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    Transfield Philippines, Inc. vs. Luzon Hydro Corporation, Et Al., G.R. No. 146717, November 22, 2004

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    Julie Anne Cäño
    This document summarizes a Supreme Court case from the Philippines about two standby letters of credit that were opened to guarantee performance in a construction contract between Transfield Philippines and Luzon Hydro Corporation. When the construction was delayed, LHC called on the letters of credit for default, but Transfield objected because there was a pending arbitration case regarding their request for an extension. The Court held that LHC could collect from the letters of credit despite the pending arbitration, because the independent nature of letters of credit means the issuing bank's obligation to pay is separate from any disputes between the parties to the underlying contract.

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    Transfield Philippines, Inc. vs. Luzon Hydro Corporation, Et Al., G.R. No. 146717, November 22, 2004

    Uploaded by

    Julie Anne Cäño
    94 views2 pages
    This document summarizes a Supreme Court case from the Philippines about two standby letters of credit that were opened to guarantee performance in a construction contract between Transfield Philippines and Luzon Hydro Corporation. When the construction was delayed, LHC called on the letters of credit for default, but Transfield objected because there was a pending arbitration case regarding their request for an extension. The Court held that LHC could collect from the letters of credit despite the pending arbitration, because the independent nature of letters of credit means the issuing bank's obligation to pay is separate from any disputes between the parties to the underlying contract.

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    Transfield Philippines, Inc. vs. Luzon Hydro Corporation, et al., G.R. No. 146717, November 22, 2004

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    This document summarizes a Supreme Court case from the Philippines about two standby letters of credit that were opened to guarantee performance in a construction contract between Transfield Philippines and Luzon Hydro Corporation. When the construction was delayed, LHC called on the letters of credit for default, but Transfield objected because there was a pending arbitration case regarding their request for an extension. The Court held that LHC could collect from the letters of credit despite the pending arbitration, because the independent nature of letters of credit means the issuing bank's obligation to pay is separate from any disputes between the parties to the underlying contract.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    94 views2 pages

    Transfield Philippines, Inc. vs. Luzon Hydro Corporation, Et Al., G.R. No. 146717, November 22, 2004

    Uploaded by

    Julie Anne Cäño
    This document summarizes a Supreme Court case from the Philippines about two standby letters of credit that were opened to guarantee performance in a construction contract between Transfield Philippines and Luzon Hydro Corporation. When the construction was delayed, LHC called on the letters of credit for default, but Transfield objected because there was a pending arbitration case regarding their request for an extension. The Court held that LHC could collect from the letters of credit despite the pending arbitration, because the independent nature of letters of credit means the issuing bank's obligation to pay is separate from any disputes between the parties to the underlying contract.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
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    Transfield 

    Philippines, Inc. vs. Luzon Hydro Corporation, et al., G.R. No. 146717,
    November 22, 2004
    The independent nature of the letter of credit may be: (a) independence in toto
    where the credit is independent from the justification aspect and is a separate
    obligation from the underlying agreement like for instance a typical standby; or
    (b) independence may be only as to the justification aspect like in a commercial
    letter of credit or repayment standby, which is identical with the same obligations
    under the underlying agreement.  In both cases the payment may be enjoined if in
    the light of the purpose of the credit the payment of the credit would constitute
    fraudulent abuse of the credit.

    Facts: Transfield Philippines (Transfield) entered into a turn-key contract with Luzon
    Hydro Corp. (LHC).Under the contract, Transfield were to construct a hydro-electric
    plants in Benguet and Ilocos. Transfield was given the sole responsibility for the design,
    construction, commissioning, testing and completion of the Project. The contract
    provides for a period for which the project is to be completed and also allows for the
    extension of the period provided that the extension is based on justifiable grounds such
    as fortuitous event. In order to guarantee performance by Transfield, two stand-by
    letters of credit were required to be opened. During the construction of the plant,
    Transfield requested for extension of time citing typhoon and various disputes delaying
    the construction. LHC did not give due course to the extension of the period prayed for
    but referred the matter to arbitration committee. Because of the delay in the construction
    of the plant, LHC called on the stand-by letters of credit because of default. However,
    the demand was objected by Transfield on the ground that there is still pending
    arbitration on their request for extension of time.

    Issue: Whether or not LHC can collect from the letters of credit despite the pending
    arbitration case

    Held: Transfield’s argument that any dispute must first be resolved by the parties,
    whether through negotiations or arbitration, before the beneficiary is entitled to call on
    the letter of credit in essence would convert the letter of credit into a mere guarantee.

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

    Jurisprudence has laid down a clear distinction between a letter of credit and a
    guarantee in that the settlement of a dispute between the parties is not a pre-requisite
    for the release of funds under a letter of credit. In other words, the argument is
    incompatible with the very nature of the letter of credit. If a letter of credit is drawable
    only after settlement of the dispute on the contract entered into by the applicant and the
    beneficiary, there would be no practical and beneficial use for letters of credit in
    commercial transactions.

    The engagement of the issuing bank is to pay the seller or beneficiary of the credit once
    the draft and the required documents are presented to it. The so-called “independence
    principle” assures the seller or the beneficiary of prompt payment independent of any
    breach of the main contract and precludes the issuing bank from determining whether
    the main contract is actually accomplished or not. Under this principle, banks assume
    no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification
    or legal effect of any documents, or for the general and/or particular conditions
    stipulated in the documents or superimposed thereon, nor do they assume any liability
    or responsibility for the description, quantity, weight, quality, condition, packing, delivery,
    value or existence of the goods represented by any documents, or for the good faith or
    acts and/or omissions, solvency, performance or standing of the consignor, the carriers,
    or the insurers of the goods, or any other person whomsoever.

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