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RELIANCE COMMODITIES v. DAEWOO INDUSTRIAL CO.

FACTS:

Reliance Commodities, Inc. ("Reliance") and Daewoo Industrial Co., Ltd. ("Daewoo") entered into a contract for the shipment and delivery of 2,000 metric tons of foundry pig iron. However, upon arrival in Manila, only 1,864.345 metric tons were delivered, resulting in a shortage of 135.655 metric tons.

Another contract was entered into on May 2, 1980, to purchase an additional 2,000 metric tons of pig iron. Daewoo acknowledged the previous short shipment and agreed to reduce the price for future orders. However, this second contract was not consummated and was replaced by a third contract dated July 31, 1980.

In the July 31, 1980 contract, Daewoo agreed to sell 2,000 metric tons of pig iron to Reliance at a reduced price of US$190.30/MT. Reliance applied for a Letter of Credit (L/C) in favor of Daewoo, but its application was denied by the Iron and Steel Authority (ISA) because Reliance exceeded its foreign exchange allocation for 1980. Reliance was asked to provide purchase orders, but it was only able to provide orders for 900 metric tons. As a result, Reliance withdrew its application for the L/C.

Daewoo later discovered that Reliance's failure to open the L/C was due to exceeding its foreign exchange allocation. Due to this breach of contract, Daewoo sold the 2,000 metric tons to another buyer at a lower price. Reliance demanded payment for the short delivery of 135.655 metric tons, while Daewoo counterclaimed damages for Reliance's breach of contract. The trial court ruled in favor of both parties, and Reliance appealed, specifically challenging the award of damages in favor of Daewoo.

ISSUES:

  1. Whether the failure of Reliance to open a letter of credit makes them liable to Daewoo for damages.

  2. Whether the failure of the buyer to open a letter of credit as stipulated constitutes a breach of contract.

RULING:

  1. The failure of Reliance to open a letter of credit does not make them liable to Daewoo for damages. The opening of the letter of credit was not a condition precedent for the formation of the contract between Reliance and Daewoo. Despite the failure to open the letter of credit, the contract between the two parties had already been perfected and was enforceable. The opening of the letter of credit was an obligation of Reliance but its failure to do so did not extinguish the contract.

  2. Yes. Failure of the buyer to seasonably furnish an agreed letter of credit is considered a breach of contract between the buyer and seller. The seller or exporter is entitled to claim damages for such breach, which may include the loss of profit that the seller would have reasonably made if the transaction had been carried out. In this case, the Court of Appeals correctly ruled that the damages incurred by the seller were sufficiently proved, considering the testimony and documentary evidence presented.

PRINCIPLES:

  • A letter of credit is a financial device that serves as a mode of payment in international trade transactions.

  • Opening a letter of credit creates in the seller/exporter a secure expectation of payment.

  • In a letter of credit transaction, there are three distinct contractual relationships: between the account party and the beneficiary, between the account party and the issuing bank, and between the issuing bank and the beneficiary.

  • The failure to open a letter of credit does not prevent the formation of a contract and does not extinguish an existing contract.

  • The opening of a letter of credit (L/C) is a mode of payment in the contract between the buyer and the seller.

  • Legal requirements must be complied with before an L/C can be opened.

  • The failure of the buyer to comply with the duty to open an L/C as stipulated in the contract constitutes a breach of contract.

  • The seller or exporter is entitled to claim damages for the breach, including the loss of profit that would have been made if the transaction had been carried out.