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SECOND DIVISION

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

INC. petitioner, vs . LUZON HYDRO


TRANSFIELD PHILIPPINES, INC.,
CORPORATION, AUSTRALIA and NEW ZEALAND BANKING GROUP
CORPORATION respondents.
LIMITED and SECURITY BANK CORPORATION,

DECISION

TINGA J :
TINGA, p

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 "Trans eld 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 hydro-electric 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 petitioner's 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
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in the instant petition.
The rst of the actions was a Request for Arbitration which LHC led before the
Construction Industry Arbitration Commission (CIAC) on 1 June 1999. 10 This was
followed by another Request for Arbitration, this time led 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. CcHDSA

Meanwhile, foreseeing that LHC would call on the Securities pursuant to the
pertinent provisions of the Turnkey Contract, 12 petitioner — in two separate letters 13
both dated 10 August 2000 — advised 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 led 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 ra ed 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 petitioner's 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 petitioner's contention that the principle of
"independent contract" could be invoked only by respondent banks since according to it
respondent LHC is the ultimate bene ciary of the Securities. The trial court further ruled
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that the banks were mere custodians of the funds and as such they were obligated to
transfer the same to the bene ciary for as long as the latter could submit the required
certification of its claims.
Dissatis ed with the trial court's 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 LHC's call on the
Securities was premature considering that the issue of its default had not yet been
resolved with nality 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 petitioner's 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 certi cates or the declarant's 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 court's decision that LHC could call on
the Securities pursuant to the rst principle in credit law that the credit itself is
independent of the underlying transaction and that as long as the bene ciary 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 court's denial of
petitioner's 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 led 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 BENEFICIARY'S CALL
THEREON IS WRONGFUL OR FRAUDULENT.

WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES
BEFORE THE RESOLUTION OF PETITIONER'S AND LHC'S DISPUTES BY THE
APPROPRIATE TRIBUNAL.HAaScT

WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN RELEASING THE
AMOUNTS DUE UNDER THE SECURITIES DESPITE BEING NOTIFIED THAT LHC'S
CALL THEREON IS WRONGFUL.

WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND IRREPARABLE


DAMAGE IN THE EVENT THAT:
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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 led 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
ling 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 Contract — to 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 Manifestationdated 8 September 2003, 24 LHC contends that the
supplemental pleadings led by petitioner present erroneous and misleading information
which would change petitioner's 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 led a Counter-Manifestation dated 29 June 2004, 26 stating that petitioner's
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
bene ciary of an irrevocable letter of credit from drawing thereon. It adds that petitioner
has led two other proceedings, to wit: (1) ICC Case No. 11264/TE/MW, entitled
"Trans eld Philippines Inc . v. Luzon Hydro Corporation," in which the parties made claims
and counterclaims arising from petitioner's 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 ICC's partial award mentioned in
petitioner's Manifestation of 12 April 2004.
In its Comment to petitioner's Motion for Leave to File Addendum to Petitioner's
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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 ICC's partial award is now fully within the Makati RTC's
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 certi cation submitted by respondent LHC or into the latter's 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 unjusti ed in view of the prevailing
independence principle under which it had no obligation to ascertain the truth of LHC's
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, petitioner's 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
bene ciary 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 bene ciary contract, because the issuer must
honor drafts drawn against a letter regardless of problems subsequently arising in the
underlying contract. Since the bank's customer cannot draw on the letter, it does not
function as an assignment by the customer to the bene ciary. 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 nancial 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 signi cant 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-bene ciary of documents that
show he has taken a rmative steps to comply with the sales agreement. In the standby
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type, the credit is payable upon certi cation of a party's nonperformance of the
agreement. The documents that accompany the bene ciary's draft tend to show that the
applicant has not performed. The bene ciary of a commercial credit must demonstrate by
documents that he has performed his contract. The bene ciary of the standby credit must
certify that his obligor has not performed the contract. 32
By de nition, 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., 3 7 this Court ruled
that the observance of the UCP is justi ed 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, 3 8 this Court ruled that
there being no speci c 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. IaSAHC

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 ful ll 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 bene ciary. A bene ciary 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 bene ciary of the
credit once the draft and the required documents are presented to it. The so-called
"independence principle" assures the seller or the bene ciary 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, su ciency, accuracy,
genuineness, falsi cation 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
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The independent nature of the letter of credit may be: (a) independence in toto
where the credit is independent from the justi cation 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 justi cation 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 bene t of an
independent contract to the very party for whom the bene t is intended. As bene ciary 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 de nite undertaking by the issuing bank to pay
the bene ciary 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 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.
Given the nature of letters of credit, petitioner's argument — that it is only the issuing
bank that may invoke the independence principle on letters of credit — does 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 bene t 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 bene t of the issuing bank but mainly for the bene t 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 con dently present the letter of credit to the bene ciary as
a security to convince the bene ciary to enter into the business transaction. On the other
hand, the other party to the business transaction, i.e., the bene ciary 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."
Petitioner's argument that any dispute must rst be resolved by the parties, whether
through negotiations or arbitration, before the bene ciary 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 bene ciary, there would be no practical
and beneficial use for letters of credit in commercial transactions.

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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 e cient. 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. HTCISE

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 re ection. The two
commercial devices share a common purpose. Both ensure against the obligor's
nonperformance. They function, however, in distinctly different ways.

Traditionally, upon the obligor's default, the surety undertakes to complete


the obligor's 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 bene ciary often
litigate) plus the cost of performance. The bene t of the surety contract to the
bene ciary is obvious. He knows that the surety, often an insurance company, is
a strong nancial institution that will perform if the obligor does not. The
bene ciary also should understand that such performance must await the
sometimes lengthy and costly determination that the obligor has defaulted. In
addition, the surety's 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 applicant's 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 bene ciary
until the bene ciary establishes the fact of the obligor's performance. The
bene ciary may have to establish that fact in litigation. During the litigation, the
surety holds the money and the bene ciary bears most of the cost of delay in
performance.

In the standby credit case, however, the bene ciary 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
bene ciary's presentation of those documents is not rightful. In that case, the
applicant may sue the bene ciary 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 bene ciary, 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 bene ciary who has
the right to ask the bank to honor the credit by allowing him to draw thereon. The situation
itself emasculates petitioner's posture that LHC cannot invoke the independence principle
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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 con rmed standby
letters of credit (the "Securities"), each in the amount of US$8,988,907, issued and
con rmed by banks or nancial 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 ful llment 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 LHC's 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
bene ciary, for the purpose of drawing on the credit, fraudulently presents to the
con rming 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. ICTHDE

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Citing Dolan's 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
principle's 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 LHC's 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 default — such 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 certi cate accompanying a demand
for payment under a standby credit may qualify as fraud su cient 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 fty-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 one's 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 LHC's call on the Securities which would justify the issuance of preliminary
injunction. By petitioner's 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
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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 LHC's 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 rst 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 nality on the existence
of default.
Nowhere in its complaint before the trial court or in its pleadings led 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 LHC's 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 rst 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 led in the courts below. At any rate,
petitioner utterly failed to show that it had a clear and unmistakable right to prevent LHC's
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 nal 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 justi ed 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
LHC's certi cation that default has occurred. Neither were they bound by petitioner's
declaration that LHC's call thereon was wrongful. To repeat, respondent banks'
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undertaking was simply to pay once the required documents are presented by the
beneficiary.
At any rate, should petitioner nally prove in the pending arbitration proceedings
that LHC's draws upon the Securities were wrongful due to the non-existence of the fact of
default, its right to seek indemni cation 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.
HAICTD

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 employer — the 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 moot — for 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 nal 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 led 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 petitioner's acts constitutes forum-shopping
which should be punished by the dismissal of the claim in both forums. Second, in its
Comment to Petitioner's Motion for Leave to File Addendum to Petitioner's Memorandum
dated 8 October 2004, LHC alleges that by maintaining the present appeal and at the same
time pursuing Civil Case No. 04-332 — wherein petitioner pressed for judgment on the
issue of whether the funds LHC drew on the Securities should be returned — petitioner
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 nal judgment
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in one case will amount to res judicata in another. 69 Forum-shopping constitutes
improper conduct and may be punished with summary dismissal of the multiple petitions
and direct contempt of court. 7 0
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 de nitive 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 fteen
(15) days from notice.
SO ORDERED.
Puno, Austria-Martinez, Callejo, Sr. and Chico-Nazario, JJ ., concur.

Footnotes

1. Penned by Justice Candido V. Rivera, concurred in by Justices Conchita Carpio-Morales and


Rebecca de Guia-Salvador.

2. Rollo, pp. 52—61.


3. Id. at 62—252.

4. Id. at 75—76.
5. Clause 1.1, Volume II of the Turnkey Contract, Rollo, p. 81.

6. 20.3 Dispute Resolution.


If at anytime any dispute or difference shall arise between the Employer and the Contractor in
connection with or arising out of this Contract or the carrying out of the Works, the
parties together shall in good faith exert all efforts to resolve such dispute or difference
by whatever means they deem appropriate, including conciliation, mediation and seeking
the assistance of technical, accounting or other experts. At the request of any party, the
chief executives of the Employer and the Contractor shall meet in a good-faith effort to
reach an amicable settlement of the dispute or difference. Any dispute or difference that
the parties are unable to resolve within a reasonable time may, at the option of either
party, be referred to arbitration in accordance with Clause 20.4. (Id. at 179)
7. Annex "C," Rollo, pp. 254—256.

8. Annex "D," Id. at 257—259.


9. Clause 4.2.1, Volume II of the Turnkey Contract, Id. at 94.

10. Id. at 261—265.


11. Id. at 359—382.

12. Turnkey Contract, Clause 4.2.5, Rollo, p. 94, in relation to Clause 8.7.1., Rollo, p. 132.
13. Annex "H," Rollo, pp. 287—289; Annex "H-1," Rollo, pp. 320—322.

14. Clause 8.2. Time for Completion.

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The Contractor shall complete all the Works, including the Tests on Completion, in accordance
with the Program on or before the Target Completion Date. (Rollo, p. 125)
15. Vol. 1, Rollo, pp. 355—357.

16. 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.
17. Annex "L," Rollo, pp. 383—402.

18. Annex "N," Id. at 406—409.


19. Annex "O," Id. at 412—423.

20. Docketed as CA-G.R. SP No. 61901.


21. Rollo, pp. 25—26.

22. Vol. II; Id. at 2—78.


23. Id. at 79—92.

24. Id. at 95—98.


25. Id. at 109—113.

26. Id. at 666—671.


27. Id. at 598—607.

28. Id. at 619—630.


29. Joseph, Letters of Credit: The Developing Concepts and Financing Functions, 94 BANKING
LAW JOURNAL 850—851 [1977] cited in M. KURKELA, LETTERS OF CREDIT UNDER
INTERNATIONAL TRADE LAW, 321 (1985).
30. Bank of America v. Court of Appeals, G.R. No. 105395, 10 December 1993, 228 SCRA 357
citing William S. Shaterian, EXPORT-IMPORT BANKING: THE INSTRUMENTS AND
OPERATIONS UTILIZED BY AMERICAN EXPORTERS AND IMPORTERS AND THEIR
BANKS IN FINANCING FOREIGN TRADE, 284—374 (1947).

31. E&H Partners v. Broadway Nat'l Bank, 39 F. Supp. 2d 275, (United States Circuit Court, S .D .
New York) No. 96 Civ. 7098 (RLC), 19 October 1998 <http: //www.westlaw.com>.
32. J. DOLAN, THE LAW OF LETTERS OF CREDIT, REVISED Ed. (2000).
33. 24 A WORDS AND PHRASES 590, Permanent Edition.

34. Ibid.
35. JACKSON & DAVEY, INTERNATIONAL ECONOMIC RELATIONS, 53 (2nd ed.).

36. ICC Publication No. 500.


37. 146 Phil. 269 (1970).
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38. G.R. No. 105395, 10 December 1993, 228 SCRA 357.
39. Article 15, UCP.

40. KURKELA, LETTERS OF CREDIT UNDER INTERNATIONAL TRADE LAW, 286—287 (1985).
41. Art. 10, UCP.

42. Supra note 32 at 1—27.


43. Rollo, pp. 604 and 624.

44. Emphasis supplied; Id. at 94.


45. Emphasis supplied; Id. at 132.

46. Art. 1315, Civil Code.


47. Clause 20.4.1, Turnkey Contract, Rollo, p. 179.

48. Supra note 32 at 2—63.


49. M. KURKELA, LETTERS OF CREDIT UNDER INTERNATIONAL TRADE LAW, 309 (1985).

50. Rollo, p. 391.


51. Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga, 415 Phil. 43.

52. Shin v. Court of Appeals, G.R. No. 113627, 6 February 2001, 351 SCRA 257.
53. Zabat v. Court of Appeals, G.R. No. 122089, 23 August 2000, 338 SCRA 551; Philippine
Economic Zone Authority v. Vianzon, G.R. No. 131020, 20 July 2000, 336 SCRA 309;
Valencia v. Court of Appeals, G.R. No. 119118, 19 February 2001, 352 SCRA 72; Crystal v.
Cebu International School, G.R. No. 135433, 4 April 2001, 356 SCRA 296; Ong Ching Kian
Chuan v. Court of Appeals, 415 Phil. 365 (2001).
54. Philippine National Bank v. Ritratto Group, Inc., 414 Phil. 494 (2001).

55. Rollo, p. 31.


56. Emphasis supplied; Id. at 94—95.

57. Id. at 132.


58. Vide Annex "L," Rollo. pp. 392—399; Petition for Certiorari, CA Rollo, pp. 7—43.

59. Salafranca v. Philamlife Village Homeowners Association, Inc., 360 Phil. 652; Ruby
Industrial Corporation v. Court of Appeals, 348 Phil. 480; Victorias Milling Co., Inc. v.
Court of Appeals, 389 Phil. 184.
60. Article 1159, Civil Code.
61. Art. 1306. The contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals,
good customs, public order, or public policy.
62. Rollo, p. 493.

63. Aznar Brothers Realty Company v. Court of Appeals, G.R. No. 128102, 7 March 2000, 327
SCRA 359; Soriano v. Court of Appeals, 416 Phil. 226 (2001); Rodil Enterprises v. Court of
Appeals, G.R. No. 129609, 29 November 2001, 371 SCRA 79; Unionbank of the
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Philippines v. Court of Appeals, 370 Phil. 837 (1999).
64. 389 Phil. 20 (2000).

65. BLACK'S LAW DICTIONARY, p. 1008, citing Leonhart v. McCormick, D.C. Pa., 395 F. Supp.
1073.

66. Vol. II, Rollo, pp. 666—669.


67. Tantoy, Sr. v. Court of Appeals, G.R. No. 141427, April 20, 2001, 357 SCRA 329.

68. Bangko Silangan Development Bank v. Court of Appeals, 412 Phil. 755 (2001).
69. Tirona v. Alejo, G.R. No. 129313, October 10, 2001, 367 SCRA 17; Manalo v. Court of
Appeals, G.R. No. 141297, October 8, 2001, 366 SCRA 752.
70. Tantoy, Sr. v. Court of Appeals, supra note 67.; Caviles v. Seventeenth Division, Court of
Appeals, G.R. No. 126857, September 18, 2002, 389 SCRA 306.

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