Case Summary (G.R. No. 100831)
Contractual Agreement and Shipment Details
On January 9, 1980, Reliance Commodities, Inc. (Reliance) entered into a contract with Daewoo Industrial Co., Ltd. (Daewoo) for the sale of 2,000 metric tons of foundry pig iron at a price of US$404,000.00. Daewoo shipped the agreed quantity from Pohang, South Korea, but upon receipt in Manila, the actual delivery was short by 135.655 metric tons. In acknowledgment of this shortfall, Daewoo subsequently entered another contract with Reliance on May 2, 1980, including a commitment to reduce the price per ton for future orders; however, this contract was later superseded by a new contract dated July 31, 1980.
July 31, 1980 Contract and Letter of Credit
The July 31, 1980 contract confirmed an order for another 2,000 metric tons of foundry pig iron at a reduced price of US$190.30 per metric ton, to be paid for by an irrevocable letter of credit (L/C). Reliance applied for the L/C on August 1, 1980; however, the application was denied by the China Banking Corporation due to the need for additional purchase orders to substantiate the request. Reliance managed to present orders for only 900 metric tons, leading Daewoo to reject the proposed L/C for failing to meet the contractual requirements.
Reliance's Non-Compliance and Legal Action
Reliance withdrew its L/C application on August 14, 1980, following Daewoo's rejection. Subsequently, Daewoo responded by selling the pig iron to another buyer at a lower price, incurring losses due to Reliance's non-compliance. On September 3, 1980, Reliance demanded payment for the short delivery under the January 9 contract, but Daewoo's refusal led Reliance to file for damages.
Trial Court Ruling
The trial court ruled that while Daewoo was responsible for the short delivery and thus required to pay Reliance, Reliance concurrently was found liable for breach of contract for failing to open the L/C as stipulated in the July 31 agreement. The court ordered Reliance to pay damages to Daewoo.
Court of Appeals Decision
Upon appeal, the Court of Appeals upheld the trial court's findings and conclusions, stating that the L/C was a requisite for payment and the opening of it did not constitute a suspensive condition preventing a contract's existence. The failure to secure the L/C was directly attributable to Reliance's prior exhaustion of foreign exchange allocated to it.
Legal Interpretation of Letter of Credit
The nature of a letter of credit was elaborated upon, illustrating it as a commercial instrument designed to facilitate international trade by securing payment once certain conditions, predominantly documentation, are met. The courts recognized an L/C as a standard mechanism under commercial agreements, reinforcing that the obligations of Reliance to establish the L/C were binding and crucial for executing the contract's intended transactions.
Responsibility and Compliance
The courts concluded that Reliance's inability to open the L/C resulted from its own prior limitations in compliance with foreign exchange regulations, leading to its liability for damages incurred by Daewoo. This liability held firm even considering Reliance's arguments
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Case Background
- On January 9, 1980, Reliance Commodities, Inc. (Reliance) entered into a contract with Daewoo Industrial Co., Ltd. (Daewoo) for the sale of 2,000 metric tons of foundry pig iron at a price of US$404,000.00.
- Daewoo shipped the agreed cargo aboard the M/S Aurelio III, but upon arrival in Manila, only 1,864.345 metric tons were delivered, resulting in a shortfall of 135.655 metric tons.
- On May 2, 1980, a second contract was created for another 2,000 metric tons of foundry pig iron, wherein Daewoo acknowledged the previous short shipment and agreed to reduce the price by US$1 to US$2 per metric ton for future orders.
- This second contract was later superseded by a contract dated July 31, 1980, which confirmed the order for 2,000 metric tons at a price of US$190.30 per metric ton.
Details of the July 31, 1980 Contract
- The contract specified that payment was to be made through an irrevocable at-sight letter of credit in favor of Daewoo.
- An attached sheet outlined various conditions including invoicing based on actual weight, chemical composition specifications, quantity tolerances, and provisions for arbitration in case of disputes.
- The letter of credit application was to be submitted by August 7, 1980.
Application for Letter of Credit
- On August 1, 1980, Reliance filed an application for a letter of credit in favor of Daewoo for US$380,600.00, which was subsequently denied by the Iron and Steel Authority (ISA).
- Reliance could only provide purchase orders for 900 metric tons to support the application, whereas Daewoo contended that Reliance had raised orders for only