1 Bank of America v CA | Letter Of Credit | Financial Transaction

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bank of america v ca
  Supreme Court of the Philippines Batas.org   Please donate to keep Batas.org free. Go to www.batas.org/donate to donate G.R. No. 105395 THIRD DIVISIONG.R. No. 105395, December 10, 1993 BANK OF AMERICA, NT & SA, PETITIONERS, VS.COURT OF APPEALS, INTER-RESIN INDUSTRIALCORPORATION, FRANCISCO TRAJANO, JOHN DOEAND JANE DOE, RESPONDENTS. D E C I S I O N VITUG, J.: A fiasco, involving an irrevocable letter of credit, has found thedistressed parties coming to court as adversaries in seeking a definition of their respective rights or liabilities thereunder.On 05 March 1981, petitioner Bank of America, NT & SA, Manila,received by registered mail an Irrevocable Letter of Credit No. 20272/81 purportedly issued by Bank of Ayudhya, Samyaek Branch, for the accountof General Chemicals, Ltd., of Thailand in the amount of US$2,782,000.00 to cover the sale of plastic ropes and agricultural files, with the petitioner as advising bank and private respondent Inter-ResinIndustrial Corporation as beneficiary.On 11 March 1981, Bank of America wrote Inter-Resin informing the  latter of the foregoing and transmitting, along with the bank'scommunication, the letter of credit. Upon receipt of the letter-advice withthe letter of credit, Inter-Resin sent Atty. Emiliano Tanay to Bank of America to have the letter of credit confirmed. The bank did not.Reynaldo Dueñas, bank employee in charge of letters of credit, however,explained to Atty. Tanay that there was no need for confirmation becausethe letter of credit would not have been transmitted if it were not genuine.Between 26 March to 10 April 1981, Inter-Resin sought to make a partialavailment under the letter of credit by submitting to Bank of Americainvoices, covering the shipment of 24,000 bales of polyethylene rope toGeneral Chemicals valued at US$1,320,600.00, the corresponding packinglist, export declaration and bill of lading. Finally, after being satisfied thatInter-Resin's documents conformed with the conditions expressed in theletter of credit, Bank of America issued in favor of Inter-Resin a Cashier'sCheck for P10,219,093.20, the Peso equivalent of the draft (for)US$1,320,600.00 drawn by Inter-Resin, after deducting the costs for documentary stamps, postage and mail insurance.” [1]  The check was pickedup by Inter-Resin's Executive Vice-President Barcelina Tio. On 10 April1981, Bank of America wrote Bank of Ayudhya advising the latter of theavailment under the letter of credit and sought the correspondingreimbursement therefor.Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of Americathe documents for the second availment under the same letter of creditconsisting of a packing list, bill of lading, invoices, export declaration and bills in set, evidencing the second shipment of goods. Immediately uponreceipt of a telex from Bank of Ayudhya declaring the letter of creditfraudulent, [2]  Bank of America stopped the processing of Inter-Resin'sdocuments and sent a telex to its branch office in Bangkok, Thailand,requesting assistance in determining the authenticity of the letter of credit. [3]  Bank of America kept Interresin informed of the developments.Sensing a fraud, Bank of America sought the assistance of the NationalBureau of Investigation (NBI). With the help of the staff of the PhilippineEmbassy at Bangkok, as well as the police and customs personnel of Thailand, the NBI agents, who were sent to Thailand, discovered that thevans exported by Inter-Resin did not contain ropes but plastic strips,wrappers, rags and waste materials. Here at home, the NBI alsoinvestigated Inter-Resin's President Francisco Trajano and Executive VicePresident Barcelina Tio, who, thereafter, were criminally charged for estafa through falsification of commercial documents. The case, however,was eventually dismissed by the Rizal Provincial Fiscal who found no prima facie evidence to warrant prosecution.Bank of America sued Inter-Resin for the recovery of P10,219,093.20, the peso equivalent of the draft for US$1,320,600.00 on the partial availmentof the now disowned letter of credit. On the other hand, Inter-Resinclaimed that not only was it entitled to retain P10,219,093.20 on its firstshipment but also to the balance US$1,461,400.00 covering the secondshipment.  On 28 June 1989, the trial court ruled for Inter-Resin, [4]  holding that: (a)Bank of America made assurances that enticed Inter-Resin to send themerchandise to Thailand; (b) the telex declaring the letter of creditfraudulent was unverified and self-serving, hence hearsay, but evenassuming that the letter of credit was fake, the fault should be borne bythe BA which was careless and negligent” [5]  for failing to utilize its modernmeans of communication to verify with Bank of Ayudhya in Thailand theauthenticity of the letter of credit before sending the same to Inter-Resin;(c) the loading of plastic products into the vans were under strictsupervision, inspection and verification of government officers who havein their favor the presumption of regularity in the performance of officialfunctions; and (d) Bank of America failed to prove the participation of Inter-Resin or its employees in the alleged fraud as, in fact, the complaintfor estafa through falsification of documents was dismissed by theProvincial Fiscal of Rizal. [6] On appeal, the Court of Appeals [7]  sustained the trial court; hence, this present recourse by petitioner Bank of America.The following issues are raised by Bank of America: (a) whether it haswarranted the genuineness and authenticity of the letter of credit and,corollarily, whether it has acted merely as an advising bank or as aconfirming bank; (b) whether Inter-Resin has actually shipped the ropesspecified by the letter of credit; and, (c) following the dishonor of the letter of credit by Bank of Ayudhya, whether Bank of America may recover against Inter-Resin under the draft executed in its partial availment of theletter of credit. [8] In rebuttal, Inter-Resin holds that: (a) Bank of America cannot, on appeal, belatedly raise the issue of being only an advising bank; (b) the findings of the trial court that the ropes have actually been shipped is binding on theCourt; and, (c) Bank of America cannot recover from Inter-Resin becausethe drawer of the letter of credit is the Bank of Ayudhya and not Inter-Resin.If only to understand how the parties, in the first place, got themselves intothe mess, it may be well to start by recalling how, in its modern use, aletter of credit is employed in trade transactions.A letter of credit is a financial device developed by merchants as aconvenient and relatively safe mode of dealing with sales of goods tosatisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to havecontrol of the goods before paying. [9]  To break the impasse, the buyer may be required to contract a bank to issue a letter of credit in favor of theseller so that, by virtue of the letter of credit, the issuing bank canauthorize the seller to draw drafts and engage to pay them upon their  presentment simultaneously with the tender of documents required by theletter of credit. [10]  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 inthe process secures the required shipping documents or documents of title.To get paid, the seller executes a draft and presents it together with therequired documents to the issuing bank. The issuing bank redeems thedraft and pays cash to the seller if it finds that the documents submitted bythe seller conform with what the letter of credit requires. The bank thenobtains possession of the documents upon paying the seller. Thetransaction is completed when the buyer reimburses the issuing bank andacquires the documents entitling him to the goods. Under thisarrangement, the seller gets paid only if he delivers the documents of titleover the goods, while the buyer acquires the said documents and controlover the goods only after reimbursing the bank.What characterizes letters of credit, as distinguished from other accessorycontracts, is the engagement of the issuing bank to pay the seller once thedraft and the required shipping documents are presented to it. In turn, thisarrangement 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 fromdetermining whether the main contract is actually accomplished or not. [11] There would at least be three (3) parties: (a) the buyer, [12]  who procures theletter of credit and obliges himself to reimburse the issuing bank uponreceipt of the documents of title; (b) the bank issuing the letter of credit, [13] which undertakes to pay the seller upon receipt of the draft and proper documents of titles and to surrender the documents to the buyer uponreimbursement; and, (c) the seller, [14]  who in compliance with the contractof sale ships the goods to the buyer and delivers the documents of title anddraft to the issuing bank to recover payment.The number of the parties, not infrequently and almost invariably ininternational trade practice, may be increased. Thus, the services of anadvising (notifying) bank  [15]  may be utilized to convey to the seller theexistence of the credit; or, of a confirming bank  [16]  which will lendcredence to the letter of credit issued by a lesser known issuing bank; or,of a paying bank  [17]  which undertakes to encash the drafts drawn by theexporter. Further, instead of going to the place of the issuing bank to claim payment, the buyer may approach another bank, termed the negotiating bank, [18]  to have the draft discounted.Being a product of international commerce, the impact of this commercialinstrument transcends national boundaries, and it is thus not uncommon tofind a dearth of national law that can adequately provide for itsgovernance. This country is no exception. Our own Code of Commerce basically introduces only its concept under Articles 567-572, inclusive,thereof. It is no wonder then why great reliance has been placed oncommercial usage and practice, which, in any case, can be justified by the
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