G.R. No.

146717 November 22, 2004

TRANSFIELD PHILIPPINES, INC., petitioner,

vs.
LUZON HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND BANKING GROUP LIMITED
and SECURITY BANK CORPORATION, respondents.

DECISION

TINGA, J.:

Subject of this case is the letter of credit which has evolved as the ubiquitous and most important
device in international trade. A creation of commerce and businessmen, the letter of credit is also
unique in the number of parties involved and its supranational character.

Petitioner has appealed from the Decision1 of the Court of Appeals in CA-G.R. SP No. 61901 entitled
"Transfield Philippines, Inc. v. Hon. Oscar Pimentel, et al.," promulgated on 31 January 2001.2

On 26 March 1997, petitioner and respondent Luzon Hydro Corporation (hereinafter, LHC) entered
into a Turnkey Contract3 whereby petitioner, as Turnkey Contractor, undertook to construct, on a
turnkey basis, a seventy (70)-Megawatt hydro-electric power station at the Bakun River in the
provinces of Benguet and Ilocos Sur (hereinafter, the Project). Petitioner was given the sole
responsibility for the design, construction, commissioning, testing and completion of the Project.4

The Turnkey Contract provides that: (1) the target completion date of the Project shall be on 1 June
2000, or such later date as may be agreed upon between petitioner and respondent LHC or otherwise
determined in accordance with the Turnkey Contract; and (2) petitioner is entitled to claim extensions
of time (EOT) for reasons enumerated in the Turnkey Contract, among which are variations, force
majeure, and delays caused by LHC itself.5 Further, in case of dispute, the parties are bound to settle
their differences through mediation, conciliation and such other means enumerated under Clause 20.3
of the Turnkey Contract.6

To secure performance of petitioner's obligation on or before the target completion date, or such time
for completion as may be determined by the parties' agreement, petitioner opened in favor of LHC two
(2) standby letters of credit both dated 20 March 2000 (hereinafter referred to as "the Securities"), to
wit: Standby Letter of Credit No. E001126/8400 with the local branch of respondent Australia and New
Zealand Banking Group Limited (ANZ Bank)7and Standby Letter of Credit No. IBDIDSB-00/4 with
respondent Security Bank Corporation (SBC)8 each in the amount of US$8,988,907.00.9

In the course of the construction of the project, petitioner sought various EOT to complete the Project.
The extensions were requested allegedly due to several factors which prevented the completion of the
Project on target date, such as force majeure occasioned by typhoon Zeb, barricades and
demonstrations. LHC denied the requests, however. This gave rise to a series of legal actions
between the parties which culminated in the instant petition.

The first of the actions was a Request for Arbitration which LHC filed before the Construction Industry
Arbitration Commission (CIAC) on 1 June 1999.10 This was followed by another Request for Arbitration,
this time filed by petitioner before the International Chamber of Commerce (ICC)11 on 3 November
1
2000. In both arbitration proceedings, the common issues presented were: [1) whether typhoon Zeb
and any of its associated events constituted force majeure to justify the extension of time sought by
petitioner; and [2) whether LHC had the right to terminate the Turnkey Contract for failure of petitioner
to complete the Project on target date.

Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent provisions of the
Turnkey Contract,12 petitioner—in two separate letters13 both dated 10 August 2000—advised
respondent banks of the arbitration proceedings already pending before the CIAC and ICC in
connection with its alleged default in the performance of its obligations. Asserting that LHC had no
right to call on the Securities until the resolution of disputes before the arbitral tribunals, petitioner
warned respondent banks that any transfer, release, or disposition of the Securities in favor of LHC or
any person claiming under LHC would constrain it to hold respondent banks liable for liquidated
damages.

As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner that pursuant to Clause
8.214 of the Turnkey Contract, it failed to comply with its obligation to complete the Project. Despite the
letters of petitioner, however, both banks informed petitioner that they would pay on the Securities if
and when LHC calls on them.15

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 and
demanded from petitioner the payment of US$75,000.00 for each day of delay beginning 28 June
2000 until actual completion of the Project pursuant to Clause 8.7.1 of the Turnkey Contract. At the
same time, LHC served notice that it would call on the securities for the payment of liquidated
damages for the delay.16

On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction, with prayer for temporary
restraining order and writ of preliminary injunction, against herein respondents as defendants before
the Regional Trial Court (RTC) of Makati.17 Petitioner 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. The RTC issued a seventy-two (72)-hour temporary
restraining order on the same day. The case was docketed as Civil Case No. 00-1312 and raffled to
Branch 148 of the RTC of Makati.

After appropriate proceedings, the trial court issued an Order on 9 November 2000, extending the
temporary restraining order for a period of seventeen (17) days or until 26 November 2000.18

The RTC, in its Order19 dated 24 November 2000, denied petitioner's application for a writ of
preliminary injunction. It ruled that petitioner had no legal right and suffered no irreparable injury to
justify the issuance of the writ. 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. It
debunked petitioner's contention that the principle of "independent contract" could be invoked only by
respondent banks since according to it respondent LHC is the ultimate beneficiary of the Securities.
The trial court further ruled that the banks were mere custodians of the funds and as such they were
obligated to transfer the same to the beneficiary for as long as the latter could submit the required
certification of its claims.

Dissatisfied with the trial court's denial of its application for a writ of preliminary injunction, petitioner
elevated the case to the Court of Appeals via a Petition for Certiorari under Rule 65, with prayer for the
issuance of a temporary restraining order and writ of preliminary injunction.20 Petitioner submitted to the
appellate court that LHC's call on the Securities was premature considering that the issue of its default
had not yet been resolved with finality by the CIAC and/or the ICC. It asserted that until the fact of
delay could be established, LHC had no right to draw on the Securities for liquidated damages.

2
Refuting petitioner's contentions, LHC claimed that petitioner had no right to restrain its call on and use
of the Securities as payment for liquidated damages. It averred that the Securities are independent of
the main contract between them as shown on the face of the two Standby Letters of Credit which both
provide that the banks have no responsibility to investigate the authenticity or accuracy of the
certificates or the declarant's capacity or entitlement to so certify.

In its Resolution dated 28 November 2000, the Court of Appeals issued a temporary restraining order,
enjoining LHC from calling on the Securities or any renewals or substitutes thereof and ordering
respondent banks to cease and desist from transferring, paying or in any manner disposing of the
Securities.

However, the appellate court failed to act on the application for preliminary injunction until the
temporary restraining order expired on 27 January 2001. Immediately thereafter, representatives of
LHC trooped to ANZ Bank and withdrew the total amount of US$4,950,000.00, thereby reducing the
balance in ANZ Bank to US$1,852,814.00.

On 2 February 2001, the appellate court dismissed the petition for certiorari. The appellate court
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. Further, the appellate court held that even assuming that the trial court's
denial of petitioner's application for a writ of preliminary injunction was erroneous, it constituted only an
error of judgment which is not correctible by certiorari, unlike error of jurisdiction.

Undaunted, petitioner filed the instant Petition for Review raising the following issues for resolution:

WHETHER THE "INDEPENDENCE PRINCIPLE" ON LETTERS OF CREDIT MAY BE

INVOKED BY A BENEFICIARY THEREOF WHERE THE BENEFICIARY'S CALL THEREON
IS WRONGFUL OR FRAUDULENT.

WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES BEFORE
THE RESOLUTION OF PETITIONER'S AND LHC'S DISPUTES BY THE APPROPRIATE
TRIBUNAL.

WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN RELEASING THE
AMOUNTS DUE UNDER THE SECURITIES DESPITE BEING NOTIFIED THAT LHC'S CALL
THEREON IS WRONGFUL.

WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND IRREPARABLE DAMAGE IN

THE EVENT THAT:

A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND SECURITY
BANK ARE ALLOWED TO RELEASE, THE REMAINING BALANCE OF THE
SECURITIES PRIOR TO THE RESOLUTION OF THE DISPUTES BETWEEN
PETITIONER AND LHC.

B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY DRAWN

FROM THE SECURITIES.21

Petitioner contends that the courts below improperly relied on the "independence principle" on letters
of credit when this case falls squarely within the "fraud exception rule." Respondent LHC deliberately
misrepresented the supposed existence of delay despite its knowledge that the issue was still pending
arbitration, petitioner continues.

3
Petitioner asserts that LHC should be ordered to return the proceeds of the Securities pursuant to the
principle against unjust enrichment and that, under the premises, injunction was the appropriate
remedy obtainable from the competent local courts.

On 25 August 2003, petitioner filed a Supplement to the Petition22 and Supplemental

Memorandum,23 alleging that in the course of the proceedings in the ICC Arbitration, a number of
documentary and testimonial evidence came out through the use of different modes of discovery
available in the ICC Arbitration. It contends that after the filing of the petition facts and admissions
were discovered which demonstrate that LHC knowingly misrepresented that petitioner had incurred
delays— notwithstanding its knowledge and admission that delays were excused under the Turnkey
Contract—to be able to draw against the Securities. Reiterating that fraud constitutes an exception to
the independence principle, petitioner urges that this warrants a ruling from this Court that the call on
the Securities was wrongful, as well as contrary to law and basic principles of equity. It avers that it
would suffer grave irreparable damage if LHC would be allowed to use the proceeds of the Securities
and not ordered to return the amounts it had wrongfully drawn thereon.

In its Manifestation dated 8 September 2003,24 LHC contends that the supplemental pleadings filed by
petitioner present erroneous and misleading information which would change petitioner's theory on
appeal.

In yet another Manifestation dated 12 April 2004,25 petitioner alleges that on 18 February 2004, the ICC
handed down its Third Partial Award, declaring that LHC wrongfully drew upon the Securities and that
petitioner was entitled to the return of the sums wrongfully taken by LHC for liquidated damages.

LHC filed a Counter-Manifestation dated 29 June 2004,26 stating that petitioner's Manifestation dated 12
April 2004 enlarges the scope of its Petition for Review of the 31 January 2001 Decision of the Court
of Appeals. LHC notes that the Petition for Review essentially dealt only with the issue of whether
injunction could issue to restrain the beneficiary of an irrevocable letter of credit from drawing thereon.
It adds that petitioner has filed two other proceedings, to wit: (1) ICC Case No. 11264/TE/MW, entitled
"Transfield Philippines Inc. v. Luzon Hydro Corporation," in which the parties made claims and
counterclaims arising from petitioner's performance/misperformance of its obligations as contractor for
LHC; and (2) Civil Case No. 04-332, entitled "Transfield Philippines, Inc. v. Luzon Hydro Corporation"
before Branch 56 of the RTC of Makati, which is an action to enforce and obtain execution of the ICC's
partial award mentioned in petitioner's Manifestation of 12 April 2004.

In its Comment to petitioner's Motion for Leave to File Addendum to Petitioner's Memorandum, LHC
stresses that the question of whether the funds it drew on the subject letters of credit should be
returned is outside the issue in this appeal. At any rate, LHC adds that the action to enforce the ICC's
partial award is now fully within the Makati RTC's jurisdiction in Civil Case No. 04-332. LHC asserts
that petitioner is engaged in forum-shopping by keeping this appeal and at the same time seeking the
suit for enforcement of the arbitral award before the Makati court.

Respondent SBC in its Memorandum, dated 10 March 200327 contends that the Court of Appeals
correctly dismissed the petition for certiorari. Invoking the independence principle, SBC argues that it
was under no obligation to look into the validity or accuracy of the certification submitted by
respondent LHC or into the latter's capacity or entitlement to so certify. It adds that the act sought to
be enjoined by petitioner was already fait accompli and the present petition would no longer serve any
remedial purpose.

In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 2003 28 posits that its
actions could not be regarded as unjustified in view of the prevailing independence principle under
which it had no obligation to ascertain the truth of LHC's allegations that petitioner defaulted in its
obligations. Moreover, it points out that since the Standby Letter of Credit No. E001126/8400 had been
fully drawn, petitioner's prayer for preliminary injunction had been rendered moot and academic.

4
At the core of the present controversy is the applicability of the "independence principle" and "fraud
exception rule" in letters of credit. Thus, a discussion of the nature and use of letters of credit, also
referred to simply as "credits," would provide a better perspective of the case.

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.29

In commercial transactions, a letter of credit is a financial device developed by merchants as a

convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly
irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer,
who wants to have control of the goods before paying.30 The use of credits in commercial transactions
serves to reduce the risk of nonpayment of the purchase price under the contract for the sale of goods.
However, credits are also used in non-sale settings where they serve to reduce the risk of
nonperformance. Generally, credits in the non-sale settings have come to be known as standby
credits.31

There are three significant differences between commercial and standby credits. First, commercial
credits involve the payment of money under a contract of sale. Such credits become payable upon the
presentation by the seller-beneficiary of documents that show he has taken affirmative steps to comply
with the sales agreement. In the standby type, the credit is payable upon certification of a party's
nonperformance of the agreement. The documents that accompany the beneficiary's draft tend to
show that the applicant has not performed. The beneficiary of a commercial credit must demonstrate
by documents that he has performed his contract. The beneficiary of the standby credit must certify
that his obligor has not performed the contract.32

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.33 A letter of credit, however, changes its nature as different transactions
occur and if carried through to completion ends up as a binding contract between the issuing and
honoring banks without any regard or relation to the underlying contract or disputes between the
parties thereto.34

Since letters of credit have gained general acceptability in international trade transactions, the ICC has
published from time to time updates on the Uniform Customs and Practice (UCP) for Documentary
Credits to standardize practices in the letter of credit area. The vast majority of letters of credit
incorporate the UCP.35 First published in 1933, the UCP for Documentary Credits has undergone
several revisions, the latest of which was in 1993.36

In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,37 this Court ruled that the
observance of the UCP is justified by Article 2 of the Code of Commerce which provides that in the
absence of any particular provision in the Code of Commerce, commercial transactions shall be
governed by usages and customs generally observed. More recently, in Bank of America, NT & SA v.
Court of Appeals,38 this Court ruled that there being no specific provisions which govern the legal
complexities arising from transactions involving letters of credit, not only between or among banks
themselves but also between banks and the seller or the buyer, as the case may be, the applicability
of the UCP is undeniable.

5
Article 3 of the UCP provides that credits, by their nature, are separate transactions from the sales or
other contract(s) on which they may be based and banks are in no way concerned with or bound by
such contract(s), even if any reference whatsoever to such contract(s) is included in the credit.
Consequently, the undertaking of a bank to pay, accept and pay draft(s) or negotiate and/or fulfill any
other obligation under the credit is not subject to claims or defenses by the applicant resulting from his
relationships with the issuing bank or the beneficiary. A beneficiary can in no case avail himself of the
contractual relationships existing between the banks or between the applicant and the issuing bank.

Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft
and the required documents are presented to it. The so-called "independence principle" assures the
seller or 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. Under this principle, 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.39

The independent nature of the letter of credit may be: (a) independence in toto where the credit is
independent from the justification aspect and is a separate obligation from the underlying agreement
like for instance a typical standby; or (b) independence may be only as to the justification aspect like in
a commercial letter of credit or repayment standby, which is identical with the same obligations under
the underlying agreement. In both cases the payment may be enjoined if in the light of the purpose of
the credit the payment of the credit would constitute fraudulent abuse of the credit.40

Can the beneficiary invoke the independence principle?

Petitioner insists that the independence principle does not apply to the instant case and assuming it is
so, it is a defense available only to respondent banks. LHC, on the other hand, contends that it would
be contrary to common sense to deny the benefit of an independent contract to the very party for
whom the benefit is intended. As beneficiary of the letter of credit, LHC asserts it is entitled to invoke
the principle.

As discussed above, in a letter of credit transaction, such as in this case, 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.41 Precisely,
the independence principle liberates the issuing bank from the duty of ascertaining compliance by the
parties in the main contract. As the principle's nomenclature clearly suggests, the obligation under the
letter of credit is independent of the related and originating contract. In brief, the letter of credit is
separate and distinct from the underlying transaction.

Given the nature of letters of credit, petitioner's argument—that it is only the issuing bank that may
invoke the independence principle on letters of credit—does not impress this Court. 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. As it is, the independence doctrine
works to the benefit of both the issuing bank and the beneficiary.

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 to the original transactions. With the
letter of credit from the issuing bank, the party who applied for and obtained it may confidently present
the letter of credit to the beneficiary as a security to convince the beneficiary to enter into the business
transaction. On the other hand, the other party to the business transaction, i.e., the beneficiary of the
letter of credit, can be rest assured of being empowered to call on the letter of credit as a security in
6
case the commercial transaction does not push through, or the applicant fails to perform his part of the
transaction. It is for this reason that the party who is entitled to the proceeds of the letter of credit is
appropriately called "beneficiary."

Petitioner's argument that any dispute must first be resolved by the parties, whether through
negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit in essence
would convert the letter of credit into a mere guarantee. Jurisprudence has laid down a clear
distinction between a letter of credit and a guarantee in that the settlement of a dispute between the
parties is not a pre-requisite for the release of funds under a letter of credit. In other words, the
argument is incompatible with the very nature of the letter of credit. If a letter of credit is drawable only
after settlement of the dispute on the contract entered into by the applicant and the beneficiary, there
would be no practical and beneficial use for letters of credit in commercial transactions.

Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the issue:

The standby credit is an attractive commercial device for many of the same reasons that
commercial credits are attractive. Essentially, these credits are inexpensive and efficient. Often
they replace surety contracts, which tend to generate higher costs than credits do and are
usually triggered by a factual determination rather than by the examination of documents.

Because parties and courts should not confuse the different functions of the surety contract on
the one hand and the standby credit on the other, the distinction between surety contracts and
credits merits some reflection. The two commercial devices share a common purpose. Both
ensure against the obligor's nonperformance. They function, however, in distinctly different
ways.

Traditionally, upon the obligor's default, the surety undertakes to complete the obligor's
performance, usually by hiring someone to complete that performance. Surety contracts, then,
often involve costs of determining whether the obligor defaulted (a matter over which the
surety and the beneficiary often litigate) plus the cost of performance. The benefit of the surety
contract to the beneficiary is obvious. He knows that the surety, often an insurance company,
is a strong financial institution that will perform if the obligor does not. The beneficiary also
should understand that such performance must await the sometimes lengthy and costly
determination that the obligor has defaulted. In addition, the surety's performance takes time.

The standby credit has different expectations. He reasonably expects that he will receive cash
in the event of nonperformance, that he will receive it promptly, and that he will receive it
before any litigation with the obligor (the applicant) over the nature of the applicant's
performance takes place. The standby credit has this opposite effect of the surety contract: it
reverses the financial burden of parties during litigation.

In the surety contract setting, there is no duty to indemnify the beneficiary until the beneficiary
establishes the fact of the obligor's performance. The beneficiary may have to establish that
fact in litigation. During the litigation, the surety holds the money and the beneficiary bears
most of the cost of delay in performance.

In the standby credit case, however, the beneficiary avoids that litigation burden and receives
his money promptly upon presentation of the required documents. It may be that the applicant
has, in fact, performed and that the beneficiary's presentation of those documents is not
rightful. In that case, the applicant may sue the beneficiary in tort, in contract, or in breach of
warranty; but, during the litigation to determine whether the applicant has in fact breached the
obligation to perform, the beneficiary, not the applicant, holds the money. Parties that use a
standby credit and courts construing such a credit should understand this allocation of
burdens. There is a tendency in some quarters to overlook this distinction between surety

7
 contracts and standby credits and to reallocate burdens by permitting the obligor or the issuer
to litigate the performance question before payment to the beneficiary.42

While it is the bank which is bound to honor the credit, it is the beneficiary who has the right to ask the
bank to honor the credit by allowing him to draw thereon. The situation itself emasculates petitioner's
posture that LHC cannot invoke the independence principle and highlights its puerility, more so in this
case where the banks concerned were impleaded as parties by petitioner itself.

Respondent banks had squarely raised the independence principle to justify their releases of the
amounts due under the Securities. Owing to the nature and purpose of the standby letters of credit,
this Court rules that the respondent banks were left with little or no alternative but to honor the credit
and both of them in fact submitted that it was "ministerial" for them to honor the call for payment.43

Furthermore, LHC has a right rooted in the Contract to call on the Securities. The relevant provisions
of the Contract read, thus:

4.2.1. In order to secure the performance of its obligations under this Contract, the Contractor
at its cost shall on the Commencement Date provide security to the Employer in the form of
two irrevocable and confirmed standby letters of credit (the "Securities"), each in the amount of
US$8,988,907, issued and confirmed by banks or financial institutions acceptable to the
Employer. Each of the Securities must be in form and substance acceptable to the Employer
and may be provided on an annually renewable basis.44

8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the Employer
by way of liquidated damages ("Liquidated Damages for Delay") the amount of US$75,000 for
each and every day or part of a day that shall elapse between the Target Completion Date and
the Completion Date, provided that Liquidated Damages for Delay payable by the Contractor
shall in the aggregate not exceed 20% of the Contract Price. The Contractor shall pay
Liquidated Damages for Delay for each day of the delay on the following day without need of
demand from the Employer.

8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the
amount of such damages from any monies due, or to become due to the Contractor and/or by
drawing on the Security."45

A contract once perfected, binds the parties not only to the fulfillment of what has been expressly
stipulated but also to all the consequences which according to their nature, may be in keeping with
good faith, usage, and law.46 A careful perusal of the Turnkey Contract reveals the intention of the
parties to make the Securities answerable for the liquidated damages occasioned by any delay on the
part of petitioner. The call upon the Securities, while not an exclusive remedy on the part of LHC, is
certainly an alternative recourse available to it upon the happening of the contingency for which the
Securities have been proffered. Thus, even without the use of the "independence principle," the
Turnkey Contract itself bestows upon LHC the right to call on the Securities in the event of default.

Next, petitioner invokes the "fraud exception" principle. It avers that LHC's call on the Securities is
wrongful because it fraudulently misrepresented to ANZ Bank and SBC that there is already a breach
in the Turnkey Contract knowing fully well that this is yet to be determined by the arbitral tribunals. It
asserts that the "fraud exception" exists when the beneficiary, for the purpose of drawing on the credit,
fraudulently presents to the confirming bank, documents that contain, expressly or by implication,
material representations of fact that to his knowledge are untrue. In such a situation, petitioner insists,
injunction is recognized as a remedy available to it.

Citing Dolan's treatise on letters of credit, petitioner argues that the independence principle is not
without limits and it is important to fashion those limits in light of the principle's purpose, which is to

8
serve the commercial function of the credit. If it does not serve those functions, application of the
principle is not warranted, and the commonlaw principles of contract should apply.

It is worthy of note that the propriety of LHC's call on the Securities is largely intertwined with the fact
of default which is the self-same issue pending resolution before the arbitral tribunals. To be able to
declare the call on the Securities wrongful or fraudulent, it is imperative to resolve, among others,
whether petitioner was in fact guilty of delay in the performance of its obligation. Unfortunately for
petitioner, this Court is not called upon to rule upon the issue of default—such issue having been
submitted by the parties to the jurisdiction of the arbitral tribunals pursuant to the terms embodied in
their agreement.47

Would injunction then be the proper remedy to restrain the alleged wrongful draws on the Securities?

Most writers agree that fraud is an exception to the independence principle. Professor Dolan opines
that 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.48 The remedy for fraudulent
abuse is an injunction. However, injunction should not be granted unless: (a) there is clear proof of
fraud; (b) the fraud constitutes fraudulent abuse of the independent purpose of the letter of credit and
not only fraud under the main agreement; and (c) irreparable injury might follow if injunction is not
granted or the recovery of damages would be seriously damaged.49

In its complaint for injunction before the trial court, petitioner alleged that it is entitled to a total
extension of two hundred fifty-three (253) days which would move the target completion date. It argued
that if its claims for extension would be found meritorious by the ICC, then LHC would not be entitled
to any liquidated damages.50

Generally, injunction is a preservative remedy for the protection of one's substantive right or interest; it
is not a cause of action in itself but merely a provisional remedy, an adjunct to a main suit. The
issuance of the writ of preliminary injunction as an ancillary or preventive remedy to secure the rights
of a party in a pending case is entirely within the discretion of the court taking cognizance of the case,
the only limitation being that this discretion should be exercised based upon the grounds and in the
manner provided by law.51

Before a writ of preliminary injunction may be issued, there must be a clear showing by the complaint
that there exists a right to be protected and that the acts against which the writ is to be directed are
violative of the said right.52It must be shown that the invasion of the right sought to be protected is
material and substantial, that the right of complainant is clear and unmistakable and that there is an
urgent and paramount necessity for the writ to prevent serious damage.53 Moreover, an injunctive
remedy may only be resorted to when there is a pressing necessity to avoid injurious consequences
which cannot be remedied under any standard compensation.54

In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain LHC's
call on the Securities which would justify the issuance of preliminary injunction. By petitioner's own
admission, the right of LHC to call on the Securities was contractually rooted and subject to the
express stipulations in the Turnkey Contract.55Indeed, the Turnkey Contract is plain and unequivocal in
that it conferred upon LHC the right to draw upon the Securities in case of default, as provided in
Clause 4.2.5, in relation to Clause 8.7.2, thus:

4.2.5 The Employer shall give the Contractor seven days' notice of calling upon any of the
Securities, stating the nature of the default for which the claim on any of the Securities is to be
made, provided that no notice will be required if the Employer calls upon any of the Securities
for the payment of Liquidated Damages for Delay or for failure by the Contractor to renew or
extend the Securities within 14 days of their expiration in accordance with Clause 4.2.2.56

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 8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the
amount of such damages from any monies due, or to become due, to the Contractor and/or by
drawing on the Security.57

The pendency of the arbitration proceedings would not per se make LHC's draws on the Securities
wrongful or fraudulent for there was nothing in the Contract which would indicate that the parties
intended that all disputes regarding delay should first be settled through arbitration before LHC would
be allowed to call upon the Securities. It is therefore premature and absurd to conclude that the draws
on the Securities were outright fraudulent given the fact that the ICC and CIAC have not ruled with
finality on the existence of default.

Nowhere in its complaint before the trial court or in its pleadings filed before the appellate court, did
petitioner invoke the fraud exception rule as a ground to justify the issuance of an injunction. 58 What
petitioner did assert before the courts below was the fact that LHC's draws on the Securities would be
premature and without basis in view of the pending disputes between them. Petitioner should not be
allowed in this instance to bring into play the fraud exception rule to sustain its claim for the issuance
of an injunctive relief. Matters, theories or arguments not brought out in the proceedings below will
ordinarily not be considered by a reviewing court as they cannot be raised for the first time on
appeal.59 The lower courts could thus not be faulted for not applying the fraud exception rule not only
because the existence of fraud was fundamentally interwoven with the issue of default still pending
before the arbitral tribunals, but more so, because petitioner never raised it as an issue in its pleadings
filed in the courts below. At any rate, petitioner utterly failed to show that it had a clear and
unmistakable right to prevent LHC's call upon the Securities.

Of course, prudence should have impelled LHC to await resolution of the pending issues before the
arbitral tribunals prior to taking action to enforce the Securities. But, as earlier stated, the Turnkey
Contract did not require LHC to do so and, therefore, it was merely enforcing its rights in accordance
with the tenor thereof. Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith.60 More importantly, pursuant to the principle of
autonomy of contracts embodied in Article 1306 of the Civil Code,61petitioner could have incorporated
in its Contract with LHC, a proviso that only the final determination by the arbitral tribunals that default
had occurred would justify the enforcement of the Securities. However, the fact is petitioner did not do
so; hence, it would have to live with its inaction.

With respect to the issue of whether the respondent banks were justified in releasing the amounts due
under the Securities, this Court reiterates that pursuant to the independence principle the banks were
under no obligation to determine the veracity of LHC's certification that default has occurred. Neither
were they bound by petitioner's declaration that LHC's call thereon was wrongful. To repeat,
respondent banks' undertaking was simply to pay once the required documents are presented by the
beneficiary.

At any rate, should petitioner finally prove in the pending arbitration proceedings that LHC's draws
upon the Securities were wrongful due to the non-existence of the fact of default, its right to seek
indemnification for damages it suffered would not normally be foreclosed pursuant to general
principles of law.

Moreover, in a Manifestation,62 dated 30 March 2001, LHC informed this Court that the subject letters of
credit had been fully drawn. This fact alone would have been sufficient reason to dismiss the instant
petition.

Settled is the rule that injunction would not lie where the acts sought to be enjoined have already
become fait accompli or an accomplished or consummated act.63 In Ticzon v. Video Post Manila,
Inc.64 this Court ruled that where the period within which the former employees were prohibited from
engaging in or working for an enterprise that competed with their former employer—the very purpose
of the preliminary injunction —has expired, any declaration upholding the propriety of the writ would be
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entirely useless as there would be no actual case or controversy between the parties insofar as the
preliminary injunction is concerned.

In the instant case, the consummation of the act sought to be restrained had rendered the instant
petition moot—for any declaration by this Court as to propriety or impropriety of the non-issuance of
injunctive relief could have no practical effect on the existing controversy.65 The other issues raised by
petitioner particularly with respect to its right to recover the amounts wrongfully drawn on the
Securities, according to it, could properly be threshed out in a separate proceeding.

One final point. LHC has charged petitioner of forum-shopping. It raised the charge on two occasions.
First, in its Counter-Manifestation dated 29 June 200466 LHC alleges that petitioner presented before
this Court the same claim for money which it has filed in two other proceedings, to wit: ICC Case No.
11264/TE/MW and Civil Case No. 04-332 before the RTC of Makati. LHC argues that petitioner's acts
constitutes forum-shopping which should be punished by the dismissal of the claim in both forums.
Second, in its Comment to Petitioner's Motion for Leave to File Addendum to Petitioner's
Memorandum dated 8 October 2004, LHC alleges that by maintaining the present appeal and at the
same time pursuing Civil Case No. 04-332—wherein petitioner pressed for judgment on the issue of
whether the funds LHC drew on the Securities should be returned—petitioner resorted to forum-
shopping. In both instances, however, petitioner has apparently opted not to respond to the charge.

Forum-shopping is a very serious charge. It exists when a party repetitively avails of several judicial
remedies in different courts, simultaneously or successively, all substantially founded on the same
transactions and the same essential facts and circumstances, and all raising substantially the same
issues either pending in, or already resolved adversely, by some other court.67 It may also consist in the
act of a party against whom an adverse judgment has been rendered in one forum, of seeking another
and possibly favorable opinion in another forum other than by appeal or special civil action of certiorari,
or the institution of two or more actions or proceedings grounded on the same cause on the
supposition that one or the other court might look with favor upon the other party.68 To determine
whether a party violated the rule against forum-shopping, the test applied is whether the elements of
litis pendentia are present or whether a final judgment in one case will amount to res judicata in
another.69 Forum-shopping constitutes improper conduct and may be punished with summary dismissal
of the multiple petitions and direct contempt of court.70

Considering the seriousness of the charge of forum-shopping and the severity of the sanctions for its
violation, the Court will refrain from making any definitive ruling on this issue until after petitioner has
been given ample opportunity to respond to the charge.

WHEREFORE, the instant petition is DENIED, with costs against petitioner.

Petitioner is hereby required to answer the charge of forum-shopping within fifteen (15) days from
notice.

SO ORDERED.

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