LETTERS OF CREDIT Lading No. HKG 266001.
The cargo arrived in Hongkong on November 25,
1. HSBC v NSC, GR No. 183486, 24 Feb 2016
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 (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 non-negotiable 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 DIC 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 non-negotiable
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 non-negotiable 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 on
board MV Sea Dragon under China Ocean Shipping Company Bill of
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 non-payment 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 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 of the amount. 17 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. 19In 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 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 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/cable advice non-payment 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. 40HSBC
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
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 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:
Plaintiffs Complaint against HSBC is DISMISSED; and, HSBC's
Counterclaims against NSC are DENIED.
Ordering Third-Party Defendant CityTrust to pay Third-Party Plaintiff
HSBC the following:
US$771.21 as actual and consequential damages; and
Pl00,000 as attorney's fees.
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, 2007,58the 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 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 Certiorari 61 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 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.
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 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 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. 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 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 provisions 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 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 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.
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
app1ication.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 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 CityTrust 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 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. 110However,
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 thatdemand
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 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 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
detennination 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.1avvphi1 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, 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 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 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 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. 127In ascertaining 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.
 2. BPI v De Reny Fabric Industries Inc., 35 SCRA 253 (1970)
This is an appeal from the decision of the Court of First Instance of Manila
ordering the defendants-appellants to pay to the Bank of the Philippine
Islands (hereinafter referred to as the Bank), jointly and severally, the
value of the credit it extended to them in several letters of credit which
the Bank opened at the behest of the defendants appellants to finance
their importation of dyestuffs from the United States, which however
turned out to be mere colored chalk upon arrival and inspection thereof at
the port of Manila.
The record shows that on four (4) different occasions in 1961, the De
Reny Fabric Industries, Inc., a Philippine corporation through its co-
defendants-appellants, Aurora Carcereny alias Aurora C. Gonzales, and
Aurora T. Tuyo, president and secretary, respectively of the corporation,
applied to the Bank for four (4) irrevocable commercial letters of credit to
cover the purchase by the corporation of goods described in the covering
L/C applications as "dyestuffs of various colors" from its American
supplier, the J.B. Distributing Company. All the applications of the
corporation were approved, and the corresponding Commercial L/C
Agreements were executed pursuant to banking procedures. Under these
agreements, the aforementioned officers of the corporation bound
themselves personally as joint and solidary debtors with the corporation.
Pursuant to banking regulations then in force, the corporation delivered
to the Bank peso marginal deposits as each letter of credit was opened.
The dates and amounts of the L/Cs applied for and approved as well as
the peso marginal deposits made were, respectively, as follows:.
Date Application Amount Marginal
& L/C No. Deposit
Oct. 10, 1961 61/1413 $57,658.38 P43,407.33
Oct. 23, 1961 61/1483 $25,867.34 19,473.64
Oct. 30, 1961 61/1495 $19,408.39 14,610.88
Nov. 10, 1961 61/1564 $26,687.64 20,090.90
TOTAL .... $129,621.75 P97,582.75
By virtue of the foregoing transactions, the Bank issued irrevocable
commercial letters of credit addressed to its correspondent banks in the
United States, with uniform instructions for them to notify the beneficiary
thereof, the J.B. Distributing Company, that they have been authorized to
negotiate the latter's sight drafts up to the amounts mentioned the
respectively, if accompanied, upon presentation, by a full set of
negotiable clean "on board" ocean bills of lading covering the
merchandise appearing in the LCs that is, dyestuffs of various colors.
Consequently, the J.B. Distributing Company drew upon, presented to
and negotiated with these banks, its sight drafts covering the amounts of
the merchandise ostensibly being exported by it, together with clean bills
of lading, and collected the full value of the drafts up to the amounts
appearing in the L/Cs as above indicated. These correspondent banks
then debited the account of the Bank of the Philippine Islands with them
up to the full value of the drafts presented by the J.B. Distributing
Company, plus commission thereon, and, thereafter, endorsed and
forwarded all documents to the Bank of the Philippine Islands.
In the meantime, as each shipment (covered by the above-mentioned
letters of credit) arrived in the Philippines, the De Reny Fabric Industries,
Inc. made partial payments to the Bank amounting, in the aggregate, to
P90,000. Further payments were, however, subsequently discontinued by
the corporation when it became established, as a result of a chemical test
conducted by the National Science Development Board, that the goods
that arrived in Manila were colored chalks instead of dyestuffs.
The corporation also refused to take possession of these goods, and for
this reason, the Bank caused them to be deposited with a bonded
warehouse paying therefor the amount of P12,609.64 up to the filing of
its complaint with the court below on December 10, 1962.
On October 24, 1963 the lower court rendered its decision ordering the
corporation and its co-defendants (the herein appellants) to pay to the
plaintiff-appellee the amount of P291,807.46, with interest thereon, as
provided for in the L/C Agreements, at the rate of 7% per annum from
October 31, 1962 until fully paid, plus costs.
It is the submission of the defendants-appellants that it was the duty of
the foreign correspondent banks of the Bank of the Philippine Islands to
take the necessary precaution to insure that the goods shipped under the
covering L/Cs conformed with the item appearing therein, and, that the
foregoing banks having failed to perform this duty, no claim for
recoupment against the defendants-appellants, arising from the losses
incurred for the non-delivery or defective delivery of the articles ordered,
could accrue.
We can appreciate the sweep of the appellants' argument, but we also
find that it is nestled hopelessly inside a salient where the valid contract
between the parties and the internationally accepted customs of the
banking trade must prevail.1
Under the terms of their Commercial Letter of Credit Agreements with the
Bank, the appellants agreed that the Bank shall not be responsible for the
"existence, character, quality, quantity, conditions, packing, value, or
delivery of the property purporting to be represented by documents; for
any difference in character, quality, quantity, condition, or value of the
property from that expressed in documents," or for "partial or incomplete
shipment, or failure or omission to ship any or all of the property referred
to in the Credit," as well as "for any deviation from instructions, delay,
default or fraud by the shipper or anyone else in connection with the
property the shippers or vendors and ourselves [purchasers] or any of
us." Having agreed to these terms, the appellants have, therefore, no
recourse but to comply with their covenant. 2
But even without the stipulation recited above, the appellants cannot shift
the burden of loss to the Bank on account of the violation by their vendor
of its prestation.
It was uncontrovertibly proven by the Bank during the trial below that
banks, in providing financing in international business transactions such
as those entered into by the appellants, do not deal with the property to
be exported or shipped to the importer, but deal only with documents.
The Bank introduced in evidence a provision contained in the "Uniform
Customs and Practices for Commercial Documentary Credits Fixed for the
Thirteenth Congress of International Chamber of Commerce," to which
the Philippines is a signatory nation. Article 10 thereof provides: .
In documentary credit operations, all parties concerned deal in
documents and not in goods. — Payment, negotiation or acceptance
against documents in accordance with the terms and conditions of a
credit by a Bank authorized to do so binds the party giving the
authorization to take up the documents and reimburse the Bank making
the payment, negotiation or acceptance.
The existence of a custom in international banking and financing circles
negating any duty on the part of a bank to verify whether what has been
described in letters of credits or drafts or shipping documents actually
tallies with what was loaded aboard ship, having been positively proven
as a fact, the appellants are bound by this established usage. They were,
after all, the ones who tapped the facilities afforded by the Bank in order
to engage in international business.
ACCORDINGLY, the judgment a quo is affirmed, at defendants-appellants'
cost. This is without prejudice to the Bank, in proper proceedings in the
court below in this same case proving and being reimbursed additional
expenses, if any, it has incurred by virtue of the continued storage of the
goods in question up to the time this decision becomes final and
executory.
Case Digest:
Doctrine: Under the terms of their Commercial Letter of Credit
Agreements with the Bank, the appellants agreed that the Bank
shall not be responsible for the “existence, character, quality,
quantity, conditions, packing, value, or delivery of the property
purporting to be represented by documents; for any difference in
character, quality, quantity, condition, or value of the property
from that expressed in documents. Having been positively proven
as a fact, the appellants are bound by this established usage.
Facts:: De Reny Fabric Industries, Inc. (De Reny) applied for, and was
granted, four (4) irrevocable commercial letters of credit with the Bank of
Philippine Islands (BPI). The letter of credits was used to cover the
purchase of goods by De Reny from its American supplier, the J.B.
Distributing Company. As each shipment arrived in the Philippines, the De
Reny Fabric Industries, Inc. made partial payments to the Bank
amounting to 12,000. Further payments were, however, subsequently
discontinued by the corporation when it became established, as a result
of a chemical test conducted by the National Science Development Board,
that the goods that arrived in Manila were colored chalks instead of
dyestuffs. The corporation also refused to take possession of these goods,
and for this reason, the Bank caused them to be deposited with a bonded
warehouse paying therefor the amount of P12,609.64 up to the filing of
its complaint with the court.
Issue : Whether or not De Reny fabrics is liable under the letter of Credit
Held : Even without the stipulation recited above, the appellants cannot
shift the burden of loss to the Bank on account of the violation by their
vendor of its prestation. It was uncontrovertibly proven by the Bank
during the trial below that banks, in providing financing in international
business transactions such as those entered into by the appellants, do not
deal with the property to be exported or shipped to the importer, but deal
only with documents. The existence of a custom in international banking
and financing circles negating any duty on the part of a bank to verify
whether what has been described in letters of credits or drafts or shipping
documents actually tallies with what was loaded aboard ship, having been
positively proven as a fact, the appellants are bound by this established
usage. They were, after all, the ones who tapped the facilities afforded by
the Bank in order to engage in international business.
Under the terms of their Commercial Letter of Credit Agreements with the
Bank, the appellants agreed that the Bank shall not be responsible for the
“existence, character, quality, quantity, conditions, packing, value, or
delivery of the property purporting to be represented by documents; for
any difference in character, quality, quantity, condition, or value of the
property from that expressed in documents,” or for “partial or incomplete
shipment, or failure or omission to ship any or all of the property referred
to in the Credit,” as well as “for any deviation from instructions, delay,
default or fraud by the shipper or anyone else in connection with the
property the shippers or vendors and ourselves [purchasers] or any of
us.” Having agreed to these terms, the appellants have, therefore, no
recourse but to comply with their covenant.
 3. FEATI Bank and Trust Co v. Court of Appeals, 196 SCRA 576
This is a petition for review seeking the reversal of the decision of the
Court of Appeals dated June 29, 1990 which affirmed the decision of the
Regional Trial Court of Rizal dated October 20, 1986 ordering the
defendants Christiansen and the petitioner, to pay various sums to
respondent Villaluz, jointly and severally.
The facts of the case are as follows:
On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant
Axel Christiansen 2,000 cubic meters of lauan logs at $27.00 per cubic
meter FOB. After inspecting the logs, Christiansen issued purchase order
No. 76171.
On the arrangements made and upon the instructions of the consignee,
Hanmi Trade Development, Ltd., de Santa Ana, California, the Security
Pacific National Bank of Los Angeles, California issued Irrevocable Letter
of Credit No. IC-46268 available at sight in favor of Villaluz for the sum of
$54,000.00, the total purchase price of the lauan logs. The letter of credit
was mailed to the Feati Bank and Trust Company (now Citytrust) with the
instruction to the latter that it "forward the enclosed letter of credit to the
beneficiary." (Records, Vol. I, p. 11)
The letter of credit further provided that the draft to be drawn is on
Security Pacific National Bank and that it be accompanied by the following
documents:
1. Signed Commercial Invoice in four copies showing the number
of the purchase order and certifying that —
a. All terms and conditions of the purchase order have been complied
with and that all logs are fresh cut and quality equal to or better than that
described in H.A. Christiansen's telex #201 of May 1, 1970, and that all
logs have been marked "BEV-EX."
b. One complete set of documents, including 1/3 original bills of lading
was airmailed to Consignee and Parties to be advised by Hans-Axel
Christiansen, Ship and Merchandise Broker.
c. One set of non-negotiable documents was airmailed to Han Mi Trade
Development Company and one set to Consignee and Parties to be
advised by Hans-Axel Christiansen, Ship and Merchandise Broker.
2. Tally sheets in quadruplicate.
3. 2/3 Original Clean on Board Ocean Bills of Lading with
Consignee and Parties to be advised by Hans Axel Christiansen,
showing Freight Prepaid and marked Notify:
Han Mi Trade Development Company, Ltd., Santa Ana, California.
Letter of Credit No. 46268 dated June 7, 1971
Han Mi Trade Development Company, Ltd., P.O. Box 10480, Santa Ana,
California 92711 and Han Mi Trade Development Company, Ltd., Seoul,
Korea.
4. Certification from Han-Axel Christiansen, Ship and Merchandise
Broker, stating that logs have been approved prior to shipment in
accordance with terms and conditions of corresponding purchase
Order. (Record, Vol. 1 pp. 11-12)
Also incorporated by reference in the letter of credit is the Uniform
Customs and Practice for Documentary Credits (1962 Revision).
The logs were thereafter loaded on the vessel "Zenlin Glory" which was
chartered by Christiansen. Before its loading, the logs were inspected by
custom inspectors Nelo Laurente, Alejandro Cabiao, Estanislao Edera from
the Bureau of Customs (Records, Vol. I, p. 124) and representatives
Rogelio Cantuba and Jesus Tadena of the Bureau of Forestry (Records,
Vol. I, pp. 16-17) all of whom certified to the good condition and
exportability of the logs.
After the loading of the logs was completed, the Chief Mate, Shao Shu
Wang issued a mate receipt of the cargo which stated the same are in
good condition (Records, Vol. I, p. 363). However, Christiansen refused to
issue the certification as required in paragraph 4 of the letter of credit,
despite several requests made by the private respondent. Because of the
absence of the certification by Christiansen, the Feati Bank and Trust
Company refused to advance the payment on the letter of credit. The
letter of credit lapsed on June 30, 1971, (extended, however up to July
31, 1971) without the private respondent receiving any certification from
Christiansen.
The persistent refusal of Christiansen to issue the certification prompted
the private respondent to bring the matter before the Central Bank. In a
memorandum dated August 16, 1971, the Central Bank ruled that:
. . . pursuant to the Monetary Board Resolution No. 1230 dated August 3,
1971, in all log exports, the certification of the lumber inspectors of the
Bureau of Forestry . . . shall be considered final for purposes of
negotiating documents. Any provision in any letter of credit covering log
exports requiring certification of buyer's agent or representative that said
logs have been approved for shipment as a condition precedent to
negotiation of shipping documents shall not be allowed. (Records, Vol. I,
p. 367)
Meanwhile, the logs arrived at Inchon, Korea and were received by the
consignee, Hanmi Trade Development Company, to whom Christiansen
sold the logs for the amount of $37.50 per cubic meter, for a net profit of
$10 per cubic meter. Hanmi Trade Development Company, on the other
hand sold the logs to Taisung Lumber Company at Inchon, Korea. (Rollo,
p. 39)
Since the demands by the private respondent for Christiansen to execute
the certification proved futile, Villaluz, on September 1, 1971, instituted
an action for mandamus and specific performance against Christiansen
and the Feati Bank and Trust Company (now Citytrust) before the then
Court of First Instance of Rizal. The petitioner was impleaded as
defendant before the lower court only to afford complete relief should the
court a quo order Christiansen to execute the required certification.
The complaint prayed for the following:
1. Christiansen be ordered to issue the certification required of him under
the Letter of Credit;
2. Upon issuance of such certification, or, if the court should find it
unnecessary, FEATI BANK be ordered to accept negotiation of the Letter
of Credit and make payment thereon to Villaluz;
3. Order Christiansen to pay damages to the plaintiff. (Rollo, p. 39)
On or about 1979, while the case was still pending trial, Christiansen left
the Philippines without informing the Court and his counsel. Hence,
Villaluz, filed an amended complaint to make the petitioner solidarily
liable with Christiansen. The trial court, in its order dated August 29,
1979, admitted the amended complaint.
After trial, the lower court found:
The liability of the defendant CHRISTIANSEN is beyond dispute, and the
plaintiffs right to demand payment is absolute. Defendant CHRISTIANSEN
having accepted delivery of the logs by having them loaded in his
chartered vessel the "Zenlin Glory" and shipping them to the consignee,
his buyer Han Mi Trade in Inchon, South Korea (Art. 1585, Civil Code),
his obligation to pay the purchase order had clearly arisen and the
plaintiff may sue and recover the price of the goods (Art. 1595, Id).
The Court believes that the defendant CHRISTIANSEN acted in bad faith
and deceit and with intent to defraud the plaintiff, reflected in and
aggravated by, not only his refusal to issue the certification that would
have enabled without question the plaintiff to negotiate the letter of
credit, but his accusing the plaintiff in his answer of fraud, intimidation,
violence and deceit. These accusations said defendant did not attempt to
prove, as in fact he left the country without even notifying his own
lawyer. It was to the Court's mind a pure swindle.
The defendant Feati Bank and Trust Company, on the other hand, must
be held liable together with his (sic) co-defendant for having, by its
wrongful act, i.e., its refusal to negotiate the letter of credit in the
absence of CHRISTIANSEN's certification (in spite of the Central Bank's
ruling that the requirement was illegal), prevented payment to the
plaintiff. The said letter of credit, as may be seen on its face,
is irrevocable and the issuing bank, the Security Pacific National Bank in
Los Angeles, California, undertook by its terms that the same shall be
honored upon its presentment. On the other hand, the notifying bank, the
defendant Feati Bank and Trust Company, by accepting the instructions
from the issuing bank, itself assumed the very same undertaking as the
issuing bank under the terms of the letter of credit.
xxx xxx xxx
The Court likewise agrees with the plaintiff that the defendant BANK may
also be held liable under the principles and laws on both trust and
estoppel. When the defendant BANK accepted its role as the notifying and
negotiating bank for and in behalf of the issuing bank, it in effect
accepted a trust reposed on it, and became a trustee in relation to
plaintiff as the beneficiary of the letter of credit. As trustee, it was then
duty bound to protect the interests of the plaintiff under the terms of the
letter of credit, and must be held liable for damages and loss resulting to
the plaintiff from its failure to perform that obligation.
Furthermore, when the defendant BANK assumed the role of a notifying
and negotiating BANK it in effect represented to the plaintiff that, if the
plaintiff complied with the terms and conditions of the letter of credit and
presents the same to the BANK together with the documents mentioned
therein the said BANK will pay the plaintiff the amount of the letter of
credit. The Court is convinced that it was upon the strength of this letter
of credit and this implied representation of the defendant BANK that the
plaintiff delivered the logs to defendant CHRISTIANSEN, considering that
the issuing bank is a foreign bank with whom plaintiff had no business
connections and CHRISTIANSEN had not offered any other Security for
the payment of the logs. Defendant BANK cannot now be allowed to deny
its commitment and liability under the letter of credit:
A holder of a promissory note given because of gambling who indorses
the same to an innocent holder for value and who assures said party that
the note has no legal defect, is in estoppel from asserting that there had
been an illegal consideration for the note, and so, he has to pay its value.
(Rodriguez v. Martinez, 5 Phil. 67).
The defendant BANK, in insisting upon the certification of defendant
CHRISTIANSEN as a condition precedent to negotiating the letter of
credit, likewise in the Court's opinion acted in bad faith, not only because
of the clear declaration of the Central Bank that such a requirement was
illegal, but because the BANK, with all the legal counsel available to it
must have known that the condition was void since it depended on the
sole will of the debtor, the defendant CHRISTIANSEN. (Art. 1182, Civil
Code) (Rollo, pp. 29-31)
On the basis of the foregoing the trial court on October 20, 1986, ruled in
favor of the private respondent. The dispositive portion of its decision
reads:
WHEREFORE, judgment is hereby rendered for the plaintiff, ordering the
defendants to pay the plaintiff, jointly and severally, the following sums:
a) $54,000.00 (US), or its peso equivalent at the prevailing rate as of the
time payment is actually made, representing the purchase price of the
logs;
b) P17,340.00, representing government fees and charges paid by
plaintiff in connection with the logs shipment in question;
c) P10,000.00 as temperate damages (for trips made to Bacolod and
Korea).
All three foregoing sums shall be with interest thereon at 12% per
annum from September 1, 1971, when the complaint was filed, until fully
paid:
d) P70,000.00 as moral damages;
e) P30,000.00 as exemplary damages; and
f) P30,000.00 as attorney's fees and litigation expense.
(Rollo, p. 28)
The petitioner received a copy of the decision on November 3, 1986. Two
days thereafter, or on November 5, 1986, it filed a notice of appeal.
On November 10, 1986, the private respondent filed a motion for the
immediate execution of the judgment on the ground that the appeal of
the petitioner was frivolous and dilatory. The trial court ordered the
immediate execution of its judgment upon the private respondent's filing
of a bond. The petitioner then filed a motion for reconsideration and a
motion to suspend the implementation of the writ of execution. Both
motions were, however, denied. Thus, petitioner filed before the Court of
Appeals a petition for certiorari and prohibition with preliminary injunction
to enjoin the immediate execution of the judgment.
The Court of Appeals in a decision dated April 9, 1987 granted the
petition and nullified the order of execution, the dispositive portion of the
decision states:
WHEREFORE, the petition for certiorari is granted. Respondent
Judge's order of execution dated December 29, 1986, as well as his order
dated January 14, 1987 denying the petitioner's urgent motion to
suspend the writ of execution against its properties are hereby annulled
and set aside insofar as they are sought to be enforced and implemented
against the petitioner Feati Bank & Trust Company, now Citytrust Banking
Corporation, during the pendency of its appeal from the adverse decision
in Civil Case No. 15121. However, the execution of the same decision
against defendant Axel Christiansen did not appeal said decision may
proceed unimpeded. The Sheriff s levy on the petitioner's properties, and
the notice of sale dated January 13, 1987 (Annex M), are hereby annulled
and set aside. Rollo p. 44)
A motion for reconsideration was thereafter filed by the private
respondent. The Court of Appeals, in a resolution dated June 29, 1987
denied the motion for reconsideration.
In the meantime, the appeal filed by the petitioner before the Court of
Appeals was given due course. In its decision dated June 29, 1990, the
Court of Appeals affirmed the decision of the lower court dated October
20, 1986 and ruled that:
1. Feati Bank admitted in the "special and negative defenses" section of
its answer that it was the bank to negotiate the letter of credit issued by
the Security Pacific National Bank of Los Angeles, California. (Record, pp.
156, 157). Feati Bank did notify Villaluz of such letter of credit. In fact, as
such negotiating bank, even before the letter of credit was presented for
payment, Feati Bank had already made an advance payment of
P75,000.00 to Villaluz in anticipation of such presentment. As the
negotiating bank, Feati Bank, by notifying Villaluz of the letter of credit in
behalf of the issuing bank (Security Pacific), confirmed such letter of
credit and made the same also its own obligation. This ruling finds
support in the authority cited by Villaluz:
A confirmed letter of credit is one in which the notifying bank gives its
assurance also that the opening bank's obligation will be performed. In
such a case, the notifying bank will not simply transmit but will confirm
the opening bank's obligation by making it also its own undertaking, or
commitment, or guaranty or obligation. (Ward & Hatfield, 28-29, cited in
Agbayani, Commercial Laws, 1978 edition, p. 77).
Feati Bank argues further that it would be considered as the negotiating
bank only upon negotiation of the letter of credit. This stance is
untenable. Assurance, commitments or guaranties supposed to be made
by notifying banks to the beneficiary of a letter of credit, as defined
above, can be relevant or meaningful only with respect to a future
transaction, that is, negotiation. Hence, even before actual negotiation,
the notifying bank, by the mere act of notifying the beneficiary of the
letter of credit, assumes as of that moment the obligation of the issuing
bank.
2. Since Feati Bank acted as guarantor of the issuing bank, and in effect
also of the latter's principal or client, i.e. Hans Axel-Christiansen. (sic)
Such being the case, when Christiansen refused to issue the certification,
it was as though refusal was made by Feati Bank itself. Feati Bank should
have taken steps to secure the certification from Christiansen; and, if the
latter should still refuse to comply, to hale him to court. In short, Feati
Bank should have honored Villaluz's demand for payment of his logs by
virtue of the irrevocable letter of credit issued in Villaluz's favor and
guaranteed by Feati Bank.
3. The decision promulgated by this Court in CA-G.R. Sp No. 11051,
which contained the statement "Since Villaluz" draft was not drawn
strictly in compliance with the terms of the letter of credit, Feati Bank's
refusal to negotiate it was justified," did not dispose of this question on
the merits. In that case, the question involved was jurisdiction or
discretion, and not judgment. The quoted pronouncement should not be
taken as a preemptive judgment on the merits of the present case on
appeal.
4. The original action was for "Mandamus and/or specific performance."
Feati Bank may not be a party to the transaction between Christiansen
and Security Pacific National Bank on the one hand, and Villaluz on the
other hand; still, being guarantor or agent of Christiansen and/or Security
Pacific National Bank which had directly dealt with Villaluz, Feati Bank
may be sued properly on specific performance as a procedural means by
which the relief sought by Villaluz may be entertained. (Rollo, pp. 32-33)
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, the decision appealed from is affirmed; and accordingly, the
appeal is hereby dismissed. Costs against the petitioner. (Rollo, p. 33)
Hence, this petition for review.
The petitioner interposes the following reasons for the allowance of the
petition.
First Reason
THE RESPONDENT COURT ERRONEOUSLY CONCLUDED FROM THE
ESTABLISHED FACTS AND INDEED, WENT AGAINST THE EVIDENCE AND
DECISION OF THIS HONORABLE COURT, THAT PETITIONER BANK IS
LIABLE ON THE LETTER OF CREDIT DESPITE PRIVATE RESPONDENTS
NON-COMPLIANCE WITH THE TERMS THEREOF,
Second Reason
THE RESPONDENT COURT COMMITTED AN ERROR OF LAW WHEN IT
HELD THAT PETITIONER BANK, BY NOTIFYING PRIVATE RESPONDENT OF
THE LETTER OF CREDIT, CONFIRMED SUCH CREDIT AND MADE THE
SAME ALSO ITS OBLIGATION AS GUARANTOR OF THE ISSUING BANK.
Third Reason
THE RESPONDENT COURT LIKEWISE COMMITTED AN ERROR OF LAW
WHEN IT AFFIRMED THE TRIAL COURT'S DECISION. (Rollo, p. 12)
The principal issue in this case is whether or not a correspondent bank is
to be held liable under the letter of credit despite non-compliance by the
beneficiary with the terms thereof?
The petition is impressed with merit.
It is a settled rule in commercial transactions involving letters of credit
that the documents tendered must strictly conform to the terms of the
letter of credit. The tender of documents by the beneficiary (seller) must
include all documents required by the letter. A correspondent bank which
departs from what has been stipulated under the letter of credit, as when
it accepts a faulty tender, acts on its own risks and it may not thereafter
be able to recover from the buyer or the issuing bank, as the case may
be, the money thus paid to the beneficiary Thus the rule of strict
compliance.
In the United States, commercial transactions involving letters of credit
are governed by the rule of strict compliance. In the Philippines, the same
holds true. The same rule must also be followed.
The case of Anglo-South America Trust Co. v. Uhe et al. (184 N.E.
741 [1933]) expounded clearly on the rule of strict compliance.
We have heretofore held that these letters of credit are to be strictly
complied with which documents, and shipping documents must be
followed as stated in the letter. There is no discretion in the bank or trust
company to waive any requirements. The terms of the letter constitutes
an agreement between the purchaser and the bank. (p. 743)
Although in some American decisions, banks are granted a little discretion
to accept a faulty tender as when the other documents may be
considered immaterial or superfluous, this theory could lead to dangerous
precedents. Since a bank deals only with documents, it is not in a position
to determine whether or not the documents required by the letter of
credit are material or superfluous. The mere fact that the document was
specified therein readily means that the document is of vital importance
to the buyer.
Moreover, the incorporation of the Uniform Customs and Practice for
Documentary Credit (U.C.P. for short) in the letter of credit resulted in
the applicability of the said rules in the governance of the relations
between the parties. And even if the U.C.P. was not incorporated in the
letter of credit, we have already ruled in the affirmative as to the
applicability of the U.C.P. in cases before us.
In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced
that the observance of the U.C.P. in this jurisdiction is justified by Article
2 of the Code of Commerce. Article 2 of the Code of Commerce
enunciates that in the absence of any particular provision in the Code of
Commerce, commercial transactions shall be governed by the usages and
customs generally observed.
There being no specific provision which governs the legal complexities
arising from transactions involving letters of credit not only between the
banks themselves but also between banks and seller and/or buyer, the
applicability of the U.C.P. is undeniable.
The pertinent provisions of the U.C.P. (1962 Revision) are:
Article 3.
An irrevocable credit is a definite undertaking on the part of the issuing
bank and constitutes the engagement of that bank to the beneficiary and
bona fide holders of drafts drawn and/or documents presented
thereunder, that the provisions for payment, acceptance or negotiation
contained in the credit will be duly fulfilled,provided that all the terms and
conditions of the credit are complied with.
An irrevocable credit may be advised to a beneficiary through another
bank (the advising bank) without engagement on the part of that bank,
but when an issuing bank authorizes or requests another bank to confirm
its irrevocable credit and the latter does so, such confirmation constitutes
a definite undertaking of the confirming bank. . . .
Article 7.
Banks must examine all documents with reasonable care to ascertain that
they appear on their face to be in accordance with the terms and
conditions of the credit,"
Article 8.
Payment, acceptance or negotiation against documents which appear
on their face to be in accordance with the terms and conditions of a
credit by a bank authorized to do so, binds the party giving the
authorization to take up documents and reimburse the bank which has
effected the payment, acceptance or negotiation. (Emphasis Supplied)
Under the foregoing provisions of the U.C.P., the bank may only
negotiate, accept or pay, if the documents tendered to it are on their face
in accordance with the terms and conditions of the documentary credit.
And since a correspondent bank, like the petitioner, principally deals only
with documents, the absence of any document required in the
documentary credit justifies the refusal by the correspondent bank to
negotiate, accept or pay the beneficiary, as it is not its obligation to look
beyond the documents. It merely has to rely on the completeness of the
documents tendered by the beneficiary.
In regard to the ruling of the lower court and affirmed by the Court of
Appeals that the petitioner is not a notifying bank but a confirming bank,
we find the same erroneous.
The trial court wrongly mixed up the meaning of an irrevocable credit
with that of a confirmed credit. In its decision, the trial court ruled that
the petitioner, in accepting the obligation to notify the respondent that
the irrevocable credithas been transmitted to the petitioner on behalf of
the private respondent, has confirmed the letter. The trial court appears
to have overlooked the fact that an irrevocable credit is not synonymous
with a confirmed credit. These types of letters have different meanings
and the legal relations arising from there varies. A credit may be
an irrevocable credit and at the same time a confirmed credit or vice-
versa.
An irrevocable credit refers to the duration of the letter of credit. What is
simply means is that the issuing bank may not without the consent of the
beneficiary (seller) and the applicant (buyer) revoke his undertaking
under the letter. The issuing bank does not reserve the right to revoke
the credit. On the other hand, a confirmed letter of credit pertains to the
kind of obligation assumed by the correspondent bank. In this case, the
correspondent bank gives an absolute assurance to the beneficiary that it
will undertake the issuing bank's obligation as its own according to the
terms and conditions of the credit. (Agbayani, Commercial Laws of the
Philippines, Vol. 1, pp. 81-83)
Hence, the mere fact that a letter of credit is irrevocable does not
necessarily imply that the correspondent bank in accepting the
instructions of the issuing bank has also confirmed the letter of credit.
Another error which the lower court and the Court of Appeals made was
to confuse the obligation assumed by the petitioner.
In commercial transactions involving letters of credit, the functions
assumed by a correspondent bank are classified according to the
obligations taken up by it. The correspondent bank may be called a
notifying bank, a negotiating bank, or a confirming bank.
In case of a notifying bank, the correspondent bank assumes no liability
except to notify and/or transmit to the beneficiary the existence of the
letter of credit. (Kronman and Co., Inc. v. Public National Bank of New
York, 218 N.Y.S. 616 [1926]; Shaterian, Export-Import Banking, p. 292,
cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76). A
negotiating bank, on the other hand, is a correspondent bank which buys
or discounts a draft under the letter of credit. Its liability is dependent
upon the stage of the negotiation. If before negotiation, it has no liability
with respect to the seller but after negotiation, a contractual relationship
will then prevail between the negotiating bank and the seller. (Scanlon v.
First National Bank of Mexico, 162 N.E. 567 [1928]; Shaterian, Export-
Import Banking, p. 293, cited in Agbayani, Commercial Laws of the
Philippines, Vol. 1, p. 76)
In the case of a confirming bank, the correspondent bank assumes a
direct obligation to the seller and its liability is a primary one as if the
correspondent bank itself had issued the letter of credit. (Shaterian,
Export-Import Banking, p. 294, cited in Agbayani Commercial Laws of the
Philippines, Vol. 1, p. 77)
In this case, the letter merely provided that the petitioner "forward the
enclosed original credit to the beneficiary." (Records, Vol. I, p. 11)
Considering the aforesaid instruction to the petitioner by the issuing
bank, the Security Pacific National Bank, it is indubitable that the
petitioner is only a notifying bank and not a confirming bank as ruled by
the courts below.
If the petitioner was a confirming bank, then a categorical declaration
should have been stated in the letter of credit that the petitioner is to
honor all drafts drawn in conformity with the letter of credit. What was
simply stated therein was the instruction that the petitioner forward the
original letter of credit to the beneficiary.
Since the petitioner was only a notifying bank, its responsibility was
solely to notify and/or transmit the documentary of credit to the private
respondent and its obligation ends there.
The notifying bank may suggest to the seller its willingness to negotiate,
but this fact alone does not imply that the notifying bank promises to
accept the draft drawn under the documentary credit.
A notifying bank is not a privy to the contract of sale between the buyer
and the seller, its relationship is only with that of the issuing bank and
not with the beneficiary to whom he assumes no liability. It follows
therefore that when the petitioner refused to negotiate with the private
respondent, the latter has no cause of action against the petitioner for
the enforcement of his rights under the letter. (See Kronman and Co.,
Inc. v. Public National Bank of New York, supra)
In order that the petitioner may be held liable under the letter, there
should be proof that the petitioner confirmed the letter of credit.
The records are, however, bereft of any evidence which will disclose that
the petitioner has confirmed the letter of credit. The only evidence in this
case, and upon which the private respondent premised his argument, is
the P75,000.00 loan extended by the petitioner to him.
The private respondent relies on this loan to advance his contention that
the letter of credit was confirmed by the petitioner. He claims that the
loan was granted by the petitioner to him, "in anticipation of the
presentment of the letter of credit."
The proposition advanced by the private respondent has no basis in fact
or law. That the loan agreement between them be construed as an act of
confirmation is rather far-fetched, for it depends principally on
speculative reasoning.
As earlier stated, there must have been an absolute assurance on the
part of the petitioner that it will undertake the issuing bank's obligation as
its own. Verily, the loan agreement it entered into cannot be categorized
as an emphatic assurance that it will carry out the issuing bank's
obligation as its own. The loan agreement is more reasonably classified as
an isolated transaction independent of the documentary credit.
Of course, it may be presumed that the petitioner loaned the money to
the private respondent in anticipation that it would later be paid by the
latter upon the receipt of the letter. Yet, we would have no basis to rule
definitively that such "act" should be construed as an act of confirmation.
The private respondent no doubt was in need of money in loading the
logs on the ship "Zenlin Glory" and the only way to satisfy this need was
to borrow money from the petitioner which the latter granted. From these
circumstances, a logical conclusion that can be gathered is that the letter
of credit was merely to serve as a collateral.
At the most, when the petitioner extended the loan to the private
respondent, it assumed the character of a negotiating bank. Even then,
the petitioner will still not be liable, for a negotiating bank before
negotiation has no contractual relationship with the seller.
The case of Scanlon v. First National Bank (supra) perspicuously
explained the relationship between the seller and the negotiating
bank, viz:
It may buy or refuse to buy as it chooses. Equally, it must be true that it
owes no contractual duty toward the person for whose benefit the letter is
written to discount or purchase any draft drawn against the credit. No
relationship of agent and principal, or of trustee and cestui, between the
receiving bank and the beneficiary of the letter is established. (P.568)
Whether therefore the petitioner is a notifying bank or a negotiating
bank, it cannot be held liable. Absent any definitive proof that it has
confirmed the letter of credit or has actually negotiated with the private
respondent, the refusal by the petitioner to accept the tender of the
private respondent is justified.
In regard to the finding that the petitioner became a "trustee in relation
to the plaintiff (private respondent) as the beneficiary of the letter of
credit," the same has no legal basis.
A trust has been defined as the "right, enforceable solely in equity, to the
beneficial enjoyment of property the legal title to which is vested to
another." (89 C.J.S. 712) The concept of a trust presupposes the
existence of a specific property which has been conferred upon the
person for the benefit of another. In order therefore for the trust theory
of the private respondent to be sustained, the petitioner should have had
in its possession a sum of money as specific fund advanced to it by the
issuing bank and to be held in trust by it in favor of the private
respondent. This does not obtain in this case.
The mere opening of a letter of credit, it is to be noted, does not involve
a specific appropriation of a sum of money in favor of the beneficiary. It
only signifies that the beneficiary may be able to draw funds upon the
letter of credit up to the designated amount specified in the letter. It does
not convey the notion that a particular sum of money has been
specifically reserved or has been held in trust.
What actually transpires in an irrevocable credit is that the correspondent
bank does not receive in advance the sum of money from the buyer or
the issuing bank. On the contrary, when the correspondent bank accepts
the tender and pays the amount stated in the letter, the money that it
doles out comes not from any particular fund that has been advanced by
the issuing bank, rather it gets the money from its own funds and then
later seeks reimbursement from the issuing bank.
Granting that a trust has been created, still, the petitioner may not be
considered a trustee. As the petitioner is only a notifying bank, its
acceptance of the instructions of the issuing bank will not create estoppel
on its part resulting in the acceptance of the trust. Precisely, as a
notifying bank, its only obligation is to notify the private respondent of
the existence of the letter of credit. How then can such create estoppel
when that is its only duty under the law?
We also find erroneous the statement of the Court of Appeals that the
petitioner "acted as a guarantor of the issuing bank and in effect also of
the latter's principal or client, i.e., Hans Axel Christiansen."
It is a fundamental rule that an irrevocable credit is independent not only
of the contract between the buyer and the seller but also of the credit
agreement between the issuing bank and the buyer. (See Kingdom of
Sweden v. New York Trust Co., 96 N.Y.S. 2d 779 [1949]). The
relationship between the buyer (Christiansen) and the issuing bank
(Security Pacific National Bank) is entirely independent from the letter of
credit issued by the latter.
The contract between the two has no bearing as to the non-compliance
by the buyer with the agreement between the latter and the seller. Their
contract is similar to that of a contract of services (to open the letter of
credit) and not that of agency as was intimated by the Court of Appeals.
The unjustified refusal therefore by Christiansen to issue the certification
under the letter of credit should not likewise be charged to the issuing
bank.
As a mere notifying bank, not only does the petitioner not have any
contractual relationship with the buyer, it has also nothing to do with the
contract between the issuing bank and the buyer regarding the issuance
of the letter of credit. The theory of guarantee relied upon by the Court of
Appeals has to necessarily fail. The concept of guarantee vis-a-vis the
concept of an irrevocable credit are inconsistent with each other.
In the first place, the guarantee theory destroys the independence of the
bank's responsibility from the contract upon which it was opened. In the
second place, the nature of both contracts is mutually in conflict with
each other. In contracts of guarantee, the guarantor's obligation is
merely collateral and it arises only upon the default of the person
primarily liable. On the other hand, in an irrevocable credit the bank
undertakes a primary obligation. (SeeNational Bank of Eagle Pass, Tex v.
American National Bank of San Francisco, 282 F. 73 [1922])
The relationship between the issuing bank and the notifying bank, on the
contrary, is more similar to that of an agency and not that of a
guarantee. It may be observed that the notifying bank is merely to follow
the instructions of the issuing bank which is to notify or to transmit the
letter of credit to the beneficiary. (See Kronman v. Public National Bank
of New York, supra). Its commitment is only to notify the beneficiary. It
does not undertake any assurance that the issuing bank will perform
what has been mandated to or expected of it. As an agent of the issuing
bank, it has only to follow the instructions of the issuing bank and to it
alone is it obligated and not to buyer with whom it has no contractual
relationship.
In fact the notifying bank, even if the seller tenders all the documents
required under the letter of credit, may refuse to negotiate or accept the
drafts drawn thereunder and it will still not be held liable for its only
engagement is to notify and/or transmit to the seller the letter of credit.
Finally, even if we assume that the petitioner is a confirming bank, the
petitioner cannot be forced to pay the amount under the letter. As we
have previously explained, there was a failure on the part of the private
respondent to comply with the terms of the letter of credit.
The failure by him to submit the certification was fatal to his
case.1âwphi1 The U.C.P. which is incorporated in the letter of credit
ordains that the bank may only pay the amount specified under the letter
if all the documents tendered are on their face in compliance with the
credit. It is not tasked with the duty of ascertaining the reason or reasons
why certain documents have not been submitted, as it is only concerned
with the documents. Thus, whether or not the buyer has performed his
responsibility towards the seller is not the bank's problem.
We are aware of the injustice committed by Christiansen on the private
respondent but we are deciding the controversy on the basis of what the
law is, for the law is not meant to favor only those who have been
oppressed, the law is to govern future relations among people as well. Its
commitment is to all and not to a single individual. The faith of the people
in our justice system may be eroded if we are to decide not what the law
states but what we believe it should declare. Dura lex sed lex.
Considering the foregoing, the materiality of ruling upon the validity of
the certificate of approval required of the private respondent to submit
under the letter of credit, has become insignificant.
In any event, we affirm the earlier ruling of the Court of Appeals dated
April 9, 1987 in regard to the petition before it for certiorari and
prohibition with preliminary injunction, to wit:
There is no merit in the respondent's contention that the certification
required in condition No. 4 of the letter of credit was "patently illegal." At
the time the letter of credit was issued there was no Central Bank
regulation prohibiting such a condition in the letter of credit. The letter of
credit (Exh. C) was issued on June 7, 1971, more than two months before
the issuance of the Central Bank Memorandum on August 16, 1971
disallowing such a condition in a letter of credit. In fact the letter of credit
had already expired on July 30, 1971 when the Central Bank
 memorandum was issued. In any event, it is difficult to see how such a
condition could be categorized as illegal or unreasonable since all that
plaintiff Villaluz, as seller of the logs, could and should have done was to
refuse to load the logs on the vessel "Zenlin Glory", unless Christiansen
first issued the required certification that the logs had been approved by
him to be in accordance with the terms and conditions of his purchase
order. Apparently, Villaluz was in too much haste to ship his logs without
taking all due precautions to assure that all the terms and conditions of
the letter of credit had been strictly complied with, so that there would be
no hitch in its negotiation. (Rollo, p. 8)
WHEREFORE, the COURT RESOLVED to GRANT the petition and hereby
NULLIFIES and SETS ASIDE the decision of the Court of Appeals dated
June 29, 1990. The amended complaint in Civil Case No. 15121 is
DISMISSED.
SO ORDERED.
Case Digest:
In case of a notifying bank, the correspondent bank assumes no liability
except to notify and/or transmit to the beneficiary the existence of the letter
of credit.
A negotiating bank, on the other hand, is a correspondent bank which
buys or discounts a draft under the letter of credit. Its liability is dependent
upon the stage of the negotiation. If before negotiation, it has no liability with
respect to the seller but after negotiation, a contractual relationship will then
prevail between the negotiating bank and the seller.
In the case of a confirming bank, the correspondent bank assumes a
direct obligation to the seller and its liability is a primary one as if the
correspondent bank itself had issued the letter of credit.
Facts: Bernardo Villaluz entered into a contract of sale with Axel Christiansen
in which Villaluz agreed to deliver to Christiansen 2,000 cubic meters of lauan
logs at $27.00 per cubic meter FOB. On the arrangements made and upon
the instructions of consignee, Hanmi Trade Development, Ltd., the Security
Pacific National Bank of Los Angeles, California issued an irrevocable letter of
credit available at sight in favor of Villaluz for the sum of $54,000.00, the
total purchase price of the lauan logs.
The letter of credit was mailed to the Feati Bank and Trust Company with the
instruction to the latter that it “forward the enclosed letter of credit to the
beneficiary.” The letter of credit also provided that the draft to be drawn is on
Security Pacific National Bank and that it be accompanied by certain
documents. The logs were thereafter loaded on a vessel but Christiansen
refused to issue the certification required in paragraph 4 of the letter of
credit, despite repeated requests by the private respondent. The logs
however were still shipped and received by consignee, to whom Christiansen
sold the logs. Because of the absence of the certification by Christiansen, the
Feati Bank and Trust company refused to advance the payment on the letter
of credit until such credit lapsed. Since the demands by Villaluz for
Christiansen to execute the certification proved futile, he filed an action for
mandamus and specific performance against Christiansen and Feati Bank and
Trust Company before the Court of First Instance of Rizal. Christiansen
however left the Philippines and Villaluz filed an amended complaint making
Feati Bank and Trust Company.
Issue: Whether or not Feati Bank is liable for Releasing the funds to
Christiansen
Held: In commercial transactions involving letters of credit, the functions
assumed by a correspondent bank are classified according to the obligations
taken up by it. The correspondent bank may be called a notifying bank, a
negotiating bank, or a confirming bank.
In case of a notifying bank, the correspondent bank assumes no liability
except to notify and/or transmit to the beneficiary the existence of the letter
of credit. A negotiating bank, on the other hand, is a correspondent bank
which buys or discounts a draft under the letter of credit. Its liability is
dependent upon the stage of the negotiation. If before negotiation, it has no
liability with respect to the seller but after negotiation, a contractual
relationship will then prevail between the negotiating bank and the seller. In
the case of a confirming bank, the correspondent bank assumes a direct
obligation to the seller and its liability is a primary one as if the
correspondent bank itself had issued the letter of credit.
In this case, the letter merely provided that the petitioner “forward the
enclosed original credit to the beneficiary.” (Records, Vol. I, p. 11)
Considering the aforesaid instruction to the petitioner by the issuing bank,
the Security Pacific National Bank, it is indubitable that the petitioner is only a
notifying bank and not a confirming bank as ruled by the courts below. A
notifying bank is not a privy to the contract of sale between the buyer and
the seller, its relationship is only with that of the issuing bank and not with
the beneficiary to whom he assumes no liability. It follows therefore that
when the petitioner refused to negotiate with the private respondent, the
latter has no cause of action against the petitioner for the enforcement of his
rights under the letter.
Since the Feati was only a notifying bank, its responsibility was solely to
notify and/or transmit the documentary of credit to the private respondent
and its obligation ends there. At the most, when the petitioner extended the
loan to the private respondent, it assumed the character of a negotiating
bank. Even then, the petitioner will still not be liable, for a negotiating bank
before negotiation has no contractual relationship with the seller. Whether
therefore the petitioner is a notifying bank or a negotiating bank, it cannot be
held liable. Absent any definitive proof that it has confirmed the letter of
credit or has actually negotiated with Feati, the refusal by the petitioner to
accept the tender of the private respondent is justified.
 4. Transfield Phils Inc v. Luzon Hydro Corp, 443 SCRA 307 (2004)
Subject of this case is the letter of credit which has evolved as the ubiquitous
and most important device in international trade. A creation of commerce and
businessmen, the letter of credit is also unique in the number of parties
involved and its supranational character.
Petitioner has appealed from the Decision1of the Court of Appeals in CA-G.R.
SP No. 61901 entitled "Transfield Philippines, Inc. v. Hon. Oscar Pimentel, et
al.," promulgated on 31 January 2001.2
On 26 March 1997, petitioner and respondent Luzon Hydro Corporation
(hereinafter, LHC) entered into a Turnkey Contract 3 whereby petitioner, as
Turnkey Contractor, undertook to construct, on a turnkey basis, a seventy
(70)-Megawatt hydro-electric power station at the Bakun River in the
provinces of Benguet and Ilocos Sur (hereinafter, the Project). Petitioner was
given the sole responsibility for the design, construction, commissioning,
testing and completion of the Project.4
The Turnkey Contract provides that: (1) the target completion date of the
Project shall be on 1 June 2000, or such later date as may be agreed upon
between petitioner and respondent LHC or otherwise determined in
accordance with the Turnkey Contract; and (2) petitioner is entitled to claim
extensions of time (EOT) for reasons enumerated in the Turnkey Contract,
among which are variations, force majeure, and delays caused by LHC
itself.5 Further, in case of dispute, the parties are bound to settle their
differences through mediation, conciliation and such other means enumerated
under Clause 20.3 of the Turnkey Contract.6
To secure performance of petitioner's obligation on or before the target
completion date, or such time for completion as may be determined by the
parties' agreement, petitioner opened in favor of LHC two (2) standby letters
of credit both dated 20 March 2000 (hereinafter referred to as "the
Securities"), to wit: Standby Letter of Credit No. E001126/8400 with the local
branch of respondent Australia and New Zealand Banking Group Limited (ANZ
Bank)7and Standby Letter of Credit No. IBDIDSB-00/4 with respondent
Security Bank Corporation (SBC)8 each in the amount of US$8,988,907.00.9
In the course of the construction of the project, petitioner sought various EOT
to complete the Project. The extensions were requested allegedly due to
several factors which prevented the completion of the Project on target date,
such as force majeure occasioned by typhoon Zeb, barricades and
demonstrations. LHC denied the requests, however. This gave rise to a series
of legal actions between the parties which culminated in the instant petition.
The first of the actions was a Request for Arbitration which LHC filed before
the Construction Industry Arbitration Commission (CIAC) on 1 June
1999.10 This was followed by another Request for Arbitration, this time filed
by petitioner before the International Chamber of Commerce (ICC)11 on 3
November 2000. In both arbitration proceedings, the common issues
presented were: [1) whether typhoon Zeb and any of its associated events
constituted force majeure to justify the extension of time sought by
petitioner; and [2) whether LHC had the right to terminate the Turnkey
Contract for failure of petitioner to complete the Project on target date.
Meanwhile, foreseeing that LHC would call on the Securities pursuant to the
pertinent provisions of the Turnkey Contract,12 petitioner—in two separate
letters13 both dated 10 August 2000—advised respondent banks of the
arbitration proceedings already pending before the CIAC and ICC in
connection with its alleged default in the performance of its obligations.
Asserting that LHC had no right to call on the Securities until the resolution of
disputes before the arbitral tribunals, petitioner warned respondent banks
that any transfer, release, or disposition of the Securities in favor of LHC or
any person claiming under LHC would constrain it to hold respondent banks
liable for liquidated damages.
As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner
that pursuant to Clause 8.214 of the Turnkey Contract, it failed to comply with
its obligation to complete the Project. Despite the letters of petitioner,
however, both banks informed petitioner that they would pay on the
Securities if and when LHC calls on them.15
LHC asserted that additional extension of time would not be warranted;
accordingly it declared petitioner in default/delay in the performance of its
obligations under the Turnkey Contract and demanded from petitioner the
payment of US$75,000.00 for each day of delay beginning 28 June 2000 until
actual completion of the Project pursuant to Clause 8.7.1 of the Turnkey
Contract. At the same time, LHC served notice that it would call on the
securities for the payment of liquidated damages for the delay.16
On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction,
with prayer for temporary restraining order and writ of preliminary injunction,
against herein respondents as defendants before the Regional Trial Court
(RTC) of Makati.17 Petitioner sought to restrain respondent LHC from calling
on the Securities and respondent banks from transferring, paying on, or in
any manner disposing of the Securities or any renewals or substitutes
thereof. The RTC issued a seventy-two (72)-hour temporary restraining order
on the same day. The case was docketed as Civil Case No. 00-1312 and
raffled to Branch 148 of the RTC of Makati.
After appropriate proceedings, the trial court issued an Order on 9 November
2000, extending the temporary restraining order for a period of seventeen
(17) days or until 26 November 2000.18
The RTC, in its Order19 dated 24 November 2000, denied petitioner's
application for a writ of preliminary injunction. It ruled that petitioner had no
legal right and suffered no irreparable injury to justify the issuance of the
writ. Employing the principle of "independent contract" in letters of credit, the
trial court ruled that LHC should be allowed to draw on the Securities for
liquidated damages. It debunked petitioner's contention that the principle of
"independent contract" could be invoked only by respondent banks since
according to it respondent LHC is the ultimate beneficiary of the Securities.
The trial court further ruled that the banks were mere custodians of the funds
and as such they were obligated to transfer the same to the beneficiary for as
long as the latter could submit the required certification of its claims.
Dissatisfied with the trial court's denial of its application for a writ of
preliminary injunction, petitioner elevated the case to the Court of Appeals
via a Petition for Certiorari under Rule 65, with prayer for the issuance of a
temporary restraining order and writ of preliminary injunction. 20 Petitioner
submitted to the appellate court that LHC's call on the Securities was
premature considering that the issue of its default had not yet been resolved
with finality by the CIAC and/or the ICC. It asserted that until the fact of
delay could be established, LHC had no right to draw on the Securities for
liquidated damages.
Refuting petitioner's contentions, LHC claimed that petitioner had no right to
restrain its call on and use of the Securities as payment for liquidated
damages. It averred that the Securities are independent of the main contract
between them as shown on the face of the two Standby Letters of Credit
which both provide that the banks have no responsibility to investigate the
authenticity or accuracy of the certificates or the declarant's capacity or
entitlement to so certify.
In its Resolution dated 28 November 2000, the Court of Appeals issued a
temporary restraining order, enjoining LHC from calling on the Securities or
any renewals or substitutes thereof and ordering respondent banks to cease
and desist from transferring, paying or in any manner disposing of the
Securities.
However, the appellate court failed to act on the application for preliminary
injunction until the temporary restraining order expired on 27 January 2001.
Immediately thereafter, representatives of LHC trooped to ANZ Bank and
withdrew the total amount of US$4,950,000.00, thereby reducing the balance
in ANZ Bank to US$1,852,814.00.
On 2 February 2001, the appellate court dismissed the petition for certiorari.
The appellate court expressed conformity with the trial court's decision that
LHC could call on the Securities pursuant to the first principle in credit law
that the credit itself is independent of the underlying transaction and that as
long as the beneficiary complied with the credit, it was of no moment that he
had not complied with the underlying contract. Further, the appellate court
held that even assuming that the trial court's denial of petitioner's application
for a writ of preliminary injunction was erroneous, it constituted only an error
of judgment which is not correctible by certiorari, unlike error of jurisdiction.
Undaunted, petitioner filed the instant Petition for Review raising the
following issues for resolution:
WHETHER THE "INDEPENDENCE PRINCIPLE" ON LETTERS OF
CREDIT MAY BE INVOKED BY A BENEFICIARY THEREOF WHERE THE
BENEFICIARY'S CALL THEREON IS WRONGFUL OR FRAUDULENT.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE
SECURITIES BEFORE THE RESOLUTION OF PETITIONER'S AND LHC'S
DISPUTES BY THE APPROPRIATE TRIBUNAL.
WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN
RELEASING THE AMOUNTS DUE UNDER THE SECURITIES DESPITE
BEING NOTIFIED THAT LHC'S CALL THEREON IS WRONGFUL.
WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND
IRREPARABLE DAMAGE IN THE EVENT THAT:
A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK
AND SECURITY BANK ARE ALLOWED TO RELEASE, THE
REMAINING BALANCE OF THE SECURITIES PRIOR TO THE
RESOLUTION OF THE DISPUTES BETWEEN PETITIONER AND
LHC.
B. LHC DOES NOT RETURN THE AMOUNTS IT HAD
WRONGFULLY DRAWN FROM THE SECURITIES.21
Petitioner contends that the courts below improperly relied on the
"independence principle" on letters of credit when this case falls squarely
within the "fraud exception rule." Respondent LHC deliberately
misrepresented the supposed existence of delay despite its knowledge that
the issue was still pending arbitration, petitioner continues.
Petitioner asserts that LHC should be ordered to return the proceeds of the
Securities pursuant to the principle against unjust enrichment and that, under
the premises, injunction was the appropriate remedy obtainable from the
competent local courts.
On 25 August 2003, petitioner filed a Supplement to the Petition22 and
Supplemental Memorandum,23 alleging that in the course of the proceedings
in the ICC Arbitration, a number of documentary and testimonial evidence
came out through the use of different modes of discovery available in the ICC
Arbitration. It contends that after the filing of the petition facts and
admissions were discovered which demonstrate that LHC knowingly
misrepresented that petitioner had incurred delays— notwithstanding its
knowledge and admission that delays were excused under the Turnkey
Contract—to be able to draw against the Securities. Reiterating that fraud
constitutes an exception to the independence principle, petitioner urges that
this warrants a ruling from this Court that the call on the Securities was
wrongful, as well as contrary to law and basic principles of equity. It avers
that it would suffer grave irreparable damage if LHC would be allowed to use
the proceeds of the Securities and not ordered to return the amounts it had
wrongfully drawn thereon.
In its Manifestation dated 8 September 2003,24 LHC contends that the
supplemental pleadings filed by petitioner present erroneous and misleading
information which would change petitioner's theory on appeal.
In yet another Manifestation dated 12 April 2004,25 petitioner alleges that on
18 February 2004, the ICC handed down its Third Partial Award, declaring
that LHC wrongfully drew upon the Securities and that petitioner was entitled
to the return of the sums wrongfully taken by LHC for liquidated damages.
LHC filed a Counter-Manifestation dated 29 June 2004,26 stating that
petitioner's Manifestation dated 12 April 2004 enlarges the scope of its
Petition for Review of the 31 January 2001 Decision of the Court of Appeals.
LHC notes that the Petition for Review essentially dealt only with the issue of
whether injunction could issue to restrain the beneficiary of an irrevocable
letter of credit from drawing thereon. It adds that petitioner has filed two
other proceedings, to wit: (1) ICC Case No. 11264/TE/MW, entitled
"Transfield Philippines Inc. v. Luzon Hydro Corporation," in which the parties
made claims and counterclaims arising from petitioner's
performance/misperformance of its obligations as contractor for LHC; and (2)
Civil Case No. 04-332, entitled "Transfield Philippines, Inc. v. Luzon Hydro
Corporation" before Branch 56 of the RTC of Makati, which is an action to
enforce and obtain execution of the ICC's partial award mentioned in
petitioner's Manifestation of 12 April 2004.
In its Comment to petitioner's Motion for Leave to File Addendum to
Petitioner's Memorandum, LHC stresses that the question of whether the
funds it drew on the subject letters of credit should be returned is outside the
issue in this appeal. At any rate, LHC adds that the action to enforce the
ICC's partial award is now fully within the Makati RTC's jurisdiction in Civil
Case No. 04-332. LHC asserts that petitioner is engaged in forum-shopping
by keeping this appeal and at the same time seeking the suit for enforcement
of the arbitral award before the Makati court.
Respondent SBC in its Memorandum, dated 10 March 2003 27 contends that
the Court of Appeals correctly dismissed the petition for certiorari. Invoking
the independence principle, SBC argues that it was under no obligation to
look into the validity or accuracy of the certification submitted by respondent
LHC or into the latter's capacity or entitlement to so certify. It adds that the
act sought to be enjoined by petitioner was already fait accompli and the
present petition would no longer serve any remedial purpose.
In a similar fashion, respondent ANZ Bank in its Memorandum dated 13
March 200328 posits that its actions could not be regarded as unjustified in
view of the prevailing independence principle under which it had no obligation
to ascertain the truth of LHC's allegations that petitioner defaulted in its
obligations. Moreover, it points out that since the Standby Letter of Credit No.
E001126/8400 had been fully drawn, petitioner's prayer for preliminary
injunction had been rendered moot and academic.
At the core of the present controversy is the applicability of the
"independence principle" and "fraud exception rule" in letters of credit. Thus,
a discussion of the nature and use of letters of credit, also referred to simply
as "credits," would provide a better perspective of the case.
The letter of credit evolved as a mercantile specialty, and the only way to
understand all its facets is to recognize that it is an entity unto itself. The
relationship between the beneficiary and the issuer of a letter of credit is not
strictly contractual, because both privity and a meeting of the minds are
lacking, yet strict compliance with its terms is an enforceable right. Nor is it a
third-party beneficiary contract, because the issuer must honor drafts drawn
against a letter regardless of problems subsequently arising in the underlying
contract. Since the bank's customer cannot draw on the letter, it does not
function as an assignment by the customer to the beneficiary. Nor, if properly
used, is it a contract of suretyship or guarantee, because it entails a primary
liability following a default. Finally, it is not in itself a negotiable instrument,
because it is not payable to order or bearer and is generally conditional, yet
the draft presented under it is often negotiable.29
In commercial transactions, a letter of credit is a financial device developed
by merchants as a convenient and relatively safe mode of dealing with sales
of goods to satisfy the seemingly irreconcilable interests of a seller, who
refuses to part with his goods before he is paid, and a buyer, who wants to
have control of the goods before paying.30 The use of credits in commercial
transactions serves to reduce the risk of nonpayment of the purchase price
under the contract for the sale of goods. However, credits are also used in
non-sale settings where they serve to reduce the risk of nonperformance.
Generally, credits in the non-sale settings have come to be known as standby
credits.31
There are three significant differences between commercial and standby
credits. First, commercial credits involve the payment of money under a
contract of sale. Such credits become payable upon the presentation by the
seller-beneficiary of documents that show he has taken affirmative steps to
comply with the sales agreement. In the standby type, the credit is payable
upon certification of a party's nonperformance of the agreement. The
documents that accompany the beneficiary's draft tend to show that the
applicant has not performed. The beneficiary of a commercial credit must
demonstrate by documents that he has performed his contract. The
beneficiary of the standby credit must certify that his obligor has not
performed the contract.32
By definition, a letter of credit is a written instrument whereby the writer
requests or authorizes the addressee to pay money or deliver goods to a third
person and assumes responsibility for payment of debt therefor to the
addressee.33 A letter of credit, however, changes its nature as different
transactions occur and if carried through to completion ends up as a binding
contract between the issuing and honoring banks without any regard or
relation to the underlying contract or disputes between the parties thereto.34
Since letters of credit have gained general acceptability in international trade
transactions, the ICC has published from time to time updates on the Uniform
Customs and Practice (UCP) for Documentary Credits to standardize practices
in the letter of credit area. The vast majority of letters of credit incorporate
the UCP.35 First published in 1933, the UCP for Documentary Credits has
undergone several revisions, the latest of which was in 1993.36
In Bank of the Philippine Islands v. De Reny Fabric Industries,
Inc.,37 this Court ruled that the observance of the UCP is justified by Article 2
of the Code of Commerce which provides that in the absence of any particular
provision in the Code of Commerce, commercial transactions shall be
governed by usages and customs generally observed. More recently, in Bank
of America, NT & SA v. Court of Appeals,38 this Court ruled that there being
no specific provisions which govern the legal complexities arising from
transactions involving letters of credit, not only between or among banks
themselves but also between banks and the seller or the buyer, as the case
may be, the applicability of the UCP is undeniable.
Article 3 of the UCP provides that credits, by their nature, are separate
transactions from the sales or other contract(s) on which they may be based
and banks are in no way concerned with or bound by such contract(s), even if
any reference whatsoever to such contract(s) is included in the credit.
Consequently, the undertaking of a bank to pay, accept and pay draft(s) or
negotiate and/or fulfill any other obligation under the credit is not subject to
claims or defenses by the applicant resulting from his relationships with the
issuing bank or the beneficiary. A beneficiary can in no case avail himself of
the contractual relationships existing between the banks or between the
applicant and the issuing bank.
Thus, the engagement of the issuing bank is to pay the seller or beneficiary
of the credit once the draft and the required documents are presented to it.
The so-called "independence principle" assures the seller or the beneficiary of
prompt payment independent of any breach of the main contract and
precludes the issuing bank from determining whether the main contract is
actually accomplished or not. Under this principle, banks assume no liability
or responsibility for the form, sufficiency, accuracy, genuineness, falsification
or legal effect of any documents, or for the general and/or particular
conditions stipulated in the documents or superimposed thereon, nor do they
assume any liability or responsibility for the description, quantity, weight,
quality, condition, packing, delivery, value or existence of the goods
represented by any documents, or for the good faith or acts and/or
omissions, solvency, performance or standing of the consignor, the carriers,
or the insurers of the goods, or any other person whomsoever.39
The independent nature of the letter of credit may be: (a) independence in
toto where the credit is independent from the justification aspect and is a
separate obligation from the underlying agreement like for instance a typical
standby; or (b) independence may be only as to the justification aspect like in
a commercial letter of credit or repayment standby, which is identical with
the same obligations under the underlying agreement. In both cases the
payment may be enjoined if in the light of the purpose of the credit the
payment of the credit would constitute fraudulent abuse of the credit.40
Can the beneficiary invoke the independence principle?
Petitioner insists that the independence principle does not apply to the instant
case and assuming it is so, it is a defense available only to respondent banks.
LHC, on the other hand, contends that it would be contrary to common sense
to deny the benefit of an independent contract to the very party for whom the
benefit is intended. As beneficiary of the letter of credit, LHC asserts it is
entitled to invoke the principle.
As discussed above, in a letter of credit transaction, such as in this case,
where the credit is stipulated as irrevocable, there is a definite undertaking
by the issuing bank to pay the beneficiary provided that the stipulated
documents are presented and the conditions of the credit are complied
with.41 Precisely, the independence principle liberates the issuing bank from
the duty of ascertaining compliance by the parties in the main contract. As
the principle's nomenclature clearly suggests, the obligation under the letter
of credit is independent of the related and originating contract. In brief, the
letter of credit is separate and distinct from the underlying transaction.
Given the nature of letters of credit, petitioner's argument—that it is only the
issuing bank that may invoke the independence principle on letters of credit—
does not impress this Court. To say that the independence principle may only
be invoked by the issuing banks would render nugatory the purpose for which
the letters of credit are used in commercial transactions. As it is, the
independence doctrine works to the benefit of both the issuing bank and the
beneficiary.
Letters of credit are employed by the parties desiring to enter into
commercial transactions, not for the benefit of the issuing bank but mainly for
the benefit of the parties to the original transactions. With the letter of credit
from the issuing bank, the party who applied for and obtained it may
confidently present the letter of credit to the beneficiary as a security to
convince the beneficiary to enter into the business transaction. On the other
hand, the other party to the business transaction, i.e., the beneficiary of the
letter of credit, can be rest assured of being empowered to call on the letter
of credit as a security in case the commercial transaction does not push
through, or the applicant fails to perform his part of the transaction. It is for
this reason that the party who is entitled to the proceeds of the letter of
credit is appropriately called "beneficiary."
Petitioner's argument that any dispute must first be resolved by the parties,
whether through negotiations or arbitration, before the beneficiary is entitled
to call on the letter of credit in essence would convert the letter of credit into
a mere guarantee. Jurisprudence has laid down a clear distinction between a
letter of credit and a guarantee in that the settlement of a dispute between
the parties is not a pre-requisite for the release of funds under a letter of
credit. In other words, the argument is incompatible with the very nature of
the letter of credit. If a letter of credit is drawable only after settlement of the
dispute on the contract entered into by the applicant and the beneficiary,
there would be no practical and beneficial use for letters of credit in
commercial transactions.
Professor John F. Dolan, the noted authority on letters of credit,
sheds more light on the issue:
The standby credit is an attractive commercial device for many of the
same reasons that commercial credits are attractive. Essentially,
these credits are inexpensive and efficient. Often they replace surety
contracts, which tend to generate higher costs than credits do and
are usually triggered by a factual determination rather than by the
examination of documents.
Because parties and courts should not confuse the different functions
of the surety contract on the one hand and the standby credit on the
other, the distinction between surety contracts and credits merits
some reflection. The two commercial devices share a common
purpose. Both ensure against the obligor's nonperformance. They
function, however, in distinctly different ways.
Traditionally, upon the obligor's default, the surety undertakes to
complete the obligor's performance, usually by hiring someone to
complete that performance. Surety contracts, then, often involve
costs of determining whether the obligor defaulted (a matter over
which the surety and the beneficiary often litigate) plus the cost of
performance. The benefit of the surety contract to the beneficiary is
obvious. He knows that the surety, often an insurance company, is a
strong financial institution that will perform if the obligor does not.
The beneficiary also should understand that such performance must
await the sometimes lengthy and costly determination that the
obligor has defaulted. In addition, the surety's performance takes
time.
The standby credit has different expectations. He reasonably expects
that he will receive cash in the event of nonperformance, that he will
receive it promptly, and that he will receive it before any litigation
with the obligor (the applicant) over the nature of the applicant's
performance takes place. The standby credit has this opposite effect
of the surety contract: it reverses the financial burden of parties
during litigation.
In the surety contract setting, there is no duty to indemnify the
beneficiary until the beneficiary establishes the fact of the obligor's
performance. The beneficiary may have to establish that fact in
litigation. During the litigation, the surety holds the money and the
beneficiary bears most of the cost of delay in performance.
In the standby credit case, however, the beneficiary avoids that
litigation burden and receives his money promptly upon presentation
of the required documents. It may be that the applicant has, in fact,
performed and that the beneficiary's presentation of those documents
is not rightful. In that case, the applicant may sue the beneficiary in
tort, in contract, or in breach of warranty; but, during the litigation to
determine whether the applicant has in fact breached the obligation
to perform, the beneficiary, not the applicant, holds the money.
Parties that use a standby credit and courts construing such a credit
should understand this allocation of burdens. There is a tendency in
some quarters to overlook this distinction between surety contracts
and standby credits and to reallocate burdens by permitting the
obligor or the issuer to litigate the performance question before
payment to the beneficiary.42
While it is the bank which is bound to honor the credit, it is the beneficiary
who has the right to ask the bank to honor the credit by allowing him to draw
thereon. The situation itself emasculates petitioner's posture that LHC cannot
invoke the independence principle and highlights its puerility, more so in this
case where the banks concerned were impleaded as parties by petitioner
itself.
Respondent banks had squarely raised the independence principle to justify
their releases of the amounts due under the Securities. Owing to the nature
and purpose of the standby letters of credit, this Court rules that the
respondent banks were left with little or no alternative but to honor the credit
and both of them in fact submitted that it was "ministerial" for them to honor
the call for payment.43
Furthermore, LHC has a right rooted in the Contract to call on the
Securities. The relevant provisions of the Contract read, thus:
4.2.1. In order to secure the performance of its obligations under this
Contract, the Contractor at its cost shall on the Commencement Date
provide security to the Employer in the form of two irrevocable and
confirmed standby letters of credit (the "Securities"), each in the
amount of US$8,988,907, issued and confirmed by banks or financial
institutions acceptable to the Employer. Each of the Securities must
be in form and substance acceptable to the Employer and may be
provided on an annually renewable basis.44
8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor
shall pay to the Employer by way of liquidated damages ("Liquidated
Damages for Delay") the amount of US$75,000 for each and every
day or part of a day that shall elapse between the Target Completion
Date and the Completion Date, provided that Liquidated Damages for
Delay payable by the Contractor shall in the aggregate not exceed
 20% of the Contract Price. The Contractor shall pay Liquidated
Damages for Delay for each day of the delay on the following day
without need of demand from the Employer.
8.7.2 The Employer may, without prejudice to any other method of
recovery, deduct the amount of such damages from any monies due,
or to become due to the Contractor and/or by drawing on the
Security."45
A contract once perfected, binds the parties not only to the fulfillment of what
has been expressly stipulated but also to all the consequences which
according to their nature, may be in keeping with good faith, usage, and
law.46 A careful perusal of the Turnkey Contract reveals the intention of the
parties to make the Securities answerable for the liquidated damages
occasioned by any delay on the part of petitioner. The call upon the
Securities, while not an exclusive remedy on the part of LHC, is certainly an
alternative recourse available to it upon the happening of the contingency for
which the Securities have been proffered. Thus, even without the use of the
"independence principle," the Turnkey Contract itself bestows upon LHC the
right to call on the Securities in the event of default.
Next, petitioner invokes the "fraud exception" principle. It avers that
LHC's call on the Securities is wrongful because it fraudulently
misrepresented to ANZ Bank and SBC that there is already a breach in the
Turnkey Contract knowing fully well that this is yet to be determined by the
arbitral tribunals. It asserts that the "fraud exception" exists when the
beneficiary, for the purpose of drawing on the credit, fraudulently presents to
the confirming bank, documents that contain, expressly or by implication,
material representations of fact that to his knowledge are untrue. In such a
situation, petitioner insists, injunction is recognized as a remedy available to
it.
Citing Dolan's treatise on letters of credit, petitioner argues that the
independence principle is not without limits and it is important to fashion
those limits in light of the principle's purpose, which is to serve the
commercial function of the credit. If it does not serve those functions,
application of the principle is not warranted, and the commonlaw principles of
contract should apply.
It is worthy of note that the propriety of LHC's call on the Securities is largely
intertwined with the fact of default which is the self-same issue pending
resolution before the arbitral tribunals. To be able to declare the call on the
Securities wrongful or fraudulent, it is imperative to resolve, among others,
whether petitioner was in fact guilty of delay in the performance of its
obligation. Unfortunately for petitioner, this Court is not called upon to rule
upon the issue of default—such issue having been submitted by the parties to
the jurisdiction of the arbitral tribunals pursuant to the terms embodied in
their agreement.47
Would injunction then be the proper remedy to restrain the alleged wrongful
draws on the Securities?
Most writers agree that fraud is an exception to the independence principle.
Professor Dolan opines that the untruthfulness of a certificate accompanying
a demand for payment under a standby credit may qualify as fraud sufficient
to support an injunction against payment.48 The remedy for fraudulent abuse
is an injunction. However, injunction should not be granted unless: (a) there
is clear proof of fraud; (b) the fraud constitutes fraudulent abuse of the
independent purpose of the letter of credit and not only fraud under the main
agreement; and (c) irreparable injury might follow if injunction is not granted
or the recovery of damages would be seriously damaged.49
In its complaint for injunction before the trial court, petitioner alleged that it
is entitled to a total extension of two hundred fifty-three (253) days which
would move the target completion date. It argued that if its claims for
extension would be found meritorious by the ICC, then LHC would not be
entitled to any liquidated damages.50
Generally, injunction is a preservative remedy for the protection of one's
substantive right or interest; it is not a cause of action in itself but merely a
provisional remedy, an adjunct to a main suit. The issuance of the writ of
preliminary injunction as an ancillary or preventive remedy to secure the
rights of a party in a pending case is entirely within the discretion of the court
taking cognizance of the case, the only limitation being that this discretion
should be exercised based upon the grounds and in the manner provided by
law.51
Before a writ of preliminary injunction may be issued, there must be a clear
showing by the complaint that there exists a right to be protected and that
the acts against which the writ is to be directed are violative of the said
right.52It must be shown that the invasion of the right sought to be protected
is material and substantial, that the right of complainant is clear and
unmistakable and that there is an urgent and paramount necessity for the
writ to prevent serious damage.53 Moreover, an injunctive remedy may only
be resorted to when there is a pressing necessity to avoid injurious
consequences which cannot be remedied under any standard compensation.54
In the instant case, petitioner failed to show that it has a clear and
unmistakable right to restrain LHC's call on the Securities which would justify
the issuance of preliminary injunction. By petitioner's own admission, the
right of LHC to call on the Securities was contractually rooted and subject to
the express stipulations in the Turnkey Contract.55Indeed, the Turnkey
Contract is plain and unequivocal in that it conferred upon LHC the right to
draw upon the Securities in case of default, as provided in Clause 4.2.5, in
relation to Clause 8.7.2, thus:
4.2.5 The Employer shall give the Contractor seven days' notice of
calling upon any of the Securities, stating the nature of the default for
which the claim on any of the Securities is to be made, provided that
 no notice will be required if the Employer calls upon any of the
Securities for the payment of Liquidated Damages for Delay or for
failure by the Contractor to renew or extend the Securities within 14
days of their expiration in accordance with Clause 4.2.2.56
8.7.2 The Employer may, without prejudice to any other method of
recovery, deduct the amount of such damages from any monies due,
or to become due, to the Contractor and/or by drawing on the
Security.57
The pendency of the arbitration proceedings would not per se make LHC's
draws on the Securities wrongful or fraudulent for there was nothing in the
Contract which would indicate that the parties intended that all disputes
regarding delay should first be settled through arbitration before LHC would
be allowed to call upon the Securities. It is therefore premature and absurd to
conclude that the draws on the Securities were outright fraudulent given the
fact that the ICC and CIAC have not ruled with finality on the existence of
default.
Nowhere in its complaint before the trial court or in its pleadings filed before
the appellate court, did petitioner invoke the fraud exception rule as a ground
to justify the issuance of an injunction.58 What petitioner did assert before the
courts below was the fact that LHC's draws on the Securities would be
premature and without basis in view of the pending disputes between them.
Petitioner should not be allowed in this instance to bring into play the fraud
exception rule to sustain its claim for the issuance of an injunctive relief.
Matters, theories or arguments not brought out in the proceedings below will
ordinarily not be considered by a reviewing court as they cannot be raised for
the first time on appeal.59 The lower courts could thus not be faulted for not
applying the fraud exception rule not only because the existence of fraud was
fundamentally interwoven with the issue of default still pending before the
arbitral tribunals, but more so, because petitioner never raised it as an issue
in its pleadings filed in the courts below. At any rate, petitioner utterly failed
to show that it had a clear and unmistakable right to prevent LHC's call upon
the Securities.
Of course, prudence should have impelled LHC to await resolution of the
pending issues before the arbitral tribunals prior to taking action to enforce
the Securities. But, as earlier stated, the Turnkey Contract did not require
LHC to do so and, therefore, it was merely enforcing its rights in accordance
with the tenor thereof. Obligations arising from contracts have the force of
law between the contracting parties and should be complied with in good
faith.60 More importantly, pursuant to the principle of autonomy of contracts
embodied in Article 1306 of the Civil Code,61petitioner could have
incorporated in its Contract with LHC, a proviso that only the final
determination by the arbitral tribunals that default had occurred would justify
the enforcement of the Securities. However, the fact is petitioner did not do
so; hence, it would have to live with its inaction.
With respect to the issue of whether the respondent banks were justified in
releasing the amounts due under the Securities, this Court reiterates that
pursuant to the independence principle the banks were under no obligation to
determine the veracity of LHC's certification that default has occurred.
Neither were they bound by petitioner's declaration that LHC's call thereon
was wrongful. To repeat, respondent banks' undertaking was simply to pay
once the required documents are presented by the beneficiary.
At any rate, should petitioner finally prove in the pending arbitration
proceedings that LHC's draws upon the Securities were wrongful due to the
non-existence of the fact of default, its right to seek indemnification for
damages it suffered would not normally be foreclosed pursuant to general
principles of law.
Moreover, in a Manifestation,62 dated 30 March 2001, LHC informed this Court
that the subject letters of credit had been fully drawn. This fact alone would
have been sufficient reason to dismiss the instant petition.
Settled is the rule that injunction would not lie where the acts sought to be
enjoined have already become fait accompli or an accomplished or
consummated act.63 In Ticzon v. Video Post Manila, Inc.64 this Court ruled that
where the period within which the former employees were prohibited from
engaging in or working for an enterprise that competed with their former
employer—the very purpose of the preliminary injunction —has expired, any
declaration upholding the propriety of the writ would be entirely useless as
there would be no actual case or controversy between the parties insofar as
the preliminary injunction is concerned.
In the instant case, the consummation of the act sought to be restrained had
rendered the instant petition moot—for any declaration by this Court as to
propriety or impropriety of the non-issuance of injunctive relief could have no
practical effect on the existing controversy.65 The other issues raised by
petitioner particularly with respect to its right to recover the amounts
wrongfully drawn on the Securities, according to it, could properly be
threshed out in a separate proceeding.
One final point. LHC has charged petitioner of forum-shopping. It raised the
charge on two occasions. First, in its Counter-Manifestation dated 29 June
200466 LHC alleges that petitioner presented before this Court the same claim
for money which it has filed in two other proceedings, to wit: ICC Case No.
11264/TE/MW and Civil Case No. 04-332 before the RTC of Makati. LHC
argues that petitioner's acts constitutes forum-shopping which should be
punished by the dismissal of the claim in both forums. Second, in its
Comment to Petitioner's Motion for Leave to File Addendum to Petitioner's
Memorandum dated 8 October 2004, LHC alleges that by maintaining the
present appeal and at the same time pursuing Civil Case No. 04-332—
wherein petitioner pressed for judgment on the issue of whether the funds
LHC drew on the Securities should be returned—petitioner resorted to forum-
shopping. In both instances, however, petitioner has apparently opted not to
respond to the charge.
Forum-shopping is a very serious charge. It exists when a party repetitively
avails of several judicial remedies in different courts, simultaneously or
successively, all substantially founded on the same transactions and the same
essential facts and circumstances, and all raising substantially the same
issues either pending in, or already resolved adversely, by some other
court.67 It may also consist in the act of a party against whom an adverse
judgment has been rendered in one forum, of seeking another and possibly
favorable opinion in another forum other than by appeal or special civil action
of certiorari, or the institution of two or more actions or proceedings
grounded on the same cause on the supposition that one or the other court
might look with favor upon the other party.68 To determine whether a party
violated the rule against forum-shopping, the test applied is whether the
elements of litis pendentia are present or whether a final judgment in one
case will amount to res judicata in another.69 Forum-shopping constitutes
improper conduct and may be punished with summary dismissal of the
multiple petitions and direct contempt of court.70
Considering the seriousness of the charge of forum-shopping and the severity
of the sanctions for its violation, the Court will refrain from making any
definitive ruling on this issue until after petitioner has been given ample
opportunity to respond to the charge.
WHEREFORE, the instant petition is DENIED, with costs against petitioner.
Case Digest:
The independent nature of the letter of credit may be: (a)
independence in toto where the credit is independent from the
justification aspect and is a separate obligation from the underlying
agreement like for instance a typical standby; or (b) independence
may be only as to the justification aspect like in a commercial letter
of credit or repayment standby, which is identical with the same
obligations under the underlying agreement. In both cases the
payment may be enjoined if in the light of the purpose of the credit
the payment of the credit would constitute fraudulent abuse of the
credit.
Facts: Transfield Philippines (Transfield) entered into a turn-key contract
with Luzon Hydro Corp. (LHC).Under the contract, Transfield were to
construct a hydro-electric plants in Benguet and Ilocos. Transfield was given
the sole responsibility for the design, construction, commissioning, testing
and completion of the Project. The contract provides for a period for which
the project is to be completed and also allows for the extension of the period
provided that the extension is based on justifiable grounds such as fortuitous
event. In order to guarantee performance by Transfield, two stand-by letters
of credit were required to be opened. During the construction of the plant,
Transfield requested for extension of time citing typhoon and various disputes
delaying the construction. LHC did not give due course to the extension of the
period prayed for but referred the matter to arbitration committee. Because
of the delay in the construction of the plant, LHC called on the stand-by
letters of credit because of default. However, the demand was objected by
Transfield on the ground that there is still pending arbitration on their request
for extension of time.
Issue: Whether or not LHC can collect from the letters of credit despite the
pending arbitration case
Held: Transfield’s argument that any dispute must first be resolved by the
parties, whether through negotiations or arbitration, before the beneficiary is
entitled to call on the letter of credit in essence would convert the letter of
credit into a mere guarantee.
The independent nature of the letter of credit may be: (a) independence in
toto where the credit is independent from the justification aspect and is a
separate obligation from the underlying agreement like for instance a typical
standby; or (b) independence may be only as to the justification aspect like in
a commercial letter of credit or repayment standby, which is identical with
the same obligations under the underlying agreement. In both cases the
payment may be enjoined if in the light of the purpose of the credit the
payment of the credit would constitute fraudulent abuse of the credit.
Jurisprudence has laid down a clear distinction between a letter of credit and
a guarantee in that the settlement of a dispute between the parties is not a
pre-requisite for the release of funds under a letter of credit. In other words,
the argument is incompatible with the very nature of the letter of credit. If a
letter of credit is drawable only after settlement of the dispute on the contract
entered into by the applicant and the beneficiary, there would be no practical
and beneficial use for letters of credit in commercial transactions.
The engagement of the issuing bank is to pay the seller or beneficiary of the
credit once the draft and the required documents are presented to it. The so-
called “independence principle” assures the seller or the beneficiary of prompt
payment independent of any breach of the main contract and precludes the
issuing bank from determining whether the main contract is actually
accomplished or not. Under this principle, banks assume no liability or
responsibility for the form, sufficiency, accuracy, genuineness, falsification or
legal effect of any documents, or for the general and/or particular conditions
stipulated in the documents or superimposed thereon, nor do they assume
any liability or responsibility for the description, quantity, weight, quality,
condition, packing, delivery, value or existence of the goods represented by
any documents, or for the good faith or acts and/or omissions, solvency,
performance or standing of the consignor, the carriers, or the insurers of the
goods, or any other person whomsoever.
 5. MWSS v Hon. Daway, 432 SCRA 559 (2004)
On November 17, 2003, the Regional Trial Court (RTC) of Quezon City,
Branch 90, made a determination that the Petition for Rehabilitation with
Prayer for Suspension of Actions and Proceedings filed by Maynilad Water
Services, Inc. (Maynilad) conformed substantially to the provisions of Sec. 2,
Rule 4 of the Interim Rules of Procedure on Corporate Rehabilitation (Interim
Rules). It forthwith issued a Stay Order1 which states, in part, that the court
was thereby:
xxx xxx xxx
2. Staying enforcement of all claims, whether for money or otherwise
and whether such enforcement is by court action or otherwise,
against the petitioner, its guarantors and sureties not solidarily liable
with the petitioner;
3. Prohibiting the petitioner from selling, encumbering, transferring,
or disposing in any manner any of its properties except in the
ordinary course of business;
4. Prohibiting the petitioner from making any payment of its
liabilities, outstanding as at the date of the filing of the petition;
xxx xxx xxx
Subsequently, on November 27, 2003, public respondent, acting on two
Urgent Ex Parte motions2 filed by respondent Maynilad, issued the herein
questioned Order3 which stated that it thereby:
"1. DECLARES that the act of MWSS in commencing on November 24,
2003 the process for the payment by the banks of US$98 million out
of the US$120 million standby letter of credit so the banks have to
make good such call/drawing of payment of US$98 million by MWSS
not later than November 27, 2003 at 10:00 P. M. or any similar act
for that matter, is violative of the above-quoted sub-paragraph 2.) of
the dispositive portion of this Court’s Stay Order dated November 17,
2003.
2. ORDERS MWSS through its officers/officials to withdraw under pain
of contempt the written certification/notice of draw to Citicorp
International Limited dated November 24, 2003 and DECLARES void
any payment by the banks to MWSS in the event such written
certification/notice of draw is not withdrawn by MWSS and/or MWSS
receives payment by virtue of the aforesaid standby letter of credit."
Aggrieved by this Order, petitioner Manila Waterworks & Sewerage System
(MWSS) filed this petition for review by way of certiorari under Rule 65 of the
Rules of Court questioning the legality of said order as having been issued
without or in excess of the lower court’s jurisdiction or that the court a
quo acted with grave abuse of discretion amounting to lack or excess of
jurisdiction.4
ANTECEDENTS OF THE CASE
On February 21, 1997, MWSS granted Maynilad under a Concession
Agreement a twenty-year period to manage, operate, repair, decommission
and refurbish the existing MWSS water delivery and sewerage services in the
West Zone Service Area, for which Maynilad undertook to pay the
corresponding concession fees on the dates agreed upon in said
agreement5 which, among other things, consisted of payments of petitioner’s
mostly foreign loans.
To secure the concessionaire’s performance of its obligations under the
Concession Agreement, Maynilad was required under Section 6.9 of said
contract to put up a bond, bank guarantee or other security acceptable to
MWSS.
In compliance with this requirement, Maynilad arranged on July 14, 2000 for
a three-year facility with a number of foreign banks, led by Citicorp
International Limited, for the issuance of an Irrevocable Standby Letter of
Credit6 in the amount of US$120,000,000 in favor of MWSS for the full and
prompt performance of Maynilad’s obligations to MWSS as aforestated.
Sometime in September 2000, respondent Maynilad requested MWSS for a
mechanism by which it hoped to recover the losses it had allegedly incurred
and would be incurring as a result of the depreciation of the Philippine Peso
against the US Dollar. Failing to get what it desired, Maynilad issued a Force
Majeure Notice on March 8, 2001 and unilaterally suspended the payment of
the concession fees. In an effort to salvage the Concession Agreement, the
parties entered into a Memorandum of Agreement (MOA)7 on June 8, 2001
wherein Maynilad was allowed to recover foreign exchange losses under a
formula agreed upon between them. Sometime in August 2001 Maynilad
again filed another Force Majeure Notice and, since MWSS could not agree
with the terms of said Notice, the matter was referred on August 30, 2001 to
the Appeals Panel for arbitration. This resulted in the parties agreeing to
resolve the issues through an amendment of the Concession Agreement on
October 5, 2001, known as Amendment No. 1,8which was based on the terms
set down in MWSS Board of Trustees Resolution No. 457-2001, as amended
by MWSS Board of Trustees Resolution No. 487-2001,9 which provided inter
alia for a formula that would allow Maynilad to recover foreign exchange
losses it had incurred or would incur under the terms of the Concession
Agreement.
As part of this agreement, Maynilad committed, among other things,
to:
a) infuse the amount of UD$80.0 million as additional funding support
from its stockholders;
b) resume payment of the concession fees; and
c) mutually seek the dismissal of the cases pending before the Court
of Appeals and with Minor Dispute Appeals Panel.
However, on November 5, 2002, Maynilad served upon MWSS a Notice of
Event of Termination, claiming that MWSS failed to comply with its
obligations under the Concession Agreement and Amendment No. 1 regarding
the adjustment mechanism that would cover Maynilad’s foreign exchange
losses. On December 9, 2002, Maynilad filed a Notice of Early Termination of
the concession, which was challenged by MWSS. This matter was eventually
brought before the Appeals Panel on January 7, 2003 by MWSS. 10 On
November 7, 2003, the Appeals Panel ruled that there was no Event of
Termination as defined under Art. 10.2 (ii) or 10.3 (iii) of the Concession
Agreement and that, therefore, Maynilad should pay the concession fees that
had fallen due.
The award of the Appeals Panel became final on November 22, 2003. MWSS,
thereafter, submitted a written notice11 on November 24, 2003, to Citicorp
International Limited, as agent for the participating banks, that by virtue of
Maynilad’s failure to perform its obligations under the Concession Agreement,
it was drawing on the Irrevocable Standby Letter of Credit and thereby
demanded payment in the amount of US$98,923,640.15.
Prior to this, however, Maynilad had filed on November 13, 2003, a petition
for rehabilitation before the court a quowhich resulted in the issuance of the
Stay Order of November 17, 2003 and the disputed Order of November 27,
2003.12
PETITIONER’S CASE
Petitioner hereby raises the following issues:
1. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR AND/OR
ACT PATENTLY WITHOUT JURISDICTION OR IN EXCESS OF
JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION AMOUNTING
TO LACK OR EXCESS OF JURISDICTION IN CONSIDERING THE
PERFORMANCE BOND OR ASSETS OF THE ISSUING BANKS AS PART
OR PROPERTY OF THE ESTATE OF THE PRIVATE RESPONDENT
MAYNILAD SUBJECT TO REHABILITATION.
2. DID THE HONORABLE PRESIDING JUDGE ACT WITH LACK OR
EXCESS OF JURISDICTION OR COMMIT A GRAVE ERROR OF LAW IN
HOLDING THAT THE PERFORMANCE BOND OBLIGATIONS OF THE
BANKS WERE NOT SOLIDARY IN NATURE.
3. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR IN
ALLOWING MAYNILAD TO IN EFFECT SEEK A REVIEW OR APPEAL OF
THE FINAL AND BINDING DECISION OF THE APPEALS PANEL.
In support of the first issue, petitioner maintains that as a matter of law, the
US$120 Million Standby Letter of Credit and Performance Bond are not
property of the estate of the debtor Maynilad and, therefore, not subject to
the in remrehabilitation jurisdiction of the trial court.
Petitioner argues that a call made on the Standby Letter of Credit does not
involve any asset of Maynilad but only assets of the banks. Furthermore, a
call on the Standby Letter of Credit cannot also be considered a "claim" falling
under the purview of the stay order as alleged by respondent as it is not
directed against the assets of respondent Maynilad.
Petitioner concludes that the public respondent erred in declaring and holding
that the commencement of the process for the payment of US$98 million is a
violation of the order issued on November 17, 2003.
RESPONDENT MAYNILAD’S CASE
Respondent Maynilad seeks to refute this argument by alleging that:
a) the order objected to was strictly and precisely worded and issued
after carefully considering/evaluating the import of the arguments
and documents referred to by Maynilad, MWSS and/or creditors
Chinatrust Commercial Bank and Suez in relation to admissions,
pleadings and/or pertinent records13 and that public respondent had
the authority to issue the same;
b) public respondent never considered nor held that the Performance
bond or assets of the issuing banks are part or property of the estate
of respondent Maynilad subject to rehabilitation and which
respondent Maynilad has not and has never claimed to be;14
c) what is relevant is not whether the performance bond or assets of
the issuing banks are part of the estate of respondent Maynilad but
whether the act of petitioner in commencing the process for the
payment by the banks of US$98 million out of the US$120 million
performance bond is covered and/or prohibited under sub-paragraphs
2.) and 4.) of the stay order dated November 17, 2003;
d) the jurisdiction of public respondent extends not only to the assets
of respondent Maynilad but also over persons and assets of "all those
affected by the proceedings x x x upon publication of the notice of
commencement;15" and
e) the obligations under the Standby Letter of Credit are not solidary
and are not exempt from the coverage of the stay order.
OUR RULING
We will discuss the first two issues raised by petitioner as these are
interrelated and make up the main issue of the petition before us which is,
did the rehabilitation court sitting as such, act in excess of its authority or
jurisdiction when it enjoined herein petitioner from seeking the payment of
the concession fees from the banks that issued the Irrevocable Standby
Letter of Credit in its favor and for the account of respondent Maynilad?
The public respondent relied on Sec. 1, Rule 3 of the Interim Rules on
Corporate Rehabilitation to support its jurisdiction over the Irrevocable
Standby Letter of Credit and the banks that issued it. The section reads in
part "that jurisdiction over those affected by the proceedings is considered
acquired upon the publication of the notice of commencement of proceedings
in a newspaper of general circulation" and goes further to define
rehabilitation as an in rem proceeding. This provision is a logical consequence
of the in rem nature of the proceedings, where jurisdiction is acquired by
publication and where it is necessary that the assets of the debtor come
within the court’s jurisdiction to secure the same for the benefit of creditors.
The reference to "all those affected by the proceedings" covers creditors or
such other persons or entities holding assets belonging to the debtor under
rehabilitation which should be reflected in its audited financial statements.
The banks do not hold any assets of respondent Maynilad that would be
material to the rehabilitation proceedings nor is Maynilad liable to the banks
at this point.
Respondent Maynilad’s Financial Statement as of December 31, 2001 and
2002 do not show the Irrevocable Standby Letter of Credit as part of its
assets or liabilities, and by respondent Maynilad’s own admission it is not. In
issuing the clarificatory order of November 27, 2003, enjoining petitioner
from claiming from an asset that did not belong to the debtor and over which
it did not acquire jurisdiction, the rehabilitation court acted in excess of its
jurisdiction.
Respondent Maynilad insists, however, that it is Sec. 6 (b), Rule 4 of the
Interim Rules that supports its claim that the commencement of the process
to draw on the Standby Letter of Credit is an enforcement of claim prohibited
by and under the Interim Rules and the order of public respondent.
Respondent Maynilad would persuade us that the above provision justifies a
leap to the conclusion that such an enforcement is prohibited by said section
because it is a "claim against the debtor, its guarantors and sureties not
solidarily liable with the debtor" and that there is nothing in the Standby
Letter of Credit nor in law nor in the nature of the obligation that would show
or require the obligation of the banks to be solidary with the respondent
Maynilad.
We disagree.
First, the claim is not one against the debtor but against an entity that
respondent Maynilad has procured to answer for its non-performance of
certain terms and conditions of the Concession Agreement, particularly the
payment of concession fees.
Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the
enforcement of all claims against guarantors and sureties, but only those
claims against guarantors and sureties who are not solidarily liable
with the debtor. Respondent Maynilad’s claim that the banks are not
solidarily liable with the debtor does not find support in jurisprudence.
We held in Feati Bank & Trust Company v. Court of Appeals16 that the
concept of guarantee vis-à-vis the concept of an irrevocable letter of credit
are inconsistent with each other. The guarantee theory destroys the
independence of the bank’s responsibility from the contract upon which it was
opened and the nature of both contracts is mutually in conflict with each
other. In contracts of guarantee, the guarantor’s obligation is merely
collateral and it arises only upon the default of the person primarily liable. On
the other hand, in an irrevocable letter of credit, the bank undertakes a
primary obligation. We have also defined a letter of credit as an engagement
by a bank or other person made at the request of a customer that the issuer
shall honor drafts or other demands of payment upon compliance with the
conditions specified in the credit.17
Letters of credit were developed for the purpose of insuring to a seller
payment of a definite amount upon the presentation of documents18 and is
thus a commitment by the issuer that the party in whose favor it is issued
and who can collect upon it will have his credit against the applicant of the
letter, duly paid in the amount specified in the letter.19 They are in
effect absolute undertakings to pay the money advanced or the amount for
which credit is given on the faith of the instrument. They are primary
obligations and not accessory contracts and while they are security
arrangements, they are not converted thereby into contracts of
guaranty.20 What distinguishes letters of credit from other accessory
contracts, is the engagement of the issuing bank to pay the seller once the
draft and other required shipping documents are presented to it.21 They are
definite undertakings to pay at sight once the documents stipulated therein
are presented.
Letters of Credits have long been and are still governed by the provisions of
the Uniform Customs and Practice for Documentary Credits of the
International Chamber of Commerce. In the 1993 Revision it provides in Art.
2 that "the expressions Documentary Credit(s) and Standby Letter(s) of
Credit mean any arrangement, however made or described, whereby a bank
acting at the request and on instructions of a customer or on its own behalf is
to make payment against stipulated document(s)" and Art. 9 thereof defines
the liability of the issuing banks on an irrevocable letter of credit as a
"definite undertaking of the issuing bank, provided that the stipulated
documents are presented to the nominated bank or the issuing bank and the
terms and conditions of the Credit are complied with, to pay at sight if the
Credit provides for sight payment."22
We have accepted, in Feati Bank and Trust Company v. Court of
Appeals23 and Bank of America NT & SA v. Court of Appeals,24 to the
extent that they are pertinent, the application in our jurisdiction of the
international credit regulatory set of rules known as the Uniform Customs and
Practice for Documentary Credits (U.C.P) issued by the International Chamber
of Commerce, which we said in Bank of the Philippine Islands v. Nery25 was
justified under Art. 2 of the Code of Commerce, which states:
"Acts of commerce, whether those who execute them be merchants
or not, and whether specified in this Code or not should be governed
by the provisions contained in it; in their absence, by the usages of
 commerce generally observed in each place; and in the absence of
both rules, by those of the civil law."
The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not
apply to herein petitioner as the prohibition is on the enforcement of claims
against guarantors or sureties of the debtors whose obligations are not
solidary with the debtor. The participating banks’ obligation are solidary with
respondent Maynilad in that it is a primary, direct, definite and an absolute
undertaking to pay and is not conditioned on the prior exhaustion of the
debtor’s assets. These are the same characteristics of a surety or solidary
obligor.
Being solidary, the claims against them can be pursued separately from and
independently of the rehabilitation case, as held in Traders Royal Bank v.
Court of Appeals26 and reiterated in Philippine Blooming Mills, Inc. v. Court of
Appeals,27 where we said that property of the surety cannot be taken into
custody by the rehabilitation receiver (SEC) and said surety can be sued
separately to enforce his liability as surety for the debts or obligations of the
debtor. The debts or obligations for which a surety may be liable include
future debts, an amount which may not be known at the time the surety is
given.
The terms of the Irrevocable Standby Letter of Credit do not show that the
obligations of the banks are not solidary with those of respondent Maynilad.
On the contrary, it is issued at the request of and for the account of Maynilad
Water Services, Inc., in favor of the Metropolitan Waterworks and Sewerage
System, as a bond for the full and prompt performance of the obligations by
the concessionaire under the Concession Agreement 28 and herein petitioner is
authorized by the banks to draw on it by the simple act of delivering to the
agent a written certification substantially in the form Annex "B" of the Letter
of Credit. It provides further in Sec. 6, that for as long as the Standby Letter
of Credit is valid and subsisting, the Banks shall honor any written
Certification made by MWSS in accordance with Sec. 2, of the Standby Letter
of Credit regardless of the date on which the event giving rise to such Written
Certification arose.29
Taking into consideration our own rulings on the nature of letters of credit
and the customs and usage developed over the years in the banking and
commercial practice of letters of credit, we hold that except when a letter of
credit specifically stipulates otherwise, the obligation of the banks issuing
letters of credit are solidary with that of the person or entity requesting for its
issuance, the same being a direct, primary, absolute and definite undertaking
to pay the beneficiary upon the presentation of the set of documents required
therein.
The public respondent, therefore, exceeded his jurisdiction, in holding that he
was competent to act on the obligation of the banks under the Letter of
Credit under the argument that this was not a solidary obligation with that of
the debtor. Being a solidary obligation, the letter of credit is excluded from
the jurisdiction of the rehabilitation court and therefore in enjoining petitioner
from proceeding against the Standby Letters of Credit to which it had a clear
right under the law and the terms of said Standby Letter of Credit, public
respondent acted in excess of his jurisdiction.
ADDITIONAL ISSUES
We proceed to consider the other issues raised in the oral arguments
and included in the parties’ memoranda:
1. Respondent Maynilad argues that petitioner had a plain, speedy
and adequate remedy under the Interim Rules itself which provides in
Sec. 12, Rule 4 that the court may on motion or motu proprio,
terminate, modify or set conditions for the continuance of the stay
order or relieve a claim from coverage thereof. We find, however,
that the public respondent had already accomplished this during the
hearing set for the two Urgent Ex Parte motions filed by respondent
Maynilad on November 21 and 24, 2003,30 where the parties
including the creditors, Suez and Chinatrust Commercial "presented
their respective arguments."31 The public respondent then ruled,
"after carefully considering/evaluating the import of the arguments
and documents referred to by Maynilad, MWSS and/or the creditors
Chinatrust Commercial Bank and Suez in relation to the admissions,
the pleadings, and/or pertinent portions of the records, this court is of
the considered and humble view that the issue must perforce be
resolved in favor of Maynilad."32 Hence to pursue their opposition
before the same court would result in the presentation of the same
arguments and issues passed upon by public respondent.
Furthermore, Sec. 5, Rule 3 of the Interim Rules would preclude any
other effective remedy questioning the orders of the rehabilitation
court since they are immediately executory and a petition for review
or an appeal therefrom shall not stay the execution of the order
unless restrained or enjoined by the appellate court." In this
situation, it had no other remedy but to seek recourse to us through
this petition for certiorari.
In Silvestre v. Torres and Oben,33 we said that it is not enough that a
remedy is available to prevent a party from making use of the
extraordinary remedy of certiorari but that such remedy be an
adequate remedy which is equally beneficial, speedy and sufficient,
not only a remedy which at some time in the future may offer relief
but a remedy which will promptly relieve the petitioner from the
injurious acts of the lower tribunal. It is the inadequacy -- not the
mere absence -- of all other legal remedies and the danger of failure
of justice without the writ, that must usually determine the propriety
of certiorari.34
2. Respondent Maynilad argues that by commencing the process for
payment under the Standby Letter of Credit, petitioner violated an
immediately executory order of the court and, therefore, comes to
Court with unclean hands and should therefore be denied any relief.
 It is true that the stay order is immediately executory. It is also true,
however, that the Standby Letter of Credit and the banks that issued
it were not within the jurisdiction of the rehabilitation court. The call
on the Standby Letter of Credit, therefore, could not be considered a
violation of the Stay Order.
3. Respondent’s claim that the filing of the petition pre-empts the
original jurisdiction of the lower court is without merit. The purpose of
the initial hearing is to determine whether the petition for
rehabilitation has merit or not. The propriety of the stay order as well
as the clarificatory order had already been passed upon in the hearing
previously had for that purpose. The determination of whether the
public respondent was correct in enjoining the petitioner from
drawing on the Standby Letter of Credit will have no bearing on the
determination to be made by public respondent whether the petition
for rehabilitation has merit or not. Our decision on the instant petition
does not pre-empt the original jurisdiction of the rehabilitation court.
WHEREFORE, the petition for certiorari is granted. The Order of November
27, 2003 of the Regional Trial Court of Quezon City, Branch 90, is hereby
declared NULL AND VOID and SET ASIDE. The status quo Order herein
previously issued is hereby LIFTED. In view of the urgency attending this
case, this decision is immediately executory.
No costs.
SO ORDERED.
Case Digest:
The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does
not apply to the the standby letter of credit issued by the bank as the
former prohibition is on the enforcement of claims against guarantors
or sureties of the debtors whose obligations are not solidary with the
debtor.
The concept of guarantee vis-à-vis the concept of an irrevocable
letter of credit are inconsistent with each other. The guarantee
theory destroys the independence of the bank’s responsibility from
the contract upon which it was opened and the nature of both
contracts is mutually in conflict with each other. A Standby Letter of
Credit is not a guaranty because under a Standby Letter of Credit, the
bank undertakes a primary obligation. On the other hand, a
guarantor undertakes a collateral obligation which arises only upon
the debtor’s default. A Standby Letter of Credit is a primary
obligation and not an accessory contract.
Facts: Maynilad obtained a 20-year concession to manage, repair, refurbish,
and upgrade existing Metropolitan Waterworks and Sewerage System
(MWSS) water delivery and sewerage services in Metro Manila’s west
zone. Maynilad, under the concession agreement undertook to pay
concession fees and itsforeign loans. To secure its obligations, Maynilad was
required under Section 9 of the concession contract to put up a bond, bank
guarantee or other security acceptable to MWSS. Pursuant to this
requirement, Maynilad arranged on for a three-year facility with a number of
foreign banks led by Citicorp Intl for the issuance of an irrevocable standby
letter of credit (SLC) in the amount of $ 120 million in favor of MWSS for the
full and prompt payment of Maynilad’s obligations to MWSS. Due to
devaluation of the peso and other business reversals of Maynilad, MWSS filed
a notice of early termination of the concession contract. Upon certification of
the non performance of Maynilad obligation, the MWSS moved to collect from
Citicorp on the standby letters of credit issued. Maynilad filed for corporate
rehabilitation. Judge Daway stayed the payment of the letter of credit by
Citicorp pursuant to Sec 6 (b) of Rule 4 of the Interim Rules on Corporate
Rehabilitation.
Issue: Whether or not the payment of the standby of letter of credit can be
stayed by filing of a petition for rehabilitation
Held: No. The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does
not apply to the the standby letter of credit issued by the bank as the former
prohibition is on the enforcement of claims against guarantors or sureties of
the debtors whose obligations are not solidary with the debtor.
The participating bank’s obligation under the letter of credit are solidary with
respondent Maynilad in that it is a primary, direct, definite and an absolute
undertaking to pay and is not conditioned on the prior exhaustion of the
debtors assets. These are the same characteristics of a surety or solidary
obligor. And being solidary, the claims against them can be pursued
separately from and independently of the rehabilitation case.
Issuing banks under the letters of credit are not equivalent to guarantors.
The concept of guarantee vis-à-vis the concept of an irrevocable letter of
credit are inconsistent with each other. The guarantee theory destroys the
independence of the bank’s responsibility from the contract upon which it was
opened and the nature of both contracts is mutually in conflict with each
other. In contracts of guarantee, the guarantor’s obligation is merely
collateral and it arises only upon the default of the person primarily liable. On
the other hand, in an irrevocable letter of credit, the bank undertakes a
primary obligation. We have also defined a letter of credit as an engagement
by a bank or other person made at the request of a customer that the issuer
shall honor drafts or other demands of payment upon compliance with the
conditions specified in the credit.
A Standby Letter of Credit is not a guaranty because under a Standby Letter
of Credit, the bank undertakes a primary obligation. On the other hand, a
guarantor undertakes a collateral obligation which arises only upon the
debtor’s default. A Standby Letter of Credit is a primary obligation and not
an accessory contract.
 6. Bank of America v. Court of Appeals, 228 SCRA 357 (1993)
A "fiasco," involving an irrevocable letter of credit, has found the distressed
parties coming to court as adversaries in seeking a definition of their
respective rights or liabilities thereunder.
On 05 March 1981, petitioner Bank of America, NT & SA, Manila, received by
registered mail an Irrevocable Letter of Credit No. 20272/81 purportedly
issued by Bank of Ayudhya, Samyaek Branch, for the account of General
Chemicals, Ltd., of Thailand in the amount of US$2,782,000.00 to cover the
sale of plastic ropes and "agricultural files," with the petitioner as advising
bank and private respondent Inter-Resin Industrial Corporation as
beneficiary.
On 11 March 1981, Bank of America wrote Inter-Resin informing the latter of
the foregoing and transmitting, along with the bank's communication,
the latter of credit. Upon receipt of the letter-advice with the letter of credit,
Inter-Resin sent Atty. Emiliano Tanay to Bank of America to have the letter of
credit confirmed. The bank did not. Reynaldo 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
Inter-Resin's documents conformed with the conditions expressed in the
letter of credit, Bank of America issued in favor of Inter-Resin a Cashier's
Check for P10,219,093.20, "the Peso equivalent of the draft (for)
US$1,320,600.00 drawn by Inter-Resin, after deducting the costs for
documentary stamps, postage and mail issuance." 1 The check was picked up
by Inter-Resin's Executive Vice-President Barcelina Tio. On 10 April 1981,
Bank of America wrote Bank of Ayudhya advising the latter of the availment
under the letter of credit and sought the corresponding reimbursement
therefor.
Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of America the
documents for the second availment under the same letter of credit
consisting of a packing list, bill of lading, invoices, export declaration and bills
in set, evidencing the second shipment of goods. Immediately upon receipt of
a telex from the Bank of Ayudhya declaring the letter of credit
fraudulent, 2 Bank of America stopped the processing of Inter-Resin's
documents and sent a telex to its branch office in Bangkok, Thailand,
requesting assistance in determining the authenticity of the letter of
credit. 3 Bank of America kept Inter-Resin informed of the developments.
Sensing a fraud, Bank of America sought the assistance of the National
Bureau of Investigation (NBI). With the help of the staff of the Philippine
Embassy at Bangkok, as well as the police and customs personnel of
Thailand, the NBI agents, who were sent to Thailand, discovered that the
vans exported by Inter-Resin did not contain ropes but plastic strips,
wrappers, rags and waste materials. Here at home, the NBI also investigated
Inter-Resin's President Francisco Trajano and Executive Vice President
Barcelina Tio, who, thereafter, were criminally charged for estafa through
falsification of commercial documents. The case, however, was eventually
dismissed by the Rizal Provincial Fiscal who found no prima facieevidence to
warrant prosecution.
Bank of America sued Inter-Resin for the recovery of P10,219,093.20, the
peso equivalent of the draft for US$1,320,600.00 on the partial availment of
the now disowned letter of credit. On the other hand, Inter-Resin claimed
that not only was it entitled to retain P10,219,093.20 on its first shipment but
also to the balance US$1,461,400.00 covering the second shipment.
On 28 June 1989, the trial court ruled for Inter-Resin, 4 holding that:
(a) Bank of America made assurances that enticed Inter-Resin to send the
merchandise to Thailand; (b) the telex declaring the letter of credit fraudulent
was unverified and self-serving, hence, hearsay, but even assuming that the
letter of credit was fake, "the fault should be borne by the BA which was
careless and negligent" 5 for failing to utilize its modern means of
communication to verify with Bank of Ayudhya in Thailand the authenticity of
the letter of credit before sending the same to Inter-Resin; (c) the loading of
plastic products into the vans were under strict supervision, inspection and
verification of government officers who have in their favor the presumption of
regularity in the performance of official functions; and (d) Bank of America
failed to prove the participation of Inter-Resin or its employees in the alleged
fraud as, in fact, the complaint for estafa through falsification of documents
was dismissed by the Provincial Fiscal of Rizal.6
On appeal, the Court of Appeals 7 sustained the trial court; hence, this
present recourse by petitioner Bank of America.
The following issues are raised by Bank of America: (a) whether it has
warranted the genuineness and authenticity of the letter of credit and,
corollarily, whether it has acted merely as an advising bank or as a
confirming bank; (b) whether Inter-Resin has actually shipped the ropes
specified by the letter of credit; and (c) following the dishonor of the letter of
credit by Bank of Ayudhya, whether Bank of America may recover against
Inter-Resin under the draft executed in its partial availment of the letter of
credit.8
In rebuttal, Inter-Resin holds that: (a) Bank of America cannot, on appeal,
belatedly raise the issue of being only an advising bank; (b) the findings of
the trial court that the ropes have actually been shipped is binding on the
Court; and, (c) Bank of America cannot recover from Inter-Resin because the
drawer of the letter of credit is the Bank of Ayudhya and not Inter-Resin.
If only to understand how the parties, in the first place, got themselves into
the mess, it may be well to start by recalling how, in its modern use, a letter
of credit is employed in trade transactions.
A letter of credit is a financial device developed by merchants as a convenient
and relatively safe mode of dealing with sales of goods to satisfy the
seemingly irreconcilable interests of a seller, who refuses to part with his
goods before he is paid, and a buyer, who wants to have control of the goods
before paying. 9 To break the impasse, the buyer may be required to contract
a bank to issue a letter of credit in favor of the seller so that, by virtue of the
latter of credit, the issuing bank can authorize the seller to draw drafts and
engage to pay them upon their presentment simultaneously with the tender
of documents required by the letter of credit. 10 The buyer and the seller
agree on what documents are to be presented for payment, but ordinarily
they are documents of title evidencing or attesting to the shipment of the
goods to the buyer.
Once the credit is established, the seller ships the goods to the buyer and in
the process secures the required shipping documents or documents of title.
To get paid, the seller executes a draft and presents it together with the
required documents to the issuing bank. The issuing bank redeems the draft
and pays cash to the seller if it finds that the documents submitted by the
seller conform with what the letter of credit requires. The bank then obtains
possession of the documents upon paying the seller. The transaction is
completed when the buyer reimburses the issuing bank and acquires the
documents entitling him to the goods. Under this arrangement, the seller gets
paid only if he delivers the documents of title over the goods, while the buyer
acquires said documents and control over the goods only after reimbursing
the bank.
What characterizes letters of credit, as distinguished from other accessory
contracts, is the engagement of the issuing bank to pay the seller of the draft
and the required shipping documents are presented to it. In turn, this
arrangement assures the seller of prompt payment, independent of any
breach of the main sales contract. By this so-called "independence principle,"
the bank determines compliance with the letter of credit only by examining
the shipping documents presented; it is precluded from determining whether
the main contract is actually accomplished or not. 11
There would at least be three (3) parties: (a) the buyer, 12 who procures the
letter of credit and obliges himself to reimburse the issuing bank upon
receipts of the documents of title; (b) the bank issuing the letter of
credit, 13 which undertakes to pay the seller upon receipt of the draft and
proper document of titles and to surrender the documents to the buyer upon
reimbursement; and, (c) the seller, 14 who in compliance with the contract of
sale ships the goods to the buyer and delivers the documents of title and
draft to the issuing bank to recover payment.
The number of the parties, not infrequently and almost invariably in
international trade practice, may be increased. Thus, the services of
an advising (notifying) bank 15 may be utilized to convey to the seller the
existence of the credit; or, of a confirming bank 16 which will lend credence to
the letter of credit issued by a lesser known issuing bank; or, of a paying
bank, 17 which undertakes to encash the drafts drawn by the exporter.
Further, instead of going to the place of the issuing bank to claim payment,
the buyer may approach another bank, termed the negotiating bank, 18 to
have the draft discounted.
Being a product of international commerce, the impact of this commercial
instrument transcends national boundaries, and it is thus not uncommon to
find a dearth of national law that can adequately provide for its governance.
This country is no exception. Our own Code of Commerce basically introduces
only its concept under Articles 567-572, inclusive, thereof. It is no wonder
then why great reliance has been placed on commercial usage and practice,
which, in any case, can be justified by the universal acceptance of the
autonomy of contract rules. The rules were later developed into what is now
known as the Uniform Customs and Practice for Documentary Credits
("U.C.P.") issued by the International Chamber of Commerce. It is by no
means a complete text by itself, for, to be sure, there are other principles,
which, although part of lex mercatoria, are not dealt with the U.C.P.
In FEATI Bank and Trust Company v. Court of Appeals, 19 we have
accepted, to the extent of their pertinency, the application in our jurisdiction
of this international commercial credit regulatory set of rules. 20 In Bank of
Phil. Islands v. De Nery, 21 we have said that the observances of the U.C.P. is
justified by Article 2 of the Code of Commerce which expresses that, in the
absence of any particular provision in the Code of Commerce, commercial
transactions shall be governed by usages and customs generally observed.
We have further observed that there being no specific provisions which
govern the legal complexities arising from transactions involving letters of
credit not only between or among banks themselves but also between banks
and the seller or the buyer, as the case may be, the applicability of the U.C.P.
is undeniable.
The first issue raised with the petitioner, i.e., that it has in this instance
merely been advising bank, is outrightly rejected by Inter-Resin and is thus
sought to be discarded for having been raised only on appeal. We cannot
agree. The crucial point of dispute in this case is whether under the "letter of
credit," Bank of America has incurred any liability to the "beneficiary" thereof,
an issue that largely is dependent on the bank's participation in that
transaction; as a mere advising or notifying bank, it would not be liable, but
as a confirming bank, had this been the case, it could be considered as
having incurred that liability. 22
In Insular Life Assurance Co. Ltd. Employees Association — Natu
vs. Insular Life Assurance Co., Ltd., 23 the Court said: Where the issues
already raised also rest on other issues not specifically presented, as long as
the latter issues bear relevance and close relation to the former and as long
as they arise from the matters on record, the court has the authority to
include them in its discussion of the controversy and to pass upon them just
as well. In brief, in those cases where questions not particularly raised by the
parties surface as necessary for the complete adjudication of the rights and
obligations of the parties, the interests of justice dictate that the court should
consider and resolve them. The rule that only issues or theories raised in the
initial proceedings may be taken up by a party thereto on appeal should only
refer to independent, not concomitant matters, to support or oppose the
cause of action or defense. The evil that is sought to be avoided, i.e., surprise
to the adverse party, is in reality not existent on matters that are properly
litigated in the lower court and appear on record.
It cannot seriously be disputed, looking at this case, that Bank of America
has, in fact, only been an advising, not confirming, bank, and this much is
clearly evident, among other things, by the provisions of the letter of credit
itself, the petitioner bank's letter of advice, its request for payment of
advising fee, and the admission of Inter-Resin that it has paid the same. That
Bank of America has asked Inter-Resin to submit documents required by the
letter of credit and eventually has paid the proceeds thereof, did not
obviously make it a confirming bank. The fact, too, that the draft required by
the letter of credit is to be drawn under the account of General Chemicals
(buyer) only means the same had to be presented to Bank of Ayudhya
(issuing bank) for payment. It may be significant to recall that the letter of
credit is an engagement of the issuing bank, not the advising bank, to pay
the draft.
No less important is that Bank of America's letter of 11 March 1981 has
expressly stated that "[t]he enclosure is solely an advise of credit opened by
the abovementioned correspondent and conveys no engagement by
us." 24This written reservation by Bank of America in limiting its obligation
only to being an advising bank is in consonance with the provisions of U.C.P.
As an advising or notifying bank, Bank of America did not incur any obligation
more than just notifying Inter-Resin of the letter of credit issued in its favor,
let alone to confirm the letter of credit. 25 The bare statement of the bank
employees, aforementioned, in responding to the inquiry made by Atty.
Tanay, Inter-Resin's representative, on the authenticity of the letter of credit
certainly did not have the effect of novating the letter of credit and Bank of
America's letter of advise, 26 nor can it justify the conclusion that the bank
must now assume total liability on the letter of credit. Indeed, Inter-Resin
itself cannot claim to have been all that free from fault. As the seller, the
issuance of the letter of credit should have obviously been a great concern to
it. 27 It would have, in fact, been strange if it did not, prior to the letter of
credit, enter into a contract, or negotiated at the every least, with General
Chemicals. 28 In the ordinary course of business, the perfection of contract
precedes the issuance of a letter of credit.
Bringing the letter of credit to the attention of the seller is the primordial
obligation of an advising bank. The view that Bank of America should have
first checked the authenticity of the letter of credit with bank of Ayudhya, by
using advanced mode of business communications, before dispatching the
same to Inter-Resin finds no real support in U.C.P. Article 18 of the U.C.P.
states that: "Banks assume no liability or responsibility for the consequences
arising out of the delay and/or loss in transit of any messages, letters or
documents, or for delay, mutilation or other errors arising in the transmission
of any telecommunication . . ." As advising bank, Bank of America is bound
only to check the "apparent authenticity" of the letter of credit, which it
did. 29 Clarifying its meaning, Webster's Ninth New Collegiate
Dictionary 30 explains that the word "APPARENT suggests appearance to
unaided senses that is not or may not be borne out by more rigorous
examination or greater knowledge."
May Bank of America then recover what it has paid under the letter of credit
when the corresponding draft for partial availment thereunder and the
required documents were later negotiated with it by Inter-Resin? The answer
is yes. This kind of transaction is what is commonly referred to as a
discounting arrangement. This time, Bank of America has acted
independently as a negotiating bank, thus saving Inter-Resin from the
hardship of presenting the documents directly to Bank of Ayudhya to recover
payment. (Inter-Resin, of course, could have chosen other banks with which
to negotiate the draft and the documents.) As a negotiating bank, Bank of
America has a right to recourse against the issuer bank and until
reimbursement is obtained, Inter-Resin, as the drawer of the draft, continues
to assume a contingent liability thereon. 31
While bank of America has indeed failed to allege material facts in its
complaint that might have likewise warranted the application of the
Negotiable Instruments Law and possible then allowed it to even go after the
indorsers of the draft, this failure, 32/ nonetheless, does not preclude
petitioner bank's right (as negotiating bank) of recovery from Inter-Resin
itself. Inter-Resin admits having received P10,219,093.20 from bank of
America on the letter of credit and in having executed the corresponding
draft. The payment to Inter-Resin has given, as aforesaid, Bank of America
the right of reimbursement from the issuing bank, Bank of Ayudhya which, in
turn, would then seek indemnification from the buyer (the General Chemicals
of Thailand). Since Bank of Ayudhya disowned the letter of credit, however,
Bank of America may now turn to Inter-Resin for restitution.
Between the seller and the negotiating bank there is the usual relationship
existing between a drawer and purchaser of drafts. Unless drafts drawn in
pursuance of the credit are indicated to be without recourse therefore, the
negotiating bank has the ordinary right of recourse against the seller in the
event of dishonor by the issuing bank . . . The fact that the correspondent
and the negotiating bank may be one and the same does not affect its rights
and obligations in either capacity, although a special agreement is always a
possibility . . . 33
The additional ground raised by the petitioner, i.e., that Inter-Resin sent
waste instead of its products, is really of no consequence. In the operation of
a letter of credit, the involved banks deal only with documents and not on
goods described in those documents. 34
The other issues raised in then instant petition, for instance, whether or not
Bank of Ayudhya did issue the letter of credit and whether or not the main
contract of sale that has given rise to the letter of credit has been breached,
are not relevant to this controversy. They are matters, instead, that can only
be of concern to the herein parties in an appropriate recourse against those,
who, unfortunately, are not impleaded in these proceedings.
In fine, we hold that —
First, given the factual findings of the courts below, we conclude that
petitioner Bank of America has acted merely as a notifying bank and did not
assume the responsibility of a confirming bank; and
Second, petitioner bank, as a negotiating bank, is entitled to recover on
Inter-Resin's partial availment as beneficiary of the letter of credit which has
been disowned by the alleged issuer bank.
No judgment of civil liability against the other defendants, Francisco Trajano
and other unidentified parties, can be made, in this instance, there being no
sufficient evidence to warrant any such finding.
WHEREFORE, the assailed decision is SET ASIDE, and respondent Inter-
Resin Industrial Corporation is ordered to refund to petitioner Bank of
America NT & SA the amount of P10,219,093.20 with legal interest from the
filing of the complaint until fully paid.
No costs.
SO ORDERED.
Case Digest:
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
receipts 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
document of titles and to surrender the documents to the buyer upon
reimbursement; and, (c) the seller, who in compliance with the contract of
sale ships the goods to the buyer and delivers the documents of title and
draft to the issuing bank to recover payment.
Facts : Bank of America received an Irrevocable Letter of Credit issued by
Bank of Ayudhya for the Account of General Chemicals Ltd., Inc. for the sale
of plastic ropes and agricultural files. Under the letter of credit, Bank of
America acted as an advising bank and Inter-Resin Industrial Corp. (IR) acted
as the beneficiary. Upon receipt of the letter advice, Inter- Resin told Bank of
America to confirm the letter of credit.
Notwithstanding such instruction, Bank of America failed to confirm the letter
of credit. Inter-Resin made a partial availment of the Letter of Credit after
presentment of the required documents to Bank of America. After
confirmation of all the documents Bank of America issued a check in favor of
IR. BA advised Bank of Ayudhya of IR’s availment under the letter of credit
and asked for the corresponding reimbursement. IR presented documents for
the second availment under the same letter of credit. However, BA stopped
the processing of such after they received a telex from Bank of Ayudhya
delaring that the LC fraudulent. BA sued IR for the recovery of the first LC
payment.
The IR contended that Bank of America should have first checked the
authenticity of the letter of credit with bank of Ayudhya
Issue: Whether or not Bank of America may recover what it has paid under
the letter of credit to Inter-Resin
Held : May Bank of America then recover what it has paid under the letter of
credit when the corresponding draft
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
receipts 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
document 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.
The services of an advising (notifying) bank may be utilized to convey to the
seller the existence of the credit; or, of a confirming bank 16 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, 18 to
have the draft discounted.
Bank of America has acted independently as a negotiating bank, thus saving
Inter-Resin from the hardship of presenting the documents directly to Bank of
Ayudhya to recover payment. As a negotiating bank, Bank of America has a
right to recourse against the issuer bank and until reimbursement is obtained,
Inter-Resin, as the drawer of the draft, continues to assume a contingent
liability thereon.
Furthermore, bringing the letter of credit to the attention of the seller is the
primordial obligation of an advising bank. The view that Bank of America
should have first checked the authenticity of the letter of credit with bank of
Ayudhya, by using advanced mode of business communications, before
dispatching the same to Inter-Resin finds no real support.
 7. PNB v San Miguel Corp, G.R. No. 186063, January 15, 2014
This treats of the petition for review on certiorari of the Decision 1 and
Resolution2 of the Court of Appeals (CA), dated June 7 2008 and December
15, 2008, respectively, in CA-G.R. SP No. 01249-MIN.
The facts, as summarized by the CA, are as follows:
On July 1, 1996, respondent San Miguel Corporation (SMC, for brevity)
entered into an Exclusive Dealership Agreement with a certain Rodolfo R.
Goroza (Goroza, hereafter), wherein the latter was given by SMC the right to
trade, deal, market or otherwise sell its various beer products.
Goroza applied for a credit line with SMC, but one of the requirements for the
credit line was a letter of credit. Thus, Goroza applied for and was granted a
letter of credit by the PNB in the amount of two million pesos
(₱2,000,000.00). Under the credit agreement, the PNB has the obligation to
release the proceeds of Goroza's credit line to SMC upon presentation of the
invoices and official receipts of Goroza's purchases of SMC beer products to
the PNB, Butuan Branch.
On August 1, 1996, Goroza availed of his credit line with PNB and started
selling SMC's beer products x x x.
On February 11, 1997, Goroza applied for an additional credit line with the
PNB. The latter granted Goroza a one (1) year revolving credit line in the
amount not exceeding two million four hundred thousand pesos
(₱2,400,000.00). Thus, Goroza's total credit line reached four million four
hundred thousand pesos (₱4,400,000.00) x x x. Initially, Goroza was able to
pay his credit purchases with SMC x x x. Sometime in January 1998,
however, Goroza started to become delinquent with his accounts.
Demands to pay the amount of three million seven hundred twenty-two
thousand four hundred forty pesos and 88/100 (₱3,722,440.88) were made
by SMC against Goroza and PNB, but neither of them paid. Thus, on April 23,
2003, SMC filed a Complaint for collection of sum of money against PNB and
Goroza with the respondent Regional Trial Court Branch 3, Butuan City.3
After summons, herein petitioner filed its Answer, 4 while Goroza did not.
Upon respondent's Motion to Declare Defendant in Default,5 Goroza was
declared in default. Trial ensued insofar as Goroza was concerned and
respondent presented its evidence ex parte against the former. Respondent
made a formal offer of its exhibits on April 6, 2004 and the trial court
admitted them on June 16, 2004. Thereafter, on January 21, 2005, pre-trial
between PNB and SMC was held.6
On May 10, 2005, the RTC rendered a Decision,7 disposing as follows:
WHEREFORE, the Court hereby renders judgment in favor of plaintiff [SMC]
ordering defendant Rodolfo Goroza to pay plaintiff the following:
1. The principal amount of ₱3,722,440.00;
2. The interest of 12% per annum on the principal amount reckoned
from January 27, 1998 up to the time of execution of the Judgment of
this case;
3. Attorney's fees of ₱30,000.00;
4. Litigation expenses of ₱20,000.00.
SO ORDERED.8
Goroza filed a Notice of Appeal,9 while SMC filed a Motion for
Reconsideration.10 On July 14, 2005, the RTC granted SMC's motion for
reconsideration. The trial court amended its Decision by increasing the award
of litigation expenses to ₱90,652.50.11
Thereafter, on July 25, 2005, the RTC issued an Order, 12 pertinent portions of
which read as follows:
xxxx
Finding the Notice of Appeal filed within the reglementary period and the
corresponding appeal fee paid, x x x. The same is hereby given due course.
Considering that the case as against defendant PNB is still on-going, let the
Record in this case insofar as defendant Rodolfo R. Goroza is concerned, be
reproduced at the expense of defendant-appellant so that the same can be
forwarded to the Court of Appeals, together with the exhibits and transcript of
stenographic notes in the required number of copies.
SO ORDERED.13
In the meantime, trial continued with respect to PNB.
On September 27, 2005, PNB filed an Urgent Motion to Terminate
Proceedings14 on the ground that a decision was already rendered on May 10,
2005 finding Goroza solely liable. The RTC denied PNB's motion in its
Resolution15 dated October 11, 2005.
On October 14, 2005, the RTC issued a Supplemental
Judgment,16 thus:
The Court omitted by inadvertence to insert in its decision dated May 10,
2005 the phrase "without prejudice to the decision that will be made against
the other co-defendant, PNB, which was not declared in default."
WHEREFORE, the phrase "without prejudice to the decision made against
the other defendant PNB which was not declared in default" shall be inserted
in the dispositive portion of said decision.
SO ORDERED.17
On even date, the RTC also issued an Amended Order,18 to wit:
The Court's Order dated July 25, 2005 is hereby amended to include the
phrase "this appeal applies only to defendant Rolando Goroza and without
prejudice to the continuance of the hearing on the other defendant Philippine
National Bank".
SO ORDERED.19
PNB then filed a Motion for Reconsideration20 of the above-quoted
Supplemental Judgment and Amended Order, but the RTC denied the said
motion via its Resolution21 dated July 6, 2006. Aggrieved, PNB filed a special
civil action for certiorari with the CA imputing grave abuse of discretion on
the part of the RTC for having issued its July 6, 2006 Resolution.22
On June 17, 2008, the CA rendered its questioned Decision denying the
petition and affirming the assailed Resolution of the RTC.
PNB filed a Motion for Reconsideration,23 but the CA denied it in its
assailed Resolution. Hence, the instant petition with the following
Assignment of Errors:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE TRIAL COURT WAS
CORRECT IN RENDERING A SUPPLEMENTAL JUDGMENT AND AMENDED
ORDER AGAINST THE BANK DESPITE THE PERFECTION OF APPEAL OF ONE
OF THE DEFENDANTS.
THE COURT OF APPEALS ERRED IN HOLDING THAT PROCEEDINGS MAY
CONTINUE AGAINST PNB DESPITE THE COMPLETE ADJUDICATION OF RELIEF
IN FAVOR OF SMC.24
PNB contends that the CA erred in holding that the RTC was correct in
rendering its Supplemental Judgment and Amended Order despite the
perfection of Goroza's appeal. PNB claims that when Goroza's appeal was
perfected, the RTC lost jurisdiction over the entire case making the assailed
Supplemental Judgment and Amended Order void for having been issued
without or in excess of jurisdiction.
PNB also argues that the CA erred in ruling that proceedings against it may
continue in the RTC, despite the trial court's complete adjudication of relief in
favor of SMC. PNB avers that the May 10, 2005 Decision of the RTC, finding
Goroza solely liable to pay the entire amount sought to be recovered by SMC,
has settled the obligation of both Goroza and PNB, and that there is no longer
any ground to hold PNB for trial and make a separate judgment against it;
otherwise, SMC will recover twice for the same cause of action.
The petition lacks merit.
It is clear from the proceedings held before and the orders issued by the RTC
that the intention of the trial court is to conduct separate proceedings to
determine the respective liabilities of Goroza and PNB, and thereafter, to
render several and separate judgments for or against them. While ideally, it
would have been more prudent for the trial court to render a single decision
with respect to Goroza and PNB, the procedure adopted the RTC is,
nonetheless, allowed under Section 4, Rule 36 of the Rules of Court, which
provides that "in an action against several defendants, the court may, when a
several judgment is proper, render judgment against one or more of them,
leaving the action to proceed against the others." In addition, Section 5 of the
same Rule states that "when more than one claim for relief is presented in an
action, the court at any stage, upon a determination of the issues material to
a particular claim and all counterclaims arising out of the transaction or
occurrence which is the subject matter of the claim may render a separate
judgment disposing of such claim." Further, the same provision provides that
"the judgment shall terminate the action with respect to the claim so
disposed of and the action shall proceed as to the remaining claims." Thus,
the appeal of Goroza, assailing the judgment of the RTC finding him liable,
will not prevent the continuation of the ongoing trial between SMC and PNB.
The RTC retains jurisdiction insofar as PNB is concerned, because the appeal
made by Goroza was only with respect to his own liability. In fact, PNB itself,
in its Reply to respondent's Comment, admitted that the May 10, 2005
judgment of the RTC was "decided solely against defendant Rodolfo
Goroza."25
The propriety of a several judgment is borne by the fact that SMC's cause of
action against PNB stems from the latter's alleged liability under the letters of
credit which it issued. On the other hand, SMC's cause of action against
Goroza is the latter's failure to pay his obligation to the former.1âwphi1 As to
the separate judgment, PNB has a counterclaim against SMC which is yet to
be resolved by the RTC.
Indeed, the issues between SMC and PNB which are to be resolved by the
RTC, as contained in the trial court's Pre-Trial Order dated January 21, 2005,
were not addressed by the RTC in its Decision rendered against Goroza. In
particular, the RTC judgment against Goroza did not make any determination
as to whether or not PNB is liable under the letter of credit it issued and, if
so, up to what extent is its liability. In fact, contrary to PNB's claim, there is
nothing in the RTC judgment which ruled that Goroza is "solely liable" to pay
the amount which SMC seeks to recover.
In this regard, this Court's disquisition on the import of a letter of credit, in
the case ofTransfield Philippines, Inc. v. Luzon Hydro Corporation,26 as
correctly cited by the CA, is instructive, to wit:
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. A letter of credit, however, changes its nature as different
transactions occur and if carried through to completion ends up as a binding
contract between the issuing and honoring banks without any regard or
relation to the underlying contract or disputes between the parties thereto.
xxxx
Thus, the engagement of the issuing bank is to pay the seller or beneficiary
of the credit once the draft and the required documents are presented to it.
The so-called "independence principle" assures the seller or the beneficiary of
prompt payment independent of any breach of the main contract and
precludes the issuing bank from determining whether the main contract is
actually accomplished or not. Under this principle, banks assume no liability
or responsibility for the form, sufficiency, accuracy, genuineness, falsification
or legal effect of any documents, or for the general and/or particular
conditions stipulated in the documents or superimposed thereon, nor do they
assume any liability or responsibility for the description, quantity, weight,
quality, condition, packing, delivery, value or existence of the goods
represented by any documents, or for the good faith or acts and/or
omissions, solvency, performance or standing of the consignor, the carriers,
or the insurers of the goods, or any other person whomsoever.
xxxx
As discussed above, in a letter of credit transaction, such as in this case,
where the credit is stipulated as irrevocable, there is a definite undertaking
by the issuing bank to pay the beneficiary provided that the stipulated
documents are presented and the conditions of the credit are complied with.
Precisely, the independence principle liberates the issuing bank from the duty
of ascertaining compliance by the parties in the main contract. As the
principle's nomenclature clearly suggests, the obligation under the letter of
credit is independent of the related and originating contract. In brief, the
letter of credit is separate and distinct from the underlying transaction.27
In other words, PNB cannot evade responsibility on the sole ground that the
RTC judgment found Goroza liable and ordered him to pay the amount sought
to be recovered by SMC. PNB's liability, if any, under the letter of credit is yet
to be determined.
WHEREFORE, the instant petition is DENIED. The Decision of the Court of
Appeals, dated June 17, 2008, and its Resolution dated December 15, 2008,
both in CA-G.R. SP No. 01249-MIN, are AFFIRMED.
SO ORDERED.
Case Digest:
Facts:
SMC entered into an Exclusive Dealership Agreement with a certain Rodolfo
R. Goroza, wherein the latter was given by SMC the right to trade, deal,
market or otherwise sell its various beer products.Goroza applied for a credit
line with SMC, but one of the requirements for the credit line was a letter of
credit.Thus, Goroza applied for and was granted a letter of credit by the PNB
in the amount of two million pesos (₱2,000,000.00).
Under the credit agreement, the PNB has the obligation to release the
proceeds of Goroza'scredit line to SMC upon presentation of the invoices and
official receipts of Goroza's purchases of SMC beer products to the PNB,
Butuan Branch.On February 11, 1997, Goroza applied for an additional credit
line with the PNB. The latter granted Goroza a one(1) year revolving credit
line in the amount not exceeding two million four hundred thousand
pesos(₱2,400,000.00).
Demands to pay the amount of three million seven hundred twenty-two
thousand four hundred forty pesos and 88/100 (₱3,722,440.88) were made
by SMC against Goroza and PNB, but neither of them paid.
After summons, herein petitioner filed its Answer, while Goroza did not. Upon
respondent's Motion to Declare Defendant in Default,5 Goroza was declared in
default.
Issue:
WON PNB is liable to SMB under the Letter of Credit.
Held:
The engagement of the issuing bank is to pay the seller or beneficiary of the
credit once the draft and the required documents are presented to it. The so-
called "independence principle" assures the seller or the beneficiary of prompt
payment independent of any breach of the main contract and precludes the
issuing bank from determining whether the main contract is actually
accomplished or not. Under this principle, banks assume no liability or
responsibility
xxx“
In a letter of credit transaction, such as in this case, where the credit is
stipulated as irrevocable, there is a definite undertaking by the issuing bank
to pay the beneficiary provided that the stipulated documents are presented
and the conditions of the credit are complied with. The obligation under the
letter of credit is independent of the related and originating contract. In brief,
the letter of credit is separate and distinct from the underlying transaction.
PNB cannot evade responsibility on the sole ground that the RTC judgment
found Goroza liable and ordered him to pay the amount sought to be
recovered by SMC. PNB's liability, if any, under the letter of credit is yet to be
determined.

TRUST RECEIPTS LAW
1. People v. Nitafan, 207 SCRA 726 (1992)
This petition for certiorari involves an issue that has been raised before this
Court several times in the past. The petitioner, in effect, is asking for a re-
examination of our decisions on the issue of whether or not an entrustee in a
trust receipt agreement who fails to deliver the proceeds of the sale or to
return the goods if not sold to the entruster-bank is liable for the crime of
estafa.
Petitioner Allied Banking Corporation charged Betty Sia Ang with
estafa in Criminal Case No. 87-53501 in an information which alleged:
That on or about July 18, 1980, in the City of Manila,
Philippines, the said accused, being then the proprietress of
Eckart Enterprises, a business entity located at 756 Norberto
Amoranto Avenue, Quezon City, did then and there wilfully,
unlawfully and feloniously defraud the Allied Banking
Corporation, a banking institution, represented by its Account
Officer, Raymund S. Li, in the following manner, to wit: the
said accused received in trust from the aforesaid bank Gordon
Plastics, plastic sheeting and Hook Chromed, in the total
amount of P398,000.00, specified in a trust receipt and
covered by Domestic Letter of Credit No. DLC-002-801254,
under the express obligation on the part of said accused to
sell the same and account for the proceeds of the sale
thereof, if sold, or to return said merchandise, if not sold, on
or before October 16, 1980, or upon demand, but the said
accused, once in possession of the said articles, far from
complying with the aforesaid obligation, notwithstanding
repeated demands made upon her to that effect, paid only
the amount of P283,115.78, thereby leaving unaccounted for
the amount of P114,884.22 which, once in her possession,
with intent to defraud, she misappropriated, misapplied and
converted to her own personal use and benefit, to the
damage and prejudice of said Allied Banking Corporation in
the aforesaid sum of P114,884.22, Philippine Currency.
(Rollo, pp. 13-14)
The accused filed a motion to quash the information on the ground that the
facts charged do not constitute an offense.
On January 7, 1988, the respondent judge granted the motion to quash. The
order was anchored on the premise that a trust receipt transaction is an
evidence of a loan being secured so that there is, as between the parties to it,
a creditor-debtor relationship. The court ruled that the penal clause of
Presidential Decree No. 15 on the Trust Receipts Law is inoperative because it
does not actually punish an offense mala prohibita. The law only refers to
the relevant estafa provision in the Revised Penal Code. The Court relied on
the judicial pronouncements in People v. Cuevo, 104 SCRA 312 [1981]
where, for lack of the required number of votes, this Court upheld the
dismissal of a charge for estafa for a violation of a trust receipt agreement;
and in Sia v. People, 121 SCRA 655 [1983] where we held that the
violation merely gives rise to a civil obligation. At the time the order to quash
was issued or on January 7, 1988, these two decisions were the only most
recent ones. Hence, this petition.
The private respondent adopted practically the same stance of the lower
court. She likewise asserts that P.D. 115 is unconstitutional as it violates the
constitutional prohibition against imprisonment for non-payment of a debt.
She argues that where no malice exists in a breach of a purely commercial
undertaking, P.D. 115 imputes it.
This Court notes that the petitioner bank brought a similar case before this
Court in G.R. No. 82495, entitled Allied Banking Corporation v. Hon.
Secretary Sedfrey Ordoñez and Alfredo Ching which we decided on
December 10, 1990 (192 SCRA 246). In that case, the petitioner additionally
questioned, and we accordingly reversed, the pronouncement of the
Secretary of Justice limiting the application of the penal provision of P.D. 115
only to goods intended to be sold to the exclusion of those still to be
manufactured.
As in G.R. No. 82495, we resolve the instant petition in the light of the
Court's ruling in Lee v. Rodil, 175 SCRA 100 [1989] and Sia v. Court of
Appeals, 166 SCRA 263 [1988]. We have held in the latter cases that acts
involving the violation of trust receipt agreements occurring after 29 January
1973 (date of enactment of P.D. 115) would make the accused criminally
liable for estafa under paragraph 1 (b), Article 315 of the Revised Penal Code
(RPC) pursuant to the explicit provision in Section 13 of P.D. 115.
The relevant penal provision of P.D. 115 provides:
Sec. 13 of P.D. No. 115 provides:
. . . 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.
Section 1 (b), Article 315 of the RPC under which the violation is
made to fall, states:
. . . Swindling (estafa). — Any person who shall defraud
another by any of the means mentioned herein below . . . :
xxx xxx xxx
b. By misappropriating or converting, to the prejudice of
another, money, goods, or any other personal property
received by the offender in trust or on commission, or for
administration, or under any other obligation involving the
duty to make delivery of or to return the same, even though
such obligation be totally or partially guaranteed by a bond;
or by denying having received such money, good, or other
property.
The factual circumstances in the present case show that the alleged violation
was committed sometime in 1980 or during the effectivity of P.D. 115. The
failure, therefore, to account for the P114,884.22 balance is what makes the
accused-respondent criminally liable for estafa. The Court reiterates its
definitive ruling that, in the Cuevo and Sia (1983) cases relied upon by the
accused, P.D. 115 was not applied because the questioned acts were
committed before its effectivity. (Lee v. Rodil, supra, p. 108) At the time
those cases were decided, the failure to comply with the obligations under the
trust receipt was susceptible to two interpretations. The Court in Sia adopted
the view that a violation gives rise only to a civil liability as the more feasible
view "before the promulgation of P.D. 115," notwithstanding prior decisions
where we ruled that a breach also gives rise to a liability for estafa. (People v.
Yu Chai Ho, 53 Phil. 874 [1929]; Samo v. People, 115 Phil. 346 [1962];
Philippine National Bank v. Arrozal, 103 Phil. 213 [1958]; Philippine National
Bank v. Viuda e Hijos de Angel Jose, 63 Phil. 814 [1936]).
Contrary to the reasoning of the respondent court and the accused, a trust
receipt arrangement does not involve a simple loan transaction between a
creditor and debtor-importer. Apart from a loan feature, the trust receipt
arrangement has a security feature that is covered by the trust receipt itself.
(Vintola v. Insular Bank of Asia and America, 151 SCRA 578 [1987]) That
second feature is what provides the much needed financial assistance to our
traders in the importation or purchase of goods or merchandise through the
use of those goods or merchandise as collateral for the advancements made
by a bank. (Samo v. People, supra). The title of the bank to the security is
the one sought to be protected and not the loan which is a separate and
distinct agreement.
The Trust Receipts Law punishes the dishonesty and abuse of confidence in
the handling of money or goods to the prejudice of another regardless of
whether the latter is the owner or not. The law does not seek to enforce
payment of the loan. Thus, there can be no violation of a right against
imprisonment for non-payment of a debt.
Trust receipts are indispensable contracts in international and domestic
business transactions. The prevalent use of trust receipts, the danger of their
misuse and/or misappropriation of the goods or proceeds realized from the
sale of goods, documents or instruments held in trust for entruster-banks,
and the need for regulation of trust receipt transactions to safeguard the
rights and enforce the obligations of the parties involved are the main thrusts
of P.D. 115. As correctly observed by the Solicitor General, P.D. 115, like
Batas Pambansa Blg. 22, punishes the act "not as an offense against
property, but as an offense against public order. . . ." The misuse of trust
receipts therefore should be deterred to prevent any possible havoc in trade
circles and the banking community (citing Lozano v. Martinez, 146 SCRA 323
[1986]; Rollo, p. 57) It is in the context of upholding public interest that the
law now specifically designates a breach of a trust receipt agreement to be an
act that "shall" make one liable for estafa.
The offense is punished as a malum prohibitum regardless of the existence of
intent or malice. A mere failure to deliver the proceeds of the sale or the
goods if not sold, constitutes a criminal offense that causes prejudice not only
to another, but more to the public interest.
We are continually re-evaluating the opposite view which insists that the
violation of a trust receipt agreement should result only in a civil action for
collection. The respondent contends that there is no malice involved. She
cites the dissent of the late Chief Justice Claudio Teehankee in Ong v.
Court of Appeals, (124 SCRA 578 [1983]) to wit:
The old capitalist orientation of putting importers in jail for
supposed estafa or swindling for non-payment of the price of
the imported goods released to them under trust receipts (a
purely commercial transaction) under the fiction of the trust
receipt device, should no longer be permitted in this day and
age.
As earlier stated, however, the law punishes the dishonesty and abuse of
confidence in the handling of money or goods to the prejudice of the bank.
The Court reiterates that the enactment of P.D. 115 is a valid exercise of the
police power of the State and is, thus, constitutional. (Lee v.
Rodil, supra; Lozano v. Martinez, supra) The arguments of the
respondent are appropriate for a repeal or modification of the law and should
be directed to Congress. But until the law is repealed, we are constrained to
apply it.
WHEREFORE, the petition is hereby GRANTED. The Order of the
respondent Regional Trial Court of Manila, Branch 52 dated January 7, 1988
is SET ASIDE. Let this case be remanded to the said court for disposition in
accordance with this decision.
SO ORDERED.
Case Digest:
Facts: Respondent judge granted a motion to quash information for estafa on
the ground that the penal clause of Presidential Decree No. 115 on the Trust
Receipts Law is inoperative because it does not actually punish an offense
mala prohibita.
ISSUE(S):
Whether or not P.D. 115 is unconstitutional as it violates the constitutional
prohibition against imprisonment for non-payment of debt.
RULING:
NO. The Trust Receipts Law punishes the dishonesty and abuse of
confidence in the handling of money or goods to the prejudice of another
regardless of whether the latter is the owner or not. The law does not seek
to enforce payment of the loan. Thus, there can be no violation of a right
against imprisonment for non-payment of a debt. Petition is GRANTED.
A memorandum check comes within the meaning of Sec. 185 of the
Negotiable Instruments Law which defines a check as "a bill of exchange
drawn on a bank payable on demand. A memorandum check, upon
presentment, is generally accepted by the bank. Hence it does not matter
whether the check issued is in the nature of a memorandum as evidence of
indebtedness or whether it was issued is partial fulfillment of a pre-existing
obligation, for what the law punishes is the issuance itself of a
bouncing check and not the purpose for which it was issuance. The
mere act of issuing a worthless check, whether as a deposit, as a guarantee,
or even as an evidence of a pre-existing debt, is malum prohibitum.
A memorandum check may carry with it the understanding that it is not be
presented at the bank but will be redeemed by the maker himself when the
loan fall due. However, with the promulgation of B.P. 22, such understanding
or private arrangement may no longer prevail to exempt it from penal
sanction imposed by the law. To require that the agreement surrounding the
issuance of check be first looked into and thereafter exempt such issuance
from the punitive provision of B.P. 22 on the basis of such agreement or
understanding would frustrate the very purpose for which the law was
enacted — to stem the proliferation of unfunded checks.
After having effectively reduced the incidence of worthless checks changing
hands, the country will once again experience the limitless circulation of
bouncing checks in the guise of memorandum checks if such checks will be
considered exempt from the operation of B.P. 22. It is common practice in
commercial transactions to require debtors to issue checks on which creditors
must rely as guarantee of payment.

Facts: To determine the reasons for which checks are issued, or the terms and
conditions for their issuance, will greatly erode the faith the public responses
Private respondent K.T. Lim was charged with violation of B.P. 22. He moved in the stability and commercial value of checks as currency substitutes, and
to quash the Information of the ground that the facts charged did not bring about havoc in trade and in banking communities.
constitute a felony as B.P. 22 was unconstitutional and that the check he
issued was a memorandum check which was in the nature of a promissory
note, perforce, civil in nature. Judge Nitafan, ruling that B.P. 22 on which the
Information was based was unconstitutional, issued the questioned Order
quashing the Information. Hence, the appeal.

Issue:

Is a memorandum check within the coverage of B.P. 22?

Held:

A memorandum check is in the form of an ordinary check, with the word

"memorandum", "memo" or "mem" written across its face, signifying that the
maker or drawer engages to pay the bona fide holder absolutely, without any
condition concerning its presentment. Such a check is an evidence of debt
against the drawer, and although may not be intended to be presented, has
the same effect as an ordinary check, and if passed to the third person, will
be valid in his hands like any other check.
 2. Lee v. Court of Appeals, 375 SCRA 579 (2002)
Before us is the joint and consolidated petition for review of the
Decision[1] dated June 15, 1994 of the Court of Appeals in CA-G.R. CV No.
27480 entitled, Philippine Bank of Communications vs. Mico Metals
Corporation, Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard
Velasco and Alfonso Co, which reversed the decision of the Regional Trial
Court (RTC) of Manila, Branch 55 dismissing the complaint for a sum of
money filed by private respondent Philippine Bank of Communications against
herein petitioners, Mico Metals Corporation (MICO, for brevity), Charles Lee,
Chua Siok Suy,[2] Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso
Co.[3] The dispositive portion of the said Decision of the Court of Appeals,
reads:
WHEREFORE, the decision of the Regional Trial Court is hereby
reversed and in lieu thereof, a new one is entered:
a) Ordering the defendants-appellees jointly and severally to pay
plaintiff PBCom the sum of Five million four hundred fifty-one
thousand six hundred sixty-three pesos and ninety centavos
(P5,451,663.90) representing defendants-appellees unpaid
obligations arising from ordinary loans granted by the plaintiff
plus legal interest until fully paid.
b) Ordering defendants-appellees jointly and severally to
pay PBCom the sum of Four hundred sixty-one thousand six
hundred pesos and sixty-six centavos (P46 1,600.66)
representing defendants-appellees unpaid obligations arising
from their letters of credit and trust receipt transactions with
plaintiff PBCom plus legal interest until fully paid.
c) Ordering defendants-appellees jointly and severally to
pay PBCom the sum of P50,000.00 as attorneys fees.
No pronouncement as to costs.
The facts of the case are as follows:
On March 2, 1979, Charles Lee, as President of MICO wrote private
respondent Philippine Bank of Communications (PBCom) requesting for a
grant of a discounting loan/credit line in the sum of Three Million Pesos
(P3,000,000.00) for the purpose of carrying out MICOs line of business as
well as to maintain its volume of business.
On the same day, Charles Lee requested for another discounting
loan/credit line of Three Million Pesos (P3,000,000.00) from PBCom for the
purpose of opening letters of credit and trust receipts.
In connection with the requests for discounting loan/credit
lines, PBCom was furnished by MICO the following resolution which was
adopted unanimously by MICOs Board of Directors:
RESOLVED, that the President, Mr. Charles Lee, and the Vice-President and
General Manager, Mr. Mariano A. Sio, singly or jointly, be and they are duly
authorized and empowered for and in behalf of this Corporation to apply for,
negotiate and secure the approval of commercial loans and other banking
facilities and accommodations, such as, but not limited to discount loans,
letters of credit, trust receipts, lines for marginal deposits on foreign and
domestic letters of credit, negotiate out-of-town checks, etc. from the
Philippine Bank of Communications, 216 Juan Luna, Manila in such sums as
they shall deem advantageous, the principal of all of which shall not exceed
the total amount of TEN MILLION PESOS (P10,000,000.00), Philippine
Currency, plus any interests that may be agreed upon with said Bank in such
loans and other credit lines of the same kind and such further terms and
conditions as may, upon granting of said loans and other banking facilities, be
imposed by the Bank; and to make, execute, sign and deliver any contracts
of mortgage, pledge or sale of one, some or all of the properties of the
Company, or any other agreements or documents of whatever nature or kind,
including the signing, indorsing, cashing, negotiation and execution of
promissory notes, checks, money orders or other negotiable instruments,
which may be necessary and proper in connection with said loans and other
banking facilities, or with their amendments, renewals and extensions of
payment of the whole or any part thereof.[4]
On March 26, 1979, MICO availed of the first loan of One Million Pesos
(P1,000,000.00) from PBCom. Upon maturity of the loan, MICO caused the
same to be renewed, the last renewal of which was made on May 21,
1982 under Promissory Note BNA No. 26218.[5]
Another loan of One Million Pesos (P1,000,000.00) was availed of by
MICO from PBCom which was likewise later on renewed, the last renewal of
which was made on May 21, 1982 under Promissory Note BNA No.
26219.[6] To complete MICOs availment of Three Million Pesos
(P3,000,000.00) discounting loan/credit line with PBCom, MICO availed of
another loan from PBCom in the sum of One Million Pesos (P1,000,000.00)
on May 24, 1979. As in previous loans, this was rolled over or renewed, the
last renewal of which was made on May 25, 1982 under Promissory Note BNA
No. 26253.[7]
As security for the loans, MICO through its Vice-President and General
Manager, Mariano Sio, executed on May 16, 1979 a Deed of Real Estate
Mortgage over its properties situated in Pasig, Metro Manila covered by
Transfer Certificates of Title (TCT) Nos. 11248 and 11250.
On March 26, 1979 Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso
Yap and Richard Velasco, in their personal capacities executed a Surety
Agreement[8] in favor of PBCom whereby the petitioners jointly and severally,
guaranteed the prompt payment on due dates or at maturity of overdrafts,
promissory notes, discounts, drafts, letters of credit, bills of exchange, trust
receipts, and other obligations of every kind and nature, for which MICO may
be held accountable by PBCom. It was provided, however, that the liability of
the sureties shall not at any one time exceed the principal amount of Three
Million Pesos (P3,000,000.00) plus interest, costs, losses, charges and
expenses including attorneys fees incurred by PBCom in connection
therewith.
 On July 14, 1980, petitioner Charles Lee, in his capacity as president of
MICO, wrote PBCom and applied for an additional loan in the sum of Four
Million Pesos (P4,000,000.00). The loan was intended for the expansion and
modernization of the companys machineries. Upon approval of the said
application for loan, MICO availed of the additional loan of Four Million Pesos
(P4,000,000.00) as evidenced by Promissory Note TA No. 094.[9]
As per agreement, the proceeds of all the loan availments were credited
to MICOs current checking account with PBCom. To induce the PBCom to
increase the credit line of MICO, Charles Lee, Chua Siok Suy, Mariano Sio,
Alfonso Yap, Richard Velasco and Alfonso Co (hereinafter referred to as
petitioners-sureties), executed another surety agreement[10] in favor
of PBCom on July 28, 1980, whereby they jointly and severally guaranteed
the prompt payment on due dates or at maturity of overdrafts, promissory
notes, discounts, drafts, letters of credit, bills of exchange, trust receipts and
all other obligations of any kind and nature for which MICO may be held
accountable by PBCom. It was provided, however, that their liability shall not
at any one time exceed the sum of Seven Million Five Hundred Thousand
Pesos (P7,500,000.00) including interest, costs, charges, expenses and
attorneys fees incurred by MICO in connection therewith.
On July 29, 1980, MICO furnished PBCom with a notarized certification
issued by its corporate secretary, Atty. P.B. Barrera, that Chua Siok Suy was
duly authorized by the Board of Directors to negotiate on behalf of MICO for
loans and other credit availmentsfrom PBCom. Indicated in the certification
was the following resolution unanimously approved by the Board of Directors:
RESOLVED, AS IT IS HEREBY RESOLVED, That Mr. Chua Siok Suy be, as
he is hereby authorized and empowered, on behalf of MICO METALS
CORPORATION from time to time, to borrow money and obtain other credit
facilities, with or without security, from the PHILIPPINE BANK OF
COMMUNICATIONS in such amount(s) and under such terms and conditions
as he may determine, with full power and authority to execute, sign and
deliver such contracts, instruments and papers in connection therewith,
including real estate and chattel mortgages, pledges and assignments over
the properties of the Corporation; and to renew and/or extend and/or roll-
over and/or reavail of the credit facilities granted thereunder, either for lesser
or for greater amount(s), the intention being that such credit facilities and all
securities of whatever kind given as collaterals thereforshall be a continuing
security.
RESOLVED FURTHER, That said bank is hereby authorized, empowered and
directed to rely on the authority given hereunder, the same to continue in full
force and effect until written notice of its revocation shall be received by said
Bank.[11]
On July 2, 1981, MICO filed with PBCom an application for a domestic
letter of credit in the sum of Three Hundred Forty-Eight Thousand Pesos
(P348,000.00).[12] The corresponding irrevocable letter of credit was
approved and opened under LC No. L-16060.[13]Thereafter, the domestic
letter of credit was negotiated and accepted by MICO as evidenced by the
corresponding bank draft issued for the purpose.[14] After the supplier of the
merchandise was paid, a trust receipt upon MICOs own initiative, was
executed in favor of PBCom.[15]
On September 14, 1981, MICO applied for another domestic letter of
credit with PBCom in the sum of Two Hundred Ninety Thousand Pesos
(P290,000.00).[16] The corresponding irrevocable letter of credit was issued
on September 22, 1981 under LC No. L-16334.[17] After the beneficiary of the
said letter of credit was paid by PBCom for the price of the merchandise, the
goods were delivered to MICO which executed a corresponding trust
receipt[18] in favor of PBCom.
On November 10, 1981, MICO applied for authority to open a foreign
letter of credit in favor of Ta Jih Enterprises Co., Ltd.,[19] and thus, the
corresponding letter of credit[20] was then issued by PBCom with a cable sent
to the beneficiary, Ta Jih Enterprises Co., Ltd. advising that said beneficiary
may draw funds from the account of PBCom in its correspondent banks New
York Office.[21] PBCom also informed its corresponding bank in Taiwan, the
Irving Trust Company, of the approved letter of credit. The correspondent
bank acknowledged PBComs advice through a confirmation letter[22] and by
debiting from PBComs account with the said correspondent bank the sum of
Eleven Thousand Nine Hundred Sixty US Dollars ($11 ,960.00).[23] As in past
transactions, MICO executed in favor of PBCom a corresponding trust
receipt.[24]
On January 4, 1982, MICO applied, for authority to open a foreign letter
of credit in the sum of One Thousand Nine Hundred US Dollars ($1,900.00),
with PBCom.[25] Upon approval, the corresponding letter of credit
denominated as LC No. 62293[26] was issued whereupon PBCom advised its
correspondent bank and MICO[27] of the same. Negotiation and proper
acceptance of the letter of credit were then made by MICO. Again, a
corresponding trust receipt[28] was executed by MICO in favor of PBCom. In
all the transactions involving foreign letters of credit, PBCom turned over to
MICO the necessary documents such as the bills of lading and commercial
invoices to enable the latter to withdraw the goods from the port of Manila.
On May 21, 1982 MICO obtained from PBCom another loan in the sum of
Three Hundred Seventy-Seven Thousand Pesos (P377,000.00) covered by
Promissory Note BA No. 7458.[29]
Upon maturity of all credit availments obtained by MICO from PBCom,
the latter made a demand for payment.[30] For failure of petitioner MICO to
pay the obligations incurred despite repeated demands, private
respondent PBCom extrajudicially foreclosed MICOsreal estate mortgage and
sold the said mortgaged properties in a public auction sale held on November
23, 1982. Private respondent PBCom which emerged as the highest bidder in
the auction sale, applied the proceeds of the purchase price at public auction
of Three Million Pesos (P3,000,000.00) to the expenses of the foreclosure,
interest and charges and part of the principal of the loans, leaving an unpaid
balance of Five Million Four Hundred Forty-One Thousand Six Hundred Sixty-
Three Pesos and Ninety Centavos (P5,441,663.90) exclusive of penalty and
interest charges. Aside from the unpaid balance of Five Million Four Hundred
Forty-One Thousand Six Hundred Sixty-Three Pesos and Ninety Centavos
(P5,441,663.90), MICO likewise had another standing obligation in the sum of
Four Hundred Sixty-One Thousand Six Hundred Pesos and Six Centavos
(P461,600.06) representing its trust receipts liabilities to private
respondent. PBCom then demanded the settlement of the aforesaid
obligations from herein petitioners-sureties who, however, refused to
acknowledge their obligations to PBCom under the surety agreements.
Hence, PBCom filed a complaint with prayer for writ of preliminary
attachment before the Regional Trial Court of Manila, which was raffled to
Branch 55, alleging that MICO was no longer in operation and had no
properties to answer for its obligations. PBCom further alleged that petitioner
Charles Lee has disposed or concealed his properties with intent to defraud
his creditors. Except for MICO and Charles Lee, the sheriff of the RTC failed to
serve the summons on herein petitioners-sureties since they were all
reportedly abroad at the time. An alias summons was later issued but the
sheriff was not able to serve the same to petitioners Alfonso Co and
Chua Siok Suy who was already sickly at the time and reportedly
in Taiwan where he later died.
Petitioners (MICO and herein petitioners-sureties) denied all the
allegations of the complaint filed by respondent PBCom, and alleged that: a)
MICO was not granted the alleged loans and neither did it receive the
proceeds of the aforesaid loans; b) Chua Siok Suywas never granted any
valid Board Resolution to sign for and in behalf of MICO; c) PBCom acted in
bad faith in granting the alleged loans and in releasing the proceeds thereof;
d) petitioners were never advised of the alleged grant of loans and the
subsequent releases therefor, if any; e) since no loan was ever released to or
received by MICO, the corresponding real estate mortgage and the surety
agreements signed concededly by the petitioners-sureties are null and void.
The trial court gave credence to the testimonies of herein petitioners and
dismissed the complaint filed by PBCom. The trial court likewise declared the
real estate mortgage and its foreclosure null and void. In ruling for herein
petitioners, the trial court said that PBCom failed to adequately prove that the
proceeds of the loans were ever delivered to MICO. The trial court pointed
out, among others, that while PBCom claimed that the proceeds of the Four
Million Pesos (P4,000,000.00) loan covered by promissory note TA 094 were
deposited to the current account of petitioner MICO, PBCom failed to produce
the ledger account showing such deposit. The trial court added that
while PBCom may have loaned to MICO the other sums of Three Hundred
Forty-Eight Thousand Pesos (P348,000.00) and Two Hundred Ninety
Thousand Pesos (P290,000.00), no proof has been adduced as to the
existence of the goods covered and paid by the said amounts. Hence,
inasmuch as no consideration ever passed from PBCom to MICO, all the
documents involved therein, such as the promissory notes, real estate
mortgage including the surety agreements were all void or nonexistent for
lack of cause or consideration. The trial court said that the lack of proof as
regards the existence of the merchandise covered by the letters of credit
bolstered the claim of herein petitioners that no purchases of the goods were
really made and that the letters of credit transactions were simply resorted to
by the PBCom and Chua Siok Suy to accommodate the latter in his financial
requirements.
The Court of Appeals reversed the ruling of the trial court, saying that
the latter committed an erroneous application and appreciation of the rules
governing the burden of proof. Citing Section 24 of the Negotiable
Instruments Law which provides that Every negotiable instrument is
deemed prima facie to have been issued for valuable consideration
and every person whose signature appears thereon to have become a
party thereto for value, the Court of Appeals said that while the subject
promissory notes and letters of credit issued by the PBCom made no mention
of delivery of cash, it is presumed that said negotiable instruments were
issued for valuable consideration. The Court of Appeals also cited the case
of Gatmaitan vs. Court of Appeals[31] which holds that "there is a
presumption that an instrument sets out the true agreement of the
parties thereto and that it was executed for valuable consideration.
The appellate court noted and found that a notarized Certification was issued
by MICOs corporate secretary, P.B. Barrera, that Chua Siok Suy, was duly
authorized by the Board of Directors of MICO to borrow money and obtain
credit facilities from PBCom.
Petitioners filed a motion for reconsideration of the challenged decision
of the Court of Appeals but this was denied in a Resolution dated November
7, 1994 issued by its Former Second Division. Petitioners-sureties then filed a
petition for review on certiorari with this Court, docketed as G.R. No. 117913,
assailing the decision of the Court of Appeals. MICO likewise filed a separate
petition for review on certiorari, docketed as G.R. No. 117914, with this Court
assailing the same decision rendered by the Court of Appeals. Upon motion
filed by petitioners, the two (2) petitions were consolidated on January 11,
1995.[32]
Petitioners contend that there was no proof that the proceeds of the
loans or the goods under the trust receipts were ever delivered to and
received by MICO. But the record shows otherwise. Petitioners-sureties
further contend that assuming that there was delivery by PBCom of the
proceeds of the loans and the goods, the contracts were executed by an
unauthorized person, more specifically Chua Siok Suy who acted fraudulently
and in collusion with PBCom to defraud MICO.
The pertinent issues raised in the consolidated cases at bar are:
a) whether or not the proceeds of the loans and letters of credit transactions
were ever delivered to MICO, and b) whether or not the individual petitioners,
as sureties, may be held liable under the two (2) Surety Agreements
executed on March 26, 1979 and July 28, 1980.
In civil cases, the party having the burden of proof must establish his
case by preponderance of evidence.[33] Preponderance of evidence means
evidence which is more convincing to the court as worthy of belief than that
which is offered in opposition thereto. Petitioners contend that the alleged
promissory notes, trust receipts and surety agreements attached to the
complaint filed by PBCom did not ripen into valid and binding contracts
inasmuch as there is no evidence of the delivery of money or loan proceeds
to MICO or to any of the petitioners-sureties. Petitioners claim that under
normal banking practice, borrowers are required to accomplish promissory
notes in blank even before the grant of the loans applied for and such
documents become valid written contracts only when the loans are actually
released to the borrower.
We are not convinced.
During the trial of an action, the party who has the burden of proof upon
an issue may be aided in establishing his claim or defense by the operation of
a presumption, or, expressed differently, by the probative value which the
law attaches to a specific state of facts. A presumption may operate against
his adversary who has not introduced proof to rebut the presumption. The
effect of a legal presumption upon a burden of proof is to create the necessity
of presenting evidence to meet the legal presumption or the prima facie case
created thereby, and which if no proof to the contrary is presented and
offered, will prevail. The burden of proof remains where it is, but by the
presumption the one who has that burden is relieved for the time being from
introducing evidence in support of his averment, because the presumption
stands in the place of evidence unless rebutted.
Under Section 3, Rule 131 of the Rules of Court the following
presumptions, among others, are satisfactory if uncontradicted: a) That there
was a sufficient consideration for a contract and b) That a negotiable
instrument was given or indorsed for sufficient consideration. As observed by
the Court of Appeals, a similar presumption is found in Section 24 of the
Negotiable Instruments Law which provides that every negotiable instrument
is deemed prima facie to have been issued for valuable consideration and
every person whose signature appears thereon to have become a party for
value. Negotiable instruments which are meant to be substitutes for money,
must conform to the following requisites to be considered as such a) it must
be in writing; b) it must be signed by the maker or drawer; c) it must contain
an unconditional promise or order to pay a sum certain in money; d) it must
be payable on demand or at a fixed or determinable future time; e) it must
be payable to order or bearer; and f) where it is a bill of exchange,
the draweemust be named or otherwise indicated with reasonable certainty.
Negotiable instruments include promissory notes, bills of exchange and
checks. Letters of credit and trust receipts are, however, not negotiable
instruments. But drafts issued in connection with letters of credit are
negotiable instruments.
Private respondent PBCom presented the following documentary
evidence to prove petitioners credit availments and liabilities:
1) Promissory Note No. BNA 26218 dated May 21, 1982 in the sum
of P1,000,000.00 executed by MICO in favor of PBCom.
2) Promissory Note No. BNA 26219 dated May 21, 1982 in the sum
of P1,000,000.00 executed by MICO in favor of PBCom.
3) Promissory Note No. BNA 26253 dated May 25, 1982 in the sum
of P1,000,000.00 executed by MICO in favor of PBCom.
4) Promissory Note No. BNA 7458 dated May 21, 1982 in the sum
of P377,000.00 executed by MICO in favor of PBCom.
5) Promissory Note No. TA 094 dated July 29, 1980 in the sum
of P4,000.000.00 executed by MICO in favor of PBCom.
6) Irrevocable letter of credit No. L-16060 dated July 2,1981 issued
in favor of Perez Battery Center for account of Mico Metals Corp.
7) Draft dated July 2, 1981 in the sum of P348,000.00 issued by
Perez Battery Center, beneficiary of irrevocable Letter of Credit
No. No. L-16060 and accepted by MICO Metals corporation.
8) Letter dated July 2, 1981 from Perez Battery Center addressed to
private respondent PBCom showing that proceeds of the
irrevocable letter of credit No. L- 16060 was received by
Mr. Moises Rosete, representative of Perez Battery Center.
9) Trust receipt dated July 2, 1981 executed by MICO in favor
of PBCom covering the merchandise purchased under Letter of
Credit No. 16060.
10) Irrevocable letter of credit No. L-16334 dated September 22,
1981 issued in favor of Perez Battery Center for account of MICO
Metals Corp.
11) Draft dated September 22, 1981 in the sum
of P290,000.00 issued by Perez Battery Center and accepted by
MICO.
12) Letter dated September 17, 1981 from Perez Battery addressed
to PBCom showing that the proceeds of credit no. L-16344 was
received by Mr. Moises Rosete, a representative
of Perez Battery Center.
13) Trust Receipt dated September 22, 1981 executed by MICO in
favor of PBCom covering the merchandise under Letter of Credit
No. L-16334.
14) Irrevocable Letter of Credit no. 61873 dated November 10,
1981 for US$11,960.00 issued by PBCom in favor of TA JIH
Enterprises Co. Ltd., through its correspondent bank, Irving
Trust Company of Taipei, Taiwan.
15) Trust Receipt dated December 15, 9181 executed by MICO in
favor of PBCom showing that possession of the merchandise
covered by Irrevocable Letter of Credit no. 61873 was released
by PBCom to MICO.
16) Letters dated March 2, 1979 from MICO signed by its president,
Charles Lee, showing that MICO sought credit line
from PBCom in the form of loans, letters of credit and trust
receipt in the sum of P7,500,000.00.
17) Letter dated July 14, 1980 from MICO signed by its president,
Charles Lee, showing that MICO requested for additional financial
assistance in the sum of P4,000,000.00.
18) Board resolution dated March 6, 1979 of MICO authorizing
Charles Lee and Mariano Sio singly or jointly to act and sign for
and in behalf of MICO relative to the obtention of credit facilities
from PBCom.
19) Duly notarized Deed of Mortgage dated May 16, 1979 executed
by MICO in favor of PBCom over MICO s real properties covered
by TCT Nos. 11248 and 11250 located in Pasig.
20) Duly notarized Surety Agreement dated March 26, 1979
executed by herein petitioners Charles Lee, Mariano Sio, Alfonso
Yap, Richard Velasco and Chua Siok Suy in favor of PBCom.
21) Duly notarized Surety Agreement dated July 28, 1980 executed
by herein petitioners Charles Lee, Mariano Sio, Alfonso Yap,
Richard Velasco and Chua Siok Suy in favor of PBCom.
 22) Duly notarized certification dated July 28, 1980 issued by MICO
s corporate secretary, Mr. P.B. Barrera, attesting to the adoption
of a board resolution authorizing Chua Siok Suy to sign, for and
in behalf of MICO, all the necessary documents including
contracts, loan instruments and mortgages relative to
the obtention of various credit facilities from PBCom.
The above-cited documents presented have not merely created a prima
facie case but have actually proved the solidary obligation of MICO and the
petitioners, as sureties of MICO, in favor of respondent PBCom. While the
presumption found under the Negotiable Instruments Law may not
necessarily be applicable to trust receipts and letters of credit, the
presumption that the drafts drawn in connection with the letters of credit
have sufficient consideration. Under Section 3(r), Rule 131 of the Rules of
Court there is also a presumption that sufficient consideration was given in a
contract. Hence, petitioners should have presented credible evidence to rebut
that presumption as well as the evidence presented by private
respondent PBCom. The letters of credit show that the pertinent
materials/merchandise have been received by MICO. The drafts signed by the
beneficiary/suppliers in connection with the corresponding letters of credit
proved that said suppliers were paid by PBCom for the account of MICO. On
the other hand, aside from their bare denials petitioners did not present
sufficient and competent evidence to rebut the evidence of private
respondent PBCom. Petitioner MICO did not proffer a single piece of evidence,
apart from its bare denials, to support its allegation that the loan
transactions, real estate mortgage, letters of credit and trust receipts were
issued allegedly without any consideration.
Petitioners-sureties, for their part, presented the By-
Laws[34] of Mico Metals Corporation (MICO) to prove that only the president of
MICO is authorized to borrow money, arrange letters of credit, execute trust
receipts, and promissory notes and consequently, that the loan transactions,
letters of credit, promissory notes and trust receipts, most of which were
executed by Chua Siok Suy in representation of MICO were not allegedly
authorized and hence, are not binding upon MICO. A perusal of the By-Laws
of MICO, however, shows that the power to borrow money for the company
and issue mortgages, bonds, deeds of trust and negotiable instruments or
securities, secured by mortgages or pledges of property belonging to the
company is not confined solely to the president of the corporation. The Board
of Directors of MICO can also borrow money, arrange letters of
credit, execute trust receipts and promissory notes on behalf of the
corporation.[35] Significantly, this power of the Board of Directors according to
the by-laws of MICO, may be delegated to any of its standing committee,
officer or agent.[36] Hence, PBCom had every right to rely on the Certification
issued by MICO's corporate secretary, P.B. Barrera, that Chua Siok Suy was
duly authorized by its Board of Directors to borrow money and obtain credit
facilities in behalf of MICO from PBCom.
Petitioners-sureties also presented a letter of their counsel dated October
9, 1982, addressed to private respondent PBCom purportedly to show
that PBCom knew that Chua Siok Suy allegedly used the credit and good
names of the petitioner-sureties for his benefit, and that petitioner-
sureties were made to sign blank documents and were furnished copies of the
same. The letter, however, is in fact merely a reply of petitioners-sureties
counsel to PBComs demand for payment of MICOs obligations, and appears to
be an inconsequential piece of self-serving evidence.
In addition to the foregoing, MICO and petitioners-sureties cited the
decision of the trial court which stated that there was no proof that the
proceeds of the loans were ever delivered to MICO. Although the private
respondents witness, Mr. Gardiola, testified that the proceeds of the loans
were deposited in MICOs current account with PBCom, his testimony was
allegedly not supported by any bank record, note or memorandum. A careful
scrutiny of the record including the transcript of stenographic notes reveals,
however, that although private respondent PBCom was willing to produce the
corresponding account ledger showing that the proceeds of the loans were
credited to MICOs current account with PBCom, MICO in fact vigorously
objected to the presentation of said document. That point is shown in the
testimony of PBComs witness, Gardiola, thus:
Q: Now, all of these promissory note Exhibits I and J which as you
have said previously (sic) availed originally by
defendant Mico Metals Corp. sometime in 1979, my question
now is, do you know what happened to the proceeds of the
original availment?
A: Well, it was credited to the current account of Mico Metals Corp.
Q: Why did it was credited to the proceeds to the account
of Mico Metals Corp? (sic)
A: Well, that is our understanding.
ATTY. DURAN:
Your honor, may we be given a chance to object, the best
evidence is the so-called current account...
COURT:
Can you produce the ledger account?
A: Yes, Your Honor, I will bring.
COURT:
The ledger or record of the current account of Mico Metals
Corp.
A: Yes, Your Honor.
ATTY. ACEJAS:
Your Honor, these are a confidential record, and they might not
be disclosed without the consent of the person concerned. (sic)
ATTY. SANTOS:
Well, you are the one who is asking that.
ATTY. DURAN:
Your Honor, Im precisely want to show for the ... (sic)
COURT:
But the amount covered by the current account of
defendant Mico Metals Corp. is the subject matter of this case.
xxx xxx xxx
Q: Are those availments were release? (sic)
A: Yes, Your Honor, to the defendant corporation.
Q: By what means?
A: By the credit to their current account.
 ATTY. ACEJAS:
We object to that, your Honor, because the disclose is the
secrecy of the bank deposit. (sic)
xxx xxx xxx
Q: Before the recess Mr. Gardiola, you stated that the proceeds of
the three (3) promissory notes were credited to the accounts
of Mico Metals Corporation, now do you know what kind of
current account was that which you are referring to?
ATTY. ACEJAS:
Objection your Honor, that is the disclose of the deposit of
defendant Mico Metals Corporation and it cannot disclosed
without the authority of the depositor. (sic)[37]
That proceeds of the loans which were originally availed of in 1979 were
delivered to MICO is bolstered by the fact that more than a year later,
specifically on July 14, 1980, MICO through its president, petitioner-surety
Charles Lee, requested for an additional loan of Four Million Pesos
(P4,000,000.00) from PBCom. The fact that MICO was requesting for an
additional loan implied that it has already availed of earlier loans
from PBCom.
Petitioners allege that PBCom presented no evidence that it remitted
payments to cover the domestic and foreign letters of credit. Petitioners
placed much reliance on the erroneous decision of the trial court which stated
that private respondent PBCom allegedly failed to prove that it actually made
payments under the letters of credit since the bank drafts presented as
evidence show that they were made in favor of the Bank of Taiwan and First
Commercial Bank.
Petitioners allegations are untenable.
Modern letters of credit are usually not made between natural persons.
They involve bank to bank transactions. Historically, the letter of credit was
developed to facilitate the sale of goods between, distant and unfamiliar
buyers and sellers. It was an arrangement under which a bank, whose credit
was acceptable to the seller, would at the instance of the buyer agree to pay
drafts drawn on it by the seller, provided that certain documents are
presented such as bills of lading accompanied the corresponding drafts.
Expansion in the use of letters of credit was a natural development in
commercial banking.[38] Parties to a commercial letter of credit include (a) the
buyer or the importer, (b) the seller, also referred to as beneficiary, (c) the
opening bank which is usually the buyers bank which actually issues the letter
of credit, (d) the notifying bank which is the correspondent bank of the
opening bank through which it advises the beneficiary of the letter of credit,
(e) negotiating bank which is usually any bank in the city of the beneficiary.
The services of the notifying bank must always be utilized if the letter of
credit is to be advised to the beneficiary through cable, (f) the paying bank
which buys or discounts the drafts contemplated by the letter of credit, if
such draft is to be drawn on the opening bank or on another designated bank
not in the city of the beneficiary. As a rule, whenever the facilities of the
opening bank are used, the beneficiary is supposed to present his drafts to
the notifying bank for negotiation and (g) the confirming bank which, upon
the request of the beneficiary, confirms the letter of credit issued by the
opening bank.
From the foregoing, it is clear that letters of credit, being usually bank to
bank transactions, involve more than just one bank. Consequently, there is
nothing unusual in the fact that the drafts presented in evidence by
respondent bank were not made payable to PBCom. As explained by
respondent bank, a draft was drawn on the Bank of Taiwan by
Ta Jih Enterprises Co., Ltd. of Taiwan, supplier of the goods covered by the
foreign letter of credit. Having paid the supplier, the Bank of Taiwan then
presented the bank draft for reimbursement by PBComs correspondent bank
in Taiwan, the Irving Trust Company which explains the reason why on its
face, the draft was made payable to the Bank of Taiwan. Irving Trust
Company accepted and endorsed the draft to PBCom. The draft was later
transmitted to PBCom to support the latters claim for payment from MICO.
MICO accepted the draft upon presentment and negotiated it to PBCom.
Petitioners further aver that MICO never requested that legal possession
of the merchandise be transferred to PBCom by way of trust receipts.
Petitioners insist that assuming that MICO transferred possession of the
merchandise to PBCom by way of trust receipts, the same would be illegal
since PBCom, being a banking institution, is not authorized by law to engage
in the business of importing and selling goods.
A trust receipt is considered as a security transaction intended to aid in
financing importers and retail dealers who do not have sufficient funds or
resources to finance the importation or purchase of merchandise, and who
may not be able to acquire credit except through utilization, as collateral of
the merchandise imported or purchased.[39] A trust receipt, therefor, is a
document of security pursuant to which a bank acquires a security interest in
the goods under trust receipt. Under a letter of credit-trust receipt
arrangement, a bank extends a loan covered by a letter of credit, with the
trust receipt as a security for the loan. The transaction involves a loan feature
represented by a letter of credit, and a security feature which is in the
covering trust receipt which secures an indebtedness.
Petitioners averments with regard to the second issue are no less
incredulous. Petitioners contend that the letters of credit, surety agreements
and loan transactions did not ripen into valid and binding contracts
since no part of the proceeds of the loan transactions were delivered to MICO
or to any of the petitioners-sureties. Petitioners-sureties allege that
Chua Siok Suy was the beneficiary of the proceeds of the loans and that the
latter made them sign the surety agreements in blank. Thus, they maintain
that they should not be held accountable for any liability that might
arise therefrom.
It has not escaped our notice that it was petitioner-surety Charles Lee,
as president of MICO Metals Corporation, who first requested for a
discounting loan of Three Million Pesos (P3,000,000.00) from PBCom as
evidenced by his letter dated March 2, 1979.[40] On the same day, Charles
Lee, as President of MICO, requested for a Letter of Credit and Trust Receipt
line in the sum of Three Million Pesos (P3,000,000.00).[41] Still, on the same
day, Charles Lee again as President of MICO, wrote another letter to PBCOM
requesting for a financing line in the sum of One Million Five Hundred
Thousand Pesos (P1,500,000.00) to be used exclusively as marginal deposit
for the opening of MICOs foreign and local letters of credit
with PBCom.[42] More than a year later, it was also Charles Lee, again in his
capacity as president of MICO, who asked for an additional loan in the sum of
Four Million Pesos (P4,000,000.00). The claim therefore of petitioners that it
was Chua Siok Suy, in connivance with the respondent PBCom, who applied
for and obtained the loan transactions and letters of credit strains credulity
considering that even the Deed of the Real Estate Mortgage in favor
of PBCom was executed by petitioner-surety Mariano Sio in his capacity as
general manager of MICO[43] to secure the loan accommodations obtained by
MICO from PBCom.
Petitioners-sureties allege that they were made to sign the surety
agreements in blank by Chua Siok Suy. Petitioner Alfonso Yap, the corporate
treasurer, for his part testified that he signed booklets of checks, surety
agreements and promissory notes in blank; that he signed the documents in
blank despite his misgivings since Chua Siok Suy assured him that the
transaction can easily be taken cared of since Chua Siok Suy personally knew
the Chairman of the Board of PBCom; that he was not receiving salary as
treasurer of Mico Metals and since Chua Siok Suy had a direct hand in the
management of Malayan Sales Corporation, of which Yap is an employee, he
(Yap) signed the documents in blank as consideration for his continued
employment in Malayan Sales Corporation. Petitioner Antonio Co testified that
he worked as office manager for MICO from 1978-1982. As office manager,
he was the one in charge of transacting business like purchasing, selling and
paying the salary of the employees. He was also in charge of the handling of
documents pertaining to surety agreements, trust receipts and promissory
notes;[44] that when he first joined MICO Metals Corporation, he was able to
read the by-laws of the corporation and he came to know that only the
chairman and the president can borrow money in behalf of the corporation;
that Chua Siok Suy once called him up and told him to secure an invoice so
that a credit line can be opened in the bank with a local letter of credit; that
when the invoice was secured, he (Co) brought it together with the
application for a credit line to Chua Siok Suy, and that he questioned the
authority of Chua Siok Suy pointing out that he (Co) is not empowered to
sign the document inasmuch as only the latter, as president, was authorized
to do so. However, Chua Siok Suy allegedly just said that he had already
talked with the Chairman of the Board of PBCom; and that
Chua Siok Suy reportedly said that he needed the money to finance a project
that he had with the Taipei government. Co also testified that he knew of the
application for domestic letter of credit in the sum of Three Hundred Forty-
Eight Thousand Pesos (P348,000.00); and that a certain Moises Rosete was
authorized to claim the check covering the Three Hundred Forty-Eight
Thousand Pesos (P348,000.00) from PBCom; and that after claiming the
check Rosete brought it to Perez Battery Center for indorsement after which
the same was deposited to the personal account of Chua Siok Suy.[45]
We consider as incredible and unacceptable the claim of petitioners-
sureties that the Board of Directors of MICO was so careless about the
business affairs of MICO as well as about their own personal reputation and
money that they simply relied on the say so of Chua Siok Suy on matters
involving millions of pesos. Under Section 3 (d), Rule 131 of the Rules of
Court, it is presumed that a person takes ordinary care of his concerns.
Hence, the natural presumption is that one does not sign a document without
first informing himself of its contents and consequences. Said presumption
acquires greater force in the case at bar where not only one but several
documents were executed at different times and at different places by the
petitioner sureties and Chua Siok Suy as president of MICO.
MICO and herein petitioners-sureties insist that Chua Siok Suy was not
duly authorized to negotiate for loans in behalf of MICO from PBCom.
Petitioners allegation, however, is belied by the July 28, 1980 Certification
issued by the corporate secretary of PBCom, Atty. P.B. Barrera,
that MICO's Board of Directors gave Chua Siok Suy full authority to negotiate
for loans in behalf of MICO with PBCom. In fact, the Certification even
provided that Chua Siok Suys authority continues until and unless PBCom is
notified in writing of the withdrawal thereof by the said Board. Notably,
petitioners failed to contest the genuineness of the said Certification which is
notarized and to show any written proof of any alleged withdrawal of the said
authority given by the Board of Directors to Chua Siok Suy to negotiate for
loans in behalf of MICO.
There was no need for PBCom to personally inform the petitioners-
sureties individually about the terms of the loans, letters of credit and other
loan documents. The petitioners-sureties themselves happen to comprise the
Board of Directors of MICO, which gave full authority to Chua Siok Suy to
negotiate for loans in behalf of MICO. Notice to MICOs authorized
representative, Chua Siok Suy, was notice to MICO. The Certification issued
by PBComs corporate secretary, Atty. P.B. Barrera, indicated that
Chua Siok Suy had full authority to negotiate and sign the necessary
documents, in behalf of MICO for loans from PBCom.
Respondent PBCom therefore had the right to rely on the said notarized
Certification of MICOs Corporate Secretary.
Anent petitioners-sureties contention that they obtained no consideration
whatsoever on the surety agreements, we need only point out that the
consideration for the sureties is the very consideration for the principal
obligor, MICO, in the contracts of loan. In the case of Willex Plastic Industries
Corporation vs. Court of Appeals,[46] we ruled that the consideration
necessary to support a surety obligation need not pass directly to the surety,
a consideration moving to the principal alone being sufficient. For a guarantor
or surety is bound by the same consideration that makes the contract
effective between the parties thereto. It is not necessary that a guarantor or
surety should receive any part or benefit, if such there be, accruing to his
principal.
Petitioners placed too much reliance on the rule in evidence that the
burden of proof does not shift whereas the burden of going forward with the
evidence does pass from party to party. It is true that said rule is not
changed by the fact that the party having the burden of proof has introduced
evidence which established prima facie his assertion because such evidence
does not shift the burden of proof; it merely puts the adversary to the
necessity of producing evidence to meet the prima facie case. Where the
defendant merely denies, either generally or otherwise, the allegations of the
plaintiffs pleadings, the burden of proof continues to rest on the plaintiff
throughout the trial and does not shift to the defendant until the plaintiffs
evidence has been presented and duly offered. The defendant has then no
burden except to produce evidence sufficient to create a state of equipoise
between his proof and that of the plaintiff to defeat the latter, whereas the
plaintiff has the burden, as in the beginning, of establishing his case by a
preponderance of evidence.[47] But where the defendant has failed to present
and marshall evidence sufficient to create a state of equipoise between his
proof and that of plaintiff, the prima facie case presented by the plaintiff will
prevail.
In the case at bar, respondent PBCom, as plaintiff in the trial court, has
in fact presented sufficient documentary and testimonial evidence that proved
by preponderance of evidence its subject collection case against the
defendants who are the petitioners herein. In view of all the foregoing, the
Court of Appeals committed no reversible error in its appealed Decision.
WHEREFORE, the assailed Decision of the Court of Appeals in CA-G.R.
CV No. 27480 entitled, Philippine Bank of Communications vs. Mico Metals
Corporation, Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard
Velasco and Alfonso Co, is AFFIRMED in toto.
Costs against the petitioners.
SO ORDERED.
Case Digest:
A trust receipt is considered as a security transaction intended to aid
in financing importers and retail dealers who do not have sufficient
funds or resources to finance the importation or purchase of
merchandise, and who may not be able to acquire credit except
through utilization, as collateral of the merchandise imported or
purchased.
Facts: Charles Lee, as President of MICO wrote private respondent Philippine
Bank of Communications (PBCom) requesting for a grant of a discounting
loan/credit line in the sum of Three Million Pesos (P3,000,000.00) for the
purpose of carrying out MICO’s line of business as well as to maintain its
volume of business. On the same day, Charles Lee requested for another
discounting loan/credit line of Three Million Pesos (P3,000,000.00)
from PBCom for the purpose of opening letters of credit and trust receipts.
nother loan of One Million Pesos (P1,000,000.00) was availed of by MICO
from PBCom which was likewise later on renewed. Charles Lee,
Chua Siok Suy, Mariano Sio, Alfonso Yap and Richard Velasco, in their
personal capacities executed a Surety Agreement in favor of PBComwhereby
the petitioners jointly and severally, guaranteed the prompt payment on due
dates or at maturity of overdrafts, promissory notes, discounts, drafts, letters
of credit, bills of exchange, trust receipts, and other obligations of every kind
and nature, for which MICO may be held accountable by PBCom. Charles
Lee, in his capacity as president of MICO, wrote PBCom and applied for an
additional loan in the sum of Four Million Pesos (P4,000,000.00). The loan
was intended for the expansion and modernization of the company’s
machineries. Upon approval of the said application for loan, MICO availed of
the additional loan of Four Million Pesos (P4,000,000.00).
To secure the trust receipts transactions, MICO and Lee executed a real
estate mortgage in favor of PBCOM over several properties it owns. Upon
maturity of all credit availments obtained by MICO from PBCom, the latter
made a demand for payment.[For failure of petitioner MICO to pay the
obligations incurred despite repeated demands,
PBCom extrajudicially foreclosed MICO’s real estate mortgage and sold the
said mortgaged properties in a public auction sale. Lee contends that the
letters of credit, surety agreements and loan transactions did not ripen into
valid and binding contracts since no part of the proceeds of the loan
transactions were delivered to MICO or to any of the petitioners-sureties.
Petitioners-sureties allege that Chua Siok Suy was the beneficiary of the
proceeds of the loans and that the latter made them sign the surety
agreements in blank. Thus, they maintain that they should not be held
accountable for any liability that might arise therefrom.
Issues:
1) whether or not the proceeds of the loans and letters of credit transactions
were ever delivered to MICO
2) whether or not the individual petitioners, as sureties, may be held liable
under the two (2) Surety Agreements
Held: 1) The letter of credita, as well as the security agreements, have not
merely created a prima facie case but have actually proved the solidary
obligation of MICO and the petitioners, as sureties of MICO, in favor of
respondent PBCom. While the presumption found under the Negotiable
Instruments Law may not necessarily be applicable to trust receipts and
letters of credit, the presumption that the drafts drawn in connection with the
letters of credit have sufficient consideration. Under Section 3(r), Rule 131
of the Rules of Court there is also a presumption that sufficient
consideration was given in a contract.
Hence, petitioners should have presented credible evidence to rebut that
presumption as well as the evidence presented by private respondent PBCom.
The letters of credit show that the pertinent materials/merchandise have
been received by MICO. The drafts signed by the beneficiary/suppliers in
connection with the corresponding letters of credit proved that said suppliers
were paid by PBCom for the account of MICO. On the other hand, aside from
their bare denials petitioners did not present sufficient and competent
evidence to rebut the evidence of private respondent PBCom.
2) A perusal of the By-Laws of MICO, however, shows that the power to
borrow money for the company and issue mortgages, bonds, deeds of trust
and negotiable instruments or securities, secured by mortgages or pledges of
property belonging to the company is not confined solely to the president of
the corporation. The Board of Directors of MICO can also borrow money,
arrange letters of credit, execute trust receipts and promissory notes on
behalf of the corporation.[35] Significantly, this power of the Board of
Directors according to the by-laws of MICO, may be delegated to any of its
standing committee, officer or agent.[36] Hence, PBCom had every right to
rely on the Certification issued by MICO’s corporate secretary, P.B. Barrera,
that Chua Siok Suy was duly authorized by its Board of Directors to borrow
money and obtain credit facilities in behalf of MICO from PBCom.

3. Colinares v. Court of Appeals, 339 SCRA 609 (2000)
In 1979 Melvin Colinares and Lordino Veloso (hereafter Petitioners) were
contracted for a consideration of P40,000 by the Carmelite Sisters of Cagayan
de Oro City to renovate the latters convent at Camaman-an, Cagayan de Oro
City. On 30 October 1979, Petitioners obtained 5,376 SF Solatone acoustical
board 2x4x, 300 SF tanguile wood tiles 12x12, 260 SF Marcelo economy tiles
and 2 gallons UMYLIN cement adhesive from CM Builders Centre for the
construction project.[1] The following day, 31 October 1979, Petitioners
applied for a commercial letter of credit[2] with the Philippine Banking
Corporation, Cagayan de Oro City branch (hereafter PBC) in favor of CM
Builders Centre. PBC approved the letter of credit[3] for P22,389.80 to cover
the full invoice value of the goods. Petitioners signed a pro-forma trust
receipt[4] as security. The loan was due on 29 January 1980.
On 31 October 1979, PBC debited P6,720 from Petitioners marginal
deposit as partial payment of the loan.[5] On 7 May 1980, PBC wrote[6] to
Petitioners demanding that the amount be paid within seven days from
notice. Instead of complying with PBCs demand, Veloso confessed that they
lost P19,195.83 in the Carmelite Monastery Project and requested for a grace
period of until 15 June 1980 to settle the account.[7]PBC sent a new demand
letter[8]to Petitioners on 16 October 1980 and informed them that their
outstanding balance as of 17 November 1979 was P20,824.40 exclusive of
attorneys fees of 25%.[9]
On 2 December 1980, Petitioners proposed[10] that the terms of payment
of the loan be modified as follows: P2,000 on or before 3 December 1980,
and P1,000 per month starting 31 January 1980 until the account is fully
paid. Pending approval of the proposal, Petitioners paid P1,000 to PBC on 4
December 1980,[11] and thereafter P500 on 11 February 1981,[12] 16 March
1981,[13] and 20 April 1981.[14] Concurrently with the separate demand for
attorneys fees by PBCs legal counsel, PBC continued to demand payment of
the balance.[15] On 14 January 1983, Petitioners were charged with the
violation of P.D. No. 115 (Trust Receipts Law) in relation to Article 315 of the
Revised Penal Code in Information which was filed with Branch 18, Regional
Trial Court of Cagayan de Oro City. The accusatory portion of the Information
reads: That on or about October 31, 1979, in the City of Cagayan de Oro,
Philippines, and within the jurisdiction of this Honorable Court, the above-
named accused entered into a trust receipt agreement with the Philippine
Banking Corporation at Cagayan de Oro City wherein the accused, as
entrustee, received from the entruster the following goods to wit:
Solatone Acoustical board
Tanguile Wood Tiles
Marcelo Cement Tiles
Umylin Cement Adhesive
with a total value of P22,389.80, with the obligation on the part of the
accused-entrustee to hold the aforesaid items in trust for the entruster
and/or to sell on cash basis or otherwise dispose of the said items and to turn
over to the entruster the proceeds of the sale of said goods or if there be no
sale to return said items to the entruster on or before January 29, 1980 but
that the said accused after receipt of the goods, with intent to defraud and
cause damage to the entruster, conspiring, confederating together and
mutually helping one another, did then and there wilfully, unlawfully and
feloniously fail and refuse to remit the proceeds of the sale of the goods to
the entruster despite repeated demands but instead converted,
misappropriated and misapplied the proceeds to their own personal use,
benefit and gain, to the damage and prejudice of the Philippine Banking
Corporation, in the aforesaid sum of P22,389.80, Philippine Currency.
Contrary to PD 115 in relation to Article 315 of the Revised Penal Code.[16]
The case was docketed as Criminal Case No. 1390.
During trial, petitioner Veloso insisted that the transaction was a clean
loan as per verbal guarantee of Cayo Garcia Tuiza, PBCs former manager. He
and petitioner Colinares signed the documents without reading the fine print,
only learning of the trust receipt implication much later. When he brought this
to the attention of PBC, Mr. Tuiza assured him that the trust receipt was a
mere formality.[17]
On 7 July 1986, the trial court promulgated its decision [18] convicting
Petitioners of estafa for violating P.D. No. 115 in relation to Article 315 of the
Revised Penal Code and sentencing each of them to suffer imprisonment of
two years and one day of prision correccional as minimum to six years and
one day of prision mayor as maximum, and to solidarily indemnify PBC the
amount of P20,824.44, with legal interest from 29 January 1980, 12 %
penalty charge per annum, 25% of the sums due as attorneys fees, and
costs.
The trial court considered the transaction between PBC and Petitioners
as a trust receipt transaction under Section 4, P.D. No. 115. It considered
Petitioners use of the goods in their Carmelite monastery project an act of
disposing as contemplated under Section 13, P.D. No. 115, and treated the
charge invoice[19] for goods issued by CM Builders Centre as a document
within the meaning of Section 3 thereof. It concluded that the failure of
Petitioners to turn over the amount they owed to PBC constituted estafa.
Petitioners appealed from the judgment to the Court of Appeals which was
docketed as CA-G.R. CR No. 05408. Petitioners asserted therein that the trial
court erred in ruling that they violated the Trust Receipt Law, and in holding
them criminally liable therefor. In the alternative, they contend that at most
they can only be made civilly liable for payment of the loan. In its
decision[20] 6 March 1989, the Court of Appeals modified the judgment of the
trial court by increasing the penalty to six years and one day of prision
mayor as minimum to fourteen years eight months and one day of reclusion
temporal as maximum. It held that the documentary evidence of the
prosecution prevails over Velosos testimony, discredited Petitioners claim that
the documents they signed were in blank, and disbelieved that they were
coerced into signing them.
On 25 March 1989, Petitioners filed a Motion for New
Trial/Reconsideration[21] alleging that the Disclosure Statement on
Loan/Credit Transaction[22] (hereafter Disclosure Statement) signed by them
and Tuiza was suppressed by PBC during the trial. That document would have
proved that the transaction was indeed a loan as it bears a 14% interest as
opposed to the trust receipt which does not at all bear any
interest. Petitioners further maintained that when PBC allowed them to pay in
installment, the agreement was novated and a creditor-debtor relationship
was created. In its resolution[23]of 16 October 1989 the Court of Appeals
denied the Motion for New Trial/Reconsideration because the alleged newly
discovered evidence was actually forgotten evidence already in existence
during the trial, and would not alter the result of the case.
Hence, Petitioners filed with us the petition in this case on 16
November 1989. They raised the following issues:
I. WHETHER OR NOT THE DENIAL OF THE MOTION FOR NEW TRIAL ON THE
GROUND OF NEWLY DISCOVERED EVIDENCE, NAMELY, DISCLOSURE ON
LOAN/CREDIT TRANSACTION, WHICH IF INTRODUCED AND ADMITTED,
WOULD CHANGE THE JUDGMENT, DOES NOT CONSTITUTE A DENIAL OF DUE
PROCESS.
2. ASSUMING THERE WAS A VALID TRUST RECEIPT, WHETHER OR NOT THE
ACCUSED WERE PROPERLY CHARGED, TRIED AND CONVICTED FOR
VIOLATION OF SEC. 13, PD NO. 115 IN RELATION TO ARTICLE 315
PARAGRAPH (I) (B) NOTWITHSTANDING THE NOVATION OF THE SO-CALLED
TRUST RECEIPT CONVERTING THE TRUSTOR-TRUSTEE RELATIONSHIP TO
CREDITOR-DEBTOR SITUATION.
In its Comment of 22 January 1990, the Office of the Solicitor General
urged us to deny the petition for lack of merit.
On 28 February 1990 Petitioners filed a Motion to Dismiss the case on
the ground that they had already fully paid PBC on 2 February 1990 the
amount of P70,000 for the balance of the loan, including interest and other
charges, as evidenced by the different receipts issued by PBC,[24] and that the
PBC executed an Affidavit of desistance.[25]
We required the Solicitor General to comment on the Motion to Dismiss.
In its Comment of 30 July 1990, the Solicitor General opined that
payment of the loan was akin to a voluntary surrender or plea of guilty which
merely serves to mitigate Petitioners culpability, but does not in any way
extinguish their criminal liability.
In the Resolution of 13 August 1990, we gave due course to the Petition
and required the parties to file their respective memoranda.
The parties subsequently filed their respective memoranda.
It was only on 18 May 1999 when this case was assigned to
the ponente. Thereafter, we required the parties to move in the premises and
for Petitioners to manifest if they are still interested in the further prosecution
of this case and inform us of their present whereabouts and whether their bail
bonds are still valid.
Petitioners submitted their Compliance.
The core issues raised in the petition are the denial by the Court of
Appeals of Petitioners Motion for New Trial and the true nature of the contract
between Petitioners and the PBC. As to the latter, Petitioners assert that it
was an ordinary loan, not a trust receipt agreement under the Trust Receipts
Law.
The grant or denial of a motion for new trial rests upon the discretion of
the judge. New trial may be granted if: (1) errors of law or irregularities have
been committed during the trial prejudicial to the substantial rights of the
accused; or (2) new and material evidence has been discovered which the
accused could not with reasonable diligence have discovered and produced at
the trial, and which, if introduced and admitted, would probably change the
judgment.[26]
For newly discovered evidence to be a ground for new trial, such
evidence must be (1) discovered after trial; (2) could not have been
discovered and produced at the trial even with the exercise of reasonable
diligence; and (3) material, not merely cumulative, corroborative, or
impeaching, and of such weight that, if admitted, would probably change the
judgment.[27] It is essential that the offering party exercised reasonable
diligence in seeking to locate the evidence before or during trial but
nonetheless failed to secure it.[28]
We find no indication in the pleadings that the Disclosure Statement is a
newly discovered evidence.
Petitioners could not have been unaware that the two-page document
exists. The Disclosure Statement itself states, NOTICE TO BORROWER: YOU
ARE ENTITLED TO A COPY OF THIS PAPER WHICH YOU SHALL
SIGN.[29] Assuming Petitioners copy was then unavailable, they could have
compelled its production in court,[30] which they never did. Petitioners have
miserably failed to establish the second requisite of the rule on newly
discovered evidence.
Petitioners themselves admitted that they searched again their voluminous
records, meticulously and patiently, until they discovered this new and
material evidence only upon learning of the Court of Appeals decision and
after they were shocked by the penalty imposed.[31] Clearly, the alleged
newly discovered evidence is mere forgotten evidence that jurisprudence
excludes as a ground for new trial.[32]
However, the second issue should be resolved in favor of Petitioners.
Section 4, P.D. No. 115, the Trust Receipts Law, defines a trust
receipt transaction as any transaction by and between a person referred to as
the entruster, and another person referred to as the entrustee, whereby the
entruster who owns or holds absolute title or security interest over certain
specified goods, documents or instruments, releases the same to the
possession of the entrustee upon the latters execution and delivery to the
entruster of a signed document called a trust receipt wherein the entrustee
binds himself to hold the designated goods, documents or instruments with
the obligation to turn over to the entruster the proceeds thereof to the extent
of the amount owing to the entruster or as appears in the trust receipt or the
goods, documents or instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms and conditions specified
in the trust receipt.
 There are two possible situations in a trust receipt transaction. The first
is covered by the provision which refers to money received under the
obligation involving the duty to deliver it (entregarla) to the owner of the
merchandise sold. The second is covered by the provision which refers to
merchandise received under the obligation to return it (devolvera) to the
owner.[33]
Failure of the entrustee to turn over the proceeds of the sale of the
goods, covered by the trust receipt to the entruster or to return said goods if
they were not disposed of in accordance with the terms of the trust receipt
shall be punishable as estafa under Article 315 (1) of the Revised Penal
Code,[34] without need of proving intent to defraud. A thorough examination
of the facts obtaining in the case at bar reveals that the transaction intended
by the parties was a simple loan, not a trust receipt agreement. Petitioners
received the merchandise from CM Builders Centre on 30 October 1979. On
that day, ownership over the merchandise was already transferred to
Petitioners who were to use the materials for their construction project. It
was only a day later, 31 October 1979, that they went to the bank to apply
for a loan to pay for the merchandise.
This situation belies what normally obtains in a pure trust receipt
transaction where goods are owned by the bank and only released to the
importer in trust subsequent to the grant of the loan. The bank acquires a
security interest in the goods as holder of a security title for the advances it
had made to the entrustee.[35] The ownership of the merchandise continues
to be vested in the person who had 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.[36] To secure that the bank shall be paid, it takes full
title to the goods at the very beginning and continues to hold that title as his
indispensable security until the goods are sold and the vendee is called upon
to pay for them; hence, the importer has never owned the goods and is not
able to deliver possession.[37] In a certain manner, trust receipts partake of
the nature of a conditional sale where the importer becomes absolute owner
of the imported merchandise as soon as he has paid its price.[38]
Trust receipt transactions are intended to aid in financing importers and
retail dealers who do not have sufficient funds or resources to finance the
importation or purchase of merchandise, and who may not be able to acquire
credit except through utilization, as collateral, of the merchandise imported or
purchased.[39] The antecedent acts in a trust receipt transaction consist of the
application and approval of the letter of credit, the making of the marginal
deposit and the effective importation of goods through the efforts of the
importer.[40]
PBC attempted to cover up the true delivery date of the merchandise,
yet the trial court took notice even though it failed to attach any significance
to such fact in the judgment. Despite the Court of Appeals contrary view that
the goods were delivered to Petitioners previous to the execution of the letter
of credit and trust receipt, we find that the records of the case speak volubly
and this fact remains uncontroverted. It is not uncommon for us to peruse
through the transcript of the stenographic notes of the proceedings to be
satisfied that the records of the case do support the conclusions of the trial
court.[41] After such perusal Grego Mutia, PBCs credit investigator, admitted
thus:
ATTY. CABANLET: (continuing)
Q Do you know if the goods subject matter of this letter of credit and trust
receipt agreement were received by the accused?
A Yes, sir
Q Do you have evidence to show that these goods subject matter of this letter
of credit and trust receipt were delivered to the accused?
A Yes, sir.
Q I am showing to you this charge invoice, are you referring to this document?
A Yes, sir.
xxx
Q What is the date of the charge invoice?
A October 31, 1979.
COURT:
Make it of record as appearing in Exhibit D, the zero in 30 has been
superimposed with numeral 1.[42]
During the cross and re-direct examinations he also impliedly admitted that
the transaction was indeed a loan. Thus:
Q In short the amount stated in your Exhibit C, the trust receipt was a loan to
the accused you admit that?
A Because in the bank the loan is considered part of the loan.
xxx
RE-DIRECT BY ATTY. CABANLET:
ATTY. CABANLET (to the witness)
Q What do you understand by loan when you were asked?
A Loan is a promise of a borrower from the value received. The borrower will
pay the bank on a certain specified date with interest[43]
Such statement is akin to an admission against interest binding upon PBC.
Petitioner Velosos claim that they were made to believe that the transaction
was a loan was also not denied by PBC. He declared:
Q Testimony was given here that that was covered by trust receipt. In short it
was a special kind of loan. What can you say as to that?
A I dont think that would be a trust receipt because we were made to
understand by the manager who encouraged us to avail of their facilities
that they will be granting us a loan[44]
PBC could have presented its former bank manager, Cayo Garcia Tuiza, who
contracted with Petitioners, to refute Velosos testimony, yet it only presented
credit investigator Grego Mutia. Nowhere from Mutias testimony can it be
gleaned that PBC represented to Petitioners that the transaction they were
entering into was not a pure loan but had trust receipt implications.
The Trust Receipts Law does not seek to enforce payment of the loan,
rather it punishes the dishonesty and abuse of confidence in the handling of
money or goods to the prejudice of another regardless of whether the latter is
the owner.[45] Here, it is crystal clear that on the part of Petitioners there was
neither dishonesty nor abuse of confidence in the handling of money to the
prejudice of PBC. Petitioners continually endeavored to meet their obligations,
as shown by several receipts issued by PBC acknowledging payment of the
loan.
The Information charges Petitioners with intent to defraud and
misappropriating the money for their personal use. The mala prohibita nature
of the alleged offense notwithstanding, intent as a state of mind was not
proved to be present in Petitioners situation.Petitioners employed no artifice
in dealing with PBC and never did they evade payment of their obligation nor
attempt to abscond. Instead, Petitioners sought favorable terms precisely to
meet their obligation. Also noteworthy is the fact that Petitioners are not
importers acquiring the goods for re-sale, contrary to the express provision
embodied in the trust receipt. They are contractors who obtained the fungible
goods for their construction project. At no time did title over the construction
materials pass to the bank, but directly to the Petitioners from CM Builders
Centre. This impresses upon the trust receipt in question vagueness and
ambiguity, which should not be the basis for criminal prosecution in the event
of violation of its provisions.[46]
The practice of banks of making borrowers sign trust receipts to facilitate
collection of loans and place them under the threats of criminal prosecution
should they be unable to pay it may be unjust and inequitable, if not
reprehensible. Such agreements are contracts of adhesion which borrowers
have no option but to sign lest their loan be disapproved. The resort to this
scheme leaves poor and hapless borrowers at the mercy of banks, and is
prone to misinterpretation, as had happened in this case. Eventually, PBC
showed its true colors and admitted that it was only after collection of the
money, as manifested by its Affidavit of Desistance.
WHEREFORE, the challenged Decision of 6 March 1989 and the
Resolution of 16 October 1989 of the Court of Appeals in CA-GR. No. 05408
are REVERSED and SET ASIDE. Petitioners are hereby ACQUITTED of the
crime charged, i.e., for violation of P.D. No. 115 in relation to Article 315 of
the Revised Penal Code. No costs. SO ORDERED.
Case Digest:
The ownership of the merchandise continues to be vested in the person who
had 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.
Facts: Melvin Colinares and Lordino Veloso (hereafter Petitioners) were
contracted for a consideration of P40,000 by the Carmelite Sisters of Cagayan
de Oro City to renovate the latter’s convent at Camaman-an, Cagayan de Oro
City. Colinares applied for a commercial letter of credit with the Philippine
Banking Corporation, Cagayan de Oro City branch (hereafter PBC) in favor of
CM Builders Centre. PBC approved the letter of credit for P22,389.80 to
cover the full invoice value of the goods. Petitioners signed a pro-forma trust
receipt as security.
PBC debited P6,720 from Petitioners’ marginal deposit as partial payment of
the loan. After the initial payment, the spouses defaulted. PBC wrote to
Petitioners demanding that the amount be paid within seven days from
notice. Instead of complying with PBC’s demand, Veloso confessed that they
lost P19,195.83 in the Carmelite Monastery Project and requested for a grace
period of until 15 June 1980 to settle the account. Colinares proposed that
the terms of payment of the loan be modified P2,000 on or before 3
December 1980, and P1,000 per month . Pending approval of the proposal,
Petitioners paid P1,000 to PBC on 4 December 1980, and thereafter P500 on
11 February 1981, 16 March 1981, and 20 April 1981. Concurrently with the
separate demand for attorney’s fees by PBC’s legal counsel, PBC continued to
demand payment of the balance. On 14 January 1983, Petitioners were
charged with the violation of P.D. No. 115 (Trust Receipts Law) in relation to
Article 315 of the Revised Penal Code
During trial, petitioner Veloso insisted that the transaction was a “clean loan”
as per verbal guarantee of Cayo Garcia Tuiza, PBC’s former manager. He and
petitioner Colinares signed the documents without reading the fine print, only
learning of the trust receipt implication much later. When he brought this to
the attention of PBC, Mr. Tuiza assured him that the trust receipt was a mere
formality. The Trust Receipts Law does not seek to enforce payment of the
loan, rather it punishes the dishonesty and abuse of confidence in the
handling of money or goods to the prejudice of another regardless of whether
the latter is the owner. Here, it is crystal clear that on the part of Petitioners
there was neither dishonesty nor abuse of confidence in the handling of
money to the prejudice of PBC. Petitioners continually endeavored to meet
their obligations, as shown by several receipts issued by PBC acknowledging
payment of the loan.
Issue: Whether or not the transaction of Colinares falls within the ambit of the Law on
Trust Receipt
Held: Colinares received the merchandise from CM Builders Centre on 30
October 1979. On that day, ownership over the merchandise was already
transferred to Petitioners who were to use the materials for their construction
project. It was only a day later, 31 October 1979, that they went to the bank
to apply for a loan to pay for the merchandise. This situation belies what
normally obtains in a pure trust receipt transaction where goods are owned
by the bank and only released to the importer in trust subsequent to the
grant of the loan.
The bank acquires a “security interest” in the goods as holder of a security
title for the advances it had made to the entrustee. The ownership of the
merchandise continues to be vested in the person who had 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. To secure that the
bank shall be paid, it takes full title to the goods at the very beginning and
continues to hold that title as his indispensable security until the goods are
sold and the vendee is called upon to pay for them; hence, the importer has
never owned the goods and is not able to deliver possession. In a certain
manner, trust receipts partake of the nature of a conditional sale where the
importer becomes absolute owner of the imported merchandise as soon as he
has paid its price. There are two possible situations in a trust receipt
transaction. The first is covered by the provision which refers to money
received under the obligation involving the duty to deliver it (entregarla) to
the owner of the merchandise sold. The second is covered by the provision
which refers to merchandise received under the obligation to “return” it
(devolvera) to the owner. Failure of the entrustee to turn over the proceeds
of the sale of the goods, covered by the trust receipt to the entruster or to
return said goods if they were not disposed of in accordance with the terms of
the trust receipt shall be punishable as estafa under Article 315 (1) of the
Revised Penal Code, without need of proving intent to defraud.
 4. Ng v. People, G.R. No. 173905, 23 April 2010
This is a Petition for Review on Certiorari under Rule 45 seeking to reverse
and set aside the August 29, 2003 Decision[1] and July 25, 2006 Resolution of
the Court of Appeals (CA) in CA-G.R. CR No. 25525, which affirmed the
Decision[2] of the Regional Trial Court (RTC), Branch 95 in Quezon City, in
Criminal Case No. Q-99-85133 for Estafa under Article 315, paragraph 1(b) of
the Revised Penal Code (RPC) in relation to Section 3 of Presidential Decree
No. (PD) 115 or the Trust Receipts Law.
The Facts
Sometime in the early part of 1997, petitioner Anthony Ng, then engaged in
the business of building and fabricating telecommunication towers under the
trade name Capitol Blacksmith and Builders, applied for a credit line of PhP
3,000,000 with Asiatrust Development Bank, Inc. (Asiatrust). In support of
Asiatrusts credit investigation, petitioner voluntarily submitted the following
documents: (1) the contracts he had with Islacom, Smart, and Infocom; (2)
the list of projects wherein he was commissioned by the said
telecommunication companies to build several steel towers; and (3) the
collectible amounts he has with the said companies.[3]
On May 30, 1997, Asiatrust approved petitioners loan
application. Petitioner was then required to sign several documents, among
which are the Credit Line Agreement, Application and Agreement for
Irrevocable L/C, Trust Receipt Agreements,[4] and Promissory Notes. Though
the Promissory Notes matured on September 18, 1997, the two (2)
aforementioned Trust Receipt Agreements did not bear any maturity dates as
they were left unfilled or in blank by Asia trust.[5]
After petitioner received the goods, consisting of chemicals and metal
plates from his suppliers, he utilized them to fabricate the communication
towers ordered from him by his clients which were installed in three project
sites, namely: Isabel, Leyte; Panabo, Davao; and Tongonan.
As petitioner realized difficulty in collecting from his client Islacom, he
failed to pay his loan to Asiatrust. Asiatrust then conducted a surprise ocular
inspection of petitioners business through Villarva S. Linga, Asiatrusts
representative appraiser. Linga thereafter reported to Asiatrust that he found
that approximately 97% of the subject goods of the Trust Receipts were sold-
out and that only 3 % of the goods pertaining to PN No. 1963 remained.
Asiatrust then endorsed petitioners account to its Account Management
Division for the possible restructuring of his loan. The parties thereafter held
a series of conferences to work out the problem and to determine a way for
petitioner to pay his debts. However, efforts towards a settlement failed to be
reached.
On March 16, 1999, Remedial Account Officer Ma. Girlie C. Bernardez filed
a Complaint-Affidavit before the Office of the City Prosecutor of Quezon
City. Consequently, on September 12, 1999, an Information for Estafa, as
defined and penalized under Art. 315, par. 1(b) of the RPC in relation to
Sec. 3, PD 115 or the Trust Receipts Law, was filed with the RTC. The
said Information reads:
That on or about the 30th day of May 1997, in Quezon City,
Philippines, the above-named petitioner, did then and there willfully,
unlawfully, and feloniously defraud Ma. Girlie C. Bernardez by entering into a
Trust Receipt Agreement with said complainant whereby said petitioner as
entrustee received in trust from the said complainant various chemicals in the
total sum of P4.5 million with the obligation to hold the said chemicals in trust
as property of the entruster with the right to sell the same for cash and to
remit the proceeds thereof to the entruster, or to return the said chemicals if
unsold; but said petitioner once in possession of the same, contrary to his
aforesaid obligation under the trust receipt agreement with intent to defraud
did then and there misappropriated, misapplied and converted the said
amount to his own personal use and benefit and despite repeated demands
made upon him, said petitioner refused and failed and still refuses and fails to
make good of his obligation, to the damage and prejudice of the said Ma.
Girlie C. Bernardez in the amount of P2,971,650.00, Philippine Currency.
CONTRARY TO LAW.
Upon arraignment, petitioner pleaded not guilty to the charges. Thereafter, a
full-blown trial ensued.
During the pendency of the abovementioned case, conferences between
petitioner and Asiatrusts Remedial Account Officer, Daniel Yap, were
held. Afterward, a Compromise Agreement was drafted by Asiatrust. One of
the requirements of the Compromise Agreement was for petitioner to issue
six (6) postdated checks. Petitioner, in good faith, tried to comply by issuing
two or three checks, which were deposited and made good. The remaining
checks, however, were not deposited as the Compromise Agreement did not
push through.
For his defense, petitioner argued that: (1) the loan was granted as
his working capital and that the Trust Receipt Agreements he signed with
Asiatrust were merely preconditions for the grant and approval of his loan;
(2) the Trust Receipt Agreement corresponding to Letter of Credit No. 1963
and the Trust Receipt Agreement corresponding to Letter of Credit No. 1964
were both contracts of adhesion, since the stipulations found in the
documents were prepared by Asiatrust in fine print; (3) unfortunately for
petitioner, his contract worth PhP 18,000,000 with Islacom was not yet paid
since there was a squabble as to the real ownership of the latters company,
but Asiatrust was aware of petitioners receivables which were more than
sufficient to cover the obligation as shown in the various Project Listings with
Islacom, Smart Communications, and Infocom; (4) prior to the Islacom
problem, he had been faithfully paying his obligation to Asiatrust as shown in
Official Receipt Nos. 549001, 549002, 565558, 577198, 577199, and
594986,[6] thus debunking Asiatrusts claim of fraud and bad faith against
him; (5) during the pendency of this case, petitioner even attempted to settle
his obligations as evidenced by the two United Coconut Planters Bank
Checks[7] he issued in favor of Asiatrust; and (6) he had already paid PhP 1.8
million out of the PhP 2.971 million he owed as per Statement of Account
dated January 26, 2000.
Ruling of the Trial Court
After trial on the merits, the RTC, on May 29, 2001, rendered a Decision,
finding petitioner guilty of the crime of Estafa. The fallo of the Decision reads
as follows:
WHEREFORE, judgment is hereby rendered finding the
petitioner, Anthony L. Ng GUILTY beyond reasonable
doubt for the crime of Estafa defined in and penalized by
Article 315, paragraph 1(b) of the Revised Penal Code in
relation to Section 3 of Presidential Decree 115, otherwise
known as the Trust Receipts Law, and is hereby sentenced to
suffer the indeterminate penalty of from six (6) years, eight
(8) months, and twenty one (21) days of prision mayor,
minimum, as the minimum penalty, to twenty (20) years of
reclusion temporal maximum, as the maximum penalty.
The petitioner is further ordered to return to the
Asiatrust Development Bank Inc. the amount of Two Million,
Nine Hundred Seventy One and Six Hundred Fifty Pesos
(P2,971,650.00) with legal rate of interest computed from the
filing of the information on September 21,1999 until the
amount is fully paid.
IT IS SO ORDERED.
In rendering its Decision, the trial court held that petitioner could not
simply argue that the contracts he had entered into with Asiatrust were void
as they were contracts of adhesion. It reasoned that petitioner is presumed to
have read and understood and is, therefore, bound by the provisions of the
Letters of Credit and Trust Receipts. It said that it was clear that Asiatrust
had furnished petitioner with a Statement of Account enumerating therein the
precise figures of the outstanding balance, which he failed to pay along with
the computation of other fees and charges; thus, Asiatrust did not violate
Republic Act No. 3765 (Truth in Lending Act). Finally, the trial court declared
that petitioner, being the entrustee stated in the Trust Receipts issued by
Asiatrust, is thus obliged to hold the goods in trust for the entruster and shall
dispose of them strictly in accordance with the terms and conditions of the
trust receipts; otherwise, he is obliged to return the goods in the event of
non-sale or upon demand of the entruster, failing thus, he evidently violated
the Trust Receipts Law.
Ruling of the Appellate Court
Petitioner then elevated the case to the CA by filing a Notice of Appeal on
August 6, 2001. In his Appellants Brief dated March 25, 2002, petitioner
argued that the court a quo erred: (1) in changing the name of the offended
party without the benefit of an amendment of the Information which violates
his right to be informed of the nature and cause of accusation against him;
(2) in making a finding of facts not in accord with that actually proved in the
trial and/or by the evidence provided; (3) in not considering the material
facts which if taken into account would have resulted in his acquittal; (4) in
being biased, hostile, and prejudiced against him; and (5) in considering the
prosecutions evidence which did not prove the guilt of petitioner beyond
reasonable doubt.
On August 29, 2003, the CA rendered a Decision affirming that of the RTC,
the fallo of which reads:
WHEREFORE, the foregoing considered, the instant
appeal is DENIED. The decision of the Regional Trial Court of
Quezon City, Branch 95 dated May 29, 2001 is AFFIRMED.
SO ORDERED.
The CA held that during the course of the trial, petitioner knew that
the complainant Bernardez and the other co-witnesses are all employees of
Asiatrust and that she is suing in behalf of the bank. Since petitioner
transacted with the same employees for the issuance of the subject Trust
Receipts, he cannot feign ignorance that Asiatrust is not the offended party in
the instant case. The CA further stated that the change in the name of the
complainant will not prejudice and alter the fact that petitioner was being
charged with the crime of Estafa in relation to the Trust Receipts Law, since
the information clearly set forth the essential elements of the crime charged,
and the constitutional right of petitioner to be informed of the nature and
cause of his accusations is not violated.[8]
As to the alleged error in the appreciation of facts by the trial court, the CA
stated that it was undisputed that petitioner entered into a trust receipt
agreement with Asiatrust and he failed to pay the bank his obligation when it
became due. According to the CA, the fact that petitioner acted without
malice or fraud in entering into the transactions has no bearing, since the
offense is punished as malum prohibitum regardless of the existence of intent
or malice; the mere failure to deliver the proceeds of the sale or the goods if
not sold constitutes the criminal offense.
With regard to the failure of the RTC to consider the fact that petitioners
outstanding receivables are sufficient to cover his indebtedness and that no
written demand was made upon him hence his obligation has not yet become
due and demandable, the CA stated that the mere query as to the
whereabouts of the goods and/or money is tantamount to a demand.[9]
Concerning the alleged bias, hostility, and prejudice of the RTC against
petitioner, the CA said that petitioner failed to present any substantial proof
to support the aforementioned allegations against the RTC.
After the receipt of the CA Decision, petitioner moved for its reconsideration,
which was denied by the CA in its Resolution dated July 25, 2006. Thereafter,
petitioner filed this Petition for Review on Certiorari. In his Memorandum, he
raised the following issues: Issues:
1. The prosecution failed to adduce evidence
beyond a reasonable doubt to satisfy the 2nd essential
element that there was misappropriation or
conversion of subject money or property by
petitioner.
2. The state was unable to prove the 3rd essential
element of the crime that the alleged
misappropriation or conversion is to the prejudice of
the real offended property.
 3. The absence of a demand (4th essential
element) on petitioner necessarily results to the
dismissal of the criminal case.
The Courts Ruling
We find the petition to be meritorious.
Essentially, the issues raised by petitioner can be summed up into
onewhether or not petitioner is liable for Estafa under Art. 315, par. 1(b) of
the RPC in relation to PD 115.
It is a well-recognized principle that factual findings of the trial court are
entitled to great weight and respect by this Court, more so when they are
affirmed by the appellate court. However, the rule is not without exceptions,
such as: (1) when the conclusion is a finding grounded entirely on
speculations, surmises, and conjectures; (2) the inferences made are
manifestly mistaken; (3) there is grave abuse of discretion; and (4) the
judgment is based on misapprehension of facts or premised on the absence
of evidence on record.[10] Especially in criminal cases where the accused
stands to lose his liberty by virtue of his conviction, the Court must be
satisfied that the factual findings and conclusions of the lower courts leading
to his conviction must satisfy the standard of proof beyond reasonable doubt.
In the case at bar, petitioner was charged with Estafa under Art. 315,
par. 1(b) of the RPC in relation to PD 115. The RPC defines Estafa as:
ART. 315. Swindling (estafa).Any person who shall
defraud another by any of the means mentioned hereinbelow
xxx
1. With unfaithfulness or abuse of
confidence, namely:
a. xxx
b. By misappropriating or converting, to
the prejudice of another, money, goods, or any other
personal property received by the offender in trust or on
commission, or for administration, or under any other
obligation involving the duty to make delivery of or to return
the same, even though such obligation be totally or partially
guaranteed by a bond; or by denying having received such
money, goods, or other property x x x.[11]
Based on the definition above, the essential elements of Estafa are:
(1) that money, goods or other personal property is received by the offender
in trust or on commission, or for administration, or under any obligation
involving the duty to make delivery of or to return it; (2) that there be
misappropriation or conversion of such money or property by the offender, or
denial on his part of such receipt; (3) that such misappropriation or
conversion or denial is to the prejudice of another; and (4) there is demand
by the offended party to the offender.[12]
Likewise, Estafa can also be committed in what is called a trust
receipt transaction under PD 115, which is defined as:
Section 4. What constitutes a trust receipts
transaction.A trust receipt transaction, within the meaning
of this Decree, is any transaction by and between a person
referred to in this Decree as the entruster, and another
person referred to in this Decree as entrustee, whereby the
entruster, who owns or holds absolute title or security
interests over certain specified goods, documents or
instruments, releases the same to the possession of the
entrustee upon the latters execution and delivery to the
entruster of a signed document called a trust receipt wherein
the entrustee binds himself to hold the designated goods,
documents or instruments in trust for the entruster and to sell
or otherwise dispose of the goods, documents or instruments
with the obligation to turn over to the entruster the proceeds
thereof to the extent of the amount owing to the entruster or
as appears in the trust receipt or the goods, documents or
instruments themselves if they are unsold or not otherwise
disposed of, in accordance with the terms and conditions
specified in the trust receipt, or for other purposes
substantially equivalent to any of the following:
1. In the case of goods or documents: (a)
to sell the goods or procure their sale; or (b) to manufacture
or process the goods with the purpose of ultimate
sale: Provided, That, in the case of goods delivered under
trust receipt for the purpose of manufacturing or processing
before its ultimate sale, the entruster shall retain its title over
the goods whether in its original or processed form until the
entrustee has complied full with his obligation under the trust
receipt; or (c) to load, unload, ship or transship or otherwise
deal with them in a manner preliminary or necessary to their
sale; or
2. In the case of instruments: (a) to sell
or procure their sale or exchange; or (b) to deliver them to a
principal; or (c) to effect the consummation of some
transactions involving delivery to a depository or register; or
(d) to effect their presentation, collection or renewal.
The sale of good, documents or instruments by a
person in the business of selling goods, documents or
instruments for profit who, at the outset of transaction, has,
as against the buyer, general property rights in such goods,
documents or instruments, or who sells the same to the
buyer on credit, retaining title or other interest as security for
the payment of the purchase price, does not constitute a trust
receipt transaction and is outside the purview and coverage of
this Decree.
In other words, a trust receipt transaction is one where the entrustee has the
obligation to deliver to the entruster the price of the sale, or if the
merchandise is not sold, to return the merchandise to the entruster. There
are, therefore, two obligations in a trust receipt transaction: the first refers to
money received under the obligation involving the duty to turn it over
(entregarla) to the owner of the merchandise sold, while the second refers to
the merchandise received under the obligation to return it (devolvera) to the
owner.[13] A violation of any of these undertakings constitutes Estafa defined
under Art. 315, par. 1(b) of the RPC, as provided in Sec. 13 of PD 115, viz:
Section 13. Penalty Clause.The failure of an entrustee
to turn over the proceeds of the sale of the goods,
documents or instruments covered by a trust receipt to the
extent of the amount owing to the entruster or as appears in
the trust receipt or to return said goods, documents or
instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall
constitute the crime of estafa, punishable under the
provisions of Article Three hundred fifteen, paragraph one (b)
of Act Numbered Three thousand eight hundred and fifteen,
as amended, otherwise known as the Revised Penal Code. x x
x (Emphasis supplied.)
A thorough examination of the facts obtaining in the instant case,
however, reveals that the transaction between petitioner and Asiatrust is not
a trust receipt transaction but one of simple loan.
PD 115 Does Not Apply
It must be remembered that petitioner was transparent to Asiatrust
from the very beginning that the subject goods were not being held for sale
but were to be used for the fabrication of steel communication towers in
accordance with his contracts with Islacom, Smart, and Infocom. In these
contracts, he was commissioned to build, out of the materials
received, steel communication towers, not to sell them.
The true nature of a trust receipt transaction can be found in the whereas
clause of PD 115 which states that a trust receipt is to be utilized as a
convenient business device to assist importers and merchants solve their
financing problems. Obviously, the State, in enacting the law, sought to find a
way to assist importers and merchants in their financing in order to
encourage commerce in the Philippines.
As stressed in Samo v. People,[14] a trust receipt is considered a
security transaction intended to aid in financing importers and retail dealers
who do not have sufficient funds or resources to finance the importation or
purchase of merchandise, and who may not be able to acquire credit except
through utilization, as collateral, of the merchandise imported or
purchased. Similarly, American Jurisprudence demonstrates that trust receipt
transactions always refer to a method of financing importations or financing
sales.[15] The principle is of course not limited in its application to financing
importations, since the principle is equally applicable to domestic
transactions.[16] Regardless of whether the transaction is foreign or domestic,
it is important to note that the transactions discussed in relation to trust
receipts mainly involved sales.
Following the precept of the law, such transactions affect situations
wherein the entruster, who owns or holds absolute title or security interests
over specified goods, documents or instruments, releases the subject goods
to the possession of the entrustee. The release of such goods to the entrustee
is conditioned upon his execution and delivery to the entruster of a trust
receipt wherein the former binds himself to hold the specific 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 to the extent of the amount owing to the
entruster or the goods, documents or instruments themselves if they
are unsold.Similarly, we held in State Investment House v. CA, et al. that
the entruster is entitled only to the proceeds derived from the sale of goods
released under a trust receipt to the entrustee.[17]
Considering that the goods in this case were never intended for sale
but for use in the fabrication of steel communication towers, the trial court
erred in ruling that the agreement is a trust receipt transaction.
In applying the provisions of PD 115, the trial court relied on the
Memorandum of Asiatrusts appraiser, Linga, who stated that the goods have
been sold by petitioner and that only 3% of the goods remained in the
warehouse where it was previously stored. But for reasons known only to the
trial court, the latter did not give weight to the testimony of Linga when he
testified that he merely presumed that the goods were sold, viz:
COURT (to the witness)
Q So, in other words, when the goods were not there
anymore. You presumed that, that is already sold?
A Yes, your Honor.
Undoubtedly, in his testimony, Linga showed that he had no real personal
knowledge or proof of the fact that the goods were indeed sold. He did not
notify petitioner about the inspection nor did he talk to or inquire with
petitioner regarding the whereabouts of the subject goods. Neither did he
confirm with petitioner if the subject goods were in fact sold. Therefore, the
Memorandum of Linga, which was based only on his presumption and not any
actual personal knowledge, should not have been used by the trial court to
prove that the goods have in fact been sold. At the very least, it could only
show that the goods were not in the warehouse.
Having established the inapplicability of PD 115, this Court finds that
petitioners liability is only limited to the satisfaction of his obligation from the
loan. The real intent of the parties was simply to enter into a simple loan
agreement.
 To emphasize, the Trust Receipts Law was created to to aid in
financing importers and retail dealers who do not have sufficient
funds or resources to finance the importation or purchase of
merchandise, and who may not be able to acquire credit except
through utilization, as collateral, of the merchandise imported or
purchased. Since Asiatrust knew that petitioner was neither an importer nor
retail dealer, it should have known that the said agreement could not possibly
apply to petitioner.
Moreover, this Court finds that petitioner is not liable for Estafa both
under the RPC and PD 115.
Goods Were Not Received in Trust
The first element of Estafa under Art. 315, par. 1(b) of the RPC requires that
the money, goods or other personal property must be received by the
offender in trust or on commission, or for administration, or under any other
obligation involving the duty to make delivery of, or to return it. But as we
already discussed, the goods received by petitioner were not held in trust.
They were also not intended for sale and neither did petitioner have the duty
to return them. They were only intended for use in the fabrication of steel
communication towers.
No Misappropriation of Goods or Proceeds
The second element of Estafa requires that there be misappropriation or
conversion of such money or property by the offender, or denial on his part of
such receipt.
This is the very essence of Estafa under Art. 315, par. 1(b). The
words convert and misappropriated connote an act of using or disposing of
anothers property as if it were ones own, or of devoting it to a purpose or use
different from that agreed upon. To misappropriate for ones own use includes
not only conversion to ones personal advantage, but also every attempt to
dispose of the property of another without a right.[18]
Petitioner argues that there was no misappropriation or conversion on
his part, because his liability for the amount of the goods subject of the trust
receipts arises and becomes due only upon receipt of the proceeds of the
sale and not prior to the receipt of the full price of the goods.
Petitioner is correct. Thus, assuming arguendo that the provisions of
PD 115 apply, petitioner is not liable for Estafa because Sec. 13 of PD 115
provides that an entrustee is only liable for Estafa when he fails to turn over
the proceeds of the sale of the goods x x x covered by a trust receipt to the
extent of the amount owing to the entruster or as appears in the trust receipt
x x x in accordance with the terms of the trust receipt.
The trust receipt entered into between Asiatrust and petitioner states:
In case of sale I/we agree to hand the proceeds as
soon as received to the BANK to apply against the relative
acceptance (as described above) and for the payment of any
other indebtedness of mine/ours to ASIATRUST
DEVELOPMENT BANK.[19] (Emphasis supplied.)
Clearly, petitioner was only obligated to turn over the proceeds as soon as he
received payment. However, the evidence reveals that petitioner experienced
difficulties in collecting payments from his clients for the communication
towers. Despite this fact, petitioner endeavored to pay his indebtedness to
Asiatrust, which payments during the period from September 1997 to July
1998 total approximately PhP 1,500,000. Thus, absent proof that the
proceeds have been actually and fully received by petitioner, his obligation to
turn over the same to Asiatrust never arose.
What is more, under the Trust Receipt Agreement itself, no date of
maturity was stipulated. The provision left blank by Asiatrust is as follows:
x x x and in consideration thereof, I/we hereby agree
to hold said goods in Trust for the said Bank and as its
property with liberty to sell the same for its account within
________ days from the date of execution of the Trust
Receipt x x x[20]
In fact, Asia trust purposely left the space designated for the date blank, an
action which in ordinary banking transactions would be noted as highly
irregular. Hence, the only way for the obligation to mature was for Asiatrust
to demand from petitioner to pay the obligation, which it never did.
Again, it also makes the Court wonder as to why Asiatrust decided to
leave the provisions for the maturity dates in the Trust Receipt agreements in
blank, since those dates are elemental part of the loan. But then, as can be
gleaned from the records of this case, Asiatrust also knew that the capacity of
petitioner to pay for his loan also hinges upon the latters receivables from
Islacom, Smart, and Infocom where he had ongoing and future projects for
fabrication and installation of steel communication towers and not from the
sale of said goods. Being a bank, Asiatrust acted inappropriately when it left
such a sensitive bank instrument with a void circumstance on an elementary
but vital feature of each and every loan transaction, that is, the maturity
dates. Without stating the maturity dates, it was impossible for petitioner to
determine when the loan will be due.
Moreover, Asiatrust was aware that petitioner was not engaged in selling the
subject goods and that petitioner will use them for the fabrication and
installation of communication towers. Before granting petitioner the credit
line, as aforementioned, Asiatrust conducted an investigation, which showed
that petitioner fabricated and installed communication towers for well-known
communication companies to be installed at designated project sites. In fine,
there was no abuse of confidence to speak of nor was there any intention to
convert the subject goods for another purpose, since petitioner did not
withhold the fact that they were to be used to fabricate steel communication
towers to Asiatrust. Hence, no malice or abuse of confidence and
misappropriation occurred in this instance due to Asiatrusts knowledge of the
facts.
 Furthermore, Asiatrust was informed at the time of petitioners
application for the loan that the payment for the loan would be derived from
the collectibles of his clients. Petitioner informed Asiatrust that he was having
extreme difficulties in collecting from Islacom the full contracted price of the
towers. Thus, the duty of petitioner to remit the proceeds of the goods has
not yet arisen since he has yet to receive proceeds of the goods. Again,
petitioner could not be said to have misappropriated or converted the
proceeds of the transaction since he has not yet received the proceeds from
his client, Islacom.
This Court also takes judicial notice of the fact that petitioner has fully
paid his obligation to Asiatrust, making the claim for damage and prejudice of
Asiatrust baseless and unfounded. Given that the acceptance of payment by
Asiatrust necessarily extinguished petitioners obligation, then there is no
longer any obligation on petitioners part to speak of, thus precluding
Asiatrust from claiming any damage. This is evidenced by Asiatrusts Affidavit
of Desistance[21] acknowledging full payment of the loan.
Reasonable Doubt Exists
In the final analysis, the prosecution failed to prove beyond
reasonable doubt that petitioner was guilty of Estafa under Art. 315, par. 1(b)
of the RPC in relation to the pertinent provision of PD 115 or the Trust
Receipts Law; thus, his liability should only be civil in nature.
While petitioner admits to his civil liability to Asiatrust, he
nevertheless does not have criminal liability. It is a well-established principle
that person is presumed innocent until proved guilty. To overcome the
presumption, his guilt must be shown by proof beyond reasonable doubt.
Thus, we held in People v. Mariano[22] that while the principle does not
connote absolute certainty, it means the degree of proof which produces
moral certainty in an unprejudiced mind of the culpability of the
accused. Such proof should convince and satisfy the reason and conscience of
those who are to act upon it that the accused is in fact guilty. The
prosecution, in this instant case, failed to rebut the constitutional innocence
of petitioner and thus the latter should be acquitted.
At this point, the ruling of this Court in Colinares v. Court of
Appeals is very apt, thus:
The practice of banks of making borrowers sign trust
receipts to facilitate collection of loans and place them under
the threats of criminal prosecution should they be unable to
pay it may be unjust and inequitable, if not reprehensible.
Such agreements are contracts of adhesion which borrowers
have no option but to sign lest their loan be disapproved. The
resort to this scheme leaves poor and hapless borrowers at
the mercy of banks, and is prone to misinterpretation x x
x.[23]
Such is the situation in this case.
Asiatrusts intention became more evident when, on March 30, 2009, it, along
with petitioner, filed their Joint Motion for Leave to File and Admit Attached
Affidavit of Desistance to qualify the Affidavit of Desistance executed by
Felino H. Esquivas, Jr., attorney-in-fact of the Board of Asiatrust, which
acknowledged the full payment of the obligation of the petitioner and the
successful mediation between the parties.
From the foregoing considerations, we deem it unnecessary to discuss
and rule upon the other issues raised in the appeal.
WHEREFORE, the CA Decision dated August 29, 2003 affirming the RTC
Decision dated May 29, 2001 is SET ASIDE. Petitioner ANTHONY L. NG is
hereby ACQUITTED of the charge of violation of Art. 315, par. 1(b) of the
RPC in relation to the pertinent provision of PD 115. SO ORDERED.
Case Digest:
The Trust Receipts Law was created to "to aid in financing importers and
retail dealers who do not have sufficient funds or resources to finance the
importation or purchase of merchandise, and who may not be able to acquire
credit except through utilization, as collateral, of the merchandise imported or
purchased." Since Asia trust knew that Anthony Ng was neither an importer
nor retail dealer, it should have known that the said agreement could not
possibly apply to petitioner. Regardless of whether the transaction is foreign
or domestic, it is important to note that the transactions discussed in relation
to trust receipts mainly involved sales .Considering that the goods in this case
were never intended for sale but for use in the fabrication of steel
communication towers, the trial court erred in ruling that the agreement is a
trust receipt transaction.
Facts: Anthony Ng, in behalf of his company “Capitol Blacksmith and
Builders”, applied for a credit line withAsiatrust Development Bank, Inc.
(Asiatrust) in order for him to procure goods consisting of chemicals andmetal
plates to be utilized in building communication towers ordered from him by
his clients (e.g.: Islacom,Smart and Infocom). Asiatrust approved Ng’s loan
application. However, he failed to pay his obligation toAsiatrust by reason of
his difficulty in in collecting from his client Islacom. Asia trust consequently
filed with the RTC a case for Estafa under the RPC in relation to Sec. 3, PD
115 (Trust Receipts Law) against Ng.
Issue:Whether Anthony Ng is liable for Estafa in relation to PD 115 (Trust
Receipts Law)
Ruling: NO. The transaction between Ng and Asiatrust is not a trust receipt
transaction but one of simple loan. Ng was transparent to Asiatrust from the
very beginning that the subject goods were not being held for sale but were
to be used for the fabrication of steel communication towers in accordance
with his contracts with his clients. In these contracts, he was commissioned
to build, out of the materials received, steel communication towers, not to
sell them. Moreover, Asiatrust was aware that petitioner was not engaged in
selling the subject goods and that petitioner will use them for the fabrication
and installation of communication towers. In fine, there was no abuse of
confidence to speak of nor was there any intention to convert the subject
goods for another purpose, since Ng did not withhold the fact that they were
to be used to fabricate steel communication towers to Asiatrust.
 5. Land Bank of the Phils v. Perez, G.R. No. 166884, 13 June 2012
Before this Court is a petition for review on certiorari,[1] under Rule 45 of the
Rules of Court, assailing the decision[2] dated January 20, 2005 of the Court
of Appeals in CA-G.R. SP No. 76588. In the assailed decision, the Court of
Appeals dismissed the criminal complaint for estafa against the respondents,
Lamberto C. Perez, Nestor C. Kun, Ma. Estelita P. Angeles-Panlilio and
Napoleon Garcia, who allegedly violated Article 315, paragraph 1(b) of the
Revised Penal Code, in relation with Section 13 of Presidential Decree No.
(P.D.) 115 the Trust Receipts Law.
Petitioner Land Bank of the Philippines (LBP) is a government financial
institution and the official depository of the Philippines.[3] Respondents are
the officers and representatives of Asian Construction and Development
Corporation (ACDC), a corporation incorporated under Philippine law and
engaged in the construction business.[4]
On June 7, 1999, LBP filed a complaint for estafa or violation of Article 315,
paragraph 1(b) of the Revised Penal Code, in relation to P.D. 115, against the
respondents before the City Prosecutors Office in Makati City. In the affidavit-
complaint[5] of June 7, 1999, the LBPs Account Officer for the Account
Management Development, Edna L. Juan, stated that LBP extended a credit
accommodation to ACDC through the execution of an Omnibus Credit Line
Agreement (Agreement)[6] between LBP and ACDC on October 29, 1996. In
various instances, ACDC used the Letters of Credit/Trust Receipts Facility of
the Agreement to buy construction materials. The respondents, as officers
and representatives of ACDC, executed trust receipts[7] in connection with the
construction materials, with a total principal amount of P52,344,096.32. The
trust receipts matured, but ACDC failed to return to LBP the proceeds of the
construction projects or the construction materials subject of the trust
receipts. LBP sent ACDC a demand letter,[8] dated May 4, 1999, for the
payment of its debts, including those under the Trust Receipts Facility in the
amount of P66,425,924.39. When ACDC failed to comply with the demand
letter, LBP filed the affidavit-complaint.
The respondents filed a joint affidavit[9] wherein they stated that they signed
the trust receipt documents on or about the same time LBP and ACDC
executed the loan documents; their signatures were required by LBP for the
release of the loans. The trust receipts in this case do not contain (1) a
description of the goods placed in trust, (2) their invoice values, and (3) their
maturity dates, in violation of Section 5(a) of P.D. 115. Moreover, they
alleged that ACDC acted as a subcontractor for government projects such as
the Metro Rail Transit, the Clark Centennial Exposition and the Quezon Power
Plant in Mauban, Quezon. Its clients for the construction projects, which were
the general contractors of these projects, have not yet paid them; thus,
ACDC had yet to receive the proceeds of the materials that were the subject
of the trust receipts and were allegedly used for these constructions. As there
were no proceeds received from these clients, no misappropriation thereof
could have taken place.
On September 30, 1999, Makati Assistant City Prosecutor Amador Y. Pineda
issued a Resolution[10] dismissing the complaint. He pointed out that the
evidence presented by LBP failed to state the date when the goods described
in the letters of credit were actually released to the possession of the
respondents. Section 4 of P.D. 115 requires that the goods covered by trust
receipts be released to the possession of the entrustee after the latters
execution and delivery to the entruster of a signed trust receipt. He adds that
LBPs evidence also fails to show the date when the trust receipts were
executed since all the trust receipts are undated. Its dispositive portion
reads:
WHEREFORE, premises considered, and for
insufficiency of evidence, it is respectfully recommended that
the instant complaints be dismissed, as upon approval, the
same are hereby dismissed.[11]
LBP filed a motion for reconsideration which the Makati Assistant City
Prosecutor denied in his order of January 7, 2000.[12]
On appeal, the Secretary of Justice reversed the Resolution of the
Assistant City Prosecutor. In his resolution of August 1, 2002,[13] the
Secretary of Justice pointed out that there was no question that the goods
covered by the trust receipts were received by ACDC. He likewise adopted
LBPs argument that while the subjects of the trust receipts were not
mentioned in the trust receipts, they were listed in the letters of credit
referred to in the trust receipts. He also noted that the trust receipts
contained maturity dates and clearly set out their stipulations. He further
rejected the respondents defense that ACDC failed to remit the payments to
LBP due to the failure of the clients of ACDC to pay them. The dispositive
portion of the resolution reads:
WHEREFORE, the assailed resolution is REVERSED
and SET ASIDE. The City Prosecutor of Makati City is hereby
directed to file an information for estafa under Art. 315 (1)
(b) of the Revised Penal Code in relation to Section 13,
Presidential Decree No. 115 against respondents Lamberto C.
Perez, Nestor C. Kun, [Ma. Estelita P. Angeles-Panlilio] and
Napoleon O. Garcia and to report the action taken within ten
(10) days from receipt hereof.[14]
The respondents filed a motion for reconsideration of the resolution dated
August 1, 2002, which the Secretary of Justice denied. [15] He rejected the
respondents submission that Colinares v. Court of Appeals[16] does not apply
to the case. He explained that in Colinares, the building materials were
delivered to the accused before they applied to the bank for a loan to pay for
the merchandise; thus, the ownership of the merchandise had already been
transferred to the entrustees before the trust receipts agreements were
entered into. In the present case, the parties have already entered into the
Agreement before the construction materials were delivered to ACDC.
Subsequently, the respondents filed a petition for review before the
Court of Appeals.
After both parties submitted their respective Memoranda, the Court of
Appeals promulgated the assailed decision of January 20, 2005. [17] Applying
the doctrine in Colinares, it ruled that this case did not involve a trust receipt
transaction, but a mere loan. It emphasized that construction materials, the
subject of the trust receipt transaction, were delivered to ACDC even before
the trust receipts were executed. It noted that LBP did not offer proof that
the goods were received by ACDC, and that the trust receipts did not contain
a description of the goods, their invoice value, the amount of the draft to be
paid, and their maturity dates. It also adopted ACDCs argument that since no
payment for the construction projects had been received by ACDC, its officers
could not have been guilty of misappropriating any payment. The dispositive
portion reads:
WHEREFORE, in view of the foregoing, the Petition is
GIVEN DUE COURSE. The assailed Resolutions of the
respondent Secretary of Justice dated August 1, 2002 and
February 17, 2003, respectively in I.S. No. 99-F-9218-28 are
hereby REVERSED and SET ASIDE.[18]
LBP now files this petition for review on certiorari, dated March 15, 2005,
raising the following error:
THE COURT OF APPEALS GRAVELY ERRED WHEN IT
REVERSED AND SET ASIDE THE RESOLUTIONS OF THE
HONORABLE SECRETARY OF JUSTICE BY APPLYING THE
RULING IN THE CASE OF COLINARES V. COURT OF APPEALS,
339 SCRA 609, WHICH IS NOT APPLICABLE IN THE CASE AT
BAR.[19]
On April 8, 2010, while the case was pending before this Court, the
respondents filed a motion to dismiss.[20] They informed the Court that LBP
had already assigned to Philippine Opportunities for Growth and Income, Inc.
all of its rights, title and interests in the loans subject of this case in a Deed
of Absolute Sale dated June 23, 2005 (attached as Annex C of the motion).
The respondents also stated that Avent Holdings Corporation, in behalf of
ACDC, had already settled ACDCs obligation to LBP on October 8,
2009. Included as Annex A in this motion was a certification [21] issued by the
Philippine Opportunities for Growth and Income, Inc., stating that it was LBPs
successor-in-interest insofar as the trust receipts in this case are concerned
and that Avent Holdings Corporation had already settled the claims of LBP or
obligations of ACDC arising from these trust receipts.
We deny this petition.
The disputed transactions
are not trust receipts.
Section 4 of P.D. 115 defines a trust receipt transaction in this
manner:
Section 4. What constitutes a trust receipt
transaction. A trust receipt transaction, within the meaning
of this Decree, is any transaction by and between a person
referred to in this Decree as the entruster, and another
person referred to in this Decree as 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 a "trust receipt"
wherein the entrustee binds himself to hold the designated
goods, documents or instruments in trust for the entruster
and to sell or otherwise dispose of the goods, documents or
instruments with the obligation to turn over to the entruster
the proceeds thereof to the extent of the amount owing to the
entruster or as appears in the trust receipt or the goods,
documents or instruments themselves if they are unsold or
not otherwise disposed of, in accordance with the terms and
conditions specified in the trust receipt, or for other purposes
substantially equivalent to any of the following:
1. In the case of goods or documents, (a) to sell the goods or
procure their sale; or (b) to manufacture or process the
goods with the purpose of ultimate sale: Provided, That, in
the case of goods delivered under trust receipt for the
purpose of manufacturing or processing before its ultimate
sale, the entruster shall retain its title over the goods whether
in its original or processed form until the entrustee has
complied fully with his obligation under the trust receipt; or
(c) to load, unload, ship or tranship or otherwise deal with
them in a manner preliminary or necessary to their sale[.]
There are two obligations in a trust receipt transaction. The first is
covered by the provision that refers to money under the obligation to deliver
it (entregarla) to the owner of the merchandise sold. The second is covered
by the provision referring to merchandise received under the obligation to
return it (devolvera) to the owner. Thus, under the Trust Receipts
Law,[22] intent to defraud is presumed when (1) the entrustee fails to turn
over the proceeds of the sale of goods covered by the trust receipt to the
entruster; or (2) when the entrustee fails to return the goods under trust, if
they are not disposed of in accordance with the terms of the trust receipts.[23]
In all trust receipt transactions, both obligations on the part of the
trustee exist in the alternative the return of the proceeds of the sale or the
return or recovery of the goods, whether raw or processed. [24] When both
parties enter into an agreement knowing that the return of the goods subject
of the trust receipt is not possible even without any fault on the part of the
trustee, it is not a trust receipt transaction penalized under Section 13 of P.D.
115; the only obligation actually agreed upon by the parties would be the
return of the proceeds of the sale transaction. This transaction becomes a
mere loan,[25] where the borrower is obligated to pay the bank the amount
spent for the purchase of the goods.

Article 1371 of the Civil Code provides that [i]n order to judge the
intention of the contracting parties, their contemporaneous and subsequent
acts shall be principally considered. Under this provision, we can examine the
contemporaneous actions of the parties rather than rely purely on the trust
receipts that they signed in order to understand the transaction through
their intent.
We note in this regard that at the onset of these transactions, LBP
knew that ACDC was in the construction business and that the materials that
it sought to buy under the letters of credit were to be used for the following
projects: the Metro Rail Transit Project and the Clark Centennial Exposition
Project.[26] LBP had in fact authorized the delivery of the materials on the
construction sites for these projects, as seen in the letters of credit it
attached to its complaint.[27] Clearly, they were aware of the fact that there
was no way they could recover the buildings or constructions for which the
materials subject of the alleged trust receipts had been used. Notably,
despite the allegations in the affidavit-complaint wherein LBP sought the
return of the construction materials,[28] its demand letter dated May 4, 1999
sought the payment of the balance but failed to ask, as an alternative, for the
return of the construction materials or the buildings where these materials
had been used.[29]
The fact that LBP had knowingly authorized the delivery of construction
materials to a construction site of two government projects, as well as
unspecified construction sites, repudiates the idea that LBP intended to be the
owner of those construction materials. As a government financial institution,
LBP should have been aware that the materials were to be used for the
construction of an immovable property, as well as a property of the public
domain. As an immovable property, the ownership of whatever was
constructed with those materials would presumably belong to the owner of
the land, under Article 445 of the Civil Code which provides:
Article 445. Whatever is built, planted or sown on the land
of another and the improvements or repairs made thereon,
belong to the owner of the land, subject to the provisions of
the following articles.
Even if we consider the vague possibility that the materials, consisting of
cement, bolts and reinforcing steel bars, would be used for the construction
of a movable property, the ownership of these properties would still pertain to
the government and not remain with the bank as they would be classified as
property of the public domain, which is defined by the Civil Code as:
Article 420. The following things are property of public
dominion:
(1) Those intended for public use, such as roads, canals,
rivers, torrents, ports and bridges constructed by the State,
banks, shores, roadsteads, and others of similar character;
(2) Those which belong to the State, without being for public
use, and are intended for some public service or for the
development of the national wealth.
In contrast with the present situation, it is fundamental in a trust receipt
transaction that the person who advanced payment for the merchandise
becomes the absolute owner of said merchandise and continues as owner
until he or she is paid in full, or if the goods had already been sold, the
proceeds should be turned over to him or to her.[30]
Thus, in concluding that the transaction was a loan and not a trust receipt,
we noted in Colinares that the industry or line of work that the borrowers
were engaged in was construction. We pointed out that the borrowers were
not importers acquiring goods for resale.[31] Indeed, goods sold in retail are
often within the custody or control of the trustee until they are purchased. In
the case of materials used in the manufacture of finished products, these
finished products if not the raw materials or their components similarly
remain in the possession of the trustee until they are sold. But the goods and
the materials that are used for a construction project are often placed under
the control and custody of the clients employing the contractor, who can only
be compelled to return the materials if they fail to pay the contractor and
often only after the requisite legal proceedings. The contractors difficulty and
uncertainty in claiming these materials (or the buildings and structures which
they become part of), as soon as the bank demands them, disqualify them
from being covered by trust receipt agreements.
Based on these premises, we cannot consider the agreements
between the parties in this case to be trust receipt transactions because (1)
from the start, the parties were aware that ACDC could not possibly be
obligated to reconvey to LBP the materials or the end product for which they
were used; and (2) from the moment the materials were used for the
government projects, they became public, not LBPs, property.
Since these transactions are not trust receipts, an action for estafa
should not be brought against the respondents, who are liable only for a
loan. In passing, it is useful to note that this is the threat held against
borrowers that Retired Justice Claudio Teehankee emphatically opposed in his
dissent in People v. Cuevo,[32] restated in Ong v. CA, et al.:[33]
The very definition of trust receipt x x x sustains the lower
courts rationale in dismissing the information that the
contract covered by a trust receipt is merely a secured
loan. The goods imported by the small importer and retail
dealer through the banks financing remain of their own
property and risk and the old capitalist orientation of putting
them in jail for estafa for non-payment of the secured loan
(granted after they had been fully investigated by the bank as
good credit risks) through the fiction of the trust receipt
device should no longer be permitted in this day and age.
 As the law stands today, violations of Trust Receipts Law are
criminally punishable, but no criminal complaint for violation of Article 315,
paragraph 1(b) of the Revised Penal Code, in relation with P.D. 115, should
prosper against a borrower who was not part of a genuine trust receipt
transaction.
Misappropriation or abuse
of confidence is absent in
this case.
Even if we assume that the transactions were trust receipts, the
complaint against the respondents still should have been dismissed. The
Trust Receipts Law punishes the dishonesty and abuse of confidence in the
handling of money or goods to the prejudice of another, regardless of
whether the latter is the owner or not. The law does not singularly seek to
enforce payment of the loan, as there can be no violation of [the] right
against imprisonment for non-payment of a debt.[34]
In order that the respondents may be validly prosecuted for estafa
under Article 315, paragraph 1(b) of the Revised Penal Code,[35] in relation
with Section 13 of the Trust Receipts Law, the following elements must be
established: (a) they received the subject goods in trust or under the
obligation to sell the same and to remit the proceeds thereof to [the trustor],
or to return the goods if not sold; (b) they misappropriated or converted the
goods and/or the proceeds of the sale; (c) they performed such acts with
abuse of confidence to the damage and prejudice of Metrobank; and (d)
demand was made on them by [the trustor] for the remittance of the
proceeds or the return of the unsold goods.[36]
In this case, no dishonesty or abuse of confidence existed in the
handling of the construction materials.
In this case, the misappropriation could be committed should the
entrustee fail to turn over the proceeds of the sale of the goods covered by
the trust receipt transaction or fail to return the goods themselves. The
respondents could not have failed to return the proceeds since their
allegations that the clients of ACDC had not paid for the projects it had
undertaken with them at the time the case was filed had never been
questioned or denied by LBP. What can only be attributed to the respondents
would be the failure to return the goods subject of the trust receipts.
We do not likewise see any allegation in the complaint that ACDC had
used the construction materials in a manner that LBP had not authorized. As
earlier pointed out, LBP had authorized the delivery of these materials to
these project sites for which they were used. When it had done so, LBP
should have been aware that it could not possibly recover the processed
materials as they would become part of government projects, two of which
(the Metro Rail Transit Project and the Quezon Power Plant Project) had even
become part of the operations of public utilities vital to public service. It
clearly had no intention of getting these materials back; if it had, as a
primary government lending institution, it would be guilty of extreme
negligence and incompetence in not foreseeing the legal complications and
public inconvenience that would arise should it decide to claim the
materials. ACDCs failure to return these materials or their end product at the
time these trust receipts expired could not be attributed to its volition. No
bad faith, malice, negligence or breach of contract has been attributed to
ACDC, its officers or representatives. Therefore, absent any abuse of
confidence or misappropriation on the part of the respondents, the criminal
proceedings against them for estafa should not prosper.
In Metropolitan Bank,[37] we affirmed the city prosecutors dismissal
of a complaint for violation of the Trust Receipts Law. In dismissing the
complaint, we took note of the Court of Appeals finding that the bank was
interested only in collecting its money and not in the return of the
goods. Apart from the bare allegation that demand was made for the return
of the goods (raw materials that were manufactured into textiles), the bank
had not accompanied its complaint with a demand letter. In addition, there
was no evidence offered that the respondents therein had misappropriated or
misused the goods in question.
The petition should be
dismissed because the OSG
did not file it and the civil
liabilities have already
been settled.
The proceedings before us, regarding the criminal aspect of this case,
should be dismissed as it does not appear from the records that the
complaint was filed with the participation or consent of the Office of the
Solicitor General (OSG). Section 35, Chapter 12, Title III, Book IV of the
Administrative Code of 1987 provides that:
Section 35. Powers and Functions. The Office of the
Solicitor General shall represent the Government of the
Philippines, its agencies and instrumentalities and its officials
and agents in any litigation, proceedings, investigation or
matter requiring the services of lawyers. x x x It shall have
the following specific powers and functions:
(1) Represent the Government in the Supreme Court
and the Court of Appeals in all criminal proceedings;
represent the Government and its officers in the Supreme
Court, the Court of Appeals and all other courts or tribunals in
all civil actions and special proceedings in which the
Government or any officer thereof in his official capacity is a
party. (Emphasis provided.)
In Heirs of Federico C. Delgado v. Gonzalez,[38] we ruled that the
preliminary investigation is part of a criminal proceeding. As all criminal
proceedings before the Supreme Court and the Court of Appeals may be
brought and defended by only the Solicitor General in behalf of the Republic
of the Philippines, a criminal action brought to us by a private party alone
suffers from a fatal defect. The present petition was brought in behalf of LBP
by the Government Corporate Counsel to protect its private interests. Since
the representative of the People of the Philippines had not taken any part of
the case, it should be dismissed.
On the other hand, if we look at the mandate given to the Office of the
Government Corporate Counsel, we find that it is limited to the civil liabilities
arising from the crime, and is subject to the control and supervision of the
public prosecutor. Section 2, Rule 8 of the Rules Governing the Exercise by
the Office of the Government Corporate Counsel of its Authority, Duties and
Powers as Principal Law Office of All Government Owned or Controlled
Corporations, filed before the Office of the National Administration Register
on September 5, 2011, reads:
Section 2. Extent of legal assistance The OGCC shall
represent the complaining GOCC in all stages of the criminal
proceedings. The legal assistance extended is not limited to
the preparation of appropriate sworn statements but shall
include all aspects of an effective private prosecution
including recovery of civil liability arising from the crime,
subject to the control and supervision of the public
prosecutor.
Based on jurisprudence, there are two exceptions when a private
party complainant or offended party in a criminal case may file a petition with
this Court, without the intervention of the OSG: (1) when there is denial of
due process of law to the prosecution, and the State or its agents refuse to
act on the case to the prejudice of the State and the private offended
party;[39] and (2) when the private offended party questions the civil aspect
of a decision of the lower court.[40]
In this petition, LBP fails to allege any inaction or refusal to act on the
part of the OSG, tantamount to a denial of due process. No explanation
appears as to why the OSG was not a party to the case. Neither can LBP now
question the civil aspect of this decision as it had already assigned ACDCs
debts to a third person, Philippine Opportunities for Growth and Income, Inc.,
and the civil liabilities appear to have already been settled by Avent Holdings
Corporation, in behalf of ACDC. These facts have not been disputed by
LBP. Therefore, we can reasonably conclude that LBP no longer has any
claims against ACDC, as regards the subject matter of this case, that would
entitle it to file a civil or criminal action.
WHEREFORE, we DENY the petition and AFFIRM the January 20,
2005 decision of the Court of Appeals in CA-G.R. SP No. 76588. No costs.
SO ORDERED.
Case Digest:
Petitioner Land Bank of the Philippines(LBP)is a government financial
institution and the official depository of the Philippines. Respondents were
officers of Asian Construction and Development Corporation (ACDC),a
corporation engaged in the construction business. On several occasion,
respondents executed in favor of Land Bank of the Philippines (LBP)trust
receipts to secure the purchase of construction materials that they will need
in their construction projects when the trust receipts matured, ACDC failed to
return to LBP the proceeds of the construction projects or the construction
materials subject of the trust receipts. After several demands went unheeded,
LBP filed a complaint for estafa or violation of Art. 315 par.1(b) of the RPC, in
relation to PD 115,against the respondent officers of ACDC
ISSUE: WON the disputed transactions is a trustreceipt or a loan?
HELD:
There are two obligations in a trust receipt transaction. The first is covered by
the provision that refers to money under the obligation to deliver it
(entregarla) to the owner of the merchandise sold. The second is covered by
the provision referring to merchandise received under the obligation to return
it (devolvera) to the owner.
Thus, under the Trust Receipts Law, intent to defraud is presumed when
(1)the entrustee fails to turn over the proceeds of the sale of goods covered
by the trust receipt to the entruster/ or(2) when the entrustee fails to return
the goods under trust, if they are not disposed of in accordance with the
terms of the trust receipts. In all trust receipt transactions, both obligations
on the part of the trustee exist in the alternative the return of the proceeds of
the sale or the return or recovery of the goods, whether raw or processed.
When both parties enter into an agreement knowing that the return of the
goods subject of the trust receipt is not possible even without any fault on
the part of the trustee, it is not a trust receipt transaction penalized under
Section13 of PD 115; the only obligation actually agreed upon by the
parties would be the return of the proceeds of the sale transaction. This
transaction becomes a mere loan, where the borrower is obligated to pay the
bank the amount spent for the purchase of the goods.
Under the Trust Receipts Law, intent to defraud is presumed when (1) the
entrustee fails to turn over the proceeds of the sale of goods covered by the
trust receipt to the entruster; or (2) when the entrustee fails to return the
goods under trust, if they are not disposed of in accordance with the terms of
the trust receipts. When both parties know that the entrustee could not have
complied with the obligations under the trust receipt twithout his fault, as
when the goods subject of the agreement were not intended for sale or
resale, the transaction cannot be considered a trust receipt but a simple loan,
where the liability is limited to the payment of the purchase price. (Land Bank
of the Philippines vs. Perez, G.R. No. 166884, June13, 2012)