SURIGAO CENTURY SAWMILL, CO., INC.

, petitioner,
vs. COURT OF APPEALS and PHOENIX ASSURANCE CO., INC.,
G.R. No. 83889 February 9, 1993
FACTS:
Standard Plywood Corporation (STANDARD) leased a barge, LCT "TANTOY" from Surigao Century
Sawmill Co., Inc. (SURIGAO), manned by the latter's crew for delivery of plywood from Butuan City to its
consignee, A-1 Construction, Inc. in Surigao City. This was covered by a Contract of Lease and a bill of
lading. The contract of lease provides that the subject of the lease is the LCT "Tantoy," to load at Butuan
City pieces of panel plywood, with the shipper being Standard Plywood Corporation of Butuan City, for
delivery to its consignee A-1 Construction, Inc. at Surigao City.
The shipment loaded on "TANTOY" failed to reach the consignee resulting in damages to
STANDARD. However, since the cargo was insured by the shipper (STANDARD) with Phoenix Assurance
Co., Inc. (PHOENIX), the latter settled its obligation to STANDARD; hence as a legal consequence,
PHOENIX was subrogated to the rights and interests of the shipper, STANDARD.
Failing to satisfy its demand from SURIGAO, PHOENIX filed a complaint with the RTC of Manila—
where the office of Phoenix is located. SURIGAO filed a motion to dismiss on the ground of improper
venue, by virtue of the lease contract of the barge that any dispute arising out of the lease shall be
settled in the proper court Surigao del Norte." The RTC denied the motion.

ISSUE:
Whether or not the bill of lading should prevail over the lease contract for purposes of venue?

RULING:
Yes. In determining which document should prevail, we should look into the real intent of the
parties and/or the characteristics of the documents. A bill of lading serves three distinct functions: first,
as a receipt for the goods; second, as contract of carriage; and third, as documentary evidence of title
to the goods.
The present action does not concern or refer to any disagreement or dispute arising out of the
lease of the barge which under the lease contract needs to be settled by the parties in the proper court
of the Province of Surigao del Norte; withall, this is an action of respondent Phoenix, as subrogor to
recover sum of money and damages from petitioner as debtor arising out of marine subrogation
recovery and on the basis of the bill of lading.
The reliance, therefore, of private respondent Phoenix on the bill of lading which serves in the
contract of carriage to support its cause of action against petitioner is well-taken.
 TRANSFIELD PHILIPPINES, INC.,
vs. LUZON HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND BANKING GROUP LIMITED and
SECURITY BANK CORPORATION
G.R. No. 146717, November 22, 2004

FACTS:

TRANSFIELD and LUZON HYDRO CORP.(LHC) entered into a Turnkey Contract whereby
petitioner, as Turnkey Contractor, undertook to construct, on a turnkey basis, a seventy (70)-Megawatt
hydro-electric power station in the provinces of Benguet and Ilocos Sur. Petitioner was given the sole
responsibility for the design, construction, commissioning, testing and completion of the Project. To
secure performance of the obligation, petitioner opened in favor of LHC two (2) standby letters of credit
with the local branch of respondent Australia and New Zealand Banking Group Limited (ANZ Bank) and
with respondent Security Bank Corporation (SBC).

In the course of the construction of the project, petitioner sought various extensions to
complete the Project to which LHC denied the requests. This gave rise to a series of legal actions
between the parties which culminated in the instant petition. LHC asserted that additional extension of
time would not be warranted; accordingly it declared petitioner in default/delay in the performance of
its obligations under the Turnkey Contract. LHC served notice that it would call on the securities for the
payment of liquidated damages for the delay.
A complaint for injunction was filed before the RTC of Makati and sought to restrain respondent LHC
from calling on the Securities and respondent banks from transferring, paying on, or in any manner
disposing of the Securities or any renewals or substitutes thereof. RTC ruled denying petitioner's
application for a writ of preliminary injunction.
Employing the principle of "independent contract" in letters of credit, the trial court ruled that LHC
should be allowed to draw on the Securities for liquidated damages.
On appeal, the CA dismissed the petition for certiorari and expressed conformity with the trial court's
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.

ISSUE:
Whether or not a letter of credit is a negotiable instrument?

RULING:

No. 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.
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.
 Transfield Philippines, Inc. v. Luzon Hydro Corp.
GR No. 146717 (22 November 2004)
(ADDITIONAL NOTES LANG TO SA CASE DIGEST KO SA KAO NI TRANSFIELD. Ang haba kasi kaya hndi ko na nabasa
ung ibang parte. Haha I LOVE YOUUUUUUUUUUUUUUUU )

SUBJECT MATTER: Special Laws; Letters of Credit; Independence Principle

CASE SUMMARY:
Transfield, as a contractor, undertook to construct a hydro-electric power station and complete the same on or
before June 1, 2000. To secure the performance of its obligation. Transfield opened 2 letters of credits from ANZ
Banking Group and Security Bank in favor of Luzon. Nonetheless, Transfield was unable to complete the project on
the target date allegedly due to force majeure. Both Transfield and Luzon filed before separate arbitration
tribunals, ICC and CIAC respectively, to determine whether force majeure would justify the delay. Pending the
arbitration proceeding, Transfield filed a complaint for preliminary injunction against the respondent banks to
restrain them from paying on the securities and also against Luzon to prevent it from calling on the securities. RTC
issued a TRO but denied the application for writ of preliminary injunction. CA affirmed RTC.
**N.B. When the TRO expired, Luzon was able to withdraw from ANZ.
DOCTRINES:
Under the independence principle, banks assume no liability or responsibility for the form, sufficiency, accuracy,
genuineness, falsification or legal effect of any document, 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.
The independence principle liberates the issuing bank from the duty of ascertaining compliance by the parties in
the main contract.
PARTIES:
Petitioner: Transfield Philippines, Inc. (Transfield)
Luzon Hydro Corporation (Luzon)
Respondents: Australia and New Zealand Banking Group Ltd. (ANZ)
Security Bank Corporation (SBC)
FACTS:
Transfield and Luzon entered into a Turnkey Contract whereby Transfield undertook, as a contractor, to construct a
70-Megawatt hydro-electric power station at the Bakun River in Benguet and Ilocos Sur.
The contract provides that:
(1) the target completion date of the project is on June 1, 2000, or such date as may be agreed upon; and
(2) petitioner is entitled to claim extensions of time (EOT) for reasons enumerated in the contract e.g.
variations, force majeure, and delays caused by Luzon itself.
It was also agreed upon that in case of dispute, the parties are bound to settle their differences through
mediation, conciliation and such other means enumerated in the contract.
To secure the performance of the obligation, Transfield opened in favor of Luzon, 2 standby letters of credits with
ANZ and SBC, each in the amount of US$8.99M.
Nonetheless, in the course of construction, Transfield sought various EOT to complete the project. The request for
extensions were allegedly due to force majeure occasioned by typhoon Zeb, barricades, and demonstrations,
which prevented the on-time completion of the project.
Luzon denied Transfield’s requests for EOT.
Luzon filed a Request for Arbitration before the Construction Industry Arbitration Commission (CIAC), while
Transfield filed a Request for Arbitration before the International Chamber of Commerce (ICC). These arbitration
proceedings would resolve the issues: (1)WON the alleged forcemajeure would justify the EOT sought by
Transfield, (2)WON Luzon had the right to terminate the contract for Transfield’s failure to complete the project on
target date.
Meanwhile, Transfield wrote letters to ANZ and SBC advising them of the arbitration proceedings. Transfield
asserted that Luzon had no right to call on the securities until the resolution of the issued before CIAC and ICC.
Transfield also warned the banks that any transfer, release, or disposition of the securities in favor of Luzon would
constrain it to hold respondent banks liable for liquidated damages.
Despite the Transfield’s letters, the banks informed Transfield that they would pay on the Securities if and when
Luzon calls on them.
Transfield filed a complaint for injunction with prayer for TRO and writ of preliminary injunction before the RTC.
Transfield sought to restraint banks from calling on the securities and the respondent banks from paying on the
securities.
RTC –denied the application for writ of preliminary injunction. Applying the “Independent Contract” principle,
Luzon should be allowed to draw on the securities for liquidated damages. Banks were mere custodians of the
funds and were obligated to transfer the same to the beneficiary for as long as the latter could submit the required
certification of its claims. Luzon, as the ultimate beneficiary, may also invoke the “independent contract” principle.
CA - issued a TRO but failed to act on the application for preliminary injunction until the TRO expired.
N.B. As soon as the TRO expired, Luzon went to ANZ bank and withdrew US$ 4.9M.
- CA affirmed RTC decisions; Luzon 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.

ISSUE/S:
1. WON the “Independence Principle” on Letter of Credit may be invoked by a beneficiary. (YES)
Petitioner’s argument:
 RTC and CA improperly relied on the “independence principle” on the letters of credit when this case falls
within the “fraud exception rule”.
 Luzon knowing misinterpreted the existence of delay despite its knowledge that the issue was still
pending arbitration to be able to draw against the securities.
 Luzon should be ordered to return proceeds of the securities.
 Injunction was the appropriate remedy obtainable from the local courts.
Respondent SBC’s argument:
 Invoking the independence principle, it was under no obligation to look into the validity or accuracy of the
certification submitted by Luzon or into the latter’s capacity or entitlement to so certify.
Respondent ANZ’s argument:
 Its actions could not be regarded as unjustified in the view of the prevailing independence principle under
which it had no obligation to ascertain the truth of Luzon’s allegations (Similar to SBC)

HOLDING/RATIO:
1. Yes, the beneficiary can invoke the independence principle.

In a letter of credit transaction 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, and particularly, the independence
principle liberates the issuing bank from the duty of ascertaining compliance by the parties of the main
contract. As it is, the independence doctrine works for the benefit of both issuing bank and the
beneficiary.

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. Letters of credit
are employed by the parties desiring to enter into commercial transactions, not for the benefit of the
issuing bank but mainly for the benefit of the parties of the original transaction. With the letter of credit,
the party who obtained the letter of credit may present it to the beneficiary as a security to convince the
latter to enter into the business transaction. On the other hand, the beneficiary can be rest assured of
being empowered to call on the letter of credit as a security in case the commercial transaction does not
push through, or the party who presented the letter of credit fails to perform his part.

Prior resolution of any dispute before beneficiary is entitled to call on the letter of credit would convert it
into a mere guarantee.

In this case, the Court ruled that ANZ and SBC banks were left with little or no alternative but to honor the
credit and that it was “ministerial for them to honor the call for payment. Also, Luzon’s right to call on the
securities was rooted on the following provisions of the contract:
… provide security to the Employer in the form of 2 irrevocable and confirmed standby letters of
credit …
… if the contractor fails to comply, the contractor shall pay the Employer by way of liquidated
damages …
… Employer may deduct the amount of such damages by drawing on the security …

Notes:
 Letter of Credit is:
o Not strictly contractual because privity and meeting of the minds are lacking.
o Not a contract of suretyship or guaranty because it entails a primary liability following a default.
o Not a negotiable instrument because it is not payable to order or bearer, and is generally
conditional.
 o 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.
Commercial credits Standby Credits
Involve payment of money under a contract of sale
Becomes payable upon presentation by the seller- Payable upon certification of a party’s
beneficiary of the documents that show he has nonperformance of the agreement;
taken affirmative steps to comply with the sales Documents that accompany the beneficiary’s draft
agreement. tend to show that the applicant has not performed.
Beneficiary of commercial credit must demonstrate Beneficiary of the standby credit must certify that his
by documents that he has performed his contract. obligor has not performed the contract.
 In a standby type of letter of credit, the credit is payable upon certification of a party’s nonperformance of
the agreement.
 The independence principle assures 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.
o Bank assumes no liability or responsibility for the form, sufficiency, accuracy, genuineness,
falsification or legal effect of any documents, or for the generals and/or particular conditions
stipulates in the documents.
 Independent nature maybe:
o Independence in toto – credit is independent from the underlying agreement (e.g. standby letter
of credit).
o Independence as to the justification aspect only – e.g in a commercial letter of credit or
repayment standby, which is identical with the same obligations under the underlying
agreement.
 PHILIPPINE EDUCATION CO., INC.,
vs. MAURICIO A. SORIANO, ET AL.,
G.R. No. L-22405 June 30, 1971
FACTS:

Enrique Montinola sought to purchase from Manila Post Office ten money orders of 200php
each payable to E. P. Montinola. Montinola offered to pay with the money orders with a private check.
Private check were not generally accepted in payment of money orders, the teller advised him to see
the Chief of the Money Order Division, but instead of doing so, Montinola managed to leave the building
without the knowledge of the teller. Upon the disappearance of the unpaid money order, a message
was sent to instruct all banks that it must not pay for the money order stolen upon presentment. The
Bank of America received a copy of said notice. However, The Bank of America received the money
order and deposited it to the appellant’s account upon clearance. Mauricio Soriano, Chief of the Money
Order Division notified the Bank of America that the money order deposited had been found to have
been irregularly issued and that, the amount it represented had been deducted from the bank’s clearing
account. The Bank of America debited appellant’s account with the same account and give notice by
mean of debit memo.

ISSUE:

Whether or not the stolen postal money order is a negotiable instrument?

RULING:

No. It is not disputed that our postal statutes were patterned after statutes in force in the
United States. For this reason, ours are generally construed in accordance with the construction given in
the United States to their own postal statutes, in the absence of any special reason justifying a
departure from this policy or practice. The weight of authority in the United States is that postal money
orders are not negotiable instruments, the reason behind this rule being that, in establishing and
operating a postal money order system, the government is not engaging in commercial transactions but
merely exercises a governmental power for the public benefit.
 BENJAMIN ABUBAKAR
vs. THE AUDITOR GENERAL
G.R. No. L-1405, July 31, 1948

FACTS:
The  Auditor  General  refuses  to  authorize  the  payment  of  the  treasury warrant  issued  in 
the  name  of  Placido  Urbanes,  now  in  the  hands  of Benjamin  Abubakar. For his refusal, the
respondent gave two reasons: first, because the money available for the redemption of treasury
warrants issued before January 2, 1942, is appropriated by Republic Act No. 80 (Item F-IV-8) and this
warrant does not come within the purview of said appropriation; and second, because of the
requirements of his office had not been complied with, namely, that it must be shown that the holders
of warrants covering payment or replenishment of cash advances for official expenditures (as this
warrant is) received them in payment of definite government obligations.

ISSUE:
Whether or not the treasury warrants are negotiable instruments?

RULING:

No. The petitioner argues that he is a holder in good faith and for value of a negotiable
instrument and is entitled to the rights and privileges of a holder in due course, free from defenses. But
this treasury warrant is not within the scope of the negotiable instruments law. For one thing, the
document bearing on its face the words "payable from the appropriation for food administration," is
actually an order for payment out of "a particular fund," and is not unconditional, and does not fulfill
one of the essential requirements of a negotiable instrument. (Section 3 last sentenced and section 1[ b]
of the Negotiable Instruments Law.) In the United States, government warrants for the payment of
money are not negotiable instruments nor commercial proper .

It is admitted that the warrant was originally made payable to Placido S. Urbanes  in his capacity
as disbursing officer of the Food Administration for "additional cash advance for Food Production
Campaign in La Union". It is thus apparent that this is a treasury warrant issued in favor of a  public
officer or employee and held in possession by a private individual. Such being the case, the Auditor
General can hardly be blamed for not authorizing its redemption out of an appropriation specifically for
"treasury warrants issued ... in favor of and held in possession by private individuals." This warrant
was not issued in favor of a private individual. It was issued in favor of a government employee.
 FAR EAST BANK AND TRUST COMPANY
vs. ESTRELLA O. QUERIMIT
G.R. No. 148582, January 16, 2002

FACTS:
Respondent Estrella O. Querimit opened a dollar savings account in petitioner's Harrison Plaza
branch, for which she was issued four (4) Certificates of Deposit, each certificate representing the
amount of $15,000.00, or a total amount of $60,000.00. The certificates were to mature in 60 days, and
were payable to bearer. The certificates bore the word "accrued," which meant that if they were not
presented for encashment or pre-terminated prior to maturity, the money deposited with accrued
interest would be "rolled over" by the bank and annual interest would accumulate automatically. The
petitioner bank's manager assured respondent that her deposit would be renewed and earn interest
upon maturity even without the surrender of the certificates if these were not indorsed and withdrawn.
Respondent kept her dollars in the bank so that they would earn interest and so that she could use the
fund after she retired.
Respondent accompanied her husband Dominador Querimit to the United States for medical
treatment however her husband died and Estrella returned to the Philippines. She went to petitioner
FEBTC to withdraw her deposit but, to her dismay, she was told that her husband had withdrawn the
money in deposit. Respondent sent a demand letter to petitioner FEBTC and later filed a complaint
against FEBTC Harrison Plaza Branch. The RTC rendered judgment for respondent to which the Court of
Appeals affirmed.

ISSUE:
Whether or not the certificate of deposit a negotiable instrument?
RULING:
Yes. A certificate of deposit is defined as a written acknowledgment by a bank or banker of the
receipt of a sum of money on deposit which the bank or banker promises to pay to the depositor, to the
order of the depositor, or to some other person or his order, whereby the relation of debtor and
creditor between the bank and the depositor is created. The principles governing other types of bank
deposits are applicable to certificates of deposit, as are the rules governing promissory notes when they
contain an unconditional promise to pay a sum certain of money absolutely. The principle that payment,
in order to discharge a debt, must be made to someone authorized to receive it is applicable to the
payment of certificates of deposit. Thus, a bank will be protected in making payment to the holder of a
certificate indorsed by the payee, unless it has notice of the invalidity of the indorsement or the holder's
want of title. A bank acts at its peril when it pays deposits evidenced by a certificate of deposit, without
its production and surrender after proper indorsement. As a rule, one who pleads payment has the
burden of proving it. Even where the plaintiff must allege non-payment, the general rule is that the
burden rests on the defendant to prove payment, rather than on the plaintiff to prove payment. The
debtor has the burden of showing with legal certainty that the obligation has been discharged by
payment.
In this case, the certificates of deposit were clearly marked payable to "bearer," which means, to
"[t]he person in possession of an instrument, document of title or security payable to bearer or indorsed
in blank." Petitioner should not have paid respondent's husband or any third party without requiring the
 

surrender of the certificates of deposit.