Reliance Commodities, Inc. v. Daewoo Industrial Co., Ltd.
REITERATIONFacts
The Antecedents: Petitioner Reliance Commodities, Inc. ("Reliance") and respondent Daewoo Industrial Co., Ltd. ("Daewoo") entered into a contract of sale on January 9, 1980, for 2,000 metric tons of foundry pig iron. Daewoo shipped the goods, but only 1,864.345 metric tons were delivered, resulting in a short shipment of 135.655 metric tons. A subsequent contract on May 2, 1980, acknowledged the short shipment and stipulated a price reduction for future orders. This was superseded by a contract dated July 31, 1980, for another 2,000 metric tons of foundry pig iron at US$190.30/MT C&F Manila, with payment by an irrevocable sight letter of credit (L/C) to be opened by Reliance in favor of Daewoo. The contract also included an arbitration clause and stipulated that the L/C should be opened on or before August 7, 1980. Reliance applied for an L/C, but it was denied by the Iron and Steel Authority (ISA) because Reliance could not submit sufficient purchase orders from end-users. Daewoo contended Reliance only submitted purchase orders for 900 metric tons, while Reliance claimed 1,900 metric tons. Daewoo rejected the proposed L/C for the shortfall, and Reliance withdrew its application. Daewoo later learned that Reliance had exhausted its foreign exchange allocation for 1980, which contributed to its inability to open the L/C. Daewoo subsequently sold the 2,000 metric tons to another buyer at a lower price. Procedural History: Reliance demanded payment for the short-delivered pig iron from the January 9, 1980 contract. When not heeded, Reliance filed an action for damages against Daewoo. Daewoo counterclaimed for damages, alleging breach of contract by Reliance for failing to open the L/C under the July 31, 1980 contract. The trial court ruled that Daewoo was liable for the short delivery under the first contract and ordered it to pay Reliance P226,370.48 plus interest and attorney's fees. However, it also ruled that Reliance breached the second contract by failing to open the L/C and ordered Reliance to pay Daewoo P331,920.97 as actual damages plus interest and attorney's fees. Reliance appealed the second part of the judgment. The Court of Appeals affirmed the trial court's decision, finding that Reliance could not open the L/C due to exhausted foreign exchange allocation and that the opening of an L/C is a mode of payment, not a suspensive condition. The Petition: Reliance assails the award of damages in favor of Daewoo, arguing that its failure to open the L/C was due to Daewoo's failure to accept purchase orders for 1,900 metric tons, that the opening of the L/C was a condition precedent to the contract's effectivity, and thus the contract never came into existence, absolving Reliance of liability.
Issue(s)
Whether the failure of Reliance to open a Letter of Credit as stipulated in the July 31, 1980 contract constitutes a breach of contract for which it may be held liable for damages. Whether the opening of a Letter of Credit was a condition precedent to the perfection of the contract dated July 31, 1980.
Ruling
The petition is denied for lack of merit. The decision of the Court of Appeals is affirmed.
Ratio Decidendi
On the issue of whether the failure to open a Letter of Credit constitutes a breach of contract: The Court held that the failure of a buyer seasonably to furnish an agreed letter of credit is a breach of the contract between buyer and seller. Where the buyer fails to open a letter of credit as stipulated, the seller or exporter is entitled to claim damages for such breach. Damages for failure to open a commercial credit may, in appropriate cases, include the loss of profit which the seller would reasonably have made had the transaction been carried out. In this case, Reliance's failure to open the L/C as stipulated in the July 31, 1980 contract was a breach of its obligation. This breach compelled Daewoo to sell the 2,000 metric tons to another buyer at a lower price, thereby incurring losses. The Court found that the damages incurred by Daewoo were sufficiently proved by testimony and documentary evidence. On the issue of whether the opening of a Letter of Credit was a condition precedent to the perfection of the contract: The Court ruled that the opening of a Letter of Credit was not a condition precedent for the birth of the obligation of Reliance to purchase foundry pig iron from Daewoo. The parties had reached a "meeting of minds" on the subject matter, price, and other principal provisions, thus perfecting the contract. The failure of Reliance to open the L/C did not prevent the birth of the contract, nor did it extinguish the contract. Instead, the opening of the L/C was an obligation of Reliance and its performance was a condition for the enforcement of Daewoo's reciprocal obligation to ship the goods. The L/C was merely a mode or mechanism by which payment was to be effected. The Court agreed with the Court of Appeals that the non-opening of the L/C was due to Reliance's failure to comply with its duty under the contract, specifically its inability to secure the necessary permits and clearances due to exhausted foreign exchange allocation and insufficient end-user purchase orders.
Main Doctrine
The failure of a buyer to seasonably furnish an agreed letter of credit constitutes a breach of the contract between buyer and seller, entitling the seller to claim damages. The opening of a letter of credit is a mode of payment and an obligation of the buyer, not a condition precedent to the perfection of the contract.