Case Summary (G.R. No. 133442)
Petitioner and Respondent
- Transfield undertook design, construction, commissioning, testing, and completion of the Project.
- LHC contracted Transfield and held two standby letters of credit as performance securities.
- ANZ Bank and SBC issued and confirmed the standby letters of credit in favor of LHC.
Key Dates
- Turnkey Contract executed: March 26, 1997
- Securities issued: March 20, 2000
- Target Completion Date: June 1, 2000
- CIAC Arbitration filed by LHC: June 1, 1999
- ICC Arbitration filed by Transfield: November 3, 2000
- LHC’s declaration of default and demand for liquidated damages: June 27, 2000
- RTC denial of preliminary injunction: November 24, 2000
- Court of Appeals dismissal of certiorari: January 31, 2001
- Supreme Court Decision: November 22, 2004
Applicable Law
- 1987 Philippine Constitution
- Civil Code: autonomy of contracts (Art. 1306), binding force of stipulations (Art. 1159)
- Code of Commerce and Uniform Customs and Practice for Documentary Credits (UCP) by the ICC
- Jurisprudence on letters of credit and the independence principle
Factual Background
Under Clause 4.2.1 of the Turnkey Contract, Transfield furnished two irrevocable, confirmed standby letters of credit for US$8,988,907 each to secure timely completion. Transfield sought extensions of time citing force majeure (typhoon Zeb) and local disturbances; LHC denied them and initiated arbitration at the CIAC. Transfield later sought ICC arbitration on similar issues. Upon declaring Transfield in default on June 27, 2000, LHC assessed liquidated damages at US$75,000 per day (Clause 8.7.1) and notified banks of its intent to draw on the securities. Transfield obtained a TRO and sought a preliminary injunction to restrain LHC and the banks from effecting payment, but both the RTC and the Court of Appeals denied relief. LHC then partially drew US$4,950,000. Transfield’s certiorari petition to the Court of Appeals was dismissed, prompting this Supreme Court appeal.
Issues
- May a beneficiary invoke the independence principle in letters of credit when its draw is alleged wrongful or fraudulent?
- Can LHC draw on the securities before final resolution of arbitration on default?
- Were ANZ Bank and Security Bank justified in honoring LHC’s draw despite notice of Transfield’s opposition?
- Would Transfield suffer irreparable injury absent injunction to restrain further draws and recover misdrawn amounts?
Discussion
Nature and Independence of Letters of Credit
- A letter of credit is a separate obligation of the issuing bank, independent of the underlying contract (UCP Art. 3). The standby variant pays upon beneficiary certification of nonperformance.
Beneficiary’s Right under the Independence Principle
- The independence principle shields the bank from inquiries into the underlying dispute. Beneficiaries, not just banks, may invoke this principle to secure prompt payment. Transfield’s argument limiting it to banks would defeat commercial purpose.
Contractual Basis for LHC’s Draw
- Clause 4.2.1 required standby letters; Clause 8.7.2 expressly permitted LHC, “without prejudice to any other method of recovery,” to draw on the securities for liquidated damages. No contractual provision conditioned the draw on prior arbitration.
Fraud Exception to Independence Principle
- Fraudulent abuse of a letter of credit is an exception warranting injunction if there is clear proof of fraud, it constitutes abuse of the credit’s independent purpose, and irreparable injury is likely. Transfield failed to raise fraud in lower courts and had not established the fact of default outside arbitration.
Injunctive Relief Standards
- Preliminary injunction requires a clear right, violation thereof, and potential for serious, irreparable harm. The contract plainly authorized LHC’s draw; Transfield did not demonstrate a clear, unmistakable right to enjoin payment.
Banks’ Obligations
- Under UCP and the independence principle, banks must honor compliant draws and have no duty
Case Syllabus (G.R. No. 133442)
Parties and Procedural Posture
- Petitioner: Transfield Philippines, Inc., engaged as turnkey contractor for a 70-MW hydro-electric power station project for respondent Luzon Hydro Corporation (LHC).
- Respondents: LHC (employer), Australia and New Zealand Banking Group Limited (ANZ Bank), and Security Bank Corporation (SBC), as issuing/confirming banks of two standby letters of credit securing performance.
- Transfield sought a writ of preliminary injunction from the RTC of Makati (Civil Case No. 00-1312) to restrain LHC’s draw on the securities and enlisted ANZ Bank and SBC as co-defendants.
- The RTC issued a TRO and later denied the preliminary injunction; petitioner elevated the matter via certiorari (Rule 65) to the Court of Appeals (CA G.R. SP No. 61901), which granted a TRO but did not resolve the injunction before it expired and ultimately dismissed the petition.
- Petitioner filed a Petition for Review under Rule 45 before the Supreme Court raising issues on the independence principle of letters of credit, the fraud exception, banks’ obligations, injunctive relief, and potential irreparable injury.
Contractual Background
- On 26 March 1997, Transfield (Contractor) and LHC (Employer) executed a Turnkey Contract for design, construction, commissioning, testing, and completion of the Bakun River hydro-electric project.
- Target completion: 1 June 2000, with entitlement to extensions of time (EOT) for variations, force majeure (e.g., Typhoon Zeb), or LHC-caused delays.
- Dispute resolution under Clause 20.3 mandated good-faith efforts (mediation, conciliation) and, if unresolved, arbitration under Clause 20.4.
- Liquidated damages: US $75,000 per day of delay (Clause 8.7.1), capped at 20% of contract price, recoverable by LHC via deduction or drawing on the securities (Clause 8.7.2).
Standby Letters of Credit (“Securities”)
- Two irrevocable and confirmed standby letters of credit, each for US $8,988,907, dated 20 March 2000:
- No. E001126/8400 issued/confirmed by ANZ Bank
- No. IBDIDSB-00/4 issued/confirmed by SBC
- Purpose: to secure Transfield’s performance obligations under the Turnkey Contract, renewable annually.
Extensions of Time, Force Majeure, and Early Dispute
- Transfield requested multiple EOTs citing Typhoon Zeb, barricades, and demonstrations; LHC denied all requests.
- On 1 June 1999, LHC filed for arbitration before the Construction Industry Arbitration Commission (CIAC).
- On 3 November 2000, Transfield initiated ICC arbitration.
- Common arbitration issues: whether force majeure justified EOT and whether LHC could lawfully terminate the contract and call o