Transfield Philippines v. Luzon Hydro Corp.

Transfield Philippines, Inc. contracted with Luzon Hydro Corporation (LHC) to build, on a turnkey basis, a 70-megawatt hydroelectric plant on the Bakun River, with a target completion date of June 1, 2000. To secure performance, Transfield opened two standby letters of credit in LHC's favor with ANZ Bank and Security Bank Corporation, each for US$8,988,907. The Turnkey Contract allowed LHC to recover liquidated damages for delay of US$75,000 per day by drawing on the Securities. LHC denied Transfield's requests for extensions due to typhoon Zeb and other events, and arbitrations before the CIAC and the ICC followed. LHC declared Transfield in delay and gave notice that it would call on the Securities; Transfield warned the banks not to pay, but they said they would honor any call. Transfield sued in the Makati RTC to enjoin the call and payment; the RTC denied a preliminary injunction under the independence principle. The Court of Appeals issued a TRO, but after it expired LHC withdrew US$4,950,000 from ANZ Bank, and the appellate court dismissed Transfield's certiorari petition. While the appeal was pending, LHC manifested that the credits had been fully drawn, and Transfield reported an ICC partial award declaring LHC's draws wrongful.

1. 1Whether the beneficiary of a letter of credit may invoke the independence principle and call on the Securities before the arbitral tribunals resolve the dispute on default.
2. 2Whether the fraud exception justified enjoining LHC's call and whether the banks were justified in paying despite Transfield's notice that the call was wrongful.

Petition denied. Under Article 3 of the UCP, applied through Article 2 of the Code of Commerce, credits are separate from the contracts on which they are based. The independence principle assures the beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing bank from determining whether the main contract was performed. It works for both the issuing bank and the beneficiary; limiting it to banks would defeat the purpose of letters of credit. Requiring disputes to be settled before a call would convert the credit into a mere guarantee. LHC's right also rested on the Turnkey Contract, whose clauses allowed drawing on the Securities for liquidated damages. Fraud is an exception, but an injunction requires (a) clear proof of fraud; (b) fraud amounting to fraudulent abuse of the credit's independent purpose, not only fraud under the main agreement; and (c) irreparable injury. The pending arbitrations did not per se make the draws fraudulent, since nothing in the contract required prior arbitral resolution; Transfield raised the fraud exception for the first time on appeal and showed no clear and unmistakable right to an injunction. The banks had no obligation to verify LHC's certification of default. The full drawing of the credits made the petition moot, and Transfield may still seek indemnification if the arbitrations find no default. The petition was denied with costs, and Transfield was required to answer LHC's forum-shopping charge within fifteen days.