Notification, not confirmation

To break the impasse between a seller who refuses to part with his goods before he is paid, and a buyer who wants to have control of the goods before paying, a financial device has been developed by merchants known as letter of credit (L/C). Under this scheme, the buyer contracts a bank to issue a letter of credit in favor of the seller so that, by virtue of said letter, the issuing bank can authorize the seller to draw drafts and engage to pay them upon their presentment simultaneously with the submission of the proper documents of titles required by the L/C. The issuing bank then obtains possession of the documents upon paying the seller and surrenders them to the buyer upon being reimbursed of the amount it has paid to the seller. Thus the seller gets paid only if he delivers the documents of title over the goods, while the buyer acquires the said documents and control over the goods only after reimbursing the bank.

Ordinarily, there would at least be three parties involved: the buyer, the seller and the paying bank. But in international transactions covering import and export of goods, the services of an advising (notifying) bank may be utilized to convey to the seller the existence of the credit; or a confirming bank which will lend credence to the letter of credit issued by a lesser known issuing bank. Further, instead of going to the place of the issuing bank to claim payment, the seller may approach another bank, termed the negotiating bank, to have the draft discounted. In this case, the issue that came up is whether the bank involved in the L/C is the confirming and paying bank or merely an advising and negotiating bank.

The case involved the sale of plastic ropes and "agricultural files" by IRIC based in the Philippines (seller) to GCL of Thailand (buyer). On March 5, 1981, Bank of America in Manila (BA) received by registered mail, an irrevocable L/C purportedly issued by Bank of Ayudhya, Samyaek Branch, for the account GCL in the amount of US $2,782,000.00.

On March 11, 1981 BA notified IRIC of such receipt and enclosed therein, the said L/C, expressly stating that "the enclosure is solely an advice of credit opened by the abovementioned correspondent and conveys no engagement by us". Upon receipt of this letter-advice from BA, IRIC paid the advising fee but asked BA to confirm the L/C. An employee of BA said that there was no need because the L/C would not have been transmitted if it were not genuine. So between March 26 and April 10, 1981 IRIC made partial availments under the L/C covering shipment of 24,000 bales of polyethelene ropes to GCL valued at $1,360,200. IRIC presented to BA the corresponding draft for said amount together with the invoices, packing list, export declaration and bill of lading of the shipment. After being satisfied that IRIC’s documents conformed with the conditions of the L/C, BA issued in favor of IRIC Cashier’s Check for P10,219,093.20 the peso equivalent of the draft drawn by IRIC after deducting the costs of the documentary stamps, postage and mail insurance. Then on April 10, 1981 BA wrote Bank of Ayudhya advising the latter of the availment under the L/C and sought the corresponding reimbursement therefor.

Pending reimbursement and while IRIC was trying to make a second availment under the same L/C, BA received a telex from Bank of Ayudhya declaring the L/C fraudulent. BA thus stopped processing the documents submitted by IRIC for the second availment, then conducted an investigation with the assistance of its branch in Thailand and the local NBI keeping IRIC informed of the developments. It was then discovered that the vans exported by IRIC did not contain ropes but plastic strips, wrappers, rags and waste materials.

BA thus sued IRIC for the recovery of P10,219,093.20, the peso equivalent of the draft covering the first availment. On the other hand, IRIC claimed that not only was it entitled to retain the said sum on its first shipment but also to the balance of US $1,461,400.00 covering the second shipment.

After trial, the lower court ruled in favor of IRIC holding among others that BA: (a) made assurances that enticed IRIC to send the merchandise to Thailand; and (b) was careless and negligent as it should have first checked the authenticity of the L/C with Bank of Ayudhya, by using advanced mode of communications, before dispatching the same to IRIC. So the lower not only denied BA recovery of the P10,219,093.20 but ordered it to pay IRIC the balance of US $1,461,400.00. The Court of Appeals affirmed this ruling.

Were the lower court and CA correct?

No.

BA has, in fact only been an advising, not an issuing or confirming bank as clearly evident in the provisions of the L/C itself, its letter of advice, its request for payment of advising fee which was admittedly paid by IRIC. The L/C is an engagement of the issuing bank, not the advising bank to pay the draft.

As an advising bank, BA did not incur any obligation more than just notifying IRIC of the L/C issued in its favor, let alone to confirm said L/C. The bare statement of a BA employee on the authenticity of the L/C cannot justify the conclusion that BA must now assume total liability on the L/C. Indeed, the issuance of the L/C should been of greater concern to IRIC as seller. It should have at the very least entered into a contract of sale or negotiated with the buyer GLC, prior to the L/C because the perfection of said contract precedes the issuance of the L/C. BA’s primordial obligation is to bring the L/C to the attention of the seller(IRIC). It assumes no responsibility for the consequences arising out of delay or errors in the transmission of letters or documents. It is only bound to check the "apparent authenticity" of the L/C which means its appearance to unaided senses that is not or may not be borne out by more rigorous examination or greater knowledge.

That BA asked IRIC to submit documents required by the L/C and eventually paid the drafts did not make it an issuing or confirming bank. Said acts only gave rise to a transaction commonly referred to as discounting arrangement. This time BA acted independently as a negotiating bank thus saving IRIC from the hardship of presenting the documents directly to the issuing Bank of Ayudhya to recover payment. As a negotiating bank it has a right of recourse against the said issuing bank and until reimbursement is obtained, IRIC as the drawer of the draft continues to assume a contingent liability thereon. Since Bank of Ayudhya disowned the L/C, BA can turn to IRIC for restitution. So as negotiating bank, BA is entitled to recover on IRIC’s partial availment of P10,219,093.20 with legal interest from filing of the complaint until fully paid (Bank of America Nt & SA vs. Court of Appeals, G.R. 105395, December 10, 1993)

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