Specom

FIRST DIVISION [G.R. NO. 160732. June 21, 2004] METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, Petitioner, v. HON.
REYNALDO B. DAWAY, IN HIS CAPACITY AS PRESIDING JUDGE OF THE REGIONAL TRIAL COURT OF QUEZON CITY, BRANCH 90 AND MAYNILAD WATER SERVICES, INC., Respondents. DECISION AZCUNA, J.: On November 17, 2003, the Regional Trial Court (RTC) of Quezon City, Branch 90, made a determination that the Petition for Rehabilitation with Prayer for Suspension of Actions and Proceedings filed by Maynilad Water Services, Inc. (Maynilad) conformed substantially to the provisions of Sec. 2, Rule 4 of the Interim Rules of Procedure on Corporate Rehabilitation (Interim Rules). It forthwith issued a Stay Order1 which states, in part, that the court was thereby: x x xx x xx x x 2. Staying enforcement of all claims, whether for money or otherwise and whether such enforcement is by court action or otherwise, against the petitioner, its guarantors and sureties not solidarily liable with the petitioner;
chanroblesvi rtua llawli bra ry
3. Prohibiting the petitioner from selling, encumbering, transferring, or disposing in any manner any of its properties except in the ordinary course of business;
chan roble svirtuallaw lib rary
4. Prohibiting the petitioner from making any payment of its liabilities, outstanding as at the date of the filing of the petition; x x xx x xx x x Subsequently, on November 27, 2003, public respondent, acting on two Urgent Ex Parte motions2 filed by respondent Maynilad, issued the herein questioned Order3 which stated that it thereby:
rb l r l l l brr
1.DECLARES that the act of MWSS in commencing on November 24, 2003 the process for the payment by the banks of US$98 million out of the US$120 million standby letter of credit so the banks have to make good such call/drawing of payment of US$98 million by MWSS not later than November 27, 2003 at 10:00 P. M. or any similar act for that matter, is violative of the above-quoted sub-paragraph 2.) of the dispositive portion of this Courts Stay Order dated November 17, 2003. 2.ORDERS MWSS through its officers/officials to withdraw under pain of contempt the written certification/notice of draw to Citicorp International Limited dated November 24, 2003 and DECLARES void any payment by the banks to MWSS in the event such written certification/notice of draw is not withdrawn by MWSS and/or MWSS receives payment by virtue of the aforesaid standby letter of credit. Aggrieved by this Order, petitioner Manila Waterworks & Sewerage System (MWSS) filed this Petition for Review by way of certiorari under Rule 65 of the Rules of Court questioning the legality of said order as having been issued without or in excess of the lower courts jurisdiction or that the court a quo acted with grave abuse of discretion amounting to lack or excess of jurisdiction.4 Antecedents of the Case
On February 21, 1997, MWSS granted Maynilad under a Concession Agreement a twenty-year period to manage, operate, repair, decommission and refurbish the existing MWSS water delivery and sewerage services in the West Zone Service Area, for which Maynilad undertook to pay the corresponding concession fees on the dates agreed upon in said agreement 5 which, among other things, consisted of payments of petitioners mostly foreign loans. To secure the concessionaires performance of its obligations under the Concession Agreement, Maynilad was required under Section 6.9 of said contract to put up a bond, bank guarantee or other security acceptable to MWSS. In compliance with this requirement, Maynilad arranged on July 14, 2000 for a three-year facility with a number of foreign banks, led by Citicorp International Limited, for the issuance of an Irrevocable Standby Letter of Credit6 in the amount of US$120,000,000 in favor of MWSS for the full and prompt performance of Maynilads obligations to MWSS as aforestated. Sometime in September 2000, respondent Maynilad requested MWSS for a mechanism by which it hoped to recover the losses it had allegedly incurred and would be incurring as a result of the depreciation of the Philippine Peso against the US Dollar. Failing to get what it desired, Maynilad issued a Force Majeure Notice on March 8, 2001 and unilaterally suspended the payment of the concession fees. In an effort to salvage the Concession Agreement, the parties entered into a Memorandum of Agreement (MOA)7 on June 8, 2001 wherein Maynilad was allowed to recover foreign exchange losses under a formula agreed upon between them. Sometime in August 2001 Maynilad again filed another Force Majeure Notice and, since MWSS could not agree with the terms of said Notice, the matter was referred on August 30, 2001 to the Appeals Panel for arbitration. This resulted in the parties agreeing to resolve the issues through an amendment of the Concession Agreement on October 5, 2001, known as Amendment No. 1,8which was based on the terms set down in MWSS Board of Trustees Resolution No. 457-2001, as amended by MWSS Board of Trustees Resolution No. 487-2001,9 which provided inter alia for a formula that would allow Maynilad to recover foreign exchange losses it had incurred or would incur under the terms of the Concession Agreement. As part of this agreement, Maynilad committed, among other things, to:
r bl rl l lb rr
a) infuse the amount of UD$80.0 million as additional funding support from its stockholders; b) resume payment of the concession fees; and
cra lawlib rary
chanroblesv irt uallawl ibra ry
c) mutually seek the dismissal of the cases pending before the Court of Appeals and with Minor Dispute Appeals Panel. However, on November 5, 2002, Maynilad served upon MWSS a Notice of Event of Termination, claiming that MWSS failed to comply with its obligations under the Concession Agreement and Amendment No. 1 regarding the adjustment mechanism that would cover Maynilads foreign exchange losses. On December 9, 2002, Maynilad filed a Notice of Early Termination of the concession, which was challenged by MWSS. This matter was eventually brought before the Appeals Panel on January 7, 2003 by MWSS.10 On November 7, 2003, the Appeals Panel ruled that there was no Event of Termination as defined under Art. 10.2 (ii) or 10.3 (iii) of the Concession Agreement and that, therefore, Maynilad should pay the concession fees that had fallen due. The award of the Appeals Panel became final on November 22, 2003. MWSS, thereafter, submitted a written notice11 on November 24, 2003, to Citicorp International Limited, as agent for the participating banks, that by virtue of Maynilads failure to perform its obligations under the Concession Agreement, it was drawing on the Irrevocable Standby Letter of Credit and thereby demanded payment in the amount of US$98,923,640.15.
Prior to this, however, Maynilad had filed on November 13, 2003, a petition for rehabilitation before the court a quowhich resulted in the issuance of the Stay Order of November 17, 2003 and the disputed Order of November 27, 2003.12 Petitioners Case Petitioner hereby raises the following issues:
rbl r l l lb r r
1. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR AND/OR ACT PATENTLY WITHOUT JURISDICTION OR IN EXCESS OF JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN CONSIDERING THE PERFORMANCE BOND OR ASSETS OF THE ISSUING BANKS AS PART OR PROPERTY OF THE ESTATE OF THE PRIVATE RESPONDENT MAYNILAD SUBJECT TO REHABILITATION. 2. DID THE HONORABLE PRESIDING JUDGE ACT WITH LACK OR EXCESS OF JURISDICTION OR COMMIT A GRAVE ERROR OF LAW IN HOLDING THAT THE PERFORMANCE BOND OBLIGATIONS OF THE BANKS WERE NOT SOLIDARY IN NATURE. 3. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR IN ALLOWING MAYNILAD TO IN EFFECT SEEK A REVIEW OR APPEAL OF THE FINAL AND BINDING DECISION OF THE APPEALS PANEL. In support of the first issue, petitioner maintains that as a matter of law, the US$120 Million Standby Letter of Credit and Performance Bond are not property of the estate of the debtor Maynilad and, therefore, not subject to the in rem rehabilitation jurisdiction of the trial court. Petitioner argues that a call made on the Standby Letter of Credit does not involve any asset of Maynilad but only assets of the banks. Furthermore, a call on the Standby Letter of Credit cannot also be considered a claim falling under the purview of the stay order as alleged by respondent as it is not directed against the assets of respondent Maynilad. Petitioner concludes that the public respondent erred in declaring and holding that the commencement of the process for the payment of US$98 million is a violation of the order issued on November 17, 2003. Respondent Maynilads Case Respondent Maynilad seeks to refute this argument by alleging that:
rbl r l l l br r
a) the order objected to was strictly and precisely worded and issued after carefully considering/evaluating the import of the arguments and documents referred to by Maynilad, MWSS and/or creditors Chinatrust Commercial Bank and Suez in relation to admissions, pleadings and/or pertinent records13 and that public respondent had the authority to issue the same;
chanrob lesvi rtua llawli bra ry
b) public respondent never considered nor held that the Performance bond or assets of the issuing banks are part or property of the estate of respondent Maynilad subject to rehabilitation and which respondent Maynilad has not and has never claimed to be;14
r ll
c) what is relevant is not whether the performance bond or assets of the issuing banks are part of the estate of respondent Maynilad but whether the act of petitioner in commencing the process for the payment by the banks of US$98 million out of the US$120 million performance bond is covered and/or prohibited under sub-paragraphs 2.) and 4.) of the stay order dated November 17, 2003;
chanroblesv irtuallaw lib rary
d) the jurisdiction of public respondent extends not only to the assets of respondent Maynilad but also over persons and assets of all those affected by the proceedings x x x upon publication of the notice of commencement;15 and
e) the obligations under the Standby Letter of Credit are not solidary and are not exempt from the coverage of the stay order. Our Ruling We will discuss the first two issues raised by petitioner as these are interrelated and make up the main issue of the petition before us which is, did the rehabilitation court sitting as such, act in excess of its authority or jurisdiction when it enjoined herein petitioner from seeking the payment of the concession fees from the banks that issued the Irrevocable Standby Letter of Credit in its favor and for the account of respondent Maynilad?
chanro blesvi rt ualawlib ra ry
The public respondent relied on Sec. 1, Rule 3 of the Interim Rules on Corporate Rehabilitation to support its jurisdiction over the Irrevocable Standby Letter of Credit and the banks that issued it. The section reads in part that jurisdiction over those affected by the proceedings is considered acquired upon the publication of the notice of commencement of proceedings in a newspaper of general circulation and goes further to define rehabilitation as anin rem proceeding. This provision is a logical consequence of the in rem nature of the proceedings, where jurisdiction is acquired by publication and where it is necessary that the assets of the debtor come within the courts jurisdiction to secure the same for the benefit of creditors. The reference to all those affected by the proceedings covers creditors or such other persons or entities holding assets belonging to the debtor under rehabilitation which should be reflected in its audited financial statements. The banks do not hold any assets of respondent Maynilad that would be material to the rehabilitation proceedings nor is Maynilad liable to the banks at this point. Respondent Maynilads Financial Statement as of December 31, 2001 and 2002 do not show the Irrevocable Standby Letter of Credit as part of its assets or liabilities, and by respondent Maynilads own admission it is not. In issuing the clarificatory order of November 27, 2003, enjoining petitioner from claiming from an asset that did not belong to the debtor and over which it did not acquire jurisdiction, the rehabilitation court acted in excess of its jurisdiction. Respondent Maynilad insists, however, that it is Sec. 6 (b), Rule 4 of the Interim Rules that supports its claim that the commencement of the process to draw on the Standby Letter of Credit is an enforcement of claim prohibited by and under the Interim Rules and the order of public respondent. Respondent Maynilad would persuade us that the above provision justifies a leap to the conclusion that such an enforcement is prohibited by said section because it is a claim against the debtor, its guarantors and sureties not solidarily liable with the debtor and that there is nothing in the Standby Letter of Credit nor in law nor in the nature of the obligation that would show or require the obligation of the banks to be solidary with the respondent Maynilad. We disagree. First, the claim is not one against the debtor but against an entity that respondent Maynilad has procured to answer for its non-performance of certain terms and conditions of the Concession Agreement, particularly the payment of concession fees. Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all claims against guarantors and sureties, but only those claims against guarantors and sureties who are not solidarily liable with the debtor.Respondent Maynilads claim that the banks are not solidarily liable with the debtor does not find support in jurisprudence. We held in Feati Bank & Trust Company v. Court of Appeals16 that the concept of guarantee vis-vis the concept of an irrevocable letter of credit are inconsistent with each other.The guarantee theory destroys the independence of the banks responsibility from the contract upon which it was opened and the nature of both contracts is mutually in conflict with each other. In contracts of guarantee, the guarantors obligation is merely collateral and it arises only upon the default of the person primarily
liable. On the other hand, in an irrevocable letter of credit, the bank undertakes a primary obligation. We have also defined a letter of credit as an engagement by a bank or other person made at the request of a customer that the issuer shall honor drafts or other demands of payment upon compliance with the conditions specified in the credit.17
rll
Letters of credit were developed for the purpose of insuring to a seller payment of a definite amount upon the presentation of documents18 and is thus a commitment by the issuer that the party in whose favor it is issued and who can collect upon it will have his credit against the applicant of the letter, duly paid in the amount specified in the letter.19 They are in effect absolute undertakings to pay the money advanced or the amount for which credit is given on the faith of the instrument. They are primary obligations and not accessory contracts and while they are security arrangements, they are not converted thereby into contracts of guaranty.20 What distinguishes letters of credit from other accessory contracts, is the engagement of the issuing bank to pay the seller once the draft and other required shipping documents are presented to it.21 They are definite undertakings to pay at sight once the documents stipulated therein are presented. Letters of Credits have long been and are still governed by the provisions of the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce. In the 1993 Revision it provides in Art. 2 that the expressions Documentary Credit(s) and Standby Letter(s) of Credit mean any arrangement, however made or described, whereby a bank acting at the request and on instructions of a customer or on its own behalf is to make payment against stipulated document(s) and Art. 9 thereof defines the liability of the issuing banks on an irrevocable letter of credit as a definite undertaking of the issuing bank, provided that the stipulated documents are presented to the nominated bank or the issuing bank and the terms and conditions of the Credit are complied with, to pay at sight if the Credit provides for sight payment.22
rll
We have accepted, in Feati Bank and Trust Company v. Court of Appeals[23 and Bank of America NT & SA v. Court of Appeals,24 to the extent that they are pertinent, the application in our jurisdiction of the international credit regulatory set of rules known as the Uniform Customs and Practice for Documentary Credits (U.C.P) issued by the International Chamber of Commerce, which we said in Bank of the Philippine Islands v. Nery25 was justified under Art. 2 of the Code of Commerce, which states:
rbl rl l lb r r
Acts of commerce, whether those who execute them be merchants or not, and whether specified in this Code or not should be governed by the provisions contained in it; in their absence, by the usages of commerce generally observed in each place; and in the absence of both rules, by those of the civil law. The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to herein petitioner as the prohibition is on the enforcement of claims against guarantors or sureties of the debtors whose obligations are not solidary with the debtor. The participating banks obligation are solidary with respondent Maynilad in that it is a primary, direct, definite and an absolute undertaking to pay and is not conditioned on the prior exhaustion of the debtors assets. These are the same characteristics of a surety or solidary obligor. Being solidary, the claims against them can be pursued separately from and independently of the rehabilitation case, as held in Traders Royal Bank v. Court of Appeals26 and reiterated in Philippine Blooming Mills, Inc. v. Court of Appeals,27 where we said that property of the surety cannot be taken into custody by the rehabilitation receiver (SEC) and said surety can be sued separately to enforce his liability as surety for the debts or obligations of the debtor. The debts or obligations for which a surety may be liable include future debts, an amount which may not be known at the time the surety is given. The terms of the Irrevocable Standby Letter of Credit do not show that the obligations of the banks are not solidary with those of respondent Maynilad. On the contrary, it is issued at the request of and for the account of Maynilad Water Services, Inc., in favor of the Metropolitan Waterworks and Sewerage System, as a bond for the full and prompt performance of the obligations by the
concessionaire under the Concession Agreement28 and herein petitioner is authorized by the banks to draw on it by the simple act of delivering to the agent a written certification substantially in the form Annex B of the Letter of Credit. It provides further in Sec. 6, that for as long as the Standby Letter of Credit is valid and subsisting, the Banks shall honor any written Certification made by MWSS in accordance with Sec. 2, of the Standby Letter of Credit regardless of the date on which the event giving rise to such Written Certification arose.29
rll
Taking into consideration our own rulings on the nature of letters of credit and the customs and usage developed over the years in the banking and commercial practice of letters of credit, we hold that except when a letter of credit specifically stipulates otherwise, the obligation of the banks issuing letters of credit are solidary with that of the person or entity requesting for its issuance, the same being a direct, primary, absolute and definite undertaking to pay the beneficiary upon the presentation of the set of documents required therein. The public respondent, therefore, exceeded his jurisdiction, in holding that he was competent to act on the obligation of the banks under the Letter of Credit under the argument that this was not a solidary obligation with that of the debtor. Being a solidary obligation, the letter of credit is excluded from the jurisdiction of the rehabilitation court and therefore in enjoining petitioner from proceeding against the Standby Letters of Credit to which it had a clear right under the law and the terms of said Standby Letter of Credit, public respondent acted in excess of his jurisdiction. Additional Issues We proceed to consider the other issues raised in the oral arguments and included in the parties memoranda:
rb l r l l l brr
1.Respondent Maynilad argues that petitioner had a plain, speedy and adequate remedy under the Interim Rules itself which provides in Sec. 12, Rule 4 that the court may on motion or motu proprio, terminate, modify or set conditions for the continuance of the stay order or relieve a claim from coverage thereof. We find, however, that the public respondent had already accomplished this during the hearing set for the two Urgent Ex Parte motions filed by respondent Maynilad on November 21 and 24, 2003,30 where the parties including the creditors, Suez and Chinatrust Commercial presented their respective arguments.31 The public respondent then ruled, after carefully considering/evaluating the import of the arguments and documents referred to by Maynilad, MWSS and/or the creditors Chinatrust Commercial Bank and Suez in relation to the admissions, the pleadings, and /or pertinent portions of the records, this court is of the considered and humble view that the issue must perforce be resolved in favor of Maynilad.32 Hence to pursue their opposition before the same court would result in the presentation of the same arguments and issues passed upon by public respondent. Furthermore, Sec. 5, Rule 3 of the Interim Rules would preclude any other effective remedy questioning the orders of the rehabilitation court since they are immediately executory and a Petition for Review or an appeal therefrom shall not stay the execution of the order unless restrained or enjoined by the appellate court. In this situation, it had no other remedy but to seek recourse to us through this Petition for Certiorari. In Silvestre v. Torres and Oben,33 we said that it is not enough that a remedy is available to prevent a party from making use of the extraordinary remedy of certiorari but that such remedy be an adequate remedy which is equally beneficial, speedy and sufficient, not only a remedy which at some time in the future may offer relief but a remedy which will promptly relieve the petitioner from the injurious acts of the lower tribunal. It is the inadequacy -- not the mere absence -- of all other legal remedies and the danger of failure of justice without the writ, that must usually determine the propriety of certiorari.34
rll
2.Respondent Maynilad argues that by commencing the process for payment under the Standby Letter of Credit, petitioner violated an immediately executory order of the court and, therefore, comes to Court with unclean hands and should therefore be denied any relief.
It is true that the stay order is immediately executory. It is also true, however, that the Standby Letter of Credit and the banks that issued it were not within the jurisdiction of the rehabilitation court. The call on the Standby Letter of Credit, therefore, could not be considered a violation of the Stay Order. 3.Respondents claim that the filing of the petition pre-empts the original jurisdiction of the lower court is without merit. The purpose of the initial hearing is to determine whether the petition for rehabilitation has merit or not. The propriety of the stay order as well as the clarificatory order had already been passed upon in the hearing previously had for that purpose. The determination of whether the public respondent was correct in enjoining the petitioner from drawing on the Standby Letter of Credit will have no bearing on the determination to be made by public respondent whether the petition for rehabilitation has merit or not. Our decision on the instant petition does not pre-empt the original jurisdiction of the rehabilitation court. WHEREFORE, the Petition for Certiorari is granted.The Order of November 27, 2003 of the Regional Trial Court of Quezon City, Branch 90, is hereby declared null and voidand set aside. The status quo Order herein previously issued is hereby LIFTED. In view of the urgency attending this case, this decision is immediately executory. No costs. SO ORDERED. Davide, Jr., C.J., (Chairman), Panganiban, and Carpio, JJ., concur. Ynares-Santiago, J.,on leave. THIRD DIVISION [G.R. No. 94209. April 30, 1991.] FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING CORPORATION), Petitioner, v. THE COURT OF APPEALS, and BERNARDO E. VILLALUZ, Respondents. Palaez, Adriano & Gregorio for Petitioner. Ezequiel S. Consulta for Private Respondent.
SYLLABUS
1. COMMERCIAL LAW; BANKING LAWS; LETTER OF CREDIT; DOCUMENTS TENDERED MUST STRICTLY CONFORM TO THE TERMS OF LETTER OF CREDIT. It is a settled rule in commercial transactions involving letters of credit that the documents tendered must strictly conform to the terms of the letter of credit. The tender of documents by the beneficiary (seller) must include all documents required by the letter. A correspondent bank which departs from what has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its own risks and it may not thereafter be able to recover from the buyer or the issuing bank, as the case may be, the money thus paid to the
beneficiary. Thus the rule of strict compliance. 2. ID.; ID.; ID.; UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDIT (U.C.P.); APPLICABILITY JUSTIFIED BY ARTICLE 2 OF THE CODE OF COMMERCE. Moreover, the incorporation of the Uniform Customs and Practice for Documentary Credit (U.C.P. for short) in the letter of credit resulted in the applicability of the said rules in the governance of the relations between the parties. And even if the U.C.P. was not incorporated in the letter of credit, we have already ruled in the affirmative as to the applicability of the U.C.P. in cases before us. In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the observance of the U.C.P. in this jurisdiction is justified by Article 2 of the Code of Commerce. Article 2 of the Code of Commerce enunciates that in the absence of any particular provision in the Code of commerce, commercial transactions shall be governed by the usages and customs generally observed. There being no specific provision which governs the legal complexities arising from transactions involving letters of credit not only between the banks themselves but also between banks and seller and/or buyer, the applicability of the U.C.P. is undeniable. 3. ID.; ID.; ID.; IRREVOCABLE CREDIT AND CONFIRMED LETTER OF CREDIT, DIFFERENTIATED. An irrevocable credits refers to the duration of the letter of credit. What it simply means is that the issuing bank may not without the consent of the beneficiary (seller) and the applicant (buyer) revoke his undertaking under the letter. The issuing bank does not reserve the right to revoke the credit. On the other hand, a confirmed letter of credit pertains to the kind of obligation assumed by the correspondent bank. In this case, the correspondent bank gives an absolute assurance of the beneficiary that it will undertake the issuing banks obligation as its o wn according to the terms and conditions of the credit. (Agbayani, Commercial Laws of the Philippines, Vol. 1, pp. 81-83) Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply that the correspondent bank in accepting the instructions of the issuing bank has also confirmed the letter of credit. 4. ID.; ID.; ID.; CLASSIFICATIONS OF CORRESPONDENT BANKS FUNCTIONS. In commercial transactions involving letters of credit, the functions assumed by a correspondent bank are classified according to the obligations taken up by it. The correspondent bank may be called a notifying bank, a negotiating bank, or a confirming bank. In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to the beneficiary the existence of the letter of credit. (Kronman and Co., Inc. v. Public National Bank of New York, 218 N.Y.S. 616 [1926]; Shaterian, Export-Import Banking, p. 292, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76) A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft under the letter of credit. Its liability is dependent upon the stage of the negotiation. If before negotiation, it has no liability with respect to the seller but after negotiation, a contractual relationship will then prevail between the negotiating bank and the seller. (Scanlon v. First National Bank of Mexico, 162 N.E. 567 [1928]; Shaterian, Export-Import Banking, p. 293, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76) In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability is a primary one as if the correspondent bank itself had issued the letter of credit. (Shaterian, Export-Import Banking, p. 294, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 77)
5. ID.; ID.; ID.; ID.; NOTIFYING BANK; CASE AT BAR. In this case, the letter merely provided that the petitioner "forward the enclosed original credit to the beneficiary." (Records, Vol. I, p. 11) Considering the aforesaid instruction to the petitioner by the issuing bank, the Security Pacific National Bank, it is indubitable that the petitioner is only a notifying bank and not a confirming bank as ruled by the courts below. A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is only with that of the issuing bank and not with the beneficiary to whom he assumes no liability. It follows therefore that when the petitioner refused to negotiate with the private respondent, the latter has no cause of action against the petitioner for the enforcement of his rights under the letter. (See Kronman and Co., Inc. v. Public National Bank of New York, supra) 6. CIVIL LAW; OBLIGATIONS AND CONTRACT; TRUST; EXPLAINED. A trust has been defined as the "right, enforceable solely in equity, to the beneficial enjoyment of property the legal title to which is vested to another." The concept of a trust presupposes the existence of a specific property which has been conferred upon the person for the benefit of another. In order therefore for the trust theory of the private respondent to be sustained, the petitioner should have had in its possession a sum of money as specific fund advanced to it by the issuing bank and to be held in trust by it in favor of the private Respondent. This does not obtain in this case. 7. ID.; ID.; ID.; A LETTER OF CREDIT DOES NOT CONVEY THAT A SUM OF MONEY IS BEING HELD IN TRUST. The mere opening of a letter of credit, it is to be noted, does not involve a specific appropriation of a sum of money in favor of the beneficiary. It only signifies that the beneficiary may be able to draw funds upon the letter of credit up to the designated amount specified in the letter. It does not convey the notion that a particular sum of money has been specifically reserved or has been held in trust. 8. ID.; ID.; GUARANTY; INCONSISTENT WITH AN IRREVOCABLE CREDIT. The theory of guarantee relied upon the by the Court of Appeals has to necessarily fail. The concept of guarantee vis-a-vis the concept of an irrevocable credit are inconsistent with each other. In the first place, the guarantee theory destroys the independence of the banks responsibility from the contract upon which i t was opened. In the second place, the nature of both contracts is mutually in conflict with each other. In contracts of guarantee, the guarantors obligation is merely collateral and it arises only upon the default of the person primarily liable. On the other hand, in an irrevocable credit the bank undertakes a primary obligation. (See National Bank of Eagle Pass, Tex. v. American National Bank of San Francisco, 282 F. 73 [1922]) 9. ID.; ID.; AGENCY; RELATIONSHIP BETWEEN ISSUING BANK AND NOTIFYING BANK IS SIMILAR TO AGENCY. The relationship between the issuing bank and the notifying bank, on the contrary, is more similar to that of an agency and not that of a guarantee. It may be observed that the notifying bank is merely to follow the instructions of the issuing bank which is to notify or to transmit the letter of credit to the beneficiary. (See Kronman v. Public National Bank of New York, supra). Its commitment is only to notify the beneficiary. It does not undertake any assurance that the issuing bank will perform what has been mandated to or expected of it. As an agent of the issuing bank, it has
only to follow the instructions of the issuing bank and to it alone is it obligated and not to the buyer with whom it has no contractual relationship. 10. STATUTORY CONSTRUCTION; CONTROVERSY IS DECIDED ON WHAT THE LAW IS; LAW IS ALSO TO GOVERN FUTURE RELATIONS AMONG PEOPLE. We are aware of the injustice committed by Christiansen on the private respondent but we are deciding the controversy on the basis of what the law is, for the law is not meant to favor only those who have been oppressed, the law is to govern future relations among people as well. Its commitment is to all and not to a single individual. The faith of the people in our justice system may be eroded if we are to decide not what the law states but what we believe it should declare. Dura lex sed lex.
DECISION
GUTIERREZ, JR., J.:
This is a petition for review seeking the reversal of the decision of the Court of Appeals dated June 29, 1990 which affirmed the decision of the Regional Trial Court of Rizal dated October 20, 1986 ordering the defendants Christiansen and the petitioner, to pay various sums to respondent Villaluz, jointly and severally. The facts of the case are as follows:
chanrob 1es vi rtual 1aw lib rary
On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant Axel Christiansen 2,000 cubic meters of lauan logs at $27.00 per cubic meter FOB. After inspecting the logs, Christiansen issued purchase order No. 76171. On the arrangements made and upon the instructions of the consignee, Hanmi Trade Development, Ltd., de Santa Ana, California, the Security Pacific National Bank of Los Angeles, California issued Irrevocable Letter of Credit No. IC-46268 available at sight in favor of Villaluz for the sum of $54,000.00, the total purchase price of the lauan logs. The letter of credit was mailed to the Feati Bank and Trust Company (now Citytrust) with the instruction to the latter that it "forward the enclosed letter of credit to the beneficiary." (Records, Vol. I, p. 11) The letter of credit further provided that the draft to be drawn is on Security Pacific National Bank and that it be accompanied by the following documents:
jgc:chanro bles. com.ph
"1. Signed Commercial Invoice in four copies showing the number of the purchase order and certifying that
a. All terms and conditions of the purchase order have been complied with and that all logs are fresh cut and quality equal to or better than that described in H.A. Christiansens telex #201 of May 1, 1970, and that all logs have been marked "BEV-EX." b. One complete set of documents, including 1/3 original bills of lading was airmailed to Consignee and Parties to be advised by Hans-Axel Christiansen, Ship and Merchandise Broker.
chan roble svirtualawl ibra ry
c. One set of non-negotiable documents was airmailed to Han Mi Trade Development Company and one set to Consignee and Parties to be advised by Hans-Axel Christiansen, Ship and Merchandise Broker. 2. Tally sheets in quadruplicate. 3. 2/3 Original Clean on Board Ocean Bills of Lading with Consignee and Parties to be advised by Hans Axel Christiansen, showing Freight Prepaid and marked Notify:
chanrob1e s virtual 1aw lib rary
Han Mi Trade Development Company, Ltd., Santa Ana, California. Letter of Credit No. 46268 dated June 7, 1971. Han Mi Trade Development Company, Ltd., P.O. Box 10480, Santa Ana, California 92711 and Han Mi Trade Development Company, Ltd., Seoul, Korea. 4. Certification from Han-Axel Christiansen, Ship and Merchandise Broker, stating that loge have been approved prior to shipment in accordance with terms and conditions of corresponding purchase Order. (Record, Vol. 1 pp. 11-12) Also incorporated by reference in the letter of credit is the Uniform Customs and Practice for Documentary Credits (1962 Revision). The logs were thereafter loaded on the vessel "Zenlin Glory" which was chartered by Christiansen. Before its loading, the logs were inspected by custom inspectors Nelo Laurente, Alejandro Cabiao, Estanislao Edera from the Bureau of Customs (Records, Vol. I, p. 124) and representatives Rogelio Cantuba and Jesus Tadena of the Bureau of Forestry (Records, Vol. I, pp. 16-17) all of whom certified to the good condition and exportability of the logs. After the loading of the logs was completed, the Chief Mate, Shao Shu Wang issued a mate receipt of the cargo which stated the same are in good condition (Records, Vol. I, p. 363). However, Christiansen refused to issue the certification as required in paragraph 4 of the letter of credit, despite several requests made by the private Respondent. Because of the absence of the certification by Christiansen, the Feati Bank and Trust Company refused
to advance the payment on the letter of credit. The letter of credit lapsed on June 30, 1971, (extended, however up to July 31, 1971) without the private respondent receiving any certification from Christiansen.
chan roble s law lib rary : red
The persistent refusal of Christiansen to issue the certification prompted the private respondent to bring the matter before the Central Bank. In a memorandum dated August 16, 1971, the Central Bank ruled that:
jgc:chanrob les.co m.ph
". . . pursuant to the Monetary Board Resolution No. 1230 dated August 3, 1971, in all log exports, the certification of the lumber inspectors of the Bureau of Forestry . . . shall be considered final for purposes of negotiating documents. Any provision in any letter of credit covering log exports requiring certification of buyers agent or representative that said logs have been approved for shipment as a condition precedent to negotiation of shipping documents shall not be allowed." (Records, Vol. I, p. 367) Meanwhile, the logs arrived at Inchon, Korea and were received by the consignee, Hamni Trade Development Company, to whom Christiansen sold the logs for the amount of $37.50 per cubic meter, for a net profit of $10 per cubic meter. Hanmi Trade Development Company, on the other hand sold the logs to Taisung Lumber Company at Inchon, Korea. (Rollo, p. 39) Since the demands by the private respondent for Christiansen to execute the certification proved futile, Villaluz, on September 1, 1971, instituted an action for mandamus and specific performance against Christiansen and the Feati Bank and Trust Company (now Citytrust) before the then Court of First Instance of Rizal. The petitioner was impleaded as defendant before the lower court only to afford complete relief should the court a quo order Christiansen to execute the required certification. The complaint prayed for the following:
chanrob1e s virtual 1aw l ibra ry
1. Christiansen be ordered to issue the certification required of him under the Letter of Credit; 2. Upon issuance of such certification, or, if the court should find it unnecessary, FEATI BANK be ordered to accept negotiation of the Letter of Credit and make payment thereon to Villaluz; 3. Order Christiansen to pay damages to the plaintiff. (Rollo, p. 39) On or about 1979, while the case was still pending trial, Christiansen left the Philippines without informing the Court and his counsel. Hence, Villaluz, filed an amended complaint to make the petitioner solidarily liable with Christiansen. The trial court, in its order dated August 29, 1979, admitted the amended complaint. After trial, the lower court found:
jgc:cha nro bles.c om.ph
"The liability of the defendant CHRISTIANSEN is beyond dispute, and the plaintiffs right to demand payment is absolute. Defendant CHRISTIANSEN having accepted delivery of the logs by having them loaded in his chartered vessel the Zenlin Glory and shipping them to the consignee, his buyer Han Mi Trade in Inchon, South Korea (Art. 1585, Civil Code), his obligation to pay the purchase order had clearly arisen and the plaintiff may sue and recover the price of the goods (Art. 1595, id).
chanroble s.com.p h : virt ual law l ibra ry
"The Court believes that the defendant CHRISTIANSEN acted in bad faith and deceit and with intent to defraud the plaintiff, reflected in and aggravated by, not only his refusal to issue the certification that would have enabled without question the plaintiff to negotiate the letter of credit, but his accusing the plaintiff in his answer of fraud. intimidation, violence and deceit. These accusations said defendant did not attempt to prove, as in fact he left the country without ever notifying his own lawyer. It was to the Courts mind a pure swindle. "The defendant Feati Bank and Trust Company, on the other hand, must be held liable together with his (sic) co-defendant for having, by its wrongful act, i.e., its refusal to negotiate the letter of credit in the absence of CHRISTIANSENs certification (in spite of the Central Banks ruling that the requirement was illegal), prevented payment to the plaintiff. The said letter of credit, as may be seen on its face, is irrevocable and the issuing bank, the Security Pacific National Bank in Los Angeles, California, undertook by its terms that the same shall be honored upon its presentment. On the other hand, the notifying bank, the defendant Feati Bank and Trust Company, by accepting the instructions from the issuing bank, itself assumed the very same undertaking as the issuing bank under the terms of the letter of credit. x x x
"The Court likewise agrees with the plaintiff that the defendant BANK may also be held liable under the principles and laws on both trust and estoppel. When the defendant BANK accepted its role as the notifying and negotiating bank for and in behalf of the issuing bank, it in effect accepted a trust reposed on it, and became a trustee i relation to plaintiff as the beneficiary of the letter of credit. As trustee, it was then duty bound to protect the interests of the plaintiff under the terms of the letter of credit, and must be held liable for damage and loss resulting to the plaintiff from its failure to perform that obligation. "Furthermore, when the defendant BANK assumed the role of a notifying and negotiating BANK it in effect represented to the plaintiff that, if the plaintiff complied with the terms and conditions of the letter of credit and presents the same to the BANK together with the documents mentioned therein the said BANK will pay the plaintiff the amount of the letter of credit. The Court is convinced that it was upon the strength of this letter of credit and this implied representation of the defendant BANK that the plaintiff delivered the logs to defendant CHRISTIANSEN, considering that the issuing bank is a foreign bank with whom plaintiff had no business connections and CHRISTIANSEN had not offered any other Security for the payment of the logs. Defendant BANK cannot now be allowed to deny its
commitment and liability under the letter of credit:
chanrobles vi rtua l lawlib rary
A holder of a promissory note given because of gambling who indorses the same to an innocent holder for value and who assures said party that the note has no legal defect, is in estoppel from asserting that there had been an illegal consideration for the note, and so, he has to pay its value. (Rodriguez v. Martinez, 5 Phil. 67). "The defendant BANK, in insisting upon the certification of defendant CHRISTIANSEN as a condition precedent to negotiating the letter of credit, likewise in the Courts opinion acted in bad faith, not only because of the clear declaration of the Central Bank that such a requirement was illegal, but because the BANK with all the legal counsel available to it, must have known that the condition was void since it depended on the sole will of the debtor, the defendant CHRISTIANSEN. (Art. 1182, Civil Code)" (Rollo, pp. 29-31) On the basis of the foregoing the trial court on October 20, 1986, ruled in favor of the private Respondent. The dispositive portion of its decision reads:
WHEREFORE, judgment is hereby rendered for the plaintiff, ordering the defendants to pay the plaintiff, jointly and severally, the following sums:
jgc:chan roble s.com.p h
"a) $54,000.00 (US), or its peso equivalent at the prevailing rate as of the time payment is actually made, representing the purchase price of the logs; "b) P17,340.00, representing government fees and charges paid by plaintiff in connection with the logs shipment in question; "c) P10,000.00 as temperate damages (for trips made to Bacolod and Korea). "All three foregoing sums shall be with interest thereon at 12% per annum from September 1, 1971, when the complaint was filed, until fully paid: "d) P70,000.00 as moral damages; "e) P30,000.00 as exemplary damages; and "f) P30,000.00 as attorneys fees and litigation expense." (Rollo, p. 28) The petitioner received a copy of the decision on November 3, 1986. Two days thereafter, or on November 5, 1986, it filed a notice of appeal. On November 10, 1986, the private respondent filed a motion for the immediate execution of the judgment on the ground that the appeal of the petitioner was frivolous and dilatory.
jgc:chan robles .com.p h
The trial court ordered the immediate execution of its judgment upon the private respondents filing of a bond. The petitioner then filed a motion for reconsideration and a motion to suspend the implementation of the writ of execution. Both motions were, however, denied. Thus, petitioner filed before the Court of Appeals a petition for certiorari and prohibition with preliminary injunction to enjoin the immediate execution of the judgment.
chan roble s.com:c ralaw:red
The Court of Appeals in a decision dated April 9, 1987 granted the petition and nullified the order of execution, the dispositive portion of the decision states:
jgc:chanrobles. com.ph
"WHEREFORE, the petition for certiorari is granted. Respondent Judges order of execution dated December 29, 1986, as well as his order dated January 14, 1987 denying the petitioners urgent motion to suspend the writ of execution against its properties are hereby annulled and set aside insofar as they are sought to be enforced and implemented against the petitioner Feati Bank & Trust Company, now Citytrust Banking Corporation, during the pendency of its appeal from the adverse decision in Civil Case No. 15121. However, the execution of the same decision against defendant Axel Christiansen who did not appeal said decision may proceed unimpeded. The Sheriffs levy on the petitioners properties, and the notice of sale dated January 13, 1987 (Annex M), are hereby annulled and set aside. (Rollo, p. 44) A motion for reconsideration was thereafter filed by the private Respondent. The Court of Appeals, in a resolution dated June 29, 1987 denied the motion for reconsideration. In the meantime, the appeal filed by the petitioner before the Court of Appeals was given due course. In its decision dated June 29, 1990, the Court of Appeals affirmed the decision of the lower court dated October 20, 1986 and ruled that:
1. Feati Bank admitted in the "special and negative defenses" section of its answer that it was the bank to negotiate the letter of credit issued by the Security Pacific National Bank of Los Angeles, California. (Record, pp. 156, 157). Feati Bank did notify Villaluz of such letter of credit. In fact, as such negotiating bank, even before the letter of credit was presented for payment, Feati Bank had already made an advance payment of P75,000.00 to Villaluz in anticipation of such presentment. As the negotiating bank, Feati Bank, by notifying Villaluz of the letter of credit in behalf of the issuing bank (Security Pacific), confirmed such letter of credit and made the same also its own obligation. This ruling finds support in the authority cited by Villaluz:
jgc:cha nroble s.com.p h
"A confirmed letter of credit is one in which the notifying bank gives its assurance also that the opening banks obligation will be performed. In such a case, the notifying bank will not simply transmit but will confirm the opening banks obligation by making it also its own u ndertaking, or commitment, or guaranty or obligation." (Ward & Harfield, 28-29, cited in Agbayani, Commercial Laws, 1978 edition, p. 77).
chanro bles law l ibra ry
Feati Bank argues further that it would be considered as the negotiating bank only upon negotiation of the letter of credit. This stance is untenable. Assurance, commitments or guaranties supposed to be made by notifying banks to the beneficiary of a letter of credit, as defined above, can be relevant or meaningful only with respect to a future transaction, that is, negotiation. Hence, even before actual negotiation, the notifying bank, by the mere act of notifying the beneficiary of the letter of credit, assumes as of that moment the obligation of the issuing bank. 2. Since Feati Bank acted as guarantor of the issuing bank and in effect also of the latters principal or client, i.e. Hans Axel-Christiansen. (sic) Such being the case, when Christiansen refused to issue the certification, it was as though refusal was made by Feati Bank Itself Feati Bank should have taken steps to secure the certification from Christiansen; and, if the latter should still refuse to comply, to hale him to court. In short, Feati Bank should have honored Villaluzs demand for payment of his logs by virtue of the irrevocable letter of credit issued in Villaluzs favor and guaranteed by Feati Bank. 3. The decision promulgated by this Court in CA-G.R. Sp No. 11051, which contained the statement "Since Villaluz draft was not drawn strictly in compliance with the terms of the l etter of credit, Feati Banks refusal to negotiate it was justified," did not dispose of this question on the merits. In that case, the question involved was jurisdiction or discretion, and not judgment. The quoted pronouncement should not be taken as a preemptive judgment on the merits of the present case on appeal. 4. The original action was for "mandamus and/ or specific performance." Feati Bank may not be a party to the transaction between Christiansen and Security Pacific National Bank on the one hand, and Villaluz on the other hand; still, being guarantor or agent of Christiansen and or Security Pacific National Bank which had directly dealt with Villaluz, Feati Bank may be sued properly on specific performance as a procedural means by which the relief sought by Villaluz may be entertained. (Rollo, pp. 32-33) The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, the decision appealed from is affirmed; and accordingly, the appeal is hereby dismissed. Costs against the petitioner. (Rollo. p. 33) Hence, this petition for review. The petitioner interposes the following reasons for the allowance of the petition. First Reason THE RESPONDENT COURT ERRONEOUSLY CONCLUDED FROM THE ESTABLISHED FACTS AND INDEED, WENT AGAINST THE EVIDENCE AND DECISION OF THIS HONORABLE COURT, THAT PETITIONER BANK IS LIABLE ON THE LETTER OF CREDIT DESPITE PRIVATE RESPONDENTS NON-COMPLIANCE WITH THE TERMS THEREOF.
Second Reason THE RESPONDENT COURT COMMITTED AN ERROR OF LAW WHEN IT HELD THAT PETITIONER BANK, BY NOTIFYING PRIVATE RESPONDENT OF THE LETTER OF CREDIT, CONFIRMED SUCH CREDIT AND MADE THE SAME ALSO ITS OBLIGATION AS GUARANTOR OF THE ISSUING BANK. Third Reason THE RESPONDENT COURT LIKEWISE COMMITTED AN ERROR OF LAW WHEN IT AFFIRMED THE TRIAL COURTS DECISION. (Rollo, p. 12) The principal issue in this case is whether or not a correspondent bank is to be held liable under the letter of credit despite non-compliance by the beneficiary with the terms thereof? The petition is impressed with merit. It is a settled rule in commercial transactions involving letters of credit that the documents tendered must strictly conform to the terms of the letter of credit. The tender of documents by the beneficiary (seller) must include all documents required by the letter. A correspondent bank which departs from what has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its own risks and it may not thereafter be able to recover from the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary. Thus the rule of strict compliance. In the United States, commercial transactions involving letters of credit are governed by the rule of strict compliance. In the Philippines, the same holds true. The same rule must also be followed. The case of Anglo-South American Trust Co. v. Uhe Et. Al. (184 N.E. 741 [1933]) expounded clearly on the rule of strict compliance. "We have heretofore held that these letters of credit are to be strictly complied with, which documents, and shipping documents must be followed as stated in the letter. There is no discretion in the bank or trust company to waive any requirements. The terms of the letter constitutes an agreement between the purchaser and the bank." (p. 743) Although in some American decisions, banks are granted a little discretion to accept a faulty tender as when the other documents may be considered immaterial or superfluous, this theory could lead to dangerous precedents. Since a bank deals only with documents, it is not in a position to determine whether or not the documents required by the letter of credit are material or superfluous. The mere fact that the document was specified therein readily means that the document is of vital importance to the buyer. Moreover, the incorporation of the Uniform Customs and Practice for Documentary Credit (U.C.P. for
chanro bles law lib rary : red nad
short) in the letter of credit resulted in the applicability of the said rules in the governance of the relations between the parties. And even if the U.C.P. was not incorporated in the letter of credit, we have already ruled in the affirmative as to the applicability of the U.C.P. in cases before us. In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the observance of the U.C.P. in this jurisdiction is justified by Article 2 of the Code of Commerce. Article 2 of the Code of Commerce enunciates that in the absence of any particular provision in the Code of Commerce, commercial transactions shall be governed by the usages and customs generally observed. There being no specific provision which governs the legal complexities arising from transactions involving letters of credit not only between the banks themselves but also between banks and seller and or buyer, the applicability of the U.C.P. is undeniable.
chanroble s.com:c ralaw:red
The pertinent provisions of the U.C.P. (1962 Revision) are: Article 3.
chan rob1e s virtual 1aw l ibra ry
"An irrevocable credit is a definite undertaking on the part of the issuing bank and constitutes the engagement of that bank to the beneficiary and bona fide holders of drafts drawn and or documents presented thereunder, that the provisions for payment, acceptance or negotiation contained in the credit will be duly fulfilled, provided that all the terms and conditions of the credit are complied with. "An irrevocable credit may be advised to a beneficiary through another bank (the advising bank) without engagement on the part of that bank, but when an issuing bank authorizes or requests another bank to confirm its irrevocable credit and the latter does so, such confirmation constitutes a definite undertaking of the confirming bank . . ." Article 7. "Banks must examine all documents with reasonable care to ascertain that they appear on their face to be in accordance with the terms and conditions of the credit." Article 8. "Payment, acceptance or negotiation against documents which appear on their face to be in accordance with the terms and conditions of a credit by a bank authorized to do so, binds the party giving the authorization to take up documents and reimburse the bank which has effected the payment, acceptance or negotiation." (Emphasis Supplied) Under the foregoing provisions of the U.C.P., the bank may only negotiate, accept or pay, if the documents tendered to it are on their face in accordance with the terms and conditions of the
cralaw vi rtua1aw l ibra ry cra law virtua1aw li bra ry
documentary credit. And since a correspondent bank, like the petitioner, principally deals only with documents, the absence of any document required in the documentary credit justifies the refusal by the correspondent bank to negotiate, accept or pay the beneficiary, as it is not its obligation to look beyond the documents. It merely has to rely on the completeness of the documents tendered by the beneficiary. In regard to the ruling of the lower court and affirmed by the Court of Appeals that the petitioner is not a notifying bank but a confirming bank, we find the same erroneous. The trial court wrongly mixed up the meaning of an irrevocable credit with that of a confirmed credit. In its decision, the trial court ruled that the petitioner, in accepting the obligation to notify the respondent that the irrevocable credit has been transmitted to the petitioner on behalf of the private respondent, has confirmed the letter. The trial court appears to have overlooked the fact that an irrevocable credit is not synonymous with a confirmed credit. These types of letters have different meanings and the legal relations arising from there varies. A credit may be an irrevocable credit and at the same time a confirmed credit or viceversa.
chan roble s virtual lawlib rary
An irrevocable credit refers to the duration of the letter of credit. What is simply means is that the issuing bank may not without the consent of the beneficiary (seller) and the applicant (buyer) revoke his undertaking under the letter. The issuing bank does not reserve the right to revoke the credit. On the other hand, a confirmed letter of credit pertains to the kind of obligation assumed by the correspondent bank. In this case, the correspondent bank gives an absolute assurance to the beneficiary that it will undertake the issuing banks obligation as its own according to the terms and conditions of the credit. (Agbayani, Commercial Laws of the Philippines, Vol. 1, pp. 81-83) Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply that the correspondent bank in accepting the instructions of the issuing bank has also confirmed the letter of credit. Another error which the lower court and the Court of Appeals made was to confuse the obligation assumed by the petitioner. In commercial transactions involving letters of credit, the functions assumed by a correspondent bank are classified according to the obligations taken up by it. The correspondent bank may be called a notifying bank, a negotiating bank, or a confirming bank. In case of a notifying bank, the correspondent bank assumes no liability except to notify and or transmit to the beneficiary the existence of the letter of credit. (Kronman and Co., Inc. v. Public National Bank of New York, 218 N.Y.S. 616 [1926]; Shaterian, Export-Import Banking, p. 292, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76) A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft under the letter of credit. Its liability is dependent upon the stage of the negotiation. If before negotiation, it has no liability with respect to the seller but after negotiation, a contractual relationship will then prevail between the negotiating
bank and the seller. (Scanlon v. First National Bank of Mexico, 162 N.E. 667 [1928]; Shaterian, Export-Import Banking, p. 293, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76) In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability is a primary one as if the correspondent bank itself had issued the letter of credit. (Shaterian, Export-Import Banking, p. 294, cited in Agbayani Commercial Laws of the Philippines, Vol. 1, p. 77) In this case, the letter merely provided that the petitioner "forward the enclosed original credit to the beneficiary." (Records, Vol. I, p. 11) Considering the aforesaid instruction to the petitioner by the issuing bank, the Security Pacific National Bank, it is indubitable that the petitioner is only a notifying bank and not a confirming bank as ruled by the courts below.
chanrob les vi rtual lawlib rary
If the petitioner was a confirming bank, then a categorical declaration should have been stated in the letter of credit that the petitioner is to honor all drafts drawn in conformity with the letter of credit. What was simply stated therein was the instruction that the petitioner forward the original letter of credit to the beneficiary. Since the petitioner was only a notifying bank, its responsibility was solely to notify and or transmit the documentary of credit to the private respondent and its obligation ends there. The notifying bank may suggest to the seller its willingness to negotiate, but this fact alone does not imply that the notifying bank promises to accept the draft drawn under the documentary credit. A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is only with that of the issuing bank and not with the beneficiary to whom he assumes no liability. It follows therefore that when the petitioner refused to negotiate with the private respondent, the latter has no cause of action against the petitioner for the enforcement of his rights under the letter. (See Kronman and Co., Inc. v. Public National Bank of New York, supra) In order that the petitioner may be held liable under the letter, there should be proof that the petitioner confirmed the letter of credit. The records are, however, bereft of any evidence which will disclose that the petitioner has confirmed the letter of credit The only evidence in this case, and upon which the private respondent premised his argument, is the P75,000.00 loan extended by the petitioner to him. The private respondent relies on this loan to advance his contention that the letter of credit was confirmed by the petitioner. He claims that the loan was granted by the petitioner to him, "in anticipation of the presentment of the letter of credit."
c ralaw virtua1aw l ibra ry
The proposition advanced by the private respondent has no basis in fact or law. That the loan agreement between them be construed as an act of confirmation is rather far-fetched, for it depends
principally on speculative reasoning. As earlier stated, there must have been an absolute assurance on the part of the petitioner that it will undertake the issuing banks obligation as its own. Verily, the loan agreement it entered into cannot be categorized as an emphatic assurance that it will carry out the issuing banks obligation as its own. The loan agreement is more reasonably classified as an isolated transaction independent of the documentary credit. Of course, it may be presumed that the petitioner loaned the money to the private respondent in anticipation that it would later be paid by the latter upon the receipt of the letter. Yet, we would have no basis to rule definitively that such "act" should be construed as an act of confirmation. The private respondent no doubt was in need of money in loading the logs on the ship "Zenlin Glory" and the only way to satisfy this need was to borrow money from the petitioner which the latter granted. From these circumstances, a logical conclusion that can be gathered is that the letter of credit was merely to serve as a collateral. At the most, when the petitioner extended the loan to the private respondent, it assumed the character of a negotiating bank. Even then, the petitioner will still not be liable, for a negotiating bank before negotiation has no contractual relationship with the seller. The case of Scanlon v. First National Bank (supra) perspicuously explained the relationship between the seller and the negotiating bank, viz:
chan rob1e s virtual 1aw l ibra ry
It may buy or refuse to buy as it chooses. Equally, it must be true that it owes no contractual duty toward the person for whose benefit the letter is written to discount or purchase any draft drawn against the credit. No relationship of agent and principal, or of trustee and cestui, between the receiving bank and the beneficiary of the letter is established." (P. 568) Whether therefore the petitioner is a notifying bank or a negotiating bank, it cannot be held liable. Absent any definitive proof that it has confirmed the letter of credit or has actually negotiated with the private respondent, the refusal by the petitioner to accept the tender of the private respondent is justified. In regard to the finding that the petitioner became a "trustee in relation to the plaintiff (private respondent) as the beneficiary of the letter of credit," the same has no legal basis. A trust has been defined as the "right, enforceable solely in equity, to the beneficial enjoyment of property the legal title to which is vested to another." (89 C.J.S. 712) The concept of a trust presupposes the existence of a specific property which has been conferred upon the person for the benefit of another. In order therefore for the trust theory of the private respondent
to be sustained, the petitioner should have had in its possession a sum of money as specific fund advanced to it by the issuing bank and to be held in trust by it in favor of the private Respondent. This does not obtain in this case.
chanro bles. com:cra law:red
The mere opening of a letter of credit, it is to be noted, does not involve a specific appropriation of a sum of money in favor of the beneficiary. It only signifies that the beneficiary may be able to draw funds upon the letter of credit up to the designated amount specified in the letter. It does not convey the notion that a particular sum of money has been specifically reserved or has been held in trust. What actually transpires in an irrevocable credit is that the correspondent bank does not receive in advance the sum of money from the buyer or the issuing bank. On the contrary, when the correspondent bank accepts the tender and pays the amount stated in the letter, the money that it doles out comes not from any particular fund that has been advanced by the Issuing bank, rather it gets the money from its own funds and then later seeks reimbursement from the issuing bank. Granting that a trust has been created, still, the petitioner may not be considered a trustee. As the petitioner is only a notifying bank, its acceptance of the instructions of the issuing bank will not create estoppel on its part resulting in the acceptance of the trust. Precisely, as a notifying bank, its only obligation is to notify the private respondent of the existence of the letter of credit. How then can such create estoppel when that is its only duty under the law? We also find erroneous the statement of the Court of Appeals that the petitioner "acted as a guarantor of the issuing bank and in effect also of the latters principal or client, i.e., Hans Axel Christiansen."
It is a fundamental rule that an irrevocable credit is independent not only of the contract between the buyer and the seller but also of the credit agreement between the issuing bank and the buyer. (See Kingdom of Sweden v. New York Trust Co., 96 N.Y.S. 2d 779 [1949]) The relationship between the buyer (Christiansen) and the issuing bank (Security Pacific National Bank) is entirely independent from the letter of credit issued by the latter. The contract between the two has no bearing as to the noncompliance by the buyer with the agreement between the latter and the seller. Their contract is similar to that of a contract of services (to open the letter of credit) and not that of agency as was intimated by the Court of Appeals. The unjustified refusal therefore by Christiansen to issue the certification under the letter of credit should not likewise be charged to the issuing bank. As a mere notifying bank, not only does the petitioner not have any contractual relationship with the buyer, it has also nothing to do with the contract between the issuing bank and the buyer regarding the issuance of the letter of credit.
chanrob les.com: cralaw: red
The theory of guarantee relied upon by the Court of Appeals has to necessarily fail. The concept of guarantee vis-a-vis the concept of an irrevocable credit are inconsistent with each other.
In the first place, the guarantee theory destroys the independence of the banks responsibility from the contract upon which it was opened. In the second place, the nature of both contracts is mutually in conflict with each other. In contracts of guarantee, the guarantors obligation is merely co llateral and it arises only upon the default of the person primarily liable. On the other hand, in an irrevocable credit the bank undertakes a primary obligation. (See National Bank of Eagle Pass, Tex v. American National Bank of San Francisco, 282 F. 73 [1922]) The relationship between the issuing bank and the notifying bank, on the contrary, is more similar to that of an agency and not that of a guarantee. It may be observed that the notifying bank is merely to follow the instructions of the issuing bank which is to notify or to transmit the letter of credit to the beneficiary. (See Kronman v. Public National Bank of New York, supra). Its commitment is only to notify the beneficiary. It does not undertake any assurance that the issuing bank will perform what has been mandated to or expected of it. As an agent of the issuing bank, it has only to follow the instructions of the issuing bank and to it alone is it obligated and not to buyer with whom it has no contractual relationship. In fact the notifying bank, even if the seller tenders all the documents required under the letter of credit, may refuse to negotiate or accept the drafts drawn thereunder and it will still not be held liable for its only engagement is to notify and or transmit to the seller the letter of credit. Finally, even if we assume that the petitioner is a confirming bank, the petitioner cannot be forced to pay the amount under the letter. As we have previously explained, there was a failure on the part of the private respondent to comply with the terms of the letter of credit. The failure by him to submit the certification was fatal to his case. The U.C.P. which is incorporated in the letter of credit ordains that the bank may only pay the amount specified under the letter if all the documents tendered are on their face in compliance with the credit. It is not tasked with the duty of ascertaining the reason or reasons why certain documents have not been submitted, as it is only concerned with the documents. Thus, whether or not the buyer has performed his responsibility towards the seller is not the banks problem. We are aware of the injustice committed by Christiansen on the private respondent but we are deciding the controversy on the basis of what the law is, for the law is not meant to favor only those who have been oppressed, the law is to govern future relations among people as well. Its commitment is to all and not to a single individual. The faith of the people in our justice system may be eroded if we are to decide not what the law states but what we believe it should declare. Dura lex sed lex.
chan roble s lawli bra ry : rednad
Considering the foregoing, the materiality of ruling upon the validity of the certificate of approval required of the private respondent to submit under the letter of credit, has become insignificant. In any event, we affirm the earlier ruling of the Court of Appeals dated April 9, 1987 in regard to the petition before it for certiorari and prohibition with preliminary injunction, to wit:
"There is no merit in the respondents contention that the certification required in condition No. 4 of the letter of credit was "patently illegal." At the time the letter of credit was issued there was no Central Bank regulation prohibiting such a condition in the letter of credit. The letter of credit (Exh. C) was issued on June 7, 1971, more than two months before the issuance of the Central Bank Memorandum on August 16, 1971 disallowing such a condition in a letter of credit. In fact the letter of credit had already expired on July 30, 1971 when the Central Bank memorandum was issued. In any event, it is difficult to see how such a condition could be categorized as illegal or unreasonable since all that plaintiff Villaluz, as seller of the logs, could and should have done was to refuse to load the logs on the vessel "Zenlin Glory", unless Christiansen first issued the required certification that the logs had been approved by him to be in accordance with the terms and conditions of his purchase order. Apparently, Villaluz was in too much haste to ship his logs without taking all due precautions to assure that all the terms and conditions of the letter of credit had been strictly complied with, so that there would be no hitch in its negotiation." (Rollo, p. 8) WHEREFORE, the COURT RESOLVED to GRANT the petition and hereby NULLIFIES and SETS ASIDE the decision of the Court of Appeals dated June 29, 1990. The amended complaint in Civil Case No. 15121 is DISMISSED. SO ORDERED. Feliciano, Bidin and Davide, Jr., JJ., concur. Fernan, C.J., took no part. THIRD DIVISION [G.R. No. 74886. December 8, 1992.] PRUDENTIAL BANK, Petitioner, v. INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS INC. and ANACLETO R. CHI, Respondents.
SYLLABUS
1. COMMERCIAL LAW; NEGOTIABLE INSTRUMENTS; LETTER OF CREDIT; CONSTRUED. A letter of credit is defined as an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. Through a letter of credit, the bank merely substitutes its own promise to pay for the promise to pay of one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon. 2. ID.; ID.; ID.; PRESENTMENT FOR ACCEPTANCE, NOT NECESSARY IN CASE AT BAR. The transaction in the case at bar stemmed from Philippine Rayons application for a commercial letter of
credit with the petitioner in the amount of $128,548.78 to cover the formers contract to purchase and import loom and textile machinery from Nissho Company, Ltd. of Japan under a five-year deferred payment plan. Petitioner approved the application. The drawee was necessarily the herein petitioner. It was to the latter that the drafts were presented for payment. There was no need for acceptance as the issued drafts are sight drafts. They are, pursuant to Section 7 of the Negotiable Instruments Law (NIL), payable on demand. Presentment for acceptance is defined as the production of a bill of exchange to a drawee for acceptance. Contrary to both courts pronouncements, Philippine Rayon immediately became liable thereon upon petitioners payment thereof. Such is the essence of the letter of credit issued by the petitioner. A different conclusion would violate the principle upon which commercial letters of credit are founded because in such a case, both the beneficiary and the issuer, Nissho Company Ltd. and the petitioner, respectively, would be placed at the mercy of Philippine Rayon even if the latter had already received the imported machinery and the petitioner had fully paid for it. Presentment for acceptance is necessary only in the cases expressly provided for in Section 143 of the Negotiable Instruments Law (NIL). 3. ID.; ID.; ACCEPTANCE OF A BILL, EXPLAINED. The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer; this may be done in writing by the drawee in the bill itself, or in a separate instrument. 4. ID.; TRUST RECEIPTS LAW (P.D. 115), TRUST RECEIPT TRANSACTION, DEFINED. Under P.D. No. 115, otherwise known as the Trust Receipts Law, which took effect on 29 January 1973, a trust receipt transaction is defined as "any transaction by and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as the entrustee, whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latters execution and delivery to the entruster of a signed document called the trust receipt wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt, or for other purposes substantially equivalent to any one of the following: . . ."
cra law virt ua1aw lib ra ry
5. ID.; ID.; VIOLATIONS THEREOF; PENDENCY OF CRIMINAL ACTION, NOT A LEGAL OBSTACLE TO A SEPARATE CIVIL ACTION. Although petitioner commenced a criminal action for the violation of the Trust Receipts Law, no legal obstacle prevented it from enforcing the civil liability arising out of the trust receipt in a separate civil action. Under Section 13 of the Trust Receipts Law, the failure of an entrustee to turn over the proceeds of the sale of goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article 315, paragraph 1(b) of the Revised Penal Code. Under Article 33 of the Civil Code, a civil action for damages, entirely separate and distinct from the criminal action, may be brought by the injured
party in cases of defamation, fraud and physical injuries. Estafa falls under fraud. 6. ID.; ID.; ID.; PENALTY WHEN VIOLATION COMMITTED BY JURIDICAL ENTITIES. A close examination of Sec. 13 of P.D. No. 115 reveals that the penalty referred to therein which shall be imposed upon the directors, officers, employees or other officials or persons of the corporation, partneship, association or other judicial utility is imprisonment, the duration of which would depend on the amount of the fraud as provided for in Article 315 of the Revised Penal Code. The reason for this is obvious: corporations, partnerships, associations and other juridical entities cannot be put in jail. However, it is these entities which are made liable for the civil liability arising from the criminal offense. This is the import of the clause "without prejudice to the civil liabilities arising from the criminal offense."
cra law virtua1aw li bra ry
7. CIVIL LAW; CONTRACTS; GUARANTY; VALIDITY THEREOF. The attestation by witnesses and the acknowledgment before a notary public are not required by law to make a party liable on the instrument. The rule is that contracts shall be obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present; however, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that it be proved in a certain way, that requirement is absolute and indispensable. With respect to a guaranty, which is a promise to answer for the debt or default of another, the law merely requires that it, or some note or memorandum thereof, be in writing. Otherwise, it would be unenforceable unless ratified. While the acknowledgment of a surety before a notary public is required to make the same a public document, under Article 1358 of the Civil Code, a contract of guaranty does not have to appear in a public document. 8. ID.; ID.; ID.; DEFENSE OF EXECUTION; NOT A CONDITION SINE QUA NON FOR THE INSTITUTION OF ACTION AGAINST GUARANTOR. Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be raised by a guarantor before he may be held liable for the obligation. However, excussion is not a condition sine qua non for the institution of an action against the guarantor. In Southern Motors, Inc. v. Barbosa (99 Phil. 263, 268 [1956]), this Court stated: "4. Although an ordinary personal guarantor not a mortgagor or pledgor may demand the aforementioned exhaustion, the creditor may, prior thereto, secure a judgment against said guarantor, who shall be entitled, however, to a deferment of the execution of said judgment against him until after the properties of the principal debtor shall have been exhausted to satisfy the obligation involved in the case."
cra law virtua1aw l ibra ry
9. ID.; ID.; CONTRACT OF ADHESION; CONSTRUCTION THEREOF. Any doubt as to the import or true intent of the solidary guaranty clause should be resolved against the petitioner. The trust receipt, together with the questioned solidary guaranty clause, is on a form drafted and prepared solely by the petitioner; Chis participation therein is limited to the affixing of his signature thereon. It is, therefore, a contract of adhesion; as such, it must be strictly construed against the party responsible for its preparation. 10. REMEDIAL LAW; CIVIL PROCEDURE; PERMISSIVE JOINDER OF PARTIES; RATIONALE. There
was then nothing procedurally objectionable in impleading private respondent Chi as a co-defendant in Civil Case No. Q-19312 before the trial court. Section 6, Rule 3 of the Rules of Court on permissive joinder of parties explicitly allows it. This is the equity rule relating to multifariousness. It is based on trial convenience and is designed to permit the joinder of plaintiffs or defendants whenever there is a common question of law or fact. It will save the parties unnecessary work, trouble and expense. 11. CIVIL LAW; CONTRACTS; GUARANTY; GUARANTOR; LIABILITY IN CASE AT BAR. Chis liability is limited to the principal obligation in the trust receipt plus all the accessories thereof including judicial costs; with respect to the latter, he shall only be liable for those costs incurred after being judicially required to pay. Interest and damages, being accessories of the principal obligation, should also be paid; these, however, shall run only from the date of the filing of the complaint. Attorneys fees may even be allowed in appropriate cases. In the instant case, the attorneys fees to be paid by Chi cannot be the same as that to be paid by Philippine Rayon since it is only the trust receipt that is covered by the guaranty and not the full extent of the latters liability. All things considered, he can be held liable for the sum of P10,000.00 as attorneys fees in favor of the petitione r.
DECISION
DAVIDE, JR., J.:
Petitioner seeks to review and set aside the decision 1 of public respondent Intermediate Appellate Court (now Court of Appeals), dated 10 March 1986, in AC-G.R. No. 66733 which affirmed in toto the 15 June 1978 decision of Branch 9 (Quezon City) of the then Court of First Instance (now Regional Trial Court) of Rizal in Civil Case No. Q-19312. The latter involved an action instituted by the petitioner for the recovery of a sum of money representing the amount paid by it to the Nissho Company Ltd. of Japan for textile machinery imported by the defendant, now private respondent, Philippine Rayon Mills, Inc. (hereinafter Philippine Rayon), represented by co-defendant Anacleto R. Chi. The facts which gave rise to the instant controversy are summarized by the public respondent as follows:
jgc:chanroble s.com.p h
"On August 8, 1962, Defendant-Appellant Philippine Rayon Mills, Inc. entered into a contract with Nissho Co., Ltd. of Japan for the importation of textile machineries under a five-year deferred payment plan (Exhibit B, Plaintiffs Folder of Exhibits, p. 2). To effect payment for said machineries, the defendant-appellant applied for a commercial letter of credit with the Prudential Bank and Trust Company in favor of Nissho. By virtue of said application, the Prudential Bank opened Letter of Credit No. DPP-63762 for $128,548.78 (Exhibit A, Ibid., p. 1). Against this letter of credit, drafts, were drawn and issued by Nissho (Exhibits X, X-1 to X-11, Ibid., pp. 65, 66 to 76), which were all paid by the Prudential Bank through its correspondent in Japan, the Bank of Tokyo, Ltd. As indicated on their faces, two of these drafts (Exhibits X and X-1, Ibid., pp. 65-66) were accepted by the defendant-
appellant through its president, Anacleto R. Chi, while the others were not (Exhibits X-2 to X-11, Ibid., pp. 66 to 76). Upon the arrival of the machineries, the Prudential Bank indorsed the shipping documents to the defendant-appellant which accepted delivery of the same. To enable the defendant-appellant to take delivery of the machineries, it executed, by prior arrangement with the Prudential Bank, a trust receipt which was signed by Anacleto R. Chi in his capacity as President (sic) of defendant-appellant company (Exhibit C, Ibid., p. 13). At the back of the trust receipt is a printed form to be accomplished by two sureties who, by the very terms and conditions thereof, were to be jointly and severally liable to the Prudential Bank should the defendant-appellant fail to pay the total amount or any portion of the drafts issued by Nissho and paid for by Prudential Bank. The defendant-appellant was able to take delivery of the textile machineries and installed the same at its factory site at 69 Obudan Street, Quezon City. Sometime in 1967, the defendant-appellant ceased business operation (sic). On December 29, 1969, Defendant-Appellants factory was leased by Yupangco Cotton Mills for an annual rental of P300,000.00 (Exhibit I, Ibid., p. 22). The lease was renewed on January 3, 1973 (Exhibit J, Ibid., p. 26). On January 5, 1974, all the textile machineries in the defendant-appellants factory were sold to AIC Development Corporation for P300,000.00 (Exhibit K, Ibid., p. 29) The obligation of the defendant-appellant arising from the letter of credit and the trust receipt remained unpaid and unliquidated. Repeated formal demands (Exhibits U, V, and W, Ibid., pp. 62, 63, 64) for the payment of the said trust receipt yielded no result. Hence, the present action for the collection of the principal amount of P956,384.95 was filed on October 3, 1974 against the defendantappellant and Anacleto R. Chi. In their respective answers, the defendants interposed identical special defenses, viz., the complaint states no cause of action; if there is, the same has prescribed; and the plaintiff is guilty of laches." 2 On 15 June 1978, the trial court rendered its decision the dispositive portion of which reads:
jgc:c han robles. com.ph
"WHEREFORE, judgment is hereby rendered sentencing the defendant Philippine Rayon Mills, Inc. to pay plaintiff the sum of P153,645.22, the amounts due under Exhibits "X" & "X-1", with interest at 6% per annum beginning September 15, 1974 until fully paid.
chanroble s law lib ra ry
Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11", inclusive, the same not having been accepted by defendant Philippine Rayon Mills, Inc., plaintiffs cause of action thereon has not accrued, hence, the instant case is premature. Insofar as defendant Anacleto R. Chi is concerned, the case is dismissed. Plaintiff is ordered to pay defendant Anacleto R. Chi the sum of P20,000.00 as attorneys fees. With costs against defendant Philippine Rayon Mills, Inc.
SO ORDERED." 3 Petitioner appealed the decision to the then Intermediate Appellate Court. In urging the said court to reverse or modify the decision, petitioner alleged in its Brief that the trial court erred in (a) disregarding its right to reimbursement from the private respondents for the entire unpaid balance of the imported machines, the total amount of which was paid to the Nissho Company Ltd., thereby violating the principle of the third party payors right to reimbursement provided for in the second paragraph of Article 1236 of the Civil Code and under the rule against unjust enrichment; (b) refusing to hold Anacleto R. Chi, as the responsible officer of defendant corporation, liable under Section 13 of P.D. No 115 for the entire unpaid balance of the imported machines covered by the banks trust receipt (Exhibit "C"); (c) finding that the solidary guaranty clause signed by Anacleto R. Chi is not a guaranty at all; (d) controverting the judicial admissions of Anacleto R. Chi that he is at least a simple guarantor of the said trust receipt obligation; (e) contravening, based on the assumption that Chi is a simple guarantor, Articles 2059, 2060 and 2062 of the Civil Code and the related evidence and jurisprudence which provide that such liability had already attached; (f) contravening the judicial admissions of Philippine Rayon with respect to its liability to pay the petitioner the amounts involved in the drafts (Exhibits "X", "X-1" to "X-11"); and (g) interpreting "sight" drafts as requiring acceptance by Philippine Rayon before the latter could be held liable thereon. 4 In its decision, public respondent sustained the trial court in all respects. As to the first and last assigned errors, it rules that the provision on unjust enrichment, Article 2142 of the Civil Code, applies only if there is no express contract between the parties and there is a clear showing that the payment is justified. In the instant case, the relationship existing between the petitioner and Philippine Rayon is governed by specific contracts, namely the application for letters of credit, the promissory note, the drafts and the trust receipt. With respect to the last ten (10) drafts (Exhibits "X-2" to "X-11") which had not been presented to and were not accepted by Philippine Rayon, petitioner was not justified in unilaterally paying the amounts stated therein. The public respondent did not agree with the petitioners claim that the drafts were sight drafts which did not require presentment for acceptance to Philippine Rayon because paragraph 8 of the trust receipt presupposes prior acceptance of the drafts. Since the ten (10) drafts were not presented and accepted, no valid demand for payment can be made.
chanrob les law l ibra ry
Public respondent also disagreed with the petitioners contention that private respondent Chi is solidarily liable with Philippine Rayon pursuant to Section 13 of P.D. No. 115 and based on his signature on the solidary guaranty clause at the dorsal side of the trust receipt. As to the first contention, the public respondent ruled that the civil liability provided for in said Section 13 attaches only after conviction. As to the second, it expressed misgivings as to whether Chis signature on the trust receipt made the latter automatically liable thereon because the so-called solidary guaranty clause at the dorsal portion of the trust receipt is to be signed not by one (1) person alone, but by two (2) persons; the last sentence of the same is incomplete and unsigned by witnesses; and it is not acknowledged before a notary public. Besides, even granting that it was executed and acknowledged before a notary public, Chi cannot be held liable therefor because the records fail to show that
petitioner had either exhausted the properties of Philippine Rayon or had resorted to all legal remedies as required in Article 2058 of the Civil Code. As provided for under Articles 2052 and 2054 of the Civil Code, the obligation of a guarantor is merely accessory and subsidiary, respectively. Chis liability would therefore arise only when the principal debtor fails to comply with his obligation. 5 Its motion to reconsider the decision having been denied by the public respondent in its Resolution of 11 June 1986, 6 petitioner filed the instant petition on 31 July 1986 submitting the following legal issues:
"I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY ERRED IN DENYING PETITIONERS CLAIM FOR FULL REIMBURSEMENT AGAINST THE PRIVATE RESPONDENTS FOR THE PAYMENT PETITIONER MADE TO NISSHO CO. LTD. FOR THE BENEFIT OF PRIVATE RESPONDENT UNDER ART. 1283 OF THE NEW CIVIL CODE OF THE PHILIPPINES AND UNDER THE GENERAL PRINCIPLE AGAINST UNJUST ENRICHMENT; II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY LIABLE UNDER THE TRUST RECEIPT (EXH. C); III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS OF RESPONDENT CHI HE IS LIABLE THEREON AND TO WHAT EXTENT; IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A SIMPLE GUARANTOR; AND IF SO, HAS HIS LIABILITY AS SUCH ALREADY ATTACHED; V. WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE OFFICER OF RESPONDENT PHIL. RAYON RESPONDENT CHI IS PERSONALLY LIABLE PURSUANT TO THE PROVISION OF SECTION 13, P.D. 115; VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER THE TRUST RECEIPT (EXH. C); VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER THE DRAFTS (EXHS. X, X-1 TO X-11) AND TO WHAT EXTENT; VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR ACCEPTANCE FROM RESPONDENT PHIL. RAYON BEFORE THE LATTER BECOMES LIABLE TO PETITIONER." 7 In the Resolution of 12 March 1990, 8 this Court gave due course to the petition after the filing of the Comment thereto by private respondent Anacleto Chi and of the Reply to the latter by the petitioner; both parties were also required to submit their respective memoranda which they subsequently complied with. As We see it, the issues may be reduced as follows:
chanro b1es vi rtual 1aw lib rary
1. Whether presentment for acceptance of the drafts was indispensable to make Philippine Rayon liable thereon; 2. Whether Philippine Rayon is liable on the basis of the trust receipt; 3. Whether private respondent Chi is jointly and severally liable with Philippine Rayon for the obligation sought to be enforced and if not, whether he may be considered a guarantor; in the latter situation, whether the case should have been dismissed on the ground of lack of cause of action as there was no prior exhaustion of Philippine Rayons properties.
chanrobles v irt ual lawl ibra ry
Both the trial court and the public respondent ruled that Philippine Rayon could be held liable for the two (2) drafts, Exhibits "X" and "X-1", because only these appear to have been accepted by the latter after due presentment. The liability for the remaining ten (10) drafts (Exhibits "X-2" to "X-11" inclusive) did not arise because the same were not presented for acceptance. In short, both courts concluded that acceptance of the drafts by Philippine Rayon was indispensable to make the latter liable thereon. We are unable to agree with this proposition. The transaction in the case at bar stemmed from Philippine Rayons application for a commercial letter of credit with the petitioner in the amount of $128,548.78 to cover the formers contract to purchase and import loom and textile machinery from Nissho Company, Ltd. of Japan under a five-year deferred payment plan. Petitioner approved the application. As correctly ruled by the trial court in its Order of 6 March 1975: 9 ". . . By virtue of said Application and Agreement for Commercial Letter of Credit, plaintiff bank 10 was under obligation to pay through its correspondent bank in Japan the drafts that Nisso (sic) Company, Ltd., periodically drew against said letter of credit from 1963 to 1968, pursuant to plaintiffs contract with the defendant Philippine Rayon Mills, Inc. In turn, defendant Philippine Rayon Mills, Inc., was obligated to pay plaintiff bank the amounts of the drafts drawn by Nisso (sic) Company, Ltd. against said plaintiff bank together with any accruing commercial charges, interest, etc. pursuant to the terms and conditions stipulated in the Application and Agreement of Commercial Letter of Credit Annex "A." "
cra law virt ua1aw li bra ry
A letter of credit is defined as an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. 11 Through a letter of credit, the bank merely substitutes its own promise to pay for the promise to pay of one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon. 12 In the instant case then, the drawee was necessarily the herein petitioner. It was to the latter that the drafts were presented for payment. In fact, there was no need for acceptance as the issued drafts are sight drafts. Presentment for acceptance is necessary only in the cases expressly provided for in Section 143 of the Negotiable Instruments Law (NIL). 13 The said section reads:
"SECTION 143. When presentment for acceptance must be made. Presentment for acceptance must be made:
chanrob1e s virtual 1aw l ibra ry
(a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument; or (b) Where the bill expressly stipulates that it shall be presented for acceptance; or (c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee. In no other case is presentment for acceptance necessary in order to render any party to the bill liable."
cralaw vi rtua 1aw lib rary
Obviously then, sight drafts do not require presentment for acceptance. The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer; 14 this may be done in writing by the drawee in the bill itself, or in a separate instrument. 15 The parties herein agree, and the trial court explicitly ruled, that the subject drafts are sight drafts. Said the latter:
chanrob les law li bra ry : red
". . . In the instant case the drafts being at sight, they are supposed to be payable upon acceptance unless plaintiff bank has given the Philippine Rayon Mills Inc. time within which to pay the same. The first two drafts (Annexes C & D, Exh. X & X-1) were duly accepted as indicated on their face (sic), and upon such acceptance should have been paid forthwith. These two drafts were not paid and although Philippine Rayon Mills ought to have paid the same, the fact remains that until now they are still unpaid." 16 Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section 7 provides: "SECTION 7. When payable on demand. An instrument is payable on demand (a) When so it is expressed to be payable on demand, or at sight, or on presentation; or (b) In which no time for payment is expressed. Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand." (Emphasis supplied) Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at maturity of any accepted draft, bill of exchange or indebtedness shall not be extinguished or modified" 17 does not, contrary to the holding of the public respondent, contemplate prior acceptance by Philippine Rayon, but by the petitioner. Acceptance, however, was not even necessary in the first place because the drafts which were eventually issued were sight drafts. And even if these were not sight drafts, thereby necessitating acceptance, it would be the petitioner and not Philippine Rayon which had to accept
jgc:chanrobles. com.ph
the same for the latter was not the drawee. Presentment for acceptance is defined as the production of a bill of exchange to a drawee for acceptance. 18 The trial court and the public respondent, therefore, erred in ruling that presentment for acceptance was an indispensable requisite for Philippine Rayons liability on the drafts to attach. Contrary to both courts pronouncements, Philippine Rayon immediately became liable thereon upon petitioners payment thereof. Such is the essence of the letter of credit issued by the petitioner. A different conclusion would violate the principle upon which commercial letter of credit are founded because in such a case, both the beneficiary and the issuer. Nissho Company Ltd. and the petitioner, respectively, would be placed at the mercy of Philippine Rayon even if the latter had already received the imported machinery and the petitioner had fully paid for it. The typical setting and purpose of a letter of credit are described in Hibernia Bank and Trust Co. v. J. Aron & Co., Inc., 19 thus:
jgc: chan roble s.com.p h
"Commercial letters of credit have come into general use in international sales transactions where much time necessarily elapses between the sale and the receipt by a purchaser of the merchandise, during which interval great price changes may occur. Buyers and sellers struggle for the advantage of position. The seller is desirous of being paid as surely and as soon as possible, realizing that the vendee at a distant point has it in his power to reject on trivial grounds merchandise on arrival, and cause considerable hardship to the shipper. Letters of credit meet this condition by affording celerity and certainty of payment. Their purpose is to insure to a seller payment of a definite amount upon presentation of documents. The bank deals only with documents. It has nothing to do with the quality of the merchandise. Disputes as to the merchandise shipped may arise and be litigated later between vendor and vendee, but they may not impede acceptance of drafts and payment by the issuing bank when the proper documents are presented."
cralaw vi rtua1aw lib rary
The trial court and the public respondent likewise erred in disregarding the trust receipt and in not holding that Philippine Rayon was liable thereon. In People v. Yu Chi Ho, 20 this Court explains the nature of a trust receipt by quoting In re Dunlap Carpet Co., 21 thus:
jgc:c hanro bles. com.ph
"By this arrangement a banker advances money to an intending importer, and thereby lends the aid of capital, of credit, or of business facilities and agencies abroad, to the enterprise of foreign commerce. Much of this trade could hardly be carried on by any other means, and therefore it is of the first importance that the fundamental factor in the transaction, the bankers advance of money and credit, should receive the amplest protection. Accordingly, in order to secure that the banker shall be repaid at the critical point that is, when the imported goods finally reach the hands of the intended vendee the banker takes the full title to the goods at the very beginning; he takes it as soon as the goods are bought and settled for by his payments or acceptances in the foreign country, and he continues to hold that title as his indispensable security until the goods are sold in the United States and the vendee is called upon to pay for them. This security is not an ordinary pledge by the importer to the banker, for the importer has never owned the goods, and moreover he is not able to deliver the possession; but the security is the complete title vested originally in the bankers, and this characteristic of the transaction has again and again been recognized and protected by the Courts. Of course, the title is at bottom a security title, as it has sometimes been called, and the banker is always under the obligation to reconvey; but only after his advances have been fully repaid and after the
importer has fulfilled the other terms of the contract."
cra law virt ua1aw li bra ry
As further stated in National Bank v. Vuida e Hijos de Angel Jose, 22 trust receipts:
jgc:chanrob les.com. ph
". . . [I]n a certain manner. . . partake of the nature of a conditional sale as provided by the Chattel Mortgage Law, that is, the importer becomes absolute owner of the imported merchandise as soon as he has paid its price. The ownership of the merchandise continues to be vested in the owner thereof or in the person who has advanced payment, until he has been paid in full, or if the merchandise has already been sold, the proceeds of the sale should be turned over to him by the importer or by his representative or successor in interest."
Under P.D. No. 115, otherwise known as the Trust Receipts Law, which took effect on 29 January 1973, a trust receipt transaction is defined as "any transaction by and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as the entrustee, whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latters execution and delivery to the entruster of a signed document called the trust receipt wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt, or for other purposes substantially equivalent to any one of the following: . . . ."
cralaw vi rt ua1aw lib ra ry
It is alleged in the complaint that private respondents "not only have presumably put said machinery to good use and have profited by its operation and/or disposition but very recent information that (sic) reached plaintiff bank that defendants already sold the machinery covered by the trust receipt to Yupangco Cotton Mills," and that "as trustees of the property covered by the trust receipt, . . . and therefore acting in fiduciary (sic) capacity, defendants have willfully violated their duty to account for the whereabouts of the machinery covered by the trust receipt or for the proceeds of any lease; sale or other disposition of the same that they may have made, notwithstanding demands therefor; defendants have fraudulently misapplied or converted to their own use any money realized from the lease, sale, and other disposition of said machinery." 23 While there is no specific prayer for the delivery to the petitioner by Philippine Rayon of the proceeds of the sale of the machinery covered by the trust receipt, such relief is covered by the general prayer for "such further and other relief as may be just and equitable on the premises." 24 And although it is true that the petitioner commenced a criminal action for the violation of the Trust Receipts Law, no legal obstacle prevented it from enforcing the civil liability arising out of the trust receipt in a separate civil action. Under Section 13 of the Trust Receipts Law, the failure of an entrustee to turn over the proceeds of the sale of goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article 315, paragraph 1(b) of the Revised Penal
Code. 25 Under Article 33 of the Civil Code, a civil action for damages, entirely separate and distinct from the criminal action, may be brought by the injured party in cases of defamation, fraud and physical injuries. Estafa falls under fraud.
cha nrob lesvi rtua lawlib rary
We also conclude, for the reason hereinafter discussed, and not for that adduced by the public respondent, that private respondent Chis signature in the dorsal portion of the trust receipt did not bind him solidarily with Philippine Rayon. The statement at the dorsal portion of the said trust receipt, which petitioner describes as a "solidary guaranty clause", reads:
jgc:c han robles. com.ph
"In consideration of the PRUDENTIAL BANK AND TRUST COMPANY complying with the foregoing, we jointly and severally agree and undertake to pay on demand to the PRUDENTIAL BANK AND TRUST COMPANY all sums of money which the said PRUDENTIAL BANK AND TRUST COMPANY may call upon us to pay arising out of or pertaining to, and/or in any event connected with the default of and/or nonfulfillment in any respect of the undertaking of the aforesaid: PHILIPPINE RAYON MILLS, INC. We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does not have to take any steps or exhaust its remedy against aforesaid: before making demand on me/us. (Sgd.) Anacleto R. Chi ANACLETO R. CHI" 26 Petitioner insists that by virtue of the clear wording of the statement, specifically the clause." . . we jointly and severally agree and undertake . . .," and the concluding sentence on exhaustion, Chis liability therein is solidary. In holding otherwise, the public respondent ratiocinates as follows:
chanrob 1es vi rtual 1aw lib rary chanrob1es vi rtua l 1aw lib rary
"With respect to the second argument, we have our misgivings as to whether the mere signature of defendant-appellee Chi of (sic) the guaranty agreement, Exhibit "C-1", will make it an actionable document. It should be noted that Exhibit "C-1" was prepared and printed by the plaintiff-appellant. A perusal of Exhibit "C-1" shows that it was to be signed and executed by two persons. It was signed only by defendant-appellee Chi. Exhibit "C-1" was to be witnessed by two persons, but no one signed in that capacity. The last sentence of the guaranty clause is incomplete Furthermore, the plaintiffappellant also failed to have the purported guarantee clause acknowledged before a notary public. All these show that the alleged guaranty provision was disregarded and, therefore, not consummated. But granting arguendo that the guaranty provision in Exhibit "C-1" was fully executed and acknowledged still defendant-appellee chi cannot be held liable thereunder because the records show
that the plaintiff-appellant had neither exhausted the property of the defendant-appellant nor had it resorted to all legal remedies against the said defendant-appellant as provided in Article 2058 of the Civil Code. The obligation of a guarantor is merely accessory under Article 2052 of the Civil Code and subsidiary under Article 2054 of the Civil Code. Therefore, the liability of the defendant-appellee arises only when the principal debtor fails to comply with his obligation." 27 Our own reading of the questioned solidary guaranty clause yields no other conclusion than that the obligation of Chi is only that of a guarantor. This is further bolstered by the last sentence which speaks of waiver of exhaustion, which, nevertheless, is ineffective in this case because the space therein for the party whose property may not be exhausted was not filled up. Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be raised by a guarantor before he may be held liable for the obligation. Petitioner likewise admits that the questioned provision is a solidary guaranty clause, thereby clearly distinguishing it from a contract of surety. It, however, described the guaranty as solidary between the guarantors; this would have been correct if two (2) guarantors had signed it. The clause "we jointly and severally agree and undertake" refers to the undertaking of the two (2) parties who are to sign it or to the liability existing between themselves. It does not refer to the undertaking between either one or both of them on the one hand and the petitioner on the other with respect to the liability described under the trust receipt. Elsewise stated, their liability is not divisible as between them, i.e., it can be enforced to its full extent against any one of them. Furthermore, any doubt as to the import or true intent of the solidary guaranty clause should be resolved against the petitioner. The trust receipt, together with the questioned solidary guaranty clause, is on a form drafted and prepared solely by the petitioner; Chis participation therein is limited to the affixing of his signature thereon. It is, therefore, a contract of adhesion; 28 as such, it must be strictly construed against the party responsible for its preparation. 29 Neither can We agree with the reasoning of the public respondent that this solidary guaranty clause was effectively disregarded simply because it was not signed and witnessed by two (2) persons and acknowledged before a notary public. While indeed, the clause ought to have been signed by two (2) guarantors, the fact that it was only Chi who signed the same did not make his act an idle ceremony or render the clause totally meaningless. By his signing, Chi became the sole guarantor. The attestation by witnesses and the acknowledgment before a notary public are not required by law to make a party liable on the instrument. The rule is that contracts shall be obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present; however, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that it be proved in a certain way, that requirement is absolute and indispensable. 30 With respect to a guaranty, 31 which is a promise to answer for the debt or default of another, the law merely requires that it, or some note or memorandum thereof, be in writing. Otherwise, it would be unenforceable unless ratified. 32 While the acknowledgment of a surety before a notary public is required to make the same a public document, under Article 1358 of the Civil Code, a contract of guaranty does not have to appear in a public document. And now to the other ground relied upon by the petitioner as basis for the solidary liability of Chi,
namely the criminal proceedings against the latter for the violation of P.C. No. 115. Petitioner claims that because of the said criminal proceedings, Chi would be answerable for the civil liability arising therefrom pursuant to Section 13 of P.D. No. 115. Public respondent rejected this claim because such civil liability presupposes prior conviction as can be gleaned from the phrase "without prejudice to the civil liability arising from the criminal offense." Both are wrong. The said section reads:
jgc:cha nrob les.com. ph
"SECTION 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense."
A close examination of the quoted provision reveals that it is the last sentence which provides for the correct solution. It is clear that if the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense. The penalty referred to is imprisonment, the duration of which would depend on the amount of the fraud as provided for in Article 315 of the Revised Penal Code. The reason for this is obvious: corporations, partnerships, associations and other juridical entities cannot be put in jail. However, it is these entities which are made liable for the civil liability arising from the criminal offense. This is the import of the clause "without prejudice to the civil liabilities arising from the criminal offense." And, as We stated earlier, since that violation of a trust receipt constitutes fraud under Article 33 of the Civil Code, petitioner was acting well within its rights in filing an independent civil action to enforce the civil liability arising therefrom against Philippine Rayon. The remaining issue to be resolved concerns the propriety of the dismissal of the case against private respondent Chi. The trial court based the dismissal, and the respondent Court its affirmance thereof, on the theory that Chi is not liable on the trust receipt in any capacity either as surety or as guarantor because his signature at the dorsal portion thereof was useless; and even if he could be bound by such signature as a simple guarantor, he cannot, pursuant to Article 2058 of the Civil Code, be compelled to pay until after petitioner has exhausted and resorted to all legal remedies against the principal debtor, Philippine Rayon. The records fail to show that petitioner had done so. 33 Reliance is thus placed on Article 2058 of the Civil Code which provides:
"ARTICLE 2058. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor."
Simply stated, there is as yet no cause of action against Chi. We are not persuaded. Excussion is not a condition sine qua non for the institution of an action against a guarantor. In Southern Motors, Inc. v. Barbosa, 34 this Court stated:
"4. Although an ordinary personal guarantor not a mortgagor or pledgor may demand the aforementioned exhaustion, the creditor may, prior thereto, secure a judgment against said guarantor, who shall be entitled, however, to a deferment of the execution of said judgment against him until after the properties of the principal debtor shall have been exhausted to satisfy the obligation involved in the case."
cra law virtua1aw li bra ry
There was then nothing procedurally objectionable in impleading private respondent Chi as a codefendant in Civil Case No. Q-19312 before the trial court. As a matter of fact, Section 6, Rule 3 of the Rules of Court on permissive joinder of parties explicitly allows it. It reads:
jgc:chan robles. com.ph
"SECTION 6. Permissive joinder of parties. All persons in whom or against whom any right to relief in respect to or arising out of the same transaction or series of transactions is alleged to exist, whether jointly, severally, or in the alternative, may, except as otherwise provided in these rules, join as plaintiffs or be joined as defendants in one complaint, where any gotten of law or fact common to all such plaintiffs or to all such defendants may arise in the action; but the court may make such orders as may be just to prevent any plaintiff or defendant from being embarrassed or put to expense in connection with any proceedings in which he may have no interest."
This is the equity rule relating to multifariousness. It is based on trial convenience and is designed to permit the joinder of plaintiffs or defendants whenever there is a common question of law or fact. It will save the parties unnecessary work, trouble and expense. 35 However, Chis liability is limited to the principal obligation in the trust receipt plus all the accessories thereof including judicial costs; with respect to the latter, he shall only be liable for those costs incurred after being judicially required to pay. 36 Interest and damages, being accessories of the principal obligation, should also be paid; these, however, shall run only from the date of the filing of the complaint. Attorneys fees may even be allowed in appropriate cases. 37 In the instant case, the attorneys fees to be paid by Chi cannot be the same as that to be paid by Philippine Rayon since it is only the trust receipt that is covered by the guaranty and not the full extent of the latters liability. All things considered, he can be held liable for the sum of P10,000.00 as attorneys fees in favor of the petitioner. Thus, the trial court committed grave abuse of discretion in dismissing the complaint as against private respondent Chi and condemning petitioner to pay him P20 ,000 00 as attorneys fees. In the light of the foregoing, it would no longer be necessary to discuss the other issues raised by the petitioner.
WHEREFORE, the instant Petition is hereby GRANTED. The appealed Decision of 10 March 1986 of the public respondent in AC-G.R. CV No. 66733 and, necessarily, that of Branch 9 (Quezon City) of the then Court of First Instance of Rizal in Civil Case No. Q-19312 are hereby REVERSED and SET ASIDE and another is hereby entered:
1. Declaring private respondent Philippine Rayon Mills, Inc. liable on the twelve drafts in question (Exhibits "X", "X-1" to "X-11", inclusive) and on the trust receipt (Exhibit "C), and ordering it to pay petitioner: (a) the amounts due thereon in the total sum of P956,384.95 as of 15 September 1974, with interest thereon at six percent (6%) per annum from 16 September 1974 until it is fully paid, less whatever may have been applied thereto by virtue of foreclosure of mortgages, if any; (b) a sum equal to ten percent (10%) of the aforesaid amount as attorneys fees; and (c) the costs. 2. Declaring private respondent Anacleto R. Chi secondarily liable on the trust receipt and ordering him to pay the face value thereof, with interest at the legal rate, commencing from the date of the filing of the complaint in Civil Case No Q-19312 until the same is fully paid as well as the costs and attorneys fees in the sum of P10,000.00 if the writ of execution for the enforcement of the above awards against Philippine Rayon Mills, Inc. is returned unsatisfied. Costs against private respondents. SO ORDERED. Gutierrez, Jr., Bidin, Romero and Melo, JJ., concur.

Specom

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Specom

Uploaded by

Copyright:

Available Formats

FIRST DIVISION [G.R. NO. 160732. June 21, 2004] METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, Petitioner, v. HON.

chanroblesv irt uallawl ibra ry

GUTIERREZ, JR., J.:

chanrob 1es vi rtual 1aw lib rary

chanrob1e s virtual 1aw l ibra ry

jgc:cha nro bles.c om.ph

commitment and liability under the letter of credit:

chanrobles vi rtua l lawlib rary

chanrob1e s virtual 1aw lib rary

The pertinent provisions of the U.C.P. (1962 Revision) are: Article 3.

chan rob1e s virtual 1aw l ibra ry

DAVIDE, JR., J.:

jgc:c han robles. com.ph

chanro b1es vi rtual 1aw lib rary

importer has fulfilled the other terms of the contract."

cra law virt ua1aw li bra ry

jgc:chanro bles. com.ph

You might also like