TRUTH IN LENDING ACT RATIONALE (6) the finance charges expressed in terms of pesos and centavos; and

DBP VS ARCILLA (7) the percentage that the finance charge bears to the total amount to be
financed expressed as a simple annual rate on the outstanding unpaid
Atty Felipe was hired as in-house counsel of DBP. In 1983, he borrowed 160K from balance of the obligation.
DBP to construct his house on. The monthly amortizations for the said account were
deducted from his monthly salary, for which he was issued receipts. He resigned tho. Under Circular No. 158 of the Central Bank, the information required by R.A. No.
So, he was informed of his remaining utang with DBP. On July 24, 1987, Arcilla 3765 shall be included in the contract covering the credit transaction or any other
signed three Promissory Notes. He was also obliged to pay service charge and document to be acknowledged and signed by the debtor.
interest. He also agreed to increase (with notice to him) the "rate of interest on the
loan, as well as all other fees and charges on loans and advances pursuant to such Furthermore, the contract or document shall specify additional charges
policy as it may adopt from time to time during the period of the loan. DBP agreed to
grant Arcilla additional cash advances and was, thus, consolidated to the outstanding
EFFECT IF THE BORROWER IS NOT DULY INFORMED: The lender will have no
balance.
right to collect such charge or increases thereof, even if stipulated in the promissory
note.22 However, such failure shall not affect the validity or enforceability of any
However, he failed to pay his loan account, advances, penalty charges and interests contract or transaction.23
which, as of October 31, 1990, amounted to ₱241,940.93.
In the present case, DBP failed to disclose the requisite information in the disclosure
DBP rescinded the Deed of Conditional Sale by notarial act on November 27, 1990, statement form authorized by the Central Bank, but did so in the loan transaction
but gave Atty. the right to repurchase in 2 years. DBP reiterated the said offer on documents between it and Arcilla.
October 7, 1992. Arcilla failed to respond. Consequently, the property was advertised
for sale at public bidding on February 14, 1994.16
Despite the notarial rescission of the conditional sale in 1990, and DBP's subsequent
repeated offers to repurchase the property, the latter maintained his silence.
Atty now files a complaint alleging violation of Truth in Lending Act.
Contrary to appellee's claim that he was not sufficiently informed of the details of the
ISSUE: WON THE BANK VIOLATED THE LAW? NO. loan, the records disclose that the required informations were readily available in the
three (3) promissory notes he executed.
THE LAW Section 1 of R.A. No. 3765 provides that prior to the consummation of a
loan transaction, the bank, as creditor, is obliged to furnish a client with a clear Plus, lawyer siya, alam niya pinapasok niya dapat.
statement, in writing, setting forth, to the extent applicable and in accordance with
the rules and regulations prescribed by the Monetary Board of the Central Bank of the
Philippines, the following information:

(1) the cash price or delivered price of the property or service to be acquired;

(2) the amounts, if any, to be credited as down payment and/or trade-in;

(3) the difference between the amounts set forth under clauses (1) and (2);

(4) the charges, individually itemized, which are paid or to be paid by such
person in connection with the transaction but which are not incident to the
extension of credit;

(5) the total amount to be financed;

 ** - prevailing market rate

PAYMENT FUNCTION – BANK DEBIT SYSTEM – REMITTANCE SERVICE The amount of returned and dishonored checks, together with interest,
penalty and other charges, shall be debited from any of our accounts with
G.R. No. 173207             February 14, 2008 any of [the bank’s] branches, and if the credit balance thereof is insufficient,
we undertake to pay [the bank] the deficiency immediately. 4 (Underscoring
supplied)
PHILIPPINE COMMERCIAL AND INTERNATIONAL BANK (now BANCO DE
ORO–EPCI, INC.), petitioner,
vs. And they authorized the PCIB-Greenhills
DENNIS CUSTODIO, WILFREDO D. GLIANE, and ROLANDO
FRANCISCO, respondents. x x x at [its] option and without notice, to set-off or apply to the payment of
any dishonored/returned check, interest, penalty and other charges, any
DECISION and all monies which may be in [its] hands on deposit or otherwise
belonging to us.5 (Underscoring supplied)
CARPIO MORALES, J.:
Francisco deposited four dollar checks totaling US$651,000 in his joint account with
Erlinda at the PCIB-Greenhills. The checks were cleared and paid by Chase
At the time material to the present case, respondent Dennis Custodio (Custodio) had
Manhattan Bank, but they were subsequently dishonored for insufficient
a door-to-door dollar remittance business. Respondent Wilfredo D. Gliane (Gliane) funds.6 Chase Manhattan Bank thus debited the amount of the dishonored checks
was one of his agents in Saudi Arabia.
from the account of PCIB-Greenhills which it maintained with it.7

As agent of Custodio, Gliane collected dollars from overseas workers in Saudi Arabia Having received notice of the debiting by Chase Manhattan Bank of US$651,000 from
to be remitted to their beneficiaries in the Philippines.
its account, PCIB-Greenhills debited US$85,000 from Francisco and Erlinda’s joint
account as partial payment of the US$651,000 dishonored checks.8
In their transactions, Custodio and Gliane availed of the services of the Express
Padala desk of petitioner Philippine Commercial and International Bank (PCIB), now
In the meantime or on May 17, 1998, Gliane remitted US$42,300 to the above-said
Banco de Oro-EPCI, Inc.,1 at its affiliate bank, the Al Rahji Bank in Saudi Arabia. The joint account of Francisco at the PCIB-Greenhills. Before that, however, Francisco
procedure they adopted in remitting dollars was to course them through regular
himself had asked Custodio to desist from remitting dollars to him from Saudi Arabia
clients of PCIB who, having established a good relationship with the bank, enjoyed because PCIB-Greenhills had imposed a higher exchange rate on him (Francisco).
special foreign exchange rates with it. One of those clients was respondent Rolando
Francisco (Francisco) who maintained joint accounts, including those with his wife
and Erlinda Chua (Erlinda). Having gotten wind of Gliane’s remittance of dollars to the joint account of Francisco,
Custodio instructed Gliane to request, as the latter did, for the amendment of the
designated beneficiary from Francisco to Belarmino Cortez and/or Rhodora Cruz
On March 12, 1997, Francisco and his wife, 2 purportedly on behalf of ROL-ED Traders who maintained a joint account in PCIB-Greenhills. PCIB’s affiliate bank in Saudi
Group Corporation (ROL-ED), a company said to be owned and controlled by
Arabia transmitted the request to PCIB-Ermita, Manila which in turn transmitted it to
Francisco, entered into a Foreign Bills Purchase Line Agreement (FBPLA) 3 in the PCIB-Greenhills.
amount of P70 Million Pesos with the PCIB-Greenhills bank which would purchase
checks and demand drafts, among other things, drawn on "U.S. Bank," the proceeds
of which would be advanced to Francisco by the bank without going through the At the time the request for change of beneficiary was received, however, PCIB-
regular 23-day clearing period. Under the FBPLA, the spouses made the following Greenhills had set off the US$42,300 remitted by Gliane against Francisco’s remaining
undertaking: balance of his obligation under the FBPLA (US$651,000 minus the US$85,000 earlier
debited or US$566,000).
If a check is returned/dishonored for any reason whatsoever, we shall
immediately, without need of demand, pay [the bank]  the amount of the The Area Manager for PCIB-Chinese Banking Group, Marilyn Tan (Marilyn), to
check, together with the interest at the rate of ** percent (%) per annum x x x whom Custodio attributed the instruction to set-off the US$42,300 remittance against
and penalty at the rate of twelve percent (12%) per annum, computed from Francisco’s obligation to PCIB-Greenhills, explained to Custodio that the amendment
the date of purchase of the check to the date of full payment. was no longer feasible as the US$42,300 remitted by Gliane had already been applied
as partial payment of his (Francisco’s) outstanding obligation with PCIB-Greenhills.
She thus advised Custodio to take the matter up with Francisco as she did not know Defendant FRANCISCO cannot be held liable under the transaction in
of any arrangement between him and Francisco. question considering that it was found out in the decision itself that there
was no finding of fault or negligence on the part of FRANCISCO. (see
Custodio and Gliane thereafter filed on July 1, 1998 a complaint against PCIB, decision p. 8.)20
Marilyn and Francisco, for specific performance and damages before the Regional
Trial Court (RTC) of Makati, to recover the US$42,300, damages and attorney’s It cannot also be said that FRANCISCO benefited from the said act of
fees.9 They alleged that PCIB failed to perform its obligation to deliver the sum of PCIBank because, according to the findings of this Honorable Court,
money they remitted through it to their beneficiaries,10 and that Francisco wrongfully the payment of the obligation of the defendant FRANCISCO out of US
appropriated or consented to the appropriation  of the aforesaid remittance as $4[2],300.00 is void. And if such application of payment by PCIBank is
payment of his loan account with the bank.11 void, no valid payment was made. Therefore, FRANCISCO was never
benefited from the invalid and void payment. The decision further state[s]:
PCIB and Marilyn filed their Answer12 with Cross-claim against Francisco. Francisco "There being no objection as to the beneficiary of the US $42,300.00 which
did file his Answer with Compulsory Counterclaim 13 beyond the reglementary period was erroneously credited to the account of defendant FRANCISCO who was
but the trial court admitted it in the interest of substantial justice.14 unauthorized to receive the same, no valid payment was made and the
defendant PCIB as debtor was not released from its obligation to return the
equivalent amount. (see decision p. 7.) 21 (Emphasis in the original;
Francisco and his counsel did not participate in the pre-trial 15 and in the trial on the
underscoring supplied)
merits. He was thereupon deemed to have waived his right to present evidence. 16

Custodio and Gliane filed a Motion for Partial Reconsideration 22 of the trial court’s
By Decision of January 30, 2002, Branch 134 of the Makati RTC, finding that PCIB was
decision, praying for an additional monetary award of legal interest "on the amount
negligent and that Francisco, albeit not negligent, may not be unjustly enriched, of US$42,3000 from May 17, 1998 up to the date PCIB, Inc. actually settles the same,
found them jointly and severally liable to pay Custodio and Gliane damages,
and reasonable amount in the award of damages and attorney’s fees."23
attorney’s fees and costs. Thus the decision disposed:

By Order of April 26, 2002, the trial court granted the respective motions for
WHEREFORE, premises considered, judgment is hereby rendered in favor
reconsideration of Francisco and of Custodio and Gliane, disposing as follows:
of the plaintiffs and against defendants PCIB and Francisco.
Defendants PCIB and Francisco are hereby directed to pay the
plaintiffs, jointly and severally, as follows: WHEREFORE, modified as indicated above, the dispositive portion of this
Court’s Decision dated January 30, 2002 should be read as follows:
1. US$42,300.00 as actual damages;
"WHEREFORE, premises considered, judgment is hereby
rendered in favor of the plaintiffs and against defendants PCIB
2. P50,000.00 as exemplary damages; and Francisco, as follows:

3. P30,000.00 as attorney’s fees;

1) Defendant PCIB is hereby directed to pay the
plaintiffs the amount of US$ 42,300.00 plus 12% interest
4. cost of suit. per annum from May 29, 1988 as actual damages with the
right of reimbursement of the amount of US$42,300.00
Defendants’ counterclaim is dismissed. against defendant Francisco; and

SO ORDERED.17 (Emphasis and underscoring supplied) 2) Defendant PCIB is likewise adjudged to pay plaintiffs
further sums of:
PCIB at once filed a Notice of Appeal.18
a) Php 50,000.00 as exemplary damages;
Francisco surfaced and filed a Motion for Reconsideration,  raising the following
19

arguments why he could not be held solidarily liable with PCIB: b) Php 30,000.00 as attorney’s fees;
 c) Cost of suit. The award of attorney’s fees and costs of suit likewise finds no factual and
legal support. x x x30 (Emphasis and underscoring supplied)
Defendants’ counterclaim is dismissed.
Thus the appellate court disposed in its August 11, 2004 Decision:
SO ORDERED."
WHEREFORE, the appealed judgment is hereby REVERSED and SET
SO ORDERED.24 (Emphasis in the original; italics and underscoring ASIDE. A new one is entered ordering defendant Rolando Francisco to pay
supplied) the plaintiffs-appellees Dennis Custodio and Alfredo Gliane the sum of
US$42,300.00 or its peso equivalent at the time of payment with legal interest
at 6% per annum from finality of this Decision until its
It bears noting that while the trial court, in the above-quoted dispositive portion of satisfaction.31 (Underscoring supplied)
the order modifying its original decision, held PCIB solely liable to pay US$42,300 to
Custodio and Gliane, it decreed that PCIB had the right of reimbursement  of the
amount from Francisco. Francisco filed a Motion for Reconsideration 32 of the appellate court’s decision in
which he, for the first time on appeal, claimed that it was ROL-ED which entered into
the FBPLA with PCIB-Greenhills:
PCIB filed a Notice of Appeal Ad Cautelam,25 indicating therein that it was likewise
appealing the trial court’s April 26, 2002 Order modifying its original decision.
A close examination of the FBLA xxx shows that the said agreement is one
between ROL-ED Traders Group Corporation (ROL-ED) and the
The Court of Appeals, by Decision 26 of August 11, 2004, granted the appeal of PCIB bank and not with Francisco. This is also true in the other agreements
and accordingly reversed the trial court’s April 26, 2002 Order-modified decision. It
presented by the bank as its evidence. As such, defendant Francisco is not a
freed PCIB of any liability and held Francisco solely liable to Custodio and Gliane. party to these agreements. They cannot be used against him. He has a
And it deleted the award of exemplary damages, attorney’s fees and costs. In so
separate and distinct personality from that of ROL-ED. Consequently, the
deciding, the trial court ruled: funds of the appellees could not be applied to Francisco[‘s] debt on the basis
of the Foreign Bills Purchase Line Agreement because the latter is not a
The record belies [the] finding of negligence on the part of appellant bank. party thereto.
Defendant Francisco and appellees are privy to an agreement whereby
appellee’s dollar remittance shall be coursed through Francisco’s account to
True, it was defendant Francisco who signed for the corporation as its
obtain higher exchange rates. In his testimony before the trial Court, signatory but his participation therein is only in a representative
appellee Custodio admitted using defendant Francisco as a pretend-
capacity and binds only the corporation and not his own private affairs such
beneficiary to enjoy higher exchange rates on his remittances. 27 as a conduit of appellees’ funds. The funds were originally directed to
"Rolando Francisco" not to "ROL-ED TRADERS GROUP
xxxx CORPORATION."33 (Emphasis and underscoring supplied);

x x x Defendant Francisco was unjustly enriched when the US$42,300.00 In the same motion, Francisco argued that no evidence was presented to prove that
remittance was credited in his favor by appellant bank. The obligation to the bank indeed credited the amount of US$42,300 to his bank account and applied it
restitute the said amount clearly falls on him.28 x x x against his obligation.34

xxxx Custodio and Gliane filed too a Motion for Reconsideration, 35 arguing that

Anent the imposition of exemplary damages, We find the award to be sorely I. THE DEBTOR-CREDITOR RELATIONSHIP BETWEEN THE BANK AND
lacking in basis. There is no showing that appellant PCIB or defendant HEREIN PLAINTIFFS-APPELLEES EMANATE[S] NOT ONLY FROM THE
Francisco acted in a wanton, fraudulent, reckless, oppressive or malevolent AMENDMENT REQUEST BUT ALSO FROM THE BANK’S
manner. Neither is there any showing of bad faith. x x x29 UNDERTAKING UNDER THE "EXPRESS PADALA" SCHEME.

xxxx II. PLAINTIFF-APPELLEES SHOULD STILL BE CONSIDERED THE

OWNER OF THE FUNDS IN THE LIGHT OF THE AMENDMENT
REQUEST.36
Custodio and Gliane later filed a Supplemental Motion for held liable to reimburse PCIBank and [Marilyn] for whatever amounts they may be
Reconsideration37 questioning the appellate court’s reduction of the interest and required to pay the plaintiffs." The trial court did not, however, order Francisco to
deletion of the award of exemplary damages, attorney’s fees, and costs. reimburse PCIB. It merely stated that PCIB had the right of reimbursement from
Francisco.
Crediting Francisco’s argument that it was ROL-ED, which he merely represented,
that entered into the FBPLA with PCIB, the appellate court, by AMENDED Parenthetically, the Court of Appeals erred in considering Francisco’s belated
DECISION38 of October 25, 2005, set aside its earlier decision and  reinstated the trial invocation of his separate personality from ROL-ED to justify his freedom from
court’s January 30, 2002 decision, as amended by its Order dated April 26, 2002. liability.

PCIB filed a Motion for Reconsideration 39 which the Court of Appeals As earlier noted, Francisco raised this argument for the first time in his motion for
denied. 40 Hence, its present Petition for Review 41 on Certiorari, contending that the reconsideration of the appellate court’s original Decision. Points of law, theories,
Court of Appeals erred issues and arguments not adequately brought to the attention of the trial
court ordinarily will not be considered by a reviewing court as they cannot be raised
A. x x x in issuing an Amended Decision without any Motion for for the first time on appeal because this would be offensive to the basic rules of fair
Reconsideration to prompt it; play, justice, and due process. 47 It would be unfair to the adverse party who would
have no opportunity to present further evidence material to the new theory which it
could have done had it been aware of it at the time of the hearing before the trial
B. x x x in taking into consideration new matters which were not put to fore
court.48
before the lower court and in lending credence to  Francisco’s bare assertions
that he and ROL-ED are not one and the same[;]
Furthermore, in his Answer with Compulsory Counterclaim, Francisco claimed that
"[h]e never instructed nor authorized the defendant bank to apply the U.S. dollar
C. x x x in ruling that [E]PCIB was negligent in carrying out its obligations remittances to pay his loan obligation with the said bank"49 (emphasis and
under the Express Padala facility;
underscoring supplied). He echoed this claim in his Motion for Reconsideration that
he filed also before the trial court, viz:
D. x x x in not ruling that PCIB compensation took place between [E]PCIB
and Francisco;
A close and serious reading of the aforesaid decision will clearly show that
there is absolutely no evidence that FRANCISCO directed nor authorized
E. x x x in disregarding that the root cause of this case was the deceitful PCIBank to apply the US $42,300.00  remitted by the plaintiffs through
scheme hatched by Gliane, Custodio, and Francisco against PCIBank to his own loan account with PCIBank.
[E]PCIB.42 (Emphasis and underscoring supplied)
xxxx
To PCIB, it was error for the appellate court to entertain Francisco’s motion for
reconsideration of its original decision, he not having appealed the modified decision It cannot also be said that FRANCISCO benefited from the said act of
of the trial court, hence, the same had, to him, become final.
PCIBank because, according to the findings of this Honorable Court,
the payment of the obligation of the defendant FRANCISCO  out of US $
While a party who has not appealed cannot obtain from the appellate court any 4[2],300.00 is void. x x x50 (Emphasis in the original; underscoring supplied)
affirmative relief other than the ones granted in the appealed decision, 43 an appellee,
like Francisco in the appellate court level, can advance any argument that he may Francisco thus virtually admitted in these two cited pleadings that the loan to which
deem necessary to defeat the appellant’s claim or to uphold the decision that is being
the US$42,300 remittance was applied was his. As the object of pleadings is to draw
disputed.44 It bears recalling at this juncture that while the modified decision of the the lines of battle, so to speak, between the litigants and to indicate fairly the nature
trial court held PCIB solely liable to Custodio and Gliane, it went on to hold that PCIB
of the claims or defenses of both parties, a party cannot subsequently take a position
had the "right of reimbursement of the amount of US$42,300.00 against defendant contrary to, or inconsistent, with his pleadings. 51 Unless a party alleges palpable
Francisco."45
mistake or denies such admission, judicial admissions cannot be controverted. 52

No doubt, PCIB prayed in its Cross-Claim46 against Francisco that, among other Therefore, as the US$42,300 remittance was applied to, by his own admission,
things, "[i]n the unlikely event that PCIB and [Marilyn] are adjudged liable for the
Francisco’s loan, the set-off was valid.
claims of the plaintiff[s], the other defendant herein, Rolando Francisco, should be
Parenthetically too, while Francisco claims that the loan in question was that of ROL- transfers are always noted with the word "PRIORITY".59 (Capitalization and
ED and not his, he, as earlier stated, deposited the US$651,000 checks in his joint emphasis in the original; underscoring supplied)
account with Erlinda and not in the account of ROL-ED.53
WHEREFORE, the petition is GRANTED. The Amended Decision of the Court of
At all events, while a corporation is clothed with a personality separate and distinct Appeals dated October 25, 2005 is REVERSED and SET ASIDE, and its August 11,
from the persons composing it, the veil of separate corporate personality may be 2004 Decision REINSTATED.
lifted when it is used as a shield to confuse legitimate issues, or where lifting the veil
is necessary to achieve equity or for the protection of the creditors. 54 In the case at bar, SO ORDERED.
there can be no mistake that Francisco belatedly invoked the separate identity of
ROL-ED to evade his liability to PCIB.

On the failure of PCIB to comply with Gliane’s request for amendment of beneficiary,
Gliane and Custodio failed to prove that the request for amendment was
communicated to PCIB within reasonable time. The testimonies 55 of Marilyn and
Allen Alcantara (Alcantara), the PCIB Remittance Officer for the Middle East, that
PCIB received the amendatory request after the set-off was not refuted. Thus,
Alcantara explained that PCIB-Greenhills received the amendatory request on May
19, 1998, local time, after the said request underwent authentication procedures.

The entry reflecting the debiting of the US$85,000 against Francisco’s account with
PCIB-Greenhills is dated May 19, 1998, 4:45 P.M, local time. 56 Gliane and Custodio
argue that "it is of standard operating policy of any banking institutions that the
regular "holding period" of money transfers is more or less three (3) days." 57 They
failed to prove, however, that PCIB had that policy, or that the contract under
the Express Padala service of PCIB provided for a three-day holding period.
Furthermore, PCIB could not be faulted for the dispatch with which it credited the
US$42,300 to Francisco’s account. As it argued:

Equitable agrees with [the Court of Appeals] that the services offered by a
banking institution are imbued with public interest. It is precisely with this
principle in mind that Equitable effected the transfer of funds the quickest
time practicable. Equitable is mindful of the fact that any delay in the
remittance of money could be disastrous for the beneficiaries interest.

It is unfortunate for the plaintiffs-appellees, however, that their beneficiary –

and by May 19, 1998, after the transfer had been effected, the rightful
owner of the amounts remitted – had several outstanding obligations with
Equitable. Obligations which Equitable, as Francisco’s creditor, had the right
to seek payment for.58 (Emphasis and underscoring supplied)

Gliane and Custodio themselves admit that time was of the essence in PCIB’s
discharge of its obligation under its Express Padala service:

x x x [W]hen petitioner’s personnel in Saudi Arabia [marketed] and [e]nticed

respondents Custodio and Gliane to course their money remittances through
petitioner bank, they fully assured respondents of a special privilege, one of
which is the speed of transfer and as a matter of fact respondents’ money
PAYMENT FUNCTION – BANK DEBIT SYSTEM – LETTERS OF CREDIT Certificates have been sent to applicant by air courier service latest two days after
shipment date. 4
G.R. No. 183486
The Letter of Credit was amended twice to reflect changes in the terms of delivery.
THE HONGKONG & SHANGHAI BANKING CORPORATION, On November 2, 1993, the Letter of Credit was first amended to change the delivery
LIMITED, Petitioner, terms from FOB ST Iligan to FOB ST Manila and to increase the amount to
vs. US$488,400.5 It was subsequently amended on November 18, 1993 to extend the
NATIONAL STEEL CORPORATION and CITYTRUST BANKING expiry and shipment date to December 8, 1993. 6 On November 21, 1993, NSC,
CORPORATION (NOW BANK OF THE PHILIPPINE ISLANDS), Respondents. through Emerald Forwarding Corporation, loaded and shipped the cargo of prime
cold rolled coils on board MV Sea Dragon under China Ocean Shipping Company
Bill of Lading No. HKG 266001. The cargo arrived in Hongkong on November 25,
DECISION 1993.7

JARDELEZA, J.:
NSC coursed the collection of its payment from Klockner through CityTrust Banking
Corporation (CityTrust). NSC had earlier obtained a loan from CityTrust secured by
This is a petition for review on certiorari under Rule 45 of the Rules of Court. the proceeds of the Letter of Credit issued by HSBC.8
Petitioner The Hongkong & Shanghai Banking Corporation, Limited (HSBC) filed this
petition to assail the Decision of the Court of Appeals (CA) dated November 19, 2007 On November 29, 1993, CityTrust sent a collection order (Collection Order) to HSBC
(Assailed Decision) which reversed the ruling of the Regional Trial Court, Branch 62
respecting the collection of payment from Klockner. The Collection Order instructed
of Makati City (RTC Makati) and its Resolution denying HSBC's Motion for as follows: (1) deliver documents against payment; (2) cable advice of non-payment
Reconsideration dated June 23, 2008 (Assailed Resolution).
with reason; (3) cable advice payment; and (4) remit proceeds via TELEX. 9 The
Collection Order also contained the following statement: "Subject to Uniform Rules
The Facts for the Collection of Commercial Paper Publication No. 322." 10 Further, the Collection
Order stated that proceeds should be remitted to Standard Chartered Bank of
Respondent National Steel Corporation (NSC) entered into an Export Sales Contract Australia, Ltd., Offshore Branch Manila (SCB-M) which was, in turn, in charge of
(the Contract) with Klockner East Asia Limited (Klockner) on October 12, 1993. 1 NSC remitting the amount to CityTrust. 11 On the same date, CityTrust also presented to
sold 1,200 metric tons of prime cold rolled coils to Klockner under FOB ST Iligan HSBC the following documents: (1) Letter of Credit; (2) Bill of Lading; (3) Commercial
terms. In accordance with the requirements in the Contract, Klockner applied for an Invoice; ( 4) Packing List; (5) Mill Test Certificate; (6) NSC's TELEX to Klockner on
irrevocable letter of credit with HSBC in favor of NSC as the beneficiary in the shipping details; (7) Beneficiary's Certificate of facsimile transmittal of documents; (8)
amount of US$468,000. On October 22, 1993, HSBC issued an irrevocable and onsight Beneficiary's Certificate of air courier transmittal of documents; and (9) DHL Receipt
letter of credit no. HKH 239409 (the Letter of Credit) in favor of NSC. 2 The Letter of No. 669988911 and Certificate of Origin. 12
Credit stated that it is governed by the International Chamber of Commerce Uniform
Customs and Practice for Documentary Credits, Publication No. 400 (UCP 400). On December 2, 1993, HSBC sent a cablegram to CityTrust acknowledging receipt of
Under UCP 400, HSBC as the issuing bank, has the obligation to immediately pay the Collection Order. It also stated that the documents will be presented to "the
NSC upon presentment of the documents listed in the Letter of Credit.3 These drawee against payment subject to UCP 322 [Uniform Rules for Collection (URC) 322]
documents are: (1) one original commercial invoice; (2) one packing list; (3) one non- as instructed ... " 13 SCB-M then sent a cablegram to HSBC requesting the latter to
negotiable copy of clean on board ocean bill of lading made out to order, blank urgently remit the proceeds to its account. It further asked that HSBC inform it "if
endorsed marked 'freight collect and notify applicant;' (4) copy of Mill Test Certificate unable to pay" 14 and of the "reasons thereof." 15 Neither CityTrust nor SCB-M objected
made out 'to whom it may concern;' (5) copy of beneficiary's telex to applicant (Telex to HSBC's statement that the collection will be handled under the Uniform Rules for
No. 86660 Klock HX) advising shipment details including DIC No., shipping marks, Collection (URC 322).
name of vessel, port of shipment, port of destination, bill of lading date, sailing and
ETA dates, description of goods, size, weight, number of packages and value of On December 7, 1993, HSBC responded to SCB-M and sent a cablegram where it
goods latest two days after shipment date; and (6) beneficiary's certificate certifying
repeated that "this bill is being handled subject to [URC] 322 as instructed by [the]
that (a) one set of non-negotiable copies of documents (being those listed above) have collecting bank." 16 It also informed SCB-M that it has referred the matter to Klockner
been faxed to applicant (FAX No. 5294987) latest two days after shipment date; and
for payment and that it will revert upon the receipt of the amount. 17 On December 8,
(b) one set of documents including one copy each of invoice and packing list, 3/3 1993, the Letter of Credit expired.18
original bills of lading plus one non-negotiable copy and three original Mill Test
On December 10, 1993, HSBC sent another cablegram to SCB-M advising it that in all of its correspondence with HSBC, that "re your previous telexes, ICC
Klockner had refused payment. It then informed SCB-M that it intends to return the Publication No. 322 is not applicable." 34 HSBC responded in cablegram dated
documents to NSC with all the banking charges for its account. 19 In a cablegram February 28, 1994.35 It insisted that CityTrust sent documents which clearly stated that
dated December 14, 1993, CityTrust requested HSBC to inform it of Klockner's reason the collection was being made under URC 322. Thus, in accordance with its
for refusing payment so that it may refer the matter to NSC.20 HSBC did not respond instructions, HSBC, in the next three months, demanded payment from Klockner
and CityTrust thus sent a follow-up cablegram to HSBC on December 17, 1993. In this which the latter eventually refused. Hence, HSBC stated that it opted to return the
cablegram, CityTrust insisted that a demand for payment must be made from documents. It then informed CityTrust that it considered the transaction closed save
Klockner since the documents "were found in compliance with LC terms and for the latter's obligation to pay the handling charges.36
conditions."21 HSBC replied on the same day stating that in accordance with
CityTrust's instruction in its Collection Order, HSBC treated the transaction as a Disagreeing with HSBC' s position, CityTrust sent a cablegram dated March 9,
matter under URC 322. Thus, it demanded payment from Klockner which 1994.37 It insisted that HSBC should pay it in accordance with the terms of the Letter
unfortunately refused payment for unspecified reasons. It then noted that under URC of Credit which it issued on October 22, 1993. Under the Letter of Credit, HSBC
322, Klockner has no duty to provide a reason for the refusal. Hence, HSBC requested undertook to reimburse the presenting bank under "ICC 400 upon the presentment of
for further instructions as to whether it should continue to press for payment or all necessary documents."38 CityTrust also stated that the reference to URC 322 in its
return the documents.22 CityTrust responded that as advised by its client, HSBC Collection Order was merely in fine print. The Collection Order itself was only pro-
should continue to press for payment.23 forma. CityTrust emphasized that the reference to URC 322 has been "obviously
superseded by our specific instructions to 'deliver documents against payment/cable
Klockner continued to refuse payment and HSBC notified CityTrust in a cablegram advice non-payment with reason/cable advice payment/remit proceeds via telex'
dated January 7, 1994, that should Klockner still refuse to accept the bill by January which was typed in on said form." 39 CityTrust also claimed that the controlling
12, 1994, it will return the full set of documents to CityTrust with all the charges for document is the Letter of Credit and not the mere fine print on the Collection
the account of the drawer. 24 Order.40 HSBC replied on March 10, 1994.41 It argued that CityTrust clearly instructed
it to collect payment under URC 322, thus, CityTrust can no longer claim a contrary
Meanwhile, on January 12, 1994, CityTrust sent a letter to NSC stating that it executed position three months after it made its request. HSBC repeated that the transaction is
NSC's instructions "to send, ON COLLECTION BASIS, the export documents ... closed except for CityTrust's obligation to pay for the expenses which HSBC
"25 CityTrust also explained that its act of sending the export documents on collection incurred.42
basis has been its usual practice in response to NSC's instructions in its transactions. 26
Meanwhile, on March 3, 1994, NSC sent a letter to HSBC where it, for the first time,
NSC responded to this in a letter dated January 18, 1994. 27 NSC expressed its demanded payment under the Letter of Credit. 43 On March 11, 1994, the NSC sent
disagreement with CityTrust's contention that it sent the export documents to HSBC another letter to HSBC through the Office of the Corporate Counsel which served as
on collection basis. It highlighted that it "negotiated with CityTrust the export its final demand. These demands were made after approximately four months from
documents pertaining to LC No. HKH 239409 of HSBC and it was CityTrust, which the expiration of the Letter of Credit.
wrongfully treated the negotiation, as 'on collection basis."' 28 NSC further claimed
that CityTrust used its own mistake as an excuse against payment under the Letter of Unable to collect from HSBC, NSC filed a complaint against it for collection of sum of
Credit. Thus, NSC argued that CityTrust remains liable under the Letter of Credit. It money (Complaint)44 docketed as Civil Case No. 94-2122 (Collection Case) of the RTC
also stated that it presumes that CityTrust has preserved whatever right of Makati. In its Complaint, NSC alleged that it coursed the collection of the Letter of
reimbursement it may have against HSBC. 29 Credit through CityTrust. However, notwithstanding CityTrust's complete
presentation of the documents in accordance with the requirements in the Letter of
On January 13, 1994, CityTrust notified HSBC that it should continue to press for Credit, HSBC unreasonably refused to pay its obligation in the amount of
payment and to hold on to the document until further notice. 30 US$485,767.93.45

However, Klockner persisted in its refusal to pay. Thus, on February 17, 1994, HSBC HSBC filed its Answer46 on January 6, 1995. HSBC denied any liability under the
returned the documents to CityTrust. 31 In a letter accompanying the returned Letter of Credit. It argued in its Answer that CityTrust modified the obligation when
documents, HSBC stated that it considered itself discharged of its duty under the it stated in its Collection Order that the transaction is subject to URC 322 and not
transaction. It also asked for payment of handling charges. 32 In response, CityTrust under UCP 400.47 It also filed a Motion to Admit Attached Third-Party
sent a cablegram to HSBC dated February 21, 1994 stating that it is "no longer Complaint48 against CityTrust on November 21, 1995. 49 It claimed that CityTrust
possible for beneficiary to wait for you to get paid by applicant." 33 It explained that instructed it to collect payment under URC 322 and never raised that it intended to
since the documents required under the Letter of Credit have been properly sent to collect under the Letter of Credit.50 HSBC prayed that in the event that the court finds
HSBC, Citytrust demanded payment from it. CityTrust also stated, for the first time it liable to NSC, CityTrust should be subrogated in its place and be made directly
liable to NSC.51 The RTC Makati granted the motion and admitted the third party per annum from the filing of the complaint until the amount is fully paid, plus
complaint. CityTrust filed its Answer 52 on January 8, 1996. CityTrust denied that it attorney's fees equivalent to 10% of the principal. Costs against appellee HSBC.
modified the obligation. It argued that as a mere agent, it cannot modify the terms of
the Letter of Credit without the consent of all the parties. 53 Further, it explained that SO ORDERED.59
the supposed instruction that the transaction is subject to URC 322 was merely in fine
print in a pro forma document and was superimposed and pasted over by a large
HSBC filed a Motion for Reconsideration of the Assailed Decision which the CA
pink sticker with different remittance instructions. 54
denied in its Assailed Resolution dated June 23, 2008.60

After a full-blown trial,55 the RTC Makati rendered a decision (RTC Decision) dated
Hence, HSBC filed this Petition for Review on Certiorari61 before this Court, seeking a
February 23, 2000.56 It found that HSBC is not liable to pay NSC the amount stated in
reversal of the CA' s Assailed Decision and Resolution. In its petition, HSBC contends
the Letter of Credit. It ruled that the applicable law is URC 322 as it was the law
that CityTrust's order to collect under URC 322 did not modify nor contradict the
which CityTrust intended to apply to the transaction. Under URC 322, HSBC has no
Letter of Credit. In fact, it is customary practice in commercial transactions for entities
liability to pay when Klockner refused payment. The dispositive portion states -
to collect under URC 322 even if there is an underlying letter of credit. Further,
CityTrust acted as an agent of NSC in collecting payment and as such, it had the
WHEREFORE, premises considered, judgment is hereby rendered as follows: authority to instruct HSBC to proceed under URC 322 and not under UCP 400.
Having clearly and expressly instructed HSBC to collect under URC 322 and having
1. Plaintiffs Complaint against HSBC is DISMISSED; and, HSBC's Counterclaims fully intended the transaction to proceed under such rule as shown by the series of
against NSC are DENIED. correspondence between CityTrust and HSBC, CityTrust is estopped from now
claiming that the collection was made under UCP 400 in accordance with the Letter of
2. Ordering Third-Party Defendant CityTrust to pay Third-Party Plaintiff HSBC the Credit.
following:
NSC, on the other hand, claims that HSBC's obligation to pay is clear from the terms
2.1 US$771.21 as actual and consequential damages; and of the Letter of Credit and under UCP 400. It asserts that the applicable rule is UCP
400 and HSBC has no basis to argue that CityTrust's presentment of the documents
allowed HSBC to vary the terms of their agreement. 62
2.2 Pl00,000 as attorney's fees.

The Issues
3. No pronouncement as to costs.

The central question in this case is who among the parties bears the liability to pay
SO ORDERED.57
the amount stated in the Letter of Credit. This requires a determination of which
between UCP 400 and URC 322 governs the transaction. The obligations of the parties
NSC and CityTrust appealed the RTC Decision before the CA. In its Assailed under the proper applicable rule will, in turn, determine their liability.
Decision dated November 19, 2007,58 the CA reversed the RTC Makati. The CA found
that it is UCP 400 and not URC 322 which governs the transaction. According to the The Ruling of the Court
CA, the terms of the Letter of Credit clearly stated that UCP 400 shall apply. Further,
the CA explained that even if the Letter of Credit did not state that UCP 400 governs,
it nevertheless finds application as this Court has consistently recognized it under We uphold the CA.
Philippine jurisdiction. Thus, applying UCP 400 and principles concerning letters of
credit, the CA explained that the obligation of the issuing bank is to pay the seller or The nature of a letter of credit
beneficiary of the credit once the draft and the required documents are properly
presented. Under the independence principle, the issuing bank's obligation to pay A letter of credit is a commercial instrument developed to address the unique needs
under the letter of credit is separate from the compliance of the parties in the main of certain commercial transactions. It is recognized in our jurisdiction and is
contract. The dispositive portion held - sanctioned under Article 56763 of the Code of Commerce and in numerous
jurisprudence defining a letter of credit, the principles relating to it, and the
WHEREFORE, in view of the foregoing, the assailed decision is hereby REVERSED obligations of parties arising from it.
and SET ASIDE. HSBC is ordered to pay its obligation under the irrevocable letter of
credit in the amount of US$485,767.93 to NSC with legal interest of six percent (6%)
In Bank of America, NT & SA v. Court of Appeals, 64  this Court defined a letter of credit First, letters of credit, as will be further explained, are governed by recognized
as " ... a financial device developed by merchants as a convenient and relatively safe international norms which dictate strict compliance with its terms. Second, the
mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of issuing bank has an existing agreement with the buyer to pay the seller upon proper
a seller, who refuses to part with his goods before he is paid, and a buyer, who wants presentation of documents. Thus, as the law on obligations applies even in
to have control of the goods before paying." 65 Through a letter of credit, a buyer commercial documents, 75 the issuing bank has a duty to the buyer to honor in good
obtains the credit of a third party, usually a bank, to provide assurance of payment. 66 faith its obligation under their agreement. As will be seen in the succeeding
discussion, this transaction is also governed by international customs which this
This, in turn, convinces a seller to part with his or her goods even before he or she is Court has recognized in this jurisdiction. 76
paid, as he or she is insured by the third party that he or she will be paid as soon as
he or she presents the documents agreed upon. 67 In simpler terms, the various transactions that give rise to a letter of credit proceed as
follows: Once the seller ships the goods, he or she obtains the documents required
A letter of credit generally arises out of a separate contract requiring the assurance of under the letter of credit. He or she shall then present these documents to the issuing
payment of a third party. In a transaction involving a letter of credit, there are usually bank which must then pay the amount identified under the letter of credit after it
three transactions and three parties. The first transaction, which constitutes the ascertains that the documents are complete. The issuing bank then holds on to these
underlying transaction in a letter of credit, is a contract of sale between the buyer and documents which the buyer needs in order to claim the goods shipped. The buyer
the seller. The contract may require that the buyer obtain a letter of credit from a third reimburses the issuing bank for its payment at which point the issuing bank releases
party acceptable to the seller. The obligations of the parties under this contract are the documents to the buyer. The buyer is then able to present these documents in
governed by our law on sales. order to claim the goods. At this point, all the transactions are completed. The seller
received payment for his or her performance of his obligation to deliver the goods.
The issuing bank is reimbursed for the payment it made to the seller. The buyer
The second transaction is the issuance of a letter of credit between the buyer and the
received the goods purchased.
issuing bank. The buyer requests the issuing bank to issue a letter of credit naming
the seller as the beneficiary. In this transaction, the issuing bank undertakes to pay
the seller upon presentation of the documents identified in the letter of credit. The Owing to the complexity of these contracts, there may be a correspondent bank which
buyer, on the other hand, obliges himself or herself to reimburse the issuing bank for facilitates the ease of completing the transactions. A correspondent bank may be a
the payment made. In addition, this transaction may also include a fee for the issuing notifying bank, a negotiating bank or a confirming bank depending on the nature of
bank's services. 68 This transaction constitutes an obligation on the part of the issuing the obligations assumed. 77 A notifying bank undertakes to inform the seller-
bank to perform a service in consideration of the buyer's payment. The obligations of beneficiary that a letter of credit exists. It may also have the duty of transmitting the
the parties and their remedies in cases of breach are governed by the letter of credit letter of credit. As its obligation is limited to this duty, it assumes no liability to pay
itself and by our general law on obligations, as our civil law finds suppletory under the letter of credit. 78 A negotiating bank, on the other hand, purchases drafts at
application in commercial documents. 69 a discount from the seller-beneficiary and presents them to the issuing bank for
payment. 79 Prior to negotiation, a negotiating bank has no obligation. A contractual
relationship between the negotiating bank and the seller-beneficiary arises only after
The third transaction takes place between the seller and the issuing bank. The issuing the negotiating bank purchases or discounts the drafts. 80 Meanwhile, a confirming
bank issues the letter of credit for the benefit of the seller. The seller may agree to ship
bank may honor the letter of credit issued by another bank or confirms that the letter
the goods to the buyer even before actual payment provided that the issuing bank of credit will be honored by the issuing bank. 81 A confirming bank essentially insures
informs him or her that a letter of credit has been issued for his or her benefit. This
that the credit will be paid in accordance with the terms of the letter of credit. 82 It
means that the seller can draw drafts from the issuing bank upon presentation of therefore assumes a direct obligation to the seller-beneficiary. 83
certain documents identified in the letter of credit. The relationship between the
issuing bank and the seller is not strictly contractual since there is no privity of
contract nor meeting of the minds between them. 70 It also does not constitute a Parenthetically, when banks are involved in letters of credit transactions, the standard
stipulation pour autrui  in favor of the seller since the issuing bank must honor the of care imposed on banks engaged in business imbued with public interest applies to
drafts drawn against the letter of credit regardless of any defect in the underlying them. Banks have the duty to act with the highest degree of diligence in dealing with
contract.71 Neither can it be considered as an assignment by the buyer to the seller- clients. 84 Thus, in dealing with the parties in a letter of credit, banks must also
beneficiary as the buyer himself cannot draw on the letter. 72 From its inception, only observe this degree of care.
the seller can demand payment under the letter of credit. It is also not a contract of
suretyship or guaranty since it involves primary liability in the event of The value of letters of credit in commerce hinges on an important aspect of such a
default. 73 Nevertheless, while the relationship between the seller-beneficiary and the commercial transaction. Through a letter of credit, a seller-beneficiary is assured of
issuing bank is not strictly contractual, strict payment under the terms of a letter of payment regardless of the status of the underlying transaction. International contracts
credit is an enforceable right. 74 This enforceable right finds two legal underpinnings. of sales are perfected and consummated because of the certainty that the seller will be
paid thus making him or her willing to part with the goods even prior to actual credit, by laws specifically applicable to them and by UCP 400, our general civil law
receipt of the amount agreed upon. The legally demandable obligation of an issuing finds suppletory app1ication.101
bank to pay under the letter of credit, and the enforceable right of the seller-
beneficiary to demand payment, are indispensable essentials for the system of letters Applying this set of laws and rules, this Court rules that HSBC is liable under the
of credit, if it is to serve its purpose of facilitating commerce. Thus, a touchstone of provisions of the Letter of Credit, in accordance with usage and custom as embodied
any law or custom governing letters of credit is an emphasis on the imperative that in UCP 400, and under the provisions of general civil law.
issuing banks respect their obligation to pay, and that seller-beneficiaries may
reasonably expect payment, in accordance with the terms of a letter of credit.
HSBC 's Liability

Rules applicable to letters of credit

The Letter of Credit categorically stated that it is subject to UCP 400, to wit:

Letters of credit are defined and their incidences regulated by Articles 567 to 572 85 of
Except so far as otherwise expressly stated, this documentary credit is subject to
the Code of Commerce. These provisions must be read with Article 2 86 of the same
uniform Customs and Practice for Documentary Credits (1983 Revision),
code which states that acts of commerce are governed by their provisions, by the
International Chamber of Commerce Publication No. 400.102
usages and customs generally observed in the particular place and, in the absence of
both rules, by civil law. In addition, Article 50 87 also states that commercial contracts
shall be governed by the Code of Commerce and special laws and in their absence, by From the moment that HSBC agreed to the terms of the Letter of Credit - which states
general civil law. that UCP 400 applies - its actions in connection with the transaction automatically
became bound by the rules set in UCP 400. Even assuming that URC 322 is an
international custom that has been recognized in commerce, this does not change the
The International Chamber of Commerce (ICC) 88 drafted a set of rules to govern
fact that HSBC, as the issuing bank of a letter of credit, undertook certain obligations
transactions involving letters of credit. This set of rules is known as the Uniform
dictated by the terms of the Letter of Credit itself and by UCP 400. In  Feati,  this Court
Customs and Practice for Documentary Credits (UCP). Since its first issuance in 1933,
applied UCP 400 even when there is no express stipulation in the letter of credit that
the UCP has seen several revisions, the latest of which was in 2007, known as the
it governs the transaction. 103 On the strength of our ruling in Feati, we have the legal
UCP 600. However, for the period relevant to this case, the prevailing version is the
duty to apply UCP 400 in this case independent of the parties' agreement to be bound
1993 revision called the UCP 400. Throughout the years, the UCP has grown to
by it.
become the worldwide standard in transactions involving letters of credit. 89 It has
enjoyed near universal application with an estimated 95% of worldwide letters of
credit issued subject to the UCP.90 UCP 400 states that an irrevocable credit payable on sight, such as the Letter of Credit
in this case, constitutes a definite undertaking of the issuing bank to pay, provided
that the stipulated documents are presented and that the terms and conditions of the
In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,91 this Court applied a
credit are complied with. 104 Further, UCP 400 provides that an issuing bank has the
provision from the UCP in resolving a case pertaining to a letter of credit transaction.
obligation to examine the documents with reasonable care. 105 Thus, when CityTrust
This Court explained that the use of international custom in our jurisdiction is
forwarded the Letter of Credit with the attached documents to HSBC, it had the duty
justified by Article 2 of the Code of Commerce which provides that acts of commerce
to make a determination of whether its obligation to pay arose by properly examining
are governed by, among others, usages and customs generally observed. Further,
the documents.
in Feati Bank & Trust Company v. Court of Appeals, 92 this Court ruled that the UCP
should be applied in cases where the letter of credit expressly states that it is the
governing rule.93 This Court also held in Feati that the UCP applies even if it is not In its petition, HSBC argues that it is not UCP 400 but URC 322 that should govern
incorporated into the letter of the credit. 94 The application of the UCP in Bank of the transaction. 106 URC 322 is a set of norms compiled by the ICC. 107 It was drafted
Philippine Islands and in Feati  was further affirmed in Metropolitan Waterworks and by international experts and has been adopted by the ICC members. Owing to the
Sewerage System v. Daway95 where this Court held that "[l]etters of credit have long status of the ICC and the international representation of its membership, these rules
been and are still governed by the provisions of the Uniform Customs and Practice have been widely observed by businesses throughout the world. It prescribes the
for Documentary Credit[s] of the International Chamber of Commerce." 96 These collection procedures, technology, and standards for handling collection transactions
precedents highlight the binding nature of the UCP in our jurisdiction. for banks. 108 Under the facts of this case, a bank acting in accordance with the terms
of URC 322 merely facilitates collection. Its duty is to forward the letter of credit and
the required documents from the entity seeking payment to another entity which has
Thus, for the purpose of clarity, letters of credit are governed primarily by their own
the duty to pay. The bank incurs no obligation other than as a collecting agent. This is
provisions, 97 by laws specifically applicable to them, 98 and by usage and
different in the case of an issuing bank acting in accordance with UCP 400. In this
custom. 99 Consistent with our rulings in several cases, 100 usage and custom refers to
case, the issuing bank has the duty to pay the amount stated in the letter of credit
UCP 400. When the particular issues are not covered by the provisions of the letter of
upon due presentment. HSBC claims that while UCP 400 applies to letters of credit, it presented to it and making a judicious inquiry of whether CityTrust, in behalf of
is also common for beneficiaries of such letters to seek collection under URC 322. NSC, made a due presentment of the Letter of Credit.
HSBC further claims that URC 322 is an accepted custom in commerce. 109 HSBC's
argument is without merit. We note that HSBC failed to present evidence to prove Further, as a bank, HSBC has the duty to observe the highest degree of diligence. In
that URC 322 constitutes custom and usage recognized in commerce. Neither was all of its transactions, it must exercise the highest standard of care and must fulfill its
there sufficient evidence to prove that beneficiaries under a letter of credit commonly obligations with utmost fidelity to its clients. Thus, upon receipt of CityTrust's
resort to collection under URC 322 as a matter of industry practice. HSBC claims that Collection Order with the Letter of Credit, HSBC had the obligation to carefully
the testimony of its witness Mr. Lincoln MacMahon (Mr. MacMahon) suffices for this examine the documents it received. Had it observed the standard of care expected of
purpose. 110 However, Mr. MacMahon was not presented as an expert witness capable it, HSBC would have discovered that the Letter of Credit is the very same document
of establishing the existing banking and commercial practice relating to URC 322 and which it issued upon the request of Klockner, its client. Had HSBC taken the time to
letters of credit. Thus, this Court cannot hold that URC 322 and resort to it by perform its duty with the highest degree of diligence, it would have been alerted by
beneficiaries of letters of credit are customs that the fact that the documents presented to it corresponded with the documents stated
in the Letter of Credit, to which HSBC freely and knowingly agreed. HSBC ought to
demand application in this case.111 have noticed the discrepancy between CityTrust's request for collection under URC
322 and the terms of the Letter of Credit. Notwithstanding any statements by
HSBC's position that URC 322 applies, thus allowing it, the issuing bank, to disregard CityTrust in the Collection Order as to the applicable rules, HSBC had the
the Letter of Credit, and merely demand collection from Klockner cannot be independent duty of ascertaining whether the presentment of the Letter of Credit and
countenanced. Such an argument effectively asks this Court to give imprimatur to a the attached documents gave rise to an obligation which it had to Klockner (its client)
practice that undermines the value and reliability of letters of credit in trade and and NSC (the beneficiary). Regardless of any error that CityTrust may have
commerce. The entire system of letters of credit rely on the assurance that upon committed, the standard of care expected of HSBC dictates that it should have made a
presentment of the proper documents, the beneficiary has an enforceable right and separate detennination of the significance of the presentment of the Letter of Credit
the issuing bank a demandable obligation, to pay the amount agreed upon. Were a and the attached documents. A bank exercising the appropriate degree of diligence
party to the transaction allowed to simply set this aside by the mere invocation of would have, at the very least, inquired if NSC was seeking payment under the Letter
another set of norms related to commerce - one that is not established as a custom of Credit or merely seeking collection under URC 322. In failing to do so, HSBC fell
that is entitled to recognition by this Court - the sanctity of letters of credit will be below the standard of care imposed upon it.
jeopardized. To repeat, any law or custom governing letters of credit should have, at
its core, an emphasis on the imperative that issuing banks respect their obligation to This Court therefore rules that CityTrust's presentment of the Letter of Credit with
pay and that seller-beneficiaries may reasonably expect payment in accordance with the attached documents in behalf of NSC, constitutes due
the terms of a letter of credit. Thus, the CA correctly ruled, to wit: presentment.1avvphi1 Under the terms of the Letter of Credit, HSBC undertook to pay
the amount of US$485,767.93 upon presentment of the Letter of Credit and the
At this juncture, it is significant to stress that an irrevocable letter of credit cannot, required documents.114 In accordance with this agreement, NSC, through CityTrust,
during its lifetime, be cancelled or modified without the express permission of the presented the Letter of Credit and the following documents: (1) Letter of Credit; (2)
beneficiary. Not even partial payment of the obligation by the applicant-buyer would Bill of Lading; (3) Commercial Invoice; (4) Packing List; (5) Mill Test Certificate; (6)
amend or modify the obligation of the issuing bank. The subsequent correspondences NSC's TELEX to Klockner on shipping details; (7) Beneficiary's Certificate of facsimile
of [CityTrust] to HSBC, thus, could not in any way affect or amend the letter of credit, transmittal of documents; (8) Beneficiary's Certificate of air courier transmittal of
as it was not a party thereto. As a notifying bank, it has nothing to do with the documents; and (9) DHL Receipt No. 669988911 and Certificate of Origin. 115
contract between the issuing bank and the buyer regarding the issuance of the letter
of credit. 112 (Citations omitted) In transactions where the letter of credit is payable on sight, as in this case, the issuer
must pay upon due presentment. This obligation is imbued with the character of
The provisions in the Civil Code and our jurisprudence apply suppletorily in this definiteness in that not even the defect or breach in the underlying transaction will
case. 113 When a party knowingly and freely binds himself or herself to perform an affect the issuing bank's liability. 116 This is the Independence Principle in the law on
act, a juridical tie is created and he or she becomes bound to fulfill his or her letters of credit. Article 17 of UCP 400 explains that under this principle, an issuing
obligation. In this case, HSBC's obligation arose from two sources. First, it has a bank assumes no liability or responsibility "for the form, sufficiency, accuracy,
contractual duty to Klockner whereby it agreed to pay NSC upon due presentment of genuineness, falsification or legal effect of any documents, or for the general and/or
the Letter of Credit and the attached documents. Second, it has an obligation to NSC particular conditions stipulated in the documents or superimposed thereon ... " Thus,
to honor the Letter of Credit. In complying with its obligation, HSBC had the duty to as long as the proper documents are presented, the issuing bank has an obligation to
perform all acts necessary. This includes a proper examination of the documents pay even if the buyer should later on refuse payment. Hence, Klockner's refusal to
pay carries no effect whatsoever on HSBC's obligation to pay under the Letter of
Credit. To allow HSBC to refuse to honor the Letter of Credit simply because it could "negotiated with CityTrust the export documents pertaining to LC No. HKH 239409
not collect first from Klockner is to countenance a breach of the Independence of HSBC and it was CityTrust which wrongfully treated the negotiation as 'on
Principle. collection basis."' 128 HSBC persistently communicated with CityTrust and
consistently repeated that it will proceed with collection under URC 322. At no point
HSBC's persistent refusal to comply with its obligation notwithstanding due did CityTrust correct HSBC or seek clarification from NSC. In insisting upon its
presentment constitutes delay contemplated in Article 1169 of the Civil Code. 117 This course of action, CityTrust failed to act in accordance with the instructions given by
provision states that a party to an obligation incurs in delay from the time the other NSC, its principal. Nevertheless while this Court recognizes that CityTrust committed
party makes a judicial or extrajudicial demand for the fulfillment of the obligation. a breach of its obligation to NSC, this carries no implications on the clear liability of
We rule that the due presentment of the Letter of Credit and the attached documents HSBC. As this Court already mentioned, HSBC had a separate obligation that it failed
is tantamount to a demand. HSBC incurred in delay when it failed to fulfill its to perform by reason of acts independent of CityTrust's breach of its obligation under
obligation despite such a demand. its contract of agency. If CityTrust has incurred any liability, it is to its principal NSC.
However, NSC has not raised any claim against CityTrust at any point in these
proceedings. Thus, this Court cannot make any finding of liability against CityTrust
Under Article 1170 of the Civil Code, 118 a party in delay is liable for damages. The
in favor of NSC.
extent of these damages pertains to the pecuniary loss duly proven. 119 In this case,
such damage refers to the losses which NSC incurred in the amount of US$485,767.93
as stated in the Letter of Credit. We also award interest as indemnity for the damages WHEREFORE, in view of the foregoing, the Assailed Decision dated November 19,
incurred in the amount of six percent (6%) from the date of NSC's extrajudicial 2007 is AFFIRMED to the extent that it orders HSBC to pay NSC the amount of
demand. 120 An interest in the amount of six percent (6%) is also awarded from the US$485,767.93. HSBC is also liable to pay legal interest of six percent (6%) per annum
time of the finality of this decision until full payment. 121 from the time of extrajudicial demand. An interest of six percent (6%) is also awarded
from the time of the finality of this decision until the amount is fully paid. We delete
the award of attorney's fees. No pronouncement as to cost.
Having been remiss in its obligations under the applicable law, rules and
jurisprudence, HSBC only has itself to blame for its consequent liability to NSC.
SO ORDERED.
However, this Court finds that there is no basis for the CA's grant of attorney's fees in
favor of NSC. Article 2208 of the Civil Code122 enumerates the grounds for the FRANCIS H. JARDELEZA
award of attorney's fees. This Court has explained that the award of attorney's fees is
an exception rather than the rule. 123 The winning party is not automatically entitled
to attorney's fees as there should be no premium on the right to litigate. 124 While
courts may exercise discretion in granting attorney's fees, this Court has stressed that
the grounds used as basis for its award must approximate as closely as possible the
enumeration in Article 2208. 125 Its award must have sufficient factual and legal
justifications. 126 This Court rules that none of the grounds stated in Article 2208 are
present in this case. NSC has not cited any specific ground nor presented any
particular fact to warrant the award of attorney's fees.

CityTrust's Liability

When NSC obtained the services of CityTrust in collecting under the Letter of Credit,
it constituted CityTrust as its agent. Article 1868 of the Civil Code states that a
contract of agency exists when a person binds himself or herself "to render some
service or to do something in representation or on behalf of another, with the consent
or authority of the latter." In this case, CityTrust bound itself to collect under the
Letter of Credit in behalf of NSC.

One of the obligations of an agent is to carry out the agency in accordance with the
instructions of the principal. 127 In ascertaining NSC's instructions to CityTrust, its
letter dated January 18, 1994 is determinative. In this letter, NSC clearly stated that it
PAYMENT FUNCTION – BANK DEBIT SYSTEM – LETTERS OF CREDIT Ltd. made the corresponding drawings against the L/C as scheduled. TCC, however,
failed to remit and/or pay the corresponding amount covered by the drawings. Thus,
G.R. No. L-46658             May 13, 1991 on May 19, 1968, pursuant to the trust receipt agreement, PNB notified TCC of its
intention to repossess, as it later did, the imported machinery and equipment for
failure of TCC to settle its obligations under the L/C.5
PHILIPPINE NATIONAL BANK, petitioner,
vs.
HON. GREGORIO G. PINEDA, in his capacity as Presiding Judge of the Court of In the meantime, the personal accounts of the spouses Arroyo, which included
First Instance of Rizal, Branch XXI and TAYABAS CEMENT COMPANY, another loan of P160,000.00 secured by a real estate mortgage over parcels of
INC., respondents. agricultural land known as Hacienda Bacon located in Isabela, Negros Occidental,
had likewise become due. The spouses Arroyo having failed to satisfy their
obligations with PNB, the latter decided to foreclose the real estate mortgages
The Chief Legal Counsel for petitioner. executed by the spouses Arroyo in its favor.
Ortille Law Office for private respondent.

On July 18, 1975, PNB filed with the City Sheriff of Quezon City a petition for extra-
judicial foreclosure under Act 3138, as amended by Act 4118 and under Presidential
Decree No. 385 of the real estate mortgage over the properties known as the La Vista
property covered by TCT No. 55323. 6 PNB likewise filed a similar petition with the
FERNAN, C.J.: City Sheriff of Bacolod, Negros Occidental with respect to the mortgaged properties
located at Isabela, Negros Occidental and covered by OCT No. RT 1615.
In this petition for certiorari, petitioner Philippine National Bank (PNB) seeks to annul
and set aside the orders dated March 4, 1977 and May 31, 1977 rendered in Civil Case The foreclosure sale of the La Vista property was scheduled on August 11, 1975. At
No. 244221 of the Court of First Instance of Rizal, Branch XXI, respectively granting the auction sale, PNB was the highest bidder with a bid price of P1,000,001.00.
private respondent Tayabas Cement Company, Inc.'s application for a writ of However, when said property was about to be awarded to PNB, the representative of
preliminary injunction to enjoin the foreclosure sale of certain properties in Quezon the mortgagor-spouses objected and demanded from the PNB the difference between
City and Negros Occidental and denying petitioner's motion for reconsideration the bid price of P1,000,001.00 and the indebtedness of P499,060.25 of the Arroyo
thereof. spouses on their personal account. It was the contention of the spouses Arroyo's
representative that the foreclosure proceedings referred only to the personal account
In 1963, Ignacio Arroyo, married to Lourdes Tuason Arroyo (the Arroyo Spouses), of the mortgagor spouses without reference to the account of TCC.
obtained a loan of P580,000.00 from petitioner bank to purchase 60% of the subscribed
capital stock, and thereby acquire the controlling interest of private respondent To remedy the situation, PNB filed a supplemental petition on August 13, 1975
Tayabas Cement Company, Inc. (TCC).2 As security for said loan, the spouses Arroyo requesting the Sheriff's Office to proceed with the sale of the subject real properties to
executed a real estate mortgage over a parcel of land covered by Transfer Certificate satisfy not only the amount of P499,060.25 owed by the spouses Arroyos on their
of Title No. 55323 of the Register of Deeds of Quezon City known as the La Vista personal account but also the amount of P35,019,901.49 exclusive of interest,
property. commission charges and other expenses owed by said spouses as sureties of
TCC.7 Said petition was opposed by the spouses Arroyo and the other bidder, Jose L.
Thereafter, TCC filed with petitioner bank an application and agreement for the Araneta.
establishment of an eight (8) year deferred letter of credit (L/C) for $7,000,000.00 in
favor of Toyo Menka Kaisha, Ltd. of Tokyo, Japan, to cover the importation of a On September 12, 1975, Acting Clerk of Court and Ex-Officio Sheriff Diana L. Dungca
cement plant machinery and equipment. issued a resolution finding that the questions raised by the parties required the
reception and evaluation of evidence, hence, proper for adjudication by the courts of
Upon approval of said application and opening of an L/C by PNB in favor of Toyo law. Since said questions were prejudicial to the holding of the foreclosure sale, she
Menka Kaisha, Ltd. for the account of TCC, the Arroyo spouses executed the ruled that her "Office, therefore, cannot properly proceed with the foreclosure sale
following documents to secure this loan accommodation: Surety Agreement dated unless and until there be a court ruling on the aforementioned issues."8
August 5, 19643 and Covenant dated August 6, 1964.4
Thus, in May, 1976, PNB filed with the Court of First Instance of Quezon City, Branch
The imported cement plant machinery and equipment arrived from Japan and were V a petition for mandamus9 against said Diana Dungca in her capacity as City Sheriff
released to TCC under a trust receipt agreement. Subsequently, Toyo Menka Kaisha, of Quezon City to compel her to proceed with the foreclosure sale of the mortgaged
properties covered by TCT No. 55323 in order to satisfy both the personal obligation Further, the VINTOLAS take the position that their obligation to IBAA has
of the spouses Arroyo as well as their liabilities as sureties of TCC.10 been extinguished inasmuch as, through no fault of their own, they were
unable to dispose of the seashells, and that they have relinquished
On September 6, 1976, the petition was granted and Dungca was directed to proceed possession thereof to the IBAA, as owner of the goods, by depositing them
with the foreclosure sale of the mortgaged properties covered by TCT No. 55323 with the Court.
pursuant to Act No. 3135 and to issue the corresponding Sheriff's Certificate of Sale. 11
The foregoing submission overlooks the nature and mercantile usage of the
Before the decision could attain finality, TCC filed on September 14, 1976 before the transaction involved. A letter of credit-trust receipt arrangement is endowed
Court of First Instance of Rizal, Pasig, Branch XXI a complaint 12 against PNB, Dungca, with its own distinctive features and characteristics. Under that set-up, a
and the Provincial Sheriff of Negros Occidental and Ex-Officio Sheriff of Bacolod City bank extends a loan covered by the Letter of Credit, with the trust receipt as
seeking, inter alia, the issuance of a writ of preliminary injunction to restrain the a security for the loan. In other words, the transaction involves a loan feature
foreclosure of the mortgages over the La Vista property and Hacienda Bacon as well represented by the letter of credit, and a security feature which is in the
as a declaration that its obligation with PNB had been fully paid by reason of the covering trust receipt.
latter's repossession of the imported machinery and equipment. 13
x x x           x x x          x x x
On October 5, 1976, the CFI, thru respondent Judge Gregorio Pineda, issued a
restraining order14 and on March 4, 1977, granted a writ of preliminary A trust receipt, therefore, is a security agreement, pursuant to which a bank
injunction.15 PNB's motion for reconsideration was denied, hence this petition. acquires a "security interest" in the goods.1âwphi1 It secures an indebtedness
and there can be no such thing as security interest that secures no obligation.
Petitioner PNB advances four grounds for the setting aside of the writ of preliminary As defined in our laws:
injunction, namely: a) that it contravenes P.D. No. 385 which prohibits the issuance of
a restraining order against a government financial institution in any action taken by (h) "Security interest" means a property interest in goods,
such institution in compliance with the mandatory foreclosure provided in Section 1 documents or instruments to secure performance of some
thereof; b) that the writ countermands a final decision of a co-equal and coordinate obligations of the entrustee or of some third persons to the
court; c) that the writ seeks to prohibit the performance of acts beyond the court's entruster and includes title, whether or not expressed to be
territorial jurisdiction; and, d) private respondent TCC has not shown any clear legal absolute, whenever such title is in substance taken or retained for
right or necessity to the relief of preliminary injunction. security only.

Private respondent TCC counters with the argument that P.D. No. 385 does not apply x x x           x x x          x x x
to the case at bar, firstly because no foreclosure proceedings have been instituted
against it by PNB and secondly, because its account under the L/C has been fully Contrary to the allegation of the VINTOLAS, IBAA did not become the real
satisfied with the repossession of the imported machinery and equipment by PNB. owner of the goods. It was merely the holder of a security title for the
advances it had made to the VINTOLAS. The goods the VINTOLAS had
The resolution of the instant controversy lies primarily on the question of whether or purchased through IBAA financing remain their own property and they
not TCC's liability has been extinguished by the repossession of PNB of the imported hold it at their own risk. The trust receipt arrangement did not convert the
cement plant machinery and equipment. IBAA into an investor; the latter remained a lender and creditor.

We rule for the petitioner PNB. It must be remembered that PNB took possession of x x x           x x x          x x x
the imported cement plant machinery and equipment pursuant to the trust receipt
agreement executed by and between PNB and TCC giving the former the unqualified Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot
right to the possession and disposal of all property shipped under the Letter of Credit justifiably claim that because they have surrendered the goods to IBAA and
until such time as all the liabilities and obligations under said letter had been subsequently deposited them in the custody of the court, they are absolutely
discharged.16 In the case of Vintola vs. Insular Bank of Asia and America 17 wherein the relieved of their obligation to pay their loan because of their inability to
same argument was advanced by the Vintolas as entrustees of imported seashells dispose of the goods. The fact that they were unable to sell the seashells in
under a trust receipt transaction, we said: question does not affect IBAA's right to recover the advances it had made
under the Letter of Credit.
PNB's possession of the subject machinery and equipment being precisely as a form officers, namely the sheriff thereof.25 The foreclosure sale having been ordered by
of security for the advances given to TCC under the Letter of Credit, said possession Branch V of the CFI of Rizal, TCC should not have filed injunction proceedings with
by itself cannot be considered payment of the loan secured thereby. Payment would Branch XXI of the same CFI, but instead should have first sought relief by proper
legally result only after PNB had foreclosed on said securities, sold the same and motion and application from the former court which had exclusive jurisdiction over
applied the proceeds thereof to TCC's loan obligation. Mere possession does not the foreclosure proceeding.26
amount to foreclosure for foreclosure denotes the procedure adopted by the
mortgagee to terminate the rights of the mortgagor on the property and includes the This doctrine of non-interference is premised on the principle that a judgment of a
sale itself.18 court of competent jurisdiction may not be opened, modified or vacated by any court
of concurrent jurisdiction.27
Neither can said repossession amount to dacion en pago. Dation in payment takes
place when property is alienated to the creditor in satisfaction of a debt in money and Furthermore, we find the issuance of the preliminary injunction directed against the
the same is governed by sales.19 Dation in payment is the delivery and transmission of Provincial Sheriff of Negros Occidental and ex-officio Sheriff of Bacolod City a
ownership of a thing by the debtor to the creditor as an accepted equivalent of the jurisdictional faux pas as the Courts of First Instance, now Regional Trial Courts, can
performance of the obligation.20 As aforesaid, the repossession of the machinery and only enforce their writs of injunction within their respective designated territories.28
equipment in question was merely to secure the payment of TCC's loan obligation
and not for the purpose of transferring ownership thereof to PNB in satisfaction of
WHEREFORE, the instant petition is hereby granted. The assailed orders are hereby
said loan. Thus, no dacion en pago was ever accomplished.
set aside. Costs against private respondent.

Proceeding from this finding, PNB has the right to foreclose the mortgages executed
Gutierrez, Jr., Feliciano, Bidin and Davide, Jr., JJ., concur.
by the spouses Arroyo as sureties of TCC. A surety is considered in law as being the
same party as the debtor in relation to whatever is adjudged touching the obligation
of the latter, and their liabilities are interwoven as to be inseparable. 21 As sureties, the
Arroyo spouses are primarily liable as original promissors and are bound
immediately to pay the creditor the amount outstanding. 22

Under Presidential Decree No. 385 which took effect on January 31, 1974, government
financial institutions like herein petitioner PNB are required to foreclose on the
collaterals and/or securities for any loan, credit or accommodation whenever the
arrearages on such account amount to at least twenty percent (20%) of the total
outstanding obligations, including interests and charges, as appearing in the books of
account of the financial institution concerned. 23 It is further provided therein that "no
restraining order, temporary or permanent injunction shall be issued by the court
against any government financial institution in any action taken by such institution in
compliance with the mandatory foreclosure provided in Section 1 hereof, whether
such restraining order, temporary or permanent injunction is sought by the
borrower(s) or any third party or parties . . ."24

It is not disputed that the foreclosure proceedings instituted by PNB against the
Arroyo spouses were in compliance with the mandate of P.D. 385. This being the
case, the respondent judge acted in excess of his jurisdiction in issuing the injunction
specifically proscribed under said decree.
PAYMENT FUNCTION – BANK DEBIT SYSTEM – CHECKS - CROSSED CHECKS
Another reason for striking down the writ of preliminary injunction complained of is
that it interfered with the order of a co-equal and coordinate court. Since Branch V of G.R. No. 89802 May 7, 1992
the CFI of Rizal had already acquired jurisdiction over the question of foreclosure of
mortgage over the La Vista property and rendered judgment in relation thereto, then ASSOCIATED BANK and CONRADO CRUZ, petitioners,
it retained jurisdiction to the exclusion of all other coordinate courts over its vs.
judgment, including all incidents relative to the control and conduct of its ministerial
HON. COURT OF APPEALS, and MERLE V. REYES, doing business under the The petitioners appealed to the respondent court, reiterating their argument that the
name and style "Melissa's RTW," respondents. private respondent had no cause of action against them and should have proceeded
instead against the companies that issued the checks. In disposing of this contention,
Soluta, Leonidas, Marifosque, Javier, Liboon & aguila Law Offices for petitioners. the Court of Appeals 2 said:

Roberto B. Lugue for private respondent. The cause of action of the appellee in the case at bar arose from the
illegal, anomalous and irregular acts of the appellants in violating
common banking practices to the damage and prejudice of the
appellees, in allowing to be deposited and encashed as well as
paying to improper parties without the knowledge, consent,
CRUZ, J.: authority or endorsement of the appellee which totalled P15,805.00,
the six (6) checks in dispute which were "crossed checks" or "for
The sole issue raised in this case is whether or not the private respondent has a cause payee's account only," the appellee being the payee.
of action against the petitioners for their encashment and payment to another person
of certain crossed checks issued in her favor. The three (3) elements of a cause of action are present in the case at
bar, namely: (1) a right in favor of the plaintiff by whatever means
The private respondent is engaged in the business of ready-to-wear garments under and under whatever law it arises or is created; (2) an obligation on
the firm name "Melissa's RTW." She deals with, among other customers, Robinson's the part of the named defendant to respect or not to violate such
Department Store, Payless Department Store, Rempson Department Store, and the right; and (3) an act or omission on the part of such defendant
Corona Bazaar. violative of the right of the plaintiff or constituting a breach thereof.
(Republic Planters Bank vs. Intermediate Appellate Court, 131
SCRA 631).
These companies issued in payment of their respective accounts crossed checks
payable to Melissa's RTW in the amounts and on the dates indicated below:
And such cause of action has been proved by evidence of great
weight. The contents of the said checks issued by the customers of
PAYOR BANK AMOUNT DATE
the appellee had not been questioned. There is no dispute that the
same are crossed checks or for payee's account only, which is
Payless Solid Bank P3,960.00 January 19, 1982 Melissa's RTW. The appellee had clearly shown that she had never
Robinson's FEBTC 4,140.00 December 18, 1981 authorized anyone to deposit the said checks nor to encash the
Robinson's FEBTC 1,650.00 December 24, 1981 same; that the appellants had allowed all said checks to be
Robinson's FEBTC 1,980.00 January 12, 1982 deposited, cleared and paid to one Rafael Sayson in violation of the
Rempson TRB 1,575.00 January 9, 1982 instructions in the said crossed checks that the same were for
Corona RCBC 2,500.00 December 22, 1981 payee's account only; and that the appellee maintained a savings
account with the Prudential Bank, Cubao Branch, Quezon City
When she went to these companies to collect on what she thought were still unpaid which never cleared the said checks and the appellee had been
accounts, she was informed of the issuance of the above-listed crossed checks. Further damaged by such encashment of the same.
inquiry revealed that the said checks had been deposited with the Associated Bank
(hereinafter, "the Bank") and subsequently paid by it to one Rafael Sayson, one of its We affirm.
"trusted depositors," in the words of its branch manager and co-petitioner, Conrado
Cruz, Sayson had not been authorized by the private respondent to deposit and
Under accepted banking practice, crossing a check is done by writing two parallel
encash the said checks.
lines diagonally on the left top portion of the checks. The crossing is special where the
name of a bank or a business institution is written between the two parallel lines,
The private respondent sued the petitioners in the Regional Trial Court of Quezon which means that the drawee should pay only with the intervention of that
City for recovery of the total value of the checks plus damages. After trial, judgment company. 3 The crossing is general where the words written between the two parallel
was rendered requiring them to pay the private respondent the total value of the lines are "and Co." or "for payee's account only," as in the case at bar. This means that
subject checks in the amount of P15,805.00 plus 12% interest, P50,000.00 actual the drawee bank should not encash the check but merely accept it for deposit. 4
damages, P25,000.00 exemplary damages, P5,000.00 attorney's fees, and the costs of
the suit. 1
In State Investment House vs.  IAC, 5 this Court declared that "the effects of crossing a The petitioners were negligent when they permitted the encashment of the checks by
check are: (1) that the check may not be encashed but only deposited in the bank; (2) Sayson. The Bank should have first verified his right to endorse the crossed checks, of
that the check may be negotiated only once –– to one who has an account with a which he was not the payee, and to deposit the proceeds of the checks to his own
bank; and (3) that the act of crossing the check serves as a warning to the holder that account. The Bank was by reason of the nature of the checks put upon notice that they
the check has been issued for a definite purpose so that he must inquire if he has were issued for deposit only to the private respondent's account. Its failure to inquire
received the check pursuant to that purpose." into Sayson's authority was a breach of a duty it owed to the private respondent.

The effects therefore of crossing a check relate to the mode of its presentment for As the Court stressed in Banco de Oro Savings and Mortgage Bank vs. Equitable Banking
payment. Under Sec. 72 of the Negotiable Instruments Law, presentment for Corp., 9 "the law imposes a duty of diligence on the collecting bank to scrutinize
payment, to be sufficient, must be made by the holder or by some person authorized checks deposited with it, for the purpose of determining their genuineness and
to receive payment on his behalf. Who the holder or authorized person is depends on regularity. The collecting bank, being primarily engaged in banking, holds itself out
the instruction stated on the face of the check. to the public as the expert on this field, and the law thus holds it to a high standard of
conduct."
The six checks in the case at bar had been crossed and issued "for payee's account
only." This could only signify that the drawers had intended the same for deposit The petitioners insist that the private respondent has no cause of action against them
only by the person indicated, to wit, Melissa's RTW. because they have no privity of contract with her. They also argue that it was Eddie
Reyes, the private respondent's own husband, who endorsed the checks.
The petitioners argue that the cause of action for violation of the common instruction
found on the face of the checks exclusively belongs to the issuers thereof and not to Assuming that Eddie Reyes did endorse the crossed checks, we hold that the Bank
the payee. Moreover, having acted in good faith as they merely facilitated the would still be liable to the private respondent because he was not authorized to make
encashment of the checks, they cannot be made liable to the private respondent. the endorsements. And even if the endorsements were forged, as alleged, the Bank
would still be liable to the private respondent for not verifying the endorser's
The subject checks were accepted for deposit by the Bank for the account of Rafael authority. There is no substantial difference between an actual forging of a name to a
Sayson although they were crossed checks and the payee was not Sayson but check as an endorsement by a person not authorized to make the signature and the
Melissa's RTW. The Bank stamped thereon its guarantee that "all prior endorsements affixing of a name to a check as an endorsement by a person not authorized to
and/or lack of endorsements (were) guaranteed." By such deliberate and positive act, endorse it. 10
the Bank had for all legal intents and purposes treated the said checks as negotiable
instruments and, accordingly, assumed the warranty of the endorser. The Bank does not deny collecting the money on the endorsement. It was its
responsibility to inquire as to the authority of Rafael Sayson to deposit crossed checks
The weight of authority is to the effect that "the possession of check on a forged or payable to Melissa's RTW upon a prior endorsement by Eddie Reyes. The failure of
unauthorized indorsement is wrongful, and when the money is collected on the the Bank to make this inquiry was a breach of duty that made it liable to the private
check, the bank can be held 'for moneys had and received." 6 The proceeds are held respondent for the amount of the checks.
for the rightful owner of the payment and may be recovered by him. The position of
the bank taking the check on the forged or unauthorized indorsement is the same as if There being no evidence that the crossed checks were actually received by the private
it had taken the check and collected without indorsement at all. The act of the bank respondent, she would have a right of action against the drawer companies, which in
amounts to conversion of the check. 7 turn could go against their respective drawee banks, which in turn could sue the
herein petitioner as collecting bank. In a similar situation, it was held that, to simplify
It is not disputed that the proceeds of the subject checks belonged to the private proceedings, the payee of the illegally encashed checks should be allowed to recover
respondent. As she had not at any time authorized Rafael Sayson to endorse or directly from the bank responsible for such encashment regardless of whether or not
encash them, there was conversion of the funds by the Bank. the checks were actually delivered to the payee. 11 We approve such direct action in
the case at bar.
When the Bank paid the checks so endorsed notwithstanding that title had not passed
to the endorser, it did so at its peril and became liable to the payee for the value of the It is worth repeating that before presenting the checks for clearing and for payment,
checks. This liability attached whether or not the Bank was aware of the unauthorized the Bank had stamped on the back thereof the words: "All prior endorsements and/or
endorsement. 8 lack of endorsements guaranteed," and thus made the assurance that it had
ascertained the genuineness of all prior endorsements.
We find that the respondent court committed no reversible error in holding that the
private respondent had a valid cause of action against the petitioners and that the
latter are indeed liable to her for their unauthorized encashment of the subject checks.
We also agree with the reduction of the award of the exemplary damages for lack of
sufficient evidence to support them.

WHEREFORE, the petition is DENIED, with costs against the petitioner. It is so

ordered.

Narvasa, C.J., Griño-Aquino, Medialdea and Bellosillo, JJ., concur.

SPECIAL FUNCTION – SAFETY DEPOSIT BOXES After the execution of the contract, two (2) renter's keys were given to the renters —
one to Aguirre (for the petitioner) and the other to the Pugaos. A guard key remained
G.R. No. 90027 March 3, 1993 in the possession of the respondent Bank. The safety deposit box has two (2)
keyholes, one for the guard key and the other for the renter's key, and can be opened
only with the use of both keys. Petitioner claims that the certificates of title were
CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner,
placed inside the said box.
vs.
THE HONORABLE COURT OF APPEALS and SECURITY BANK AND TRUST
COMPANY, respondents. Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two
(2) lots at a price of P225.00 per square meter which, as petitioner alleged in its
complaint, translates to a profit of P100.00 per square meter or a total of P280,500.00
Dolorfino & Dominguez Law Offices for petitioner.
for the entire property. Mrs. Ramos demanded the execution of a deed of sale which
necessarily entailed the production of the certificates of title. In view thereof, Aguirre,
Danilo B. Banares for private respondent. accompanied by the Pugaos, then proceeded to the respondent Bank on 4 October
1979 to open the safety deposit box and get the certificates of title. However, when
opened in the presence of the Bank's representative, the box yielded no such
certificates. Because of the delay in the reconstitution of the title, Mrs. Ramos
withdrew her earlier offer to purchase the lots; as a consequence thereof, the
DAVIDE, JR., J.:
petitioner allegedly failed to realize the expected profit of P280,500.00. Hence, the
latter filed on 1 September 1980 a complaint2 for damages against the respondent
Is the contractual relation between a commercial bank and another party in a contract Bank with the Court of First Instance (now Regional Trial Court) of Pasig, Metro
of rent of a safety deposit box with respect to its contents placed by the latter one of Manila which docketed the same as Civil Case No. 38382.
bailor and bailee or one of lessor and lessee?
In its Answer with Counterclaim,3 respondent Bank alleged that the petitioner has no
This is the crux of the present controversy. cause of action because of paragraphs 13 and 14 of the contract of lease (Exhibit "2");
corollarily, loss of any of the items or articles contained in the box could not give rise
On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses to an action against it. It then interposed a counterclaim for exemplary damages as
Ramon and Paula Pugao entered into an agreement whereby the former purchased well as attorney's fees in the amount of P20,000.00. Petitioner subsequently filed an
from the latter two (2) parcels of land for a consideration of P350,625.00. Of this answer to the counterclaim.4
amount, P75,725.00 was paid as downpayment while the balance was covered by
three (3) postdated checks. Among the terms and conditions of the agreement In due course, the trial court, now designated as Branch 161 of the Regional Trial
embodied in a Memorandum of True and Actual Agreement of Sale of Land were Court (RTC) of Pasig, Metro Manila, rendered a decision 5 adverse to the petitioner on
that the titles to the lots shall be transferred to the petitioner upon full payment of the 8 December 1986, the dispositive portion of which reads:
purchase price and that the owner's copies of the certificates of titles thereto, Transfer
Certificates of Title (TCT) Nos. 284655 and 292434, shall be deposited in a safety
WHEREFORE, premises considered, judgment is hereby rendered
deposit box of any bank. The same could be withdrawn only upon the joint
dismissing plaintiff's complaint.
signatures of a representative of the petitioner and the Pugaos upon full payment of
the purchase price. Petitioner, through Sergio Aguirre, and the Pugaos then rented
Safety Deposit Box No. 1448 of private respondent Security Bank and Trust On defendant's counterclaim, judgment is hereby rendered
Company, a domestic banking corporation hereinafter referred to as the respondent ordering plaintiff to pay defendant the amount of FIVE
Bank. For this purpose, both signed a contract of lease (Exhibit "2") which THOUSAND (P5,000.00) PESOS as attorney's fees.
contains, inter alia, the following conditions:
With costs against plaintiff.6
13. The bank is not a depositary of the contents of the safe and it
has neither the possession nor control of the same. The unfavorable verdict is based on the trial court's conclusion that under paragraphs
13 and 14 of the contract of lease, the Bank has no liability for the loss of the
14. The bank has no interest whatsoever in said contents, except certificates of title. The court declared that the said provisions are binding on the
herein expressly provided, and it assumes absolutely no liability in parties.
connection therewith.1
Its motion for reconsideration 7 having been denied, petitioner appealed from the 8. The Bank shall use due diligence that no unauthorized person
adverse decision to the respondent Court of Appeals which docketed the appeal as shall be admitted to any rented safe and beyond this, the Bank will
CA-G.R. CV No. 15150. Petitioner urged the respondent Court to reverse the not be responsible for the contents of any safe rented from it. 13
challenged decision because the trial court erred in (a) absolving the respondent Bank
from liability from the loss, (b) not declaring as null and void, for being contrary to Its motion for reconsideration 14 having been denied in the respondent Court's
law, public order and public policy, the provisions in the contract for lease of the Resolution of 28 August 1989, 15 petitioner took this recourse under Rule 45 of the
safety deposit box absolving the Bank from any liability for loss, (c) not concluding Rules of Court and urges Us to review and set aside the respondent Court's ruling.
that in this jurisdiction, as well as under American jurisprudence, the liability of the Petitioner avers that both the respondent Court and the trial court (a) did not
Bank is settled and (d) awarding attorney's fees to the Bank and denying the properly and legally apply the correct law in this case, (b) acted with grave abuse of
petitioner's prayer for nominal and exemplary damages and attorney's fees.8 discretion or in excess of jurisdiction amounting to lack thereof and (c) set a precedent
that is contrary to, or is a departure from precedents adhered to and affirmed by
In its Decision promulgated on 4 July 1989, 9 respondent Court affirmed the appealed decisions of this Court and precepts in American jurisprudence adopted in the
decision principally on the theory that the contract (Exhibit "2") executed by the Philippines. It reiterates the arguments it had raised in its motion to reconsider the
petitioner and respondent Bank is in the nature of a contract of lease by virtue of trial court's decision, the brief submitted to the respondent Court and the motion to
which the petitioner and its co-renter were given control over the safety deposit box reconsider the latter's decision. In a nutshell, petitioner maintains that regardless of
and its contents while the Bank retained no right to open the said box because it had nomenclature, the contract for the rent of the safety deposit box (Exhibit "2") is
neither the possession nor control over it and its contents. As such, the contract is actually a contract of deposit governed by Title XII, Book IV of the Civil Code of the
governed by Article 1643 of the Civil Code 10 which provides: Philippines. 16 Accordingly, it is claimed that the respondent Bank is liable for the loss
of the certificates of title pursuant to Article 1972 of the said Code which provides:
Art. 1643. In the lease of things, one of the parties binds himself to
give to another the enjoyment or use of a thing for a price certain, Art. 1972. The depositary is obliged to keep the thing safely and to
and for a period which may be definite or indefinite. However, no return it, when required, to the depositor, or to his heirs and
lease for more than ninety-nine years shall be valid. successors, or to the person who may have been designated in the
contract. His responsibility, with regard to the safekeeping and the
It invoked Tolentino vs. Gonzales  11 — which held that the owner of the loss of the thing, shall be governed by the provisions of Title I of
property loses his control over the property leased during the period of the this Book.
contract — and Article 1975 of the Civil Code which provides:
If the deposit is gratuitous, this fact shall be taken into account in
Art. 1975. The depositary holding certificates, bonds, securities or determining the degree of care that the depositary must observe.
instruments which earn interest shall be bound to collect the latter
when it becomes due, and to take such steps as may be necessary in Petitioner then quotes a passage from American Jurisprudence 17 which is
order that the securities may preserve their value and the rights supposed to expound on the prevailing rule in the United States, to wit:
corresponding to them according to law.
The prevailing rule appears to be that where a safe-deposit
The above provision shall not apply to contracts for the rent of company leases a safe-deposit box or safe and the lessee takes
safety deposit boxes. possession of the box or safe and places therein his securities or
other valuables, the relation of bailee and bail or is created between
and then concluded that "[c]learly, the defendant-appellee is not under any the parties to the transaction as to such securities or other
duty to maintain the contents of the box. The stipulation absolving the valuables; the fact that the
defendant-appellee from liability is in accordance with the nature of the safe-deposit company does not know, and that it is not expected
contract of lease and cannot be regarded as contrary to law, public order and that it shall know, the character or description of the property
public policy." 12 The appellate court was quick to add, however, that under which is deposited in such safe-deposit box or safe does not change
the contract of lease of the safety deposit box, respondent Bank is not that relation. That access to the contents of the safe-deposit box can
completely free from liability as it may still be made answerable in case be had only by the use of a key retained by the lessee ( whether it is
unauthorized persons enter into the vault area or when the rented box is the sole key or one to be used in connection with one retained by
forced open. Thus, as expressly provided for in stipulation number 8 of the the lessor) does not operate to alter the foregoing rule. The
contract in question: argument that there is not, in such a case, a delivery of exclusive
possession and control to the deposit company, and that therefore
 the situation is entirely different from that of ordinary bailment, We observe, however, that the deposit theory itself does not altogether find
has been generally rejected by the courts, usually on the ground unanimous support even in American jurisprudence. We agree with the petitioner
that as possession must be either in the depositor or in the that under the latter, the prevailing rule is that the relation between a bank renting
company, it should reasonably be considered as in the latter rather out safe-deposit boxes and its customer with respect to the contents of the box is that
than in the former, since the company is, by the nature of the of a bail or and bailee, the bailment being for hire and mutual benefit. 21 This is just
contract, given absolute control of access to the property, and the the prevailing view because:
depositor cannot gain access thereto without the consent and active
participation of the company. . . . (citations omitted). There is, however, some support for the view that the relationship
in question might be more properly characterized as that of
and a segment from Words and Phrases 18 which states that a contract for the landlord and tenant, or lessor and lessee. It has also been suggested
rental of a bank safety deposit box in consideration of a fixed amount at that it should be characterized as that of licensor and licensee. The
stated periods is a bailment for hire. relation between a bank, safe-deposit company, or storage
company, and the renter of a safe-deposit box therein, is often
Petitioner further argues that conditions 13 and 14 of the questioned contract are described as contractual, express or implied, oral or written, in
contrary to law and public policy and should be declared null and void. In support whole or in part. But there is apparently no jurisdiction in which
thereof, it cites Article 1306 of the Civil Code which provides that parties to a contract any rule other than that applicable to bailments governs questions
may establish such stipulations, clauses, terms and conditions as they may deem of the liability and rights of the parties in respect of loss of the
convenient, provided they are not contrary to law, morals, good customs, public contents of safe-deposit boxes. 22 (citations omitted)
order or public policy.
In the context of our laws which authorize banking institutions to rent out safety
After the respondent Bank filed its comment, this Court gave due course to the deposit boxes, it is clear that in this jurisdiction, the prevailing rule in the United
petition and required the parties to simultaneously submit their respective States has been adopted. Section 72 of the General Banking Act 23 pertinently
Memoranda. provides:

The petition is partly meritorious. Sec. 72. In addition to the operations specifically authorized
elsewhere in this Act, banking institutions other than building and
loan associations may perform the following services:
We agree with the petitioner's contention that the contract for the rent of the safety
deposit box is not an ordinary contract of lease as defined in Article 1643 of the Civil
Code. However, We do not fully subscribe to its view that the same is a contract of (a) Receive in custody funds, documents, and
deposit that is to be strictly governed by the provisions in the Civil Code on valuable objects, and rent safety deposit boxes for
deposit; 19 the contract in the case at bar is a special kind of deposit. It cannot be the safeguarding of such effects.
characterized as an ordinary contract of lease under Article 1643 because the full and
absolute possession and control of the safety deposit box was not given to the joint xxx xxx xxx
renters — the petitioner and the Pugaos. The guard key of the box remained with the
respondent Bank; without this key, neither of the renters could open the box. On the The banks shall perform the services permitted under subsections
other hand, the respondent Bank could not likewise open the box without the renter's (a), (b) and (c) of this section as depositories or as
key. In this case, the said key had a duplicate which was made so that both renters agents. . . . 24 (emphasis supplied)
could have access to the box.
Note that the primary function is still found within the parameters of a contract
Hence, the authorities cited by the respondent Court 20 on this point do not apply. of deposit, i.e., the receiving in custody of funds, documents and other valuable objects
Neither could Article 1975, also relied upon by the respondent Court, be invoked as for safekeeping. The renting out of the safety deposit boxes is not independent from,
an argument against the deposit theory. Obviously, the first paragraph of such but related to or in conjunction with, this principal function. A contract of deposit
provision cannot apply to a depositary of certificates, bonds, securities or instruments may be entered into orally or in writing 25 and, pursuant to Article 1306 of the Civil
which earn interest if such documents are kept in a rented safety deposit box. It is Code, the parties thereto may establish such stipulations, clauses, terms and
clear that the depositary cannot open the box without the renter being present. conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order or public policy. The depositary's responsibility
for the safekeeping of the objects deposited in the case at bar is governed by Title I,
Book IV of the Civil Code. Accordingly, the depositary would be liable if, in by words of doubtful meaning. The company, in renting
performing its obligation, it is found guilty of fraud, negligence, delay or safe-deposit boxes, cannot exempt itself from liability for loss of the
contravention of the tenor of the agreement. 26 In the absence of any stipulation contents by its own fraud or negligence or that of its agents or
prescribing the degree of diligence required, that of a good father of a family is to be servants, and if a provision of the contract may be construed as an
observed. 27 Hence, any stipulation exempting the depositary from any liability attempt to do so, it will be held ineffective for the purpose.
arising from the loss of the thing deposited on account of fraud, negligence or delay Although it has been held that the lessor of a safe-deposit box
would be void for being contrary to law and public policy. In the instant case, cannot limit its liability for loss of the contents thereof through its
petitioner maintains that conditions 13 and 14 of the questioned contract of lease of own negligence, the view has been taken that such a lessor may
the safety deposit box, which read: limits its liability to some extent by agreement or
stipulation. 30 (citations omitted)
13. The bank is not a depositary of the contents of the safe and it
has neither the possession nor control of the same. Thus, we reach the same conclusion which the Court of Appeals arrived at, that is,
that the petition should be dismissed, but on grounds quite different from those
14. The bank has no interest whatsoever in said contents, except relied upon by the Court of Appeals. In the instant case, the respondent Bank's
herein expressly provided, and it assumes absolutely no liability in exoneration cannot, contrary to the holding of the Court of Appeals, be based on or
connection therewith. 28 proceed from a characterization of the impugned contract as a contract of lease, but
rather on the fact that no competent proof was presented to show that respondent
Bank was aware of the agreement between the petitioner and the Pugaos to the effect
are void as they are contrary to law and public policy. We find Ourselves in
that the certificates of title were withdrawable from the safety deposit box only upon
agreement with this proposition for indeed, said provisions are inconsistent both parties' joint signatures, and that no evidence was submitted to reveal that the
with the respondent Bank's responsibility as a depositary under Section
loss of the certificates of title was due to the fraud or negligence of the respondent
72(a) of the General Banking Act. Both exempt the latter from any liability Bank. This in turn flows from this Court's determination that the contract involved
except as contemplated in condition 8 thereof which limits its duty to
was one of deposit. Since both the petitioner and the Pugaos agreed that each should
exercise reasonable diligence only with respect to who shall be admitted to have one (1) renter's key, it was obvious that either of them could ask the Bank for
any rented safe, to wit:
access to the safety deposit box and, with the use of such key and the Bank's own
guard key, could open the said box, without the other renter being present.
8. The Bank shall use due diligence that no unauthorized person
shall be admitted to any rented safe and beyond this, the Bank will
Since, however, the petitioner cannot be blamed for the filing of the complaint and no
not be responsible for the contents of any safe rented from it. 29 bad faith on its part had been established, the trial court erred in condemning the
petitioner to pay the respondent Bank attorney's fees. To this extent, the Decision
Furthermore, condition 13 stands on a wrong premise and is contrary to the (dispositive portion) of public respondent Court of Appeals must be modified.
actual practice of the Bank. It is not correct to assert that the Bank has neither
the possession nor control of the contents of the box since in fact, the safety WHEREFORE, the Petition for Review is partially GRANTED by deleting the award for
deposit box itself is located in its premises and is under its absolute control; attorney's fees from the 4 July 1989 Decision of the respondent Court of Appeals in CA-G.R. CV
moreover, the respondent Bank keeps the guard key to the said box. As No. 15150. As modified, and subject to the pronouncement We made above on the nature of the
stated earlier, renters cannot open their respective boxes unless the Bank relationship between the parties in a contract of lease of safety deposit boxes, the dispositive
cooperates by presenting and using this guard key. Clearly then, to the portion of the said Decision is hereby AFFIRMED and the instant Petition for Review is
extent above stated, the foregoing conditions in the contract in question are otherwise DENIED for lack of merit.
void and ineffective. It has been said:

With respect to property deposited in a safe-deposit box by a

customer of a safe-deposit company, the parties, since the relation
is a contractual one, may by special contract define their respective
duties or provide for increasing or limiting the liability of the
deposit company, provided such contract is not in violation of law
or public policy. It must clearly appear that there actually was such
a special contract, however, in order to vary the ordinary
obligations implied by law from the relationship of the parties;
liability of the deposit company will not be enlarged or restricted