The Supreme Court held that a bank failed to prove its cause of action against a construction company and its guarantors for obligations arising from a Letter of Credit. The Court emphasized that the bank’s evidence was insufficient to establish the terms and conditions governing the legal relationship between the parties, particularly concerning the provisions at the back of the Application and Agreement for Commercial Letter of Credit. This ruling underscores the importance of presenting complete and properly authenticated documents to substantiate claims in commercial disputes, highlighting the necessity for banks and other financial institutions to maintain meticulous records and competent witnesses.

Empty Promises: When a Bank’s Claim on a Letter of Credit Falls Flat

This case, Metropolitan Bank and Trust Company v. Ley Construction and Development Corporation, arose from a complaint filed by Philippine Banking Corporation (now Metropolitan Bank and Trust Company) against Ley Construction and Development Corporation (LCDC) and the spouses Manuel and Janet Ley. The Bank sought to recover a sum of money and damages related to a Letter of Credit (LC) it had issued. LCDC, a general contracting firm, had applied for the LC to finance the importation of Iraqi cement. The Bank issued Letter of Credit No. DC 90-303-C in favor of Global Enterprises Limited, the supplier-beneficiary, for USD 802,500.00.

The supplier-beneficiary negotiated the LC with Credit Suisse of Zurich, Switzerland, which then sought reimbursement from American Express Bank Ltd., New York. American Express Bank debited the Bank’s account for USD 770,691.30. The Bank received the shipping documents and delivered them to LCDC, which executed a trust receipt. However, the cement never arrived in the Philippines. The Bank alleged that LCDC’s obligation under the LC was overdue and unpaid, despite repeated demands for payment. The spouses Ley were impleaded as guarantors under a Continuing Surety Agreement.

The Regional Trial Court (RTC) dismissed the Bank’s complaint, a decision affirmed by the Court of Appeals (CA). The RTC found that the Bank’s sole witness, Fenelito Cabrera, was incompetent to testify on the presented documents, as he lacked direct involvement in the transaction during the relevant period. Only a few exhibits were admitted as evidence, and these were deemed insufficient to prove LCDC and the spouses Ley were responsible for the improper negotiation of the letter of credit. The Court of Appeals upheld this decision, leading the Bank to appeal to the Supreme Court.

The Supreme Court identified a critical procedural lapse in the Bank’s appeal. According to the Court, the Bank raised questions of fact rather than questions of law, violating Rule 45 of the Rules of Court. The rule states that appeals to the Supreme Court by petition for review on certiorari should raise only questions of law. The Court emphasized that it is not a trier of facts, and the factual findings of the lower courts, if affirmed by the Court of Appeals, are conclusive. The central issue—whether the Bank established its cause of action by preponderant evidence—was deemed a question of fact.

The Court explained the difference between questions of law and questions of fact. A question of law arises when there is doubt about what the law is on a certain set of facts, not requiring an examination of the evidence’s probative value. In contrast, a question of fact arises when the doubt or controversy concerns the truth or falsity of alleged facts. The Court clarified that determining whether evidence is sufficient to meet the standard of preponderance of evidence—meaning the evidence is more convincing than the opposing evidence—requires a factual review.

The Bank attempted to circumvent this procedural rule by claiming that the lower courts had misapprehended the facts, particularly regarding the basis of the Bank’s cause of action. The Bank argued that its claim was based on the Trust Receipt, not the Letter of Credit. However, the Supreme Court disagreed, stating that the nature of the cause of action is determined by the facts alleged in the complaint, not by what the party claims it to be. A party’s cause of action is what the allegations in the body of the complaint define and describe.

The Supreme Court scrutinized the Bank’s Complaint and found that its cause of action was indeed based on the Letter of Credit. The Complaint detailed the issuance of the LC, its amendments, the negotiation by the supplier, and the subsequent debiting of the Bank’s account. The Trust Receipt was mentioned only incidentally. The spouses Ley were impleaded based on their Continuing Surety Agreement, which guaranteed obligations under the Letter of Credit, not the Trust Receipt. This analysis solidified the lower courts’ understanding of the case’s factual underpinnings.

The Supreme Court further supported its decision by referring to Section 7, Rule 8 of the Rules of Court, which governs actions based on written instruments. This section requires that when an action is based on a document, the substance of the document must be set forth in the pleading, and the original or a copy must be attached. The Court noted that the Bank did not set forth the substance of the Trust Receipt in the Complaint. Instead, it merely attached a copy and described it as LCDC’s manifestation of acceptance of the Letter of Credit negotiation. In contrast, the Bank set forth the substance of the Letter of Credit, stating that it issued the LC for USD 802,500.00 to cover the importation of Iraqi cement. This underscored the Bank’s reliance on the Letter of Credit as the basis for its claim.

The Court then addressed the stipulations in the Application and Agreement for Commercial Letter of Credit. This document, marked as the Bank’s Exhibit “B”, contained a stipulation requiring the parties to adhere to the provisions and conditions on the reverse side. A note emphasized the importance of reading these provisions before signing. However, the reverse side of Exhibit “B” was blank. This absence of crucial terms and conditions undermined the Bank’s ability to establish LCDC’s specific duties and obligations under the agreement. It also meant that the Bank could not sufficiently prove that LCDC had violated any specific term that would give rise to a cause of action.

The Supreme Court reiterated the essential elements of a cause of action: the existence of a legal right in favor of the plaintiff, a correlative legal duty of the defendant to respect that right, and an act or omission by the defendant violating the plaintiff’s right, resulting in injury or damage. While the first two elements might exist, a cause of action arises only when the last element occurs. Here, the Bank failed to sufficiently establish its legal rights and LCDC’s correlative duties due to the missing terms and conditions on the reverse side of the Application and Agreement for Commercial Letter of Credit. Even if there was no impropriety in the Letter of Credit negotiation, the Bank did not prove every element of its claim against LCDC. As a result, the spouses Ley, whose liability was contingent on LCDC’s liability under the Letter of Credit, also benefited from the Bank’s failure of proof.

In conclusion, the Supreme Court affirmed the decisions of the lower courts, finding that the Bank had not presented sufficient evidence to establish its claims against LCDC and the spouses Ley. The Bank’s reliance on the Letter of Credit, coupled with the absence of critical terms and conditions, proved fatal to its case. The Court emphasized the importance of adhering to procedural rules and presenting complete and properly authenticated evidence in commercial disputes.

FAQs

What was the key issue in this case?	The key issue was whether the Metropolitan Bank and Trust Company (MBTC) presented sufficient evidence to prove that Ley Construction and Development Corporation (LCDC) and its guarantors were liable for obligations arising from a Letter of Credit. The Supreme Court found that the bank’s evidence was insufficient.
Why did the Supreme Court deny the Bank’s petition?	The Supreme Court denied the petition primarily because the Bank raised questions of fact rather than questions of law, which is not allowed under Rule 45 of the Rules of Court. The Court also found that the Bank’s cause of action was not adequately proven due to missing terms in the agreement.
What is the difference between a question of law and a question of fact?	A question of law concerns what the law is on a certain state of facts, while a question of fact concerns the truth or falsity of alleged facts based on the evidence presented. The Supreme Court only addresses questions of law in petitions for review on certiorari.
On what document did the Bank base its cause of action?	Although the Bank argued it was the Trust Receipt, the Supreme Court determined that the Bank’s cause of action was actually based on the Letter of Credit, as evidenced by the allegations in the complaint. The Trust Receipt was only incidentally mentioned.
What was missing from the Application and Agreement for Commercial Letter of Credit?	The reverse side of the Application and Agreement for Commercial Letter of Credit (Exhibit “B”) was blank, even though it was supposed to contain the provisions and conditions governing the legal relationship between the Bank and LCDC. This absence was detrimental to the Bank’s case.
What are the essential elements of a cause of action?	The essential elements are: (1) the existence of a legal right in favor of the plaintiff; (2) a correlative legal duty of the defendant to respect that right; and (3) an act or omission by the defendant violating the plaintiff’s right, resulting in injury or damage. All three elements must be proven to establish a cause of action.
How did the missing terms and conditions affect the Bank’s case?	The missing terms and conditions made it impossible for the Bank to establish the specific duties and obligations of LCDC under the Letter of Credit agreement. Without these terms, the Bank could not prove that LCDC had violated any specific provision, thus failing to establish a cause of action.
Why were the spouses Ley not held liable in this case?	The spouses Ley were not held liable because their liability was based on a Continuing Surety Agreement that guaranteed LCDC’s obligations under the Letter of Credit. Since the Bank failed to prove LCDC’s liability, the spouses Ley could not be held liable either.

This case serves as a reminder of the importance of due diligence and thorough documentation in commercial transactions. Banks and financial institutions must ensure that all terms and conditions are clearly stated and properly authenticated to avoid disputes and ensure enforceability.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Metropolitan Bank and Trust Company vs. Ley Construction and Development Corporation and Spouses Manuel Ley and Janet Ley, G.R. No. 185590, December 03, 2014