SPCL - LETTER OF CREDIT- CASE DIGEST I.

FACTS: Four irrevocable letters of credit were applied to BPI by DE RENY FABRIC INDUSTRIES (DRFI) for the purchase of various colors of dyestuffs from J.B. DISTRIBUTING, an American supplier. BPI approved and executed the same with the corresponding Letter of Credit (L/C) Agreement. L/Cs were forwarded by BPI to its Correspondent Bank (CB) in the U.S. In this set-up CB shall pay the purchase price to the supplier J.B. DISTRIBUTING upon the latters presentation of required documents. J.B. DISTRIBUTING did present the documents and CB paid them. The problem arose when DRFI, upon the arrival of shipment in Manila, discovered that those delivered only contained colored chalks. DRFI stopped the payment of issued L/Cs to BPI on the ground that it is CB of BPI has the responsibility to check first if what is to be shipped conform to what was stipulated under L/C. ISSUE: WON the applicant DRFI can shift the burden of loss to issuing bank BPI on account of the violation by the seller-beneficiary J.B. DISTRIBUTINGs prestation. HELD: SC ruled in the negative. DRFI has to comply with L/C agreement which states that the bank shall not be responsible for the existence, character, quality, quantity, conditions, packing, value, or delivery of the property. BPI introduced as evidence a provision under the Uniform Customs and Practices for Commercial Documentary Credits. BPI vs. DE RENY FABRIC INDUSTRIES Also, DRFI cannot shift the burden of loss to BPI on account of the vendors prestation. BPI undisputedly proven by BPI that in providing financing in international business transactions such as that entered into with DRFI, banks do not deal with the property to be exported or shipped to the importer, but deal only with documents.

The use of the same as evidence was justified by the Article 2 of the Code of Commerce In the absence of any particular provision in the COC, commercial transactions shall be governed by usage and customs. Under the evidence presented, it was stated that in documentary credit operations, all parties concerned deal in documents not in goods. Payment, negotiation or acceptance against documents in accordance with the terms and conditions of credit by the bank authorized to do so, binds the party giving the authorization to take up the documents and reimburse the bank making payment, negotiation and acceptance. The existence of a custom in international baking and financing circles negating any duty on the part of the bank to verify whether what has been described in the L/Cs, drafts or shipping documents actually tallied with what has been loaded aboard a ship.

DIANA ABIGAIL M. DIESTRO

SECTION 3-B

1ST SEMESTER AY 2013-2014

SPCL - LETTER OF CREDIT- CASE DIGEST Bank is not required to investigate if the contract underlying credit has been fulfilled or not. DRFI is bound by the established usage.

II.

PHILIPPINE VIRGINIA TOBACCO ADMINISTRATION (PVTA) vs. DE LOS ANGELES

FACTS: DIANA ABIGAIL M. DIESTRO SECTION 3-B

Respondent Timoteo Sevilla, proprietor and General Manager of the Philippine Associated Resources (PAR) together with two other entities, namely, the Nationwide AgroIndustrial Development Corp. and the Consolidated Agro-Producers Inc. were awarded in a public bidding the right to import Virginia leaf tobacco for blending purposes and exportation by them of PVTA and farmer's low-grade tobacco. Subsequently, the other two entities assigned their rights to PVTA and respondent remained the only private entity accorded the privilege. In their contract respondent Sevilla purchased from petitioner and actually exported 2,101.470 kilos of tobacco, paying the PVTA the sum of P2,482,938.50 and leaving a balance of P3,713,908.91. Before respondent Sevilla could import the counterpart blending Virginia tobacco, Republic Act No. 4155 was passed and took effect on June 20, 1 964, authorizing the PVTA to grant import privileges at the ratio of 4 to 1 instead of 9 to 1 and to dispose of all its tobacco stock at the best price available. Subject contract which was already amended because of the prevailing export or world market price under which respondent will be exporting at a loss; further amended to grant respondent the privileges under aforesaid law, subject to the following conditions: (1) that on the 2,101.470 kilos already purchased, and exported, the purchase price of about P3.00 a kilo was maintained; (2) that the unpaid balance of P3,713,908.91 was to be liquidated by paying PVTA the sum of P4.00 for every kilo of imported Virginia blending tobacco and; (3) that respondent Sevilla would open an irrevocable letter of credit No. 6232 with the Prudential Bank and Trust Co. in favor of the PVTA to secure the payment of said balance, drawable upon the release from the Bureau of 1ST SEMESTER AY 2013-2014

SPCL - LETTER OF CREDIT- CASE DIGEST Customs of the imported Virginia blending tobacco. While respondent was trying to negotiate the reduction of the procurement cost which attempt was denied, petitioner prepared two drafts to be drawn against said letter of credit for amounts which have already become due and demandable. Respondent then filed a complaint for damages with preliminary injunction against the petitioner in the amount of P5,000,000.00. Petitioner filed an answer with counterclaim, admitting the execution of the contract. It alleged however that respondent, violated the terms thereof by causing the issuance of the preliminary injunction to prevent the former from drawing from the letter of credit for amounts due and payable and thus caused petitioner additional damage of 6% per annum. Philippine Virginia Tobacco Administration seeks to annul and set aside Orders of respondent Judge of the Court of First Instance of Rizal, Branch IV (Quezon City) in Civil Case No. Q-10351 and prays that the Writ of Preliminary Injunction (that may be) issued by this Court enjoining enforcement of the aforesaid Orders be made permanent. AS PRAYED FOR, the Prudential Bank & Trust Company is hereby directed to release and deliver to the herein plaintiff, Timoteo A. Sevilla, the amount of P800,000.00 in its custody representing the marginal deposit of the Letters of Credit which said bank has issued in favor of the defendant, upon filing by the plaintiff of a bond in the um of P800,000.00, to answer for whatever damage that the defendant PVTA and the Prudential Bank & Trust Company may suffer by reason of this order. DIANA ABIGAIL M. DIESTRO SECTION 3-B

ISSUE: WON the court can order an Issuing Bank to release the funds pertaining to the irrevocable L/Cs in favor of the applicant. HELD: The petition is impressed with merit.

In issuing the Order of July 17, 1967, respondent Judge violated the irrevocability of the letter of credit issued by respondent Bank in favor of petitioner. An irrevocable letter of credit caretaker.2 during its lifetime be cancelled or modified Without the express permission of the Consequently, if the finding agriculthe trial on the merits is that respondent Sevilla has alleged unpaid balance due the petitioner, such unpaid obligation would be unsecured. The sole object of a preliminary injunction is to preserve the status quo until the merit can be heard. It is the last actual peaceable uncontested status which precedes the pending controversy . Injury is considered irreparable if it is of such constant and frequent recurrence that no fair or reasonable redress can be had therefor in a court of law (Allundorff v. Abrahanson, 38 Phil. 585) or where there is no standard c,irrency which their amount can be measured with reasonable accuracy, that is, it is not susceptible of mathematical computation (SSC v. Bayona, et al., L-13555, May 30, 1962). Any alleged damage suffered or might possibly be suffered by respondent Sevilla refers to expected profits and claimed by him in this complaint as damages in the amount of FIVE Million Pesos (P5,000,000.00), a damage that can be measured, susceptible of mathematical computation, not 1ST SEMESTER AY 2013-2014

SPCL - LETTER OF CREDIT- CASE DIGEST irreparable, nor do they necessitate the issuance of the Order of November 3, 1967. Conversely, there is truth in petitioner's claim that it will suffer greater damage than that suffered by respondent Sevilla if the Order of November 3, 1967 is not annulled. Petitioner's stock if not made available to other parties will require warehouse storage and servicing fees in the amount of P4,704,236.00 yearly or more than P9,000.000.00 in two years time. Orders are ANNULLED and SET ASIDE; and the preliminary injunctions should continue until the termination of Case

III. FACTS:

INSULAR BANK OF ASIA & AMERICA (IBAA)vs. IAC

PHILAMLIFE (beneficiary) granted 2 loans to SPS. MENDOZA (applicant) to finance the construction of their house. This transaction is under amortizations over a period of 5 years. PHILAMLIFE required that the amortizations be guaranteed by an irrevocable standby L/C (SLOC) of a commercial bank. SPS. MENDOZA applied to IBAA (issuing bank) for the issuance of 2 SLOCs in favor of PHILAMLIFE for the total amount of P600,000. SLOCs were also secured by a real estate mortgage for the same amount over the property of SPS. MENDOZA.

DIANA ABIGAIL M. DIESTRO

SECTION 3-B

1ST SEMESTER AY 2013-2014

SPCL - LETTER OF CREDIT- CASE DIGEST SPS. MENDOZA failed to pay their first amortization so PHILAMLIFE drawn on the SLOC from IBAA. Later, upon another default in amortization payment, PHILAMLIFE demanded the entire amount of SLOC from IBAA. IBAA refused to pay under the SLOCS on the ground that SPS. MENDOZAs partial payments entitled them to refund which has the effect of reducing their liability as a guarantor. On the other hand, PHILAMLIFE and SPS. MENDOZA disagree on the ground that IBAA has an original and primary obligation under the SLOCS which cannot be reduced by the payments made by the SPS. ISSUE: WON liability of Issuing Bank can be reduced by partial payments rendered by the applicant to the beneficiary as a guarantor. HELD: SC ruled in the negative. In construing the terms of a Letter of Credit, as in other contracts, it is the intention of the parties that must govern.

Philam Life including all interests, surcharges and expenses thereon but not to exceed P600,000.00. But while they are a security arrangement, they are not converted thereby into contracts of guaranty. That would make them ultra vires rather than a letter of credit, which is within the powers of a bank (Section 74[e], RA 337, General Banking Act). 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.

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 DIANA ABIGAIL M. DIESTRO SECTION 3-B

Both the Trial Court and the Appellate Court found, as a fact, that there still remains a balance on the loan, Pursuant to its absolute undertaking under the L/Cs, therefore, IBAA cannot escape the obligation to pay Philam Life for this unexpended balance. The Appellate Court found it to be P222,000.00, arrived at by the Trial Court and adopted by the Appellate Court, as follows: As found by the Appellate Court, however, the amount payable should not exceed P296,294,05 (P600,000.00 less P303,705.95, the total amount 1ST SEMESTER AY 2013-2014

SPCL - LETTER OF CREDIT- CASE DIGEST found by the Appellate Court to have been paid by IBAA to Philam Life).

VILLALUZ then filed an action for mandamus against CHRISTIANSEN and FEATI BANK. But since CHRISTIANSEN left the Philippines, in an amended complaint, FEATI was alleged to be solidarily liable with CHIRSTIANSEN. ISSUE: WON FEATI BANK should be held solidarily liable with CHIRSTIANSEN for latters non-compliance with the required documents under the L/C HELD: NO. 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.

IV. FACTS:

FEATI BANK & TRUST CO. vs. CA

CHRISTIANSEN issued a purchase order to buy certain type of logs from VILLALUZ for the price of 27 dollars per cubic meter FOB. CHRISTIANSEN sold the logs to HANMI TRADE OF CALIFORNIA (HANMI) HANMI instructed the SECURITY PACIFIC BANK OF CALIFORNIA (SPBC) to issue irrevocable L/C in favor of VILLALUZ. SPBC then mailed the irrevocable L/C to its correspondent bank FEATI BANK instructing the same to forward the enclosed letter to beneficiary VILLALUZ. Under the L/C agreement, the draft is to be drawn to SPBC and that it shall be accompanied by certain documents. One of the documents required is the certification by CHRISTIANSEN (direct buyer) that the goods were in good order condition. But upon loading of the logs and its inspection, CHRISTIANSEN refused to issue the same. Nevertheless, the logs were shipped and received by HANMI as its consignee. With absence of the certification, FEATI BANK refused to advance the payment on the L/C until the credit lapsed. DIANA ABIGAIL M. DIESTRO SECTION 3-B

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. 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 1ST SEMESTER AY 2013-2014

SPCL - LETTER OF CREDIT- CASE DIGEST 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. Also, 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 appears to have overlooked the fact that an irrevocable credit is not synonymous with a confirmed credit. 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. In commercial transactions involving letters of credit, the functions assumed by a correspondent bank are DIANA ABIGAIL M. DIESTRO SECTION 3-B

classified according to the obligations taken up by it. 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. 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. 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. In this case, the letter merely provided that the petitioner "forward the enclosed original credit to the beneficiary." 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. 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 1ST SEMESTER AY 2013-2014

SPCL - LETTER OF CREDIT- CASE DIGEST 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. The loan agreement is more reasonably classified as an isolated transaction independent of the documentary credit. 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 DIANA ABIGAIL M. DIESTRO SECTION 3-B

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." 1ST SEMESTER AY 2013-2014

SPCL - LETTER OF CREDIT- CASE DIGEST 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.

default of the person primarily liable. On the other hand, in an irrevocable credit the bank undertakes a primary obligation. (See National Bank of Eagle Pass, Tex v. American National Bank of San Francisco, 282 F. 73 [1922]) The relationship between the issuing bank and the notifying bank, on the contrary, is more similar to that of an agency and not that of a guarantee. It may be observed that the notifying bank is merely to follow the instructions of the issuing bank which is to notify or to transmit the letter of credit to the beneficiary. (See Kronman v. Public National Bank of New York, supra). Its commitment is only to notify the beneficiary. It does not undertake any assurance that the issuing bank will perform what has been mandated to or expected of it. As an agent of the issuing bank, it has only to follow the instructions of the issuing bank and to it alone is it obligated and not to buyer with whom it has no contractual relationship. In fact the notifying bank, even if the seller tenders all the documents required under the letter of credit, may refuse to negotiate or accept the drafts drawn thereunder and it will still not be held liable for its only engagement is to notify and/or transmit to the seller the letter of credit. Finally, even if we assume that the petitioner is a confirming bank, the petitioner cannot be forced to pay the amount under the letter. As we have previously explained, there was a failure on the part of the private respondent to comply with the terms of the letter of credit.

The 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 DIANA ABIGAIL M. DIESTRO SECTION 3-B

V. FACTS:

PRUDENTIAL BANK & TRUST CO. V. IAC

1ST SEMESTER AY 2013-2014

SPCL - LETTER OF CREDIT- CASE DIGEST Philippine Rayon Mills (PRM-BA) entered into a contract with NISSHIO Co. of Japan (SB) for the importation of textile machineries under a 5-year deferred payment plan. PRM applied for commercial letter with PRUDENTIAL BANK in favor of NISSHIO. It was later approved. PRUDENTIAL BANK through its correspondent bank in Japan, paid NISSHIO, after the latter drawn and issued drafts against the letter of credit. PRUDENTIAL BANK indorsed the shipping documents to PRM upon arrival of the machineries. To be able to take the delivery of the machineries, PRM executed, by prior arrangement with the PRUDENTIAL BANK, a trust receipt signed by Anacleto R. Chi in his capacity as president of PRM. PRM obtained the delivery and had the machineries installed in its factory site. But later, PRM ceased its operations and the machineries were sold to AIC Development Corporation PURUDENTIAL BANK filed an action to collect the principal amount because PRMs obligation under the L/C remained unpaid. Lower Court Ruling: Insofar as the amount involved in the draft which was not presented and accepted by PRM, PRUDENTIAL BANK was not justified to unilaterally pay to NISSHIO. ISSUE: 1. WON presentment for acceptance of the drafts was indispensable before PRM can be held liable thereon. 2. Whether Philippine Rayon is liable on the basis of the trust receipt; 3. Whether private respondent Chi is jointly and severally liable with Philippine Rayon for the obligation sought to be enforced and if not, whether he may be considered a guarantor; in the latter situation, whether the case should have been dismissed on the ground of lack of DIANA ABIGAIL M. DIESTRO SECTION 3-B

cause of action as there was no prior exhaustion of Philippine Rayon's properties.

HELD: 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. 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. In the instant case then, the drawee was necessarily the herein petitioner. It was to the latter that the drafts were presented for payment. In fact, there was no need for acceptance as the issued drafts are sight drafts. Presentment for acceptance is necessary only in the cases expressly provided for in Section 143 of the Negotiable Instruments Law (NIL). 13 The said section reads:

Sec. 143. When presentment for acceptance must be made. Presentment for acceptance must be made: (a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument; or (b) Where the bill expressly stipulates that it shall be presented for acceptance; or (c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee. 1ST SEMESTER AY 2013-2014

SPCL - LETTER OF CREDIT- CASE DIGEST In no other case is presentment for acceptance necessary in order to render any party to the bill liable. Obviously then, sight drafts do not require presentment for acceptance. Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section 7 provides:

that presentment for acceptance was an indispensable requisite for Philippine Rayon's liability on the drafts to attach. Contrary to both courts' pronouncements, Philippine Rayon immediately became liable thereon upon petitioner's payment thereof. Such is the essence of the letter of credit issued by the petitioner. A different conclusion would violate the principle upon which commercial letters of credit are founded because in such a case, both the beneficiary and the issuer, Nissho Company Ltd. and the petitioner, respectively, would be placed at the mercy of Philippine Rayon even if the latter had already received the imported machinery and the petitioner had fully paid for it. The trial court and the public respondent likewise erred in disregarding the trust receipt and in not holding that Philippine Rayon was liable thereon.

Sec. 7. When payable on demand. An instrument is payable on demand (a) When so it is expressed to be payable on demand, or at sight, or on presentation; or (b) In which no time for payment in expressed. Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand. 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" 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. The trial court and the public respondent, therefore, erred in ruling DIANA ABIGAIL M. DIESTRO SECTION 3-B

Under P.D. No. 115, otherwise known an the Trust Receipts Law, "any transaction by and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as the entrustee, whereby the entruster, who owns or holds absolute title or security interests' over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter's execution and delivery to the entruster of a signed document called the "trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the 1ST SEMESTER AY 2013-2014

SPCL - LETTER OF CREDIT- CASE DIGEST entruster or as appears in the trust receipt or the goods, instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trusts receipt, or for other purposes substantially equivalent to any one of the following: . . ." It is alleged in the complaint that private respondents "not only have presumably put said machinery to good use and have profited by its operation and/or disposition but very recent information that (sic) reached plaintiff bank that defendants already sold the machinery covered by the trust receipt to Yupangco Cotton Mills," and that "as trustees of the property covered by the trust receipt, . . . and therefore acting in fiduciary (sic) capacity, defendants have willfully violated their duty to account for the whereabouts of the machinery covered by the trust receipt or for the proceeds of any lease, sale or other disposition of the same that they may have made, notwithstanding demands therefor; defendants have fraudulently misapplied or converted to their own use any money realized from the lease, sale, and other disposition of said machinery." 23 While there is no specific prayer for the delivery to the petitioner by Philippine Rayon of the proceeds of the sale of the machinery covered by the trust receipt, such relief is covered by the general prayer for "such further and other relief as may be just and equitable on the premises." 24 And although it is true that the petitioner commenced a criminal action for the violation of the Trust Receipts Law, no legal obstacle prevented it from enforcing the civil liability arising out of the trust, receipt in a separate civil action. Under Section 13 of the Trust Receipts Law, the failure of an entrustee to turn over the proceeds of the sale of DIANA ABIGAIL M. DIESTRO SECTION 3-B

goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appear in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article 315, paragraph 1(b) of the Revised Penal Code. 25 Under Article 33 of the Civil Code, a civil action for damages, entirely separate and distinct from the criminal action, may be brought by the injured party in cases of defamation, fraud and physical injuries. Estafa falls under fraud. We also conclude, for the reason hereinafter discussed, and not for that adduced by the public respondent, that private respondent Chi's signature in the dorsal portion of the trust receipt did not bind him solidarily with Philippine Rayon. Petitioner insists that by virtue of the clear wording of the statement, specifically the clause ". . . we jointly and severally agree and undertake . . .," and the concluding sentence on exhaustion, Chi's liability therein is solidary. Our own reading of the questioned solidary guaranty clause yields no other conclusion than that the obligation of Chi is only that of a guarantor. This is further bolstered by the last sentence which speaks of waiver of exhaustion, which, nevertheless, is ineffective in this case because the space therein for the party whose property may not be exhausted was not filled up. Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be raised by a guarantor before he may be held liable for the obligation. Petitioner likewise

1ST SEMESTER AY 2013-2014

SPCL - LETTER OF CREDIT- CASE DIGEST admits that the questioned provision is a solidary guaranty clause, thereby clearly distinguishing it from a contract of surety. It, however, described the guaranty as solidary between the guarantors; this would have been correct if two (2) guarantors had signed it. The clause "we jointly and severally agree and undertake" refers to the undertaking of the two (2) parties who are to sign it or to the liability existing between themselves. It does not refer to the undertaking between either one or both of them on the one hand and the petitioner on the other with respect to the liability described under the trust receipt. Elsewise stated, their liability is not divisible as between them, i.e., it can be enforced to its full extent against any one of them. And now to the other ground relied upon by the petitioner as basis for the solidary liability of Chi, namely the criminal proceedings against the latter for the violation of P.D. No. 115. Petitioner claims that because of the said criminal proceedings, Chi would be answerable for the civil liability arising therefrom pursuant to Section 13 of P.D. No. 115. Public respondent rejected this claim because such civil liability presupposes prior conviction as can be gleaned from the phrase "without prejudice to the civil liability arising from the criminal offense." Both are wrong. Corporations, partnerships, associations and other juridical entities cannot be put in jail. However, it is these entities which are made liable for the civil liability arising from the criminal offense. This is the import of the clause "without prejudice to the civil liabilities arising from the criminal offense." And, as We stated earlier, since that violation of a trust receipt constitutes fraud under Article 33 of the Civil Code, petitioner was acting well within its rights in filing an independent civil action to enforce the civil liability DIANA ABIGAIL M. DIESTRO SECTION 3-B

arising therefrom against Philippine Rayon. However, Chi's liability is limited to the principal obligation in the trust receipt plus all the accessories thereof including judicial costs;

VI.

BANK OF AMERICA V. COURT OF APPEALS

FACTS: An irrevocable letter of credit was issued by BANK OF AYUDHYA of Thailand upon application by GENERAL CHEMICALS of Thailand (BA) in favor of INTER RESIN Industrial Corporation (SB) for the purchase of certain plastic ropes and agricultural resin. Irrevocable L/C was mailed by BANK OF AYUDHYAH to BANK OF AMERICA. BANK OF AMERICA notified INTER RESIN of the L/C. INTER RESIN requested BANK OF AMERICA to confirm the L/C but the latter refused while one of its employees explained that there is no need for that because the L/C is genuine. BANK OF AMERICA issed 10.2M to respond to INTER RESINs first availment upon being satisfied of the latters submitted documents. But BANK OF AMERCA refused to process the second availment upon being informed by Bank of Ayudhya that the L/C was fraudulent and disowned by the latter. BANK OF AMERICA filed an action against INTER RESIN for the recovery of sum of money that it gave under the first availement. However, lower court ruled in favor of INTER RESIN and affirmed by CA. 1ST SEMESTER AY 2013-2014

SPCL - LETTER OF CREDIT- CASE DIGEST ISSUES: 1. WON BANK OF AMERICA has warranted the genuineness and authenticity of the letter of credit and, corollarily, whether it has acted merely as an advising bank or as a confirming bank; 2. WON Bank of America may recover against Inter-Resin under the draft executed in its partial availment of the letter of credit. 8 HELD: The first issue raised with the petitioner, i.e., that it has in this instance merely been advising bank, is outrightly rejected by Inter-Resin and is thus sought to be discarded for having been raised only on appeal. We cannot agree. The crucial point of dispute in this case is whether under the "letter of credit," Bank of America has incurred any liability to the "beneficiary" thereof, an issue that largely is dependent on the bank's participation in that transaction; as a mere advising or notifying bank, it would not be liable, but as a confirming bank, had this been the case, it could be considered as having incurred that liability. 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 InterResin 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 DIANA ABIGAIL M. DIESTRO SECTION 3-B

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. Article 18 of the U.C.P. states that: "Banks assume no liability or responsibility for the consequences arising out of the delay and/or loss in transit of any messages, letters or documents, or for delay, mutilation or other errors arising in the transmission of any telecommunication . . ." As advising bank, Bank of America is bound only to check the "apparent authenticity" of the letter of credit, which it did. 29 Clarifying its meaning, Webster's Ninth New Collegiate Dictionary 30 explains that the word "APPARENT suggests appearance to unaided senses that is not or may not be borne out by more rigorous examination or greater knowledge." May Bank of America then recover what it has paid under the letter of credit when the corresponding draft for partial availment thereunder and the required documents were later negotiated with it by Inter-Resin? The answer is yes. This kind of transaction is what is commonly referred to as a discounting arrangement. This time, Bank of America has

acted independently as a negotiating bank, thus saving Inter-Resin from the hardship of presenting the documents directly to Bank of Ayudhya to recover payment. (Inter-Resin, of course, could have chosen other banks with which to negotiate the draft and the documents.) As a negotiating bank, Bank of America has a right to recourse against the issuer bank and until reimbursement is obtained, InterResin, as the drawer of the draft, 1ST SEMESTER AY 2013-2014

SPCL - LETTER OF CREDIT- CASE DIGEST continues to assume a contingent liability thereon. The payment to Inter-Resin has given, as aforesaid, Bank of America the right of reimbursement from the issuing bank, Bank of Ayudhya which, in turn, would then seek indemnification from the buyer (the General Chemicals of Thailand). Since Bank of Ayudhya disowned the letter of credit, however, Bank of America may now turn to Inter-Resin for restitution. The additional ground raised by the petitioner, i.e., that Inter-Resin sent waste instead of its products, is really of no consequence. In the operation of a letter of credit, the involved banks deal only with documents and not on goods described in those documents.
34

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.

VII. FACTS:

RODZSEN SUPPLY V. FAR EAST BANK & TRUST CO.

RODZSEN applied for domestic L/C from FAR EAST BANK in favor of DIANA ABIGAIL M. DIESTRO SECTION 3-B 1ST SEMESTER AY 2013-2014

SPCL - LETTER OF CREDIT- CASE DIGEST EKMAN to finance the purchase of 5 units of hydraulic loaders. The L/C will expire sometime in February but it was extended until October (about 10 months) The first batch of loaders were delivered by EKMAN on time and FAR EAST paid it. The second batch was delivered beyond the expiration of the L/C. Despite the late delivery (5 months delay), FAR EAST still paid EKMAN upon its presentation of stipulated documents. FAR EAST then demanded RODZSEN for reimbursement. RODZSEN refused, instead, it offered to return he last batch of loaders. ISSUE: WON RODZSEN can refuse to pay FAR EAST despite its payment beyond the expiration of L/C. HELD: NO. Be that was it may, We agree with CA that RODSZEN should pay respondent FAR EAST for the amount the latter expended for the equipment belatedly delivered by EKMAN and voluntarily receipt and kept by RODSZEN. FAR EAST right to recovery is anchored not upon the inefficacious L/C but on Article 2142, NCC. Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-contract to the end that no one shall be unjustly enriched or benefitted at the expense of another. Equitable considerations behoove us to allow recovery.

True, it erred in paying EKMAN but RODZSEN is not without fault in the transaction. It had voluntarily received and kept the loaders since October 1979. Although RODZSEN claimed that it accepted the delivery because it was bound to receive it under the companys trust receipt arrangement with FAR EAST. Granting that it is bound by such arrangement, we note its unexplained inaction for almost 4 years with regard to the status of the ownership and possession of the loaders. Also, it only formalized its return of the 2 pieces of equipment only after FAR EAST demanded payment, which happened 3 years after the delivery. When both parties to the transaction are mutually negligent in the performance of their obligations, the fault of one cancels the negligence of the other. In this case the rights and obligations may be determined equitably under the law proscribing unjust enrichment. An IB which paid the beneficiary of an expired L/C can recover payment from an AB which obtained the goods from the beneficiary to prevent unjust enrichment.

DIANA ABIGAIL M. DIESTRO

SECTION 3-B

1ST SEMESTER AY 2013-2014

SPCL - LETTER OF CREDIT- CASE DIGEST open a L/C so it also awarded damaged in favor of DAEWOO. ISSUE: WON RELIANCE is liable for breach of contract. HELD: We agree with the Court of Appeals that Reliance and Daewoo, having reached "a meeting of minds" in respect of the subject matter of the contract (2000 metric tons of foundry pig iron with a specified chemical composition), the price thereof (US $380,600.00), and other principal provisions, "they had a perfected contract." The failure of Reliance to open, the appropriate L/C did not prevent the birth of that contract, and neither did such failure extinguish that contract . The L/C provided for in that contract was the mode or mechanism by which payment was to be effected by Reliance of the price of the pig iron. In undertaking to accept or pay the drafts presented to it by the beneficiary according to the tenor of an L/C, and only later on being reimbursed by the account party, the issuing bank in effect extends a loan to the account party. This loan feature, combined with the bank's undertaking to accept the beneficiary's drafts drawn on the bank, constitutes the L/C as a mode of payment. Logically, before the issuing bank open an L/C, it will take steps to ensure that it would indeed be reimbursed when the time comes. Before an L/C can be opened, specific legal requirements must be complied with. The Central Bank of the Philippines has established the following requirements for opening a letter of credit: importers shall submit to the commercial bank the following documents: 1ST SEMESTER AY 2013-2014

VIII.

RELIANCE COMMODITIES, INC. V. DAEWOO INDUSTRIAL CO.

FACTS: RELIANCE (BA) and DAEWOO (SB) entered into two contract of sale for the shipment and delivery of foundry pig iron provided that a L/C shall cover their second transaction. Under the first contract Daewoo fell short of certain metric tons. Under the second contract, the 2,000 metric tons was completely delivered by Daewoo. But upon RELIANCEs applicaton for L/C, it was denied by the CHINA BANKING CORP. because it has exceeded its foreign exchange allocation. Because of such, DAEWOO was forced to sell the foundry pig irons to another buyer at a lower price. RELIANCE filed an action for damages against DAEWOO for the recovery of P226K+ representing the value of the short delivery of more than 135 metric tons of foundry pig iron under their first contract. DAEWOO filed a counterclaim alleging that RELIANCE was guilty of breach of contract for its failure to open a L/C under the second contract. TC ruled that RELIANCE is entitled to short delivery price and ordered DAEWOO to pay the amount. BUT it also held that RELIANCE is liable for breach of contract for its failure to DIANA ABIGAIL M. DIESTRO SECTION 3-B

SPCL - LETTER OF CREDIT- CASE DIGEST a) the duly accomplished L/C application; b) firm offer/proforma invoice which shall contain information on the specific quantity of the importation, unit cost and total cost, complete description/specific ation of the commodity and the Philippine Standard Commodity Classification statistical code; c) permits/clearances from the appropriate government agencies, whenever applicable; and d) duly accomplished Import Entry

security, international commitments, and development/rationalization of local industry." The petitioner in the instant case entered into a transaction to import foundry pig iron, a regulated commodity. In respect of the importation of this particular commodity, the Iron and Steel Authority (ISA) is the government agency designated to issue the permit or clearance. Prior to the issuance of such permit or clearance, ISA asks the buyer/importer to comply with particular requirements, such as to show the availability of foreign exchange allocations. The issuance of an L/C becomes, among other things, an indication of compliance by the buyer/importer with his own government's regulations relating to imports and to payment thereof. The records shows that the opening of the L/C in the instant case became very difficult because Reliance had exhausted its dollar allocation. Reliance knew that it had already exceeded its dollar allocation for the year 1980 when it entered into the 31 July 1980 transaction with Daewoo. As a rule, when the importer has exceeded its foreign exchange allocation, his application would be denied. However, ISA could reconsider such application on a case to case basis.

Declaration (IED) form which shall serve as basis for payment of advance duties as required under PD 1853. 11 (Emphasis supplied) The need for permits or clearances from appropriate government agencies arises when regulated commodities are to be imported. Certain commodities are classified as "regulated commodities" for purposes of their importation, "for reasons of public health and safety, national DIANA ABIGAIL M. DIESTRO SECTION 3-B

Thus, in the instant case, ISA required Reliance to support its application by submitting purchase orders from endusers for the same quantity the latter wished to import. As earlier noted, Reliance was able to present purchase

orders for only 900 metric tons of the subject pig iron. For having exceeded its foreign exchange allocation before it entered ST 1 SEMESTER AY 2013-2014

SPCL - LETTER OF CREDIT- CASE DIGEST into the 31 July 1980 contract with Daewoo, petitioner Reliance can hold only itself responsible. for having failed to secure end-users purchase orders equivalent to 2,000 metric tons, only Reliance should be held responsible. Daewoo rejected Reliance's proposed reduced tonnage. It had the right to demand compliance with the terms of the basic contract and had no duty to accept any unilateral modification of that contract. We believe and so hold that failure of a buyer seasonably to furnish an agreed letter of credit is a breach of the contract between buyer and seller. Where the buyer fails to open a letter of credit as stipulated, the seller or exporter is entitled to claim damages for such breach. Damages for failure to open a commercial credit may, in appropriate cases, include the loss of profit which the seller would reasonably have made had the transaction been carried out. 19 Petition for Review is hereby DENIED.

FACTS: TOMOCO Inc. purchased to OREGON Industries a Skagit Yarder with accessories. TOMOCO applied for domestic L/C and granted by Philippine Commercial Bank (PCB) in favor of OREGON. TOMOCO signed and delivered to PCB a trust receipt rendering the required marginal deposit. At the back of the trust receipt, it was stipulated by Ramon ABAD (guarantor) that he is jointly and severally liable thereon with TOMOCO. PCB then paid OREGON for the machineries. But no other payment was made either by TOMOCO or ABAD to PCB. PCB sued them. TOMOCO did not deny it liability but it averred that inasmuch as it paid MD to PCB in amount of 28K, it should be deducted from its principal obligation, leaving only a balance of 52K. Lower court ordered both TOMOCO and ABAD to pay PCB. ABAD appealed, alleging that the MD made must be first deducted before computing their balance. If not, PCB will unjustly enrich themselves. ISSUE: WON MD must first be deducted from the entire indebtedness before computing other charges.

IX.

ABAD v. CA

DIANA ABIGAIL M. DIESTRO

HELD: The petition is impressed with merit. The nature and mercantile usage of a trust receipt was explained in the case of PNB vs. General Acceptance & Finance Corporation, et al., G.R. No. L30751, 24 May 1988 and Vintola vs. Insular Bank of Asia and America, 150 SCRA 578, as follows: . . . . A trust receipt is considered as a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral ST SECTION 3-B 1 SEMESTER AY 2013-2014

SPCL - LETTER OF CREDIT- CASE DIGEST of the merchandise imported or purchased, ... . The bank does not become the real owner of the goods. It is merely the holder of a security title for the advances it had made to the importer. The goods the importer had purchased through the bank financing, remain the importer's property and he holds it at his own risk. The trust receipt arrangement does not convert the bank into an investor; it remains a lender and creditor. This is so because the bank had previously extended a loan which the letter of credit represents to the importer, and by that loan, the importer should be the real owner of the goods. If under the trust receipt, the bank is made to appear as the owner, it was but an artificial expedient, more of a legal fiction than fact, for if it were so, it could dispose of the goods in any manner it wants, which it cannot do, just to give consistency with the purpose of the trust receipt of giving a stronger security for the loan obtained by the importer. To consider the bank as the true owner from the inception of the transaction would be to disregard the loan feature involved. . . . . A letter of credit-trust receipt arrangement is endowed with its own distinctive features and characteristics. Under that set-up, a bank extends a loan covered by the letter of credit, with the trust receipt as a security for the loan. In other words, the transaction involves a loan feature represented by the letter of credit, and a security feature which is in the covering trust receipt. . . . . A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a "security interest" in the goods. It secures an indebtedness and there can be no such thing as security interest that secures no obligation. The marginal deposit requirement is a Central Bank measure to cut off excess currency liquidity which would create inflationary pressure. It is a DIANA ABIGAIL M. DIESTRO SECTION 3-B

collateral security given by the debtor, and is supposed to be returned to him upon his compliance with his secured obligation. Consequently, the bank pays no interest on the marginal deposit, unlike an ordinary bank deposit which earns interest in the bank. As a matter of fact, the marginal deposit requirement for letters of credit has been discontinued, except in those cases where the applicant for a letter of credit is not known to the bank or does not maintain a good credit standing therein. It is only fair then that the importer's marginal deposit (if one was made, as in this case), should be set off against his debt, for while the importer earns no interest on his marginal deposit, the bank, apart from being able to use said deposit for its own purposes, also earns interest on the money it loaned to the importer. It would be onerous to compute interest and other charges on the face value of the letter of credit which the bank issued, without first crediting or setting off the marginal deposit which the importer paid to the bank. Compensation is proper and should take effect by operation of law because the requisites in Article 1279 of the Civil Code are present and should extinguish both debts to the concurrent amount (Art. 1290, Civil Code). Although Abad is only a surety, he may set up compensation as regards what the creditor owes the principal debtor, TOMCO (Art. 1280, Civil Code). It is not farfetched to assume that the bank used TOMCO's marginal deposit to partially fund the P80,000 letter of credit it issued to TOMCO, hence, the interests and other charges on said letter of credit should be levied only on the balance of P52,000 which was the portion that was actually funded or loaned by the bank from its own 1ST SEMESTER AY 2013-2014

SPCL - LETTER OF CREDIT- CASE DIGEST funds. Requiring the importer to pay interest on the entire letter of credit without deducting first him marginal deposit, would be a clear case of unjust enrichment by the bank. Petition for review is granted.

X.

CONSOLIDATED BANK & TRUST CO. V. COURT OF APPEALS

FACTS: CONTINENTAL Cement Corp. and Gregory T. LIM obtained from CONSOLIDATED BANK and Trust Co. a L/C. CONTINENTAL paid a MD of P320K+ to CONSOLIDATED BANK. L/C was used for the purchase about 500K liters of bunker fuel oil from PETROPHIL Corp. which the latter delivered to CONTINENTALs plant in Bulacan. To support the transaction, a trust receipt was executed by CONTINENTAL with LIM as its signatory. Later, CONSOLIDATED BANK filed a complaint for sum of money with application for preliminary attachment claiming that CONTINENTAL and LIM failed to turn over the goods covered by the trust receipt or the proceeds thereof. In answer, CONTINENTAL and LIM averred that the transaction between them was a simple loan and not a trust receipt transaction AND that the amount claimed by CONSOLIDATED BANK from them did not take into account payments already made by them (MD). Also, LIM denied personal liability in the transaction. DIANA ABIGAIL M. DIESTRO SECTION 3-B 1ST SEMESTER AY 2013-2014

SPCL - LETTER OF CREDIT- CASE DIGEST ISSUE: 1. WON the MD must be deducted first. 2. WON the transaction is one of simple loan or that of trust receipt. HELD: The petition must be denied. CONSOLIDATED BANKs contention that the marginal deposit made by CONTINENTAL should not be deducted outright from the amount of the letter of credit is untenable. Petitioner argues that the marginal deposit should be considered only after computing the principal plus accrued interests and other charges. However, to sustain petitioner on this score would be to countenance a clear case of unjust enrichment, for while a marginal deposit earns no interest in favor of the debtor-depositor, the bank is not only able to use the same for its own purposes, interest-free, but is also able to earn interest on the money loaned to respondent Corporation. Indeed, it would be onerous to compute interest and other charges on the face value of the letter of credit which the petitioner issued, without first crediting or setting off the marginal deposit which the respondent Corporation paid to it. Compensation is proper and should take effect by operation of law because the requisites in Article 1279 of the Civil Code are present and should extinguish both debts to the concurrent amount.i Hence, the interests and other charges on the subject letter of credit should be computed only on the balance of P681,075.93, which was the portion actually loaned by the bank to respondent Corporation. Petitioner has also failed to convince us that its transaction with respondent Corporation is really a trust receipt transaction instead of merely a simple loan, as found by the lower court and the Court of Appeals. SECTION 3-B The recent case of Colinares v. Court of Appealsii appears to be foursquare with the facts obtaining in the case at bar. There, we found that inasmuch as the debtor received the goods subject of the trust receipt before the trust receipt itself was entered into, the transaction in question was a simple loan and not a trust receipt agreement. Prior to the date of execution of the trust receipt, ownership over the goods was already transferred to the debtor. This situation is inconsistent with what normally obtains in a pure trust receipt transaction, wherein the goods belong in ownership to the bank and are only released to the importer in trust after the loan is granted. In the case at bar, as in Colinares, the delivery to respondent Corporation of the goods subject of the trust receipt occurred long before the trust receipt itself was executed. More specifically, delivery of the bunker fuel oil to respondent Corporations Bulacan plant commenced on July 7, 1982 and was completed by July 19, 1982. Further, the oil was used up by respondent Corporation in its normal operations by August, 1982. On the other hand, the subject trust receipt was only executed nearly two months after full delivery of the oil was made to respondent Corporation, or on September 2, 1982. The danger in characterizing a simple loan as a trust receipt transaction was explained in Colinares, to wit: The Trust Receipts Law does not seek to enforce payment of the loan, rather it punishes the dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another regardless of whether the latter is the owner. Here, it is crystal clear that on the part of Petitioners there was neither dishonesty nor abuse of confidence in the handling of money to the prejudice of PBC. Petitioners continually 1ST SEMESTER AY 2013-2014

DIANA ABIGAIL M. DIESTRO

SPCL - LETTER OF CREDIT- CASE DIGEST endeavored to meet their obligations, as shown by several receipts issued by PBC acknowledging payment of the loan. The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and place them under the threats of criminal prosecution should they be unable to pay it may be unjust and inequitable, if not reprehensible. Such agreements are contracts of adhesion which borrowers have no option but to sign lest their loan be disapproved. The resort to this scheme leaves poor and hapless borrowers at the mercy of banks, and is prone to misinterpretation, as had happened in this case. Eventually, PBC showed its true colors and admitted that it was only after collection of the money, as manifested by its Affidavit of Desistance. Similarly, respondent Corporation cannot be said to have been dishonest in its dealings with petitioner. Neither has it been shown that it has evaded payment of its obligations. Indeed, it continually endeavored to meet the same, as shown by the various receipts issued by petitioner acknowledging payment on the loan. Certainly, the payment of the sum of P1,832,158.38 on a loan with a principal amount of only P681,075.93 negates any badge of dishonesty, abuse of confidence or mishandling of funds on the part of respondent Corporation, which are the gravamen of a trust receipt violation. Furthermore, respondent Corporation is not an importer which acquired the bunker fuel oil for re-sale; it needed the oil for its own operations. More importantly, at no time did title over the oil pass to petitioner, but directly to respondent Corporation to which DIANA ABIGAIL M. DIESTRO SECTION 3-B

the oil was directly delivered long before the trust receipt was executed. The fact that ownership of the oil belonged to respondent Corporation, through its President, Gregory Lim, was acknowledged by petitioners own account officer on the witness stand, By all indications, then, it is apparent that there was really no trust receipt transaction that took place. Evidently, respondent Corporation was required to sign the trust receipt simply to facilitate collection by petitioner of the loan it had extended to the former. Finally, we are not convinced that respondent Gregory T. Lim and his spouse should be personally liable under the subject trust receipt. Petitioners argument that respondent Corporation and respondent Lim and his spouse are one and the same cannot be sustained. The transactions sued upon were clearly entered into by respondent Lim in his capacity as Executive Vice President of respondent Corporation. We stress the hornbook law that corporate personality is a shield against personal liability of its officers. Thus, we agree that respondents Gregory T. Lim and his spouse cannot be made personally liable since respondent Lim entered into and signed the contract clearly in his official capacity as Executive Vice President. The personality of the corporation is separate and distinct from the persons composing it.iii Petition for Review is DENIED.

1ST SEMESTER AY 2013-2014

SPCL - LETTER OF CREDIT- CASE DIGEST it contended that Corporation Rehabilitation prohibited such. XI. MWSS v. DAWAY ISSUE: 1. WON the rules on corporate rehabilitation bar recovery of the SLOC. 2. WON SLOC is a guaranty. FACTS: MWSS granted MAYNILAD a 20-year Concession Agreement to manage and repair existing MWSS water delivery and sewerage in the West Zone Service Area As a concessionare, MAYNILAD undertook to pay concession fees (payment for the right given by the government) on dates agreed upon which consisted mostly of foreign loans of MWSS. MAYNILAD was required under their concession agreement (SEC. 69) to put up a bond, bank guarantee or other security acceptable to MWSS to secure its obligation. MAYNILAD then arranged a 3-year facility with a number of foreign banks led by CITICORP Intl Ltd. for the issuance of irrevocable SLOC in favor of MWSS for its full and prompt compliance. To be able to recover losses it allegedly incurred and will be incurring as a result of peso depreciation against US dollar, MAYNILAD requested MWSS for a mechanism. MWSS denied the request so MAYNILAD issued a Force Majeure Notice and unilaterally suspended the payment of concession fees under their agreement. MOA was then entered into between MWSS and MAYNILAD in order to save the concession agreement wherein it allowed MAYNILAD to recover its losses. But another Force Majeure Notice was filed by MAYNILAD to which MWSS cannot agree anymore. It was said that peso depreciation caused MAYNILAD to file notice of early termination of their agreement. MWSS then filed a notice to CITICORP that it will draw $98M on the SLOC. But at that time, MAYNILAD was currently undergoing rehabilitation so DIANA ABIGAIL M. DIESTRO SECTION 3-B

HELD: First, the claim is not one against the debtor but against an entity that respondent Maynilad has procured to answer for its non-performance of certain terms and conditions of the Concession Agreement, particularly the payment of concession fees. Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all claims against guarantors and sureties, but only those claims against guarantors and sureties who are not solidarily liable with the debtor. Respondent Maynilads claim that the banks are not solidarily liable with the debtor does not find support in jurisprudence. We held in Feati Bank & Trust Company v. Court of Appeals1 that the concept of guarantee vis--vis the concept of an irrevocable letter of credit are inconsistent with each other. In contracts of guarantee, the guarantors obligation is merely collateral and it arises only upon the default of the person primarily liable. On the other hand, in an irrevocable letter of credit, the bank undertakes a primary obligation. We have also defined a letter of credit as an engagement by a bank or other person made at the request of a customer that the issuer shall honor drafts or other demands of payment upon compliance with the conditions specified in the credit. Letters of credit are in effect absolute
1

1ST SEMESTER AY 2013-2014

SPCL - LETTER OF CREDIT- CASE DIGEST undertakings to pay the money advanced or the amount for which credit is given on the faith of the instrument. They are primary obligations and not accessory contracts and while they are security arrangements, they are not converted thereby into contracts of guaranty. What distinguishes letters of credit from other accessory contracts, is the engagement of the issuing bank to pay the seller once the draft and other required shipping documents are

The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to herein petitioner as the prohibition is on the enforcement of claims against guarantors or sureties of the debtors whose obligations are not solidary with the debtor. The participating banks obligation are solidary with respondent Maynilad in that it is a primary, direct, definite and an absolute undertaking to pay and is not conditioned on the prior exhaustion of the debtors assets. These are the same characteristics of a surety or solidary obligor. Being solidary, the claims against them can be pursued separately from and independently of the rehabilitation case, as held in Traders Royal Bank v. Court of Appeals6 and reiterated in Philippine Blooming Mills, Inc. v. Court of Appeals,7 where we said that property of the surety cannot be taken into custody by the rehabilitation receiver (SEC) and said surety can be sued separately to enforce his liability as surety for the debts or obligations of the debtor. The debts or obligations for which a surety may be liable include future debts, an amount which may not be known at the time the surety is given. The terms of the Irrevocable Standby Letter of Credit do not show that the obligations of the banks are not solidary with those of respondent Maynilad. On the contrary, it is issued at the request of and for the account of Maynilad Water Services, Inc., in favor of the Metropolitan Waterworks and Sewerage System, as a bond for the full and prompt performance of the obligations by the concessionaire under the Concession Agreement8 and herein petitioner is authorized by the banks to draw on it by the simple act of delivering to the agent a written
6

presented to it.2 They are definite undertakings to pay at sight once the documents stipulated therein are presented. We have accepted, in Feati Bank and Trust Company v. Court of Appeals3 and Bank of America NT & SA v. Court of Appeals,4 to the extent that they are pertinent, the application in our jurisdiction of the international credit regulatory set of rules known as the Uniform Customs and Practice for Documentary Credits (U.C.P) issued by the International Chamber of Commerce, which we said in Bank of the Philippine Islands v. Nery5 was justified under Art. 2 of the Code of Commerce, which states: Acts of commerce, whether those who execute them be merchants or not, and whether specified in this Code or not should be governed by the provisions contained in it; in their absence, by the usages of commerce generally observed in each place; and in the absence of both rules, by those of the civil law.
2

DIANA ABIGAIL M. DIESTRO

SECTION 3-B

1ST SEMESTER AY 2013-2014

SPCL - LETTER OF CREDIT- CASE DIGEST certification substantially in the form Annex B of the Letter of Credit. It provides further in Sec. 6, that for as long as the Standby Letter of Credit is valid and subsisting, the Banks shall honor any written Certification made by MWSS in accordance with Sec. 2, of the Standby Letter of Credit regardless of the date on which the event giving rise to such Written Certification arose.9 The public respondent, therefore, exceeded his jurisdiction, in holding that he was competent to act on the obligation of the banks under the Letter of Credit under the argument that this was not a solidary obligation with that of the debtor. Being a solidary obligation, the letter of credit is excluded from the jurisdiction of the rehabilitation court and therefore in enjoining petitioner from proceeding against the SLOC to which it had a clear right under the law and the terms of said SLOC. Petition for certiorari is GRANTED.

DIANA ABIGAIL M. DIESTRO

SECTION 3-B

1ST SEMESTER AY 2013-2014

XII. TRANSFIELD PHILIPPINES INC. V. LUZON HYDRO CORP. FACTS: TRANSFIELD and LUZON HYDRO entered into a turn key contract. TRANSFIELD is the contractor for 79 megawatt hydro electric power and given the sole power and discretion for the construction of the project To secure the obligation of TRANSFIELD, it opened 2 SLOC from ANZ BANK and SBC in favor of LUZON HYDRO. But later on, some circumstances prevented TRANSFIELD to complete the project. TRANSFIELD requested LUZON HYDRO for extensions but it was denied. As TRANSFIELD defaulted on its obligation, LUZON HYDRO served notice to TRANSFIELD that it will go after the security banks. To prevent this, TRANFIELD filed an injunction. But the TC ruled that LUZON HYDRO was allowed to draw on the securities for liquidated damages being an independent contract. It further ruled that banks are mere custodian of the funds and as such they are obligated to transfer it to the beneficiary. TRANSFIELD appealed contending that it is premature for LUZON HYDRO to draw against SLOC because the issue is not yet resolved with regard to its default. OTOH, LUZON HYDRO averred that securities are independent from the main contract between the as shown in the face of the SLOCs. It provided that the banls have no responsibility to investigate the authenticity or accuracy of

the certificate of the declarants capacity or entitlement to so certify. ISSUES: WON LUZON HYDRO may draw against the SLOC regardless of the pending issue on the main contract. HELD: 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.

 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] 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] Given the nature of letters of credit, petitioners argumentthat it is only the issuing bank that may invoke the independence principle on letters of creditdoes 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. Petitioners 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. Next, petitioner invokes the fraud exception principle. It avers that LHCs 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 Dolans 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 principles 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 LHCs 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 defaultsuch issue having been submitted by the parties to the jurisdiction of the arbitral tribunals pursuant to the terms embodied in their agreement.[47] WHEREFORE, the instant petition is DENIED, with costs against petitioner.

XIII. BANK OF COMMERCE V SERRANO FACTS: VIA MODA as represented by SERRANO obtained an export packing loan from BANK OF COMMERCE The loan was secured by a deed of assignment over an irrevocable transferable letter of credit. Serrano then executed a promisory note in favor of BANK OF COMMERCE. VIA MODA opened an irrevocable L/C for the purchase and importation of fabric and textile porducts from tiger ear fabric. A trust receipt was executed to secure the purchase Under the trust receipt, VIA MODA agreed to hold the goods in trust in favor of SERRANO as VIA MODAs property to sell the same for the latters account. Later, VIA MODA shipped the goods covered by the trust receipt to its consignee im New Jersey, USA. The consignee then sent an Export Letter of Credit issued by BANK OF NEWYORK in favor of BANK OF COMMERCE.

 The REGL OPERATIONS OFFICER of BOC signed the export declarations to show consent to the shipments BANK OF COMMERCE demanded VIA MODA to pay them. But the latter refused. VIA MODA was charged with estafa under Art. 315 RPC in rel. to PD 115. TC found Tererisita Serrano guilty of estafa. She appealed and later acquitted BUT bound by the court to be liable with respect to the loan secured by a trust receipt. ISSUE: 1. WHETHER RESPONDENT IS JOINTLY AND SEVERALLY LIABLE WITH VIA MODA UNDER THE GUARANTEE CLAUSE OF LC NO. [BCZ-940051] (EXHIBIT A) SECURED BY TRUST RECEIPT NO. [94-22221] (EXHIBIT C). 12 2. WHETHER THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN DELETING THE CIVIL LIABILITY OF RESPONDENT SERRANO IN ITS DECISION HELD: Petitioner contends that the Court of Appeals made a manifestly mistaken inference from its findings or a misapprehension of facts and overlooked a vital piece of evidence on record, particularly, the Guarantee Clause of the Letter of Credit secured by the Trust Receipt. Petitioner further alleges that the said Guarantee Clause provides that the liability of respondent is joint and solidary; hence, she should be held liable on the obligation. A letter of credit is a separate document from a trust receipt. While the trust receipt may have been executed as a security on the letter of credit, still the two documents involve different undertakings and obligations. A letter of credit is 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.

Through a letter of credit, the bank merely substitutes its own promise to pay for the promise to pay of 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.14 By contrast, a trust receipt transaction is one where the entruster, who holds an absolute title or security interests over certain goods, documents or instruments, released the same to the entrustee, who executes a trust receipt binding himself to hold the goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents and instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster, or as appears in the trust receipt, or return the goods, documents or instruments themselves if they are unsold, or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt. 15

 However, the question of the liability of respondent based on the Guarantee Clause of the Letter of Credit, was not raised either at the trial court or before the Court of Appeals. A question that was never raised in the courts below cannot be allowed to be raised for the first time on appeal without offending basic rules of fair play, justice and due process. Such an issue was not brought to the fore either in the trial court or the appellate court, and would have been disregarded by the latter tribunal for the reasons previously stated. With more reason, the same does not deserve consideration by this Court.16
On the second issue, the Court of Appeals held that respondent Serrano cannot be held civilly liable under the trust receipt since she was not made personally liable nor was she a guarantor therein. The parties stipulated during the pre-trial that respondent Serrano executed the trust receipt in representation of Via Moda, Inc., which has a separate personality from Serrano, and petitioner BOC failed to show sufficient reason to justify the piercing of the veil of corporate fiction. It thus ruled that this was not Serranos personal obligation but that of Via Moda and there was no basis of finding her solidarily liable with Via Moda. 17 Worthy of mention at this point is the Court of Appeals finding that there was no misappropriation or conversion by the respondent of the proceeds of the sale in the goods, subject of the trust receipt since the proceeds were actually received by petitioner but the latter applied the same to Via Modas other obligations under the export packing loan. It further stated that such application of payment to another obligation was done by petitioner on its own and should not create a criminal liability on the part of respondent who did not take part nor had any knowledge thereof. It is on this premise that the respondent was acquitted of the crime charged.18 Incidentally, petitioner urged this Court to review the factual findings of the case due to contradictory findings of the trial court and the Court of Appeals arising from misappreciation of facts by the Court of Appeals. Such plea must be rejected.l^vvphi1.net It is a well established rule that in an appeal via certiorari, only questions of law may be raised,19 and we find petitioners averments insufficient to disregard this well-entrenched rule. This Court does not, of itself, automatically delve into the record of a case to determine the facts anew where there is disagreement between the findings of fact by the trial court and by the Court of Appeals. When the disagreement is merely on the probative value of the evidence, i.e., which is more credible of two versions, we limit our review to only ascertaining if the findings of the Court of Appeals are supported by the records. So long as the findings of the appellate court are consistent with and not palpably contrary to the evidence on record, we shall decline to make a review on the probative value of such evidence. The findings of fact of the Court of Appeals, and not those of the trial court, will be considered final and conclusive, even in this Court.20 In this case, we find no cogent reason to disturb the foregoing factual findings of the Court of Appeals.

At any rate, petitioner BOC is not precluded from filing a separate civil action against the responsible party where the abovementioned issues could be properly resolved or determined. The issues raised by herein petitioner involve a determination of facts and require the admission and examination of additional evidence for its resolution. That cannot be done in a petition for review on certiorari by merely appealing the civil aspect of an acquittal in a criminal case.

 WHEREFORE, the petition is DENIED for lack of merit.

XIV. LANDBANK V. MONETS EXPORT FACTS: LBP and MONET executed an Export Packing Credit Line Agreement whereby the latter is given a credit line which was secured by the proceeds of the export letters of credit, the continuing guarantee of the sps. Tagle, and third party mortgage by Mendigoria. The credit line agreement was renewed and amended several times until it was increased to 5M. Later MONET continuously refused to pay LBP despite repeated demands. The loan ballooned to 11M LBP filed to the RTC a complaint for sum of money with prayer for preliminary attachment. MONET and sps. Tagle contended that LBP failed and refused to collect the receivable son their Export L/C against Wishbone Trading Co. of Hing Kong in the sum of $33K+ WHILE it made unauthorized payments on their Import L/C to Beautilike HK in the amount of $38M+ which seriously damaged the business interest of MONET. ISSUES: WON the bank should be faulted for the lost of profits of the client. HELD: Our ruling in Bank of America, NT & SA v. Court of Appeals ,[21] is pertinent: What characterizes letters of credit, as distinguished from other accessory contracts, is the engagement of the issuing bank to pay the seller once the draft and the required shipping documents are presented to it. In turn, this arrangement assures the seller of prompt payment, independent of any breach of the main sales contract.

 By this so-called independence principle, the bank determines compliance with the letter of credit only by examining the shipping documents presented Moreover, Article 3 of the Uniform Customs and Practice (UCP) for Documentary Credits provides that credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the credit. Article 15 of the UCP states: Banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or particular conditions stipulated in the documents or superimposed thereon; nor do they assume any liability or responsibility for the description, weight, quality, condition, packing, delivery, value or existence of the goods represented by any 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. (Emphasis supplied) In Transfield Philippines, Inc. v. Luzon Hydro Corporation, et al.,[22] we held that 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. For, if the letter of credit is drawable only after the settlement of any dispute on the main contract entered into by the applicant of the said letter of credit and the beneficiary, then there would be no practical and beneficial use for letters of credit in commercial transactions. Accordingly, we find merit in the contention of Land Bank that, as the issuing bank in the Beautilike transaction involving an import letter of credit, it only deals in documents and it is not involved in the contract between the parties. The relationship between the beneficiary and the issuer of a letter of credit is not strictly contractual, because both privity and a meeting of the minds are lacking. Thus, upon receipt by Land Bank of the documents of title which conform with what the letter of credit requires, it is duty bound to pay the seller, as it did in this case. Thus, no fault or acts of mismanagement can be attributed to Land Bank relative to Monets import letter of credit. Its actions find solid footing on the legal principles and jurisprudence earlier discussed. Consequently, it was error for the trial court and for the Court of Appeals to grant opportunity losses to the respondents on this account. On the matter, however, of the Wishbone transaction where it is alleged by respondents that petitioner failed in its duty to protect its (Monets) interest in collecting the amount due to it from its customers, we find that the trial court and the Court of Appeals committed no reversible error in holding Land Bank liable for opportunity losses. The trial court summarized the transaction in this manner:

A careful review of the records reveal that the trial court correctly considered Land Bank as the attorney-in-fact of Monet with regard to its export transactions with Wishbone Trading Company. As the attorney-in-fact of Monet in transactions involving its export letters of credit, such as the Wishbone account, Land Bank should have exercised the requisite degree of diligence in collecting the amount due to the former. The records of this case are bereft of evidence showing that Land Bank exercised the prudence mandated by its contractual obligations to Monet. The failure of Land Bank to judiciously safeguard the interest of Monet is not without any repercussions vis--vis the viability of Monet as a business enterprise. As correctly observed by the Court of Appeals: In fine, because of the non-collection defendants-appellees suffered from a lack of financial resources sufficient to buy new materials. And since they also could no longer draw on their existing credit line with Landbank, they could not purchase materials to fill up the orders of their customers. Because of this the business reputation of Monets suffered which hastened its decline. [25] amount of US$ 15,000.00 payable in Philippine pesos at the official exchange rate when payment is to be made. WHEREFORE, the instant petition is GRANTED. The October 9, 2003 decision and the January 20, 2004 resolution of the Court of Appeals in CA-G.R. CV No. 57436, are MODIFIED insofar as the award of the counterclaim to the respondents is concerned. Accordingly, there being no basis to award opportunity costs to the respondents, Monets Export and Manufacturing Corporation and the spouses, Vicente V. Tagle, Sr. and Ma. Consuelo G. Tagle, relative to the Beautilike account, but finding good cause to sustain the award of opportunity costs to the respondents on account of the failure of the petitioner to diligently perform its duties as the attorney-in-fact of the respondents in the Wishbone Trading Company account, the amount of opportunity costs granted to the respondents, is REDUCED to US$15,000.00 payable in Philippine pesos at the official exchange rate when payment is to be made.

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