Reliance Commodities, Inc. vs. Daewoo Industrial Co., Ltd.
sales of goods to satisfy the seemingly irreconcilable interests of a
DOCTRINE: The primary purpose of the letter of credit is to substitute for, and therefore
support, the agreement of the buyer/importer to pay money under a contract or other
arrangement.—A letter of credit is one of the modes of payment, set out in Sec. 8,
Central Bank Circular No. 1389, “Consolidated Foreign Exchange Rules and
Regulations”, dated 13 April 1993, by which commercial banks sell foreign exchange to
service payments for, e.g., commodity imports. The primary purpose of the letter of
credit is to substitute for, and therefore support, the agreement of the buyer/ importer to
pay money under a contract or other arrangement. It creates in the seller/exporter a
secure expectation of payment.
FACTS:
 Reliance Commodities, Inc. (Reliance) and Daewoo Industrial Co Ltd
(Daewoo) entered into a contract of sale where Reliance undertook to ship
and deliver to Daewoo 2,000 tons of foundry pig iron.
 First contract was consummated and completed but Daewoo fell short of
135.655 metric tons.
 Second contract for 2,000 metric tons was also perfected. However, Reliance’s
application for a letter of credit was denied by the China Banking
Corporation, and it was shown later that the reason for this is that it has
exceeded its foreign exchange allocation.
 Because of the failure of Reliance to comply with its undertaking under the
contract, Daewoo was forced to sell the foundry pig irons to another buyer at
a lower price.
 Reliance filed an action for damages against Daewoo for the recovery of
P226,370.48 representing the value of the short delivery of 135.655 metric tons
of foundry pig iron under the first contract.
 Daewoo filed a counterclaim, contending that Reliance was guilty of breach
of contract when it failed to open a letter of credit as required in the second
contract.
ISSUE:
W/N the failure of an importer (Reliance) to open a letter of credit on the date agreed
upon makes him liable to the exporter (Daewoo) for damages.
RULING: RELIANCE IS LIABLE.
A. DISCUSSION OF LETTER OF CREDIT:
In addressing this issue, it is useful to recall the nature of a Letter of Credit, and
the mechanics involved in applying for a Letter of Credit.
NATURE = Bank of America, NT & SA v. Court of Appeals
“A letter of credit is a financial device developed by
merchants as a convenient and relatively safe mode of dealing with
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.”
B. DISCUSSION ABOUT PERFECTION OF CONTRACT BETWEEN RELIANCE AND DAEWOO:
Reliance and Daewoo, having reached “a meeting of minds” in respect of the
subject matter of the contract (2000 metric tons of foundry pig iron with a specified
chemical composition), the price thereof (US $380,600.00), and other principal provisions
“they had a perfected contract.”
The failure of Reliance to open, the appropriate L/C did not prevent the birth of that
contract, and neither did such failure extinguish that contract.
The opening of the L/C in favor of Daewoo was an obligation of Reliance and the
performance of that obligation by Reliance was a condition for enforcement of the
reciprocal obligation of Daewoo to ship the subject matter of the contract—the foundry
pig iron—to Reliance.
THEREFORE, the contract itself between Reliance and Daewoo had already sprung into
legal existence and was enforceable.
C. DISCUSSION ABOOUT FAILURE OF RELIANCE TO ACQUIRE LC MADE HIM SOLELY
RESPONSIBLE.
The Central Bank of the Philippines has established the following requirements
for opening a letter of credit: “All L/C’s must be opened on or before the date of
shipment with maximum validity of one (1) year. Likewise, only one L/C should be
opened for each import transaction. For purposes of opening an L/C, importers shall
submit to the commercial bank the following documents:
A) duly accomplished LC application
B) firm offer/proforma invoice;
C) permits/clearances from the appropriate government agencies
D) duly accomplished Import Entry Declaration (IED)
In this case, third document is missing, the Iron and Steel Authority (ISA) is the
government agency designated to issue the permit or clearance. The record shows that
the opening of the L/C in the instant case became very difficult because Reliance had
exhausted its dollar allocation.
As a rule, when the importer has exceeded its foreign exchange allocation, his
application would be denied. For having exceeded its foreign exchange allocation
before it entered into the 31 July 1980 contract with Daewoo, petitioner Reliance can
hold only itself responsible.
THEREFORE, For having failed to secure end-users’ purchase orders equivalent to 2,000
metric tons, only Reliance should be held responsible.
 Prudential Bank vs. Intermediate Appellate Court ISSUE:

DOCTRINE: 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. 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.
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.
FACTS:
WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR ACCEPTANCE FROM RESPONDENT PHIL.
RAYON BEFORE THE LATTER BECOMES LIABLE TO PETITIONER. NO
RULING: There was no need for acceptance as the issued drafts are sight drafts.
A.) DEFINITION OF LETTER OF CREDIT=
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. 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.
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.

B.) Presentment for acceptance is necessary only in the cases expressly provided for in
 Philippine Rayon Mills, Inc.(PRMI) entered into a contract with Nissho Co., Ltd.
Section 143 of the Negotiable Instruments Law (NIL).
of Japan for the importation of textile machineries under a 5-year deferred
payment plan.
"SEC. 143. When presentment for acceptance must be made. -- Presentment for
acceptance must be made:
 To effect the payment, PRMI applied for a commercial letter of credit with the
Prudential Bank and Trust Company in favor of Nissho.
(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
 Prudential Bank opened Letter of Credit for $128,548.
(b) Where the bill expressly stipulates that it shall be presented for acceptance;
 Against this letter of credit, drafts were drawn and issued by Nissho, which
or
were all paid by the Prudential Bank through its correspondent in Japan, the
Bank of Tokyo, Ltd. Two of the original drafts were accepted by PRMI through
(c) Where the bill is drawn payable elsewhere than at the residence or place
its president, Chi, while the others were not.
of business of the drawee.
 Upon the arrival of the machineries, the Prudential Bank indorsed the shipping
In no other case is presentment for acceptance necessary in order to render any party
documents to the PRMI which accepted delivery of the same.
to the bill liable."
 To enable PRMI to take delivery of the machineries, it executed, by prior
C,) PRESENTMENT AND ACCEPTANCE NOT AN INDISPENSABLE REQUISITES.
arrangement with the Prudential Bank, a trust receipt which was signed by Chi
in his capacity as President of PRMI company
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
 At the back of the trust receipt was printed a form to be accomplished by 2
modified” does not, contrary to the holding of the public respondent, contemplate prior
sureties who, by the very terms and conditions thereof, were to be jointly and
acceptance by Philippine Rayon, but by the petitioner.
severally liable to the Prudential Bank should the PRMI fail to pay the total
amount or any portion of the drafts issued by Nissho and paid for by Prudential
Philippine Rayon immediately became liable thereon upon petitioner’s payment
Bank.
thereof. Such is the essence of the letter of credit issued by the petitioner.
 PRMI was able to take delivery of the textile machineries and installed the
A different conclusion would violate the principle upon which commercial letters of
same at its factory site.
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
 Chi argued that presentment for acceptance was necessary to make PRMI
Philippine Rayon even if the latter had already received the imported machinery and
liable. The trial court ruled that that presentment for acceptance was an
the petitioner had fully paid for it.
indispensable requisite for Philippine Rayon’s liability on the drafts to attach.
 Bank of America, NT & SA vs. Court of Appeals
DOCTRINE: There would at least be three (3) parties:
(a) the buyer, who procures the letter of credit and obliges himself to reimburse the
issuing bank upon receipt of the documents of title;
(b) the bank issuing the letter of credit, which undertakes to pay the seller upon receipt
of the draft and proper documents of titles and to surrender the documents to the
buyer upon reimbursement; and,
(c) the seller, 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.
FACTS:
will lend credence to the letter of credit issued by a lesser known issuing bank; or, of a
paying bank 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, to have the draft discounted.
A negotiating bank has right of recourse against the issuer bank and, until
reimbursement is obtained, the drawer of the draft continues to assume a contingent
liability thereon.
IN THIS CASE, 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.

 Bank of America received an Irrevocable Letter of Credit issued by Bank of THEREFORE, As a negotiating bank, Bank of America has a right of recourse against the
Ayudhya for the Account of General Chemicals Ltd., Inc. for the sale of plastic issuer bank and until reimbursement is obtained, Inter-Resin, as the drawer of the draft,
ropes and agricultural files with Bank of America as advising bank and Inter- continues to assume a contingent liability thereon.
Resin Industrial Corp. as beneficiary.

 Upon receipt of the letter advice with letter of credit by Inter- Resin told Bank
of America to confirm said letter of credit, but the bank did not confirm such.

 Bank of America explained that there was no need for confirmation.

 Inter-Resin made a partial availment of the Letter of Credit after presentment

of the required documents to Bank of America.

 After confirmation of all the documents BA issued a check in favor of IR.

 BA advice Bank of Ayudhya of IR’s availment under the letter of credit and
asked for the corresponding reimbursement.

 IR presented documents for the second availment under the same LC but BA
stopped the processing of such after they received a telex from Bank of
Ayudhya declaring that the LC fraudulent. BA sued IR for the recovery of the
first LC payment

ISSUE: Whether or not Bank of America may recover what it has paid under the letter of
credit to Inter-Resin? YES

RULING:

First, given the factual findings, the court 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.

A.) Other parties to a letter of credit.

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 may be
utilized to convey to the seller the existence of the credit; or, of a confirming bank which