Letters of Credit

SPCL Letters of Credit

Comia, A.T.

SPECIAL COMMERCIAL LAWS A. LETTER OF CREDIT 1. Bank of the Philippine Islands v. De Reny Fabric Industries, Inc., 35 SCRA 253 (1970) 2. Philippine Virginia Tobacco Administration v. De los Angeles, 164 SCRA 543 (1988) 3. Insular Bank of Asia and America v. IAC, 167 SCRA 450 (1988) 4. Feati Bank and Trust Company v. Court of Appeals, 196 SCRA 576 (1991) 5. Prudential Bank and Trust Company v. IAC, 216 SCRA 257 (1992) 6. Bank of America v. Court of Appeals, 228 SCRA 357 (1993) 7. Reliance Commodities, Inc. V. Daewoo Industrial Co., Ltd., 228 SCRA 545 (1993) 8. Rodzssen Supply Company, Inc.v. Far East Bank and Trust Company, 357 SCRA 618 (2001) 9. Abad v. Court of Appeals, 181 SCRA 191 (1990) 10. MWSS v. Hon. Daway, 432 SCRA 559 (2004) 11. Transfield Philippines, Inc. v. Luzon Hydro Corp., 443 SCRA 307 (2004) 12. Bank of Commerce v. Serrano, 451 SCRA 484 (2005) 13. Land Bank of the Philippines v. Monet’s Export and Manufacturing Corp. 453 SCRA 173 (2005)

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SPCL Letters of Credit

Comia, A.T.

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 defendantsappellants, arising from the losses incurred for the non-delivery or defective delivery of the articles ordered, could accrue. Page 2 of 20

SPCL Letters of Credit

Comia, A.T.

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.

2. Phil. Virginia Tobacco Administration vs. Delos Angeles, 164 SCRA 543 (1988) FACTS:

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SPCL Letters of Credit

Comia, A.T.

-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. 3. Insular Bank of Asia & America vs. IAC, 167 SCRA 450 (1988) FACTS:

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SPCL Letters of Credit

Comia, A.T.

-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.

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SPCL Letters of Credit

Comia, A.T.

"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.

4. Feati Bank & Trust Company vs. Court of Appeals, 196 SCRA 576 (1991) FACTS: -Bernardo E. Villaluz agreed to sell to the then defendant Axel Christiansen 2,000 cubic meters of lauan logs at $27.00 per cubic meter FOB. -After inspecting the logs, Christiansen issued purchase order. -On the arrangements made and upon the instructions of the consignee, Hanmi Trade Development, Ltd., de Santa Ana, California, the Security Pacific National Bank of Los Angeles, California issued Irrevocable Letter of Credit available at sight in favor of Villaluz for the sum of $54,000.00, the total purchase price of the lauan logs. -The letter of credit was mailed to the Feati Bank and Trust Company (now Citytrust) with the instruction to the latter that it "forward the enclosed letter of credit to the beneficiary.” The letter of credit further provided that the draft to be drawn is on Security Pacific National Bank and that it be accompanied by the documents specified therein. Also incorporated by reference is the Uniform Customs and Practice for Documentary Credits). -The logs were thereafter loaded on the vessel "Zenlin Glory" which was chartered by Christiansen. Before its loading, the logs were inspected by custom inspectors, all of whom certified to the good condition and exportsbility of the logs, and the loading was completed. Page 6 of 20

SPCL Letters of Credit

Comia, A.T.

-However, Christiansen refused to issue the certification as required in paragraph 4 of the letter of credit, despite several requests made by the private respondent.Because of the absence of the certification by Christiansen, the Feati Bank and Trust Company refused to advance the payment on the letter of credit. -Meanwhile, the logs arrived at Inchon, Korea and were received by the consignee, Hanmi Trade Development Company, to whom Christiansen sold the logs and obtained profit. Hanmi Trade Development Company, on the other hand sold the logs to Taisung Lumber Company at Inchon, Korea. -Since the demands by the private respondent for Christiansen to execute the certification proved futile, Villaluz, instituted an action for mandamus and specific performance against Christiansen and the Feati Bank and Trust Company (now Citytrust).The petitioner was impleaded as defendant before the lower court only to afford complete relief should the court a quo order Christiansen to execute the required certifica tion. -While the case was still pending trial, Christiansen left the Philippines without informing the Court and his counsel. Hence, Villaluz, filed an amended complaint make the petitioner solidarily liable with Christiansen. ISSUE: Whether or not a correspondent bank is to be held liable under the letter of credit despite non-compliance by the beneficiary with the terms thereon. HELD: Commercial transactions involving letter of credits are governed by the rule on strict compliance-- It is a settled rule in commercial transactions involving letters of credit that the documents tendered must strictly conform to the terms of the letter of credit. The tender of documents by the beneficiary (seller) must include all documents required by the letter. A correspondent bank which departs from what has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its own risks and it may not thereafter be able to recover from the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary. Thus the rule of strict compliance. In the United States, commercial transactions involving letters of credit are governed by the rule of strict compliance. In the Philippines, the same holds true. The-same rule must also be followed. Although in some American decisions, banks are granted a little discretion to accept a faulty tender as when the other documents may be considered immaterial or superfluous, this theory could lead to dangerous precedents. Since a bank deals only with documents, it is not in a position to determine whether or not the documents required by the letter of credit Are material or superfluous. The mere fact that the document was specified therein readily means that the document is of vital importance to the buyer.

5. Prudential Bank v. IAC, 216 SCRA 257 (1992) FACTS: 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.

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SPCL Letters of Credit

Comia, A.T.

Rayon applied for a commercial letter of credit with the Prudential Bank and Trust Company in favor of Nissho. By virtue of said application, the Prudential Bank opened Utter of Credit 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 Rayon through its president, Anacleto R. Chi, while the others were not. Upon the arrival of the machineries, the Prudential Bank indorsed the shipping documents to Rayon which accepted delivery of the same. To enable 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 . 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 Rayon fail to pay the total amount or any portion of the drafts issued by Nissho and paid for by Prudential Bank. The defendant-appellant was able to take delivery of the textile machineries and installed the same at its factory site at 69 Obudan Street, Quezon City. Subsequently, Rayon ceased business operation. All the textile machineries in its factory were sold to AIC Development Corporation. The obligation of 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.

TC: -Ordered Philippine Rayon to pay, however disregarded the latter drafts as those drafts were not accepted by Rayon. Prudential Bank: Trial Court erred in interpreting “sight” drafts as requiring acceptance by Rayon before it could be held liable thereon.

CA: -Sustained the Trial Court. The last drafts which had not been presented and accepted by Rayon, prudential Bank was not justified in unilaterally paying the amounts therein.

ISSUE: Whether or not sight drafts require prior acceptance before Rayon can be held liable thereon. HELD: Page 8 of 20

SPCL Letters of Credit

Comia, A.T.

Letters of Credit; Presentment for acceptance not required for sight drafts.-- A letter of credit is defined as 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.11 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. In the instant case then, the drawee was necessarily the herein petitioner. It was to the latter that the drafts were presented for payment. In fact, there was no need for acceptance as the issued drafts are sight drafts. Presentment for acceptance is necessary only in the cases expressly provided for in Section 143 of the Negotiable Instruments Law (NIL).13 The said section reads: "SEC. 143. When presentment for acceptance must be made.-Presentment for acceptance must be made: (a) Where the bill is payable after sight, or in any other ease, 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; (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. Presentment is not a condition sine qua non for reimbursement.

6. Bank of America, NT & SA v. Court of Appeals, 228 SCRA 357 (1993) FACTS: Bank of America, NT & SA, Manila, received by registered mail art Irrevocable Letter of Credit purportedly issued by Bank of Ayudhya, Sarnyaek Branch, for the account of General Chemicals, Ltd., of Thailand in the amount to cover the sale of Plastic ropes and "agricultural files," with the Bank of America as advising bank and Inter-Resin Industrial Corporation as beneficiary. Upon receipt of the letter-advice with the letter of credit, Inter-Resin sent its lawyer to Bank of America to have the letter of credit confirmed. The bank did not. The bank employee in charge of letters of credit, however, explained to that there was no need for confirmation because the letter of credit would not have been transmitted if it were not genuine. 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 InterResin a Cashier's Check the peso equivalent of the draft. Bank of America wrote Bank of Ayudhya advising the latter of the availment under the letter of credit and sought the corresponding reimbursernent therefor. Meanwhile, Inter-Resin, presented to Bank of America the documents for the second availment under the same letter of credit. Immediately upon receipt of a telex from Bank of Ayudhya declaring the letter of credit fraudulent, 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. Bank of America sued Inter-Resin for the recovery of the peso equivalent of the draft on the partial availment of the now disowned letter of credit. Page 9 of 20

SPCL Letters of Credit

Comia, A.T.

TC: -Ruled for Inter-Resin, holding that (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, that Bank of America made assurances that enticed Inter-Resin and the merchandise to Thailand; CA: -Sustained the Trial Court.

ISSUE: Whether or not the Bank of America acted merely as an advising bank or a confirming bank, corollarily, Bank of America can recover from Inter-Resin.

HELD: 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 that the same had to be presented to Bank of Ayudhya (issuing, bank) for payment. It may be significant to recall that the letter of credit is an engagement of the issuing bank, not the advising bank, to pay the draft. No less important is that Bank of America's letter of 11 March 1981 has expressly stated that "[t]he enclosure is solely an advise of credit opened by the abovementioned correspondent and conveys no engagement by us." This 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 Amenca 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. The bare statement of the bank employee, 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, 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. 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 very least, with General Chemicals. In the ordinary course, of business, the perfection of contract precedes the issuance of a letter of credit.

7. Reliance Commodities, Inc. V. Daewoo Industrial Co., Ltd., 228 SCRA 545 (1993) Facts: -Reliance Commodities and Daewoo Industrial entered into a contract of sale of foundry pig iron. Page 10 of 20

SPCL Letters of Credit

Comia, A.T.

- Pursuant to this, Daewoo shipped from Pohang, Republic of Korea, 2,000 metric tons of foundry pig iron for delivery to its consignee Reliance.The shipment was fully paid for. - Upon arrival in Manila, the cargo was found to be short of 135.655 metric tons. - Subsequently, another contract was entered into between the same parties for the purchase of another 2,000 metric tons of foundry pig iron. -Daewoo acknowledged the short shipment, and to compensate Reliance therefore, bound itself to reduce the price. -The agreement was made part of the subsequent contract, however, that contract was not consummated and was later superseded by still another contract. - Reliance filed with the China Banking Corporation, an application for a letter of credit in favor of Daewoo. -The application was endorsed to the Iron Steel Authority (ISA) for approval, but the application was denied. - Reliance was instead asked to submit purchase orders from end-users to support its application for a letter of credit. -However, Reliance was not able to raise purchase orders for 2,000 metric tons. Reliance alleges that it was able to raise purchase orders for 1,900 metric tons. -Daewoo, upon the other hand, contends that reliance was only able to raise purchase orders for 900 metric tons. -An examination of the exhibits' presented by Reliance in the trial court shows that only purchase orders for 900 metric tons were stamped "Received" by the ISA. The other purchase orders for 1,000 metric tons allegedly sent by prospective end-users to Reliance were not shown to have been duly sent and exhibited to the ISA. Whatever the exact amount of the purchase orders was, Daewoo rejected the proposed L/C for the reason that the goods covered fell short of the contracted tonnage. Thus, Reliance withdrew the application for the L/C. -Subsequently, Daewoo learned that the failure of Reliance to open the LC was due to the fact that Reliance had already exceeded its foreign exchange allocation. -Because of the failure of Reliance to comply with its undertaking, Daewoo was compelled to sell the 2,000 metric tons to another buyer at a lower price, to cut losses and expenses Daewoo had begun to incur due to its inability to ship the 2000 metric tons to Reliance under their contract. -Reliance, through its counsel, wrote Daewoo requesting of the amount of P226,370.48, representing the value of the short delivery of 135.655 metric tons of foundry pig iron under the 1st contract. -Not being heeded, Reliance filed an action for damages against Daewoo with the trial court. Daewoo responded, inter alia, with a counterclaim for damages, contending that Reliance was guilty of breach of contract when it failed to open and L/C as required in the 31 July 1980 contract.

TC: -Reliance is in turn liable for breach of contract for its failure to open a letter of credit in favor of Daewoo pursuant to their contract and must therefore pay the latter actual damages with legal interest plus attorney's fees. Page 11 of 20

SPCL Letters of Credit

Comia, A.T.

CA: - Affirmed TC

ISSUE: -Whether or not the failure of an importer (Reliance) to open a letter of credit on the date agreed upon makes him liable to the exporter (Daewoo) for damages. HELD: -Failure of Reliance to open the appropriate letter of credit did not prevent the birth of the contract and neither did such failure extinguish that contract.— Reliance and Daewoo, having reached "a meeting of minds" in respect of the subject matter of the contract (2000 metric of foundry pig iron with a specified chemical composition), the price thereof (US $380,600.00), and other principal provisions,"they had a perfected contract,failure of Reliance to open, the appropriate L/C did not prevent the birth of that contract, and neither did the failure extinguish that contract. The opening of the L/C in favor of Daewoo was an obligation of Reliance and the performance of that obligation by Reliance was a condition for enforcement of the reciprocal obligation of Daewoo to ship the subject matter of the contract-the foundry pig iron-to Reliance. But the contract itself between Reliance and Daewoo had already sprung into legal existence and was enforceable. Failure of a buyer seasonably to furnish an agreed letter of credit is a breach of the contract between buyer and seller. Where the buyer fails to open a letter of credit as stipulated, the seller or exporter is entitled to claim damages for such breach. Damages for failure to open a commercial credit may, in appropriate capes, include the loss of profit which the seller would reasonably have made had the transaction been carried out. 8. Rodzssen Supply Company, Inc.v. Far East Bank and Trust Company, 357 SCRA 618 (2001) FACTS: -Rodzssen Supply opened an irrevocable letter 30-day domestic letter of credit from Far East Bank and Trust in favor of Ekman and Company, Inc. for the purchase of five units of hydraulic loaders; subsequent amendments extended the validity of the said LC for eight months. -For the first three hydraulic loaders that were delivered, the Bank paid for the amount specified in the letter of credit. -The last two hydraulic loaders were delivered late, nevertheless, Rodzssen accepted the same. -Upon Ekman’s presentation of documents, FBTC paid even if it was no longer bound to do so, because the letter of credit has already expired five months ago. -FBTC demanded payment from Rodzssen. -Rodzssen refused to pay and instead offered to return the last two pieces of equipment.

TC and CA: - Ordered Rodzssen to pay FBTC. Page 12 of 20

SPCL Letters of Credit

Comia, A.T.

ISSUE: 1. Whether or not it is proper for a banking institution to pay a letter of credit which has long expired or been cancelled. 2. Whether or not Rodzssen is liable to reimburse FBTC.

HELD: 1. The subject Letter of Credit had become invalid upon the lapse of the period fixed therein. Thus, FBTC should not have paid Ekman; it was not obliged to do so. In the same vein, of no moment was Ekman’s presentation, within the prescribed period, of all the documents necessary for collection, as the Letter of Credit had already expired and had in fact been cancelled. 2. Be that as it may, we agree with the CA that Rodzssen should pay FBTC the amount the latter expended for the equipment belatedly delivered by Ekman and voluntarily received and kept by petitioner. FBTC’s right to seek recovery from petitioner is anchored, not upon the inefficacious Letter of Credit, but on Article 2142 of the Civil Code which reads as follows: “Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-contract to the end that no one shall be unjustly enriched or benefited at the expense of another.” Indeed, equitable considerations behoove us to allow recovery by FBTC. True, it erred in paying Ekman, but Rodzssen itself was not without fault in the transaction. It must be noted that the latter had voluntarily received and kept the loaders. When both parties to a transaction are mutually negligent in the performance of their obligations, the fault of one cancels the negligence of the other and, as in this case, their rights and obligations may be determined equitably under the law proscribing unjust enrichment. 9. 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.

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-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.

10. MWSS v. Hon. Daway, 432 SCRA 559 (2004) FACTS: - MWSS granted Maynilad a 20- year period to manage, operate, repair, decommission and refurbish the existing MWSS water delivery and sewerage services in the west zone service area, for which Maynilad undertook to pay the corresponding concession fees on the date agreed upon in the said agreement which consisted of the payments of MWSS’ foreign loans. Page 14 of 20

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- To secure the concessionaire’s performance of it’s obligation under the Concession Agreement, Maynilad was required to put up a bond, bank guarantee or other security acceptable to MWSS. - In compliance with this requirement, Maynilad arranged for a 3 year facility with a number of foreign banks, led by Citicorp International Limited for the issuance of an irrevocable Standby Letter of Credit for the full and prompt performance of Maynilad’s obligations under MWSS. - As a result, of the depreciation of the Philippine Peso against US dollar, Maynilad incurred losses and issued a force majeure notice and unilaterally suspend payment of the concession fees. - In an effort to salvage the concession agreement, the parties entered into a Memorandum of Agreement wherein Maynilad was allowed to recover foreign exchange losses under a formula agreed upon between them. - Maynilad filed again another force majeure notice and since MWSS could not agree with the terms of the notice, the same was referred to the Appeals Panel for arbitration. - New term was agreed upon. - Prior to that Maynilad had filed a petition for rehabilitation. - RTC issued an order staying the enforcement of the claims and stopping payment of liabilities, because it is under rehabilitation. It effectively stopped the commencing process of payment by the bank to MWSS. - When MWSS demanded payment and commenced drawing on the irrevocable standby letter of credit, another order was issued by the RTC declaring such act of MWSS as violative of stay order earlier issued. - Aggrieved, MWSS filed this petition for review by way of certiorari under rule 65.

ISSUE: -Whether or not Court has the authority to issue order enjoining MWSS from proceeding against the Stand-by Letter of Credit.

HELD: -Letters of credit are in effect absolute undertakings to pay the money advanced or the amount for which credit is given on the faith of the instrument; they are primary obligations and not accessory contracts and while they are security arrangements, they are not converted into contracts of guaranty.—Letters of credit were developed for the purpose of insuring to a seller payment of a definite amount upon the presentation of documents and is thus a commitment by the issuer that the party in whose favor it is issued and who can collect upon it will have his credit against the applicant of the letter, duly paid in the amount specified in the letter. They are in effect absolute undertakings to pay the money advanced or the amount for which credit is given on the faith of the instrument. They are primary obligations and not accessory contracts and while they are security arrangements, they are not converted thereby into contracts of guaranty. What distinguishes letters of credit from other accessory contracts is the engagement of the issuing bank to pay the seller once draft and other required shipping documents are presented to it. They are definite undertakings to pay at sight once the documents stipulated therein are presented. Page 15 of 20

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-The obligation of the banks issuing letters of credit are solidary with that of the person or entity requesting for its issuance, the same being a direct, primary, absolute and definite undertaking to pay the beneficiary upon the presentation of the set of documents required therein. - Being a solidary obligation, the letter of credit is excluded from the jurisdiction of the rehabilitation and therefore in enjoining MWSS from proceeding against the Standby Letters of Credit to which it had a clear right under the law and the terms of said Standby Letter of credit, Hon. Daway acted in excess of his jurisdiction

11. Transfield Philippines, Inc. v. Luzon Hydro Corp., 443 SCRA 307 (2004) FACTS: -Transfield and Luzon Hydro Corporation entered into a Turnkey contract whereby Transfield, as turnkey contractor, undertook to construct, on a turnkey basis, a seventy Megawatt Hydro-Electric power station at the Bakun River in the provinces of Benguet and Ilocos Sur. -Transfield was given the sole responsibility for the design, construction, commissioning, testing and completion of the project. -The turnkey contract entitled Transfield to claim extensions of time for reasons enumerated in the turnkey contract, among which are variations, force majeure and delays caused by LHC itself. -To secure performance of Transfield’s obligation on or before target completion date, Transfield opened in favor of LHC two stand-by letters of credit. -In the course of construction of the project, Transfield sought various extension of time to complete the project. The extensions were requested allegedly due to several factors which prevented the completion of the project on the target date, such as force majeure occasioned by typhoon Zeb, barricades and demonstration. LHC denied the requests. -Arbitration proceeding were initiated. -Asserting that LHC had no right to call on the securities until the resolution of disputes before the arbitration tribunals, Transfield warned the banks that any transfer, release or disposition of the securities in favor of LHC would constrain it to hold them liable for damages. -Despite warning, however, the banks informed Transfield that they would pay on the securities if and when LHC calls on them. -Subsequently, LHC declared Transfield in default and demanded payment for the delay until actual completion of the project pursuant to the turnkey contract. -Also, LHC served notice that it would call on the securities for payment of liquidated damages for the delay. -Hence, Transfield filed a complaint for injunction against LHC and the banks.

ISSUES: 1. Whether or not it is only the issuing bank that may invoke the independence principle on letters of credit. Page 16 of 20

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2. Whether or not there is necessity of resolving first any dispute by the parties before the beneficiary is entitled to call on the letter of credit. 3. Whether or not injunction is the proper remedy to restrain wrongful draws on the securities. 4. Whether the banks were justified in releasing the amounts due under the securities.

HELD: - Letters of credit are also used in non-sale settings where they serve to reduce the risk of non-performance. Letters of credit in non-sale settings are known as standby letters of credit. There are three significant differences between commercial and standby credits. First, commercial credits involve the payment of money under a contract of sale. Such credits become payable upon the presentation by the seller-beneficiary of documents that show he has taken affirmative steps to comply with the sales agreement. In the standby type, the credit is payable upon certification of a party's nonperformance of the agreement. The documents that accompany the beneficiary's draft tend to show that the applicant has not performed. The beneficiary of a commercial credit must demonstrate by documents that he has performed his contract. The beneficiary of the standby credit must certify that his obligor has not performed the contract. - As beneficiary of the letter of credit, LHC is entitled to invoke the principle.

- The so-called “independence principle” assures the seller or the beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing bank from determining whether the main contract is actually accomplished or not. Under this principle, banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or particular conditions stipulated in the documents or superimposed thereon, nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any documents, or for the good faith or acts and/or omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of the goods, or any other person whomsoever. The independent nature of the letter of credit may be: (a) independence in toto where the credit is independent from the justification aspect and is a separate obligation from the underlying agreement like for instance a typical standby; or (b) independence may be only as to the justification aspect like in a commercial letter of credit or repayment standby, which is identical with the same obligations under the underlying agreement. In both cases the payment may be enjoined if in the light of the purpose of the credit the payment of the credit would constitute fraudulent abuse of the credit. -The “fraud exception principle” is an exception to the independence principle. The untruthfulness of a certificate accompanying a demand for payment under a standby letter of credit may qualify as fraud sufficient to support an injunction against payment. The remedy for fraudulent abuse is an injunction. However, injunction should not be granted unless: (a) there is a clear proof of fraud; (b) the fraud constitutes fraudulent abuse of the independent purpose of the letter of credit and not only fraud in the main agreement; and Page 17 of 20

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(3) irreparable injury might follow if injunction is not granted or the recovery of damages would be seriously damaged.

-Where the applicant entered into a Turnkey contract whereby it undertook to construct, on a turnkey basis, a seventy (70) megawatt hydro electric power station, the performance of which is secured by a standby letter of credit, the resort to arbitration by the applicant/ contractor to arbitration to determine if the latter is guilty of delay does not preclude the beneficiary to draw on the letter of credit upon the issuance of certificate of default because whether or not the issuance of certification of default amounted to fraud was not raised in the lower court and the parties did not stipulate that all dispute regarding delay should first be settled through arbitration before the beneficiary would be allowed to call upon the letter of credit. If drawing upon the letter of credit was wrongful due to the non-existent of the fact of default, the right of the applicant to seek indemnification for damages it suffered would not normally be foreclosed pursuant to general principle of law.

12. 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 be 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: Page 18 of 20

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-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 personal obligation but that of Via Moda and there was no basis of finding her solidarily liable with Via Moda.

13. 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. Page 19 of 20

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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

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