G.R. No. 146717 - Transfield Philippines, Inc. vs. Luzon Hydro Corp.

On March 26, 1997, Transfield Philippines, Inc. (Petitioner) and Luzon Hydro Corporation (LHC) entered into a Turnkey Contract for the design, construction, commissioning, testing and completion of a 70-MW hydroelectric power station on the Bakun River, with a target completion date of June 1, 2000. The Contract allowed Petitioner to claim extensions of time (EOT) for variations, force majeure and LHC-caused delays, and required dispute resolution by mediation, conciliation or arbitration (Clause 20.3).
To secure performance, on March 20, 2000, Petitioner obtained two irrevocable standby letters of credit (“Securities”)—No. E001126/8400 from ANZ Bank and No. IBDIDSB-00/4 from Security Bank—each for US$8,988,907.00, payable to LHC in case of default.

Petitioner alleged force majeure (e.g., Typhoon Zeb, protests) and sought EOTs, which LHC denied. LHC then filed for arbitration before CIAC on June 1, 1999. Petitioner filed a second arbitration request before the ICC on November 3, 2000. Both tribunals were asked to decide (a) whether force majeure justified EOT; and (b) whether LHC could terminate the Contract for delay.
Anticipating LHC’s call on the Securities, Petitioner on August 10, 2000 notified both banks of the pending arbitrations and warned them against honoring any draw. LHC nonetheless declared default on June 27, 2000, demanded US$75,000/day in liquidated damages per Clause 8.7.1, and gave notice of its intention to draw on the Securities.

On November 5, 2000, Petitioner sought a TRO and preliminary injunction from the Makati RTC (Civ. Case No. 00-1312) to restrain LHC’s call on the Securities and banks’ payment. A 72-hour TRO issued, extended to November 26, 2000. On November 24, 2000, the RTC denied the preliminary injunction, applying the independence principle of letters of credit and holding that LHC as beneficiary could draw upon the Securities once the certificate of delay was presented.
Petitioner filed a Petition for Certiorari (Rule 65) in the Court of Appeals (CA-G.R. SP No. 61901) and obtained a TRO enjoining LHC and the banks from disposing of the Securities; however, the CA did not resolve the preliminary injunction before the TRO expired on January 27, 2001. LHC then withdrew US$4,950,000 from ANZ Bank. On February 2, 2001, the CA dismissed the petition, upholding the independence principle and holding that erroneous denial of injunction is not a jurisdictional error correctible by certiorari.

Whether the independence principle on letters of credit may be invoked by the beneficiary (LHC) when its call is allegedly wrongful or fraudulent.
Whether LHC had the right to draw on the Securities before final resolution of the underlying disputes.

Whether ANZ Bank and Security Bank were justified in releasing the amounts under the Securities despite notice of wrongful call.
Whether Petitioner would suffer grave and irreparable damage if LHC and the banks were allowed to draw and release the remaining balance before dispute resolution, and if LHC did not return wrongly drawn amounts.