Prudential Bank vs IAC

PRUDENTIAL BANK vs. INTERMEDIATE APPELLATE

COURT
G.R. No. 74886 December 8, 1992, 216 scra 257
--presentment for payment
FACTS:
Philippine Rayon Mills, Inc. entered into a contract
with Nissho Co., Ltd. of Japan for the importation of
textile machineries under a five-year deferred
payment plan.
To effect payment for said
machineries, Philippine Rayon Mills opened a
commercial letter of credit with the Prudential Bank
and Trust Company in favor of Nissho. Against this
letter of credit, drafts were drawn and issued by
Nissho, which were all paid by the Prudential Bank
through its correspondent in Japan. Two of these
drafts were accepted by Philippine Rayon Mills while
the others were not. Petitioner instituted an action
for the recovery of the sum of money it paid to Nissho
as Philippine Rayon Mills was not able to pay its
obligations arising from the letter of credit.
Respondent court ruled that with regard to the ten
drafts which were not presented and accepted, no
valid demand for payment can be made. Petitioner
however claims that the drafts were sight drafts
which did not require presentment for acceptance to
Philippine Rayon.
ISSUE:
Whether presentment for acceptance of the drafts
was indispensable to make Philippine Rayon liable
thereon.

RULING:
In the case at bar, the drawee was necessarily the
herein petitioner. It was to the latter that the drafts
were presented for payment. There was in fact 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). The
said section provides that 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.
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.

Bank of America NT & SA v

Court
of
Appeals
and
Francisco et. al G.R. No.
105395 December 10, 1993
MARCH 15, 2014
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There would at least be three (3) parties: (a)
the buyer, who procures the letter of credit
and obliges himself to reimburse the issuing
bank upon receipts of the documents of title;
(b) the bank issuing the letter of credit, which
undertakes to pay the seller upon receipt of
the draft and proper document of titles and to
surrender the documents to the buyer upon
reimbursement; and, (c) the seller, who in
compliance with the contract of sale ships the
goods to the buyer and delivers the
documents of title and draft to the issuing
bank to recover payment.
Facts : Bank of America received an
Irrevocable Letter of Credit issued by Bank of

Ayudhya for the Account of General Chemicals

Ltd., Inc. for the sale of plastic ropes and
agricultural files. Under the letter of credit,
Bank of America acted as an advising bank
and Inter-Resin Industrial Corp. (IR) acted as
the beneficiary. Upon receipt of the letter
advice, Inter- Resin told Bank of America to
confirm the letter of credit.
Notwithstanding such instruction, Bank of
America failed to confirm the letter of credit.
Inter-Resin made a partial availment of the
Letter of Credit after presentment of the
required documents to Bank of America. After
confirmation of all the documents Bank of
America issued a check in favor of IR. BA
advised Bank of Ayudhya of IRs availment
under the letter of credit and asked for the
corresponding reimbursement. IR presented
documents for the second availment under
the same letter of credit. However, BA
stopped the processing of such after they
received a telex from Bank of Ayudhya
delaring that the LC fraudulent. BA sued IR for
the recovery of the first LC payment.
The IR contended that Bank of America should
have first checked the authenticity of the
letter of credit with bank of Ayudhya
Issue: Whether or not Bank of America may
recover what it has paid under the letter of
credit to Inter-Resin

Held : May Bank of America then recover what

it has paid under the letter of credit when the
corresponding draft
There would at least be three (3) parties: (a)
the buyer, who procures the letter of credit
and obliges himself to reimburse the issuing
bank upon receipts of the documents of title;
(b) the bank issuing the letter of credit, which
undertakes to pay the seller upon receipt of
the draft and proper document of titles and to
surrender the documents to the buyer upon
reimbursement; and, (c) the seller, who in
compliance with the contract of sale ships the
goods to the buyer and delivers the
documents of title and draft to the issuing
bank to recover payment.
The services of an advising (notifying) bank
may be utilized to convey to the seller the
existence of the credit; or, of a confirming
bank 16 which will lend credence to the letter
of credit issued by a lesser known issuing
bank; or, of a paying bank, which undertakes
to encash the drafts drawn by the exporter.
Further, instead of going to the place of the
issuing bank to claim payment, the buyer may
approach
another
bank,
termed
the
negotiating bank, 18 to have the draft
discounted.
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. As a negotiating bank, Bank of
America has a right to recourse against the
issuer bank and until reimbursement is
obtained, Inter-Resin, as the drawer of the
draft, continues to assume a contingent
liability thereon.
Furthermore, bringing the letter of credit to
the attention of the seller is the primordial
obligation of an advising bank. The view that
Bank of America should have first checked the
authenticity of the letter of credit with bank of
Ayudhya, by using advanced mode of business
communications, before dispatching the same
to Inter-Resin finds no real support.

Metropolitan Waterworks
and Sewerage System V.
Hon. Reynaldo B. Daway G.R.
No. 160732. June 21, 2004
MARCH 15, 2014
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The prohibition under Sec 6 (b) of Rule 4 of
the Interim Rules does not apply to the the

standby letter of credit issued by the bank as

the former prohibition is on the enforcement
of claims against guarantors or sureties of the
debtors whose obligations are not solidary
with the debtor.
The concept of guarantee vis--vis the
concept of an irrevocable letter of credit are
inconsistent with each other. The guarantee
theory destroys the independence of the
banks responsibility from the contract upon
which it was opened and the nature of both
contracts is mutually in conflict with each
other. A Standby Letter of Credit is not a
guaranty because under a Standby Letter of
Credit, the bank undertakes a primary
obligation. On the other hand, a guarantor
undertakes a collateral obligation which arises
only upon the debtors default. A Standby
Letter of Credit is a primary obligation and not
an accessory contract.
Facts: Maynilad obtained a 20-year
concession to manage, repair, refurbish, and
upgrade existing Metropolitan Waterworks and
Sewerage System (MWSS) water delivery and
sewerage services in Metro Manilas west
zone. Maynilad, under the concession
agreement undertook to pay concession fees
and itsforeign loans. To secure its obligations,
Maynilad was required under Section 9 of the
concession contract to put up a bond, bank

guarantee or other security acceptable to

MWSS. Pursuant to this requirement,
Maynilad arranged on for a three-year facility
with a number of foreign banks led by Citicorp
Intl for the issuance of an irrevocable standby
letter of credit (SLC) in the amount of $ 120
million in favor of MWSS for the full and
prompt payment of Maynilads obligations to
MWSS. Due to devaluation of the peso and
other business reversals of Maynilad, MWSS
filed a notice of early termination of the
concession contract. Upon certification of the
non performance of Maynilad obligation, the
MWSS moved to collect from Citicorp on the
standby letters of credit issued. Maynilad filed
for corporate rehabilitation. Judge Daway
stayed the payment of the letter of credit by
Citicorp pursuant to Sec 6 (b) of Rule 4 of the
Interim Rules on Corporate Rehabilitation.
Issue: Whether or not the payment of the
standby of letter of credit can be stayed by
filing of a petition for rehabilitation
Held: No. The prohibition under Sec 6 (b) of
Rule 4 of the Interim Rules does not apply to
the the standby letter of credit issued by the
bank as the former 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 under the

letter of credit 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.
And being solidary, the claims against them
can be pursued separately from and
independently of the rehabilitation case.
Issuing banks under the letters of credit are
not equivalent to guarantors. The concept of
guarantee vis--vis the concept of an
irrevocable letter of credit are inconsistent
with each other. The guarantee theory
destroys the independence of the banks
responsibility from the contract upon which it
was opened and the nature of both contracts
is mutually in conflict 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.

A Standby Letter of Credit is not a guaranty

because under a Standby Letter of Credit, the
bank undertakes a primary obligation. On the
other hand, a guarantor undertakes a
collateral obligation which arises only upon
the debtors default. A Standby Letter of
Credit is a primary obligation and not an
accessory contract.

Schuback & Sons vs.

CA
Facts:
On October 16, 1981, defendant submitted
to plaintiff the list of bus spare parts he
wanted to purchase to its counterpart in
Hamburg. Plaintiff sent an offer on the
items listed. On December 4, 1981,
defendant informed plaintiff that he
preferred genuine to replacement parts,
and requested a 15% discount. On
December 17, plaintiff submitted its formal
offer.
On
December
24,
defendant
submitted a purchase order, and submitted
the quantity on December 29. Plaintiff
immediately ordered the items from
Schuback Hamburg, which thereafter
ordered the same from NDK, a supplier in
Germany. Plaintiff sent a pro-forma invoice
to be used in applying for letter of credit.
On February 16, 1982, plaintiff reminded
defendant to open a letter of credit to avoid
delay in shipment. Defendant mentioned
the difficulty he was encountering in
procuring the same. Plaintiff continued
receiving invoices and partial deliveries
from NDK. On October 18, 1982, plaintiff

again reminded the defendant to open a

letter of credit. Defendant replied that he
did not make a valid purchase order and
that there was no definite contract between
him and the plaintiff. Plaintiff sent a
rejoinder explaining that there is a valid
Purchase Order and suggesting that
defendant either proceed with the order
and open a letter of credit or cancel the
order and pay the cancellation fee of 30%
of F.O.B. value, or plaintiff will endorse the
case to its lawyers. Demand letters sent to
defendant by plaintiff's counsel dated
March 22, 1983 and June 9, 1983 were to
no avail. Consequently, petitioner filed a
complaint for recovery of actual or
compensatory damages, unearned profits,
interest, attorney's fees and costs against
private respondent.
Issue:
Whether or not a contract of sale has been
perfected between the parties
Held:
Article 1319 of the Civil Code states:
"Consent is manifested by the meeting of
the offer and acceptance upon the thing
and the cause which are to constitute the
contract. The offer must be certain and the

acceptance
absolute.
A
qualified
acceptance constitutes a counter offer."
The facts presented to us indicate that
consent
on
both
sides
has
been
manifested. The offer by petitioner was
manifested on December 17, 1981 when
petitioner submitted its proposal containing
the item number, quantity, part number,
description, the unit price and total to
private respondent. On December 24,
1981,
private
respondent
informed
petitioner of his desire to avail of the prices
of
the
parts
at
that
time
and
simultaneously enclosed its Purchase
Order. At this stage, a meeting of the minds
between vendor and vendee has occurred,
the object of the contract: being the spare
parts and the consideration, the price
stated in petitioner's offer dated December
17, 1981 and accepted by the respondent
on December 24, 1981.

Transfield Philippines vs
Luzon Hydro Electric Corp.
GR No 146717, Nov 22, 2004
MARCH 15, 2014
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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.
Facts: Transfield Philippines (Transfield)
entered into a turn-key contract with Luzon
Hydro Corp. (LHC).Under the contract,
Transfield were to construct a hydro-electric
plants in Benguet and Ilocos. Transfield was
given the sole responsibility for the design,
construction, commissioning, testing and
completion of the Project. The contract
provides for a period for which the project is to
be completed and also allows for the
extension of the period provided that the
extension is based on justifiable grounds such
as fortuitous event. In order to guarantee
performance by Transfield, two stand-by
letters of credit were required to be opened.
During the construction of the plant, Transfield
requested for extension of time citing typhoon
and various disputes delaying the
construction. LHC did not give due course to
the extension of the period prayed for but
referred the matter to arbitration committee.
Because of the delay in the construction of the
plant, LHC called on the stand-by letters of
credit because of default. However, the
demand was objected by Transfield on the
ground that there is still pending arbitration
on their request for extension of time.
Issue: Whether or not LHC can collect from the

letters of credit despite the pending

arbitration case
Held: Transfields argument that any dispute
must first be resolved by the parties, whether
through negotiations or arbitration, before the
beneficiary is entitled to call on the letter of
credit in essence would convert the letter of
credit into a mere guarantee.
The independent nature of the letter of credit
may be: (a) independence in toto where the
credit is independent from the justification
aspect and is a separate obligation from the
underlying agreement like for instance a
typical standby; or (b) independence may be
only as to the justification aspect like in a
commercial letter of credit or repayment
standby, which is identical with the same
obligations under the underlying agreement.
In both cases the payment may be enjoined if
in the light of the purpose of the credit the
payment of the credit would constitute
fraudulent abuse of the credit.
Jurisprudence has laid down a clear distinction
between a letter of credit and a guarantee in
that the settlement of a dispute between the
parties is not a pre-requisite for the release of
funds under a letter of credit. In other words,
the argument is incompatible with the very
nature of the letter of credit. If a letter of
credit is drawable only after settlement of the

dispute on the contract entered into by the

applicant and the beneficiary, there would be
no practical and beneficial use for letters of
credit in commercial transactions.
The engagement of the issuing bank is to pay
the seller or beneficiary of the credit once the
draft and the required documents are
presented to it. The so-called independence
principle assures the seller or the beneficiary
of prompt payment independent of any breach
of the main contract and precludes the issuing
bank from determining whether the main
contract is actually accomplished or not.
Under this principle, banks assume no liability
or responsibility for the form, sufficiency,
accuracy, genuineness, falsification or legal
effect of any documents, or for the general
and/or particular conditions stipulated in the
documents or superimposed thereon, nor do
they assume any liability or responsibility for
the description, quantity, weight, quality,
condition,
packing,
delivery,
value
or
existence of the goods represented by any
documents, or for the good faith or acts
and/or omissions, solvency, performance or
standing of the consignor, the carriers, or the
insurers of the goods, or any other person
whomsoever.

Feati Bank and Trust

Company v Court of Appeals
G.R. No. 94209 April
30, 1991
MARCH 15, 2014
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.entry-meta
.entry-header
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.
Facts: Bernardo Villaluz entered into a
contract of sale with Axel Christiansen in
which Villaluz agreed to deliver to Christiansen
2,000 cubic meters of lauan logs at $27.00 per
cubic meter FOB. On the arrangements made
and upon the instructions of consignee, Hanmi
Trade Development, Ltd., the Security Pacific
National Bank of Los Angeles, California issued
an irrevocable letter of credit available at sight
in favor of Villaluz for the sum of $54,000.00,
the total purchase price of the lauan logs.

The letter of credit was mailed to the Feati

Bank and Trust Company with the instruction
to the latter that it forward the enclosed
letter of credit to the beneficiary. The letter of
credit also provided that the draft to be drawn
is on Security Pacific National Bank and that it
be accompanied by certain documents. The
logs were thereafter loaded on a vessel but
Christiansen refused to issue the certification
required in paragraph 4 of the letter of credit,
despite repeated requests by the private
respondent. The logs however were still
shipped and received by consignee, to whom
Christiansen sold the logs. Because of the
absence of the certification by Christiansen,
the Feati Bank and Trust company refused to
advance the payment on the letter of credit
until such credit lapsed. Since the demands by
Villaluz for Christiansen to execute the
certification proved futile, he filed an action
for mandamus and specific performance
against Christiansen and Feati Bank and Trust
Company before the Court of First Instance of
Rizal. Christiansen however left the Philippines
and Villaluz filed an amended complaint
making Feati Bank and Trust Company.
Issue: Whether or not Feati Bank is liable for
Releasing the funds to Christiansen
Held: In commercial transactions involving
letters of credit, the functions assumed by a

correspondent bank are classified according to

the obligations taken up by it. The
correspondent bank may be called a notifying
bank, a negotiating bank, or a confirming
bank.
In case of a notifying bank, the correspondent
bank assumes no liability except to notify
and/or transmit to the beneficiary the
existence of the letter of credit.
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. (Records, Vol. I, p.
11) Considering the aforesaid instruction to
the petitioner by the issuing bank, the
Security Pacific National Bank, it is indubitable
that the petitioner is only a notifying bank and
not a confirming bank as ruled by the courts

below.
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.
Since the Feati 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.
At the most, when the petitioner extended the
loan to the private respondent, it assumed the
character of a negotiating bank. Even then,
the petitioner will still not be liable, for a
negotiating bank before negotiation has no
contractual relationship with the seller.
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 Feati, the refusal by the
petitioner to accept the tender of the private
respondent is justified.