltd., P.O. Box 10480, Santa Ana, California 92711 and Han Mi Trade
Development Company, Ltd., Seoul, Korea.

4. Certification from Han-Axel Christiansen, Ship and Merchandise Broker, stating that logs have been approved
prior to shipment in accordance with terms and conditions of corresponding purchase Order. (Record, Vol. 1 pp.
11-12)

Also incorporated by reference in the letter of credit is the Uniform Customs and Practice for Documentary Credits (1962
Revision).

The logs were thereafter loaded on the vessel "Zenlin Glory" which was chartered by Christiansen. Before its loading, the
logs were inspected by custom inspectors Nelo Laurente, Alejandro Cabiao, Estanislao Edera from the Bureau of
Customs (Records, Vol. I, p. 124) and representatives Rogelio Cantuba and Jesus Tadena of the Bureau of Forestry
(Records, Vol. I, pp. 16-17) all of whom certified to the good condition and exportability of the logs.

After the loading of the logs was completed, the Chief Mate, Shao Shu Wang issued a mate receipt of the cargo which
stated the same are in good condition (Records, Vol. I, p. 363). However, Christiansen refused to issue the certification as
required in paragraph 4 of the letter of credit, despite several requests made by the private respondent.

Because of the absence of the certification by Christiansen, the Feati Bank and Trust Company refused to advance the
payment on the letter of credit.

The letter of credit lapsed on June 30, 1971, (extended, however up to July 31, 1971) without the private respondent
receiving any certification from Christiansen.

The persistent refusal of Christiansen to issue the certification prompted the private respondent to bring the matter before
the Central Bank. In a memorandum dated August 16, 1971, the Central Bank ruled that:

. . . pursuant to the Monetary Board Resolution No. 1230 dated August 3, 1971, in all log exports, the certification
of the lumber inspectors of the Bureau of Forestry . . . shall be considered final for purposes of negotiating
documents. Any provision in any letter of credit covering log exports requiring certification of buyer's agent or
representative that said logs have been approved for shipment as a condition precedent to negotiation of shipping
documents shall not be allowed. (Records, Vol. I, p. 367)

Meanwhile, the logs arrived at Inchon, Korea and were received by the consignee, Hanmi Trade Development Company,
to whom Christiansen sold the logs for the amount of $37.50 per cubic meter, for a net profit of $10 per cubic meter.
Hanmi Trade Development Company, on the other hand sold the logs to Taisung Lumber Company at Inchon, Korea.
(Rollo, p. 39)

Since the demands by the private respondent for Christiansen to execute the certification proved futile, Villaluz, on
September 1, 1971, instituted an action for mandamus and specific performance against Christiansen and the Feati Bank
and Trust Company (now Citytrust) before the then Court of First Instance of Rizal. The petitioner was impleaded as
defendant before the lower court only to afford complete relief should the court a quo order Christiansen to execute the
required certification.

The complaint prayed for the following:

1. Christiansen be ordered to issue the certification required of him under the Letter of Credit;

2. Upon issuance of such certification, or, if the court should find it unnecessary, FEATI BANK be ordered to
accept negotiation of the Letter of Credit and make payment thereon to Villaluz;

3. Order Christiansen to pay damages to the plaintiff. (Rollo, p. 39)

On or about 1979, while the case was still pending trial, Christiansen left the Philippines without informing the Court and
his counsel. Hence, Villaluz, filed an amended complaint to make the petitioner solidarily liable with Christiansen.

The trial court, in its order dated August 29, 1979, admitted the amended complaint.

After trial, the lower court found:

The liability of the defendant CHRISTIANSEN is beyond dispute, and the plaintiffs right to demand payment is
absolute. Defendant CHRISTIANSEN having accepted delivery of the logs by having them loaded in his chartered
vessel the "Zenlin Glory" and shipping them to the consignee, his buyer Han Mi Trade in Inchon, South Korea
(Art. 1585, Civil Code), his obligation to pay the purchase order had clearly arisen and the plaintiff may sue and
recover the price of the goods (Art. 1595, Id).

The Court believes that the defendant CHRISTIANSEN acted in bad faith and deceit and with intent to defraud the
plaintiff, reflected in and aggravated by, not only his refusal to issue the certification that would have enabled
without question the plaintiff to negotiate the letter of credit, but his accusing the plaintiff in his answer of fraud,
intimidation, violence and deceit. These accusations said defendant did not attempt to prove, as in fact he left the
country without even notifying his own lawyer. It was to the Court's mind a pure swindle.

The defendant Feati Bank and Trust Company, on the other hand, must be held liable together with his (sic) co-
defendant for having, by its wrongful act, i.e., its refusal to negotiate the letter of credit in the absence of
CHRISTIANSEN's certification (in spite of the Central Bank's ruling that the requirement was illegal), prevented
payment to the plaintiff. The said letter of credit, as may be seen on its face, is irrevocable and the issuing bank,
the Security Pacific National Bank in Los Angeles, California, undertook by its terms that the same shall be
honored upon its presentment. On the other hand, the notifying bank, the defendant Feati Bank and Trust
Company, by accepting the instructions from the issuing bank, itself assumed the very same undertaking as the
issuing bank under the terms of the letter of credit.

x x x           x x x          x x x
 The Court likewise agrees with the plaintiff that the defendant BANK may also be held liable under the principles
and laws on both trust and estoppel. When the defendant BANK accepted its role as the notifying and negotiating
bank for and in behalf of the issuing bank, it in effect accepted a trust reposed on it, and became a trustee in
relation to plaintiff as the beneficiary of the letter of credit. As trustee, it was then duty bound to protect the
interests of the plaintiff under the terms of the letter of credit, and must be held liable for damages and loss
resulting to the plaintiff from its failure to perform that obligation.

Furthermore, when the defendant BANK assumed the role of a notifying and negotiating BANK it in effect
represented to the plaintiff that, if the plaintiff complied with the terms and conditions of the letter of credit and
presents the same to the BANK together with the documents mentioned therein the said BANK will pay the
plaintiff the amount of the letter of credit. The Court is convinced that it was upon the strength of this letter of
credit and this implied representation of the defendant BANK that the plaintiff delivered the logs to defendant
CHRISTIANSEN, considering that the issuing bank is a foreign bank with whom plaintiff had no business
connections and CHRISTIANSEN had not offered any other Security for the payment of the logs. Defendant
BANK cannot now be allowed to deny its commitment and liability under the letter of credit:

A holder of a promissory note given because of gambling who indorses the same to an innocent holder
for value and who assures said party that the note has no legal defect, is in estoppel from asserting that
there had been an illegal consideration for the note, and so, he has to pay its value. (Rodriguez v.
Martinez, 5 Phil. 67).

The defendant BANK, in insisting upon the certification of defendant CHRISTIANSEN as a condition precedent to
negotiating the letter of credit, likewise in the Court's opinion acted in bad faith, not only because of the clear
declaration of the Central Bank that such a requirement was illegal, but because the BANK, with all the legal
counsel available to it must have known that the condition was void since it depended on the sole will of the
debtor, the defendant CHRISTIANSEN. (Art. 1182, Civil Code) (Rollo, pp. 29-31)

On the basis of the foregoing the trial court on October 20, 1986, ruled in favor of the private respondent. The dispositive
portion of its decision reads:

WHEREFORE, judgment is hereby rendered for the plaintiff, ordering the defendants to pay the plaintiff, jointly
and severally, the following sums:

a) $54,000.00 (US), or its peso equivalent at the prevailing rate as of the time payment is actually made,
representing the purchase price of the logs;

b) P17,340.00, representing government fees and charges paid by plaintiff in connection with the logs shipment in
question;

c) P10,000.00 as temperate damages (for trips made to Bacolod and Korea).

All three foregoing sums shall be with interest thereon at 12%  per annum from September 1, 1971, when the
complaint was filed, until fully paid:

d) P70,000.00 as moral damages;

e) P30,000.00 as exemplary damages; and

f) P30,000.00 as attorney's fees and litigation expense.

(Rollo, p. 28)

The petitioner received a copy of the decision on November 3, 1986. Two days thereafter, or on November 5, 1986, it filed
a notice of appeal.

On November 10, 1986, the private respondent filed a motion for the immediate execution of the judgment on the ground
that the appeal of the petitioner was frivolous and dilatory.

The trial court ordered the immediate execution of its judgment upon the private respondent's filing of a bond.

The petitioner then filed a motion for reconsideration and a motion to suspend the implementation of the writ of execution.
Both motions were, however, denied. Thus, petitioner filed before the Court of Appeals a petition for certiorari and
prohibition with preliminary injunction to enjoin the immediate execution of the judgment.

The Court of Appeals in a decision dated April 9, 1987 granted the petition and nullified the order of execution, the
dispositive portion of the decision states:

WHEREFORE, the petition for certiorari is granted. Respondent Judge's order of execution dated December 29,
1986, as well as his order dated January 14, 1987 denying the petitioner's urgent motion to suspend the writ of
execution against its properties are hereby annulled and set aside insofar as they are sought to be enforced and
implemented against the petitioner Feati Bank & Trust Company, now Citytrust Banking Corporation, during the
 pendency of its appeal from the adverse decision in Civil Case No. 15121. However, the execution of the same
decision against defendant Axel Christiansen did not appeal said decision may proceed unimpeded. The Sheriff s
levy on the petitioner's properties, and the notice of sale dated January 13, 1987 (Annex M), are hereby annulled
and set aside. Rollo p. 44)

A motion for reconsideration was thereafter filed by the private respondent. The Court of Appeals, in a resolution dated
June 29, 1987 denied the motion for reconsideration.

In the meantime, the appeal filed by the petitioner before the Court of Appeals was given due course. In its decision dated
June 29, 1990, the Court of Appeals affirmed the decision of the lower court dated October 20, 1986 and ruled that:

1. Feati Bank admitted in the "special and negative defenses" section of its answer that it was the bank to
negotiate the letter of credit issued by the Security Pacific National Bank of Los Angeles, California. (Record, pp.
156, 157). Feati Bank did notify Villaluz of such letter of credit. In fact, as such negotiating bank, even before the
letter of credit was presented for payment, Feati Bank had already made an advance payment of P75,000.00 to
Villaluz in anticipation of such presentment. As the negotiating bank, Feati Bank, by notifying Villaluz of the letter
of credit in behalf of the issuing bank (Security Pacific), confirmed such letter of credit and made the same also its
own obligation. This ruling finds support in the authority cited by Villaluz:

A confirmed letter of credit is one in which the notifying bank gives its assurance also that the opening bank's
obligation will be performed. In such a case, the notifying bank will not simply transmit but will confirm the opening
bank's obligation by making it also its own undertaking, or commitment, or guaranty or obligation. (Ward &
Hatfield, 28-29, cited in Agbayani, Commercial Laws, 1978 edition, p. 77).

Feati Bank argues further that it would be considered as the negotiating bank only upon negotiation of the letter of
credit. This stance is untenable. Assurance, commitments or guaranties supposed to be made by notifying banks
to the beneficiary of a letter of credit, as defined above, can be relevant or meaningful only with respect to a future
transaction, that is, negotiation. Hence, even before actual negotiation, the notifying bank, by the mere act of
notifying the beneficiary of the letter of credit, assumes as of that moment the obligation of the issuing bank.

2. Since Feati Bank acted as guarantor of the issuing bank, and in effect also of the latter's principal or client, i.e.
Hans Axel-Christiansen. (sic) Such being the case, when Christiansen refused to issue the certification, it was as
though refusal was made by Feati Bank itself. Feati Bank should have taken steps to secure the certification from
Christiansen; and, if the latter should still refuse to comply, to hale him to court. In short, Feati Bank should have
honored Villaluz's demand for payment of his logs by virtue of the irrevocable letter of credit issued in Villaluz's
favor and guaranteed by Feati Bank.

3. The decision promulgated by this Court in CA-G.R. Sp No. 11051, which contained the statement "Since
Villaluz" draft was not drawn strictly in compliance with the terms of the letter of credit, Feati Bank's refusal to
negotiate it was justified," did not dispose of this question on the merits. In that case, the question involved was
jurisdiction or discretion, and not judgment. The quoted pronouncement should not be taken as a preemptive
judgment on the merits of the present case on appeal.

4. The original action was for "Mandamus and/or specific performance." Feati Bank may not be a party to the
transaction between Christiansen and Security Pacific National Bank on the one hand, and Villaluz on the other
hand; still, being guarantor or agent of Christiansen and/or Security Pacific National Bank which had directly dealt
with Villaluz, Feati Bank may be sued properly on specific performance as a procedural means by which the relief
sought by Villaluz may be entertained. (Rollo, pp. 32-33)

The dispositive portion of the decision of the Court of Appeals reads:

WHEREFORE, the decision appealed from is affirmed; and accordingly, the appeal is hereby dismissed. Costs
against the petitioner. (Rollo, p. 33)

Hence, this petition for review.

The petitioner interposes the following reasons for the allowance of the petition.

First Reason

THE RESPONDENT COURT ERRONEOUSLY CONCLUDED FROM THE ESTABLISHED FACTS AND
INDEED, WENT AGAINST THE EVIDENCE AND DECISION OF THIS HONORABLE COURT, THAT
PETITIONER BANK IS LIABLE ON THE LETTER OF CREDIT DESPITE PRIVATE RESPONDENTS NON-
COMPLIANCE WITH THE TERMS THEREOF,

Second Reason

THE RESPONDENT COURT COMMITTED AN ERROR OF LAW WHEN IT HELD THAT PETITIONER BANK,
BY NOTIFYING PRIVATE RESPONDENT OF THE LETTER OF CREDIT, CONFIRMED SUCH CREDIT AND
MADE THE SAME ALSO ITS OBLIGATION AS GUARANTOR OF THE ISSUING BANK.
 Third Reason

THE RESPONDENT COURT LIKEWISE COMMITTED AN ERROR OF LAW WHEN IT AFFIRMED THE TRIAL
COURT'S DECISION. (Rollo, p. 12)

The principal issue in this case is whether or not a correspondent bank is to be held liable under the letter of credit despite
non-compliance by the beneficiary with the terms thereof?

The petition is impressed with merit.

It is a settled rule in commercial transactions involving letters of credit that the documents tendered must strictly conform
to the terms of the letter of credit. The tender of documents by the beneficiary (seller) must include all documents required
by the letter. A correspondent bank which departs from what has been stipulated under the letter of credit, as when it
accepts a faulty tender, acts on its own risks and it may not thereafter be able to recover from the buyer or the issuing
bank, as the case may be, the money thus paid to the beneficiary Thus the rule of strict compliance.

In the United States, commercial transactions involving letters of credit are governed by the rule of strict compliance. In
the Philippines, the same holds true. The same rule must also be followed.

The case of Anglo-South America Trust Co. v. Uhe et al. (184 N.E. 741 [1933]) expounded clearly on the rule of strict
compliance.

We have heretofore held that these letters of credit are to be strictly complied with which documents, and shipping
documents must be followed as stated in the letter. There is no discretion in the bank or trust company to waive
any requirements. The terms of the letter constitutes an agreement between the purchaser and the bank. (p. 743)

Although in some American decisions, banks are granted a little discretion to accept a faulty tender as when the other
documents may be considered immaterial or superfluous, this theory could lead to dangerous precedents. Since a bank
deals only with documents, it is not in a position to determine whether or not the documents required by the letter of credit
are material or superfluous. The mere fact that the document was specified therein readily means that the document is of
vital importance to the buyer.

Moreover, the incorporation of the Uniform Customs and Practice for Documentary Credit (U.C.P. for short) in the letter of
credit resulted in the applicability of the said rules in the governance of the relations between the parties.

And even if the U.C.P. was not incorporated in the letter of credit, we have already ruled in the affirmative as to the
applicability of the U.C.P. in cases before us.

In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the observance of the U.C.P. in this jurisdiction is
justified by Article 2 of the Code of Commerce. Article 2 of the Code of Commerce enunciates that in the absence of any
particular provision in the Code of Commerce, commercial transactions shall be governed by the usages and customs
generally observed.

There being no specific provision which governs the legal complexities arising from transactions involving letters of credit
not only between the banks themselves but also between banks and seller and/or buyer, the applicability of the U.C.P. is
undeniable.

The pertinent provisions of the U.C.P. (1962 Revision) are:

Article 3.

An irrevocable credit is a definite undertaking on the part of the issuing bank and constitutes the engagement of
that bank to the beneficiary and bona fide holders of drafts drawn and/or documents presented thereunder, that
the provisions for payment, acceptance or negotiation contained in the credit will be duly fulfilled,  provided that all
the terms and conditions of the credit are complied with.

An irrevocable credit may be advised to a beneficiary through another bank (the advising bank) without
engagement on the part of that bank, but when an issuing bank authorizes or requests another bank to confirm its
irrevocable credit and the latter does so, such confirmation constitutes a definite undertaking of the confirming
bank. . . .

Article 7.

Banks must examine all documents with reasonable care to ascertain that they appear on their face to be in
accordance with the terms and conditions of the credit,"

Article 8.

Payment, acceptance or negotiation against documents which appear on their face to be in accordance with the
terms and conditions of a credit by a bank authorized to do so, binds the party giving the authorization to take up
 documents and reimburse the bank which has effected the payment, acceptance or negotiation. (Emphasis
Supplied)

Under the foregoing provisions of the U.C.P., the bank may only negotiate, accept or pay, if the documents tendered to it
are on their face in accordance with the terms and conditions of the documentary credit. And since a correspondent bank,
like the petitioner, principally deals only with documents, the absence of any document required in the documentary credit
justifies the refusal by the correspondent bank to negotiate, accept or pay the beneficiary, as it is not its obligation to look
beyond the documents. It merely has to rely on the completeness of the documents tendered by the beneficiary.

In regard to the ruling of the lower court and affirmed by the Court of Appeals that the petitioner is not a notifying bank but
a confirming bank, we find the same erroneous.

The trial court wrongly mixed up the meaning of an irrevocable credit with that of a confirmed credit. In its decision, the
trial court ruled that the petitioner, in accepting the obligation to notify the respondent that the irrevocable credit has been
transmitted to the petitioner on behalf of the private respondent, has confirmed the letter.

The trial court appears to have overlooked the fact that an irrevocable credit is not synonymous with a confirmed credit.
These types of letters have different meanings and the legal relations arising from there varies. A credit may be
an irrevocable credit and at the same time a confirmed credit or vice-versa.

An irrevocable credit refers to the duration of the letter of credit. What is simply means is that the issuing bank may not
without the consent of the beneficiary (seller) and the applicant (buyer) revoke his undertaking under the letter. The
issuing bank does not reserve the right to revoke the credit. On the other hand, a confirmed letter of credit pertains to the
kind of obligation assumed by the correspondent bank. In this case, the correspondent bank gives an absolute assurance
to the beneficiary that it will undertake the issuing bank's obligation as its own according to the terms and conditions of the
credit. (Agbayani, Commercial Laws of the Philippines, Vol. 1, pp. 81-83)

Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply that the correspondent bank in
accepting the instructions of the issuing bank has also confirmed the letter of credit. Another error which the lower court
and the Court of Appeals made was to confuse the obligation assumed by the petitioner.

In commercial transactions involving letters of credit, the functions assumed by a correspondent bank are classified
according to the obligations taken up by it. The correspondent bank may be called a notifying bank, a negotiating bank, or
a confirming bank.

In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to the beneficiary
the existence of the letter of credit. (Kronman and Co., Inc. v. Public National Bank of New York, 218 N.Y.S. 616 [1926];
Shaterian, Export-Import Banking, p. 292, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76). A
negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft under the letter of credit. Its
liability is dependent upon the stage of the negotiation. If before negotiation, it has no liability with respect to the seller but
after negotiation, a contractual relationship will then prevail between the negotiating bank and the seller. (Scanlon v. First
National Bank of Mexico, 162 N.E. 567 [1928]; Shaterian, Export-Import Banking, p. 293, cited in Agbayani, Commercial
Laws of the Philippines, Vol. 1, p. 76)

In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability is a
primary one as if the correspondent bank itself had issued the letter of credit. (Shaterian, Export-Import Banking, p. 294,
cited in Agbayani Commercial Laws of the Philippines, Vol. 1, p. 77)

In this case, the letter merely provided that the petitioner "forward the enclosed original credit to the beneficiary."
(Records, Vol. I, p. 11) Considering the aforesaid instruction to the petitioner by the issuing bank, the Security Pacific
National Bank, it is indubitable that the petitioner is only a notifying bank and not a confirming bank as ruled by the courts
below.

If the petitioner was a confirming bank, then a categorical declaration should have been stated in the letter of credit that
the petitioner is to honor all drafts drawn in conformity with the letter of credit. What was simply stated therein was the
instruction that the petitioner forward the original letter of credit to the beneficiary.

Since the petitioner was only a notifying bank, its responsibility was solely to notify and/or transmit the documentary of
credit to the private respondent and its obligation ends there.

The notifying bank may suggest to the seller its willingness to negotiate, but this fact alone does not imply that the
notifying bank promises to accept the draft drawn under the documentary credit.

A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is only with that of
the issuing bank and not with the beneficiary to whom he assumes no liability. It follows therefore that when the petitioner
refused to negotiate with the private respondent, the latter has no cause of action against the petitioner for the
enforcement of his rights under the letter. (See Kronman and Co., Inc. v. Public National Bank of New York, supra)

In order that the petitioner may be held liable under the letter, there should be proof that the petitioner confirmed the letter
of credit.
The records are, however, bereft of any evidence which will disclose that the petitioner has confirmed the letter of credit.
The only evidence in this case, and upon which the private respondent premised his argument, is the P75,000.00 loan
extended by the petitioner to him.

The private respondent relies on this loan to advance his contention that the letter of credit was confirmed by the
petitioner. He claims that the loan was granted by the petitioner to him, "in anticipation of the presentment of the letter of
credit."

The proposition advanced by the private respondent has no basis in fact or law. That the loan agreement between them
be construed as an act of confirmation is rather far-fetched, for it depends principally on speculative reasoning.

As earlier stated, there must have been an absolute assurance on the part of the petitioner that it will undertake the
issuing bank's obligation as its own. Verily, the loan agreement it entered into cannot be categorized as an emphatic
assurance that it will carry out the issuing bank's obligation as its own.

The loan agreement is more reasonably classified as an isolated transaction independent of the documentary credit.

Of course, it may be presumed that the petitioner loaned the money to the private respondent in anticipation that it would
later be paid by the latter upon the receipt of the letter. Yet, we would have no basis to rule definitively that such "act"
should be construed as an act of confirmation.

The private respondent no doubt was in need of money in loading the logs on the ship "Zenlin Glory" and the only way to
satisfy this need was to borrow money from the petitioner which the latter granted. From these circumstances, a logical
conclusion that can be gathered is that the letter of credit was merely to serve as a collateral.

At the most, when the petitioner extended the loan to the private respondent, it assumed the character of a negotiating
bank. Even then, the petitioner will still not be liable, for a negotiating bank before negotiation has no contractual
relationship with the seller.

The case of Scanlon v. First National Bank (supra) perspicuously explained the relationship between the seller and the
negotiating bank, viz:

It may buy or refuse to buy as it chooses. Equally, it must be true that it owes no contractual duty toward the
person for whose benefit the letter is written to discount or purchase any draft drawn against the credit. No
relationship of agent and principal, or of trustee and cestui, between the receiving bank and the beneficiary of the
letter is established. (P.568)

Whether therefore the petitioner is a notifying bank or a negotiating bank, it cannot be held liable. Absent any definitive
proof that it has confirmed the letter of credit or has actually negotiated with the private respondent, the refusal by the
petitioner to accept the tender of the private respondent is justified.

In regard to the finding that the petitioner became a "trustee in relation to the plaintiff (private respondent) as the
beneficiary of the letter of credit," the same has no legal basis.

A trust has been defined as the "right, enforceable solely in equity, to the beneficial enjoyment of property the legal title to
which is vested to another." (89 C.J.S. 712)

The concept of a trust presupposes the existence of a specific property which has been conferred upon the person for the
benefit of another. In order therefore for the trust theory of the private respondent to be sustained, the petitioner should
have had in its possession a sum of money as specific fund advanced to it by the issuing bank and to be held in trust by it
in favor of the private respondent. This does not obtain in this case.

The mere opening of a letter of credit, it is to be noted, does not involve a specific appropriation of a sum of money in
favor of the beneficiary. It only signifies that the beneficiary may be able to draw funds upon the letter of credit up to the
designated amount specified in the letter. It does not convey the notion that a particular sum of money has been
specifically reserved or has been held in trust.

What actually transpires in an irrevocable credit is that the correspondent bank does not receive in advance the sum of
money from the buyer or the issuing bank. On the contrary, when the correspondent bank accepts the tender and pays
the amount stated in the letter, the money that it doles out comes not from any particular fund that has been advanced by
the issuing bank, rather it gets the money from its own funds and then later seeks reimbursement from the issuing bank.

Granting that a trust has been created, still, the petitioner may not be considered a trustee. As the petitioner is only a
notifying bank, its acceptance of the instructions of the issuing bank will not create estoppel on its part resulting in the
acceptance of the trust. Precisely, as a notifying bank, its only obligation is to notify the private respondent of the
existence of the letter of credit. How then can such create estoppel when that is its only duty under the law?

We also find erroneous the statement of the Court of Appeals that the petitioner "acted as a guarantor of the issuing bank
and in effect also of the latter's principal or client, i.e., Hans Axel Christiansen."
It is a fundamental rule that an irrevocable credit is independent not only of the contract between the buyer and the seller
but also of the credit agreement between the issuing bank and the buyer. (See Kingdom of Sweden v. New York Trust
Co., 96 N.Y.S. 2d 779 [1949]). The relationship between the buyer (Christiansen) and the issuing bank (Security Pacific
National Bank) is entirely independent from the letter of credit issued by the latter.

The contract between the two has no bearing as to the non-compliance by the buyer with the agreement between the
latter and the seller. Their contract is similar to that of a contract of services (to open the letter of credit) and not that of
agency as was intimated by the Court of Appeals. The unjustified refusal therefore by Christiansen to issue the
certification under the letter of credit should not likewise be charged to the issuing bank.

As a mere notifying bank, not only does the petitioner not have any contractual relationship with the buyer, it has also
nothing to do with the contract between the issuing bank and the buyer regarding the issuance of the letter of credit.

The theory of guarantee relied upon by the Court of Appeals has to necessarily fail. The concept of guarantee vis-a-
vis the concept of an irrevocable credit are inconsistent with each other.

In the first place, the guarantee theory destroys the independence of the bank's responsibility from the contract upon
which it was opened. In the second place, the nature of both contracts is mutually in conflict with each other. In contracts
of guarantee, the guarantor's obligation is merely collateral and it arises only upon the default of the person primarily
liable. On the other hand, in an irrevocable credit the bank undertakes a primary obligation. (See National Bank of Eagle
Pass, Tex v. American National Bank of San Francisco, 282 F. 73 [1922])

The relationship between the issuing bank and the notifying bank, on the contrary, is more similar to that of an agency and
not that of a guarantee. It may be observed that the notifying bank is merely to follow the instructions of the issuing bank
which is to notify or to transmit the letter of credit to the beneficiary. (See Kronman v. Public National Bank of New
York, supra). Its commitment is only to notify the beneficiary. It does not undertake any assurance that the issuing bank
will perform what has been mandated to or expected of it. As an agent of the issuing bank, it has only to follow the
instructions of the issuing bank and to it alone is it obligated and not to buyer with whom it has no contractual relationship.

In fact the notifying bank, even if the seller tenders all the documents required under the letter of credit, may refuse to
negotiate or accept the drafts drawn thereunder and it will still not be held liable for its only engagement is to notify and/or
transmit to the seller the letter of credit.

Finally, even if we assume that the petitioner is a confirming bank, the petitioner cannot be forced to pay the amount
under the letter. As we have previously explained, there was a failure on the part of the private respondent to comply with
the terms of the letter of credit.

The failure by him to submit the certification was fatal to his case.1âwphi1 The U.C.P. which is incorporated in the letter of
credit ordains that the bank may only pay the amount specified under the letter if all the documents tendered are on their
face in compliance with the credit. It is not tasked with the duty of ascertaining the reason or reasons why certain
documents have not been submitted, as it is only concerned with the documents. Thus, whether or not the buyer has
performed his responsibility towards the seller is not the bank's problem.

We are aware of the injustice committed by Christiansen on the private respondent but we are deciding the controversy
on the basis of what the law is, for the law is not meant to favor only those who have been oppressed, the law is to govern
future relations among people as well. Its commitment is to all and not to a single individual. The faith of the people in our
justice system may be eroded if we are to decide not what the law states but what we believe it should declare. Dura lex
sed lex.

Considering the foregoing, the materiality of ruling upon the validity of the certificate of approval required of the private
respondent to submit under the letter of credit, has become insignificant.

In any event, we affirm the earlier ruling of the Court of Appeals dated April 9, 1987 in regard to the petition before it
for certiorari and prohibition with preliminary injunction, to wit:

There is no merit in the respondent's contention that the certification required in condition No. 4 of the letter of
credit was "patently illegal." At the time the letter of credit was issued there was no Central Bank regulation
prohibiting such a condition in the letter of credit. The letter of credit (Exh. C) was issued on June 7, 1971, more
than two months before the issuance of the Central Bank Memorandum on August 16, 1971 disallowing such a
condition in a letter of credit. In fact the letter of credit had already expired on July 30, 1971 when the Central
Bank memorandum was issued. In any event, it is difficult to see how such a condition could be categorized as
illegal or unreasonable since all that plaintiff Villaluz, as seller of the logs, could and should have done was to
refuse to load the logs on the vessel "Zenlin Glory", unless Christiansen first issued the required certification that
the logs had been approved by him to be in accordance with the terms and conditions of his purchase order.
Apparently, Villaluz was in too much haste to ship his logs without taking all due precautions to assure that all the
terms and conditions of the letter of credit had been strictly complied with, so that there would be no hitch in its
negotiation. (Rollo, p. 8)

WHEREFORE, the COURT RESOLVED to GRANT the petition and hereby NULLIFIES and SETS ASIDE the decision of
the Court of Appeals dated June 29, 1990. The amended complaint in Civil Case No. 15121 is DISMISSED.

SO ORDERED.
G.R. No. 146717             November 22, 2004

TRANSFIELD PHILIPPINES, INC., petitioner,

vs.
LUZON HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND BANKING GROUP LIMITED and SECURITY
BANK CORPORATION, respondents.

DECISION

TINGA, J.:

Subject of this case is the letter of credit which has evolved as the ubiquitous and most important device in international
trade. A creation of commerce and businessmen, the letter of credit is also unique in the number of parties involved and
its supranational character.

Petitioner has appealed from the Decision1 of the Court of Appeals in CA-G.R. SP No. 61901 entitled "Transfield
Philippines, Inc. v. Hon. Oscar Pimentel, et al.," promulgated on 31 January 2001. 2

On 26 March 1997, petitioner and respondent Luzon Hydro Corporation (hereinafter, LHC) entered into a Turnkey
Contract3 whereby petitioner, as Turnkey Contractor, undertook to construct, on a turnkey basis, a seventy (70)-Megawatt
hydro-electric power station at the Bakun River in the provinces of Benguet and Ilocos Sur (hereinafter, the Project).
Petitioner was given the sole responsibility for the design, construction, commissioning, testing and completion of the
Project.4

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

To secure performance of petitioner's obligation on or before the target completion date, or such time for completion as
may be determined by the parties' agreement, petitioner opened in favor of LHC two (2) standby letters of credit both
dated 20 March 2000 (hereinafter referred to as "the Securities"), to wit: Standby Letter of Credit No. E001126/8400 with
the local branch of respondent Australia and New Zealand Banking Group Limited (ANZ Bank) 7 and Standby Letter of
Credit No. IBDIDSB-00/4 with respondent Security Bank Corporation (SBC) 8 each in the amount of US$8,988,907.00.9

In the course of the construction of the project, petitioner sought various EOT to complete the Project. The extensions
were requested allegedly due to several factors which prevented the completion of the Project on target date, such as
force majeure occasioned by typhoon Zeb, barricades and demonstrations. LHC denied the requests, however. This gave
rise to a series of legal actions between the parties which culminated in the instant petition.

The first of the actions was a Request for Arbitration which LHC filed before the Construction Industry Arbitration
Commission (CIAC) on 1 June 1999.10 This was followed by another Request for Arbitration, this time filed by petitioner
before the International Chamber of Commerce (ICC) 11 on 3 November 2000. In both arbitration proceedings, the common
issues presented were: [1) whether typhoon Zeb and any of its associated events constituted force majeure to justify the
extension of time sought by petitioner; and [2) whether LHC had the right to terminate the Turnkey Contract for failure of
petitioner to complete the Project on target date.

Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent provisions of the Turnkey
Contract,12 petitioner—in two separate letters13 both dated 10 August 2000—advised respondent banks of the arbitration
proceedings already pending before the CIAC and ICC in connection with its alleged default in the performance of its
obligations. Asserting that LHC had no right to call on the Securities until the resolution of disputes before the arbitral
tribunals, petitioner warned respondent banks that any transfer, release, or disposition of the Securities in favor of LHC or
any person claiming under LHC would constrain it to hold respondent banks liable for liquidated damages.

As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner that pursuant to Clause 8.2 14 of the Turnkey
Contract, it failed to comply with its obligation to complete the Project. Despite the letters of petitioner, however, both
banks informed petitioner that they would pay on the Securities if and when LHC calls on them. 15
LHC asserted that additional extension of time would not be warranted; accordingly it declared petitioner in default/delay
in the performance of its obligations under the Turnkey Contract and demanded from petitioner the payment of
US$75,000.00 for each day of delay beginning 28 June 2000 until actual completion of the Project pursuant to Clause
8.7.1 of the Turnkey Contract. At the same time, LHC served notice that it would call on the securities for the payment of
liquidated damages for the delay.16

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

After appropriate proceedings, the trial court issued an Order on 9 November 2000, extending the temporary restraining
order for a period of seventeen (17) days or until 26 November 2000. 18

The RTC, in its Order19 dated 24 November 2000, denied petitioner's application for a writ of preliminary injunction. It ruled
that petitioner had no legal right and suffered no irreparable injury to justify the issuance of the writ. Employing the
principle of "independent contract" in letters of credit, the trial court ruled that LHC should be allowed to draw on the
Securities for liquidated damages. It debunked petitioner's contention that the principle of "independent contract" could be
invoked only by respondent banks since according to it respondent LHC is the ultimate beneficiary of the Securities. The
trial court further ruled that the banks were mere custodians of the funds and as such they were obligated to transfer the
same to the beneficiary for as long as the latter could submit the required certification of its claims.

Dissatisfied with the trial court's denial of its application for a writ of preliminary injunction, petitioner elevated the case to
the Court of Appeals via a Petition for Certiorari under Rule 65, with prayer for the issuance of a temporary restraining
order and writ of preliminary injunction.20 Petitioner submitted to the appellate court that LHC's call on the Securities was
premature considering that the issue of its default had not yet been resolved with finality by the CIAC and/or the ICC. It
asserted that until the fact of delay could be established, LHC had no right to draw on the Securities for liquidated
damages.

Refuting petitioner's contentions, LHC claimed that petitioner had no right to restrain its call on and use of the Securities
as payment for liquidated damages. It averred that the Securities are independent of the main contract between them as
shown on the face of the two Standby Letters of Credit which both provide that the banks have no responsibility to
investigate the authenticity or accuracy of the certificates or the declarant's capacity or entitlement to so certify.

In its Resolution dated 28 November 2000, the Court of Appeals issued a temporary restraining order, enjoining LHC from
calling on the Securities or any renewals or substitutes thereof and ordering respondent banks to cease and desist from
transferring, paying or in any manner disposing of the Securities.

However, the appellate court failed to act on the application for preliminary injunction until the temporary restraining order
expired on 27 January 2001. Immediately thereafter, representatives of LHC trooped to ANZ Bank and withdrew the total
amount of US$4,950,000.00, thereby reducing the balance in ANZ Bank to US$1,852,814.00.

On 2 February 2001, the appellate court dismissed the petition for certiorari. The appellate court expressed conformity
with the trial court's decision that LHC could call on the Securities pursuant to the first principle in credit law that the credit
itself is independent of the underlying transaction and that as long as the beneficiary complied with the credit, it was of no
moment that he had not complied with the underlying contract. Further, the appellate court held that even assuming that
the trial court's denial of petitioner's application for a writ of preliminary injunction was erroneous, it constituted only an
error of judgment which is not correctible by certiorari, unlike error of jurisdiction.

Undaunted, petitioner filed the instant Petition for Review raising the following issues for resolution:

WHETHER THE "INDEPENDENCE PRINCIPLE" ON LETTERS OF CREDIT MAY BE INVOKED BY A

BENEFICIARY THEREOF WHERE THE BENEFICIARY'S CALL THEREON IS WRONGFUL OR FRAUDULENT.

WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES BEFORE THE RESOLUTION
OF PETITIONER'S AND LHC'S DISPUTES BY THE APPROPRIATE TRIBUNAL.

WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN RELEASING THE AMOUNTS DUE UNDER
THE SECURITIES DESPITE BEING NOTIFIED THAT LHC'S CALL THEREON IS WRONGFUL.

WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND IRREPARABLE DAMAGE IN THE EVENT
THAT:

A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND SECURITY BANK ARE
ALLOWED TO RELEASE, THE REMAINING BALANCE OF THE SECURITIES PRIOR TO THE
RESOLUTION OF THE DISPUTES BETWEEN PETITIONER AND LHC.

B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY DRAWN FROM THE
SECURITIES.21
Petitioner contends that the courts below improperly relied on the "independence principle" on letters of credit when this
case falls squarely within the "fraud exception rule." Respondent LHC deliberately misrepresented the supposed
existence of delay despite its knowledge that the issue was still pending arbitration, petitioner continues.

Petitioner asserts that LHC should be ordered to return the proceeds of the Securities pursuant to the principle against
unjust enrichment and that, under the premises, injunction was the appropriate remedy obtainable from the competent
local courts.

On 25 August 2003, petitioner filed a Supplement to the Petition 22 and Supplemental Memorandum,23 alleging that in the
course of the proceedings in the ICC Arbitration, a number of documentary and testimonial evidence came out through
the use of different modes of discovery available in the ICC Arbitration. It contends that after the filing of the petition facts
and admissions were discovered which demonstrate that LHC knowingly misrepresented that petitioner had incurred
delays— notwithstanding its knowledge and admission that delays were excused under the Turnkey Contract—to be able
to draw against the Securities. Reiterating that fraud constitutes an exception to the independence principle, petitioner
urges that this warrants a ruling from this Court that the call on the Securities was wrongful, as well as contrary to law and
basic principles of equity. It avers that it would suffer grave irreparable damage if LHC would be allowed to use the
proceeds of the Securities and not ordered to return the amounts it had wrongfully drawn thereon.

In its Manifestation dated 8 September 2003,24 LHC contends that the supplemental pleadings filed by petitioner present
erroneous and misleading information which would change petitioner's theory on appeal.

In yet another Manifestation dated 12 April 2004,25 petitioner alleges that on 18 February 2004, the ICC handed down its
Third Partial Award, declaring that LHC wrongfully drew upon the Securities and that petitioner was entitled to the return
of the sums wrongfully taken by LHC for liquidated damages.

LHC filed a Counter-Manifestation dated 29 June 2004, 26 stating that petitioner's Manifestation dated 12 April 2004
enlarges the scope of its Petition for Review of the 31 January 2001 Decision of the Court of Appeals. LHC notes that the
Petition for Review essentially dealt only with the issue of whether injunction could issue to restrain the beneficiary of an
irrevocable letter of credit from drawing thereon. It adds that petitioner has filed two other proceedings, to wit: (1) ICC
Case No. 11264/TE/MW, entitled "Transfield Philippines Inc. v. Luzon Hydro Corporation," in which the parties made
claims and counterclaims arising from petitioner's performance/misperformance of its obligations as contractor for LHC;
and (2) Civil Case No. 04-332, entitled "Transfield Philippines, Inc. v. Luzon Hydro Corporation" before Branch 56 of the
RTC of Makati, which is an action to enforce and obtain execution of the ICC's partial award mentioned in petitioner's
Manifestation of 12 April 2004.

In its Comment to petitioner's Motion for Leave to File Addendum to Petitioner's Memorandum, LHC stresses that the
question of whether the funds it drew on the subject letters of credit should be returned is outside the issue in this appeal.
At any rate, LHC adds that the action to enforce the ICC's partial award is now fully within the Makati RTC's jurisdiction in
Civil Case No. 04-332. LHC asserts that petitioner is engaged in forum-shopping by keeping this appeal and at the same
time seeking the suit for enforcement of the arbitral award before the Makati court.

Respondent SBC in its Memorandum, dated 10 March 2003 27 contends that the Court of Appeals correctly dismissed the
petition for certiorari. Invoking the independence principle, SBC argues that it was under no obligation to look into the
validity or accuracy of the certification submitted by respondent LHC or into the latter's capacity or entitlement to so certify.
It adds that the act sought to be enjoined by petitioner was already fait accompli and the present petition would no longer
serve any remedial purpose.

In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 2003 28 posits that its actions could not be
regarded as unjustified in view of the prevailing independence principle under which it had no obligation to ascertain the
truth of LHC's allegations that petitioner defaulted in its obligations. Moreover, it points out that since the Standby Letter of
Credit No. E001126/8400 had been fully drawn, petitioner's prayer for preliminary injunction had been rendered moot and
academic.

At the core of the present controversy is the applicability of the "independence principle" and "fraud exception rule" in
letters of credit. Thus, a discussion of the nature and use of letters of credit, also referred to simply as "credits," would
provide a better perspective of the case.

The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is to recognize that it is
an entity unto itself. The relationship between the beneficiary and the issuer of a letter of credit is not strictly contractual,
because both privity and a meeting of the minds are lacking, yet strict compliance with its terms is an enforceable right.
Nor is it a third-party beneficiary contract, because the issuer must honor drafts drawn against a letter regardless of
problems subsequently arising in the underlying contract. Since the bank's customer cannot draw on the letter, it does not
function as an assignment by the customer to the beneficiary. Nor, if properly used, is it a contract of suretyship or
guarantee, because it entails a primary liability following a default. Finally, it is not in itself a negotiable instrument,
because it is not payable to order or bearer and is generally conditional, yet the draft presented under it is often
negotiable.29

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

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

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

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

In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc., 37 this Court ruled that the observance of the UCP is
justified by Article 2 of the Code of Commerce which provides that in the absence of any particular provision in the Code
of Commerce, commercial transactions shall be governed by usages and customs generally observed. More recently, in
Bank of America, NT & SA v. Court of Appeals,38 this Court ruled that there being no specific provisions which govern the
legal complexities arising from transactions involving letters of credit, not only between or among banks themselves but
also between banks and the seller or the buyer, as the case may be, the applicability of the UCP is undeniable.

Article 3 of the UCP provides that credits, by their nature, are separate transactions from the sales or other contract(s) on
which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference
whatsoever to such contract(s) is included in the credit. Consequently, the undertaking of a bank to pay, accept and pay
draft(s) or negotiate and/or fulfill any other obligation under the credit is not subject to claims or defenses by the applicant
resulting from his relationships with the issuing bank or the beneficiary. A beneficiary can in no case avail himself of the
contractual relationships existing between the banks or between the applicant and the issuing bank.

Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft and the required
documents are presented to it. The so-called "independence principle" assures the seller or the beneficiary of prompt
payment independent of any breach of the main contract and precludes the issuing bank from determining whether the
main contract is actually accomplished or not. Under this principle, banks assume no liability or responsibility for the form,
sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or particular
conditions stipulated in the documents or superimposed thereon, nor do they assume any liability or responsibility for the
description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any
documents, or for the good faith or acts and/or omissions, solvency, performance or standing of the consignor, the
carriers, or the insurers of the goods, or any other person whomsoever. 39

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

Can the beneficiary invoke the independence principle?

Petitioner insists that the independence principle does not apply to the instant case and assuming it is so, it is a defense
available only to respondent banks. LHC, on the other hand, contends that it would be contrary to common sense to deny
the benefit of an independent contract to the very party for whom the benefit is intended. As beneficiary of the letter of
credit, LHC asserts it is entitled to invoke the principle.

As discussed above, in a letter of credit transaction, such as in this case, where the credit is stipulated as irrevocable,
there is a definite undertaking by the issuing bank to pay the beneficiary provided that the stipulated documents are
presented and the conditions of the credit are complied with. 41 Precisely, the independence principle liberates the issuing
bank from the duty of ascertaining compliance by the parties in the main contract. As the principle's nomenclature 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.
Letters of credit are employed by the parties desiring to enter into commercial transactions, not for the benefit of the
issuing bank but mainly for the benefit of the parties to the original transactions. With the letter of credit from the issuing
bank, the party who applied for and obtained it may confidently present the letter of credit to the beneficiary as a security
to convince the beneficiary to enter into the business transaction. On the other hand, the other party to the business
transaction, i.e., the beneficiary of the letter of credit, can be rest assured of being empowered to call on the letter of credit
as a security in case the commercial transaction does not push through, or the applicant fails to perform his part of the
transaction. It is for this reason that the party who is entitled to the proceeds of the letter of credit is appropriately called
"beneficiary."

Petitioner's argument that any dispute must first be resolved by the parties, whether through negotiations or arbitration,
before the beneficiary is entitled to call on the letter of credit in essence would convert the letter of credit into a mere
guarantee. Jurisprudence has laid down a clear distinction between a letter of credit and a guarantee in that the
settlement of a dispute between the parties is not a pre-requisite for the release of funds under a letter of credit. In other
words, the argument is incompatible with the very nature of the letter of credit. If a letter of credit is drawable only after
settlement of the dispute on the contract entered into by the applicant and the beneficiary, there would be no practical and
beneficial use for letters of credit in commercial transactions.

Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the issue:

The standby credit is an attractive commercial device for many of the same reasons that commercial credits are
attractive. Essentially, these credits are inexpensive and efficient. Often they replace surety contracts, which tend
to generate higher costs than credits do and are usually triggered by a factual determination rather than by the
examination of documents.

Because parties and courts should not confuse the different functions of the surety contract on the one hand and
the standby credit on the other, the distinction between surety contracts and credits merits some reflection. The
two commercial devices share a common purpose. Both ensure against the obligor's nonperformance. They
function, however, in distinctly different ways.

Traditionally, upon the obligor's default, the surety undertakes to complete the obligor's performance, usually by
hiring someone to complete that performance. Surety contracts, then, often involve costs of determining whether
the obligor defaulted (a matter over which the surety and the beneficiary often litigate) plus the cost of
performance. The benefit of the surety contract to the beneficiary is obvious. He knows that the surety, often an
insurance company, is a strong financial institution that will perform if the obligor does not. The beneficiary also
should understand that such performance must await the sometimes lengthy and costly determination that the
obligor has defaulted. In addition, the surety's performance takes time.

The standby credit has different expectations. He reasonably expects that he will receive cash in the event of
nonperformance, that he will receive it promptly, and that he will receive it before any litigation with the obligor (the
applicant) over the nature of the applicant's performance takes place. The standby credit has this opposite effect
of the surety contract: it reverses the financial burden of parties during litigation.

In the surety contract setting, there is no duty to indemnify the beneficiary until the beneficiary establishes the fact
of the obligor's performance. The beneficiary may have to establish that fact in litigation. During the litigation, the
surety holds the money and the beneficiary bears most of the cost of delay in performance.

In the standby credit case, however, the beneficiary avoids that litigation burden and receives his money promptly
upon presentation of the required documents. It may be that the applicant has, in fact, performed and that the
beneficiary's presentation of those documents is not rightful. In that case, the applicant may sue the beneficiary in
tort, in contract, or in breach of warranty; but, during the litigation to determine whether the applicant has in fact
breached the obligation to perform, the beneficiary, not the applicant, holds the money. Parties that use a standby
credit and courts construing such a credit should understand this allocation of burdens. There is a tendency in
some quarters to overlook this distinction between surety contracts and standby credits and to reallocate burdens
by permitting the obligor or the issuer to litigate the performance question before payment to the beneficiary. 42

While it is the bank which is bound to honor the credit, it is the beneficiary who has the right to ask the bank to honor the
credit by allowing him to draw thereon. The situation itself emasculates petitioner's posture that LHC cannot invoke the
independence principle and highlights its puerility, more so in this case where the banks concerned were impleaded as
parties by petitioner itself.

Respondent banks had squarely raised the independence principle to justify their releases of the amounts due under the
Securities. Owing to the nature and purpose of the standby letters of credit, this Court rules that the respondent banks
were left with little or no alternative but to honor the credit and both of them in fact submitted that it was "ministerial" for
them to honor the call for payment.43

Furthermore, LHC has a right rooted in the Contract to call on the Securities. The relevant provisions of the Contract read,
thus:

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

8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the Employer by way of
liquidated damages ("Liquidated Damages for Delay") the amount of US$75,000 for each and every day or part of
a day that shall elapse between the Target Completion Date and the Completion Date, provided that Liquidated
Damages for Delay payable by the Contractor shall in the aggregate not exceed 20% of the Contract Price. The
Contractor shall pay Liquidated Damages for Delay for each day of the delay on the following day without need of
demand from the Employer.

8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such damages
from any monies due, or to become due to the Contractor and/or by drawing on the Security." 45

A contract once perfected, binds the parties not only to the fulfillment of what has been expressly stipulated but also to all
the consequences which according to their nature, may be in keeping with good faith, usage, and law. 46 A careful perusal
of the Turnkey Contract reveals the intention of the parties to make the Securities answerable for the liquidated damages
occasioned by any delay on the part of petitioner. The call upon the Securities, while not an exclusive remedy on the part
of LHC, is certainly an alternative recourse available to it upon the happening of the contingency for which the Securities
have been proffered. Thus, even without the use of the "independence principle," the Turnkey Contract itself bestows
upon LHC the right to call on the Securities in the event of default.

Next, petitioner invokes the "fraud exception" principle. It avers that LHC's call on the Securities is wrongful because it
fraudulently misrepresented to ANZ Bank and SBC that there is already a breach in the Turnkey Contract knowing fully
well that this is yet to be determined by the arbitral tribunals. It asserts that the "fraud exception" exists when the
beneficiary, for the purpose of drawing on the credit, fraudulently presents to the confirming bank, documents that contain,
expressly or by implication, material representations of fact that to his knowledge are untrue. In such a situation, petitioner
insists, injunction is recognized as a remedy available to it.

Citing Dolan's treatise on letters of credit, petitioner argues that the independence principle is not without limits and it is
important to fashion those limits in light of the principle's purpose, which is to serve the commercial function of the credit. If
it does not serve those functions, application of the principle is not warranted, and the commonlaw principles of contract
should apply.

It is worthy of note that the propriety of LHC's call on the Securities is largely intertwined with the fact of default which is
the self-same issue pending resolution before the arbitral tribunals. To be able to declare the call on the Securities
wrongful or fraudulent, it is imperative to resolve, among others, whether petitioner was in fact guilty of delay in the
performance of its obligation. Unfortunately for petitioner, this Court is not called upon to rule upon the issue of default—
such issue having been submitted by the parties to the jurisdiction of the arbitral tribunals pursuant to the terms embodied
in their agreement.47

Would injunction then be the proper remedy to restrain the alleged wrongful draws on the Securities?

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

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

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

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

In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain LHC's call on the
Securities which would justify the issuance of preliminary injunction. By petitioner's own admission, the right of LHC to call
on the Securities was contractually rooted and subject to the express stipulations in the Turnkey Contract. 55 Indeed, the
Turnkey Contract is plain and unequivocal in that it conferred upon LHC the right to draw upon the Securities in case of
default, as provided in Clause 4.2.5, in relation to Clause 8.7.2, thus:
 4.2.5 The Employer shall give the Contractor seven days' notice of calling upon any of the Securities, stating the
nature of the default for which the claim on any of the Securities is to be made, provided that no notice will be
required if the Employer calls upon any of the Securities for the payment of Liquidated Damages for Delay or for
failure by the Contractor to renew or extend the Securities within 14 days of their expiration in accordance with
Clause 4.2.2.56

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

The pendency of the arbitration proceedings would not per se make LHC's draws on the Securities wrongful or fraudulent
for there was nothing in the Contract which would indicate that the parties intended that all disputes regarding delay
should first be settled through arbitration before LHC would be allowed to call upon the Securities. It is therefore
premature and absurd to conclude that the draws on the Securities were outright fraudulent given the fact that the ICC
and CIAC have not ruled with finality on the existence of default.

Nowhere in its complaint before the trial court or in its pleadings filed before the appellate court, did petitioner invoke the
fraud exception rule as a ground to justify the issuance of an injunction. 58 What petitioner did assert before the courts
below was the fact that LHC's draws on the Securities would be premature and without basis in view of the pending
disputes between them. Petitioner should not be allowed in this instance to bring into play the fraud exception rule to
sustain its claim for the issuance of an injunctive relief. Matters, theories or arguments not brought out in the proceedings
below will ordinarily not be considered by a reviewing court as they cannot be raised for the first time on appeal. 59 The
lower courts could thus not be faulted for not applying the fraud exception rule not only because the existence of fraud
was fundamentally interwoven with the issue of default still pending before the arbitral tribunals, but more so, because
petitioner never raised it as an issue in its pleadings filed in the courts below. At any rate, petitioner utterly failed to show
that it had a clear and unmistakable right to prevent LHC's call upon the Securities.

Of course, prudence should have impelled LHC to await resolution of the pending issues before the arbitral tribunals prior
to taking action to enforce the Securities. But, as earlier stated, the Turnkey Contract did not require LHC to do so and,
therefore, it was merely enforcing its rights in accordance with the tenor thereof. Obligations arising from contracts have
the force of law between the contracting parties and should be complied with in good faith. 60 More importantly, pursuant to
the principle of autonomy of contracts embodied in Article 1306 of the Civil Code, 61 petitioner could have incorporated in its
Contract with LHC, a proviso that only the final determination by the arbitral tribunals that default had occurred would
justify the enforcement of the Securities. However, the fact is petitioner did not do so; hence, it would have to live with its
inaction.

With respect to the issue of whether the respondent banks were justified in releasing the amounts due under the
Securities, this Court reiterates that pursuant to the independence principle the banks were under no obligation to
determine the veracity of LHC's certification that default has occurred. Neither were they bound by petitioner's declaration
that LHC's call thereon was wrongful. To repeat, respondent banks' undertaking was simply to pay once the required
documents are presented by the beneficiary.

At any rate, should petitioner finally prove in the pending arbitration proceedings that LHC's draws upon the Securities
were wrongful due to the non-existence of the fact of default, its right to seek indemnification for damages it suffered
would not normally be foreclosed pursuant to general principles of law.

Moreover, in a Manifestation,62 dated 30 March 2001, LHC informed this Court that the subject letters of credit had been
fully drawn. This fact alone would have been sufficient reason to dismiss the instant petition.

Settled is the rule that injunction would not lie where the acts sought to be enjoined have already become fait accompli or
an accomplished or consummated act.63 In Ticzon v. Video Post Manila, Inc.64 this Court ruled that where the period within
which the former employees were prohibited from engaging in or working for an enterprise that competed with their former
employer—the very purpose of the preliminary injunction —has expired, any declaration upholding the propriety of the writ
would be entirely useless as there would be no actual case or controversy between the parties insofar as the preliminary
injunction is concerned.

In the instant case, the consummation of the act sought to be restrained had rendered the instant petition moot—for any
declaration by this Court as to propriety or impropriety of the non-issuance of injunctive relief could have no practical
effect on the existing controversy.65 The other issues raised by petitioner particularly with respect to its right to recover the
amounts wrongfully drawn on the Securities, according to it, could properly be threshed out in a separate proceeding.

One final point. LHC has charged petitioner of forum-shopping. It raised the charge on two occasions. First, in its Counter-
Manifestation dated 29 June 200466 LHC alleges that petitioner presented before this Court the same claim for money
which it has filed in two other proceedings, to wit: ICC Case No. 11264/TE/MW and Civil Case No. 04-332 before the RTC
of Makati. LHC argues that petitioner's acts constitutes forum-shopping which should be punished by the dismissal of the
claim in both forums. Second, in its Comment to Petitioner's Motion for Leave to File Addendum to Petitioner's
Memorandum dated 8 October 2004, LHC alleges that by maintaining the present appeal and at the same time pursuing
Civil Case No. 04-332—wherein petitioner pressed for judgment on the issue of whether the funds LHC drew on the
Securities should be returned—petitioner resorted to forum-shopping. In both instances, however, petitioner has
apparently opted not to respond to the charge.

Forum-shopping is a very serious charge. It exists when a party repetitively avails of several judicial remedies in different
courts, simultaneously or successively, all substantially founded on the same transactions and the same essential facts
and circumstances, and all raising substantially the same issues either pending in, or already resolved adversely, by some
other court.67 It may also consist in the act of a party against whom an adverse judgment has been rendered in one forum,
of seeking another and possibly favorable opinion in another forum other than by appeal or special civil action of certiorari,
or the institution of two or more actions or proceedings grounded on the same cause on the supposition that one or the
other court might look with favor upon the other party. 68 To determine whether a party violated the rule against forum-
shopping, the test applied is whether the elements of litis pendentia are present or whether a final judgment in one case
will amount to res judicata in another.69 Forum-shopping constitutes improper conduct and may be punished with summary
dismissal of the multiple petitions and direct contempt of court. 70

Considering the seriousness of the charge of forum-shopping and the severity of the sanctions for its violation, the Court
will refrain from making any definitive ruling on this issue until after petitioner has been given ample opportunity to
respond to the charge.

WHEREFORE, the instant petition is DENIED, with costs against petitioner.

Petitioner is hereby required to answer the charge of forum-shopping within fifteen (15) days from notice.

SO ORDERED.
 THIRD DIVISION

G.R. No. 74886 December 8, 1992

PRUDENTIAL BANK, petitioner,
vs.
INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS, INC. and ANACLETO R. CHI, respondents.

DAVIDE, JR., J.:

Petitioner seeks to review and set aside the decision 1 of public respondent; Intermediate Appellate Court (now Court of
Appeals), dated 10 March 1986, in AC-G.R. No. 66733 which affirmed in toto the 15 June 1978 decision of Branch 9
(Quezon City) of the then Court of First Instance (now Regional Trial Court) of Rizal in Civil Case No. Q-19312. The latter
involved an action instituted by the petitioner for the recovery of a sum of money representing the amount paid by it to the
Nissho Company Ltd. of Japan for textile machinery imported by the defendant, now private respondent, Philippine Rayon
Mills, Inc. (hereinafter Philippine Rayon), represented by co-defendant Anacleto R. Chi.

The facts which gave rise to the instant controversy are summarized by the public respondent as follows:

On August 8, 1962, defendant-appellant Philippine Rayon Mills, Inc. entered into a contract with Nissho
Co., Ltd. of Japan for the importation of textile machineries under a five-year deferred payment plan
(Exhibit B, Plaintiff's Folder of Exhibits, p 2). To effect payment for said machineries, the defendant-
appellant applied for a commercial letter of credit with the Prudential Bank and Trust Company in favor of
Nissho. By virtue of said application, the Prudential Bank opened Letter of Credit No. DPP-63762 for
$128,548.78 (Exhibit A, Ibid., p. 1). Against this letter of credit, drafts were drawn and issued by Nissho
(Exhibits X, X-1 to X-11, Ibid., pp. 65, 66 to 76), which were all paid by the Prudential Bank through its
correspondent in Japan, the Bank of Tokyo, Ltd. As indicated on their faces, two of these drafts (Exhibit X
and X-1, Ibid., pp. 65-66) were accepted by the defendant-appellant through its president, Anacleto R.
Chi, while the others were not (Exhibits X-2 to X-11, Ibid., pp. 66 to 76).

Upon the arrival of the machineries, the Prudential Bank indorsed the shipping documents to the
defendant-appellant which accepted delivery of the same. To enable the defendant-appellant to take
delivery of the machineries, it executed, by prior arrangement with the Prudential Bank, a trust receipt
which was signed by Anacleto R. Chi in his capacity as President (sic) of defendant-appellant company
(Exhibit C, Ibid., p. 13).

At the back of the trust receipt is a printed form to be accomplished by two sureties who, by the very
terms and conditions thereof, were to be jointly and severally liable to the Prudential Bank should the
defendant-appellant fail to pay the total amount or any portion of the drafts issued by Nissho and paid for
by Prudential Bank. The defendant-appellant was able to take delivery of the textile machineries and
installed the same at its factory site at 69 Obudan Street, Quezon City.

Sometime in 1967, the defendant-appellant ceased business operation (sic). On December 29, 1969,
defendant-appellant's factory was leased by Yupangco Cotton Mills for an annual rental of P200,000.00
(Exhibit I, Ibid., p. 22). The lease was renewed on January 3, 1973 (Exhibit J, Ibid., p. 26). On January 5,
1974, all the textile machineries in the defendant-appellant's factory were sold to AIC Development
Corporation for P300,000.00 (Exhibit K, Ibid., p. 29).

The obligation of the defendant-appellant arising from the letter of credit and the trust receipt remained
unpaid and unliquidated. Repeated formal demands (Exhibits U, V, and W, Ibid., pp. 62, 63, 64) for the
payment of the said trust receipt yielded no result Hence, the present action for the collection of the
principal amount of P956,384.95 was filed on October 3, 1974 against the defendant-appellant and
Anacleto R. Chi. In their respective answers, the defendants interposed identical special defenses, viz.,
the complaint states no cause of action; if there is, the same has prescribed; and the plaintiff is guilty of
laches. 2

On 15 June 1978, the trial court rendered its decision the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered sentencing the defendant Philippine Rayon Mills, Inc. to pay
plaintiff the sum of P153,645.22, the amounts due under Exhibits "X" & "X-1", with interest at 6% per
annum beginning September 15, 1974 until fully paid.

Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11", inclusive, the same not having been
accepted by defendant Philippine Rayon Mills, Inc., plaintiff's cause of action thereon has not accrued,
hence, the instant case is premature.

Insofar as defendant Anacleto R. Chi is concerned, the case is dismissed. Plaintiff is ordered to pay
defendant Anacleto R. Chi the sum of P20,000.00 as attorney's fees.
 With costs against defendant Philippine Rayon Mills, Inc.

SO ORDERED. 3

Petitioner appealed the decision to the then Intermediate Appellate Court. In urging the said court to reverse or modify the
decision, petitioner alleged in its Brief that the trial court erred in (a) disregarding its right to reimbursement from the
private respondents for the entire unpaid balance of the imported machines, the total amount of which was paid to the
Nissho Company Ltd., thereby violating the principle of the third party payor's right to reimbursement provided for in the
second paragraph of Article 1236 of the Civil Code and under the rule against unjust enrichment; (b) refusing to hold
Anacleto R. Chi, as the responsible officer of defendant corporation, liable under Section 13 of P.D No 115 for the entire
unpaid balance of the imported machines covered by the bank's trust receipt (Exhibit "C"); (c) finding that the solidary
guaranty clause signed by Anacleto R. Chi is not a guaranty at all; (d) controverting the judicial admissions of Anacleto R.
Chi that he is at least a simple guarantor of the said trust receipt obligation; (e) contravening, based on the assumption
that Chi is a simple guarantor, Articles 2059, 2060 and 2062 of the Civil Code and the related evidence and jurisprudence
which provide that such liability had already attached; (f) contravening the judicial admissions of Philippine Rayon with
respect to its liability to pay the petitioner the amounts involved in the drafts (Exhibits "X", "X-l" to "X-11''); and (g)
interpreting "sight" drafts as requiring acceptance by Philippine Rayon before the latter could be held liable thereon. 4

In its decision, public respondent sustained the trial court in all respects. As to the first and last assigned errors, it ruled
that the provision on unjust enrichment, Article 2142 of the Civil Code, applies only if there is no express contract between
the parties and there is a clear showing that the payment is justified. In the instant case, the relationship existing between
the petitioner and Philippine Rayon is governed by specific contracts, namely the application for letters of credit, the
promissory note, the drafts and the trust receipt. With respect to the last ten (10) drafts (Exhibits "X-2" to "X-11") which
had not been presented to and were not accepted by Philippine Rayon, petitioner was not justified in unilaterally paying
the amounts stated therein. The public respondent did not agree with the petitioner's claim that the drafts were sight drafts
which did not require presentment for acceptance to Philippine Rayon because paragraph 8 of the trust receipt
presupposes prior acceptance of the drafts. Since the ten (10) drafts were not presented and accepted, no valid demand
for payment can be made.

Public respondent also disagreed with the petitioner's contention that private respondent Chi is solidarily liable with
Philippine Rayon pursuant to Section 13 of P.D. No. 115 and based on his signature on the solidary guaranty clause at
the dorsal side of the trust receipt. As to the first contention, the public respondent ruled that the civil liability provided for
in said Section 13 attaches only after conviction. As to the second, it expressed misgivings as to whether Chi's signature
on the trust receipt made the latter automatically liable thereon because the so-called solidary guaranty clause at the
dorsal portion of the trust receipt is to be signed not by one (1) person alone, but by two (2) persons; the last sentence of
the same is incomplete and unsigned by witnesses; and it is not acknowledged before a notary public. Besides, even
granting that it was executed and acknowledged before a notary public, Chi cannot be held liable therefor because the
records fail to show that petitioner had either exhausted the properties of Philippine Rayon or had resorted to all legal
remedies as required in Article 2058 of the Civil Code. As provided for under Articles 2052 and 2054 of the Civil Code, the
obligation of a guarantor is merely accessory and subsidiary, respectively. Chi's liability would therefore arise only when
the principal debtor fails to comply with his obligation. 5

Its motion to reconsider the decision having been denied by the public respondent in its Resolution of 11 June
1986, 6 petitioner filed the instant petition on 31 July 1986 submitting the following legal issues:

I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY ERRED IN DENYING

PETITIONER'S CLAIM FOR FULL REIMBURSEMENT AGAINST THE PRIVATE RESPONDENTS FOR
THE PAYMENT PETITIONER MADE TO NISSHO CO. LTD. FOR THE BENEFIT OF PRIVATE
RESPONDENT UNDER ART. 1283 OF THE NEW CIVIL CODE OF THE PHILIPPINES AND UNDER
THE GENERAL PRINCIPLE AGAINST UNJUST ENRICHMENT;

II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY LIABLE UNDER THE TRUST RECEIPT
(EXH. C);

III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS OF RESPONDENT CHI HE
IS LIABLE THEREON AND TO WHAT EXTENT;

IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A SIMPLE GUARANTOR; AND IF SO; HAS
HIS LIABILITY AS SUCH ALREADY ATTACHED;

V. WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE OFFICER OF RESPONDENT PHIL.

RAYON RESPONDENT CHI IS PERSONALLY LIABLE PURSUANT TO THE PROVISION OF SECTION
13, P.D. 115;

VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER THE
TRUST RECEIPT (EXH. C);

VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS RESPONDENT PHIL.
RAYON IS LIABLE TO THE PETITIONER UNDER THE DRAFTS (EXHS. X, X-1 TO X-11) AND TO
WHAT EXTENT;
 VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR ACCEPTANCE FROM RESPONDENT
PHIL. RAYON BEFORE THE LATTER BECOMES LIABLE TO PETITIONER. 7

In the Resolution of 12 March 1990, 8 this Court gave due course to the petition after the filing of the Comment thereto by
private respondent Anacleto Chi and of the Reply to the latter by the petitioner; both parties were also required to submit
their respective memoranda which they subsequently complied with.

As We see it, the issues may be reduced as follows:

1. Whether presentment for acceptance of the drafts was indispensable to make

Philippine Rayon liable thereon;

2. Whether Philippine Rayon is liable on the basis of the trust receipt;

3. Whether private respondent Chi is jointly and severally liable with Philippine Rayon for
the obligation sought to be enforced and if not, whether he may be considered a
guarantor; in the latter situation, whether the case should have been dismissed on the
ground of lack of cause of action as there was no prior exhaustion of Philippine Rayon's
properties.

Both the trial court and the public respondent ruled that Philippine Rayon could be held liable for the two (2) drafts,
Exhibits "X" and "X-1", because only these appear to have been accepted by the latter after due presentment. The liability
for the remaining ten (10) drafts (Exhibits "X-2" to "X-11" inclusive) did not arise because the same were not presented for
acceptance. In short, both courts concluded that acceptance of the drafts by Philippine Rayon was indispensable to make
the latter liable thereon. We are unable to agree with this proposition. The transaction in the case at bar stemmed from
Philippine Rayon's application for a commercial letter of credit with the petitioner in the amount of $128,548.78 to cover
the former's contract to purchase and import loom and textile machinery from Nissho Company, Ltd. of Japan under a
five-year deferred payment plan. Petitioner approved the application. As correctly ruled by the trial court in its Order of 6
March 1975: 9

. . . By virtue of said Application and Agreement for Commercial Letter of Credit, plaintiff bank 10 was
under obligation to pay through its correspondent bank in Japan the drafts that Nisso (sic) Company, Ltd.,
periodically drew against said letter of credit from 1963 to 1968, pursuant to plaintiff's contract with the
defendant Philippine Rayon Mills, Inc. In turn, defendant Philippine Rayon Mills, Inc., was obligated to pay
plaintiff bank the amounts of the drafts drawn by Nisso (sic) Company, Ltd. against said plaintiff bank
together with any accruing commercial charges, interest, etc. pursuant to the terms and conditions
stipulated in the Application and Agreement of Commercial Letter of Credit Annex "A".

A letter of credit is defined as an engagement by a bank or other person made at the request of a customer that the issuer
will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. 11 Through a
letter of credit, the bank merely substitutes its own promise to pay for one of its customers who in return promises to pay
the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon. 12 In
the instant case then, the drawee was necessarily the herein petitioner. It was to the latter that the drafts were presented
for payment. In fact, there was no need for acceptance as the issued drafts are sight drafts. Presentment for acceptance
is necessary only in the cases expressly provided for in Section 143 of the Negotiable Instruments Law (NIL). 13 The said
section reads:

Sec. 143. When presentment for acceptance must be made. — Presentment for acceptance must be
made:

(a) Where the bill is payable after sight, or in any other case, where
presentment for acceptance is necessary in order to fix the maturity of
the instrument; or

(b) Where the bill expressly stipulates that it shall be presented for
acceptance; or

(c) Where the bill is drawn payable elsewhere than at the residence or
place of business of the drawee.

In no other case is presentment for acceptance necessary in order to render any party to the bill liable.

Obviously then, sight drafts do not require presentment for acceptance.

The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer; 14 this may be done in
writing by the drawee in the bill itself, or in a separate instrument. 15

The parties herein agree, and the trial court explicitly ruled, that the subject, drafts are sight drafts. Said the latter:

. . . In the instant case the drafts being at sight, they are supposed to be payable upon acceptance unless
plaintiff bank has given the Philippine Rayon Mills Inc. time within which to pay the same. The first two
 drafts (Annexes C & D, Exh. X & X-1) were duly accepted as indicated on their face (sic), and upon such
acceptance should have been paid forthwith. These two drafts were not paid and although Philippine
Rayon Mills
ought to have paid the same, the fact remains that until now they are still unpaid. 16

Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section 7 provides:

Sec. 7. When payable on demand. — An instrument is payable on demand —

(a) When so it is expressed to be payable on demand, or at sight, or on

presentation; or

(b) In which no time for payment in expressed.

Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so
issuing, accepting, or indorsing it, payable on demand. (emphasis supplied)

Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at maturity of any accepted draft, bill of
exchange or indebtedness shall not be extinguished or modified" 17 does not, contrary to the holding of the public
respondent, contemplate prior acceptance by Philippine Rayon, but by the petitioner. Acceptance, however, was
not even necessary in the first place because the drafts which were eventually issued were sight drafts And even
if these were not sight drafts, thereby necessitating acceptance, it would be the petitioner — and not Philippine
Rayon — which had to accept the same for the latter was not the drawee. Presentment for acceptance is defined
an the production of a bill of exchange to a drawee for acceptance. 18 The trial court and the public respondent,
therefore, erred in ruling that presentment for acceptance was an indispensable requisite for Philippine Rayon's
liability on the drafts to attach. Contrary to both courts' pronouncements, Philippine Rayon immediately became
liable thereon upon petitioner's payment thereof. Such is the essence of the letter of credit issued by the
petitioner. A different conclusion would violate the principle upon which commercial letters of credit are founded
because in such a case, both the beneficiary and the issuer, Nissho Company Ltd. and the petitioner,
respectively, would be placed at the mercy of Philippine Rayon even if the latter had already received the
imported machinery and the petitioner had fully paid for it. The typical setting and purpose of a letter of credit are
described in Hibernia Bank and Trust Co. vs.  J. Aron & Co., Inc., 19 thus:

Commercial letters of credit have come into general use in international sales transactions where much
time necessarily elapses between the sale and the receipt by a purchaser of the merchandise, during
which interval great price changes may occur. Buyers and sellers struggle for the advantage of position.
The seller is desirous of being paid as surely and as soon as possible, realizing that the vendee at a
distant point has it in his power to reject on trivial grounds merchandise on arrival, and cause
considerable hardship to the shipper. Letters of credit meet this condition by affording celerity and
certainty of payment. Their purpose is to insure to a seller payment of a definite amount upon
presentation of documents. The bank deals only with documents. It has nothing to do with the quality of
the merchandise. Disputes as to the merchandise shipped may arise and be litigated later between
vendor and vendee, but they may not impede acceptance of drafts and payment by the issuing bank
when the proper documents are presented.

The trial court and the public respondent likewise erred in disregarding the trust receipt and in not holding that Philippine
Rayon was liable thereon. In People vs. Yu Chai Ho, 20 this Court explains the nature of a trust receipt by quoting In re
Dunlap Carpet Co., 21 thus:

By this arrangement a banker advances money to an intending importer, and thereby lends the aid of
capital, of credit, or of business facilities and agencies abroad, to the enterprise of foreign commerce.
Much of this trade could hardly be carried on by any other means, and therefore it is of the first
importance that the fundamental factor in the transaction, the banker's advance of money and credit,
should receive the amplest protection. Accordingly, in order to secure that the banker shall be repaid at
the critical point — that is, when the imported goods finally reach the hands of the intended vendee — the
banker takes the full title to the goods at the very beginning; he takes it as soon as the goods are bought
and settled for by his payments or acceptances in the foreign country, and he continues to hold that title
as his indispensable security until the goods are sold in the United States and the vendee is called upon
to pay for them. This security is not an ordinary pledge by the importer to the banker, for the importer has
never owned the goods, and moreover he is not able to deliver the possession; but the security is the
complete title vested originally in the bankers, and this characteristic of the transaction has again and
again been recognized and protected by the courts. Of course, the title is at bottom a security title, as it
has sometimes been called, and the banker is always under the obligation to reconvey; but only after his
advances have been fully repaid and after the importer has fulfilled the other terms of the contract.

As further stated in National Bank vs.  Viuda e Hijos de Angel Jose, 22 trust receipts:

. . . [I]n a certain manner, . . . partake of the nature of a conditional sale as provided by the Chattel
Mortgage Law, that is, the importer becomes absolute owner of the imported merchandise as soon an he
has paid its price. The ownership of the merchandise continues to be vested in the owner thereof or in the
person who has advanced payment, until he has been paid in full, or if the merchandise has already been
 sold, the proceeds of the sale should be turned over to him by the importer or by his representative or
successor in interest.

Under P.D. No. 115, otherwise known an the Trust Receipts Law, which took effect on 29 January 1973, a trust receipt
transaction is defined as "any transaction by and between a person referred to in this Decree as the entruster, and
another person referred to in this Decree as the entrustee, whereby the entruster, who owns or holds absolute title or
security interests' over certain specified goods, documents or instruments, releases the same to the possession of the
entrustee upon the latter's execution and delivery to the entruster of a signed document called the "trust receipt" wherein
the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or
otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds
thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, instruments
themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the
trusts receipt, or for other purposes substantially equivalent to any one of the following: . . ."

It is alleged in the complaint that private respondents "not only have presumably put said machinery to good use and have
profited by its operation and/or disposition but very recent information that (sic) reached plaintiff bank that defendants
already sold the machinery covered by the trust receipt to Yupangco Cotton Mills," and that "as trustees of the property
covered by the trust receipt, . . . and therefore acting in fiduciary (sic) capacity, defendants have willfully violated their duty
to account for the whereabouts of the machinery covered by the trust receipt or for the proceeds of any lease, sale or
other disposition of the same that they may have made, notwithstanding demands therefor; defendants have fraudulently
misapplied or converted to their own use any money realized from the lease, sale, and other disposition of said
machinery." 23 While there is no specific prayer for the delivery to the petitioner by Philippine Rayon of the proceeds of the
sale of the machinery covered by the trust receipt, such relief is covered by the general prayer for "such further and other
relief as may be just and equitable on the premises." 24 And although it is true that the petitioner commenced a criminal
action for the violation of the Trust Receipts Law, no legal obstacle prevented it from enforcing the civil liability arising out
of the trust, receipt in a separate civil action. Under Section 13 of the Trust Receipts Law, the failure of an entrustee to
turn over the proceeds of the sale of goods, documents or instruments covered by a trust receipt to the extent of the
amount owing to the entruster or as appear 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 315, paragraph 1(b) of the Revised Penal Code. 25 Under Article 33 of the Civil
Code, a civil action for damages, entirely separate and distinct from the criminal action, may be brought by the injured
party in cases of defamation, fraud and physical injuries. Estafa falls under fraud.

We also conclude, for the reason hereinafter discussed, and not for that adduced by the public respondent, that private
respondent Chi's signature in the dorsal portion of the trust receipt did not bind him solidarily with Philippine Rayon. The
statement at the dorsal portion of the said trust receipt, which petitioner describes as a "solidary guaranty clause", reads:

In consideration of the PRUDENTIAL BANK AND TRUST COMPANY complying with the foregoing, we
jointly and severally agree and undertake to pay on demand to the PRUDENTIAL BANK AND TRUST
COMPANY all sums of money which the said PRUDENTIAL BANK AND TRUST COMPANY may call
upon us to pay arising out of or pertaining to, and/or in any event connected with the default of and/or
non-fulfillment in any respect of the undertaking of the aforesaid:

PHILIPPINE RAYON MILLS, INC.

We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does not have to take any steps
or exhaust its remedy against aforesaid:

before making demand on me/us.

(Sgd.)
Anaclet
o R.
Chi
ANACL
ETO R.
CHI 26

Petitioner insists that by virtue of the clear wording of the statement, specifically the clause ". . . we jointly and severally
agree and undertake . . .," and the concluding sentence on exhaustion, Chi's liability therein is solidary.

In holding otherwise, the public respondent ratiocinates as follows:

With respect to the second argument, we have our misgivings as to whether the mere signature of
defendant-appellee Chi of (sic) the guaranty agreement, Exhibit "C-1", will make it an actionable
document. It should be noted that Exhibit "C-1" was prepared and printed by the plaintiff-appellant. A
perusal of Exhibit "C-1" shows that it was to be signed and executed by two persons. It was signed only
by defendant-appellee Chi. Exhibit "C-1" was to be witnessed by two persons, but no one signed in that
capacity. The last sentence of the guaranty clause is incomplete. Furthermore, the plaintiff-appellant also
failed to have the purported guarantee clause acknowledged before a notary public. All these show that
the alleged guaranty provision was disregarded and, therefore, not consummated.
 But granting arguendo that the guaranty provision in Exhibit "C-1" was fully executed and acknowledged
still defendant-appellee Chi cannot be held liable thereunder because the records show that the plaintiff-
appellant had neither exhausted the property of the defendant-appellant nor had it resorted to all legal
remedies against the said defendant-appellant as provided in Article 2058 of the Civil Code. The
obligation of a guarantor is merely accessory under Article 2052 of the Civil Code and subsidiary under
Article 2054 of the Civil Code. Therefore, the liability of the defendant-appellee arises only when the
principal debtor fails to comply with his obligation. 27

Our own reading of the questioned solidary guaranty clause yields no other conclusion than that the obligation of Chi is
only that of a guarantor. This is further bolstered by the last sentence which speaks of waiver of exhaustion, which,
nevertheless, is ineffective in this case because the space therein for the party whose property may not be exhausted was
not filled up. Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be raised by a guarantor
before he may be held liable for the obligation. Petitioner likewise admits that the questioned provision is a solidary
guaranty clause, thereby clearly distinguishing it from a contract of surety. It, however, described the guaranty as solidary
between the guarantors; this would have been correct if two (2) guarantors had signed it. The clause "we jointly and
severally agree and undertake" refers to the undertaking of the two (2) parties who are to sign it or to the liability existing
between themselves. It does not refer to the undertaking between either one or both of them on the one hand and the
petitioner on the other with respect to the liability described under the trust receipt. Elsewise stated, their liability is not
divisible as between them, i.e., it can be enforced to its full extent against any one of them.

Furthermore, any doubt as to the import, or true intent of the solidary guaranty clause should be resolved against the
petitioner. The trust receipt, together with the questioned solidary guaranty clause, is on a form drafted and prepared
solely by the petitioner; Chi's participation therein is limited to the affixing of his signature thereon. It is, therefore, a
contract of adhesion; 28 as such, it must be strictly construed against the party responsible for its preparation. 29

Neither can We agree with the reasoning of the public respondent that this solidary guaranty clause was effectively
disregarded simply because it was not signed and witnessed by two (2) persons and acknowledged before a notary
public. While indeed, the clause ought to have been signed by two (2) guarantors, the fact that it was only Chi who signed
the same did not make his act an idle ceremony or render the clause totally meaningless. By his signing, Chi became the
sole guarantor. The attestation by witnesses and the acknowledgement before a notary public are not required by law to
make a party liable on the instrument. The rule is that contracts shall be obligatory in whatever form they may have been
entered into, provided all the essential requisites for their validity are present; however, when the law requires that a
contract be in some form in order that it may be valid or enforceable, or that it be proved in a certain way, that requirement
is absolute and indispensable. 30 With respect to a guaranty, 31 which is a promise to answer for the debt or default of
another, the law merely requires that it, or some note or memorandum thereof, be in writing. Otherwise, it would be
unenforceable unless ratified. 32 While the acknowledgement of a surety before a notary public is required to make the
same a  public document, under Article 1358 of the Civil Code, a contract of guaranty does not have to appear in a public
document.

And now to the other ground relied upon by the petitioner as basis for the solidary liability of Chi, namely the criminal
proceedings against the latter for the violation of P.D. No. 115. Petitioner claims that because of the said criminal
proceedings, Chi would be answerable for the civil liability arising therefrom pursuant to Section 13 of P.D. No. 115. Public
respondent rejected this claim because such civil liability presupposes prior conviction as can be gleaned from the phrase
"without prejudice to the civil liability arising from the criminal offense." Both are wrong. The said section reads:

Sec. 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 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.

A close examination of the quoted provision reveals that it is the last sentence which provides for the correct solution. It is
clear that if the violation or offense is committed by a corporation, partnership, association or other juridical entities, the
penalty shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the
offense. The penalty referred to is imprisonment, the duration of which would depend on the amount of the fraud as
provided for in Article 315 of the Revised Penal Code. The reason for this is obvious: corporations, partnerships,
associations and other juridical entities cannot be put in jail. However, it is these entities which are made liable for the civil
liability arising from the criminal offense. This is the import of the clause "without prejudice to the civil liabilities arising from
the criminal offense." And, as We stated earlier, since that violation of a trust receipt constitutes fraud under Article 33 of
the Civil Code, petitioner was acting well within its rights in filing an independent civil action to enforce the civil liability
arising therefrom against Philippine Rayon.

The remaining issue to be resolved concerns the propriety of the dismissal of the case against private respondent Chi.
The trial court based the dismissal, and the respondent Court its affirmance thereof, on the theory that Chi is not liable on
the trust receipt in any capacity — either as surety or as guarantor — because his signature at the dorsal portion thereof
was useless; and even if he could be bound by such signature as a simple guarantor, he cannot, pursuant to Article 2058
of the Civil Code, be compelled to pay until
after petitioner has exhausted and resorted to all legal remedies against the principal debtor, Philippine Rayon. The
records fail to show that petitioner had done so 33 Reliance is thus placed on Article 2058 of the Civil Code which provides:

Art. 2056. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the
property of the debtor, and has resorted to all the legal remedies against the debtor.

Simply stated, there is as yet no cause of action against Chi.

We are not persuaded. Excussion is not a condition sine qua non for the institution of an action against a guarantor.
In Southern Motors, Inc. vs.  Barbosa, 34 this Court stated:

4. Although an ordinary personal guarantor — not a mortgagor or pledgor — may demand the
aforementioned exhaustion, the creditor may, prior thereto, secure a judgment against said guarantor,
who shall be entitled, however, to a deferment of the execution of said judgment against him until after the
properties of the principal debtor shall have been exhausted to satisfy the obligation involved in the case.

There was then nothing procedurally objectionable in impleading private respondent Chi as a co-defendant in Civil Case
No. Q-19312 before the trial court. As a matter of fact, Section 6, Rule 3 of the Rules of Court on permissive joinder of
parties explicitly allows it. It reads:

Sec. 6. Permissive joinder of parties. — All persons in whom or against whom any right to relief in respect
to or arising out of the same transaction or series of transactions is alleged to exist, whether jointly,
severally, or in the alternative, may, except as otherwise provided in these rules, join as plaintiffs or be
joined as defendants in one complaint, where any question of law or fact common to all such plaintiffs or
to all such defendants may arise in the action; but the court may make such orders as may be just to
prevent any plaintiff or defendant from being embarrassed or put to expense in connection with any
proceedings in which he may have no interest.

This is the equity rule relating to multifariousness. It is based on trial convenience and is designed to permit the joinder of
plaintiffs or defendants whenever there is a common question of law or fact. It will save the parties unnecessary work,
trouble and expense. 35

However, Chi's liability is limited to the principal obligation in the trust receipt plus all the accessories thereof including
judicial costs; with respect to the latter, he shall only be liable for those costs incurred after being judicially required to
pay. 36 Interest and damages, being accessories of the principal obligation, should also be paid; these, however, shall run
only from the date of the filing of the complaint. Attorney's fees may even be allowed in appropriate cases. 37

In the instant case, the attorney's fees to be paid by Chi cannot be the same as that to be paid by Philippine Rayon since
it is only the trust receipt that is covered by the guaranty and not the full extent of the latter's liability. All things considered,
he can be held liable for the sum of P10,000.00 as attorney's fees in favor of the petitioner.

Thus, the trial court committed grave abuse of discretion in dismissing the complaint as against private respondent Chi
and condemning petitioner to pay him P20,000.00 as attorney's fees.

In the light of the foregoing, it would no longer necessary to discuss the other issues raised by the petitioner

WHEREFORE, the instant Petition is hereby GRANTED.

The appealed Decision of 10 March 1986 of the public respondent in AC-G.R. CV No. 66733 and, necessarily,
that of Branch 9 (Quezon City) of the then Court of First Instance of Rizal in Civil Case No. Q-19312 are hereby
REVERSED and SET ASIDE and another is hereby entered:

1. Declaring private respondent Philippine Rayon Mills, Inc. liable on the twelve drafts in
question (Exhibits "X", "X-1" to "X-11", inclusive) and on the trust receipt (Exhibit "C"),
and ordering it to pay petitioner: (a) the amounts due thereon in the total sum of
P956,384.95 as of 15 September 1974, with interest thereon at six percent (6%) per
annum from 16 September 1974 until it is fully paid, less whatever may have been
applied thereto by virtue of foreclosure of mortgages, if any; (b) a sum equal to ten
percent (10%) of the aforesaid amount as attorney's fees; and (c) the costs.

2. Declaring private respondent Anacleto R. Chi secondarily liable on the trust receipt and
ordering him to pay the face value thereof, with interest at the legal rate, commencing
from the date of the filing of the complaint in Civil Case No. Q-19312 until the same is
fully paid as well as the costs and attorney's fees in the sum of P10,000.00 if the writ of
execution for the enforcement of the above awards against Philippine Rayon Mills, Inc. is
returned unsatisfied.

Costs against private respondents.

SO ORDERED.
G.R. No. 149193               April 4, 2011

RICARDO B. BANGAYAN, Petitioner,
vs.
RIZAL COMMERCIAL BANKING CORPORATION AND PHILIP SARIA, Respondents,

DECISION

SERENO, J.:

Before this Court is a Rule 45 Petition1 questioning the Court of Appeals’ affirmance of a trial court’s dismissal of a
complaint for damages filed by a depositor against a bank for the dishonor of seven checks and for the wrongful
disclosure of information regarding the depositor’s account contrary to the Bank Secrecy Act (Republic Act No. 1405). 2

The Facts

Petitioner Ricardo Bangayan had a savings account and a current account with one of the branches of respondent Rizal
Commercial Banking Corporation (RCBC). 3 These two accounts had an "automatic transfer" condition wherein checks
issued by the depositor may be funded by any of the two accounts. 4

On 26 June 1992, petitioner Bangayan purportedly signed a Comprehensive Surety Agreement (the Surety
Agreement)5 with respondent RCBC in favor of nine corporations. 6 Under the Surety Agreement, the funds in petitioner
Bangayan’s accounts with respondent RCBC would be used as security to guarantee any existing and future loan
obligations, advances, credits/increases and other obligations, including any and all expenses that these corporations
may incur with respondent bank.

Petitioner Bangayan contests the veracity and due authenticity of the Surety Agreement on the ground that his signature
thereon was not genuine, and that the agreement was not notarized. 7 Respondent RCBC refutes this claim, although it
admitted that it was exceptional for a perfected Surety Agreement of the bank to be without a signature of the witness and
to remain unnotarized. Mr. Eli Lao, respondent bank’s Group Head of Account Management, however, explained that the
bank was still in the process of "completing" the Surety Agreement at that time. 8

The following are the transactions of respondent RCBC in relation to the Surety Agreement vis-à-vis the petitioner
Bangayan.

On 26 June 1992 (the same day that the Surety Agreement was allegedly signed), two of the corporations whose
performance were guaranteed therein – LBZ Commercial and Peaks Marketing – were issued separate commercial letters
of credit9 by respondent RCBC for the importation of PVC resin from Korea. Three days later or on 29 June 1992,
respondent RCBC issued a third letter of credit10 in favor of another corporation, Final Sales Enterprise, whose obligations
to respondent bank were likewise secured by petitioner Bangayan under the Surety Agreement. Mr. Lao claimed that
respondent bank would not have extended the letters of credit in favor of the three corporations without petitioner
Bangayan acting as surety.11

On 26 August 1992, a fourth letter of credit12 was issued by respondent RCBC for the importation of materials from Korea,
this time by Lotec Marketing, another corporation enumerated in the Surety Agreement. The Korea Exchange Bank was
designated as the advising bank for Lotec Marketing’s letter of credit. 13

On 15 September 1992, after the arrival of the shipments of the first three corporations from Korea, the Bureau of
Customs (BOC) demanded – via letter of the same date – from respondent RCBC, which facilitated the three letters of
credit, the remittance of import duties in the amount of thirteen million two hundred sixty-five thousand two hundred
twenty-five pesos (PhP13,265,225).14

Mr. Lao of respondent RCBC allegedly called petitioner Bangayan and informed him of the BOC’s demand for payment of
import duties.15 According to Mr. Lao, petitioner allegedly replied that he understood the situation and assured Mr. Lao that
he was doing everything he could to solve the problem. 16

Considering the BOC’s demand, respondent RCBC decided to put on hold the funds in petitioner Bangayan’s accounts by
virtue of the authority given to it by petitioner under the Surety Agreement. 17 Respondent RCBC reasoned that as the
collecting agent, it had to earmark sufficient funds in the account of petitioner Bangayan (the surety) to satisfy the tax
obligations of the three corporations, in the event that they would fail to pay the same. 18 Thus, respondent bank refused
payments drawn from petitioner Bangayan’s deposits, unless there was an order from the BOC. 19 Petitioner Bangayan,
however, contests this action since respondent bank did not present any writ of garnishment that would authorize the
freezing of his funds.20

On 18 September 1992, two of the seven checks that were drawn against petitioner Bangayan’s Current Account No.
0109-8232-5 were presented for payment to respondent RCBC, namely:

RCBC Check No. Date of Presentment Paid To Amount

21
98799 18 Sept 1992 United Pacific Enterprises PhP3,650,000
22
938000 18 Sept 1992 United Pacific Enterprises PhP4,500,000
 TOTAL PhP8,150,000

On the same day, the amounts of three million six hundred fifty thousand pesos (PhP3,650,000) and four million five
hundred thousand pesos (PhP4,500,000)23 were successively debited from the said current account, as shown in
petitioner Bangayan’s passbook for the current account. 24 Alongside these two debit entries in the passbook was the
transaction reference code "DFT," which apparently stands for "debit fund transfer." 25

On 21 September 1992, the same amounts in the two checks were credited to petitioner Bangayan’s current account,
under the transaction reference code "CM," that stands for "credit memo." 26 Moreover, petitioner Bangayan’s Checks Nos.
93799 and 93800 issued in favor of United Pacific Enterprises were also returned by respondent RCBC with the notation
"REFER TO DRAWER."27

On the same day that the checks were referred to petitioner Bangayan by respondent RCBC, United Pacific Enterprises,
through Mr. Manuel Dente, demanded from petitioner Bangayan the payment of eight million one hundred fifty thousand
pesos (PhP8,150,000), which corresponded to the amounts of the two dishonored checks that were issued to it. 28 Nothing
more has been alleged by petitioner on this particular matter.

On 24 September 1992, the Korea Exchange Bank (the advising bank) informed respondent RCBC through a telex that it
had already negotiated the fourth letter of credit for Lotec Marketing’s shipment, which amounted to seven hundred twelve
thousand eight hundred U.S. dollars (US$712,800) and, thereafter, claimed reimbursement from respondent RCBC. 29

This particular shipment by Lotec Marketing became the subject matter of an investigation conducted by the Customs
Intelligence & Investigation Service of the BOC, according to respondent bank. 30 Both parties agreed that the BOC
likewise conducted an investigation covering the importation of the three corporations – LBZ Commercial, Peaks
Marketing and Final Sales Enterprise - that were opened through the letters of credit issued by respondent RCBC. 31

On 09 October 1992, respondent Philip Saria, who was an Account Officer of respondent bank’s Binondo Branch, signed
and executed a Statement before the BOC, with the assistance of Atty. Arnel Z. Dolendo of respondent RCBC, on the
bank’s letters of credit issued in favor of the three corporations. 32 Petitioner Bangayan cited this incident as the basis for
the allegation in the Complaint he subsequently filed that respondent RCBC had disclosed to a third party (the BOC)
information concerning the identity, nature, transaction and deposits including details of transaction related to and
pertaining to his deposits with the said bank, in violation of the Bank Secrecy Act. 33 It must be pointed out that the trial
court found that "no evidence was introduced by (petitioner Bangayan) to substantiate his claim that (respondent RCBC)
gave any classified information" in violation of the Bank Secrecy Law. 34 Thus, the trial court considered the alleged
disclosure of confidential bank information by respondent RCBC as a non-issue. 35

On the same date, when Lotec Marketing’s loan obligation under the fourth letter of credit became due and
demandable,36 respondent RCBC issued an advice that it would debit the amount of twelve million seven hundred sixty-
two thousand six hundred pesos (PhP12,762,600) from petitioner Bangayan’s current account to partially satisfy the
guaranteed corporation’s loan.37 At that time, petitioner Bangayan’s passbook for his current account showed that it had
funds of twelve million seven hundred sixty-two thousand six hundred forty-five and 64/100 pesos (PhP12,762,645.64). 38

On 12 October 1992, the amount of twelve million seven hundred sixty-two thousand and six hundred pesos
(PhP12,762,600) was debited from petitioner Bangayan’s current account, consequently reducing the funds to forty-five
and 64/100 pesos (PhP45.64).39 Respondent RCBC claimed that the former amount was debited from petitioner’s account
to partially pay Lotec Marketing’s outstanding obligation which stood at eighteen million forty-seven thousand thirty-three
and 60/100 pesos (PhP18,047,033.60).40 Lotec Marketing, thereafter, paid the balance of its obligation to respondent
RCBC in the amount of five million three hundred thirty-eight thousand eight hundred nineteen and 20/100 pesos
(PhP5,338,819.20)41 under the fourth letter of credit.

On 13 October 2010, the three corporations earlier adverted to paid the corresponding customs duties demanded by the
BOC.42 Receipts were subsequently issued by the BOC for the corporations’ payments, copies of which were received by
Atty. Nelson Loyola, counsel of petitioner Bangayan in this case. 43 The trial court considered this as payment by petitioner
of the three corporations’ obligations for custom duties. 44 Thereafter, respondent RCBC released to the corporations the
necessary papers for their PVC resin shipments which were imported through the bank’s letters of credit. 45

On 15 October 2010, five other checks of petitioner Bangayan were presented for payment to respondent RCBC, namely:

RCBC Check No. Date of Presentment Paid To Amount

93801146 15 Oct 1992 Simplex Merchandising PhP1,200,000
93801247 15 Oct 1992 Simplex Merchandising PhP1,260,000
48
938013 15 Oct 1992 Simplex Merchandising PhP1,180,000
49
938014 15 Oct 1992 Hinomoto Trading Company PhP1,052,000
50
938015 15 Oct 1992 Hinomoto Trading Company PhP982,000
TOTAL AMOUNT PhP5,674,000

On 16 October 1992, these five checks were also dishonored by respondent RCBC on the ground that they had been
drawn against insufficient funds ("DAIF") and were subsequently returned. 51
On 20 October 1992, Hinomoto Trading Company, one of the payees for two of the dishonored checks, 52 demanded that
petitioner Bangayan make good on his payments.53 On 21 October 1992, the other payee of the three other dishonored
checks,54 Simplex Merchandising, likewise made a final demand on petitioner to replace the dishonored instruments. 55

On 23 October 1992, petitioner Bangayan, through counsel, demanded that respondent bank restore all the funds to his
account and indemnify him for damages.56

On 30 October 1992, nineteen thousand four hundred twenty-seven and 15/100 pesos (PhP19,427.15) was credited in
petitioner Bangayan’s current account, with the transaction reference code "INT" referring to interest. 57 Petitioner explains
that even if the outstanding balance at that time was reduced, this interest was earned based on the average daily
balance of the account for the quarter and not just on the balance at that time, which was forty-five and 64/100 pesos
(PhP45.64).58

The Case in the Trial Court

On 09 November 1992, petitioner Bangayan filed a complaint for damages against respondent RCBC. 59 Subsequently,
respondent RCBC filed an Answer dated 02 December 1992 with compulsory counter-claims. 60 On 12 January 1993,
respondent RCBC filed a Motion for Leave to File Attached Amended Answer and Amended Answer. 61

Petitioner Bangayan argues that at the time the dishonored checks were issued, there were sufficient funds in his
accounts to cover them;62 that he was informed by personnel of respondent RCBC that his accounts were garnished, but
no notice or writ of garnishment was ever shown to him; 63 and that his name and reputation were tarnished because of the
dishonor of checks that were issued in relation to his automotive business. 64

In its defense, respondent RCBC claims that petitioner Bangayan signed a Surety Agreement in favor of several
companies that defaulted in their payment of customs duties that resulted in the imposition of a lien over the accounts,
particularly for the payment of customs duties assessed by the Bureau of Customs. 65 Respondent bank further claimed
that it had funded the letter of credit66 availed of by Lotec Marketing to finance the latter’s importation with the account of
petitioner Bangayan, who agreed to guarantee Lotec Marketing’s obligations under the Surety Agreement; and, that
respondent bank applied petitioner Bangayan’s deposits to satisfy part of Lotec Marketing’s obligation in the amount of
twelve million seven hundred sixty-two thousand and six hundred pesos (PhP12,762,600), which resulted in the depletion
of the bank accounts.67

Petitioner Bangayan also alleged that respondent RCBC disclosed to a third party (the BOC) classified information about
the identity and nature of the transactions and deposits, in violation of the Bank Secrecy Act. Respondent RCBC counters
that no confidential information on petitioner’s bank accounts was disclosed.

Availing himself of discovery proceedings in the lower court, petitioner Bangayan filed a Request for Admission 68 and
Request for Answer to Written Interrogatories,69 to which respondent RCBC filed the corresponding Answers and
Objections to Interrogatories70 and Response to Request for Admission.71

During the presentation of complainant’s evidence, petitioner Bangayan, Atty. Randy Rutaquio, respondent Saria and
Manuel Dantes testified in open court. Petitioner Bangayan thereafter filed a Formal Offer of Evidence. 72

On the other hand, respondent RCBC presented Mr. Lao as its lone defense witness. Before the termination of Mr. Lao’s
direct examination, respondent RCBC filed a Motion to Inhibit Presiding Judge Pedro Santiago, 73 who subsequently
denied the motion.74 The Order denying the Motion to Inhibit was the subject matter of petitions filed by respondent RCBC
in the Court of Appeals75 and subsequently in this Court, which were all dismissed.

In the meantime, when respondent RCBC’s witness (Mr. Lao) failed to appear at the hearing, Judge Santiago ordered that
Mr. Lao’s testimony be stricken off the record despite respondent bank’s motion to have the case reset. 76 After the
appellate proceedings for respondent RCBC’s Petition as regards the Motion to Inhibit, however, Judge Santiago set
aside his earlier Order and reinstated the testimony of Mr. Lao, subject to cross-examination. 77 Petitioner Bangayan took
exception to the Order reinstating Mr. Lao’s testimony, but continued to conduct his cross examination with a reservation
to raise the Order in the appellate courts.78

Respondent RCBC thereafter filed its Formal Offer of Exhibits. 79

On 17 October 1994, the trial court rendered a Decision, the dispositive portion of which reads:

"WHEREFORE, premises above considered, plaintiff not having proved that defendant RCBC acted wrongly, maliciously
and negligently in dishonoring his 7 checks, nor has the bank given any confidential informations against the plaintiff in
violation of R.A. 1405 and the defendant bank having established on the contrary that plaintiff has no sufficient funds for
his said checks, the instant complaint is hereby DISMISSED." 80 (Emphasis supplied)

When his omnibus motion81 to have the Decision reconsidered was denied,82 petitioner Bangayan filed a notice of
appeal.83

The Ruling of the Court of Appeals

After petitioner Bangayan84 and respondent RCBC85 filed their respective appeal briefs, the Court of Appeals affirmed the
trial court’s decision in toto.86 The appellate court found that the dishonor of the checks by respondent RCBC was not
without good reason, considering that petitioner Bangayan’s account had been debited owing to his obligations as a
surety in favor of several corporations. Thus, the Court Appeals found "there was no ‘dishonest purpose,’ or ‘some moral
obliquity,’ or ‘conscious doing of wrong,’ or ‘breach of a known duty,’ or ‘some motive or interest,’ or ‘ill will’ that ‘partakes
(sic) nature of fraud’ that can be attributed" to respondent RCBC. 87 It likewise ruled that petitioner Bangayan cannot raise
the question as to the genuineness, authenticity and due execution of the Surety Agreement for the first time on appeal. 88

This Decision of the appellate court is the subject of the instant Petition for Review on Certiorari filed by petitioner
Bangayan under Rule 45 of the Rules of Court.89

Assignment of Errors

Petitioner Bangayan makes the following assignment of errors:

A. THE COURT OF APPEALS ACTED WITH GROSS ARBITRARINESS AND IN BLATANT VIOLATION OF

THE CONSTITUTIONAL RIGHTS OF THE PETITITONER TO DUE PROCESS, AND A FAIR TRIAL:

(1) WHEN IT REINSTATED THE TESTIMONY OF ELI LAO ALREADY STRICKEN OFF THE RECORDS
UPON PRIOR ORDER OF THE RTC AFFIRMED BY THE COURT OFAPPEALS AND CONFIRMED BY
THE SUPREME COURT;

(2) WHEN IT SANCTIONED THE CAVALIER ACT OF RESPONDENTS IN DEMEANING THE RULES
ON DISCOVERY PROCEDURE;

(3) WHEN IT RENDERED A DECISION WHICH IS CONTRARY TO THE FACTS AND THE EVIDENCE
PRESENTED AT THE TRIAL; and

(4) WHEN IT REFUSED TO APPLY THE LAWS SQUARELY IN POINT ON THE MATTER IN
CONTROVERSY.

B. THE HONORABLE COURT OF APPEALS DECIDED THIS CASE IN A WAY NOT IN ACCORD WITH THE
APPLICABLE DECISIONS OF THE HONORABLE SUPREME COURT;

C. THERE ARE SPECIAL AND IMPORTANT REASONS THAT REQUIRE A REVIEW OF THE CA DECISION;

D. THE DECISION OF THE COURT OF APPEALS … IS NEITHER JUST NOR IN ACCORD WITH THE RULES OF LAW
AND JURISPRUDENCE NOR IS IT EQUITABLE AND IT IGNORES THE PREVIOUS RULINGS OF THE SUPREME
COURT IN EARLIER PRECEDENT CASES.90

The Issues

A. Whether respondent RCBC was justified in dishonoring the checks, and, consequently, whether petitioner
Bangayan is entitled to damages arising from the dishonor.

B. Whether there was reversible error on the part of the lower court in allowing the testimony of Mr. Lao, despite
its earlier Order to strike off the testimony.

C. Whether respondent RCBC violated the Bank Secrecy Act.

The Ruling of the Court

Preliminarily, petitioner Bangayan raises questions of fact 91 regarding the authenticity of the Surety Agreement and the
events leading up to the dishonor of the seven checks. However, petitions for review on certiorari under Rule 45 are
limited only to pure questions of law92 and, generally, questions of fact are not reviewable 93 since this Court is not a trier of
facts.94 Although respondent RCBC briefly treated this procedural matter, 95 the Court finds that the instant Petition is
indeed subject to dismissal because the determination of questions of fact is improper in a Rule 45 proceeding. 96 In any
case, even if procedural rules were to be relaxed at this instance, the substantial merits of petitioner Bangayan’s cause is
nonetheless insufficient to reverse the decisions of the trial and appellate courts, as will be discussed in detail below.

A. There was no malice or bad faith on the part of respondent RCBC in the dishonor of the checks, since its actions were
justified by petitioner Bangayan’s obligations under the Surety Agreement.

The Court is unconvinced by petitioner Bangayan’s arguments that respondent RCBC acted with malice or bad faith in
dishonoring the seven checks, which would entitle him to an award of damages.

At the heart of the controversy is the Surety Agreement that secured the obligations of the nine corporations in favor of
respondent RCBC.
Petitioner Bangayan denies the genuineness, authenticity and due execution of the alleged agreement on the following
grounds: (a) his signature on the document is not genuine; (b) the Surety Agreement was never notarized; and (c) the
alleged accounts, being guaranteed, appear in a separate piece of paper that does not bear his signature or conformity. 97

Both the trial and the appellate courts gave credence to the Surety Agreement, which categorically guaranteed the four
corporations’ obligations to respondent RCBC under the letters of credit. Petitioner Bangayan did not provide sufficient
reason for the Court to reverse these findings. The evidence on record supports the conclusion arrived at by the lower
court and the Court of Appeals.

First, aside from his bare allegations, petitioner Bangayan failed to establish how his signature in the Surety Agreement
was forged and therefore, not genuine.

Before a private document is offered as authentic, its due execution and authenticity must be proved: (a) either by anyone
who has seen the document executed or written; or (b) by evidence of the genuineness of the signature or handwriting of
the maker.98 As a rule, forgery cannot be presumed and must be proved by clear, positive and convincing evidence. 99 The
burden of proof rests on the party alleging forgery. 100 Mere allegation of forgery is not evidence.101

Mr. Lao, witness for respondent RCBC, identified the Surety Agreement 102 as well as the genuineness of petitioner
Bangayan’s signature therein using petitioner’s signature cards in his bank accounts. 103 The trial and the appellate courts
gave due credence to the identification and authentication of the Surety Agreement made by Mr. Lao. 104

In Deheza-Inamarga v. Alano,105 the Court ruled that:

The question of forgery is one of fact. It is well-settled that when supported by substantial evidence or borne out by the
records, the findings of fact of the Court of Appeals are conclusive and binding on the parties and are not reviewable by
this Court.

It is a hornbook doctrine that the findings of fact of trial courts are entitled to great weight on appeal and should not be
disturbed except for strong and valid reasons. It is not a function of this Court to analyze and weigh evidence by the
parties all over again. Our jurisdiction is limited to reviewing errors of law that might have been committed by the Court of
Appeals. Where the factual findings of the trial court are affirmed in toto by the Court of Appeals as in this case, there is
great reason for not disturbing such findings and for regarding them as not reviewable by this Court. (Emphasis supplied)

Furthermore, petitioner Bangayan did not adduce any evidence to support his claim of forgery, despite the opportunity to
do so. Considering that there was evidence on record of his genuine signature and handwriting (the signature card and
the dishonored checks themselves), nothing should have prevented petitioner Bangayan from submitting the Surety
Agreement for examination or comparison by a handwriting expert.

Even respondent RCBC did not interpose any objection when the possibility of forwarding the signature card and Surety
Agreement forwarded to the National Bureau of Investigation for examination was raised during the testimony of Mr. Lao:

ATTY. LOYOLA

Considering the delicate nature or the significance of the signatures in the signature cards and the risk of my admitting the
authenticity of a mere xerox copies [sic] and considering further that it is our position that the surety agreement as well as
specimen signatures on the signature cards must be submitted to the Court and later forwarded to the NBI, Question
Document Section, for examination, I am in no position to admit now that the machine copies in the signature cards are
faithful reproduction. Accordingly, I am hoping at this stage that the surety agreement and the signature cards be
forwarded to the NBI later on for examination and in the mean time, the questioned documents be entrusted to the
custody of the Honorable Court.

ATTY. POBLADOR

With respect to the manifestation of counsel that the documents with the signatures should be submitted to the NBI, we
have no objection, but at this juncture, we are only asking, Your Honor, if the xerox copies are faithful reproduction of the
original.106 (Emphasis supplied)

Despite his intention to have the signatures in the Surety Agreement compared with those in the signature cards,
petitioner Bangayan did not have the questioned document examined by a handwriting expert in rebuttal and simply relied
on his bare allegations. There is no clear, positive and convincing evidence to show that his signature in the Surety
Agreement was indeed forged. As petitioner failed to discharge his burden of demonstrating that his signature was forged,
there is no reason to overturn the factual findings of the lower courts with respect to the genuineness and due execution
of the Surety Agreement.

Second, the mere absence of notarization does not necessarily render the Surety Agreement invalid.

Notarization of a private document converts the document into a public one, renders it admissible in court without further
proof of its authenticity, and is entitled to full faith and credit upon its face. 107 However, the irregular notarization — or, for
that matter, the lack of notarization — does not necessarily affect the validity of the contract reflected in the document. 108
On its face, the Surety Agreement is not notarized, even if respondent RCBC’s standard form for that agreement makes
provisions for it. The non-completion of the notarization form, however, does not detract from the validity of the
agreement, especially in this case where the genuineness and due authenticity of petitioner Bangayan’s signature in the
contract was not successfully assailed.

The failure to notarize the Surety Agreement does not invalidate petitioner Bangayan’s consent to act as surety for the
nine corporations’ obligations to respondent RCBC. Contracts are obligatory in whatever form they may have been
entered into, provided all essential requisites are present 109 and the notarization is not an essential requisite for the validity
of a Surety Agreement.110

Third, that the annex of the Surety Agreement does not bear petitioner Bangayan’s signature is not a sufficient ground to
invalidate the main agreement altogether. As the records will bear out, the Surety Agreement enumerated the names of
the corporation whose obligations petitioner Bangayan are securing. The annex to the Surety Agreement enumerated not
only the names of the corporations but their respective addresses as well. 111 The corporations enumerated in the annex
correspond to the nine corporations enumerated in the main body of the Surety Agreement. Ordinarily, the name and
address of the principal borrower whose obligation is sought to be assured by the surety is placed in the body of the
agreement, but in this case the addresses could not all fit in the body of the document, thus, requiring that the address be
written in an annex. The Surety Agreement itself noted that the principal places of business and postal addresses of the
nine corporations were to be found in an "attached" document.

Fourth, petitioner Bangayan never contested the existence of the Surety Agreement prior to the filing of the Complaint.
When Mr. Lao informed him of the letter from the BOC regarding the failure of the three corporations to pay the customs
duties under the letters of credit, the petitioner assured respondent bank that "he is doing everything he can to solve the
problem."112 If petitioner Bangayan purportedly never signed the Surety Agreement, he would have been surprised or at
least perplexed that respondent RCBC would contact him regarding the three corporations’ letters of credit, when, as he
claims, he never agreed to act as their surety. Instead, he acknowledged the situation and even offered to solve the
predicament of these borrower corporations. In fact, Atty. Loyola, petitioner’s counsel in this case, even obtained copies of
the BOC receipts after the three corporations paid the customs duties for their importation under the letters of credit giving
a possible interpretation that petitioner was himself answering the obligations of the three corporations for the unpaid
customs duties.

It must be emphasized that petitioner Bangayan did not complain against the four corporations which had benefitted from
his bank account. He claims to have no reasonable connection to these borrower corporations and denies having signed
the Surety Agreement. If true, nothing should have stopped him from taking these corporations to court and demanding
compensation as well as damages for their unauthorized use of his bank account. Yet, these bank accounts were put on
hold and/or depleted by the letters of credit issued to the four entities. That petitioner did not include them in the present
suit strengthens the finding that he had indeed consented to act as surety for those entities, and that there seems to be no
arm’s length relationship between petitioner and the three entities.

Whatever damage to petitioner Bangayan’s interest or reputation from the dishonor of the seven checks was a
consequence of his agreement to act as surety for the corporations and their failure to pay their loan obligations,
advances and other expenses.

With respect to the first two dishonored checks, respondent RCBC had already put on hold petitioner Bangayan’s account
to answer for the customs duties being demanded from the bank by the BOC. In fact, the trial court considered the referral
of these checks to petitioner Bangayan as an effort by respondent RCBC to allow its depositor an opportunity to "arrange
his accounts and provide funds for his checks."113 It likewise appeared to the appellate court that the funds in petitioner’s
account served as the lien of the custom duties assessed; thus, the funds cannot be considered as sufficient to cover
future transactions.114

On the other hand, the five other checks were subsequently dishonored because petitioner Bangayan’s account was by
that time already depleted due to the partial payment of Lotec Marketing’s loan obligation. 115 Although the lien earlier
imposed on petitioner’s account was lifted when the three corporations paid the customs duties, 116 the account was almost
completely depleted when the funds were subsequently used to partially pay Lotec Marketing’s outstanding obligation
under the fourth letter of credit.117 Respondent RCBC was compelled to fully debit the funds to satisfy the main loan
obligation of Lotec Marketing, which petitioner had guaranteed in joint and several capacity.

What must be underscored in respondent RCBC’s immediate action of applying petitioner Bangayan’s account to the
Lotec Marketing is the nature of the loan instrument used in this case – a letter of credit. In a letter of credit, the
engagement of the issuing bank (respondent RCBC in this instance) is to pay the seller or beneficiary of the credit (or the
advising bank, Korean Exchange Bank, in this instance) once the draft and the required documents are presented to
it.118 This "independence principle" in letters of credit 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.119

In this case, respondent RCBC, as the issuing bank for Lotec Marketing’s letter of credit had to make prompt payment to
Korea Exchange Bank (the advising bank) when the obligation became due and demandable. Precisely because of the
independence principle in letters of credit and the need for prompt payment, 120 respondent RCBC required a Surety
Agreement from petitioner Bangayan before issuing the letters of credit in favor of the four corporations, including Lotec
Marketing.
Under Articles 2199121 and 2200122 of the Civil Code, actual or compensatory damages are those awarded in satisfaction
of or in recompense for loss or injury sustained.123 They proceed from a sense of natural justice and are designed to repair
the wrong that has been done.124

In all seven dishonored checks, respondent RCBC properly exercised its right as a creditor under the Surety Agreement
to apply the petitioner Bangayan’s funds in his accounts as security for the obligations of the four corporations under the
letters of credit. Thus, petitioner Bangayan cannot attribute any wrong or misconduct to respondent RCBC since there
was no malice or bad faith on the part of respondent in dishonoring the checks. Any damage to petitioner arising from the
dishonor of those checks was brought about, not by the bank’s actions, but by the corporations that defaulted on their
obligations that petitioner had guaranteed to pay. The trial and the appellate courts, therefore, committed no reversible
error in disallowing the award of damages to petitioner.

B. The trial court did not commit reversible error when it reinstated the testimony of Mr. Lao and allowed petitioner
Bangayan to cross-examine him.

Petitioner Bangayan also assails the lower court’s order that reinstated the direct testimony of Mr. Lao, respondent
RCBC’s lone witness. Petitioner claims that Judge Santiago acted with partiality by reinstating Mr. Lao’s testimony,
because this Court in another case had already sustained the lower court’s earlier Order striking out the testimony.
Hence, petitioner says that the judge’s reinstatement of Mr. Lao’s testimony was in violation of petitioner’s right to due
process.

Petitioner Bangayan’s arguments are unmeritorious.

Discretionary power is generally exercised by trial judges in furtherance of the convenience of the courts and the litigants,
the expedition of business, and in the decision of interlocutory matters on conflicting facts where one tribunal could not
easily prescribe to another the appropriate rule of procedure. 125 Thus, the Court ruled:

In its very nature, the discretionary control conferred upon the trial judge over the proceedings had before him implies the
absence of any hard-and-fast rule by which it is to be exercised, and in accordance with which it may be reviewed. But the
discretion conferred upon the courts is not a willful, arbitrary, capricious and uncontrolled discretion. It is a sound, judicial
discretion which should always be exercised with due regard to the rights of the parties and the demands of equity and
justice. As was said in the case of The Styria vs. Morgan (186 U.S., 1, 9): "The establishment of a clearly defined rule of
action would be the end of discretion, and yet discretion should not be a word for arbitrary will or inconsiderate action." So
in the case of Goodwin vs. Prime (92 Me., 355), it was said that "discretion implies that in the absence of positive law or
fixed rule the judge is to decide by his view of expediency or by the demands of equity and justice."

There being no "positive law or fixed rule" to guide the judge in the court below in such cases, there is no "positive law or
fixed rule" to guide a court of appeals in reviewing his action in the premises, and such courts will not therefore attempt to
control the exercise of discretion by the court below unless it plainly appears that there was "inconsiderate action" or the
exercise of mere "arbitrary will", or in other words that his action in the premises amounted to "an abuse of discretion." But
the right of an appellate court to review judicial acts which lie in the discretion of inferior courts may properly be invoked
upon a showing of a strong and clear case of abuse of power to the prejudice of the appellant, or that the ruling objected
to rested on an erroneous principle of law not vested in discretion. 126 (Emphasis supplied)

Prior to a final judgment, trial courts have plenary control over the proceedings including the judgment, and in the exercise
of a sound judicial discretion, may take such proper action in this regard as truth and justice may require. 127

In the instant case, the trial court was within the exercise of its discretionary and plenary control of the proceedings when
it reconsidered motu propio its earlier order striking out the testimony of Mr. Lao 128 and ordered it reinstated.129 The order
of the judge cannot be considered as "willful, arbitrary, capricious and uncontrolled discretion," since his action allowed
respondent bank to present its case fully, especially considering that Mr. Lao was the sole witness for the defense.

Petitioner Bangayan’s reliance130 on the Decisions of the Court of Appeals (CA-G.R. SP No. 31865) and this Court (G.R.
No. 115922) with respect to respondent RCBC’s Petition is misplaced. Contrary to his claim, what respondent RCBC
questioned in those cases was the denial by Judge Santiago of its Motion for Inhibition. 131 As respondent pointed out, its
Petitions to the Court of Appeals and the Court simply prayed for the reversal of the denial of the Motion for Inhibition and
did not include the Order striking out the testimony of Mr. Lao. Even the appellate court (CA-G.R. CV No. 48479) noted
that "what was resolved by the High Court was the issue of Inhibition of the Judge and not the striking out of the testimony
of Mr. Eli Lao."132

Neither can petitioner Bangayan claim any deprivation of due process when the trial court ordered the reinstatement of
Mr. Lao’s testimony without any motion or prayer from respondent RCBC. The right of a party to confront and cross-
examine opposing witnesses in a judicial litigation, be it criminal or civil in nature, or in proceedings before administrative
tribunals with quasi-judicial powers, is a fundamental right which is part of due process. 133 This right, however, has always
been understood as requiring not necessarily an actual cross-examination but merely an opportunity to exercise the right
to cross-examine if desired.134 What is proscribed by statutory norm and jurisprudential precept is the absence of the
opportunity to cross-examine.135

In this case, petitioner Bangayan’s right to due process was not violated, as he was given the freedom and opportunity to
cross-examine and confront Mr. Lao on the latter’s testimony. Even if respondent RCBC had not filed any motion, it was
well within the court’s discretion to have Mr. Lao’s testimony reinstated in the "interest of substantial justice." The
proceedings in the trial court in this civil case were adversarial in nature insofar as the parties, in the process of attaining
justice, were made to advocate their respective positions in order to ascertain the truth. 136 The truth-seeking function of the
judicial system is best served by giving an opportunity to all parties to fully present their case, subject to procedural and
evidentiary rules. Absent any blatant neglect or willful delay, both parties should be afforded equal latitude in presenting
the evidence and the testimonies of their witnesses in favor of their respective positions, as well as in testing the credibility
and the veracity of the opposing party’s claims through cross-examination.

The Court finds no reversible error on the part of the trial court in allowing the full presentation of the reinstated testimony
of respondent RCBC’s lone witness, especially since the other party was afforded the occasion to cross-examine the
witness and in fact availed himself of the opportunity. Although he expressly reserved his right to question the court’s
reinstatement of the testimony of the witness, petitioner Bangayan did not satisfactorily offer convincing arguments to
overturn the trial court’s order. That the court gave petitioner the opportunity to cross-examine Mr. Lao – a remedy that
petitioner even fully availed himself of – negates the allegation of bias against the Judge.

The timing of petitioner Bangayan’s allegations of prejudice on the part of Judge Santiago is suspect, since the latter had
already rendered a Decision unfavorable to petitioner’s cause.

A motion to inhibit shall be denied if filed after a member of the court has already given an opinion on the merits of the
case, the rationale being that "a litigant cannot be permitted to speculate on the action of the court . . . (only to) raise an
objection of this sort after the decision has been rendered."137

When respondent RCBC moved for Judge Santiago’s inhibition, petitioner even interposed an objection and characterized
as unfounded respondent bank’s charge of partiality.138 It is now too late in the day to suddenly accuse Judge Santiago of
prejudice in the proceedings below, after he has already rendered an unfavorable judgment against petitioner. If at all, the
latter’s claim that Judge Santiago was biased in favoring respondent RCBC is a mere afterthought that fails to support a
reversal by the Court.

C. Respondent RCBC did not violate the Bank Secrecy Act.

The Court affirms the trial court’s findings which were likewise concurred with by the Court of Appeals that the alleged
violation of the Bank Secrecy Act was not substantiated:

The Customs’s investigation with a subpoena/duces tecum sent to witness Mr. Lao on the three companies, Final Sales
Enterprises, Peak Marketing and LBZ Commercial, guaranteed by plaintiff naturally raised an alarm. Mr. Lao was asked to
bring documents on the questioned importations. The witness denied having given any statement in connection therewith.
No evidence was introduced by plaintiff to substantiate his claim that defendant bank gave any classified information in
violation of Republic Act No. 1405. On this score, plaintiff has no cause of action for damages against said defendant
RCBC.139

In his Memorandum, petitioner Bangayan argues that there was a wrongful disclosure by respondents RCBC and Philip
Saria of confidential information regarding his bank accounts in violation of the Bank Secrecy Act. 140 However, petitioner
failed to identify which confidential information respondents divulged before the BOC that would make them liable under
the said law.

Section 2 of the Bank Secrecy Act provides:

All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued
by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby considered as of an
absolutely confidential nature and may not be examined, inquired or looked into by any person, government official,
bureau or office, except upon written permission of the depositor, or in cases of impeachment, or upon order of a
competent court in cases of bribery or dereliction of duty of public officials, or in cases where the money deposited or
invested is the subject matter of the litigation.

Petitioner Bangayan claims that respondent Saria divulged confidential information through the Affidavit he submitted to
the BOC.141 However, nothing in respondent Saria’s Affidavit before the BOC showed that details of petitioner Bangayan’s
bank accounts with respondent bank was disclosed. If at all, respondent Saria merely discussed his functions as an
account officer in respondent bank and identified petitioner as the one who had guaranteed the payment or obligations of
the importers under the Surety Agreement.

According to petitioner Bangayan, the responses of respondent RCBC’s officers in relation to the BOC’s actions led to
unsavory news reports that "disparaged petitioner’s good character and reputation" and exposed him to "public ridicule
and contempt."142 However, as the appellate court correctly found, the humiliation and embarrassment that petitioner
Bangayan suffered in the business community was not brought about by the alleged violation of the Bank Secrecy Act; it
was due to the smuggling charges filed by the Bureau of Customs which found their way in the headlines of
newspapers.143

Both the trial and appellate courts correctly found that petitioner Bangayan did not satisfactorily introduce evidence "to
substantiate his claim that defendant bank gave any classified information" in violation of the Bank Secrecy Act. Failing to
adduce further evidence in the instant Petition with respect to the bank’s purported disclosure of confidential information
as regards his accounts, petitioner cannot be awarded any damages arising from an unsubstantiated and unproved
violation of the Bank Secrecy Act.

Rules of Discovery
The Court finds that petitioner Bangayan’s argument as regards the bank’s purported failure to comply with the rules of
discovery is not substantive enough to warrant further discussion by this Court. Petitioner has not alleged any different
outcome that would be generated if we were to agree with him on this point. If petitioner is unsatisfied with respondent
RCBC’s responses, then his remedy is to expose the falsity (if any) of the bank’s responses in the various modes of
discovery during the trial proper. He could have confronted respondent with contradictory statements, testimonies or other
countervailing evidence. The Court affirms the findings of the appellate court that the rules of discovery were not treated
lightly by respondent RCBC.1441avvphi1

In summary, petitioner Bangayan failed to establish that the dishonor of the seven checks by respondent RCBC entitled
him to damages, since the dishonor arose from his own voluntary agreement to act as surety for the four corporations’
letters of credit. There was no bad faith or malice on the part of respondent bank, as it merely acted within its rights as a
creditor under the Surety Agreement.

IN VIEW OF THE FOREGOING, the instant Petition for Review on Certiorari filed by Ricardo B. Bangayan
is DENIED. The Decisions of the trial court and appellate court dismissing the Complaint for damages filed by Bangayan
against respondents Rizal Commercial Banking Corporation and Philip Saria are hereby AFFIRMED.

SO ORDERED.