BANK OF THE PHILIPPINE ISLANDS vs. DE RENY FABRIC INDUSTRIES, INC. (Commercial Law Review).

G.R. No. L-24821 October 16, 1970

BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee,

vs.

DE RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO and AURORA CARCERENY alias AURORA C. GONZALES, defendants-appellants.

FACTS:

On four (4) different occasions, the De Reny Fabric Industries, Inc., a Philippine corporation through its co-defendants-applied to the Bank for four (4) irrevocable commercial letters of credit to cover the purchase by the corporation of goods described in the covering L/C applications as "dyestuffs of various colors" from its American supplier, the J.B. Distributing Company. 

All the applications of the corporation were approved, and the corresponding Commercial L/C Agreements were executed pursuant to banking procedures. Under these agreements, the aforementioned officers of the corporation bound themselves personally as joint and solidary debtors with the corporation. Pursuant to banking regulations then in force, the corporation delivered to the Bank peso marginal deposits as each letter of credit was opened.

The Bank issued irrevocable commercial letters of credit addressed to its correspondent banks in the United States, 

Consequently, the J.B. Distributing Company drew upon, presented to and negotiated with these banks, its sight drafts covering the amounts of the merchandise ostensibly being exported by it, together with clean bills of lading, and collected the full value of the drafts up to the amounts appearing in the L/Cs as above indicated. These correspondent banks then debited the account of the Bank of the Philippine Islands with them up to the full value of the drafts presented by the J.B. Distributing Company, plus commission thereon, and, thereafter, endorsed and forwarded all documents to the Bank of the Philippine Islands.

In the meantime, as each shipment (covered by the above-mentioned letters of credit) arrived in the Philippines, the De Reny Fabric Industries, Inc. made partial payments to the Bank amounting, in the aggregate, to P90,000. Further payments were, however, subsequently discontinued by the corporation when it became established, as a result of a chemical test conducted by the National Science Development Board, that the goods that arrived in Manila were colored chalks instead of dyestuffs.

The corporation also refused to take possession of these goods, and for this reason, the Bank filed a complaint then the lower court rendered its decision ordering the corporation and its co-defendants (the herein appellants) to pay to the plaintiff-appellee.

ISSUE:

Whether it is the duty of the foreign correspondent banks of the Bank of the Philippine Islands to take the necessary precaution to insure that the goods shipped under the covering L/Cs conformed with the item appearing therein.

RULING:

No. Under the terms of their Commercial Letter of Credit Agreements with the Bank, the appellants agreed that the Bank shall not be responsible for the "existence, character, quality, quantity, conditions, packing, value, or delivery of the property purporting to be represented by documents; for any difference in character, quality, quantity, condition, or value of the property from that expressed in documents," or for "partial or incomplete shipment, or failure or omission to ship any or all of the property referred to in the Credit," as well as "for any deviation from instructions, delay, default or fraud by the shipper or anyone else in connection with the property the shippers or vendors and ourselves [purchasers] or any of us." Having agreed to these terms, the appellants have, therefore, no recourse but to comply with their covenant. 2

But even without the stipulation recited above, the appellants cannot shift the burden of loss to the Bank on account of the violation by their vendor of its prestation.

It was uncontrovertibly proven by the Bank during the trial below that banks, in providing financing in international business transactions such as those entered into by the appellants, do not deal with the property to be exported or shipped to the importer, but deal only with documents. The Bank introduced in evidence a provision contained in the "Uniform Customs and Practices for Commercial Documentary Credits Fixed for the Thirteenth Congress of International Chamber of Commerce," to which the Philippines is a signatory nation. Article 10 thereof provides: .

In documentary credit operations, all parties concerned deal in documents and not in goods. — Payment, negotiation or acceptance against documents in accordance with the terms and conditions of a credit by a Bank authorized to do so binds the party giving the authorization to take up the documents and reimburse the Bank making the payment, negotiation or acceptance.

The existence of a custom in international banking and financing circles negating any duty on the part of a bank to verify whether what has been described in letters of credits or drafts or shipping documents actually tallies with what was loaded aboard ship, having been positively proven as a fact, the appellants are bound by this established usage. They were, after all, the ones who tapped the facilities afforded by the Bank in order to engage in international business.

ACCORDINGLY, the judgment a quo is affirmed, at defendants-appellants' cost.