Credit Transactions

12/18/2018 SUPREME COURT REPORTS ANNOTATED VOLUME 216
VOL. 216, DECEMBER 8, 1992 257

Prudential Bank vs. Intermediate Appellate Court
*
G.R. No. 74886.December 8, 1992.
PRUDENTIAL BANK, petitioner, vs. INTERMEDIATE

APPELLATE COURT, PHILIPPINE RAYON MILLS INC. and
ANACLETO R. CHI, respondents.
Commercial Law; Negotiable Instruments Law; Letters of Credit;

Presentment for acceptance not required for sight drafts.—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. Presentment for acceptance is necessary only
in the cases expressly provided for in Section 143 of the Negotiable
Instruments Law (NIL). 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
_________________
* THIRD DIVISION.
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258 SUPREME COURT REPORTS ANNOTATED
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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.
Same; Trust Receipts Law; Violation of duty to account for goods

constitutes crime of estafa.—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, x x x and therefore acting in
fiduciary (sic) capacity, defendants have wilfully 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.” 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.” 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 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 315, paragraph 1(b) of the Revised Penal Code. 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.
Contracts; Solidary guaranty clause; Requisites of defense of

exhaustion (excussion); Contracts of adhesion; Ambiguity strictly construed
against party who drafted the form.—Our own reading of the
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VOL. 216, DECEMBER 8, 1992 259

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; as such, it
must be strictly construed against the party responsible for its preparation.
Same; Same; Contract of guaranty does not have to appear in a public

instrument.—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 acknowledgment 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. With respect to a guaranty, which
is a promise to answer for the debt or
260
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.While the acknowledgment 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.
Criminal Law; Violation of Trust Receipts Law committed by a

corporation, partnership, association or other juridical entities.—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.
Civil Procedure; Joinder of parties; Excussion not condition sine

Prudential Bank vs. Intermediate Appellate Court qua non for institution of
action against guarantor.—Excussion is not a condition sine qua non for the
institution of an action against a guarantor. In Southern Motors, Inc. vs.
Barbosa, 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. xxx xxx. 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.
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VOL. 216, DECEMBER 8, 1992 261

PETITION for review from the decision of the then Intermediate

Appellate Court.
The facts are stated in the opinion of the Court.
DAVIDE, JR., J.:

1
Petitioner seeks to review and set aside the decision of public
respondent Intermediate Appellate Court (now Court of Appeals),
dated 10 March 1986, in AC-G.R. No. 66733 which affirmedin 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 (Exhibits X and X-1, Ibid., pp. 65-66) were accepted by the
defendantappellant through its president, Anacleto R. Chi, while the others
were not (Exhibits X-2 to X-11, Ibid., pp. 66 to 76).
Upon the arrival of the machineries, the Prudential Bank in-
______________
1 Rollo, 39-47, per Associate Justice Crisolito Pascual, concurred in by Associate Justices
Jose C. Campos, Jr, and Serafin E. Camilon.
262

dorsed 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;2 if there is, the same has
prescribed; and the plaintiff is guilty of laches.”
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.
_______________
2 Rollo, 39-41.
263
VOL. 216, DECEMBER 8, 1992 263

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 against3 defendant Philippine Rayon Mills, Inc.
SO ORDERED.”
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-1” to “X-11”); and
(g) interpreting “sight” drafts as requiring acceptance
4
by Philippine
Rayon before the latter could be held liable thereon.
________________
3 Rollo, 81-83.
4 Brief for Appellant, 1-4; Rollo, 85, et. seq.
264

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
265
VOL. 216, DECEMBER 8, 1992 265

5
comply with his obligation.
Its motion to reconsider the decision having been6
denied by the
public respondent in its Resolution of 11 June 1986, 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 THE7 LATTER BECOMES LIABLE TO
PETITIONER.”
________________
5 Rollo, 45-46.
6 Id., 48.
7 Rollo, 16.
266

8
In the Resolution of 12 March 1990, 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.
9
As correctly ruled by the
trial court in its Order of 6 March 1975:
______________
8 Id., 131.
9 Record on Appeal, 123.
267
VOL. 216, DECEMBER 8, 1992 267

“x x x By virtue of said Application

10
and Agreement for Commercial Letter
of Credit, plaintiff bank 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 payment11
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
12
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. Presentment
for acceptance is necessary only in the cases expressly provided
13
for
in Section 143 of the Negotiable Instruments Law (NIL). 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
________________
10 Herein petitioner.
11 Black’s Law Dictionary, Fifth ed., 813; DAVIDSON, KNOWLES, FORSYTHE
AND JESPERSEN, Business Law, Principles and Cases, 1984 ed., 390.
12 ROSE, Money and Capital Markets, 1983 ed., 692.
13 Act No. 2031.
268

(b) Where the bill expressly stipulates that it shall be presented for
acceptance; or
(c) Where the bill is drawn payable elsewhere than at the residence or
place of business of the drawee.
In no other case is presentment for acceptance necessary in order to render

any party to the bill liable.”
Obviously then, sight drafts do not require presentment for

acceptance.
The acceptance of a bill is the14 signification by the drawee of his
assent to the order of the drawer; this may be done15in writing by the
drawee in the bill itself, or in a separate instrument.
The parties herein agree, and the trial court explicitly ruled, that
the subject drafts are sight drafts. Said the latter:
“x x x In the instant case that 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 ought16 to have
paid the same, the fact remains that until now they are still unpaid.”
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 is 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.” (italics supplied)
________________
14 Section 132, NIL.

15 Sections 133 and 134, Id.
16 Rollo, 66.
269
VOL. 216, DECEMBER 8, 1992 269

Paragraph 8 of the Trust Receipt which reads: “My/our liability for

payment at maturity of any accepted draft, bill of exchange
17
or
indebtedness shall not be extinguished or modified” 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 as 18the production of a bill of exchange to a drawee for
acceptance. 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
19
described in Hibernia Bank and
Trust Co. vs. J. Aron & Co., Inc., 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
_________________
17 Id., 17.
18 AGBAYANI, A.F., Commercial Laws of the Philippines, 1987 ed., vol. 1, 409 citing
Windham Bank vs. Norton, 22 Conn. 213, 56 Am. Dec. 397.
19 134 Misc. 18, 21-22, 233 N.Y.S. 486, 490-491, cited in Johnston vs. State Bank, 195
N.W. 2d 126, 130-131 (Iowa 1972), and excerpted in CORMAN, Commercial Law, Cases and
Materials, 1976 ed., 622.
270

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 that20 Philippine
Rayon was liable thereon. In People vs. Yu Chai Ho, this Court
explains
21
the nature of a trust receipt by quoting In re Dunlap Carpet
Co., 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
__________________
20 53 Phil. 874, 876-877 [1928]; see also, Samo vs. People, 115 Phil. 346 [1962].
21 206 Fed., 726.
271
VOL. 216, DECEMBER 8, 1992 271

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.”
22
As further stated in National Bank vs. Viuda e Hijos de Angel Jose,
trust receipts:
“x x x [I]n a certain manner, x x x 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 mechandise as soon as 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 as 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 trust
receipt, or for other purposes substantially equivalent to any one of
the following: x x x.”
It is alleged in the complaint that private respondents “not only
have presumably put said machinery to good use and have
________________
22 63 Phil. 814, 821 [1936].
272

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, x x x and therefore acting in fiduciary (sic) capacity,
defendants have wilfully 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
23
the lease, sale, and other disposition of said
machinery.” 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
24
24
equitable on the premises.” 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
25
of
Article 315, paragraph 1(b) of the Revised Penal Code. 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
_________________
23 Record on Appeal, 6-7.

24 Id., 9.
25 Even before P.D. No. 115, these acts covered by Section 13 were already
considered as estafa; see People vs. Yu Chai Ho, supra,; Samo vs. People, supra,;
Robles vs. Court of Appeals, 199 SCRA 195 [1991].
273
VOL. 216, DECEMBER 8, 1992 273

falls under fraud.

We also conclude, for the reason hereinafter discussed, and not
for that adduced by the public respondent, that private respondent
Chi’s signature in the dorsal portion of the trust receipt did not bind
him solidarily with Philippine Rayon. The statement at the dorsal
portion of the said trust receipt, which petitioner describes as a
“solidary guaranty clause”, reads:
“In consideration of the PRUDENTIAL BANK AND TRUST COMPANY

complying with the foregoing, we jointly and severally agree and undertake
to pay on demand to the PRUDENTIAL BANK AND TRUST COMPANY
all sums of money which the said PRUDENTIAL BANK AND TRUST
COMPANY may call upon us to pay arising out of or pertaining to, and/or
in any event connected with the default of and/or non-fulfillment in any
respect of the undertaking of the aforesaid:
PHILIPPINE RAYON MILLS, INC.
We further agree that the PRUDENTIAL BANK AND TRUST

COMPANY does not have to take any steps or exhaust its remedy against
aforesaid:
before making demand on me/us.
(Sgd.) Anacleto R. Chi26
ANACLETO R. CHI”
Petitioner insists that by virtue of the clear wording of the statement,

specifically the clause “x x x we jointly and severally agree and
undertake x x x,” 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
_________________
26 Record on Appeal, 43.
274

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
27
only when the principal debtor fails to comply with his
obligation.”
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,
________________
27 Rollo, 45-46.
275
VOL. 216, DECEMBER 8, 1992 275

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
28
of his signature
thereon. It is, therefore, a contract of adhesion; as such, it must29be
strictly construed against the party responsible for its preparation.
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
acknowledgment 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

30
in a
certain way, that requirement
31
is absolute and indispensable. With
respect to a guaranty, 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
_________________
28 Sweet Lines, Inc. vs. Teves, 83 SCRA 361 [1978]; Angeles vs. Calasanz, 135
SCRA 323 [1985].
29 Western Guaranty Corp. vs. Court of Appeals, 187 SCRA 652 [1990]; BPI
Credit Corp. vs. Court of Appeals, 204 SCRA 601 [1991].
30 Article 1356, Civil Code.
31 Article 2047 of the Civil Code defines it as follows: “By guaranty a person,
called the guarantor, binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so.”
276

32
would be unenforceable unless ratified. While the acknowledgment
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.
__________________
32 Article 1403 (2) (b), Civil Code.
277
VOL. 216, DECEMBER 8, 1992 277

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 guarantor—because his
signature at the dorsal portion thereof trust receipt in any capacity—
either as surety or as 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
33
Rayon. The records fail to show that petitioner
had done so. Reliance is thus placed on Article 2058 of the Civil
Code which provides:
“ART.2058.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 an34 action against a guarantor. In Southern
Motors, Inc. vs. Barbosa, this Court stated:
_________________
33 Rollo, 75.
34 99 Phil. 263, 268 [1956].
278

“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 or35 fact. It
will save the parties unnecessary work, trouble and expense.
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 liable36 for those costs
incurred after being judicially required to pay. Interest and
damages, being accessories of the principal obliga-
______________
35 FRANCISCO, V.J., The Revised Rules of Court, vol. I, 1973 ed., 258.
36 Second paragraph, Article 2055, Civil Code; see National Marketing Corp. vs.
Marquez, 26 SCRA 722 [1969]; Republic vs. Pal-Fox Lumber Co., Inc., 43 SCRA
365 [1972].
279
VOL. 216, DECEMBER 8, 1992 279

tion, should also be paid; these, however, shall run only from the
date of the filing of the complaint.
37
Attorney’s fees may even be
allowed in appropriate cases.
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 be 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,
______________
37 Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc., 100
Phil. 679 [1957]; Philippine National Bank vs. Luzon Surety Co., Inc., 68 SCRA 207
[1975].
280

Canlubang Security Agency Corp. vs. NLRC
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.
Petition granted.
Note.—The failure of the accused to turnover to the entruster the

proceeds of the sale of goods covered by the delivery trust receipt
and to return the said goods, constituted estafa punishable under
Article 315 (1) (b) of the Revised Penal Code (Robles vs. Court of
Appeals, 199 SCRA 195).
——o0o——
© Copyright 2018 Central Book Supply, Inc. All rights reserved.
VOL. 228, DECEMBER 10, 1993 357

Bank of America, NT & SA vs. Court of Appeals
*
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.
Commercial Law; Letters of Credit; Concept and nature.—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. 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 letter
of credit, the issuing bank can
_______________
* THIRD DIVISION.
358
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. 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
http://www.central.com.ph/sfsreader/session/00000167bfac41538774e847003600fb002c009e/t/?o=False 1/20
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 the said
documents and control over the goods only after reimbursing the bank.
Same; Same; Letters of Credit distinguished from other accessory
contracts.—What characterizes letters of credit, as distinguished from other
accessory contracts, is the engagement of the issuing bank to pay the seller
once 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.
Same; Same; Parties to a letter of credit.—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.
Same; Same; 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
359
VOL. 228, DECEMBER 10, 1993 359
the credit; or, of a confirming bank which 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.
Same; Same; Being a product of international commerce, it is not
uncommon to find a dearth of national law that can adequately provide for
the governance of letters of credit.—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 contracts rule. 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 in the U.C.P.
Same; Same; Suppletory application of the Uniform Customs and
Practices for Documentary Credits (“U.C.P.”).—In FEATI Bank and Trust
Company v. Court of Appeals, we have accepted, to the extent of their
pertinency, the application in our jurisdiction of this international
commercial credit regulatory set of rules. In Bank of Phil. Islands v. De
Nery, we have said that the observance 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.
Same; Same; An advising or notifying bank does not incur any
obligation more than just notifying the seller.—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. The bare statement of the bank em-
360
ployee, 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, nor can it justify the conclusion that the bank
must now assume total liability on the letter of credit.
Same; Same; An advising bank is bound only to check the “apparent
authenticity” of the letter of credit.—As advising bank, Bank of America is
bound only to check the “apparent authenticity” of the letter of credit, which
it did. Clarifying its meaning, Webster’s Ninth New Collegiate Dictionary

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.”
Same; Same; 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.—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 therefor were later negotiated with it by InterResin? 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 of 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.
Same; Same; Same.—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 x x x 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 x x x.”
Same; Same; The involved banks deal only with documents and not on
goods described in those documents.—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
361
VOL. 228, DECEMBER 10, 1993 361
credit, the involved banks deal only with documents and not on goods
described in those documents.
Courts; Remedial Law; Where questions not raised 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.—In Insular Life Assurance Co. Ltd. Employees Association-
Natu vs. Insular Life-Assurance Co., Ltd., 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 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, and such questions fall within the issues already
framed by 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.
PETITION for review of a decision of the Court of Appeals.

Agcaoili & Associates for petitioner.
Valenzuela Law Center, Victor Fernandez and Ramon M.
Guevara 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 advis-
362

ing 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 letter 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 Dueñas, 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 InterResin’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 1
the costs for
documentary stamps, postage and mail insurance.” The check was
picked up by Inter-Resin 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 2
from Bank of
Ayudhya declaring the letter of credit fraudulent, Bank
_______________
1 Decision in Civil Case No. 41021 of Regional Trial Court, Branch 134, Makati,
p. 15.
2 The Bank of Ayudhya expressed impossibility of availment against the above-
mentioned letter of credit because the same had been issued, for the account of Siam
Union Metal L.P. (not General Chemicals of Thailand), for a different amount
covering “zinc highgrade,” and
363
VOL. 228, DECEMBER 10, 1993 363

of America stopped the processing of Inter-Resin’s documents and

sent a telex to its branch office in Bangkok, Thailand, requesting3
assistance in determining the authenticity of the letter of credit.
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 crimi-nally 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.
4
On 28 June 1989, the trial court ruled for Inter-Resin, holding
_______________
in favor of Electrolytic Zinc Co. of Australasia Ltd. (not Inter Resin) (Exh. “Q,”
Record p. 27).
3 The Bank of America, Bangkok, in an answer to the inquiry of the Bank of
America, Manila, stated that General Chemicals of Thailand received the bill of
lading but denied having ordered them. However, Bank of America, Bangkok
doubted that it could hold the merchandise in favor of Bank of America, Manila, as it
did not have the documents (Exhs. “R” and “R-1,” Record, pp. 28-29).
4 The dispositive portion reads: ‘WHEREFORE, in view of the foregoing,
judgment is hereby rendered as follows: 1. ordering the dismissal of the complaint for
lack of merit; 2. defendants’ counterclaim with the Court found to be tenable and
meritorious; 3. plaintiff BA is hereby ordered to pay the defendants the Peso
equivalent of US$1,461,400.00 with interests counted from April 21, 1981, until fully
paid; 4. plaintiff is hereby ordered to pay the defendants attorney’s fees
364

that: (a) Bank of America made assurances that enticed InterResin 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
5
fault should
be borne by the BA which was careless and negligent” 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

6
of documents was dismissed by the
Provincial Fiscal of Rizal. 7
On appeal, the Court of Appeals 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 8
the draft
executed in its partial availment of the letter of credit.
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
_______________
in the amount of P30,000.00; 5. ordering the dissolution and lifting of the

attachment issued by the Court against defendants’ properties’ and 6. with costs
against plaintiff’ (Decision in Civil Case No. 41021, p. 209).
5 Decision in Civil Case No. 41021, p. 21.
6 Decision in Civil Case No. 41021, pp. 23-24.
7 CA-G.R. CV No. 24236, prom. 28 January 1992; Lapeña, Jr., ponente, Guingona
and Santiago, concurring.
8 Petition, pp. 13-14.
365
VOL. 228, DECEMBER 10, 1993 365

actually been shipped is binding of 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, and9 a buyer, who
wants to have control of the goods before paying. 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 letter of
credit, the issuing bank can authorize the seller to draw drafts and
engage to pay them upon their presentment simultaneously with the
10
10
tender of documents required by the letter of credit. The buyer and
the seller agree on what documents are to
_______________
9 See extensive discussions in William S. Shaterian, ExportImport Banking: The

instruments and Operations Utilized by American Exporters and Importers and their
Banks in Financing Foreign Trade (The Ronald Press Company: New York, 1947, pp.
284-374), James J. White and Robert S. Summers (eds) Uniform Commercial Code
(West Publishing Co.: St. Paul, 1988) pp. 806-883, and John H. Jackson and William
J. Davey Legal Problems of International Economic Relations: Cases, Materials and
Text on the National and International Economic Relations, 2nd Ed. (West Publishing
Co., St. Paul, pp. 52-63).
10 Article 10 of the U.C.P. defines an irrevocable letter of credit as one that
“constitutes a definite undertaking of the issuing bank, provided that the stipulated
documents are presented and that the terms and conditions of the credit are complied
with: i. if the credit provides for sight payment—to pay, or that payment will be
made; ii. if the credit provides for deferred payment—to pay, or that payment will be
made, on the date(s) determinable in accordance with the stipulations of the credit; iii.
if the credit provides for acceptance—to accept drafts drawn by the beneficiary if the
credit stipulates that they are to be drawn on the issuing bank, or to be responsible for
their acceptance and payment at maturity if the credit stipulates that they are to be
drawn on the applicant for the credit or any other drawee stipulated in the credit; iv.
366

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 the 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 once 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
11
whether the
main contract is actually accomplished or not.
_______________
if the credit provides for negotiation—to pay without recourse to drawers and/or
bona fide holders, draft(s) drawn by the beneficiary, at sight or at a tenor, on the
applicant for the credit or on any other drawee stipulated in the credit other than the
issuing bank itself, or to provide for negotiation by another bank and to pay, as above,
if such negotiation is not effected.”
11 Article 17 of the U.C.P. states: “Banks assume no liability or responsibility for
the form, sufficiency, accuracy, genuineness, falsification or legal effect of any
documents, or for the general and/or particular conditions stipulated in the documents
or superimposed thereon; nor do they assume any liability or responsibility for the
description, quantity, weight, quality, condition, packing, delivery, value or existence
of the goods represented by any documents, or for the good faith or
367
VOL. 228, DECEMBER 10, 1993 367

12
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 receipt13 of the documents of title; (b) the bank
issuing the letter of credit, which undertakes to pay the seller
_______________
acts and/or omissions, solvency, performance or standing of the consignor, the

carriers, or the insurers of the goods, or any other person whomsoever.”
According to White and Summers, op. cit.: “x x x x Bankers x x x (describe) the
transaction between the bank and the beneficiary as a ‘paper transaction.’ By that they
mean the bank issuer’s agent should be able to sit with a necktie and a white shirt at a
desk in a bank and by looking at papers that are presented to him determine whether
the bank is obliged to make payment or not. He is not obligated and, indeed, is
foreclosed from donning his overalls and going into the field to determine whether the
underlying contract has been performed. This is the principal reason why careful
courts and lawyers state that the letter of credit is not a guarantee. In a typical
guarantee the guarantor will agree to make payments if, and only if, the customer has
failed to fulfill his obligation on the underlying contract. If his obligation has been
avoided because of the acts of the beneficiary, typically there would be no obligation
to guarantee and thus no duty on the guarantor to pay. Letters of credit are different,
and they are explicitly and consciously designed to be different in this respect. In
effect, the beneficiary under a letter of credit has bargained for the right to be paid and
thus often to be the defendant instead of the plaintiff in the ensuing litigation on the
underlying contract, to be sued at home instead of being a plaintiff abroad x x x x.”
12 “The buyer of the merchandise, who is also the buyer of the credit instrument, is
the party who initiates the operation. His contract is with the bank which is to issue
the instrument and is represented by the Commercial Credit of Agreement form
which he signs, supported by the mutually made promises contained in the
Agreement” (Shaterian, op. cit. pp. 291-292).
13 “The Opening Bank, usually the buyer’s bank, is the bank which actually issues
the instrument. It is also known as the Issuing Bank. The selection of the opening
banks is important. It should be a strong bank, well known and well regarded in
international trading circles. This is the reason x x x smaller banks do not attempt to
issue their own commercial credit instruments but take advantage of the facilities of x
x x much larger, stronger, and better known correspondent banks x x x The purposes
of commercial credit may not be readily accomplished unless the opening bank is
well known and well regarded” (Shaterian, op. cit., p. 292).
368

upon receipt of the draft and proper documents of titles and to

surrender 14the 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.
The number of the parties, not infrequently and almost invariably
in international trade practice, may
15
be increased. Thus, the services
of an advising (notifying) bank may be utilized to convey 16
to the
seller the existence of the credit; or, of a confirming bank which
will lend credence to the letter of credit issued by a
________________
14 “The seller of the merchandise is called the Beneficiary of the credit instrument.
The instrument is addressed to him and is in his favor. It is the written contract of the
bank which has created the instrument. While the bank cannot compel the beneficiary
to ship and avail himself of the benefits of the instrument, the seller may recover from
the bank the value of his shipment if made within the terms of the instrument, even
though he had not given the bank any direct consideration for the bank’s promises
contained in the instrument. By a stretch of imagination, and in order to support the
instrument as a two-sided contract, supported by mutually given considerations, the
courts seem to hold that the commission paid or to be paid by the buyer to the bank is
also the consideration flowing from the seller to the bank” (Shaterian, op. cit. p. 292).
15 “Whenever the instrument is not delivered to the buyer and by him mailed to the
beneficiary, the opening bank will advise the existence of the credit to the beneficiary
through its correspondent bank operating in the same locality as the seller. Such
correspondent bank becomes the Notifying Bank. The services of a notifying bank
must always be utilized if the credit is to be advised to the beneficiary by cable x x x”

(Shaterian, op. cit., p. 292).
16 “Whenever the beneficiary stipulates that the obligation of the opening bank
shall also be made the obligation of a bank to himself, we have what is known as a
confirmed commercial credit and the bank local to the beneficiary becomes the
Confirming Bank. In view of the fact that commercial credits issued by American
banks in favor of foreign sellers are invariably issued only by x x x larger well known
banks, no seller requests that they be confirmed by another bank. The standing of the
x x x opening bank is good enough. But many foreign banks are not particularly
strong or well known, compared with x x x banks issuing these credit instruments.
Indeed, many banks operating abroad are only known through the Banker’s Almanac.
They serve a
369
VOL. 228, DECEMBER 10, 1993 369

17
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 18
buyer may
approach another bank, termed the negotiating bank, to have the
draft discounted.
_________________
useful purpose in their own small communities and perhaps maintain dollars
account with the larger x x x banks. But their names are quite meaningless to the x x x
exporter, and when the foreign buyer offers to his x x x seller a credit instrument
issued by such a bank, the seller may not receive the protection and other facilities
which an instrument issued by a large, strong, and well known bank will give him. To
overcome this, he requests that the credit as issued by the local bank of the foreign
buyer be confirmed by a well known x x x bank, which will turn out to be (a) x x x
bank with which the local bank of the buyer carries a dollar account. The liability of
the confirming bank is a primary one and is not contingent in any sense of the word.
It is as if the credit were issued by the opening and confirming banks jointly, thus
giving the beneficiary or a holder for value of drafts drawn under the credit, the right
to proceed against either or both banks, the moment the credit instrument has been
breached. The confirming bank receives a commission for its confirmation from the
opening bank which the opening bank, in turn, passes on to the buyer of the
merchandise” (Shaterian, op. cit., pp. 294-295).
17 “The Paying Bank is the bank on which the drafts are to be drawn. It may be the
opening bank, it may be a bank other than the opening bank and not in the city of the
beneficiary, or it may be a bank in the city of the beneficiary, usually the advising
bank. If the beneficiary is to draw and receive payment in his own currency, the
notifying bank will be indicated as the paying bank also. When the draft is to be paid
in this manner, the paying bank assumes no responsibility but merely pays the
beneficiary and debits the payment immediately to the account which the opening
bank has with it. If the opening bank maintains no account with the paying bank, the
paying bank reimburses itself by drawing a bill of exchange on the opening bank, in
dollars, for the equivalent of the local currency paid to the beneficiary, at its buying
rate for dollar exchange. The beneficiary is entirely out of the transaction because his
draft is completely discharged by payment, and the credit arrangement between the
paying bank and the opening bank does not concern him” (Shaterian, op. cit., pp. 293-
294).
18“If the draft contemplated by the credit instrument is to be drawn on the opening
bank or on another designated bank not in the city of the seller, any bank in the city of
the seller which buys or
370

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 contracts rule. 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 in the U.C.P. 19
In FEATI Bank and Trust Company v. Court of Appeals, we
have accepted, to the extent of their pertinency, the application in
our jurisdiction
20
of this international commercial credit regulatory set
of rules. In Bank of Phil. Islands v. De
_______________
discounts the draft of the beneficiary becomes a Negotiating Bank. As a rule,

whenever the facilities of a notifying bank are used, the beneficiary is apt to offer his
drafts to the notifying bank for negotiation, thus giving the notifying bank the
character of a negotiating bank also. By negotiating the beneficiary’s drafts, the
negotiating bank becomes “an endorser and bona fide holder” of the drafts and within
the protection of the credit instrument. It is also protected by the drawer’s signature,
as the drawer’s contingent liability, as drawer, continues until discharged by the actual
payment of the bills of exchange” (Shaterian, op. cit., p. 293).
19 G.R. No. 94209, prom. 30 April 1991, 196 SCRA 576.
20 “The Uniform Customs and Practices for documentary credits were first
published in 1933. The current version was adopted by the International Chamber of
Commerce Council in 1983 and published as Publication No. 400 in July of that year.
This current version has the blessing of the United Nations Commission on
International Trade Law (UNCITRAL). The Uniform Customs and Practices are not
‘law’ because of the act of any legislature or court, but because they have been
explicitly and implicitly made part of the contract of letters of credit. x x x [M]any of
the letters of credit in the United States are governed by the Uniform Customs and
Practices and not by the UCC
371
VOL. 228, DECEMBER 10, 1993 371

21
Nery, we have said that the observance 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 by the petitioner, i.e., that it has in this
instance merely been an 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 22
the case, it could be considered as
having incurred that liability.
In Insular Life Assurance Co. Ltd.23 Employees AssociationNatu
vs. Insular Life Assurance Co., Ltd., the Court said: Where the
issues already raised also rest on other issues not specifically
presented, as long as the latter issues bear relevance
_______________
(Uniform Commercial Code) x x x

“In general, the UCP is much more detailed than the UCC. It clearly shows the
tracks of many bankers and bank lawyers walking back and forth across its surface x
xx
“Every lawyer who deals at any time with a letter of credit should have read the
UCP at least once. The lawyer who deals routinely with such letters or who advises a
bank or beneficiary in a circumstance where litigation is threatened or commenced
should look more closely at the UCP.” (White and Summers, op. cit., pp. 881-883).
21 No. L-24821, 16 October 1970, 35 SCRA 256.
22 See Feati Bank vs. Court of Appeals, 196 SCRA 576.

23 76 SCRA 61; see also Roman Catholic Archbishop vs. Court of Appeals, 198
SCRA 300; Macenas vs. Court of Appeals, 180 SCRA 83; Sociedad Europea de
Financiacion vs. Court of Appeals, 193 SCRA 105; Lianga Lumber Co. vs. Lianga
Timber Co., Inc. 76 SCRA 197.
372

and close relation to the former and as long as they arise from
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, and such questions fall within
the issues already framed by 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 that 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 the24 abovementioned correspondent and conveys no
engagement by us.” 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
_______________
24 Exh. “C,” Records, p. 17.
373
VOL. 228, DECEMBER 10, 1993 373

incur any obligation more than just notifying Inter-Resin of the letter 25
of credit issued in its favor, let alone to confirm the letter of credit.
The bare statement of the bank employee, aforementioned, in
responding to the inquiry made by Atty. Tanay, InterResin’s
representative, on the authenticity of the letter of credit certainly did
not have the effect of novating
26
the letter of credit and Bank of
America’s letter of advise, 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 27letter of credit should have
obviously been a great concern to it. It would have, in fact, been
strange if it did not, prior to the letter of credit, enter into a 28contract,
or negotiated at the very least, with General Chemicals. 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
_______________
25 “The banks involved charge a modest commission for their various services.
The higher the risk that the bank assumes, the higher the commission (e.g., to confirm
an L/C is riskier than merely transmitting an advice of credit) (Jackson and Davey,
op. cit., p. 53).
26 See Art. 1878 (9) and (11) of the Civil Code, respectively, provides that a
special power of attorney is required “[T]o bind the principal to render some service
without compensation” and “[T]o obligate the principal as a guarantor or surety.” Art.
1887 states that “the agent shall act in accordance with the instructions of the
principal”. Moreover, Art. 1888 enjoins the agent from carrying out “an agency if its
execution would manifestly result in loss or damage to the principal.”
27 In fact, Inter-Resin’s pro forma invoice (Exh. “A”) sent to General Chemicals,
on the basis of which the letter of credit was apparently issued, demanded for a
confirmed and irrevocable letter of credit.
28 The suspicion that no contract of sale was perfected between Inter-Resin and
General Chemicals may find support in the absence of a written memorandum of the
sale or any other document showing that General Chemicals ordered the goods, and
the Comment of Inter-Resin detailing the material events of this case but, surprisingly,
failed to categorically state or show that such contract was consented to by the parties.
374

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 InterResin 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 x x x” As advising bank,
Bank of America is bound only to check29the “apparent authenticity”
of the letter of credit, which it did. Clarifying
30
its meaning,
Webster’s Ninth New Collegiate Dictionary 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 therefor 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 of recourse against
the issuer bank and until reimbursement is obtained, Inter-Resin, as
the drawer
31
of the draft, continues to assume a contingent liability
thereon.
While Bank of America has indeed failed to allege material facts
in its complaint that might have likewise warranted the
_______________
29 Article 8 of U.C.P. states: “A credit may be advised to a beneficiary through

another bank (the advising bank) without engagement on the part of the advising
bank, but that bank shall take reasonable care to check the apparent authenticity of the
credit which it advises. (Revised 1983, ICC No. 400; reproduced in Jackson and
Davey, op. cit., p. 54); TSN, 13 May 1982, Darley Wijiesekara on cross-examination.
30 1983 ed, p. 96.
31 See Shaterian, op. cit., p. 293.
375
VOL. 228, DECEMBER 10, 1993 375

application of the Negotiable Instruments Law and possibly then32

allowed it to even go after the indorsers of the draft, this failure,
nonetheless, does not preclude petitioner bank’s right (as a
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 transaction and in having executed the
corresponding draft. That 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, could 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 x x x The fact that the correspondent
and the negotiating bank may be one and the same does not affect its rights
and obligations in33 either capacity, although a special agreement is always a
possibility x x x”
The additional ground raised by the petitioner, i.e., that InterResin

sent waste instead of its products, is really of no consequence. In the
operation of a letter of credit, the involved banks deal only34
with
documents and not on goods described in those documents.
_______________
32 In this respect, its belated theory before us and in its motion for reconsideration
of the assailed decision should be rejected for being iniquitous under the
circumstances. In fact, Bank of America has failed to present the draft and, more
substantially, Inter-Resin has not been afforded full opportunity to refute by evidence
this new argument of Bank of America. In short, we find the records insufficient to
arrive at a just determination on this fact that can allow us to apply the Negotiable
Instruments Law thereon.
33 Philip W. Thayer, “Irrevocable Credits in International Commerce: Their Legal
Effects,” Columbia Law Review (1937), vol. 37, pp. 1357-1358.
34 “Both in the application form to import credits and in the
376

The other issues raised in the 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 proceed-
________________
regulations governing our export credits, it is definitely provided that the banks
involved shall not be responsible for the genuineness of the documents submitted
under commercial credits. If the buyer of merchandise has sufficient confidence in the
integrity of the seller to provide payment to the seller against shipping documents to
be tendered to the bank by the seller, as provided by the credit instrument, it follows
that the same confidence should extend to the tendering of genuine documents. If the
seller is dishonest, he need not attempt to defraud the buyer by the tender of forged
documents. He can obtain the desired evil end with less opportunity for prompt
detection by shipping inferior goods or no goods at all. The carrier does not pry into
the cases and packages to make sure that the merchandise is, in fact, as described in
the bill of lading and invoices which are prepared by the shipper. The tender of forged
documents for the purpose of obtaining money is a crime and the seller who commits
such crime is prosecuted and jailed.
“x x x Neither can the interested banks assume responsibility for the character or
quality of the goods shipped nor for the terms of the sale contract not incorporated
and made part of the credit instrument. How could they? While the parties to the sale
contract may be experts as to the involved merchandise the banks are not, generally
speaking, sufficiently versed in the fine points of each and every class of merchandise
which they finance. Even assuming the bank has men in its employ who can qualify
as experts in certain lines of merchandising, it would not wish to extend this sort of
service without adequate compensation but such service is not a banking function.
“x x x Because of this the credit should describe the goods in general terms only
and the buyer should trust that the seller will ship the exact merchandise ordered. If
the buyer is not satisfied with the moral standing of the seller, he should not open the
credit but buy on open account basis, or subject the draft terms with the additional
requirement that the draft need not be paid until after the buyer has had an
opportunity to examine the goods to make sure that he has received exactly what he
ordered” (Shaterian, op. cit., pp. 352-354).
377
VOL. 228, DECEMBER 10, 1993 377

ings.
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 (Chairman), Bidin, Romero and Melo, JJ., concur.
Assailed decision set aside.
Notes.—Foreign checks, provided they are either drawn and

issued in the Philippines though payable outside thereof, are within
the coverage of the Bouncing Checks Law (De Villa vs. Court of
Appeals, 195 SCRA 722 [1991]).
The phrase “charter may be oral” means that the terms in the
contract, not having been reduced in writing shall be those embodied
in the bill of lading (Market Developers, Inc. vs. Intermediate
Appellate Court, 177 SCRA 393 [1989]).
——o0o——
378
G.R. No. 183486. February 24, 2016.*
THE HONGKONG & SHANGHAI BANKING CORPORATION,

LIMITED, petitioner, vs. NATIONAL STEEL CORPORATION and
CITYTRUST BANKING CORPORATION (now BANK OF THE
PHILIPPINE ISLANDS), respondents.
Mercantile Law; Letter of Credit; Words and Phrases; A letter of credit

is a commercial instrument developed to address the unique needs of certain
commercial transactions.—A letter of credit is a commercial instrument
developed to address the unique needs of certain commercial transactions. It
is recognized in our jurisdiction and is sanctioned under Article 567 of the
Code of Commerce and in numerous jurisprudence defining a letter of
credit, the principles relating to it, and the obligations of parties arising from
it. In Bank of America, NT & SA v. Court of Appeals, 228 SCRA 357
(1993), this Court defined a letter of credit as “...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.” Through a letter of
credit, a buyer obtains the credit of a third party, usually a bank, to provide
assurance of payment. This, in turn, convinces a seller to part with his or her
goods even before he or she is paid, as he or she is insured by the third party
that he or she will be paid as soon as he or she presents the documents
agreed upon.
Same; Same; Owing to the complexity of these contracts, there may be
a correspondent bank which facilitates the ease of completing the
transactions.—Owing to the complexity of these contracts, there may be a
correspondent bank which facilitates the ease of completing the
transactions. A correspondent bank may be a notifying bank, a negotiating
bank or a confirming bank depending on the nature of the obligations
assumed. A notifying bank undertakes to inform the seller-beneficiary that a
letter of credit exists. It may also have the duty of transmitting the letter of
credit. As its obligation is limited to this duty, it assumes no liability to pay
under the letter of credit. A
_______________
* THIRD DIVISION.
http://www.central.com.ph/sfsreader/session/00000167bfaf243a12bd115c003600fb002c009e/t/?o=False 1/33
660

The Hongkong ###amp### Shanghai Banking Corporation, Limited
vs. National Steel Corporation
negotiating bank, on the other hand, purchases drafts at a discount from

the seller-beneficiary and presents them to the issuing bank for payment.
Prior to negotiation, a negotiating bank has no obligation. A contractual
relationship between the negotiating bank and the seller-beneficiary arises
only after the negotiating bank purchases or discounts the drafts.
Meanwhile, a confirming bank may honor the letter of credit issued by
another bank or confirms that the letter of credit will be honored by the
issuing bank. A confirming bank essentially insures that the credit will be
paid in accordance with the terms of the letter of credit. It therefore assumes
a direct obligation to the seller-beneficiary.
Same; Same; International contracts of sales are perfected and
consummated because of the certainty that the seller will be paid thus
making him or her willing to part with the goods even prior to actual receipt
of the amount agreed upon.—The value of letters of credit in commerce
hinges on an important aspect of such a commercial transaction. Through a
letter of credit, a seller-beneficiary is assured of payment regardless of the
status of the underlying transaction. International contracts of sales are
perfected and consummated because of the certainty that the seller will be
paid thus making him or her willing to part with the goods even prior to
actual receipt of the amount agreed upon. The legally demandable
obligation of an issuing bank to pay under the letter of credit, and the
enforceable right of the seller-beneficiary to demand payment, are
indispensable essentials for the system of letters of credit, if it is to serve its
purpose of facilitating commerce. Thus, a touchstone of any law or custom
governing letters of credit is an emphasis on the imperative that issuing
banks respect their obligation to pay, and that seller-beneficiaries may
reasonably expect payment, in accordance with the terms of a letter of
credit.
Same; Same; In Metropolitan Waterworks and Sewerage System v.
Daway, 432 SCRA 559 (2004), the Supreme Court (SC) held that “[l]etters
of credit have long been and are still governed by the provisions of the
Uniform Customs and Practice for Documentary Credit[s] of the
International Chamber of Commerce.”—In Bank of the Philippine Islands v.
De Reny Fabric Industries, Inc., 35 SCRA 256 (1970), this Court applied a
provision from the UCP in resolving a case pertaining to a letter of credit
transaction. This Court explained that the use of international custom in our
jurisdiction is
661
VOL. 784, FEBRUARY 24, 2016 661

justified by Article 2 of the Code of Commerce which provides that

acts of commerce are governed by, among others, usages and customs
generally observed. Further, in Feati Bank & Trust Company v. Court of
Appeals, 196 SCRA 576 (1991), this Court ruled that the UCP should be
applied in cases where the letter of credit expressly states that it is the
governing rule. This Court also held in Feati that the UCP applies even if it
is not incorporated into the letter of the credit. The application of the UCP in
Bank of Philippine Islands and in Feati was further affirmed in Metropolitan
Waterworks and Sewerage System v. Daway, 432 SCRA 559 (2004), where
this Court held that “[l]etters of credit have long been and are still governed
by the provisions of the Uniform Customs and Practice for Documentary
Credit[s] of the International Chamber of Commerce.” These precedents
highlight the binding nature of the UCP in our jurisdiction.
Civil Law; Obligations; When a party knowingly and freely binds
himself or herself to perform an act, a juridical tie is created and he or she
becomes bound to fulfill his or her obligation.—The provisions in the Civil
Code and our jurisprudence apply suppletorily in this case. When a party
knowingly and freely binds himself or herself to perform an act, a juridical
tie is created and he or she becomes bound to fulfill his or her obligation. In
this case, HSBC’s obligation arose from two sources. First, it has a
contractual duty to Klockner whereby it agreed to pay NSC upon due
presentment of the Letter of Credit and the attached documents. Second, it
has an obligation to NSC to honor the Letter of Credit. In complying with its
obligation, HSBC had the duty to perform all acts necessary. This includes a
proper examination of the documents presented to it and making a judicious
inquiry of whether CityTrust, in behalf of NSC, made a due presentment of
the Letter of Credit.
Mercantile Law; Letter of Credit; In transactions where the letter of
credit is payable on sight, the issuer must pay upon due presentment.—In
transactions where the letter of credit is payable on sight, as in this case, the
issuer must pay upon due presentment. This obligation is imbued with the
character of definiteness in that not even the defect or breach in the
underlying transaction will affect the issuing bank’s liability. This is the
Independence Principle in the law on letters of credit. Article 17 of UCP
400 explains that under this principle, an issuing bank assumes no liability
or responsibility “for the form, sufficiency, accuracy, genuineness,
falsification
662

or legal effect of any documents, or for the general and/or particular

conditions stipulated in the documents or superimposed thereon...” Thus, as
long as the proper documents are presented, the issuing bank has an
obligation to pay even if the buyer should later on refuse payment. Hence,
Klockner’s refusal to pay carries no effect whatsoever on HSBC’s obligation
to pay under the Letter of Credit. To allow HSBC to refuse to honor the
Letter of Credit simply because it could not collect first from Klockner is to
countenance a breach of the Independence Principle.
Civil Law; Delay; Under Article 1170 of the Civil Code, a party in
delay is liable for damages.—Under Article 1170 of the Civil Code, a party
in delay is liable for damages. The extent of these damages pertains to the
pecuniary loss duly proven. In this case, such damage refers to the losses
which NSC incurred in the amount of US$485,767.93 as stated in the Letter
of Credit. We also award interest as indemnity for the damages incurred in
the amount of six percent (6%) from the date of NSC’s extrajudicial
demand. An interest in the amount of six percent (6%) is also awarded from
the time of the finality of this decision until full payment.
PETITION for review on certiorari of the decision and resolution of

the Court of Appeals.
Feria, Tantoco, Robeniol Law Offices for petitioner.
Reyno, Tiu, Domingo & Santos for respondent National Steel
Corp.
Benedicto, Versoza & Burkley for respondent BPI.
JARDELEZA, J.:
This is a petition for review on certiorari under Rule 45 of the

Rules of Court. Petitioner The Hongkong & Shanghai Banking
Corporation, Limited (HSBC) filed this petition to assail the
Decision of the Court of Appeals (CA) dated November 19, 2007
(Assailed Decision) which reversed the ruling of the Regional Trial
Court, Branch 62 of Makati City
663
VOL. 784, FEBRUARY 24, 2016 663

(RTC Makati) and its Resolution denying HSBC’s Motion for

Reconsideration dated June 23, 2008 (Assailed Resolution).
The Facts
Respondent National Steel Corporation (NSC) entered into an

Export Sales Contract (the Contract) with Klockner East Asia
Limited (Klockner) on October 12, 1993.1 NSC sold 1,200 metric
tons of prime cold rolled coils to Klockner under FOB ST Iligan
terms. In accordance with the requirements in the Contract,
Klockner applied for an irrevocable letter of credit with HSBC in
favor of NSC as the beneficiary in the amount of US$468,000. On
October 22, 1993, HSBC issued an irrevocable and onsight letter of
credit no. HKH 239409 (the Letter of Credit) in favor of NSC.2 The
Letter of Credit stated that it is governed by the International
Chamber of Commerce Uniform Customs and Practice for
Documentary Credits, Publication No. 400 (UCP 400). Under UCP
400, HSBC as the issuing bank, has the obligation to immediately
pay NSC upon presentment of the documents listed in the Letter of
Credit.3 These documents are: (1) one original commercial invoice;
(2) one packing list; (3) one nonnegotiable copy of clean on board
ocean bill of lading made out to order, blank endorsed marked
‘freight collect and notify applicant’; (4) copy of Mill Test
Certificate made out ‘to whom it may concern’; (5) copy of
beneficiary’s telex to applicant (Telex No. 86660 Klock HX)
advising shipment details including D/C No., shipping marks, name
of vessel, port of shipment, port of destination, bill of lading date,
sailing and ETA dates, description of goods, size, weight, number of
packages and value of goods latest two days after shipment date; and
(6) beneficiary’s certificate certifying that (a) one set of
nonnegotiable copies of documents (being those listed above) have
been faxed to applicant (FAX No. 5294987)
_______________
1 Rollo, p. 362.
2 Id.
3 Id., at p. 133.
664

latest two days after shipment date; and (b) one set of documents
including one copy each of invoice and packing list, 3/3 original
bills of lading plus one nonnegotiable copy and three original Mill
Test Certificates have been sent to applicant by air courier service
latest two days after shipment date.4
The Letter of Credit was amended twice to reflect changes in the
terms of delivery. On November 2, 1993, the Letter of Credit was
first amended to change the delivery terms from FOB ST Iligan to
FOB ST Manila and to increase the amount to US$488,400.5 It was
subsequently amended on November 18, 1993 to extend the expiry
and shipment date to December 8, 1993.6 On November 21, 1993,
NSC, through Emerald Forwarding Corporation, loaded and shipped
the cargo of prime cold rolled coils onboard MV Sea Dragon under
China Ocean Shipping Company Bill of Lading No. HKG 266001.
The cargo arrived in Hongkong on November 25, 1993.7
NSC coursed the collection of its payment from Klockner
through CityTrust Banking Corporation (CityTrust). NSC had earlier
obtained a loan from CityTrust secured by the proceeds of the Letter
of Credit issued by HSBC.8
On November 29, 1993, CityTrust sent a collection order
(Collection Order) to HSBC respecting the collection of payment
from Klockner. The Collection Order instructed as follows: (1)
deliver documents against payment; (2) cable advice of nonpayment
with reason; (3) cable advice payment; and (4) remit proceeds via
TELEX.9 The Collection Order also contained the following
statement: “Subject to Uniform Rules for the Collection of
Commercial Paper Publication No. 322.”10
_______________
4 Id., at pp. 132-133.

5 Id., at pp. 362, 525.
6 Id., at p. 362.
7 Id.
8 Id.
9 Id., at p. 231.
10 Id.
665
VOL. 784, FEBRUARY 24, 2016 665

Further, the Collection Order stated that proceeds should be

remitted to Standard Chartered Bank of Australia, Ltd., Offshore
Branch Manila (SCB-M) which was, in turn, in charge of remitting
the amount to CityTrust.11 On the same date, CityTrust also
presented to HSBC the following documents: (1) Letter of Credit;
(2) Bill of Lading; (3) Commercial Invoice; (4) Packing List; (5)
Mill Test Certificate; (6) NSC’s TELEX to Klockner on shipping
details; (7) Beneficiary’s Certificate of facsimile transmittal of
documents; (8) Beneficiary’s Certificate of air courier transmittal of
documents; and (9) DHL Receipt No. 669988911 and Certificate of
Origin.12
On December 2, 1993, HSBC sent a cablegram to CityTrust
acknowledging receipt of the Collection Order. It also stated that the
documents will be presented to “the drawee against payment subject
to UCP 322 [Uniform Rules for Collection (URC) 322] as instructed
...”13 SCB-M then sent a cablegram to HSBC requesting the latter to
urgently remit the proceeds to its account. It further asked that
HSBC inform it “if unable to pay”14 and of the “reasons thereof.”15
Neither CityTrust nor SCB-M objected to HSBC’s statement that the
collection will be handled under the Uniform Rules for Collection
(URC 322).
On December 7, 1993, HSBC responded to SCB-M and sent a
cablegram where it repeated that “this bill is being handled subject
to [URC] 322 as instructed by [the] collecting bank.”16 It also
informed SCB-M that it has referred the matter to Klockner for
payment and that it will revert upon the receipt
_______________
11 Id.
12 Id., at pp. 125-126.
13 Id., at p. 232.
14 Id., at p. 233.
15 Id.
16 Id., at p. 234.
666

17
of the amount. On December 8, 1993, the Letter of Credit
expired.18
On December 10, 1993, HSBC sent another cablegram to SCB-
M advising it that Klockner had refused payment. It then informed
SCB-M that it intends to return the documents to NSC with all the
banking charges for its account.19 In a cablegram dated December
14, 1993, CityTrust requested HSBC to inform it of Klockner’s
reason for refusing payment so that it may refer the matter to NSC.20
HSBC did not respond and CityTrust thus sent a follow-up
cablegram to HSBC on December 17, 1993. In this cablegram,
CityTrust insisted that a demand for payment must be made from
Klockner since the documents “were found in compliance with LC
terms and conditions.”21 HSBC replied on the same day stating that
in accordance with CityTrust’s instruction in its Collection Order,
HSBC treated the transaction as a matter under URC 322. Thus, it
demanded payment from Klockner which unfortunately refused
payment for unspecified reasons. It then noted that under URC 322,
Klockner has no duty to provide a reason for the refusal. Hence,
HSBC requested for further instructions as to whether it should
continue to press for payment or return the documents.22 CityTrust
responded that as advised by its client, HSBC should continue to
press for payment.23
Klockner continued to refuse payment and HSBC notified
CityTrust in a cablegram dated January 7, 1994, that should
Klockner still refuse to accept the bill by January 12, 1994, it
_______________
17 Id.
18 Id., at p. 38.
19 Id., at p. 236.
20 Id., at p. 237.
21 Id., at p. 238.
22 Id., at p. 239.
23 Id., at p. 240.
667
VOL. 784, FEBRUARY 24, 2016 667

will return the full set of documents to CityTrust with all the
charges for the account of the drawer.24
Meanwhile, on January 12, 1994, CityTrust sent a letter to NSC

stating that it executed NSC’s instructions “to send, ON
COLLECTION BASIS, the export documents...”25 CityTrust also
explained that its act of sending the export documents on collection
basis has been its usual practice in response to NSC’s instructions in
its transactions.26
NSC responded to this in a letter dated January 18, 1994.27 NSC
expressed its disagreement with CityTrust’s contention that it sent
the export documents to HSBC on collection basis. It highlighted
that it “negotiated with CityTrust the export documents pertaining to
LC No. HKH 239409 of HSBC and it was CityTrust, which
wrongfully treated the negotiation, as ‘on collection basis.’”28 NSC
further claimed that CityTrust used its own mistake as an excuse
against payment under the Letter of Credit. Thus, NSC argued that
CityTrust remains liable under the Letter of Credit. It also stated that
it presumes that CityTrust has preserved whatever right of
reimbursement it may have against HSBC.29
On January 13, 1994, CityTrust notified HSBC that it should
continue to press for payment and to hold on to the document until
further notice.30
However, Klockner persisted in its refusal to pay. Thus, on
February 17, 1994, HSBC returned the documents to CityTrust.31 In
a letter accompanying the returned documents, HSBC stated that it
considered itself discharged of its duty
_______________
24 Id., at p. 241.
25 Id., at p. 568.
26 Id.
27 Id., at p. 223.
28 Id., at p. 569.
29 Id.
30 Id., at p. 242.
668

under the transaction. It also asked for payment of handling

charges.32 In response, CityTrust sent a cablegram to HSBC dated
February 21, 1994 stating that it is “no longer possible for
beneficiary to wait for you to get paid by applicant.”33 It explained
that since the documents required under the Letter of Credit have
been properly sent to HSBC, Citytrust demanded payment from it.
CityTrust also stated, for the first time in all of its correspondence
with HSBC, that “re your previous telexes, ICC Publication No. 322
is not applicable.”34 HSBC responded in cablegram dated February
28, 1994.35 It insisted that CityTrust sent documents which clearly
stated that the collection was being made under URC 322. Thus, in
accordance with its instructions, HSBC, in the next three months,
demanded payment from Klockner which the latter eventually
refused. Hence, HSBC stated that it opted to return the documents. It
then informed CityTrust that it considered the transaction closed
save for the latter’s obligation to pay the handling charges.36
Disagreeing with HSBC’s position, CityTrust sent a cablegram
dated March 9, 1994.37 It insisted that HSBC should pay it in
accordance with the terms of the Letter of Credit which it issued on
October 22, 1993. Under the Letter of Credit, HSBC undertook to
reimburse the presenting bank under “ICC 400 upon the presentment
of all necessary documents.”38 CityTrust also stated that the
reference to URC 322 in its Collection Order was merely in fine
print. The Collection Order itself was only pro forma. CityTrust
emphasized that the reference to URC 322 has been “obviously
superseded by our specific instructions to ‘deliver documents against
payment/
_______________
31 Id., at p. 243.
32 Id.
33 Id., at p. 244.
34 Id.
35 Id., at p. 245.
36 Id.
37 Id., at p. 246.
38 Id.
669
VOL. 784, FEBRUARY 24, 2016 669

cable advice nonpayment with reason/cable advice payment/

remit proceeds via telex’ which was typed in on said form.”39
CityTrust also claimed that the controlling document is the Letter of
Credit and not the mere fine print on the Collection Order.40 HSBC
replied on March 10, 1994.41 It argued that CityTrust clearly

instructed it to collect payment under URC 322, thus, CityTrust can
no longer claim a contrary position three months after it made its
request. HSBC repeated that the transaction is closed except for
CityTrust’s obligation to pay for the expenses which HSBC
incurred.42
Meanwhile, on March 3, 1994, NSC sent a letter to HSBC where
it, for the first time, demanded payment under the Letter of Credit.43
On March 11, 1994, the NSC sent another letter to HSBC through
the Office of the Corporate Counsel which served as its final
demand. These demands were made after approximately four
months from the expiration of the Letter of Credit.
Unable to collect from HSBC, NSC filed a complaint against it
for collection of sum of money (Complaint)44 docketed as Civil
Case No. 94-2122 (Collection Case) of the RTC Makati. In its
Complaint, NSC alleged that it coursed the collection of the Letter
of Credit through CityTrust. However, notwithstanding CityTrust’s
complete presentation of the documents in accordance with the
requirements in the Letter of Credit, HSBC unreasonably refused to
pay its obligation in the amount of US$485,767.93.45
_______________
39 Id.
40 Id.
41 Id., at p. 248.
42 Id.
43 Id., at p. 42.
44 Id., at p. 123; the complaint was filed on July 8, 1994 but was later amended,
id., at p. 44.
45 Id., at p. 126.
670

HSBC filed its Answer46 on January 6, 1995. HSBC denied any

liability under the Letter of Credit. It argued in its Answer that
CityTrust modified the obligation when it stated in its Collection
Order that the transaction is subject to URC 322 and not under UCP
400.47 It also filed a Motion to Admit Attached Third-Party
Complaint48 against CityTrust on November 21, 1995.49 It claimed
that CityTrust instructed it to collect payment under URC 322 and
never raised that it intended to collect under the Letter of Credit.50

HSBC prayed that in the event that the court finds it liable to NSC,
CityTrust should be subrogated in its place and be made directly
liable to NSC.51 The RTC Makati granted the motion and admitted
the third party complaint. CityTrust filed its Answer52 on January 8,
1996. CityTrust denied that it modified the obligation. It argued that
as a mere agent, it cannot modify the terms of the Letter of Credit
without the consent of all the parties.53 Further, it explained that the
supposed instruction that the transaction is subject to URC 322 was
merely in fine print in a pro forma document and was superimposed
and pasted over by a large pink sticker with different remittance
instructions.54
After a full-blown trial,55 the RTC Makati rendered a decision
(RTC Decision) dated February 23, 2000.56 It found that
_______________
46 Id., at pp. 163-171.

47 Id., at pp. 165-169.
48 Id., at pp. 173-180.
49 Id., at p. 45.
50 Id., at pp. 175-177.
51 Id., at p. 179.
52 Id., at pp. 186-198.
53 Id., at p. 188.
54 Id., at p. 189.
671
VOL. 784, FEBRUARY 24, 2016 671

HSBC is not liable to pay NSC the amount stated in the Letter of
Credit. It ruled that the applicable law is URC 322 as it was the law
which CityTrust intended to apply to the transaction. Under URC
322, HSBC has no liability to pay when Klockner refused payment.
The dispositive portion states —
WHEREFORE, premises considered, judgment is hereby

rendered as follows:
1. Plaintiff’s Complaint against HSBC is DISMISSED;
and HSBC’s Counterclaims against NSC are DENIED.
2. Ordering Third-Party Defendant CityTrust to pay Third-
Party Plaintiff HSBC the following:
2.1 US$771.21 as actual and consequential damages; and

2.2 P100,000 as attorney’s fees.
3. No pronouncement as to costs.
SO ORDERED.57
NSC and CityTrust appealed the RTC Decision before the CA. In
its Assailed Decision dated November 19, 2007,58 the CA reversed
the RTC Makati. The CA found that it is UCP 400 and not URC 322
which governs the transaction. According to the CA, the terms of the
Letter of Credit clearly stated that UCP 400 shall apply. Further, the
CA explained that even if the Letter of Credit did not state that UCP
400 governs, it nevertheless finds application as this Court has
consistently recognized it under Philippine jurisdiction. Thus,
applying UCP 400 and principles concerning letters of credit, the
CA explained that the obligation of the issuing bank is to pay the
seller or beneficiary of the credit once the draft and
_______________
57 Id., at p. 369.
58 Id., at pp. 9-26. Penned by Associate Justice Lucenito N. Tagle, with Associate
Justices Amelita G. Tolentino and Agustin S. Dizon, concurring.
672

the required documents are properly presented. Under the

independence principle, the issuing bank’s obligation to pay under
the letter of credit is separate from the compliance of the parties in
the main contract. The dispositive portion held —
WHEREFORE, in view of the foregoing, the assailed

decision is hereby REVERSED and SET ASIDE. HSBC is
ordered to pay its obligation under the irrevocable letter of
credit in the amount of US$485,767.93 to NSC with legal
interest of six percent (6%) per annum from the filing of the
complaint until the amount is fully paid, plus attorney’s fees
equivalent to 10% of the principal. Costs against appellee
HSBC.
SO ORDERED.59
HSBC filed a Motion for Reconsideration of the Assailed

Decision which the CA denied in its Assailed Resolution dated June
23, 2008.60
Hence, HSBC filed this Petition for Review on Certiorari61
before this Court, seeking a reversal of the CA’s Assailed Decision
and Resolution. In its petition, HSBC contends that CityTrust’s order
to collect under URC 322 did not modify nor contradict the Letter of
Credit. In fact, it is customary practice in commercial transactions
for entities to collect under URC 322 even if there is an underlying
letter of credit. Further, CityTrust acted as an agent of NSC in
collecting payment and as such, it had the authority to instruct
HSBC to proceed under URC 322 and not under UCP 400. Having
clearly and expressly instructed HSBC to collect under URC 322
and having fully intended the transaction to proceed under such rule
as shown by the series of correspondence between CityTrust and
HSBC, CityTrust is estopped from
_______________
59 Id., at p. 25.
60 Id., at pp. 28-29.
61 Id., at pp. 32-90.
673
VOL. 784, FEBRUARY 24, 2016 673

now claiming that the collection was made under UCP 400 in
accordance with the Letter of Credit.
NSC, on the other hand, claims that HSBC’s obligation to pay is
clear from the terms of the Letter of Credit and under UCP 400. It
asserts that the applicable rule is UCP 400 and HSBC has no basis to
argue that CityTrust’s presentment of the documents allowed HSBC
to vary the terms of their agreement.62
The Issues
The central question in this case is who among the parties bears
the liability to pay the amount stated in the Letter of Credit. This
requires a determination of which between UCP 400 and URC 322
governs the transaction. The obligations of the parties under the
proper applicable rule will, in turn, determine their liability.
The Ruling of the Court
We uphold the CA.
The nature of a letter of credit
A letter of credit is a commercial instrument developed to

address the unique needs of certain commercial transactions. It is
recognized in our jurisdiction and is sanctioned under Article 56763
of the Code of Commerce and in numerous jurisprudence defining a
letter of credit, the principles relating to it, and the obligations of
parties arising from it.
_______________
62 Id., at pp. 529-530.

63 Article 567. Letters of credit are those issued by one merchant to another, or
for the purpose of attending to a commercial transaction.
674

In Bank of America, NT & SA v. Court of Appeals,64 this Court

defined a letter of credit as “. . . 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.”65
Through a letter of credit, a buyer obtains the credit of a third party,
usually a bank, to provide assurance of payment.66 This, in turn,
convinces a seller to part with his or her goods even before he or she
is paid, as he or she is insured by the third party that he or she will
be paid as soon as he or she presents the documents agreed upon.67
A letter of credit generally arises out of a separate contract
requiring the assurance of payment of a third party. In a transaction
involving a letter of credit, there are usually three transactions and
three parties. The first transaction, which constitutes the underlying
transaction in a letter of credit, is a contract of sale between the
buyer and the seller. The contract may require that the buyer obtain a
letter of credit from a third party acceptable to the seller. The
obligations of the parties under this contract are governed by our law
on sales.
The second transaction is the issuance of a letter of credit

between the buyer and the issuing bank. The buyer requests the
issuing bank to issue a letter of credit naming the seller as the
beneficiary. In this transaction, the issuing bank undertakes to pay
the seller upon presentation of the documents identified in the letter
of credit. The buyer, on the other hand, obliges himself or herself to
reimburse the issuing bank for the payment made. In addition, this
transaction may also
_______________
64 G.R. No. 105395, December 10, 1993, 228 SCRA 357.

65 Id., at p. 365.
66 Leon, Christopher, Letters of Credit: A Primer, 45 Md. L. Rev. 432 (1986).
67 Id.
675
VOL. 784, FEBRUARY 24, 2016 675

include a fee for the issuing bank’s services.68 This transaction

constitutes an obligation on the part of the issuing bank to perform a
service in consideration of the buyer’s payment. The obligations of
the parties and their remedies in cases of breach are governed by the
letter of credit itself and by our general law on obligations, as our
civil law finds suppletory application in commercial documents.69
The third transaction takes place between the seller and the
issuing bank. The issuing bank issues the letter of credit for the
benefit of the seller. The seller may agree to ship the goods to the
buyer even before actual payment provided that the issuing bank
informs him or her that a letter of credit has been issued for his or
her benefit. This means that the seller can draw drafts from the
issuing bank upon presentation of certain documents identified in
the letter of credit. The relationship between the issuing bank and
the seller is not strictly contractual since there is no privity of
contract nor meeting of the minds between them.70 It also does not
constitute a stipulation pour autrui in favor of the seller since the
issuing bank must honor the drafts drawn against the letter of credit
regardless of any defect in the underlying contract.71 Neither can it
be considered as an assignment by the buyer to the seller-beneficiary
as the buyer himself cannot draw on the letter.72 From its inception,
only the seller can demand payment under the letter of credit. It is
also not a contract of
_______________
68 G. Hamp Uzzelle III, Letters of Credit, 10 Tul. Mar. L. J. 47 (1985).

69 Code of Commerce, Art. 50. Commercial contracts in all that relates to their
requisites, modifications, exceptions, interpretations, and extinction and to the
capacity of the contracting parties shall be governed in all that is not expressly
established in this Code or in special laws, by the general rules of civil law.
70 Transfield Philippines, Inc. v. Luzon Hydro Corporation, G.R. No. 146717,
November 22, 2004, 443 SCRA 307, 325.
71 Id., at pp. 325-326.
72 Id.
675
VOL. 784, FEBRUARY 24, 2016 675

suretyship or guaranty since it involves primary liability in the

event of default.73 Nevertheless, while the relationship between the
seller-beneficiary and the issuing bank is not strictly contractual,
strict payment under the terms of a letter of credit is an enforceable
right.74 This enforceable right finds two legal underpinnings. First,
letters of credit, as will be further explained, are governed by
recognized international norms which dictate strict compliance with
its terms. Second, the issuing bank has an existing agreement with
the buyer to pay the seller upon proper presentation of documents.
Thus, as the law on obligations applies even in commercial
documents,75 the issuing bank has a duty to the buyer to honor in
good faith its obligation under their agreement. As will be seen in
the succeeding discussion, this transaction is also governed by
international customs which this Court has recognized in this
jurisdiction.76
In simpler terms, the various transactions that give rise to a letter
of credit proceed as follows: Once the seller ships the goods, he or
she obtains the documents required under the letter of credit. He or
she shall then present these documents to the issuing bank which
must then pay the amount identified under the letter of credit after it
ascertains that the documents are complete. The issuing bank then
holds on to these documents which the buyer needs in order to claim
the goods shipped. The buyer reimburses the issuing bank for its
payment at which point the issuing bank releases the documents to
the buyer. The buyer is then able to present these documents in order
to claim the goods. At this point, all the transactions are completed.
The seller received payment for his or her performance of his
obligation to deliver the goods.
_______________
73 Id.
74 Id.
75 Code of Commerce, Art. 50.
76 Bank of the Philippine Islands v. De Reny Fabric Industries, Inc., No. L-
24821, October 16, 1970, 35 SCRA 256.
677
VOL. 784, FEBRUARY 24, 2016 677

The issuing bank is reimbursed for the payment it made to the

seller. The buyer received the goods purchased.
Owing to the complexity of these contracts, there may be a
correspondent bank which facilitates the ease of completing the
transactions. A correspondent bank may be a notifying bank, a
negotiating bank or a confirming bank depending on the nature of
the obligations assumed.77 A notifying bank undertakes to inform
the seller-beneficiary that a letter of credit exists. It may also have
the duty of transmitting the letter of credit. As its obligation is
limited to this duty, it assumes no liability to pay under the letter of
credit.78 A negotiating bank, on the other hand, purchases drafts at a
discount from the seller-beneficiary and presents them to the issuing
bank for payment.79 Prior to negotiation, a negotiating bank has no
obligation. A contractual relationship between the negotiating bank
and the seller-beneficiary arises only after the negotiating bank
purchases or discounts the drafts.80 Meanwhile, a confirming bank
may honor the letter of credit issued by another bank or confirms
that the letter of credit will be honored by the issuing bank.81 A
confirming bank essentially insures that the credit will be paid in
accordance with the terms of the letter of credit.82 It therefore
assumes a direct obligation to the seller-beneficiary.83
Parenthetically, when banks are involved in letters of credit
transactions, the standard of care imposed on banks
_______________
77 Feati Bank & Trust Company v. Court of Appeals, G.R. No. 94209, April 30,
1991, 196 SCRA 576.
78 Id., at p. 589.
79 Supra note 66.
80 Feati Bank & Trust Company v. Court of Appeals, supra.
81 Supra note 66.
82 Dong-heon Chae, Letters of Credit and the Uniform Customs and Practice for
Documentary Credits: The Negotiating Bank and the Fraud Rule in Korea Supreme
Court, Case 96 DA 43713, 12 Fla. J. Int’l L. 23 (1986).
83 Feati Bank & Trust Company v. Court of Appeals, supra.
678

engaged in business imbued with public interest applies to them.

Banks have the duty to act with the highest degree of diligence in
dealing with clients.84 Thus, in dealing with the parties in a letter of
credit, banks must also observe this degree of care.
The value of letters of credit in commerce hinges on an important
aspect of such a commercial transaction. Through a letter of credit, a
seller-beneficiary is assured of payment regardless of the status of
the underlying transaction. International contracts of sales are
perfected and consummated because of the certainty that the seller
will be paid thus making him or her willing to part with the goods
even prior to actual receipt of the amount agreed upon. The legally
demandable obligation of an issuing bank to pay under the letter of
credit, and the enforceable right of the seller-beneficiary to demand
payment, are indispensable essentials for the system of letters of
credit, if it is to serve its purpose of facilitating commerce. Thus, a
touchstone of any law or custom governing letters of credit is an
emphasis on the imperative that issuing banks respect their
obligation to pay, and that seller-beneficiaries may reasonably
expect payment, in accordance with the terms of a letter of credit.
Rules applicable to letters

of credit
Letters of credit are defined and their incidences regulated by

Articles 567 to 57285 of the Code of Commerce. These provi-
_______________
84 Far East Bank and Trust Company v. Tentmakers Group, Inc., G.R. No.
171050, July 4, 2012, 675 SCRA 546.
85 Art. 567. Letters of credit are those issued by one merchant to another, or for
the purpose of attending to a commercial transaction.
Art. 568. The essential conditions of letters of credit shall be:
1. To be issued in favor of a determined person and not to order.
679
VOL. 784, FEBRUARY 24, 2016 679

sions must be read with Article 286 of the same code which states
that acts of commerce are governed by their provisions, by the
usages and customs generally observed in the particular place and,
in the absence of both rules, by civil law. In
_______________
2. To be limited to a fixed and specified amount, or to one or more indeterminate

amounts, but all within a maximum sum the limit of which must be exactly stated.
Letters of credit which do not have one of these conditions shall be considered
simply as letters of recommendation.
Art. 569. One who issues a letter of credit shall be liable to the person on whom
it was issued for the amount paid by virtue of the same within the maximum fixed
therein.
Letters of credit cannot be protested, even when not paid, nor can the holder
thereof acquire any right of action for said nonpayment against the person who issued
it.
The payor shall have a right to demand the proof of the identity of the person in
whose favor the letter of credit was issued.
Art. 570. The drawer of a letter of credit may annul it, informing the bearer and
the person to whom it is addressed of said revocation.
Art. 571. The holder of a letter of credit shall pay the drawer the amount
received without delay. Should he not do so, an action including attachment may be
brought to recover said amount with the legal interest and the current exchange in the
place where the payment was made, on the place where it was repaid.
Art. 572. If the holder of a letter of credit does not make use thereof within the
period agreed upon with the drawer of the same, or, in the absence of a fixed period,
within six months from its date in any point of the Philippines, and within twelve
months outside thereof, it shall be void in fact and in law.
86 Code of Commerce, Art. 2. Commercial transactions, whether performed by
merchants or not, and whether or not specified in this Code, shall be governed by
provisions contained herein; in default of such provisions, by the commercial usages
generally observed in each place and in the absence of both, by rules of the civil law.
680

addition, Article 5087 also states that commercial contracts shall

be governed by the Code of Commerce and special laws and in their
absence, by general civil law.
The International Chamber of Commerce (ICC)88 drafted a set of
rules to govern transactions involving letters of credit. This set of
rules is known as the Uniform Customs and Practice for
Documentary Credits (UCP). Since its first issuance in 1933, the
UCP has seen several revisions, the latest of which was in 2007,
known as the UCP 600. However, for the period relevant to this
case, the prevailing version is the 1993 revision called the UCP 400.
Throughout the years, the UCP has grown to become the worldwide
standard in transactions involving letters of credit.89 It has enjoyed
near universal application with an estimated 95% of worldwide
letters of credit issued subject to the UCP.90
In Bank of the Philippine Islands v. De Reny Fabric Industries,
Inc.,91 this Court applied a provision from the UCP in
_______________
87 Code of Commerce, Art. 50. Commercial contracts in all that relates to their

requisites, modifications, exceptions, interpretations, and extinction and to the
capacity of the contracting parties shall be governed in all that is not expressly
established in this Code or in special laws, by the general rules of civil law.
88 The International Chamber of Commerce is a private international organization
composed of companies and business organizations worldwide. Throughout the years,
it has been recognized as a representative of private business in international trade. It
has also been awarded the highest level consultative status by the United Nations in
1946 and has continued to be influential in international commerce. The ICC drafts
rules that governs conduct of business across borders. This rules are voluntary but
have been consistently observed by businesses all over the world. See
<www.iccwbo.org/about-icc> (last accessed on January 26, 2016).
89 Buckley, Ross P., The 1993 Revision of the Uniform Customs and Practice for
Documentary Credits, 28 GW J. Int’l L. & Econ. 265 (1995).
90 Id.
91 Supra note 76 at pp. 259-261.
681
VOL. 784, FEBRUARY 24, 2016 681

resolving a case pertaining to a letter of credit transaction. This

Court explained that the use of international custom in our
jurisdiction is justified by Article 2 of the Code of Commerce which
provides that acts of commerce are governed by, among others,
usages and customs generally observed. Further, in Feati Bank &
Trust Company v. Court of Appeals,92 this Court ruled that the UCP
should be applied in cases where the letter of credit expressly states
that it is the governing rule.93 This Court also held in Feati that the
UCP applies even if it is not incorporated into the letter of the
credit.94 The application of the UCP in Bank of Philippine Islands
and in Feati was further affirmed in Metropolitan Waterworks and
Sewerage System v. Daway95 where this Court held that “[l]etters of
credit have long been and are still governed by the provisions of the
Uniform Customs and Practice for Documentary Credit[s] of the
International Chamber of Commerce.”96 These precedents highlight
the binding nature of the UCP in our jurisdiction.
_______________
92 Supra note 77.

93 Id., at p. 586.
94 Id., at p. 587.
95 G.R. No. 160732, June 21, 2004, 432 SCRA 559.
96 Id., at pp. 569-570. The pertinent portion of the decision reads:
We have accepted, in Feati Bank and Trust Company v. Court of Appeals
and Bank of America NT & SA v. Court of Appeals, 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 Philippines Islands v. Nery (sic) was
justified under Art. 2 of the Code of Commerce, which states:
“Acts of commerce, whether those who execute them to be
merchants or not, and whether specified in this Code or not should
682

Thus, for the purpose of clarity, letters of credit are governed

primarily by their own provisions,97 by laws specifically applicable
to them,98 and by usage and custom.99 Consistent with our rulings in
several cases,100 usage and custom refers to UCP 400. When the
particular issues are not covered by the provisions of the letter of

credit, by laws specifically applicable to them and by UCP 400, our
general civil law finds suppletory application.101
Applying this set of laws and rules, this Court rules that HSBC is
liable under the provisions of the Letter of Credit, in accordance
with usage and custom as embodied in UCP 400, and under the
provisions of general civil law.
HSBC’s Liability
The Letter of Credit categorically stated that it is subject to UCP

400, to wit:
Except so far as otherwise expressly stated, this

documentary credit is subject to uniform Customs and
_______________
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.”
98 Code of Commerce, Art. 50; Feati Bank & Trust Company v. Court of Appeals,
supra note 77 at p. 587.
100 Transfield Philippines, Inc. v. Luzon Hydro Corporation, supra note 70;
Metropolitan Waterworks Sewerage System v. Daway, supra note 95; Lee v. Court of
Appeals, G.R. No. 117913, February 1, 2002, 375 SCRA 579; Bank of America, NT &
SA v. Court of Appeals, supra note 64; Feati Bank & Trust Company v. Court of
Appeals, supra note 77.
101 Code of Commerce, Arts. 2 & 50.
683
VOL. 784, FEBRUARY 24, 2016 683

Practice for Documentary Credits (1983 Revision),

International Chamber of Commerce Publication No. 400.102
From the moment that HSBC agreed to the terms of the Letter of
Credit — which states that UCP 400 applies — its actions in
connection with the transaction automatically became bound by the
rules set in UCP 400. Even assuming that URC 322 is an
international custom that has been recognized in commerce, this

does not change the fact that HSBC, as the issuing bank of a letter of
credit, undertook certain obligations dictated by the terms of the
Letter of Credit itself and by UCP 400. In Feati, this Court applied
UCP 400 even when there is no express stipulation in the letter of
credit that it governs the transaction.103 On the strength of our ruling
in Feati, we have the legal duty to apply UCP 400 in this case
independent of the parties’ agreement to be bound by it.
UCP 400 states that an irrevocable credit payable on sight, such
as the Letter of Credit in this case, constitutes a definite undertaking
of the issuing bank to pay, provided that the stipulated documents
are presented and that the terms and conditions of the credit are
complied with.104 Further, UCP 400 provides that an issuing bank
has the obligation to examine the documents with reasonable care.105
Thus, when City-
_______________
102 Rollo, p. 133.

103 Supra note 77 at p. 587.
104 Uniform Customs and Practice For Documentary Credits 400, Art. 10(a).
An irrevocable credit constitutes a definite undertaking of the issuing bank, provided
that the stipulated documents are presented and that the terms and conditions of the
credit are complied with:
(i) if the credit provides for sight payment — to pay, or that payment will
be made; x x x.
105 Uniform Customs and Practice For Documentary Credits 400, Art. 15.
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.
Documents which appear on their face to be inconsistent with one another will be
considered
684

Trust forwarded the Letter of Credit with the attached documents

to HSBC, it had the duty to make a determination of whether its
obligation to pay arose by properly examining the documents.
In its petition, HSBC argues that it is not UCP 400 but URC 322
that should govern the transaction.106 URC 322 is a set of norms
compiled by the ICC.107 It was drafted by international experts and
has been adopted by the ICC members. Owing to the status of the
ICC and the international representation of its membership, these

rules have been widely observed by businesses throughout the
world. It prescribes the collection procedures, technology, and
standards for handling collection transactions for banks.108 Under
the facts of this case, a bank acting in accordance with the terms of
URC 322 merely facilitates collection. Its duty is to forward the
letter of credit and the required documents from the entity seeking
payment to another entity which has the duty to pay. The bank incurs
no obligation other than as a collecting agent. This is different in the
case of an issuing bank acting in accordance with UCP 400. In this
case, the issuing bank has the duty to pay the amount stated in the
letter of credit upon due presentment. HSBC claims that while UCP
400 applies to letters of credit, it is also common for beneficiaries of
such letters to seek collection under URC 322. HSBC further claims
that URC 322 is an accepted custom in commerce.109
HSBC’s argument is without merit. We note that HSBC failed to
present evidence to prove that URC 322 constitutes
_______________
as not appearing on their face to be in accordance with the terms and conditions of
the credit.
106 Rollo, pp. 54-71.
107 ICC Uniform Rules for Collections, available at <store.iccwbo.
org/Content/uploaded/pdf/ICC-Uniform-Rules-for-Collections.pdf> (last accessed on
January 18, 2016).
108 Id.
109 Rollo, pp. 60-61.
685
VOL. 784, FEBRUARY 24, 2016 685

custom and usage recognized in commerce. Neither was there

sufficient evidence to prove that beneficiaries under a letter of credit
commonly resort to collection under URC 322 as a matter of
industry practice. HSBC claims that the testimony of its witness Mr.
Lincoln MacMahon (Mr. MacMahon) suffices for this purpose.110
However, Mr. MacMahon was not presented as an expert witness
capable of establishing the existing banking and commercial practice
relating to URC 322 and letters of credit. Thus, this Court cannot
hold that URC 322 and resort to it by beneficiaries of letters of
credit are customs that demand application in this case.111
HSBC’s position that URC 322 applies, thus allowing it, the
issuing bank, to disregard the Letter of Credit, and merely demand
collection from Klockner cannot be countenanced. Such an
argument effectively asks this Court to give imprimatur to a practice
that undermines the value and reliability of letters of credit in trade
and commerce. The entire system of letters of credit rely on the
assurance that upon presentment of the proper documents, the
beneficiary has an enforceable right and the issuing bank a
demandable obligation, to pay the amount agreed upon. Were a party
to the transaction allowed to simply set this aside by the mere
invocation of another set of norms related to commerce — one that
is not established as a custom that is entitled to recognition by this
Court — the sanctity of letters of credit will be jeopardized. To
repeat, any law or custom governing letters of credit should have, at
its core, an emphasis on the imperative that issuing banks respect
their obligation to pay and that seller-beneficiaries may reasonably
expect payment in accordance with the terms of a letter of credit.
Thus, the CA correctly ruled, to wit:
At this juncture, it is significant to stress that an

irrevocable letter of credit cannot, during its lifetime, be
_______________
110 Id., at pp. 57-59.

111 Supra note 76 at p. 261.
686

cancelled or modified without the express permission of

the beneficiary. Not even partial payment of the obligation by
the applicant-buyer would amend or modify the obligation of
the issuing bank. The subsequent correspondences of
[CityTrust] to HSBC, thus, could not in any way affect or
amend the letter of credit, as it was not a party thereto. As a
notifying bank, it has nothing to do with the contract between
the issuing bank and the buyer regarding the issuance of the
letter of credit.112 (Citations omitted)
The provisions in the Civil Code and our jurisprudence apply

suppletorily in this case.113 When a party knowingly and freely binds
himself or herself to perform an act, a juridical tie is created and he

or she becomes bound to fulfill his or her obligation. In this case,
HSBC’s obligation arose from two sources. First, it has a contractual
duty to Klockner whereby it agreed to pay NSC upon due
presentment of the Letter of Credit and the attached documents.
Second, it has an obligation to NSC to honor the Letter of Credit. In
complying with its obligation, HSBC had the duty to perform all
acts necessary. This includes a proper examination of the documents
presented to it and making a judicious inquiry of whether CityTrust,
in behalf of NSC, made a due presentment of the Letter of Credit.
Further, as a bank, HSBC has the duty to observe the highest
degree of diligence. In all of its transactions, it must exercise the
highest standard of care and must fulfill its obligations with utmost
fidelity to its clients. Thus, upon receipt of CityTrust’s Collection
Order with the Letter of Credit, HSBC had the obligation to
carefully examine the documents it received. Had it observed the
standard of care expected of it, HSBC would have discovered that
the Letter of Credit is the very same document which it issued upon
the request of
_______________
112 Rollo, p. 18.

687
VOL. 784, FEBRUARY 24, 2016 687

Klockner, its client. Had HSBC taken the time to perform its duty
with the highest degree of diligence, it would have been alerted by
the fact that the documents presented to it corresponded with the
documents stated in the Letter of Credit, to which HSBC freely and
knowingly agreed. HSBC ought to have noticed the discrepancy
between CityTrust’s request for collection under URC 322 and the
terms of the Letter of Credit. Notwithstanding any statements by
CityTrust in the Collection Order as to the applicable rules, HSBC
had the independent duty of ascertaining whether the presentment of
the Letter of Credit and the attached documents gave rise to an
obligation which it had to Klockner (its client) and NSC (the
beneficiary). Regardless of any error that CityTrust may have
committed, the standard of care expected of HSBC dictates that it
should have made a separate determination of the significance of the
presentment of the Letter of Credit and the attached documents. A

bank exercising the appropriate degree of diligence would have, at
the very least, inquired if NSC was seeking payment under the
Letter of Credit or merely seeking collection under URC 322. In
failing to do so, HSBC fell below the standard of care imposed upon
it.
This Court therefore rules that CityTrust’s presentment of the
Letter of Credit with the attached documents in behalf of NSC,
constitutes due presentment. Under the terms of the Letter of Credit,
HSBC undertook to pay the amount of US$485,767.93 upon
presentment of the Letter of Credit and the required documents.114 In
accordance with this agreement,
_______________
114 The following are the required documents as provided in the Letter of Credit:
(1) one original commercial invoice; (2) one packing list; (3) one nonnegotiable copy
of clean on board ocean bill of lading made out to order, blank endorsed marked
‘freight collect’ and ‘notify applicant’; (4) copy of Mill Test Certificate made out ‘to
whom it may concern’; (5) copy of beneficiary’s telex to applicant (Telex No. 86660
Klock HX) advising shipment details including D/C No., shipping marks, name of
vessel, part of shipment, port of destination, bill of lading date, sailing and ETA dates,
description of goods, size, weight,
688

NSC, through CityTrust, presented the Letter of Credit and the

following documents: (1) Letter of Credit; (2) Bill of Lading; (3)
Commercial Invoice; (4) Packing List; (5) Mill Test Certificate; (6)
NSC’s TELEX to Klockner on shipping details; (7) Beneficiary’s
Certificate of facsimile transmittal of documents; (8) Beneficiary’s
Certificate of air courier transmittal of documents; and (9) DHL
Receipt No. 669988911 and Certificate of Origin.115
In transactions where the letter of credit is payable on sight, as in
this case, the issuer must pay upon due presentment. This obligation
is imbued with the character of definiteness in that not even the
defect or breach in the underlying transaction will affect the issuing
bank’s liability.116 This is the Independence Principle in the law on
letters of credit. Article 17 of UCP 400 explains that under this
principle, an issuing bank assumes 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...”
Thus, as long as the proper documents are presented, the issuing
bank has an obligation to pay even if the buyer should later on
refuse payment. Hence, Klockner’s refusal to pay carries no effect
whatsoever on HSBC’s obligation to pay under the Letter of Credit.
To allow HSBC to refuse to honor the Letter of Credit simply
because it could not
_______________
number of packages and value of goods latest two days after shipment date; and
(6) beneficiary’s certificate certifying that: (a) one set of nonnegotiable copies of
documents (being those listed above) have been faxed to applicant (FAX No.
5294987) latest two days after shipment date; and (b) one set of documents including
one copy each of invoice and packing list, 3/3 original bills of lading plus one
nonnegotiable copy and three original Mill Test Certificates have been sent to
applicant by air courier service latest two days after shipment date, Rollo, pp. 132-
133.
115 Id., at pp. 125-126.
116 Uniform Customs and Practice For Documentary Credits 400, Art. 3.
689
VOL. 784, FEBRUARY 24, 2016 689

collect first from Klockner is to countenance a breach of the

Independence Principle.
HSBC’s persistent refusal to comply with its obligation
notwithstanding due presentment constitutes delay contemplated in
Article 1169 of the Civil Code.117 This provision states that a party
to an obligation incurs in delay from the time the other party makes
a judicial or extrajudicial demand for the fulfillment of the
obligation. We rule that the due presentment of the Letter of Credit
and the attached documents is tantamount to a demand. HSBC
incurred in delay when it failed to fulfill its obligation despite such a
demand.
Under Article 1170 of the Civil Code,118 a party in delay is liable
for damages. The extent of these damages pertains to the pecuniary
loss duly proven.119 In this case, such damage refers to the losses
which NSC incurred in the amount of US$485,767.93 as stated in
the Letter of Credit. We also
_______________
117 Art. 1169. Those obliged to deliver or to do something incur in delay from

the time the obligee judicially or extrajudicially demands from them the fulfillment of
their obligation.
However, the demand by the creditor shall not be necessary in order that delay
may exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it appears that
the designation of the time when the thing is to be delivered or the service is to be
rendered was a controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond
his power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply
or is not ready to comply in a proper manner with what is incumbent upon him. From
the moment one of the parties fulfills his obligation, delay by the other begins.
118 Art. 1170. Those who in the performance of their obligations are guilty of
fraud, negligence, or delay, and those who in any manner contravene the tenor
thereof, are liable for damages.
119 Civil Code, Art. 2199.
690

award interest as indemnity for the damages incurred in the

amount of six percent (6%) from the date of NSC’s extrajudicial
demand.120 An interest in the amount of six percent (6%) is also
awarded from the time of the finality of this decision until full
payment.121
Having been remiss in its obligations under the applicable law,
rules and jurisprudence, HSBC only has itself to blame for its
consequent liability to NSC.
However, this Court finds that there is no basis for the CA’s grant
of attorney’s fees in favor of NSC. Article 2208 of the Civil Code122
enumerates the grounds for the award of attorney’s fees. This Court
has explained that the award of
_______________
120 Civil Code, Art. 2209; Nacar v. Gallery Frames, G.R. No. 189871, August
13, 2013, 703 SCRA 439.
121 Nacar v. Gallery Frames, id.
122 Art. 2208. In the absence of stipulation, attorney’s fees and expenses of

litigation, other than judicial costs, cannot be recovered, except:
(1) When exemplary damages are awarded;
(2) When the defendant’s act or omission has compelled the plaintiff to litigate
with third persons or to incur expenses to protect his interest;
(3) In criminal cases of malicious prosecution against the plaintiff;
(4) In case of a clearly unfounded civil action or proceeding against the plaintiff;
(5) Where the defendant acted in gross and evident bad faith in refusing to satisfy
the plaintiff’s plainly valid, just and demandable claim;
(6) In actions for legal support;
(7) In actions for the recovery of wages of household helpers, laborers and skilled
workers;
(8) In actions for indemnity under workmen’s compensation and employer’s
liability laws;
(9) In a separate civil action to recover civil liability arising from a crime;
(10) When at least double judicial costs are awarded;
691
VOL. 784, FEBRUARY 24, 2016 691

attorney’s fees is an exception rather than the rule.123 The

winning party is not automatically entitled to attorney’s fees as there
should be no premium on the right to litigate.124 While courts may
exercise discretion in granting attorney’s fees, this Court has stressed
that the grounds used as basis for its award must approximate as
closely as possible the enumeration in Article 2208.125 Its award
must have sufficient factual and legal justifications.126 This Court
rules that none of the grounds stated in Article 2208 are present in
this case. NSC has not cited any specific ground nor presented any
particular fact to warrant the award of attorney’s fees.
CityTrust’s Liability
When NSC obtained the services of CityTrust in collecting under

the Letter of Credit, it constituted CityTrust as its agent. Article
1868 of the Civil Code states that a contract of agency exists when a
person binds himself or herself “to render some service or to do
something in representation or on behalf of another, with the consent
or authority of the latter.” In this case, CityTrust bound itself to
collect under the Letter of Credit in behalf of NSC.
One of the obligations of an agent is to carry out the agency in
accordance with the instructions of the principal.127 In as-
_______________
(11) In any other case where the court deems it just and equitable that attorney’s
fees and expenses of litigation should be recovered.
In all cases, the attorney’s fees and expenses of litigation must be reasonable.
123 Republic v. Lorenzo Shipping Corporation, G.R. No. 153563, February 7,
2005, 450 SCRA 550; Padillo v. Court of Appeals, G.R. No. 119707, November 29,
2001, 371 SCRA 27.
124 Padillo v. Court of Appeals, id.
125 Republic v. Lorenzo Shipping Corporation, supra.
126 Id.
127 Civil Code, Art. 1887.
692

certaining NSC’s instructions to CityTrust, its letter dated

January 18, 1994 is determinative. In this letter, NSC clearly stated
that it “negotiated with CityTrust the export documents pertaining to
LC No. HKH 239409 of HSBC and it was CityTrust which
wrongfully treated the negotiation as ‘on collection basis.’”128
HSBC persistently communicated with CityTrust and consistently
repeated that it will proceed with collection under URC 322. At no
point did CityTrust correct HSBC or seek clarification from NSC. In
insisting upon its course of action, CityTrust failed to act in
accordance with the instructions given by NSC, its principal.
Nevertheless while this Court recognizes that CityTrust committed a
breach of its obligation to NSC, this carries no implications on the
clear liability of HSBC. As this Court already mentioned, HSBC had
a separate obligation that it failed to perform by reason of acts
independent of CityTrust’s breach of its obligation under its contract
of agency. If CityTrust has incurred any liability, it is to its principal
NSC. However, NSC has not raised any claim against CityTrust at
any point in these proceedings. Thus, this Court cannot make any
finding of liability against CityTrust in favor of NSC.
WHEREFORE, in view of the foregoing, the Assailed Decision
dated November 19, 2007 is AFFIRMED to the extent that it orders
HSBC to pay NSC the amount of US$485,767.93. HSBC is also
liable to pay legal interest of six percent (6%) per annum from the
time of extrajudicial demand. An interest of six percent (6%) is also
awarded from the time of the finality of this decision until the
amount is fully paid. We delete the award of attorney’s fees. No
pronouncement as to cost.
SO ORDERED.
Velasco, Jr. (Chairperson), Peralta, Perez and Reyes, JJ.,

concur.
_______________
128 Rollo, p. 223.
693
VOL. 784, FEBRUARY 24, 2016 693

Judgment affirmed.
Notes.—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 his goods before paying. (Asian
Terminals, Inc. vs. Philam Insurance Co., Inc., 702 SCRA 88
[2013])
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. (Philippine National Bank
vs. San Miguel Corporation, 713 SCRA 586 [2014])
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12/18/2018 SUPREME COURT REPORTS ANNOTATED VOLUME 216

VOL. 216, DECEMBER 8, 1992 257

PRUDENTIAL BANK, petitioner, vs. INTERMEDIATE

Commercial Law; Negotiable Instruments Law; Letters of Credit;

258 SUPREME COURT REPORTS ANNOTATED

Prudential Bank vs. Intermediate Appellate Court

Same; Trust Receipts Law; Violation of duty to account for goods

Contracts; Solidary guaranty clause; Requisites of defense of

VOL. 216, DECEMBER 8, 1992 259

Prudential Bank vs. Intermediate Appellate Court

Same; Same; Contract of guaranty does not have to appear in a public

260 SUPREME COURT REPORTS ANNOTATED

Prudential Bank vs. Intermediate Appellate Court

Criminal Law; Violation of Trust Receipts Law committed by a

Civil Procedure; Joinder of parties; Excussion not condition sine

VOL. 216, DECEMBER 8, 1992 261

PETITION for review from the decision of the then Intermediate

The facts are stated in the opinion of the Court.

DAVIDE, JR., J.:

“On August 8, 1962, defendant-appellant Philippine Rayon Mills, Inc.

262 SUPREME COURT REPORTS ANNOTATED

dorsed the shipping documents to the defendant-appellant which accepted

the machineries, it executed, by prior arrangement with the Prudential Bank,

“WHEREFORE, judgment is hereby rendered sentencing the defendant

VOL. 216, DECEMBER 8, 1992 263

Insofar as the amounts involved in drafts Exhs. “X” (sic) to “X-11”,

Insofar as defendant Anacleto R. Chi is concerned, the case is dismissed.

Petitioner appealed the decision to the then Intermediate Appellate

264 SUPREME COURT REPORTS ANNOTATED

In its decision, public respondent sustained the trial court in all

VOL. 216, DECEMBER 8, 1992 265

“I. WHETHER OR NOT THE RESPONDENT APPELLATE

FOR THE BENEFIT OF PRIVATE RESPONDENT

266 SUPREME COURT REPORTS ANNOTATED

petitioner; both parties were also required to submit their respective

1. Whether presentment for acceptance of the drafts was

VOL. 216, DECEMBER 8, 1992 267

“x x x By virtue of said Application

A letter of credit is defined as an engagement by a bank or other

“SEC. 143. When presentment for acceptance must be made.—Presentment

268 SUPREME COURT REPORTS ANNOTATED

In no other case is presentment for acceptance necessary in order to render

Obviously then, sight drafts do not require presentment for

Corollarily, they are, pursuant to Section 7 of the NIL, payable on

“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

Where an instrument is issued, accepted, or indorsed when overdue, it is,

14 Section 132, NIL.

VOL. 216, DECEMBER 8, 1992 269

Paragraph 8 of the Trust Receipt which reads: “My/our liability for

the petitioner—and not Philippine Rayon—which had to accept the

“Commercial letters of credit have come into general use in international

270 SUPREME COURT REPORTS ANNOTATED

The trial court and the public respondent likewise erred in

“By this arrangement a banker advances money to an intending importer,

VOL. 216, DECEMBER 8, 1992 271

“x x x [I]n a certain manner, x x x partake of the nature of a conditional sale

should be turned over to him by the importer or by his representative or

22 63 Phil. 814, 821 [1936].

272 SUPREME COURT REPORTS ANNOTATED

profited by its operation and/or disposition but very recent

23 Record on Appeal, 6-7.

VOL. 216, DECEMBER 8, 1992 273

falls under fraud.