2010 BAR - The Supreme Court has held
that fraud is an exception to the ― “independence principle” governing letters
of credit. Explain this principle and give an example of how fraud can be an
exception.
1.
Doctrine of Independence
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 [Transfield
Philippines v. Luzon Hydro, G.R. No. 146717 (2004]
2008 BAR - X Corporation entered into a
contract with PT Construction Corp. for the latter to construct and build a
sugar mill with six (6) months. They agreed that in case of delay, PT
Construction Corp. will pay X Corporation P100,000 for every day of delay. To
ensure payment of the agreed amount of damages, PT Construction Corp. secured
from Atlantic Bank a confirmed and irrevocable letter of credit which was
accepted by X Corporation in due time. One week before the expiration of the
six (6) month period, PT Construction Corp. requested for an extension of time
to deliver claiming that the delay was due to the fault of X Corporation. A
controversy as to the cause of the delay which involved the workmanship of the
building ensued. The controversy remained unresolved. Despite the controversy,
X Corporation presented a claim against Atlantic Bank by executing a draft
against the letter of credit.
(A) Can Atlantic Bank refuse payment
due to the unresolved controversy? Explain.
Suggested Answer:
No, Atlantic Bank cannot refuse payment
due to the said unresolved controversy.
Under the Doctrine of Independence, an
irrevocable letter of credit is independent of the contract between the
buyer-applicant and the seller-beneficiary.
The principle that limits the
application of the independence principle only to instances where it would
serve the commercial function of the credit and not when fraud attends the
transaction.
The untruthfulness of a certificate
accompanying a demand for payment under a standby credit may qualify as fraud
sufficient to support an injunction against payment. The remedy of injunction
is available when the following are present:
(1) Clear proof
of fraud;
(2) Fraudulent
abuse of the independent purpose of the letter of credit and only fraud under
the main agreement and
(3) Irreparable
injury might follow if injunction is not granted or the recovery of damages
would be seriously damaged
3.
Doctrine of Strict Compliance
The settled rule in commercial
transactions involving letters of credit requires that the documents tendered
by the seller must strictly conform to the terms of the letter of credit.
Otherwise, the issuing bank or the
concerned correspondent bank is not obliged to perform its undertaking under
the contract.
