TRANSFIELD PHILIPPINES, INC., vs.
The first of the actions was a Request for Arbitration
LUZON HYDRO CORPORATION, AUSTRALIA and
NEW ZEALAND BANKING GROUP LIMITED and
SECURITY BANK CORPORATION,
G.R. No. 146717 November 22, 2004
DECISION
Subject of this case is the letter of credit which has
evolved as the ubiquitous and most important device
in international trade. A creation of commerce and
businessmen, the letter of credit is also unique in the
number of parties involved and its supranational
character.
Petitioner has appealed from the Decision1 of the Court
of Appeals in CA-G.R. SP No. 61901 entitled "Transfield
Philippines, Inc. v. Hon. Oscar Pimentel, et al.,"
promulgated on 31 January 2001. 2
On 26 March 1997, petitioner and respondent Luzon
Hydro Corporation (hereinafter, LHC) entered into a
Turnkey Contract3 whereby petitioner, as Turnkey
Contractor, undertook to construct, on a turnkey basis,
a seventy (70)-Megawatt hydro-electric power station
at the Bakun River in the provinces of Benguet and
Ilocos Sur (hereinafter, the Project). Petitioner was
given the sole responsibility for the design,
construction, commissioning, testing and completion of
the Project.4
The Turnkey Contract provides that: (1) the target
completion date of the Project shall be on 1 June 2000,
or such later date as may be agreed upon between
petitioner and respondent LHC or otherwise
determined in accordance with the Turnkey Contract;
and (2) petitioner is entitled to claim extensions of
time (EOT) for reasons enumerated in the Turnkey
Contract, among which are variations, force majeure,
and delays caused by LHC itself.5 Further, in case of
dispute, the parties are bound to settle their
differences through mediation, conciliation and such
other means enumerated under Clause 20.3 of the
Turnkey Contract.6
To secure performance of petitioner's obligation on or
before the target completion date, or such time for
completion as may be determined by the parties'
agreement, petitioner opened in favor of LHC two (2)
standby letters of credit both dated 20 March 2000
(hereinafter referred to as "the Securities"), to wit:
Standby Letter of Credit No. E001126/8400 with the
local branch of respondent Australia and New Zealand
Banking Group Limited (ANZ Bank)7 and Standby
Letter of Credit No. IBDIDSB-00/4 with respondent
Security Bank Corporation (SBC)8each in the amount of
US$8,988,907.00.9
In the course of the construction of the project,
petitioner sought various EOT to complete the Project.
The extensions were requested allegedly due to several
factors which prevented the completion of the Project
on target date, such as force majeure occasioned by
typhoon Zeb, barricades and demonstrations. LHC
denied the requests, however. This gave rise to a
series of legal actions between the parties which
culminated in the instant petition.
which LHC filed before the Construction Industry
Arbitration Commission (CIAC) on 1 June 1999. 10 This
was followed by another Request for Arbitration, this
time filed by petitioner before the International
Chamber of Commerce (ICC)11 on 3 November 2000.
In both arbitration proceedings, the common issues
presented were: [1) whether typhoon Zeb and any of
its associated events constituted force majeure to
justify the extension of time sought by petitioner; and
[2) whether LHC had the right to terminate the
Turnkey Contract for failure of petitioner to complete
the Project on target date.
Meanwhile, foreseeing that LHC would call on the
Securities pursuant to the pertinent provisions of the
Turnkey Contract,12 petitionerin two separate
letters13 both dated 10 August 2000advised
respondent banks of the arbitration proceedings
already pending before the CIAC and ICC in connection
with its alleged default in the performance of its
obligations. Asserting that LHC had no right to call on
the Securities until the resolution of disputes before
the arbitral tribunals, petitioner warned respondent
banks that any transfer, release, or disposition of the
Securities in favor of LHC or any person claiming under
LHC would constrain it to hold respondent banks liable
for liquidated damages.
As petitioner had anticipated, on 27 June 2000, LHC
sent notice to petitioner that pursuant to Clause
8.214 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 petitioner in
default/delay in the performance of its obligations
under the Turnkey Contract and demanded from
petitioner the payment of US$75,000.00 for each day
of delay beginning 28 June 2000 until actual
completion of the Project pursuant to Clause 8.7.1 of
the Turnkey Contract. At the same time, LHC served
notice that it would call on the securities for the
payment of liquidated damages for the delay.16
On 5 November 2000, petitioner as plaintiff filed a
Complaint for Injunction, with prayer for temporary
restraining order and writ of preliminary injunction,
against herein respondents as defendants before the
Regional Trial Court (RTC) of Makati.17 Petitioner sought
to restrain respondent LHC from calling on the
Securities and respondent banks from transferring,
paying on, or in any manner disposing of the Securities
or any renewals or substitutes thereof. The RTC issued
a seventy-two (72)-hour temporary restraining order
on the same day. The case was docketed as Civil Case
No. 00-1312 and raffled to Branch 148 of the RTC of
Makati.
After appropriate proceedings, the trial court issued an
Order on 9 November 2000, extending the temporary
restraining order for a period of seventeen (17) days
or until 26 November 2000.18
The RTC, in its Order19 dated 24 November 2000,
denied petitioner's application for a writ of preliminary
injunction. It ruled that petitioner had no legal right
and suffered no irreparable injury to justify the
issuance of the writ. Employing the principle of
"independent contract" in letters of credit, the trial
court ruled that LHC should be allowed to draw on the
Securities for liquidated damages. It debunked
petitioner's contention that the principle of
"independent contract" could be invoked only by
respondent banks since according to it respondent LHC
is the ultimate beneficiary of the Securities. The trial
court further ruled that the banks were mere
custodians of the funds and as such they were
obligated to transfer the same to the beneficiary for as
long as the latter could submit the required
certification of its claims.
Dissatisfied with the trial court's denial of its
application for a writ of preliminary injunction,
petitioner elevated the case to the Court of Appeals via
a Petition for Certiorari under Rule 65, with prayer for
the issuance of a temporary restraining order and writ
of preliminary injunction.20 Petitioner submitted to the
appellate court that LHC's call on the Securities was
premature considering that the issue of its default had
not yet been resolved with finality by the CIAC and/or
the ICC. It asserted that until the fact of delay could be
established, LHC had no right to draw on the Securities
for liquidated damages.
Refuting petitioner's contentions, LHC claimed that
petitioner had no right to restrain its call on and use of
the Securities as payment for liquidated damages. It
averred that the Securities are independent of the
main contract between them as shown on the face of
the two Standby Letters of Credit which both provide
that the banks have no responsibility to investigate the
authenticity or accuracy of the certificates or the
declarant's capacity or entitlement to so certify.
In its Resolution dated 28 November 2000, the Court
of Appeals issued a temporary restraining order,
enjoining LHC from calling on the Securities or any
renewals or substitutes thereof and ordering
respondent banks to cease and desist from
transferring, paying or in any manner disposing of the
Securities.
However, the appellate court failed to act on the
application for preliminary injunction until the
temporary restraining order expired on 27 January
2001. Immediately thereafter, representatives of LHC
trooped to ANZ Bank and withdrew the total amount of
US$4,950,000.00, thereby reducing the balance in
ANZ Bank to US$1,852,814.00.
On 2 February 2001, the appellate court dismissed the
petition for certiorari. The appellate court expressed
conformity with the trial court's decision that LHC could
call on the Securities pursuant to the first principle in
credit law that the credit itself is independent of the
underlying transaction and that as long as the
beneficiary complied with the credit, it was of no
moment that he had not complied with the underlying
contract. Further, the appellate court held that even
assuming that the trial court's denial of petitioner's
application for a writ of preliminary injunction was
erroneous, it constituted only an error of judgment
which is not correctible by certiorari, unlike error of
jurisdiction.
Undaunted, petitioner filed the instant Petition for
Review raising the following issues for resolution:
WHETHER THE "INDEPENDENCE PRINCIPLE" ON
LETTERS OF CREDIT MAY BE INVOKED BY A
BENEFICIARY THEREOF WHERE THE BENEFICIARY'S
CALL THEREON IS WRONGFUL OR FRAUDULENT.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW
ON THE SECURITIES BEFORE THE RESOLUTION OF
PETITIONER'S AND LHC'S DISPUTES BY THE
APPROPRIATE TRIBUNAL.
WHETHER ANZ BANK AND SECURITY BANK ARE
JUSTIFIED IN RELEASING THE AMOUNTS DUE UNDER
THE SECURITIES DESPITE BEING NOTIFIED THAT
LHC'S CALL THEREON IS WRONGFUL.
WHETHER OR NOT PETITIONER WILL SUFFER GRAVE
AND IRREPARABLE DAMAGE IN THE EVENT THAT:
A. LHC IS ALLOWED TO CALL AND DRAW ON, AND
ANZ BANK AND SECURITY BANK ARE ALLOWED TO
RELEASE, THE REMAINING BALANCE OF THE
SECURITIES PRIOR TO THE RESOLUTION OF THE
DISPUTES BETWEEN PETITIONER AND LHC.
B. LHC DOES NOT RETURN THE AMOUNTS IT HAD
WRONGFULLY DRAWN FROM THE SECURITIES.21
Petitioner contends that the courts below improperly
relied on the "independence principle" on letters of
credit when this case falls squarely within the "fraud
exception rule." Respondent LHC deliberately
misrepresented the supposed existence of delay
despite its knowledge that the issue was still pending
arbitration, petitioner continues.
Petitioner asserts that LHC should be ordered to return
the proceeds of the Securities pursuant to the principle
against unjust enrichment and that, under the
premises, injunction was the appropriate remedy
obtainable from the competent local courts.
On 25 August 2003, petitioner filed a Supplement to
the Petition22 and Supplemental
Memorandum,23 alleging that in the course of the
proceedings in the ICC Arbitration, a number of
documentary and testimonial evidence came out
through the use of different modes of discovery
available in the ICC Arbitration. It contends that after
the filing of the petition facts and admissions were
discovered which demonstrate that LHC knowingly
misrepresented that petitioner had incurred delays
notwithstanding its knowledge and admission that
delays were excused under the Turnkey Contractto
be able to draw against the Securities. Reiterating that
fraud constitutes an exception to the independence
principle, petitioner urges that this warrants a ruling
from this Court that the call on the Securities was
wrongful, as well as contrary to law and basic
principles of equity. It avers that it would suffer grave
irreparable damage if LHC would be allowed to use the
proceeds of the Securities and not ordered to return
the amounts it had wrongfully drawn thereon.
In its Manifestation dated 8 September 2003,24 LHC
contends that the supplemental pleadings filed by
petitioner present erroneous and misleading
information which would change petitioner's theory on
appeal.
In yet another Manifestation dated 12 April
2004,25 petitioner alleges that on 18 February 2004,
the ICC handed down its Third Partial Award, declaring
that LHC wrongfully drew upon the Securities and that
petitioner was entitled to the return of the sums
wrongfully taken by LHC for liquidated damages.
LHC filed a Counter-Manifestation dated 29 June
2004,26 stating that petitioner's Manifestation dated 12
April 2004 enlarges the scope of its Petition for Review
of the 31 January 2001 Decision of the Court of
Appeals. LHC notes that the Petition for Review
essentially dealt only with the issue of whether
injunction could issue to restrain the beneficiary of an
irrevocable letter of credit from drawing thereon. It
adds that petitioner has filed two other proceedings, to
wit: (1) ICC Case No. 11264/TE/MW, entitled
"Transfield Philippines Inc. v. Luzon Hydro
Corporation," in which the parties made claims and
counterclaims arising from petitioner's
performance/misperformance of its obligations as
contractor for LHC; and (2) Civil Case No. 04-332,
entitled "Transfield Philippines, Inc. v. Luzon Hydro
Corporation" before Branch 56 of the RTC of Makati,
which is an action to enforce and obtain execution of
the ICC's partial award mentioned in petitioner's
Manifestation of 12 April 2004.
In its Comment to petitioner's Motion for Leave to File
Addendum to Petitioner's Memorandum, LHC stresses
that the question of whether the funds it drew on the
subject letters of credit should be returned is outside
the issue in this appeal. At any rate, LHC adds that the
action to enforce the ICC's partial award is now fully
within the Makati RTC's jurisdiction in Civil Case No.
04-332. LHC asserts that petitioner is engaged in
forum-shopping by keeping this appeal and at the
same time seeking the suit for enforcement of the
arbitral award before the Makati court.
Respondent SBC in its Memorandum, dated 10 March
200327 contends that the Court of Appeals correctly
dismissed the petition for certiorari. Invoking the
independence principle, SBC argues that it was under
no obligation to look into the validity or accuracy of the
certification submitted by respondent LHC or into the
latter's capacity or entitlement to so certify. It adds
that the act sought to be enjoined by petitioner was
already fait accompli and the present petition would no
longer serve any remedial purpose.
In a similar fashion, respondent ANZ Bank in its
Memorandum dated 13 March 200328 posits that its
actions could not be regarded as unjustified in view of
the prevailing independence principle under which it
had no obligation to ascertain the truth of LHC's
allegations that petitioner defaulted in its obligations.
Moreover, it points out that since the Standby Letter of
Credit No. E001126/8400 had been fully drawn,
petitioner's prayer for preliminary injunction had been
rendered moot and academic.
At the core of the present controversy is the
applicability of the "independence principle" and "fraud
exception rule" in letters of credit. Thus, a discussion
of the nature and use of letters of credit, also referred
to simply as "credits," would provide a better
perspective of the case.
The letter of credit evolved as a mercantile specialty,
and the only way to understand all its facets is to
recognize that it is an entity unto itself. The
relationship between the beneficiary and the issuer of
a letter of credit is not strictly contractual, because
both privity and a meeting of the minds are lacking,
yet strict compliance with its terms is an enforceable
right. Nor is it a third-party beneficiary contract,
because the issuer must honor drafts drawn against a
letter regardless of problems subsequently arising in
the underlying contract. Since the bank's customer
cannot draw on the letter, it does not function as an
assignment by the customer to the beneficiary. Nor, if
properly used, is it a contract of suretyship or
guarantee, because it entails a primary liability
following a default. Finally, it is not in itself a
negotiable instrument, because it is not payable to
order or bearer and is generally conditional, yet the
draft presented under it is often negotiable.29
In commercial transactions, a letter of credit is a
financial device developed by merchants as a
convenient and relatively safe mode of dealing with
sales of goods to satisfy the seemingly irreconcilable
interests of a seller, who refuses to part with his goods
before he is paid, and a buyer, who wants to have
control of the goods before paying. 30 The use of credits
in commercial transactions serves to reduce the risk of
nonpayment of the purchase price under the contract
for the sale of goods. However, credits are also used in
non-sale settings where they serve to reduce the risk
of nonperformance. Generally, credits in the non-sale
settings have come to be known as standby credits. 31
There are three significant differences between
commercial and standby credits. First, commercial
credits involve the payment of money under a contract
of sale. Such credits become payable upon the
presentation by the seller-beneficiary of documents
that show he has taken affirmative steps to comply
with the sales agreement. In the standby type, the
credit is payable upon certification of a party's
nonperformance of the agreement. The documents
that accompany the beneficiary's draft tend to show
that the applicant has not performed. The beneficiary
of a commercial credit must demonstrate by
documents that he has performed his contract. The
beneficiary of the standby credit must certify that his
obligor has not performed the contract.32
By definition, a letter of credit is a written instrument
whereby the writer requests or authorizes the
addressee to pay money or deliver goods to a third
person and assumes responsibility for payment of debt
therefor to the addressee.33 A letter of credit, however,
changes its nature as different transactions occur and
if carried through to completion ends up as a binding
contract between the issuing and honoring banks
without any regard or relation to the underlying
contract or disputes between the parties thereto. 34
Since letters of credit have gained general acceptability
in international trade transactions, the ICC has
published from time to time updates on the Uniform
Customs and Practice (UCP) for Documentary Credits
to standardize practices in the letter of credit area. The
vast majority of letters of credit incorporate the
UCP.35 First published in 1933, the UCP for
Documentary Credits has undergone several revisions,
the latest of which was in 1993. 36
In Bank of the Philippine Islands v. De Reny Fabric
Industries, Inc.,37 this Court ruled that the observance
of the UCP is justified by Article 2 of the Code of
Commerce which provides that in the absence of any
particular provision in the Code of Commerce,
commercial transactions shall be governed by usages
and customs generally observed. More recently, in
Bank of America, NT & SA v. Court of Appeals,38 this
Court ruled that there being no specific provisions
which govern the legal complexities arising from
transactions involving letters of credit, not only
between or among banks themselves but also between
banks and the seller or the buyer, as the case may be,
the applicability of the UCP is undeniable.
Article 3 of the UCP provides that credits, by their
nature, are separate transactions from the sales or
other contract(s) on which they may be based and
banks are in no way concerned with or bound by such
contract(s), even if any reference whatsoever to such
contract(s) is included in the credit. Consequently, the
undertaking of a bank to pay, accept and pay draft(s)
or negotiate and/or fulfill any other obligation under
the credit is not subject to claims or defenses by the
applicant resulting from his relationships with the
issuing bank or the beneficiary. A beneficiary can in no
case avail himself of the contractual relationships
existing between the banks or between the applicant
and the issuing bank.
Thus, the engagement of the issuing bank is to pay the
seller or beneficiary of the credit once the draft and the
required documents are presented to it. The so-called
"independence principle" assures the seller or the
beneficiary of prompt payment independent of any
breach of the main contract and precludes the issuing
bank from determining whether the main contract is
actually accomplished or not. Under this principle,
banks assume no liability or responsibility for the form,
sufficiency, accuracy, genuineness, falsification or legal
effect of any documents, or for the general and/or
particular conditions stipulated in the documents or
superimposed thereon, nor do they assume any
liability or responsibility for the description, quantity,
weight, quality, condition, packing, delivery, value or
existence of the goods represented by any documents,
or for the good faith or acts and/or omissions,
solvency, performance or standing of the consignor,
the carriers, or the insurers of the goods, or any other
person whomsoever.39
The independent nature of the letter of credit may be:
(a) independence in toto where the credit is
independent from the justification aspect and is a
separate obligation from the underlying agreement like
for instance a typical standby; or (b) independence
may be only as to the justification aspect like in a
commercial letter of credit or repayment standby,
which is identical with the same obligations under the
underlying agreement. In both cases the payment may
be enjoined if in the light of the purpose of the credit
the payment of the credit would constitute fraudulent
abuse of the credit.40
Can the beneficiary invoke the independence principle?
Petitioner insists that the independence principle does
not apply to the instant case and assuming it is so, it is
a defense available only to respondent banks. LHC, on
the other hand, contends that it would be contrary to
common sense to deny the benefit of an independent
contract to the very party for whom the benefit is
intended. As beneficiary of the letter of credit, LHC
asserts it is entitled to invoke the principle.
As discussed above, in a letter of credit transaction,
such as in this case, where the credit is stipulated as
irrevocable, there is a definite undertaking by the
issuing bank to pay the beneficiary provided that the
stipulated documents are presented and the conditions
of the credit are complied with.41 Precisely, the
independence principle liberates the issuing bank from
the duty of ascertaining compliance by the parties in
the main contract. As the principle's nomenclature
clearly suggests, the obligation under the letter of
credit is independent of the related and originating
contract. In brief, the letter of credit is separate and
distinct from the underlying transaction.
Given the nature of letters of credit, petitioner's
argumentthat it is only the issuing bank that may
invoke the independence principle on letters of credit
does not impress this Court. To say that the
independence principle may only be invoked by the
issuing banks would render nugatory the purpose for
which the letters of credit are used in commercial
transactions. As it is, the independence doctrine works
to the benefit of both the issuing bank and the
beneficiary.
Letters of credit are employed by the parties desiring
to enter into commercial transactions, not for the
benefit of the issuing bank but mainly for the benefit of
the parties to the original transactions. With the letter
of credit from the issuing bank, the party who applied
for and obtained it may confidently present the letter
of credit to the beneficiary as a security to convince
the beneficiary to enter into the business transaction.
On the other hand, the other party to the business
transaction, i.e., the beneficiary of the letter of credit,
can be rest assured of being empowered to call on the
letter of credit as a security in case the commercial
transaction does not push through, or the applicant
fails to perform his part of the transaction. It is for this
reason that the party who is entitled to the proceeds of
the letter of credit is appropriately called "beneficiary."
Petitioner's argument that any dispute must first be
resolved by the parties, whether through negotiations
or arbitration, before the beneficiary is entitled to call
on the letter of credit in essence would convert the
letter of credit into a mere guarantee. Jurisprudence
has laid down a clear distinction between a letter of
credit and a guarantee in that the settlement of a
dispute between the parties is not a pre-requisite for
the release of funds under a letter of credit. In other
words, the argument is incompatible with the very
nature of the letter of credit. If a letter of credit is
drawable only after settlement of the dispute on the
contract entered into by the applicant and the
beneficiary, there would be no practical and beneficial
use for letters of credit in commercial transactions.
Professor John F. Dolan, the noted authority on letters
of credit, sheds more light on the issue:
The standby credit is an attractive commercial device
for many of the same reasons that commercial credits
are attractive. Essentially, these credits are
inexpensive and efficient. Often they replace surety
contracts, which tend to generate higher costs than
credits do and are usually triggered by a factual
determination rather than by the examination of
documents.
Because parties and courts should not confuse the
different functions of the surety contract on the one
hand and the standby credit on the other, the
distinction between surety contracts and credits merits
some reflection. The two commercial devices share a
common purpose. Both ensure against the obligor's
nonperformance. They function, however, in distinctly
different ways.
Traditionally, upon the obligor's default, the surety
undertakes to complete the obligor's performance,
usually by hiring someone to complete that
performance. Surety contracts, then, often involve
costs of determining whether the obligor defaulted (a
matter over which the surety and the beneficiary often
litigate) plus the cost of performance. The benefit of
the surety contract to the beneficiary is obvious. He
knows that the surety, often an insurance company, is
a strong financial institution that will perform if the
obligor does not. The beneficiary also should
understand that such performance must await the
sometimes lengthy and costly determination that the
obligor has defaulted. In addition, the surety's
performance takes time.
The standby credit has different expectations. He
reasonably expects that he will receive cash in the
event of nonperformance, that he will receive it
promptly, and that he will receive it before any
litigation with the obligor (the applicant) over the
nature of the applicant's performance takes place. The
standby credit has this opposite effect of the surety
contract: it reverses the financial burden of parties
during litigation.
In the surety contract setting, there is no duty to
indemnify the beneficiary until the beneficiary
establishes the fact of the obligor's performance. The
beneficiary may have to establish that fact in litigation.
During the litigation, the surety holds the money and
the beneficiary bears most of the cost of delay in
performance.
In the standby credit case, however, the beneficiary
avoids that litigation burden and receives his money
promptly upon presentation of the required
documents. It may be that the applicant has, in fact,
performed and that the beneficiary's presentation of
those documents is not rightful. In that case, the
applicant may sue the beneficiary in tort, in contract,
or in breach of warranty; but, during the litigation to
determine whether the applicant has in fact breached
the obligation to perform, the beneficiary, not the
applicant, holds the money. Parties that use a standby
credit and courts construing such a credit should
understand this allocation of burdens. There is a
tendency in some quarters to overlook this distinction
between surety contracts and standby credits and to
reallocate burdens by permitting the obligor or the
issuer to litigate the performance question before
payment to the beneficiary.42
While it is the bank which is bound to honor the credit,
it is the beneficiary who has the right to ask the bank
to honor the credit by allowing him to draw thereon.
The situation itself emasculates petitioner's posture
that LHC cannot invoke the independence principle and
highlights its puerility, more so in this case where the
banks concerned were impleaded as parties by
petitioner itself.
Respondent banks had squarely raised the
independence principle to justify their releases of the
amounts due under the Securities. Owing to the nature
and purpose of the standby letters of credit, this Court
rules that the respondent banks were left with little or
no alternative but to honor the credit and both of them
in fact submitted that it was "ministerial" for them to
honor the call for payment.43
Furthermore, LHC has a right rooted in the Contract
to call on the Securities. The relevant provisions of
the Contract read, thus:
4.2.1. In order to secure the performance of its
obligations under this Contract, the Contractor at its
cost shall on the Commencement Date provide security
to the Employer in the form of two irrevocable and
confirmed standby letters of credit (the "Securities"),
each in the amount of US$8,988,907, issued and
confirmed by banks or financial institutions acceptable
to the Employer. Each of the Securities must be in form
and substance acceptable to the Employer and may be
provided on an annually renewable basis.44
8.7.1 If the Contractor fails to comply with Clause 8.2,
the Contractor shall pay to the Employer by way of
liquidated damages ("Liquidated Damages for Delay")
the amount of US$75,000 for each and every day or
part of a day that shall elapse between the Target
Completion Date and the Completion Date, provided
that Liquidated Damages for Delay payable by the
Contractor shall in the aggregate not exceed 20% of
the Contract Price. The Contractor shall pay Liquidated
Damages for Delay for each day of the delay on the
following day without need of demand from the
Employer.
8.7.2 The Employer may, without prejudice to any
other method of recovery, deduct the amount of such
damages from any monies due, or to become due to
the Contractor and/or by drawing on the Security."45
A contract once perfected, binds the parties not only to
the fulfillment of what has been expressly stipulated
but also to all the consequences which according to
their nature, may be in keeping with good faith, usage,
and law.46 A careful perusal of the Turnkey Contract
reveals the intention of the parties to make the
Securities answerable for the liquidated damages
occasioned by any delay on the part of petitioner. The
call upon the Securities, while not an exclusive remedy
on the part of LHC, is certainly an alternative recourse
available to it upon the happening of the contingency
for which the Securities have been proffered. Thus,
even without the use of the "independence principle,"
the Turnkey Contract itself bestows upon LHC the right
to call on the Securities in the event of default.
Next, petitioner invokes the "fraud exception" principle.
It avers that LHC's call on the Securities is wrongful
because it fraudulently misrepresented to ANZ Bank
and SBC that there is already a breach in the Turnkey
Contract knowing fully well that this is yet to be
determined by the arbitral tribunals. It asserts that the
"fraud exception" exists when the beneficiary, for the
purpose of drawing on the credit, fraudulently presents
to the confirming bank, documents that contain,
expressly or by implication, material representations of
fact that to his knowledge are untrue. In such a
situation, petitioner insists, injunction is recognized as
a remedy available to it.
Citing Dolan's treatise on letters of credit, petitioner
argues that the independence principle is not without
limits and it is important to fashion those limits in light
of the principle's purpose, which is to serve the
commercial function of the credit. If it does not serve
those functions, application of the principle is not
warranted, and the commonlaw principles of contract
should apply.
It is worthy of note that the propriety of LHC's call on
the Securities is largely intertwined with the fact of
default which is the self-same issue pending resolution
before the arbitral tribunals. To be able to declare the
call on the Securities wrongful or fraudulent, it is
imperative to resolve, among others, whether
petitioner was in fact guilty of delay in the performance
of its obligation. Unfortunately for petitioner, this Court
is not called upon to rule upon the issue of default
such issue having been submitted by the parties to the
jurisdiction of the arbitral tribunals pursuant to the
terms embodied in their agreement.47
Would injunction then be the proper remedy to restrain
the alleged wrongful draws on the Securities?
Most writers agree that fraud is an exception to the
independence principle. Professor Dolan opines that
the untruthfulness of a certificate accompanying a
demand for payment under a standby credit may
qualify as fraud sufficient to support an injunction
against payment.48 The remedy for fraudulent abuse is
an injunction. However, injunction should not be
granted unless: (a) there is clear proof of fraud; (b)
the fraud constitutes fraudulent abuse of the
independent purpose of the letter of credit and not
only fraud under the main agreement; and (c)
irreparable injury might follow if injunction is not
granted or the recovery of damages would be seriously
damaged.49
In its complaint for injunction before the trial court,
petitioner alleged that it is entitled to a total extension
of two hundred fifty-three (253) days which would
move the target completion date. It argued that if its
claims for extension would be found meritorious by the
ICC, then LHC would not be entitled to any liquidated
damages.50
Generally, injunction is a preservative remedy for the
protection of one's substantive right or interest; it is
not a cause of action in itself but merely a provisional
remedy, an adjunct to a main suit. The issuance of the
writ of preliminary injunction as an ancillary or
preventive remedy to secure the rights of a party in a
pending case is entirely within the discretion of the
court taking cognizance of the case, the only limitation
being that this discretion should be exercised based
upon the grounds and in the manner provided by law.51
Before a writ of preliminary injunction may be issued,
there must be a clear showing by the complaint that
there exists a right to be protected and that the acts
against which the writ is to be directed are violative of
the said right.52 It must be shown that the invasion of
the right sought to be protected is material and
substantial, that the right of complainant is clear and
unmistakable and that there is an urgent and
paramount necessity for the writ to prevent serious
damage.53 Moreover, an injunctive remedy may only be
resorted to when there is a pressing necessity to avoid
injurious consequences which cannot be remedied
under any standard compensation.54
In the instant case, petitioner failed to show that it has
a clear and unmistakable right to restrain LHC's call on
the Securities which would justify the issuance of
preliminary injunction. By petitioner's own admission,
the right of LHC to call on the Securities was
contractually rooted and subject to the express
stipulations in the Turnkey Contract.55 Indeed, the
Turnkey Contract is plain and unequivocal in that it
conferred upon LHC the right to draw upon the
Securities in case of default, as provided in Clause
4.2.5, in relation to Clause 8.7.2, thus:
4.2.5 The Employer shall give the Contractor seven
days' notice of calling upon any of the Securities,
stating the nature of the default for which the claim on
any of the Securities is to be made, provided that no
notice will be required if the Employer calls upon any
of the Securities for the payment of Liquidated
Damages for Delay or for failure by the Contractor to
renew or extend the Securities within 14 days of their
expiration in accordance with Clause 4.2.2.56
8.7.2 The Employer may, without prejudice to any
other method of recovery, deduct the amount of such
damages from any monies due, or to become due, to
the Contractor and/or by drawing on the Security.57
The pendency of the arbitration proceedings would not
per se make LHC's draws on the Securities wrongful or
fraudulent for there was nothing in the Contract which
would indicate that the parties intended that all
disputes regarding delay should first be settled through
arbitration before LHC would be allowed to call upon
the Securities. It is therefore premature and absurd to
conclude that the draws on the Securities were
outright fraudulent given the fact that the ICC and
CIAC have not ruled with finality on the existence of
default.
Nowhere in its complaint before the trial court or in its
pleadings filed before the appellate court, did
petitioner invoke the fraud exception rule as a ground employees were prohibited from engaging in or
to justify the issuance of an injunction. 58 What working for an enterprise that competed with their
petitioner did assert before the courts below was the former employerthe very purpose of the preliminary
fact that LHC's draws on the Securities would be injunction has expired, any declaration upholding the
premature and without basis in view of the pending propriety of the writ would be entirely useless as there
disputes between them. Petitioner should not be would be no actual case or controversy between the
allowed in this instance to bring into play the fraud parties insofar as the preliminary injunction is
exception rule to sustain its claim for the issuance of concerned.
an injunctive relief. Matters, theories or arguments not
In the instant case, the consummation of the act
brought out in the proceedings below will ordinarily not
sought to be restrained had rendered the instant
be considered by a reviewing court as they cannot be
petition mootfor any declaration by this Court as to
raised for the first time on appeal.59 The lower courts
propriety or impropriety of the non-issuance of
could thus not be faulted for not applying the fraud
injunctive relief could have no practical effect on the
exception rule not only because the existence of fraud
existing controversy.65 The other issues raised by
was fundamentally interwoven with the issue of default
petitioner particularly with respect to its right to
still pending before the arbitral tribunals, but more so,
recover the amounts wrongfully drawn on the
because petitioner never raised it as an issue in its
Securities, according to it, could properly be threshed
pleadings filed in the courts below. At any rate,
out in a separate proceeding.
petitioner utterly failed to show that it had a clear and
unmistakable right to prevent LHC's call upon the One final point. LHC has charged petitioner of forum-
Securities. shopping. It raised the charge on two occasions. First,
in its Counter-Manifestation dated 29 June 200466 LHC
Of course, prudence should have impelled LHC to await
alleges that petitioner presented before this Court the
resolution of the pending issues before the arbitral
same claim for money which it has filed in two other
tribunals prior to taking action to enforce the
proceedings, to wit: ICC Case No. 11264/TE/MW and
Securities. But, as earlier stated, the Turnkey Contract
Civil Case No. 04-332 before the RTC of Makati. LHC
did not require LHC to do so and, therefore, it was
argues that petitioner's acts constitutes forum-
merely enforcing its rights in accordance with the tenor
shopping which should be punished by the dismissal of
thereof. Obligations arising from contracts have the
the claim in both forums. Second, in its Comment to
force of law between the contracting parties and
Petitioner's Motion for Leave to File Addendum to
should be complied with in good faith.60 More
Petitioner's Memorandum dated 8 October 2004, LHC
importantly, pursuant to the principle of autonomy of
alleges that by maintaining the present appeal and at
contracts embodied in Article 1306 of the Civil
the same time pursuing Civil Case No. 04-332
Code,61 petitioner could have incorporated in its
wherein petitioner pressed for judgment on the issue
Contract with LHC, a proviso that only the final
of whether the funds LHC drew on the Securities
determination by the arbitral tribunals that default had
should be returnedpetitioner resorted to forum-
occurred would justify the enforcement of the
shopping. In both instances, however, petitioner has
Securities. However, the fact is petitioner did not do
apparently opted not to respond to the charge.
so; hence, it would have to live with its inaction.
Forum-shopping is a very serious charge. It exists
With respect to the issue of whether the respondent
when a party repetitively avails of several judicial
banks were justified in releasing the amounts due
remedies in different courts, simultaneously or
under the Securities, this Court reiterates that
successively, all substantially founded on the same
pursuant to the independence principle the banks were
transactions and the same essential facts and
under no obligation to determine the veracity of LHC's
circumstances, and all raising substantially the same
certification that default has occurred. Neither were
issues either pending in, or already resolved adversely,
they bound by petitioner's declaration that LHC's call
by some other court.67 It may also consist in the act of
thereon was wrongful. To repeat, respondent banks'
a party against whom an adverse judgment has been
undertaking was simply to pay once the required
rendered in one forum, of seeking another and possibly
documents are presented by the beneficiary.
favorable opinion in another forum other than by
At any rate, should petitioner finally prove in the appeal or special civil action of certiorari, or the
pending arbitration proceedings that LHC's draws upon institution of two or more actions or proceedings
the Securities were wrongful due to the non-existence grounded on the same cause on the supposition that
of the fact of default, its right to seek indemnification one or the other court might look with favor upon the
for damages it suffered would not normally be other party.68 To determine whether a party violated
foreclosed pursuant to general principles of law. the rule against forum-shopping, the test applied is
whether the elements of litis pendentia are present or
Moreover, in a Manifestation,62 dated 30 March 2001,
whether a final judgment in one case will amount to
LHC informed this Court that the subject letters of
res judicata in another.69 Forum-shopping constitutes
credit had been fully drawn. This fact alone would have
improper conduct and may be punished with summary
been sufficient reason to dismiss the instant petition.
dismissal of the multiple petitions and direct contempt
Settled is the rule that injunction would not lie where of court.70
the acts sought to be enjoined have already become
Considering the seriousness of the charge of forum-
fait accompli or an accomplished or consummated
shopping and the severity of the sanctions for its
act.63 In Ticzon v. Video Post Manila, Inc.64 this Court
violation, the Court will refrain from making any
ruled that where the period within which the former
definitive ruling on this issue until after petitioner has
been given ample opportunity to respond to the
charge.
WHEREFORE, the instant petition is DENIED, with costs
against petitioner.
Petitioner is hereby required to answer the charge of
forum-shopping within fifteen (15) days from notice.
SO ORDERED.
KENG HUA PAPER PRODUCTS CO. INC.,
vs. COURT OF APPEALS; REGIONAL TRIAL COURT
OF MANILA, BR. 21; and SEA-LAND SERVICE,
INC., G.R. No. 116863. February 12, 1998]
DECISION
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 consignees 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
Appeals[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
dispositive 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
Defendant, 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
extrajudicial demand until fully paid;
2. A sum equivalent to ten (10%) percent of the total
amount due as Attorneys fees and litigation expenses.
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
business 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
defendant (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 arrival
were transmitted to the defendant but the latter failed
to discharge the shipment from the container during
the free time period or grace period. The said shipment
remained inside the plaintiffs container 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 demanding 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 plaintiffs
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, attorneys 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 petitioners contention that
there was overshipment, (3) ruling that petitioners
recourse was against the shipper, and (4) computing
legal interest from date of extrajudicial demand.[5]
Respondent Court of Appeals denied the appeal and
affirmed the lower courts decision in toto. In a
subsequent resolution,[6] it also denied the petitioners
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 respondents extrajudicial demand was
proper;[8]
In the main, the case revolves around the question of
whether petitioner was bound by the bill of lading. We
shall, thus, discuss the above four issues as they
intertwine with this main question.
The Courts Ruling
The petition is partly meritorious. We affirm petitioners
liability for demurrage, but modify the interest 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 responsibilities
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 acceptance 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 between
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 liable. 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, duty, 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 shippers failure to procure consular or other
proper permits, certificates or any papers that may be
required at any port or place or shippers failure 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: (Underscoring
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 therein. [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 shipment. Petitioner adds that it
sent a copy of the said notice to the shipper on
December 29, 1982. Petitioner 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
consequence of the shippers 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--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 arrival
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 saying that it could not accept
the shipment. Petitioners 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 petitioners inability to use the
delivery permit, i.e. to pick up the cargo, due to the
shippers failure to comply with the terms and
conditions of the letter of credit, for which reason the
bill of lading and other shipping documents were
returned by the banks to the shipper.[18] The letter
merely proved petitioners refusal to pick up the cargo,
not its rejection of the bill of lading.
Petitioners 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 respondent
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 petitioners prolonged failure to
object to the bill of lading. Contrary to petitioners
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 interposing 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 plaintiff, 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
petitioners) 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 intend to be
bound, (herein petitioner) would not have waited for
six months to lapse before finally bringing the matter
to (herein private respondents 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 respondents) vessel to the
latters prejudice.[19]
Petitioners 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 impossible,[20] cannot
defeat the petitioners 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
petitioners 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 estoppel. Questions raised on
appeal must be within the issues framed by the parties
and, consequently, issues 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 private
respondents vessel constitutes a violation of the terms
of the bill of lading. It should thus be liable 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 commercial
voyages, a particular sum is deemed by the parties a
fair compensation for delays, is the very reason 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 ships 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 respondents loss
and prevention manager, Loi Gillera,
demanded P50,260, but its counsel, Sofronio Larcia,
subsequently asked for a different amount of P37,800.
Petitioners 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 discrepancy 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
respondents counsel demanded payment of
only P37,800, the additional demurrage incurred by
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 November 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 issuance
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 allowed 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 presented 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--vis the commercial invoice and the letter
of credit. Thus, the discrepancy between the amount of
goods indicated in the invoice and the
amount in thebill of lading cannot negate petitioners
obligation to private respondent arising from the
contract of transportation. Furthermore, private
respondent, as carrier, had no knowledge of the
contents of the container. The contract of carriage was
under the arrangement known as Shippers Load And
Count, and the shipper was solely responsible for the
loading of the container while the carrier was oblivious
to the contents of the shipment. Petitioners 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 summons,
private respondents complaint. Hence, interest may
not be allowed to run from the date of private
respondents 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 established
with reasonable certainty, the interest shall begin to
run from the time the claim is made judicially or
extrajudicially (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
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 annum from
such finality until its satisfaction, this interim period
being deemed to be by then an equivalent to a
forbearance of credit.[31]
The case before us involves an obligation not arising
from a loan or forbearance of money; thus, pursuant
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 increased as the days
went by, the total amount demanded cannot be
deemed to have been established with reasonable
certainty until the trial court rendered its
judgment. Indeed, (u)nliquidated damages or claims, it
is said, are those which are not or cannot be known
until definitely ascertained, assessed 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 courts decision. And in accordance
with Philippine Natonal Bank[33] and Eastern Shipping,
[34]
the rate of twelve percent 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 attorneys
fees was taken up only in the dispositive portion of the
trial courts decision. This falls short of the settled
requirement that the text of the decision should state
the reason for the award of attorneys fees, for without
such justification, its award would be a conclusion
without a premise, its basis being improperly left to
speculation and conjecture.[35]
WHEREFORE, the assailed Decision is
hereby AFFIRMED with the MODIFICATION that the
legal interest 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 attorneys fees is DELETED.
SO ORDERED.
G.R. No. 94209 April 30, 1991
FEATI BANK & TRUST COMPANY (now CITYTRUST
BANKING CORPORATION)vs.THE COURT OF
APPEALS, and BERNARDO E. VILLALUZ,
This is a petition for review seeking the reversal of the
decision of the Court of Appeals dated June 29, 1990
which affirmed the decision of the Regional Trial Court
of Rizal dated October 20, 1986 ordering the
defendants Christiansen and the petitioner, to pay
various sums to respondent Villaluz, jointly and
severally.
The facts of the case are as follows:
On June 3, 1971, Bernardo E. Villaluz agreed to sell to
the then defendant Axel Christiansen 2,000 cubic
meters of lauan logs at $27.00 per cubic meter FOB.
After inspecting the logs, Christiansen issued purchase
order No. 76171.
On the arrangements made and upon the instructions
of the consignee, Hanmi Trade Development, Ltd., de
Santa Ana, California, the Security Pacific National
Bank of Los Angeles, California issued Irrevocable
Letter of Credit No. IC-46268 available at sight in favor
of Villaluz for the sum of $54,000.00, the total
purchase price of the lauan logs.
The letter of credit was mailed to the Feati Bank and
Trust Company (now Citytrust) with the instruction to
the latter that it "forward the enclosed letter of credit
to the beneficiary." (Records, Vol. I, p. 11)
The letter of credit further provided that the draft to be
drawn is on Security Pacific National Bank and that it
be accompanied by the following documents:
1. Signed Commercial Invoice in four copies showing
the number of the purchase order and certifying that
1230 dated August 3, 1971, in all log exports, the
a. All terms and conditions of the purchase order have
been complied with and that all logs are fresh cut and
quality equal to or better than that described in H.A.
Christiansen's telex #201 of May 1, 1970, and that all
logs have been marked "BEV-EX."
b. One complete set of documents, including 1/3
original bills of lading was airmailed to Consignee and
Parties to be advised by Hans-Axel Christiansen, Ship
and Merchandise Broker.
c. One set of non-negotiable documents was airmailed
to Han Mi Trade Development Company and one set to
Consignee and Parties to be advised by Hans-Axel
Christiansen, Ship and Merchandise Broker.
2. Tally sheets in quadruplicate.
3. 2/3 Original Clean on Board Ocean Bills of Lading
with Consignee and Parties to be advised by Hans Axel
Christiansen, showing Freight Prepaid and marked
Notify:
Han Mi Trade Development Company, Ltd., Santa Ana,
California.
Letter of Credit No. 46268 dated June 7, 1971
Han Mi Trade Development Company, Ltd., P.O. Box
10480, Santa Ana, California 92711 and Han Mi Trade
Development Company, Ltd., Seoul, Korea.
4. Certification from Han-Axel Christiansen, Ship and
Merchandise Broker, stating that logs have been
approved prior to shipment in accordance with terms
and conditions of corresponding purchase Order.
(Record, Vol. 1 pp. 11-12)
Also incorporated by reference in the letter of credit is
the Uniform Customs and Practice for Documentary
Credits (1962 Revision).
The logs were thereafter loaded on the vessel "Zenlin
Glory" which was chartered by Christiansen. Before its
loading, the logs were inspected by custom inspectors
Nelo Laurente, Alejandro Cabiao, Estanislao Edera from
the Bureau of Customs (Records, Vol. I, p. 124) and
representatives Rogelio Cantuba and Jesus Tadena of
the Bureau of Forestry (Records, Vol. I, pp. 16-17) all
of whom certified to the good condition and
exportability of the logs.
After the loading of the logs was completed, the Chief
Mate, Shao Shu Wang issued a mate receipt of the
cargo which stated the same are in good condition
(Records, Vol. I, p. 363). However, Christiansen
refused to issue the certification as required in
paragraph 4 of the letter of credit, despite several
requests made by the private respondent.
Because of the absence of the certification by
Christiansen, the Feati Bank and Trust Company
refused to advance the payment on the letter of credit.
The letter of credit lapsed on June 30, 1971,
(extended, however up to July 31, 1971) without the
private respondent receiving any certification from
Christiansen.
The persistent refusal of Christiansen to issue the
certification prompted the private respondent to bring
the matter before the Central Bank. In a memorandum
dated August 16, 1971, the Central Bank ruled that:
. . . pursuant to the Monetary Board Resolution No.
certification of the lumber inspectors of the Bureau of
Forestry . . . shall be considered final for purposes of
negotiating documents. Any provision in any letter of
credit covering log exports requiring certification of
buyer's agent or representative that said logs have
been approved for shipment as a condition precedent
to negotiation of shipping documents shall not be
allowed. (Records, Vol. I, p. 367)
Meanwhile, the logs arrived at Inchon, Korea and were
received by the consignee, Hanmi Trade Development
Company, to whom Christiansen sold the logs for the
amount of $37.50 per cubic meter, for a net profit of
$10 per cubic meter. Hanmi Trade Development
Company, on the other hand sold the logs to Taisung
Lumber Company at Inchon, Korea. (Rollo, p. 39)
Since the demands by the private respondent for
Christiansen to execute the certification proved futile,
Villaluz, on September 1, 1971, instituted an action
for mandamus and specific performance against
Christiansen and the Feati Bank and Trust Company
(now Citytrust) before the then Court of First Instance
of Rizal. The petitioner was impleaded as defendant
before the lower court only to afford complete relief
should the court a quo order Christiansen to execute
the required certification.
The complaint prayed for the following:
1. Christiansen be ordered to issue the certification
required of him under the Letter of Credit;
2. Upon issuance of such certification, or, if the court
should find it unnecessary, FEATI BANK be ordered to
accept negotiation of the Letter of Credit and make
payment thereon to Villaluz;
3. Order Christiansen to pay damages to the plaintiff.
On or about 1979, while the case was still pending
trial, Christiansen left the Philippines without informing
the Court and his counsel. Hence, Villaluz, filed an
amended complaint to make the petitioner solidarily
liable with Christiansen.
The trial court, in its order dated August 29, 1979,
admitted the amended complaint.
After trial, the lower court found:
The liability of the defendant CHRISTIANSEN is beyond
dispute, and the plaintiffs right to demand payment is
absolute. Defendant CHRISTIANSEN having accepted
delivery of the logs by having them loaded in his
chartered vessel the "Zenlin Glory" and shipping them
to the consignee, his buyer Han Mi Trade in Inchon,
South Korea (Art. 1585, Civil Code), his obligation to
pay the purchase order had clearly arisen and the
plaintiff may sue and recover the price of the goods
(Art. 1595, Id).
The Court believes that the defendant CHRISTIANSEN
acted in bad faith and deceit and with intent to defraud
the plaintiff, reflected in and aggravated by, not only
his refusal to issue the certification that would have
enabled without question the plaintiff to negotiate the
letter of credit, but his accusing the plaintiff in his
answer of fraud, intimidation, violence and deceit.
These accusations said defendant did not attempt to
prove, as in fact he left the country without even
notifying his own lawyer. It was to the Court's mind a
pure swindle.
The defendant Feati Bank and Trust Company, on the
other hand, must be held liable together with his (sic)
co-defendant for having, by its wrongful act, i.e., its
refusal to negotiate the letter of credit in the absence
of CHRISTIANSEN's certification (in spite of the Central
Bank's ruling that the requirement was illegal),
prevented payment to the plaintiff. The said letter of
credit, as may be seen on its face, isirrevocable and
the issuing bank, the Security Pacific National Bank in
Los Angeles, California, undertook by its terms that the
same shall be honored upon its presentment. On the
other hand, the notifying bank, the defendant Feati
Bank and Trust Company, by accepting the instructions
from the issuing bank, itself assumed the very same
undertaking as the issuing bank under the terms of the
letter of credit.
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 notifying
and negotiating bank for and in behalf of the issuing
bank, it in effect accepted a trust reposed on it, and
became a trustee in relation to plaintiff as the
beneficiary of the letter of credit. As trustee, it was
then duty bound to protect the interests of the plaintiff
under the terms of the letter of credit, and must be
held liable for damages and loss resulting to the
plaintiff from its failure to perform that obligation.
Furthermore, when the defendant BANK assumed the
role of a notifying and negotiating BANK it in effect
represented to the plaintiff that, if the plaintiff
complied with the terms and conditions of the letter of
credit and presents the same to the BANK together
with the documents mentioned therein the said BANK
will pay the plaintiff the amount of the letter of credit.
The Court is convinced that it was upon the strength of
this letter of credit and this implied representation of
the defendant BANK that the plaintiff delivered the logs
to defendant CHRISTIANSEN, considering that the
issuing bank is a foreign bank with whom plaintiff had
no business connections and CHRISTIANSEN had not
offered any other Security for the payment of the logs.
Defendant BANK cannot now be allowed to deny its
commitment and liability under the letter of credit:
A holder of a promissory note given because of
gambling who indorses the same to an innocent holder
for value and who assures said party that the note has
no legal defect, is in estoppel from asserting that there
had been an illegal consideration for the note, and so,
he has to pay its value. (Rodriguez v. Martinez, 5 Phil.
67).
The defendant BANK, in insisting upon the certification
of defendant CHRISTIANSEN as a condition precedent
to negotiating the letter of credit, likewise in the
Court's opinion acted in bad faith, not only because of
the clear declaration of the Central Bank that such a
requirement was illegal, but because the BANK, with all
the legal counsel available to it must have known that
the condition was void since it depended on the sole
will of the debtor, the defendant CHRISTIANSEN. (Art.
1182, Civil Code) (Rollo, pp. 29-31)
On the basis of the foregoing the trial court on October
20, 1986, ruled in favor of the private respondent. The
dispositive portion of its decision reads:
WHEREFORE, judgment is hereby rendered for the
plaintiff, ordering the defendants to pay the plaintiff,
jointly and severally, the following sums:
a) $54,000.00 (US), or its peso equivalent at the
prevailing rate as of the time payment is actually
made, representing the purchase price of the logs;
b) P17,340.00, representing government fees and
charges paid by plaintiff in connection with the logs
shipment in question;
c) P10,000.00 as temperate damages (for trips made
to Bacolod and Korea).
All three foregoing sums shall be with interest thereon
at 12% per annum from September 1, 1971, when the
complaint was filed, until fully paid:
d) P70,000.00 as moral damages;
e) P30,000.00 as exemplary damages; and
f) P30,000.00 as attorney's fees and litigation
expense.
The petitioner received a copy of the decision on
November 3, 1986. Two days thereafter, or on
November 5, 1986, it filed a notice of appeal.
On November 10, 1986, the private respondent filed a
motion for the immediate execution of the judgment
on the ground that the appeal of the petitioner was
frivolous and dilatory.
The trial court ordered the immediate execution of its
judgment upon the private respondent's filing of a
bond.
The petitioner then filed a motion for reconsideration
and a motion to suspend the implementation of the
writ of execution. Both motions were, however, denied.
Thus, petitioner filed before the Court of Appeals a
petition forcertiorari and prohibition with preliminary
injunction to enjoin the immediate execution of the
judgment.
The Court of Appeals in a decision dated April 9, 1987
granted the petition and nullified the order of
execution, the dispositive portion of the decision
states:
WHEREFORE, the petition for certiorari is granted.
Respondent Judge's order of execution dated
December 29, 1986, as well as his order dated January
14, 1987 denying the petitioner's urgent motion to
suspend the writ of execution against its properties are
hereby annulled and set aside insofar as they are
sought to be enforced and implemented against the
petitioner Feati Bank & Trust Company, now Citytrust
Banking Corporation, during the pendency of its appeal
from the adverse decision in Civil Case No. 15121.
However, the execution of the same decision against
defendant Axel Christiansen did not appeal said
decision may proceed unimpeded. The Sheriff s levy on
the petitioner's properties, and the notice of sale dated
January 13, 1987 (Annex M), are hereby annulled and
set aside. Rollo p. 44)
A motion for reconsideration was thereafter filed by the
private respondent. The Court of Appeals, in a
resolution dated June 29, 1987 denied the motion for
reconsideration.
In the meantime, the appeal filed by the petitioner
before the Court of Appeals was given due course. In
its decision dated June 29, 1990, the Court of Appeals
affirmed the decision of the lower court dated October
20, 1986 and ruled that:
1. Feati Bank admitted in the "special and negative
defenses" section of its answer that it was the bank to
negotiate the letter of credit issued by the Security
Pacific National Bank of Los Angeles, California.
(Record, pp. 156, 157). Feati Bank did notify Villaluz of
such letter of credit. In fact, as such negotiating bank,
even before the letter of credit was presented for
payment, Feati Bank had already made an advance
payment of P75,000.00 to Villaluz in anticipation of
such presentment. As the negotiating bank, Feati
Bank, by notifying Villaluz of the letter of credit in
behalf of the issuing bank (Security Pacific), confirmed
such letter of credit and made the same also its own
obligation. This ruling finds support in the authority
cited by Villaluz:
A confirmed letter of credit is one in which the
notifying bank gives its assurance also that the
opening bank's obligation will be performed. In such a
case, the notifying bank will not simply transmit but
will confirm the opening bank's obligation by making it
also its own undertaking, or commitment, or guaranty
or obligation. (Ward & Hatfield, 28-29, cited in
Agbayani, Commercial Laws, 1978 edition, p. 77).
Feati Bank argues further that it would be considered
as the negotiating bank only upon negotiation of the
letter of credit. This stance is untenable. Assurance,
commitments or guaranties supposed to be made by
notifying banks to the beneficiary of a letter of credit,
as defined above, can be relevant or meaningful only
with respect to a future transaction, that is,
negotiation. Hence, even before actual negotiation, the
notifying bank, by the mere act of notifying the
beneficiary of the letter of credit, assumes as of that
moment the obligation of the issuing bank.
2. Since Feati Bank acted as guarantor of the issuing
bank, and in effect also of the latter's principal or
client, i.e. Hans Axel-Christiansen. (sic) Such being the
case, when Christiansen refused to issue the
certification, it was as though refusal was made by
Feati Bank itself. Feati Bank should have taken steps to
secure the certification from Christiansen; and, if the
latter should still refuse to comply, to hale him to
court. In short, Feati Bank should have honored
Villaluz's demand for payment of his logs by virtue of
the irrevocable letter of credit issued in Villaluz's favor
and guaranteed by Feati Bank.
3. The decision promulgated by this Court in CA-G.R.
Sp No. 11051, which contained the statement "Since
Villaluz" draft was not drawn strictly in compliance with
the terms of the letter of credit, Feati Bank's refusal to
negotiate it was justified," did not dispose of this
question on the merits. In that case, the question
involved was jurisdiction or discretion, and not
judgment. The quoted pronouncement should not be
taken as a preemptive judgment on the merits of the
present case on appeal.
4. The original action was for "Mandamus and/or
specific performance." Feati Bank may not be a party
to the transaction between Christiansen and Security
Pacific National Bank on the one hand, and Villaluz on
the other hand; still, being guarantor or agent of
Christiansen and/or Security Pacific National Bank
which had directly dealt with Villaluz, Feati Bank may
be sued properly on specific performance as a
procedural means by which the relief sought by Villaluz
may be entertained. (Rollo, pp. 32-33)
The dispositive portion of the decision of the Court of
Appeals reads:
WHEREFORE, the decision appealed from is affirmed;
and accordingly, the appeal is hereby dismissed. Costs
against the petitioner. (Rollo, p. 33)
Hence, this petition for review.
The petitioner interposes the following reasons for the
allowance of the petition.
First Reason
THE RESPONDENT COURT ERRONEOUSLY CONCLUDED
FROM THE ESTABLISHED FACTS AND INDEED, WENT
AGAINST THE EVIDENCE AND DECISION OF THIS
HONORABLE COURT, THAT PETITIONER BANK IS
LIABLE ON THE LETTER OF CREDIT DESPITE PRIVATE
RESPONDENTS NON-COMPLIANCE WITH THE TERMS
THEREOF,
Second Reason
THE RESPONDENT COURT COMMITTED AN ERROR OF
LAW WHEN IT HELD THAT PETITIONER BANK, BY
NOTIFYING PRIVATE RESPONDENT OF THE LETTER OF
CREDIT, CONFIRMED SUCH CREDIT AND MADE THE
SAME ALSO ITS OBLIGATION AS GUARANTOR OF THE
ISSUING BANK.
Third Reason
THE RESPONDENT COURT LIKEWISE COMMITTED AN
ERROR OF LAW WHEN IT AFFIRMED THE TRIAL
COURT'S DECISION. (Rollo, p. 12)
The principal issue in this case is whether or not a
correspondent bank is to be held liable under the letter
of credit despite non-compliance by the beneficiary
with the terms thereof?
The petition is impressed with merit.
It is a settled rule in commercial transactions involving
letters of credit that the documents tendered must
strictly conform to the terms of the letter of credit. The
tender of documents by the beneficiary (seller) must
include all documents required by the letter. A
correspondent bank which departs from what has been
stipulated under the letter of credit, as when it accepts
a faulty tender, acts on its own risks and it may not
thereafter be able to recover from the buyer or the
issuing bank, as the case may be, the money thus paid
to the beneficiary Thus the rule of strict compliance.
In the United States, commercial transactions involving
letters of credit are governed by the rule of strict
compliance. In the Philippines, the same holds true.
The same rule must also be followed.
The case of Anglo-South America Trust Co. v. Uhe et
al. (184 N.E. 741 [1933]) expounded clearly on the
rule of strict compliance.
We have heretofore held that these letters of credit are
to be strictly complied with which documents, and
shipping documents must be followed as stated in the
letter. There is no discretion in the bank or trust
company to waive any requirements. The terms of the
letter constitutes an agreement between the purchaser
and the bank. (p. 743)
Although in some American decisions, banks are
granted a little discretion to accept a faulty tender as
when the other documents may be considered
immaterial or superfluous, this theory could lead to
dangerous precedents. Since a bank deals only with
documents, it is not in a position to determine whether
or not the documents required by the letter of credit
are material or superfluous. The mere fact that the
document was specified therein readily means that the
document is of vital importance to the buyer.
Moreover, the incorporation of the Uniform Customs
and Practice for Documentary Credit (U.C.P. for short)
in the letter of credit resulted in the applicability of the
said rules in the governance of the relations between
the parties.
And even if the U.C.P. was not incorporated in the
letter of credit, we have already ruled in the
affirmative as to the applicability of the U.C.P. in cases
before us.
In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we
pronounced that the observance of the U.C.P. in this
jurisdiction is justified by Article 2 of the Code of
Commerce. Article 2 of the Code of Commerce
enunciates that in the absence of any particular
provision in the Code of Commerce, commercial
transactions shall be governed by the usages and
customs generally observed.
There being no specific provision which governs the
legal complexities arising from transactions involving
letters of credit not only between the banks
themselves but also between banks and seller and/or
buyer, the applicability of the U.C.P. is undeniable.
The pertinent provisions of the U.C.P. (1962 Revision)
are:
Article 3.
An irrevocable credit is a definite undertaking on the
part of the issuing bank and constitutes the
engagement of that bank to the beneficiary and bona
fide holders of drafts drawn and/or documents
presented thereunder, that the provisions for payment,
acceptance or negotiation contained in the credit will
be duly fulfilled, provided that all the terms and
conditions of the credit are complied with.
An irrevocable credit may be advised to a beneficiary
through another bank (the advising bank) without
engagement on the part of that bank, but when an
issuing bank authorizes or requests another bank to
confirm its irrevocable credit and the latter does so,
such confirmation constitutes a definite undertaking of
the confirming bank. . . .
Article 7.
Banks must examine all documents with reasonable
care to ascertain that they appear on their face to be
in accordance with the terms and conditions of the
credit,"
Article 8.
Payment, acceptance or negotiation against documents
which appear on their face to be in accordance with
the terms and conditions of a credit by a bank
authorized to do so, binds the party giving the
authorization to take up documents and reimburse the
bank which has effected the payment, acceptance or
negotiation. (Emphasis Supplied)
Under the foregoing provisions of the U.C.P., the bank
may only negotiate, accept or pay, if the documents
tendered to it are on their face in accordance with the
terms and conditions of the documentary credit. And
since a correspondent bank, like the petitioner,
principally deals only with documents, the absence of
any document required in the documentary credit
justifies the refusal by the correspondent bank to
negotiate, accept or pay the beneficiary, as it is not its
obligation to look beyond the documents. It merely has
to rely on the completeness of the documents tendered
by the beneficiary.
In regard to the ruling of the lower court and affirmed
by the Court of Appeals that the petitioner is not a
notifying bank but a confirming bank, we find the same
erroneous.
The trial court wrongly mixed up the meaning of an
irrevocable credit with that of a confirmed credit. In its
decision, the trial court ruled that the petitioner, in
accepting the obligation to notify the respondent that
theirrevocable credit has been transmitted to the
petitioner on behalf of the private respondent, has
confirmed the letter.
The trial court appears to have overlooked the fact that
an irrevocable credit is not synonymous with a
confirmed credit. These types of letters have different
meanings and the legal relations arising from there
varies. A credit may be an irrevocable credit and at the
same time a confirmed credit or vice-versa.
An irrevocable credit refers to the duration of the letter
of credit. What is simply means is that the issuing
bank may not without the consent of the beneficiary
(seller) and the applicant (buyer) revoke his
undertaking under the letter. The issuing bank does
not reserve the right to revoke the credit. On the other
hand, a confirmed letter of credit pertains to the kind
of obligation assumed by the correspondent bank. In
this case, the correspondent bank gives an absolute
assurance to the beneficiary that it will undertake the
issuing bank's obligation as its own according to the
terms and conditions of the credit. (Agbayani,
Commercial Laws of the Philippines, Vol. 1, pp. 81-83)
Hence, the mere fact that a letter of credit is
irrevocable does not necessarily imply that the
correspondent bank in accepting the instructions of the
issuing bank has also confirmed the letter of credit.
Another error which the lower court and the Court of
Appeals made was to confuse the obligation assumed
by the petitioner.
In commercial transactions involving letters of credit,
the functions assumed by a correspondent bank are
classified according to the obligations taken up by it.
The correspondent bank may be called a notifying
bank, a negotiating bank, or a confirming bank.
In case of a notifying bank, the correspondent bank
assumes no liability except to notify and/or transmit to
the beneficiary the existence of the letter of credit.
(Kronman and Co., Inc. v. Public National Bank of New
York, 218 N.Y.S. 616 [1926]; Shaterian, Export-Import
Banking, p. 292, cited in Agbayani, Commercial Laws
of the Philippines, Vol. 1, p. 76). A negotiating bank,
on the other hand, is a correspondent bank which buys
or discounts a draft under the letter of credit. Its
liability is dependent upon the stage of the negotiation.
If before negotiation, it has no liability with respect to
the seller but after negotiation, a contractual
relationship will then prevail between the negotiating
bank and the seller. (Scanlon v. First National Bank of
Mexico, 162 N.E. 567 [1928]; Shaterian, Export-
Import Banking, p. 293, cited in Agbayani, Commercial
Laws of the Philippines, Vol. 1, p. 76)
In the case of a confirming bank, the correspondent
bank assumes a direct obligation to the seller and its
liability is a primary one as if the correspondent bank
itself had issued the letter of credit. (Shaterian,
Export-Import Banking, p. 294, cited in Agbayani
Commercial Laws of the Philippines, Vol. 1, p. 77)
In this case, the letter merely provided that the
petitioner "forward the enclosed original credit to the
beneficiary." (Records, Vol. I, p. 11) Considering the
aforesaid instruction to the petitioner by the issuing
bank, the Security Pacific National Bank, it is
indubitable that the petitioner is only a notifying bank
and not a confirming bank as ruled by the courts
below.
If the petitioner was a confirming bank, then a
categorical declaration should have been stated in the
letter of credit that the petitioner is to honor all drafts
drawn in conformity with the letter of credit. What was
simply stated therein was the instruction that the
petitioner forward the original letter of credit to the
beneficiary.
Since the petitioner was only a notifying bank, its
responsibility was solely to notify and/or transmit the
documentary of credit to the private respondent and
its obligation ends there.
The notifying bank may suggest to the seller its
willingness to negotiate, but this fact alone does not
imply that the notifying bank promises to accept the
draft drawn under the documentary credit.
A notifying bank is not a privy to the contract of sale
between the buyer and the seller, its relationship is
only with that of the issuing bank and not with the
beneficiary to whom he assumes no liability. It follows
therefore that when the petitioner refused to negotiate
with the private respondent, the latter has no cause of
action against the petitioner for the enforcement of his
rights under the letter. (See Kronman and Co., Inc. v.
Public National Bank of New York, supra)
In order that the petitioner may be held liable under
the letter, there should be proof that the petitioner
confirmed the letter of credit.
The records are, however, bereft of any evidence which
will disclose that the petitioner has confirmed the letter
of credit. The only evidence in this case, and upon
which the private respondent premised his argument,
is the P75,000.00 loan extended by the petitioner to
him.
The private respondent relies on this loan to advance
his contention that the letter of credit was confirmed
by the petitioner. He claims that the loan was granted
by the petitioner to him, "in anticipation of the
presentment of the letter of credit."
The proposition advanced by the private respondent
has no basis in fact or law. That the loan agreement
between them be construed as an act of confirmation
is rather far-fetched, for it depends principally on
speculative reasoning.
As earlier stated, there must have been an absolute
assurance on the part of the petitioner that it will
undertake the issuing bank's obligation as its own.
Verily, the loan agreement it entered into cannot be
categorized as an emphatic assurance that it will carry
out the issuing bank's obligation as its own.
The loan agreement is more reasonably classified as an
isolated transaction independent of the documentary
credit.
Of course, it may be presumed that the petitioner
loaned the money to the private respondent in
anticipation that it would later be paid by the latter
upon the receipt of the letter. Yet, we would have no
basis to rule definitively that such "act" should be
construed as an act of confirmation.
The private respondent no doubt was in need of money
in loading the logs on the ship "Zenlin Glory" and the
only way to satisfy this need was to borrow money
from the petitioner which the latter granted. From
these circumstances, a logical conclusion that can be
gathered is that the letter of credit was merely to
serve as a collateral.
At the most, when the petitioner extended the loan to
the private respondent, it assumed the character of a
negotiating bank. Even then, the petitioner will still not
be liable, for a negotiating bank before negotiation has
no contractual relationship with the seller.
The case of Scanlon v. First National Bank (supra)
perspicuously explained the relationship between the
seller and the negotiating bank, viz:
It may buy or refuse to buy as it chooses. Equally, it
must be true that it owes no contractual duty toward
the person for whose benefit the letter is written to
discount or purchase any draft drawn against the
credit. No relationship of agent and principal, or of
trustee and cestui, between the receiving bank and the
beneficiary of the letter is established. (P.568)
Whether therefore the petitioner is a notifying bank or
a negotiating bank, it cannot be held liable. Absent any
definitive proof that it has confirmed the letter of credit
or has actually negotiated with the private respondent,
the refusal by the petitioner to accept the tender of the
private respondent is justified.
In regard to the finding that the petitioner became a
"trustee in relation to the plaintiff (private respondent)
as the beneficiary of the letter of credit," the same has
no legal basis.
A trust has been defined as the "right, enforceable
solely in equity, to the beneficial enjoyment of property
the legal title to which is vested to another." (89 C.J.S.
712)
The concept of a trust presupposes the existence of a
specific property which has been conferred upon the
person for the benefit of another. In order therefore for
the trust theory of the private respondent to be
sustained, the petitioner should have had in its
possession a sum of money as specific fund advanced
to it by the issuing bank and to be held in trust by it in
favor of the private respondent. This does not obtain in
this case.
The mere opening of a letter of credit, it is to be noted,
does not involve a specific appropriation of a sum of
money in favor of the beneficiary. It only signifies that
the beneficiary may be able to draw funds upon the
letter of credit up to the designated amount specified
in the letter. It does not convey the notion that a
particular sum of money has been specifically reserved
or has been held in trust.
What actually transpires in an irrevocable credit is that
the correspondent bank does not receive in advance
the sum of money from the buyer or the issuing bank.
On the contrary, when the correspondent bank accepts
the tender and pays the amount stated in the letter,
the money that it doles out comes not from any
particular fund that has been advanced by the issuing
bank, rather it gets the money from its own funds and
then later seeks reimbursement from the issuing bank.
Granting that a trust has been created, still, the
petitioner may not be considered a trustee. As the
petitioner is only a notifying bank, its acceptance of
the instructions of the issuing bank will not create
estoppel on its part resulting in the acceptance of the
trust. Precisely, as a notifying bank, its only obligation
is to notify the private respondent of the existence of
the letter of credit. How then can such create estoppel
when that is its only duty under the law?
We also find erroneous the statement of the Court of
Appeals that the petitioner "acted as a guarantor of the
issuing bank and in effect also of the latter's principal
or client, i.e., Hans Axel Christiansen."
It is a fundamental rule that an irrevocable credit is
independent not only of the contract between the
buyer and the seller but also of the credit agreement
between the issuing bank and the buyer. (See Kingdom
of Sweden v. New York Trust Co., 96 N.Y.S. 2d 779
[1949]). The relationship between the buyer
(Christiansen) and the issuing bank (Security Pacific
National Bank) is entirely independent from the letter
of credit issued by the latter.
The contract between the two has no bearing as to the
non-compliance by the buyer with the agreement
between the latter and the seller. Their contract is
similar to that of a contract of services (to open the
letter of credit) and not that of agency as was
intimated by the Court of Appeals. The unjustified
refusal therefore by Christiansen to issue the
certification under the letter of credit should not
likewise be charged to the issuing bank.
As a mere notifying bank, not only does the petitioner
not have any contractual relationship with the buyer, it
has also nothing to do with the contract between the
issuing bank and the buyer regarding the issuance of
the letter of credit.
The theory of guarantee relied upon by the Court of
Appeals has to necessarily fail. The concept of
guarantee vis-a-vis the concept of an irrevocable credit
are inconsistent with each other.
In the first place, the guarantee theory destroys the
independence of the bank's responsibility from the
contract upon which it was opened. In the second
place, the nature of both contracts is mutually in
conflict with each other. In contracts of guarantee, the
guarantor's obligation is merely collateral and it arises
only upon the default of the person primarily liable. On
the other hand, in an irrevocable credit the bank
undertakes a primary obligation. (SeeNational Bank of
Eagle Pass, Tex v. American National Bank of San
Francisco, 282 F. 73 [1922])
The relationship between the issuing bank and the
notifying bank, on the contrary, is more similar to that
of an agency and not that of a guarantee. It may be
observed that the notifying bank is merely to follow
the instructions of the issuing bank which is to notify
or to transmit the letter of credit to the beneficiary.
(See Kronman v. Public National Bank of New
York, supra). Its commitment is only to notify the
beneficiary. It does not undertake any assurance that
the issuing bank will perform what has been mandated
to or expected of it. As an agent of the issuing bank, it
has only to follow the instructions of the issuing bank
and to it alone is it obligated and not to buyer with
whom it has no contractual relationship.
In fact the notifying bank, even if the seller tenders all
the documents required under the letter of credit, may
refuse to negotiate or accept the drafts drawn
thereunder and it will still not be held liable for its only
engagement is to notify and/or transmit to the seller
the letter of credit.
Finally, even if we assume that the petitioner is a
confirming bank, the petitioner cannot be forced to pay
the amount under the letter. As we have previously
explained, there was a failure on the part of the private
respondent to comply with the terms of the letter of
credit.
The failure by him to submit the certification was fatal
to his case.1wphi1 The U.C.P. which is incorporated in
the letter of credit ordains that the bank may only pay
the amount specified under the letter if all the
documents tendered are on their face in compliance
with the credit. It is not tasked with the duty of
ascertaining the reason or reasons why certain
documents have not been submitted, as it is only
concerned with the documents. Thus, whether or not
the buyer has performed his responsibility towards the
seller is not the bank's problem.
We are aware of the injustice committed by
Christiansen on the private respondent but we are
deciding the controversy on the basis of what the law
is, for the law is not meant to favor only those who
have been oppressed, the law is to govern future
relations among people as well. Its commitment is to
all and not to a single individual. The faith of the
people in our justice system may be eroded if we are
to decide not what the law states but what we believe
it should declare. Dura lex sed lex.
Considering the foregoing, the materiality of ruling
upon the validity of the certificate of approval required
of the private respondent to submit under the letter of
credit, has become insignificant.
In any event, we affirm the earlier ruling of the Court
of Appeals dated April 9, 1987 in regard to the petition
before it for certiorari and prohibition with preliminary
injunction, to wit:
There is no merit in the respondent's contention that
the certification required in condition No. 4 of the letter
of credit was "patently illegal." At the time the letter of
credit was issued there was no Central Bank regulation
prohibiting such a condition in the letter of credit. The
letter of credit (Exh. C) was issued on June 7, 1971,
more than two months before the issuance of the
Central Bank Memorandum on August 16, 1971
disallowing such a condition in a letter of credit. In fact
the letter of credit had already expired on July 30,
1971 when the Central Bank memorandum was issued.
In any event, it is difficult to see how such a condition
could be categorized as illegal or unreasonable since all
that plaintiff Villaluz, as seller of the logs, could and
should have done was to refuse to load the logs on the
vessel "Zenlin Glory", unless Christiansen first issued
the required certification that the logs had been
approved by him to be in accordance with the terms
and conditions of his purchase order. Apparently,
Villaluz was in too much haste to ship his logs without
taking all due precautions to assure that all the terms
and conditions of the letter of credit had been strictly
complied with, so that there would be no hitch in its
negotiation. (Rollo, p. 8)
WHEREFORE, the COURT RESOLVED to GRANT the
petition and hereby NULLIFIES and SETS ASIDE the
decision of the Court of Appeals dated June 29, 1990.
The amended complaint in Civil Case No. 15121 is
DISMISSED.
SO ORDERED.