Letters of Credit Case Digests

8/2/2019 Letters of Credit Case Digests

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Letters of Credit Case Digests

SPCL Letters of Credit

SPECIAL COMMERCIAL LAWS A. LETTER OF CREDIT 1. Bank of the Philippine Islands v. De Reny

Fabric Industries, Inc., 35 SCRA 253 (1970) 2. Philippine Virginia Tobacco Administration v. De los

Angeles, 164 SCRA 543 (1988) 3. Insular Bank of Asia and America v. IAC, 167 SCRA 450 (1988) 4.

Feati Bank and Trust Company v. Court of Appeals, 196 SCRA 576 (1991) 5. Prudential Bank and

Trust Company v. IAC, 216 SCRA 257 (1992) 6. Bank of America v. Court of Appeals, 228 SCRA 357

(1993) 7. Reliance Commodities, Inc. V. Daewoo Industrial Co., Ltd., 228 SCRA 545 (1993) 8.

Rodzssen Supply Company, Inc.v. Far East Bank and Trust Company, 357 SCRA 618 (2001) 9. Abad

v. Court of Appeals, 181 SCRA 191 (1990) 10. MWSS v. Hon. Daway, 432 SCRA 559 (2004) 11.

Transfield Philippines, Inc. v. Luzon Hydro Corp., 443 SCRA 307 (2004) 12. Bank of Commerce v.

Serrano, 451 SCRA 484 (2005) 13. Land Bank of the Philippines v. Monets Export and Manufacturing

Corp. 453 SCRA 173 (2005)

Page 1 of 21


1. Bank of the Philippine Islands v. De Reny Fabric Industries, Inc., 35 SCRA 253 (1970)

FACTS: -On four (4) diffierent occasions in 1961, the De Reny Fabric Industries, Inc., a Philippine

corporation, applied to the Bank for four (4) irrevocable commercial letters of credit to cover the

purchase by the corporation of goods described in the covering L/C applications as "dyestuffs of

various colors" from its American supplier, the J.B. Distributing Company. -All the applications of thecorporation were approved, and the corresponding Commercial L/C Agreements were executed

pursuant to banking procedures. -Pursuant to banking regulations then in force, the corporation

delivered to the Bank peso marginal deposits as each letter of credit was opened. -By virtue of the

foregoing transactions, the Bank issued irrevocable commercial letters of credit addressed to its

correspondent banks in the United States, with uniform instructions for them to notify the beneficiary

thereof, the JB. Distributing Company, that they have been authorized to negotiate the latter's sight

drafts up to the amounts mentioned therein, respectively, if accompanied, upon presentation, by a

full set of negotiable clean "on board" ocean bills of lading, covering the merchandise appearing in

the L/Cs, that is, dyestuffs of various colors, Consequently, the J.B. Distributing Company drew upon,

presented to and negotiated with these banks, its sight drafts covering the amounts of the

merchandise ostensibly being exported by it, together with clean bills of lading, and collected the full

value of the drafts up to the amounts appearing in the L/ Cs as above indicated. -These

correspondent banks then debited the account of the Bank of the Philippine Islands with them up to

the full value of th drafts presented by the J.B. Distributing Company, thereafter, endorsed and

forwarded all documents to the Bank of the Philippine Islands. -In the meantime, as each shipment

(covered by the above-mentioned letters of credit) arrived in the Philippines, the De Reny Fabric



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Industries, Inc. made partial payments to the Bank amounting, in the aggregate, to P90,000. -Further

payments were, however, subsequently discontinued by the corporation when it became established,

as a result of a chemical test conducted by the National Science Development Board, that the goods

that arrived in Manila were colored chalks instead of dyestuffs. -The corporation also refused to take

possession of these goods, and for this reason, the Bank caused them to be deposited with a bonded

warehouse paying therefor the amount of P12,609.64 up to the filing of its complaint with the court below on December 10, 1962. LOWER COURT: Ordered the corporation and its co-defendants (the

herein appellants) to pay BPI the amount of the LC agreement. DEFENSE OF DE RENY: It was the

duty of the foreign correspondent banks of the Bank of the Philippine Islands to take the necessary

precautions to insure that the goods shipped under the covering L/Cs conformed with the item

appearing therein, and, that the foreign banks having failed to perform this duty, no claim for

recoupment against the defendantsappellants, arising from the losses incurred for the non-delivery or

defective delivery of the articles ordered, could accrue.

Page 2 of 21


HELD: Under the terms of their Commercial Letter of Credit Agreements with the Bank, the appellants

agreed that the Bank shall not be responsible for the "existence, chancier, quality, quantity,

conditions, packing, value, or delivery of the property purporting to be represented by documents, for

any difference in character, quality, quantity, condition, or value of the property front that expressed

in documents," or for "partial or incomplete shipment, or failure or omission to ship my or all of the

property referred to in the Credit," as well as "for any deviation from instructions, delay, default or

fraud by the shipper or anyone else in connection with the property or the shipping thereof," and "for

any breach of contract between the shippers or vendors and ourselves, [purchasers] or any of us."

Having agreed to these terms, the appellants have, therefore, no recourse but to comply with their

covenant to the rules of evidence." The Code of Commerce, in its Article 2, likewise provides that

"Acts of commerce, whether those who execute them be merchants or not, and whether specified in

this Code or not, should be governed by the provisions contained in it, in their absence, b) the usages

of commerce generally observed in each place, and in the absence of both rules, by those of the civil

law" "Those acts contained in this Code and all Others of analogous character, shall be deemed acts

of commerce." It must be noted that certain principles governing the issuance, acceptance and

payment of letters of credit arc specifically provided for in the Code of Commerce. But even without

the stipulation recited above, the appellants cannot shift the burden of loss to the Bank on account of

the violation by their vendor of its prestation. Banks, in providing financing in international businesstransactions such as those entered into by the appellants, do not deal with the property to be

exported or shipped to the importer, but deal only with documents. The Bank introduced in evidence

a provision contained in the "Uniform Customs and Practices for Commercial Documentary Credits

Fixed for the Thirteenth Congress of International Chamber of Commerce," to which the Philippines is

a signatory nation. Article 10 thereof provides: "Its documentary credit operations, all parties

concerned deal in documents and not in goods. payment, negotiation or acceptance against

documents in accordance with the terms and conditions of a credit by a Bank authorized to do so



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binds the party giving the authorization to take up the documents and reimbursed the Bank making

the payment, negotiation or acceptance." The existence of a custom in international banking and

financing circles negating any duty on the part of a bank to verify whether what has been described

in letters of credits or drafts or shipping documents actually tallies with what was loaded aboard ship,

having been positively proven as a fact, the appellants me bound by this established usage. They

were, after all, the ones who tapped the facilities afforded by the Bank in order to engage ininternational business.

2. Phil. Virginia Tobacco Administration vs. Delos Angeles, 164 SCRA 543 (1988) FACTS:

Page 3 of 21


-Timoteo Sevilla, proprietor and General Manager of the Philippine Associated Resources (PAR) was

awarded in a public bidding the right to import Virginia leaf tobacco for blending purposes and

exportation by them of PVTA and farmer's low-grade tobacco at a rate of one (1) kilo of importedtobacco for every nine (9) kilos of leaf tobacco actually exported. -Before Sevilla could import the

counterpart blending Virginia tobacco, Republic Act No. 4155 was passed and took effect on June 20,

1964, authorizing the PVTA to grant import privileges at the ratio of 4 to I instead of 9 to 1 and to

dispose of all its tobacco stock at the best price available. -Thus, on September 14, 1965 subject

contract which was already amended on December 14, 1963 because of the prevailing export or

world market price under which respondent will be exporting at a loss, was further amended to grant

respondent the privileges under aforesaid law, subject to conditions, one of which is that respondent

Sevilla would open an irrevocable letter of credit No. 6232 with the Prudential Bank and Trust Co. in

favor of the PVTA to secure the payment of said balance, drawable upon the release from the Bureau

of Customs of the imported Virginia blending tobacco. -While Revilla was trying to negotiate the

reduction of the procurement cost of the 2,101.479 kilos of PVTA tobacco already exported which

attempt was denied by petitioner and also by the Office of the President, petitioner prepared two

drafts to be drawn against said letter of credit for amounts which have already become due and

demandable. -Sevilla then filed a complaint for damages with preliminary injunction. -The Lower

Court dismissed the complaint and lifted the preliminary injunction issued. -Sevilla filed an urgent

Motion for Reconsideration. -Pending Resolution, respondent judge issued the assailed Order of July

17, 1967 directing the Prudential Bank & Trust Co. to make the questioned release of funds from the

Letter of Credit. Before petitioner could file a motion for reconsideration of said order, respondent

Sevilla was able to secure the release of P300,000.00 and the rest of the amount.

ISSUE: 1. Respondent Judge acted without or in excess of jurisdiction or with grave abuse of

discretion when he issued the Order of July 17, 1967, on the ground: (a) the letter of credit issued by

respondent bank is irrevocable; xxx

HELD: In issuing the Order of July 17, 1967, respondent Judge violated the irrevocability of the letter

of credit issued by respondent Bank in favor of petitioner. An irrevocable letter of credit cannot during



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its lifetime be cancelled or modified without the express permission of the beneficiary. 3. Insular Bank

of Asia & America vs. IAC, 167 SCRA 450 (1988) FACTS:

Page 4 of 21


-Sometime in 1976 and 1977 spouses Ben S. Mendoza and Juanita M. Mendoza (the Mendozas, for

brevity), obtained two (2) loans from Philippine American Life Insurance Co. (Philam Life) in the total

amount of P600,000.00 to finance the construction of their residential house at Mandaue City. The

said loans, with a 14% nominal interest rate, were to be liquidated in equal amortizations over a

period of five (5) years. -To secure payment, Philam Life required that amortizations be guaranteed

by an irrevocable standby letter of credit of a commercial bank. Thus, the Mendozas contracted with

petitioner Insular Bank of Asia and America (IBAA) for the issuance of two (2) irrevocable standby

Letters of Credit in favor of Philam Life for the total amount of P600,000.00. -These two (2)

irrevocable standby L/Cs were, in turn, secured by a real estate mortgage for the same amount on

the property of Respondent Spouses in favor of IBAA. -The Mendozas failed to pay Philam Life theamortization that fell due on I June 1978 so that Philam Life informed IBAA that it was declaring both

loans as "entirely due and demandable" and demanded payment of P492,996.30. However, because

IBAA contested the propriety of calling in the entire loan, Philam Life desisted and resumed availing of

the L/Cs by drawing on them for five (5) more amortizations. -Because the Mendozas defaulted again

on their amortization due on, Philam Life again informed IBAA that it was declaring the entire balance

outstanding on both loans, including liquidated damages, "immediately due and payable." Philam Life

then demanded the payment of P274,779.56 from IBAA 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 (2) standby L/Cs was only P30,100.60. Later, IBAA corrected the latter and demanded

refund because the partial payment by Mendozas have the effect of reducing its liability as guarantor

or surety under the terms of the standby L/Cs in question. -The real Estate Mortgage, which secured

the two (2) standby L/Cs, was extrajudicially foreclosed by, and sold at public auction to petitioner

IBAA as the lone and highest bidder. TRIAL COURT: Trial Court took the position that IBAA, "as

surety," was discharged of its liability to the extent of the payment made by the Mendozas, as the

principal debtors, to the creditor, Philam Life. COURT OF APPEALS: Reversed the Trial Court and ruled

instead that IBAA's liability was not reduced by virtue of the payments made by the Mendozas.

ISSUE: Whether or not the partial payments made by the principal obligors (respondent MENDOZAS)

would have the corresponding effect of reducing the liability of the petitioner as guarantor or suretyunder the terms of the standby LCs in question.

HELD: In construing the terms of a Letter of Credit, as in other contracts, it is the intention of the

parties that must govern.

Page 5 of 21



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"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 letters of

credit, they are to be construed with reference to all the surrounding facts and circumstances, to the

particular and often varying terms in which they may be expressed, the circumstances and intentionof 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

P600,000.00. 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 a bank. The standby L/Cs 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 contracts. Being separate and independent agreements, the payments

made by the Mendozas cannot be added in computing IBAA's liability under its own standby letters of

credit. Payments made by the Mendozas directly to Philam Life are in compliance with their ownprestation under the loan agreement. As to the liability of the Mendozas to IBAA, it bears recalling

that the Mendozas, upon their application for the opening and issuance of the Irrevocable Standby

Letters of Credit in favor of Philam Life, had executed a Real Estate Mortgage as security to IBAA for

any payment that the latter may remit to Philam Life on the strength of said Letters of Credit; and

that IBAA had recovered from the Mendozas the amount of P432,386.07 when it foreclosed on the

mortgaged property of said spouses in the concept of "principal (unpaid advances under the 2

standby LCs plus interest and charges)." In addition, IBAA had recovered P255,364.95 representing

its clean loans to the Mendozas plus accrued interest besides the fact that it now has the foreclosed

property. As between IBAA and the Mendozas, therefore, there has been full liquidation. The

remaining obligation of P222,000.00 on the loan of the Mendozas, therefore, is now IBAA's sole

responsibility to pay to Philam Life by virtue of its absolute and irrevocable undertaking under the

standby L/Cs. Specially so, since the promissory notes executed by the Mendozas in favor of IBAA

authorized the sale of the mortgaged security "for the purpose of applying their proceeds to x x x

payments" of their obligations to IBAA.

4. Feati Bank & Trust Company vs. Court of Appeals, 196 SCRA 576 (1991) FACTS: -Bernardo E.

Villaluz agreed to sell to the then defendant Axel Christiansen 2,000 cubic meters of lauan logs at

$27.00 per cubic meter FOB. -After inspecting the logs, Christiansen issued purchase order. -On the

arrangements made and upon the instructions of the consignee, Hanmi Trade Development, Ltd., deSanta Ana, California, the Security Pacific National Bank of Los Angeles, California issued 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 (now

Citytrust) with the instruction to the latter that it "forward the enclosed letter of credit to the

beneficiary. The letter of credit further provided that the draft to be drawn is on Security Pacific

National Bank and that it be accompanied by the documents specified therein. Also incorporated by

reference is the Uniform Customs and Practice for Documentary Credits). -The logs were thereafter



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loaded on the vessel "Zenlin Glory" which was chartered by Christiansen. Before its loading, the logs

were inspected by custom inspectors, all of whom certified to the good condition and exportsbility of

the logs, and the loading was completed.

Page 6 of 21


-However, Christiansen refused to issue the certification as required in paragraph 4 of the letter of

credit, despite several requests made by the private respondent.Because of the absence of the

certification by Christiansen, the Feati Bank and Trust Company refused to advance the payment on

the letter of credit. -Meanwhile, the logs arrived at Inchon, Korea and were received by the

consignee, Hanmi Trade Development Company, to whom Christiansen sold the logs and obtained

profit. Hanmi Trade Development Company, on the other hand sold the logs to Taisung Lumber

Company at Inchon, Korea. -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).The petitioner wasimpleaded as defendant before the lower court only to afford complete relief should the court a quo

order Christiansen to execute the required certifica tion. -While the case was still pending trial,

Christiansen left the Philippines without informing the Court and his counsel. Hence, Villaluz, filed an

amended complaint make the petitioner solidarily liable with Christiansen. ISSUE: 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 thereon. HELD: Commercial transactions involving letter of credits are

governed by the rule on strict compliance-- It is a settled rule in commercial transactions involving

letters of credit that the documents tendered must strictly conform to the terms of the letter of credit.

The tender of documents by the beneficiary (seller) must include all documents required by the letter.

A correspondent bank which departs from what has been stipulated under the letter of credit, as

when it accepts a faulty tender, acts on its own risks and it may not thereafter be able to recover

from the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary. Thus

the rule of strict compliance. In the United States, commercial transactions involving letters of credit

are governed by the rule of strict compliance. In the Philippines, the same holds true. The-same rule

must also be followed. Although in some American decisions, banks are granted a little discretion to

accept a faulty tender as when the other documents may be considered immaterial or superfluous,

this theory could lead to dangerous precedents. Since a bank deals only with documents, it is not in a

position to determine whether or not the documents required by the letter of credit Are material or

superfluous. The mere fact that the document was specified therein readily means that the document is of vital importance to the buyer.

5. Prudential Bank v. IAC, 216 SCRA 257 (1992) FACTS: Philippine Rayon Mills, Inc. entered into a

contract with Nissho Co., Ltd. of Japan for the importation of textile machineries under a five-year

deferred payment plan.

Page 7 of 21



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Rayon applied for a commercial letter of credit with the Prudential Bank and Trust Company in favor

of Nissho. By virtue of said application, the Prudential Bank opened Utter of Credit Against this letter

of credit, drafts were drawn and issued by Nissho, which were all paid by the Prudential Bank through

its correspondent in Japan, the Bank of Tokyo, Ltd. As indicated on their faces, two of these drafts

were accepted by the Rayon through its president, Anacleto R. Chi, while the others were not. Uponthe arrival of the machineries, the Prudential Bank indorsed the shipping documents to Rayon which

accepted delivery of the same. To enable Rayon to take delivery of the machineries, it executed, by

prior arrangement with the Prudential Bank, a trust receipt which was signed by Anacleto R. Chi in his

capacity as President . At the back of the trust receipt is a printed form to be accomplished by two

sureties who, by the very terms and conditions thereof, were to be jointly and severally liable to the

Prudential Bank should the Rayon fail to pay the total amount or any portion of the drafts issued by

Nissho and paid for by Prudential Bank. The defendant-appellant was able to take delivery of the

textile machineries and installed the same at its factory site at 69 Obudan Street, Quezon City.

Subsequently, Rayon ceased business operation. All the textile machineries in its factory were sold to

AIC Development Corporation. The obligation of Rayon arising from the letter of credit and the trust receipt remained unpaid and unliquidated. Repeated formal demands for the payment of the said

trust receipt yielded no result.

TC: -Ordered Philippine Rayon to pay, however disregarded the latter drafts as those drafts were not

accepted by Rayon. Prudential Bank: Trial Court erred in interpreting sight drafts as requiring

acceptance by Rayon before it could be held liable thereon.

CA: -Sustained the Trial Court. The last drafts which had not been presented and accepted by Rayon,

prudential Bank was not justified in unilaterally paying the amounts therein.

ISSUE: Whether or not sight drafts require prior acceptance before Rayon can be held liable thereon.

HELD:

Page 8 of 21


Letters of Credit; Presentment for acceptance not required for sight drafts.-- A letter of credit is

defined as an engagement by a bank or other person made at the request of a customer that the

issuer will honor drafts or other demands for payment upon compliance with the conditions specified

in the credit.11 Through a letter of credit, the bank merely substitutes its own promise to pay for 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. In the instant

case then, the drawee was necessarily the herein petitioner. It was to the latter that the drafts were

presented for payment. In fact, there was no need for acceptance as the issued drafts are sight

drafts. Presentment for acceptance is necessary only in the cases expressly provided for in Section

143 of the Negotiable Instruments Law (NIL).13 The said section reads: "SEC. 143. When

presentment for acceptance must be made.-Presentment for acceptance must be made: (a) Where



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the bill is payable after sight, or in any other ease, where presentment for acceptance is necessary in

order to fix the maturity of the instrument; or (b)Where the bill expressly stipulates that it shall be

presented for acceptance; (c) Where the bill is drawn payable elsewhere than at the residence or

place of business of the drawee. In no other case is presentment for acceptance necessary in order to

render any party to the bill liable." Obviously then, sight drafts do not require presentment for

acceptance. Presentment is not a condition sine qua non for reimbursement.

6. Bank of America, NT & SA v. Court of Appeals, 228 SCRA 357 (1993) FACTS: Bank of America, NT

& SA, Manila, received by registered mail art Irrevocable Letter of Credit purportedly issued by Bank

of Ayudhya, Sarnyaek Branch, for the account of General Chemicals, Ltd., of Thailand in the amount

to cover the sale of Plastic ropes and "agricultural files," with the Bank of America as advising bank

and Inter-Resin Industrial Corporation as beneficiary. Upon receipt of the letter-advice with the letter

of credit, Inter-Resin sent its lawyer to Bank of America to have the letter of credit confirmed. The

bank did not. The bank employee in charge of letters of credit, however, explained to that there was

no need for confirmation because the letter of credit would not have been transmitted if it were not

genuine. Inter-Resin sought to make a partial availment under the letter of credit by submitting toBank of America invoices, covering the shipment of 24,000 bales of polyethylene rope to General

Chemicals valued at US$1,320,600.00, the corresponding packing list, export declaration and bill of

lading. Finally, after being satisfied that Inter-Resin's documents conformed with the conditions

expressed in the letter of credit, Bank of America issued in favor of Inter-Resin a Cashier's Check the

peso equivalent of the draft. Bank of America wrote Bank of Ayudhya advising the latter of the

availment under the letter of credit and sought the corresponding reimbursernent therefor.

Meanwhile, Inter-Resin, presented to Bank of America the documents for the second availment under

the same letter of credit. Immediately upon receipt of a telex from Bank of Ayudhya declaring the

letter of credit fraudulent, Bank of America stopped the processing of Inter-Resin's documents and

sent a telex to its branch office in Bangkok, Thailand, requesting assistance in determining the

authenticity of the letter of credit. Bank of America sued Inter-Resin for the recovery of the peso

equivalent of the draft on the partial availment of the now disowned letter of credit.

Page 9 of 21


TC: -Ruled for Inter-Resin, holding that (c) Bank of America cannot recover from Inter-Resin because

the drawer of the letter of credit is the Bank of Ayudhya and not Inter-Resin, that Bank of America

made assurances that enticed Inter-Resin and the merchandise to Thailand; CA: -Sustained the TrialCourt.

ISSUE: Whether or not the Bank of America acted merely as an advising bank or a confirming bank,

corollarily, Bank of America can recover from Inter-Resin.

HELD: It cannot seriously be disputed, looking at this case, that Bank of America has, in fact, only

been an advising, not confirming, bank, and this much is clearly evident, among other things, by the





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purchase orders for 900 metric tons were stamped "Received" by the ISA. The other purchase orders

for 1,000 metric tons allegedly sent by prospective end-users to Reliance were not shown to have

been duly sent and exhibited to the ISA. Whatever the exact amount of the purchase orders was,

Daewoo rejected the proposed L/C for the reason that the goods covered fell short of the contracted

tonnage. Thus, Reliance withdrew the application for the L/C. -Subsequently, Daewoo learned that

the failure of Reliance to open the LC was due to the fact that Reliance had already exceeded itsforeign exchange allocation. -Because of the failure of Reliance to comply with its undertaking,

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 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 1st contract. -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 and L/C as required in the 31 July

1980 contract.

TC:

Page 11 of 21


-Reliance is in turn liable for breach of contract for its failure to open a letter of credit in favor of

Daewoo pursuant to their contract and must therefore pay the latter actual damages with legal

interest plus attorney's fees. CA: - Affirmed TC

ISSUE: -Whether or not the failure of an importer (Reliance) to open a letter of credit on the dateagreed upon makes him liable to the exporter (Daewoo) for damages.

HELD: -Failure of Reliance to open the appropriate letter of credit did not prevent the birth of the

contract and neither did such failure extinguish that contract. Reliance and Daewoo, having reached

"a meeting of minds" in respect of the subject matter of the contract (2000 metric 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,failure of Reliance to open, the appropriate L/C did not

prevent the birth of that contract, and neither did the failure extinguish that contract. The opening of

the L/C in favor of Daewoo was an obligation of Reliance and the performance of that obligation by

Reliance was a condition for 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. Failure of a buyer seasonably

to furnish an agreed letter of credit is a breach of the contract between buyer and seller. Where the

buyer fails to open a letter of credit as stipulated, the seller or exporter is entitled to claim damages

for such breach. Damages for failure to open a commercial credit may, in appropriate capes, include



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the loss of profit which the seller would reasonably have made had the transaction been carried out.

8. Rodzssen Supply Company, Inc.v. Far East Bank and Trust Company, 357 SCRA 618 (2001)

FACTS: -Rodzssen Supply opened an irrevocable letter 30-day domestic letter of credit from Far East

Bank and Trust in favor of Ekman and Company, Inc. for the purchase of five units of hydraulic

loaders; subsequent amendments extended the validity of the said LC for eight months. -For the first

three hydraulic loaders that were delivered, the Bank paid for the amount specified in the letter of

credit. -The last two hydraulic loaders were delivered late, nevertheless, Rodzssen accepted the

same. -Upon Ekmans presentation of documents, FBTC paid even if it was no longer bound to do so,

because the letter of credit has already expired five months ago. -FBTC demanded payment from

Rodzssen. -Rodzssen refused to pay and instead offered to return the last two pieces of equipment.

Page 12 of 21


TC and CA: - Ordered Rodzssen to pay FBTC.

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. 2. Whether or not Rodzssen is liable to reimburse FBTC.

HELD: 1. The subject Letter of Credit had become invalid upon the lapse of the period fixed therein.

Thus, FBTC should not have paid Ekman; it was not obliged to do so. In the same vein, of no

moment was Ekmans presentation, within the prescribed period, of all the documents necessary for

collection, as the Letter of Credit had already expired and had in fact been cancelled. 2. Be that as it

may, we agree with the CA that Rodzssen should pay FBTC the amount the latter expended for the

equipment belatedly delivered by Ekman and voluntarily received and kept by petitioner. FBTCs right to seek recovery from petitioner is anchored, not upon the inefficacious Letter of Credit, but on Article

2142 of the Civil Code which reads as follows: Certain lawful, voluntary and unilateral acts give rise

to the juridical relation of quasi-contract to the end that no one shall be unjustly enriched or

benefited at the expense of another. Indeed, equitable considerations behoove us to allow recovery

by FBTC. True, it erred in paying Ekman, but Rodzssen itself was not without fault in the transaction.

It must be noted that the latter had voluntarily received and kept the loaders. When both parties to a

transaction are mutually negligent in the performance of their obligations, the fault of one cancels the

negligence of the other and, as in this case, their rights and obligations may be determined equitably

under the law proscribing unjust enrichment. 9. Abad v. Court of Appeals, 181 SCRA 191 (1990)

FACTS: - TOMCO, Inc.applied for, and was granted by the Philippine Commercial and Industrial Bank

(hereafter called "PCIB"), a domestic letter of credit in favor of its supplier, Oregon Industries, Inc., to

pay for one Skagit Yarder with accessories. PCIB paid to Oregon Industries the cost of the machinery

against a bill of exchange . -After making the required marginal deposit, TOMCO, Inc. signed and

delivered to the bank a trust receipt acknowledging receipt of the merchandise in trust for the bank,

with the obligation "to hold the same in storage" as property of PCIB, with a right to sell the same for





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10. MWSS v. Hon. Daway, 432 SCRA 559 (2004) FACTS:

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- MWSS granted Maynilad a 20- year period to manage, operate, repair, decommission and refurbish

the existing MWSS water delivery and sewerage services in the west zone service area, for which

Maynilad undertook to pay the corresponding concession fees on the date agreed upon in the said

agreement which consisted of the payments of MWSS foreign loans. - To secure the concessionaires

performance of its obligation under the Concession Agreement, Maynilad was required to put up a

bond, bank guarantee or other security acceptable to MWSS. - In compliance with this requirement,

Maynilad arranged for a 3 year facility with a number of foreign banks, led by Citicorp International

Limited for the issuance of an irrevocable Standby Letter of Credit for the full and prompt

performance of Maynilads obligations under MWSS. - As a result, of the depreciation of the

Philippine Peso against US dollar, Maynilad incurred losses and issued a force majeure notice and

unilaterally suspend payment of the concession fees. - In an effort to salvage the concession

agreement, the parties entered into a Memorandum of Agreement wherein Maynilad was allowed torecover foreign exchange losses under a formula agreed upon between them. - Maynilad filed again

another force majeure notice and since MWSS could not agree with the terms of the notice, the

same was referred to the Appeals Panel for arbitration. - New term was agreed upon. - Prior to that

Maynilad had filed a petition for rehabilitation. - RTC issued an order staying the enforcement of the

claims and stopping payment of liabilities, because it is under rehabilitation. It effectively stopped the

commencing process of payment by the bank to MWSS. - When MWSS demanded payment and

commenced drawing on the irrevocable standby letter of credit, another order was issued by the RTC

declaring such act of MWSS as violative of stay order earlier issued. - Aggrieved, MWSS filed this

petition for review by way of certiorari under rule 65.

ISSUE: -Whether or not Court has the authority to issue order enjoining MWSS from proceeding

against the Stand-by Letter of Credit.

HELD: -Letters of credit 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 into contracts

of guaranty.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

Page 15 of 21



14


converted thereby into contracts of guaranty. What distinguishes letters of credit from other

accessory contracts is the engagement of the issuing bank to pay the seller once draft and other

required shipping documents are presented to it. They are definite undertakings to pay at sight once

the documents stipulated therein are presented. -The obligation of the banks issuing letters of credit

are solidary with that of the person or entity requesting for its issuance, the same being a direct,primary, absolute and definite undertaking to pay the beneficiary upon the presentation of the set of

documents required therein. - Being a solidary obligation, the letter of credit is excluded from the

jurisdiction of the rehabilitation and therefore in enjoining MWSS from proceeding against the

Standby Letters of Credit to which it had a clear right under the law and the terms of said Standby

Letter of credit, Hon. Daway acted in excess of his jurisdiction

11. Transfield Philippines, Inc. v. Luzon Hydro Corp., 443 SCRA 307 (2004) FACTS: -Transfield and

Luzon Hydro Corporation entered into a Turnkey contract whereby Transfield, as turnkey contractor,

undertook to construct, on a turnkey basis, a seventy Megawatt Hydro-Electric power station at the

Bakun River in the provinces of Benguet and Ilocos Sur. -Transfield was given the sole responsibilityfor the design, construction, commissioning, testing and completion of the project. -The turnkey

contract entitled Transfield to claim extensions of time for reasons enumerated in the turnkey

contract, among which are variations, force majeure and delays caused by LHC itself. -To secure

performance of Transfields obligation on or before target completion date, Transfield opened in favor

of LHC two stand-by letters of credit. -In the course of construction of the project, Transfield sought

various extension of time to complete the project. The extensions were requested allegedly due to

several factors which prevented the completion of the project on the target date, such as force

majeure occasioned by typhoon Zeb, barricades and demonstration. LHC denied the requests. -

Arbitration proceeding were initiated. -Asserting that LHC had no right to call on the securities until

the resolution of disputes before the arbitration tribunals, Transfield warned the banks that any

transfer, release or disposition of the securities in favor of LHC would constrain it to hold them liable

for damages. -Despite warning, however, the banks informed Transfield that they would pay on the

securities if and when LHC calls on them. -Subsequently, LHC declared Transfield in default and

demanded payment for the delay until actual completion of the project pursuant to the turnkey

contract. -Also, LHC served notice that it would call on the securities for payment of liquidated

damages for the delay. -Hence, Transfield filed a complaint for injunction against LHC and the banks.

Page 16 of 21


ISSUES: 1. Whether or not it is only the issuing bank that may invoke the independence principle on

letters of credit. 2. Whether or not there is necessity of resolving first any dispute by the parties

before the beneficiary is entitled to call on the letter of credit. 3. Whether or not injunction is the

proper remedy to restrain wrongful draws on the securities. 4. Whether the banks were justified in

releasing the amounts due under the securities.



15

HELD: - Letters of credit are also used in non-sale settings where they serve to reduce the risk of

non-performance. Letters of credit in non-sale settings are known as standby letters of credit. There

are three significant differences between commercial and standby credits. First, commercial credits

involve the payment of money under a contract of sale. Such credits become payable upon the

presentation by the seller-beneficiary of documents that show he has taken affirmative steps to

comply with the sales agreement. In the standby type, the credit is payable upon certification of aparty's nonperformance of the agreement. The documents that accompany the beneficiary's draft

tend to show that the applicant has not performed. The beneficiary of a commercial credit must

demonstrate by documents that he has performed his contract. The beneficiary of the standby credit

must certify that his obligor has not performed the contract. - As beneficiary of the letter of credit,

LHC is entitled to invoke the principle.

- 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. 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. -The

fraud exception principle is an exception to the independence principle. The untruthfulness of a

certificate accompanying a demand for payment under a standby letter of credit may qualify as fraud

sufficient to support an injunction against payment. The remedy for fraudulent abuse is an injunction.

However, injunction should not be granted unless:

Page 17 of 21


(a) there is a clear proof of fraud; (b) the fraud constitutes fraudulent abuse of the independent purpose of the letter of credit and not only fraud in the main agreement; and (3) irreparable injury

might follow if injunction is not granted or the recovery of damages would be seriously damaged.

-Where the applicant entered into a Turnkey contract whereby it undertook to construct, on a turnkey

basis, a seventy (70) megawatt hydro electric power station, the performance of which is secured by

a standby letter of credit, the resort to arbitration by the applicant/ contractor to arbitration to

determine if the latter is guilty of delay does not preclude the beneficiary to draw on the letter of



16

credit upon the issuance of certificate of default because whether or not the issuance of certification

of default amounted to fraud was not raised in the lower court and the parties did not stipulate that

all dispute regarding delay should first be settled through arbitration before the beneficiary would be

allowed to call upon the letter of credit. If drawing upon the letter of credit was wrongful due to the

non-existent of the fact of default, the right of the applicant to seek indemnification for damages it

suffered would not normally be foreclosed pursuant to general principle of law.

12. Bank of Commerce v. Serrano, 451 SCRA 484 (2005)

FACTS: - Via Moda International, through Serrano, obtained an export packing loan from, Bank of

Commerce (BOC) secured by a Deed of Assignment over Irrevocable Transferable Letter of Credit.

Serrano executed in favor of BOC Promissory Note. Via Moda then opened a deposit account for the

proceeds of the said loan. -BOC issued to Via Moda, Irrevocable Letter of Credit for the purchase and

importation of fabric and textile products from Tiger Ear Fabric Co. Ltd. of Taiwan. To secure the

release of the goods covered, Serrano, in representation of Via Moda, executed Trust Receipt . -Under

the terms of the trust receipt, Via Moda agreed to hold the goods in trust for BOC as the lattersproperty and to sell the same for the latters account. In case of sale, the proceeds are to be remitted

to the bank as soon as it is received, but not later than the maturity date. Said proceeds are to be

applied to the relative acceptances, with interest and penalty or in the alternative, to return the goods

in case of non-sale. -The goods covered by the trust receipt were shipped by Via Moda to its

consignee in New Jersey, USA, who sent an Export Letter of Credit issued by the Bank of New York,

in favor of BOC. The Regional Operations Officer of BOC signed the export declarations to show

consent to the shipment. The proceeds of the entrusted goods sold were not credited to the trust

receipt but, were applied by the bank to the principal, penalties and interest of the export packing

loan. The excess was applied to the trust receipt, leaving a balance. - BOC sent a demand letter to

Via Moda to pay the said amount plus interest and penalty charges, or to return the goods covered by

Trust Receipt within 5 days from receipt. -The demand was not heeded. -Serrano was charged with

the crime of estafa under Article 315 (b) of the Revised Penal Code in relation to Presidential Decree

No. 115.

Page 18 of 21


TC: -Serrano guilty and ordered to pay civil liability to BOC. CA: -Reversed the decision of

TC.

ISSUE: - Whether or not Serrano is jointly and severally liable with Via Moda under the guarantee of

the Letter of Credit secured by the Trust Receipt. HELD: - A letter of credit is a separate document

from a trust receipt. While the 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 is 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.



17

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. 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 orotherwise dispose of the goods, documents and 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 instruments themselves if they are unsold, or not

otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt. -

Serrano cannot be held civilly liable under the trust receipt since she was not made personally liable

nor was she a guarantor therein. The parties stipulated during the pre-trial that respondent Serrano

executed the trust receipt in representation of Via Moda, Inc., which has a separate personality from

Serrano, and petitioner BOC failed to show sufficient reason to justify the piercing of the veil of

corporate fiction. It thus ruled that this was not Serranos personal obligation but that of Via Moda

and there was no basis of finding her solidarily liable with Via Moda.

13. Land Bank of the Philippines v. Monets Export and Manufacturing Corp. 453 SCRA 173 (2005)

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 in the amount of P250,000.00, secured by the proceeds of its export letters of credit, the

continuing guaranty of the spouses Vicente V. Tagle, Sr. and Ma. Consuelo G. Tagle, and the third

party mortgage.

Page 19 of 21


-The credit line agreement was renewed and amended several times until it was increased to

P5,000,000.00. -Owing to the continued failure and refusal of Monet, notwithstanding repeated

demands, to pay its indebtedness to Land Bank, which have ballooned to P11,464,246.19 a complaint

for collection of sum of money with prayer for preliminary attachment was filed by Land Bank.

DEFENSE OF MONET AND TAGLE SPOUSES: - Land Bank failed and refused to collect the receivables

on their export letter of credit against Wishbone Trading Company, while it made unauthorized

payment on their import letter of credit to Beautilike Limited which seriously damaged the business

interests of Monet. LC AND CA: - Land Bank was responsible for the mismanagement of the Wishboneand Beautilike accounts of Monet. 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 lack of financial resources sufficient to buy the needed

materials to fill up the standing orders from its customers. ISSUE: - Whether or not fault or acts of

mismanagement can be attributed to Land Bank relative to Monet's import letter of credit



Letters of Credit Case Digests

Documents