G.R. No. 119231. April 18, 1996.
*
PHILIPPINE NATIONAL BANK, petitioner, vs. HON. PRES. JUDGE BENITO C. SE,
JR., RTC, BR. 45, MANILA; NOAH’S ARK SUGAR REFINERY; ALBERTO T.
LOOYUKO, JIMMY T. GO and WILSON T. GO, respondents.
Warehouse Receipts Law (R.A. 2137); Warehouseman’s Liens;Actions; Judgments; A
prior judgment holding that a party is a warehouseman obligated to deliver sugar stocks
covered by the Warehouse Receipts does not necessarily carry with it a denial of the
warehouseman’s lien over the same sugar stocks.—We have carefully examined our
resolution, dated March 9, 1994, which denied Noah’s Ark’s motion for clarification of
our decision, dated September 1, 1993, wherein we affirmed in full and adopted the
Court of Appeals’ earlier decision, dated December 13, 1991, in CA-G.R. SP No. 25938.
______________
*
FIRST DIVISION.
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VOL. 256, APRIL 18, 1996 381
Philippine National Bank vs. Se, Jr.
We are not persuaded by the petitioner’s argument that our said resolution carried
with it the denial of the warehouseman’s lien over the sugar stocks covered by the
subject Warehouse Receipts. We have simply resolved and upheld in our decision, dated
September 1, 1993, the propriety of summary judgment which was then assailed by
private respondents. In effect, we ruled therein that, considering the circumstances
obtaining before the trial court, the issuance of the Warehouse Receipts not being
disputed by the private respondents, a summary judgment in favor of PNB was proper.
We in effect further affirmed the finding that Noah’s Ark is a warehouseman which was
obliged to deliver the sugar stocks covered by the Warehouse Receipts pledged by
Cresencia K. Zoleta and Luis T. Ramos to the petitioner pursuant to the pertinent
provisions of Republic Act 2137. In disposing of the private respondents’ motion for
clarification, we could not contemplate the matter of warehouseman’s lien because the
issue to be finally resolved then was the claim of private respondents for retaining
ownership of the stocks of sugar covered by the endorsed quedans. Stated otherwise,
there was no point in taking up the issue of warehouseman’s lien since the matter of
ownership was as yet being determined. Neither could storage fees be due then while no
one has been declared the owner of the sugar stocks in question.
Same; Same; Even in the absence of a provision in the Warehouse Receipts, law and
equity dictate the payment of the warehouseman’s lien pursuant to Sections 27 and 31 of
the Warehouse Receipts Law.—Petitioner anchors its claim against private respondents
on the five (5) Warehouse Receipts issued by the latter to third-party defendants Rosa Ng
Sy of RNS Merchandising and Teresita Ng of St. Therese Merchandising, which found their
way to petitioner after they were negotiated to them by Luis T. Ramos and Cresencia K.
Zoleta for a loan of P39.1 Million. Accordingly, petitioner PNB is legally bound to stand by
the express terms and conditions on the face of the Warehouse Receipts as to the
payment of storage fees. Even in the absence of such a provision, law and equity dictate
the payment of the warehouseman’s lien pursuant to Sections 27 and 31 of the
Warehouse Receipts Law (R.A. 2137).
Same; Same; Contracts; Receipts; As contracts, warehouse receipts must be respected
by authority of Article 1159 of the Civil Code.—Considering that petitioner does not deny
the existence, validity and genuineness of the Warehouse Receipts on which it
382
382 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Se, Jr.
anchors its claim for payment against private respondents, it cannot disclaim
liability for the payment of the storage fees stipulated therein. As contracts, the receipts
must be respected by authority of Article 1159 of the Civil Code, to wit: “ ART. 1159.
Obligations arising from contracts have the force of law between the contracting parties
and should be complied with in good faith.”
Same; Same; Same; Same; Estoppel; A party is in estoppel in disclaiming liability for
the payment of storage fees due the warehouseman while claiming to be entitled to the
sugar stocks covered by the subject Warehouse Receipts on the basis of which it anchors its
claim for payment or delivery of the sugar stocks.—Petitioner is in estoppel in disclaiming
liability for the payment of storage fees due the private respondents as warehouseman
while claiming to be entitled to the sugar stocks covered by the subject Warehouse
Receipts on the basis of which it anchors its claim for payment or delivery of the sugar
stocks. The unconditional presentment of the receipts by the petitioner for payment
against private respondents on the strength of the provisions of the Warehouse Receipts
Law (R.A. 2137) carried with it the admission of the existence and validity of the terms,
conditions and stipulations written on the face of the Warehouse Receipts, including the
unqualified recognition of the payment of warehouseman’s lien for storage fees and
preservation expenses. Petitioner may not now retrieve the sugar stocks without paying
the lien due private respondents as warehouseman.
Same; Same; Imperative is the right of the warehouseman to demand payment of his
lien because he loses his lien upon goods by surrendering possession thereof.—In view of
the foregoing, the rule may be simplified thus: While the PNB is entitled to the stocks of
sugar as the endorsee of the quedans, delivery to it shall be effected only upon payment
of the storage fees. Imperative is the right of the warehouseman to demand payment of
his lien at this juncture, because, in accordance with Section 29 of the Warehouse
Receipts Law, the warehouseman loses his lien upon goods by surrendering possession
thereof. In other words, the lien may be lost where the warehouseman surrenders the
possession of the goods without requiring payment of his lien, because a
warehouseman’s lien is possessory in nature.
PETITION to nullify a decision of the Regional Trial Court of Manila, Br. 45.
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VOL. 256, APRIL 18, 1996 383
Philippine National Bank vs. Se, Jr.
The facts are stated in the opinion of the Court.
Rolan A. Nieto for petitioner.
Madella & Cruz Law Offices for private respondents.
HERMOSISIMA, JR., J.:
The source of conflict herein is the question as to whether the Philippine
National Bank should pay storage fees for sugar stocks covered by five (5)
Warehouse Receipts stored in the warehouse of private respondents in the face
of the Court of Appeals’ decision (affirmed by the Supreme Court) declaring the
Philippine National Bank as the owner of the said sugar stocks and ordering
their delivery to the said bank. From the same facts but on a different
perspective, it can be said that the issue is: Can the warehouseman enforce his
warehouseman’s lien before delivering the sugar stocks as ordered by the Court
of Appeals or need he file a separate action to enforce payment of storage fees?
The herein petitioner seeks to annul: (1) the Resolution of respondent Judge
Benito C. Se, Jr. of the Regional Trial Court of Manila, Branch 45, dated December
20, 1994, in Civil Case No. 90-53023, authorizing reception of evidence to
establish the claim of respondents Noah’s Ark Sugar Refinery, et al., for storage
fees and preservation expenses over sugar stocks covered by five (5) Warehouse
Receipts which is in the nature of a warehouseman’s lien; and (2) the Resolution
of the said respondent Judge, dated March 1, 1995, declaring the validity of
private respondents’ warehouseman’s lien under Section 27 of Republic Act No.
2137 and ordering that execution of the Court of Appeals’ decision, dated
December 13, 1991, be in effect held in abeyance until the full amount of the
warehouseman’s lien on the sugar stocks covered by five (5) quedans subject of
the action shall have been satisfied conformably with the provisions of Section
31 of Republic Act 2137.
Also prayed for by the petition is a Writ of Prohibition to require respondent
RTC Judge to desist from further proceeding with Civil Case No. 90-53023,
except order the execution
384
384 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Se, Jr.
of the Supreme Court judgment; and a Writ of Mandamus to compel respondent
RTC Judge to issue a Writ of Execution in accordance with the said executory
Supreme Court decision.
THE FACTS
In accordance with Act No. 2137, the Warehouse Receipts Law, Noah’s Ark Sugar
Refinery issued on several dates, the following Warehouse Receipts (Quedans):
(a) March 1, 1989, Receipt No. 18062, covering sugar deposited by Rosa Sy; (b)
March 7, 1989, Receipt No. 18080, covering sugar deposited by RNS
Merchandising (Rosa Ng Sy); (c) March 21, 1989, Receipt No. 18081, covering
sugar deposited by St. Therese Merchandising; (d) March 31, 1989, Receipt No.
18086, covering sugar deposited by St. Therese Merchandising; and (e) April 1,
1989, Receipt No. 18087, covering sugar deposited by RNS Merchandising. The
receipts are substantially in the form, and contains the terms, prescribed for
negotiable warehouse receipts by Section 2 of the law.
Subsequently, Warehouse Receipts Nos. 18080 and 18081 were negotiated
and endorsed to Luis T. Ramos; and Receipts Nos. 18086, 18087 and 18062
were negotiated and endorsed to Cresencia K. Zoleta. Ramos and Zoleta then
used the quedans as security for two loan agreements—one for P15.6 million
and the other for P23.5 million—obtained by them from the Philippine National
Bank. The aforementioned quedans were endorsed by them to the Philippine
National Bank.
Luis T. Ramos and Cresencia K. Zoleta failed to pay their loans upon maturity
on January 9, 1990. Consequently, on March 16, 1990, the Philippine National
Bank wrote to Noah’s Ark Sugar Refinery demanding delivery of the sugar stocks
covered by the quedans endorsed to it by Zoleta and Ramos. Noah’s Ark Sugar
Refinery refused to comply with the demand alleging ownership thereof, for
which reason the Philippine National Bank filed with the Regional Trial Court of
Manila a verified complaint for “Specific Performance with Damages and
Application for Writ of Attachment” against Noah’s Ark Sugar Refinery, Alberto
T. Looyuko, Jimmy T. Go
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VOL. 256, APRIL 18, 1996 385
Philippine National Bank vs. Se, Jr.
and Wilson T. Go, the last three being identified as the sole proprietor, managing
partner, and Executive Vice President of Noah’s Ark, respectively.
Respondent Judge Benito C. Se, Jr., in whose sala the case was raffled, denied
the Application for Preliminary Attachment. Reconsideration therefor was
likewise denied.
Noah’s Ark and its co-defendants filed an Answer with Counterclaim and
Third-Party Complaint in which they claimed that they are the owners of the
subject quedans and the sugar represented therein, averring as they did that:
“9. *** In an agreement dated April 1, 1989, defendants agreed to sell to Rosa Ng Sy of
RNS Merchandising and Teresita Ng of St. Therese Merchandising the total volume of
sugar indicated in the quedans stored at Noah’s Ark Sugar Refinery for a total
consideration of P63,000,000.00, *** The corresponding payments in the form of checks
issued by the vendees in favor of defendants were subsequently dishonored by the
drawee banks by reason of ‘payment stopped’ and ‘drawn against insufficient funds,’ ***
Upon proper notification to said vendees and plaintiff in due course, defendants refused
to deliver to vendees therein the quantity of sugar covered by the subject quedans.
10. *** Considering that the vendees and first endorsers of subject quedans did not
acquire ownership thereof, the subsequent endorsers and plaintiff itself did not acquire a
better right of ownership than the original vendees/first endorsers.” 1
The Answer incorporated a Third-Party Complaint by Alberto T. Looyuko, Jimmy
T. Go and Wilson T. Go, doing business under the trade name and style Noah’s
Ark Sugar Refinery against Rosa Ng Sy and Teresita Ng, praying that the latter be
ordered to deliver or return to them the quedans (previously endorsed to PNB
and the subject of the suit) and pay damages and litigation expenses.
The Answer of Rosa Ng Sy and Teresita Ng, dated September 6, 1990, one of
avoidance, is essentially to the effect
_______________
1
Answer with Counterclaim and Third-Party Complaint, p. 3; Rollo, p. 47.
386
386 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Se, Jr.
that the transaction between them, on the one hand, and Jimmy T. Go, on the
other, concerning the quedans and the sugar stocks covered by them was merely
a simulated one being part of the latter’s complex banking schemes and
financial maneuvers, and thus, they are not answerable in damages to him.
On January 31, 1991, the Philippine National Bank filed a Motion for
Summary Judgment in favor of the plaintiff as against the defendants for the
reliefs prayed for in the complaint.
On May 2, 1991, the Regional Trial Court issued an order denying the Motion
for Summary Judgment. Thereupon, the Philippine National Bank filed a Petition
for Certiorari with the Court of Appeals, docketed as CA-G.R. SP No. 25938 on
December 13, 1991.
Pertinent portions of the decision of the Court of Appeals read:
“In issuing the questioned Orders, the respondent Court ruled that ‘questions of law
should be resolved after and not before, the questions of fact are properly litigated.’ A
scrutiny of defendant’s affirmative defenses does not show material questions of fact as
to the alleged nonpayment of purchase price by the vendees/first endorsers, and which
nonpayment is not disputed by PNB as it does not materially affect PNB’s title to the
sugar stocks as holder of the negotiable quedans.
What is determinative of the propriety of summary judgment is not the existence of
conflicting claims from prior parties but whether from an examination of the pleadings,
depositions, admissions and documents on file, the defenses as to the main issue do not
tender material questions of fact (see Garcia vs. Court of Appeals, 167 SCRA 815) or the
issues thus tendered are in fact sham, fictitious, contrived, set up in bad faith or so
unsubstantial as not to constitute genuine issues for trial. (See Vergara vs. Suelto, et
al., 156 SCRA 753; Mercado, et al. vs. Court of Appeals, 162 SCRA 75). The questioned
Orders themselves do not specify what material facts are in issue. (See Sec. 4, Rule 34,
Rules of Court).
To require a trial notwithstanding pertinent allegations of the pleadings and other
facts appearing on the record, would constitute a waste of time and an injustice to the
PNB whose rights to relief to
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VOL. 256, APRIL 18, 1996 387
Philippine National Bank vs. Se, Jr.
which it is plainly entitled would be further delayed to its prejudice.
In issuing the questioned Orders, We find the respondent Court to have acted in
grave abuse of discretion which justify holding null and void and setting aside the Orders
dated May 2 and July 4, 1990 of respondent Court, and that a summary judgment be
rendered forthwith in favor of the PNB against Noah’s Ark Sugar Refinery, et al., as prayed
for in petitioner’s Motion for Summary Judgment.” 2
On December 13, 1991, the Court of Appeals nullified and set aside the orders of
May 2 and July 4, 1990 of the Regional Trial Court and ordered the trial court to
render summary judgment in favor of the PNB. On June 18, 1992, the trial court
rendered judgment dismissing plaintiff’s complaint against private respondents
for lack of cause of action and likewise dismissed private respondents’
counterclaim against PNB and of the Third-Party Complaint and the Third-Party
Defendant’s Counterclaim. On September 4, 1992, the trial court denied PNB’s
Motion for Reconsideration.
On June 9, 1992, the PNB filed an appeal from the RTC decision with the
Supreme Court, G.R. No. 107243, by way of a Petition for Review on Certiorari
under Rule 45 of the Rules of Court. This Court rendered judgment on
September 1, 1993, the dispositive portion of which reads:
“WHEREFORE, the trial judge’s decision in Civil Case No. 90-53023, dated June 18, 1992,
is reversed and set aside and a new one rendered conformably with the final and
executory decision of the Court of Appeals in CA-G.R. SP. No. 25938, ordering the private
respondents Noah’s Ark Sugar Refinery, Alberto T. Looyuko, Jimmy T. Go and Wilson T. Go,
jointly and severally:
1. (a)to deliver to the petitioner Philippine National Bank, ‘the sugar stocks
covered by the Warehouse Receipts/Quedans which are now in the latter’s
possession as holder for value and in due course; or alternatively, to pay (said)
plaintiff actual damages in the amount of P39.1 million,’ with legal interest
thereon from the filing of the complaint until full payment; and
_______________
2
Quoted in the Petition, p. 8; Rollo, p. 9.
388
388 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Se, Jr.
1. (b)to pay plaintiff Philippine National Bank attorney’s fees, litigation expenses
and judicial costs hereby fixed at the amount of One Hundred Fifty Thousand
Pesos (P150,000.00) as well as the costs.
SO ORDERED.” 3
On September 29, 1993, private respondents moved for reconsideration of this
decision. A Supplemental/Second Motion for Reconsideration with leave of
court was filed by private respondents on November 8, 1993. We denied private
respondents’ motion on January 10, 1994.
Private respondents filed a Motion Seeking Clarification of the Decision,
dated September 1, 1993. We denied this motion in this manner:
“It bears stressing that the relief granted in this Court’s decision of September 1, 1993 is
precisely that set out in the final and executory decision of the Court of Appeals in CA-
G.R. SP No. 25938, dated December 13, 1991, which was affirmed in toto by this Court
and which became unalterable upon becoming final and executory.” 4
Private respondents thereupon filed before the trial court an Omnibus Motion
seeking among others the deferment of the proceedings until private
respondents are heard on their claim for warehouseman’s lien. On the other
hand, on August 22, 1994, the Philippine National Bank filed a Motion for the
Issuance of a Writ of Execution and an Opposition to the Omnibus Motion filed
by private respondents.
The trial court granted private respondents’ Omnibus Motion on December
20, 1994 and set reception of evidence on their claim for warehouseman’s lien.
The resolution of the PNB’s Motion for Execution was ordered deferred until the
determination of private respondents’ claim.
_______________
3
Decision of the Supreme Court in G.R. No. 107243, p. 8; Rollo, p. 64.
4
Resolution of the Supreme Court (Second Division) in G.R. No. 107243; Rollo, p. 71.
389
VOL. 256, APRIL 18, 1996
Philippine National Bank vs. Se, Jr.
On February 21, 1995, private respondents’ claim for lien was heard and
evidence was received in support thereof. The trial court thereafter gave both
parties five (5) days to file respective memoranda.
On February 28, 1995, the Philippine National Bank filed a Manifestation
with Urgent Motion to Nullify Court Proceedings. In adjudication thereof, the
trial court issued the following order on March 1, 1995:
“WHEREFORE, this court hereby finds that there exists in favor of the defendants a valid
warehouseman’s lien under Section 27 of Republic Act 2137 and accordingly, execution of
the judgment is hereby ordered stayed and/or precluded until the full amount of
defendants’ lien on the sugar stocks covered by the five (5) quedans subject of this action
shall have been satisfied conformably with the provisions of Section 31 of Republic Act
2137.” 5
Consequently, the Philippine National Bank filed the herein petition to seek the
nullification of the above-assailed orders of respondent judge.
The PNB submits that:
“I
PNB’S RIGHT TO A WRIT OF EXECUTION IS SUPPORTED BY TWO FINAL AND
EXECUTORY DECISIONS: THE DECEMBER 13, 1991 COURT OF APPEALS DECISION
IN CA-G.R. SP NO. 25938; AND, THE NOVEMBER 9, 1992 SUPREME COURT DECISION
IN G.R. NO. 107243. RESPONDENT RTC’S MINISTERIAL AND MANDATORY DUTY IS TO
ISSUE THE WRIT OF EXECUTION TO IMPLEMENT THE DECRETAL PORTION OF SAID
SUPREME COURT DECISION
II
RESPONDENT RTC IS WITHOUT JURISDICTION TO HEAR PRIVATE RESPONDENTS’
OMNIBUS MOTION. THE CLAIMS
_______________
5
Resolution of the RTC in Civil Case No. 90-53023, p. 5; Rollo, p. 44.
390
390 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Se, Jr.
SET FORTH IN SAID MOTION: (1) WERE ALREADY REJECTED BY THE SUPREME COURT
IN ITS MARCH 9, 1994 RESOLUTION DENYING PRIVATE RESPONDENTS’ ‘MOTION FOR
CLARIFICATION OF DECISION’ IN G.R. NO. 107243; AND (2) ARE BARRED FOREVER BY
PRIVATE RESPONDENTS’ FAILURE TO INTERPOSE THEM IN THEIR ANSWER, AND
FAILURE TO APPEAL FROM THE JUNE 18, 1992 RTC DECISION IN CIVIL CASE NO. 90-
52023
III
RESPONDENT RTC’S ONLY JURISDICTION IS TO ISSUE THE WRIT TO EXECUTE THE
SUPREME COURT DECISION. THUS, PNB IS ENTITLED TO: (1) A WRIT OF CERTIORARI
389 TO ANNUL THE RTC RESOLUTION DATED DECEMBER 20, 1994 AND THE ORDER DATED
FEBRUARY 7, 1995 AND ALL PROCEEDINGS TAKEN BY THE RTC THEREAFTER; (2) A
WRIT OF PROHIBITION TO PREVENT RESPONDENT RTC FROM FURTHER PROCEEDING
WITH CIVIL CASE NO. 90-53023 AND COMMITTING OTHER ACTS VIOLATIVE OF THE
SUPREME COURT DECISION IN G.R. NO. 107243; AND (3) A WRIT OF MANDAMUS TO
COMPEL RESPONDENT RTC TO ISSUE THE WRIT TO EXECUTE THE SUPREME COURT
JUDGMENT IN FAVOR OF PNB
The issues presented before us in this petition revolve around the legality of the
questioned orders of respondent judge, issued as they were after we had denied
with finality private respondents’ contention that the PNB could not compel
them to deliver the stocks of sugar in their warehouse covered by the endorsed
quedans or pay the value of the said stocks of sugar.
Petitioner’s submission is on a technicality, that is, that private respondents
have lost their right to recover warehouseman’s lien on the sugar stocks covered
by the five (5) Warehouse Receipts for the reason that they failed to set up said
claim in their Answer before the trial court and that private respondents did not
appeal from the decision in this regard, dated June 18, 1992. Petitioner
asseverates that the denial by this Court on March 9, 1994 of the motion seeking
clarification of our decision, dated September 1, 1993, has
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VOL. 256, APRIL 18, 1996 391
Philippine National Bank vs. Se, Jr.
foreclosed private respondents’ right to enforce their warehouseman’s lien for
storage fees and preservation expenses under the Warehouse Receipts Act.
On the other hand, private respondents maintain that they could not have
claimed the right to a warehouseman’s lien in their Answer to the complaint
before the trial court as it would have been inconsistent with their stand that
they claim ownership of the stocks covered by the quedans since the checks
issued for payment thereof were dishonored. If they were still the owners, it
would have been absurd for them to ask payment for storage fees and
preservation expenses. They further contend that our resolution, dated March 9,
1994, denying their motion for clarification did not preclude their right to claim
their warehouseman’s lien under Sections 27 and 31 of Republic Act 2137, as
our resolution merely affirmed and adopted the earlier decision, dated
December 13, 1991, of the Court of Appeals (6th Division) in CA-G.R. SP No.
25938 and did not make any finding on the matter of the warehouseman’s lien.
We find for private respondents on the foregoing issue and so the petition
necessarily must fail.
We have carefully examined our resolution, dated March 9, 1994, which
denied Noah’s Ark’s motion for clarification of our decision, dated September 1,
1993, wherein we affirmed in full and adopted the Court of Appeals’ earlier
decision, dated December 13, 1991, in CA-G.R. SP No. 25938. We are not
persuaded by the petitioner’s argument that our said resolution carried with it
the denial of the warehouseman’s lien over the sugar stocks covered by the
subject Warehouse Receipts. We have simply resolved and upheld in our
decision, dated September 1, 1993, the propriety of summary judgment which
was then assailed by private respondents. In effect, we ruled therein that,
considering the circumstances obtaining before the trial court, the issuance of
the Warehouse Receipts not being disputed by the private respondents, a
summary judgment in favor of PNB was proper. We in effect further affirmed the
finding that Noah’s Ark is a warehouseman which was obliged to deliver the
sugar stocks covered by the
392
392 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Se, Jr.
Warehouse Receipts pledged by Cresencia K. Zoleta and Luis T. Ramos to the
petitioner pursuant to the pertinent provisions of Republic Act 2137.
In disposing of the private respondents’ motion for clarification, we could
not contemplate the matter of warehouseman’s lien because the issue to be
finally resolved then was the claim of private respondents for retaining
ownership of the stocks of sugar covered by the endorsed quedans. Stated
otherwise, there was no point in taking up the issue of warehouseman’s lien
since the matter of ownership was as yet being determined. Neither could
storage fees be due then while no one has been declared the owner of the sugar
stocks in question.
Of considerable relevance is the pertinent stipulation in the subject
Warehouse Receipts which provides for respondent Noah’s Ark’s right to impose
and collect warehouseman’s lien:
“Storage of the refined sugar quantities mentioned herein shall be free up to one (1)
week from the date of the quedans covering said sugar and thereafter, storage fees shall
be charged in accordance with the Refining Contract under which the refined sugar
covered by this Quedan was produced.” 6
It is not disputed, therefore, that, under the subject Warehouse Receipts
provision, storage fees are chargeable.
Petitioner anchors its claim against private respondents on the five (5)
Warehouse Receipts issued by the latter to third-party defendants Rosa Ng Sy of
RNS Merchandising and Teresita Ng of St. Therese Merchandising, which found
their way to petitioner after they were negotiated to them by Luis T. Ramos and
Cresencia K. Zoleta for a loan of P39.1 Million. Accordingly, petitioner PNB is
legally bound to stand by the express terms and conditions on the face of the
Warehouse Receipts as to the payment of storage fees. Even in the absence of
such a provision, law and equity dictate the payment of the warehouseman’s lien
pursuant to Sections 27 and
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6
Comment, p. 5; Rollo, p. 92.
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VOL. 256, APRIL 18, 1996 393
Philippine National Bank vs. Se, Jr.
31 of the Warehouse Receipts Law (R.A. 2137), to wit:
“SECTION 27. What claims are included in the warehouseman’s lien.—Subject to the
provisions of section thirty, a warehouseman shall have lien on goods deposited or on the
proceeds thereof in his hands, for all lawful charges for storage and preservation of the
goods; also for all lawful claims for money advanced, interest, insurance, transportation,
labor, weighing, coopering and other charges and expenses in relation to such goods; also
for all reasonable charges and expenses for notice, and advertisement of sale, and for sale
of the goods where default has been made in satisfying the warehouseman’s lien.
xxx xxx xxx
SECTION 31. Warehouseman need not deliver until lien is satisfied.—A warehouseman
having a lien valid against the person demanding the goods may refuse to deliver the
goods to him until the lien is satisfied.”
After being declared not the owner, but the warehouseman, by the Court of
Appeals on December 13, 1991 in CA-G.R. SP No. 25938, the decision having
been affirmed by us on December 1, 1993, private respondents cannot legally be
deprived of their right to enforce their claim for warehouseman’s lien, for
reasonable storage fees and preservation expenses. Pursuant to Section 31
which we quote hereunder, the goods under storage may not be delivered until
said lien is satisfied.
“SECTION 31. Warehouseman need not deliver until lien is satisfied.—A warehouseman
having a lien valid against the person demanding the goods may refuse to deliver the
goods to him until the lien is satisfied.”
Considering that petitioner does not deny the existence, validity and
genuineness of the Warehouse Receipts on which it anchors its claim for
payment against private respondents, it cannot disclaim liability for the
payment of the storage fees stipulated therein. As contracts, the receipts must
be respected by authority of Article 1159 of the Civil Code, to wit:
394
394 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Se, Jr.
“ART. 1159. Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith.”
Petitioner is in estoppel in disclaiming liability for the payment of storage fees
due the private respondents as warehouseman while claiming to be entitled to
the sugar stocks covered by the subject Warehouse Receipts on the basis of Petition dismissed. Orders affirmed.
which it anchors its claim for payment or delivery of the sugar stocks. The Notes.—A receipt is merely presumptive evidence and is not conclusive.
unconditional presentment of the receipts by the petitioner for payment against (Philippine National Bank vs. Court of Appeals, 256 SCRA 309 [1996])
private respondents on the strength of the provisions of the Warehouse Receipts The relationship between the consignee and the arrastre operator is much
Law (R.A. 2137) carried with it the admission of the existence and validity of the akin to that existing between the consignee or owned of shipped goods and the
terms, conditions and stipulations written on the face of the Warehouse common carrier, or that between a depositor and a warehouseman. (Summa
Receipts, including the unqualified recognition of the payment of Insurance Corporation vs. Court of Appeals, 253 SCRA 175 [1996])
warehouseman’s lien for storage fees and preservation expenses. Petitioner may
not now retrieve the sugar stocks without paying the lien due private ——o0o——
respondents as warehouseman.
In view of the foregoing, the rule may be simplified thus: While the PNB is
entitled to the stocks of sugar as the endorsee of the quedans, delivery to it shall
be effected only upon payment of the storage fees.
Imperative is the right of the warehouseman to demand payment of his lien
at this juncture, because, in accordance with Section 29 of the Warehouse
Receipts Law, the warehouseman loses his lien upon goods by surrendering
possession thereof. In other words, the lien may be lost where the
warehouseman surrenders the possession of the goods without requiring
payment of his lien, because a warehouseman’s lien is possessory in nature.
We, therefore, uphold and sustain the validity of the assailed orders of public
respondent, dated December 20, 1994 and March 1, 1995.
In fine, we fail to see any taint of abuse of discretion on the part of the public
respondent in issuing the questioned orders which recognized the legitimate
right of Noah’s Ark, after being declared as warehouseman, to recover storage
fees
395
VOL. 256, APRIL 18, 1996 395
Philippine National Bank vs. Se, Jr.
before it would release to the PNB sugar stocks covered by the five (5)
Warehouse Receipts. Our resolution, dated March 9, 1994, did not preclude
private respondents’ unqualified right to establish its claim to recover storage
fees which is recognized under Republic Act No. 2137. Neither did the Court of
Appeals’ decision, dated December 13, 1991, restrict such right.
Our Resolution’s reference to the decision by the Court of Appeals, dated
December 13, 1991, in CA-G.R. SP No. 25938, was intended to guide the parties
in the subsequent disposition of the case to its final end. We certainly did not
foreclose private respondents’ inherent right as warehouseman to collect
storage fees and preservation expenses as stipulated on the face of each of the
Warehouse Receipts and as provided for in the Warehouse Receipts Law (R.A.
2137).
WHEREFORE, the petition should be, as it is, hereby dismissed for lack of
merit. The questioned orders issued by public respondent judge are affirmed.
Costs against the petitioner.
SO ORDERED.
Padilla (Chairman), Bellosillo, Vitug and Kapunan, JJ., concur.
 VOL. 443, NOVEMBER 22, 2004 307
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
G.R. No. 146717. November 22, 2004. * occur and if carried through to completion ends up as a binding contract between the
TRANSFIELD PHILIPPINES, INC., petitioner, vs. LUZON HYDRO CORPORATION,
AUSTRALIA and NEW ZEALAND BANKING GROUP LIMITED and SECURITY
BANK CORPORATION, respondents.
Commercial Law; Banks and Banking; Letters of Credit;Standby Credits; Words and
Phrases; 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; Generally,
credits in non-sale settings have come to be known as standby credits.—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. 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. 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 nonperfor-
_______________
SECOND DIVISION.
*
308
308 SUPREME COURT REPORTS ANNOTATED
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
mance. Generally, credits in the non-sale settings have come to be known as
standby credits.
Same; Same; Same; Same; Commercial Credits and Standby Credits, Distinguished.—
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.
Same; Same; Same; A letter of credit changes its nature as different transactions
issuing and honoring banks without any regard or relation to the underlying contract or
disputes between the parties thereto.—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.
Same; Same; Same; Uniform Customs and Practice (UCP) for Documentary
Credits; Since letters of credit have gained general acceptability in international trade
transactions, the International Chamber of Commerce (ICC) has published from time to
time updates on the Uniform Customs and Practice for Documentary Credits to standardize
practices in the letter of credit area; 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.—Since letters of credit have gained general acceptability in
international trade transactions, the ICC
309
VOL. 443, NOVEMBER 22, 2004 309
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
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. First published in 1933, the UCP for
Documentary Credits has undergone several revisions, the latest of which was in 1993.
In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc., 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, 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.
Same; Same; Same; “Independence Principle”; Under the “independence 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.—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
310
310 SUPREME COURT REPORTS ANNOTATED
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
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.
Same; Same; Same; Same; 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; or (b) independence may be only as to
the justification aspect, though 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.—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.
Same; Same; Same; Same; The independence principle liberates the issuing bank
from the duty of ascertaining compliance by the parties in the main contract; As it is, the
independence doctrine works to the benefit of both the issuing bank and the beneficiary. —
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
311
VOL. 443, NOVEMBER 22, 2004 311
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
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.
Same; Same; Same; Same; 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 prerequisite for the release of funds under a letter of credit.—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.
Same; Same; Same; Same; Owing to the nature and purpose of standby letters of
credit, banks are left with little or no alternative but to honor the credit or the call for
payment.—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
312
312 SUPREME COURT REPORTS ANNOTATED
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
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.
Same; Same; Same; Same; Contracts; 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.— 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. 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.
Same; Same; Same; Same; Injunction; Requisites; Most writers agree that fraud is an
exception to the independence principle; The remedy for fraudulent abuse is an injunction.
—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. 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.
Same; Same; Same; Same; Same; 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.—Generally, injunction is a preservative remedy for the protection of
one’s substantive right or interest;
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VOL. 443, NOVEMBER 22, 2004 313
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
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. 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. It must be shown that the invasion of the
right sought to be protected is material and substantial, that the right of complainant is
clear and unmistakable and that there is an urgent and paramount necessity for the writ
to prevent serious damage. 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.
Same; Same; Same; Same; It is premature and absurd to conclude that the draws on
the Securities were outright fraudulent where the International Chamber of Commerce and
the Construction Industry Authority Commission have not ruled with finality on the
existence of default.—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.
Same; Same; Same; Same; Actions; Appeals; Pleadings and Practice; 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.—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. 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
314
314 SUPREME COURT REPORTS ANNOTATED
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
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. 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.
Same; Same; Same; Same; Obligations and Contracts; Obligations arising from
contracts have the force of law between the contracting parties and should be complied
with in good faith.— 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. More importantly, pursuant to the principle of
autonomy of contracts embodied in Article 1306 of the Civil Code, petitioner could have
incorporated in its Contract with LHC, a proviso that only the final determination by the
arbitral tribunals that default had occurred would justify the enforcement of the
Securities. However, the fact is petitioner did not do so; hence, it would have to live with
its inaction.
Actions; Injunction; 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.—In a Manifestation, 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 accomplior an
accomplished or consummated act. In Ticzon v. Video Post Manila, Inc. this Court ruled
that where the period within which the former employees were
315
VOL. 443, NOVEMBER 22, 2004 315
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
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. 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.
Same; Pleadings and Practice; Forum Shopping; 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 the issue until the party alleged to have
committed forum shopping has been given ample opportunity 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. 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. 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. Forum Shopping constitutes
improper conduct and may be punished with summary dismissal of the multiple
petitions and direct contempt of court. 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.
316
316 SUPREME COURT REPORTS ANNOTATED
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Romulo, Mabanta, Buenaventura, Sayoc and Delos Angeles and M. B.
Tomacruz & Associates Law Offices for petitioner.
Castro, Yan Binas, Ortile, Samillano & Mangrobangfor respondent Security
Bank.
Quasha, Ancheta, Peña & Nolasco for respondent ANZ Bank.
Sycip, Salazar, Hernandez & Gatmaitan for respondent LHC.
TINGA, J.:
Subject of this case is the letter of credit which has evolved as the ubiquitous
and most important device in international trade. A creation of commerce and
businessmen, the letter of credit is also unique in the number of parties involved
and its supranational character.
Petitioner has appealed from the Decision of the Court of Appeals in CA-G.R.
1 318
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 whereby petitioner, as
3
Turnkey Contractor, undertook to construct, on a turnkey basis, a seventy (70)-
Megawatt hydro-electric power station at the Bakun River in the prov-
_______________
Penned by Justice Candido V. Rivera, concurred in by Justices Conchita Carpio-Morales and
1
Rebecca de Guia-Salvador.
Rollo, pp. 52-61.
2
Id., at pp. 62-252.
3
317
VOL. 443, NOVEMBER 22, 2004 317
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
inces 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 Turn-key Contract, among which are
variations, force majeure, and delays caused by LHC itself. Further, in case of 5
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
_______________
4
Id., at pp. 75-76.
5
Clause 1.1, Volume II of the Turnkey Contract, Rollo, p. 81.
6
20.3 Dispute Resolution.
If at anytime any dispute or difference shall arise between the Employer and the Contractor in
connection with or arising out of this Contract or the carrying out of the Works, the parties together
shall in good faith exert all efforts to resolve such dispute or difference by whatever means they
deem appropriate, including conciliation, mediation and seeking the assistance of technical,
accounting or other experts. At the request of any party, the chief executives of the Employer and the
Contractor shall meet in a good-faith effort to reach an amicable settlement of the dispute or
difference. Any dispute or difference that the parties are unable to resolve within a reasonable time
may, at the option of either party, be referred to arbitration in accordance with Clause 20.4. (Id., at p.
179)
318 SUPREME COURT REPORTS ANNOTATED
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
the local branch of respondent Australia and New Zealand Banking Group
Limited (ANZ Bank) and Standby Letter of Credit No. IBDIDSB-00/4 with
7
respondent Security Bank Corporation (SBC) each in the amount of 8
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. This
was followed by another Request for Arbitration, this time filed by petitioner
before the International Chamber of Commerce (ICC) on 3 November 2000. In 11
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, petitioner—in two separate
12
letters both dated 10 August 2000—advised respondent banks of the
13
arbitration
_______________
Annex “C”, Rollo, pp. 254-256.
7
8
Annex “D”, Id., at pp. 257-259.
9
Clause 4.2.1, Volume II of the Turnkey Contract, Id., at p. 94.
10
Id., at pp. 261-265.
11
Id., at pp. 359-382.
Turnkey Contract, Clause 4.2.5, Rollo, p. 94, in relation to Clause 8.7.1., Rollo, p. 132.
12
13
Annex “H”, Rollo, pp. 287-289; Annex “H-1”, Rollo, pp. 320-322.
319
VOL. 443, NOVEMBER 22, 2004
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
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 8.2 of the Turnkey Contract, it failed to comply with its
14
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
_______________
Clause 8.2. Time for Completion. The Contractor shall complete all the Works, including the
14
Tests on Completion, in accordance with the Program on or before the Target Completion Date.
10
(Rollo, p. 125)
Vol. 1, Rollo, pp. 355-357.
15
8.7.1. If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the
16
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 Liq
320
320 SUPREME COURT REPORTS ANNOTATED
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
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. Petitioner sought to restrain respondent LHC from calling on the
17
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
319 seventeen (17) days or until 26 November 2000. 18
The RTC, in its Order dated 24 November 2000, denied petitioner’s
19
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.
_______________
uidated Damages for Delay for each day of the delay on the following day without need of
demand from the Employer.
Annex “L”, Rollo, pp. 383-402.
17
Annex “N”, Id., at pp. 406-409.
18
Annex “O”, Id., at pp. 412-423.
19
321
 VOL. 443, NOVEMBER 22, 2004 321
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
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 Certiorariunder Rule 65, with prayer for the issuance
of a temporary restraining order and writ of preliminary injunction. Petitioner
20
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 Se-
_______________
20
Docketed as CA-G.R. SP No. 61901.
322
322 SUPREME COURT REPORTS ANNOTATED
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
curities 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:
1. 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.
2. B.LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY DRAWN
FROM THE SECURITIES. 21
_______________
Rollo, pp. 25-26.
21
323
VOL. 443, NOVEMBER 22, 2004 323
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
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
Petition and Supplemental Memorandum, alleging that in the course of the
22 23
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, LHC contends that the
24
supplemental pleadings filed by petitioner
_______________
22
Vol. II; Id., at pp. 2-78.
23
Id., at pp. 79-92.
24
Id., at pp. 95-98.
324
324 SUPREME COURT REPORTS ANNOTATED
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
present erroneous and misleading information which would change petitioner’s
theory on appeal.
In yet another Manifestation dated 12 April 2004, petitioner alleges that on
25
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, stating that26
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
_______________
25
Id., at pp. 109-113.
26
Id., at pp. 666-671.
325
VOL. 443, NOVEMBER 22, 2004 325
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
same time seeking the suit for enforcement of the arbitral award before the
Makati court.
Respondent SBC in its Memorandum, dated 10 March 2003 contends that
27
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 2003 posits that its actions could not be regarded as unjustified in view
28
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
_______________
27
Id., at pp. 598-607.
Id., at pp. 619-630.
28
326
326 SUPREME COURT REPORTS ANNOTATED
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
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. The use of credits in commercial transactions serves to
30
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 be-
_______________
Joseph, Letters of Credit: The Developing Concepts and Financing Functions, 94 BANKING
29
LAW JOURNAL 850-851 [1977] cited in M. KURKELA, LETTERS OF CREDIT UNDER INTERNATIONAL
TRADE LAW, 321 (1985).
Bank of America v. Court of Appeals, G.R. No. 105395, 10 December 1993, 228 SCRA
30
357 citing William S. Shaterian, EXPORT-IMPORT BANKING: THE INSTRUMENTS AND OPERATIONS
UTILIZED BY AMERICAN EXPORTERS AND IMPORTERS AND THEIR BANKS IN FINANCING FOREIGN
TRADE, 284-374 (1947).
E&H Partners v. Broadway Nat’l. Bank, 39 F. Supp. 2d 275, (United States Circuit Court, S.D.
31
New York) No. 96 Civ. 7098 (RLC), 19 October 1998 <http://www.westlaw.com>.
327
VOL. 443, NOVEMBER 22, 2004
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
come 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. A letter of credit, however, changes its nature as different
33
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. First published in 1933, the UCP for Documentary Credits
35
has undergone several revisions, the latest of which was in 1993.
36
_______________
32
J. DOLAN, THE LAW OF LETTERS OF CREDIT, REVISED Ed. (2000).
24 A WORDS AND PHRASES 590, Permanent Edition.
33
34
Ibid.
35
JACKSON & DAVEY, INTERNATIONAL ECONOMIC RELATIONS, 53 (2nd ed.).
36
ICC Publication No. 500.
328
328 SUPREME COURT REPORTS ANNOTATED
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc., this Court
37
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, this Court ruled that there being no specific provisions which govern
38
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,
327 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, falsifica-
_______________
146 Phil. 269; 35 SCRA 256 (1970).
37
38
G.R. No. 105395, 10 December 1993, 228 SCRA 357.
329
VOL. 443, NOVEMBER 22, 2004 329
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
tion 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 pre-
_______________
39
Article 15, UCP.
40
KURKELA, LETTERS OF CREDIT UNDER INTERNATIONAL TRADE LAW, 286-287 (1985).
330
330 SUPREME COURT REPORTS ANNOTATED
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
sented and the conditions of the credit are complied with. Precisely, the 41
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
_______________
41
Art. 10, UCP.
331
VOL. 443, NOVEMBER 22, 2004 331
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
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
prerequisite 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.
 332
332 SUPREME COURT REPORTS ANNOTATED
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
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
_______________
42
Supra note 32 at pp. 1-27.
333
VOL. 443, NOVEMBER 22, 2004 333
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
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:
1. 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
2. 8.7.1If 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.
3. 8.7.2The 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. A careful 46
perusal
_______________
43
Rollo, pp. 604 and 624.
44
Italics supplied; Id., at p. 94.
45
Italics supplied; Id., at p. 132.
46
Art. 1315, Civil Code.
334
334 SUPREME COURT REPORTS ANNOTATED
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
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
47
Clause 20.4.1, Turnkey Contract, Rollo, p. 179.
48
Supra note 32 at pp. 2-63.
that contain, expressly or by implication, material representations of fact that to 49
M. KURKELA, LETTERS OF CREDIT UNDER INTERNATIONAL TRADE LAW, 309 (1985).
his knowledge are untrue. In such a situation, petitioner insists, injunction is 50
Rollo, p. 391.
recognized as a remedy available to it.
336
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 336 SUPREME COURT REPORTS ANNOTATED
limits in light of the principle’s purpose, which is to serve the commercial Transfield Philippines, Inc. vs. Luzon Hydro Corporation
function of the credit. If it does not serve those functions, application of the the court taking cognizance of the case, the only limitation being that this
principle is not warranted, and the common law principles of contract should discretion should be exercised based upon the grounds and in the manner
apply. provided by law. 51

It is worthy of note that the propriety of LHC’s call on the Securities is largely Before a writ of preliminary injunction may be issued, there must be a clear
intertwined with the fact of default which is the self-same issue pending showing by the complaint that there exists a right to be protected and that the
resolution before the arbitral tribunals. To be able to declare the call on the acts against which the writ is to be directed are violative of the said right. It 52

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,
335
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. Moreover, an injunctive remedy may only be resorted to when there is
53

VOL. 443, NOVEMBER 22, 2004 335 a pressing necessity to avoid injurious consequences which cannot be remedied
Transfield Philippines, Inc. vs. Luzon Hydro Corporation under any standard compensation. 54

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?
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. Indeed, the Turnkey Contract is
55

Most writers agree that fraud is an exception to the independence principle. plain and unequivocal in that it conferred upon LHC the right to draw upon the
Professor Dolan opines that the untruthfulness of a certificate accompanying a Securities in case
_______________
demand for payment under a standby credit may qualify as fraud sufficient to
support an injunction against payment. The remedy for fraudulent abuse is an
48

Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga, 415 Phil. 43; 362 SCRA 635, 651
51

injunction. However, injunction should not be granted unless: (a) there is clear (2001).
proof of fraud; (b) the fraud constitutes fraudulent abuse of the independent Shin v. Court of Appeals, G.R. No. 113627, 6 February 2001, 351 SCRA 257.
52

purpose of the letter of credit and not only fraud under the main agreement; and Zabat v. Court of Appeals, G.R. No. 122089, 23 August 2000, 338 SCRA 551; Philippine Economic
53

(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
Zone Authority v. Vianzon, G.R. No. 131020, 20 July 2000, 336 SCRA 309; Valencia v. Court of
Appeals, G.R. No. 119118, 19 February 2001, 352 SCRA 72; Crystal v. Cebu International School, G.R.
No. 135433, 4 April 2001, 356 SCRA 296; Ong Ching Kian Chuan v. Court of Appeals, 415 Phil.
365; 363 SCRA 145(2001).
Philippine National Bank v. Ritratto Group, Inc., 414 Phil. 494; 362 SCRA 216 (2001).
54

Rollo, p. 31.
would move the target completion date. It argued that if its claims for extension
55

would be found meritorious by the ICC, then LHC would not be entitled to any 337
liquidated damages. 50

VOL. 443, NOVEMBER 22, 2004 337

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 Transfield Philippines, Inc. vs. Luzon Hydro Corporation
provisional remedy, an adjunct to a main suit. The issuance of the writ of of default, as provided in Clause 4.2.5, in relation to Clause 8.7.2, thus:
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
 1. “4.2.5The 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.
2. 8.7.2The 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.”
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. What petitioner did assert
58
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
_______________
56
Italics supplied; Id., at pp. 94-95.
Id., at p. 132.
57
58
Vide Annex “L”, Rollo. pp. 392-399; Petition for Certiorari, CA Rollo, pp. 7-43.
338
338 SUPREME COURT REPORTS ANNOTATED
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
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. The lower courts
59
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. More 60
importantly, pursuant to the principle of autonomy of contracts embodied in
Article 1306 of the Civil Code, petitioner could have incorporated in its Contract
61
56 with LHC, a proviso that only the final determination by the arbitral tribunals
that default had occurred would justify the enforcement of the
_______________
Salafranca v. Philamlife Village Homeowners Association, Inc., 360 Phil. 652; 300 SCRA
59
57
469 (1998); Ruby Industrial Corporation v. Court of Appeals, 348 Phil. 480; 284 SCRA
445 (1998); Victorias Milling Co., Inc. v. Court of Appeals, 389 Phil. 184; 333 SCRA 663 (2000).
Article 1159, Civil Code.
60
Art. 1306. The contracting parties may establish such stipulations, clauses, terms and
61
conditions as they may deem convenient, provided they are not contrary to law, morals, good
customs, public order, or public policy.
339
VOL. 443, NOVEMBER 22, 2004 339
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
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, dated 30 March 2001, LHC informed this Court
62
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. In Ticzon v. Video Post Manila, Inc. this Court ruled that
63 64
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
_______________
62
Rollo, p. 493.
 Aznar Brothers Realty Company v. Court of Appeals, G.R. No. 128102, 7 March 2000, 327 SCRA
63
359; Soriano v. Court of Appeals, 416 Phil. 226; 363 SCRA 725 (2001); Rodil Enterprises v. Court of
Appeals,G.R. No. 129609, 29 November 2001, 371 SCRA 79; Unionbank of the Philippines v. Court of
Appeals, 370 Phil. 837; 311 SCRA 795 (1999).
389 Phil. 20; 333 SCRA 472 (2000).
64
340
340 SUPREME COURT REPORTS ANNOTATED
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
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. The other issues raised by
65
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
2004 LHC alleges that petitioner presented before this Court the same claim for
66
money which it has filed in two other proceedings, to wit: ICC Case No.
11264/TE/MW and Civil Case No. 04-332before 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
_______________
65
BLACK’S LAW DICTIONARY, p. 1008, citing Leonhart v. McCormick, D.C. Pa., 395 F. Supp. 1073.
66
Vol. II, Rollo, pp. 666-669.
341
VOL. 443, NOVEMBER 22, 2004
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
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. It may also consist in the act of
67
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. To determine 68
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. Forum shopping constitutes
69
improper conduct and may be punished with summary dismissal of the multiple
petitions and direct contempt of court. 70
Considering the seriousness of the charge of forum shopping and the
severity of the sanctions for its violation, the Court will refrain from making any
definitive ruling on this issue until after petitioner has been given ample
opportunity to respond to the charge.
WHEREFORE, the instant petition is DENIED, with costs against petitioner.
Petitioner is hereby required to answer the charge of forum shopping within
fifteen (15) days from notice.
_______________
Tantoy, Sr. v. Court of Appeals, G.R. No. 141427, April 20, 2001, 357 SCRA 329.
67
Bangko Silangan Development Bank v. Court of Appeals, 412 Phil. 755; 360 SCRA 422 (2001).
68
Tirona v. Alejo, G.R. No. 129313, October 10, 2001, 367 SCRA 17; Manalo v. Court of
69
Appeals, G.R. No. 141297, October 8, 2001, 366 SCRA 752.
Tantoy, Sr. v. Court of Appeals, supra note 67; Caviles v. Seventeenth Division, Court of
70
Appeals, G.R. No. 126857, September 18, 2002, 389 SCRA 306.
342
342 SUPREME COURT REPORTS ANNOTATED
National Power Corporation vs. Alonzo-Legasto
SO ORDERED.
Puno (Chairman), Austria-Martinez, Callejo, Sr.and Chico-Nazario,
JJ., concur.
Petition denied.
Notes.—Being a product of international commerce, it is not uncommon to
find a dearth of national law that can adequately provide for the governance of
letters of credit. (Bank of America, NT & SA vs. Court of Appeals, 228 SCRA
357 [1993])
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. (Salafranca v. Philamlife (Pamplona) Village
Homeowners Association, Inc., 300 SCRA 469 [1998])
341
——o0o——
 G.R. No. 146717. May 19, 2006. * Sycip, Salazar, Hernandez & Gatmaitan for respondent LHC.
TRANSFIELD PHILIPPINES, INC., petitioner, vs. LUZON HYDRO CORPORATION,
AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED and SECURITY
BANK CORPORATION, respondents.
Civil Procedure; Actions; Forum Shopping; The essence of forum shopping is the filing
of multiple suits involving the same parties for the same cause of action, either
simultaneously or successively, for the purpose of obtaining a favorable judgment; Grounds
for Forum Shopping to Exist.—The essence of forum shopping is the filing of multiple suits
involving the same parties for the same cause of action, either simultaneously or
successively, for the purpose of obtaining a favorable judgment. Forum shopping has
likewise been defined as the act of a party against whom an adverse judgment has been
rendered in one forum, seeking and possibly getting a favorable opinion in another
forum, other than by appeal or the 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 would make a favorable disposition. Thus, for forum shopping to
exist, there must be (a) identity of parties, or at least such parties as represent the same
interests in both actions; (b) identity of rights asserted and relief prayed for, the relief
being founded on the same facts; and (c) the identity of the two preceding particulars is
such that any judgment rendered in the other action will, regardless of which party is
successful, amount to res judicata in the action under consideration.
Same; Same; Same; Arbitration; The pendency of arbitral proceedings does not
foreclose resort to the courts for provisional reliefs.—As a fundamental point, the
pendency of arbitral proceedings does not foreclose resort to the courts for provisional
reliefs. The Rules of the ICC, which governs the parties’ arbitral dispute, allows the
application of a party to a judicial authority for interim or conservatory measures.
Likewise, Section 14 of Republic Act (R.A.) No. 876 (The Arbitration Law) recognizes the
rights of any party to petition the court to take measures to safeguard and/or conserve
any
_______________
*
SPECIAL SECOND DIVISION.
15
VOL. 490, MAY 19, 2006 15
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
matter which is the subject of the dispute in arbitration. In addition, R.A. 9285,
otherwise known as the “Alternative Dispute Resolution Act of 2004,” allows the filing of
provisional or interim measures with the regular courts whenever the arbitral tribunal
has no power to act or to act effectively.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the resolution of the Court.
Manuel M. Cosico and M.B. Tomacruz & Associatesfor petitioner.
Lariba, Perez, Anastacio, Mangrobang, Miralles & Vil-lones for respondent
Security Bank.
Quasha, Ancheta, Peña & Nolasco Law Office for respondent ANZ Bank.
RESOLUTION
TINGA, J.:
The adjudication of this case proved to be a two-stage process as its constituent
parts involve two segregate but equally important issues. The first stage relating
to the merits of the case, specifically the question of the propriety of calling on
the securities during the pendency of the arbitral proceedings, was resolved in
favor of Luzon Hydro Corporation (LHC) with the Court’s Decision of 22 1
November 2004. The second stage involving the issue of forum shopping on
which the Court required the parties to submit their respective memoranda is 2
disposed of in this Resolution.
The disposal of the forum shopping charge is crucial to the parties to this
case on account of its profound effect on the
_______________
1
443 SCRA 307 (2004).
2
Resolution dated 27 April 2005, Rollo, pp. 1213-1219.
16
16 SUPREME COURT REPORTS ANNOTATED
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
final outcome of the international arbitral proceedings which they have chosen
as their principal dispute resolution mechanism. 3
LHC claims that Transfield Philippines, Inc. (TPI) is guilty of forum shopping
when it filed the following suits:
1. 1.Civil Case No. 04-332 filed on 19 March 2004, pending before the
Regional Trial Court (RTC) of Makati, Branch 56 for confirmation,
recognition and enforcement of the Third Partial Award in case 11264
TE/MW, ICC International Court of Arbitration, entitled Transfield
Philippines, Inc. v. Luzon Hydro Corporation. 4
2. 2.ICC Case No. 11264/TE/MW, Transfield Philippines, Inc. v. Luzon Hydro
Corporation filed before the International Court of Arbitration,
International Chamber of Commerce (ICC) a request for arbitration
dated 3 November 2000 pursuant to the Turnkey Contract between
LHC and TPI;
3. 3.G.R. No. 146717, Transfield Philippines, Inc. v. Luzon Hydro
Corporation, Australia and New Zealand Banking Group Limited and
Security Bank Corp. filed on 5 February 2001, which was an appeal by
certiorari with prayer for TRO/preliminary prohibitory and
 mandatory injunction, of the Court of Appeals Decision dated 31 2004, as well as the viability of international commercial arbitration as an
January 2001 in CA-G.R. SP No. 61901. alternative mode of dispute resolution in the country. Said motion was opposed
7

by LHC in its opposition

_______________
1. a.CA-G.R. SP No. 61901 was a petition for review of the Decision in Civil
Case No. 00-1312, wherein TPI claimed that LHC’s call on the
Rollo, pp. 1289-1293.
5

securities was premature considering ANZ Bank’s Motion to be Excused, Id., at p. 1220; Security Bank’s Motion to be Excused,
6

Temporary Rollo.
_______________ Motion for Leave to Set Case for Oral Argument, Id., at pp. 1747-1751.
7

18
3
The growth of international commercial arbitration (ICA) is both a rejection of the non-binding
conciliation and mediation process and a retreat from the vicissitudes and uncertainties of 18 SUPREME COURT REPORTS ANNOTATED
international business litigation. More positively, the mechanism offers predictability and neutrality
as a forum and allows the parties to select and shape the procedures and costs of dispute resolution.
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
On the other hand, ICA procedures are often informal and not laden with legal rights. R. H. FOLSOM, filed on 2 September 2005, with LHC arguing that the respective memoranda of
M. W. GORDON, J. A. SPANOGLE, JR., INTERNATIONAL BUSINESS TRANSACTIONS, pp. 1113-1114 (2nd the parties are sufficient for the Court to resolve the issue of forum
ed., 1 year published). shopping. On 28 October 2005, TPI filed its Manifestation and Reiterative
8

The award purportedly held that LHC wrongfully drew on the securities; and that TPI is
Motion to set the case for oral argument, where it manifested that the
4

entitled to the return of the said sums, liquidated damages, and liquidation costs.
International Chamber of Commerce (ICC) arbitral tribunal had issued its Final
17 Award ordering LHC to pay TPI US$24,533,730.00 (including the
VOL. 490, MAY 19, 2006 17 US$17,977,815.00 proceeds of the two standby letters of credit). TPI also
Transfield Philippines, Inc. vs. Luzon Hydro Corporation submitted a copy thereof with a Supplemental Petition to the Regional Trial
10

Court (RTC), seeking recognition and enforcement of the said award. 11

The essence of forum shopping is the filing of multiple suits involving the
1. that the issue of default has not yet been resolved with finality; the same parties for the same cause of action, either simultaneously or successively,
petition was however denied by the Court of Appeals; for the purpose of obtaining a favorable judgment. Forum shopping has
12

2. b.Civil Case No. 00-1312 was a complaint for injunction with prayer for
temporary restraining order and/or writ of preliminary injunction
dated 5 November 2000, which sought to restrain LHC from calling on
the securities and respondent banks from transferring or paying of the
securities; the complaint was denied by the RTC.
likewise been defined as the act of a party against whom an adverse judgment
has been rendered in one forum, seeking and possibly getting a favorable
opinion in another forum, other than by appeal or the 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 would make a
favorable disposition. 13

On the other hand, TPI claims that it is LHC which is guilty of forum shopping
when it raised the issue of forum shopping not only in this case, but also in Civil
Case No. 04-332, and even asked for the dismissal of the other case based on
this ground. Moreover, TPI argues that LHC is relitigating in Civil Case No. 04-
332 the very same causes of action in ICC Case No. 11264/TE/MW, and even
manifesting therein that it will present evidence earlier presented before the
Thus, for forum shopping to exist, there must be (a) identity of parties, or at
least such parties as represent the same interests in both actions; (b) identity of
rights asserted and relief prayed for, the relief being founded on the same facts;
and (c) the identity of the two preceding particulars is such
_______________
Opposition, Id., at pp. 1757-1760.
8

Id., at pp. 1763-1767.

9

arbitral tribunal. 5

Id., at pp. 1823-1829.

10

Meanwhile, ANZ Bank and Security Bank moved to be excused from filing a TPI also submitted a copy of the Award, Id., at pp. 1768-1818.
11

memorandum. They claim that with the finality of the Court’s Decision dated 22 Mondragon Leisure and Resorts Corporation v. United Coconut Planters Bank, G.R. No. 154187,
12

November 2004, any resolution by the Court on the issue of forum shopping will 14 April 2004, 427 SCRA 585, 590.
Roxas v. Court of Appeals, G.R. No. 139337, 15 August 2001, 363 SCRA 207, 217.
13

not materially affect their role as the banking entities involved are
concerned. The Court granted their respective motions.
6
19
On 1 August 2005, TPI moved to set the case for oral argument, positing that VOL. 490, MAY 19, 2006 19
the resolution of the Court on the issue of forum shopping may have significant
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
implications on the interpretation of the Alternative Dispute Resolution Act of
that any judgment rendered in the other action will, regardless of which party is
successful, amount to res judicata in the action under consideration.
There is no identity of causes of action between and among the arbitration
case, the instant petition, and Civil Case No. 04-332.
The arbitration case, ICC Case No. 11264 TE/MW, is an arbitral proceeding
commenced pursuant to the Turnkey Contract between TPI and LHC, to
determine the primary issue of whether the delays in the construction of the
project were excused delays, which would consequently render valid TPI’s
claims for extension of time to finish the project. Together with the primary
issue to be settled in the arbitration case is the equally important question of
monetary awards to the aggrieved party.
On the other hand, Civil Case No. 00-1312, the precursor of the instant
petition, was filed to enjoin LHC from calling on the securities and respondent
banks from transferring or paying the securities in case LHC calls on them.
However, in view of the fact that LHC collected the proceeds, TPI, in its appeal
and petition for review asked that the same be returned and placed in escrow
pending the resolution of the disputes before the ICC arbitral tribunal.
While the ICC case thus calls for a thorough review of the facts which led to
the delay in the construction of the project, as well as the attendant
responsibilities of the parties therein, in contrast, the present petition puts in
issue the propriety of drawing on the letters of credit during the pendency of the
arbitral case, and of course, absent a final determination by the ICC Arbitral
tribunal. Moreover, as pointed out by TPI, it
_______________
Korea Exchange Bank v. Hon. Rogelio C. Gonzales, et al., G.R. Nos. 142286-87, 15 April 2005, 456
14
SCRA 224, 243, citing Benedicto v. Court of Appeals, G.R. No. 125359, 4 September 2001, 364 SCRA
334.
Rollo, p. 1270.
15
20
20 SUPREME COURT REPORTS ANNOTATED
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
did not pray for the return of the proceeds of the letters of credit. What it asked
instead is that the said moneys be placed in escrow until the final resolution of
the arbitral case. Meanwhile, in Civil Case No. 04-332, TPI no longer seeks the
issuance of a provisional relief, but rather the issuance of a writ of execution to
enforce the Third Partial Award.
Neither is there an identity of parties between and among the three (3)
cases. The ICC case only involves TPI and LHC logically since they are the parties
to the Turnkey Contract. In comparison, the instant petition includes Security
Bank and ANZ Bank, the banks sought to be enjoined from releasing the funds of
the letters of credit. The Court agrees with TPI that it would be ineffectual to ask
the ICC to issue writs of preliminary injunction against Security Bank and ANZ
Bank since these banks are not parties to the arbitration case, and that the ICC
Arbitral tribunal would not even be able to compel LHC to obey any writ of
preliminary injunction issued from its end. Civil Case No. 04-322, on the other
16
hand, logically involves TPI and LHC only, they being the parties to the
14
arbitration agreement whose partial award is sought to be enforced.
As a fundamental point, the pendency of arbitral proceedings does not
foreclose resort to the courts for provisional reliefs. The Rules of the ICC, which
governs the parties’ arbitral dispute, allows the application of a party to a
judicial authority for interim or conservatory measures. Likewise, 17
_______________
Id., at p. 1267.
16
Art. 23 (2), Rules of Arbitration of the International Chamber of Commerce provides:
17
Before the file is transmitted to the Arbitral tribunal and in appropriate circumstances even
thereafter, the parties may apply to any competent judicial authority for interim or conservatory
measures. The application of a party to a judicial authority for such measure or for the
implementation of any such measure ordered by an Arbitral tribunal shall not be deemed to be an
21
VOL. 490, MAY 19, 2006 21
15
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
Section 14 of Republic Act (R.A.) No. 876 (The Arbitration Law) recognizes the 18
rights of any party to petition the court to take measures to safeguard and/or
conserve any matter which is the subject of the dispute in arbitration. In
addition, R.A. 9285, otherwise known as the “Alternative Dispute Resolution Act
of 2004,” allows the filing of provisional or interim measures with the regular
courts whenever the arbitral tribunal has no power to act or to act effectively. 19
_______________
shall not affect the relevant powers reserved to the Arbitral tribunal.Any such application and
any measures taken by the judicial authority must be notified without delay to the Secretariat. The
Secretariat shall inform the Arbitral tribunal thereof. (emphasis supplied)
18
Section 14. Subpoena and subpoena duces tecum.—Arbitrators shall have the power to require
any person to attend a hearing as a witness. They shall have the power to subpoena witnesses and
documents when the relevancy of the testimony and the materiality thereof has been demonstrated
to the arbitrators. Arbitrators may also require the retirement of any witness during the testimony
of any other witness. All of the arbitrators appointed in any controversy must attend all the hearings
in that matter and hear all the allegations and proofs of the parties; but an award by the majority of
them is valid unless the concurrence of all of them is expressly required in the submission or
contract to arbitrate. The arbitrator or arbitrators shall have the power at any time, before rendering
the award, without prejudice to the rights of any party to petition the court to take measures to
safeguard and/or conserve any matter which is the subject of the dispute in arbitration. (Emphasis
supplied).
Sec. 28, R.A. No. 9285. Grant of Interim Measure of Protection. (a) It is not incompatible with
19
an arbitration agreement for a party to request, before constitution of the tribunal, from a Court an
interim measure of protection and for the Court to grant such measure. After constitution of the
arbitral tribunal and during arbitral proceedings, a request for an interim measure of protection, or
modification thereof, may be made with the arbitral tribunal or to the extent that the arbitral
tribunal has no power to act or is unable to act effectively, the request may be made with the Court. x
x x. (Emphasis supplied).
22
22 SUPREME COURT REPORTS ANNOTATED
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
TPI’s verified petition in Civil Case No. 04-332, filed on 19 March 2004, was
captioned as one “For: Confirmation, Recognition and Enforcement of Foreign
Arbitral Award in Case 11264 TE/MW, ICC International Court of Arbitration,
‘Transfield Philippines, Inc. v. Luzon Hydro Corporation’ (Place of arbitration:
Singapore).” In the said petition, TPI prayed:
20
1. “1.That the THIRD PARTIAL AWARD dated February 18, 2004 in Case
No. 11264/TE/MW made by the ICC International Court of
Arbitration, the signed original copy of which is hereto attached as
Annex “H” hereof, be confirmed, recognized and enforced in
accordance with law.
2. 2.That the corresponding writ of execution to enforce Question 31 of
the said Third Partial Award, be issued, also in accordance with law.
3. 3.That TPI be granted such other relief as may be deemed just and
equitable, and allowed, in accordance with law.” 21
The pertinent portion of the Third Partial Award relied upon by TPI were the
22
answers to Questions 10 to 26, to wit:
“Question Did TPI [LHC] wrongfully draw upon the security?
30
Yes
“Question Is TPI entitled to have returned to it any sum wrongfully
31 taken by LHC for liquidated damages?
Yes
“Question Is TPI entitled to any acceleration costs? TPI is entitled to
32 the reasonable costs TPI incurred after Typhoon Zeb as a
result of LHC’s 5 February 1999 Notice to Correct. 23
_______________
20
Rollo, p. 672.
21
Id., at p. 680.
22
Id., at p. 661.
23
Third Partial Award, id., at pp. 114-664.
23
VOL. 490, MAY 19, 2006 23
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
According to LHC, the filing of the above case constitutes forum shopping since
it is the same claim for the return of US$17.9 Million which TPI made before the
ICC Arbitral Tribunal and before this Court. LHC adds that while Civil Case No.
04-332 is styled as an action for money, the Third Partial Award used as basis of
the suit does not authorize TPI to seek a writ of execution for the sums drawn
on the letters of credit. Said award does not even contain an order for the
payment of money, but instead has reserved the quantification of the amounts
for a subsequent determination, LHC argues. In fact, even the Fifth Partial
Award, dated 30 March 2005, does not contain such orders. LHC insists that the
24
declarations or the partial awards issued by the ICC Arbitral Tribunal do not
constitute orders for the payment of money and are not intended to be
enforceable as such, but merely constitute amounts which will be included in
the Final Award and will be taken into account in determining the actual amount
payable to the prevailing party. R.A. No. 9825 provides that international
25
commercial arbitrations shall be governed shall be governed by the Model Law
on International Commercial Arbitration (“Model Law”) adopted by the United
Nations Commission on International Trade Law (UNCITRAL). The UNCITRAL 26
Model Law provides:
ARTICLE 35. Recognition and enforcement
1. (1)An arbitral award, irrespective of the country in which it was made, shall be
recognized as binding and, upon application in writing to the competent court,
shall be enforced subject to the provisions of this article and of article 36.
2. (2)The party relying on an award or applying for its enforcement shall supply
the duly authenticated original award or a duly certified copy thereof, and the
original arbitration agreement
_______________
24
Id., at pp. 1685-1743.
25
Id., at pp. 1665-66.
26
Rep. Act No. 9285, Sec. 19.
24
24 SUPREME COURT REPORTS ANNOTATED
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
referred to in article 7 or a duly certified copy thereof. If the award or agreement is not
made in an official language of this State, the party shall supply a duly certified
translation thereof into such language.
Moreover, the New York Convention, to which the Philippines is a signatory,
27
governs the recognition and enforcement of foreign arbitral awards. The
applicability of the New York Convention in the Philippines was confirmed in
Section 42 of R.A. 9285. Said law also provides that the application for the
recognition and enforcement of such awards shall be filed with the proper RTC.
While TPI’s resort to the RTC for recognition and enforcement of the Third
Partial Award is sanctioned by both the New York Convention and R.A. 9285, its
application for enforcement, however, was premature, to say the least. True, the
ICC Arbitral Tribunal had indeed ruled that LHC wrongfully drew upon the
securities, yet there is no order for the payment or return of the proceeds of the
said securities. In fact, Paragraph 2142, which is the final paragraph of the Third 30
Id., at pp. 1703-1705.
Id., at p. 1741.
Partial Award, reads:
31

32
Id., at pp. 1741-1742.
2142. All other issues, including any issues as to quantum and costs, are reserved to a
future award. 28
26

Meanwhile, the tribunal issued its Fifth Partial Award on 30 March 2005. It
29
26 SUPREME COURT REPORTS ANNOTATED
contains, among others, a declaration that while LHC wrongfully drew on the Transfield Philippines, Inc. vs. Luzon Hydro Corporation
securities, the drawing was made in good faith, under the mistaken assumption which included TPI’s claim of US$17,977,815.00 for the return of the securities
that the contractor, TPI, was in default. Thus, the tribunal ruled that while the from LHC. 33

amount drawn must be returned, TPI is not entitled to any damages or interests The fact that the ICC Arbitral tribunal included the proceeds of the securities
due to LHC’s drawing on shows that it intended to make a final determination/award as to the said issue
_______________ only in the Final Award and not in the previous partial awards. This supports
LHC’s position that when the Third Partial Award was released and Civil Case
Convention on the Recognition and Enforcement of Foreign Arbitral Awards, signed at New
27

No. 04-332 was filed, TPI was not yet authorized to seek the issuance of a writ of
York on 10 June 1958, and ratified by the Philippines under Senate Resolution No. 71.
Rollo, p. 663.
28
execution since the quantification of the amounts due to TPI had not yet been
Id., at pp. 1685-1703.
29 settled by the ICC Arbitral tribunal. Notwithstanding the fact that the amount of
proceeds drawn on the securities was not disputed the application for the
. enforcement of the Third Partial Award was precipitately filed. To repeat, the
25
declarations made in the Third Partial Award do not constitute orders for the
VOL. 490, MAY 19, 2006 25 payment of money.
Transfield Philippines, Inc. vs. Luzon Hydro Corporation Anent the claim of TPI that it was LHC which committed forum shopping,
the securities. In the Fifth Partial Award, the tribunal ordered:
30 suffice it to say that its bare allegations are not sufficient to sustain the charge.
“6. Order WHEREFORE, the Court RESOLVES to DISMISS the charges of forum
6.1. General shopping filed by both parties against each other.
166. This Fifth Partial Award deals with many issues of quantum. However, it does No pronouncement as to costs.
not resolve them all. The outstanding quantum issues will be determined in a future SO ORDERED.
award. It will contain a reconciliation of the amounts awarded to each party and a Puno (Chairperson), Austria-Martinez, Callejo, Sr.and Chico-Nazario, JJ.,
determination of the net amount payable to Claimant or Respondent, as the case may be.
concur.
167. In view of this the Tribunal will make no orders for payment in this Fifth Partial
Award. The Tribunal will make a number of declarations concerning the quantum issues Charges of forum shopping dismissed.
it has resolved in this Award together with the outstanding liability issues. The
Note.—Forum shopping is present when there is identity of parties, rights or
declarations do not constitute orders for the payment of money and are not intended to
be enforceable as such. They merely constitute amounts which will be included in the causes of action and reliefs sought in two or more pending cases. (R & E
Final Award and will be taken into account in determining the actual amount Transport, Inc. vs. Latag, 422 SCRA 698 [2004])
payable.” (Emphasis Supplied.)
31

Further, in the Declarations part of the award, the tribunal held:

6.2 Declarations
168. The Tribunal makes the following declarations:
xxx
3. LHC is liable to repay TPI the face value of the securities drawn down by it, namely,
$17,977,815. It is not liable for any further damages claimed by TPI in respect of the
drawdown of the securities.
x x x. 32

Finally, on 9 August 2005, the ICC Arbitral tribunal issued its Final Award, in
essence awarding US$24,533,730.00,
_______________
 VOL. 339, SEPTEMBER 5, 2000 609
Colinares vs. Court of Appeals
G.R. No. 90828. September 5, 2000. * instruments with the obligation to turn over to the entruster the proceeds thereof to the
MELVTN COLINARES and LORDINO VELOSO, petitioners, vs. HONORABLE
COURT OF APPEALS, and THE PEOPLE OF THE PHILIPPINES, respondents.
Actions; New Trial; The grant or denial of a motion for new trial rests upon the
discretion of the judge.—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.
Same; Same; Newly Discovered Evidence; It is essential that the offering party
exercise reasonable diligence in seeking to locate the evidence before or during trial but
nonetheless failed to secure it.—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. 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.
Same; Same; Same; Alleged newly discovered evidence which is mere forgotten
evidence is excluded as a ground for new trial.—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.”
Assuming Petitioners’ copy was then unavailable, they could have compelled its
production in court, 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.” Clearly, the
alleged newly discovered evidence is mere forgotten evidence that jurisprudence
excludes as a ground for new trial.
________________
*
FIRST DIVISION.
610
610 SUPREME COURT REPORTS ANNOTATED
Colinares vs. Court of Appeals
Criminal Law; Trust Receipts Law (P.D. 115); Words and Phrases; “Trust Receipt
Transaction,” Defined.—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 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
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.
Same; Same; Estafa; 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 is punishable as estafa.—
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.
Same; Same; Same; In a pure trust receipt transaction, the 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; 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.—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
611
VOL. 339, SEPTEMBER 5, 2000 611
Colinares vs. Court of Appeals
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.
Same; Same; The Trust Receipts Law does not seek to enforce the 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.—The Trust Receipts Law does not seek to enforce The Solicitor General for the People.
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 DAVIDE, JR., C.J.:
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 In 1979 Melvin Colinares and Lordino Veloso (hereafter Petitioners) were
receipts issued by PBC acknowledging payment of the loan. 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.
Same; Same; The mala prohibita nature of the alleged offense notwithstanding, On 30 October 1979, Petitioners obtained 5,376 SF Solatone acoustical
intent as a state of mind was not proved to be present in the situation of the accused—they board 2’x4’x1/2”, 300 SF tanguile Wood tiles 12”x 12”,
employed no artifice in dealing with the bank and never did they evade payment of their 613
obligation nor attempt to abscond.—The Information charges Petitioners with intent to
defraud and misappropriating the money for their personal use. The mala
VOL. 339, SEPTEMBER 5, 2000 613
prohibita nature of the alleged offense notwithstanding, intent as a state of mind was not Colinares vs. Court of Appeals
proved to be present in Petitioners’ situation. Petitioners employed no artifice in dealing 260 SF Marcelo economy tiles and 2 gallons UMYLIN cement adhesive from CM
with PBC and never did they evade payment of their obligation nor attempt to abscond. Builders Centre for the construction project. The following day, 31 October
1

Instead, Petitioners sought favorable terms precisely to meet their obligation. 1979, Petitioners applied for a commercial letter of credit with the Philippine
2

Same; Same; The fact that the accused are not importers acquiring the goods for re- Banking Corporation, Cagayan de Oro City branch (hereafter PBC) in favor of CM
sale, contrary to the express provision embodied in the trust receipt and at no time did the Builders Centre. PBC approved the letter of credit for P22,389.80 to cover the
3

title pass to the bank impresses upon the full invoice value of the goods. Petitioners signed a pro-forma trust receipt as 4

612 security. The loan was due on 29 January 1980.

On 31 October 1979, PBC debited P6,720 from Petitioners’ marginal deposit
612 SUPREME COURT REPORTS ANNOTATED as partial payment of the loan. 5

Colinares vs. Court of Appeals On 7 May 1980, PBC wrote to Petitioners demanding that the amount be
6

trust receipt in question vagueness and ambiguity which should not be the basis for paid within seven days from notice. Instead of complying with PBC’s demand,
criminal prosecution in the event of violation of its provisions.—Also noteworthy is the fact Veloso confessed that they lost P19,195.83 in the Carmelite Monastery Project
that Petitioners are not importers acquiring the goods for re-sale, contrary to the express and requested for a grace period of until 15 June 1980 to settle the account. 7

provision embodied in the trust receipt. They are contractors who obtained the fungible PBC sent a new demand letter to Petitioners on 16 October 1980 and
8

goods for their construction project. At no time did title over the construction materials
informed them that their outstanding balance as of 17 November 1979 was
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 P20,824.40 exclusive of attorney s fees of 25%. 9

basis for criminal prosecution in the event of violation of its provisions. On 2 December 1980, Petitioners proposed that the terms of payment of the
10

loan be modified as follows: P2,000 on or before 3 December 1980, and P1,000

Same; Same; Banks and Banking; Contracts; Contracts of Adhesion; The practice of per month starting 31 January 1980 until the account is fully paid. Pending
banks of making borrowers sign trust receipts to facilitate collection of loans and place approval of the proposal, Petitioners paid P1,000 to PBC on 4 December
them under the threats of criminal prosecution should they be unable to pay it may be 1980, and thereafter P500 on 11 February 1981, 16 March 1981, and 20 April
11 12 13

unjust and inequitable, if not reprehensible.—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 1
Exhibit “D,” Original Record (OR), 115.
reprehensible. Such agreements are contracts of adhesion which borrowers have no 2
Exhibit “A,” Id., 112.
option but to sign lest their loan be disapproved. The resort to this scheme leaves poor 3
Exhibit “B,” OR, 113.
and hapless borrowers at the mercy of banks, and is prone to misinterpretation, as had 4
Exhibit “C,” Id., 114.
happened in this case. Eventually, PBC showed its true colors and admitted that it was 5
Exhibit “8-C,” Id., 181.
only after collection of the money, as manifested by its Affidavit of Desistance. 6
Exhibit “4,” Id., 160.
7
Exhibits “3, I,” Id., 153.
8
Exhibit “E,” Id., 116.
PETITION for review on certiorari of a decision of the Court of Appeals. 9
Exhibit “5,” Id., 161.
10
Exhibit “F,” Id., 117.
The facts are stated in the opinion of the Court. 11
Exhibit “7,” Id., 167.
Exhibit “7-A,” Id., 168.
Romualdo, Amado, Romualda and Associates Law Office for petitioners.
12

13
Exhibit “7-B,” Id., 169.
 614
614 SUPREME COURT REPORTS ANNOTATED
Colinares vs. Court of Appeals
1981. Concurrently with the separate demand for attorney’s fees by PBC’s legal
14
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
an 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
________________
14
Exhibit “7-C,” Id., 170.
15
Exhibit “G,” Id., 118.
16
OR, 33.
615
VOL. 339, SEPTEMBER 5, 2000 615
Colinares vs. Court of Appeals
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, 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. 17
On 7 July 1986, the trial court promulgated its decision convicting18
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 solidarity 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 attorney’s 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 for
19
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.
________________
TSN, 21 May 1986, 21-22, 30.
17
18
Per Judge Senen C. Penñ aranda. Rollo 12-17.
19
Exhibit “D,” supra note 1.
616
616 SUPREME COURT REPORTS ANNOTATED
Colinares vs. Court of Appeals
In its decision 6 March 1989, the Court of Appeals modified the judgment of the
20
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 Veloso’s 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 alleging that the “Disclosure Statement on Loan/Credit
21
Transaction” (hereafter Disclosure Statement) signed by them and Tuiza was
22
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 of 16 October 1989 the Court of Appeals denied the Motion
23
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:
1. 1.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. 2.ASSUMING THERE WAS A VALID TRUST RECEIPT, WHETHER OR NOT
THE ACCUSED WERE PROPERLY CHARGED,
________________
Annex “A” Petition, Rollo, 3-10. Per Imperial, J., J., with the concurrence of Puno, R. and
20
Francisco, C, JJ.
Rollo, 27-39.
21
Id., 177-178.
22
Id., 45.
23
617
VOL. 339, SEPTEMBER 5, 2000
Colinares vs. Court of Appeals
1. 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 CREDITORDEBTOR
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, and that the PBC executed an
24
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,
________________
24
Rollo, 127.
25
Id., 128.
618
618 SUPREME COURT REPORTS ANNOTATED
Colinares vs. Court of Appeals
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
617 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. It is essential 27
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.” Assuming 29
Petitioners’ copy was then unavailable, they could have compelled its
production in court, which they never did. Petitioners have miserably failed to
30
establish the second requisite of the rule on newly discovered evidence.
________________
Section 2, Rule 121, Revised Rules of Criminal Procedure.
26
See People v. Excija, 258 SCRA 424, 443 [1996]; People v. Tirona, 300 SCRA 431, 440
27
[1998]; Villanueva v. People, G.R. No. 135098, 12 April 2000, 7, 330 SCRA 695.
Tumang v. Court of Appeals, et al., 172 SCRA 328, 334 [1989]. SeeGarrido v. CA, et al., 236 SCRA
28
450, 456 [1994].
 29
Rollo, 178.
People v. Ducay, et al., 225 SCRA 1 [1993].
30
619
VOL. 339, SEPTEMBER 5, 2000
Colinares vs. Court of Appeals
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.” Clearly, the alleged newly discovered
31
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 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 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 Arti-
________________
Motion for New Trial/Reconsideration; Rollo, 28.
31
People v. Hernando, et al., 108 SCRA 121 [1981]; People v. Ducay, supra note 30; People v.
32
Penones, 200 SCRA 624 [1994].
People v. Cuevo, 104 SCRA 312, 318 [1981].
33
620
620 SUPREME COURT REPORTS ANNOTATED
Colinares vs. Court of Appeals
cle 315 (1) of the Revised Penal Code, without need of proving intent to
34
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.
619 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. The ownership of the merchandise continues to be
35
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
36
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
37
conditional sale where the importer becomes absolute owner of the imported
merchandise as soon as he has paid its price. 38
_______________
Section 13, P.D. No. 115.
34
Vintola v. IBAA, 150 SCRA 578, 583 [1987].
35
Prudential Bank v. NLRC, 251 SCRA 421 [1995], quoting National Bank v. Vda. de Hijos de
36
Angel Jose, 63 Phil. 814, 821 [1936].
People v. Yu Chai Ho, 53 Phil. 874 [1928], quoting In re: Dunlap Carpet Co., 207 Fed. 726.
37
Prudential Bank v. NLRC, supra note 36.
38
621
VOL. 339, SEPTEMBER 5, 2000 621
Colinares vs. Court of Appeals
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 A Loan is a promise of a borrower from the value received. The
transcript of the stenographic notes of the proceedings to be satisfied that the
borrower will pay the bank on a certain specified date with
records of the case do support the conclusions of the trial court. After such 41

perusal Grego Mutia, PBC’s credit investigator, admitted thus: interest 43

Such statement is akin to an admission against interest binding upon PBC

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?
Petitioner Veloso’s 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 don’t 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

A Yes, sir. PBC could have presented its former bank manager, Cayo Garcia Tuiza, who
Q I am showing to you this charge invoice, are you referring to this contracted with Petitioners, to refute Veloso’s testimony, yet it only presented
credit investigator Grego Mutia. No-
document? _______________
A Yes, sir.
_______________ 42
TSN, 18 December 1986, 10-11.
43
Id., 21-22.
Ceferina Samo v. People, 115 Phil. 346, 349-350; 5 SCRA 354, 356357, [1962], citing 53 Am Jur.
39 44
TSN, 21 May 1986, 3-4.
961. See also Prudential Bank v. NLRC, supra note 36.
Sia v. People, 121 SCRA 655 [1983].
40 623
People v. Vergara, et al., 270 SCRA 624 [1997].
41
VOL. 339, SEPTEMBER 5, 2000 623
622 Colinares vs. Court of Appeals
62 SUPREME COURT REPORTS ANNOTATED where from Mutia’s testimony can it be gleaned that PBC represented to
2 Petitioners that the transaction they were entering into was not a pure loan but
had trust receipt implications.
Colinares vs. Court of Appeals The Trust Receipts Law does not seek to enforce payment of the loan, rather
xxx it punishes the dishonesty and abuse of confidence in the handling of money or
Q What is the date of the charge invoice? goods to the prejudice of Another regardless of whether the latter is the
A October 31, 1979. owner. Here, it is crystal clear that on the part of Petitioners there was neither
45

dishonesty nor abuse of confidence in the handling of money to the prejudice of

COURT: PBC. Petitioners continually endeavored to meet their obligations, as shown by
Make it of record as appearing in Exhibit D, the zero in 30 has several receipts issued by PBC acknowledging payment of the loan.
been superimposed with numeral 1. 42 The Information charges Petitioners with intent to defraud and
During the cross and re-direct examinations he also impliedly admitted that the misappropriating the money for their personal use. The mala prohibita nature of
transaction was indeed a loan. Thus: the alleged offense notwithstanding, intent as a state of mind was not proved to
Q In short the amount stated in your Exhibit C, the trust receipt was 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
a loan to the accused you admit that? abscond. Instead, Petitioners sought favorable terms precisely to meet their
A Because in the bank the loan is considered part of the loan. obligation.
xxx Also noteworthy is the fact that Petitioners are not importers acquiring the
RE-DIRECT BY ATTY. CABANLET. goods for re-sale, contrary to the express provision embodied in the trust
receipt. They are contractors who obtained the fungible goods for their
ATTY. CABANLET (to the witness)
construction project. At no time did title over the construction materials pass to
Q What do you understand by loan when you were asked?
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
_______________

45
People v. Nitafan, et al., 207 SCRA 726 [1992].
46
Sia v. People, supra note 40.

624
624 SUPREME COURT REPORTS ANNOTATED
Colinares vs. Court of Appeals
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-G.R. 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.
Kapunan and Pardo, JJ., concur.
Puno, J., No part.
Ynares-Santiago, J., On leave.
Judgment reversed and set aside. Petitioners acquitted.
Notes.—At the pith of the requirements for newly discovered evidence as
ground for new trial is that what is essential is that the offering party had
exercised reasonable diligence in producing or locating such evidence before or
during trial but had nonetheless failed to secure it. (Garrido vs. Court of
Appeals, 236 SCRA 450 [1994])
An affidavit of desistance can not be said to be newly discovered evidence.
(People vs. Delabajan, 280 SCRA 696[1997])

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