The Hongkong & Shanghai Banking Corporation, Ltd. (HSBC) v.

National Steel
Corporation
G.R. No. 183486. February 24, 2016
Jardeleza, J.:

DOCTRINE: Under the Independence Principle in the law on letters of credit, as long as the
proper documents are presented, the issuing bank has an obligation to pay even if the buyer should
later on refuse payment.

FACTS:
Respondent National Steel Corporation (NSC) entered into an Export Sales Contract with
Klockner East Asia Limited hence, Klockner applied for an irrevocable letter of credit with
petitioner HSBC in favor of NSC. HSBC then issued a letter of credit which stated that it is
governed by the International Chamber of Commerce Uniform Customs and Practice for
Documentary Credits, Publication No. 400 (UCP 400) which obligates HSBC to immediately pay
NSC upon presentment of the documents listed in the letter of credit.
Upon the arrival of the cargo, NSC coursed the collection of its payment from Klockner
through City Trust Banking Corporation to which it obtained a loan secured by the proceeds of the
Letter of Credit issued by HSBC. However, Klockner refused payment prompting City Trust to
demand payment from HSBC which contended however that it is not liable and insisted the
application of ICC Publication No. 322 (URC 322) which states that it has no liability to pay upon
refusal of payment.
The trial court ruled in favor of HSBC but the said ruling was reversed by the appellate
court which held that it is UCP 400 and not URC 322 which governs the transaction, thus the
obligation of the issuing bank is to pay the seller or beneficiary upon compliance with the
requirements.

ISSUE:
Whether or not the bank is liable to pay due to the application of UCP 400 in the transaction
of the Letter of Credit.

RULING:

Yes, HSBC is liable under the provisions of the Letter of Credit, in accordance with the
usage and custom as embodied in UCP 400 and under the provisions of general civil law.

A letter of credit generally arises out of a separate contract requiring the assurance of
payment of a third party, hence it involves three transactions and parties: the contract of sale
between the buyer and the seller, the issuance of a letter of credit between the buyer and the issuing
bank, and the issuance of the letter of credit in favor of the seller. Under the Independence
Principle, the issuing bank's obligation to pay under the letter of credit is separate from the
compliance of the parties in the main contract. UCP 400 states that an irrevocable credit payable
on sight, such as the Letter of Credit in this case, constitutes a definite undertaking of the issuing
bank to pay, provided that the stipulated documents are presented and that the terms and conditions
of the credit are complied with. Hence, Klockner's refusal to pay carries no effect whatsoever on
HSBC's obligation to pay under the Letter of Credit.