Title
National Marketing Corp. vs. Atlas Trading Development Corp.
Case
G.R. No. L-21979
Decision Date
Sep 29, 1967
NATMACO sued Atlas and Alto for non-delivery of steel sheets; court ruled no liability for broker or surety due to letter of credit discrepancy and waiver of claims.
liability
discrepancy
contract

Case Summary (G.R. No. L-21979)

Factual Background

In its complaint dated June 14, 1950, PRATRA alleged that on July 21, 1948, Atlas offered to sell PRATRA eight thousand metric tons of galvanized sheets at U.S. $247 per ton of 1,000 kilos, CIF Manila, with shipment beginning August 1948. PRATRA allegedly accepted the offer on July 24, 1948, but only on the condition that Atlas would furnish a performance bond in the amount of P100,000.00 in favor of PRATRA.

PRATRA further alleged that on August 5, 1948, the parties executed a contract of purchase and sale under which Atlas undertook to sell the same quantity at the same price (U.S. $247 per ton, CIF Manila). Under the same purchase and sale contract, Atlas allegedly obligated itself to furnish a performance bond of P100,000.00 to guarantee faithful compliance, with Alto acting as surety. PRATRA also alleged that in compliance with the contract, PRATRA opened a letter of credit with the Philippine National Bank on August 26, 1948, for U.S. $1,976,000.00, in favor of West India Commercial Corp. of New York, U.S.A.

PRATRA alleged that neither Atlas nor its alleged principal, West India Commercial Corp., delivered the 8,000 metric tons of galvanized sheets. The complaint relied on a contractual provision entitling the buyer to liquidated damages of twenty percent of the total contractual value (U.S. $395,200.00, equivalent to P790,400.00), and sought to recover that amount from Atlas. It additionally prayed that Alto be ordered to pay P100,000.00, the bond amount.

Atlas, in its answer filed on July 15, 1950, admitted the making of the offer but claimed that PRATRA acted in a representative capacity. It admitted an order to purchase and stated that the purchase and sale contract mentioned in the complaint was executed, though Atlas asserted a different date—August 21, 1948 rather than August 5, 1948—and further alleged that the terms had been modified or supplemented by an agreement dated August 20, 1948. Atlas admitted that a letter of credit was opened on August 26, 1948 in favor of West India Commercial Corp., but it contended that it could not be utilized due to alleged serious discrepancies between the letter of credit and the contract. Atlas claimed that no delivery was made because there was no obligation to do so, or, alternatively, that delivery was rendered impossible by the prior rescission of the contract by PRATRA.

Alto denied knowledge sufficient to form a belief as to the complaint’s contents, except that it executed and acknowledged the bond for and on behalf of West India Commercial Corp. to guarantee the latter’s performance, and that this occurred on August 21, 1948 rather than August 5, 1948. Alto maintained that it was acting for West India Commercial Corp. and not for Atlas. It alleged that West India Commercial Corp. was not a party to the suit and that, since the principal had been discharged, the surety’s accessory obligation could not stand.

Trial Court Proceedings

After trial, the lower court rendered a decision on July 29, 1962 dismissing the complaint. As to Atlas, the court held that Atlas was duly authorized to act as agent or broker of West India Commercial Corp. in entering the purchase and sale contract. The lower court also reasoned that even if Atlas could be held to have direct liability, PRATRA had demanded payment of damages from West India Commercial Corp. and not from Atlas, and thereby waived any claim it might have against Atlas.

The dismissal also rested on the lower court’s findings concerning the letter of credit. It found a discrepancy between what was provided in the contract and what was contained in the letter of credit, specifically that the letter of credit allegedly did not provide a sixty (60)-day grace period for delivery. It noted that the discrepancy was corrected only after the first delivery was already “impossible physically” for West India Commercial Corp. to make on time. The court concluded that, for all legal intents and purposes, the purchase and sale contract “had not been operative up to the time it was rescinded” by PRATRA on September 23, 1948, due to the failure to establish a sufficient letter of credit.

As to Alto, the lower court dismissed the case on the premise that judgment could not be rendered against Alto because Alto posted its bond for West India Commercial Corp. and not for Atlas, and because West India Commercial Corp. was not a party in the suit, leaving “nothing for the Alto Surety to answer.”

The Parties’ Contentions on Appeal

In the Supreme Court, the plaintiff-appellant challenged the dismissal, essentially seeking to impose liability for Atlas’s alleged breach of the sales contract and to hold Alto accountable under the performance bond. The Supreme Court decision, however, framed the appeal around the decisive legal question whether liability could arise in the first place given the undisputed non-delivery of the contracted quantity.

Atlas defended the non-delivery by emphasizing the discrepancy between the contract terms and the letter of credit. It argued that shipment could be made during a period from August 1948 to February 1949 with a sixty-day grace for late shipments, meaning that all shipments within sixty days of the schedule would be accepted as good delivery. Atlas contended that the letter of credit, on the other hand, did not provide this sixty-day grace period. It further stressed that the corrected letter of credit was received by West India Commercial Corp. only on September 7, 1948, while the first shipment was supposed to have been made in August 1948; thus, it was impossible for the principal to make delivery on time.

Plaintiff-appellant attempted to avoid the controlling effect of the letter-of-credit principle by arguing that a letter of credit could not contain all particulars and could not embody all agreements among the parties because the terms and conditions of the parties’ agreement were allegedly reflected in separate documents, such as Exhibit C.

Decisive Legal Issues

The Supreme Court identified the decisive question as whether liability could be deemed to have arisen despite the undisputed fact that no delivery of the contracted 8,000 metric tons had been made. If liability could arise, the next inquiry would have been who should be held accountable among Atlas and Alto. Because the Court resolved the liability question negatively, it did not need to pass upon Atlas’s agency or brokerage aspects or other potential accountabilities beyond the non-liability finding tied to the lack of effective contractual operation.

As for Alto, the issue depended entirely on whether the principal’s obligation ever became enforceable and whether any accountability attached due to the failure to deliver under the purported sales contract.

Legal Basis and Reasoning

The Supreme Court held that liability could not attach because of the legal consequences of the discrepancy between the contract of purchase and sale and the letter of credit. It relied on principles articulated in prior jurisprudence, including Sycip v. National Coconut Corp. and Board of Liquidators, G.R. No. L-6618, April 28, 1956, where the Court held that failure to open a letter of credit within the period agreed upon sufficed to prevent a binding juridical relation from being created. The Supreme Court treated that principle as applicable to the present context not in terms of timing alone, but in terms of strict compliance with the conditions for effectivity.

The Court explained that, in the situation before it, the failure was not merely a timing lapse by one party in performing a contractual step. Rather, what was manifest was a material discrepancy between the contract and the letter of credit, and the effectivity of the letter of credit required strict compliance with its conditions “however onerous they may be.” The Court characterized this strict-compliance requirement as “absolutely necessary for the protection of the banking and mercantile community,” and it cited commentary from Zollman on Banks and Banking for the proposition that where legal relations arise from a letter of credit, the letter contains the entire contract of the parties and their obligations should be measured by its provisions; it was also said that failure to strictly observe the terms and conditions of a credit meant the seller had no cause of action against the bank for refusal to honor drafts.

The Supreme Court further supported the strict compliance rule by reference to a New York Supreme Court decision stating that “material variance” between the letter of credit and the sales agreement would excuse non-performance by the seller. Applying these principles, it rejected plaintiff-appellant’s attempt to circumvent strict compliance by arguing that a letter of credit could not contain all particulars or embody all agreements and that the grace period was already contained in separate documents. The Court held that the argument was far from persuasive when weighed against the controlling rule that, for relations arising from a letter of credit, the

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