SECOND DIVISION

[G.R. No. 146717. November 22, 2004]

TRANSFIELD PHILIPPINES, INC., petitioner, vs. LUZON HYDRO

CORPORATION, AUSTRALIA and NEW ZEALAND BANKING
GROUP
LIMITED
and
SECURITY
BANK
CORPORATION, respondents.
DECISION
TINGA, J.:

Subject of this case is the letter of credit which has evolved as the ubiquitous
and most important device in international trade. A creation of commerce and
businessmen, the letter of credit is also unique in the number of parties involved and
its supranational character.
Petitioner has appealed from the Decision[1] of the Court of Appeals in CA-G.R.
SP No. 61901 entitledTransfield Philippines, Inc. v. Hon. Oscar Pimentel, et al.,
promulgated on 31 January 2001.[2]
On 26 March 1997, petitioner and respondent Luzon Hydro Corporation
(hereinafter, LHC) entered into a Turnkey Contract [3] whereby petitioner, as Turnkey
Contractor, undertook to construct, on a turnkey basis, a seventy (70)-Megawatt
hydro-electric power station at the Bakun River in the provinces of Benguet and
Ilocos Sur (hereinafter, the Project). Petitioner was given the sole responsibility for
the design, construction, commissioning, testing and completion of the Project. [4]
The Turnkey Contract provides that: (1) the target completion date of the Project
shall be on 1 June 2000, or such later date as may be agreed upon between
petitioner and respondent LHC or otherwise determined in accordance with the
Turnkey Contract; and (2) petitioner is entitled to claim extensions of time (EOT) for
reasons enumerated in the Turnkey Contract, among which are variations, force
majeure, and delays caused by LHC itself. [5] Further, in case of dispute, the parties
are bound to settle their differences through mediation, conciliation and such other
means enumerated under Clause 20.3 of the Turnkey Contract. [6]
To secure performance of petitioners obligation on or before the target
completion date, or such time for completion as may be determined by the parties
agreement, petitioner opened in favor of LHC two (2) standby letters of credit both
dated 20 March 2000 (hereinafter referred to as the Securities), to wit: Standby
Letter of Credit No. E001126/8400 with the local branch of respondent Australia and
New Zealand Banking Group Limited (ANZ Bank) [7] and Standby Letter of Credit No.
IBDIDSB-00/4 with respondent Security Bank Corporation (SBC) [8] each in the
amount of US$8,988,907.00.[9]

In the course of the construction of the project, petitioner 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, such as force
majeure occasioned by typhoon Zeb, barricades and demonstrations. LHC denied
the requests, however. This gave rise to a series of legal actions between the parties
which culminated in the instant petition.
The first of the actions was a Request for Arbitration which LHC filed before the
Construction Industry Arbitration Commission (CIAC) on 1 June 1999. [10] This was
followed by another Request for Arbitration, this time filed by petitioner before the
International Chamber of Commerce (ICC) [11] on 3 November 2000. In both
arbitration proceedings, the common issues presented were: [1) whether
typhoon Zeb and any of its associated events constituted force majeure to justify the
extension of time sought by petitioner; and [2) whether LHC had the right to
terminate the Turnkey Contract for failure of petitioner to complete the Project on
target date.
Meanwhile, foreseeing that LHC would call on the Securities pursuant to the
pertinent provisions of the Turnkey Contract, [12] petitionerin two separate
letters[13] both dated 10 August 2000advised respondent banks of the arbitration
proceedings already pending before the CIAC and ICC in connection with its alleged
default in the performance of its obligations. Asserting that LHC had no right to call
on the Securities until the resolution of disputes before the arbitral tribunals,
petitioner warned respondent banks that any transfer, release, or disposition of the
Securities in favor of LHC or any person claiming under LHC would constrain it to
hold respondent banks liable for liquidated damages.
As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner that
pursuant to Clause 8.2[14] of the Turnkey Contract, it failed to comply with its
obligation to complete the Project. Despite the letters of petitioner, however, both
banks informed petitioner that they would pay on the Securities if and when LHC
calls on them.[15]
LHC asserted that additional extension of time would not be warranted;
accordingly it declared petitioner in default/delay in the performance of its obligations
under the Turnkey Contract and demanded from petitioner the payment of
US$75,000.00 for each day of delay beginning 28 June 2000 until actual completion
of the Project pursuant to Clause 8.7.1 of the Turnkey Contract. At the same time,
LHC served notice that it would call on the securities for the payment of liquidated
damages for the delay.[16]
On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction, with
prayer for temporary restraining order and writ of preliminary injunction, against
herein respondents as defendants before the Regional Trial Court (RTC) of Makati.
[17]
Petitioner sought to restrain respondent LHC from calling on the Securities and
respondent banks from transferring, paying on, or in any manner disposing of the
Securities or any renewals or substitutes thereof. The RTC issued a seventy-two
(72)-hour temporary restraining order on the same day. The case was docketed as
Civil Case No. 00-1312 and raffled to Branch 148 of the RTC of Makati.
After appropriate proceedings, the trial court issued an Order on 9 November
2000, extending the temporary restraining order for a period of seventeen (17) days
or until 26 November 2000.[18]

The RTC, in its Order[19] dated 24 November 2000, denied petitioners application
for a writ of preliminary injunction. It ruled that petitioner had no legal right and
suffered no irreparable injury to justify the issuance of the writ. Employing the
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. It debunked
petitioners contention that the principle of independent contract could be invoked
only by respondent banks since according to it respondent LHC is the ultimate
beneficiary of the Securities. 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.
Dissatisfied with the trial courts denial of its application for a writ of preliminary
injunction, petitioner elevated the case to the Court of Appeals via a Petition for
Certiorari under Rule 65, with prayer for the issuance of a temporary restraining
order and writ of preliminary injunction. [20] Petitioner submitted to the appellate court
that LHCs call on the Securities was premature considering that the issue of its
default had not yet been resolved with finality by the CIAC and/or the ICC. It
asserted that until the fact of delay could be established, LHC had no right to draw
on the Securities for liquidated damages.
Refuting petitioners contentions, LHC claimed that petitioner had no right to
restrain its call on and use of the Securities as payment for liquidated damages. It
averred that the Securities are independent of the main contract between them as
shown on the face of the two Standby Letters of Credit which both provide that the
banks have no responsibility to investigate the authenticity or accuracy of the
certificates or the declarants capacity or entitlement to so certify.
In its Resolution dated 28 November 2000, the Court of Appeals issued a
temporary restraining order, enjoining LHC from calling on the Securities or any
renewals or substitutes thereof and ordering respondent banks to cease and desist
from transferring, paying or in any manner disposing of the Securities.
However, the appellate court failed to act on the application for preliminary
injunction until the temporary restraining order expired on 27 January 2001.
Immediately thereafter, representatives of LHC trooped to ANZ Bank and withdrew
the total amount of US$4,950,000.00, thereby reducing the balance in ANZ Bank to
US$1,852,814.00.
On 2 February 2001, the appellate court dismissed the petition for certiorari. The
appellate court expressed conformity with the trial courts decision that LHC could call
on the Securities pursuant to the first principle in credit law that the credit itself is
independent of the underlying transaction and that as long as the beneficiary
complied with the credit, it was of no moment that he had not complied with the
underlying contract. Further, the appellate court held that even assuming that the trial
courts denial of petitioners application for a writ of preliminary injunction was
erroneous, it constituted only an error of judgment which is not correctible by
certiorari, unlike error of jurisdiction.
Undaunted, petitioner filed the instant Petition for Review raising the following
issues for resolution:

WHETHER THE INDEPENDENCE PRINCIPLE ON LETTERS OF CREDIT

MAY BE INVOKED BY A BENEFICIARY THEREOF WHERE THE
BENEFICIARYS CALL THEREON IS WRONGFUL OR FRAUDULENT.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE
SECURITIES BEFORE THE RESOLUTION OF PETITIONERS AND LHCS
DISPUTES BY THE APPROPRIATE TRIBUNAL.
WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN
RELEASING THE AMOUNTS DUE UNDER THE SECURITIES DESPITE
BEING NOTIFIED THAT LHCS CALL THEREON IS WRONGFUL.
WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND
IRREPARABLE DAMAGE IN THE EVENT THAT:
A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND
SECURITY BANK ARE ALLOWED TO RELEASE, THE REMAINING
BALANCE OF THE SECURITIES PRIOR TO THE RESOLUTION OF
THE DISPUTES BETWEEN PETITIONER AND LHC.
B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY
DRAWN FROM THE SECURITIES.[21]

Petitioner contends that the courts below improperly relied on the independence
principle on letters of credit when this case falls squarely within the fraud exception
rule. Respondent LHC deliberately misrepresented the supposed existence of delay
despite its knowledge that the issue was still pending arbitration, petitioner
continues.
Petitioner asserts that LHC should be ordered to return the proceeds of the
Securities pursuant to the principle against unjust enrichment and that, under the
premises, injunction was the appropriate remedy obtainable from the competent
local courts.
On
25
August
2003,
petitioner
filed
a Supplement
to
the
[22]
[23]
Petition and Supplemental Memorandum, alleging that in the course of the
proceedings in the ICC Arbitration, a number of documentary and testimonial
evidence came out through the use of different modes of discovery available in the
ICC Arbitration. It contends that after the filing of the petition facts and admissions
were discovered which demonstrate that LHC knowingly misrepresented that
petitioner had incurred delays notwithstanding its knowledge and admission that
delays were excused under the Turnkey Contractto be able to draw against the
Securities. Reiterating that fraud constitutes an exception to the independence
principle, petitioner urges that this warrants a ruling from this Court that the call on
the Securities was wrongful, as well as contrary to law and basic principles of equity.
It avers that it would suffer grave irreparable damage if LHC would be allowed to use
the proceeds of the Securities and not ordered to return the amounts it had
wrongfully drawn thereon.
In its Manifestation dated 8 September 2003,[24] LHC contends that the
supplemental pleadings filed by petitioner present erroneous and misleading
information which would change petitioners theory on appeal.

In yet another Manifestation dated 12 April 2004,[25] petitioner alleges that on 18

February 2004, the ICC handed down its Third Partial Award, declaring that LHC
wrongfully drew upon the Securities and that petitioner was entitled to the return of
the sums wrongfully taken by LHC for liquidated damages.
LHC filed a Counter-Manifestation dated 29 June 2004,[26] stating that
petitioners Manifestationdated 12 April 2004 enlarges the scope of its Petition for
Review of the 31 January 2001 Decision of the Court of Appeals. LHC notes that
the Petition for Review essentially dealt only with the issue of whether injunction
could issue to restrain the beneficiary of an irrevocable letter of credit from drawing
thereon. It adds that petitioner has filed two other proceedings, to wit: (1) ICC Case
No. 11264/TE/MW, entitledTransfield Philippines Inc. v. Luzon Hydro Corporation, in
which the parties made claims and counterclaims arising from petitioners
performance/misperformance of its obligations as contractor for LHC; and (2) Civil
Case No. 04-332, entitled Transfield Philippines, Inc. v. Luzon Hydro
Corporation before Branch 56 of the RTC of Makati, which is an action to enforce
and
obtain
execution
of
the
ICCs
partial
award
mentioned
in
petitioners Manifestation of 12 April 2004.
In its Comment to petitioners Motion for Leave to File Addendum to Petitioners
Memorandum, LHC stresses that the question of whether the funds it drew on the
subject letters of credit should be returned is outside the issue in this appeal. At any
rate, LHC adds that the action to enforce the ICCs partial award is now fully within
the Makati RTCs jurisdiction in Civil Case No. 04-332. LHC asserts that petitioner is
engaged in forum-shopping by keeping this appeal and at the same time seeking the
suit for enforcement of the arbitral award before the Makati court.
Respondent SBC in its Memorandum, dated 10 March 2003[27] contends that the
Court of Appeals correctly dismissed the petition for certiorari. Invoking the
independence principle, SBC argues that it was under no obligation to look into the
validity or accuracy of the certification submitted by respondent LHC or into the
latters capacity or entitlement to so certify. It adds that the act sought to be enjoined
by petitioner was already fait accompli and the present petition would no longer
serve any remedial purpose.
In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March
2003[28] posits that its actions could not be regarded as unjustified in view of the
prevailing independence principle under which it had no obligation to ascertain the
truth of LHCs allegations that petitioner defaulted in its obligations. Moreover, it
points out that since the Standby Letter of Credit No. E001126/8400 had been fully
drawn, petitioners prayer for preliminary injunction had been rendered moot and
academic.
At the core of the present controversy is the applicability of the independence
principle and fraud exception rule in letters of credit. Thus, a discussion of the nature
and use of letters of credit, also referred to simply as credits, would provide a better
perspective of the case.
The letter of credit evolved as a mercantile specialty, and the only way to
understand all its facets is to recognize that it is an entity unto itself. 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, yet strict compliance
with its terms is an enforceable right. Nor is it a third-party beneficiary contract,

because the issuer must honor drafts drawn against a letter regardless of problems
subsequently arising in the underlying contract. Since the banks customer cannot
draw on the letter, it does not function as an assignment by the customer to the
beneficiary. Nor, if properly used, is it a contract of suretyship or guarantee, because
it entails a primary liability following a default. Finally, it is not in itself a negotiable
instrument, because it is not payable to order or bearer and is generally conditional,
yet the draft presented under it is often negotiable. [29]
In commercial transactions, a letter of credit is a financial device developed by
merchants as a convenient and relatively safe mode of dealing with sales of goods to
satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his
goods before he is paid, and a buyer, who wants to have control of the goods before
paying.[30] The use of credits in commercial transactions serves to reduce the risk of
nonpayment of the purchase price under the contract for the sale of goods. However,
credits are also used in non-sale settings where they serve to reduce the risk of
nonperformance. Generally, credits in the non-sale settings have come to be known
as standby credits.[31]
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 a party'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.[32]
By definition, a letter of credit is a written instrument whereby the writer requests
or authorizes the addressee to pay money or deliver goods to a third person and
assumes responsibility for payment of debt therefor to the addressee. [33] A letter of
credit, however, changes its nature as different transactions occur and if carried
through to completion ends up as a binding contract between the issuing and
honoring banks without any regard or relation to the underlying contract or disputes
between the parties thereto.[34]
Since letters of credit have gained general acceptability in international trade
transactions, the ICC has published from time to time updates on the Uniform
Customs and Practice (UCP) for Documentary Credits to standardize practices in the
letter of credit area. The vast majority of letters of credit incorporate the UCP.[35] First
published in 1933, the UCP for Documentary Credits has undergone several
revisions, the latest of which was in 1993.[36]
In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,[37] this Court
ruled that the observance of the UCP is justified by Article 2 of the Code of
Commerce which provides that in the absence of any particular provision in the Code
of Commerce, commercial transactions shall be governed by usages and customs
generally observed. More recently, in Bank of America, NT & SA v. Court of Appeals,
[38]
this Court ruled that there being no specific provisions which govern the legal
complexities arising from transactions involving letters of credit, not only between or

among banks themselves but also between banks and the seller or the buyer, as the
case may be, the applicability of the UCP is undeniable.
Article 3 of the UCP provides that credits, by their nature, are separate
transactions from the sales or other contract(s) on which they may be based and
banks are in no way concerned with or bound by such contract(s), even if any
reference whatsoever to such contract(s) is included in the credit. Consequently, the
undertaking of a bank to pay, accept and pay draft(s) or negotiate and/or fulfill any
other obligation under the credit is not subject to claims or defenses by the applicant
resulting from his relationships with the issuing bank or the beneficiary. A beneficiary
can in no case avail himself of the contractual relationships existing between the
banks 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 socalled 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.[39]
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.[40]
Can the beneficiary invoke the independence principle?
Petitioner insists that the independence principle does not apply to the instant
case and assuming it is so, it is a defense available only to respondent banks. LHC,
on the other hand, contends that it would be contrary to common sense to deny the
benefit of an independent contract to the very party for whom the benefit is intended.
As beneficiary of the letter of credit, LHC asserts it is entitled to invoke the principle.
As discussed above, in a letter of credit transaction, such as in this case, where
the credit is stipulated as irrevocable, there is a 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. [41] Precisely, the independence
principle liberates the issuing bank from the duty of ascertaining compliance by the
parties in the main contract. As the principles nomenclature clearly suggests, the
obligation under the letter of credit is independent of the related and originating
contract. In brief, the letter of credit is separate and distinct from the underlying
transaction.

Given the nature of letters of credit, petitioners argumentthat it is only the issuing
bank that may invoke the independence principle on letters of creditdoes not impress
this Court. To say that the independence principle may only be invoked by the
issuing banks would render nugatory the purpose for which the letters of credit are
used in commercial transactions. As it is, the independence doctrine works to the
benefit of both the issuing bank and the beneficiary.
Letters of credit are employed by the parties desiring to enter into commercial
transactions, not for the benefit of the issuing bank but mainly for the benefit of the
parties to the original transactions. With the letter of credit from the issuing bank, the
party who applied for and obtained it may confidently present the letter of credit to
the beneficiary as a security to convince the beneficiary to enter into the business
transaction. On the other hand, the other party to the business transaction, i.e., the
beneficiary of the letter of credit, can be rest assured of being empowered to call on
the letter of credit as a security in case the commercial transaction does not push
through, or the applicant fails to perform his part of the transaction. It is for this
reason that the party who is entitled to the proceeds of the letter of credit is
appropriately called beneficiary.
Petitioners argument that any dispute must first be resolved by the parties,
whether through negotiations or arbitration, before the beneficiary is entitled to call
on the letter of credit in essence would convert the letter of credit into a mere
guarantee. Jurisprudence has laid down a clear distinction between a letter of credit
and a guarantee in that the settlement of a dispute between the parties is not a prerequisite for the release of funds under a letter of credit. In other words, the
argument is incompatible with the very nature of the letter of credit. If a letter of credit
is drawable only after settlement of the dispute on the contract entered into by the
applicant and the beneficiary, there would be no practical and beneficial use for
letters of credit in commercial transactions.
Professor John F. Dolan, the noted authority on letters of credit, sheds more light
on the issue:

The standby credit is an attractive commercial device for many of the same reasons
that commercial credits are attractive. Essentially, these credits are inexpensive and
efficient. Often they replace surety contracts, which tend to generate higher costs
than credits do and are usually triggered by a factual determination rather than by
the examination of documents.
Because parties and courts should not confuse the different functions of the surety
contract on the one hand and the standby credit on the other, the distinction
between surety contracts and credits merits some reflection. The two commercial
devices share a common purpose. Both ensure against the obligors
nonperformance. They function, however, in distinctly different ways.
Traditionally, upon the obligors default, the surety undertakes to complete the
obligors performance, usually by hiring someone to complete that performance.
Surety contracts, then, often involve costs of determining whether the obligor
defaulted (a matter over which the surety and the beneficiary often litigate) plus the
cost of performance. The benefit of the surety contract to the beneficiary is

obvious. He knows that the surety, often an insurance company, is a strong

financial institution that will perform if the obligor does not. The beneficiary also
should understand that such performance must await the sometimes lengthy and
costly determination that the obligor has defaulted. In addition, the suretys
performance takes time.
The standby credit has different expectations. He reasonably expects that he will
receive cash in the event of nonperformance, that he will receive it promptly, and
that he will receive it before any litigation with the obligor (the applicant) over the
nature of the applicants performance takes place. The standby credit has this
opposite effect of the surety contract: it reverses the financial burden of parties
during litigation.
In the surety contract setting, there is no duty to indemnify the beneficiary until the
beneficiary establishes the fact of the obligors performance. The beneficiary may
have to establish that fact in litigation. During the litigation, the surety holds the
money and the beneficiary bears most of the cost of delay in performance.
In the standby credit case, however, the beneficiary avoids that litigation burden
and receives his money promptly upon presentation of the required documents. It
may be that the applicant has, in fact, performed and that the beneficiarys
presentation of those documents is not rightful. In that case, the applicant may sue
the beneficiary in tort, in contract, or in breach of warranty; but, during the
litigation to determine whether the applicant has in fact breached the obligation to
perform, the beneficiary, not the applicant, holds the money. Parties that use a
standby credit and courts construing such a credit should understand this allocation
of burdens. There is a tendency in some quarters to overlook this distinction
between surety contracts and standby credits and to reallocate burdens by
permitting the obligor or the issuer to litigate the performance question before
payment to the beneficiary.[42]
While it is the bank which is bound to honor the credit, it is the beneficiary who
has the right to ask the bank to honor the credit by allowing him to draw thereon. The
situation itself emasculates petitioners posture that LHC cannot invoke the
independence principle and highlights its puerility, more so in this case where the
banks concerned were impleaded as parties by petitioner itself.
Respondent banks had squarely raised the independence principle to justify their
releases of the amounts due under the Securities. Owing to the nature and purpose
of the standby letters of credit, this Court rules that the respondent banks were left
with little or no alternative but to honor the credit and both of them in fact submitted
that it was ministerial for them to honor the call for payment. [43]
Furthermore, LHC has a right rooted in the Contract to call on the Securities. The
relevant provisions of the Contract read, thus:

4.2.1. In order to secure the performance of its obligations under this Contract, the
Contractor at its cost shall on the Commencement Date provide security to the
Employer in the form of two irrevocable and confirmed standby letters of credit
(the Securities), each in the amount of US$8,988,907, issued and confirmed by
banks or financial institutions acceptable to the Employer. Each of the Securities
must be in form and substance acceptable to the Employer and may be provided on
an annually renewable basis.[44]
8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to
the Employer by way of liquidated damages (Liquidated Damages for Delay) the
amount of US$75,000 for each and every day or part of a day that shall elapse
between the Target Completion Date and the Completion Date, provided that
Liquidated Damages for Delay payable by the Contractor shall in the aggregate not
exceed 20% of the Contract Price. The Contractor shall pay Liquidated Damages
for Delay for each day of the delay on the following day without need of demand
from the Employer.
8.7.2 The Employer may, without prejudice to any other method of
recovery, deduct the amount of such damages from any monies due, or to become
due to the Contractor and/or by drawing on the Security.[45]
A contract once perfected, binds the parties not only to the fulfillment of what has
been expressly stipulated but also to all the consequences which according to their
nature, may be in keeping with good faith, usage, and law. [46] A careful perusal of the
Turnkey Contract reveals the intention of the parties to make the Securities
answerable for the liquidated damages occasioned by any delay on the part of
petitioner. The call upon the Securities, while not an exclusive remedy on the part of
LHC, is certainly an alternative recourse available to it upon the happening of the
contingency for which the Securities have been proffered. Thus, even without the
use of the independence principle, the Turnkey Contract itself bestows upon LHC the
right to call on the Securities in the event of default.
Next, petitioner invokes the fraud exception principle. It avers that LHCs call on
the Securities is wrongful because it fraudulently misrepresented to ANZ Bank and
SBC that there is already a breach in the Turnkey Contract knowing fully well that
this is yet to be determined by the arbitral tribunals. It asserts that the fraud
exception exists when the beneficiary, for the purpose of drawing on the credit,
fraudulently presents to the confirming bank, documents that contain, expressly or by
implication, material representations of fact that to his knowledge are untrue. In such
a situation, petitioner insists, injunction is recognized as a remedy available to it.
Citing Dolans treatise on letters of credit, petitioner argues that the
independence principle is not without limits and it is important to fashion those limits
in light of the principles purpose, which is to serve the commercial function of the
credit. If it does not serve those functions, application of the principle is not
warranted, and the commonlaw principles of contract should apply.
It is worthy of note that the propriety of LHCs call on the Securities is largely
intertwined with the fact of default which is the self-same issue pending resolution

before the arbitral tribunals. To be able to declare the call on the Securities wrongful
or fraudulent, it is imperative to resolve, among others, whether petitioner was in fact
guilty of delay in the performance of its obligation. Unfortunately for petitioner, this
Court is not called upon to rule upon the issue of defaultsuch issue having been
submitted by the parties to the jurisdiction of the arbitral tribunals pursuant to the
terms embodied in their agreement.[47]
Would injunction then be the proper remedy to restrain the alleged wrongful
draws on the Securities?
Most writers agree that fraud is an exception to the independence principle.
Professor Dolan opines that the untruthfulness of a certificate accompanying a
demand for payment under a standby credit may qualify as fraud sufficient to support
an injunction against payment.[48] 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.[49]
In its complaint for injunction before the trial court, petitioner alleged that it is
entitled to a total extension of two hundred fifty-three (253) days which would move
the target completion date. It argued that if its claims for extension would be found
meritorious by the ICC, then LHC would not be entitled to any liquidated damages. [50]
Generally, injunction is a preservative remedy for the protection of ones
substantive right or interest; it is not a cause of action in itself but merely a
provisional remedy, an adjunct to a main suit. The issuance of the writ of preliminary
injunction as an ancillary or preventive remedy to secure the rights of a party in a
pending case is entirely within the discretion of the court taking cognizance of the
case, the only limitation being that this discretion should be exercised based upon
the grounds and in the manner provided by law.[51]
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. [52] It 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.
[53]
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.[54]
In the instant case, petitioner failed to show that it has a clear and unmistakable
right to restrain LHCs call on the Securities which would justify the issuance of
preliminary injunction. By petitioners own admission, the right of LHC to call on the
Securities was contractually rooted and subject to the express stipulations in the
Turnkey Contract.[55] Indeed, the Turnkey Contract is plain and unequivocal in that it
conferred upon LHC the right to draw upon the Securities in case of default, as
provided in Clause 4.2.5, in relation to Clause 8.7.2, thus:

4.2.5 The Employer shall give the Contractor seven days notice of calling upon any
of the Securities, stating the nature of the default for which the claim on any of the

Securities is to be made, provided that no notice will be required if the Employer

calls upon any of the Securities for the payment of Liquidated Damages for
Delay or for failure by the Contractor to renew or extend the Securities within 14
days of their expiration in accordance with Clause 4.2.2. [56]
8.7.2 The Employer may, without prejudice to any other method of recovery,
deduct the amount of such damages from any monies due, or to become due, to the
Contractor and/or by drawing on the Security.[57]
The pendency of the arbitration proceedings would not per se make LHCs 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. It is therefore premature and absurd to conclude that the draws on the
Securities were outright fraudulent given the fact that the ICC and CIAC have not
ruled with finality on the existence of default.
Nowhere in its complaint before the trial court or in its pleadings filed before the
appellate court, did petitioner invoke the fraud exception rule as a ground to justify
the issuance of an injunction.[58] What petitioner did assert before the courts below
was the fact that LHCs draws on the Securities would be premature and without
basis in view of the pending disputes between them. Petitioner should not be allowed
in this instance to bring into play the fraud exception rule to sustain its claim for the
issuance of an injunctive relief. Matters, theories or arguments not brought out in the
proceedings below will ordinarily not be considered by a reviewing court as they
cannot be raised for the first time on appeal. [59] The lower courts could thus not be
faulted for not applying the fraud exception rule not only because the existence of
fraud was fundamentally interwoven with the issue of default still pending before the
arbitral tribunals, but more so, because petitioner never raised it as an issue in its
pleadings filed in the courts below. At any rate, petitioner utterly failed to show that it
had a clear and unmistakable right to prevent LHCs call upon the Securities.
Of course, prudence should have impelled LHC to await resolution of the
pending issues before the arbitral tribunals prior to taking action to enforce the
Securities. But, as earlier stated, the Turnkey Contract did not require LHC to do so
and, therefore, it was merely enforcing its rights in accordance with the tenor thereof.
Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith. [60] More importantly, pursuant to
the principle of autonomy of contracts embodied in Article 1306 of the Civil Code,
[61]
petitioner could have incorporated in its Contract with LHC, a proviso that only the
final determination by the arbitral tribunals that default had occurred would justify the
enforcement of the Securities. However, the fact is petitioner did not do so; hence, it
would have to live with its inaction.
With respect to the issue of whether the respondent banks were justified in
releasing the amounts due under the Securities, this Court reiterates that pursuant to
the independence principle the banks were under no obligation to determine the
veracity of LHCs certification that default has occurred. Neither were they bound by
petitioners declaration that LHCs call thereon was wrongful. To repeat, respondent
banks undertaking was simply to pay once the required documents are presented by
the beneficiary.

At any rate, should petitioner finally prove in the pending arbitration proceedings
that LHCs draws upon the Securities were wrongful due to the non-existence of the
fact of default, its right to seek indemnification for damages it suffered would not
normally be foreclosed pursuant to general principles of law.
Moreover, in a Manifestation,[62] dated 30 March 2001, LHC informed this Court
that the subject letters of credit had been fully drawn. This fact alone would have
been sufficient reason to dismiss the instant petition.
Settled is the rule that injunction would not lie where the acts sought to be
enjoined have already become fait accompli or an accomplished or consummated
act.[63] In Ticzon v. Video Post Manila, Inc.[64] this Court ruled that where the period
within which the former employees were prohibited from engaging in or working for
an enterprise that competed with their former employerthe very purpose of the
preliminary injunction has expired, any declaration upholding the propriety of the writ
would be entirely useless as there would be no actual case or controversy between
the parties insofar as the preliminary injunction is concerned.
In the instant case, the consummation of the act sought to be restrained had
rendered the instant petition mootfor any declaration by this Court as to propriety or
impropriety of the non-issuance of injunctive relief could have no practical effect on
the existing controversy.[65] The other issues raised by petitioner particularly with
respect to its right to recover the amounts wrongfully drawn on the Securities,
according to it, could properly be threshed out in a separate proceeding.
One final point. LHC has charged petitioner of forum-shopping. It raised the
charge on two occasions. First, in its Counter-Manifestation dated 29 June
2004[66] LHC alleges that petitioner presented before this Court the same claim for
money which it has filed in two other proceedings, to wit: ICC Case No.
11264/TE/MW and Civil Case No. 04-332 before the RTC of Makati. LHC argues that
petitioners acts constitutes forum-shopping which should be punished by the
dismissal of the claim in both forums. Second, in its Comment to Petitioners Motion
for Leave to File Addendum to Petitioners Memorandumdated 8 October 2004, LHC
alleges that by maintaining the present appeal and at the same time pursuing Civil
Case No. 04-332wherein petitioner pressed for judgment on the issue of whether the
funds LHC drew on the Securities should be returnedpetitioner resorted to forumshopping. In both instances, however, petitioner has apparently opted not to respond
to the charge.
Forum-shopping is a very serious charge. It exists when a party repetitively
avails of several judicial remedies in different courts, simultaneously or successively,
all substantially founded on the same transactions and the same essential facts and
circumstances, and all raising substantially the same issues either pending in, or
already resolved adversely, by some other court. [67] It may also consist in the act of a
party against whom an adverse judgment has been rendered in one forum, of
seeking another and possibly favorable opinion in another forum other than by
appeal or special civil action of certiorari, or the institution of two or more actions or
proceedings grounded on the same cause on the supposition that one or the other
court might look with favor upon the other party.[68] To determine whether a party
violated the rule against forum-shopping, the test applied is whether the elements
of litis pendentia are present or whether a final judgment in one case will amount
to res judicata in another.[69] Forum-shopping constitutes improper conduct and may

be punished with summary dismissal of the multiple petitions and direct contempt of
court.[70]
Considering the seriousness of the charge of forum-shopping and the severity of
the sanctions for its violation, the Court will refrain from making any definitive ruling
on this issue until after petitioner has been given ample opportunity to respond to the
charge.
WHEREFORE, the instant petition is DENIED, with costs against petitioner.
Petitioner is hereby required to answer the charge of forum-shopping within
fifteen (15) days from notice.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.

[1]

Penned by Justice Candido V. Rivera, concurred in by Justices Conchita Carpio-Morales and

Rebecca de Guia-Salvador.

[2]

Rollo, pp. 52-61.

[3]

Id. at 62-252.

[4]

Id. at 75-76.

[5]

Clause 1.1, Volume II of the Turnkey Contract, Rollo, p. 81.

[6]

20.3 Dispute Resolution.

If at anytime any dispute or difference shall arise between the Employer and the Contractor in
connection with or arising out of this Contract or the carrying out of the Works, the parties
together shall in good faith exert all efforts to resolve such dispute or difference by whatever
means they deem appropriate, including conciliation, mediation and seeking the assistance of
technical, accounting or other experts. At the request of any party, the chief executives of the
Employer and the Contractor shall meet in a good-faith effort to reach an amicable settlement
of the dispute or difference. Any dispute or difference that the parties are unable to resolve
within a reasonable time may, at the option of either party, be referred to arbitration in
accordance with Clause 20.4. (Id. at 179)

[7]

Annex C, Rollo, pp. 254-256.

[8]

Annex D, Id. at 257-259.

[9]

Clause 4.2.1, Volume II of the Turnkey Contract, Id. at 94.

[10]

Id. at 261-265.

[11]

Id. at 359-382.

[12]

Turnkey Contract, Clause 4.2.5, Rollo, p. 94, in relation to Clause 8.7.1., Rollo, p. 132.

[13]

Annex H, Rollo, pp. 287-289; Annex H-1, Rollo, pp. 320-322.

[14]

Clause 8.2. Time for Completion.

The Contractor shall complete all the Works, including the Tests on Completion, in accordance with
the Program on or before the Target Completion Date. (Rollo, p. 125)
[15]

Vol. 1, Rollo, pp. 355-357.

[16]

8.7.1. If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the Employer by
way of liquidated damages (Liquidated Damages for Delay) the amount of US$75,000 for
each and every day or part of a day that shall elapse between the Target Completion Date

and the Completion Date, provided that Liquidated Damages for Delay payable by the
Contractor shall in the aggregate not exceed 20% of the Contract Price. The Contractor shall
pay Liquidated Damages for Delay for each day of the delay on the following day without
need of demand from the Employer.
[17]

Annex L, Rollo, pp. 383-402.

[18]

Annex N, Id. at 406-409.

[19]

Annex O, Id. at 412-423.

[20]

Docketed as CA-G.R. SP No. 61901.

[21]

Rollo, pp. 25-26.

[22]

Vol. II; Id. at 2-78.

[23]

Id. at 79-92.

[24]

Id. at 95-98

[25]

Id. at 109-113.

[26]

Id. at 666-671.

[27]

Id. at 598-607.

[28]

Id. at 619-630.

[29]

Joseph, Letters of Credit: The Developing Concepts and Financing Functions, 94 BANKING LAW
JOURNAL 850-851 [1977]cited in M. KURKELA, LETTERS OF CREDIT UNDER
INTERNATIONAL TRADE LAW, 321 (1985).

[30]

Bank of America v. Court of Appeals, G.R. No. 105395, 10 December 1993, 228 SCRA
357 citing William S. Shaterian,EXPORT-IMPORT BANKING: THE INSTRUMENTS AND
OPERATIONS UTILIZED BY AMERICAN EXPORTERS AND IMPORTERS AND THEIR
BANKS IN FINANCING FOREIGN TRADE, 284-374 (1947).

[31]

E&H Partners v. Broadway Nat'l Bank, 39 F. Supp. 2d 275, (United States Circuit Court, S.D. New
York) No. 96 Civ. 7098 (RLC), 19 October 1998 <http://www.westlaw.com>.

[32]

J. DOLAN, THE LAW OF LETTERS OF CREDIT, REVISED Ed. (2000).

[33]

24 A WORDS AND PHRASES 590, Permanent Edition.

[34]

Ibid.

[35]

JACKSON & DAVEY, INTERNATIONAL ECONOMIC RELATIONS, 53 (2nd ed.).

[36]

ICC Publication No. 500.

[37]

146 Phil. 269 (1970).

[38]

G.R. No. 105395, 10 December 1993, 228 SCRA 357.

[39]

Article 15, UCP.

[40]

KURKELA, LETTERS OF CREDIT UNDER INTERNATIONAL TRADE LAW, 286-287 (1985).

[41]

Art. 10, UCP.

[42]

Supra note 32 at 1-27.

[43]

Rollo, pp. 604 and 624.

[44]

Underscoring supplied; Id. at 94.

[45]

Underscoring supplied; Id. at 132.

[46]

Art. 1315, Civil Code.

[47]

Clause 20.4.1, Turnkey Contract, Rollo, p. 179.

[48]

Supra note 32 at 2-63.

[49]

M. KURKELA, LETTERS OF CREDIT UNDER INTERNATIONAL TRADE LAW, 309 (1985).

[50]

Rollo, p. 391.

[51]

Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga, 415 Phil. 43.

[52]

Shin v. Court of Appeals, G.R. No. 113627, 6 February 2001, 351 SCRA 257.

[53]

Zabat v. Court of Appeals, G.R. No. 122089, 23 August 2000, 338 SCRA 551; Philippine Economic
Zone Authority v. Vianzon, G.R. No. 131020, 20 July 2000, 336 SCRA 309; Valencia v. Court
of Appeals, G.R. No. 119118, 19 February 2001, 352 SCRA 72; Crystal v. Cebu International
School, G.R. No. 135433, 4 April 2001, 356 SCRA 296; Ong Ching Kian Chuan v. Court of
Appeals, 415 Phil. 365 (2001).

[54]

Philippine National Bank v. Ritratto Group, Inc., 414 Phil. 494 (2001).

[55]

Rollo, p. 31.

[56]

Underscoring supplied; Id. at 94-95.

[57]

Id. at 132.

[58]

Vide Annex L, Rollo. pp. 392-399; Petition for Certiorari, CA Rollo, pp. 7-43.

[59]

Salafranca v. Philamlife Village Homeowners Association, Inc., 360 Phil. 652; Ruby Industrial
Corporation v. Court of Appeals, 348 Phil. 480; Victorias Milling Co., Inc. v. Court of Appeals,
389 Phil. 184.

[60]

Article 1159, Civil Code.

[61]

Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as
they may deem convenient, provided they are not contrary to law, morals, good customs,
public order, or public policy.

[62]

Rollo, p. 493.

[63]

Aznar Brothers Realty Company v. Court of Appeals, G.R. No. 128102, 7 March 2000, 327 SCRA
359; Soriano v. Court of Appeals, 416 Phil. 226 (2001); Rodil Enterprises v. Court of Appeals,
G.R. No. G.R. No. 129609, 29 November 2001, 371 SCRA 79; Unionbank of the
Philippines v. Court of Appeals, 370 Phil. 837 (1999).

[64]

389 Phil. 20 (2000).

[65]

BLACKS LAW DICTIONARY, p. 1008, citing Leonhart v. McCormick, D.C. Pa., 395 F. Supp. 1073.

[66]

Vol. II, Rollo, pp. 666-669.

[67]

Tantoy, Sr. v. Court of Appeals, G.R. No. 141427, April 20, 2001, 357 SCRA 329.

[68]

Bangko Silangan Development Bank v. Court of Appeals, 412 Phil. 755 (2001).

[69]

Tirona v. Alejo, G.R. No. 129313, October 10, 2001, 367 SCRA 17; Manalo v. Court of Appeals,
G.R. No. 141297, October 8, 2001, 366 SCRA 752.

[70]

Tantoy, Sr. v. Court of Appeals, supra note 67.; Caviles v. Seventeenth Division, Court of Appeals,
G.R. No. 126857, September 18, 2002, 389 SCRA 306.