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1. Bank of America v. CA, December 10, 1993

2. Transfield Philippines, Inc. v. Luzon Hydro Corp., November 22, 2004

Facts:

Transfield Philippines (Transfield) entered into a turn-key contract with Luzon Hydro Corp.
(LHC).Under the contract, Transfield were to construct a hydro-electric plants in Benguet and
Ilocos. Transfield was given the sole responsibility for the design, construction, commissioning,
testing and completion of the Project. The contract provides for a period for which the project is
to be completed and also allows for the extension of the period provided that the extension is
based on justifiable grounds such as fortuitous event. In order to guarantee performance by
Transfield, two stand-by letters of credit were required to be opened. During the construction of

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the plant, Transfield requested for extension of time citing typhoon and various disputes
delaying the construction. LHC did not give due course to the extension of the period prayed for
but referred the matter to arbitration committee. Because of the delay in the construction of the
plant, LHC called on the stand-by letters of credit because of default. However, the demand was
objected by Transfield on the ground that there is still pending arbitration on their request for
extension of time.

Issue:

Whether or not LHC can collect from the letters of credit despite the pending arbitration case

Held:

Transfield’s argument that any dispute must first be resolved by the parties, whether through
negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit in
essence would convert the letter of credit into a mere guarantee.

The independent nature of the letter of credit may be: (a) independence in toto where the credit
is independent from the justification aspect and is a separate obligation from the underlying
agreement like for instance a typical standby; or (b) independence may be only as to the
justification aspect like in a commercial letter of credit or repayment standby, which is identical
with the same obligations under the underlying agreement. In both cases the payment may be
enjoined if in the light of the purpose of the credit the payment of the credit would constitute
fraudulent abuse of the credit.

Jurisprudence has laid down a clear distinction between a letter of credit and a guarantee in that
the settlement of a dispute between the parties is not a pre-requisite for the release of funds
under a letter of credit. In other words, the argument is incompatible with the very nature of the
letter of credit. If a letter of credit is drawable only after settlement of the dispute on the contract
entered into by the applicant and the beneficiary, there would be no practical and beneficial use
for letters of credit in commercial transactions.

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

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3. Feati Bank Trust Co. v. CA, April 30, 1991

Facts:

Bernardo Villaluz entered into a contract of sale with Axel Christiansen in which Villaluz agreed
to deliver to Christiansen 2,000 cubic meters of lauan logs at $27.00 per cubic meter FOB. On
the arrangements made and upon the instructions of consignee, Hanmi Trade Development,
Ltd., the Security Pacific National Bank of Los Angeles, California issued an irrevocable letter of
credit available at sight in favor of Villaluz for the sum of $54,000.00, the total purchase price of
the lauan logs.

The letter of credit was mailed to the Feati Bank and Trust Company with the instruction to the
latter that it “forward the enclosed letter of credit to the beneficiary.” The letter of credit also
provided that the draft to be drawn is on Security Pacific National Bank and that it be
accompanied by certain documents. The logs were thereafter loaded on a vessel but
Christiansen refused to issue the certification required in paragraph 4 of the letter of credit,
despite repeated requests by the private respondent. The logs however were still shipped and
received by consignee, to whom Christiansen sold the logs. Because of the absence of the
certification by Christiansen, the Feati Bank and Trust company refused to advance the
payment on the letter of credit until such credit lapsed. Since the demands by Villaluz for
Christiansen to execute the certification proved futile, he filed an action for mandamus and
specific performance against Christiansen and Feati Bank and Trust Company before the Court
of First Instance of Rizal. Christiansen however left the Philippines and Villaluz filed an
amended complaint making Feati Bank and Trust Company.

Issue:

Whether or not Feati Bank is liable for Releasing the funds to Christiansen

Held:

In commercial transactions involving letters of credit, the functions assumed by a correspondent

bank are classified according to the obligations taken up by it. The correspondent bank may be
called a notifying bank, a negotiating bank, or a confirming bank.

In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or
transmit to the beneficiary the existence of the letter of credit.

A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft
under the letter of credit. Its liability is dependent upon the stage of the negotiation. If before
negotiation, it has no liability with respect to the seller but after negotiation, a contractual
relationship will then prevail between the negotiating bank and the seller.

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In the case of a confirming bank, the correspondent bank assumes a direct obligation to the
seller and its liability is a primary one as if the correspondent bank itself had issued the letter of
credit.

In this case, the letter merely provided that the petitioner “forward the enclosed original credit to
the beneficiary.” (Records, Vol. I, p. 11) Considering the aforesaid instruction to the petitioner by
the issuing bank, the Security Pacific National Bank, it is indubitable that the petitioner is only a
notifying bank and not a confirming bank as ruled by the courts below.

A notifying bank is not a privy to the contract of sale between the buyer and the seller, its
relationship is only with that of the issuing bank and not with the beneficiary to whom he
assumes no liability. It follows therefore that when the petitioner refused to negotiate with the
private respondent, the latter has no cause of action against the petitioner for the enforcement
of his rights under the letter.

Since the Feati was only a notifying bank, its responsibility was solely to notify and/or transmit
the documentary of credit to the private respondent and its obligation ends there.

At the most, when the petitioner extended the loan to the private respondent, it assumed the
character of a negotiating bank. Even then, the petitioner will still not be liable, for a negotiating
bank before negotiation has no contractual relationship with the seller. Whether therefore the
petitioner is a notifying bank or a negotiating bank, it cannot be held liable. Absent any definitive
proof that it has confirmed the letter of credit or has actually negotiated with Feati, the refusal by
the petitioner to accept the tender of the private respondent is justified.

4. PNB v. San Miguel Corp., January 15, 2014

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