G.R. No. 157309. March 28, 2008.

MARLOU L. VELASQUEZ, petitioner, vs.

SOLIDBANK CORPORATION, respondent.

Negotiable Instruments; Foreign Bills of

Exchange; Protests; When a foreign bill is dishonored
by non-acceptance or non-payment, protest is
necessary to hold the drawer and indorsers liable.—
Admittedly, petitioner was discharged from liability
under the sight draft when respondent failed to protest
it for non-acceptance by the Bank of Seoul. A sight
draft made payable outside the Philippines is a foreign
bill of exchange. When a foreign bill is dishonored by
non-acceptance or non-payment, protest is necessary to
hold the drawer and indorsers liable. Verily,
respondent’s failure to protest the non-acceptance of the
sight draft resulted in the discharge of petitioner from
liability under the instrument.
Same; Same; Same; Even if an indorser of a sight
draft was discharged from liability for failure of the
holder to protest for non-acceptance, he would still be
liable under his letter of undertaking since the same is
independent from his liability under the sight draft—
liability subsists on it even if the sight draft was
dishonored for non-acceptance or non-payment.—
Petitioner, however, can still be made liable under the
letter of undertaking. It bears stressing that it is a
separate contract from the sight draft. The liability of
petitioner under the letter of undertaking is direct and
primary. It is independent from his liability under the
sight draft. Liability subsists on it even if the sight draft
was dishonored for non-acceptance or non-payment.
Respondent agreed to purchase the draft and credit
petitioner its value upon the undertaking that he will
reimburse the amount in case the sight draft is
dishonored. The bank would certainly not have agreed
to grant petitioner an advance export payment were it
not for the letter of undertaking. The consideration for
the letter of undertaking was petitioner’s promise to pay
respondent the value of the sight draft if it was
dishonored for any reason by the Bank of Seoul.

_______________

* THIRD DIVISION.

120

120 SUPREME COURT REPORTS ANNOTATED

Velasquez vs. Solidbank Corporation

Same; Same; Guaranty; A person cannot be both

the primary debtor and the guarantor of his own debt—
this is inconsistent with the very purpose of a guarantee
which is for the creditor to proceed against a third
person if the debtor defaults in his obligation.—We
cannot accept petitioner’s thesis that he is only a mere
guarantor under the letter of credit. Petitioner cannot be
both the primary debtor and the guarantor of his own
debt. This is inconsistent with the very purpose of a
guarantee which is for the creditor to proceed against a
third person if the debtor defaults in his obligation.
Certainly, to accept such an argument would make a
mockery of commercial transactions.
Same; Same; Obligations and Contracts; Parties
are bound to fulfill what has been expressly stipulated
in the contract.—Respondent need not prove that
petitioner violated the provisions of the letter of credit
in order to be held liable under the letter of
undertaking. Parties are bound to fulfill what has been
expressly stipulated in the contract. Petitioner’s liability
under the letter of undertaking is clear. He is liable to
respondent if the sight draft is not accepted by the Bank
of Seoul. Mere non-acceptance of the sight draft is
sufficient for liability to attach. Here, the sight draft
was dishonored for non-acceptance. The non-
acceptance of the sight draft triggered petitioner’s
liability under the letter of undertaking.

PETITION for review on certiorari of a decision

of the Court of Appeals.
   The facts are stated in the opinion of the Court.
  Palma, Pangan & Ybanez for petitioner.
  Rivera, Santos and Maranan for respondent.

REYES, R.T., J.:

PARTIES may not impugn the effectivity of a
contract, after much benefit has been gained to the
prejudice of another. They are bound by the
obligations they expressly set out to do.

121
 VOL. 550, MARCH 28, 2008 121
Velasquez vs. Solidbank Corporation

Before Us is a petition for review on certiorari

of the Decision1 of the Court of Appeals (CA)
which affirmed with modification that of the
Regional Trial Court (RTC) in Cebu City,2
holding petitioner Marlou Velasquez liable under
his letter of undertaking to respondent Solidbank
Corporation.

The Facts

Petitioner is engaged in the export business

operating under the name Wilderness Trading.
Respondent is a domestic banking corporation
organized under Philippine laws.
The case arose out of a business transaction for
the sale of dried sea cucumber for export to South
Korea between Wilderness Trading, as seller, and
Goldwell Trading of Pusan, South Korea, as
buyer. To facilitate payment of the products,
Goldwell Trading opened a letter of credit in
favor of Wilderness Trading in the amount of
US$87,500.003 with the Bank of Seoul, Pusan,
Korea.
On November 12, 1992, petitioner applied for
credit accommodation with respondent bank for
pre-shipment financing. The credit
accommodation was granted. Petitioner was
successful in his first two export transactions both
drawn on the letter of credit. The third export
shipment, however, yielded a different result.
 On February 22, 1993, petitioner submitted to
respondent the necessary documents for his third
shipment. Wanting to be paid the value of the
shipment in advance, petitioner negotiated for a
documentary sight draft to be drawn on the letter
of credit, chargeable to the account of Bank of
Seoul. The

_______________

1 Rollo, pp. 38-55. Penned by Associate Justice Andres B.

Reyes, Jr., with Associate Justices Josefina Guevara-Salonga
and Mario L. Guariña, III, concurring.
2 Id., at pp. 115-121.
3  Irrevocable Letter of Credit No. M2073210NS00040,
opened on October 6, 1992.

122

122 SUPREME COURT REPORTS

ANNOTATED
Velasquez vs. Solidbank Corporation

sight draft represented the value of the shipment

in the amount of US$59,640.00.4
As a condition for the issuance of the sight
draft, petitioner executed a letter of undertaking in
favor of respondent. Under the terms of the letter
of undertaking, petitioner promised that the draft
will be accepted and paid by Bank of Seoul
according to its tenor. Petitioner also held himself
liable if the sight draft was not accepted. The
letter of undertaking provided:
SOLIDBANK
CORPORATION                                            Feb. 22,
1993
32 Borromeo Street
Cebu City
Gentlemen:   Re: PURCHASE OF ONE DOC. SIGHT
DRAFT DRAWN
                       UNDER LC#M2073210NS00040 FOR
                                            US$59,640.00 UNDER OUR
CEBP93/102.
In consideration of your negotiating the above
described draft(s), we hereby warrant that the above
referred to draft(s) and accompanying documents are
genuine and accurately represent the facts stated
therein and that the draft(s) will be accepted and paid
in accordance with its/their tenor. We further undertake
and agree, jointly and severally, to hold you free and
harmless from and to defend all actions, claims and
demands whatsoever, and to pay on demand all
damages, actual or compensatory, including attorney’s
fees, in case of suit, at least equal to __% of the amount
due, which you may suffer arising by reason of or on
account of your negotiating the above draft(s) because
of the following discrepancies or reasons or any other
discrepancy or reason whatever:
1) B/L MARKED “SAID TO CONTAIN”
& “SHIPPER’S LOAD, STOWAGE &
COUNT.”
2) LATE SHIPMENT.
3) QUANTITY SHIPPED @ US$14.00
OVERDRAWN BY 0.06 TON.
4) NO INSPECTION CERTIFICATE
PRESENTED.
_______________

4 Rollo, p. 70.

123

VOL. 550, MARCH 28, 2008 123

Velasquez vs. Solidbank Corporation

We hereby undertake to pay on demand the full

amount of the draft(s) or any unpaid balance of the
draft(s), with interest at the prevailing rate of today
from the date of negotiation, plus all charges and
expenses whatsoever incurred in connection therewith.
You shall neither be obligated to contest or dispute any
refusal to accept or to pay the whole or any part of the
above draft(s) nor to proceed in anyway against the
drawee thereof, the issuing bank, or against any
indorser thereof before making a demand on us for the
payment of the whole or any unpaid balance of the
draft(s).”5 (Emphasis added)

By virtue of the letter of undertaking,

respondent advanced the value of the shipment
which, at the current rate of exchange at that time
was P1,495,115.16, less bank charges, to
petitioner. Respondent then sent all the documents
pertinent to the export transaction to the Bank of
Seoul.
Respondent failed to collect on the sight draft
as it was dishonored by non-acceptance by the
Bank of Seoul. The reasons given for the dishonor
were late shipment, forged inspection certificate,
and absence of countersignature of the negotiating
bank on the inspection certificate.6 Goldwell
Trading likewise issued a stop payment order on
the sight draft because most of the bags of dried
sea cucumber exported by petitioner contained
soil.
Due to the dishonor of the sight draft and the
stop payment order, respondent demanded
restitution of the sum advanced.7 Petitioner failed
to heed the demand.
On June 3, 1993, respondent filed a complaint
for recovery of sum of money8 with the RTC in
Cebu City. In his answer, petitioner alleged that
his liability under the sight draft was extinguished
when respondent failed to protest its non-
acceptance, as required under the Negotiable
Instruments

_______________

5 Id.
6 Annex “Q.”
7 Rollo, pp. 81-82. Demand letters dated March 9, 1993,
March 23, 1993, and April 7, 1993.
8 Docketed as Civil Case No. CEB-14080, RTC, Branch 8,
Cebu City.

124

124 SUPREME COURT REPORTS

ANNOTATED
Velasquez vs. Solidbank Corporation

Law (NIL). He also alleged that the letter of

undertaking is not binding because it is a
superfluous document, and that he did not violate
any of the provisions of the letter of credit.9

RTC and CA Dispositions

On September 25, 1996, the RTC rendered

judgment10 in favor of respondent with the
following fallo:

“IN VIEW OF THE FOREGOING, judgment is

hereby rendered ordering the defendant:
(1) to pay the plaintiff the principal sum of
P1,495, 115.16 plus interest at 20% per annum counted
from February 22, 1993 up to the time the entire
amount shall have been fully paid;
(2) to pay attorney’s fees equivalent to 10% of the
total amount due the plaintiff; and
(3) to pay the costs.
SO ORDERED.”11

The RTC ratiocinated:

“This court is not convinced with the defendant’s

argument that because of plaintiff’s failure to protest
the dishonor of the sight draft, his liability is
extinguished because his liability remains under the
letter of undertaking which he signed and without
which plaintiff would not have advanced or credited to
him the amount.
Section 152 of the Negotiable Instruments Law
under which defendant claims extinguishment of his
liability to plaintiff is not a bar to the filing of other
appropriate remedies which the aggrieved party may
pursue to vindicate his rights and in this instant case,
plaintiff wants his right vindicated by virtue of the
letter of undertaking which defendant signed. By the
letter of undertaking, defendant bound himself to pay
on demand all damages including attorney’s fees which
plaintiff may suffer arising by reason of or on ac-

_______________

9 Rollo, pp. 100-109.

10 Id., at pp. 115-121.
11 Id., at p. 121.

125

VOL. 550, MARCH 28, 2008 125

Velasquez vs. Solidbank Corporation

count of negotiating the above draft because of the

following discrepancies or any other discrepancy or
reasons whatsoever and further to pay on demand full
amount of any unpaid balance with interest at the
prevailing rate. He should be bound to the fulfillment of
what he expressly obligated himself to do and perform
in the letter of undertaking without which, plaintiff
would not have advance (sic) and credited to him the
amount in the draft. He should not enrich himself at the
expense of plaintiff.”12 (Emphasis added)

Disagreeing, petitioner elevated the matter to

the CA.
On June 27, 2002, the CA affirmed with
modification the RTC decision, disposing as
follows:

“WHEREFORE, premises considered, the assailed

Decision is hereby AFFIRMED with
MODIFICATION. Defendant-appellant Marlou L.
Velasquez is hereby ordered to pay plaintiff-appellee
Solidbank Corporation, the following: (1) the principal
amount of One Million Four Hundred Ninety-Five
Thousand One Hundred Fifteen and Sixteen Centavos
(P1,495,115.16) plus interest at twelve percent (12%)
per annum from February 22, 1993 until fully paid, (2)
attorney’s fees equivalent to five percent (5%) of the
total amount due, and (3) costs of the suit.
SO ORDERED.”13

In ruling against petitioner, the CA opined:

“The fact that said draft was dishonored and not

paid by the Bank of Seoul-Korea, (sic) it is incumbent
upon defendant-appellant Velasquez to comply with his
obligation under the Letter of Undertaking. He cannot
be allowed to impugn the contract of undertaking he
entered into by saying that it was a superfluous
document, and therefore, not binding on him. The
contract of undertaking is the law between them, and
must be enforced accordingly. This is in accord with
Article 1159 of the New Civil Code, which provides
that “obligations arising from contracts have the force
of law between the contracting parties and should be
complied with in good faith.” And parties to a contract
are bound to the fulfillment of what has ex-

_______________

12 Id.
13 Id., at p. 55.

126

126 SUPREME COURT REPORTS ANNOTATED

 Velasquez vs. Solidbank Corporation

pressly been stipulated therein, regardless of the fact

that it turn (sic) out to be financially
disadvantageous.14
x x x x
The fact that Defendant-appellant benefited from the
advance payment made by Plaintiff appellee, (sic) it is
incumbent upon him to return what he received because
the purpose of the advance payment was not attained
and/or realized, as the sight draft was not paid
accordingly, otherwise, it will result to unjust
enrichment on the part of Defendant-appellant at the
expense of Plaintiff-appellee, in violation of Articles 19
and 22 of the New Civil Code. The doctrine of unjust
enrichment and restitution simply means that “the
exercise of a right ends when the right disappears, and
it disappears when it is abused, especially to the
prejudice of others.”15 (Emphasis added)

Petitioner moved for reconsideration16 but his

motion was denied.17 Hence, the present recourse.

Issues

Petitioner raises twin issues for Our

consideration, to wit:

THE COURT OF APPEALS HAS DECIDED A

QUESTION OF SUBSTANCE, NOT HERETOFORE
DETERMINED BY THIS HONORABLE COURT, OR
HAS DECIDED IT IN A WAY PROBABLY NOT IN
ACCORD WITH LAW OR WITH THE APPLICABLE
DECISIONS OF THIS HONORABLE COURT, IN
THAT:
I.
 THE COURT OF APPEALS RULED THAT
PETITIONER IS LIABLE ON THE
ACCESSORY CONTRACT, THE LETTER OF
UNDERTAKING, DESPITE THE FACT THAT
PETITIONER WAS ALREADY RELEASED
FROM LIABILITY UNDER THE SIGHT
DRAFT, THE PRINCIPAL CONTRACT,
UNDER THE PROVISIONS OF THE
NEGOTIABLE INSTRUMENTS LAW AND
THE CIVIL CODE.

_______________

14 Id., at p. 49.
15 Id., at pp. 50-51.
16 Id., at pp. 242-253.
17 Id., at p. 58.

127

VOL. 550, MARCH 28, 2008 127

Velasquez vs. Solidbank Corporation

II.
THE COURT OF APPEALS HELD
PETITIONER LIABLE UNDER THE
ACCESSORY CONTRACT, THE LETTER OF
UNDERTAKING, DESPITE THE FACT THAT
THERE WAS NO PROOF WHATSOEVER
THAT PETITIONER VIOLATED EITHER THE
PRINCIPAL CONTRACT, THE SIGHT DRAFT,
OR EVEN THE LETTER OF UNDERTAKING.18
(Italics supplied)
 The main issue is whether or not petitioner
should be held liable to respondent under the sight
draft or the letter of undertaking. There is no
dispute that petitioner duly signed and executed
these documents. It is likewise admitted that the
sight draft was dishonored by non acceptance by
the Bank of Seoul.

Our Ruling

The petition is without merit.

Petitioner is not liable under the sight
draft but he is liable under his letter of
undertaking; liability under the letter of
undertaking was not extinguished by non-protest
of the dishonor of the sight draft.
Petitioner argues that he cannot be held liable
under either the sight draft or the letter of
undertaking. He claims that the failure of
respondent to protest the dishonor of the sight
draft under Section 152 of the NIL discharged
him from liability under the negotiable
instrument. It is also contended that his liability
under the letter of undertaking is that of a mere
guarantor; that the letter of undertaking is only an
accessory contract to the sight draft. Since he was
discharged from liability under the sight draft, he
cannot be held liable under the letter of
undertaking.

_______________

18 Id., at p. 12.

128
128 SUPREME COURT REPORTS
ANNOTATED
Velasquez vs. Solidbank Corporation

For its part, respondent counters that

petitioner’s liability springs from the letter of
undertaking, independently of the sight draft. It
would not have advanced the amount without the
letter of undertaking. According to respondent,
the letter of undertaking is an independent
agreement and not merely an accessory contract.
To permit petitioner to escape liability under the
letter of undertaking would result in unjust
enrichment.
Petitioner’s liability under the letter of
undertaking is independent from his liability
under the sight draft. He may be held liable under
either the sight draft or the letter of undertaking or
both.
Admittedly, petitioner was discharged from
liability under the sight draft when respondent
failed to protest it for non-acceptance by the Bank
of Seoul. A sight draft made payable outside the
Philippines is a foreign bill of exchange.19 When
a foreign bill is dishonored by non-acceptance or
non-payment, protest is necessary to hold the
drawer and indorsers liable. Verily, respondent’s
failure to protest the non-acceptance of the sight
draft resulted in the discharge of petitioner from
liability under the instrument.
Section 152 of the NIL is explicit:

“Section 152. In what cases protest necessary.—

Where a foreign bill appearing on its face to be such is
dishonored by non-acceptance, it must be duly
protested for non-acceptance, and where such a bill
which has not been previously dishonored by non-
acceptance, is dishonored by non-payment, it must be
duly protested for non-payment. If it is not so protested,
the drawer and indorsers are discharged. Where a bill
does not appear on its face to be a for-

_______________

19 Negotiable Instruments Law, Sec. 129 provides:

Sec. 129. Inland and Foreign Bills of Exchange.—An
inland bill of exchange is a bill which is, or on its face
purports to be, both drawn and payable within the
Philippines. Any other bill is foreign bill. Unless the contrary
appears on the face of the bill, the holder may treat is as an
inland bill.

129

VOL. 550, MARCH 28, 2008 129

Velasquez vs. Solidbank Corporation

eign bill, protest thereof in case of dishonor is

unnecessary.” (Emphasis added)

Petitioner, however, can still be made liable

under the letter of undertaking. It bears stressing
that it is a separate contract from the sight draft.
The liability of petitioner under the letter of
undertaking is direct and primary. It is
independent from his liability under the sight
draft. Liability subsists on it even if the sight draft
was dishonored for non-acceptance or non-
payment.
 Respondent agreed to purchase the draft and
credit petitioner its value upon the undertaking
that he will reimburse the amount in case the sight
draft is dishonored. The bank would certainly not
have agreed to grant petitioner an advance export
payment were it not for the letter of undertaking.
The consideration for the letter of undertaking
was petitioner’s promise to pay respondent the
value of the sight draft if it was dishonored for
any reason by the Bank of Seoul.
We cannot accept petitioner’s thesis that he is
only a mere guarantor under the letter of credit.
Petitioner cannot be both the primary debtor and
the guarantor of his own debt. This is inconsistent
with the very purpose of a guarantee which is for
the creditor to proceed against a third person if the
debtor defaults in his obligation. Certainly, to
accept such an argument would make a mockery
of commercial transactions.
Petitioner bound himself liable to respondent
under the letter of undertaking if the sight draft is
not accepted. He also warranted that the sight
draft is genuine; will be paid by the issuing bank
in accordance with its tenor; and that he will be
held liable for the full amount of the draft upon
demand, without necessity of proceeding against
the drawee bank.20 Petitioner breached his
undertaking when the Bank of Seoul dishonored
the sight draft and Goldwell Trading ordered a

_______________

20 Rollo, pp. 61-62.

130
130 SUPREME COURT REPORTS
ANNOTATED
Velasquez vs. Solidbank Corporation

stop payment order on it for discrepancies in the

export documents.
Petitioner is liable without need for
respondent to establish collateral facts
such as violations of the letter of credit.
It is also argued that petitioner cannot be held
liable under the letter of undertaking because
respondent failed to prove that he violated any of
the provisions in the letter of credit or that sixty
(60) of the seventy-one (71) bags shipped to
Goldwell Trading contained soil instead of dried
sea cucumber.
We cannot agree. Respondent need not prove
that petitioner violated the provisions of the letter
of credit in order to be held liable under the letter
of undertaking. Parties are bound to fulfill what
has been expressly stipulated in the contract.21
Petitioner’s liability under the letter of
undertaking is clear. He is liable to respondent if
the sight draft is not accepted by the Bank of
Seoul. Mere non-acceptance of the sight draft is
sufficient for liability to attach. Here, the sight
draft was dishonored for non-acceptance. The
non-acceptance of the sight draft triggered
petitioner’s liability under the letter of
undertaking.
Records also show that the Bank of Seoul
found discrepancies in the documents submitted
by petitioner. Goldwell Trading issued a stop
payment order because the products shipped were
defective. It found that most of the bags shipped
contained soil instead of dried sea cucumber. If
petitioner disputes the finding of Goldwell
Trading, he can file a case against said company
but he cannot dispute his liability under either the
sight draft or the letter of undertaking.

_______________

21  New Civil Code, Art. 1315 provides: “Contracts are

perfected by mere consent, and from that moment the parties
are bound 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.”

131

VOL. 550, MARCH 28, 2008 131

Velasquez vs. Solidbank Corporation

As We see it, this is a straightforward case of

collection of sum of money on the basis of a letter
of undertaking. Respondent advanced the export
payment to petitioner on the understanding that
the draft will be honored and paid. The draft was
dishonored. Justice and equity dictate that
petitioner be held liable to respondent bank.
WHEREFORE, the petition is DENIED for
lack of merit. The Decision of the Court of
Appeals dated June 27, 2002 is hereby
AFFIRMED.
SO ORDERED.
 Austria-Martinez (Actg. Chairperson),**
Tinga,*** Chico-Nazario and Nachura, JJ.,
concur.

Petition denied, judgment affirmed.

Notes.—If a bank refuses to pay a check

(notwithstanding sufficiency of funds), the payee-
holder cannot sue the bank—the payee should
instead sue the drawer who might in turn sue the
bank. (Villanueva vs. Nite, 496 SCRA 459 [2006])
The term “promissory note” has a definite
meaning under the negotiable instruments law,
which does not include “securities.” (Security
Bank Corporation vs. Commissioner of Internal
Revenue, 499 SCRA 453 [2006])
——o0o——

_______________

** Vice Associate Justice Consuelo Ynares-Santiago,

Chairperson, who is on official leave per Special Order No.
497 dated March 14, 2008.
*** Designated as additional member per Special Order
No. 497 dated March 14, 2008.

© Copyright 2020 Central Book Supply, Inc. All rights reserved.