In the case of Gregorio H. Reyes and Consuelo Puyat-Reyes vs. The Hon. Court of Appeals and Far East Bank and Trust Company, the Supreme Court of the Philippines clarified the extent of a bank’s liability in foreign exchange transactions. The Court held that when a bank is acting as a seller of a foreign exchange demand draft, its duty of care is that of a good father of a family, not the higher degree of diligence required when handling deposit accounts. This ruling shields banks from liability for unforeseen errors by other financial institutions in the transaction chain, provided the bank itself exercises reasonable care and diligence.

Whose Fault Was It? Determining Liability for a Dishonored Foreign Exchange Draft

The case stemmed from a foreign exchange demand draft (FXDD) issued by Far East Bank and Trust Company (FEBTC) to the Philippine Racing Club, Inc. (PRCI) for remittance to an Asian Racing Conference in Sydney, Australia. Gregorio H. Reyes, representing PRCI, sought to secure a draft in Australian dollars. Since FEBTC lacked a direct Australian dollar account, they proposed a workaround involving Westpac Bank in Sydney and Westpac Bank in New York. The arrangement involved FEBTC drawing the draft against Westpac-Sydney, which would then be reimbursed from FEBTC’s U.S. dollar account in Westpac-New York. This indirect method had been used successfully in the past. However, upon presentment, the draft was dishonored with the reason: “xxx No account held with Westpac.”

Subsequent investigation revealed that Westpac-New York had debited FEBTC’s account, but Westpac-Sydney had erroneously decoded FEBTC’s SWIFT message, leading to the dishonor of the draft. This incident caused considerable embarrassment and humiliation to Gregorio H. Reyes and his spouse, Consuelo Puyat-Reyes, when they attempted to register at the conference. They subsequently filed a complaint for damages against FEBTC, alleging negligence and breach of warranty. The trial court dismissed the complaint, a decision affirmed by the Court of Appeals, leading to the petition before the Supreme Court.

The petitioners argued that FEBTC, due to its fiduciary relationship with its clients, should have exercised a higher degree of diligence. They also claimed that FEBTC violated Section 61 of the Negotiable Instruments Law, which provides a warranty for drawers of negotiable instruments. Section 61 states:

Liability of drawer.- The drawer by drawing the instrument admits the existence of the payee and his then capacity to indorse; and engages that, on due presentment, the instrument will be accepted or paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder.

The Supreme Court, however, disagreed with the petitioners’ contentions. The Court emphasized that its review was limited to questions of law, and the factual findings of the lower courts, particularly regarding FEBTC’s lack of negligence, were conclusive. The Court found that FEBTC had disclosed the indirect arrangement to the petitioners, who agreed to it. Moreover, the Court noted that the dishonor of the draft was due to an error on the part of Westpac-Sydney, not FEBTC. Specifically, FEBTC’s SWIFT message, intended as an MT199, was misread as an MT799, causing the message to be misdirected within Westpac-Sydney.

Building on this, the Supreme Court addressed the degree of diligence required of banks in different contexts. The Court distinguished between situations where banks act in their fiduciary capacity, such as handling deposit accounts, and those where they engage in ordinary commercial transactions. In the former, banks are required to exercise the highest degree of care. However, in the latter, such as the sale and issuance of a foreign exchange demand draft, the standard of care is that of a good father of a family, meaning ordinary diligence. The Supreme Court cited the case of Philippine Bank of Commerce v. Court of Appeals where it was ruled that:

the degree of diligence required of banks, is more than that of a good father of a family where the fiduciary nature of their relationship with their depositors is concerned. In other words banks are duty bound to treat the deposit accounts of their depositors with the highest degree of care. But the said ruling applies only to cases where banks act under their fiduciary capacity, that is, as depositary of the deposits of their depositors. But the same higher degree of diligence is not expected to be exerted by banks in commercial transactions that do not involve their fiduciary relationship with their depositors.

This approach contrasts with the higher standard imposed when managing deposit accounts, clarifying that not all bank transactions require the same level of scrutiny. The Court reasoned that the relationship between FEBTC and PRCI was that of a buyer and seller, not a fiduciary one. As such, FEBTC was only required to exercise ordinary diligence, which it had done by disclosing the indirect arrangement and taking steps to ensure the draft was honored. The fact that Westpac-Sydney erroneously decoded the SWIFT message was beyond FEBTC’s control and could not be attributed to its negligence.

Furthermore, the Court found that FEBTC had taken reasonable steps to rectify the situation once the draft was dishonored. It re-confirmed the authority of Westpac-New York to debit its dollar account and sent multiple cable messages inquiring about the dishonor. These actions demonstrated that FEBTC had acted in good faith and had exercised the diligence expected of a prudent person under the circumstances. The Supreme Court concluded that the dishonor of the foreign exchange demand draft was not attributable to any fault of FEBTC. Because the petitioners agreed to the indirect transaction, they were essentially estopped from claiming damages based on the draft’s dishonor due to an error by a third-party bank.

FAQs

What was the key issue in this case?	The key issue was determining the degree of diligence required of a bank when selling a foreign exchange demand draft, and whether the bank could be held liable for damages resulting from the dishonor of the draft due to an error by another bank.
What standard of care applies to banks in commercial transactions?	In commercial transactions that do not involve a fiduciary relationship, such as the sale of a foreign exchange demand draft, the standard of care required of banks is that of a good father of a family, meaning ordinary diligence.
Was FEBTC negligent in this case?	The Supreme Court found that FEBTC was not negligent, as the dishonor of the draft was due to an error by Westpac-Sydney in decoding the SWIFT message, which was beyond FEBTC’s control. FEBTC had also disclosed the indirect arrangement to the petitioners and took steps to rectify the situation.
What is a foreign exchange demand draft (FXDD)?	A foreign exchange demand draft is a negotiable instrument used to transfer funds in a foreign currency from one party to another through a bank. It is essentially an order by one bank to another to pay a specified amount to a named payee.
What does Section 61 of the Negotiable Instruments Law cover?	Section 61 of the Negotiable Instruments Law outlines the liability of the drawer of a negotiable instrument, stating that the drawer warrants the instrument will be accepted or paid upon presentment and that they will pay the amount if it is dishonored.
What is a SWIFT message?	SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a global network used by banks to securely exchange financial information and instructions, such as money transfers.
What is the significance of the MT199 and MT799 codes?	MT199 is a SWIFT message format used for free-format messages, while MT799 is used for specific instructions related to letters of credit. The misreading of MT199 as MT799 caused the message to be misdirected within Westpac-Sydney.
What is the doctrine of estoppel in this case?	The doctrine of estoppel prevented the petitioners from claiming damages because they had agreed to the indirect transaction arrangement, knowing that FEBTC did not have a direct account with Westpac-Sydney.

The Supreme Court’s decision in this case provides important clarity on the scope of a bank’s liability in foreign exchange transactions. By distinguishing between fiduciary and commercial relationships, the Court has set a reasonable standard of care that protects banks from liability for errors beyond their control, provided they act with ordinary diligence. This ruling acknowledges the complexities of international financial transactions and the importance of clear communication and risk allocation among the parties involved.

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: Gregorio H. Reyes and Consuelo Puyat-Reyes vs. The Hon. Court of Appeals and Far East Bank and Trust Company, G.R. No. 118492, August 15, 2001