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.

This is an appeal from the decision of the Court of First
Instance of Manila dated October 24, 1963 in civil case 52434, ordering the
defendants-appellants to pay to the Bank of the Philippine Islands (hereinafter
referred to as the Bank), jointly and severally, the value of the credit it
extended to them in several letters of credit which the Bank opened at the
behest of the defendants-appellants to finance their importation of dyestuffs
from the United States, which however turned out to be mere colored chalk upon
arrival and inspection thereof at the port of Manila.

The record shows that on four (4) different occasions in 1961,
the De Reny Fabric Industries, Inc., a Philippine
corporation, through its co-defendants-appellants, Aurora Carcereny,
alias Aurora C. Gonzales, and Aurora T. Tuyo,
president and secretary, respectively of the corporation, 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 dates and amounts of the L/Cs applied for and approved
as well as the peso marginal deposits made were, respectively, as follows:

By virtue of the foregoing transactions, the Bank issued
irrevocable commercial letters of credit addressed to its correspondent banks
in the United States, with uniform instructions
for them to notify the beneficiary thereof, the J.B. Distributing Company,
that they have been authorized to negotiate
the latter’s sight drafts up to the amounts mentioned therein,
respectively, if accompanied, upon presentation, by a full set of negotiable clean “on board” ocean bills of lading,
covering the merchandise appearing in the L/Cs, that is, dyestuffs of various
colors.  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 caused them to be deposited with a
bonded warehouse paying therefor the
amount of P12,609.64 up to the filing of its complaint
with the court below on December 10, 1962.

On October 24, 1963 the lower court rendered its decision
ordering the corporation and its co-defendants (the herein appellants) to pay
to the plaintiff-appellee the amount of P291,807.46, with interest thereon, as provided for in the L/C Agreements, at the rate
of 7% per annum from October 31, 1962 Until fully paid, plus costs.

It is the submission of the defendants-appellants that it was the
duty of the foreign correspondent banks of the Bank of the Philippine Islands
to take the necessary precautions to insure that the goods shipped under the
covering L/Cs conformed with the item appearing therein, and, that the foreign
banks having failed to perform this
duty, no claim for recoupment against the
defendants-appellants, arising from the losses incurred for the non-delivery or
defective delivery of the articles ordered, could accrue.

We can appreciate the sweep of the appellants, argument, but we
also find that it is nestled hopelessly inside a salient where the valid
contract between the parties and the
internationally accepted customs of the banking trade must prevail.^[1]

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 or the shipping thereof, ” and “for any breach of contract
between 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 incontrovertibly 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 given 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.  This is
without prejudice to the Bank, in proper proceedings in the court below in this
same case, proving and being reimbursed additional expenses, if any, it has incurred by
virtue of the continued storage of the goods in question up to the time this
decision becomes final and executory.

Reyes, J.B.L., Acting C.J., Dizon, Makalintal, Zaldivar, Fernando, Teehankee, Barredo, Villamor, and Makasiar, JJ., concur.

Concepcion, C.J., on official leave.

^[1]
The power of our courts to accept in evidence, international custom as evidence
of a general practice accepted as law, may be said to be derived from
both Constitutional as well as statutory sources.  Section 3, Article II of the Constitution
provides that “The Philippines renounces
war as an instrument of national policy, and adopts the generally accepted
principles of international law as a part of the law of the Nation.”  Art. 9 of the New Civil Code provides that
“No court or judge shall decline
to render judgment by
reason of the silence, obscurity or insufficiency
of the law,” and
Art. 12 of the same Code provides that “A custom
must be proved as a fact, according to the rules of evidence.” The Code of
Commerce, in its Article 2, likewise provides that “Acts of commerce,
whether those who execute them be merchants or not, and whether specified in
this Code or not, should be governed by
the provisions contained in it, in
their absence, by the usages of commerce generally observed in each
place; and in the absence of both
rules, by those of the civil law.”  “Those acts contained in this Code and
all others of analogous character, shall be deemed acts of commerce.”  It must be noted that certain principles
governing the issuance, acceptance and payment of letters of credit are specifically
provided for in the Code of Commerce.

^[2]
Article 12 of the Commercial Letter of Credit Agreement provides, inter alia: 
“The users of the Credit shall be deemed our agents and we assume
all risks of their acts or omissions. 
Neither you nor your correspondents shall be responsible: for the existence, character,
quality, quantity, condition,
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; … for partial or incomplete shipment, or
failure or omission to ship any or all of the property referred to in the
Credit; … for any deviation from instructions, delay, default or fraud by the
shipper or
anyone else in connection with the property or the shipping thereof; …
for any breach of contract between the shipper or vendors and ourselves or any of
us; … We are responsible to you for all obligations imposed upon you with respect to the
Credit or the relative drafts, documents or property.  In furtherance and extension and not in
limitation of the specific provisions hereinbefore set forth, we agree that any action taken
by you or by any correspondent of yours under or in connection with the Credit or
the relative drafts, documents or property, if taken in good faith, shall be
binding on us and shall not put you or your correspondent under any resulting
liability to us; and we make like agreement as to any inaction or omission, unless in
breach of good faith.”