Bank of America, NT & SAD v. CA, Inter-Resin Industrial G.R. No.

105395
Corp., Francisco Trajano, John Doe and Jane Doe
10 December 1993 Vitug, J.
TOPIC IN SYLLABUS:

Definition and Nature of Letter of Credit: a Financial devise to facilitate commercial transaction. An
arrangement whereby the seller gets paid only if he delivers the documents of title over the goods, while the buyer
acquires said documents and control over the goods only after reimbursing the bank.

Kinds of Letters of Credit: Irrevocable and Revocable letter of credit: Article 10 of the U.C.P. defines an
irrevocable letter of credit as one that "constitutes a definite undertaking of the issuing bank, provided that the
stipulated documents are presented and that the terms and conditions of the credit are complied with: i. if the credit
provides for sight payment — to pay, or that payment will be made; ii. if the credit provides for deferred payment —
to pay, or that payment will be made, on the date(s) determinable in accordance with the stipulations of the credit;
iii. if the credit provides for acceptance — to accept drafts drawn by the beneficiary if he credit stipulates that they
are to be drawn on the issuing bank, or to be responsible for their acceptance and payment at maturity if the credit
stipulates that they are to be drawn on the applicant for the credit or any other drawee stipulated in the credit; iv. if
the credit provides for negotiation — to pay without recourse to drawers and/or bona fide holders, draft(s) drawn by
the beneficiary, at sight or at a tenor, on the applicant for the credit or on any other drawee stipulated in the credit
other than the issuing bank itself, or to provide for negotiation by another bank and to pay, as above, if such
negotiation is not effected.

SUMMARY: Bank of America (BOA/Advising Bank) received an alleged Irrevocable Letter of Credit purportedly
issued by Bank of Ayudha in favor of General Chemicals (Buyer). BOA informed Inter-Resin (Seller) of the LoC, and
upon presentment by Inter-Resin of certain documents of title, BOA paid to Inter-Resin certains amount as partial
availment by the latter under the LoC. Inter-Resin later tried to make a second availment under the same LoC, but
BOA denied the same due to certain NBI investigations of irregularities in Inter-Resin’s shipments as well as Bank
of Ayudha denying the LoC outright as fraudulent. BOA then sued Inter-Resin for reimbursement under the first
partial availment. Inter-Resin argues that BOA cannot raise on appeal the issue of being only an advising bank, nor
can BOA recover from Inter-Resin because Bank of Ayudha is the drawer of the LoC, and not Inter-Resin.

SC held for BOA: A letter of credit is an arrangement whereby the seller gets paid only if he delivers the documents
of title over the goods, while the buyer acquires said documents and control over the goods only after reimbursing
the bank. Under the “independence principle”, a letter of credit, engages the issuing bank to pay the seller of the
draft after the required shipping documents are presented to it. The arrangement assures the seller of prompt
payment, independent of any breach of the main sales contract.

LoC is an engagement of the issuing bank, not the advising bank, to pay the draft. BOA was an advising, not a
confirming bank, as seen by the provisions of the LoC itself, BOA’s letter of advice, its request for payment of
advising fee, and the admission by Inter-Resin that it had paid such advising fee.

Futhermore, the transaction in this case is a DISCOUNTING ARRANGEMENT, whereby BOA acted independently
as a negotiating bank, saving Inter-Resin from the hardship of presenting the documents directly to Bank of Ayudha
to recover payment. As a negotiating bank, BOA has a right to recourse against Issuer Bank and until
reimbursement is obtained, Inter-Resin, as the drawer of the draft, continues to assume a contingent liability and is
liable to BOA for what the latter paid under the partial availment

PROCEDURAL ANTECEDENTS:

FACTS:
 5 March 1981: Petitioner Bank of America, (BOA) NT & SA, Manila, received by registered mail an
Irrevocable Letter of Credit No. 20272/81 purportedly issued by Bank of Ayudhya, Samyaek Branch, for the
account of General Chemicals, Ltd., of Thailand.
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 o Amount: USD 2,782,000.00
o purpose: cover sale of plastic ropes and “agricultural files,” with BOA as advising bank and private
respondent Inter-Resin Industrial Corporation as beneficiary.
 11 March 1981: BOA wrote Inter-Resin, informing the latter about the LoC and transmitting such LoC with
the communication. Inter-Resin sent Atty. Tanay to BOA to have the LoC confirmed. BOA did not confirm
the LoC but Renylado Duenas, BOA employee in charge of LoCs, explained to Atty. Tanay that there was
no need for confirmation because the LoC would not have been transmitted if it were not genuine.
 Between 26 March to 10 April 1981: Inter-Resin sought to make partial availment under the LoC by
submitting to BOA certain documents1, pursuant to which BOA issued in Inter-Resin’s favor a
Cashier’s Check for P10, 291, 093.202. Barcelina Tio, (TIO) Inter-Resin’s Executive VP, picked up the
check.
 10 April 2981: BOA wrote Bank of Ayudha advising the latter of the availment under the LoC and sought
the corresponding reimbursement.
 When Inter-Resin, thru VP Tio, presented to BOA documents for the second availment under the
same LoC evidencing a second shipment of goods, BOA, upon receipt of a telex from Bank of
Ayudha declaring the LoC fraudulent, stopped processing Inter-Resin’s documents. BOA sent a
telex to its branch office in Bangkok, Thailand, requesting assistance in determining authenticity of LoC.
BOA also sought the NBI’s help. With the help of the Ph Embassy in Bangkok and the police and customs
personnel of Thailand, NBI agents sent to Thailand discovered that the vans exported by Inter-Resin did
not contain ropes but plastic strips, wrappers, rags and waste materials. NBI also investigated Inter-Resin’s
President Francisco Trajano and Executive VP Tio, who were criminally charged for estafa thru falsification
of commercial documents, though the case was dismissed for lack of prima facie evidence by Rizal
Provincial Fiscal.
 BOA sued Inter-Resin to recover the amount covered by the check on the partial availment of the
now disowned LoC. Inter-Resin argues that it was entitled not only to this partial availment on the
first shipment, but also the balance covering the second shipment.
 28 June 1989, Trial Court ruled for Inter-Resin:
o BOA made assurances that enticed Inter-Resin to send merchandise to Thailand
o The telex declaring the LoC fraudulent was unverified and self-serving (hearsay)
o Even assuming the LoC was fake, “the fault should be borne by BOA which was careless and
negligent” for failing to utilize modern means of communication to verify with Bank of Ayudha the
authenticity of LoC before sending it to Inter-Resin
o Loading of plastic products into the vans was under the strict supervision, inspection and verification of
gov’t officers who enjoy the presumption of regularity in the performance of official functions
o BOA failed to prove the participation of Inter-Resin or its employees in the alleged fraud
 CA sustained the TC, hence this petition.

ISSUES:
1. WON under the LoC, BOA had incurred any liability to the “beneficiary” thereof, which would depend on
whether the bank’s participation in the transaction amounted to an advising/notifying bank (not liable) or a
confirming bank (liable). NO. BOA was an advising bank.
2. WON BOA may recover against Inter-Resin under the draft executed in its partial availment of the LoC.
YES.
3. WON Inter-Resin actually shipped the ropes specified by the LoC. Immaterial. In the operation of a LoC,
the involved banks deal only with documents, and not the goods described in those documents.

RESPONDENT’S ARGUMENTS:
1. BOA cannot, on appeal, belatedly raise the issue of being only an advising bank.
2. Findings of the trial court that the ropes have actually been shipped is binding on the Court.

1
invoices covering the shipment of 24k bales of polyethylene rope to General Chemicals (value: USD 1, 320,600), corresponding packing list, export
declaration, bill of lading
2
“the Peso equivalent of the draft for USD 1,320,600 drawn by Inter-Resin, after deducting the costs for documentary stamps, postage and mail
issuance.
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3. BOA cannot recover from Inter-Resin because the drawer of the LoC is the Bank of Ayudha and not Inter-
Resin.

HELD:

WHAT IS A LETTER OF CREDIT? An arrangement whereby the seller gets paid only if he delivers the
documents of title over the goods, while the buyer acquires said documents and control over the
goods only after reimbursing the bank.
 A financial device developed by merchants as a convenient and relatively safe mode of dealing with sales
of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods
before he is paid, and a buyer, who wants control of the goods before paying.
o The buyer may be required to contract a bank to issue a LoC in favor of the seller so that, by virtue of
the LoC, the issuing bank can authorize the seller to draw drafts and engage to pay them upon their
presentment simultaneously with the tender of documents required by the LoC.
o The buyer and the seller agree on what documents are to be presented for payment, ordinarily,
documents of title evidencing or attesting to the shipment of goods to the buyer.
 Once the credit is established, seller ships the goods to buyer and secures the required shipping
documents or documents of title. Seller then executes a draft and presents it together with the required
documents to the issuing bank, who then redeems the draft and pays cash to the seller if it finds that the
documents conform with the LoC requirements. The bank obtains possession of the documents upon
paying the seller. When the buyer reimburses the issuing bank, buyer acquires the documents entitling him
to the goods.

INDEPENDENCE PRINCIPLE: A letter of credit, as distinguished from other accessory contracts, engages the
issuing bank to pay the seller of the draft after the required shipping documents are presented to it. The
arrangement assures the seller of prompt payment, independent of any breach of the main sales
contract.

PARTIES: (first three are the Main Parties, the rest, optional)
 Buyer – procures LoC, obliges himself to reimburse issuing bank upon receipt of documents of title.
 Issuing Bank – bank issuing LoC, undertakes to pay seller upon receipt of draft and proper documents of
title and to surrender documents to buyer upon reimbursement
 Seller – in compliance with contract of sale, ships goods to buyer and delivers documents of title and draft
to issuing bank to recover payment
 Advising (Notifying) Bank -- may be utilized to convey to seller the existence of the credit
 Confirming Bank – lends credence to LoC issued by a lesser known issuing bank
 Paying Bank – undertakes to encash drafts drawn by exporter
 Negotiating Bank – buyer may approach a bank other than issuing bank to have the draft discounted

1. LoC is an engagement of the issuing bank, not the advising bank, to pay the draft. BOA was an
advising, not a confirming bank, as seen by the provisions of the LoC itself, BOA’s letter of advice,
its request for payment of advising fee, and the admission by Inter-Resin that it had paid such
advising fee.
 The fact that BOA asked Inter-Resin to submit documents required by the LoC and eventually paid the
proceeds thereof did not make it a confirming bank.
o The fact that the draft required by the LoC is to be drawn under the account of General Chemicals
(buyer) only means that the same had to be presented to Bank of Ayudha (issuing bank) for
payment.
o BOA’s 11 March 1981 letter expressly stated that, “the enclosure is solely an advise of credit
opened by the abovementioned correspondent and conveys no engagement by us,” in effect, a
written reservation by BOA limiting its obligation to one of an advising bank, in accordance with the
Uniform Customs and Practice for Documentary Credits.

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 An advising bank’s primordial obligation is to bring the LoC to the attention of the seller. Furthermore, BOA
was bound only to check the “apparent authenticity” of the LoC, and was under no obligation to have first
checked the LoC’s authenticity with the Bank of Ayudha before dispatching it to Inter-Resin.3

2. The transaction in this case is a DISCOUNTING ARRANGEMENT, whereby BOA acted

independently as a negotiating bank, saving Inter-Resin from the hardship of presenting the
documents directly to Bank of Ayudha to recover payment. As a negotiating bank, BOA has a right
to recourse against Issuer Bank and until reimbursement is obtained, Inter-Resin, as the drawer of
the draft, continues to assume a contingent liability and is liable to BOA for what the latter paid
under the partial availment.
 Inter-Resin admits having received an amount from BOA on the LoC, and in having executed the
corresponding draft. The payment to Inter-Resin gave BOA the right of reimbursement from Issuing Bank,
Bank of Ayudha, which would in turn seek indemnification from the Buyer (General Chemicals of Thailand).
But since Bank of Ayudha disowned the LoC, BOA may seek restitution from Inter-Resin.
 Between the seller and the negotiating bank there is the usual relationship existing between a drawer and
purchaser of drafts. Unless the drafts drawn in pursuance of the credit are indicated to be without recourse
therefore, the negotiating bank has the ordinary right of recourse against the seller in the event of dishonor
by the issuing bank.

3
U.C.P. Article 18: “Banks assume no liability or responsibility for the consequences arising out of the delay and/or loss in transit of any messages,
letters or documents, or for delay, mutilation or other errors arising in the transmission of any telecommunication…”
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