G.R. No. 100831 - Reliance Commodities, Inc. vs. Daewoo Industrial Co., Ltd.

On January 9, 1980, Reliance Commodities, Inc. (Reliance) and Daewoo Industrial Co., Ltd. (Daewoo) entered into a contract of sale for 2,000 metric tons of foundry pig iron at a price of US$404,000.00.
Under the contract, Daewoo shipped the cargo from Pohang, Republic of Korea on board the vessel M/S Aurelio III under Bill of Lading No. PIP-1 for delivery in Manila.
The shipment was fully paid for; however, upon arrival in Manila, only 1,864.345 metric tons were discharged, resulting in a short shipment of 135.655 metric tons.

On May 2, 1980, the parties entered into another contract for the purchase of 2,000 metric tons, where Daewoo acknowledged the short shipment and undertook to reduce the price for succeeding orders by US$1 to US$2 per metric ton as compensation.
That contract was not consummated and was later superseded by a new contract dated July 31, 1980.
The July 31, 1980 contract (Confirmation of Order Sales Note No. HSB-SN/S001-R) specified the sale of 2,000 metric tons of foundry pig iron at US$190.30 per metric ton, with payment to be made by an irrevocable at sight letter of credit (L/C) in favor of Daewoo.

On August 1, 1980, Reliance, through its representative Mr. Samuel Chuason, applied for an L/C with the China Banking Corporation for US$380,600.00 to support the July 31 contract.
The application was forwarded to the Iron and Steel Authority (ISA) for approval but was denied.
ISA required Reliance to submit purchase orders from end-users to support the application; while Reliance claimed to have raised purchase orders for 1,900 metric tons, exhibit evidence showed purchase orders for only 900 metric tons stamped “Received” by the ISA.
Consequently, Daewoo rejected Reliance’s L/C proposal on the ground that the covered quantity did not meet the contracted 2,000 metric tons, and Reliance withdrew its L/C application on August 14, 1980.

On September 3, 1980, Reliance, through counsel, requested payment of P226,370.48 as compensation for the short delivery under the January 9 contract.
After Reliance’s request was not heeded, it filed an action for damages against Daewoo, while Daewoo counterclaimed, alleging breach of contract by Reliance for failing to open the L/C as required under the July 31, 1980 contract.
The trial court ruled that:

Daewoo was still liable for the short shipment and had to pay the corresponding value plus interest and attorney’s fees.
Reliance was liable for breach of contract due to non-opening of the L/C, subjecting it to actual damages of P331,920.97 with legal interest plus attorney’s fees.

The Court of Appeals affirmed the portion regarding Reliance’s failure to open the L/C, emphasizing that the opening of the L/C was a standard mode of payment rather than a suspensive condition and noting that Reliance had already exhausted its foreign exchange allocation.
Reliance elevated the issue through a Petition for Review, contesting its liability on the grounds that:

The failure to open the L/C was attributable, in part, to Daewoo’s non-acceptance of purchase orders for 1,900 metric tons.
The L/C was a condition precedent to the effectiveness of the contract.
Since the condition was unmet, the contract never fully materialized, and reliance should not be liable for damages.

Whether reliance’s failure to open the letter of credit on the agreed-upon date constitutes a breach of contract, thereby making it liable for damages to Daewoo.

Whether the obligation to open the L/C was a condition precedent to the contract’s effectivity or merely a mode of payment.
Whether Reliance’s inability to meet regulatory requirements—specifically, submitting sufficient purchase orders in light of its exhausted foreign exchange allocation—can excuse its non-performance.