G.R. No. 160732 June 21, 2004 FIRST DIVISION

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner, vs. HON. REYNALDO B. DAWAY, in his capacity as Presiding Judge of the Regional Trial Court of Quezon City, Branch 90 and Maynilad Water Services, Inc., respondents

D E C I S I O N AZCUNA, J.:

On November 17, 2003, the Regional Trial Court (RTC) of Quezon City, Branch 90, made a determination that the Petition for Rehabilitation with Prayer for Suspension of Actions and Proceedings filed by Maynilad Water Services, Inc. (Maynilad) conformed substantially to the provisions of Sec. 2, Rule 4 of the Interim Rules of Procedure on Corporate Rehabilitation (Interim Rules). It forthwith issued a Stay Order

1 which states, in part, that the court was

thereby:

x x x x x x x x x

2. Staying enforcement of all claims, whether for money or otherwise and whether such enforcement is by court action or otherwise, against the petitioner, its guarantors and sureties not solidarily liable with the petitioner;

3. Prohibiting the petitioner from selling, encumbering, transferring, or disposing in any manner any of its properties except in the ordinary course of business;

4. Prohibiting the petitioner from making any payment of its liabilities, outstanding as at the date of the filing of the petition;

x x x x x x x x x

Subsequently, on November 27, 2003, public respondent, acting on two Urgent Ex Parte motions2 filed by

respondent Maynilad, issued the herein questioned Order3 which stated that it thereby:

"1. DECLARES that the act of MWSS in commencing on November 24, 2003 the process for the payment by the banks of US$98 million out of the US$120 million standby letter of credit so the banks have to make good such call/drawing of payment of US$98 million by MWSS not later than November 27, 2003 at 10:00 P. M. or any similar act for that matter, is violative of the above-quoted sub-paragraph 2.) of the dispositive portion of this Court’s Stay Order dated November 17, 2003.

2. ORDERS MWSS through its officers/officials to withdraw under pain of contempt the written certification/notice of draw to Citicorp International Limited dated November 24, 2003 and DECLARES void any payment by the banks to MWSS in the event such written certification/notice of draw is not withdrawn by MWSS and/or MWSS receives payment by virtue of the aforesaid standby letter of credit."

Aggrieved by this Order, petitioner Manila Waterworks & Sewerage System (MWSS) filed this petition for review by way of certiorari under Rule 65 of the Rules of Court questioning the legality of said order as having been issued without or in excess of the lower court’s jurisdiction or that the court a quo acted with grave abuse of discretion amounting to lack or excess of jurisdiction.

4

ANTECEDENTS OF THE CASE

On February 21, 1997, MWSS granted Maynilad under a Concession Agreement a twenty-year period to manage, operate, repair, decommission and refurbish the existing MWSS water delivery and sewerage services in the West Zone Service Area, for which Maynilad undertook to pay the corresponding concession fees on the dates agreed upon in said agreement

5 which, among other things, consisted of payments of petitioner’s mostly foreign loans.

To secure the concessionaire’s performance of its obligations under the Concession Agreement, Maynilad was required under Section 6.9 of said contract to put up a bond, bank guarantee or other security acceptable to MWSS.

In compliance with this requirement, Maynilad arranged on July 14, 2000 for a three-year facility with a number of foreign banks, led by Citicorp International Limited, for the issuance of an Irrevocable Standby Letter of Credit

6 in

the amount of US$120,000,000 in favor of MWSS for the full and prompt performance of Maynilad’s obligations to MWSS as aforestated.

Sometime in September 2000, respondent Maynilad requested MWSS for a mechanism by which it hoped to recover the losses it had allegedly incurred and would be incurring as a result of the depreciation of the Philippine Peso against the US Dollar. Failing to get what it desired, Maynilad issued a Force Majeure Notice on March 8, 2001 and unilaterally suspended the payment of the concession fees. In an effort to salvage the Concession Agreement, the parties entered into a Memorandum of Agreement (MOA)

7 on June 8, 2001 wherein Maynilad was

allowed to recover foreign exchange losses under a formula agreed upon between them. Sometime in August 2001 Maynilad again filed another Force Majeure Notice and, since MWSS could not agree with the terms of said Notice, the matter was referred on August 30, 2001 to the Appeals Panel for arbitration. This resulted in the parties agreeing to resolve the issues through an amendment of the Concession Agreement on October 5, 2001, known as Amendment No. 1,

8 which was based on the terms set down in MWSS Board of Trustees Resolution No. 457-

2001, as amended by MWSS Board of Trustees Resolution No. 487-2001,9 which providedinter alia for a formula

that would allow Maynilad to recover foreign exchange losses it had incurred or would incur under the terms of the Concession Agreement.

As part of this agreement, Maynilad committed, among other things, to:

a) infuse the amount of UD$80.0 million as additional funding support from its stockholders;

b) resume payment of the concession fees; and

c) mutually seek the dismissal of the cases pending before the Court of Appeals and with Minor Dispute Appeals Panel.

However, on November 5, 2002, Maynilad served upon MWSS a Notice of Event of Termination, claiming that MWSS failed to comply with its obligations under the Concession Agreement and Amendment No. 1 regarding the adjustment mechanism that would cover Maynilad’s foreign exchange losses. On December 9, 2002, Maynilad filed a Notice of Early Termination of the concession, which was challenged by MWSS. This matter was eventually brought before the Appeals Panel on January 7, 2003 by MWSS.

10 On November 7, 2003, the Appeals Panel ruled

that there was no Event of Termination as defined under Art. 10.2 (ii) or 10.3 (iii) of the Concession Agreement and that, therefore, Maynilad should pay the concession fees that had fallen due.

The award of the Appeals Panel became final on November 22, 2003. MWSS, thereafter, submitted a written notice

11 on November 24, 2003, to Citicorp International Limited, as agent for the participating banks, that by virtue

of Maynilad’s failure to perform its obligations under the Concession Agreement, it was drawing on the Irrevocable Standby Letter of Credit and thereby demanded payment in the amount of US$98,923,640.15.

Prior to this, however, Maynilad had filed on November 13, 2003, a petition for rehabilitation before the court a quo which resulted in the issuance of the Stay Order of November 17, 2003 and the disputed Order of November 27, 2003.

12

PETITIONER’S CASE

Petitioner hereby raises the following issues:

1. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR AND/OR ACT PATENTLY WITHOUT JURISDICTION OR IN EXCESS OF JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN CONSIDERING THE PERFORMANCE BOND OR ASSETS OF THE ISSUING BANKS AS PART OR PROPERTY OF THE ESTATE OF THE PRIVATE RESPONDENT MAYNILAD SUBJECT TO REHABILITATION.

2. DID THE HONORABLE PRESIDING JUDGE ACT WITH LACK OR EXCESS OF JURISDICTION OR COMMIT A GRAVE ERROR OF LAW IN HOLDING THAT THE PERFORMANCE BOND OBLIGATIONS OF THE BANKS WERE NOT SOLIDARY IN NATURE.

3. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR IN ALLOWING MAYNILAD TO IN EFFECT SEEK A REVIEW OR APPEAL OF THE FINAL AND BINDING DECISION OF THE APPEALS PANEL.

In support of the first issue, petitioner maintains that as a matter of law, the US$120 Million Standby Letter of Credit and Performance Bond are not property of the estate of the debtor Maynilad and, therefore, not subject to the in rem rehabilitation jurisdiction of the trial court.

Petitioner argues that a call made on the Standby Letter of Credit does not involve any asset of Maynilad but only assets of the banks. Furthermore, a call on the Standby Letter of Credit cannot also be considered a "claim" falling under the purview of the stay order as alleged by respondent as it is not directed against the assets of respondent Maynilad.

Petitioner concludes that the public respondent erred in declaring and holding that the commencement of the process for the payment of US$98 million is a violation of the order issued on November 17, 2003.

RESPONDENT MAYNILAD’S CASE

Respondent Maynilad seeks to refute this argument by alleging that:

a) the order objected to was strictly and precisely worded and issued after carefully considering/evaluating the import of the arguments and documents referred to by Maynilad, MWSS and/or creditors Chinatrust Commercial Bank and Suez in relation to admissions, pleadings and/or pertinent records

13 and that public

respondent had the authority to issue the same;

b) public respondent never considered nor held that the Performance bond or assets of the issuing banks are part or property of the estate of respondent Maynilad subject to rehabilitation and which respondent Maynilad has not and has never claimed to be;

14

c) what is relevant is not whether the performance bond or assets of the issuing banks are part of the estate of respondent Maynilad but whether the act of petitioner in commencing the process for the payment by the banks of US$98 million out of the US$120 million performance bond is covered and/or prohibited under sub-paragraphs 2.) and 4.) of the stay order dated November 17, 2003;

d) the jurisdiction of public respondent extends not only to the assets of respondent Maynilad but also over persons and assets of "all those affected by the proceedings x x x upon publication of the notice of commencement;

15" and

e) the obligations under the Standby Letter of Credit are not solidary and are not exempt from the coverage of the stay order.

OUR RULING

We will discuss the first two issues raised by petitioner as these are interrelated and make up the main issue of the petition before us which is, did the rehabilitation court sitting as such, act in excess of its authority or jurisdiction when it enjoined herein petitioner from seeking the payment of the concession fees from the banks that issued the Irrevocable Standby Letter of Credit in its favor and for the account of respondent Maynilad?

The public respondent relied on Sec. 1, Rule 3 of the Interim Rules on Corporate Rehabilitation to support its jurisdiction over the Irrevocable Standby Letter of Credit and the banks that issued it. The section reads in part "that jurisdiction over those affected by the proceedings is considered acquired upon the publication of the notice of commencement of proceedings in a newspaper of general circulation" and goes further to define rehabilitation as an in rem proceeding. This provision is a logical consequence of the in rem nature of the proceedings, where jurisdiction is acquired by publication and where it is necessary that the assets of the debtor come within the court’s jurisdiction to secure the same for the benefit of creditors. The reference to "all those affected by the proceedings" covers creditors or such other persons or entities holding assets belonging to the debtor under rehabilitation which should be reflected in its audited financial statements. The banks do not hold any assets of respondent Maynilad that would be material to the rehabilitation proceedings nor is Maynilad liable to the banks at this point.

Respondent Maynilad’s Financial Statement as of December 31, 2001 and 2002 do not show the Irrevocable Standby Letter of Credit as part of its assets or liabilities, and by respondent Maynilad’s own admission it is not. In issuing the clarificatory order of November 27, 2003, enjoining petitioner from claiming from an asset that did not belong to the debtor and over which it did not acquire jurisdiction, the rehabilitation court acted in excess of its jurisdiction.

Respondent Maynilad insists, however, that it is Sec. 6 (b), Rule 4 of the Interim Rules that supports its claim that the commencement of the process to draw on the Standby Letter of Credit is an enforcement of claim prohibited by and under the Interim Rules and the order of public respondent.

Respondent Maynilad would persuade us that the above provision justifies a leap to the conclusion that such an enforcement is prohibited by said section because it is a "claim against the debtor, its guarantors and sureties not solidarily liable with the debtor" and that there is nothing in the Standby Letter of Credit nor in law nor in the nature of the obligation that would show or require the obligation of the banks to be solidary with the respondent Maynilad.

We disagree.

First, the claim is not one against the debtor but against an entity that respondent Maynilad has procured to answer for its non-performance of certain terms and conditions of the Concession Agreement, particularly the payment of concession fees.

Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all claims against guarantors and sureties, but only those claims against guarantors and sureties who are not solidarily liable with the debtor. Respondent Maynilad’s claim that the banks are not solidarily liable with the debtor does not find support in jurisprudence.

We held in Feati Bank & Trust Company v. Court of Appeals16

that the concept of guarantee vis-à-vis the concept of an irrevocable letter of credit are inconsistent with each other. The guarantee theory destroys the independence of the bank’s responsibility from the contract upon which it was opened and the nature of both contracts is mutually in conflict with each other. In contracts of guarantee, the guarantor’s obligation is merely collateral and it arises only upon the default of the person primarily liable. On the other hand, in an irrevocable letter of credit, the bank undertakes a primary obligation. We have also defined a letter of credit as an engagement by a bank or other person made at the request of a customer that the issuer shall honor drafts or other demands of payment upon compliance with the conditions specified in the credit.

17

Letters of credit were developed for the purpose of insuring to a seller payment of a definite amount upon the presentation of documents

18 and is thus a commitment by the issuer that the party in whose favor it is issued and

who can collect upon it will have his credit against the applicant of the letter, duly paid in the amount specified in the letter.

19 They are in effect absolute undertakings to pay the money advanced or the amount for which credit is

given on the faith of the instrument. They are primary obligations and not accessory contracts and while they are security arrangements, they are not converted thereby into contracts of guaranty.

20 What distinguishes letters of

credit from other accessory contracts, is the engagement of the issuing bank to pay the seller once the draft and other required shipping documents are presented to it.

21 They are definite undertakings to pay at sight once the

documents stipulated therein are presented.

Letters of Credits have long been and are still governed by the provisions of the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce. In the 1993 Revision it provides in Art. 2 that "the expressions Documentary Credit(s) and Standby Letter(s) of Credit mean any arrangement, however made or described, whereby a bank acting at the request and on instructions of a customer or on its own behalf is to make payment against stipulated document(s)" and Art. 9 thereof defines the liability of the issuing banks on an irrevocable letter of credit as a "definite undertaking of the issuing bank, provided that the stipulated documents are presented to the nominated bank or the issuing bank and the terms and conditions of the Credit are complied with, to pay at sight if the Credit provides for sight payment."

22

We have accepted, in Feati Bank and Trust Company v. Court of Appeals23

and Bank of America NT & SA v. Court of Appeals,

24 to the extent that they are pertinent, the application in our jurisdiction of the international credit

regulatory set of rules known as the Uniform Customs and Practice for Documentary Credits (U.C.P) issued by the International Chamber of Commerce, which we said in Bank of the Philippine Islands v. Nery

25 was justified under

Art. 2 of the Code of Commerce, which states:

"Acts of commerce, whether those who execute them be merchants or not, and whether specified in this Code or not should be governed by the provisions contained in it; in their absence, by the usages of commerce generally observed in each place; and in the absence of both rules, by those of the civil law."

The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to herein petitioner as the prohibition is on the enforcement of claims against guarantors or sureties of the debtors whose obligations are not solidary with the debtor. The participating banks’ obligation are solidary with respondent Maynilad in that it is a primary, direct, definite and an absolute undertaking to pay and is not conditioned on the prior exhaustion of the debtor’s assets. These are the same characteristics of a surety or solidary obligor.

Being solidary, the claims against them can be pursued separately from and independently of the rehabilitation case, as held in Traders Royal Bank v. Court of Appeals

26 and reiterated in Philippine Blooming Mills, Inc. v. Court

of Appeals,27

where we said that property of the surety cannot be taken into custody by the rehabilitation receiver (SEC) and said surety can be sued separately to enforce his liability as surety for the debts or obligations of the debtor. The debts or obligations for which a surety may be liable include future debts, an amount which may not be known at the time the surety is given.

The terms of the Irrevocable Standby Letter of Credit do not show that the obligations of the banks are not solidary with those of respondent Maynilad. On the contrary, it is issued at the request of and for the account of Maynilad Water Services, Inc., in favor of the Metropolitan Waterworks and Sewerage System, as a bond for the full and prompt performance of the obligations by the concessionaire under the Concession Agreement

28 and herein

petitioner is authorized by the banks to draw on it by the simple act of delivering to the agent a written certification substantially in the form Annex "B" of the Letter of Credit. It provides further in Sec. 6, that for as long as the Standby Letter of Credit is valid and subsisting, the Banks shall honor any written Certification made by MWSS in accordance with Sec. 2, of the Standby Letter of Credit regardless of the date on which the event giving rise to such Written Certification arose.

29

Taking into consideration our own rulings on the nature of letters of credit and the customs and usage developed over the years in the banking and commercial practice of letters of credit, we hold that except when a letter of credit specifically stipulates otherwise, the obligation of the banks issuing letters of credit are solidary with that of the person or entity requesting for its issuance, the same being a direct, primary, absolute and definite undertaking to pay the beneficiary upon the presentation of the set of documents required therein.

The public respondent, therefore, exceeded his jurisdiction, in holding that he was competent to act on the obligation of the banks under the Letter of Credit under the argument that this was not a solidary obligation with that of the debtor. Being a solidary obligation, the letter of credit is excluded from the jurisdiction of the rehabilitation court and therefore in enjoining petitioner from proceeding against the Standby Letters of Credit to which it had a clear right under the law and the terms of said Standby Letter of Credit, public respondent acted in excess of his jurisdiction.

ADDITIONAL ISSUES

We proceed to consider the other issues raised in the oral arguments and included in the parties’ memoranda:

1. Respondent Maynilad argues that petitioner had a plain, speedy and adequate remedy under the Interim Rules itself which provides in Sec. 12, Rule 4 that the court may on motion or motu proprio, terminate, modify or set conditions for the continuance of the stay order or relieve a claim from coverage thereof. We find, however, that the public respondent had already accomplished this during the hearing set for the two Urgent Ex Parte motions filed by respondent Maynilad on November 21 and 24, 2003,

30 where the parties

including the creditors, Suez and Chinatrust Commercial "presented their respective arguments."31

The public respondent then ruled, "after carefully considering/evaluating the import of the arguments and documents referred to by Maynilad, MWSS and/or the creditors Chinatrust Commercial Bank and Suez in relation to the admissions, the pleadings, and/or pertinent portions of the records, this court is of the considered and humble view that the issue must perforce be resolved in favor of Maynilad."

32 Hence to

pursue their opposition before the same court would result in the presentation of the same arguments and issues passed upon by public respondent.

Furthermore, Sec. 5, Rule 3 of the Interim Rules would preclude any other effective remedy questioning the orders of the rehabilitation court since they are immediately executory and a petition for review or an appeal therefrom shall not stay the execution of the order unless restrained or enjoined by the appellate court." In this situation, it had no other remedy but to seek recourse to us through this petition for certiorari.

In Silvestre v. Torres and Oben,33

we said that it is not enough that a remedy is available to prevent a party from making use of the extraordinary remedy of certiorari but that such remedy be an adequate remedy which is equally beneficial, speedy and sufficient, not only a remedy which at some time in the future may offer relief but a remedy which will promptly relieve the petitioner from the injurious acts of the lower tribunal. It is the inadequacy -- not the mere absence -- of all other legal remedies and the danger of failure of justice without the writ, that must usually determine the propriety of certiorari.

34

2. Respondent Maynilad argues that by commencing the process for payment under the Standby Letter of Credit, petitioner violated an immediately executory order of the court and, therefore, comes to Court with unclean hands and should therefore be denied any relief.

It is true that the stay order is immediately executory. It is also true, however, that the Standby Letter of Credit and the banks that issued it were not within the jurisdiction of the rehabilitation court. The call on the Standby Letter of Credit, therefore, could not be considered a violation of the Stay Order.

3. Respondent’s claim that the filing of the petition pre-empts the original jurisdiction of the lower court is without merit. The purpose of the initial hearing is to determine whether the petition for rehabilitation has merit or not. The propriety of the stay order as well as the clarificatory order had already been passed upon in the hearing previously had for that purpose. The determination of whether the public respondent was correct in enjoining the petitioner from drawing on the Standby Letter of Credit will have no bearing on the determination to be made by public respondent whether the petition for rehabilitation has merit or not. Our decision on the instant petition does not pre-empt the original jurisdiction of the rehabilitation court.

WHEREFORE, the petition for certiorari is granted. The Order of November 27, 2003 of the Regional Trial Court of Quezon City, Branch 90, is hereby declared NULL AND VOID and SET ASIDE. The status quo Order herein previously issued is hereby LIFTED. In view of the urgency attending this case, this decision is immediately executory.

No costs.

SO ORDERED.

G.R. No. 117913 February 1, 2002 SECOND DIVISION

CHARLES LEE, CHUA SIOK SUY, MARIANO SIO, ALFONSO YAP, RICHARD VELASCO and ALFONSO CO, petitioners, vs. COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents.

x - - - - - - - - - - - - - - - - - - - - - - - x

G.R. NO. 117914

MICO METALS CORPORATION, petitioner, vs. COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents.

D E C I S I O N DE LEON, JR., J:

Before us is the joint and consolidated petition for review of the Decision1 dated June 15, 1994 of the Court of

Appeals in CA-G.R. CV No. 27480 entitled, "Philippine Bank of Communications vs. Mico Metals Corporation, Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso Co," which reversed the decision of the Regional Trial Court (RTC) of Manila, Branch 55 dismissing the complaint for a sum of money filed by private respondent Philippine Bank of Communications against herein petitioners, Mico Metals Corporation (MICO, for brevity), Charles Lee, Chua Siok Suy,

2 Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso Co.

3The

dispositive portion of the said Decision of the Court of Appeals, reads:

WHEREFORE, the decision of the Regional Trial Court is hereby reversed and in lieu thereof, a new one is entered:

a) Ordering the defendants-appellees jointly and severally to pay plaintiff PBCom the sum of Five million four hundred fifty-one thousand six hundred sixty-three pesos and ninety centavos (P5,451,663.90) representing defendants-appellees unpaid obligations arising from ordinary loans granted by the plaintiff plus legal interest until fully paid.

b) Ordering defendants-appellees jointly and severally to pay PBCom the sum of Four hundred sixty-one thousand six hundred pesos and sixty-six centavos (P46 1,600.66) representing defendants-appellees unpaid obligations arising from their letters of credit and trust receipt transactions with plaintiff PBCom plus legal interest until fully paid.

c) Ordering defendants-appellees jointly and severally to pay PBCom the sum of P50,000.00 as attorney’s fees.

No pronouncement as to costs.

The facts of the case are as follows:

On March 2, 1979, Charles Lee, as President of MICO wrote private respondent Philippine Bank of Communications (PBCom) requesting for a grant of a discounting loan/credit line in the sum of Three Million Pesos (P3,000,000.00) for the purpose of carrying out MICO’s line of business as well as to maintain its volume of business.

On the same day, Charles Lee requested for another discounting loan/credit line of Three Million Pesos (P3,000,000.00) from PBCom for the purpose of opening letters of credit and trust receipts.

In connection with the requests for discounting loan/credit lines, PBCom was furnished by MICO the following resolution which was adopted unanimously by MICO’s Board of Directors:

RESOLVED, that the President, Mr. Charles Lee, and the Vice-President and General Manager, Mr. Mariano A. Sio, singly or jointly, be and they are duly authorized and empowered for and in behalf of this Corporation to apply for, negotiate and secure the approval of commercial loans and other banking facilities and accommodations, such as, but not limited to discount loans, letters of credit, trust receipts, lines for marginal deposits on foreign and domestic letters of credit, negotiate out-of-town checks, etc. from the Philippine Bank of Communications, 216 Juan Luna, Manila in such sums as they shall deem advantageous, the principal of all of which shall not exceed

the total amount of TEN MILLION PESOS (P10,000,000.00), Philippine Currency, plus any interests that may be agreed upon with said Bank in such loans and other credit lines of the same kind and such further terms and conditions as may, upon granting of said loans and other banking facilities, be imposed by the Bank; and to make, execute, sign and deliver any contracts of mortgage, pledge or sale of one, some or all of the properties of the Company, or any other agreements or documents of whatever nature or kind, including the signing, indorsing, cashing, negotiation and execution of promissory notes, checks, money orders or other negotiable instruments, which may be necessary and proper in connection with said loans and other banking facilities, or with their amendments, renewals and extensions of payment of the whole or any part thereof.

4

On March 26, 1979, MICO availed of the first loan of One Million Pesos (P1,000,000.00) from PBCom. Upon maturity of the loan, MICO caused the same to be renewed, the last renewal of which was made on May 21, 1982 under Promissory Note BNA No. 26218.

5

Another loan of One Million Pesos (P1,000,000.00) was availed of by MICO from PBCom which was likewise later on renewed, the last renewal of which was made on May 21, 1982 under Promissory Note BNA No. 26219.

6 To

complete MICO’s availment of Three Million Pesos (P3,000,000.00) discounting loan/credit line with PBCom, MICO availed of another loan from PBCom in the sum of One Million Pesos (P1,000,000.00) on May 24, 1979. As in previous loans, this was rolled over or renewed, the last renewal of which was made on May 25, 1982 under Promissory Note BNA No. 26253.

7

As security for the loans, MICO through its Vice-President and General Manager, Mariano Sio, executed on May 16, 1979 a Deed of Real Estate Mortgage over its properties situated in Pasig, Metro Manila covered by Transfer Certificates of Title (TCT) Nos. 11248 and 11250.

On March 26, 1979 Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap and Richard Velasco, in their personal capacities executed a Surety Agreement

8 in favor of PBCom whereby the petitioners jointly and severally,

guaranteed the prompt payment on due dates or at maturity of overdrafts, promissory notes, discounts, drafts, letters of credit, bills of exchange, trust receipts, and other obligations of every kind and nature, for which MICO may be held accountable by PBCom. It was provided, however, that the liability of the sureties shall not at any one time exceed the principal amount of Three Million Pesos (P3,000,000.00) plus interest, costs, losses, charges and expenses including attorney’s fees incurred by PBCom in connection therewith.

On July 14, 1980, petitioner Charles Lee, in his capacity as president of MICO, wrote PBCom and applied for an additional loan in the sum of Four Million Pesos (P4,000,000.00). The loan was intended for the expansion and modernization of the company’s machineries. Upon approval of the said application for loan, MICO availed of the additional loan of Four Million Pesos (P4,000,000.00) as evidenced by Promissory Note TA No. 094.

9

As per agreement, the proceeds of all the loan availments were credited to MICO’s current checking account with PBCom. To induce the PBCom to increase the credit line of MICO, Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso Co (hereinafter referred to as petitioners-sureties), executed another surety agreement

10 in favor of PBCom on July 28, 1980, whereby they jointly and severally guaranteed the prompt

payment on due dates or at maturity of overdrafts, promissory notes, discounts, drafts, letters of credit, bills of exchange, trust receipts and all other obligations of any kind and nature for which MICO may be held accountable by PBCom. It was provided, however, that their liability shall not at any one time exceed the sum of Seven Million Five Hundred Thousand Pesos (P7,500,000.00) including interest, costs, charges, expenses and attorney’s fees incurred by MICO in connection therewith.

On July 29, 1980, MICO furnished PBCom with a notarized certification issued by its corporate secretary, Atty. P.B. Barrera, that Chua Siok Suy was duly authorized by the Board of Directors to negotiate on behalf of MICO for loans and other credit availments from PBCom. Indicated in the certification was the following resolution unanimously approved by the Board of Directors:

RESOLVED, AS IT IS HEREBY RESOLVED, That Mr. Chua Siok Suy be, as he is hereby authorized and empowered, on behalf of MICO METALS CORPORATION from time to time, to borrow money and obtain other credit facilities, with or without security, from the PHILIPPINE BANK OF COMMUNICATIONS in such amount(s) and under such terms and conditions as he may determine, with full power and authority to execute, sign and deliver such contracts, instruments and papers in connection therewith, including real estate and chattel mortgages, pledges and assignments over the properties of the Corporation; and to renew and/or extend and/or roll-over and/or reavail of the credit facilities granted thereunder, either for lesser or for greater amount(s), the intention being that such credit facilities and all securities of whatever kind given as collaterals therefor shall be a continuing security.

RESOLVED FURTHER, That said bank is hereby authorized, empowered and directed to rely on the authority given hereunder, the same to continue in full force and effect until written notice of its revocation shall be received by said Bank.

11

On July 2, 1981, MICO filed with PBCom an application for a domestic letter of credit in the sum of Three Hundred Forty-Eight Thousand Pesos (P348,000.00).

12 The corresponding irrevocable letter of credit was approved and

opened under LC No. L-16060.13

Thereafter, the domestic letter of credit was negotiated and accepted by MICO as evidenced by the corresponding bank draft issued for the purpose.

14 After the supplier of the merchandise was

paid, a trust receipt upon MICO’s own initiative, was executed in favor of PBCom.15

On September 14, 1981, MICO applied for another domestic letter of credit with PBCom in the sum of Two Hundred Ninety Thousand Pesos (P290,000.00).

16 The corresponding irrevocable letter of credit was issued on

September 22, 1981 under LC No. L-16334.17

After the beneficiary of the said letter of credit was paid by PBCom for the price of the merchandise, the goods were delivered to MICO which executed a corresponding trust receipt

18 in favor of PBCom.

On November 10, 1981, MICO applied for authority to open a foreign letter of credit in favor of Ta Jih Enterprises Co., Ltd.,

19 and thus, the corresponding letter of credit

20 was then issued by PBCom with a cable sent to the

beneficiary, Ta Jih Enterprises Co., Ltd. advising that said beneficiary may draw funds from the account of PBCom in its correspondent bank’s New York Office.

21 PBCom also informed its corresponding bank in Taiwan, the Irving

Trust Company, of the approved letter of credit. The correspondent bank acknowledged PBCom’s advice through a confirmation letter

22 and by debiting from PBCom’s account with the said correspondent bank the sum of Eleven

Thousand Nine Hundred Sixty US Dollars ($11 ,960.00).23

As in past transactions, MICO executed in favor of PBCom a corresponding trust receipt.

24

On January 4, 1982, MICO applied, for authority to open a foreign letter of credit in the sum of One Thousand Nine Hundred US Dollars ($1,900.00), with PBCom.

25 Upon approval, the corresponding letter of credit denominated as

LC No. 6229326

was issued whereupon PBCom advised its correspondent bank and MICO27

of the same. Negotiation and proper acceptance of the letter of credit were then made by MICO. Again, a corresponding trust receipt

28 was executed by MICO in favor of PBCom.

In all the transactions involving foreign letters of credit, PBCom turned over to MICO the necessary documents such as the bills of lading and commercial invoices to enable the latter to withdraw the goods from the port of Manila.

On May 21, 1982 MICO obtained from PBCom another loan in the sum of Three Hundred Seventy-Seven Thousand Pesos (P377,000.00) covered by Promissory Note BA No. 7458.

29

Upon maturity of all credit availments obtained by MICO from PBCom, the latter made a demand for payment.30

For failure of petitioner MICO to pay the obligations incurred despite repeated demands, private respondent PBCom extrajudicially foreclosed MICO’s real estate mortgage and sold the said mortgaged properties in a public auction sale held on November 23, 1982. Private respondent PBCom which emerged as the highest bidder in the auction sale, applied the proceeds of the purchase price at public auction of Three Million Pesos (P3,000,000.00) to the expenses of the foreclosure, interest and charges and part of the principal of the loans, leaving an unpaid balance of Five Million Four Hundred Forty-One Thousand Six Hundred Sixty-Three Pesos and Ninety Centavos (P5,441,663.90) exclusive of penalty and interest charges. Aside from the unpaid balance of Five Million Four Hundred Forty-One Thousand Six Hundred Sixty-Three Pesos and Ninety Centavos (P5,441,663.90), MICO likewise had another standing obligation in the sum of Four Hundred Sixty-One Thousand Six Hundred Pesos and Six Centavos (P461,600.06) representing its trust receipts liabilities to private respondent. PBCom then demanded the settlement of the aforesaid obligations from herein petitioners-sureties who, however, refused to acknowledge their obligations to PBCom under the surety agreements. Hence, PBCom filed a complaint with prayer for writ of preliminary attachment before the Regional Trial Court of Manila, which was raffled to Branch 55, alleging that MICO was no longer in operation and had no properties to answer for its obligations. PBCom further alleged that petitioner Charles Lee has disposed or concealed his properties with intent to defraud his creditors. Except for MICO and Charles Lee, the sheriff of the RTC failed to serve the summons on herein petitioners-sureties since they were all reportedly abroad at the time. An alias summons was later issued but the sheriff was not able to serve the same to petitioners Alfonso Co and Chua Siok Suy who was already sickly at the time and reportedly in Taiwan where he later died.

Petitioners (MICO and herein petitioners-sureties) denied all the allegations of the complaint filed by respondent PBCom, and alleged that: a) MICO was not granted the alleged loans and neither did it receive the proceeds of the aforesaid loans; b) Chua Siok Suy was never granted any valid Board Resolution to sign for and in behalf of MICO; c) PBCom acted in bad faith in granting the alleged loans and in releasing the proceeds thereof; d) petitioners were

never advised of the alleged grant of loans and the subsequent releases therefor, if any; e) since no loan was ever released to or received by MICO, the corresponding real estate mortgage and the surety agreements signed concededly by the petitioners-sureties are null and void.

The trial court gave credence to the testimonies of herein petitioners and dismissed the complaint filed by PBCom. The trial court likewise declared the real estate mortgage and its foreclosure null and void. In ruling for herein petitioners, the trial court said that PBCom failed to adequately prove that the proceeds of the loans were ever delivered to MICO. The trial court pointed out, among others, that while PBCom claimed that the proceeds of the Four Million Pesos (P4,000,000.00) loan covered by promissory note TA 094 were deposited to the current account of petitioner MICO, PBCom failed to produce the ledger account showing such deposit. The trial court added that while PBCom may have loaned to MICO the other sums of Three Hundred Forty-Eight Thousand Pesos (P348,000.00) and Two Hundred Ninety Thousand Pesos (P290,000.00), no proof has been adduced as to the existence of the goods covered and paid by the said amounts. Hence, inasmuch as no consideration ever passed from PBCom to MICO, all the documents involved therein, such as the promissory notes, real estate mortgage including the surety agreements were all void or nonexistent for lack of cause or consideration. The trial court said that the lack of proof as regards the existence of the merchandise covered by the letters of credit bolstered the claim of herein petitioners that no purchases of the goods were really made and that the letters of credit transactions were simply resorted to by the PBCom and Chua Siok Suy to accommodate the latter in his financial requirements.

The Court of Appeals reversed the ruling of the trial court, saying that the latter committed an erroneous application and appreciation of the rules governing the burden of proof. Citing Section 24 of the Negotiable Instruments Law which provides that "Every negotiable instrument is deemed prima facie to have been issued for valuable consideration and every person whose signature appears thereon to have become a party thereto for value", the Court of Appeals said that while the subject promissory notes and letters of credit issued by the PBCom made no mention of delivery of cash, it is presumed that said negotiable instruments were issued for valuable consideration. The Court of Appeals also cited the case of Gatmaitan vs. Court of Appeals

31which holds that "there

is a presumption that an instrument sets out the true agreement of the parties thereto and that it was executed for valuable consideration". The appellate court noted and found that a notarized Certification was issued by MICO’s corporate secretary, P.B. Barrera, that Chua Siok Suy, was duly authorized by the Board of Directors of MICO to borrow money and obtain credit facilities from PBCom.

Petitioners filed a motion for reconsideration of the challenged decision of the Court of Appeals but this was denied in a Resolution dated November 7, 1994 issued by its Former Second Division. Petitioners-sureties then filed a petition for review on certiorari with this Court, docketed as G.R. No. 117913, assailing the decision of the Court of Appeals. MICO likewise filed a separate petition for review on certiorari, docketed as G.R. No. 117914, with this Court assailing the same decision rendered by the Court of Appeals. Upon motion filed by petitioners, the two (2) petitions were consolidated on January 11, 1995.

32

Petitioners contend that there was no proof that the proceeds of the loans or the goods under the trust receipts were ever delivered to and received by MICO. But the record shows otherwise. Petitioners-sureties further contend that assuming that there was delivery by PBCom of the proceeds of the loans and the goods, the contracts were executed by an unauthorized person, more specifically Chua Siok Suy who acted fraudulently and in collusion with PBCom to defraud MICO.

The pertinent issues raised in the consolidated cases at bar are: a) whether or not the proceeds of the loans and letters of credit transactions were ever delivered to MICO, and b) whether or not the individual petitioners, as sureties, may be held liable under the two (2) Surety Agreements executed on March 26, 1979 and July 28, 1980.

In civil cases, the party having the burden of proof must establish his case by preponderance of evidence.

33Preponderance of evidence means evidence which is more convincing to the court as worthy of belief

than that which is offered in opposition thereto. Petitioners contend that the alleged promissory notes, trust receipts and surety agreements attached to the complaint filed by PBCom did not ripen into valid and binding contracts inasmuch as there is no evidence of the delivery of money or loan proceeds to MICO or to any of the petitioners-sureties. Petitioners claim that under normal banking practice, borrowers are required to accomplish promissory notes in blank even before the grant of the loans applied for and such documents become valid written contracts only when the loans are actually released to the borrower.

We are not convinced.

During the trial of an action, the party who has the burden of proof upon an issue may be aided in establishing his claim or defense by the operation of a presumption, or, expressed differently, by the probative value which the law attaches to a specific state of facts. A presumption may operate against his adversary who has not introduced

proof to rebut the presumption. The effect of a legal presumption upon a burden of proof is to create the necessity of presenting evidence to meet the legal presumption or the prima facie case created thereby, and which if no proof to the contrary is presented and offered, will prevail. The burden of proof remains where it is, but by the presumption the one who has that burden is relieved for the time being from introducing evidence in support of his averment, because the presumption stands in the place of evidence unless rebutted.

Under Section 3, Rule 131 of the Rules of Court the following presumptions, among others, are satisfactory if uncontradicted: a) That there was a sufficient consideration for a contract and b) That a negotiable instrument was given or indorsed for sufficient consideration. As observed by the Court of Appeals, a similar presumption is found in Section 24 of the Negotiable Instruments Law which provides that every negotiable instrument is deemedprima facie to have been issued for valuable consideration and every person whose signature appears thereon to have become a party for value. Negotiable instruments which are meant to be substitutes for money, must conform to the following requisites to be considered as such a) it must be in writing; b) it must be signed by the maker or drawer; c) it must contain an unconditional promise or order to pay a sum certain in money; d) it must be payable on demand or at a fixed or determinable future time; e) it must be payable to order or bearer; and f) where it is a bill of exchange, the drawee must be named or otherwise indicated with reasonable certainty. Negotiable instruments include promissory notes, bills of exchange and checks. Letters of credit and trust receipts are, however, not negotiable instruments. But drafts issued in connection with letters of credit are negotiable instruments.

Private respondent PBCom presented the following documentary evidence to prove petitioners’ credit availments and liabilities:

1) Promissory Note No. BNA —26218 dated May 21, 1982 in the sum of P1,000,000.00 executed by MICO in favor of PBCom.

2) Promissory Note No. BNA —26219 dated May 21, 1982 in the sum of P1,000,000.00 executed by MICO in favor of PBCom.

3) Promissory Note No. BNA —26253 dated May 25, 1982 in the sum of P1,000,000.00 executed by MICO in favor of PBCom.

4) Promissory Note No. BNA —7458 dated May 21, 1982 in the sum of P377,000.00 executed by MICO in favor of PBCom.

5) Promissory Note No. TA — 094 dated July 29, 1980 in the sum of P4,000.000.00 executed by MICO in favor of PBCom.

6) Irrevocable letter of credit No. L-16060 dated July 2,1981 issued in favor of Perez Battery Center for account of Mico Metals Corp.

7) Draft dated July 2, 1981 in the sum of P348,000.00 issued by Perez Battery Center, beneficiary of irrevocable Letter of Credit No. No. L-16060 and accepted by MICO Metals corporation.

8) Letter dated July 2, 1981 from Perez Battery Center addressed to private respondent PBCom showing that proceeds of the irrevocable letter of credit No. L- 16060 was received by Mr. Moises Rosete, representative of Perez Battery Center.

9) Trust receipt dated July 2, 1981 executed by MICO in favor of PBCom covering the merchandise purchased under Letter of Credit No. 16060.

10) Irrevocable letter of credit No. L-16334 dated September 22, 1981 issued in favor of Perez Battery Center for account of MICO Metals Corp.

11) Draft dated September 22, 1981 in the sum of P290,000.00 issued by Perez Battery Center and accepted by MICO.

12) Letter dated September 17, 1981 from Perez Battery addressed to PBCom showing that the proceeds of credit no. L-16344 was received by Mr. Moises Rosete, a representative of Perez Battery Center.

13) Trust Receipt dated September 22, 1981 executed by MICO in favor of PBCom covering the merchandise under Letter of Credit No. L-16334.

14) Irrevocable Letter of Credit no. 61873 dated November 10, 1981 for US$11,960.00 issued by PBCom in favor of TA JIH Enterprises Co. Ltd., through its correspondent bank, Irving Trust Company of Taipei, Taiwan.

15) Trust Receipt dated December 15, 9181 executed by MICO in favor of PBCom showing that possession of the merchandise covered by Irrevocable Letter of Credit no. 61873 was released by PBCom to MICO.

16) Letters dated March 2, 1979 from MICO signed by its president, Charles Lee, showing that MICO sought credit line from PBCom in the form of loans, letters of credit and trust receipt in the sum ofP7,500,000.00.

17) Letter dated July 14, 1980 from MICO signed by its president, Charles Lee, showing that MICO requested for additional financial assistance in the sum of P4,000,000.00.

18) Board resolution dated March 6, 1979 of MICO authorizing Charles Lee and Mariano Sio singly or jointly to act and sign for and in behalf of MICO relative to the obtention of credit facilities from PBCom.

19) Duly notarized Deed of Mortgage dated May 16, 1979 executed by MICO in favor of PBCom over MICO ‘s real properties covered by TCT Nos. 11248 and 11250 located in Pasig.

20) Duly notarized Surety Agreement dated March 26, 1979 executed by herein petitioners Charles Lee, Mariano Sio, Alfonso Yap, Richard Velasco and Chua Siok Suy in favor of PBCom.

21) Duly notarized Surety Agreement dated July 28, 1980 executed by herein petitioners Charles Lee, Mariano Sio, Alfonso Yap, Richard Velasco and Chua Siok Suy in favor of PBCom.

22) Duly notarized certification dated July 28, 1980 issued by MICO ‘s corporate secretary, Mr. P.B. Barrera, attesting to the adoption of a board resolution authorizing Chua Siok Suy to sign, for and in behalf of MICO, all the necessary documents including contracts, loan instruments and mortgages relative to the obtention of various credit facilities from PBCom.

The above-cited documents presented have not merely created a prima facie case but have actually proved the solidary obligation of MICO and the petitioners, as sureties of MICO, in favor of respondent PBCom. While the presumption found under the Negotiable Instruments Law may not necessarily be applicable to trust receipts and letters of credit, the presumption that the drafts drawn in connection with the letters of credit have sufficient consideration. Under Section 3(r), Rule 131 of the Rules of Court there is also a presumption that sufficient consideration was given in a contract. Hence, petitioners should have presented credible evidence to rebut that presumption as well as the evidence presented by private respondent PBCom. The letters of credit show that the pertinent materials/merchandise have been received by MICO. The drafts signed by the beneficiary/suppliers in connection with the corresponding letters of credit proved that said suppliers were paid by PBCom for the account of MICO. On the other hand, aside from their bare denials petitioners did not present sufficient and competent evidence to rebut the evidence of private respondent PBCom. Petitioner MICO did not proffer a single piece of evidence, apart from its bare denials, to support its allegation that the loan transactions, real estate mortgage, letters of credit and trust receipts were issued allegedly without any consideration.

Petitioners-sureties, for their part, presented the By-Laws34

of Mico Metals Corporation (MICO) to prove that only the president of MICO is authorized to borrow money, arrange letters of credit, execute trust receipts, and promissory notes and consequently, that the loan transactions, letters of credit, promissory notes and trust receipts, most of which were executed by Chua Siok Suy in representation of MICO were not allegedly authorized and hence, are not binding upon MICO. A perusal of the By-Laws of MICO, however, shows that the power to borrow money for the company and issue mortgages, bonds, deeds of trust and negotiable instruments or securities, secured by mortgages or pledges of property belonging to the company is not confined solely to the president of the corporation. The Board of Directors of MICO can also borrow money, arrange letters of credit, execute trust receipts and promissory notes on behalf of the corporation.

35 Significantly, this power of the Board of

Directors according to the by-laws of MICO, may be delegated to any of its standing committee, officer or agent.

36 Hence, PBCom had every right to rely on the Certification issued by MICO's corporate secretary, P.B.

Barrera, that Chua Siok Suy was duly authorized by its Board of Directors to borrow money and obtain credit facilities in behalf of MICO from PBCom.

Petitioners-sureties also presented a letter of their counsel dated October 9, 1982, addressed to private respondent PBCom purportedly to show that PBCom knew that Chua Siok Suy allegedly used the credit and good names of the petitioner-sureties for his benefit, and that petitioner-sureties were made to sign blank documents

and were furnished copies of the same. The letter, however, is in fact merely a reply of petitioners-sureties’ counsel to PBCom’s demand for payment of MICO’s obligations, and appears to be an inconsequential piece of self-serving evidence.

In addition to the foregoing, MICO and petitioners-sureties cited the decision of the trial court which stated that there was no proof that the proceeds of the loans were ever delivered to MICO. Although the private respondent’s witness, Mr. Gardiola, testified that the proceeds of the loans were deposited in MICO’s current account with PBCom, his testimony was allegedly not supported by any bank record, note or memorandum. A careful scrutiny of the record including the transcript of stenographic notes reveals, however, that although private respondent PBCom was willing to produce the corresponding account ledger showing that the proceeds of the loans were credited to MICO’s current account with PBCom, MICO in fact vigorously objected to the presentation of said document. That point is shown in the testimony of PBCom’s witness, Gardiola, thus:

Q: Now, all of these promissory note Exhibits "I" and "J" which as you have said previously (sic) availed originally by defendant Mico Metals Corp. sometime in 1979, my question now is, do you know what happened to the proceeds of the original availment?

A: Well, it was credited to the current account of Mico Metals Corp.

Q: Why did it was credited to the proceeds to the account of Mico Metals Corp? (sic)

A: Well, that is our understanding.

ATTY. DURAN:

Your honor, may we be given a chance to object, the best evidence is the so-called current account...

COURT:

Can you produce the ledger account?

A: Yes, Your Honor, I will bring.

COURT:

The ledger or record of the current account of Mico Metals Corp.

A: Yes, Your Honor.

ATTY. ACEJAS:

Your Honor, these are a confidential record, and they might not be disclosed without the consent of the person concerned. (sic)

ATTY. SANTOS:

Well, you are the one who is asking that.

ATTY. DURAN:

Your Honor, I’m precisely want to show for the ... (sic)

COURT:

But the amount covered by the current account of defendant Mico Metals Corp. is the subject matter of this case.

x x x x x x x x x

Q: Are those availments were release? (sic)

A: Yes, Your Honor, to the defendant corporation.

Q: By what means?

A: By the credit to their current account.

ATTY. ACEJAS:

We object to that, your Honor, because the disclose is the secrecy of the bank deposit. (sic)

x x x x x x x x x

Q: Before the recess Mr. Gardiola, you stated that the proceeds of the three (3) promissory notes were credited to the accounts of Mico Metals Corporation, now do you know what kind of current account was that which you are referring to?

ATTY. ACEJAS:

Objection your Honor, that is the disclose of the deposit of defendant Mico Metals Corporation and it cannot disclosed without the authority of the depositor. (sic)

37

That proceeds of the loans which were originally availed of in 1979 were delivered to MICO is bolstered by the fact that more than a year later, specifically on July 14, 1980, MICO through its president, petitioner-surety Charles Lee, requested for an additional loan of Four Million Pesos (P4,000,000.00) from PBCom. The fact that MICO was requesting for an additional loan implied that it has already availed of earlier loans from PBCom.

Petitioners allege that PBCom presented no evidence that it remitted payments to cover the domestic and foreign letters of credit. Petitioners placed much reliance on the erroneous decision of the trial court which stated that private respondent PBCom allegedly failed to prove that it actually made payments under the letters of credit since the bank drafts presented as evidence show that they were made in favor of the Bank of Taiwan and First Commercial Bank.

Petitioners’ allegations are untenable.

Modern letters of credit are usually not made between natural persons. They involve bank to bank transactions. Historically, the letter of credit was developed to facilitate the sale of goods between, distant and unfamiliar buyers and sellers. It was an arrangement under which a bank, whose credit was acceptable to the seller, would at the instance of the buyer agree to pay drafts drawn on it by the seller, provided that certain documents are presented such as bills of lading accompanied the corresponding drafts. Expansion in the use of letters of credit was a natural development in commercial banking.

38 Parties to a commercial letter of credit include (a) the buyer or the importer,

(b) the seller, also referred to as beneficiary, (c) the opening bank which is usually the buyer’s bank which actually issues the letter of credit, (d) the notifying bank which is the correspondent bank of the opening bank through which it advises the beneficiary of the letter of credit, (e) negotiating bank which is usually any bank in the city of the beneficiary. The services of the notifying bank must always be utilized if the letter of credit is to be advised to the beneficiary through cable, (f) the paying bank which buys or discounts the drafts contemplated by the letter of credit, if such draft is to be drawn on the opening bank or on another designated bank not in the city of the beneficiary. As a rule, whenever the facilities of the opening bank are used, the beneficiary is supposed to present his drafts to the notifying bank for negotiation and (g) the confirming bank which, upon the request of the beneficiary, confirms the letter of credit issued by the opening bank.

From the foregoing, it is clear that letters of credit, being usually bank to bank transactions, involve more than just one bank. Consequently, there is nothing unusual in the fact that the drafts presented in evidence by respondent bank were not made payable to PBCom. As explained by respondent bank, a draft was drawn on the Bank of Taiwan by Ta Jih Enterprises Co., Ltd. of Taiwan, supplier of the goods covered by the foreign letter of credit. Having paid the supplier, the Bank of Taiwan then presented the bank draft for reimbursement by PBCom’s correspondent bank in Taiwan, the Irving Trust Company — which explains the reason why on its face, the draft was made payable to the Bank of Taiwan. Irving Trust Company accepted and endorsed the draft to PBCom. The draft was later transmitted to PBCom to support the latter’s claim for payment from MICO. MICO accepted the draft upon presentment and negotiated it to PBCom.

Petitioners further aver that MICO never requested that legal possession of the merchandise be transferred to PBCom by way of trust receipts. Petitioners insist that assuming that MICO transferred possession of the

merchandise to PBCom by way of trust receipts, the same would be illegal since PBCom, being a banking institution, is not authorized by law to engage in the business of importing and selling goods.

A trust receipt is considered as a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral of the merchandise imported or purchased.

39A trust

receipt, therefor, is a document of security pursuant to which a bank acquires a "security interest" in the goods under trust receipt. Under a letter of credit-trust receipt arrangement, a bank extends a loan covered by a letter of credit, with the trust receipt as a security for the loan. The transaction involves a loan feature represented by a letter of credit, and a security feature which is in the covering trust receipt which secures an indebtedness.

Petitioners’ averments with regard to the second issue are no less incredulous.1âwphi1 Petitioners’ contend that the letters of credit, surety agreements and loan transactions did not ripen into valid and binding contracts since no part of the proceeds of the loan transactions were delivered to MICO or to any of the petitioners-sureties. Petitioners-sureties allege that Chua Siok Suy was the beneficiary of the proceeds of the loans and that the latter made them sign the surety agreements in blank. Thus, they maintain that they should not be held accountable for any liability that might arise therefrom.

It has not escaped our notice that it was petitioner-surety Charles Lee, as president of MICO Metals Corporation, who first requested for a discounting loan of Three Million Pesos (P3,000,000.00) from PBCom as evidenced by his letter dated March 2, 1979.

40 On the same day, Charles Lee, as President of MICO, requested for a Letter of

Credit and Trust Receipt line in the sum of Three Million Pesos (P3,000,000.00).41

Still, on the same day, Charles Lee again as President of MICO, wrote another letter to PBCOM requesting for a financing line in the sum of One Million Five Hundred Thousand Pesos (P1,500,000.00) to be used exclusively as marginal deposit for the opening of MICO’s foreign and local letters of credit with PBCom.

42 More than a year later, it was also Charles Lee, again in

his capacity as president of MICO, who asked for an additional loan in the sum of Four Million Pesos (P4,000,000.00). The claim therefore of petitioners that it was Chua Siok Suy, in connivance with the respondent PBCom, who applied for and obtained the loan transactions and letters of credit strains credulity considering that even the Deed of the Real Estate Mortgage in favor of PBCom was executed by petitioner-surety Mariano Sio in his capacity as general manager of MICO

43 to secure the loan accommodations obtained by MICO from PBCom.

Petitioners-sureties allege that they were made to sign the surety agreements in blank by Chua Siok Suy. Petitioner Alfonso Yap, the corporate treasurer, for his part testified that he signed booklets of checks, surety agreements and promissory notes in blank; that he signed the documents in blank despite his misgivings since Chua Siok Suy assured him that the transaction can easily be taken cared of since Chua Siok Suy personally knew the Chairman of the Board of PBCom; that he was not receiving salary as treasurer of Mico Metals and since Chua Siok Suy had a direct hand in the management of Malayan Sales Corporation, of which Yap is an employee, he (Yap) signed the documents in blank as consideration for his continued employment in Malayan Sales Corporation. Petitioner Antonio Co testified that he worked as office manager for MICO from 1978-1982. As office manager, he was the one in charge of transacting business like purchasing, selling and paying the salary of the employees. He was also in charge of the handling of documents pertaining to surety agreements, trust receipts and promissory notes;

44 that when he first joined MICO Metals Corporation, he was able to read the by-laws of the corporation and

he came to know that only the chairman and the president can borrow money in behalf of the corporation; that Chua Siok Suy once called him up and told him to secure an invoice so that a credit line can be opened in the bank with a local letter of credit; that when the invoice was secured, he (Co) brought it together with the application for a credit line to Chua Siok Suy, and that he questioned the authority of Chua Siok Suy pointing out that he (Co) is not empowered to sign the document inasmuch as only the latter, as president, was authorized to do so. However, Chua Siok Suy allegedly just said that he had already talked with the Chairman of the Board of PBCom; and that Chua Siok Suy reportedly said that he needed the money to finance a project that he had with the Taipei government. Co also testified that he knew of the application for domestic letter of credit in the sum of Three Hundred Forty-Eight Thousand Pesos (P348,000.00); and that a certain Moises Rosete was authorized to claim the check covering the Three Hundred Forty-Eight Thousand Pesos (P348,000.00) from PBCom; and that after claiming the check Rosete brought it to Perez Battery Center for indorsement after which the same was deposited to the personal account of Chua Siok Suy.

45

We consider as incredible and unacceptable the claim of petitioners-sureties that the Board of Directors of MICO was so careless about the business affairs of MICO as well as about their own personal reputation and money that they simply relied on the say so of Chua Siok Suy on matters involving millions of pesos. Under Section 3 (d), Rule 131 of the Rules of Court, it is presumed that a person takes ordinary care of his concerns. Hence, the natural presumption is that one does not sign a document without first informing himself of its contents and consequences. Said presumption acquires greater force in the case at bar where not only one but several documents were executed at different times and at different places by the petitioner sureties and Chua Siok Suy as president of MICO.

MICO and herein petitioners-sureties insist that Chua Siok Suy was not duly authorized to negotiate for loans in behalf of MICO from PBCom. Petitioners’ allegation, however, is belied by the July 28, 1980 Certification issued by the corporate secretary of PBCom, Atty. P.B. Barrera, that MICO's Board of Directors gave Chua Siok Suy full authority to negotiate for loans in behalf of MICO with PBCom. In fact, the Certification even provided that Chua Siok Suy’s authority continues until and unless PBCom is notified in writing of the withdrawal thereof by the said Board. Notably, petitioners failed to contest the genuineness of the said Certification which is notarized and to show any written proof of any alleged withdrawal of the said authority given by the Board of Directors to Chua Siok Suy to negotiate for loans in behalf of MICO.

There was no need for PBCom to personally inform the petitioners-sureties individually about the terms of the loans, letters of credit and other loan documents. The petitioners-sureties themselves happen to comprise the Board of Directors of MICO, which gave full authority to Chua Siok Suy to negotiate for loans in behalf of MICO. Notice to MICO’s authorized representative, Chua Siok Suy, was notice to MICO. The Certification issued by PBCom’s corporate secretary, Atty. P.B. Barrera, indicated that Chua Siok Suy had full authority to negotiate and sign the necessary documents, in behalf of MICO for loans from PBCom. Respondent PBCom therefore had the right to rely on the said notarized Certification of MICO’s Corporate Secretary.

Anent petitioners-sureties contention that they obtained no consideration whatsoever on the surety agreements, we need only point out that the consideration for the sureties is the very consideration for the principal obligor, MICO, in the contracts of loan. In the case of Willex Plastic Industries Corporation vs. Court of Appeals,

46 we ruled

that the consideration necessary to support a surety obligation need not pass directly to the surety, a consideration moving to the principal alone being sufficient. For a guarantor or surety is bound by the same consideration that makes the contract effective between the parties thereto. It is not necessary that a guarantor or surety should receive any part or benefit, if such there be, accruing to his principal.

Petitioners placed too much reliance on the rule in evidence that the burden of proof does not shift whereas the burden of going forward with the evidence does pass from party to party. It is true that said rule is not changed by the fact that the party having the burden of proof has introduced evidence which established prima facie his assertion because such evidence does not shift the burden of proof; it merely puts the adversary to the necessity of producing evidence to meet the prima facie case. Where the defendant merely denies, either generally or otherwise, the allegations of the plaintiff’s pleadings, the burden of proof continues to rest on the plaintiff throughout the trial and does not shift to the defendant until the plaintiff’s evidence has been presented and duly offered. The defendant has then no burden except to produce evidence sufficient to create a state of equipoise between his proof and that of the plaintiff to defeat the latter, whereas the plaintiff has the burden, as in the beginning, of establishing his case by a preponderance of evidence.

47 But where the defendant has failed to

present and marshall evidence sufficient to create a state of equipoise between his proof and that of plaintiff, theprima facie case presented by the plaintiff will prevail.

In the case at bar, respondent PBCom, as plaintiff in the trial court, has in fact presented sufficient documentary and testimonial evidence that proved by preponderance of evidence its subject collection case against the defendants who are the petitioners herein. In view of all the foregoing, the Court of Appeals committed no reversible error in its appealed Decision.

WHEREFORE, the assailed Decision of the Court of Appeals in CA-G.R. CV No. 27480 entitled, "Philippine Bank of Communications vs. Mico Metals Corporation, Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso Co," is AFFIRMED in toto.

Costs against the petitioners.

SO ORDERED.

G.R. No. 146717 November 22, 2004 SECOND DIVISION

TRANSFIELD PHILIPPINES, INC., petitioner, vs. LUZON HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND BANKING GROUP LIMITED and SECURITY BANK CORPORATION, respondents.

D E C I S I O N TINGA, J.:

Subject of this case is the letter of credit which has evolved as the ubiquitous and most important device in international trade. A creation of commerce and businessmen, the letter of credit is also unique in the number of parties involved and its supranational character.

Petitioner has appealed from the Decision1 of the Court of Appeals in CA-G.R. SP No. 61901 entitled "Transfield

Philippines, Inc. v. Hon. Oscar Pimentel, et al.," promulgated on 31 January 2001.2

On 26 March 1997, petitioner and respondent Luzon Hydro Corporation (hereinafter, LHC) entered into a Turnkey Contract

3 whereby petitioner, as Turnkey Contractor, undertook to construct, on a turnkey basis, a seventy (70)-

Megawatt hydro-electric power station at the Bakun River in the provinces of Benguet and Ilocos Sur (hereinafter, the Project). Petitioner was given the sole responsibility for the design, construction, commissioning, testing and completion of the Project.

4

The Turnkey Contract provides that: (1) the target completion date of the Project shall be on 1 June 2000, or such later date as may be agreed upon between petitioner and respondent LHC or otherwise determined in accordance with the Turnkey Contract; and (2) petitioner is entitled to claim extensions of time (EOT) for reasons enumerated in the Turnkey Contract, among which are variations, force majeure, and delays caused by LHC itself.

5 Further, in

case of dispute, the parties are bound to settle their differences through mediation, conciliation and such other means enumerated under Clause 20.3 of the Turnkey Contract.

6

To secure performance of petitioner's obligation on or before the target completion date, or such time for completion as may be determined by the parties' agreement, petitioner opened in favor of LHC two (2) standby letters of credit both dated 20 March 2000 (hereinafter referred to as "the Securities"), to wit: Standby Letter of Credit No. E001126/8400 with the local branch of respondent Australia and New Zealand Banking Group Limited (ANZ Bank)

7 and Standby Letter of Credit No. IBDIDSB-00/4 with respondent Security Bank Corporation

(SBC)8each in the amount of US$8,988,907.00.

9

In the course of the construction of the project, petitioner sought various EOT to complete the Project. The extensions were requested allegedly due to several factors which prevented the completion of the Project on target date, such as force majeure occasioned by typhoon Zeb, barricades and demonstrations. LHC denied the requests, however. This gave rise to a series of legal actions between the parties which culminated in the instant petition.

The first of the actions was a Request for Arbitration which LHC filed before the Construction Industry Arbitration Commission (CIAC) on 1 June 1999.

10 This was followed by another Request for Arbitration, this time filed by

petitioner before the International Chamber of Commerce (ICC)11

on 3 November 2000. In both arbitration proceedings, the common issues presented were: [1) whether typhoon Zeb and any of its associated events constituted force majeure to justify the extension of time sought by petitioner; and [2) whether LHC had the right to terminate the Turnkey Contract for failure of petitioner to complete the Project on target date.

Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent provisions of the Turnkey Contract,

12 petitioner—in two separate letters

13 both dated 10 August 2000—advised respondent banks of the

arbitration proceedings already pending before the CIAC and ICC in connection with its alleged default in the performance of its obligations. Asserting that LHC had no right to call on the Securities until the resolution of disputes before the arbitral tribunals, petitioner warned respondent banks that any transfer, release, or disposition of the Securities in favor of LHC or any person claiming under LHC would constrain it to hold respondent banks liable for liquidated damages.

As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner that pursuant to Clause 8.214

of the Turnkey Contract, it failed to comply with its obligation to complete the Project. Despite the letters of petitioner, however, both banks informed petitioner that they would pay on the Securities if and when LHC calls on them.

15

LHC asserted that additional extension of time would not be warranted; accordingly it declared petitioner in default/delay in the performance of its obligations under the Turnkey Contract and demanded from petitioner the payment of US$75,000.00 for each day of delay beginning 28 June 2000 until actual completion of the Project pursuant to Clause 8.7.1 of the Turnkey Contract. At the same time, LHC served notice that it would call on the securities for the payment of liquidated damages for the delay.

16

On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction, with prayer for temporary restraining order and writ of preliminary injunction, against herein respondents as defendants before the Regional Trial Court (RTC) of Makati.

17 Petitioner sought to restrain respondent LHC from calling on the Securities and respondent

banks from transferring, paying on, or in any manner disposing of the Securities or any renewals or substitutes thereof. The RTC issued a seventy-two (72)-hour temporary restraining order on the same day. The case was docketed as Civil Case No. 00-1312 and raffled to Branch 148 of the RTC of Makati.

After appropriate proceedings, the trial court issued an Order on 9 November 2000, extending the temporary restraining order for a period of seventeen (17) days or until 26 November 2000.

18

The RTC, in its Order19

dated 24 November 2000, denied petitioner's application for a writ of preliminary injunction. It ruled that petitioner had no legal right and suffered no irreparable injury to justify the issuance of the writ. Employing the principle of "independent contract" in letters of credit, the trial court ruled that LHC should be allowed to draw on the Securities for liquidated damages. It debunked petitioner's contention that the principle of "independent contract" could be invoked only by respondent banks since according to it respondent LHC is the ultimate beneficiary of the Securities. The trial court further ruled that the banks were mere custodians of the funds and as such they were obligated to transfer the same to the beneficiary for as long as the latter could submit the required certification of its claims.

Dissatisfied with the trial court's denial of its application for a writ of preliminary injunction, petitioner elevated the case to the Court of Appeals via a Petition for Certiorari under Rule 65, with prayer for the issuance of a temporary restraining order and writ of preliminary injunction.

20 Petitioner submitted to the appellate court that LHC's call on

the Securities was premature considering that the issue of its default had not yet been resolved with finality by the CIAC and/or the ICC. It asserted that until the fact of delay could be established, LHC had no right to draw on the Securities for liquidated damages.

Refuting petitioner's contentions, LHC claimed that petitioner had no right to restrain its call on and use of the Securities as payment for liquidated damages. It averred that the Securities are independent of the main contract between them as shown on the face of the two Standby Letters of Credit which both provide that the banks have no responsibility to investigate the authenticity or accuracy of the certificates or the declarant's capacity or entitlement to so certify.

In its Resolution dated 28 November 2000, the Court of Appeals issued a temporary restraining order, enjoining LHC from calling on the Securities or any renewals or substitutes thereof and ordering respondent banks to cease and desist from transferring, paying or in any manner disposing of the Securities.

However, the appellate court failed to act on the application for preliminary injunction until the temporary restraining order expired on 27 January 2001. Immediately thereafter, representatives of LHC trooped to ANZ Bank and withdrew the total amount of US$4,950,000.00, thereby reducing the balance in ANZ Bank to US$1,852,814.00.

On 2 February 2001, the appellate court dismissed the petition for certiorari. The appellate court expressed conformity with the trial court's decision that LHC could call on the Securities pursuant to the first principle in credit law that the credit itself is independent of the underlying transaction and that as long as the beneficiary complied with the credit, it was of no moment that he had not complied with the underlying contract. Further, the appellate court held that even assuming that the trial court's denial of petitioner's application for a writ of preliminary injunction was erroneous, it constituted only an error of judgment which is not correctible by certiorari, unlike error of jurisdiction.

Undaunted, petitioner filed the instant Petition for Review raising the following issues for resolution:

WHETHER THE "INDEPENDENCE PRINCIPLE" ON LETTERS OF CREDIT MAY BE INVOKED BY A BENEFICIARY THEREOF WHERE THE BENEFICIARY'S CALL THEREON IS WRONGFUL OR FRAUDULENT.

WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES BEFORE THE RESOLUTION OF PETITIONER'S AND LHC'S DISPUTES BY THE APPROPRIATE TRIBUNAL.

WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN RELEASING THE AMOUNTS DUE UNDER THE SECURITIES DESPITE BEING NOTIFIED THAT LHC'S CALL THEREON IS WRONGFUL.

WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND IRREPARABLE DAMAGE IN THE EVENT THAT:

A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND SECURITY BANK ARE ALLOWED TO RELEASE, THE REMAINING BALANCE OF THE SECURITIES PRIOR TO THE RESOLUTION OF THE DISPUTES BETWEEN PETITIONER AND LHC.

B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY DRAWN FROM THE SECURITIES.

21

Petitioner contends that the courts below improperly relied on the "independence principle" on letters of credit when this case falls squarely within the "fraud exception rule." Respondent LHC deliberately misrepresented the supposed existence of delay despite its knowledge that the issue was still pending arbitration, petitioner continues.

Petitioner asserts that LHC should be ordered to return the proceeds of the Securities pursuant to the principle against unjust enrichment and that, under the premises, injunction was the appropriate remedy obtainable from the competent local courts.

On 25 August 2003, petitioner filed a Supplement to the Petition22

and Supplemental Memorandum,23

alleging that in the course of the proceedings in the ICC Arbitration, a number of documentary and testimonial evidence came out through the use of different modes of discovery available in the ICC Arbitration. It contends that after the filing of the petition facts and admissions were discovered which demonstrate that LHC knowingly misrepresented that petitioner had incurred delays— notwithstanding its knowledge and admission that delays were excused under the Turnkey Contract—to be able to draw against the Securities. Reiterating that fraud constitutes an exception to the independence principle, petitioner urges that this warrants a ruling from this Court that the call on the Securities was wrongful, as well as contrary to law and basic principles of equity. It avers that it would suffer grave irreparable damage if LHC would be allowed to use the proceeds of the Securities and not ordered to return the amounts it had wrongfully drawn thereon.

In its Manifestation dated 8 September 2003,24

LHC contends that the supplemental pleadings filed by petitioner present erroneous and misleading information which would change petitioner's theory on appeal.

In yet another Manifestation dated 12 April 2004,25

petitioner alleges that on 18 February 2004, the ICC handed down its Third Partial Award, declaring that LHC wrongfully drew upon the Securities and that petitioner was entitled to the return of the sums wrongfully taken by LHC for liquidated damages.

LHC filed a Counter-Manifestation dated 29 June 2004,26

stating that petitioner's Manifestation dated 12 April 2004 enlarges the scope of its Petition for Review of the 31 January 2001 Decision of the Court of Appeals. LHC notes that the Petition for Review essentially dealt only with the issue of whether injunction could issue to restrain the beneficiary of an irrevocable letter of credit from drawing thereon. It adds that petitioner has filed two other proceedings, to wit: (1) ICC Case No. 11264/TE/MW, entitled "Transfield Philippines Inc. v. Luzon Hydro Corporation," in which the parties made claims and counterclaims arising from petitioner's performance/misperformance of its obligations as contractor for LHC; and (2) Civil Case No. 04-332, entitled "Transfield Philippines, Inc. v. Luzon Hydro Corporation" before Branch 56 of the RTC of Makati, which is an action to enforce and obtain execution of the ICC's partial award mentioned in petitioner's Manifestation of 12 April 2004.

In its Comment to petitioner's Motion for Leave to File Addendum to Petitioner's Memorandum, LHC stresses that the question of whether the funds it drew on the subject letters of credit should be returned is outside the issue in this appeal. At any rate, LHC adds that the action to enforce the ICC's partial award is now fully within the Makati RTC's jurisdiction in Civil Case No. 04-332. LHC asserts that petitioner is engaged in forum-shopping by keeping this appeal and at the same time seeking the suit for enforcement of the arbitral award before the Makati court.

Respondent SBC in its Memorandum, dated 10 March 200327

contends that the Court of Appeals correctly dismissed the petition for certiorari. Invoking the independence principle, SBC argues that it was under no obligation to look into the validity or accuracy of the certification submitted by respondent LHC or into the latter's capacity or entitlement to so certify. It adds that the act sought to be enjoined by petitioner was already fait accompli and the present petition would no longer serve any remedial purpose.

In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 200328

posits that its actions could not be regarded as unjustified in view of the prevailing independence principle under which it had no obligation to

ascertain the truth of LHC's allegations that petitioner defaulted in its obligations. Moreover, it points out that since the Standby Letter of Credit No. E001126/8400 had been fully drawn, petitioner's prayer for preliminary injunction had been rendered moot and academic.

At the core of the present controversy is the applicability of the "independence principle" and "fraud exception rule" in letters of credit. Thus, a discussion of the nature and use of letters of credit, also referred to simply as "credits," would provide a better perspective of the case.

The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is to recognize that it is an entity unto itself. The relationship between the beneficiary and the issuer of a letter of credit is not strictly contractual, because both privity and a meeting of the minds are lacking, yet strict compliance with its terms is an enforceable right. Nor is it a third-party beneficiary contract, because the issuer must honor drafts drawn against a letter regardless of problems subsequently arising in the underlying contract. Since the bank's customer cannot draw on the letter, it does not function as an assignment by the customer to the beneficiary. Nor, if properly used, is it a contract of suretyship or guarantee, because it entails a primary liability following a default. Finally, it is not in itself a negotiable instrument, because it is not payable to order or bearer and is generally conditional, yet the draft presented under it is often negotiable.

29

In commercial transactions, a letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying.

30 The use of credits in commercial transactions serves to reduce the risk of nonpayment of the purchase

price under the contract for the sale of goods. However, credits are also used in non-sale settings where they serve to reduce the risk of nonperformance. Generally, credits in the non-sale settings have come to be known as standby credits.

31

There are three significant differences between commercial and standby credits. First, commercial credits involve the payment of money under a contract of sale. Such credits become payable upon the presentation by the seller-beneficiary of documents that show he has taken affirmative steps to comply with the sales agreement. In the standby type, the credit is payable upon certification of a party's nonperformance of the agreement. The documents that accompany the beneficiary's draft tend to show that the applicant has not performed. The beneficiary of a commercial credit must demonstrate by documents that he has performed his contract. The beneficiary of the standby credit must certify that his obligor has not performed the contract.

32

By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the addressee to pay money or deliver goods to a third person and assumes responsibility for payment of debt therefor to the addressee.

33 A letter of credit, however, changes its nature as different transactions occur and if carried through to

completion ends up as a binding contract between the issuing and honoring banks without any regard or relation to the underlying contract or disputes between the parties thereto.

34

Since letters of credit have gained general acceptability in international trade transactions, the ICC has published from time to time updates on the Uniform Customs and Practice (UCP) for Documentary Credits to standardize practices in the letter of credit area. The vast majority of letters of credit incorporate the UCP.

35 First published in

1933, the UCP for Documentary Credits has undergone several revisions, the latest of which was in 1993.36

In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,37

this Court ruled that the observance of the UCP is justified by Article 2 of the Code of Commerce which provides that in the absence of any particular provision in the Code of Commerce, commercial transactions shall be governed by usages and customs generally observed. More recently, in Bank of America, NT & SA v. Court of Appeals,

38 this Court ruled that there being no

specific provisions which govern the legal complexities arising from transactions involving letters of credit, not only between or among banks themselves but also between banks and the seller or the buyer, as the case may be, the applicability of the UCP is undeniable.

Article 3 of the UCP provides that credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the credit. Consequently, the undertaking of a bank to pay, accept and pay draft(s) or negotiate and/or fulfill any other obligation under the credit is not subject to claims or defenses by the applicant resulting from his relationships with the issuing bank or the beneficiary. A beneficiary can in no case avail himself of the contractual relationships existing between the banks or between the applicant and the issuing bank.

Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft and the required documents are presented to it. The so-called "independence principle" assures the seller or the

beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing bank from determining whether the main contract is actually accomplished or not. Under this principle, banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or particular conditions stipulated in the documents or superimposed thereon, nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any documents, or for the good faith or acts and/or omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of the goods, or any other person whomsoever.

39

The independent nature of the letter of credit may be: (a) independence in toto where the credit is independent from the justification aspect and is a separate obligation from the underlying agreement like for instance a typical standby; or (b) independence may be only as to the justification aspect like in a commercial letter of credit or repayment standby, which is identical with the same obligations under the underlying agreement. In both cases the payment may be enjoined if in the light of the purpose of the credit the payment of the credit would constitute fraudulent abuse of the credit.

40

Can the beneficiary invoke the independence principle?

Petitioner insists that the independence principle does not apply to the instant case and assuming it is so, it is a defense available only to respondent banks. LHC, on the other hand, contends that it would be contrary to common sense to deny the benefit of an independent contract to the very party for whom the benefit is intended. As beneficiary of the letter of credit, LHC asserts it is entitled to invoke the principle.

As discussed above, in a letter of credit transaction, such as in this case, where the credit is stipulated as irrevocable, there is a definite undertaking by the issuing bank to pay the beneficiary provided that the stipulated documents are presented and the conditions of the credit are complied with.

41 Precisely, the independence

principle liberates the issuing bank from the duty of ascertaining compliance by the parties in the main contract. As the principle's nomenclature clearly suggests, the obligation under the letter of credit is independent of the related and originating contract. In brief, the letter of credit is separate and distinct from the underlying transaction.

Given the nature of letters of credit, petitioner's argument—that it is only the issuing bank that may invoke the independence principle on letters of credit—does not impress this Court. To say that the independence principle may only be invoked by the issuing banks would render nugatory the purpose for which the letters of credit are used in commercial transactions. As it is, the independence doctrine works to the benefit of both the issuing bank and the beneficiary.

Letters of credit are employed by the parties desiring to enter into commercial transactions, not for the benefit of the issuing bank but mainly for the benefit of the parties to the original transactions. With the letter of credit from the issuing bank, the party who applied for and obtained it may confidently present the letter of credit to the beneficiary as a security to convince the beneficiary to enter into the business transaction. On the other hand, the other party to the business transaction, i.e., the beneficiary of the letter of credit, can be rest assured of being empowered to call on the letter of credit as a security in case the commercial transaction does not push through, or the applicant fails to perform his part of the transaction. It is for this reason that the party who is entitled to the proceeds of the letter of credit is appropriately called "beneficiary."

Petitioner's argument that any dispute must first be resolved by the parties, whether through negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit in essence would convert the letter of credit into a mere guarantee. Jurisprudence has laid down a clear distinction between a letter of credit and a guarantee in that the settlement of a dispute between the parties is not a pre-requisite for the release of funds under a letter of credit. In other words, the argument is incompatible with the very nature of the letter of credit. If a letter of credit is drawable only after settlement of the dispute on the contract entered into by the applicant and the beneficiary, there would be no practical and beneficial use for letters of credit in commercial transactions.

Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the issue:

The standby credit is an attractive commercial device for many of the same reasons that commercial credits are attractive. Essentially, these credits are inexpensive and efficient. Often they replace surety contracts, which tend to generate higher costs than credits do and are usually triggered by a factual determination rather than by the examination of documents.

Because parties and courts should not confuse the different functions of the surety contract on the one hand and the standby credit on the other, the distinction between surety contracts and credits merits some

reflection. The two commercial devices share a common purpose. Both ensure against the obligor's nonperformance. They function, however, in distinctly different ways.

Traditionally, upon the obligor's default, the surety undertakes to complete the obligor's performance, usually by hiring someone to complete that performance. Surety contracts, then, often involve costs of determining whether the obligor defaulted (a matter over which the surety and the beneficiary often litigate) plus the cost of performance. The benefit of the surety contract to the beneficiary is obvious. He knows that the surety, often an insurance company, is a strong financial institution that will perform if the obligor does not. The beneficiary also should understand that such performance must await the sometimes lengthy and costly determination that the obligor has defaulted. In addition, the surety's performance takes time.

The standby credit has different expectations. He reasonably expects that he will receive cash in the event of nonperformance, that he will receive it promptly, and that he will receive it before any litigation with the obligor (the applicant) over the nature of the applicant's performance takes place. The standby credit has this opposite effect of the surety contract: it reverses the financial burden of parties during litigation.

In the surety contract setting, there is no duty to indemnify the beneficiary until the beneficiary establishes the fact of the obligor's performance. The beneficiary may have to establish that fact in litigation. During the litigation, the surety holds the money and the beneficiary bears most of the cost of delay in performance.

In the standby credit case, however, the beneficiary avoids that litigation burden and receives his money promptly upon presentation of the required documents. It may be that the applicant has, in fact, performed and that the beneficiary's presentation of those documents is not rightful. In that case, the applicant may sue the beneficiary in tort, in contract, or in breach of warranty; but, during the litigation to determine whether the applicant has in fact breached the obligation to perform, the beneficiary, not the applicant, holds the money. Parties that use a standby credit and courts construing such a credit should understand this allocation of burdens. There is a tendency in some quarters to overlook this distinction between surety contracts and standby credits and to reallocate burdens by permitting the obligor or the issuer to litigate the performance question before payment to the beneficiary.

42

While it is the bank which is bound to honor the credit, it is the beneficiary who has the right to ask the bank to honor the credit by allowing him to draw thereon. The situation itself emasculates petitioner's posture that LHC cannot invoke the independence principle and highlights its puerility, more so in this case where the banks concerned were impleaded as parties by petitioner itself.

Respondent banks had squarely raised the independence principle to justify their releases of the amounts due under the Securities. Owing to the nature and purpose of the standby letters of credit, this Court rules that the respondent banks were left with little or no alternative but to honor the credit and both of them in fact submitted that it was "ministerial" for them to honor the call for payment.

43

Furthermore, LHC has a right rooted in the Contract to call on the Securities. The relevant provisions of the Contract read, thus:

4.2.1. In order to secure the performance of its obligations under this Contract, the Contractor at its cost shall on the Commencement Date provide security to the Employer in the form of two irrevocable and confirmed standby letters of credit (the "Securities"), each in the amount of US$8,988,907, issued and confirmed by banks or financial institutions acceptable to the Employer. Each of the Securities must be in form and substance acceptable to the Employer and may be provided on an annually renewable basis.

44

8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the Employer by way of liquidated damages ("Liquidated Damages for Delay") the amount of US$75,000 for each and every day or part of a day that shall elapse between the Target Completion Date and the Completion Date, provided that Liquidated Damages for Delay payable by the Contractor shall in the aggregate not exceed 20% of the Contract Price. The Contractor shall pay Liquidated Damages for Delay for each day of the delay on the following day without need of demand from the Employer.

8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such damages from any monies due, or to become due to the Contractor and/or by drawing on the Security."

45

A contract once perfected, binds the parties not only to the fulfillment of what has been expressly stipulated but also to all the consequences which according to their nature, may be in keeping with good faith, usage, and law.

46 A careful perusal of the Turnkey Contract reveals the intention of the parties to make the Securities

answerable for the liquidated damages occasioned by any delay on the part of petitioner. The call upon the Securities, while not an exclusive remedy on the part of LHC, is certainly an alternative recourse available to it upon the happening of the contingency for which the Securities have been proffered. Thus, even without the use of the "independence principle," the Turnkey Contract itself bestows upon LHC the right to call on the Securities in the event of default.

Next, petitioner invokes the "fraud exception" principle. It avers that LHC's call on the Securities is wrongful because it fraudulently misrepresented to ANZ Bank and SBC that there is already a breach in the Turnkey Contract knowing fully well that this is yet to be determined by the arbitral tribunals. It asserts that the "fraud exception" exists when the beneficiary, for the purpose of drawing on the credit, fraudulently presents to the confirming bank, documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue. In such a situation, petitioner insists, injunction is recognized as a remedy available to it.

Citing Dolan's treatise on letters of credit, petitioner argues that the independence principle is not without limits and it is important to fashion those limits in light of the principle's purpose, which is to serve the commercial function of the credit. If it does not serve those functions, application of the principle is not warranted, and the commonlaw principles of contract should apply.

It is worthy of note that the propriety of LHC's call on the Securities is largely intertwined with the fact of default which is the self-same issue pending resolution before the arbitral tribunals. To be able to declare the call on the Securities wrongful or fraudulent, it is imperative to resolve, among others, whether petitioner was in fact guilty of delay in the performance of its obligation. Unfortunately for petitioner, this Court is not called upon to rule upon the issue of default—such issue having been submitted by the parties to the jurisdiction of the arbitral tribunals pursuant to the terms embodied in their agreement.

47

Would injunction then be the proper remedy to restrain the alleged wrongful draws on the Securities?

Most writers agree that fraud is an exception to the independence principle. Professor Dolan opines that the untruthfulness of a certificate accompanying a demand for payment under a standby credit may qualify as fraud sufficient to support an injunction against payment.

48 The remedy for fraudulent abuse is an injunction. However,

injunction should not be granted unless: (a) there is clear proof of fraud; (b) the fraud constitutes fraudulent abuse of the independent purpose of the letter of credit and not only fraud under the main agreement; and (c) irreparable injury might follow if injunction is not granted or the recovery of damages would be seriously damaged.

49

In its complaint for injunction before the trial court, petitioner alleged that it is entitled to a total extension of two hundred fifty-three (253) days which would move the target completion date. It argued that if its claims for extension would be found meritorious by the ICC, then LHC would not be entitled to any liquidated damages.

50

Generally, injunction is a preservative remedy for the protection of one's substantive right or interest; it is not a cause of action in itself but merely a provisional remedy, an adjunct to a main suit. The issuance of the writ of preliminary injunction as an ancillary or preventive remedy to secure the rights of a party in a pending case is entirely within the discretion of the court taking cognizance of the case, the only limitation being that this discretion should be exercised based upon the grounds and in the manner provided by law.

51

Before a writ of preliminary injunction may be issued, there must be a clear showing by the complaint that there exists a right to be protected and that the acts against which the writ is to be directed are violative of the said right.

52 It must be shown that the invasion of the right sought to be protected is material and substantial, that the

right of complainant is clear and unmistakable and that there is an urgent and paramount necessity for the writ to prevent serious damage.

53 Moreover, an injunctive remedy may only be resorted to when there is a pressing

necessity to avoid injurious consequences which cannot be remedied under any standard compensation.54

In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain LHC's call on the Securities which would justify the issuance of preliminary injunction. By petitioner's own admission, the right of LHC to call on the Securities was contractually rooted and subject to the express stipulations in the Turnkey Contract.

55 Indeed, the Turnkey Contract is plain and unequivocal in that it conferred upon LHC the right to draw

upon the Securities in case of default, as provided in Clause 4.2.5, in relation to Clause 8.7.2, thus:

4.2.5 The Employer shall give the Contractor seven days' notice of calling upon any of the Securities, stating the nature of the default for which the claim on any of the Securities is to be made, provided that no notice will be required if the Employer calls upon any of the Securities for the payment of Liquidated Damages for Delay or for failure by the Contractor to renew or extend the Securities within 14 days of their expiration in accordance with Clause 4.2.2.

56

8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such damages from any monies due, or to become due, to the Contractor and/or by drawing on the Security.

57

The pendency of the arbitration proceedings would not per se make LHC's draws on the Securities wrongful or fraudulent for there was nothing in the Contract which would indicate that the parties intended that all disputes regarding delay should first be settled through arbitration before LHC would be allowed to call upon the Securities. It is therefore premature and absurd to conclude that the draws on the Securities were outright fraudulent given the fact that the ICC and CIAC have not ruled with finality on the existence of default.

Nowhere in its complaint before the trial court or in its pleadings filed before the appellate court, did petitioner invoke the fraud exception rule as a ground to justify the issuance of an injunction.

58 What petitioner did assert

before the courts below was the fact that LHC's draws on the Securities would be premature and without basis in view of the pending disputes between them. Petitioner should not be allowed in this instance to bring into play the fraud exception rule to sustain its claim for the issuance of an injunctive relief. Matters, theories or arguments not brought out in the proceedings below will ordinarily not be considered by a reviewing court as they cannot be raised for the first time on appeal.

59 The lower courts could thus not be faulted for not applying the fraud exception

rule not only because the existence of fraud was fundamentally interwoven with the issue of default still pending before the arbitral tribunals, but more so, because petitioner never raised it as an issue in its pleadings filed in the courts below. At any rate, petitioner utterly failed to show that it had a clear and unmistakable right to prevent LHC's call upon the Securities.

Of course, prudence should have impelled LHC to await resolution of the pending issues before the arbitral tribunals prior to taking action to enforce the Securities. But, as earlier stated, the Turnkey Contract did not require LHC to do so and, therefore, it was merely enforcing its rights in accordance with the tenor thereof. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.

60 More importantly, pursuant to the principle of autonomy of contracts embodied in Article 1306 of the Civil

Code,61

petitioner could have incorporated in its Contract with LHC, a proviso that only the final determination by the arbitral tribunals that default had occurred would justify the enforcement of the Securities. However, the fact is petitioner did not do so; hence, it would have to live with its inaction.

With respect to the issue of whether the respondent banks were justified in releasing the amounts due under the Securities, this Court reiterates that pursuant to the independence principle the banks were under no obligation to determine the veracity of LHC's certification that default has occurred. Neither were they bound by petitioner's declaration that LHC's call thereon was wrongful. To repeat, respondent banks' undertaking was simply to pay once the required documents are presented by the beneficiary.

At any rate, should petitioner finally prove in the pending arbitration proceedings that LHC's draws upon the Securities were wrongful due to the non-existence of the fact of default, its right to seek indemnification for damages it suffered would not normally be foreclosed pursuant to general principles of law.

Moreover, in a Manifestation,62

dated 30 March 2001, LHC informed this Court that the subject letters of credit had been fully drawn. This fact alone would have been sufficient reason to dismiss the instant petition.

Settled is the rule that injunction would not lie where the acts sought to be enjoined have already become fait accompli or an accomplished or consummated act.

63 In Ticzon v. Video Post Manila, Inc.

64 this Court ruled that

where the period within which the former employees were prohibited from engaging in or working for an enterprise that competed with their former employer—the very purpose of the preliminary injunction —has expired, any declaration upholding the propriety of the writ would be entirely useless as there would be no actual case or controversy between the parties insofar as the preliminary injunction is concerned.

In the instant case, the consummation of the act sought to be restrained had rendered the instant petition moot—for any declaration by this Court as to propriety or impropriety of the non-issuance of injunctive relief could have no practical effect on the existing controversy.

65 The other issues raised by petitioner particularly with respect to its

right to recover the amounts wrongfully drawn on the Securities, according to it, could properly be threshed out in a separate proceeding.

One final point. LHC has charged petitioner of forum-shopping. It raised the charge on two occasions. First, in its Counter-Manifestation dated 29 June 2004

66 LHC alleges that petitioner presented before this Court the same

claim for money which it has filed in two other proceedings, to wit: ICC Case No. 11264/TE/MW and Civil Case No. 04-332 before the RTC of Makati. LHC argues that petitioner's acts constitutes forum-shopping which should be punished by the dismissal of the claim in both forums. Second, in its Comment to Petitioner's Motion for Leave to File Addendum to Petitioner's Memorandum dated 8 October 2004, LHC alleges that by maintaining the present appeal and at the same time pursuing Civil Case No. 04-332—wherein petitioner pressed for judgment on the

issue of whether the funds LHC drew on the Securities should be returned—petitioner resorted to forum-shopping. In both instances, however, petitioner has apparently opted not to respond to the charge.

Forum-shopping is a very serious charge. It exists when a party repetitively avails of several judicial remedies in different courts, simultaneously or successively, all substantially founded on the same transactions and the same essential facts and circumstances, and all raising substantially the same issues either pending in, or already resolved adversely, by some other court.

67 It may also consist in the act of a party against whom an adverse

judgment has been rendered in one forum, of seeking another and possibly favorable opinion in another forum other than by appeal or special civil action of certiorari, or the institution of two or more actions or proceedings grounded on the same cause on the supposition that one or the other court might look with favor upon the other party.

68 To determine whether a party violated the rule against forum-shopping, the test applied is whether the

elements of litis pendentia are present or whether a final judgment in one case will amount to res judicata in another.

69 Forum-shopping constitutes improper conduct and may be punished with summary dismissal of the

multiple petitions and direct contempt of court.70

Considering the seriousness of the charge of forum-shopping and the severity of the sanctions for its violation, the Court will refrain from making any definitive ruling on this issue until after petitioner has been given ample opportunity to respond to the charge.

WHEREFORE, the instant petition is DENIED, with costs against petitioner.

Petitioner is hereby required to answer the charge of forum-shopping within fifteen (15) days from notice.

SO ORDERED.