Title
Bank of America, NT and SA vs. Court of Appeals
Case
G.R. No. 105395
Decision Date
Dec 10, 1993
Bank of America, acting as an advising bank, paid Inter-Resin under a fraudulent letter of credit. The Supreme Court ruled Bank of America could recover the payment, emphasizing advising banks' limited liability and the independence principle in letter of credit transactions.
letter of credit
fraudulent
refund
A

Case Summary (G.R. No. 178407)

Factual Background and Sequence of Events

An irrevocable letter of credit purportedly issued by Bank of Ayudhya for the account of General Chemicals, Ltd. (Thailand) in the amount of US$2,782,000 was received by Bank of America Manila on 5 March 1981 and advised to Inter‑Resin on 11 March 1981. Inter‑Resin sought confirmation but Bank of America did not confirm; a bank employee advised there was no need because the letter would not have been transmitted if not genuine. Inter‑Resin presented documents for a first partial draw covering US$1,320,600 for shipment of 24,000 bales of polyethylene rope. Bank of America examined the documents, found them conforming to the credit, and issued a cashier’s check for the peso equivalent, which was received by Inter‑Resin’s EVP. When Inter‑Resin sought a second draw, Bank of Ayudhya telexed that the credit was fraudulent and disowned. Bank of America stopped further processing, sought verification through its Bangkok office and the NBI; investigations in Thailand found that the exported vans contained plastic strips, wrappers, rags and waste materials rather than ropes. Criminal charges for estafa against Inter‑Resin officers were later dismissed by the Rizal Provincial Fiscal for lack of prima facie evidence.

Procedural History

Bank of America sued Inter‑Resin to recover P10,219,093.20, the peso equivalent of the payment on the first partial availment. Inter‑Resin counterclaimed for payment corresponding to the second shipment. The trial court ruled for Inter‑Resin, finding among other things that the advising bank had given assurances that induced shipment, that the telex declaring the credit fraudulent was hearsay and unverified, that government officers supervised the loading, and that criminal charges were dismissed. The Court of Appeals affirmed. The Supreme Court granted review and considered, based on the record, whether Bank of America acted as an advising bank or assumed confirming liability, whether Inter‑Resin actually shipped the ropes, and whether Bank of America could recover after the issuing bank disowned the credit.

Legal Issues Framed by the Parties

  • Whether Bank of America warranted the genuineness/authenticity of the letter of credit and thereby acted as a confirming bank rather than merely an advising bank.
  • Whether Inter‑Resin actually shipped the goods specified by the letter of credit (i.e., whether the documents corresponded to genuine shipments of polyethylene ropes).
  • Whether, after dishonor/disavowal of the letter of credit by the issuing bank, Bank of America could recover the amount it paid on the partial availment from Inter‑Resin (including the bank’s claim based on its role as negotiating bank).
    Inter‑Resin countered that Bank of America could not assert belatedly on appeal that it was only an advising bank, that the trial court’s factual finding that ropes were shipped is binding, and that recovery was improper because the issuer, not Inter‑Resin, was the drawee.

Nature, Function and Governing Law of Letters of Credit as Applied

The decision explains the commercial function of an irrevocable letter of credit: to assure the seller that payment will be made upon presentation of stipulated documents, independent of performance under the underlying sales contract (the autonomy principle). The Court recognized the limited domestic statutory guidance (Code of Commerce Articles 567–572) and the accepted reliance on international commercial practice, specifically the U.C.P. (Uniform Customs and Practice for Documentary Credits), which is treated as incorporated insofar as relevant. U.C.P. provisions invoked include Article 10 (definition and undertakings under an irrevocable credit), Article 17 (banks deal with documents and assume no responsibility for the goods or the genuineness/accuracy of documents beyond examination), and Article 8 (advising bank must take reasonable care to check the apparent authenticity of the credit).

Advising Bank versus Confirming Bank: Court’s Analysis

The Court analyzed the bank’s conduct and the documentary record to determine whether Bank of America assumed confirming obligations. Key points relied upon: the letter of advice expressly stated that the enclosure “conveys no engagement by us,” Bank of America requested and received an advising fee (and Inter‑Resin admits payment), the letter of credit itself and the bank’s correspondence evidenced an advising relationship, and the bank did not issue any confirmation. The bank employee’s oral reassurance to Inter‑Resin’s counsel did not amount to novation or an assumption of primary liability. The Court concluded Bank of America acted only as an advising/notifying bank and did not undertake confirming bank obligations. The Court rejected the notion that an advising bank must verify authenticity with the issuing bank prior to advising: under U.C.P. Article 8 the advising bank’s duty is to take reasonable care to check apparent authenticity, not to verify by advanced communications before transmission.

Negotiating Bank Role and Right of Recourse

Although Bank of America was merely an advising bank with respect to the credit, the Court found that when it paid on presentation of conforming documents and the draft it acted in a negotiating capacity by discounting or negotiating Inter‑Resin’s draft and documents. As a negotiating bank, Bank of America became a purchaser/holder of the draft and obtained the ordinary right of recourse against the seller/drawer (Inter‑Resin) in the event of dishonor by the issuing bank, unless the draft was explicitly negotiated without recourse. The Court emphasized the documentary nature of the bank’s dealings and the common international practice that a negotiating bank, absent a “without recourse” agreement, may seek reimbursement from the beneficiary/drawer when the issuing bank disowns the credit. Bank of America’s failure to plead certain Negotiable Instruments Law facets did not extinguish its right to recover from Inter‑Resin under its negotiating bank status; Inter‑Resin admitted receipt of the payment and execution of the draft.

Documentary Principle and Irrelevance of Goods’ Actual Condition as to Bank Liability

The Court reiterated the established rule that banks dealing with letters of credit deal with documents and not with the goods themselves — their obligation is to examine documents for conformity, not to inspect the physical goods describ

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