Breach of Contract in Letter of Credit Transactions: Proving Liability in Court

Metropolitan Bank and Trust Company v. Ley Construction and Development Corporation (G.R. No. 185590, December 3, 2014) clarifies what a bank must prove to recover from a client in a letter of credit transaction. The case is a useful reminder that in civil cases, the party claiming a right must prove it with preponderant evidence, and that the way a complaint is drafted can determine the outcome of the case.

The Facts of the Case

Ley Construction and Development Corporation (LCDC) applied with Philippine Banking Corporation (now Metropolitan Bank and Trust Company) for the opening of a letter of credit to finance the importation of 15,000 metric tons of Iraqi cement. The bank issued Letter of Credit No. DC 90-303-C in favor of the supplier, Global Enterprises Limited, in the amount of USD 802,500.00.

The supplier negotiated the letter of credit with Credit Suisse of Zurich, which sent a reimbursement claim to American Express Bank in New York. American Express debited the bank's account and credited Credit Suisse for the negotiation. The bank later received the shipping documents and delivered them to LCDC, which executed a trust receipt. However, the cement never arrived in the Philippines.

When LCDC failed to pay, the bank sued LCDC and the spouses Manuel and Janet Ley, who had executed a Continuing Surety Agreement guaranteeing LCDC's obligations. The bank sought to recover over PHP 23 million, plus interest, penalties, and attorney's fees.

The Procedural History

The Regional Trial Court dismissed the bank's complaint after granting LCDC's demurrer to evidence. The trial court found that the bank's sole witness, Fenelito Cabrera, was incompetent to testify on most of the bank's documentary exhibits. Cabrera was assigned to a branch office, not the head office, during the period the transaction occurred. The trial court ruled that the bank failed to establish its cause of action by preponderant evidence.

The Court of Appeals affirmed, and the bank appealed to the Supreme Court under Rule 45 of the Rules of Court, which allows appeals only on questions of law.

The Supreme Court's Ruling

The Supreme Court denied the petition. The Court identified three key problems with the bank's appeal.

First, the appeal raised questions of fact, not law. Whether the bank established its cause of action by preponderant evidence is essentially a question of fact. The Supreme Court is not a trier of facts, and factual findings of the trial court affirmed by the Court of Appeals are conclusive on the Court. The bank failed to show that any exception to this rule applied.

Second, the bank's cause of action was based on the letter of credit, not the trust receipt. The bank argued that its "primary actionable document" was the trust receipt. But the nature of a cause of action is determined by the allegations in the complaint, not by what the party later claims it to be.

The Court examined the complaint and found that the letter of credit figured prominently throughout, while the trust receipt was mentioned only incidentally. The spouses Ley were impleaded as sureties for obligations under the letter of credit, not the trust receipt. Under Section 7, Rule 8 of the Rules of Court, when an action is based on a written document, the substance of that document must be set forth in the pleading. The bank set forth the substance of the letter of credit but merely attached the trust receipt as an annex without pleading its substance.

Third, the bank failed to prove the terms of its contract with LCDC. The Application and Agreement for Commercial Letter of Credit contained a stipulation that the applicant agreed to the provisions and conditions on the reverse side. However, the reverse side of the document was blank. The bank therefore failed to establish the legal rights and correlative duties that would give rise to a cause of action.

Practical Takeaways

• Pleadings matter. A party cannot change the theory of its case on appeal. The cause of action is determined by the allegations in the complaint, not by what the party later says it intended to plead.
• Prove the contract's terms. A bank seeking to recover on a letter of credit must present evidence of the actual terms and conditions governing the parties' relationship. An application form with a blank reverse side cannot establish the parties' rights and obligations.
• Preponderance of evidence is the standard. In civil cases, the plaintiff must present evidence that is more convincing than the defendant's — "probability of truth." Failure to properly authenticate documentary evidence can be fatal to the case.
• Witness competence is critical. A witness who cannot identify and authenticate the documents on which the case rests cannot help the plaintiff meet its burden of proof.
• Rule 45 appeals are limited. Appeals to the Supreme Court under Rule 45 raise only questions of law. Factual findings of lower courts, when affirmed on appeal, are generally conclusive.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.