INSULAR BANK OF ASIA & AMERICA vs.

IAC
G.R. No. L-74834
November 17, 1988

The Spouses Mendoza obtained two loans from Philam Life totalling PhP 600,000. The loans (together
with a 14% nominal interest rate) were to be liquidated in equal amortizations over a period of 5 years.
To secure payment, Philam Life required that the said amortizations be guaranteed by an irrevocable
standby letter of credit (L/C) of a commercial bank. As such, the Spouses Mendoza contracted with
Insular Bank for the issuance of two irrevocable standby L/C in favor of Philam Life for the total amount
of PhP 600,000. These L/Cs were, in turn, secured by a real estate mortgage on the property of the
spouses in favor of Insular Bank.

The Mendozas failed to pay Philam Life the amortizations that fell due on 11 June 1978, thus, Philam Life
informed Insular Bank that it was declaring both loans "entirely due and demandable", and demanded
the payment of PhP492,996.30. Insular Bank contested the propriety of calling in the entire loan, and
philam life desisted. However, the spouses once again defaulted on their amortization, causing Philam
Life to declare the remaining PhP 274,779.56 entirely due and demandable again. By way of defense,
Insular Bank claimed that, as a mere guarantor of the spouses, its remaining obligation under the two
standby L/Cs were only PhP30,100.60. Later, the bank even claimed that it made an overpayment to
Philam Life, and demanded a refund of the same.

Philam life filed a suit against the spouses and Insular Bank for the recovery of the amount of the loan
allegedly still owed to them. The trial court ruled that Insular Bank, "as surety", was discharged of its
liability to the extent of the payment made by the spouses, as the principal debtors, to Philam Life.

Upon appeal of Philam Life and the spouses, the appellate court reversed the lower court's decision, and
ruled that insular bank's liability was not reduced by virtue of the payments made by Mendoza.

ISSUE:

Whether the partial payments made by the Spouses Mendoza would have the effect of reducing the
liability of the Insular Bank as guarantor or surety under the terms of the standby L/C in question.

RULING:

NO, the partial payments made will not reduce the liability of Insular Bank.

Unequivocally, the subject standby Letters of Credit secure the payment of any obligation of the
Mendozas to Philam Life including all interests, surcharges and expenses thereon but not to exceed
P600,000.00. But while they are a security arrangement, they are not converted thereby into contracts
of guaranty. They are primary obligations and not accessory contracts. Being separate and independent
agreements, the payments made by the Mendozas cannot be added in computing IBBA's liability
under its own standby letters of credit. Payments made by the Mendozas directly to Philam Life are in
compliance with their own prestation under the loan agreements. And although these payments could
result in the reduction of the actual amount which could ultimately be collected from IBAA, the latter's
separate undertaking under its L/Cs remains.

The amount of P222,000.00 as found by the trial court, therefore, considered as "any obligation of the
accountee" under the L/Cs will still have to be paid by Insular Bank under the explicit terms thereof,
which the bank had itself supplied. Letters of credit are strictly construed to the end that the rights of
those directly parties to them may be preserved and their interest safeguarded. Like any other writing, it
will be construed most strongly against the writer and so as to be reasonable and consistent with honest
intentions