59 Transfield Phil vs Luzon Hydro Corp

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VOL. 443, NOVEMBER 22, 2004 307

Transfield Philippines, Inc. vs. Luzon Hydro Corporation

G.R. No. 146717. November 22, 2004.*

TRANSFIELD PHILIPPINES, INC., petitioner, vs. LUZON

HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND

BANKING GROUP LIMITED and SECURITY BANK

CORPORATION, respondents.

Commercial Law; Banks and Banking; Letters of Credit; Standby

Credits; Words and Phrases; In commercial transactions, a letter of credit

is a financial device developed by merchants as a convenient and relatively

safe mode of dealing with sales of goods to satisfy the seemingly

irreconcilable interests of a seller, who refuses to part with his goods

before he is paid, and a buyer, who wants to have control of the goods

before paying; Generally, credits in non-sale settings have come to be known

as standby credits. —The letter of credit evolved as a mercantile specialty,

and the only way to understand all its facets is to recognize that it is an entity

unto itself. The relationship between the beneficiary and the issuer of a letter

of credit is not strictly contractual, because both privity and a meeting of the

minds are lacking, yet strict compliance with its terms is an enforceable

right. Nor is it a third-party beneficiary contract, because the issuer must

honor drafts drawn against a letter regardless of problems subsequently

arising in the underlying contract. Since the bank’s customer cannot draw on

the letter, it does not function as an assignment by the customer to the

beneficiary. Nor, if properly used, is it a contract of suretyship or guarantee,

because it entails a primary liability following a default. Finally, it is not in

itself a negotiable instrument, because it is not payable to order or bearer andis generally conditional, yet the draft presented under it is often negotiable.

In commercial transactions, a letter of credit is a financial device developed

by merchants as a convenient and relatively safe mode of dealing with sales

of goods to satisfy the seemingly irreconcilable interests of a seller, who

refuses to part with his goods before he is paid, and a buyer, who wants to

have control of the goods before paying. 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 nonperfor-

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particular provision in the Code of Commerce, commercial transactions

shall be governed by usages and customs generally observed. —Since letters

of credit have gained general acceptability in international trade transactions,

the ICC

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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.

First published in 1933, the UCP for Documentary Credits has undergone

several revisions, the latest of which was in 1993. In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc., this Court ruled that the

observance of the UCP is justified by Article 2 of the Code of Commerce

which provides that in the absence of any particular provision in the Code of

Commerce, commercial transactions shall be governed by usages and

customs generally observed. More recently, in Bank of America, NT & SA v.

Court of Appeals, this Court ruled that there being no specific provisions

which govern the legal complexities arising from transactions involving

letters of credit, not only between or among banks themselves but also

between banks and the seller or the buyer, as the case may be, the

applicability of the UCP is undeniable.

Same; Same; Same; “Independence Principle”; Under the

“independence principle,” banks assume no liability or responsibility for the

form, sufficiency, accuracy, genuineness, falsification or legal effect of any

documents, or for the general and /or particular conditions stipulated in the

documents or superimposed thereon, nor do they assume any liability or

responsibility for the description, quantity, weight, quality, condition,

packing, delivery, value or existence of the goods represented by any

documents, or for the good faith or acts and /or omissions, solvency,

performance or standing of the consignor, the carriers, or the insurers of

the goods, or any other person whomsoever. —Article 3 of the UCP provides

that credits, by their nature, are separate transactions from the sales or other

contract(s) on which they may be based and banks are in no way concerned

with or bound by such contract(s), even if any reference whatsoever to such

contract(s) is included in the credit. Consequently, the undertaking of a bank

to pay, accept and pay draft(s) or negotiate and/or fulfill any other obligation

under the credit is not subject to claims or defenses by the applicant resulting

from his relationships with the issuing bank or the beneficiary. A beneficiary



can in no case avail himself of the contractual relationships existing between

the banks or between the applicant and the issuing bank. Thus, the

engagement of the issuing bank is to pay the seller or beneficiary of the

credit once the draft and the required documents are presented to it. The so-

called “independence principle” assures the seller or the

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310 SUPREME COURT REPORTS ANNOTATED


beneficiary of prompt payment independent of any breach of the main

contract and precludes the issuing bank from determining whether the main

contract is actually accomplished or not. Under this principle, banks assume

no liability or responsibility for the form, sufficiency, accuracy,genuineness, falsification or legal effect of any documents, or for the general

and/or particular conditions stipulated in the documents or superimposed

thereon, nor do they assume any liability or responsibility for the

description, quantity, weight, quality, condition, packing, delivery, value or

existence of the goods represented by any documents, or for the good faith

or acts and/or omissions, solvency, performance or standing of the

consignor, the carriers, or the insurers of the goods, or any other person

whomsoever.

Same; Same; Same; Same; 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; or (b) independence may be only as to the justification aspect,

though in both cases the payment may be enjoined if in the light of the

purpose of the credit the payment of the credit would constitute fraudulent

abuse of the credit. —The 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.

Same; Same; Same; Same; The independence principle liberates the

issuing bank from the duty of ascertaining compliance by the parties in the

main contract; As it is, the independence doctrine works to the benefit of

both the issuing bank and the beneficiary. —As discussed above, in a letter



of credit transaction, such as in this case, where the credit is stipulated as

irrevocable, there is a definite undertaking by the issuing bank to pay the

beneficiary provided that the stipulated documents are presented and the

conditions of the credit are complied with. Precisely, the independence

principle liberates the issuing bank from the duty of ascertaining compliance

by

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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 distinctfrom 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 benefit of both the issuing bank and the beneficiary.

Same; Same; Same; Same; 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 prerequisite for the

release of funds under a letter of credit. —Petitioner’s argument that any

dispute must first be resolved by the parties, whether through negotiations or

arbitration, before the beneficiary is entitled to call on the letter of credit in

essence would convert the letter of credit into a mere guarantee.

Jurisprudence has laid down a clear distinction between a letter of credit and

a guarantee in that the settlement of a dispute between the parties is not a

pre-requisite for the release of funds under a letter of credit. In other words,

the argument is incompatible with the very nature of the letter of credit. If a

letter of credit is drawable only after settlement of the dispute on the contract

entered into by the applicant and the beneficiary, there would be no practical

and beneficial use for letters of credit in commercial transactions.

Same; Same; Same; Same; Owing to the nature and purpose of standby

letters of credit, banks are left with little or no alternative but to honor the

credit or the call for payment. —While it is the bank which is bound to honor

the credit, it is the beneficiary who has the right to ask the bank to honor the

credit by allowing him to draw thereon. The situation itself emasculates

petitioner’s posture that LHC cannot invoke the independence principle and



highlights its puerility, more so in this case where the banks concerned were

impleaded as parties by petitioner itself. Respondent banks had squarely

raised the independence principle to justify their releases of the amounts due

under the Securities. Owing to the nature and purpose of the standby letters

of credit, this Court rules that the

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Documents

59 Transfield Phil vs Luzon Hydro Corp