Republic of the PhilippinesSUPREME COURTManila

THIRD DIVISION

G.R. No. 81024           February 3, 2000

ASSET PRIVATIZATION TRUST, petitioner, vs.COURT OF APPEALS, HON. JESUS F. GUERRERO, Judge of the Regional Trial Court of Makati, Branch 148, STA. INES MELALE FOREST PRODUCTS CORPORATION, RODOLFO M. CUENCA and MANUEL I. TINIO,respondents.

PURISIMA, J.:

May the proscription against multiplicity of suits be properly invoked to allow the filing of a supplemental complaint involving basically the same parties as those in the original complaint but with a cause of action arising from a transaction distinct from that sued upon in the original complaint? This is the issue posed in the present petition for review on certiorari of the Decision of the Court of Appeals.

At the outset, it should be clarified that the Development Bank of the Philippines (DBP), not the Asset Privatization Trust (APT), was the original petitioner in the case. APT was first impleaded as a party-respondent in the Resolution of August 14, 19891 on account of the fact that respondent Sta. Ines Melale Forest Products Corporation (SIM) "has been taken over" by the APT. However, in its reply to the manifestation and comment of APT, the DBP asserted that the transfer of SIM's rights and interests to the APT cannot be valid ground for the dismissal of the petition because the said transfer was effected pendente lite. The case could prosper only if the Court would direct "APT, as transferee (of SIM's interests), to be substituted in the action or joined with petitioner" in accordance with Sec. 20, Rule 3 of the Rules of Court.2 Thus, pursuant to the said rule, in the Resolution of March 26, 1990,3 the Court ordered that the DBP "be substituted" as party-petitioner in this case by APT.4

The petition originated from a transaction between the DBP and Galleon Shipping Corporation sometime in 1979. Galleon obtained several "foreign loan guarantee accommodations" from DBP in the total amount of US$87.233 Million for the acquisition of five (5) brand-new vessels and to finance twenty percent (20%) of the acquisition cost of two (2) second-hand vessels. To secure payment thereof, Galleon mortgaged the vessels to DBP. Named joint and solidary debtors with Galleon in such transaction were SIM, Rodolfo M. Cuenca and Manuel I. Tinio. Due to Galleon's default in the payment of its obligations, DBP had to "make good its guarantees to Galleon's foreign creditors." In June 1984, DBP forclosed the mortgage but the proceeds of the auction sales conducted after the extrajudicial foreclosure of the mortgage on the vessels, yielded a deficiency in the amount of P2,700,960,412.60.5

Apparently in anticipation of DBP's claim for the said deficiency, private respondents SIM, Cuenca and Tinio lodged a complaint against DBP, National Development Corporation (NDC) and Galleon (which had become the National Galleon Shipping Corporation (NGSC) before Branch 148 of the Regional Trial Court of Makati, alleging that under Letter of Instruction No. 1155, July 21, 1981, the then President of the Philippines directed NDC to take over the ownership and operation of Galleon. In compliance with such directive, on August 10, 1981 Galleon, represented Cuenca, entered into a Memorandum of Agreement with NDC whereby the latter acquired 100% of Galleon's equity. However, without paying a single centavo in accordance with the "share purchase agreement," NDC took over absolute ownership of Galleon but mismanaged its operations and placed obstacles to the formal signing of the "share purchase agreement". It is alleged that it was during the management of NDC that Galleon incurred the aforesaid indebtedness with the accommodation of DBP.

The Complaint prayed for the issuance of a temporary restraining order directing the defendants "to cease and desist from filing or pursuing any action or claim for deficiency judgment or enforcing further claim of any nature against the plaintiffs or any of them whether connected or not with the transaction herein, whether the action be judicial or extrajudicial foreclosure, until the rights of the parties shall have been declared under L.O.I. 1155, the Memorandum Agreement, and other supporting documents, and contemporaneous actions of the parties." They also prayed that the injunction that the court would grant be made permanent; that they be declared as "no longer liable to the defendants under the Deed of Undertaking, pledge, mortgages, and other accessory contracts between the parties;" that the contracts be declared as having been extinguished and the plaintiffs released from any and all responsibilities therefor, and that the NDC be declared the absolute owner of Galleon "even without the execution of a share purchase agreement and responsible for any and all obligations of said Galleon and the plaintiffs, if any prior to the transfer of ownership, management and control of defendant NDC." They further prayed that NDC and Galleon be made to pay them their "advances" on behalf of Galleon in the total amount of P15.15 million plus $2.3 million, the price of their equity in Galleon and damages.6

In its answer to the complaint, DBP theorized that the liability of the plaintiffs therein for Galleon's obligation was not extinguished because L.O.I. 1155, which was not implemented, was in fact revoked by L.O.I. 1195 dated February 19, 1982. Galleon's ownership was not transferred to NDC because Galleon and NDC did not proceed with the formality of entering into the "share purchase agreement" which was supposed to effect the conveyance as stipulated in the memorandum of Agreement. The DBP stated further that it was enforcing its claim against the plaintiffs upon a deed of undertaking they had signed and not upon the deed of mortgage. By way of counterclaim, the DBP reiterated its deficiency claim against the plaintiffs in the amount of P2,700,960,412.60.7

On May 15, 1985, the trial court issued a writ of preliminary injunction ordering the DBP and its co-defendants to "refrain from pursuing any other deficiency claims or any other claim of any nature, whether judicial or extra-judicial, arising out of, bred by or incident to the transactions covered by the complaint except as counterclaims in this proceedings.8

Meanwhile, the DBP granted SIM, Cuenca and Tinio foreign loan guarantee accommodations in the total amount of P238,526,225.68, as of August 31, 1985. The transactions were secured by a mortgage over certain parcels of land owned by SIM in Magallanes, Agusan del Sur.9 The mortgage contract authorized DBP to take actual possession of the mortgaged property upon breach of any of the conditions therein stipulated.10 Thus, when the mortgagor failed to pay their amortizations on time, the DBP took the initial step to foreclose the mortgage by taking possession of the mortgaged plant site in Magallanes, Agusan del Sur. It posted forty-five (45) security guards with instructions to prevent the taking out therefrom of property or equipment without DBP's approval.11

SIM took DBP's action as a "retaliatory move."12 It sought to supplement the original complaint in Civil Case No. 10378 by filing a "Motion to Admit Supplemental Complaint."13 It alleged that DBP's taking possession of the said plant was a "new development" between the parties and in violation of the writ of preliminary injunction issued and therefore, warranted the admission of the supplemental complaint pursuant to Section 6, Rule 10 of the Rules of Court.

The supplemental complaint dated June 13, 1985 sought a declaration that "the defendant DBP is not entitled to foreclose the mortgage" and that DBP's act of posting its security guards in the Agusan del Sur plant is null and void and unlawful. The same pleading, the first sentence of which stated that it was filed by SIM only, alleged that the presence of DBP's security men at the manufacturing and logging plant site caused SIM's creditors, suppliers and workers to panic. SIM also claimed that the foreclosure of mortgage would "paralyze" its "business operation" thereby rendering jobless 2,300 employees. It then, prayed that judgment be rendered "making the injunction permanent" and that petitioner be adjudged liable to SIM for damages.14

Immediately, or on June 14, 1985, to be precise, the trial court issued an order directing DBP and all persons acting under it "to refrain from interfering with the possession, operation, management and administration"

of SIM's plant at Agusan del Norte, "as well as its other mortgaged properties, until plaintiffs' motion could be heard on June 21, 1985." In the same order the court directed DBP to file its comment on or opposition to plaintiffs' motion to admit supplemental complaint.15

The DBP opposed the admission of the supplemental complaint; alleging primarily "that the subject matter of the supplemental complaint is not a proper subject to be heard in the instant case." 16 Explaining that it "merely exercised its power as attorney-in fact" under the mortgage contract, the DBP argued that the supplemental complaint "introduces another cause of action into this case". It added that the cause of action in the original complaint could not he joined with that alleged in the supplemental complaint "pursuant to the provisions of Sec. 5 of Rule 2 of the Rules of a Court."17

On August 20, 1985, the trial court issued an Order admitting the supplemental complaint;18 stating thus;

Considering that the Supreme Court of the Philippines has implicitly recognized the propriety of admitting a supplemental pleading although the causes therein mentioned are not in any way relevant and material to the action originally pleaded as a means of serving "the ends of a speedy administration of justice or a prompt dispatch of cases" (De la Rama Steamship Co., Inc. v. National Development Co., 6 SCRA 775, 781); that the provisions of the Rules on joinder of causes of action should be liberally construed to avoid multiplicity of suits and to expedite the disposition of litigation at minimum cost (Francisco on Rules of Court, 1973 Ed., Vol. I, p. 186, citing cases & authorities);that the Supreme Court has likewise recognized an exception to the general rule that it is a prerequisite to the joinder of causes of action that all the causes must affect all the parties to the action (Sapalico vs. Calpe, et. al., 41 Phil 850, cited in Francisco, supra, p. 187); that cognizance of the cause pleaded in plaintiffs supplemental pleading will not by itself cause prejudice to the other parties inasmuch as certain specific procedural measures in the course of the proceedings could be adopted and imposed by the Court to obviate not only inconvenience on the part of the parties but more importantly confusion of the material issues in controversy; and that the filing of the supplemental pleading with this Court is not violative of the rules on venue considering that the subject of the action refers essentially to the propriety of the right of defendant Development Bank of the Philippines to foreclose and the legality of certain acts done or about to be perpetrated by the said defendants anterior to and as incidents of the exercise of such right to foreclose, and not the actual foreclosure of the mortgaged propertied located in Mindanao;

This Court finds no cogent grounds to deny the admission of plaintiffs' Supplemental Complaint.

x x x           x x x           x x x

The DBP questioned the said Order before the Court of Appeals via a petition for certiorari dated November 19, 1985.19

On February 18, 1987, the Court of Appeals20 declared the assailed Order as null and void, dismissed the supplemental complaint and lifted the preliminary injunction issued by the trial court. It held that the trial court gravely abused its discretion in issuing subject Order for two reasons: First, the admission of the supplemental complaint violated the rule on venue, specifically Sec. 2 (a), Rule 4 of the Rules of Court. The supplemental complaint was filed when DBP had already initiated foreclosure proceedings and therefore while the supplemental complaint appeared to be a personal action, in reality it was a real action seeking "a ruling on the legality of (DBP's) foreclosure action." Citing Lizares v. Caluag,21 the Court of Appeals held that venue was improperly laid. Second, a supplemental complaint should strengthen or reinforce the cause of action or defense in the original complaint for it is meant to "supply deficiencies in aid of one original pleading, not to entirely substitute the latter." The supplemental complaint, however, has a subject matter "distinct and different from each other." The cause of action in the original complaint arose from the mortgage contract executed by Galleon while that in the supplemental complaint arose from the mortgage contract "executed by principal obligors (firm)."

The Court of Appeals also held that the trial court gravely, abused its discretion in directing the parties "to maintain the status quo ante, litem" as it would restrain the DBP from exercising its right to foreclose the mortgage in accordance with P.D. No. 385. Section 2 of said decree specifically enjoins courts from issuing permanent injunctions against any government financial institution that seeks foreclosure of mortgage unless after hearing it is proven that after the filing of the foreclosure proceedings, the borrower had paid twenty percent (20%) of the outstanding arrearages. The status quo order also violated Sec. 5, Rule 58 of the Rules of Court, as amended by B.P. Blg. 224, limiting the period of a restraining order to only twenty (20) days from the date of its issuance, as well as Circular No. 13 dated May 17, 1984 of this Court enjoining Justices and Judges to observe strictly said provisions of law.22

However, upon motion for reconsideration, the Court of Appeals reversed its aforesaid Decision. In its Resolution dated August 25, 1987, the appellate court said:

There is a difference between an action for foreclosure of mortgage, and an action to stop the foreclosure of said mortgage, because the former is a real action and, therefore, venue is governed by Section 2-(a) of Rule 4 of the Rules of Court; while the latter is definitely a personal action which is governed by Section 2-(b) of said rule.

A personal action is one for the recovery of personal property, the enforcement of a contract or damages for its breach, or for damages for injury to person or property (1 C.J.S. 948). In a real action, the plaintiff seeks the recovery of real property, or, as indicated in Section 2(a) of Rule 4, it is an action affecting title to real property or for the recovery of possession, or for partition or condemnation of, or foreclosure of a mortgage on, real property (Hernandez vs. Rural Bank of Lucena, Inc., 81 SCRA 75, 84).

The case of Lizares, Inc. v. Caluag (4 SCRA 746) cited by petitioner in support of its claim that venue was improperly laid is clearly not applicable since said case involves "Cacnio's title to the real property adverted to" and involved his retention of possession of said property, while in the case at bar, there is no dispute as to the title of the properties therein. What is in issue is the right of petitioner to foreclose, and this involves a personal action.

x x x           x x x           x x x

At any rate, the original and amended complaint filed by private respondent Sta. Ines (SIM) against petitioner with the Regional Trial Court of Makati, Branch 148, in Civil Case No. 10387, with prayer for the issuance of a writ of preliminary injunction has for its purpose to declare private respondents not liable as co-makers to petitioner in view of LOI No. 1155, and to defeat petitioner's right to sue respondents for a deficiency claim. On May 15, 1985, said Court acting on the petition for the issuance of a writ preliminary injunction, issued said writ restraining petitioner —

. . . from pursuing any other deficiency claims or any other claim of any nature, whether judicial or extrajudicial, arising out of, bred by or incident to the transaction covered by the complaint, except on counterclaim.

In spite of said injunction, on June 3, 1985 petitioner posted guards at the Magallanes Plant of private respondent SIM to immobilize private respondent, thereby causing panic on the suppliers of SIM. The need, therefore, for a declaration that the petitioner could not yet foreclose on the mortgage and for an imposition of damages, necessitated the filing on June 13, 1985 of a Motion to Admit Supplemental Complaint with application for issuance of restraining order or preliminary injunction. Private respondent SIM questioned the right of petitioner to take possession of its mortgaged properties and assets and to foreclose the same. On June 14, 1985, the respondent Judge issued a restraining order directing petitioner. (sic)

. . . to refrain from interfering with the possession, management and administration of respondents' mortgaged assets.

x x x           x x x           x x x23

On the alleged error of the court a quo in directing the parties to maintain the status quo ante litem, the Court of Appeals agreed with therein private respondents that in raising the issue of equity, the DBP did so with "dirty hands" because it had invoked the jurisdiction of the trial court to stop SIM from moving out any item from the plant site and it had agreed with private respondents in open court that the status quo ante litem should be maintained. The Court of Appeals considered as an "important issue" the fact that the DBP had ceased to be the real party-in-interest by the transfer of SIM's account to the APT. It noted the PCGG's letter to the DBP emphasizing that it was necessary to keep SIM operational because as "a surrendered asset with millions worth of valuable equipment," a foreclosure would mean its closure, the loss of jobs and the eventual destruction of equipment by vandals. The Court of Appeals added that the PCGG cannot allow the foreclosure of SIM because of its policy that foreclosure is allowed only if "there is no pending litigation or controversy regarding either the asset or the loan transaction which may adversely affect the foreclosure of the sequestered asset."

The DBP presented a motion for the reconsideration of the Resolution of August 25, 1987 but on November 25, 1987, the Court of Appeals denied the same for lack of merit.

Undaunted, DBP has come to this Court via the instant petition for review on certiorari where petitioner DBP (now the APT) contends that:

THE HONORABLE COURT OF APPEALS ERRED IN ADMITTING THE SUPPLEMENTAL COMPLAINT IT BEING VIOLATIVE OF THE —

A) RULE ON VENUE OF REAL ACTION (Rule 4, Sec. 2-A, Revised Rules of Court)

B) RULE ON JOINDER OF CAUSES OF ACTION (Rule 2, Sec. 5, Revised Rules of Court)

C) RULE ON MATTERS SUBJECT OF SUPPLEMENTAL PLEADINGS (Rule 10, Sec. 8, Revised Rules of Court)

II

THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE LOWER COURT'S ISSUANCE OF A RESTRAINING ORDER/PRELIMINARY INJUNCTION WHICH IS CONTRARY TO LAW.

III

THE HONORABLE COURT OF APPEALS ERRED IN CONSIDERING THAT THE TRANSFER OF THE STA. INES MELALE ACCOUNT FROM DBP TO ASSETS PRIVATIZATION TRUST WARRANTS DISMISSAL OF THE PETITION.

The petition is impressed with merit.

At the time the supplemental complaint was filed in Civil Case No. 10387, the pertinent provision of Rule 10 of the Rules of Court provided:

Sec. 6. Matters subject of supplemental pleadings. — Upon motion of a party the court may, upon reasonable notice and upon such terms as are just, permit him to serve a supplemental pleading

setting forth transactions, occurrences or events which have happened since the date of the pleading sought to be supplemented. If the court deems it advisable that the adverse party should plead thereto, it shall so order, specifying the time therefor.24

Under the aforecited rule, a supplemental pleading is meant to supply deficiencies in aid of the original pleading and not to dispense with or substitute the latter.25 It is not like an amended pleading which is a substitute for the original one. It does not supersede the original, but assumes that the original pleading is to stand. The issues joined under the original pleading remain as issues to be tried in the action.26

In Leobrera v. Court of Appeals27 the Court ruled that when the cause of action stated in the supplemental complaint is different from the cause of action mentioned in the original complaint, the court should not admit the supplemental complaint. In that case, the Bank of the Philippine Islands (BPI) granted Carlos Leobrera an P800,000.00 credit facility that was secured by two (2) real estate mortgages. The credit facility was later converted into "a revolving promissory note line" the last of which was renewed on March 21, 1986 through two (2) ninety-day promissory notes. Upon maturity of the notes, Leobrera and BPI negotiated for renewal thereof but they failed to agree. Consequently, BPI demanded full payment 90-day loans. Because Leobrera failed to pay the loans, BPI prepared to foreclose the mortgages. However, before BPI could institute the foreclosure proceedings, Leobrera filed a complaint for damages with a prayer for the issuance of a writ of preliminary injunction to enjoin BPI from foreclosing the mortgages. The trial court issued the writ applied for.

It appeared, however, that apart from the P800,000.00 credit facility, BPI also granted Leobrera a three-year term loan of P500,000.00 secured by a real estate mortgage. After Leobrera had defaulted in his amortization payments, BPI called the entire loan due and demandable. Leobrera failed to pay but before BPI could foreclose the mortgage, Leobrera filed with the trial court a "Motion to File Supplemental Complaint" with the supplemental complaint attached thereto. The trial court granted Leobrera's motion but the Court of Appeals nullified that order of the trial court. Leobrera thus filed a petition for review on certiorari with this Court which, in due course, denied Leobrera's petition; this Court ratiocinating:

As to the supplemental complaint, what likewise militates against its admission is the fact that the matters involved therein are entirely different from the causes of action mentioned in the original complaint.

A supplemental complaint should, as the name implies, supply only deficiencies in aid of an original complaint [British Traders Insurance Company v. Commissioner of Internal Revenue, G.R. No. L-20501, April 30, 1965, 13 SCRA 728]. It should contain only causes of action relevant and material to the plaintiffs right and which help or aid the plaintiffs right or defense [De la Rama Steamship Co., Inc. v. National Development Company, G.R. No. L-15659, November 30, 1962, 6 SCRA 775]. The supplemental complaint must be based on matters arising subsequent to the original complaint related to the claim or defense presented therein, and founded on the same cause of action. It cannot be used to try a new matter or a new cause of action [See Randolphi v. Missouri-Kansas-Texas R. Co., D.C. Mo. 1948, 78 F. Supp. 727, Berssenbrugge v. Luce Mfg. Co., D.C. Mo. 1939, 30 F. Supp. 101.]

While petitioner would persuade this Court that the causes of action are interrelated, the record reveals otherwise. The record shows that petitioner's main cause of action in the original complaint filed in Civil Case No. 15644 concerned BPI's threat to foreclose two real estate mortgages securing the two 90-day promissory notes executed by petitioner in 1986. Petitioner alleges that this threatened foreclosure violated the terms of the 1980 amicable settlement between BPI and petitioner.

The supplemental complaint on the other hand alleged facts of harassment committed by BPI in unreasonably opting to declare petitioner in default and in demanding full liquidation of the 1985 three-year term loan. This three-year term loan, as previously mentioned, was entirely distinct and separate from the two promissory notes. It was independent of the 1980 amicable settlement

between petitioner and BPI which gave rise to the credit facility subject of the original complaint. Although there is identity in the remedies asked for in the original and supplemental complaints, i.e., injunction, petitioner's subsequent cause of action giving rise to the claim for damages in the supplemental complaint is unrelated to the amicable settlement which brought about the grant of the credit facilities, the breach of which settlement is alleged to be the basis of the original complaint. Petitioner himself in his supplemental complaint admits this. . . .

x x x           x x x           x x x

The two causes of action being, entirely, different, the latter one could not be successfully pleaded by supplemental complaint.28

The facts of the Leobrera cases are not very different from those in the case under scrutiny. However, private respondent SIM attempts to impress upon the Court that the facts alleged in the original complaint are connected with those in the supplemental complaint because the DBP's act of initiating foreclosure proceedings as regards the mortgaged plant in Agusan del Sur was in violation of the May 15, 1985 writ of preliminary injunction. Nevertheless, a closer look at the facts reveals that the original complaint was based on a cause of action that is entirely different from that stated in the supplemental complaint which arose out of a different set of facts.1âwphi1.nêt

A cause of action is the fact or combination of facts which affords a party a right to judicial interference in his behalf. It is the reason why the litigation has come about; it is the act or omission of defendant resulting in the violation of someone's right. Its existence is determined upon consideration of the statements or allegations in the complaint.29

In the original complaint in Civil Case No. 103871 what private respondents sought to prevent by their prayer for an injunction was the DBP's intention to go after private respondents for the deficiency of P2,700,960,412.60 resulting from the foreclosure of the mortgages in June 1984 of seven (7) vessels of Galleon. On the other hand, the cause of action stated in the supplemental complaint was the DBP's initial act of posing security guards in SIM's Agusan del Norte plant preparatory to the foreclosure of the mortgage of the same plant, allegedly in contravention of the writ of preliminary injunction issued by the trial court in Civil Case No. 10387. The supplemental complaint, however, states a fact that is entirely distinct from those in the original complaint. It alleges that the DBP's taking over the Agusan del Sur plant of SIM could not have been, in pursuance of any agreement between SIM and the DBP because the mortgaged dated November 8, 1984 that was entered into between those parties "does not provide extrajudicial and forcible taking over of the mortgaged properties by defendant DBP."30 Although the thrust of the allegations in the supplemental complaint was to create a connection or relation between it and the original complaint, the same allegations reveal the fact that its filing was impelled by the imminence of the foreclosure of the November 8, 1984 mortgage, that is different from and outside of the subject matter of the complaint.

Furthermore, if the supplemental complaint "assumes the original pleading to stand," then there was no pint in naming only the SIM as the plaintiff in the supplemental complaint. That fact only proves that the other plaintiffs in the original complaint, namely, Cuenca and Tinio, have no cause of action against the DBP in the supplemental complaint as it is in reality based on an different subject matter.

Granting that SIM's purpose in filing the supplemental complaint was to effect a joinder of causes of action to avoid multiplicity of suits, it must fail just the same. The Rules of Court provide that causes of action may be joined provided that they arise out of the same contract, transaction or relation between the parties or are for demands for money or are of the same nature and character.31 In Republic v. Hernandez,32 the Court held:

The statutory intent behind the provisions on joinder of causes of action is to encourage joinder of actions which could reasonably be said to involve kindred rights and wrongs, although the courts have not succeeded in giving a standard definition of the terms used or in developing a rule of

universal application. The dominant idea is to permit joinder of causes of action, legal or equitable, where there is some substantial unity between them. While the rule allows a plaintiff to join as many separate claims as he may have, there should nevertheless be some unity in the problems presented and a common question of law and fact involved, subject always to the restriction thereon regarding jurisdiction, venue and joinder of parties. Unlimited joinder is not authorized

In this case, hardly do the original and supplemental complaints meet the required test of "unity in the problem presented" and "a common question of law and fact involved" as regards jurisdiction venue and joinder of parties. The ultimate problem in the original complaint as far as private respondents are concerned is how to prevent the DBP from pursuing the amount of deficiency after an extrajudicial foreclosure sale of the mortgaged vessels. In the supplemental complaint, what private respondent SIM seeks to preempt is the foreclosure of the mortgage of its Agusan del Sur plant.

As regards the issues of jurisdiction and venue, the original complaint clearly presents a personal action between the parties as it aims for a declaration of nonliability of private respondents under the contracts wherein they are solidarily liable with Galleon. A personal action is one brought for the recovery of personal property or for the enforcement of some contract or for the recovery of damages for its breach, or the recovery of damages for the commission of an injury to the person or property.33 Hence, it was properly filed with the RTC of Makati in accordance with Sec. 2(b) of Rule 4 of the Rules of Court.34

On the other hand, the supplemental complaint is actually a real action as it was filed for the "specific recovery of land, tenements, or hereditaments."35 Notably, private respondent SIM prays in the supplemental complaint that the DBP be declared as not entitled to foreclose the mortgage dated November 8, 1984 and that the DBP be ordered to restructure SIM's indebtedness. A declaration that the said mortgage should not be foreclosed involves a determination of the validity of the mortgage even though its subject mater, a real property, is located in Agusan del Sur and not in Makati. Although the supplemental complaint was so crafted that a cursory perusal thereof would create the impression that it is a personal action, the fact that is actually a real action, notwithstanding the claim for damages, may be gleaned from its prayer:

WHEREFORE, it is most respectfully prayed that, after hearing on the merits, judgment be rendered:

1. Making the injunction permanent;

2. Declaring that the defendant DBP is not entitled to foreclose the mortgage under the Deed of Mortgage;

3. Ordering defendant DBP to restructure the indebtedness of plaintiff SIM to defendant DBP;

4. Sentencing the defendant DBP to pay to plaintiff SIM the following items of damages —

a) actual and consequential damages of not less that P21M;

b) moral damages of not less than P1M;

c) exemplary damages of not less than P1M;

d) 25% of whatever may be recovered by plaintiff SIM from defendant DBP as attorney's fees;

e) costs of suit;

5. Granting to the plaintiff SIM such further and other reliefs to which it may be entitled in law and in equity.

Should the prayer for a permanent injunction be considered in connection with the writ of injunction that enjoined the DBP from "pursuing any other deficiency claims or any other claim of any nature, whether judicial or extrajudicial, arising out of, bred by or incident to the transactions covered by the complaint," then SIM's primordial aim in filing the supplemental complaint is to, end DBP's continued possession of the Agusan del Sur plant. That would of course mean that the court had to deal with a transaction that is not "covered by the (original) complaint" as the November 8, 1984 mortgage is not alleged therein. Moreover, upon admission of the supplemental complaint, the Makati court would have to enforce the writ of injunction in Agusan del Sur.

As regards the prayer that the DBP be declared as "not entitled to foreclose" the November 8, 1984 mortgage that private respondent SIM admitted it had entered into with the DBP, it might as well be read as a prayer for the setting aside of the provisions of said mortgage, if not its nullification, in light of the following allegations in the supplemental complaint:

VII

The only instrument signed by the plaintiff SIM in favor of the defendant DBP is a mortgage dated November 8, 1984, which does not provide extrajudicial and forcible taking over of the mortgaged properties by defendant DBP, a copy of which is hereto attached as Annex "C" and made an integral part hereof;

VIII

The forcible and extrajudicial taking over possession of the Magallanes plant of the plaintiff SIM is null and void ab initio and unlawful, considering inter alia:

a) There is no written contract, authorization, deed or instrument authorizing defendant DBP to extrajudicially possess and take over the said plant;

b) The forcible taking over of the said plant by the defendant DBP constitutes a  pactum commissorium for it amounts to an appropriation by defendant DBP of the mortgaged properties without any foreclosure thereof;

c) The said extrajudicial taking over of possession also constitute a disobedience of the writ of preliminary injunction issued by this Honorable Court;

d) Defendant DBP can not immediately take over possession without any writ of possession being issued by any court under Act 3135, as amended by Act 4118, because even after the foreclosure of the mortgagee, the mortgagor is still entitled to retain possession within one year from the registration of the certificate of sale, unless the court issues a writ of possession upon the mortgage putting up the corresponding bond and after hearing the mortgagor, which situations has not yet arisen in the case at bar;

e) The plaintiff SIM has been required by defendant DBP to secure additional logging concessions to supplement its forest resources as a basic condition to restructure its loan, with assurance by defendant DBP that said loan would be restructured, and plaintiff has acquired Basey Wood Industries, Inc. from a P20M loan extended by Far East Bank & Trust Co. with a current floating rate of interest, and this investment stands to be lost totally by the plaintiff;

f) The defendant DBP is imposing surcharges, penalties, and exorbitant and unconscionable rates of interest in spite of the fact that plaintiff SIM is prevented by fortuitous event from complying therewith, such as, but not limited to the default of the Republic of the Philippines in the payment of its worl (sic) loan, which has produced serious repercussions and legal complications to plaintiff SIM;

g) The said impositions are not warranted by any promissory note or mortgage;

h) The said taking over of possession and foreclosure would paralyze the business operation of the plaintiff SIM, since the plaintiff is prevented from bringing out any property or equipment;

i) This will also panic creditors and suppliers of plaintiff SIM, and invite several judicial or extrajudicial actions to take over the assets of the company;

j) The said acts will also result in legal and commercial complications with the foreign buyers of the plaintiff SIM, who have made cash advances for products to be produced and delivered to them by plaintiff SIM;

k) The disruption of the operation of the plant would result in rendering jobless 2,300 employees of the plaintiff SIM, and in the looting of company properties, theft and/or destruction of its assets, etc.;

x x x           x x x           x x x36

In short, while private respondent SIM admits that it had entered into a mortgage contract with DBP involving the Agusan del Sur plant, SIM denies that the contract has a power of attorney authorizing the DBP to take possession of the Agusan del Sur plant. In the same breadth, it asserts that the DBP's "taking over" of possession of the plant, apparently in pursuance of the mortgage contract, would irretrievably damage the plant's operation and that such occurrence would warrant a declaration that the DBP "is not entitled to foreclose the mortgage." Notably, the supplemental complaint cleverly intertwines the issue of the validity of the mortgage of November 8, 1984 with the enforcement of the preliminary injunction issued in Civil Case No. 10387 that prevented the DBP's pursuit of the deficiency resulting from the foreclosure sale in June 1984.

However, such ingenious attempt may not efface the fact that the ultimate goal of the supplemental complaint is two-pronged: (a) to retake possession of the plant, and (b) to abrogate the provisions of the mortgage contract or to nullify it, for its own survival. A prayer for the nullification of the mortgage is a prayer affecting real property and hence, it is a real action. Verily, as this Court held in Fortune Motors (Phils.), Inc. v. Court of Appeals, a motion to dismiss an action filed in Manila to annul an extrajudicial foreclosure sale of real property located in Makati on the ground of improper venue should be granted as the action was a real action affecting real property.37 Hence, the supplemental complaint should have been filed as a separate action in Agusan del Sur in accordance with the following provision of Rule 4 of the Rules of Court:

Sec. 2. Venue in Courts of First Instance (now Regional Trial Courts). — Actions affecting title to, or for recovery of possession, or for partition or condemnation of, or foreclosure of mortgage on, real property, shall be commenced and tried in the province where the property or any part thereof lies.

x x x           x x x           x x x

The trial court also incorrectly relied upon the ruling in De la Rama Steamship Co., Inc. v. National Development Company.38 In its Order of August 20, 1985, the trial court stated that in the De la Rama case, this Court "implicitly recognized the propriety of admitting a supplemental pleading although the causes therein mentioned are not in any way relevant and material to the action originally pleaded as a means of serving

"the ends of speedy administration of justice or a prompt dispatch of cases.'"39 The De la Rama ruling should be understood in its proper context. In that case, the original action and the supplemental pleading stemmed from one and the same contract. i.e., the management agreement dated October 26, 1949 between De la Rama Steamship Co. and the NDC. Thus, the joinder of causes of action would still have been in accord with the Rules. Since the supplemental pleading was filed after the original action was decided, this Court ordered that it "be enrolled in the court below as a new action." There is thus a marked difference between the facts of the case at bar and those obtaining in De la Rama.

Multiplicity of suits should be avoided if the filing of a separate and independent action to recover a claim would entail proving exactly the same claim in an existing action.40 It can not however, be avoided when the cause of action in the two complaints are distinct and separate from each other.

With respect to the validity of the restraining order, issued on June 14, 1985 and the trial court's directive enjoining the parties to maintain the status quo ante litem, petitioner contends that these are contrary to P.D. 38541 and Sec. 5, Rule 59 of the Rules of Court, as amended by B.P. Blg. 224,42 as well as this Court's Circular No. 13 dated May 17, 1984.43

That issue has been mooted by the invalidity of the order admitting the supplemental complaint. "A temporary restraining order is merely an ancillary process to an action owing its existence entirely and exclusively from the latter. It cannot survive the main case which it was but an incident."44

It should he stressed, moreover, that P.D. 385 should only be invoked after the factual basis for its application has been laid through the presentation of evidence in a trial on the merits. It cannot be applied automatically.45 It is noteworthy, too, that the TRO was issued on June 14, 1985, the same day the motion to admit the supplemental pleading was filed, while the directive to maintain the status quo ante litem was incorporated in the order of August 20, 1985 or more than two (2) months after the issuance of the restraining order. By force of law, the TRO expired on the 20th day after notice of the June 14, 1985 TRO. It is evident therefore that respondent judge acted with grave abuse of discretion in extending the lifetime of the restraining order that had in the meantime expired, by issuing another order in violation of B.P. Blg. 224. As such, the second order of August 20, 1985 as far as it ordered the return to the status quo ante litem is concerned, is a "patent nullity"46 because the 20-day lifetime of a restraining order is non-extendible.47 The court is without discretion to extend such period considering the mandatory tenor of the Rule.48

On the issue of whether or not the transfer of private respondent SIM's assets to APT warrants the dismissal of this petition, the Court of Appeals erred in holding that petitioner which should pursue the claim against SIM is no longer the real party-in-interest and therefore, the instant case for certiorari should be dismissed.49 Transfer of interest from litigant to another person or entity is a reason for substitution of the former in a case. It is not a ground for dismissal of the case or petition. Thus, in the Resolution of March 26, 1990,50 this Court ordered the substitution of the original petitioner by Asset Privatization Trust "pursuant to Sec. 20, Rule 3 of the Rules of Court,"51 now Sec. 19 of Rule 3 of the 1997 Rules of Civil Procedure.1âwphi1.nêt

WHEREFORE, the Resolutions of August 25, 1987 and November 25, 1987 of the Court of Appeals are SET ASIDE and the Decision of February 18, 1987 of the same appellate court is REINSTATED and AFFIRMED. No pronouncement as to costs.

SO ORDERED.

Melo, Vitug, Panganiban and Gonzaga-Reyes, JJ., concur.

G.R. No. 133113            August 30, 2001

EDGAR H. ARREZA, petitioner, vs.MONTANO M. DIAZ, JR., respondent.

QUISUMBING, J.:

This petition assails the decision 1 promulgated on December 24, 1997, and the resolution 2 dated March 6, 1998, by the Court of Appeals in CA-G.R SP No. 43895. That decision dismissed the petition for certiorari questioning the order 3 dated February 4, 1997 of the Regional Trial Court of Makati City, Branch 59, in Civil Case No. 96-1372, which had denied petitioner's motion to dismiss the complaint filed against him on grounds of res adjudicata.

The factual antecedents of the present petition are culled from the findings of the Court of Appeals.

Bliss Development Corporation is the owner of a housing unit located at Lot 27. Block 30 New Capitol Estates I, Barangay Matandang Balara, Quezon City. In the course of a case involving a conflict of ownership between petitioner Edgar H. Arreza and respondent Montano M. Diaz, Jr., 4 docketed as Civil Case No. 94-2086 before the Regional Trial Court of Makati, Branch 146, Bliss Development Corporation filed a complaint for interpleader.

In a decision dated March 27, 1996, the trial court resolved the conflict by decreeing as follows:

WHEREFORE, premises considered, the herein interpleader is resolved in favor of defendant Edgar H. Arreza, and plaintiff Bliss Development is granted cognizance of the May 6, 1991 transfer of rights by Emiliano and Leonila Melgazo thru Manuel Melgazo, to said defendant Edgar Arreza. The case is dismissed as against defendant Montano M. Diaz, Jr.

The third-party complaint is likewise dismissed.

SO ORDERED.

The decision became final and was duly executed with Bliss executing a Contract to Sell the aforementioned property to petitioner Arreza. Respondent Diaz was constrained to deliver the property with all its improvements to petitioner.

Thereafter respondent Diaz filed a complaint against Bliss Development Corporation, Edgar H. Arreza, and Domingo Tapay in the Regional Trial Court of Makati, Branch 59, docketed as Civil Case No. 96-1372. He sought to hold Bliss Development Corporation and petitioner Arreza liable for reimbursement to him of P1,706,915;58 representing the cost of his acquisition and improvements on the subject property with interest at 8% per annum.

Petitioner Arreza filed a Motion to Dismiss the case, citing as grounds res adjudicata or conclusiveness of the judgment in the interpleader case as well as lack of cause of action.

In an Order dated February 4, 1997, the motion was denied for lack of merit.

A Motion for Reconsideration filed by Arreza was likewise denied on March 20, 1997.

On April 16, 1997, Arreza filed a petition for certiorari before the Court of Appeals alleging that the Orders dated February 4 and March 20, 1997, were issued against clear provisions of pertinent laws, the Rules of Court, and established jurisprudence such that respondent court acted without or in excess of jurisdiction, or grave abuse of discretion amounting to lack or excess of jurisdiction.

The petition was dismissed for lack of merit. The Court of Appeals said:

The decision invoked by the petitioner as res adjudicata resolved only the issue of who between Edgar H. Arreza and Montano Diaz has the better right over the property under litigation. It did not resolve the rights and obligations of the parties.

The action filed by Montano M. Diaz against Bliss Development Corporation, et al. seeks principally the collection of damages in the form of the payments Diaz made to the defendant and the value of the improvements he introduced on the property — matters that were not adjudicated upon in the previous case for interpleader.

xxx           xxx           xxx

WHEREFORE, this petition is hereby DISMISSED with costs against the petitioner.

SO ORDERED.5

Petitioner's motion to reconsider the decision of the Court of Appeals was denied. 6 Hence, the present petition, where petitioner raises the following grounds for review:

I

THE CAUSE OF ACTION EMBODIED IN THE PRESENT RTC CASE PERTAINING TO MR. DIAZ'S CLAIMS FOR REIMBURSEMENT OF AMOUNTS WHICH HE ALLEGEDLY PAID TO BLISS BY WAY OF PREMIUM OR INSTALLMENT PAYMENTS FOR THE ACQUISITION OF THE PROPERTY WAS ERRONEOUSLY BROUGHT AGAINST MR. ARREZA. ALSO, SAID CLAIMS ARE BARRED BY RES ADJUDICATA OR CONCLUSIVENESS OF A PRIOR JUDGMENT IN THE PRIOR RTC CASE WHICH WAS ULTIMATELY AFFIRMED BY THIS HONORABLE COURT IN G.R. NO. 128726.

II

THE CAUSE OF ACTION EMBODIED IN THE PRESENT RTC CASE PERTAINING TO MR. DIAZ'S CLAIMS FOR REIMBURSEMENT OF THE COST OF IMPROVEMENTS HE ALLEGEDLY INTRODUCED TO THE PROPERTY IS LIKEWISE BARRED BY RES ADJUDICATA OR CONCLUSIVENESS OF A PRIOR JUDGMENT IN THE PRIOR RTC CASE WHICH WAS ULTIMATELY AFFIRMED BY THIS HONORABLE COURT IN G.R NO. 128726.

III.

THE RULING IN THE PRIOR CA PETITION (CA-G.R. SP. NO. 41974) WHICH WAS ULTIMATELY AFFIRMED BY THIS HONORABLE COURT IN G.R. NO. 128726 THAT THE DECISION IN THE PRIOR RTC CASE SETTLED ALL CLAIMS WHICH MESSRS. DIAZ AND ARREZA HAD AGAINST EACH OTHER CONSTITUTES THE LAW OF THE CASE BETWEEN THEM AND SERVES AS BAR TO THE FILING OF THE PRESENT RTC CASE INVOLVING THE SAME CLAIMS.

IV.

IN ITS ENTIRETY, THE AMENDED COMPLAINT IN THE PRESENT RTC CASE IS DISMISSIBLE ON THE GROUND OF LACK OF CAUSE OF ACTION.7

The issue for our resolution now is whether respondent Diaz's claims for reimbursement against petitioner Arreza are barred by res adjudicata.

The elements of res adjudicata are: (a) that the former judgment must be final; (b) the court which rendered judgment had jurisdiction over the parties and the subject matter; (c) it must be a judgment on the merits; and (d) there must be between the first and second causes of action identity of the parties, subject matter, and cause of action.8

Worthy of note, the prior case for interpleader filed with Branch 146 of the Regional Trial Court of Makati, Civil Case No. 94-2086, was settled with finality with this Court's resolution in G.R. No. 128726. 9 The judgment therein is now final.

When the Regional Trial Court of Makati (Branch 146) rendered judgment, it had priorly acquired jurisdiction over the parties and the subject matter. Respondent, however, contends that the trial court did not acquire jurisdiction over the property subject of the action, as the action was instituted in Makati City while the subject unit is situated in Quezon City.

We find, however, that in his answer to the complaint dated October 3, 1994, respondent alleged:

20. That should the said additional provision be declared valid and in the remote possibility that the alleged conflicting claimant is adjudged to possess better right herein answering defendant is asserting his right as a buyer for value and in good faith against all persons/parties concerned.10 (Italics supplied)

Respondent in his answer also prayed that:

D. Should the said additional provision be found valid and in the event his co-defendant is found to possess better rights, to adjudge him (Diaz) entitled to rights as a buyer in good faith and for value.11

By asserting his right as a buyer for value and in good faith of the subject property, and asking for relief arising therefrom, respondent invoked the jurisdiction of the trial court. Having invoked the jurisdiction of the Regional Trial Court of Makati (Branch 146) by filing his answer to secure affirmative relief against petitioner, respondent is now estopped from challenging the jurisdiction of said court after it had decided the case against him. Surely we cannot condone here the undesirable practice of a party submitting his case for decision and then accepting the judgment only if favorable, but attacking it on grounds of jurisdiction when adverse.12

Respondent also claims that there is no identity of causes of action between Civil Case No. 94-2086, the prior case, and Civil Case No. 96-1372, the present case subject of this petition, as the former involved a complaint for interpleader while the latter now involves an action for a sum of money and damages. He avers that a complaint for interpleader is nothing more than the determination of rights over the subject matter involved.

In its assailed decision, respondent Court of Appeals pointed out that the 1997 Rules of Civil Procedure provide that in a case for interpleader, the court shall determine the respective rights and obligations of the parties and adjudicate their respective claims.13 The appellate court noted, however, that the defendants in that interpleader case, namely Diaz and Arreza, did not pursue the issue of damages and reimbursement although the answer of respondent Diaz did pray for affirmative relief arising out of the rights of a buyer in good faith.14

Following the same tack, respondent Diaz now alleges that the issues in the prior case, Civil Case No. 94-2086, were delimited by the pre-trial order which did not include matters of damages and reimbursement as an issue. He faults petitioner for not raising such issues in the prior case, with the result that the trial court did not resolve the rights and obligations of the parties. There being no such resolution, no similar cause of action exists between the prior case and the present case, according to respondent Diaz.

Respondent in effect argues that it was incumbent upon petitioner as a party in Civil Case No. 94-2086 to put in issue respondent's demands for reimbursement. However, it was not petitioner's duty to do the lawyering for respondent. As stated by the Court of Appeals, the court in a complaint for interpleader shall determine the rights and obligations of the parties and adjudicate their respective claims. Such rights, obligations, and claims could only be adjudicated if put forward by the aggrieved party in assertion of his rights. That party in this case referred to respondent Diaz. The second paragraph of Section 5 of Rule 62 of the 1997 Rules of Civil Procedure provides that the parties in an interpleader action may file counterclaims, cross-claims, third party complaints and responsive pleadings thereto, "as provided by these Rules." The second paragraph was added to Section 5 to expressly authorize the additional pleadings and claims enumerated therein, in the interest of a complete adjudication of the controversy and its incidents.15

Pursuant to said Rules, respondent should have filed his claims against petitioner Arreza in the interpleader action. Having asserted his rights as a buyer in good faith in his answer, and praying relief therefor, respondent Diaz should have crystallized his demand into specific claims for reimbursement by petitioner Arreza. This he failed to do. Such failure gains significance in light of our ruling in Baclayon vs. Court of Appeals, 182 SCRA 761, 771-772 (1990), where this Court said:

A corollary question that We might as well resolve now (although not raised as an issue in the present petition, but conformably with Gayos, et al. v. Gayos, et al., G.R. No. L-27812, September 26, 197S, 67 SCRA 146, that it is a cherished rule of procedure that a court should always strive to settle the entire controversy in a single proceeding leaving no root or branch to bear the seeds in future litigation) is whether or not the private respondents can still file a separate complaint against the petitioners on the ground that they are builders in good faith and consequently, recover the value of the improvements introduced by them on the subject lot. The case of Heirs of Laureano Marquez v. Valencia, 99 Phil. 740, provides the answer:

If, aside from relying solely on the deed of sale with a right to repurchase and failure on the part of the vendors to purchase it within the period stipulated therein, the defendant had set up an alternative though inconsistent defense that he had inherited the parcel of land from his late maternal grandfather and presented evidence in support of both defenses, the overruling of the first would not bar the determination by the court of the second. The defendant having failed to set up such alternative defenses and chosen or elected to rely on one only, the overruling thereof was a complete determination of the controversy between the parties which bars a subsequent action based upon an unpleaded defense, or any other cause of action, except that of Failure of the complaint to state a cause of action and of lack of jurisdiction of the Court. The determination of the issue joined by the parties constitutes res judicata. (Italics supplied)

Although the alternative defense of being builders in good faith is only permissive,  the counterclaim for reimbursement of the value of the improvements is in the nature of a compulsory counterclaim. Thus, the failure by the private respondents to set it up bars their right to raise it in a subsequent litigation (Rule 9, Section 4 of the Rules of Court). While We realize the plight of the private respondents, the rule on compulsory counterclaim is designed to enable the disposition of the whole controversy at one time and in one action. The philosophy of the rule is to discourage multiplicity of suits. (Italics supplied)

Having failed to set up his claim for reimbursement, said claim of respondent Diaz being in the nature of a compulsory counterclaim is now barred.16

In cases involving res adjudicata, the parties and the causes of action are identical or substantially the same in the prior as well as the subsequent action. The judgment in the first action is conclusive as to every matter offered and received therein and as to any other matter admissible therein and which might have been offered for that purpose, hence said judgment is an absolute bar to a subsequent action for the same cause. 17 The bar extends to questions "necessarily involved in an issue, and necessarily adjudicated, or necessarily implied in

the final judgment, although no specific finding may have been made in reference thereto, and although such matters were directly referred to in the pleadings and were not actually or formally presented" 18 Said prior judgment is conclusive in a subsequent suit between the same parties on the same subject matter, and on the same cause of action, not only as to matters which were decided in the first action, but also as to every other matter which the parties could have properly set up in the prior suit.19

In the present case, we find there is an identity of causes of action between Civil Case No. 94-2086 and Civil Case No. 96-1372. Respondent Diaz's cause of action in the prior case, now the crux of his present complaint against petitioner, was in the nature of an unpleaded compulsory counterclaim, which is now barred. There being a former final judgment on the merits in the prior case, rendered in Civil Case No. 94-2086 by Branch 146 of the Regional Trial Court of Makati, which acquired jurisdiction over the same parties, the same subject property, and the same cause of action, the present complaint of respondent herein (Diaz) against petitioner Arreza docketed as Civil Case No. 96-1372 before the Regional Trial of Makati, Branch 59 should be dismissed on the ground of res adjudicata.

WHEREFORE, the instant petition is GRANTED. The decision dated December 24, 1997 and the resolution dated March 6, 1998 of the Court of Appeals in CA-G.R. SP No. 43895 are REVERSED and SET ASIDE. Civil Case No. 96-1372 before the Regional Trial Court of Makati City, Branch 59, is hereby ordered DISMISSED as against herein petitioner Edgar H. Arreza. Costs against respondent.

SO ORDERED.

Bellosillo, Mendoza, Buena and De Leon, Jr., JJ ., concur.

Republic of the PhilippinesSUPREME COURTManila

THIRD DIVISION

 

G.R. No. 117211 March 1, 1995

PROTECTION TECHNOLOGY, petitioner, vs.HONORABLE SECRETARY, DEPARTMENT OF LABOR AND EMPLOYMENT, MED-ARBITER BRIGIDA C. FADRIGON and SAMAHAN NG MANGGAGAWA SA PROTECTION-ALLIANCE OF NATIONALIST AND GENUINE LABOR ORGANIZATION (SMP-ANGLO), respondents.

R E S O L U T I O N

 

FELICIANO, J.:

On 12 January 1994, private respondent Samahan ng Manggagawa sa Protection — Alliance of Nationalist and Genuine Labor Organizations ("Union"), a newly organized union affiliated with a federation, filed a Petition for direct certification or for certification election to determine the exclusive collective bargaining representative of the regular rank and file employees of petitioner Protection Technology Inc. ("Company"), at its Pasay City and Guiguinto, Bulacan offices, with the National Capital Region Med Arbitration Branch, Department of Labor and Employment ("DOLE"). 1

In its Comment on the petition, petitioner Company stated that the Union was not a legitimate labor organization capable of filing the petition because it had failed to submit its books of account with the Bureau of Labor Relations ("BLR") at the time it was registered as a legitimate labor organization. Submission of such documentation is a "mandatory" requirement before a union can exercise the rights and privileges of a legitimate labor organization, pursuant to the Court's ruling in ruling Progressive Development Corporation v. Secretary, Department of Labor and Employment. 2

In an Order dated 14 March 1994, Med Arbiter Brigida C. Fadrigon dismissed the Union's petition and held further that the submission of the books of account, consisting of journals, ledgers and other accounting books, was one of several "preventive measures against commission of fraud" arising from "improper or incorrect recording of union funds, inefficient administration and even malversation of union funds." 3

The Union appealed to the Secretary, DOLE, contending that the Labor Code and Progressive Development"never mentioned journals and ledgers" as part of the documentation requirements for registration of a newly-organized local union. 4

In a Resolution dated 6 July 1994, public respondent DOLE Undersecretary, Bienvenido Laguesma, set aside the Order of the Med Arbiter, holding that the requirement to submit books of account applies only to labor organizations already existing for at least a year. Undersecretary Laguesma ordered the holding of a certification election at petitioner's establishment with the following as choices: (1) the Union; and (2) no union. He also took note of the Union's submission of one sheet of paper captioned a "Statement of Income and Expenses for the month ended September 28, 1993." This "Statement" contained only one entry: "Cash on hand — P590.00;" the sheet was certified correct by the Union secretary, attested by the Union president and duly subscribed. 5

Petitioner's motion for reconsideration therefrom having been unsuccessful, it is now before the Court on Petition for Certiorari with prayer for a temporary restraining order (TRO), seeking annulment of the Resolution and Order of the public respondent DOLE Undersecretary as products of grave abuse of discretion. 6

In a Resolution dated 19 October 1994, the Court required the respondents to comment upon the Petition. On 9 November 1994, after the Union had filed its Comment and prior to the filing of public respondent's Comment, the Court issued a TRO upon petitioner's posting of a sufficient cash bond. 7 This notwithstanding, the certification election was conducted on 10 November 1994 in the presence and under the supervision of DOLE representation officers. 8 Of the fifty-eight (58) votes validly cast, the Union obtained fifty-three (53) votes. 9

In a Manifestation dated 17 November 1994, the Union prayed that the main Petition should be considered moot and academic since the results of the certification election showed that an "overwhelming majority" of the employees had chosen it to be their collective bargaining representative vis-a-vis management. 10 Upon the other hand, in a Manifestation and Motion dated 25 November 1994, the Company moved that public respondents be "admonished" for hastily conducting the certification election, "just to accommodate" the Union. 11 The Court required public and private respondents to comment on the Company's Manifestation and Motion. 12

Pending receipt of such comments, the Court will deal with the merits of the Petition for Certiorari, that is, whether or not the Undersecretary's decision to grant the Union's petition for a certification election constituted a grave abuse of discretion correctible on certiorari.

In its Petition for Certiorari, the Company contends that the statement of income and expenses submitted by the Union is actually an annual financial statement which is required, under Articles 234 and 241(1-1) of the Labor Code, to be submitted by unions organized and existing for a period of at least one year or more prior to the filing of their application for registration as a legitimate labor organization. Having reference to ordinary

accounting practice, the Company continues, such document cannot possibly be the "books of account" demanded both by the Progressive Development Corporation case and by Section 3, Rule 2 of the Omnibus Rules Implementing the Labor Code, as a prerequisite for due registration of a newly organized union affiliated with a federation. 13

Undersecretary Laguesma, through the Solicitor-General, on the other hand, contends that submission of the statement of income and expenses is "substantial compliance" with the requirements of the law for the registration of labor organizations because a newly organized union like the private respondent, which had been operating for just four (4) months prior to the filing of its application for registration with the BLR, was in no position to submit books of account, for "it (had) no daily transaction to be entered everyday in the books except the receipt of union dues from its members which are remitted to it only during certain periods of time." 14

Undersecretary Laguesma argues further that the juridical existence of the Union as a legitimate labor organization had commenced from the moment its application for registration was approved; "its subsequent non-compliance with the requirements of the Labor Code relative to the keeping of books of account, if at all, would only be a ground for the cancellation of its registration." Until such due cancellation is made, Laguesma argues, the Union is not to be prevented from exercising its rights, powers and privileges as a legitimate labor organization. 15

The Union, in its own Comment on the Petition, adds that the DOLE Undersecretary's factual findings and administrative interpretation of the Labor Code and its Implementing Rules, an area within his special expertise and arrived at by him after "a thorough and extensive examination of the entire records of the case," is entitled to great respect by the courts and "should no longer be subject to the review of this Honorable Supreme Court." 16

Deliberating upon the present Petition for Certiorari, the Court considers that petitioner Company has shown that public respondent DOLE Undersecretary had indeed committed a grave abuse of discretion, amounting to an act without or in excess of jurisdiction, in rendering his assailed Resolution and Order granting the Petition for the holding of a certification election.

The principal issue here posed is whether books of account, consisting of ledgers, journals and other accounting books, form part of the mandatory documentation requirements for registration of a newly organized union affiliated with a federation, or a local or chapter of such a federation, as a legitimate labor organization.

The above issue was addressed several years ago and answered in the affirmative by this Court in Progressive Development Corporation v. Secretary, DOLE. 17 There, the Court said:

In the case of union affiliation with a federation, the documentary requirements are found in Rule II Section 3(e), Book V of the Implementing Rules, which we again quote as follows:

(c) The local or chapter of a labor federation or national union shall have and maintain a constitution and by-laws, set of officers and books of accounts. For reporting purposes, the procedure governing the reporting of independently registered unions, federations or national unions shall be observed.

Since the "procedure governing the reporting of independently registered unions" refers to the certification and attestation requirements contained in Article 235, paragraph 2, it follows that the constitution and by-laws, set of officers and books of accounts submitted by the local and chapter must likewise comply with these requirements. The same rationale for requiring the submission of duly subscribed documents upon union registration exists in the

case of union affiliation. Moreover, there is greater reason to exact compliance with the certification and attestation requirements because, as previously mentioned, several requirements applicable to independent union registration are no longer required in the case of the formation of a local or chapter. The policy of the law in conferring greater bargaining power upon labor unions must be balanced with the policy of providing preventive measures against the commission of fraud.

A local or chapter therefore becomes a legitimate labor organization only upon submission of the following to the BLR:

1) A chapter certificate within 30 days from its issuance by the labor federation or national union, and

2) The constitution and by-laws, a statement on the set of officers and the books of accounts all of which are certified under oath by the secretary or treasurer, as the case may be, of such local or chapter, and attested to by its president.

Absent compliance with these mandatory requirements, the local or chapter does not become a legitimate labor organization.

In the case at bar, the failure of the secretary of PDEU-Kilusan to certify the required documentsunder oath is fatal to its acquisition of a legitimate status.

xxx xxx xxx 18

(Emphasis partly in the original and partly supplied.)

Non-submission of such books of account certified by and attested to by the appropriate officer is a ground which the employer can invoke legitimately to oppose a petition for certification election filed by the local or chapter concerned.

Although the federation with which the Union is affiliated submitted documents purporting to show that the latter had offered books of account to support its (the Union's) application for registration as a legitimate labor organization, what had been actually submitted to the BLR by the Union was a mere "financial statement," 19 a generous description considering the sheet of paper in fact submitted by the Union.

Books of account are quite different in their essential nature from financial statements. In generally accepted accounting practice, the former consist of journals, ledgers and other accounting books (which are registered with the Bureau of Internal Revenue) containing a record of individual transactions wherein monies are received and disbursed by an establishment or entity; entries are made on such books on a day-to-day basis (or as close thereto as is possible). Statements of accounts or financial reports, upon the other hand, merely summarize such individual transactions as have been set out in the books of account and are usually prepared at the end of an accounting period, commonly corresponding to the fiscal year of the establishment or entity concerned. 20Statements of account and financial reports do not set out or repeat the basic data (i.e., the individual transactions) on which they are based and are, therefore, much less informative sources of cash flow information. Books of account are kept and handled by bookkeepers (employees) of the company or agency; financial statements may be audited statements, i.e., prepared by external independent auditors (certified public accountants).

It is immaterial that the Union, having been organized for less than a year before its application for registration with the BLR, would have had no real opportunity to levy and collect dues and fees from its members which need to be recorded in the books of account. Such accounting books can and must be

submitted to the BLR, even if they contain no detailed or extensive entries as yet. The point to be stressed is that the applicant local or chapter must demonstrate to the BLR that it is entitled to registered status because it has in place a system for accounting for members' contributions to its fund even before it actually receives dues or fees from its members. The controlling intention is to minimize the risk of fraud and diversion in the course of the subsequent formation and growth of the Union fund.

The public respondent Undersecretary thus acted arbitrarily in disregarding the plain terms of the Omnibus Implementing Rules (Section 3(e), Rule III Book V, Omnibus Rules Implementing the Labor Code), and as well the rule laid down by this court in the Progressive Development Corporation case. The statutory and regulatory provisions defining the requirements of registration of legitimate labor organizations are an exercise of the overriding police power of the State, designed for the protection of workers against potential abuse by unions and federations of unions that recruit them. 21 This purpose is obviously defeated if the registration requirements are relaxed arbitrarily by the very officials supposed to administer such requirements and registered status extended to an organization not entitled to such status, as in the case at bar.

The Court is not closing its eyes to the certification election actually, if precipitately, held in this case notwithstanding the prior issuance of the temporary restraining order of this Court. So far as the record of this case is concerned, that certification election was held in the presence of representatives of the DOLE and presumably reflected the free and democratic will of the workers of petitioner Company. The Court will not set aside that will, in the absence of compelling reasons to do so.

Nevertheless, private respondent Union must comply with all the requirements of registration as a legitimate labor organization before it may enjoy the fruits of its certification election victory and before it may exercise the rights of a legitimate labor organization. Registration is a condition sine qua non for the acquisition of legal personality by a labor organization and the exercise of the rights and privileges granted by law to legitimate labor organizations. 22

We hold, therefore, that private respondent Union must submit its books of account certified under oath by its treasurer and attested to by its president before such Union may demand recognition by the Company as exclusive bargaining agent of the members of the bargaining unit and before the Union may exercise any of the rights pertaining to such an agent.

ACCORDINGLY, the Court Resolved to DISMISS the Petition for Certiorari for having become moot and academic and to LIFT the Temporary Restraining Order issued by this Court dated 9 November 1994. However, private respondent Union is hereby ENJOINED from exercising the rights and privileges of a legitimate labor organization and duly authorized collective bargaining representative UNTIL it shall have submitted the required books of account, duly certified and attested, with the Bureau of Labor Relations.

This Resolution shall be without prejudice to the liability, if any, which public and private respondents may have incurred in connection with their alleged failure to comply with the Court's Temporary Restraining Order dated 9 November 1994. The Court hereby REITERATES its Resolution dated 18 January 1995 requiring public and private respondents to comment on the petitioner Company's Manifestation and Motion dated 25 November 1994 within ten (10) days from notice hereof.

Romero, Melo, Vitug and Francisco, JJ., concur.

 

G.R. No. L-54334 January 22, 1986

KIOK LOY, doing business under the name and style SWEDEN ICE CREAM PLANT, petitioner, vs.

NATIONAL LABOR RELATIONS COMMISSION (NLRC) and PAMBANSANG KILUSAN NG PAGGAWA (KILUSAN), respondents.

Ablan and Associates for petitioner.

Abdulcadir T. Ibrahim for private respondent.

 

CUEVAS, J.:

Petition for certiorari to annul the decision 1 of the National Labor Relations Commission (NLRC) dated July 20, 1979 which found petitioner Sweden Ice Cream guilty of unfair labor practice for unjustified refusal to bargain, in violation of par. (g) of Article 249 2 of the New Labor Code, 3 and declared the draft proposal of the Union for a collective bargaining agreement as the governing collective bargaining agreement between the employees and the management.

The pertinent background facts are as follows:

In a certification election held on October 3, 1978, the Pambansang Kilusang Paggawa (Union for short), a legitimate late labor federation, won and was subsequently certified in a resolution dated November 29, 1978 by the Bureau of Labor Relations as the sole and exclusive bargaining agent of the rank-and-file employees of Sweden Ice Cream Plant (Company for short). The Company's motion for reconsideration of the said resolution was denied on January 25, 1978.

Thereafter, and more specifically on December 7, 1978, the Union furnished 4 the Company with two copies of its proposed collective bargaining agreement. At the same time, it requested the Company for its counter proposals. Eliciting no response to the aforesaid request, the Union again wrote the Company reiterating its request for collective bargaining negotiations and for the Company to furnish them with its counter proposals. Both requests were ignored and remained unacted upon by the Company.

Left with no other alternative in its attempt to bring the Company to the bargaining table, the Union, on February 14, 1979, filed a "Notice of Strike", with the Bureau of Labor Relations (BLR) on ground of unresolved economic issues in collective bargaining. 5

Conciliation proceedings then followed during the thirty-day statutory cooling-off period. But all attempts towards an amicable settlement failed, prompting the Bureau of Labor Relations to certify the case to the National Labor Relations Commission (NLRC) for compulsory arbitration pursuant to Presidential Decree No. 823, as amended. The labor arbiter, Andres Fidelino, to whom the case was assigned, set the initial hearing for April 29, 1979. For failure however, of the parties to submit their respective position papers as required, the said hearing was cancelled and reset to another date. Meanwhile, the Union submitted its position paper. The Company did not, and instead requested for a resetting which was granted. The Company was directed anew to submit its financial statements for the years 1976, 1977, and 1978.

The case was further reset to May 11, 1979 due to the withdrawal of the Company's counsel of record, Atty. Rodolfo dela Cruz. On May 24, 1978, Atty. Fortunato Panganiban formally entered his appearance as counsel for the Company only to request for another postponement allegedly for the purpose of acquainting himself with the case. Meanwhile, the Company submitted its position paper on May 28, 1979.

When the case was called for hearing on June 4, 1979 as scheduled, the Company's representative, Mr. Ching, who was supposed to be examined, failed to appear. Atty. Panganiban then requested for another postponement which the labor arbiter denied. He also ruled that the Company has waived its right to present further evidence and, therefore, considered the case submitted for resolution.

On July 18, 1979, labor arbiter Andres Fidelino submitted its report to the National Labor Relations Commission. On July 20, 1979, the National Labor Relations Commission rendered its decision, the dispositive portion of which reads as follows:

WHEREFORE, the respondent Sweden Ice Cream is hereby declared guilty of unjustified refusal to bargain, in violation of Section (g) Article 248 (now Article 249), of P.D. 442, as amended. Further, the draft proposal for a collective bargaining agreement (Exh. "E ") hereto attached and made an integral part of this decision, sent by the Union (Private respondent) to the respondent (petitioner herein) and which is hereby found to be reasonable under the premises, is hereby declared to be the collective agreement which should govern the relationship between the parties herein.

SO ORDERED. (Emphasis supplied)

Petitioner now comes before Us assailing the aforesaid decision contending that the National Labor Relations Commission acted without or in excess of its jurisdiction or with grave abuse of discretion amounting to lack of jurisdiction in rendering the challenged decision. On August 4, 1980, this Court dismissed the petition for lack of merit. Upon motion of the petitioner, however, the Resolution of dismissal was reconsidered and the petition was given due course in a Resolution dated April 1, 1981.

Petitioner Company now maintains that its right to procedural due process has been violated when it was precluded from presenting further evidence in support of its stand and when its request for further postponement was denied. Petitioner further contends that the National Labor Relations Commission's finding of unfair labor practice for refusal to bargain is not supported by law and the evidence considering that it was only on May 24, 1979 when the Union furnished them with a copy of the proposed Collective Bargaining Agreement and it was only then that they came to know of the Union's demands; and finally, that the Collective Bargaining Agreement approved and adopted by the National Labor Relations Commission is unreasonable and lacks legal basis.

The petition lacks merit. Consequently, its dismissal is in order.

Collective bargaining which is defined as negotiations towards a collective agreement,  6 is one of the democratic frameworks under the New Labor Code, designed to stabilize the relation between labor and management and to create a climate of sound and stable industrial peace. It is a mutual responsibility of the employer and the Union and is characterized as a legal obligation. So much so that Article 249, par. (g) of the Labor Code makes it an unfair labor practice for an employer to refuse "to meet and convene promptly and expeditiously in good faith for the purpose of negotiating an agreement with respect to wages, hours of work, and all other terms and conditions of employment including proposals for adjusting any grievance or question arising under such an agreement and executing a contract incorporating such agreement, if requested by either party.

While it is a mutual obligation of the parties to bargain, the employer, however, is not under any legal duty to initiate contract negotiation. 7 The mechanics of collective bargaining is set in motion only when the following jurisdictional preconditions are present, namely, (1) possession of the status of majority representation of the employees' representative in accordance with any of the means of selection or designation provided for by the Labor Code; (2) proof of majority representation; and (3) a demand to bargain under Article 251, par. (a) of the New Labor Code . ... all of which preconditions are undisputedly present in the instant case.

From the over-all conduct of petitioner company in relation to the task of negotiation, there can be no doubt that the Union has a valid cause to complain against its (Company's) attitude, the totality of which is indicative of the latter's disregard of, and failure to live up to, what is enjoined by the Labor Code — to bargain in good faith.

We are in total conformity with respondent NLRC's pronouncement that petitioner Company is GUILTY of unfair labor practice. It has been indubitably established that (1) respondent Union was a duly certified bargaining agent; (2) it made a definite request to bargain, accompanied with a copy of the proposed Collective Bargaining Agreement, to the Company not only once but twice which were left unanswered and unacted upon; and (3) the Company made no counter proposal whatsoever all of which conclusively indicate lack of a sincere desire to negotiate. 8 A Company's refusal to make counter proposal if considered in relation to the entire bargaining process, may indicate bad faith and this is specially true where the Union's request for a counter proposal is left unanswered. 9 Even during the period of compulsory arbitration before the NLRC, petitioner Company's approach and attitude-stalling the negotiation by a series of postponements, non-appearance at the hearing conducted, and undue delay in submitting its financial statements, lead to no other conclusion except that it is unwilling to negotiate and reach an agreement with the Union. Petitioner has not at any instance, evinced good faith or willingness to discuss freely and fully the claims and demands set forth by the Union much less justify its opposition thereto.10

The case at bar is not a case of first impression, for in the Herald Delivery Carriers Union (PAFLU) vs. Herald Publications 11the rule had been laid down that "unfair labor practice is committed when it is shown that the respondent employer, after having been served with a written bargaining proposal by the petitioning Union, did not even bother to submit an answer or reply to the said proposal This doctrine was reiterated anew in Bradman vs. Court of Industrial Relations 12 wherein it was further ruled that "while the law does not compel the parties to reach an agreement, it does contemplate that both parties will approach the negotiation with an open mind and make a reasonable effort to reach a common ground of agreement

As a last-ditch attempt to effect a reversal of the decision sought to be reviewed, petitioner capitalizes on the issue of due process claiming, that it was denied the right to be heard and present its side when the Labor Arbiter denied the Company's motion for further postponement.

Petitioner's aforesaid submittal failed to impress Us. Considering the various postponements granted in its behalf, the claimed denial of due process appeared totally bereft of any legal and factual support. As herein earlier stated, petitioner had not even honored respondent Union with any reply to the latter's successive letters, all geared towards bringing the Company to the bargaining table. It did not even bother to furnish or serve the Union with its counter proposal despite persistent requests made therefor. Certainly, the moves and overall behavior of petitioner-company were in total derogation of the policy enshrined in the New Labor Code which is aimed towards expediting settlement of economic disputes. Hence, this Court is not prepared to affix its imprimatur to such an illegal scheme and dubious maneuvers.

Neither are WE persuaded by petitioner-company's stand that the Collective Bargaining Agreement which was approved and adopted by the NLRC is a total nullity for it lacks the company's consent, much less its argument that once the Collective Bargaining Agreement is implemented, the Company will face the prospect of closing down because it has to pay a staggering amount of economic benefits to the Union that will equal if not exceed its capital. Such a stand and the evidence in support thereof should have been presented before the Labor Arbiter which is the proper forum for the purpose.

We agree with the pronouncement that it is not obligatory upon either side of a labor controversy to precipitately accept or agree to the proposals of the other. But an erring party should not be tolerated and allowed with impunity to resort to schemes feigning negotiations by going through empty gestures.  13 More so, as in the instant case, where the intervention of the National Labor Relations Commission was properly sought for after conciliation efforts undertaken by the BLR failed. The instant case being a certified one, it must be resolved by the NLRC pursuant to the mandate of P.D. 873, as amended, which authorizes the said body to determine the reasonableness of the terms and conditions of employment embodied in any Collective Bargaining Agreement. To that extent, utmost deference to its findings of reasonableness of any Collective Bargaining Agreement as the governing agreement by the employees and management must be accorded due respect by this Court.

WHEREFORE, the instant petition is DISMISSED. The temporary restraining order issued on August 27, 1980, is LIFTED and SET ASIDE.

No pronouncement as to costs.

SO ORDERED.

Concepcion, Jr., (Chairman), Abad Santos, Escolin and Alampay, JJ., concur.

SECOND DIVISION

[G.R. No. 146717.  November 22, 2004]

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 Decision[1] 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)[8] each 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 8.2[14] 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 Order[19] 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 Petition[22] 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 2003[27] 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 2003[28] 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.Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.