THIRD DIVISION

G.R. No. 183486, February 24, 2016

THE HONGKONG & SHANGHAI BANKING CORPORATION, LIMITED, Petitioner, v. NATIONAL STEEL
CORPORATION AND CITYTRUST BANKING CORPORATION (NOW BANK OF THE PHILIPPINE
ISLANDS), Respondents.
DECISION
JARDELEZA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court. Petitioner The Hongkong &
Shanghai Banking Corporation, Limited (HSBC) filed this petition to assail the Decision of the Court of
Appeals (CA) dated November 19, 2007 (Assailed Decision) which reversed the ruling of the Regional Trial
Court, Branch 62 of Makati City (RTC Makati) and its Resolution denying HSBC's Motion for Reconsideration
dated June 23, 2008 (Assailed Resolution).
The Facts
Respondent National Steel Corporation (NSC) entered into an Export Sales Contract (the Contract) with
Klockner East Asia Limited (Klockner) on October 12, 1993. 1 NSC sold 1,200 metric tons of prime cold rolled
coils to Klockner under FOB ST Iligan terms. In accordance with the requirements in the Contract, Klockner
applied for an irrevocable letter of credit with HSBC in favor of NSC as the beneficiary in the amount of
US$468,000. On October 22, 1993, HSBC issued an irrevocable and onsight letter of credit no. HKH 239409
(the Letter of Credit) in favor of NSC.2 The Letter of Credit stated that it is governed by the International
Chamber of Commerce Uniform Customs and Practice for Documentary Credits, Publication No. 400 (UCP
400). Under UCP 400, HSBC as the issuing bank, has the obligation to immediately pay NSC upon
presentment of the documents listed in the Letter of Credit. 3 These documents are: (1) one original
commercial invoice; (2) one packing list; (3) one non-negotiable copy of clean on board ocean bill of lading
made out to order, blank endorsed marked 'freight collect and notify applicant;' (4) copy of Mill Test
Certificate made out 'to whom it may concern;' (5) copy of beneficiary's telex to applicant (Telex No. 86660
Klock HX) advising shipment details including D/C No., shipping marks, name of vessel, port of shipment,
port of destination, bill of lading date, sailing and ETA dates, description of goods, size, weight, number of
packages and value of goods latest two days after shipment date; and (6) beneficiary's certificate certifying
that (a) one set of non-negotiable copies of documents (being those listed above) have been faxed to
applicant (FAX No. 5294987) latest two days after shipment date; and (b) one set of documents including
one copy each of invoice and packing list, 3/3 original bills of lading plus one non-negotiable copy and three
original Mill Test Certificates have been sent to applicant by air courier service latest two days after shipment
date.4
The Letter of Credit was amended twice to reflect changes in the terms of delivery. On November 2, 1993,
the Letter of Credit was first amended to change the delivery terms from FOB ST Iligan to FOB ST Manila
and to increase the amount to US$488,400.5 It was subsequently amended on November 18, 1993 to
extend the expiry and shipment date to December 8, 1993. 6 On November 21, 1993, NSC, through Emerald
Forwarding Corporation, loaded and shipped the cargo of prime cold rolled coils on board MV Sea Dragon
under China Ocean Shipping Company Bill of Lading No. HKG 266001. The cargo arrived in Hongkong on
November 25, 1993.7
NSC coursed the collection of its payment from Klockner through City Trust Banking Corporation (City Trust).
NSC had earlier obtained a loan from City Trust secured by the proceeds of the Letter of Credit issued by
HSBC.8
On November 29, 1993, City Trust sent a collection order (Collection Order) to HSBC respecting the
collection of payment from Klockner. The Collection Order instructed as follows: (1) deliver documents
against payment; (2) cable advice of non-payment with reason; (3) cable advice payment; and (4) remit
proceeds via TELEX.9 The Collection Order also contained the following statement: "Subject to Uniform Rules
for the Collection of Commercial Paper Publication No. 322." 10 Further, the Collection Order stated that
proceeds should be remitted to Standard Chartered Bank of Australia, Ltd., Offshore Branch Manila (SCB-M)

which was, in turn, in charge of remitting the amount to City Trust. 11 On the same date, City Trust also
presented to HSBC the following documents: (1) Letter of Credit; (2) Bill of Lading; (3) Commercial Invoice;
(4) Packing List; (5) Mill Test Certificate; (6) NSC's TELEX to Klockner on shipping details; (7) Beneficiary's
Certificate of facsimile transmittal of documents; (8) Beneficiary's Certificate of air courier transmittal of
documents; and (9) DHL Receipt No. 669988911 and Certificate of Origin. 12
On December 2, 1993, LISBC sent a cablegram to City Trust acknowledging receipt of the Collection Order. It
also stated that the documents will be presented to "the drawee against payment subject to UCP 322
[Uniform Rules for Collection (URC) 322] as instructed..."13 SCB-M then sent a cablegram to ITSBC
requesting the latter to urgently remit the proceeds to its account. It further asked that LISBC inform it "if
unable to pay"14 and of the "reasons thereof."15 Neither CityTrust nor SCB-M objected to LISBC's statement
that the collection will be handled under the Uniform Rules for Collection (URC 322).
On December 7, 1993, HSBC responded to SCB-M and sent a cablegram where it repeated that "this bill is
being handled subject to [URC] 322 as instructed by [the] collecting bank." 16 It also informed SCB-M that it
has referred the matter to Klockner for payment and that it will revert upon the receipt of the amount. 17 On
December 8, 1993, the Letter of Credit expired.18
On December 10, 1993, HSBC sent another cablegram to SCB-M advising it that Klockner had refused
payment. It then informed SCB-M that it intends to return the documents to NSC with all the banking
charges for its account.19 In a cablegram dated December 14, 1993, CityTrust requested HSBC to inform it of
Klockner's reason for refusing payment so that it may refer the matter to NSC. 20 HSBC did not respond and
City Trust thus sent a follow-up cablegram to HSBC on December 17, 1993. In this cablegram, City Trust
insisted that a demand for payment must be made from Kloclaier since the documents "were found in
compliance with LC terms and conditions."21 HSBC replied on the same day stating that in accordance with
CityTrust's instruction in its Collection Order, HSBC treated the transaction as a matter under URC 322. Thus,
it demanded payment from Klockner which unfortunately refused payment for unspecified reasons. It then
noted that under URC 322, Kloclaier has no duty to provide a reason for the refusal. Hence, HSBC requested
for further instructions as to whether it should continue to press for payment or return the documents. 22 City
Trust responded that as advised by its client, HSBC should continue to press for payment. 23
Klockner continued to refuse payment and HSBC notified City Trust in a cablegram dated January 7, 1994,
that should Kloclaier still refuse to accept the bill by January 12, 1994, it will return the full set of documents
to City Trust with all the charges for the account of the drawer.24
Meanwhile, on January 12, 1994, City Trust sent a letter to NSC stating that it executed NSC's instructions
"to send, ON COLLECTION BASIS, the export documents..." 25 City Trust also explained that its act of sending
the export documents on collection basis has been its usual practice in response to NSC's instructions in its
transactions.26
NSC responded to this in a letter dated January 18, 1994.27 NSC expressed its disagreement with CityTrust's
contention that it sent the export documents to HSBC on collection basis. It highlighted that it "negotiated
with City Trust the export documents pertaining to LC No. HKH 239409 of HSBC and it was City Trust, which
wrongfully treated the negotiation, as 'on collection basis.'" 28 NSC further claimed that City Trust used its
own mistake as an excuse against payment under the Letter of Credit. Thus, NSC argued that City Trust
remains liable under the Letter of Credit. It also stated that it presumes that City Trust has preserved
whatever right of reimbursement it may have against HSBC. 29
On January 13, 1994, CityTrust notified HSBC that it should continue to press for payment and to hold on to
the document until further notice.30
However, Klockner persisted in its refusal to pay. Thus, on February 17, 1994, HSBC returned the documents
to CityTrust.31 In a letter accompanying the returned documents, HSBC stated that it considered itself
discharged of its duty under the transaction. It also asked for payment of handling charges. 32 In response,
CityTrust sent a cablegram to HSBC dated February 21, 1994 stating that it is "no longer possible for
beneficiary to wait for you to get paid by applicant." 33 It explained that since the documents required under
the Letter of Credit have been properly sent to HSBC, Citytrust demanded payment from it. CityTrust also
stated, for the first time in all of its correspondence with HSBC, that "re your previous telexes, ICC
Publication No. 322 is not applicable."34 FISBC responded in cablegram dated February 28, 1994.35 It insisted
that CityTrust sent documents which clearly stated that the collection was being made under URC 322. Thus,
in accordance with its instructions, HSBC, in the next three months, demanded payment from Klockner
which the latter eventually refused. Flence, FISBC stated that it opted to return the documents. It then

informed CityTrust that it considered the transaction closed save for the latter's obligation to pay the
handling charges.36
Disagreeing with HSBC's position, CityTrust sent a cablegram dated March 9, 1994. 37 It insisted that HSBC
should pay it in accordance with the terms of the Letter of Credit which it issued on October 22, 1993. Under
the Letter of Credit, FISBC undertook to reimburse the presenting bank under "ICC 400 upon the
presentment of all necessary documents."38 CityTrust also stated that the reference to URC 322 in its
Collection Order was merely in fine print. The Collection Order itself was only pro-forma. CityTrust
emphasized that the reference to URC 322 has been "obviously superseded by our specific instructions to
'deliver documents against payment/cable advice non-payment with reason/cable advice payment/remit
proceeds via telex' which was typed in on said form." 39 CityTrust also claimed that the controlling document
is the Letter of Credit and not the mere fine print on the Collection Order.40 FISBC replied on March 10,
1994.41 It argued that CityTrust clearly instructed it to collect payment under URC 322, thus, CityTrust can
no longer claim a contrary position three months after it made its request. FISBC repeated that the
transaction is closed except for City Trust's obligation to pay for the expenses which HSBC incurred. 42
Meanwhile, on March 3, 1994, NSC sent a letter to HSBC where it, for the first time, demanded payment
under the Letter of Credit.43 On March 11, 1994, the NSC sent another letter to LISBC through the Office of
the Corporate Counsel which served as its final demand. These demands were made after approximately
four months from the expiration of the Letter of Credit.
Unable to collect from HSBC, NSC filed a complaint against it for collection of sum of money
(Complaint)44 docketed as Civil Case No. 94-2122 (Collection Case) of the RTC Makati. In its Complaint, NSC
alleged that it coursed the collection of the Letter of Credit through CityTrust. However, notwithstanding
CityTrust's complete presentation of the documents in accordance with the requirements in the Letter of
Credit, HSBC unreasonably refused to pay its obligation in the amount of US$485, 767.93. 45
HSBC filed its Answer46 on January 6, 1995. HSBC denied any liability under the Letter of Credit. It argued in
its Answer that CityTrust modified the obligation when it stated in its Collection Order that the transaction is
subject to URC 322 and not under UCP 400.47 It also filed a Motion to Admit Attached Third-Party
Complaint48 against CityTrust on November 21, 1995.49 It claimed that CityTrust instructed it to collect
payment under URC 322 and never raised that it intended to collect under the Letter of Credit. 50 HSBC
prayed that in the event that the court finds it liable to NSC, CityTrust should be subrogated in its place and
be made directly liable to NSC. 51 The RTC Makati granted the motion and admitted the third party complaint.
CityTrust filed its Answer52 on January 8, 1996. CityTrust denied that it modified the obligation. It argued
that as a mere agent, it cannot modify the terms of the Letter of Credit without the consent of all the
parties.53 Further, it explained that the supposed instruction that the transaction is subject to URC 322 was
merely in fine print in a pro forma document and was superimposed and pasted over by a large pink sticker
with different remittance instructions.54
After a full-blown trial,55 the RTC Makati rendered a decision (RTC Decision) dated February 23, 2000. 56 It
found that IiSBC is not liable to pay NSC the amount stated in the Letter of Credit. It ruled that the
applicable law is URC 322 as it was the law which CityTrust intended to apply to the transaction. Under URC
322, HSBC has no liability to pay when Klockner refused payment. The dispositive portion states WHEREFORE, premises considered, judgment is hereby rendered as follows:
1. Plaintiffs Complaint against HSBC is DISMISSED; and, HSBC's Counterclaims against NSC are DENIED.
2. Ordering Third-Party Defendant CityTrust to pay Third-Party Plaintiff HSBC the following:
2.1 US$771.21 as actual and consequential damages; and
2.2 P100,000 as attorney's fees.
3. No pronouncement as to costs.
chanRoble svirtualLawlibrary

SO ORDERED.57
NSC and CityTrust appealed the RTC Decision before the CA. In its Assailed Decision dated November 19,
2007,58 the CA reversed the RTC Makati. The CA found that it is UCP 400 and not URC 322 which governs
the transaction. According to the CA, the terms of the Letter of Credit clearly stated that UCP 400 shall
apply. Further, the CA explained that even if the Letter of Credit did not state that UCP 400 governs, it
nevertheless finds application as this Court has consistently recognized it under Philippine jurisdiction. Thus,
applying UCP 400 and principles concerning letters of credit, the CA explained that the obligation of the

issuing bank is to pay the seller or beneficiary of the credit once the draft and the required documents are
properly presented. Under the independence principle, the issuing bank's obligation to pay under the letter
of credit is separate from the compliance of the parties in the main contract. The dispositive portion held WHEREFORE, in view of the foregoing, the assailed decision is hereby REVERSED and SET ASIDE. HSBC
is ordered to pay its obligation under the irrevocable letter of credit in the amount of US$485,767.93 to NSC
with legal interest of six percent (6%) per annum from the filing of the complaint until the amount is fully
paid, plus attorney's fees equivalent to 10% of the principal. Costs against appellee HSBC.
SO ORDERED.59
HSBC filed a Motion for Reconsideration of the Assailed Decision which the CA denied in its Assailed
Resolution dated June 23, 2008.60
Hence, HSBC filed this Petition for Review on Certiorari 61 before this Court, seeking a reversal of the CA's
Assailed Decision and Resolution. In its petition, HSBC contends that CityTrust's order to collect under URC
322 did not modify nor contradict the Letter of Credit. In fact, it is customary practice in commercial
transactions for entities to collect under URC 322 even if there is an underlying letter of credit. Further, City
Trust acted as an agent of NSC in collecting payment and as such, it had the authority to instruct HSBC to
proceed under URC 322 and not under UCP 400. Having clearly and expressly instructed HSBC to collect
under URC 322 and having fully intended the transaction to proceed under such rule as shown by the series
of correspondence between City Trust and HSBC, City Trust is estopped from now claiming that the collection
was made under UCP 400 in accordance with the Letter of Credit.
NSC, on the other hand, claims that ITSBC's obligation to pay is clear from the terms of the Letter of Credit
and under UCP 400. It asserts that the applicable rule is UCP 400 and HSBC has no basis to argue that
CityTrust's presentment of the documents allowed LISBC to vary the terms of their agreement. 62
The Issues
The central question in this case is who among the parties bears the liability to pay the amount stated in the
Letter of Credit. This requires a determination of which between UCP 400 and URC 322 governs the
transaction. The obligations of the parties under the proper applicable rule will, in turn, determine their
liability.
The Ruling of the Court
We uphold the CA.
The nature of a letter of credit
A letter of credit is a commercial instrument developed to address the unique needs of certain commercial
transactions. It is recognized in our jurisdiction and is sanctioned under Article 567 63 of the Code of
Commerce and in numerous jurisprudence defining a letter of credit, the principles relating to it, and the
obligations of parties arising from it.
In Bank of America, NT & SA v. Court of Appeals,64 this Court defined a letter of credit as "...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." 65Through a letter of credit, a buyer
obtains the credit of a third party, usually a bank, to provide assurance of payment. 66 This, in turn,
convinces a seller to part with his or her goods even before he or she is paid, as he or she is insured by the
third party that he or she will be paid as soon as he or she presents the documents agreed upon. 67
A letter of credit generally arises out of a separate contract requiring the assurance of payment of a third
party. In a transaction involving a letter of credit, there are usually three transactions and three parties. The
first transaction, which constitutes the underlying transaction in a letter of credit, is a contract of sale
between the buyer and the seller. The contract may require that the buyer obtain a letter of credit from a
third party acceptable to the seller. The obligations of the parties under this contract are governed by our
law on sales.

The second transaction is the issuance of a letter of credit between the buyer and the issuing bank. The
buyer requests the issuing bank to issue a letter of credit naming the seller as the beneficiary. In this
transaction, the issuing bank undertakes to pay the seller upon presentation of the documents identified in
the letter of credit. The buyer, on the other hand, obliges himself or herself to reimburse the issuing bank for
the payment made. In addition, this transaction may also include a fee for the issuing bank's services. 68 This
transaction constitutes an obligation on the part of the issuing bank to perform a service in consideration of
the buyer's payment. The obligations of the parties and their remedies in cases of breach are governed by
the letter of credit itself and by our general law on obligations, as our civil law finds suppletory application in
commercial documents.69
The third transaction takes place between the seller and the issuing bank. The issuing bank issues the letter
of credit for the benefit of the seller. The seller may agree to ship the goods to the buyer even before actual
payment provided that the issuing bank informs him or her that a letter of credit has been issued for his or
her benefit. This means that the seller can draw drafts from the issuing bank upon presentation of certain
documents identified in the letter of credit. The relationship between the issuing bank and the seller is not
strictly contractual since there is no privity of contract nor meeting of the minds between them. 70 It also
does not constitute a stipulation pour autrui in favor of the seller since the issuing bank must honor the
drafts drawn against the letter of credit regardless of any defect in the underlying contract. 71 Neither can it
be considered as an assignment by the buyer to the seller-beneficiary as the buyer himself cannot draw on
the letter.72 From its inception, only the seller can demand payment under the letter of credit. It is also not a
contract of suretyship or guaranty since it involves primary liability in the event of default. 73 Nevertheless,
while the relationship between the seller-beneficiary and the issuing bank is not strictly contractual, strict
payment under the terms of a letter of credit is an enforceable right. 74 This enforceable right finds two legal
underpinnings. First, letters of credit, as will be further explained, are governed by recognized international
norms which dictate strict compliance with its terms. Second, the issuing bank has an existing agreement
with the buyer to pay the seller upon proper presentation of documents. Thus, as the law on obligations
applies even in commercial documents,75 the issuing bank has a duty to the buyer to honor in good faith its
obligation under their agreement. As will be seen in the succeeding discussion, this transaction is also
governed by international customs which this Court has recognized in this jurisdiction. 76
In simpler terms, the various transactions that give rise to a letter of credit proceed as follows: Once the
seller ships the goods, he or she obtains the documents required under the letter of credit. He or she shall
then present these documents to the issuing bank which must then pay the amount identified under the
letter of credit after it ascertains that the documents are complete. The issuing bank then holds on to these
documents which the buyer needs in order to claim the goods shipped. The buyer reimburses the issuing
bank for its payment at which point the issuing bank releases the documents to the buyer. The buyer is then
able to present these documents in order to claim the goods. At this point, all the transactions are
completed. The seller received payment for his or her performance of his obligation to deliver the goods. The
issuing bank is reimbursed for the payment it made to the seller. The buyer received the goods purchased.
Owing to the complexity of these contracts, there may be a correspondent bank which facilitates the ease of
completing the transactions. A correspondent bank may be a notifying bank, a negotiating bank or a
confirming bank depending on the nature of the obligations assumed. 77 A notifying bank undertakes to
inform the seller-beneficiary that a letter of credit exists. It may also have the duty of transmitting the letter
of credit. As its obligation is limited to this duty, it assumes no liability to pay under the letter of credit. 78 A
negotiating bank, on the other hand, purchases drafts at a discount from the seller-beneficiary and presents
them to the issuing bank for payment.79 Prior to negotiation, a negotiating bank has no obligation. A
contractual relationship between the negotiating bank and the seller-beneficiary arises only after the
negotiating bank purchases or discounts the drafts.80Meanwhile, a confirming bank may honor the letter of
credit issued by another bank or confirms that the letter of credit will be honored by the issuing bank. 81 A
confirming bank essentially insures that the credit will be paid in accordance with the terms of the letter of
credit.82 It therefore assumes a direct obligation to the seller-beneficiary.83
Parenthetically, when banks are involved in letters of credit transactions, the standard of care imposed on
banks engaged in business imbued with public interest applies to them. Banks have the duty to act with the
highest degree of diligence in dealing with clients.84 Thus, in dealing with the parties in a letter of credit,
banks must also observe this degree of care.
The value of letters of credit in commerce hinges on an important aspect of such a commercial transaction.
Through a letter of credit, a seller-beneficiary is assured of payment regardless of the status of the
underlying transaction. International contracts of sales are perfected and consummated because of the
certainty that the seller will be paid thus making him or her willing to part with the goods even prior to

actual receipt of the amount agreed upon. The legally demandable obligation of an issuing bank to pay
under the letter of credit, and the enforceable right of the seller-beneficiary to demand payment, are
indispensable essentials for the system of letters of credit, if it is to serve its purpose of facilitating
commerce. Thus, a touchstone of any law or custom governing letters of credit is an emphasis on the
imperative that issuing banks respect their obligation to pay, and that seller-beneficiaries may reasonably
expect payment, in accordance with the terms of a letter of credit.
Rules applicable to letters of credit
Letters of credit are defined and their incidences regulated by Articles 567 to 572 85 of the Code of
Commerce. These provisions must be read with Article 286 of the same code which states that acts of
commerce are governed by their provisions, by the usages and customs generally observed in the particular
place and, in the absence of both rules, by civil law. In addition, Article 50 87 also states that commercial
contracts shall be governed by the Code of Commerce and special laws and in their absence, by general civil
law.
The International Chamber of Commerce (ICC)88 drafted a set of rules to govern transactions involving
letters of credit. This set of rules is known as the Uniform Customs and Practice for Documentary Credits
(UCP). Since its first issuance in 1933, the UCP has seen several revisions, the latest of which was in 2007,
known as the UCP 600. However, for the period relevant to this case, the prevailing version is the 1993
revision called the UCP 400. Throughout the years, the UCP has grown to become the worldwide standard in
transactions involving letters of credit.89 It has enjoyed near universal application with an estimated 95% of
worldwide letters of credit issued subject to the UCP.90
In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,91 this Court applied a provision from the
UCP in resolving a case pertaining to a letter of credit transaction. This Court explained that the use of
international custom in our jurisdiction is justified by Article 2 of the Code of Commerce which provides that
acts of commerce are governed by, among others, usages and customs generally observed. Further, in Feati
Bank & Trust Company v. Court of Appeals,92 this Court ruled that the UCP should be applied in cases where
the letter of credit expressly states that it is the governing rule. 93This Court also held in Feati that the UCP
applies even if it is not incorporated into the letter of the credit. 94 The application of the UCP in Bank of
Philippine Islands and in Feati was further affirmed in Metropolitan Waterworks and Sewerage System v.
Daway95 where this Court held that "[l]etters of credit have long been and are still governed by the
provisions of the Uniform Customs and Practice for Documentary Credit[s] of the International Chamber of
Commerce."96 These precedents highlight the binding nature of the UCP in our jurisdiction.
Thus, for the purpose of clarity, letters of credit are governed primarily by their own provisions, 97 by laws
specifically applicable to them,98 and by usage and custom.99 Consistent with our rulings in several
cases,100 usage and custom refers to UCP 400. When the particular issues are not covered by the provisions
of the letter of credit, by laws specifically applicable to them and by UCP 400, our general civil law finds
suppletory application.101
Applying this set of laws and rules, this Court rules that HSBC is liable under the provisions of the Letter of
Credit, in accordance with usage and custom as embodied in UCP 400, and under the provisions of general
civil law.
HSBC's Liability
The Letter of Credit categorically stated that it is subject to UCP 400, to wit:
Except so far as otherwise expressly stated, this documentary credit is subject to uniform Customs and
Practice for Documentary Credits (1983 Revision), International Chamber of Commerce Publication No.
400.102
From the moment that HSBC agreed to the terms of the Letter of Credit - which states that UCP 400 applies
- its actions in connection with the transaction automatically became bound by the rules set in UCP 400.
Even assuming that URC 322 is an international custom that has been recognized in commerce, this does
not change the fact that HSBC, as the issuing bank of a letter of credit, undertook certain obligations
dictated by the terms of the Letter of Credit itself and by UCP 400. InFeati, this Court applied UCP 400 even
when there is no express stipulation in the letter of credit that it governs the transaction. 103 On the strength
of our ruling in Feati, we have the legal duty to apply UCP 400 in this case independent of the parties'
agreement to be bound by it.

UCP 400 states that an irrevocable credit payable on sight, such as the Letter of Credit in this case,
constitutes a definite undertaking of the issuing bank to pay, provided that the stipulated documents are
presented and that the terms and conditions of the credit are complied with. 104 Further, UCP 400 provides
that an issuing bank has the obligation to examine the documents with reasonable care. 105Thus, when City
Trust forwarded the Letter of Credit with the attached documents to LISBC, it had the duty to make a
determination of whether its obligation to pay arose by properly examining the documents.
In its petition, HSBC argues that it is not UCP 400 but URC 322 that should govern the transaction. 106URC
322 is a set of norms compiled by the ICC.107 It was drafted by international experts and has been adopted
by the ICC members. Owing to the status of the ICC and the international representation of its membership,
these rules have been widely observed by businesses throughout the world. It prescribes the collection
procedures, technology, and standards for handling collection transactions for banks. 108 Under the facts of
this case, a bank acting in accordance with the terms of URC 322 merely facilitates collection. Its duty is to
forward the letter of credit and the required documents from the entity seeking payment to another entity
which has the duty to pay. The bank incurs no obligation other than as a collecting agent. This is different in
the case of an issuing bank acting in accordance with UCP 400. In this case, the issuing bank has the duty to
pay the amount stated in the letter of credit upon due presentment. HSBC claims that while UCP 400 applies
to letters of credit, it is also common for beneficiaries of such letters to seek collection under URC 322.
HSBC further claims that URC 322 is an accepted custom in commerce. 109
HSBC's argument is without merit. We note that HSBC failed to present evidence to prove that URC 322
constitutes custom and usage recognized in commerce. Neither was there sufficient evidence to prove that
beneficiaries under a letter of credit commonly resort to collection under URC 322 as a matter of industry
practice. HSBC claims that the testimony of its witness Mr. Lincoln MacMahon (Mr. MacMahon) suffices for
this purpose.110 However, Mr. MacMahon was not presented as an expert witness capable of establishing the
existing banking and commercial practice relating to URC 322 and letters of credit. Thus, this Court cannot
hold that URC 322 and resort to it by beneficiaries of letters of credit are customs that demand application in
this case.111
HSBC's position that URC 322 applies, thus allowing it, the issuing bank, to disregard the Letter of Credit,
and merely demand collection from Klockner cannot be countenanced. Such an argument effectively asks
this Court to give imprimatur to a practice that undermines the value and reliability of letters of credit in
trade and commerce. The entire system of letters of credit rely on the assurance that upon presentment of
the proper documents, the beneficiary has an enforceable right and the issuing bank a demandable
obligation, to pay the amount agreed upon. Were a party to the transaction allowed to simply set this aside
by the mere invocation of another set of norms related to commerce - one that is not established as a
custom that is entitled to recognition by this Court - the sanctity of letters of credit will be jeopardized. To
repeat, any law or custom governing letters of credit should have, at its core, an emphasis on the imperative
that issuing banks respect their obligation to pay and that seller-beneficiaries may reasonably expect
payment in accordance with the terms of a letter of credit. Thus, the CA correctly ruled, to wit:
At this juncture, it is significant to stress that an irrevocable letter of credit cannot, during its lifetime, be
cancelled or modified without the express permission of the beneficiary. Not even partial payment of the
obligation by the applicant-buyer would amend or modify the obligation of the issuing bank. The subsequent
correspondences of [CityTrust] to HSBC, thus, could not in any way affect or amend the letter of credit, as it
was not a party thereto. As a notifying bank, it has nothing to do with the contract between the issuing bank
and the buyer regarding the issuance of the letter of credit. 112(Citations omitted)
The provisions in the Civil Code and our jurisprudence apply suppletorily in this case. 113 When a party
knowingly and freely binds himself or herself to perform an act, a juridical tie is created and he or she
becomes bound to fulfill his or her obligation. In this case, HSBC's obligation arose from two sources. First, it
has a contractual duty to Klockner whereby it agreed to pay NSC upon due presentment of the Letter of
Credit and the attached documents. Second, it has an obligation to NSC to honor the Letter of Credit. In
complying with its obligation, HSBC had the duty to perform all acts necessary. This includes a proper
examination of the documents presented to it and making a judicious inquiry of whether City Trust, in behalf
of NSC, made a due presentment of the Letter of Credit.
Further, as a bank, HSBC has the duty to observe the highest degree of diligence. In all of its transactions, it
must exercise the highest standard of care and must fulfill its obligations with utmost fidelity to its clients.
Thus, upon receipt of City Trust's Collection Order with the Letter of Credit, HSBC had the obligation to
carefully examine the documents it received. Had it observed the standard of care expected of it, HSBC

would have discovered that the Letter of Credit is the very same document which it issued upon the request
of Klockner, its client. Had LISBC taken the time to perform its duty with the highest degree of diligence, it
would have been alerted by the fact that the documents presented to it corresponded with the documents
stated in the Letter of Credit, to which HSBC freely and knowingly agreed. HSBC ought to have noticed the
discrepancy between City Trust's request for collection under URC 322 and the terms of the Letter of Credit.
Notwithstanding any statements by City Trust in the Collection Order as to the applicable rules, FISBC had
the independent duty of ascertaining whether the presentment of the Letter of Credit and the attached
documents gave rise to an obligation which it had to Klockner (its client) and NSC (the beneficiary).
Regardless of any error that City Trust may have committed, the standard of care expected of LISBC dictates
that it should have made a separate determination of the significance of the presentment of the Letter of
Credit and the attached documents. A bank exercising the appropriate degree of diligence would have, at
the very least, inquired if NSC was seeking payment under the Letter of Credit or merely seeking collection
under URC 322. In failing to do so, HSBC fell below the standard of care imposed upon it.
This Court therefore rules that CityTrust's presentment of the Letter of Credit with the attached documents
in behalf of NSC, constitutes due presentment. Under the terms of the Letter of Credit, LISBC undertook to
pay the amount of US$485,767.93 upon presentment of the Letter of Credit and the required
documents.114 In accordance with this agreement, NSC, through CityTrust, presented the Letter of Credit and
the following documents: (1) Letter of Credit; (2) Bill of Lading; (3) Commercial Invoice; (4) Packing List;
(5) Mill Test Certificate; (6) NSC's TELEX to Klockner on shipping details; (7) Beneficiary's Certificate of
facsimile transmittal of documents; (8) Beneficiary's Certificate of air courier transmittal of documents; and
(9) DHL Receipt No. 669988911 and Certificate of Origin. 115
In transactions where the letter of credit is payable on sight, as in this case, the issuer must pay upon due
presentment. This obligation is imbued with the character of definiteness in that not even the defect or
breach in the underlying transaction will affect the issuing bank's liability.116 This is the Independence
Principle in the law on letters of credit. Article 17 of UCP 400 explains that under this principle, an issuing
bank assumes 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..." Thus, as long as the proper documents are presented, the issuing bank has an
obligation to pay even if the buyer should later on refuse payment. Hence, Klockner's refusal to pay carries
no effect whatsoever on HSBC's obligation to pay under the Letter of Credit. To allow HSBC to refuse to
honor the Letter of Credit simply because it could not collect first from Klockner is to countenance a breach
of the Independence Principle.
HSBC's persistent refusal to comply with its obligation notwithstanding due presentment constitutes delay
contemplated in Article 1169 of the Civil Code.117 This provision states that a party to an obligation incurs in
delay from the time the other party makes a judicial or extrajudicial demand for the fulfillment of the
obligation. We rule that the due presentment of the Letter of Credit and the attached documents is
tantamount to a demand. IISBC incurred in delay when it failed to fulfill its obligation despite such a
demand.
Under Article 1170 of the Civil Code,118 a party in delay is liable for damages. The extent of these damages
pertains to the pecuniary loss duly proven.119 In this case, such damage refers to the losses which NSC
incurred in the amount of US$485,767.93 as stated in the Letter of Credit. We also award interest as
indemnity for the damages incurred in the amount of six percent (6%) from the date of NSC's extrajudicial
demand.120 An interest in the amount of six percent (6%) is also awarded from the time of the finality of this
decision until full payment.121
Having been remiss in its obligations under the applicable law, rules and jurisprudence, HSBC only has itself
to blame for its consequent liability to NSC.
However, this Court finds that there is no basis for the CA's grant of attorney's fees in favor of NSC. Article
2208 of the Civil Code122 enumerates the grounds for the award of attorney's fees. This Court has explained
that the award of attorney's fees is an exception rather than the rule. 123 The winning party is not
automatically entitled to attorney's fees as there should be no premium on the right to litigate. 124 While
courts may exercise discretion in granting attorney's fees, this Court has stressed that the grounds used as
basis for its award must approximate as closely as possible the enumeration in Article 2208. 125 Its award
must have sufficient factual and legal justifications. 126 This Court rules that none of the grounds stated in
Article 2208 are present in this case. NSC has not cited any specific ground nor presented any particular fact
to warrant the award of attorney's fees.

CityTrust's Liability
When NSC obtained the services of CityTrust in collecting under the Letter of Credit, it constituted CityTrust
as its agent. Article 1868 of the Civil Code states that a contract of agency exists when a person binds
himself or herself "to render some service or to do something in representation or on behalf of another, with
the consent or authority of the latter." In this case, CityTrust bound itself to collect under the Letter of Credit
in behalf of NSC.
One of the obligations of an agent is to carry out the agency in accordance with the instructions of the
principal. In ascertaining NSC's instructions to CityTrust, its letter dated January 18, 1994 is determinative.
In this letter, NSC clearly stated that it "negotiated with CityTrust the export documents pertaining to LC No.
HKH 239409 of HSBC and it was CityTrust which wrongfully treated the negotiation as 'on collection
basis.'"128 HSBC persistently communicated with CityTrust and consistently repeated that it will proceed
with collection under URC 322. At no point did CityTrust correct HSBC or seek clarification from NSC. In
insisting upon its course of action, CityTrust failed to act in accordance with the instructions given by NSC,
its principal. Nevertheless while this Court recognizes that CityTrust committed a breach of its obligation to
NSC, this carries no implications on the clear liability of HSBC. As this Court already mentioned, HSBC had a
separate obligation that it failed to perform by reason of acts independent of CityTrust's breach of its
obligation under its contract of agency. If CityTrust has incurred any liability, it is to its principal NSC.
However, NSC has not raised any claim against CityTrust at any point in these proceedings. Thus, this Court
cannot make any finding of liability against City Trust in favor of NSC.
chanrobleslaw

WHEREFORE, in view of the foregoing, the Assailed Decision dated November 19, 2007 is AFFIRMEDto the
extent that it orders HSBC to pay NSC the amount of US$485,767.93. HSBC is also liable to pay legal
interest of six percent (6%) per annum from the time of extrajudicial demand. An interest of six percent
(6%) is also awarded from the time of the finality of this decision until the amount is fully paid. We delete
the award of attorney's fees. No pronouncement as to cost.
SO ORDERED.

cralawla wlibrary

Velasco, Jr., (Chairperson), Peralta, Perez, and Reyes, JJ., concur.

chanroblesvirtuallawlibrary

Bank of Philippine Islands v De Reny Fabric

Industries G.R. No. L-24821 October
16, 1970
MARCH 15, 2014LEAVE A COMMENT

Doctrine: 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. Having been positively proven as a fact, the appellants are
bound by this established usage.
Facts:: De Reny Fabric Industries, Inc. (De Reny) applied for, and was granted,
four (4) irrevocable commercial letters of credit with the Bank of Philippine
Islands (BPI). The letter of credits was used to cover the purchase of goods by
De Reny from its American supplier, the J.B. Distributing Company. As each
shipment arrived in the Philippines, the De Reny Fabric Industries, Inc. made
partial payments to the Bank amounting to 12,000. 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.
Issue : Whether or not De Reny fabrics is liable under the letter of Credit
Held : 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. 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
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.
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.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-24821 October 16, 1970
BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee,
vs.
DE RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO and AURORA CARCERENY alias
AURORA C. GONZALES, defendants-appellants.

Aviado and Aranda for plaintiff-appellee.

S. Emiliano Calma for defendants-appellants.

CASTRO, J.:.
This is an appeal from the decision of the Court of First Instance of Manila ordering the defendantsappellants to pay to the Bank of the Philippine Islands (hereinafter referred to as the Bank), jointly
and severally, the value of the credit it extended to them in several letters of credit which the Bank
opened at the behest of the defendants appellants to finance their importation of dyestuffs from the
United States, which however turned out to be mere colored chalk upon arrival and inspection
thereof at the port of Manila.
The record shows that 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.
The dates and amounts of the L/Cs applied for and approved as well as the peso marginal deposits
made were, respectively, as follows:.
Date Application Amount Marginal
& L/C No. Deposit
Oct. 10, 1961 61/1413 $57,658.38 P43,407.33
Oct. 23, 1961 61/1483 $25,867.34 19,473.64
Oct. 30, 1961 61/1495 $19,408.39 14,610.88
Nov. 10, 1961 61/1564 $26,687.64 20,090.90
TOTAL .... $129,621.75 P97,582.75
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 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. 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.
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.
On October 24, 1963 the lower court rendered its decision ordering the corporation and its codefendants (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.
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.
We can appreciate the sweep of the appellants' argument, but we also find that it is nestled
hopelessly inside a salient where the valid contract between the parties and the internationally
accepted customs of the banking trade must prevail.1
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.
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 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 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.
ACCORDINGLY, the 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.
Reyes, J.B.L., Actg. C.J., Dizon, Makalintal, Zaldivar, Fernando, Teehankee, Barredo, Villamor and
Makasiar, JJ., concur.
Concepcion, C.J., is on leave.

Feati Bank and Trust Company v Court of

Appeals G.R. No. 94209 April 30, 1991
MARCH 15, 2014LEAVE A COMMENT

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.
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.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 94209

April 30, 1991

FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING CORPORATION), petitioner,
vs.
THE COURT OF APPEALS, and BERNARDO E. VILLALUZ, respondents.
Pelaez, Adriano & Gregorio for petitioner.
Ezequiel S. Consulta for private respondent.

GUTIERREZ, JR., J.:

This is a petition for review seeking the reversal of the decision of the Court of Appeals dated June
29, 1990 which affirmed the decision of the Regional Trial Court of Rizal dated October 20, 1986
ordering the defendants Christiansen and the petitioner, to pay various sums to respondent Villaluz,
jointly and severally.
The facts of the case are as follows:
On June 3, 1971, 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 No. 76171.
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 No. IC-46268 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." (Records, Vol.
I, p. 11)
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 following documents:
1. Signed Commercial Invoice in four copies showing the number of the purchase order and
certifying that
a. All terms and conditions of the purchase order have been complied with and that
all logs are fresh cut and quality equal to or better than that described in H.A.
Christiansen's telex #201 of May 1, 1970, and that all logs have been marked "BEVEX."
b. One complete set of documents, including 1/3 original bills of lading was airmailed
to Consignee and Parties to be advised by Hans-Axel Christiansen, Ship and
Merchandise Broker.
c. One set of non-negotiable documents was airmailed to Han Mi Trade Development
Company and one set to Consignee and Parties to be advised by Hans-Axel
Christiansen, Ship and Merchandise Broker.
2. Tally sheets in quadruplicate.
3. 2/3 Original Clean on Board Ocean Bills of Lading with Consignee and Parties to be
advised by Hans Axel Christiansen, showing Freight Prepaid and marked Notify:
Han Mi Trade Development Company, Ltd., Santa Ana, California.
Letter of Credit No. 46268 dated June 7, 1971

Han Mi Trade Development Company, Ltd., P.O. Box 10480, Santa Ana, California 92711
and Han Mi Trade Development Company, Ltd., Seoul, Korea.
4. Certification from Han-Axel Christiansen, Ship and Merchandise Broker, stating that logs
have been approved prior to shipment in accordance with terms and conditions of
corresponding purchase Order. (Record, Vol. 1 pp. 11-12)
Also incorporated by reference in the letter of credit is the Uniform Customs and Practice for
Documentary Credits (1962 Revision).
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 Nelo Laurente, Alejandro Cabiao,
Estanislao Edera from the Bureau of Customs (Records, Vol. I, p. 124) and representatives Rogelio
Cantuba and Jesus Tadena of the Bureau of Forestry (Records, Vol. I, pp. 16-17) all of whom
certified to the good condition and exportability of the logs.
After the loading of the logs was completed, the Chief Mate, Shao Shu Wang issued a mate receipt
of the cargo which stated the same are in good condition (Records, Vol. I, p. 363). 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.
The letter of credit lapsed on June 30, 1971, (extended, however up to July 31, 1971) without the
private respondent receiving any certification from Christiansen.
The persistent refusal of Christiansen to issue the certification prompted the private respondent to
bring the matter before the Central Bank. In a memorandum dated August 16, 1971, the Central
Bank ruled that:
. . . pursuant to the Monetary Board Resolution No. 1230 dated August 3, 1971, in all log
exports, the certification of the lumber inspectors of the Bureau of Forestry . . . shall be
considered final for purposes of negotiating documents. Any provision in any letter of credit
covering log exports requiring certification of buyer's agent or representative that said logs
have been approved for shipment as a condition precedent to negotiation of shipping
documents shall not be allowed. (Records, Vol. I, p. 367)
Meanwhile, the logs arrived at Inchon, Korea and were received by the consignee, Hanmi Trade
Development Company, to whom Christiansen sold the logs for the amount of $37.50 per cubic
meter, for a net profit of $10 per cubic meter. Hanmi Trade Development Company, on the other
hand sold the logs to Taisung Lumber Company at Inchon, Korea. (Rollo, p. 39)
Since the demands by the private respondent for Christiansen to execute the certification proved
futile, Villaluz, on September 1, 1971, instituted an action for mandamus and specific performance
against Christiansen and the Feati Bank and Trust Company (now Citytrust) before the then Court of
First Instance of Rizal. 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 certification.
The complaint prayed for the following:

1. Christiansen be ordered to issue the certification required of him under the Letter of
Credit;
2. Upon issuance of such certification, or, if the court should find it unnecessary, FEATI
BANK be ordered to accept negotiation of the Letter of Credit and make payment thereon to
Villaluz;
3. Order Christiansen to pay damages to the plaintiff. (Rollo, p. 39)
On or about 1979, while the case was still pending trial, Christiansen left the Philippines without
informing the Court and his counsel. Hence, Villaluz, filed an amended complaint to make the
petitioner solidarily liable with Christiansen.
The trial court, in its order dated August 29, 1979, admitted the amended complaint.
After trial, the lower court found:
The liability of the defendant CHRISTIANSEN is beyond dispute, and the plaintiffs right to
demand payment is absolute. Defendant CHRISTIANSEN having accepted delivery of the
logs by having them loaded in his chartered vessel the "Zenlin Glory" and shipping them to
the consignee, his buyer Han Mi Trade in Inchon, South Korea (Art. 1585, Civil Code), his
obligation to pay the purchase order had clearly arisen and the plaintiff may sue and recover
the price of the goods (Art. 1595, Id).
The Court believes that the defendant CHRISTIANSEN acted in bad faith and deceit and
with intent to defraud the plaintiff, reflected in and aggravated by, not only his refusal to issue
the certification that would have enabled without question the plaintiff to negotiate the letter
of credit, but his accusing the plaintiff in his answer of fraud, intimidation, violence and
deceit. These accusations said defendant did not attempt to prove, as in fact he left the
country without even notifying his own lawyer. It was to the Court's mind a pure swindle.
The defendant Feati Bank and Trust Company, on the other hand, must be held liable
together with his (sic) co-defendant for having, by its wrongful act, i.e., its refusal to negotiate
the letter of credit in the absence of CHRISTIANSEN's certification (in spite of the Central
Bank's ruling that the requirement was illegal), prevented payment to the plaintiff. The said
letter of credit, as may be seen on its face, is irrevocable and the issuing bank, the Security
Pacific National Bank in Los Angeles, California, undertook by its terms that the same shall
be honored upon its presentment. On the other hand, the notifying bank, the defendant Feati
Bank and Trust Company, by accepting the instructions from the issuing bank, itself assumed
the very same undertaking as the issuing bank under the terms of the letter of credit.
xxx

xxx

xxx

The Court likewise agrees with the plaintiff that the defendant BANK may also be held liable
under the principles and laws on both trust and estoppel. When the defendant BANK
accepted its role as the notifying and negotiating bank for and in behalf of the issuing bank, it
in effect accepted a trust reposed on it, and became a trustee in relation to plaintiff as the
beneficiary of the letter of credit. As trustee, it was then duty bound to protect the interests of
the plaintiff under the terms of the letter of credit, and must be held liable for damages and
loss resulting to the plaintiff from its failure to perform that obligation.

Furthermore, when the defendant BANK assumed the role of a notifying and negotiating
BANK it in effect represented to the plaintiff that, if the plaintiff complied with the terms and
conditions of the letter of credit and presents the same to the BANK together with the
documents mentioned therein the said BANK will pay the plaintiff the amount of the letter of
credit. The Court is convinced that it was upon the strength of this letter of credit and this
implied representation of the defendant BANK that the plaintiff delivered the logs to
defendant CHRISTIANSEN, considering that the issuing bank is a foreign bank with whom
plaintiff had no business connections and CHRISTIANSEN had not offered any other
Security for the payment of the logs. Defendant BANK cannot now be allowed to deny its
commitment and liability under the letter of credit:
A holder of a promissory note given because of gambling who indorses the same to
an innocent holder for value and who assures said party that the note has no legal
defect, is in estoppel from asserting that there had been an illegal consideration for
the note, and so, he has to pay its value. (Rodriguez v. Martinez, 5 Phil. 67).
The defendant BANK, in insisting upon the certification of defendant CHRISTIANSEN as a
condition precedent to negotiating the letter of credit, likewise in the Court's opinion acted in
bad faith, not only because of the clear declaration of the Central Bank that such a
requirement was illegal, but because the BANK, with all the legal counsel available to it must
have known that the condition was void since it depended on the sole will of the debtor, the
defendant CHRISTIANSEN. (Art. 1182, Civil Code) (Rollo, pp. 29-31)
On the basis of the foregoing the trial court on October 20, 1986, ruled in favor of the private
respondent. The dispositive portion of its decision reads:
WHEREFORE, judgment is hereby rendered for the plaintiff, ordering the defendants to pay
the plaintiff, jointly and severally, the following sums:
a) $54,000.00 (US), or its peso equivalent at the prevailing rate as of the time payment is
actually made, representing the purchase price of the logs;
b) P17,340.00, representing government fees and charges paid by plaintiff in connection with
the logs shipment in question;
c) P10,000.00 as temperate damages (for trips made to Bacolod and Korea).
All three foregoing sums shall be with interest thereon at 12% per annum from September 1,
1971, when the complaint was filed, until fully paid:
d) P70,000.00 as moral damages;
e) P30,000.00 as exemplary damages; and
f) P30,000.00 as attorney's fees and litigation expense.
(Rollo, p. 28)
The petitioner received a copy of the decision on November 3, 1986. Two days thereafter, or on
November 5, 1986, it filed a notice of appeal.

On November 10, 1986, the private respondent filed a motion for the immediate execution of the
judgment on the ground that the appeal of the petitioner was frivolous and dilatory.
The trial court ordered the immediate execution of its judgment upon the private respondent's filing
of a bond.
The petitioner then filed a motion for reconsideration and a motion to suspend the implementation of
the writ of execution. Both motions were, however, denied. Thus, petitioner filed before the Court of
Appeals a petition for certiorari and prohibition with preliminary injunction to enjoin the immediate
execution of the judgment.
The Court of Appeals in a decision dated April 9, 1987 granted the petition and nullified the order of
execution, the dispositive portion of the decision states:
WHEREFORE, the petition for certiorari is granted. Respondent Judge's order of execution
dated December 29, 1986, as well as his order dated January 14, 1987 denying the
petitioner's urgent motion to suspend the writ of execution against its properties are hereby
annulled and set aside insofar as they are sought to be enforced and implemented against
the petitioner Feati Bank & Trust Company, now Citytrust Banking Corporation, during the
pendency of its appeal from the adverse decision in Civil Case No. 15121. However, the
execution of the same decision against defendant Axel Christiansen did not appeal said
decision may proceed unimpeded. The Sheriff s levy on the petitioner's properties, and the
notice of sale dated January 13, 1987 (Annex M), are hereby annulled and set
aside. Rollo p. 44)
A motion for reconsideration was thereafter filed by the private respondent. The Court of Appeals, in
a resolution dated June 29, 1987 denied the motion for reconsideration.
In the meantime, the appeal filed by the petitioner before the Court of Appeals was given due
course. In its decision dated June 29, 1990, the Court of Appeals affirmed the decision of the lower
court dated October 20, 1986 and ruled that:
1. Feati Bank admitted in the "special and negative defenses" section of its answer that it
was the bank to negotiate the letter of credit issued by the Security Pacific National Bank of
Los Angeles, California. (Record, pp. 156, 157). Feati Bank did notify Villaluz of such letter of
credit. In fact, as such negotiating bank, even before the letter of credit was presented for
payment, Feati Bank had already made an advance payment of P75,000.00 to Villaluz in
anticipation of such presentment. As the negotiating bank, Feati Bank, by notifying Villaluz of
the letter of credit in behalf of the issuing bank (Security Pacific), confirmed such letter of
credit and made the same also its own obligation. This ruling finds support in the authority
cited by Villaluz:
A confirmed letter of credit is one in which the notifying bank gives its assurance also that the
opening bank's obligation will be performed. In such a case, the notifying bank will not simply
transmit but will confirm the opening bank's obligation by making it also its own undertaking,
or commitment, or guaranty or obligation. (Ward & Hatfield, 28-29, cited in Agbayani,
Commercial Laws, 1978 edition, p. 77).
Feati Bank argues further that it would be considered as the negotiating bank only upon
negotiation of the letter of credit. This stance is untenable. Assurance, commitments or
guaranties supposed to be made by notifying banks to the beneficiary of a letter of credit, as
defined above, can be relevant or meaningful only with respect to a future transaction, that

is, negotiation. Hence, even before actual negotiation, the notifying bank, by the mere act of
notifying the beneficiary of the letter of credit, assumes as of that moment the obligation of
the issuing bank.
2. Since Feati Bank acted as guarantor of the issuing bank, and in effect also of the latter's
principal or client, i.e. Hans Axel-Christiansen. (sic) Such being the case, when Christiansen
refused to issue the certification, it was as though refusal was made by Feati Bank itself.
Feati Bank should have taken steps to secure the certification from Christiansen; and, if the
latter should still refuse to comply, to hale him to court. In short, Feati Bank should have
honored Villaluz's demand for payment of his logs by virtue of the irrevocable letter of credit
issued in Villaluz's favor and guaranteed by Feati Bank.
3. The decision promulgated by this Court in CA-G.R. Sp No. 11051, which contained the
statement "Since Villaluz" draft was not drawn strictly in compliance with the terms of the
letter of credit, Feati Bank's refusal to negotiate it was justified," did not dispose of this
question on the merits. In that case, the question involved was jurisdiction or discretion, and
not judgment. The quoted pronouncement should not be taken as a preemptive judgment on
the merits of the present case on appeal.
4. The original action was for "Mandamus and/or specific performance." Feati Bank may not
be a party to the transaction between Christiansen and Security Pacific National Bank on the
one hand, and Villaluz on the other hand; still, being guarantor or agent of Christiansen
and/or Security Pacific National Bank which had directly dealt with Villaluz, Feati Bank may
be sued properly on specific performance as a procedural means by which the relief sought
by Villaluz may be entertained. (Rollo, pp. 32-33)
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, the decision appealed from is affirmed; and accordingly, the appeal is hereby
dismissed. Costs against the petitioner. (Rollo, p. 33)
Hence, this petition for review.
The petitioner interposes the following reasons for the allowance of the petition.
First Reason
THE RESPONDENT COURT ERRONEOUSLY CONCLUDED FROM THE ESTABLISHED
FACTS AND INDEED, WENT AGAINST THE EVIDENCE AND DECISION OF THIS
HONORABLE COURT, THAT PETITIONER BANK IS LIABLE ON THE LETTER OF CREDIT
DESPITE PRIVATE RESPONDENTS NON-COMPLIANCE WITH THE TERMS THEREOF,
Second Reason
THE RESPONDENT COURT COMMITTED AN ERROR OF LAW WHEN IT HELD THAT
PETITIONER BANK, BY NOTIFYING PRIVATE RESPONDENT OF THE LETTER OF
CREDIT, CONFIRMED SUCH CREDIT AND MADE THE SAME ALSO ITS OBLIGATION AS
GUARANTOR OF THE ISSUING BANK.
Third Reason

THE RESPONDENT COURT LIKEWISE COMMITTED AN ERROR OF LAW WHEN IT

AFFIRMED THE TRIAL COURT'S DECISION. (Rollo, p. 12)
The principal issue in this case is 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 thereof?
The petition is impressed with merit.
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.
The case of Anglo-South America Trust Co. v. Uhe et al. (184 N.E. 741 [1933]) expounded clearly on
the rule of strict compliance.
We have heretofore held that these letters of credit are to be strictly complied with which
documents, and shipping documents must be followed as stated in the letter. There is no
discretion in the bank or trust company to waive any requirements. The terms of the letter
constitutes an agreement between the purchaser and the bank. (p. 743)
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.
Moreover, the incorporation of the Uniform Customs and Practice for Documentary Credit (U.C.P. for
short) in the letter of credit resulted in the applicability of the said rules in the governance of the
relations between the parties.
And even if the U.C.P. was not incorporated in the letter of credit, we have already ruled in the
affirmative as to the applicability of the U.C.P. in cases before us.
In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the observance of the U.C.P. in
this jurisdiction is justified by Article 2 of the Code of Commerce. Article 2 of the Code of Commerce
enunciates that in the absence of any particular provision in the Code of Commerce, commercial
transactions shall be governed by the usages and customs generally observed.
There being no specific provision which governs the legal complexities arising from transactions
involving letters of credit not only between the banks themselves but also between banks and seller
and/or buyer, the applicability of the U.C.P. is undeniable.
The pertinent provisions of the U.C.P. (1962 Revision) are:

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)
Under the foregoing provisions of the U.C.P., the bank may only 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 a correspondent bank, like the petitioner, principally deals only with
documents, the absence of any document required in the documentary credit 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 tendered by the
beneficiary.
In regard to the ruling of the lower court and affirmed by the Court of Appeals that the petitioner is
not a notifying bank but a confirming bank, we find the same erroneous.
The trial court wrongly mixed up the meaning of an irrevocable credit with that of a confirmed credit.
In its decision, the trial court ruled that the petitioner, in accepting the obligation to notify the
respondent that the irrevocable credit has been transmitted to the petitioner on behalf of the private
respondent, has confirmed the letter.
The trial court appears to have overlooked the fact that an irrevocable credit is not synonymous with
a confirmed credit. These types of letters have different meanings and the legal relations arising from
there varies. A credit may be an irrevocable credit and at the same time a confirmed credit or viceversa.
An irrevocable credit refers to the duration of the letter of credit. What is simply means is that the
issuing bank may not without the consent of the beneficiary (seller) and the applicant (buyer) revoke
his undertaking under the letter. The issuing bank does not reserve the right to revoke the credit. On
the other hand, a confirmed letter of credit pertains to the kind of obligation assumed by the
correspondent bank. In this case, the correspondent bank gives an absolute 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. (Agbayani, Commercial Laws of the Philippines, Vol. 1, pp. 81-83)
Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply that the
correspondent bank in accepting the instructions of the issuing bank has also confirmed the letter of
credit. Another error which the lower court and the Court of Appeals made was to confuse the
obligation assumed by the petitioner.
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. (Kronman and Co., Inc. v. Public
National Bank of New York, 218 N.Y.S. 616 [1926]; Shaterian, Export-Import Banking, p. 292, cited in
Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76). 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. (Scanlon v. First National Bank of Mexico, 162 N.E. 567 [1928]; Shaterian,
Export-Import Banking, p. 293, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76)
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.
(Shaterian, Export-Import Banking, p. 294, cited in Agbayani Commercial Laws of the Philippines,
Vol. 1, p. 77)
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.
If the petitioner was a confirming bank, then a categorical declaration should have been stated in the
letter of credit that the petitioner is to honor all drafts drawn in conformity with the letter of credit.
What was simply stated therein was the instruction that the petitioner forward the original letter of
credit to the beneficiary.
Since the petitioner 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.
The notifying bank may suggest to the seller its willingness to negotiate, but this fact alone does not
imply that the notifying bank promises to accept the draft drawn under the documentary credit.
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.
(See Kronman and Co., Inc. v. Public National Bank of New York, supra)
In order that the petitioner may be held liable under the letter, there should be proof that the
petitioner confirmed the letter of credit.

The records are, however, bereft of any evidence which will disclose that the petitioner has
confirmed the letter of credit. The only evidence in this case, and upon which the private respondent
premised his argument, is the P75,000.00 loan extended by the petitioner to him.
The private respondent relies on this loan to advance his contention that the letter of credit was
confirmed by the petitioner. He claims that the loan was granted by the petitioner to him, "in
anticipation of the presentment of the letter of credit."
The proposition advanced by the private respondent has no basis in fact or law. That the loan
agreement between them be construed as an act of confirmation is rather far-fetched, for it depends
principally on speculative reasoning.
As earlier stated, there must have been an absolute assurance on the part of the petitioner that it will
undertake the issuing bank's obligation as its own. Verily, the loan agreement it entered into cannot
be categorized as an emphatic assurance that it will carry out the issuing bank's obligation as its
own.
The loan agreement is more reasonably classified as an isolated transaction independent of the
documentary credit.
Of course, it may be presumed that the petitioner loaned the money to the private respondent in
anticipation that it would later be paid by the latter upon the receipt of the letter. Yet, we would have
no basis to rule definitively that such "act" should be construed as an act of confirmation.
The private respondent no doubt was in need of money in loading the logs on the ship "Zenlin Glory"
and the only way to satisfy this need was to borrow money from the petitioner which the latter
granted. From these circumstances, a logical conclusion that can be gathered is that the letter of
credit was merely to serve as a collateral.
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.
The case of Scanlon v. First National Bank (supra) perspicuously explained the relationship between
the seller and the negotiating bank, viz:
It may buy or refuse to buy as it chooses. Equally, it must be true that it owes no contractual
duty toward the person for whose benefit the letter is written to discount or purchase any
draft drawn against the credit. No relationship of agent and principal, or of trustee and cestui,
between the receiving bank and the beneficiary of the letter is established. (P.568)
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 the
private respondent, the refusal by the petitioner to accept the tender of the private respondent is
justified.
In regard to the finding that the petitioner became a "trustee in relation to the plaintiff (private
respondent) as the beneficiary of the letter of credit," the same has no legal basis.
A 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." (89 C.J.S. 712)

The concept of a trust presupposes the existence of a specific property which has been conferred
upon the person for the benefit of another. In order therefore for the trust theory of the private
respondent to be sustained, the petitioner 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 of the private
respondent. This does not obtain in this case.
The mere opening of a letter of credit, it is to be noted, 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 letter. It does not convey
the notion that a particular sum of money has been specifically reserved or has been held in trust.
What actually transpires in an irrevocable credit is that the correspondent bank does not receive in
advance the sum of money from the buyer or the issuing bank. On the contrary, when the
correspondent bank accepts the tender and pays the amount stated in the letter, the money that it
doles out comes not from any particular fund that has been advanced by the issuing bank, rather it
gets the money from its own funds and then later seeks reimbursement from the issuing bank.
Granting that a trust has been created, still, the petitioner may not be considered a trustee. As the
petitioner is only a notifying bank, its acceptance of the instructions of the issuing bank will not
create estoppel on its part resulting in the acceptance of the trust. Precisely, as a notifying bank, its
only obligation is to notify the private respondent of the existence of the letter of credit. How then can
such create estoppel when that is its only duty under the law?
We also find erroneous the statement of the Court of Appeals that the petitioner "acted as a
guarantor of the issuing bank and in effect also of the latter's principal or client, i.e., Hans Axel
Christiansen."
It is a fundamental rule 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.
(See Kingdom of Sweden v. New York Trust Co., 96 N.Y.S. 2d 779 [1949]). The relationship between
the buyer (Christiansen) and the issuing bank (Security Pacific National Bank) is entirely
independent from the letter of credit issued by the latter.
The contract between the two has no bearing as to the non-compliance by the buyer with the
agreement between the latter and the seller. Their contract is similar to that of a contract of services
(to open the letter of credit) and not that of agency as was intimated by the Court of Appeals. The
unjustified refusal therefore by Christiansen to issue the certification under the letter of credit should
not likewise be charged to the issuing bank.
As a mere notifying bank, not only does the petitioner not have any contractual relationship with the
buyer, it has also nothing to do with the contract between the issuing bank and the buyer regarding
the issuance of the letter of credit.
The theory of guarantee relied upon by the Court of Appeals has to necessarily fail. The concept of
guarantee vis-a-vis the concept of an irrevocable credit are inconsistent with each other.
In the first place, the guarantee theory destroys the independence of the bank's responsibility from
the contract upon which it was opened. In the second place, the nature of both contracts is mutually
in conflict with each other. In contracts of guarantee, the guarantor's obligation is merely collateral
and it arises only upon the default of the person primarily liable. On the other hand, in an irrevocable
credit the bank undertakes a primary obligation. (SeeNational Bank of Eagle Pass, Tex v. American
National Bank of San Francisco, 282 F. 73 [1922])

The relationship between the issuing bank and the notifying bank, on the contrary, is more similar to
that of an agency and not that of a guarantee. It may be observed that the notifying bank is merely to
follow the instructions of the issuing bank which is to notify or to transmit the letter of credit to the
beneficiary. (See Kronman v. Public National Bank of New York, supra). Its commitment is only to
notify the beneficiary. It does not undertake any assurance that the issuing bank will perform what
has been mandated to or expected of it. As an agent of the issuing bank, it has only to follow the
instructions of the issuing bank and to it alone is it obligated and not to buyer with whom it has no
contractual relationship.
In fact the notifying bank, even if the seller tenders all the documents required under the letter of
credit, may refuse to negotiate or accept the drafts drawn thereunder and it will still not be held liable
for its only engagement is to notify and/or transmit to the seller the letter of credit.
Finally, even if we assume that the petitioner is a confirming bank, the petitioner cannot be forced to
pay the amount under the letter. As we have previously explained, there was a failure on the part of
the private respondent to comply with the terms of the letter of credit.
The failure by him to submit the certification was fatal to his case. The U.C.P. which is incorporated
in the letter of credit ordains that the bank may only pay the amount specified under the letter if all
the documents tendered are on their face in compliance with the credit. It is not tasked with the duty
of ascertaining the reason or reasons why certain documents have not been submitted, as it is only
concerned with the documents. Thus, whether or not the buyer has performed his responsibility
towards the seller is not the bank's problem.
1wphi1

We are aware of the injustice committed by Christiansen on the private respondent but we are
deciding the controversy on the basis of what the law is, for the law is not meant to favor only those
who have been oppressed, the law is to govern future relations among people as well. Its
commitment is to all and not to a single individual. The faith of the people in our justice system may
be eroded if we are to decide not what the law states but what we believe it should declare. Dura lex
sed lex.
Considering the foregoing, the materiality of ruling upon the validity of the certificate of approval
required of the private respondent to submit under the letter of credit, has become insignificant.
In any event, we affirm the earlier ruling of the Court of Appeals dated April 9, 1987 in regard to the
petition before it for certiorari and prohibition with preliminary injunction, to wit:
There is no merit in the respondent's contention that the certification required in condition
No. 4 of the letter of credit was "patently illegal." At the time the letter of credit was issued
there was no Central Bank regulation prohibiting such a condition in the letter of credit. The
letter of credit (Exh. C) was issued on June 7, 1971, more than two months before the
issuance of the Central Bank Memorandum on August 16, 1971 disallowing such a condition
in a letter of credit. In fact the letter of credit had already expired on July 30, 1971 when the
Central Bank memorandum was issued. In any event, it is difficult to see how such a
condition could be categorized as illegal or unreasonable since all that plaintiff Villaluz, as
seller of the logs, could and should have done was to refuse to load the logs on the vessel
"Zenlin Glory", unless Christiansen first issued the required certification that the logs had
been approved by him to be in accordance with the terms and conditions of his purchase
order. Apparently, Villaluz was in too much haste to ship his logs without taking all due
precautions to assure that all the terms and conditions of the letter of credit had been strictly
complied with, so that there would be no hitch in its negotiation. (Rollo, p. 8)

WHEREFORE, the COURT RESOLVED to GRANT the petition and hereby NULLIFIES and SETS
ASIDE the decision of the Court of Appeals dated June 29, 1990. The amended complaint in Civil
Case No. 15121 is DISMISSED.
SO ORDERED.
Feliciano, Bidin and Davide, Jr., JJ., concur.
Fernan, C.J., took no part.

SECOND DIVISION

[G.R. No. 146717. November 22, 2004]

TRANSFIELD PHILIPPINES, INC., petitioner, vs. LUZON HYDRO

CORPORATION, AUSTRALIA and NEW ZEALAND BANKING
GROUP
LIMITED
and
SECURITY
BANK
CORPORATION, respondents.
DECISION
TINGA, J.:

Subject of this case is the letter of credit which has evolved as the ubiquitous and
most important device in international trade. A creation of commerce and businessmen,
the letter of credit is also unique in the number of parties involved and its supranational
character.
Petitioner has appealed from the Decision[1] of the Court of Appeals in CA-G.R. SP
No. 61901 entitled Transfield Philippines, Inc. v. Hon. Oscar Pimentel, et al.,
promulgated on 31 January 2001.[2]
On 26 March 1997, petitioner and respondent Luzon Hydro Corporation
(hereinafter, LHC) entered into a Turnkey Contract [3] whereby petitioner, as Turnkey
Contractor, undertook to construct, on a turnkey basis, a seventy (70)-Megawatt hydroelectric power station at the Bakun River in the provinces of Benguet and Ilocos Sur
(hereinafter, the Project). Petitioner was given the sole responsibility for the design,
construction, commissioning, testing and completion of the Project. [4]
The Turnkey Contract provides that: (1) the target completion date of the Project
shall be on 1 June 2000, or such later date as may be agreed upon between petitioner
and respondent LHC or otherwise determined in accordance with the Turnkey Contract;
and (2) petitioner is entitled to claim extensions of time (EOT) for reasons enumerated
in the Turnkey Contract, among which are variations, force majeure, and delays caused
by LHC itself.[5] Further, in case of dispute, the parties are bound to settle their

differences through mediation, conciliation and such other means enumerated under
Clause 20.3 of the Turnkey Contract.[6]
To secure performance of petitioners obligation on or before the target completion
date, or such time for completion as may be determined by the parties agreement,
petitioner opened in favor of LHC two (2) standby letters of credit both dated 20 March
2000 (hereinafter referred to as the Securities), to wit: Standby Letter of Credit No.
E001126/8400 with the local branch of respondent Australia and New Zealand Banking
Group Limited (ANZ Bank)[7] and Standby Letter of Credit No. IBDIDSB-00/4 with
respondent Security Bank Corporation (SBC) [8] each in the amount of US$8,988,907.00.
[9]

In the course of the construction of the project, petitioner sought various EOT to
complete the Project. The extensions were requested allegedly due to several factors
which prevented the completion of the Project on target date, such as force
majeure occasioned by typhoon Zeb, barricades and demonstrations. LHC denied the
requests, however. This gave rise to a series of legal actions between the parties which
culminated in the instant petition.
The first of the actions was a Request for Arbitration which LHC filed before the
Construction Industry Arbitration Commission (CIAC) on 1 June 1999. [10] This was
followed by another Request for Arbitration, this time filed by petitioner before the
International Chamber of Commerce (ICC) [11] on 3 November 2000. In both arbitration
proceedings, the common issues presented were: [1) whether typhoon Zeb and any of
its associated events constituted force majeure to justify the extension of time sought by
petitioner; and [2) whether LHC had the right to terminate the Turnkey Contract for
failure of petitioner to complete the Project on target date.
Meanwhile, foreseeing that LHC would call on the Securities pursuant to the
pertinent provisions of the Turnkey Contract, [12] petitionerin two separate letters[13] both
dated 10 August 2000advised respondent banks of the arbitration proceedings already
pending before the CIAC and ICC in connection with its alleged default in the
performance of its obligations. Asserting that LHC had no right to call on the Securities
until the resolution of disputes before the arbitral tribunals, petitioner warned respondent
banks that any transfer, release, or disposition of the Securities in favor of LHC or any
person claiming under LHC would constrain it to hold respondent banks liable for
liquidated damages.
As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner that
pursuant to Clause 8.2[14] of the Turnkey Contract, it failed to comply with its obligation to
complete the Project. Despite the letters of petitioner, however, both banks informed
petitioner that they would pay on the Securities if and when LHC calls on them. [15]
LHC asserted that additional extension of time would not be warranted; accordingly
it declared petitioner in default/delay in the performance of its obligations under the
Turnkey Contract and demanded from petitioner the payment of US$75,000.00 for each
day of delay beginning 28 June 2000 until actual completion of the Project pursuant to
Clause 8.7.1 of the Turnkey Contract. At the same time, LHC served notice that it would
call on the securities for the payment of liquidated damages for the delay.[16]

On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction, with

prayer for temporary restraining order and writ of preliminary injunction, against herein
respondents as defendants before the Regional Trial Court (RTC) of Makati.
[17]
Petitioner sought to restrain respondent LHC from calling on the Securities and
respondent banks from transferring, paying on, or in any manner disposing of the
Securities or any renewals or substitutes thereof. The RTC issued a seventy-two (72)hour temporary restraining order on the same day. The case was docketed as Civil
Case No. 00-1312 and raffled to Branch 148 of the RTC of Makati.
After appropriate proceedings, the trial court issued an Order on 9 November 2000,
extending the temporary restraining order for a period of seventeen (17) days or until 26
November 2000.[18]
The RTC, in its Order[19] dated 24 November 2000, denied petitioners application for
a writ of preliminary injunction. It ruled that petitioner had no legal right and suffered no
irreparable injury to justify the issuance of the writ. Employing the principle of
independent contract in letters of credit, the trial court ruled that LHC should be allowed
to draw on the Securities for liquidated damages. It debunked petitioners contention that
the principle of independent contract could be invoked only by respondent banks since
according to it respondent LHC is the ultimate beneficiary of the Securities. The trial
court further ruled that the banks were mere custodians of the funds and as such they
were obligated to transfer the same to the beneficiary for as long as the latter could
submit the required certification of its claims.
Dissatisfied with the trial courts denial of its application for a writ of preliminary
injunction, petitioner elevated the case to the Court of Appeals via a Petition for
Certiorari under Rule 65, with prayer for the issuance of a temporary restraining order
and writ of preliminary injunction.[20] Petitioner submitted to the appellate court that LHCs
call on the Securities was premature considering that the issue of its default had not yet
been resolved with finality by the CIAC and/or the ICC. It asserted that until the fact of
delay could be established, LHC had no right to draw on the Securities for liquidated
damages.
Refuting petitioners contentions, LHC claimed that petitioner had no right to restrain
its call on and use of the Securities as payment for liquidated damages. It averred that
the Securities are independent of the main contract between them as shown on the face
of the two Standby Letters of Credit which both provide that the banks have no
responsibility to investigate the authenticity or accuracy of the certificates or the
declarants capacity or entitlement to so certify.
In its Resolution dated 28 November 2000, the Court of Appeals issued a temporary
restraining order, enjoining LHC from calling on the Securities or any renewals or
substitutes thereof and ordering respondent banks to cease and desist from
transferring, paying or in any manner disposing of the Securities.
However, the appellate court failed to act on the application for preliminary
injunction until the temporary restraining order expired on 27 January 2001. Immediately
thereafter, representatives of LHC trooped to ANZ Bank and withdrew the total amount
of US$4,950,000.00, thereby reducing the balance in ANZ Bank to US$1,852,814.00.

On 2 February 2001, the appellate court dismissed the petition for certiorari. The
appellate court expressed conformity with the trial courts decision that LHC could call on
the Securities pursuant to the first principle in credit law that the credit itself is
independent of the underlying transaction and that as long as the beneficiary complied
with the credit, it was of no moment that he had not complied with the underlying
contract. Further, the appellate court held that even assuming that the trial courts denial
of petitioners application for a writ of preliminary injunction was erroneous, it constituted
only an error of judgment which is not correctible by certiorari, unlike error of jurisdiction.
Undaunted, petitioner filed the instant Petition for Review raising the following
issues for resolution:

WHETHER THE INDEPENDENCE PRINCIPLE ON LETTERS OF CREDIT MAY

BE INVOKED BY A BENEFICIARY THEREOF WHERE THE BENEFICIARYS
CALL THEREON IS WRONGFUL OR FRAUDULENT.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES
BEFORE THE RESOLUTION OF PETITIONERS AND LHCS DISPUTES BY THE
APPROPRIATE TRIBUNAL.
WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN
RELEASING THE AMOUNTS DUE UNDER THE SECURITIES DESPITE BEING
NOTIFIED THAT LHCS CALL THEREON IS WRONGFUL.
WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND IRREPARABLE
DAMAGE IN THE EVENT THAT:
A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND
SECURITY BANK ARE ALLOWED TO RELEASE, THE REMAINING
BALANCE OF THE SECURITIES PRIOR TO THE RESOLUTION OF THE
DISPUTES BETWEEN PETITIONER AND LHC.
B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY
DRAWN FROM THE SECURITIES.[21]

Petitioner contends that the courts below improperly relied on the independence
principle on letters of credit when this case falls squarely within the fraud exception rule.
Respondent LHC deliberately misrepresented the supposed existence of delay despite
its knowledge that the issue was still pending arbitration, petitioner continues.
Petitioner asserts that LHC should be ordered to return the proceeds of the
Securities pursuant to the principle against unjust enrichment and that, under the
premises, injunction was the appropriate remedy obtainable from the competent local
courts.
On
25
August
2003,
petitioner
filed
a Supplement
to
the
Petition[22] and Supplemental Memorandum,[23] alleging that in the course of the
proceedings in the ICC Arbitration, a number of documentary and testimonial evidence

came out through the use of different modes of discovery available in the ICC
Arbitration. It contends that after the filing of the petition facts and admissions were
discovered which demonstrate that LHC knowingly misrepresented that petitioner had
incurred delays notwithstanding its knowledge and admission that delays were excused
under the Turnkey Contractto be able to draw against the Securities. Reiterating that
fraud constitutes an exception to the independence principle, petitioner urges that this
warrants a ruling from this Court that the call on the Securities was wrongful, as well as
contrary to law and basic principles of equity. It avers that it would suffer grave
irreparable damage if LHC would be allowed to use the proceeds of the Securities and
not ordered to return the amounts it had wrongfully drawn thereon.
In its Manifestation dated 8 September 2003,[24] LHC contends that the
supplemental pleadings filed by petitioner present erroneous and misleading information
which would change petitioners theory on appeal.
In yet another Manifestation dated 12 April 2004,[25] petitioner alleges that on 18
February 2004, the ICC handed down its Third Partial Award, declaring that LHC
wrongfully drew upon the Securities and that petitioner was entitled to the return of the
sums wrongfully taken by LHC for liquidated damages.
LHC filed a Counter-Manifestation dated 29 June 2004,[26] stating that
petitioners Manifestation dated 12 April 2004 enlarges the scope of its Petition for
Review of the 31 January 2001 Decision of the Court of Appeals. LHC notes that
the Petition for Review essentially dealt only with the issue of whether injunction could
issue to restrain the beneficiary of an irrevocable letter of credit from drawing thereon. It
adds that petitioner has filed two other proceedings, to wit: (1) ICC Case No.
11264/TE/MW, entitled Transfield Philippines Inc. v. Luzon Hydro Corporation, in which
the parties made claims and counterclaims arising from petitioners
performance/misperformance of its obligations as contractor for LHC; and (2) Civil Case
No. 04-332, entitled Transfield Philippines, Inc. v. Luzon Hydro Corporation before
Branch 56 of the RTC of Makati, which is an action to enforce and obtain execution of
the ICCs partial award mentioned in petitioners Manifestation of 12 April 2004.
In its Comment to petitioners Motion for Leave to File Addendum to Petitioners
Memorandum, LHC stresses that the question of whether the funds it drew on the
subject letters of credit should be returned is outside the issue in this appeal. At any
rate, LHC adds that the action to enforce the ICCs partial award is now fully within the
Makati RTCs jurisdiction in Civil Case No. 04-332. LHC asserts that petitioner is
engaged in forum-shopping by keeping this appeal and at the same time seeking the
suit for enforcement of the arbitral award before the Makati court.
Respondent SBC in its Memorandum, dated 10 March 2003[27] contends that the
Court of Appeals correctly dismissed the petition for certiorari. Invoking the
independence principle, SBC argues that it was under no obligation to look into the
validity or accuracy of the certification submitted by respondent LHC or into the latters
capacity or entitlement to so certify. It adds that the act sought to be enjoined by
petitioner was already fait accompli and the present petition would no longer serve any
remedial purpose.

In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March

2003[28] posits that its actions could not be regarded as unjustified in view of the
prevailing independence principle under which it had no obligation to ascertain the truth
of LHCs allegations that petitioner defaulted in its obligations. Moreover, it points out
that since the Standby Letter of Credit No. E001126/8400 had been fully drawn,
petitioners prayer for preliminary injunction had been rendered moot and academic.
At the core of the present controversy is the applicability of the independence
principle and fraud exception rule in letters of credit. Thus, a discussion of the nature
and use of letters of credit, also referred to simply as credits, would provide a better
perspective of the case.
The letter of credit evolved as a mercantile specialty, and the only way to
understand all its facets is to recognize that it is an entity unto itself. The relationship
between the beneficiary and the issuer of a letter of credit is not strictly contractual,
because both privity and a meeting of the minds are lacking, yet strict compliance with
its terms is an enforceable right. Nor is it a third-party beneficiary contract, because the
issuer must honor drafts drawn against a letter regardless of problems subsequently
arising in the underlying contract. Since the banks customer cannot draw on the letter, it
does not function as an assignment by the customer to the beneficiary. Nor, if properly
used, is it a contract of suretyship or guarantee, because it entails a primary liability
following a default. Finally, it is not in itself a negotiable instrument, because it is not
payable to order or bearer and is generally conditional, yet the draft presented under it
is often negotiable.[29]
In commercial transactions, a letter of credit is a financial device developed by
merchants as a convenient and relatively safe mode of dealing with sales of goods to
satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his
goods before he is paid, and a buyer, who wants to have control of the goods before
paying.[30] The use of credits in commercial transactions serves to reduce the risk of
nonpayment of the purchase price under the contract for the sale of goods. However,
credits are also used in non-sale settings where they serve to reduce the risk of
nonperformance. Generally, credits in the non-sale settings have come to be known as
standby credits.[31]
There are three significant differences between commercial and standby credits.
First, commercial credits involve the payment of money under a contract of sale. Such
credits 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. [32]
By definition, a letter of credit is a written instrument whereby the writer requests or
authorizes the addressee to pay money or deliver goods to a third person and assumes
responsibility for payment of debt therefor to the addressee. [33] A letter of credit,
however, changes its nature as different transactions occur and if carried through to

completion ends up as a binding contract between the issuing and honoring banks
without any regard or relation to the underlying contract or disputes between the parties
thereto.[34]
Since letters of credit have gained general acceptability in international trade
transactions, the ICC has published from time to time updates on the Uniform Customs
and Practice (UCP) for Documentary Credits to standardize practices in the letter of
credit area. The vast majority of letters of credit incorporate the UCP.[35] First published
in 1933, the UCP for Documentary Credits has undergone several revisions, the latest
of which was in 1993.[36]
In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,[37] this Court
ruled that the observance of the UCP is justified by Article 2 of the Code of Commerce
which provides that in the absence of any particular provision in the Code of Commerce,
commercial transactions shall be governed by usages and customs generally observed.
More recently, in Bank of America, NT & SA v. Court of Appeals,[38] this Court ruled that
there being no specific provisions which govern the legal complexities arising from
transactions involving letters of credit, not only between or among banks themselves but
also between banks and the seller or the buyer, as the case may be, the applicability of
the UCP is undeniable.
Article 3 of the UCP provides that credits, by their nature, are separate transactions
from the sales or other contract(s) on which they may be based and banks are in no
way concerned with or bound by such contract(s), even if any reference whatsoever to
such contract(s) is included in the credit. Consequently, the undertaking of a bank to
pay, accept and pay draft(s) or negotiate and/or fulfill any other obligation under the
credit is not subject to claims or defenses by the applicant resulting from his
relationships with the issuing bank or the beneficiary. A beneficiary can in no case avail
himself of the contractual relationships existing between the banks or between the
applicant and the issuing bank.
Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the
credit once the draft and the required documents are presented to it. The so-called
independence principle assures the seller or the 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.[39]
The independent nature of the letter of credit may be: (a) independence in
toto where the credit is independent from the justification aspect and is a separate
obligation from the underlying agreement like for instance a typical standby; or (b)
independence may be only as to the justification aspect like in a commercial letter of

credit or repayment standby, which is identical with the same obligations under the
underlying agreement. In both cases the payment may be enjoined if in the light of the
purpose of the credit the payment of the credit would constitute fraudulent abuse of the
credit.[40]
Can the beneficiary invoke the independence principle?
Petitioner insists that the independence principle does not apply to the instant case
and assuming it is so, it is a defense available only to respondent banks. LHC, on the
other hand, contends that it would be contrary to common sense to deny the benefit of
an independent contract to the very party for whom the benefit is intended. As
beneficiary of the letter of credit, LHC asserts it is entitled to invoke the principle.
As discussed above, in a letter of credit transaction, such as in this case, where the
credit is stipulated as irrevocable, there is a definite undertaking by the issuing bank to
pay the beneficiary provided that the stipulated documents are presented and the
conditions of the credit are complied with. [41] Precisely, the independence principle
liberates the issuing bank from the duty of ascertaining compliance by the parties in the
main contract. As the principles nomenclature clearly suggests, the obligation under the
letter of credit is independent of the related and originating contract. In brief, the letter of
credit is separate and distinct from the underlying transaction.
Given the nature of letters of credit, petitioners argumentthat it is only the issuing
bank that may invoke the independence principle on letters of creditdoes not impress
this Court. To say that the independence principle may only be invoked by the issuing
banks would render nugatory the purpose for which the letters of credit are used in
commercial transactions. As it is, the independence doctrine works to the benefit of both
the issuing bank and the beneficiary.
Letters of credit are employed by the parties desiring to enter into commercial
transactions, not for the benefit of the issuing bank but mainly for the benefit of the
parties to the original transactions. With the letter of credit from the issuing bank, the
party who applied for and obtained it may confidently present the letter of credit to the
beneficiary as a security to convince the beneficiary to enter into the business
transaction. On the other hand, the other party to the business transaction, i.e., the
beneficiary of the letter of credit, can be rest assured of being empowered to call on the
letter of credit as a security in case the commercial transaction does not push through,
or the applicant fails to perform his part of the transaction. It is for this reason that the
party who is entitled to the proceeds of the letter of credit is appropriately called
beneficiary.
Petitioners argument that any dispute must first be resolved by the parties, whether
through negotiations or arbitration, before the beneficiary is entitled to call on the letter
of credit in essence would convert the letter of credit into a mere guarantee.
Jurisprudence has laid down a clear distinction between a letter of credit and a
guarantee in that the settlement of a dispute between the parties is not a pre-requisite
for the release of funds under a letter of credit. In other words, the argument is
incompatible with the very nature of the letter of credit. If a letter of credit is drawable
only after settlement of the dispute on the contract entered into by the applicant and the

beneficiary, there would be no practical and beneficial use for letters of credit in
commercial transactions.
Professor John F. Dolan, the noted authority on letters of credit, sheds more light on
the issue:

The standby credit is an attractive commercial device for many of the same reasons
that commercial credits are attractive. Essentially, these credits are inexpensive and
efficient. Often they replace surety contracts, which tend to generate higher costs than
credits do and are usually triggered by a factual determination rather than by the
examination of documents.
Because parties and courts should not confuse the different functions of the surety
contract on the one hand and the standby credit on the other, the distinction between
surety contracts and credits merits some reflection. The two commercial devices share
a common purpose. Both ensure against the obligors nonperformance. They function,
however, in distinctly different ways.
Traditionally, upon the obligors default, the surety undertakes to complete the obligors
performance, usually by hiring someone to complete that performance. Surety
contracts, then, often involve costs of determining whether the obligor defaulted (a
matter over which the surety and the beneficiary often litigate) plus the cost of
performance. The benefit of the surety contract to the beneficiary is obvious. He
knows that the surety, often an insurance company, is a strong financial institution that
will perform if the obligor does not. The beneficiary also should understand that such
performance must await the sometimes lengthy and costly determination that the
obligor has defaulted. In addition, the suretys performance takes time.
The standby credit has different expectations. He reasonably expects that he will
receive cash in the event of nonperformance, that he will receive it promptly, and that
he will receive it before any litigation with the obligor (the applicant) over the nature
of the applicants performance takes place. The standby credit has this opposite effect
of the surety contract: it reverses the financial burden of parties during litigation.
In the surety contract setting, there is no duty to indemnify the beneficiary until the
beneficiary establishes the fact of the obligors performance. The beneficiary may have
to establish that fact in litigation. During the litigation, the surety holds the money and
the beneficiary bears most of the cost of delay in performance.
In the standby credit case, however, the beneficiary avoids that litigation burden and
receives his money promptly upon presentation of the required documents. It may be
that the applicant has, in fact, performed and that the beneficiarys presentation of
those documents is not rightful. In that case, the applicant may sue the beneficiary in

tort, in contract, or in breach of warranty; but, during the litigation to determine

whether the applicant has in fact breached the obligation to perform, the beneficiary,
not the applicant, holds the money. Parties that use a standby credit and courts
construing such a credit should understand this allocation of burdens. There is a
tendency in some quarters to overlook this distinction between surety contracts and
standby credits and to reallocate burdens by permitting the obligor or the issuer to
litigate the performance question before payment to the beneficiary.[42]
While it is the bank which is bound to honor the credit, it is the beneficiary who has
the right to ask the bank to honor the credit by allowing him to draw thereon. The
situation itself emasculates petitioners posture that LHC cannot invoke the
independence principle and highlights its puerility, more so in this case where the banks
concerned were impleaded as parties by petitioner itself.
Respondent banks had squarely raised the independence principle to justify their
releases of the amounts due under the Securities. Owing to the nature and purpose of
the standby letters of credit, this Court rules that the respondent banks were left with
little or no alternative but to honor the credit and both of them in fact submitted that it
was ministerial for them to honor the call for payment. [43]
Furthermore, LHC has a right rooted in the Contract to call on the Securities. The
relevant provisions of the Contract read, thus:

4.2.1. In order to secure the performance of its obligations under this Contract, the
Contractor at its cost shall on the Commencement Date provide security to the
Employer in the form of two irrevocable and confirmed standby letters of credit (the
Securities), each in the amount of US$8,988,907, issued and confirmed by banks or
financial institutions acceptable to the Employer. Each of the Securities must be in
form and substance acceptable to the Employer and may be provided on an annually
renewable basis.[44]
8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the
Employer by way of liquidated damages (Liquidated Damages for Delay) the amount
of US$75,000 for each and every day or part of a day that shall elapse between the
Target Completion Date and the Completion Date, provided that Liquidated Damages
for Delay payable by the Contractor shall in the aggregate not exceed 20% of the
Contract Price. The Contractor shall pay Liquidated Damages for Delay for each day
of the delay on the following day without need of demand from the Employer.
8.7.2 The Employer may, without prejudice to any other method of recovery, deduct
the amount of such damages from any monies due, or to become due to the Contractor
and/or by drawing on the Security.[45]

A contract once perfected, binds the parties not only to the fulfillment of what has
been expressly stipulated but also to all the consequences which according to their
nature, may be in keeping with good faith, usage, and law. [46] A careful perusal of the
Turnkey Contract reveals the intention of the parties to make the Securities answerable
for the liquidated damages occasioned by any delay on the part of petitioner. The call
upon the Securities, while not an exclusive remedy on the part of LHC, is certainly an
alternative recourse available to it upon the happening of the contingency for which the
Securities have been proffered. Thus, even without the use of the independence
principle, the Turnkey Contract itself bestows upon LHC the right to call on the
Securities in the event of default.
Next, petitioner invokes the fraud exception principle. It avers that LHCs call on the
Securities is wrongful because it fraudulently misrepresented to ANZ Bank and SBC
that there is already a breach in the Turnkey Contract knowing fully well that this is yet
to be determined by the arbitral tribunals. It asserts that the fraud exception exists when
the beneficiary, for the purpose of drawing on the credit, fraudulently presents to the
confirming bank, documents that contain, expressly or by implication, material
representations of fact that to his knowledge are untrue. In such a situation, petitioner
insists, injunction is recognized as a remedy available to it.
Citing Dolans treatise on letters of credit, petitioner argues that the independence
principle is not without limits and it is important to fashion those limits in light of the
principles purpose, which is to serve the commercial function of the credit. If it does not
serve those functions, application of the principle is not warranted, and the commonlaw
principles of contract should apply.
It is worthy of note that the propriety of LHCs call on the Securities is largely
intertwined with the fact of default which is the self-same issue pending resolution
before the arbitral tribunals. To be able to declare the call on the Securities wrongful or
fraudulent, it is imperative to resolve, among others, whether petitioner was in fact guilty
of delay in the performance of its obligation. Unfortunately for petitioner, this Court is not
called upon to rule upon the issue of defaultsuch issue having been submitted by the
parties to the jurisdiction of the arbitral tribunals pursuant to the terms embodied in their
agreement.[47]
Would injunction then be the proper remedy to restrain the alleged wrongful draws
on the Securities?
Most writers agree that fraud is an exception to the independence principle.
Professor Dolan opines that the untruthfulness of a certificate accompanying a demand
for payment under a standby credit may qualify as fraud sufficient to support an
injunction against payment.[48] The remedy for fraudulent abuse is an injunction.
However, injunction should not be granted unless: (a) there is clear proof of fraud; (b)
the fraud constitutes fraudulent abuse of the independent purpose of the letter of credit
and not only fraud under the main agreement; and (c) irreparable injury might follow if
injunction is not granted or the recovery of damages would be seriously damaged. [49]
In its complaint for injunction before the trial court, petitioner alleged that it is entitled
to a total extension of two hundred fifty-three (253) days which would move the target

completion date. It argued that if its claims for extension would be found meritorious by
the ICC, then LHC would not be entitled to any liquidated damages. [50]
Generally, injunction is a preservative remedy for the protection of ones substantive
right or interest; it is not a cause of action in itself but merely a provisional remedy, an
adjunct to a main suit. The issuance of the writ of preliminary injunction as an ancillary
or preventive remedy to secure the rights of a party in a pending case is entirely within
the discretion of the court taking cognizance of the case, the only limitation being that
this discretion should be exercised based upon the grounds and in the manner provided
by law.[51]
Before a writ of preliminary injunction may be issued, there must be a clear showing
by the complaint that there exists a right to be protected and that the acts against which
the writ is to be directed are violative of the said right. [52] It must be shown that the
invasion of the right sought to be protected is material and substantial, that the right of
complainant is clear and unmistakable and that there is an urgent and paramount
necessity for the writ to prevent serious damage. [53] Moreover, an injunctive remedy may
only be resorted to when there is a pressing necessity to avoid injurious consequences
which cannot be remedied under any standard compensation. [54]
In the instant case, petitioner failed to show that it has a clear and unmistakable
right to restrain LHCs call on the Securities which would justify the issuance of
preliminary injunction. By petitioners own admission, the right of LHC to call on the
Securities was contractually rooted and subject to the express stipulations in the
Turnkey Contract.[55] Indeed, the Turnkey Contract is plain and unequivocal in that it
conferred upon LHC the right to draw upon the Securities in case of default, as provided
in Clause 4.2.5, in relation to Clause 8.7.2, thus:

4.2.5 The Employer shall give the Contractor seven days notice of calling upon any of
the Securities, stating the nature of the default for which the claim on any of the
Securities is to be made, provided that no notice will be required if the Employer calls
upon any of the Securities for the payment of Liquidated Damages for Delay or for
failure by the Contractor to renew or extend the Securities within 14 days of their
expiration in accordance with Clause 4.2.2. [56]
8.7.2 The Employer may, without prejudice to any other method of recovery, deduct
the amount of such damages from any monies due, or to become due, to the
Contractor and/or by drawing on the Security.[57]
The pendency of the arbitration proceedings would not per se make LHCs draws on
the Securities wrongful or fraudulent for there was nothing in the Contract which would
indicate that the parties intended that all disputes regarding delay should first be settled
through arbitration before LHC would be allowed to call upon the Securities. It is
therefore premature and absurd to conclude that the draws on the Securities were
outright fraudulent given the fact that the ICC and CIAC have not ruled with finality on
the existence of default.

Nowhere in its complaint before the trial court or in its pleadings filed before the
appellate court, did petitioner invoke the fraud exception rule as a ground to justify the
issuance of an injunction.[58] What petitioner did assert before the courts below was the
fact that LHCs draws on the Securities would be premature and without basis in view of
the pending disputes between them. Petitioner should not be allowed in this instance to
bring into play the fraud exception rule to sustain its claim for the issuance of an
injunctive relief. Matters, theories or arguments not brought out in the proceedings
below will ordinarily not be considered by a reviewing court as they cannot be raised for
the first time on appeal.[59] The lower courts could thus not be faulted for not applying the
fraud exception rule not only because the existence of fraud was fundamentally
interwoven with the issue of default still pending before the arbitral tribunals, but more
so, because petitioner never raised it as an issue in its pleadings filed in the courts
below. At any rate, petitioner utterly failed to show that it had a clear and unmistakable
right to prevent LHCs call upon the Securities.
Of course, prudence should have impelled LHC to await resolution of the pending
issues before the arbitral tribunals prior to taking action to enforce the Securities. But,
as earlier stated, the Turnkey Contract did not require LHC to do so and, therefore, it
was merely enforcing its rights in accordance with the tenor thereof. Obligations arising
from contracts have the force of law between the contracting parties and should be
complied with in good faith.[60] More importantly, pursuant to the principle of autonomy of
contracts embodied in Article 1306 of the Civil Code, [61] petitioner could have
incorporated in its Contract with LHC, a proviso that only the final determination by the
arbitral tribunals that default had occurred would justify the enforcement of the
Securities. However, the fact is petitioner did not do so; hence, it would have to live with
its inaction.
With respect to the issue of whether the respondent banks were justified in
releasing the amounts due under the Securities, this Court reiterates that pursuant to
the independence principle the banks were under no obligation to determine the
veracity of LHCs certification that default has occurred. Neither were they bound by
petitioners declaration that LHCs call thereon was wrongful. To repeat, respondent
banks undertaking was simply to pay once the required documents are presented by
the beneficiary.
At any rate, should petitioner finally prove in the pending arbitration proceedings
that LHCs draws upon the Securities were wrongful due to the non-existence of the fact
of default, its right to seek indemnification for damages it suffered would not normally be
foreclosed pursuant to general principles of law.
Moreover, in a Manifestation,[62] dated 30 March 2001, LHC informed this Court that
the subject letters of credit had been fully drawn. This fact alone would have been
sufficient reason to dismiss the instant petition.
Settled is the rule that injunction would not lie where the acts sought to be enjoined
have already become fait accompli or an accomplished or consummated act.
[63]
In Ticzon v. Video Post Manila, Inc.[64] this Court ruled that where the period within
which the former employees were prohibited from engaging in or working for an
enterprise that competed with their former employerthe very purpose of the preliminary

injunction has expired, any declaration upholding the propriety of the writ would be
entirely useless as there would be no actual case or controversy between the parties
insofar as the preliminary injunction is concerned.
In the instant case, the consummation of the act sought to be restrained had
rendered the instant petition mootfor any declaration by this Court as to propriety or
impropriety of the non-issuance of injunctive relief could have no practical effect on the
existing controversy.[65] The other issues raised by petitioner particularly with respect to
its right to recover the amounts wrongfully drawn on the Securities, according to it, could
properly be threshed out in a separate proceeding.
One final point. LHC has charged petitioner of forum-shopping. It raised the charge
on two occasions. First, in its Counter-Manifestation dated 29 June 2004[66] LHC alleges
that petitioner presented before this Court the same claim for money which it has filed in
two other proceedings, to wit: ICC Case No. 11264/TE/MW and Civil Case No. 04-332
before the RTC of Makati. LHC argues that petitioners acts constitutes forum-shopping
which should be punished by the dismissal of the claim in both forums. Second, in
its Comment to Petitioners Motion for Leave to File Addendum to Petitioners
Memorandum dated 8 October 2004, LHC alleges that by maintaining the present
appeal and at the same time pursuing Civil Case No. 04-332wherein petitioner pressed
for judgment on the issue of whether the funds LHC drew on the Securities should be
returnedpetitioner resorted to forum-shopping. In both instances, however, petitioner
has apparently opted not to respond to the charge.
Forum-shopping is a very serious charge. It exists when a party repetitively avails of
several judicial remedies in different courts, simultaneously or successively, all
substantially founded on the same transactions and the same essential facts and
circumstances, and all raising substantially the same issues either pending in, or
already resolved adversely, by some other court. [67] It may also consist in the act of a
party against whom an adverse judgment has been rendered in one forum, of seeking
another and possibly favorable opinion in another forum other than by appeal or special
civil action of certiorari, or the institution of two or more actions or proceedings
grounded on the same cause on the supposition that one or the other court might look
with favor upon the other party.[68] To determine whether a party violated the rule against
forum-shopping, the test applied is whether the elements of litis pendentia are present
or whether a final judgment in one case will amount to res judicata in another.[69] Forumshopping constitutes improper conduct and may be punished with summary dismissal of
the multiple petitions and direct contempt of court. [70]
Considering the seriousness of the charge of forum-shopping and the severity of the
sanctions for its violation, the Court will refrain from making any definitive ruling on this
issue until after petitioner has been given ample opportunity to respond to the charge.
WHEREFORE, the instant petition is DENIED, with costs against petitioner.
Petitioner is hereby required to answer the charge of forum-shopping within fifteen
(15) days from notice.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.

Metropolitan Waterworks and Sewerage

System V. Hon. Reynaldo B. Daway G.R.
No. 160732. June 21, 2004
MARCH 15, 2014LEAVE A COMMENT

The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not
apply to the the standby letter of credit issued by the bank as the
former prohibition is on the enforcement of claims against guarantors
or sureties of the debtors whose obligations are not solidary with the
debtor.
The concept of guarantee vis--vis the concept of an irrevocable letter
of credit are inconsistent with each other. The guarantee theory
destroys the independence of the banks responsibility from the
contract upon which it was opened and the nature of both contracts is
mutually in conflict with each other. A Standby Letter of Credit is not a
guaranty because under a Standby Letter of Credit, the bank
undertakes a primary obligation. On the other hand, a guarantor
undertakes a collateral obligation which arises only upon the debtors
default. A Standby Letter of Credit is a primary obligation and not an
accessory contract.
Facts: Maynilad obtained a 20-year concession to manage, repair, refurbish, and
upgrade existing Metropolitan Waterworks and Sewerage System (MWSS) water
delivery and sewerage services in Metro Manilas west zone. Maynilad, under
the concession agreement undertook to pay concession fees and itsforeign
loans. To secure its obligations, Maynilad was required under Section 9 of the
concession contract to put up a bond, bank guarantee or other security
acceptable to MWSS. Pursuant to this requirement, Maynilad arranged on for a
three-year facility with a number of foreign banks led by Citicorp Intl for the
issuance of an irrevocable standby letter of credit (SLC) in the amount of $ 120
million in favor of MWSS for the full and prompt payment of Maynilads
obligations to MWSS. Due to devaluation of the peso and other business
reversals of Maynilad, MWSS filed a notice of early termination of the concession
contract. Upon certification of the non performance of Maynilad obligation, the
MWSS moved to collect from Citicorp on the standby letters of credit issued.
Maynilad filed for corporate rehabilitation. Judge Daway stayed the payment of
the letter of credit by Citicorp pursuant to Sec 6 (b) of Rule 4 of the Interim Rules
on Corporate Rehabilitation.
Issue: Whether or not the payment of the standby of letter of credit can be
stayed by filing of a petition for rehabilitation
Held: No. The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not
apply to the the standby letter of credit issued by the bank as the former
prohibition is on the enforcement of claims against guarantors or sureties of the
debtors whose obligations are not solidary with the debtor.

The participating banks obligation under the letter of credit are solidary with
respondent Maynilad in that it is a primary, direct, definite and an absolute
undertaking to pay and is not conditioned on the prior exhaustion of the debtors
assets. These are the same characteristics of a surety or solidary obligor. And
being solidary, the claims against them can be pursued separately from and
independently of the rehabilitation case.
Issuing banks under the letters of credit are not equivalent to guarantors. The
concept of guarantee vis--vis the concept of an irrevocable letter of credit are
inconsistent with each other. The guarantee theory destroys the independence
of the banks responsibility from the contract upon which it was opened and the
nature of both contracts is mutually in conflict with each other. In contracts of
guarantee, the guarantors obligation is merely collateral and it arises only upon
the default of the person primarily liable. On the other hand, in an irrevocable
letter of credit, the bank undertakes a primary obligation. We have also defined
a letter of credit as an engagement by a bank or other person made at the
request of a customer that the issuer shall honor drafts or other demands of
payment upon compliance with the conditions specified in the credit.
A Standby Letter of Credit is not a guaranty because under a Standby Letter of
Credit, the bank undertakes a primary obligation. On the other hand, a
guarantor undertakes a collateral obligation which arises only upon the debtors
default. A Standby Letter of Credit is a primary obligation and not an accessory
contract.

FIRST DIVISION
[G.R. No. 160732. June 21, 2004]

METROPOLITAN
WATERWORKS
AND
SEWERAGE
SYSTEM, petitioner, vs. HON. REYNALDO B. DAWAY, IN HIS
CAPACITY AS PRESIDING JUDGE OF THE REGIONAL TRIAL
COURT OF QUEZON CITY, BRANCH 90 AND MAYNILAD WATER
SERVICES, INC., respondents.
DECISION
AZCUNA, J.:

On November 17, 2003, the Regional Trial Court (RTC) of Quezon City, Branch 90,
made a determination that the Petition for Rehabilitation with Prayer for Suspension of
Actions and Proceedings filed by Maynilad Water Services, Inc. (Maynilad) conformed
substantially to the provisions of Sec. 2, Rule 4 of the Interim Rules of Procedure on

Corporate Rehabilitation (Interim Rules). It forthwith issued a Stay Order which states,
in part, that the court was thereby:
[1]

xxxxxxxxx
2. Staying enforcement of all claims, whether for money or otherwise and whether such
enforcement is by court action or otherwise, against the petitioner, its guarantors
and sureties not solidarily liable with the petitioner;
3. Prohibiting the petitioner from selling, encumbering, transferring, or disposing in any
manner any of its properties except in the ordinary course of business;
4. Prohibiting the petitioner from making any payment of its liabilities, outstanding as at
the date of the filing of the petition;
xxxxxxxxx

Subsequently, on November 27, 2003, public respondent, acting on two Urgent Ex

Parte motions filed by respondent Maynilad, issued the herein questioned
Order which stated that it thereby:
[2]

[3]

1. DECLARES that the act of MWSS in commencing on November 24, 2003 the
process for the payment by the banks of US$98 million out of the US$120 million
standby letter of credit so the banks have to make good such call/drawing of payment
of US$98 million by MWSS not later than November 27, 2003 at 10:00 P. M. or any
similar act for that matter, is violative of the above-quoted sub-paragraph 2.) of the
dispositive portion of this Courts Stay Order dated November 17, 2003.
2. ORDERS MWSS through its officers/officials to withdraw under pain of contempt
the written certification/notice of draw to Citicorp International Limited dated
November 24, 2003 and DECLARES void any payment by the banks to MWSS in the
event such written certification/notice of draw is not withdrawn by MWSS and/or
MWSS receives payment by virtue of the aforesaid standby letter of credit.
Aggrieved by this Order, petitioner Manila Waterworks & Sewerage System
(MWSS) filed this petition for review by way of certiorari under Rule 65 of the Rules of
Court questioning the legality of said order as having been issued without or in excess
of the lower courts jurisdiction or that the court a quo acted with grave abuse of
discretion amounting to lack or excess of jurisdiction.
[4]

ANTECEDENTS OF THE CASE

On February 21, 1997, MWSS granted Maynilad under a Concession Agreement a

twenty-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 dates agreed
upon in said agreement which, among other things, consisted of payments of
petitioners mostly foreign loans.
[5]

To secure the concessionaires performance of its obligations under the Concession

Agreement, Maynilad was required under Section 6.9 of said contract to put up a bond,
bank guarantee or other security acceptable to MWSS.
In compliance with this requirement, Maynilad arranged on July 14, 2000 for a
three-year facility with a number of foreign banks, led by Citicorp International Limited,
for the issuance of an Irrevocable Standby Letter of Credit in the amount of
US$120,000,000 in favor of MWSS for the full and prompt performance of Maynilads
obligations to MWSS as aforestated.
[6]

Sometime in September 2000, respondent Maynilad requested MWSS for a

mechanism by which it hoped to recover the losses it had allegedly incurred and would
be incurring as a result of the depreciation of the Philippine Peso against the US Dollar.
Failing to get what it desired, Maynilad issued a Force Majeure Notice on March 8, 2001
and unilaterally suspended the payment of the concession fees. In an effort to salvage
the Concession Agreement, the parties entered into a Memorandum of Agreement
(MOA) on June 8, 2001 wherein Maynilad was allowed to recover foreign exchange
losses under a formula agreed upon between them. Sometime in August 2001 Maynilad
again filed another Force Majeure Notice and, since MWSS could not agree with the
terms of said Notice, the matter was referred on August 30, 2001 to the Appeals Panel
for arbitration. This resulted in the parties agreeing to resolve the issues through an
amendment of the Concession Agreement on October 5, 2001, known as Amendment
No. 1, which was based on the terms set down in MWSS Board of Trustees Resolution
No. 457-2001, as amended by MWSS Board of Trustees Resolution No. 487-2001,
which provided inter alia for a formula that would allow Maynilad to recover foreign
exchange losses it had incurred or would incur under the terms of the Concession
Agreement.
[7]

[8]

[9]

As part of this agreement, Maynilad committed, among other things, to:

a) infuse the amount of UD$80.0 million as additional funding support from its
stockholders;
b) resume payment of the concession fees; and

c) mutually seek the dismissal of the cases pending before the Court of Appeals and
with Minor Dispute Appeals Panel.

However, on November 5, 2002, Maynilad served upon MWSS a Notice of Event of

Termination, claiming that MWSS failed to comply with its obligations under the
Concession Agreement and Amendment No. 1 regarding the adjustment mechanism
that would cover Maynilads foreign exchange losses. On December 9, 2002, Maynilad
filed a Notice of Early Termination of the concession, which was challenged by MWSS.
This matter was eventually brought before the Appeals Panel on January 7, 2003 by
MWSS. On November 7, 2003, the Appeals Panel ruled that there was no Event of
Termination as defined under Art. 10.2 (ii) or 10.3 (iii) of the Concession Agreement and
that, therefore, Maynilad should pay the concession fees that had fallen due.
[10]

The award of the Appeals Panel became final on November 22, 2003. MWSS,
thereafter, submitted a written notice on November 24, 2003, to Citicorp International
Limited, as agent for the participating banks, that by virtue of Maynilads failure to
perform its obligations under the Concession Agreement, it was drawing on the
Irrevocable Standby Letter of Credit and thereby demanded payment in the amount of
US$98,923,640.15.
[11]

Prior to this, however, Maynilad had filed on November 13, 2003, a petition for
rehabilitation before the court a quo which resulted in the issuance of the Stay Order of
November 17, 2003 and the disputed Order of November 27, 2003.
[12]

PETITIONERS CASE
Petitioner hereby raises the following issues:
1. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR AND/OR ACT
PATENTLY WITHOUT JURISDICTION OR IN EXCESS OF JURISDICTION OR
WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION IN CONSIDERING THE PERFORMANCE BOND OR ASSETS OF
THE ISSUING BANKS AS PART OR PROPERTY OF THE ESTATE OF THE
PRIVATE RESPONDENT MAYNILAD SUBJECT TO REHABILITATION.
2. DID THE HONORABLE PRESIDING JUDGE ACT WITH LACK OR EXCESS OF
JURISDICTION OR COMMIT A GRAVE ERROR OF LAW IN HOLDING THAT THE
PERFORMANCE BOND OBLIGATIONS OF THE BANKS WERE NOT SOLIDARY
IN NATURE.
3. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR IN ALLOWING
MAYNILAD TO IN EFFECT SEEK A REVIEW OR APPEAL OF THE FINAL AND
BINDING DECISION OF THE APPEALS PANEL.

In support of the first issue, petitioner maintains that as a matter of law, the US$120
Million Standby Letter of Credit and Performance Bond are not property of the estate of
the debtor Maynilad and, therefore, not subject to the in rem rehabilitation jurisdiction of
the trial court.
Petitioner argues that a call made on the Standby Letter of Credit does not involve
any asset of Maynilad but only assets of the banks. Furthermore, a call on the Standby
Letter of Credit cannot also be considered a claim falling under the purview of the stay
order as alleged by respondent as it is not directed against the assets of respondent
Maynilad.
Petitioner concludes that the public respondent erred in declaring and holding that
the commencement of the process for the payment of US$98 million is a violation of the
order issued on November 17, 2003.
RESPONDENT MAYNILADS CASE
Respondent Maynilad seeks to refute this argument by alleging that:

a) the order objected to was strictly and precisely worded and issued after carefully
considering/evaluating the import of the arguments and documents referred to by
Maynilad, MWSS and/or creditors Chinatrust Commercial Bank and Suez in relation
to admissions, pleadings and/or pertinent records and that public respondent had the
authority to issue the same;
[13]

b) public respondent never considered nor held that the Performance bond or assets of
the issuing banks are part or property of the estate of respondent Maynilad subject to
rehabilitation and which respondent Maynilad has not and has never claimed to be;
[14]

c) what is relevant is not whether the performance bond or assets of the issuing banks
are part of the estate of respondent Maynilad but whether the act of petitioner in
commencing the process for the payment by the banks of US$98 million out of the
US$120 million performance bond is covered and/or prohibited under sub-paragraphs
2.) and 4.) of the stay order dated November 17, 2003;
d) the jurisdiction of public respondent extends not only to the assets of respondent
Maynilad but also over persons and assets of all those affected by the proceedings x x
x upon publication of the notice of commencement; and
[15]

e) the obligations under the Standby Letter of Credit are not solidary and are not
exempt from the coverage of the stay order.
OUR RULING
We will discuss the first two issues raised by petitioner as these are interrelated and
make up the main issue of the petition before us which is, did the rehabilitation court
sitting as such, act in excess of its authority or jurisdiction when it enjoined herein
petitioner from seeking the payment of the concession fees from the banks that issued
the Irrevocable Standby Letter of Credit in its favor and for the account of respondent
Maynilad?
The public respondent relied on Sec. 1, Rule 3 of the Interim Rules on Corporate
Rehabilitation to support its jurisdiction over the Irrevocable Standby Letter of Credit and
the banks that issued it. The section reads in part that jurisdiction over those affected by
the proceedings is considered acquired upon the publication of the notice of
commencement of proceedings in a newspaper of general circulation and goes further
to define rehabilitation as an in rem proceeding. This provision is a logical consequence
of the in rem nature of the proceedings, where jurisdiction is acquired by publication and
where it is necessary that the assets of the debtor come within the courts jurisdiction to
secure the same for the benefit of creditors. The reference to all those affected by the
proceedings covers creditors or such other persons or entities holding assets belonging
to the debtor under rehabilitation which should be reflected in its audited financial
statements. The banks do not hold any assets of respondent Maynilad that would be
material to the rehabilitation proceedings nor is Maynilad liable to the banks at this
point.
Respondent Maynilads Financial Statement as of December 31, 2001 and 2002 do
not show the Irrevocable Standby Letter of Credit as part of its assets or liabilities, and
by respondent Maynilads own admission it is not. In issuing the clarificatory order of
November 27, 2003, enjoining petitioner from claiming from an asset that did not belong
to the debtor and over which it did not acquire jurisdiction, the rehabilitation court acted
in excess of its jurisdiction.
Respondent Maynilad insists, however, that it is Sec. 6 (b), Rule 4 of the Interim
Rules that supports its claim that the commencement of the process to draw on the
Standby Letter of Credit is an enforcement of claim prohibited by and under the Interim
Rules and the order of public respondent.
Respondent Maynilad would persuade us that the above provision justifies a leap to
the conclusion that such an enforcement is prohibited by said section because it is a

claim against the debtor, its guarantors and sureties not solidarily liable with the debtor
and that there is nothing in the Standby Letter of Credit nor in law nor in the nature of
the obligation that would show or require the obligation of the banks to be solidary with
the respondent Maynilad.
We disagree.
First, the claim is not one against the debtor but against an entity that respondent
Maynilad has procured to answer for its non-performance of certain terms and
conditions of the Concession Agreement, particularly the payment of concession fees.
Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement
of all claims against guarantors and sureties, but only those claims against
guarantors and sureties who are not solidarily liable with the debtor. Respondent
Maynilads claim that the banks are not solidarily liable with the debtor does not find
support in jurisprudence.
We held in Feati Bank & Trust Company v. Court of Appeals that the concept of
guarantee vis--vis the concept of an irrevocable letter of credit are inconsistent with
each other. The guarantee theory destroys the independence of the banks responsibility
from the contract upon which it was opened and the nature of both contracts is mutually
in conflict with each other. In contracts of guarantee, the guarantors obligation is merely
collateral and it arises only upon the default of the person primarily liable. On the other
hand, in an irrevocable letter of credit, the bank undertakes a primary obligation. We
have also defined a letter of credit as an engagement by a bank or other person made
at the request of a customer that the issuer shall honor drafts or other demands of
payment upon compliance with the conditions specified in the credit.
[16]

[17]

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
the 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.
[18]

[19]

[20]

[21]

Letters of Credits have long been and are still governed by the provisions of the
Uniform Customs and Practice for Documentary Credits of the International Chamber of
Commerce. In the 1993 Revision it provides in Art. 2 that the expressions Documentary
Credit(s) and Standby Letter(s) of Credit mean any arrangement, however made or
described, whereby a bank acting at the request and on instructions of a customer or on
its own behalf is to make payment against stipulated document(s) and Art. 9 thereof
defines the liability of the issuing banks on an irrevocable letter of credit as a definite
undertaking of the issuing bank, provided that the stipulated documents are presented
to the nominated bank or the issuing bank and the terms and conditions of the Credit
are complied with, to pay at sight if the Credit provides for sight payment.
[22]

We have accepted, in Feati Bank and Trust Company v. Court of

Appeals and Bank of America NT & SA v. Court of Appeals, to the extent that they
are pertinent, the application in our jurisdiction of the international credit regulatory set
of rules known as the Uniform Customs and Practice for Documentary Credits (U.C.P)
issued by the International Chamber of Commerce, which we said in Bank of the
Philippine Islands v. Nery was justified under Art. 2 of the Code of Commerce, which
states:
[23]

[24]

[25]

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, by the usages of commerce generally observed in each place; and in the
absence of both rules, by those of the civil law.
The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to
herein petitioner as the prohibition is on the enforcement of claims against guarantors or
sureties of the debtors whose obligations are not solidary with the debtor. The
participating banks obligation are solidary with respondent Maynilad in that it is a
primary, direct, definite and an absolute undertaking to pay and is not conditioned on
the prior exhaustion of the debtors assets. These are the same characteristics of a
surety or solidary obligor.
Being solidary, the claims against them can be pursued separately from and
independently of the rehabilitation case, as held in Traders Royal Bank v. Court of
Appeals and reiterated in Philippine Blooming Mills, Inc. v. Court of Appeals, where
we said that property of the surety cannot be taken into custody by the rehabilitation
receiver (SEC) and said surety can be sued separately to enforce his liability as surety
for the debts or obligations of the debtor. The debts or obligations for which a surety
may be liable include future debts, an amount which may not be known at the time the
surety is given.
[26]

[27]

The terms of the Irrevocable Standby Letter of Credit do not show that the
obligations of the banks are not solidary with those of respondent Maynilad. On the
contrary, it is issued at the request of and for the account of Maynilad Water Services,
Inc., in favor of the Metropolitan Waterworks and Sewerage System, as a bond for the
full and prompt performance of the obligations by the concessionaire under the
Concession Agreement and herein petitioner is authorized by the banks to draw on it
by the simple act of delivering to the agent a written certification substantially in the form
Annex B of the Letter of Credit. It provides further in Sec. 6, that for as long as the
Standby Letter of Credit is valid and subsisting, the Banks shall honor any written
Certification made by MWSS in accordance with Sec. 2, of the Standby Letter of Credit
regardless of the date on which the event giving rise to such Written Certification arose.
[28]

[29]

Taking into consideration our own rulings on the nature of letters of credit and the
customs and usage developed over the years in the banking and commercial practice of
letters of credit, we hold that except when a letter of credit specifically stipulates
otherwise, 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.
The public respondent, therefore, exceeded his jurisdiction, in holding that he was
competent to act on the obligation of the banks under the Letter of Credit under the
argument that this was not a solidary obligation with that of the debtor. Being a solidary
obligation, the letter of credit is excluded from the jurisdiction of the rehabilitation court
and therefore in enjoining petitioner 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, public respondent acted in excess of his jurisdiction.
ADDITIONAL ISSUES
We proceed to consider the other issues raised in the oral arguments and included
in the parties memoranda:
1. Respondent Maynilad argues that petitioner had a plain, speedy and adequate
remedy under the Interim Rules itself which provides in Sec. 12, Rule 4 that the court
may on motion or motu proprio, terminate, modify or set conditions for the continuance
of the stay order or relieve a claim from coverage thereof. We find, however, that the
public respondent had already accomplished this during the hearing set for the two
Urgent Ex Partemotions filed by respondent Maynilad on November 21 and 24, 2003,
where the parties including the creditors, Suez and Chinatrust Commercial presented
[30]

their respective arguments. The public respondent then ruled, after carefully
considering/evaluating the import of the arguments and documents referred to by
Maynilad, MWSS and/or the creditors Chinatrust Commercial Bank and Suez in relation
to the admissions, the pleadings, and/or pertinent portions of the records, this court is of
the considered and humble view that the issue must perforce be resolved in favor of
Maynilad. Hence to pursue their opposition before the same court would result in the
presentation of the same arguments and issues passed upon by public respondent.
[31]

[32]

Furthermore, Sec. 5, Rule 3 of the Interim Rules would preclude any other effective
remedy questioning the orders of the rehabilitation court since they are immediately
executory and a petition for review or an appeal therefrom shall not stay the execution
of the order unless restrained or enjoined by the appellate court. In this situation, it had
no other remedy but to seek recourse to us through this petition for certiorari.
In Silvestre v. Torres and Oben, we said that it is not enough that a remedy is
available to prevent a party from making use of the extraordinary remedy
of certiorari but that such remedy be an adequate remedy which is equally beneficial,
speedy and sufficient, not only a remedy which at some time in the future may offer
relief but a remedy which will promptly relieve the petitioner from the injurious acts of
the lower tribunal. It is the inadequacy -- not the mere absence -- of all other legal
remedies and the danger of failure of justice without the writ, that must usually
determine the propriety of certiorari.
[33]

[34]

2. Respondent Maynilad argues that by commencing the process for payment under
the Standby Letter of Credit, petitioner violated an immediately executory order of the
court and, therefore, comes to Court with unclean hands and should therefore be
denied any relief.
It is true that the stay order is immediately executory. It is also true, however, that
the Standby Letter of Credit and the banks that issued it were not within the jurisdiction
of the rehabilitation court. The call on the Standby Letter of Credit, therefore, could not
be considered a violation of the Stay Order.
3. Respondents claim that the filing of the petition pre-empts the original jurisdiction
of the lower court is without merit. The purpose of the initial hearing is to determine
whether the petition for rehabilitation has merit or not. The propriety of the stay order as
well as the clarificatory order had already been passed upon in the hearing previously
had for that purpose. The determination of whether the public respondent was correct in
enjoining the petitioner from drawing on the Standby Letter of Credit will have no
bearing on the determination to be made by public respondent whether the petition for

rehabilitation has merit or not. Our decision on the instant petition does not pre-empt the
original jurisdiction of the rehabilitation court.
WHEREFORE, the petition for certiorari is GRANTED. The Order of November 27,
2003 of the Regional Trial Court of Quezon City, Branch 90, is hereby declared NULL
AND VOID and SET ASIDE. The status quoOrder herein previously issued is hereby
LIFTED. In view of the urgency attending this case, this decision is immediately
executory.
No costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Panganiban, and Carpio, JJ., concur.
Ynares-Santiago, J., on leave.

Bank of America NT & SA v Court of

Appeals and Francisco et. al G.R. No.
105395 December 10, 1993
MARCH 15, 2014LEAVE A COMMENT

There would at least be three (3) parties: (a) the buyer, 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, which 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, 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.
Facts : Bank of America received an Irrevocable Letter of Credit issued by Bank
of Ayudhya for the Account of General Chemicals Ltd., Inc. for the sale of plastic
ropes and agricultural files. Under the letter of credit, Bank of America acted as
an advising bank and Inter-Resin Industrial Corp. (IR) acted as the beneficiary.
Upon receipt of the letter advice, Inter- Resin told Bank of America to confirm
the letter of credit.
Notwithstanding such instruction, Bank of America failed to confirm the letter of
credit. Inter-Resin made a partial availment of the Letter of Credit after
presentment of the required documents to Bank of America. After confirmation
of all the documents Bank of America issued a check in favor of IR. BA advised
Bank of Ayudhya of IRs availment under the letter of credit and asked for the
corresponding reimbursement. IR presented documents for the second

availment under the same letter of credit. However, BA stopped the processing
of such after they received a telex from Bank of Ayudhya delaring that the LC
fraudulent. BA sued IR for the recovery of the first LC payment.
The IR contended that Bank of America should have first checked the
authenticity of the letter of credit with bank of Ayudhya
Issue: Whether or not Bank of America may recover what it has paid under the
letter of credit to Inter-Resin
Held : May Bank of America then recover what it has paid under the letter of
credit when the corresponding draft
There would at least be three (3) parties: (a) the buyer, 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, which 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,
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 services of an advising (notifying) bank 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, 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 the negotiating bank, 18 to have the
draft discounted.
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
to recourse against the issuer bank and until reimbursement is obtained, InterResin, as the drawer of the draft, continues to assume a contingent liability
thereon.
Furthermore, 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.
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
Dueas, 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. 3Bank 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 Inter-Resin'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 facie evidence 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 Inter-Resin 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, 13 which 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 the negotiating 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 is solely 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.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 186063

January 15, 2014

PHILIPPINE NATIONAL BANK, Petitioner,

vs.
SAN MIGUEL CORPORATION, Respondent.
DECISION
PERALTA, J.:
This treats of the petition for review on certiorari of the Decision and Resolution of the Court of
Appeals (CA), dated June 7 2008 and December 15, 2008, respectively, in CA-G.R. SP No. 01249MIN.
1

The facts, as summarized by the CA, are as follows:

On July 1, 1996, respondent San Miguel Corporation (SMC, for brevity) entered into an Exclusive
Dealership Agreement with a certain Rodolfo R. Goroza (Goroza, hereafter), wherein the latter was
given by SMC the right to trade, deal, market or otherwise sell its various beer products.
Goroza applied for a credit line with SMC, but one of the requirements for the credit line was a letter
of credit. Thus, Goroza applied for and was granted a letter of credit by the PNB in the amount of two
million pesos (P2,000,000.00). Under the credit agreement, the PNB has the obligation to release
the proceeds of Goroza's credit line to SMC upon presentation of the invoices and official receipts of
Goroza's purchases of SMC beer products to the PNB, Butuan Branch.
On August 1, 1996, Goroza availed of his credit line with PNB and started selling SMC's beer
products x x x.
On February 11, 1997, Goroza applied for an additional credit line with the PNB. The latter granted
Goroza a one (1) year revolving credit line in the amount not exceeding two million four hundred
thousand pesos (P2,400,000.00). Thus, Goroza's total credit line reached four million four hundred
thousand pesos (P4,400,000.00) x x x. Initially, Goroza was able to pay his credit purchases with
SMC x x x. Sometime in January 1998, however, Goroza started to become delinquent with his
accounts.
Demands to pay the amount of three million seven hundred twenty-two thousand four hundred forty
pesos and 88/100 (P3,722,440.88) were made by SMC against Goroza and PNB, but neither of
them paid. Thus, on April 23, 2003, SMC filed a Complaint for collection of sum of money against
PNB and Goroza with the respondent Regional Trial Court Branch 3, Butuan City.
3

After summons, herein petitioner filed its Answer, while Goroza did not. Upon respondent's Motion to
Declare Defendant in Default, Goroza was declared in default.
4

Trial ensued insofar as Goroza was concerned and respondent presented its evidence ex parte
against the former. Respondent made a formal offer of its exhibits on April 6, 2004 and the trial court
admitted them on June 16, 2004.

Thereafter, on January 21, 2005, pre-trial between PNB and SMC was held.

On May 10, 2005, the RTC rendered a Decision, disposing as follows:

7

WHEREFORE, the Court hereby renders judgment in favor of plaintiff [SMC] ordering defendant
Rodolfo Goroza to pay plaintiff the following:
1. The principal amount of P3,722,440.00;
2. The interest of 12% per annum on the principal amount reckoned from January 27, 1998
up to the time of execution of the Judgment of this case;
3. Attorney's fees of P30,000.00;
4. Litigation expenses of P20,000.00.
SO ORDERED.

Goroza filed a Notice of Appeal, while SMC filed a Motion for Reconsideration.
9

10

On July 14, 2005, the RTC granted SMC's motion for reconsideration. The trial court amended its
Decision by increasing the award of litigation expenses to P90,652.50.
11

Thereafter, on July 25, 2005, the RTC issued an Order, pertinent portions of which read as follows:
12

xxxx
Finding the Notice of Appeal filed within the reglementary period and the corresponding appeal fee
paid, x x x. The same is hereby given due course.
Considering that the case as against defendant PNB is still on-going, let the Record in this case
insofar as defendant Rodolfo R. Goroza is concerned, be reproduced at the expense of defendantappellant so that the same can be forwarded to the Court of Appeals, together with the exhibits and
transcript of stenographic notes in the required number of copies.
SO ORDERED.

13

In the meantime, trial continued with respect to PNB.

On September 27, 2005, PNB filed an Urgent Motion to Terminate Proceedings on the ground that
a decision was already rendered on May 10, 2005 finding Goroza solely liable.
14

The RTC denied PNB's motion in its Resolution dated October 11, 2005.
15

On October 14, 2005, the RTC issued a Supplemental Judgment, thus:

16

The Court omitted by inadvertence to insert in its decision dated May 10, 2005 the phrase "without
prejudice to the decision that will be made against the other co-defendant, PNB, which was not
declared in default."
WHEREFORE, the phrase "without prejudice to the decision made against the other defendant PNB
which was not declared in default" shall be inserted in the dispositive portion of said decision.
SO ORDERED.

17

On even date, the RTC also issued an Amended Order, to wit:

18

The Court's Order dated July 25, 2005 is hereby amended to include the phrase "this appeal applies
only to defendant Rolando Goroza and without prejudice to the continuance of the hearing on the
other defendant Philippine National Bank".
SO ORDERED.

19

PNB then filed a Motion for Reconsideration of the above-quoted Supplemental Judgment and
Amended Order, but the RTC denied the said motion via its Resolution dated July 6, 2006.
20

21

Aggrieved, PNB filed a special civil action for certiorari with the CA imputing grave abuse of
discretion on the part of the RTC for having issued its July 6, 2006 Resolution.
22

On June 17, 2008, the CA rendered its questioned Decision denying the petition and affirming the
assailed Resolution of the RTC.
PNB filed a Motion for Reconsideration, but the CA denied it in its assailed Resolution. Hence, the
instant petition with the following Assignment of Errors:
23

THE COURT OF APPEALS ERRED IN HOLDING THAT THE TRIAL COURT WAS CORRECT IN
RENDERING A SUPPLEMENTAL JUDGMENT AND AMENDED ORDER AGAINST THE BANK
DESPITE THE PERFECTION OF APPEAL OF ONE OF THE DEFENDANTS.
THE COURT OF APPEALS ERRED IN HOLDING THAT PROCEEDINGS MAY CONTINUE
AGAINST PNB DESPITE THE COMPLETE ADJUDICATION OF RELIEF IN FAVOR OF SMC.

24

PNB contends that the CA erred in holding that the RTC was correct in rendering its Supplemental
Judgment and Amended Order despite the perfection of Goroza's appeal. PNB claims that when
Goroza's appeal was perfected, the RTC lost jurisdiction over the entire case making the assailed
Supplemental Judgment and Amended Order void for having been issued without or in excess of
jurisdiction.
PNB also argues that the CA erred in ruling that proceedings against it may continue in the RTC,
despite the trial court's complete adjudication of relief in favor of SMC. PNB avers that the May 10,
2005 Decision of the RTC, finding Goroza solely liable to pay the entire amount sought to be
recovered by SMC, has settled the obligation of both Goroza and PNB, and that there is no longer

any ground to hold PNB for trial and make a separate judgment against it; otherwise, SMC will
recover twice for the same cause of action.
The petition lacks merit.
It is clear from the proceedings held before and the orders issued by the RTC that the intention of
the trial court is to conduct separate proceedings to determine the respective liabilities of Goroza
and PNB, and thereafter, to render several and separate judgments for or against them. While
ideally, it would have been more prudent for the trial court to render a single decision with respect to
Goroza and PNB, the procedure adopted the RTC is, nonetheless, allowed under Section 4, Rule 36
of the Rules of Court, which provides that "in an action against several defendants, the court may,
when a several judgment is proper, render judgment against one or more of them, leaving the action
to proceed against the others." In addition, Section 5 of the same Rule states that "when more than
one claim for relief is presented in an action, the court at any stage, upon a determination of the
issues material to a particular claim and all counterclaims arising out of the transaction or occurrence
which is the subject matter of the claim may render a separate judgment disposing of such claim."
Further, the same provision provides that "the judgment shall terminate the action with respect to the
claim so disposed of and the action shall proceed as to the remaining claims." Thus, the appeal of
Goroza, assailing the judgment of the RTC finding him liable, will not prevent the continuation of the
ongoing trial between SMC and PNB. The RTC retains jurisdiction insofar as PNB is concerned,
because the appeal made by Goroza was only with respect to his own liability. In fact, PNB itself, in
its Reply to respondent's Comment, admitted that the May 10, 2005 judgment of the RTC was
"decided solely against defendant Rodolfo Goroza."
25

The propriety of a several judgment is borne by the fact that SMC's cause of action against PNB
stems from the latter's alleged liability under the letters of credit which it issued. On the other hand,
SMC's cause of action against Goroza is the latter's failure to pay his obligation to the former. As to
the separate judgment, PNB has a counterclaim against SMC which is yet to be resolved by the
RTC.
1wphi1

Indeed, the issues between SMC and PNB which are to be resolved by the RTC, as contained in the
trial court's Pre-Trial Order dated January 21, 2005, were not addressed by the RTC in its Decision
rendered against Goroza. In particular, the RTC judgment against Goroza did not make any
determination as to whether or not PNB is liable under the letter of credit it issued and, if so, up to
what extent is its liability. In fact, contrary to PNB's claim, there is nothing in the RTC judgment which
ruled that Goroza is "solely liable" to pay the amount which SMC seeks to recover.
In this regard, this Court's disquisition on the import of a letter of credit, in the case ofTransfield
Philippines, Inc. v. Luzon Hydro Corporation, as correctly cited by the CA, is instructive, to wit:
26

By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the
addressee to pay money or deliver goods to a third person and assumes responsibility for payment
of debt therefor to the addressee. A letter of credit, however, changes its nature as different
transactions occur and if carried through to completion ends up as a binding contract between the
issuing and honoring banks without any regard or relation to the underlying contract or disputes
between the parties thereto.

xxxx
Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the
draft and the required documents are presented to it. The so-called "independence principle"
assures the seller or the beneficiary of prompt payment independent of any breach of the main
contract and precludes the issuing bank from determining whether the main contract is actually
accomplished or not. Under this principle, banks assume no liability or responsibility for the form,
sufficiency, accuracy, genuineness, 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.
xxxx
As discussed above, in a letter of credit transaction, such as in this case, where the credit is
stipulated as irrevocable, there is a definite undertaking by the issuing bank to pay the beneficiary
provided that the stipulated documents are presented and the conditions of the credit are complied
with. Precisely, the independence principle liberates the issuing bank from the duty of ascertaining
compliance by the parties in the main contract. As the principle's nomenclature clearly suggests, the
obligation under the letter of credit is independent of the related and originating contract. In brief, the
letter of credit is separate and distinct from the underlying transaction.
27

In other words, PNB cannot evade responsibility on the sole ground that the RTC judgment found
Goroza liable and ordered him to pay the amount sought to be recovered by SMC. PNB's liability, if
any, under the letter of credit is yet to be determined.
WHEREFORE, the instant petition is DENIED. The Decision of the Court of Appeals, dated June 17,
2008, and its Resolution dated December 15, 2008, both in CA-G.R. SP No. 01249-MIN, are
AFFIRMED.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 81559-60 April 6, 1992
PEOPLE OF THE PHILIPPINES, (public petitioner) and ALLIED BANKING
CORPORATION (private petitioner),
vs.
HON. JUDGE DAVID G. NITAFAN (public respondent) and BETTY SIA ANG (private respondent).

GUTIERREZ, JR., J.:

This petition for certiorari involves an issue that has been raised before this Court several times in
the past. The petitioner, in effect, is asking for a re-examination of our decisions on the issue of
whether or not an entrustee in a trust receipt agreement who fails to deliver the proceeds of the sale
or to return the goods if not sold to the entruster-bank is liable for the crime of estafa.
Petitioner Allied Banking Corporation charged Betty Sia Ang with estafa in Criminal Case No. 8753501 in an information which alleged:
That on or about July 18, 1980, in the City of Manila, Philippines, the said accused,
being then the proprietress of Eckart Enterprises, a business entity located at 756
Norberto Amoranto Avenue, Quezon City, did then and there wilfully, unlawfully and
feloniously defraud the Allied Banking Corporation, a banking institution, represented
by its Account Officer, Raymund S. Li, in the following manner, to wit: the said
accused received in trust from the aforesaid bank Gordon Plastics, plastic sheeting
and Hook Chromed, in the total amount of P398,000.00, specified in a trust receipt
and covered by Domestic Letter of Credit No. DLC-002-801254, under the express
obligation on the part of said accused to sell the same and account for the proceeds
of the sale thereof, if sold, or to return said merchandise, if not sold, on or before
October 16, 1980, or upon demand, but the said accused, once in possession of the
said articles, far from complying with the aforesaid obligation, notwithstanding
repeated demands made upon her to that effect, paid only the amount of
P283,115.78, thereby leaving unaccounted for the amount of P114,884.22 which,
once in her possession, with intent to defraud, she misappropriated, misapplied and
converted to her own personal use and benefit, to the damage and prejudice of said
Allied Banking Corporation in the aforesaid sum of P114,884.22, Philippine Currency.
(Rollo, pp. 13-14)
The accused filed a motion to quash the information on the ground that the facts charged do not
constitute an offense.
On January 7, 1988, the respondent judge granted the motion to quash. The order was anchored on
the premise that a trust receipt transaction is an evidence of a loan being secured so that there is, as
between the parties to it, a creditor-debtor relationship. The court ruled that the penal clause of
Presidential Decree No. 15 on the Trust Receipts Law is inoperative because it does not actually
punish an offense mala prohibita. The law only refers to the relevant estafa provision in the Revised
Penal Code. The Court relied on the judicial pronouncements in People v. Cuevo, 104 SCRA 312
[1981] where, for lack of the required number of votes, this Court upheld the dismissal of a charge
for estafa for a violation of a trust receipt agreement; and in Sia v. People, 121 SCRA 655 [1983]
where we held that the violation merely gives rise to a civil obligation. At the time the order to quash
was issued or on January 7, 1988, these two decisions were the only most recent ones. Hence, this
petition.

The private respondent adopted practically the same stance of the lower court. She likewise asserts
that P.D. 115 is unconstitutional as it violates the constitutional prohibition against imprisonment for
non-payment of a debt. She argues that where no malice exists in a breach of a purely commercial
undertaking, P.D. 115 imputes it.
This Court notes that the petitioner bank brought a similar case before this Court in G.R. No. 82495,
entitled Allied Banking Corporation v. Hon. Secretary Sedfrey Ordoez and Alfredo Ching which we
decided on December 10, 1990 (192 SCRA 246). In that case, the petitioner additionally questioned,
and we accordingly reversed, the pronouncement of the Secretary of Justice limiting the application
of the penal provision of P.D. 115 only to goods intended to be sold to the exclusion of those still to
be manufactured.
As in G.R. No. 82495, we resolve the instant petition in the light of the Court's ruling in Lee v.
Rodil, 175 SCRA 100 [1989] and Sia v. Court of Appeals, 166 SCRA 263 [1988]. We have held in the
latter cases that acts involving the violation of trust receipt agreements occurring after 29 January
1973 (date of enactment of P.D. 115) would make the accused criminally liable for estafa under
paragraph 1 (b), Article 315 of the Revised Penal Code (RPC) pursuant to the explicit provision in
Section 13 of P.D. 115.
The relevant penal provision of P.D. 115 provides:
Sec. 13 of P.D. No. 115 provides:
. . . Penalty clause. The failure of an entrustee to turn over the proceeds of the
sale of the goods, documents or instruments covered by a trust receipt to the extent
of the amount owing to the entruster or as appears 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 Article Three Hundred and Fifteen, paragraph one
(b) of Act Numbered Three Thousand Eight Hundred and Fifteen, as amended,
otherwise known as the Revised Penal Code. If the violation or offense is committed
by a corporation, partnership, association or other juridical entities, the
penalty provided for in this Decree shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for the offense, without
prejudice to the civil liabilities arising from the criminal offense.
Section 1 (b), Article 315 of the RPC under which the violation is made to fall, states:
. . . Swindling (estafa). Any person who shall defraud another by any of the means
mentioned herein below . . . :
xxx xxx xxx
b. By misappropriating or converting, to the prejudice of another, money, goods, or
any other personal property received by the offender in trust or on commission, or for
administration, or under any other obligation involving the duty to make delivery of or

to return the same, even though such obligation be totally or partially guaranteed by
a bond; or by denying having received such money, good, or other property.
The factual circumstances in the present case show that the alleged violation was committed
sometime in 1980 or during the effectivity of P.D. 115. The failure, therefore, to account for the
P114,884.22 balance is what makes the accused-respondent criminally liable for estafa. The Court
reiterates its definitive ruling that, in the Cuevo and Sia(1983) cases relied upon by the accused,
P.D. 115 was not applied because the questioned acts were committed before its effectivity. (Lee v.
Rodil, supra, p. 108) At the time those cases were decided, the failure to comply with the obligations
under the trust receipt was susceptible to two interpretations. The Court in Sia adopted the view that
a violation gives rise only to a civil liability as the more feasible view "before the promulgation of P.D.
115," notwithstanding prior decisions where we ruled that a breach also gives rise to a liability for
estafa. (People v. Yu Chai Ho, 53 Phil. 874 [1929]; Samo v. People, 115 Phil. 346 [1962]; Philippine
National Bank v. Arrozal, 103 Phil. 213 [1958]; Philippine National Bank v. Viuda e Hijos de Angel
Jose, 63 Phil. 814 [1936]).
Contrary to the reasoning of the respondent court and the accused, a trust receipt arrangement does
not involve a simple loan transaction between a creditor and debtor-importer. Apart from a loan
feature, the trust receipt arrangement has a security feature that is covered by the trust receipt itself.
(Vintola v. Insular Bank of Asia and America, 151 SCRA 578 [1987]) That second feature is what
provides the much needed financial assistance to our traders in the importation or purchase of
goods or merchandise through the use of those goods or merchandise as collateral for the
advancements made by a bank. (Samo v. People, supra). The title of the bank to the security is the
one sought to be protected and not the loan which is a separate and distinct agreement.
The Trust Receipts Law punishes the dishonesty and abuse of confidence in the handling of money
or goods to the prejudice of another regardless of whether the latter is the owner or not. The law
does not seek to enforce payment of the loan. Thus, there can be no violation of a right against
imprisonment for non-payment of a debt.
Trust receipts are indispensable contracts in international and domestic business transactions. The
prevalent use of trust receipts, the danger of their misuse and/or misappropriation of the goods or
proceeds realized from the sale of goods, documents or instruments held in trust for entruster-banks,
and the need for regulation of trust receipt transactions to safeguard the rights and enforce the
obligations of the parties involved are the main thrusts of P.D. 115. As correctly observed by the
Solicitor General, P.D. 115, like Batas Pambansa Blg. 22, punishes the act "not as an offense
against property, but as an offense against public order. . . ." The misuse of trust receipts therefore
should be deterred to prevent any possible havoc in trade circles and the banking community (citing
Lozano v. Martinez, 146 SCRA 323 [1986]; Rollo, p. 57) It is in the context of upholding public
interest that the law now specifically designates a breach of a trust receipt agreement to be an act
that "shall" make one liable for estafa.
The offense is punished as a malum prohibitum regardless of the existence of intent or malice. A
mere failure to deliver the proceeds of the sale or the goods if not sold, constitutes a criminal offense
that causes prejudice not only to another, but more to the public interest.

We are continually re-evaluating the opposite view which insists that the violation of a trust receipt
agreement should result only in a civil action for collection. The respondent contends that there is no
malice involved. She cites the dissent of the late Chief Justice Claudio Teehankee in Ong v. Court of
Appeals, (124 SCRA 578 [1983]) to wit:
The old capitalist orientation of putting importers in jail for supposed estafa or
swindling for non-payment of the price of the imported goods released to them under
trust receipts (a purely commercial transaction) under the fiction of the trust receipt
device, should no longer be permitted in this day and age.
As earlier stated, however, the law punishes the dishonesty and abuse of confidence in the handling
of money or goods to the prejudice of the bank.
The Court reiterates that the enactment of P.D. 115 is a valid exercise of the police power of the
State and is, thus, constitutional. (Lee v. Rodil, supra; Lozano v. Martinez, supra) The arguments of
the respondent are appropriate for a repeal or modification of the law and should be directed to
Congress. But until the law is repealed, we are constrained to apply it.
WHEREFORE, the petition is hereby GRANTED. The Order of the respondent Regional Trial Court
of Manila, Branch 52 dated January 7, 1988 is SET ASIDE. Let this case be remanded to the said
court for disposition in accordance with this decision.
SO ORDERED.
Feliciano, Bidin, Davide, Jr. and Romero, JJ., concur.

SECOND DIVISION

[G.R. NO. 117913. February 1, 2002]

CHARLES LEE, CHUA SIOK SUY, MARIANO SIO, ALFONSO YAP,

RICHARD VELASCO and ALFONSO CO, petitioners, vs. COURT
OF
APPEALS
and
PHILIPPINE
BANK
OF
COMMUNICATIONS, respondents.

[G.R. NO. 117914. February 1, 2002]

MICO METALS CORPORATION, petitioner, vs. COURT OF APPEALS

and PHILIPPINE BANK OF COMMUNICATIONS, respondents.
DECISION
DE LEON, JR., J:

Before us is the joint and consolidated petition for review of the

Decision dated June 15, 1994 of the Court of Appeals in CA-G.R. CV No.
27480 entitled, Philippine Bank of Communications vs. Mico Metals
Corporation, Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard
Velasco and Alfonso Co, which reversed the decision of the Regional Trial
Court (RTC) of Manila, Branch 55 dismissing the complaint for a sumof money
filed by private respondent Philippine Bank of Communications against herein
petitioners, Mico Metals Corporation (MICO, for brevity), Charles Lee,
Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso Co.
The dispositive portion of the said Decision of the Court of Appeals, reads:
[1]

[2]

[3]

WHEREFORE, the decision of the Regional Trial Court is hereby reversed and in lieu
thereof, a new one is entered:
a) Ordering the defendants-appellees jointly and severally to pay plaintiff PBCom the
sum of Five million four hundred fifty-one thousand six hundred sixty-three pesos
and ninety centavos (P5,451,663.90) representing defendants-appellees unpaid
obligations arising from ordinary loans granted by the plaintiff plus legal interest until
fully paid.
b) Ordering defendants-appellees jointly and severally to pay PBCom the sum of Four
hundred sixty-one thousand six hundred pesos and sixty-six centavos (P46
1,600.66) representing defendants-appellees unpaid obligations arising from their
letters of credit and trust receipt transactions with plaintiff PBCom plus legal interest
until fully paid.
c) Ordering defendants-appellees jointly and severally to pay PBCom the sum
of P50,000.00 as attorneys fees.

No pronouncement as to costs.
The facts of the case are as follows:
On March 2, 1979, Charles Lee, as President of MICO wrote private
respondent Philippine Bank of Communications (PBCom) requesting for a
grant of a discounting loan/credit line in the sum of Three Million Pesos
(P3,000,000.00) for the purpose of carrying out MICOs line of business as
well as to maintain its volume of business.

On the same day, Charles Lee requested for another discounting

loan/credit line of Three Million Pesos (P3,000,000.00) from PBCom for the
purpose of opening letters of credit and trust receipts.
In connection with the requests for discounting loan/credit
lines, PBCom was furnished by MICO the following resolution which was
adopted unanimously by MICOs Board of Directors:
RESOLVED, that the President, Mr. Charles Lee, and the Vice-President and General
Manager, Mr. Mariano A. Sio, singly or jointly, be and they are duly authorized and
empowered for and in behalf of this Corporation to apply for, negotiate and secure the
approval of commercial loans and other banking facilities and accommodations, such
as, but not limited to discount loans, letters of credit, trust receipts, lines for marginal
deposits on foreign and domestic letters of credit, negotiate out-of-town checks, etc.
from the Philippine Bank of Communications, 216 Juan Luna, Manila in such sums as
they shall deem advantageous, the principal of all of which shall not exceed the total
amount of TEN MILLION PESOS (P10,000,000.00), Philippine Currency, plus any
interests that may be agreed upon with said Bank in such loans and other credit lines
of the same kind and such further terms and conditions as may, upon granting of said
loans and other banking facilities, be imposed by the Bank; and to make, execute, sign
and deliver any contracts of mortgage, pledge or sale of one, some or all of the
properties of the Company, or any other agreements or documents of whatever nature
or kind, including the signing, indorsing, cashing, negotiation and execution of
promissory notes, checks, money orders or other negotiable instruments, which may
be necessary and proper in connection with said loans and other banking facilities, or
with their amendments, renewals and extensions of payment of the whole or any part
thereof.
[4]

On March 26, 1979, MICO availed of the first loan of One Million Pesos
(P1,000,000.00) from PBCom. Upon maturity of the loan, MICO caused the
same to be renewed, the last renewal of which was made on May 21,
1982 under Promissory Note BNA No. 26218.
[5]

Another loan of One Million Pesos (P1,000,000.00) was availed of by

MICO from PBCom which was likewise later on renewed, the last renewal of
which was made on May 21, 1982 under Promissory Note BNA No. 26219.
To complete MICOs availment of Three Million Pesos (P3,000,000.00)
discounting loan/credit line with PBCom, MICO availed of another loan
from PBCom in the sum of One Million Pesos (P1,000,000.00) on May 24,
1979. As in previous loans, this was rolled over or renewed, the last renewal
of which was made on May 25, 1982 under Promissory Note BNA No. 26253.
[6]

[7]

As security for the loans, MICO through its Vice-President and General
Manager, Mariano Sio, executed on May 16, 1979 a Deed of Real Estate
Mortgage over its properties situated in Pasig, Metro Manila covered by
Transfer Certificates of Title (TCT) Nos. 11248 and 11250.
On March 26, 1979 Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap
and Richard Velasco, in their personal capacities executed a Surety
Agreement in favor of PBCom whereby the petitioners jointly and severally,
guaranteed the prompt payment on due dates or at maturity of overdrafts,
promissory notes, discounts, drafts, letters of credit, bills of exchange, trust
receipts, and other obligations of every kind and nature, for which MICO may
be held accountable by PBCom. It was provided, however, that the liability of
the sureties shall not at any one time exceed the principal amount of Three
Million Pesos (P3,000,000.00) plus interest, costs, losses, charges and
expenses including attorneys fees incurred by PBCom in connection
therewith.
[8]

On July 14, 1980, petitioner Charles Lee, in his capacity as president of

MICO, wrote PBCom and applied for an additional loan in the sum of Four
Million Pesos (P4,000,000.00). The loan was intended for the expansion and
modernization of the companys machineries. Upon approval of the said
application for loan, MICO availed of the additional loan of Four Million Pesos
(P4,000,000.00) as evidenced by Promissory Note TA No. 094.
[9]

As per agreement, the proceeds of all the loan availments were credited
to MICOs current checking account with PBCom. To induce the PBCom to
increase the credit line of MICO, Charles Lee, Chua Siok Suy, Mariano Sio,
Alfonso Yap, Richard Velasco and Alfonso Co (hereinafter referred to as
petitioners-sureties), executed another surety agreement in favor
of PBCom on July 28, 1980, whereby they jointly and severally guaranteed
the prompt payment on due dates or at maturity of overdrafts, promissory
notes, discounts, drafts, letters of credit, bills of exchange, trust receipts and
all other obligations of any kind and nature for which MICO may be held
accountable by PBCom. It was provided, however, that their liability shall not
at any one time exceed the sum of Seven Million Five Hundred Thousand
Pesos (P7,500,000.00) including interest, costs, charges, expenses and
attorneys fees incurred by MICO in connection therewith.
[10]

On July 29, 1980, MICO furnished PBCom with a notarized certification

issued by its corporate secretary, Atty. P.B. Barrera, that Chua Siok Suy was
duly authorized by the Board of Directors to negotiate on behalf of MICO for
loans and other credit availments from PBCom. Indicated in the certification
was the following resolution unanimously approved by the Board of Directors:

RESOLVED, AS IT IS HEREBY RESOLVED, That Mr. Chua Siok Suy be, as he is

hereby authorized and empowered, on behalf of MICO METALS CORPORATION
from time to time, to borrow money and obtain other credit facilities, with or without
security, from the PHILIPPINE BANK OF COMMUNICATIONS in such amount(s)
and under such terms and conditions as he may determine, with full power and
authority to execute, sign and deliver such contracts, instruments and papers in
connection therewith, including real estate and chattel mortgages, pledges and
assignments over the properties of the Corporation; and to renew and/or extend
and/or roll-over and/or reavail of the credit facilities granted thereunder, either for
lesser or for greater amount(s), the intention being that such credit facilities and all
securities of whatever kind given as collaterals therefor shall be a continuing security.
RESOLVED FURTHER, That said bank is hereby authorized, empowered and
directed to rely on the authority given hereunder, the same to continue in full force
and effect until written notice of its revocation shall be received by said Bank.
[11]

On July 2, 1981, MICO filed with PBCom an application for a domestic

letter of credit in the sum of Three Hundred Forty-Eight Thousand Pesos
(P348,000.00). The corresponding irrevocable letter of credit was approved
and opened under LC No. L-16060. Thereafter, the domestic letter of credit
was negotiated and accepted by MICO as evidenced by the corresponding
bank draft issued for the purpose. After the supplier of the merchandise was
paid, a trust receipt upon MICOs own initiative, was executed in favor
of PBCom.
[12]

[13]

[14]

[15]

On September 14, 1981, MICO applied for another domestic letter of

credit with PBCom in the sum of Two Hundred Ninety Thousand Pesos
(P290,000.00). The corresponding irrevocable letter of credit was issued
on September 22, 1981 under LC No. L-16334. After the beneficiary of the
said letter of credit was paid by PBCom for the price of the merchandise, the
goods were delivered to MICO which executed a corresponding trust
receipt in favor of PBCom.
[16]

[17]

[18]

On November 10, 1981, MICO applied for authority to open a foreign letter
of credit in favor of Ta Jih Enterprises Co., Ltd., and thus, the corresponding
letter of credit was then issued by PBCom with a cable sent to the
beneficiary, Ta Jih Enterprises Co., Ltd. advising that said beneficiary may
draw funds from the account of PBCom in its correspondent banks New York
Office. PBCom also informed its corresponding bank inTaiwan, the Irving
Trust Company, of the approved letter of credit. The correspondent bank
acknowledged PBComs advice through a confirmation letter and by debiting
from PBComs account with the said correspondent bank the sum of Eleven
[19]

[20]

[21]

[22]

Thousand Nine Hundred Sixty US Dollars ($11 ,960.00). As in past

transactions, MICO executed in favor of PBCom a corresponding trust receipt.
[23]

[24]

On January 4, 1982, MICO applied, for authority to open a foreign letter of

credit in the sum of One Thousand Nine Hundred US Dollars ($1,900.00),
with PBCom. Upon approval, the corresponding letter of credit denominated
as LC No. 62293 was issued whereupon PBCom advised its correspondent
bank and MICO of the same. Negotiation and proper acceptance of the letter
of credit were then made by MICO. Again, a corresponding trust receipt was
executed by MICO in favor of PBCom.
[25]

[26]

[27]

[28]

In all the transactions involving foreign letters of credit, PBCom turned

over to MICO the necessary documents such as the bills of lading and
commercial invoices to enable the latter to withdraw the goods from
the portof Manila.
On May 21, 1982 MICO obtained from PBCom another loan in the sum of
Three Hundred Seventy-Seven Thousand Pesos (P377,000.00) covered by
Promissory Note BA No. 7458.
[29]

Upon maturity of all credit availments obtained by MICO from PBCom, the
latter made a demand for payment. For failure of petitioner MICO to pay the
obligations
incurred
despite
repeated
demands,
private
respondent PBCom extrajudicially foreclosed MICOs real estate mortgage
and sold the said mortgaged properties in a public auction sale held
on November 23, 1982. Private respondent PBCom which emerged as the
highest bidder in the auction sale, applied the proceeds of the purchase price
at public auction of Three Million Pesos (P3,000,000.00) to the expenses of
the foreclosure, interest and charges and part of the principal of the loans,
leaving an unpaid balance of Five Million Four Hundred Forty-One Thousand
Six Hundred Sixty-Three Pesos and Ninety Centavos (P5,441,663.90)
exclusive of penalty and interest charges. Aside from the unpaid balance of
Five Million Four Hundred Forty-One Thousand Six Hundred Sixty-Three
Pesos and Ninety Centavos (P5,441,663.90), MICO likewise had another
standing obligation in the sum of Four Hundred Sixty-One Thousand Six
Hundred Pesos and Six Centavos (P461,600.06) representing its trust
receipts liabilities to private respondent. PBCom then demanded the
settlement of the aforesaid obligations from herein petitioners-sureties who,
however, refused to acknowledge their obligations to PBCom under the surety
agreements. Hence, PBCom filed a complaint with prayer for writ of
preliminary attachment before the Regional Trial Court of Manila, which was
raffled to Branch 55, alleging that MICO was no longer in operation and had
no properties to answer for its obligations. PBCom further alleged that
[30]

petitioner Charles Lee has disposed or concealed his properties with intent to
defraud his creditors. Except for MICO and Charles Lee, the sheriff of the RTC
failed to serve the summons on herein petitioners-sureties since they were all
reportedly abroad at the time. An alias summons was later issued but the
sheriff was not able to serve the same to petitioners Alfonso Co and
Chua Siok Suy who was already sickly at the time and reportedly
in Taiwan where he later died.
Petitioners (MICO and herein petitioners-sureties) denied all the
allegations of the complaint filed by respondent PBCom, and alleged that: a)
MICO was not granted the alleged loans and neither did it receive the
proceeds of the aforesaid loans; b) Chua Siok Suy was never granted any
valid Board Resolution to sign for and in behalf of MICO; c) PBCom acted in
bad faith in granting the alleged loans and in releasing the proceeds thereof;
d) petitioners were never advised of the alleged grant of loans and the
subsequent releases therefor, if any; e) since no loan was ever released to or
received by MICO, the corresponding real estate mortgage and the surety
agreements signed concededly by the petitioners-sureties are null and void.
The trial court gave credence to the testimonies of herein petitioners and
dismissed the complaint filed by PBCom. The trial court likewise declared the
real estate mortgage and its foreclosure null and void. In ruling for herein
petitioners, the trial court said that PBCom failed to adequately prove that the
proceeds of the loans were ever delivered to MICO. The trial court pointed
out, among others, that while PBCom claimed that the proceeds of the Four
Million Pesos (P4,000,000.00) loan covered by promissory note TA 094 were
deposited to the current account of petitioner MICO, PBCom failed to produce
the ledger account showing such deposit. The trial court added that
while PBCom may have loaned to MICO the other sums of Three Hundred
Forty-Eight Thousand Pesos (P348,000.00) and Two Hundred Ninety
Thousand Pesos (P290,000.00), no proof has been adduced as to the
existence of the goods covered and paid by the said amounts. Hence,
inasmuch as no consideration ever passed from PBCom to MICO, all the
documents involved therein, such as the promissory notes, real estate
mortgage including the surety agreements were all void or nonexistent for lack
of cause or consideration. The trial court said that the lack of proof as regards
the existence of the merchandise covered by the letters of credit bolstered the
claim of herein petitioners that no purchases of the goods were really made
and that the letters of credit transactions were simply resorted to by
the PBCom and Chua Siok Suy to accommodate the latter in his financial
requirements.

The Court of Appeals reversed the ruling of the trial court, saying that the
latter committed an erroneous application and appreciation of the rules
governing the burden of proof. Citing Section 24 of the Negotiable Instruments
Law which 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 thereto for
value, the Court of Appeals said that while the subject promissory notes and
letters of credit issued by the PBCom made no mention of delivery of cash, it
is presumed that said negotiable instruments were issued for valuable
consideration. The Court of Appeals also cited the case of Gatmaitan vs.
Court of Appeals which holds that "there is a presumption that an
instrument sets out the true agreement of the parties thereto and that it
was executed for valuable consideration. The appellate court noted and
found that a notarized Certification was issued by MICOs corporate secretary,
P.B. Barrera, that Chua Siok Suy, was duly authorized by the Board of
Directors of MICO to borrow money and obtain credit facilities from PBCom.
[31]

Petitioners filed a motion for reconsideration of the challenged decision of

the Court of Appeals but this was denied in a Resolution dated November 7,
1994 issued by its Former Second Division. Petitioners-sureties then filed a
petition for review on certiorari with this Court, docketed as G.R. No. 117913,
assailing the decision of the Court of Appeals. MICO likewise filed a separate
petition for review on certiorari, docketed as G.R. No. 117914, with this Court
assailing the same decision rendered by the Court of Appeals. Upon motion
filed by petitioners, the two (2) petitions were consolidated on January 11,
1995.
[32]

Petitioners contend that there was no proof that the proceeds of the loans
or the goods under the trust receipts were ever delivered to and received by
MICO. But the record shows otherwise. Petitioners-sureties further contend
that assuming that there was delivery by PBCom of the proceeds of the loans
and the goods, the contracts were executed by an unauthorized person, more
specifically Chua Siok Suy who acted fraudulently and in collusion
with PBCom to defraud MICO.
The pertinent issues raised in the consolidated cases at bar are: a)
whether or not the proceeds of the loans and letters of credit transactions
were ever delivered to MICO, and b) whether or not the individual petitioners,
as sureties, may be held liable under the two (2) Surety Agreements executed
on March 26, 1979 and July 28, 1980.
In civil cases, the party having the burden of proof must establish his case
by preponderance of evidence. Preponderance of evidence means evidence
[33]

which is more convincing to the court as worthy of belief than that which is
offered in opposition thereto. Petitioners contend that the alleged promissory
notes, trust receipts and surety agreements attached to the complaint filed
by PBCom did not ripen into valid and binding contracts inasmuch as there is
no evidence of the delivery of money or loan proceeds to MICO or to any of
the petitioners-sureties. Petitioners claim that under normal banking practice,
borrowers are required to accomplish promissory notes in blank even before
the grant of the loans applied for and such documents become valid written
contracts only when the loans are actually released to the borrower.
We are not convinced.
During the trial of an action, the party who has the burden of proof upon an
issue may be aided in establishing his claim or defense by the operation of a
presumption, or, expressed differently, by the probative value which the law
attaches to a specific state of facts. A presumption may operate against his
adversary who has not introduced proof to rebut the presumption. The effect
of a legal presumption upon a burden of proof is to create the necessity of
presenting evidence to meet the legal presumption or the prima facie case
created thereby, and which if no proof to the contrary is presented and offered,
will prevail. The burden of proof remains where it is, but by the presumption
the one who has that burden is relieved for the time being from introducing
evidence in support of his averment, because the presumption stands in the
place of evidence unless rebutted.
Under Section 3, Rule 131 of the Rules of Court the following
presumptions, among others, are satisfactory if uncontradicted: a) That there
was a sufficient consideration for a contract and b) That a negotiable
instrument was given or indorsed for sufficient consideration. As observed by
the Court of Appeals, a similar presumption is found in Section 24 of the
Negotiable Instruments Law which 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. Negotiable instruments which are meant to be substitutes for money,
must conform to the following requisites to be considered as such a) it must
be in writing; b) it must be signed by the maker or drawer; c) it must contain
an unconditional promise or order to pay a sum certain in money; d) it must be
payable on demand or at a fixed or determinable future time; e) it must be
payable to order or bearer; and f) where it is a bill of exchange,
the drawee must be named or otherwise indicated with reasonable certainty.
Negotiable instruments include promissory notes, bills of exchange and
checks. Letters of credit and trust receipts are, however, not negotiable

instruments. But drafts issued in connection with letters of credit are

negotiable instruments.
Private respondent PBCom presented the following documentary evidence
to prove petitioners credit availments and liabilities:
1) Promissory Note No. BNA 26218 dated May 21,
of P1,000,000.00 executed by MICO in favor of PBCom.

1982

in

the

sum

2) Promissory Note No. BNA 26219 dated May 21,

of P1,000,000.00 executed by MICO in favor of PBCom.

1982

in

the

sum

3) Promissory Note No. BNA 26253 dated May 25,

of P1,000,000.00 executed by MICO in favor of PBCom.

1982

in

the

sum

4) Promissory Note No. BNA 7458 dated May

of P377,000.00 executed by MICO in favor of PBCom.

1982

in

the

sum

21,

5) Promissory
Note
No.
TA 094
dated July
29,
of P4,000.000.00 executed by MICO in favor of PBCom.

1980 in

the

sum

6) Irrevocable letter of credit No. L-16060 dated July 2,1981 issued in favor
of Perez Battery Center for account of Mico Metals Corp.
7) Draft dated July 2, 1981 in the sum of P348,000.00 issued by Perez Battery Center,
beneficiary of irrevocable Letter of Credit No. No. L-16060 and accepted by MICO
Metals corporation.
8) Letter dated July 2, 1981 from Perez Battery Center addressed to private
respondent PBCom showing that proceeds of the irrevocable letter of credit No. L16060 was received by Mr. Moises Rosete, representative of Perez BatteryCenter.
9) Trust receipt dated July 2, 1981 executed by MICO in favor of PBCom covering the
merchandise purchased under Letter of Credit No. 16060.
10) Irrevocable letter of credit No. L-16334 dated September 22, 1981 issued in favor
of Perez Battery Center for account of MICO Metals Corp.
11) Draft
dated September
22,
1981 in
the
by Perez Battery Center and accepted by MICO.

sum

of P290,000.00 issued

12) Letter
dated September
17,
1981 from
Perez Battery addressed
to PBCom showing that the proceeds of credit no. L-16344 was received by
Mr. Moises Rosete, a representative of Perez Battery Center.
13) Trust Receipt dated September 22, 1981 executed by MICO
of PBCom covering the merchandise under Letter of Credit No. L-16334.

in

favor

14) Irrevocable Letter of Credit no. 61873 dated November 10, 1981 for US$11,960.00
issued by PBCom in favor of TA JIH Enterprises Co. Ltd., through its correspondent
bank, Irving Trust Company of Taipei, Taiwan.
15) Trust Receipt dated December 15, 9181 executed by MICO in favor
of PBCom showing that possession of the merchandise covered by Irrevocable
Letter of Credit no. 61873 was released by PBCom to MICO.

16) Letters dated March 2, 1979 from MICO signed by its president, Charles Lee,
showing that MICO sought credit line from PBCom in the form of loans, letters of
credit and trust receipt in the sum of P7,500,000.00.
17) Letter dated July 14, 1980 from MICO signed by its president, Charles Lee,
showing that MICO requested for additional financial assistance in the sum
of P4,000,000.00.
18) Board resolution dated March 6, 1979 of MICO authorizing Charles Lee and
Mariano Sio singly or jointly to act and sign for and in behalf of MICO relative to
the obtention of credit facilities from PBCom.
19) Duly notarized Deed of Mortgage dated May 16, 1979 executed by MICO in favor
of PBCom over MICO s real properties covered by TCT Nos. 11248 and 11250
located in Pasig.
20) Duly notarized Surety Agreement dated March 26, 1979 executed by herein
petitioners Charles Lee, Mariano Sio, Alfonso Yap, Richard Velasco and
Chua Siok Suy in favor of PBCom.
21) Duly notarized Surety Agreement dated July 28, 1980 executed by herein
petitioners Charles Lee, Mariano Sio, Alfonso Yap, Richard Velasco and
Chua Siok Suy in favor of PBCom.
22) Duly notarized certification dated July 28, 1980 issued by MICO s corporate
secretary, Mr. P.B. Barrera, attesting to the adoption of a board resolution
authorizing Chua Siok Suy to sign, for and in behalf of MICO, all the necessary
documents including contracts, loan instruments and mortgages relative to
the obtention of various credit facilities from PBCom.

The above-cited documents presented have not merely created a prima

facie case but have actually proved the solidary obligation of MICO and the
petitioners, as sureties of MICO, in favor of respondent PBCom. While the
presumption found under the Negotiable Instruments Law may not necessarily
be applicable to trust receipts and letters of credit, the presumption that the
drafts drawn in connection with the letters of credit have sufficient
consideration. Under Section 3(r), Rule 131 of the Rules of Court there is also
a presumption that sufficient consideration was given in a contract. Hence,
petitioners should have presented credible evidence to rebut that presumption
as well as the evidence presented by private respondent PBCom. The letters
of credit show that the pertinent materials/merchandise have been received by
MICO. The drafts signed by the beneficiary/suppliers in connection with the
corresponding letters of credit proved that said suppliers were paid
by PBCom for the account of MICO. On the other hand, aside from their bare
denials petitioners did not present sufficient and competent evidence to rebut
the evidence of private respondent PBCom. Petitioner MICO did not proffer a
single piece of evidence, apart from its bare denials, to support its allegation
that the loan transactions, real estate mortgage, letters of credit and trust
receipts were issued allegedly without any consideration.

Petitioners-sureties, for their part, presented the By-Laws of Mico Metals

Corporation (MICO) to prove that only the president of MICO is authorized to
borrow money, arrange letters of credit, execute trust receipts, and promissory
notes and consequently, that the loan transactions, letters of credit,
promissory notes and trust receipts, most of which were executed by
Chua Siok Suy in representation of MICO were not allegedly authorized and
hence, are not binding upon MICO. A perusal of the By-Laws of MICO,
however, shows that the power to borrow money for the company and issue
mortgages, bonds, deeds of trust and negotiable instruments or securities,
secured by mortgages or pledges of property belonging to the company is not
confined solely to the president of the corporation. The Board of Directors of
MICO can also borrow money, arrange letters of credit, execute trust receipts
and promissory notes on behalf of the corporation. Significantly, this power of
the Board of Directors according to the by-laws of MICO, may be delegated to
any of its standing committee, officer or agent. Hence, PBCom had every
right to rely on the Certification issued by MICO's corporate secretary, P.B.
Barrera, that Chua Siok Suy was duly authorized by its Board of Directors to
borrow money and obtain credit facilities in behalf of MICO from PBCom.
[34]

[35]

[36]

Petitioners-sureties also presented a letter of their counsel dated October

9, 1982, addressed to private respondent PBCom purportedly to show
that PBCom knew that Chua Siok Suy allegedly used the credit and good
names of the petitioner-sureties for his benefit, and that petitionersureties were made to sign blank documents and were furnished copies of the
same. The letter, however, is in fact merely a reply of petitioners-sureties
counsel to PBComs demand for payment of MICOs obligations, and appears
to be an inconsequential piece of self-serving evidence.
In addition to the foregoing, MICO and petitioners-sureties cited the
decision of the trial court which stated that there was no proof that the
proceeds of the loans were ever delivered to MICO. Although the private
respondents witness, Mr. Gardiola, testified that the proceeds of the loans
were deposited in MICOs current account with PBCom, his testimony was
allegedly not supported by any bank record, note or memorandum. A careful
scrutiny of the record including the transcript of stenographic notes reveals,
however, that although private respondent PBCom was willing to produce the
corresponding account ledger showing that the proceeds of the loans were
credited to MICOs current account with PBCom, MICO in fact vigorously
objected to the presentation of said document. That point is shown in the
testimony of PBComs witness, Gardiola, thus:
Q: Now, all of these promissory note Exhibits I and J which as you have said previously
(sic) availed originally by defendant Mico Metals Corp. sometime in 1979, my

question now is, do you know what happened to the proceeds of the
original availment?
A: Well, it was credited to the current account of Mico Metals Corp.
Q: Why did it was credited to the proceeds to the account of Mico Metals Corp? (sic)
A: Well, that is our understanding.
ATTY. DURAN:
Your honor, may we be given a chance to object, the best evidence is the so-called
current account...
COURT:
Can you produce the ledger account?
A: Yes, Your Honor, I will bring.
COURT:
The ledger or record of the current account of Mico Metals Corp.
A: Yes, Your Honor.
ATTY. ACEJAS:
Your Honor, these are a confidential record, and they might not be disclosed
without the consent of the person concerned. (sic)
ATTY. SANTOS:
Well, you are the one who is asking that.
ATTY. DURAN:
Your Honor, Im precisely want to show for the ... (sic)
COURT:
But the amount covered by the current account of defendant Mico Metals Corp. is
the subject matter of this case.

xxx xxx xxx

Q: Are those availments were release? (sic)
A: Yes, Your Honor, to the defendant corporation.
Q: By what means?
A: By the credit to their current account.
ATTY. ACEJAS:
We object to that, your Honor, because the disclose is the secrecy of the bank
deposit. (sic)

xxx xxx xxx

Q: Before the recess Mr. Gardiola, you stated that the proceeds of the three (3)
promissory notes were credited to the accounts of Mico Metals Corporation, now
do you know what kind of current account was that which you are referring to?
ATTY. ACEJAS:
Objection your Honor, that is the disclose of the deposit of defendant Mico Metals
Corporation and it cannot disclosed without the authority of the depositor. (sic)[37]

That proceeds of the loans which were originally availed of in 1979 were
delivered to MICO is bolstered by the fact that more than a year later,
specifically on July 14, 1980, MICO through its president, petitioner-surety
Charles Lee, requested for an additional loan of Four Million Pesos
(P4,000,000.00) from PBCom. The fact that MICO was requesting for an
additional loan implied that it has already availed of earlier loans from PBCom.
Petitioners allege that PBCom presented no evidence that it remitted
payments to cover the domestic and foreign letters of credit. Petitioners
placed much reliance on the erroneous decision of the trial court which stated
that private respondent PBCom allegedly failed to prove that it actually made
payments under the letters of credit since the bank drafts presented as
evidence show that they were made in favor of the Bank of Taiwan and First
Commercial Bank.
Petitioners allegations are untenable.
Modern letters of credit are usually not made between natural persons.
They involve bank to bank transactions. Historically, the letter of credit 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 accompanied the corresponding drafts. Expansion in
the use of letters of credit was a natural development in commercial banking.
Parties to a commercial letter of credit include (a) the buyer or the importer,
(b) the seller, also referred to as beneficiary, (c) the opening bank which is
usually the buyers bank which actually issues the letter of credit, (d) the
notifying bank which is the correspondent bank of the opening bank through
which it advises the beneficiary of the letter of credit, (e) negotiating bank
which is usually any bank in the city of the beneficiary. The services of the
notifying bank must always be utilized if the letter of credit is to be advised to
the beneficiary through cable, (f) the paying bank which buys or discounts the
drafts contemplated by the letter of credit, if such draft is to be drawn on the
opening bank or on another designated bank not in the city of the beneficiary.
As a rule, whenever the facilities of the opening bank are used, the beneficiary
is supposed to present his drafts to the notifying bank for negotiation and (g)
[38]

the confirming bank which, upon the request of the beneficiary, confirms the
letter of credit issued by the opening bank.
From the foregoing, it is clear that letters of credit, being usually bank to
bank transactions, involve more than just one bank. Consequently, there is
nothing unusual in the fact that the drafts presented in evidence by
respondent bank were not made payable to PBCom. As explained by
respondent bank, a draft was drawn on the Bank of Taiwan by
Ta Jih Enterprises Co., Ltd. of Taiwan, supplier of the goods covered by the
foreign letter of credit. Having paid the supplier, the Bank of Taiwan then
presented the bank draft for reimbursement by PBComs correspondent bank
in Taiwan, the Irving Trust Company which explains the reason why on its
face, the draft was made payable to the Bank of Taiwan. Irving Trust Company
accepted and endorsed the draft to PBCom. The draft was later transmitted
to PBCom to support the latters claim for payment from MICO. MICO
accepted the draft upon presentment and negotiated it to PBCom.
Petitioners further aver that MICO never requested that legal possession
of the merchandise be transferred to PBCom by way of trust receipts.
Petitioners insist that assuming that MICO transferred possession of the
merchandise to PBCom by way of trust receipts, the same would be illegal
since PBCom, being a banking institution, is not authorized by law to engage
in the business of importing and selling goods.
A trust receipt is considered as a security transaction intended to aid in
financing importers and retail dealers who do not have sufficient funds or
resources to finance the importation or purchase of merchandise, and who
may not be able to acquire credit except through utilization, as collateral of the
merchandise imported or purchased. A trust receipt, therefor, is a document
of security pursuant to which a bank acquires a security interest in the goods
under trust receipt. Under a letter of credit-trust receipt arrangement, a bank
extends a loan covered by a letter of credit, with the trust receipt as a security
for the loan. The transaction involves a loan feature represented by a letter of
credit, and a security feature which is in the covering trust receipt which
secures an indebtedness.
[39]

Petitioners averments with regard to the second issue are no less

incredulous. Petitioners contend that the letters of credit, surety agreements
and loan transactions did not ripen into valid and binding contracts
since no part of the proceeds of the loan transactions were delivered to MICO
or to any of the petitioners-sureties. Petitioners-sureties allege that
Chua Siok Suy was the beneficiary of the proceeds of the loans and that the
latter made them sign the surety agreements in blank. Thus, they maintain

that they should not be held accountable for any liability that might
arise therefrom.
It has not escaped our notice that it was petitioner-surety Charles Lee, as
president of MICO Metals Corporation, who first requested for a
discounting loan of Three Million Pesos (P3,000,000.00) from PBCom as
evidenced by his letter dated March 2, 1979. On the same day, Charles Lee,
as President of MICO, requested for a Letter of Credit and Trust Receipt line
in the sum of Three Million Pesos (P3,000,000.00). Still, on the same day,
Charles Lee again as President of MICO, wrote another letter to PBCOM
requesting for a financing line in the sum of One Million Five Hundred
Thousand Pesos (P1,500,000.00) to be used exclusively as marginal deposit
for the opening of MICOs foreign and local letters of credit with PBCom.
More than a year later, it was also Charles Lee, again in his capacity as
president of MICO, who asked for an additional loan in the sum of Four Million
Pesos (P4,000,000.00). The claim therefore of petitioners that it was
Chua Siok Suy, in connivance with the respondent PBCom, who applied for
and obtained the loan transactions and letters of credit strains credulity
considering that even the Deed of the Real Estate Mortgage in favor
of PBCom was executed by petitioner-surety Mariano Sio in his capacity as
general manager of MICO to secure the loan accommodations obtained by
MICO from PBCom.
[40]

[41]

[42]

[43]

Petitioners-sureties allege that they were made to sign the surety

agreements in blank by Chua Siok Suy. Petitioner Alfonso Yap, the corporate
treasurer, for his part testified that he signed booklets of checks, surety
agreements and promissory notes in blank; that he signed the documents in
blank despite his misgivings since Chua Siok Suy assured him that the
transaction can easily be taken cared of since Chua Siok Suy personally knew
the Chairman of the Board of PBCom; that he was not receiving salary as
treasurer of Mico Metals and since Chua Siok Suy had a direct hand in the
management of Malayan Sales Corporation, of which Yap is an employee, he
(Yap) signed the documents in blank as consideration for his continued
employment in Malayan Sales Corporation. Petitioner Antonio Co testified that
he worked as office manager for MICO from 1978-1982. As office manager, he
was the one in charge of transacting business like purchasing, selling and
paying the salary of the employees. He was also in charge of the handling of
documents pertaining to surety agreements, trust receipts and promissory
notes; that when he first joined MICO Metals Corporation, he was able to
read the by-laws of the corporation and he came to know that only the
chairman and the president can borrow money in behalf of the corporation;
that Chua Siok Suy once called him up and told him to secure an invoice so
[44]

that a credit line can be opened in the bank with a local letter of credit; that
when the invoice was secured, he (Co) brought it together with the application
for a credit line to Chua Siok Suy, and that he questioned the authority of
Chua Siok Suy pointing out that he (Co) is not empowered to sign the
document inasmuch as only the latter, as president, was authorized to do so.
However, Chua Siok Suy allegedly just said that he had already talked with
the Chairman of the Board of PBCom; and that Chua Siok Suy reportedly said
that he needed the money to finance a project that he had with
the Taipei government. Co also testified that he knew of the application for
domestic letter of credit in the sum of Three Hundred Forty-Eight Thousand
Pesos (P348,000.00); and that a certain Moises Rosete was authorized to
claim the check covering the Three Hundred Forty-Eight Thousand Pesos
(P348,000.00) from PBCom; and that after claiming the check Rosete brought
it to Perez Battery Center for indorsement after which the same was deposited
to the personal account of Chua Siok Suy.
[45]

We consider as incredible and unacceptable the claim of petitionerssureties that the Board of Directors of MICO was so careless about the
business affairs of MICO as well as about their own personal reputation and
money that they simply relied on the say so of Chua Siok Suy on matters
involving millions of pesos. Under Section 3 (d), Rule 131 of the Rules of
Court, it is presumed that a person takes ordinary care of his concerns.
Hence, the natural presumption is that one does not sign a document without
first informing himself of its contents and consequences. Said presumption
acquires greater force in the case at bar where not only one but several
documents were executed at different times and at different places by the
petitioner sureties and Chua Siok Suy as president of MICO.
MICO and herein petitioners-sureties insist that Chua Siok Suy was not
duly authorized to negotiate for loans in behalf of MICO from PBCom.
Petitioners allegation, however, is belied by the July 28, 1980 Certification
issued by the corporate secretary of PBCom, Atty. P.B. Barrera,
that MICO's Board of Directors gave Chua Siok Suy full authority to negotiate
for loans in behalf of MICO with PBCom. In fact, the Certification even
provided that Chua Siok Suys authority continues until and unless PBCom is
notified in writing of the withdrawal thereof by the said Board. Notably,
petitioners failed to contest the genuineness of the said Certification which is
notarized and to show any written proof of any alleged withdrawal of the said
authority given by the Board of Directors to Chua Siok Suy to negotiate for
loans in behalf of MICO.
There was no need for PBCom to personally inform the petitionerssureties individually about the terms of the loans, letters of credit and other

loan documents. The petitioners-sureties themselves happen to comprise the

Board of Directors of MICO, which gave full authority to Chua Siok Suy to
negotiate for loans in behalf of MICO. Notice to MICOs authorized
representative, Chua Siok Suy, was notice to MICO. The Certification issued
by PBComs corporate secretary, Atty. P.B. Barrera, indicated that
Chua Siok Suy had full authority to negotiate and sign the necessary
documents, in behalf
of
MICO
for
loans
from PBCom.
Respondent PBCom therefore had the right to rely on the said notarized
Certification of MICOs Corporate Secretary.
Anent petitioners-sureties contention that they obtained no consideration
whatsoever on the surety agreements, we need only point out that the
consideration for the sureties is the very consideration for the principal obligor,
MICO, in the contracts of loan. In the case of Willex Plastic Industries
Corporation vs. Court of Appeals, we ruled that the consideration necessary
to support a surety obligation need not pass directly to the surety, a
consideration moving to the principal alone being sufficient. For a guarantor or
surety is bound by the same consideration that makes the contract effective
between the parties thereto. It is not necessary that a guarantor or surety
should receive any part or benefit, if such there be, accruing to his principal.
[46]

Petitioners placed too much reliance on the rule in evidence that the
burden of proof does not shift whereas the burden of going forward with the
evidence does pass from party to party. It is true that said rule is not changed
by the fact that the party having the burden of proof has introduced evidence
which established prima facie his assertion because such evidence does not
shift the burden of proof; it merely puts the adversary to the necessity of
producing evidence to meet the prima facie case. Where the defendant
merely denies, either generally or otherwise, the allegations of the plaintiffs
pleadings, the burden of proof continues to rest on the plaintiff throughout the
trial and does not shift to the defendant until the plaintiffs evidence has been
presented and duly offered. The defendant has then no burden except to
produce evidence sufficient to create a state of equipoise between his proof
and that of the plaintiff to defeat the latter, whereas the plaintiff has the
burden, as in the beginning, of establishing his case by a preponderance of
evidence. But
where
the
defendant
has
failed
to
present
and marshall evidence sufficient to create a state of equipoise between his
proof and that of plaintiff, the prima facie case presented by the plaintiff will
prevail.
[47]

In the case at bar, respondent PBCom, as plaintiff in the trial court, has in
fact presented sufficient documentary and testimonial evidence that proved by
preponderance of evidence its subject collection case against the defendants

who are the petitioners herein. In view of all the foregoing, the Court of
Appeals committed no reversible error in its appealed Decision.
WHEREFORE, the assailed Decision of the Court of Appeals in CA-G.R.
CV No. 27480 entitled, Philippine Bank of Communications vs. Mico Metals
Corporation, Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard
Velasco and Alfonso Co, is AFFIRMED in toto.
Costs against the petitioners.
SO ORDERED.

FIRST DIVISION
[G.R. No. 90828. September 5, 2000]

MELVIN
COLINARES
and
LORDINO
VELOSO, petitioners,
vs. HONORABLE COURT OF APPEALS, and THE PEOPLE OF
THE PHILIPPINES, respondents.
DECISION
DAVIDE, JR., C.J.:

In 1979 Melvin Colinares and Lordino Veloso (hereafter Petitioners) were contracted
for a consideration of P40,000 by the Carmelite Sisters of Cagayan de Oro City to
renovate the latters convent at Camaman-an, Cagayan de Oro City.
On 30 October 1979, Petitioners obtained 5,376 SF Solatone acoustical board
2x4x, 300 SF tanguile wood tiles 12x12, 260 SF Marcelo economy tiles and 2 gallons
UMYLIN cement adhesive from CM Builders Centre for the construction project. [1] The
following day, 31 October 1979, Petitioners applied for a commercial letter of
credit[2] with the Philippine Banking Corporation, Cagayan de Oro City branch (hereafter
PBC) in favor of CM Builders Centre. PBC approved the letter of credit [3] for P22,389.80
to cover the full invoice value of the goods. Petitioners signed a pro-forma trust
receipt[4] as security. The loan was due on 29 January 1980.
On 31 October 1979, PBC debited P6,720 from Petitioners marginal deposit as
partial payment of the loan.[5]
On 7 May 1980, PBC wrote[6] to Petitioners demanding that the amount be paid
within seven days from notice. Instead of complying with PBCs demand, Veloso

confessed that they lost P19,195.83 in the Carmelite Monastery Project and requested
for a grace period of until 15 June 1980 to settle the account. [7]
PBC sent a new demand letter [8]to Petitioners on 16 October 1980 and informed
them that their outstanding balance as of 17 November 1979 was P20,824.40 exclusive
of attorneys fees of 25%.[9]
On 2 December 1980, Petitioners proposed [10] that the terms of payment of the loan
be modified as follows: P2,000 on or before 3 December 1980, and P1,000 per month
starting 31 January 1980 until the account is fully paid. Pending approval of the
proposal, Petitioners paid P1,000 to PBC on 4 December 1980, [11] and thereafter P500
on 11 February 1981,[12] 16 March 1981,[13] and 20 April 1981.[14] Concurrently with the
separate demand for attorneys fees by PBCs legal counsel, PBC continued to demand
payment of the balance.[15]
On 14 January 1983, Petitioners were charged with the violation of P.D. No. 115
(Trust Receipts Law) in relation to Article 315 of the Revised Penal Code in an
Information which was filed with Branch 18, Regional Trial Court of Cagayan de Oro
City. The accusatory portion of the Information reads:

That on or about October 31, 1979, in the City of Cagayan de Oro, Philippines, and
within the jurisdiction of this Honorable Court, the above-named accused entered into
a trust receipt agreement with the Philippine Banking Corporation at Cagayan de Oro
City wherein the accused, as entrustee, received from the entruster the following
goods to wit:
Solatone Acoustical board
Tanguile Wood Tiles
Marcelo Cement Tiles
Umylin Cement Adhesive
with a total value of P22,389.80, with the obligation on the part of the accusedentrustee to hold the aforesaid items in trust for the entruster and/or to sell on cash
basis or otherwise dispose of the said items and to turn over to the entruster the
proceeds of the sale of said goods or if there be no sale to return said items to the
entruster on or before January 29, 1980 but that the said accused after receipt of the
goods, with intent to defraud and cause damage to the entruster, conspiring,

confederating together and mutually helping one another, did then and there wilfully,
unlawfully and feloniously fail and refuse to remit the proceeds of the sale of the
goods to the entruster despite repeated demands but instead converted,
misappropriated and misapplied the proceeds to their own personal use, benefit and
gain, to the damage and prejudice of the Philippine Banking Corporation, in the
aforesaid sum of P22,389.80, Philippine Currency.
Contrary to PD 115 in relation to Article 315 of the Revised Penal Code. [16]
The case was docketed as Criminal Case No. 1390.
During trial, petitioner Veloso insisted that the transaction was a clean loan as per
verbal guarantee of Cayo Garcia Tuiza, PBCs former manager. He and petitioner
Colinares signed the documents without reading the fine print, only learning of the trust
receipt implication much later. When he brought this to the attention of PBC, Mr. Tuiza
assured him that the trust receipt was a mere formality.[17]
On 7 July 1986, the trial court promulgated its decision [18] convicting Petitioners of
estafa for violating P.D. No. 115 in relation to Article 315 of the Revised Penal Code and
sentencing each of them to suffer imprisonment of two years and one day of prision
correccional as minimum to six years and one day of prision mayor as maximum, and to
solidarily indemnify PBC the amount of P20,824.44, with legal interest from 29 January
1980, 12 % penalty charge per annum, 25% of the sums due as attorneys fees, and
costs.
The trial court considered the transaction between PBC and Petitioners as a trust
receipt transaction under Section 4, P.D. No. 115. It considered Petitioners use of the
goods in their Carmelite monastery project an act of disposing as contemplated under
Section 13, P.D. No. 115, and treated the charge invoice [19] for goods issued by CM
Builders Centre as a document within the meaning of Section 3 thereof. It concluded
that the failure of Petitioners to turn over the amount they owed to PBC constituted
estafa.
Petitioners appealed from the judgment to the Court of Appeals which was docketed
as CA-G.R. CR No. 05408. Petitioners asserted therein that the trial court erred in ruling
that they violated the Trust Receipt Law, and in holding them criminally liable therefor. In
the alternative, they contend that at most they can only be made civilly liable for
payment of the loan.

In its decision[20] 6 March 1989, the Court of Appeals modified the judgment of the
trial court by increasing the penalty to six years and one day of prision mayor as
minimum to fourteen years eight months and one day of reclusion temporal as
maximum. It held that the documentary evidence of the prosecution prevails over
Velosos testimony, discredited Petitioners claim that the documents they signed were in
blank, and disbelieved that they were coerced into signing them.
On
25
March
1989,
Petitioners
filed
a
Motion
for
New
[21]
Trial/Reconsideration alleging that the Disclosure Statement on Loan/Credit
Transaction[22] (hereafter Disclosure Statement) signed by them and Tuiza was
suppressed by PBC during the trial. That document would have proved that the
transaction was indeed a loan as it bears a 14% interest as opposed to the trust receipt
which does not at all bear any interest. Petitioners further maintained that when PBC
allowed them to pay in installment, the agreement was novated and a creditor-debtor
relationship was created.
In its resolution[23]of 16 October 1989 the Court of Appeals denied the Motion for
New Trial/Reconsideration because the alleged newly discovered evidence was actually
forgotten evidence already in existence during the trial, and would not alter the result of
the case.
Hence, Petitioners filed with us the petition in this case on 16 November 1989. They
raised the following issues:

I. WHETHER OR NOT THE DENIAL OF THE MOTION FOR NEW TRIAL ON

THE GROUND OF NEWLY DISCOVERED EVIDENCE, NAMELY,
DISCLOSURE ON LOAN/CREDIT TRANSACTION, WHICH IF INTRODUCED
AND ADMITTED, WOULD CHANGE THE JUDGMENT, DOES NOT
CONSTITUTE A DENIAL OF DUE PROCESS.
2. ASSUMING THERE WAS A VALID TRUST RECEIPT, WHETHER OR NOT
THE ACCUSED WERE PROPERLY CHARGED, TRIED AND CONVICTED FOR
VIOLATION OF SEC. 13, PD NO. 115 IN RELATION TO ARTICLE 315
PARAGRAPH (I) (B) NOTWITHSTANDING THE NOVATION OF THE SOCALLED TRUST RECEIPT CONVERTING THE TRUSTOR-TRUSTEE
RELATIONSHIP TO CREDITOR-DEBTOR SITUATION.
In its Comment of 22 January 1990, the Office of the Solicitor General urged us to
deny the petition for lack of merit.

On 28 February 1990 Petitioners filed a Motion to Dismiss the case on the ground
that they had already fully paid PBC on 2 February 1990 the amount of P70,000 for the
balance of the loan, including interest and other charges, as evidenced by the different
receipts issued by PBC,[24] and that the PBC executed an Affidavit of desistance. [25]
We required the Solicitor General to comment on the Motion to Dismiss.
In its Comment of 30 July 1990, the Solicitor General opined that payment of the
loan was akin to a voluntary surrender or plea of guilty which merely serves to mitigate
Petitioners culpability, but does not in any way extinguish their criminal liability.
In the Resolution of 13 August 1990, we gave due course to the Petition and
required the parties to file their respective memoranda.
The parties subsequently filed their respective memoranda.
It was only on 18 May 1999 when this case was assigned to
the ponente. Thereafter, we required the parties to move in the premises and for
Petitioners to manifest if they are still interested in the further prosecution of this case
and inform us of their present whereabouts and whether their bail bonds are still valid.
Petitioners submitted their Compliance.
The core issues raised in the petition are the denial by the Court of Appeals of
Petitioners Motion for New Trial and the true nature of the contract between Petitioners
and the PBC. As to the latter, Petitioners assert that it was an ordinary loan, not a trust
receipt agreement under the Trust Receipts Law.
The grant or denial of a motion for new trial rests upon the discretion of the
judge. New trial may be granted if: (1) errors of law or irregularities have been
committed during the trial prejudicial to the substantial rights of the accused; or (2) new
and material evidence has been discovered which the accused could not with
reasonable diligence have discovered and produced at the trial, and which, if introduced
and admitted, would probably change the judgment. [26]
For newly discovered evidence to be a ground for new trial, such evidence must be
(1) discovered after trial; (2) could not have been discovered and produced at the trial
even with the exercise of reasonable diligence; and (3) material, not merely cumulative,
corroborative, or impeaching, and of such weight that, if admitted, would probably
change the judgment.[27] It is essential that the offering party exercised reasonable
diligence in seeking to locate the evidence before or during trial but nonetheless failed
to secure it.[28]

We find no indication in the pleadings that the Disclosure Statement is a newly

discovered evidence.
Petitioners could not have been unaware that the two-page document exists. The
Disclosure Statement itself states, NOTICE TO BORROWER: YOU ARE ENTITLED TO
A COPY OF THIS PAPER WHICH YOU SHALL SIGN. [29] Assuming Petitioners copy was
then unavailable, they could have compelled its production in court, [30] which they never
did. Petitioners have miserably failed to establish the second requisite of the rule on
newly discovered evidence.
Petitioners themselves admitted that they searched again their voluminous records,
meticulously and patiently, until they discovered this new and material evidence only
upon learning of the Court of Appeals decision and after they were shocked by the
penalty imposed.[31] Clearly, the alleged newly discovered evidence is mere forgotten
evidence that jurisprudence excludes as a ground for new trial. [32]
However, the second issue should be resolved in favor of Petitioners.
Section 4, P.D. No. 115, the Trust Receipts Law, defines a trust receipt transaction
as any transaction by and between a person referred to as the entruster, and another
person referred to as the entrustee, whereby the entruster who owns or holds absolute
title or security interest over certain specified goods, documents or instruments,
releases the same to the possession of the entrustee upon the latters execution and
delivery to the entruster of a signed document called a trust receipt wherein the
entrustee binds himself to hold the designated goods, documents or instruments with
the obligation to turn over to the entruster the proceeds thereof to the extent of the
amount owing to the entruster or as appears in the trust receipt or the goods,
documents or instruments themselves if they are unsold or not otherwise disposed of, in
accordance with the terms and conditions specified in the trust receipt.
There are two possible situations in a trust receipt transaction. The first is covered
by the provision which refers to money received under the obligation involving the duty
to deliver it (entregarla) to the owner of the merchandise sold. The second is covered by
the provision which refers to merchandise received under the obligation to return it
(devolvera) to the owner.[33]
Failure of the entrustee to turn over the proceeds of the sale of the goods, covered
by the trust receipt to the entruster or to return said goods if they were not disposed of
in accordance with the terms of the trust receipt shall be punishable as estafa under
Article 315 (1) of the Revised Penal Code, [34] without need of proving intent to defraud.

A thorough examination of the facts obtaining in the case at bar reveals that the
transaction intended by the parties was a simple loan, not a trust receipt agreement.
Petitioners received the merchandise from CM Builders Centre on 30 October
1979. On that day, ownership over the merchandise was already transferred to
Petitioners who were to use the materials for their construction project. It was only a day
later, 31 October 1979, that they went to the bank to apply for a loan to pay for the
merchandise.
This situation belies what normally obtains in a pure trust receipt transaction where
goods are owned by the bank and only released to the importer in trust subsequent to
the grant of the loan. The bank acquires a security interest in the goods as holder of a
security title for the advances it had made to the entrustee. [35] The ownership of the
merchandise continues to be vested in the person who had advanced payment until he
has been paid in full, or if the merchandise has already been sold, the proceeds of the
sale should be turned over to him by the importer or by his representative or successor
in interest.[36] To secure that the bank shall be paid, it takes full title to the goods at the
very beginning and continues to hold that title as his indispensable security until the
goods are sold and the vendee is called upon to pay for them; hence, the importer has
never owned the goods and is not able to deliver possession. [37] In a certain manner,
trust receipts partake of the nature of a conditional sale where the importer becomes
absolute owner of the imported merchandise as soon as he has paid its price. [38]
Trust receipt transactions are intended to aid in financing importers and retail
dealers who do not have sufficient funds or resources to finance the importation or
purchase of merchandise, and who may not be able to acquire credit except through
utilization, as collateral, of the merchandise imported or purchased. [39]
The antecedent acts in a trust receipt transaction consist of the application and
approval of the letter of credit, the making of the marginal deposit and the effective
importation of goods through the efforts of the importer.[40]
PBC attempted to cover up the true delivery date of the merchandise, yet the trial
court took notice even though it failed to attach any significance to such fact in the
judgment. Despite the Court of Appeals contrary view that the goods were delivered to
Petitioners previous to the execution of the letter of credit and trust receipt, we find that
the records of the case speak volubly and this fact remains uncontroverted. It is not
uncommon for us to peruse through the transcript of the stenographic notes of the
proceedings to be satisfied that the records of the case do support the conclusions of
the trial court.[41] After such perusal Grego Mutia, PBCs credit investigator, admitted thus:

ATTY. CABANLET: (continuing)

Q Do you know if the goods subject matter of this letter of credit and trust receipt agreement
were received by the accused?
A Yes, sir
Q Do you have evidence to show that these goods subject matter of this letter of credit and
trust receipt were delivered to the accused?
A Yes, sir.
Q I am showing to you this charge invoice, are you referring to this document?
A Yes, sir.

xxx
Q What is the date of the charge invoice?
A October 31, 1979.
COURT:
Make it of record as appearing in Exhibit D, the zero in 30 has been superimposed with
numeral 1.[42]

During the cross and re-direct examinations he also impliedly admitted that the
transaction was indeed a loan. Thus:
Q In short the amount stated in your Exhibit C, the trust receipt was a loan to the accused
you admit that?
A Because in the bank the loan is considered part of the loan.

xxx
RE-DIRECT BY ATTY. CABANLET:
ATTY. CABANLET (to the witness)
Q What do you understand by loan when you were asked?
A Loan is a promise of a borrower from the value received. The borrower will pay the bank
on a certain specified date with interest[43]

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

Petitioner Velosos claim that they were made to believe that the transaction was a
loan was also not denied by PBC. He declared:
Q Testimony was given here that that was covered by trust receipt. In short it was a special
kind of loan. What can you say as to that?
A I dont think that would be a trust receipt because we were made to understand by the
manager who encouraged us to avail of their facilities that they will be granting us a
loan[44]

PBC could have presented its former bank manager, Cayo Garcia Tuiza, who
contracted with Petitioners, to refute Velosos testimony, yet it only presented credit
investigator Grego Mutia. Nowhere from Mutias testimony can it be gleaned that PBC
represented to Petitioners that the transaction they were entering into was not a pure
loan but had trust receipt implications.
The Trust Receipts Law does not seek to enforce payment of the loan, rather it
punishes the dishonesty and abuse of confidence in the handling of money or goods to
the prejudice of another regardless of whether the latter is the owner. [45] Here, it is crystal
clear that on the part of Petitioners there was neither dishonesty nor abuse of
confidence in the handling of money to the prejudice of PBC. Petitioners continually
endeavored to meet their obligations, as shown by several receipts issued by PBC
acknowledging payment of the loan.
The Information charges Petitioners with intent to defraud and misappropriating the
money for their personal use. The mala prohibita nature of the alleged offense
notwithstanding, intent as a state of mind was not proved to be present in Petitioners
situation. Petitioners employed no artifice in dealing with PBC and never did they evade
payment of their obligation nor attempt to abscond. Instead, Petitioners sought
favorable terms precisely to meet their obligation.
Also noteworthy is the fact that Petitioners are not importers acquiring the goods for
re-sale, contrary to the express provision embodied in the trust receipt. They are
contractors who obtained the fungible goods for their construction project. At no time did
title over the construction materials pass to the bank, but directly to the Petitioners from
CM Builders Centre. This impresses upon the trust receipt in question vagueness and
ambiguity, which should not be the basis for criminal prosecution in the event of
violation of its provisions.[46]

The practice of banks of making borrowers sign trust receipts to facilitate collection
of loans and place them under the threats of criminal prosecution should they be unable
to pay it may be unjust and inequitable, if not reprehensible. Such agreements are
contracts of adhesion which borrowers have no option but to sign lest their loan be
disapproved. The resort to this scheme leaves poor and hapless borrowers at the mercy
of banks, and is prone to misinterpretation, as had happened in this case. Eventually,
PBC showed its true colors and admitted that it was only after collection of the money,
as manifested by its Affidavit of Desistance.
WHEREFORE, the challenged Decision of 6 March 1989 and the Resolution of 16
October 1989 of the Court of Appeals in CA-GR. No. 05408 are REVERSED and
SET ASIDE. Petitioners are hereby ACQUITTED of the crime charged, i.e., for violation
of P.D. No. 115 in relation to Article 315 of the Revised Penal Code.
No costs.
SO ORDERED.
Republic of the Philippines

SUPREME COURT
Baguio City

THIRD DIVISION

ANTHONY L. NG,

G.R. No. 173905

Petitioner,
Present:

CORONA, J.,

- versus-

Chairperson,VELASCO, JR.,
ABAD,*
PEREZ,** and
MENDOZA, JJ.

PEOPLE OF
THE PHILIPPINES,
Respondent.

Promulgated:

April 23, 2010

x-----------------------------------------------------------------------------------------x

DECISION

VELASCO, JR.

The Case
This is a Petition for Review on Certiorari under Rule 45 seeking to
reverse and set aside the August 29, 2003 Decision [1] and July 25,
2006 Resolution of the Court of Appeals (CA) in CA-G.R. CR No.
25525, which affirmed the Decision[2] of the Regional Trial Court
(RTC), Branch 95 in Quezon City, in Criminal Case No. Q-99-85133
for Estafa under Article 315, paragraph 1(b) of the Revised Penal
Code (RPC) in relation to Section 3 of Presidential Decree No. (PD)
115 or the Trust Receipts Law.

The Facts
Sometime in the early part of 1997, petitioner Anthony Ng, then engaged in the
business of building and fabricating telecommunication towers under the trade
name Capitol Blacksmith and Builders, applied for a credit line of PhP 3,000,000
with Asiatrust Development Bank, Inc. (Asiatrust). In support of Asiatrusts credit
investigation, petitioner voluntarily submitted the following documents: (1) the
contracts he had with Islacom, Smart, and Infocom; (2) the list of projects wherein
he was commissioned by the said telecommunication companies to build several
steel towers; and (3) the collectible amounts he has with the said companies.[3]

On May 30, 1997, Asiatrust approved petitioners loan

application. Petitioner was then required to sign several
documents, among which are the Credit Line Agreement,
Application and Agreement for Irrevocable L/C, Trust Receipt
Agreements,[4] and Promissory Notes. Though the Promissory
Notes matured on September 18, 1997, the two (2)
aforementioned Trust Receipt Agreements did not bear any
maturity dates as they were left unfilled or in blank by Asiatrust. [5]

After petitioner received the goods, consisting of chemicals and

metal plates from his suppliers, he utilized them to fabricate the
communication towers ordered from him by his clients which were
installed in three project sites, namely: Isabel, Leyte; Panabo,
Davao; and Tongonan.

As petitioner realized difficulty in collecting from his client

Islacom, he failed to pay his loan to Asiatrust. Asiatrust then
conducted a surprise ocular inspection of petitioners business
through
Villarva
S.
Linga,
Asiatrusts
representative
appraiser. Linga thereafter reported to Asiatrust that he found

that approximately 97% of the subject goods of the Trust Receipts

were sold-out and that only 3 % of the goods pertaining to PN No.
1963 remained. Asiatrust then endorsed petitioners account to its
Account Management Division for the possible restructuring of his
loan. The parties thereafter held a series of conferences to work
out the problem and to determine a way for petitioner to pay his
debts. However, efforts towards a settlement failed to be
reached.

On March 16, 1999, Remedial Account Officer Ma. Girlie C.

Bernardez filed a Complaint-Affidavit before the Office of the City
Prosecutor of Quezon City. Consequently, on September 12, 1999,
an Information for Estafa, as defined and penalized under Art.
315, par. 1(b) of the RPC in relation to Sec. 3, PD 115 or the Trust
Receipts Law, was filed with the RTC. The said Information reads:

That on or about the 30th day of May 1997, in

Quezon City, Philippines, the above-named petitioner, did
then and there willfully, unlawfully, and feloniously
defraud Ma. Girlie C. Bernardez by entering into a Trust
Receipt Agreement with said complainant whereby said
petitioner as entrustee received in trust from the said
complainant various chemicals in the total sum of P4.5
million with the obligation to hold the said chemicals in
trust as property of the entruster with the right to sell the
same for cash and to remit the proceeds thereof to the
entruster, or to return the said chemicals if unsold; but
said petitioner once in possession of the same, contrary
to his aforesaid obligation under the trust receipt
agreement with intent to defraud did then and there
misappropriated, misapplied and converted the said
amount to his own personal use and benefit and despite

repeated demands made upon him, said petitioner

refused and failed and still refuses and fails to make good
of his obligation, to the damage and prejudice of the said
Ma. Girlie C. Bernardez in the amount of P2,971,650.00,
Philippine Currency.

CONTRARY TO LAW.

Upon arraignment, petitioner pleaded not guilty to the charges. Thereafter, a fullblown trial ensued.

During the pendency of the abovementioned case, conferences between petitioner

and Asiatrusts Remedial Account Officer, Daniel Yap, were held. Afterward, a
Compromise Agreement was drafted by Asiatrust. One of the requirements of the
Compromise Agreement was for petitioner to issue six (6) postdated
checks. Petitioner, in good faith, tried to comply by issuing two or three checks,
which were deposited and made good. The remaining checks, however, were not
deposited as the Compromise Agreement did not push through.

For his defense, petitioner argued that: (1) the loan was
granted as his working capital and that the Trust Receipt
Agreements he signed with Asiatrust were merely preconditions
for the grant and approval of his loan; (2) the Trust Receipt
Agreement corresponding to Letter of Credit No. 1963 and the
Trust Receipt Agreement corresponding to Letter of Credit No.
1964 were both contracts of adhesion, since the stipulations
found in the documents were prepared by Asiatrust in fine print;

(3) unfortunately for petitioner, his contract worth PhP 18,000,000

with Islacom was not yet paid since there was a squabble as to
the real ownership of the latters company, but Asiatrust was
aware of petitioners receivables which were more than sufficient
to cover the obligation as shown in the various Project Listings
with Islacom, Smart Communications, and Infocom; (4) prior to
the Islacom problem, he had been faithfully paying his obligation
to Asiatrust as shown in Official Receipt Nos. 549001, 549002,
565558, 577198, 577199, and 594986,[6] thus debunking
Asiatrusts claim of fraud and bad faith against him; (5) during the
pendency of this case, petitioner even attempted to settle his
obligations as evidenced by the two United Coconut Planters Bank
Checks[7] he issued in favor of Asiatrust; and (6) he had already
paid PhP 1.8 million out of the PhP 2.971 million he owed as per
Statement of Account dated January 26, 2000.

Ruling of the Trial Court

After trial on the merits, the RTC, on May 29, 2001, rendered a
Decision,
finding
petitioner
guilty
of
the
crime
of Estafa. The fallo of the Decision reads as follows:

WHEREFORE, judgment is hereby rendered finding the petitioner,

Anthony L. Ng GUILTY beyond reasonable doubt for the crime of
Estafa defined in and penalized by Article 315, paragraph 1(b) of the

Revised Penal Code in relation to Section 3 of Presidential Decree 115,

otherwise known as the Trust Receipts Law, and is hereby sentenced to
suffer the indeterminate penalty of from six (6) years, eight (8) months,
and twenty one (21) days of prision mayor, minimum, as the minimum
penalty, to twenty (20) years of reclusion temporal maximum, as the
maximum penalty.

The petitioner is further ordered to return to the Asiatrust

Development Bank Inc. the amount of Two Million, Nine Hundred
Seventy One and Six Hundred Fifty Pesos (P2,971,650.00) with legal
rate of interest computed from the filing of the information on
September 21,1999 until the amount is fully paid.

IT IS SO ORDERED.

In rendering its Decision, the trial court held that petitioner could not simply
argue that the contracts he had entered into with Asiatrust were void as they were
contracts of adhesion. It reasoned that petitioner is presumed to have read and
understood and is, therefore, bound by the provisions of the Letters of Credit and
Trust Receipts. It said that it was clear that Asiatrust had furnished petitioner with a
Statement of Account enumerating therein the precise figures of the outstanding
balance, which he failed to pay along with the computation of other fees and
charges; thus, Asiatrust did not violate Republic Act No. 3765 (Truth in Lending
Act). Finally, the trial court declared that petitioner, being the entrustee stated in
the Trust Receipts issued by Asiatrust, is thus obliged to hold the goods in trust for
the entruster and shall dispose of them strictly in accordance with the terms and
conditions of the trust receipts; otherwise, he is obliged to return the goods in the
event of non-sale or upon demand of the entruster, failing thus, he evidently
violated the Trust Receipts Law.

Ruling of the Appellate Court

Petitioner then elevated the case to the CA by filing a Notice of Appeal on August
6, 2001. In his Appellants Brief dated March 25, 2002, petitioner argued that the
court a quo erred: (1) in changing the name of the offended party without the
benefit of an amendment of the Information which violates his right to be informed
of the nature and cause of accusation against him; (2) in making a finding of facts
not in accord with that actually proved in the trial and/or by the evidence provided;
(3) in not considering the material facts which if taken into account would have
resulted in his acquittal; (4) in being biased, hostile, and prejudiced against him;
and (5) in considering the prosecutions evidence which did not prove the guilt of
petitioner beyond reasonable doubt.

On August 29, 2003, the CA rendered a Decision affirming that of the RTC,
the fallo of which reads:

WHEREFORE, the foregoing considered, the instant appeal is

DENIED. The decision of the Regional Trial Court of Quezon City,
Branch 95 dated May 29, 2001 is AFFIRMED.

SO ORDERED.

The CA held that during the course of the trial, petitioner knew that the
complainant Bernardez and the other co-witnesses are all employees of Asiatrust
and that she is suing in behalf of the bank. Since petitioner transacted with the
same employees for the issuance of the subject Trust Receipts, he cannot feign
ignorance that Asiatrust is not the offended party in the instant case. The CA
further stated that the change in the name of the complainant will not prejudice and
alter the fact that petitioner was being charged with the crime of Estafa in relation
to the Trust Receipts Law, since the information clearly set forth the essential
elements of the crime charged, and the constitutional right of petitioner to be
informed of the nature and cause of his accusations is not violated.[8]

As to the alleged error in the appreciation of facts by the trial court, the CA stated
that it was undisputed that petitioner entered into a trust receipt agreement with
Asiatrust and he failed to pay the bank his obligation when it became
due. According to the CA, the fact that petitioner acted without malice or fraud in
entering into the transactions has no bearing, since the offense is punished
as malum prohibitumregardless of the existence of intent or malice; the mere
failure to deliver the proceeds of the sale or the goods if not sold constitutes the
criminal offense.

With regard to the failure of the RTC to consider the fact that petitioners
outstanding receivables are sufficient to cover his indebtedness and that no written
demand was made upon him hence his obligation has not yet become due and
demandable, the CA stated that the mere query as to the whereabouts of the goods
and/or money is tantamount to a demand.[9]
Concerning the alleged bias, hostility, and prejudice of the RTC against petitioner,
the CA said that petitioner failed to present any substantial proof to support the
aforementioned allegations against the RTC.

After the receipt of the CA Decision, petitioner moved for its reconsideration,
which was denied by the CA in its Resolution dated July 25, 2006. Thereafter,
petitioner filed this Petition for Review on Certiorari. In his Memorandum, he
raised the following issues:

Issues:

1.

The prosecution failed to adduce evidence beyond a reasonable

doubt to satisfy the 2nd essential element that there was
misappropriation or conversion of subject money or property by
petitioner.

2.

The state was unable to prove the 3rd essential element of the
crime that the alleged misappropriation or conversion is to the
prejudice of the real offended property.

3.

The absence of a demand (4th essential element) on petitioner

necessarily results to the dismissal of the criminal case.

The Courts Ruling

We find the petition to be meritorious.

Essentially, the issues raised by petitioner can be summed up into onewhether or

not petitioner is liable for Estafa under Art. 315, par. 1(b) of the RPC in relation to
PD 115.

It is a well-recognized principle that factual findings of the trial court are entitled
to great weight and respect by this Court, more so when they are affirmed by the
appellate court. However, the rule is not without exceptions, such as: (1) when the
conclusion is a finding grounded entirely on speculations, surmises, and
conjectures; (2) the inferences made are manifestly mistaken; (3) there is grave
abuse of discretion; and (4) the judgment is based on misapprehension of facts or
premised on the absence of evidence on record.[10] Especially in criminal cases
where the accused stands to lose his liberty by virtue of his conviction, the Court
must be satisfied that the factual findings and conclusions of the lower courts
leading to his conviction must satisfy the standard of proof beyond reasonable
doubt.

In the case at bar, petitioner was charged with Estafa under Art. 315, par.
1(b) of the RPC in relation to PD 115. The RPC defines Estafa as:

ART. 315. Swindling (estafa).Any person who shall defraud

another by any of the means mentioned hereinbelow x x x

1.

With unfaithfulness or abuse of confidence, namely:

a.

xxx

b.
By misappropriating or converting, to the prejudice of
another, money, goods, or any other personal property received by the
offender in trust or on commission, or for administration, or under any
other obligation involving the duty to make delivery of or to return the
same, even though such obligation be totally or partially guaranteed by a
bond; or by denying having received such money, goods, or other
property x x x.[11]

Based on the definition above, the essential elements of Estafa are: (1) that
money, goods or other personal property is received by the offender in trust or on
commission, or for administration, or under any obligation involving the duty to
make delivery of or to return it; (2) that there be misappropriation or conversion of
such money or property by the offender, or denial on his part of such receipt; (3)
that such misappropriation or conversion or denial is to the prejudice of another;
and (4) there is demand by the offended party to the offender.[12]

Likewise, Estafa can also be committed in what is called a trust receipt

transaction under PD 115, which is defined as:

Section 4. What constitutes a trust receipts transaction.A trust

receipt transaction, within the meaning of this Decree, is any transaction
by and between a person referred to in this Decree as the entruster, and
another person referred to in this Decree as entrustee, whereby the
entruster, who owns or holds absolute title or security interests over
certain specified goods, documents or instruments, releases the same to
the possession of the entrustee upon the latters execution and delivery to

the entruster of a signed document called a trust receipt wherein the

entrustee binds himself to hold the designated goods, documents or
instruments in trust for the entruster and to sell or otherwise dispose of
the goods, documents or instruments with the obligation to turn over to
the entruster the proceeds thereof to the extent of the amount owing to
the entruster or as appears in the trust receipt or the goods, documents or
instruments themselves if they are unsold or not otherwise disposed of,
in accordance with the terms and conditions specified in the trust receipt,
or for other purposes substantially equivalent to any of the following:

1.
In the case of goods or documents: (a) to sell the goods or
procure their sale; or (b) to manufacture or process the goods with the
purpose of ultimate sale: Provided, That, in the case of goods delivered
under trust receipt for the purpose of manufacturing or processing before
its ultimate sale, the entruster shall retain its title over the goods whether
in its original or processed form until the entrustee has complied full
with his obligation under the trust receipt; or (c) to load, unload, ship or
transship or otherwise deal with them in a manner preliminary or
necessary to their sale; or

2.
In the case of instruments: (a) to sell or procure their sale
or exchange; or (b) to deliver them to a principal; or (c) to effect the
consummation of some transactions involving delivery to a depository or
register; or (d) to effect their presentation, collection or renewal.

The sale of good, documents or instruments by a person in the

business of selling goods, documents or instruments for profit who, at
the outset of transaction, has, as against the buyer, general property
rights in such goods, documents or instruments, or who sells the same to
the buyer on credit, retaining title or other interest as security for the

payment of the purchase price, does not constitute a trust receipt

transaction and is outside the purview and coverage of this Decree.

In other words, a trust receipt transaction is one where the entrustee has the
obligation to deliver to the entruster the price of the sale, or if the merchandise is
not sold, to return the merchandise to the entruster. There are, therefore, two
obligations in a trust receipt transaction: the first refers to money received under
the obligation involving the duty to turn it over (entregarla) to the owner of the
merchandise sold, while the second refers to the merchandise received under the
obligation to return it (devolvera) to the owner.[13] A violation of any of these
undertakings constitutes Estafa defined under Art. 315, par. 1(b) of the RPC, as
provided in Sec. 13 of PD 115, viz:
Section 13. Penalty Clause.The failure of an entrustee to turn over the
proceeds of the sale of the goods, documents or instruments covered by
a trust receipt to the extent of the amount owing to the entruster or as
appears 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 Article Three hundred fifteen,
paragraph one (b) of Act Numbered Three thousand eight hundred and
fifteen, as amended, otherwise known as the Revised Penal Code. x x x
(Emphasis supplied.)

A thorough examination of the facts obtaining in the instant case, however,

reveals that the transaction between petitioner and Asiatrust is not a trust receipt
transaction but one of simple loan.

PD 115 Does Not Apply

It must be remembered that petitioner was transparent to Asiatrust from the

very beginning that the subject goods were not being held for sale but were to be
used for the fabrication of steel communication towers in accordance with his
contracts with Islacom, Smart, and Infocom. In these contracts, he was
commissioned to build, out of the materials received, steel communication
towers, not to sell them.

The true nature of a trust receipt transaction can be found in the whereas clause of
PD 115 which states that a trust receipt is to be utilized as a convenient business
device to assist importers and merchants solve their financing
problems. Obviously, the State, in enacting the law, sought to find a way to assist
importers and merchants in their financing in order to encourage commerce in
the Philippines.

As stressed in Samo v. People,[14] a trust receipt is considered a security

transaction intended to aid in financing importers and retail dealers who do not
have sufficient funds or resources to finance the importation or purchase of
merchandise, and who may not be able to acquire credit except through utilization,
as collateral, of the merchandise imported or purchased. Similarly, American
Jurisprudence demonstrates that trust receipt transactions always refer to a method
of financing importations or financing sales.[15] The principle is of course not
limited in its application to financing importations, since the principle is equally
applicable to domestic transactions.[16] Regardless of whether the transaction is
foreign or domestic, it is important to note that the transactions discussed in
relation to trust receipts mainly involved sales.

Following the precept of the law, such transactions affect situations wherein
the entruster, who owns or holds absolute title or security interests over specified
goods, documents or instruments, releases the subject goods to the possession of
the entrustee. The release of such goods to the entrustee is conditioned upon his
execution and delivery to the entruster of a trust receipt wherein the former binds
himself to hold the specific goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the goods, documents or instruments
with the obligation to turn over to the entruster the proceeds to the extent of the
amount owing to the entruster or the goods, documents or instruments themselves
if they are unsold. Similarly, we held in State Investment House v. CA, et al. that
the entruster is entitled only to the proceeds derived from the sale of goods
released under a trust receipt to the entrustee.[17]

Considering that the goods in this case were never intended for sale but for
use in the fabrication of steel communication towers, the trial court erred in ruling
that the agreement is a trust receipt transaction.

In applying the provisions of PD 115, the trial court relied on the

Memorandum of Asiatrusts appraiser, Linga, who stated that the goods have been
sold by petitioner and that only 3% of the goods remained in the warehouse where
it was previously stored. But for reasons known only to the trial court, the latter did
not give weight to the testimony of Linga when he testified that he merely
presumed that the goods were sold, viz:

COURT (to the witness)

Q So, in other words, when the goods

anymore. You presumed that, that is already sold?

were

not

there

A Yes, your Honor.

Undoubtedly, in his testimony, Linga showed that he had no real personal

knowledge or proof of the fact that the goods were indeed sold. He did not notify
petitioner about the inspection nor did he talk to or inquire with petitioner
regarding the whereabouts of the subject goods. Neither did he confirm with
petitioner if the subject goods were in fact sold. Therefore, the Memorandum of
Linga, which was based only on his presumption and not any actual personal
knowledge, should not have been used by the trial court to prove that the goods
have in fact been sold. At the very least, it could only show that the goods were not
in the warehouse.

Having established the inapplicability of PD 115, this Court finds that

petitioners liability is only limited to the satisfaction of his obligation from the
loan. The real intent of the parties was simply to enter into a simple loan
agreement.

To emphasize, the Trust Receipts Law was created to to aid in financing

importers and retail dealers who do not have sufficient funds or resources to
finance the importation or purchase of merchandise, and who may not be able
to acquire credit except through utilization, as collateral, of the merchandise
imported or purchased. Since Asiatrust knew that petitioner was neither an
importer nor retail dealer, it should have known that the said agreement could not
possibly apply to petitioner.

Moreover, this Court finds that petitioner is not liable for Estafa both under
the RPC and PD 115.

Goods Were Not Received in Trust

The first element of Estafa under Art. 315, par. 1(b) of the RPC requires that the
money, goods or other personal property must be received by the offender in trust
or on commission, or for administration, or under any other obligation involving
the duty to make delivery of, or to return it. But as we already discussed, the goods
received by petitioner were not held in trust. They were also not intended for sale
and neither did petitioner have the duty to return them. They were only intended
for use in the fabrication of steel communication towers.

No Misappropriation of Goods or Proceeds

The second element of Estafa requires that there be misappropriation or conversion

of such money or property by the offender, or denial on his part of such receipt.

This is the very essence of Estafa under Art. 315, par. 1(b). The words
convert and misappropriated connote an act of using or disposing of anothers
property as if it were ones own, or of devoting it to a purpose or use different from
that agreed upon. To misappropriate for ones own use includes not only conversion
to ones personal advantage, but also every attempt to dispose of the property of
another without a right.[18]

Petitioner argues that there was no misappropriation or conversion on his

part, because his liability for the amount of the goods subject of the trust receipts
arises and becomes due only upon receipt of the proceeds of the sale and not prior
to the receipt of the full price of the goods.

Petitioner is correct. Thus, assuming arguendo that the provisions of PD 115

apply, petitioner is not liable for Estafa because Sec. 13 of PD 115 provides that an
entrustee is only liable for Estafa when he fails to turn over the proceeds of the sale
of the goods x x x covered by a trust receipt to the extent of the amount owing to
the entruster or as appears in the trust receipt x x x in accordance with the terms
of the trust receipt.

The trust receipt entered into between Asiatrust and petitioner states:

In case of sale I/we agree to hand the proceeds as soon as

received to the BANK to apply against the relative acceptance (as
described above) and for the payment of any other indebtedness of
mine/ours to ASIATRUST DEVELOPMENT BANK. [19] (Emphasis
supplied.)

Clearly, petitioner was only obligated to turn over the proceeds as soon as he
received payment. However, the evidence reveals that petitioner experienced
difficulties in collecting payments from his clients for the communication towers.
Despite this fact, petitioner endeavored to pay his indebtedness to Asiatrust, which
payments during the period from September 1997 to July 1998 total approximately
PhP 1,500,000. Thus, absent proof that the proceeds have been actually and fully
received by petitioner, his obligation to turn over the same to Asiatrust never arose.

What is more, under the Trust Receipt Agreement itself, no date of maturity
was stipulated. The provision left blank by Asiatrust is as follows:

x x x and in consideration thereof, I/we hereby agree to hold said

goods in Trust for the said Bank and as its property with liberty to sell
the same for its account within ________ days from the date of
execution of the Trust Receipt x x x[20]

In fact, Asiatrust purposely left the space designated for the date blank, an action
which in ordinary banking transactions would be noted as highly irregular. Hence,
the only way for the obligation to mature was for Asiatrust to demand from
petitioner to pay the obligation, which it never did.

Again, it also makes the Court wonder as to why Asiatrust decided to leave
the provisions for the maturity dates in the Trust Receipt agreements in blank,
since those dates are elemental part of the loan.But then, as can be gleaned from
the records of this case, Asiatrust also knew that the capacity of petitioner to pay
for his loan also hinges upon the latters receivables from Islacom, Smart, and
Infocom where he had ongoing and future projects for fabrication and installation

of steel communication towers and not from the sale of said goods. Being a bank,
Asiatrust acted inappropriately when it left such a sensitive bank instrument with a
void circumstance on an elementary but vital feature of each and every loan
transaction, that is, the maturity dates. Without stating the maturity dates, it was
impossible for petitioner to determine when the loan will be due.

Moreover, Asiatrust was aware that petitioner was not engaged in selling the
subject goods and that petitioner will use them for the fabrication and installation
of communication towers. Before granting petitioner the credit line, as
aforementioned, Asiatrust conducted an investigation, which showed that petitioner
fabricated and installed communication towers for well-known communication
companies to be installed at designated project sites. In fine, there was no abuse of
confidence to speak of nor was there any intention to convert the subject goods for
another purpose, since petitioner did not withhold the fact that they were to be used
to fabricate steel communication towers to Asiatrust. Hence, no malice or abuse of
confidence and misappropriation occurred in this instance due to Asiatrusts
knowledge of the facts.

Furthermore, Asiatrust was informed at the time of petitioners application

for the loan that the payment for the loan would be derived from the collectibles of
his clients. Petitioner informed Asiatrust that he was having extreme difficulties in
collecting from Islacom the full contracted price of the towers. Thus, the duty of
petitioner to remit the proceeds of the goods has not yet arisen since he has yet to
receive proceeds of the goods. Again, petitioner could not be said to have
misappropriated or converted the proceeds of the transaction since he has not yet
received the proceeds from his client, Islacom.

This Court also takes judicial notice of the fact that petitioner has fully paid
his obligation to Asiatrust, making the claim for damage and prejudice of Asiatrust

baseless and unfounded. Given that the acceptance of payment by Asiatrust

necessarily extinguished petitioners obligation, then there is no longer any
obligation on petitioners part to speak of, thus precluding Asiatrust from claiming
any
damage.
This
is
evidenced
by
Asiatrusts Affidavit
of
[21]
Desistance acknowledging full payment of the loan.

Reasonable Doubt Exists

In the final analysis, the prosecution failed to prove beyond

reasonable doubt that petitioner was guilty of Estafa under Art.
315, par. 1(b) of the RPC in relation to the pertinent provision of
PD 115 or the Trust Receipts Law; thus, his liability should only be
civil in nature.

While petitioner admits to his civil liability to Asiatrust, he

nevertheless does not have criminal liability. It is a wellestablished principle that person is presumed innocent until
proved guilty. To overcome the presumption, his guilt must be
shown by proof beyond reasonable doubt. Thus, we held in People
v. Mariano[22] that while the principle does not connote absolute
certainty, it means the degree of proof which produces moral
certainty in an unprejudiced mind of the culpability of the
accused. Such proof should convince and satisfy the reason and
conscience of those who are to act upon it that the accused is in
fact guilty. The prosecution, in this instant case, failed to rebut the
constitutional innocence of petitioner and thus the latter should
be acquitted.
At this point, the ruling of this Court in Colinares v. Court of Appeals is very
apt, thus:

The practice of banks of making borrowers sign trust receipts to

facilitate collection of loans and place them under the threats of criminal
prosecution should they be unable to pay it may be unjust and
inequitable, if not reprehensible. Such agreements are contracts of
adhesion which borrowers have no option but to sign lest their loan be
disapproved. The resort to this scheme leaves poor and hapless
borrowers at the mercy of banks, and is prone to misinterpretation x x x.
[23]

Such is the situation in this case.

Asiatrusts intention became more evident when, on March 30,

2009, it, along with petitioner, filed their Joint Motion for Leave to
File and Admit Attached Affidavit of Desistance to qualify the
Affidavit of Desistance executed by Felino H. Esquivas, Jr.,
attorney-in-fact of the Board of Asiatrust, which acknowledged the
full payment of the obligation of the petitioner and the successful
mediation between the parties.

From the foregoing considerations, we deem it unnecessary to discuss and

rule upon the other issues raised in the appeal.

WHEREFORE, the CA Decision dated August 29, 2003 affirming

the RTC Decision dated May 29, 2001 is SET ASIDE. Petitioner
ANTHONY L. NG is hereby ACQUITTED of the charge of violation

of Art. 315, par. 1(b) of the RPC in relation to the pertinent

provision of PD 115.

SO ORDERED.

epublic of the Philippines

Supreme Court
Manila

SECOND DIVISION
LAND BANK OF THE PHILIPPINES,
Petitioner,

G.R. No. 166884

Present:

- versus -

LAMBERTO C. PEREZ, NESTOR C.

KUN, MA. ESTELITA P. ANGELESPANLILIO, and NAPOLEON O.
GARCIA,
Respondents.

CARPIO, J., Chairperson,

BRION,
PEREZ,
SERENO, and
REYES, JJ.
Promulgated:
June 13, 2012

x------------------------------------------------------------------------------------x
DECISION
BRION, J.:

Before this Court is a petition for review on certiorari,[1] under Rule 45 of the
Rules of Court, assailing the decision[2] dated January 20, 2005 of the Court of
Appeals in CA-G.R. SP No. 76588. In the assailed decision, the Court of Appeals
dismissed the criminal complaint for estafa against the respondents, Lamberto C.
Perez, Nestor C. Kun, Ma. Estelita P. Angeles-Panlilio and Napoleon Garcia, who
allegedly violated Article 315, paragraph 1(b) of the Revised Penal Code, in
relation with Section 13 of Presidential Decree No. (P.D.) 115 the Trust Receipts
Law.
Petitioner Land Bank of the Philippines (LBP) is a government financial institution
and the official depository of the Philippines. [3] Respondents are the officers and
representatives of Asian Construction and Development Corporation (ACDC), a
corporation incorporated under Philippine law and engaged in the construction
business.[4]
On June 7, 1999, LBP filed a complaint for estafa or violation of Article 315,
paragraph 1(b) of the Revised Penal Code, in relation to P.D. 115, against the
respondents before the City Prosecutors Office in Makati City. In the affidavitcomplaint[5] of June 7, 1999, the LBPs Account Officer for the Account
Management Development, Edna L. Juan, stated that LBP extended a credit
accommodation to ACDC through the execution of an Omnibus Credit Line
Agreement (Agreement)[6] between LBP and ACDC on October 29, 1996. In
various instances, ACDC used the Letters of Credit/Trust Receipts Facility of the
Agreement to buy construction materials. The respondents, as officers and
representatives of ACDC, executed trust receipts[7] in connection with the
construction materials, with a total principal amount of P52,344,096.32. The trust
receipts matured, but ACDC failed to return to LBP the proceeds of the
construction projects or the construction materials subject of the trust receipts. LBP
sent ACDC a demand letter,[8] dated May 4, 1999, for the payment of its debts,
including those under the Trust Receipts Facility in the amount
of P66,425,924.39. When ACDC failed to comply with the demand letter, LBP
filed the affidavit-complaint.
The respondents filed a joint affidavit[9] wherein they stated that they signed the
trust receipt documents on or about the same time LBP and ACDC executed the
loan documents; their signatures were required by LBP for the release of the
loans. The trust receipts in this case do not contain (1) a description of the goods
placed in trust, (2) their invoice values, and (3) their maturity dates, in violation of
Section 5(a) of P.D. 115. Moreover, they alleged that ACDC acted as a

subcontractor for government projects such as the Metro Rail Transit, the Clark
Centennial Exposition and the Quezon Power Plant in Mauban, Quezon.Its clients
for the construction projects, which were the general contractors of these projects,
have not yet paid them; thus, ACDC had yet to receive the proceeds of the
materials that were the subject of the trust receipts and were allegedly used for
these constructions. As there were no proceeds received from these clients, no
misappropriation thereof could have taken place.
On September 30, 1999, Makati Assistant City Prosecutor Amador Y. Pineda
issued a Resolution[10] dismissing the complaint. He pointed out that the evidence
presented by LBP failed to state the date when the goods described in the letters of
credit were actually released to the possession of the respondents. Section 4 of P.D.
115 requires that the goods covered by trust receipts be released to the possession
of the entrustee after the latters execution and delivery to the entruster of a signed
trust receipt. He adds that LBPs evidence also fails to show the date when the trust
receipts were executed since all the trust receipts are undated. Its dispositive
portion reads:
WHEREFORE, premises considered, and for insufficiency of evidence, it
is respectfully recommended that the instant complaints be dismissed, as upon
approval, the same are hereby dismissed.[11]

LBP filed a motion for reconsideration which the Makati Assistant City Prosecutor
denied in his order of January 7, 2000.[12]
On appeal, the Secretary of Justice reversed the Resolution of the Assistant
City Prosecutor. In his resolution of August 1, 2002,[13] the Secretary of Justice
pointed out that there was no question that the goods covered by the trust receipts
were received by ACDC. He likewise adopted LBPs argument that while the
subjects of the trust receipts were not mentioned in the trust receipts, they were
listed in the letters of credit referred to in the trust receipts. He also noted that the
trust receipts contained maturity dates and clearly set out their stipulations. He
further rejected the respondents defense that ACDC failed to remit the payments to
LBP due to the failure of the clients of ACDC to pay them. The dispositive portion
of the resolution reads:
WHEREFORE, the assailed resolution is REVERSED and SET
ASIDE. The City Prosecutor of Makati City is hereby directed to file an
information for estafa under Art. 315 (1) (b) of the Revised Penal Code in relation
to Section 13, Presidential Decree No. 115 against respondents Lamberto C.

Perez, Nestor C. Kun, [Ma. Estelita P. Angeles-Panlilio] and Napoleon O. Garcia

and to report the action taken within ten (10) days from receipt hereof.[14]

The respondents filed a motion for reconsideration of the resolution dated August
1, 2002, which the Secretary of Justice denied.[15] He rejected the respondents
submission that Colinares v. Court of Appeals[16] does not apply to the case. He
explained that in Colinares, the building materials were delivered to the accused
before they applied to the bank for a loan to pay for the merchandise; thus, the
ownership of the merchandise had already been transferred to the entrustees before
the trust receipts agreements were entered into. In the present case, the parties have
already entered into the Agreement before the construction materials were
delivered to ACDC.
Subsequently, the respondents filed a petition for review before the Court of
Appeals.
After both parties submitted their respective Memoranda, the Court of Appeals
promulgated the assailed decision of January 20, 2005.[17] Applying the doctrine
in Colinares, it ruled that this case did not involve a trust receipt transaction, but a
mere loan. It emphasized that construction materials, the subject of the trust receipt
transaction, were delivered to ACDC even before the trust receipts were
executed. It noted that LBP did not offer proof that the goods were received by
ACDC, and that the trust receipts did not contain a description of the goods, their
invoice value, the amount of the draft to be paid, and their maturity dates. It also
adopted ACDCs argument that since no payment for the construction projects had
been received by ACDC, its officers could not have been guilty of
misappropriating any payment. The dispositive portion reads:
WHEREFORE, in view of the foregoing, the Petition is GIVEN DUE
COURSE. The assailed Resolutions of the respondent Secretary of Justice dated
August 1, 2002 and February 17, 2003, respectively in I.S. No. 99-F-9218-28 are
hereby REVERSED and SET ASIDE.[18]

LBP now files this petition for review on certiorari, dated March 15, 2005, raising
the following error:
THE COURT OF APPEALS GRAVELY ERRED WHEN IT REVERSED AND
SET ASIDE THE RESOLUTIONS OF THE HONORABLE SECRETARY OF
JUSTICE BY APPLYING THE RULING IN THE CASE OF COLINARES V.

COURT OF APPEALS, 339 SCRA 609, WHICH IS NOT APPLICABLE IN THE

CASE AT BAR.[19]

On April 8, 2010, while the case was pending before this Court, the respondents
filed a motion to dismiss.[20] They informed the Court that LBP had already
assigned to Philippine Opportunities for Growth and Income, Inc. all of its rights,
title and interests in the loans subject of this case in a Deed of Absolute Sale dated
June 23, 2005 (attached as Annex C of the motion). The respondents also stated
that Avent Holdings Corporation, in behalf of ACDC, had already settled ACDCs
obligation to LBP on October 8, 2009. Included as Annex A in this motion was a
certification[21] issued by the Philippine Opportunities for Growth and Income, Inc.,
stating that it was LBPs successor-in-interest insofar as the trust receipts in this
case are concerned and that Avent Holdings Corporation had already settled the
claims of LBP or obligations of ACDC arising from these trust receipts.
We deny this petition.

The disputed transactions are not trust

receipts.
Section 4 of P.D. 115 defines a trust receipt transaction in this manner:
Section 4. What constitutes a trust receipt transaction. A trust receipt
transaction, within the meaning of this Decree, is any transaction by and
between a person referred to in this Decree as the entruster, and another
person referred to in this Decree as entrustee, whereby the entruster, who
owns or holds absolute title or security interests over certain specified
goods, documents or instruments, releases the same to the possession of
the entrustee upon the latter's execution and delivery to the entruster of a
signed document called a "trust receipt" wherein the entrustee binds
himself to hold the designated goods, documents or instruments in trust
for the entruster and to sell or otherwise dispose of the goods, documents
or instruments with the obligation to turn over to the entruster the
proceeds thereof to the extent of the amount owing to the entruster or as
appears in the trust receipt or the goods, documents or instruments
themselves if they are unsold or not otherwise disposed of, in accordance
with the terms and conditions specified in the trust receipt, or for other
purposes substantially equivalent to any of the following:

1. In the case of goods or documents, (a) to sell the goods or procure

their sale; or (b) to manufacture or process the goods with the purpose of
ultimate sale: Provided, That, in the case of goods delivered under trust
receipt for the purpose of manufacturing or processing before its ultimate
sale, the entruster shall retain its title over the goods whether in its
original or processed form until the entrustee has complied fully with his
obligation under the trust receipt; or (c) to load, unload, ship or tranship
or otherwise deal with them in a manner preliminary or necessary to
their sale[.]

There are two obligations in a trust receipt transaction. The first is covered
by the provision that refers to money under the obligation to deliver it (entregarla)
to the owner of the merchandise sold. The second is covered by the provision
referring to merchandise received under the obligation to return it (devolvera) to
the owner. Thus, under the Trust Receipts Law,[22] intent to defraud is presumed
when (1) the entrustee fails to turn over the proceeds of the sale of goods covered
by the trust receipt to the entruster; or (2) when the entrustee fails to return the
goods under trust, if they are not disposed of in accordance with the terms of the
trust receipts.[23]
In all trust receipt transactions, both obligations on the part of the trustee
exist in the alternative the return of the proceeds of the sale or the return or
recovery of the goods, whether raw or processed. [24]When both parties enter into an
agreement knowing that the return of the goods subject of the trust receipt is not
possible even without any fault on the part of the trustee, it is not a trust receipt
transaction penalized under Section 13 of P.D. 115; the only obligation actually
agreed upon by the parties would be the return of the proceeds of the sale
transaction. This transaction becomes a mere loan,[25] where the borrower is
obligated to pay the bank the amount spent for the purchase of the goods.
Article 1371 of the Civil Code provides that [i]n order to judge the intention
of the contracting parties, their contemporaneous and subsequent acts shall be
principally considered. Under this provision, we can examine the contemporaneous
actions of the parties rather than rely purely on the trust receipts that they signed in
order to understand the transaction through their intent.
We note in this regard that at the onset of these transactions, LBP knew that
ACDC was in the construction business and that the materials that it sought to buy

under the letters of credit were to be used for the following projects: the Metro Rail
Transit Project and the Clark Centennial Exposition Project.[26] LBP had in fact
authorized the delivery of the materials on the construction sites for these projects,
as seen in the letters of credit it attached to its complaint. [27] Clearly, they were
aware of the fact that there was no way they could recover the buildings or
constructions for which the materials subject of the alleged trust receipts had been
used. Notably, despite the allegations in the affidavit-complaint wherein LBP
sought the return of the construction materials, [28] its demand letter dated May 4,
1999 sought the payment of the balance but failed to ask, as an alternative, for the
return of the construction materials or the buildings where these materials had been
used.[29]
The fact that LBP had knowingly authorized the delivery of construction materials
to a construction site of two government projects, as well as unspecified
construction sites, repudiates the idea that LBP intended to be the owner of those
construction materials. As a government financial institution, LBP should have
been aware that the materials were to be used for the construction of an immovable
property, as well as a property of the public domain. As an immovable property,
the ownership of whatever was constructed with those materials would presumably
belong to the owner of the land, under Article 445 of the Civil Code which
provides:
Article 445. Whatever is built, planted or sown on the land of another and the
improvements or repairs made thereon, belong to the owner of the land, subject to
the provisions of the following articles.

Even if we consider the vague possibility that the materials, consisting of cement,
bolts and reinforcing steel bars, would be used for the construction of a movable
property, the ownership of these properties would still pertain to the government
and not remain with the bank as they would be classified as property of the public
domain, which is defined by the Civil Code as:
Article 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and
bridges constructed by the State, banks, shores, roadsteads, and others of similar
character;
(2) Those which belong to the State, without being for public use, and are
intended for some public service or for the development of the national wealth.

In contrast with the present situation, it is fundamental in a trust receipt transaction

that the person who advanced payment for the merchandise becomes the absolute
owner of said merchandise and continues as owner until he or she is paid in full, or
if the goods had already been sold, the proceeds should be turned over to him or to
her.[30]
Thus, in concluding that the transaction was a loan and not a trust receipt, we noted
in Colinares that the industry or line of work that the borrowers were engaged in
was construction. We pointed out that the borrowers were not importers acquiring
goods for resale.[31] Indeed, goods sold in retail are often within the custody or
control of the trustee until they are purchased. In the case of materials used in the
manufacture of finished products, these finished products if not the raw materials
or their components similarly remain in the possession of the trustee until they are
sold. But the goods and the materials that are used for a construction project are
often placed under the control and custody of the clients employing the contractor,
who can only be compelled to return the materials if they fail to pay the contractor
and often only after the requisite legal proceedings. The contractors difficulty and
uncertainty in claiming these materials (or the buildings and structures which they
become part of), as soon as the bank demands them, disqualify them from being
covered by trust receipt agreements.
Based on these premises, we cannot consider the agreements between the
parties in this case to be trust receipt transactions because (1) from the start, the
parties were aware that ACDC could not possibly be obligated to reconvey to LBP
the materials or the end product for which they were used; and (2) from the
moment the materials were used for the government projects, they became public,
not LBPs, property.
Since these transactions are not trust receipts, an action for estafa should not
be brought against the respondents, who are liable only for a loan. In passing, it is
useful to note that this is the threat held against borrowers that Retired Justice
Claudio Teehankee emphatically opposed in his dissent in People v. Cuevo,
[32]
restated in Ong v. CA, et al.:[33]
The very definition of trust receipt x x x sustains the lower courts rationale in
dismissing the information that the contract covered by a trust receipt is merely a
secured loan. The goods imported by the small importer and retail dealer through
the banks financing remain of their own property and risk and the old capitalist
orientation of putting them in jail for estafa for non-payment of the secured loan

(granted after they had been fully investigated by the bank as good credit risks)
through the fiction of the trust receipt device should no longer be permitted in this
day and age.

As the law stands today, violations of Trust Receipts Law are criminally
punishable, but no criminal complaint for violation of Article 315, paragraph 1(b)
of the Revised Penal Code, in relation with P.D. 115, should prosper against a
borrower who was not part of a genuine trust receipt transaction.
Misappropriation or abuse of confidence is
absent in this case.
Even if we assume that the transactions were trust receipts, the complaint
against the respondents still should have been dismissed. The Trust Receipts Law
punishes the dishonesty and abuse of confidence in the handling of money or
goods to the prejudice of another, regardless of whether the latter is the owner or
not. The law does not singularly seek to enforce payment of the loan, as there can
be no violation of [the] right against imprisonment for non-payment of a debt.[34]
In order that the respondents may be validly prosecuted for estafa under
Article 315, paragraph 1(b) of the Revised Penal Code, [35] in relation with Section
13 of the Trust Receipts Law, the following elements must be established: (a) they
received the subject goods in trust or under the obligation to sell the same and to
remit the proceeds thereof to [the trustor], or to return the goods if not sold; (b)
they misappropriated or converted the goods and/or the proceeds of the sale; (c)
they performed such acts with abuse of confidence to the damage and prejudice of
Metrobank; and (d) demand was made on them by [the trustor] for the remittance
of the proceeds or the return of the unsold goods.[36]
In this case, no dishonesty or abuse of confidence existed in the handling of
the construction materials.
In this case, the misappropriation could be committed should the entrustee
fail to turn over the proceeds of the sale of the goods covered by the trust receipt
transaction or fail to return the goods themselves. The respondents could not have
failed to return the proceeds since their allegations that the clients of ACDC had

not paid for the projects it had undertaken with them at the time the case was filed
had never been questioned or denied by LBP. What can only be attributed to the
respondents would be the failure to return the goods subject of the trust receipts.
We do not likewise see any allegation in the complaint that ACDC had used
the construction materials in a manner that LBP had not authorized. As earlier
pointed out, LBP had authorized the delivery of these materials to these project
sites for which they were used. When it had done so, LBP should have been aware
that it could not possibly recover the processed materials as they would become
part of government projects, two of which (the Metro Rail Transit Project and the
Quezon Power Plant Project) had even become part of the operations of public
utilities vital to public service. It clearly had no intention of getting these materials
back; if it had, as a primary government lending institution, it would be guilty of
extreme negligence and incompetence in not foreseeing the legal complications
and public inconvenience that would arise should it decide to claim the
materials. ACDCs failure to return these materials or their end product at the time
these trust receipts expired could not be attributed to its volition.No bad faith,
malice, negligence or breach of contract has been attributed to ACDC, its officers
or representatives. Therefore, absent any abuse of confidence or misappropriation
on the part of the respondents, the criminal proceedings against them for estafa
should not prosper.
In Metropolitan Bank,[37] we affirmed the city prosecutors dismissal of a
complaint for violation of the Trust Receipts Law. In dismissing the complaint, we
took note of the Court of Appeals finding that the bank was interested only in
collecting its money and not in the return of the goods. Apart from the bare
allegation that demand was made for the return of the goods (raw materials that
were manufactured into textiles), the bank had not accompanied its complaint with
a demand letter. In addition, there was no evidence offered that the respondents
therein had misappropriated or misused the goods in question.
The petition should be dismissed because
the OSG did not file it and the civil
liabilities have already been settled.
The proceedings before us, regarding the criminal aspect of this case, should
be dismissed as it does not appear from the records that the complaint was filed
with the participation or consent of the Office of the Solicitor General

(OSG). Section 35, Chapter 12, Title III, Book IV of the Administrative Code of
1987 provides that:
Section 35. Powers and Functions. The Office of the Solicitor General shall
represent the Government of the Philippines, its agencies and instrumentalities
and its officials and agents in any litigation, proceedings, investigation or matter
requiring the services of lawyers. x x x It shall have the following specific powers
and functions:
(1) Represent the Government in the Supreme Court and the Court of
Appeals in all criminal proceedings; represent the Government and its officers
in the Supreme Court, the Court of Appeals and all other courts or tribunals in all
civil actions and special proceedings in which the Government or any officer
thereof in his official capacity is a party. (Emphasis provided.)

In Heirs of Federico C. Delgado v. Gonzalez,[38] we ruled that the

preliminary investigation is part of a criminal proceeding. As all criminal
proceedings before the Supreme Court and the Court of Appeals may be brought
and defended by only the Solicitor General in behalf of the Republic of the
Philippines, a criminal action brought to us by a private party alone suffers from a
fatal defect. The present petition was brought in behalf of LBP by the Government
Corporate Counsel to protect its private interests. Since the representative of the
People of the Philippines had not taken any part of the case, it should be dismissed.
On the other hand, if we look at the mandate given to the Office of the Government
Corporate Counsel, we find that it is limited to the civil liabilities arising from the
crime, and is subject to the control and supervision of the public
prosecutor. Section 2, Rule 8 of the Rules Governing the Exercise by the Office of
the Government Corporate Counsel of its Authority, Duties and Powers as
Principal Law Office of All Government Owned or Controlled Corporations, filed
before the Office of the National Administration Register on September 5, 2011,
reads:
Section 2. Extent of legal assistance The OGCC shall represent the
complaining GOCC in all stages of the criminal proceedings. The legal assistance
extended is not limited to the preparation of appropriate sworn statements but
shall include all aspects of an effective private prosecution including recovery of
civil liability arising from the crime, subject to the control and supervision of the
public prosecutor.

Based on jurisprudence, there are two exceptions when a private party

complainant or offended party in a criminal case may file a petition with this
Court, without the intervention of the OSG: (1) when there is denial of due process
of law to the prosecution, and the State or its agents refuse to act on the case to the
prejudice of the State and the private offended party; [39] and (2) when the private
offended party questions the civil aspect of a decision of the lower court.[40]
In this petition, LBP fails to allege any inaction or refusal to act on the part
of the OSG, tantamount to a denial of due process. No explanation appears as to
why the OSG was not a party to the case.Neither can LBP now question the civil
aspect of this decision as it had already assigned ACDCs debts to a third person,
Philippine Opportunities for Growth and Income, Inc., and the civil liabilities
appear to have already been settled by Avent Holdings Corporation, in behalf of
ACDC. These facts have not been disputed by LBP. Therefore, we can reasonably
conclude that LBP no longer has any claims against ACDC, as regards the subject
matter of this case, that would entitle it to file a civil or criminal action.
WHEREFORE, we DENY the petition and AFFIRM the January 20, 2005
decision of the Court of Appeals in CA-G.R. SP No. 76588. No costs.
SO ORDERED.