Letters of Credit

Special Commercial Laws Page 1

List of Cases
Bank of the Philippine Islands v. De Reny
Fabric Industries, Inc. 1
Philippine Virginia Tobacco Administration v.
Walfrido De Los Angeles 2
Insular Bank of Asia and America v.
Intermediate Appellate Court J
Feati Bank and Trust Company v. Court of
Appeals 4
Prudential Bank and Trust Company v.
Intermediate Appellate Court 5
Bank of America, NT & SA v. Court of Appeals 6
Reliance Commodities Inc. v. Daewoo
Industrial Co., Ltd. 7
Rodzzen Suppy Co., Inc. v. Far East Bank and
Trust Co. 9
Ramon L. Abad v. Court of Appeals 10
Consolidated Bank and Trust Corporation v.
Court of Appeals 11
etropolitan Waterworks and Sewerage
System v. Honorable Reynaldo B. Daway 12
Transfield Philippines, Inc. v. Luzon Hydro
Corporation 14
Bank of Commerce v. Teresita S. Serrano 16
Land Bank of the Philippines v. onet's Export
and anufacturing Corporation 17

Bank of the PhiIippine IsIands v. De Reny
Fabric Industries, Inc.
October 16, 1970

L-24821

Facts:
De Reny Fabric ndustries, nc. (De
Reny) applied to the Bank of Philippine slands
(BP) for four irrevocable commercial letters of
credit to cover the purchase of "dyestuffs of
various colors from J.B. Distributing Company.
All the applications of the corporation were
approved and the corresponding Commercial
Letter of Credit Agreements were executed
pursuant to banking procedures. J.B.
Distributing Company thereafter collected the
full value of the drafts upon presentment of
necessary documents.
n the meantime, as each shipment
arrived in the Philippines, De Reny made partial
payments to the Bank amounting to Php
90,000.00. However, further payments were
subsequently discontinued by the De Reny
when it was made known to it, through a
chemical test, that the goods that were shipped
were colored chalk instead of dyestuffs. t also
refused to accept and take possession of the
goods.
BP filed a complaint for collection of the
value of the Letters of Credit, in which the lower
court has granted through its decision ordering
De Reny and its co-defendants to pay the bank
the amount of the Letter of Credit Agreements.
De Reny contends that it was the duty of
the foreign correspondent bank of BP to take
necessary precaution to insure that the goods
shipped under the Letters of Credit confirmed
with the item appearing on its face and that the
foregoing banks having failed to perform this
duty, no claim for recoupment against De Reny,
arising from the losses incurred for the non-
delivery or defective delivery of the articles
ordered, cold accrue.

ssue:
Whether or not the Bank has the obligation to
inspect the goods subject of a Letter of Credit

Ruling:
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
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to the importer, but deal only with the
documents.
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.

PhiIippine Virginia Tobacco Administration
v. WaIfrido De Los AngeIes
August 19, 1988

No. L-27829
Facts:
Respondent Timoteo Sevilla (Sevilla),
with two other entities were awarded in a public
bidding the right to import leaf tobacco for
blending purposes and exportation by them of
the Philippine Virginia Tobacco Administration
(PVTA) and farmer's low-grade tobacco.
Subsequently, the other two entities assigned
their rights to PVTA and Sevilla remained the
only private entity accorded the privilege.
The contract entered into between
PVTA and Sevilla was for the importation of
Virginia Leaf tobacco and a counterpart
exportation of PVTA and farmer's low grade
tobacco. n accordance with their contract,
Sevilla purchased and exported tobacco but
was not able to pay the total amount of such
purchase to PVTA. Before Sevilla could import
the counterpart blending Virginia tobacco, RA
4155 was passed, authorizing the PVTA to
grant import privileges at a ratio of 4:1 instead
of 9:1 and to dispose of all its tobacco stock at
the best price available.
Thus, the subject contract which was
already amended was further amended to grant
Sevilla the privileges under the newly passed
law, subject to conditions, one of which is "(3)
that Sevilla would open an irrevocable letter of
credit in favor of PVTA to secure the payment
of said balance. While Sevilla was trying to
negotiate the reduction of the procurement cost
already exported, PVTA prepared two drafts to
be drawn against said letter of credit for the
amount which have already become due and
demandable. Sevilla then filed a complaint for
damages with preliminary injunction against
PVTA. PVTA filed an answer with counterclaim,
admitting the execution of the contract,
however, it alleged that Sevilla violated the
terms thereof by causing the issuance of the
preliminary injunction to prevent the former from
drawing from the letter of credit for amounts
due and payable and that caused PVTA
additional damage of 6% per annum.
A writ of preliminary injunction was
issued by respondent Judge Walfrido De los
Angeles adjoining PVTA from drawing against
the letter of credit. On motion of Sevilla, the
court dismissed the complaint without prejudice
and lifted the preliminary injunction but PVTA's
motion was granted setting aside the order of
dismissal. Sevilla filed a motion for
reconsideration, but pending its resolution and
without notice to PVTA, respondent Judge
issued the assailed order directing the
Prudential Bank and Trust Co. to make the
questioned release of funds from the Letter of
Credit in favor of Sevilla.

ssue:
Whether or not a court can order the release to
the applicant the proceeds of an irrevocable
letter of credit



Letters of Credit

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Ruling:
n issuing the order, respondent Judge
violated the irrevocability of the letter of credit
issued by the bank to PVTA. An irrevocable
letter of credit cannot during its lifetime be
cancelled or modified without the express
permission of the beneficiary.

InsuIar Bank of Asia and America v.
Intermediate AppeIIate Court
November 17, 1988

No. L-74834
Facts:
Respondent spouses Ben and Juanita
Mendoza (the Mendozas) obtained two loans
from respondent Philippine American Life
nsurance Co. (Philam Life) in the total amount
of Php600,000.00 to finance the construction of
their residential house. To secure payment,
Philam Life required that amortizations be
guaranteed by an irrevocable standby letter of
credit with petitioner nsular Bank of Asia and
America (BAA). BAA issued two irrevocable
standby letters of credit in favor of Philam Life
secured by a real estate mortgage one the
property of the Mendozas in favor of BAA.
The Mendozas failed to pay Philam Life
on two amortizations causing the latter to
declare the entire balance outstanding on both
loans immediately due and demandable and
demanded payment from BAA of
Php274,779.56, but the latter took the position
that, as a mere guarantor of the Mendozas who
are the principal debtors, its remaining
outstanding obligation under the two standby
letters of credit was only Php30,100.60 Later,
BAA corrected the latter amount and showed
instead an overpayment by deducting from its
liability the amount already paid by them to
Philam Life as well as the payments made to
the latter by the Mendozas.

ssue:
Whether or not BAA's obligation under the two
letters of credit is that of a surety and direct
payments made by the Mendozas to Philam
Life reduced such obligation

Ruling:
Letters of credit and contracts for the
issuance of such letters are subject to the same
rules of construction as are ordinary
commercial contracts. They are to receive a
reasonable and not a technical construction and
although usage and custom cannot control
express terms in a letter of credit, they are to be
construed with reference to the surrounding
facts and circumstances, to the particular and
often varying terms in which they may be
expressed, the circumstances and intentions of
the parties to them and the usages of the
particular trade of business contemplated.
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
Php600,000.00. But while they are a security
arrangement, they are not converted thereby
into contracts of guaranty. That would make
them ultra vires rather than a letter of credit,
which is within the powers of the bank. The
standby Letters of Credit are, "in effect an
absolute undertaking to pay the money
advanced or the amount for which credit is
given on the faith of the instrument. They are
primary obligations and not accessory
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contracts. Being separate and independent
agreements, the payments made by the
Mendozas cannot be added in computing
BAA'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 agreement.
And although these payments could result in
the reduction of the actual amount which could
ultimately be collected from BAA, the latter's
separate undertaking under its letters of credit
remains.

Feati Bank and Trust Company v. Court of
AppeaIs
April 30, 1991

GR. No. 94209

Facts:
Bernardo Villaluz agreed to sell to Axel
Christiansen lauan logs. After inspecting the
logs, Christiansen issued a purchase order and
through Hanmi Trade Development, the
Security Pacific National Bank of Los Angeles
issued an rrevocable Letter of Credit available
at sight in favor of Villaluz for the sum of the
total purchase price of the lauan logs. The letter
of credit was mailed to Feati Bank and Trust
Company (Feati) with the instructions to the
latter that it "forward the enclosed letter of credit
to the beneficiary and further provided that the
draft to be drawn is to be accompanied by
certain documents, one of which is "(4)
certification from Han-Axel Christiansen, Ship
and Merchandise Broker, stating that logs have
been approved prior to shipment in accordance
with the terms and conditions of corresponding
purchase order.
The logs were thereafter loaded on the
vessel chartered by Christiansen and were
inspected by the Bureau of Customs and the
Bureau of Forestry, all of whom certified to the
good condition and exportability of the logs.
However, Christiansen refused to issue the
certification as required despite several
requests made by Villaluz, the latter instituted
an action for mandamus and specific
performance against the former and the Feati.
Feati 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. However, with the
subsequent flight of Christiansen, Villaluz filed
an amended complaint to make Feati solidarily
liable with Christiansen.
The trial court ruled in favor of Villaluz
stating that Feati must be held liable together
with Christiansen for its refusal to negotiate the
letter of credit in the absence of Christiansen's
certification. t stated further that the Feati, by
accepting the instructions from the issuing bank
has assumed the very same undertaking as the
issuing bank under the terms of the letter of
credit. On appeal, the Court of Appeals affirmed
the decision of the lower court.

ssue:
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

Ruling:
t 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 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
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risks and it may not thereafter be able to
recover from the buyer or the issuing bank.
Thus the rule of strict compliance.

PrudentiaI Bank and Trust Company v.
Intermediate AppeIIate Court
December 8, 1992

GR No. 74886
Facts:
Philippine Rayon Mills (Philippine
Rayon), nc. entered into a contract with Nissho
Co., Ltd of Japan for the importation of textile
machineries under a 5-year deferred payment
plan. To effect payment for said machineries,
Philippine Rayon applied for a commercial letter
of credit with Prudential Bank and Trust
Company (Prudential Bank) in favor of Nissho.
Against this letter of credit, drafts were drawn
and issued by Nissho which were all paid by the
Prudential Bank. As indicated on their faces,
two of these drafts were accepted by Anacleto
Chi, Philippine Rayon's president, while the
other were not.
Some time after, Philippine Rayon
ceased business operations and its factory was
leased by Yupangco Cotton Mills. Subsequently
all the textile machineries of Philippine Rayon
were sold to AC Development Corporation.
However, the obligations of Philippine Rayon
arising from the letter of credit and trust receipts
remained unpaid and unliquidated. Repeated
formal demands for its payment yielded no
result prompting Prudential Bank to file an
action for the collection of the amount stated in
the letter of credit.
The trial court rendered its decision in
favor of Prudential Bank to the extent of the
amount covered by the two drafts that were
accepted by Philippine Rayon but held that as
to the amounts involved in the drafts that were
not accepted by the latter, it cannot be
demanded as the cause of action thereon has
not yet accrued, thereby, the case is considered
premature. The decision was further affirmed by
the Court of Appeals.
ssue:
Whether or not presentment for acceptance of
the drafts was indispensable to make Philippine
Rayon liable thereon

Ruling:
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. Through a letter of credit, the bank
merely substitutes its own promise to pay for
the promise to pay of 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. n the instant case, the drawee was
necessarily the Prudential Bank. t was to the
latter that the drafts were presented for
payment. n 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 Sec. 143
of the Negotiable nstruments Law.






Letters of Credit

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Bank of America, NT & SA v. Court of
AppeaIs
December 10, 1993

GR No. 105395

Facts:
Bank of America, NT & SA, Manila
(Bank of America) received by registered mail
an rrevocable Letter of Credit purportedly
issued by Bank of Ayudhya, Samyaek Branch,
for the account of General Chemicals, Ltd. , of
Thailand to cover the sale of plastic ropes and
"agricultural files, with the Bank of America as
advising bank and nter-Resin ndustrial
Corporatin (nter-Resin) as beneficiary.
nter-Resin made partial availment
under the letter of credit by submitting to the
Bank of America the necessary documents.
Thereafter, 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, nter-Resin presented to Bank of
America the documents for the second
availment under the same letter of credit,
evidencing the second shipment of goods.
However, immediately after receiving a telex
from Bank of Ayudhya declaring the letter of
credit fraudulent, Bank of America stopped the
processing of nter-Resin's documents. Upon
investigation, it was discovered that the good
exported by nter-Resin did not contain ropes
but plastic strips, wrappers, rags and waste
materials.
Bank of America sued nter-Resin for
the recovery of the amount paid on the partial
availment of the fraudulent letter of credit. nter-
Resin on the on the other hand claimed that not
only was it entitled to retain the amount paid to
it on its first shipment but also to the balance
covering the second shipment. The trial court
ruled in favor of nter-Resin holding that Bank of
America should shoulder the losses as it was
careless and negligent for failing to determine
the authenticity of the letter of credit before
sending it to nter-Resin. On appeal, the Court
of Appeals sustained the trial court.

ssue:
1. Whether or not Bank of America has
incurred liability to the beneficiary
2. Whether or not Bank of America may
recover what it has paid under the letter
of credit when the corresponding draft
for partial availment and the required
documents were negotiated with it by
nter-Resin

Ruling:

First ssue:
Any liability that may be incurred by the
bank, under a letter of credit, to its beneficiary is
dependent on the bank's participation in that
transaction, if as a mere advising or notifying
banks, it would not be liable but as a confirming
bank, had this been the case, it could be
considered as having incurred that liability.
t cannot seriously be disputed 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 Bank
of America's letter of advice, its request for
payment of advising fee and the admission of
nter-Resin that it had paid the same. That Bank
of America has asked nter-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
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credit is to be drawn under the account of
General Chemicals only means that the same
has to be presented to Bank of Ayudhya
(issuing bank) for payment. t 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.
As an advising or notifying bank, Bank
of America did not incur any obligation more
than just notifying nter-Resin of the Letter of
Credit issued in its favor, let alone to confirm
the 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
communication, before dispatching the same to
nter-Resin finds no real support, since, as an
advising bank, Bank of America is only bound
to check the "apparent authenticity of the letter
of credit, which it did.

Second ssue:
Bank of America may recover what is
has paid under the letter of credit when the
corresponding draft for partial availment
thereunder and the required document therefor
were later negotiated with it by nter-Resin. 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 nter-Resin from
the hardship of presenting the documents
directly to Bank of Ayudhya to recover payment.
As a negotiating bank, Bank of America has a
right of recourse against the issuer bank and
until reimbursement is obtained, nter-Resin, as
the drawer of the draft, continues to assume a
contingent liability thereon.
nter-Resin admits having received
payment from Bank of America on the letter of
credit transaction and in having executed the
corresponding draft. That payment to nter-
Resin has given Bank of America the right of
reimbursement from the issuing bank, Bank of
Ayudhya which, in turn, could then seek
indemnification from the buyer, General
Chemicals. Since Bank of Ayudhya disowned
the letter of credit, Bank of America may now
turn to nter-Resin for restitution.


ReIiance Commodities Inc. v. Daewoo
IndustriaI Co., Ltd.
December 17, 1993

GR. No. 100831
Facts:
Reliance Commodities nc. (Reliance)
and Daewoo ndustrial Co., Ltd. (Daewoo)
entered into a contract of sale under the terms
of which the latter took to ship and deliver to the
former 2,000 metric tons of foundry pig iron.
Upon arrival in Manila, the subject cargo was
found to be short of 135.655 metric tons as only
1,864.345 metric tons were discharged and
delivered to Reliance.
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 short shipment
under the first contract and bound itself to
reduce the price for succeeding orders.
However, the contract was not consummated
and was later superseded by another contract
wherein the payment of the shipment should be
made by an irrevocable letter of credit.
Thereafter, Reliance, through its Mrs. Samuel
Chuason, filed with the China Banking
Corporation, an application for a letter of credit
in favor of Daewoo covering the amount of the
shipment for the latest contract. The application
Letters of Credit

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was endorsed to the ron and Steel Authority
(SA) for 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, thus Daewoo rejected the
proposed letter of credit.
Subsequently, Daewoo learned that the
failure of Reliance to open the letter of credit as
stipulated in the latest contract was due to the
fact that Reliance had already exceeded its
foreign exchange allocation for the year.
Because of the failure of Reliance to comply
with its undertaking, Daewoo was compelled to
sell the cargo to another buyer at a lower price,
to cut losses and expenses Daewoo had begun
to incur due its inability to ship it to Reliance
under their contract.
Reliance then wrote to Daewoo
requesting for the amount representing the
value of the short delivery of foundry pig iron
under their first contract. After no response from
Daewoo, Reliance filed an action for damages
it, which the former responded with a
counterclaim for damages contending that the
latter was guilty of breach of contract when it
failed to open a letter of credit as required
under their latest contract. The trial court ruled
that Daewoo is liable for the amount of the short
delivered goods pursuant to the first contract
and also held that Reliance is in turn liable for
breach of contract for its failure to open a letter
of credit. Reliance appealed the second part of
the trial court's decision but the Court of
Appeals affirmed such decision.
Hence this present petition wherein
Reliance contends that its failure to open a
letter of credit was due to the failure of Daewoo
to accept the purchase order which fell short of
2,000 metric tons. t further contends that the
opening of the letter of credit was a condition
precedent to the effectivity of the contract
between them and since such condition did not
happen, there was no contract to speak of and
Reliance should not be liable for damages.

ssue:
Whether or not the failure of Reliance to open a
letter of credit make it liable to Daewoo for
damages

Ruling:
The court considers that under the
instrument, the opening of a letter of credit 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 (2,000 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. The failure of
Reliance to open, the appropriate letter of
contract did not prevent the birth of the contract
and neither did such failure extinguish that
contract. The opening of the letter of credit in
favor of Daewoo was an obligation of Reliance
and the performance of that obligation by
Reliance was condition for enforcement of the
reciprocal obligation of Daewoo to ship the
subject matter of the contract to Reliance. But
the contract itself between Reliance and
Daewoo had already sprung into legal
existence and was enforceable.
We believe and so hold that failure of a
buyer seasonably to furnish an agreed letter of
credit is a breach of the contract between the
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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.

Rodzzen Suppy Co., Inc. v. Far East Bank
and Trust Co.
May 9, 2001

G.R. No. 109087
Facts:
Rodzssen Supply, Co., nc. (Rodzssen)
opened with Far East Bank and Trust Co., (Far
East) a 30-day domestic letter of credit for Php
190,000.00 in favor of Ekman and Company,
nc. (Ekman) for the purchase of five hydraulic
loaders. Subsequent amendments were made
which extended the validity of the letter of credit
to 8 months. Three units of the hydraulic
loaders were first shipped and were
subsequently paid by Rodzssen before the
expiry date of the letter of credit. The shipment
of the remaining two units of hydraulic loaders
valued at Php 76,000.00 was received by
Rodzssen before the expiry date of the letter of
credit. Ekman presented the documents
evidencing the second shipment also before the
expiration the letter of credit, however, when
Far East demanded reimbursement for the
payment made, Rodzssen refused without any
valid reason.
Far East filed a complaint for specific
performance against Rodzssen praying for the
payment of the value of the two hydraulic
loaders with interest. Rodzssen, in its answer,
contended that Far East had no cause of action
against it as there was a breach of contract by
the latter who paid Ekman, knowing that the
delivery of the two hydraulic loaders were made
after the expiry of the subject letter of credit,
thereby making such a payment in bad faith.
Also, Rodzssen offered to return the subject
hydraulic loaders to Far East, but the latter
refused to take possession of it.
The trial court ruled in favor of Far East
based on its findings that the failure of
Rodzssen to directly pay Ekman for the value of
the subject two units lead to the demand by the
latter from Far East for it to pay in behalf of the
former. n the honest belief of Far East that it
was still under obligation to Ekman for said
amount, considering that it had presented all
the necessary documents, the former
voluntarily paid the said amount to the latter.
The trial court ruled that the voluntary and
lawful act of payment gave rise to a quasi-
contract between Far East and Rodzssen and if
Rodzssen should escape liability for said
amount, the result would allow it to enrich itself
at Far East's expense.
On appeal, CA rejected Rodzssen's
allegation of bad faith and negligence to Far
East for paying the subject two units which has
been delivered after the expiration of the letter
of credit.

ssue:
Whether or not a banking institution may pay a
letter of credit which has already expired or has
been cancelled

Ruling:
Clearly, the bank paid Ekman when the
former was no longer bound to do so under the
subject Letter of Credit. The records show that
Far East paid the latter for the two hydraulic
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loaders five months after the expiration of the
Letter of Credit.
The subject letter of credit had become
invalid upon the lapse of the period fixed
therein. Thus, Far East should not have paid
Ekman; it was not obliged to do so.
However, Rodzssen should pay Far
East the amount the latter expended for the
equipment belatedly delivered and voluntarily
received and kept by the former. when both
parties to a transaction are mutually negligent in
the performance of their obligation, the fault of
one cancels the negligence of the other, as in
this case, their rights and obligations may be
determined equitably under the law proscribing
unjust enrichment.

Ramon L. Abad v. Court of AppeaIs
January 22, 1990

G.R. No. 42735
Facts:
Southeast Timber Co. (Phils.), nc.
(previously TOMCO, nc.), was granted by the
Philippinr Commercial and ndustrial Bank
(PCB), a domestic letter of credit for Php
80,000.00 in favor of Oregon ndustries,
nc.(Oregon), to pay for one Skagit Yarder with
accessories. PCB paid to Oregon the cost of
machinery against a bill of exchange for the
same amount.
After making the required marginal
deposit of Php 28,000.00, TOMCO signed and
delivered to the bank a trust receipt. Such trust
receipt was guaranteed by Ramon Aban and
promised to pay the obligation jointly and
severally with TOMCO, nc.
The bank defaulted payment of the
amount and was consequently sued by the
bank for the payment of the value of the letter of
credit and interests therein amounting to Php
125,766.13.
TOMCO did not deny its liability to PCB
but alleged that inasmuch as it made a marginal
deposit, such amount should have been
deducted from its principal obligation on which
the bank should have computed the interest,
bank charges and attorney's fees.
The trial court rendered judgment in
favor of PCB ordering TOMCO nc. and Abad
to pay jointly and severally the amount prayed
for by the bank. Abad appealed to the Court of
Appeals which affirmed in toto the decision of
the trial court.

ssue:
Whether or not the marginal deposit in the
possession of the bank should first be deducted
from its principal obligation before computing
the interest and other charges due

Ruling:
The marginal deposit requirement is a
Central Bank measure to cut off excess
currency liquidity which would create
inflationary pressure. t is a collateral security
given by the debtor and is supposed to be
returned to him upon his compliance with his
secured obligation. Consequently, the bank
pays no interest on the marginal deposit, unlike
an ordinary bank deposit which earns interest in
the bank.
t is only fair then that the importer's
marginal deposit should be set off against his
debt, for while the importer earns no interest on
his marginal deposit, the bank, apart from being
able to use said deposit for its own purposes,
Letters of Credit

Special Commercial Laws Page 11

also earns interest in the money it loaned to the
importer. t would be onerous to compute
interest and other charges on the face value of
the letter of credit which the bank issued,
without first crediting or setting off the marginal
deposit which the importer paid to the bank.
Compensation is proper and should take effect
by operation of law because the requisites in
Article 1279 of the Civil Code are present and
should extinguish both debts to the concurrent
amount. Although Abad is only a surety, he may
set up compensation as regards what the
creditor owes the principal debtor, TOMCO.

ConsoIidated Bank and Trust Corporation v.
Court of AppeaIs
April 19, 2001

G.R. No. 114286
Facts:
Continental Cement Corporation
(Continental) and Gregory Lim (Lim) obtained
from Consolidated Bank and Trust Corporation
(Consolidated) a Letter of Credit in the amount
of Php1,068,150.00. On the same day,
Continental paid a marginal deposit of
Php320,445.00 to Consolidated. The letter of
credit was used to purchase around 5,000 liters
of bunker fuel oil from Petrophil Corporation. n
relation to the same transaction, a trust receipt
was executed by Continental, with Lim as
signatory.
Claiming that Continental failed to turn
over the goods covered by the trust receipts or
the proceeds thereof, Consolidated filed a
complaint for the sum of money with application
for preliminary attachment. n answer,
Continental claimed that the transaction
between them was a simple loan and not a trust
receipt transaction and that the amount claimed
by Consolidated did not take into account
payments already made by them. Furthermore,
in a Supplemental Answer, Continental prayed
for reimbursement of alleged overpayment to
Consolidated of the amount of Php490, 228.90.
The trial court rendered its decision
dismissing the complaint and ordering
Consolidated to pay Continental the amount
overpaid by the latter. The Court of Appeals
partially modified the decision by deleting the
award of attorney's fees.

ssues:
1. Whether or not the subject transaction is
a trust receipt transaction or a simple loan.
2. Whether or not marginal deposit must
be deducted outright from the amount of the
letter of credit.

Ruling:

First ssue:
The recent case of Colinares v. Court of
Appeals appears to be the foursquare with the
facts obtaining in the case at bar. There, we
found that inasmuch as the debtor received the
goods subject of the trust receipt before the
trust receipt itself was entered into, the
transaction in question was a simple loan and
not a trust receipt agreement. Prior to the date
of execution of the trust receipt, ownership over
the goods was already transferred to the
debtor. This situation is inconsistent with what
normally obtains in a pure trust receipt
transaction, wherein the goods belong in
ownership to the bank and are only released to
the importer in trust after the loan is granted.
Letters of Credit

Special Commercial Laws Page 12

n the case at bar, the delivery to
Continental of the goods subject of the trust
receipt occurred before the trust receipt itself
was executed. More specifically, delivery of the
bunker fuel oil to Continental's Bulacan plant
was made two months prior the execution of the
subject trust receipt.

Second ssue:
Consolidated argues that the marginal
deposit should be considered only after
computing the principal plus accrued interests
and other charges. However, to sustain such
contention would be to countenance a clear
case of unjust enrichment, for while a marginal
deposit earns no interest in favor of the debtor-
depositor, the bank is not only able to use the
same for its own purposes, interest-free, but is
also able to earn interest on the money loaned
to Continental. ndeed, it would be onerous to
compute interest and other charges on the face
value of the letter of credit which Consolidated
issued, without first crediting or setting off the
marginal deposit which Continental paid to it.
Compensation is proper and should take effect
by operation of law because requisites in Article
1279
1
of the Civil Code are present and should
extinguish both debts to the concurrent amount.

1
ArL 1279 ln order LhaL compensaLlon may be proper lL
ls necessary
1 1haL each one of Lhe obllgors be bound
prlnclpally and LhaL he be aL Lhe same Llme prlnclpal
credlLor of Lhe oLher
2 1haL boLh debLs conslsLs ln a sum of money or
Lhe Lhlngs due are consumable Lhey be of Lhe same klnd
and also of Lhe same quallLy lf Lhe laLLer has been sLaLed
3 1haL Lhe Lwo debLs be due
4 1haL Lhey be llquldaLed and demandable
3 1haL over nelLher of Lhem Lhere be any
reLenLlon or conLroversy commenced by Lhlrd persons
and communlcaLed ln due Llme Lo Lhe debLor
Hence, the interests and other charges
on the subject letter of credit should be
computed only on the balance which was the
portion actually loaned by the bank to
Continental.

etropoIitan Waterworks and Sewerage
System v. HonorabIe ReynaIdo B. Daway
June 21, 2004

G.R. No. 160732
Metropolitan Waterworks and Sewerage
System (MWSS) granted Maynilad Water
Services, nc. (Maynilad) under a Concession
Agreement a twenty-year period to manage,
operate, repair, decommission and refurbish the
existing MWSS water delivery and sewerage
services in the West Zone Service Area. To
secure the concessionaire's performance of its
obligations under the agreement, Maynilad was
required to put up a bond, bank guarantee or
other security acceptable to MWSS.
n compliance with the requirement,
Maynilad arranged for a three-year facility with
a number of foreign banks for the issuance of
an rrevocable Standyby Letter of Credit in the
amount of US$120,000,000 in favor of MWSS
for the full and prompt performance of
Maynilad's obligation to the former.
While the agreement was still in effect,
Maynilad requested MWSS for a mechanism by
which it hoped to recover present and future
losses as a result of the depreciation of the
Philippine peso against the US dollar. However,
with its request not having met, Maynilad issued
a Force Majeure Notice and unilaterally
suspended the payment of the concession fees.
n an effort to salvage the Concession
Agreement, the parties entered into a


Letters of Credit

Special Commercial Laws Page 13

Memorandum of Agreement and the
subsequent amendment of the Concession
Agreement.
However, Maynilad served upon MWSS
a Notice of Event of Termination, claiming that
MWSS failed to comply with its obligation under
the Concession Agreement and its Amendment
regarding the adjustment mechanism that
would cover Maynilad's foreign exchange
losses and it consequently filed a Notice of
Early Termination which the latter challenged.
The matter was brought before the Appeals
Panel, and it ruled n favor of MWSS stating
that that there was no Event of Termination as
defined under the Concession Agreement and
that Maynilad should pay the concession fees
that had fallen due. The decision of the Appeals
Panel became final and executor and MWSS
submitted a written notice to Citicorp
nternational Limited, as agent for the
participating banks, that it was drawing on the
rrevocable Standby Letter of Credit and
demanded that payment of the fees already
due.
Prior to the finality of the decision,
Maynilad filed a petition for rehabilitation which
resulted in the issuance of the Stay Order by
Judge Reynaldo Daway and the its order to
withdraw the certification/notice to draw from
the rrevocable Standby Letter of Credit.

ssue:
Whether or not a rehabilitation court can enjoin
a party from seeking payment from banks that
issued an rrevocable Standby Letter of Credit
in its favor



Ruling:
First, the claim is not one against the
debtor but against an entity that Maynilad has
procured to answer for its nonperformance of
certain terms and conditions of the Concession
Agreement, particularly the payment of
concession fees.
Secondly, Sec.6 of Rule 4 of the nterim
Rules does not enjoin the enforcement of all
claims against guarantors and sureties, but only
those claims against guarantors and sureties
who are not solidarily liable with the debtor.
Maynilad's claim that the banks are not
solidarily liable with the debtor did not find
support in jurisprudence.
Letters of credit were developed for the
purpose of insuring to a seller payment of a
definite amount upon the presentation of
documents and is thus a commitment by the
issuer that the party in whose favor it is issued
and who can collect upon it will have his credit
against the applicant of the letter, duly paid in
the amount specified in the letter. They are in
effect absolute undertakings to pay the money
advanced or the amount for which credit is
given on the faith of the instrument. They are
primary obligations and not accessory contracts
and while they are security arrangements, they
are not converted thereby into contracts of
guaranty.
The participating bank's obligation is
solidary with Maynilad in that it is primary,
direct, definite and an absolute undertaking to
pay and is not conditioned on the prior
exhaustion of the debtor's assets. These are
the same characteristics of a surety or solidary
obligor.
Judge Daway, therefore, exceeded his
jurisdiction, in holding that he was competent to
act on the obligation of the banks under the
Letter of Credit under the argument that this
Letters of Credit

Special Commercial Laws Page 14

was not a solidary obligation with that of the
debtor. Being a solidary obligation, the letter of
credit id excluded from the jurisdiction of the
rehabilitation court and therefore enjoining
MWSS from proceeding against the Standby
Letter of Credit to which it had a clear right
under the law and the terms of said Standby
Letter of Credit, Judge Daway acted in excess
of his jurisdiction.

TransfieId PhiIippines, Inc. v. Luzon Hydro
Corporation
November 22, 2004

G.R. No. 146717
Facts:
Transfield Philippines, nc.(Transfield)
and Luzon Hydro Corporation (LHC) entered
into a Turnkey Contract whereby Transfield, as
Turnkey Contractor, undertook to construct a
seventy (70)-Megawatt hydro-electric power
station.
The Turnkey Contract provides, among
others, that: (2) Transfield is entitled to claims
extensions of time (EOT) for reasons
enumerated in the Turnkey Contract. Further, in
case of dispute, the parties are bound to settle
their difference through mediation, conciliation
and such other means enumerated under
Clause 20.3 of the Turnkey Contract.
To secure the performance of
Transfield's obligation, it opened in favor of
LHC two standy letters of credit with the local
branch of Australia and New Zealand Banking
Limited (ANZ Bank) and Security Bank
Corporation (SBC).
n the course of the construction,
Transfield sought various EOT to complete the
project. The extensions were requested
allegedly due to several factors which
prevented the completion of the project on
target date which gave rise to a series of legal
actions between the parties. LHC filed a
Request for Arbitration before the Construction
ndustry Arbitration Commission (CAC) and
then before the nternational Chamber of
Commerce.
Transfield, anticipating that LHC would
call on the securities, advised ANZ Bank and
SBC of the arbitration proceedings already
pending before the CAC and CC in connection
with the alleged default in the performance of its
obligation. Despite the letters of the former,
however, both banks informed it that they would
pay on the securities if and when LHC calls on
them.
Subsequently, LHC declared Transfield
in default /delay in the performance of its
obligation and demanded the payment of
US$75,000.00 for each day of delay until actual
completion of the project. At the same time,
LHC served notice that it would call on the
securities for the payment of liquidated
damages for the delay.
Transfield filed a Complaint for
Injunction, with prayer for temporary restraining
order and writ of preliminary injunction to
restrain LHC from calling on the securities and
the banks from transferring, paying on, or in any
manner disposing the securities or any
renewals or substitutes thereof. The RTC
issued a 72-hour temporary restraining order
which was extended for a period of 17 days
after the commencement of appropriate
proceedings.
However, after trial, the RTC issued an
Order denying Transfield's application for a writ
of preliminary injunction ruling that it has no
legal right and suffered no irreparable injury to
justify the issuance of the writ. Employing the
Letters of Credit

Special Commercial Laws Page 15

principle of "independent contract in letters of
credit, the trial court ruled that LHC should be
allowed to draw on the securities for liquidated
damages. The trial court further ruled that the
banks were mere custodians of the funds and
as such they were obligated to transfer the
same to the beneficiary for as long as the latter
could submit the required certification of its
claims.
On appeal, the Court of Appeals, in its
Resolution, issued a temporary restraining
order. However, the appellate court failed to act
on the application for preliminary injunction until
the temporary restraining order expired, which
gave the opportunity for LHC to withdraw a total
amount of US$4,950,000.00 from ANZ Bank
upon its expiration. Then the Court of Appeals
affirmed the decision of the trial court.

ssue:
Whether or not the "independence principle or
the "fraud exception rule in letters of credit is
applicable in the present case

Ruling:
Article 3 of the Uniform Customs and
Practice provides that credits, by their nature
are separate transactions from 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. A beneficiary can in no case avail
himself of the contractual relationships existing
between the banks and or between the
applicant and the issuing bank.
Thus, the engagement of the issuing
bank is to pay the seller or beneficiary of the
credit once the draft and the required
documents are presented to it. The so-called
"independence principle assures the seller or
the beneficiary of prompt payment independent
of any breach of the main contract and
precludes the issuing bank from determining
whether the main contract is actually
accomplished or not.
n a letter of credit, such as in this case,
where the credit is stipulated as irrevocable,
there is definite undertaking by the issuing bank
to pay the beneficiary provided that the
stipulated documents are presented and the
conditions of the credit are complied with.
Precisely, the independence principle liberates
the issuing bank from the duty of ascertaining
compliance by the parties in the main contract.
As the principle's nomenclature clearly
suggests, the obligation under the letter of
credit is independent of the related and
originating contract. n brief, the letter of credit
is separate and distinct from the underlying
transaction.
With regard to the issue in relation to the
prayer of injunction to restrain the alleged
wrongful draws on the securities, the Supreme
Court held that most writers agree that fraud is
an exception to the independence principle and
the remedy for fraudulent abuse is an
injunction. However, injunction should not be
granted unless: (a) there is clear proof of fraud;
(b) the fraud constitutes fraudulent abuse of the
independent purpose of the letter of credit and
not only fraud under the main agreement, and
(c) irreparable injury might follow if injunction is
not granted or the recovery of damages would
be seriously damaged.
Letters of Credit

Special Commercial Laws Page 16

Before a writ of preliminary injunction
may be issued, there must be a clear showing
by the complaint that there exists a right to be
protected and that the acts against which the
writ is to be directed are violative of the said
right. t must be shown that the invasion of the
right sought to be protected is material and
substantial, that the right of complainant is clear
and unmistakable and that there is an urgent
and paramount necessity for the writ to prevent
serious damage. Moreover, an injunctive
remedy may only be resorted to when there is a
pressing necessity to avoid injurious
consequences which cannot be remedied under
any standard compensation.
n the instant case, Transfield failed to
show that it has a clear and unmistakable right
to restrain LHC's call on the securities which
would justify the issuance of preliminary
injunction. By Transfield's own admission, the
right of LHC to call on the securities was
contractually rooted and subject to the express
stipulations in the Turnkey Contract. ndeed, the
Turnkey Contract is plain and unequivocal in
that in conferred upon LHC the right to draw
upon the securities in case of default.
The pendency of the arbitration
proceedings would not per se make LHC's
draws on the securities wrongful or fraudulent
for there was nothing in the contract which
would indicate that the parties intended that all
disputes regarding delay should first be settled
through arbitration before LHC would be
allowed to call upon the securities. t is
therefore premature and absurd to conclude
that the draws on the securities were outright
fraudulent given the fact that the CC and CAC
have not ruled with finality on the existence of
default.

Bank of Commerce v. Teresita S. Serrano
February 16, 2005

G.R. No. 151895
Facts:
Via Moda nternational, represented by
Teresita S. Serrano (Serrano), obtained an
export packing loan from Bank of Commerce
(BOC) for Php1, 382,250. Thereafter, BOC
issued to Via Moda an rrevocable Letter of
Credit for the purchase and importation of fabric
and textile product from Tiger East Fabric Co.
Ltd. of Taiwan. To secure the release of the
goods covered, Serrrano executed a trust
receipt.
The goods covered by the trust receipt
were shipped by Via Moda to its consignee in
New Jersey, USA. The proceeds of the
entrusted goods were not credited to the trust
receipt, but were applied by the bank to the
principal, penalties and interest of the export
packing loan and the remainder to the trust
receipt.
Serrano failed in the subsequent
payment of the trust receipt. BOC sent a
demand letter to Via Moda to pay the remaining
amount plus interest and penalty charges, or
return the goods covered by the trust receipt,
which demand was not heeded. Thus, BOC
filed a complaint against Serrano, charging the
latter with the crime of estafa, in relation to PD
115.
The trial court rendered judgment in
favor of BOC, but was reversed by the Court of
Appeals. The appellate court held that the
element of misappropriation or conversion in
violation of PD 115, in relation to the crime of
estafa, was absent in this case, and acquitted
Serrano and deleting her civil liability.

Letters of Credit

Special Commercial Laws Page 17

ssue:
Whether or not Serrano is jointly and severally
liable with Via Moda under the Guarantee
Clause of the Letter of Credit secured by the
Trust Receipt

Ruling:
A letter of credit is a separate document
from a trust receipt. While a trust receipt may
have been executed as a security on the letter
of credit, still the two documents involve
different undertakings and obligations. A letter
of credit id an engagement by a bank or other
person made at the request of a customer that
the issuer will honor drafts and other demands
for payment upon the compliance with the
conditions specified in the credit. Through a
letter of credit, the bank merely substitutes its
own promise to pay for the promise to pay off
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. By contrast, a trust
receipt transaction is one where the entruster,
who holds an absolute title or security interests
over certain goods, documents or instruments,
released the same to the entrustee, who
executes a trust receipt binding himself to hold
the 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 return the goods, documents or
instrument themselves if they are unsold, or not
otherwise disposed of, in accordance with the
terms and conditions specified in the trust
receipt.

Land Bank of the PhiIippines v. onet's
Export and anufacturing Corporation
March 10, 2005

G.R. No. 161865
Facts:
Land Bank of the Philippines (Land
Bank) and Monet's Export and Manufacturing
Corporation (Monet) executed an Export
Packing Credit Line Agreement under which
Monet was given a credit line of Php250,000.00
secured by the proceeds of its export letters of
credit, the continuing surety of the Spouses
Vicente S. Tagle, Sr. and Ma. Consuelo G.
Tagle and the third party mortgage executed by
Pepita C. Mendigoria.
The credit line agreement was renewed
and amended several times until it was
increased to Php5,000,000.00. Owing to the
continued failure and refusal of Monet,
notwithstanding repeated demands, to pay its
indebtedness, Land Bank filed a complaint for
collection of sum of money with prayer of
preliminary attachment.
n their joint answer with Compulsory
Counterclaim, Monet and the Spouses Tagle
alleged that Land Bank failed and refused to
collect the receivables on their export letter of
credit against Wishbone Trading Company of
Hong Kong, while it made unauthorized
payments on their import letter of credit to
Beautilike (H.K.) Ltd., which seriously damaged
the business interest of Monet.
The trial court rendered a decision
holding Monet, the Spouses Tagle and
Mendigoria jointly and severally liable for its
obligation to Land Bank, but granted the
counterclaim of the former. On appeal, the
Court of Appeals affirmed the decision of the
trial court, when it found out that Land Bank
was responsible for the mismanagement of the
Letters of Credit

Special Commercial Laws Page 18

Wishbone and Beautilike accounts of Monet. t
held that because of the non-collection and
unauthorized payment made by Land Bank on
behalf of Monet, and considering that the latter
could no longer draw from its credit line with
Land Bank, it suffered from the lack of financial
resources sufficient to buy the needed materials
to fill up the standing orders of its customers.

ssue:
Whether or not Land Bank is liable for its
unauthorized payment to the Beautilike account
of Monet

Ruling:
We find merit in the contention of Land
Bank that, as the issuing bank in the Beautilike
transaction involving a import letter of credit, it
only deals in documents and it is not involved in
the contract between the parties. The
relationship between the beneficiary and the
issuer of a letter of credit is not strictly
contractual, because both privity and a meeting
of the minds are lacking. Thus, upon receipt
Land Bank of the documents of title which
conform with what the letter of credit requires, it
is duty bound to pay the seller, as it did in this
case.
Thus, no fault or acts of
mismanagement can be attributed to Land
Bank relative to Monet's import letter of credit.
ts actions find solid footing on the legal
principles and jurisprudence. Consequently, it
was error for the trial court and for the Court of
Appeals to grant opportunity losses to Monet on
this account.