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 defendant-appellant 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, defendant-appellant'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 application. As correctly ruled by the trial court in its Order of 6 March 1975: 9

. . . 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.

14
The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer; this
may be done in writing by the drawee in the bill itself, or in a separate instrument. 15

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.

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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 defendant-appellee 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.

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, "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." 1
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 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.

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.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 117913 February 1, 2002

CHARLES LEE, CHUA SIOK SUY, MARIANO SIO, ALFONSO YAP, RICHARD
VELASCO and ALFONSO CO, petitioners,
vs.
COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents.
x-----------------------x

G.R. NO. 117914

MICO METALS CORPORATION, petitioner,

vs.
COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents.

DECISION

DE LEON, JR., J:

Before us is the joint and consolidated petition for review of the Decision1 dated June 15, 1994
of the Court of Appeals in CA-G.R. CV No. 27480 entitled, "Philippine Bank of
Communications vs. Mico Metals Corporation, Charles Lee, Chua Siok Suy, Mariano Sio,
Alfonso Yap, Richard Velasco and Alfonso Co," which reversed the decision of the Regional
Trial Court (RTC) of Manila, Branch 55 dismissing the complaint for a sum of money filed by
private respondent Philippine Bank of Communications against herein petitioners, Mico Metals
Corporation (MICO, for brevity), Charles Lee, Chua Siok Suy,2 Mariano Sio, Alfonso Yap,
Richard Velasco and Alfonso Co.3 The dispositive portion of the said Decision of the Court of
Appeals, reads:

WHEREFORE, the decision of the Regional Trial Court is hereby reversed and in lieu thereof, a
new one is entered:

a) Ordering the defendants-appellees jointly and severally to pay plaintiff PBCom the
sum of Five million four hundred fifty-one thousand six hundred sixty-three pesos and
ninety centavos (P5,451,663.90) representing defendants-appellees unpaid obligations
arising from ordinary loans granted by the plaintiff plus legal interest until fully paid.

b) Ordering defendants-appellees jointly and severally to pay PBCom the sum of Four
hundred sixty-one thousand six hundred pesos and sixty-six centavos (P46 1,600.66)
representing defendants-appellees unpaid obligations arising from their letters of credit
and trust receipt transactions with plaintiff PBCom plus legal interest until fully paid.

c) Ordering defendants-appellees jointly and severally to pay PBCom the sum of

P50,000.00 as attorneys fees.

No pronouncement as to costs.

The facts of the case are as follows:

On March 2, 1979, Charles Lee, as President of MICO wrote private respondent Philippine Bank
of Communications (PBCom) requesting for a grant of a discounting loan/credit line in the sum
of Three Million Pesos (P3,000,000.00) for the purpose of carrying out MICOs line of business
as well as to maintain its volume of business.
On the same day, Charles Lee requested for another discounting loan/credit line of Three Million
Pesos (P3,000,000.00) from PBCom for the purpose of opening letters of credit and trust
receipts.

In connection with the requests for discounting loan/credit lines, PBCom was furnished by
MICO the following resolution which was adopted unanimously by MICOs Board of Directors:

RESOLVED, that the President, Mr. Charles Lee, and the Vice-President and General Manager,
Mr. Mariano A. Sio, singly or jointly, be and they are duly authorized and empowered for and in
behalf of this Corporation to apply for, negotiate and secure the approval of commercial loans
and other banking facilities and accommodations, such as, but not limited to discount loans,
letters of credit, trust receipts, lines for marginal deposits on foreign and domestic letters of
credit, negotiate out-of-town checks, etc. from the Philippine Bank of Communications, 216 Juan
Luna, Manila in such sums as they shall deem advantageous, the principal of all of which shall
not exceed the total amount of TEN MILLION PESOS (P10,000,000.00), Philippine Currency,
plus any interests that may be agreed upon with said Bank in such loans and other credit lines of
the same kind and such further terms and conditions as may, upon granting of said loans and
other banking facilities, be imposed by the Bank; and to make, execute, sign and deliver any
contracts of mortgage, pledge or sale of one, some or all of the properties of the Company, or
any other agreements or documents of whatever nature or kind, including the signing, indorsing,
cashing, negotiation and execution of promissory notes, checks, money orders or other
negotiable instruments, which may be necessary and proper in connection with said loans and
other banking facilities, or with their amendments, renewals and extensions of payment of the
whole or any part thereof.4

On March 26, 1979, MICO availed of the first loan of One Million Pesos (P1,000,000.00) from
PBCom. Upon maturity of the loan, MICO caused the same to be renewed, the last renewal of
which was made on May 21, 1982 under Promissory Note BNA No. 26218.5

Another loan of One Million Pesos (P1,000,000.00) was availed of by MICO from PBCom
which was likewise later on renewed, the last renewal of which was made on May 21, 1982
under Promissory Note BNA No. 26219.6 To complete MICOs availment of Three Million
Pesos (P3,000,000.00) discounting loan/credit line with PBCom, MICO availed of another loan
from PBCom in the sum of One Million Pesos (P1,000,000.00) on May 24, 1979. As in previous
loans, this was rolled over or renewed, the last renewal of which was made on May 25, 1982
under Promissory Note BNA No. 26253.7

As security for the loans, MICO through its Vice-President and General Manager, Mariano Sio,
executed on May 16, 1979 a Deed of Real Estate Mortgage over its properties situated in Pasig,
Metro Manila covered by Transfer Certificates of Title (TCT) Nos. 11248 and 11250.

On March 26, 1979 Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap and Richard
Velasco, in their personal capacities executed a Surety Agreement8 in favor of PBCom whereby
the petitioners jointly and severally, guaranteed the prompt payment on due dates or at maturity
of overdrafts, promissory notes, discounts, drafts, letters of credit, bills of exchange, trust
receipts, and other obligations of every kind and nature, for which MICO may be held
accountable by PBCom. It was provided, however, that the liability of the sureties shall not at
any one time exceed the principal amount of Three Million Pesos (P3,000,000.00) plus interest,
costs, losses, charges and expenses including attorneys fees incurred by PBCom in connection
therewith.

On July 14, 1980, petitioner Charles Lee, in his capacity as president of MICO, wrote PBCom
and applied for an additional loan in the sum of Four Million Pesos (P4,000,000.00). The loan
was intended for the expansion and modernization of the companys machineries. Upon approval
of the said application for loan, MICO availed of the additional loan of Four Million Pesos
(P4,000,000.00) as evidenced by Promissory Note TA No. 094.9

As per agreement, the proceeds of all the loan availments were credited to MICOs current
checking account with PBCom. To induce the PBCom to increase the credit line of MICO,
Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso Co
(hereinafter referred to as petitioners-sureties), executed another surety agreement10 in favor of
PBCom on July 28, 1980, whereby they jointly and severally guaranteed the prompt payment on
due dates or at maturity of overdrafts, promissory notes, discounts, drafts, letters of credit, bills
of exchange, trust receipts and all other obligations of any kind and nature for which MICO may
be held accountable by PBCom. It was provided, however, that their liability shall not at any one
time exceed the sum of Seven Million Five Hundred Thousand Pesos (P7,500,000.00) including
interest, costs, charges, expenses and attorneys fees incurred by MICO in connection therewith.

On July 29, 1980, MICO furnished PBCom with a notarized certification issued by its corporate
secretary, Atty. P.B. Barrera, that Chua Siok Suy was duly authorized by the Board of Directors
to negotiate on behalf of MICO for loans and other credit availments from PBCom. Indicated in
the certification was the following resolution unanimously approved by the Board of Directors:

RESOLVED, AS IT IS HEREBY RESOLVED, That Mr. Chua Siok Suy be, as he is hereby
authorized and empowered, on behalf of MICO METALS CORPORATION from time to time, to
borrow money and obtain other credit facilities, with or without security, from the PHILIPPINE
BANK OF COMMUNICATIONS in such amount(s) and under such terms and conditions as he
may determine, with full power and authority to execute, sign and deliver such contracts,
instruments and papers in connection therewith, including real estate and chattel mortgages,
pledges and assignments over the properties of the Corporation; and to renew and/or extend
and/or roll-over and/or reavail of the credit facilities granted thereunder, either for lesser or for
greater amount(s), the intention being that such credit facilities and all securities of whatever
kind given as collaterals therefor shall be a continuing security.

RESOLVED FURTHER, That said bank is hereby authorized, empowered and directed to rely on
the authority given hereunder, the same to continue in full force and effect until written notice of
its revocation shall be received by said Bank.11

On July 2, 1981, MICO filed with PBCom an application for a domestic letter of credit in the
sum of Three Hundred Forty-Eight Thousand Pesos (P348,000.00).12 The corresponding
irrevocable letter of credit was approved and opened under LC No. L-16060.13 Thereafter, the
domestic letter of credit was negotiated and accepted by MICO as evidenced by the
corresponding bank draft issued for the purpose.14 After the supplier of the merchandise was
paid, a trust receipt upon MICOs own initiative, was executed in favor of PBCom.15

On September 14, 1981, MICO applied for another domestic letter of credit with PBCom in the
sum of Two Hundred Ninety Thousand Pesos (P290,000.00).16 The corresponding irrevocable
letter of credit was issued on September 22, 1981 under LC No. L-16334.17 After the beneficiary
of the said letter of credit was paid by PBCom for the price of the merchandise, the goods were
delivered to MICO which executed a corresponding trust receipt18 in favor of PBCom.

On November 10, 1981, MICO applied for authority to open a foreign letter of credit in favor of
Ta Jih Enterprises Co., Ltd.,19 and thus, the corresponding letter of credit20 was then issued by
PBCom with a cable sent to the beneficiary, Ta Jih Enterprises Co., Ltd. advising that said
beneficiary may draw funds from the account of PBCom in its correspondent banks New York
Office.21 PBCom also informed its corresponding bank in Taiwan, the Irving Trust Company, of
the approved letter of credit. The correspondent bank acknowledged PBComs advice through a
confirmation letter22 and by debiting from PBComs account with the said correspondent bank
the sum of Eleven Thousand Nine Hundred Sixty US Dollars ($11 ,960.00).23 As in past
transactions, MICO executed in favor of PBCom a corresponding trust receipt.24

On January 4, 1982, MICO applied, for authority to open a foreign letter of credit in the sum of
One Thousand Nine Hundred US Dollars ($1,900.00), with PBCom.25 Upon approval, the
corresponding letter of credit denominated as LC No. 6229326 was issued whereupon PBCom
advised its correspondent bank and MICO27 of the same. Negotiation and proper acceptance of
the letter of credit were then made by MICO. Again, a corresponding trust receipt28 was executed
by MICO in favor of PBCom.

In all the transactions involving foreign letters of credit, PBCom turned over to MICO the
necessary documents such as the bills of lading and commercial invoices to enable the latter to
withdraw the goods from the port of Manila.

On May 21, 1982 MICO obtained from PBCom another loan in the sum of Three Hundred
Seventy-Seven Thousand Pesos (P377,000.00) covered by Promissory Note BA No. 7458.29

Upon maturity of all credit availments obtained by MICO from PBCom, the latter made a
demand for payment.30 For failure of petitioner MICO to pay the obligations incurred despite
repeated demands, private respondent PBCom extrajudicially foreclosed MICOs real estate
mortgage and sold the said mortgaged properties in a public auction sale held on November 23,
1982. Private respondent PBCom which emerged as the highest bidder in the auction sale,
applied the proceeds of the purchase price at public auction of Three Million Pesos
(P3,000,000.00) to the expenses of the foreclosure, interest and charges and part of the principal
of the loans, leaving an unpaid balance of Five Million Four Hundred Forty-One Thousand Six
Hundred Sixty-Three Pesos and Ninety Centavos (P5,441,663.90) exclusive of penalty and
interest charges. Aside from the unpaid balance of Five Million Four Hundred Forty-One
Thousand Six Hundred Sixty-Three Pesos and Ninety Centavos (P5,441,663.90), MICO likewise
had another standing obligation in the sum of Four Hundred Sixty-One Thousand Six Hundred
Pesos and Six Centavos (P461,600.06) representing its trust receipts liabilities to private
respondent. PBCom then demanded the settlement of the aforesaid obligations from herein
petitioners-sureties who, however, refused to acknowledge their obligations to PBCom under the
surety agreements. Hence, PBCom filed a complaint with prayer for writ of preliminary
attachment before the Regional Trial Court of Manila, which was raffled to Branch 55, alleging
that MICO was no longer in operation and had no properties to answer for its obligations.
PBCom further alleged that petitioner Charles Lee has disposed or concealed his properties with
intent to defraud his creditors. Except for MICO and Charles Lee, the sheriff of the RTC failed to
serve the summons on herein petitioners-sureties since they were all reportedly abroad at the
time. An alias summons was later issued but the sheriff was not able to serve the same to
petitioners Alfonso Co and Chua Siok Suy who was already sickly at the time and reportedly in
Taiwan where he later died.

Petitioners (MICO and herein petitioners-sureties) denied all the allegations of the complaint
filed by respondent PBCom, and alleged that: a) MICO was not granted the alleged loans and
neither did it receive the proceeds of the aforesaid loans; b) Chua Siok Suy was never granted
any valid Board Resolution to sign for and in behalf of MICO; c) PBCom acted in bad faith in
granting the alleged loans and in releasing the proceeds thereof; d) petitioners were never
advised of the alleged grant of loans and the subsequent releases therefor, if any; e) since no loan
was ever released to or received by MICO, the corresponding real estate mortgage and the surety
agreements signed concededly by the petitioners-sureties are null and void.

The trial court gave credence to the testimonies of herein petitioners and dismissed the complaint
filed by PBCom. The trial court likewise declared the real estate mortgage and its foreclosure
null and void. In ruling for herein petitioners, the trial court said that PBCom failed to adequately
prove that the proceeds of the loans were ever delivered to MICO. The trial court pointed out,
among others, that while PBCom claimed that the proceeds of the Four Million Pesos
(P4,000,000.00) loan covered by promissory note TA 094 were deposited to the current account
of petitioner MICO, PBCom failed to produce the ledger account showing such deposit. The trial
court added that while PBCom may have loaned to MICO the other sums of Three Hundred
Forty-Eight Thousand Pesos (P348,000.00) and Two Hundred Ninety Thousand Pesos
(P290,000.00), no proof has been adduced as to the existence of the goods covered and paid by
the said amounts. Hence, inasmuch as no consideration ever passed from PBCom to MICO, all
the documents involved therein, such as the promissory notes, real estate mortgage including the
surety agreements were all void or nonexistent for lack of cause or consideration. The trial court
said that the lack of proof as regards the existence of the merchandise covered by the letters of
credit bolstered the claim of herein petitioners that no purchases of the goods were really made
and that the letters of credit transactions were simply resorted to by the PBCom and Chua Siok
Suy to accommodate the latter in his financial requirements.

The Court of Appeals reversed the ruling of the trial court, saying that the latter committed an
erroneous application and appreciation of the rules governing the burden of proof. Citing Section
24 of the Negotiable Instruments Law which provides that "Every negotiable instrument is
deemed prima facie to have been issued for valuable consideration and every person whose
signature appears thereon to have become a party thereto for value", the Court of Appeals
said that while the subject promissory notes and letters of credit issued by the PBCom made no
mention of delivery of cash, it is presumed that said negotiable instruments were issued for
valuable consideration. The Court of Appeals also cited the case of Gatmaitan vs. Court of
Appeals31 which holds that "there is a presumption that an instrument sets out the true
agreement of the parties thereto and that it was executed for valuable consideration". The
appellate court noted and found that a notarized Certification was issued by MICOs corporate
secretary, P.B. Barrera, that Chua Siok Suy, was duly authorized by the Board of Directors of
MICO to borrow money and obtain credit facilities from PBCom.

Petitioners filed a motion for reconsideration of the challenged decision of the Court of Appeals
but this was denied in a Resolution dated November 7, 1994 issued by its Former Second
Division. Petitioners-sureties then filed a petition for review on certiorari with this Court,
docketed as G.R. No. 117913, assailing the decision of the Court of Appeals. MICO likewise
filed a separate petition for review on certiorari, docketed as G.R. No. 117914, with this Court
assailing the same decision rendered by the Court of Appeals. Upon motion filed by petitioners,
the two (2) petitions were consolidated on January 11, 1995.32

Petitioners contend that there was no proof that the proceeds of the loans or the goods under the
trust receipts were ever delivered to and received by MICO. But the record shows otherwise.
Petitioners-sureties further contend that assuming that there was delivery by PBCom of the
proceeds of the loans and the goods, the contracts were executed by an unauthorized person,
more specifically Chua Siok Suy who acted fraudulently and in collusion with PBCom to
defraud MICO.

The pertinent issues raised in the consolidated cases at bar are: a) whether or not the proceeds of
the loans and letters of credit transactions were ever delivered to MICO, and b) whether or not
the individual petitioners, as sureties, may be held liable under the two (2) Surety Agreements
executed on March 26, 1979 and July 28, 1980.

In civil cases, the party having the burden of proof must establish his case by preponderance of
evidence.33 Preponderance of evidence means evidence which is more convincing to the court as
worthy of belief than that which is offered in opposition thereto. Petitioners contend that the
alleged promissory notes, trust receipts and surety agreements attached to the complaint filed by
PBCom did not ripen into valid and binding contracts inasmuch as there is no evidence of the
delivery of money or loan proceeds to MICO or to any of the petitioners-sureties. Petitioners
claim that under normal banking practice, borrowers are required to accomplish promissory
notes in blank even before the grant of the loans applied for and such documents become valid
written contracts only when the loans are actually released to the borrower.

We are not convinced.

During the trial of an action, the party who has the burden of proof upon an issue may be aided
in establishing his claim or defense by the operation of a presumption, or, expressed differently,
by the probative value which the law attaches to a specific state of facts. A presumption may
operate against his adversary who has not introduced proof to rebut the presumption. The effect
of a legal presumption upon a burden of proof is to create the necessity of presenting evidence to
meet the legal presumption or the prima facie case created thereby, and which if no proof to the
contrary is presented and offered, will prevail. The burden of proof remains where it is, but by
the presumption the one who has that burden is relieved for the time being from introducing
evidence in support of his averment, because the presumption stands in the place of evidence
unless rebutted.

Under Section 3, Rule 131 of the Rules of Court the following presumptions, among others, are
satisfactory if uncontradicted: a) That there was a sufficient consideration for a contract and b)
That a negotiable instrument was given or indorsed for sufficient consideration. As observed by
the Court of Appeals, a similar presumption is found in Section 24 of the Negotiable Instruments
Law which provides that every negotiable instrument is deemed prima facie to have been issued
for valuable consideration and every person whose signature appears thereon to have become a
party for value. Negotiable instruments which are meant to be substitutes for money, must
conform to the following requisites to be considered as such a) it must be in writing; b) it must
be signed by the maker or drawer; c) it must contain an unconditional promise or order to pay a
sum certain in money; d) it must be payable on demand or at a fixed or determinable future time;
e) it must be payable to order or bearer; and f) where it is a bill of exchange, the drawee must be
named or otherwise indicated with reasonable certainty. Negotiable instruments include
promissory notes, bills of exchange and checks. Letters of credit and trust receipts are, however,
not negotiable instruments. But drafts issued in connection with letters of credit are negotiable
instruments.

Private respondent PBCom presented the following documentary evidence to prove petitioners
credit availments and liabilities:

1) Promissory Note No. BNA 26218 dated May 21, 1982 in the sum of P1,000,000.00
executed by MICO in favor of PBCom.

2) Promissory Note No. BNA 26219 dated May 21, 1982 in the sum of P1,000,000.00
executed by MICO in favor of PBCom.

3) Promissory Note No. BNA 26253 dated May 25, 1982 in the sum of P1,000,000.00
executed by MICO in favor of PBCom.

4) Promissory Note No. BNA 7458 dated May 21, 1982 in the sum of P377,000.00
executed by MICO in favor of PBCom.

5) Promissory Note No. TA 094 dated July 29, 1980 in the sum of P4,000.000.00
executed by MICO in favor of PBCom.

6) Irrevocable letter of credit No. L-16060 dated July 2,1981 issued in favor of Perez
Battery Center for account of Mico Metals Corp.

7) Draft dated July 2, 1981 in the sum of P348,000.00 issued by Perez Battery Center,
beneficiary of irrevocable Letter of Credit No. No. L-16060 and accepted by MICO
Metals corporation.
8) Letter dated July 2, 1981 from Perez Battery Center addressed to private respondent
PBCom showing that proceeds of the irrevocable letter of credit No. L- 16060 was
received by Mr. Moises Rosete, representative of Perez Battery Center.

9) Trust receipt dated July 2, 1981 executed by MICO in favor of PBCom covering the
merchandise purchased under Letter of Credit No. 16060.

10) Irrevocable letter of credit No. L-16334 dated September 22, 1981 issued in favor of
Perez Battery Center for account of MICO Metals Corp.

11) Draft dated September 22, 1981 in the sum of P290,000.00 issued by Perez Battery
Center and accepted by MICO.

12) Letter dated September 17, 1981 from Perez Battery addressed to PBCom showing
that the proceeds of credit no. L-16344 was received by Mr. Moises Rosete, a
representative of Perez Battery Center.

13) Trust Receipt dated September 22, 1981 executed by MICO in favor of PBCom
covering the merchandise under Letter of Credit No. L-16334.

14) Irrevocable Letter of Credit no. 61873 dated November 10, 1981 for US$11,960.00
issued by PBCom in favor of TA JIH Enterprises Co. Ltd., through its correspondent
bank, Irving Trust Company of Taipei, Taiwan.

15) Trust Receipt dated December 15, 9181 executed by MICO in favor of PBCom
showing that possession of the merchandise covered by Irrevocable Letter of Credit no.
61873 was released by PBCom to MICO.

16) Letters dated March 2, 1979 from MICO signed by its president, Charles Lee,
showing that MICO sought credit line from PBCom in the form of loans, letters of credit
and trust receipt in the sum of P7,500,000.00.

17) Letter dated July 14, 1980 from MICO signed by its president, Charles Lee, showing
that MICO requested for additional financial assistance in the sum of P4,000,000.00.

18) Board resolution dated March 6, 1979 of MICO authorizing Charles Lee and
Mariano Sio singly or jointly to act and sign for and in behalf of MICO relative to the
obtention of credit facilities from PBCom.

19) Duly notarized Deed of Mortgage dated May 16, 1979 executed by MICO in favor of
PBCom over MICO s real properties covered by TCT Nos. 11248 and 11250 located in
Pasig.

20) Duly notarized Surety Agreement dated March 26, 1979 executed by herein
petitioners Charles Lee, Mariano Sio, Alfonso Yap, Richard Velasco and Chua Siok Suy
in favor of PBCom.
 21) Duly notarized Surety Agreement dated July 28, 1980 executed by herein petitioners
Charles Lee, Mariano Sio, Alfonso Yap, Richard Velasco and Chua Siok Suy in favor of
PBCom.

22) Duly notarized certification dated July 28, 1980 issued by MICO s corporate
secretary, Mr. P.B. Barrera, attesting to the adoption of a board resolution authorizing
Chua Siok Suy to sign, for and in behalf of MICO, all the necessary documents including
contracts, loan instruments and mortgages relative to the obtention of various credit
facilities from PBCom.

The above-cited documents presented have not merely created a prima facie case but have
actually proved the solidary obligation of MICO and the petitioners, as sureties of MICO, in
favor of respondent PBCom. While the presumption found under the Negotiable Instruments
Law may not necessarily be applicable to trust receipts and letters of credit, the presumption that
the drafts drawn in connection with the letters of credit have sufficient consideration. Under
Section 3(r), Rule 131 of the Rules of Court there is also a presumption that sufficient
consideration was given in a contract. Hence, petitioners should have presented credible
evidence to rebut that presumption as well as the evidence presented by private respondent
PBCom. The letters of credit show that the pertinent materials/merchandise have been received
by MICO. The drafts signed by the beneficiary/suppliers in connection with the corresponding
letters of credit proved that said suppliers were paid by PBCom for the account of MICO. On the
other hand, aside from their bare denials petitioners did not present sufficient and competent
evidence to rebut the evidence of private respondent PBCom. Petitioner MICO did not proffer a
single piece of evidence, apart from its bare denials, to support its allegation that the loan
transactions, real estate mortgage, letters of credit and trust receipts were issued allegedly
without any consideration.

Petitioners-sureties, for their part, presented the By-Laws34 of Mico Metals Corporation (MICO)
to prove that only the president of MICO is authorized to borrow money, arrange letters of credit,
execute trust receipts, and promissory notes and consequently, that the loan transactions, letters
of credit, promissory notes and trust receipts, most of which were executed by Chua Siok Suy in
representation of MICO were not allegedly authorized and hence, are not binding upon MICO. A
perusal of the By-Laws of MICO, however, shows that the power to borrow money for the
company and issue mortgages, bonds, deeds of trust and negotiable instruments or securities,
secured by mortgages or pledges of property belonging to the company is not confined solely to
the president of the corporation. The Board of Directors of MICO can also borrow money,
arrange letters of credit, execute trust receipts and promissory notes on behalf of the
corporation.35 Significantly, this power of the Board of Directors according to the by-laws of
MICO, may be delegated to any of its standing committee, officer or agent. 36 Hence, PBCom had
every right to rely on the Certification issued by MICO's corporate secretary, P.B. Barrera, that
Chua Siok Suy was duly authorized by its Board of Directors to borrow money and obtain credit
facilities in behalf of MICO from PBCom.

Petitioners-sureties also presented a letter of their counsel dated October 9, 1982, addressed to
private respondent PBCom purportedly to show that PBCom knew that Chua Siok Suy allegedly
used the credit and good names of the petitioner-sureties for his benefit, and that petitioner-
sureties were made to sign blank documents and were furnished copies of the same. The letter,
however, is in fact merely a reply of petitioners-sureties counsel to PBComs demand for
payment of MICOs obligations, and appears to be an inconsequential piece of self-serving
evidence.

In addition to the foregoing, MICO and petitioners-sureties cited the decision of the trial court
which stated that there was no proof that the proceeds of the loans were ever delivered to MICO.
Although the private respondents witness, Mr. Gardiola, testified that the proceeds of the loans
were deposited in MICOs current account with PBCom, his testimony was allegedly not
supported by any bank record, note or memorandum. A careful scrutiny of the record including
the transcript of stenographic notes reveals, however, that although private respondent PBCom
was willing to produce the corresponding account ledger showing that the proceeds of the loans
were credited to MICOs current account with PBCom, MICO in fact vigorously objected to the
presentation of said document. That point is shown in the testimony of PBComs witness,
Gardiola, thus:

Q: Now, all of these promissory note Exhibits "I" and "J" which as you have said previously (sic)
availed originally by defendant Mico Metals Corp. sometime in 1979, my question now is, do
you know what happened to the proceeds of the original availment?

A: Well, it was credited to the current account of Mico Metals Corp.

Q: Why did it was credited to the proceeds to the account of Mico Metals Corp? (sic)

A: Well, that is our understanding.

ATTY. DURAN:

Your honor, may we be given a chance to object, the best evidence is the so-called current
account...

COURT:

Can you produce the ledger account?

A: Yes, Your Honor, I will bring.

COURT:

The ledger or record of the current account of Mico Metals Corp.

A: Yes, Your Honor.

ATTY. ACEJAS:
Your Honor, these are a confidential record, and they might not be disclosed without the consent
of the person concerned. (sic)

ATTY. SANTOS:

Well, you are the one who is asking that.

ATTY. DURAN:

Your Honor, Im precisely want to show for the ... (sic)

COURT:

But the amount covered by the current account of defendant Mico Metals Corp. is the subject
matter of this case.

xxx xxx xxx

Q: Are those availments were release? (sic)

A: Yes, Your Honor, to the defendant corporation.

Q: By what means?

A: By the credit to their current account.

ATTY. ACEJAS:

We object to that, your Honor, because the disclose is the secrecy of the bank deposit. (sic)

xxx xxx xxx

Q: Before the recess Mr. Gardiola, you stated that the proceeds of the three (3) promissory notes
were credited to the accounts of Mico Metals Corporation, now do you know what kind of
current account was that which you are referring to?

ATTY. ACEJAS:

Objection your Honor, that is the disclose of the deposit of defendant Mico Metals Corporation
and it cannot disclosed without the authority of the depositor. (sic)37

That proceeds of the loans which were originally availed of in 1979 were delivered to MICO is
bolstered by the fact that more than a year later, specifically on July 14, 1980, MICO through its
president, petitioner-surety Charles Lee, requested for an additional loan of Four Million Pesos
(P4,000,000.00) from PBCom. The fact that MICO was requesting for an additional loan implied
that it has already availed of earlier loans from PBCom.
Petitioners allege that PBCom presented no evidence that it remitted payments to cover the
domestic and foreign letters of credit. Petitioners placed much reliance on the erroneous decision
of the trial court which stated that private respondent PBCom allegedly failed to prove that it
actually made payments under the letters of credit since the bank drafts presented as evidence
show that they were made in favor of the Bank of Taiwan and First Commercial Bank.

Petitioners allegations are untenable.

Modern letters of credit are usually not made between natural persons. They involve bank to
bank transactions. Historically, the letter of credit was developed to facilitate the sale of goods
between, distant and unfamiliar buyers and sellers. It was an arrangement under which a bank,
whose credit was acceptable to the seller, would at the instance of the buyer agree to pay drafts
drawn on it by the seller, provided that certain documents are presented such as bills of lading
accompanied the corresponding drafts. Expansion in the use of letters of credit was a natural
development in commercial banking.38 Parties to a commercial letter of credit include (a) the
buyer or the importer, (b) the seller, also referred to as beneficiary, (c) the opening bank which is
usually the buyers bank which actually issues the letter of credit, (d) the notifying bank which is
the correspondent bank of the opening bank through which it advises the beneficiary of the letter
of credit, (e) negotiating bank which is usually any bank in the city of the beneficiary. The
services of the notifying bank must always be utilized if the letter of credit is to be advised to the
beneficiary through cable, (f) the paying bank which buys or discounts the drafts contemplated
by the letter of credit, if such draft is to be drawn on the opening bank or on another designated
bank not in the city of the beneficiary. As a rule, whenever the facilities of the opening bank are
used, the beneficiary is supposed to present his drafts to the notifying bank for negotiation and
(g) the confirming bank which, upon the request of the beneficiary, confirms the letter of credit
issued by the opening bank.

From the foregoing, it is clear that letters of credit, being usually bank to bank transactions,
involve more than just one bank. Consequently, there is nothing unusual in the fact that the drafts
presented in evidence by respondent bank were not made payable to PBCom. As explained by
respondent bank, a draft was drawn on the Bank of Taiwan by Ta Jih Enterprises Co., Ltd. of
Taiwan, supplier of the goods covered by the foreign letter of credit. Having paid the supplier,
the Bank of Taiwan then presented the bank draft for reimbursement by PBComs correspondent
bank in Taiwan, the Irving Trust Company which explains the reason why on its face, the
draft was made payable to the Bank of Taiwan. Irving Trust Company accepted and endorsed the
draft to PBCom. The draft was later transmitted to PBCom to support the latters claim for
payment from MICO. MICO accepted the draft upon presentment and negotiated it to PBCom.

Petitioners further aver that MICO never requested that legal possession of the merchandise be
transferred to PBCom by way of trust receipts. Petitioners insist that assuming that MICO
transferred possession of the merchandise to PBCom by way of trust receipts, the same would be
illegal since PBCom, being a banking institution, is not authorized by law to engage in the
business of importing and selling goods.

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.39 A trust receipt, therefor, is a document
of security pursuant to which a bank acquires a "security interest" in the goods under trust
receipt. Under a letter of credit-trust receipt arrangement, a bank extends a loan covered by a
letter of credit, with the trust receipt as a security for the loan. The transaction involves a loan
feature represented by a letter of credit, and a security feature which is in the covering trust
receipt which secures an indebtedness.

Petitioners averments with regard to the second issue are no less incredulous.1wphi1
Petitioners contend that the letters of credit, surety agreements and loan transactions did not
ripen into valid and binding contracts since no part of the proceeds of the loan transactions were
delivered to MICO or to any of the petitioners-sureties. Petitioners-sureties allege that Chua Siok
Suy was the beneficiary of the proceeds of the loans and that the latter made them sign the surety
agreements in blank. Thus, they maintain that they should not be held accountable for any
liability that might arise therefrom.

It has not escaped our notice that it was petitioner-surety Charles Lee, as president of MICO
Metals Corporation, who first requested for a discounting loan of Three Million Pesos
(P3,000,000.00) from PBCom as evidenced by his letter dated March 2, 1979.40 On the same
day, Charles Lee, as President of MICO, requested for a Letter of Credit and Trust Receipt line
in the sum of Three Million Pesos (P3,000,000.00).41 Still, on the same day, Charles Lee again as
President of MICO, wrote another letter to PBCOM requesting for a financing line in the sum of
One Million Five Hundred Thousand Pesos (P1,500,000.00) to be used exclusively as marginal
deposit for the opening of MICOs foreign and local letters of credit with PBCom.42 More than a
year later, it was also Charles Lee, again in his capacity as president of MICO, who asked for an
additional loan in the sum of Four Million Pesos (P4,000,000.00). The claim therefore of
petitioners that it was Chua Siok Suy, in connivance with the respondent PBCom, who applied
for and obtained the loan transactions and letters of credit strains credulity considering that even
the Deed of the Real Estate Mortgage in favor of PBCom was executed by petitioner-surety
Mariano Sio in his capacity as general manager of MICO43 to secure the loan accommodations
obtained by MICO from PBCom.

Petitioners-sureties allege that they were made to sign the surety agreements in blank by Chua
Siok Suy. Petitioner Alfonso Yap, the corporate treasurer, for his part testified that he signed
booklets of checks, surety agreements and promissory notes in blank; that he signed the
documents in blank despite his misgivings since Chua Siok Suy assured him that the transaction
can easily be taken cared of since Chua Siok Suy personally knew the Chairman of the Board of
PBCom; that he was not receiving salary as treasurer of Mico Metals and since Chua Siok Suy
had a direct hand in the management of Malayan Sales Corporation, of which Yap is an
employee, he (Yap) signed the documents in blank as consideration for his continued
employment in Malayan Sales Corporation. Petitioner Antonio Co testified that he worked as
office manager for MICO from 1978-1982. As office manager, he was the one in charge of
transacting business like purchasing, selling and paying the salary of the employees. He was also
in charge of the handling of documents pertaining to surety agreements, trust receipts and
promissory notes;44 that when he first joined MICO Metals Corporation, he was able to read the
by-laws of the corporation and he came to know that only the chairman and the president can
borrow money in behalf of the corporation; that Chua Siok Suy once called him up and told him
to secure an invoice so that a credit line can be opened in the bank with a local letter of credit;
that when the invoice was secured, he (Co) brought it together with the application for a credit
line to Chua Siok Suy, and that he questioned the authority of Chua Siok Suy pointing out that he
(Co) is not empowered to sign the document inasmuch as only the latter, as president, was
authorized to do so. However, Chua Siok Suy allegedly just said that he had already talked with
the Chairman of the Board of PBCom; and that Chua Siok Suy reportedly said that he needed the
money to finance a project that he had with the Taipei government. Co also testified that he knew
of the application for domestic letter of credit in the sum of Three Hundred Forty-Eight
Thousand Pesos (P348,000.00); and that a certain Moises Rosete was authorized to claim the
check covering the Three Hundred Forty-Eight Thousand Pesos (P348,000.00) from PBCom;
and that after claiming the check Rosete brought it to Perez Battery Center for indorsement after
which the same was deposited to the personal account of Chua Siok Suy.45

We consider as incredible and unacceptable the claim of petitioners-sureties that the Board of
Directors of MICO was so careless about the business affairs of MICO as well as about their
own personal reputation and money that they simply relied on the say so of Chua Siok Suy on
matters involving millions of pesos. Under Section 3 (d), Rule 131 of the Rules of Court, it is
presumed that a person takes ordinary care of his concerns. Hence, the natural presumption is
that one does not sign a document without first informing himself of its contents and
consequences. Said presumption acquires greater force in the case at bar where not only one but
several documents were executed at different times and at different places by the petitioner
sureties and Chua Siok Suy as president of MICO.

MICO and herein petitioners-sureties insist that Chua Siok Suy was not duly authorized to
negotiate for loans in behalf of MICO from PBCom. Petitioners allegation, however, is belied
by the July 28, 1980 Certification issued by the corporate secretary of PBCom, Atty. P.B.
Barrera, that MICO's Board of Directors gave Chua Siok Suy full authority to negotiate for loans
in behalf of MICO with PBCom. In fact, the Certification even provided that Chua Siok Suys
authority continues until and unless PBCom is notified in writing of the withdrawal thereof by
the said Board. Notably, petitioners failed to contest the genuineness of the said Certification
which is notarized and to show any written proof of any alleged withdrawal of the said authority
given by the Board of Directors to Chua Siok Suy to negotiate for loans in behalf of MICO.

There was no need for PBCom to personally inform the petitioners-sureties individually about
the terms of the loans, letters of credit and other loan documents. The petitioners-sureties
themselves happen to comprise the Board of Directors of MICO, which gave full authority to
Chua Siok Suy to negotiate for loans in behalf of MICO. Notice to MICOs authorized
representative, Chua Siok Suy, was notice to MICO. The Certification issued by PBComs
corporate secretary, Atty. P.B. Barrera, indicated that Chua Siok Suy had full authority to
negotiate and sign the necessary documents, in behalf of MICO for loans from PBCom.
Respondent PBCom therefore had the right to rely on the said notarized Certification of MICOs
Corporate Secretary.

Anent petitioners-sureties contention that they obtained no consideration whatsoever on the

surety agreements, we need only point out that the consideration for the sureties is the very
consideration for the principal obligor, MICO, in the contracts of loan. In the case of Willex
Plastic Industries Corporation vs. Court of Appeals,46 we ruled that the consideration necessary
to support a surety obligation need not pass directly to the surety, a consideration moving to the
principal alone being sufficient. For a guarantor or surety is bound by the same consideration that
makes the contract effective between the parties thereto. It is not necessary that a guarantor or
surety should receive any part or benefit, if such there be, accruing to his principal.

Petitioners placed too much reliance on the rule in evidence that the burden of proof does not
shift whereas the burden of going forward with the evidence does pass from party to party. It is
true that said rule is not changed by the fact that the party having the burden of proof has
introduced evidence which established prima facie his assertion because such evidence does not
shift the burden of proof; it merely puts the adversary to the necessity of producing evidence to
meet the prima facie case. Where the defendant merely denies, either generally or otherwise, the
allegations of the plaintiffs pleadings, the burden of proof continues to rest on the plaintiff
throughout the trial and does not shift to the defendant until the plaintiffs evidence has been
presented and duly offered. The defendant has then no burden except to produce evidence
sufficient to create a state of equipoise between his proof and that of the plaintiff to defeat the
latter, whereas the plaintiff has the burden, as in the beginning, of establishing his case by a
preponderance of evidence.47 But where the defendant has failed to present and marshall
evidence sufficient to create a state of equipoise between his proof and that of plaintiff, the prima
facie case presented by the plaintiff will prevail.

In the case at bar, respondent PBCom, as plaintiff in the trial court, has in fact presented
sufficient documentary and testimonial evidence that proved by preponderance of evidence its
subject collection case against the defendants who are the petitioners herein. In view of all the
foregoing, the Court of Appeals committed no reversible error in its appealed Decision.

WHEREFORE, the assailed Decision of the Court of Appeals in CA-G.R. CV No. 27480
entitled, "Philippine Bank of Communications vs. Mico Metals Corporation, Charles Lee, Chua
Siok Suy, Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso Co," is AFFIRMED in toto.

Costs against the petitioners.

SO ORDERED.

Bellosillo, (Chairman), Mendoza, Quisumbing, and Buena, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-24821 October 16, 1970

BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee,
vs.
DE RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO and AURORA
CARCERENY alias AURORA C. GONZALES, defendants-appellants.

Aviado and Aranda for plaintiff-appellee.

S. Emiliano Calma for defendants-appellants.

CASTRO, J.:.

This is an appeal from the decision of the Court of First Instance of Manila ordering the
defendants-appellants to pay to the Bank of the Philippine Islands (hereinafter referred to as the
Bank), jointly and severally, the value of the credit it extended to them in several letters of credit
which the Bank opened at the behest of the defendants appellants to finance their importation of
dyestuffs from the United States, which however turned out to be mere colored chalk upon
arrival and inspection thereof at the port of Manila.

The record shows that on four (4) different occasions in 1961, the De Reny Fabric Industries,
Inc., a Philippine corporation through its co-defendants-appellants, Aurora Carcereny alias
Aurora C. Gonzales, and Aurora T. Tuyo, president and secretary, respectively of the
corporation, applied to the Bank for four (4) irrevocable commercial letters of credit to cover the
purchase by the corporation of goods described in the covering L/C applications as "dyestuffs of
various colors" from its American supplier, the J.B. Distributing Company. All the applications
of the corporation were approved, and the corresponding Commercial L/C Agreements were
executed pursuant to banking procedures. Under these agreements, the aforementioned officers
of the corporation bound themselves personally as joint and solidary debtors with the
corporation. Pursuant to banking regulations then in force, the corporation delivered to the Bank
peso marginal deposits as each letter of credit was opened.

The dates and amounts of the L/Cs applied for and approved as well as the peso marginal
deposits made were, respectively, as follows:.

Date Application Amount Marginal

& L/C No. Deposit

Oct. 10, 1961 61/1413 $57,658.38 P43,407.33

Oct. 23, 1961 61/1483 $25,867.34 19,473.64

Oct. 30, 1961 61/1495 $19,408.39 14,610.88

Nov. 10, 1961 61/1564 $26,687.64 20,090.90

 TOTAL .... $129,621.75 P97,582.75

By virtue of the foregoing transactions, the Bank issued irrevocable commercial letters
of credit addressed to its correspondent banks in the United States, with uniform
instructions for them to notify the beneficiary thereof, the J.B. Distributing Company, that
they have been authorized to negotiate the latter's sight drafts up to the amounts
mentioned the respectively, if accompanied, upon presentation, by a full set of
negotiable clean "on board" ocean bills of lading covering the merchandise appearing in
the LCs that is, dyestuffs of various colors. Consequently, the J.B. Distributing Company
drew upon, presented to and negotiated with these banks, its sight drafts covering the
amounts of the merchandise ostensibly being exported by it, together with clean bills of
lading, and collected the full value of the drafts up to the amounts appearing in the L/Cs
as above indicated. These correspondent banks then debited the account of the Bank of
the Philippine Islands with them up to the full value of the drafts presented by the J.B.
Distributing Company, plus commission thereon, and, thereafter, endorsed and
forwarded all documents to the Bank of the Philippine Islands.

In the meantime, as each shipment (covered by the above-mentioned letters of credit)

arrived in the Philippines, the De Reny Fabric Industries, Inc. made partial payments to
the Bank amounting, in the aggregate, to P90,000. Further payments were, however,
subsequently discontinued by the corporation when it became established, as a result of
a chemical test conducted by the National Science Development Board, that the goods
that arrived in Manila were colored chalks instead of dyestuffs.

The corporation also refused to take possession of these goods, and for this reason, the
Bank caused them to be deposited with a bonded warehouse paying therefor the
amount of P12,609.64 up to the filing of its complaint with the court below on December
10, 1962.

On October 24, 1963 the lower court rendered its decision ordering the corporation and
its co-defendants (the herein appellants) to pay to the plaintiff-appellee the amount of
P291,807.46, with interest thereon, as provided for in the L/C Agreements, at the rate of
7% per annum from October 31, 1962 until fully paid, plus costs.

It is the submission of the defendants-appellants that it was the duty of the foreign
correspondent banks of the Bank of the Philippine Islands to take the necessary
precaution to insure that the goods shipped under the covering L/Cs conformed with the
item appearing therein, and, that the foregoing banks having failed to perform this duty,
no claim for recoupment against the defendants-appellants, arising from the losses
incurred for the non-delivery or defective delivery of the articles ordered, could accrue.

We can appreciate the sweep of the appellants' argument, but we also find that it is
nestled hopelessly inside a salient where the valid contract between the parties and the
internationally accepted customs of the banking trade must prevail. 1

Under the terms of their Commercial Letter of Credit Agreements with the Bank, the appellants agreed
that the Bank shall not be responsible for the "existence, character, quality, quantity, conditions, packing,
value, or delivery of the property purporting to be represented by documents; for any difference in
character, quality, quantity, condition, or value of the property from that expressed in documents," or for
"partial or incomplete shipment, or failure or omission to ship any or all of the property referred to in the
Credit," as well as "for any deviation from instructions, delay, default or fraud by the shipper or anyone
else in connection with the property the shippers or vendors and ourselves [purchasers] or any of us."
Having agreed to these terms, the appellants have, therefore, no recourse but to comply with their
covenant. 2

But even without the stipulation recited above, the appellants cannot shift the burden of loss to the Bank on account of the violation by their
vendor of its prestation.

It was uncontrovertibly proven by the Bank during the trial below that banks, in providing financing in international business transactions such
as those entered into by the appellants, do not deal with the property to be exported or shipped to the importer, but deal only with
documents. The Bank introduced in evidence a provision contained in the "Uniform Customs and Practices for Commercial Documentary
Credits Fixed for the Thirteenth Congress of International Chamber of Commerce," to which the Philippines is a signatory nation. Article 10
thereof provides: .

In documentary credit operations, all parties concerned deal in documents and not in goods. Payment, negotiation
or acceptance against documents 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 the documents and reimburse the Bank making the payment,
negotiation or acceptance.

The existence of a custom in international banking and financing circles negating any duty on the part of a bank to verify whether what has
been described in letters of credits or drafts or shipping documents actually tallies with what was loaded aboard ship, having been positively
proven as a fact, the appellants are bound by this established usage. They were, after all, the ones who tapped the facilities afforded by the
Bank in order to engage in international business.

ACCORDINGLY, the judgment a quo is affirmed, at defendants-appellants' cost. This is without prejudice to the Bank, in proper proceedings
in the court below in this same case proving and being reimbursed additional expenses, if any, it has incurred by virtue of the continued
storage of the goods in question up to the time this decision becomes final and executory.

Reyes, J.B.L., Actg. C.J., Dizon, Makalintal, Zaldivar, Fernando, Teehankee, Barredo, Villamor and Makasiar, JJ., concur.

Concepcion, C.J., is on leave.

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.:p

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.

In regard to the ruling of the lower court and affirmed by the Court of Appeals that the petitioner is not a notifying bank but a confirming bank,
we find the same erroneous.

The trial court wrongly mixed up the meaning of an irrevocable credit with that of a confirmed credit. In its decision, the trial court ruled that
the petitioner, in accepting the obligation to notify the respondent that the irrevocable credit has been transmitted to the petitioner on behalf
of the private respondent, has confirmed the letter.

The trial court appears to have overlooked the fact that an irrevocable credit is not synonymous with a confirmed credit. These types of
letters have different meanings and the legal relations arising from there varies. A credit may be an irrevocable credit and at the same time a
confirmed credit or vice-versa.

An irrevocable credit refers to the duration of the letter of credit. What is simply means is that the issuing bank may not without the consent of
the beneficiary (seller) and the applicant (buyer) revoke his undertaking under the letter. The issuing bank does not reserve the right to
revoke the credit. On the other hand, a confirmed letter of credit pertains to the kind of obligation assumed by the correspondent bank. In this
case, the correspondent bank gives an absolute assurance to the beneficiary that it will undertake the issuing bank's obligation as its own
according to the terms and conditions of the credit. (Agbayani, Commercial Laws of the Philippines, Vol. 1, pp. 81-83)

Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply that the correspondent bank in accepting the instructions
of the issuing bank has also confirmed the letter of credit. Another error which the lower court and the Court of Appeals made was to confuse
the obligation assumed by the petitioner.

In commercial transactions involving letters of credit, the 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. (Kronman and Co., Inc. v. Public National Bank of New York, 218 N.Y.S. 616 [1926]; Shaterian, Export-Import Banking, p.
292, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76). 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. (Scanlon v. First National Bank of Mexico, 162 N.E. 567 [1928]; Shaterian, Export-Import Banking, p. 293, cited in Agbayani,
Commercial Laws of the Philippines, Vol. 1, p. 76)

In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability is a primary one as if the
correspondent bank itself had issued the letter of credit. (Shaterian, Export-Import Banking, p. 294, cited in Agbayani Commercial Laws of
the Philippines, Vol. 1, p. 77)

In this case, the letter merely provided that the petitioner "forward the enclosed original credit to the beneficiary." (Records, Vol. I, p. 11)
Considering the aforesaid instruction to the petitioner by the issuing bank, the Security Pacific National Bank, it is indubitable that the
petitioner is only a notifying bank and not a confirming bank as ruled by the courts below.

If the petitioner was a confirming bank, then a categorical declaration should have been stated in the letter of credit that the petitioner is to
honor all drafts drawn in conformity with the letter of credit. What was simply stated therein was the instruction that the petitioner forward the
original letter of credit to the beneficiary.
Since the petitioner was only a notifying bank, its responsibility was solely to notify and/or transmit the documentary of credit to the private
respondent and its obligation ends there.

The notifying bank may suggest to the seller its willingness to negotiate, but this fact alone does not imply that the notifying bank promises to
accept the draft drawn under the documentary credit.

A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is only with that of the issuing bank and
not with the beneficiary to whom he assumes no liability. It follows therefore that when the petitioner refused to negotiate with the private
respondent, the latter has no cause of action against the petitioner for the enforcement of his rights under the letter. (See Kronman and Co.,
Inc. v. Public National Bank of New York, supra)

In order that the petitioner may be held liable under the letter, there should be proof that the petitioner confirmed the letter of credit.

The records are, however, bereft of any evidence which will disclose that the petitioner has confirmed the letter of credit. The only evidence
in this case, and upon which the private respondent premised his argument, is the P75,000.00 loan extended by the petitioner to him.

The private respondent relies on this loan to advance his contention that the letter of credit was confirmed by the petitioner. He claims that
the loan was granted by the petitioner to him, "in anticipation of the presentment of the letter of credit."

The proposition advanced by the private respondent has no basis in fact or law. That the loan agreement between them be construed as an
act of confirmation is rather far-fetched, for it depends principally on speculative reasoning.

As earlier stated, there must have been an absolute assurance on the part of the petitioner that it will undertake the issuing bank's obligation
as its own. Verily, the loan agreement it entered into cannot be categorized as an emphatic assurance that it will carry out the issuing bank's
obligation as its own.

The loan agreement is more reasonably classified as an isolated transaction independent of the documentary credit.

Of course, it may be presumed that the petitioner loaned the money to the private respondent in anticipation that it would later be paid by the
latter upon the receipt of the letter. Yet, we would have no basis to rule definitively that such "act" should be construed as an act of
confirmation.

The private respondent no doubt was in need of money in loading the logs on the ship "Zenlin Glory" and the only way to satisfy this need
was to borrow money from the petitioner which the latter granted. From these circumstances, a logical conclusion that can be gathered is
that the letter of credit was merely to serve as a collateral.

At the most, when the petitioner extended the loan to the private respondent, it assumed the character of a negotiating bank. Even then, the
petitioner will still not be liable, for a negotiating bank before negotiation has no contractual relationship with the seller.

The case of Scanlon v. First National Bank (supra) perspicuously explained the relationship between the seller and the negotiating bank, viz:

It may buy or refuse to buy as it chooses. Equally, it must be true that it owes no contractual duty toward the person for
whose benefit the letter is written to discount or purchase any draft drawn against the credit. No relationship of agent
and principal, or of trustee and cestui, between the receiving bank and the beneficiary of the letter is established.
(P.568)

Whether therefore the petitioner is a notifying bank or a negotiating bank, it cannot be held liable. Absent any definitive proof that it has
confirmed the letter of credit or has actually negotiated with the private respondent, the refusal by the petitioner to accept the tender of the
private respondent is justified.

In regard to the finding that the petitioner became a "trustee in relation to the plaintiff (private respondent) as the beneficiary of the letter of
credit," the same has no legal basis.

A trust has been defined as the "right, enforceable solely in equity, to the beneficial enjoyment of property the legal title to which is vested to
another." (89 C.J.S. 712)

The concept of a trust presupposes the existence of a specific property which has been conferred upon the person for the benefit of another.
In order therefore for the trust theory of the private respondent to be sustained, the petitioner should have had in its possession a sum of
money as specific fund advanced to it by the issuing bank and to be held in trust by it in favor of the private respondent. This does not obtain
in this case.
The mere opening of a letter of credit, it is to be noted, does not involve a specific appropriation of a sum of money in favor of the beneficiary.
It only signifies that the beneficiary may be able to draw funds upon the letter of credit up to the designated amount specified in the letter. It
does not convey the notion that a particular sum of money has been specifically reserved or has been held in trust.

What actually transpires in an irrevocable credit is that the correspondent bank does not receive in advance the sum of money from the
buyer or the issuing bank. On the contrary, when the correspondent bank accepts the tender and pays the amount stated in the letter, the
money that it doles out comes not from any particular fund that has been advanced by the issuing bank, rather it gets the money from its own
funds and then later seeks reimbursement from the issuing bank.

Granting that a trust has been created, still, the petitioner may not be considered a trustee. As the petitioner is only a notifying bank, its
acceptance of the instructions of the issuing bank will not create estoppel on its part resulting in the acceptance of the trust. Precisely, as a
notifying bank, its only obligation is to notify the private respondent of the existence of the letter of credit. How then can such create estoppel
when that is its only duty under the law?

We also find erroneous the statement of the Court of Appeals that the petitioner "acted as a guarantor of the issuing bank and in effect also
of the latter's principal or client, i.e., Hans Axel Christiansen."

It is a fundamental rule that an irrevocable credit is independent not only of the contract between the buyer and the seller but also of the
credit agreement between the issuing bank and the buyer. (See Kingdom of Sweden v. New York Trust Co., 96 N.Y.S. 2d 779 [1949]). The
relationship between the buyer (Christiansen) and the issuing bank (Security Pacific National Bank) is entirely independent from the letter of
credit issued by the latter.

The contract between the two has no bearing as to the non-compliance by the buyer with the agreement between the latter and the seller.
Their contract is similar to that of a contract of services (to open the letter of credit) and not that of agency as was intimated by the Court of
Appeals. The unjustified refusal therefore by Christiansen to issue the certification under the letter of credit should not likewise be charged to
the issuing bank.

As a mere notifying bank, not only does the petitioner not have any contractual relationship with the buyer, it has also nothing to do with the
contract between the issuing bank and the buyer regarding the issuance of the letter of credit.

The theory of guarantee relied upon by the Court of Appeals has to necessarily fail. The concept of guarantee vis-a-vis the concept of an
irrevocable credit are inconsistent with each other.

In the first place, the guarantee theory destroys the independence of the bank's responsibility from the contract upon which it was opened. In
the second place, the nature of both contracts is mutually in conflict with each other. In contracts of guarantee, the guarantor's obligation is
merely collateral and it arises only upon the default of the person primarily liable. On the other hand, in an irrevocable credit the bank
undertakes a primary obligation. (See National Bank of Eagle Pass, Tex v. American National Bank of San Francisco, 282 F. 73 [1922])

The relationship between the issuing bank and the notifying bank, on the contrary, is more similar to that of an agency and not that of a
guarantee. It may be observed that the notifying bank is merely to follow the instructions of the issuing bank which is to notify or to transmit
the letter of credit to the beneficiary. (See Kronman v. Public National Bank of New York, supra). Its commitment is only to notify the
beneficiary. It does not undertake any assurance that the issuing bank will perform what has been mandated to or expected of it. As an agent
of the issuing bank, it has only to follow the instructions of the issuing bank and to it alone is it obligated and not to buyer with whom it has no
contractual relationship.

In fact the notifying bank, even if the seller tenders all the documents required under the letter of credit, may refuse to negotiate or accept the
drafts drawn thereunder and it will still not be held liable for its only engagement is to notify and/or transmit to the seller the letter of credit.

Finally, even if we assume that the petitioner is a confirming bank, the petitioner cannot be forced to pay the amount under the letter. As we
have previously explained, there was a failure on the part of the private respondent to comply with the terms of the letter of credit.

The failure by him to submit the certification was fatal to his case. The U.C.P. which is incorporated in the letter of credit ordains that the
bank may only pay the amount specified under the letter if all the documents tendered are on their face in compliance with the credit. It is not
tasked with the duty of ascertaining the reason or reasons why certain documents have not been submitted, as it is only concerned with the
documents. Thus, whether or not the buyer has performed his responsibility towards the seller is not the bank's problem.

We are aware of the injustice committed by Christiansen on the private respondent but we are deciding the controversy on the basis of what
the law is, for the law is not meant to favor only those who have been oppressed, the law is to govern future relations among people as well.
Its commitment is to all and not to a single individual. The faith of the people in our justice system may be eroded if we are to decide not what
the law states but what we believe it should declare. Dura lex sed lex.

Considering the foregoing, the materiality of ruling upon the validity of the certificate of approval required of the private respondent to submit
under the letter of credit, has become insignificant.
In any event, we affirm the earlier ruling of the Court of Appeals dated April 9, 1987 in regard to the petition before it for certiorari and
prohibition with preliminary injunction, to wit:

There is no merit in the respondent's contention that the certification required in condition No. 4 of the letter of credit
was "patently illegal." At the time the letter of credit was issued there was no Central Bank regulation prohibiting such a
condition in the letter of credit. The letter of credit (Exh. C) was issued on June 7, 1971, more than two months before
the issuance of the Central Bank Memorandum on August 16, 1971 disallowing such a condition in a letter of credit. In
fact the letter of credit had already expired on July 30, 1971 when the Central Bank memorandum was issued. In any
event, it is difficult to see how such a condition could be categorized as illegal or unreasonable since all that plaintiff
Villaluz, as seller of the logs, could and should have done was to refuse to load the logs on the vessel "Zenlin Glory",
unless Christiansen first issued the required certification that the logs had been approved by him to be in accordance
with the terms and conditions of his purchase order. Apparently, Villaluz was in too much haste to ship his logs without
taking all due precautions to assure that all the terms and conditions of the letter of credit had been strictly complied
with, so that there would be no hitch in its negotiation. (Rollo, p. 8)

WHEREFORE, the COURT RESOLVED to GRANT the petition and hereby NULLIFIES and SETS ASIDE the decision of the Court of
Appeals dated June 29, 1990. The amended complaint in Civil Case No. 15121 is DISMISSED.

SO ORDERED.

Feliciano, Bidin and Davide, Jr., JJ., concur.

Fernan, C.J., took no part.

Republic of the Philippines

SUPREME COURT
Manila

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 Decision1 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 Contract3 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 petitioner's 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 letters13 both dated 10 August 2000
advised 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 8.214 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 Order19 dated 24 November 2000, denied petitioner's application for a writ of
preliminary injunction. It ruled that petitioner had no legal right and suffered no irreparable
injury to justify the issuance of the writ. 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 petitioner's 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 court's 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 LHC's 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 petitioner's 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 declarant's 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 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. Further, the appellate court held that even
assuming that the trial court's denial of petitioner's 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 BENEFICIARY'S
CALL THEREON IS WRONGFUL OR FRAUDULENT.

WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES
BEFORE THE RESOLUTION OF PETITIONER'S AND LHC'S 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 LHC'S 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 Petition22 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 petitioner's
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 petitioner's 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 petitioner's
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 ICC's partial award
mentioned in petitioner's Manifestation of 12 April 2004.

In its Comment to petitioner's Motion for Leave to File Addendum to Petitioner's 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 ICC's partial award is now fully within the Makati RTC's 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 200327 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 latter's 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 200328 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 LHC's 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, petitioner's 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 bank's customer cannot
draw on the letter, it does not function as an assignment by the customer to the beneficiary. Nor,
if properly used, is it a contract of suretyship or guarantee, because it entails a primary liability
following a default. Finally, it is not in itself a negotiable instrument, because it is not payable to
order or bearer and is generally conditional, yet the draft presented under it is often negotiable.29

In commercial transactions, a letter of credit is a financial device developed by merchants as a

convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly
irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a
buyer, who wants to have control of the goods before paying.30 The use of credits in commercial
transactions serves to reduce the risk of nonpayment of the purchase price under the contract for
the sale of goods. However, credits are also used in non-sale settings where they serve to reduce
the risk of nonperformance. Generally, credits in the non-sale settings have come to be known as
standby credits.31

There are three significant differences between commercial and standby credits. First,
commercial credits involve the payment of money under a contract of sale. Such credits become
payable upon the presentation by the seller-beneficiary of documents that show he has taken
affirmative steps to comply with the sales agreement. In the standby type, the credit is payable
upon certification of a party's nonperformance of the agreement. The documents that accompany
the beneficiary's draft tend to show that the applicant has not performed. The beneficiary of a
commercial credit must demonstrate by documents that he has performed his contract. The
beneficiary of the standby credit must certify that his obligor has not performed the contract.32

By definition, a letter of credit is a written instrument whereby the writer requests or authorizes
the addressee to pay money or deliver goods to a third person and assumes responsibility for
payment of debt therefor to the addressee.33 A letter of credit, however, changes its nature as
different transactions occur and if carried through to completion ends up as a binding contract
between the issuing and honoring banks without any regard or relation to the underlying contract
or disputes between the parties thereto.34

Since letters of credit have gained general acceptability in international trade transactions, the
ICC has published from time to time updates on the Uniform Customs and Practice (UCP) for
Documentary Credits to standardize practices in the letter of credit area. The vast majority of
letters of credit incorporate the UCP.35 First published in 1933, the UCP for Documentary
Credits has undergone several revisions, the latest of which was in 1993.36

In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,37 this Court ruled that the
observance of the UCP is justified by Article 2 of the Code of Commerce which provides that in
the absence of any particular provision in the Code of Commerce, commercial transactions shall
be governed by usages and customs generally observed. More recently, in Bank of America, NT
& SA v. Court of Appeals,38 this Court ruled that there being no specific provisions which
govern the legal complexities arising from transactions involving letters of credit, not only
between or among banks themselves but also between banks and the seller or the buyer, as the
case may be, the applicability of the UCP is undeniable.

Article 3 of the UCP provides that credits, by their nature, are separate transactions from the
sales or other contract(s) on which they may be based and banks are in no way concerned with or
bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the
credit. Consequently, the undertaking of a bank to pay, accept and pay draft(s) or negotiate
and/or fulfill any other obligation under the credit is not subject to claims or defenses by the
applicant resulting from his relationships with the issuing bank or the beneficiary. A beneficiary
can in no case avail himself of the contractual relationships existing between the banks or
between the applicant and the issuing bank.

Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the
draft and the required documents are presented to it. The 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 principle's
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, petitioner's 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."
Petitioner's argument that any dispute must first be resolved by the parties, whether through
negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit in
essence would convert the letter of credit into a mere guarantee. Jurisprudence has laid down a
clear distinction between a letter of credit and a guarantee in that the settlement of a dispute
between the parties is not a pre-requisite for the release of funds under a letter of credit. In other
words, the argument is incompatible with the very nature of the letter of credit. If a letter of
credit is drawable only after settlement of the dispute on the contract entered into by the
applicant and the beneficiary, there would be no practical and beneficial use for letters of credit
in commercial transactions.

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 obligor's nonperformance. They function,
however, in distinctly different ways.

Traditionally, upon the obligor's default, the surety undertakes to complete the obligor's
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 surety's 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
applicant's 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 obligor's 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 beneficiary's 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 petitioner's 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 LHC's 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 Dolan's 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 principle's 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 LHC's call on the Securities is largely intertwined with
the fact of default which is the self-same issue pending resolution before the arbitral tribunals. To
be able to declare the call on the Securities wrongful or fraudulent, it is imperative to resolve,
among others, whether petitioner was in fact guilty of delay in the performance of its obligation.
Unfortunately for petitioner, this Court is not called upon to rule upon the issue of defaultsuch
issue having been submitted by the parties to the jurisdiction of the arbitral tribunals pursuant to
the terms embodied in their agreement.47

Would injunction then be the proper remedy to restrain the alleged wrongful draws on the
Securities?

Most writers agree that fraud is an exception to the independence principle. Professor Dolan
opines that the untruthfulness of a certificate accompanying a demand for payment under a
standby credit may qualify as fraud sufficient to support an injunction against payment.48 The
remedy for fraudulent abuse is an injunction. However, injunction should not be granted unless:
(a) there is clear proof of fraud; (b) the fraud constitutes fraudulent abuse of the independent
purpose of the letter of credit and not only fraud under the main agreement; and (c) irreparable
injury might follow if injunction is not granted or the recovery of damages would be seriously
damaged.49

In its complaint for injunction before the trial court, petitioner alleged that it is entitled to a total
extension of two hundred fifty-three (253) days which would move the target completion date. It
argued that if its claims for extension would be found meritorious by the ICC, then LHC would
not be entitled to any liquidated damages.50

Generally, injunction is a preservative remedy for the protection of one's 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
LHC's call on the Securities which would justify the issuance of preliminary injunction. By
petitioner's own admission, the right of LHC to call on the Securities was contractually rooted
and subject to the express stipulations in the Turnkey Contract.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 LHC's 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 LHC's 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 LHC's
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 LHC's certification that default has
occurred. Neither were they bound by petitioner's declaration that LHC's 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 LHC's
draws upon the Securities were wrongful due to the non-existence of the fact of default, its right
to seek indemnification for damages it suffered would not normally be foreclosed pursuant to
general principles of law.

Moreover, in a Manifestation,62 dated 30 March 2001, LHC informed this Court that the subject
letters of credit had been fully drawn. This fact alone would have been sufficient reason to
dismiss the instant petition.

Settled is the rule that injunction would not lie where the acts sought to be enjoined have already
become fait accompli or an accomplished or consummated act.63 In Ticzon v. Video Post Manila,
Inc.64 this Court ruled that where the period within which the former employees were prohibited
from engaging in or working for an enterprise that competed with their former employerthe
very purpose of the preliminary injunction has expired, any declaration upholding the
propriety of the writ would be entirely useless as there would be no actual case or controversy
between the parties insofar as the preliminary injunction is concerned.
In the instant case, the consummation of the act sought to be restrained had rendered the instant
petition mootfor any declaration by this Court as to propriety or impropriety of the non-
issuance of injunctive relief could have no practical effect on the existing controversy.65 The
other issues raised by petitioner particularly with respect to its right to recover the amounts
wrongfully drawn on the Securities, according to it, could properly be threshed out in a separate
proceeding.

One final point. LHC has charged petitioner of forum-shopping. It raised the charge on two
occasions. First, in its Counter-Manifestation dated 29 June 200466 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 petitioner's acts constitutes forum-shopping which should be punished
by the dismissal of the claim in both forums. Second, in its Comment to Petitioner's Motion for
Leave to File Addendum to Petitioner's Memorandum dated 8 October 2004, LHC alleges that
by maintaining the present appeal and at the same time pursuing Civil Case No. 04-332
wherein 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.

 Republic of the Philippines
SUPREME COURT
Manila

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 which states, in part, that the court was thereby:

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 filed by respondent Maynilad, issued the herein questioned Order3 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

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 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 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 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
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. 487-2001,9 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 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 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.

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

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

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 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

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" 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?

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 non-performance 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 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

Letters of credit were developed for the purpose of insuring to a seller payment of a definite
amount upon the presentation of documents18 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 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 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
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 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

We have accepted, in Feati Bank and Trust Company v. Court of Appeals23 and Bank of America
NT & SA v. Court of Appeals,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 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 and reiterated in
Philippine Blooming Mills, Inc. v. Court of Appeals,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 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 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

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.
 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 where the
parties including the creditors, Suez and Chinatrust Commercial "presented their
respective arguments."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 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 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 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

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., Panganiban, Ynares-Santiago, and Carpio, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 137232 June 29, 2005

ROSARIO TEXTILE MILLS CORPORATION and EDILBERTO YUJUICO, petitioners,

vs.
HOME BANKERS SAVINGS AND TRUST COMPANY, respondent.

DECISION

SANDOVAL-GUTIERREZ, J.:

For our resolution is the petition for review on certiorari assailing the Decision1 of the Court of
Appeals dated March 31, 1998 in CA-G.R. CV No. 48708 and its Resolution dated January 12,
1999.

The facts of the case as found by the Court of Appeals are:

"Sometime in 1989, Rosario Textile Mills Corporation (RTMC) applied from Home Bankers
Savings & Trust Co. for an Omnibus Credit Line for P10 million. The bank approved RTMCs
credit line but for only P8 million. The bank notified RTMC of the grant of the said loan thru a
letter dated March 2, 1989 which contains terms and conditions conformed by RTMC thru
Edilberto V. Yujuico. On March 3, 1989, Yujuico signed a Surety Agreement in favor of the
bank, in which he bound himself jointly and severally with RTMC for the payment of all
RTMCs indebtedness to the bank from 1989 to 1990. RTMC availed of the credit line by
making numerous drawdowns, each drawdown being covered by a separate promissory note and
trust receipt. RTMC, represented by Yujuico, executed in favor of the bank a total of eleven (11)
promissory notes.

Despite the lapse of the respective due dates under the promissory notes and notwithstanding the
banks demand letters, RTMC failed to pay its loans. Hence, on January 22, 1993, the bank filed
a complaint for sum of money against RTMC and Yujuico before the Regional Trial Court, Br.
16, Manila.

In their answer (OR, pp. 44-47), RTMC and Yujuico contend that they should be absolved from
liability. They claimed that although the grant of the credit line and the execution of the
suretyship agreement are admitted, the bank gave assurance that the suretyship agreement was
merely a formality under which Yujuico will not be personally liable. They argue that the
importation of raw materials under the credit line was with a grant of option to them to turn-over
to the bank the imported raw materials should these fail to meet their manufacturing
requirements. RTMC offered to make such turn-over since the imported materials did not
conform to the required specifications. However, the bank refused to accept the same, until the
materials were destroyed by a fire which gutted down RTMCs premises.

For failure of the parties to amicably settle the case, trial on the merits proceeded. After the trial,
the Court a quo rendered a decision in favor of the bank, the decretal part of which reads:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered in favor of plaintiff

and against defendants who are ordered to pay jointly and severally in favor of plaintiff,
inclusive of stipulated 30% per annum interest and penalty of 3% per month until fully paid,
under the following promissory notes:

90-1116 6-20-90 P737,088.25 9-18-90

(maturity)
90-1320 7-13-90 P650,000.00 10-11-90
90-1334 7-17-90 P422,500.00 10-15-90
90-1335 7-17-90 P422,500.00 10-15-90
90-1347 7-18-90 P795,000.00 10-16-90
90-1373 7-20-90 P715,900.00 10-18-90
90-1397 7-27-90 P773,500.00 10-20-90
90-1429 7-26-90 P425,750.00 10-24-90
90-1540 8-7-90 P720,984.00 11-5-90
90-1569 8-9-90 P209,433.75 11-8-90
 90-0922 5-28-90 P747,780.00 8-26-90

The counterclaims of defendants are hereby DISMISSED.

SO ORDERED." (OR, p. 323; Rollo, p. 73)."2

Dissatisfied, RTMC and Yujuico, herein petitioners, appealed to the Court of Appeals,
contending that under the trust receipt contracts between the parties, they merely held the goods
described therein in trust for respondent Home Bankers Savings and Trust Company (the
bank) which owns the same. Since the ownership of the goods remains with the bank, then it
should bear the loss. With the destruction of the goods by fire, petitioners should have been
relieved of any obligation to pay.

The Court of Appeals, however, affirmed the trial courts judgment, holding that the bank is
merely the holder of the security for its advance payments to petitioners; and that the goods they
purchased, through the credit line extended by the bank, belong to them and hold said goods at
their own risk.

Petitioners then filed a motion for reconsideration but this was denied by the Appellate Court in
its Resolution dated January 12, 1999.

Hence, this petition for review on certiorari ascribing to the Court of Appeals the following
errors:

"I

THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE ACTS
OF THE PETITIONERS-DEFENDANTS WERE TANTAMOUNT TO A VALID AND
EFFECTIVE TENDER OF THE GOODS TO THE RESPONDENT-PLAINTIFF.

II

THE HONORABLE COURT OF APPEALS ERRED IN NOT APPLYING THE DOCTRINE

OF RES PERIT DOMINO IN THE CASE AT BAR CONSIDERING THE VALID AND
EFFECTIVE TENDER OF THE DEFECTIVE RAW MATERIALS BY THE PETITIONERS-
DEFENDANTS TO THE RESPONDENT-PLAINTIFF AND THE EXPRESS STIPULATION
IN THEIR CONTRACT THAT OWNERSHIP OF THE GOODS REMAINS WITH THE
RESPONDENT-PLAINTIFF.

III

THE HONORABLE COURT OF APPEALS VIOLATED ARTICLE 1370 OF THE CIVIL

CODE AND THE LONG-STANDING JURISPRUDENCE THAT INTENTION OF THE
PARTIES IS PRIMORDIAL IN ITS FAILURE TO UPHOLD THE INTENTION OF THE
PARTIES THAT THE SURETY AGREEMENT WAS A MERE FORMALITY AND DID
NOT INTEND TO HOLD PETITIONER YUJUICO LIABLE UNDER THE SAME SURETY
AGREEMENT.

IV

ASSUMING ARGUENDO THAT THE SURETYSHIP AGREEMENT WAS VALID AND

EFFECTIVE, THE HONORABLE COURT OF APPEALS VIOLATED THE BASIC LEGAL
PRECEPT THAT A SURETY IS NOT LIABLE UNLESS THE DEBTOR IS HIMSELF
LIABLE.

THE HONORABLE COURT OF APPEALS VIOLATED THE PURPOSE OF TRUST

RECEIPT LAW IN HOLDING THE PETITIONERS LIABLE TO THE RESPONDENT."

The above assigned errors boil down to the following issues: (1) whether the Court of Appeals
erred in holding that petitioners are not relieved of their obligation to pay their loan after they
tried to tender the goods to the bank which refused to accept the same, and which goods were
subsequently lost in a fire; (2) whether the Court of Appeals erred when it ruled that petitioners
are solidarily liable for the payment of their obligations to the bank; and (3) whether the Court of
Appeals violated the Trust Receipts Law.

On the first issue, petitioners theorize that when petitioner RTMC imported the raw materials
needed for its manufacture, using the credit line, it was merely acting on behalf of the bank, the
true owner of the goods by virtue of the trust receipts. Hence, under the doctrine of res perit
domino, the bank took the risk of the loss of said raw materials. RTMCs role in the transaction
was that of end user of the raw materials and when it did not accept those materials as they did
not meet the manufacturing requirements, RTMC made a valid and effective tender of the goods
to the bank. Since the bank refused to accept the raw materials, RTMC stored them in its
warehouse. When the warehouse and its contents were gutted by fire, petitioners obligation to
the bank was accordingly extinguished.

Petitioners stance, however, conveniently ignores the true nature of its transaction with the
bank. We recall that RTMC filed with the bank an application for a credit line in the amount of
P10 million, but only P8 million was approved. RTMC then made withdrawals from this credit
line and issued several promissory notes in favor of the bank. In banking and commerce, a credit
line is "that amount of money or merchandise which a banker, merchant, or supplier agrees to
supply to a person on credit and generally agreed to in advance."3 It is the fixed limit of credit
granted by a bank, retailer, or credit card issuer to a customer, to the full extent of which the
latter may avail himself of his dealings with the former but which he must not exceed and is
usually intended to cover a series of transactions in which case, when the customers line of
credit is nearly exhausted, he is expected to reduce his indebtedness by payments before making
any further drawings.4

It is thus clear that the principal transaction between petitioner RTMC and the bank is a contract
of loan. RTMC used the proceeds of this loan to purchase raw materials from a supplier abroad.
In order to secure the payment of the loan, RTMC delivered the raw materials to the bank as
collateral. Trust receipts were executed by the parties to evidence this security arrangement.
Simply stated, the trust receipts were mere securities.

In Samo vs. People,5 we described a trust receipt 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."6

In Vintola vs. Insular Bank of Asia and America,7 we elucidated further that "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."8 Section 3 (h) of the Trust Receipts Law (P.D. No. 115) defines a
"security interest" as follows:

"(h) Security Interest means a property interest in goods, documents, or instruments to secure
performance of some obligation of the entrustee or of some third persons to the entruster and
includes title, whether or not expressed to be absolute, whenever such title is in substance taken
or retained for security only."

Petitioners insistence that the ownership of the raw materials remained with the bank is
untenable. In Sia vs. People,9 Abad vs. Court of Appeals,10 and PNB vs. Pineda,11 we held that:

"If under the trust receipt, the bank is made to appear as the owner, it was but an artificial
expedient, more of legal fiction than fact, for if it were really so, it could dispose of the goods in
any manner it wants, which it cannot do, just to give consistency with 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
thereof..."12

Thus, petitioners cannot be relieved of their obligation to pay their loan in favor of the bank.

Anent the second issue, petitioner Yujuico contends that the suretyship agreement he signed does
not bind him, the same being a mere formality.

We reject petitioner Yujuicos contentions for two reasons.

First, there is no record to support his allegation that the surety agreement is a "mere formality;"
and

Second, as correctly held by the Court of Appeals, the Suretyship Agreement signed by
petitioner Yujuico binds him. The terms clearly show that he agreed to pay the bank jointly and
severally with RTMC. The parole evidence rule under Section 9, Rule 130 of the Revised Rules
of Court is in point, thus:
"SEC. 9. Evidence of written agreements. When the terms of an agreement have been reduced
in writing, it is considered as containing all the terms agreed upon and there can be, between the
parties and their successors in interest, no evidence of such terms other than the contents of the
written agreement.

However, a party may present evidence to modify, explain, or add to the terms of the written
agreement if he puts in issue in his pleading:

(a) An intrinsic ambiguity, mistake, or imperfection in the written agreement;

(b) The failure of the written agreement to express the true intent and agreement of the
parties thereto;

(c) The validity of the written agreement; or

(d) The existence of other terms agreed to by the parties or their successors in interest
after the execution of the written agreement.

x x x."

Under this Rule, the terms of a contract are rendered conclusive upon the parties and evidence
aliunde is not admissible to vary or contradict a complete and enforceable agreement embodied
in a document.13 We have carefully examined the Suretyship Agreement signed by Yujuico and
found no ambiguity therein. Documents must be taken as explaining all the terms of the
agreement between the parties when there appears to be no ambiguity in the language of said
documents nor any failure to express the true intent and agreement of the parties.14

As to the third and final issue At the risk of being repetitious, we stress that the contract
between the parties is a loan. What respondent bank sought to collect as creditor was the loan it
granted to petitioners. Petitioners recourse is to sue their supplier, if indeed the materials were
defective.

WHEREFORE, the petition is DENIED. The assailed Decision and Resolution of the Court of
Appeals in CA-G.R. CV No. 48708 are AFFIRMED IN TOTO. Costs against petitioners.

SO ORDERED.

Panganiban, (Chairman), Corona, Carpio-Morales, and Garcia, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 151895 February 16, 2005

BANK OF COMMERCE, petitioner,
vs.
TERESITA S. SERRANO, respondent.

DECISION

QUISUMBING, J.:

For our review on certiorari is the civil aspect of the Court of Appeals Decision,1 dated
September 28, 2001, in CA-G.R. CR No. 24570 as well as its Resolution,2 dated January 17,
2002, denying petitioners motion for reconsideration. The Court of Appeals set aside the
Decision3 dated May 31, 2000, of the Regional Trial Court (RTC) Branch 105 of Quezon City.

The facts are as follows:

Petitioner Bank of Commerce (formerly Boston Bank of the Philippines) is a private domestic
banking institution. Respondent Teresita S. Serrano is the General Manager and Treasurer of Via
Moda International, Inc., a domestic business entity primarily engaged in the import and export
of textile materials and fabrics.

Via Moda International, represented by respondent, obtained an export packing loan from
petitioner, Bank of Commerce (BOC)-Diliman, Quezon City Branch, in the amount of
US$50,000 (P1,382,250), secured by a Deed of Assignment over Irrevocable Transferable Letter
of Credit No. 100072119. Respondent Serrano executed in favor of BOC Promissory Note No.
94/086 for US$50,000 dated May 6, 1994 with maturity date on July 14, 1994. Via Moda then
opened a deposit account for the proceeds of the said loan.4

On March 15, 1994, BOC issued to Via Moda, Irrevocable Letter of Credit No. BCZ-940051, in
the amount of US$56,735, for the purchase and importation of fabric and textile products from
Tiger Ear Fabric Co. Ltd. of Taiwan. To secure the release of the goods covered, respondent, in
representation of Via Moda, executed Trust Receipt No. 94-22221 dated April 21, 1994 with due
date on July 20, 1994 for US$55,944.73 (P1,554,424.32).5

Under the terms of the trust receipt, Via Moda agreed to hold the goods in trust for petitioner as
the latters property and to sell the same for the latters account. In case of sale, the proceeds are
to be remitted to the bank as soon as it is received, but not later than the maturity date. Said
proceeds are to be applied to the relative acceptances, with interest at the rate of 26% per annum,
with a penalty of 36% per annum of the total amount due until fully paid in case of non-payment
of the trust receipt and relative acceptance at maturity date or, in the alternative, to return the
goods in case of non-sale.6

The goods covered by the trust receipt were shipped by Via Moda to its consignee in New
Jersey, USA, who sent an Export Letter of Credit issued by the Bank of New York, in favor of
BOC. The Regional Operations Officer of BOC signed the export declarations to show consent
to the shipment.l^vvphi1.net The total value of the entrusted goods which were shipped per
export declaration was US$81,987 (P2,246,443.80). The proceeds of the entrusted goods sold
were not credited to the trust receipt but, were applied by the bank to the principal, penalties and
interest of the export packing loan. The excess P472,114.85 was applied to the trust receipt,
leaving a balance of P1,444,802.28 as of November 15, 1994.7

On November 16, 1994, petitioner sent a demand letter to Via Moda to pay the said amount plus
interest and penalty charges, or to return the goods covered by Trust Receipt No. 94-22221
within 5 days from receipt. The demand was not heeded. As of December 15, 1998, the
outstanding balance of Via Moda was P4,783,487.15.81vvphi1.nt

On March 8, 1998, respondent was charged with the crime of estafa under Article 315 (b) of the
Revised Penal Code in relation to Presidential Decree No. 115.9

On May 31, 2000, the trial court rendered judgment and the dispositive portion of which reads:

WHEREFORE, in the light of the foregoing, the Court finds accused Teresita S. Serrano
GUILTY beyond reasonable doubt of the crime charged in the Information filed in this case and
sentences her to serve the indeterminate penalty of imprisonment from EIGHT (8) YEARS AND
ONE (1) DAY OF PRISION MAYOR, AS MINIMUM, TO TWENTY (20) YEARS OF
RECLUSION TEMPORAL, AS MAXIMUM, including the accessory penalties. She is ordered
to pay her civil liability to Bank of Commerce in the amount of P4,783,487.15, with interest until
fully paid, and the costs of this suit.

SO ORDERED.10

Respondent appealed to the Court of Appeals which rendered a decision dated September 28,
2001, reversing the trial courts decision. The Court of Appeals held that the element of
misappropriation or conversion in violation of P.D. No. 115, in relation to the crime of estafa,
was absent in this case, thereby acquitting the respondent and deleting her civil liability. The
decretal portion of the decision reads as follows:

WHEREFORE, premises considered, the appealed decision is hereby REVERSED, and the
accused-appellant ACQUITTED of the crime charged. The civil liability adjudged by the court a
quo is hereby deleted, there being no showing that accused-appellant bound herself personally
liable with respect to the loan secured by the trust receipt.1awphi1.nt

SO ORDERED.11

Petitioner filed a Motion for Reconsideration which was denied. Petitioner now comes to this
Court submitting the following issues for our resolution:

I. WHETHER RESPONDENT IS JOINTLY AND SEVERALLY LIABLE WITH VIA

MODA UNDER THE GUARANTEE CLAUSE OF LC NO. [BCZ-940051] (EXHIBIT
A) SECURED BY TRUST RECEIPT NO. [94-22221] (EXHIBIT C).12
 II. WHETHER THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR
IN DELETING THE CIVIL LIABILITY OF RESPONDENT SERRANO IN ITS
DECISION DATED SEPTEMBER 28, 2001.13

On the first issue, petitioner contends that the Court of Appeals made a manifestly mistaken
inference from its findings or a misapprehension of facts and overlooked a vital piece of
evidence on record, particularly, the Guarantee Clause of the Letter of Credit secured by the
Trust Receipt. Petitioner further alleges that the said Guarantee Clause provides that the liability
of respondent is joint and solidary; hence, she should be held liable on the obligation.

A letter of credit is a separate document from a trust receipt. While the trust receipt may have
been executed as a security on the letter of credit, still the two documents involve different
undertakings and obligations. A letter of credit is 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. Through a letter of credit, the bank merely
substitutes its own promise to pay for the promise to pay of 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.14 By contrast, a trust receipt transaction is one where the
entruster, who holds an absolute title or security interests over certain goods, documents or
instruments, released the same to the entrustee, who executes a trust receipt binding himself to
hold the goods, documents or instruments in trust for the entruster and to sell or otherwise
dispose of the goods, documents and 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 return the goods, documents or instruments themselves if they are unsold, or not
otherwise disposed of, in accordance with the terms and conditions specified in the trust
receipt.15

However, the question of the liability of respondent based on the Guarantee Clause of the Letter
of Credit, was not raised either at the trial court or before the Court of Appeals. A question that
was never raised in the courts below cannot be allowed to be raised for the first time on appeal
without offending basic rules of fair play, justice and due process. Such an issue was not brought
to the fore either in the trial court or the appellate court, and would have been disregarded by the
latter tribunal for the reasons previously stated. With more reason, the same does not deserve
consideration by this Court.16

On the second issue, the Court of Appeals held that respondent Serrano cannot be held civilly
liable under the trust receipt since she was not made personally liable nor was she a guarantor
therein. The parties stipulated during the pre-trial that respondent Serrano executed the trust
receipt in representation of Via Moda, Inc., which has a separate personality from Serrano, and
petitioner BOC failed to show sufficient reason to justify the piercing of the veil of corporate
fiction. It thus ruled that this was not Serranos personal obligation but that of Via Moda and
there was no basis of finding her solidarily liable with Via Moda.17

Worthy of mention at this point is the Court of Appeals finding that there was no
misappropriation or conversion by the respondent of the proceeds of the sale in the goods,
subject of the trust receipt since the proceeds were actually received by petitioner but the latter
applied the same to Via Modas other obligations under the export packing loan. It further stated
that such application of payment to another obligation was done by petitioner on its own and
should not create a criminal liability on the part of respondent who did not take part nor had any
knowledge thereof. It is on this premise that the respondent was acquitted of the crime charged.18

Incidentally, petitioner urged this Court to review the factual findings of the case due to
contradictory findings of the trial court and the Court of Appeals arising from misappreciation of
facts by the Court of Appeals. Such plea must be rejected.l^vvphi1.net It is a well established rule
that in an appeal via certiorari, only questions of law may be raised,19 and we find petitioners
averments insufficient to disregard this well-entrenched rule. This Court does not, of itself,
automatically delve into the record of a case to determine the facts anew where there is
disagreement between the findings of fact by the trial court and by the Court of Appeals. When
the disagreement is merely on the probative value of the evidence, i.e., which is more credible of
two versions, we limit our review to only ascertaining if the findings of the Court of Appeals are
supported by the records. So long as the findings of the appellate court are consistent with and
not palpably contrary to the evidence on record, we shall decline to make a review on the
probative value of such evidence. The findings of fact of the Court of Appeals, and not those of
the trial court, will be considered final and conclusive, even in this Court.20 In this case, we find
no cogent reason to disturb the foregoing factual findings of the Court of Appeals.

At any rate, petitioner BOC is not precluded from filing a separate civil action against the
responsible party where the abovementioned issues could be properly resolved or determined.
The issues raised by herein petitioner involve a determination of facts and require the admission
and examination of additional evidence for its resolution. That cannot be done in a petition for
review on certiorari by merely appealing the civil aspect of an acquittal in a criminal case.

WHEREFORE, the petition is DENIED for lack of merit. The Decision dated September 28,
2001 and the Resolution dated January 17, 2002, of the Court of Appeals in CA-G.R. CR No.
24570, are AFFIRMED.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 180165 April 7, 2009

METROPOLITAN BANK & TRUST COMPANY, Petitioner,

vs.
HON. SECRETARY OF JUSTICE RAUL M. GONZALES, OLIVER T. YAO and DIANA
T. YAO, Respondents.
 DECISION

CHICO-NAZARIO, J.:

Before this Court is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of
Court filed by petitioner Metropolitan Bank and Trust Company, seeking to reverse and set aside
the Decision1 dated 30 March 2007and the Resolution2 dated 16 October 2007 of the Court of
Appeals in CA-G.R. SP No. 91892. In its assailed Decision and Resolution, the appellate court
affirmed the Resolution3 of the Secretary of Justice directing the City Prosecutor of Manila to
move for the withdrawal of the Informations for Estafa filed against private respondents Oliver
T. Yao and Diana T. Yao.

The factual and procedural antecedents of this present petition are as follows:

Petitioner is a banking institution duly authorized to engage in the banking business under
Philippine laws.

Private respondents were the duly authorized representatives of Visaland Inc. (Visaland),
likewise a domestic corporation engaged in the real estate development business.

In order to finance the importation of materials necessary for the operations of its sister
company, Titan Ikeda Construction and Development Corporation (TICDC), private
respondents, on behalf of Visaland, applied with petitioner for 24 letters of credit, the aggregate
amount of which reached the sum of P68,749,487.96. Simultaneous with the issuance of the
letters of credit, private respondents signed trust receipts4 in favor of petitioner. Private
respondents bound themselves to sell the goods covered by the letters of credit and to remit the
proceeds to petitioner, if sold, or to return the goods, if not sold, on or before their agreed
maturity dates.

When the trust receipts matured, private respondents failed to return the goods to petitioner, or to
return their value amounting to P68,749,487.96 despite demand. Thus, petitioner filed a criminal
complaint5 for estafa6 against Visaland and private respondents with the Office of the City
Prosecutor of Manila (City Prosecutor).7

In their Counter-Affidavit,8 private respondents denied having entered into trust receipt
transactions with petitioner. Instead, private respondents claimed that the contract entered into by
the parties was a Contract of Loan secured by a Real Estate Mortgage over two parcels of land
situated at Tagaytay City and registered under the name of the spouses Wilbert and Isabelita
King (the spouses King).9 According to private respondents, petitioner made them sign
documents bearing fine prints without apprising them of the real nature of the transaction
involved. Private respondents came to know of the trust receipt transaction only after they were
served a copy of the Affidavit-Complaint of the petitioner.

After the requisite preliminary investigation, the City Prosecutor found that no probable cause
existed and dismissed Information Sheet (I.S.) No. 02G-30918 in a Resolution10 dated 23
January 2003. While the City Prosecutor was not persuaded by the defense proffered by private
respondents that no trust receipt transaction existed, it nonetheless, dismissed the case for lack of
evidence that prior demand was made by petitioner. The City Prosecutor underscored that for a
charge of estafa with grave abuse of confidence to prosper, previous demand is an indispensable
requisite.

To prove that a demand was made prior to the institution of the criminal complaint, petitioner
attached to its Motion for Reconsideration a copy of a letter-demand11 dated 27 February 2001,
addressed to private respondents.

After the element of prior demand was satisfied, the City Prosecutor issued a Resolution12 dated
11 October 2004 finding probable cause for estafa under Article 315, paragraph 1(b)13 of the
Revised Penal Code, in relation to Presidential Decree No. 115.14 Accordingly, 23 separate
Informations15 for estafa were filed before the Regional Trial Court (RTC) of Manila against
private respondents. The cases were docketed as Criminal Cases No. 04231721-44 and raffled to
Branch 17 of the said court.

In the interim, private respondents appealed the investigating prosecutors Resolution to the
Secretary of Justice. In a Resolution16 dated 31 March 2005, the Secretary of Justice ruled that
there was no probable cause to prosecute private respondents for estafa in relation to Presidential
Decree No. 115. The Secretary of Justice declared that the legitimate transactional relationship
between the parties being merely a contract of loan, violations of the terms thereunder were not
covered by Presidential Decree No. 115. Thus, the Secretary of Justice directed the City
Prosecutor of Manila to move for the withdrawal of the Informations. In a subsequent
Resolution17 dated 30 August 2005, the Secretary of Justice denied petitioners Motion for
Reconsideration, for the matters raised therein had already been passed upon in his prior
resolution.

Acting on the directive of the Secretary of Justice, the City Prosecutor moved for the withdrawal
of the Informations which was granted by the RTC in an Order18 dated 29 July 2005.
Consequently, Criminal Cases No. 04-231721 to No. 04231744 were withdrawn. The RTC
refused to reconsider its earlier resolution in an Order19 dated 3 February 2006, thereby denying
petitioners Motion for Reconsideration.

From the adverse Resolutions of the Secretary of Justice, petitioner elevated its case before the
Court of Appeals by filing a Petition for Certiorari,20 which was docketed as CA-G.R. SP No.
91892. Petitioner averred in its Petition that the Secretary of Justice abused his discretion in
ignoring the established facts and legal principles when he ruled that probable cause for the
crime of estafa was absent.

The Court of Appeals, however, in its Decision21 dated 30 March 2007, dismissed petitioners
Petition for Certiorari after finding that the Secretary of Justice committed no grave abuse of
discretion in ruling against the existence of probable cause to prosecute private respondents. In
arriving at its assailed decision, the appellate court recognized the authority of the Secretary of
Justice to control and supervise the prosecutors, which includes the power to reverse or modify
their decisions without committing grave abuse of discretion.
Similarly ill-fated was Petitioners Motion for Reconsideration in a Resolution22 dated 16
October 2007.

Unfazed by the turn of events, petitioner now comes before this Court urging us to reverse the
Court of Appeals Decision and Resolution and to direct the filing of Informations against private
respondents. For the disposition of this Court is the sole issue of:

WHETHER OR NOT PROBABLE CAUSE EXISTS FOR THE PROSECUTION OF

PRIVATE RESPONDENTS FOR THE CRIME OF ESTAFA IN RELATION TO P.D. NO.
115.

Petitioner impugns the findings of the appellate court sustaining the non-existence of probable
cause as found by the Secretary of Justice. Petitioner insists that the allegations in its complaint,
together with the pieces of evidence appended thereon, are sufficient to sustain a finding of
probable cause in preliminary investigation.

Asserting their innocence, private respondents continue to argue that the agreement contracted
by parties is one of loan, and not of trust receipt. To buttress their contention, private respondents
aver that a contract of mortgage was executed by the spouses King to secure private respondents
loan obligation with petitioner, the proceeds of which were the ones utilized to finance the
importation of materials.23 Private respondents likewise defend the assailed Court of Appeals
Decision and assert that the Secretary of Justice was justified in overruling the investigating
prosecutors findings, as sanctioned by Section 12 of DOJ Department Order No. 70.24

The present petition bears impressive merits.

Probable cause has been defined as the existence of such facts and circumstances as would excite
the belief in a reasonable mind, acting on the facts within the knowledge of the prosecutor, that
the person charged was guilty of the crime for which he was prosecuted. Probable cause is a
reasonable ground of presumption that a matter is, or may be, well founded on such a state of
facts in the mind of the prosecutor as would lead a person of ordinary caution and prudence to
believe, or entertain an honest or strong suspicion, that a thing is so.25 The term does not mean
"actual or positive cause" nor does it import absolute certainty. It is merely based on opinion and
reasonable belief. Thus, a finding of probable cause does not require an inquiry into whether
there is sufficient evidence to procure a conviction. It is enough that it is believed that the act or
omission complained of constitutes the offense charged. Precisely, there is a trial for the
reception of evidence of the prosecution in support of the charge.26

To determine the existence of probable cause, there is need to conduct preliminary investigation.
A preliminary investigation constitutes a realistic judicial appraisal of the merits of a case.27 Its
purpose is to determine whether (a) a crime has been committed; and (b) whether there is a
probable cause to believe that the accused is guilty thereof.28 It is a means of discovering which
person or persons may be reasonably charged with a crime.

The conduct of preliminary investigation is executive in nature. The Court may not be compelled
to pass upon the correctness of the exercise of the public prosecutors function unless there is a
showing of grave abuse of discretion or manifest error in his findings.29 Grave abuse of
discretion implies a capricious and whimsical exercise of judgment tantamount to lack or excess
of jurisdiction.30 The exercise of power must have been done in an arbitrary or a despotic manner
by reason of passion or personal hostility. It must have been so patent and gross as to amount to
an evasion of positive duty or a virtual refusal to perform the duty enjoined or to act at all in
contemplation of law.31

In the present case, the abuse of discretion is patent in the act of the Secretary of Justice holding
that the contractual relationship forged by the parties was a simple loan, for in so doing, the
Secretary of Justice assumed the function of the trial judge of calibrating the evidence on record,
done only after a full-blown trial on the merits. The fact of existence or non-existence of a trust
receipt transaction is evidentiary in nature, the veracity of which can best be passed upon after
trial on the merits, for it is virtually impossible to ascertain the real nature of the transaction
involved based solely on the self-serving allegations contained in the opposing parties
pleadings. Clearly, the Secretary of Justice is not in a competent position to pass judgment on
substantive matters. The bases of a partys accusation and defenses are better ventilated at the
trial proper than at the preliminary investigation.

We need not overemphasize that in a preliminary investigation, the public prosecutor merely
determines whether there is probable cause or sufficient ground to engender a well-founded
belief that a crime has been committed, and that the respondent is probably guilty thereof and
should be held for trial. It does not call for the application of rules and standards of proof that a
judgment of conviction requires after trial on the merits. The complainant need not present at this
stage proof beyond reasonable doubt. A preliminary investigation does not require a full and
exhaustive presentation of the parties evidence.32 Precisely, there is a trial to allow the reception
of evidence for both parties to substantiate their respective claims.

Having said the foregoing, this Court now proceeds to determine whether probable cause exists
for holding private respondents liable for estafa in relation to Presidential Decree No. 115.

Trust receipt transactions are governed by the provisions of Presidential Decree No. 115 which
defines such a transaction as follows:

Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the
meaning of this Decree, is 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 latters
execution and delivery to the entruster of a signed document called a "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, documents or instruments themselves
if they are unsold or not otherwise disposed of, in accordance with the terms and conditions
specified in the trust receipt, or for other purposes substantially equivalent to any one of the
following:
 1. In the case of goods or documents, (a) to sell the goods or procure their sale; or (b) to
manufacture or process the goods with the purpose of ultimate sale: Provided, That, in the
case of goods delivered under trust receipt for the purpose of manufacturing or
processing before its ultimate sale, the entruster shall retain its title over the goods
whether in its original or processed form until the entrustee has complied fully with his
obligation under the trust receipt; or (c) to load, unload, ship or transship or otherwise
deal with them in a manner preliminary or necessary to their sale; or

2. In the case of instruments, a) to sell or procure their sale or exchange; or b) to deliver

them to a principal; or c) to effect the consummation of some transactions involving
delivery to a depository or register; or d) to effect their presentation, collection or
renewal.

The sale of goods, documents or instruments by a person in the business of selling goods,
documents or instruments for profit who, at the outset of the transaction, has, as against the
buyer, general property rights in such goods, documents or instruments, or who sells the same to
the buyer on credit, retaining title or other interest as security for the payment of the purchase
price, does not constitute a trust receipt transaction and is outside the purview and coverage of
this Decree.

An entrustee is one having or taking possession of goods, documents or instruments under a trust
receipt transaction, and any successor in interest of such person for the purpose of payment
specified in the trust receipt agreement. The entrustee is obliged to (1) hold the goods,
documents or instruments in trust for the entruster and shall dispose of them strictly in
accordance with the terms and conditions of the trust receipt; (2) receive the proceeds in trust for
the entruster and turn over the same to the entruster to the extent of the amount owed to the
entruster or as appears on the trust receipt; (3) insure the goods for their total value against loss
from fire, theft, pilferage or other casualties; (4) keep said goods or the proceeds therefrom
whether in money or whatever form, separate and capable of identification as property of the
entruster; (5) return the goods, documents or instruments in the event of non-sale or upon
demand of the entruster; and (6) observe all other terms and conditions of the trust receipt not
contrary to the provisions of the decree.33

The entruster shall be entitled to the proceeds from the sale of the goods, documents or
instruments released under a trust receipt to the entrustee to the extent of the amount owed to the
entruster or as appears in the trust receipt; or to the return of the goods, documents or instruments
in case of non-sale; and to the enforcement of all other rights conferred on him in the trust
receipt, provided these are not contrary to the provisions of the document.34 A violation of any of
these undertakings constitutes estafa defined under Article 315(1)(b) of the Revised Renal Code,
as provided by Section 13 of Presidential Decree No. 115 viz:

Section 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.

Apropos thereto, Article 315(1)(b) of the Revised Renal Code punishes estafa committed as
follows:

ARTICLE 315. Swindling (estafa). Any person who shall defraud another by any of the means
mentioned hereinbelow shall be punished by:

1st. The penalty of prision correccional in its maximum period to prision mayor in its
minimum period, if the amount of the fraud is over 12,000 pesos but does not exceed
22,000 pesos, and if such amount exceeds the latter sum, the penalty provided in this
paragraph shall be imposed in its maximum period, adding one year for each additional
10,000 pesos; but the total penalty which may be imposed shall not exceed twenty years.
In such case, and in connection with the accessory penalties which may be imposed and
for the purpose of the other provisions of this Code, the penalty shall be termed prision
mayor to reclusion temporal, as the case may be.

2nd. The penalty of prision correccional in its minimum and medium periods, if the
amount of the fraud is over 6,000 pesos but does not exceed 12,000 pesos;

3rd. The penalty of arresto mayor in its maximum period to prision correccional in its
minimum period, if such amount is over 200 pesos but does not exceed 6,000 pesos; and

4th. By arresto mayor in its medium and maximum periods, if such amount does not
exceed 200 pesos, provided that in the four cases mentioned, the fraud be committed by
any of the following means; x x x.

As found in the Complaint-Affidavit of petitioner, private respondents were charged with failing
to account for or turn over to petitioner the merchandise or goods covered by the trust receipts or
the proceeds of the sale thereof in payment of their obligations thereunder. The following pieces
of evidence adduced from the affidavits and documents submitted before the City Prosecutor are
sufficient to establish the existence of probable cause, to wit:

First, the trust receipts35 bearing the genuine signatures of private respondents; second, the
demand letter36 of petitioner addressed to respondents; and third, the initial admission by private
respondents of the receipt of the imported goods from petitioner.37

Prescinding from the foregoing, we conclude that there is ample evidence on record to warrant a
finding that there is a probable cause to warrant the prosecution of private respondents for estafa.
It must be once again stressed that probable cause does not require an inquiry into whether there
is sufficient evidence to procure a conviction. It is enough that it is believed that the act or
omission complained of constitutes the offense charged.

That private respondents did not sell the goods under the trust receipt but allowed it to be used by
their sister company is of no moment. The offense punished under Presidential Decree No. 115 is
in the nature of malum prohibitum. A mere failure to deliver the proceeds of the sale or the
goods, if not sold, constitutes a criminal offense that causes prejudice not only to another, but
more to the public interest.38 Even more incredible is the contention of private respondents that
they did not give much significance to the documents they signed, considering the enormous
value of the transaction involved. Thus, it is highly improbable to mistake trust receipt
documents for a contract of loan when the heading thereon printed in bold and legible letters
reads: "Trust Receipts." We are not prejudging this case on the merits. However, by merely
glancing at the documents submitted by petitioner entitled "Trust Receipts" and the arguments
advanced by private respondents, we are convinced that there is probable cause to file the case
and to hold them for trial.1avvphi1

All told, the evidentiary measure for the propriety of filing criminal charges has been reduced
and liberalized to a mere probable cause. As implied by the words themselves, "probable cause"
is concerned with probability, not absolute or moral certainty.39

WHEREFORE, premises considered, the instant Petition is GRANTED. The Decision dated 30
March 2007 and the Resolution dated 16 October 2007 of the Court of Appeals in CA-G.R. SP
No. 91892 are REVERSED and SET ASIDE. The Secretary of Justice is hereby ORDERED to
direct the Office of the City Prosecutor of Manila to forthwith FILE Informations for estafa
against private respondents Oliver T. Yao and Diana T. Yao before the appropriate court.

SO ORDERED.

MINITA V. CHICO-NAZARIO
Associate Justice

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 159622 July 30, 2004

LANDL & COMPANY (PHIL.) INC., PERCIVAL G. LLABAN and MANUEL P.

LUCENTE, petitioners,
vs.
METROPOLITAN BANK & TRUST COMPANY, respondent.
 DECISION

YNARES-SANTIAGO, J.:

At issue in this petition for review on certiorari is whether or not, in a trust receipt transaction,
an entruster which had taken actual and juridical possession of the goods covered by the trust
receipt may subsequently avail of the right to demand from the entrustee the deficiency of the
amount covered by the trust receipt.

As correctly appreciated by the Court of Appeals, the undisputed facts of this case are as follows:

Respondent Metropolitan Bank and Trust Company (Metrobank) filed a complaint for sum of
money against Landl and Company (Phil.) Inc. (Landl) and its directors, Percival G. Llaban and
Manuel P. Lucente before the Regional Trial Court of Cebu City, Branch 19, docketed as Civil
Case No. CEB-4895.

Respondent alleged that petitioner corporation is engaged in the business of selling imported
welding rods and alloys. On June 17, 1983, it opened Commercial Letter of Credit No. 4998 with
respondent bank, in the amount of US$19,606.77, which was equivalent to P218,733.92 in
Philippine currency at the time the transaction was consummated. The letter of credit was opened
to purchase various welding rods and electrodes from Perma Alloys, Inc., New York, U.S.A., as
evidenced by a Pro-Forma Invoice dated March 10, 1983. Petitioner corporation put up a
marginal deposit of P50,414.00 from the proceeds of a separate clean loan.

As an additional security, and as a condition for the approval of petitioner corporation's

application for the opening of the commercial letter of credit, respondent bank required
petitioners Percival G. Llaban and Manuel P. Lucente to execute a Continuing Suretyship
Agreement to the extent of P400,000.00, excluding interest, in favor of respondent bank.
Petitioner Lucente also executed a Deed of Assignment in the amount of P35,000.00 in favor of
respondent bank to cover the amount of petitioner corporation's obligation to the bank. Upon
compliance with these requisites, respondent bank opened an irrevocable letter of credit for the
petitioner corporation.

To secure the indebtedness of petitioner corporation, respondent bank required the execution of a
Trust Receipt in an amount equivalent to the letter of credit, on the condition that petitioner
corporation would hold the goods in trust for respondent bank, with the right to sell the goods
and the obligation to turn over to respondent bank the proceeds of the sale, if any. If the goods
remained unsold, petitioner corporation had the further obligation to return them to respondent
bank on or before November 23, 1983.

Upon arrival of the goods in the Philippines, petitioner corporation took possession and custody
thereof.
On November 23, 1983, the maturity date of the trust receipt, petitioner corporation defaulted in
the payment of its obligation to respondent bank and failed to turn over the goods to the latter.
On July 24, 1984, respondent bank demanded that petitioners, as entrustees, turn over the goods
subject of the trust receipt. On September 24, 1984, petitioners turned over the subject goods to
the respondent bank.

On July 31, 1985, in the presence of representatives of the petitioners and respondent bank, the
goods were sold at public auction. The goods were sold for P30,000.00 to respondent bank as the
highest bidder.

The proceeds of the auction sale were insufficient to completely satisfy petitioners' outstanding
obligation to respondent bank, notwithstanding the application of the time deposit account of
petitioner Lucente. Accordingly, respondent bank demanded that petitioners pay the remaining
balance of their obligation. After petitioners failed to do so, respondent bank instituted the instant
case to collect the said deficiency.

On March 31, 1997, after trial on the merits, the trial court rendered a decision, the dispositive
portion of which reads:

WHEREFORE, foregoing premises considered, Judgment is hereby rendered in favor of

the plaintiff and against the defendant by (1) ordering the defendant to pay jointly and
severally to the plaintiff the sum of P292,172.23 representing the defendant's obligation,
as of April 17, 1986; (2) to pay the interest at the rate of 19% per annum to be reckoned
from April 18, 1986 until [the] obligation is fully paid; (3) to pay service charge at the
rate of 2% per annum starting April 18, 1986; (4) to pay the sum equivalent to 10% per
annum of the total amount due collectible by way of Attorney's Fees; (5) to pay Litigation
Expenses of P3,000.00 and to pay the cost of the suit; and (6) to pay penalty charge of
12% per annum.

SO ORDERED.1

Petitioners appealed to the Court of Appeals, raising the issues of: (1) whether or not respondent
bank has the right to recover any deficiency after it has retained possession of and subsequently
effected a public auction sale of the goods covered by the trust receipt; (2) whether or not
respondent bank is entitled to the amount of P3,000.00 as and for litigation expenses and costs of
the suit; and (3) whether or not respondent bank is entitled to the award of attorney's fees.

On February 13, 2003, the Court of Appeals rendered a decision affirming in toto the decision of
the trial court.2

Hence, this petition for review on the following assignment of errors:

I.

THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN AFFIRMING THE

TRIAL COURT'S RULING THAT RESPONDENT HAD THE RIGHT TO CLAIM
 THE DEFICIENCY FROM PETITIONERS NOTWITHSTANDING THE FACT THAT
THE GOODS COVERED BY THE TRUST RECEIPT WERE FULLY TURNED OVER
TO RESPONDENT.

II.

THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN AFFIRMING THE

TRIAL COURT'S PATENTLY ERRONEOUS AWARD OF PRINCIPAL
OBLIGATION, INTEREST, ATTORNEY'S FEES, AND PENALTY AGAINST THE
PETITIONERS.3

The instant petition is partly meritorious.

The resolution of the first assigned error hinges on the proper interpretation of Section 7 of
Presidential Decree No. 115, or the Trust Receipts Law, which reads:

Sec. 7. Rights of the entruster. - The entruster shall be entitled to the proceeds from the
sale of the goods, documents or instruments released under a trust receipt to the entrustee
to the extent of the amount owing to the entruster or as appears in the trust receipt, or to
the return of the goods, documents or instruments in case of non-sale, and to the
enforcement of all other rights conferred on him in the trust receipt provided such are not
contrary to the provisions of this Decree.

The entruster may cancel the trust and take possession of the goods, documents or
instruments subject of the trust or of the proceeds realized therefrom at any time upon
default or failure of the entrustee to comply with any of the terms and conditions of the
trust receipt or any other agreement between the entruster and the entrustee, and the
entruster in possession of the goods, documents or instruments may, on or after default,
give notice to the entrustee of the intention to sell, and may, not less than five days after
serving or sending of such notice, sell the goods, documents or instruments at public or
private sale, and the entruster may, at a public sale, become a purchaser. The proceeds of
any such sale, whether public or private, shall be applied (a) to the payment of the
expenses thereof; (b) to the payment of the expenses of re-taking, keeping and storing the
goods, documents or instruments; (c) to the satisfaction of the entrustee's indebtedness to
the entruster. The entrustee shall receive any surplus but shall be liable to the entruster for
any deficiency. Notice of sale shall be deemed sufficiently given if in writing, and either
personally served on the entrustee or sent by post-paid ordinary mail to the entrustee's
last known business address.

There is no question that petitioners failed to pay their outstanding obligation to respondent
bank. They contend, however, that when the entrustee fails to settle his principal loan, the
entruster may choose between two separate and alternative remedies: (1) the return of the goods
covered by the trust receipt, in which case, the entruster now acquires the ownership of the goods
which the entrustee failed to sell; or (2) cancel the trust and take possession of the goods, for the
purpose of selling the same at a private sale or at public auction. Petitioners assert that, under this
second remedy, the entruster does not acquire ownership of the goods, in which case he is
entitled to the deficiency. Petitioners argue that these two remedies are so distinct that the
availment of one necessarily bars the availment of the other. Thus, when respondent bank availed
of the remedy of demanding the return of the goods, the actual return of all the unsold goods
completely extinguished petitioners' liability.4

Petitioners' argument is bereft of merit.

A trust receipt is inextricably linked with the primary agreement between the parties. Time and
again, we have emphasized that a trust receipt agreement is merely a collateral agreement, the
purpose of which is to serve as security for a loan. Thus, in Abad v. Court of Appeals,5 we ruled:

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 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. x x x.

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.6

The Trust Receipts Law was enacted to safeguard commercial transactions and to offer an
additional layer of security to the lending bank. Trust receipts are indispensable contracts in
international and domestic business transactions. The prevalent use of trust receipts, the danger
of their misuse and/or misappropriation of the goods or proceeds realized from the sale of goods,
documents or instruments held in trust for entruster banks, and the need for regulation of trust
receipt transactions to safeguard the rights and enforce the obligations of the parties involved are
the main thrusts of the Trust Receipts Law.7

The second paragraph of Section 7 provides a statutory remedy available to an entruster in the
event of default or failure of the entrustee to comply with any of the terms and conditions of the
trust receipt or any other agreement between the entruster and the entrustee. More specifically,
the entruster "may cancel the trust and take possession of the goods, documents or instruments
subject of the trust or of the proceeds realized therefrom at any time". The law further provides
that "the entruster in possession of the goods, documents or instruments may, on or after default,
give notice to the entrustee of the intention to sell, and may, not less than five days after serving
or sending of such notice, sell the goods, documents or instruments at public or private sale, and
the entruster may, at a public sale, become a purchaser. The proceeds of any such sale, whether
public or private, shall be applied (a) to the payment of the expenses thereof; (b) to the payment
of the expenses of re-taking, keeping and storing the goods, documents or instruments; (c) to the
satisfaction of the entrustee's indebtedness to the entruster. The entrustee shall receive any
surplus but shall be liable to the entruster for any deficiency."

The trust receipt between respondent bank and petitioner corporation contains the following
relevant clauses:
 The BANK/ENTRUSTER may, at any time, and only at its option, cancel this trust and
take possession of the goods/documents/instruments subject hereof or of the proceeds
realized therefrom wherever they may then be found, upon default or failure of the
ENTRUSTEE to comply with any of the terms and conditions of this Trust Receipt or of
any other agreement between the BANK/ENTRUSTER and the ENTRUSTEE; and the
BANK/ENTRUSTER having taken repossession of the goods/documents/instruments
object hereof may, on or after default, give at least five (5) days' previous notice to the
ENTRUSTEE of its intention to sell the goods/documents/instruments at public or private
sale, at which public sale, it may become a purchaser; Provided, that the proceeds of any
such sale, whether public or private, shall be applied: (a) to the payment of the expenses
thereof; (b) to the payment of the expenses of retaking, keeping and storing the
goods/documents/instruments; (c) to the satisfaction of all of the ENTRUSTEE's
indebtedness to the BANK/ENTRUSTER; and Provided, further, that the ENTRUSTEE
shall receive any surplus thereof but shall, in any case, be liable to the
BANK/ENTRUSTER for any deficiency. x x x

No act or omission on the part of the BANK/ENTRUSTER shall be deemed and

considered a waiver of any of its rights hereunder or under any related letters of credit,
drafts or other documents unless such waiver is expressly made in writing over the
signature of the BANK/ENTRUSTER.8

The afore-cited stipulations in the trust receipt are a near-exact reproduction of the second
paragraph of Section 7 of the Trust Receipts Law. The right of repossession and subsequent sale
at public auction which were availed of by respondent bank were rights available upon default,
and which were conferred by statute and reinforced by the contract between the parties.

The initial repossession by the bank of the goods subject of the trust receipt did not result in the
full satisfaction of the petitioners' loan obligation. Petitioners are apparently laboring under the
mistaken impression that the full turn-over of the goods suffices to divest them of their
obligation to repay the principal amount of their loan obligation. This is definitely not the case.
In Philippine National Bank v. Hon. Gregorio G. Pineda and Tayabas Cement Company, Inc.,9
we had occasion to rule:

PNB's possession of the subject machinery and equipment being precisely as a form of
security for the advances given to TCC under the Letter of Credit, said possession by
itself cannot be considered payment of the loan secured thereby. Payment would legally
result only after PNB had foreclosed on said securities, sold the same and applied the
proceeds thereof to TCC's loan obligation. Mere possession does not amount to
foreclosure for foreclosure denotes the procedure adopted by the mortgagee to terminate
the rights of the mortgagor on the property and includes the sale itself.

Neither can said repossession amount to dacion en pago. Dation in payment takes place
when property is alienated to the creditor in satisfaction of a debt in money and the same
is governed by sales. Dation in payment is the delivery and transmission of ownership of
a thing by the debtor to the creditor as an accepted equivalent of the performance of the
obligation. As aforesaid, the repossession of the machinery and equipment in question
 was merely to secure the payment of TCC's loan obligation and not for the purpose of
transferring ownership thereof to PNB in satisfaction of said loan. Thus, no dacion en
pago was ever accomplished. (Citations omitted, underscoring supplied)10

Indeed, in the 1987 case of Vintola v. Insular Bank of Asia and America,11 we struck down the
position of the petitioner-spouses that their obligation to the entruster bank had been
extinguished when they relinquished possession of the goods in question. Thus:

A trust receipt 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. As defined in our laws:

(h) Security Interest means a property interest in goods, documents or instruments

to secure performance of some obligations of the entrustee or of some third
persons to the entruster and includes title, whether or not expressed to be absolute,
whenever such title is in substance taken or retained for security only.

xxx xxx xxx

Contrary to the allegations of the VINTOLAS, IBAA did not become the real owner of
the goods. It was merely the holder of a security title for the advances it had made to the
VINTOLAS. The goods the VINTOLAS had purchased through IBAA financing remain
their own property and they hold it at their own risk. The trust receipt arrangement did
not convert the IBAA into an investor; the latter remained a lender and creditor.

"x x x for the bank has previously extended a loan which the L/C 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 thereof. x x x"

Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot justifiably
claim that because they have surrendered the goods to IBAA and subsequently deposited
them in the custody of the court, they are absolutely relieved of their obligation to pay
their loan because of their inability to dispose of the goods. The fact that they were
unable to sell the seashells in question does not affect IBAA's right to recover the
advances it had made under the Letter of Credit. (Citations omitted.)12

Respondent bank's repossession of the properties and subsequent sale of the goods were
completely in accordance with its statutory and contractual rights upon default of petitioner
corporation.
The second paragraph of Section 7 expressly provides that the entrustee shall be liable to the
entruster for any deficiency after the proceeds of the sale have been applied to the payment of the
expenses of the sale, the payment of the expenses of re-taking, keeping and storing the goods,
documents or instruments, and the satisfaction of the entrustee's indebtedness to the entruster.

In the case at bar, the proceeds of the auction sale were insufficient to satisfy entirely petitioner
corporation's indebtedness to the respondent bank. Respondent bank was thus well within its
rights to institute the instant case to collect the deficiency.

We find, however, that there has been an error in the computation of the total amount of
petitioners' indebtedness to respondent bank.

Although respondent bank contends that the error of computation is a question of fact which is
beyond the power of this Court to review,13 the total amount of petitioners' indebtedness in this
case is not a question of fact. Rather, it is a question of law, i.e., the application of legal
principles for the computation of the amount owed to respondent bank, and is thus a matter
properly brought for our determination.

The first issue involves the amount of indebtedness prior to the imposition of interest and penalty
charges. The initial amount of the trust receipt of P218,733.92, was reduced to P192,265.92 as of
June 14, 1984, as per respondent's Statement of Past Due Trust Receipt dated December 1,
1993.14 This amount presumably includes the application of P35,000.00, the amount of petitioner
Lucente's Deed of Assignment, which amount was applied by respondent bank to petitioners'
obligation. No showing was made, however, that the P30,000.00 proceeds of the auction sale on
July 31, 1985 was ever applied to the loan. Neither was the amount of P50,414.00, representing
the marginal deposit made by petitioner corporation, deducted from the loan. Although
respondent bank contends that the marginal deposit should not be deducted from the principal
obligation, this is completely contrary to prevailing jurisprudence allowing the deduction of the
marginal deposit, thus:

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.

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 place 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).15

The net amount of the obligation, represented by respondent bank to be P292,172.23 as of April
17, 1986, would thus be P211,758.23.

To this principal amount must be imposed the following charges: (1) 19% interest per annum, in
keeping with the terms of the trust receipt;16 and (2) 12% penalty per annum, collected based on
the outstanding principal obligation plus unpaid interest, again in keeping with the wording of
the trust receipt.17 It appearing that petitioners have paid the interest and penalty charges until
April 17, 1986, the reckoning date for the computation of the foregoing charges must be April
18, 1986.

A perusal of the records reveals that the trial court and the Court of Appeals erred in imposing
service charges upon the petitioners. No such stipulation is found in the trust receipt. Moreover,
the trial court and the Court of Appeals erred in computing attorney's fees equivalent to 10% per
annum, rather than 10% of the total amount due. There is no basis for compounding the interest
annually, as the trial court and Court of Appeals have done. This amount would be
unconscionable.

Finally, Lucente and Llaban's contention that they are not solidarily liable with petitioner
corporation is untenable. As co-signatories of the Continuing Suretyship Agreement, they bound
themselves, inter alia, to pay the principal sum in the amount of not more than P400,000.00;
interest due on the principal obligation; attorney's fees; and expenses that may be incurred in
collecting the credit. The amount owed to respondent bank is the amount of the principal,
interest, attorney's fees, and expenses in collecting the principal amount. The Continuing
Suretyship Agreement expressly states the nature of the liability of Lucente and Llaban:

The liability of the SURETY shall be solidary, direct and immediate and not contingent
upon the bank's pursuit of whatever remedies the BANK have [sic] against the Borrower
or the securities or liens the BANK may possess and the SURETY will at any time,
whether due or not due, pay to the BANK with or withour demand upon the Borrower,
any of the instruments of indebtedness or other obligation hereby guaranteed by the
SURETY.18

Solidary liability is one of the primary characteristics of a surety contract,19 and the Continuing
Suretyship Agreement expressly stipulates the solidary nature of Lucente and Llaban's liability.
All three petitioners thus share the solidary obligation in favor of respondent bank, which is
given the right, under the Civil Code, to proceed against any one of the solidary debtors or some
or all of them simultaneously.20

WHEREFORE, premises considered, the instant petition is PARTIALLY GRANTED. The

decision of the Court of Appeals in CA-G.R. CV No. 58193 dated February 13, 2003 is
AFFIRMED with MODIFICATIONS. Accordingly, petitioners are ordered to pay respondent
bank the following: (1) P211,758.23 representing petitioners' net obligation as of April 17, 1986;
(2) interest at the rate of 19% per annum and penalty at the rate of 12% per annum reckoned
from April 18, 1986; (3) attorney's fees equivalent to 10% of the total amount due and
collectible; and (4) litigation expenses in the amount of P3,000.00. The service charge at the rate
of 2% per annum beginning April 18, 1986 is deleted. Costs against petitioners.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Quisumbing, Carpio, and Azcuna, JJ., concur.