RELIANCE COMMODITIES, INC., PETITIONER, VS. DAEWOO INDUSTRIAL CO., LTD., RESPONDENT.

On 9 January 1980, petitioner Reliance Commodities, Inc.
(“Reliance”) and private respondent Daewoo Industrial Co., Ltd. (“Daewoo”) entered into a contract
of sale under the terms of which the latter undertook to ship and deliver to
the former 2,000 metric tons of foundry pig iron for the price of
US$404,000.00. Pursuant to this
contract, Daewoo shipped from Pohang, Republic of Korea, 2,000 metric tons of
foundry pig iron on board the M/S Aurelio III under Bill of Lading No.
PIP-1 for carriage to and delivery in Manila to its consignee, Reliance. The shipment was fully paid for. Upon arrival in Manila, the subject cargo
was found to be short of 135.655 metric tons as only 1,864.345 metric tons were
discharged and delivered to Reliance.

On 2 May 1980, another contract was entered into between the same
parties for the purchase of another 2,000 metric tons of foundry pig iron. Daewoo acknowledged the short shipment of
135.655 metric tons under the 9 January 1980 contract and, to compensate
Reliance therefor, bound itself to reduce the price by US$1 to US$2 per metric
ton of pig iron for succeeding orders. This undertaking was made part of the 2 May 1980 contract. However, that contract was not consummated
and was later superseded by still another contract dated 31 July 1980.

The 31 July 1980 contract read as follows:

“CONFIRMATION
OF ORDER

SALES
NOTE No. HSB-SN/S001-R

To Messrs:   Reliance Commodities, Inc.

161, 9th Street, 10th
Avenue

Caloocan City

Reference:    HSB-PI/8019-R

Contracted through:

_______________________________________________________________________________________________________________

Order No.:

Commodity:  Foundry Pig
Iron

Spec.: JIS G 2202
Class 1-1C

Quantity:       2,000MT

Price:            US
$190.30/MT C&F Manila

Amount:        US
$380,600.00

Packing:        Bare
Loose

Shipment:     August

Destination:  Manila

Payment:      By an irrevocable
at sight letter of credit in favor of Daewoo Industrial Co., Ltd., 541 5th
Street, namdaemunro, Jung-Gu,

Seoul, Korea.

Remarks:      Other
terms and conditions as per attached sheet.

_______________________________________________________________________________________________________________

We confirm our sales as
specified herein. Subject to the terms
and conditions set forth herein, this confirmation of order (“the
Contract”) constitutes a contract between Daewoo Industrial Co., Ltd. (“Seller”)
and the addressee (“Buyer”). Other terms and conditions of the Contract are on the back hereof. If you find anything herein not in order,
please let us know immediately, if necessary by telex, cable or telegram. Kindly sign and return the duplicate after
confirming the above.

Read and agreed to:

Name of addressee:                                                                                     Daewoo
Industrial Co., Ltd.

By: (“SGD) MR. SAMUEL CHUASON                                                                     By: (SGD) JA-HYUNG RYU

Date: July 31, 1980                                                                                                  Date: July 31, 1980″^[1]

The attached sheet referred to above set out the following:

“Reliance Commodities, Inc.

Our Reference No. HSB-PI/S019-R

1.    Invoicing : Actual Weight

2.    Chemical Composition (%):

Carbon               : 3.30 min. (aiming 3.80 min.)

Silicon                : 2.21-2.60 (aiming 2.60)

Manganese        : 0.30-1.00

Phosphorous     : 0.45
max. (aiming 0.25 max.)

Sulfur      : 0.05 max.

3.    Quantity Tolerance : ± 10 percent of total quantity should be
allowed.

4.    Unit Weight : 5 kgs. ± 1 kg. (one notch)

5.    Broken pieces of twenty (20%) percent should
be allowed.

6.    All disputes, controversies, or differences
which may arise between the parties, out of or in relation to or in connection
with this contract, or for the breach thereof, shall be finally settled by
arbitration in Korea in accordance with the rules and regulations of Korea
commercial arbitration association or in the Philippines in accordance with the
Philippine arbitration rules.

7.    Letter of credit should be opened on or
before August 7, 1980.

8.    Other terms and conditions, if necessary,
are to be solved later by mutual agreement.

9.    Mill sheets and copies of non-negotiable
documents to be sent to buyer by airmail immediately after shipment.

10.  This Sales Note No. HSB-SN/S001R cancels Sales
Note No. HSB-SN/8001 dated May 2, 1980.”^[2]

On August 1, 1980, Reliance, through its Mr. Samuel Chuason,
filed with the China Banking Corporation, an application for a Letter of Credit
(L/C) in favor of Daewoo covering the amount of US$380,600.00. The application was endorsed to the Iron and
Steel Authority (ISA) for approval but the application was denied. Reliance was instead asked to submit
purchase orders from end-users to support its application for a Letter of
Credit. However, Reliance was not able
to raise purchase orders for 2,000 metric tons. Reliance alleges that it was able to raise purchase orders for
1,900 metric tons.^[3]
Daewoo, upon the other hand, contends that Reliance was only able to raise
purchase orders for 900 metric tons.^[4]
An examination of the exhibits^[5]
presented by Reliance in the trial court shows that only purchase orders for
900 metric tons were stamped “Received” by the ISA. The other purchase orders for 1,000 metric
tons allegedly sent by prospective end-users to Reliance were not shown to have
been duly sent and exhibited to the ISA. Whatever the exact amount of the purchase orders was, Daewoo rejected
the proposed L/C for the reason that the covered quantity fell short of the
contracted tonnage. Thus, Reliance
withdrew the application for the L/C on 14 August 1980.

Subsequently, Daewoo learned that the failure of Reliance to open
the L/C stipulated in the 31 July 1980 contract was due to the fact that as
early as May 1980, Reliance had already exceeded its foreign exchange
allocation for 1980. Because of the failure
of Reliance to comply with its undertaking under the 31 July 1980 contract,
Daewoo was compelled to sell the 2,000 metric tons to another buyer at a lower
price, to cut losses and expenses Daewoo had begun to incur due to its
inability to ship the 2000 metric tons to Reliance under their contract.

On 3 September 1980, Reliance, through its counsel, wrote Daewoo
requesting payment of the amount of P226,370.48, representing the value of the
short delivery of 135.655 metric tons of foundry pig iron under the contract of
9 January 1980. Not being heeded,
Reliance filed an action for damages against Daewoo with the trial court. Daewoo responded, inter alia, with a
counterclaim for damages, contending that Reliance was guilty of breach of
contract when it failed to open an L/C as required in the 31 July 1980
contract.

After trial, the trial court ruled that:

(1) the 31 July 1980
contract did not extinguish Daewoo’s obligation for short delivery pursuant to
the 9 January 1980 contract and must therefore pay Reliance P226,370.48
representing the value of the short delivered goods plus interest and
attorney’s fees; and

(2) Reliance is in turn
liable for breach of contract for its failure to open a letter of credit in
favor of Daewoo pursuant to the 31 July 1980 contract and must therefore pay
the latter P331,920.97 as actual damages with legal interest plus attorney’s
fees.

Reliance appealed the second part of the trial court’s
judgment. Public respondent Court of
Appeals found no merit in the appeal and in affirming the decision of the trial
court ruled that:

1) the trial court’s
finding that Reliance could not have opened the Letter of Credit in favor of
Daewoo because it had already exhausted its foreign exchange allocation at the
time of its application, was amply supported by evidence; and

2) the opening of a letter
of credit is not such a future and uncertain event as to make it a suspensive
condition within the contemplation of law; but, only a mode of payment agreed
upon by the parties, and a standard mode at that when one of the parties to transaction
is a foreigner and the consideration is payable in foreign exchange.

In the present Petition for Review, Reliance assails the award of
damages in favor of Daewoo. Reliance
contends a) that its failure to open a Letter of Credit was due to the failure
of Daewoo to accept the purchase orders for 1,900 metric tons instead of 2,000
metric tons; b) that the opening of the Letter of Credit was a condition
precedent to the effectivity of the contract between Reliance and Daewoo; and
c) that since such condition had not occurred, the contract never came into
existence and, therefore, Reliance should not have been held liable for
damages.

The issue before us is whether or not the failure of an importer
(Reliance) to open a letter of credit on the date agreed upon makes him liable
to the exporter (Daewoo) for damages.

In addressing this issue, it is useful to recall the nature of a
Letter of Credit, and the mechanics involved in applying for a Letter of
Credit.

The nature of a letter of credit was extensively discussed in Bank
of America, NT & SA v. Court of Appeals, et al^[6]
by Vitug, J. in the following terms:

A letter of credit is a financial device developed by merchants as
a convenient and relatively safe mode of dealing with sales of goods to satisfy
the seemingly irreconcilable interests of a seller, who refuses to part with
his goods before he is paid, and a buyer, who wants to have control of the
goods before paying. To break the
impasse, the buyer may be required to contract a bank to issue a letter of
credit in favor of the seller so that, by virtue of the letter of credit, the
issuing bank can authorize the seller to draw drafts and engage to pay them
upon their presentment simultaneously with the tender of documents required by
the letter of credit. The buyer and the
seller agree on what documents are to be presented for payment, but ordinarily
they are documents of title evidencing or attesting to the shipment of the
goods to the buyer.

Once the credit is established, the seller ships the goods to the
buyer and in the process secures the required shipping documents or documents
of title. To get paid, the seller
executes a draft and presents it together with the required documents to the
issuing bank. The issuing bank redeems
the draft and pays cash to the seller if it finds that the documents submitted
by the seller conform with what the letter of credit requires. The bank then obtains possession of the
documents upon paying the seller. The
transaction is completed when the buyer reimburses the issuing bank and
acquires the documents entitling him to the goods. Under this arrangement, the seller gets paid only if he delivers
the documents of title over the goods, while the buyer acquires the said documents
and control over the goods only after reimbursing the bank.”^[7]
(footnotes omitted).

A letter of credit is one of the modes of payment, set out in
Sec. 8, Central Bank Circular No. 1389, “Consolidated Foreign Exchange
Rules and Regulations”, dated 13 April 1993, by which commercial banks
sell foreign exchange to service payments for, e.g., commodity imports. The primary purpose of the letter of credit
is to substitute for, and therefore support, the agreement of the
buyer/importer to pay money under a contract or other arrangement.^[8]
It creates in the seller/exporter a secure expectation of payment.

A letter of credit transaction may thus be seen to be a composite
of at least three (3) distinct but intertwined relationships, each relationship
being concretized in a contract:

(a) One contract relationship links the party
applying for the L/C (the account party or buyer or importer) and the party for
whose benefit the L/C is issued (the beneficiary or seller or exporter). In this contract, the account party, here
Reliance, agrees, among other things and subject to the terms and conditions of
the contract, to pay money to the beneficiary, here Daewoo.

(b) A second contract relationship is between
the account party and the issuing bank. Under this contract, (sometimes called the “Application and Agreement”
or the “Reimbursement Agreement”), the account party, among other
things, applies to the issuing bank for a specified L/C and agrees to reimburse
the bank for amounts paid by that bank pursuant to the L/C.

(c) The third contract relationship is established
between the issuing bank and the beneficiary, in order to support the contract,
under (a) above, of the account party and the beneficiary to, inter alia,
pay certain monies to the latter.

Certain other parties may be added to the
foregoing, but the above three are the indispensable ones.

The issue raised in the Petition at bar relates principally to
the first component contractual relation above: that between account party or importer Reliance and beneficiary
or exporter Daewoo.

Examining the actual terms of that relationship as set out in the
31 July 1980 contract quoted earlier (and not simply the summary
inaccurately rendered by the trial court), the Court considers that under that
instrument, the opening of an L/C upon application of Reliance was not a
condition precedent for the birth of the obligation of Reliance to purchase
foundry pig iron from Daewoo. We agree
with the Court of Appeals that Reliance and Daewoo, having reached “a
meeting of minds” in respect of the subject matter of the contract (2000
metric tons of foundry pig iron with a specified chemical composition), the
price thereof (US $380,600.00), and other principal provisions, “they had
a perfected contract.”^[9]
The failure of Reliance to open, the appropriate L/C did not prevent the birth
of that contract, and neither did such failure extinguish that contract. The opening of the L/C in favor of Daewoo
was an obligation of Reliance and the performance of that obligation by
Reliance was a condition for enforcement of the reciprocal obligation of Daewoo
to ship the subject matter of the contract – the foundry pig iron – to
Reliance. But the contract itself
between Reliance and Daewoo had already sprung into legal existence and was
enforceable.

The L/C provided for in that contract was the mode or mechanism
by which payment was to be effected by Reliance of the price of the pig
iron. In undertaking to accept or pay
the drafts presented to it by the beneficiary according to the tenor of an L/C,
and only later on being reimbursed by the account party, the issuing bank in
effect extends a loan to the account party. This loan feature, combined with the bank’s undertaking to accept the
beneficiary’s drafts drawn on the bank, constitutes the L/C as a mode of
payment.^[10]
Logically, before the issuing bank opens an L/C, it will take steps to ensure
that it would indeed be reimbursed when the time comes. Before an L/C can be opened, specific legal
requirements must be complied with.

The Central Bank of the Philippines has established the following
requirements for opening a letter of credit:

“All L/C’s must be opened on or before the date of shipment
with maximum validity of one (1) year. Likewise, only one L/C should be opened for each import
transaction. For purposes of opening an
L/C, importers shall submit to the commercial bank the following documents:

a)   the duly accomplished L/C application;

b)   firm offer/proforma invoice which shall
contain information on the specific quantity of the importation, unit cost and
total cost, complete description/specification of the commodity and the
Philippine Standard Commodity Classification statistical code;

c)   permits/clearances from the appropriate
government agencies, whenever applicable; and

d)   duly accomplished Import Entry Declaration
(IED) form which shall serve as basis for payment of advance duties as required
under PD 1853.”^[11]
(Underscoring supplied)

The need for permits or clearances from appropriate government
agencies arises when regulated commodities are to be imported.^[12]
Certain commodities are classified as “regulated commodities” for
purposes of their importation, “for reasons of public health and safety,
national security, international commitments, and development/rationalization
of local industry”.^[13]
The petitioner in the instant case entered into a transaction to import foundry
pig iron, a regulated commodity. In
respect of the importation of this particular commodity, the Iron and Steel
Authority (ISA) is the government agency designated to issue the permit or
clearance.^[14]
Prior to the issuance of such permit or clearance, ISA asks the buyer/importer
to comply with particular requirements, such as to show the availability of
foreign exchange allocations. The
issuance of an L/C becomes, among other things, an indication of compliance by
the buyer/importer with his own government’s regulations relating to imports
and to payment thereof.^[15]

The record shows that the opening of the L/C in the instant case
became very difficult because Reliance had exhausted its dollar
allocation. Reliance knew that it had
already exceeded its dollar allocation for the year 1980 when it entered into
the 31 July 1980 transaction with Daewoo.^[16]
As a rule, when the importer has exceeded
its foreign exchange allocation, his application would be denied. However, ISA could reconsider such
application on a case to case basis.^[17]
Thus, in the instant case, ISA required Reliance to support its application by
submitting purchase orders from end-users for the same quantity the latter
wished to import. As earlier noted, Reliance
was able to present purchase orders for only 900 metric tons of the subject pig
iron.^[18]
For having exceeded its foreign exchange allocation before it entered into the
31 July 1980 contract with Daewoo, petitioner Reliance can hold only itself
responsible. For having failed to
secure end-users’ purchase orders equivalent to 2,000 metric tons, only
Reliance should be held responsible.

Daewoo rejected Reliance’s proposed reduced tonnage. It had the right to demand compliance with
the terms of the basic contract and had no duty to accept any unilateral
modification of that contract. Compliance with Philippine legal requirements was the duty of Reliance;
it is not disputed that ISA’s requirements were legal and valid, and not
arbitrary or capricious. Compliance
with such requirements, like keeping within one’s dollar allocation and
complying with the requirements of ISA, were within the control of Reliance and
not of Daewoo. The Court is compelled
to agree with the Court of Appeals that the non-opening of the L/C was due to
the failure of Reliance to comply with its duty under the contract.

We believe and so hold that 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.^[19]

We hold, further, that the Court of Appeals committed no
reversible error when it ruled that the damages incurred by Daewoo were
sufficiently proved with the testimony of Mr. Ricardo Fernandez and “the
various documentary evidence showing the loss suffered by the defendant when it
was compelled to sell the subject goods at a lower price”^[20]

WHEREFORE, in view of all the foregoing, the Petition for Review
is hereby DENIED for lack of merit and the decision of the Court of Appeals
dated 8 February 1991 is hereby AFFIRMED. Costs against petitioner.

SO ORDERED.

Bidin, Romero, Melo, and
Vitug, JJ., concur.

^[1]
As quoted in the Court of Appeals
decision; Rollo pp. 47-48.

^[2]
Id., Rollo pp. 48-49.

^[3]
TSN, 16 December 1992, Direct
Examination of Mr. Samuel Chuason, p. 40.

^[4]
TSN, 25 April 1986, Cross Examination
of Ms. Nancy Solinap, pp. 11-12.

^[5]
Records, Exhibits I to I-4 for
then-plaintiff Reliance Commodities, Inc., pp. 195-199.

^[6]
G.R. No. 105395, promulgated December
10, 1993.

^[7]
Id.

^[8]
Ryan, “General Principles and
Classifications of Letters of Credit”, in Letters of Credit (1981),
p.12.

^[9]
Decision of the Court of Appeals, p.
11; Villamor v. Court of Appeals, 202 SCRA 607 (1991); Edca Publishing
& Distributing Corporation v. Santos, 184 SCRA 614 (1990).

^[10]
Sia v. People, 121 SCRA 655
(1983); Vintola v. Insular Bank of Asia & America, 150 SCRA 578
(1987); Abad v. CA, 181 SCRA 195 (1990).

^[11]
Section 9, CB Circular No. 1389,
“Consolidated Foreign Exchange Rules and Regulations”, 13 April 1993.

^[12]
Section 7, id.

^[13]
Section 6, Chapter II Foreign Trade
Transactions, id.

^[14]
Item No. 19, Section 8, CB Circular No.
1029, “Consolidated Rules and Regulations to Govern Import Transactions”,
15 October 1984.

^[15]
Kramer, d’Arlin, Root, International
Trade: Theory, Policy, Practice (1959),
p. 603.

^[16]
TSN, 16 December 1982, p. 39.

^[17]
TSN, 25 April 1986, p. 26.

^[18]
TSN, 25 April 1986, pp. 11-12.

^[19]
Such is the rule in many jurisdictions and
in the practice of international trade; see chap. 21, “The Finance of
Export”, in C.M. Schmitthoff, The Export Trade – The Law and Practice
of International Trade, (1962), Stevens & Sons Limited, London.

^[20]
Decision of the Court of Appeals, p.
13.