G.R. No.

74886 December 8, 1992

PRUDENTIAL BANK, petitioner,

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

FACTS : Philippine Rayon Mills, Inc. (PRMI)applied for a commercial letter of credit with
Prudential bank for the importation of textile machinery with Nissho Co., Ltd. of Japan.
Prudential Bank executed a trust receipt signed by the President of PRMI.

PMRI received the machinery and installed the same at its factory. PMRI ceased business
sometime in 1967 without paying his obligation arising from the letters of credit and trust
receipt. Repeated demands for the payment of the said trust receipt were made and to no
avail. Hence, action for collection of money was filed to the trial court.

ISSUE : Whether Philippine Rayon is liable on the basis of the trust receipt?

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

Commercial letters of credit have come into general use in international sales transactions
where much time necessarily elapses between the sale and the receipt by a purchaser of the
merchandise, during which interval great price changes may occur. Their purpose is to
insure to a seller payment of a definite amount upon presentation of documents. The
bank deals only with documents. It has nothing to do with the quality of the merchandise.
Disputes as to the merchandise shipped may arise and be litigated later between vendor and
vendee, but they may not impede acceptance of drafts and payment by the issuing bank
when the proper documents are presented.

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

G.R. No. 105395 December 10, 1993

BANK OF AMERICA, NT & SA, petitioners,

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

FACTS : Bank of America received an Irrevocable Letter of Credit issued bu Bank of

Ayudhya for the Account of General Chemicals Ltd., Inc. for the sale of plastic ropes and
agricultural files with Bank of America as advising bank and Inter-Resin Industrial Corp. as
beneficiary.

Upon receipt of the letter advice with letter of credit by Inter- Resin told Bank of America to
confirm said letter of credit, but the bank did not confirm such. Bank of America explained
that there was no need for confirmation.

Inter-Resin made a partial availment of the Letter of Credit after presentment of the required
documents to Bank of America. After confirmation of all the documents BA issued a check in
favor of IR. BA advice Bank of Ayudhya of IR’s availment under the letter of credit and asked
for the corresponding reimbursement.

IR presented documents for the second availment under the same LC but BA stopped the
processing of such after they received a telex from Bank of Ayudhya delaring that the LC
fraudulent. BA sued IR for the recovery of the first LC payment.

ISSUE : Whether or not Bank of America may recover what it has paid under the letter of
credit to Inter-Resin?

HELD : In fine, we hold that —

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

Second, petitioner bank, as a negotiating bank, is entitled to recover on Inter-Resin's

partial availment as beneficiary of the letter of credit which has been disowned by the
alleged issuer bank.

A letter of credit is a financial device developed by merchants as a convenient and relatively

safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a
seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have
control of the goods before paying. 9 To break the impasse, the buyer may be required to
contract a bank to issue a letter of credit in favor of the seller so that, by virtue of the latter of
credit, the issuing bank can authorize the seller to draw drafts and engage to pay them upon
their presentment simultaneously with the tender of documents required by the letter of
credit. 10 The buyer and the seller agree on what documents are to be presented for
payment, but ordinarily they are documents of title evidencing or attesting to the shipment of
the goods to the buyer.

There would at least be three (3) parties: (a) the buyer, 12 who procures the letter of credit
and obliges himself to reimburse the issuing bank upon receipts of the documents of title; (b)
the bank issuing the letter of credit, 13 which undertakes to pay the seller upon receipt of the
draft and proper document of titles and to surrender the documents to the buyer upon
reimbursement; and, (c) the seller, 14 who in compliance with the contract of sale ships the
goods to the buyer and delivers the documents of title and draft to the issuing bank to
recover payment.

The number of the parties, not infrequently and almost invariably in international trade
practice, may be increased. Thus, the services of an advising (notifying) bank 15 may be
utilized to convey to the seller the existence of the credit; or, of a confirming bank 16 which will
lend credence to the letter of credit issued by a lesser known issuing bank; or, of a paying
bank, 17 which undertakes to encash the drafts drawn by the exporter. Further, instead of
going to the place of the issuing bank to claim payment, the buyer may approach another
bank, termed the negotiating bank, 18 to have the draft discounted.

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

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

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

BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee,

vs.
DE RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO and AURORA CARCERENY
alias AURORA C. GONZALES, defendants-appellants.
FACTS : De Reny Fabric Industries, Inc. applied to the Bank for four (4) irrevocable
commercial letters of credit to cover the purchase by the corporation of goods from its
American supplier, the J.B. Distributing Company.

As each shipment arrived in the Philippines, the De Reny Fabric Industries, Inc. made partial
payments to the Bank amounting. Further payments were, however, subsequently
discontinued by the corporation when it became established, as a result of a chemical test
conducted by the National Science Development Board, that the goods that arrived in Manila
were colored chalks instead of dyestuffs.

The corporation also refused to take possession of these goods, and for this reason, the
Bank caused them to be deposited with a bonded warehouse paying therefor the amount of
P12,609.64 up to the filing of its complaint with the court.

ISSUE : Whether or not De Reny fabrics is liable under the letter of Credit?

HLED : Under the terms of their Commercial Letter of Credit Agreements with the
Bank, the appellants agreed that the Bank shall not be responsible for the "existence,
character, quality, quantity, conditions, packing, value, or delivery of the property purporting
to be represented by documents; for any difference in character, quality, quantity, condition,
or value of the property from that expressed in documents," or for "partial or incomplete
shipment, or failure or omission to ship any or all of the property referred to in the Credit," as
well as "for any deviation from instructions, delay, default or fraud by the shipper or anyone
else in connection with the property the shippers or vendors and ourselves [purchasers] or
any of us." Having agreed to these terms, the appellants have, therefore, no recourse
but to comply with their covenant.

But even without the stipulation recited above, the appellants cannot shift the burden of loss
to the Bank on account of the violation by their vendor of its prestation.

It was uncontrovertibly proven by the Bank during the trial below that banks, in providing
financing in international business transactions such as those entered into by the appellants,
do not deal with the property to be exported or shipped to the importer, but deal only
with documents.

The existence of a custom in international banking and financing circles negating any duty
on the part of a bank to verify whether what has been described in letters of credits or drafts
or shipping documents actually tallies with what was loaded aboard ship, having been
positively proven as a fact, the appellants are bound by this established usage. They were,
after all, the ones who tapped the facilities afforded by the Bank in order to engage in
international business.

G.R. No. 74834 November 17, 1988

INSULAR BANK OF ASIA & AMERICA (NOW PHILIPPINE COMMERCIAL

INTERNATIONAL BANK), petitioner,
vs.
HON. INTERMEDIATE APPELLATE COURT, THE PHILIPPINE AMERICAN LIFE
INSURANCE CO., SPS. BEN MENDOZA & JUANITA M. MENDOZA, respondents.
FACTS : Spouses Mendoza obtained a from PHILAM Life to finance the construction of their
residential house. Phiilam life required that the amortization be guaranteed by an irrevocable
LC of a commerciaql bank. The Mendoza’s contracted Insular Bank of Asia and America
(IBAA) for the issuance of LC in favor of Philam life, such LC’s in turn, secured by a real
mortgage on the property of spouses in favor of IBAA.

Mendoza’s executed promissory notes in favor of IBAA. Both Notes authorized IBAA "to sell
at public or private sale such securities or things for the purpose of applying their proceeds
to such payments" of many particular obligation or obligations" the Mendozas may have to
IBAA.

The Mendozas failed to pay Philam Life the amortization and informed IBAA that it was
declaring the entire balance outstanding on both loans, including liquidated damages,
"immediately due and payable." Philam Life then demanded the payment of P274,779.56
from IBAA but the latter took the position that, as a melee guarantor of the Mendozas who
are the principal debtors.

The Real Estate Mortgage, which secured the two (2) standby L/Cs. was extrajudicially
foreclosed by, and sold at public auction for P775,000.00, to petitioner IBAA as the lone and
highest bidder.

Philam Life filed suit against Respondent Spouses and IBAA before the Regional Trial Court
of Manila, Branch XXXXI, for the recovery of the sum of P274,779.56, the amount allegedly
still owing under the loan.

ISSUE : Whether or not IBAA has no more liability to Philam Life under the two (2) standby
Letters of Credit and, instead, is entitled to a refund?

HELD : In construing the terms of a Letter of Credit, as in other contracts, it is the intention of
the parties that must govern.

Letters of credit and contracts for the issuance of such letters are subject to the same rules
of construction as are ordinary commercial contracts. They are to receive a reasonable and
not a technical construction and although usage and custom cannot control express terms in
letters of credit, they are to be construed with reference to all the surrounding facts and
circumstances, to the particular and often varying terms in which they may be expressed, the
circumstances and intention of the parties to them, and the usages of the particular trade of
business contemplated .

Unequivocally, the subject standby Letters of Credit secure the payment of any obligation of
the Mendozas to Philam Life including all interests, surcharges and expenses thereon but
not to exceed P600,000.00. But while they are a security arrangement, they are not
converted thereby into contracts of guaranty. That would make them ultra vires rather than a
letter of credit, which is within the powers of a bank. The standby L/Cs are, "in effect an
absolute undertaking to pay the money advanced or the amount for which credit is
given on the faith of the instrument. They are primary obligations and not accessory
contracts. Being separate and independent agreements, the payments made by the
Mendozas cannot be added in computing IBAA's liability under its own standby letters
of credit. Payments made by the Mendozas directly to Philam Life are in compliance with
their own prestation under the loan agreements. And although these payments could result
in the reduction of the actual amount which could ultimately be collected from IBAA, the
latter's separate undertaking under its L/Cs remains. That there still remains a balance on
the loan, Pursuant to its absolute undertaking under the L/Cs, therefore, IBAA cannot
escape the obligation to pay Philam Life for this unexpended balance.