1
BANK OF AMERICA v CA
FACTS
1. Petitioner received by registered mail an Irrevocable Letter
of Credit issued by Bank Ayudhya, Smyaek Branch for the
account of General Chemicals, Ltd., of Thailand amounting
to 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
2. Bank of America wrote Inter-Resin informing the latter of the
foregoing and transmitting, along with the bank's
communication,
the letter of credit.
3. 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.
4. Bank employee explained that there was n need for
confirmation because it would not have been transmitted if
it were not genuine.
5. 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.
6. Bank of America issued in favor of Inter-Resin a Cashier's
Check for P10,219,093.20
7. The check was picked up by Inter-Resin's Executive Vice-
President Barcelina Tio.
8. 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.
9. 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.
10. 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.
11. Pres and VP of Inter-Resin were charged for estafa through
falsification of commercial documents
12. Bank of America sued Inter-Resin for the recovery of
P10,219,093.20, the peso equivalent of the draft
13. TC ruled in favor of Inter-Resin saying that BA made
assurances that enticed Inter-Resin to send the merchandise
to Thailand and the telex declaring the letter of credit
fraudulent was unverified and self serving
14. CA affirmed
ISSUE: WON BA warranted the genuineness and authenticity of
letter of credit?
HELD:
RATIO:
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.
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
BA MAY RECOVER
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.
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.
BA as ADVISING BANK
- That Bank of America has asked Inter-Resin to submit
documents required by the letter of credit and eventually
has paid the proceeds thereof, did not obviously make it a
confirming bank. 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.
2
- 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."
- 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.
- As advising bank, Bank of America is bound only to check
the "apparent authenticity" of the letter of credit, which it
did.
- This kind of transaction is what is commonly referred to as a
discounting arrangement. This time, Bank of America has
acted independently as a negotiating bank, thus saving
Inter-Resin from the hardship of presenting the documents
directly to Bank of Ayudhya to recover payment.
- As a negotiating bank, Bank of America has a right 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
- 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.

FEATI BANK v CA and VILLALUZ
FACTS
1. Villaluz agreed to sell to the then defendant Axel
Christiansen 2,000 cubic meters of lauan logs at $27.00 per
cubic meter FOB.
2. After inspecting the logs, Christiansen issued purchase order
3. Security Pacific National Bank of Los Angeles, California
issued Irrevocable Letter of Credit in favor of Villaluz for the
sum of $54,000.00, the total purchase price of the lauan
logs.
4. 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."
5. he letter of credit further provided that the draft to be drawn
is on Security Pacific National Bank and accompanied by:
Signed Commercial Invoice and tally sheets; 2/3 Original
Clean on Board Ocean Bills of Lading and certification from
Han-Axel Christiansen, Ship and Merchandise Broker, stating
that logs have been approved prior to shipment
6. 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; all of whom
certified to the good condition and exportability of the logs.
7. Christiansen refused to issue the certification as required in
paragraph 4 of the letter of credit, despite several requests
made by the private respondent.
8. 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.
9. 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.
10. CB when the matter was brough before it ruled that
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.
11. Meanwhile, the logs arrived at Inchon, Korea and were
received by the consignee, Hanmi Trade Development
3
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
12. Villaluz instituted an action for mandamus and specific
performance against Christiansen and the Feati Bank and
Trust Company
13. 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.
14. TC ruled that CHRISTIANSEN acted in bad faith and deceit
and with intent to defraud and 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; 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.
15. CA affirmed: 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.
ISSUE: whether or not a correspondent bank is to be held liable
under the letter of credit despite non-compliance by the beneficiary
with the terms thereof?
HELD: No.
RATIO:
 4

The trial court appears to have overlooked the fact that an primary one as if the correspondent bank itself had issued
irrevocable credit is not synonymous with a confirmed the letter of credit.
credit. These types of letters have different meanings and In this case, the letter merely provided that the petitioner
the legal relations arising from there varies. A credit may be "forward the enclosed original credit to the beneficiary."
an irrevocable credit and at the same time a confirmed (Records, Vol. I, p. 11) Considering the aforesaid instruction
credit or vice-versa. to the petitioner by the issuing bank, the Security Pacific
An irrevocable credit refers to the duration of the letter of National Bank, it is indubitable that the petitioner is only a
credit. What is simply means is that the issuing bank may notifying bank and not a confirming bank as ruled by the
not without the consent of the beneficiary (seller) and the courts below.
applicant (buyer) revoke his undertaking under the letter. Since the petitioner was only a notifying bank, its
The issuing bank does not reserve the right to revoke the responsibility was solely to notify and/or transmit the
credit. On the other hand, a confirmed letter of credit documentary of credit to the private respondent and its
pertains to the kind of obligation assumed by the obligation ends there.
correspondent bank. In this case, the correspondent bank
gives an absolute assurance to the beneficiary that it will The records are, however, bereft of any evidence which will
undertake the issuing bank's obligation as its own according disclose that the petitioner has confirmed the letter of
to the terms and conditions of the credit. credit. The only evidence in this case, and upon which the
Hence, the mere fact that a letter of credit is irrevocable private respondent premised his argument, is the
does not necessarily imply that the correspondent bank in P75,000.00 loan extended by the petitioner to him.
accepting the instructions of the issuing bank has also
confirmed the letter of credit. Another error which the lower It is a fundamental rule that an irrevocable credit is
court and the Court of Appeals made was to confuse the independent not only of the contract between the buyer and
obligation assumed by the petitioner. the seller but also of the credit agreement between the
In commercial transactions involving letters of credit, the issuing bank and the buyer.
functions assumed by a correspondent bank are classified
according to the obligations taken up by it. The
correspondent bank may be called a notifying bank, a
negotiating bank, or a confirming bank.
In case of a notifying bank, the correspondent bank assumes
no liability except to notify and/or transmit to the
beneficiary the existence of the letter of credit.
A negotiating bank, on the other hand, is a correspondent
bank which buys or discounts a draft under the letter of
credit. Its liability is dependent upon the stage of the
negotiation. If before negotiation, it has no liability with
respect to the seller but after negotiation, a contractual
relationship will then prevail between the negotiating bank
and the seller.
In the case of a confirming bank, the correspondent bank
assumes a direct obligation to the seller and its liability is a

KENG HUA PAPER PRODUCTS v CA, RTC and SEA-LAND SERVICE
FACTS
1. Sea-land is a shipping company. It received in its HK
terminal a sealed container, 70 bales of unsorted waste
paper for shipment to petitioner in Manila
2. Shipment was discharged at Manila Intl Container Port.
Notices of arrival were transmitted to pet, but the latter
failed to discharge the shipment; it remained inside the
container from the time period expired until shipment was
unloaded from container or 481 days
3. Demurrage charges accrued; letters demanding payment
were sent by Sealand, but the petitioner failed to settle its
obligation amounting to 67k
4. Civil action was filed, but petitioner argues that it purchased
50 tons of waste paper as manifested in Letter of Credit
issued by Equitable bank; that under that, the balance was
only 10 metric tons and that the shipment now was 20
metric tons, which is 10 metric tons more than the balance,
and if pet would accept the shipment, it would be violating
the CB ruled and regulations and customs law
5. RTC found pet liable; CA affirmed
ISSUE: WON the petitioner was bound by the bill of lading?
HELD: Yes
RATIO:
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
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.
5
We are not persuaded. Petitioner admits that it received the
bill of lading immediately after the arrival of the
shipment[16] on July 8, 1982.[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.[18] The letter merely proved petitioners refusal to
pick up the cargo, not its rejection of the bill of lading.
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.[28] 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.
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
 6

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,[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.

INSULAR BANK v IAC
FACTS
FACTS:
1. Sometime in 1976 and 1977 spouses Ben S. Mendoza and
Juanita M. Mendoza obtained 2 loans from Philippine
American Life Insurance Co. (Philam Life) with a total
amount of P600,000.00 to finance the construction of
their residential house at Mandaue City. The said loans, with
a 14% nominal interest rate, were to be liquidated in equal
amortizations over a period of 5 years.
2. To secure payment, Philam Life required that amortizations
be guaranteed by an irrevocable standby letter of credit (LC)
of a commercial bank. Thus, the Spouses Mendoza
contracted with Insular Bank of Asia and America (IBAA)
for the issuance of 2 irrevocable standby LCs in favor of
Philam Life for the total amount of P600,000.00.
3. These 2 irrevocable standby LCs were, in turn, secured by
a real estate mortgage for the same amount on the property
of Spouses Mendoza in favor of IBAA.
4. The Spouses Mendoza failed to pay Philam Life the
amortization that fell due on 1 June 1978 so that Philam Life
informed IBAA that it was declaring both loans as entirely
due and demandable and demanded payment.
5. However, because IBAA contested the propriety of calling in
the entire loan, Philam Life desisted and resumed availing of
the LCs by drawing on them for 5 more amortizations.
6. The Spouses Mendoza defaulted again on their amortization,
so Philam Life again informed IBAA that it was declaring the
entire balance outstanding on both loans, including
liquidated damages, immediately due and payable. Philam
Life then demanded payment from IBAA but the latter took
the position that, as a mere guarantor of the Spouses
Mendoza, who are the principal debtors, its remaining
outstanding obligation under the 2 standby LCs was only
P30,100.60. Later, IBAA corrected the latter and demanded
refund because the partial payments by the Spouses
Mendoza have the effect of reducing its liability as guarantor
or surety under the terms of the standby LCs in question.
7. The Real Estate Mortgage, which secured the 2 standby LCs,
was extra-judicially foreclosed by, and sold at public auction
to petitioner IBAA as the lone and highest bidder.
7
8. TC: IBAA, "as surety," was discharged of its liability to the
extent of the payment made by the Spouses Mendoza, as
the principal debtors, to the creditor, Philam Life.
9. CA: reversed and ruled instead that IBAA's liability was not
reduced by virtue of the payments made by the Spouses
Mendoza.
ISSUE: WON the partial payments made by the principal obligors
have the corresponding effect of reducing the liability of the
guarantor or surety under the terms of the standby LCs in
question.-NO
RULING:
1. In construing the terms of a Letter of Credit, as in other
contracts, it is the intention of the parties that must govern.
2. Letters of credit and contracts for the issuance of
such letters are subject to the same rules of construction as
are ordinary commercial contracts. They are to receive a
reasonable and not a technical construction and although
usage and custom cannot control express terms in letters of
credit, they are to be construed with reference to all the
surrounding facts and circumstances, to the particular and
often varying terms in which they may be expressed, the
circumstances and intention of the parties to them, and the
usages of the particular trade of business contemplated.
3. The subject standby LCs secure the payment of any
obligation of the Spouses Mendoza to Philam Life including
all interests, surcharges and expenses thereon, but not to
exceed P600,000.00. But while they are a security
arrangement, they are not converted thereby into contracts
of guaranty.
a. The standby LCs are, in effect, an absolute
undertaking to pay the money advanced or the
amount for which credit is given on the faith of
the instrument.
b. They are primary obligations and not accessory
contracts. Being separate and independent
agreements, the payments made by the
Spouses Mendoza cannot be added in
 8

computing IBAA's liability under its own

standby letters of credit.
4. Payments made by the Spouses Mendoza directly to Philam
Life are in compliance with their own prestation under the
loan agreement.
5. As to the liability of the Spouses Mendoza to the IBAA, it
bears recalling that the Spouses
Mendoza, upon their application for the opening and
issuance of the Irrevocable Standby LCs in favor of Philam
Life, had executed a Real Estate Mortgage as security to
IBAA for any payment that the latter may remit to Philam
Life on the strength of said LCs; that IBAA had recovered
from the Spouses Mendoza the amount of P432,386.07
when it foreclosed on the mortgaged property in the
concept of principal (unpaid advances under the
2 standby LCs plus interest and charges); and recovered
P255,364.95 representing its clean loans to the Spouses
Mendoza plus accrued interest besides the fact that it now
has the foreclosed property.
6. As between IBAA and the Spouses Mendoza, therefore, there
has been full liquidation. The remaining obligation of
P222,000.00 on the loan of the Spouses Mendoza, therefore,
is now IBAA's sole responsibility to pay to Philam Life by
virtue of its absolute and irrevocable undertaking under the
standby LCs. Specially so, since the promissory notes
executed by the Spouses Mendoza in favor of IBAA
authorized the sale of the mortgaged security "for the
purpose of applying their proceeds to payments" of their
obligations to IBAA.

TRANSFIELD PHILIPPINES, INC., vs. LUZON HYDRO CORPORATION,
AUSTRALIA and NEW ZEALAND BANKING GROUP LIMITED and
SECURITY BANK CORPORATION
1. Petitioner Transfield and respondent Luzon Hydro
Corporation (LHC) entered into a Turnkey Contract whereby
Transfield, as Turnkey Contractor, undertook to construct, on
a turnkey 70-Megawatt hydro-electric power station at the
Bakun River in the provinces of Benguet and Ilocos Sur (the
Project).
2. The Turnkey Contract provides that: (1) the target
completion date of the Project shall be on June 1 2000, or
such later date as may be agreed upon between petitioner
Transfield and respondent LHC or otherwise determined in
accordance with the Turnkey Contract; and (2) Transfieled 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.
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.
3. In order to guarantee performance by Transfield, 2 stand-
by letters of credit (the securities) were required to be
opened: Standby Letter of Credit the local branch of
respondent Australia and New Zealand Banking Group
Limited (ANZ Bank and Standby Letter of Credit with
respondent Security Bank Corporation (SBC) each in the
amount of US$8,988,907.00.
4. During the construction of the project, Transfield sought
various EOT to complete the Project 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. This gave rise to a series of legal actions between
the parties which culminated in the instant petition.
5. The first of the actions was a Request for Arbitration which
LHC filed before the Construction Industry Arbitration
Commission (CIAC). This was followed by another Request
for Arbitration, this time filed by Transfield before the
International Chamber of Commerce (ICC). In both
arbitration proceedings, the common issues presented were:
9
[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.
6. Meanwhile, foreseeing that LHC would call on the Securities
pursuant to the Turnkey Contract, Transfield advised
respondent banks of the arbitration proceedings already
pending, asserting that LHC had no right to call on the
Securities until the resolution of disputes before the arbitral
tribunals
7. LHC sent notice to Transfield that pursuant to Clause 8.2 of
the Turnkey Contract, it failed to comply with its obligation
to complete the Project. Despite the letters of Transfield,
however, both banks informed Transfield that they would
pay on the Securities if and when LHC calls on them
8. 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 until actual completion
of the Project pursuant to Clause 8.7.1 of the Turnkey
Contract. And that it would call on the securities for the
payment of liquidated damages for the delay.
9. 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.
10. RTC ruled that Transfield 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.
11. CA expressed conformity with the trial court's 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.
ISSUE: Whether LHC can collect from letters of credit despite the
pending arbitration case(yes)
 10

HELD: enjoined if in the light of the purpose of the credit the

payment of the credit would constitute fraudulent abuse of
Petitioner's argument that any dispute must first be resolved the credit.
by the parties, whether through negotiations or arbitration,
before the beneficiary is entitled to call on the letter of NOTES:
credit in essence would convert the letter of credit into a
mere guarantee. Jurisprudence has laid down a clear A letter of credit is a financial device developed by
distinction between a letter of credit and a guarantee in that merchants as a convenient and relatively safe mode of
the settlement of a dispute between the parties is not a pre- dealing with sales of goods to satisfy the seemingly
requisite for the release of funds under a letter of credit. In irreconcilable interests of a seller, who refuses to take part
other words, the argument is incompatible with the very with his goods before he is paid, and a buyer, who wants to
nature of the letter of credit. If a letter of credit is drawable have control of the goods before paying. GenThe use of
only after settlement of the dispute on the contract entered credits in commercial transactions serves to reduce the risk
into by the applicant and the beneficiary, there would be no of nonpayment of the purchase price under the contract for
practical and beneficial use for letters of credit in the sale of goods. However, credits are also used in non-sale
commercial transactions. settings where they serve to reduce the risk of
the engagement of the issuing bank is to pay the seller or nonperformance. Generally, credits in the non-sale settings
beneficiary of the credit once the draft and the required have come to be known as standby credits
documents are presented to it. The so-called "independence Owing to the nature and purpose of standby letters of credit,
principle" assures the seller or the beneficiary of prompt banks are left with little or no alternative but to honor the
payment independent of any breach of the main contract credit or the call for payment.
and precludes the issuing bank from determining whether A contract once perfected, binds the parties not only to
the main contract is actually accomplished or not. Under fulfillment of what has been expressly stipulated but also to
this principle, banks assume no liability or responsibility for all the consequences which according to their nature, may
the form, sufficiency, accuracy, genuineness, falsification or be in keeping with good faith, usage and law.
legal effect of any documents, or for the general and/or Most writers agree that fraud is an exception to the
particular conditions stipulated in the documents or
independence principle. And the remedy for fraudulent
superimposed thereon, nor do they assume any liability or
abuse is injunction.
responsibility for the description, quantity, weight, quality,
condition, packing, delivery, value or existence of the goods
represented by any documents, or for the good faith or acts
and/or omissions, solvency, performance or standing of the
consignor, the carriers, or the insurers of the goods, or any
other person whomsoever
The independent nature of the letter of credit may be: (a)
independence in toto where the credit is independent from
the justification aspect and is a separate obligation from the
underlying agreement like for instance a typical standby; or
(b) independence may be only as to the justification aspect
like in a commercial letter of credit or repayment standby,
which is identical with the same obligations under the
underlying agreement. In both cases the payment may be