Case Digest: FEATI Bank and Trust Co. (now Citytrust Banking Corp.) vs. CA and Bernardo E. Villaluz (GR No. 94209, April 30, 1991)

 

• Bernardo E. Villaluz agreed to sell 2,000 cubic meters of lauan logs at $27.00 per cubic meter to Axel Christiansen.

• Hanmi Trade Development, Ltd., de Santa Ana, California arranged for an Irrevocable Letter of Credit No. IC-46268 for $54,000.00 in favor of Villaluz, issued by Security Pacific National Bank of Los Angeles, California.

• The letter of credit was sent to Feati Bank and Trust Company (now Citytrust) with instructions to forward it to Villaluz.

• Feati Bank refused to negotiate with Villaluz due to the absence of a required certification from the buyer, Axel Christiansen.

• Villaluz filed a complaint for mandamus and specific performance against Christiansen and Feati Bank, seeking payment under the letter of credit.

Is FEATI Bank liable under the letter of credit despite non-compliance by the beneficiary with the terms thereof?

No FEATI Bank is not liable. 

• The letter merely provided that the petitioner "forward the enclosed original credit to the beneficiary." Considering the aforesaid instruction to the petitioner by the issuing bank, the Security Pacific National Bank, it is indubitable that the petitioner is only a notifying bank and not a confirming bank. 

• If FEATI bank was a confirming bank, then a categorical declaration should have been stated in the letter of credit that the petitioner is to honor all drafts drawn in conformity with the letter of credit. What was simply stated therein was the instruction that the petitioner forward the original letter of credit to the beneficiary. 

• Since FEATI bank was only a notifying bank, its responsibility was solely to notify and or transmit the documentary of credit to the private respondent and its obligation ends there. The notifying bank may suggest to the seller its willingness to negotiate, but this fact alone does not imply that the notifying bank promises to accept the draft drawn under the documentary credit. 

• A notifying bank is not privy to the contract of sale between the buyer and the seller; its relationship is only with the issuing bank and not with the beneficiary to whom he assumes no liability. It follows therefore that when the petitioner refused to negotiate with the private respondent, the latter has no cause of action against the petitioner for the enforcement of his rights under the letter. 

• In order that the FEATI bank may be held liable under the letter, there should be proof that the petitioner confirmed the letter of credit which is not the case here. 

• However, even assuming for the sake of argument that FEATI is a confirming bank, FEATI bank is still not liable because the beneficiary failed to comply with the requirements of the Letter of Credit (LC). There must be strict compliance with the requirements of the LC.

Decision Full Text:

The principal issue in this case is whether or not a correspondent bank is to be held liable under the letter of credit despite non-compliance by the beneficiary with the terms thereof?

The petition is impressed with merit.

It is a settled rule in commercial transactions involving letters of credit that the documents tendered must strictly conform to the terms of the letter of credit. The tender of documents by the beneficiary (seller) must include all documents required by the letter. A correspondent bank which departs from what has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its own risks and it may not thereafter be able to recover from the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary Thus the rule of strict compliance.

In the United States, commercial transactions involving letters of credit are governed by the rule of strict compliance. In the Philippines, the same holds true. The same rule must also be followed.

The case of Anglo-South America Trust Co. v. Uhe et al. (184 N.E. 741 [1933]) expounded clearly on the rule of strict compliance.

We have heretofore held that these letters of credit are to be strictly complied with which documents, and shipping documents must be followed as stated in the letter. There is no discretion in the bank or trust company to waive any requirements. The terms of the letter constitutes an agreement between the purchaser and the bank. (p. 743)

Although in some American decisions, banks are granted a little discretion to accept a faulty tender as when the other documents may be considered immaterial or superfluous, this theory could lead to dangerous precedents. Since a bank deals only with documents, it is not in a position to determine whether or not the documents required by the letter of credit are material or superfluous. The mere fact that the document was specified therein readily means that the document is of vital importance to the buyer.

Moreover, the incorporation of the Uniform Customs and Practice for Documentary Credit (U.C.P. for short) in the letter of credit resulted in the applicability of the said rules in the governance of the relations between the parties.

And even if the U.C.P. was not incorporated in the letter of credit, we have already ruled in the affirmative as to the applicability of the U.C.P. in cases before us.

In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the observance of the U.C.P. in this jurisdiction is justified by Article 2 of the Code of Commerce. Article 2 of the Code of Commerce enunciates that in the absence of any particular provision in the Code of Commerce, commercial transactions shall be governed by the usages and customs generally observed.

There being no specific provision which governs the legal complexities arising from transactions involving letters of credit not only between the banks themselves but also between banks and seller and/or buyer, the applicability of the U.C.P. is undeniable.

The pertinent provisions of the U.C.P. (1962 Revision) are:

Article 3.

An irrevocable credit is a definite undertaking on the part of the issuing bank and constitutes the engagement of that bank to the beneficiary and bona fide holders of drafts drawn and/or documents presented thereunder, that the provisions for payment, acceptance or negotiation contained in the credit will be duly fulfilled, provided that all the terms and conditions of the credit are complied with.

An irrevocable credit may be advised to a beneficiary through another bank (the advising bank) without engagement on the part of that bank, but when an issuing bank authorizes or requests another bank to confirm its irrevocable credit and the latter does so, such confirmation constitutes a definite undertaking of the confirming bank. . . .

Article 7.

Banks must examine all documents with reasonable care to ascertain that they appear on their face to be in accordance with the terms and conditions of the credit,"

Article 8.

Payment, acceptance or negotiation against documents which appear on their face to be in accordance with the terms and conditions of a credit by a bank authorized to do so, binds the party giving the authorization to take up documents and reimburse the bank which has effected the payment, acceptance or negotiation. 

Under the foregoing provisions of the U.C.P., the bank may only negotiate, accept or pay, if the documents tendered to it are on their face in accordance with the terms and conditions of the documentary credit. And since a correspondent bank, like the petitioner, principally deals only with documents, the absence of any document required in the documentary credit justifies the refusal by the correspondent bank to negotiate, accept or pay the beneficiary, as it is not its obligation to look beyond the documents. It merely has to rely on the completeness of the documents tendered by the beneficiary.

In regard to the ruling of the lower court and affirmed by the Court of Appeals that the petitioner is not a notifying bank but a confirming bank, we find the same erroneous.

The trial court wrongly mixed up the meaning of an irrevocable credit with that of a confirmed credit. In its decision, the trial court ruled that the petitioner, in accepting the obligation to notify the respondent that the irrevocable credit has been transmitted to the petitioner on behalf of the private respondent, has confirmed the letter.

The trial court appears to have overlooked the fact that an irrevocable credit is not synonymous with a confirmed credit. These types of letters have different meanings and the legal relations arising from there varies. A credit may be an irrevocable credit and at the same time a confirmed credit or vice-versa.

An irrevocable credit refers to the duration of the letter of credit. What is simply means is that the issuing bank may not without the consent of the beneficiary (seller) and the applicant (buyer) revoke his undertaking under the letter. The issuing bank does not reserve the right to revoke the credit. 

On the other hand, a confirmed letter of credit pertains to the kind of obligation assumed by the correspondent bank. In this case, the correspondent bank gives an absolute assurance to the beneficiary that it will undertake the issuing bank's obligation as its own according to the terms and conditions of the credit. (Agbayani, Commercial Laws of the Philippines, Vol. 1, pp. 81-83)

Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply that the correspondent bank in accepting the instructions of the issuing bank has also confirmed the letter of credit.

Another error which the lower court and the Court of Appeals made was to confuse the obligation assumed by the petitioner.

In commercial transactions involving letters of credit, the functions assumed by a correspondent bank are classified according to the obligations taken up by it. The correspondent bank may be called a notifying bank, a negotiating bank, or a confirming bank.

In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to the beneficiary the existence of the letter of credit. 

A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft under the letter of credit. Its liability is dependent upon the stage of the negotiation. If before negotiation, it has no liability with respect to the seller but after negotiation, a contractual relationship will then prevail between the negotiating bank and the seller. 

In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability is a primary one as if the correspondent bank itself had issued the letter of credit. 

In this case, the letter merely provided that the petitioner "forward the enclosed original credit to the beneficiary." Considering the aforesaid instruction to the petitioner by the issuing bank, the Security Pacific National Bank, it is indubitable that the petitioner is only a notifying bank and not a confirming bank as ruled by the courts below.

If the petitioner was a confirming bank, then a categorical declaration should have been stated in the letter of credit that the petitioner is to honor all drafts drawn in conformity with the letter of credit. What was simply stated therein was the instruction that the petitioner forward the original letter of credit to the beneficiary.

Since the petitioner was only a notifying bank, its responsibility was solely to notify and/or transmit the documentary of credit to the private respondent and its obligation ends there.

The notifying bank may suggest to the seller its willingness to negotiate, but this fact alone does not imply that the notifying bank promises to accept the draft drawn under the documentary credit.

A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is only with that of the issuing bank and not with the beneficiary to whom he assumes no liability. It follows therefore that when the petitioner refused to negotiate with the private respondent, the latter has no cause of action against the petitioner for the enforcement of his rights under the letter. 

In order that the petitioner may be held liable under the letter, there should be proof that the petitioner confirmed the letter of credit.

The records are, however, bereft of any evidence which will disclose that the petitioner has confirmed the letter of credit. The only evidence in this case, and upon which the private respondent premised his argument, is the P75,000.00 loan extended by the petitioner to him.

The private respondent relies on this loan to advance his contention that the letter of credit was confirmed by the petitioner. He claims that the loan was granted by the petitioner to him, "in anticipation of the presentment of the letter of credit."

The proposition advanced by the private respondent has no basis in fact or law. That the loan agreement between them be construed as an act of confirmation is rather far-fetched, for it depends principally on speculative reasoning.

As earlier stated, there must have been an absolute assurance on the part of the petitioner that it will undertake the issuing bank's obligation as its own. Verily, the loan agreement it entered into cannot be categorized as an emphatic assurance that it will carry out the issuing bank's obligation as its own.

The loan agreement is more reasonably classified as an isolated transaction independent of the documentary credit.

Of course, it may be presumed that the petitioner loaned the money to the private respondent in anticipation that it would later be paid by the latter upon the receipt of the letter. Yet, we would have no basis to rule definitively that such "act" should be construed as an act of confirmation.

The private respondent no doubt was in need of money in loading the logs on the ship "Zenlin Glory" and the only way to satisfy this need was to borrow money from the petitioner which the latter granted. From these circumstances, a logical conclusion that can be gathered is that the letter of credit was merely to serve as a collateral.

At the most, when the petitioner extended the loan to the private respondent, it assumed the character of a negotiating bank. Even then, the petitioner will still not be liable, for a negotiating bank before negotiation has no contractual relationship with the seller.

The case of Scanlon v. First National Bank (supra) perspicuously explained the relationship between the seller and the negotiating bank, viz:

It may buy or refuse to buy as it chooses. Equally, it must be true that it owes no contractual duty toward the person for whose benefit the letter is written to discount or purchase any draft drawn against the credit. No relationship of agent and principal, or of trustee and cestui, between the receiving bank and the beneficiary of the letter is established. (P.568)

Whether therefore the petitioner is a notifying bank or a negotiating bank, it cannot be held liable. Absent any definitive proof that it has confirmed the letter of credit or has actually negotiated with the private respondent, the refusal by the petitioner to accept the tender of the private respondent is justified.

In regard to the finding that the petitioner became a "trustee in relation to the plaintiff (private respondent) as the beneficiary of the letter of credit," the same has no legal basis.

A trust has been defined as the "right, enforceable solely in equity, to the beneficial enjoyment of property the legal title to which is vested to another." (89 C.J.S. 712)

The concept of a trust presupposes the existence of a specific property which has been conferred upon the person for the benefit of another. In order therefore for the trust theory of the private respondent to be sustained, the petitioner should have had in its possession a sum of money as specific fund advanced to it by the issuing bank and to be held in trust by it in favor of the private respondent. This does not obtain in this case.

The mere opening of a letter of credit, it is to be noted, does not involve a specific appropriation of a sum of money in favor of the beneficiary. It only signifies that the beneficiary may be able to draw funds upon the letter of credit up to the designated amount specified in the letter. It does not convey the notion that a particular sum of money has been specifically reserved or has been held in trust.

What actually transpires in an irrevocable credit is that the correspondent bank does not receive in advance the sum of money from the buyer or the issuing bank. On the contrary, when the correspondent bank accepts the tender and pays the amount stated in the letter, the money that it doles out comes not from any particular fund that has been advanced by the issuing bank, rather it gets the money from its own funds and then later seeks reimbursement from the issuing bank.

Granting that a trust has been created, still, the petitioner may not be considered a trustee. As the petitioner is only a notifying bank, its acceptance of the instructions of the issuing bank will not create estoppel on its part resulting in the acceptance of the trust. Precisely, as a notifying bank, its only obligation is to notify the private respondent of the existence of the letter of credit. How then can such create estoppel when that is its only duty under the law?

We also find erroneous the statement of the Court of Appeals that the petitioner "acted as a guarantor of the issuing bank and in effect also of the latter's principal or client, i.e., Hans Axel Christiansen."

It is a fundamental rule that an irrevocable credit is independent not only of the contract between the buyer and the seller but also of the credit agreement between the issuing bank and the buyer. (See Kingdom of Sweden v. New York Trust Co., 96 N.Y.S. 2d 779 [1949]). The relationship between the buyer (Christiansen) and the issuing bank (Security Pacific National Bank) is entirely independent from the letter of credit issued by the latter.

The contract between the two has no bearing as to the non-compliance by the buyer with the agreement between the latter and the seller. Their contract is similar to that of a contract of services (to open the letter of credit) and not that of agency as was intimated by the Court of Appeals. The unjustified refusal therefore by Christiansen to issue the certification under the letter of credit should not likewise be charged to the issuing bank.

As a mere notifying bank, not only does the petitioner not have any contractual relationship with the buyer, it has also nothing to do with the contract between the issuing bank and the buyer regarding the issuance of the letter of credit.

The theory of guarantee relied upon by the Court of Appeals has to necessarily fail. The concept of guarantee vis-a-vis the concept of an irrevocable credit are inconsistent with each other.

In the first place, the guarantee theory destroys the independence of the bank's responsibility from the contract upon which it was opened. In the second place, 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 credit the bank undertakes a primary obligation. (See National Bank of Eagle Pass, Tex v. American National Bank of San Francisco, 282 F. 73 [1922])

The relationship between the issuing bank and the notifying bank, on the contrary, is more similar to that of an agency and not that of a guarantee. It may be observed that the notifying bank is merely to follow the instructions of the issuing bank which is to notify or to transmit the letter of credit to the beneficiary. (See Kronman v. Public National Bank of New York, supra). Its commitment is only to notify the beneficiary. It does not undertake any assurance that the issuing bank will perform what has been mandated to or expected of it. As an agent of the issuing bank, it has only to follow the instructions of the issuing bank and to it alone is it obligated and not to buyer with whom it has no contractual relationship.

In fact the notifying bank, even if the seller tenders all the documents required under the letter of credit, may refuse to negotiate or accept the drafts drawn thereunder and it will still not be held liable for its only engagement is to notify and/or transmit to the seller the letter of credit.

Finally, even if we assume that the petitioner is a confirming bank, the petitioner cannot be forced to pay the amount under the letter. As we have previously explained, there was a failure on the part of the private respondent to comply with the terms of the letter of credit.

The failure by him to submit the certification was fatal to his case. The U.C.P. which is incorporated in the letter of credit ordains that the bank may only pay the amount specified under the letter if all the documents tendered are on their face in compliance with the credit. It is not tasked with the duty of ascertaining the reason or reasons why certain documents have not been submitted, as it is only concerned with the documents. Thus, whether or not the buyer has performed his responsibility towards the seller is not the bank's problem.

We are aware of the injustice committed by Christiansen on the private respondent but we are deciding the controversy on the basis of what the law is, for the law is not meant to favor only those who have been oppressed, the law is to govern future relations among people as well. Its commitment is to all and not to a single individual. The faith of the people in our justice system may be eroded if we are to decide not what the law states but what we believe it should declare. Dura lex sed lex.

Considering the foregoing, the materiality of ruling upon the validity of the certificate of approval required of the private respondent to submit under the letter of credit, has become insignificant.

In any event, we affirm the earlier ruling of the Court of Appeals dated April 9, 1987 in regard to the petition before it for certiorari and prohibition with preliminary injunction, to wit:

There is no merit in the respondent's contention that the certification required in condition No. 4 of the letter of credit was "patently illegal." At the time the letter of credit was issued there was no Central Bank regulation prohibiting such a condition in the letter of credit. The letter of credit (Exh. C) was issued on June 7, 1971, more than two months before the issuance of the Central Bank Memorandum on August 16, 1971 disallowing such a condition in a letter of credit. In fact the letter of credit had already expired on July 30, 1971 when the Central Bank memorandum was issued. In any event, it is difficult to see how such a condition could be categorized as illegal or unreasonable since all that plaintiff Villaluz, as seller of the logs, could and should have done was to refuse to load the logs on the vessel "Zenlin Glory", unless Christiansen first issued the required certification that the logs had been approved by him to be in accordance with the terms and conditions of his purchase order. Apparently, Villaluz was in too much haste to ship his logs without taking all due precautions to assure that all the terms and conditions of the letter of credit had been strictly complied with, so that there would be no hitch in its negotiation. (Rollo, p. 8)

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

SO ORDERED.