Case Digests

Mico Metals v. Court of AppealsG.R. No. 117914. 1 February 2002.De Leon, J. FACTS: Mico Metals Corporation (MCC) applied for two domestic letters of credit (L/C) with the Philippine Bank of Communications (PBC) which applications were eventually granted. Thereafter, the domestic L/Cs were negotiated and accepted by MCC as evidenced by thecorresponding bank draft issued for the purpose. After MCC’s supplier was paid, a trust receipt(T/R), upon MCC ’s own initiative, was executed in favor of PBC. A few months later, MCC applied for authority to open foreign L/Cs with PBC Which applications were eventually approved. Negotiation and proper acceptance of the L/C were then made by MCC. Again, a corresponding T/R was executed by MCC in favor of PBC. In all the transactions involving foreign L/C, PBC turned over to MCC the necessary documents such as the bills of lading and commercial invoices to enable the latter to withdraw the goods from the port of Manila. About five months later, MCC obtained from PBC a loan covered by a promissory note(P/N). Upon maturity of all credit availments obtained by MCC from PBC, the latter made a demand for payment which demand was left unheeded. ISSUE: Whether or not PBC failed to prove that it actually made payments under the L/C since the bank drafts presented as evidence show that they were made in favor of two corresponding banks, and as such it (PBC) is not entitled to reimbursement? HELD: No. Modern L/Cs are usually not made between natural persons. They involve bank to bank transactions. Historically, L/Cs was developed to facilitate the sale of goods between, distant and unfamiliar buyers and sellers. It was an arrangement under which a bank, whose credit was acceptable to the seller, would at the instance of the buyer agree to pay drafts drawn on it by the seller, provided that certain documents are presented such as bills of lading accompanying the corresponding drafts. Consequently, there is nothing unusual in the fact that the drafts presented in evidence by PBC were not made payable to it (PBC).§ 24 of the Negotiable Instruments Law (NIL) provides that every negotiable instrument is deemed prima facie to have been issued for valuable consideration and every person whose signature appears thereon to have become a party for value. Nevertheless, while that presumption found under the NIL may not necessarily be applicable to T/R and L/C, the presumption that the drafts drawn in connection with the L/C have sufficient consideration prevails. More importantly, under § 3(r), Rule 131 of the Rules of Court there is also a presumption that sufficient consideration was given in a contract. Hence, MCC should have presented credible evidence to rebut thatpresumption as well as the evidence presented by PBC. The L/C show that the pertinent materials/merchandise have been received by MCC. The drafts signed by the beneficiary/suppliers in connection with the corresponding L/C proved that said suppliers were paid by PBC for the account of MCC. On the other hand, aside from its bare denials MCC did not present sufficient and competent evidence to rebut the evidence of PBC. MCC did not proffer a single piece of evidence, apart from its bare denial, to support its allegation that the loan transactions, L/Cs and T/Rs were issued allegedly without any consideration Transfield Philippines vs Luzon Hydro Electric Corp.(GR No 146717, Nov 22, 2004, Tinga) Transfield entered into a turn-key contract with Luzon Hydro Corp. (LHC). Under the contract, Transfield were to construct a hydro-electric plants in Benguet and Ilocos. The contract provides for a period for which the project is to be completed and also allows for the extension of the period provided that the extension is based on justifiable grounds such as fortuitous event. In order to guarantee performance by Transfield, two stand-by letters of credit were required to be opened. During the construction of the plant, Transfield requested for extension of time citing fortuitous events brought about by typhoon, barricades and demonstration. LHC did not give due course to the extension of the period prayed for but referred the matter to arbitration committee. In the meanwhile, because of the delay in the construction of the plant, LHCcalled on the stand-by letters of credit because of default. However, the demand was objected by Transfield on the ground that there is still pending arbitration on their request for extension of time. LHC invoked the“independence principle”. On the other hand, Transfield claims fraud on the part of LHC on calling the stand-by letters of credit. Under the independence principle, a LC accommodation is entirely distinct and separate, independent agreement. It is not supposed to be affected by the main contract upon which it rests. The court held for the LHC. Following the independence principle, even granting that there is still issue to be resolved arising from the turn-key project. This issue is not supposed to affect the obligation of the bank to pay the letter of credit in question. The court stressed that a LC accommodation is intended to benefit not only the beneficiary therein but the applicant thereon. On the issue of fraud, the SC held that there is nothing in the turn-key contract which states that

allissues between the parties must be resolved first before LHC can call on the stand-by LC but the contract provides that if Transfield defaults, then LHC cancall on these stand-by LC

PRUDENTIAL BANK V IAC (Philippine Rayon Mills & Anacleto Chi) 216 SCRA 257 DAVIDE, JR.; G.R. No. 74886 December 8, 1992
CA affirmed TC

letter of credit is an engagement by a bank or other person made at te rquest of a customer that the issuer will honor a draft or other demands for payments or other complaints with th conditions specified in the credit.

NATURE Petition for review of the decision of IAC, which affirmed in toto the decision of CFI Quezon City in a civil action instituted by the petitioner for the recovery of a sum of money representing the amount paid by it to the Nissho Company Ltd. of Japan for textile machinery imported by the Philippine Rayon Mills, Inc., represented by co-defendant Anacleto R. Chi. FACTS -August 8, 1962: Philippine Rayon Mills, Inc. entered into a contract with Nissho Co., Ltd. of Japan for the importation of textile machineries under a five-year deferred payment plan. To effect payment for said machineries, Phil. Rayon applied for and was granted a commercial letter of credit with the Prudential Bank and Trust Company in favor of Nissho. Against this letter of credit, drafts were drawn and issued by Nissho, which were all paid by the Prudential Bank through its correspondent in Japan, the Bank of Tokyo, Ltd. As indicated on their faces, two of these drafts were accepted by the Phil Rayon through its president, Anacleto R. Chi, while the others were not. -Upon arrival of the machineries, the Prudential Bank indorsed the shipping documents to the Phil Rayon which accepted delivery of the same. To enable the Phil Rayon to take delivery of the machineries, it executed, by prior arrangement with the Prudential Bank, a trust receipt which was signed by Anacleto R. Chi in his capacity as president of Phil Rayon. -At the back of the trust receipt is a printed form to be accomplished by two sureties who, by the very terms and conditions thereof, were to be jointly and severally liable to the Prudential Bank should the Phil Rayon fail to pay the total amount or any portion of the drafts issued by Nissho and paid for by Prudential Bank. The Phil Rayon was able to take delivery of the textile machineries and installed the same at its factory site at 69 Obudan Street, Quezon City. -Sometime in 1967, the Phil Rayon ceased business operation. On December 29, 1969, Phil Rayon's factory was leased by Yupangco Cotton Mills for an annual rental of P200,000.00. The lease was renewed on January 3, 1973. On January 5, 1974, all the textile machineries in the Phil Rayon's factory were sold to AIC Development Corporation for P300,000.00. -The obligation of the Phil Rayon arising from the letter of credit and the trust receipt remained unpaid and unliquidated. Repeated formal demands for the payment of the said trust receipt yielded no result Hence, the present action for the collection of the principal amount of P956,384.95 was filed on October 3, 1974 against the Phil Rayon and Anacleto R. Chi. Defendant’s Defenses lack of cause of action; prescription; laches Lower Court’s Ruling Both the CFI and the IAC ruled that Philippine Rayon could be held liable for the two (2) drafts because only these appear to have been accepted by the latter after due presentment. The liability for the remaining ten (10) drafts did not arise because the same were not presented for acceptance. In short, both courts concluded that acceptance of the drafts by Philippine Rayon was indispensable to make the latter liable thereon. ISSUES: 1. Whether presentment for acceptance of the drafts was indispensable to make Philippine Rayon liable thereon; 2. Whether Philippine Rayon is liable on the basis of the trust receipt; 3. Whether private respondent Chi is jointly and severally liable with Philippine Rayon for the obligation sought to be enforced 3a. If not, WON he may be considered a guarantor 3b. If he is a guarantor, WON the case should have been dismissed on the ground of lack of cause of action as there was no prior exhaustion of Philippine Rayon's properties. HELD: 1. NO. Presentment for acceptance is necessary only in the cases expressly provided for in Section 143 of the Negotiable Instruments Law (NIL). The parties herein agree, and the trial court explicitly ruled, that the subject, drafts are sight drafts which do not require presentment for acceptance. They are, pursuant to Section 7 of the NIL, payable on demand. And

even if these were not sight drafts, thereby necessitating acceptance, it would be the petitioner — and not Philippine Rayon — which had to accept the same for the latter was not the drawee. SEC 143 (NIL) (a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument; or (b) Where the bill expressly stipulates that it shall be presented for acceptance; or (c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee. In no other case is presentment for acceptance necessary in order to render any party to the bill liable. Obviously then, sight drafts do not require presentment for acceptance. 2. YES. -And although it is true that the petitioner commenced a criminal action for the violation of the Trust Receipts Law, no legal obstacle prevented it from enforcing the civil liability arising out of the trust, receipt in a separate civil action. Under Section 13 of the Trust Receipts Law, the failure of an entrustee to turn over the proceeds of the sale of goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appear in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Art.315, par. 1(b) of the RPC. -Under Article 33 of the Civil Code, a civil action for damages, entirely separate and distinct from the criminal action, may be brought by the injured party in cases of defamation, fraud and physical injuries. Estafa falls under fraud. 3. NO. Private respondent Chi's signature in the dorsal portion of the trust receipt did not bind him solidarily with Philippine Rayon. 3a. YES. SC’s own reading of the questioned solidary guaranty clause yields the conclusion that the obligation of Chi is only that of a guarantor. Reasoning Last sentence of the clause speaks of waiver of exhaustion, which, nevertheless, is ineffective in this case because the space therein for the party whose property may not be exhausted was not filled up. -The clause "we jointly and severally agree and undertake" refers to the undertaking of the two (2) parties who are to sign it or to the liability existing between themselves. It does not refer to the undertaking between either one or both of them on the one hand and the petitioner on the other with respect to the liability described under the trust receipt. Elsewise stated, their liability is not divisible as between them, i.e., it can be enforced to its full extent against any one of them. -Any doubt as to the import, or true intent of the solidary guaranty clause should be resolved against the petitioner since the trust receipt, together with the questioned solidary guaranty clause, is a contract of adhesion which must be strictly construed against the party responsible for its preparation. -By his signing, Chi became the sole guarantor. The attestation by witnesses and the acknowledgement before a notary public are not required by law to make a party liable on the instrument. Contracts shall be obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present; however, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that it be proved in a certain way, that requirement is absolute and indispensable. With respect to a guaranty, which is a promise to answer for the debt or default of another, the law merely requires that it, or some note or memorandum thereof, be in writing. Otherwise, it would be unenforceable unless ratified. While the acknowledgement of a surety before a notary public is required to make the same a public document, under Article 1358 of the Civil Code, a contract of guaranty does not have to appear in a public document. -Reading Section 13 of PD No. 115: It is clear that if the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty of imprisonment shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense. However, it is these corporations, partnerships, associations, etc, which are made liable for the civil liability arising from the criminal offense. -Since that violation of a trust receipt constitutes fraud under Article 33 of the Civil Code, petitioner was acting well within its rights in filing an independent civil action to enforce the civil liability arising therefrom against Philippine Rayon. 3b. NO. Excussion is not a condition sine qua non for the institution of an action against a guarantor. There was nothing procedurally objectionable in impleading private respondent Chi as a co-defendant in the civil case for the collection of a sum of money. As a matter of fact, Section 6, Rule 3 of the Rules of Court on permissive joinder of parties explicitly allows it. -This is the equity rule relating to multifariousness. It is based on trial convenience and is designed to permit the joinder of plaintiffs or defendants whenever there is a common question of law or fact. It will save the parties unnecessary work, trouble and expense.

-However, Chi's liability is limited to the principal obligation in the trust receipt plus all the accessories thereof including judicial costs; with respect to the latter, he shall only be liable for those costs incurred after being judicially required to pay. Interest and damages, being accessories of the principal obligation, should also be paid; these, however, shall run only from the date of the filing of the complaint. Attorney's fees may even be allowed in appropriate cases. Disposition Petition granted. Philippine Rayon Mills, Inc. declared liable on the 12 drafts in question and on the trust receipt. Private respondent Anacleto R. Chi declared secondarily liable on the trust receipt.

Republic of the Philippines SUPREME COURT Manila THIRD DIVISION

G.R. No. 105395 December 10, 1993 BANK OF AMERICA, NT & SA, petitioners, vs. COURT OF APPEALS, INTER-RESIN INDUSTRIAL CORPORATION, FRANCISCO TRAJANO, JOHN DOE AND JANE DOE, respondents. Agcaoili & Associates for petitioner. Valenzuela Law Center, Victor Fernandez and Ramon Guevarra for private respondents.

VITUG, J.: A "fiasco," involving an irrevocable letter of credit, has found the distressed parties coming to court as adversaries in seeking a definition of their respective rights or liabilities thereunder. On 05 March 1981, petitioner Bank of America, NT & SA, Manila, received by registered mail an Irrevocable Letter of Credit No. 20272/81 purportedly issued by Bank of Ayudhya, Samyaek Branch, for the account of General Chemicals, Ltd., of Thailand in the amount of US$2,782,000.00 to cover the sale of plastic ropes and "agricultural files," with the petitioner as advising bank and private respondent Inter-Resin Industrial Corporation as beneficiary. On 11 March 1981, Bank of America wrote Inter-Resin informing the latter of the foregoing and transmitting, along with the bank's communication, the latter of credit. Upon receipt of the letter-advice with the letter of credit, Inter-Resin sent Atty. Emiliano Tanay to Bank of America to have the letter of credit confirmed. The bank did not. Reynaldo Dueñas, bank employee in charge of letters of credit, however, explained to Atty. Tanay that there was no need for confirmation because the letter of credit would not have been transmitted if it were not genuine. Between 26 March to 10 April 1981, Inter-Resin sought to make a partial availment under the letter of credit by submitting to Bank of America invoices, covering the shipment of 24,000 bales of polyethylene rope to General Chemicals valued at US$1,320,600.00, the corresponding packing list, export declaration and bill of lading. Finally, after being satisfied that Inter-Resin's documents conformed with the conditions expressed in the letter of credit, Bank of America issued in favor of Inter-Resin a Cashier's Check for P10,219,093.20, "the Peso equivalent of the draft (for) US$1,320,600.00 drawn by Inter-Resin, after deducting the costs for documentary stamps, postage and mail issuance." 1 The check was picked up by Inter-Resin's Executive Vice-President Barcelina Tio. On 10 April 1981, Bank of

America wrote Bank of Ayudhya advising the latter of the availment under the letter of credit and sought the corresponding reimbursement therefor. Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of America the documents for the second availment under the same letter of credit consisting of a packing list, bill of lading, invoices, export declaration and bills in set, evidencing the second shipment of goods. Immediately upon receipt of a telex from the Bank of Ayudhya declaring the letter of credit fraudulent, 2 Bank of America stopped the processing of Inter-Resin's documents and sent a telex to its branch office in Bangkok, Thailand, requesting assistance in determining the authenticity of the letter of credit. 3 Bank of America kept Inter-Resin informed of the developments. Sensing a fraud, Bank of America sought the assistance of the National Bureau of Investigation (NBI). With the help of the staff of the Philippine Embassy at Bangkok, as well as the police and customs personnel of Thailand, the NBI agents, who were sent to Thailand, discovered that the vans exported by Inter-Resin did not contain ropes but plastic strips, wrappers, rags and waste materials. Here at home, the NBI also investigated InterResin's President Francisco Trajano and Executive Vice President Barcelina Tio, who, thereafter, were criminally charged for estafa through falsification of commercial documents. The case, however, was eventually dismissed by the Rizal Provincial Fiscal who found no prima facieevidence to warrant prosecution. Bank of America sued Inter-Resin for the recovery of P10,219,093.20, the peso equivalent of the draft for US$1,320,600.00 on the partial availment of the now disowned letter of credit. On the other hand, Inter-Resin claimed that not only was it entitled to retain P10,219,093.20 on its first shipment but also to the balance US$1,461,400.00 covering the second shipment. On 28 June 1989, the trial court ruled for Inter-Resin, 4 holding that: (a) Bank of America made assurances that enticed Inter-Resin to send the merchandise to Thailand; (b) the telex declaring the letter of credit fraudulent was unverified and self-serving, hence, hearsay, but even assuming that the letter of credit was fake, "the fault should be borne by the BA which was careless and negligent" 5 for failing to utilize its modern means of communication to verify with Bank of Ayudhya in Thailand the authenticity of the letter of credit before sending the same to Inter-Resin; (c) the loading of plastic products into the vans were under strict supervision, inspection and verification of government officers who have in their favor the presumption of regularity in the performance of official functions; and (d) Bank of America failed to prove the participation of Inter-Resin or its employees in the alleged fraud as, in fact, the complaint for estafa through falsification of documents was dismissed by the Provincial Fiscal of Rizal. 6 On appeal, the Court of Appeals 7 sustained the trial court; hence, this present recourse by petitioner Bank of America. The following issues are raised by Bank of America: (a) whether it has warranted the genuineness and authenticity of the letter of credit and, corollarily, whether it has acted merely as an advising bank or as a confirming bank; (b) whether InterResin has actually shipped the ropes specified by the letter of credit; and (c) following the dishonor of the letter of credit by Bank of Ayudhya, whether Bank of America may recover against Inter-Resin under the draft executed in its partial availment of the letter of credit. 8 In rebuttal, Inter-Resin holds that: (a) Bank of America cannot, on appeal, belatedly raise the issue of being only an advising bank; (b) the findings of the trial court that the ropes have actually been shipped is binding on the Court; and, (c) Bank of America cannot recover from Inter-Resin because the drawer of the letter of credit is the Bank of Ayudhya and not Inter-Resin. If only to understand how the parties, in the first place, got themselves into the mess, it may be well to start by recalling how, in its modern use, a letter of credit is employed in trade transactions. A letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying. 9 To break the impasse, the buyer may be required to contract a bank to issue a letter of credit in favor of the seller so that, by virtue of the latter of credit, the issuing bank can authorize the seller to draw drafts and engage to pay them upon their presentment simultaneously with the tender of documents required by the letter of credit. 10 The buyer and the seller agree on what documents are to be presented for payment, but ordinarily they are documents of title evidencing or attesting to the shipment of the goods to the buyer.

Once the credit is established, the seller ships the goods to the buyer and in the process secures the required shipping documents or documents of title. To get paid, the seller executes a draft and presents it together with the required documents to the issuing bank. The issuing bank redeems the draft and pays cash to the seller if it finds that the documents submitted by the seller conform with what the letter of credit requires. The bank then obtains possession of the documents upon paying the seller. The transaction is completed when the buyer reimburses the issuing bank and acquires the documents entitling him to the goods. Under this arrangement, the seller gets paid only if he delivers the documents of title over the goods, while the buyer acquires said documents and control over the goods only after reimbursing the bank. What characterizes letters of credit, as distinguished from other accessory contracts, is the engagement of the issuing bank to pay the seller of the draft and the required shipping documents are presented to it. In turn, this arrangement assures the seller of prompt payment, independent of any breach of the main sales contract. By this so-called "independence principle," the bank determines compliance with the letter of credit only by examining the shipping documents presented; it is precluded from determining whether the main contract is actually accomplished or not. 11 There would at least be three (3) parties: (a) the buyer, 12 who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipts of the documents of title; (b) the bank issuing the letter of credit, 13which undertakes to pay the seller upon receipt of the draft and proper document of titles and to surrender the documents to the buyer upon reimbursement; and, (c) the seller, 14 who in compliance with the contract of sale ships the goods to the buyer and delivers the documents of title and draft to the issuing bank to recover payment. The number of the parties, not infrequently and almost invariably in international trade practice, may be increased. Thus, the services of an advising (notifying) bank 15 may be utilized to convey to the seller the existence of the credit; or, of a confirming bank 16 which will lend credence to the letter of credit issued by a lesser known issuing bank; or, of a paying bank, 17 which undertakes to encash the drafts drawn by the exporter. Further, instead of going to the place of the issuing bank to claim payment, the buyer may approach another bank, termed thenegotiating bank, 18 to have the draft discounted. Being a product of international commerce, the impact of this commercial instrument transcends national boundaries, and it is thus not uncommon to find a dearth of national law that can adequately provide for its governance. This country is no exception. Our own Code of Commerce basically introduces only its concept under Articles 567-572, inclusive, thereof. It is no wonder then why great reliance has been placed on commercial usage and practice, which, in any case, can be justified by the universal acceptance of the autonomy of contract rules. The rules were later developed into what is now known as the Uniform Customs and Practice for Documentary Credits ("U.C.P.") issued by the International Chamber of Commerce. It is by no means a complete text by itself, for, to be sure, there are other principles, which, although part of lex mercatoria, are not dealt with the U.C.P. In FEATI Bank and Trust Company v. Court of Appeals, 19 we have accepted, to the extent of their pertinency, the application in our jurisdiction of this international commercial credit regulatory set of rules. 20 In Bank of Phil.Islands v. De Nery, 21 we have said that the observances of the U.C.P. is justified by Article 2 of the Code of Commerce which expresses that, in the absence of any particular provision in the Code of Commerce, commercial transactions shall be governed by usages and customs generally observed. We have further observed that there being no specific provisions which govern the legal complexities arising from transactions involving letters of credit not only between or among banks themselves but also between banks and the seller or the buyer, as the case may be, the applicability of the U.C.P. is undeniable. The first issue raised with the petitioner, i.e., that it has in this instance merely been advising bank, is outrightly rejected by Inter-Resin and is thus sought to be discarded for having been raised only on appeal. We cannot agree. The crucial point of dispute in this case is whether under the "letter of credit," Bank of America has incurred any liability to the "beneficiary" thereof, an issue that largely is dependent on the bank's participation in that transaction; as a mere advising or notifying bank, it would not be liable, but as a confirming bank, had this been the case, it could be considered as having incurred that liability. 22 In Insular Life Assurance Co. Ltd. Employees Association — Natu vs. Insular Life Assurance Co., Ltd., 23 the Court said: Where the issues already raised also rest on other issues not specifically presented, as long as the latter issues bear relevance and close relation to the former and as long as they arise from the matters on record, the court has the authority to include them in its discussion of the controversy and to pass upon them just as well. In brief, in those cases where questions not particularly raised by the parties surface as necessary for the complete adjudication of the rights and

obligations of the parties, the interests of justice dictate that the court should consider and resolve them. The rule that only issues or theories raised in the initial proceedings may be taken up by a party thereto on appeal should only refer to independent, not concomitant matters, to support or oppose the cause of action or defense. The evil that is sought to be avoided, i.e., surprise to the adverse party, is in reality not existent on matters that are properly litigated in the lower court and appear on record. It cannot seriously be disputed, looking at this case, that Bank of America has, in fact, only been an advising, not confirming, bank, and this much is clearly evident, among other things, by the provisions of the letter of credit itself, the petitioner bank's letter of advice, its request for payment of advising fee, and the admission of Inter-Resin that it has paid the same. That Bank of America has asked Inter-Resin to submit documents required by the letter of credit and eventually has paid the proceeds thereof, did not obviously make it a confirming bank. The fact, too, that the draft required by the letter of credit is to be drawn under the account of General Chemicals (buyer) only means the same had to be presented to Bank of Ayudhya (issuing bank) for payment. It may be significant to recall that the letter of credit is an engagement of the issuing bank, not the advising bank, to pay the draft. No less important is that Bank of America's letter of 11 March 1981 has expressly stated that "[t]he enclosure issolely an advise of credit opened by the abovementioned correspondent and conveys no engagement by us." 24This written reservation by Bank of America in limiting its obligation only to being an advising bank is in consonance with the provisions of U.C.P. As an advising or notifying bank, Bank of America did not incur any obligation more than just notifying Inter-Resin of the letter of credit issued in its favor, let alone to confirm the letter of credit. 25 The bare statement of the bank employees, aforementioned, in responding to the inquiry made by Atty. Tanay, Inter-Resin's representative, on the authenticity of the letter of credit certainly did not have the effect of novating the letter of credit and Bank of America's letter of advise, 26 nor can it justify the conclusion that the bank must now assume total liability on the letter of credit. Indeed, Inter-Resin itself cannot claim to have been all that free from fault. As the seller, the issuance of the letter of credit should have obviously been a great concern to it. 27 It would have, in fact, been strange if it did not, prior to the letter of credit, enter into a contract, or negotiated at the every least, with General Chemicals. 28 In the ordinary course of business, the perfection of contract precedes the issuance of a letter of credit. Bringing the letter of credit to the attention of the seller is the primordial obligation of an advising bank. The view that Bank of America should have first checked the authenticity of the letter of credit with bank of Ayudhya, by using advanced mode of business communications, before dispatching the same to Inter-Resin finds no real support in U.C.P. Article 18 of the U.C.P. states that: "Banks assume no liability or responsibility for the consequences arising out of the delay and/or loss in transit of any messages, letters or documents, or for delay, mutilation or other errors arising in the transmission of any telecommunication . . ." As advising bank, Bank of America is bound only to check the "apparent authenticity" of the letter of credit, which it did. 29 Clarifying its meaning, Webster's Ninth New Collegiate Dictionary 30 explains that the word "APPARENT suggests appearance to unaided senses that is not or may not be borne out by more rigorous examination or greater knowledge." May Bank of America then recover what it has paid under the letter of credit when the corresponding draft for partial availment thereunder and the required documents were later negotiated with it by Inter-Resin? The answer is yes. This kind of transaction is what is commonly referred to as a discounting arrangement. This time, Bank of America has acted independently as a negotiating bank, thus saving Inter-Resin from the hardship of presenting the documents directly to Bank of Ayudhya to recover payment. (Inter-Resin, of course, could have chosen other banks with which to negotiate the draft and the documents.) As a negotiating bank, Bank of America has a right to recourse against the issuer bank and until reimbursement is obtained, Inter-Resin, as the drawer of the draft, continues to assume a contingent liability thereon. 31 While bank of America has indeed failed to allege material facts in its complaint that might have likewise warranted the application of the Negotiable Instruments Law and possible then allowed it to even go after the indorsers of the draft, this failure, 32/ nonetheless, does not preclude petitioner bank's right (as negotiating bank) of recovery from Inter-Resin itself. Inter-Resin admits having received P10,219,093.20 from bank of America on the letter of credit and in having executed the corresponding draft. The payment to Inter-Resin has given, as aforesaid, Bank of America the right of reimbursement from the issuing bank, Bank of Ayudhya which, in turn, would then seek indemnification from the buyer (the General Chemicals of Thailand). Since Bank of Ayudhya disowned the letter of credit, however, Bank of America may now turn to Inter-Resin for restitution.

Between the seller and the negotiating bank there is the usual relationship existing between a drawer and purchaser of drafts. Unless drafts drawn in pursuance of the credit are indicated to be without recourse therefore, the negotiating bank has the ordinary right of recourse against the seller in the event of dishonor by the issuing bank . . . The fact that the correspondent and the negotiating bank may be one and the same does not affect its rights and obligations in either capacity, although a special agreement is always a possibility . . .33 The additional ground raised by the petitioner, i.e., that Inter-Resin sent waste instead of its products, is really of no consequence. In the operation of a letter of credit, the involved banks deal only with documents and not on goods described in those documents. 34 The other issues raised in then instant petition, for instance, whether or not Bank of Ayudhya did issue the letter of credit and whether or not the main contract of sale that has given rise to the letter of credit has been breached, are not relevant to this controversy. They are matters, instead, that can only be of concern to the herein parties in an appropriate recourse against those, who, unfortunately, are not impleaded in these proceedings. In fine, we hold that — First, given the factual findings of the courts below, we conclude that petitioner Bank of America has acted merely as a notifying bank and did not assume the responsibility of a confirming bank; and Second, petitioner bank, as a negotiating bank, is entitled to recover on Inter-Resin's partial availment as beneficiary of the letter of credit which has been disowned by the alleged issuer bank. No judgment of civil liability against the other defendants, Francisco Trajano and other unidentified parties, can be made, in this instance, there being no sufficient evidence to warrant any such finding. WHEREFORE, the assailed decision is SET ASIDE, and respondent Inter-Resin Industrial Corporation is ordered to refund to petitioner Bank of America NT & SA the amount of P10,219,093.20 with legal interest from the filing of the complaint until fully paid. No costs. SO ORDERED. Another ruling: Supreme Court reversed the decision of the lower courts. It ruled that the crucial point of dispute in this case is whether, under the “letter of credit,” Bank of America has incurred any liability to the “beneficiary” thereof, an issue that largely is dependent on the bank’s participation in that transaction: as a mere advising or notifying bank, it would not be liable, but as a confirming bank, had this been the case, it could be considered as having incurred that liability. It cannot seriously be disputed, looking at this case, that Bank of America has, in fact, only been an advising, not confirming, bank, and this much is clearly evident, among other things, by the provisions of the letter of credit itself, the petitioner bank’s letter of advice, its request for payment of advising fee, and the admission of Inter -Resin that it has paid the same. That Bank of America has asked Inter-Resin to submit documents required by the letter of credit and eventually has paid the proceeds thereof, did not obviously make it a confirming bank. As an advising or notifying bank, Bank of America did not incur any obligation more than just notifying Inter-Resin of the letter of credit issued in its favor, let alone to confirm the letter of credit. Bringing the letter of credit to the attention of the seller is the primordial obligation of an advising bank. The view that Bank of America should have first checked the authenticity of the letter of credit with Bank of Ayudhya, by using advanced mode of business communications, before dispatching the same to Inter-Resin finds no real support in the UCP. As advising bank, Bank of America is bound only to check the “apparent authenticity” of the letter of credit, which it did. Websters explains that the word “apparent” suggests appearance to unaided senses that is not or may not be borne out by more rigorous examination or greater knowledge.

May Bank of America then recover what it has paid under the letter of credit when the corresponding draft for partial availment thereunder and the required documents therefore were later negotiated with it by Inter-Resin? The answer is yes. This kind of transaction is what is commonly referred to as a discounting arrangement. This time, Bank of America, has acted independently as a negotiating bank, thus saving Inter-Resin from the hardship of presenting the documents directly to Bank of Ayudhya to recover payment. As a negotiating bank, Bank of America has a right of recourse against the issuer bank and until reimbursement is obtained, Inter-Resin, as the drawer of the draft, continues to assume a contingent liability thereon. SC noted that the additional ground raised by Bank of America, i.e. that Inter-Resin sent waste instead of its products, is really of no consequence. In the operation of a letter of credit, the involved banks deal only with documents and not on goods described in those documents.

FEATI BANK VS. CA FACTS: Note: Feati as a notifying bank is only obliged to notify and transmit to the seller the LC. Bernardo Villaluz (seller) agreed to sell to Christiansen (buyer) 2,000 cubic meters of lauan logs at a price of $27 per cubic meter FOB. Security Pacific National Bank of LA (Security) issued an Irrevocable Letter of Credit. Said letter of credit was mailed to FEATI bank and one of the documents required to be submitted by the seller to the bank is the Certification from Han Axel Christiansen that the logs have been approved prior to shipping in accordance with terms and conditions of corresponding purchase order. Also incorporated by reference in the letter of credit is the Uniform Customs and Practice for Documentary Credits (UCP). The logs were thereafter loaded on the vessel Zenlin Glory which was chartered by Christiansen. It was certified to be in good condition and exportable. The logs arrived at Korea and were received by the consignee H anmi Trade Dev’t Comp. and were subsequently sold to another party. However Christiansen failed and refused to issue the certificate despite repeated demands by Villaluz. Due to the absence of the said certificate, Feati Bank refused to advance the payment on the letter of credit. because of the situation of Villaluz, Central Bank issued a memorandum declaring that the requirement of CERTIFICATION is not allowed. However such memo only came out after the letter of credit has already lapsed. RTC ruled in favor of Villaluz and held Feati Bank and Christiansen solildarily liable, it held that: 1. Feati Bank is liable because it failed to negotiate the letter of credit in the absence of the certification even if the Central Bank held such requirement as void. 2. That because the LC is irrevocable, the issuing bank, Security, is deemed to honor the LC upon presentment. And by accepting the instructions from the issuing bank Feati assumed the same undertaking. 3. Under the principles and laws on both trust and estoppels. When Feati Bank accepted its role as the notifying and negotiating bank in behalf of the issuing bank, it in effect accepted a trust reposed on it and became a trustee in relation to Villaluz. CA affirmed and further held:

RTC

affirmed by CA

1. The LC was a confirmed LC in which the notifying bank gives its assurance also that the opening bank’s obligation will be performed. The notifying bank in such a case will not simply transmit but will confirm the opening bank’s obligation by making it also its own understanding, commitment or guaranty or obligation. ISSUE:

1. W/N Feati Bank can be held liable for the LC absence the certification required by the LC. RULING: NO, Feati Bank is not liable. It is already a settled rule in Commercial transaction involving letter of credit that the documents tendered must strictly conform to the terms of the LC. In this case, the mere fact that the certification was required by the LC means that the document is of vital importance to the buyer and therefore must be submitted before the notifying bank is compelled to honor the LC. Thus failure of Villaluz to surrender the Certification is fatal. Under the UCP1 the bank may negotiate, accept or pay, if the documents tendered to it are on their face in accordance with the terms and conditions of the documentary credit. And since Feati Bank deals only with documents, the absence of any document required in the LC justifies the refusal by the correspondent bank to negotiate, accept, or pay the beneficiary, as it is not its obligation to look beyond the documents. It merely has to rely on the completeness of the documents. SC also held that the decision of the TC was wrong in holding that irrevocable and confirmed credit is synonymous. It held that an irrevocable credit refers to the duration of the LC. On the other hand confirmed letter pertains to the obligation assumed by the bank, in this case, the correspondent bank gives an assurance to the beneficiary that it will undertake the issuing bank’s obligation as its own according to the terms and conditions of the credit. Hence it does not mean that the mere fact that a LC is irrevocable imply that the Correspondent bank in accepting the instructions of the issuing bank has also confirmed the LC. The SC also held that in this case Feati Bank was merely a notifying bank2 and not a negotiating bank3 nor a confirming bank4. In this case the LC merely provided Feati Bank forward the enclosed original credit to Villaluz. As a notifying bank, its responsibility was solely to notify and/or transmit the documentary of credit to Villaluz and its obligation ends there. There is neither proof that Feati Bank confirmed the letter, the $75,000 loan granted by Feati Bank to Villaluz was not in anticipation of the loan but was an isolated transaction, the logical conclusion is that the LC was merely a collateral. By extending the loan it assumed the character of a negotiating bank but even then Feati bank was still not liable because there was no contractual relationship between Feati and Villaluz. Neither was there a trust5 between Feati Bank (trustee) and Villaluz (beneficiary). the mere opening of a LC does not involve a specific appropriation of a sum of money in favor of the beneficiary. It only signifies that the beneficiary may be able to draw funds upon the letter of credit up to the designated amount specified in the LC. The correspondent bank does not receive in advance the sum of money from the issuing bank. On the contrary, when they accept the tender and pays the

1

Article 3. An irrevocable credit is a definite undertaking on the part of the issuing bank and constitutes the engagement of that bank to the beneficiary and bona fide holders of drafts drawn and/or documents presented thereunder, that the provisions for payment, acceptance or negotiation contained in the credit will be duly fulfilled, provided that all the terms and conditions of the credit are complied with . An irrevocable credit may be advised to a beneficiary through another bank (the advising bank) without engagement on the part of that bank, but when an issuing bank authorizes or requests another bank to confirm its irrevocable credit and the latter does so, such confirmation constitutes a definite undertaking of the confirming bank. . .. Article 7. Banks must examine all documents with reasonable care to ascertain that they appear on their face to be in accordance with the terms and conditions of the credit," Article 8. Payment, acceptance or negotiation against documents which appear on their face to be in accordance with the terms and conditions of a credit by a bank authorized to do so, binds the party giving the authorization to take up documents and reimburse the bank which has effected the payment, acceptance or negotiation. (Emphasis Supplied)
2

In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to the beneficiary the existence of the letter of credit. (no contractual relationship with seller/benificiary) 3 A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft under the letter of credit. Its liability is dependent upon the stage of the negotiation. If before negotiation, it has no liability with respect to the seller but after negotiation, a contractual relationship will then prevail between the negotiating bank and the seller. (no contractual relationship with seller/benificiary) 4 a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability is a primary one as if the correspondent bank itself had issued the letter of credit. 5 trust has been defined as the "right, enforceable solely in equity, to the beneficial enjoyment of property the legal title to which is vested to another." Therefore, In order therefore for the trust theory to be sustained, Feati Bank should have had in its possession a sum of money as specific fund advanced to it by the issuing bank and to be held in trust by it in favor Viallaluz. This does not obtain in this case.

amount, it gets the money from its own funds and then later seeks reimbursement from the issuing bank. Also as notifying bank it cannot be held liable even if there is a trust created. Neither was there a guarantee. It is fundamental that an irrevocable credit is independent not only of the contract between the buyer and the seller but also of the credit agreement between the issuing bank and the buyer. Feati Bank has no business with the relationship of Christiansen and Security it merely being a notifying bank. Feati Bank was only following instruction of the issuing bank. But even if all of this argument existed (trust, guarantee, and confirming bank, Feati Bank cannot be compelled to pay because there was a failure on the part of Villaluz to comply with the terms of the LC which is the absence of the certificate. It cannot be argued that such a requirement is illegal because such pronouncement by the Central Bank was only done after the issuance of the LC, when the LC was issued there was still no such prohibition.

Keng Hua Paper Products vs. CA (GR 116863, 12 February 1998)

First Division, Panganiban (J): 4 concur Facts: Sea-Land Service, a shipping company, is a foreign corporation licensed to do business in the Philippines. On 29 June 1982, Sea Land received at its Hong Kong terminal a sealed container, Container SEAU 67523, containing 76 bales of “unsorted waste paper” for shipment to Keng Hua Paper Products, Co. in Manila. A bill of lading to cover the shipment was issued by Sea-Land. On 9 July 1982, the shipment was discharged at the Manila International Container Port. Notices of arrival were transmitted to Keng Hua but the latter failed to discharge the shipment from the container during the “free time” period or grace period. The said shipment remained inside the Sea-Land’s container from the moment the free time period expired on 29July 1982 until the time when the shipment was unloaded from the container on 22 November 1983, or a total of 481 days. During the 481-day period, demurrage charges accrued. Within the same period, letters demanding payment were sent by Sea-Land to Keng Hua who, however,refused to settle its obligation which eventually amounted to P67,340.00. Numerous demands were made on Keng Hua but the obligation remained unpaid. Sea Land thereafter commenced the civil action for collection and damages. The RTC found Keng Hua liable for demurrage, attorn ey’s fees and expenses of litigation. Keng Hua appealed to the Court of Appeals, which denied the appeal and affirmed the lower court’s decision in toto. In a subsequent resolution, it also denied Keng Hua’s motion for reconsideration. Hence, the petition for review. The Supreme Court affirmed the assailed Decision with the modification that the legal interest of 6% per annum shall be computed from 28 September 1990 until its full payment before finality of judgment. The rate of interest shall be adjusted to 12% per annum, computed from the time said judgment became final and executory until full satisfaction. The award of attorney’s fees is deleted. 1. Nature of bill of lading A bill of lading serves two functions. First, it is a receipt for the goods shipped. Second, it is a contract by which three parties, namely, the shipper, the carrier, and the consignee undertake specific responsibilities and assume stipulated obligations. A “bill of lading delivered and accepted constitutes the contract of carriage even though not signed,” because the “(a)cceptance of a paper containing the terms of a proposed contract generally constitutes an acceptance of the contract and of all of its terms and conditions of which the acceptor has actual or constructive notice.” In a nutshell, the acceptance of a bill of lading by the shipper and the consignee, with full knowledge of its contents, gives rise to the presumption that the same was a perfected and binding contract. 2. Shipper and consignee were liable for payment of demurrer charges; Section 17 of the bill of lading Section 17 of the bill of lading provided that the shipper and the consignee were liable for the payment of demurrage charges for the failure to discharge the containerized shipment beyond the grace period allowed by tariff rules. Section 17 of the bill of lading provided “Cooperage Fines. The shipper and consignee shall be liable for, indemnify the carrier and ship and hold them harmless against, and the carrier shall have a lien on the goods for, all expenses and charges for mending cooperage, baling, repairing or reconditioning the goods, or the van, trailers or containers, and all expenses incurred in protecting, caring for or otherwise made for the benefit of the goods, whether the goods be damaged or not, and for any payment, expense, penalty fine, dues, duty, tax or impost, loss, damage, detention, demurrage, or liability of whatsoever nature, sustained or incurred by or levied upon the carrier or the ship in connection with the goods or by reason of the goods being or having been on board, or because of shipper’s failure to procure consular or other proper permits, certificates or any papers that may be required at any port or place or shipper’s failure to supply information or otherwise to comply with all laws, regulations and requirements of law in connection with the goods of from any other act

RTC found petitioner guilty; CA affirmed RTC; hence, petition for review filed in the SC

or omission of the shipper or consignee.” Keng Hua’s prolonged failure to receive and discharge the cargo from the Sea Land’s vessel constitutes a violation of the terms of the bill of lading. It should thus be liable for demurrage to the former. 3. Keng Hua’s letter proved refusal to pick up cargo and not rejection of bill of lading; Implied acceptance Keng Hua “received the bill of lading immediately after the arrival of the shipment” on 8 July1982. Having been afforded an opportunity to examine the said document, it did not immediately object to or dissent from any term or stipulation therein. It was only six months later, on 24January 1983, that it sent a letter to private respondent saying that it could not accept the shipment. Its inaction for such a long period conveys the clear inference that it accepted the terms and conditions of the bill of lading. Moreover, said letter spoke only of petitioner’s inabilit y to use the delivery permit, i.e. to pick up the cargo, due to the shipper’s failure to comply with the terms and conditions of the letter of credit, for which reason the bill of lading and other shipping documents were returned by the “banks” to the shipper. The letter merely proved its refusal to pick up the cargo, not its rejection of the bill of lading. 4. Apprehension of violating laws cannot defeat contractual obligation and liability Keng Hua’s attempt to evade its obligation to receive the shipment on the pretext that this may cause it to violate customs, tariff and central bank laws must fail. Mere apprehension of violating said laws, without a clear demonstration that taking delivery of the shipment has become legally impossible, cannot defeat the petitioner’s contractual obligation and liability under the bill of lading. 5. Issue raised for first time on appeal cannot be entertained An issue raised for the first time on appeal and not raised timely in the proceedings in the lower court is barred by estoppel. Questions raised on appeal must be within the issues framed by the parties and, consequently, issues not raised in the trial court cannot be raised for the first time on appeal. Herein, the issue of whether or not Keng Hua accepted the bill of lading was raised for the first time only in its memorandum before the Supreme Court. 6. Nature of demurrage Demurrage is merely an allowance or compensation for the delay or detention of a vessel. It is often a matter of contract, but not necessarily so. The very circumstance that in ordinary commercial voyages, a particular sum is deemed by the parties a fair compensation for delays, is the very reason why it is, and ought to be, adopted as a measure of compensation, in cases ex delicto. What fairer rule can be adopted than that which founds itself upon mercantile usage as to indemnity, and fixes a recompense upon the deliberate consideration of all the circumstances attending the usual earnings and expenditures in common voyages? It appears to us that an allowance, by way of demurrage, is the true measure of damages in all cases of mere detention, for that allowance has reference to the ship’s expenses, wear and tear, and common employment. 7. Amount of Demurrage Charges supported by extant evidence The amount of demurrage charges in the sum of P67,340 is a factual conclusion of the trial court that was affirmed by the Court of Appeals and, thus, binding on the Supreme Court. Besides, such factual finding is supported by the extant evidence. The apparent discrepancy was a result of the variance of the dates when the two demands were made. Necessarily, the longer the cargo remained unclaimed, the higher the demurrage. Thus, while in his letter dated 24 April 1983,Sea-Land’s counsel demanded payment of only P37,800, the additional demurrage incurred by Keng Hua due to its continued refusal to receive delivery of the cargo ballooned to P67,340 by22 November 1983. 8. Three contracts in a letter of credit In a letter of credit, there are three distinct and independent contracts: (1) the contract of sale between the buyer and the seller, (2) the contract of the buyer with the issuing bank, and (3) the letter of credit proper in which the bank promises to pay the seller pursuant to the terms and conditions stated therein. “Few things are more clearly settled in law than that the three contracts which make up the letter of credit arrangement are to be maintained in a state of perpetual separation.” A transaction involving the purchase of goods may also require, apart from a letter of credit, a contract of transportation specially when the seller and the buyer are not in the same locale or country, and the goods purchased have to be transported to the latter. 9. Contract of carriage in bill of lading to be treated independently of contract of sale and the contract for the issuance of credit The contract of carriage, as stipulated in the bill of lading in the present case, must be treated independently of the contract of sale between the seller and the buyer, and the contract for the issuance of a letter of credit between the buyer and the issuing bank. Any discrepancy between the amount of the goods described in the commercial invoice in the contract of sale and the amount allowed in the letter of credit will not affect the validity and enforceability of the contract of carriage as embodied in the bill of lading. As the bank cannot be expected to look beyond the documents presented to it by the seller pursuant to the letter of credit, neither can the carrier be expected to go beyond the representations of the shipper in the bill of lading and to verify their accuracy vis-a-vis the commercial invoice and the letter of credit. Thus, the discrepancy between the amount of goods indicated in the invoice and the amount in the bill of lading cannot negate Keng Hua’s obligation to private respondent arising from the contract of transportation. 10. Remedy of alleged over shipment lies against the shipper and not against the carrier

The contract of carriage was under the arrangement known as “Shipper’s Load And Count,” and the shipper was solely responsible for the loading of the container while the carrier was oblivious to the contents of the shipment. Keng Hua’s remedy in case of over shipment lies against the seller/shipper, not against the carrier. 11. Computation of legal interest a. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual basefor the computation of legal interest shall, in any case, be on the amount finally adjudged. b. When the judgment of the court awarding a sum of money becomes final and executory, therate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. 12. Obligation one not arising from loan or forbearance of money; Legal interest in thepresent case The case involves an obligation not arising from a loan or forbearance of money; thus, pursuantto Article 2209 of the Civil Code, the applicable interest rate is 6% per annum. Since the bill of lading did not specify the amount of demurrage, and the sum claimed by Sea-Land increased asthe days went by, the total amount demanded cannot be deemed to have been established withreasonable certainty until the trial court rendered its judgment. Indeed, “unliquidated damages or claims, it is said, are those which are not or cannot be known until definitely ascertained,assessed and determined by the courts after presentation of proof.” Consequently, the legalinterest rate is 6%, to be computed from 28 September 1990, the date of the trial court’s decision.And in accordance with the cases of PNB and Eastern Shipping, the rate of 12% per annum shall be charged on the total then outstanding, from the time the judgment becomes final andexecutory until its satisfaction. 13. Attorney’s fees denied due to lack of justification The matter of attorney’s fees was taken up only in the dispositive portion of the trial court’sdecision. This falls short of the settled requirement that the text of the decision should state thereason for the award of attorney’s fees, for without such justification, its award would be a“conclusion without a premise, its basis being improperly left to speculation and conjecture.”

Case 4: Belman Inc. vs. Central Bank; G.R. No. L-10195 November 29, 1958. Facts: Belman Compañia Inc.(Belman) is the successful bidder to supply the Republic of thePhilippines with 1,000 reams of onion skin paper. [Sept. 21, 1960] It applied to the Philippine NationalBank (PNB) for a letter of credit in the sum of $4,300 (US currency), in favor of Getz Bros. & Co., SanFrancisco, California (GetzBros./payee). The application for the letter of credit was approved andgranted. PNB, through its correspondent in the United States, Crocker First National Bank (Crocker),paid to Getz Bros. the sum of $4,300. However, on April 26, 1951, when Belman paid its account toPNB in Manila, the Central Bank of the Philippines (CBP) assessed and collected from it 17% specialexcise tax on the amount in Philippine peso of foreign exchange sold, ( P1,474.70) pursuant to R.A.601. Belman paid the excise tax under protest for the reason that as the letter of credit was approvedand granted on September 21, 1950, or before March 28, 1951, the date of the enactment or approvalof Republic Act No. 601, thus not subject to excise tax.In 1954, Belman demanded in writing that Central Bank refund the amount. Of course, CBP refused. This prompted Belman to file a case to delare the 17% special excise tax assessed and collected fromit illegal. After trial, the CFI ordered that CBP refund the said amount. The issue is then brought to theSC on pure questions of law.( You don’t have to read this part ) The contention of both parties:CBP contends that the grant or approval on an application for a letter of credit for an amount payablein foreign currency is only an executory contract, in the sense that until payment, return, or settlementof the amount paid and delivered by, or collected from the bank in foreign currency be made by thedebtor, the contract is not executed or consummated. On the other hand, Belman claims that upon theapproval or grant of an application for a letter of credit for an amount payable in foreign currency, thecontract is perfected or consummated.

Hence, if on the date of such approval or grant the lawimposing the excise tax was not yet in existence, such tax cannot be assessed and collected. As will bediscussed in the ruling, both contentions are wrong. Issue: W/N the17% special excise tax assessed is proper. Ruling: Nope, it isn’t. CBP should make a refund. An irrevocable letter of credit granted by a bank, which authorizes a creditor in a foreign country todraw upon a debtor of another and to negotiate the draft through the agent or correspondent bank orany bank in the country of the creditor, is a consummated contract, when the agent or correspondentbank or any bank in the country of the creditor pays or delivers to the latter the amount in foreigncurrency, as authorized by the bank in the country of the debtor in compliance with the letter of creditgranted by it. It is the date of the payment of the amount in foreign currency to the creditor in hiscountry by the agent or correspondent bank of the bank in the country of the debtor that turns fromexecutory to executed or consummated contract. It is not the date of payment by the debtor to thebank in his country of the amount of foreign exchange sold that makes the contract executed orconsummated, because the bank may grant the debtor extension of time to pay such debt. Thecontention of Belman that as there was a meeting of the minds and of contracting parties as to priceand object of the contract upon the approval or grant of an application for a letter of credit for anamount payable in payable in foreign currency is that the contract was a valid and executed contractof sale of foreign exchange. True, there was such a contract in the sense that one party who hasperformed his part may compel the other to perform his. Still until payment be made in foreigncurrency of the amount applied for in the letter of credit and approved and granted by the bank, thesame is not an executed or consummated contract. The payment of the amount in foreign currency tothe creditor by the bank or its agent or correspondent is necessary to consummate the contract.Hence the date of such payment or delivery of the amount in foreign currency to the creditordetermines whether such amount of foreign currency is subject to the tax imposed by the Governmentof the country where such letter of credit was granted. The draft authorized by the letter of credit applied for by Belman and granted by the CBP stated that itmust be drawn and presented or negotiated in San Francisco, California, U.S.A., not later than October19,1950. It may be presumed that payment was made on or before such date. And since Republic ActNo. 601 imposing such tax took effect only on March 28, 1951, it was not subject to excise tax.

1. Bank of the Philippine Islands v. De Reny Fabric Industries, Inc., 35 SCRA 253 (1970)

FACTS:

-On four (4) diffierent occasions in 1961, the De Reny Fabric Industries, Inc., a Philippine corporation, applied to the Bank for four (4) irrevocable commercial letters of credit to cover the purchase by the corporation of goods described in the covering L/C applications as "dyestuffs of various colors" from its American supplier, the J.B. Distributing Company.

-All the applications of the corporation were approved, and the corresponding Commercial L/C Agreements were executed pursuant to banking procedures.

-Pursuant to banking regulations then in force, the corporation delivered to the Bank peso marginal deposits as each letter of credit was opened.

-By virtue of the foregoing transactions, the Bank issued irrevocable commercial letters of credit addressed to its correspondent banks in the United States, with uniform instructions for them to notify the beneficiary thereof, the JB. Distributing Company, that they have been authorized to negotiate the latter's sight drafts up to the amounts mentioned therein, respectively, if accompanied, upon presentation, by a full set of negotiable clean "on board" ocean bills of lading, covering the merchandise appearing in the L/Cs, that is, dyestuffs of various colors, Consequently, the J.B. Distributing Company drew upon, presented to and negotiated with these banks, its sight drafts covering the amounts of the merchandise ostensibly being exported by it, together with clean bills of lading, and collected the full value of the drafts up to the amounts appearing in the L/ Cs as above indicated.

-These correspondent banks then debited the account of the Bank of the Philippine Islands with them up to the full value of th drafts presented by the J.B. Distributing Company, thereafter, endorsed and forwarded all documents to the Bank of the Philippine Islands.

-In the meantime, as each shipment (covered by the above-mentioned letters of credit) arrived in the Philippines, the De Reny Fabric Industries, Inc. made partial payments to the Bank amounting, in the aggregate, to P90,000.

-Further payments were, however, subsequently discontinued by the corporation when it became established, as a result of a chemical test conducted by the National Science Development Board, that the goods that arrived in Manila were colored chalks instead of dyestuffs.

-The corporation also refused to take possession of these goods, and for this reason, the Bank caused them to be deposited with a bonded warehouse paying therefor the amount of P12,609.64 up to the filing of its complaint with the court below on December 10, 1962.

LOWER COURT:

Ordered the corporation and its co-defendants (the herein appellants) to pay BPI the amount of the LC agreement.

DEFENSE OF DE RENY:

It was the duty of the foreign correspondent banks of the Bank of the Philippine Islands to take the necessary precautions to insure that the goods shipped under the covering L/Cs conformed with the item appearing therein, and, that the foreign banks having failed to perform this duty, no claim for recoupment against the defendants-appellants, arising from the losses incurred for the non-delivery or defective delivery of the articles ordered, could accrue.

HELD:

Under the terms of their Commercial Letter of Credit Agreements with the Bank, the appellants agreed that the Bank shall not be responsible for the "existence, chancier, quality, quantity, conditions, packing, value, or delivery of the property purporting to be represented by documents, for any difference in character, quality, quantity, condition, or value of the property front that expressed in documents," or for "partial or incomplete shipment, or failure or omission to ship my or all of the property referred to in the Credit," as well as "for any deviation from instructions, delay, default or fraud by the shipper or inyone else in connection with the property or the shipping thereof," and "for any breach of contract between the shippers or vendors and ourselves, [purchasers] or any of us."

Having agreed to these terms, the appellants have, therefore, no recourse but to comply with their covenant to the rules of evidence."

The Code of Commerce, in its Article 2, likewise provides that "Acts of commerce, whether those who execute them be merchants or not, and whether specified in this Code or not, should be governed by the provisions contained in it, in their absence, b) the usages of commerce generally observed in each place, and in the absence of both rules, by those of the civil law" "Those acts contained in this Code and all Others of analogous character, shall be deemed acts of commerce." It must be noted that certain principles governing the issuance, acceptance and payment of letters of credit arc specifically provided for in the Code of Commerce.

But even without the stipulation recited above, the appellants cannot shift the burden of loss to the Bank on account of the violation by their vendor of its prestation.

Banks, in providing financing in international business transactions such as those entered into by the appellants, do not deal with the property to be exported or shipped to the importer, but deal only with documents. The Bank introduced in evidence a provision contained in the "Uniform Customs and Practices for Commercial Documentary Credits Fixed for the Thirteenth Congress of International Chamber of Commerce," to which the Philippines is a signatory nation. Article 10 thereof provides:

"Its documentary credit operations, all parties concerned deal in documents and not in goods. payment, negotiation or acceptance against documents in accordance with the terms and conditions of a credit by a Bank authorized to do so binds the party giving the authorization to take up the documents and reimbursed the Bank making the payment, negotiation or acceptance."

The existence of a custom in international banking and financing circles negating any duty on the part of a bank to verify whether what has been described in letters of credits or drafts or shipping documents actually tallies with what was loaded aboard ship, having been positively proven as a fact, the appellants me bound by this established usage. They were, after all, the ones who tapped the facilities afforded by the Bank in order to engage in international business.

Insular bank vs IAC -Sometime in 1976 and 1977 spouses Ben S. Mendoza and Juanita M. Mendoza (the Mendozas, for brevity), obtained two (2) loans from Philippine American Life Insurance Co. (Philam Life) in the total amount of P600,000.00 to finance the construction of their residential house at Mandaue City. The said loans, with a 14% nominal interest rate, were to be liquidated in equal amortizations over a period of five (5) years.

-To secure payment, Philam Life required that amortizations be guaranteed by an irrevocable standby letter of credit of a commercial bank. Thus, the Mendozas contracted with petitioner Insular Bank of Asia and America (IBAA) for the issuance of two (2) irrevocable standby Letters of Credit in favor of Philam Life for the total amount of P600,000.00.

-These two (2) irrevocable standby L/Cs were, in turn, secured by a real estate mortgage for the same amount on the property of Respondent Spouses in favor of IBAA.

-The Mendozas failed to pay Philam Life the amortization that fell due on I June 1978 so that Philam Life informed IBAA that it was declaring both loans as "entirely due and demandable" and demanded payment of P492,996.30. However, because IBAA contested the propriety of calling in the entire loan, Philam Life desisted and resumed availing of the L/Cs by drawing on them for five (5) more amortizations.

-Because the Mendozas defaulted again on their amortization due on, Philam Life again informed IBAA that it was declaring the entire balance outstanding on both loans, including liquidated damages, "immediately due and payable." Philam Life then demanded the payment of P274,779.56 from IBAA but the latter took the position that, as a mere guarantor of the Mendozas who are the principal debtors, its remaining outstanding obligation under the two (2) standby L/Cs was only P30,100.60. Later, IBAA corrected the latter and demanded refund because the partial payment by Mendozas have the effect of reducing its liability as guarantor or surety under the terms of the standby L/Cs in question.

-The real Estate Mortgage, which secured the two (2) standby L/Cs, was extrajudicially foreclosed by, and sold at public auction to petitioner IBAA as the lone and highest bidder.

TRIAL COURT:

Trial Court took the position that IBAA, "as surety," was discharged of its liability to the extent of the payment made by the Mendozas, as the principal debtors, to the creditor, Philam Life.

COURT OF APPEALS:

Reversed the Trial Court and ruled instead that IBAA's liability was not reduced by virtue of the payments made by the Mendozas.

ISSUE:

Whether or not the partial payments made by the principal obligors (respondent MENDOZAS) would have the corresponding effect of reducing the liability of the petitioner as guarantor or surety under the terms of the standby LCs in question.

HELD:

In construing the terms of a Letter of Credit, as in other contracts, it is the intention of the parties that must govern.

"Letters of credit and contracts for the issuance of such letters are subject to the same rules of construction as are ordinary commercial contracts. They are to receive a reasonable and not a technical construction and although usage and custom cannot control express terms in letters of credit, they are to be construed with reference to all the surrounding facts and circumstances, to the particular and often varying terms in which they may be expressed, the circumstances and intention of the parties to them, and the usages of the particular trade of business contemplated."

Unequivocally, the subject standby Letters of Credit secure the payment of any obligation of the Mendozas to Philam Life including all interests, surcharges and expenses thereon but not to exceed P600,000.00. But while they are a security arrangement, they are not converted thereby into contracts of guaranty. That would make them ultra vires rather than a letter of credit, which is within the powers of a bank. The standby L/Cs are, "in effect an absolute undertaking to pay the money advanced or the amount for which credit is given on the faith of the instrument." They are primary obligations and not accessory contracts. Being separate and independent agreements, the payments made by the Mendozas cannot be added in computing IBAA's liability under its own standby letters of credit. Payments made by the Mendozas directly to Philam Life are in compliance with their own prestation under the loan agreement. As to the liability of the Mendozas to IBAA, it bears recalling that the Mendozas, upon their application for the opening and issuance of the Irrevocable Standby Letters of Credit in favor of Philam Life, had executed a Real Estate Mortgage as security to IBAA for any payment that the latter may remit to Philam Life on the strength of said Letters of Credit; and that IBAA had recovered from the Mendozas the amount of P432,386.07 when it foreclosed on the mortgaged property of said spouses in the concept of "principal (unpaid advances under the 2 standby LCs plus interest and charges)." In addition, IBAA had recovered P255,364.95 representing its clean loans to the Mendozas plus accrued interest besides the fact that it now has the foreclosed property. As between IBAA and the Mendozas, therefore, there has been full liquidation. The remaining obligation of P222,000.00 on the loan of the Mendozas, therefore, is now IBAA's sole responsibility to pay to Philam Life by virtue of its absolute and irrevocable undertaking under the standby L/Cs. Specially so, since the promissory notes executed by the Mendozas in favor of IBAA authorized the sale of the mortgaged security "for the purpose of applying their proceeds to x x x payments" of their obligations to IBAA.

Phil. Virginia Tobacco Adm vs De los Angeles -Timoteo Sevilla, proprietor and General Manager of the Philippine Associated Resources (PAR) was awarded in a public bidding the right to import Virginia leaf tobacco for blending purposes and exportation by them of PVTA and farmer's low-grade tobacco at a rate of one (1) kilo of imported tobacco for every nine (9) kilos of leaf tobacco actually exported.

-Before Sevilla could import the counterpart blending Virginia tobacco, Republic Act No. 4155 was passed and took effect on June 20, 1964, authorizing the PVTA to grant import privileges at the ratio of 4 to I instead of 9 to 1 and to dispose of all its tobacco stock at the best price available.

-Thus, on September 14, 1965 subject contract which was already amended on December 14, 1963 because of the prevailing export or world market price under which respondent will be exporting at a loss, was further amended to grant respondent the privileges under aforesaid law, subject to conditions, one of which is that respondent Sevilla would open an irrevocable letter of credit No. 6232 with the Prudential Bank and Trust Co. in favor of the PVTA to secure the payment of said balance, drawable upon the release from the Bureau of Customs of the imported Virginia blending tobacco.

-While Revilla was trying to negotiate the reduction of the procurement cost of the 2,101.479 kilos of PVTA tobacco already exported which attempt was denied by petitioner and also by the Office of the President, petitioner prepared two drafts to be drawn against said letter of credit for amounts which have already become due and demandable. -Sevilla then filed a complaint for damages with preliminary injunction. -The Lower Court dismissed the complaint and lifted the preliminary injunction issued. -Sevilla filed an urgent Motion for Reconsideration. -Pending Resolution, respondent judge issued the assailed Order of July 17, 1967 directing the Prudential Bank & Trust Co. to make the questioned release of funds from the Letter of Credit. Before petitioner could file a motion for reconsideration of said order, respondent Sevilla was able to secure the release of P300,000.00 and the rest of the amount. ISSUE: 1. Respondent Judge acted without or in excess of jurisdiction or with grave abuse of discretion when he issued the Order of July 17, 1967, on the ground: (a) the letter of credit issued by respondent bank is irrevocable; xxx HELD: In issuing the Order of July 17, 1967, respondent Judge violated the irrevocability of the letter of credit issued by respondent Bank in favor of petitioner. An irrevocable letter of credit cannot during its lifetime be cancelled or modified without the express permission of the beneficiary.

Land Bank of the Philippines v. Monet’s Export and Manufacturing Corp. 453 SCRA 173 (2005) FACTS: - Land Bank of the Philippines (Land Bank), and Monet's Export and Manufacturing Corporation (Monet) executed an Export Packing Credit Line Agreement under which Monet was given a credit line in the amount of P250,000.00, secured by the proceeds of its export letters of credit, the continuing guaranty of the spouses Vicente V. Tagle, Sr. and Ma. Consuelo G. Tagle, and the third party mortgage. -The credit line agreement was renewed and amended several times until it was increased to P5,000,000.00. -Owing to the continued failure and refusal of Monet, notwithstanding repeated demands, to pay its indebtedness to Land Bank, which have ballooned to P11,464,246.19 a complaint for collection of sum of money with prayer for preliminary attachment was filed by Land Bank. DEFENSE OF MONET AND TAGLE SPOUSES: - Land Bank failed and refused to collect the receivables on their export letter of credit against Wishbone Trading Company, while it made unauthorized payment on their import letter of credit to Beautilike Limited which seriously damaged the business interests of Monet. LC AND CA: - Land Bank was responsible for the mismanagement of the Wishbone and Beautilike accounts of Monet. That because of the non- collection and unauthorized payment made by Land Bank on behalf of Monet and considering that the latter could no longer draw from its credit line with Land Bank, it suffered from lack of financial resources sufficient to buy the needed materials to fill up the standing orders from its customers. ISSUE: - Whether or not fault or acts of mismanagement can be attributed to Land Bank relative to Monet's import letter of credit

HELD: - The engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft and the required documents are presented to it. The so-called 'independence principle assures the seller or the beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing bank from determining whether the main contract is actually accomplished or not. Accordingly, we find merit in the contention of Land Bank that, as the issuing bank in the Beautilike transaction involving an import letter of credit, it only deals in documents and it is not involved in the contract between the parties. 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. Thus, upon receipt by Land Bank of the documents of title which conform to what the letter of credit requires, it is duty bound to pay the seller, as it did in this case. -Thus, no fault or acts of mismanagement can be attributed to Land Bank relative to Monet's import letter of credit

Abad v. Court of Appeals, 181 SCRA 191 (1990)

FACTS: - TOMCO, Inc.applied for, and was granted by the Philippine Commercial and Industrial Bank (hereafter called "PCIB"), a domestic letter of credit in favor of its supplier, Oregon Industries, Inc., to pay for one Skagit Yarder with accessories. PCIB paid to Oregon Industries the cost of the machinery against a bill of exchange . -After making the required marginal deposit, TOMCO, Inc. signed and delivered to the bank a trust receipt acknowledging receipt of the merchandise in trust for the bank, with the obligation "to hold the same in storage" as property of PCIB, with a right to sell the same for cash provided that the entire proceeds thereof are turned over to the bank, to be applied against acceptance(s) and any other indebtedness of TOMCO, Inc. -In consideration of the release to TOMCO, Inc. by PCIB of the machinery covered by the trust receipt, Ramon Abad signed an undertaking entitled, "Deed of Continuing Guaranty" appearing on the back of the trust receipt, whereby he Promised to pay the obligation jointly and severally with TOMCO, Inc. -Except for TOMCO’s P28,000 marginal deposit in the bank, no payment has been made to PCIB by either TOMCO, Inc. or its surety, Abad, on the P80,000 letter of credit. -Consequently, the bank sued TOMCO, Inc. and Abad -TOMCO did not deny its liability to PCIB under the letter of credit but it alleged that inasmuch as it made a marginal deposit the same should have been deducted from its principal obligation, on which the bank should have computed the interest, bank charges, and attorney's fees. TC: -in favor of PCIB ordering TOMCO and ABAD to pay jointly and severally to PCIB with the marginal deposit still included in the computation of the obligation. CA: - Affirmed in toto decision of TC. ISSUE: - Whether or not the marginal deposit paid for should first be deducted from its principal before computing interests and other charges. HELD: - The marginal deposit requirement is a Central Bank measure to cut off excess currency liquidity which would create inflationary pressure. It is a collateral security given by the debtor, and is supposed to be returned to him upon his compliance with his secured obligation. Consequently, the bank pays no interest on the marginal deposit, unlike an ordinary bank deposit which earns interest in the bank. As a matter of fact, the marginal deposit requirement for letters of credit has been discontinued, except in those cases where the applicant for a letter of credit is not known to the bank or does not maintain a good credit standing therein. - It is only fair then that the marginal deposit (if one was made, as in this case), should be set off against his debt, for while the importer earns no interest on his marginal deposit, the bank, apart from being able to use said deposit for its own purposes, also earns interest on the money it loaned to the importer. It would be onerous to compute interest and other

charges on the face value of the letter of credit which the bank issued, without first crediting or setting off the marginal deposit which the importer paid to the bank. To allow such would be a clear case of unjust enrichment.

Bank of Commerce v. Serrano, 451 SCRA 484 (2005)

FACTS: - Via Moda International, through Serrano, obtained an export packing loan from, Bank of Commerce (BOC) secured by a Deed of Assignment over Irrevocable Transferable Letter of Credit. Serrano executed in favor of BOC Promissory Note. Via Moda then opened a deposit account for the proceeds of the said loan. -BOC issued to Via Moda, Irrevocable Letter of Credit for the purchase and importation of fabric and textile products from Tiger Ear Fabric Co. Ltd. of Taiwan. To secure the release of the goods covered, Serrano, in representation of Via Moda, executed Trust Receipt . -Under the terms of the trust receipt, Via Moda agreed to hold the goods in trust for BOC as the latter’s property and to sell the same for the latter’s account. In case of sale, the proceeds are to b e remitted to the bank as soon as it is received, but not later than the maturity date. Said proceeds are to be applied to the relative acceptances, with interest and penalty or in the alternative, to return the goods in case of non-sale. -The goods covered by the trust receipt were shipped by Via Moda to its consignee in New Jersey, USA, who sent an Export Letter of Credit issued by the Bank of New York, in favor of BOC. The Regional Operations Officer of BOC signed the export declarations to show consent to the shipment. The proceeds of the entrusted goods sold were not credited to the trust receipt but, were applied by the bank to the principal, penalties and interest of the export packing loan. The excess was applied to the trust receipt, leaving a balance. - BOC sent a demand letter to Via Moda to pay the said amount plus interest and penalty charges, or to return the goods covered by Trust Receipt within 5 days from receipt. -The demand was not heeded. -Serrano was charged with the crime of estafa under Article 315 (b) of the Revised Penal Code in relation to Presidential Decree No. 115. TC: -Serrano guilty and ordered to pay civil liability to BOC. CA: -Reversed the decision of TC. ISSUE: - Whether or not Serrano is jointly and severally liable with Via Moda under the guarantee of the Letter of Credit secured by the Trust Receipt. HELD:

- A letter of credit is a separate document from a trust receipt. While the trust receipt may have been executed as a security on the letter of credit, still the two documents involve different undertakings and obligations. A letter of credit is an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. Through a letter of credit, the bank merely substitutes its own promise to pay for the promise to pay of one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon. By contrast, a trust receipt transaction is one where the entruster, who holds an absolute title or security interests over certain goods, documents or instruments, released the same to the entrustee, who executes a trust receipt binding himself to hold the goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents and 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 return 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. - Serrano cannot be held civilly liable under the trust receipt since she was not made personally liable nor was she a guarantor therein. The parties stipulated during the pre-trial that respondent Serrano executed the trust receipt in representation of Via Moda, Inc., which has a separate personality from Serrano, and petitioner BOC failed to show sufficient reason to justify the piercing of the veil of corporate fiction. It thus ruled that this was not Serrano’s persona l obligation but that of Via Moda and there was no basis of finding her solidarily liable with Via Moda.