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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 entitled Transfield 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 Petition[22] and Supplemental Memorandum,[23] 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 Manifestation dated 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, entitled Transfield
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 nonsale 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 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.[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 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.
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 selfsame 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 CounterManifestation 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 Memorandum dated 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 forum-shopping. 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,


[13] Annex
[14]

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

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

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.

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.
[16]

[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.

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).
[29]

[30]Bank

of America v. Court of Appeals, G.R. No. 105395, 10 December 1993, 228 SCRA 357 citing William S. Shaterian, EXPORTIMPORT BANKING: THE INSTRUMENTS AND OPERATIONS UTILIZED BY AMERICAN EXPORTERS AND IMPORTERS
AND THEIR BANKS IN FINANCING FOREIGN TRADE, 284-374 (1947).
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>.
[31]

[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,


[40]

UCP.

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.

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).
[53]

[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.

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.
[59]

[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.

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).
[63]

[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).

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.
[69]

[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.

Today is Monday, November 07, 2016

Republic of the Philippines


SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 74886 December 8, 1992


PRUDENTIAL BANK, petitioner,
vs.
INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS, INC. and ANACLETO R. CHI, respondents.

DAVIDE, JR., J.:


Petitioner seeks to review and set aside the decision 1 of public respondent; Intermediate Appellate Court (now Court of
Appeals), dated 10 March 1986, in AC-G.R. No. 66733 which affirmed in toto the 15 June 1978 decision of Branch 9 (Quezon City) of the
then Court of First Instance (now Regional Trial Court) of Rizal in Civil Case No. Q-19312. The latter involved an action instituted by the
petitioner for the recovery of a sum of money representing the amount paid by it to the Nissho Company Ltd. of Japan for textile
machinery imported by the defendant, now private respondent, Philippine Rayon Mills, Inc. (hereinafter Philippine Rayon), represented
by co-defendant Anacleto R. Chi.
The facts which gave rise to the instant controversy are summarized by the public respondent as follows:
On August 8, 1962, defendant-appellant 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 (Exhibit B, Plaintiff's
Folder of Exhibits, p 2). To effect payment for said machineries, the defendant-appellant 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 Letter of Credit No. DPP-63762 for $128,548.78 (Exhibit A, Ibid., p. 1).
Against this letter of credit, drafts were drawn and issued by Nissho (Exhibits X, X-1 to X-11, Ibid., pp. 65, 66 to
76), 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 (Exhibit X and X-1, Ibid., pp. 65-66) were accepted by the defendantappellant through its president, Anacleto R. Chi, while the others were not (Exhibits X-2 to X-11, Ibid., pp. 66 to
76).
Upon the arrival of the machineries, the Prudential Bank indorsed the shipping documents to the defendant-

appellant which accepted delivery of the same. To enable the defendant-appellant 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 (sic) of defendant-appellant company (Exhibit C, Ibid., p. 13).
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 defendant-appellant
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.
Sometime in 1967, the defendant-appellant ceased business operation (sic). On December 29, 1969, defendantappellant's factory was leased by Yupangco Cotton Mills for an annual rental of P200,000.00 (Exhibit I, Ibid., p.
22). The lease was renewed on January 3, 1973 (Exhibit J, Ibid., p. 26). On January 5, 1974, all the textile
machineries in the defendant-appellant's factory were sold to AIC Development Corporation for P300,000.00
(Exhibit K, Ibid., p. 29).
The obligation of the defendant-appellant arising from the letter of credit and the trust receipt remained unpaid
and unliquidated. Repeated formal demands (Exhibits U, V, and W, Ibid., pp. 62, 63, 64) for the payment of the
said trust receipt yielded no result Hence, the present action for the collection of the principal amount of
P956,384.95 was filed on October 3, 1974 against the defendant-appellant and Anacleto R. Chi. In their
respective answers, the defendants interposed identical special defenses, viz., the complaint states no cause of
action; if there is, the same has prescribed; and the plaintiff is guilty of laches. 2
On 15 June 1978, the trial court rendered its decision the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered sentencing the defendant Philippine Rayon Mills, Inc. to pay
plaintiff the sum of P153,645.22, the amounts due under Exhibits "X" & "X-1", with interest at 6% per annum
beginning September 15, 1974 until fully paid.
Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11", inclusive, the same not having been accepted
by defendant Philippine Rayon Mills, Inc., plaintiff's cause of action thereon has not accrued, hence, the instant
case is premature.
Insofar as defendant Anacleto R. Chi is concerned, the case is dismissed. Plaintiff is ordered to pay defendant
Anacleto R. Chi the sum of P20,000.00 as attorney's fees.

With costs against defendant Philippine Rayon Mills, Inc.


SO ORDERED. 3
Petitioner appealed the decision to the then Intermediate Appellate Court. In urging the said court to reverse or modify the decision,
petitioner alleged in its Brief that the trial court erred in (a) disregarding its right to reimbursement from the private respondents for the
entire unpaid balance of the imported machines, the total amount of which was paid to the Nissho Company Ltd., thereby violating the
principle of the third party payor's right to reimbursement provided for in the second paragraph of Article 1236 of the Civil Code and under
the rule against unjust enrichment; (b) refusing to hold Anacleto R. Chi, as the responsible officer of defendant corporation, liable under
Section 13 of P.D No 115 for the entire unpaid balance of the imported machines covered by the bank's trust receipt (Exhibit "C"); (c)
finding that the solidary guaranty clause signed by Anacleto R. Chi is not a guaranty at all; (d) controverting the judicial admissions of
Anacleto R. Chi that he is at least a simple guarantor of the said trust receipt obligation; (e) contravening, based on the assumption that
Chi is a simple guarantor, Articles 2059, 2060 and 2062 of the Civil Code and the related evidence and jurisprudence which provide that
such liability had already attached; (f) contravening the judicial admissions of Philippine Rayon with respect to its liability to pay the
petitioner the amounts involved in the drafts (Exhibits "X", "X-l" to "X-11''); and (g) interpreting "sight" drafts as requiring acceptance by
Philippine Rayon before the latter could be held liable thereon. 4
In its decision, public respondent sustained the trial court in all respects. As to the first and last assigned errors, it ruled that the provision
on unjust enrichment, Article 2142 of the Civil Code, applies only if there is no express contract between the parties and there is a clear
showing that the payment is justified. In the instant case, the relationship existing between the petitioner and Philippine Rayon is
governed by specific contracts, namely the application for letters of credit, the promissory note, the drafts and the trust receipt. With
respect to the last ten (10) drafts (Exhibits "X-2" to "X-11") which had not been presented to and were not accepted by Philippine Rayon,
petitioner was not justified in unilaterally paying the amounts stated therein. The public respondent did not agree with the petitioner's
claim that the drafts were sight drafts which did not require presentment for acceptance to Philippine Rayon because paragraph 8 of the
trust receipt presupposes prior acceptance of the drafts. Since the ten (10) drafts were not presented and accepted, no valid demand for
payment can be made.
Public respondent also disagreed with the petitioner's contention that private respondent Chi is solidarily liable with Philippine Rayon
pursuant to Section 13 of P.D. No. 115 and based on his signature on the solidary guaranty clause at the dorsal side of the trust receipt.
As to the first contention, the public respondent ruled that the civil liability provided for in said Section 13 attaches only after conviction.
As to the second, it expressed misgivings as to whether Chi's signature on the trust receipt made the latter automatically liable thereon
because the so-called solidary guaranty clause at the dorsal portion of the trust receipt is to be signed not by one (1) person alone, but
by two (2) persons; the last sentence of the same is incomplete and unsigned by witnesses; and it is not acknowledged before a notary
public. Besides, even granting that it was executed and acknowledged before a notary public, Chi cannot be held liable therefor because
the records fail to show that petitioner had either exhausted the properties of Philippine Rayon or had resorted to all legal remedies as
required in Article 2058 of the Civil Code. As provided for under Articles 2052 and 2054 of the Civil Code, the obligation of a guarantor is
merely accessory and subsidiary, respectively. Chi's liability would therefore arise only when the principal debtor fails to comply with his

obligation. 5
Its motion to reconsider the decision having been denied by the public respondent in its Resolution of 11 June 1986, 6 petitioner filed the
instant petition on 31 July 1986 submitting the following legal issues:
I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY ERRED IN DENYING
PETITIONER'S CLAIM FOR FULL REIMBURSEMENT AGAINST THE PRIVATE RESPONDENTS FOR THE
PAYMENT PETITIONER MADE TO NISSHO CO. LTD. FOR THE BENEFIT OF PRIVATE RESPONDENT
UNDER ART. 1283 OF THE NEW CIVIL CODE OF THE PHILIPPINES AND UNDER THE GENERAL
PRINCIPLE AGAINST UNJUST ENRICHMENT;
II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY LIABLE UNDER THE TRUST RECEIPT (EXH. C);
III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS OF RESPONDENT CHI HE IS
LIABLE THEREON AND TO WHAT EXTENT;
IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A SIMPLE GUARANTOR; AND IF SO; HAS HIS
LIABILITY AS SUCH ALREADY ATTACHED;
V. WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE OFFICER OF RESPONDENT PHIL.
RAYON RESPONDENT CHI IS PERSONALLY LIABLE PURSUANT TO THE PROVISION OF SECTION 13,
P.D. 115;
VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER THE TRUST
RECEIPT (EXH. C);
VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS RESPONDENT PHIL. RAYON IS
LIABLE TO THE PETITIONER UNDER THE DRAFTS (EXHS. X, X-1 TO X-11) AND TO WHAT EXTENT;
VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR ACCEPTANCE FROM RESPONDENT PHIL.
RAYON BEFORE THE LATTER BECOMES LIABLE TO PETITIONER. 7
In the Resolution of 12 March 1990,

8 this Court gave due course to the petition after the filing of the Comment thereto by private respondent Anacleto Chi and of the
Reply to the latter by the petitioner; both parties were also required to submit their respective memoranda which they subsequently complied with.
As We see it, the issues may be reduced as follows:

1. Whether presentment for acceptance of the drafts was indispensable to make Philippine Rayon liable thereon;
2. Whether Philippine Rayon is liable on the basis of the trust receipt;
3. Whether private respondent Chi is jointly and severally liable with Philippine Rayon for the obligation sought to be enforced
and if not, whether he may be considered a guarantor; in the latter situation, whether the case should have been dismissed on
the ground of lack of cause of action as there was no prior exhaustion of Philippine Rayon's properties.
Both the trial court and the public respondent ruled that Philippine Rayon could be held liable for the two (2) drafts, Exhibits "X" and "X-1", because only these appear to have been
accepted by the latter after due presentment. The liability for the remaining ten (10) drafts (Exhibits "X-2" to "X-11" inclusive) did not arise because the same were not presented for
acceptance. In short, both courts concluded that acceptance of the drafts by Philippine Rayon was indispensable to make the latter liable thereon. We are unable to agree with this
proposition. The transaction in the case at bar stemmed from Philippine Rayon's application for a commercial letter of credit with the petitioner in the amount of $128,548.78 to cover
the former's contract to purchase and import loom and textile machinery from Nissho Company, Ltd. of Japan under a five-year deferred payment plan. Petitioner approved the
9
application. As correctly ruled by the trial court in its Order of 6 March 1975:

. . . By virtue of said Application and Agreement for Commercial Letter of Credit, plaintiff bank 10 was under
obligation to pay through its correspondent bank in Japan the drafts that Nisso (sic) Company, Ltd., periodically
drew against said letter of credit from 1963 to 1968, pursuant to plaintiff's contract with the defendant Philippine
Rayon Mills, Inc. In turn, defendant Philippine Rayon Mills, Inc., was obligated to pay plaintiff bank the amounts
of the drafts drawn by Nisso (sic) Company, Ltd. against said plaintiff bank together with any accruing
commercial charges, interest, etc. pursuant to the terms and conditions stipulated in the Application and
Agreement of Commercial Letter of Credit Annex "A".
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 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. 12 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 the bill is payable after sight, or in any other case, 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;
or

(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.
The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer;
drawee in the bill itself, or in a separate instrument. 15

14

this may be done in writing by the

The parties herein agree, and the trial court explicitly ruled, that the subject, drafts are sight drafts. Said the latter:
. . . In the instant case the drafts being at sight, they are supposed to be payable upon acceptance unless
plaintiff bank has given the Philippine Rayon Mills Inc. time within which to pay the same. The first two drafts
(Annexes C & D, Exh. X & X-1) were duly accepted as indicated on their face (sic), and upon such acceptance
should have been paid forthwith. These two drafts were not paid and although Philippine Rayon Mills
ought to have paid the same, the fact remains that until now they are still unpaid. 16
Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section 7 provides:
Sec. 7. When payable on demand. An instrument is payable on demand
(a) When so it is expressed to be payable on demand, or at sight, or on
presentation; or
(b) In which no time for payment in expressed.
Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing,
accepting, or indorsing it, payable on demand. (emphasis supplied)
Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at maturity of any accepted draft, bill of
exchange or indebtedness shall not be extinguished or modified" 17 does not, contrary to the holding of the public
respondent, contemplate prior acceptance by Philippine Rayon, but by the petitioner. Acceptance, however, was not
even necessary in the first place because the drafts which were eventually issued were sight drafts And even if these
were not sight drafts, thereby necessitating acceptance, it would be the petitioner and not Philippine Rayon which
had to accept the same for the latter was not the drawee. Presentment for acceptance is defined an the production of a
bill of exchange to a drawee for acceptance. 18 The trial court and the public respondent, therefore, erred in ruling that

presentment for acceptance was an indispensable requisite for Philippine Rayon's liability on the drafts to attach.
Contrary to both courts' pronouncements, Philippine Rayon immediately became liable thereon upon petitioner's
payment thereof. Such is the essence of the letter of credit issued by the petitioner. A different conclusion would violate
the principle upon which commercial letters of credit are founded because in such a case, both the beneficiary and the
issuer, Nissho Company Ltd. and the petitioner, respectively, would be placed at the mercy of Philippine Rayon even if
the latter had already received the imported machinery and the petitioner had fully paid for it. The typical setting and
purpose of a letter of credit are described in Hibernia Bank and Trust Co. vs. J. Aron & Co., Inc., 19 thus:
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.
The trial court and the public respondent likewise erred in disregarding the trust receipt and in not holding that Philippine Rayon was
liable thereon. In People vs. Yu Chai Ho, 20 this Court explains the nature of a trust receipt by quoting In re Dunlap Carpet Co., 21 thus:
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.
As further stated in National Bank vs. Viuda e Hijos de Angel Jose, 22 trust receipts:

. . . [I]n 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 an 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.
Under P.D. No. 115, otherwise known an the Trust Receipts Law, which took effect on 29 January 1973, 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: . . ."
It is alleged in the complaint that private respondents "not only have presumably put said machinery to good use and have profited by its
operation and/or disposition but very recent information that (sic) reached plaintiff bank that defendants already sold the machinery
covered by the trust receipt to Yupangco Cotton Mills," and that "as trustees of the property covered by the trust receipt, . . . and
therefore acting in fiduciary (sic) capacity, defendants have willfully violated their duty to account for the whereabouts of the machinery
covered by the trust receipt or for the proceeds of any lease, sale or other disposition of the same that they may have made,
notwithstanding demands therefor; defendants have fraudulently misapplied or converted to their own use any money realized from the
lease, sale, and other disposition of said machinery." 23 While there is no specific prayer for the delivery to the petitioner by Philippine
Rayon of the proceeds of the sale of the machinery covered by the trust receipt, such relief is covered by the general prayer for "such
further and other relief as may be just and equitable on the premises." 24 And 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. 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. 25 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 under fraud.
We also conclude, for the reason hereinafter discussed, and not for that adduced by the public respondent, that private respondent Chi's
signature in the dorsal portion of the trust receipt did not bind him solidarily with Philippine Rayon. The statement at the dorsal portion of
the said trust receipt, which petitioner describes as a "solidary guaranty clause", reads:
In consideration of the PRUDENTIAL BANK AND TRUST COMPANY complying with the foregoing, we jointly

and severally agree and undertake to pay on demand to the PRUDENTIAL BANK AND TRUST COMPANY all
sums of money which the said PRUDENTIAL BANK AND TRUST COMPANY may call upon us to pay arising out
of or pertaining to, and/or in any event connected with the default of and/or non-fulfillment in any respect of the
undertaking of the aforesaid:
PHILIPPINE RAYON MILLS, INC.
We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does not have to take any steps or
exhaust its remedy against aforesaid:
before making demand on me/us.
(Sgd.)
Anacleto R.
Chi
ANACLETO
R. CHI 26
Petitioner insists that by virtue of the clear wording of the statement, specifically the clause ". . . we jointly and severally agree and
undertake . . .," and the concluding sentence on exhaustion, Chi's liability therein is solidary.
In holding otherwise, the public respondent ratiocinates as follows:
With respect to the second argument, we have our misgivings as to whether the mere signature of defendantappellee Chi of (sic) the guaranty agreement, Exhibit "C-1", will make it an actionable document. It should be
noted that Exhibit "C-1" was prepared and printed by the plaintiff-appellant. A perusal of Exhibit "C-1" shows that
it was to be signed and executed by two persons. It was signed only by defendant-appellee Chi. Exhibit "C-1"
was to be witnessed by two persons, but no one signed in that capacity. The last sentence of the guaranty
clause is incomplete. Furthermore, the plaintiff-appellant also failed to have the purported guarantee clause
acknowledged before a notary public. All these show that the alleged guaranty provision was disregarded and,
therefore, not consummated.
But granting arguendo that the guaranty provision in Exhibit "C-1" was fully executed and acknowledged still
defendant-appellee Chi cannot be held liable thereunder because the records show that the plaintiff-appellant
had neither exhausted the property of the defendant-appellant nor had it resorted to all legal remedies against
the said defendant-appellant as provided in Article 2058 of the Civil Code. The obligation of a guarantor is
merely accessory under Article 2052 of the Civil Code and subsidiary under Article 2054 of the Civil Code.

Therefore, the liability of the defendant-appellee arises only when the principal debtor fails to comply with his
obligation. 27
Our own reading of the questioned solidary guaranty clause yields no other conclusion than that the obligation of Chi is only that of a
guarantor. This is further bolstered by the last sentence which speaks of waiver of exhaustion, which, nevertheless, is ineffective in this
case because the space therein for the party whose property may not be exhausted was not filled up. Under Article 2058 of the Civil
Code, the defense of exhaustion (excussion) may be raised by a guarantor before he may be held liable for the obligation. Petitioner
likewise admits that the questioned provision is a solidary guaranty clause, thereby clearly distinguishing it from a contract of surety. It,
however, described the guaranty as solidary between the guarantors; this would have been correct if two (2) guarantors had signed it.
The clause "we jointly and severally agree and undertake" refers to the undertaking of the two (2) parties who are to sign it or to the
liability existing between themselves. It does not refer to the undertaking between either one or both of them on the one hand and the
petitioner on the other with respect to the liability described under the trust receipt. Elsewise stated, their liability is not divisible as
between them, i.e., it can be enforced to its full extent against any one of them.
Furthermore, any doubt as to the import, or true intent of the solidary guaranty clause should be resolved against the petitioner. The trust
receipt, together with the questioned solidary guaranty clause, is on a form drafted and prepared solely by the petitioner; Chi's
participation therein is limited to the affixing of his signature thereon. It is, therefore, a contract of adhesion; 28 as such, it must be strictly
construed against the party responsible for its preparation. 29
Neither can We agree with the reasoning of the public respondent that this solidary guaranty clause was effectively disregarded simply
because it was not signed and witnessed by two (2) persons and acknowledged before a notary public. While indeed, the clause ought to
have been signed by two (2) guarantors, the fact that it was only Chi who signed the same did not make his act an idle ceremony or
render the clause totally meaningless. By his signing, Chi became the sole guarantor. The attestation by witnesses and the
acknowledgement before a notary public are not required by law to make a party liable on the instrument. The rule is that contracts shall
be obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present;
however, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that it be proved in a
certain way, that requirement is absolute and indispensable. 30 With respect to a guaranty, 31 which is a promise to answer for the debt or
default of another, the law merely requires that it, or some note or memorandum thereof, be in writing. Otherwise, it would be
unenforceable unless ratified. 32 While the acknowledgement of a surety before a notary public is required to make the same a public
document, under Article 1358 of the Civil Code, a contract of guaranty does not have to appear in a public document.
And now to the other ground relied upon by the petitioner as basis for the solidary liability of Chi, namely the criminal proceedings against
the latter for the violation of P.D. No. 115. Petitioner claims that because of the said criminal proceedings, Chi would be answerable for
the civil liability arising therefrom pursuant to Section 13 of P.D. No. 115. Public respondent rejected this claim because such civil liability
presupposes prior conviction as can be gleaned from the phrase "without prejudice to the civil liability arising from the criminal offense."
Both are wrong. The said section reads:
Sec. 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of the goods,

documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as
appears 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 Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight
hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense is
committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this
Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible
for the offense, without prejudice to the civil liabilities arising from the criminal offense.
A close examination of the quoted provision reveals that it is the last sentence which provides for the correct solution. It is clear that if the
violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty shall be imposed upon
the directors, officers, employees or other officials or persons therein responsible for the offense. The penalty referred to is imprisonment,
the duration of which would depend on the amount of the fraud as provided for in Article 315 of the Revised Penal Code. The reason for
this is obvious: corporations, partnerships, associations and other juridical entities cannot be put in jail. However, it is these entities which
are made liable for the civil liability arising from the criminal offense. This is the import of the clause "without prejudice to the civil
liabilities arising from the criminal offense." And, as We stated earlier, since that violation of a trust receipt constitutes fraud under Article
33 of the Civil Code, petitioner was acting well within its rights in filing an independent civil action to enforce the civil liability arising
therefrom against Philippine Rayon.
The remaining issue to be resolved concerns the propriety of the dismissal of the case against private respondent Chi. The trial court
based the dismissal, and the respondent Court its affirmance thereof, on the theory that Chi is not liable on the trust receipt in any
capacity either as surety or as guarantor because his signature at the dorsal portion thereof was useless; and even if he could be
bound by such signature as a simple guarantor, he cannot, pursuant to Article 2058 of the Civil Code, be compelled to pay until
after petitioner has exhausted and resorted to all legal remedies against the principal debtor, Philippine Rayon. The records fail to show
that petitioner had done so 33 Reliance is thus placed on Article 2058 of the Civil Code which provides:
Art. 2056. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property
of the debtor, and has resorted to all the legal remedies against the debtor.
Simply stated, there is as yet no cause of action against Chi.
We are not persuaded. Excussion is not a condition sine qua non for the institution of an action against a guarantor. In Southern Motors,
Inc. vs. Barbosa, 34 this Court stated:
4. Although an ordinary personal guarantor not a mortgagor or pledgor may demand the aforementioned
exhaustion, the creditor may, prior thereto, secure a judgment against said guarantor, who shall be entitled,
however, to a deferment of the execution of said judgment against him until after the properties of the principal
debtor shall have been exhausted to satisfy the obligation involved in the case.

There was then nothing procedurally objectionable in impleading private respondent Chi as a co-defendant in Civil Case No. Q-19312
before the trial court. As a matter of fact, Section 6, Rule 3 of the Rules of Court on permissive joinder of parties explicitly allows it. It
reads:
Sec. 6. Permissive joinder of parties. All persons in whom or against whom any right to relief in respect to or
arising out of the same transaction or series of transactions is alleged to exist, whether jointly, severally, or in the
alternative, may, except as otherwise provided in these rules, join as plaintiffs or be joined as defendants in one
complaint, where any question of law or fact common to all such plaintiffs or to all such defendants may arise in
the action; but the court may make such orders as may be just to prevent any plaintiff or defendant from being
embarrassed or put to expense in connection with any proceedings in which he may have no interest.
This is the equity rule relating to multifariousness. It is based on trial convenience and is designed to permit the joinder of plaintiffs or
defendants whenever there is a common question of law or fact. It will save the parties unnecessary work, trouble and expense. 35
However, Chi's liability is limited to the principal obligation in the trust receipt plus all the accessories thereof including judicial costs; with
respect to the latter, he shall only be liable for those costs incurred after being judicially required to pay. 36 Interest and damages, being
accessories of the principal obligation, should also be paid; these, however, shall run only from the date of the filing of the complaint.
Attorney's fees may even be allowed in appropriate cases. 37
In the instant case, the attorney's fees to be paid by Chi cannot be the same as that to be paid by Philippine Rayon since it is only the
trust receipt that is covered by the guaranty and not the full extent of the latter's liability. All things considered, he can be held liable for
the sum of P10,000.00 as attorney's fees in favor of the petitioner.
Thus, the trial court committed grave abuse of discretion in dismissing the complaint as against private respondent Chi and condemning
petitioner to pay him P20,000.00 as attorney's fees.
In the light of the foregoing, it would no longer necessary to discuss the other issues raised by the petitioner
WHEREFORE, the instant Petition is hereby GRANTED.
The appealed Decision of 10 March 1986 of the public respondent in AC-G.R. CV No. 66733 and, necessarily, that of
Branch 9 (Quezon City) of the then Court of First Instance of Rizal in Civil Case No. Q-19312 are hereby REVERSED
and SET ASIDE and another is hereby entered:
1. Declaring private respondent Philippine Rayon Mills, Inc. liable on the twelve drafts in
question (Exhibits "X", "X-1" to "X-11", inclusive) and on the trust receipt (Exhibit "C"), and
ordering it to pay petitioner: (a) the amounts due thereon in the total sum of P956,384.95 as of

15 September 1974, with interest thereon at six percent (6%) per annum from 16 September
1974 until it is fully paid, less whatever may have been applied thereto by virtue of foreclosure of
mortgages, if any; (b) a sum equal to ten percent (10%) of the aforesaid amount as attorney's
fees; and (c) the costs.
2. Declaring private respondent Anacleto R. Chi secondarily liable on the trust receipt and
ordering him to pay the face value thereof, with interest at the legal rate, commencing from the
date of the filing of the complaint in Civil Case No. Q-19312 until the same is fully paid as well
as the costs and attorney's fees in the sum of P10,000.00 if the writ of execution for the
enforcement of the above awards against Philippine Rayon Mills, Inc. is returned unsatisfied.
Costs against private respondents.
SO ORDERED.
Gutierrez, Jr., Bidin, Romero and Melo, JJ., concur.

Footnotes
1 Rollo, 39-47; per Associate Justice Crisolito Pascual, concurred in by Associate Justices Jose C. Campos, Jr.
and Serafin E. Camilon.
2 Rollo, 39-41.
3 Rollo, 81-83.
4 Brief for Appellant, 1-4; Rollo, 85, et seq.
5 Rollo, 45-46.
6 Id., 48.
7 Rollo, 16.

8 Id., 131.
9 Record on Appeal, 123.
10 Herein petitioner.
11 Black's Law Dictionary, Fifth ed., 813; DAVIDSON, KNOWLES, FORSYTHE AND JESPERSEN Business
Law, Principles, and Cases, 1984 ed., 390.
12 ROSE, Money and Capital Markets, 1983 ed., 692.
13 Act No. 2031.
14 Section 132, NIL.
15 Sections 133 and 134, Id.
16 Rollo, 66.
17 Id., 17.
18 AGBAYANI, A.F., Commercial Laws of the Philippines, 1987 ed., vol. 1, 409, citing Windham Bank vs. Norton,
22 Conn. 213, 56 Am. Dec. 397,
19 134 Misc. 18, 21-22, 233 N.Y.S. 486, 490-491, cited in Johnston vs. State Bank, 195 N.W. 2d 126, 130-131
(Iowa 1972), and excerpted in CORMAN, Commercial Law, Cases and Materials, 1976 ed., 622.
20 53 Phil. 874, 876-877 [1928]; see also, Samo vs. People, 115 Phil. 346 [1962].
21 206 Fed., 126.
22 63 Phil. 814, 82l [1936].
23 Record on Appeal, 6-7.
24 Id., 9.

25 Even before P.D. No. 115, these acts covered by Section 13 were already considered as estafa; see People
vs. Yu Chai Ho. supra.; Samo vs. People, supra.; Robles vs. Court of Appeals, 199 SCRA 195 [1991].
26 Record on Appeal, 43.
27 Rollo, 45-46.
28 Sweet Lines, Inc. vs. Teves, 83 SCRA 361 [1978]; Angeles vs. Calasanz, 135 SCRA 323 [1985].
29 Western Guaranty Corp. vs Court of Appeals, 187 SCRA 652 [1990]; BPI Credit Corp. vs. Court of Appeals,
204 SCRA 601, [1991].
30 Article 1356, Civil Code.
31 Article 2047 of the Civil Code defines it as follows
"By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so."
32 Article 1403 (2) (b), Civil Code.
33 Rollo, 75,
34 99 Phil. 263, 268 [1956].
35 FRANCISCO, V.J., The Revised Rules of Court, vol. I, 1973 ed., 258.
36 Second paragraph, (Article 2055, Civil Code; see National Marketing Corp. vs. Marquez, 26 SCRA 722
[1969]; Republic vs. Pal-Fox Lumber Co., Inc., 43 SCRA 365 [1972].
37 Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang. Machinery Co., Inc., 100 Phil. 679 [1957]; Philippine
National Bank vs. Luzon Surety Co., Inc., 68 SCRA 207. [1975].

The Lawphil Project - Arellano Law Foundation

Today is Monday, November 07, 2016

Republic of the Philippines


SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-27829 August 19, 1988
PHILIPPINE VIRGINIA TOBACCO ADMINISTRATION, petitioner,
vs.
HON. WALFRIDO DE LOS ANGELES, Judge of the Court of First Instance of Rizal, Branch IV (Quezon City)
and TIMOTEO A. SEVILLA, doing business under the name and style of PHILIPPINE ASSOCIATED
RESOURCES and PRUDENTIAL BANK AND TRUST COMPANY, respondents.
Lorenzo F. Miravite for respondent Timoteo Sevilla.
Ferrer & Ranada Law Office for respondent Prudential Bank & Trust Co.

PARAS, J.:
In these petition and supplemental petition for Certiorari, Prohibition and mandamus with Preliminary Injunction, petitioner Philippine Virginia Tobacco Administration seeks to annul

and set aside the following Orders of respondent Judge of the Court of First Instance of Rizal, Branch IV (Quezon City) in Civil Case No. Q-10351 and prays that the Writ of
Preliminary Injunction (that may be) issued by this Court enjoining enforcement of the aforesaid Orders be made permanent. (Petition, Rollo, pp. 1-9)
They are:
The Order of July 17, 1967:
AS PRAYED FOR, the Prudential Bank & Trust Company is hereby directed to release and deliver to the herein plaintiff, Timoteo A. Sevilla, the
amount of P800,000.00 in its custody representing the marginal deposit of the Letters of Credit which said bank has issued in favor of the defendant,
upon filing by the plaintiff of a bond in the um of P800,000.00, to answer for whatever damage that the defendant PVTA and the Prudential Bank &
Trust Company may suffer by reason of this order. (Annex "A," Rollo, p. 12)
The Order of November 3,1967:
IN VIEW OF THE FOREGOING, the petition under consideration is granted, as follows: (a) the defendant PVTA is hereby ordered to issue the
corresponding certificate of Authority to the plaintiff, allowing him to export the remaining balance of his tobacco quota at the current world market
price and to make the corresponding import of American high-grade tobacco; (b) the defendant PVTA is hereby restrained from issuing any Certificate
of Authority to export or import to any persons and/or entities while the right of the plaintiff to the balance of his quota remains valid, effective and in
force; and (c) defendant PVTA is hereby enjoined from opening public bidding to sell its Virginia leaf tobacco during the effectivity of its contract with
the plaintiff.
xxx xxx xxx
In order to protect the defendant from whatever damage it may sustain by virtue of this order, the plaintiff is hereby directed to file a bond in the sum of
P20,000.00. (Annex "K," Rollo, pp. 4-5)
The Order of March 16, 1968:
WHEREFORE, the motion for reconsideration of the defendant against the order of November 3, 1967 is hereby DENIED. (Annex "M," Rollo, P. 196)
The facts of the case are as follows:
Respondent Timoteo Sevilla, proprietor and General Manager of the Philippine Associated Resources (PAR) together with two other entities, namely, the Nationwide Agro-Industrial
Development Corp. and the Consolidated Agro-Producers Inc. were 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 imported tobacco for every nine (9) kilos of leaf tobacco actually exported. Subsequently, the other two entities
assigned their rights to PVTA and respondent remained the only private entity accorded the privilege.
The contract entered into between the petitioner and respondent Sevilla was for the importation of 85 million kilos of Virginia leaf tobacco and a counterpart exportation of 2.53 million
kilos of PVTA and 5.1 million kilos of farmer's and/or PVTA at P3.00 a kilo. (Annex "A," p. 55 and Annex "B," Rollo, p. 59) In accordance with their contract respondent Sevilla
purchased from petitioner and actually exported 2,101.470 kilos of tobacco, paying the PVTA the sum of P2,482,938.50 and leaving a balance of P3,713,908.91. Before respondent
Sevilla could import the counterpart blending Virginia tobacco, amounting to 525,560 kilos, Republic Act No. 4155 was passed and took effect on June 20, 1 964, authorizing the PVTA
to grant import privileges at the ratio of 4 to 1 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, (Complaint, Rollo, p. 3) was further amended to grant respondent the privileges under aforesaid law, subject to the following conditions: (1) that on the
2,101.470 kilos already purchased, and exported, the purchase price of about P3.00 a kilo was maintained; (2) that the unpaid balance of P3,713,908.91 was to be liquidated by
paying PVTA the sum of P4.00 for every kilo of imported Virginia blending tobacco and; (3) 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 respondent 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. Respondent
then filed a complaint for damages with preliminary injunction against the petitioner in the amount of P5,000,000.00. Petitioner filed an answer with counterclaim, admitting the
execution of the contract. It alleged however that respondent, violated the terms thereof by causing the issuance of the preliminary injunction to prevent the former from drawing from
the letter of credit for amounts due and payable and thus caused petitioner additional damage of 6% per annum.
A writ of preliminary injunction was issued by respondent judge enjoining petitioner from drawing against the letter of credit. On motion of respondent, Sevilla, the lower court
dismissed the complaint on April 19, 1967 without prejudice and lifted the writ of preliminary injunction but petitioner's motion for reconsideration was granted on June 5,1967 and the
Order of April 19,1967 was set aside. On July 1, 1967 Sevilla filed an urgent motion for reconsideration of the Order of June 5, 1967 praying that the Order of dismissal be reinstated.
But pending the resolution of respondent's motion and without notice to the petitioner, 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 releaseof P300,000.00 and the rest of the amount. Hence this petition, followed by the supplemental petition when respondent filed with the lower court an urgent ex-parte
petition for the issuance of preliminary mandatory and preventive injunction which was granted in the resolution of respondent Judge on November 3, 1967, above quoted. On March
16, 1968, respondent Judge denied petitioner's motion for reconsideration. (Supp. Petition, Rollo, pp. 128- 130)
Pursuant to the resolution of July 21, 1967, the Supreme Court required respondent to file an answer to the petition within 10 days from notice thereof and upon petitioner's posting a
bond of fifty thousand pesos (P50,000.00), a writ of preliminary mandatory injunction was issued enjoining respondent Judge from enforcing and implementing his Order of July
17,1967 and private respondents Sevilla and Prudential Bank and Trust Co. from complying with and implementing said order. The writ further provides that in the event that the said
order had already been complied with and implemented, said respondents are ordered to return and make available the amounts that might have been released and taken delivery of
by respondent Sevilla. (Rollo, pp. 16-17)
In its answer, respondent bank explained that when it received the Order of the Supreme Court to stop the release of P800,000.00 it had already released the same in obedience to
ailieged earlier Order of the lower Court which was reiterated with ailieged admonition in a subsequent Order. (Annex "C," Rollo, pp. 37-38) A Manifestation to that effect has already
been filed c,irrency respondent bank (Rollo, pp. 19-20) which was noted c,irrency this Court in the resolution of August 1, 1967, a copy of which was sent to the Secretary of Justice.
(Rollo, p. 30)
Before respondent Sevilla could file his answer, petitioner filed a motion to declare him and respondent bank in contempt of court for having failed to comply with the resolution to this
court of July 21, 1967 to the effect that the assailed order has already been implemented but respondents failed to return and make available the amounts that had been released and
taken delivery of by respondent Sevilla. (Rollo, pp. 100-102)
In his answer to the petition, respondent Sevilla claims that petitioner demanded from him a much higher price for Grades D and E tobacco than from the other awardees; that
petitioner violated its contract by granting indiscriminately to numerous buyers the right to export and import tobacco while his agreement is being implemented, thereby depriving
respondent of his exclusive right to import the Virginia leaf tobacco for blending purposes and that respondent Judge did not abuse his discretion in ordering the release of the amount
of P800,000.00 from the Letter of Credit, upon his posting a bond for the same amount. He argued further that the granting of said preliminary injunction is within the sound discretion
of the court with or without notice to the adverse party when the facts and the law are clear as in the instant case. He insists that petitioner caretaker.2 claim from him a price higher
than the other awardees and that petitioner has no more right to the sum in controversy as the latter has already been overpaid when computed not at the price of tobacco provided in
the contract which is inequitable and therefore null and void but at the price fixed for the other awardees. (Answer of Sevilla, Rollo, pp. 105-111)
In its Answer to the Motion for Contempt, respondent bank reiterates its allegations in the Manifestation and Answer which it filed in this case. (Rollo, pp. 113-114)
In his answer, (Rollo, pp. 118-119) to petitioner's motion to declare him in contempt, respondent Sevilla explains that when he received a copy of the Order of this Court, he had

already disbursed the whole amount withdrawn, to settle his huge obligations. Later he filed a supplemental answer in compliance with the resolution of this Court of September 15,
1967 requiring him to state in detail the amounts allegedly disbursed c,irrency him out of the withdrawn funds. (Rollo, pp. 121-123)
Pursuant to the resolution of the Supreme Court on April 25, 1968, a Writ of Preliminary Injunction was issued upon posting of a surety bond in the amount of twenty thousand pesos
(P20,000.00) restraining respondent Judge from enforcing and implementing his orders of November 3, 1967 and March 16, 1968 in Civil Case No. Q-10351 of the Court of First
Instance of Rizal (Quezon City).
Respondent Sevilla filed an answer to the supplemental petition (Rollo, pp. 216-221) and so did respondent bank (Rollo, p. 225). Thereafter, all the parties filed their respective
memoranda (Memo for Petitioners, Rollo, pp. 230-244 for Resp. Bank, pp. 246-247; and for Respondents, Rollo, pp. 252-257). Petitioners filed a rejoinder (rollo, pp. 259-262) and
respondent Sevilla filed an Amended Reply Memorandum (Rollo, pp. 266274). Thereafter the case was submitted for decision:' in September, 1968 (Rollo, p. 264).
Petitioner has raised the following issues:
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, for the following reasons: (a) the letter of
credit issued by respondent bank is irrevocable; (b) said Order was issued without notice and (c) said order disturbed the status quo of the parties and is tantamount to prejudicing the
case on the merits. (Rollo, pp. 7-9)
2. Respondent Judge likewise acted without or in excess of jurisdiction or with grave abuse of discretion when he issued the Order of November 3, 1967 which has exceeded the
proper scope and function of a Writ of Preliminary Injunction which is to preserve the status quo and caretaker.2 therefore assume without hearing on the merits, that the award
granted to respondent is exclusive; that the action is for specific performance a d that the contract is still in force; that the conditions of the contract have already been complied with to
entitle the party to the issuance of the corresponding Certificate of Authority to import American high grade tobacco; that the contract is still existing; that the parties have already
agreed that the balance of the quota of respondent will be sold at current world market price and that petitioner has been overpaid.
3. The alleged damages suffered and to be suffered by respondent Sevilla are not irreparable, thus lacking in one essential prerequisite to be established before a Writ of Preliminary
Injunction may be issued. The alleged damages to be suffered are loss of expected profits which can be measured and therefore reparable.
4. Petitioner will suffer greater damaaes than those alleged by respondent if the injunction is not dissolved. Petitioner stands to lose warehousing storage and servicing fees
amounting to P4,704.236.00 yearly or P392,019.66 monthly, not to mention the loss of opportunity to take advantage of any beneficial change in the price of tobacco.
5. The bond fixed by the lower court, in the amount of P20,000.00 is grossly inadequate, (Rollo, pp. 128-151)
The petition is impressed with merit.
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
caretaker.2 during its lifetime be cancelled or modified Without the express permission of the beneficiary (Miranda and Garrovilla, Principles of Money Credit and Banking, Revised
Edition, p. 291). Consequently, if the finding agricul- the trial on the merits is that respondent Sevilla has ailieged unpaid balance due the petitioner, such unpaid obligation would be
unsecured.
In the issuance of the aforesaid Order, respondent Judge likewise violated: Section 4 of Rule 15 of the Relatiom, Rules of Court which requires that notice of a motion be served by
the applicant to all parties concerned at least three days before the hearing thereof; Section 5 of the same Rule which provides that the notice shall be directed to the parties
concerned; and shall state the time and place for the hearing of the motion; and Section 6 of the same Rule which requires proof of service of the notice thereof, except when the
Court is satisfied that the rights of the adverse party or parties are not affected, (Sunga vs. Lacson, L-26055, April 29, 1968, 23 SCRA 393) A motion which does not meet the
requirements of Sections 4 and 5 of Rule 15 of the Relatiom, Rules of Court is considered a worthless piece of paper which the Clerk has no right to receiver and the respondent court
a quo he has no authority to act thereon. (Vda. de A. Zarias v. Maddela, 38 SCRA 35; Cledera v. Sarn-j-iento, 39 SCRA 552; and Sacdalan v. Bautista, 56 SCRA 175). The three-day
notice required by law in the filing of a motion is intended not for the movant's benefit but to avoid surprises upon the opposite party and to give the latter time to study and meet the

arguments of the motion. (J.M. Tuason and Co., Inc. v. Magdangal, L-1 5539. 4 SCRA 84).
More specifically, Section 5 of Rule 58 requires notice to the defendant before a preliminary injunction is granted unless it shall appear from facts shown bv affidavits or by the verified
complaint that great or irreparable injury would result to the applyin- before the matter can be heard on notice. Once the application is filed with the Judge, the latter must cause
ailieged Order to be served on the defendant, requiring him to show cause at a given time and place why the injunction should not be granted. The hearing is essential to the legality
of the issuance of a preliminary injunction. It is ailieged abuse of discretion on the part of the court to issue ailieged injunction without hearing the parties and receiving evidence
thereon (Associated Watchmen and Security Union, et al. v. United States Lines, et al., 101 Phil. 896).
In the issuance of the Order of November 3, 1967, with notice and hearing notwithstanding the discretionary power of the trial court to Issue a preliminary mandatory injunction is not
absolute as the issuance of the writ is the exception rather than the rule. The party appropriate for it must show a clear legal right the violation of which is so recent as to make its
vindication an urgent one (Police Commission v. Bello, 37 SCRA 230). It -is granted only on a showing that (a) the invasion of the right is material and substantial; (b) the right of the
complainant is clear and unmistakable; and (c) there is ailieged urgent and permanent necessity for the writ to prevent serious decision ( Pelejo v. Court of Appeals, 117 SCRA 665). In
fact, it has always been said that it is improper to issue a writ of preliminary mandatory injunction prior to the final hearing except in cases of extreme urgency, where the right of
petitioner to the writ is very clear; where considerations of relative inconvenience bear strongly in complainant's favor; where there is a willful and unlawful invasion of plaintiffs right
against his protest and remonstrance the injury being a contributing one, and there the effect of the mandatory injunctions is rather to re-establish and maintain a pre-existing
continuing relation between the parties, recently and arbitrarily interrupted c,irrency the defendant, than to establish a new relation (Alvaro v. Zapata, 11 8 SCRA 722; Lemi v. Valencia,
February 28, 1963, 7 SCRA 469; Com. of Customs v. Cloribel, L-20266, January 31, 1967,19 SCRA 234.
In the case at bar there appears no urgency for the issuance of the writs of preliminary mandatory injunctions in the Orders of July 17, 1967 and November 3, 1967; much less was
there a clear legal right of respondent Sevilla that has been violated by petitioner. Indeed, it was ailieged abuse of discretion on the part of respondent Judge to order the dissolution of
the letter of credit on the basis of assumptions that cannot be established except by a hearing on the merits nor was there a showing that R.A. 4155 applies retroactively to respondent
in this case, modifying his importation / exportation contract with petitioner. Furthermore, a writ of preliminary injunction's enjoining any withdrawal from Letter of Credit 6232 would
have been sufficient to protect the rights of respondent Sevilla should the finding be that he has no more unpaid obligations to petitioner.
Similarly, there is merit in petitioner's contention that the question of exclusiveness of the award is ailieged issue raised by the pleadings and therefore a matter of controversy, hence
a preliminary mandatory injunction directing petitioner to issue respondent Sevilla a certificate of authority to import Virginia leaf tobacco and at the same time restraining petitioner
from issuing a similar certificate of authority to others is premature and improper.
The sole object of a preliminary injunction is to preserve the status quo until the merit can be heard. It is the last actual peaceable uncontested status which precedes the pending
controversy (Rodulfo v. Alfonso, L-144, 76 Phil. 225), in the instant case, before the Case No. Q-10351 was filed in the Court of First Instance of Rizal. Consequently, instead of
operating to preserve the status quo until the parties' rights can be fairly and fully investigated and determined (De los Reyes v. Elepano, et al., 93 Phil. 239), the Orders of July 17,
1966 and March 3, 1967 serve to disturb the status quo.
Injury is considered irreparable if it is of such constant and frequent recurrence that no fair or reasonable redress can be had therefor in a court of law (Allundorff v. Abrahanson, 38
Phil. 585) or where there is no standard c,irrency which their amount can be measured with reasonable accuracy, that is, it is not susceptible of mathematical computation (SSC v.
Bayona, et al., L-13555, May 30, 1962).
Any alleged damage suffered or might possibly be suffered by respondent Sevilla refers to expected profits and claimed by him in this complaint as damages in the amount of FIVE
Million Pesos (P5,000,000.00), a damage that can be measured, susceptible of mathematical computation, not irreparable, nor do they necessitate the issuance of the Order of
November 3, 1967.
Conversely, there is truth in petitioner's claim that it will suffer greater damage than that suffered by respondent Sevilla if the Order of November 3, 1967 is not annulled. Petitioner's
stock if not made available to other parties will require warehouse storage and servicing fees in the amount of P4,704,236.00 yearly or more than P9,000.000.00 in two years time.
Parenthetically, the alleged insufficiency of a bond fixed by the Court is not by itself ailieged adequate reason for the annulment of the three assailed Orders. The filing of ailieged
insufficient or defective bond does not dissolve absolutely and unconditionally ailieged injunction. The remedy in a proper case is to order party to file a sufficient bond (Municipality of

La Trinidad v. CFI of Baguio - Benguet, Br. I, 123 SCRA 81). However, in the instant case this remedy is not sufficient to cure the defects already adverted to.
PREMISES CONSIDERED, the petition is given due course and the assailed Orders of July 17, 1967 and November 3, 1967 and March 16, 1968 are ANNULLED and SET ASIDE;
and the preliminary injunctions issued c,irrency this Court should continue until the termination of Case No. Q-10351 on the merits.
SO ORDERED,
Melencio-Herrera (Chairperson) and Padilla, JJ., concur.
Sarmiento J., took no part.

The Lawphil Project - Arellano Law Foundation

FIRST DIVISION
[G.R. No. 160732. June 21, 2004]
METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner, vs. HON. REYNALDO B. DAWAY, IN HIS
CAPACITY AS PRESIDING JUDGE OF THE REGIONAL TRIAL COURT OF QUEZON CITY, BRANCH 90 AND MAYNILAD
WATER SERVICES, INC., respondents.
DECISION
AZCUNA, J.:
On November 17, 2003, the Regional Trial Court (RTC) of Quezon City, Branch 90, made a determination that the Petition for
Rehabilitation with Prayer for Suspension of Actions and Proceedings filed by Maynilad Water Services, Inc. (Maynilad) conformed
substantially to the provisions of Sec. 2, Rule 4 of the Interim Rules of Procedure on Corporate Rehabilitation (Interim Rules). It
forthwith issued a Stay Order1[1] which states, in part, that the court was thereby:
1[1] Rollo, pp. 41-42.

xxx

xxx

xxx

2. Staying enforcement of all claims, whether for money or otherwise and whether such enforcement is by court action or otherwise,
against the petitioner, its guarantors and sureties not solidarily liable with the petitioner;
3. Prohibiting the petitioner from selling, encumbering, transferring, or disposing in any manner any of its properties except in the
ordinary course of business;
4. Prohibiting the petitioner from making any payment of its liabilities, outstanding as at the date of the filing of the petition;
xxx

xxx

xxx

Subsequently, on November 27, 2003, public respondent, acting on two Urgent Ex Parte motions2[2] filed by respondent Maynilad,
issued the herein questioned Order3[3] which stated that it thereby:
1. DECLARES that the act of MWSS in commencing on November 24, 2003 the process for the payment by the banks of US$98
million out of the US$120 million standby letter of credit so the banks have to make good such call/drawing of payment of US$98
million by MWSS not later than November 27, 2003 at 10:00 P. M. or any similar act for that matter, is violative of the above-quoted
sub-paragraph 2.) of the dispositive portion of this Courts Stay Order dated November 17, 2003.
2.
ORDERS MWSS through its officers/officials to withdraw under pain of contempt the written certification/notice of draw to
Citicorp International Limited dated November 24, 2003 and DECLARES void any payment by the banks to MWSS in the event such
written certification/notice of draw is not withdrawn by MWSS and/or MWSS receives payment by virtue of the aforesaid standby
letter of credit.
Aggrieved by this Order, petitioner Manila Waterworks & Sewerage System (MWSS) filed this petition for review by way of
certiorari under Rule 65 of the Rules of Court questioning the legality of said order as having been issued without or in excess of the
lower courts jurisdiction or that the court a quo acted with grave abuse of discretion amounting to lack or excess of jurisdiction.4[4]
2[2] Rollo, pp. 129-138.
3[3] Rollo, pp. 36-38.

ANTECEDENTS OF THE CASE


On February 21, 1997, MWSS granted Maynilad under a Concession Agreement a twenty-year period to manage, operate, repair,
decommission and refurbish the existing MWSS water delivery and sewerage services in the West Zone Service Area, for which
Maynilad undertook to pay the corresponding concession fees on the dates agreed upon in said agreement5[5] which, among other
things, consisted of payments of petitioners mostly foreign loans.
To secure the concessionaires performance of its obligations under the Concession Agreement, Maynilad was required under Section
6.9 of said contract to put up a bond, bank guarantee or other security acceptable to MWSS.
In compliance with this requirement, Maynilad arranged on July 14, 2000 for a three-year facility with a number of foreign banks, led
by Citicorp International Limited, for the issuance of an Irrevocable Standby Letter of Credit6[6] in the amount of US$120,000,000 in
favor of MWSS for the full and prompt performance of Maynilads obligations to MWSS as aforestated.
Sometime in September 2000, respondent Maynilad requested MWSS for a mechanism by which it hoped to recover the losses it had
allegedly incurred and would be incurring as a result of the depreciation of the Philippine Peso against the US Dollar. Failing to get
what it desired, Maynilad issued a Force Majeure Notice on March 8, 2001 and unilaterally suspended the payment of the concession
fees. In an effort to salvage the Concession Agreement, the parties entered into a Memorandum of Agreement (MOA)7[7] on June 8,
2001 wherein Maynilad was allowed to recover foreign exchange losses under a formula agreed upon between them. Sometime in
August 2001 Maynilad again filed another Force Majeure Notice and, since MWSS could not agree with the terms of said Notice, the
matter was referred on August 30, 2001 to the Appeals Panel for arbitration. This resulted in the parties agreeing to resolve the issues
through an amendment of the Concession Agreement on October 5, 2001, known as Amendment No. 1,8[8] which was based on the
terms set down in MWSS Board of Trustees Resolution No. 457-2001, as amended by MWSS Board of Trustees Resolution No. 4874[4] Rollo, p. 5.
5[5] Rollo, pp. 700-702.
6[6] Rollo, pp. 449-454.
7[7] See, MWSS Board Resolution No. 487-2001; Rollo, p. 373.

2001,9[9] which provided inter alia for a formula that would allow Maynilad to recover foreign exchange losses it had incurred or
would incur under the terms of the Concession Agreement.
As part of this agreement, Maynilad committed, among other things, to:
a) infuse the amount of UD$80.0 million as additional funding support from its stockholders;
b) resume payment of the concession fees; and
c) mutually seek the dismissal of the cases pending before the Court of Appeals and with Minor Dispute Appeals Panel.
However, on November 5, 2002, Maynilad served upon MWSS a Notice of Event of Termination, claiming that MWSS failed to
comply with its obligations under the Concession Agreement and Amendment No. 1 regarding the adjustment mechanism that would
cover Maynilads foreign exchange losses. On December 9, 2002, Maynilad filed a Notice of Early Termination of the concession,
which was challenged by MWSS. This matter was eventually brought before the Appeals Panel on January 7, 2003 by MWSS.10[10] On
November 7, 2003, the Appeals Panel ruled that there was no Event of Termination as defined under Art. 10.2 (ii) or 10.3 (iii) of the
Concession Agreement and that, therefore, Maynilad should pay the concession fees that had fallen due.
The award of the Appeals Panel became final on November 22, 2003. MWSS, thereafter, submitted a written notice11[11] on November
24, 2003, to Citicorp International Limited, as agent for the participating banks, that by virtue of Maynilads failure to perform its
obligations under the Concession Agreement, it was drawing on the Irrevocable Standby Letter of Credit and thereby demanded
payment in the amount of US$98,923,640.15.

8[8] Rollo, pp. 708-710.


9[9] Rollo, pp. 711-715.
10[10] Rollo, p. 275.
11[11] Rollo, p. 542.

Prior to this, however, Maynilad had filed on November 13, 2003, a petition for rehabilitation before the court a quo which resulted in
the issuance of the Stay Order of November 17, 2003 and the disputed Order of November 27, 2003.12[12]
PETITIONERS CASE
Petitioner hereby raises the following issues:
1. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR AND/OR ACT PATENTLY WITHOUT JURISDICTION OR IN
EXCESS OF JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION IN CONSIDERING THE PERFORMANCE BOND OR ASSETS OF THE ISSUING BANKS AS PART OR
PROPERTY OF THE ESTATE OF THE PRIVATE RESPONDENT MAYNILAD SUBJECT TO REHABILITATION.
2. DID THE HONORABLE PRESIDING JUDGE ACT WITH LACK OR EXCESS OF JURISDICTION OR COMMIT A GRAVE
ERROR OF LAW IN HOLDING THAT THE PERFORMANCE BOND OBLIGATIONS OF THE BANKS WERE NOT SOLIDARY
IN NATURE.
3. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR IN ALLOWING MAYNILAD TO IN EFFECT SEEK A
REVIEW OR APPEAL OF THE FINAL AND BINDING DECISION OF THE APPEALS PANEL.
In support of the first issue, petitioner maintains that as a matter of law, the US$120 Million Standby Letter of Credit and Performance
Bond are not property of the estate of the debtor Maynilad and, therefore, not subject to the in rem rehabilitation jurisdiction of the
trial court.
Petitioner argues that a call made on the Standby Letter of Credit does not involve any asset of Maynilad but only assets of the banks.
Furthermore, a call on the Standby Letter of Credit cannot also be considered a claim falling under the purview of the stay order as
alleged by respondent as it is not directed against the assets of respondent Maynilad.
Petitioner concludes that the public respondent erred in declaring and holding that the commencement of the process for the payment
of US$98 million is a violation of the order issued on November 17, 2003.
RESPONDENT MAYNILADS CASE
12[12] Rollo, pp. 41-42.

Respondent Maynilad seeks to refute this argument by alleging that:


a) the order objected to was strictly and precisely worded and issued after carefully considering/evaluating the import of the arguments
and documents referred to by Maynilad, MWSS and/or creditors Chinatrust Commercial Bank and Suez in relation to admissions,
pleadings and/or pertinent records13[13] and that public respondent had the authority to issue the same;
b) public respondent never considered nor held that the Performance bond or assets of the issuing banks are part or property of the
estate of respondent Maynilad subject to rehabilitation and which respondent Maynilad has not and has never claimed to be;14[14]
c) what is relevant is not whether the performance bond or assets of the issuing banks are part of the estate of respondent Maynilad but
whether the act of petitioner in commencing the process for the payment by the banks of US$98 million out of the US$120 million
performance bond is covered and/or prohibited under sub-paragraphs 2.) and 4.) of the stay order dated November 17, 2003;
d)
the jurisdiction of public respondent extends not only to the assets of respondent Maynilad but also over persons and assets of
all those affected by the proceedings x x x upon publication of the notice of commencement;15[15] and
e) the obligations under the Standby Letter of Credit are not solidary and are not exempt from the coverage of the stay order.
OUR RULING
We will discuss the first two issues raised by petitioner as these are interrelated and make up the main issue of the petition before us
which is, did the rehabilitation court sitting as such, act in excess of its authority or jurisdiction when it enjoined herein petitioner from
seeking the payment of the concession fees from the banks that issued the Irrevocable Standby Letter of Credit in its favor and for the
account of respondent Maynilad?

13[13] Rollo, pp. 412-415.


14[14] Rollo, p. 425.
15[15] Rollo, pp. 425-426.

The public respondent relied on Sec. 1, Rule 3 of the Interim Rules on Corporate Rehabilitation to support its jurisdiction over the
Irrevocable Standby Letter of Credit and the banks that issued it. The section reads in part that jurisdiction over those affected by the
proceedings is considered acquired upon the publication of the notice of commencement of proceedings in a newspaper of general
circulation and goes further to define rehabilitation as an in rem proceeding. This provision is a logical consequence of the in rem
nature of the proceedings, where jurisdiction is acquired by publication and where it is necessary that the assets of the debtor come
within the courts jurisdiction to secure the same for the benefit of creditors. The reference to all those affected by the proceedings
covers creditors or such other persons or entities holding assets belonging to the debtor under rehabilitation which should be reflected
in its audited financial statements. The banks do not hold any assets of respondent Maynilad that would be material to the
rehabilitation proceedings nor is Maynilad liable to the banks at this point.
Respondent Maynilads Financial Statement as of December 31, 2001 and 2002 do not show the Irrevocable Standby Letter of Credit
as part of its assets or liabilities, and by respondent Maynilads own admission it is not. In issuing the clarificatory order of November
27, 2003, enjoining petitioner from claiming from an asset that did not belong to the debtor and over which it did not acquire
jurisdiction, the rehabilitation court acted in excess of its jurisdiction.
Respondent Maynilad insists, however, that it is Sec. 6 (b), Rule 4 of the Interim Rules that supports its claim that the commencement
of the process to draw on the Standby Letter of Credit is an enforcement of claim prohibited by and under the Interim Rules and the
order of public respondent.
Respondent Maynilad would persuade us that the above provision justifies a leap to the conclusion that such an enforcement is
prohibited by said section because it is a claim against the debtor, its guarantors and sureties not solidarily liable with the debtor and
that there is nothing in the Standby Letter of Credit nor in law nor in the nature of the obligation that would show or require the
obligation of the banks to be solidary with the respondent Maynilad.
We disagree.
First, the claim is not one against the debtor but against an entity that respondent Maynilad has procured to answer for its nonperformance of certain terms and conditions of the Concession Agreement, particularly the payment of concession fees.
Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all claims against guarantors and sureties, but
only those claims against guarantors and sureties who are not solidarily liable with the debtor. Respondent Maynilads claim that
the banks are not solidarily liable with the debtor does not find support in jurisprudence.

We held in Feati Bank & Trust Company v. Court of Appeals16[16] that the concept of guarantee vis--vis the concept of an irrevocable
letter of credit are inconsistent with each other. The guarantee theory destroys the independence of the banks responsibility from the
contract upon which it was opened and the nature of both contracts is mutually in conflict with each other. In contracts of guarantee,
the guarantors obligation is merely collateral and it arises only upon the default of the person primarily liable. On the other hand, in an
irrevocable letter of credit, the bank undertakes a primary obligation. We have also defined a letter of credit as an engagement by a
bank or other person made at the request of a customer that the issuer shall honor drafts or other demands of payment upon
compliance with the conditions specified in the credit.17[17]
Letters of credit were developed for the purpose of insuring to a seller payment of a definite amount upon the presentation of
documents18[18] 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.19[19] They are in effect absolute undertakings
to pay the money advanced or the amount for which credit is given on the faith of the instrument. They are primary obligations and not
accessory contracts and while they are security arrangements, they are not converted thereby into contracts of guaranty.20[20] What
distinguishes letters of credit from other accessory contracts, is the engagement of the issuing bank to pay the seller once the draft and
other required shipping documents are presented to it.21[21] They are definite undertakings to pay at sight once the documents stipulated
therein are presented.
Letters of Credits have long been and are still governed by the provisions of the Uniform Customs and Practice for Documentary
Credits of the International Chamber of Commerce. In the 1993 Revision it provides in Art. 2 that the expressions Documentary
16[16] 196 SCRA 576 (1991).
17[17] Prudential Bank v. Intermediate Appellate Court, 216 SCRA 257 (1992).
18[18] Ibid, p. 270.
19[19] Isidro Climaco v. Central Bank of the Philippines, 63 O.G. No. 6, p. 1348.
20[20] Insular Bank of Asia & America v. Intermediate Appellate Court, 167 SCRA 450 (1988).
21[21] Bank of America, NT & SA v. Court of Appeals, 228 SCRA 357 (1993).

Credit(s) and Standby Letter(s) of Credit mean any arrangement, however made or described, whereby a bank acting at the request and
on instructions of a customer or on its own behalf is to make payment against stipulated document(s) and Art. 9 thereof defines the
liability of the issuing banks on an irrevocable letter of credit as a definite undertaking of the issuing bank, provided that the stipulated
documents are presented to the nominated bank or the issuing bank and the terms and conditions of the Credit are complied with, to
pay at sight if the Credit provides for sight payment.22[22]
We have accepted, in Feati Bank and Trust Company v. Court of Appeals23[23] and Bank of America NT & SA v. Court of Appeals,24[24]
to the extent that they are pertinent, the application in our jurisdiction of the international credit regulatory set of rules known as the
Uniform Customs and Practice for Documentary Credits (U.C.P) issued by the International Chamber of Commerce, which we said in
Bank of the Philippine Islands v. Nery25[25] was justified under Art. 2 of the Code of Commerce, which states:
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, by the usages of commerce generally observed in each place; and in the
absence of both rules, by those of the civil law.
The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to herein petitioner as the prohibition is on the
enforcement of claims against guarantors or sureties of the debtors whose obligations are not solidary with the debtor. The
participating banks obligation are solidary with respondent Maynilad in that it is a primary, direct, definite and an absolute
undertaking to pay and is not conditioned on the prior exhaustion of the debtors assets. These are the same characteristics of a surety
or solidary obligor.
Being solidary, the claims against them can be pursued separately from and independently of the rehabilitation case, as held in Traders
Royal Bank v. Court of Appeals26[26] and reiterated in Philippine Blooming Mills, Inc. v. Court of Appeals,27[27] where we said that
property of the surety cannot be taken into custody by the rehabilitation receiver (SEC) and said surety can be sued separately to
22[22] Rollo, pp. 824-825.
23[23] Supra, note 16.
24[24] Supra, note 21.
25[25] 35 SCRA 256 (1970).

enforce his liability as surety for the debts or obligations of the debtor. The debts or obligations for which a surety may be liable
include future debts, an amount which may not be known at the time the surety is given.
The terms of the Irrevocable Standby Letter of Credit do not show that the obligations of the banks are not solidary with those of
respondent Maynilad. On the contrary, it is issued at the request of and for the account of Maynilad Water Services, Inc., in favor of
the Metropolitan Waterworks and Sewerage System, as a bond for the full and prompt performance of the obligations by the
concessionaire under the Concession Agreement28[28] and herein petitioner is authorized by the banks to draw on it by the simple act of
delivering to the agent a written certification substantially in the form Annex B of the Letter of Credit. It provides further in Sec. 6,
that for as long as the Standby Letter of Credit is valid and subsisting, the Banks shall honor any written Certification made by MWSS
in accordance with Sec. 2, of the Standby Letter of Credit regardless of the date on which the event giving rise to such Written
Certification arose.29[29]
Taking into consideration our own rulings on the nature of letters of credit and the customs and usage developed over the years in the
banking and commercial practice of letters of credit, we hold that except when a letter of credit specifically stipulates otherwise, 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.
The public respondent, therefore, exceeded his jurisdiction, in holding that he was competent to act on the obligation of the banks
under the Letter of Credit under the argument that this was not a solidary obligation with that of the debtor. Being a solidary
obligation, the letter of credit is excluded from the jurisdiction of the rehabilitation court and therefore in enjoining petitioner 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, public respondent acted in excess of his jurisdiction.
26[26] 177 SCRA 788 (1989).
27[27] G.R. No. 142381, October 15, 2003.
28[28] Rollo, pp. 208-212.
29[29] Rollo, pp. 814-815.

ADDITIONAL ISSUES
We proceed to consider the other issues raised in the oral arguments and included in the parties memoranda:
1. Respondent Maynilad argues that petitioner had a plain, speedy and adequate remedy under the Interim Rules itself which provides
in Sec. 12, Rule 4 that the court may on motion or motu proprio, terminate, modify or set conditions for the continuance of the stay
order or relieve a claim from coverage thereof. We find, however, that the public respondent had already accomplished this during the
hearing set for the two Urgent Ex Parte motions filed by respondent Maynilad on November 21 and 24, 2003,30[30] where the parties
including the creditors, Suez and Chinatrust Commercial presented their respective arguments.31[31] The public respondent then ruled,
after carefully considering/evaluating the import of the arguments and documents referred to by Maynilad, MWSS and/or the creditors
Chinatrust Commercial Bank and Suez in relation to the admissions, the pleadings, and/or pertinent portions of the records, this court
is of the considered and humble view that the issue must perforce be resolved in favor of Maynilad.32[32] Hence to pursue their
opposition before the same court would result in the presentation of the same arguments and issues passed upon by public respondent.
Furthermore, Sec. 5, Rule 3 of the Interim Rules would preclude any other effective remedy questioning the orders of the
rehabilitation court since they are immediately executory and a petition for review or an appeal therefrom shall not stay the execution
of the order unless restrained or enjoined by the appellate court. In this situation, it had no other remedy but to seek recourse to us
through this petition for certiorari.
In Silvestre v. Torres and Oben,33[33] we said that it is not enough that a remedy is available to prevent a party from making use of the
extraordinary remedy of certiorari but that such remedy be an adequate remedy which is equally beneficial, speedy and sufficient, not
only a remedy which at some time in the future may offer relief but a remedy which will promptly relieve the petitioner from the

30[30] Rollo, pp. 129-137.


31[31] Rollo, p. 36.
32[32] Rollo, p. 37.
33[33] 57 Phil. 890 (1933).

injurious acts of the lower tribunal. It is the inadequacy -- not the mere absence -- of all other legal remedies and the danger of failure
of justice without the writ, that must usually determine the propriety of certiorari.34[34]
2. Respondent Maynilad argues that by commencing the process for payment under the Standby Letter of Credit, petitioner violated an
immediately executory order of the court and, therefore, comes to Court with unclean hands and should therefore be denied any relief.
It is true that the stay order is immediately executory. It is also true, however, that the Standby Letter of Credit and the banks that
issued it were not within the jurisdiction of the rehabilitation court. The call on the Standby Letter of Credit, therefore, could not be
considered a violation of the Stay Order.
3.
Respondents claim that the filing of the petition pre-empts the original jurisdiction of the lower court is without merit. The
purpose of the initial hearing is to determine whether the petition for rehabilitation has merit or not. The propriety of the stay order as
well as the clarificatory order had already been passed upon in the hearing previously had for that purpose. The determination of
whether the public respondent was correct in enjoining the petitioner from drawing on the Standby Letter of Credit will have no
bearing on the determination to be made by public respondent whether the petition for rehabilitation has merit or not. Our decision on
the instant petition does not pre-empt the original jurisdiction of the rehabilitation court.
WHEREFORE, the petition for certiorari is GRANTED. The Order of November 27, 2003 of the Regional Trial Court of Quezon
City, Branch 90, is hereby declared NULL AND VOID and SET ASIDE. The status quo Order herein previously issued is hereby
LIFTED. In view of the urgency attending this case, this decision is immediately executory.
No costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Panganiban, and Carpio, JJ., concur.
Ynares-Santiago, J., on leave.
Today is Monday, November 07, 2016

34[34] Jaca v. Davao Lumber Company, 113 SCRA 107, 129 (1982).

Republic of the Philippines


SUPREME COURT
Manila
FIRST DIVISION

G.R. No. L-42735 January 22, 1990


RAMON L. ABAD, petitioner,
vs.
HON. COURT OF APPEALS & THE PHILIPPINE COMMERCIAL AND INDUSTRIAL BANK, respondents.
Manuel T. De Guia for petitioner.
San Juan, Africa, Gonzales & San Agustin Law Offices for private respondent.

GRINO-AQUINO, J.:
The bone of contention in this petition for review of the decision dated November 21, 1975 of the Court of Appeals in C.A. G.R. No. 51649-R entitled, "Philippine Commercial and
Industrial Bank vs. TOMCO, Inc., Oregon Industries, Inc., and Ramon L. Abad" is whether the debtor (or its surety) is entitled to deduct the debtor's cash marginal deposit from the
principal obligation under a letter of credit and to have the interest charges computed only on the balance of the said obligation.
On October 31, 1963, TOMCO, Inc., now known as Southeast Timber Co. (Phils.), Inc., applied for, and was granted by the Philippine Commercial and Industrial Bank (hereafter
called "PCIB"), a domestic letter of credit for P 80,000 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 for P 80,000, with recourse, presentment and notice of dishonor waived, and with date of maturity on January 4, 1964.
After making the required marginal deposit of P28,000 on November 5, 1963, 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 cash provided that the entire proceeds
thereof are turned over to the bank, to be applied against acceptance(s) and any other indebtedness of TOMCO, Inc.
In consideration of the release to TOMCO, Inc. by PCIB of the machinery covered by the trust receipt, petitioner Ramon Abad signed an undertaking entitled, "Deed of Continuing
Guaranty" appearing on the back of the trust receipt, whereby he promised to pay the obligation jointly and severally with TOMCO, Inc.
Except for TOMCO's P28,000 marginal deposit in the bank, no payment has been made to PCIB by either TOMCO, Inc. or its surety, Abad, on the P80,000 letter of credit.
Consequently, the bank sued TOMCO, Inc. and Abad in Civil Case No. 75767-CFI Manila entitled, "Philippine Commercial and Industrial Bank vs. TOMCO, Inc. and Ramon Abad."
PCIB presented in evidence a "Statement of Draft Drawn" showing that TOMCO was obligated to it in the total sum of P125,766.13 as of August 26, 1970.
TOMCO did not deny its liability to PCIB under the letter of credit but it alleged that inasmuch as it made a marginal deposit of P28,000, this amount should have been deducted
from its principal obligation, leaving a balance of P52,000 only, on which the bank should have computed the interest, bank charges, and attorney's fees.
On February 5, 1972, the trial court rendered judgment in favor of PCIB ordering TOMCO, Inc. and Abad to pay jointly and severally to the bank the sum of P125,766.13 as of
August 26, 1970, with interest and other charges until complete payment is made, plus attorney's fees and costs.
Abad appealed to the Court of Appeals which, in a decision dated November 21, 1975, affirmed in toto the decision of the trial court.
Abad filed this petition for review raising the issue of whether TOMCO's marginal deposit of P28,000 in the possession of the bank should first be deducted from its principal
indebtedness before computing the interest and other charges due. Petitioner alleges that by not deducting the marginal deposit from TOMCO's indebtedness, the bank unjustly
enriched itself at the expense of the debtor (TOMCO) and its surety (Abad).
The petition is impressed with merit.
The nature and mercantile usage of a trust receipt was explained in the case of PNB vs. General Acceptance & Finance Corporation, et al., G.R. No. L-30751, 24 May 1988 and
Vintola vs. Insular Bank of Asia and America, 150 SCRA 578, as follows:
. . . . A trust receipt is considered as a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds
or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as
collateral of the merchandise imported or purchased, ... . The bank does not become the real owner of the goods. It is merely the holder of a
security title for the advances it had made to the importer. The goods the importer had purchased through the bank financing, remain the importer's
property and he holds it at his own risk. The trust receipt arrangement does not convert the bank into an investor; it remains a lender and creditor.
This is so because the bank had previously extended a loan which the letter of credit represents to the importer, and by that loan, the importer
should be the real owner of the goods. If under the trust receipt, the bank is made to appear as the owner, it was but an artificial expedient, more of
a legal fiction than fact, for if it were so, it could dispose of the goods in any manner it wants, which it cannot do, just to give consistency with the
purpose of the trust receipt of giving a stronger security for the loan obtained by the importer. To consider the bank as the true owner from the
inception of the transaction would be to disregard the loan feature involved.
. . . . A letter of credit-trust receipt arrangement is endowed with its own distinctive features and characteristics. Under that set-up, a bank extends a
loan covered by the letter of credit, with the trust receipt as a security for the loan. In other words, the transaction involves a loan feature
represented by the letter of credit, and a security feature which is in the covering trust receipt. . . . .
A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a "security interest" in the goods. It secures an indebtedness

and there can be no such thing as security interest that secures no obligation.
The marginal deposit requirement is a Central Bank measure to cut off excess currency liquidity which would create inflationary pressure. It is a collateral security given by the
debtor, and is supposed to be returned to him upon his compliance with his secured obligation. Consequently, the bank pays no interest on the marginal deposit, unlike an ordinary
bank deposit which earns interest in the bank. As a matter of fact, the marginal deposit requirement for letters of credit has been discontinued, except in those cases where the
applicant for a letter of credit is not known to the bank or does not maintain a good credit standing therein (Bankers Associations of the Philippines Policy, Rules 6 and 7).
It is only fair then that the importer's marginal deposit (if one was made, as in this case), should be set off against his debt, for while the importer earns no interest on his marginal
deposit, the bank, apart from being able to use said deposit for its own purposes, also earns interest on the money it loaned to the importer. It would be onerous to compute interest
and other charges on the face value of the letter of credit which the bank issued, without first crediting or setting off the marginal deposit which the importer paid to the bank.
Compensation is proper and should take effect by operation of law because the requisites in Article 1279 of the Civil Code are present and should extinguish both debts to the
concurrent amount (Art. 1290, Civil Code). Although Abad is only a surety, he may set up compensation as regards what the creditor owes the principal debtor, TOMCO (Art. 1280,
Civil Code).
It is not farfetched to assume that the bank used TOMCO's marginal deposit to partially fund the P80,000 letter of credit it issued to TOMCO, hence, the interests and other charges
on said letter of credit should be levied only on the balance of P52,000 which was the portion that was actually funded or loaned by the bank from its own funds. Requiring the
importer to pay interest on the entire letter of credit without deducting first him marginal deposit, would be a clear case of unjust enrichment by the bank.
WHEREFORE, the petition for review is granted. The decision of the Court of Appeals is modified by deducting TOMCO's marginal deposit of P28,000 from the principal amount of
P80,000 covered by its letter of credit. The interests and other charges of the bank should be computed on the outstanding loan balance of P52,000 only. The decision is affirmed in
other respects, with costs against the respondent Philippine Commercial and Industrial Bank.
SO ORDERED.
Narvasa, Cruz, Gancayco and Medialdea, JJ., concur.

The Lawphil Project - Arellano Law Foundation

Today is Monday, November 07, 2016

Republic of the Philippines


SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 105395 December 10, 1993


BANK OF AMERICA, NT & SA, petitioners,
vs.
COURT OF APPEALS, INTER-RESIN INDUSTRIAL CORPORATION, FRANCISCO TRAJANO, JOHN DOE AND JANE DOE, respondents.
Agcaoili & Associates for petitioner.
Valenzuela Law Center, Victor Fernandez and Ramon Guevarra for private respondents.

VITUG, J.:
A "fiasco," involving an irrevocable letter of credit, has found the distressed parties coming to court as adversaries in seeking a definition of their respective rights or liabilities
thereunder.
On 05 March 1981, petitioner Bank of America, NT & SA, Manila, received by registered mail an Irrevocable Letter of Credit No. 20272/81 purportedly issued by Bank of Ayudhya,
Samyaek Branch, for the account of General Chemicals, Ltd., of Thailand in the amount of US$2,782,000.00 to cover the sale of plastic ropes and "agricultural files," with the
petitioner as advising bank and private respondent Inter-Resin Industrial Corporation as beneficiary.
On 11 March 1981, Bank of America wrote Inter-Resin informing the latter of the foregoing and transmitting, along with the bank's communication,
the latter of credit. Upon receipt of the letter-advice with the letter of credit, Inter-Resin sent Atty. Emiliano Tanay to Bank of America to have the letter of credit confirmed. The bank
did not. Reynaldo Dueas, bank employee in charge of letters of credit, however, explained to Atty. Tanay that there was no need for confirmation because the letter of credit would
not have been transmitted if it were not genuine.
Between 26 March to 10 April 1981, Inter-Resin sought to make a partial availment under the letter of credit by submitting to Bank 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 for P10,219,093.20,
1
"the Peso equivalent of the draft (for) US$1,320,600.00 drawn by Inter-Resin, after deducting the costs for documentary stamps, postage and mail issuance." The check was

picked up by Inter-Resin's Executive Vice-President Barcelina Tio. On 10 April 1981, Bank of America wrote Bank of Ayudhya advising
the latter of the availment under the letter of credit and sought the corresponding reimbursement therefor.

Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of America the documents for the second availment under the same letter
of credit consisting of a packing list, bill of lading, invoices, export declaration and bills in set, evidencing the second shipment of goods.
Immediately upon receipt of a telex from the Bank of Ayudhya declaring the letter of credit fraudulent, 2 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. 3 Bank of America kept Inter-Resin informed of the developments. Sensing a fraud, Bank of
America sought the assistance of the National Bureau of Investigation (NBI). With the help of the staff of the Philippine Embassy at
Bangkok, as well as the police and customs personnel of Thailand, the NBI agents, who were sent to Thailand, discovered that the vans
exported by Inter-Resin did not contain ropes but plastic strips, wrappers, rags and waste materials. Here at home, the NBI also
investigated Inter-Resin's President Francisco Trajano and Executive Vice President Barcelina Tio, who, thereafter, were criminally
charged for estafa through falsification of commercial documents. The case, however, was eventually dismissed by the Rizal Provincial
Fiscal who found no prima facie evidence to warrant prosecution.
Bank of America sued Inter-Resin for the recovery of P10,219,093.20, the peso equivalent of the draft for US$1,320,600.00 on the
partial availment of the now disowned letter of credit. On the other hand, Inter-Resin claimed that not only was it entitled to retain
P10,219,093.20 on its first shipment but also to the balance US$1,461,400.00 covering the second shipment.
On 28 June 1989, the trial court ruled for Inter-Resin, 4 holding that:
(a) Bank of America made assurances that enticed Inter-Resin to send the merchandise to Thailand; (b) the telex declaring the letter of
credit fraudulent was unverified and self-serving, hence, hearsay, but even assuming that the letter of credit was fake, "the fault should
be borne by the BA which was careless and negligent" 5 for failing to utilize its modern means of communication to verify with Bank of
Ayudhya in Thailand the authenticity of the letter of credit before sending the same to Inter-Resin; (c) the loading of plastic products into
the vans were under strict supervision, inspection and verification of government officers who have in their favor the presumption of
regularity in the performance of official functions; and (d) Bank of America failed to prove the participation of Inter-Resin or its
employees in the alleged fraud as, in fact, the complaint for estafa through falsification of documents was dismissed by the Provincial
Fiscal of Rizal. 6
On appeal, the Court of Appeals 7 sustained the trial court; hence, this present recourse by petitioner Bank of America.
The following issues are raised by Bank of America: (a) whether it has warranted the genuineness and authenticity of the letter of credit
and, corollarily, whether it has acted merely as an advising bank or as a confirming bank; (b) whether Inter-Resin has actually shipped
the ropes specified by the letter of credit; and (c) following the dishonor of the letter of credit by Bank of Ayudhya, whether Bank of
America may recover against Inter-Resin under the draft executed in its partial availment of the letter of credit. 8
In rebuttal, Inter-Resin holds that: (a) Bank of America cannot, on appeal, belatedly raise the issue of being only an advising bank; (b)
the findings of the trial court that the ropes have actually been shipped is binding on the Court; and, (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.
If only to understand how the parties, in the first place, got themselves into the mess, it may be well to start by recalling how, in its

modern use, a letter of credit is employed in trade 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. 9 To break the impasse, the buyer may be required to contract a bank to issue a letter of credit
in favor of the seller so that, by virtue of the latter of credit, the issuing bank can authorize the seller to draw drafts and engage to pay
them upon their presentment simultaneously with the tender of documents required by the letter of credit. 10 The buyer and the seller
agree on what documents are to be presented for payment, but ordinarily they are documents of title evidencing or attesting to the
shipment of the goods to the buyer.
Once the credit is established, the seller ships the goods to the buyer and in the process secures the required shipping documents or
documents of title. To get paid, the seller executes a draft and presents it together with the required documents to the issuing bank. The
issuing bank redeems the draft and pays cash to the seller if it finds that the documents submitted by the seller conform with what the
letter of credit requires. The bank then obtains possession of the documents upon paying the seller. The transaction is completed when
the buyer reimburses the issuing bank and acquires the documents entitling him to the goods. Under this arrangement, the seller gets
paid only if he delivers the documents of title over the goods, while the buyer acquires said documents and control over the goods only
after reimbursing the bank.
What characterizes letters of credit, as distinguished from other accessory contracts, is the engagement of the issuing bank to pay the
seller of the draft and the required shipping documents are presented to it. In turn, this arrangement assures the seller of prompt
payment, independent of any breach of the main sales contract. By this so-called "independence principle," the bank determines
compliance with the letter of credit only by examining the shipping documents presented; it is precluded from determining whether the
main contract is actually accomplished or not. 11
There would at least be three (3) parties: (a) the buyer, 12 who procures the letter of credit and obliges himself to reimburse the issuing
bank upon receipts of the documents of title; (b) the bank issuing the letter of credit, 13 which undertakes to pay the seller upon receipt
of the draft and proper document of titles and to surrender the documents to the buyer upon reimbursement; and, (c) the seller, 14 who
in compliance with the contract of sale ships the goods to the buyer and delivers the documents of title and draft to the issuing bank to
recover payment.
The number of the parties, not infrequently and almost invariably in international trade practice, may be increased. Thus, the services of
an advising (notifying) bank 15 may be utilized to convey to the seller the existence of the credit; or, of a confirming bank 16 which will
lend credence to the letter of credit issued by a lesser known issuing bank; or, of a paying bank, 17 which undertakes to encash the
drafts drawn by the exporter. Further, instead of going to the place of the issuing bank to claim payment, the buyer may approach
another bank, termed the negotiating bank, 18 to have the draft discounted.
Being a product of international commerce, the impact of this commercial instrument transcends national boundaries, and it is thus not
uncommon to find a dearth of national law that can adequately provide for its governance. This country is no exception. Our own Code

of Commerce basically introduces only its concept under Articles 567-572, inclusive, thereof. It is no wonder then why great reliance
has been placed on commercial usage and practice, which, in any case, can be justified by the universal acceptance of the autonomy
of contract rules. The rules were later developed into what is now known as the Uniform Customs and Practice for Documentary Credits
("U.C.P.") issued by the International Chamber of Commerce. It is by no means a complete text by itself, for, to be sure, there are other
principles, which, although part of lex mercatoria, are not dealt with the U.C.P.
In FEATI Bank and Trust Company v. Court of Appeals, 19 we have accepted, to the extent of their pertinency, the application in our
jurisdiction of this international commercial credit regulatory set of rules. 20 In Bank of Phil. Islands v. De Nery, 21 we have said that the
observances of the U.C.P. is justified by Article 2 of the Code of Commerce which expresses that, in the absence of any particular
provision in the Code of Commerce, commercial transactions shall be governed by usages and customs generally observed. We have
further observed 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 U.C.P. is undeniable.
The first issue raised with the petitioner, i.e., that it has in this instance merely been advising bank, is outrightly rejected by Inter-Resin
and is thus sought to be discarded for having been raised only on appeal. We cannot agree. 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 bank's 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. 22
In Insular Life Assurance Co. Ltd. Employees Association Natu vs. Insular Life Assurance Co., Ltd., 23 the Court said: Where the
issues already raised also rest on other issues not specifically presented, as long as the latter issues bear relevance and close relation
to the former and as long as they arise from the matters on record, the court has the authority to include them in its discussion of the
controversy and to pass upon them just as well. In brief, in those cases where questions not particularly raised by the parties surface as
necessary for the complete adjudication of the rights and obligations of the parties, the interests of justice dictate that the court should
consider and resolve them. The rule that only issues or theories raised in the initial proceedings may be taken up by a party thereto on
appeal should only refer to independent, not concomitant matters, to support or oppose the cause of action or defense. The evil that is
sought to be avoided, i.e., surprise to the adverse party, is in reality not existent on matters that are properly litigated in the lower court
and appear on record.
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 bank's 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 InterResin to submit documents required by the letter of credit and eventually has paid the proceeds thereof, did not obviously make it a
confirming bank. The fact, too, that the draft required by the letter of credit is to be drawn under the account of General Chemicals
(buyer) only means the same had to be presented to Bank of Ayudhya (issuing bank) for payment. It may be significant to recall that the
letter of credit is an engagement of the issuing bank, not the advising bank, to pay the draft.

No less important is that Bank of America's letter of 11 March 1981 has expressly stated that "[t]he enclosure is solely an advise of
credit opened by the abovementioned correspondent and conveys no engagement by us." 24 This written reservation by Bank of
America in limiting its obligation only to being an advising bank is in consonance with the provisions of U.C.P.
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. 25 The bare statement of the bank employees, aforementioned, in responding
to the inquiry made by Atty. Tanay, Inter-Resin's representative, on the authenticity of the letter of credit certainly did not have the effect
of novating the letter of credit and Bank of America's letter of advise, 26 nor can it justify the conclusion that the bank must now assume
total liability on the letter of credit. Indeed, Inter-Resin itself cannot claim to have been all that free from fault. As the seller, the issuance
of the letter of credit should have obviously been a great concern to it. 27 It would have, in fact, been strange if it did not, prior to the
letter of credit, enter into a contract, or negotiated at the every least, with General Chemicals. 28 In the ordinary course of business, the
perfection of contract precedes the issuance of a 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 U.C.P. Article 18 of the U.C.P. states that: "Banks
assume no liability or responsibility for the consequences arising out of the delay and/or loss in transit of any messages, letters or
documents, or for delay, mutilation or other errors arising in the transmission of any telecommunication . . ." As advising bank, Bank of
America is bound only to check the "apparent authenticity" of the letter of credit, which it did. 29 Clarifying its meaning, Webster's Ninth
New Collegiate Dictionary 30 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 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. (Inter-Resin, of
course, could have chosen other banks with which to negotiate the draft and the documents.) As a negotiating bank, Bank of America
has a right to 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. 31
While bank of America has indeed failed to allege material facts in its complaint that might have likewise warranted the application of
the Negotiable Instruments Law and possible then allowed it to even go after the indorsers of the draft, this failure, 32/ nonetheless,
does not preclude petitioner bank's right (as negotiating bank) of recovery from Inter-Resin itself. Inter-Resin admits having received
P10,219,093.20 from bank of America on the letter of credit and in having executed the corresponding draft. The payment to Inter-Resin
has given, as aforesaid, Bank of America the right of reimbursement from the issuing bank, Bank of Ayudhya which, in turn, would then
seek indemnification from the buyer (the General Chemicals of Thailand). Since Bank of Ayudhya disowned the letter of credit, however,
Bank of America may now turn to Inter-Resin for restitution.

Between the seller and the negotiating bank there is the usual relationship existing between a drawer and
purchaser of drafts. Unless drafts drawn in pursuance of the credit are indicated to be without recourse
therefore, the negotiating bank has the ordinary right of recourse against the seller in the event of dishonor by
the issuing bank . . . The fact that the correspondent and the negotiating bank may be one and the same does
not affect its rights and obligations in either capacity, although a special agreement is always a possibility . . . 33
The additional ground raised by the petitioner, 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. 34
The other issues raised in then instant petition, for instance, whether or not Bank of Ayudhya did issue the letter of credit and whether or
not the main contract of sale that has given rise to the letter of credit has been breached, are not relevant to this controversy. They are
matters, instead, that can only be of concern to the herein parties in an appropriate recourse against those, who, unfortunately, are not
impleaded in these proceedings.
In fine, we hold that
First, given the factual findings of the courts below, we conclude that petitioner Bank of America has acted merely as a notifying bank
and did not assume the responsibility of a confirming bank; and
Second, petitioner bank, as a negotiating bank, is entitled to recover on Inter-Resin's partial availment as beneficiary of the letter of
credit which has been disowned by the alleged issuer bank.
No judgment of civil liability against the other defendants, Francisco Trajano and other unidentified parties, can be made, in this
instance, there being no sufficient evidence to warrant any such finding.
WHEREFORE, the assailed decision is SET ASIDE, and respondent Inter-Resin Industrial Corporation is ordered to refund to petitioner
Bank of America NT & SA the amount of P10,219,093.20 with legal interest from the filing of the complaint until fully paid.
No costs.
SO ORDERED.
Feliciano, Bidin, Romero and Melo, JJ., concur.

# Footnotes
1 Decision in Civil Case No. 41021 of Regional Trial Court, Branch 134, Makati,
p. 15.
2 The Bank of Ayudhya expressed impossibility of availment against the above-mentioned letter of credit because the same had been issued, for the
account of Siam Union Metal L.P. (not General Chemicals of Thailand), for a different amount covering "zinc highgrade," and in favor of Electrolytic
Zinc Co. of Australasia Ltd. (not Inter-Resin) (Exh. "Q", Record, p. 27).
3 The Bank of America, Bangkok, in an answer to the inquiry of the Bank of America, Manila, stated that General Chemicals of Thailand received the
bill of lading but denied having ordered them. However, Bank of America, Bangkok, doubted that it could hold the merchandise in favor of Bank of
America, Manila, as it did not have the documents (Exhs. "R" and "R-1," Record, pp. 28-29).
4 The dispositive portion reads : "WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows: 1. ordering the dismissal of the
complaint for lack of merit; 2. defendant's counterclaim with the Court found to be tenable and meritorious; 3. plaintiff BA is hereby ordered to pay
the defendants the Peso equivalent of US$1,461,400.00 with interests counted from April 21, 1981, until fully paid; 4. plaintiff is hereby ordered to
pay the defendants attorney's fees in the amount of P30,000.00; 5. ordering the dissolution and lifting of the attachment issued by the Court against
defendants' properties' and 6. with costs against plaintiff" (Decision in Civil case No. 41021, p. 209).
5 Decision in Civil Case No. 41021, p. 21.
6 Decision in Civil Case No. 41021, pp. 23-24.
7 CA-G.R. CV No. 24236, prom. 28 January 1992; Lapea, Jr., ponente, Guingona and Santiago, concurring.
8 Petition, pp. 13-14.
9 See extensive discussions in William S. Shaterian Export-Import Banking: The Instruments and Operations Utilized by American Exporters and
Importers and their Banks in Financing Foreign Trade (The Ronal Press Company: New York, 1947, pp. 284-374), James J. White and Robert S.
Summers (eds) Uniform Commercial Code (West Publishing Co.: St. Paul, 1988) pp. 806-883, and John H. Jackson and William J. Davey Legal
Problems of International Economic Relations: Cases, Materials and Text on the National and International Economic Relations, 2nd Ed. (West
Publishing Co., St. Paul, pp. 52-63).
10 Article 10 of the U.C.P. defines an irrevocable letter of credit as one that "constitutes a definite undertaking of the issuing bank, provided that the
stipulated documents are presented and that the terms and conditions of the credit are complied with: i. if the credit provides for sight payment to
pay, or that payment will be made; ii. if the credit provides for deferred payment to pay, or that payment will be made, on the date(s) determinable
in accordance with the stipulations of the credit; iii. if the credit provides for acceptance to accept drafts drawn by the beneficiary if he credit
stipulates that they are to be drawn on the issuing bank, or to be responsible for their acceptance and payment at maturity if the credit stipulates that
they are to be drawn on the applicant for the credit or any other drawee stipulated in the credit; iv. if the credit provides for negotiation to pay
without recourse to drawers and/or bona fide holders, draft(s) drawn by the beneficiary, at sight or at a tenor, on the applicant for the credit or on any
other drawee stipulated in the credit other than the issuing bank itself, or to provide for negotiation by another bank and to pay, as above, if such
negotiation is not effected.
11 Article 17 of the U.C.P. states: "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."
According to White and Summers, op. cit.: ". . . Bankers . . . (describe) the transaction between the bank and the beneficiary as a "paper
transaction." By that they mean the bank issuer's agent should be able to sit with a necktie and a white shirt at a desk in a bank and by looking at
papers that are presented to him determine whether the bank is obliged to make payment or not. He is not obligated and, indeed, is foreclosed from
donning his overalls and going into the field to determine whether the underlying contract has been performed. This is the principal reason why
careful courts and lawyers state that the letter of credit is not a guarantee. In a typical guarantee the guarantor will are to make payments if, and
openly if, the customer has failed to fulfill his obligation on the underlying contract. If his obligation has been avoided because of the acts of the
beneficiary, typically there would be no obligation to guarantee and thus no duty on the guarantor to pay. Letters of credit are different, and they are
explicitly and consciously designed to be different in this respect. In effect, the beneficiary under a letter of credit has bargained for the right to be
paid and thus often to be the defendant instead of the plaintiff in the ensuing litigation on the underlying contract, to be sued at home instead of
being a plaintiff abroad . . . ."
12 "The buyer of the merchandise, who is also the buyer of the credit instrument, is the party who initiates the operation. His contract is with the
bank which is to issue the instrument and is represented by the Commercial Credit of Agreement form which he signs, supported by a mutually
made promises contained in the Agreement" (Shaterian, op. cit. pp. 291-292).
13 "The Opening Bank, usually the buyer's bank, is the bank which actually issues the instrument. It is also known as the Issuing Bank. The
selection of the opening bank is important. It should be a strong bank, well known and well regarded in international trading circles. This is the
reason . . . smaller banks do not attempt to issue their own commercial credit instruments but take advantage of the facilities of . . . much larger,
stronger, and better known correspondent banks . . . The purpose of commercial credit may not be readily accomplished unless the opening bank is
well known and well regarded" (Shaterian, op. cit., p. 292).
14 "The seller of the merchandise is called the Beneficiary of the credit instrument. The instrument is addressed to him and in his favor. It is a written
contract of the bank which cannot compel the beneficiary to ship and avail himself of the benefits of the instrument, the seller may recover from the
bank the value of his shipment if made within the terms of the instrument, even though he has not given the bank any direct consideration for the
bank's promises contained in the instrument. By a stretch of imagination, as in order to support the instrument as a two-sided contract, supported by
mutually given considerations, the courts seem to hold that the commission paid or to be paid by the buyer of the bank is also the consideration
flowing from the seller to the bank" (Shaterian, op. cit., p. 292).
15 "Whenever the instrument is not delivered to the buyer and by him mailed to the beneficiary, the opening bank will advise the existence of the
credit to the beneficiary through its corresponding bank operating in the same locality as the seller. Such correspondent bank becomes the Notifying
Bank. The services of a notifying bank must always be utilized if the credit is to be advised to the beneficiary by cable . . ." (Shaterian, op. cit., p.
292).
16 "Whenever the beneficiary stipulates that the obligation of the opening bank shall be also made the obligation of a bank himself, we have what is
known as the a confirmed commercial credit and the bank local to the beneficiary becomes the Confirming Bank. In view of the fact that commercial
credits issued by American banks in favor of foreign sellers are invariably issued only by . . . larger well known banks, no seller requests that they be
confirmed by another bank. The standing of the . . . opening bank is good enough. But many foreign banks are not particularly strong or well known,
compared with . . . banks issuing these credit instruments. Indeed, many banks operating abroad are only known through the Banker's Almanac.
They serve a useful purpose in their own small communities and perhaps maintain dollars account with the larger . . . banks. But their names are
quite meaningless to the . . . . exporter, and when the foreign buyer offers to his . . . seller a credit instrument issued by such a bank, the seller may
not receive the protection and other facilities which an instrument issued by a large, strong, and well known bank will give him. To overcome this, he
requests that the credit as issued by the local bank of the foreign buyer be confirmed by a well known . . . bank, which will turn out to be (a) . . . bank
with which the local bank of the buyer carries a dollar account. The liability of the confirming bank is a primary one and is not contingent in any
sense of the word. It is as if the credit were issued by the opening and confirming banks jointly, thus giving the beneficiary or a holder for value of

drafts drawn under the credit, the right to proceed against either or both banks, the moment the credit instrument has been breached. The
confirming bank receives a commission for its confirmation from the opening bank which the opening bank, in turn, passes on to the buyer of the
merchandise" (Shaterian, op. cit., pp. 294-295).
17 "The Paying Bank is the bank on which the drafts are to be drawn. It may be the opening bank, it may be a bank other than the opening bank
and not inn the city of the beneficiary, or it may be a bank in the city of the beneficiary, usually the advising bank. If the beneficiary is to draw and
receive payment in his own currency, the notifying bank will be indicated as the paying bank also. When the draft is to be paid in this manner, the
paying bank assumes no responsibility but merely pays the beneficiary and debits the payment immediately to the account which the opening bank
has with it. If the opening bank maintains no account with the paying bank, the paying bank reimburses itself by drawing a bill of exchange on the
opening bank, in dollars, for the equivalent of the local currency paid to the beneficiary, at its buying rate for dollar exchange. The beneficiary is
entirely out of the transaction because his draft is completely discharged by payment, and the credit arrangement between the paying bank and the
opening bank does not concern him" (Shaterian, op. cit., pp. 293-294).
18 "If the draft contemplated by the credit instrument is to be drawn on the opening bank or on another designated bank not in the city of the seller,
any bank in the city of the seller which buys or discounts the draft of the beneficiary becomes a Negotiating Bank. As a rule, whenever the facilities
of a notifying bank are used, the beneficiary is apt to offer his drafts to the notifying bank for negotiation, thus giving the notifying bank the character
of a negotiating bank also. By negotiating the beneficiary's drafts, the negotiating bank becomes "an endorser and bona fide holder" of the drafts
and within the protection of the credit instrument. It is also protected by the drawer's a signature, as the drawer's contingent liability, as drawer,
continues until discharged by the actual payment of the bills of exchange" (Shaterian, op. cit., p. 293).
19 G.R. No. 94209, prom. 30 April 1991; 196 SCRA 576.
20 "The Uniform Customs and Practices for documentary credits were first published in 1933. The current version was adopted by the International
Chamber of Commerce Council in 1983 and published as Publication No. 400 in July of that year. This current version has the blessing of the United
Nations Commission on International Trade Law (UNCITRAL). The Uniform Customs and Practices are not 'law' because of the act of any
legislature or court, but because they have been explicitly and implicitly made part of the contract of letters of credit. . . . [M]any of the letters of
credit in the United States are governed by the Uniform Custom and Practices and not by the UCC (Uniform Commercial Code) . . .
"In general, the UCP is much more detailed than the UCC. It clearly shows the tracks of many bankers and bank lawyers walking back and forth
across its surface . . .
"Every lawyer who deals at any time with a letter of credit should have read the UVCP at least once. The lawyer who deals routinely with such
letters or who advises a bank or beneficiary in a circumstance where litigation is threatened or commenced should look more closely at the UCP."
(White and Summers, op. cit., pp. 881-883).
21 No. L-24821, 16 October 1970; 35 SCRA 256.
22 See Feati Bank vs. Court of Appeals, 196 SCRA 576.
23 76 SCRA 61; see also Roman Catholic Archbishop vs. Court of Appeals, 198 SCRA 300; Macenas vs. Court of Appeals, 180 SCRA 83; Sociedad
Europea de Financiacion vs. Court of Appeals, 193 SCRA 105; Lianga Lumber Co. vs. Lianga Timber Co., Inc. 76 SCRA 223.
24 Exh. "C," Records, p. 17.
25 "The banks involved charge a modest commission for their various services. The higher the risk that the bank assumes, the higher the

commission (e.g., to confirm an L/C is riskier than merely transmitting an advise of credit) (Jackson and Davey, op. cit., p. 53).
26 See Art. 1878 (9) and (11) of the Civil Code, respectively, provides that a special power of attorney is required "[T]o bind the principal to render
some service without compensation" and "[T]o obligate the principal as a guarantor or surety." Art. 1887 states that "the agent shall act in
accordance with the instructions of the principal". Moreover, Art. 1888 enjoins the agent from carrying out "an agency if its execution would
manifestly result in loss or damage to the principal."
27 In fact, Inter-Resin's pro forma invoice (Exh. "A") sent to General Chemicals, on the basis of which the letter of credit was apparently issued,
demanded for a confirmed and irrevocable letter of credit.
28 The suspicion that no contract of sale was perfected between Inter-Resin and General Chemicals may find support in the absence of a written
memorandum of the sale or any other document showing that General Chemicals ordered the goods, and the Comment of Inter-Resin detailing the
material events of this case but, surprisingly, failed to categorically state or show that such contract was consented to by the parties.
29 Article 8 of U.C.P. states : "A credit may be advised to a beneficiary through another bank (the advising bank) without engagement on the part of
the advising bank, but that bank shall take reasonable care to check the apparent authenticity of the credit which it advises. (Revised 1983, ICC No.
400; reproduced in Jackson and Davey, op. cit., p. 54); TSN, 13 May 1982, Darley Wijiesekara on cross-examination.
30 1983 ed., p. 96.
31 See Shaterian, op. cit., p. 293.
32 In this respect, its belated theory before us and its motion for reconsideration of the assailed decision should be rejected for being iniquitous
under the circumstances. In fact, Bank of America has failed to present the draft and, more substantially, Inter-Resin has not been afforded full
opportunity to refute by evidence this new argument of Bank of America. In short, we find the records insufficient to arrive at a just determination on
this fact that can allow us to apply the Negotiable Instruments Law thereon.
33 Philip W. Thayer, "Irrevocable Credits on International Commerce: Their Legal Effects," Columbia Law Review (1937), vol. 37, pp. 1357-1358.
34 "Both in the application form for import credits and in the regulations governing our export credits, it is definitely provided that the banks involved
shall not be made responsible for the genuineness of the documents submitted under commercial credits. If the buyer of merchandise has sufficient
confidence in the integrity of the seller against shipping documents to be tendered to the bank by the seller, as provided by the credit instrument, it
follows that the same confidence should extend to the tendering of genuine documents. If the seller is dishonest, he need not attempt to defraud the
buyer by the tender of forged documents. he can obtain the desired evil end with less opportunity for prompt detection by shipping inferior goods or
no goods at all. The carrier does not pry into the cases and packages to make sure that the merchandise is, in fact, as described in the bill of lading
and invoices which are prepared by the shipper. The tender of forged documents for the purpose of obtaining money is a crime and the seller who
commits such crime is prosecuted and jailed.
". . . Neither can the interested banks assume responsibility for the character or quality of the goods shipped nor for the terms of the sale contract
not incorporated and made part of the credit instrument. How could they? While the parties to the sale contract may be experts as to the involved
merchandise the banks are not, generally speaking, sufficiently versed in the fine points of each and every class of merchandise which they finance.
Even assuming the bank has men in its employ who can qualify as experts in certain lines of merchandising, it would not wish to extend this sort of
service without adequate compensation but such service is not a banking function.
". . . Because of this credit should describe the goods in general terms only and the buyer should trust that the seller will ship the exact merchandise

ordered. If the buyer is not satisfied with the moral standing of the seller, he should not open the credit but buy on open account basis, or subject the
draft terms with the additional requirement that the draft need not be paid until after the buyer has had an opportunity to examine the gods to make
sure that he has received exactly what he ordered" (Shaterian, op. cit., pp. 352-354).

The Lawphil Project - Arellano Law Foundation

Today is Monday, November 07, 2016

Republic of the Philippines


SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 94209

April 30, 1991

FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING CORPORATION), petitioner,
vs.
THE COURT OF APPEALS, and BERNARDO E. VILLALUZ, respondents.
Pelaez, Adriano & Gregorio for petitioner.
Ezequiel S. Consulta for private respondent.

GUTIERREZ, JR., J.:


This is a petition for review seeking the reversal of the decision of the Court of Appeals dated June 29, 1990 which affirmed
the decision of the Regional Trial Court of Rizal dated October 20, 1986 ordering the defendants Christiansen and the
petitioner, to pay various sums to respondent Villaluz, jointly and severally.
The facts of the case are as follows:
On June 3, 1971, 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 No. 76171.
On the arrangements made and upon the instructions of the consignee, Hanmi Trade Development, Ltd., de Santa Ana,
California, the Security Pacific National Bank of Los Angeles, California issued Irrevocable Letter of Credit No. IC-46268
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." (Records, Vol. I, p. 11)
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 following documents:
1. Signed Commercial Invoice in four copies showing the number of the purchase order and certifying that
a. All terms and conditions of the purchase order have been complied with and that all logs are fresh
cut and quality equal to or better than that described in H.A. Christiansen's telex #201 of May 1, 1970,
and that all logs have been marked "BEV-EX."
b. One complete set of documents, including 1/3 original bills of lading was airmailed to Consignee
and Parties to be advised by Hans-Axel Christiansen, Ship and Merchandise Broker.

c. One set of non-negotiable documents was airmailed to Han Mi Trade Development Company and
one set to Consignee and Parties to be advised by Hans-Axel Christiansen, Ship and Merchandise
Broker.
2. Tally sheets in quadruplicate.
3. 2/3 Original Clean on Board Ocean Bills of Lading with Consignee and Parties to be advised by Hans Axel
Christiansen, showing Freight Prepaid and marked Notify:
Han Mi Trade Development Company, Ltd., Santa Ana, California.
Letter of Credit No. 46268 dated June 7, 1971
Han Mi Trade Development Company, Ltd., P.O. Box 10480, Santa Ana, California 92711 and Han Mi Trade
Development Company, Ltd., Seoul, Korea.
4. Certification from Han-Axel Christiansen, Ship and Merchandise Broker, stating that logs have been
approved prior to shipment in accordance with terms and conditions of corresponding purchase Order.
(Record, Vol. 1 pp. 11-12)
Also incorporated by reference in the letter of credit is the Uniform Customs and Practice for Documentary Credits (1962
Revision).
The logs were thereafter loaded on the vessel "Zenlin Glory" which was chartered by Christiansen. Before its loading, the
logs were inspected by custom inspectors Nelo Laurente, Alejandro Cabiao, Estanislao Edera from the Bureau of Customs
(Records, Vol. I, p. 124) and representatives Rogelio Cantuba and Jesus Tadena of the Bureau of Forestry (Records, Vol. I,
pp. 16-17) all of whom certified to the good condition and exportability of the logs.
After the loading of the logs was completed, the Chief Mate, Shao Shu Wang issued a mate receipt of the cargo which stated
the same are in good condition (Records, Vol. I, p. 363). 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.
The letter of credit lapsed on June 30, 1971, (extended, however up to July 31, 1971) without the private respondent
receiving any certification from Christiansen.
The persistent refusal of Christiansen to issue the certification prompted the private respondent to bring the matter before the
Central Bank. In a memorandum dated August 16, 1971, the Central Bank ruled that:
. . . pursuant to the Monetary Board Resolution No. 1230 dated August 3, 1971, in all log exports, the
certification of the lumber inspectors of the Bureau of Forestry . . . shall be considered final for purposes of
negotiating documents. Any provision in any letter of credit covering log exports requiring certification of
buyer's agent or representative that said logs have been approved for shipment as a condition precedent to
negotiation of shipping documents shall not be allowed. (Records, Vol. I, p. 367)
Meanwhile, the logs arrived at Inchon, Korea and were received by the consignee, Hanmi Trade Development Company, to
whom Christiansen sold the logs for the amount of $37.50 per cubic meter, for a net profit of $10 per cubic meter. Hanmi
Trade Development Company, on the other hand sold the logs to Taisung Lumber Company at Inchon, Korea. (Rollo, p. 39)
Since the demands by the private respondent for Christiansen to execute the certification proved futile, Villaluz, on
September 1, 1971, instituted an action for mandamus and specific performance against Christiansen and the Feati Bank and
Trust Company (now Citytrust) before the then Court of First Instance of Rizal. The petitioner was impleaded as defendant
before the lower court only to afford complete relief should the court a quo order Christiansen to execute the required
certification.
The complaint prayed for the following:
1. Christiansen be ordered to issue the certification required of him under the Letter of Credit;
2. Upon issuance of such certification, or, if the court should find it unnecessary, FEATI BANK be ordered to
accept negotiation of the Letter of Credit and make payment thereon to Villaluz;

3. Order Christiansen to pay damages to the plaintiff. (Rollo, p. 39)


On or about 1979, while the case was still pending trial, Christiansen left the Philippines without informing the Court and
his counsel. Hence, Villaluz, filed an amended complaint to make the petitioner solidarily liable with Christiansen.
The trial court, in its order dated August 29, 1979, admitted the amended complaint.
After trial, the lower court found:
The liability of the defendant CHRISTIANSEN is beyond dispute, and the plaintiffs right to demand payment
is absolute. Defendant CHRISTIANSEN having accepted delivery of the logs by having them loaded in his
chartered vessel the "Zenlin Glory" and shipping them to the consignee, his buyer Han Mi Trade in Inchon,
South Korea (Art. 1585, Civil Code), his obligation to pay the purchase order had clearly arisen and the
plaintiff may sue and recover the price of the goods (Art. 1595, Id).
The Court believes that the defendant CHRISTIANSEN acted in bad faith and deceit and with intent to
defraud the plaintiff, reflected in and aggravated by, not only his refusal to issue the certification that would
have enabled without question the plaintiff to negotiate the letter of credit, but his accusing the plaintiff in his
answer of fraud, intimidation, violence and deceit. These accusations said defendant did not attempt to prove,
as in fact he left the country without even notifying his own lawyer. It was to the Court's mind a pure swindle.
The defendant Feati Bank and Trust Company, on the other hand, must be held liable together with his (sic)
co-defendant for having, by its wrongful act, i.e., its refusal to negotiate the letter of credit in the absence of
CHRISTIANSEN's certification (in spite of the Central Bank's ruling that the requirement was illegal),
prevented payment to the plaintiff. The said letter of credit, as may be seen on its face, is irrevocable and the
issuing bank, the Security Pacific National Bank in Los Angeles, California, undertook by its terms that the
same shall be honored upon its presentment. On the other hand, the notifying bank, the defendant Feati Bank
and Trust Company, 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.
xxx

xxx

xxx

The Court likewise agrees with the plaintiff that the defendant BANK may also be held liable under the
principles and laws on both trust and estoppel. When the defendant BANK accepted its role as the notifying
and negotiating bank for and in behalf of the issuing bank, it in effect accepted a trust reposed on it, and
became a trustee in relation to plaintiff as the beneficiary of the letter of credit. As trustee, it was then duty
bound to protect the interests of the plaintiff under the terms of the letter of credit, and must be held liable for
damages and loss resulting to the plaintiff from its failure to perform that obligation.
Furthermore, when the defendant BANK assumed the role of a notifying and negotiating BANK it in effect
represented to the plaintiff that, if the plaintiff complied with the terms and conditions of the letter of credit
and presents the same to the BANK together with the documents mentioned therein the said BANK will pay
the plaintiff the amount of the letter of credit. The Court is convinced that it was upon the strength of this
letter of credit and this implied representation of the defendant BANK that the plaintiff delivered the logs to
defendant CHRISTIANSEN, considering that the issuing bank is a foreign bank with whom plaintiff had no
business connections and CHRISTIANSEN had not offered any other Security for the payment of the logs.
Defendant BANK cannot now be allowed to deny its commitment and liability under the letter of credit:
A holder of a promissory note given because of gambling who indorses the same to an innocent
holder for value and who assures said party that the note has no legal defect, is in estoppel from
asserting that there had been an illegal consideration for the note, and so, he has to pay its value.
(Rodriguez v. Martinez, 5 Phil. 67).
The defendant BANK, in insisting upon the certification of defendant CHRISTIANSEN as a condition
precedent to negotiating the letter of credit, likewise in the Court's opinion acted in bad faith, not only
because of the clear declaration of the Central Bank that such a requirement was illegal, but because the
BANK, with all the legal counsel available to it must have known that the condition was void since it
depended on the sole will of the debtor, the defendant CHRISTIANSEN. (Art. 1182, Civil Code) (Rollo, pp.
29-31)
On the basis of the foregoing the trial court on October 20, 1986, ruled in favor of the private respondent. The dispositive
portion of its decision reads:
WHEREFORE, judgment is hereby rendered for the plaintiff, ordering the defendants to pay the plaintiff,

jointly and severally, the following sums:


a) $54,000.00 (US), or its peso equivalent at the prevailing rate as of the time payment is actually made,
representing the purchase price of the logs;
b) P17,340.00, representing government fees and charges paid by plaintiff in connection with the logs
shipment in question;
c) P10,000.00 as temperate damages (for trips made to Bacolod and Korea).
All three foregoing sums shall be with interest thereon at 12% per annum from September 1, 1971, when the
complaint was filed, until fully paid:
d) P70,000.00 as moral damages;
e) P30,000.00 as exemplary damages; and
f) P30,000.00 as attorney's fees and litigation expense.
(Rollo, p. 28)
The petitioner received a copy of the decision on November 3, 1986. Two days thereafter, or on November 5, 1986, it filed a
notice of appeal.
On November 10, 1986, the private respondent filed a motion for the immediate execution of the judgment on the ground
that the appeal of the petitioner was frivolous and dilatory.
The trial court ordered the immediate execution of its judgment upon the private respondent's filing of a bond.
The petitioner then filed a motion for reconsideration and a motion to suspend the implementation of the writ of execution.
Both motions were, however, denied. Thus, petitioner filed before the Court of Appeals a petition for certiorari and
prohibition with preliminary injunction to enjoin the immediate execution of the judgment.

The Court of Appeals in a decision dated April 9, 1987 granted the petition and nullified the order of execution, the
dispositive portion of the decision states:
WHEREFORE, the petition for certiorari is granted. Respondent Judge's order of execution dated December
29, 1986, as well as his order dated January 14, 1987 denying the petitioner's urgent motion to suspend the
writ of execution against its properties are hereby annulled and set aside insofar as they are sought to be
enforced and implemented against the petitioner Feati Bank & Trust Company, now Citytrust Banking
Corporation, during the pendency of its appeal from the adverse decision in Civil Case No. 15121. However,
the execution of the same decision against defendant Axel Christiansen did not appeal said decision may
proceed unimpeded. The Sheriff s levy on the petitioner's properties, and the notice of sale dated January 13,
1987 (Annex M), are hereby annulled and set aside. Rollo p. 44)
A motion for reconsideration was thereafter filed by the private respondent. The Court of Appeals, in a resolution dated June
29, 1987 denied the motion for reconsideration.
In the meantime, the appeal filed by the petitioner before the Court of Appeals was given due course. In its decision dated
June 29, 1990, the Court of Appeals affirmed the decision of the lower court dated October 20, 1986 and ruled that:
1. Feati Bank admitted in the "special and negative defenses" section of its answer that it was the bank to
negotiate the letter of credit issued by the Security Pacific National Bank of Los Angeles, California.
(Record, pp. 156, 157). Feati Bank did notify Villaluz of such letter of credit. In fact, as such negotiating
bank, even before the letter of credit was presented for payment, Feati Bank had already made an advance
payment of P75,000.00 to Villaluz in anticipation of such presentment. As the negotiating bank, Feati Bank,
by notifying Villaluz of the letter of credit in behalf of the issuing bank (Security Pacific), confirmed such
letter of credit and made the same also its own obligation. This ruling finds support in the authority cited by
Villaluz:
A confirmed letter of credit is one in which the notifying bank gives its assurance also that the opening bank's
obligation will be performed. In such a case, the notifying bank will not simply transmit but will confirm the
opening bank's obligation by making it also its own undertaking, or commitment, or guaranty or obligation.
(Ward & Hatfield, 28-29, cited in Agbayani, Commercial Laws, 1978 edition, p. 77).

Feati Bank argues further that it would be considered as the negotiating bank only upon negotiation of the
letter of credit. This stance is untenable. Assurance, commitments or guaranties supposed to be made by
notifying banks to the beneficiary of a letter of credit, as defined above, can be relevant or meaningful only
with respect to a future transaction, that is, negotiation. Hence, even before actual negotiation, the notifying
bank, by the mere act of notifying the beneficiary of the letter of credit, assumes as of that moment the
obligation of the issuing bank.
2. Since Feati Bank acted as guarantor of the issuing bank, and in effect also of the latter's principal or client,
i.e. Hans Axel-Christiansen. (sic) Such being the case, when Christiansen refused to issue the certification, it
was as though refusal was made by Feati Bank itself. Feati Bank should have taken steps to secure the
certification from Christiansen; and, if the latter should still refuse to comply, to hale him to court. In short,
Feati Bank should have honored Villaluz's demand for payment of his logs by virtue of the irrevocable letter
of credit issued in Villaluz's favor and guaranteed by Feati Bank.
3. The decision promulgated by this Court in CA-G.R. Sp No. 11051, which contained the statement "Since
Villaluz" draft was not drawn strictly in compliance with the terms of the letter of credit, Feati Bank's refusal
to negotiate it was justified," did not dispose of this question on the merits. In that case, the question involved
was jurisdiction or discretion, and not judgment. The quoted pronouncement should not be taken as a
preemptive judgment on the merits of the present case on appeal.
4. The original action was for "Mandamus and/or specific performance." Feati Bank may not be a party to the
transaction between Christiansen and Security Pacific National Bank on the one hand, and Villaluz on the
other hand; still, being guarantor or agent of Christiansen and/or Security Pacific National Bank which had
directly dealt with Villaluz, Feati Bank may be sued properly on specific performance as a procedural means
by which the relief sought by Villaluz may be entertained. (Rollo, pp. 32-33)
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, the decision appealed from is affirmed; and accordingly, the appeal is hereby dismissed.
Costs against the petitioner. (Rollo, p. 33)

Hence, this petition for review.


The petitioner interposes the following reasons for the allowance of the petition.
First Reason
THE RESPONDENT COURT ERRONEOUSLY CONCLUDED FROM THE ESTABLISHED FACTS AND
INDEED, WENT AGAINST THE EVIDENCE AND DECISION OF THIS HONORABLE COURT, THAT
PETITIONER BANK IS LIABLE ON THE LETTER OF CREDIT DESPITE PRIVATE RESPONDENTS
NON-COMPLIANCE WITH THE TERMS THEREOF,
Second Reason
THE RESPONDENT COURT COMMITTED AN ERROR OF LAW WHEN IT HELD THAT PETITIONER
BANK, BY NOTIFYING PRIVATE RESPONDENT OF THE LETTER OF CREDIT, CONFIRMED SUCH
CREDIT AND MADE THE SAME ALSO ITS OBLIGATION AS GUARANTOR OF THE ISSUING
BANK.
Third Reason
THE RESPONDENT COURT LIKEWISE COMMITTED AN ERROR OF LAW WHEN IT AFFIRMED
THE TRIAL COURT'S DECISION. (Rollo, p. 12)
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 petition is impressed with merit.
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.
The case of Anglo-South America Trust Co. v. Uhe et al. (184 N.E. 741 [1933]) expounded clearly on 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. (p. 743)
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.
Moreover, the incorporation of the Uniform Customs and Practice for Documentary Credit (U.C.P. for short) in the letter of
credit resulted in the applicability of the said rules in the governance of the relations between the parties.
And even if the U.C.P. was not incorporated in the letter of credit, we have already ruled in the affirmative as to the
applicability of the U.C.P. in cases before us.
In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the observance of the U.C.P. in this jurisdiction is
justified by Article 2 of the Code of Commerce. Article 2 of the Code of Commerce enunciates 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.
There being no specific provision which governs the legal complexities arising from transactions involving letters of credit
not only between the banks themselves but also between banks and seller and/or buyer, the applicability of the U.C.P. is

undeniable.
The pertinent provisions of the U.C.P. (1962 Revision) are:
Article 3.
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. . . .
Article 7.
Banks must examine all documents with reasonable care to ascertain that they appear on their face to be in
accordance with the terms and conditions of the credit,"
Article 8.
Payment, acceptance or negotiation against documents which appear on their face to be in accordance with
the terms and conditions of a credit by a bank authorized to do so, binds the party giving the authorization to
take up documents and reimburse the bank which has effected the payment, acceptance or negotiation.
(Emphasis Supplied)
Under the foregoing provisions of the U.C.P., 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
the petitioner, 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.

FIRST DIVISION
[G.R. No. 116863. February 12, 1998]
KENG HUA PAPER PRODUCTS CO. INC., petitioner, vs. COURT OF APPEALS; REGIONAL TRIAL COURT OF
MANILA, BR. 21; and SEA-LAND SERVICE, INC., respondents.
DECISION
PANGANIBAN, J.:
What is the nature of a bill of lading? When does a bill of lading become binding on a consignee? Will an alleged
overshipment justify the consignees refusal to receive the goods described in the bill of lading? When may interest be
computed on unpaid demurrage charges?
Statement of the Case
These are the main questions raised in this petition assailing the Decision i[1] of the Court of Appealsii[2] promulgated on
May 20, 1994 in C.A.-G.R. CV No. 29953 affirming in toto the decisioniii[3] dated September 28, 1990 in Civil Case No. 8533269 of the Regional Trial Court of Manila, Branch 21. The dispositive portion of the said RTC decision reads:
WHEREFORE, the Court finds by preponderance of evidence that Plaintiff has proved its cause of action and
right to relief. Accordingly, judgment is hereby rendered in favor of the Plaintiff and against Defendant, ordering
the Defendant to pay plaintiff:
1.The sum of P67,340.00 as demurrage charges, with interest at the legal rate from the date of the extrajudicial demand
until fully paid;
2.

A sum equivalent to ten (10%) percent of the total amount due as Attorneys fees and litigation expenses.

Send copy to respective counsel of the parties.


SO ORDERED.iv[4]

The Facts
The factual antecedents of this case as found by the Court of Appeals are as follows:
Plaintiff (herein private respondent), a shipping company, is a foreign corporation licensed to do business in the
Philippines. On June 29, 1982, plaintiff received at its Hong Kong terminal a sealed container, Container No.
SEAU 67523, containing seventy-six bales of unsorted waste paper for shipment to defendant (herein petitioner),
Keng Hua Paper Products, Co. in Manila. A bill of lading (Exh. A) to cover the shipment was issued by the
plaintiff.
On July 9, 1982, the shipment was discharged at the Manila International Container Port. Notices of arrival were
transmitted to the defendant but the latter failed to discharge the shipment from the container during the free time
period or grace period. The said shipment remained inside the plaintiffs container from the moment the free time
period expired on July 29, 1982 until the time when the shipment was unloaded from the container on November
22, 1983, or a total of four hundred eighty-one (481) days. During the 481-day period, demurrage charges
accrued. Within the same period, letters demanding payment were sent by the plaintiff to the defendant who,
however, refused to settle its obligation which eventually amounted to P67,340.00. Numerous demands were
made on the defendant but the obligation remained unpaid. Plaintiff thereafter commenced this civil action for
collection and damages.
In its answer, defendant, by way of special and affirmative defense, alleged that it purchased fifty (50) tons of
waste paper from the shipper in Hong Kong, Ho Kee Waste Paper, as manifested in Letter of Credit No. 824858
(Exh. 7. p. 110. Original Record) issued by Equitable Banking Corporation, with partial shipment permitted; that
under the letter of credit, the remaining balance of the shipment was only ten (10) metric tons as shown in Invoice
No. H-15/82 (Exh. 8, p. 111, Original Record); that the shipment plaintiff was asking defendant to accept was
twenty (20) metric tons which is ten (10) metric tons more than the remaining balance; that if defendant were to
accept the shipment, it would be violating Central Bank rules and regulations and custom and tariff laws; that
plaintiff had no cause of action against the defendant because the latter did not hire the former to carry the
merchandise; that the cause of action should be against the shipper which contracted the plaintiffs services and
not against defendant; and that the defendant duly notified the plaintiff about the wrong shipment through a letter
dated January 24, 1983 (Exh. D for plaintiff, Exh. 4 for defendant, p. 5. Folder of Exhibits).
As previously mentioned, the RTC found petitioner liable for demurrage, attorneys fees and expenses of litigation. The
petitioner appealed to the Court of Appeals, arguing that the lower court erred in (1) awarding the sum of P67,340 in favor

of the private respondent, (2) rejecting petitioners contention that there was overshipment, (3) ruling that petitioners
recourse was against the shipper, and (4) computing legal interest from date of extrajudicial demand. v[5]
Respondent Court of Appeals denied the appeal and affirmed the lower courts decision in toto. In a subsequent
resolution,vi[6] it also denied the petitioners motion for reconsideration.
Hence, this petition for review.vii[7]
The Issues
In its memorandum, petitioner submits the following issues:
I.Whether or not petitioner had accepted the bill of lading;
II.

Whether or not the award of the sum of P67,340.00 to private respondent was proper;

III.

Whether or not petitioner was correct in not accepting the overshipment;

IV.

Whether or not the award of legal interest from the date of private respondents extrajudicial demand was proper; viii

[8]

In the main, the case revolves around the question of whether petitioner was bound by the bill of lading. We shall, thus,
discuss the above four issues as they intertwine with this main question.
The Courts Ruling
The petition is partly meritorious. We affirm petitioners liability for demurrage, but modify the interest rate thereon.
Main Issue: Liability Under the Bill of Lading
A bill of lading serves two functions. First, it is a receipt for the goods shipped. Second, it is a contract by which three
parties, namely, the shipper, the carrier, and the consignee undertake specific responsibilities and assume stipulated
obligations.ix[9] A bill of lading delivered and accepted constitutes the contract of carriage even though not signed, x[10]
because the (a)cceptance of a paper containing the terms of a proposed contract generally constitutes an acceptance of

the contract and of all of its terms and conditions of which the acceptor has actual or constructive notice. xi[11] In a nutshell,
the acceptance of a bill of lading by the shipper and the consignee, with full knowledge of its contents, gives rise to the
presumption that the same was a perfected and binding contract. xii[12]
In the case at bar, both lower courts held that the bill of lading was a valid and perfected contract between the shipper (Ho
Kee), the consignee (Petitioner Keng Hua), and the carrier (Private Respondent Sea-Land). Section 17 of the bill of lading
provided that the shipper and the consignee were liable for the payment of demurrage charges for the failure to discharge
the containerized shipment beyond the grace period allowed by tariff rules. Applying said stipulation, both lower courts
found petitioner liable. The aforementioned section of the bill of lading reads:
17. COOPERAGE FINES. The shipper and consignee shall be liable for, indemnify the carrier and ship and hold
them harmless against, and the carrier shall have a lien on the goods for, all expenses and charges for mending
cooperage, baling, repairing or reconditioning the goods, or the van, trailers or containers, and all expenses
incurred in protecting, caring for or otherwise made for the benefit of the goods, whether the goods be damaged
or not, and for any payment, expense, penalty fine, dues, duty, tax or impost, loss, damage, detention,
demurrage, or liability of whatsoever nature, sustained or incurred by or levied upon the carrier or the ship in
connection with the goods or by reason of the goods being or having been on board, or because of shippers
failure to procure consular or other proper permits, certificates or any papers that may be required at any port or
place or shippers failure to supply information or otherwise to comply with all laws, regulations and requirements
of law in connection with the goods of from any other act or omission of the shipper or consignee: (Underscoring
supplied.)
Petitioner contends, however, that it should not be bound by the bill of lading because it never gave its consent thereto.
Although petitioner admits physical acceptance of the bill of lading, it argues that its subsequent actions belie the finding
that it accepted the terms and conditions printed therein. xiii[13] Petitioner cites as support the Notice of Refused or On Hand
Freight it received on November 2, 1982 from private respondent, which acknowledged that petitioner declined to accept
the shipment. Petitioner adds that it sent a copy of the said notice to the shipper on December 29, 1982. Petitioner points
to its January 24, 1983 letter to the private respondent, stressing that its acceptance of the bill of lading would be
tantamount to an act of smuggling as the amount it had imported (with full documentary support) was only (at that time)
for 10,000 kilograms and not for 20,313 kilograms as stated in the bill of lading and could lay them vulnerable to legal
sanctions for violation of customs and tariff as well as Central Bank laws. xiv[14] Petitioner further argues that the demurrage
was a consequence of the shippers mistake of shipping more than what was bought. The discrepancy in the amount of

waste paper it actually purchased, as reflected in the invoice vis--vis the excess amount in the bill of lading, allegedly
justifies its refusal to accept the shipment. xv[15]
Petitioner Bound by the Bill of Lading
We are not persuaded. Petitioner admits that it received the bill of lading immediately after the arrival of the shipment xvi[16]
on July 8, 1982.xvii[17] Having been afforded an opportunity to examine the said document, petitioner did not immediately
object to or dissent from any term or stipulation therein. It was only six months later, on January 24, 1983, that petitioner
sent a letter to private respondent saying that it could not accept the shipment. Petitioners inaction for such a long period
conveys the clear inference that it accepted the terms and conditions of the bill of lading. Moreover, said letter spoke only
of petitioners inability to use the delivery permit, i.e. to pick up the cargo, due to the shippers failure to comply with the
terms and conditions of the letter of credit, for which reason the bill of lading and other shipping documents were returned
by the banks to the shipper.xviii[18] The letter merely proved petitioners refusal to pick up the cargo, not its rejection of the
bill of lading.
Petitioners reliance on the Notice of Refused or On Hand Freight, as proof of its nonacceptance of the bill of lading, is of
no consequence. Said notice was not written by petitioner; it was sent by private respondent to petitioner in November
1982, or four months after petitioner received the bill of lading. If the notice has any legal significance at all, it is to
highlight petitioners prolonged failure to object to the bill of lading. Contrary to petitioners contention, the notice and the
letter support not belie the findings of the two lower courts that the bill of lading was impliedly accepted by petitioner.
As aptly stated by Respondent Court of Appeals:
In the instant case, (herein petitioner) cannot and did not allege non-receipt of its copy of the bill of lading from
the shipper. Hence, the terms and conditions as well as the various entries contained therein were brought to its
knowledge. (Herein petitioner) accepted the bill of lading without interposing any objection as to its contents. This
raises the presumption that (herein petitioner) agreed to the entries and stipulations imposed therein.
Moreover, it is puzzling that (herein petitioner) allowed months to pass, six (6) months to be exact, before
notifying (herein private respondent) of the wrong shipment. It was only on January 24, 1983 that (herein
petitioner) sent (herein private respondent) such a letter of notification (Exh D for plaintiff, Exh. 4 for defendant; p.
5, Folder of Exhibits). Thus, for the duration of those six months (herein private respondent never knew the
reason for (herein petitioners) refusal to discharge the shipment.

After accepting the bill of lading, receiving notices of arrival of the shipment, failing to object thereto, (herein
petitioner) cannot now deny that it is bound by the terms in the bill of lading. If it did not intend to be bound,
(herein petitioner) would not have waited for six months to lapse before finally bringing the matter to (herein
private respondents attention. The most logical reaction in such a case would be to immediately verify the matter
with the other parties involved. In this case, however, (herein petitioner) unreasonably detained (herein private
respondents) vessel to the latters prejudice.xix[19]
Petitioners attempt to evade its obligation to receive the shipment on the pretext that this may cause it to violate customs,
tariff and central bank laws must likewise fail. Mere apprehension of violating said laws, without a clear demonstration that
taking delivery of the shipment has become legally impossible, xx[20] cannot defeat the petitioners contractual obligation and
liability under the bill of lading.
In any event, the issue of whether petitioner accepted the bill of lading was raised for the first time only in petitioners
memorandum before this Court. Clearly, we cannot now entertain an issue raised for the very first time on appeal, in
deference to the well-settled doctrine that (a)n issue raised for the first time on appeal and not raised timely in the
proceedings in the lower court is barred by estoppel. Questions raised on appeal must be within the issues framed by the
parties and, consequently, issues not raised in the trial court cannot be raised for the first time on appeal. xxi[21]
In the case at bar, the prolonged failure of petitioner to receive and discharge the cargo from the private respondents
vessel constitutes a violation of the terms of the bill of lading. It should thus be liable for demurrage to the former.
In The Apollon,xxii[22] Justice Story made the following relevant comment on the nature of demurrage:
In truth, demurrage is merely an allowance or compensation for the delay or detention of a vessel. It is often a
matter of contract, but not necessarily so. The very circumstance that in ordinary commercial voyages, a
particular sum is deemed by the parties a fair compensation for delays, is the very reason why it is, and ought to
be, adopted as a measure of compensation, in cases ex delicto. What fairer rule can be adopted than that which
founds itself upon mercantile usage as to indemnity, and fixes a recompense upon the deliberate consideration of
all the circumstances attending the usual earnings and expenditures in common voyages? It appears to us that
an allowance, by way of demurrage, is the true measure of damages in all cases of mere detention, for that
allowance has reference to the ships expenses, wear and tear, and common employment. xxiii[23]
Amount of Demurrage Charges

Petitioner argues that it is not obligated to pay any demurrage charges because, prior to the filing of the complaint, private
respondent made no demand for the sum of P67,340. Moreover, private respondents loss and prevention manager, Loi
Gillera, demanded P50,260, but its counsel, Sofronio Larcia, subsequently asked for a different amount of P37,800.
Petitioners position is puerile. The amount of demurrage charges in the sum of P67,340 is a factual conclusion of the trial
court that was affirmed by the Court of Appeals and, thus, binding on this Court. xxiv[24] Besides such factual finding is
supported by the extant evidence. xxv[25] The apparent discrepancy was a result of the variance of the dates when the two
demands were made. Necessarily, the longer the cargo remained unclaimed, the higher the demurrage. Thus, while in his
letter dated April 24, 1983,xxvi[26] private respondents counsel demanded payment of only P37,800, the additional
demurrage incurred by petitioner due to its continued refusal to receive delivery of the cargo ballooned to P67,340 by
November 22, 1983. The testimony of Counsel Sofronio Larcia as regards said letter of April 24, 1983 elucidates, viz:
QNow, after you sent this letter, do you know what happened?
A
Defendant continued to refuse to take delivery of the shipment and the shipment stayed at the port for a longer
period.
Q

So, what happened to the shipment?

A
The shipment incurred additional demurrage charges which amounted to P67,340.00 as of November 22, 1983 or
more than a year after - almost a year after the shipment arrived at the port.
Q

So, what did you do?

We requested our collection agency to pursue the collection of this amount. xxvii[27]

Bill of Lading Separate from


Other Letter of Credit Arrangements
In a letter of credit, there are three distinct and independent contracts: (1) the contract of sale between the buyer and the
seller, (2) the contract of the buyer with the issuing bank, and (3) the letter of credit proper in which the bank promises to
pay the seller pursuant to the terms and conditions stated therein. Few things are more clearly settled in law than that the
three contracts which make up the letter of credit arrangement are to be maintained in a state of perpetual separation. xxviii

A transaction involving the purchase of goods may also require, apart from a letter of credit, a contract of transportation
specially when the seller and the buyer are not in the same locale or country, and the goods purchased have to be
transported to the latter.
[28]

Hence, the contract of carriage, as stipulated in the bill of lading in the present case, must be treated independently of the
contract of sale between the seller and the buyer, and the contract for the issuance of a letter of credit between the buyer
and the issuing bank. Any discrepancy between the amount of the goods described in the commercial invoice in the
contract of sale and the amount allowed in the letter of credit will not affect the validity and enforceability of the contract of
carriage as embodied in the bill of lading. As the bank cannot be expected to look beyond the documents presented to it
by the seller pursuant to the letter of credit,xxix[29] neither can the carrier be expected to go beyond the representations of
the shipper in the bill of lading and to verify their accuracy vis--vis the commercial invoice and the letter of credit. Thus, the
discrepancy between the amount of goods indicated in the invoice and the amount in the bill of lading cannot negate
petitioners obligation to private respondent arising from the contract of transportation. Furthermore, private respondent, as
carrier, had no knowledge of the contents of the container. The contract of carriage was under the arrangement known as
Shippers Load And Count, and the shipper was solely responsible for the loading of the container while the carrier was
oblivious to the contents of the shipment. Petitioners remedy in case of overshipment lies against the seller/shipper, not
against the carrier.
Payment of Interest
Petitioner posits that it first knew of the demurrage claim of P67,340 only when it received, by summons, private
respondents complaint. Hence, interest may not be allowed to run from the date of private respondents extrajudicial
demands on March 8, 1983 for P50,260 or on April 24, 1983 for P37,800, considering that, in both cases, there was no
demand for interest.xxx[30] We agree.
Jurisprudence teaches us:
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of
damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall
be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is

made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual
base for the computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. xxxi[31]
The case before us involves an obligation not arising from a loan or forbearance of money; thus, pursuant to Article 2209
of the Civil Code, the applicable interest rate is six percent per annum. Since the bill of lading did not specify the amount
of demurrage, and the sum claimed by private respondent increased as the days went by, the total amount demanded
cannot be deemed to have been established with reasonable certainty until the trial court rendered its judgment. Indeed,
(u)nliquidated damages or claims, it is said, are those which are not or cannot be known until definitely ascertained,
assessed and determined by the courts after presentation of proof. xxxii[32] Consequently, the legal interest rate is six
percent, to be computed from September 28, 1990, the date of the trial courts decision. And in accordance with Philippine
Natonal Bankxxxiii[33] and Eastern Shipping,xxxiv[34] the rate of twelve percent per annum shall be charged on the total then
outstanding, from the time the judgment becomes final and executory until its satisfaction.
Finally, the Court notes that the matter of attorneys fees was taken up only in the dispositive portion of the trial courts
decision. This falls short of the settled requirement that the text of the decision should state the reason for the award of
attorneys fees, for without such justification, its award would be a conclusion without a premise, its basis being improperly
left to speculation and conjecture.xxxv[35]
WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION that the legal interest of six percent
per annum shall be computed from September 28, 1990 until its full payment before finality of judgment. The rate of
interest shall be adjusted to twelve percent per annum, computed from the time said judgment became final and
executory until full satisfaction. The award of attorneys fees is DELETED.
SO ORDERED.
Davide, Jr., (Chairman), Bellosillo, Vitug, and Quisumbing, JJ., concur.

i[1] Rollo, pp. 20-32.


ii[2] Tenth Division, composed of J. Fermin A. Martin, Jr., ponente; and JJ. Emeterio C. Cui (chairman) and
Eugenio S. Labitoria, concurring.

iii[3] Rollo, pp. 15-18. The RTC decision was penned by Judge Lourdes K. Tayao-Jaguros, who was later
appointed to the Court of Appeals, from where she has now retired.

iv[4] Ibid., pp. 17-18.


v[5] Petitioners brief before the Court of Appeals, pp. 5-8; record of the Court of Appeals, pp. 21-24.
vi[6] Rollo, p. 35.
vii[7] The case was deemed submitted for resolution on June 3, 1996 upon this Courts receipt of petitioners
memorandum.

viii[8] Petitioners memorandum, p. 4; Rollo, p. 87.


ix[9] Magellan Mftg. Marketing Corp. vs. Court of Appeals, 201 SCRA 102, 110, August 22, 1991, per Regalado,
J.

x[10] 13 C.J.S. 239. See also Pan American World Airways, Inc. vs. IAC, 164 SCRA 268, 275, August 11, 1988;
citing Ong Yiu vs. Court of Appeals, 91 SCRA 223, 231, June 29, 1979.

xi[11] 17 C.J.S. 672.


xii[12] Saludo, Jr. vs. Court of Appeals, 207 SCRA 498, 527-528, March 23, 1992.
xiii[13] Ibid., p. 5, Rollo, p. 88.
xiv[14] Ibid., pp. 5-6; Rollo, pp. 88-89.
xv[15] Petitioners memorandum, pp. 9-10; Rollo, pp. 92-93.
xvi[16] See petitioners motion for reconsideration before the Court of Appeals, p. 2; record of the Court of
Appeals, p. 81.

xvii[17] See Exhibit B, Folder of Exhibits, p. 2.

xviii[18] See Exhibit D, Folder of Exhibits, p. 5.


xix[19] Decision of the Court of Appeals, pp. 4-5; Rollo, pp. 23-24.
xx[20] Art. 1266 of the Civil Code provides:Art. 1266. The debtor in obligations to do shall also be
released when the prestation becomes legally or physically impossible without the fault of the obligor.

xxi[21] Sanchez vs. Court of Appeals, G.R. No. 108947, p. 28, September 29, 1997, per Panganiban, J.; quoting
Caltex (Philippines), Inc. vs. Court of Appeals, 212 SCRA 448, 461, August 10, 1992, per Regalado, J.

xxii[22] 22 U.S. (9 Wheat.) 362; 6 L. Ed. 111 (1824).


xxiii[23] 22 U.S. at 378.
xxiv[24] Fuentes vs. Court of Appeals, G.R. No. 109849, p. 9, February 26, 1997, per Panganiban, J.
xxv[25] See computation of CBCS Guaranteed Fast Collection Services, Exh. F-1, Folder of Exhibits, p. 8.
xxvi[26] Exh. E, Folder of Exhibits, p. 6.
xxvii[27] TSN, pp. 5-6, August 31, 1988.
xxviii[28] Gilmore, Grant and Black, Charles, The Law of Admiralty, p. 120, 2nd ed. (1975).
xxix[29] See Irrevocable Letter of Credit No. 82-1858, rollo, p. 11.
xxx[30] Petitioners memorandum, p. 10; rollo, p. 93.
xxxi[31] Eastern Shipping Lines, Inc. vs. Court of Appeals, 234 SCRA 88, July 12, 1994, per Vitug, J. See also
Philippine National Bank vs. Court of Appeals, 263 SCRA 766, 770, October 30, 1996.

xxxii[32] Central Azucera de Bais vs. Court of Appeals, 188 SCRA 328, 339, August 3, 1990, per Regalado, J.
xxxiii[33] 263 SCRA at 772.
xxxiv[34] 234 SCRA at 97.

xxxv[35] Francel Realty Corporation vs. Court of Appeals, 252 SCRA 127, 134, January 22, 1996, per Mendoza,
J.; citing Buan vs. Camaganacan, 16 SCRA 321, February 28, 1966.