Transfield Philippines vs Luzon Hydro Electric Corp.

(GR No 146717, Nov 22, 2004, Tinga)

Transfield entered into a turn-key contract with Luzon Hydro Corp. (LHC).Under the contract,
Transfield were to construct a hydro-electric plants inBenguet and Ilocos. The contract provides for
a period for which the projectis to be completed and also allows for the extension of the period
providedthat 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 fortuitous
events broughtabout by typhoon, barricades and demonstration. LHC did not give duecourse to the
extension of the period prayed for but referred the matter toarbitration committee.In the
meanwhile, because of the delay in the construction of the plant, LHCcalled on the stand-by letters
of credit because of default. However, thedemand was objected by Transfield on the ground that
there is still pendingarbitration on their request for extension of time. LHC invoked
the independence principle. On the other hand, Transfield claims fraud on thepart of LHC on
calling the stand-by letters of credit.Under the independence principle, a LC accommodation is
entirely distinctand separate, independent agreement. It is not supposed to be affected bythe main
contract upon which it rests.The court held for the LHC. Following the independence principle,
evengranting that there is still issue to be resolved arising from the turn-keyproject. This issue is
not supposed to affect the obligation of the bank to paythe letter of credit in question. The court
stressed that a LC accommodationis intended to benefit not only the beneficiary therein but the
applicantthereon. On the issue of fraud, the SC held that there is nothing in the turn-key contract
which states that all issues between the parties must beresolved first before LHC can call on the
stand-by LC but the contractprovides that if Transfield defaults, then LHC can call on these standby LC
LETTERS OF CREDIT
TRANSFIELD PHILIPPINES, INC. V. LUZON HYDRO CORPORATION AUSTRALIA, ET. AL., (2004)
Letters of Credit : General Concepts, Code of Commerce, Art. 567, Art. 568, Art. 2

Nature and use of letters of credit (credits)

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.

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.
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.
Commercial credits
involve the payment of money under a contract of sale

Standby credits

become payable upon the presentation by the seller- the credit is payable upon certification of a party's
beneficiary of documents that show he has taken nonperformance of the agreement.
affirmative steps to comply with the sales 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 The beneficiary of the standby credit must certify that his

by documents that he has performed his contract.

obligor has not performed the contract.

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. 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.

a)
b)

Independence principle
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.
The independent nature of the letter of credit may be:
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
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.

Issue: Can the beneficiary invoke the independence principle? YES.

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. 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.
Held: 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.
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.
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.
Fraud exception principle
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.
Issue: 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

a)
b)
c)

injunction against payment. The remedy for fraudulent abuse is an injunction. However, injunction should not be granted
unless:
there is clear proof of fraud;
the fraud constitutes fraudulent abuse of the independent purpose of the letter of credit and not only fraud under the main
agreement; and
irreparable injury might follow if injunction is not granted or the recovery of damages would be seriously damaged.
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. 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.

TRUST RECEIPTS
COLINARES & VELOSO V. CA, (2000)
Trust Receipts: Rights of Purchaser, Sec. 11
Section 4, P.D. No. 115, the Trust Receipts Law
Trust receipt transaction - any transaction by and between a person referred to as the entruster, and another person
referred to as the entrustee, whereby the entruster who owns or holds absolute title or security interest over certain specified
goods, documents or instruments, releases the same to the possession of the entrustee upon the latters execution and delivery
to the entruster of a signed document called a trust receipt wherein the entrustee binds himself to hold the designated
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 entruster or as appears in the trust receipt or 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.

1.
2.

2 possible situations in a trust receipt transaction.

Money received under the obligation involving the duty to deliver it (entregarla) to the owner of the merchandise sold.
Merchandise received under the obligation to return it (devolvera) to the owner.
Estafa
Failure of the entrustee to turn over the proceeds of the sale of the goods, covered by the trust receipt to the entruster or to
return said goods if they were not disposed of in accordance with the terms of the trust receipt shall be punishable as estafa
under Article 315 (1) of the RPC, without need of proving intent to defraud

GUARANTY
TUPAZ IV & TUPAZ V. CA & BPI, (2005)
Guaranty: Benefit of Excussion, Art. 2058 to 2064, Art. 2081
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 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. xxx
Jose Tupaz bound himself personally liable for El Oro Corporations debts.
1.
2.

First, excussion is not a pre-requisite to secure judgment against a guarantor. The guarantor can still demand deferment of the
execution of the judgment against him until after the assets of the principal debtor shall have been exhausted.
Second, the benefit of excussion may be waived. Under the trust receipt dated 30 September 1981, petitioner Jose Tupaz
waived excussion when he agreed that his liability in [the] guaranty shall be DIRECT AND IMMEDIATE, without any need
whatsoever on xxx [the] part [of respondent bank] to take any steps or exhaust any legal remedies xxx. The clear import of
this stipulation is that petitioner Jose Tupaz waived the benefit of excussion under his guarantee.

Colinares v CA G.R. No. 90828. September

5, 2000
MARCH 15, 2014LEAVE A COMMENT

The ownership of the merchandise continues to be vested in the person who

had advanced payment until he has been paid in full, or if the merchandise
has already been sold, the proceeds of the sale should be turned over to him
by the importer or by his representative or successor in interest.
Facts: Melvin Colinares and Lordino Veloso (hereafter Petitioners) were contracted for a
consideration of P40,000 by the Carmelite Sisters of Cagayan de Oro City to renovate
the latters convent at Camaman-an, Cagayan de Oro City. Colinares applied for a
commercial letter of credit with the Philippine Banking Corporation, Cagayan de Oro
City branch (hereafter PBC) in favor of CM Builders Centre. PBC approved the letter of
credit for P22,389.80 to cover the full invoice value of the goods. Petitioners signed a
pro-forma trust receipt as security.
PBC debited P6,720 from Petitioners marginal deposit as partial payment of the loan.
After the initial payment, the spouses defaulted. PBC wrote to Petitioners demanding
that the amount be paid within seven days from notice. Instead of complying with
PBCs demand, Veloso confessed that they lost P19,195.83 in the Carmelite Monastery
Project and requested for a grace period of until 15 June 1980 to settle the account.
Colinares proposed that the terms of payment of the loan be modified P2,000 on or
before 3 December 1980, and P1,000 per month . Pending approval of the proposal,
Petitioners paid P1,000 to PBC on 4 December 1980, and thereafter P500 on 11
February 1981, 16 March 1981, and 20 April 1981. Concurrently with the separate
demand for attorneys fees by PBCs legal counsel, PBC continued to demand payment
of the balance. On 14 January 1983, Petitioners were charged with the violation of P.D.
No. 115 (Trust Receipts Law) in relation to Article 315 of the Revised Penal Code
During trial, petitioner Veloso insisted that the transaction was a clean loan as per
verbal guarantee of Cayo Garcia Tuiza, PBCs former manager. He and petitioner
Colinares signed the documents without reading the fine print, only learning of the
trust receipt implication much later. When he brought this to the attention of PBC, Mr.
Tuiza assured him that the trust receipt was a mere formality. 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 endeavored to meet their
obligations, as shown by several receipts issued by PBC acknowledging payment of the
loan.
Issue: Whether or not the transaction of Colinares falls within the ambit of the Law on
Trust Receipt
Held: Colinares received the merchandise from CM Builders Centre on 30 October
1979. On that day, ownership over the merchandise was already transferred to
Petitioners who were to use the materials for their construction project. It was only a

day later, 31 October 1979, that they went to the bank to apply for a loan to pay for
the merchandise. This situation belies what normally obtains in a pure trust receipt
transaction where goods are owned by the bank and only released to the importer in
trust subsequent to the grant of the loan.
The bank acquires a security interest in the goods as holder of a security title for the
advances it had made to the entrustee. The ownership of the merchandise continues
to be vested in the person who had advanced payment until he has been paid in full,
or if the merchandise has already been sold, the proceeds of the sale should be turned
over to him by the importer or by his representative or successor in interest. To secure
that the bank shall be paid, it takes full title to the goods at the very beginning and
continues to hold that title as his indispensable security until the goods are sold and
the vendee is called upon to pay for them; hence, the importer has never owned the
goods and is not able to deliver possession. In a certain manner, trust receipts partake
of the nature of a conditional sale where the importer becomes absolute owner of the
imported merchandise as soon as he has paid its price. There are two possible
situations in a trust receipt transaction. The first is covered by the provision which
refers to money received under the obligation involving the duty to deliver it
(entregarla) to the owner of the merchandise sold. The second is covered by the
provision which refers to merchandise received under the obligation to return it
(devolvera) to the owner. Failure of the entrustee to turn over the proceeds of the sale
of the goods, covered by the trust receipt to the entruster or to return said goods if
they were not disposed of in accordance with the terms of the trust receipt shall be
punishable as estafa under Article 315 (1) of the Revised Penal Code, without need of
proving intent to defraud.
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