G.R. No.

94209

April 30, 1991

FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING

CORPORATION), petitioner,
vs.
THE COURT OF APPEALS, and BERNARDO E.
VILLALUZ, respondents.
Pelaez, Adriano & Gregorio for petitioner.
Ezequiel S. Consulta for private respondent.

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:
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:
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.
Christiansen's 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.
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:
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 logs 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.
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:
. . . 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 buyer's 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, Hanmi 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:
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:
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).
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
even notifying his own lawyer. It was to the Court's mind a
pure swindle.
The defendant Feati Bank and Trust Company, on the other
hand, must be held liable together with his (sic) codefendant for having, by its wrongful act, i.e., its refusal to
negotiate the letter of credit in the absence of
CHRISTIANSEN's certification (in spite of the Central Bank's
ruling that the requirement was illegal), prevented payment
to the plaintiff. The said letter of credit, as may be seen on
its face, isirrevocable 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.
xxx

xxx

xxx

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 in 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 damages 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:
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 Court's 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:
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 attorney's 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.
The trial court ordered the immediate execution of its judgment
upon the private respondent's 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 forcertiorari and prohibition with
preliminary injunction to enjoin the immediate execution of the
judgment.
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:
WHEREFORE, the petition for certiorari is granted.
Respondent Judge's order of execution dated December 29,
1986, as well as his order dated January 14, 1987 denying
the petitioner's 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 did not appeal
said decision may proceed unimpeded. The Sheriff s levy on
the petitioner's 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:
A confirmed letter of credit is one in which the notifying bank
gives its assurance also that the opening bank's obligation
will be performed. In such a case, the notifying bank will not
simply transmit but will confirm the opening bank's
obligation by making it also its own undertaking, or
commitment, or guaranty or obligation. (Ward & Hatfield, 2829, cited in Agbayani, Commercial Laws, 1978 edition, p.
77).
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 latter's 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 Villaluz's demand for payment of his logs by virtue
of the irrevocable letter of credit issued in Villaluz's 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
letter of credit, Feati Bank's 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 COURT'S 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 noncompliance 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 America 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 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.
The pertinent provisions of the U.C.P. (1962 Revision) are:
Article 3.
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
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 theirrevocable 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

vice-versa.
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 bank's 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. 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)
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.
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."
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 bank's
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 bank's 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:
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.
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 latter's 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.
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 bank's 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 guarantor's 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. (SeeNational 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.1wphi1 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 bank's 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.
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 respondent's 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.
G.R. No. L-24821 October 16, 1970
BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee,
vs.
DE RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO and

AURORA CARCERENY alias AURORA C.

GONZALES, defendants-appellants.
Aviado and Aranda for plaintiff-appellee.
S. Emiliano Calma for defendants-appellants.

CASTRO, J.:.
This is an appeal from the decision of the Court of First Instance of
Manila ordering the defendants-appellants to pay to the Bank of
the Philippine Islands (hereinafter referred to as the Bank), jointly
and severally, the value of the credit it extended to them in
several letters of credit which the Bank opened at the behest of
the defendants appellants to finance their importation of
dyestuffs from the United States, which however turned out to be
mere colored chalk upon arrival and inspection thereof at the port
of Manila.
The record shows that on four (4) different occasions in 1961, the
De Reny Fabric Industries, Inc., a Philippine corporation through
its co-defendants-appellants, Aurora Carcereny alias Aurora C.
Gonzales, and Aurora T. Tuyo, president and secretary,
respectively of the corporation, applied to the Bank for four (4)
irrevocable commercial letters of credit to cover the purchase by
the corporation of goods described in the covering L/C
applications as "dyestuffs of various colors" from its American
supplier, the J.B. Distributing Company. All the applications of the
corporation were approved, and the corresponding Commercial
L/C Agreements were executed pursuant to banking procedures.
Under these agreements, the aforementioned officers of the
corporation bound themselves personally as joint and solidary
debtors with the corporation. Pursuant to banking regulations
then in force, the corporation delivered to the Bank peso marginal
deposits as each letter of credit was opened.

The dates and amounts of the L/Cs applied for and approved as
well as the peso marginal deposits made were, respectively, as
follows:.
Date Application Amount Marginal
& L/C No. Deposit
Oct. 10, 1961 61/1413 $57,658.38
P43,407.33
Oct. 23, 1961 61/1483 $25,867.34 19,473.64
Oct. 30, 1961 61/1495 $19,408.39 14,610.88
Nov. 10, 1961 61/1564 $26,687.64 20,090.90
TOTAL .... $129,621.75 P97,582.75
By virtue of the foregoing transactions, the Bank issued
irrevocable commercial letters of credit addressed to its
correspondent banks in the United States, with uniform
instructions for them to notify the beneficiary thereof, the J.B.
Distributing Company, that they have been authorized to
negotiate the latter's sight drafts up to the amounts mentioned
the respectively, if accompanied, upon presentation, by a full set
of negotiable clean "on board" ocean bills of lading covering the
merchandise appearing in the LCs that is, dyestuffs of various
colors. Consequently, the J.B. Distributing Company drew upon,
presented to and negotiated with these banks, its sight drafts
covering the amounts of the merchandise ostensibly being
exported by it, together with clean bills of lading, and collected
the full value of the drafts up to the amounts appearing in the
L/Cs as above indicated. These correspondent banks then debited
the account of the Bank of the Philippine Islands with them up to
the full value of the drafts presented by the J.B. Distributing
Company, plus commission thereon, and, thereafter, endorsed
and forwarded all documents to the Bank of the Philippine Islands.

In the meantime, as each shipment (covered by the abovementioned letters of credit) arrived in the Philippines, the De Reny
Fabric Industries, Inc. made partial payments to the Bank
amounting, in the aggregate, to P90,000. Further payments were,
however, subsequently discontinued by the corporation when it
became established, as a result of a chemical test conducted by
the National Science Development Board, that the goods that
arrived in Manila were colored chalks instead of dyestuffs.
The corporation also refused to take possession of these goods,
and for this reason, the Bank caused them to be deposited with a
bonded warehouse paying therefor the amount of P12,609.64 up
to the filing of its complaint with the court below on December 10,
1962.
On October 24, 1963 the lower court rendered its decision
ordering the corporation and its co-defendants (the herein
appellants) to pay to the plaintiff-appellee the amount of
P291,807.46, with interest thereon, as provided for in the L/C
Agreements, at the rate of 7% per annum from October 31, 1962
until fully paid, plus costs.
It is the submission of the defendants-appellants that it was the
duty of the foreign correspondent banks of the Bank of the
Philippine Islands to take the necessary precaution to insure that
the goods shipped under the covering L/Cs conformed with the
item appearing therein, and, that the foregoing banks having
failed to perform this duty, no claim for recoupment against the
defendants-appellants, arising from the losses incurred for the
non-delivery or defective delivery of the articles ordered, could
accrue.
We can appreciate the sweep of the appellants' argument, but we
also find that it is nestled hopelessly inside a salient where the
valid contract between the parties and the internationally
accepted customs of the banking trade must prevail. 1

Under the terms of their Commercial Letter of Credit Agreements

with the Bank, the appellants agreed that the Bank shall not be
responsible for the "existence, character, quality, quantity,
conditions, packing, value, or delivery of the property purporting
to be represented by documents; for any difference in character,
quality, quantity, condition, or value of the property from that
expressed in documents," or for "partial or incomplete shipment,
or failure or omission to ship any or all of the property referred to
in the Credit," as well as "for any deviation from instructions,
delay, default or fraud by the shipper or anyone else in
connection with the property the shippers or vendors and
ourselves [purchasers] or any of us." Having agreed to these
terms, the appellants have, therefore, no recourse but to comply
with their covenant. 2
But even without the stipulation recited above, the appellants
cannot shift the burden of loss to the Bank on account of the
violation by their vendor of its prestation.
It was uncontrovertibly proven by the Bank during the trial below
that banks, in providing financing in international business
transactions such as those entered into by the appellants, do not
deal with the property to be exported or shipped to the importer,
but deal only with documents. The Bank introduced in evidence a
provision contained in the "Uniform Customs and Practices for
Commercial Documentary Credits Fixed for the Thirteenth
Congress of International Chamber of Commerce," to which the
Philippines is a signatory nation. Article 10 thereof provides: .
In documentary credit operations, all parties concerned
deal in documents and not in goods. Payment,
negotiation or acceptance against documents 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 the documents and reimburse
the Bank making the payment, negotiation or
acceptance.

The existence of a custom in international banking and financing

circles negating any duty on the part of a bank to verify whether
what has been described in letters of credits or drafts or shipping
documents actually tallies with what was loaded aboard ship,
having been positively proven as a fact, the appellants are bound
by this established usage. They were, after all, the ones who
tapped the facilities afforded by the Bank in order to engage in
international business.
ACCORDINGLY, the judgment a quo is affirmed, at defendantsappellants' cost. This is without prejudice to the Bank, in proper
proceedings in the court below in this same case proving and
being reimbursed additional expenses, if any, it has incurred by
virtue of the continued storage of the goods in question up to the
time this decision becomes final and executory.
TRANSFIELD PHILIPPINES, INC., petitioner, vs. LUZON
HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND
BANKING GROUP LIMITED and SECURITY BANK
CORPORATION, respondents.
DECISION
TINGA, J.:
Subject of this case is the letter of credit which has evolved as
the ubiquitous and most important device in international trade. A
creation of commerce and businessmen, the letter of credit is also
unique in the number of parties involved and its supranational
character.
Petitioner has appealed from the Decision[1] of the Court of
Appeals in CA-G.R. SP No. 61901 entitled Transfield Philippines,
Inc. v. Hon. Oscar Pimentel, et al., promulgated on 31 January
2001.[2]
On 26 March 1997, petitioner and respondent Luzon Hydro
Corporation (hereinafter, LHC) entered into a Turnkey
Contract[3] whereby petitioner, as Turnkey Contractor, undertook
to construct, on a turnkey basis, a seventy (70)-Megawatt hydro-

electric power station at the Bakun River in the provinces of

Benguet and Ilocos Sur (hereinafter, the Project). Petitioner was
given the sole responsibility for the design, construction,
commissioning, testing and completion of the Project. [4]
The Turnkey Contract provides that: (1) the target completion
date of the Project shall be on 1 June 2000, or such later date as
may be agreed upon between petitioner and respondent LHC or
otherwise determined in accordance with the Turnkey Contract;
and (2) petitioner is entitled to claim extensions of time (EOT) for
reasons enumerated in the Turnkey Contract, among which are
variations, force majeure, and delays caused by LHC itself.
[5]
Further, in case of dispute, the parties are bound to settle their
differences through mediation, conciliation and such other means
enumerated under Clause 20.3 of the Turnkey Contract. [6]
To secure performance of petitioners obligation on or before
the target completion date, or such time for completion as may
be determined by the parties agreement, petitioner opened in
favor of LHC two (2) standby letters of credit both dated 20 March
2000 (hereinafter referred to as the Securities), to wit: Standby
Letter of Credit No. E001126/8400 with the local branch of
respondent Australia and New Zealand Banking Group Limited
(ANZ Bank)[7] and Standby Letter of Credit No. IBDIDSB-00/4 with
respondent Security Bank Corporation (SBC) [8] each in the amount
of US$8,988,907.00.[9]
In the course of the construction of the project, petitioner
sought various EOT to complete the Project. The extensions were
requested allegedly due to several factors which prevented the
completion of the Project on target date, such as force
majeure occasioned
by
typhoon Zeb,
barricades
and
demonstrations. LHC denied the requests, however. This gave rise
to a series of legal actions between the parties which culminated
in the instant petition.
The first of the actions was a Request for Arbitration which LHC
filed before the Construction Industry Arbitration Commission
(CIAC) on 1 June 1999.[10] This was followed by another Request
for Arbitration, this time filed by petitioner before the
International Chamber of Commerce (ICC)[11] on 3 November

2000. In both arbitration proceedings, the common issues

presented were: [1) whether typhoon Zeb and any of its
associated events constituted force majeure to justify the
extension of time sought by petitioner; and [2) whether LHC had
the right to terminate the Turnkey Contract for failure of petitioner
to complete the Project on target date.
Meanwhile, foreseeing that LHC would call on the Securities
pursuant to the pertinent provisions of the Turnkey Contract,
[12]
petitionerin two separate letters[13] both dated 10 August
2000advised respondent banks of the arbitration proceedings
already pending before the CIAC and ICC in connection with its
alleged default in the performance of its obligations. Asserting
that LHC had no right to call on the Securities until the resolution
of disputes before the arbitral tribunals, petitioner warned
respondent banks that any transfer, release, or disposition of the
Securities in favor of LHC or any person claiming under LHC would
constrain it to hold respondent banks liable for liquidated
damages.
As petitioner had anticipated, on 27 June 2000, LHC sent
notice to petitioner that pursuant to Clause 8.2 [14] of the Turnkey
Contract, it failed to comply with its obligation to complete the
Project. Despite the letters of petitioner, however, both banks
informed petitioner that they would pay on the Securities if and
when LHC calls on them.[15]
LHC asserted that additional extension of time would not be
warranted; accordingly it declared petitioner in default/delay in
the performance of its obligations under the Turnkey Contract and
demanded from petitioner the payment of US$75,000.00 for each
day of delay beginning 28 June 2000 until actual completion of
the Project pursuant to Clause 8.7.1 of the Turnkey Contract. At
the same time, LHC served notice that it would call on the
securities for the payment of liquidated damages for the delay. [16]
On 5 November 2000, petitioner as plaintiff filed a Complaint
for Injunction, with prayer for temporary restraining order and writ
of preliminary injunction, against herein respondents as
defendants before the Regional Trial Court (RTC) of Makati.
[17]
Petitioner sought to restrain respondent LHC from calling on

the Securities and respondent banks from transferring, paying on,

or in any manner disposing of the Securities or any renewals or
substitutes thereof. The RTC issued a seventy-two (72)-hour
temporary restraining order on the same day. The case was
docketed as Civil Case No. 00-1312 and raffled to Branch 148 of
the RTC of Makati.
After appropriate proceedings, the trial court issued
an Order on 9 November 2000, extending the temporary
restraining order for a period of seventeen (17) days or until 26
November 2000.[18]
The RTC, in its Order[19] dated 24 November 2000, denied
petitioners application for a writ of preliminary injunction. It ruled
that petitioner had no legal right and suffered no irreparable
injury to justify the issuance of the writ. Employing the principle of
independent contract in letters of credit, the trial court ruled that
LHC should be allowed to draw on the Securities for liquidated
damages. It debunked petitioners contention that the principle of
independent contract could be invoked only by respondent banks
since according to it respondent LHC is the ultimate beneficiary of
the Securities. The trial court further ruled that the banks were
mere custodians of the funds and as such they were obligated to
transfer the same to the beneficiary for as long as the latter could
submit the required certification of its claims.
Dissatisfied with the trial courts denial of its application for a
writ of preliminary injunction, petitioner elevated the case to the
Court of Appeals via a Petition for Certiorari under Rule 65, with
prayer for the issuance of a temporary restraining order and writ
of preliminary injunction.[20] Petitioner submitted to the appellate
court that LHCs call on the Securities was premature considering
that the issue of its default had not yet been resolved with finality
by the CIAC and/or the ICC. It asserted that until the fact of delay
could be established, LHC had no right to draw on the Securities
for liquidated damages.
Refuting petitioners contentions, LHC claimed that petitioner
had no right to restrain its call on and use of the Securities as
payment for liquidated damages. It averred that the Securities are
independent of the main contract between them as shown on the

face of the two Standby Letters of Credit which both provide that
the banks have no responsibility to investigate the authenticity or
accuracy of the certificates or the declarants capacity or
entitlement to so certify.
In its Resolution dated 28 November 2000, the Court of
Appeals issued a temporary restraining order, enjoining LHC from
calling on the Securities or any renewals or substitutes thereof
and ordering respondent banks to cease and desist from
transferring, paying or in any manner disposing of the Securities.
However, the appellate court failed to act on the application
for preliminary injunction until the temporary restraining order
expired on 27 January 2001. Immediately thereafter,
representatives of LHC trooped to ANZ Bank and withdrew the
total amount of US$4,950,000.00, thereby reducing the balance in
ANZ Bank to US$1,852,814.00.
On 2 February 2001, the appellate court dismissed the petition
for certiorari. The appellate court expressed conformity with the
trial courts decision that LHC could call on the Securities pursuant
to the first principle in credit law that the credit itself is
independent of the underlying transaction and that as long as the
beneficiary complied with the credit, it was of no moment that he
had not complied with the underlying contract. Further, the
appellate court held that even assuming that the trial courts
denial of petitioners application for a writ of preliminary injunction
was erroneous, it constituted only an error of judgment which is
not correctible by certiorari, unlike error of jurisdiction.
Undaunted,
petitioner
filed
the
instant Petition
Review raising the following issues for resolution:

for

WHETHER THE INDEPENDENCE PRINCIPLE ON LETTERS OF CREDIT

MAY BE INVOKED BY A BENEFICIARY THEREOF WHERE THE
BENEFICIARYS CALL THEREON IS WRONGFUL OR FRAUDULENT.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE
SECURITIES BEFORE THE RESOLUTION OF PETITIONERS AND LHCS
DISPUTES BY THE APPROPRIATE TRIBUNAL.

WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN

RELEASING THE AMOUNTS DUE UNDER THE SECURITIES DESPITE
BEING NOTIFIED THAT LHCS CALL THEREON IS WRONGFUL.
WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND
IRREPARABLE DAMAGE IN THE EVENT THAT:
A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ
BANK AND SECURITY BANK ARE ALLOWED TO
RELEASE, THE REMAINING BALANCE OF THE
SECURITIES PRIOR TO THE RESOLUTION OF THE
DISPUTES BETWEEN PETITIONER AND LHC.
B. LHC DOES NOT RETURN THE AMOUNTS IT HAD
WRONGFULLY DRAWN FROM THE SECURITIES.[21]
Petitioner contends that the courts below improperly relied on
the independence principle on letters of credit when this case falls
squarely within the fraud exception rule. Respondent LHC
deliberately misrepresented the supposed existence of delay
despite its knowledge that the issue was still pending arbitration,
petitioner continues.
Petitioner asserts that LHC should be ordered to return the
proceeds of the Securities pursuant to the principle against unjust
enrichment and that, under the premises, injunction was the
appropriate remedy obtainable from the competent local courts.
On 25 August 2003, petitioner filed a Supplement to the
Petition[22] and Supplemental Memorandum,[23] alleging that in the
course of the proceedings in the ICC Arbitration, a number of
documentary and testimonial evidence came out through the use
of different modes of discovery available in the ICC Arbitration. It
contends that after the filing of the petition facts and admissions
were discovered which demonstrate that LHC knowingly
misrepresented
that
petitioner
had
incurred
delays
notwithstanding its knowledge and admission that delays were
excused under the Turnkey Contractto be able to draw against the
Securities. Reiterating that fraud constitutes an exception to the
independence principle, petitioner urges that this warrants a
ruling from this Court that the call on the Securities was wrongful,
as well as contrary to law and basic principles of equity. It avers

that it would suffer grave irreparable damage if LHC would be

allowed to use the proceeds of the Securities and not ordered to
return the amounts it had wrongfully drawn thereon.
In its Manifestation dated 8 September 2003,[24] LHC contends
that the supplemental pleadings filed by petitioner present
erroneous and misleading information which would change
petitioners theory on appeal.
In yet another Manifestation dated 12 April 2004,[25] petitioner
alleges that on 18 February 2004, the ICC handed down its Third
Partial Award, declaring that LHC wrongfully drew upon the
Securities and that petitioner was entitled to the return of the
sums wrongfully taken by LHC for liquidated damages.
LHC filed a Counter-Manifestation dated 29 June 2004,
stating that petitioners Manifestation dated 12 April 2004
enlarges the scope of its Petition for Review of the 31 January
2001 Decision of the Court of Appeals. LHC notes that the Petition
for Review essentially dealt only with the issue of whether
injunction could issue to restrain the beneficiary of an irrevocable
letter of credit from drawing thereon. It adds that petitioner has
filed two other proceedings, to wit: (1) ICC Case No.
11264/TE/MW, entitled Transfield Philippines Inc. v. Luzon Hydro
Corporation, in which the parties made claims and counterclaims
arising from petitioners performance/misperformance of its
obligations as contractor for LHC; and (2) Civil Case No. 04-332,
entitled Transfield
Philippines,
Inc.
v.
Luzon
Hydro
Corporation before Branch 56 of the RTC of Makati, which is an
action to enforce and obtain execution of the ICCs partial award
mentioned in petitioners Manifestation of 12 April 2004.
[26]

In its Comment to petitioners Motion for Leave to File

Addendum to Petitioners Memorandum, LHC stresses that the
question of whether the funds it drew on the subject letters of
credit should be returned is outside the issue in this appeal. At
any rate, LHC adds that the action to enforce the ICCs partial
award is now fully within the Makati RTCs jurisdiction in Civil Case
No. 04-332. LHC asserts that petitioner is engaged in forumshopping by keeping this appeal and at the same time seeking

the suit for enforcement of the arbitral award before the Makati
court.
Respondent SBC in its Memorandum, dated 10 March
2003[27] contends that the Court of Appeals correctly dismissed
the petition for certiorari. Invoking the independence principle,
SBC argues that it was under no obligation to look into the validity
or accuracy of the certification submitted by respondent LHC or
into the latters capacity or entitlement to so certify. It adds that
the act sought to be enjoined by petitioner was already fait
accompli and the present petition would no longer serve any
remedial purpose.
In
a
similar
fashion,
respondent
ANZ
Bank
in
[28]
its Memorandum dated 13 March 2003
posits that its actions
could not be regarded as unjustified in view of the prevailing
independence principle under which it had no obligation to
ascertain the truth of LHCs allegations that petitioner defaulted in
its obligations. Moreover, it points out that since the Standby
Letter of Credit No. E001126/8400 had been fully drawn,
petitioners prayer for preliminary injunction had been rendered
moot and academic.
At the core of the present controversy is the
independence principle and fraud exception
credit. Thus, a discussion of the nature and use
also referred to simply as credits, would
perspective of the case.

applicability of the
rule in letters of
of letters of credit,
provide a better

The letter of credit evolved as a mercantile specialty, and the

only way to understand all its facets is to recognize that it is an
entity unto itself. The relationship between the beneficiary and
the issuer of a letter of credit is not strictly contractual, because
both privity and a meeting of the minds are lacking, yet strict
compliance with its terms is an enforceable right. Nor is it a thirdparty beneficiary contract, because the issuer must honor drafts
drawn against a letter regardless of problems subsequently
arising in the underlying contract. Since the banks customer
cannot draw on the letter, it does not function as an assignment
by the customer to the beneficiary. Nor, if properly used, is it a
contract of suretyship or guarantee, because it entails a primary

liability following a default. Finally, it is not in itself a negotiable

instrument, because it is not payable to order or bearer and is
generally conditional, yet the draft presented under it is often
negotiable.[29]
In commercial transactions, a letter of credit is a financial
device developed by merchants as a convenient and relatively
safe mode of dealing with sales of goods to satisfy the seemingly
irreconcilable interests of a seller, who refuses to part with his
goods before he is paid, and a buyer, who wants to have control
of the goods before paying.[30] The use of credits in commercial
transactions serves to reduce the risk of nonpayment of the
purchase price under the contract for the sale of goods. However,
credits are also used in non-sale settings where they serve to
reduce the risk of nonperformance. Generally, credits in the nonsale settings have come to be known as standby credits. [31]
There are three significant differences between commercial
and standby credits. First, commercial credits involve the
payment of money under a contract of sale. Such credits become
payable upon the presentation by the seller-beneficiary of
documents that show he has taken affirmative steps to comply
with the sales agreement. In the standby type, the credit is
payable upon certification of a party's nonperformance of the
agreement. The documents that accompany the beneficiary's
draft tend to show that the applicant has not performed. The
beneficiary of a commercial credit must demonstrate by
documents that he has performed his contract. The beneficiary of
the standby credit must certify that his obligor has not performed
the contract.[32]
By definition, a letter of credit is a written instrument whereby
the writer requests or authorizes the addressee to pay money or
deliver goods to a third person and assumes responsibility for
payment of debt therefor to the addressee. [33] A letter of credit,
however, changes its nature as different transactions occur and if
carried through to completion ends up as a binding contract
between the issuing and honoring banks without any regard or
relation to the underlying contract or disputes between the
parties thereto.[34]

Since letters of credit have gained general acceptability in

international trade transactions, the ICC has published from time
to time updates on the Uniform Customs and Practice (UCP) for
Documentary Credits to standardize practices in the letter of
credit area. The vast majority of letters of credit incorporate the
UCP.[35] First published in 1933, the UCP for Documentary Credits
has undergone several revisions, the latest of which was in 1993.
[36]

In Bank of the Philippine Islands v. De Reny Fabric Industries,

Inc.,[37] this Court ruled that the observance of the UCP is justified
by Article 2 of the Code of Commerce which provides that in the
absence of any particular provision in the Code of Commerce,
commercial transactions shall be governed by usages and
customs generally observed. More recently, in Bank of America,
NT & SA v. Court of Appeals,[38] this Court ruled that there being
no specific provisions which govern the legal complexities arising
from transactions involving letters of credit, not only between or
among banks themselves but also between banks and the seller
or the buyer, as the case may be, the applicability of the UCP is
undeniable.
Article 3 of the UCP provides that credits, by their nature, are
separate transactions from the sales or other contract(s) on which
they may be based and banks are in no way concerned with or
bound by such contract(s), even if any reference whatsoever to
such contract(s) is included in the credit. Consequently, the
undertaking of a bank to pay, accept and pay draft(s) or negotiate
and/or fulfill any other obligation under the credit is not subject to
claims or defenses by the applicant resulting from his
relationships with the issuing bank or the beneficiary. A
beneficiary can in no case avail himself of the contractual
relationships existing between the banks or between the
applicant and the issuing bank.
Thus, the engagement of the issuing bank is to pay the seller
or beneficiary of the credit once the draft and the required
documents are presented to it. The so-called independence
principle assures the seller or the beneficiary of prompt payment
independent of any breach of the main contract and precludes the
issuing bank from determining whether the main contract is

actually accomplished or not. Under this principle, banks assume

no liability or responsibility for the form, sufficiency, accuracy,
genuineness, falsification or legal effect of any documents, or for
the general and/or particular conditions stipulated in the
documents or superimposed thereon, nor do they assume any
liability or responsibility for the description, quantity, weight,
quality, condition, packing, delivery, value or existence of the
goods represented by any documents, or for the good faith or acts
and/or omissions, solvency, performance or standing of the
consignor, the carriers, or the insurers of the goods, or any other
person whomsoever.[39]
The independent nature of the letter of credit may be: (a)
independence in toto where the credit is independent from the
justification aspect and is a separate obligation from the
underlying agreement like for instance a typical standby; or (b)
independence may be only as to the justification aspect like in a
commercial letter of credit or repayment standby, which is
identical with the same obligations under the underlying
agreement. In both cases the payment may be enjoined if in the
light of the purpose of the credit the payment of the credit would
constitute fraudulent abuse of the credit. [40]
Can the beneficiary invoke the independence principle?
Petitioner insists that the independence principle does not
apply to the instant case and assuming it is so, it is a defense
available only to respondent banks. LHC, on the other hand,
contends that it would be contrary to common sense to deny the
benefit of an independent contract to the very party for whom the
benefit is intended. As beneficiary of the letter of credit, LHC
asserts it is entitled to invoke the principle.
As discussed above, in a letter of credit transaction, such as in
this case, where the credit is stipulated as irrevocable, there is a
definite undertaking by the issuing bank to pay the beneficiary
provided that the stipulated documents are presented and the
conditions of the credit are complied with. [41] Precisely, the
independence principle liberates the issuing bank from the duty of
ascertaining compliance by the parties in the main contract. As
the principles nomenclature clearly suggests, the obligation under

the letter of credit is independent of the related and originating

contract. In brief, the letter of credit is separate and distinct from
the underlying transaction.
Given the nature of letters of credit, petitioners argumentthat
it is only the issuing bank that may invoke the independence
principle on letters of creditdoes not impress this Court. To say
that the independence principle may only be invoked by the
issuing banks would render nugatory the purpose for which the
letters of credit are used in commercial transactions. As it is, the
independence doctrine works to the benefit of both the issuing
bank and the beneficiary.
Letters of credit are employed by the parties desiring to enter
into commercial transactions, not for the benefit of the issuing
bank but mainly for the benefit of the parties to the original
transactions. With the letter of credit from the issuing bank, the
party who applied for and obtained it may confidently present the
letter of credit to the beneficiary as a security to convince the
beneficiary to enter into the business transaction. On the other
hand, the other party to the business transaction, i.e., the
beneficiary of the letter of credit, can be rest assured of being
empowered to call on the letter of credit as a security in case the
commercial transaction does not push through, or the applicant
fails to perform his part of the transaction. It is for this reason that
the party who is entitled to the proceeds of the letter of credit is
appropriately called beneficiary.
Petitioners argument that any dispute must first be resolved by
the parties, whether through negotiations or arbitration, before
the beneficiary is entitled to call on the letter of credit in essence
would convert the letter of credit into a mere guarantee.
Jurisprudence has laid down a clear distinction between a letter of
credit and a guarantee in that the settlement of a dispute
between the parties is not a pre-requisite for the release of funds
under a letter of credit. In other words, the argument is
incompatible with the very nature of the letter of credit. If a letter
of credit is drawable only after settlement of the dispute on the
contract entered into by the applicant and the beneficiary, there
would be no practical and beneficial use for letters of credit in
commercial transactions.

Professor John F. Dolan, the noted authority on letters of credit,

sheds more light on the issue:
The standby credit is an attractive commercial device for many of
the same reasons that commercial credits are attractive.
Essentially, these credits are inexpensive and efficient. Often they
replace surety contracts, which tend to generate higher costs
than credits do and are usually triggered by a factual
determination rather than by the examination of documents.
Because parties and courts should not confuse the different
functions of the surety contract on the one hand and the standby
credit on the other, the distinction between surety contracts and
credits merits some reflection. The two commercial devices share
a common purpose. Both ensure against the obligors
nonperformance. They function, however, in distinctly different
ways.
Traditionally, upon the obligors default, the surety undertakes to
complete the obligors performance, usually by hiring someone to
complete that performance. Surety contracts, then, often involve
costs of determining whether the obligor defaulted (a matter over
which the surety and the beneficiary often litigate) plus the cost
of performance. The benefit of the surety contract to the
beneficiary is obvious. He knows that the surety, often an
insurance company, is a strong financial institution that will
perform if the obligor does not. The beneficiary also should
understand that such performance must await the sometimes
lengthy and costly determination that the obligor has defaulted.
In addition, the suretys performance takes time.
The standby credit has different expectations. He reasonably
expects that he will receive cash in the event of nonperformance,
that he will receive it promptly, and that he will receive it before
any litigation with the obligor (the applicant) over the nature of
the applicants performance takes place. The standby credit has
this opposite effect of the surety contract: it reverses the financial
burden of parties during litigation.

In the surety contract setting, there is no duty to indemnify the

beneficiary until the beneficiary establishes the fact of the
obligors performance. The beneficiary may have to establish that
fact in litigation. During the litigation, the surety holds the money
and the beneficiary bears most of the cost of delay in
performance.
In the standby credit case, however, the beneficiary avoids that
litigation burden and receives his money promptly upon
presentation of the required documents. It may be that the
applicant has, in fact, performed and that the beneficiarys
presentation of those documents is not rightful. In that case, the
applicant may sue the beneficiary in tort, in contract, or in breach
of warranty; but, during the litigation to determine whether the
applicant has in fact breached the obligation to perform, the
beneficiary, not the applicant, holds the money. Parties that use a
standby credit and courts construing such a credit should
understand this allocation of burdens. There is a tendency in
some quarters to overlook this distinction between surety
contracts and standby credits and to reallocate burdens by
permitting the obligor or the issuer to litigate the performance
question before payment to the beneficiary. [42]
While it is the bank which is bound to honor the credit, it is the
beneficiary who has the right to ask the bank to honor the credit
by allowing him to draw thereon. The situation itself emasculates
petitioners posture that LHC cannot invoke the independence
principle and highlights its puerility, more so in this case where
the banks concerned were impleaded as parties by petitioner
itself.
Respondent banks had squarely raised the independence
principle to justify their releases of the amounts due under the
Securities. Owing to the nature and purpose of the standby letters
of credit, this Court rules that the respondent banks were left with
little or no alternative but to honor the credit and both of them in
fact submitted that it was ministerial for them to honor the call for
payment.[43]
Furthermore, LHC has a right rooted in the Contract to call on
the Securities. The relevant provisions of the Contract read, thus:

4.2.1. In order to secure the performance of its obligations under

this Contract, the Contractor at its cost shall on the
Commencement Date provide security to the Employer in the
form of two irrevocable and confirmed standby letters of credit
(the Securities), each in the amount of US$8,988,907, issued and
confirmed by banks or financial institutions acceptable to the
Employer. Each of the Securities must be in form and substance
acceptable to the Employer and may be provided on an annually
renewable basis.[44]
8.7.1 If the Contractor fails to comply with Clause 8.2, the
Contractor shall pay to the Employer by way of liquidated
damages (Liquidated Damages for Delay) the amount of
US$75,000 for each and every day or part of a day that shall
elapse between the Target Completion Date and the Completion
Date, provided that Liquidated Damages for Delay payable by the
Contractor shall in the aggregate not exceed 20% of the Contract
Price. The Contractor shall pay Liquidated Damages for Delay for
each day of the delay on the following day without need of
demand from the Employer.
8.7.2 The Employer may, without prejudice to any other method
of recovery, deduct the amount of such damages from any
monies due, or to become due to the Contractor and/or by
drawing on the Security.[45]
A contract once perfected, binds the parties not only to the
fulfillment of what has been expressly stipulated but also to all
the consequences which according to their nature, may be in
keeping with good faith, usage, and law. [46] A careful perusal of the
Turnkey Contract reveals the intention of the parties to make the
Securities answerable for the liquidated damages occasioned by
any delay on the part of petitioner. The call upon the Securities,
while not an exclusive remedy on the part of LHC, is certainly an
alternative recourse available to it upon the happening of the
contingency for which the Securities have been proffered. Thus,
even without the use of the independence principle, the Turnkey
Contract itself bestows upon LHC the right to call on the Securities
in the event of default.

Next, petitioner invokes the fraud exception principle. It avers

that LHCs call on the Securities is wrongful because it fraudulently
misrepresented to ANZ Bank and SBC that there is already a
breach in the Turnkey Contract knowing fully well that this is yet
to be determined by the arbitral tribunals. It asserts that the fraud
exception exists when the beneficiary, for the purpose of drawing
on the credit, fraudulently presents to the confirming bank,
documents that contain, expressly or by implication, material
representations of fact that to his knowledge are untrue. In such a
situation, petitioner insists, injunction is recognized as a remedy
available to it.
Citing Dolans treatise on letters of credit, petitioner argues
that the independence principle is not without limits and it is
important to fashion those limits in light of the principles purpose,
which is to serve the commercial function of the credit. If it does
not serve those functions, application of the principle is not
warranted, and the commonlaw principles of contract should
apply.
It is worthy of note that the propriety of LHCs call on the
Securities is largely intertwined with the fact of default which is
the self-same issue pending resolution before the arbitral
tribunals. To be able to declare the call on the Securities wrongful
or fraudulent, it is imperative to resolve, among others, whether
petitioner was in fact guilty of delay in the performance of its
obligation. Unfortunately for petitioner, this Court is not called
upon to rule upon the issue of defaultsuch issue having been
submitted by the parties to the jurisdiction of the arbitral tribunals
pursuant to the terms embodied in their agreement. [47]
Would injunction then be the proper remedy to restrain the
alleged wrongful draws on the Securities?
Most writers agree that fraud is an exception to the
independence principle. Professor Dolan opines that the
untruthfulness of a certificate accompanying a demand for
payment under a standby credit may qualify as fraud sufficient to
support an injunction against payment. [48] The remedy for
fraudulent abuse is an injunction. However, injunction should not
be granted unless: (a) there is clear proof of fraud; (b) the fraud

constitutes fraudulent abuse of the independent purpose of the

letter of credit and not only fraud under the main agreement; and
(c) irreparable injury might follow if injunction is not granted or
the recovery of damages would be seriously damaged. [49]
In its complaint for injunction before the trial court, petitioner
alleged that it is entitled to a total extension of two hundred fiftythree (253) days which would move the target completion date. It
argued that if its claims for extension would be found meritorious
by the ICC, then LHC would not be entitled to any liquidated
damages.[50]
Generally, injunction is a preservative remedy for the
protection of ones substantive right or interest; it is not a cause of
action in itself but merely a provisional remedy, an adjunct to a
main suit. The issuance of the writ of preliminary injunction as an
ancillary or preventive remedy to secure the rights of a party in a
pending case is entirely within the discretion of the court taking
cognizance of the case, the only limitation being that this
discretion should be exercised based upon the grounds and in the
manner provided by law.[51]
Before a writ of preliminary injunction may be issued, there
must be a clear showing by the complaint that there exists a right
to be protected and that the acts against which the writ is to be
directed are violative of the said right. [52] It must be shown that
the invasion of the right sought to be protected is material and
substantial, that the right of complainant is clear and
unmistakable and that there is an urgent and paramount
necessity for the writ to prevent serious damage. [53] Moreover, an
injunctive remedy may only be resorted to when there is a
pressing necessity to avoid injurious consequences which cannot
be remedied under any standard compensation. [54]
In the instant case, petitioner failed to show that it has a clear
and unmistakable right to restrain LHCs call on the Securities
which would justify the issuance of preliminary injunction. By
petitioners own admission, the right of LHC to call on the
Securities was contractually rooted and subject to the express
stipulations in the Turnkey Contract. [55] Indeed, the Turnkey
Contract is plain and unequivocal in that it conferred upon LHC

the right to draw upon the Securities in case of default, as

provided in Clause 4.2.5, in relation to Clause 8.7.2, thus:
4.2.5 The Employer shall give the Contractor seven days notice of
calling upon any of the Securities, stating the nature of the
default for which the claim on any of the Securities is to be
made, provided that no notice will be required if the Employer
calls upon any of the Securities for the payment of Liquidated
Damages for Delay or for failure by the Contractor to renew or
extend the Securities within 14 days of their expiration in
accordance with Clause 4.2.2.[56]
8.7.2 The Employer may, without prejudice to any other method
of recovery, deduct the amount of such damages from any
monies due, or to become due, to the Contractor and/or by
drawing on the Security.[57]
The pendency of the arbitration proceedings would not per
se make LHCs draws on the Securities wrongful or fraudulent for
there was nothing in the Contract which would indicate that the
parties intended that all disputes regarding delay should first be
settled through arbitration before LHC would be allowed to call
upon the Securities. It is therefore premature and absurd to
conclude that the draws on the Securities were outright
fraudulent given the fact that the ICC and CIAC have not ruled
with finality on the existence of default.
Nowhere in its complaint before the trial court or in its
pleadings filed before the appellate court, did petitioner invoke
the fraud exception rule as a ground to justify the issuance of an
injunction.[58] What petitioner did assert before the courts below
was the fact that LHCs draws on the Securities would be
premature and without basis in view of the pending disputes
between them. Petitioner should not be allowed in this instance to
bring into play the fraud exception rule to sustain its claim for the
issuance of an injunctive relief. Matters, theories or arguments not
brought out in the proceedings below will ordinarily not be
considered by a reviewing court as they cannot be raised for the
first time on appeal.[59] The lower courts could thus not be faulted
for not applying the fraud exception rule not only because the

existence of fraud was fundamentally interwoven with the issue of

default still pending before the arbitral tribunals, but more so,
because petitioner never raised it as an issue in its pleadings filed
in the courts below. At any rate, petitioner utterly failed to show
that it had a clear and unmistakable right to prevent LHCs call
upon the Securities.
Of course, prudence should have impelled LHC to await
resolution of the pending issues before the arbitral tribunals prior
to taking action to enforce the Securities. But, as earlier stated,
the Turnkey Contract did not require LHC to do so and, therefore,
it was merely enforcing its rights in accordance with the tenor
thereof. Obligations arising from contracts have the force of law
between the contracting parties and should be complied with in
good faith.[60] More importantly, pursuant to the principle of
autonomy of contracts embodied in Article 1306 of the Civil Code,
[61]
petitioner could have incorporated in its Contract with LHC, a
proviso that only the final determination by the arbitral tribunals
that default had occurred would justify the enforcement of the
Securities. However, the fact is petitioner did not do so; hence, it
would have to live with its inaction.
With respect to the issue of whether the respondent banks
were justified in releasing the amounts due under the Securities,
this Court reiterates that pursuant to the independence principle
the banks were under no obligation to determine the veracity of
LHCs certification that default has occurred. Neither were they
bound by petitioners declaration that LHCs call thereon was
wrongful. To repeat, respondent banks undertaking was simply to
pay once the required documents are presented by the
beneficiary.
At any rate, should petitioner finally prove in the pending
arbitration proceedings that LHCs draws upon the Securities were
wrongful due to the non-existence of the fact of default, its right
to seek indemnification for damages it suffered would not
normally be foreclosed pursuant to general principles of law.
Moreover, in a Manifestation,[62] dated 30 March 2001, LHC
informed this Court that the subject letters of credit had been fully

drawn. This fact alone would have been sufficient reason to

dismiss the instant petition.
Settled is the rule that injunction would not lie where the acts
sought to be enjoined have already become fait accompli or an
accomplished or consummated act. [63] In Ticzon v. Video Post
Manila, Inc.[64] this Court ruled that where the period within which
the former employees were prohibited from engaging in or
working for an enterprise that competed with their former
employerthe very purpose of the preliminary injunction has
expired, any declaration upholding the propriety of the writ would
be entirely useless as there would be no actual case or
controversy between the parties insofar as the preliminary
injunction is concerned.
In the instant case, the consummation of the act sought to be
restrained had rendered the instant petition mootfor any
declaration by this Court as to propriety or impropriety of the nonissuance of injunctive relief could have no practical effect on the
existing controversy.[65] The other issues raised by petitioner
particularly with respect to its right to recover the amounts
wrongfully drawn on the Securities, according to it, could properly
be threshed out in a separate proceeding.
One final point. LHC has charged petitioner of forum-shopping.
It raised the charge on two occasions. First, in its CounterManifestation dated 29 June 2004[66] LHC alleges that petitioner
presented before this Court the same claim for money which it
has filed in two other proceedings, to wit: ICC Case No.
11264/TE/MW and Civil Case No. 04-332 before the RTC of Makati.
LHC argues that petitioners acts constitutes forum-shopping
which should be punished by the dismissal of the claim in both
forums. Second, in its Comment to Petitioners Motion for Leave to
File Addendum to Petitioners Memorandum dated 8 October
2004, LHC alleges that by maintaining the present appeal and at
the same time pursuing Civil Case No. 04-332wherein petitioner
pressed for judgment on the issue of whether the funds LHC drew
on the Securities should be returnedpetitioner resorted to forumshopping. In both instances, however, petitioner has apparently
opted not to respond to the charge.

Forum-shopping is a very serious charge. It exists when a party

repetitively avails of several judicial remedies in different courts,
simultaneously or successively, all substantially founded on the
same transactions and the same essential facts and
circumstances, and all raising substantially the same issues either
pending in, or already resolved adversely, by some other court.
[67]
It may also consist in the act of a party against whom an
adverse judgment has been rendered in one forum, of seeking
another and possibly favorable opinion in another forum other
than by appeal or special civil action of certiorari, or the
institution of two or more actions or proceedings grounded on the
same cause on the supposition that one or the other court might
look with favor upon the other party. [68] To determine whether a
party violated the rule against forum-shopping, the test applied is
whether the elements of litis pendentia are present or whether a
final judgment in one case will amount to res judicata in another.
[69]
Forum-shopping constitutes improper conduct and may be
punished with summary dismissal of the multiple petitions and
direct contempt of court.[70]
Considering the seriousness of the charge of forum-shopping
and the severity of the sanctions for its violation, the Court will
refrain from making any definitive ruling on this issue until after
petitioner has been given ample opportunity to respond to the
charge.
WHEREFORE, the instant petition is DENIED, with costs
against petitioner.
Petitioner is hereby required to answer the charge of forumshopping within fifteen (15) days from notice.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and ChicoNazario, JJ., concur.

[1]

Penned by Justice Candido V. Rivera, concurred in by Justices

Conchita Carpio-Morales and Rebecca de Guia-Salvador.

[2]

Rollo, pp. 52-61.

[3]

Id. at 62-252.

[4]

Id. at 75-76.

[5]

Clause 1.1, Volume II of the Turnkey Contract, Rollo, p. 81.

[6]

20.3 Dispute Resolution.

If at anytime any dispute or difference shall arise between
the Employer and the Contractor in connection with or
arising out of this Contract or the carrying out of the Works,
the parties together shall in good faith exert all efforts to
resolve such dispute or difference by whatever means they
deem appropriate, including conciliation, mediation and
seeking the assistance of technical, accounting or other
experts. At the request of any party, the chief executives of
the Employer and the Contractor shall meet in a good-faith
effort to reach an amicable settlement of the dispute or
difference. Any dispute or difference that the parties are
unable to resolve within a reasonable time may, at the
option of either party, be referred to arbitration in
accordance with Clause 20.4. (Id. at 179)

[7]

Annex C, Rollo, pp. 254-256.

[8]

Annex D, Id. at 257-259.

[9]

Clause 4.2.1, Volume II of the Turnkey Contract, Id. at 94.

[10]

Id. at 261-265.

METROPOLITAN
WATERWORKS
AND
SEWERAGE
SYSTEM, petitioner, vs. 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 Order[1] which states, in part, that
the court was thereby:
xxxxxxxxx
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;
3. Prohibiting the petitioner from selling, encumbering,
transferring, or disposing in any manner any of its
properties except in the ordinary course of business;
4. Prohibiting the petitioner from making any payment of its
liabilities, outstanding as at the date of the filing of the
petition;
xxxxxxxxx
Subsequently, on November 27, 2003, public respondent,
acting on two Urgent Ex Parte motions[2] filed by respondent
Maynilad, issued the herein questioned Order [3] which stated that
it thereby:
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 Credit[6] 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,[8] which 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:
a) infuse the amount of UD$80.0 million as additional
funding support from its stockholders;
b) resume payment of the concession fees; and
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 notice [11] 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 quo which
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:
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:
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 records [13] and that public
respondent had the authority to issue the same;
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]
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 subparagraphs 2.) and 4.) of the stay order dated November 17,
2003;
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?
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
an in 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
Appeals[16] 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]
Letters of credit were developed for the purpose of insuring to
a seller payment of a definite amount upon the presentation of
documents[18] 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]
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. Nery [25] was
justified under Art. 2 of the Code of Commerce, which states:
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 Appeals [26] 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 Agreement [28] 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]
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:
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]
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),
JJ., concur.
Ynares-Santiago, J., on leave.

[1]

Rollo, pp. 41-42.

[2]

Rollo, pp. 129-138.

[3]

Rollo, pp. 36-38.

G.R. No. 186063

Panganiban, and Carpio,

January 15, 2014

PHILIPPINE NATIONAL BANK, Petitioner,

vs.
SAN MIGUEL CORPORATION, Respondent.

DECISION
PERALTA, J.:
This treats of the petition for review on certiorari of the
Decision1 and Resolution2 of the Court of Appeals (CA), dated June
7 2008 and December 15, 2008, respectively, in CA-G.R. SP No.
01249-MIN.
The facts, as summarized by the CA, are as follows:
On July 1, 1996, respondent San Miguel Corporation (SMC, for
brevity) entered into an Exclusive Dealership Agreement with a
certain Rodolfo R. Goroza (Goroza, hereafter), wherein the latter
was given by SMC the right to trade, deal, market or otherwise
sell its various beer products.
Goroza applied for a credit line with SMC, but one of the
requirements for the credit line was a letter of credit. Thus,
Goroza applied for and was granted a letter of credit by the PNB
in the amount of two million pesos (P2,000,000.00). Under the
credit agreement, the PNB has the obligation to release the
proceeds of Goroza's credit line to SMC upon presentation of the
invoices and official receipts of Goroza's purchases of SMC beer
products to the PNB, Butuan Branch.
On August 1, 1996, Goroza availed of his credit line with PNB and
started selling SMC's beer products x x x.
On February 11, 1997, Goroza applied for an additional credit line
with the PNB. The latter granted Goroza a one (1) year revolving
credit line in the amount not exceeding two million four hundred
thousand pesos (P2,400,000.00). Thus, Goroza's total credit line
reached four million four hundred thousand pesos
(P4,400,000.00) x x x. Initially, Goroza was able to pay his credit
purchases with SMC x x x. Sometime in January 1998, however,
Goroza started to become delinquent with his accounts.

Demands to pay the amount of three million seven hundred

twenty-two thousand four hundred forty pesos and 88/100
(P3,722,440.88) were made by SMC against Goroza and PNB, but
neither of them paid. Thus, on April 23, 2003, SMC filed a
Complaint for collection of sum of money against PNB and Goroza
with the respondent Regional Trial Court Branch 3, Butuan City. 3
After summons, herein petitioner filed its Answer, 4 while Goroza
did not. Upon respondent's Motion to Declare Defendant in
Default,5 Goroza was declared in default.
Trial ensued insofar as Goroza was concerned and respondent
presented its evidence ex parte against the former. Respondent
made a formal offer of its exhibits on April 6, 2004 and the trial
court admitted them on June 16, 2004.
Thereafter, on January 21, 2005, pre-trial between PNB and SMC
was held.6
On May 10, 2005, the RTC rendered a Decision,7 disposing as
follows:
WHEREFORE, the Court hereby renders judgment in favor of
plaintiff [SMC] ordering defendant Rodolfo Goroza to pay plaintiff
the following:
1. The principal amount of P3,722,440.00;
2. The interest of 12% per annum on the principal amount
reckoned from January 27, 1998 up to the time of execution
of the Judgment of this case;
3. Attorney's fees of P30,000.00;
4. Litigation expenses of P20,000.00.
SO ORDERED.8

Goroza filed a Notice of Appeal,9 while SMC filed a Motion for

Reconsideration.10
On July 14, 2005, the RTC granted SMC's motion for
reconsideration. The trial court amended its Decision by
increasing the award of litigation expenses to P90,652.50.11
Thereafter, on July 25, 2005, the RTC issued an Order, 12 pertinent
portions of which read as follows:
xxxx
Finding the Notice of Appeal filed within the reglementary period
and the corresponding appeal fee paid, x x x. The same is hereby
given due course.
Considering that the case as against defendant PNB is still ongoing, let the Record in this case insofar as defendant Rodolfo R.
Goroza is concerned, be reproduced at the expense of defendantappellant so that the same can be forwarded to the Court of
Appeals, together with the exhibits and transcript of stenographic
notes in the required number of copies.
SO ORDERED.13
In the meantime, trial continued with respect to PNB.
On September 27, 2005, PNB filed an Urgent Motion to Terminate
Proceedings14 on the ground that a decision was already rendered
on May 10, 2005 finding Goroza solely liable.
The RTC denied PNB's motion in its Resolution 15 dated October 11,
2005.
On October 14, 2005, the RTC issued a Supplemental
Judgment,16 thus:
The Court omitted by inadvertence to insert in its decision dated
May 10, 2005 the phrase "without prejudice to the decision that

will be made against the other co-defendant, PNB, which was not
declared in default."
WHEREFORE, the phrase "without prejudice to the decision made
against the other defendant PNB which was not declared in
default" shall be inserted in the dispositive portion of said
decision.
SO ORDERED.17
On even date, the RTC also issued an Amended Order, 18 to wit:
The Court's Order dated July 25, 2005 is hereby amended to
include the phrase "this appeal applies only to defendant Rolando
Goroza and without prejudice to the continuance of the hearing
on the other defendant Philippine National Bank".
SO ORDERED.19
PNB then filed a Motion for Reconsideration 20 of the above-quoted
Supplemental Judgment and Amended Order, but the RTC denied
the said motion via its Resolution21 dated July 6, 2006.
Aggrieved, PNB filed a special civil action for certiorari with the CA
imputing grave abuse of discretion on the part of the RTC for
having issued its July 6, 2006 Resolution.22
On June 17, 2008, the CA rendered its questioned Decision
denying the petition and affirming the assailed Resolution of the
RTC.
PNB filed a Motion for Reconsideration,23 but the CA denied it in its
assailed Resolution. Hence, the instant petition with the following
Assignment of Errors:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE TRIAL
COURT WAS CORRECT IN RENDERING A SUPPLEMENTAL

JUDGMENT AND AMENDED ORDER AGAINST THE BANK DESPITE

THE PERFECTION OF APPEAL OF ONE OF THE DEFENDANTS.
THE COURT OF APPEALS ERRED IN HOLDING THAT PROCEEDINGS
MAY CONTINUE AGAINST PNB DESPITE THE COMPLETE
ADJUDICATION OF RELIEF IN FAVOR OF SMC.24
PNB contends that the CA erred in holding that the RTC was
correct in rendering its Supplemental Judgment and Amended
Order despite the perfection of Goroza's appeal. PNB claims that
when Goroza's appeal was perfected, the RTC lost jurisdiction over
the entire case making the assailed Supplemental Judgment and
Amended Order void for having been issued without or in excess
of jurisdiction.
PNB also argues that the CA erred in ruling that proceedings
against it may continue in the RTC, despite the trial court's
complete adjudication of relief in favor of SMC. PNB avers that the
May 10, 2005 Decision of the RTC, finding Goroza solely liable to
pay the entire amount sought to be recovered by SMC, has settled
the obligation of both Goroza and PNB, and that there is no longer
any ground to hold PNB for trial and make a separate judgment
against it; otherwise, SMC will recover twice for the same cause of
action.
The petition lacks merit.
It is clear from the proceedings held before and the orders issued
by the RTC that the intention of the trial court is to conduct
separate proceedings to determine the respective liabilities of
Goroza and PNB, and thereafter, to render several and separate
judgments for or against them. While ideally, it would have been
more prudent for the trial court to render a single decision with
respect to Goroza and PNB, the procedure adopted the RTC is,
nonetheless, allowed under Section 4, Rule 36 of the Rules of
Court, which provides that "in an action against several
defendants, the court may, when a several judgment is proper,

render judgment against one or more of them, leaving the action

to proceed against the others." In addition, Section 5 of the same
Rule states that "when more than one claim for relief is presented
in an action, the court at any stage, upon a determination of the
issues material to a particular claim and all counterclaims arising
out of the transaction or occurrence which is the subject matter of
the claim may render a separate judgment disposing of such
claim." Further, the same provision provides that "the judgment
shall terminate the action with respect to the claim so disposed of
and the action shall proceed as to the remaining claims." Thus,
the appeal of Goroza, assailing the judgment of the RTC finding
him liable, will not prevent the continuation of the ongoing trial
between SMC and PNB. The RTC retains jurisdiction insofar as PNB
is concerned, because the appeal made by Goroza was only with
respect to his own liability. In fact, PNB itself, in its Reply to
respondent's Comment, admitted that the May 10, 2005
judgment of the RTC was "decided solely against defendant
Rodolfo Goroza."25
The propriety of a several judgment is borne by the fact that
SMC's cause of action against PNB stems from the latter's alleged
liability under the letters of credit which it issued. On the other
hand, SMC's cause of action against Goroza is the latter's failure
to pay his obligation to the former.1wphi1 As to the separate
judgment, PNB has a counterclaim against SMC which is yet to be
resolved by the RTC.
Indeed, the issues between SMC and PNB which are to be
resolved by the RTC, as contained in the trial court's Pre-Trial
Order dated January 21, 2005, were not addressed by the RTC in
its Decision rendered against Goroza. In particular, the RTC
judgment against Goroza did not make any determination as to
whether or not PNB is liable under the letter of credit it issued
and, if so, up to what extent is its liability. In fact, contrary to
PNB's claim, there is nothing in the RTC judgment which ruled that
Goroza is "solely liable" to pay the amount which SMC seeks to
recover.

In this regard, this Court's disquisition on the import of a letter of

credit, in the case ofTransfield Philippines, Inc. v. Luzon Hydro
Corporation,26 as correctly cited by the CA, is instructive, to wit:
By definition, a letter of credit is a written instrument whereby the
writer requests or authorizes the addressee to pay money or
deliver goods to a third person and assumes responsibility for
payment of debt therefor to the addressee. A letter of credit,
however, changes its nature as different transactions occur and if
carried through to completion ends up as a binding contract
between the issuing and honoring banks without any regard or
relation to the underlying contract or disputes between the
parties thereto.
xxxx
Thus, the engagement of the issuing bank is to pay the seller or
beneficiary of the credit once the draft and the required
documents are presented to it. The so-called "independence
principle" assures the seller or the beneficiary of prompt payment
independent of any breach of the main contract and precludes the
issuing bank from determining whether the main contract is
actually accomplished or not. Under this principle, banks assume
no liability or responsibility for the form, sufficiency, accuracy,
genuineness, falsification or legal effect of any documents, or for
the general and/or particular conditions stipulated in the
documents or superimposed thereon, nor do they assume any
liability or responsibility for the description, quantity, weight,
quality, condition, packing, delivery, value or existence of the
goods represented by any documents, or for the good faith or acts
and/or omissions, solvency, performance or standing of the
consignor, the carriers, or the insurers of the goods, or any other
person whomsoever.
xxxx

As discussed above, in a letter of credit transaction, such as in

this case, where the credit is stipulated as irrevocable, there is a
definite undertaking by the issuing bank to pay the beneficiary
provided that the stipulated documents are presented and the
conditions of the credit are complied with. Precisely, the
independence principle liberates the issuing bank from the duty of
ascertaining compliance by the parties in the main contract. As
the principle's nomenclature clearly suggests, the obligation
under the letter of credit is independent of the related and
originating contract. In brief, the letter of credit is separate and
distinct from the underlying transaction. 27
In other words, PNB cannot evade responsibility on the sole
ground that the RTC judgment found Goroza liable and ordered
him to pay the amount sought to be recovered by SMC. PNB's
liability, if any, under the letter of credit is yet to be determined.
WHEREFORE, the instant petition is DENIED. The Decision of the
Court of Appeals, dated June 17, 2008, and its Resolution dated
December 15, 2008, both in CA-G.R. SP No. 01249-MIN, are
AFFIRMED.
SO ORDERED.
G.R. No. L-273

March 29, 1947

CRESENCIA HERNANDEZ, plaintiff-appellee,

vs.
ZACARIAS ANDAL, defendant-appellant.
QUIRINO DIMASACAT, MARIA HERNANDEZ and AQUILINA
HERNANDEZ, intervenors-appellants.
Pedro Paganiban y Tolentino for appellants.
Vicente Reyes Villavicencio for appellee.
TUASON, J.:

The plaintiff, Cresencia Hernandez, the intervenors, Maria and

Aquilina Hernandez, and Pedro and Basilia Hernandez who are not
parties here, are brother and sisters. They acquired in common by
descent from their father a parcel of land of which he died seized
and known as lot No. 120073 of the Batangas cadastral survey.
On January 23, 1944, the intervenors sold 1800 square meters of
this parcel, a portion which is particularly described in the deed of
conveyance Exhibit A, to Zacarias Andal, the defendant, and
Andal's wife in consideration of P860. This portion purports to be
the combined shares of the intervenors in the larger parcel,
allotted to them in a verbal partition alleged to have been made
(time not stated) among the five brother and sisters.
After the sale, on a date as to which the evidence is in
disagreement but which is not now important, the plaintiff
attempted to repurchase the land sold to Andal. According to her
original complaint, dated February 3, 1944, she offered the
purchasers P150 as price of repurchase, this being, according to
that complaint, the amount Andal had paid for Maria Hernandez's
and Aquilina Hernandez's shares, but Andal, it is alleged, refused
to part with the property.
On April 8, the plaintiff filed a supplemental complaint. She
alleged that when the cause was called for trial on March 8, she
announced in open court that she was willing to repurchase her
sister's share from Andal for P860 and reimburse Andal for his
expense; that Andal asked for continuance until the 29th stating
that he had made other expenses; that on 29th she brought P860
to repurchase the land in question but the case was again
postponed because the plaintiff's sisters had intervened; and that
meanwhile, on the 26th, Andal resold the land fictitiously to the
vendors for P970.
It results that on the date last mentioned Andal executed a deed
of sale for P970 in favor of the intervenors, an amount which
included Andal's expenses as well as the normal sale price. The

document of repurchase gave as reason for the transaction the

fact that it had been agreed that in the event trouble should arise
the sellers should return to the buyer what they had received and
pay the latter his expenses.
On February 14, 1944, the defendant filed his answer alleging
that Maria and Aquilina Hernandez had sold him their respective
portions of the inherited land for P860 and that he had no
objection to disposing of those portions in favor of the plaintiff for
P860 plus the expenses he had incurred in the execution of the
deed of sale amounting to P50, but that he was unwilling to
accept P150, which was all the plaintiff offered him besides his
expenses.
On April 4, 1944, Maria and Aquilina Hernandez's answer in
intervention was filed. The intervenors alleged that there had
been a partition among them and their brother and sisters "with
the share of each delineated and marked, and after partition and
delineation everyone took exclusive, separate and independent
possession of his portion in the partition." They charged the
plaintiff with bad faith in that "it was upon her request for chance
that the sale to the defendant, about to take place last November,
was delayed till January of this year when she finally informed the
intervenors that they could sell to the defendant, or she could pay
only P150 and could not raise the amount of P860 offered by the
defendant."
Cresencia Hernandez, the plaintiff, was the only witness to testify
on her own behalf. Substantially she reiterated the allegations in
her two complaints. Zacarias Andal, the defendant, also testified.
He said that he was in possession of the land in question until he
returned it to the intervenors. He declared that the plaintiff
offered to repurchase the land from him long after he had bought
it, that is, when she was about to file her action. He stated that
after he came from Candelaria, Tayabas, with the document of
sale he showed it to the plaintiff: that was on the 23rd of January.
He was able to do this because he lived near Cresencia and

passed by her house on his way home from Candelaria. He said

that Cresencia Hernandez upon being shown the document
merely exclaimed, "Oh, so you already have a document." When
asked whether the land "described in the complaint of the herein
plaintiff has been the object of partition among the co-owners
Pedro, Basilia, Cresencia, Maria and Aquilina surnamed
Hernandez," counsel for the plaintiff objected on the ground that
the best evidence was the document of partition, and the
objection was sustained. The same objection and the same ruling
were made on the same ground when the witness was queried
how it was that the land he had bought from Maria and Aquilina
Hernandez had been specified in the deed of sale, Exhibit A.
In consequence of this ruling, counsel for the defendant and
intervenors did not call any more witnesses but only announced
that he had witnesses ready to prove that a parol partition among
the five brother and sisters had been made, mentioning the
names of six such witnesses. Counsel for the plaintiff again
objected asserting that "under the Rules of Court agreement
affecting real estate may not be proved except by means of
writing subscribed by the person against whom the proof is
offered. "Upon this objection, the court ruled that under Rules 74
and 123 of the Rules of Court (Statute of Frauds) as well as under
article 1248 of the Civil Code, parol evidence of partition was
inadmissible, adding that to decide the case it had enough with
the testimony and evidence offered by the parties.
Thereafter the court handed down its decision declaring that the
resale of the land by Zacarias Andal in favor of Maria and Aquilina
Hernandez was illegal and in bad faith. It, however, did not seem
to have found as a fact the allegation that the resale was
simulated. The court then made this judgment:
(a) declarando y sin valor alguno el documento de
reventaotorgado por el demandado Zacarias Andal en 26 de
marzo de 1944, a favor de Maria y Aquilina Hernandez sobre
el terrenocuestionado que se presento como Exhibito 2 de

dichodemandado, y consiguientemente se anulan tambien

todas lastransacciones posteriores que las mencionadas
Maria y Aquilina Hernandez hayan hecho sobre el terreno
cuestionado despuesdel 26 de marzo de 1944, asi como
tambien cualquiera anotacionen la Oficiana del Registrador
de Titulos de Batangas que hayaanotado dicha reventa por
el demandado Zacarias Andal a favorde las terceristas Maria
y Aquilina Hernandez en el citado dia 26 de marzo de 1944;
y
(b) se ordena al aqui demandado Zacarias Andal, que
otorgue unaescritura de reventa a favor de la aqui
demandante Cresencia Hernandez, de las participaciones de
las terceristas en el terrenodescrito en la demanda
suplementaria previo pago de P860 mas lacantidad de P50
como gastos de documentacion. Se absuelve al demandado
de los daos y perjuicios que reclama la demandante. Se
absuelve tambien a la demandante de la contra-demanda de
lasterceristas.
Sin especial pronunciamento en cuanto a las costas.
The defendant and the intervenors are appealing from the
foregoing decision and in their joint brief made one assignment of
error:
The lower court erred in refusing to admit oral evidence for
proving a contract of partition among the heirs on the
ground that it was not admissible.
Before proceeding with a discussion of the questions raised we
are tempted to point up some seeming incongruities in the abovequoted judgment. Although Zacarias Andal is no longer interested
in the case, as far as the land is concerned, and even though the
intervenors have become again the absolute owners and are now
in full possession of the property, while Andal has already gotten
his money back, the judgment would have Andal execute a deed

of resale in favor of the plaintiff and received from her the price of
repurchase. The judgment is silent as to the intervenors with
reference to the execution of the deed of sale or the receipt of the
sale price. And the lower court made no finding and expressed no
opinion as to whether the offer of P150 instead of P860, not to
mention Andal's expenses, by the plaintiff as price of repurchase
was sufficient compliance with article 1067 of the Civil Code on
which the court rested the plaintiff's cause of action.
However, in this decision we are concerned mainly with the
application of section 21 of Rule 123 and section 1 of Rule 74 both
of the Rules of Court. Article 1248 of the Civil Code has no bearing
on the case.
There is a conflict of authority as to whether an agreement of
partition is such a contract as is required to be in writing under
the statute of frauds. One line of authorities holds the affirmative
view; other authorities say no. The reason for the rule that
excludes partition from the operation of the statute of frauds is
that partition is not a conveyance but simply a separation and
designation of that part of the land which belongs to each tenant
in common. (27 C.J., 206.) The differences in the conclusions
reached are "due perhaps to varied phraseology of the statutes"
in the several states. (40 Amer. Jur., 15.) However the case may
be, as enacted in the Philippines, first in section 335 of the former
Code of Civil Procedure, and now in Rule 123, section 21, of the
Rules of Court, the law has been uniformly interpreted in a long
line of cases to be applicable to executory and not to completed
or executed contracts. (27 C.J., 206.) In this jurisdiction
performance of the contract takes it out of the operation of the
statute. (Gomez vs. Salcedo, 26 Phil., 485; Almirol and
Cario vs. Monserrat, 48 Phil., 67.) The statute of frauds does not
declare the contracts therein enumerated void and of no legal
effect, but only makes ineffective the action for specific
performance. (Almirol and Cario vs. Monserrat, supra.) In the
United States, even in those states where the affirmative view of
the question has been followed, "the weight of authority upholds

the rule that an oral partition is effective when several possession

is taken under it by the respective parties to the agreement." (27
C.J., 206.)
On general principle, independent and in spite of the statute of
frauds, courts of equity have enforced oral partition when it has
been completely or partly performed.
Regardless of whether a parol partition or agreement to
partition is valid and enforceable at law, equity will in proper
cases, where the parol partition has actually been
consummated by the taking of possession in severalty and
the exercise of ownership by the parties of the respective
portions set off to each, recognize and enforce such parol
partition and the rights of the parties thereunder. Thus, it has
been held or stated in a number of cases involving an oral
partition under which the parties went into possession,
exercised acts of ownership, or otherwise partly performed
the partition agreement, that equity will confirm such
partition and in a proper case decree title in accordance with
the possession in severalty.
In numerous cases it has been held or stated that parol
partitions may be sustained on the ground of estoppel of the
parties to assert the rights of a tenant in common as to parts
of the land divided by parol partition as to which possession
in severalty was taken and acts of individual ownership were
exercised. And a court of equity will recognize the agreement
and decree it to be valid and effectual for the purpose of
concluding the right of the parties as between each other to
hold their respective parts in severalty.
A parol partition may also be sustained on the ground that
the parties thereto have acquiesced in and ratified the
partition by taking possession in severalty, exercising acts of
ownership with respect thereto, or otherwise recognizing the
existence of the partition.

A number of cases have specifically applied the doctrine of

part performance, or have stated that a part performance is
necessary, to take a parol partition out of the operation of
the statute of frauds. It has been held that where there was
a partition in fact between tenants in common, and a part
performance, a court of equity would have regard to and
enforce such partition agreed to by the parties. (40 Amer.
Jur., 15-18.)
It is on the effects of Rule 74, section 1, of the Rules of Court on a
parol partition that there are sharp divergences of opinion among
the members of this Court. This section reads:
If the decedent left no debts and the heirs and legatees are
all of age, or the minors are represented by their judicial
guardians, the parties may, without securing letters of
administration, divide the estate among themselves as they
see fit by means of a public instrument file in the office of
the register of deeds, and should they disagree, they may do
so in an ordinary action of partition. If there is only one heir
or one legatee, he may adjudicate to himself the entire
estate by means of an affidavit filed in the office of the
register of deeds. It shall be presumed that the decedent left
no debts if no creditor files a petition for letters of
administration within two years after the death of the
decedent.
It is contended that under this rule a verbal partition is entirely
void and cannot be validated by any acts of the parties short of
the execution of a public document and its registration.
As a general proposition, transactions, so far as they affect the
parties, are required to be reduced to writing either as a condition
of jural validity or as a means of providing evidence to prove the
transactions. Written form exacted by the statute of frauds, for
example, "is for evidential purposes only." (Domalagan vs. Bolifer,
33 Phil., 471.) The decisions of this Court which we have noticed

were predicated on this assumption. The Civil Code, too, requires

the accomplishment of acts or contracts in a public instrument,
not in order to validate the act or contract but only to insure its
efficacy so that after the existence of the acts or contracts has
been admitted, the party bound may be compelled to execute the
document. (Hawaiian Philippine Co. vs .Hernaez, 45 Phil., 746.)
Is section 1 of Rule 74 constitutive and not merely evidential of
partition? In other words, is writing the act that confers legal
validity upon the agreement? There are no indications in the
phraseology of this rule which justify an affirmative answer to
these questions. It must be noted that where the law intends a
writing or other formality to be the essential requisite to the
validity of the transactions it says so in clear and unequivocal
terms. Thus, the statute of frauds as originally enacted in England
and as enacted in some of the states, uses the words "utterly
void" with statute transactions required to be in writing are
absolutely void and not merely voidable if not made in the
manner indicated. Again article 633 of the Civil Code says that
donation may be valid only when made in a public document.
Article 146 of the Mortgage Law makes known its intention to
have the execution of a public instrument and its registration in
the registry indispensable to the validity of the contract by using
this phrase: "in order that voluntary mortgages may be legally
created in a valid manner." Article 1765 of the Civil Code also
employs for the same purpose similar expression with reference
to the execution of a public document: "in order that mortgage
may be validly constituted." And with respect to the formalities of
last wills and testaments, section 618 of Act No. 190 makes this
emphatic statement: "No will shall be valid to pass upon any
estate real or personal nor change or affect the same, unless it be
written etc." Other examples might be mentioned.
Section 1 of Rule 74 contains no such express or clear declaration
that the required public instruments is to be constitutive of a
contract of partition or an inherent element of its effectiveness as
between the parties. And this Court had no apparent reason, in

adopting this rule, to make the efficacy of a partition as between

the parties dependent on the execution of a public instrument and
its registration. On the other hand, the opposite theory is not
without reasonable support. We can think of possible factors
against the proposition that a public document and its registration
were contemplated as necessary ingredients to give life to a
contract of partition so that without them no oral partition can
bind the parties.
1. In the first place, the Rules of Court of which the rule under
consideration forms a part were promulgated by the Judicial
Department under authority to deal with matters of procedure
exclusively. For this court to prescribe what is to be a binding
agreement between co-heirs in the settlement of their private
affairs which in no way affect the rights of third parties would be
to transcends its rule-making power. We bring out this limitation
upon the authority of this court to make rules, as an aid to
interpretation, as a method of arriving at the conclusion that
section 1 of Rule 74 was meant to be remedial and not a rule of
substantive law of far-reaching importance and serious juridical
and practical implications. It is to be presumed that the framers of
the Rules of Court realized the bounds of this court's functions
and did not intend to trespass on purely substantive rights of the
parties to the partition. To the extent the execution and
registration of a notarized instrument are made essential
elements to validity to protect innocent third parties, the rule is
legitimate and necessary; legitimate because decedent's estate
are placed under the jurisdiction of the courts to administer and
distribute. The interests of third parties eliminated, the rule loses
its character as one of procedure and practice and invades the
realm of substantive law.
Section 596 of Act No. 190, which is the precursor of section 1
Rule 74, is enlightening and instructive. The former after stating
that heirs may apportion and divide the estate among themselves
as they may see fit by agreement duly executed in writing by all
of them, adds the words "and not otherwise." These words, in our

opinion, were expressive of an intention to make the written

formality inherent element of the validity of a parol partition. But
what is far more to the point is that by logical process of
deduction the elimination from the new rule of the words "and not
otherwise" imports the casting away from the prescribed public
document of its jural character which the document enjoyed in
the former code. At the same time, the inclusion of the aforesaid
words in the old provision serves to emphasize the necessity of a
positive and clear language if a given contractual formality is to
be the exclusive basis of the contract's binding effect on the
parties. It is of course unnecessary to say that the attaching of
jural character to the prescribed public instrument in section 596
of Act No. 190 is no argument for contending that such document
must be clothed with the same raiment in the new Rules. Act No.
190 was a mixture of procedural and substantive provisions,
having been enacted by the legislative body itself which, unlike
this court, was unhampered and untrammelled, except by the
fundamental law, in the choice of its subjects of legislation.
2. The civil law looks upon the role of public instruments in acts
and contracts with greater liberality with a view to better
adaptation to human frailties and idiosyncracies. In their blind
faith in friends and relatives, in their lack of experience and
foresight, and their ignorance, men, in spite of laws, will make
and continue to make verbal contracts. The advantages of an airtight policy concerning such contracts fall far short of
compensating for the resulting damage, injustice, inconveniences
and confusion. So even though articles 1278, 1279 and 1280 of
the Civil Code have made provisions for public instrument for all
transactions and contracts whose object is the creation,
modification or extinction of real rights in immovables, it has been
recognized and held that verbal contracts may be effective
between the parties. A leading case on this subject is Thunga
Chui vs. Que Bentec (2 Phil., 561), Mr. Justice Williard writing the
decision. It was said in that case that when the essential
requisites for the existence of a contract are present, the contract
is binding upon the parties, and, although required to be in writing

by article 1280 of the Civil Code, the plaintiff can maintain an

action under article 1279 to compel the execution of a written
instrument. It says that "article 1279 does not impose an
obligation, but confers a privilege upon both contracting parties,
and the fact that the plaintiff has not made use of same does not
bar his action." It further says that article 1279, far from making
the enforceability of the contract dependent upon any special
intrinsic form, recognizes its enforceability by the mere act of
granting the contracting parties an adequate remedy whereby to
compel the execution of public writing or any other special form
whenever such form is necessary in order that contract may
produce the effect which is desired according to whatever its
object. This doctrine was iterated and reiterated in a series of
decisions perhaps longer than that on any other legal topic. And it
has been extended even to verbal contracts involving land
registered under the Torrens Act. Do the Rules of Court adhere to
this salutary principle? We can perceive no sufficient ground for
the new Rules to depart from it. No considerations of public policy
enter into a partition of hereditary estate among co-heirs greater
than those involved in a contract between strangers which
operates to create, transmit, modify or extinguish property rights
in land. If as between strangers the creation, transmission,
modification or extinction of real rights may be lawfully effected
by parol agreement notwithstanding the requirement that it be
put in writing, the new rule could not be more intransigent when
the transaction is between co-heirs and there is no change of
ownership but simply designation and segregation of that part
which belongs to each heir.
The requirement that a partition be put in a public document and
registered has, in our opinion, for its purpose the protection of
creditors and at the same time the protection of the heirs
themselves against tardy claims. Note that the last sentence of
the section speaks of debts and creditors. The object of
registration is to serve as constructive notice, and this means
notice to others. It must follow that the intrinsic validity of
partition not executed with the prescribed formalities does not

come into play when, as in this case, there are no creditors or the
rights of creditors are not affected. No rights of creditors being
involved, it is competent for the heirs of an estate to enter into an
agreement for distribution in a manner and upon a plan different
from those provided by law.
It is said that the findings, conclusions and judgment in the
appealed decision are not assigned as errors and that for this
reason the appeal should be dismissed. We do not think that the
premise of this objection is exactly correct. The evidence on parol
partition tendered by the defendant and intervenors was ruled out
and they specifically complain of this exclusion as error. In this
manner the assignment of error squarely meets and attacks the
opinion and judgment of the trial court. A superficial analysis of
the case will show that on the validity of the alleged partition
hangs the result of the entire litigation, and on that validity
depends in turn the competence of the excluded evidence. These
two interrelated points are the core of the whole case. All other
points are incidental to and revolve around them. If a completed
oral partition may be enforced, as the defendant and the
intervenors contend and as we opine, their evidence should be
allowed, and if allowed and it establishes their allegation, the
plaintiff's cause of action vanishes.
If the appellant's assignment of error be not considered a direct
challenge to the decision of the court below, we still believe that
the objection takes a narrow view of practice and procedure
contrary to the liberal spirit which pervades the Rules of Court.
The first injunction of the new Rules (Rule 1, section 2) is that
they "shall be liberally construed in order to promote their object
and to assist the parties in obtaining just, speedy, and
inexpensive determination of every action and proceeding." In
line with the modern trends of procedure, we are told that, "while
an assignment of error which is required by law or rule of court
has been held essential to appellate review, and only those
assigned will be considered, there are a number of cases which
appear to accord to the appellate court a broad discretionary

power to waive the lack of proper assignment of errors and

consider errors not assigned. And an unassigned error closely
related to an error properly assigned, or upon which the
determination of the question raised by the error properly
assigned is dependent, will be considered by the appellate court
notwithstanding the failure to assign it as error." (4 C.J.S., 1734; 3
C.J., 1341, footnote 77.) At the least, the assignment of error,
viewed in this light, authorizes us to examine and pass upon the
decision of the court below.
The judgment is reversed and the case is remanded to the court
of origin for further proceeding and a new decision not
incompatible with this decision, with costs of this appeal against
the appellee.
Moran, C.J., Pablo, Hilado, Bengzon, Briones, Hontiveros, and
Padilla, JJ., concur.
G.R. No. L-24742 October 26, 1973
ROSA CAYETANO CUENCO, petitioners,
vs.
THE HONORABLE COURT OF APPEALS, THIRD DIVISION,
MANUEL CUENCO, LOURDES CUENCO, CONCEPCION
CUENCO MANGUERRA, CARMEN CUENCO, CONSUELO
CUENCO REYES, and TERESITA CUENCO
GONZALEZ, respondents.
Ambrosio Padilla Law Office for petitioner.
Jalandoni and Jamir for respondents.

TEEHANKEE, J.:
Petition for certiorari to review the decision of respondent Court of
Appeals in CA-G.R. No. 34104-R, promulgated 21 November 1964,

and its subsequent Resolution promulgated 8 July 1964 denying

petitioner's Motion for Reconsideration.
The pertinent facts which gave rise to the herein petition follow:
On 25 February 1964 Senator Mariano Jesus Cuenco died at the
Manila Doctors' Hospital, Manila. He was survived by his widow,
the herein petitioner, and their two (2) minor sons, Mariano Jesus,
Jr. and Jesus Salvador, both surnamed Cuenco, all residing at 69 Pi
y Margal St., Sta. Mesa Heights, Quezon City, and by his children
of the first marriage, respondents herein, namely, Manuel Cuenco,
Lourdes Cuenco, Concepcion Cuenco Manguera, Carmen Cuenco,
Consuelo Cuenco Reyes and Teresita Cuenco Gonzales, all of legal
age and residing in Cebu.
On 5 March 1964, (the 9th day after the death of the late
Senator) 1 respondent Lourdes Cuenco filed a Petition for Letters
of Administration with the court of first instance of Cebu (Sp. Proc.
No. 2433-R), alleging among other things, that the late senator
died intestate in Manila on 25 February 1964; that he was a
resident of Cebu at the time of his death; and that he left real and
personal properties in Cebu and Quezon City. On the same date,
the Cebu court issued an order setting the petition for hearing on
10 April 1964, directing that due notice be given to all the heirs
and interested persons, and ordering the requisite publication
thereof at LA PRENSA, a newspaper of general circulation in the
City and Province of Cebu.
The aforesaid order, however, was later suspended and cancelled
and a new and modified one released on 13 March 1964, in view
of the fact that the petition was to be heard at Branch II instead of
Branch I of the said Cebu court. On the same date, a third order
was further issued stating that respondent Lourdes Cuenco's
petition for the appointment of a special administrator dated 4
March 1964 was not yet ready for the consideration of the said
court, giving as reasons the following:

It will be premature for this Court to act thereon, it not

having yet regularly acquired jurisdiction to try this
proceeding, the requisite publication of the notice of
hearing not yet having been complied with. Moreover,
copies of the petition have not been served on all of the
heirs specified in the basic petition for the issuance of
letters of administration. 2
In the meantime, or specifically on 12 March 1964, (a week after
the filing of the Cebu petition) herein petitioner Rosa Cayetano
Cuenco filed a petition with the court of first instance of Rizal
(Quezon City) for the probate of the deceased's last will and
testament and for the issuance of letters testamentary in her
favor, as the surviving widow and executrix in the said last will
and testament. The said proceeding was docketed as Special
Proceeding No. Q-7898.
Having learned of the intestate proceeding in the Cebu court,
petitioner Rosa Cayetano Cuenco filed in said Cebu court an
Opposition and Motion to Dismiss, dated 30 March 1964, as well
as an Opposition to Petition for Appointment of Special
Administrator, dated 8 April 1964. On 10 April 1964, the Cebu
court issued an order holding in abeyance its resolution on
petitioner's motion to dismiss "until after the Court of First
Instance of Quezon City shall have acted on the petition
for probate of that document purporting to be the last will and
testament of the deceased Don Mariano Jesus Cuenco." 3 Such
order of the Cebu court deferring to the probateproceedings in
the Quezon City court was neither excepted to nor sought by
respondents to be reconsidered or set aside by the Cebu court nor
did they challenge the same by certiorari or prohibition
proceedings in the appellate courts.
Instead, respondents filed in the Quezon City court an Opposition
and Motion to Dismiss, dated 10 April 1964,opposing probate of
the will and assailing the jurisdiction of the said Quezon City court
to entertain petitioner's petition for probate and for appointment

as executrix in Sp. Proc. No. Q-7898 in view of the alleged

exclusive jurisdiction vested by her petition in the Cebu court in
Sp. Proc. No. 2433-R. Said respondent prayed that Sp. Proc. No. Q7898 be dismissed for lack of jurisdiction and/or improper venue.
In its order of 11 April 1964, the Quezon City court denied the
motion to dismiss, giving as a principal reason the "precedence of
probate proceeding over an intestate proceeding." 4 The said
court further found in said order that theresidence of the late
senator at the time of his death was at No. 69 Pi y Margal, Sta.
Mesa Heights, Quezon City. The pertinent portion of said order
follows:
On the question of residence of the decedent,
paragraph 5 of the opposition and motion to dismiss
reads as follows: "that since the decedent Don Mariano
Jesus Cuenco was a resident of the City of Cebu at the
time of his death, the aforesaid petition filed by Rosa
Cayetano Cuenco on 12 March 1964 was not filed with
the proper Court (wrong venue) in view of the
provisions of Section 1 of Rule 73 of the New Rules of
Court ...". From the aforequoted allegation, the Court is
made to understand that the oppositors do not mean to
say that the decedent being a resident of Cebu City
when he died, the intestate proceedings in Cebu City
should prevail over the probate proceedings in Quezon
City, because as stated above the probate of the will
should take precedence, but that the probate
proceedings should be filed in the Cebu City Court of
First Instance. If the last proposition is the desire of the
oppositors as understood by this Court, that could not
also be entertained as proper because paragraph 1 of
the petition for the probate of the will indicates
that Don Mariano Jesus Cuenco at the time of his death
was a resident of Quezon City at 69 Pi y Margal. Annex
A (Last Will and Testament of Mariano Jesus Cuenco) of
the petition for probate of the will shows that the

decedent at the time when he executed his Last Will

clearly stated that he is a resident of 69 Pi y Margal,
Sta. Mesa Heights, Quezon City, and also of the City of
Cebu. He made the former as his first choice and the
latter as his second choice of residence." If a party has
two residences, the one will be deemed or presumed to
his domicile which he himself selects or considers to be
his home or which appears to be the center of his
affairs. The petitioner, in thus filing the instant petition
before this Court, follows the first choice of residence of
the decedent and once this court acquires jurisdiction
of the probate proceeding it is to the exclusion of all
others. 5
Respondent Lourdes Cuenco's motion for reconsideration of the
Quezon City court's said order of 11 April 1964 asserting its
exclusive jurisdiction over the probate proceeding as deferred to
by the Cebu court was denied on 27 April 1964 and a second
motion for reconsideration dated 20 May 1964 was
likewise denied.
On 11 May 1964, pursuant to its earlier order of 11 April 1964, the
hearing for probate of the last will of the decedent was called
three times at half-hour intervals, but notwithstanding due
notification none of the oppositors appeared and the Quezon City
court proceeded at 9:00 a.m. with the hearing in their absence.
As per the order issued by it subsequently on 15 May 1964, the
Quezon City court noted that respondents-oppositors had
opposed probate under their opposition and motion to dismiss on
the following grounds:
(a) That the will was not executed and attested as
required by law;

(b) That the will was procured by undue and improper

pressure and influence on the part of the beneficiary or
some other persons for his benefit;
(c) That the testator's signature was procured by fraud
and/or that the testator acted by mistake and did not
intend that the instrument he signed should be his will
at the time he affixed his signature thereto. 6
The Quezon City court further noted that the requisite publication
of the notice of the hearing had been duly complied with and that
all the heirs had been duly notified of the hearing, and after
receiving the testimony of the three instrumental witnesses to the
decedent's last will, namely Atty. Florencio Albino, Dr. Guillermo A.
Picache and Dr. Jose P. Ojeda, and of the notary public, Atty.
Braulio A. Arriola, Jr., who ratified the said last will, and the
documentary evidence (such as the decedent's residence
certificates, income tax return, diplomatic passport, deed of
donation) all indicating that the decedent was a resident of 69 Pi y
Margal St., Quezon City, as also affirmed by him in his last will,
the Quezon City court in its said order of 15 May 1964 admitted
to probate the late senator's last will and testament as having
been "freely and voluntarily executed by the testator" and "with
all formalities of the law" and appointed petitioner-widow as
executrix of his estate without bond "following the desire of the
testator" in his will as probated.
Instead of appealing from the Quezon City court's said
order admitting the will to probate and naming petitioner-widow
as executrix thereof, respondents filed a special civil action
of certiorari and prohibition with preliminary injunction with
respondent Court of Appeals (docketed as case CA-G.R. No.
34104-R) to bar the Rizal court from proceeding with case No. Q7898.

On 21 November 1964, the Court of Appeals rendered a decision

in favor of respondents (petitioners therein) and against the
herein petitioner, holding that:
Section 1, Rule 73, which fixes the venue in
proceedings for the settlement of the estate of a
deceased person, covers both testate and intestate
proceedings. Sp. Proc. 2433-R of the Cebu CFI having
been filed ahead, it is that court whose jurisdiction was
first invoked and which first attached. It is that court
which can properly and exclusively pass upon the
factual issues of (1) whether the decedent left or did
not leave a valid will, and (2) whether or not the
decedent was a resident of Cebu at the time of his
death.
Considering therefore that the first proceeding was
instituted in the Cebu CFI (Special Proceeding 2433-R),
it follows that the said court must exercise jurisdiction
to the exclusion of the Rizal CFI, in which the petition
for probate was filed by the respondent Rosa Cayetano
Cuenco (Special Proceeding Q-7898). The said
respondent should assert her rights within the
framework of the proceeding in the Cebu CFI, instead of
invoking the jurisdiction of another court.
The respondents try to make capital of the fact that on
March 13, 1964, Judge Amador Gomez of the Cebu CFI,
acting in Sp. Proc. 2433-R, stated that the petition for
appointment of special administrator was "not yet
ready for the consideration of the Court today. It would
be premature for this Court to act thereon, it not having
yet regularly acquired jurisdiction to try this
proceeding ... . " It is sufficient to state in this
connection that the said judge was certainly not
referring to the court's jurisdiction over the res, not to
jurisdiction itself which is acquired from the moment a

petition is filed, but only to theexercise of jurisdiction in

relation to the stage of the proceedings. At all events,
jurisdiction is conferred and determined by law and
does not depend on the pronouncements of a trial
judge.
The dispositive part of respondent appellate court's judgment
provided as follows:
ACCORDINGLY, the writ of prohibition will issue,
commanding and directing the respondent Court of First
Instance of Rizal, Branch IX, Quezon City, and the
respondent Judge Damaso B. Tengco to refrain
perpetually from proceeding and taking any action in
Special Proceeding Q-7898 pending before the said
respondent court. All orders heretofore issued and
actions heretofore taken by said respondent court and
respondent Judge, therein and connected therewith, are
hereby annulled. The writ of injunction heretofore
issued is hereby made permanent. No pronouncement
as to costs.
Petitioner's motion for reconsideration was denied in a resolution
of respondent Court of Appeals, dated 8 July 1965; hence the
herein petition for review on certiorari.
The principal and decisive issue at bar is, theretofore, whether the
appellate court erred in law in issuing the writ of prohibition
against the Quezon City court ordering it to refrain perpetually
from proceeding with the testateproceedings and annulling and
setting aside all its orders and actions, particularly its admission
to probate of the decedent's last will and testament and
appointing petitioner-widow as executrix thereof without bond in
compliance with the testator's express wish in his testament. This
issue is tied up with the issue submitted to the appellate court, to
wit, whether the Quezon City court acted without jurisdiction or
with grave abuse of discretion in taking cognizance and assuming

exclusive jurisdiction over the probate proceedings filed with it, in

pursuance of the Cebu court's order of 10 April 1964
expressly consenting in deference to the precedence of probate
over intestate proceedings that it (the Quezon City court)
should first act "on the petition for probate of the document
purporting to be the last will and testament of the deceased Don
Mariano Jesus Cuenco" - which order of the Cebu court
respondents never questioned nor challenged by prohibition
or certiorari proceedings and thus enabled the Quezon City court
to proceed without any impediment or obstruction, once it denied
respondent Lourdes Cuenco's motion to dismiss the probate
proceeding for alleged lack of jurisdiction or improper venue,
toproceed with the hearing of the petition and to admit the will to
probate upon having been satisfied as to its due execution and
authenticity.
The Court finds under the above-cited facts that the appellate
court erred in law in issuing the writ of prohibition against the
Quezon City court from proceeding with the testate proceedings
and annulling and setting aside all its orders and actions,
particularly its admission to probate of the deceased's last will
and testament and appointing petitioner-widow as executrix
thereof without bond pursuant to the deceased testator's express
wish, for the following considerations:
1. The Judiciary Act 7 concededly confers original jurisdiction upon
all Courts of First Instance over "all matter of probate, both of
testate and intestate estates." On the other hand, Rule 73,
section of the Rules of Court lays down the rule of venue, as the
very caption of the Rule indicates, and in order to prevent conflict
among the different courts which otherwise may properly assume
jurisdiction from doing so, the Rule specifies that "the court first
taking cognizance of the settlement of the estate of a decedent,
shall exercise jurisdiction to the exclusion of all other courts." The
cited Rule provides:

Section 1. Where estate of deceased persons settled. If

the decedent is an inhabitant of the Philippines at the
time of his death, whether a citizen or an alien, his will
shall be proved, or letters of administration granted,
and his estate settled, in the Court of First Instance in
the Province in which he resides at the time of his
death, and if he is an inhabitant of a foreign country,
the Court of First Instance of the province in which he
had estate. The court first taking cognizance of
the settlement of the estate of a decedent,
shall exercise jurisdiction to the exclusion of all other
courts. The jurisdiction assumed by a court, so far as it
depends on the place of residence, of the decedent, or
of the location of his estate, shall not be contested in a
suit or proceeding, except in an appeal from that
court, in the original case, or when the want of
jurisdiction appears on the record. (Rule 73) 8
It is equally conceded that the residence of the deceased or the
location of his estate is not an element of jurisdiction over the
subject matter but merely of venue. This was lucidly stated by the
late Chief Justice Moran inSy Oa vs. Co Ho 9 as follows:
We are not unaware of existing decisions to the effect
that in probate cases the place of residence of the
deceased is regarded as a question of jurisdiction over
the subject-matter. But we decline to follow this view
because of its mischievous consequences. For instance,
a probate case has been submitted in good faith to the
Court of First Instance of a province where the
deceased had not resided. All the parties, however,
including all the creditors, have submitted themselves
to the jurisdiction of the court and the case is therein
completely finished except for a claim of a creditor who
also voluntarily filed it with said court but on appeal
from an adverse decision raises for the first time in this
Court the question of jurisdiction of the trial court for

lack of residence of the deceased in the province. If we

consider such question of residence as one affecting
the jurisdiction of the trial court over the subjectmatter, the effect shall be that the whole
proceedings including all decisions on the different
incidents which have arisen in court will have to
be annulled and the same case will have to
be commenced anew before another court of the same
rank in another province. That this is ofmischievous
effect in the prompt administration of justice is too
obvious to require comment. (Cf. Tanunchuan vs. Dy
Buncio & Co., G.R. No. 48206, December 31, 1942)
Furthermore, section 600 of Act No. 190, 10 providing
that the estate of a deceased person shall be settled in
the province where he had last resided, could not have
been intended as defining the jurisdiction of the
probate court over the subject-matter, because such
legal provision is contained in a law of procedure
dealing merely with procedural matters, and, as we
have said time and again, procedure is one thing and
jurisdiction over the subject matter is another.
(Attorney-General vs. Manila Railroad Company, 20 Phil.
523.) The law of jurisdiction Act No. 136, 11 Section
56, No. 5 confers upon Courts of First Instance
jurisdiction over all probate cases independently of the
place of residence of the deceased. Since, however,
there are many courts of First Instance in the
Philippines, the Law of Procedure, Act No. 190, section
600, fixes the venue or the place where each case shall
be brought. Thus, the place of residence of
the deceased is not an element of jurisdiction over the
subject-matter but merely of venue. And it is upon this
ground that in the new Rules of Court the province
where the estate of a deceased person shall be settled
is properly called "venue".

It should be noted that the Rule on venue does not state that the
court with whom the estate or intestate petition is first
filed acquires exclusive jurisdiction.
The Rule precisely and deliberately provides that "the court first
taking cognizance of the settlement of the estateof a decedent,
shall exercise jurisdiction to the exclusion of all other courts."
A fair reading of the Rule since it deals with venue and comity
between courts of equal and co-ordinate jurisdiction indicates
that the court with whom the petition is first filed, must also first
take cognizance of the settlement of the estate in order
to exercise jurisdiction over it to the exclusion of all other courts.
Conversely, such court, may upon learning that a petition
for probate of the decedent's last will has been presented in
another court where the decedent obviously had his conjugal
domicile and resided with his surviving widow and their minor
children, and that the allegation of the intestate petition before it
stating that the decedent died intestate may be actually false,
may decline to take cognizance of the petition and hold the
petition before it in abeyance, and instead defer to the second
court which has before it the petition for probate of the
decedent's alleged last will.
2. This exactly what the Cebu court did. Upon petitioner-widow's
filing with it a motion to dismiss Lourdes' intestate petition, it
issued its order holding in abeyance its action on the dismissal
motion and deferred to the Quezon City court, awaiting its action
on the petition for probate before that court. Implicit in the Cebu
court's order was that if the will was duly admitted to probate, by
the Quezon City court, then it would definitely decline to take
cognizance of Lourdes' intestate petition which would thereby be
shown to be false and improper, and leave the exercise of
jurisdiction to the Quezon City court, to the exclusion of all other
courts. Likewise by its act of deference, the Cebu court left it to
the Quezon City court to resolve the question between the parties

whether the decedent's residence at the time of his death was in

Quezon City where he had his conjugal domicile rather than in
Cebu City as claimed by respondents. The Cebu court thus
indicated that it would decline to take cognizance of
the intestate petition before it and instead defer to the Quezon
City court, unless the latter would make a negative finding as to
the probate petition and the residence of the decedent within its
territory and venue.
3. Under these facts, the Cebu court could not be held to have
acted without jurisdiction or with grave abuse of jurisdiction in
declining to take cognizance of the intestate petition and
deferring to the Quezon City court.
Necessarily, neither could the Quezon City court be deemed to
have acted without jurisdiction in taking cognizance of and acting
on the probate petition since under Rule 73, section 1, the Cebu
court must first take cognizance over the estate of the decedent
and must exercise jurisdiction to exclude all other courts, which
the Cebu court declined to do. Furthermore, as is undisputed, said
rule only lays down a rule of venue and the Quezon City court
indisputably had at least equal and coordinate jurisdiction over
the estate.
Since the Quezon City court took cognizance over
the probate petition before it and assumed jurisdiction over the
estate, with the consent and deference of the Cebu court, the
Quezon City court should be left now, by the same rule of venue
of said Rule 73, to exercise jurisdiction to the exclusion of all other
courts.
Under the facts of the case and where respondents submitted to
the Quezon City court their opposition to probate of the will, but
failed to appear at the scheduled hearing despite due notice, the
Quezon City court cannot be declared, as the appellate court did,
to have acted without jurisdiction in admitting to probate the
decedent's will and appointing petitioner-widow as executrix

thereof in accordance with the

testator's testamentary disposition.
4. The relatively recent case of Uriarte vs. Court of First Instance
of Negros Occidental 12 with facts analogous to the present
case 13 is authority against respondent appellate court's
questioned decision.
In said case, the Court upheld the doctrine of precedence of
probate proceedings over intestate proceedings in this wise:
It can not be denied that a special proceeding intended
to effect the distribution of the estate of a deceased
person, whether in accordance with the law on intestate
succession or in accordance with his will, is a "probate
matter" or a proceeding for the settlement of his
estate. It is equally true, however, that in accordance
with settled jurisprudence in this jurisdiction, testate
proceedings for the settlement of the estate of a
deceased person take precedence over intestate
proceedings for the same purpose. Thus it has been
held repeatedly that, if in the course of intestate
proceedings pending before a court of first instance it is
found that the decedent had left a last will, proceedings
for the probate of the latter should replace the
intestate proceedings even if at that state an
administrator had already been appointed, the latter
being required to render final account and turn over the
estate in his possession to the executor subsequently
appointed. This however, is understood to be without
prejudice that should the alleged last will be rejected or
is disapproved, the proceeding shall continue as an
intestacy. As already adverted to, this is a clear
indication that proceedings for the probate of a will
enjoy priority over intestate proceedings. 14

The Court likewise therein upheld the jurisdiction of

the second court, (in this case, the Quezon City court) although
opining that certain considerations therein "would seem to
support the view that [therein respondent] should have submitted
said will for probate to the Negros Court, [in this case, the Cebu
court] either in a separate special proceeding or in an appropriate
motion for said purpose filed in the already pending Special
Proceeding No. 6344," 15 thus:
But the fact is that instead of the aforesaid will being presented
for probate to the Negros Court, Juan Uriarte Zamacona filed the
petition for the purpose with the Manila Court. We can not accept
petitioner's contention in this regard that the latter court had no
jurisdiction to consider said petition, albeit we say that it was not
the proper venue therefor.
It is well settled in this jurisdiction that wrong venue is
merely a waivable procedural defect, and, in the light of
the circumstances obtaining in the instant case, we are
of the opinion, and so hold, that petitioner has waived
the right to raise such objection or is precluded from
doing so by laches. It is enough to consider in this
connection that petitioner knew of the existence of a
will executed by Juan Uriarte y Goite since December
19, 1961 when Higinio Uriarte filed his opposition to the
initial petition filed in Special Proceeding No. 6344; that
petitioner likewise was served with notice of the
existence (presence) of the alleged last will in the
Philippines and of the filing of the petition for its
probate with the Manila Court since August 28, 1962
when Juan Uriarte Zamacona filed a motion for the
dismissal of Special Proceeding No. 6344. All these
notwithstanding, it was only on April 15, 1963 that he
filed with the Manila Court in Special Proceeding No.
51396 an Omnibus motion asking for leave to intervene
and for the dismissal and annulment of all the
proceedings had therein up to that date; thus enabling

the Manila Court not only to appoint an administrator

with the will annexed but also to admit said will to
probate more than five months earlier, or more
specifically, on October 31, 1962. To allow him now to
assail the exercise of jurisdiction over the probate of
the will by the Manila Court and the validity of all the
proceedings had in Special Proceeding No. 51396 would
put a premium on his negligence. Moreover, it must be
remembered that this Court is not inclined to annul
proceedings regularly had in a lower court even if the
latter was not the proper venue therefor, if the net
result would be to have the same proceedings repeated
in some other court of similar jurisdiction; more so in a
case like the present where the objection against said
proceedings is raised too late. 16
5. Under Rule 73, section 1 itself, the Quezon City
court's assumption of jurisdiction over the decedent's estate on
the basis of the will duly presented for probate by petitionerwidow and finding that Quezon City was the
firstchoice of residence of the decedent, who had his conjugal
home and domicile therein with the deference in comity duly
given by the Cebu court could not be contested except by
appeal from said court in the original case. The last paragraph of
said Rule expressly provides:
... The jurisdiction assumed by a court, so far as it
depends on the place of residence of the decedent, or
of the location of his estate, shall not be contested in a
suit or proceeding, except in an appeal from that court,
in the original case, or when the want of jurisdiction
appears on the record. (Rule 73)
The exception therein given, viz, "when the want of jurisdiction
appears on the record" could probably be properly invoked, had
such deference in comity of the Cebu court to the Quezon City
court not appeared in the record, or had the record otherwise

shown that the Cebu court had taken cognizance of the petition
before it and assumed jurisdiction.
6. On the question that Quezon City established to be the
residence of the late senator, the appellate court while
recognizing that "the issue is a legitimate one" held in reliance
on Borja vs. Tan 17 that.
... The issue of residence comes within the competence
of whichever court is considered to prevail in the
exercise jurisdiction - in this case, the Court of First
Instance of Cebu as held by this Court. Parenthetically,
we note that the question of the residence of the
deceased is a serious one, requiring both factual and
legal resolution on the basis of ample evidence to be
submitted in the ordinary course of procedure in the
first instance, particularly in view of the fact that the
deceased was better known as the Senator from Cebu
and the will purporting to be his also gives Cebu,
besides Quezon City, as his residence. We reiterate that
this matter requires airing in the proper court, as so
indicated in the leading and controlling case of Borja
vs. Hon. Bienvenido Tan, et al., G.R. L-7792, July 27,
1955.
In the case at bar, however, the Cebu court declined to take
cognizance of the intestate petition first filed with it and deferred
to the testate proceedings filed with the Quezon City court and in
effect asked the Quezon City court to determine the residence of
the decedent and whether he did leave a last will and testament
upon which would depend the proper venue of the estate
proceedings, Cebu or Quezon City. The Quezon City court having
thus determined in effect for both courts at the
behest and with the deference and consent of the Cebu court
thatQuezon City was the actual residence of the decedent who
died testate and therefore the proper venue, the Borja ruling
would seem to have no applicability. It would not serve the

practical ends of justice to still require the Cebu court, if the Borja
ruling is to be held applicable and as indicated in the decision
under review, to determine for itself the actual residence of the
decedent (when the Quezon City court had already so determined
Quezon City as the actual residence at the Cebu court's behest
and respondents have not seriously questioned this factual
finding based on documentary evidence) and if the Cebu court
should likewise determine Quezon City as the actual residence, or
its contrary finding reversed on appeal, only then to allow
petitioner-widow after years of waiting and inaction to institute
the corresponding proceedings in Quezon City.
7. With more reason should the Quezon City proceedings be
upheld when it is taken into consideration that Rule 76, section 2
requires that the petition for allowance of a will must show: "(a)
the jurisdictional facts." Such "jurisdictional facts" in probate
proceedings, as held by the Court in Fernando vs. Crisostomo 18 "
are the death of the decedent, his residence at the time of his
death in the province where the probate court is sitting, or if he is
an inhabitant of a foreign country, his having left his estate in
such province."
This tallies with the established legal concept as restated by
Moran that "(T)he probate of a will is a proceeding in rem. The
notice by publication as a pre-requisite to the allowance of a will,
is a constructive notice to the whole world, and when probate is
granted, the judgment of the court is binding upon everybody,
even against the State.The probate of a will by a court having
jurisdiction thereof is conclusive as to its due execution and
validity." 19 The Quezon City court acted regularly within its
jurisdiction (even if it were to be conceded that Quezon City was
not the proper venue notwithstanding the Cebu court's giving way
and deferring to it,) in admitting the decedent's last will to
probate and naming petitioner-widow as executrix thereof. Hence,
the Quezon city court's action should not be set aside by a writ of
prohibition for supposed lack of jurisdiction as per the appellate
court's appealed decision, and should instead be sustained in line

with Uriarte, supra, where the Court, in dismissing

the certiorari petition challenging the Manila court's action
admitting the decedent's will to probate and distributing the
estate in accordance therewith in the second proceeding, held
that "it must be remembered that this Court is not inclined to
annul proceedings regularly had in a lower court even if the latter
was not the proper venue therefor, if the net result would be to
have the same proceedings repeated in some other court of
similar jurisdiction." As stressed by Chief Justice Moran in Sy Oa,
supra, "the mischievous effect in the administration of justice" of
considering the question of residence as affecting the jurisdiction
of the trial court and annulling the whole proceedings only to start
all over again the same proceedings before another court of the
same rank in another province "is too obvious to require
comment."
8. If the question of jurisdiction were to be made to depend only
on who of the decedent's relatives gets first to file a petition for
settlement of the decedent's estate, then the established
jurisprudence of the Court that Rule 73, section 1 provides only a
rule of venue in order to preclude different courts which may
properly assumejurisdiction from doing so and creating conflicts
between them to the detriment of the administration of justice,
and that venue is waivable, would be set at naught. As between
relatives who unfortunately do not see eye to eye, it would be
converted into a race as to who can file the petition faster in the
court of his/her choice regardless of whether the decedent is still
in cuerpo presente and in disregard of the decedent's actual last
domicile, the fact that he left a last will and testament and the
right of his surviving widow named as executrix thereof. Such dire
consequences were certainly not intended by the Rule nor would
they be in consonance with public policy and the orderly
administration of justice.
9. It would finally be unjust and inequitable that petitioner-widow,
who under all the applicable rules of venue, and despite the fact
that the Cebu court (where respondent Lourdes Cuenco had filed

an intestate petition in the Cebu court earlier by a week's time on

5 March 1964) deferred to the Quezon City court where petitioner
had within fifteen days (on March 12, 1964) after the decedent's
death (on February 25, 1964) timely filed the decedent's last will
and petitioned for letters testamentary and is admittedly entitled
to preference in the administration of her husband's
estate, 20 would be compelled under the appealed decision to
have to go all the way to Cebu and submit anew the decedent's
will there for probate either in a new proceeding or by asking that
the intestate proceedings be converted into a testate proceeding
when under the Rules, the proper venue for
the testate proceedings, as per the facts of record and as already
affirmed by the Quezon City court is Quezon City, where the
decedent and petitioner-widow had their conjugal domicile.
It would be an unfair imposition upon petitioner as the one named
and entitled to be executrix of the decedent's last will and settle
his estate in accordance therewith, and a disregard of her rights
under the rule on venue and the law on jurisdiction to require her
to spend much more time, money and effort to have to go from
Quezon City to the Cebu court everytime she has an important
matter of the estate to take up with the probate court.
It would doubly be an unfair imposition when it is considered that
under Rule 73, section 2, 21 since petitioner's marriage has been
dissolved with the death of her husband, their community
property and conjugal estate have to beadministered and
liquidated in the estate proceedings of the deceased spouse.
Under the appealed decision, notwithstanding that petitioner
resides in Quezon City, and the proper venue of
the testate proceeding was in Quezon City and the Quezon City
court properly took cognizance and exercised exclusive
jurisdiction with the deference in comity and consent of the Cebu
court, such proper exercise of jurisdiction would be nullified and
petitioner would have to continually leave her residence in
Quezon City and go to Cebu to settle and liquidate

even her own community property and conjugal estate with the
decedent.
10. The Court therefore holds under the facts of record that
the Cebu court did not act without jurisdiction nor with grave
abuse of discretion in declining to take cognizance of
the intestate petition and instead deferring to
thetestate proceedings filed just a week later by petitioner as
surviving widow and designated executrix of the decedent's last
will, since the record before it (the petitioner's opposition and
motion to dismiss) showed the falsityof the allegation in
the intestate petition that the decedent had died without a will. It
is noteworthy that respondents never challenged by certiorari or
prohibition proceedings the Cebu court's order of 10 April 1964
deferring to the probate proceedings before the Quezon City
court, thus leaving the latter free (pursuant to the Cebu court's
order of deference) to exercise jurisdiction and admit the
decedent's will to probate.
For the same reasons, neither could the Quezon City court be
held to have acted without jurisdiction nor with grave abuse of
discretion in admitting the decedent's will to probate and
appointing petitioner as executrix in accordance with its
testamentary disposition, in the light of the settled doctrine that
the provisions of Rule 73, section 1 lay down only a rule of venue,
not of jurisdiction.
Since respondents undisputedly failed to appeal from the Quezon
City court's order of May 15, 1964 admitting the will to probate
and appointing petitioner as executrix thereof, and said court
concededly has jurisdiction to issue said order, the said order of
probate has long since become final and can not be overturned in
a special civic action of prohibition.
11. Finally, it should be noted that in the Supreme Court's
exercise of its supervisory authority over all inferior courts,
may properly determine, as it has done in the case at bar,

22

it

that venue was properly assumed by and transferredto

the Quezon City court and that it is the interest of justice and in
avoidance of needless delay that the Quezon City court's exercise
of jurisdiction over the testate estate of the decedent (with the
due deference and consent of the Cebu court) and its admission
to probate of his last will and testament and appointment of
petitioner-widow as administratrix without bond in pursuance of
the decedent's express will and all its orders and actions taken in
the testate proceedings before it be approved and authorized
rather than to annul all such proceedings regularly had and to
repeat and duplicate the same proceedings before the Cebu court
only to revert once more to the Quezon City court should the
Cebu court find that indeed and in fact, as already determined by
the Quezon City court on the strength of incontrovertible
documentary evidence of record, Quezon City was the conjugal
residence of the decedent.
ACCORDINGLY, judgment is hereby rendered reversing the
appealed decision and resolution of the Court of Appeals and the
petition for certiorari and prohibition with preliminary injunction
originally filed by respondents with the Court of Appeals (CA-G.R.
No. 34104-R) is ordered dismissed. No costs.
Makalintal, C.J., Zaldivar, Makasiar, Antonio and Esguerra, JJ.,
concur.
Fernando and Castro, JJ., took no part