TRUST RECEIPT

LANDL & COMPANY (PHIL.) INC., PERCIVAL G. LLABAN and MANUEL P. LUCENTE, petitioners, vs.
METROPOLITAN BANK & TRUST COMPANY, respondent.
G.R. No. 159622. July 30, 2004

Facts:

Petitioner corporation was granted by respondents bank an irrevocable letter of credit in the
amount of US$19,606.77, which was equivalent to P218,733.92 in Philippine currency at the
time the transaction was consummated to purchase various welding rods and electrodes from
Perma Alloys, Inc., New York, U.S.A.

To secure the indebtedness of petitioner corporation, respondent bank required the

execution of a Trust Receipt in an amount equivalent to the letter of credit, on the condition
that petitioner corporation would hold the goods in trust for respondent bank, with the right to
sell the goods and the obligation to turn over to respondent bank the proceeds of the sale, if
any and return them to respondent bank on or before November 23, 1983 if the goods
remained unsold.

Petitioner Corporation defaulted in the payment of its obligation to respondent bank so the
goods were sold at public auction and was awarded to respondent bank as the highest bidder.

The proceeds of the auction sale were insufficient to completely satisfy petitioner’s
outstanding obligation to respondent bank which prompted the latter to demand from the
petitioners to pay the remaining balance of their obligation. After petitioners failed to do so,
respondent bank instituted the instant case to collect the said deficiency.

Issue: Whether or not respondent bank had the right to claim the deficiency from petitioners
notwithstanding the fact that the goods covered by the trust receipt were fully turned over to
respondent.

Ruling:

Yes, the trust receipt between respondent bank and petitioner corporation contains the
following relevant clauses:
“The BANK/ENTRUSTER may, at any time, and only at its option, cancel this trust and take
possession of the goods/documents/instruments subject hereof or of the proceeds realized
therefrom wherever they may then be found, upon default or failure of the ENTRUSTEE to
comply with any of the terms and conditions of this Trust Receipt or of any other agreement
between the BANK/ENTRUSTER and the ENTRUSTEE. x x x Provided, further, that the
ENTRUSTEE shall receive any surplus thereof but shall, in any case, be liable to the
BANK/ENTRUSTER for any deficiency.

The afore-cited stipulations in the trust receipt are a near-exact reproduction of the second
paragraph of Section 7 of Presidential Decree No. 115, or the Trust Receipts Law which
expressly provides that the entrustee shall be liable to the entruster for any deficiency after the
proceeds of the sale have been applied to the payment of the expenses of the sale, the
payment of the expenses of re-taking, keeping and storing the goods, documents or
instruments, and the satisfaction of the entrustees indebtedness to the entruster.

In the case at bar, the proceeds of the auction sale were insufficient to satisfy entirely
petitioner corporations indebtedness to the respondent bank. Respondent bank was thus well
within its rights to institute the instant case to collect the deficiency.

LETTERS OF CREDIT
 FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING CORPORATION), petitioner,
vs.
THE COURT OF APPEALS, and BERNARDO E. VILLALUZ, respondents.

Facts:

The consignee, Hanmi Trade Development, Ltd., de Santa Ana, California, the Security Pacific
National Bank of Los Angeles, California issued Irrevocable Letter of Credit available at sight in
favor of Villaluz as the seller for the sum of $54,000.00, for the total purchase price of the lauan
logs.

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", and
the letter of credit further provided that the draft to be drawn is on Security Pacific National
Bank and that it be accompanied by documents, among them, is the 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.

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, but Christiansen refused to
issue the certification as required in 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.

Since the demands by the private respondent for Christiansen to execute the certification
proved futile, Villaluz, 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.

Issue:
1. 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.

2. Whether or not 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.

3. Whether or not petitioner is a notifying bank, negotiating bank or a confirming bank.

4. Whether or not petitioner became a "trustee in relation to the plaintiff (private

respondent) as the beneficiary of the letter of credit.

5. Whether or not petitioner acted as a guarantor of the issuing bank and in effect also of
the latter's principal or client.
Ruling:

1.
No, 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.

In the case of Anglo-South America Trust Co. v. Uhe et al., the Supreme court enunciated that
these letters of credit are to be strictly complied with which documents, and shipping
documents must be followed as stated in the letter.

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.

Under the Uniform Customs and Practice for Documentary Credit (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.

2. No.
An irrevocable credit is not synonymous with a confirmed credit. A credit may be
an irrevocable credit and at the same time a confirmed credit or vice-versa.

An irrevocable credit simply means that the issuing bank may not without the consent of the
beneficiary (seller) and the applicant (buyer) revoke his undertaking under the letter. On the
other hand, a confirmed letter of credit pertains to the kind of obligation assumed by the
correspondent bank wherein 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.

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.

3.
 It is a notifying bank and its responsibility was solely to notify and/or transmit the
documentary of credit to the private respondent and its obligation ends there.

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. In this case, the letter
merely provided that the petitioner "forward the enclosed original credit to the beneficiary."

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, otherwise, 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 and
that there should be proof that the petitioner confirmed the letter of 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.

4.
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.

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. Precisely, as a notifying bank, its only obligation is to notify the private
respondent of the existence of the letter of credit.

5.
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 concept of guarantee vis-a-vis the concept of an irrevocable credit are inconsistent with
each other since 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.

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. 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.

TRANSFIELD PHILIPPINES, INC., petitioner, vs. LUZON HYDRO CORPORATION, AUSTRALIA and
NEW ZEALAND BANKING GROUP LIMITED and SECURITY BANK CORPORATION, respondents.
G.R. No. 146717. November 22, 2004

Facts:

Petitioner and Respondent Luzon Hydro Corporation (hereinafter, LHC) entered into a
Turnkey Contract whereby petitioner, as Turnkey Contractor, undertook to construct, on a
turnkey basis, a seventy (70)-Megawatt hydro-electric power station at the Bakun River in the
provinces of Benguet and Ilocos Sur (hereinafter, the Project).
 To secure performance of petitioners obligation on or before the target completion date, or
such time for completion as may be determined by the parties agreement, petitioner opened in
favor of LHC two (2) standby letters of credit (hereinafter referred to as the Securities).

Petitioner sought various EOT (extension of time) to complete the Project but LHC denied
the requests which gave rise to a series of legal actions between the parties which culminated
in the instant petition.

Foreseeing that LHC would call on the Securities pursuant to the pertinent provisions of the
Turnkey Contract, petitioner in two separate letters advised respondent banks of the
arbitration proceedings already pending before the CIAC and ICC in connection with its alleged
default in the performance of its obligations and warned respondent banks that any transfer,
release, or disposition of the Securities in favor of LHC or any person claiming under LHC would
constrain it to hold respondent banks liable for liquidated damages.

Despite the letters of petitioner, however, both banks informed petitioner that they would
pay on the Securities if and when LHC calls on them because LHC averred that the Securities are
independent of the main contract between them as shown on the face of the two Standby
Letters of Credit which both provide that the banks have no responsibility to investigate the
authenticity or accuracy of the certificates or the declarants capacity or entitlement to so
certify.

Issue:

1. Whether or not the independence principle on letters of credit may be invoked by a

beneficiary thereof where the beneficiary’s call thereon is wrongful or fraudulent.

2. Whether or not it is only the issuing bank that may invoke the independence principle in
letters of credit.

3. Whether or not any dispute must first be resolved by the parties, whether through
negotiations or arbitration, before the beneficiary is entitled to call on the letter of
credit.

4. Whether or not the fraud exception principle may be invoked in this case.

Ruling:

1.
No, Article 3 of the UCP provides that credits, by their nature, are separate transactions
from the sales or other contract(s) on which they may be based and banks are in no way
concerned with or bound by such contract(s), even if any reference whatsoever to such
contract(s) is included in the credit.

Consequently, the undertaking of a bank to pay, accept and pay draft(s) or negotiate and/or
fulfill any other obligation under the credit is not subject to claims or defenses by the applicant
resulting from his relationships with the issuing bank or the beneficiary

The engagement of the issuing bank is to pay the seller or beneficiary of the credit once the
draft and the required documents are presented to it.

The independence principle assures the seller or the beneficiary of prompt payment
independent of any breach of the main contract and precludes the issuing bank from
determining whether the main contract is actually accomplished or not.

Under this principle, banks assume no liability or responsibility for the form, sufficiency,
accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or
particular conditions stipulated in the documents or superimposed thereon, nor do they
assume any liability or responsibility for the description, quantity, weight, quality, condition,
packing, delivery, value or existence of the goods represented by any documents, or for the
good faith or acts and/or omissions, solvency, performance or standing of the consignor, the
carriers, or the insurers of the goods, or any other person whomsoever.

2.
The independence doctrine works to the benefit of both the issuing bank and the
beneficiary.

Letters of credit are employed by the parties desiring to enter into commercial transactions,
not for the benefit of the issuing bank but mainly for the benefit of the parties to the original
transactions.

With the letter of credit from the issuing bank, the party who applied for and obtained it
may confidently present the letter of credit to the beneficiary as a security to convince the
beneficiary to enter into the business transaction.

On the other hand, the other party to the business transaction, i.e., the beneficiary of the
letter of credit, can be rest assured of being empowered to call on the letter of credit as a
security in case the commercial transaction does not push through, or the applicant fails to
perform his part of the transaction. It is for this reason that the party who is entitled to the
proceeds of the letter of credit is appropriately called beneficiary.

3.
No, Petitioners argument that any dispute must first be resolved by the parties, whether
through negotiations or arbitration, before the beneficiary is entitled to call on the letter of
credit in essence would convert the letter of credit into a mere guarantee.
 Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the
issue stated that the standby credit are inexpensive and efficient. Often they replace surety
contracts, which tend to generate higher costs than credits do and are usually triggered by a
factual determination rather than by the examination of documents.

The standby credit has different expectations since the beneficiary reasonably expects that
he will receive cash in the event of nonperformance, that he will receive it promptly, and that
he will receive it before any litigation with the obligor (the applicant) over the nature of the
applicants performance takes place. On the other hand, in the surety contract setting, there is
no duty to indemnify the beneficiary until the beneficiary establishes the fact of the obligors
performance in litigation.

4.
Petitioner invokes the fraud exception principle which is without merit.

It avers that LHCs call on the Securities is wrongful because it fraudulently misrepresented
to ANZ Bank and SBC that there is already a breach in the Turnkey Contract knowing fully well
that this is yet to be determined by the arbitral tribunals.

The propriety of LHCs call on the Securities is largely intertwined with the fact of default
which is the self-same issue pending resolution before the arbitral tribunals.

To be able to declare the call on the Securities wrongful or fraudulent, it is imperative to

resolve, among others, whether petitioner was in fact guilty of delay in the performance of its
obligation.

Unfortunately for petitioner, this Court is not called upon to rule upon the issue of default
such issue having been submitted by the parties to the jurisdiction of the arbitral tribunals
pursuant to the terms embodied in their agreement
 RELIANCE COMMODITIES, INC., petitioner,
vs.
DAEWOO INDUSTRIAL CO., LTD., respondent.
G.R. No. L-100831 December 17, 1993

Facts:

Petitioner Reliance Commodities, Inc. ("reliance") and private respondent Daewoo Industrial
Co., Ltd. ("Daewoo") entered into a contract of sale under the terms of which the latter
undertook to ship and deliver to the former 2,000 metric tons of foundry pig iron for the price
of US$404,000.00.

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, but Reliance was instead asked to submit purchase orders from end-users to
support its application for a Letter of Credit but it was not able to raise purchase orders for
2,000 metric tons.

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.

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 but, 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.

Issue: 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.

Ruling:

Yes, 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 for 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.

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.

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, and specific legal requirements must be complied
with.
Where the buyer fails to open a letter of credit as stipulated, it amounts to a breach of the
contract between buyer and seller or exporter, and latter is entitled to claim damages for such
breach.
 RODZSSEN SUPPLY CO. INC., petitioner, vs. FAR EAST BANK & TRUST CO., respondent.
G.R. No. 109087. May 9, 2001

Facts:

Defendant Rodzssen Supply, Inc. opened with plaintiff Far East Bank and Trust Co. a 30-day
domestic letter of credit in the amount of P190,000.00 in favor of Ekman and Company, Inc.
(Ekman) for the purchase from the latter of five units of hydraulic loaders, and that subsequent
amendments extended the validity of said Letters of credit.

Upon Ekmans presentation of the documents for the P76,000.00 representing final
negotiation on the LC before the expiry date, and after a series of negotiations, plaintiff paid to
Ekman the amount of P76,000.00. That upon plaintiffs demand on defendant(buyer) to pay for
said amount (P76,000.00), defendant refused to pay. Plaintiff prays for judgment ordering
defendant to pay the abovementioned P76,000.00 plus due interest thereon

Defendant(buyer)interposed, inter alia, by way of special and affirmative defenses that

plaintiff ha[d] no cause of action against defendant on the ground that there was a breach of
contract by plaintiff who in bad faith paid Ekman, knowing that the two units of hydraulic
loaders had been delivered to defendant after the expiry date of subject LC

Issue:
 1. Whether or not it is proper for a banking institution to pay a letter of credit which has
long expired or been cancelled.

Ruling:

No, the Letters of credit originally set to expire on February 15, 1979, and was amended
several times to extend its validity until October 16, 1979.

For the first three hydraulic loaders that were delivered, the bank paid the amount
specified in the letter of credit. The present dispute pertains only to the last two hydraulic
loaders.

The records show that respondent paid Ekman P76,000 for the last two hydraulic loaders on
March 14, 1980, five months after the expiration of the Letter of Credit on October 16, 1979.
The subject Letter of Credit had become invalid upon the lapse of the period fixed therein, thus,
respondent should not have paid Ekman since it was no longer bound to do so under the
subject Letter of Credit.

ASIAN TERMINALS, INC., Petitioner, v. PHILAM INSURANCE CO., INC. (NOW CHARTIS
PHILIPPINES INSURANCE, INC.), Respondent.

RESOLUTION
[G.R. NO. 181262]

RESOLUTION
PHILAM INSURANCE CO., INC. (NOW CHARTIS PHILIPPINES INSURANCE,
INC.), Petitioner, v. WESTWIND SHIPPING CORPORATION AND ASIAN TERMINALS,
INC., Respondents.

RESOLUTION
[G.R. NO. 181319]

RESOLUTION
WESTWIND SHIPPING CORPORATION, Petitioner, v. PHILAM INSURANCE CO., INC. (NOW
CHARTIS PHILIPPINES INSURANCE, INC.) AND ASIAN TERMINALS, INC., Respondents.
G.R. No. 181163, July 24, 2013

Facts:
 Nichimen Corporation shipped to Universal Motors Corporation (Universal Motors) 219
packages containing 120 units of brand new Nissan Pickup Truck Double Cab 4x2 model,
without engine, tires and batteries, on board the vessel S/S “Calayan Iris” from Japan to Manila
which was insured with Philam against all risks.

Universal Motors filed a formal claim for damages in the amount of P643,963.84 against
Westwind, ATI and R.F. Revilla Customs Brokerage, Inc. (the authorized broker of Universal
Motors which delivered the packages to its warehouse) but the demands remained unheeded,
so it sought reparation from and was compensated in the sum of P633,957.15 by Philam, as the
insurer.

Philam, as subrogee of Universal Motors, filed a Complaint for damages against Westwind,
ATI and R.F. Revilla Customs Brokerage, Inc. The trial court acknowledged the subrogation
between Philam and Universal Motors on the strength of the Subrogation Receipt and the
appellate court accordingly affirmed Westwind and ATI’s joint and solidary liability for the
damage to only one (1) unit of Frame Axle Sub without Lower inside Case No. 03-245-42K/1. In
his appeal, Westwind argues that Philam’s cause of action has prescribed since the latter filed a
formal claim with it only on August 17, 1995 or four months after the cargoes arrived on April
20, 1995.

Issue: Whether or not Philam’s cause of action has prescribed.

Ruling:

Petitioner Philam has adequately established the basis of its claim against petitioners ATI
and Westwind because Philam, as insurer, was subrogated to the rights of the consignee,
Universal Motors Corporation, pursuant to the Subrogation Receipt executed by the latter in
favor of the former.

The prescriptive period for filing an action for the loss or damage of the goods under the
COGSA is found in paragraph (6), Section 3, thus: Unless notice of loss or damage and the
general nature of such loss or damage be given in writing to the carrier or his agent at the port
of discharge before or at the time of the removal of the goods into the custody of the person
entitled to delivery thereof under the contract of carriage, such removal shall be prima facie
evidence of the delivery by the carrier of the goods as described in the bill of lading.

In the Bill of Lading dated April 15, 1995, Rizal Commercial Banking Corporation (RCBC) is
indicated as the consignee while Universal Motors is listed as the notify party, these
designations are in line with the subject shipment being covered by Letter of Credit No.
I501054, which RCBC issued upon the request of Universal Motors.

Letters of credit are employed by the parties desiring to enter into commercial transactions,
not for the benefit of the issuing bank but mainly for the benefit of the parties to the original
transaction, in these cases, Nichimen Corporation as the seller and Universal Motors as the
buyer, hence, the latter should be regarded as the person entitled to delivery of the goods.

Accordingly, for purposes of reckoning when notice of loss or damage should be given to the
carrier or its agent, the date of delivery to Universal Motors is controlling, and petitioner
Philam, as subrogee of Universal Motors, which filed the Complaint for damages on January 18,
1996, just eight months after all the packages were delivered to its possession on May 17, 1995
was evidently seasonably filed.