SECONDDIVISION

[G.R.No.146717.November22,2004]

TRANSFIELD PHILIPPINES, INC., petitioner, vs. LUZON HYDRO

CORPORATION,AUSTRALIAandNEWZEALANDBANKINGGROUP
LIMITEDandSECURITYBANKCORPORATION,respondents.

DECISION
TINGA,J.:

Subject of this case is the letter of credit which has evolved as the ubiquitous and most
importantdeviceininternationaltrade.Acreationofcommerceandbusinessmen,theletterof
creditisalsouniqueinthenumberofpartiesinvolvedanditssupranationalcharacter.
[1]
Petitioner has appealed from the Decision of the Court of Appeals in CAG.R. SP No.
61901entitledTransfieldPhilippines,Inc.v.Hon.OscarPimentel,etal., promulgated on 31
[2]
January2001.
On26March1997,petitionerandrespondentLuzonHydroCorporation(hereinafter,LHC)
[3]
entered into a Turnkey Contract whereby petitioner, as Turnkey Contractor, undertook to
construct,onaturnkeybasis,aseventy(70)MegawatthydroelectricpowerstationattheBakun
RiverintheprovincesofBenguetandIlocosSur(hereinafter,theProject).Petitionerwasgiven
thesoleresponsibilityforthedesign,construction,commissioning,testingandcompletionofthe
[4]
Project.
TheTurnkeyContractprovidesthat:(1)thetargetcompletiondateoftheProjectshallbeon
1June2000,orsuchlaterdateasmaybeagreeduponbetweenpetitionerandrespondentLHC
orotherwisedeterminedinaccordancewiththeTurnkeyContractand(2)petitionerisentitledto
claimextensionsoftime(EOT)forreasonsenumeratedintheTurnkeyContract,amongwhich
[5]
arevariations,forcemajeure,anddelayscausedbyLHCitself. Further,incaseofdispute,the
parties are bound to settle their differences through mediation, conciliation and such other
[6]
meansenumeratedunderClause20.3oftheTurnkeyContract.
Tosecureperformanceofpetitionersobligationonorbeforethetargetcompletiondate,or
suchtimeforcompletionasmaybedeterminedbythepartiesagreement,petitioneropenedin
favorofLHCtwo(2)standbylettersofcreditbothdated20March2000(hereinafterreferredtoas
the Securities), to wit: Standby Letter of Credit No. E001126/8400 with the local branch of
[7]
respondent Australia and New Zealand Banking Group Limited (ANZ Bank) and Standby
[8]
LetterofCreditNo.IBDIDSB00/4withrespondentSecurityBankCorporation(SBC) eachin
[9]
theamountofUS$8,988,907.00.
 Inthecourseoftheconstructionoftheproject,petitionersoughtvariousEOTtocompletethe
Project. The extensions were requested allegedly due to several factors which prevented the
completion of the Project on target date, such as forcemajeure occasioned by typhoon Zeb,
barricadesanddemonstrations.LHCdeniedtherequests,however.Thisgaverisetoaseriesof
legalactionsbetweenthepartieswhichculminatedintheinstantpetition.
ThefirstoftheactionswasaRequestforArbitrationwhichLHCfiledbeforetheConstruction
[10]
Industry Arbitration Commission (CIAC) on 1 June 1999. This was followed by another
Request for Arbitration, this time filed by petitioner before the International Chamber of
[11]
Commerce(ICC) on3November2000.Inbotharbitrationproceedings,thecommonissues
presented were: [1) whether typhoon Zeb and any of its associated events constituted force
majeuretojustifytheextensionoftimesoughtbypetitionerand[2)whetherLHChadtherightto
terminatetheTurnkeyContractforfailureofpetitionertocompletetheProjectontargetdate.
Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent
[12] [13]
provisions of the Turnkey Contract, petitionerin two separate letters both dated 10
August2000advisedrespondentbanksofthearbitrationproceedingsalreadypendingbefore
theCIACandICCinconnectionwithitsallegeddefaultintheperformanceofitsobligations.
AssertingthatLHChadnorighttocallontheSecuritiesuntiltheresolutionofdisputesbefore
the arbitral tribunals, petitioner warned respondent banks that any transfer, release, or
dispositionoftheSecuritiesinfavorofLHCoranypersonclaimingunderLHCwouldconstrainit
toholdrespondentbanksliableforliquidateddamages.
Aspetitionerhadanticipated,on27June2000,LHCsentnoticetopetitionerthatpursuantto
[14]
Clause8.2 of the Turnkey Contract, it failed to comply with its obligation to complete the
Project.Despitethelettersofpetitioner,however,bothbanksinformedpetitionerthattheywould
[15]
payontheSecuritiesifandwhenLHCcallsonthem.
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
beginning28June2000untilactualcompletionoftheProjectpursuanttoClause8.7.1ofthe
TurnkeyContract.Atthesametime,LHCservednoticethatitwouldcallonthesecuritiesforthe
[16]
paymentofliquidateddamagesforthedelay.
On5November2000,petitionerasplaintifffiledaComplaintforInjunction,withprayerfor
temporary restraining order and writ of preliminary injunction, against herein respondents as
[17]
defendants before the Regional Trial Court (RTC) of Makati. Petitioner sought to restrain
respondentLHCfromcallingontheSecuritiesandrespondentbanksfromtransferring,paying
on,orinanymannerdisposingoftheSecuritiesoranyrenewalsorsubstitutesthereof.TheRTC
issued a seventytwo (72)hour temporary restraining order on the same day. The case was
docketedasCivilCaseNo.001312andraffledtoBranch148oftheRTCofMakati.
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
[18]
November2000.
[19]
TheRTC,initsOrder dated24November2000,deniedpetitionersapplicationforawrit
ofpreliminaryinjunction.Itruledthatpetitionerhadnolegalrightandsufferednoirreparable
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
contractcouldbeinvokedonlybyrespondentbankssinceaccordingtoitrespondentLHCisthe
ultimate beneficiary of the Securities. The trial court further ruled that the banks were mere
custodiansofthefundsandassuchtheywereobligatedtotransferthesametothebeneficiary
foraslongasthelattercouldsubmittherequiredcertificationofitsclaims.
Dissatisfiedwiththetrialcourtsdenialofitsapplicationforawritofpreliminaryinjunction,
petitionerelevatedthecasetotheCourtofAppealsviaaPetitionforCertiorariunderRule65,
withprayerfortheissuanceofatemporaryrestrainingorderandwritofpreliminaryinjunction.
[20]
PetitionersubmittedtotheappellatecourtthatLHCscallontheSecuritieswaspremature
consideringthattheissueofitsdefaulthadnotyetbeenresolvedwithfinalitybytheCIACand/or
theICC.Itassertedthatuntilthefactofdelaycouldbeestablished,LHChadnorighttodrawon
theSecuritiesforliquidateddamages.
Refutingpetitionerscontentions,LHCclaimedthatpetitionerhadnorighttorestrainitscall
onanduseoftheSecuritiesaspaymentforliquidateddamages.ItaverredthattheSecurities
areindependentofthemaincontractbetweenthemasshownonthefaceofthetwoStandby
Letters of Credit which both provide that the banks have no responsibility to investigate the
authenticityoraccuracyofthecertificatesorthedeclarantscapacityorentitlementtosocertify.
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
thereofandorderingrespondentbankstoceaseanddesistfromtransferring,payingorinany
mannerdisposingoftheSecurities.
However,theappellatecourtfailedtoactontheapplicationforpreliminaryinjunctionuntil
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,therebyreducingthebalanceinANZBanktoUS$1,852,814.00.
On2February2001,theappellatecourtdismissedthepetitionforcertiorari.Theappellate
courtexpressedconformitywiththetrialcourtsdecisionthatLHCcouldcallontheSecurities
pursuanttothefirstprincipleincreditlawthatthecredititselfisindependentoftheunderlying
transactionandthataslongasthebeneficiarycompliedwiththecredit,itwasofnomomentthat
he had not complied with the underlying contract. Further, the appellate court held that even
assumingthatthetrialcourtsdenialofpetitionersapplicationforawritofpreliminaryinjunction
was erroneous, it constituted only an error of judgment which is not correctible by certiorari,
unlikeerrorofjurisdiction.
Undaunted, petitioner filed the instant Petition for Review raising the following issues for
resolution:

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.LHCISALLOWEDTOCALLANDDRAWON,ANDANZBANKANDSECURITY
BANK ARE ALLOWED TO RELEASE, THE REMAINING BALANCE OF THE
SECURITIES PRIOR TO THE RESOLUTION OF THE DISPUTES BETWEEN
PETITIONERANDLHC.
B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY DRAWN
[21]
FROMTHESECURITIES.
Petitionercontendsthatthecourtsbelowimproperlyreliedontheindependenceprinciple
onlettersofcreditwhenthiscasefallssquarelywithinthefraudexceptionrule.Respondent
LHCdeliberatelymisrepresentedthesupposedexistenceofdelaydespiteitsknowledgethatthe
issuewasstillpendingarbitration,petitionercontinues.
Petitioner asserts that LHC should be ordered to return the proceeds of the Securities
pursuanttotheprincipleagainstunjustenrichmentandthat,underthepremises,injunctionwas
theappropriateremedyobtainablefromthecompetentlocalcourts.
[22]
On 25 August 2003, petitioner filed a Supplement to the Petition and Supplemental
[23]
Memorandum, allegingthatinthecourseoftheproceedingsintheICCArbitration,anumber
of documentary and testimonial evidence came out through the use of different modes of
discoveryavailableintheICCArbitration.Itcontendsthatafterthefilingofthepetitionfactsand
admissions were discovered which demonstrate that LHC knowingly misrepresented that
petitionerhadincurreddelaysnotwithstandingitsknowledgeandadmissionthatdelayswere
excusedundertheTurnkeyContracttobeabletodrawagainsttheSecurities.Reiteratingthat
fraudconstitutesanexceptiontotheindependenceprinciple,petitionerurgesthatthiswarrantsa
rulingfromthisCourtthatthecallontheSecuritieswaswrongful,aswellascontrarytolawand
basicprinciplesofequity.ItaversthatitwouldsuffergraveirreparabledamageifLHCwouldbe
allowed to use the proceeds of the Securities and not ordered to return the amounts it had
wrongfullydrawnthereon.
[24]
In its Manifestation dated 8 September 2003, LHC contends that the supplemental
pleadingsfiledbypetitionerpresenterroneousandmisleadinginformationwhichwouldchange
petitionerstheoryonappeal.
[25]
InyetanotherManifestationdated12April2004, petitionerallegesthaton18February
2004,theICChandeddownitsThirdPartialAward,declaringthatLHCwrongfullydrewupon
theSecuritiesandthatpetitionerwasentitledtothereturnofthesumswrongfullytakenbyLHC
forliquidateddamages.
[26]
LHC filed a CounterManifestation dated 29 June 2004, stating that petitioners
Manifestationdated12April2004enlargesthescopeofitsPetitionforReviewofthe31January
2001DecisionoftheCourtofAppeals.LHCnotesthatthePetitionforReviewessentiallydealt
onlywiththeissueofwhetherinjunctioncouldissuetorestrainthebeneficiaryofanirrevocable
letterofcreditfromdrawingthereon.Itaddsthatpetitionerhasfiledtwootherproceedings,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/misperformanceofitsobligationsascontractorforLHCand(2)CivilCaseNo.04
332,entitledTransfieldPhilippines,Inc.v.LuzonHydroCorporationbeforeBranch56ofthe
RTC of Makati, which is an action to enforce and obtain execution of the ICCs partial award
mentionedinpetitionersManifestationof12April2004.
In its Comment to petitioners Motion for Leave to File Addendum to Petitioners
Memorandum,LHCstressesthatthequestionofwhetherthefundsitdrewonthesubjectletters
ofcreditshouldbereturnedisoutsidetheissueinthisappeal.Atanyrate,LHCaddsthatthe
actiontoenforcetheICCspartialawardisnowfullywithintheMakatiRTCsjurisdictioninCivil
Case No. 04332. LHC asserts that petitioner is engaged in forumshopping by keeping this
appealandatthesametimeseekingthesuitforenforcementofthearbitralawardbeforethe
Makaticourt.
[27]
RespondentSBCinitsMemorandum,dated10March2003 contendsthattheCourtof
Appealscorrectlydismissedthepetitionforcertiorari.Invokingtheindependenceprinciple,SBC
argues that it was under no obligation to look into the validity or accuracy of the certification
submittedbyrespondentLHCorintothelatterscapacityorentitlementtosocertify.Itaddsthat
the act sought to be enjoined by petitioner was already faitaccompli and the present petition
wouldnolongerserveanyremedialpurpose.
[28]
In a similar fashion, respondent ANZ Bank in 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
preliminaryinjunctionhadbeenrenderedmootandacademic.
Atthecoreofthepresentcontroversyistheapplicabilityoftheindependenceprincipleand
fraudexceptionruleinlettersofcredit.Thus,adiscussionofthenatureanduseoflettersof
credit,alsoreferredtosimplyascredits,wouldprovideabetterperspectiveofthecase.
Theletterofcreditevolvedasamercantilespecialty,andtheonlywaytounderstandallits
facetsistorecognizethatitisanentityuntoitself.Therelationshipbetweenthebeneficiaryand
theissuerofaletterofcreditisnotstrictlycontractual,becausebothprivityandameetingofthe
mindsarelacking,yetstrictcompliancewithitstermsisanenforceableright.Norisitathird
partybeneficiarycontract,becausetheissuermusthonordraftsdrawnagainstaletterregardless
ofproblemssubsequentlyarisingintheunderlyingcontract.Sincethebankscustomercannot
drawontheletter,itdoesnotfunctionasanassignmentbythecustomertothebeneficiary.Nor,
ifproperlyused,isitacontractofsuretyshiporguarantee,becauseitentailsaprimaryliability
followingadefault.Finally,itisnotinitselfanegotiableinstrument,becauseitisnotpayableto
orderorbearerandisgenerallyconditional,yetthedraftpresentedunderitisoftennegotiable.
[29]

Incommercialtransactions,aletterofcreditisafinancialdevicedevelopedbymerchantsas
aconvenientandrelativelysafemodeofdealingwithsalesofgoodstosatisfytheseemingly
irreconcilableinterestsofaseller,whorefusestopartwithhisgoodsbeforeheispaid,anda
[30]
buyer, who wants to have control of the goods before paying. The use of credits in
commercialtransactionsservestoreducetheriskofnonpaymentofthepurchasepriceunderthe
contractforthesaleofgoods.However,creditsarealsousedinnonsalesettingswherethey
serve to reduce the risk of nonperformance. Generally, credits in the nonsale settings have
[31]
cometobeknownasstandbycredits.
There are three significant differences between commercial and standby credits. First,
commercialcreditsinvolvethepaymentofmoneyunderacontractofsale.Suchcreditsbecome
payableuponthepresentationbythesellerbeneficiaryofdocumentsthatshowhehastaken
affirmativestepstocomplywiththesalesagreement.Inthestandbytype,thecreditispayable
uponcertificationofaparty'snonperformanceoftheagreement.Thedocumentsthataccompany
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
[32]
beneficiaryofthestandbycreditmustcertifythathisobligorhasnotperformedthecontract.
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
[33]
responsibility for payment of debt therefor to the addressee. A letter of credit, however,
changesitsnatureasdifferenttransactionsoccurandifcarriedthroughtocompletionendsupas
abindingcontractbetweentheissuingandhonoringbankswithoutanyregardorrelationtothe
[34]
underlyingcontractordisputesbetweenthepartiesthereto.
Sincelettersofcredithavegainedgeneralacceptabilityininternationaltradetransactions,
theICChaspublishedfromtimetotimeupdatesontheUniformCustomsandPractice(UCP)for
Documentary Credits to standardize practices in the letter of credit area. The vast majority of
[35]
letters of credit incorporate the UCP. First published in 1933, the UCP for Documentary
[36]
Creditshasundergoneseveralrevisions,thelatestofwhichwasin1993.
[37]
InBankofthePhilippineIslandsv.DeRenyFabricIndustries,Inc., thisCourtruledthat
theobservanceoftheUCPisjustifiedbyArticle2oftheCodeofCommercewhichprovidesthat
intheabsenceofanyparticularprovisionintheCodeofCommerce,commercialtransactions
shall be governed by usages and customs generally observed. More recently, in Bank of
[38]
America, NT & SA v. Court of Appeals, this Court ruled that there being no specific
provisions which govern the legal complexities arising from transactions involving letters of
credit,notonlybetweenoramongbanksthemselvesbutalsobetweenbanksandtheselleror
thebuyer,asthecasemaybe,theapplicabilityoftheUCPisundeniable.
Article3oftheUCPprovidesthatcredits,bytheirnature,areseparatetransactionsfromthe
salesorothercontract(s)onwhichtheymaybebasedandbanksareinnowayconcernedwith
orboundbysuchcontract(s),evenifanyreferencewhatsoevertosuchcontract(s)isincludedin
thecredit.Consequently,theundertakingofabanktopay,acceptandpaydraft(s)ornegotiate
and/or fulfill any other obligation under the credit is not subject to claims or defenses by the
applicantresultingfromhisrelationshipswiththeissuingbankorthebeneficiary.Abeneficiary
can in no case avail himself of the contractual relationships existing between the banks or
betweentheapplicantandtheissuingbank.
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 socalled independence
principleassuresthesellerorthebeneficiaryofpromptpaymentindependentofanybreachof
themaincontractandprecludestheissuingbankfromdeterminingwhetherthemaincontractis
actuallyaccomplishedornot.Underthisprinciple,banksassumenoliabilityorresponsibilityfor
theform,sufficiency,accuracy,genuineness,falsificationorlegaleffectofanydocuments,orfor
thegeneraland/orparticularconditionsstipulatedinthedocumentsorsuperimposedthereon,
nor do they assume any liability or responsibility for the description, quantity, weight, quality,
condition,packing,delivery,valueorexistenceofthegoodsrepresentedbyanydocuments,or
forthegoodfaithoractsand/oromissions,solvency,performanceorstandingoftheconsignor,
[39]
thecarriers,ortheinsurersofthegoods,oranyotherpersonwhomsoever.
Theindependentnatureoftheletterofcreditmaybe:(a)independenceintotowherethe
credit is independent from the justification aspect and is a separate obligation from the
underlyingagreementlikeforinstanceatypicalstandbyor(b)independencemaybeonlyasto
the justification aspect like in a commercial letter of credit or repayment standby, which is
identicalwiththesameobligationsundertheunderlyingagreement.Inbothcasesthepayment
may be enjoined if in the light of the purpose of the credit the payment of the credit would
[40]
constitutefraudulentabuseofthecredit.
Canthebeneficiaryinvoketheindependenceprinciple?
Petitioner insists that the independence principle does not apply to the instant case and
assumingitisso,itisadefenseavailableonlytorespondentbanks.LHC,ontheotherhand,
contends that it would be contrary to common sense to deny the benefit of an independent
contracttotheverypartyforwhomthebenefitisintended.Asbeneficiaryoftheletterofcredit,
LHCassertsitisentitledtoinvoketheprinciple.
Asdiscussedabove,inaletterofcredittransaction,suchasinthiscase,wherethecreditis
stipulated as irrevocable, there is a definite undertaking by the issuing bank to pay the
beneficiaryprovidedthatthestipulateddocumentsarepresentedandtheconditionsofthecredit
[41]
arecompliedwith. Precisely,theindependenceprincipleliberatestheissuingbankfromthe
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
underlyingtransaction.
Given the nature of letters of credit, petitioners argumentthat it is only the issuing bank
thatmayinvoketheindependenceprincipleonlettersofcreditdoesnotimpressthisCourt.To
say that the independence principle may only be invoked by the issuing banks would render
nugatorythepurposeforwhichthelettersofcreditareusedincommercialtransactions.Asitis,
theindependencedoctrineworkstothebenefitofboththeissuingbankandthebeneficiary.
Lettersofcreditareemployedbythepartiesdesiringtoenterintocommercialtransactions,
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
obtaineditmayconfidentlypresenttheletterofcredittothebeneficiaryasasecuritytoconvince
thebeneficiarytoenterintothebusinesstransaction.Ontheotherhand,theotherpartytothe
business transaction, i.e., the beneficiary of the letter of credit, can be rest assured of being
empoweredtocallontheletterofcreditasasecurityincasethecommercialtransactiondoes
notpushthrough,ortheapplicantfailstoperformhispartofthetransaction.Itisforthisreason
that the party who is entitled to the proceeds of the letter of credit is appropriately called
beneficiary.
Petitionersargumentthatanydisputemustfirstberesolvedbytheparties,whetherthrough
negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit in
essencewouldconverttheletterofcreditintoamereguarantee.Jurisprudencehaslaiddowna
clear distinction between a letter of credit and a guarantee in that the settlement of a dispute
betweenthepartiesisnotaprerequisiteforthereleaseoffundsunderaletterofcredit.Inother
words,theargumentisincompatiblewiththeverynatureoftheletterofcredit.Ifaletterofcredit
isdrawableonlyaftersettlementofthedisputeonthecontractenteredintobytheapplicantand
thebeneficiary,therewouldbenopracticalandbeneficialuseforlettersofcreditincommercial
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
[42]
performance question before payment to the beneficiary.

Whileitisthebankwhichisboundtohonorthecredit,itisthebeneficiarywhohastheright
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
partiesbypetitioneritself.
Respondentbankshadsquarelyraisedtheindependenceprincipletojustifytheirreleases
oftheamountsdueundertheSecurities.Owingtothenatureandpurposeofthestandbyletters
ofcredit,thisCourtrulesthattherespondentbankswereleftwithlittleornoalternativebutto
honorthecreditandbothoftheminfactsubmittedthatitwasministerialforthemtohonorthe
[43]
callforpayment.
Furthermore,LHChasarightrootedintheContracttocallontheSecurities.Therelevant
provisionsoftheContractread,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
[44]
form and substance acceptable to the Employer and may be provided on an annually renewable basis.

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
[45]
damages from any monies due, or to become due to the Contractor and/or by drawing on the Security.

A contract once perfected, binds the parties not only to the fulfillment of what has been
expresslystipulatedbutalsotoalltheconsequenceswhichaccordingtotheirnature,maybein
[46]
keepingwithgoodfaith,usage,andlaw. AcarefulperusaloftheTurnkeyContractreveals
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
exclusiveremedyonthepartofLHC,iscertainlyanalternativerecourseavailabletoituponthe
happeningofthecontingencyforwhichtheSecuritieshavebeenproffered.Thus,evenwithout
theuseoftheindependenceprinciple,theTurnkeyContractitselfbestowsuponLHCtheright
tocallontheSecuritiesintheeventofdefault.
Next, petitioner invokes the fraud exception principle. It avers that LHCs call on the
SecuritiesiswrongfulbecauseitfraudulentlymisrepresentedtoANZBankandSBCthatthereis
alreadyabreachintheTurnkeyContractknowingfullywellthatthisisyettobedeterminedby
the arbitral tribunals. It asserts that the fraud exception exists when the beneficiary, for the
purposeofdrawingonthecredit,fraudulentlypresentstotheconfirmingbank,documentsthat
contain,expresslyorbyimplication,materialrepresentationsoffactthattohisknowledgeare
untrue.Insuchasituation,petitionerinsists,injunctionisrecognizedasaremedyavailabletoit.
CitingDolanstreatiseonlettersofcredit,petitionerarguesthattheindependenceprinciple
isnotwithoutlimitsanditisimportanttofashionthoselimitsinlightoftheprinciplespurpose,
which is to serve the commercial function of the credit. If it does not serve those functions,
applicationoftheprincipleisnotwarranted,andthecommonlawprinciplesofcontractshould
apply.
 ItisworthyofnotethattheproprietyofLHCscallontheSecuritiesislargelyintertwinedwith
thefactofdefaultwhichistheselfsameissuependingresolutionbeforethearbitraltribunals.
TobeabletodeclarethecallontheSecuritieswrongfulorfraudulent,itisimperativetoresolve,
amongothers,whetherpetitionerwasinfactguiltyofdelayintheperformanceofitsobligation.
Unfortunatelyforpetitioner,thisCourtisnotcalledupontoruleupontheissueofdefaultsuch
issuehavingbeensubmittedbythepartiestothejurisdictionofthearbitraltribunalspursuantto
[47]
thetermsembodiedintheiragreement.
Wouldinjunctionthenbetheproperremedytorestraintheallegedwrongfuldrawsonthe
Securities?
Most writers agree that fraud is an exception to the independence principle. Professor
Dolanopinesthattheuntruthfulnessofacertificateaccompanyingademandforpaymentunder
[48]
astandbycreditmayqualifyasfraudsufficienttosupportaninjunctionagainstpayment. The
remedyforfraudulentabuseisaninjunction.However,injunctionshouldnotbegrantedunless:
(a) there is clear proof of fraud (b) the fraud constitutes fraudulent abuse of the independent
purposeoftheletterofcreditandnotonlyfraudunderthemainagreementand(c)irreparable
injury might follow if injunction is not granted or the recovery of damages would be seriously
[49]
damaged.
Initscomplaintforinjunctionbeforethetrialcourt,petitionerallegedthatitisentitledtoa
total extension of two hundred fiftythree (253) days which would move the target completion
date.ItarguedthatifitsclaimsforextensionwouldbefoundmeritoriousbytheICC,thenLHC
[50]
wouldnotbeentitledtoanyliquidateddamages.
Generally,injunctionisapreservativeremedyfortheprotectionofonessubstantiverightor
interestitisnotacauseofactioninitselfbutmerelyaprovisionalremedy,anadjuncttoamain
suit.Theissuanceofthewritofpreliminaryinjunctionasanancillaryorpreventiveremedyto
securetherightsofapartyinapendingcaseisentirelywithinthediscretionofthecourttaking
cognizanceofthecase,theonlylimitationbeingthatthisdiscretionshouldbeexercisedbased
[51]
uponthegroundsandinthemannerprovidedbylaw.
Beforeawritofpreliminaryinjunctionmaybeissued,theremustbeaclearshowingbythe
complaintthatthereexistsarighttobeprotectedandthattheactsagainstwhichthewritistobe
[52]
directedareviolativeofthesaidright. Itmustbeshownthattheinvasionoftherightsoughtto
beprotectedismaterialandsubstantial,thattherightofcomplainantisclearandunmistakable
[53]
andthatthereisanurgentandparamountnecessityforthewrittopreventseriousdamage.
Moreover,aninjunctiveremedymayonlyberesortedtowhenthereisapressingnecessityto
[54]
avoidinjuriousconsequenceswhichcannotberemediedunderanystandardcompensation.
In the instant case, petitioner failed to show that it has a clear and unmistakable right to
restrainLHCscallontheSecuritieswhichwouldjustifytheissuanceofpreliminaryinjunction.
Bypetitionersownadmission,therightofLHCtocallontheSecuritieswascontractuallyrooted
[55]
andsubjecttotheexpressstipulationsintheTurnkeyContract. Indeed,theTurnkeyContract
isplainandunequivocalinthatitconferreduponLHCtherighttodrawupontheSecuritiesin
caseofdefault,asprovidedinClause4.2.5,inrelationtoClause8.7.2,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
[56]
expiration in accordance with Clause 4.2.2.

8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such
[57]
damages from any monies due, or to become due, to the Contractor and/or by drawing on the Security.

The pendency of the arbitration proceedings would not perse make LHCs draws on the
SecuritieswrongfulorfraudulentfortherewasnothingintheContractwhichwouldindicatethat
thepartiesintendedthatalldisputesregardingdelayshouldfirstbesettledthrougharbitration
beforeLHCwouldbeallowedtocallupontheSecurities.Itisthereforeprematureandabsurdto
concludethatthedrawsontheSecuritieswereoutrightfraudulentgiventhefactthattheICCand
CIAChavenotruledwithfinalityontheexistenceofdefault.
Nowhereinitscomplaintbeforethetrialcourtorinitspleadingsfiledbeforetheappellate
court, did petitioner invoke the fraud exception rule as a ground to justify the issuance of an
[58]
injunction. WhatpetitionerdidassertbeforethecourtsbelowwasthefactthatLHCsdraws
ontheSecuritieswouldbeprematureandwithoutbasisinviewofthependingdisputesbetween
them.Petitionershouldnotbeallowedinthisinstancetobringintoplaythefraudexceptionrule
tosustainitsclaimfortheissuanceofaninjunctiverelief.Matters,theoriesorargumentsnot
broughtoutintheproceedingsbelowwillordinarilynotbeconsideredbyareviewingcourtas
[59]
theycannotberaisedforthefirsttimeonappeal. Thelowercourtscouldthusnotbefaulted
for not applying the fraud exception rule not only because the existence of fraud was
fundamentallyinterwovenwiththeissueofdefaultstillpendingbeforethearbitraltribunals,but
moreso,becausepetitionerneverraiseditasanissueinitspleadingsfiledinthecourtsbelow.
Atanyrate,petitionerutterlyfailedtoshowthatithadaclearandunmistakablerighttoprevent
LHCscallupontheSecurities.
Of course, prudence should have impelled LHC to await resolution of the pending issues
beforethearbitraltribunalspriortotakingactiontoenforcetheSecurities.But,asearlierstated,
the Turnkey Contract did not require LHC to do so and, therefore, it was merely enforcing its
rightsinaccordancewiththetenorthereof.Obligationsarisingfromcontractshavetheforceof
[60]
law between the contracting parties and should be complied with in good faith. More
importantly,pursuanttotheprincipleofautonomyofcontractsembodiedinArticle1306ofthe
[61]
CivilCode, petitionercouldhaveincorporatedinitsContractwithLHC,aprovisothatonly
the final determination by the arbitral tribunals that default had occurred would justify the
enforcementoftheSecurities.However,thefactispetitionerdidnotdosohence,itwouldhave
tolivewithitsinaction.
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
principlethebankswereundernoobligationtodeterminetheveracityofLHCscertificationthat
defaulthasoccurred.NeitherweretheyboundbypetitionersdeclarationthatLHCscallthereon
waswrongful.Torepeat,respondentbanksundertakingwassimplytopayoncetherequired
documentsarepresentedbythebeneficiary.
Atanyrate,shouldpetitionerfinallyproveinthependingarbitrationproceedingsthatLHCs
drawsupontheSecuritieswerewrongfulduetothenonexistenceofthefactofdefault,itsright
to seek indemnification for damages it suffered would not normally be foreclosed pursuant to
generalprinciplesoflaw.
[62]
Moreover, in a Manifestation, dated 30 March 2001, LHC informed this Court that the
subjectlettersofcredithadbeenfullydrawn.Thisfactalonewouldhavebeensufficientreason
todismisstheinstantpetition.
Settledistherulethatinjunctionwouldnotliewheretheactssoughttobeenjoinedhave
[63]
alreadybecomefaitaccomplioranaccomplishedorconsummatedact. InTiczonv.Video
[64]
PostManila,Inc. thisCourtruledthatwheretheperiodwithinwhichtheformeremployees
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
upholdingtheproprietyofthewritwouldbeentirelyuselessastherewouldbenoactualcaseor
controversybetweenthepartiesinsofarasthepreliminaryinjunctionisconcerned.
Intheinstantcase,theconsummationoftheactsoughttoberestrainedhadrenderedthe
instantpetitionmootforanydeclarationbythisCourtastoproprietyorimproprietyofthenon
[65]
issuanceofinjunctivereliefcouldhavenopracticaleffectontheexistingcontroversy. The
other issues raised by petitioner particularly with respect to its right to recover the amounts
wrongfullydrawnontheSecurities,accordingtoit,couldproperlybethreshedoutinaseparate
proceeding.
Onefinalpoint.LHChaschargedpetitionerofforumshopping.Itraisedthechargeontwo
[66]
occasions. First, in its CounterManifestation dated 29 June 2004 LHC alleges that
petitionerpresentedbeforethisCourtthesameclaimformoneywhichithasfiledintwoother
proceedings,towit:ICCCaseNo.11264/TE/MWandCivilCaseNo.04332beforetheRTCof
Makati.LHCarguesthatpetitionersactsconstitutesforumshoppingwhichshouldbepunished
bythedismissaloftheclaiminbothforums.Second,initsCommenttoPetitionersMotionfor
LeavetoFileAddendumtoPetitionersMemorandumdated8October2004,LHCallegesthat
by maintaining the present appeal and at the same time pursuing Civil Case No. 04332
wherein 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,petitionerhasapparentlyoptednottorespondtothecharge.
Forumshoppingisaveryseriouscharge.Itexistswhenapartyrepetitivelyavailsofseveral
judicialremediesindifferentcourts,simultaneouslyorsuccessively,allsubstantiallyfoundedon
the same transactions and the same essential facts and circumstances, and all raising
substantiallythesameissueseitherpendingin,oralreadyresolvedadversely,bysomeother
[67]
court. Itmayalsoconsistintheactofapartyagainstwhomanadversejudgmenthasbeen
renderedinoneforum,ofseekinganotherandpossiblyfavorableopinioninanotherforumother
than by appeal or special civil action of certiorari, or the institution of two or more actions or
proceedingsgroundedonthesamecauseonthesuppositionthatoneortheothercourtmight
[68]
lookwithfavorupontheotherparty. Todeterminewhetherapartyviolatedtheruleagainst
forumshopping, the test applied is whether the elements of litis pendentia are present or
[69]
whetherafinaljudgmentinonecasewillamounttoresjudicatainanother. Forumshopping
constitutes improper conduct and may be punished with summary dismissal of the multiple
[70]
petitionsanddirectcontemptofcourt.
 Considering the seriousness of the charge of forumshopping and the severity of the
sanctionsforitsviolation,theCourtwillrefrainfrommakinganydefinitiverulingonthisissue
untilafterpetitionerhasbeengivenampleopportunitytorespondtothecharge.
WHEREFORE,theinstantpetitionisDENIED,withcostsagainstpetitioner.
Petitionerisherebyrequiredtoanswerthechargeofforumshoppingwithinfifteen(15)days
fromnotice.
SOORDERED.
Puno,(Chairman),AustriaMartinez,Callejo,Sr.,andChicoNazario,JJ.,concur.

[1]
Penned by Justice Candido V. Rivera, concurred in by Justices Conchita CarpioMorales and Rebecca de Guia
Salvador.
[2]
Rollo,pp.5261.
[3]
Id.at62252.
[4]
Id.at7576.
[5]
Clause1.1,VolumeIIoftheTurnkeyContract,Rollo,p.81.
[6]
20.3DisputeResolution.
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,mediationandseekingtheassistanceoftechnical,accountingorotherexperts.Attherequest
of any party, the chief executives of the Employer and the Contractor shall meet in a goodfaith 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
accordancewithClause20.4.(Id.at179)
[7]
AnnexC,Rollo,pp.254256.
[8]
AnnexD,Id.at257259.
[9]
Clause4.2.1,VolumeIIoftheTurnkeyContract,Id.at94.
[10]
Id.at261265.
[11]
Id.at359382.
[12]
TurnkeyContract,Clause4.2.5,Rollo,p.94,inrelationtoClause8.7.1.,Rollo,p.132.
[13]
AnnexH,Rollo,pp.287289AnnexH1,Rollo,pp.320322.
[14]
Clause8.2.TimeforCompletion.
The Contractor shall complete all the Works, including the Tests on Completion, in accordance with the
ProgramonorbeforetheTargetCompletionDate.(Rollo,p.125)
[15]
Vol.1,Rollo,pp.355357.
[16]
8.7.1. If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the Employer by way of
liquidateddamages(LiquidatedDamagesforDelay)theamountofUS$75,000foreachandeverydayor
partofadaythatshallelapsebetweentheTargetCompletionDateandtheCompletionDate,providedthat
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
followingdaywithoutneedofdemandfromtheEmployer.
[17]
AnnexL,Rollo,pp.383402.
[18]
AnnexN,Id.at406409.
[19]
AnnexO,Id.at412423.
[20]
DocketedasCAG.R.SPNo.61901.
[21]
Rollo,pp.2526.
[22]
Vol.IIId.at278.
[23]
Id.at7992.
[24]
Id.at9598
[25]
Id.at109113.
[26]
Id.at666671.
[27]
Id.at598607.
[28]
Id.at619630.
[29]
Joseph, Letters of Credit: The Developing Concepts and Financing Functions, 94 BANKING LAW JOURNAL
850851[1977]citedinM.KURKELA,LETTERS OF CREDIT UNDER INTERNATIONAL TRADE LAW, 321
(1985).
[30]
Bank of America v. Court of Appeals, G.R. No. 105395, 10 December 1993, 228 SCRA 357 citing William S.
Shaterian, EXPORTIMPORT BANKING: THE INSTRUMENTS AND OPERATIONS UTILIZED BY
AMERICANEXPORTERSANDIMPORTERSANDTHEIRBANKSINFINANCINGFOREIGNTRADE, 284
374(1947).
[31]
E&HPartnersv.BroadwayNat'lBank,39F.Supp.2d275,(UnitedStatesCircuitCourt,S.D.NewYork)No.96
Civ.7098(RLC),19October1998<http://www.westlaw.com>.
[32]
J.DOLAN,THELAWOFLETTERSOFCREDIT,REVISEDEd.(2000).
[33]
24AWORDSANDPHRASES590,PermanentEdition.
[34]
Ibid.
[35]
JACKSON&DAVEY,INTERNATIONALECONOMICRELATIONS,53(2nded.).
[36]
ICCPublicationNo.500.
[37]
146Phil.269(1970).
[38]
G.R.No.105395,10December1993,228SCRA357.
[39]
Article15,UCP.
[40]
KURKELA,LETTERSOFCREDITUNDERINTERNATIONALTRADELAW,286287(1985).
[41]
Art.10,UCP.
[42]
Supranote32at127.
[43]
Rollo,pp.604and624.
[44]
UnderscoringsuppliedId.at94.
[45]
UnderscoringsuppliedId.at132.
[46]
Art.1315,CivilCode.
[47]
Clause20.4.1,TurnkeyContract,Rollo,p.179.
[48]
Supranote32at263.
[49]
M.KURKELA,LETTERSOFCREDITUNDERINTERNATIONALTRADELAW,309(1985).
[50]
Rollo,p.391.
[51]
BatangasLagunaTayabasBusCompany,Inc.v.Bitanga,415Phil.43.
[52]
Shinv.CourtofAppeals,G.R.No.113627,6February2001,351SCRA257.
[53]
Zabat v. Court of Appeals, G.R. No. 122089, 23 August 2000, 338 SCRA 551 Philippine Economic Zone
Authorityv.Vianzon,G.R.No.131020,20July2000,336SCRA309Valenciav.CourtofAppeals,G.R.No.
119118, 19 February 2001, 352 SCRA 72 Crystal v. Cebu International School, G.R. No. 135433, 4 April
2001,356SCRA296OngChingKianChuanv.CourtofAppeals,415Phil.365(2001).
[54]
PhilippineNationalBankv.RitrattoGroup,Inc.,414Phil.494(2001).
[55]
Rollo,p.31.
[56]
UnderscoringsuppliedId.at9495.
[57]
Id.at132.
[58]
VideAnnexL,Rollo.pp.392399PetitionforCertiorari,CARollo,pp.743.
[59]
Salafranca v. Philamlife Village Homeowners Association, Inc., 360 Phil. 652 Ruby Industrial Corporation v.
CourtofAppeals,348Phil.480VictoriasMillingCo.,Inc.v.CourtofAppeals,389Phil.184.
[60]
Article1159,CivilCode.
[61]
Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may
deemconvenient,providedtheyarenotcontrarytolaw,morals,goodcustoms,publicorder,orpublicpolicy.
[62]
Rollo,p.493.
[63]
AznarBrothersRealtyCompanyv.CourtofAppeals,G.R.No.128102,7March2000,327SCRA359Soriano
v.CourtofAppeals,416Phil.226(2001)RodilEnterprisesv.CourtofAppeals,G.R.No.G.R.No.129609,
29November2001,371SCRA79UnionbankofthePhilippinesv.CourtofAppeals,370Phil.837(1999).
[64]
389Phil.20(2000).
[65]
BLACKSLAWDICTIONARY,p.1008,citingLeonhartv.McCormick,D.C.Pa.,395F.Supp.1073.
[66]
Vol.II,Rollo,pp.666669.
[67]
Tantoy,Sr.v.CourtofAppeals,G.R.No.141427,April20,2001,357SCRA329.
[68]
BangkoSilanganDevelopmentBankv.CourtofAppeals,412Phil.755(2001).
[69]
Tirona v. Alejo, G.R. No. 129313, October 10, 2001, 367 SCRA 17 Manalo v. Court of Appeals, G.R. No.
141297,October8,2001,366SCRA752.
[70]
Tantoy, Sr. v. Court of Appeals, supra note 67. Caviles v. Seventeenth Division, Court of Appeals, G.R. No.
126857,September18,2002,389SCRA306.