TRANSFIELD PHILIPPINES, INC., petitioner, vs.

LUZON HYDRO CORPORATION, AUSTRALIA and

NEW
ZEALAND
BANKING
GROUP
LIMITED
and
SECURITY
BANK
CORPORATION, respondents.
DECISION
TINGA, J.:

Subject of this case is the letter of credit which has evolved as the ubiquitous and most important device
in international trade. A creation of commerce and businessmen, the letter of credit is also unique in the
number of parties involved and its supranational character.
Petitioner has appealed from the Decision[1] of the Court of Appeals in CA-G.R. SP No. 61901
entitled Transfield Philippines, Inc. v. Hon. Oscar Pimentel, et al., promulgated on 31 January 2001.[2]
On 26 March 1997, petitioner and respondent Luzon Hydro Corporation (hereinafter, LHC) entered into a
Turnkey Contract[3] whereby petitioner, as Turnkey Contractor, undertook to construct, on a turnkey basis, a
seventy (70)-Megawatt hydro-electric power station at the Bakun River in the provinces of Benguet and
Ilocos Sur (hereinafter, the Project). Petitioner was given the sole responsibility for the design, construction,
commissioning, testing and completion of the Project.[4]
The Turnkey Contract provides that: (1) the target completion date of the Project shall be on 1 June
2000, or such later date as may be agreed upon between petitioner and respondent LHC or otherwise
determined in accordance with the Turnkey Contract; and (2) petitioner is entitled to claim extensions of time
(EOT) for reasons enumerated in the Turnkey Contract, among which are variations, force majeure, and
delays caused by LHC itself.[5] Further, in case of dispute, the parties are bound to settle their differences
through mediation, conciliation and such other means enumerated under Clause 20.3 of the Turnkey
Contract.[6]
To secure performance of petitioners obligation on or before the target completion date, or such time for
completion as may be determined by the parties agreement, petitioner opened in favor of LHC two (2)
standby letters of credit both dated 20 March 2000 (hereinafter referred to as the Securities), to wit: Standby

Letter of Credit No. E001126/8400 with the local branch of respondent Australia and New Zealand Banking
Group Limited (ANZ Bank)[7] and Standby Letter of Credit No. IBDIDSB-00/4 with respondent Security Bank
Corporation (SBC)[8] each in the amount of US$8,988,907.00.[9]
In the course of the construction of the project, petitioner sought various EOT to complete the Project.
The extensions were requested allegedly due to several factors which prevented the completion of the
Project on target date, such as force majeure occasioned by typhoon Zeb, barricades and demonstrations.
LHC denied the requests, however. This gave rise to a series of legal actions between the parties which
culminated in the instant petition.
The first of the actions was a Request for Arbitration which LHC filed before the Construction Industry
Arbitration Commission (CIAC) on 1 June 1999. [10] This was followed by another Request for Arbitration, this
time filed by petitioner before the International Chamber of Commerce (ICC) [11] on 3 November 2000. In both
arbitration proceedings, the common issues presented were: [1) whether typhoon Zeb and any of its
associated events constituted force majeure to justify the extension of time sought by petitioner; and [2)
whether LHC had the right to terminate the Turnkey Contract for failure of petitioner to complete the Project
on target date.
Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent provisions of the
Turnkey Contract,[12] petitionerin two separate letters[13] both dated 10 August 2000advised respondent banks
of the arbitration proceedings already pending before the CIAC and ICC in connection with its alleged
default in the performance of its obligations. Asserting that LHC had no right to call on the Securities until the
resolution of disputes before the arbitral tribunals, petitioner warned respondent banks that any transfer,
release, or disposition of the Securities in favor of LHC or any person claiming under LHC would constrain it
to hold respondent banks liable for liquidated damages.
As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner that pursuant to Clause
8.2 of the Turnkey Contract, it failed to comply with its obligation to complete the Project. Despite the
letters of petitioner, however, both banks informed petitioner that they would pay on the Securities if and
when LHC calls on them.[15]
[14]

LHC asserted that additional extension of time would not be warranted; accordingly it declared petitioner
in default/delay in the performance of its obligations under the Turnkey Contract and demanded from
petitioner the payment of US$75,000.00 for each day of delay beginning 28 June 2000 until actual
completion of the Project pursuant to Clause 8.7.1 of the Turnkey Contract. At the same time, LHC served
notice that it would call on the securities for the payment of liquidated damages for the delay.[16]
On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction, with prayer for temporary
restraining order and writ of preliminary injunction, against herein respondents as defendants before the
Regional Trial Court (RTC) of Makati.[17] Petitioner sought to restrain respondent LHC from calling on the
Securities and respondent banks from transferring, paying on, or in any manner disposing of the Securities
or any renewals or substitutes thereof. The RTC issued a seventy-two (72)-hour temporary restraining order
on the same day. The case was docketed as Civil Case No. 00-1312 and raffled to Branch 148 of the RTC of
Makati.
After appropriate proceedings, the trial court issued an Order on 9 November 2000, extending the
temporary restraining order for a period of seventeen (17) days or until 26 November 2000.[18]
The RTC, in its Order[19] dated 24 November 2000, denied petitioners application for a writ of preliminary
injunction. It ruled that petitioner had no legal right and suffered no irreparable injury to justify the issuance
of the writ. Employing the principle of independent contract in letters of credit, the trial court ruled that LHC
should be allowed to draw on the Securities for liquidated damages. It debunked petitioners contention that
the principle of independent contract could be invoked only by respondent banks since according to it
respondent LHC is the ultimate beneficiary of the Securities. The trial court further ruled that the banks were
mere custodians of the funds and as such they were obligated to transfer the same to the beneficiary for as
long as the latter could submit the required certification of its claims.
Dissatisfied with the trial courts denial of its application for a writ of preliminary injunction, petitioner
elevated the case to the Court of Appeals via a Petition for Certiorari under Rule 65, with prayer for the
issuance of a temporary restraining order and writ of preliminary injunction. [20] Petitioner submitted to the
appellate court that LHCs call on the Securities was premature considering that the issue of its default had
not yet been resolved with finality by the CIAC and/or the ICC. It asserted that until the fact of delay could be
established, LHC had no right to draw on the Securities for liquidated damages.

Refuting petitioners contentions, LHC claimed that petitioner had no right to restrain its call on and use of
the Securities as payment for liquidated damages. It averred that the Securities are independent of the main
contract between them as shown on the face of the two Standby Letters of Credit which both provide that
the banks have no responsibility to investigate the authenticity or accuracy of the certificates or the
declarants capacity or entitlement to so certify.
In its Resolution dated 28 November 2000, the Court of Appeals issued a temporary restraining order,
enjoining LHC from calling on the Securities or any renewals or substitutes thereof and ordering respondent
banks to cease and desist from transferring, paying or in any manner disposing of the Securities.
However, the appellate court failed to act on the application for preliminary injunction until the temporary
restraining order expired on 27 January 2001. Immediately thereafter, representatives of LHC trooped to
ANZ Bank and withdrew the total amount of US$4,950,000.00, thereby reducing the balance in ANZ Bank to
US$1,852,814.00.
On 2 February 2001, the appellate court dismissed the petition for certiorari. The appellate court
expressed conformity with the trial courts decision that LHC could call on the Securities pursuant to the first
principle in credit law that the credit itself is independent of the underlying transaction and that as long as the
beneficiary complied with the credit, it was of no moment that he had not complied with the underlying
contract. Further, the appellate court held that even assuming that the trial courts denial of petitioners
application for a writ of preliminary injunction was erroneous, it constituted only an error of judgment which is
not correctible by certiorari, unlike error of jurisdiction.
Undaunted, petitioner filed the instant Petition for Review raising the following issues for resolution:
WHETHER THE INDEPENDENCE PRINCIPLE ON LETTERS OF CREDIT MAY BE INVOKED BY A
BENEFICIARY THEREOF WHERE THE BENEFICIARYS CALL THEREON IS WRONGFUL OR
FRAUDULENT.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES BEFORE THE RESOLUTION
OF PETITIONERS AND LHCS DISPUTES BY THE APPROPRIATE TRIBUNAL.

WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN RELEASING THE AMOUNTS DUE
UNDER THE SECURITIES DESPITE BEING NOTIFIED THAT LHCS CALL THEREON IS WRONGFUL.
WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND IRREPARABLE DAMAGE IN THE EVENT
THAT:
A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND SECURITY BANK ARE ALLOWED TO
RELEASE, THE REMAINING BALANCE OF THE SECURITIES PRIOR TO THE RESOLUTION OF THE
DISPUTES BETWEEN PETITIONER AND LHC.
B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY DRAWN FROM THE SECURITIES.[21]

Petitioner contends that the courts below improperly relied on the independence principle on letters of
credit when this case falls squarely within the fraud exception rule. Respondent LHC deliberately
misrepresented the supposed existence of delay despite its knowledge that the issue was still pending
arbitration, petitioner continues.
Petitioner asserts that LHC should be ordered to return the proceeds of the Securities pursuant to the
principle against unjust enrichment and that, under the premises, injunction was the appropriate remedy
obtainable from the competent local courts.
On 25 August 2003, petitioner filed a Supplement to the Petition[22] and Supplemental Memorandum,
[23]
alleging that in the course of the proceedings in the ICC Arbitration, a number of documentary and
testimonial evidence came out through the use of different modes of discovery available in the ICC
Arbitration. It contends that after the filing of the petition facts and admissions were discovered which
demonstrate that LHC knowingly misrepresented that petitioner had incurred delays notwithstanding its
knowledge and admission that delays were excused under the Turnkey Contractto be able to draw against
the Securities. Reiterating that fraud constitutes an exception to the independence principle, petitioner urges
that this warrants a ruling from this Court that the call on the Securities was wrongful, as well as contrary to
law and basic principles of equity. It avers that it would suffer grave irreparable damage if LHC would be
allowed to use the proceeds of the Securities and not ordered to return the amounts it had wrongfully drawn
thereon.

In its Manifestation dated 8 September 2003,[24] LHC contends that the supplemental pleadings filed by
petitioner present erroneous and misleading information which would change petitioners theory on appeal.
In yet another Manifestation dated 12 April 2004,[25] petitioner alleges that on 18 February 2004, the ICC
handed down its Third Partial Award, declaring that LHC wrongfully drew upon the Securities and that
petitioner was entitled to the return of the sums wrongfully taken by LHC for liquidated damages.
LHC filed a Counter-Manifestation dated 29 June 2004,[26] stating that petitioners Manifestation dated 12
April 2004 enlarges the scope of its Petition for Review of the 31 January 2001 Decision of the Court of
Appeals. LHC notes that the Petition for Review essentially dealt only with the issue of whether injunction
could issue to restrain the beneficiary of an irrevocable letter of credit from drawing thereon. It adds that
petitioner has filed two other proceedings, to wit: (1) ICC Case No. 11264/TE/MW, entitled Transfield
Philippines Inc. v. Luzon Hydro Corporation, in which the parties made claims and counterclaims arising
from petitioners performance/misperformance of its obligations as contractor for LHC; and (2) Civil Case No.
04-332, entitled Transfield Philippines, Inc. v. Luzon Hydro Corporation before Branch 56 of the RTC of
Makati, which is an action to enforce and obtain execution of the ICCs partial award mentioned in
petitioners Manifestation of 12 April 2004.
In its Comment to petitioners Motion for Leave to File Addendum to Petitioners Memorandum, LHC
stresses that the question of whether the funds it drew on the subject letters of credit should be returned is
outside the issue in this appeal. At any rate, LHC adds that the action to enforce the ICCs partial award is
now fully within the Makati RTCs jurisdiction in Civil Case No. 04-332. LHC asserts that petitioner is
engaged in forum-shopping by keeping this appeal and at the same time seeking the suit for enforcement of
the arbitral award before the Makati court.
Respondent SBC in its Memorandum, dated 10 March 2003[27] contends that the Court of Appeals
correctly dismissed the petition for certiorari. Invoking the independence principle, SBC argues that it was
under no obligation to look into the validity or accuracy of the certification submitted by respondent LHC or
into the latters capacity or entitlement to so certify. It adds that the act sought to be enjoined by petitioner
was already fait accompli and the present petition would no longer serve any remedial purpose.

In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 2003[28] posits that its
actions could not be regarded as unjustified in view of the prevailing independence principle under which it
had no obligation to ascertain the truth of LHCs allegations that petitioner defaulted in its obligations.
Moreover, it points out that since the Standby Letter of Credit No. E001126/8400 had been fully drawn,
petitioners prayer for preliminary injunction had been rendered moot and academic.
At the core of the present controversy is the applicability of the independence principle and fraud
exception rule in letters of credit. Thus, a discussion of the nature and use of letters of credit, also referred to
simply as credits, would provide a better perspective of the case.
The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is to
recognize that it is an entity unto itself. The relationship between the beneficiary and the issuer of a letter of
credit is not strictly contractual, because both privity and a meeting of the minds are lacking, yet strict
compliance with its terms is an enforceable right. Nor is it a third-party beneficiary contract, because the
issuer must honor drafts drawn against a letter regardless of problems subsequently arising in the
underlying contract. Since the banks customer cannot draw on the letter, it does not function as an
assignment by the customer to the beneficiary. Nor, if properly used, is it a contract of suretyship or
guarantee, because it entails a primary liability following a default. Finally, it is not in itself a negotiable
instrument, because it is not payable to order or bearer and is generally conditional, yet the draft presented
under it is often negotiable.[29]
In commercial transactions, a letter of credit is a financial device developed by merchants as a
convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable
interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have
control of the goods before paying. [30] The use of credits in commercial transactions serves to reduce the risk
of nonpayment of the purchase price under the contract for the sale of goods. However, credits are also
used in non-sale settings where they serve to reduce the risk of nonperformance. Generally, credits in the
non-sale settings have come to be known as standby credits.[31]
There are three significant differences between commercial and standby credits. First, commercial
credits involve the payment of money under a contract of sale. Such credits become payable upon the
presentation by the seller-beneficiary of documents that show he has taken affirmative steps to comply with

the sales agreement. In the standby type, the credit is payable upon certification of a party's
nonperformance of the agreement. The documents that accompany the beneficiary's draft tend to show that
the applicant has not performed. The beneficiary of a commercial credit must demonstrate by documents
that he has performed his contract. The beneficiary of the standby credit must certify that his obligor has not
performed the contract.[32]
By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the
addressee to pay money or deliver goods to a third person and assumes responsibility for payment of debt
therefor to the addressee.[33] A letter of credit, however, changes its nature as different transactions occur
and if carried through to completion ends up as a binding contract between the issuing and honoring banks
without any regard or relation to the underlying contract or disputes between the parties thereto.[34]
Since letters of credit have gained general acceptability in international trade transactions, the ICC has
published from time to time updates on the Uniform Customs and Practice (UCP) for Documentary Credits
to standardize practices in the letter of credit area. The vast majority of letters of credit incorporate the UCP.
[35]
First published in 1933, the UCP for Documentary Credits has undergone several revisions, the latest of
which was in 1993.[36]
In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,[37] this Court ruled that the
observance of the UCP is justified by Article 2 of the Code of Commerce which provides that in the absence
of any particular provision in the Code of Commerce, commercial transactions shall be governed by usages
and customs generally observed. More recently, in Bank of America, NT & SA v. Court of Appeals,[38] this
Court ruled that there being no specific provisions which govern the legal complexities arising from
transactions involving letters of credit, not only between or among banks themselves but also between
banks and the seller or the buyer, as the case may be, the applicability of the UCP is undeniable.
Article 3 of the UCP provides that credits, by their nature, are separate transactions from the sales or
other contract(s) on which they may be based and banks are in no way concerned with or bound by such
contract(s), even if any reference whatsoever to such contract(s) is included in the credit. Consequently, the
undertaking of a bank to pay, accept and pay draft(s) or negotiate and/or fulfill any other obligation under the
credit is not subject to claims or defenses by the applicant resulting from his relationships with the issuing

bank or the beneficiary. A beneficiary can in no case avail himself of the contractual relationships existing
between the banks or between the applicant and the issuing bank.
Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft
and the required documents are presented to it. The so-called independence principle assures the seller or
the beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing
bank from determining whether the main contract is actually accomplished or not. Under this principle, banks
assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal
effect of any documents, or for the general and/or particular conditions stipulated in the documents or
superimposed thereon, nor do they assume any liability or responsibility for the description, quantity, weight,
quality, condition, packing, delivery, value or existence of the goods represented by any documents, or for
the good faith or acts and/or omissions, solvency, performance or standing of the consignor, the carriers, or
the insurers of the goods, or any other person whomsoever.[39]
The independent nature of the letter of credit may be: (a) independence in toto where the credit is
independent from the justification aspect and is a separate obligation from the underlying agreement like for
instance a typical standby; or (b) independence may be only as to the justification aspect like in a
commercial letter of credit or repayment standby, which is identical with the same obligations under the
underlying agreement. In both cases the payment may be enjoined if in the light of the purpose of the credit
the payment of the credit would constitute fraudulent abuse of the credit.[40]
Can the beneficiary invoke the independence principle?
Petitioner insists that the independence principle does not apply to the instant case and assuming it is
so, it is a defense available only to respondent banks. LHC, on the other hand, contends that it would be
contrary to common sense to deny the benefit of an independent contract to the very party for whom the
benefit is intended. As beneficiary of the letter of credit, LHC asserts it is entitled to invoke the principle.
As discussed above, in a letter of credit transaction, such as in this case, where the credit is stipulated
as irrevocable, there is a definite undertaking by the issuing bank to pay the beneficiary provided that the
stipulated documents are presented and the conditions of the credit are complied with. [41] Precisely, the
independence principle liberates the issuing bank from the duty of ascertaining compliance by the parties in

the main contract. As the principles nomenclature clearly suggests, the obligation under the letter of credit is
independent of the related and originating contract. In brief, the letter of credit is separate and distinct from
the underlying transaction.
Given the nature of letters of credit, 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.
Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the issue:
The standby credit is an attractive commercial device for many of the same reasons that commercial credits are
attractive. Essentially, these credits are inexpensive and efficient. Often they replace surety contracts, which tend to

generate higher costs than credits do and are usually triggered by a factual determination rather than by the examination
of documents.
Because parties and courts should not confuse the different functions of the surety contract on the one hand and the
standby credit on the other, the distinction between surety contracts and credits merits some reflection. The two
commercial devices share a common purpose. Both ensure against the obligors nonperformance. They function,
however, in distinctly different ways.
Traditionally, upon the obligors default, the surety undertakes to complete the obligors performance, usually by hiring
someone to complete that performance. Surety contracts, then, often involve costs of determining whether the obligor
defaulted (a matter over which the surety and the beneficiary often litigate) plus the cost of performance. The benefit of
the surety contract to the beneficiary is obvious. He knows that the surety, often an insurance company, is a strong
financial institution that will perform if the obligor does not. The beneficiary also should understand that such
performance must await the sometimes lengthy and costly determination that the obligor has defaulted. In addition, the
suretys performance takes time.
The standby credit has different expectations. He reasonably expects that he will receive cash in the event of
nonperformance, that he will receive it promptly, and that he will receive it before any litigation with the obligor (the
applicant) over the nature of the applicants performance takes place. The standby credit has this opposite effect of the
surety contract: it reverses the financial burden of parties during litigation.
In the surety contract setting, there is no duty to indemnify the beneficiary until the beneficiary establishes the fact of
the obligors performance. The beneficiary may have to establish that fact in litigation. During the litigation, the surety
holds the money and the beneficiary bears most of the cost of delay in performance.
In the standby credit case, however, the beneficiary avoids that litigation burden and receives his money promptly upon
presentation of the required documents. It may be that the applicant has, in fact, performed and that the beneficiarys
presentation of those documents is not rightful. In that case, the applicant may sue the beneficiary in tort, in contract, or
in breach of warranty; but, during the litigation to determine whether the applicant has in fact breached the obligation to
perform, the beneficiary, not the applicant, holds the money. Parties that use a standby credit and courts construing such

a credit should understand this allocation of burdens. There is a tendency in some quarters to overlook this distinction
between surety contracts and standby credits and to reallocate burdens by permitting the obligor or the issuer to litigate
the performance question before payment to the beneficiary.[42]
While it is the bank which is bound to honor the credit, it is the beneficiary who has the right to ask the
bank to honor the credit by allowing him to draw thereon. The situation itself emasculates petitioners posture
that LHC cannot invoke the independence principle and highlights its puerility, more so in this case where
the banks concerned were impleaded as parties by petitioner itself.
Respondent banks had squarely raised the independence principle to justify their releases of the
amounts due under the Securities. Owing to the nature and purpose of the standby letters of credit, this
Court rules that the respondent banks were left with little or no alternative but to honor the credit and both of
them in fact submitted that it was ministerial for them to honor the call for payment. [43]
Furthermore, LHC has a right rooted in the Contract to call on the Securities. The relevant provisions of
the Contract read, thus:
4.2.1. In order to secure the performance of its obligations under this Contract, the Contractor at its cost shall on the
Commencement Date provide security to the Employer in the form of two irrevocable and confirmed standby letters of
credit (the Securities), each in the amount of US$8,988,907, issued and confirmed by banks or financial institutions
acceptable to the Employer. Each of the Securities must be in form and substance acceptable to the Employer and may
be provided on an annually renewable basis. [44]
8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the Employer by way of liquidated
damages (Liquidated Damages for Delay) the amount of US$75,000 for each and every day or part of a day that shall
elapse between the Target Completion Date and the Completion Date, provided that Liquidated Damages for Delay
payable by the Contractor shall in the aggregate not exceed 20% of the Contract Price. The Contractor shall pay
Liquidated Damages for Delay for each day of the delay on the following day without need of demand from the
Employer.

8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such damages from
any monies due, or to become due to the Contractor and/or by drawing on the Security.[45]
A contract once perfected, binds the parties not only to the fulfillment of what has been expressly
stipulated but also to all the consequences which according to their nature, may be in keeping with good
faith, usage, and law.[46] A careful perusal of the Turnkey Contract reveals the intention of the parties to make
the Securities answerable for the liquidated damages occasioned by any delay on the part of petitioner. The
call upon the Securities, while not an exclusive remedy on the part of LHC, is certainly an alternative
recourse available to it upon the happening of the contingency for which the Securities have been proffered.
Thus, even without the use of the independence principle, the Turnkey Contract itself bestows upon LHC the
right to call on the Securities in the event of default.
Next, petitioner invokes the fraud exception principle. It avers that 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]

Would injunction then be the proper remedy to restrain the alleged wrongful draws on the Securities?
Most writers agree that fraud is an exception to the independence principle. Professor Dolan opines that
the untruthfulness of a certificate accompanying a demand for payment under a standby credit may qualify
as fraud sufficient to support an injunction against payment.[48] The remedy for fraudulent abuse is an
injunction. However, injunction should not be granted unless: (a) there is clear proof of fraud; (b) the fraud
constitutes fraudulent abuse of the independent purpose of the letter of credit and not only fraud under the
main agreement; and (c) irreparable injury might follow if injunction is not granted or the recovery of
damages would be seriously damaged.[49]
In its complaint for injunction before the trial court, petitioner alleged that it is entitled to a total extension
of two hundred fifty-three (253) days which would move the target completion date. It argued that if its claims
for extension would be found meritorious by the ICC, then LHC would not be entitled to any liquidated
damages.[50]
Generally, injunction is a preservative remedy for the protection of ones substantive right or interest; it is
not a cause of action in itself but merely a provisional remedy, an adjunct to a main suit. The issuance of the
writ of preliminary injunction as an ancillary or preventive remedy to secure the rights of a party in a pending
case is entirely within the discretion of the court taking cognizance of the case, the only limitation being that
this discretion should be exercised based upon the grounds and in the manner provided by law.[51]
Before a writ of preliminary injunction may be issued, there must be a clear showing by the complaint
that there exists a right to be protected and that the acts against which the writ is to be directed are violative
of the said right.[52] It must be shown that the invasion of the right sought to be protected is material and
substantial, that the right of complainant is clear and unmistakable and that there is an urgent and
paramount necessity for the writ to prevent serious damage.[53] Moreover, an injunctive remedy may only be
resorted to when there is a pressing necessity to avoid injurious consequences which cannot be remedied
under any standard compensation.[54]
In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain LHCs
call on the Securities which would justify the issuance of preliminary injunction. By petitioners own
admission, the right of LHC to call on the Securities was contractually rooted and subject to the express

stipulations in the Turnkey Contract.[55] Indeed, the Turnkey Contract is plain and unequivocal in that it
conferred upon LHC the right to draw upon the Securities in case of default, as provided in Clause 4.2.5, in
relation to Clause 8.7.2, thus:
4.2.5 The Employer shall give the Contractor seven days notice of calling upon any of the Securities, stating the nature
of the default for which the claim on any of the Securities is to be made, provided that no notice will be required if the
Employer calls upon any of the Securities for the payment of Liquidated Damages for Delay or for failure by the
Contractor to renew or extend the Securities within 14 days of their expiration in accordance with Clause 4.2.2. [56]
8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such damages from
any monies due, or to become due, to the Contractor and/or by drawing on the Security. [57]
The pendency of the arbitration proceedings would not per se make LHCs draws on the Securities
wrongful or fraudulent for there was nothing in the Contract which would indicate that the parties intended
that all disputes regarding delay should first be settled through arbitration before LHC would be allowed to
call upon the Securities. It is therefore premature and absurd to conclude that the draws on the Securities
were outright fraudulent given the fact that the ICC and CIAC have not ruled with finality on the existence of
default.
Nowhere in its complaint before the trial court or in its pleadings filed before the appellate court, did
petitioner invoke the fraud exception rule as a ground to justify the issuance of an injunction. [58] What
petitioner did assert before the courts below was the fact that LHCs draws on the Securities would be
premature and without basis in view of the pending disputes between them. Petitioner should not be allowed
in this instance to bring into play the fraud exception rule to sustain its claim for the issuance of an injunctive
relief. Matters, theories or arguments not brought out in the proceedings below will ordinarily not be
considered by a reviewing court as they cannot be raised for the first time on appeal. [59] The lower courts
could thus not be faulted for not applying the fraud exception rule not only because the existence of fraud
was fundamentally interwoven with the issue of default still pending before the arbitral tribunals, but more so,
because petitioner never raised it as an issue in its pleadings filed in the courts below. At any rate, petitioner
utterly failed to show that it had a clear and unmistakable right to prevent LHCs call upon the Securities.

Of course, prudence should have impelled LHC to await resolution of the pending issues before the
arbitral tribunals prior to taking action to enforce the Securities. But, as earlier stated, the Turnkey Contract
did not require LHC to do so and, therefore, it was merely enforcing its rights in accordance with the tenor
thereof. Obligations arising from contracts have the force of law between the contracting parties and should
be complied with in good faith.[60] More importantly, pursuant to the principle of autonomy of contracts
embodied in Article 1306 of the Civil Code, [61] petitioner could have incorporated in its Contract with LHC, a
proviso that only the final determination by the arbitral tribunals that default had occurred would justify the
enforcement of the Securities. However, the fact is petitioner did not do so; hence, it would have to live with
its inaction.
With respect to the issue of whether the respondent banks were justified in releasing the amounts due
under the Securities, this Court reiterates that pursuant to the independence principle the banks were under
no obligation to determine the veracity of LHCs certification that default has occurred. Neither were they
bound by petitioners declaration that LHCs call thereon was wrongful. To repeat, respondent banks
undertaking was simply to pay once the required documents are presented by the beneficiary.
At any rate, should petitioner finally prove in the pending arbitration proceedings that LHCs draws upon
the Securities were wrongful due to the non-existence of the fact of default, its right to seek indemnification
for damages it suffered would not normally be foreclosed pursuant to general principles of law.
Moreover, in a Manifestation,[62] dated 30 March 2001, LHC informed this Court that the subject letters of
credit had been fully drawn. This fact alone would have been sufficient reason to dismiss the instant petition.
Settled is the rule that injunction would not lie where the acts sought to be enjoined have already
become fait accompli or an accomplished or consummated act. [63] In Ticzon v. Video Post Manila, Inc. [64] this
Court ruled that where the period within which the former employees were prohibited from engaging in or
working for an enterprise that competed with their former employerthe very purpose of the preliminary
injunction has expired, any declaration upholding the propriety of the writ would be entirely useless as there
would be no actual case or controversy between the parties insofar as the preliminary injunction is
concerned.

In the instant case, the consummation of the act sought to be restrained had rendered the instant petition
mootfor any declaration by this Court as to propriety or impropriety of the non-issuance of injunctive relief
could have no practical effect on the existing controversy.[65] The other issues raised by petitioner particularly
with respect to its right to recover the amounts wrongfully drawn on the Securities, according to it, could
properly be threshed out in a separate proceeding.
One final point. LHC has charged petitioner of forum-shopping. It raised the charge on two occasions.
First, in its Counter-Manifestation dated 29 June 2004[66] LHC alleges that petitioner presented before this
Court the same claim for money which it has filed in two other proceedings, to wit: ICC Case No.
11264/TE/MW and Civil Case No. 04-332 before the RTC of Makati. LHC argues that petitioners acts
constitutes forum-shopping which should be punished by the dismissal of the claim in both forums. Second,
in its Comment to Petitioners Motion for Leave to File Addendum to Petitioners Memorandum dated 8
October 2004, LHC alleges that by maintaining the present appeal and at the same time pursuing Civil Case
No. 04-332wherein petitioner pressed for judgment on the issue of whether the funds LHC drew on the
Securities should be returnedpetitioner resorted to forum-shopping. In both instances, however, petitioner
has apparently opted not to respond to the charge.
Forum-shopping is a very serious charge. It exists when a party repetitively avails of several judicial
remedies in different courts, simultaneously or successively, all substantially founded on the same
transactions and the same essential facts and circumstances, and all raising substantially the same issues
either pending in, or already resolved adversely, by some other court. [67] It may also consist in the act of a
party against whom an adverse judgment has been rendered in one forum, of seeking another and possibly
favorable opinion in another forum other than by appeal or special civil action of certiorari, or the institution
of two or more actions or proceedings grounded on the same cause on the supposition that one or the other
court might look with favor upon the other party.[68] To determine whether a party violated the rule against
forum-shopping, the test applied is whether the elements of litis pendentia are present or whether a final
judgment in one case will amount to res judicata in another.[69] Forum-shopping constitutes improper conduct
and may be punished with summary dismissal of the multiple petitions and direct contempt of court. [70]

Considering the seriousness of the charge of forum-shopping and the severity of the sanctions for its
violation, the Court will refrain from making any definitive ruling on this issue until after petitioner has been
given ample opportunity to respond to the charge.
WHEREFORE, the instant petition is DENIED, with costs against petitioner.
Petitioner is hereby required to answer the charge of forum-shopping within fifteen (15) days from notice.
SO ORDERED.