Palmares vs CA and MB Lending Corp, March 31 1998 gr no 126490

Facts

Respondent M.B. Lending Corporation extended a loan to the spouses Osmeña and Merlyn Azarraga,
together with petitioner Estrella Palmares, in the amount of P30,000.00 with 6% interest. On four
occasions after the execution of the promissory note and even after the loan matured, petitioner and the
Azarraga spouses were able to pay a total of P16,300.00, thereby leaving a balance of P13,700.00. No
payments were made after.

However, pursuant to the promissory note, the petitioner were bound solidarily liable. Thus, the
respondent filed a complaint against Palmares to the exclusion of principal debtor by reason of insolvency.
Palmares alleged that after the loan matured, she offered to settle her obligation but the respondent
informed her that they would try to collect it from spouses Azarraga; that there has already been a partial
payment in the amount of P17,010.00 and that she is only liable upon default of the principal debtors.

During the pre trial to determine WON Palmares is only a guarantor with a subsidiary liability and not a
co-maker with primary liability. Thereafter, the parties submit the case for decision before the RTC Iloilo.
The RTC dismissed the case without prejudice to the filing of a separate action for a sum of money against
the spouses Osmeña and Merlyn Azarraga who are primarily liable on the instrument and that the offer
made by Palmares to pay the obligation is considered a valid tender of payment sufficient to discharge a
person's secondary liability on the instrument; as co-maker, is only secondarily liable on the instrument;
and that the promissory note is a contract of adhesion. On appeal, the CA reversed the RTC decision
holding that Palmares is a surety since she bound herself to be solidarily liable with the spouses principal
debtors, when she signed as a co-maker. Nevertheless, Palmares contend that under the third paragraph
her liability is actually that of a mere guarantor because she bound herself to fulfill the obligation only
in case the principal debtor should fail to do so, which is the essence of a contract of guaranty. More
simply stated, although the second paragraph says that she is liable as a surety, the third paragraph
defines the nature of her liability as that of a guarantor.

Issue

WON Palmares sign in the promissory note as a co-maker and binds herself to solidarily liable with the
principal debtor in case the latter defaults in the payment, is deemed surety as an insurer of debt (YES)

Ruling

The Civil Code pertinently provides:

Art. 2047. By guaranty, a person called the guarantor binds himself to the creditor to fulfill the obligation
of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I
of this Book shall be observed. In such case the contract is called a suretyship.

It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and leave no
doubt upon the intention of the contracting parties, the literal meaning of its stipulation shall control. In
the case at bar, petitioner expressly bound herself to be jointly and severally or solidarily liable with the
principal maker of the note. The terms of the contract are clear, explicit and unequivocal that
petitioner's liability is that of a surety.
Having entered into the contract with full knowledge of its terms and conditions, petitioner is estopped
to assert that she did so under a misapprehension or in ignorance of their legal effect, or as to the legal
effect of the undertaking. The rule that ignorance of the contents of an instrument does not ordinarily
affect the liability of one who signs it also applies to contracts of suretyship. And the mistake of a surety
as to the legal effect of her obligation is ordinarily no reason for relieving her of liability

A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. A
suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking that the debtor shall
pay. Stated differently, a surety promises to pay the principal's debt if the principal will not pay, while a
guarantor agrees that the creditor, after proceeding against the principal, may proceed against the
guarantor if the principal is unable to pay. A surety binds himself to perform if the principal does not,
without regard to his ability to do so. A guarantor, on the other hand, does not contract that the principal
will pay, but simply that he is able to do so. In other words, a surety undertakes directly for the payment
and is so responsible at once if the principal debtor makes default, while a guarantor contracts to pay
if, by the use of due diligence, the debt cannot be made out of the principal debtor.

The undertaking to pay upon default of the principal debtor does not automatically remove it from the
ambit of a contract of suretyship.

The second and third paragraphs of the aforequoted portion of the promissory note do not contain any
other condition for the enforcement of Respondent Corporation’s right against petitioner. It has not
been shown, either in the contract or the pleadings, that respondent corporation agreed to proceed
against herein petitioner only if and when the defaulting principal has become insolvent. A contract of
suretyship, to repeat, is that wherein one lends his credit by joining in the principal debtor's obligation, so
as to render himself directly and primarily responsible with him, and without reference to the solvency of
the principal

In this regard, we need only to reiterate the rule that a surety is bound equally and absolutely with the
principal, and as such is deemed an original promisor and debtor from the beginning. 27 This is because in
suretyship there is but one contract, and the surety is bound by the same agreement which binds the
principal.

It will further be observed that petitioner's undertaking as co-maker immediately follows the terms and
conditions stipulated between respondent corporation, as creditor, and the principal obligors. A surety is
usually bound with his principal by the same instrument, executed at the same time and upon the same
consideration; he is an original debtor, and his liability is immediate and direct. Thus, it has been held that
where a written agreement on the same sheet of paper with and immediately following the principal
contract between the buyer and seller is executed simultaneously therewith, providing that the signers
of the agreement agreed to the terms of the principal contract, the signers were "sureties" jointly liable
with the buyer. A surety usually enters into the same obligation as that of his principal, and the signatures
of both usually appear upon the same instrument, and the same consideration usually supports the
obligation for both the principal and the surety.

Even if it were otherwise, demand on the sureties is not necessary before bringing suit against them,
since the commencement of the suit is a sufficient demand. On this point, it may be worth mentioning
that a surety is not even entitled, as a matter of right, to be given notice of the principal's default.
Inasmuch as the creditor owes no duty of active diligence to take care of the interest of the surety, his
mere failure to voluntarily give information to the surety of the default of the principal cannot have the
effect of discharging the surety. The surety is bound to take notice of the principal's default and to perform
the obligation.

Where a creditor refrains from proceeding against the principal, the surety is not exonerated. In other
words, mere want of diligence or forbearance does not affect the creditor's rights vis-a-vis the surety,
unless the surety requires him by appropriate notice to sue on the obligation.

In order to constitute an extension discharging the surety, it should appear that the extension was for
a definite period, pursuant to an enforceable agreement between the principal and the creditor, and
that it was made without the consent of the surety or with a reservation of rights with respect to him.
The contract must be one which precludes the creditor from, or at least hinders him in, enforcing the
principal contract within the period during which he could otherwise have enforced it, and which
precludes the surety from paying the debt.

None of these elements are present in the instant case. Verily, the mere fact that respondent
corporation gave the principal debtors an extended period of time within which to comply with their
obligation did not effectively absolve here in petitioner from the consequences of her undertaking.
Besides, the burden is on the surety, herein petitioner, to show that she has been discharged by some act
of the creditor, herein respondent corporation, failing in which we cannot grant the relief prayed for.

Metropolitan Sewerage system vs Dawah GR No 160732 June 21, 2004

Facts

MWSS granted Maynilad a 20 year period for it to manage, operate, repair, decommission under a
Concession agreement the existing MWSS water delivery and sewerage service in West zone Service Area,
for which Maynilad undertook to pay the corresponding concession fees on the dates agreed upon in said
agreement5 which, among other things, consisted of payments of petitioner’s mostly foreign loans

Maynilad was required put up a bond as a security to the agreement. Thus, the same availed a 3 yr facility
of an irrevocable standby letter or credit from different foreign banks, led by Citicorp International Limited
in the amount of $120,000,000. However, Maynilad requested MWSS for a mechanism to recover the
losses due to depreciation of Philippine peso but it got failed. Thus, it issued a force majeure notice and
unilaterally suspend the payment of concession fees.

In order to save the agreement, the parties entered into a Memorandum of Agreement wherein Maynilad
was allowed to recover foreign exchange losses under a formula agreed upon between them. However,
Maynilad filed again a force majeure notice of which MWSS could not agree with its terms and conditions.
The parties were referred to arbitration wherein Maynila promised to resume payment, however, a notice
of event of termination was served by Maynilad to MWSS claiming that it failed to comply with its
obligation. The award of the appeals panel became final. Thus, the notice to by Citicorp International
Limited, as agent for participating banks, it was drawing on the Irrevocable Standby Letter of Credit and
thereby demanded payment in the amount of US$98,923,640.15. prior to this, Maynilad filed a petition
for rehabilitation before the RTC raising, among others, did the Honorable presiding judge act with lack
or excess of jurisdiction or commit a grave error of law in holding that the performance bond obligations
of the banks were not solidary in nature

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

Issue

WON the rehabilitation court sitting as such, act in excess of its authority or jurisdiction when it enjoined
herein petitioner from seeking the payment of the concession fees from the banks that issued the
Irrevocable Standby Letter of Credit in its favor

Ruling

YES

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

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

Letters of credit were developed for the purpose of insuring to a seller payment of a definite amount upon
the presentation of documentsand is thus a commitment by the issuer that the party in whose favor it is
issued and who can collect upon it will have his credit against the applicant of the letter, duly paid in the
amount specified in the letter They are in effect absolute undertakings to pay the money advanced or the
amount for which credit is given on the faith of the instrument. They are primary obligations and not
accessory contracts and while they are security arrangements, they are not converted thereby into
contracts of guaranty. What distinguishes letters of credit from other accessory contracts, is the
engagement of the issuing bank to pay the seller once the draft and other required shipping documents
are presented to it. They are definite undertakings to pay at sight once the documents stipulated therein
are presented.

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

The terms of the Irrevocable Standby Letter of Credit do not show that the obligations of the banks are
not solidary with those of respondent Maynilad. On the contrary, it is issued at the request of and for the
account of Maynilad in favor of the MWSS as a bond for the full and prompt performance of the
obligations by the concessionaire under the Concession Agreement and herein MWSS is authorized by the
banks to draw on it by the simple act of delivering to the agent a written certification substantially in the
form of the Letter of Credit.

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

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

Note

We held in Feati Bank & Trust Company v. Court of Appeals16 that the concept of guarantee vis-à-vis the
concept of an irrevocable letter of credit are inconsistent with each other. The guarantee theory destroys
the independence of the bank’s responsibility from the contract upon which it was opened and the nature
of both contracts is mutually in conflict with each other. In contracts of guarantee, the guarantor’s
obligation is merely collateral and it arises only upon the default of the person primarily liable. On the
other hand, in an irrevocable letter of credit, the bank undertakes a primary obligation. We have also
defined a letter of credit as an engagement by a bank or other person made at the request of a customer
that the issuer shall honor drafts or other demands of payment upon compliance with the conditions
specified in the credit

Escano vs. Silos and Ortigas, GR 151959 June 30, 2007

Facts

Private Development Corporation of the Philippines (PDCP) entered into a loan agreement with Falcon
Minerals, Inc. (Falcon) whereby PDCP agreed to make available and lend to Falcon the amount of
US$320,000.00, for specific purposes and subject to certain terms and conditions. At the same time,
Falcon stockholders-officers respondent Rafael Ortigas, Jr. (Ortigas), George A. Scooley executed an
Assumption of Solidary liability for the punctual payment of loan with PDCP. Meanwhile, two separate
jointly guaranties were executed for the same loan by other stockholders by petitioner Salvador Escaño
(Escaño), while the other by petitioner Mario M. Silos (Silos), Ricardo C. Silverio (Silverio), Carlos L.
Inductivo (Inductivo) and Joaquin J. Rodriguez (Rodriguez).

Two years later, Falcon gave up its control to petitioners. Consequently, contracts were executed whereby
the heirs of Scholey assigned their share of stocks to Escano et al, to relieve from all the solidary liability
undertakings, iuncluding the loan with PDCP. Thus, an undertakin was executed wherein Escano et al were
identified as SURETIES on one hand and Scholey et al as OBLIGORS. On the other hand, the undertaking
includes that SURETIES are irrevocably agree and undertake to assume all the OBLIGORS guarantees.

Falcon eventually availed of the sum of $178,655.59 from the credit line extended by PDCP with
attachment of chattel mortgage over its personal properties. Falcon defaulted its payment. PDCP then
foreclosed the chattel mortgage leaving deficiency of ₱5,031,004.07, which Falcon did not satisfy despite
demand. PDCP then filed a complaint for sum of money before the RTC Makati against Falcon and the
petitioners. Escano, Ortigas and Silos then seek a settlement with PDCP. Escano promised to pay
₱1,000,000.00 in exchang, PDCP will waive in favour of Escano 1/3 of its entire claim. While Ortigas
entered in a compromise agreement with PDCP without knowledge of Escano, Matti and Silos, to pay
PDCP 1,300,000.00 as "full satisfaction of the PDCP’s claim against Ortigas," in exchange for PDCP’s release
of Ortigas from any liability or claim arising from the Falcon loan agreement. While Silos agreed to pay
₱500,000.00 in exchange for PDCP’s waiver of its claims against him. After settlements, Ortigas pursued
his claims against Escaño, Silos and Matti, on the basis of the 1982 Undertaking while he maintained his
cross-claim against Escaño. The RTC ordered Escaño, Silos and Matti solidarily liable to pay Ortigas. On
appeal, Escaño and Silos appealed jointly while Matti appealed by his lonesome. The CA affirmed the RTC
decision.

The petitioners contend that they should be held jointly, not solidarily, liable to Ortigas, claiming that the
Undertaking did not provide for express solidarity. They cite Article 1207 of the New Civil Code, which
states in part that "[t]here is a solidary liability only when the obligation expressly so states, or when the
law or the nature of the obligation requires solidarity. On the other hand, Ortigas contend that
petitioners, as well as Matti, are solidarily liable for the Undertaking, as the language used in the
agreement "clearly shows that it is a surety agreement" between the obligors (Ortigas group) and the
sureties (Escaño group). It is further contended that the principal objective of the parties in executing the
Undertaking cannot be attained unless petitioners are solidarily liable "because the total loan obligation
can not be paid or settled to free or release the OBLIGORS if one or any of the SURETIES default from their
obligation in the Undertaking

Issue

WON petitioners are jointly liable only and not solidarily to Ortigas under 1982 undertaking

Ruling

In case, there is a concurrence of two or more creditors or of two or more debtors in one and the same
obligation, Article 1207 of the Civil Code states that among them, "[t]here is a solidary liability only when
the obligation expressly so states, or when the law or the nature of the obligation requires solidarity."
Article 1210 supplies further caution against the broad interpretation of solidarity by providing: "The
indivisibility of an obligation does not necessarily give rise to solidarity. Nor does solidarity of itself imply
indivisibility."

These Civil Code provisions establish that in case of concurrence of two or more creditors or of two or
more debtors in one and the same obligation, and in the absence of express and indubitable terms
characterizing the obligation as solidary, the presumption is that the obligation is only joint. It thus
becomes incumbent upon the party alleging that the obligation is indeed solidary in character to prove
such fact with a preponderance of evidence.

The Undertaking does not contain any express stipulation that the petitioners agreed "to bind themselves
jointly and severally" in their obligations to the Ortigas group, or any such terms to that effect. Hence,
such obligation established in the Undertaking is presumed only to be joint. Ortigas, as the party alleging
that the obligation is in fact solidary, bears the burden to overcome the presumption of jointness of
obligations. We rule and so hold that he failed to discharge such burden.

Ortigas places primary reliance on the fact that the petitioners and Matti identified themselves in the
Undertaking as "SURETIES", a term repeated no less than thirteen (13) times in the document. Ortigas
claims that such manner of identification sufficiently establishes that the obligation of petitioners to
him was joint and solidary in nature.
The term "surety" has a specific meaning under our Civil Code. Article 2047 provides the statutory
definition of a surety agreement, thus:

Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation
of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I
of this Book shall be observed. In such case the contract is called a suretyship. [Emphasis supplied] 40

As provided in Article 2047 in a surety agreement the surety undertakes to be bound solidarily with the
principal debtor. Thus, a surety agreement is an ancillary contract as it presupposes the existence of a
principal contract. It appears that Ortigas’s argument rests solely on the solidary nature of the

obligation of the surety under Article 2047. In tandem with the nomenclature "SURETIES" accorded to
petitioners and Matti in the Undertaking, however, this argument can only be viable if the obligations
established in the Undertaking do partake of the nature of a suretyship as defined under Article 2047 in
the first place. That clearly is not the case here, notwithstanding the use of the nomenclature "SURETIES"
in the Undertaking.

Again, as indicated by Article 2047, a suretyship requires a principal debtor to whom the surety is solidarily
bound by way of an ancillary obligation of segregate identity from the obligation between the principal
debtor and the creditor. The suretyship does bind the surety to the creditor, inasmuch as the latter is
vested with the right to proceed against the former to collect the credit in lieu of proceeding against the
principal debtor for the same obligation.41 At the same time, there is also a legal tie created between the
surety and the principal debtor to which the creditor is not privy or party to. The moment the surety fully
answers to the creditor for the obligation created by the principal debtor, such obligation is
extinguished.42 At the same time, the surety may seek reimbursement from the principal debtor for the
amount paid, for the surety does in fact "become subrogated to all the rights and remedies of the
creditor."43

Note that Article 2047 itself specifically calls for the application of the provisions on joint and solidary
obligations to suretyship contracts.44 Article 1217 of the Civil Code thus comes into play, recognizing the
right of reimbursement from a co-debtor (the principal debtor, in case of suretyship) in favor of the one
who paid (i.e., the surety).45 However, a significant distinction still lies between a joint and several debtor,
on one hand, and a surety on the other. Solidarity signifies that the creditor can compel any one of the
joint and several debtors or the surety alone to answer for the entirety of the principal debt. The
difference lies in the respective faculties of the joint and several debtor and the surety to seek
reimbursement for the sums they paid out to the creditor.

Dr. Tolentino explains the differences between a solidary co-debtor and a surety:

A guarantor who binds himself in solidum with the principal debtor under the provisions of the second
paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference between
a solidary co-debtor and a fiador in solidum (surety). The latter, outside of the liability he assumes to pay
the debt before the property of the principal debtor has been exhausted, retains all the other rights,
actions and benefits which pertain to him by reason of the fiansa; while a solidary co-debtor has no other
rights than those bestowed upon him in Section 4, Chapter 3, Title I, Book IV of the Civil Code.

The second paragraph of [Article 2047] is practically equivalent to the contract of suretyship. The civil law
suretyship is, accordingly, nearly synonymous with the common law guaranty; and the civil law
relationship existing between the co-debtors liable in solidum is similar to the common law suretyship.
In the case of joint and several debtors, Article 1217 makes plain that the solidary debtor who effected
the payment to the creditor "may claim from his co-debtors only the share which corresponds to each,
with the interest for the payment already made." Such solidary debtor will not be able to recover from
the co-debtors the full amount already paid to the creditor, because the right to recovery extends only to
the proportional share of the other co-debtors, and not as to the particular proportional share of the
solidary debtor who already paid. In contrast, even as the surety is solidarily bound with the principal
debtor to the creditor, the surety who does pay the creditor has the right to recover the full amount paid,
and not just any proportional share, from the principal debtor or debtors. Such right to full reimbursement
falls within the other rights, actions and benefits which pertain to the surety by reason of the subsidiary
obligation assumed by the surety.

Accordingly, the rights to indemnification and subrogation as established and granted to the guarantor by
Articles 2066 and 2067 extend as well to sureties as defined under Article 2047. These rights granted to
the surety who pays materially differ from those granted under Article 1217 to the solidary debtor who
pays, since the "indemnification" that pertains to the latter extends "only [to] the share which
corresponds to each [co-debtor]." It is for this reason that the Court cannot accord the conclusion that
because petitioners are identified in the Undertaking as "SURETIES," they are consequently joint and
severally liable to Ortigas.

In order for the conclusion espoused by Ortigas to hold, in light of the general presumption favoring joint
liability, the Court would have to be satisfied that among the petitioners and Matti, there is one or some
of them who stand as the principal debtor to Ortigas and another as surety who has the right to full
reimbursement from the principal debtor or debtors. No suggestion is made by the parties that such is
the case, and certainly the Undertaking is not revelatory of such intention. If the Court were to give full
fruition to the use of the term "sureties" as conclusive indication of the existence of a surety agreement
that in turn gives rise to a solidary obligation to pay Ortigas, the necessary implication would be to lay
down a corresponding set of rights and obligations as between the "SURETIES" which petitioners and
Matti did not clearly intend.

It is not impossible that as between Escaño, Silos and Matti, there was an agreement whereby in the event
that Ortigas were to seek reimbursement from them per the terms of the Undertaking, one of them was
to act as surety and to pay Ortigas in full, subject to his right to full reimbursement from the other two
obligors. In such case, there would have been, in fact, a surety agreement which evinces a solidary
obligation in favor of Ortigas. Yet if there was indeed such an agreement, it does not appear on the record.
More consequentially, no such intention is reflected in the Undertaking itself, the very document that
creates the conditional obligation that petitioners and Matti reimburse Ortigas should he be made to pay
PDCP. The mere utilization of the term "SURETIES" could not work to such effect, especially as it does not
appear who exactly is the principal debtor whose obligation is "assured" or "guaranteed" by the surety.

Ortigas further argues that the nature of the Undertaking requires "solidary obligation of the Sureties,"
since the Undertaking expressly seeks to "reliev[e] obligors of any and all liability arising from their said
joint and several undertaking with [F]alcon," and for the "sureties" to "irrevocably agree and undertake
to assume all of obligors said guarantees to PDCP." 50 We do not doubt that a finding of solidary liability
among the petitioners works to the benefit of Ortigas in the facilitation of these goals, yet the Undertaking
itself contains no stipulation or clause that establishes petitioners’ obligation to Ortigas as solidary.
Moreover, the aims adverted to by Ortigas do not by themselves establish that the nature of the obligation
requires solidarity. Even if the liability of petitioners and Matti were adjudged as merely joint, the full
relief and reimbursement of Ortigas arising from his payment to PDCP would still be accomplished through
the complete execution of such a judgment.

Bank of America vs CA Gr no 105395 December 10 1993

Facts

Petitioner Bank of America received an irrevocable letter of credit issued by Bank of ayudhya, Samyaek
branch with petitioner as advising bank and private respondent Inter-Resin Industrial Corporation as
beneficiary for the account of (buyer) General Chemicals, Ltd., of Thailand in the amount of
US$2,782,000.00 to cover the sale of plastic ropes and "agricultural files. Bank of America advised the
respondent about the letter of credit. Upon receipt, Inter-Resin sent atty. Emiliano Tanay for confirmation.
However, Reynaldo Duena, a bank employee claimed that there is no need for confirmation because such
letter would not have been transmitted if it was not genuine. Thus, Inter-Resin make a partial availment
under the letter of credit covering the shipment of 24,000 bales of polyethylene rope to General Chemicals
the corresponding packing list, export declaration and bill of lading. After successfully conforming to
conditions, Bank of America issued a cashier’s check amounting to P10,219,093.20 in favour Inter-resin
whereby such check was pick up by the Executive VP Barcelina Tio. Thereafter, Bank of America sought
reimbursement from Bank of Ayudha.

Meanwhile, Ms. Tio presented to Bank of America the required documents for the second availment
under the letter of credit consisting of a packing list, bill of lading, invoices, export declaration and bills in
set, evidencing the second shipment of goods. However, the Bank of America stopped the processing of
documents upon receipt from a telex from the Bank of ayudha that the letter of credit was fraudulent.
Upon sensing of fraud, Bank of America sought the assistance of the NBI. The NBI discovered that the vans
exported by Inter-Resin did not contain ropes but plastic strips, wrappers, rags and waste materials. The
same then charge a crime of estafa against the Inter-Resin's President Francisco Trajano and Executive
Vice President Barcelina Tio. Unfortunately, the Rizal Provincial Fiscal dismissed the case because of no
prima facie evidence.

Bank of America then filed a motion for recovery of P10,219,093.20 against Inter-resin before the RTC. On
the other hand, Inter-resin argued that not only it entitled to retain the said amount but also to balance
the amount covered for the second shipment. The RTC ruled in favour of inter-resin holding that, among
others, the call from telex that the letter of credit was fraudulent was hearsay and even if fake, the fault
should be borne by Bank of America for being negligent. On appeal, the CA affirmed the RTC decision.

The Inter-resin contend that it being only an advising bank and that it cannot recover the amount paid
because the drawer of the letter of credit is the Bank of Ayudhya and not Inter-Resin.

Issue

Whether or not Bank of America may recover what it has paid under the letter of credit to Inter-Resin
(YES)

Ruling

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.
To break the impasse, the buyer may be required to contract a bank to issue a letter of credit in favor of
the seller so that, by virtue of the latter of credit, the issuing bank can authorize the seller to draw drafts
and engage to pay them upon their presentment simultaneously with the tender of documents required
by the letter of credit. The buyer and the seller agree on what documents are to be presented for payment,
but ordinarily they are documents of title evidencing or attesting to the shipment of the goods to the
buyer.

Once the credit is established, the seller ships the goods to the buyer and in the process secures the
required shipping documents or documents of title. To get paid, the seller executes a draft and pays cash
to the seller if it finds that the documents submitted by the seller conform with what the letter of credit
requires. The bank then obtains possession of the documents upon paying the seller. The transaction is
completed when the buyer reimburses the issuing bank and acquires the documents entitling him to the
goods. Under this arrangement, the seller gets paid only if he delivers the documents of title over the
goods, while the goods only after reimbursing the bank.

Under this arrangement, the seller gets paid only if he delivers the documents of title over the goods,
while the buyer acquires said documents and control over the goods only after reimbursing the bank.

What characterizes letters of credit, as distinguished from other accessory contracts, is the engagement
of the issuing bank to pay the seller of the draft and the required shipping documents are presented to
it. In turn, this arrangement assures the seller of prompt payment, independent of any breach of the main
sales contract. By this so-called "independence principle," the bank determines compliance with the
letter of credit only by examining the shipping documents presented; it is precluded from determining
whether the main contract is actually accomplished or not.

There would at least be three (3) parties: (a) the buyer, who procures the letter of credit and obliges
himself to reimburse the issuing bank upon receipts of the documents of title; (b) the bank issuing the
letter of credit, which undertakes to pay the seller upon receipt of the draft and proper document of titles
and to surrender the documents to the buyer upon reimbursement; and, (c) the seller, who in compliance
with the contract of sale ships the goods to the buyer and delivers the documents of title and draft to the
issuing bank to recover payment.

It cannot seriously be disputed, looking at this case, that Bank of America has, in fact, only been an
advising, not confirming, bank, and this much is clearly evident, among other things, by the provisions of
the letter of credit itself, the petitioner bank's letter of advice, its request for payment of advising fee, and
the admission of Inter-Resin that it has paid the same. That Bank of America has asked Inter-Resin to
submit documents required by the letter of credit and eventually has paid the proceeds thereof, did not
obviously make it a confirming bank. The fact, too, that the draft required by the letter of credit is to be
drawn under the account of General Chemicals (buyer) only means the same had to be presented to
Bank of Ayudhya (issuing bank) for payment. It may be significant to recall that the letter of credit is an
engagement of the issuing bank, not the advising bank, to pay the draft.

As an advising or notifying bank, Bank of America did not incur any obligation more than just notifying
Inter-Resin of the letter of credit issued in its favor, let alone to confirm the letter of credit. The bare
statement of the bank employees, aforementioned, in responding to the inquiry made by Atty. Tanay,
Inter-Resin's representative, on the authenticity of the letter of credit certainly did not have the effect of
novating the letter of credit and Bank of America's letter of advise, nor can it justify the conclusion that
the bank must now assume total liability on the letter of credit. Indeed, Inter-Resin itself cannot claim to
have been all that free from fault. As the seller, the issuance of the letter of credit should have obviously
been a great concern to it. 27 It would have, in fact, been strange if it did not, prior to the letter of credit,
enter into a contract, or negotiated at the every least, with General Chemicals. In the ordinary course
of business, the perfection of contract precedes the issuance of a letter of credit.

Bringing the letter of credit to the attention of the seller is the primordial obligation of an advising bank.
The view that Bank of America should have first checked the authenticity of the letter of credit with bank
of Ayudhya, by using advanced mode of business communications, before dispatching the same to Inter-
Resin finds no real support in U.C.P. As advising bank, Bank of America is bound only to check the
"apparent authenticity" of the letter of credit, which it did.

May Bank of America can recover what it has paid under the letter of credit when the corresponding
draft for partial availment thereunder and the required documents were later negotiated with it by
Inter-Resin. This kind of transaction is what is commonly referred to as a discounting arrangement. This
time, Bank of America has acted independently as a negotiating bank, thus saving Inter-Resin from the
hardship of presenting the documents directly to Bank of Ayudhya to recover payment. (Inter-Resin, of
course, could have chosen other banks with which to negotiate the draft and the documents.) As a
negotiating bank, Bank of America has a right to recourse against the issuer bank and until reimbursement
is obtained, Inter-Resin, as the drawer of the draft, continues to assume a contingent liability thereon.

BPI vs De Reny Fabric Industries et al GR No. L-24821 october 16 1970

Facts

On (4) different occasions, De Reny Fabric Industries, Inc., a Philippine corporation through president
Aurora Gonzales and secretary Aurora Tuyo, applied with Bank of the Philippine Islands (BPI) a (4)
irrevocable commercial letter of credit for the purchase of goods describe in the L/C application as
“dyestuffs of various colours” from J.B. Distributing Company, an American supplier. All the application
were approves as well as the Commercial L/C agreements whereby the aforementioned individuals bound
themselves solidarily liable with the corporation. Pursuant to banking regulations then in force, the
corporation delivered to the Bank peso marginal deposits as each letter of credit was opened.

BPI then issued irrevocable commercial letter of credit in favour of the correspondent bank in the US with
instruction for them to notify the beneficiary JB distributing company, that they have been authorized to
negotiate its right. Consequently, J.B. Distributing Company drew upon, presented to and negotiated with
these banks, its sight drafts covering the amounts of the merchandise together with clean bills of lading,
and collected the full value of the drafts up to the amounts appearing in the L/Cs as indicated. These
correspondent banks then debited the account of the BPI with them up to the full value of the drafts
presented by the J.B. Distributing Company and, thereafter, endorsed and forwarded all documents to
the BPI.

In the meantime, as each shipment arrive, respondent De Reny made partial payment with BPI in the
amount of 90,000. However, subsequent payments were discontinued when the result of the chemical
test conducted by National Science Development Board in the shipments were colored chalks instead of
dyestuffs. Thus, respondent refused to take possession. Thus BPI stuffed it with a bonded warehouse
amounting to P12,609.64 up to the filing of its complaint with the court. BPI filed a complaint before CFI
Manila against the respondent. The CFI ordered the respondent to solidarily pay the value of credit to BPI.

The respondent contend that it was the duty of foreign correspondent bank to insure that the goods were
in conformity under the L/Cs and that the banks failed to perform its duty.
Issue

Whether or not De Reny fabrics is liable under the letter of Credit (YES)

Ruling

Under the terms of their Commercial Letter of Credit Agreements with the Bank, the appellants agreed
that the Bank shall not be responsible for the "existence, character, quality, quantity, conditions, packing,
value, or delivery of the property purporting to be represented by documents; for any difference in
character, quality, quantity, condition, or value of the property from that expressed in documents," or for
"partial or incomplete shipment, or failure or omission to ship any or all of the property referred to in the
Credit," as well as "for any deviation from instructions, delay, default or fraud by the shipper or anyone
else in connection with the property the shippers or vendors and ourselves [purchasers] or any of us."
Having agreed to these terms, the appellants have, therefore, no recourse but to comply with their
covenant

But even without the stipulation recited above, the appellants cannot shift the burden of loss to the Bank
on account of the violation by their vendor of its prestation.

It was uncontrovertibly proven by the Bank during the trial below that banks, in providing financing in
international business transactions such as those entered into by the appellants, do not deal with the
property to be exported or shipped to the importer, but deal only with documents. The Bank introduced
in evidence a provision contained in the "Uniform Customs and Practices for Commercial Documentary
Credits Fixed for the Thirteenth Congress of International Chamber of Commerce," to which the
Philippines is a signatory nation

The existence of a custom in international banking and financing circles negating any duty on the part
of a bank to verify whether what has been described in letters of credits or drafts or shipping documents
actually tallies with what was loaded aboard ship, having been positively proven as a fact, the
appellants are bound by this established usage. They were, after all, the ones who tapped the facilities
afforded by the Bank in order to engage in international business

Reliance commodities inc be Daewoo international co LTD GR no L-100831 December 17 1993

Facts

Respondent Daewoo Industrial Co., Ltd entered in a contract of sale Petitioner Reliance Commodities, Inc.
whereby Daewoo shipped a 2,000 metric tons of foundry pig iron worth $404,000 from Pohang, Korea to
Reliance Commodities, Inc. The said foundry pig iron was on board of M/S Aurelio III under Bill of Lading
to Manila. The shipment was fully paid. However, the shipment was found short of 135.655 metric tons
upon its arrival. Thereafter, Reliance purchase another 2,000 metric tons of foundry pig iron. While,
Daewoo acknowledge the deficiency of the first delivery. Thus, reducing the price by $1 to $2per metric
ton for next orders. This stipulation was made part of the contract however, it did not consummated and
superseded by another contract.

Unfortunately, Reliance application of letter of Credit with China Banking Corporation in favour of
Daewoo was denied. Reliance then asked to submit purchase orders from end-users to support its
application. However, the orders only raised to 1,900 which supposed to 2,000 metric tons. Daewoo
allege that Reliance failure to open the Letter of Credit was due to its exceeded foreign exchange
allocation. Due to Reliance failure to comply its part, Daewoo sold the 2,000 metric tons to another
buyer at a lower price. Consequently, Reliance request Daewoo for payment of the amount of
P226,370.48, representing the value of the short delivery of 135.655 metric tons of foundry pig iron.
Because of Daewoo failure to notice, Reliance filed an action for damages before the RTC. Daewoo
argued that Reliance was guilty of breach of contract when it failed to open an L/C as required in their
contract. The RTC hold that the contract did not extinguish Daewoo's obligation for short delivery but
Reliance is in turn liable for breach of contract for its failure to open a letter of credit in favor of
Daewoo. On appeal, the CA denied the appeal on the ground that Reliance could not have opened the
Letter of Credit in favor of Daewoo because it had already exhausted its foreign exchange allocation at
the time of its application and that the opening of a letter of credit is not such a future and uncertain
event as to make it a suspensive condition within the contemplation of law; but, only mode of payment
agreed upon by the parties, and a standard mode at that when one of the parties to the transaction is a
foreigner and the consideration is payable in foreign exchange.

Issue

Whether or not the failure of an importer (Reliance) to open a letter of credit on the date agreed upon
makes him liable to the exporter (Daewoo) for damages (YES)

Ruling

A letter of credit is one of the modes of payment, set out in Sec. 8, Central Bank Circular No. 1389,
"Consolidated Foreign Exchange Rules and Regulations," dated 13 April 1993, by which commercial banks
sell foreign exchange to service payments for, e.g., commodity imports. The primary purpose of the letter
of credit is to substitute for and therefore support, the agreement of the buyer/importer to pay money
under a contract or other arrangement. It creates in the seller/exporter a secure expectation of
payment

A letter of credit transaction may thus be seen to be a composite of at least three (3) distinct but intertwined
relationships being concretized in a contract: (indispensable)

(a) One contract relationship links the party applying for the L/C (the account party or buyer or importer)
and the party for whose benefit the L/C is issued (the beneficiary or seller or exporter). In this contract,
the account party, here Reliance, agrees, among other things and subject to the terms and conditions
of the contract, to pay money to the beneficiary, here Daewoo.
(b) A second contract relationship is between the account party and the issuing bank. Under this contract,
(sometimes called the "Application and Agreement" or the "Reimbursement Agreement"), the account
party among other things, applies to the issuing bank for a specified L/C and agrees to reimburse the
bank for amounts paid by that bank pursuant to the L/C.
(c) The third contract relationship is established between the issuing bank and the beneficiary, in order
to support the contract, under
(a) above, of the account party and the beneficiary to, inter alia, pay certain monies to the latter

The Court considers that under that instrument, the opening of an L/C upon application of Reliance was not
a condition precedent for the birth of the obligation of Reliance to purchase foundry pig iron from Daewoo.
We agree with the Court of Appeals that Reliance and Daewoo, having reached "a meeting of minds" in respect
of the subject matter of the contract (2000 metric tons of foundry pig iron with a specified chemical
composition), the price thereof (US $380,600.00), and other principal provisions, "they had a perfected
contract." The failure of Reliance to open, the appropriate L/C did not prevent the birth of that contract, and
neither did such failure extinguish that contract. The opening of the L/C in favor of Daewoo was an obligation
of Reliance and the performance of that obligation by Reliance was a condition of enforcement of the
reciprocal obligation of Daewoo to ship the subject matter of the contract — the foundry pig iron — to
Reliance. But the contract itself between Reliance and Daewoo had already sprung into legal existence and
was enforceable.

As a rule, when the importer has exceeded its foreign exchange allocation, his application would be denied.
However, ISA could reconsider such application on a case to case basis. Thus, in the instant case, ISA required
Reliance to support its application by submitting purchase orders from end-users for the same quantity the
latter wished to import. As earlier noted, Reliance was able to present purchase orders for only 900 metric tons
of the subject pig iron. For having exceeded its foreign exchange allocation before it entered into the 31 July
1980 contract with Daewoo, petitioner Reliance can hold only itself responsible for having failed to secure
end-users purchase orders equivalent to 2,000 metric tons, only Reliance should be held responsible

The Court is compelled to agree with the Court of Appeals that the non-opening of the L/C was due to the
failure of Reliance to comply with its duty under the contract.

We believe and so hold that failure of a buyer seasonably to furnish an agreed letter of credit is a breach of
he contract between buyer and seller. Where the buyer fails to open a letter of credit as stipulated, the
seller or exporter is entitled to claim damages for such breach. Damages for failure to open a commercial
credit may, in appropriate cases, include the loss of profit which the seller would reasonably have made had
the transaction been carried out

Once the credit is established, the seller ships the goods to the buyer and in the process secures the required
shipping documents or documents of title. To get paid, the seller executes a draft and pays cash to the seller
if it finds that the documents submitted by the seller conform with what the letter of credit requires. The
bank then obtains possession of the documents upon paying the seller. The transaction is completed when
the buyer reimburses the issuing bank and acquires the documents entitling him to the goods. Under this
arrangement, the seller gets paid only if he delivers the documents of title over the goods, while the goods
only after reimbursing the bank.

Transfield PH vs Luzon Hybrid Corp et al Gr no 146717 Nov 22 2004

Facts

Petitioner transfield PH entered in a Turnkey contract with respondent Luzon Hydro Corporation (LHC)
whereby transfield will be as the Turnkey contractor for the construction of a (70)-Megawatt hydro-electric
power station at the Bakun River in the provinces of Benguet and Ilocos Sur. Under the contract, the target
completion date is on June 1, 2000 which is entitled to extension of time. To secure the petitioner’s obligation,
Transfield opened a (2) standby letters of credit (securities) in favour of LHC with local branch of respondent
Australia and New Zealand Banking Group Limited (ANZ Bank) and Standby Letter of Credit with respondent
Security Bank Corporation (SBC) each in the amount of US$8,988,907.00.

Transfield sought numerous extension of time to complete the project for alleged force majeure. However,
LHC denied the requests. Thus, LHC calls for arbitration. Meanwhile, Transfield filed (2) separate letter advising
the respondents bank of the arbitration proceeding 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 expected, LHC sent Transfield a notice of failure to comply with its obligation to
complete the project which constitute delay. Despite the letters of transfield, both banks advised Transfield
that they would pay the securities upon LHC call. LHC served notice that it would call on the securities for the
payment of liquidated damages for the delay.
Consequently, Transfield filed a complaint for injunction with TRO against LHC to restrain it from calling the
securities or any substitutes. It also claimed that the principle of "independent contract" could be invoked only
by respondent banks since LHC is the ultimate beneficiary of the Securities. However, the RTC issued a 72 hrs
TRO but denying the motion of Transfield. It further ruled that Transfield had no legal right to justify the
issuance of writ, employing the principle of Independent contract in letters of credit and 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. On appeal, Transfield contend that LHC
calls for securities were pre-mature considering that the issue of its default had not yet been resolved with
finality by the arbitration and that until the fact of delay could be established, LHC had no right to draw on the
Securities for liquidated damages and that under the principle of "fraud exception” 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.
On the other hand, LHC claimed that Transfield had no right to restrain it to call the securities as payment for
damages. It claimed that 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. The CA affirmed the RTC 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.
Transfield filed a petition for review. Hence this case.

Issue

WON the "Independence Principle" on Letters of Credit may be invoked by a beneficiary thereof Where The
Beneficiary's Call Thereon Is Wrongful Or Fraudulent (NO)

Ruling

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. 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.

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.
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.

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

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

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.

In commercial transactions, a letter of credit is a financial device developed by merchants as a convenient

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 non-performance 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. 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.

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. First
published in 1933, the UCP for Documentary Credits has undergone several revisions, the latest of which was
in 1993.

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.

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