Velasquez v. Solidbank
REITERATIONFacts
The Antecedents: Petitioner Marlou L. Velasquez, operating as Wilderness Trading, engaged in export transactions payable under a letter of credit opened by a foreign buyer. For a third shipment petitioner negotiated a documentary sight draft drawn on the foreign issuing bank and, as a condition for the bank's advancing the proceeds, executed a letter of undertaking in favor of respondent Solidbank Corporation promising to hold the bank free and harmless and to pay on demand the amount of the draft if it was not accepted or paid. Respondent advanced the amount to petitioner and forwarded documents to the issuing bank. The sight draft was later dishonored by non-acceptance and the foreign buyer issued a stop payment order citing discrepancies in the export documents. Procedural History: Respondent filed a complaint for recovery of sum of money with the Regional Trial Court (RTC) in Cebu City. The RTC rendered judgment in favor of respondent ordering petitioner to pay the principal amount advanced with interest at 20% per annum, attorney's fees equivalent to 10% of the total amount due, and costs. Petitioner appealed to the Court of Appeals (CA), which on June 27, 2002 affirmed with modification the RTC decision and ordered payment of the principal with interest at 12% per annum from February 22, 1993, attorney's fees equivalent to 5% of the total amount due, and costs. Petitioner filed a petition for review on certiorari to the Supreme Court. The Petition: Petitioner argued that he was discharged from liability under the sight draft because respondent failed to protest its non-acceptance under Section 152 of the Negotiable Instruments Law and that, being discharged under the principal instrument, he could not be held liable under the accessory letter of undertaking; he also contended lack of proof that he violated the letter of credit or the undertaking.
Issue(s)
Whether the Court of Appeals erred in holding petitioner liable on the accessory contract, the letter of undertaking, despite petitioner having been released from liability under the sight draft by operation of the Negotiable Instruments Law. Whether petitioner can be held liable under the letter of undertaking in the absence of proof that he violated the provisions of the sight draft or the letter of credit.
Ruling
The petition is DENIED for lack of merit. The Decision of the Court of Appeals dated June 27, 2002 is hereby AFFIRMED. The Supreme Court held that petitioner was discharged from liability under the sight draft due to respondent's failure to protest its non-acceptance under Section 152 of the Negotiable Instruments Law, but petitioner remained liable under his independent letter of undertaking. The CA judgment as to amounts, interest, attorney's fees and costs was affirmed.
Ratio Decidendi
On Whether petitioner is liable under the letter of undertaking despite discharge under the sight draft: The Court explained that Section 152 of the Negotiable Instruments Law requires protest to hold parties liable on a foreign bill dishonored for non-acceptance; therefore petitioner was discharged from liability under the sight draft when respondent failed to effect the required protest. However, the letter of undertaking was a separate and independent contract that constituted the consideration for respondent's advance. The liability under the letter of undertaking is direct and primary and subsists independently from any liability under the sight draft. The Court stressed that the bank would not have advanced the proceeds but for the express undertaking, which obliged petitioner to reimburse the amount on demand if the draft was dishonored. Consequently, the extinguishment of liability under the negotiable instrument did not negate the bank's contractual right to demand payment under the distinct letter of undertaking. The Court therefore held that petitioner could be held liable under the letter of undertaking even if he was discharged under the sight draft. On Whether proof of violation of the sight draft or letter of credit was required for liability under the letter of undertaking: The Court held that respondent need not establish collateral facts such as breaches of the letter of credit in order to enforce the letter of undertaking. The undertaking itself contained an express promise that the draft would be accepted and paid and an agreement that petitioner would pay on demand in case of dishonor, including liabilities for discrepancies enumerated in the instrument. Mere non-acceptance of the sight draft was sufficient to trigger petitioner’s contractual obligation under the letter of undertaking. The Court observed that the issuing bank and buyer found discrepancies in the documents and the buyer issued a stop payment order, matters which supported the factual predicate for the bank's demand but which were not essential to the existence of petitioner's contractual duty under the undertaking. The Court noted that the proper remedy for petitioner, if he contested the foreign buyer's findings, was a separate action against that buyer, but such contest did not absolve petitioner of his primary contractual obligation to the bank. The enforcement of the letter of undertaking thus rested on the clear and express terms of the undertaking and the consideration supplied by the bank in reliance thereon.
Main Doctrine
Liability under an independent letter of undertaking is a primary, separate obligation and is not extinguished by the failure to protest the dishonor of a foreign sight draft under Section 152 of the Negotiable Instruments Law.