FACTS:

The case involves a dispute between the plaintiff, Villaluz, and the defendants, Christiansen and Feati Bank and Trust Company. In 1971, Villaluz entered into a contract for the sale of logs with Christiansen, who accepted delivery and shipped the logs to the buyer in South Korea. However, Christiansen refused to issue the necessary certification for Villaluz to negotiate a letter of credit, accusing him of fraud. Feati Bank and Trust Company, the notifying and negotiating bank, refused to negotiate the letter of credit without Christiansen's certification, despite the Central Bank's ruling that this requirement was illegal. As a result, Villaluz filed a complaint against Christiansen and later amended the complaint to include Feati Bank and Trust Company.

After trial, the lower court found Christiansen liable for the purchase price of the logs and concluded that he acted in bad faith and deceit. The court also held Feati Bank and Trust Company liable for refusing to negotiate the letter of credit and for its role as a notifying and negotiating bank. The court ordered the defendants to pay various sums to Villaluz, including the purchase price of the logs, government fees and charges, damages, and attorney's fees and litigation expenses. The defendants were also ordered to pay interest on these sums.

Subsequently, the petitioner, Feati Bank and Trust Company, filed a notice of appeal against the decision. The private respondent filed a motion for the immediate execution of the judgment, which was granted by the trial court. The petitioner then filed a motion for reconsideration and a motion to suspend the implementation of the writ of execution, both of which were denied. The petitioner then filed a petition for certiorari and prohibition with preliminary injunction before the Court of Appeals, which granted the petition and nullified the order of execution. The Court of Appeals affirmed the decision of the lower court, ruling that the petitioner bank is liable on the letter of credit. The petitioner filed a petition for review before the Supreme Court, arguing that the respondent court made an error of law in holding it liable despite the non-compliance of the private respondent.

ISSUES:

1. Whether a correspondent bank is liable under a letter of credit despite the beneficiary's non-compliance with its terms.

2. Whether the act of the correspondent bank in notifying the beneficiary of the letter of credit makes it liable as a guarantor of the issuing bank.

3. Whether the respondent court committed an error in affirming the trial court's decision.

4. Whether the petitioner is a confirming bank or a notifying bank.

5. Whether the petitioner had the obligation to negotiate or accept drafts drawn under the documentary credit.

6. Whether the petitioner can be held liable for the enforcement of the private respondent's rights under the letter of credit.

7. Whether the irrevocable credit is independent of the contract between the buyer and the seller and the credit agreement between the issuing bank and the buyer.

8. Whether the unjustified refusal of the buyer to issue the certification under the letter of credit should be charged to the issuing bank.

9. Whether the theory of guarantee is applicable in this case.

10. Whether the petitioner, as a notifying bank, has any contractual relationship with the buyer and the contract between the issuing bank and the buyer regarding the issuance of the letter of credit.

11. Whether the notifying bank can be held liable for refusing to negotiate or accept drafts drawn under the letter of credit.

12. Whether the petitioner, assuming to be a confirming bank, can be forced to pay the amount under the letter of credit.

13. Whether the failure to submit the certification is fatal to the buyer's case.

14. Whether the law should favor the oppressed party in this case.

15. Whether or not the Court of Appeals erred in affirming the trial court's finding that there was a perfected contract of sale between the petitioner and the respondent.

16. Whether or not the petitioner is entitled to the recovery of the amount it paid as earnest money.

RULING:

1. The petition is granted. It is settled that in commercial transactions involving letters of credit, the documents tendered must strictly conform to the terms of the letter. The rule of strict compliance applies in both the United States and the Philippines. A correspondent bank that accepts a faulty tender departs from what has been stipulated under the letter of credit and acts at its own risk. As such, the correspondent bank may not recover the money paid to the beneficiary. The incorporation of the Uniform Customs and Practice for Documentary Credit (U.C.P.) in the letter of credit also governs the relations between the parties and further justifies the applicability of the U.C.P. in these cases. The respondent court's ruling that the correspondent bank is liable under the letter of credit despite the beneficiary's non-compliance is therefore erroneous.

2. The petitioner is a notifying bank, not a confirming bank. The court ruled that the trial court and the Court of Appeals erred in mixing up the meanings of an irrevocable credit and a confirmed credit. An irrevocable credit refers to the duration of the letter of credit, while a confirmed letter of credit pertains to the obligation assumed by the correspondent bank. In this case, the petitioner's obligation was solely to notify and/or transmit the documentary credit to the beneficiary, as stated in the letter of credit.

3. The petitioner, as a notifying bank, did not have the obligation to negotiate or accept drafts drawn under the documentary credit. Its responsibility was limited to notifying and/or transmitting the letter of credit to the private respondent. The petitioner was not a party to the contract of sale between the buyer and the seller, and its relationship was only with the issuing bank.

4. The petitioner cannot be held liable for the enforcement of the private respondent's rights under the letter of credit. The records do not show any evidence that the petitioner confirmed the letter of credit. The loan agreement between the parties cannot be construed as an act of confirmation, and the loan itself was granted in anticipation of the letter of credit. The petitioner, at most, acted as a negotiating bank and had no contractual relationship with the seller. Therefore, the refusal of the petitioner to accept the tender of the private respondent is justified. The finding that the petitioner became a trustee in relation to the private respondent has no legal basis, as a trust requires the existence of a specific property held for the benefit of another. Furthermore, the petitioner's acceptance of the instructions of the issuing bank as a notifying bank does not create estoppel and does not make it a trustee. The petitioner is not a guarantor of the issuing bank or its client.

5. Yes, the irrevocable credit is independent of the contract between the buyer and the seller and the credit agreement between the issuing bank and the buyer.

6. No, the unjustified refusal of the buyer to issue the certification under the letter of credit should not be charged to the issuing bank.

7. No, the theory of guarantee is not applicable in this case.

8. No, the notifying bank does not have any contractual relationship with the buyer and the contract between the issuing bank and the buyer regarding the issuance of the letter of credit.

9. No, the notifying bank cannot be held liable for refusing to negotiate or accept drafts drawn under the letter of credit.

10. No, assuming to be a confirming bank, the petitioner cannot be forced to pay the amount under the letter of credit.

11. Yes, the failure to submit the certification is fatal to the buyer's case.

12. No, the law should not favor the oppressed party in this case.

13. No, the Court of Appeals did not err in affirming the trial court's finding that there was a perfected contract of sale between the petitioner and the respondent. The Court held that there was sufficient evidence to support the lower courts' findings that there was a meeting of the minds between the petitioner and the respondent with respect to the sale of the subject property.

14. No, the petitioner is not entitled to the recovery of the amount it paid as earnest money. The Court ruled that the petitioner, by its own act, waived its right to recover the earnest money when it participated in the bidding for the subject property and failed to comply with the terms of the contract after winning the bid.

PRINCIPLES:

• The rule of strict compliance applies in commercial transactions involving letters of credit. The documents tendered must strictly conform to the terms of the letter.

• A correspondent bank that accepts a faulty tender departs from what has been stipulated under the letter of credit and acts at its own risk.

• The incorporation of the Uniform Customs and Practice for Documentary Credit (U.C.P.) in the letter of credit governs the relations between the parties.

• In the absence of any particular provision in the Code of Commerce, commercial transactions shall be governed by the usages and customs generally observed.

• The absence of any document required in the documentary credit justifies the refusal by the correspondent bank to negotiate, accept, or pay the beneficiary.

• The functions assumed by a correspondent bank in a letter of credit transaction are classified according to the obligations taken up by it - notifying bank, negotiating bank, or confirming bank.

• A notifying bank assumes no liability except to notify and/or transmit the existence of the letter of credit to the beneficiary.

• A confirming bank assumes a direct obligation to the seller and its liability is primary as if it had issued the letter of credit itself.

• A seller's relationship is only with the issuing bank and not with the beneficiary of a letter of credit.

• To hold a party liable under a letter of credit, there must be proof of confirmation.

• A loan agreement cannot be construed as an act of confirmation of a letter of credit.

• A negotiating bank has no contractual relationship with the seller.

• The opening of a letter of credit does not create a trust or signify the specific reservation of a sum of money.

• An irrevocable credit is independent of the contract between the issuing bank and the beneficiary.

• The acceptance of instructions by a notifying bank does not create estoppel or a trust.

• An irrevocable credit is independent of the contract between the buyer and the seller and the credit agreement between the issuing bank and the buyer.

• The unjustified refusal of the buyer to issue a certification under a letter of credit should not be charged to the issuing bank.

• The theory of guarantee is inconsistent with the concept of an irrevocable credit.

• A notifying bank does not have a contractual relationship with the buyer and the contract between the issuing bank and the buyer regarding the issuance of the letter of credit.

• The notifying bank is only obligated to notify and/or transmit the letter of credit to the seller, and is not responsible for the performance of the issuing bank.

• The failure to comply with the terms of a letter of credit can be fatal to the party's case.

• The law should govern future relations among people and should not be decided based on what individuals believe it should declare.

• To have a perfected contract of sale, there must be a meeting of minds between the parties on the essential elements of the contract, such as the object of the sale and the purchase price.

• Waiver is the intentional relinquishment of a known right, and it may be done expressly or impliedly. A party is deemed to have impliedly waived a right when, by its own acts, it has led the other party to believe that it has no intention to enforce such right.