feati bank

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http://www.lawphil.net/judjuris/juri1991/apr1991/gr_94209_1991.html 1/9

TodayisMonday,July27,2015

RepublicofthePhilippinesSUPREMECOURT

Manila

THIRDDIVISION

G.R.No.94209April30,1991

FEATIBANK&TRUSTCOMPANY(nowCITYTRUSTBANKINGCORPORATION),petitioner,vs.THECOURTOFAPPEALS,andBERNARDOE.VILLALUZ,respondents.

Pelaez,Adriano&Gregorioforpetitioner.EzequielS.Consultaforprivaterespondent.

GUTIERREZ,JR.,J.:

This is a petition for review seeking the reversal of the decision of theCourt ofAppeals dated June29, 1990whichaffirmedthedecisionoftheRegionalTrialCourtofRizaldatedOctober20,1986orderingthedefendantsChristiansenandthepetitioner,topayvarioussumstorespondentVillaluz,jointlyandseverally.

Thefactsofthecaseareasfollows:

OnJune3,1971,BernardoE.VillaluzagreedtoselltothethendefendantAxelChristiansen2,000cubicmetersoflauanlogsat$27.00percubicmeterFOB.

Afterinspectingthelogs,ChristiansenissuedpurchaseorderNo.76171.

On the arrangementsmade and upon the instructions of the consignee, Hanmi Trade Development, Ltd., deSantaAna,California, theSecurityPacificNationalBankofLosAngeles,California issued IrrevocableLetterofCreditNo.IC46268availableatsightinfavorofVillaluzforthesumof$54,000.00,thetotalpurchasepriceofthelauanlogs.

The letterofcreditwasmailed to theFeatiBankandTrustCompany (nowCitytrust)with the instruction to thelatterthatit"forwardtheenclosedletterofcredittothebeneficiary."(Records,Vol.I,p.11)

TheletterofcreditfurtherprovidedthatthedrafttobedrawnisonSecurityPacificNationalBankandthatitbeaccompaniedbythefollowingdocuments:

1.SignedCommercialInvoiceinfourcopiesshowingthenumberofthepurchaseorderandcertifyingthat

a.Alltermsandconditionsofthepurchaseorderhavebeencompliedwithandthatalllogsarefreshcut and quality equal to or better than that described in H.A. Christiansen's telex #201 ofMay 1,1970,andthatalllogshavebeenmarked"BEVEX."

b.Onecompletesetofdocuments, including1/3originalbillsof ladingwasairmailedtoConsigneeandPartiestobeadvisedbyHansAxelChristiansen,ShipandMerchandiseBroker.

c.OnesetofnonnegotiabledocumentswasairmailedtoHanMiTradeDevelopmentCompanyandoneset toConsigneeandParties tobeadvisedbyHansAxelChristiansen,ShipandMerchandiseBroker.

2.Tallysheetsinquadruplicate.

3.2/3OriginalCleanonBoardOceanBillsofLadingwithConsigneeandParties tobeadvisedbyHansAxelChristiansen,showingFreightPrepaidandmarkedNotify:

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HanMiTradeDevelopmentCompany,Ltd.,SantaAna,California.

LetterofCreditNo.46268datedJune7,1971

HanMi Trade Development Company, Ltd., P.O. Box 10480, Santa Ana, California 92711 and HanMiTradeDevelopmentCompany,Ltd.,Seoul,Korea.

4. Certification from HanAxel Christiansen, Ship and Merchandise Broker, stating that logs have beenapproved prior to shipment in accordance with terms and conditions of corresponding purchase Order.(Record,Vol.1pp.1112)

AlsoincorporatedbyreferenceintheletterofcreditistheUniformCustomsandPracticeforDocumentaryCredits(1962Revision).

The logswere thereafter loaded on the vessel "ZenlinGlory" whichwas chartered byChristiansen. Before itsloading, the logswere inspectedbycustom inspectorsNeloLaurente,AlejandroCabiao,EstanislaoEdera fromtheBureauofCustoms(Records,Vol.I,p.124)andrepresentativesRogelioCantubaandJesusTadenaoftheBureauofForestry(Records,Vol.I,pp.1617)allofwhomcertifiedtothegoodconditionandexportabilityofthelogs.

Aftertheloadingofthelogswascompleted,theChiefMate,ShaoShuWangissuedamatereceiptofthecargowhichstatedthesameareingoodcondition(Records,Vol.I,p.363).However,Christiansenrefusedtoissuethecertification as required in paragraph 4 of the letter of credit, despite several requests made by the privaterespondent.

Because of the absence of the certification by Christiansen, the Feati Bank and Trust Company refused toadvancethepaymentontheletterofcredit.

The letter of credit lapsed on June 30, 1971, (extended, however up to July 31, 1971) without the privaterespondentreceivinganycertificationfromChristiansen.

The persistent refusal of Christiansen to issue the certification prompted the private respondent to bring thematterbeforetheCentralBank.InamemorandumdatedAugust16,1971,theCentralBankruledthat:

. . . pursuant to theMonetary BoardResolutionNo. 1230 dated August 3, 1971, in all log exports, thecertificationofthelumberinspectorsoftheBureauofForestry...shallbeconsideredfinalforpurposesofnegotiatingdocuments.Anyprovision in any letter of credit covering logexports requiring certificationofbuyer'sagentorrepresentativethatsaidlogshavebeenapprovedforshipmentasaconditionprecedenttonegotiationofshippingdocumentsshallnotbeallowed.(Records,Vol.I,p.367)

Meanwhile, the logsarrivedat Inchon,Koreaandwere receivedby theconsignee,HanmiTradeDevelopmentCompany,towhomChristiansensoldthelogsfortheamountof$37.50percubicmeter,foranetprofitof$10percubicmeter.HanmiTradeDevelopmentCompany,ontheotherhandsoldthelogstoTaisungLumberCompanyatInchon,Korea.(Rollo,p.39)

SincethedemandsbytheprivaterespondentforChristiansentoexecutethecertificationprovedfutile,Villaluz,onSeptember 1, 1971, institutedanaction formandamus and specific performanceagainstChristiansenand theFeatiBankandTrustCompany(nowCitytrust)beforethethenCourtofFirstInstanceofRizal.Thepetitionerwasimpleaded as defendant before the lower court only to afford complete relief should the court a quo orderChristiansentoexecutetherequiredcertification.

Thecomplaintprayedforthefollowing:

1.ChristiansenbeorderedtoissuethecertificationrequiredofhimundertheLetterofCredit

2.Uponissuanceofsuchcertification,or,ifthecourtshouldfinditunnecessary,FEATIBANKbeorderedtoacceptnegotiationoftheLetterofCreditandmakepaymentthereontoVillaluz

3.OrderChristiansentopaydamagestotheplaintiff.(Rollo,p.39)

Onor about 1979,while the casewas still pending trial,Christiansen left thePhilippineswithout informing theCourt and his counsel.Hence,Villaluz, filed an amended complaint tomake the petitioner solidarily liablewithChristiansen.

Thetrialcourt,initsorderdatedAugust29,1979,admittedtheamendedcomplaint.

Aftertrial,thelowercourtfound:

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TheliabilityofthedefendantCHRISTIANSENisbeyonddispute,andtheplaintiffsrighttodemandpaymentisabsolute.DefendantCHRISTIANSENhavingaccepteddeliveryofthelogsbyhavingthemloadedinhischarteredvesselthe"ZenlinGlory"andshippingthemtotheconsignee,hisbuyerHanMiTradeinInchon,SouthKorea (Art. 1585,CivilCode), hisobligation topay thepurchaseorderhadclearlyarisenand theplaintiffmaysueandrecoverthepriceofthegoods(Art.1595,Id).

The Court believes that the defendant CHRISTIANSEN acted in bad faith and deceit and with intent todefraudtheplaintiff,reflectedinandaggravatedby,notonlyhisrefusaltoissuethecertificationthatwouldhaveenabledwithoutquestiontheplaintifftonegotiatetheletterofcredit,buthisaccusingtheplaintiffinhisanswer of fraud, intimidation, violence and deceit. These accusations said defendant did not attempt toprove,asinfactheleftthecountrywithoutevennotifyinghisownlawyer.ItwastotheCourt'smindapureswindle.

ThedefendantFeatiBankandTrustCompany,on theotherhand,mustbeheld liable togetherwithhis(sic) codefendant for having, by its wrongful act, i.e., its refusal to negotiate the letter of credit in theabsenceofCHRISTIANSEN's certification (in spite of theCentralBank's ruling that the requirementwasillegal), prevented payment to the plaintiff. The said letter of credit, as may be seen on its face, isirrevocableandthe issuingbank, theSecurityPacificNationalBank inLosAngeles,California,undertookbyitstermsthatthesameshallbehonoreduponitspresentment.Ontheotherhand,thenotifyingbank,thedefendantFeatiBankandTrustCompany,byaccepting the instructions from the issuingbank, itselfassumedtheverysameundertakingastheissuingbankunderthetermsoftheletterofcredit.

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TheCourt likewise agrees with the plaintiff that the defendant BANKmay also be held liable under theprinciplesandlawsonbothtrustandestoppel.WhenthedefendantBANKaccepteditsroleasthenotifyingandnegotiatingbankforandinbehalfof theissuingbank, it ineffectacceptedatrustreposedonit,andbecameatrusteeinrelationtoplaintiffasthebeneficiaryoftheletterofcredit.Astrustee,itwasthendutyboundtoprotecttheinterestsoftheplaintiffunderthetermsoftheletterofcredit,andmustbeheldliablefordamagesandlossresultingtotheplaintifffromitsfailuretoperformthatobligation.

Furthermore,whenthedefendantBANKassumedtheroleofanotifyingandnegotiatingBANKit ineffectrepresentedtotheplaintiffthat,iftheplaintiffcompliedwiththetermsandconditionsoftheletterofcreditandpresentsthesametotheBANKtogetherwiththedocumentsmentionedthereinthesaidBANKwillpaytheplaintiff theamountof the letterofcredit.TheCourt isconvincedthat itwasuponthestrengthof thisletterofcreditandthisimpliedrepresentationofthedefendantBANKthattheplaintiffdeliveredthelogstodefendantCHRISTIANSEN,consideringthattheissuingbankisaforeignbankwithwhomplaintiffhadnobusinessconnectionsandCHRISTIANSENhadnotofferedanyotherSecurityforthepaymentofthelogs.DefendantBANKcannotnowbeallowedtodenyitscommitmentandliabilityundertheletterofcredit:

A holder of a promissory note given because of gamblingwho indorses the same to an innocentholder for valueandwhoassuressaidparty that thenotehasno legaldefect, is inestoppel fromassertingthat therehadbeenan illegalconsiderationfor thenote,andso,hehastopay itsvalue.(Rodriguezv.Martinez,5Phil.67).

The defendant BANK, in insisting upon the certification of defendant CHRISTIANSEN as a conditionprecedent to negotiating the letter of credit, likewise in the Court's opinion acted in bad faith, not onlybecauseofthecleardeclarationoftheCentralBankthatsucharequirementwasillegal,butbecausetheBANK, with all the legal counsel available to it must have known that the condition was void since itdependedonthesolewillofthedebtor,thedefendantCHRISTIANSEN.(Art.1182,CivilCode)(Rollo,pp.2931)

Onthebasisof the foregoing the trialcourtonOctober20,1986, ruled in favorof theprivaterespondent.Thedispositiveportionofitsdecisionreads:

WHEREFORE, judgment is hereby rendered for theplaintiff, ordering thedefendants topay theplaintiff,jointlyandseverally,thefollowingsums:

a)$54,000.00(US),or itspesoequivalentat theprevailingrateasof thetimepayment isactuallymade,representingthepurchasepriceofthelogs

b) P17,340.00, representing government fees and charges paid by plaintiff in connection with the logsshipmentinquestion

c)P10,000.00astemperatedamages(fortripsmadetoBacolodandKorea).

Allthreeforegoingsumsshallbewithinterestthereonat12%perannum fromSeptember1,1971,when

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thecomplaintwasfiled,untilfullypaid:

d)P70,000.00asmoraldamages

e)P30,000.00asexemplarydamagesand

f)P30,000.00asattorney'sfeesandlitigationexpense.

(Rollo,p.28)

Thepetitioner receivedacopyof thedecisiononNovember3,1986.Twodays thereafter,oronNovember5,1986,itfiledanoticeofappeal.

OnNovember10,1986,theprivaterespondentfiledamotionfortheimmediateexecutionofthejudgmentonthegroundthattheappealofthepetitionerwasfrivolousanddilatory.

Thetrialcourtorderedtheimmediateexecutionofitsjudgmentupontheprivaterespondent'sfilingofabond.

Thepetitionerthenfiledamotionforreconsiderationandamotiontosuspendtheimplementationofthewritofexecution.Bothmotionswere,however,denied.Thus,petitioner filedbefore theCourtofAppealsapetition forcertiorariandprohibitionwithpreliminaryinjunctiontoenjointheimmediateexecutionofthejudgment.

TheCourtofAppealsinadecisiondatedApril9,1987grantedthepetitionandnullifiedtheorderofexecution,thedispositiveportionofthedecisionstates:

WHEREFORE, the petition for certiorari is granted. Respondent Judge's order of execution datedDecember29,1986,aswellashisorderdatedJanuary14,1987denyingthepetitioner'surgentmotiontosuspendthewritofexecutionagainstitspropertiesareherebyannulledandsetasideinsofarastheyaresoughttobeenforcedandimplementedagainstthepetitionerFeatiBank&TrustCompany,nowCitytrustBankingCorporation,duringthependencyofitsappealfromtheadversedecisioninCivilCaseNo.15121.However, the execution of the same decision against defendant Axel Christiansen did not appeal saiddecisionmayproceedunimpeded.TheSheriffs levyonthepetitioner'sproperties,andthenoticeofsaledatedJanuary13,1987(AnnexM),areherebyannulledandsetaside.Rollop.44)

Amotionforreconsiderationwasthereafterfiledbytheprivaterespondent.TheCourtofAppeals,inaresolutiondatedJune29,1987deniedthemotionforreconsideration.

In the meantime, the appeal filed by the petitioner before the Court of Appeals was given due course. In itsdecisiondatedJune29,1990, theCourtofAppealsaffirmed thedecisionof the lowercourtdatedOctober20,1986andruledthat:

1.FeatiBankadmittedinthe"specialandnegativedefenses"sectionofitsanswerthatitwasthebanktonegotiate the letter of credit issued by the Security Pacific National Bank of Los Angeles, California.(Record, pp. 156, 157).FeatiBankdidnotifyVillaluzof such letter of credit. In fact, as suchnegotiatingbank,evenbeforetheletterofcreditwaspresentedforpayment,FeatiBankhadalreadymadeanadvancepaymentofP75,000.00toVillaluzinanticipationofsuchpresentment.Asthenegotiatingbank,FeatiBank,by notifyingVillaluz of the letter of credit in behalf of the issuing bank (SecurityPacific), confirmed suchletterofcreditandmadethesamealsoitsownobligation.ThisrulingfindssupportintheauthoritycitedbyVillaluz:

A confirmed letter of credit is one inwhich the notifying bank gives its assurance also that the openingbank's obligation will be performed. In such a case, the notifying bank will not simply transmit but willconfirmtheopeningbank'sobligationbymakingitalsoitsownundertaking,orcommitment,orguarantyorobligation.(Ward&Hatfield,2829,citedinAgbayani,CommercialLaws,1978edition,p.77).

FeatiBankarguesfurtherthatitwouldbeconsideredasthenegotiatingbankonlyuponnegotiationoftheletterofcredit.Thisstanceisuntenable.Assurance,commitmentsorguarantiessupposedtobemadebynotifyingbankstothebeneficiaryofaletterofcredit,asdefinedabove,canberelevantormeaningfulonlywithrespecttoafuturetransaction,thatis,negotiation.Hence,evenbeforeactualnegotiation,thenotifyingbank,by themereactof notifying thebeneficiaryof the letterof credit, assumesasof thatmoment theobligationoftheissuingbank.

2.SinceFeatiBankactedasguarantor of the issuingbank, and ineffect alsoof the latter's principal orclient, i.e. Hans AxelChristiansen. (sic) Such being the case, when Christiansen refused to issue thecertification,itwasasthoughrefusalwasmadebyFeatiBankitself.FeatiBankshouldhavetakenstepstosecurethecertificationfromChristiansenand,ifthelattershouldstillrefusetocomply,tohalehimtocourt.In short, Feati Bank should have honored Villaluz's demand for payment of his logs by virtue of theirrevocableletterofcreditissuedinVillaluz'sfavorandguaranteedbyFeatiBank.

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3.ThedecisionpromulgatedbythisCourtinCAG.R.SpNo.11051,whichcontainedthestatement"SinceVillaluz"draftwasnotdrawnstrictlyincompliancewiththetermsoftheletterofcredit,FeatiBank'srefusalto negotiate it was justified," did not dispose of this question on the merits. In that case, the questioninvolvedwasjurisdictionordiscretion,andnotjudgment.Thequotedpronouncementshouldnotbetakenasapreemptivejudgmentonthemeritsofthepresentcaseonappeal.

4.Theoriginalactionwasfor"Mandamusand/orspecificperformance."FeatiBankmaynotbeapartytothetransactionbetweenChristiansenandSecurityPacificNationalBankontheonehand,andVillaluzontheotherhandstill,beingguarantororagentofChristiansenand/orSecurityPacificNationalBankwhichhaddirectlydealtwithVillaluz,FeatiBankmaybesuedproperlyonspecificperformanceasaproceduralmeansbywhichthereliefsoughtbyVillaluzmaybeentertained.(Rollo,pp.3233)

ThedispositiveportionofthedecisionoftheCourtofAppealsreads:

WHEREFORE, thedecisionappealed from is affirmed andaccordingly, theappeal is herebydismissed.Costsagainstthepetitioner.(Rollo,p.33)

Hence,thispetitionforreview.

Thepetitionerinterposesthefollowingreasonsfortheallowanceofthepetition.

FirstReason

THE RESPONDENT COURT ERRONEOUSLY CONCLUDED FROM THE ESTABLISHED FACTS ANDINDEED, WENT AGAINST THE EVIDENCE AND DECISION OF THIS HONORABLE COURT, THATPETITIONERBANKISLIABLEONTHELETTEROFCREDITDESPITEPRIVATERESPONDENTSNONCOMPLIANCEWITHTHETERMSTHEREOF,

SecondReason

THE RESPONDENT COURT COMMITTED AN ERROR OF LAW WHEN IT HELD THAT PETITIONERBANK, BY NOTIFYING PRIVATE RESPONDENT OF THE LETTER OF CREDIT, CONFIRMED SUCHCREDITANDMADETHESAMEALSOITSOBLIGATIONASGUARANTOROFTHEISSUINGBANK.

ThirdReason

THE RESPONDENT COURT LIKEWISE COMMITTED AN ERROR OF LAWWHEN IT AFFIRMED THETRIALCOURT'SDECISION.(Rollo,p.12)

Theprincipal issue in this case iswhether or not a correspondent bank is to beheld liableunder the letter ofcreditdespitenoncompliancebythebeneficiarywiththetermsthereof?

Thepetitionisimpressedwithmerit.

Itisasettledruleincommercialtransactionsinvolvinglettersofcreditthatthedocumentstenderedmuststrictlyconformtothetermsof the letterofcredit.Thetenderofdocumentsbythebeneficiary(seller)must includealldocumentsrequiredbytheletter.Acorrespondentbankwhichdepartsfromwhathasbeenstipulatedundertheletter of credit, as when it accepts a faulty tender, acts on its own risks and it may not thereafter be able torecoverfromthebuyerortheissuingbank,asthecasemaybe,themoneythuspaidtothebeneficiaryThustheruleofstrictcompliance.

In the United States, commercial transactions involving letters of credit are governed by the rule of strictcompliance.InthePhilippines,thesameholdstrue.Thesamerulemustalsobefollowed.

ThecaseofAngloSouthAmericaTrustCo.v.Uheetal.(184N.E.741[1933])expoundedclearlyontheruleofstrictcompliance.

Wehaveheretoforeheldthattheselettersofcreditaretobestrictlycompliedwithwhichdocuments,andshipping documentsmust be followed as stated in the letter. There is no discretion in the bank or trustcompany to waive any requirements. The terms of the letter constitutes an agreement between thepurchaserandthebank.(p.743)

AlthoughinsomeAmericandecisions,banksaregrantedalittlediscretiontoacceptafaultytenderaswhentheotherdocumentsmaybeconsideredimmaterialorsuperfluous,thistheorycouldleadtodangerousprecedents.Since a bank deals only with documents, it is not in a position to determine whether or not the documentsrequiredbytheletterofcreditarematerialorsuperfluous.Themerefactthatthedocumentwasspecifiedthereinreadilymeansthatthedocumentisofvitalimportancetothebuyer.

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Moreover,theincorporationoftheUniformCustomsandPracticeforDocumentaryCredit(U.C.P.forshort)intheletterofcreditresultedintheapplicabilityofthesaidrulesinthegovernanceoftherelationsbetweentheparties.

AndeveniftheU.C.P.wasnotincorporatedintheletterofcredit,wehavealreadyruledintheaffirmativeastotheapplicabilityoftheU.C.P.incasesbeforeus.

InBank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the observance of the U.C.P. in thisjurisdictionisjustifiedbyArticle2oftheCodeofCommerce.Article2oftheCodeofCommerceenunciatesthatintheabsenceofanyparticularprovisionintheCodeofCommerce,commercialtransactionsshallbegovernedbytheusagesandcustomsgenerallyobserved.

Therebeingnospecificprovisionwhichgovernsthelegalcomplexitiesarisingfromtransactionsinvolvinglettersofcreditnotonlybetweenthebanksthemselvesbutalsobetweenbanksandsellerand/orbuyer,theapplicabilityoftheU.C.P.isundeniable.

ThepertinentprovisionsoftheU.C.P.(1962Revision)are:

Article3.

An irrevocable credit is a definite undertaking on the part of the issuing bank and constitutes theengagement of that bank to the beneficiary and bona fide holders of drafts drawn and/or documentspresented thereunder, that theprovisions forpayment,acceptanceornegotiationcontained in thecreditwillbedulyfulfilled,providedthatallthetermsandconditionsofthecreditarecompliedwith.

An irrevocable creditmay be advised to a beneficiary through another bank (the advising bank)withoutengagementon thepartof thatbank, butwhenan issuingbankauthorizesor requestsanotherbank toconfirmitsirrevocablecreditandthelatterdoesso,suchconfirmationconstitutesadefiniteundertakingoftheconfirmingbank....

Article7.

Banksmustexaminealldocumentswithreasonablecaretoascertainthattheyappearontheirfacetobeinaccordancewiththetermsandconditionsofthecredit,"

Article8.

Payment, acceptanceor negotiation against documentswhich appear on their face to be in accordancewith the terms and conditions of a credit by a bank authorized to do so, binds the party giving theauthorizationtotakeupdocumentsandreimbursethebankwhichhaseffectedthepayment,acceptanceornegotiation.(EmphasisSupplied)

Under the foregoing provisions of the U.C.P., the bank may only negotiate, accept or pay, if the documentstenderedtoitareontheirfaceinaccordancewiththetermsandconditionsofthedocumentarycredit.Andsincea correspondent bank, like thepetitioner, principally dealsonlywithdocuments, theabsenceof anydocumentrequiredinthedocumentarycreditjustifiestherefusalbythecorrespondentbanktonegotiate,acceptorpaythebeneficiary,asitisnotitsobligationtolookbeyondthedocuments.Itmerelyhastorelyonthecompletenessofthedocumentstenderedbythebeneficiary.

InregardtotherulingofthelowercourtandaffirmedbytheCourtofAppealsthatthepetitionerisnotanotifyingbankbutaconfirmingbank,wefindthesameerroneous.

The trial court wrongly mixed up the meaning of an irrevocable credit with that of a confirmed credit. In itsdecision, the trial court ruled that the petitioner, in accepting the obligation to notify the respondent that theirrevocablecredithasbeen transmitted to thepetitioneronbehalfof theprivate respondent,hasconfirmed theletter.

Thetrialcourtappearstohaveoverlookedthefactthatanirrevocablecreditisnotsynonymouswithaconfirmedcredit.These typesof lettershavedifferentmeaningsand the legal relationsarising from therevaries.Acreditmaybeanirrevocablecreditandatthesametimeaconfirmedcreditorviceversa.

An irrevocablecredit refers to thedurationof the letterofcredit.What issimplymeans is that the issuingbankmaynotwithouttheconsentofthebeneficiary(seller)andtheapplicant(buyer)revokehisundertakingundertheletter.Theissuingbankdoesnotreservetherighttorevokethecredit.Ontheotherhand,aconfirmedletterofcreditpertainstothekindofobligationassumedbythecorrespondentbank.Inthiscase,thecorrespondentbankgives an absolute assurance to the beneficiary that it will undertake the issuing bank's obligation as its ownaccordingtothetermsandconditionsofthecredit.(Agbayani,CommercialLawsofthePhilippines,Vol.1,pp.8183)

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Hence,themerefactthataletterofcreditisirrevocabledoesnotnecessarilyimplythatthecorrespondentbankinaccepting the instructionsof the issuingbankhasalsoconfirmed the letterofcredit.Anothererrorwhich thelowercourtandtheCourtofAppealsmadewastoconfusetheobligationassumedbythepetitioner.

In commercial transactions involving letters of credit, the functions assumed by a correspondent bank areclassifiedaccordingtotheobligationstakenupbyit.Thecorrespondentbankmaybecalledanotifyingbank,anegotiatingbank,oraconfirmingbank.

Incaseofanotifyingbank, thecorrespondentbankassumesno liabilityexcept tonotifyand/or transmit to thebeneficiarytheexistenceoftheletterofcredit.(KronmanandCo.,Inc.v.PublicNationalBankofNewYork,218N.Y.S. 616 [1926] Shaterian, ExportImport Banking, p. 292, cited in Agbayani, Commercial Laws of thePhilippines,Vol.1,p.76).Anegotiatingbank,ontheotherhand,isacorrespondentbankwhichbuysordiscountsadraftundertheletterofcredit.Itsliabilityisdependentuponthestageofthenegotiation.Ifbeforenegotiation,ithasnoliabilitywithrespecttothesellerbutafternegotiation,acontractualrelationshipwillthenprevailbetweenthenegotiatingbankand theseller. (Scanlonv.FirstNationalBankofMexico,162N.E.567 [1928]Shaterian,ExportImportBanking,p.293,citedinAgbayani,CommercialLawsofthePhilippines,Vol.1,p.76)

Inthecaseofaconfirmingbank,thecorrespondentbankassumesadirectobligationtotheselleranditsliabilityis a primary one as if the correspondent bank itself had issued the letter of credit. (Shaterian, ExportImportBanking,p.294,citedinAgbayaniCommercialLawsofthePhilippines,Vol.1,p.77)

Inthiscase,thelettermerelyprovidedthatthepetitioner"forwardtheenclosedoriginalcredittothebeneficiary."(Records,Vol. I, p.11)Considering theaforesaid instruction to thepetitionerby the issuingbank, theSecurityPacificNationalBank, it is indubitable that thepetitioner is onlyanotifyingbankandnot a confirmingbankasruledbythecourtsbelow.

If thepetitionerwasa confirmingbank, thena categorical declaration shouldhavebeen stated in the letter ofcreditthatthepetitioneristohonoralldraftsdrawninconformitywiththeletterofcredit.Whatwassimplystatedthereinwastheinstructionthatthepetitionerforwardtheoriginalletterofcredittothebeneficiary.

Since the petitioner was only a notifying bank, its responsibility was solely to notify and/or transmit thedocumentaryofcredittotheprivaterespondentanditsobligationendsthere.

Thenotifyingbankmaysuggesttotheselleritswillingnesstonegotiate,butthisfactalonedoesnotimplythatthenotifyingbankpromisestoacceptthedraftdrawnunderthedocumentarycredit.

Anotifyingbankisnotaprivytothecontractofsalebetweenthebuyerandtheseller,itsrelationshipisonlywiththat of the issuing bank and notwith the beneficiary towhomhe assumes no liability. It follows therefore thatwhenthepetitionerrefusedtonegotiatewiththeprivaterespondent,thelatterhasnocauseofactionagainstthepetitionerfortheenforcementofhisrightsundertheletter.(SeeKronmanandCo.,Inc.v.PublicNationalBankofNewYork,supra)

Inorderthatthepetitionermaybeheldliableundertheletter,thereshouldbeproofthatthepetitionerconfirmedtheletterofcredit.

Therecordsare,however,bereftofanyevidencewhichwilldisclosethatthepetitionerhasconfirmedtheletterofcredit. The only evidence in this case, and upon which the private respondent premised his argument, is theP75,000.00loanextendedbythepetitionertohim.

Theprivaterespondentreliesonthisloantoadvancehiscontentionthattheletterofcreditwasconfirmedbythepetitioner.Heclaimsthattheloanwasgrantedbythepetitionertohim,"inanticipationofthepresentmentoftheletterofcredit."

The proposition advanced by the private respondent has no basis in fact or law. That the loan agreementbetween them be construed as an act of confirmation is rather farfetched, for it depends principally onspeculativereasoning.

Asearlierstated,theremusthavebeenanabsoluteassuranceonthepartofthepetitionerthatitwillundertakethe issuingbank'sobligationas itsown.Verily, the loanagreement itentered intocannotbecategorizedasanemphaticassurancethatitwillcarryouttheissuingbank'sobligationasitsown.

The loan agreement ismore reasonably classified as an isolated transaction independent of the documentarycredit.

Ofcourse,itmaybepresumedthatthepetitionerloanedthemoneytotheprivaterespondentinanticipationthatitwouldlaterbepaidbythelatteruponthereceiptoftheletter.Yet,wewouldhavenobasistoruledefinitivelythatsuch"act"shouldbeconstruedasanactofconfirmation.

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Theprivaterespondentnodoubtwasinneedofmoneyinloadingthelogsontheship"ZenlinGlory"andtheonlyway to satisfy this need was to borrow money from the petitioner which the latter granted. From thesecircumstances, a logical conclusion that can be gathered is that the letter of credit wasmerely to serve as acollateral.

At the most, when the petitioner extended the loan to the private respondent, it assumed the character of anegotiatingbank.Eventhen,thepetitionerwillstillnotbeliable,foranegotiatingbankbeforenegotiationhasnocontractualrelationshipwiththeseller.

ThecaseofScanlonv.FirstNationalBank(supra) perspicuously explained the relationship between the sellerandthenegotiatingbank,viz:

Itmaybuyorrefusetobuyasitchooses.Equally, itmustbetruethatitowesnocontractualdutytowardthepersonforwhosebenefittheletteriswrittentodiscountorpurchaseanydraftdrawnagainstthecredit.No relationship of agent and principal, or of trustee and cestui, between the receiving bank and thebeneficiaryoftheletterisestablished.(P.568)

Whether therefore thepetitioner is anotifyingbankor anegotiatingbank, it cannotbeheld liable.Absentanydefinitiveproofthatithasconfirmedtheletterofcreditorhasactuallynegotiatedwiththeprivaterespondent,therefusalbythepetitionertoacceptthetenderoftheprivaterespondentisjustified.

Inregardtothefindingthatthepetitionerbecamea"trusteeinrelationtotheplaintiff(privaterespondent)asthebeneficiaryoftheletterofcredit,"thesamehasnolegalbasis.

A trusthasbeendefinedas the "right,enforceablesolely inequity, to thebeneficialenjoymentofproperty thelegaltitletowhichisvestedtoanother."(89C.J.S.712)

The concept of a trust presupposes the existence of a specific property which has been conferred upon thepersonforthebenefitofanother.Inorderthereforeforthetrusttheoryoftheprivaterespondenttobesustained,thepetitionershouldhavehad in itspossessionasumofmoneyasspecific fundadvanced to itby the issuingbankandtobeheldintrustbyitinfavoroftheprivaterespondent.Thisdoesnotobtaininthiscase.

Themere opening of a letter of credit, it is to be noted, does not involve a specific appropriation of a sumofmoneyinfavorofthebeneficiary.Itonlysignifiesthatthebeneficiarymaybeabletodrawfundsupontheletterofcredituptothedesignatedamountspecifiedintheletter. Itdoesnotconveythenotionthataparticularsumofmoneyhasbeenspecificallyreservedorhasbeenheldintrust.

Whatactuallytranspiresinanirrevocablecredit isthatthecorrespondentbankdoesnotreceiveinadvancethesumofmoney from thebuyeror the issuingbank.On thecontrary,when thecorrespondentbankaccepts thetenderandpaystheamountstatedintheletter,themoneythat itdolesoutcomesnotfromanyparticularfundthathasbeenadvancedby the issuingbank, rather itgets themoney from itsown fundsand then laterseeksreimbursementfromtheissuingbank.

Granting thata trusthasbeencreated,still, thepetitionermaynotbeconsidereda trustee.As thepetitioner isonly a notifying bank, its acceptanceof the instructions of the issuing bankwill not create estoppel on its partresulting in theacceptanceof the trust.Precisely,asanotifyingbank, itsonlyobligation is tonotify theprivaterespondentof theexistenceoftheletterofcredit.Howthencansuchcreateestoppelwhenthat is itsonlydutyunderthelaw?

Wealso find erroneous the statement of theCourt ofAppeals that the petitioner "acted as a guarantor of theissuingbankandineffectalsoofthelatter'sprincipalorclient,i.e.,HansAxelChristiansen."

Itisafundamentalrulethatanirrevocablecreditisindependentnotonlyofthecontractbetweenthebuyerandthesellerbutalsoofthecreditagreementbetweentheissuingbankandthebuyer.(SeeKingdomofSwedenv.NewYorkTrustCo.,96N.Y.S.2d779[1949]).Therelationshipbetweenthebuyer(Christiansen)andtheissuingbank(SecurityPacificNationalBank)isentirelyindependentfromtheletterofcreditissuedbythelatter.

Thecontractbetweenthetwohasnobearingastothenoncompliancebythebuyerwiththeagreementbetweenthelatterandtheseller.Theircontractissimilartothatofacontractofservices(toopentheletterofcredit)andnotthatofagencyaswasintimatedbytheCourtofAppeals.TheunjustifiedrefusalthereforebyChristiansentoissuethecertificationundertheletterofcreditshouldnotlikewisebechargedtotheissuingbank.

Asamerenotifyingbank,notonlydoesthepetitionernothaveanycontractualrelationshipwiththebuyer,ithasalsonothingtodowiththecontractbetweentheissuingbankandthebuyerregardingtheissuanceoftheletterofcredit.

ThetheoryofguaranteerelieduponbytheCourtofAppealshastonecessarilyfail.Theconceptofguaranteevisavistheconceptofanirrevocablecreditareinconsistentwitheachother.

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Inthefirstplace, theguaranteetheorydestroysthe independenceof thebank'sresponsibility fromthecontractuponwhichitwasopened.Inthesecondplace,thenatureofbothcontractsismutuallyinconflictwitheachother.Incontractsofguarantee,theguarantor'sobligationismerelycollateralanditarisesonlyuponthedefaultofthepersonprimarilyliable.Ontheotherhand,inanirrevocablecreditthebankundertakesaprimaryobligation.(SeeNationalBankofEaglePass,Texv.AmericanNationalBankofSanFrancisco,282F.73[1922])

Therelationshipbetweenthe issuingbankandthenotifyingbank,on thecontrary, ismoresimilar to thatofanagencyandnotthatofaguarantee.Itmaybeobservedthatthenotifyingbankismerelytofollowtheinstructionsoftheissuingbankwhichistonotifyortotransmittheletterofcredittothebeneficiary.(SeeKronmanv.PublicNationalBankofNewYork,supra). Its commitment is only to notify thebeneficiary. It doesnot undertakeanyassurance that the issuingbankwillperformwhathasbeenmandated toorexpectedof it.Asanagentof theissuingbank,ithasonlytofollowtheinstructionsoftheissuingbankandtoitaloneisitobligatedandnottobuyerwithwhomithasnocontractualrelationship.

In fact the notifying bank, even if the seller tenders all the documents required under the letter of credit,mayrefusetonegotiateoracceptthedraftsdrawnthereunderanditwillstillnotbeheldliableforitsonlyengagementistonotifyand/ortransmittothesellertheletterofcredit.

Finally, even ifwe assume that the petitioner is a confirming bank, the petitioner cannot be forced to pay theamount under the letter. As we have previously explained, there was a failure on the part of the privaterespondenttocomplywiththetermsoftheletterofcredit.

Thefailurebyhimtosubmitthecertificationwasfataltohiscase.1 w p h i1TheU.C.P.whichisincorporatedintheletterofcreditordainsthatthebankmayonlypaytheamountspecifiedundertheletterifallthedocumentstenderedareontheirfaceincompliancewiththecredit.Itisnottaskedwiththedutyofascertainingthereasonorreasonswhycertaindocumentshavenotbeensubmitted,as it isonlyconcernedwith thedocuments.Thus,whetherornotthebuyerhasperformedhisresponsibilitytowardsthesellerisnotthebank'sproblem.

We are aware of the injustice committed by Christiansen on the private respondent but we are deciding thecontroversy on the basis of what the law is, for the law is not meant to favor only those who have beenoppressed,thelawistogovernfuturerelationsamongpeopleaswell.Itscommitmentistoallandnottoasingleindividual.Thefaithofthepeopleinourjusticesystemmaybeerodedifwearetodecidenotwhatthelawstatesbutwhatwebelieveitshoulddeclare.Duralexsedlex.

Consideringtheforegoing,thematerialityofrulinguponthevalidityof thecertificateofapprovalrequiredof theprivaterespondenttosubmitundertheletterofcredit,hasbecomeinsignificant.

In any event, we affirm the earlier ruling of theCourt of Appeals datedApril 9, 1987 in regard to the petitionbeforeitforcertiorariandprohibitionwithpreliminaryinjunction,towit:

Thereisnomeritintherespondent'scontentionthatthecertificationrequiredinconditionNo.4oftheletterof credit was "patently illegal." At the time the letter of credit was issued there was no Central Bankregulationprohibitingsuchaconditionintheletterofcredit.Theletterofcredit(Exh.C)wasissuedonJune7,1971,morethantwomonthsbeforetheissuanceoftheCentralBankMemorandumonAugust16,1971disallowingsuchaconditioninaletterofcredit.InfacttheletterofcredithadalreadyexpiredonJuly30,1971 when the Central Bank memorandum was issued. In any event, it is difficult to see how such aconditioncouldbecategorizedasillegalorunreasonablesinceallthatplaintiffVillaluz,assellerofthelogs,couldandshouldhavedonewastorefusetoloadthelogsonthevessel"ZenlinGlory",unlessChristiansenfirstissuedtherequiredcertificationthatthelogshadbeenapprovedbyhimtobeinaccordancewiththeterms and conditions of his purchase order. Apparently, Villaluzwas in toomuch haste to ship his logswithouttakingalldueprecautionstoassurethatallthetermsandconditionsoftheletterofcredithadbeenstrictlycompliedwith,sothattherewouldbenohitchinitsnegotiation.(Rollo,p.8)

WHEREFORE, the COURT RESOLVED to GRANT the petition and hereby NULLIFIES and SETS ASIDE thedecision of the Court of Appeals dated June 29, 1990. The amended complaint in Civil Case No. 15121 isDISMISSED.

SOORDERED.

Feliciano,BidinandDavide,Jr.,JJ.,concur.Fernan,C.J.,tooknopart.

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