Case Summary (A.M. No. P-93-822)
Facts of the Case
Bernardo E. Villaluz agreed to sell 2,000 cubic meters of lauan logs to Axel Christiansen at $27 per cubic meter FOB. Christiansen issued purchase order and the Security Pacific National Bank opened an irrevocable letter of credit (LC) for $54,000. The LC was sent to Feati Bank with instructions to forward it to Villaluz. The LC required specific documents for payment, including among others, a certification from Christiansen that the logs were approved prior to shipment. The logs were inspected by customs and forestry officials and loaded aboard the vessel "Zenlin Glory." Christiansen refused to issue the certification demanded by the LC. Accordingly, Feati Bank declined to negotiate or make payment on the LC due to the absence of this certification. The LC expired without payment. Villaluz brought suit for mandamus and specific performance against Christiansen and Feati Bank to compel payment and to obligate them to honor the LC.
Procedural History
The Regional Trial Court (RTC) ruled in favor of Villaluz, holding Christiansen liable for payment and jointly holding Feati Bank responsible for refusal to negotiate the LC despite the Central Bank ruling that the certification requirement was illegal. Feati Bank appealed to the Court of Appeals (CA), which issued an interlocutory order halting execution of judgment against Feati Bank but ultimately affirmed the RTC’s judgment on the merits in 1990, holding Feati Bank liable as guarantor of the issuing bank and Christiansen. Feati Bank then filed a petition for review before the Supreme Court.
Issue
Whether Feati Bank, as a correspondent bank merely instructed to notify the LC to the beneficiary and not explicitly acting as a confirming or negotiating bank, is liable for payment under the letter of credit despite the beneficiary’s failure to comply strictly with the terms of the LC by not presenting all required documents, including Christiansen’s certification.
Legal Principles on Letters of Credit
- Strict Compliance Rule – Payment under a letter of credit is conditioned strictly upon the presentation of documents in strict conformity with its terms. Deviation or omission, even if minor, may justify refusal of payment.
- Independence of the LC – The obligation of the bank issuing or confirming an LC is independent of the underlying sales contract between buyer and seller.
- Types of Banks Involved:
- Notifying Bank: Notifies beneficiary of LC; no obligation to pay.
- Negotiating Bank: May buy drafts drawn under LC; contractual liability arises only after negotiation.
- Confirming Bank: Gives an absolute undertaking to honor drafts if terms are complied with.
Analysis of the Court
- The Supreme Court underscored that Feati Bank was only a notifying bank, as the LC explicitly instructed Feati Bank only to forward the credit to Villaluz. There was no express or implied confirmation in the LC that Feati Bank was to honor drafts or to act as a guarantor.
- The Court distinguished irrevocable credit from confirmed credit, explaining that irrevocability relates to the issuing bank's obligation unilaterally not to revoke the credit, while confirmation refers to the correspondent bank’s additional undertaking to pay.
- Villaluz’s reliance on the $75,000 loan from Feati Bank as evidence of confirmation was rejected. The Court ruled that this loan was a separate transaction and insufficient to establish Feati Bank’s liability as a confirming or negotiating bank.
- The Court held that the prohibition imposed by the Central Bank on the certification requirement in LC came after the LC’s issuance and expiry; thus, it was not applicable. Nonetheless, the failure of Villaluz to strictly comply with the LC terms, notably the absence of Christiansen's certification, was fatal to his claim.
- The Court also rejected the notion that Feati Bank acted as trustee or guarantor for Villaluz, emphasizing the absence of any trust res or collateral fund advanced specifically for Villaluz’s benefit. Consequently, there was no basis to hold Feati Bank liable under principles of trust or estoppel.
- The Court recognized the injustice suffered by Villaluz due to Christiansen's bad faith but emphasized that the law must be applied as it is, preserving the integrity of legal principles governing commercial transactions.
- The Court affirmed the importance of adhering to the Uniform Customs and Practice for Documentary Credits (UCP), incorporated in the LC, which mandates banks to pay only on documents strictly conforming to the LC.
Conclusion and Final Ruling
The Supreme Court granted the petition and set aside the decisions of both the Regional Trial Court and the Court of Appeals. It held that Feati Bank c
...continue readingCase Syllabus (A.M. No. P-93-822)
Facts of the Case
- On June 3, 1971, Bernardo E. Villaluz agreed to sell 2,000 cubic meters of lauan logs to Axel Christiansen at $27.00 per cubic meter on FOB terms.
- Christiansen issued purchase order No. 76171 after inspection of the logs.
- Security Pacific National Bank of Los Angeles issued Irrevocable Letter of Credit No. IC-46268 payable at sight to Villaluz for $54,000, the full purchase price.
- The letter of credit was sent to Feati Bank & Trust Co. with instructions to forward it to Villaluz.
- The letter of credit mandated that drafts be supported by various documents, including a certification from Christiansen stating approval of logs prior to shipment.
- The Uniform Customs and Practice for Documentary Credits (1962 Revision) was incorporated by reference into the letter of credit.
- Logs were inspected and certified as fit for export by Bureau of Customs inspectors and Bureau of Forestry representatives.
- The logs were loaded onto the vessel "Zenlin Glory," chartered by Christiansen, and a mate’s receipt certified the cargo’s good condition.
- Christiansen refused to issue the required certification under the letter of credit despite repeated requests.
- Feati Bank refused to advance payment due to the lack of this certification.
- The letter of credit lapsed on June 30, 1971, extended to July 31, 1971, without receipt of the certification.
- The refusal by Christiansen led Villaluz to seek redress before the Central Bank, which ruled that buyer’s agent certification was illegal after August 16, 1971.
- The logs eventually arrived in Korea and were sold at a higher price by Christiansen to the consignee; further resale occurred thereafter.
- Villaluz filed an action for mandamus and specific performance against Christiansen and Feati Bank, praying for issuance of certification, payment under the letter of credit, and damages.
- Christiansen fled the Philippines during trial, prompting Villaluz to amend the complaint to include Feati Bank as solidarily liable.
- The lower court found Christiansen liable for payment, ruled Feati Bank acted in bad faith by refusing to negotiate the letter of credit despite the Central Bank ruling, and held the bank liable under principles of trust and estoppel.
- Damages, both moral and exemplary, attorney’s fees, and interest were awarded to Villaluz.
- Feati Bank appealed, leading to a series of legal proceedings involving a motion for execution, certiorari, and appellate review.
Issues Presented
- Whether Feati Bank, as a correspondent bank, is liable under the letter of credit despite non-compliance by Villaluz, the beneficiary, with the terms thereof.
- Whether the act of notifying the beneficiary by Feati Bank constitutes confirmation of the letter of credit and makes Feati Bank liable as guarantor of the issuing bank.
- Whether the trial court and Court of Appeals erred in holding Feati Bank solidarily liable with Christiansen.
- The proper interpretation of the roles and liabilities of notifying, negotiating, and confirming banks in a letter of credit transaction.
- The application and effect of the Uniform Customs and Practice for Documentary Credits (UCP) on the letter of credit and the correspondent bank’s duties.
- The validity and legality of the certification requirement for negotiation under the letter of credit.
Ruling of the Court of Appeals and Trial Court
- The courts below declared Feati Bank liable as it acted as the negotiating and confirming bank, assuming the obligations under the letter of credit.
- Feati Bank was held responsible for ref