TRANSFIELD vs LUZON HYDRO CORPORATION

FACTS:
On 26 March 1997, petitioner and respondent Luzon Hydro Corporation entered into a Turnkey Contract
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.
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.
To secure performance of petitioner's obligation on or before the target completion, petitioner opened in
favor of LHC two (2) standby letters of credit both dated 20 March 2000 (hereinafter referred to as "the
Securities") in the amount of US$8,988,907.00 each.
Standby Letter of Credit No. E001126/8400 - local branch of respondent Australia and New Zealand
Banking Group Limited (ANZ Bank)
Standby Letter of Credit No.IBDIDSB-00/4 - respondent Security Bank Corporation (SBC)
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. In the
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, petitioner advised respondent banks of the arbitration proceedings already pending with

Letter of Credit

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, LHC sent notice to petitioner that pursuant to 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.
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. At the same time, LHC served notice that it would call on the securities for the
payment of liquidated damages for the delay.
On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction , with prayer for TRO and writ of
preliminary injunction, against herein respondents as defendants. 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 72-hour TRO on the
same day and was extended for a period of 17 days or until November 26, 2000.
The RTC, in its Order dated 24 November 2000, denied petitioner's 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.
Petitioner elevated the case to the CA via a Petition for Certiorari under Rule 65, with prayer for the
issuance of a TRO and writ of preliminary injunction.
In its Resolution dated 28 November 2000, the CA issued a TRO, 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 TRO 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 court's decision.
ISSUE: WON the independence principle is applicable.
RULING: YES

Letter of Credit

In a letter of credit transaction, 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. The independence principle liberates the issuing bank from the
duty of ascertaining compliance by the parties in the main contract. The obligation under the letter of credit
is independent of the related and originating contract. As it is, the independence doctrine works to the
benefit of both the issuing bank and the beneficiary.
Petitioner's argument that any dispute must first be resolved by the parties, whether through negotiations or
arbitration, before the beneficiary is entitled to call on the letter of credit in essence would convert the letter
of credit into a mere guarantee. Jurisprudence has laid down a clear distinction between a letter of credit
and a guarantee in that the settlement of a dispute between the parties is not a pre-requisite for the release
of funds under a letter of credit. In other words, the argument is incompatible with the very nature of the
letter of credit. If a letter of credit is drawable only after settlement of the dispute on the contract entered
into by the applicant and the beneficiary, there would be no practical and beneficial use for letters of credit
in commercial transactions.
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 proered. 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.
ISSUE: WON the "fraud exception" principle can be invoked.
RULING: NO.
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 sucient to
support an injunction against payment.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.
Petitioner failed to show that it has a clear and unmistakable right to restrain LHC's call on the Securities
which would justify the issuance of preliminary injunction. By petitioner's own admission, the right of LHC to
call on the Securities was contractually rooted and subject to the express stipulations in the Turnkey
Contract. 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.

Letter of Credit