Wednesday, May 17, 2006

Letters of Credit - New Laws

Transfield Philippines vs Luzon Hydro Electric Corp.
(GR No 146717, Nov 22, 2004, Tinga)

Transfield entered into a turn-key contract with Luzon Hydro Corp. (LHC). Under the contract, Transfield were to construct a hydro-electric plants in Benguet and Ilocos. The contract provides for a period for which the project is to be completed and also allows for the extension of the period provided that the extension is based on justifiable grounds such as fortuitous event. In order to guarantee performance by Transfield, two stand-by letters of credit were required to be opened. During the construction of the plant, Transfield requested for extension of time citing fortuitous events brought about by typhoon, barricades and demonstration. LHC did not give due course to the extension of the period prayed for but referred the matter to arbitration committee.

In the meanwhile, because of the delay in the construction of the plant, LHC called on the stand-by letters of credit because of default. However, the demand was objected by Transfield on the ground that there is still pending arbitration on their request for extension of time. LHC invoked the “independence principle”. On the other hand, Transfield claims fraud on the part of LHC on calling the stand-by letters of credit.

Under the independence principle, a LC accommodation is entirely distinct and separate, independent agreement. It is not supposed to be affected by the main contract upon which it rests.

The court held for the LHC. Following the independence principle, even granting that there is still issue to be resolved arising from the turn-key project. This issue is not supposed to affect the obligation of the bank to pay the letter of credit in question. The court stressed that a LC accommodation is intended to benefit not only the beneficiary therein but the applicant thereon. On the issue of fraud, the SC held that there is nothing in the turn-key contract which states that all issues between the parties must be resolved first before LHC can call on the stand-by LC but the contract provides that if Transfield defaults, then LHC can call on these stand-by LC.

Lander vs Metrobank
(GR No. 159622 July 30, 2004, Santiago)

The business of the petitioner is importation of welding rods. Lander opened a LC with Metrobank and as security, a trust receipt was executed by Lander in favor of Metrobank. The TR matured but Lander was unable to pay Metrobank so the former returned the goods to Metrobank to avoid criminal liability (estafa). Metrobank sold the goods in an auction but the proceeds were not sufficient to satisfy the entire obligation of the petitioner.

1. Can the Metrobank claim the deficiency?
2. Can we not consider the return of the goods in full satisfaction of Metrobank’s claim against the petitioner?

Yes. Sec 7 of the TR Law provides that in case of sale by the entruster of the possessed goods, the entrustee shall receive any surplus but shall be liable to the entruster for any deficiency.
No. Repossession of the goods is not intended to transfer ownership of the goods (dacion en pago does not lie) but as a security for the loan obligation of the debtor that arose from the trust receipt agreement.

National Commercial Bank of Saudi Arabia vs CA
(GR No. 124269, Jan 31 2003)

Petitioner in this case was sued in connection with a LC transaction. The defense of prescription was invoked by the petitioner claiming that solutio indebeti cases prescribe in six years.

If one is to pursue a claim arising from a LC accommodation, within what time/period should he bring an action thereon?
Can the court apply the doctrine of laches?

10 years because LC is a written contract.
Courts are not permitted to apply the doctrine of laches earlier than the expiration of time limited for the commencement of action of law.

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