Bank of America vs CA Bank of America received by registered mail an irrevocable letter of credit purportedly issued by Bank of Ayudhya Samyek

Branch, for the account of General Chemicals, Ltd., of Thailand in the amount of $2,782,000.00 to cover the sale of plastic ropes and agricultural files, with Bank of America as the advising bank and Inter-Resin Industrial Corporation as beneficiary. Bank of America notified Inter-Resin of the letter of credit. Upon request by Inter-Resin for Bank of America to confirm the letter of credit, latter refused although one of its employee explained to Inter-Resin that there was no need for confirmation because the letter of credit is genuine. Inter-Resin therefore twice sought availment under the letter of credit. Bank of America issued P10,219,093 in the first availment upon being satisfied of the documents submitted by InterResin. However, Bank of America stopped the processing of the second availment upon being informed by Bank of Ayudhya that the letter of credit was fraudulent. Further, upon conducting an examination of the vans sent by Inter-Resin, it found out that they contain not ropes but plastic strips, wrappers, rags and waste materials. Bank of America sued Inter-Resin for recovery of the money it gave under the first availment, considering the letter of credit has been disowned by Bank of Ayudhya. However, the trial court ruled in favor of Inter-Resin which was affirmed by the Court of Appeals. Supreme Court reversed the decision of the lower courts. It ruled that the crucial point of dispute in this case is whether, under the letter of credit, Bank of America has incurred any liability to the beneficiary thereof, an issue that largely is dependent on the banks participation in that transaction: as a mere advising or notifying bank, it would not be liable, but as a confirming bank, had this been the case, it could be considered as having incurred that liability. 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 provisions of the letter of credit itself, the petitioner banks letter of advice, its request for payment of advising fee, and the admission of Inter-Resin that it has paid the same. That Bank of America has asked Inter-Resin to submit documents required by the letter of credit and eventually has paid the proceeds thereof, did not obviously make it a confirming bank. As an advising or notifying bank, Bank of America did not incur any obligation more than just notifying Inter-Resin of the letter of credit issued in its favor, let alone to confirm the letter of credit. Bringing the letter of credit to the attention of the seller is the primordial obligation of an advising bank. The view that Bank of America should have first checked the authenticity of the letter of credit with Bank of Ayudhya, by using advanced mode of business communications, before dispatching the same to Inter-Resin finds no real support in the UCP. As advising bank, Bank of America is bound only to check the apparent authenticity of the letter of credit, which it did. Websters explains that the word apparent suggests appearance to unaided senses that is not or may not be borne out by more rigorous examination or greater knowledge. May Bank of America then recover what it has paid under the letter of credit when the corresponding draft for partial availment thereunder and the required documents therefore were later negotiated with it by Inter-Resin? The answer is yes. This kind of transaction is what is commonly referred to as a discounting arrangement. This time, Bank of America, has acted independently as a negotiating bank, thus saving Inter-Resin from the hardship of presenting the documents directly to Bank of Ayudhya to recover payment. As a negotiating bank, Bank of America has a right of recourse against the issuer bank and until reimbursement is obtained, Inter-Resin, as the drawer of the draft, continues to assume a contingent liability thereon.

SC noted that the additional ground raised by Bank of America, i.e. that Inter-Resin sent waste instead of its products, is really of no consequence. In the operation of a letter of credit, the involved banks deal only with documents and not on goods described in those documents.

Reliance Commodities vs Daewoo Industrial Reliance Commodities, Inc. and Daewoo entered into a contract of sale where latter undertook to ship and deliver to former several tons of foundry pig iron. First contract was consummated and completed but Daewoo fell short of 135.655 metric tons. Second contract for 2,000 metric tons was also perfected. However, Reliances application for a letter of credit was denied by the China Banking Corporation, and it was shown later that the reason for this is that it has exceeded its foreign exchange allocation. Because of the failure of Reliance to comply with its undertaking under the contract, Daewoo was forced to sell the foundry pig irons to another buyer at a lower price. Reliance filed an action for damages against Daewoo for the recovery of P226,370.48 representing the value of the short delivery of 135.655 metric tons of foundry pig iron under the first contract. Daewoo filed a counterclaim, contending that Reliance was guilty of breach of contract when it failed to open a letter of credit as required in the second contract. Trial court ruled that Reliance is entitled to short delivery price and ordered Daewoo to pay the amount. However, it also held that Reliance is liable for breach of contract for its failure to open a letter of credit. Thus, it also awarded damages to Daewoo. Court of Appeals denied the appeal of Reliance. Supreme Court affirmed the decision. SC agreed with the Court of Appeals that Reliance and Daewoo had a perfected contract. The failure of Reliance to open the appropriate letter of credit did not prevent the birth of the contract, and neither did such failure extinguish the contract. The opening of the letter of credit in favor of Daewoo was an obligation of Reliance and the performance of that obligation by Reliance was 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. The letter of credit provided for in that contract was the mode or mechanism by which payment was to be effected by Reliance of the price of the pig iron. We believe and so hold that failure of a buyer seasonably to furnish an agreed letter of credit is a breach of the contract between buyer and seller. Where the buyer fails to open a letter of credit as stipulated, the seller or exporter is entitled to claim damages for such breach. Damages for failure to open a commercial credit may, in appropriate cases, include the loss of profit which the seller would seasonably have made had the transaction been carried out. Johannes Schuback vs CA On October 16, 1981, defendant submitted to plaintiff the list of bus spare parts he wanted to purchase to its counterpart in Hamburg. Plaintiff sent an offer on the items listed. On December 4, 1981, defendant informed plaintiff that he preferred genuine to replacement parts, and requested a 15% discount. On December 17, plaintiff submitted its formal offer. On December 24, defendant submitted a purchase order, and submitted the quantity on December 29. Plaintiff immediately ordered the items from Schuback Hamburg, which thereafter ordered the same from NDK, a supplier in Germany. Plaintiff sent a pro-forma invoice to be used in applying for letter of credit. On February 16, 1982, plaintiff reminded defendant to open a letter of credit to avoid delay in shipment. Defendant mentioned the difficulty he was encountering in procuring the same. Plaintiff continued receiving invoices and partial deliveries from NDK. On October 18, 1982, plaintiff again reminded the defendant to open a letter of credit. Defendant replied that he did not make a valid purchase order and that there was no definite contract between him and the plaintiff. Plaintiff sent a rejoinder explaining that there is a valid Purchase Order and suggesting that

defendant either proceed with the order and open a letter of credit or cancel the order and pay the cancellation fee of 30% of F.O.B. value, or plaintiff will endorse the case to its lawyers. Demand letters sent to defendant by plaintiff's counsel dated March 22, 1983 and June 9, 1983 were to no avail. Consequently, petitioner filed a complaint for recovery of actual or compensatory damages, unearned profits, interest, attorney's fees and costs against private respondent. Issue: Whether or not a contract of sale has been perfected between the parties Held: Article 1319 of the Civil Code states: "Consent is manifested by the meeting of the offer and acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter offer." The facts presented to us indicate that consent on both sides has been manifested. The offer by petitioner was manifested on December 17, 1981 when petitioner submitted its proposal containing the item number, quantity, part number, description, the unit price and total to private respondent. On December 24, 1981, private respondent informed petitioner of his desire to avail of the prices of the parts at that time and simultaneously enclosed its Purchase Order. At this stage, a meeting of the minds between vendor and vendee has occurred, the object of the contract: being the spare parts and the consideration, the price stated in petitioner's offer dated December 17, 1981 and accepted by the respondent on December 24, 1981. FEATI Bank vs CA In this case, Bernardo Villaluz agreed to sell to Axel Christiansen 2,000 cubic meters of lauan logs at $27.00 per cubic meter FOB. On the arrangements made and upon the instructions of consignee, Hanmi Trade Development, Ltd., the Security Pacific National Bank of Los Angeles, California issued an irrevocable letter of credit available at sight in favor of Villaluz for the sum of $54,000.00, the total purchase price of the lauan logs. The letter of credit was mailed to the Feati Bank and Trust Company (now Citytrust) with the instruction to the latter that it forward the enclosed letter of credit to the beneficiary. The letter of credit also provided that the draft to be drawn is on Security Pacific National Bank and that it be accompanied by certain documents. The logs were thereafter loaded on a vessel but Christiansen refused to issue the certification required in paragraph 4 of the letter of credit, despite repeated requests by the private respondent. The logs however were still shipped and received by consignee, to whom Christiansen sold the logs. Because of the absence of the certification by Christiansen, the Feati Bank and Trust company refused to advance the payment on the letter of credit until such credit lapsed. Since the demands by Villaluz for Christiansen to execute the certification proved futile, he filed an action for mandamus and specific performance against Christiansen and Feati Bank and Trust Company before the Court of First Instance of Rizal. Christiansen however left the Philippines and Villaluz filed an amended complaint making Feati Bank and Trust Company solidarily liable with Christiansen. Trial court held that Christiansen and Feati Bank were liable, the latter for refusing to negotiate the letter of credit in the absence of Christiansens certification considering that the letter of credit is irrevocable. Trial court said that Security Pacific National Bank, the issuing bank, undertook by the terms of the letter of credit that the same shall be honored upon presentment. On the other hand, the notifying bank, Feati Bank, by accepting the instructions from the issuing bank, itself assumed the very same undertaking as the issuing bank under the terms of the letter of credit.

The Court of Appeals affirmed the decision of the trial court thus this petition for review. The principal issue in this case is whether or not a correspondent bank is to be held liable under the letter of credit despite non-compliance by the beneficiary with the terms thereof. The Supreme Court held that Feati Bank is not liable. It is 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. We have heretofore held that these letters of credit are to be strictly complied with, which documents and shipping documents must be followed as stated in the letter. There is no discretion in the bank or trust company to waive any requirements. The terms of the letter constitutes an agreement between the purchaser and the bank. In the absence of any specific provision governing the legal complexities arising from transactions involving letters of credit in the Philippines, the Supreme Court applied the Uniform Customs and Practice for Documentary Credit (UCP) in lieu of Article 2 of the Code of Commerce that in the absence of any particular provision in the Code of Commerce, commercial transactions shall be governed by the usages and customs generally observed. Under the UCP, an irrevocable credit is a definite undertaking on the part of the issuing bank and constitutes the engagement of that bank to the beneficiary and bona fide holders of drafts drawn and/or documents presented thereunder, that the provisions for payment, acceptance or negotiation contained in the credit will be duly fulfilled, provided that all the terms and conditions of the credit are complied with. An irrevocable credit may be advised to a beneficiary through another bank (the advising bank) without engagement on the part of that bank, but when an issuing bank authorizes or requests another bank to confirm its irrevocable credit and the latter does so, such confirmation constitutes a definite undertaking of the confirming bank. Under the foregoing provisions, the bank may only negotiate, accept or pay, if the documents tendered to it are on their face in accordance with the terms and conditions of the documentary credit. And since a correspondent bank, like Feati Bank, principally deals only with documents, the absence of any document required in the documentary credit justifies the refusal by the correspondent bank to negotiate, accept or pay the beneficiary, as it is not its obligation to look beyond the documents. It merely has to rely on the completeness of the documents tendered by the beneficiary. SC also ruled out the contentions that Feati Bank is a trustee and guarantor. Prudential Bank v. IAC Facts: Philippine Rayon Mills, Inc. (Respondent) entered into a contract with Nissho Co., Ltd. of Japan for the importation of textile machineries under a 5-year deferred payment plan. To effect payment for the machineries, Philippine Rayon Mills applied for a commercial letter of credit with Prudential Bank and Trust Company (Petitioner) in favor of Nissho. Prudential Bank opened Letter of Credit No. DPP-63762 for $128,548.78. Against the letter of credit, drafts were drawn and issued by Nissho, which were all paid by Prudential Bank through the Bank of Tokyo, its correspondent bank in Japan. 2 of these drafts were accepted by Philippine Rayon Mills, through its president, Anacleto R. Chi (Respondent), while the others (10 drafts) were not. Upon the arrival of the machineries, to enable Philippine Rayon Mills to take delivery of the machineries, a trust receipt was executed which was signed by Chi.

o o

In 1967, Philippine Rayon Mills ceased business operations and its factory was leased by Yupangco Cotton Mills for an annual rental of P200,000. In 1974, all the textile machineries were sold to AIC Development Corporation for P300,000. However, Philippine Rayon Mills obligation arising from the letter of credit and the trust receipt remained unpaid. Repeated demands yielded no result. Prudential Bank filed an action for collection of the principal amount of P956,384.95. The trial court held Philippine Rayon Mills liable for only the 2 drafts which it had accepted. CA affirmed. Hence the appeal.

Issue: 1) Whether presentment for acceptance of the drafts was indispensable to make Philippine Rayon liable? 2) Whether Philippine Rayon is liable on the basis of the trust receipt? Ruling: 1) No. 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. o Through a letter of credit, the bank merely substitutes its own promise to pay for 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 Prudential Bank. It was to Prudential Bank 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). Even if these were not sight drafts, thereby necessitating acceptance, it would be the Prudential Bank and not Philippine Rayon which had to accept the same for the latter was not the drawee. Hibernia Bank and Trust Co. v. J. Aron& Co.: o Commercial letters of credit have come into general use in international sales transactions where much time necessarily elapses between the sale and the receipt by a purchaser of the merchandise, during which interval great price changes may occur. Buyers and sellers struggle for the advantage of position. The seller is desirous of being paid as surely and as soon as possible, realizing that the vendee at a distant point has it in his power to reject on trivial grounds merchandise on arrival, and cause considerable hardship to the shipper. Letters of credit meet this condition by affording celerity and certainty of payment. Their purpose is to insure to a seller payment of a definite amount upon presentation of documents. The bank deals only with documents. It has nothing to do with the quality of the merchandise. Disputes as to the merchandise shipped may arise and be litigated later between vendor and vendee, but they may not impede acceptance of drafts and payment by the issuing bank when the proper documents are presented. 2) Yes A trust receipt transaction is defined as "any transaction by and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as the entrustee, whereby the entruster, who owns or holds absolute title or security interests' over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter's execution and delivery to the entruster of a signed document called the "trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trusts receipt, or for other purposes substantially equivalent to any one of the following: . . ." o By this arrangement a banker advances money to an intending importer, and thereby lends the aid of capital, of credit, or of business facilities and agencies abroad, to the enterprise of foreign commerce. Much of this trade could hardly be carried on by any other means, and therefore it is of the first importance that the fundamental factor in the transaction, the banker's advance of money and credit, should receive the amplest protection. Accordingly, in order to secure that the

banker shall be repaid at the critical point that is, when the imported goods finally reach the hands of the intended vendee the banker takes the full title to the goods at the very beginning; he takes it as soon as the goods are bought and settled for by his payments or acceptances in the foreign country, and he continues to hold that title as his indispensable security until the goods are sold in the United States and the vendee is called upon to pay for them. This security is not an ordinary pledge by the importer to the banker, for the importer has never owned the goods, and moreover he is not able to deliver the possession; but the security is the complete title vested originally in the bankers, and this characteristic of the transaction has again and again been recognized and protected by the courts. Of course, the title is at bottom a security title, as it has sometimes been called, and the banker is always under the obligation to reconvey; but only after his advances have been fully repaid and after the importer has fulfilled the other terms of the contract. o Trust receipts, in a certain manner, partake of the nature of a conditional sale as provided by the Chattel Mortgage Law, that is, the importer becomes absolute owner of the imported merchandise as soon as he has paid its price. The ownership of the merchandise continues to be vested in the owner thereof or in the person who has advanced payment, until he has been paid in full, or if the merchandise has already been sold, the proceeds of the sale should be turned over to him by the importer or by his representative or successor in interest. Although it is true that the petitioner commenced a criminal action for the violation of the Trust Receipts Law, no legal obstacle prevented it from enforcing the civil liability arising out of the trust, receipt in a separate civil action. o Under Section 13 of the Trust Receipts Law, the failure of an entrustee to turn over the proceeds of the sale of goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appear in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article 315, paragraph 1(b) of the Revised Penal Code. Under Article 33 of the Civil Code, a civil action for damages, entirely separate and distinct from the criminal action, may be brought by the injured party in cases of defamation, fraud and physical injuries. Estafa falls underfraud.