LETTERS OF CREDIT

G.R. No. 74886 December 8, 1992

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

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 fol-
lows:
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 (Ex-
hibit B, Plaintiff's Folder of Exhibits, p 2). To effect payment for said machineries, the defendant-appel-
lant applied for a commercial letter of credit with the Prudential Bank and Trust Company in favor of Nis-
sho. 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 de-
fendant-appellant which accepted delivery of the same. To enable the defendant-appellant to take deliv-
ery 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, de-
fendant-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 Cor-
poration 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 re-
mained 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 de-
fendant 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 re-
verse 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 ma-
chines, 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 un-
paid 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 judi-
cial admissions of Anacleto R. Chi that he is at least a simple guarantor of the said trust receipt obliga-
tion; (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) interpret-
ing "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 justi-
fied. In the instant case, the relationship existing between the petitioner and Philippine Rayon is gov-
erned 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 be-
cause 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 solidari-
ly 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 re-
spondent 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 au-
tomatically 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. Be-
sides, 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 ac-
cessory 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 PETITION-
ER'S CLAIM FOR FULL REIMBURSEMENT AGAINST THE PRIVATE RESPONDENTS FOR THE PAYMENT PETI-
TIONER 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 EN-
RICHMENT;
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 RE-
SPONDENT 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 RE-
CEIPT (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 com-
plied 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 af-
ter 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 ac-
ceptance 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 Ray-
on'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 obli-
gated 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 cus-
tomer that the issuer will honor drafts or other demands for payment upon compliance with the condi-
tions 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 Instru-
ments 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 nec-
essary 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 draw-
er; 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 issu-
ing, 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 peti-
tioner. 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 accept-
ance, it would be the petitioner — and not Philippine Rayon — which had to accept the same for the lat-
ter 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 there-
on upon petitioner's payment thereof. Such is the essence of the letter of credit issued by the petition-
er. A different conclusion would violate the principle upon which commercial letters of credit are found-
ed 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 let-
ter 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 dis-
tant 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 pay-
ment. Their purpose is to insure to a seller payment of a definite amount upon presentation of docu-
ments. 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 docu-
ments are presented.
The trial court and the public respondent likewise erred in disregarding the trust receipt and in not hold-
ing 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 impor-
tance 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 af-
ter his advances have been fully repaid and after the importer has fulfilled the other terms of the con-
tract.
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 Mort-
gage 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 representa-
tive 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 De-
cree as the entruster, and another person referred to in this Decree as the entrustee, whereby the en-
truster, 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 de-
livery to the entruster of a signed document called the "trust receipt" wherein the entrustee binds him-
self to hold the designated goods, documents or instruments in trust for the entruster and to sell or oth-
erwise 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 re-
ceipt or the goods, instruments themselves if they are unsold or not otherwise disposed of, in accord-
ance 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 Yu-
pangco Cotton Mills," and that "as trustees of the property covered by the trust receipt, . . . and there-
fore 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 oth-
er 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 petition-
er by Philippine Rayon of the proceeds of the sale of the machinery covered by the trust receipt, such re-
lief 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 viola-
tion 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 respond-
ent, 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 peti-
tioner 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 COM-
PANY 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-fulfill-
ment 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.) Anacleto R. Chi
ANACLETO 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 de-
fendant-appellee Chi of (sic) the guaranty agreement, Exhibit "C-1", will make it an actionable docu-
ment. It should be noted that Exhibit "C-1" was prepared and printed by the plaintiff-appellant. A perus-
al of Exhibit "C-1" shows that it was to be signed and executed by two persons. It was signed only by de-
fendant-appellee Chi. Exhibit "C-1" was to be witnessed by two persons, but no one signed in that ca-
pacity. 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 plain-
tiff-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 ob-
ligation of a guarantor is merely accessory under Article 2052 of the Civil Code and subsidiary under Arti-
cle 2054 of the Civil Code. Therefore, the liability of the defendant-appellee arises only when the princi-
pal debtor fails to comply with his obligation. 27
Our own reading of the questioned solidary guaranty clause yields no other conclusion than that the ob-
ligation 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 ob-
ligation. 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 be-
tween 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 ei-
ther 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 re-
solved 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 affix-
ing of his signature thereon. It is, therefore, a contract of adhesion; 28 as such, it must be strictly con-
strued 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 acknowl-
edged 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 cer-
tain 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 docu-
ment.
And now to the other ground relied upon by the petitioner as basis for the solidary liability of Chi, name-
ly the criminal proceedings against the latter for the violation of P.D. No. 115. Petitioner claims that be-
cause 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 Num-
bered 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 juridi-
cal entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, em-
ployees or other officials or persons therein responsible for the offense, without prejudice to the civil lia-
bilities 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, as-
sociation 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 imprison-
ment, 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 oth-
er juridical entities cannot be put in jail. However, it is these entities which are made liable for the civil li-
ability arising from the criminal offense. This is the import of the clause "without prejudice to the civil li-
abilities arising from the criminal offense." And, as We stated earlier, since that violation of a trust re-
ceipt constitutes fraud under Article 33 of the Civil Code, petitioner was acting well within its rights in fil-
ing 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 re-
spondent 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 afore-
mentioned 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-defend-
ant 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 re-
spect to or arising out of the same transaction or series of transactions is alleged to exist, whether joint-
ly, 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 plain-
tiffs 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 per-
mit 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 obliga-
tion, should also be paid; these, however, shall run only from the date of the filing of the complaint. At-
torney'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 Philip-
pine 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 peti-
tioner
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, neces-
sarily, 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 (Exhib-
its "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.
Gutierrez, Jr., Bidin, Romero and Melo, JJ., concur.

====

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 Irrevoca-
ble Letter of Credit No. 20272/81 purportedly issued by Bank of Ayudhya, Samyaek Branch, for the ac-
count of General Chemicals, Ltd., of Thailand in the amount of US$2,782,000.00 to cover the sale of plas-
tic 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 trans-
mitting, 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. Emi-
liano 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 condi-
tions 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 re-
imbursement 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 decla-
ration 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 proc-
essing 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 in-
formed of the developments. Sensing a fraud, Bank of America sought the assistance of the National Bu-
reau 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 Execu-
tive Vice President Barcelina Tio, who, thereafter, were criminally charged for estafa through falsifica-
tion of commercial documents. The case, however, was eventually dismissed by the Rizal Provincial Fis-
cal 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 care-
less 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 cred-
it; 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 be-
ing 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 pay-
ing. 9 To break the impasse, the buyer may be required to contract a bank to issue a letter of credit in fa-
vor 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 present-
ed 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 re-
quired 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 transac-
tion 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 determin-
ing 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 is-
sued 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 na-
tional boundaries, and it is thus not uncommon to find a dearth of national law that can adequately pro-
vide 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 ac-
ceptance 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 Cham-
ber 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 perti-
nency, 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 justi-
fied by Article 2 of the Code of Commerce which expresses that, in the absence of any particular provi-
sion in the Code of Commerce, commercial transactions shall be governed by usages and customs gener-
ally 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 ap-
peal. 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 lia-
ble, but as a confirming bank, had this been the case, it could be considered as having incurred that lia-
bility. 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 present-
ed, 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 contro-
versy 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 par-
ties, 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 de-
fense. 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 ad-
vising, 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 en-
closure is solely an advise of credit opened by the abovementioned correspondent and conveys no en-
gagement 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 let-
ter of credit, enter into a contract, or negotiated at the every least, with General Chemicals. 28 In the or-
dinary 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, let-
ters or documents, or for delay, mutilation or other errors arising in the transmission of any telecommu-
nication . . ." 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 Diction-
ary 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 In-
ter-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 In-
ter-Resin from the hardship of presenting the documents directly to Bank of Ayudhya to recover pay-
ment. (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 contin-
gent 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 af-
ter 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 pay-
ment 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 re-
course 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 agree-
ment 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 docu-
ments 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 im-
pleaded 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 act-
ed 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 par-
ties, 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 or-
dered 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.
Feliciano, Bidin, Romero and Melo, JJ., concur.

====

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 May-
nilad Water Services, Inc. (Maynilad) conformed substantially to the provisions of Sec. 2, Rule 4 of the In-
terim Rules of Procedure on Corporate Rehabilitation (Interim Rules). It forthwith issued a Stay Or-
 1
der 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
2
Subsequently, on November 27, 2003, public respondent, acting on two Urgent Ex Parte motions filed
3
by respondent Maynilad, issued the herein questioned Order 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 certifica-
tion/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
4
with grave abuse of discretion amounting to lack or excess of jurisdiction.
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 conces-
5
sion fees on the dates agreed upon in said agreement which, among other things, consisted of pay-
ments of petitioner’s mostly foreign loans.
To secure the concessionaire’s performance of its obligations under the Concession Agreement, Mayni-
lad 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 Stand-
6
by Letter of Credit in the amount of US$120,000,000 in favor of MWSS for the full and prompt perform-
ance of Maynilad’s obligations to MWSS as aforestated.
Sometime in September 2000, respondent Maynilad requested MWSS for a mechanism by which it hop-
ed 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 Ma-
jeure Notice on March 8, 2001 and unilaterally suspended the payment of the concession fees. In an ef-
fort to salvage the Concession Agreement, the parties entered into a Memorandum of Agreement
7
(MOA) on June 8, 2001 wherein Maynilad was allowed to recover foreign exchange losses under a for-
mula agreed upon between them. Sometime in August 2001 Maynilad again filed another Force Ma-
jeure 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
8
No. 1, which was based on the terms set down in MWSS Board of Trustees Resolution No. 457-2001, as
9
amended by MWSS Board of Trustees Resolution No. 487-2001, 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, claim-
ing 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 De-
cember 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
10
MWSS. On November 7, 2003, the Appeals Panel ruled that there was no Event of Termination as de-
fined 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
11
written notice 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 Or-
12
der of November 27, 2003.
PETITIONER’S CASE
Petitioner hereby raises the following issues:
1. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR AND/OR ACT PATENTLY WITHOUT JURISDIC-
TION 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 RE-
HABILITATION.
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, there-
fore, 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 consid-
ered 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/evaluat-
ing the import of the arguments and documents referred to by Maynilad, MWSS and/or creditors China-
13
trust Commercial Bank and Suez in relation to admissions, pleadings and/or pertinent records 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 re-
14
spondent Maynilad has not and has never claimed to be;
c) what is relevant is not whether the performance bond or assets of the issuing banks are part of the es-
tate of respondent Maynilad but whether the act of petitioner in commencing the process for the pay-
ment by the banks of US$98 million out of the US$120 million performance bond is covered and/or pro-
hibited 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
15
commencement; " and
e) the obligations under the Standby Letter of Credit are not solidary and are not exempt from the cov-
erage 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 au-
thority 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 sup-
port its jurisdiction over the Irrevocable Standby Letter of Credit and the banks that issued it. The sec-
tion 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 nec-
essary that the assets of the debtor come within the court’s jurisdiction to secure the same for the bene-
fit 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 reflect-
ed 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 Irrevo-
cable Standby Letter of Credit as part of its assets or liabilities, and by respondent Maynilad’s own ad-
mission it is not. In issuing the clarificatory order of November 27, 2003, enjoining petitioner from claim-
ing from an asset that did not belong to the debtor and over which it did not acquire jurisdiction, the re-
habilitation 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 guaran-
tors 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 pro-
cured 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 li-
able with the debtor. Respondent Maynilad’s claim that the banks are not solidarily liable with the debt-
or does not find support in jurisprudence.
16
We held in Feati Bank & Trust Company v. Court of Appeals that the concept of guarantee vis-à-vis the
concept of an irrevocable letter of credit are inconsistent with each other. The guarantee theory de-
stroys 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 guar-
antor’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 cus-
tomer that the issuer shall honor drafts or other demands of payment upon compliance with the condi-
17
tions specified in the credit.
Letters of credit were developed for the purpose of insuring to a seller payment of a definite amount
18
upon the presentation of documents and is thus a commitment by the issuer that the party in whose
favor it is issued and who can collect upon it will have his credit against the applicant of the letter, duly
19
paid in the amount specified in the letter. They are in effect absolute undertakings to pay the money
advanced or the amount for which credit is given on the faith of the instrument. They are primary obli-
gations and not accessory contracts and while they are security arrangements, they are not converted
20
thereby into contracts of guaranty. What distinguishes letters of credit from other accessory con-
tracts, is the engagement of the issuing bank to pay the seller once the draft and other required ship-
21
ping documents are presented to it. They are definite undertakings to pay at sight once the docu-
ments 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 is-
suing bank and the terms and conditions of the Credit are complied with, to pay at sight if the Credit
22
provides for sight payment."
23
We have accepted, in Feati Bank and Trust Company v. Court of Appeals and Bank of America NT & SA
24
v. Court of Appeals, to the extent that they are pertinent, the application in our jurisdiction of the in-
ternational 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 Philip-
 25
pine Islands v. Nery 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 obliga-
tions 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 condi-
tioned 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 reha-
26
bilitation case, as held in Traders Royal Bank v. Court of Appeals and reiterated in Philippine Blooming
27
Mills, Inc. v. Court of Appeals, 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 sure-
ty for the debts or obligations of the debtor. The debts or obligations for which a surety may be liable in-
clude 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
28
the Concession Agreement and herein petitioner is authorized by the banks to draw on it by the sim-
ple 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 subsist-
ing, 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 Certifica-
29
tion arose.
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 ex-
cept 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 ju-
risdiction 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’ memo-
randa:
1. Respondent Maynilad argues that petitioner had a plain, speedy and adequate remedy under the In-
terim Rules itself which provides in Sec. 12, Rule 4 that the court may on motion or motu proprio, termi-
nate, 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,
 30
2003, where the parties including the creditors, Suez and Chinatrust Commercial "presented their re-
31
spective arguments." The public respondent then ruled, "after carefully considering/evaluating the im-
port 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 fa-
32
vor of Maynilad." Hence to pursue their opposition before the same court would result in the presen-
tation 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 appel-
late court." In this situation, it had no other remedy but to seek recourse to us through this petition
for certiorari.
33
In Silvestre v. Torres and Oben, 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
34
danger of failure of justice without the writ, that must usually determine the propriety of certiorari.
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 rehabilita-
tion 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 re-
spondent 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 rehabilita-
tion 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 Or-
der herein previously issued is hereby LIFTED. In view of the urgency attending this case, this decision is
immediately executory.
No costs.
SO ORDERED.
Davide, Jr., Panganiban, Ynares-Santiago, and Carpio, JJ., concur.

===

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 Irrevo-
cable 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 Documen-
tary Credits (1962 Revision).
The logs were thereafter loaded on the vessel "Zenlin Glory" which was chartered by Christiansen. Be-
fore its loading, the logs were inspected by custom inspectors Nelo Laurente, Alejandro Cabiao, Estani-
slao 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 con-
dition 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 re-
quests 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 pri-
vate 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 certifica-
tion 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 Devel-
opment 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 In-
stance of Rizal. The petitioner was impleaded as defendant before the lower court only to afford com-
plete 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 inform-
ing the Court and his counsel. Hence, Villaluz, filed an amended complaint to make the petitioner solida-
rily 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 pay-
ment 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 de-
fraud 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 irrevo-
cable 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 as-
sumed the very same undertaking as the issuing bank under the terms of the letter of credit.
xxx xxx xxx
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 noti-
fying 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 ef-
fect 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. Marti-
nez, 5 Phil. 67).
The defendant BANK, in insisting upon the certification of defendant CHRISTIANSEN as a condition prec-
edent to negotiating the letter of credit, likewise in the Court's opinion acted in bad faith, not only be-
cause 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 de-
pended 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 respond-
ent. 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 Novem-
ber 5, 1986, it filed a notice of appeal.
On November 10, 1986, the private respondent filed a motion for the immediate execution of the judg-
ment 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 exe-
cution of the judgment.
The Court of Appeals in a decision dated April 9, 1987 granted the petition and nullified the order of exe-
cution, the dispositive portion of the decision states:
WHEREFORE, the petition for certiorari is granted. Respondent Judge's order of execution dated Decem-
ber 29, 1986, as well as his order dated January 14, 1987 denying the petitioner's urgent motion to sus-
pend 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 City-
trust 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 Oc-
tober 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 ad-
vance 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), con-
firmed 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 guaran-
ty 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 ne-
gotiation, 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 cer-
tification, 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 pro-
cedural 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 let-
ter 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 dan-
gerous 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 rela-
tions between the parties.
And even if the U.C.P. was not incorporated in the letter of credit, we have already ruled in the affirma-
tive 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 enunci-
ates 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 involv-
ing 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 en-
gagement of that bank to the beneficiary and bona fide holders of drafts drawn and/or documents pre-
sented 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 undertak-
ing 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 au-
thorization 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 docu-
ments 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 issu-
ing bank may not without the consent of the beneficiary (seller) and the applicant (buyer) revoke his un-
dertaking 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 correspond-
ent bank in accepting the instructions of the issuing bank has also confirmed the letter of credit. Anoth-
er 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 notify-
ing 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, Commer-
cial 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 negotia-
tion, 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 Ag-
bayani, 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 im-
ply 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 fol-
lows 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 Kron-
man 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 con-
firmed 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 agree-
ment between them be construed as an act of confirmation is rather far-fetched, for it depends princi-
pally 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 docu-
mentary credit.
Of course, it may be presumed that the petitioner loaned the money to the private respondent in antici-
pation that it would later be paid by the latter upon the receipt of the letter. Yet, we would have no ba-
sis 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 mere-
ly 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 ne-
gotiation 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 to-
ward 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. Ab-
sent any definitive proof that it has confirmed the letter of credit or has actually negotiated with the pri-
vate 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 respond-
ent) 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 prop-
erty 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 ad-
vanced 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 no-
tion 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 ad-
vance 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 peti-
tioner is only a notifying bank, its acceptance of the instructions of the issuing bank will not create es-
toppel on its part resulting in the acceptance of the trust. Precisely, as a notifying bank, its only obliga-
tion 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 King-
dom 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 let-
ter of credit issued by the latter.
The contract between the two has no bearing as to the non-compliance by the buyer with the agree-
ment 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 re-
fusal 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 guar-
antee 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 con-
flict 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 ben-
eficiary. (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 man-
dated to or expected of it. As an agent of the issuing bank, it has only to follow the instructions of the is-
suing 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 cred-
it, 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 incorpo-
rated 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 con-
cerned 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 re-
quired 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 pe-
tition 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 is-
sued 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 Glo-
ry", 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 de-
cision of the Court of Appeals dated June 29, 1990. The amended complaint in Civil Case No. 15121 is
DISMISSED.
SO ORDERED.
Feliciano, Bidin and Davide, Jr., JJ., concur.
Fernan, C.J., took no part.

===

G.R. No. L-100831 December 17, 1993

RELIANCE COMMODITIES, INC., petitioner,
vs.
DAEWOO INDUSTRIAL CO., LTD., respondent.
Ongkiko & Dizon Law Offices for petitioner.
Lao, Veloso-Lao & Lao for private respondent.

FELICIANO, J.:
On 9 January 1980, petitioner Reliance Commodities, Inc. ("reliance") and private respondent Daewoo
Industrial Co., Ltd. ("Daewoo") entered into a contract of sale under the terms of which the latter under-
took to ship and deliver to the former 2,000 metric tons of foundry pig iron for the price of
US$404,000.00. Pursuant to this contract, Daewoo shipped from Pohang, Republic of Korea, 2,000 met-
ric tons of foundry pig iron on board the M/S Aurelio III under Bill of Lading No. PIP-1 for carriage to and
delivery in Manila to its consignee, Reliance. The shipment was fully paid for. Upon arrival in Manila, the
subject cargo was found to be short of 135.655 metric tons as only 1,864.345 metric tons were dis-
charged and delivered to Reliance.
On 2 May 1980, another contract was entered into between the same parties for the purchase of anoth-
er 2,000 metric tons of foundry pig iron. Daewoo acknowledged the short shipment of 135.655 metric
tons under the 9 January 1980 contract and, to compensate Reliance therefor, bound itself to reduce
the price by US$1 to US$2 per metric ton of pig iron for succeeding orders. This undertaking was made
part of the 2 May 1980 contract. However, that contract was not consummated and was later super-
seded by still another contract dated 31 July 1980.
The 31 July 1980 contract read as follows:
CONFIRMATION OF ORDER
SALES NOTE No. HSB-SN/S001-R
To Messrs: Reliance Commodities, Inc.
161, 9th Street, 10th Avenue
Caloocan City
Reference: HSB-PI/8019-R
Contracted through:
Order No.:
Commodity: Foundry Pig Iron
Spec.: JIS G 2202 Class 1-1C
Quantity: 2,000MT
Price: US $190.30/MT C&F Manila
Amount: US $380,600.00
Packing: Bare Loose
Shipment: August
Destination: Manila
Payment: By an irrevocable of sight letter of credit in favor of Daewoo Industrial Co., Ltd., 541 5th
Street, namdaemunro, Jung-Gu, Seoul, Korea.
Remarks: Other terms and conditions as per attached sheet.
We confirm our sales as specified herein. Subject to the terms and conditions set forth herein, this con-
firmation of order ("the Contract") constitutes a contract between Daewoo Industrial Co. Ltd. ("Seller")
and the addressee ("Buyer"). Other terms and conditions of the Contract are on the back hereof. If you
find anything herein not in order, please let us know immediately, if necessary by telex, cable or tele-
gram. Kindly sign and return the duplicate after confirming the above.
Read and agreed to:
Name of addressee: Daewoo Industrial Co., Ltd.
By: (SGD) MR SAMUEL CHUASON By: (SGD) JA-HYUNG RYU
Date: July 31, 1980 Date: July 31, 19801
The attached sheet referred to above set out the following:
Reliance Commodities, Inc.
Our Reference No. HSB-PI/SO19-R
1. Invoicing: Actual Weight
2. Chemical Composition (%):
Carbon: 3.30 min. (aiming 3.80 min.)
Silicon: 2.21-2.60 (aiming 2.60)
Manganese: 0.30-1.00
Phosphorous: 0.45 max. (aiming 0.25 max.)
Sulfur: 0.05 max.
3. Quantity Tolerance: +10 percent of total quantity should be allowed.
4. Unit Weight: 5 kgs. + 1 kg. (one notch)
5. Broken pieces of twenty (20%) percent should be allowed.
6. All disputes, controversies, or differences which may arise between the parties, out of or in relation to
or in connection with this contract, or for the breach thereof, shall be finally settled by arbitration in Ko-
rea in accordance with the rules and regulations of Korea commercial arbitration association or in the
Philippines in accordance with the Philippine arbitration rules.
7. Letter of credit should be opened on or before August 7, 1980.
8. Other terms and conditions, if necessary, are to be solved later by mutual agreement.
9. Mill sheets and copies of non-negotiable documents to be sent to buyer by airmail immediately after
shipment.
10. This Sales Note No. HSB-SN/S001R cancels Sales Note No. HSB-SN/8001 dated May 2, 1980.2
On August 1, 1980, Reliance, through its Mrs. Samuel Chuason, filed with the China Banking Corpora-
tion, an application for a Letter of Credit (L/C) in favor of Daewoo covering the amount of
US$380,600.00. The application was endorsed to the Iron and Steel Authority (ISA) or approval but the
application was denied. Reliance was instead asked to submit purchase orders from end-users to sup-
port its application for a Letter of Credit. However, Reliance was not able to raise purchase orders for
2,000 metric tons. Reliance alleges that it was able to raise purchase orders for 1,900 metric tons. 3 Dae-
woo, upon the other hand, contends that Reliance was only able to raise purchase orders for 900 metric
tons. 4 An examination of the exhibits 5 presented by Reliance in the trial court shows that only pur-
chase orders for 900 metric tons were stamped "Received" by the ISA. The other purchase orders for
1,000 metric tons allegedly sent by prospective end users to Reliance were not shown to have been duly
sent and exhibited to the ISA. Whatever the exact amount of the purchase orders was, Daewoo rejected
the proposed L/C for the reason that the covered quantity fell short of the contracted tonnage. Thus, Re-
liance withdrew the application for the L/C on 14 August 1980.
Subsequently, Daewoo leaned that the failure of Reliance to open the L/C as stipulated in the 31 July
1980 contract was due to the fact that as early as May 1980, Reliance has already exceeded its foreign
exchange allocation for 1980. Because of the failure of Reliance to comply with its undertaking under
the 31 July 1980 contract, Daewoo was compelled to sell the 2,000 metric tons to another buyer at a
lower price, to cut losses and expenses Daewoo had begun to incur due to its inability to ship the 2000
metric tons to Reliance under their contract.
On 3 September 1980, Reliance, through its counsel, wrote Daewoo requesting payment of the amount
of P226,370.48, representing the value of the short delivery of 135.655 metric tons of foundry pig iron
under the contract of 9 January 1980. Not being heeded, Reliance filed an action for damages against
Daewoo with the trial court. Daewoo responded, inter alia, with a counterclaim for damages, contend-
ing that Reliance was guilty of breach of contract when it failed to open an L/C as required in the 31 July
1980 contract.
After trial, the trial court ruled that:
(1) the 31 July 1980 contract did not extinguish Daewoo's obligation for short delivery pursuant to the 9
January 1980 contract and must therefore pay Reliance P226,370.48 representing the value of the short
delivered goods plus interest and attorney's fees; and
(2) Reliance is in turn liable for breach of contract for its failure to open a letter of credit in favor of Dae-
woo pursuant to the 31 July 1980 contract and must therefore pay the latter P331,920.97 as actual dam-
ages with legal interest plus attorney's fees.
Reliance appealed the second part of the trial court's judgment. Public respondent Court of Appeals
found no merit in the appeal and in affirming the decision of the trial court ruled that:
1) the trial court's finding that Reliance could not have opened the Letter of Credit in favor of Daewoo
because it had already exhausted its foreign exchange allocation at the time of its application, was am-
ply supported by evidence; and
2) the opening of a letter of credit is not such a future and uncertain event as to make it a suspensive
condition within the contemplation of law; but, only mode of payment agreed upon by the parties, and
a standard mode at that when one of the parties to the transaction is a foreigner and the consideration
is payable in foreign exchange.
In the present Petition for Review, Reliance assails the award of damages in favor of Daewoo. Reliance
contends a) that its failure to open a Letter of Credit was due to the failure of Daewoo to accept the pur-
chase orders for 1,900 metric tons instead of 2,000 metric tons; b) that the opening of the Letter of
Credit was a condition precedent to the effectivity of the contract between Reliance and Daewoo; and c)
that since such condition had not occurred, the contract never came into existence and, therefore, Reli-
ance should not have been held liable for damages.
The issue before us is whether or not the failure of an importer (Reliance) to open a letter of credit on
the date agreed upon makes him liable to the exporter (Daewoo) for damages.
In addressing this issue, it is useful to recall the nature of a Letter of Credit, and the mechanics involved
in applying for a Letter of Credit.
The nature of a letter of credit was extensively discussed in Bank of America, NT & SA v. Court of Ap-
peals, et al. 6 by Vitug, J. in the following terms:
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 pay-
ing. To break the impasse, the buyer may be required to contract a bank to issue a letter of credit in fa-
vor of the seller so that, by virtue of the letter 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. The buyer and 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 re-
quired shipping documents or documents of title. To get paid, the seller executes a 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 goods only after reimbursing the bank. 7 (footnotes omitted)
A letter of credit is one of the modes of payment, set out in Sec. 8, Central Bank Circular No. 1389, "Con-
solidated Foreign Exchange Rules and Regulations," dated 13 April 1993, by which commercial banks sell
foreign exchange to service payments for, e.g., commodity imports. The primary purpose of the letter of
credit is to substitute for and therefore support, the agreement of the buyer/importer to pay money un-
der a contract or other arrangement. 8 It creates in the seller/exporter a secure expectation of payment.
A letter of credit transaction may thus be seen to be a composite of at least three (3) distinct but inter-
twined relationships being concretized in a contract:
(a) One contract relationship links the party applying for the L/C (the account party or buyer or import-
er) and the party for whose benefit the L/C is issued (the beneficiary or seller or exporter). In this con-
tract, the account party, here Reliance, agrees, among other things and subject to the terms and condi-
tions of the contract, to pay money to the beneficiary, here Daewoo.
(b) A second contract relationship is between the account party and the issuing bank. Under this con-
tract, (sometimes called the "Application and Agreement" or the "Reimbursement Agreement"), the ac-
count party among other things, applies to the issuing bank for a specified L/C and agrees to reimburse
the bank for amounts paid by that bank pursuant to the L/C.
(c) The third contract relationship is established between the issuing bank and the beneficiary, in order
to support the contract, under
(a) above, of the account party and the beneficiary to, inter alia, pay certain monies to the latter.
Certain other parties may be added to the foregoing, but the above three are the indispensable ones.
The issue raised in the Petition at bar relates principally to the first component contractual relation
above: that between account party or importer Reliance and beneficiary or exporter Daewoo.
Examining the actual terms of that relationship as set out in the 31 July 1980 contract quoted earlier
(and not simply the summary inaccurately rendered by the trial court), the Court considers that under
that instrument, the opening of an L/C upon application of Reliance was not a condition precedent for
the birth of the obligation of Reliance to purchase foundry pig iron from Daewoo. We agree with the
Court of Appeals that Reliance and Daewoo, having reached "a meeting of minds" in respect of the sub-
ject matter of the contract (2000 metric tons of foundry pig iron with a specified chemical composition),
the price thereof (US $380,600.00), and other principal provisions, "they had a perfected con-
tract." 9 The failure of Reliance to open, the appropriate L/C did not prevent the birth of that contract,
and neither did such failure extinguish that contract. The opening of the L/C in favor of Daewoo was an
obligation of Reliance and the performance of that obligation by Reliance was a condition of enforce-
ment of the reciprocal obligation of Daewoo to ship the subject matter of the contract — the foundry
pig iron — to Reliance. But the contract itself between Reliance and Daewoo had already sprung into le-
gal existence and was enforceable.
The L/C provided for in that contract was the mode or mechanism by which payment was to be effected
by Reliance of the price of the pig iron. In undertaking to accept or pay the drafts presented to it by the
beneficiary according to the tenor of an L/C, and only later on being reimbursed by the account party,
the issuing bank in effect extends a loan to the account party. This loan feature, combined with the
bank's undertaking to accept the beneficiary's drafts drawn on the bank, constitutes the L/C as a mode
of payment. 10 Logically, before the issuing bank open an L/C, it will take steps to ensure that it would
indeed be reimbursed when the time comes. Before an L/C can be opened, specific legal requirements
must be complied with.
The Central Bank of the Philippines has established the following requirements for opening a letter of
credit:
All L/C's must be opened on or before the date of shipment with maximum validity of one (1) year. Like-
wise, only one L/C should be opened for each import transaction. for purposes of opening an L/C, im-
porters shall submit to the commercial bank the following documents:
a) the duly accomplished L/C application;
b) firm offer/proforma invoice which shall contain information on the specific quantity of the importa-
tion, unit cost and total cost, complete description/specification of the commodity and the Philippine
Standard Commodity Classification statistical code;
c) permits/clearances from the appropriate government agencies, whenever applicable; and
d) duly accomplished Import Entry Declaration (IED) form which shall serve as basis for payment of ad-
vance duties as required under PD 1853. 11 (Emphasis supplied)
The need for permits or clearances from appropriate government agencies arises when regulated com-
modities are to be imported. 12 Certain commodities are classified as "regulated commodities" for pur-
poses of their importation, "for reasons of public health and safety, national security, international com-
mitments, and development/rationalization of local industry." 13 The petitioner in the instant case en-
tered into a transaction to import foundry pig iron, a regulated commodity. In respect of the importa-
tion of this particular commodity, the Iron and Steel Authority (ISA) is the government agency designat-
ed to issue the permit or clearance. 14 Prior to the issuance of such permit or clearance, ISA asks the
buyer/importer to comply with particular requirements, such as to show the availability of foreign ex-
change allocations. The issuance of an L/C becomes, among other things, an indication of compliance by
the buyer/importer with his own government's regulations relating to imports and to payment there-
of. 15
The records shows that the opening of the L/C in the instant case became very difficult because Reliance
had exhausted its dollar allocation. Reliance knew that it had already exceeded its dollar allocation for
the year 1980 when it entered into the 31 July 1980 transaction with Daewoo. 16 As a rule, when the im-
porter has exceeded its foreign exchange allocation, his application would be denied. However, ISA
could reconsider such application on a case to case basis. 17 Thus, in the instant case, ISA required Reli-
ance to support its application by submitting purchase orders from end-users for the same quantity the
latter wished to import. As earlier noted, Reliance was able to present purchase orders for only 900 met-
ric tons of the subject pig iron. 18 For having exceeded its foreign exchange allocation before it entered
into the 31 July 1980 contract with Daewoo, petitioner Reliance can hold only itself responsible. for hav-
ing failed to secure end-users purchase orders equivalent to 2,000 metric tons, only Reliance should be
held responsible.
Daewoo rejected Reliance's proposed reduced tonnage. It had the right to demand compliance with the
terms of the basic contract and had no duty to accept any unilateral modification of that contract. Com-
pliance with Philippine legal requirements was the duty of Reliance; it is not disputed that ISA's require-
ments were legal and valid, and not arbitrary or capricious. Compliance with such requirements, like
keeping within one's dollar allocation and complying with the requirements of ISA, were within the con-
trol of Reliance and not of Daewoo. The Court is compelled to agree with the Court of Appeals that the
non-opening of the L/C was due to the failure of Reliance to comply with its duty under the contract.
We believe and so hold that failure of a buyer seasonably to furnish an agreed letter of credit is a breach
of he contract between buyer and seller. Where the buyer fails to open a letter of credit as stipulated,
the seller or exporter is entitled to claim damages for such breach. Damages for failure to open a com-
mercial credit may, in appropriate cases, include the loss of profit which the seller would reasonably
have made had the transaction been carried out. 19
We hold, further, that the Court of Appeals committed no reversible error when it ruled that the damag-
es incurred by Daewoo were sufficiently proved with the testimony of Mr. Ricardo Fernandez and "the
various documentary evidence showing the loss suffered by the defendant when it was compelled to sell
the subject goods at a lower price." 20
WHEREFORE, in view of the foregoing, the Petition for Review is hereby DENIED for lack of merit and the
decision of the Court of Appeals dated 8 February 1991 is hereby AFFIRMED. Costs against petitioner.
SO ORDERED.
Bidin, Romero, Melo and Vitug, JJ., concur.

====

SECOND DIVISION

[G.R. No. 117913. February 1, 2002.]

CHARLES LEE, CHUA SIOK SUY, MARIANO SIO, ALFONSO YAP, RICHARD VELASCO and ALFONSO CO, Pe-
titioners, v. COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, Respondents.

[G.R. No. 117914. February 1, 2002.]

MICO METALS CORPORATION, Petitioner, v. COURT OF APPEALS and PHILIPPINE BANK OF COMMUNI-
CATIONS, Respondents.

DECISION

DE LEON, JR., J.:

Before us is the joint and consolidated petition for review of the Decision 1 dated June 15, 1994 of the
Court of Appeals in CA-G.R. CV No. 27480 entitled, "Philippine Bank of Communications v. Mico Metals
Corporation, Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso Co,"
which reversed the decision of the Regional Trial Court (RTC) of Manila, Branch 55 dismissing the com-
plaint for a sum of money filed by private respondent Philippine Bank of Communications against herein
petitioners, Mico Metals Corporation (MICO, for brevity), Charles Lee, Chua Siok Suy, 2 Mariano Sio, Al-
fonso Yap, Richard Velasco and Alfonso Co. 3 The dispositive portion of the said Decision of the Court of
Appeals, reads:chanrob1es virtua1 1aw 1ibrary

WHEREFORE, the decision of the Regional Trial Court is hereby reversed and in lieu thereof, a new one is
entered:chanrob1es virtual 1aw library

a) Ordering the defendants-appellees jointly and severally to pay plaintiff PBCom the sum of Five million
four hundred fifty-one thousand six hundred sixty-three pesos and ninety centavos (P5,451,663.90) rep-
resenting defendants-appellees unpaid obligations arising from ordinary loans granted by the plaintiff
plus legal interest until fully paid.

b) Ordering defendants-appellees jointly and severally to pay PBCom the sum of Four hundred sixty-one
thousand six hundred pesos and sixty-six centavos (P461,600.66) representing defendants-appellees un-
paid obligations arising from their letters of credit and trust receipt transactions with plaintiff PBCom
plus legal interest until fully paid.

c) Ordering defendants-appellees jointly and severally to pay PBCom the sum of P50,000.00 as attor-
ney’s fees.

No pronouncement as to costs.

The facts of the case are as follows:chanrob1es virtual 1aw library

On March 2, 1979, Charles Lee, as President of MICO wrote private respondent Philippine Bank of Com-
munications (PBCom) requesting for a grant of a discounting loan/credit line in the sum of Three Million
Pesos (P3,000,000.00) for the purpose of carrying out MICO’s line of business as well as to maintain its
volume of business.

On the same day, Charles Lee requested for another discounting loan/credit line of Three Million Pesos
(P3,000,000.00) from PBCom for the purpose of opening letters of credit and trust receipts.

In connection with the requests for discounting loan/credit lines, PBCom was furnished by MICO the fol-
lowing resolution which was adopted unanimously by MICO’s Board of Directors:chanrob1es virtual 1aw
library

RESOLVED, that the President, Mr. Charles Lee, and the Vice-President and General Manager, Mr. Maria-
no A. Sio, singly or jointly, be and they are duly authorized and empowered for and in behalf of this Cor-
poration to apply for, negotiate and secure the approval of commercial loans and other banking facilities
and accommodations, such as, but not limited to discount loans, letters of credit, trust receipts, lines for
marginal deposits on foreign and domestic letters of credit, negotiate out-of-town checks, etc. from the
Philippine Bank of Communications, 216 Juan Luna, Manila in such sums as they shall deem advanta-
geous, the principal of all of which shall not exceed the total amount of TEN MILLION PESOS
(P10,000,000.00), Philippine Currency, plus any interests that may be agreed upon with said Bank in
such loans and other credit lines of the same kind and such further terms and conditions as may, upon
granting of said loans and other banking facilities, be imposed by the Bank; and to make, execute, sign
and deliver any contracts of mortgage, pledge or sale of one, some or all of the properties of the Compa-
ny, or any other agreements or documents of whatever nature or kind, including the signing, indorsing,
cashing, negotiation and execution of promissory notes, checks, money orders or other negotiable in-
struments, which may be necessary and proper in connection with said loans and other banking facili-
ties, or with their amendments, renewals and extensions of payment of the whole or any part thereof. 4

On March 26, 1979, MICO availed of the first loan of One Million Pesos (P1,000,000.00) from PBCom.
Upon maturity of the loan, MICO caused the same to be renewed, the last renewal of which was made
on May 21, 1982 under Promissory Note BNA No. 26218. 5

Another loan of One Million Pesos (P1,000,000.00) was availed of by MICO from PBCom which was like-
wise later on renewed, the last renewal of which was made on May 21, 1982 under Promissory Note
BNA No. 26219. 6 To complete MICO’s availment of Three Million Pesos (P3,000,000.00) discounting
loan/credit line with PBCom, MICO availed of another loan from PBCom in the sum of One Million Pesos
(P1,000,000.00) on May 24, 1979. As in previous loans, this was rolled over or renewed, the last renewal
of which was made on May 25, 1982 under Promissory Note BNA No. 26253. 7

As security for the loans, MICO through its Vice-President and General Manager, Mariano Sio, executed
on May 16, 1979 a Deed of Real Estate Mortgage over its properties situated in Pasig, Metro Manila cov-
ered by Transfer Certificates of Title (TCT) Nos. 11248 and 11250.

On March 26, 1979 Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap and Richard Velasco, in their
personal capacities executed a Surety Agreements 8 in favor of PBCom whereby the petitioners jointly
and severally, guaranteed the prompt payment on due dates or at maturity of overdrafts, promissory
notes, discounts, drafts, letters of credit, bills of exchange, trust receipts, and other obligations of every
kind and nature, for which MICO may be held accountable by PBCom. It was provided, however, that
the liability of the sureties shall not at any one time exceed the principal amount of Three Million Pesos
(P3,000,000.00) plus interest, costs, losses, charges and expenses including attorney’s fees incurred by
PBCom in connection therewith.

On July 14, 1980, petitioner Charles Lee, in his capacity as president of MICO, wrote PBCom and applied
for an additional loan in the sum of Four Million Pesos (P4,000,000.00). The loan was intended for the
expansion and modernization of the company’s machineries. Upon approval of the said application for
loan, MICO availed of the additional loan of Four Million Pesos (P4,000,000.00) as evidenced by Promis-
sory Note TA No. 094. 9

As per agreement, the proceeds of all the loan availments were credited to MICO’s current checking ac-
count with PBCom. To induce the PBCom to increase the credit line of MICO, Charles Lee, Chua Siok Suy,
Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso Co (hereinafter referred to as petitioners-suret-
ies), executed another surety agreement 10 in favor of PBCom on July 28, 1980, whereby they jointly
and severally guaranteed the prompt payment on due dates or at maturity of overdrafts, promissory
notes, discounts, drafts, letters of credit, bills of exchange, trust receipts and all other obligations of any
kind and nature for which MICO may be held accountable by PBCom. It was provided, however, that
their liability shall not at any one time exceed the sum of Seven Million Five Hundred Thousand Pesos
(P7,500,000.00) including interest, costs, charges, expenses and attorney’s fees incurred by MICO in con-
nection therewith.

On July 29, 1980, MICO furnished PBCom with a notarized certification issued by its corporate secretary,
Atty. P.B. Barrera, that Chua Siok Suy was duly authorized by the Board of Directors to negotiate on be-
half of MICO for loans and other credit availments from PBCom. Indicated in the certification was the
following resolution unanimously approved by the Board of Directors:chanrob1es virtual 1aw library

RESOLVED, AS IT IS HEREBY RESOLVED, That Mr. Chua Siok Suy be, as he is hereby authorized and em-
powered, on behalf of MICO METALS CORPORATION from time to time, to borrow money and obtain
other credit facilities, with or without security, from the PHILIPPINE BANK OF COMMUNICATIONS in
such amount(s) and under such terms and conditions as he may determine, with full power and author-
ity to execute, sign and deliver such contracts, instruments and papers in connection therewith, includ-
ing real estate and chattel mortgages, pledges and assignments over the properties of the Corporation;
and to renew and/or extend and/or roll-over and/or reavail of the credit facilities granted thereunder,
either for lesser or for greater amount(s), the intention being that such credit facilities and all securities
of whatever kind given as collaterals therefor shall be a continuing security.

RESOLVED FURTHER, That said bank is hereby authorized, empowered and directed to rely on the au-
thority given hereunder, the same to continue in full force and effect until written notice of its revoca-
tion shall be received by said Bank. 11

On July 2, 1981, MICO filed with PBCom an application for a domestic letter of credit in the sum of Three
Hundred Forty-Eight Thousand Pesos (P348,000.00). 12 The corresponding irrevocable letter of credit
was approved and opened under LC No. L-16060. 13 Thereafter, the domestic letter of credit was nego-
tiated and accepted by MICO as evidenced by the corresponding bank draft issued for the purpose. 14
After the supplier of the merchandise was paid, a trust receipt upon MICO’s own initiative, was executed
in favor of PBCom. 15

On September 14, 1981, MICO applied for another domestic letter of credit with PBCom in the sum of
Two Hundred Ninety Thousand Pesos (P290,000.00). 16 The corresponding irrevocable letter of credit
was issued on September 22, 1981 under LC No. L-16334. 17 After the beneficiary of the said letter of
credit was paid by PBCom for the price of the merchandise, the goods were delivered to MICO which
executed a corresponding trust receipt 18 in favor of PBCom.

On November 10, 1981, MICO applied for authority to open a foreign letter of credit in favor of Ta Jih
Enterprises Co., Ltd., 19 and thus, the corresponding letter of credit 20 was then issued by PBCom with a
cable sent to the beneficiary, Ta Jih Enterprises Co., Ltd. advising that said beneficiary may draw funds
from the account of PBCom in its correspondent bank’s New York Office. 21 PBCom also informed its
corresponding bank in Taiwan, the Irving Trust Company, of the approved letter of credit. The corre-
spondent bank acknowledged PBCom’s advice through a confirmation letter 22 and by debiting from
PBCom’s account with the said correspondent bank the sum of Eleven Thousand Nine Hundred Sixty US
Dollars ($11,960.00). 23 As in past transactions, MICO executed in favor of PBCom a corresponding trust
receipt. 24

On January 4, 1982, MICO applied, for authority to open a foreign letter of credit in the sum of One
Thousand Nine Hundred US Dollars,($1,900.00), with PBCom. 25 Upon approval, the corresponding let-
ter of credit denominated as LC No. 62293 26 was issued whereupon PBCom advised its correspondent
bank and MICO 27 of the same. Negotiation and proper acceptance of the letter of credit were then
made by MICO. Again, a corresponding trust receipt 28 was executed by MICO in favor of PBCom.

In all the transactions involving foreign letters of credit, PBCom turned over to MICO the necessary
documents such as the bills .of lading and commercial invoices to enable the latter to withdraw the
goods from the port of Manila.

On May 21, 1982 MICO obtained from PBCom another loan in the sum of Three Hundred Seventy-Seven
Thousand Pesos (P377,000.00) covered by Promissory Note BA No. 7458. 29

Upon maturity of all credit availments obtained by MICO from PBCom, the latter made a demand for
payment. 30 For failure of petitioner MICO to pay the obligations incurred despite repeated demands,
private respondent PBCom extrajudicially foreclosed MICO’s real estate mortgage and sold the said
mortgaged properties in a public auction sale held on November 23, 1982. Private respondent PBCom
which emerged as the highest bidder in the auction sale, applied the proceeds of the purchase price at
public auction of Three Million Pesos (P3,000,000.00) to the expenses of the foreclosure, interest and
charges and part of the principal of the loans, leaving an unpaid balance of Five Million Four Hundred
Forty-One Thousand Six Hundred Sixty-Three Pesos and Ninety Centavos (P5,441,663.90) exclusive of
penalty and interest charges. Aside from the unpaid balance of Five Million Four Hundred Forty-One
Thousand Six Hundred Sixty-Three Pesos and Ninety Centavos (P5,441,663.90), MICO likewise had an-
other standing obligation in the sum of Four Hundred Sixty-One Thousand Six Hundred Pesos and Six
Centavos (P461,600.06) representing its trust receipts liabilities to private Respondent. PBCom then de-
manded the settlement of the aforesaid obligations from herein petitioners-sureties who, however, re-
fused to acknowledge their obligations to PBCom under the surety agreements. Hence, PBCom filed a
complaint with prayer for writ of preliminary attachment before the Regional Trial Court of Manila,
which was raffled to Branch 55, alleging that MICO was no longer in operation and had no properties to
answer for its obligations. PBCom further alleged that petitioner Charles Lee has disposed or concealed
his properties with intent to defraud his creditors. Except for MICO and Charles Lee, the sheriff of the
RTC failed to serve the summons on herein petitioners-sureties since they were all reportedly abroad at
the time. An alias summons was later issued but the sheriff was not able to serve the same to petition-
ers Alfonso Co and Chua Siok Suy who was already sickly at the time and reportedly in Taiwan where he
later died.

Petitioners (MICO and herein petitioners-sureties) denied all the allegations of the complaint filed by re-
spondent PBCom, and alleged that: a) MICO was not granted the alleged loans and neither did it receive
the proceeds of the aforesaid loans; b) Chua Siok Suy was never granted any valid Board Resolution to
sign for and in behalf of MICO; c) PBCom acted in bad faith in granting the alleged loans and in releasing
the proceeds thereof; d) petitioners were never advised of the alleged grant of loans and the subse-
quent releases therefor, if any; e) since no loan was ever released to or received by MICO, the corre-
sponding real estate mortgage and the surety agreements signed concededly by the petitioners-sureties
are null and void.

The trial court gave credence to the testimonies of herein petitioners and dismissed the complaint filed
by PBCom. The trial court likewise declared the real estate mortgage and its foreclosure null and void. In
ruling for herein petitioners, the trial court said that PBCom failed to adequately prove that the pro-
ceeds of the loans were ever delivered to MICO. The trial court pointed out, among others, that while
PBCom claimed that the proceeds of the Four Million Pesos (P4,000,000.00) loan covered by promissory
note TA 094 were deposited to the current account of petitioner MICO, PBCom failed to produce the
ledger account showing such deposit. The trial court added that while PBCom may have loaned to MICO
the other sums of Three Hundred Forty-Eight Thousand Pesos (P348,000.00) and Two Hundred Ninety
Thousand Pesos (P290,000.00), no proof has been adduced as to the existence of the goods covered and
paid by the said amounts. Hence, inasmuch as no consideration ever passed from PBCom to MICO, all
the documents involved therein, such as the promissory notes, real estate mortgage including the surety
agreements were all void or nonexistent for lack of cause or consideration. The trial court said that the
lack of proof as regards the existence of the merchandise covered by the letters of credit bolstered the
claim of herein petitioners that no purchases of the goods were really made and that the letters of cred-
it transactions were simply resorted to by the PBCom and Chua Siok Suy to accommodate the latter in
his financial requirements.

The Court of Appeals reversed the ruling of the trial court, saying that the latter committed an errone-
ous application and appreciation of the rules governing the burden of proof. Citing Section 24 of the Ne-
gotiable Instruments Law which provides that "Every negotiable instrument is deemed prima facie to
have been issued for valuable consideration and every person whose signature appears thereon to have
become a party thereto for value", the Court of Appeals said that while the subject promissory notes
and letters of credit issued by the PBCom made no mention of delivery of cash, it is presumed that said
negotiable instruments were issued for valuable consideration. The Court of Appeals also cited the case
of Gatmaitan v. Court of Appeals 31 which holds that "there is a presumption that an instrument sets
out the true agreement of the parties thereto and that it was executed for valuable consideration." The
appellate court noted and found that a notarized Certification was issued by MICO’s corporate secreta-
ry, P.B. Barrera, that Chua Siok Suy, was duly authorized by the Board of Directors of MICO to borrow
money and obtain credit facilities from PBCom.

Petitioners filed a motion for reconsideration of the challenged decision of the Court of Appeals but this
was denied in a Resolution dated November 7, 1994 issued by its Former Second Division. Petitioners-
sureties then filed a petition for review on certiorari with this Court, docketed as G.R. No. 117913, assail-
ing the decision of the Court of Appeals. MICO likewise filed a separate petition for review on certiorari,
docketed as G.R. No. 117914, with this Court assailing the same decision rendered by the Court of Ap-
peals. Upon motion filed by petitioners, the two (2) petitions were consolidated on January 11, 1995. 32

Petitioners contend that there was no proof that the proceeds of the loans or the goods under the trust
receipts were ever delivered to and received by MICO. But the record shows otherwise. Petitioners-sur-
eties further contend that assuming that there was delivery by PBCom of the proceeds of the loans and
the goods, the contracts were executed by an unauthorized person, more specifically Chua Siok Suy who
acted fraudulently and in collusion with PBCom to defraud MICO.

The pertinent issues raised in the consolidated cases at bar are: a) whether or not the proceeds of the
loans and letters of credit transactions were ever delivered to MICO, and b) whether or not the individu-
al petitioners, as sureties, may be held liable under the two (2) Surety Agreements executed on March
26, 1979 and July 28, 1980.

In civil cases, the party having the burden of proof must establish his case by preponderance of evi-
dence. 33 Preponderance of evidence means evidence which is more convincing to the court as worthy
of belief than that which is offered in opposition thereto. Petitioners contend that the alleged promisso-
ry notes, trust receipts and surety agreements attached to the complaint filed by PBCom did not ripen
into valid and binding contracts inasmuch as there is no evidence of the delivery of money or loan pro-
ceeds to MICO or to any of the petitioners-sureties. Petitioners claim that under normal banking prac-
tice, borrowers are required to accomplish promissory notes in blank even before the grant of the loans
applied for and such documents become valid written contracts only when the loans are actually re-
leased to the borrower.

We are not convinced.

During the trial of an action, the party who has the burden of proof upon an issue may be aided in estab-
lishing his claim or defense by the operation of a presumption, or, expressed differently, by the proba-
tive value which the law attaches to a specific state of facts. A presumption may operate against his ad-
versary who has not introduced proof to rebut the presumption. The effect of a legal presumption upon
a burden of proof is to create the necessity of presenting evidence to meet the legal presumption or the
prima facie case created thereby, and which if no proof to the contrary is presented and offered, will
prevail. The burden of proof remains where it is, but by the presumption the one who has that burden is
relieved for the time being from introducing evidence in support of his averment, because the presump-
tion stands in the place of evidence unless rebutted.

Under Section 3, Rule 131 of the Rules of Court the following presumptions, among others, are satisfac-
tory if uncontradicted: a) That there was a sufficient consideration for a contract and b) That a negotia-
ble instrument was given or indorsed for sufficient consideration. As observed by the Court of Appeals, a
similar presumption is found in Section 24 of the Negotiable Instruments Law which provides that every
negotiable instrument is deemed prima facie to have been issued for valuable consideration and every
person whose signature appears thereon to have become a party for value. Negotiable instruments
which are meant to be substitutes for money, must conform to the following requisites to be considered
as such a) it must be in writing; b) it must be signed by the maker or drawer; c) it must contain an uncon-
ditional promise or order to pay a sum certain in money; d) it must be payable on demand or at a fixed
or determinable future time; e) it must be payable to order or bearer; and f) where it is a bill of ex-
change, the drawee must be named or otherwise indicated with reasonable certainty. Negotiable instru-
ments include promissory notes, bills of exchange and checks. Letters of credit and trust receipts are,
however, not negotiable instruments. But drafts issued in connection with letters of credit are negotia-
ble instruments.

Private respondent PBCom presented the following documentary evidence to prove petitioners’ credit
availments and liabilities:chanrob1es virtual 1aw library

1) Promissory Note No. BNA-26218 dated May 21, 1982 in the sum of P1,000,000.00 executed by MICO
in favor of PBCom.

2) Promissory Note No. BNA-26219 dated May 21, 1982 in the sum of P1,000,000.00 executed by MICO
in favor of PBCom.

3) Promissory Note No. BNA-26253 dated May 25, 1982 in the sum of P1,000,000.00 executed by MICO
in favor of PBCom.

4) Promissory Note No. BNA-7458 dated May 21, 1982 in the sum of P377,000.00 executed by MICO in
favor of PBCom.
5) Promissory Note No. TA - 094 dated July 29, 1980 in the sum of P4,000.000.00 executed by MICO in
favor of PBCom.

6) Irrevocable letter of credit No. L-16060 dated July 2, 1981 issued in favor of Perez Battery Center for
account of Mico Metals Corp.

7) Draft dated July 2, 1981 in the sum of P348,000.00 issued by Perez Battery Center, beneficiary of ir-
revocable Letter of Credit No. No. L-16060 and accepted by MICO Metals corporation.

8) Letter dated July 2, 1981 from Perez Battery Center addressed to private respondent PBCom showing
that proceeds of the irrevocable letter of credit No. L-16060 was received by Mr. Moises Rosete, repre-
sentative of Perez Battery Center.

9) Trust receipt dated July 2, 1981 executed by MICO in favor of PBCom covering the merchandise pur-
chased under Letter of Credit No. 16060.

10) Irrevocable letter of credit No. L-16334 dated September 22, 1981 issued in favor of Perez Battery
Center for account of MICO Metals Corp.

11) Draft dated September 22, 1981 in the sum of P290,000.00 issued by Perez Battery Center and ac-
cepted by MICO.

12) Letter dated September 17, 1981 from Perez Battery addressed to PBCom showing that the pro-
ceeds of credit no. L-16344 was received by Mr. Moises Rosete, a representative of Perez Battery Cen-
ter.

13) Trust Receipt dated September 22, 1981 executed by MICO in favor of PBCom covering the merchan-
dise under Letter of Credit No. L-16334.

14) Irrevocable Letter of Credit no. 61873 dated November 10, 1981 for US$11,960.00 issued by PBCom
in favor of TA JIH Enterprises Co. Ltd., through its correspondent bank, Irving Trust Company of Taipei,
Taiwan.

15) Trust Receipt dated December 15, 1981 executed by MICO in favor of PBCom showing that posses-
sion of the merchandise covered by Irrevocable Letter of Credit no. 61873 was released by PBCom to MI-
CO.

16) Letters dated March 2, 1979 from MICO signed by its president, Charles Lee, showing that MICO
sought credit line from PBCom in the form of loans, letters of credit and trust receipt in the sum of
P7,500,000.00.

17) Letter dated July 14, 1980 from MICO signed by its president, Charles Lee, showing that MICO re-
quested for additional financial assistance in the sum of P4,000,000.00.

18) Board resolution dated March 6, 1979 of MICO authorizing Charles Lee and Mariano Sio singly or
jointly to act and sign for and in behalf of MICO relative to the obtention of credit facilities from PBCom.

19) Duly notarized Deed of Mortgage dated May 16, 1979 executed by MICO in favor of PBCom over MI-
CO’s real properties covered by TCT Nos. 11248 and 11250 located in Pasig.

20) Duly notarized Surety Agreement dated March 26, 1979 executed by herein petitioners Charles Lee,
Mariano Sio, Alfonso Yap, Richard Velasco and Chua Siok Suy in favor of PBCom.

21) Duly notarized Surety Agreement dated July 28, 1980 executed by herein petitioners Charles Lee,
Mariano Sio, Alfonso Yap, Richard Velasco and Chua Siok Suy in favor of PBCom.

22) Duly notarized certification dated July 28, 1980 issued by MICO’s corporate secretary, Mr. P.B. Bar-
rera, attesting to the adoption of a board resolution authorizing Chua Siok Suy to sign, for and in behalf
of MICO, all the necessary documents including contracts, loan instruments and mortgages relative to
the obtention of various credit facilities from PBCom.

The above-cited documents presented have not merely created a prima facie case but have actually
proved the solidary obligation of MICO and the petitioners, as sureties of MICO, in favor of respondent
PBCom. While the presumption found under the Negotiable Instruments Law may not necessarily be ap-
plicable to trust receipts and letters of credit, the presumption that the drafts drawn in connection with
the letters of credit have sufficient consideration. Under Section 3(r), Rule 131 of the Rules of Court
there is also a presumption that sufficient consideration was given in a contract. Hence, petitioners
should have presented credible evidence to rebut that presumption as well as the evidence presented
by private respondent PBCom. The letters of credit show that the pertinent materials/merchandise have
been received by MICO. The drafts signed by the beneficiary/suppliers in connection with the corre-
sponding letters of credit proved that said suppliers were paid by PBCom for the account of MICO. On
the other hand, aside from their bare denials petitioners did not present sufficient and competent evi-
dence to rebut the evidence of private respondent PBCom. Petitioner MICO did not proffer a single
piece of evidence, apart from its bare denials, to support its allegation that the loan transactions, real es-
tate mortgage, letters of credit and trust receipts were issued allegedly without any consideration.

Petitioners-sureties, for their part, presented the By-Laws 34 of Mico Metals Corporation (MICO) to
prove that only the president of MICO is authorized to borrow money, arrange letters of credit, execute
trust receipts, and promissory notes and consequently, that the loan transactions, letters of credit,
promissory notes and trust receipts, most of which were executed by Chua Siok Suy in representation of
MICO were not allegedly authorized and hence, are not binding upon MICO. A perusal of the By-Laws of
MICO, however, shows that the power to borrow money for the company and issue mortgages, lands,
deeds of trust and negotiable instruments or securities, secured by mortgages or pledges of property be-
longing to the company is not confined solely to the president of the corporation. The Board of Directors
of MICO can also borrow money, arrange letters of credit, execute trust receipts and promissory notes
on behalf of the corporation. 35 Significantly, this power of the Board of Directors according to the by-
laws of MICO, may be delegated to any of its standing committee, officer or agent. 36 Hence, PBCom
had every right to rely on the Certification issued by MICO’s corporate secretary, P.B. Barrera, that Chua
Siok Suy was duly authorized by its Board of Directors to borrow money and obtain credit facilities in be-
half of MICO from PBCom.

Petitioners-sureties also presented a letter of their counsel dated October 9, 1982, addressed to private
respondent PBCom purportedly to show that PBCom knew that Chua Siok Suy allegedly used the credit
and good names of the petitioner-sureties for his benefit, and that petitioner-sureties were made to
sign blank documents and were furnished copies of the same. The letter, however, is in fact merely a re-
ply of petitioners-sureties’ counsel to PBCom’s demand for payment of MICO’s obligations, and appears
to be an inconsequential piece of self-serving evidence.

In addition to the foregoing, MICO and petitioners-sureties cited the decision of the trial court which
stated that there was no proof that the proceeds of the loans were ever delivered to MICO. Although
the private respondent’s witness, Mr. Gardiola, testified that the proceeds of the loans were deposited
in MICO’s current account with PBCom, his testimony was allegedly not supported by any bank record,
note or memorandum. A careful scrutiny of the record including the transcript of stenographic notes re-
veals, however, that although private respondent PBCom was willing to produce the corresponding ac-
count ledger showing that the proceeds of the loans were credited to MICO’s current account with
PBCom, MICO in fact vigorously objected to the presentation of said document. That point is shown in
the testimony of PBCom’s witness, Gardiola, thus:chanrob1es virtual 1aw library

Q: Now, all of these promissory note Exhibits "I" and "T’ which as you have said previously (sic) availed
originally by defendant Mico Metals Corp. sometime in 1979, my question now is, do you know what
happened to the proceeds of the original availment?

A: Well, it was credited to the current account of Mico Metals Corp.

Q: Why did it was credited to the proceeds to the account of Mico Metals Corp? (sic)

A: Well, that is our understanding.

ATTY. DURAN:chanrob1es virtual 1aw library

Your honor, may we be given a chance to object, the best evidence is the so-called current account...

COURT:chanrob1es virtual 1aw library

Can you produce the ledger account?

A: Yes, Your Honor, I will bring.

COURT:chanrob1es virtual 1aw library

The ledger or record of the current account of Mico Metals Corp.

A: Yes, Your Honor.

ATTY. ACEJAS:chanrob1es virtual 1aw library

Your Honor, these are a confidential record, and they might not be disclosed without the consent of the
person concerned. (sic)

ATTY. SANTOS:chanrob1es virtual 1aw library

Well, you are the one who is asking that.

ATTY. DURAN:chanrob1es virtual 1aw library

Your Honor, I’m precisely want to show for the ... (sic)

COURT:chanrob1es virtual 1aw library

But the amount covered by the current account of defendant Mico Metals Corp. is the subject matter of
this case.

x x x

Q: Are those availments were release? (sic)

A: Yes, Your Honor, to the defendant corporation.

Q: By what means?

A: By the credit to their current account.

ATTY. ACEJAS:chanrob1es virtual 1aw library

We object to that, your Honor, because the disclose is the secrecy of the bank deposit. (sic)

x x x

Q: Before the recess Mr. Gardiola, you stated that the proceeds of the three (3) promissory notes were
credited to the accounts of Mico Metals Corporation, now do you know what kind of current account
was that which you are referring to?

ATTY. ACEJAS:chanrob1es virtual 1aw library

Objection your Honor, that is the disclose of the deposit of defendant Mico Metals Corporation and it
cannot disclosed without the authority of the depositor. (sic) 37

That proceeds of the loans which were originally availed of in 1979 were delivered to MICO is bolstered
by the fact that" more than a year later, specifically on July 14, 1980, MICO through its president, peti-
tioner-surety Charles Lee, requested for an additional loan of Four Million Pesos (P4,000,000.00) from
PBCom. The fact that MICO was requesting for an additional loan implied that it has already availed of
earlier loans from PBCom.

Petitioners allege that PBCom presented no evidence that it remitted payments to cover the domestic
and foreign letters of credit. Petitioners placed much reliance on the erroneous decision of the trial
court which stated that private respondent PBCom allegedly failed to prove that it actually made pay-
ments under the letters of credit since the bank drafts presented as evidence show that they were made
in favor of the Bank of Taiwan and First Commercial Bank.
Petitioners’ allegations are untenable.

Modern letters of credit are usually not made between natural persons. They involve bank to bank
transactions. Historically, the letter of credit was developed to facilitate the sale of goods between, dis-
tant and unfamiliar buyers and sellers. It was an arrangement under which a bank, whose credit was ac-
ceptable to the seller, would at the instance of the buyer agree to pay drafts drawn on it by the seller,
provided that certain documents are presented such as bills of lading accompanied the corresponding
drafts. Expansion in the use of letters of credit was a natural development in commercial banking. 38
Parties to a commercial letter of credit include (a) the buyer or the importer, (b) the seller, also referred
to as beneficiary, (c) the opening bank which is usually the buyer’s bank which actually issues the letter
of credit, (d) the notifying bank which is the correspondent bank of the opening bank through, which it
advises the beneficiary of the letter of credit, (e) negotiating bank which is usually any bank in the city of
the beneficiary. The services of the notifying bank must always be utilized if the letter of credit is to be
advised to the beneficiary through cable, (f) the paying bank which buys or discounts the drafts contem-
plated by the letter of credit, if such draft is to be drawn on the opening bank or on another designated
bank not in the city of the beneficiary. As a rule, whenever the facilities of the opening bank are used,
the beneficiary is supposed to present his drafts to the notifying bank for negotiation and (g) the con-
firming bank which, upon the request of the beneficiary, confirms the letter of credit issued by the open-
ing bank.

From the foregoing, it is clear that letters of credit, being usually bank to bank transactions, involve
more than just one bank. Consequently, there is nothing unusual in the fact that the drafts presented in
evidence by respondent bank were not made payable to PBCom. As explained by respondent bank, a
draft was drawn on the Bank of Taiwan by Ta Jih Enterprises Co., Ltd. of Taiwan, supplier of the goods
covered by the foreign letter of credit. Having paid the supplier, the Bank of Taiwan then presented the
bank draft for reimbursement by PBCom’s correspondent bank in Taiwan, the Irving Trust Company —
which explains the reason why on its face, the draft was made payable to the Bank of Taiwan. Irving
Trust Company accepted and endorsed the draft to PBCom. The draft was later transmitted to PBCom to
support the latter’s claim for payment from MICO. MICO accepted the draft upon presentment and ne-
gotiated it to PBCom.

Petitioners further aver that MICO never requested that legal possession of the merchandise be trans-
ferred to PBCom by way of trust receipts. Petitioners insist that assuming that MICO transferred posses-
sion of the merchandise to PBCom by way of trust receipts, the same would be illegal since PBCom, be-
ing a banking institution, is not authorized by law to engage in the business of importing and selling
goods.

A trust receipt is considered as a security transaction intended to aid in financing importers and retail
dealers who do not have sufficient funds or resources to finance the importation or purchase of mer-
chandise, and who may not be able to acquire credit except through utilization, as collateral of the mer-
chandise imported or purchased. 39 A trust receipt, therefor, is a document of security pursuant to
which a bank acquires a "security interest" in the goods under trust receipt. Under a letter of credit-trust
receipt arrangement, a bank extends a loan covered by a letter of credit, with the trust receipt as a se-
curity for the loan. The transaction involves a loan feature represented by a letter of credit, and a securi-
ty feature which is in the covering trust receipt which secures an indebtedness.

Petitioners’ averments with regard to the second issue are no less incredulous. Petitioners’ contend that
the letters of credit, surety agreements and loan transactions did not ripen into valid and binding con-
tracts since no part of the proceeds of the loan transactions were delivered to MICO or to any of the pe-
titioners-sureties. Petitioners-sureties allege that Chua Siok Suy was the beneficiary of the proceeds of
the loans and that the latter made them sign the surety agreements in blank. Thus, they maintain that
they should not be held accountable for any liability that might arise therefrom.

It has not escaped our notice that it was petitioner-surety Charles Lee, as president of MICO Metals Cor-
poration, who first requested for a discounting loan of Three Million Pesos (P3,000,000.00) from PBCom
as evidenced by his letter dated March 2, 1979. 40 On the same day, Charles Lee, as President of MICO,
requested for a Letter of Credit and Trust Receipt line in the sum of Three Million Pesos (P3,000,000.00).
41 Still, on the same day, Charles Lee again as President of MICO, wrote another letter to PBCOM re-
questing for a financing line in the sum of One Million Five Hundred Thousand Pesos (P1,500,000.00) to
be used exclusively as marginal deposit for the opening of MICO’s foreign and local letters of credit with
PBCom. 42 More than a year later, it was also Charles Lee, again in his capacity as president of MICO,
who asked for an additional loan in the sum of Four Million Pesos (P4,000,000.00). The claim therefore
of petitioners that it was Chua Siok Suy, in connivance with the respondent PBCom, who applied for and
obtained the loan transactions and letters of credit strains credulity considering that even the Deed of
the Real Estate Mortgage in favor of PBCom was executed by petitioner-surety Mariano Sio in his capaci-
ty as general manager of MICO 43 to secure the loan accommodations obtained by MICO from PBCom.

Petitioners-sureties allege that they were made to sign the surety agreements in blank by Chua Siok Suy.
Petitioner Alfonso Yap, the corporate treasurer, for his part testified that he signed booklets of checks,
surety agreements and promissory notes in blank; that he signed the documents in blank despite his
misgivings since Chua Siok Suy assured him that the transaction can easily be taken cared of since Chua
Siok Suy personally knew the Chairman of the Board of PBCom; that he was not receiving salary as treas-
urer of Mico Metals and since Chua Siok Suy had a direct hand in the management of Malayan Sales Cor-
poration, of which Yap is an employee, he (Yap) signed the documents in blank as consideration for his
continued employment in Malayan Sales Corporation. Petitioner Antonio Co testified that he worked as
office manager for MICO from 1978-1982. As office manager, he was the one in charge of transacting
business like purchasing, selling and paying the salary of the employees. He was also in charge of the
handling of documents pertaining to surety agreements, trust receipts and promissory notes; 44 that
when he first joined MICO Metals Corporation, he was able to read the by-laws of the corporation and
he came to know that only the chairman and the president can borrow money in behalf of the corpora-
tion; that Chua Siok Suy once called him up and told him to secure an invoice so that a credit line can be
opened in the bank with a local letter of credit; that when the invoice was secured, he (Co) brought it to-
gether with the application for a credit line to Chua Siok Suy, and that he questioned the authority of
Chua Siok Suy pointing out that he (Co) is not empowered to sign the document inasmuch as only the
Latter, as president, was authorized to do so. However, Chua Siok Suy allegedly just said that he had al-
ready talked with the Chairman of the Board of PBCom; and that Chua Siok Suy reportedly said that he
needed the money to’ finance a project that he had with the Taipei government. Co also testified that
he knew of the application for domestic letter of credit in the sum of Three Hundred Forty-Eight Thou-
sand Pesos (P348,000.00); and that a certain Moises Rosete was authorized to claim the check covering
the Three Hundred Forty-Eight Thousand Pesos (P348,000.00) from PBCom; and that after claiming the
check Rosete brought it to Perez Battery Center for indorsement after which the same was deposited to
the personal account of Chua Siok Suy. 45

We consider as incredible and unacceptable the claim of petitioners-sureties that the Board of Directors
of MICO was so careless about the business affairs of MICO as well as about their own personal reputa-
tion and money that they simply relied on the say so of Chua Siok Suy on matters involving millions of
pesos. Under Section 3 (d), Rule 131 of the Rules of Court, it is presumed that a person takes ordinary
care of his concerns. Hence; the natural presumption is that one does not sign a document without first
informing himself of its contents and consequences. Said presumption acquires greater force in the case
at bar where not only one but several documents were executed at different times and at different pla-
ces by the petitioner sureties and Chua Siok Suy as president of MICO.

MICO and herein petitioners-sureties insist that Chua Siok Suy was not duly authorized to negotiate for
loans in behalf of MICO from PBCom. Petitioners’ allegation, however, is belied by the July 28, 1980 ,Cer-
tification issued by the corporate secretary of PBCom, Atty. P.B. Barrera, that MICO’s Board of Directors
gave Chua Siok Suy full authority to :negotiate for loans in behalf of MICO with PBCom. In fact, the Cer-
tification even provided that Chua Siok Suy’s authority continues until and unless PBCom is notified in
writing of the withdrawal thereof by the said Board. Notably, petitioners failed to contest the genuine-
ness of the said Certification which is notarized and to show any written proof of any alleged withdrawal
of the said authority given by the Board of Directors to Chua Siok Suy to negotiate for loans in behalf of
MICO.

There was no need for PBCom to personally inform the petitioners-sureties individually about the terms
of the loans, letters of credit and other loan documents. The petitioners-sureties themselves happen to
comprise the Board of Directors of MICO, which gave full authority to Chua Siok Suy to negotiate for
loans in behalf of MICO. Notice to MICO’s authorized representative, Chua Siok Suy, was notice to MICO.
The Certification issued by PBCom’s corporate secretary, Atty. P.B. Barrera, indicated that Chua Siok Suy
had full authority to negotiate and sign the necessary documents, in behalf of MICO, for loans from
PBCom. Respondent PBCom therefore had the right to rely on the said notarized Certification of MICO’s
Corporate Secretary.

Anent petitioners-sureties contention that they obtained no consideration whatsoever on the surety
agreements, we need only point out that the consideration for the sureties is the very consideration for
the principal obligor, MICO, in the contracts of loan. In the case of Willex Plastic Industries Corporation
v. Court of Appeals, 46 we ruled that the consideration necessary to support a surety obligation need
not pass directly to the surety, a consideration moving to the principal alone being sufficient. For a guar-
antor or surety is bound by the same consideration that makes the contract effective between the par-
ties thereto. It is not necessary that a guarantor or surety should receive any part or benefit, if such
there be, accruing to his principal.

Petitioners placed too much reliance on the rule in evidence that the burden of proof does not shift
whereas the burden of going forward with the evidence does not pass from party to party. It is true that
said rule is not changed by the fact that the party having the burden of proof has introduced evidence
which established prima facie his assertion because such evidence does not shift the burden of proof; it
merely puts the adversary to the necessity of producing evidence to meet the prima facie case. Where
the defendant merely denies, either generally or otherwise, the allegations of the plaintiff’s pleadings,
the burden of proof continues to rest on the plaintiff throughout the trial and does not shift to the de-
fendant until the plaintiff’s evidence has been presented and duly offered. The defendant has then no
burden except to produce evidence sufficient to create a state of equipoise between his proof and that
of the plaintiff to defeat the latter, whereas the plaintiff has the burden, as in the beginning, of estab-
lishing his case by a preponderance of evidence. 47 But where the defendant has failed to present and
marshall evidence sufficient to create a state of equipoise between his proof and that of the plaintiff,
the prima facie case presented by the plaintiff will prevail.
In the case at bar, respondent PBCom, as plaintiff in the trial court, has in fact presented sufficient docu-
mentary and testimonial evidence that proved by preponderance of evidence its subject collection case
against the defendants who are the petitioners herein. In view of all the foregoing, the Court of Appeals
committed no reversible error in its appealed Decision.

WHEREFORE, the assailed Decision of the Court of Appeals in CA-G.R. CV No. 27480 entitled, "Philippine
Bank of Communications v. Mico Metals Corporation, Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso
Yap, Richard Velasco and Alfonso Co," is AFFIRMED in toto.chanrob1es virtua1 1aw 1ibrary

Costs against the petitioners.

SO ORDERED.

Bellosillo, Mendoza, Quisumbing, and Buena, JJ., concur.

====

G.R. No. L-24821 October 16, 1970

BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee,
vs.
DE RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO and AURORA CARCERENY alias AURORA C. GON-
ZALES, defendants-appellants.
Aviado and Aranda for plaintiff-appellee.
S. Emiliano Calma for defendants-appellants.

CASTRO, J.:.
This is an appeal from the decision of the Court of First Instance of Manila ordering the defendants-ap-
pellants to pay to the Bank of the Philippine Islands (hereinafter referred to as the Bank), jointly and sev-
erally, the value of the credit it extended to them in several letters of credit which the Bank opened at
the behest of the defendants appellants to finance their importation of dyestuffs from the United
States, which however turned out to be mere colored chalk upon arrival and inspection thereof at the
port of Manila.
The record shows that on four (4) different occasions in 1961, the De Reny Fabric Industries, Inc., a Phil-
ippine corporation through its co-defendants-appellants, Aurora Carcereny alias Aurora C. Gonzales, and
Aurora T. Tuyo, president and secretary, respectively of the corporation, applied to the Bank for four (4)
irrevocable commercial letters of credit to cover the purchase by the corporation of goods described in
the covering L/C applications as "dyestuffs of various colors" from its American supplier, the J.B. Distrib-
uting Company. All the applications of the corporation were approved, and the corresponding Commer-
cial L/C Agreements were executed pursuant to banking procedures. Under these agreements, the
aforementioned officers of the corporation bound themselves personally as joint and solidary debtors
with the corporation. Pursuant to banking regulations then in force, the corporation delivered to the
Bank peso marginal deposits as each letter of credit was opened.
The dates and amounts of the L/Cs applied for and approved as well as the peso marginal deposits made
were, respectively, as follows:.
Date Application Amount Marginal
& L/C No. Deposit
Oct. 10, 1961 61/1413 $57,658.38 P43,407.33
Oct. 23, 1961 61/1483 $25,867.34 19,473.64
Oct. 30, 1961 61/1495 $19,408.39 14,610.88
Nov. 10, 1961 61/1564 $26,687.64 20,090.90
TOTAL .... $129,621.75 P97,582.75
By virtue of the foregoing transactions, the Bank issued irrevocable commercial letters of credit ad-
dressed to its correspondent banks in the United States, with uniform instructions for them to notify the
beneficiary thereof, the J.B. Distributing Company, that they have been authorized to negotiate the lat-
ter's sight drafts up to the amounts mentioned the respectively, if accompanied, upon presentation, by
a full set of negotiable clean "on board" ocean bills of lading covering the merchandise appearing in the
LCs that is, dyestuffs of various colors. Consequently, the J.B. Distributing Company drew upon, present-
ed to and negotiated with these banks, its sight drafts covering the amounts of the merchandise ostensi-
bly being exported by it, together with clean bills of lading, and collected the full value of the drafts up
to the amounts appearing in the L/Cs as above indicated. These correspondent banks then debited the
account of the Bank of the Philippine Islands with them up to the full value of the drafts presented by
the J.B. Distributing Company, plus commission thereon, and, thereafter, endorsed and forwarded all
documents to the Bank of the Philippine Islands.
In the meantime, as each shipment (covered by the above-mentioned letters of credit) arrived in the
Philippines, the De Reny Fabric Industries, Inc. made partial payments to the Bank amounting, in the ag-
gregate, to P90,000. Further payments were, however, subsequently discontinued by the corporation
when it became established, as a result of a chemical test conducted by the National Science Develop-
ment Board, that the goods that arrived in Manila were colored chalks instead of dyestuffs.
The corporation also refused to take possession of these goods, and for this reason, the Bank caused
them to be deposited with a bonded warehouse paying therefor the amount of P12,609.64 up to the fil-
ing of its complaint with the court below on December 10, 1962.
On October 24, 1963 the lower court rendered its decision ordering the corporation and its co-defend-
ants (the herein appellants) to pay to the plaintiff-appellee the amount of P291,807.46, with interest
thereon, as provided for in the L/C Agreements, at the rate of 7% per annum from October 31, 1962 un-
til fully paid, plus costs.
It is the submission of the defendants-appellants that it was the duty of the foreign correspondent
banks of the Bank of the Philippine Islands to take the necessary precaution to insure that the goods
shipped under the covering L/Cs conformed with the item appearing therein, and, that the foregoing
banks having failed to perform this duty, no claim for recoupment against the defendants-appellants,
arising from the losses incurred for the non-delivery or defective delivery of the articles ordered, could
accrue.
We can appreciate the sweep of the appellants' argument, but we also find that it is nestled hopelessly
inside a salient where the valid contract between the parties and the internationally accepted customs
1
of the banking trade must prevail.
Under the terms of their Commercial Letter of Credit Agreements with the Bank, the appellants agreed
that the Bank shall not be responsible for the "existence, character, quality, quantity, conditions, pack-
ing, value, or delivery of the property purporting to be represented by documents; for any difference in
character, quality, quantity, condition, or value of the property from that expressed in documents," or
for "partial or incomplete shipment, or failure or omission to ship any or all of the property referred to
in the Credit," as well as "for any deviation from instructions, delay, default or fraud by the shipper or
anyone else in connection with the property the shippers or vendors and ourselves [purchasers] or any
of us." Having agreed to these terms, the appellants have, therefore, no recourse but to comply with
their covenant. 2
But even without the stipulation recited above, the appellants cannot shift the burden of loss to the
Bank on account of the violation by their vendor of its prestation.
It was uncontrovertibly proven by the Bank during the trial below that banks, in providing financing in in-
ternational business transactions such as those entered into by the appellants, do not deal with the
property to be exported or shipped to the importer, but deal only with documents. The Bank introduced
in evidence a provision contained in the "Uniform Customs and Practices for Commercial Documentary
Credits Fixed for the Thirteenth Congress of International Chamber of Commerce," to which the Philip-
pines is a signatory nation. Article 10 thereof provides: .
In documentary credit operations, all parties concerned deal in documents and not in goods. — Payment,
negotiation or acceptance against documents in accordance with the terms and conditions of a credit by
a Bank authorized to do so binds the party giving the authorization to take up the documents and reim-
burse the Bank making the payment, negotiation or acceptance.
The existence of a custom in international banking and financing circles negating any duty on the part of
a bank to verify whether what has been described in letters of credits or drafts or shipping documents
actually tallies with what was loaded aboard ship, having been positively proven as a fact, the appellants
are bound by this established usage. They were, after all, the ones who tapped the facilities afforded by
the Bank in order to engage in international business.
ACCORDINGLY, the judgment a quo is affirmed, at defendants-appellants' cost. This is without prejudice
to the Bank, in proper proceedings in the court below in this same case proving and being reimbursed
additional expenses, if any, it has incurred by virtue of the continued storage of the goods in question up
to the time this decision becomes final and executory.
Reyes, J.B.L., Actg. C.J., Dizon, Makalintal, Zaldivar, Fernando, Teehankee, Barredo, Villamor and Maka-
siar, JJ., concur.
Concepcion, C.J., is on leave.

====

G.R. No. L-10195 November 29, 1958

BELMAN COMPAÑIA INCORPORADA, plaintiff-appellee,
vs.
CENTRAL BANK OF THE PHILIPPINES, defendant-appellant.
Bienvenido L. Garcia and Eutiquiano Garcia for appellee.
Nat. M. Balboa and Luis M. Kasilag for appellant.
PADILLA, J.:
In a complaint filed on 18 March 1955 in the Court of First Instance of Manila the plaintiff, a corporation,
alleges that having been a successful bidder to supply the Republic of the Philippines with 1,000 reams
of onion skin paper, on 21 September 1950 it applied to the Philippine National Bank for a letter of cred-
it in the sum of $4,300, United States currency, in favor of Getz Bros. & Co., San Francisco, California,
U.S.A., to pay for such reams, and the Philippine National Bank approved and granted the application for
the letter of credit; that the Philippine National Bank, through the Crocker First National Bank, its corre-
spondent in the United States, paid to the payee the sum of $4,300, United States Currency; that on 26
April 1951 when the plaintiff paid its account to the Philippine National Bank in Manila, the defendant,
pursuant to Republic Act No. 601, as amended, assessed and collected from it 17% special excise tax on
the amount in Philippine peso of foreign exchange sold, amounting to P1,474.70 which the plaintiff paid
to the defendant under protest for the reason that as the letter of credit was approved and granted on
21 September 1950, or before 28 March 1951, the date of the enactment or approval of Republic Act
No. 601, as amended, the amount of foreign exchange sold by the defendant bank by the letter of credit
to the plaintiff corporation was not subject to such excise tax; that on 28 December 1954 the plaintiff
corporation made a demand in writing upon the defendant bank for the refund of the aforesaid sum;
and that notwithstanding repeated demands the defendant bank refused to make the refund. The plain-
tiff corporation prays that the 17% special excise tax assessed and collected from it on the amount in
Philippine peso of foreign exchange sold on 21 September 1950, be declared illegal; and that the de-
fendant bank be ordered to refund to it the sum of P1,474.70 illegally assessed and collected (civil No.
25708).
On 25 March 1955 the defendant bank moved for the dismissal of the complaint on the ground that —
1. The assessment and collection from the plaintiff of the sum of P1,474.70 as 17% special excise tax is in
accordance with law, because it was a tax collected after March 28, 1951, when the 17% special excise
tax law went into effect, when the plaintiff paid to the Philippine National Bank on April 25, 1951 the pe-
so equivalent of the draft in U. S. dollars accepted by the plaintiff.
2. The transaction in which foreign exchange was sold subject to the 17% excise tax is not one of those
exempted or refundable under Section 2, 3, 4, and 8 of said 17% tax law, Republic Act No. 601.
On 1 April 1955 the plaintiff corporation objected to the motion to dismiss; on 5 April the defendant
bank filed a reply thereto; and on 11 April the plaintiff a "rejoinder to defendant's reply." On 19 April the
Court denied the motion to dismiss.
On 28 April 1955 the defendant filed its answer reiterating that although the plaintiff corporation had
applied for and been granted a commercial letter of credit on 21 September 1950, before the effectivity
of Republic Act No. 601, as amended, no sale of foreign exchange took place on that date, because such
sale actually took place on 26 April 1951, when the plaintiff paid to the Philippine National Bank the
amount in Philippine currency of the foreign exchange sold. Hence it was subject to the 17% special ex-
cise tax.
After hearing and filing by the parties of their respective memoranda, the Court rendered judgment or-
dering the defendant bank to refund to the plaintiff corporation the sum of P1,474.70, with legal inter-
est thereon from 25 April 1951 until fully paid and to pay the costs. A motion to set aside the judgment
thus rendered was denied. The defendant has appealed.
Foreign exchange is the conversion of an amount of money or currency of one country into an equiva-
1
lent amount of money or currency of another. The appellant claims that the grant or approval on an ap-
plication for a letter of credit for an amount payable in foreign currency is only an executory contract, in
the sense that until payment, return, or settlement of the amount paid and delivered by, or collected
from, the bank in foreign currency be made by the debtor, the contract is not executed or consummat-
ed. Hence, if on the date of payment by the debtor to the bank of the amount of foreign exchange sold
the law imposing the excise tax was already in force, such tax must be collected. On the other hand, the
appellee contends that, upon the approval or grant of an application for a letter of credit for an amount
payable in foreign currency, the contract is perfected or consummated. Hence, if on the date of such ap-
proval or grant the law imposing the excise tax was not yet in existence, such tax can not be assessed
and collected. Both contentions cannot be sustained.
An irrevocable letter of credit granted by a bank, which authorizes a creditor in a foreign country to
draw upon a debtor of another and to negotiate the draft through the agent or correspondent bank or
any bank in the country of the creditor, is a consummated contract, when the agent or correspondent
bank or any bank in the country of the creditor pays or delivers to the latter the amount in foreign cur-
rency, as authorized by the bank in the country of the debtor in compliance with the letter of credit
granted by it. It is the date of the payment of the amount in foreign currency to the creditor in his coun-
try by the agent or correspondent bank of the bank in the country of the debtor that turns from execu-
tory to executed or consummated contract. It is not the date of payment by the debtor to the bank in
his country of the amount of foreign exchange sold that makes the contract executed or consummated,
because the bank may grant the debtor extension of time to pay such debt. The contention of the ap-
pellee that as there was a meeting of the minds and of contracting parties as to price and object of the
2
contract upon the approval or grant of an application for a letter of credit for an amount payable in
payable in foreign currency, the contract was a valid and executed contract of sale of foreign exchange.
True, there was such a contract in the sense that one party who has performed his part may compel the
3
other to perform his. Still until payment be made in foreign currency of the amount applied for in the
letter of credit and approved and granted by the bank, the same is not an executed or consummated
contract. The payment of the amount in foreign currency to the creditor by the bank or its agent or cor-
respondent is necessary to consummate the contract. Hence the date of such payment or delivery of the
amount in foreign currency to the creditor determines whether such amount of foreign currency is sub-
ject to the tax imposed by the Government of the country where such letter of credit was granted.
It appearing that the draft authorized by the letter of credit applied for by the appellee and granted by
the appellant must be drawn and presented or negotiated in San Francisco, California, U.S.A., not later
than 19 October 1950 (Exhibit H), it may be presumed that the payment of $4,300 in favor of Getz Bros.,
Inc. in San Francisco, California, U.S.A., for the account of the appellee was paid by the Crocker First Na-
tional Bank, as agent or correspondent of the Philippine National Bank, on or before 19 October 1950.
Such being the case, the excise tax at the rate of 17% on the amount to be paid by the appellant in Phil-
ippine currency for the foreign exchange sold is not subject to such tax, because Republic Act No. 601
4
imposing such tax took effect only on 28 March 1951.
5
The judgment appealed from is affirmed, without pronouncement as to costs.
Paras, C. J., Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes, J. B. L. and
Endencia, JJ., concur.

===

G.R. No. 105387 November 11, 1993

JOHANNES SCHUBACK & SONS PHILIPPINE TRADING CORPORATION, petitioner,
vs.
THE HON. COURT OF APPEALS, RAMON SAN JOSE, JR., doing business under the name and style "PHIL-
IPPINE SJ INDUSTRIAL TRADING," respondents.
Hernandez, Velicaria, Vibar & Santiago for petitioner.
Ernesto M. Tomaneng for private respondent.

ROMERO, J.:
In this petition for review on certiorari, petitioner questions the reversal by the Court of Appeals 1 of the
trial court's ruling that a contract of sale had been perfected between petitioner and private respondent
over bus spare parts.
The facts as quoted from the decision of the Court of Appeals are as follows:
Sometime in 1981, defendant 2 established contact with plaintiff 3 through the Philippine Consulate
General in Hamburg, West Germany, because he wanted to purchase MAN bus spare parts from Germa-
ny. Plaintiff communicated with its trading partner. Johannes Schuback and Sohne Handelsgesellschaft
m.b.n. & Co. (Schuback Hamburg) regarding the spare parts defendant wanted to order.
On October 16, 1981, defendant submitted to plaintiff a list of the parts (Exhibit B) he wanted to pur-
chase with specific part numbers and description. Plaintiff referred the list to Schuback Hamburg for
quotations. Upon receipt of the quotations, plaintiff sent to defendant a letter dated 25 November,
1981 (Exh. C) enclosing its offer on the items listed by defendant.
On December 4, 1981, defendant informed plaintiff that he preferred genuine to replacement parts, and
requested that he be given 15% on all items (Exh. D).
On December 17, 1981, plaintiff submitted its formal offer (Exh. E) containing the item number, quanti-
ty, part number, description, unit price and total to defendant. On December, 24, 1981, defendant in-
formed plaintiff of his desire to avail of the prices of the parts at that time and enclosed Purchase Order
No. 0101 dated 14 December 1981 (Exh. F to F-4). Said Purchase Order contained the item number, part
number and description. Defendant promised to submit the quantity per unit he wanted to order on De-
cember 28 or 29 (Exh. F).
On December 29, 1981, defendant personally submitted the quantities he wanted to Mr. Dieter Reich-
ert, General Manager of plaintiff, at the latter's residence (t.s.n., 13 December, 1984, p. 36). The quanti-
ties were written in ink by defendant in the same Purchase Order previously submitted. At the bottom
of said Purchase Order, defendant wrote in ink above his signature: "NOTE: Above P.O. will include a 3%
discount. The above will serve as our initial P.O." (Exhs. G to G-3-a).
Plaintiff immediately ordered the items needed by defendant from Schuback Hamburg to enable de-
fendant to avail of the old prices. Schuback Hamburg in turn ordered (Order No. 12204) the items from
NDK, a supplier of MAN spare parts in West Germany. On January 4, 1982, Schuback Hamburg sent
plaintiff a proforma invoice (Exhs. N-1 to N-3) to be used by defendant in applying for a letter of credit.
Said invoice required that the letter of credit be opened in favor of Schuback Hamburg. Defendant ac-
knowledged receipt of the invoice (t.s.n., 19 December 1984, p. 40).
An order confirmation (Exhs. I, I-1) was later sent by Schuback Hamburg to plaintiff which was forward-
ed to and received by defendant on February 3, 1981 (t.s.n., 13 Dec. 1984, p. 42).
On February 16, 1982, plaintiff reminded defendant to open the letter of credit to avoid delay in ship-
ment and payment of interest (Exh. J). Defendant replied, mentioning, among others, the difficulty he
was encountering in securing: the required dollar allocations and applying for the letter of credit, pro-
curing a loan and looking for a partner-financier, and of finding ways 'to proceed with our orders" (Exh.
K).
In the meantime, Schuback Hamburg received invoices from, NDK for partial deliveries on Order
No.12204 (Direct Interrogatories., 07 Oct, 1985, p. 3). Schuback Hamburg paid NDK. The latter con-
firmed receipt of payments made on February 16, 1984 (Exh.C-Deposition).
On October 18, 1982, Plaintiff again reminded defendant of his order and advised that the case may be
endorsed to its lawyers (Exh. L). Defendant replied that he did not make any valid Purchase Order and
that there was no definite contract between him and plaintiff (Exh. M). Plaintiff sent a rejoinder explain-
ing that there is a valid Purchase Order and suggesting that defendant either proceed with the order and
open a letter of credit or cancel the order and pay the cancellation fee of 30% of F.O.B. value, or plaintiff
will endorse the case to its lawyers (Exh. N).
Schuback Hamburg issued a Statement of Account (Exh. P) to plaintiff enclosing therewith Debit Note
(Exh. O) charging plaintiff 30% cancellation fee, storage and interest charges in the total amount of DM
51,917.81. Said amount was deducted from plaintiff's account with Schuback Hamburg (Direct Interroga-
tories, 07 October, 1985).
Demand letters sent to defendant by plaintiff's counsel dated March 22, 1983 and June 9, 1983 were to
no avail (Exhs R and S).
Consequently, petitioner filed a complaint for recovery of actual or compensatory damages, unearned
profits, interest, attorney's fees and costs against private respondent.
In its decision dated June 13, 1988, the trial court4 ruled in favor of petitioner by ordering private re-
spondent to pay petitioner, among others, actual compensatory damages in the amount of DM
51,917.81, unearned profits in the amount of DM 14,061.07, or their peso equivalent.
Thereafter, private respondent elevated his case before the Court of Appeals. On February 18, 1992, the
appellate court reversed the decision of the trial court and dismissed the complaint of petitioner. It
ruled that there was no perfection of contract since there was no meeting of the minds as to the price
between the last week of December 1981 and the first week of January 1982.
The issue posed for resolution is whether or not a contract of sale has been perfected between the par-
ties.
We reverse the decision of the Court of Appeals and reinstate the decision of the trial court. It bears em-
phasizing that a "contract of sale is perfected at the moment there is a meeting of minds upon the thing
which is the object of the contract and upon the price. . . . " 5
Article 1319 of the Civil Code states: "Consent is manifested by the meeting of the offer and acceptance
upon the thing and the cause which are to constitute the contract. The offer must be certain and the ac-
ceptance absolute. A qualified acceptance constitutes a counter offer." The facts presented to us indi-
cate that consent on both sides has been manifested.
The offer by petitioner was manifested on December 17, 1981 when petitioner submitted its proposal
containing the item number, quantity, part number, description, the unit price and total to private re-
spondent. On December 24, 1981, private respondent informed petitioner of his desire to avail of the
prices of the parts at that time and simultaneously enclosed its Purchase Order No. 0l01 dated Decem-
ber 14, 1981. At this stage, a meeting of the minds between vendor and vendee has occurred, the object
of the contract: being the spare parts and the consideration, the price stated in petitioner's offer dated
December 17, 1981 and accepted by the respondent on December 24,1981.
Although said purchase order did not contain the quantity he wanted to order, private respondent made
good, his promise to communicate the same on December 29, 1981. At this juncture, it should be point-
ed out that private respondent was already in the process of executing the agreement previously
reached between the parties.
Below Exh. G-3, marked as Exhibit G-3-A, there appears this statement made by private respondent:
"Note. above P.O. will include a 3% discount. The above will serve as our initial P.O." This notation on
the purchase order was another indication of acceptance on the part of the vendee, for by requesting a
3% discount, he implicitly accepted the price as first offered by the vendor. The immediate acceptance
by the vendee of the offer was impelled by the fact that on January 1, 1982, prices would go up, as in
fact, the petitioner informed him that there would be a 7% increase, effective January 1982. On the oth-
er hand, concurrence by the vendor with the said discount requested by the vendee was manifested
when petitioner immediately ordered the items needed by private respondent from Schuback Hamburg
which in turn ordered from NDK, a supplier of MAN spare parts in West Germany.
When petitioner forwarded its purchase order to NDK, the price was still pegged at the old one. Thus,
the pronouncement of the Court Appeals that there as no confirmed price on or about the last week of
December 1981 and/or the first week of January 1982 was erroneous.
While we agree with the trial court's conclusion that indeed a perfection of contract was reached be-
tween the parties, we differ as to the exact date when it occurred, for perfection took place, not on De-
cember 29, 1981. Although the quantity to be ordered was made determinate only on December 29,
1981, quantity is immaterial in the perfection of a sales contract. What is of importance is the meeting
of the minds as to the object and cause, which from the facts disclosed, show that as of December 24,
1981, these essential elements had already occurred.
On the part of the buyer, the situation reveals that private respondent failed to open an irrevocable let-
ter of credit without recourse in favor of Johannes Schuback of Hamburg, Germany. This omission, how-
ever. does not prevent the perfection of the contract between the parties, for the opening of the letter
of credit is not to be deemed a suspensive condition. The facts herein do not show that petitioner re-
served title to the goods until private respondent had opened a letter of credit. Petitioner, in the course
of its dealings with private respondent, did not incorporate any provision declaring their contract of sale
without effect until after the fulfillment of the act of opening a letter of credit.
The opening of a etter of credit in favor of a vendor is only a mode of payment. It is not among the es-
sential requirements of a contract of sale enumerated in Article 1305 and 1474 of the Civil Code, the ab-
sence of any of which will prevent the perfection of the contract from taking place.
To adopt the Court of Appeals' ruling that the contract of sale was dependent on the opening of a letter
of credit would be untenable from a pragmatic point of view because private respondent would not be
able to avail of the old prices which were open to him only for a limited period of time. This explains why
private respondent immediately placed the order with petitioner which, in turn promptly contacted its
trading partner in Germany. As succinctly stated by petitioner, "it would have been impossible for re-
spondent to avail of the said old prices since the perfection of the contract would arise much later, or af-
ter the end of the year 1981, or when he finally opens the letter of credit." 6
WHEREFORE, the petition is GRANTED and the decision of the trial court dated June 13, 1988 is REIN-
STATED with modification.
SO ORDERED.
Feliciano, Bidin, Melo and Vitug, JJ., concur.

===

G.R. No. L-24821 October 16, 1970

BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee,
vs.
DE RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO and AURORA CARCERENY alias AURORA C. GON-
ZALES, defendants-appellants.
Aviado and Aranda for plaintiff-appellee.
S. Emiliano Calma for defendants-appellants.

CASTRO, J.:.
This is an appeal from the decision of the Court of First Instance of Manila ordering the defendants-ap-
pellants to pay to the Bank of the Philippine Islands (hereinafter referred to as the Bank), jointly and sev-
erally, the value of the credit it extended to them in several letters of credit which the Bank opened at
the behest of the defendants appellants to finance their importation of dyestuffs from the United
States, which however turned out to be mere colored chalk upon arrival and inspection thereof at the
port of Manila.
The record shows that on four (4) different occasions in 1961, the De Reny Fabric Industries, Inc., a Phil-
ippine corporation through its co-defendants-appellants, Aurora Carcereny alias Aurora C. Gonzales, and
Aurora T. Tuyo, president and secretary, respectively of the corporation, applied to the Bank for four (4)
irrevocable commercial letters of credit to cover the purchase by the corporation of goods described in
the covering L/C applications as "dyestuffs of various colors" from its American supplier, the J.B. Distrib-
uting Company. All the applications of the corporation were approved, and the corresponding Commer-
cial L/C Agreements were executed pursuant to banking procedures. Under these agreements, the
aforementioned officers of the corporation bound themselves personally as joint and solidary debtors
with the corporation. Pursuant to banking regulations then in force, the corporation delivered to the
Bank peso marginal deposits as each letter of credit was opened.
The dates and amounts of the L/Cs applied for and approved as well as the peso marginal deposits made
were, respectively, as follows:.
Date Application Amount Marginal
& L/C No. Deposit
Oct. 10, 1961 61/1413 $57,658.38 P43,407.33
Oct. 23, 1961 61/1483 $25,867.34 19,473.64
Oct. 30, 1961 61/1495 $19,408.39 14,610.88
Nov. 10, 1961 61/1564 $26,687.64 20,090.90
TOTAL .... $129,621.75 P97,582.75
By virtue of the foregoing transactions, the Bank issued irrevocable commercial letters of credit ad-
dressed to its correspondent banks in the United States, with uniform instructions for them to notify the
beneficiary thereof, the J.B. Distributing Company, that they have been authorized to negotiate the lat-
ter's sight drafts up to the amounts mentioned the respectively, if accompanied, upon presentation, by
a full set of negotiable clean "on board" ocean bills of lading covering the merchandise appearing in the
LCs that is, dyestuffs of various colors. Consequently, the J.B. Distributing Company drew upon, present-
ed to and negotiated with these banks, its sight drafts covering the amounts of the merchandise ostensi-
bly being exported by it, together with clean bills of lading, and collected the full value of the drafts up
to the amounts appearing in the L/Cs as above indicated. These correspondent banks then debited the
account of the Bank of the Philippine Islands with them up to the full value of the drafts presented by
the J.B. Distributing Company, plus commission thereon, and, thereafter, endorsed and forwarded all
documents to the Bank of the Philippine Islands.
In the meantime, as each shipment (covered by the above-mentioned letters of credit) arrived in the
Philippines, the De Reny Fabric Industries, Inc. made partial payments to the Bank amounting, in the ag-
gregate, to P90,000. Further payments were, however, subsequently discontinued by the corporation
when it became established, as a result of a chemical test conducted by the National Science Develop-
ment Board, that the goods that arrived in Manila were colored chalks instead of dyestuffs.
The corporation also refused to take possession of these goods, and for this reason, the Bank caused
them to be deposited with a bonded warehouse paying therefor the amount of P12,609.64 up to the fil-
ing of its complaint with the court below on December 10, 1962.
On October 24, 1963 the lower court rendered its decision ordering the corporation and its co-defend-
ants (the herein appellants) to pay to the plaintiff-appellee the amount of P291,807.46, with interest
thereon, as provided for in the L/C Agreements, at the rate of 7% per annum from October 31, 1962 un-
til fully paid, plus costs.
It is the submission of the defendants-appellants that it was the duty of the foreign correspondent
banks of the Bank of the Philippine Islands to take the necessary precaution to insure that the goods
shipped under the covering L/Cs conformed with the item appearing therein, and, that the foregoing
banks having failed to perform this duty, no claim for recoupment against the defendants-appellants,
arising from the losses incurred for the non-delivery or defective delivery of the articles ordered, could
accrue.
We can appreciate the sweep of the appellants' argument, but we also find that it is nestled hopelessly
inside a salient where the valid contract between the parties and the internationally accepted customs
1
of the banking trade must prevail.
Under the terms of their Commercial Letter of Credit Agreements with the Bank, the appellants agreed
that the Bank shall not be responsible for the "existence, character, quality, quantity, conditions, pack-
ing, value, or delivery of the property purporting to be represented by documents; for any difference in
character, quality, quantity, condition, or value of the property from that expressed in documents," or
for "partial or incomplete shipment, or failure or omission to ship any or all of the property referred to
in the Credit," as well as "for any deviation from instructions, delay, default or fraud by the shipper or
anyone else in connection with the property the shippers or vendors and ourselves [purchasers] or any
of us." Having agreed to these terms, the appellants have, therefore, no recourse but to comply with
their covenant. 2
But even without the stipulation recited above, the appellants cannot shift the burden of loss to the
Bank on account of the violation by their vendor of its prestation.
It was uncontrovertibly proven by the Bank during the trial below that banks, in providing financing in in-
ternational business transactions such as those entered into by the appellants, do not deal with the
property to be exported or shipped to the importer, but deal only with documents. The Bank introduced
in evidence a provision contained in the "Uniform Customs and Practices for Commercial Documentary
Credits Fixed for the Thirteenth Congress of International Chamber of Commerce," to which the Philip-
pines is a signatory nation. Article 10 thereof provides: .
In documentary credit operations, all parties concerned deal in documents and not in goods. — Payment,
negotiation or acceptance against documents in accordance with the terms and conditions of a credit by
a Bank authorized to do so binds the party giving the authorization to take up the documents and reim-
burse the Bank making the payment, negotiation or acceptance.
The existence of a custom in international banking and financing circles negating any duty on the part of
a bank to verify whether what has been described in letters of credits or drafts or shipping documents
actually tallies with what was loaded aboard ship, having been positively proven as a fact, the appellants
are bound by this established usage. They were, after all, the ones who tapped the facilities afforded by
the Bank in order to engage in international business.
ACCORDINGLY, the judgment a quo is affirmed, at defendants-appellants' cost. This is without prejudice
to the Bank, in proper proceedings in the court below in this same case proving and being reimbursed
additional expenses, if any, it has incurred by virtue of the continued storage of the goods in question up
to the time this decision becomes final and executory.
Reyes, J.B.L., Actg. C.J., Dizon, Makalintal, Zaldivar, Fernando, Teehankee, Barredo, Villamor and Maka-
siar, JJ., concur.
Concepcion, C.J., is on leave.

===

G.R. No. 74834 November 17, 1988

INSULAR BANK OF ASIA & AMERICA (NOW PHILIPPINE COMMERCIAL INTERNATIONAL BANK), petition-
er,
vs.
HON. INTERMEDIATE APPELLATE COURT, THE PHILIPPINE AMERICAN LIFE INSURANCE CO., SPS. BEN
MENDOZA & JUANITA M. MENDOZA, respondents.
Balili, Parado, Cavada & Maamo for petitioner.
Romulo, Mabanta, Buenaventura, Sayoc & Delos Angeles for respondent Spouses Mendozas.
Francisco, Zulueta & Associates for respondent Philam Life.

MELENCIO-HERRERA, J.:
An appeal by certiorari under Rule 45 of the Rules of Court by petitioner, the Insular Bank of Asia and
America (IBAA) [now the Philippine Commercial International Bank], from the judgment of the public re-
spondent, then the Intermediate Appellate Court, * in CA-G.R. CV No. 03224.
Briefly, the antecedent facts disclose that sometime in 1976 and 1977 respondent spouses Ben S. Men-
doza and Juanita M. Mendoza (the Mendozas, for brevity), obtained two (2) loans from respondent Phil-
ippine American Life Insurance Co. (Philam Life) in the total amount of P600,000.00 to finance the con-
struction of their residential house at Mandaue City. The said loans, with a 14% nominal interest rate,
were to be liquidated in equal amortizations over a period of five (5) years from March 1977 to March
1982.
To secure payment, Philam Life required that amortizations be guaranteed by an irrevocable standby let-
ter of credit of a commercial bank. Thus, the Mendozas contracted with petitioner Insular Bank of Asia
and America (IBAA) for the issuance of two (2) irrevocable standby Letters of Credit in favor of Philam
Life for the total amount of P600,000.00. The first L/C for P500,000.00 was to expire on 1 October 1981
(Exhibit "7", IBAA) and the second for P100,000.00 on 1 January 1982 (Exhibit "8", IBAA) These two (2) ir-
revocable standby L/Cs were, in turn, secured by a real estate mortgage for the same amount on the
property of Respondent Spouses in favor of IBAA.
On 11 May 1977, the Mendozas executed a promissory note (No. L-562/77) in favor of IBAA promising
to pay the sum of P100,000.00 plus 19% p.a. interest on 31 May 1979. Again, on 3 June 1977, Respond-
ent Spouses executed another Promissory Note (No. 564/77) binding themselves to pay IBAA
P100,000.00 plus 19% p.a. interest on 23 June 1979. Both Notes authorized IBAA "to sell at public or pri-
vate sale such securities or things for the purpose of applying their proceeds to such payments" of many
particular obligation or obligations" the Mendozas may have to IBAA. (Exhibits "34" and "35"-IBAA, An-
nex "D" p. 131, Rollo)
The Mendozas failed to pay Philam Life the amortization that fell due on 1 June 1978 so that Philam Life
informed IBAA that it was declaring both loans as "entirely due and demandable" and demanded pay-
ment of P492,996.30 (Exhibit "H"). However, because IBAA contested the propriety of calling ill the en-
tire loan, Philam Life desisted and resumed availing of the L/Cs by drawing on them for five (5) more am-
ortizations.
On 7 September 1979, because the Mendozas defaulted on their amortization due on 1 September
1979, Philam Life again informed IBAA that it was declaring the entire balance outstanding on both
loans, including liquidated damages, "immediately due and payable." Philam Life then demanded the
payment of P274,779.56 from IBAA but the latter took the position that, as a melee guarantor of the
Mendozas who are the principal debtors, its remaining outstanding obligation under the two (2) standby
L/Cs was only P30,100.60. Later, IBAA corrected the latter amount and showed instead an overpayment
arrived at as follows:
Limit of Liability P 600,000.00

Less:

a) Payment of Mendozas P 280, 293.11

b) Payment of IBAA 372,227.65 652,520.76

Overpayment by IBAA ( P 52,520.76)

On 21 April 1980 the Real Estate Mortgage, which secured the two (2) standby L/Cs. was extrajudicially
foreclosed by, and sold at public auction for P775,000.00, to petitioner IBAA as the lone and highest bid-
der (Exhibit "17-Mendoza"). The bid price of P775,000.00 by petitioner IBAA was arrived at as follows:
 Principal (unpaid advances under the 2 P 432,386.07

standby LCs) plus interest & charges

Add:

a) Stipulated Attorney's fees (20%) P 86,477.20

b) Principals (clean loans) plus accrued

interest under P/Ns Nos. 562/77 and

564/77 P 255,346.95

c) Expenses of foreclosure P 72.20

TOTAL P 775,000.42
On a date that does not appear of record, Philam Life filed suit against Respondent Spouses and IBAA
before the Regional Trial Court of Manila, Branch XXXXI, for the recovery of the sum of P274,779.56, the
amount allegedly still owing under the loan. After trial, said Court rendered a Decision finding that IBAA
had paid Philam Life only P342,127.05 and not P372,227.65, as claimed by IBAA, because of a stale IBAA
Manager's check in the amount of P30,100.60, which had to be deducted. With this deduction, the Trial
Court arrived at the following computation:
Limit of Liability of IBAA Less: P 600,000.00

a) Payment by Mendozas P 280, 293.11

b) Payment by IBAA P342,127.05 P 622,420.16

Overpayment by IBAA P 22,420.16

Thus, the Trial Court ruled:
ACCORDINGLY, judgment is hereby rendered ordering:
(1) Defendants-spouses Ben S. Mendoza and Juanita M. Mendoza to pay plaintiff Philippine American
Life Insurance Company the sum of P322,000.00 plus 2% per month as penalty interest from September
12, 1979 until the whole amount is fully paid, P10,000 as attorney's fees, and costs.
(2) Plaintiff Philippine American Life Insurance Company to refund the sum of P22,420.16 to the defend-
ant Insular Bank of Asia and America plus legal interest from March 31, 1980 until the whole amount is
fully paid; and
(3) Dismissal of the counterclaim and crossclaim filed by the defendants- spouses against the plaintiff
and the defendant IBAA, as well as the counterclaim filed by defendant IBAA against the plaintiff. (pp.
28-29, Rollo)
In so deciding, the Trial Court took the position that IBAA, "as surety" was discharged of its liability to
the extent of the payment made by the Mendozas, as the principal debtors, to the creditor, Philam Life.
Both Philam Life and Respondent Spouses appealed to respondent Appellate Court, which reversed the
Trial Court and ruled instead that IBAA's liability was not reduced by virtue of the payments made by the
Mendozas. Accordingly, the Appellate Court decreed:
WHEREFORE, premises considered, judgment is hereby rendered ordering:
1. Defendants-appellant spouses Ben S. Mendoza and Juanita M. Mendoza and defendant-appellee IBAA
to pay jointly and severally plaintiff-appellant Philamlife, the sum of P222,000.00 plus 2% per month as
penalty interest from September 12, 1979 until the whole amount is fully paid; plus P25,000.00, as attor-
ney's fees, and costs; however, defendant-appellee IBAA shall only be liable up to the amount of
P296,294.05;
2. Dismissal of the claim by the IBAA for a refund of P22,420.16 from the Phil-American Life Insurance
Co.; and
3. Dismissal of the counterclaim and cross-claim filed by the defendant- spouses against the plaintiff and
the defendant IBAA, as well as the counterclaim filed by defendant IBAA against the plaintiff.
No special pronouncement as to costs in this instance. (p. 51, Rollo).
Availing of the instant Petition, IBAA seeks a reversal of the aforesaid judgment and the affirmance in-
stead of that of the Trial Court. We resolved to give due course. The issues addressed, as posited by
IBAA, are:
1. Whether or not the partial payments made by the principal obligors (respondent MENDOZAS) would
have the corresponding effect of reducing the liability of the petitioner as guarantor or surety under the
terms of the standby LCs in question.
2. Whether or not respondent Intermediate Appellate Court is correct in disregarding a documentary
evidence (O.R. No. 74323, Exhibit 28-IBAA) showing the amount paid by petitioner and which was admit-
ted as evidence without objection on the paint of the counsel for the respondent Philam.
3. Whether or not the Intermediate Appellate Court is correct in passing sub-silencio the following
points raised by the petitioner in its Brief to sustain the decision of the Trial Court on some other
grounds.
a. Effective rate of interest imposed by respondent Philam exceeded the allowable ceiling;
b. Respondent Philam has no right to call in at one time the two standby letters of credit;
c. Respondent Philam failed to follow the condition in the two (2) standby letters of credit:
which could have otherwise altered the result of the decision.
4. Whether or not the award of attorney's fees to respondent Philam is proper in so far as petitioner is
affected. (p. 15, Rollo)
The pivotal issue is the first one. IBAA stresses that it has no more liability to Philam Life under the two
(2) standby Letters of Credit and, instead, is entitled to a refund. Whereas Philam Life and the Mendoza
spouses separately maintain that IBAA's obligation under said two (2) L/Cs is original and primary and is
not reduced by the direct payments made by the Mendozas to Philam Life.
1. In construing the terms of a Letter of Credit, as in other contracts, it is the intention of the parties that
must govern.
Letters of credit and contracts for the issuance of such letters are subject to the same rules of construc-
tion as are ordinary commercial contracts. They are to receive a reasonable and not a technical construc-
tion and although usage and custom cannot control express terms in letters of credit, they are to be con-
strued with reference to all the surrounding facts and circumstances, to the particular and often varying
terms in which they may be expressed, the circumstances and intention of the parties to them, and the
usages of the particular trade of business contemplated. (International Banking Corp. vs. Irving National
Bank, CCA N.Y. 283 F. 103, affirming DC 274 F. 122; Old Colony Trust Co. vs. Lawyers' Title and Trust Co.,
CAA NY, 297 F. 152, cited in Vol. 72, CJS sec. 178, pp. 387-388).<äre||anº•1àw>
The terms of the subject Irrevocable Standby Letters of Credit read, in part, as follows:
This credit secures the payment of any obligation of the accountee to you under that Loan Agreement
hereto attached as Annex 'A' and made a part hereof, including those pertaining to (a) surcharges on de-
faulted account; stallments, (b) increased interest charges (in the event the law should authorize this in-
crease), and (c) liabilities connected with taxes stipulated to be for Accountee's and provided however,
that our maximum liabilities hereunder shall not exceed the amount of P500,000.00 (Pl00.000.00 for the
other LC).
Each drawing under this credit shall be available at any time after one (1) day from due date of the obli-
gations therein secured. Each drawing under this credit shall be accomplished by your signed statement
in duplicate that the amount drawn represents payment due and unpaid by the accountee. (pp. 11-12,
Decision, pp. 38-39, Rollo). [Emphasis our ].
Unequivocally, the subject standby Letters of Credit secure the payment of any obligation of the Mendo-
zas to Philam Life including all interests, surcharges and expenses thereon but not to exceed
P600,000.00. But while they are a security arrangement, they are not converted thereby into contracts
of guaranty. That would make them ultra vires rather than a letter of credit, which is within the powers
of a bank (Section 74[e], RA 337, General Banking Act). 1 The standby L/Cs are, "in effect an absolute un-
dertaking to pay the money advanced or the amount for which credit is given on the faith of the instru-
ment." (Scribner v. Rutherford, 22 N.W. 670, 65 Iowa 551; Duval v. Trask,, 12 Mass. 154, cited in 38 CJS,
Sec. 7, p. 1142). They are primary obligations and not accessory contracts. Being separate and independ-
ent agreements, the payments made by the Mendozas cannot be added in computing IBAA's liability un-
der its own standby letters of credit. Payments made by the Mendozas directly to Philam Life are in com-
pliance with their own prestation under the loan agreements. And although these payments could result
in the reduction of the actual amount which could ultimately be collected from IBAA, the latter's sepa-
rate undertaking under its L/Cs remains.
Both the Trial Court and the Appellate Court found, as a fact, that there still remains a balance on the
loan, Pursuant to its absolute undertaking under the L/Cs, therefore, IBAA cannot escape the obligation
to pay Philam Life for this unexpended balance. The Appellate Court found it to be P222,000.00, arrived
at by the Trial Court and adopted by the Appellate Court, as follows:
... In the summary of application of payments (Exhibit "KK") the plaintiff applied Pl,918.00 as commit-
ment fee, P4,397.66 as surcharges, P199,683.40 as interests, and P320,000.00 on the principal. The
P58,000.00 which is covered by OR No. 74396 was also applied "against the total loan." Since plaintiff
applied P378,000.00 against the total indebtedness of P600,000.00 there still remains an outstanding
balance on the principal P322,000.00 (should be P222,000.00) aside from the agreed penalty interest
until the whole amount is fully paid. ... (Decision, Trial Court, p. 50, Rollo)
The amount of P222,000.00, therefore, considered as "any obligation of the accountee" under the L/Cs
will still have to be paid by IBAA under the explicit terms thereof, which IBAA had itself supplied. Letters
of credit are strictly construed to the end that the rights of those directly parties to them may be pre-
served and their interest safeguarded (Moss vs. Old Colony Trust Co., 140 N.E. 803, 246 Mass. 138,
152).<äre||anº•1àw> Like any other writing, it will be construed most strongly against the writer and so
as to be reasonable and consistent with honest intentions. On the whole, the construction will be gener-
ally a strict one (Lamborn vs. National Park Bank of New York, 208 N.Y.S. 428, 212 App. Div. 25, affirming
Id , 204 N.Y.S. 557,123 Misc. 211, affirmed Id.. 148 N.E. 664, 240 N.Y. 520). As found by the Appellate
Court, however, the amount payable should not exceed P296,294,05 (P600,000.00 less P303,705.95, the
total amount found by the Appellate Court to have been paid by IBAA to Philam Life).
2. The second issue as to whether or not documentary evidence was disregarded by the Appellate Court
regarding the amount actually paid by IBAA to Philam Life, or P303,705.95 (not P342,127.05 as found by
the Trial Court), questions a finding of fact, which should be accorded not only respect but even finality.
It is not the function of this Court to analyze or weigh such evidence all over again, its jurisdiction being
limited to reviewing errors of law that might have been committed by lower Courts.
3. The third issue faults respondent Appellate Court with having passed
sub-silencio over certain points raised by petitioner IBAA in his Brief sustaining the Decision of the Trial
Court. It is accepted judicial practice, however, that Courts are not required to resolve all issues raised in
pleadings unless necessary for the resolution of the case. Apparently, respondent Appellate Court
deemed it unnecessary to pass upon those points. Be that as it may, suffice it to state:
a) It is a matter of common knowledge in lending procedures that the nominal interest is different from
the effective rate of interest and that the discounting interest scheme as well as the principal amortiza-
tion scheme are practices commonly resorted to by lending institutions. If IBAA disagreed with the com-
putation scheme adopted by Philam Life, which could have been detected in the early stages of the con-
troversy, IBAA could have interposed its objections.
b) The right to call in at one time the two standby L/Cs was specifically provided for in the Loan Agree-
ment, which was specifically made an integral part of the L/Cs Section 8 thereof read:
... 8. The Lender shall have the light to declare the entire balance of the loans and all obligations of the
borrower to the lender as immediately due and payable in case the borrower fails for any reason to
comply with any payment or other obligations of the Lender. (p. 248, Rollo)
c) The omission by Philam Life to draw the required drafts on the standby L/Cs can be explained by the
fact that all the drafts were pre-prepared, pre-dated and
pre-accepted by the Mendozas. Philam Life, therefore, could not have complied to the letter with the
provision in the L/Cs that drawings therefrom were to be made by drafts for each due and unpaid amor-
tization. Besides, the accelaration of the entire balance of the loan was sufficient notice of dishonor of
the pre-drawn and pre-accepted drafts.
4. Coming now to the award of attorney's fees of P25,000.00, the same appears reasonable under the
circumstances of the case specially considering that in the foreclosure of the mortgage in its favor IBAA
charged the Mendozas attorney's fees in the amount of P86,477.20, supra.
As to the liability of the Mendozas to IBAA, it bears recalling that the Mendozas, upon their application
for the opening and issuance of the Irrevocable Standby Letters of Credit in favor of Philam Life, had exe-
cuted a Real Estate Mortgage as security to IBAA for any payment that the latter may remit to Philam
Life on the strength of said Letters of Credit; and that IBAA had recovered from the Mendozas the
amount of P432,386.07 when it foreclosed on the mortgaged property of said spouses in the concept of
"principal (unpaid advances under the 2 standby L/Cs plus interest and charges)." In addition, IBAA had
recovered P255,364.95 representing its clean loans to the Mendozas plus accrued interest besides the
fact that it now has the foreclosed property. As between IBAA and the Mendozas, therefore, there has
been full liquidation. The remaining obligation of P222,000.00 on the loan of the Mendozas, therefore, is
now IBAA's sole responsibility to pay to Philam Life by virtue of its absolute and irrevocable undertaking
under the standby L/Cs. Specially so, since the promissory notes executed by the Mendozas in favor of
IBAA authorized the sale of the mortgaged security "for the purpose of applying their proceeds to ...
payments" of their obligations to IBAA.
WHEREFORE, the Decision of respondent Intermediate Appellate Court, dated 20 December 1985, is
hereby MODIFIED. Petitioner IBAA (now the Philippine Commercial International Bank) shall pay Philip-
pine American Life Insurance Company the sum of P222,000.00 plus 2% per month as penalty interest
from 12 September 1979 until the whole amount is fully paid, but in no case to exceed P296,294.05,
plus P25,000.00 as attorney's fees. No costs.
SO ORDERED.
Paras, Sarmiento and Regalado, JJ., concur.
Padilla, J., took no part.

====

G.R. No. L-27829 August 19, 1988

PHILIPPINE VIRGINIA TOBACCO ADMINISTRATION, petitioner,
vs.
HON. WALFRIDO DE LOS ANGELES, Judge of the Court of First Instance of Rizal, Branch IV (Quezon
City) and TIMOTEO A. SEVILLA, doing business under the name and style of PHILIPPINE ASSOCIATED
RESOURCES and PRUDENTIAL BANK AND TRUST COMPANY, respondents.
Lorenzo F. Miravite for respondent Timoteo Sevilla.
Ferrer & Ranada Law Office for respondent Prudential Bank & Trust Co.

PARAS, J.:
In these petition and supplemental petition for Certiorari, Prohibition and mandamus with Preliminary
Injunction, petitioner Philippine Virginia Tobacco Administration seeks to annul and set aside the follow-
ing Orders of respondent Judge of the Court of First Instance of Rizal, Branch IV (Quezon City) in Civil
Case No. Q-10351 and prays that the Writ of Preliminary Injunction (that may be) issued by this Court
enjoining enforcement of the aforesaid Orders be made permanent. (Petition, Rollo, pp. 1-9)
They are:
The Order of July 17, 1967:
AS PRAYED FOR, the Prudential Bank & Trust Company is hereby directed to release and deliver to the
herein plaintiff, Timoteo A. Sevilla, the amount of P800,000.00 in its custody representing the marginal
deposit of the Letters of Credit which said bank has issued in favor of the defendant, upon filing by the
plaintiff of a bond in the um of P800,000.00, to answer for whatever damage that the defendant PVTA
and the Prudential Bank & Trust Company may suffer by reason of this order. (Annex "A," Rollo, p. 12)
The Order of November 3,1967:
IN VIEW OF THE FOREGOING, the petition under consideration is granted, as follows: (a) the defendant
PVTA is hereby ordered to issue the corresponding certificate of Authority to the plaintiff, allowing him
to export the remaining balance of his tobacco quota at the current world market price and to make the
corresponding import of American high-grade tobacco; (b) the defendant PVTA is hereby restrained
from issuing any Certificate of Authority to export or import to any persons and/or entities while the
right of the plaintiff to the balance of his quota remains valid, effective and in force; and (c) defendant
PVTA is hereby enjoined from opening public bidding to sell its Virginia leaf tobacco during the effectivi-
ty of its contract with the plaintiff.
xxx xxx xxx
In order to protect the defendant from whatever damage it may sustain by virtue of this order, the
plaintiff is hereby directed to file a bond in the sum of P20,000.00. (Annex "K," Rollo, pp. 4-5)
The Order of March 16, 1968:
WHEREFORE, the motion for reconsideration of the defendant against the order of November 3, 1967 is
hereby DENIED. (Annex "M," Rollo, P. 196)
The facts of the case are as follows:
Respondent Timoteo Sevilla, proprietor and General Manager of the Philippine Associated Resources
(PAR) together with two other entities, namely, the Nationwide Agro-Industrial Development Corp. and
the Consolidated Agro-Producers Inc. were awarded in a public bidding the right to import Virginia leaf
tobacco for blending purposes and exportation by them of PVTA and farmer's low-grade tobacco at a
rate of one (1) kilo of imported tobacco for every nine (9) kilos of leaf tobacco actually exported. Subse-
quently, the other two entities assigned their rights to PVTA and respondent remained the only private
entity accorded the privilege.
The contract entered into between the petitioner and respondent Sevilla was for the importation of 85
million kilos of Virginia leaf tobacco and a counterpart exportation of 2.53 million kilos of PVTA and 5.1
million kilos of farmer's and/or PVTA at P3.00 a kilo. (Annex "A," p. 55 and Annex "B," Rollo, p. 59) In ac-
cordance with their contract respondent Sevilla purchased from petitioner and actually exported
2,101.470 kilos of tobacco, paying the PVTA the sum of P2,482,938.50 and leaving a balance of
P3,713,908.91. Before respondent Sevilla could import the counterpart blending Virginia tobacco,
amounting to 525,560 kilos, Republic Act No. 4155 was passed and took effect on June 20, 1 964, au-
thorizing the PVTA to grant import privileges at the ratio of 4 to 1 instead of 9 to 1 and to dispose of all
its tobacco stock at the best price available.
Thus, on September 14, 1965 subject contract which was already amended on December 14, 1963 be-
cause of the prevailing export or world market price under which respondent will be exporting at a loss,
(Complaint, Rollo, p. 3) was further amended to grant respondent the privileges under aforesaid law,
subject to the following conditions: (1) that on the 2,101.470 kilos already purchased, and exported, the
purchase price of about P3.00 a kilo was maintained; (2) that the unpaid balance of P3,713,908.91 was
to be liquidated by paying PVTA the sum of P4.00 for every kilo of imported Virginia blending tobacco
and; (3) that respondent Sevilla would open an irrevocable letter of credit No. 6232 with the Prudential
Bank and Trust Co. in favor of the PVTA to secure the payment of said balance, drawable upon the re-
lease from the Bureau of Customs of the imported Virginia blending tobacco.
While respondent was trying to negotiate the reduction of the procurement cost of the 2,101.479 kilos
of PVTA tobacco already exported which attempt was denied by petitioner and also by the Office of the
President, petitioner prepared two drafts to be drawn against said letter of credit for amounts which
have already become due and demandable. Respondent then filed a complaint for damages with pre-
liminary injunction against the petitioner in the amount of P5,000,000.00. Petitioner filed an answer
with counterclaim, admitting the execution of the contract. It alleged however that respondent, violated
the terms thereof by causing the issuance of the preliminary injunction to prevent the former from
drawing from the letter of credit for amounts due and payable and thus caused petitioner additional
damage of 6% per annum.
A writ of preliminary injunction was issued by respondent judge enjoining petitioner from drawing
against the letter of credit. On motion of respondent, Sevilla, the lower court dismissed the complaint
on April 19, 1967 without prejudice and lifted the writ of preliminary injunction but petitioner's motion
for reconsideration was granted on June 5,1967 and the Order of April 19,1967 was set aside. On July 1,
1967 Sevilla filed an urgent motion for reconsideration of the Order of June 5, 1967 praying that the Or-
der of dismissal be reinstated. But pending the resolution of respondent's motion and without notice to
the petitioner, respondent judge issued the assailed Order of July 17, 1967 directing the Prudential Bank
& Trust Co. to make the questioned release of funds from the Letter of Credit. Before petitioner could
file a motion for reconsideration of said order, respondent Sevilla was able to secure the releaseof
P300,000.00 and the rest of the amount. Hence this petition, followed by the supplemental petition
when respondent filed with the lower court an urgent ex-parte petition for the issuance of preliminary
mandatory and preventive injunction which was granted in the resolution of respondent Judge on No-
vember 3, 1967, above quoted. On March 16, 1968, respondent Judge denied petitioner's motion for re-
consideration. (Supp. Petition, Rollo, pp. 128- 130)
Pursuant to the resolution of July 21, 1967, the Supreme Court required respondent to file an answer to
the petition within 10 days from notice thereof and upon petitioner's posting a bond of fifty thousand
pesos (P50,000.00), a writ of preliminary mandatory injunction was issued enjoining respondent Judge
from enforcing and implementing his Order of July 17,1967 and private respondents Sevilla and Pruden-
tial Bank and Trust Co. from complying with and implementing said order. The writ further provides that
in the event that the said order had already been complied with and implemented, said respondents are
ordered to return and make available the amounts that might have been released and taken delivery of
by respondent Sevilla. (Rollo, pp. 16-17)
In its answer, respondent bank explained that when it received the Order of the Supreme Court to stop
the release of P800,000.00 it had already released the same in obedience to ailieged earlier Order of the
lower Court which was reiterated with ailieged admonition in a subsequent Order. (Annex "C," Rollo, pp.
37-38) A Manifestation to that effect has already been filed c,irrency respondent bank (Rollo, pp. 19-20)
which was noted c,irrency this Court in the resolution of August 1, 1967, a copy of which was sent to the
Secretary of Justice. (Rollo, p. 30)
Before respondent Sevilla could file his answer, petitioner filed a motion to declare him and respondent
bank in contempt of court for having failed to comply with the resolution to this court of July 21, 1967 to
the effect that the assailed order has already been implemented but respondents failed to return and
make available the amounts that had been released and taken delivery of by respondent Sevilla. (Rollo,
pp. 100-102)
In his answer to the petition, respondent Sevilla claims that petitioner demanded from him a much high-
er price for Grades D and E tobacco than from the other awardees; that petitioner violated its contract
by granting indiscriminately to numerous buyers the right to export and import tobacco while his agree-
ment is being implemented, thereby depriving respondent of his exclusive right to import the Virginia
leaf tobacco for blending purposes and that respondent Judge did not abuse his discretion in ordering
the release of the amount of P800,000.00 from the Letter of Credit, upon his posting a bond for the
same amount. He argued further that the granting of said preliminary injunction is within the sound dis-
cretion of the court with or without notice to the adverse party when the facts and the law are clear as
in the instant case. He insists that petitioner caretaker.2 claim from him a price higher than the other
awardees and that petitioner has no more right to the sum in controversy as the latter has already been
overpaid when computed not at the price of tobacco provided in the contract which is inequitable and
therefore null and void but at the price fixed for the other awardees. (Answer of Sevilla, Rollo, pp. 105-
111)
In its Answer to the Motion for Contempt, respondent bank reiterates its allegations in the Manifesta-
tion and Answer which it filed in this case. (Rollo, pp. 113-114)
In his answer, (Rollo, pp. 118-119) to petitioner's motion to declare him in contempt, respondent Sevilla
explains that when he received a copy of the Order of this Court, he had already disbursed the whole
amount withdrawn, to settle his huge obligations. Later he filed a supplemental answer in compliance
with the resolution of this Court of September 15, 1967 requiring him to state in detail the amounts al-
legedly disbursed c,irrency him out of the withdrawn funds. (Rollo, pp. 121-123)
Pursuant to the resolution of the Supreme Court on April 25, 1968, a Writ of Preliminary Injunction was
issued upon posting of a surety bond in the amount of twenty thousand pesos (P20,000.00) restraining
respondent Judge from enforcing and implementing his orders of November 3, 1967 and March 16,
1968 in Civil Case No. Q-10351 of the Court of First Instance of Rizal (Quezon City).
Respondent Sevilla filed an answer to the supplemental petition (Rollo, pp. 216-221) and so did respond-
ent bank (Rollo, p. 225). Thereafter, all the parties filed their respective memoranda (Memo for Petition-
ers, Rollo, pp. 230-244 for Resp. Bank, pp. 246-247; and for Respondents, Rollo, pp. 252-257). Petition-
ers filed a rejoinder (rollo, pp. 259-262) and respondent Sevilla filed an Amended Reply Memorandum
(Rollo, pp. 266274). Thereafter the case was submitted for decision:' in September, 1968 (Rollo, p. 264).
Petitioner has raised the following issues:
1. Respondent Judge acted without or in excess of jurisdiction or with grave abuse of discretion when he
issued the Order of July 17, 1967, for the following reasons: (a) the letter of credit issued by respondent
bank is irrevocable; (b) said Order was issued without notice and (c) said order disturbed the status
quo of the parties and is tantamount to prejudicing the case on the merits. (Rollo, pp. 7-9)
2. Respondent Judge likewise acted without or in excess of jurisdiction or with grave abuse of discretion
when he issued the Order of November 3, 1967 which has exceeded the proper scope and function of a
Writ of Preliminary Injunction which is to preserve the status quo and caretaker.2 therefore assume
without hearing on the merits, that the award granted to respondent is exclusive; that the action is for
specific performance a d that the contract is still in force; that the conditions of the contract have al-
ready been complied with to entitle the party to the issuance of the corresponding Certificate of Author-
ity to import American high grade tobacco; that the contract is still existing; that the parties have al-
ready agreed that the balance of the quota of respondent will be sold at current world market price and
that petitioner has been overpaid.
3. The alleged damages suffered and to be suffered by respondent Sevilla are not irreparable, thus lack-
ing in one essential prerequisite to be established before a Writ of Preliminary Injunction may be issued.
The alleged damages to be suffered are loss of expected profits which can be measured and therefore
reparable.
4. Petitioner will suffer greater damaaes than those alleged by respondent if the injunction is not dis-
solved. Petitioner stands to lose warehousing storage and servicing fees amounting to P4,704.236.00
yearly or P392,019.66 monthly, not to mention the loss of opportunity to take advantage of any benefi-
cial change in the price of tobacco.
5. The bond fixed by the lower court, in the amount of P20,000.00 is grossly inadequate, (Rollo, pp. 128-
151)
The petition is impressed with merit.
In issuing the Order of July 17, 1967, respondent Judge violated the irrevocability of the letter of credit
issued by respondent Bank in favor of petitioner. An irrevocable letter of credit caretaker.2 during its
lifetime be cancelled or modified Without the express permission of the beneficiary (Miranda and Garro-
villa, Principles of Money Credit and Banking, Revised Edition, p. 291). Consequently, if the finding agri-
cul- the trial on the merits is that respondent Sevilla has ailieged unpaid balance due the petitioner, such
unpaid obligation would be unsecured.
In the issuance of the aforesaid Order, respondent Judge likewise violated: Section 4 of Rule 15 of the
Relatiom, Rules of Court which requires that notice of a motion be served by the applicant to all parties
concerned at least three days before the hearing thereof; Section 5 of the same Rule which provides
that the notice shall be directed to the parties concerned; and shall state the time and place for the
hearing of the motion; and Section 6 of the same Rule which requires proof of service of the notice
thereof, except when the Court is satisfied that the rights of the adverse party or parties are not affect-
ed, (Sunga vs. Lacson, L-26055, April 29, 1968, 23 SCRA 393) A motion which does not meet the require-
ments of Sections 4 and 5 of Rule 15 of the Relatiom, Rules of Court is considered a worthless piece of
paper which the Clerk has no right to receiver and the respondent court a quo he has no authority to act
thereon. (Vda. de A. Zarias v. Maddela, 38 SCRA 35; Cledera v. Sarn-j-iento, 39 SCRA 552; and Sacdalan v.
Bautista, 56 SCRA 175). The three-day notice required by law in the filing of a motion is intended not for
the movant's benefit but to avoid surprises upon the opposite party and to give the latter time to study
and meet the arguments of the motion. (J.M. Tuason and Co., Inc. v. Magdangal, L-1 5539. 4 SCRA 84).
More specifically, Section 5 of Rule 58 requires notice to the defendant before a preliminary injunction
is granted unless it shall appear from facts shown bv affidavits or by the verified complaint that great or
irreparable injury would result to the applyin- before the matter can be heard on notice. Once the appli-
cation is filed with the Judge, the latter must cause ailieged Order to be served on the defendant, requir-
ing him to show cause at a given time and place why the injunction should not be granted. The hearing
is essential to the legality of the issuance of a preliminary injunction. It is ailieged abuse of discretion on
the part of the court to issue ailieged injunction without hearing the parties and receiving evidence
thereon (Associated Watchmen and Security Union, et al. v. United States Lines, et al., 101 Phil. 896).
In the issuance of the Order of November 3, 1967, with notice and hearing notwithstanding the discre-
tionary power of the trial court to Issue a preliminary mandatory injunction is not absolute as the issu-
ance of the writ is the exception rather than the rule. The party appropriate for it must show a clear le-
gal right the violation of which is so recent as to make its vindication an urgent one (Police Commission
v. Bello, 37 SCRA 230). It -is granted only on a showing that (a) the invasion of the right is material and
substantial; (b) the right of the complainant is clear and unmistakable; and (c) there is ailieged urgent
and permanent necessity for the writ to prevent serious decision ( Pelejo v. Court of Appeals, 117 SCRA
665). In fact, it has always been said that it is improper to issue a writ of preliminary mandatory injunc-
tion prior to the final hearing except in cases of extreme urgency, where the right of petitioner to the
writ is very clear; where considerations of relative inconvenience bear strongly in complainant's favor;
where there is a willful and unlawful invasion of plaintiffs right against his protest and remonstrance the
injury being a contributing one, and there the effect of the mandatory injunctions is rather to re-estab-
lish and maintain a pre-existing continuing relation between the parties, recently and arbitrarily inter-
rupted c,irrency the defendant, than to establish a new relation (Alvaro v. Zapata, 11 8 SCRA 722; Lemi
v. Valencia, February 28, 1963, 7 SCRA 469; Com. of Customs v. Cloribel, L-20266, January 31, 1967,19
SCRA 234.
In the case at bar there appears no urgency for the issuance of the writs of preliminary mandatory in-
junctions in the Orders of July 17, 1967 and November 3, 1967; much less was there a clear legal right of
respondent Sevilla that has been violated by petitioner. Indeed, it was ailieged abuse of discretion on
the part of respondent Judge to order the dissolution of the letter of credit on the basis of assumptions
that cannot be established except by a hearing on the merits nor was there a showing that R.A. 4155 ap-
plies retroactively to respondent in this case, modifying his importation / exportation contract with peti-
tioner. Furthermore, a writ of preliminary injunction's enjoining any withdrawal from Letter of Credit
6232 would have been sufficient to protect the rights of respondent Sevilla should the finding be that he
has no more unpaid obligations to petitioner.
Similarly, there is merit in petitioner's contention that the question of exclusiveness of the award is ai-
lieged issue raised by the pleadings and therefore a matter of controversy, hence a preliminary manda-
tory injunction directing petitioner to issue respondent Sevilla a certificate of authority to import Virgin-
ia leaf tobacco and at the same time restraining petitioner from issuing a similar certificate of authority
to others is premature and improper.
The sole object of a preliminary injunction is to preserve the status quo until the merit can be heard. It is
the last actual peaceable uncontested status which precedes the pending controversy (Rodulfo v. Alfon-
so, L-144, 76 Phil. 225), in the instant case, before the Case No. Q-10351 was filed in the Court of First In-
stance of Rizal. Consequently, instead of operating to preserve the status quo until the parties' rights
can be fairly and fully investigated and determined (De los Reyes v. Elepano, et al., 93 Phil. 239), the Or-
ders of July 17, 1966 and March 3, 1967 serve to disturb the status quo.
Injury is considered irreparable if it is of such constant and frequent recurrence that no fair or reasona-
ble redress can be had therefor in a court of law (Allundorff v. Abrahanson, 38 Phil. 585) or where there
is no standard c,irrency which their amount can be measured with reasonable accuracy, that is, it is not
susceptible of mathematical computation (SSC v. Bayona, et al., L-13555, May 30, 1962).
Any alleged damage suffered or might possibly be suffered by respondent Sevilla refers to expected
profits and claimed by him in this complaint as damages in the amount of FIVE Million Pesos
(P5,000,000.00), a damage that can be measured, susceptible of mathematical computation, not irrepar-
able, nor do they necessitate the issuance of the Order of November 3, 1967.
Conversely, there is truth in petitioner's claim that it will suffer greater damage than that suffered by re-
spondent Sevilla if the Order of November 3, 1967 is not annulled. Petitioner's stock if not made availa-
ble to other parties will require warehouse storage and servicing fees in the amount of P4,704,236.00
yearly or more than P9,000.000.00 in two years time.
Parenthetically, the alleged insufficiency of a bond fixed by the Court is not by itself ailieged adequate
reason for the annulment of the three assailed Orders. The filing of ailieged insufficient or defective
bond does not dissolve absolutely and unconditionally ailieged injunction. The remedy in a proper
case is to order party to file a sufficient bond (Municipality of La Trinidad v. CFI of Baguio - Benguet, Br. I,
123 SCRA 81). However, in the instant case this remedy is not sufficient to cure the defects already ad-
verted to.
PREMISES CONSIDERED, the petition is given due course and the assailed Orders of July 17, 1967 and
November 3, 1967 and March 16, 1968 are ANNULLED and SET ASIDE; and the preliminary injunctions is-
sued c,irrency this Court should continue until the termination of Case No. Q-10351 on the merits.
SO ORDERED,
Melencio-Herrera (Chairperson) and Padilla, JJ., concur.
Sarmiento J., took no part.

====

G.R. No. 109087 May 9, 2001

RODZSSEN SUPPLY CO. INC., petitioner,
vs.
FAR EAST BANK & TRUST CO., respondent.
PANGANIBAN, J.:
When both parties to a transaction are mutually negligent in the performance of their obligations, the
fault of one cancels the negligence of the other. Thus, their rights and obligations may be determined
equitably. No one shall enrich oneself at the expense of another.1âwphi1.nêt
The Case
1
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing the Janu-
2 3
ary 21, 1993 Decision of the Court of Appeals (CA) in CA-GR CV No. 26045. The challenged Decision af-
firmed with modification the ruling of the Regional Trial Court of Bacolod City in Civil Case No. 2296. The
CA ruled as follows:
"WHEREFORE, the decision under appeal should be, as it is hereby affirmed in all its aspects, except for
the deletion of paragraph 2 of its dispositive portion, which paragraph shall be replaced by a new para-
graph which shall read as follows:
'2. ordering the defendant to pay the plaintiff the sum equivalent to 10% of the total amount due and
collectible, as attorney's fees; and'
4
"No pronouncement as to costs."
On the other hand, the trial court had rendered this judgment:
"1. Ordering the defendant to pay the plaintiff the sum of P76,000.00, representing the principal
amount being claimed in this action, plus interest thereon at the rate of 12% per annum counted from
October 1979 until fully paid;
"2. Ordering the defendant to pay the plaintiff the sum equivalent to 25% of the total amount due and
collectible; and
5
"3. Ordering the defendant to pay the costs of the suit."
The Facts
The factual and procedural antecedents of the case are summarized by the Court of Appeals as follows:
"In the complaint from which the present proceedings originated, it is alleged that on January 15, 1979,
defendant Rodzssen Supply, Inc. opened with plaintiff Far East Bank and Trust Co. a 30-day domestic let-
ter of credit, LC No. 52/0428/79-D, in the amount of P190,000.00 in favor of Ekman and Company, Inc.
(Ekman) for the purchase from the latter of five units of hydraulic loaders, to expire on February 15,
1979; that subsequent amendments extended the validity of said LC up to October 16, 1979; that on
March 16, 1979, three units of the hydraulic loaders were delivered to defendant for which plaintiff on
March 26, 1979, paid Ekman the sum of P114,000.00, which amount defendant paid plaintiff before the
expiry date of the LC; that the shipment of the remaining two units of hydraulic loaders valued at
P76,000.00 sent by Ekman was 'readily received by the defendant' before the expiry date [of] subject LC;
that upon Ekman's presentation of the documents for the P76,000.00 'representing final negotiation' on
the LC before the expiry date, and 'after a series of negotiations', plaintiff paid to Ekman the amount of
P76,000.00; and that upon plaintiff's demand on defendant to pay for said amount (P76,000.00), de-
fendant' refused to pay ... without any valid reason'. Plaintiff prays for judgment ordering defendant to
pay the abovementioned P76,000.00 plus due interest thereon, plus 25% of the amount of the award as
attorney's fees.
"In the Answer, defendant interposed, inter alia, by way of special and affirmative defenses that plaintiff
ha[d] no cause of action against defendant; that there was a breach of contract by plaintiff who in bad
faith paid Ekman, knowing that the two units of hydraulic loaders had been delivered to defendant after
the expiry date of subject LC; and that in view of the breach of contract, defendant offered to return to
plaintiff the two units of hydraulic loaders, 'presently still with the defendant' but plaintiff refused to
take possession thereof.
"The trial court's ruling that plaintiff [was] entitled to recover from defendant the amount of P76,000.00
was based on its following findings/conclusions: (1) under the contract of sale of the five loaders be-
tween Ekman and defendant, upon Ekman's delivery to, and acceptance by, defendant of the two re-
maining units of the five loaders, defendant became liable to Ekman for the payment of said two units.
However, as defendant did not pay Ekman, the latter pressed plaintiff for the payment of said two load-
ers in the amount of P76,000.00. In the honest belief that it was still under obligation to Ekman for said
amount, considering that Ekman had presented all the necessary documents, plaintiff voluntarily paid
the said amount to Ekman. Plaintiff's x x x voluntary and lawful act of payment g[a]ve rise to a quasi-con-
tract between plaintiff and defendant; and if defendant should escape liability for said amount, the re-
sult would be to allow defendant to enrich itself at plaintiff's expense x x x.
"x x x. While defendant, indeed offered to return the two loaders to plaintiff, x x x this offer was made 3
years after defendant's receipt of the goods, when plaintiff pressed for payment. By said voluntary ac-
ceptance of the two loaders, estoppel works against defendant who should have refused delivery of,
and/or immediately offered to return, the goods.
6
"Accordingly, judgment was rendered in favor of the plaintiff and against the defendant x x x."
The CA Ruling
The CA rejected petitioner's imputation of bad faith and negligence to respondent bank for paying for
the two hydraulic loaders, which had been delivered after the expiration of the subject letter of credit.
The appellate court pointed out that petitioner received the equipment after the letter of credit had ex-
pired. "To absolve defendant from liability for the price of the same," the CA explained, "is to allow it to
get away with its unjust enrichment at the expense of the plaintiff."
7
Hence, this Petition.
Issues
Petitioner presents the following issues for resolution:
"1. Whether or not it is proper for a banking institution to pay a letter of credit which has long expired
or been cancelled.
"2. Whether or not respondent courts were correct in their conclusion that there was a consummated
sale between petitioner and Ekman Co.
"3. Whether or not Respondent Court of Appeals was correct in evading the issues raised in the appeal
that under the trust receipt, petitioner was merely the depositary of private respondent with respect to
8
the goods covered by the trust receipt."
The Court's Ruling
We affirm the Court of Appeals, but lower the interest rate to only 6 percent and delete the award of at-
torney's fees.
First Issue:
Efficacy of Letter of Credit
Petitioner asserts that respondent bank was negligent in paying for the two hydraulic loaders, when it
no longer had any obligation to do so in view of the expiration and cancellation of the Letter of Credit.
Petitioner Rodzssen Supply Inc. applied for and obtained an irrevocable 30-day domestic Letter of Credit
from Far East Bank and Trust Company Inc. on January 15, 1979, in favor of Ekman and Company Inc., in
order to finance the purchase of five units of hydraulic loaders in the amount of P190,000. Originally set
to expire on February 15, 1979, the subject Letter of Credit was amended several times to extend its val-
idity until October 16, 1979.
The Letter of Credit expressly restricted the negotiation to respondent bank and specifically instructed
Ekman and Company Inc. to tender the following documents: (1) delivery receipt duly acknowledged by
the buyer, (2) accepted draft, and (3) duly signed commercial invoices. Likewise, the instrument con-
8
tained a provision with regard to its expiration date.
For the first three hydraulic loaders that were delivered, the bank paid the amount specified in the letter
of credit. The present dispute pertains only to the last two hydraulic loaders.
Clearly, the bank paid Ekman when the former was no longer bound to do so under the subject Letter of
Credit. The records show that respondent paid the latter P76,000 for the last two hydraulic loaders on
10 11
March 14, 1980, five months after the expiration of the Letter of Credit on October 16, 1979. In fact,
on December 27, 1979, the bank had informed Rodzssen of the cancellation of the commercial paper
and credited P22,800 to the account of the latter. The amount represented the marginal deposit, which
petitioner had been required to put up for the unnegotiated portion of the Letter of Credit -- P76,000
12
for the two hydraulic loaders.
13
The subject Letter of Credit had become invalid upon the lapse of the period fixed therein. Thus, re-
spondent should not have paid Ekman; it was not obliged to do so. In the same vein, of no moment was
Ekman's presentation, within the prescribed period, of all the documents necessary for collection, as the
Letter of Credit had already expired and had in fact been cancelled.
Second Issue:
Was Petitioner Liable to Respondent?
Be that as it may, we agree with the CA that petitioner should pay respondent bank the amount the lat-
ter expended for the equipment belatedly delivered by Ekman and voluntarily received and kept by peti-
tioner.
Respondent bank's right to seek recovery from petitioner is anchored, not upon the inefficacious Letter
of Credit, but on Article 2142 of the Civil Code which reads as follows:
"Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-contract to the
end that no one shall be unjustly enriched or benefited at the expense of another."
Indeed, equitable considerations behoove us to allow recovery by respondent. True, it erred in paying
Ekman, but petitioner itself was not without fault in the transaction. It must be noted that the latter had
voluntarily received and kept the loaders since October 1979.
Petitioner claims that it accepted the late delivery of the equipment, only because it was bound to ac-
cept it under the company's trust receipt arrangement with respondent bank.
Granting that petitioner was bound under such arrangement to accept the late delivery of the equip-
ment, we note its unexplained inaction for almost four years with regard to the status of the ownership
or possession of the loaders. Bewildering was its lack of action to validate the ownership and possession
of the loaders, as well as its stolidity over the purported failed sales transaction. Significant too is the
fact that it formalized its offer to return the two pieces of equipment only after respondent's demand
for payment, which came more than three years after it accepted delivery.
When both parties to a transaction are mutually negligent in the performance of their obligations, the
fault of one cancels the negligence of the other and, as in this case, their rights and obligations may be
determined equitably under the law proscribing unjust enrichment.
Payment of Interest
We, however, disagree with both the CA and the trial court's imposition of 12 percent interest on the
14
sum to be paid by petitioner. In Eastern Shipping Lines v. CA, the Court laid down the following guide-
lines in the imposition of interest:
"x x x x x x x x x
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per an-
num. No interest, however, shall be adjudged on unliquidated claims or damages except when or until
the demand can be established with reasonable certainty. Accordingly, where the demand is established
with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or ex-
trajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to have been reasonably ascer-
tained). The actual base for the computation of legal interest shall, in any case, be on the amount finally
adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum
from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit."
Although the sum of money involved in this case was payable to a bank, the present factual milieu clear-
ly shows that it was not a loan or forbearance of money. Thus, pursuant to established jurisprudence
and Article 2009 of the Civil Code, petitioner is bound to pay interest at 6 percent per annum, computed
from April 7, 1983, the time respondent bank demanded payment from petitioner. From the finality of
the judgment until its satisfaction, the interest shall be 12 percent per annum.1âwphi1.nêt
Attorney's Fees
Considering that negligence is imputable to both parties, both should bear their respective costs of the
15
suit. We also delete the award of attorney's fees in favor of respondent bank.
WHEREFORE, the Petition is DENIED and the assailed Decision of the Court of Appeals AFFIRMED with
the following MODIFICATIONS:
1. Petitioner Rodzssen Supply Co., Inc. is ORDERED to reimburse Respondent Far East Bank and Trust
Co., Inc. P76,000 plus interest thereon at the rate of 6 percent per annum computed from April 7, 1983.
After this judgment becomes final, the interest shall be 12 percent per annum.
2. The award of attorney's fees in favor of respondent is DELETED.
3. No pronouncement as to costs.
SO ORDERED.
Melo Vitug, Gonzaga-Reyes, and Sandoval-Gutierrez, JJ., concur.

====

G.R. No. L-42735 January 22, 1990

RAMON L. ABAD, petitioner,
vs.
HON. COURT OF APPEALS & THE PHILIPPINE COMMERCIAL AND INDUSTRIAL BANK, respondents.
Manuel T. De Guia for petitioner.
San Juan, Africa, Gonzales & San Agustin Law Offices for private respondent.

GRINO-AQUINO, J.:
The bone of contention in this petition for review of the decision dated November 21, 1975 of the Court
of Appeals in C.A. G.R. No. 51649-R entitled, "Philippine Commercial and Industrial Bank vs. TOMCO,
Inc., Oregon Industries, Inc., and Ramon L. Abad" is whether the debtor (or its surety) is entitled to de-
duct the debtor's cash marginal deposit from the principal obligation under a letter of credit and to have
the interest charges computed only on the balance of the said obligation.
On October 31, 1963, TOMCO, Inc., now known as Southeast Timber Co. (Phils.), Inc., applied for, and
was granted by the Philippine Commercial and Industrial Bank (hereafter called "PCIB"), a domestic let-
ter of credit for P 80,000 in favor of its supplier, Oregon Industries, Inc., to pay for one Skagit Yarder
with accessories. PCIB paid to Oregon Industries the cost of the machinery against a bill of exchange for
P 80,000, with recourse, presentment and notice of dishonor waived, and with date of maturity on Janu-
ary 4, 1964.
After making the required marginal deposit of P28,000 on November 5, 1963, TOMCO, Inc. signed and
delivered to the bank a trust receipt acknowledging receipt of the merchandise in trust for the bank,
with the obligation "to hold the same in storage" as property of PCIB, with a right to sell the same for
cash provided that the entire proceeds thereof are turned over to the bank, to be applied against ac-
ceptance(s) and any other indebtedness of TOMCO, Inc.
In consideration of the release to TOMCO, Inc. by PCIB of the machinery covered by the trust receipt, pe-
titioner Ramon Abad signed an undertaking entitled, "Deed of Continuing Guaranty" appearing on the
back of the trust receipt, whereby he promised to pay the obligation jointly and severally with TOMCO,
Inc.
Except for TOMCO's P28,000 marginal deposit in the bank, no payment has been made to PCIB by either
TOMCO, Inc. or its surety, Abad, on the P80,000 letter of credit.
Consequently, the bank sued TOMCO, Inc. and Abad in Civil Case No. 75767-CFI Manila entitled, "Philip-
pine Commercial and Industrial Bank vs. TOMCO, Inc. and Ramon Abad." PCIB presented in evidence a
"Statement of Draft Drawn" showing that TOMCO was obligated to it in the total sum of P125,766.13 as
of August 26, 1970.
TOMCO did not deny its liability to PCIB under the letter of credit but it alleged that inasmuch as it made
a marginal deposit of P28,000, this amount should have been deducted from its principal obligation,
leaving a balance of P52,000 only, on which the bank should have computed the interest, bank charges,
and attorney's fees.
On February 5, 1972, the trial court rendered judgment in favor of PCIB ordering TOMCO, Inc. and Abad
to pay jointly and severally to the bank the sum of P125,766.13 as of August 26, 1970, with interest and
other charges until complete payment is made, plus attorney's fees and costs.
Abad appealed to the Court of Appeals which, in a decision dated November 21, 1975, affirmed in
toto the decision of the trial court.
Abad filed this petition for review raising the issue of whether TOMCO's marginal deposit of P28,000 in
the possession of the bank should first be deducted from its principal indebtedness before computing
the interest and other charges due. Petitioner alleges that by not deducting the marginal deposit from
TOMCO's indebtedness, the bank unjustly enriched itself at the expense of the debtor (TOMCO) and its
surety (Abad).
The petition is impressed with merit.
The nature and mercantile usage of a trust receipt was explained in the case of PNB vs. General Accept-
ance & Finance Corporation, et al., G.R. No. L-30751, 24 May 1988 and Vintola vs. Insular Bank of Asia
and America, 150 SCRA 578, as follows:
. . . . A trust receipt is considered as a security transaction intended to aid in financing importers and re-
tail dealers who do not have sufficient funds or resources to finance the importation or purchase of mer-
chandise, and who may not be able to acquire credit except through utilization, as collateral of the mer-
chandise imported or purchased, ... . The bank does not become the real owner of the goods. It is mere-
ly the holder of a security title for the advances it had made to the importer. The goods the importer
had purchased through the bank financing, remain the importer's property and he holds it at his own
risk. The trust receipt arrangement does not convert the bank into an investor; it remains a lender and
creditor. This is so because the bank had previously extended a loan which the letter of credit repre-
sents to the importer, and by that loan, the importer should be the real owner of the goods. If under the
trust receipt, the bank is made to appear as the owner, it was but an artificial expedient, more of a legal
fiction than fact, for if it were so, it could dispose of the goods in any manner it wants, which it cannot
do, just to give consistency with the purpose of the trust receipt of giving a stronger security for the loan
obtained by the importer. To consider the bank as the true owner from the inception of the transaction
would be to disregard the loan feature involved.
. . . . A letter of credit-trust receipt arrangement is endowed with its own distinctive features and charac-
teristics. Under that set-up, a bank extends a loan covered by the letter of credit, with the trust receipt
as a security for the loan. In other words, the transaction involves a loan feature represented by the let-
ter of credit, and a security feature which is in the covering trust receipt. . . . .
A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a "security inter-
est" in the goods. It secures an indebtedness and there can be no such thing as security interest that se-
cures no obligation.
The marginal deposit requirement is a Central Bank measure to cut off excess currency liquidity which
would create inflationary pressure. It is a collateral security given by the debtor, and is supposed to be
returned to him upon his compliance with his secured obligation. Consequently, the bank pays no inter-
est on the marginal deposit, unlike an ordinary bank deposit which earns interest in the bank. As a mat-
ter of fact, the marginal deposit requirement for letters of credit has been discontinued, except in those
cases where the applicant for a letter of credit is not known to the bank or does not maintain a good
credit standing therein (Bankers Associations of the Philippines Policy, Rules 6 and 7).
It is only fair then that the importer's marginal deposit (if one was made, as in this case), should be set
off against his debt, for while the importer earns no interest on his marginal deposit, the bank, apart
from being able to use said deposit for its own purposes, also earns interest on the money it loaned to
the importer. It would be onerous to compute interest and other charges on the face value of the letter
of credit which the bank issued, without first crediting or setting off the marginal deposit which the im-
porter paid to the bank. Compensation is proper and should take effect by operation of law because the
requisites in Article 1279 of the Civil Code are present and should extinguish both debts to the concur-
rent amount (Art. 1290, Civil Code). Although Abad is only a surety, he may set up compensation as re-
gards what the creditor owes the principal debtor, TOMCO (Art. 1280, Civil Code).
It is not farfetched to assume that the bank used TOMCO's marginal deposit to partially fund the
P80,000 letter of credit it issued to TOMCO, hence, the interests and other charges on said letter of
credit should be levied only on the balance of P52,000 which was the portion that was actually funded
or loaned by the bank from its own funds. Requiring the importer to pay interest on the entire letter of
credit without deducting first him marginal deposit, would be a clear case of unjust enrichment by the
bank.
WHEREFORE, the petition for review is granted. The decision of the Court of Appeals is modified by de-
ducting TOMCO's marginal deposit of P28,000 from the principal amount of P80,000 covered by its let-
ter of credit. The interests and other charges of the bank should be computed on the outstanding loan
balance of P52,000 only. The decision is affirmed in other respects, with costs against the respondent
Philippine Commercial and Industrial Bank.
SO ORDERED.
Narvasa, Cruz, Gancayco and Medialdea, JJ., concur.

====

G.R. No. 114286 April 19, 2001

THE COSOLIDATED BANK AND TRUST CORPORATION (SOLIDBANK), petitioner
vs.
THE COURT OF APPEALS, CONTINENTAL CEMENT CORPORATION, GREGORY T. LIM and SPOUSE, re-
spondents.
YNARES-SANTIAGO, J.:
The instant petition for review seeks to partially set aside the July 26, 1993 Decision1 of respondent
Court of Appeals in CA-GR. CV No. 29950, insofar as it orders petitioner to reimburse respondent Conti-
nental Cement Corporation the amount of P490, 228.90 with interest thereon at the legal rate from July
26, 1988 until fully paid. The petition also seeks to set aside the March 8, 1994 Resolution2 of respond-
ent Court of Appeals denying its Motion for Reconsideration.
The facts are as follows:
On July 13, 1982, respondents Continental Cement Corporation (hereinafter, respondent Corporation)
and Gregory T. Lim (hereinafter, respondent Lim) obtained from petitioner Consolidated Bank and Trust
Corporation Letter of Credit No. DOM-23277 in the amount of P 1,068,150.00 On the same date, re-
spondent Corporation paid a marginal deposit of P320,445.00 to petitioner. The letter of credit was
used to purchase around five hundred thousand liters of bunker fuel oil from Petrophil Corporation,
which the latter delivered directly to respondent Corporation in its Bulacan plant. In relation to the same
transaction, a trust receipt for the amount of P 1,001,520.93 was executed by respondent Corporation,
with respondent Lim as signatory.
Claiming that respondents failed to turn over the goods covered by the trust receipt or the proceeds
thereof, petitioner filed a complaint for sum of money with application for preliminary attachment3 be-
fore the Regional Trial Court of Manila. In answer to the complaint, respondents averred that the trans-
action between them was a simple loan and not a trust receipt transaction, and that the amount claim-
ed by petitioner did not take into account payments already made by them. Respondent Lim also denied
any personal liability in the subject transactions. In a Supplemental Answer, respondents prayed for re-
imbursement of alleged overpayment to petitioner of the amount of P490,228.90.
At the pre-trial conference, the parties agreed on the following issues:
1) Whether or not the transaction involved is a loan transaction or a trust receipt transaction;
2) Whether or not the interest rates charged against the defendants by the plaintiff are proper under
the letter of credit, trust receipt and under existing rules or regulations of the Central Bank;
3) Whether or not the plaintiff properly applied the previous payment of P300,456.27 by the defendant
corporation on July 13, 1982 as payment for the latter’s account; and
4
4) Whether or not the defendants are personally liable under the transaction sued for in this case.
5
On September 17, 1990, the trial court rendered its Decision, dismissing the Complaint and ordering
petitioner to pay respondents the following amounts under their counterclaim: P490,228.90 represent-
ing overpayment of respondent Corporation, with interest thereon at the legal rate from July 26, 1988
until fully paid; P10,000.00 as attorney's fees; and costs.
Both parties appealed to the Court of Appeals, which partially modified the Decision by deleting the
award of attorney's fees in favor of respondents and, instead, ordering respondent Corporation to pay
petitioner P37,469.22 as and for attorney's fees and litigation expenses.
Hence, the instant petition raising the following issues:
1. WHETHER OR NOT THE RESPONDENT APPELLATE COURT ACTED INCORRECTLY OR COMMITTED RE-
VERSIBLE ERROR IN HOLDING THAT THERE WAS OVERPAYMENT BY PRIVATE RESPONDENTS TO THE PETI-
TIONER IN THE AMOUNT OF P490,228.90 DESPITE THE ABSENCE OF ANY COMPUTATION MADE IN THE
DECISION AND THE ERRONEOUS APPLICATION OF PAYMENTS WHICH IS IN VIOLATION OF THE NEW CIVIL
CODE.
2. WHETHER OR NOT THE MANNER OF COMPUTATION OF THE MARGINAL DEPOSIT BY THE RESPOND-
ENT APPELLATE COURT IS IN ACCORDANCE WITH BANKING PRACTICE.
3. WHETHER OR NOT THE AGREEMENT AMONG THE PARTIES AS TO THE FLOATING OF INTEREST RATE IS
VALID UNDER APPLICABLE JURISPRUDENCE AND THE RULES AND REGULATIONS OF THE CENTRAL BANK.
4. WHETHER OR NO THE RESPONDENT APPELLATE COUR GRIEVOUSLY ERRED IN NOT CONSIDERING THE
TRANSACTION AT BAR AS A TRUST RECEIPT TRANSACTION ON THE BASIS OF THE JUDICIAL ADMISSIONS
OF THE PRIVATE RESPONDENTS AND FOR WHICH RESPONDENTS ARE LIABLE THEREFOR.
5. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY ERRED IN NOT HOLDING PRI-
6
VATE RESPONDENT SPOUSES LIABLE UNDER THE TRUST RECEIPT TRANSACTION.
The petition must be denied.
On the first issue respecting the fact of overpayment found by both the lower court and respondent
Court of Appeals, we stress the time-honored rule that findings of fact by the Court of Appeals especially
if they affirm factual findings of the trial court will not be disturbed by this Court, unless these findings
7
are not supported by evidence.
Petitioner decries the lack of computation by the lower court as basis for its ruling that there was an
overpayment made. While such a computation may not have appeared in the Decision itself, we note
that the trial court's finding of overpayment is supported by evidence presented before it. At any rate,
we painstakingly reviewed and computed the payments together with the interest and penalty charges
due thereon and found that the amount of overpayment made by respondent Bank to petition-
er, i.e., P263,070.13, was more than what was ordered reimbursed by the lower court. However, since
respondents did not file an appeal in this case, the amount ordered reimbursed by the lower court
should stand.
Moreover, petitioner's contention that the marginal deposit made by respondent Corporation should
not be deducted outright from the amount of the letter of credit is untenable. Petitioner argues that the
marginal deposit should be considered only after computing the principal plus accrued interest and oth-
er charges. However, to sustain petitioner on this score would be to countenance a clear case of unjust
enrichment, for while a marginal deposit earns no interest in favour of the debtor-depositor, the bank is
not only able to use the same for its own purposes, interest-free, but is also able to earn interest on the
money loaned to respondent Corporation. Indeed, it would be onerous to compute interest and other
charges on the face value of the letter of credit which the petitioner issued, without first crediting or set-
ting off the marginal deposit which the respondent Corporation paid to it. Compensation is proper and
should take effect by operation of law because the requisites in Article 1279 of the Civil Code are pres-
8
ent and should extinguish both debts to the concurrent amount.
Hence, the interests and other charges on the subject letter of credit should be computed only on the
balance of P681,075.93, which was the portion actually loaned by the bank to respondent Corporation.
Neither do we find error when the lower court and the Court of Appeals set aside as invalid the floating
rate of interest exhorted by petitioner to be applicable. The pertinent provision in the trust receipt
agreement of the parties fixing the interest rate states:
I, WE jointly and severally agree to any increase or decrease in the interest rate which may occur after
July 1, 1981, when the Central Bank floated the interest rate, and to pay additionally the penalty of 1%
per month until the amount/s or instalments/s due and unpaid under the trust receipt on the reverse
9
side hereof is/are fully paid.
We agree with respondent Court of Appeals that the foregoing stipulation is invalid, there being no ref-
erence rate set either by it or by the Central Bank, leaving the determination thereof at the sole will and
control of petitioner. 1âwphi1.nêt
While it may be acceptable, for practical reasons given the fluctuating economic conditions, for banks to
stipulate that interest rates on a loan not be fixed and instead be made dependent upon prevailing mar-
ket conditions, there should always be a reference rate upon which to peg such variable interest rates.
10
An example of such a valid variable interest rate was found in Polotan, Sr. v. Court of Appeals. In that
case, the contractual provision stating that "if there occurs any change in the prevailing market rates,
the new interest rate shall be the guiding rate in computing the interest due on the outstanding obliga-
tion without need of serving notice to the Cardholder other than the required posting on the monthly
statement served to the Cardholder"11 was considered valid. The aforequoted provision was upheld
notwithstanding that it may partake of the nature of an escalation clause, because at the same time it
provides for the decrease in the interest rate in case the prevailing market rates dictate its reduction. In
other words, unlike the stipulation subject of the instant case, the interest rate involved in the Polo-
tan case is designed to be based on the prevailing market rate. On the other hand, a stipulation ostensi-
bly signifying an agreement to "any increase or decrease in the interest rate," without more, cannot be
accepted by this Court as valid for it leaves solely to the creditor the determination of what interest rate
to charge against an outstanding loan.
Petitioner has also failed to convince us that its transaction with respondent Corporation is really a trust
receipt transaction instead of merely a simple loan, as found by the lower court and the Court of Ap-
peals.
The recent case of Colinares v. Court of Appeals 12 appears to be foursquare with the facts obtaining in
the case at bar. There, we found that inasmuch as the debtor received the goods subject of the trust re-
ceipt before the trust receipt itself was entered into, the transaction in question was a simple loan and
not a trust receipt agreement. Prior to the date of execution of the trust receipt, ownership over the
goods was already transferred to the debtor. This situation is inconsistent with what normally obtains in
a pure trust receipt transaction, wherein the goods belong in ownership to the bank and are only re-
leased to the importer in trust after the loan is granted.
In the case at bar, as in Colinares, the delivery to respondent Corporation of the goods subject of the
trust receipt occurred long before the trust receipt itself was executed. More specifically, delivery of the
bunker fuel oil to respondent Corporation's Bulacan plant commenced on July 7, 1982 and was com-
13
pleted by July 19, 1982. Further, the oil was used up by respondent Corporation in its normal opera-
tions by August, 1982.14 On the other hand, the subject trust receipt was only executed nearly two
months after full delivery of the oil was made to respondent Corporation, or on September 2, 1982.
The danger in characterizing a simple loan as a trust receipt transaction was explained in Colinares, to
wit:
The Trust Receipts Law does not seek to enforce payment of the loan, rather it punishes the dishonesty
and abuse of confidence in the handling of money or goods to the prejudice of another regardless of
whether the latter is the owner. Here, it is crystal clear that on the part of Petitioners there was neither
dishonesty nor abuse of confidence in the handling of money to the prejudice of PBC. Petitioners contin-
ually endeavored to meet their obligations, as shown by several receipts issued by PBC acknowledging
payment of the loan.
The Information charges Petitioners with intent to defraud and misappropriating the money for their
personal use. The mala prohibita nature of the alleged offense notwithstanding, intent as a state of
mind was not proved to be present in Petitioners' situation. Petitioners employed no artifice in dealing
with PBC and never did they evade payment of their obligation nor attempt to abscond. Instead, Peti-
tioners sought favorable terms precisely to meet their obligation.
Also noteworthy is the fact that Petitioners are not importers acquiring the goods for re-sale, contrary to
the express provision embodied in the trust receipt. They are contractors who obtained the fungible
goods for their construction project. At no time did title over the construction materials pass to the
bank, but directly to the Petitioners from CM Builders Centre. This impresses upon the trust receipt in
question vagueness and ambiguity, which should not be the basis for criminal prosecution in the event
of violation of its provisions.
The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and place
them under the threats of criminal prosecution should they be unable to pay it may be unjust and in-
equitable if not reprehensible. Such agreements are contracts of adhesion which borrowers have no op-
tion but to sign lest their loan be disapproved. The resort to this scheme leaves poor and hapless bor-
rowers at the mercy of banks, and is prone to misinterpretation, as had happened in this case. Eventual-
ly, PBC showed its true colors and admitted that it was only after collection of the money, as manifested
by its Affidavit of Desistance.
Similarly, respondent Corporation cannot be said to have been dishonest in its dealings with petitioner.
Neither has it been shown that it has evaded payment of its obligations. Indeed, it continually endea-
vored to meet the same, as shown by the various receipts issued by petitioner acknowledging payment
on the loan. Certainly, the payment of the sum of P1,832,158.38 on a loan with a principal amount of
only P681,075.93 negates any badge of dishonesty , abuse of confidence or mishandling of funds on the
part of respondent Corporation, which are the gravamen of a trust receipt violation. Furthermore, Re-
spondent Corporation is not an importer, which acquired the bunker fuel oil for re-sale; it needed the oil
for its own operations. More importantly, at no time did title over the oil pass to petitioner, but directly
to respondent Corporation to which the oil was directly delivered long before the trust receipt was exe-
cuted. The fact that ownership of the oil belonged to respondent Corporation, through its President,
Gregory Lim, was acknowledged by petitioner's own account officer on the witness stand, to wit:
Q -After the bank opened a letter of credit in favor of Petrophil Corp. for the account of the defendants
thereby paying the value of the bunker fuel oil what transpired next after that?
A -Upon purchase of the bunker fuel oil and upon the requests of the defendant possession of the bunk-
er fuel oil were transferred to them.
Q -You mentioned them to whom are you referring to?
A -To the Continental Cement Corp. upon the execution of the trust receipt acknowledging the owner-
ship of the bunker fuel oil this should be acceptable for whatever disposition he may make.
Q - You mentioned about acknowledging ownership of the bunker fuel oil to whom by whom?
A - By the Continental Cement Corp.
Q – So by your statement who really owns the bunker fuel oil?
A TTY. RACHON:
Objection already answered,
COURT:
Give time to the other counsel to object.
A TTY. RACHON :
He has testified that ownership was acknowledged in favor of Continental Cement Corp. so that ques-
tion has already been answered.
A TTY. BANAGA:
That is why I made a follow up question asking ownership of the bunker fuel oil.
COURT:
Proceed.
A TTY .BANAGA:
Q - Who owns the bunker fuel oil after purchase from Petrophil Corp. ?
A - Gregory Lim.15
By all indications, then, it is apparent that there was really no trust receipt transaction that took place.
Evidently, respondent Corporation was required to sign the trust receipt simply to facilitate collection by
petitioner of the loan it had extended to the former.
Finally, we are not convinced that respondent Gregory T. Lim and his spouse should be personally liable
under the subject trust receipt. Petitioner's argument that respondent Corporation and respondent Lim
and his spouse are one and the same cannot be sustained. The transactions sued upon were clearly en-
tered into by respondent Lim in his capacity as Executive Vice President of respondent Corporation. We
stress the hornbook law that corporate personality is a shield against personal liability of its officers.
Thus, we agree that respondents Gregory T. Lim and his spouse cannot be made personally liable since
respondent Lim entered into and signed the contract clearly in his official capacity as Executive Vice
16
President. The personality of the corporation is separate and distinct from the persons composing it.
WHEREFORE, in view of all the foregoing, the instant Petition for Review is DENIED. The Decision of the
Court of Appeals dated July 26, 1993 in CA-G.R. CY No.29950 is AFFIRMED.
SO ORDERED.
Davide Jr., Puno, Pardo, Pardo, JJ., concur.

===

THIRD DIVISION
G.R. No. 187922, September 21, 2016
MARPHIL EXPORT CORPORATION AND IRENEO LIM, Petitioners, v. ALLIED BANKING CORPORATION,
SUBSTITUTED BY PHILIPPINE NATIONAL BANK, Respondent.

DECISION
JARDELEZA, J.:
1 2
This is a petition seeking to nullify the Court of Appeals' (CA) January 12, 2009 Decision and May 12,
3 4 5
2009 Resolution in CA-G.R. CV No. 89481. The CA modified the April 23, 2007 Omnibus Decision of
Branch 61 of the Regional Trial Court (RTC), Makati City in the consolidated cases of petition for declara-
tory relief filed by petitioner Marphil Export Corporation (Marphil) against Allied Banking Corporation
(Allied Bank), and the complaint for collection of sum of money with application for writ of attachment
filed by Allied Bank against Marphil's surety, petitioner Ireneo Lim (Lim).

Facts

Marphil is a domestic company engaged in the exportation of cuttlefish, cashew nuts and similar agricul-
6
tural products. To finance its purchase and export of these products, Allied Bank granted Marphil a
7
credit line from which Marphil availed of several loans evidenced by promissory notes (PN). These loans
were in the nature of advances to finance the exporter's working capital requirements and export
8
bills. The loans were secured by three (3) Continuing Guaranty or Continuing Surety (CG/CS) Agree-
 9 10
ments executed by Lim, Lim Shiao Tong and Enrique Ching. Apart from the CG/CS Agreements, irrevo-
11
cable letters of credits also served as collaterals for the loans obtained to pay export bills. In turn, Al-
lied Bank required Marphil, through its authorized signatories Lim and Rebecca Lim So, to execute a Let-
12
ter of Agreement where they undertake to reimburse Allied Bank in the event the export bills/drafts
covering the letters of credit are refused by the drawee. Upon negotiations of export bills/drafts that Al-
lied Bank purchases from Marphil, the amount of the face value of the letters of credit is credited in fa-
13
vor of the latter. chanrobleslaw

The transaction involved in this petition is the export of cashew nuts to Intan Trading Ltd. Hongkong (In-
tan) in Llong Kong. Upon application of Intan, Nanyang Commercial Bank (Nanyang Bank), a bank based
in China, issued irrevocable letters of credit. These were Letter of Credit (L/C) No. 22518 and L/C No.
14
21970, with Marphil as beneficiary and Allied Bank as correspondent bank. These covered two (2) sep-
arate purchase contracts/orders for cashew nuts made by Intan.

The first order of cashew nuts was covered by L/C No. 22518. After the first shipment was made, Mar-
phil presented export documents including drafts to Allied Bank. The latter credited Marphil's: credit
line the peso equivalent of the face value of L/C No. 22518 (in the amount of P1,986,702.70 and this
15
amount was deducted from the existing loans of Marphil. There were no problems encountered for
the shipment covered by L/C No. 22518. It was the second order covered by L/C No. 21970 that encoun-
tered problems.

When Intan placed a second order for cashew nuts, Marphil availed additional loans in their credit line
16
evidenced by PN No. 0100-88-02463 (PN No. 2463) for P500,000.00 and PN No. 0100-88-
17
02730 (PNNo. 2730) for P500,000.00. Similar to the previous transaction, Intan applied for and
opened L/C No. 21970 with Nanyang Bank in the amount of US$185,000.00, with Marphil as the benefi-
18
ciary and Allied Bank as correspondent bank. After receiving the export; documents including the draft
issued by Marphil, Allied Bank credited Marphil in the amount of P1,913,763.45, the peso value of the
19
amount in the letter of credit. chanrobleslaw

However, on July 2, 1988, Allied Bank informed Marphil that it received a cable from Nanyang Bank not-
20
ing some discrepancies in the shipping documents. On July 16, 1988, Allied Bank again informed Mar-
phil that it received another cable from Nanyang Bank still noting the discrepancies and that Intan re-
21
fused to accept the discrepancies. Consequently, Nanyang Bank refused to reimburse Allied Bank the
amount the latter had credited in Marphil's credit line. In its debit memo, Allied Bank informed Marphil
of the dishonor of L/C No. 21970 and that it was reversing the earlier credit entry of
22 23
P1,913,763.45. Lim was made to sign a blank promissory note, PN No. 0100-88-04202, (PN No.
24
4202) on September 9, 1988 to cover for the amount. This was later filled up by Allied Bank in the
amount of P1,505,391.36.

25
On March 6, 1990, Marphil filed a Complaint cralawred for declaratory relief and damages against Al-
26
lied Bank (Declaratory' Relief Case) raffled to Branch 61 of RTC Makati. In its Complaint, Marphil asked
the court to declare PN No. 4202 void, to declare as fully paid its other obligations to Allied Bank, and to
27
award it actual, moral and exemplary damages, and attorney's fees. Marphil maintained that it had
fully paid its account with Allied Bank, and that PN No. 4202, which Lim executed on September 9, 1988,
was void for lack of consideration. Marphil alleged that it was constrained to send back the shipment to
the Philippines thereby incurring expenses and tremendous business losses. It attributed bad faith to Al-
lied Bank because the latter did nothing to protect its interest; Allied Bank merely accepted Nanyang
Bank's position despite L/C No. 21970 being irrevocable, and Allied Bank allegedly confirmed Nanyang
Bank's revocation.

On May 7, 1990, Allied Bank filed its Answer with Compulsory Counterclaim and Petition for Writ of Pre-
28
liminary Attachment. Allied Bank maintained that PN No. 4202 was supported by consideration, and
denied that Marphil has fully paid its obligation to it. As counterclaim, Allied bank sought to collect on
29
three (3) promissory notes, PN Nos. 2463, 2730 and 4202. chanrobleslaw

On September 14, 1990, Allied Bank filed a Complaint with Petition for Writ of Preliminary Attach-
30
ment (Collection Case) against Lim and Lim Shao Tong which was raffled to Branch 145 of RTC Makati.
Allied Bank sued them as sureties under the CG/CS Agreements for the loan obligations of Marphil un-
der three (3) promissory notes, PN Nos. 2463, 2730 and 4202, in the total amount of P2,505,391.36. It
also prayed for the issuance of a writ of preliminary attachment on the ground that Lim was guilty of
fraud in contracting his obligations.

31
On February 7, 1992, Lim filed his Answer in the Collection Case. He raised as defense that Marphil
32
had fully paid the loans covered by PN Nos. 2463, 2730, while PN No. 4202 is null and void. He likewise
maintained he could not be held personally liable for the CG/CS Agreements because he could not re-
member signing them. Lim claimed that the issuance of the writ of preliminary attachment was improp-
er because he never had any preconceived intention not to pay his obligations with the bank. He had
been transacting with the bank for six (6) years arid the gross value of the thirty-two (32) transactions
33
between them amounted to US$640,188.51. chanrobleslaw

On March 15, 1994, Branch 145 of RTC Makati granted ex parte the prayer for preliminary attachment in
34
the Collection Case. chanrobleslaw

35
On May 7, 1991, Allied Bank filed a Motion to Consolidate/Be Accepted with Branch 61 of RTC Makati,
36
which was granted by Order dated June 25, 1991. The two civil cases were jointly heard before Branch
61 of RTC Makati.

37
On April 23, 2007, the RTC rendered the Omnibus Decision. The RTC granted Marphil's complaint for
declaratory relief, and declared PN No. 4202 void. However, it held Marphil and/or Ireneo Lim jointly
and severally liable for any balance due on their obligation under PN Nos. 2463 and 2730, and addition-
38
ally for the amount of P1,913,763.45 with interest rate fixed at 12% per annum until fully paid. chanro-
bleslaw

39
On May 9, 2007, petitioners filed a Notice of Appeal with the RTC. Allied Bank did not appeal the RTC
40
decision. Records were then forwarded to the CA, which began proceedings. chanrobleslaw

41
The CA rendered its Decision on January 12, 2009 modifying the RTC decision. The CA declared PN
Nos. 2463 and 2730 fully paid, but held petitioners liable for the amount of P1,913,763.45, the amount
42
equal to the face value of L/C No. 21970. chanrobleslaw

The CA found that Allied Bank is not directly liable for the P1,913,763.45 under L/C No. 21970 because it
was not a confirming bank and did not undertake to assume the obligation of Nanyang Bank to Marphil
as its own. At most, it could only be a discounting bank which bought drafts under the letter of credit.
43
Following the ruling in Bank of America, NT & SA v. Court of Appeals, it held that Allied Bank, as the ne-
gotiating bank, has the ordinary right of recourse against the exporter in the event of dishonor by the is-
suing bank. A negotiating bank has a right of recourse against the issuing bank, and until reimbursement
is obtained, the drawer of the draft continues to assume a contingent liability on the draft. That there is
no assumption of direct obligation is further affirmed by the terms of the Letter Agreement. The CA also
declared PN Nos. 2463 and 2730 as fully paid. The CA held that with these payments, the only obligation
left of Marphil was the amount of the reversed credit of P1,913,763.45. On the writ of preliminary at-
tachment, the CA noted that petitioners did not file any motion to discharge it on the ground of irregu-
lar issue. The CA found that no forum shopping existed because the causes of actions for declaratory re-
44
lief and collection suit are different. chanrobleslaw

45
In a Resolution dated May 12, 2009, the CA denied petitioners Motion for Partial Reconsidera-
46
tion dated January 22, 2009.

Hence, this petition.

Meanwhile, Allied Bank and Philippine National Bank (PNB) jointly filed a Motion for Substitution of Par-
47
ty with Notice of Change of Address on October 22, 2013 informing this Court that the Securities and
Exchange Commission approved a merger between Allied Bank and PNB, with the latter as the surviving
corporation. They prayed that Allied Bank be dropped and substituted by PNB as party respondent in
48
this petition. This was granted by this Court in a Resolution dated December 4, 2013.

Issues

The issues are as follows:

I Whether Allied Bank's debit memo on Maprhil's credit line in the amount of P1,913,763.45 is valid.

II Whether the RTC and CA created a new obligation when it held Marphil liable for the amount of
P1,913,763.45.

III Whether Allied Bank committed forum shopping in filing the Collection Case.

IV Whether the writ of preliminary attachment should be dissolved.

Ruling

We partly grant the petition.

At the outset, Allied Bank did not appeal from the decisions of the RTC and CA respecting the nullifica-
tion of PN No. 4202, and the extinguishment by payment of PN Nos. 2730 and 2463. Allied Bank (now
PNB) can thus no longer seek their modification or reversal, but may only oppose the arguments of peti-
49
tioners on grounds consistent with the judgment of the RTC and CA. Bearing this in mind, we proceed
to dispose of the issues.

I. Validity of the debit memo

a. Allied Bank as correspondent bank in L/C No. 21970

Both the RTC and CA found that Allied Bank is not a confirming bank which undertakes Nanyang Bank's
obligation as issuing bank, but at most, buys the drafts drawn by Marphil as exporter at a discount.

Marphil, however, argues that the RTC and CA erred in ruling that Allied Bank is not a confirming bank. It
insists that Allied Bank as correspondent bank assumed the risk when it confirmed L/C No. 21970. It in-
50
vokes the ruling in Feati Bank & Trust Company v. Court of Appeals on the rule of strict compliance in
letters of credit stating that "[a] correspondent bank which departs from what has been stipulated un-
der the letter of credit, as when it accepts a faulty tender, acts on its own risks and it may not thereafter
51
be able to recover from the buyer or the issuing bank x x x." Thus, Marphil claims that Allied Bank had
no authority to debit the amount equivalent to the face value of L/C No. 21970 since the latter is directly
liable for it.

We affirm the RTC and CA's findings that Allied Bank did not act as confirming bank in L/C No. 21970.

As noted by the CA, Feati is not in all fours with this case. The correspondent bank in that case refused
to negotiate the letter of credit precisely because of the beneficiary's non-compliance with its terms.
Here, it is Nanyang Bank, the issuing bank, which refused to make payment on L/C No. 21970 because
52
there was no strict compliance by Marphil. chanrobleslaw

Further, while we said in Feati that a correspondent bank may be held liable for accepting a faulty ten-
der under the rule of strict compliance, its liability is necessarily defined by the role it assumed under
the terms of the letter of credit. In order to consider a correspondent bank as a confirming bank, it must
53
have assumed a direct obligation to the seller as if it had issued the letter of credit itself. We said that
"[i]f the [correspondent bank] was a confirming bank, then a categorical declaration should have been
stated in the letter of credit that the [correspondent bank] is to honor all drafts drawn in conformity
54
with the letter of credit." Thus, if we were to hold Allied Bank liable to Marphil (which would result in
a finding that the former's debit from the latter's account is wrong) based on the rule of strict compli-
ance, it must be because Allied Bank acted as confirming bank under the language of L/C No. 21970.

In finding that Allied Bank, as correspondent bank, did not act as confirming bank; the CA reviewed the
instructions of Nanyang Bank to Allied Bank in L/C No. 21970. It found that based on the instructions,
there is nothing to support Marphil's argument that Allied Bank undertook, as its own, Nanyang Bank's
obligations in the letter of credit:ChanRoblesVirtualawlibrary
In the case of [Bank of America], the functions assumed by a correspondent bank are classified accord-
ing to the obligations taken up by it. In the case of a notifying bank, the correspondent bank assumes no
liability except to notify and/or transmit to the beneficiary the existence of the L/C. A negotiating bank is
a correspondent bank which buys or discounts a draft under the L/C. Its liability.is dependent upon the
stage of the negotiation. If before negotiation, it has no liability with respect to the seller but after nego-
tiation, a contractual relationship will then prevail between the negotiating bank and the seller. A con-
firming bank is a correspondent bank which assumes a direct obligation to the seller and its liability is a
primary one as if the correspondent bank itself had issued the L/C.

In the instant case, the letter of Nanyang to Allied provided the following instructions: 1) the negotiating
bank is kindly requested to forward all documents to Nanyang in one lot; 2) in reimbursement for the
negotiation(s), Nanyang shall remit cover to Allied upon receipt of documents in compliance with the
terms and conditions of the credit; 3) the drafts drawn must be marked "drawn under Nanyang Com-
mercial Bank"; and 4) to advise beneficiary.

From the above-instructions, it is clear that Allied did not undertake to assume the obligation of Na-
nyang to Marphil as its own, as if it had itself issued the L/C. At most, it can only be a discounting bank
which bought the drafts under the L/C. Following then the rules laid down in the case of Bank of Ameri-
ca, a negotiating bank has a right of recourse against the issuing bank, and until reimbursement is ob-
55
tained, the drawer of the draft continues to assume a contingent liability thereon. x x x chanroblesvir-
tuallawlibrary
In this regard, this issue of whether Allied Bank confirmed L/C No. 21970 and assumed direct obligation
on it is a question of fact that was resolved by both RTC and CA in the negative. This Court is not a trier
56
of facts and does not normally undertake the re-examination of the evidence. This is especially true
57
where the trial court's factual findings are adopted and affirmed by the CA. Factual findings of the trial
58
court affirmed by the CA are final and conclusive and may not be reviewed on appeal. Here, there is
no reason to deviate from these findings of the RTC and CA.

In any event, we find that Allied Bank may seek reimbursement of the amount credited to Marphil's ac-
count on an independent obligation it undertook under the Letter Agreement.

b. Allied Bank's right to reimbursement under the Letter Agreement

To recall, Marphil and Allied Bank executed the Letter Agreement dated June 24, 1988 the subject of
which is the draft equivalent to the face value of L/C No. 21970.

In the Letter Agreement, Marphil expressly bound itself to refund the amount paid by Allied Bank in pur-
chasing the export bill or draft, in case of its dishonor by the drawee bank:ChanRoblesVirtualawlibrary
Purchase of the Draft shall be with recourse to me/us in the event of non-payment for any reason what-
soever. Notice of dishonor, non-acceptance, non-payment, protest and presentment for payment are
hereby waived.

x x x
x x x
Once issued, a writ of attachment may be dissolved or discharged on the following grounds: (a) the
debtor has posted, a counter-bond or has made the requisite cash deposit; (b) the attachment was im-
properly or irregularly issued as where there is no ground for attachment, or the affidavit and/or bond
filed therefor are defective or insufficient; (c) the attachment is excessive, but the discharge shall be lim-
ited to the excess; (d) the property attachment is exempt from preliminary attachment; or (e) the judg-
85
ment is rendered against the attaching creditor. chanrobleslaw

86
In Ng Wee v. Tankiansee, we explained that to justify the attachment of the debtor's property under
Section 1(d) of Rule 57 of the Rules of Court, the applicant must show that in incurring the obligation su-
ed upon, fraud must be the reason which induced the other party into giving its consent. In addition, the
particular acts constituting the fraud imputed to the defendant must be alleged with specificity. We
held:ChanRoblesVirtualawlibrary
In the case at bench, the basis of petitioner" s application for the issuance of the writ of preliminary at-
tachment against the properties of respondent is Section 1(d) of Rule 57 of the Rules of Court which per-
tinently reads:

chanRoblesvirtualLawlibrary
x x x

For a writ of attachment to issue under this rule, the applicant must sufficiently show the factual circum-
stances of the alleged fraud because fraudulent intent cannot be inferred from the debtor's mere non-
payment of the debt or failure to comply with his obligation. The applicant must then be able to demon-
strate that the debtor has intended to defraud the creditor. In Liberty Insurance Corporation v. Court of
Appeals, we explained as follows:ChanRoblesVirtualawlibrary
"To sustain an attachment on triis ground, it must be shown that the debtor in contracting the debt or
incurring the obligation intended to defraud the creditor. The fraud must relate to the execution of the
agreement and must have been the reason which induced the other party into giving consent which he
would not have otherwise given. To constitute a ground for attachment in Section 1 (d), Rule 57 of the
Rules of Court, fraud should be committed upon contracting the obligation sued upon. A debt is fraudu-
lently contracted if at the time of contracting it the debtor has a preconceived plan or intention not to
pay, as it is in this case. Fraud is a state of mind and need not be proved by direct evidence but may be
inferred1 from the circumstances attendant in each case."
In the instant case, petitioner's October 12, 2000 Affidavit is bereft of any factual statement that re-
spondent committed a fraud. The affidavit narrated only the alleged fraudulent transaction between
Wincorp and Virata and/or Power Merge, which, by the way, explains why this Court, in G.R. No.
162928, affirmed the writ of attachment issued against the latter. As to the participation of respondent
in the said transaction, the affidavit merely states that respondent, an officer and director of Wincorp,
connived with the other defendants in the civil case to defraud petitioner of his money placements. No
other factual averment or circumstance details how respondent committed a fraud or how he connived
with the other defendants to commit a fraud in the transaction sued upon. In other words, petitioner
has not shown any specific act or deed to support the allegation that respondent is guilty of fraud.

The affidavit, being the foundation of the writ, must contain such particulars as to how the fraud imput-
ed to respondent was committed for the court to decide whether or not to issue the writ. Absent any
statement of other factual circumstances to show that respondent, at the time of contracting the obliga-
tion, had a preconceived plan or intention not to pay, or without any showing of how respondent com-
mitted the alleged fraud, the general averment in the affidavit that respondent is an officer and director
of Wincorp who allegedly connived with the other defendants to commit a fraud, is insufficient to sup-
port the issuance of a writ of preliminary attachment. In the application for the writ under the said
ground, compelling is the need to give a hint about what constituted the fraud and how it was perpe-
trated because established is the rule that fraud is never presumed. Verily, the mere fact that respond-
ent is an officer and director of the company does not necessarily give rise to the inference that he com-
mitted a fraud or that he connived with the other defendants to commit a fraud. While under certain cir-
cumstances, courts may treat a corporation as a mere aggroupment of persons, to whom liability will di-
rectly attach, this is only done when the wrongdoing has been clearly and convincingly establish-
87
ed. (Citations omitted.)
We also reiterated in Ng Wee that the rules on the issuance of the writ of preliminary attachment as a
provisional remedy are strictly construed against the applicant because it exposes the debtor to humilia-
88 89
tion and annoyance. The applicant must show that all requisites are present. Otherwise, if issued on
false or insufficient allegations, the court acts in excess of its jurisdiction which must be correct-
90
ed. chanrobleslaw

In this case, the writ of preliminary attachment was improperly or irregularly issued because there is no
ground for the attachment.

To begin with, Allied Bank filed the application for the writ of preliminary attachment in the Collection
Case against Lim as surety. However, the allegations of fraud refer to the execution of the promissory
notes, and not on the surety agreement. The application was bereft of any allegation as to Lim's partici-
pation in the alleged conspiracy of fraud. Also, the writ of preliminary attachment was granted in the
Collection Case against Lim as . surety, yet there was no allegation on Lim's fraudulent intention in incur-
ring its obligation under the CG/CS Agreements. It cannot be inferred that Lim had, at the time of con-
tracting the obligation, the preconceived intention to renege on his obligation under the CG/CS Agree-
ments. Continuing guaranty and surety agreements are normally required by a bank or financing compa-
91
ny anticipating to enter into a series of credit transactions with a particular principal debtor. This
avoids a need to execute a separate surety contract or bond for each financing or credit accommodation
92
extended to the principal debtor. Here, the CG/CS Agreements were executed prior to the issuance of
L/C No. 21970, and were in force during other transactions including the one involving L/C No. 22518
which encountered no problem. Thus, this transaction cannot be singled out to justify that the surety
agreement has been contracted through fraud.

Moreover, the filing of the Declaratory Relief Case cannot be evidence of a preconceived intention not
to pay the surety's obligation because it was filed by Marphil, and not Lim. In any case, the filing of the
case is a legitimate means resorted to by Marphil in, seeking to clarify its existing obligations with Allied
Bank. If its intention was to renege on its obligations, it would not have submitted itself to the jurisdic-
tion of the court where it can be ordered to pay any existing obligations. The allegation that petitioners
made representations to induce it to grant them a credit line is belied by the fact that it is only in the
transaction involving L/C No. 21970 where Allied Bank encountered problems, because of Nanyang
Bank's dishonor of the draft and documents. Also, the allegation that petitioners committed misrepre-
sentation in shipping the cashew nuts at a volume less than that which was required by the foreign buy-
er, relates to the sale between Marphil and Intan, and not to the loan between Marphil and Allied Bank.

From the foregoing, Allied Bank was not able to sufficiently establish the factual circumstances of the al-
leged fraud in contracting the obligation. Thus, there being no ground for its issuance, the writ of pre-
liminary attachment should be dissolved.

WHEREFORE, the petition for review on certiorari is PARTLY GRANTED. The January 12, 2009 Decision
and May 12, 2009 Resolution of the Court of Appeals are MODIFIED. Marphil Export Corporation and
Ireneo Lim are ordered to pay jointly and severally Allied Banking Corporation (now Philippine National
Bank) the principal amount of P1,913,763.45, with interest at the rate of six percent (6%) per an-
num computed from May 7, 1990, until the date of finality of this judgment. The total amount shall
thereafter earn interest at the rate of six percent (6%) per annum from the finality of judgment until its
satisfaction. Let the writ of preliminary attachment issued against Ireneo Lim's property be DISSOLVED.

SO ORDERED.chanRoblesvirtualLawlibrary

Velasco, Jr., (Chairperson), Peralta, Perez, and Reyes, JJ., concur.

====

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 Irrevo-
cable 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 Documen-
tary Credits (1962 Revision).
The logs were thereafter loaded on the vessel "Zenlin Glory" which was chartered by Christiansen. Be-
fore its loading, the logs were inspected by custom inspectors Nelo Laurente, Alejandro Cabiao, Estani-
slao 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 con-
dition 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 re-
quests 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 pri-
vate 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 certifica-
tion 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 Devel-
opment 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 In-
stance of Rizal. The petitioner was impleaded as defendant before the lower court only to afford com-
plete 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 inform-
ing the Court and his counsel. Hence, Villaluz, filed an amended complaint to make the petitioner solida-
rily 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 pay-
ment 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 de-
fraud 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 irrevo-
cable 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 as-
sumed the very same undertaking as the issuing bank under the terms of the letter of credit.
xxx xxx xxx
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 noti-
fying 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 ef-
fect 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. Marti-
nez, 5 Phil. 67).
The defendant BANK, in insisting upon the certification of defendant CHRISTIANSEN as a condition prec-
edent to negotiating the letter of credit, likewise in the Court's opinion acted in bad faith, not only be-
cause 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 de-
pended 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 respond-
ent. 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 Novem-
ber 5, 1986, it filed a notice of appeal.
On November 10, 1986, the private respondent filed a motion for the immediate execution of the judg-
ment 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 exe-
cution of the judgment.
The Court of Appeals in a decision dated April 9, 1987 granted the petition and nullified the order of exe-
cution, the dispositive portion of the decision states:
WHEREFORE, the petition for certiorari is granted. Respondent Judge's order of execution dated Decem-
ber 29, 1986, as well as his order dated January 14, 1987 denying the petitioner's urgent motion to sus-
pend 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 City-
trust 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 Oc-
tober 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 ad-
vance 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), con-
firmed 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 guaran-
ty 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 ne-
gotiation, 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 cer-
tification, 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 pro-
cedural 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 let-
ter 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 dan-
gerous 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 rela-
tions between the parties.
And even if the U.C.P. was not incorporated in the letter of credit, we have already ruled in the affirma-
tive 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 enunci-
ates 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 involv-
ing 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 en-
gagement of that bank to the beneficiary and bona fide holders of drafts drawn and/or documents pre-
sented 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 undertak-
ing 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 au-
thorization 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 docu-
ments 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 issu-
ing bank may not without the consent of the beneficiary (seller) and the applicant (buyer) revoke his un-
dertaking 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 correspond-
ent bank in accepting the instructions of the issuing bank has also confirmed the letter of credit. Anoth-
er 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 notify-
ing 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, Commer-
cial 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 negotia-
tion, 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 Ag-
bayani, 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 im-
ply 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 fol-
lows 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 Kron-
man 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 con-
firmed 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 agree-
ment between them be construed as an act of confirmation is rather far-fetched, for it depends princi-
pally 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 docu-
mentary credit.
Of course, it may be presumed that the petitioner loaned the money to the private respondent in antici-
pation that it would later be paid by the latter upon the receipt of the letter. Yet, we would have no ba-
sis 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 mere-
ly 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 ne-
gotiation 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 to-
ward 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. Ab-
sent any definitive proof that it has confirmed the letter of credit or has actually negotiated with the pri-
vate 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 respond-
ent) 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 prop-
erty 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 ad-
vanced 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 no-
tion 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 ad-
vance 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 peti-
tioner is only a notifying bank, its acceptance of the instructions of the issuing bank will not create es-
toppel on its part resulting in the acceptance of the trust. Precisely, as a notifying bank, its only obliga-
tion 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 King-
dom 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 let-
ter of credit issued by the latter.
The contract between the two has no bearing as to the non-compliance by the buyer with the agree-
ment 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 re-
fusal 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 guar-
antee 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 con-
flict 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 ben-
eficiary. (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 man-
dated to or expected of it. As an agent of the issuing bank, it has only to follow the instructions of the is-
suing 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 cred-
it, 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 incorpo-
rated 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 con-
cerned 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 re-
quired 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 pe-
tition 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 is-
sued 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 Glo-
ry", 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 de-
cision of the Court of Appeals dated June 29, 1990. The amended complaint in Civil Case No. 15121 is
DISMISSED.
SO ORDERED.
Feliciano, Bidin and Davide, Jr., JJ., concur.
Fernan, C.J., took no part.

====

G.R. No. 146717 November 22, 2004

TRANSFIELD PHILIPPINES, INC., petitioner,
vs.
LUZON HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND BANKING GROUP LIMITED and SECUR-
ITY 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 Ben-
guet 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 differ-
ences through mediation, conciliation and such other means enumerated under Clause 20.3 of the Turn-
key 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 re-
spondent 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 demonstra-
tions. 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 pe-
titioner; 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 re-
spondent 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 respond-
ent banks that any transfer, release, or disposition of the Securities in favor of LHC or any person claim-
ing 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
8.214 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 petition-
er 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 Se-
curities or any renewals or substitutes thereof. The RTC issued a seventy-two (72)-hour temporary re-
straining 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 tem-
porary 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 prelimina-
ry injunction. It ruled that petitioner had no legal right and suffered no irreparable injury to justify the is-
suance 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 petition-
er'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 de-
fault 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 certifi-
cates 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 re-
spondent banks to cease and desist from transferring, paying or in any manner disposing of the Securi-
ties.
However, the appellate court failed to act on the application for preliminary injunction until the tempo-
rary restraining order expired on 27 January 2001. Immediately thereafter, representatives of LHC troop-
ed 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 ex-
pressed 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 RE-
LEASE, THE REMAINING BALANCE OF THE SECURITIES PRIOR TO THE RESOLUTION OF THE DISPUTES BE-
TWEEN 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 reme-
dy obtainable from the competent local courts.
On 25 August 2003, petitioner filed a Supplement to the Petition22 and Supplemental Memoran-
dum,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, pe-
titioner 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 dam-
age 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 ap-
peal.
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 in-
junction 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 counter-
claims 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 re-
turned is outside the issue in this appeal. At any rate, LHC adds that the action to enforce the ICC's parti-
al award is now fully within the Makati RTC's jurisdiction in Civil Case No. 04-332. LHC asserts that peti-
tioner is engaged in forum-shopping by keeping this appeal and at the same time seeking the suit for en-
forcement of the arbitral award before the Makati court.
Respondent SBC in its Memorandum, dated 10 March 200327 contends that the Court of Appeals cor-
rectly 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 pur-
pose.
In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 200328 posits that its ac-
tions 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 ex-
ception rule" in letters of credit. Thus, a discussion of the nature and use of letters of credit, also re-
ferred 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 let-
ter 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, be-
cause 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 pre-
sented under it is often negotiable.29
In commercial transactions, a letter of credit is a financial device developed by merchants as a conven-
ient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable inter-
ests 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 cred-
its involve the payment of money under a contract of sale. Such credits become payable upon the pre-
sentation 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 non-
performance 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 ad-
dressee 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 oc-
cur 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 there-
to.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 Cred-
its 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. Conse-
quently, 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 rela-
tionships with the issuing bank or the beneficiary. A beneficiary can in no case avail himself of the con-
tractual 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 sell-
er 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 de-
scription, quantity, weight, quality, condition, packing, delivery, value or existence of the goods repre-
sented 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 inde-
pendent 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 prin-
ciple.
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 par-
ties in the main contract. As the principle's nomenclature clearly suggests, the obligation under the let-
ter of credit is independent of the related and originating contract. In brief, the letter of credit is sepa-
rate 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 in-
voke the independence principle on letters of credit—does not impress this Court. To say that the inde-
pendence 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 ap-
propriately called "beneficiary."
Petitioner's argument that any dispute must first be resolved by the parties, whether through negotia-
tions or arbitration, before the beneficiary is entitled to call on the letter of credit in essence would con-
vert 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 de-
termination 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 obli-
gor'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 liti-
gate) 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 per-
formance 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 litiga-
tion 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 estab-
lishes 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, per-
formed and that the beneficiary's presentation of those documents is not rightful. In that case, the appli-
cant 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 ba-
sis.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 de-
lay 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 Securi-
ty."45
A contract once perfected, binds the parties not only to the fulfillment of what has been expressly stipu-
lated 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 peti-
tioner. The call upon the Securities, while not an exclusive remedy on the part of LHC, is certainly an al-
ternative 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 as-
serts 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, ma-
terial representations of fact that to his knowledge are untrue. In such a situation, petitioner insists, in-
junction is recognized as a remedy available to it.
Citing Dolan's treatise on letters of credit, petitioner argues that the independence principle is not with-
out 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 de-
clare 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 exten-
sion 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 lim-
itation being that this discretion should be exercised based upon the grounds and in the manner provid-
ed 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 vio-
lative of the said right.52 It must be shown that the invasion of the right sought to be protected is mate-
rial 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 can-
not 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 ad-
mission, 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 Liqui-
dated 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 Securi-
ty.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 in-
tended 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 pe-
titioner invoke the fraud exception rule as a ground to justify the issuance of an injunction.58 What peti-
tioner did assert before the courts below was the fact that LHC's draws on the Securities would be pre-
mature and without basis in view of the pending disputes between them. Petitioner should not be al-
lowed 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 ordi-
narily not be considered by a reviewing court as they cannot be raised for the first time on ap-
peal.59 The lower courts could thus not be faulted for not applying the fraud exception rule not only be-
cause 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 arbi-
tral 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 ten-
or 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 Con-
tract with LHC, a proviso that only the final determination by the arbitral tribunals that default had oc-
curred 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 indemnifi-
cation 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 be-
come 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 peti-
tion moot—for any declaration by this Court as to propriety or impropriety of the non-issuance of in-
junctive relief could have no practical effect on the existing controversy.65 The other issues raised by pe-
titioner 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 con-
stitutes 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, howev-
er, 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 rem-
edies in different courts, simultaneously or successively, all substantially founded on the same transac-
tions 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 fa-
vorable opinion in another forum other than by appeal or special civil action of certiorari, or the institu-
tion 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 con-
stitutes improper conduct and may be punished with summary dismissal of the multiple petitions and di-
rect contempt of court.70
Considering the seriousness of the charge of forum-shopping and the severity of the sanctions for its vio-
lation, 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 no-
tice.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.

===

G.R. No. 116863 February 12, 1998

KENG HUA PAPER PRODUCTS CO. INC., petitioner,
vs.
COURT OF APPEALS; REGIONAL TRIAL COURT OF MANILA, BR. 21; and SEA-LAND SERVICE, INC., re-
spondents.

PANGANIBAN, J.:
What is the nature of a bill of lading? When does a bill of lading become binding on a consignee? Will an
alleged overshipment justify the consignee's refusal to receive the goods described in the bill of lading?
When may interest be computed on unpaid demurrage charges?
Statement of the Case
These are the main questions raised in this petition assailing the Decision 1 of the Court of Ap-
peals 2 promulgated on May 20, 1994 in C.A.-G.R. CV No. 29953 affirming in toto the decision 3 dated
September 28, 1990 in Civil Case No. 85-33269 of the Regional Trial Court of Manila, Branch 21. The dis-
positive portion of the said RTC decision reads:
WHEREFORE, the Court finds by preponderance of evidence that Plaintiff has proved its cause of action
and right to relief. Accordingly, judgment is hereby rendered in favor of the Plaintiff and against Defend-
ant, ordering the Defendant to pay plaintiff:
1. The sum of P67,340.00 as demurrage charges, with interest at the legal rate from the date of the ex-
trajudicial demand until fully paid;
2. A sum equivalent to ten (10%) percent of the total amount due as Attorney's fees and litigation ex-
penses.
Send copy to respective counsel of the parties.
SO ORDERED.4
The Facts
The factual antecedents of this case as found by the Court of Appeals are as follows:
Plaintiff (herein private respondent), a shipping company, is a foreign corporation licensed to do busi-
ness in the Philippines. On June 29, 1982, plaintiff received at its Hong Kong terminal a sealed container,
Container No. SEAU 67523, containing seventy-six bales of "unsorted waste paper" for shipment to de-
fendant (herein petitioner), Keng Hua Paper Products, Co. in Manila. A bill of lading (Exh. A) to cover the
shipment was issued by the plaintiff.
On July 9, 1982, the shipment was discharged at the Manila International Container Port. Notices of ar-
rival were transmitted to the defendant but the latter failed to discharge the shipment from the contain-
er during the "free time" period or grace period. The said shipment remained inside the plaintiff's con-
tainer from the moment the free time period expired on July 29, 1982 until the time when the shipment
was unloaded from the container on November 22, 1983, or a total of four hundred eighty-one (481)
days. During the 481-day period, demurrage charges accrued. Within the same period, letters demand-
ing payment were sent by the plaintiff to the defendant who, however, refused to settle its obligation
which eventually amounted to P67,340.00. Numerous demands were made on the defendant but the
obligation remained unpaid. Plaintiff thereafter commenced this civil action for collection and damages.
In its answer, defendant, by way of special and affirmative defense, alleged that it purchased fifty (50)
tons of waste paper from the shipper in Hong Kong, Ho Kee Waste Paper, as manifested in Letter of
Credit No. 824858 (Exh. 7. p. 110. Original Record) issued by Equitable Banking Corporation, with partial
shipment permitted; that under the letter of credit, the remaining balance of the shipment was only ten
(10) metric tons as shown in Invoice No. H-15/82 (Exh. 8, p. 111, Original Record); that the shipment
plaintiff was asking defendant to accept was twenty (20) metric tons which is ten (10) metric tons more
than the remaining balance; that if defendant were to accept the shipment, it would be violating Central
Bank rules and regulations and custom and tariff laws; that plaintiff had no cause of action against the
defendant because the latter did not hire the former to carry the merchandise; that the cause of action
should be against the shipper which contracted the plaintiff's services and not against defendant; and
that the defendant duly notified the plaintiff about the wrong shipment through a letter dated January
24, 1983 (Exh. D for plaintiff, Exh. 4 for defendant, p. 5. Folder of Exhibits).
As previously mentioned, the RTC found petitioner liable for demurrage; attorney's fees and expenses of
litigation. The petitioner appealed to the Court of Appeals, arguing that the lower court erred in (1)
awarding the sum of P67,340 in favor of the private respondent, (2) rejecting petitioner's contention
that there was overshipment, (3) ruling that petitioner's recourse was against the shipper, and (4) com-
puting legal interest from date of extrajudicial demand.5
Respondent Court of Appeals denied the appeal and affirmed the lower court's decision in toto. In a sub-
sequent resolution,6 it also denied the petitioner's motion for reconsideration.
Hence, this petition for review.7
The Issues
In its memorandum, petitioner submits the following issues:
I. Whether or not petitioner had accepted the bill of lading;
II. Whether or not the award of the sum of P67,340.00 to private respondent was proper;
III. Whether or not petitioner was correct in not accepting the overshipment;
IV. Whether or not the award of legal interest from the date of private respondent's extrajudicial de-
mand was proper;8
In the main, the case revolves around the question of whether petitioner bound by the bill of lading.
We shall, thus, discuss the above four issues as they intertwine with this main question.
The Court's Ruling
The petition is partly meritorious. We affirm petitioner's liability for demurrage, but modify the inter-
est rate thereon.
Main Issue: Liability Under the Bill of Lading
A bill of lading serves two functions. First, it is a receipt for the goods shipped. Second, it is a contract
by which three parties, namely, the shipper, the carrier, and the consignee undertake specific respon-
sibilities and assume stipulated obligations. 9 A "bill of lading delivered and accepted constitutes the
contract of carriage even though not signed," 10 because the "(a)cceptance of a paper containing the
terms of a proposed contract generally constitutes an acceptance of the contract and of all of its terms
and conditions of which the acceptor has actual or constructive notice." 11 In a nutshell, the accept-
ance of a bill of lading by the shipper and the consignee, with full knowledge of its contents, gives rise
to the presumption that the same was a perfected and binding contract. 12
In the case at bar, both lower courts held that the bill of lading was a valid and perfected contract be-
tween the shipper (Ho Kee), the consignee (Petitioner Keng Hua), and the carrier (Private Respondent
Sea-Land). Section 17 of the bill of lading provided that the shipper and the consignee were liable for
the payment of demurrage charges for the failure to discharge the containerized shipment beyond the
grace period allowed by tariff rules. Applying said stipulation, both lower courts found petitioner lia-
ble. The aforementioned section of the bill of lading reads:
17. COOPERAGE FINES. The shipper and consignee shall be liable for, indemnify the carrier and ship
and hold them harmless against, and the carrier shall have a lien on the goods for, all expenses and
charges for mending cooperage, baling, repairing or reconditioning the goods, or the van, trailers or
containers, and all expenses incurred in protecting, caring for or otherwise made for the benefit of the
goods, whether the goods be damaged or not, and for any payment, expense, penalty fine, dues, du-
ty, tax or impost, loss, damage, detention, demurrage, or liability of whatsoever nature, sustained or
incurred by or levied upon the carrier or the ship in connection with the goods or by reason of the
goods being or having been on board, or because of shipper's failure to procure consular or other
proper permits, certificates or any papers that may be required at any port or place or shipper's fail-
ure to supply information or otherwise to comply with all laws, regulations and requirements of law
in connection with the goods of from any other act or omission of the shipper or consignee: (Emphasis
supplied.)
Petitioner contends, however, that it should not be bound by the bill of lading because it never gave
its consent thereto. Although petitioner admits "physical acceptance" of the bill of lading, it argues
that its subsequent actions belie the finding that it accepted the terms and conditions printed there-
in. 13 Petitioner cites as support the "Notice of Refused or On Hand Freight" it received on November
2, 1982 from private respondent, which acknowledged that petitioner declined to accept the ship-
ment. Petitioner adds that it sent a copy of the said notice to the shipper on December 23, 1982. Peti-
tioner points to its January 24, 1983 letter to the private respondent, stressing "that its acceptance of
the bill of lading would be tantamount to an act of smuggling as the amount it had imported (with full
documentary support) was only (at that time) for 10,000 kilograms and not for 20,313 kilograms as
stated in the bill of lading" and "could lay them vulnerable to legal sanctions for violation of customs
and tariff as well as Central Bank laws." 14 Petitioner further argues that the demurrage "was a conse-
quence of the shipper's mistake" of shipping more than what was bought. The discrepancy in the
amount of waste paper it actually purchased, as reflected in the invoice vis-a-vis the excess amount in
the bill of lading, allegedly justifies its refusal to accept the shipment. 15
Petitioner Bound by
the Bill of Lading
We are not persuaded. Petitioner admits that it "received the bill of lading immediately after the ar-
rival of the shipment" 16 on July 8, 1982. 17 Having been afforded an opportunity to examine the said
document, petitioner did not immediately object to or dissent from any term or stipulation therein. It
was only six months later, on January 24, 1983, that petitioner sent a letter to private respondent say-
ing that it could not accept the shipment. Petitioner's inaction for such a long period conveys the clear
inference that it accepted the terms and conditions of the bill of lading. Moreover, said letter spoke
only of petitioner's inability to use the delivery permit, i.e. to pick up the cargo, due to the shipper's
failure to comply with the terms and conditions of the letter of credit, for which reason the bill of lad-
ing and other shipping documents were returned by the "banks" to the shipper. 18 The letter merely
proved petitioner's refusal to pick up the cargo, not its rejection of the bill of lading.
Petitioner's reliance on the Notice of Refused or On Hand Freight, as proof of its nonacceptance of the
bill of lading, is of no consequence. Said notice was not written by petitioner; it was sent by private re-
spondent to petitioner in November 1982, or four months after petitioner received the bill of lading. If
the notice has any legal significance at all, it is to highlight petitioner's prolonged failure to object to
the bill of lading. Contrary to petitioner's contention, the notice and the letter support — not belie —
the findings of the two lower courts that the bill of lading was impliedly accepted by petitioner.
As aptly stated by Respondent Court of Appeals:
In the instant case, (herein petitioner) cannot and did not allege non-receipt of its copy of the bill of
lading from the shipper. Hence, the terms and conditions as well as the various entries contained
therein were brought to its knowledge. (Herein petitioner) accepted the bill of lading without inter-
posing any objection as to its contents. This raises the presumption that (herein petitioner) agreed to
the entries and stipulations imposed therein.
Moreover, it is puzzling that (herein petitioner) allowed months to pass, six (6) months to be exact,
before notifying (herein private respondent) of the "wrong shipment". It was only on January 24, 1983
that (herein petitioner) sent (herein private respondent) such a letter of notification (Exh D for plain-
tiff, Exh. 4 for defendant; p. 5, Folder of Exhibits). Thus, for the duration of those six months (herein
private respondent never knew the reason for (herein petitioner's) refusal to discharge the shipment.
After accepting the bill of lading, receiving notices of arrival of the shipment, failing to object thereto,
(herein petitioner) cannot now deny that it is bound by the terms in the bill of lading. If it did not in-
tend to be bound, (herein petitioner) would not have waited for six months to lapse before finally
bringing the matter to (herein private respondent's attention. The most logical reaction in such a case
would be to immediately verify the matter with the other parties involved. In this case, however,
(herein petitioner) unreasonably detained (herein private respondent's) vessel to the latter's preju-
dice. 19
Petitioner's attempt to evade its obligation to receive the shipment on the pretext that this may cause
it to violate customs, tariff and central bank laws must likewise fail. Mere apprehension of violating
said laws, without a clear demonstration that taking delivery of the shipment has become legally im-
possible, 20 cannot defeat the petitioner's contractual obligation and liability under the bill of lading.
In any event, the issue of whether petitioner accepted the bill of lading was raised for the first time
only in petitioner's memorandum before this Court. Clearly, we cannot now entertain an issue raised
for the very first time on appeal, in deference to the well-settled doctrine that "(a)n issue raised for
the first time on appeal and not raised timely in the proceedings in the lower court is barred by estop-
pel. Questions raised on appeal must be within the issues framed by the parties and, consequently, is-
sues not raised in the trial court cannot be raised for the first time on appeal."21
In the case at bar, the prolonged failure of petitioner to receive and discharge the cargo from the pri-
vate respondent's vessel constitutes a violation of the terms of the bill of lading. It should thus be lia-
ble for demurrage to the former.
In The Apollon, 22 Justice Story made the following relevant comment on the nature of demurrage:
In truth, demurrage is merely an allowance or compensation for the delay or detention of a vessel. It
is often a matter of contract, but not necessarily so. The very circumstance that in ordinary commer-
cial voyages, a particular sum is deemed by the parties a fair compensation for delays, is the very rea-
son why it is, and ought to be, adopted as a measure of compensation, in cases ex delicto. What fairer
rule can be adopted than that which founds itself upon mercantile usage as to indemnity, and fixes a
recompense upon the deliberate consideration of all the circumstances attending the usual earnings
and expenditures in common voyages? It appears to us that an allowance, by way of demurrage, is
the true measure of damages in all cases of mere detention, for that allowance has reference to the
ship's expenses, wear and tear, and common employment.23
Amount of Demurrage Charges
Petitioner argues that it is not obligated to pay any demurrage charges because, prior to the filing of
the complaint, private respondent made no demand for the sum of P67,340. Moreover, private re-
spondent's loss and prevention manager, Loi Gillera, demanded P50,260; but its counsel, Sofronio Lar-
cia, subsequently asked for a different amount of P37,800.
Petitioner's position is puerile. The amount of demurrage charges in the sum of P67,340 is a factual
conclusion of the trial court that was affirmed by the Court of Appeals and, thus, binding on this
Court. 24 Besides, such factual finding is supported by the extant evidence. 25 The apparent discrep-
ancy was a result of the variance of the dates when the two demands were made. Necessarily, the
longer the cargo remained unclaimed, the higher the demurrage. Thus, while in his letter dated April
24, 1983, 26 private respondent's counsel demanded payment of only P37,800, the additional demur-
rage incurred petitioner due to its continued refusal to receive delivery of the cargo ballooned to
P67,340 by November 22, 1983. The testimony of Counsel Sofronio Larcia as regards said letter of
April 24, 1983 elucidates, viz:
Q Now, after you sent this letter, do you know what happened?
A Defendant continued to refuse to take delivery of the shipment and the shipment stayed at the port
for a longer period.
Q So, what happened to the shipment?
A The shipment incurred additional demurrage charges which amounted to P67,340.00 as of Novem-
ber 22, 1983 or more than a year after — almost a year after the shipment arrived at the port.
Q So, what did you do?
A We requested our collection agency to pursue the collection of this amount. 27
Bill of Lading Separate from
Other Letter of Credit Arrangements
In a letter of credit, there are three distinct and independent contracts:
(1) the contract of sale between the buyer and the seller, (2) the contract of the buyer with the issuing
bank, and (3) the letter of credit proper in which the bank promises to pay the seller pursuant to the
terms and conditions stated therein. "Few things are more clearly settled in law than that the three
contracts which make up the letter of credit arrangement are to be maintained in a state of perpetual
separation." 28 A transaction involving the purchase of goods may also require, apart from a letter of
credit, a contract of transportation specially when the seller and the buyer are not in the same locale
or country, and the goods purchased have to be transported to the latter.
Hence, the contract of carriage, as stipulated in the bill of lading in the present case, must be treated
independently of the contract of sale between the seller and the buyer, and the contract for the issu-
ance of a letter of credit between the buyer and the issuing bank. Any discrepancy between the
amount of the goods described in the commercial invoice in the contract of sale and the amount al-
lowed in the letter of credit will not affect the validity and enforceability of the contract of carriage as
embodied in the bill of lading. As the bank cannot be expected to look beyond the documents pre-
sented to it by the seller pursuant to the letter of credit, 29 neither can the carrier be expected to go
beyond the representations of the shipper in the bill of lading and to verify their accuracy vis-a-viz the
commercial invoice and the letter of a credit. Thus, the discrepancy between the amount of goods in-
dicated in the invoice and the amount in the bill of lading cannot negate petitioner's obligation to pri-
vate respondent arising from the contract of transportation. Furthermore, private respondent, as car-
rier, had no knowledge of the contents of the container. The contract of carriage was under the ar-
rangement known as "Shipper's Load And Count," and shipper was solely responsible for the loading
of the container while carrier was oblivious to the contents of the shipment. Petitioner's remedy in
case of overshipment lies against the seller/shipper, not against the carrier.
Payment of Interest
Petitioner posits that it "first knew" of the demurrage claim of P67,340 only when it received, by sum-
mons, private respondent's complaint. Hence, interest may not be allowed to run from the date of pri-
vate respondent's extrajudicial demands on March 8, 1983 for P50,260 or on April 24, 1983 for
P37,800, considering that, in both cases, "there was no demand for interest." 30 We agree.
Jurisprudence teaches us:
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or
until the demand can be established with reasonable certainty. Accordingly, where the demand is es-
tablished with reasonable certainty, the interest shall begin to run from the time the claim is made ju-
dicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably es-
tablished at the time the demand is made, the interest shall begin to run only from the date the judg-
ment of the court is made (at which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on
the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per an-
num from such finality until its satisfaction, this interim period being deemed to be by then an equiva-
lent to a forbearance of credit.31
The case before us involves an obligation not arising from a loan or forbearance of money; thus, pur-
suant to Article 2209 of the Civil Code, the applicable interest rate is six percent per annum. Since the
bill of lading did not specify the amount of demurrage, and the sum claimed by private respondent in-
creased as the days went by, the total amount demanded cannot be deemed to have been establish-
ed with reasonable certainty until the trial court rendered its judgment. Indeed, "(u)nliquidated dam-
ages or claims, it is said, are those which are not or cannot be known until definitely ascertained, as-
sessed and determined by the courts after presentation of proof. " 32 Consequently, the legal interest
rate is six percent, to be computed from September 28, 1990, the date of the trial court's decision.
And in accordance with Philippine National Bank 33 and Eastern Shipping, 34 the rate of twelve per-
cent per annum shall be charged on the total then outstanding, from the time the judgment becomes
final and executory until its satisfaction.
Finally, the Court notes that the matter of attorney's fees was taken up only in the dispositive portion
of the trial court's decision. This falls short of the settled requirement that the text of the decision
should state the reason for the award of attorney's fees, for without such justification, its award
would be a "conclusion without a premise, its basis being improperly left to speculation and conjec-
ture."35
WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION that the legal inter-
est of six percent per annum shall be computed from September 28, 1990 until its full payment before
finality of judgment. The rate of interest shall be adjusted to twelve percent per annum, computed
from the time said judgment became final and executory until full satisfaction. The award of attor-
ney's fees is DELETED.
SO ORDERED.
Davide, Jr., Bellosillo, Vitug and Quisumbing, JJ., concur.

===

G.R. No. 161865. March 10, 2005

LAND BANK OF THE PHILIPPINES, Petitioners,
vs.
MONET’S EXPORT AND MANUFACTURING CORPORATION, SPOUSES VICENTE V. TAGLE, SR. and MA.
CONSUELO G. TAGLE, Respondents.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the October 9,
1 2
2003 Decision of the Court of Appeals in CA-G.R. CV No. 57436, and its January 20, 2004 Resolu-
3
tion denying petitioner’s motion for reconsideration.
The factual antecedents are as follows:
On June 25, 1981, petitioner, Land Bank of the Philippines (Land Bank), and Monet’s Export and Manu-
4
facturing Corporation (Monet) executed an Export Packing Credit Line Agreement under which Monet
was given a credit line in the amount of P250,000.00, secured by the proceeds of its export letters of
5 6
credit, the continuing guaranty of the spouses Vicente V. Tagle, Sr. and Ma. Consuelo G. Tagle, and the
7
third party mortgage executed by Pepita C. Mendigoria.
8
The credit line agreement was renewed and amended several times until it was increased to
9
P5,000,000.00. Owing to the continued failure and refusal of Monet, notwithstanding repeated de-
10
mands, to pay its indebtedness to Land Bank, which have ballooned to P11,464,246.19 by August 31,
11
1992, a complaint for collection of sum of money with prayer for preliminary attachment was filed by
12
Land Bank with the Regional Trial Court of Manila, docketed as Civil Case No. 93-64350.
13
In their joint Answer with Compulsory Counterclaim, Monet and the Tagle spouses alleged that Land
Bank failed and refused to collect the receivables on their export letter of credit against Wishbone Trad-
ing Company of Hong Kong in the sum of US$33,434.00, while it made unauthorized payments on their
import letter of credit to Beautilike (H.K.) Ltd. in the amount of US$38,768.40, which seriously damaged
the business interests of Monet.
14
On July 15, 1997, the trial court rendered decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows:
1. Recognizing the obligation of the defendants as stated in the "Schedule of Amortization from the
Loans and Discount Department of LAND BANK" (Exh. "39"), as well as the interest mentioned therein,
but deleting the penalty thereof as no penalty should be charged and sentencing defendants jointly and
severally to pay the amounts stated therein as verified;
2. Granting the counterclaim interposed by the defendants in the amount of US$30,000.00 payable in
Philippine Pesos at the official exchange rate when payment is to be made, to compensate for the de-
fendants’ lost income opportunities occasioned by defendants’ transaction with Wishbone Trading Cor-
poration and with Beautilike, the same to be deducted from the confirmed and computed obligation
mentioned in No. 1 hereof; and
15
3. Denying the claim for attorney’s fees for lack of merit.
16
From the foregoing decision, Land Bank filed an appeal with the Court of Appeals.
On October 9, 2003, the Court of Appeals promulgated the decision subject of the present petition for
review. In affirming the trial court, the Court of Appeals found that, indeed, Land Bank was responsible
for the mismanagement of the Wishbone and Beautilike accounts of Monet. It held that because of the
non-collection and unauthorized payment made by Land Bank on behalf of Monet, and considering that
the latter could no longer draw from its credit line with Land Bank, it suffered from lack of financial re-
sources sufficient to buy the needed materials to fill up the standing orders from its customers.
The Court of Appeals disposed of Land Bank’s appeal in this wise:
WHEREFORE, premises considered, and finding no reversible error in the assailed Decision of the Region-
al Trial Court of Manila, Branch 49, in Civil Case No. 93-64350 dated July 15, 1997, said Decision is here-
by AFFIRMED and UPHELD and the appeal is DISMISSED for lack of merit.
17
SO ORDERED.
18
Land Bank’s Motion for Reconsideration was denied by the Court of Appeals on January 20,
19
2004, hence, this petition raising the following issues:
1. Whether or not the respondent Court seriously erred in upholding the findings and conclusion of the
trial court limiting the liability of private respondents based on [the] Summary of Availment and Sched-
ule of Amortization and granting the latter opportunity losses anchored on the theory that petitioner
disrupted the cas[h] flow of respondent MONET’s which led to its decline;
2. Whether or not the respondent Court palpably erred in not clearly establishing petitioner’s right to
collect payment from private respondents’ loan validly obtained in the sum of P11,464,246.19 Million
20
which has become long overdue and demandable.
The petition is partly impressed with merit.
As regards the Beautilike account, the trial court and the Court of Appeals erred in holding that Land
Bank failed to protect Monet’s interest when it paid the suppliers despite discrepancies in the shipment
vis-à-vis the order specifications of Monet.
21
Our ruling in Bank of America, NT & SA v. Court of Appeals, is pertinent:
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 pay-
ing. To break the impasse, the buyer may be required to contract a bank to issue a letter of credit in fa-
vor of the seller so that, by virtue of the letter 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. 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 re-
quired 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 transac-
tion 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 the said documents and control over the goods only after reimburs-
ing the bank.
What characterizes letters of credit, as distinguished from other accessory contracts, is the engage-
ment of the issuing bank to pay the seller once the draft and the required shipping documents are pre-
sented 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 pre-
cluded from determining whether the main contract is actually accomplished or not. (Emphasis sup-
plied)
Moreover, Article 3 of the Uniform Customs and Practice (UCP) for Documentary Credits 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 benefi-
ciary.
In particular, Article 15 of the UCP states:
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 docu-
ments or superimposed thereon; nor do they assume any liability or responsibility for the description,
weight, quality, condition, packing, delivery, value or existence of the goods represented by any docu-
ments, or for the good faith or acts and/or omissions, solvency, performance or standing of the consign-
or, the carriers, or the insurers of the goods, or any other person whomsoever. (Emphasis supplied)
22
In Transfield Philippines, Inc. v. Luzon Hydro Corporation, et al., we held that the engagement of the is-
suing 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 deter-
mining whether the main contract is actually accomplished or not.
For, if the letter of credit is drawable only after the settlement of any dispute on the main contract en-
tered into by the applicant of the said letter of credit and the beneficiary, then there would be no practi-
cal and beneficial use for letters of credit in commercial transactions.
Accordingly, we find merit in the contention of Land Bank that, as the issuing bank in the Beautilike
transaction involving an import letter of credit, it only deals in documents and it is not involved in the
contract between the parties. The relationship between the beneficiary and the issuer of a letter of cred-
it is not strictly contractual, because both privity and a meeting of the minds are lacking. Thus, upon re-
ceipt by Land Bank of the documents of title which conform with what the letter of credit requires, it is
duty bound to pay the seller, as it did in this case.
Thus, no fault or acts of mismanagement can be attributed to Land Bank relative to Monet’s import let-
ter of credit. Its actions find solid footing on the legal principles and jurisprudence earlier discussed. Con-
sequently, it was error for the trial court and for the Court of Appeals to grant opportunity losses to the
respondents on this account.
On the matter, however, of the Wishbone transaction where it is alleged by respondents that petitioner
failed in its duty to protect its (Monet’s) interest in collecting the amount due to it from its customers,
we find that the trial court and the Court of Appeals committed no reversible error in holding Land Bank
liable for opportunity losses. The trial court summarized the transaction in this manner:
The shipment to Wishbone Trading Company was for US16,119.00 on October 16, 1986. Documents
were submitted without requesting for purchase of export bills. This was sent by plaintiff (Land Bank) via
telex to Hongkong Bank requesting advice to pay as there were discrepancies. On advice of Hongkong
Bank plaintiff paid the first shipment. At this point defendants (Monet and the Tagle spouses) were re-
luctant to release the two subsequent documents to the buyer until payment of the first shipment is
made. When LANDBANK paid the defendants, believing that everything was in order, defendants re-
leased the documents for the two subsequent shipments, thinking that the LANDBANK’s international
department had taken the necessary measures for them to be paid. Wishbone then came up with new
additional discrepancies not listed in the cable sent by LANDBANK. Defendants argue that if LANDBANK
had acted prudently on this as it used to do, Mantruste Hongkong could not have denied payment upon
the first instructions of the buyer based on the cable of LANDBANK’s international department. Defend-
ants therefore asked LANDBANK to share with them the burden of compelling the shrewd buyers to ef-
fect the payment of the export bills. Furthermore, referring to the telex of Mantruste Hongkong the
original documents to Wishbone were sent per requirement under the term of the Letter of Credit, but
the goods were consigned to the order of Wells Fargo Bank. Defendants believed that Wells Fargo Bank
should be responsible to the shipper. Thus the defendants requested for assistance to telex Wells Fargo
Bank to inquire about the whereabouts of the merchandise shipped to them as consignee. As early as
November 30, 1986, Mantruste Hongkong sent a telex addressed to the bank instructing it to pay MON-
ET the sum of US$16,119.00 for the first shipment despite discrepancies which were minor and properly
corrected. The evidence indicates that in the Wishbone case the foreign buyer was actually putting one
over the defendants, which LANDBANK could have properly prevented had it been more aggressive as is
expected of a bank.
Exhibits "27" and "27-A" clearly show that the terms and conditions of the Letter of Credit were substan-
tially complied with by MONET. And the evidence shows that Wells Fargo Bank was included to receive
the bills of lading, notifying only Style Up of California, and yet LANDBANK did not consider this for pur-
poses of collection. These were testified to by defendant Consuelo Tagle who explained what happened,
including payments of account, which LANDBANK failed to rebut. LANDBANK did not pursue collection
23
on this despite the fact that the goods were acceptable merchandise.
A careful review of the records reveal that the trial court correctly considered Land Bank as the attor-
ney-in-fact of Monet with regard to its export transactions with Wishbone Trading Company. It was
24
stipulated in the Deed of Assignment executed between Monet and Land Bank on June 26, 1981:
That the ASSIGNOR/s (Monet) by these presents, does/do hereby appoint/s the ASSIGNEE (Land Bank)
their/his/her true and lawful attorney-in-fact and in their/his/her place and stead, to demand, collect
and receive the proceeds of the export letters of credit at a loan value of 80% to be applied to the pay-
ment of the credit accommodation herein secured. (Underscoring supplied)
Clearly, petitioner’s refusal to own its responsibility in the handling of the Wishbone account fails
against the aforequoted provision.
As the attorney-in-fact of Monet in transactions involving its export letters of credit, such as the Wish-
bone account, Land Bank should have exercised the requisite degree of diligence in collecting the
amount due to the former. The records of this case are bereft of evidence showing that Land Bank exer-
cised the prudence mandated by its contractual obligations to Monet.
The failure of Land Bank to judiciously safeguard the interest of Monet is not without any repercussions
vis-à-vis the viability of Monet as a business enterprise. As correctly observed by the Court of Appeals:
In fine, because of the non-collection … defendants-appellees suffered from a lack of financial resources
sufficient to buy new materials. And since they also could no longer draw on their existing credit line
with Landbank, they could not purchase materials to fill up the orders of their customers. Because of
25
this the business reputation of Monet’s suffered which hastened its decline.
The right of the respondents to be awarded opportunity losses having been established, we now go to
the determination of the proper amount to be awarded to them under the circumstances obtaining in
this case. The lower court awarded to herein respondents opportunity losses in the amount of
US$30,000.00 based on its findings of two (2) acts of mismanagement committed by Land Bank. The
Court of Appeals affirmed the amount of the award in the assailed decision. In view of our findings that
Land Bank is not guilty of mismanagement in its handling of Monet’s import letter of credit relative to
the Beautilike transaction, we hold that a reduction of the amount of the grant is in order. It is not possi-
ble for us to totally do away with the award of opportunity losses having affirmed the findings of the tri-
al court and the Court of Appeals that Land Bank, as the attorney-in-fact of Monet in its transaction with
Wishbone Trading Company, committed acts of mismanagement. On account of the foregoing reasons,
we reduce the amount of opportunity losses granted to Monet to US$15,000.00 payable in Philippine
pesos at the official exchange rate when payment is to be made.
Anent the second issue, we find that the trial court erred in limiting the obligation of the respondents to
Land Bank to what was stated in the "Schedule of Amortization from the Loans and Discounts Depart-
26
ment of LANDBANK", or Exhibit "39", for the respondents.
Prefatorily, we restate the time honored principle that in a petition for review under Rule 45, only ques-
tions of law may be raised. It is not our function to analyze or weigh all over again evidence already con-
sidered in the proceedings below, our jurisdiction is limited to reviewing only errors of law that may
27
have been committed by the lower court. The resolution of factual issues is the function of lower
courts, whose findings on these matters are received with respect. A question of law which we may pass
upon must not involve an examination of the probative value of the evidence presented by the liti-
28
gants.
The above rule, however, admits of certain exceptions. The findings of fact of the Court of Appeals are
generally conclusive but may be reviewed when: (1) the factual findings of the Court of Appeals and the
trial court are contradictory; (2) the findings are grounded entirely on speculation, surmises or conjec-
tures; (3) the inference made by the Court of Appeals from its findings of fact is manifestly mistaken, ab-
surd or impossible; (4) there is grave abuse of discretion in the appreciation of facts; (5) the appellate
court, in making its findings, goes beyond the issues of the case and such findings are contrary to the ad-
missions of both appellant and appellee; (6) the judgment of the Court of Appeals is premised on a mis-
apprehension of facts; (7) the Court of Appeals fails to notice certain relevant facts which, if properly
considered, will justify a different conclusion; and (8) the findings of fact of the Court of Appeals are con-
trary to those of the trial court or are mere conclusions without citation of specific evidence, or where
the facts set forth by the petitioner are not disputed by respondent, or where the findings of fact of the
Court of Appeals are premised on the absence of evidence but are contradicted by the evidence on re-
29
cord.
Our review of the records of this case reveal that the reversible error committed by the lower court, and
that of the Court of Appeals, partook of the form of over reliance and sole reliance on the figures con-
tained in Exhibit "39", to the exclusion of other pieces of documentary evidence annexed by Land Bank
to its complaint.
There is no doubt that the respondents indeed owed Land Bank a sum of money. This much was clearly
30
established by the series of letters written by the officers of Monet to Land Bank acknowledging the
corporation’s indebtedness, albeit without specifying any amount, and asking for understanding and
more time within which they can settle their obligations. We note, however, that the respondents have
been consistent and persistent in their stand that they do not harbor any intention of evading the pay-
ment of the amount they actually owed to the petitioner, provided that there be a reconciliation of the
31
payments made by the respondents on their loan obligations.
Indeed, Exhibit "39" or the Summary of Availment and Schedule of Amortization, which was made by
the trial court as the basis in determining the amount of indebtedness of the respondents to the peti-
tioner, is a document issued by the Loans and Discounts Department of Land Bank itself. Nevertheless,
we note that the amount covered by the said summary pertains only to the indebtedness of Monet to
Land Bank amounting to P2,500,000.00, as covered by Promissory Note No. P-981. The amount reflect-
ed in Exhibit "39" is so small when compared to the P11,464,246.19 which Land Bank sought to collect
from the respondents in its complaint before the trial court. The records of this case show that respond-
ents, in the course of their credit transactions with Land Bank, executed not only one, but several prom-
issory notes in varying amounts in favor of the bank.
On the other hand, Land Bank submitted a Consolidated Statement of Account dated August 31,
32
1992 in support of its claim as to the amount owed to it. The said document illustrated how, based on
the computations made by Land Bank, the indebtedness of Monet ballooned to P11,464,246.19. Land
33
Bank also submitted a Summary of Availments and Payments from 1981 to 1989 which detailed the
series of availments and payments made by Monet.
Notwithstanding the above facts, and considering that Monet’s Exhibit "39" was prepared before its due
date of April 29, 1991, while Land Bank’s Consolidated Statement of Account was prepared much later
on August 31, 1992, the trial court chose to overlook them and conveniently held that the correct basis
of Monet’s indebtedness to Land Bank are the figures contained in Exhibit "39". Nonetheless, no explan-
ation was proferred why it used Exhibit "39" as basis in determining the actual indebtedness of Monet.
We note that instead of dealing squarely with the issue of resolving the total amount of indebtedness
due to Land Bank, the trial court and the Court of Appeals chose to expound on Land Bank’s alleged acts
of mismanagement.
In "discussing" this issue, all the trial court said was:
LANDBANK claims that as of August 31, 1992, the defendants owe them the sum of P11,464,246.19 pay-
able with interest at the rate of 10% per annum. But this is disputed by the defendants as shown in their
34
Summary of Availment and Schedule of Amortization (Exh. "39").
While both the petitioner and the respondents submitted their respective pieces of documentary evi-
dence in support of their contentions as to the amount of indebtedness due to petitioner, the trial court
failed to calibrate and harmonize them.
Unfortunately, despite the pieces of evidence submitted by the parties, our review of the same is incon-
clusive in determining the total amount due to the petitioner. The petitioner had failed to establish the
effect of Monet’s Exhibit "39" to its own Consolidated Statement of Account as of August 31, 1992, nor
did the respondents categorically refute the said statement of account vis-à-vis its Exhibit "39". The in-
terest of justice will best be served if this case be remanded to the court of origin for the purpose of de-
termining the amount due to petitioner. The dearth in the records of sufficient evidence with which we
can utilize in making a categorical ruling on the amount of indebtedness due to the petitioner constrains
us to remand this case to the trial court with instructions to receive additional evidence as needed in or-
der to fully thresh out the issue and establish the rights and obligations of the parties. From the amount
ultimately determined by the trial court as the outstanding obligation of the respondents to the petition-
er, will be deducted the award of opportunity losses granted to the respondents in the amount of US$
15,000.00 payable in Philippine pesos at the official exchange rate when payment is to be made.
WHEREFORE, the instant petition is GRANTED. The October 9, 2003 decision and the January 20, 2004
resolution of the Court of Appeals in CA-G.R. CV No. 57436, are MODIFIED insofar as the award of the
counterclaim to the respondents is concerned. Accordingly, there being no basis to award opportunity
costs to the respondents, Monet’s Export and Manufacturing Corporation and the spouses, Vicente V.
Tagle, Sr. and Ma. Consuelo G. Tagle, relative to the Beautilike account, but finding good cause to sus-
tain the award of opportunity costs to the respondents on account of the failure of the petitioner to dili-
gently perform its duties as the attorney-in-fact of the respondents in the Wishbone Trading Company
account, the amount of opportunity costs granted to the respondents, is REDUCED to US$15,000.00 pay-
able in Philippine pesos at the official exchange rate when payment is to be made.
Insofar as the amount of indebtedness of the respondents to the petitioner is concerned, the October 9,
2003 decision and the January 20, 2004 resolution of the Court of Appeals in CA-G.R. CV No. 57436, are
SET ASIDE. The case is hereby remanded to its court of origin, the Regional Trial Court of Manila, Branch
49, for the reception of additional evidence as may be needed to determine the actual amount of in-
debtedness of the respondents to the petitioner. The trial court is INSTRUCTED to deduct the award of
opportunity losses granted to the respondents, in the amount of US$15,000.00 payable in Philippine pe-
sos at the official exchange rate when payment is to be made, from the amount ultimately determined
as the actual amount of indebtedness of the respondents to the petitioner. No pronouncement as to
costs.
SO ORDERED.
Davide, Jr., C.J. (Chairman), Quisumbing, Carpio, and Azcuna, JJ., concur.
===

G.R. No. 186063 January 15, 2014

PHILIPPINE NATIONAL BANK, Petitioner,
vs.
SAN MIGUEL CORPORATION, Respondent.
DECISION
PERALTA, J.:
This treats of the petition for review on certiorari of the Decision1 and Resolution2 of the Court of Ap-
peals (CA), dated June 7 2008 and December 15, 2008, respectively, in CA-G.R. SP No. 01249-MIN.
The facts, as summarized by the CA, are as follows:
On July 1, 1996, respondent San Miguel Corporation (SMC, for brevity) entered into an Exclusive Dealer-
ship Agreement with a certain Rodolfo R. Goroza (Goroza, hereafter), wherein the latter was given by
SMC the right to trade, deal, market or otherwise sell its various beer products.
Goroza applied for a credit line with SMC, but one of the requirements for the credit line was a letter of
credit. Thus, Goroza applied for and was granted a letter of credit by the PNB in the amount of two mil-
lion pesos (₱2,000,000.00). Under the credit agreement, the PNB has the obligation to release the pro-
ceeds of Goroza's credit line to SMC upon presentation of the invoices and official receipts of Goroza's
purchases of SMC beer products to the PNB, Butuan Branch.
On August 1, 1996, Goroza availed of his credit line with PNB and started selling SMC's beer products x x
x.
On February 11, 1997, Goroza applied for an additional credit line with the PNB. The latter granted Gor-
oza a one (1) year revolving credit line in the amount not exceeding two million four hundred thousand
pesos (₱2,400,000.00). Thus, Goroza's total credit line reached four million four hundred thousand pe-
sos (₱4,400,000.00) x x x. Initially, Goroza was able to pay his credit purchases with SMC x x x. Sometime
in January 1998, however, Goroza started to become delinquent with his accounts.
Demands to pay the amount of three million seven hundred twenty-two thousand four hundred forty
pesos and 88/100 (₱3,722,440.88) were made by SMC against Goroza and PNB, but neither of them
paid. Thus, on April 23, 2003, SMC filed a Complaint for collection of sum of money against PNB and Gor-
oza with the respondent Regional Trial Court Branch 3, Butuan City.3
After summons, herein petitioner filed its Answer,4 while Goroza did not. Upon respondent's Motion to
Declare Defendant in Default,5 Goroza was declared in default.
Trial ensued insofar as Goroza was concerned and respondent presented its evidence ex parte against
the former. Respondent made a formal offer of its exhibits on April 6, 2004 and the trial court admitted
them on June 16, 2004.
Thereafter, on January 21, 2005, pre-trial between PNB and SMC was held.6
On May 10, 2005, the RTC rendered a Decision,7 disposing as follows:
WHEREFORE, the Court hereby renders judgment in favor of plaintiff [SMC] ordering defendant Rodolfo
Goroza to pay plaintiff the following:
1. The principal amount of ₱3,722,440.00;
2. The interest of 12% per annum on the principal amount reckoned from January 27, 1998 up to the
time of execution of the Judgment of this case;
3. Attorney's fees of ₱30,000.00;
4. Litigation expenses of ₱20,000.00.
SO ORDERED.8
Goroza filed a Notice of Appeal,9 while SMC filed a Motion for Reconsideration.10
On July 14, 2005, the RTC granted SMC's motion for reconsideration. The trial court amended its Deci-
sion by increasing the award of litigation expenses to ₱90,652.50.11
Thereafter, on July 25, 2005, the RTC issued an Order,12 pertinent portions of which read as follows:
xxxx
Finding the Notice of Appeal filed within the reglementary period and the corresponding appeal fee
paid, x x x. The same is hereby given due course.
Considering that the case as against defendant PNB is still on-going, let the Record in this case insofar as
defendant Rodolfo R. Goroza is concerned, be reproduced at the expense of defendant-appellant so that
the same can be forwarded to the Court of Appeals, together with the exhibits and transcript of steno-
graphic notes in the required number of copies.
SO ORDERED.13
In the meantime, trial continued with respect to PNB.
On September 27, 2005, PNB filed an Urgent Motion to Terminate Proceedings14 on the ground that a
decision was already rendered on May 10, 2005 finding Goroza solely liable.
The RTC denied PNB's motion in its Resolution15 dated October 11, 2005.
On October 14, 2005, the RTC issued a Supplemental Judgment,16 thus:
The Court omitted by inadvertence to insert in its decision dated May 10, 2005 the phrase "without prej-
udice to the decision that will be made against the other co-defendant, PNB, which was not declared in
default."
WHEREFORE, the phrase "without prejudice to the decision made against the other defendant PNB
which was not declared in default" shall be inserted in the dispositive portion of said decision.
SO ORDERED.17
On even date, the RTC also issued an Amended Order,18 to wit:
The Court's Order dated July 25, 2005 is hereby amended to include the phrase "this appeal applies only
to defendant Rolando Goroza and without prejudice to the continuance of the hearing on the other de-
fendant Philippine National Bank".
SO ORDERED.19
PNB then filed a Motion for Reconsideration20 of the above-quoted Supplemental Judgment and
Amended Order, but the RTC denied the said motion via its Resolution21 dated July 6, 2006.
Aggrieved, PNB filed a special civil action for certiorari with the CA imputing grave abuse of discretion on
the part of the RTC for having issued its July 6, 2006 Resolution.22
On June 17, 2008, the CA rendered its questioned Decision denying the petition and affirming the as-
sailed Resolution of the RTC.
PNB filed a Motion for Reconsideration,23 but the CA denied it in its assailed Resolution. Hence, the in-
stant petition with the following Assignment of Errors:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE TRIAL COURT WAS CORRECT IN RENDERING A
SUPPLEMENTAL JUDGMENT AND AMENDED ORDER AGAINST THE BANK DESPITE THE PERFECTION OF
APPEAL OF ONE OF THE DEFENDANTS.
THE COURT OF APPEALS ERRED IN HOLDING THAT PROCEEDINGS MAY CONTINUE AGAINST PNB DESPITE
THE COMPLETE ADJUDICATION OF RELIEF IN FAVOR OF SMC.24
PNB contends that the CA erred in holding that the RTC was correct in rendering its Supplemental Judg-
ment and Amended Order despite the perfection of Goroza's appeal. PNB claims that when Goroza's ap-
peal was perfected, the RTC lost jurisdiction over the entire case making the assailed Supplemental Judg-
ment and Amended Order void for having been issued without or in excess of jurisdiction.
PNB also argues that the CA erred in ruling that proceedings against it may continue in the RTC, despite
the trial court's complete adjudication of relief in favor of SMC. PNB avers that the May 10, 2005 Deci-
sion of the RTC, finding Goroza solely liable to pay the entire amount sought to be recovered by SMC,
has settled the obligation of both Goroza and PNB, and that there is no longer any ground to hold PNB
for trial and make a separate judgment against it; otherwise, SMC will recover twice for the same cause
of action.
The petition lacks merit.
It is clear from the proceedings held before and the orders issued by the RTC that the intention of the
trial court is to conduct separate proceedings to determine the respective liabilities of Goroza and PNB,
and thereafter, to render several and separate judgments for or against them. While ideally, it would
have been more prudent for the trial court to render a single decision with respect to Goroza and PNB,
the procedure adopted the RTC is, nonetheless, allowed under Section 4, Rule 36 of the Rules of Court,
which provides that "in an action against several defendants, the court may, when a several judgment is
proper, render judgment against one or more of them, leaving the action to proceed against the oth-
ers." In addition, Section 5 of the same Rule states that "when more than one claim for relief is present-
ed in an action, the court at any stage, upon a determination of the issues material to a particular claim
and all counterclaims arising out of the transaction or occurrence which is the subject matter of the
claim may render a separate judgment disposing of such claim." Further, the same provision provides
that "the judgment shall terminate the action with respect to the claim so disposed of and the action
shall proceed as to the remaining claims." Thus, the appeal of Goroza, assailing the judgment of the RTC
finding him liable, will not prevent the continuation of the ongoing trial between SMC and PNB. The RTC
retains jurisdiction insofar as PNB is concerned, because the appeal made by Goroza was only with re-
spect to his own liability. In fact, PNB itself, in its Reply to respondent's Comment, admitted that the
May 10, 2005 judgment of the RTC was "decided solely against defendant Rodolfo Goroza."25
The propriety of a several judgment is borne by the fact that SMC's cause of action against PNB stems
from the latter's alleged liability under the letters of credit which it issued. On the other hand, SMC's
cause of action against Goroza is the latter's failure to pay his obligation to the former.1âwphi1 As to the
separate judgment, PNB has a counterclaim against SMC which is yet to be resolved by the RTC.
Indeed, the issues between SMC and PNB which are to be resolved by the RTC, as contained in the trial
court's Pre-Trial Order dated January 21, 2005, were not addressed by the RTC in its Decision rendered
against Goroza. In particular, the RTC judgment against Goroza did not make any determination as to
whether or not PNB is liable under the letter of credit it issued and, if so, up to what extent is its liability.
In fact, contrary to PNB's claim, there is nothing in the RTC judgment which ruled that Goroza is "solely
liable" to pay the amount which SMC seeks to recover.
In this regard, this Court's disquisition on the import of a letter of credit, in the case ofTransfield Philip-
pines, Inc. v. Luzon Hydro Corporation,26 as correctly cited by the CA, is instructive, to wit:
By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the ad-
dressee to pay money or deliver goods to a third person and assumes responsibility for payment of debt
therefor to the addressee. A letter of credit, however, changes its nature as different transactions occur
and if carried through to completion ends up as a binding contract between the issuing and honoring
banks without any regard or relation to the underlying contract or disputes between the parties thereto.
xxxx
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 sell-
er 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 de-
scription, quantity, weight, quality, condition, packing, delivery, value or existence of the goods repre-
sented 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.
xxxx
As discussed above, in a letter of credit transaction, such as in this case, where the credit is stipulated as
irrevocable, there is a definite undertaking by the issuing bank to pay the beneficiary provided that the
stipulated documents are presented and the conditions of the credit are complied with. Precisely, the in-
dependence principle liberates the issuing bank from the duty of ascertaining compliance by the parties
in the main contract. As the principle's nomenclature clearly suggests, the obligation under the letter of
credit is independent of the related and originating contract. In brief, the letter of credit is separate and
distinct from the underlying transaction.27
In other words, PNB cannot evade responsibility on the sole ground that the RTC judgment found Goro-
za liable and ordered him to pay the amount sought to be recovered by SMC. PNB's liability, if any, un-
der the letter of credit is yet to be determined.
WHEREFORE, the instant petition is DENIED. The Decision of the Court of Appeals, dated June 17, 2008,
and its Resolution dated December 15, 2008, both in CA-G.R. SP No. 01249-MIN, are AFFIRMED.
SO ORDERED.
DIOSDADO M. PERLATA
Associate Justice

====

G.R. No. 183486

THE HONGKONG & SHANGHAI BANKING CORPORATION, LIMITED, Petitioner,
vs.
NATIONAL STEEL CORPORATION and CITYTRUST BANKING CORPORATION (NOW BANK OF THE PHILIP-
PINE 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 Ap-
peals (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 Reconsidera-
tion 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, Publica-
tion 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 (Tel-
ex 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) beneficia-
ry'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 (City-
Trust). NSC had earlier obtained a loan from CityTrust secured by the proceeds of the Letter of Credit is-
sued by HSBC.8
On November 29, 1993, CityTrust sent a collection order (Collection Order) to HSBC respecting the col-
lection 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 stat-
ed 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 de-
tails; (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 Or-
der. 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 in-
form 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 cable-
gram, 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 mat-
ter 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 con-
tinue 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 instruc-
tions "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 in-
structions in its transactions.26
NSC responded to this in a letter dated January 18, 1994.27 NSC expressed its disagreement with City-
Trust'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 ar-
gued that CityTrust remains liable under the Letter of Credit. It also stated that it presumes that City-
Trust has preserved whatever right of reimbursement it may have against HSBC. 29
On January 13, 1994, CityTrust notified HSBC that it should continue to press for payment and to hold
on to the document until further notice. 30
However, Klockner persisted in its refusal to pay. Thus, on February 17, 1994, HSBC returned the docu-
ments 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 re-
sponse, 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 re-
quired 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, de-
manded 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. City-
Trust emphasized that the reference to URC 322 has been "obviously superseded by our specific instruc-
tions to 'deliver documents against payment/cable advice non-payment with reason/cable advice pay-
ment/remit proceeds via telex' which was typed in on said form."39 CityTrust also claimed that the con-
trolling document is the Letter of Credit and not the mere fine print on the Collection Order.40 HSBC re-
plied 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 Of-
fice of the Corporate Counsel which served as its final demand. These demands were made after approx-
imately 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 (Com-
plaint)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, notwithstand-
ing CityTrust's complete presentation of the documents in accordance with the requirements in the Let-
ter 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 ar-
gued in its Answer that CityTrust modified the obligation when it stated in its Collection Order that the
transaction is subject to URC 322 and not under UCP 400.47 It also filed a Motion to Admit Attached
Third-Party Complaint48 against CityTrust on November 21, 1995.49 It claimed that CityTrust instructed
it to collect payment under URC 322 and never raised that it intended to collect under the Letter of
Credit.50 HSBC prayed that in the event that the court finds it liable to NSC, CityTrust should be subro-
gated in its place and be made directly liable to NSC.51 The RTC Makati granted the motion and admit-
ted 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 Cred-
it 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 superim-
posed 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 gov-
erns 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 gov-
erns, it nevertheless finds application as this Court has consistently recognized it under Philippine juris-
diction. Thus, applying UCP 400 and principles concerning letters of credit, the CA explained that the ob-
ligation of the issuing bank is to pay the seller or beneficiary of the credit once the draft and the re-
quired documents are properly presented. Under the independence principle, the issuing bank's obliga-
tion 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 Res-
olution 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 commer-
cial transactions for entities to collect under URC 322 even if there is an underlying letter of credit. Fur-
ther, CityTrust acted as an agent of NSC in collecting payment and as such, it had the authority to in-
struct 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 commer-
cial transactions. It is recognized in our jurisdiction and is sanctioned under Article 56763 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 cred-
it, 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 con-
tract 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 identi-
fied in the letter of credit. The buyer, on the other hand, obliges himself or herself to reimburse the issu-
ing 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 serv-
ice 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 be-
fore actual payment provided that the issuing bank informs him or her that a letter of credit has been is-
sued for his or her benefit. This means that the seller can draw drafts from the issuing bank upon pre-
sentation 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-benefi-
ciary 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 pri-
mary liability in the event of default. 73 Nevertheless, while the relationship between the seller-benefi-
ciary 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 compli-
ance 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 internation-
al 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 un-
der 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 reimburs-
es 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 re-
ceived 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 under-
takes to inform the seller-beneficiary that a letter of credit exists. It may also have the duty of transmit-
ting 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-benefi-
ciary arises only after the negotiating bank purchases or discounts the drafts. 80 Meanwhile, a confirm-
ing 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 transac-
tion. 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 in-
dispensable essentials for the system of letters of credit, if it is to serve its purpose of facilitating com-
merce. Thus, a touchstone of any law or custom governing letters of credit is an emphasis on the imper-
ative that issuing banks respect their obligation to pay, and that seller-beneficiaries may reasonably ex-
pect 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 57285 of the Code of Com-
merce. These provisions must be read with Article 286 of the same code which states that acts of com-
merce 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 pro-
vides 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 appli-
cation of the UCP in Bank of Philippine Islands and in Feati was further affirmed in Metropolitan Water-
works 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 sev-
eral 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 ap-
plies - 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 obliga-
tions 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 transac-
tion. 103 On the strength of our ruling in Feati, we have the legal duty to apply UCP 400 in this case in-
dependent 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, con-
stitutes 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 pro-
vides 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 transac-
tion. 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 representa-
tion 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 en-
tity 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 beneficia-
ries 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 evi-
dence 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 un-
der 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 pre-
sentment of the proper documents, the beneficiary has an enforceable right and the issuing bank a de-
mandable 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 es-
tablished 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 empha-
sis 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 let-
ter of credit, as it was not a party thereto. As a notifying bank, it has nothing to do with the contract be-
tween the issuing bank and the buyer regarding the issuance of the letter of credit. 112 (Citations omit-
ted)
The provisions in the Civil Code and our jurisprudence apply suppletorily in this case. 113 When a party
knowingly and freely binds himself or herself to perform an act, a juridical tie is created and he or she
becomes bound to fulfill his or her obligation. In this case, HSBC's obligation arose from two sources.
First, it has a contractual duty to Klockner whereby it agreed to pay NSC upon due presentment of the
Letter of Credit and the attached documents. Second, it has an obligation to NSC to honor the Letter of
Credit. In complying with its obligation, HSBC had the duty to perform all acts necessary. This includes a
proper examination of the documents presented to it and making a judicious inquiry of whether City-
Trust, in behalf of NSC, made a due presentment of the Letter of Credit.
Further, as a bank, HSBC has the duty to observe the highest degree of diligence. In all of its transac-
tions, 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 obli-
gation 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 cli-
ent) 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 appropri-
ate 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 docu-
ments 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 Let-
ter 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 de-
fect or breach in the underlying transaction will affect the issuing bank's liability. 116 This is the Inde-
pendence Principle in the law on letters of credit. Article 17 of UCP 400 explains that under this princi-
ple, an issuing bank assumes no liability or responsibility "for the form, sufficiency, accuracy, genuine-
ness, falsification or legal effect of any documents, or for the general and/or particular conditions stipu-
lated in the documents or superimposed thereon ... " Thus, as long as the proper documents are pre-
sented, 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 Let-
ter 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 de-
lay 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 dam-
ages 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 extraju-
dicial demand. 120 An interest in the amount of six percent (6%) is also awarded from the time of the fi-
nality of this decision until full payment. 121
Having been remiss in its obligations under the applicable law, rules and jurisprudence, HSBC only has it-
self 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. Arti-
cle 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 liti-
gate. 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 Arti-
cle 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 City-
Trust 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 an-
other, 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 determi-
native. In this letter, NSC clearly stated that it "negotiated with CityTrust the export documents pertain-
ing 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 instruc-
tions 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 al-
ready mentioned, HSBC had a separate obligation that it failed to perform by reason of acts independ-
ent of CityTrust's breach of its obligation under its contract of agency. If CityTrust has incurred any liabili-
ty, 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 de-
lete the award of attorney's fees. No pronouncement as to cost.
SO ORDERED.
FRANCIS H. JARDELEZA
Associate Justice