Luzon Hydro

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

TRANSFIELD PHILIPPINES, INC., petitioner, vs. L!"N H#DR" C"RP"RATI"N, ASTRALIA $%& NE' !EALAND(AN)ING GR"P LI*ITED $%& SECRIT# (AN) C"RP"RATI"N, respondents.

D E C I S I " N

TINGA, J.+

Subject of this case is the letter of credit which has evolved as the ubiquitous and most important device in international trade. A creation of commerce and businessmen, the letter of credit is also unique in the number of parties involved and its supranationalcharacter.

Petitioner has appealed from the Decision[1] of the Court of Appeals in CA!.". SP #o. $1%&1 entitled Transfield Philippines,Inc. v. Hon. Oscar Pimentel, et al ., promul'ated on (1 )anuar* +&&1.[+]

n +$ -arch 1%%, petitioner and respondent /u0on *dro Corporation 2hereinafter, /C3 entered into a 4urn5e*Contract[(] whereb* petitioner, as 4urn5e* Contractor, undertoo5 to construct, on a turn5e* basis, a sevent* 2&3-e'awatt h*droelectric power station at the 6a5un "iver in the provinces of 6en'uet and 7locos Sur 2hereinafter, the Project3. Petitioner was 'iventhe sole responsibilit* for the desi'n, construction, commissionin', testin' and completion of the Project.[8]

4he 4urn5e* Contract provides that9 213 the tar'et completion date of the Project shall be on 1 )une +&&&, or such later dateas ma* be a'reed upon between petitioner and respondent /C or otherwise determined in accordance with the 4urn5e* Contract:and 2+3 petitioner is entitled to claim e;tensions of time 2<43 for reasons enumerated in the 4urn5e* Contract, amon' which arevariations, force majeure, and dela*s caused b* /C itself. [=] >urther, in case of dispute, the parties are bound to settle their differences throu'h mediation, conciliation and such other means enumerated under Clause +&.( of the 4urn5e* Contract.[$]

4o secure performance of petitioners obli'ation on or before the tar'et completion date, or such time for completion as ma* bedetermined b* the parties a'reement, petitioner opened in favor of /C two 2+3 standb* letters of credit both dated +& -arch +&&&2hereinafter referred to as the Securities3, to wit9 Standb* /etter of Credit #o. <&&11+$?@8&& with the local branch of respondent Australia and #ew ealand 6an5in' !roup /imited 2A# 6an53[] and Standb* /etter of Credit #o. 76B7BS6&&?8 with respondentSecurit* 6an5 Corporation 2S6C3[@] each in the amount of SD@,%@@,%&.&&.[%]

7n the course of the construction of the project, petitioner sou'ht various <4 to complete the Project. 4he e;tensions wererequested alle'edl* due to several factors which prevented the completion of the Project on tar'et date, such as force

majeure occasioned b* t*phoon Zeb, barricades and demonstrations. /C denied the requests, however. 4his 'ave rise to a seriesof le'al actions between the parties which culminated in the instant petition.

4he first of the actions was a "equest for Arbitration which /C filed before the Construction 7ndustr* Arbitration Commission2C7AC3 on 1 )une 1%%%.[1&] 4his was followed b* another "equest for Arbitration, this time filed b* petitioner before the 7nternationalChamber of Commerce 27CC3[11] on ( #ovember +&&&. 7n both arbitration proceedin's, the common issues presented were9 [13whether t*phoon Zeb and an* of its associated events constituted force majeure to justif* the e;tension of time sou'ht b* petitioner:and [+3 whether /C had the ri'ht to terminate the 4urn5e* Contract for failure of petitioner to complete the Project on tar'et date.

-eanwhile, foreseein' that /C would call on the Securities pursuant to the pertinent provisions of the 4urn5e* Contract,[1+] petitionerin two separate letters[1(] both dated 1& Au'ust +&&&advised respondent ban5s of the arbitration proceedin's alread*pendin' before the C7AC and 7CC in connection with its alle'ed default in the performance of its obli'ations. Assertin' that /C hadno ri'ht to call on the Securities until the resolution of disputes before the arbitral tribunals, petitioner warned respondent ban5s thatan* transfer, release, or disposition of the Securities in favor of /C or an* person claimin' under /C would constrain it to holdrespondent ban5s liable for liquidated dama'es.

As petitioner had anticipated, on + )une +&&&, /C sent notice to petitioner that pursuant to Clause @.+ [18] of the 4urn5e*

Contract, it failed to compl* with its obli'ation to complete the Project. Bespite the letters of petitioner, however, both ban5s informedpetitioner that the* would pa* on the Securities if and when /C calls on them. [1=]

/C asserted that additional e;tension of time would not be warranted: accordin'l* it declared petitioner in default?dela* in theperformance of its obli'ations under the 4urn5e* Contract and demanded from petitioner the pa*ment of SD=,&&&.&& for each da*of dela* be'innin' +@ )une +&&& until actual completion of the Project pursuant to Clause @..1 of the 4urn5e* Contract. At the sametime, /C served notice that it would call on the securities for the pa*ment of liquidated dama'es for the dela*.[1$]

n = #ovember +&&&, petitioner as plaintiff filed a Complaint for Injunction, with pra*er for temporar* restrainin' order and writof preliminar* injunction, a'ainst herein respondents as defendants before the "e'ional 4rial Court 2"4C3 of -a5ati. [1] Petitioner sou'ht to restrain respondent /C from callin' on the Securities and respondent ban5s from transferrin', pa*in' on, or in an*manner disposin' of the Securities or an* renewals or substitutes thereof. 4he "4C issued a sevent*two 2+3hour temporar*

http://sc.judiciary.gov.ph/jurisprudence/2004/nov2004/146717.htm#_ftn1

















































restrainin' order on the same da*. 4he case was doc5eted as Civil Case #o. &&1(1+ and raffled to 6ranch 18@ of the "4C of -a5ati.

After appropriate proceedin's, the trial court issued an Order on % #ovember +&&&, e;tendin' the temporar* restrainin' order for a period of seventeen 213 da*s or until +$ #ovember +&&&.[1@]

4he "4C, in its Order [1%] dated +8 #ovember +&&&, denied petitioners application for a writ of preliminar* injunction. 7t ruledthat petitioner had no le'al ri'ht and suffered no irreparable injur* to justif* the issuance of the writ. <mplo*in' the principle of independent contract in letters of credit, the trial court ruled that /C should be allowed to draw on the Securities for liquidated

dama'es. 7t debun5ed petitioners contention that the principle of independent contract could be invo5ed onl* b* respondent ban5ssince accordin' to it respondent /C is the ultimate beneficiar* of the Securities. 4he trial court further ruled that the ban5s weremere custodians of the funds and as such the* were obli'ated to transfer the same to the beneficiar* for as lon' as the latter couldsubmit the required certification of its claims.

Bissatisfied with the trial courts denial of its application for a writ of preliminar* injunction, petitioner elevated the case to theCourt of Appeals via a Petition for Certiorari under "ule $=, with pra*er for the issuance of a temporar* restrainin' order and writ of preliminar* injunction.[+&] Petitioner submitted to the appellate court that /Cs call on the Securities was premature considerin' thatthe issue of its default had not *et been resolved with finalit* b* the C7AC and?or the 7CC. 7t asserted that until the fact of dela* couldbe established, /C had no ri'ht to draw on the Securities for liquidated dama'es.

"efutin' petitioners contentions, /C claimed that petitioner had no ri'ht to restrain its call on and use of the Securities aspa*ment for liquidated dama'es. 7t averred that the Securities are independent of the main contract between them as shown on theface of the two Standb* /etters of Credit which both provide that the ban5s have no responsibilit* to investi'ate the authenticit* or accurac* of the certificates or the declarants capacit* or entitlement to so certif*.

7n its Resolution dated +@ #ovember +&&&, the Court of Appeals issued a temporar* restrainin' order, enjoinin' /C from

callin' on the Securities or an* renewals or substitutes thereof and orderin' respondent ban5s to cease and desist from transferrin',pa*in' or in an* manner disposin' of the Securities.

owever, the appellate court failed to act on the application for preliminar* injunction until the temporar* restrainin' order e;pired on + )anuar* +&&1. 7mmediatel* thereafter, representatives of /C trooped to A# 6an5 and withdrew the total amount of SD8,%=&,&&&.&&, thereb* reducin' the balance in A# 6an5 to SD1,@=+,@18.&&.

n + >ebruar* +&&1, the appellate court dismissed the petition for certiorari. 4he appellate court e;pressed conformit* withthe trial courts decision that /C could call on the Securities pursuant to the first principle in credit law that the credit itself isindependent of the underl*in' transaction and that as lon' as the beneficiar* complied with the credit, it was of no moment that hehad not complied with the underl*in' contract. >urther, the appellate court held that even assumin' that the trial courts denial of petitioners application for a writ of preliminar* injunction was erroneous, it constituted onl* an error of jud'ment which is notcorrectible b* certiorari, unli5e error of jurisdiction.

ndaunted, petitioner filed the instant Petition for Revie raisin' the followin' issues for resolution9

WHETHER THE INDEPENDENCE PRINCIPLE ON LETTERS OF CREDIT MAY BE INVOKED BY A BENEFICIARY THEREOF WHERE

THE BENEFICIARYS CALL THEREON IS WRONGFUL OR FRAUDULENT.

WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES BEFORE THE RESOLUTION OF PETITIONERS ANDLHCS DISPUTES BY THE APPROPRIATE TRIBUNAL.

WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN RELEASING THE AMOUNTS DUE UNDER THE SECURITIESDESPITE BEING NOTIFIED THAT LHCS CALL THEREON IS WRONGFUL.

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

A. /C 7S A//E<B 4 CA// A#B B"AE #, A#B A# 6A#F A#B S<C"74G 6A#F A"< A//E<B4 "</<AS<, 4< "<-A7#7#! 6A/A#C< > 4< S<C"747<S P"7" 4 4< "<S/47# >4< B7SP4<S 6<4E<<# P<4747#<" A#B /C.

6. /C B<S #4 "<4"# 4< A-#4S 74 AB E"#!>//G B"AE# >"- 4< S<C"747<S.

[+1]

Petitioner contends that the courts below improperl* relied on the independence principle on letters of credit when this casefalls squarel* within the fraud e;ception rule. "espondent /C deliberatel* misrepresented the supposed e;istence of dela* despiteits 5nowled'e that the issue was still pendin' arbitration, petitioner continues.

Petitioner asserts that /C should be ordered to return the proceeds of the Securities pursuant to the principle a'ainst unjustenrichment and that, under the premises, injunction was the appropriate remed* obtainable from the competent local courts.

n += Au'ust +&&(, petitioner filed a !upplement to the Petition[++] and !upplemental "emorandum,[+(] alle'in' that in thecourse of the proceedin's in the 7CC Arbitration, a number of documentar* and testimonial evidence came out throu'h the use of different modes of discover* available in the 7CC Arbitration. 7t contends that after the filin' of the petition facts and admissions werediscovered which demonstrate that /C 5nowin'l* misrepresented that petitioner had incurred dela*s notwithstandin' its 5nowled'e



















and admission that dela*s were e;cused under the 4urn5e* Contractto be able to draw a'ainst the Securities. "eiteratin' that fraudconstitutes an e;ception to the independence principle, petitioner ur'es that this warrants a rulin' from this Court that the call on theSecurities was wron'ful, as well as contrar* to law and basic principles of equit*. 7t avers that it would suffer 'rave irreparabledama'e if /C would be allowed to use the proceeds of the Securities and not ordered to return the amounts it had wron'full*drawn thereon.

7n its "anifestation dated @ September +&&(,[+8] /C contends that the supplemental pleadin's filed b* petitioner presenterroneous and misleadin' information which would chan'e petitioners theor* on appeal.

7n *et another "anifestation dated 1+ April +&&8,[+=] petitioner alle'es that on 1@ >ebruar* +&&8, the 7CC handed down its4hird Partial Award, declarin' that /C wron'full* drew upon the Securities and that petitioner was entitled to the return of the sumswron'full* ta5en b* /C for liquidated dama'es.

/C filed a Counter#"anifestation dated +% )une +&&8,[+$] statin' that petitioners "anifestation dated 1+ April +&&8 enlar'esthe scope of its Petition for Revie of the (1 )anuar* +&&1 Decision of the Court of Appeals. /C notes that the Petition for Revie essentiall* dealt onl* with the issue of whether injunction could issue to restrain the beneficiar* of an irrevocable letter of credit from drawin' thereon. 7t adds that petitioner has filed two other proceedin's, to wit9 213 7CC Case #o. 11+$8?4<?-E,entitled Transfield Philippines Inc. v. $u%on H&dro Corporation , in which the parties made claims and counterclaims arisin' frompetitioners performance?misperformance of its obli'ations as contractor for /C: and 2+3 Civil Case #o. &8((+, entitled Transfield Philippines, Inc. v. $u%on H&dro Corporation before 6ranch =$ of the "4C of -a5ati, which is an action to enforce and obtaine;ecution of the 7CCs partial award mentioned in petitioners "anifestation of 1+ April +&&8.

7n its Comment to petitioners "otion for $eave to 'ile (ddendum to Petitioners "emorandum, /C stresses that the questionof whether the funds it drew on the subject letters of credit should be returned is outside the issue in this appeal. At an* rate, /Cadds that the action to enforce the 7CCs partial award is now full* within the -a5ati "4Cs jurisdiction in Civil Case #o. &8((+. /Casserts that petitioner is en'a'ed in forumshoppin' b* 5eepin' this appeal and at the same time see5in' the suit for enforcement of

the arbitral award before the -a5ati court.

"espondent S6C in its "emorandum, dated 1& -arch +&&([+] contends that the Court of Appeals correctl* dismissed thepetition for certiorari. 7nvo5in' the independence principle, S6C ar'ues that it was under no obli'ation to loo5 into the validit* or accurac* of the certification submitted b* respondent /C or into the latters capacit* or entitlement to so certif*. 7t adds that the actsou'ht to be enjoined b* petitioner was alread* fait accompli and the present petition would no lon'er serve an* remedial purpose.

7n a similar fashion, respondent A# 6an5 in its "emorandum dated 1( -arch +&&([+@] posits that its actions could not bere'arded as unjustified in view of the prevailin' independence principle under which it had no obli'ation to ascertain the truth of /Cs alle'ations that petitioner defaulted in its obli'ations. -oreover, it points out that since the Standb* /etter of Credit #o.<&&11+$?@8&& had been full* drawn, petitioners pra*er for preliminar* injunction had been rendered moot and academic.

At the core of the present controvers* is the applicabilit* of the independence principle and fraud e;ception rule in letters of credit. 4hus, a discussion of the nature and use of letters of credit, also referred to simpl* as credits, would provide a better perspective of the case.

4he letter of credit evolved as a mercantile specialt*, and the onl* wa* to understand all its facets is to reco'ni0e that it is an

entit* unto itself. 4he relationship between the beneficiar* and the issuer of a letter of credit is not strictl* contractual, because bothprivit* and a meetin' of the minds are lac5in', *et strict compliance with its terms is an enforceable ri'ht. #or is it a thirdpart*beneficiar* contract, because the issuer must honor drafts drawn a'ainst a letter re'ardless of problems subsequentl* arisin' in theunderl*in' contract. Since the ban5s customer cannot draw on the letter, it does not function as an assi'nment b* the customer tothe beneficiar*. #or, if properl* used, is it a contract of suret*ship or 'uarantee, because it entails a primar* liabilit* followin' adefault. >inall*, it is not in itself a ne'otiable instrument, because it is not pa*able to order or bearer and is 'enerall* conditional, *etthe draft presented under it is often ne'otiable.[+%]

7n commercial transactions, a letter of credit is a financial device developed b* merchants as a convenient and relativel* safemode of dealin' with sales of 'oods to satisf* the seemin'l* irreconcilable interests of a seller, who refuses to part with his 'oodsbefore he is paid, and a bu*er, who wants to have control of the 'oods before pa*in'. [(&] 4he use of credits in commercialtransactions serves to reduce the ris5 of nonpa*ment of the purchase price under the contract for the sale of 'oods. owever,credits are also used in nonsale settin's where the* serve to reduce the ris5 of nonperformance. !enerall*, credits in the nonsalesettin's have come to be 5nown as standb* credits.[(1]

4here are three si'nificant differences between commercial and standb* credits. >irst, commercial credits involve the pa*mentof mone* under a contract of sale. Such credits become pa*able upon the presentation b* the sellerbeneficiar* of documents that

show he has ta5en affirmative steps to compl* with the sales a'reement. 7n the standb* t*pe, the credit is pa*able upon certificationof a part*Hs nonperformance of the a'reement. 4he documents that accompan* the beneficiar*Hs draft tend to show that theapplicant has not performed. 4he beneficiar* of a commercial credit must demonstrate b* documents that he has performed hiscontract. 4he beneficiar* of the standb* credit must certif* that his obli'or has not performed the contract.[(+]

6* definition, a letter of credit is a written instrument whereb* the writer requests or authori0es the addressee to pa* mone* or deliver 'oods to a third person and assumes responsibilit* for pa*ment of debt therefor to the addressee. [((] A letter of credit,however, chan'es its nature as different transactions occur and if carried throu'h to completion ends up as a bindin' contractbetween the issuin' and honorin' ban5s without an* re'ard or relation to the underl*in' contract or disputes between the partiesthereto.[(8]

Since letters of credit have 'ained 'eneral acceptabilit* in international trade transactions, the 7CC has published from time totime updates on the niform Customs and Practice 2CP3 for Bocumentar* Credits to standardi0e practices in the letter of credit
































area. 4he vast majorit* of letters of credit incorporate the CP.[(=] >irst published in 1%((, the CP for Bocumentar* Credits hasunder'one several revisions, the latest of which was in 1%%(.[($]

7n )an* of the Philippine Islands v. De Ren& 'abric Industries, Inc .,[(] this Court ruled that the observance of the CP is justified b* Article + of the Code of Commerce which provides that in the absence of an* particular provision in the Code of Commerce, commercial transactions shall be 'overned b* usa'es and customs 'enerall* observed. -ore recentl*, in )an* of

(merica, +T !( v. Court of (ppeals,[(@] this Court ruled that there bein' no specific provisions which 'overn the le'al comple;itiesarisin' from transactions involvin' letters of credit, not onl* between or amon' ban5s themselves but also between ban5s and theseller or the bu*er, as the case ma* be, the applicabilit* of the CP is undeniable.

Article ( of the CP provides that credits, b* their nature, are separate transactions from the sales or other contract2s3 onwhich the* ma* be based and ban5s are in no wa* concerned with or bound b* such contract2s3, even if an* reference whatsoever to such contract2s3 is included in the credit. Consequentl*, the underta5in' of a ban5 to pa*, accept and pa* draft2s3 or ne'otiateand?or fulfill an* other obli'ation under the credit is not subject to claims or defenses b* the applicant resultin' from his relationshipswith the issuin' ban5 or the beneficiar*. A beneficiar* can in no case avail himself of the contractual relationships e;istin' betweenthe ban5s or between the applicant and the issuin' ban5.

4hus, the en'a'ement of the issuin' ban5 is to pa* the seller or beneficiar* of the credit once the draft and the requireddocuments are presented to it. 4he socalled independence principle assures the seller or the beneficiar* of prompt pa*mentindependent of an* breach of the main contract and precludes the issuin' ban5 from determinin' whether the main contract isactuall* accomplished or not. nder this principle, ban5s assume no liabilit* or responsibilit* for the form, sufficienc*, accurac*,'enuineness, falsification or le'al effect of an* documents, or for the 'eneral and?or particular conditions stipulated in thedocuments or superimposed thereon, nor do the* assume an* liabilit* or responsibilit* for the description, quantit*, wei'ht, qualit*,condition, pac5in', deliver*, value or e;istence of the 'oods represented b* an* documents, or for the 'ood faith or acts and?or omissions, solvenc*, performance or standin' of the consi'nor, the carriers, or the insurers of the 'oods, or an* other personwhomsoever .[(%]

4he independent nature of the letter of credit ma* be9 2a3 independence in toto where the credit is independent from the justification aspect and is a separate obli'ation from the underl*in' a'reement li5e for instance a t*pical standb*: or 2b3independence ma* be onl* as to the justification aspect li5e in a commercial letter of credit or repa*ment standb*, which is identicalwith the same obli'ations under the underl*in' a'reement. 7n both cases the pa*ment ma* be enjoined if in the li'ht of the purposeof the credit the pa*ment of the credit would constitute fraudulent abuse of the credit.[8&]

Can the beneficiar* invo5e the independence principleI

Petitioner insists that the independence principle does not appl* to the instant case and assumin' it is so, it is a defenseavailable onl* to respondent ban5s. /C, on the other hand, contends that it would be contrar* to common sense to den* thebenefit of an independent contract to the ver* part* for whom the benefit is intended. As beneficiar* of the letter of credit, /Casserts it is entitled to invo5e the principle.

As discussed above, in a letter of credit transaction, such as in this case, where the credit is stipulated as irrevocable, there isa definite underta5in' b* the issuin' ban5 to pa* the beneficiar* provided that the stipulated documents are presented and theconditions of the credit are complied with.[81] Precisel*, the independence principle liberates the issuin' ban5 from the dut* of

ascertainin' compliance b* the parties in the main contract. As the principles nomenclature clearl* su''ests, the obli'ation under the letter of credit is independent of the related and ori'inatin' contract. 7n brief, the letter of credit is separate and distinct from theunderl*in' transaction.

!iven the nature of letters of credit, petitioners ar'umentthat it is onl* the issuin' ban5 that ma* invo5e the independenceprinciple on letters of creditdoes not impress this Court. 4o sa* that the independence principle ma* onl* be invo5ed b* the issuin'ban5s would render nu'ator* the purpose for which the letters of credit are used in commercial transactions. As it is, theindependence doctrine wor5s to the benefit of both the issuin' ban5 and the beneficiar*.

/etters of credit are emplo*ed b* the parties desirin' to enter into commercial transactions, not for the benefit of the issuin'ban5 but mainl* for the benefit of the parties to the ori'inal transactions. Eith the letter of credit from the issuin' ban5, the part* whoapplied for and obtained it ma* confidentl* present the letter of credit to the beneficiar* as a securit* to convince the beneficiar* toenter into the business transaction. n the other hand, the other part* to the business transaction, i.e., the beneficiar* of the letter of credit, can be rest assured of bein' empowered to call on the letter of credit as a securit* in case the commercial transaction doesnot push throu'h, or the applicant fails to perform his part of the transaction. 7t is for this reason that the part* who is entitled to theproceeds of the letter of credit is appropriatel* called beneficiar*.

Petitioners ar'ument that an* dispute must first be resolved b* the parties, whether throu'h ne'otiations or arbitration, beforethe beneficiar* is entitled to call on the letter of credit in essence would convert the letter of credit into a mere 'uarantee.)urisprudence has laid down a clear distinction between a letter of credit and a 'uarantee in that the settlement of a disputebetween the parties is not a prerequisite for the release of funds under a letter of credit. 7n other words, the ar'ument isincompatible with the ver* nature of the letter of credit. 7f a letter of credit is drawable onl* after settlement of the dispute on thecontract entered into b* the applicant and the beneficiar*, there would be no practical and beneficial use for letters of credit incommercial transactions.

Professor )ohn >. Bolan, the noted authorit* on letters of credit, sheds more li'ht on the issue9






















The st!"#$ %&e"'t 's ! tt&%t'(e %)**e&%'+ "e('%e ,)& *!$ ), the s*e &es)!s tht %)**e&%'+ %&e"'ts &e tt&%t'(e. Esse!t'++$- these%&e"'ts &e '!e/e!s'(e !" e,,'%'e!t. O,te! the$ &e/+%e s0&et$ %)!t&%ts- 1h'%h te!" t) 2e!e&te h'2he& %)sts th! %&e"'ts ") !" &e 0s0++$t&'22e&e" #$ ,%t0+ "ete&*'!t')! &the& th! #$ the e*'!t')! ), ")%0*e!ts.

Be%0se /&t'es !" %)0&ts sh)0+" !)t %)!,0se the "',,e&e!t ,0!%t')!s ), the s0&et$ %)!t&%t )! the )!e h!" !" the st!"#$ %&e"'t )! the )the&-the "'st'!%t')! #et1ee! s0&et$ %)!t&%ts !" %&e"'ts *e&'ts s)*e &e,+e%t')!. The t1) %)**e&%'+ "e('%es sh&e %)**)! /0&/)se. B)th e!s0&e2'!st the )#+'2)&s !)!/e&,)&*!%e. The$ ,0!%t')!- h)1e(e&- '! "'st'!%t+$ "',,e&e!t 1$s.

T&"'t')!++$- 0/)! the )#+'2)&s "e,0+t- the s0&et$ 0!"e&t3es t) %)*/+ete the )#+'2)&s /e&,)&*!%e- 0s0++$ #$ h'&'!2 s)*e)!e t) %)*/+ete tht /e&,)&*!%e. S0&et$ %)!t&%ts- the!- ),te! '!()+(e %)sts ), "ete&*'!'!2 1hethe& the )#+'2)& "e,0+te" 4 *tte& )(e& 1h'%h the s0&et$ !" the #e!e,'%'&$ ),te! +'t'2te5 /+0s the %)st ), /e&,)&*!%e. The #e!e,'t ), the s0&et$ %)!t&%t t) the #e!e,'%'&$ 's )#(')0s. He 3!)1s tht the s0&et$-),te! ! '!s0&!%e %)*/!$- 's st&)!2 ,'!!%'+ '!st't0t')! tht 1'++ /e&,)&* ', the )#+'2)& ")es !)t. The #e!e,'%'&$ +s) sh)0+" 0!"e&st!" thts0%h /e&,)&*!%e *0st 1't the s)*et'*es +e!2th$ !" %)st+$ "ete&*'!t')! tht the )#+'2)& hs "e,0+te". I! ""'t')!- the s0&et$s /e&,)&*!%et3es t'*e.

The st!"#$ %&e"'t hs "',,e&e!t e/e%tt')!s. He &es)!#+$ e/e%ts tht he 1'++ &e%e'(e %sh '! the e(e!t ), !)!/e&,)&*!%e- tht he 1'++ &e%e'(e't /&)*/t+$- !" tht he 1'++ &e%e'(e 't #e,)&e !$ +'t'2t')! 1'th the )#+'2)& 4the //+'%!t5 )(e& the !t0&e ), the //+'%!ts /e&,)&*!%e t3es

/+%e. The st!"#$ %&e"'t hs th's )//)s'te e,,e%t ), the s0&et$ %)!t&%t: 't &e(e&ses the ,'!!%'+ #0&"e! ), /&t'es "0&'!2 +'t'2t')!.

I! the s0&et$ %)!t&%t sett'!2- the&e 's !) "0t$ t) '!"e*!',$ the #e!e,'%'&$ 0!t'+ the #e!e,'%'&$ est#+'shes the ,%t ), the )#+'2)&s /e&,)&*!%e.The #e!e,'%'&$ *$ h(e t) est#+'sh tht ,%t '! +'t'2t')!. D0&'!2 the +'t'2t')!- the s0&et$ h)+"s the *)!e$ !" the #e!e,'%'&$ #e&s *)st ),the %)st ), "e+$ '! /e&,)&*!%e.

I! the st!"#$ %&e"'t %se- h)1e(e&- the #e!e,'%'&$ ()'"s tht +'t'2t')! #0&"e! !" &e%e'(es h's *)!e$ /&)*/t+$ 0/)! /&ese!tt')! ), the&e60'&e" ")%0*e!ts. It *$ #e tht the //+'%!t hs- '! ,%t- /e&,)&*e" !" tht the #e!e,'%'&$s /&ese!tt')! ), th)se ")%0*e!ts 's !)t &'2ht,0+.I! tht %se- the //+'%!t *$ s0e the #e!e,'%'&$ '! t)&t- '! %)!t&%t- )& '! #&e%h ), 1&&!t$7 #0t- "0&'!2 the +'t'2t')! t) "ete&*'!e 1hethe& the//+'%!t hs '! ,%t #&e%he" the )#+'2t')! t) /e&,)&*- the #e!e,'%'&$- !)t the //+'%!t- h)+"s the *)!e$. P&t'es tht 0se st!"#$ %&e"'t !"%)0&ts %)!st&0'!2 s0%h %&e"'t sh)0+" 0!"e&st!" th's ++)%t')! ), #0&"e!s. The&e 's te!"e!%$ '! s)*e 60&te&s t) )(e&+))3 th's "'st'!%t')!

#et1ee! s0&et$ %)!t&%ts !" st!"#$ %&e"'ts !" t) &e++)%te #0&"e!s #$ /e&*'tt'!2 the )#+'2)& )& the 'ss0e& t) +'t'2te the /e&,)&*!%e 60est')! #e,)&e /$*e!t t) the #e!e,'%'&$.[8+]

Ehile it is the ban5 which is bound to honor the credit, it is the beneficiar* who has the ri'ht to as5 the ban5 to honor the creditb* allowin' him to draw thereon. 4he situation itself emasculates petitioners posture that /C cannot invo5e the independenceprinciple and hi'hli'hts its puerilit*, more so in this case where the ban5s concerned were impleaded as parties b* petitioner itself.

"espondent ban5s had squarel* raised the independence principle to justif* their releases of the amounts due under theSecurities. win' to the nature and purpose of the standb* letters of credit, this Court rules that the respondent ban5s were left withlittle or no alternative but to honor the credit and both of them in fact submitted that it was ministerial for them to honor the call for pa*ment.[8(]

>urthermore, /C has a ri'ht rooted in the Contract to call on the Securities. 4he relevant provisions of the Contract read,thus9

8.9.. I! )&"e& t) se%0&e the /e&,)&*!%e ), 'ts )#+'2t')!s 0!"e& th's C)!t&%t- the C)!t&%t)& t 'ts %)st sh++ )! the C)**e!%e*e!tDte /&)('"e se%0&'t$ t) the E*/+)$e& '! the ,)&* ), t1) '&&e()%#+e !" %)!,'&*e" st!"#$ +ette&s ), %&e"'t 4the Se%0&'t'es5- e%h '! the *)0!t), US;<-=<<-=>?- 'ss0e" !" %)!,'&*e" #$ #!3s )& ,'!!%'+ '!st't0t')!s %%e/t#+e t) the E*/+)$e&. E%h ), the Se%0&'t'es *0st #e '! ,)&* !"s0#st!%e %%e/t#+e t) the E*/+)$e& !" *$ #e /&)('"e" )! ! !!0++$ &e!e1#+e #s's. [88]

<.?. I, the C)!t&%t)& ,'+s t) %)*/+$ 1'th C+0se <.9- the C)!t&%t)& sh++ /$ t) the E*/+)$e& #$ 1$ ), +'60'"te" "*2es 4L'60'"te"D*2es ,)& De+$5 the *)0!t ), US;?@->>> ,)& e%h !" e(e&$ "$ )& /&t ), "$ tht sh++ e+/se #et1ee! the T&2et C)*/+et')! Dte !"the C)*/+et')! Dte- /&)('"e" tht L'60'"te" D*2es ,)& De+$ /$#+e #$ the C)!t&%t)& sh++ '! the 22&e2te !)t e%ee" 9> ), theC)!t&%t P&'%e. The C)!t&%t)& sh++ /$ L'60'"te" D*2es ,)& De+$ ,)& e%h "$ ), the "e+$ )! the ,)++)1'!2 "$ 1'th)0t !ee" ), "e*!",&)* the E*/+)$e&.

<.?.9 The E*/+)$e& *$- 1'th)0t /&e0"'%e t) !$ )the& *eth)" ), &e%)(e&$- "e"0%t the *)0!t ), s0%h "*2es ,&)* !$ *)!'es "0e- )& t) #e%)*e "0e t) the C)!t&%t)& !")& #$ "&1'!2 )! the Se%0&'t$. [8=]

A contract once perfected, binds the parties not onl* to the fulfillment of what has been e;pressl* stipulated but also to all theconsequences which accordin' to their nature, ma* be in 5eepin' with 'ood faith, usa'e, and law. [8$] A careful perusal of the4urn5e* Contract reveals the intention of the parties to ma5e the Securities answerable for the liquidated dama'es occasioned b*an* dela* on the part of petitioner. 4he call upon the Securities, while not an e;clusive remed* on the part of /C, is certainl* analternative recourse available to it upon the happenin' of the contin'enc* for which the Securities have been proffered. 4hus, evenwithout the use of the independence principle, the 4urn5e* Contract itself bestows upon /C the ri'ht to call on the Securities in theevent of default.

















#e;t, petitioner invo5es the fraud e;ception principle. 7t avers that /Cs call on the Securities is wron'ful because itfraudulentl* misrepresented to A# 6an5 and S6C that there is alread* a breach in the 4urn5e* Contract 5nowin' full* well that thisis *et to be determined b* the arbitral tribunals. 7t asserts that the fraud e;ception e;ists when the beneficiar*, for the purpose of drawin' on the credit, fraudulentl* presents to the confirmin' ban5, documents that contain, e;pressl* or b* implication, materialrepresentations of fact that to his 5nowled'e are untrue. 7n such a situation, petitioner insists, injunction is reco'ni0ed as a remed*available to it.

Citin' Bolans treatise on letters of credit, petitioner ar'ues that the independence principle is not without limits and it isimportant to fashion those limits in li'ht of the principles purpose, which is to serve the commercial function of the credit. 7f it doesnot serve those functions, application of the principle is not warranted, and the commonlaw principles of contract should appl*.

7t is worth* of note that the propriet* of /Cs call on the Securities is lar'el* intertwined with the fact of default which is theselfsame issue pendin' resolution before the arbitral tribunals. 4o be able to declare the call on the Securities wron'ful or fraudulent, it is imperative to resolve, amon' others, whether petitioner was in fact 'uilt* of dela* in the performance of its obli'ation.nfortunatel* for petitioner, this Court is not called upon to rule upon the issue of defaultsuch issue havin' been submitted b* theparties to the jurisdiction of the arbitral tribunals pursuant to the terms embodied in their a'reement.[8]

Eould injunction then be the proper remed* to restrain the alle'ed wron'ful draws on the SecuritiesI

-ost writers a'ree that fraud is an e;ception to the independence principle. Professor Bolan opines that the untruthfulness of a certificate accompan*in' a demand for pa*ment under a standb* credit ma* qualif* as fraud sufficient to support an injunctiona'ainst pa*ment.[8@] 4he remed* for fraudulent abuse is an injunction. owever, injunction should not be 'ranted unless9 2a3 there isclear proof of fraud: 2b3 the fraud constitutes fraudulent abuse of the independent purpose of the letter of credit and not onl* fraudunder the main a'reement: and 2c3 irreparable injur* mi'ht follow if injunction is not 'ranted or the recover* of dama'es would beseriousl* dama'ed.[8%]

7n its complaint for injunction before the trial court, petitioner alle'ed that it is entitled to a total e;tension of two hundred fift*three 2+=(3 da*s which would move the tar'et completion date. 7t ar'ued that if its claims for e;tension would be found meritoriousb* the 7CC, then /C would not be entitled to an* liquidated dama'es.[=&]

!enerall*, injunction is a preservative remed* for the protection of ones substantive ri'ht or interest: it is not a cause of actionin itself but merel* a provisional remed*, an adjunct to a main suit. 4he issuance of the writ of preliminar* injunction as an ancillar*or preventive remed* to secure the ri'hts of a part* in a pendin' case is entirel* within the discretion of the court ta5in' co'ni0anceof the case, the onl* limitation bein' that this discretion should be e;ercised based upon the 'rounds and in the manner provided b*law.[=1]

6efore a writ of preliminar* injunction ma* be issued, there must be a clear showin' b* the complaint that there e;ists a ri'htto be protected and that the acts a'ainst which the writ is to be directed are violative of the said ri'ht. [=+] 7t must be shown that theinvasion of the ri'ht sou'ht to be protected is material and substantial, that the ri'ht of complainant is clear and unmista5able andthat there is an ur'ent and paramount necessit* for the writ to prevent serious dama'e.[=(] -oreover, an injunctive remed* ma* onl*be resorted to when there is a pressin' necessit* to avoid injurious consequences which cannot be remedied under an* standardcompensation.[=8]

7n the instant case, petitioner failed to show that it has a clear and unmista5able ri'ht to restrain /Cs call on the Securitieswhich would justif* the issuance of preliminar* injunction. 6* petitioners own admission, the ri'ht of /C to call on the Securitieswas contractuall* rooted and subject to the e;press stipulations in the 4urn5e* Contract.[==] 7ndeed, the 4urn5e* Contract is plain andunequivocal in that it conferred upon /C the ri'ht to draw upon the Securities in case of default, as provided in Clause 8.+.=, inrelation to Clause @..+, thus9

8.9.@ The E*/+)$e& sh++ 2'(e the C)!t&%t)& se(e! "$s !)t'%e ), %++'!2 0/)! !$ ), the Se%0&'t'es- stt'!2 the !t0&e ), the "e,0+t ,)& 1h'%hthe %+'* )! !$ ), the Se%0&'t'es 's t) #e *"e- /&)('"e" tht !) !)t'%e 1'++ #e &e60'&e" ', the E*/+)$e& %++s 0/)! !$ ), the Se%0&'t'es ,)& the

/$*e!t ), L'60'"te" D*2es ,)& De+$ )& ,)& ,'+0&e #$ the C)!t&%t)& t) &e!e1 )& ete!" the Se%0&'t'es 1'th'! 8 "$s ), the'& e/'&t')! '!%%)&"!%e 1'th C+0se 8.9.9.[=$]

<.?.9 The E*/+)$e& *$- 1'th)0t /&e0"'%e t) !$ )the& *eth)" ), &e%)(e&$- "e"0%t the *)0!t ), s0%h "*2es ,&)* !$ *)!'es "0e- )& t) #e%)*e "0e- t) the C)!t&%t)& !")& #$ "&1'!2 )! the Se%0&'t$.[=]

4he pendenc* of the arbitration proceedin's would not per se ma5e /Cs draws on the Securities wron'ful or fraudulent for

there was nothin' in the Contract which would indicate that the parties intended that all disputes re'ardin' dela* should first besettled throu'h arbitration before /C would be allowed to call upon the Securities. 7t is therefore premature and absurd to concludethat the draws on the Securities were outri'ht fraudulent 'iven the fact that the 7CC and C7AC have not ruled with finalit* on thee;istence of default.

#owhere in its complaint before the trial court or in its pleadin's filed before the appellate court, did petitioner invo5e the fraude;ception rule as a 'round to justif* the issuance of an injunction. [=@] Ehat petitioner did assert before the courts below was the factthat /Cs draws on the Securities would be premature and without basis in view of the pendin' disputes between them. Petitioner should not be allowed in this instance to brin' into pla* the fraud e;ception rule to sustain its claim for the issuance of an injunctiverelief. -atters, theories or ar'uments not brou'ht out in the proceedin's below will ordinaril* not be considered b* a reviewin' courtas the* cannot be raised for the first time on appeal. [=%] 4he lower courts could thus not be faulted for not appl*in' the fraude;ception rule not onl* because the e;istence of fraud was fundamentall* interwoven with the issue of default still pendin' before





































the arbitral tribunals, but more so, because petitioner never raised it as an issue in its pleadin's filed in the courts below. At an* rate,petitioner utterl* failed to show that it had a clear and unmista5able ri'ht to prevent /Cs call upon the Securities.

f course, prudence should have impelled /C to await resolution of the pendin' issues before the arbitral tribunals prior tota5in' action to enforce the Securities. 6ut, as earlier stated, the 4urn5e* Contract did not require /C to do so and, therefore, itwas merel* enforcin' its ri'hts in accordance with the tenor thereof. bli'ations arisin' from contracts have the force of lawbetween the contractin' parties and should be complied with in 'ood faith.[$&] -ore importantl*, pursuant to the principle of autonom*of contracts embodied in Article 1(&$ of the Civil Code, [$1] petitioner could have incorporated in its Contract with /C, a proviso thatonl* the final determination b* the arbitral tribunals that default had occurred would justif* the enforcement of the Securities.owever, the fact is petitioner did not do so: hence, it would have to live with its inaction.

Eith respect to the issue of whether the respondent ban5s were justified in releasin' the amounts due under the Securities,this Court reiterates that pursuant to the independence principle the ban5s were under no obli'ation to determine the veracit* of /Cs certification that default has occurred. #either were the* bound b* petitioners declaration that /Cs call thereon waswron'ful. 4o repeat, respondent ban5s underta5in' was simpl* to pa* once the required documents are presented b* thebeneficiar*.

At an* rate, should petitioner finall* prove in the pendin' arbitration proceedin's that /Cs draws upon the Securities werewron'ful due to the none;istence of the fact of default, its ri'ht to see5 indemnification for dama'es it suffered would not normall*be foreclosed pursuant to 'eneral principles of law.

-oreover, in a "anifestation,[$+] dated (& -arch +&&1, /C informed this Court that the subject letters of credit had been full*drawn. 4his fact alone would have been sufficient reason to dismiss the instant petition.

Settled is the rule that injunction would not lie where the acts sou'ht to be enjoined have alread* become fait accompli or anaccomplished or consummated act.[$(] 7n Tic%on v. -ideo Post "anila, Inc. [$8] this Court ruled that where the period within which the

former emplo*ees were prohibited from en'a'in' in or wor5in' for an enterprise that competed with their former emplo*erthe ver*purpose of the preliminar* injunction has e;pired, an* declaration upholdin' the propriet* of the writ would be entirel* useless asthere would be no actual case or controvers* between the parties insofar as the preliminar* injunction is concerned.

7n the instant case, the consummation of the act sou'ht to be restrained had rendered the instant petition mootfor an*declaration b* this Court as to propriet* or impropriet* of the nonissuance of injunctive relief could have no practical effect on thee;istin' controvers*.[$=] 4he other issues raised b* petitioner particularl* with respect to its ri'ht to recover the amounts wron'full*drawn on the Securities, accordin' to it, could properl* be threshed out in a separate proceedin'.

ne final point. /C has char'ed petitioner of forumshoppin'. 7t raised the char'e on two occasions. >irst, in its Counter#"anifestation dated +% )une +&&8[$$] /C alle'es that petitioner presented before this Court the same claim for mone* which it hasfiled in two other proceedin's, to wit9 7CC Case #o. 11+$8?4<?-E and Civil Case #o. &8((+ before the "4C of -a5ati. /C ar'uesthat petitioners acts constitutes forumshoppin' which should be punished b* the dismissal of the claim in both forums. Second, inits Comment to Petitioners "otion for $eave to 'ile (ddendum to Petitioners "emorandum dated @ ctober +&&8, /C alle'es thatb* maintainin' the present appeal and at the same time pursuin' Civil Case #o. &8((+wherein petitioner pressed for jud'ment onthe issue of whether the funds /C drew on the Securities should be returnedpetitioner resorted to forumshoppin'. 7n bothinstances, however, petitioner has apparentl* opted not to respond to the char'e.

>orumshoppin' is a ver* serious char'e. 7t e;ists when a part* repetitivel* avails of several judicial remedies in differentcourts, simultaneousl* or successivel*, all substantiall* founded on the same transactions and the same essential facts andcircumstances, and all raisin' substantiall* the same issues either pendin' in, or alread* resolved adversel*, b* some other court.[$] 7t ma* also consist in the act of a part* a'ainst whom an adverse jud'ment has been rendered in one forum, of see5in' another and possibl* favorable opinion in another forum other than b* appeal or special civil action of certiorari, or the institution of two or more actions or proceedin's 'rounded on the same cause on the supposition that one or the other court mi'ht loo5 with favor uponthe other part*.[$@] 4o determine whether a part* violated the rule a'ainst forumshoppin', the test applied is whether the elementsof litis pendentia are present or whether a final jud'ment in one case will amount to res judicata in another .[$%] >orumshoppin'constitutes improper conduct and ma* be punished with summar* dismissal of the multiple petitions and direct contempt of court.[&]

Considerin' the seriousness of the char'e of forumshoppin' and the severit* of the sanctions for its violation, the Court willrefrain from ma5in' an* definitive rulin' on this issue until after petitioner has been 'iven ample opportunit* to respond to thechar'e.

'HEREF"RE, the instant petition is B<#7<B, with costs a'ainst petitioner.

Petitioner is hereb* required to answer the char'e of forumshoppin' within fifteen 21=3 da*s from notice.

S" "RDERED.Puno, Chairman/, (ustria#"artine%, Callejo, !r., and Chico#+a%ario, 00., concur .





































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