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Note: In 1993, Yeson International Philippines Inc. (Seller/Beneficiary), a domestic Philippine manufacturing company, entered into several transactions to sell goods to Sunkyong Trading (HK) Limited (Buyer/Applicant), a Hong Kong-based company. To finance these transactions, Buyer/Applicant applied for four commercial letters of credit from the Hong Kong Branch of Korea Exchange Bank (Issuer) in favor of Seller/Beneficiary to finance these transactions and to secure the loan payments drawn from the Export Bills Purchase Line. They were subject to UCP500 (1999 revision). The letters of credit nominated any bank in the Philippines to negotiate drafts or documents.

The Philippine Commercial International Bank (Nominated Bank) extended an Export Bills Purchase Line to Seller/Beneficiary and D’Capstone Outdoors, Inc., Seller/Beneficiary’s sister company. Through this arrangement, Seller/Beneficiary assigned letters of credit in Seller/Beneficiary’s own favor to Nominated Bank.

On 13 October 1995, Nominated Bank presented the letters of credit to the Manila office of Issuer for payment by courier. Nominated Bank also had the following discrepancies in its cover letters: 1) the acceptance letter issued by Applicant was not presented, 2) Seller/Beneficiary’s address on documents was different, and 3) the quantity over-shipped by 7,767 pieces. Nominated Bank claimed that Issuer did not question the completeness, validity, and propriety of the presentation within seven days in accordance with UCP500 Articles 13 (Standard for Examination of Documents) and 14 (Discrepant Documents and Notice). Despite several demands, Issuer continued to refuse to pay.

In June 1996, Issuer communicated to Nominated Bank that the presented documents had discrepancies and no waiver from Buyer/Applicant had been obtained. On 24 June 1996, Buyer/Applicant informed Issuer that it did not waive the discrepant documents, and directed Issuer to return them to Nominated Bank. Seller/Beneficiary sent letters to Buyer/Applicant on 15 and 16 July 1996, respectively, confirming its instruction to return the documents to Nominated Bank. On 16 July 1996, Issuer returned the documents to Nominated Bank, who received them without question, complaint, demand, or reservation.

Three years later, Nominated Bank sued Issuer and Korea Exchange Bank (KEB)-Head Office (Issuer’s Head Office) for wrongful dishonor in the Philippines. Nominated Bank demanded payment from Issuer and Issuer’s Head Office equal to the amount covered by the LCs totaling USD 284,591.00 plus legal interest from the date of the first demand, until full judgment or its Philippine peso equivalent for actual damages, PHP 1,000,000.00 for exemplary damages, and 15 percent of the amount due and owing from Issuer for attorney’s fees. Issuer alleged Nominated Bank’s complaint should be dismissed for want of a cause of action and counterclaimed that Nominated Bank should pay Issuer PHP 1,000,000.00 and PHP 4,000.00 per hour for litigation expenses and attorney’s fees. The Regional Trial Court (of Makati) entered judgment for Nominated Bank.

Issuer appealed to the Court of Appeals in Manila. On appeal, the Court of Appeals, in a decision by Garcia-Fernandez, J., granted Issuer’s appeal, dismissed Nominated Bank’s complaint, and reversed and set aside the judgment for Nominated Bank.

Issuer had raised the following errors in its appeal:

“The [trial court] erred in awarding the claims of [Nominated Bank] against [Issuer]. In particular:

A) [Nominated Bank] failed to prove its claims…by preponderance of evidence;

B) [Nominated Bank] failed to prove that it is entitled to an award of attorney’s fees;

C) [Nominated Bank] failed to prove that it is entitled to an award of exemplary damages.

The [trial court] erred in refusing or otherwise failing to dismiss the civil case. In particular:

A) [Nominated Bank] has no cause of action against [Issuer’s Head Office];

B) The [trial court] did not acquire jurisdiction over [Issuer];

C) The [trial court] should have dismissed the case because of the absence of “minimum contacts” justifying the court’s assumption and/or exercise of jurisdiction over [Issuer].”

The Court of Appeals granted Issuer’s appeal on grounds that Nominated Bank failed to prove claims against Issuer by a preponderance of evidence, and that the trial court did not exercise jurisdiction over Issuer.

The Court of Appeals affirmed the applicability of the UCP, which provides that “in the absence of any particular provision in the Code of Commerce, commercial transactions shall be governed by usages and customs generally observed.” The court stated that “there being no specific [legal] provisions which govern the legal complexities arising from transactions involving letters of credit, not only between or among banks themselves but also between banks and the seller or the buyer,” the UCP should apply in this case.

The Court of Appeals held that, pursuant to UCP500, the branches of a bank in different countries are considered separate banks. Based on this provision, Issuer’s Head Office is considered a different bank from Issuer. Since Nominated Bank had no transaction or dealing with Issuer’s Head Office, the Court of Appeals determined that Nominated Bank failed to establish its cause of action against Issuer’s Head Office by a preponderance of the evidence.

The Court of Appeals referred to case law and Section 12 of Rule 14 of the Revised Rules of Court to determine whether service of summons through the Philippine Branch of KEB (Philippine Branch) for Issuer was proper. The Court of Appeals recognized that Issuer is a foreign corporation organized and existing under Hong Kong laws. To show proper service of summons on foreign corporations, the plaintiff must first appropriately establish in the complaint that the foreign corporation did business in the country in which jurisdiction is sought.

The appellate court noted that Nominated Bank’s complaint failed to allege that Issuer performed any act in the country that would place it within the sphere of the trial court’s jurisdiction. Furthermore, it was stated there was no showing that Philippine Branch was the domestic agent of Issuer to warrant service of summons upon it. Thus, the Court of Appeals held that the summons served through Philippine Branch for Issuer was improper.

The Court of Appeals ruled that the trial court erred in taking cognizance of the case against Issuer for lack of jurisdiction, ruling that any proceeding by the trial court on this case is therefore null and void. The complaint against Issuer should have been dismissed.

[AWL/GMC]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.