Transfield Phils vs Luzon HydroG.R. No. 146717, November 22, 2004On March 26, 1997, petitioner Transfield Philippines and respondent Luzon Hydro Corporation (LHC) entered into a Turnkey Contract, whereby petitioner, as Turnkey Contractor, undertook to construct, on a turnkey basis, a seventy Megawatt hydro-electric power station (project) at the Bakun River in Benguet and Ilocos Sure. The Turnkey Contract provided that: the target completion date of the project shall be on June 1 200, or any later date that may be agreed upon between petitioner and respondent or otherwise determined in accordance with the Turnkey Contract; and petitioner is entitled to claim extensions of time (EOT) for reasons enumerated in the Turnkey Contract which includes variations, force majeure, and delays caused by LHC itself. In case of dispute, the parties are to settle their differences through mediation, conciliation and other means enumerated under the Turnkey Contract.To secure performance of petitioners obligation, it opened in favor of LHC, two standby letters of credit (Securities) both dated March 20, 2000 with respondent banks ANZ Bank and SBC, each amounting to $8,988,907.00.Before completing the project, petitioner sought various EOT allegedly due to several factors such as force majeure occasioned by typhoon Zeb, barricades and demonstrations. LHC, however, denied the request, giving rise to a series of legal actions between the parties.On June 1, 1999, LHC filed a request for Arbitration before the Construction Industry Arbitration Commission (CIAC). Petitioner also filed a request for arbitration before the International Chamber of Commerce (ICC) on November 3, 200. Both proceedings sought to answer the issues on whether typhoon Zeb and any of its associated events constituted force majeure to justify the EOTs; and whether LHC had the right to terminate the Turnkey Contract for failure of petitioner to complete the project on target date.Meanwhile, petitioner sent two letters advising respondent banks of the arbitration proceedings that are pending and asserted that LHC had no right to call on the Securities until the resolution of the arbitration proceedings. Petitioner warned the banks that any transfer, release, or disposition of Securities to LHC would constrain it to hold respondent banks liable for liquidated damages.LHC on June 27, 2000 sent notice to petitioner that it failed to comply with its obligation to complete the Project. Despite of the letters of the petitioner, both banks informed petitioner that they would pay on the Securities if and when LHC calls on them.LHC on the other hand asserted that additional extension of time would not be warranted; accordingly, LHC declared petitioner in default and demanded payment from petitioner of $75,000.00 for each delay beginning June 28, 2000 until actual completion of the project. LHC also notified petitioner that it would call on the securities for payment of liquidated damages for the delay.Petitioner then filed a Complaint for Injuction with prayer for TPO and writ of preliminary injunction against LHC before the RTC, seeking to restrain LHC from calling on the securities and respondent banks from transferring, paying on, or in any manner disposing of the Securities. A 72-hour TPO was issued by the RTC of Makati. After appropriate proceedings, the RTC issued an order extending the TPO for a period of 17 days or until November 26, 2000.The RTC in its Order dated November 24, 2000 denied petitioners application for a writ of PI ruling that it had no legal right and suffered no irreparable injury. The RTC employed the principle of independent contract in letters of credit.The case was elevated to the CA via certiorari under Rule 65. In a resolution, the CA issued a TPO. The CA however failed to act on writ of PI until the TPO was expired. LHC then withdrew the total amount of $4,950,000.00 from respondent banks.The CA later on dismissed the petition for certiorari and expressed its conformity with the RTCs decision. Hence, this petition.Issue: Whether the respondent can rightfully call on the Securities, despite the disputes between the parties in the arbitral tribunals.Ruling: YES.Letters of CreditIn 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. 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.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.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.Applicability of UCPSince 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. It has been settled that absent any specific provisions governing legal complexities arising from transactions involving LC, not only between or among banks but also between banks and the seller of buyer, the UCP is applicable. 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.The Independence PrincipleThus, 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.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.Respondent can rightfully invoke the independence principle, contrary to the assertions of the petitioner. To say otherwise would render the purpose of the LC inutile. The independence doctrine works for 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.Also wrong is the argument of the petitioner that the dispute must be resolved before the beneficiary is entitled to call on the letters of credit. This would in essence turn the LC to a mere guarantee. It has been made clear by jurisprudence that in LC transactions, the settlement of a dispute is not a pre-requisite for the release of funds under the LC.