G.R. No. 74886 December 8, 1992
Chi in his capacity as President (sic) of defendant-appellant
PRUDENTIAL BANK, petitioner,
vs.
INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS, INC. and
ANACLETO R. CHI, respondents.
DAVIDE, JR., J.:
Petitioner seeks to review and set aside the decision 1 of public respondent;
Intermediate Appellate Court (now Court of Appeals), dated 10 March 1986, in AC-
G.R. No. 66733 which affirmed in toto the 15 June 1978 decision of Branch 9
(Quezon City) of the then Court of First Instance (now Regional Trial Court) of Rizal in
Civil Case No. Q-19312. The latter involved an action instituted by the petitioner for
the recovery of a sum of money representing the amount paid by it to the Nissho
Company Ltd. of Japan for textile machinery imported by the defendant, now private
respondent, Philippine Rayon Mills, Inc. (hereinafter Philippine Rayon), represented
by co-defendant Anacleto R. Chi.
The facts which gave rise to the instant controversy are summarized by the public
respondent as follows:
On August 8, 1962, defendant-appellant 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 (Exhibit B, Plaintiff's Folder of Exhibits, p 2). To effect
payment for said machineries, the defendant-appellant applied for a
commercial letter of credit with the Prudential Bank and Trust
Company in favor of Nissho. By virtue of said application, the
Prudential Bank opened Letter of Credit No. DPP-63762 for
On 15 June 1978, the trial court rendered its decision the dispositive portion of which
$128,548.78 (Exhibit A, Ibid., p. 1). Against this letter of credit,
reads:
drafts were drawn and issued by Nissho (Exhibits X, X-1 to X-
11, Ibid., pp. 65, 66 to 76), which were all paid by the Prudential
Bank through its correspondent in Japan, the Bank of Tokyo, Ltd.
As indicated on their faces, two of these drafts (Exhibit X and X-
1, Ibid., pp. 65-66) were accepted by the defendant-appellant
through its president, Anacleto R. Chi, while the others were not
(Exhibits X-2 to X-11, Ibid., pp. 66 to 76).
Upon the arrival of the machineries, the Prudential Bank indorsed
the shipping documents to the defendant-appellant which accepted
delivery of the same. To enable the defendant-appellant to take
delivery of the machineries, it executed, by prior arrangement with
the Prudential Bank, a trust receipt which was signed by Anacleto
R.
company (Exhibit C, Ibid., p. 13).
At the back of the trust receipt is a printed form to be accomplished
by two sureties who, by the very terms and conditions thereof, were
to be jointly and severally liable to the Prudential Bank should the
defendant-appellant fail to pay the total amount or any portion of
the drafts issued by Nissho and paid for by Prudential Bank. The
defendant-appellant was able to take delivery of the textile
machineries and installed the same at its factory site at 69 Obudan
Street, Quezon City.
Sometime in 1967, the defendant-appellant ceased business
operation (sic). On December 29, 1969, defendant-appellant's
factory was leased by Yupangco Cotton Mills for an annual rental of
P200,000.00 (Exhibit I, Ibid., p. 22). The lease was renewed on
January 3, 1973 (Exhibit J, Ibid., p. 26). On January 5, 1974, all the
textile machineries in the defendant-appellant's factory were sold to
AIC Development Corporation for P300,000.00 (Exhibit K, Ibid., p.
29).
The obligation of the defendant-appellant arising from the letter of
credit and the trust receipt remained unpaid and unliquidated.
Repeated formal demands (Exhibits U, V, and W, Ibid., pp. 62, 63,
64) for the payment of the said trust receipt yielded no result
Hence, the present action for the collection of the principal amount
of P956,384.95 was filed on October 3, 1974 against the
defendant-appellant and Anacleto R. Chi. In their respective
answers, the defendants interposed identical special defenses, viz.,
the complaint states no cause of action; if there is, the same has
prescribed; and the plaintiff is guilty of laches. 2
WHEREFORE, judgment is hereby rendered sentencing the
defendant Philippine Rayon Mills, Inc. to pay plaintiff the sum of
P153,645.22, the amounts due under Exhibits "X" & "X-1", with
interest at 6% per annum beginning September 15, 1974 until fully
paid.
Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11",
inclusive, the same not having been accepted by defendant
Philippine Rayon Mills, Inc., plaintiff's cause of action thereon has
not accrued, hence, the instant case is premature.
 Insofar as defendant Anacleto R. Chi is concerned, the case is
dismissed. Plaintiff is ordered to pay defendant Anacleto R. Chi the
sum of P20,000.00 as attorney's fees.
With costs against defendant Philippine Rayon Mills, Inc.
SO ORDERED. 3
Petitioner appealed the decision to the then Intermediate Appellate Court. In urging
the said court to reverse or modify the decision, petitioner alleged in its Brief that the
trial court erred in (a) disregarding its right to reimbursement from the private
respondents for the entire unpaid balance of the imported machines, the total amount
of which was paid to the Nissho Company Ltd., thereby violating the principle of the
third party payor's right to reimbursement provided for in the second paragraph of
Article 1236 of the Civil Code and under the rule against unjust enrichment; (b)
refusing to hold Anacleto R. Chi, as the responsible officer of defendant corporation,
liable under Section 13 of P.D No 115 for the entire unpaid balance of the imported
machines covered by the bank's trust receipt (Exhibit "C"); (c) finding that the solidary
guaranty clause signed by Anacleto R. Chi is not a guaranty at all; (d) controverting
the judicial admissions of Anacleto R. Chi that he is at least a simple guarantor of the
said trust receipt obligation; (e) contravening, based on the assumption that Chi is a
simple guarantor, Articles 2059, 2060 and 2062 of the Civil Code and the related
evidence and jurisprudence which provide that such liability had already attached; (f)
contravening the judicial admissions of Philippine Rayon with respect to its liability to
pay the petitioner the amounts involved in the drafts (Exhibits "X", "X-l" to "X-11''); and
(g) interpreting "sight" drafts as requiring acceptance by Philippine Rayon before the
latter could be held liable thereon. 4
In its decision, public respondent sustained the trial court in all respects. As to the first
and last assigned errors, it ruled that the provision on unjust enrichment, Article 2142
of the Civil Code, applies only if there is no express contract between the parties and
there is a clear showing that the payment is justified. In the instant case, the
relationship existing between the petitioner and Philippine Rayon is governed by
specific contracts, namely the application for letters of credit, the promissory note, the
drafts and the trust receipt. With respect to the last ten (10) drafts (Exhibits "X-2" to
"X-11") which had not been presented to and were not accepted by Philippine Rayon,
petitioner was not justified in unilaterally paying the amounts stated therein. The
public respondent did not agree with the petitioner's claim that the drafts were sight
drafts which did not require presentment for acceptance to Philippine Rayon because
paragraph 8 of the trust receipt presupposes prior acceptance of the drafts. Since the
ten (10) drafts were not presented and accepted, no valid demand for payment can
be made.
Public respondent also disagreed with the petitioner's contention that private
respondent Chi is solidarily liable with Philippine Rayon pursuant to Section 13 of P.D.
No. 115 and based on his signature on the solidary guaranty clause at the dorsal side
of the trust receipt. As to the first contention, the public respondent ruled that the civil
liability provided for in said Section 13 attaches only after conviction. As to the
second, it expressed misgivings as to whether Chi's signature on the trust receipt
made the latter automatically liable thereon because the so-called solidary guaranty
clause at the dorsal portion of the trust receipt is to be signed not by one (1) person
alone, but by two (2) persons; the last sentence of the same is incomplete and
unsigned by witnesses; and it is not acknowledged before a notary public. Besides,
even granting that it was executed and acknowledged before a notary public, Chi
cannot be held liable therefor because the records fail to show that petitioner had
either exhausted the properties of Philippine Rayon or had resorted to all legal
remedies as required in Article 2058 of the Civil Code. As provided for under Articles
2052 and 2054 of the Civil Code, the obligation of a guarantor is merely accessory
and subsidiary, respectively. Chi's liability would therefore arise only when the
principal debtor fails to comply with his obligation. 5
Its motion to reconsider the decision having been denied by the public respondent in
its Resolution of 11 June 1986, 6 petitioner filed the instant petition on 31 July 1986
submitting the following legal issues:
I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT
GRIEVOUSLY ERRED IN DENYING PETITIONER'S CLAIM FOR
FULL REIMBURSEMENT AGAINST THE PRIVATE
RESPONDENTS FOR THE PAYMENT PETITIONER MADE TO
NISSHO CO. LTD. FOR THE BENEFIT OF PRIVATE
RESPONDENT UNDER ART. 1283 OF THE NEW CIVIL CODE OF
THE PHILIPPINES AND UNDER THE GENERAL PRINCIPLE
AGAINST UNJUST ENRICHMENT;
II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY
LIABLE UNDER THE TRUST RECEIPT (EXH. C);
III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL
ADMISSIONS OF RESPONDENT CHI HE IS LIABLE THEREON
AND TO WHAT EXTENT;
IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A
SIMPLE GUARANTOR; AND IF SO; HAS HIS LIABILITY AS SUCH
ALREADY ATTACHED;
V. WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE
OFFICER OF RESPONDENT PHIL. RAYON RESPONDENT CHI
IS PERSONALLY LIABLE PURSUANT TO THE PROVISION OF
SECTION 13, P.D. 115;
VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE
TO THE PETITIONER UNDER THE TRUST RECEIPT (EXH. C);
 VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL
ADMISSIONS RESPONDENT PHIL. RAYON IS LIABLE TO THE
PETITIONER UNDER THE DRAFTS (EXHS. X, X-1 TO X-11) AND
TO WHAT EXTENT;
VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR
ACCEPTANCE FROM RESPONDENT PHIL. RAYON BEFORE
THE LATTER BECOMES LIABLE TO PETITIONER. 7
In the Resolution of 12 March 1990, 8 this Court gave due course to the petition after
the filing of the Comment thereto by private respondent Anacleto Chi and of the Reply
to the latter by the petitioner; both parties were also required to submit their
respective memoranda which they subsequently complied with.
As We see it, the issues may be reduced as follows:
1. Whether presentment for acceptance of the
drafts was indispensable to make Philippine
Rayon 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 cause of
action as there was no prior exhaustion of
Philippine Rayon's properties.
Both the trial court and the public respondent ruled that Philippine Rayon could be
held liable for the two (2) drafts, Exhibits "X" and "X-1", because only these appear to
have been accepted by the latter after due presentment. The liability for the remaining
ten (10) drafts (Exhibits "X-2" to "X-11" inclusive) did not arise because the same
were not presented for acceptance. In short, both courts concluded that acceptance
of the drafts by Philippine Rayon was indispensable to make the latter liable thereon.
We are unable to agree with this proposition. The transaction in the case at bar
stemmed from Philippine Rayon's application for a commercial letter of credit with the
petitioner in the amount of $128,548.78 to cover the former's contract to purchase
and import loom and textile machinery from Nissho Company, Ltd. of Japan under a
five-year deferred payment plan. Petitioner approved the application. As correctly
ruled by the trial court in its Order of 6 March 1975: 9
. . . By virtue of said Application and Agreement for Commercial
Letter of Credit, plaintiff bank 10 was under obligation to pay through
its correspondent bank in Japan the drafts that Nisso (sic)
Company, Ltd., periodically drew against said letter of credit from
1963 to 1968, pursuant to plaintiff's contract with the defendant
Philippine Rayon Mills, Inc. In turn, defendant Philippine Rayon
Mills, Inc., was obligated to pay plaintiff bank the amounts of the
drafts drawn by Nisso (sic) Company, Ltd. against said plaintiff bank
together with any accruing commercial charges, interest, etc.
pursuant to the terms and conditions stipulated in the Application
and Agreement of Commercial Letter of Credit Annex "A".
A letter of credit is defined as an engagement by a bank or other person made at the
request of a customer that the issuer will honor drafts or other demands for payment
upon compliance with the conditions specified in the credit. 11 Through a letter of
credit, the bank merely substitutes its own promise to pay for one of its customers
who in return promises to pay the bank the amount of funds mentioned in the letter of
credit plus credit or commitment fees mutually agreed upon. 12 In the instant case
then, the drawee was necessarily the herein petitioner. It was to the latter that the
drafts were presented for payment. In fact, there was no need for acceptance as the
issued drafts are sight drafts. Presentment for acceptance is necessary only in the
cases expressly provided for in Section 143 of the Negotiable Instruments Law
(NIL). 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.
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.
The acceptance of a bill is the signification by the drawee of his assent to the order of
the drawer; 14 this may be done in writing by the drawee in the bill itself, or in a
separate instrument. 15
The parties herein agree, and the trial court explicitly ruled, that the subject, drafts are
sight drafts. Said the latter:
. . . In the instant case the drafts being at sight, they are supposed
to be payable upon acceptance unless plaintiff bank has given the
Philippine Rayon Mills Inc. time within which to pay the same. The
first two drafts (Annexes C & D, Exh. X & X-1) were duly accepted
as indicated on their face (sic), and upon such acceptance should
have been paid forthwith. These two drafts were not paid and
although Philippine Rayon Mills
ought to have paid the same, the fact remains that until now they
are still unpaid. 16
Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section 7
provides:
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. (emphasis supplied)
Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at
maturity of any accepted draft, bill of exchange or indebtedness shall not be
extinguished or modified" 17 does not, contrary to the holding of the public
respondent, contemplate prior acceptance by Philippine Rayon, but by the
petitioner. Acceptance, however, was not even necessary in the first place
because the drafts which were eventually issued were sight drafts And even
if these were not sight drafts, thereby necessitating acceptance, it would be
the petitioner and not Philippine Rayon which had to accept the same
for the latter was not the drawee. Presentment for acceptance is defined an
the production of a bill of exchange to a drawee for acceptance. 18 The trial
court and the public respondent, therefore, erred in ruling that presentment
for acceptance was an indispensable requisite for Philippine Rayon's liability
on the drafts to attach. Contrary to both courts' pronouncements, Philippine
Rayon immediately became liable thereon upon petitioner's payment
thereof. Such is the essence of the letter of credit issued by the petitioner. A
different conclusion would violate the principle upon which commercial
letters of credit are founded because in such a case, both the beneficiary
and the issuer, Nissho Company Ltd. and the petitioner, respectively, would
be placed at the mercy of Philippine Rayon even if the latter had already
received the imported machinery and the petitioner had fully paid for it. The
typical setting and purpose of a letter of credit are described in Hibernia
Bank and Trust Co. vs. J. Aron & Co., Inc., 19 thus:
Commercial letters of credit have come into general use in
international sales transactions where much time necessarily
elapses between the sale and the receipt by a purchaser of the
merchandise, during which interval great price changes may occur.
Buyers and sellers struggle for the advantage of position. The seller
is desirous of being paid as surely and as soon as possible,
realizing that the vendee at a distant point has it in his power to
reject on trivial grounds merchandise on arrival, and cause
considerable hardship to the shipper. Letters of credit meet this
condition by affording celerity and certainty of payment. Their
purpose is to insure to a seller payment of a definite amount upon
presentation of documents. The bank deals only with documents. It
has nothing to do with the quality of the merchandise. Disputes as
to the merchandise shipped may arise and be litigated later
between vendor and vendee, but they may not impede acceptance
of drafts and payment by the issuing bank when the proper
documents are presented.
The trial court and the public respondent likewise erred in disregarding the trust
receipt and in not holding that Philippine Rayon was liable thereon. In People vs. Yu
Chai Ho, 20 this Court explains the nature of a trust receipt by quoting In re Dunlap
Carpet Co., 21 thus:
By this arrangement a banker advances money to an intending
importer, and thereby lends the aid of capital, of credit, or of
business facilities and agencies abroad, to the enterprise of foreign
commerce. Much of this trade could hardly be carried on by any
other means, and therefore it is of the first importance that the
fundamental factor in the transaction, the banker's advance of
money and credit, should receive the amplest protection.
Accordingly, in order to secure that the banker shall be repaid at the
critical point that is, when the imported goods finally reach the
hands of the intended vendee the banker takes the full title to the
goods at the very beginning; he takes it as soon as the goods are
 bought and settled for by his payments or acceptances in the
foreign country, and he continues to hold that title as his
indispensable security until the goods are sold in the United States
and the vendee is called upon to pay for them. This security is not
an ordinary pledge by the importer to the banker, for the importer
has never owned the goods, and moreover he is not able to deliver
the possession; but the security is the complete title vested
originally in the bankers, and this characteristic of the transaction
has again and again been recognized and protected by the courts.
Of course, the title is at bottom a security title, as it has sometimes
been called, and the banker is always under the obligation to
reconvey; but only after his advances have been fully repaid and
after the importer has fulfilled the other terms of the contract.
As further stated in National Bank vs. Viuda e Hijos de Angel Jose, 22 trust receipts:
. . . [I]n a certain manner, . . . partake of the nature of a conditional
sale as provided by the Chattel Mortgage Law, that is, the importer
becomes absolute owner of the imported merchandise as soon an
he has paid its price. The ownership of the merchandise continues
to be vested in the owner thereof or in the person who has
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.
Under P.D. No. 115, otherwise known an the Trust Receipts Law, which took effect on
29 January 1973, a trust receipt transaction is defined as "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 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 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. The statement at the
dorsal portion of the said trust receipt, which petitioner describes as a "solidary
guaranty clause", reads:
In consideration of the PRUDENTIAL BANK AND TRUST
COMPANY complying with the foregoing, we jointly and severally
agree and undertake to pay on demand to the PRUDENTIAL BANK
AND TRUST COMPANY all sums of money which the said
PRUDENTIAL BANK AND TRUST COMPANY may call upon us to
pay arising out of or pertaining to, and/or in any event connected
with the default of and/or non-fulfillment in any respect of the
undertaking of the aforesaid:
PHILIPPINE RAYON MILLS, INC.
We further agree that the PRUDENTIAL BANK AND TRUST
COMPANY does not have to take any steps or exhaust its remedy
against aforesaid:
before making demand on me/us.
 (Sgd.) Anacleto R. Chi
ANACLETO R. CHI6
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.
In holding otherwise, the public respondent ratiocinates as follows:
With respect to the second argument, we have our misgivings as to
whether the mere signature of defendant-appellee Chi of (sic) the
guaranty agreement, Exhibit "C-1", will make it an actionable
document. It should be noted that Exhibit "C-1" was prepared and
printed by the plaintiff-appellant. A perusal of Exhibit "C-1" shows
that it was to be signed and executed by two persons. It was signed
only by defendant-appellee Chi. Exhibit "C-1" was to be witnessed
by two persons, but no one signed in that capacity. The last
sentence of the guaranty clause is incomplete. Furthermore, the
plaintiff-appellant also failed to have the purported guarantee
clause acknowledged before a notary public. All these show that
the alleged guaranty provision was disregarded and, therefore, not
consummated.
But granting arguendo that the guaranty provision in Exhibit "C-1"
was fully executed and acknowledged still defendant-appellee Chi
cannot be held liable thereunder because the records show that the
plaintiff-appellant had neither exhausted the property of the
defendant-appellant nor had it resorted to all legal remedies against
the said defendant-appellant as provided in Article 2058 of the Civil
Code. The obligation of a guarantor is merely accessory under
Article 2052 of the Civil Code and subsidiary under Article 2054 of
the Civil Code. Therefore, the liability of the defendant-appellee
arises only when the principal debtor fails to comply with his
obligation. 27
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 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.
Furthermore, any doubt as to the import, or true intent of the solidary guaranty clause
should be resolved against the petitioner. The trust receipt, together with the
questioned solidary guaranty clause, is on a form drafted and prepared solely by the
petitioner; Chi's participation therein is limited to the affixing of his signature thereon.
It is, therefore, a contract of adhesion; 28 as such, it must be strictly construed against
the party responsible for its preparation. 29
Neither can We agree with the reasoning of the public respondent that this solidary
guaranty clause was effectively disregarded simply because it was not signed and
witnessed by two (2) persons and acknowledged before a notary public. While
indeed, the clause ought to have been signed by two (2) guarantors, the fact that it
was only Chi who signed the same did not make his act an idle ceremony or render
the clause totally meaningless. By his signing, Chi became the sole guarantor. The
attestation by witnesses and the acknowledgement before a notary public are not
required by law to make a party liable on the instrument. The rule is that contracts
shall be obligatory in whatever form they may have been entered into, provided all the
essential requisites for their validity are present; however, when the law requires that
a contract be in some form in order that it may be valid or enforceable, or that it be
proved in a certain way, that requirement is absolute and indispensable. 30 With
respect to a guaranty, 31 which is a promise to answer for the debt or default of
another, the law merely requires that it, or some note or memorandum thereof, be in
writing. Otherwise, it would be unenforceable unless ratified. 32 While the
acknowledgement of a surety before a notary public is required to make the same
a public document, under Article 1358 of the Civil Code, a contract of guaranty does
not have to appear in a public document.
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. The said section
reads:
Sec. 13. Penalty Clause. The failure of an entrustee to turn over
the proceeds of the sale of the goods, documents or instruments
covered by a trust receipt to the extent of the amount owing to the
entruster or as appears 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 Three
 hundred and fifteen, paragraph one (b) of Act Numbered Three
thousand eight hundred and fifteen, as amended, otherwise known
as the Revised Penal Code. If the violation or offense is committed
by a corporation, partnership, association or other juridical entities,
the penalty provided for in this Decree shall be imposed upon the
directors, officers, employees or other officials or persons therein
responsible for the offense, without prejudice to the civil liabilities
arising from the criminal offense.
A close examination of the quoted provision reveals that it is the last sentence which
provides for the correct solution. It is clear that if the violation or offense is committed
by a corporation, partnership, association or other juridical entities, the penalty shall
be imposed upon the directors, officers, employees or other officials or persons
therein responsible for the offense. The penalty referred to is imprisonment, the
duration of which would depend on the amount of the fraud as provided for in Article
315 of the Revised Penal Code. The reason for this is obvious: 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 arising
therefrom against Philippine Rayon.
The remaining issue to be resolved concerns the propriety of the dismissal of the
case against private respondent Chi. The trial court based the dismissal, and the
respondent Court its affirmance thereof, on the theory that Chi is not liable on the
trust receipt in any capacity either as surety or as guarantor because his
signature at the dorsal portion thereof was useless; and even if he could be bound by
such signature as a simple guarantor, he cannot, pursuant to Article 2058 of the Civil
Code, be compelled to pay until
after petitioner has exhausted and resorted to all legal remedies against the principal
debtor, Philippine Rayon. The records fail to show that petitioner had done
so 33 Reliance is thus placed on Article 2058 of the Civil Code which provides:
Art. 2056. The guarantor cannot be compelled to pay the creditor
unless the latter has exhausted all the property of the debtor, and
has resorted to all the legal remedies against the debtor.
Simply stated, there is as yet no cause of action against Chi.
We are not persuaded. Excussion is not a condition sine qua non for the institution of
an action against a guarantor. In Southern Motors, Inc. vs. Barbosa, 34 this Court
stated:
4. Although an ordinary personal guarantor not a mortgagor or
pledgor may demand the aforementioned exhaustion, the
creditor may, prior thereto, secure a judgment against said
guarantor, who shall be entitled, however, to a deferment of the
execution of said judgment against him until after the properties of
the principal debtor shall have been exhausted to satisfy the
obligation involved in the case.
There was then nothing procedurally objectionable in impleading private respondent
Chi as a co-defendant in Civil Case No. Q-19312 before the trial court. As a matter of
fact, Section 6, Rule 3 of the Rules of Court on permissive joinder of parties explicitly
allows it. It reads:
Sec. 6. Permissive joinder of parties. All persons in whom or
against whom any right to relief in respect to or arising out of the
same transaction or series of transactions is alleged to exist,
whether jointly, severally, or in the alternative, may, except as
otherwise provided in these rules, join as plaintiffs or be joined as
defendants in one complaint, where any question of law or fact
common to all such plaintiffs or to all such defendants may arise in
the action; but the court may make such orders as may be just to
prevent any plaintiff or defendant from being embarrassed or put to
expense in connection with any proceedings in which he may have
no interest.
This is the equity rule relating to multifariousness. It is based on trial convenience and
is designed to permit the joinder of plaintiffs or defendants whenever there is a
common question of law or fact. It will save the parties unnecessary work, trouble and
expense. 35
However, Chi's liability is limited to the principal obligation in the trust receipt plus all
the accessories thereof including judicial costs; with respect to the latter, he shall only
be liable for those costs incurred after being judicially required to pay. 36 Interest and
damages, being accessories of the principal obligation, should also be paid; these,
however, shall run only from the date of the filing of the complaint. Attorney's fees
may even be allowed in appropriate cases. 37
In the instant case, the attorney's fees to be paid by Chi cannot be the same as that
to be paid by Philippine Rayon since it is only the trust receipt that is covered by the
guaranty and not the full extent of the latter's liability. All things considered, he can be
held liable for the sum of P10,000.00 as attorney's fees in favor of the petitioner.
Thus, the trial court committed grave abuse of discretion in dismissing the complaint
as against private respondent Chi and condemning petitioner to pay him P20,000.00
as attorney's fees.
In the light of the foregoing, it would no longer necessary to discuss the other issues
raised by the petitioner

WHEREFORE, the instant Petition is hereby GRANTED.

The appealed Decision of 10 March 1986 of the public respondent in AC-

G.R. CV No. 66733 and, necessarily, that of Branch 9 (Quezon City) of the
then Court of First Instance of Rizal in Civil Case No. Q-19312 are hereby
REVERSED and SET ASIDE and another is hereby entered:

G.R. No. 105395 December 10, 1993

1. Declaring private respondent Philippine Rayon
Mills, Inc. liable on the twelve drafts in question
(Exhibits "X", "X-1" to "X-11", inclusive) and on BANK OF AMERICA, NT & SA, petitioners,
the trust receipt (Exhibit "C"), and ordering it to vs.
pay petitioner: (a) the amounts due thereon in the COURT OF APPEALS, INTER-RESIN INDUSTRIAL CORPORATION, FRANCISCO
total sum of P956,384.95 as of 15 September TRAJANO, JOHN DOE AND JANE DOE, respondents.
1974, with interest thereon at six percent (6%)
per annum from 16 September 1974 until it is Agcaoili & Associates for petitioner.
fully paid, less whatever may have been applied
thereto by virtue of foreclosure of mortgages, if Valenzuela Law Center, Victor Fernandez and Ramon Guevarra for private
any; (b) a sum equal to ten percent (10%) of the respondents.
aforesaid amount as attorney's fees; and (c) the
costs.

2. Declaring private respondent Anacleto R. Chi

secondarily liable on the trust receipt and
ordering him to pay the face value thereof, with
interest at the legal rate, commencing from the
date of the filing of the complaint in Civil Case
No. Q-19312 until the same is fully paid as well
as the costs and attorney's fees in the sum of
P10,000.00 if the writ of execution for the
enforcement of the above awards against
Philippine Rayon Mills, Inc. is returned
unsatisfied.
Costs against private respondents.
VITUG, J.:
A "fiasco," involving an irrevocable letter of credit, has found the distressed parties
coming to court as adversaries in seeking a definition of their respective rights or
liabilities thereunder.
On 05 March 1981, petitioner Bank of America, NT & SA, Manila, received by
registered mail an Irrevocable Letter of Credit No. 20272/81 purportedly issued by
Bank of Ayudhya, Samyaek Branch, for the account of General Chemicals, Ltd., of
Thailand in the amount of US$2,782,000.00 to cover the sale of plastic ropes and
"agricultural files," with the petitioner as advising bank and private respondent Inter-
Resin Industrial Corporation as beneficiary.

SO ORDERED. On 11 March 1981, Bank of America wrote Inter-Resin informing the latter of the
foregoing and transmitting, along with the bank's communication,
the latter of credit. Upon receipt of the letter-advice with the letter of credit, Inter-Resin
sent Atty. Emiliano Tanay to Bank of America to have the letter of credit confirmed.
The bank did not. Reynaldo Dueas, bank employee in charge of letters of credit,
however, explained to Atty. Tanay that there was no need for confirmation because
the letter of credit would not have been transmitted if it were not genuine.
Between 26 March to 10 April 1981, Inter-Resin sought to make a partial availment
under the letter of credit by submitting to Bank of America invoices, covering the
shipment of 24,000 bales of polyethylene rope to General Chemicals valued at
US$1,320,600.00, the corresponding packing list, export declaration and bill of lading.
Finally, after being satisfied that Inter-Resin's documents conformed with the
conditions expressed in the letter of credit, Bank of America issued in favor of Inter-
Resin a Cashier's Check for P10,219,093.20, "the Peso equivalent of the draft (for)
US$1,320,600.00 drawn by Inter-Resin, after deducting the costs for documentary
stamps, postage and mail issuance." 1 The check was picked up by Inter-Resin's
Executive Vice-President Barcelina Tio. On 10 April 1981, Bank of America wrote
Bank of Ayudhya advising the latter of the availment under the letter of credit and
sought the corresponding reimbursement therefor.
Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of America the
documents for the second availment under the same letter of credit consisting of a
packing list, bill of lading, invoices, export declaration and bills in set, evidencing the
second shipment of goods. Immediately upon receipt of a telex from the Bank of
Ayudhya declaring the letter of credit fraudulent, 2 Bank of America stopped the
processing of Inter-Resin's documents and sent a telex to its branch office in
Bangkok, Thailand, requesting assistance in determining the authenticity of the letter
of credit. 3Bank of America kept Inter-Resin informed of the developments. Sensing a
fraud, Bank of America sought the assistance of the National Bureau of Investigation
(NBI). With the help of the staff of the Philippine Embassy at Bangkok, as well as the
police and customs personnel of Thailand, the NBI agents, who were sent to
Thailand, discovered that the vans exported by Inter-Resin did not contain ropes but
plastic strips, wrappers, rags and waste materials. Here at home, the NBI also
investigated Inter-Resin's President Francisco Trajano and Executive Vice President
Barcelina Tio, who, thereafter, were criminally charged for estafa through falsification
of commercial documents. The case, however, was eventually dismissed by the Rizal
Provincial Fiscal who found no prima facie evidence to warrant prosecution.
Bank of America sued Inter-Resin for the recovery of P10,219,093.20, the peso
equivalent of the draft for US$1,320,600.00 on the partial availment of the now
disowned letter of credit. On the other hand, Inter-Resin claimed that not only was it
entitled to retain P10,219,093.20 on its first shipment but also to the balance
US$1,461,400.00 covering the second shipment.
On 28 June 1989, the trial court ruled for Inter-Resin, 4 holding that:
(a) Bank of America made assurances that enticed Inter-Resin to send the
merchandise to Thailand; (b) the telex declaring the letter of credit fraudulent was
unverified and self-serving, hence, hearsay, but even assuming that the letter of credit
was fake, "the fault should be borne by the BA which was careless and
negligent" 5 for failing to utilize its modern means of communication to verify with
Bank of Ayudhya in Thailand the authenticity of the letter of credit before sending the
same to Inter-Resin; (c) the loading of plastic products into the vans were under strict
supervision, inspection and verification of government officers who have in their favor
the presumption of regularity in the performance of official functions; and (d) Bank of
America failed to prove the participation of Inter-Resin or its employees in the alleged
fraud as, in fact, the complaint for estafa through falsification of documents was
dismissed by the Provincial Fiscal of Rizal. 6
On appeal, the Court of Appeals 7 sustained the trial court; hence, this present
recourse by petitioner Bank of America.
The following issues are raised by Bank of America: (a) whether it 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; (b) whether Inter-Resin
has actually shipped the ropes specified by the letter of credit; and (c) following the
dishonor of the letter of credit by Bank of Ayudhya, whether Bank of America may
recover against Inter-Resin under the draft executed in its partial availment of the
letter of credit. 8
In rebuttal, Inter-Resin holds that: (a) Bank of America cannot, on appeal, belatedly
raise the issue of being only an advising bank; (b) the findings of the trial court that
the ropes have actually been shipped is binding on the Court; and, (c) Bank of
America cannot recover from Inter-Resin because the drawer of the letter of credit is
the Bank of Ayudhya and not Inter-Resin.
If only to understand how the parties, in the first place, got themselves into the mess,
it may be well to start by recalling how, in its modern use, a letter of credit is
employed in trade 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. 9 To break
the impasse, the buyer may be required to contract a bank to issue a letter of credit in
favor of the seller so that, by virtue of the latter of credit, the issuing bank can
authorize the seller to draw drafts and engage to pay them upon their presentment
simultaneously with the tender of documents required by the letter of credit. 10 The
buyer and the seller agree on what documents are to be presented for payment, but
ordinarily they are documents of title evidencing or attesting to the shipment of the
goods to the buyer.
Once the credit is established, the seller ships the goods to the buyer and in the
process secures the required shipping documents or documents of title. To get paid,
the seller executes a draft and presents it together with the required documents to the
issuing bank. The issuing bank redeems the draft and pays cash to the seller if it finds
that the documents submitted by the seller conform with what the letter of credit
requires. The bank then obtains possession of the documents upon paying the seller.
The transaction is completed when the buyer reimburses the issuing bank and
acquires the documents entitling him to the goods. Under this arrangement, the seller
gets paid only if he delivers the documents of title over the goods, while the buyer
acquires said documents and control over the goods only after reimbursing the bank.
What characterizes letters of credit, as distinguished from other accessory contracts,
is the engagement of the issuing bank to pay the seller of 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; it is precluded from
determining whether the main contract is actually accomplished or not. 11
There would at least be three (3) parties: (a) the buyer, 12 who procures the letter of
credit and obliges himself to reimburse the issuing bank upon receipts of the
documents of title; (b) the bank issuing the letter of credit, 13 which undertakes to pay
the seller upon receipt of the draft and proper document of titles and to surrender the
documents to the buyer upon reimbursement; and, (c) the seller, 14 who in compliance
with the contract of sale ships the goods to the buyer and delivers the documents of
title and draft to the issuing bank to recover payment.
The number of the parties, not infrequently and almost invariably in international trade
practice, may be increased. Thus, the services of an advising (notifying) bank 15 may
be utilized to convey to the seller the existence of the credit; or, of
a confirming bank 16 which will lend credence to the letter of credit issued by a lesser
known issuing bank; or, of a paying bank, 17 which undertakes to encash the drafts
drawn by the exporter. Further, instead of going to the place of the issuing bank to
claim payment, the buyer may approach another bank, termed the negotiating
bank, 18 to have the draft discounted.
Being a product of international commerce, the impact of this commercial instrument
transcends national boundaries, and it is thus not uncommon to find a dearth of
national law that can adequately provide for its governance. This country is no
exception. Our own Code of Commerce basically introduces only its concept under
Articles 567-572, inclusive, thereof. It is no wonder then why great reliance has been
placed on commercial usage and practice, which, in any case, can be justified by the
universal acceptance of the autonomy of contract rules. The rules were later
developed into what is now known as the Uniform Customs and Practice for
Documentary Credits ("U.C.P.") issued by the International Chamber of Commerce. It
is by no means a complete text by itself, for, to be sure, there are other principles,
which, although part of lex mercatoria, are not dealt with the U.C.P.
In FEATI Bank and Trust Company v. Court of Appeals, 19 we have accepted, to the
extent of their pertinency, the application in our jurisdiction of this international
commercial credit regulatory set of rules. 20 In Bank of Phil. Islands v. De Nery, 21 we
have said that the observances of the U.C.P. is justified by Article 2 of the Code of
Commerce which expresses that, in the absence of any particular provision in the
Code of Commerce, commercial transactions shall be governed by usages and
customs generally observed. We have further observed 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 U.C.P. is
undeniable.
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. 22
In Insular Life Assurance Co. Ltd. Employees Association Natu vs. Insular Life
Assurance Co., Ltd., 23 the Court said: Where the issues already raised also rest on
other issues not specifically presented, as long as the latter issues bear relevance
and close relation to the former and as long as they arise from the matters on record,
the court has the authority to include them in its discussion of the controversy and to
pass upon them just as well. In brief, in those cases where questions not particularly
raised by the parties surface as necessary for the complete adjudication of the rights
and obligations of the parties, the interests of justice dictate that the court should
consider and resolve them. The rule that only issues or theories raised in the initial
proceedings may be taken up by a party thereto on appeal should only refer to
independent, not concomitant matters, to support or oppose the cause of action or
defense. The evil that is sought to be avoided, i.e., surprise to the adverse party, is in
reality not existent on matters that are properly litigated in the lower court and appear
on record.
It cannot seriously be disputed, looking at this case, that Bank of America has, in fact,
only been an advising, not confirming, bank, and this much is clearly evident, among
other things, by the provisions of the letter of credit itself, the petitioner bank's letter of
advice, its request for payment of advising fee, and the admission of Inter-Resin that
it has paid the same. That Bank of America has asked Inter-Resin to submit
documents required by the letter of credit and eventually has paid the proceeds
thereof, did not obviously make it a confirming bank. The fact, too, that the draft
required by the letter of credit is to be drawn under the account of General Chemicals
(buyer) only means the same had to be presented to Bank of Ayudhya (issuing bank)
for payment. It may be significant to recall that the letter of credit is an engagement of
the issuing bank, not the advising bank, to pay the draft.
No less important is that Bank of America's letter of 11 March 1981 has expressly
stated that "[t]he enclosure is solely an advise of credit opened by the
abovementioned correspondent and conveys no engagement by us." 24This written
reservation by Bank of America in limiting its obligation only to being an advising bank
is in consonance with the provisions of U.C.P.
As an advising or notifying bank, Bank of America did not incur any obligation more
than just notifying Inter-Resin of the letter of credit issued in its favor, let alone to
confirm the letter of credit. 25 The bare statement of the bank employees,
aforementioned, in responding to the inquiry made by Atty. Tanay, Inter-Resin's
representative, on the authenticity of the letter of credit certainly did not have the
effect of novating the letter of credit and Bank of America's letter of advise, 26 nor can
it justify the conclusion that the bank must now assume total liability on the letter of
credit. Indeed, Inter-Resin itself cannot claim to have been all that free from fault. As
the seller, the issuance of the letter of credit should have obviously been a great
concern to it. 27 It would have, in fact, been strange if it did not, prior to the letter of
credit, enter into a contract, or negotiated at the every least, with General
Chemicals. 28 In the ordinary course of business, the perfection of contract precedes
the issuance of a letter of credit.
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 in U.C.P. 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, Inter-
Resin, as the drawer of the draft, continues to assume a contingent liability thereon. 31
While bank of America has indeed failed to allege material facts in its complaint that
might have likewise warranted the application of the Negotiable Instruments Law and
possible then allowed it to even go after the indorsers of the draft, this failure, 32/
nonetheless, does not preclude petitioner bank's right (as negotiating bank) of
recovery from Inter-Resin itself. Inter-Resin admits having received P10,219,093.20
from bank of America on the letter of credit and in having executed the corresponding
draft. 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.
Between the seller and the negotiating bank there is the usual
relationship existing between a drawer and purchaser of drafts.
Unless drafts drawn in pursuance of the credit are indicated to be
without recourse therefore, the negotiating bank has the ordinary
right of recourse against the seller in the event of dishonor by the
issuing bank . . . The fact that the correspondent and the
negotiating bank may be one and the same does not affect its
rights and obligations in either capacity, although a special
agreement is always a possibility . . . 33
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
The other issues raised in then instant petition, for instance, whether or not Bank of
Ayudhya did issue the letter of credit and whether or not the main contract of sale that
has given rise to the letter of credit has been breached, are not relevant to this
controversy. They are matters, instead, that can only be of concern to the herein
parties in an appropriate recourse against those, who, unfortunately, are not
impleaded in these proceedings.
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.
No judgment of civil liability against the other defendants, Francisco Trajano and other
unidentified parties, can be made, in this instance, there being no sufficient evidence
to warrant any such finding.
WHEREFORE, the assailed decision is SET ASIDE, and respondent Inter-Resin
Industrial Corporation is ordered to refund to petitioner Bank of America NT & SA the
amount of P10,219,093.20 with legal interest from the filing of the complaint until fully
paid.
No costs.
SO ORDERED.

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

BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee,

vs.
DE RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO and AURORA
CARCERENY alias AURORA C. GONZALES, defendants-appellants.
Aviado and Aranda for plaintiff-appellee.
S. Emiliano Calma for defendants-appellants.
CASTRO, J.:.
This is an appeal from the decision of the Court of First Instance of Manila ordering
the defendants-appellants to pay to the Bank of the Philippine Islands (hereinafter
referred to as the Bank), jointly and severally, the value of the credit it extended to
them in several letters of credit which the Bank opened at the behest of the
defendants appellants to finance their importation of dyestuffs from the United States,
which however turned out to be mere colored chalk upon arrival and inspection
thereof at the port of Manila.
The record shows that on four (4) different occasions in 1961, the De Reny Fabric
Industries, Inc., a Philippine corporation through its co-defendants-appellants, Aurora
Carcereny alias Aurora C. Gonzales, and Aurora T. Tuyo, president and secretary,
respectively of the corporation, applied to the Bank for four (4) irrevocable commercial
letters of credit to cover the purchase by the corporation of goods described in the
covering L/C applications as "dyestuffs of various colors" from its American supplier,
the J.B. Distributing Company. All the applications of the corporation were approved,
and the corresponding Commercial L/C Agreements were executed pursuant to
banking procedures. Under these agreements, the aforementioned officers of the
corporation bound themselves personally as joint and solidary debtors with the
corporation. Pursuant to banking regulations then in force, the corporation delivered
to the Bank peso marginal deposits as each letter of credit was opened.
The dates and amounts of the L/Cs applied for and approved as well as the peso
marginal deposits made were, respectively, as follows:.
Date Application Amount Marginal
& L/C No. Deposit
Oct. 10, 1961 61/1413 $57,658.38 P43,407.33
Oct. 23, 1961 61/1483 $25,867.34 19,473.64
Oct. 30, 1961 61/1495 $19,408.39 14,610.88
Nov. 10, 1961 61/1564 $26,687.64 20,090.90
TOTAL .... $129,621.75 P97,582.75
By virtue of the foregoing transactions, the Bank issued irrevocable commercial
letters of credit addressed to its correspondent banks in the United States, with
uniform instructions for them to notify the beneficiary thereof, the J.B. Distributing
Company, that they have been authorized to negotiate the latter's sight drafts up to
the amounts mentioned the respectively, if accompanied, upon presentation, by a full
set of negotiable clean "on board" ocean bills of lading covering the merchandise
appearing in the LCs that is, dyestuffs of various colors. Consequently, the J.B.
Distributing Company drew upon, presented to and negotiated with these banks, its
sight drafts covering the amounts of the merchandise ostensibly being exported by it,
together with clean bills of lading, and collected the full value of the drafts up to the
amounts appearing in the L/Cs as above indicated. These correspondent banks then
debited the account of the Bank of the Philippine Islands with them up to the full value
of the drafts presented by the J.B. Distributing Company, plus commission thereon,
and, thereafter, endorsed and forwarded all documents to the Bank of the Philippine
Islands.
In the meantime, as each shipment (covered by the above-mentioned letters of credit)
arrived in the Philippines, the De Reny Fabric Industries, Inc. made partial payments
to the Bank amounting, in the aggregate, to P90,000. Further payments were,
however, subsequently discontinued by the corporation when it became established,
as a result of a chemical test conducted by the National Science Development Board,
that the goods that arrived in Manila were colored chalks instead of dyestuffs.
The corporation also refused to take possession of these goods, and for this reason,
the Bank caused them to be deposited with a bonded warehouse paying therefor the
amount of P12,609.64 up to the filing of its complaint with the court below on
December 10, 1962.
On October 24, 1963 the lower court rendered its decision ordering the corporation
and its co-defendants (the herein appellants) to pay to the plaintiff-appellee the
amount of P291,807.46, with interest thereon, as provided for in the L/C Agreements,
at the rate of 7% per annum from October 31, 1962 until fully paid, plus costs.
It is the submission of the defendants-appellants that it was the duty of the foreign
correspondent banks of the Bank of the Philippine Islands to take the necessary
precaution to insure that the goods shipped under the covering L/Cs conformed with
the item appearing therein, and, that the foregoing banks having failed to perform this
duty, no claim for recoupment against the defendants-appellants, arising from the
losses incurred for the non-delivery or defective delivery of the articles ordered, could
accrue.
We can appreciate the sweep of the appellants' argument, but we also find that it is
nestled hopelessly inside a salient where the valid contract between the parties and
the internationally accepted customs of the banking trade must prevail.1
Under the terms of their Commercial Letter of Credit Agreements with the Bank, the
appellants agreed that the Bank shall not be responsible for the "existence, character,
quality, quantity, conditions, packing, value, or delivery of the property purporting to
be represented by documents; for any difference in character, quality, quantity,
condition, or value of the property from that expressed in documents," or for "partial or
incomplete shipment, or failure or omission to ship any or all of the property referred
to in the Credit," as well as "for any deviation from instructions, delay, default or fraud
by the shipper or anyone else in connection with the property the shippers or vendors
and ourselves [purchasers] or any of us." Having agreed to these terms, the
appellants have, therefore, no recourse but to comply with their covenant. 2

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

It was uncontrovertibly proven by the Bank during the trial below that banks, in
providing financing in international business transactions such as those entered into
by the appellants, do not deal with the property to be exported or shipped to the
importer, but deal only with documents. The Bank introduced in evidence a provision
contained in the "Uniform Customs and Practices for Commercial Documentary
Credits Fixed for the Thirteenth Congress of International Chamber of Commerce," to
which the Philippines is a signatory nation. Article 10 thereof provides: .

In documentary credit operations, all parties concerned deal in

documents and not in goods. Payment, negotiation or
acceptance against documents in accordance with the terms and
conditions of a credit by a Bank authorized to do so binds the party
giving the authorization to take up the documents and reimburse
the Bank making the payment, negotiation or acceptance.

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

ACCORDINGLY, the judgment a quo is affirmed, at defendants-appellants' cost. This

is without prejudice to the Bank, in proper proceedings in the court below in this same
case proving and being reimbursed additional expenses, if any, it has incurred by
virtue of the continued storage of the goods in question up to the time this decision
becomes final and executory.
 a. All terms and conditions of the purchase order have been
complied with and that all logs are fresh cut and quality equal to or
G.R. No. 94209 April 30, 1991 better than that described in H.A. Christiansen's telex #201 of May
1, 1970, and that all logs have been marked "BEV-EX."

FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING

CORPORATION), petitioner, b. One complete set of documents, including 1/3 original bills of
lading was airmailed to Consignee and Parties to be advised by
vs.
THE COURT OF APPEALS, and BERNARDO E. VILLALUZ, respondents. Hans-Axel Christiansen, Ship and Merchandise Broker.

c. One set of non-negotiable documents was airmailed to Han Mi

Pelaez, Adriano & Gregorio for petitioner.
Ezequiel S. Consulta for private respondent. Trade Development Company and one set to Consignee and
Parties to be advised by Hans-Axel Christiansen, Ship and
Merchandise Broker.

2. Tally sheets in quadruplicate.

GUTIERREZ, JR., J.:
This is a petition for review seeking the reversal of the decision of the Court of
Appeals dated June 29, 1990 which affirmed the decision of the Regional Trial Court
of Rizal dated October 20, 1986 ordering the defendants Christiansen and the
petitioner, to pay various sums to respondent Villaluz, jointly and severally.
The facts of the case are as follows:
On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant Axel
Christiansen 2,000 cubic meters of lauan logs at $27.00 per cubic meter FOB.
3. 2/3 Original Clean on Board Ocean Bills of Lading with Consignee and
Parties to be advised by Hans Axel Christiansen, showing Freight Prepaid
and marked Notify:
Han Mi Trade Development Company, Ltd., Santa Ana, California.
Letter of Credit No. 46268 dated June 7, 1971
Han Mi Trade Development Company, Ltd., P.O. Box 10480, Santa Ana,
California 92711 and Han Mi Trade Development Company, Ltd., Seoul,
Korea.

After inspecting the logs, Christiansen issued purchase order No. 76171.
On the arrangements made and upon the instructions of the consignee, Hanmi Trade
Development, Ltd., de Santa Ana, California, the Security Pacific National Bank of
Los Angeles, California issued Irrevocable Letter of Credit No. IC-46268 available at
sight in favor of Villaluz for the sum of $54,000.00, the total purchase price of the
lauan logs.
4. Certification from Han-Axel Christiansen, Ship and Merchandise Broker,
stating that logs have been approved prior to shipment in accordance with
terms and conditions of corresponding purchase Order. (Record, Vol. 1 pp.
11-12)
Also incorporated by reference in the letter of credit is the Uniform Customs and
Practice for Documentary Credits (1962 Revision).

The letter of credit was mailed to the Feati Bank and Trust Company (now Citytrust)
with the instruction to the latter that it "forward the enclosed letter of credit to the
beneficiary." (Records, Vol. I, p. 11)
The letter of credit further provided that the draft to be drawn is on Security Pacific
National Bank and that it be accompanied by the following documents:
The logs were thereafter loaded on the vessel "Zenlin Glory" which was chartered by
Christiansen. Before its loading, the logs were inspected by custom inspectors Nelo
Laurente, Alejandro Cabiao, Estanislao Edera from the Bureau of Customs (Records,
Vol. I, p. 124) and representatives Rogelio Cantuba and Jesus Tadena of the Bureau
of Forestry (Records, Vol. I, pp. 16-17) all of whom certified to the good condition and
exportability of the logs.

1. Signed Commercial Invoice in four copies showing the number of the
purchase order and certifying that
After the loading of the logs was completed, the Chief Mate, Shao Shu Wang issued a
mate receipt of the cargo which stated the same are in good condition (Records, Vol.
I, p. 363). However, Christiansen refused to issue the certification as required in
paragraph 4 of the letter of credit, despite several requests made by the private
respondent.
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.
The letter of credit lapsed on June 30, 1971, (extended, however up to July 31, 1971)
without the private respondent receiving any certification from Christiansen.
The persistent refusal of Christiansen to issue the certification prompted the private
respondent to bring the matter before the Central Bank. In a memorandum dated
August 16, 1971, the Central Bank ruled that:
. . . pursuant to the Monetary Board Resolution No. 1230 dated August 3,
1971, in all log exports, the certification of the lumber inspectors of the
Bureau of Forestry . . . shall be considered final for purposes of negotiating
documents. Any provision in any letter of credit covering log exports
requiring certification of buyer's agent or representative that said logs have
been approved for shipment as a condition precedent to negotiation of
shipping documents shall not be allowed. (Records, Vol. I, p. 367)
Meanwhile, the logs arrived at Inchon, Korea and were received by the consignee,
Hanmi Trade Development Company, to whom Christiansen sold the logs for the
amount of $37.50 per cubic meter, for a net profit of $10 per cubic meter. Hanmi
Trade Development Company, on the other hand sold the logs to Taisung Lumber
Company at Inchon, Korea. (Rollo, p. 39)
Since the demands by the private respondent for Christiansen to execute the
certification proved futile, Villaluz, on September 1, 1971, instituted an action
for mandamus and specific performance against Christiansen and the Feati Bank and
Trust Company (now Citytrust) before the then Court of First Instance of Rizal. The
petitioner was impleaded as defendant before the lower court only to afford complete
relief should the court a quo order Christiansen to execute the required certification.
The complaint prayed for the following:
1. Christiansen be ordered to issue the certification required of him under the
Letter of Credit;
2. Upon issuance of such certification, or, if the court should find it
unnecessary, FEATI BANK be ordered to accept negotiation of the Letter of
Credit and make payment thereon to Villaluz;
3. Order Christiansen to pay damages to the plaintiff. (Rollo, p. 39)
On or about 1979, while the case was still pending trial, Christiansen left the
Philippines without informing the Court and his counsel. Hence, Villaluz, filed an
amended complaint to make the petitioner solidarily liable with Christiansen.
The trial court, in its order dated August 29, 1979, admitted the amended complaint.
After trial, the lower court found:
The liability of the defendant CHRISTIANSEN is beyond dispute, and the
plaintiffs right to demand payment is absolute. Defendant CHRISTIANSEN
having accepted delivery of the logs by having them loaded in his chartered
vessel the "Zenlin Glory" and shipping them to the consignee, his buyer Han
Mi Trade in Inchon, South Korea (Art. 1585, Civil Code), his obligation to pay
the purchase order had clearly arisen and the plaintiff may sue and recover
the price of the goods (Art. 1595, Id).
The Court believes that the defendant CHRISTIANSEN acted in bad faith
and deceit and with intent to defraud the plaintiff, reflected in and aggravated
by, not only his refusal to issue the certification that would have enabled
without question the plaintiff to negotiate the letter of credit, but his accusing
the plaintiff in his answer of fraud, intimidation, violence and deceit. These
accusations said defendant did not attempt to prove, as in fact he left the
country without even notifying his own lawyer. It was to the Court's mind a
pure swindle.
The defendant Feati Bank and Trust Company, on the other hand, must be
held liable together with his (sic) co-defendant for having, by its wrongful
act, i.e., its refusal to negotiate the letter of credit in the absence of
CHRISTIANSEN's certification (in spite of the Central Bank's ruling that the
requirement was illegal), prevented payment to the plaintiff. The said letter of
credit, as may be seen on its face, is irrevocable and the issuing bank, the
Security Pacific National Bank in Los Angeles, California, undertook by its
terms that the same shall be honored upon its presentment. On the other
hand, the notifying bank, the defendant Feati Bank and Trust Company, by
accepting the instructions from the issuing bank, itself assumed the very
same undertaking as the issuing bank under the terms of the letter of credit.
xxx xxx xxx
The Court likewise agrees with the plaintiff that the defendant BANK may
also be held liable under the principles and laws on both trust and estoppel.
When the defendant BANK accepted its role as the notifying and negotiating
bank for and in behalf of the issuing bank, it in effect accepted a trust
reposed on it, and became a trustee in relation to plaintiff as the beneficiary
of the letter of credit. As trustee, it was then duty bound to protect the
interests of the plaintiff under the terms of the letter of credit, and must be
held liable for damages and loss resulting to the plaintiff from its failure to
perform that obligation.
Furthermore, when the defendant BANK assumed the role of a notifying and
negotiating BANK it in effect represented to the plaintiff that, if the plaintiff
complied with the terms and conditions of the letter of credit and presents
the same to the BANK together with the documents mentioned therein the
said BANK will pay the plaintiff the amount of the letter of credit. The Court is
convinced that it was upon the strength of this letter of credit and this implied
representation of the defendant BANK that the plaintiff delivered the logs to
 defendant CHRISTIANSEN, considering that the issuing bank is a foreign
bank with whom plaintiff had no business connections and CHRISTIANSEN
had not offered any other Security for the payment of the logs. Defendant
BANK cannot now be allowed to deny its commitment and liability under the
letter of credit:
A holder of a promissory note given because of gambling who
indorses the same to an innocent holder for value and who assures
said party that the note has no legal defect, is in estoppel from
asserting that there had been an illegal consideration for the note,
and so, he has to pay its value. (Rodriguez v. Martinez, 5 Phil. 67).
The defendant BANK, in insisting upon the certification of defendant
CHRISTIANSEN as a condition precedent to negotiating the letter of credit,
likewise in the Court's opinion acted in bad faith, not only because of the
clear declaration of the Central Bank that such a requirement was illegal, but
because the BANK, with all the legal counsel available to it must have
known that the condition was void since it depended on the sole will of the
debtor, the defendant CHRISTIANSEN. (Art. 1182, Civil Code) (Rollo, pp.
29-31)
On the basis of the foregoing the trial court on October 20, 1986, ruled in favor of the
private respondent. The dispositive portion of its decision reads:
WHEREFORE, judgment is hereby rendered for the plaintiff, ordering the
defendants to pay the plaintiff, jointly and severally, the following sums:
a) $54,000.00 (US), or its peso equivalent at the prevailing rate as of the
time payment is actually made, representing the purchase price of the logs;
b) P17,340.00, representing government fees and charges paid by plaintiff in
connection with the logs shipment in question;
c) P10,000.00 as temperate damages (for trips made to Bacolod and Korea).
All three foregoing sums shall be with interest thereon at 12% per
annum from September 1, 1971, when the complaint was filed, until fully
paid:
d) P70,000.00 as moral damages;
e) P30,000.00 as exemplary damages; and
f) P30,000.00 as attorney's fees and litigation expense.
(Rollo, p. 28)
The petitioner received a copy of the decision on November 3, 1986. Two days
thereafter, or on November 5, 1986, it filed a notice of appeal.
On November 10, 1986, the private respondent filed a motion for the immediate
execution of the judgment on the ground that the appeal of the petitioner was
frivolous and dilatory.
The trial court ordered the immediate execution of its judgment upon the private
respondent's filing of a bond.
The petitioner then filed a motion for reconsideration and a motion to suspend the
implementation of the writ of execution. Both motions were, however, denied. Thus,
petitioner filed before the Court of Appeals a petition for certiorari and prohibition with
preliminary injunction to enjoin the immediate execution of the judgment.
The Court of Appeals in a decision dated April 9, 1987 granted the petition and
nullified the order of execution, the dispositive portion of the decision states:
WHEREFORE, the petition for certiorari is granted. Respondent Judge's
order of execution dated December 29, 1986, as well as his order dated
January 14, 1987 denying the petitioner's urgent motion to suspend the writ
of execution against its properties are hereby annulled and set aside insofar
as they are sought to be enforced and implemented against the petitioner
Feati Bank & Trust Company, now Citytrust Banking Corporation, during the
pendency of its appeal from the adverse decision in Civil Case No. 15121.
However, the execution of the same decision against defendant Axel
Christiansen did not appeal said decision may proceed unimpeded. The
Sheriff s levy on the petitioner's properties, and the notice of sale dated
January 13, 1987 (Annex M), are hereby annulled and set aside. Rollo p. 44)
A motion for reconsideration was thereafter filed by the private respondent. The Court
of Appeals, in a resolution dated June 29, 1987 denied the motion for reconsideration.
In the meantime, the appeal filed by the petitioner before the Court of Appeals was
given due course. In its decision dated June 29, 1990, the Court of Appeals affirmed
the decision of the lower court dated October 20, 1986 and ruled that:
1. Feati Bank admitted in the "special and negative defenses" section of its
answer that it was the bank to negotiate the letter of credit issued by the
Security Pacific National Bank of Los Angeles, California. (Record, pp. 156,
157). Feati Bank did notify Villaluz of such letter of credit. In fact, as such
negotiating bank, even before the letter of credit was presented for payment,
Feati Bank had already made an advance payment of P75,000.00 to Villaluz
in anticipation of such presentment. As the negotiating bank, Feati Bank, by
notifying Villaluz of the letter of credit in behalf of the issuing bank (Security
Pacific), confirmed such letter of credit and made the same also its own
obligation. This ruling finds support in the authority cited by Villaluz:
 A confirmed letter of credit is one in which the notifying bank gives its
assurance also that the opening bank's obligation will be performed. In such
a case, the notifying bank will not simply transmit but will confirm the
opening bank's obligation by making it also its own undertaking, or
commitment, or guaranty or obligation. (Ward & Hatfield, 28-29, cited in
Agbayani, Commercial Laws, 1978 edition, p. 77).
Feati Bank argues further that it would be considered as the negotiating
bank only upon negotiation of the letter of credit. This stance is untenable.
Assurance, commitments or guaranties supposed to be made by notifying
banks to the beneficiary of a letter of credit, as defined above, can be
relevant or meaningful only with respect to a future transaction, that is,
negotiation. Hence, even before actual negotiation, the notifying bank, by the
mere act of notifying the beneficiary of the letter of credit, assumes as of that
moment the obligation of the issuing bank.
2. Since Feati Bank acted as guarantor of the issuing bank, and in effect
also of the latter's principal or client, i.e. Hans Axel-Christiansen. (sic) Such
being the case, when Christiansen refused to issue the certification, it was
as though refusal was made by Feati Bank itself. Feati Bank should have
taken steps to secure the certification from Christiansen; and, if the latter
should still refuse to comply, to hale him to court. In short, Feati Bank should
have honored Villaluz's demand for payment of his logs by virtue of the
irrevocable letter of credit issued in Villaluz's favor and guaranteed by Feati
Bank.
3. The decision promulgated by this Court in CA-G.R. Sp No. 11051, which
contained the statement "Since Villaluz" draft was not drawn strictly in
compliance with the terms of the letter of credit, Feati Bank's refusal to
negotiate it was justified," did not dispose of this question on the merits. In
that case, the question involved was jurisdiction or discretion, and not
judgment. The quoted pronouncement should not be taken as a preemptive
judgment on the merits of the present case on appeal.
4. The original action was for "Mandamus and/or specific performance."
Feati Bank may not be a party to the transaction between Christiansen and
Security Pacific National Bank on the one hand, and Villaluz on the other
hand; still, being guarantor or agent of Christiansen and/or Security Pacific
National Bank which had directly dealt with Villaluz, Feati Bank may be sued
properly on specific performance as a procedural means by which the relief
sought by Villaluz may be entertained. (Rollo, pp. 32-33)
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, the decision appealed from is affirmed; and accordingly, the
appeal is hereby dismissed. Costs against the petitioner. (Rollo, p. 33)
Hence, this petition for review.
The petitioner interposes the following reasons for the allowance of the petition.
First Reason
THE RESPONDENT COURT ERRONEOUSLY CONCLUDED FROM THE
ESTABLISHED FACTS AND INDEED, WENT AGAINST THE EVIDENCE
AND DECISION OF THIS HONORABLE COURT, THAT PETITIONER
BANK IS LIABLE ON THE LETTER OF CREDIT DESPITE PRIVATE
RESPONDENTS NON-COMPLIANCE WITH THE TERMS THEREOF,
Second Reason
THE RESPONDENT COURT COMMITTED AN ERROR OF LAW WHEN IT
HELD THAT PETITIONER BANK, BY NOTIFYING PRIVATE RESPONDENT
OF THE LETTER OF CREDIT, CONFIRMED SUCH CREDIT AND MADE
THE SAME ALSO ITS OBLIGATION AS GUARANTOR OF THE ISSUING
BANK.
Third Reason
THE RESPONDENT COURT LIKEWISE COMMITTED AN ERROR OF LAW
WHEN IT AFFIRMED THE TRIAL COURT'S DECISION. (Rollo, p. 12)
The principal issue in this case is whether or not a correspondent bank is to be held
liable under the letter of credit despite non-compliance by the beneficiary with the
terms thereof?
The petition is impressed with merit.
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. 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.
The case of Anglo-South America Trust Co. v. Uhe et al. (184 N.E. 741 [1933])
expounded clearly on the rule of strict compliance.
We have heretofore held that these letters of credit are to be strictly
complied with which documents, and shipping documents must be followed
 as stated in the letter. There is no discretion in the bank or trust company to
waive any requirements. The terms of the letter constitutes an agreement
between the purchaser and the bank. (p. 743)
Although in some American decisions, banks are granted a little discretion to accept a
faulty tender as when the other documents may be considered immaterial or
superfluous, this theory could lead to dangerous precedents. Since a bank deals only
with documents, it is not in a position to determine whether or not the documents
required by the letter of credit are material or superfluous. The mere fact that the
document was specified therein readily means that the document is of vital
importance to the buyer.
Moreover, the incorporation of the Uniform Customs and Practice for Documentary
Credit (U.C.P. for short) in the letter of credit resulted in the applicability of the said
rules in the governance of the relations between the parties.
And even if the U.C.P. was not incorporated in the letter of credit, we have already
ruled in the affirmative as to the applicability of the U.C.P. in cases before us.
In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the observance
of the U.C.P. in this jurisdiction is justified by Article 2 of the Code of Commerce.
Article 2 of the Code of Commerce enunciates that in the absence of any particular
provision in the Code of Commerce, commercial transactions shall be governed by
the usages and customs generally observed.
There being no specific provision which governs the legal complexities arising from
transactions involving letters of credit not only between the banks themselves but also
between banks and seller and/or buyer, the applicability of the U.C.P. is undeniable.
The pertinent provisions of the U.C.P. (1962 Revision) are:
Article 3.
An irrevocable credit is a definite undertaking on the part of the issuing bank
and constitutes the engagement of that bank to the beneficiary and bona fide
holders of drafts drawn and/or documents presented thereunder, that the
provisions for payment, acceptance or negotiation contained in the credit will
be duly fulfilled, provided that all the terms and conditions of the credit are
complied with.
An irrevocable credit may be advised to a beneficiary through another bank
(the advising bank) without engagement on the part of that bank, but when
an issuing bank authorizes or requests another bank to confirm its
irrevocable credit and the latter does so, such confirmation constitutes a
definite undertaking of the confirming bank. . . .
Article 7.
Banks must examine all documents with reasonable care to ascertain that
they appear on their face to be in accordance with the terms and conditions
of the credit,"
Article 8.
Payment, acceptance or negotiation against documents which appear
on their face to be in accordance with the terms and conditions of a credit by
a bank authorized to do so, binds the party giving the authorization to take
up documents and reimburse the bank which has effected the payment,
acceptance or negotiation. (Emphasis Supplied)
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 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.
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 wrongly mixed up the meaning of an irrevocable credit with that of a
confirmed credit. In its decision, the trial court ruled that the petitioner, in accepting
the obligation to notify the respondent that the irrevocable credit has been transmitted
to the petitioner on behalf of the private respondent, has confirmed the letter.
The trial court appears to have overlooked the fact that an irrevocable credit is not
synonymous with a confirmed credit. These types of letters have different meanings
and the legal relations arising from there varies. A credit may be
an irrevocable credit and at the same time a confirmed credit or vice-versa.
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. Another error which the lower court and the Court of
Appeals made was to confuse the obligation assumed by the petitioner.
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. (Kronman
and Co., Inc. v. Public National Bank of New York, 218 N.Y.S. 616 [1926]; Shaterian,
Export-Import Banking, p. 292, cited in Agbayani, Commercial Laws of the
Philippines, Vol. 1, p. 76). 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. (Scanlon v. First National Bank of Mexico, 162
N.E. 567 [1928]; Shaterian, Export-Import Banking, p. 293, cited in Agbayani,
Commercial Laws of the Philippines, Vol. 1, p. 76)
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. (Shaterian, Export-Import Banking, p. 294, cited in
Agbayani Commercial Laws of the Philippines, Vol. 1, p. 77)
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.
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. What was simply stated therein was the instruction
that the petitioner forward the original letter of credit to the beneficiary.
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 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. (See Kronman and Co.,
Inc. v. Public National Bank of New York, supra)
In order that the petitioner may be held liable under the letter, there should be proof
that the petitioner confirmed the letter of credit.
The records are, however, bereft of any evidence which will disclose that the
petitioner has confirmed the letter of credit. The only evidence in this case, and upon
which the private respondent premised his argument, is the P75,000.00 loan
extended by the petitioner to him.
The private respondent relies on this loan to advance his contention that the letter of
credit was confirmed by the petitioner. He claims that the loan was granted by the
petitioner to him, "in anticipation of the presentment of the letter of credit."
The proposition advanced by the private respondent has no basis in fact or law. That
the loan agreement between them be construed as an act of confirmation is rather
far-fetched, for it depends principally on speculative reasoning.
As earlier stated, there must have been an absolute assurance on the part of the
petitioner that it will undertake the issuing bank's obligation as its own. Verily, the loan
agreement it entered into cannot be categorized as an emphatic assurance that it will
carry out the issuing bank's obligation as its own.
The loan agreement is more reasonably classified as an isolated transaction
independent of the documentary credit.
Of course, it may be presumed that the petitioner loaned the money to the private
respondent in anticipation that it would later be paid by the latter upon the receipt of
the letter. Yet, we would have no basis to rule definitively that such "act" should be
construed as an act of confirmation.
The private respondent no doubt was in need of money in loading the logs on the ship
"Zenlin Glory" and the only way to satisfy this need was to borrow money from the
petitioner which the latter granted. From these circumstances, a logical conclusion
that can be gathered is that the letter of credit was merely to serve as a collateral.
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.
The case of Scanlon v. First National Bank (supra) perspicuously explained the
relationship between the seller and the negotiating bank, viz:
It may buy or refuse to buy as it chooses. Equally, it must be true that it owes
no contractual duty toward the person for whose benefit the letter is written
to discount or purchase any draft drawn against the credit. No relationship of
agent and principal, or of trustee and cestui, between the receiving bank and
the beneficiary of the letter is established. (P.568)
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 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."
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.
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
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 failure by him to submit the certification was fatal to his case.1wphi1 The U.C.P.
which is incorporated in the letter of credit ordains that the bank may only pay the
amount specified under the letter if all the documents tendered are on their face in
compliance with the credit. It is not tasked with the duty of ascertaining the reason or
reasons why certain documents have not been submitted, as it is only concerned with
the documents. Thus, whether or not the buyer has performed his responsibility
towards the seller is not the bank's problem.

We are aware of the injustice committed by Christiansen on the private respondent

but we are deciding the controversy on the basis of what the law is, for the law is not
meant to favor only those who have been oppressed, the law is to govern future
relations among people as well. Its commitment is to all and not to a single individual.
The faith of the people in our justice system may be eroded if we are to decide not
what the law states but what we believe it should declare. Dura lex sed lex.

Considering the foregoing, the materiality of ruling upon the validity of the certificate
of approval required of the private respondent to submit under the letter of credit, has
become insignificant.

In any event, we affirm the earlier ruling of the Court of Appeals dated April 9, 1987 in
regard to the petition before it for certiorari and prohibition with preliminary injunction,
to wit:

There is no merit in the respondent's contention that the certification

required in condition No. 4 of the letter of credit was "patently illegal." At the
time the letter of credit was issued there was no Central Bank regulation
prohibiting such a condition in the letter of credit. The letter of credit (Exh. C)
was issued on June 7, 1971, more than two months before the issuance of
the Central Bank Memorandum on August 16, 1971 disallowing such a
condition in a letter of credit. In fact the letter of credit had already expired on
July 30, 1971 when the Central Bank memorandum was issued. In any
event, it is difficult to see how such a condition could be categorized as
illegal or unreasonable since all that plaintiff Villaluz, as seller of the logs,
could and should have done was to refuse to load the logs on the vessel
"Zenlin Glory", unless Christiansen first issued the required certification that
the logs had been approved by him to be in accordance with the terms and
conditions of his purchase order. Apparently, Villaluz was in too much haste
to ship his logs without taking all due precautions to assure that all the terms
and conditions of the letter of credit had been strictly complied with, so that
there would be no hitch in its negotiation. (Rollo, p. 8)

WHEREFORE, the COURT RESOLVED to GRANT the petition and hereby

NULLIFIES and SETS ASIDE the decision of the Court of Appeals dated June 29,
1990. The amended complaint in Civil Case No. 15121 is DISMISSED.

SO ORDERED.
 Caloocan City
Reference: HSB-PI/8019-R
Contracted through:

Order No.:
Commodity: Foundry Pig Iron
Spec.: JIS G 2202 Class 1-1C
G.R. No. L-100831 December 17, 1993 Quantity: 2,000MT
Price: US $190.30/MT C&F Manila
RELIANCE COMMODITIES, INC., petitioner, Amount: US $380,600.00
vs. Packing: Bare Loose
DAEWOO INDUSTRIAL CO., LTD., respondent. Shipment: August
Destination: Manila
Ongkiko & Dizon Law Offices for petitioner. Payment: By an irrevocable of sight letter of credit in favor of
Daewoo Industrial Co., Ltd., 541 5th Street, namdaemunro, Jung-
Lao, Veloso-Lao & Lao for private respondent. Gu, Seoul, Korea.

Remarks: Other terms and conditions as per attached sheet.

FELICIANO, J.: We confirm our sales as specified herein. Subject to the terms and
conditions set forth herein, this confirmation of order ("the
Contract") constitutes a contract between Daewoo Industrial Co.
On 9 January 1980, petitioner Reliance Commodities, Inc. ("reliance") and private Ltd. ("Seller") and the addressee ("Buyer"). Other terms and
respondent Daewoo Industrial Co., Ltd. ("Daewoo") entered into a contract of sale conditions of the Contract are on the back hereof. If you find
under the terms of which the latter undertook to ship and deliver to the former 2,000 anything herein not in order, please let us know immediately, if
metric tons of foundry pig iron for the price of US$404,000.00. Pursuant to this necessary by telex, cable or telegram. Kindly sign and return the
contract, Daewoo shipped from Pohang, Republic of Korea, 2,000 metric tons of duplicate after confirming the above.
foundry pig iron on board the M/S Aurelio III under Bill of Lading No. PIP-1 for
carriage to and delivery in Manila to its consignee, Reliance. The shipment was fully
paid for. Upon arrival in Manila, the subject cargo was found to be short of 135.655 Read and agreed to:
metric tons as only 1,864.345 metric tons were discharged and delivered to Reliance.
Name of addressee: Daewoo Industrial Co., Ltd.
On 2 May 1980, another contract was entered into between the same parties for the
purchase of another 2,000 metric tons of foundry pig iron. Daewoo acknowledged the By: (SGD) MR SAMUEL CHUASON By: (SGD) JA-HYUNG RYU
short shipment of 135.655 metric tons under the 9 January 1980 contract and, to Date: July 31, 1980 Date: July 31, 1980 1
compensate Reliance therefor, bound itself to reduce the price by US$1 to US$2 per
metric ton of pig iron for succeeding orders. This undertaking was made part of the 2 The attached sheet referred to above set out the following:
May 1980 contract. However, that contract was not consummated and was later
superseded by still another contract dated 31 July 1980. Reliance Commodities, Inc.
Our Reference No. HSB-PI/SO19-R
The 31 July 1980 contract read as follows:
1. Invoicing: Actual Weight
CONFIRMATION OF ORDER
SALES NOTE No. HSB-SN/S001-R 2. Chemical Composition (%):
Carbon: 3.30 min. (aiming 3.80 min.)
To Messrs: Reliance Commodities, Inc. Silicon: 2.21-2.60 (aiming 2.60)
161, 9th Street, 10th Avenue
 Manganese: 0.30-1.00
Phosphorous: 0.45 max. (aiming 0.25 max.)
Sulfur: 0.05 max.
3. Quantity Tolerance: +10 percent of total quantity should be
allowed.
4. Unit Weight: 5 kgs. + 1 kg. (one notch)
5. Broken pieces of twenty (20%) percent should be allowed.
6. All disputes, controversies, or differences which may arise
between the parties, out of or in relation to or in connection with this
contract, or for the breach thereof, shall be finally settled by
arbitration in Korea in accordance with the rules and regulations of
Korea commercial arbitration association or in the Philippines in
accordance with the Philippine arbitration rules.
7. Letter of credit should be opened on or before August 7, 1980.
8. Other terms and conditions, if necessary, are to be solved later
by mutual agreement.
9. Mill sheets and copies of non-negotiable documents to be sent to
buyer by airmail immediately after shipment.
10. This Sales Note No. HSB-SN/S001R cancels Sales Note No.
HSB-SN/8001 dated May 2, 1980. 2
On August 1, 1980, Reliance, through its Mrs. Samuel Chuason, filed with the China
Banking Corporation, an application for a Letter of Credit (L/C) in favor of Daewoo
covering the amount of US$380,600.00. The application was endorsed to the Iron and
Steel Authority (ISA) or approval but the application was denied. Reliance was
instead asked to submit purchase orders from end-users to support its application for
a Letter of Credit. However, Reliance was not able to raise purchase orders for 2,000
metric tons. Reliance alleges that it was able to raise purchase orders for 1,900
metric tons. 3 Daewoo, upon the other hand, contends that Reliance was only able to
raise purchase orders for 900 metric tons. 4 An examination of the
exhibits 5 presented by Reliance in the trial court shows that only purchase orders for
900 metric tons were stamped "Received" by the ISA. The other purchase orders for
1,000 metric tons allegedly sent by prospective end users to Reliance were not
shown to have been duly sent and exhibited to the ISA. Whatever the exact amount
of the purchase orders was, Daewoo rejected the proposed L/C for the reason that
the covered quantity fell short of the contracted tonnage. Thus, Reliance withdrew the
application for the L/C on 14 August 1980.
Subsequently, Daewoo leaned that the failure of Reliance to open the L/C as
stipulated in the 31 July 1980 contract was due to the fact that as early as May 1980,
Reliance has already exceeded its foreign exchange allocation for 1980. Because of
the failure of Reliance to comply with its undertaking under the 31 July 1980 contract,
Daewoo was compelled to sell the 2,000 metric tons to another buyer at a lower price,
to cut losses and expenses Daewoo had begun to incur due to its inability to ship the
2000 metric tons to Reliance under their contract.
On 3 September 1980, Reliance, through its counsel, wrote Daewoo requesting
payment of the amount of P226,370.48, representing the value of the short delivery of
135.655 metric tons of foundry pig iron under the contract of 9 January 1980. Not
being heeded, Reliance filed an action for damages against Daewoo with the trial
court. Daewoo responded, inter alia, with a counterclaim for damages, contending
that Reliance was guilty of breach of contract when it failed to open an L/C as
required in the 31 July 1980 contract.
After trial, the trial court ruled that:
(1) the 31 July 1980 contract did not extinguish Daewoo's obligation
for short delivery pursuant to the 9 January 1980 contract and must
therefore pay Reliance P226,370.48 representing the value of the
short delivered goods plus interest and attorney's fees; and
(2) Reliance is in turn liable for breach of contract for its failure to
open a letter of credit in favor of Daewoo pursuant to the 31 July
1980 contract and must therefore pay the latter P331,920.97 as
actual damages with legal interest plus attorney's fees.
Reliance appealed the second part of the trial court's judgment. Public respondent
Court of Appeals found no merit in the appeal and in affirming the decision of the trial
court ruled that:
1) the trial court's finding that Reliance could not have opened the
Letter of Credit in favor of Daewoo because it had already
exhausted its foreign exchange allocation at the time of its
application, was amply supported by evidence; and
2) the opening of a letter of credit is not such a future and uncertain
event as to make it a suspensive condition within the contemplation
of law; but, only mode of payment agreed upon by the parties, and
a standard mode at that when one of the parties to the transaction
is a foreigner and the consideration is payable in foreign exchange.
In the present Petition for Review, Reliance assails the award of damages in favor of
Daewoo. Reliance contends a) that its failure to open a Letter of Credit was due to the
failure of Daewoo to accept the purchase orders for 1,900 metric tons instead of
2,000 metric tons; b) that the opening of the Letter of Credit was a condition
precedent to the effectivity of the contract between Reliance and Daewoo; and c) that
since such condition had not occurred, the contract never came into existence and,
therefore, Reliance should not have been held liable for damages.
The issue before us is whether or not the failure of an importer (Reliance) to open a
letter of credit on the date agreed upon makes him liable to the exporter (Daewoo) for
damages.
In addressing this issue, it is useful to recall the nature of a Letter of Credit, and the
mechanics involved in applying for a Letter of Credit.
The nature of a letter of credit was extensively discussed in Bank of America, NT &
SA v. Court of Appeals, et al. 6by Vitug, J. in the following terms:
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. To break the
impasse, the buyer may be required to contract a bank to issue a
letter of credit in favor of the seller so that, by virtue of the letter of
credit, the issuing bank can authorize the seller to draw drafts and
engage to pay them upon their presentment simultaneously with
the tender of documents required by the letter of credit. The buyer
and seller agree on what documents are to be presented for
payment, but ordinarily they are documents of title evidencing or
attesting to the shipment of the goods to the buyer.
Once the credit is established, the seller ships the goods to the
buyer and in the process secures the required shipping documents
or documents of title. To get paid, the seller executes a draft and
pays cash to the seller if it finds that the documents submitted by
the seller conform with what the letter of credit requires. The bank
then obtains possession of the documents upon paying the seller.
The transaction is completed when the buyer reimburses the
issuing bank and acquires the documents entitling him to the
goods. Under this arrangement, the seller gets paid only if he
delivers the documents of title over the goods, while the goods only
after reimbursing the bank. 7 (footnotes omitted)
A letter of credit is one of the modes of payment, set out in Sec. 8, Central Bank
Circular No. 1389, "Consolidated Foreign Exchange Rules and Regulations," dated
13 April 1993, by which commercial banks sell foreign exchange to service payments
for, e.g., commodity imports. The primary purpose of the letter of credit is to substitute
for and therefore support, the agreement of the buyer/importer to pay money under a
contract or other arrangement. 8 It creates in the seller/exporter a secure expectation
of payment.
A letter of credit transaction may thus be seen to be a composite of at least three (3)
distinct but intertwined relationships being concretized in a contract:
(a) One contract relationship links the party applying for the L/C
(the account party or buyer or importer) and the party for whose
benefit the L/C is issued (the beneficiary or seller or exporter). In
this contract, the account party, here Reliance, agrees, among
other things and subject to the terms and conditions of the contract,
to pay money to the beneficiary, here Daewoo.
(b) A second contract relationship is between the account party and
the issuing bank. Under this contract, (sometimes called the
"Application and Agreement" or the "Reimbursement Agreement"),
the account party among other things, applies to the issuing bank
for a specified L/C and agrees to reimburse the bank for amounts
paid by that bank pursuant to the L/C.
(c) The third contract relationship is established between the
issuing bank and the beneficiary, in order to support the contract,
under
(a) above, of the account party and the beneficiary to, inter alia, pay
certain monies to the latter.
Certain other parties may be added to the foregoing, but the above three are the
indispensable ones.
The issue raised in the Petition at bar relates principally to the first component
contractual relation above: that between account party or importer Reliance and
beneficiary or exporter Daewoo.
Examining the actual terms of that relationship as set out in the 31 July 1980 contract
quoted earlier (and not simply the summary inaccurately rendered by the trial court),
the Court considers that under that instrument, the opening of an L/C upon
application of Reliance was not a condition precedent for the birth of the obligation of
Reliance to purchase foundry pig iron from Daewoo. 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." 9 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 opening of the L/C in favor of Daewoo was an
obligation of Reliance and the performance of that obligation by Reliance was a
condition of enforcement of the reciprocal obligation of Daewoo to ship the subject
matter of the contract the foundry pig iron to Reliance. But the contract itself
between Reliance and Daewoo had already sprung into legal existence and was
enforceable.
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. 10 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:
All L/C's must be opened on or before the date of shipment with
maximum validity of one (1) year. Likewise, only one L/C should be
opened for each import transaction. for purposes of opening an
L/C, importers shall submit to the commercial bank the following
documents:
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/specification 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 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. 12 Certain commodities are classified
as "regulated commodities" for purposes of their importation, "for reasons of public
health and safety, national security, international commitments, and
development/rationalization of local industry." 13 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. 14 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. 15
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. 16 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. 17 Thus, in the instant case, ISA
required Reliance to support its application by submitting purchase orders from end-
users 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. 18 For
having exceeded its foreign exchange allocation before it entered 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. Compliance with Philippine legal requirements
was the duty of Reliance; it is not disputed that ISA's requirements were legal and
valid, and not arbitrary or capricious. Compliance with such requirements, like
keeping within one's dollar allocation and complying with the requirements of ISA,
were within the control of Reliance and not of Daewoo. The Court is compelled to
agree with the Court of Appeals that the non-opening of the L/C was due to the failure
of Reliance to comply with its duty under the contract.
We believe and so hold that failure of a buyer seasonably to furnish an agreed letter
of credit is a breach of he 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
We hold, further, that the Court of Appeals committed no reversible error when it ruled
that the damages incurred by Daewoo were sufficiently proved with the testimony of
Mr. Ricardo Fernandez and "the various documentary evidence showing the loss
suffered by the defendant when it was compelled to sell the subject goods at a lower
price." 20
WHEREFORE, in view of the foregoing, the Petition for Review is hereby DENIED for SO ORDERED.
lack of merit and the decision of the Court of Appeals dated 8 February 1991 is
hereby AFFIRMED. Costs against petitioner.