Feati Bank v.
CA In the case of a confirming bank, the correspondent bank assumes a direct obligation to the
Letters of Credit | April 30, 1991 |Gutierrez, J.
Nature of Case: Petition for Review
SUMMARY: Bernardo Villaluz (seller) agreed to sell to Christiansen (buyer) 2,000 cubic
meters of lauan logs at a price of $27 per cubic meter FOB. Security Pacific National Bank of
LA (Security) issued an Irrevocable Letter of Credit. Said letter of credit was mailed to
FEATI bank with the instruction that it “forward the enclosed letter of credit to the
beneficiary.” It further provided the submission to the beneficiary (seller) of certain
documents including a Certification from Han Axel Christiansen that the logs have been
approved prior to shipping in accordance with terms and conditions of corresponding
purchase order. Such documents will then be presented to Feati. Also incorporated by
reference in the letter of credit is the Uniform Customs and Practice for Documentary
Credits (UCP).
The logs were thereafter loaded on the vessel Zenlin Glory which was chartered by
Christiansen. It was certified to be in good condition and exportable. The logs arrived at
Korea and were received by the consignee Hanmi Trade Dev’t Comp. and were
subsequently sold to another party.
However Christiansen failed and refused to issue the certificate despite repeated demands
by Villaluz. Due to the absence of the said certificate, Feati Bank refused to advance the
payment on the letter of credit. because of the situation of Villaluz, Central Bank issued a
memorandum declaring that the requirement of CERTIFICATION is not allowed. However
such memo only came out after the letter of credit has already lapsed.
RTC ruled in favor of Villaluz and held Feati Bank and Christiansen solildarily liable.
The SC held that Feati is not liable under the letter of credit due to the non-compliance of
the beneficiary with the terms thereof. 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.
Also, Feati’s obligation is only that of 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.
DOCTRINE: 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 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.
seller and its liability is a primary one as if the correspondent bank itself had issued the
letter of credit.
FACTS:
 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.
 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.
 Said letter of credit was mailed to FEATI bank with the instruction to the latter that it
“forward the enclosed letter of credit to the beneficiary.”
o 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:
 Signed Commercial Invoice in four copies showing the number of
the purchase order and certifying that—
 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 “BEV-EX”.
 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.
 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.
 Tally sheets in quadruplicate.
 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
 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.
o Also incorporated by reference in the letter of credit is the Uniform
Customs and Practice for Documentary Credits
 The logs were thereafter loaded on the vessel Zenlin Glory which was chartered by
Christiansen. It was certified to be in good condition and exportable.
 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.
 Private respondent brought the matter to the Central Bank which issued a memo
saying that “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.”
  Meanwhile the logs arrived at Korea and were received by the consignee Hanmi
Trade Dev’t Comp. and were subsequently sold to another party.
 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.
 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.
 RTC ruled in favor of Villaluz and held Feati Bank and Christiansen solildarily liable,
it held that:
o Feati Bank is liable because it failed to negotiate the letter of credit in the
absence of the certification even if the Central Bank held such requirement
as void.
o That because the LC is irrevocable, the issuing bank, Security, is deemed to
honor the LC upon presentment. And by accepting the instructions from
the issuing bank Feati assumed the same undertaking.
o Under the principles and laws on both trust and estoppels. When Feati
Bank accepted its role as the notifying and negotiating bank in behalf of
the issuing bank, it in effect accepted a trust reposed on it and became a
trustee in relation to Villaluz.
 CA affirmed and further held:
o The LC was a confirmed LC in which the notifying bank gives its
assurance also that the opening bank’s obligation will be performed. The
notifying bank in such a case will not simply transmit but will confirm
the opening bank’s obligation by making it also its own understanding,
commitment or guaranty or obligation.
ISSUE/S & RATIO:
1. WON Feati bank is to be held liable under the letter of credit despite non-compliance
by the beneficiary with the terms thereof (submission of certification)? - NO
a. 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.
b. 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.
c. 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.
i. The pertinent provisions of the UCP are:
1. Article 3.
“An irrevocable credit is a definite undertaking on the
part of the issuing bank and constitutes the engagement
of that bank to the beneficiary and bona fide holders of
drafts drawn and/or documents presented thereunder,
that the provisions for payment, acceptance or
negotiation contained in the credit will be duly fulfilled,
provided that all the terms and conditions of the credit
are complied with.
“An irrevocable credit may be advised to a beneficiary
through another bank (the advising bank) without
engagement on the part of that bank, but when an
issuing bank authorizes or requests another bank to
confirm its irrevocable credit and the latter does so, such
confirmation constitutes a definite undertaking of the
confirming bank . . . .”
2. 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.”
3. 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.”
ii. 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.
2. WON Feati had confirmed the letter of credit ? - NO
a. 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.
b. 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 vice-versa.
c. 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.
d. On the other hand, a confirmed letter of credit pertains to the kind of k. Neither was there a trust between Feati Bank (trustee) and Villaluz
obligation assumed by the correspondent bank. In this case, the (beneficiary). the mere opening of a LC does not involve a specific
correspondent bank gives an absolute assurance to the beneficiary that it appropriation of a sum of money in favor of the beneficiary. It only signifies
will undertake the issuing bank’s obligation as its own according to the that the beneficiary may be able to draw funds upon the letter of credit up
terms and conditions of the credit. to the designated amount specified in the LC. The correspondent bank does
e. Hence, the mere fact that a letter of credit is irrevocable does not not receive in advance the sum of money from the issuing bank. On the
necessarily imply that the correspondent bank in accepting the contrary, when they accept the tender and pays the amount, it gets the
instructions of the issuing bank has also confirmed the letter of credit. money from its own funds and then later seeks reimbursement from the
f. In commercial transactions involving letters of credit, the functions issuing bank. Also as notifying bank it cannot be held liable even if there is
assumed by a correspondent bank are classified according to the obligations a trust created.
taken up by it. The correspondent bank may be called a notifying bank, a l. Neither was there a guarantee. It is fundamental that an irrevocable credit
negotiating bank, or a confirming bank. is independent not only of the contract between the buyer and the seller but
i. In case of a notifying bank, the correspondent bank assumes no also of the credit agreement between the issuing bank and the buyer. Feati
liability except to notify and/or transmit to the beneficiary the Bank has no business with the relationship of Christiansen and Security it
existence of the letter of credit. merely being a notifying bank. Feati Bank was only following instruction of
ii. A negotiating bank, on the other hand, is a correspondent bank the issuing bank.
which buys or discounts a draft under the letter of credit. Its m. But even if all of this argument existed (trust, guarantee, and confirming
liability is dependent upon the stage of the negotiation. If before bank, Feati Bank cannot be compelled to pay because there was a failure on
negotiation, it has no liability with respect to the seller but after the part of Christiansen to comply with the terms of the LC which is the
negotiation, a contractual relationship will then prevail between absence of the certificate. It cannot be argued that such a requirement is
the negotiating bank and the seller. illegal because such pronouncement by the Central Bank was only done
iii. In the case of a confirming bank, the correspondent bank after the issuance of the LC, when the LC was issued there was still no such
assumes a direct obligation to the seller and its liability is a prohibition.
primary one as if the correspondent bank itself had issued the
letter of credit. RULING: Petition granted
g. 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.
h. 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.
i. 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.
j. 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. 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 was an isolated transaction,
the logical conclusion is that the LC was merely a collateral. By extending
the loan it assumed the character of a negotiating bank but even then Feati
bank was still not liable because there was no contractual relationship
between Feati and Villaluz.