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Transfield Philippines vs Luzon Hydro Electric Corp. GR No 14!1!" Nov ##" #$$4

DOCTRINE: The independent nature of the letter of credit may be: (a) independence intoto where the credit is independent from the ustification aspect and is a separateobli!ation from the underlyin! a!reement li"e for instance a typical standby# or (b)

independence may be only as to the ustification aspect li"e in a commercial letter ofcredit or repayment standby$ which is identical with the same obli!ations under theunderlyin! a!reement% In both cases the payment may be enoined if in the li!ht of thepurpose of the credit the payment of the credit would constitute fraudulent abuse of thecredit%

&acts:Transfield 'hilippines (Transfield) entered into a turn"ey contract with u*on +ydroCorp% (+C)%,nder the contract$ Transfield were to construct a hydroelectric plants in-en!uet and Ilocos% Transfield was !i.en the sole responsibility for the desi!n$construction$ commissionin!$ testin! and completion of the 'roect% The contract

pro.ides for a period for which the proect is to be completed and also allows for thee/tension of the period pro.ided that the e/tension is based on ustifiable !rounds suchas fortuitous e.ent% In order to !uarantee performance by Transfield$ two standbyletters of credit were re0uired to be opened% Durin! the construction of the plant$Transfield re0uested for e/tension of time citin! typhoon and .arious disputes delayin!the construction% +C did not !i.e due course to the e/tension of the period prayed forbut referred the matter to arbitration committee% -ecause of the delay in the constructionof the plant$ +C called on the standby letters of credit because of default% +owe.er$the demand was obected by Transfield on the !round that there is still pendin!arbitration on their re0uest for e/tension of time%

Issue:1hether or not +C can collect from the letters of credit despite the pendin! arbitrationcase

+eld:Transfield2s ar!ument that any dispute must first be resol.ed by the parties$ whetherthrou!h ne!otiations or arbitration$ before the beneficiary is entitled to call on the letterof credit in essence would con.ert the letter of credit into a mere !uarantee%The independent nature of the letter of credit may be: (a) independence in toto wherethe credit is independent from the ustification aspect and is a separate obli!ation fromthe underlyin! a!reement li"e for instance a typical standby# or (b) independence maybe only as to the ustification aspect li"e in a commercial letter of credit or repaymentstandby$ which is identical with the same obli!ations under the underlyin! a!reement% Inboth cases the payment may be enoined if in the li!ht of the purpose of the credit thepayment of the credit would constitute fraudulent abuse of the credit%

3urisprudence has laid down a clear distinction between a letter of credit and a!uarantee in that the settlement of a dispute between the parties is not a prere0uisitefor the release of funds under a letter of credit% In other words$ the ar!ument is

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incompatible with the .ery nature of the letter of credit% If a letter of credit is drawableonly after settlement of the dispute on the contract entered into by the applicant and thebeneficiary$ there would be no practical and beneficial use for letters of credit incommercial transactions%

The en!a!ement of the issuin! ban" is to pay the seller or beneficiary of the credit oncethe draft and the re0uired documents are presented to it% The socalled 4independenceprinciple5 assures the seller or the beneficiary of prompt payment independent of anybreach of the main contract and precludes the issuin! ban" from determinin! whetherthe main contract is actually accomplished or not% ,nder this principle$ ban"s assumeno liability or responsibility for the form$ sufficiency$ accuracy$ !enuineness$ falsificationor le!al effect of any documents$ or for the !eneral and6or particular conditionsstipulated in the documents or superimposed thereon$ nor do they assume any liabilityor responsibility for the description$ 0uantity$ wei!ht$ 0uality$ condition$ pac"in!$ deli.ery$.alue or e/istence of the !oods represented by any documents$ or for the !ood faith oracts and6or omissions$ sol.ency$ performance or standin! of the consi!nor$ the carriers$

or the insurers of the !oods$ or any other person whomsoe.er%