BPI vs De reny digest

BPI vs. DE RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO and AURORA CARCERENY alias AURORA C. GONZALES FACTS: On four (4) different occasions in 1961, the De Reny Fabric Industries, Inc., a Philippine corporation through its co-defendants-appellants, Aurora Carcereny alias Aurora C. Gonzales, and Aurora T. Tuyo, president and secretary, respectively of the corporation, applied to the Bank for four (4) irrevocable commercial letters of credit to cover the purchase by the corporation of goods described in the covering L/C applications as "dyestuffs of various colors" from its American supplier, the J.B. Distributing Company. All the applications of the corporation were approved, and the corresponding Commercial L/C Agreements were executed pursuant to banking procedures. Under these agreements, the aforementioned officers of the corporation bound themselves personally as joint and solidary debtors with the corporation. Pursuant to banking regulations then in force, the corporation delivered to the Bank peso marginal deposits as each letter of credit was opened. Bank issued irrevocable commercial letters of credit addressed to its correspondent banks in the United States, with uniform instructions for them to notify the beneficiary thereof, the J.B. Distributing Company, that they have been authorized to negotiate the latter's sight drafts up to the amounts mentioned the respectively, if accompanied, upon presentation, by a full set of negotiable clean "on board" ocean bills of lading covering the merchandise appearing in the LCs that is, dyestuffs of various colors.

It is the submission of the defendants-appellants that it was the duty of the foreign correspondent banks of the Bank of the Philippine Islands to take the necessary precaution to insure that the goods shipped under the covering L/Cs conformed with the item appearing therein, and, that the foregoing banks having failed to perform this duty, no claim for recoupment against the defendants-appellants, arising from the losses incurred for the non-delivery or defective delivery of the articles ordered, could accrue. ISSUE: WON the De Reny corporation shall be held liable? YES. 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, character, quality, quantity, conditions, packing, value, or delivery of the property purporting to be represented by documents; for any difference in character, quality, quantity, condition, or value of the property from that expressed in documents," or for "partial or incomplete shipment, or failure or omission to ship any or all of the property referred to in the Credit," as well as "for any deviation from instructions, delay, default or fraud by the shipper or anyone else in connection with the property the shippers or vendors and ourselves [purchasers] or any of us." Having agreed to these terms, the appellants have, therefore, no recourse but to comply with their covenant. 2 But even without the stipulation recited above, the appellants cannot shift the burden of loss to the Bank on account of the violation by their vendor of its prestation.

Consequently, the J.B. Distributing Company drew upon, presented to and negotiated with these banks, its sight drafts covering the amounts of the merchandise ostensibly being exported by it, together with clean bills of lading, and collected the full value of the drafts up to the amounts appearing in the L/Cs as above indicated. These correspondent banks then debited the account of the Bank of the Philippine Islands with them up to the full value of the drafts presented by the J.B. Distributing Company, plus commission thereon, and, thereafter, endorsed and forwarded all documents to the Bank of the Philippine Islands.

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

In 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.

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

The 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. LC - rendered its decision ordering the corporation and its co-defendants (the herein appellants) to pay to the plaintiff-appellee the amount of P291,807.46, with interest thereon, as provided for in the L/C Agreements, at the rate of 7% per annum from October 31, 1962 until fully paid, plus costs.

The existence of a custom in international banking and financing circles negating any duty on the part of a bank to verify whether what has been described in letters of credits or drafts or shipping documents actually tallies with what was loaded aboard ship, having been positively proven as a fact, the appellants are bound by this established usage. They were, after all, the ones who tapped the facilities afforded by the Bank in order to engage in international business. SC - judgment a quo is affirmed, at defendants-appellants' cost. This is without prejudice to the Bank, in proper proceedings in the court below in this same case proving and being reimbursed additional expenses, if any, it has incurred by virtue

of the continued storage of the goods in question up to the time this decision becomes final and executory.

bank’s obligation by making it also its own understanding, commitment or guaranty or obligation. ISSUE: 1.

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 Hanmi 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.

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.

RTC ruled in favor of Villaluz and held Feati Bank and Christiansen solildarily liable, it held that: 1. 2. 3.

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. 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. 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: 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

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)

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 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.

FEATI BANK vs. CA In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to the beneficiary the existence of the letter of credit. A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft under the letter of credit. Its liability is dependent upon the stage of the negotiation. If before negotiation, it has no liability with respect to the seller but after negotiation, a contractual relationship will then prevail between the negotiating bank and the seller. In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability is a primary one as if the correspondent bank itself had issued the letter of credit.

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.

Facts: Bernardo Villaluz entered into a contract of sale with Axel Christiansen in which Villaluz agreed to deliver to Christiansen 2,000 cubic meters of lauan logs at $27.00 per cubic meter FOB. On the arrangements made and upon the instructions of consignee, Hanmi Trade Development, Ltd., the Security Pacific National Bank of Los Angeles, California issued an irrevocable letter of credit available at sight in favor of Villaluz for the sum of $54,000.00, the total purchase price of the lauan logs. The letter of credit was mailed to the Feati Bank and Trust Company with the instruction to the latter that it “forward the enclosed letter of credit to the beneficiary.” The letter of credit also provided that the draft to be drawn is on Security Pacific National Bank and that it be accompanied by certain documents. The logs were thereafter loaded on a vessel but Christiansen refused to issue the certification required in paragraph 4 of the letter of credit, despite repeated requests by the private respondent. The logs however were still shipped and received by consignee, to whom Christiansen sold the logs. Because of the absence

of the certification by Christiansen, the Feati Bank and Trust company refused to advance the payment on the letter of credit until such credit lapsed. Since the demands by Villaluz for Christiansen to execute the certification proved futile, he filed an action for mandamus and specific performance against Christiansen and Feati Bank and Trust Company before the Court of First Instance of Rizal. Christiansen however left the Philippines and Villaluz filed an amended complaint making Feati Bank and Trust Company. Issue: Whether or not Feati Bank is liable for Releasing the funds to Christiansen Held: In commercial transactions involving letters of credit, the functions assumed by a correspondent bank are classified according to the obligations taken up by it. The correspondent bank may be called a notifying bank, a negotiating bank, or a confirming bank. In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to the beneficiary the existence of the letter of credit. A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft under the letter of credit. Its liability is dependent upon the stage of the negotiation. If before negotiation, it has no liability with respect to the seller but after negotiation, a contractual relationship will then prevail between the negotiating bank and the seller.

In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability is a primary one as if the correspondent bank itself had issued the letter of credit. In this case, the letter merely provided that the petitioner “forward the enclosed original credit to the beneficiary.” (Records, Vol. I, p. 11) Considering the aforesaid instruction to the petitioner by the issuing bank, the Security Pacific National Bank, it is indubitable that the petitioner is only a notifying bank and not a confirming bank as ruled by the courts below. A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is only with that of the issuing bank and not with the beneficiary to whom he assumes no liability. It follows therefore that when the petitioner refused to negotiate with the private respondent, the latter has no cause of action against the petitioner for the enforcement of his rights under the letter. Since the Feati was only a notifying bank, its responsibility was solely to notify and/or transmit the documentary of credit to the private respondent and its obligation ends there. At the most, when the petitioner extended the loan to the private respondent, it assumed the character of a negotiating bank. Even then, the petitioner will still not be liable, for a negotiating bank before negotiation has no contractual relationship with the seller. Whether therefore the petitioner is a notifying bank or a negotiating bank, it cannot be held liable. Absent any definitive proof that it has confirmed the letter of credit or has actually negotiated with Feati, the refusal by the petitioner to accept the tender of the private respondent is justified.