Transfield Philippines Inc. V. Luzon Hydro Corp et al.

485 Phil. 699 Nov 22, 2004

Tinga, J.,

Facts:
Transfield Philippines (Transfield) contracted Luzon Hydro Corp. (LHC) to construct a hydro-
electric plants in Benguet and Ilocos. Transfield was given the sole responsibility for the design,
construction, commissioning, testing and completion of the Project. The contract provides for a
period for which the project is to be completed and also allows for the extension of the period
provided that the extension is based on justifiable grounds such as fortuitous event. Two stand-by
letters of credit were required to be opened to guarantee the performance of Transfield. During the
construction of the plant, Transfield requested for extension of time citing various reasons delaying
the construction. LHC did not give due course to the extension of the period prayed for but referred
the matter to arbitration committee. Because of the delay in the construction of the plant, LHC
called on the stand-by letters of credit because of default. However, the demand was objected by
Transfield on the ground that there is still pending arbitration on their request for extension of time.
Issue:

• Whether or not LHC can collect from the letters of credit despite the pending arbitration
case.
Ruling:
Transfield’s argument that any dispute must first be resolved by the parties, whether
through negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit in
essence would convert the letter of credit into a mere guarantee.
The independent nature of the letter of credit may be: (a) independence in toto where the credit is
independent from the justification aspect and is a separate obligation from the underlying
agreement like for instance a typical standby; or (b) independence may be only as to the
justification aspect like in a commercial letter of credit or repayment standby, which is identical
with the same obligations under the underlying agreement. In both cases the payment may be
enjoined if in the light of the purpose of the credit the payment of the credit would constitute
fraudulent abuse of the credit.
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.
The engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft
and the required documents are presented to it. The so-called “independence principle” assures the
seller or the beneficiary of prompt payment independent of any breach of the main contract and
precludes the issuing bank from determining whether the main contract is actually accomplished
or not. Under this principle, banks assume no liability or responsibility for the form, sufficiency,
accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or
particular conditions stipulated in the documents or superimposed thereon, nor do they assume
any liability or responsibility for the description, quantity, weight, quality, condition, packing,
delivery, value or existence of the goods represented by any documents, or for the good faith or
acts and/or omissions, solvency, performance or standing of the consignor, the carriers, or the
insurers of the goods, or any other person whomsoever.