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3/12/2015 SUPREME COURT REPORTS ANNOTATED VOLUME 443 http://www.central.com.ph/sfsreader/session/0000014c09fbba39e76ae99d000a0094004f00ee/p/AJR258/?username=Guest 1/39 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 nonsale 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 and is 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

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Page 1: 64) Transfield Phil Inc. v. Luzon Hydro Corp

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VOL. 443, NOVEMBER 22, 2004 307Transfield Philippines, Inc. vs. Luzon Hydro Corporation

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

TRANSFIELD PHILIPPINES, INC., petitioner, vs. LUZONHYDRO CORPORATION, AUSTRALIA and NEWZEALAND BANKING GROUP LIMITED and SECURITYBANK 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 aconvenient and relatively safe mode of dealing with sales of goodsto satisfy the seemingly irreconcilable interests of a seller, whorefuses to part with his goods before he is paid, and a buyer, whowants to have control of the goods before paying; Generally, creditsin non­sale settings have come to be known as standby credits.—The letter of credit evolved as a mercantile specialty, and the onlyway to understand all its facets is to recognize that it is an entityunto itself. The relationship between the beneficiary and theissuer of a letter of credit is not strictly contractual, because bothprivity and a meeting of the minds are lacking, yet strictcompliance with its terms is an enforceable right. Nor is it a third­party beneficiary contract, because the issuer must honor draftsdrawn against a letter regardless of problems subsequentlyarising in the underlying contract. Since the bank’s customercannot draw on the letter, it does not function as an assignmentby the customer to the beneficiary. Nor, if properly used, is it acontract of suretyship or guarantee, because it entails a primaryliability following a default. Finally, it is not in itself a negotiableinstrument, because it is not payable to order or bearer and isgenerally conditional, yet the draft presented under it is oftennegotiable. In commercial transactions, a letter of credit is afinancial device developed by merchants as a convenient andrelatively safe mode of dealing with sales of goods to satisfy theseemingly irreconcilable interests of a seller, who refuses to partwith his goods before he is paid, and a buyer, who wants to have

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control of the goods before paying. The use of credits incommercial transactions serves to reduce the risk of nonpaymentof the purchase price under the contract for the sale of goods.However, credits are also used in non­sale settings where theyserve to reduce the risk of nonperfor­

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* SECOND DIVISION.

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mance. Generally, credits in the non­sale settings have come to beknown as standby credits.

Same; Same; Same; Same; Commercial Credits and StandbyCredits, Distinguished.—There are three significant differencesbetween commercial and standby credits. First, commercialcredits involve the payment of money under a contract of sale.Such credits become payable upon the presentation by the seller­beneficiary of documents that show he has taken affirmative stepsto comply with the sales agreement. In the standby type, thecredit is payable upon certification of a party’s nonperformance ofthe agreement. The documents that accompany the beneficiary’sdraft tend to show that the applicant has not performed. Thebeneficiary of a commercial credit must demonstrate bydocuments that he has performed his contract. The beneficiary ofthe standby credit must certify that his obligor has not performedthe contract.

Same; Same; Same; A letter of credit changes its nature asdifferent transactions occur and if carried through to completionends up as a binding contract between the issuing and honoringbanks without any regard or relation to the underlying contract ordisputes between the parties thereto.—By definition, a letter ofcredit is a written instrument whereby the writer requests orauthorizes the addressee to pay money or deliver goods to a thirdperson and assumes responsibility for payment of debt therefor to

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the addressee. A letter of credit, however, changes its nature asdifferent transactions occur and if carried through to completionends up as a binding contract between the issuing and honoringbanks without any regard or relation to the underlying contract ordisputes between the parties thereto.

Same; Same; Same; Uniform Customs and Practice (UCP) forDocumentary Credits; Since letters of credit have gained generalacceptability in international trade transactions, the InternationalChamber of Commerce (ICC) has published from time to timeupdates on the Uniform Customs and Practice for DocumentaryCredits to standardize practices in the letter of credit area; Theobservance of the UCP is justified by Article 2 of the Code ofCommerce which provides that in the absence of any particularprovision in the Code of Commerce, commercial transactions shallbe governed by usages and customs generally observed.—Sinceletters of credit have gained general acceptability in internationaltrade transactions, the ICC

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has published from time to time updates on the Uniform Customsand Practice (UCP) for Documentary Credits to standardizepractices in the letter of credit area. The vast majority of letters ofcredit incorporate the UCP. First published in 1933, the UCP forDocumentary Credits has undergone several revisions, the latestof which was in 1993. In Bank of the Philippine Islands v. DeReny Fabric Industries, Inc., this Court ruled that the observanceof the UCP is justified by Article 2 of the Code of Commerce whichprovides that in the absence of any particular provision in theCode of Commerce, commercial transactions shall be governed byusages and customs generally observed. More recently, in Bank ofAmerica, NT & SA v. Court of Appeals, this Court ruled that therebeing no specific provisions which govern the legal complexitiesarising from transactions involving letters of credit, not onlybetween or among banks themselves but also between banks andthe seller or the buyer, as the case may be, the applicability of theUCP is undeniable.

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

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“independence principle,” banks assume no liability orresponsibility for the form, sufficiency, accuracy, genuineness,falsification or legal effect of any documents, or for the generaland/or particular conditions stipulated in the documents orsuperimposed thereon, nor do they assume any liability orresponsibility for the description, quantity, weight, quality,condition, packing, delivery, value or existence of the goodsrepresented by any documents, or for the good faith or acts and/oromissions, solvency, performance or standing of the consignor, thecarriers, or the insurers of the goods, or any other personwhomsoever.—Article 3 of the UCP provides that credits, by theirnature, are separate transactions from the sales or othercontract(s) on which they may be based and banks are in no wayconcerned with or bound by such contract(s), even if any referencewhatsoever to such contract(s) is included in the credit.Consequently, the undertaking of a bank to pay, accept and paydraft(s) or negotiate and/or fulfill any other obligation under thecredit is not subject to claims or defenses by the applicantresulting from his relationships with the issuing bank or thebeneficiary. A beneficiary can in no case avail himself of thecontractual relationships existing between the banks or betweenthe applicant and the issuing bank. Thus, the engagement of theissuing bank is to pay the seller or beneficiary of the credit oncethe draft and the required documents are presented to it. The so­called “independence principle” assures the seller or the

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beneficiary of prompt payment independent of any breach of themain contract and precludes the issuing bank from determiningwhether the main contract is actually accomplished or not. Underthis principle, banks assume no liability or responsibility for theform, sufficiency, accuracy, genuineness, falsification or legaleffect of any documents, or for the general and/or particularconditions stipulated in the documents or superimposed thereon,nor do they assume any liability or responsibility for thedescription, quantity, weight, quality, condition, packing,delivery, value or existence of the goods represented by anydocuments, or for the good faith or acts and/or omissions,

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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 theletter of credit may be: (a) independence in toto where the credit isindependent from the justification aspect and is a separateobligation from the underlying agreement; or (b) independencemay be only as to the justification aspect, though in both cases thepayment may be enjoined if in the light of the purpose of the creditthe payment of the credit would constitute fraudulent abuse of thecredit.—The independent nature of the letter of credit may be: (a)independence in toto where the credit is independent from thejustification aspect and is a separate obligation from theunderlying agreement like for instance a typical standby; or (b)independence may be only as to the justification aspect like in acommercial letter of credit or repayment standby, which isidentical with the same obligations under the underlyingagreement. In both cases the payment may be enjoined if in thelight of the purpose of the credit the payment of the credit wouldconstitute fraudulent abuse of the credit.

Same; Same; Same; Same; The independence principleliberates the issuing bank from the duty of ascertainingcompliance by the parties in the main contract; As it is, theindependence doctrine works to the benefit of both the issuing bankand the beneficiary.—As discussed above, in a letter of credittransaction, such as in this case, where the credit is stipulated asirrevocable, there is a definite undertaking by the issuing bank topay the beneficiary provided that the stipulated documents arepresented and the conditions of the credit are complied with.Precisely, the independence principle liberates the issuing bankfrom the duty of ascertaining compliance by

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the parties in the main contract. As the principle’s nomenclatureclearly suggests, the obligation under the letter of credit isindependent of the related and originating contract. In brief, theletter of credit is separate and distinct from the underlyingtransaction. Given the nature of letters of credit, petitioner’s

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argument—that it is only the issuing bank that may invoke theindependence principle on letters of credit—does not impress thisCourt. To say that the independence principle may only beinvoked by the issuing banks would render nugatory the purposefor which the letters of credit are used in commercialtransactions. As it is, the independence doctrine works to thebenefit of both the issuing bank and the beneficiary.

Same; Same; Same; Same; Guarantee; Jurisprudence has laiddown a clear distinction between a letter of credit and a guaranteein that the settlement of a dispute between the parties is not aprerequisite for the release of funds under a letter of credit.—Petitioner’s argument that any dispute must first be resolved bythe parties, whether through negotiations or arbitration, beforethe beneficiary is entitled to call on the letter of credit in essencewould convert the letter of credit into a mere guarantee.Jurisprudence has laid down a clear distinction between a letterof credit and a guarantee in that the settlement of a disputebetween the parties is not a pre­requisite for the release of fundsunder a letter of credit. In other words, the argument isincompatible with the very nature of the letter of credit. If a letterof credit is drawable only after settlement of the dispute on thecontract entered into by the applicant and the beneficiary, therewould be no practical and beneficial use for letters of credit incommercial transactions.

Same; Same; Same; Same; Owing to the nature and purposeof standby letters of credit, banks are left with little or noalternative but to honor the credit or the call for payment.—Whileit is the bank which is bound to honor the credit, it is thebeneficiary who has the right to ask the bank to honor the creditby allowing him to draw thereon. The situation itself emasculatespetitioner’s posture that LHC cannot invoke the independenceprinciple and highlights its puerility, more so in this case wherethe banks concerned were impleaded as parties by petitioneritself. Respondent banks had squarely raised the independenceprinciple to justify their releases of the amounts due under theSecurities. Owing to the nature and purpose of the standby lettersof credit, this Court rules that the

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respondent banks were left with little or no alternative but tohonor the credit and both of them in fact submitted that it was“ministerial” for them to honor the call for payment.

Same; Same; Same; Same; Contracts; A contract onceperfected, binds the parties not only to the fulfillment of what hasbeen expressly stipulated but also to all the consequences whichaccording to their nature, may be in keeping with good faith,usage, and law.— A contract once perfected, binds the parties notonly to the fulfillment of what has been expressly stipulated butalso to all the consequences which according to their nature, maybe in keeping with good faith, usage, and law. A careful perusal ofthe Turnkey Contract reveals the intention of the parties to makethe Securities answerable for the liquidated damages occasionedby any delay on the part of petitioner. The call upon theSecurities, while not an exclusive remedy on the part of LHC, iscertainly an alternative recourse available to it upon thehappening of the contingency for which the Securities have beenproffered. Thus, even without the use of the “independenceprinciple,” the Turnkey Contract itself bestows upon LHC theright to call on the Securities in the event of default.

Same; Same; Same; Same; Injunction; Requisites; Mostwriters agree that fraud is an exception to the independenceprinciple; The remedy for fraudulent abuse is an injunction.—Most writers agree that fraud is an exception to theindependence principle. Professor Dolan opines that theuntruthfulness of a certificate accompanying a demand forpayment under a standby credit may qualify as fraud sufficient tosupport an injunction against payment. The remedy forfraudulent abuse is an injunction. However, injunction should notbe granted unless: (a) there is clear proof of fraud; (b) the fraudconstitutes fraudulent abuse of the independent purpose of theletter of credit and not only fraud under the main agreement; and(c) irreparable injury might follow if injunction is not granted orthe recovery of damages would be seriously damaged.

Same; Same; Same; Same; Same; The issuance of the writ ofpreliminary injunction as an ancillary or preventive remedy tosecure the rights of a party in a pending case is entirely within thediscretion of the court taking cognizance of the case, the onlylimitation being that this discretion should be exercised basedupon the grounds and in the manner provided by law.—Generally,injunction is a preservative remedy for the protection of one’ssubstantive right or interest;

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it is not a cause of action in itself but merely a provisionalremedy, an adjunct to a main suit. The issuance of the writ ofpreliminary injunction as an ancillary or preventive remedy tosecure the rights of a party in a pending case is entirely withinthe discretion of the court taking cognizance of the case, the onlylimitation being that this discretion should be exercised basedupon the grounds and in the manner provided by law. Before awrit of preliminary injunction may be issued, there must be aclear showing by the complaint that there exists a right to beprotected and that the acts against which the writ is to bedirected are violative of the said right. It must be shown that theinvasion of the right sought to be protected is material andsubstantial, that the right of complainant is clear andunmistakable and that there is an urgent and paramountnecessity for the writ to prevent serious damage. Moreover, aninjunctive remedy may only be resorted to when there is apressing necessity to avoid injurious consequences which cannotbe remedied under any standard compensation.

Same; Same; Same; Same; It is premature and absurd toconclude that the draws on the Securities were outright fraudulentwhere the International Chamber of Commerce and theConstruction Industry Authority Commission have not ruled withfinality on the existence of default.—The pendency of thearbitration proceedings would not per se make LHC’s draws onthe Securities wrongful or fraudulent for there was nothing in theContract which would indicate that the parties intended that alldisputes regarding delay should first be settled througharbitration before LHC would be allowed to call upon theSecurities. It is therefore premature and absurd to conclude thatthe draws on the Securities were outright fraudulent given thefact that the ICC and CIAC have not ruled with finality on theexistence of default.

Same; Same; Same; Same; Actions; Appeals; Pleadings andPractice; Matters, theories or arguments not brought out in theproceedings below will ordinarily not be considered by a reviewing

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court as they cannot be raised for the first time on appeal.—Nowhere in its complaint before the trial court or in its pleadingsfiled before the appellate court, did petitioner invoke the fraudexception rule as a ground to justify the issuance of an injunction.What petitioner did assert before the courts below was the factthat LHC’s draws on the Securities would be premature andwithout basis in view of the

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pending disputes between them. Petitioner should not be allowedin this instance to bring into play the fraud exception rule tosustain its claim for the issuance of an injunctive relief. Matters,theories or arguments not brought out in the proceedings belowwill ordinarily not be considered by a reviewing court as theycannot be raised for the first time on appeal. The lower courtscould thus not be faulted for not applying the fraud exception rulenot only because the existence of fraud was fundamentallyinterwoven with the issue of default still pending before thearbitral tribunals, but more so, because petitioner never raised itas an issue in its pleadings filed in the courts below. At any rate,petitioner utterly failed to show that it had a clear andunmistakable right to prevent LHC’s call upon the Securities.

Same; Same; Same; Same; Obligations and Contracts;Obligations arising from contracts have the force of law betweenthe contracting parties and should be complied with in good faith.— Prudence should have impelled LHC to await resolution of thepending issues before the arbitral tribunals prior to taking actionto enforce the Securities. But, as earlier stated, the TurnkeyContract did not require LHC to do so and, therefore, it wasmerely enforcing its rights in accordance with the tenor thereof.Obligations arising from contracts have the force of law betweenthe contracting parties and should be complied with in good faith.More importantly, pursuant to the principle of autonomy ofcontracts embodied in Article 1306 of the Civil Code, petitionercould have incorporated in its Contract with LHC, a proviso thatonly the final determination by the arbitral tribunals that defaulthad occurred would justify the enforcement of the Securities.

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However, the fact is petitioner did not do so; hence, it would haveto live with its inaction.

Actions; Injunction; Settled is the rule that injunction wouldnot lie where the acts sought to be enjoined have already becomefait accompli or an accomplished or consummated act.—In aManifestation, dated 30 March 2001, LHC informed this Courtthat the subject letters of credit had been fully drawn. This factalone would have been sufficient reason to dismiss the instantpetition. Settled is the rule that injunction would not lie wherethe acts sought to be enjoined have already become fait accomplior an accomplished or consummated act. In Ticzon v. Video PostManila, Inc. this Court ruled that where the period within whichthe former employees were

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prohibited from engaging in or working for an enterprise thatcompeted with their former employer—the very purpose of thepreliminary injunction—has expired, any declaration upholdingthe propriety of the writ would be entirely useless as there wouldbe no actual case or controversy between the parties insofar as thepreliminary injunction is concerned. In the instant case, theconsummation of the act sought to be restrained had rendered theinstant petition moot—for any declaration by this Court as topropriety or impropriety of the non­issuance of injunctive reliefcould have no practical effect on the existing controversy. Theother issues raised by petitioner particularly with respect to itsright to recover the amounts wrongfully drawn on the Securities,according to it, could properly be threshed out in a separateproceeding.

Same; Pleadings and Practice; Forum Shopping; Consideringthe seriousness of the charge of forum shopping and the severity ofthe sanctions for its violation, the Court will refrain from makingany definitive ruling on the issue until the party alleged to havecommitted forum shopping has been given ample opportunity torespond to the charge.—Forum Shopping is a very serious charge.It exists when a party repetitively avails of several judicialremedies in different courts, simultaneously or successively, all

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substantially founded on the same transactions and the sameessential facts and circumstances, and all raising substantiallythe same issues either pending in, or already resolved adversely,by some other court. It may also consist in the act of a partyagainst whom an adverse judgment has been rendered in oneforum, of seeking another and possibly favorable opinion inanother forum other than by appeal or special civil action ofcertiorari, or the institution of two or more actions or proceedingsgrounded on the same cause on the supposition that one or theother court might look with favor upon the other party. Todetermine whether a party violated the rule against forumshopping, the test applied is whether the elements of litispendentia are present or whether a final judgment in one case willamount to res judicata in another. Forum Shopping constitutesimproper conduct and may be punished with summary dismissalof the multiple petitions and direct contempt of court. Consideringthe seriousness of the charge of forum Shopping and the severityof the sanctions for its violation, the Court will refrain frommaking any definitive ruling on this issue until after petitionerhas been given ample opportunity to respond to the charge.

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PETITION for review on certiorari of a decision of theCourt of Appeals.

The facts are stated in the opinion of the Court. Romulo, Mabanta, Buenaventura, Sayoc and Delos

Angeles and M. B. Tomacruz & Associates Law Offices forpetitioner.

Castro, Yan Binas, Ortile, Samillano & Mangrobangfor respondent Security Bank.

Quasha, Ancheta, Peña & Nolasco for respondentANZ Bank.

Sycip, Salazar, Hernandez & Gatmaitan forrespondent LHC.

TINGA, J.:

Subject of this case is the letter of credit which has evolvedas the ubiquitous and most important device ininternational trade. A creation of commerce and

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businessmen, the letter of credit is also unique in thenumber of parties involved and its supranational character.

Petitioner has appealed from the Decision1 of the Court

of Appeals in CA­G.R. SP No. 61901 entitled “TransfieldPhilippines, Inc. v. Hon. Oscar Pimentel, et al.,”promulgated on 31 January 2001.

2

On 26 March 1997, petitioner and respondent LuzonHydro Corporation (hereinafter, LHC) entered into aTurnkey Contract

3 whereby petitioner, as Turnkey

Contractor, undertook to construct, on a turnkey basis, aseventy (70)­Megawatt hydro­electric power station at theBakun River in the prov­

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1 Penned by Justice Candido V. Rivera, concurred in by JusticesConchita Carpio­Morales and Rebecca de Guia­Salvador.

2 Rollo, pp. 52­61.3 Id., at pp. 62­252.

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inces of Benguet and Ilocos Sur (hereinafter, the Project).Petitioner was given the sole responsibility for the design,construction, commissioning, testing and completion of theProject.

4

The Turnkey Contract provides that: (1) the targetcompletion date of the Project shall be on 1 June 2000, orsuch later date as may be agreed upon between petitionerand respondent LHC or otherwise determined inaccordance with the Turnkey Contract; and (2) petitioner isentitled to claim extensions of time (EOT) for reasonsenumerated in the Turn­key Contract, among which arevariations, force majeure, and delays caused by LHC itself.

5

Further, in case of dispute, the parties are bound to settletheir differences through mediation, conciliation and suchother means enumerated under Clause 20.3 of the TurnkeyContract.

6

To secure performance of petitioner’s obligation on orbefore the target completion date, or such time forcompletion as may be determined by the parties’agreement, petitioner opened in favor of LHC two (2)

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standby letters of credit both dated 20 March 2000(hereinafter referred to as “the Securities”), to wit: StandbyLetter of Credit No. E001126/8400 with

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4 Id., at pp. 75­76.5 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 thisContract or the carrying out of the Works, the parties together shall ingood faith exert all efforts to resolve such dispute or difference bywhatever means they deem appropriate, including conciliation, mediationand seeking the assistance of technical, accounting or other experts. Atthe request of any party, the chief executives of the Employer and theContractor shall meet in a good­faith effort to reach an amicablesettlement of the dispute or difference. Any dispute or difference that theparties are unable to resolve within a reasonable time may, at the optionof either party, be referred to arbitration in accordance with Clause 20.4.(Id., at p. 179)

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the local branch of respondent Australia and New ZealandBanking Group Limited (ANZ Bank)

7 and Standby Letter of

Credit No. IBDIDSB­00/4 with respondent Security BankCorporation (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. Theextensions were requested allegedly due to several factorswhich prevented the completion of the Project on targetdate, 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 betweenthe parties which culminated in the instant petition.

The first of the actions was a Request for Arbitrationwhich LHC filed before the Construction IndustryArbitration Commission (CIAC) on 1 June 1999.

10 This was

followed by another Request for Arbitration, this time filedby petitioner before the International Chamber of

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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 eventsconstituted force majeure to justify the extension of timesought by petitioner; and [2) whether LHC had the right toterminate the Turnkey Contract for failure of petitioner tocomplete the Project on target date.

Meanwhile, foreseeing that LHC would call on theSecurities pursuant to the pertinent provisions of theTurnkey Contract,

12 petitioner—in two separate letters

13

both dated 10 August 2000—advised respondent banks ofthe arbitration

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7 Annex “C”, Rollo, pp. 254­256.8 Annex “D”, Id., at pp. 257­259.9 Clause 4.2.1, Volume II of the Turnkey Contract, Id., at p. 94.10 Id., at pp. 261­265.11 Id., at pp. 359­382.12 Turnkey Contract, Clause 4.2.5, Rollo, p. 94, in relation to Clause

8.7.1., Rollo, p. 132.13 Annex “H”, Rollo, pp. 287­289; Annex “H­1”, Rollo, pp. 320­322.

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proceedings already pending before the CIAC and ICC inconnection with its alleged default in the performance of itsobligations. Asserting that LHC had no right to call on theSecurities until the resolution of disputes before thearbitral tribunals, petitioner warned respondent banksthat any transfer, release, or disposition of the Securities infavor of LHC or any person claiming under LHC wouldconstrain it to hold respondent banks liable for liquidateddamages.

As petitioner had anticipated, on 27 June 2000, LHCsent notice to petitioner that pursuant to Clause 8.2

14 of the

Turnkey Contract, it failed to comply with its obligation tocomplete the Project. Despite the letters of petitioner,however, both banks informed petitioner that they wouldpay on the Securities if and when LHC calls on them.

15

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LHC asserted that additional extension of time wouldnot be warranted; accordingly it declared petitioner indefault/delay in the performance of its obligations underthe Turnkey Contract and demanded from petitioner thepayment of US$75,000.00 for each day of delay beginning28 June 2000 until actual completion of the Projectpursuant to Clause 8.7.1 of the Turnkey Contract. At thesame time, LHC served notice that it would call on thesecurities for the payment of liquidated damages for thedelay.

16

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14 Clause 8.2. Time for Completion. The Contractor shall complete allthe Works, including the Tests on Completion, in accordance with theProgram on or before the Target Completion Date. (Rollo, p. 125)

15 Vol. 1, Rollo, pp. 355­357.16 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 andevery day or part of a day that shall elapse between the TargetCompletion Date and the Completion Date, provided that LiquidatedDamages for Delay payable by the Contractor shall in the aggregate notexceed 20% of the Contract Price. The Contractor shall pay Liq

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On 5 November 2000, petitioner as plaintiff filed aComplaint for Injunction, with prayer for temporaryrestraining order and writ of preliminary injunction,against herein respondents as defendants before theRegional Trial Court (RTC) of Makati.

17 Petitioner sought

to restrain respondent LHC from calling on the Securitiesand respondent banks from transferring, paying on, or inany manner disposing of the Securities or any renewals orsubstitutes thereof. The RTC issued a seventy­two (72)­hour temporary restraining order on the same day. Thecase was docketed as Civil Case No. 00­1312 and raffled toBranch 148 of the RTC of Makati.

After appropriate proceedings, the trial court issued anOrder on 9 November 2000, extending the temporaryrestraining order for a period of seventeen (17) days or

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until 26 November 2000.18

The RTC, in its Order19 dated 24 November 2000, denied

petitioner’s application for a writ of preliminary injunction.It ruled that petitioner had no legal right and suffered noirreparable injury to justify the issuance of the writ.Employing the principle of “independent contract” in lettersof credit, the trial court ruled that LHC should be allowedto draw on the Securities for liquidated damages. Itdebunked petitioner’s contention that the principle of“independent contract” could be invoked only by respondentbanks since according to it respondent LHC is the ultimatebeneficiary of the Securities. The trial court further ruledthat the banks were mere custodians of the funds and assuch they were obligated to transfer the same to thebeneficiary for as long as the latter could submit therequired certification of its claims.

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uidated Damages for Delay for each day of the delay on the followingday without need of demand from the Employer.

17 Annex “L”, Rollo, pp. 383­402.18 Annex “N”, Id., at pp. 406­409.19 Annex “O”, Id., at pp. 412­423.

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Dissatisfied with the trial court’s denial of its applicationfor a writ of preliminary injunction, petitioner elevated thecase to the Court of Appeals via a Petition for Certiorariunder Rule 65, with prayer for the issuance of a temporaryrestraining order and writ of preliminary injunction.

20

Petitioner submitted to the appellate court that LHC’s callon the Securities was premature considering that the issueof its default had not yet been resolved with finality by theCIAC and/or the ICC. It asserted that until the fact ofdelay could be established, LHC had no right to draw onthe Securities for liquidated damages.

Refuting petitioner’s contentions, LHC claimed thatpetitioner had no right to restrain its call on and use of theSecurities as payment for liquidated damages. It averred

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that the Securities are independent of the main contractbetween them as shown on the face of the two StandbyLetters of Credit which both provide that the banks haveno responsibility to investigate the authenticity or accuracyof the certificates or the declarant’s capacity or entitlementto so certify.

In its Resolution dated 28 November 2000, the Court ofAppeals issued a temporary restraining order, enjoiningLHC from calling on the Securities or any renewals orsubstitutes thereof and ordering respondent banks to ceaseand desist from transferring, paying or in any mannerdisposing of the Securities.

However, the appellate court failed to act on theapplication for preliminary injunction until the temporaryrestraining order expired on 27 January 2001. Immediatelythereafter, representatives of LHC trooped to ANZ Bankand withdrew the total amount of US$4,950,000.00,thereby reducing the balance in ANZ Bank toUS$1,852,814.00.

On 2 February 2001, the appellate court dismissed thepetition for certiorari. The appellate court expressedconformity with the trial court’s decision that LHC couldcall on the Se­

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20 Docketed as CA­G.R. SP No. 61901.

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curities pursuant to the first principle in credit law thatthe credit itself is independent of the underlyingtransaction and that as long as the beneficiary compliedwith the credit, it was of no moment that he had notcomplied with the underlying contract. Further, theappellate court held that even assuming that the trialcourt’s denial of petitioner’s application for a writ ofpreliminary injunction was erroneous, it constituted onlyan error of judgment which is not correctible by certiorari,unlike error of jurisdiction.

Undaunted, petitioner filed the instant Petition forReview raising the following issues for resolution:

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A.

B.

WHETHER THE “INDEPENDENCE PRINCIPLE” ONLETTERS OF CREDIT MAY BE INVOKED BY ABENEFICIARY THEREOF WHERE THEBENEFICIARY’S CALL THEREON IS WRONGFUL ORFRAUDULENT.

WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ONTHE SECURITIES BEFORE THE RESOLUTION OFPETITIONER’S AND LHC’S DISPUTES BY THEAPPROPRIATE TRIBUNAL.

WHETHER ANZ BANK AND SECURITY BANK AREJUSTIFIED IN RELEASING THE AMOUNTS DUE UNDERTHE SECURITIES DESPITE BEING NOTIFIED THAT LHC’SCALL THEREON IS WRONGFUL.

WHETHER OR NOT PETITIONER WILL SUFFER GRAVEAND IRREPARABLE DAMAGE IN THE EVENT THAT:

LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZBANK AND SECURITY BANK ARE ALLOWED TORELEASE, THE REMAINING BALANCE OF THESECURITIES PRIOR TO THE RESOLUTION OF THEDISPUTES BETWEEN PETITIONER AND LHC.LHC DOES NOT RETURN THE AMOUNTS IT HADWRONGFULLY DRAWN FROM THE SECURITIES.

21

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21 Rollo, pp. 25­26.

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Petitioner contends that the courts below improperly reliedon the “independence principle” on letters of credit whenthis case falls squarely within the “fraud exception rule.”Respondent LHC deliberately misrepresented the supposedexistence of delay despite its knowledge that the issue wasstill pending arbitration, petitioner continues.

Petitioner asserts that LHC should be ordered to returnthe proceeds of the Securities pursuant to the principleagainst unjust enrichment and that, under the premises,injunction was the appropriate remedy obtainable from thecompetent local courts.

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On 25 August 2003, petitioner filed a Supplement to thePetition

22 and Supplemental Memorandum,

23 alleging that

in the course of the proceedings in the ICC Arbitration, anumber of documentary and testimonial evidence came outthrough the use of different modes of discovery available inthe ICC Arbitration. It contends that after the filing of thepetition facts and admissions were discovered whichdemonstrate that LHC knowingly misrepresented thatpetitioner had incurred delays—notwithstanding itsknowledge and admission that delays were excused underthe Turnkey Contract—to be able to draw against theSecurities. Reiterating that fraud constitutes an exceptionto the independence principle, petitioner urges that thiswarrants a ruling from this Court that the call on theSecurities was wrongful, as well as contrary to law andbasic principles of equity. It avers that it would suffergrave irreparable damage if LHC would be allowed to usethe proceeds of the Securities and not ordered to return theamounts it had wrongfully drawn thereon.

In its Manifestation dated 8 September 2003,24 LHC

contends that the supplemental pleadings filed bypetitioner

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22 Vol. II; Id., at pp. 2­78.23 Id., at pp. 79­92.24 Id., at pp. 95­98.

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324 SUPREME COURT REPORTS ANNOTATEDTransfield Philippines, Inc. vs. Luzon Hydro Corporation

present erroneous and misleading information which wouldchange petitioner’s theory on appeal.

In yet another Manifestation dated 12 April 2004,25

petitioner alleges that on 18 February 2004, the ICChanded down its Third Partial Award, declaring that LHCwrongfully drew upon the Securities and that petitionerwas entitled to the return of the sums wrongfully taken byLHC for liquidated damages.

LHC filed a Counter­Manifestation dated 29 June 2004,26

stating that petitioner’s Manifestation dated 12 April 2004enlarges the scope of its Petition for Review of the 31

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January 2001 Decision of the Court of Appeals. LHC notesthat the Petition for Review essentially dealt only with theissue of whether injunction could issue to restrain thebeneficiary of an irrevocable letter of credit from drawingthereon. It adds that petitioner has filed two otherproceedings, to wit: (1) ICC Case No. 11264/TE/MW,entitled “Transfield Philippines Inc. v. Luzon HydroCorporation,” in which the parties made claims andcounterclaims arising from petitioner’sperformance/misperformance of its obligations ascontractor for LHC; and (2) Civil Case No. 04­332, entitled“Transfield Philippines, Inc. v. Luzon Hydro Corporation”before Branch 56 of the RTC of Makati, which is an actionto enforce and obtain execution of the ICC’s partial awardmentioned in petitioner’s Manifestation of 12 April 2004.

In its Comment to petitioner’s Motion for Leave to FileAddendum to Petitioner’s Memorandum, LHC stresses thatthe question of whether the funds it drew on the subjectletters of credit should be returned is outside the issue inthis appeal. At any rate, LHC adds that the action toenforce the ICC’s partial award is now fully within theMakati RTC’s jurisdiction in Civil Case No. 04­332. LHCasserts that petitioner is engaged in forum shopping bykeeping this appeal and at the

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25 Id., at pp. 109­113.26 Id., at pp. 666­671.

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same time seeking the suit for enforcement of the arbitralaward before the Makati court.

Respondent SBC in its Memorandum, dated 10 March2003

27 contends that the Court of Appeals correctly

dismissed the petition for certiorari. Invoking theindependence principle, SBC argues that it was under noobligation to look into the validity or accuracy of thecertification submitted by respondent LHC or into thelatter’s capacity or entitlement to so certify. It adds thatthe act sought to be enjoined by petitioner was already fait

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accompli and the present petition would no longer serveany remedial purpose.

In a similar fashion, respondent ANZ Bank in itsMemorandum dated 13 March 2003

28 posits that its actions

could not be regarded as unjustified in view of theprevailing independence principle under which it had noobligation to ascertain the truth of LHC’s allegations thatpetitioner defaulted in its obligations. Moreover, it pointsout that since the Standby Letter of Credit No.E001126/8400 had been fully drawn, petitioner’s prayer forpreliminary injunction had been rendered moot andacademic.

At the core of the present controversy is the applicabilityof the “independence principle” and “fraud exception rule”in letters of credit. Thus, a discussion of the nature and useof 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 recognizethat it is an entity unto itself. The relationship between thebeneficiary and the issuer of a letter of credit is not strictlycontractual, because both privity and a meeting of theminds are lacking, yet strict compliance with its terms isan enforceable right. Nor is it a third­party beneficiarycontract, because the issuer must honor drafts drawnagainst a letter regardless of

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27 Id., at pp. 598­607.28 Id., at pp. 619­630.

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326 SUPREME COURT REPORTS ANNOTATEDTransfield Philippines, Inc. vs. Luzon Hydro Corporation

problems subsequently arising in the underlying contract.Since the bank’s customer cannot draw on the letter, itdoes not function as an assignment by the customer to thebeneficiary. Nor, if properly used, is it a contract ofsuretyship or guarantee, because it entails a primaryliability following a default. Finally, it is not in itself anegotiable instrument, because it is not payable to order orbearer and is generally conditional, yet the draft presented

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under it is often negotiable.29

In commercial transactions, a letter of credit is afinancial device developed by merchants as a convenientand relatively safe mode of dealing with sales of goods tosatisfy the seemingly irreconcilable interests of a seller,who refuses to part with his goods before he is paid, and abuyer, who wants to have control of the goods beforepaying.

30 The use of credits in commercial transactions

serves to reduce the risk of nonpayment of the purchaseprice under the contract for the sale of goods. However,credits are also used in non­sale settings where they serveto reduce the risk of nonperformance. Generally, credits inthe non­sale settings have come to be known as standbycredits.

31

There are three significant differences betweencommercial and standby credits. First, commercial creditsinvolve the payment of money under a contract of sale.Such credits be­

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29 Joseph, Letters of Credit: The Developing Concepts and FinancingFunctions, 94 BANKING LAW JOURNAL 850­851 [1977] cited in M.KURKELA, LETTERS OF CREDIT UNDER INTERNATIONAL TRADELAW, 321 (1985).

30 Bank of America v. Court of Appeals, G.R. No. 105395, 10 December1993, 228 SCRA 357 citing William S. Shaterian, EXPORT­IMPORTBANKING: THE INSTRUMENTS AND OPERATIONS UTILIZED BYAMERICAN EXPORTERS AND IMPORTERS AND THEIR BANKS INFINANCING FOREIGN TRADE, 284­374 (1947).

31 E&H Partners v. Broadway Nat’l. Bank, 39 F. Supp. 2d 275, (UnitedStates Circuit Court, S.D. New York) No. 96 Civ. 7098 (RLC), 19 October1998 http://www.westlaw.com.

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come payable upon the presentation by the seller­beneficiary of documents that show he has takenaffirmative steps to comply with the sales agreement. Inthe standby type, the credit is payable upon certification ofa party's nonperformance of the agreement. The documents

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that accompany the beneficiary’s draft tend to show thatthe applicant has not performed. The beneficiary of acommercial credit must demonstrate by documents that hehas performed his contract. The beneficiary of the standbycredit must certify that his obligor has not performed thecontract.

32

By definition, a letter of credit is a written instrumentwhereby the writer requests or authorizes the addressee topay money or deliver goods to a third person and assumesresponsibility for payment of debt therefor to theaddressee.

33 A letter of credit, however, changes its nature

as different transactions occur and if carried through tocompletion ends up as a binding contract between theissuing and honoring banks without any regard or relationto the underlying contract or disputes between the partiesthereto.

34

Since letters of credit have gained general acceptabilityin international trade transactions, the ICC has publishedfrom time to time updates on the Uniform Customs andPractice (UCP) for Documentary Credits to standardizepractices in the letter of credit area. The vast majority ofletters of credit incorporate the UCP.

35 First published in

1933, the UCP for Documentary Credits has undergoneseveral revisions, the latest of which was in 1993.

36

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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.

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328 SUPREME COURT REPORTS ANNOTATEDTransfield Philippines, Inc. vs. Luzon Hydro Corporation

In Bank of the Philippine Islands v. De Reny FabricIndustries, Inc.,

37 this Court ruled that the observance of

the UCP is justified by Article 2 of the Code of Commercewhich provides that in the absence of any particularprovision in the Code of Commerce, commercial

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transactions shall be governed by usages and customsgenerally observed. More recently, in Bank of America, NT& SA v. Court of Appeals,

38 this Court ruled that there

being no specific provisions which govern the legalcomplexities arising from transactions involving letters ofcredit, not only between or among banks themselves butalso between banks and the seller or the buyer, as the casemay be, the applicability of the UCP is undeniable.

Article 3 of the UCP provides that credits, by theirnature, are separate transactions from the sales or othercontract(s) on which they may be based and banks are in noway concerned with or bound by such contract(s), even ifany reference whatsoever to such contract(s) is included inthe credit. Consequently, the undertaking of a bank to pay,accept and pay draft(s) or negotiate and/or fulfill any otherobligation under the credit is not subject to claims ordefenses by the applicant resulting from his relationshipswith the issuing bank or the beneficiary. A beneficiary canin no case avail himself of the contractual relationshipsexisting between the banks or between the applicant andthe issuing bank.

Thus, the engagement of the issuing bank is to pay theseller or beneficiary of the credit once the draft and therequired documents are presented to it. The so­called“independence principle” assures the seller or thebeneficiary of prompt payment independent of any breachof the main contract and precludes the issuing bank fromdetermining whether the main contract is actuallyaccomplished or not. Under this principle, banks assume noliability or responsibility for the form, sufficiency, accuracy,genuineness, falsifica­

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37 146 Phil. 269; 35 SCRA 256 (1970).38 G.R. No. 105395, 10 December 1993, 228 SCRA 357.

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tion or legal effect of any documents, or for the generaland/or particular conditions stipulated in the documents orsuperimposed thereon, nor do they assume any liability or

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responsibility for the description, quantity, weight, quality,condition, packing, delivery, value or existence of the goodsrepresented by any documents, or for the good faith or actsand/or omissions, solvency, performance or standing of theconsignor, the carriers, or the insurers of the goods, or anyother person whomsoever.

39

The independent nature of the letter of credit may be:(a) independence in toto where the credit is independentfrom the justification aspect and is a separate obligationfrom the underlying agreement like for instance a typicalstandby; or (b) independence may be only as to thejustification aspect like in a commercial letter of credit orrepayment standby, which is identical with the sameobligations under the underlying agreement. In both casesthe payment may be enjoined if in the light of the purposeof the credit the payment of the credit would constitutefraudulent 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 adefense available only to respondent banks. LHC, on theother hand, contends that it would be contrary to commonsense to deny the benefit of an independent contract to thevery party for whom the benefit is intended. As beneficiaryof the letter of credit, LHC asserts it is entitled to invokethe principle.

As discussed above, in a letter of credit transaction, suchas in this case, where the credit is stipulated as irrevocable,there is a definite undertaking by the issuing bank to paythe beneficiary provided that the stipulated documents arepre­

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39 Article 15, UCP.40 KURKELA, LETTERS OF CREDIT UNDER INTERNATIONAL

TRADE LAW, 286­287 (1985).

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sented and the conditions of the credit are complied with.41

Precisely, the independence principle liberates the issuing

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bank from the duty of ascertaining compliance by theparties in the main contract. As the principle’snomenclature clearly suggests, the obligation under theletter of credit is independent of the related and originatingcontract. In brief, the letter of credit is separate anddistinct from the underlying transaction.

Given the nature of letters of credit, petitioner’sargument—that it is only the issuing bank that may invokethe independence principle on letters of credit—does notimpress this Court. To say that the independence principlemay only be invoked by the issuing banks would rendernugatory the purpose for which the letters of credit areused in commercial transactions. As it is, the independencedoctrine works to the benefit of both the issuing bank andthe beneficiary.

Letters of credit are employed by the parties desiring toenter into commercial transactions, not for the benefit ofthe issuing bank but mainly for the benefit of the parties tothe original transactions. With the letter of credit from theissuing bank, the party who applied for and obtained itmay confidently present the letter of credit to thebeneficiary as a security to convince the beneficiary toenter into the business transaction. On the other hand, theother party to the business transaction, i.e., the beneficiaryof the letter of credit, can be rest assured of beingempowered to call on the letter of credit as a security incase the commercial transaction does not push through, orthe applicant fails to perform his part of the transaction. Itis for this reason that the party who is entitled to theproceeds of the letter of credit is appropriately called“beneficiary.”

Petitioner’s argument that any dispute must first beresolved by the parties, whether through negotiations orarbitration, before the beneficiary is entitled to call on theletter

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41 Art. 10, UCP.

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of credit in essence would convert the letter of credit into amere guarantee. Jurisprudence has laid down a cleardistinction between a letter of credit and a guarantee inthat the settlement of a dispute between the parties is nota prerequisite for the release of funds under a letter ofcredit. In other words, the argument is incompatible withthe very nature of the letter of credit. If a letter of credit isdrawable only after settlement of the dispute on thecontract entered into by the applicant and the beneficiary,there would be no practical and beneficial use for letters ofcredit in commercial transactions.

Professor John F. Dolan, the noted authority on lettersof credit, sheds more light on the issue:

The standby credit is an attractive commercial device for many ofthe same reasons that commercial credits are attractive.Essentially, these credits are inexpensive and efficient. Often theyreplace surety contracts, which tend to generate higher costs thancredits do and are usually triggered by a factual determinationrather than by the examination of documents.

Because parties and courts should not confuse the differentfunctions of the surety contract on the one hand and the standbycredit on the other, the distinction between surety contracts andcredits merits some reflection. The two commercial devices sharea common purpose. Both ensure against the obligor’snonperformance. They function, however, in distinctly differentways.

Traditionally, upon the obligor’s default, the surety undertakesto complete the obligor’s performance, usually by hiring someoneto complete that performance. Surety contracts, then, ofteninvolve costs of determining whether the obligor defaulted (amatter over which the surety and the beneficiary often litigate)plus the cost of performance. The benefit of the surety contract tothe beneficiary is obvious. He knows that the surety, often aninsurance company, is a strong financial institution that willperform if the obligor does not. The beneficiary also shouldunderstand that such performance must await the sometimeslengthy and costly determination that the obligor has defaulted.In addition, the surety’s performance takes time.

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The standby credit has different expectations. He reasonablyexpects that he will receive cash in the event of nonperformance,that he will receive it promptly, and that he will receive it beforeany litigation with the obligor (the applicant) over the nature ofthe applicant’s performance takes place. The standby credit hasthis opposite effect of the surety contract: it reverses the financialburden of parties during litigation.

In the surety contract setting, there is no duty to indemnify thebeneficiary until the beneficiary establishes the fact of theobligor’s performance. The beneficiary may have to establish thatfact in litigation. During the litigation, the surety holds themoney and the beneficiary bears most of the cost of delay inperformance.

In the standby credit case, however, the beneficiary avoids thatlitigation burden and receives his money promptly uponpresentation of the required documents. It may be that theapplicant has, in fact, performed and that the beneficiary’spresentation of those documents is not rightful. In that case, theapplicant may sue the beneficiary in tort, in contract, or in breachof warranty; but, during the litigation to determine whether theapplicant has in fact breached the obligation to perform, thebeneficiary, not the applicant, holds the money. Parties that use astandby credit and courts construing such a credit shouldunderstand this allocation of burdens. There is a tendency insome quarters to overlook this distinction between suretycontracts and standby credits and to reallocate burdens bypermitting the obligor or the issuer to litigate the performancequestion before payment to the beneficiary.

42

While it is the bank which is bound to honor the credit, it isthe beneficiary who has the right to ask the bank to honorthe credit by allowing him to draw thereon. The situationitself emasculates petitioner’s posture that LHC cannotinvoke the independence principle and highlights itspuerility, more so in this case where the banks concernedwere impleaded as parties by petitioner itself.

Respondent banks had squarely raised the independenceprinciple to justify their releases of the amounts due underthe Securities. Owing to the nature and purpose of the

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42 Supra note 32 at pp. 1­27.

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4.2.1.

8.7.1

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standby letters of credit, this Court rules that therespondent banks were left with little or no alternative butto honor the credit and both of them in fact submitted thatit was “ministerial” for them to honor the call forpayment.

43

Furthermore, LHC has a right rooted in the Contract tocall on the Securities. The relevant provisions of theContract read, thus:

In order to secure the performance of its obligationsunder this Contract, the Contractor at its cost shallon the Commencement Date provide security to theEmployer in the form of two irrevocable andconfirmed standby letters of credit (the “Securities”),each in the amount of US$8,988,907, issued andconfirmed by banks or financial institutionsacceptable to the Employer. Each of the Securitiesmust be in form and substance acceptable to theEmployer and may be provided on an annuallyrenewable basis.

44

If the Contractor fails to comply with Clause 8.2, theContractor shall pay to the Employer by way ofliquidated damages (“Liquidated Damages forDelay”) the amount of US$75,000 for each and everyday or part of a day that shall elapse between theTarget Completion Date and the Completion Date,provided that Liquidated Damages for Delaypayable by the Contractor shall in the aggregatenot exceed 20% of the Contract Price. TheContractor shall pay Liquidated Damages for Delayfor each day of the delay on the following daywithout need of demand from the Employer.The Employer may, without prejudice to any othermethod of recovery, deduct the amount of suchdamages from any monies due, or to become due tothe Contractor and/or by drawing on theSecurity.”

45

A contract once perfected, binds the parties not only to thefulfillment of what has been expressly stipulated but alsoto all the consequences which according to their nature,may be in keeping with good faith, usage, and law.

46 A

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careful perusal

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43 Rollo, pp. 604 and 624.44 Italics supplied; Id., at p. 94.45 Italics supplied; Id., at p. 132.46 Art. 1315, Civil Code.

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334 SUPREME COURT REPORTS ANNOTATEDTransfield Philippines, Inc. vs. Luzon Hydro Corporation

of the Turnkey Contract reveals the intention of the partiesto make the Securities answerable for the liquidateddamages occasioned by any delay on the part of petitioner.The call upon the Securities, while not an exclusive remedyon the part of LHC, is certainly an alternative recourseavailable to it upon the happening of the contingency forwhich the Securities have been proffered. Thus, evenwithout the use of the “independence principle,” theTurnkey Contract itself bestows upon LHC the right to callon the Securities in the event of default.

Next, petitioner invokes the “fraud exception” principle.It avers that LHC’s call on the Securities is wrongfulbecause it fraudulently misrepresented to ANZ Bank andSBC that there is already a breach in the Turnkey Contractknowing fully well that this is yet to be determined by thearbitral tribunals. It asserts that the “fraud exception”exists when the beneficiary, for the purpose of drawing onthe credit, fraudulently presents to the confirming bank,documents that contain, expressly or by implication,material representations of fact that to his knowledge areuntrue. In such a situation, petitioner insists, injunction isrecognized as a remedy available to it.

Citing Dolan’s treatise on letters of credit, petitionerargues that the independence principle is not withoutlimits and it is important to fashion those limits in light ofthe principle’s purpose, which is to serve the commercialfunction of the credit. If it does not serve those functions,application of the principle is not warranted, and thecommon law principles of contract should apply.

It is worthy of note that the propriety of LHC’s call onthe Securities is largely intertwined with the fact of default

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which is the self­same issue pending resolution before thearbitral tribunals. To be able to declare the call on theSecurities wrongful or fraudulent, it is imperative toresolve, among others, whether petitioner was in fact guiltyof delay in the performance of its obligation. Unfortunatelyfor petitioner,

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this Court is not called upon to rule upon the issue ofdefault—such issue having been submitted by the partiesto the jurisdiction of the arbitral tribunals pursuant to theterms embodied in their agreement.

47

Would injunction then be the proper remedy to restrainthe alleged wrongful draws on the Securities?

Most writers agree that fraud is an exception to theindependence principle. Professor Dolan opines that theuntruthfulness of a certificate accompanying a demand forpayment under a standby credit may qualify as fraudsufficient 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 clearproof of fraud; (b) the fraud constitutes fraudulent abuse ofthe independent purpose of the letter of credit and not onlyfraud under the main agreement; and (c) irreparable injurymight follow if injunction is not granted or the recovery ofdamages would be seriously damaged.

49

In its complaint for injunction before the trial court,petitioner alleged that it is entitled to a total extension oftwo hundred fifty­three (253) days which would move thetarget completion date. It argued that if its claims forextension would be found meritorious by the ICC, thenLHC would not be entitled to any liquidated damages.

50

Generally, injunction is a preservative remedy for theprotection of one’s substantive right or interest; it is not acause of action in itself but merely a provisional remedy, anadjunct to a main suit. The issuance of the writ ofpreliminary injunction as an ancillary or preventiveremedy to secure the rights of a party in a pending case isentirely within the discretion of

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47 Clause 20.4.1, Turnkey Contract, Rollo, p. 179.48 Supra note 32 at pp. 2­63.49 M. KURKELA, LETTERS OF CREDIT UNDER INTERNATIONAL

TRADE LAW, 309 (1985).50 Rollo, p. 391.

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336 SUPREME COURT REPORTS ANNOTATEDTransfield Philippines, Inc. vs. Luzon Hydro Corporation

the court taking cognizance of the case, the only limitationbeing that this discretion should be exercised based uponthe 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 thereexists a right to be protected and that the acts againstwhich the writ is to be directed are violative of the saidright.

52 It must be shown that the invasion of the right

sought to be protected is material and substantial, that theright of complainant is clear and unmistakable and thatthere is an urgent and paramount necessity for the writ toprevent serious damage.

53 Moreover, an injunctive remedy

may only be resorted to when there is a pressing necessityto avoid injurious consequences which cannot be remediedunder any standard compensation.

54

In the instant case, petitioner failed to show that it hasa clear and unmistakable right to restrain LHC’s call onthe Securities which would justify the issuance ofpreliminary injunction. By petitioner’s own admission, theright of LHC to call on the Securities was contractuallyrooted and subject to the express stipulations in theTurnkey Contract.

55 Indeed, the Turnkey Contract is plain

and unequivocal in that it conferred upon LHC the right todraw upon the Securities in case

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51 Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga, 415 Phil.43; 362 SCRA 635, 651 (2001).

52 Shin v. Court of Appeals, G.R. No. 113627, 6 February 2001, 351SCRA 257.

53 Zabat v. Court of Appeals, G.R. No. 122089, 23 August 2000, 338

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“4.2.5

8.7.2

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. CebuInternational School, G.R. No. 135433, 4 April 2001, 356 SCRA 296; OngChing Kian Chuan v. Court of Appeals, 415 Phil. 365; 363 SCRA 145(2001).

54 Philippine National Bank v. Ritratto Group, Inc., 414 Phil. 494; 362SCRA 216 (2001).

55 Rollo, p. 31.

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VOL. 443, NOVEMBER 22, 2004 337Transfield Philippines, Inc. vs. Luzon Hydro Corporation

of default, as provided in Clause 4.2.5, in relation to Clause8.7.2, thus:

The Employer shall give the Contractor seven days’notice of calling upon any of the Securities, statingthe nature of the default for which the claim on anyof the Securities is to be made, provided that nonotice will be required if the Employer calls uponany of the Securities for the payment of LiquidatedDamages for Delay or for failure by the Contractorto renew or extend the Securities within 14 days oftheir expiration in accordance with Clause 4.2.2.

56

The Employer may, without prejudice to any othermethod of recovery, deduct the amount of suchdamages from any monies due, or to become due, tothe Contractor and/or by drawing on the Security.”

57

The pendency of the arbitration proceedings would not perse make LHC’s draws on the Securities wrongful orfraudulent for there was nothing in the Contract whichwould indicate that the parties intended that all disputesregarding delay should first be settled through arbitrationbefore LHC would be allowed to call upon the Securities. Itis therefore premature and absurd to conclude that thedraws on the Securities were outright fraudulent given thefact that the ICC and CIAC have not ruled with finality onthe existence of default.

Nowhere in its complaint before the trial court or in itspleadings filed before the appellate court, did petitioner

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invoke the fraud exception rule as a ground to justify theissuance of an injunction.

58 What petitioner did assert

before the courts below was the fact that LHC’s draws onthe Securities would be premature and without basis inview of the pending disputes between them. Petitionershould not be allowed in

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56 Italics supplied; Id., at pp. 94­95.57 Id., at p. 132.58 Vide Annex “L”, Rollo. pp. 392­399; Petition for Certiorari, CA Rollo,

pp. 7­43.

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338 SUPREME COURT REPORTS ANNOTATEDTransfield Philippines, Inc. vs. Luzon Hydro Corporation

this instance to bring into play the fraud exception rule tosustain its claim for the issuance of an injunctive relief.Matters, theories or arguments not brought out in theproceedings below will ordinarily not be considered by areviewing court as they cannot be raised for the first timeon appeal.

59 The lower courts could thus not be faulted for

not applying the fraud exception rule not only because theexistence of fraud was fundamentally interwoven with theissue of default still pending before the arbitral tribunals,but more so, because petitioner never raised it as an issuein its pleadings filed in the courts below. At any rate,petitioner utterly failed to show that it had a clear andunmistakable right to prevent LHC’s call upon theSecurities.

Of course, prudence should have impelled LHC to awaitresolution of the pending issues before the arbitraltribunals prior to taking action to enforce the Securities.But, as earlier stated, the Turnkey Contract did not requireLHC to do so and, therefore, it was merely enforcing itsrights in accordance with the tenor thereof. Obligationsarising from contracts have the force of law between thecontracting parties and should be complied with in goodfaith.

60 More importantly, pursuant to the principle of

autonomy of contracts embodied in Article 1306 of the CivilCode,

61 petitioner could have incorporated in its Contract

with LHC, a proviso that only the final determination by

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the arbitral tribunals that default had occurred wouldjustify the enforcement of the

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59 Salafranca v. Philamlife Village Homeowners Association, Inc., 360Phil. 652; 300 SCRA 469 (1998); Ruby Industrial Corporation v. Court ofAppeals, 348 Phil. 480; 284 SCRA 445 (1998); Victorias Milling Co., Inc. v.Court of Appeals, 389 Phil. 184; 333 SCRA 663 (2000).

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 theyare not contrary to law, morals, good customs, public order, or publicpolicy.

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VOL. 443, NOVEMBER 22, 2004 339Transfield Philippines, Inc. vs. Luzon Hydro Corporation

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 respondentbanks were justified in releasing the amounts due underthe Securities, this Court reiterates that pursuant to theindependence principle the banks were under no obligationto determine the veracity of LHC’s certification that defaulthas occurred. Neither were they bound by petitioner’sdeclaration that LHC’s call thereon was wrongful. Torepeat, respondent banks’ undertaking was simply to payonce the required documents are presented by thebeneficiary.

At any rate, should petitioner finally prove in thepending arbitration proceedings that LHC’s draws uponthe Securities were wrongful due to the non­existence ofthe fact of default, its right to seek indemnification fordamages it suffered would not normally be foreclosedpursuant to general principles of law.

Moreover, in a Manifestation,62 dated 30 March 2001,

LHC informed this Court that the subject letters of credithad been fully drawn. This fact alone would have beensufficient reason to dismiss the instant petition.

Settled is the rule that injunction would not lie wherethe acts sought to be enjoined have already become faitaccompli or an accomplished or consummated act.

63 In

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Ticzon v. Video Post Manila, Inc.64 this Court ruled that

where the period within which the former employees wereprohibited from engaging in or working for an enterprisethat competed with their former employer—the verypurpose of the preliminary

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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, 416Phil. 226; 363 SCRA 725 (2001); Rodil Enterprises v. Court of Appeals,G.R. No. 129609, 29 November 2001, 371 SCRA 79; Unionbank of thePhilippines v. Court of Appeals, 370 Phil. 837; 311 SCRA 795 (1999).

64 389 Phil. 20; 333 SCRA 472 (2000).

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340 SUPREME COURT REPORTS ANNOTATEDTransfield Philippines, Inc. vs. Luzon Hydro Corporation

injunction—has expired, any declaration upholding thepropriety of the writ would be entirely useless as therewould be no actual case or controversy between the partiesinsofar as the preliminary injunction is concerned.

In the instant case, the consummation of the act soughtto be restrained had rendered the instant petition moot—for any declaration by this Court as to propriety orimpropriety of the non­issuance of injunctive relief couldhave no practical effect on the existing controversy.

65 The

other issues raised by petitioner particularly with respectto its right to recover the amounts wrongfully drawn on theSecurities, according to it, could properly be threshed out ina separate proceeding.

One final point. LHC has charged petitioner of forumshopping. It raised the charge on two occasions. First, in itsCounter­Manifestation dated 29 June 2004

66 LHC alleges

that petitioner presented before this Court the same claimfor money which it has filed in two other proceedings, towit: ICC Case No. 11264/TE/MW and Civil Case No. 04­332before the RTC of Makati. LHC argues that petitioner’sacts constitutes forum shopping which should be punishedby the dismissal of the claim in both forums. Second, in itsComment to Petitioner’s Motion for Leave to File Addendum

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to Petitioner’s Memorandum dated 8 October 2004, LHCalleges that by maintaining the present appeal and at thesame time pursuing Civil Case No. 04­332—whereinpetitioner pressed for judgment on the issue of whether thefunds LHC drew on the Securities should be returned—petitioner resorted to forum shopping. In both instances,however, petitioner has apparently opted not to respond tothe charge.

Forum shopping is a very serious charge. It exists whena party repetitively avails of several judicial remedies indifferent courts, simultaneously or successively, allsubstantially

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

66 Vol. II, Rollo, pp. 666­669.

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founded on the same transactions and the same essentialfacts and circumstances, and all raising substantially thesame issues either pending in, or already resolvedadversely, by some other court.

67 It may also consist in the

act of a party against whom an adverse judgment has beenrendered in one forum, of seeking another and possiblyfavorable opinion in another forum other than by appeal orspecial civil action of certiorari, or the institution of two ormore actions or proceedings grounded on the same cause onthe supposition that one or the other court might look withfavor upon the other party.

68 To determine whether a party

violated the rule against forum shopping, the test appliedis whether the elements of litis pendentia are present orwhether a final judgment in one case will amount to resjudicata in another.

69 Forum shopping constitutes improper

conduct and may be punished with summary dismissal ofthe multiple petitions and direct contempt of court.

70

Considering the seriousness of the charge of forumshopping and the severity of the sanctions for its violation,the Court will refrain from making any definitive ruling onthis issue until after petitioner has been given ample

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opportunity to respond to the charge.WHEREFORE, the instant petition is DENIED, with

costs against petitioner.Petitioner is hereby required to answer the charge of

forum shopping within fifteen (15) days from notice.

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

68 Bangko Silangan Development Bank v. Court of Appeals, 412 Phil.755; 360 SCRA 422 (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 SCRA752.

70 Tantoy, Sr. v. Court of Appeals, supra note 67; Caviles v. SeventeenthDivision, Court of Appeals, G.R. No. 126857, September 18, 2002, 389SCRA 306.

342

342 SUPREME COURT REPORTS ANNOTATEDNational Power Corporation vs. Alonzo­Legasto

SO ORDERED.

Puno (Chairman), Austria­Martinez, Callejo, Sr.and Chico­Nazario, JJ., concur.

Petition denied.

Notes.—Being a product of international commerce, it isnot uncommon to find a dearth of national law that canadequately provide for the governance of letters of credit.(Bank of America, NT & SA vs. Court of Appeals, 228 SCRA357 [1993])

Matters, theories or arguments not brought out in theproceedings below will ordinarily not be considered by areviewing court, as they cannot be raised for the first timeon appeal. (Salafranca v. Philamlife (Pamplona) VillageHomeowners Association, Inc., 300 SCRA 469 [1998])

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