Title
The Hongkong and Shanghai Banking Corp., Limited vs. National Steel Corp.
Case
G.R. No. 183486
Decision Date
Feb 24, 2016
NSC shipped goods under a UCP 400-governed letter of credit; HSBC wrongly applied URC 322, refusing payment. Court ruled HSBC liable, upholding UCP 400's independence principle and bank diligence standards.

Case Summary (G.R. No. 147009)

Facts and Documentary Presentment

NSC sold steel coils to Klockner under an FOB term and payment by an irrevocable sight letter of credit issued by HSBC naming NSC as beneficiary. The LC expressly stated that it was subject to UCP 400. NSC shipped the goods and CityTrust, acting for NSC, presented to HSBC the LC and required documents on Nov. 29, 1993 and sent a Collection Order indicating, in the form, that the transaction was "subject to Uniform Rules for the Collection of Commercial Paper Publication No. 322 (URC 322)." HSBC treated the instructions as directing collection under URC 322, demanded payment from applicant Klockner, which refused; after attempted collection and repeated correspondence, HSBC returned the documents to CityTrust on Feb. 17, 1994 and considered itself discharged. NSC demanded payment later and filed a collection suit against HSBC when payment could not be collected from HSBC.

Procedural Posture and Contentions

RTC Makati dismissed NSC’s complaint, holding that the parties had intended URC 322 to govern the transaction because CityTrust’s Collection Order so indicated; under URC 322 HSBC, as collecting bank, had no liability when Klockner refused to pay. CityTrust was ordered to pay limited damages to HSBC. The CA reversed, holding UCP 400 governed the letter of credit (LC expressly so provided) and that HSBC, as issuing bank, was obliged to pay upon due presentment; the CA ordered HSBC to pay NSC the LC amount with interest and attorney’s fees. HSBC sought review before the Supreme Court, arguing CityTrust’s Collection Order converted the transaction into a collection governed by URC 322 and that, as presented, HSBC properly acted as a collecting bank under CityTrust’s instruction; NSC and CityTrust contended that HSBC’s obligation was clear under the LC and UCP 400 and could not be altered by the collecting bank’s form.

Issue Presented

Which set of rules governs the parties’ rights and liabilities — UCP 400 (governing documentary credits) or URC 322 (governing collections) — and, under the correct rule, who bears liability for the LC amount presented and not paid?

Legal Framework on Letters of Credit and International Custom

The Court reiterated that letters of credit are regulated by the Code of Commerce and by usages/customs generally observed, with UCP (specifically UCP 400 for the period in question) having been consistently applied in Philippine jurisprudence where applicable. The LC itself, governing provisions of the LC, and the applicable international custom (UCP 400) are primary; in the absence of controlling provisions, Philippine civil law supplies suppletory rules. The decision emphasized the commercial policy underpinning letters of credit: they create a demandable obligation of the issuing bank to pay upon compliance with documentary requirements, separate from the underlying contract between buyer and seller.

Nature of the Transactions and Distinction Between UCP 400 and URC 322

The Court set out the tripartite nature of transactions involving letters of credit (underlying sale; issuance of LC; presentation by beneficiary to issuing bank) and described roles of notifying, negotiating, confirming, and collecting banks. It explained the essential difference: under UCP 400 an issuing bank undertakes a definite undertaking to pay sight credits upon proper document presentation; under URC 322 a collecting bank acts merely as an intermediary to forward documents and collect proceeds and generally incurs no payment obligation beyond collection agency duties. Thus, application of URC 322 would render the presenting bank a mere collector with no obligation to pay the beneficiary under the LC, whereas UCP 400 imposes a direct payment obligation on the issuing bank upon compliance.

Governing Rule for This Transaction: UCP 400 Applies

The Court found that UCP 400 governs the transaction because the LC itself expressly stated that it is subject to UCP 400. Even if that express stipulation were absent, the Court noted prior precedents applying UCP 400 as usage in the Philippines; accordingly HSBC’s obligations were measured by the LC terms and UCP 400. The Court rejected HSBC’s contention that URC 322 applied merely because CityTrust’s Collection Order contained a reference to URC 322: HSBC failed to establish that URC 322 had become a binding custom that could displace express terms of an LC; the Court also noted the lack of expert evidence proving that beneficiaries commonly resort to URC 322 instead of UCP 400 in such circumstances.

HSBC’s Duties, Failure of Diligence, and Liability

The Court emphasized that HSBC, as issuing bank, had independent duties: to examine presented documents with reasonable care; to determine whether due presentment occurred; and to honor its undertaking under the LC upon proper presentment. The Court held CityTrust’s presentation of the LC and accompanying documents constituted due presentment. HSBC, however, treated the transaction as collection under URC 322 and repeatedly demanded payment from the applicant (Klockner) instead of recognizing and honoring its sight payment obligation under the LC. The Court found that HSBC should have noticed the inconsistency between the Collection Order and the LC (which it had issued and which stated UCP 400 applied) and should have inquired of CityTrust/NSC whether NSC sought payment under the LC or merely collection. HSBC’s failure to exercise the highest degree of diligence required of banks in such commercial transactions constituted breach and delay; the Court equated due presentment with an extrajudicial demand, and HSBC’s refusal to pay after due presentment amounted to delay under Arts. 1169–1170 of the Civil Code, rendering HSBC liable for damages equivalent to the LC amount.

Independence Principle and Effect of Klockner’s Refusal

The Court reaffirmed the independence principle in letters of credit: the issuing bank’s obligation to pay upon proper document presentation is independent of disputes or refusals under the underlying sale contract. Klockner’s refusal to pay the collecting bank did not affect HSBC’s separate contractual and independent obligation under the irrevocable LC to pay NSC upon due presentment of compliant documents. Therefore HSBC’s reliance on nonpayment by Klockner did not excuse HSBC’s failure to honor the LC.

CityTrust’s Role and Liability to NSC

CityTrust acted as NSC’s agent to collect payment. The Court found that CityTrust breached its agency obligation to NSC by failing to correct HSBC’s treatment of the transaction as a collection under UR

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