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G.R. No.

74886 December 8, 1992

PRUDENTIAL BANK, petitioner,
ANACLETO R. CHI, respondents.
FACTS : Philippine Rayon Mills, Inc. (PRMI)applied for a commercial letter of
credit with Prudential bank for the importation of textile machinery with Nissho
Co., Ltd. of Japan. Prudential Bank executed a trust receipt signed by the
President of PRMI.
PMRI received the machinery and installed the same at its factory. PMRI ceased
business sometime in 1967 without paying his obligation arising from the letters
of credit and trust receipt. Repeated demands for the payment of the said trust
receipt were made and to no avail. Hence, action for collection of money was
filed to the trial court.
ISSUE : Whether Philippine Rayon is liable on the basis of the trust receipt?
HELD : Paragraph 8 of the Trust Receipt which reads: "My/our liability for
payment at maturity of any accepted draft, bill of exchange or indebtedness shall
not be extinguished or modified" 17 does not, contrary to the holding of the public
respondent, contemplate prior acceptance by Philippine Rayon, but by the
petitioner. Acceptance, however, was not even necessary in the first place
because the drafts which were eventually issued were sight drafts And even if
these were not sight drafts, thereby necessitating acceptance, it would be the
petitioner and not Philippine Rayon which had to accept the same for the
latter was not the drawee. Presentment for acceptance is defined an the
production of a bill of exchange to a drawee for acceptance. 18 The trial court and
the public respondent, therefore, erred in ruling that presentment for acceptance
was an indispensable requisite for Philippine Rayon's liability on the drafts to
attach. Contrary to both courts' pronouncements, Philippine Rayon
immediately became liable thereon upon petitioner's payment thereof. Such
is the essence of the letter of credit issued by the petitioner. A different
conclusion would violate the principle upon which commercial letters of credit are
founded because in such a case, both the beneficiary and the issuer, Nissho
Company Ltd. and the petitioner, respectively, would be placed at the mercy of
Philippine Rayon even if the latter had already received the imported machinery
and the petitioner had fully paid for it.

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Commercial letters of credit have come into general use in international sales
transactions where much time necessarily elapses between the sale and the
receipt by a purchaser of the merchandise, during which interval great price
changes may occur. Their purpose is to insure to a seller payment of a
definite amount upon presentation of documents. The bank deals only with
documents. It has nothing to do with the quality of the merchandise. Disputes as
to the merchandise shipped may arise and be litigated later between vendor and
vendee, but they may not impede acceptance of drafts and payment by the
issuing bank when the proper documents are presented.
A letter of credit is defined as an engagement by a bank or other person made at
the request of a customer that the issuer will honor drafts or other demands for
payment upon compliance with the conditions specified in the credit. 11 Through a
letter of credit, the bank merely substitutes its own promise to pay for one of its
customers who in return promises to pay the bank the amount of funds
mentioned in the letter of credit plus credit or commitment fees mutually agreed
upon. 12 In the instant case then, the drawee was necessarily the herein
petitioner. It was to the latter that the drafts were presented for payment. In fact,
there was no need for acceptance as the issued drafts are sight drafts.
Presentment for acceptance is necessary only in the cases expressly provided
for in Section 143 of the Negotiable Instruments Law (NIL).
G.R. No. 105395 December 10, 1993
BANK OF AMERICA, NT & SA, petitioners,
FACTS : Bank of America received an Irrevocable Letter of Credit issued bu
Bank of Ayudhya for the Account of General Chemicals Ltd., Inc. for the sale of
plastic ropes and agricultural files with Bank of America as advising bank and
Inter-Resin Industrial Corp. as beneficiary.
Upon receipt of the letter advice with letter of credit by Inter- Resin told Bank of
America to confirm said letter of credit, but the bank did not confirm such. Bank
of America explained that there was no need for confirmation.
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 BA issued a check in favor of IR. BA advice Bank of Ayudhya of IRs

availment under the letter of credit and asked for the corresponding
IR presented documents for the second availment under the same LC but 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
ISSUE : Whether or not Bank of America may recover what it has paid under the
letter of credit to Inter-Resin?
HELD : 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 InterResin's partial availment as beneficiary of the letter of credit which has been
disowned by the alleged issuer bank.
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.
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

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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.
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.
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.


G.R. No. 160732.
June 21, 2004
FACTS: MWSS granted Maynilad under a Concession Agreement 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 which, among other things,
consisted of payments of petitioners mostly foreign loans.
To secure the concessionaires performance of its obligations, 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 for a three-year facility
with a number of foreign banks, led by Citicorp Intl Ltd., for the issuance of an
Irrevocable Standby Letter of Credit in favor of MWSS for the full and prompt
performance of Maynilads obligations to MWSS as aforestated.
Later, the parties agreed to resolve the issues between them [Maynilad is asking
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 and in filing to get what it desired, Maynilad unilaterally
suspended the payment of the concession fees] through an amendment of the
Concession Agreement which was based on the terms set down in MWSS Board
of Trustees Resolution 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.
However Maynilad served upon MWSS a Notice of Event of Termination,
claiming that MWSS failed to comply with its obligations under the Concession
Agreement and its Amendment regarding the adjustment mechanism that would
cover Maynilads foreign exchange losses. Maynilad filed a Notice of Early
Termination of the concession, which was challenged by MWSS. This matter was
eventually brought before the Appeals Panel by MWSS. 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.

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The award of the Appeals Panel became final. MWSS, thereafter, submitted a
written notice to Citicorp Intl Ltd, 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.
Prior to this, however, Maynilad had filed on a petition for rehabilitation before the
RTC of Quezon City which resulted in the issuance of the Stay Order and the
disputed Order of November 27, 2003.
ISSUE: WON 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
HELD: the petition for certiorari is granted.The Order of November 27, 2003 of
the RTC of Quezon City 90, is hereby declared null and voidand set aside.
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
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.
Letters of credit were developed for the purpose of insuring to a seller payment of
a definite amount upon the presentation of documentsand 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.
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. And being solidary, the claims
against them can be pursued separately from and independently of the
rehabilitation case.
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 in favor
of the MWSS as a bond for the full and prompt performance of the obligations by
the concessionaire under the Concession Agreement and herein MWSS 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 of the Letter of Credit.
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.
We held in Feati Bank & Trust Company v. Court of Appeals that the concept of
guarantee visvis the concept of an irrevocable letter of credit are inconsistent

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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.
G.R. No. L-15044

May 30, 1960


From the decision of the Court of First Instance of Manila (in Civil Case No.
34566), in which it was ordered to refund to plaintiff Belman Compaia
Incorporada the amounts of P273.41 and P172.87, with legal interest from the
date the complaint was filed until fully paid, and the amount of P250.00 as
attorney's fees, and to pay costs, defendant Central Bank of the Philippines
interposed this appeal.
Two issues both legal, are presented in this appeal; (a) whether the action has
already prescribed, and (b) whether defendant Central Bank can be compelled to
make the refund after the amounts involved had already been turned over to the
National Treasury of the Government. We take up only the first question because
it is decisive.
On April 26, 1951 and May 4, 1951, plaintiff paid to the Philippine National Bank
its obligations for foreign exchange obtained under Credits Nos. 43729 (PNB I/B
36747) and 41347 (PNB I/B 37605), respectively. On the same dates, defendant
Central Bank collected from plaintiff, as exchange tax, 1 the amounts of P273.41
(CBP O. R. No. 002801 dated April 26, (1951) and P172.87 (CBP O. R. No
002928 dated May 4, 1951) Plaintiff paid said amounts to defendant, under
On November 8, 1951, plaintiff requested defendant to refund to it both amounts,
but defendant refused to do so. Plaintiff reiterated said request for the refund of
P273.41 on September 2, 1957, and of P172.87 on October 7, 1957; and for both
amounts, on December 2, 1957. Defendant, however, likewise refused to comply
with plaintiff's request2 .

Plaintiff, therefore, on December 20, 1957, filed with the above-mentioned court
a complaint praying, inter alia, that defendant's Monetary Board Resolution No.
286, series of 1951, be declared null and void, and that defendant be ordered to
refund to plaintiff said amounts of P273.41 and P172.87 it paid as exchange tax.
On January 3, 1958, defendant filed a motion to dismiss on the grounds that (1)
the court has no jurisdiction over the subject matter of the action; (2) the
complaint states no cause of action; and (3) the cause of action, if any, is barred
by the statute of limitations. On January 10, 1958, plaintiff filed an opposition to
said motion, to which, defendant filed a reply on January 17, 1958.
On April 7, 1958, the court issued an order holding in abeyance its resolution on
defendant's motion to dismiss, until after the parties shall have presented their
On April 11, 1958, defendant filed its answer reiterating as defenses, the grounds
alleged in its motion to dismiss.
After the issues have been joined and due hearing had, the lower court rendered
a decision which, in pertinent part, reads:



Defendant's collection of the Exchange Tax on April 26, 1951 and May 4,
1951, when plaintiff paid its obligations under Credits Nos. 43729 and
No. 41347 is erroneous and without any legal basis because the plaintiff
on these dates did not purchase any foreign exchange from the Bank
but merely liquidated its existing accounts under the Credits. The sale of
foreign exchange in the present case took place at the moment when
the applications for Letters of Credit were approved and given due
course that is, on May 29, 1950 and January 2, 1951, at which time,
Republic Act 601 imposing a tax on the sale of Foreign Exchange was
not, as yet, in existence.



Under these circumstances, and considering the fact that the amount of
P273.41 under Official Receipt No. 002801 was collected by the
defendants seven (7) days (April 26, 1951) before Resolution No. 286
was approved on May 3, 1951, the conclusion is inescapable that
Central Bank Resolution No. 286 is null and void not only because it has
not been published as required by law in the Official Gazette, but as
admitted by the defendant itself under oath in par. XV of Exhibit "B", the
same is erroneous interpretation of Section 1 of Republic Act 601.

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The present suit is directed against the Central Bank, a corporation duly
authorized by its Charter to sue and be sued. Resolution No. 286 was
issued by the Central Bank and the defendant cannot now be permitted
to claim exemption from the consequences of an illegal resolution of its
own making.
There is nothing to the contention that plaintiff's action has prescribed,
because no vested or acquired rights can arise from acts or ommissions
which are against the law or which infringe upon the rights of others.
(Art. 2254, New Civil Code).
renders judgments in favor of the plaintiff and against the defendant
declaring Central Bank Resolution No. 286 illegal and void ab initio.
Defendant is hereby ordered to return to the plaintiff the sums of
P273.41 and P172.87 with legal interests thereon from the date of the
filing of the complaint until fully paid and the amount of P250.00 as
attorney's fees. Defendant shall pay the costs.
Defendant-appellant urges in this appeal that the lower court erred in not
dismissing plaintiff-appellee's complaint on the ground that it has prescribed.
The contention is correct. It is to be noted that the excise tax law (Rep. Act No.
601, contain no provision regarding the period within which a taxpayer must bring
his action to recover an excise tax erroneously or illegally collected. Accordingly,
Articles 18 and 1149 of the New Civil Code, should be applied in order to
determine said period. The articles referred to, respectively, provide:
ART. 18. In matters which are governed by the Code of Commerce and
special laws, their deficiency shall be governed by the provisions of this
Code. (Emphasis supplied.).
ART. 1149. All other actions whose periods are not fixed in this Code or
in other laws must be brought within five years from the time the right of
action accrues. (Id.)
It is not disputed that under the doctrine laid down in the cases of Philippine
National Bank vs. Zulueta, 101 Phil., 1071; 55 Off. Gaz. (2) 222; Philippine
National Bank vs. Union Books, Incorporated, 101 Phil., 1084; andPhilippine
National Bank vs. Arrozal, 103 Phil., 213; 54 Off. Gaz. (21) 5698,3 said amounts
of P273.41 and P172.87, were erroneously or illegally collected by the defendant
from plaintiff inasmuch as the latter had applied for the letters of credit (Nos.
41347 and 43729) with the PNB, on May 29, 1950 and December 28, 1950, long
before the enactment of Republic Act No. 601 on March 28, 1951, imposing the

excise tax on the purchase on foreign exchange. Pursuant to Article 1149 of the
New Civil Code above-quoted, plaintiff's right of action to recover the
aforementioned amounts should have prescribed on April 26, 1956 (as to the
P273.41) and May 4, 1956 (as to the P172.87).


- Characters:

However, it appears that on November 8, 1951, plaintiff requested defendant, in

writing, to refund to it said amounts. Pursuant to Article 1155 of the New Civil
Code,4 the five-year period is interrupted and should start to be counted again
from November 8, 1951. Thus computed, the right of action should expire on
November 11, 1956. Since the complaint was filed only on December 20, 1957,
the action is clearly barred. It is true that other extrajudicial written requests or
demands were made on September 2, 1957 and October 7, 1957, and lastly on
December 2, 1957, but all of these came after the period had already prescribed,
as stated, on November 11, 1956.
Article 2254 of the new Civil Code which provides that "No vested or acquired
right can arise from acts or omissions which are against the law or which infringe
upon the rights of others", and which was cited by the lower court as authority for
its conclusion that plaintiff's action has not prescribed, is inapplicable. This article
is among the transitional provisions of the New Civil Code. It must be read in
relation to, and within the context of Article 2252 which speaks of "Changes
made and new provisions and rules laid down by this Code which may prejudice
or impair vested or acquired rights in accordance with the old legislation" which
changes shall have no retroactive effect. The second paragraph of Article 2252
For the determination of the applicable law in cases which are not
specified elsewhere in this Code, the following articles shall be
And, one of these "following articles", is Article 2254 cited by the lower court.
Here in the instant case, all the pertinent facts occurred after the effectivity of the
New Civil Code. There is, therefore, no reason to apply Article 2254, especially
so, when no vested or acquired right is being here asserted by defendant Central
Bank, the only question being, whether the right of plaintiff to bring the action had
already prescribed.
In view of the conclusion at which we have arrived, we find no necessity in taking
up the other questions raised in this appeal.
Wherefore the decision appealed from is hereby reversed, with costs against the
appellee. So ordered.

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a) Keng Hua Paper Products consignee, receiver of shipment

b) Sea-Land Service Inc. shipping company, transporter of waste
c) Ho Kee Waste Paper shipper
- Definitions:
a) Bill of lading - document issued by a carrier to a shipper,
acknowledging that
specified goods have been received on board as
cargo for conveyance to a named place for delivery to the consignee who is
usually identified.
b) Demurrage an allowance or compensation for the delay or detention
of a ship/vessel; has
reference to the ships expenses, wear and tear, and
common employment.
- Keng Hua purchased from Ho Kee fifty tons of waste paper, with partial
shipment permitted.
- On June 29, 1982, Sea-Land received at its Hong Kong terminal a sealed
container containing 67 bales of unsorted waste paper for shipment to Keng Hua
in Manila. A bill of lading to cover the shipment was issued by Sea-Land.
- However, the June 29 shipment was 10 tons more than the remaining balance
of the purchase/order, as manifested under the letter of credit. (Keng Hua
ordered 50 tons. 10 tons na lang dapat yung kulang/balance. Pero yung June 29
shipment, 20 tons of waste paper.)
- On July 9, 1982, the shipment was discharged at the Manila International
Container Port. Notices of arrival were transmitted to Keng Hua but it failed to
discharge the shipment from the container during the free time or grace period.
The waste paper remained inside Sea-Lands container from the expiration of the
free time period (July 29) until the shipment was unloaded on November 22,
1983 (481 days).

- During the 481-day period, demurrage charges accrued. Numerous demands

for Keng Hua to pay but it refused to settle its obligation.

- Notice of Refused or On Hand Freight: proof that Keng Hua declined to accept
the shipment.



- Sea-Land sued Keng Hua for collection and damages.

- None really, just that Keng Hua should pay demurrage charges since it delayed
Sea-Lands vessel by failing to unload the shipment during the free time period.

- The Regional Trial Court of Manila rendered judgment in favor of Sea-Land, and
ordered Keng Hua to pay P67,340 as demurrage charges with interest at the
legal rate from the date of the extrajudicial demand. Also, Keng Hua must pay
10% of the total amount due as attorneys fees/litigation expenses.
- Court of Appeals affirmed in toto the RTC.
1) WoN Keng Hua accepted the bill of lading.
2) WoN the award of P67,340 to Sea-Land was proper
3) WoN Keng Hua was correct in not accepting the overshipment
4) WoN the award of legal interest from the date of Sea-Lands extrajudicial
demand was proper

1) YES, Keng Hua accepted and is thus bound by the bill of lading.
- A bill of lading has two functions:
a) receipt for the goods shipped,
b) a contract by which three parties (shipper, carrier, and consignee)
specific responsibilities and assume stipulated obligations.
- A bill of lading delivered and accepted constitutes the contract of carriage even
though not signed because the acceptance of a paper containing the terms of a
proposed contract generally constitutes an acceptance of the contract and of all
its terms and conditions of which the acceptor has actual or constructive notice.
- Acceptance = perfect and binding contract

- If Keng Hua accepted the shipment, it would be violating Central Bank rules and
regulations and custom and tariff laws. It would be tantamount to smuggling. It
would make Keng Hua vulnerable to legal sanctions.

- The bill of lading between Ho Kee, Keng Hua, and Sea-Land was a valid and
PERFECTED contract. Section 17 of the bill of lading provides that the shipper
and consignee were liable for demurrage charges for the failure to discharge the
shipment within the grace period.

- Sea-Land has no cause of action against Keng Hua because Keng Hua did not
hire Sea-Land. The cause of action should be against the shipper, Ho Kee. The
demurrage was a consequence of the shippers mistake of shipping more than
wahat was bought.

- SC not persuaded by Keng Huas arguments. Keng Hua did not immediately
object to or dissent from any term or stipulated in the bill of lading. It waited for
SIX MONTHS to send a letter to Sea-Land saying that it would not accept the

- Keng Hua duly notified Sea-Land about the wrong shipment through a letter
dated January 24, 1983.

- The inaction for such a long period conveys the clear inference that it accepted
the terms and conditions of the bill of lading.

- Keng Hua is not bound by the bill of lading because it never gave its consent. It
admits physical acceptance of the bill of lading, but argues that its subsequent
actions belie the finding that it accepted the terms.

- Re: Notice of Refused or On Hand Freight: said notice was not written by Keng
Hua; it was sent by Sea-Land to Keng Hua four months after it received the bill of
lading. Its only significance is to highlight Keng Huas prolonged failure to object
to the bill of lading.

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- Issue of WoN Keng Hua accepted the bill of lading is raised for the first time in
the SC (not raised in the lower courts). Hence, it is barred by estoppel.
- Prolonged failure to receive and discharge cargo -> violation of terms of bill of
lading -> liability for demurrage
2) YES, it is proper
- Keng Hua argued that Sea-Land made no demand for the sum of P67,340.
Also, Sea-Lands loss and prevention manager (P50,260) and its counsel
(P37,800) asked for different amounts.
- The amount fo P67,340 was a factual conclusion of the trial court, affirmed by
the Court of Appeals, and is therefore binding on the SC. Such finding is
supported by extant evidence.
- Re: discrepancy in amounts demanded: result of the variance of dates when the
demands were made. The longer the cargo remained unclaimed, the higher the
demurrage. Thus when counsel demanded on April 24, 1983 P37,800, it already
ballooned to P67,340 by November 22.

- These three are to be maintained in perpetual separation.

- The contract of carriage in the bill of lading must be TREATED
INDEPENDENTLY of the contract of sale and contract with issuing bank. Any
discrepancy between the contract of sale and letter of credit will NOT AFFECT
the validity of the contract of carriage in the bill of lading.
- The carrier cannot be expected to go beyond the representation of the shipper
in the bill of lading and to verify their accuracy vis--vis the contract of sale and
the letter of credit.
- Carrier had no knowledge of the contents of the container.
- CA decision is AFFIRMED, legal interest MODIFIED to 6% to be computed from
the trial court decision (Sept. 28, 1990), plus 12% on the total then outstanding
from the time judgment becomes final and executory until its satisfaction


146717, NOV 22, 2004

3) NO.
- Re: violation of laws: mere apprehension of violating said laws, without a clear
demonstration that taking delivery of the shipment has become legally
impossible, cannot defeat Keng Huas obligations under the bill of lading.
4) NO.
- Based on NCC 2209: interest rate is six percent per annum.
- Bill of lading did not specify the amount of demurrage; this was only established
during the trial court decision. Hence, the rate is 6% to be computed from the trial
court decision (Sept. 28, 1990), plus 12% on the total then outstanding from the
time judgment becomes final and executory until its satisfaction.
* In a letter of credit, there are three distinct and independent contracts:
a) contract of sale between buyer and seller
b) contract of buyer with issuing bank
c) letter of credit proper where bank promises to pay seller

8 | Page

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.
Facts: Transfield Philippines (Transfield) entered into a turn-key contract with
Luzon Hydro Corp. (LHC).Under the contract, Transfield were to construct a
hydro-electric plants in Benguet and Ilocos. Transfield was given the sole
responsibility for the design, construction, commissioning, testing and completion
of the Project. The contract provides for a period for which the project is to be
completed and also allows for the extension of the period provided that the
extension is based on justifiable grounds such as fortuitous event. In order to
guarantee performance by Transfield, two stand-by letters of credit were required
to be opened. During the construction of the plant, Transfield requested for

extension of time citing typhoon and various disputes delaying the construction.
LHC did not give due course to the extension of the period prayed for but
referred the matter to arbitration committee. Because of the delay in the
construction of the plant, LHC called on the stand-by letters of credit because of
default. However, the demand was objected by Transfield on the ground that
there is still pending arbitration on their request for extension of time.

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.

Issue: Whether or not LHC can collect from the letters of credit despite the
pending arbitration case


Held: Transfields 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


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.
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 prerequisite 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.
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 socalled 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,

9 | Page

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

-However, Christiansen refused to issue the certification as required in paragraph

4 of the letter of credit, despite several requests made by the private
respondent.Because of the absence of the certification by Christiansen, the Feati
Bank and Trust Company refused to advance the payment on the letter of credit.

-Meanwhile, the logs arrived at Inchon, Korea and were received by the
consignee, Hanmi Trade Development Company, to whom Christiansen sold the
logs and obtained profit. Hanmi Trade Development Company, on the other hand
sold the logs to Taisung Lumber Company at Inchon, Korea.

The mere fact that the document was specified therein readily means that the
document is of vital importance to the buyer.

-Since the demands by the private respondent for Christiansen to execute the
certification proved futile, Villaluz, instituted an action for mandamus and specific
performance against Christiansen and the Feati Bank and Trust Company (now
Citytrust).The petitioner was impleaded as defendant before the lower court only
to afford complete relief should the court a quo order Christiansen to execute the
required certifica tion.


INC., 35 SCRA 253 (1970)

-While the case was still pending trial, Christiansen left the Philippines without
informing the Court and his counsel. Hence, Villaluz, filed an amended complaint
make the petitioner solidarily liable with Christiansen.

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

Whether or not a correspondent bank is to be held liable under the letter of credit
despite non-compliance by the beneficiary with the terms thereon.
Commercial transactions involving letter of credits are governed by the rule on
strict compliance-- It is a settled rule in commercial transactions involving letters
of credit that the documents tendered must strictly conform to the terms of the
letter of credit. The tender of documents by the beneficiary (seller) must include
all documents required by the letter. A correspondent bank which departs from
what has been stipulated under the letter of credit, as when it accepts a faulty
tender, acts on its own risks and it may not thereafter be able to recover from the
buyer or the issuing bank, as the case may be, the money thus paid to the
beneficiary. Thus the rule of strict compliance.
In the United States, commercial transactions involving letters of credit are
governed by the rule of strict compliance. In the Philippines, the same holds true.
The-same rule must also be followed.
Although in some American decisions, banks are granted a little discretion to
accept a faulty tender as when the other documents may be considered
immaterial or superfluous, this theory could lead to dangerous precedents. Since
a bank deals only with documents, it is not in a position to determine whether or
not the documents required by the letter of credit Are material or superfluous.

10 | P a g e

-Pursuant to banking regulations then in force, the corporation delivered to the

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

-In the meantime, as each shipment (covered by the above-mentioned letters of

credit) arrived in the Philippines, the De Reny Fabric Industries, Inc. made partial
payments to the Bank amounting, in the aggregate, to P90,000.
-Further payments were, however, subsequently discontinued by the corporation
when it became established, as a result of a chemical test conducted by the
National Science Development Board, that the goods that arrived in Manila were
colored chalks instead of dyestuffs.
-The corporation also refused to take possession of these goods, and for this
reason, the Bank caused them to be deposited with a bonded warehouse paying
therefor the amount of P12,609.64 up to the filing of its complaint with the court
below on December 10, 1962.
Ordered the corporation and its co-defendants (the herein appellants) to pay BPI
the amount of the LC agreement.
It was the duty of the foreign correspondent banks of the Bank of the Philippine
Islands to take the necessary precautions to insure that the goods shipped under
the covering L/Cs conformed with the item appearing therein, and, that the
foreign banks having failed to perform this duty, no claim for recoupment against
the defendants-appellants, arising from the losses incurred for the non-delivery or
defective delivery of the articles ordered, could accrue.
Under the terms of their Commercial Letter of Credit Agreements with the Bank,
the appellants agreed that the Bank shall not be responsible for the "existence,
chancier, quality, quantity, conditions, packing, value, or delivery of the property
purporting to be represented by documents, for any difference in character,
quality, quantity, condition, or value of the property front that expressed in
documents," or for "partial or incomplete shipment, or failure or omission to ship
my or all of the property referred to in the Credit," as well as "for any deviation
from instructions, delay, default or fraud by the shipper or inyone else in
connection with the property or the shipping thereof," and "for any breach of
contract between the shippers or vendors and ourselves, [purchasers] or any of

11 | P a g e

Having agreed to these terms, the appellants have, therefore, no recourse but to
comply with their covenant to the rules of evidence."
The Code of Commerce, in its Article 2, likewise provides that "Acts of
commerce, whether those who execute them be merchants or not, and whether
specified in this Code or not, should be governed by the provisions contained in
it, in their absence, b) the usages of commerce generally observed in each place,
and in the absence of both rules, by those of the civil law" "Those acts contained
in this Code and all Others of analogous character, shall be deemed acts of
commerce." It must be noted that certain principles governing the issuance,
acceptance and payment of letters of credit arc specifically provided for in the
Code of Commerce.
But even without the stipulation recited above, the appellants cannot shift the
burden of loss to the Bank on account of the violation by their vendor of its
Banks, in providing financing in international business transactions such as those
entered into by the appellants, do not deal with the property to be exported or
shipped to the importer, but deal only with documents. The Bank introduced in
evidence a provision contained in the "Uniform Customs and Practices for
Commercial Documentary Credits Fixed for the Thirteenth Congress of
International Chamber of Commerce," to which the Philippines is a signatory
nation. Article 10 thereof provides:
"Its documentary credit operations, all parties concerned deal in documents and
not in goods. payment, negotiation or acceptance against documents in
accordance with the terms and conditions of a credit by a Bank authorized to do
so binds the party giving the authorization to take up the documents and
reimbursed the Bank making the payment, negotiation or acceptance."
The existence of a custom in international banking and financing circles negating
any duty on the part of a bank to verify whether what has been described in
letters of credits or drafts or shipping documents actually tallies with what was
loaded aboard ship, having been positively proven as a fact, the appellants me
bound by this established usage. They were, after all, the ones who tapped the
facilities afforded by the Bank in order to engage in international business.


-Sometime in 1976 and 1977 spouses Ben S. Mendoza and Juanita M. Mendoza
(the Mendozas, for brevity), obtained two (2) loans from Philippine American Life
Insurance Co. (Philam Life) in the total amount of P600,000.00 to finance the
construction of their residential house at Mandaue City. The said loans, with a
14% nominal interest rate, were to be liquidated in equal amortizations over a
period of five (5) years.
-To secure payment, Philam Life required that amortizations be guaranteed by an
irrevocable standby letter of credit of a commercial bank. Thus, the Mendozas
contracted with petitioner Insular Bank of Asia and America (IBAA) for the
issuance of two (2) irrevocable standby Letters of Credit in favor of Philam Life
for the total amount of P600,000.00.
-These two (2) irrevocable standby L/Cs were, in turn, secured by a real estate
mortgage for the same amount on the property of Respondent Spouses in favor
of IBAA.
-The Mendozas failed to pay Philam Life the amortization that fell due on I June
1978 so that Philam Life informed IBAA that it was declaring both loans as
"entirely due and demandable" and demanded payment of P492,996.30.
However, because IBAA contested the propriety of calling in the entire loan,
Philam Life desisted and resumed availing of the L/Cs by drawing on them for
five (5) more amortizations.
-Because the Mendozas defaulted again on their amortization due on, Philam
Life again informed IBAA that it was declaring the entire balance outstanding on
both loans, including liquidated damages, "immediately due and payable." Philam
Life then demanded the payment of P274,779.56 from IBAA but the latter took
the position that, as a mere guarantor of the Mendozas who are the principal
debtors, its remaining outstanding obligation under the two (2) standby L/Cs was
only P30,100.60. Later, IBAA corrected the latter and demanded refund because
the partial payment by Mendozas have the effect of reducing its liability as
guarantor or surety under the terms of the standby L/Cs in question.
-The real Estate Mortgage, which secured the two (2) standby L/Cs, was
extrajudicially foreclosed by, and sold at public auction to petitioner IBAA as the
lone and highest bidder.

12 | P a g e

Trial Court took the position that IBAA, "as surety," was discharged of its liability
to the extent of the payment made by the Mendozas, as the principal debtors, to
the creditor, Philam Life.
Reversed the Trial Court and ruled instead that IBAA's liability was not reduced
by virtue of the payments made by the Mendozas.
Whether or not the partial payments made by the principal obligors (respondent
MENDOZAS) would have the corresponding effect of reducing the liability of the
petitioner as guarantor or surety under the terms of the standby LCs in question.
In construing the terms of a Letter of Credit, as in other contracts, it is the
intention of the parties that must govern.
"Letters of credit and contracts for the issuance of such letters are subject to the
same rules of construction as are ordinary commercial contracts. They are to
receive a reasonable and not a technical construction and although usage and
custom cannot control express terms in letters of credit, they are to be construed
with reference to all the surrounding facts and circumstances, to the particular
and often varying terms in which they may be expressed, the circumstances and
intention of the parties to them, and the usages of the particular trade of business
Unequivocally, the subject standby Letters of Credit secure the payment of any
obligation of the Mendozas to Philam Life including all interests, surcharges and
expenses thereon but not to exceed P600,000.00. But while they are a security
arrangement, they are not converted thereby into contracts of guaranty. That
would make them ultra vires rather than a letter of credit, which is within the
powers of a bank. The standby L/Cs are, "in effect an absolute undertaking to
pay the money advanced or the amount for which credit is given on the faith of
the instrument." They are primary obligations and not accessory contracts. Being
separate and independent agreements, the payments made by the Mendozas
cannot be added in computing IBAA's liability under its own standby letters of
credit. Payments made by the Mendozas directly to Philam Life are in
compliance with their own prestation under the loan agreement.

As to the liability of the Mendozas to IBAA, it bears recalling that the Mendozas,
upon their application for the opening and issuance of the Irrevocable Standby
Letters of Credit in favor of Philam Life, had executed a Real Estate Mortgage as
security to IBAA for any payment that the latter may remit to Philam Life on the
strength of said Letters of Credit; and that IBAA had recovered from the
Mendozas the amount of P432,386.07 when it foreclosed on the mortgaged
property of said spouses in the concept of "principal (unpaid advances under the
2 standby LCs plus interest and charges)." In addition, IBAA had recovered
P255,364.95 representing its clean loans to the Mendozas plus accrued interest
besides the fact that it now has the foreclosed property. As between IBAA and
the Mendozas, therefore, there has been full liquidation. The remaining obligation
of P222,000.00 on the loan of the Mendozas, therefore, is now IBAA's sole
responsibility to pay to Philam Life by virtue of its absolute and irrevocable
undertaking under the standby L/Cs. Specially so, since the promissory notes
executed by the Mendozas in favor of IBAA authorized the sale of the mortgaged
security "for the purpose of applying their proceeds to x x x payments" of their
obligations to IBAA.

which respondent will be exporting at a loss, was further amended to grant

respondent the privileges under aforesaid law, subject to conditions, one of which
is that respondent Sevilla would open an irrevocable letter of credit No. 6232 with
the Prudential Bank and Trust Co. in favor of the PVTA to secure the payment of
said balance, drawable upon the release from the Bureau of Customs of the
imported Virginia blending tobacco.
-While Revilla was trying to negotiate the reduction of the procurement cost of
the 2,101.479 kilos of PVTA tobacco already exported which attempt was denied
by petitioner and also by the Office of the President, petitioner prepared two
drafts to be drawn against said letter of credit for amounts which have already
become due and demandable.

-Sevilla filed an urgent Motion for Reconsideration.


SCRA 543 (1988)

-Pending Resolution, respondent judge issued the assailed Order of July 17,
1967 directing the Prudential Bank & Trust Co. to make the questioned release of
funds from the Letter of Credit. Before petitioner could file a motion for
reconsideration of said order, respondent Sevilla was able to secure the release
of P300,000.00 and the rest of the amount.



-Timoteo Sevilla, proprietor and General Manager of the Philippine Associated

Resources (PAR) was awarded in a public bidding the right to import Virginia leaf
tobacco for blending purposes and exportation by them of PVTA and farmer's
low-grade tobacco at a rate of one (1) kilo of imported tobacco for every nine (9)
kilos of leaf tobacco actually exported.

1. Respondent Judge acted without or in excess of jurisdiction or with grave

abuse of discretion when he issued the Order of July 17, 1967, on the ground:

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

In issuing the Order of July 17, 1967, respondent Judge violated the irrevocability
of the letter of credit issued by respondent Bank in favor of petitioner. An
irrevocable letter of credit cannot during its lifetime be cancelled or modified
without the express permission of the beneficiary.

-Thus, on September 14, 1965 subject contract which was already amended on
December 14, 1963 because of the prevailing export or world market price under

13 | P a g e

(a) the letter of credit issued by respondent bank is irrevocable; xxx