G.R. No. L-100831 December 17, 1993
RELIANCE COMMODITIES, INC., petitioner, vs. DAEWOO INDUSTRIAL CO., LTD., respondent.

FACTS

On January 9, 1980, petitioner Reliance Commodities, Inc. (“Reliance”) and private respondent Daewoo Industrial Co., Ltd. (“Daewoo”) entered into a contract of sale for 2,000 metric tons of foundry pig iron. Upon arrival in Manila, the cargo was short by 135.655 metric tons. On May 2, 1980, the parties entered into another contract for another 2,000 metric tons, wherein Daewoo acknowledged the prior short shipment and agreed to reduce the price for succeeding orders as compensation. This contract was not consummated and was superseded by a contract dated July 31, 1980. The July 31, 1980 contract was for the sale of 2,000 metric tons of foundry pig iron, with payment to be made by an irrevocable sight letter of credit to be opened on or before August 7, 1980. Reliance applied for the letter of credit with the China Banking Corporation, but the application was denied endorsement by the Iron and Steel Authority (ISA) because Reliance failed to submit sufficient supporting purchase orders from end-users. Reliance alleges it raised orders for 1,900 metric tons, while Daewoo contends it was only 900 metric tons. Daewoo rejected the proposed letter of credit as the quantity fell short of the contract. Reliance withdrew its application on August 14, 1980. Daewoo later discovered Reliance had already exhausted its foreign exchange allocation for 1980 as of May 1980. Due to Reliance’s failure to open the letter of credit, Daewoo sold the goods to another buyer at a lower price. Reliance filed an action for damages concerning the short shipment under the January 1980 contract. Daewoo counterclaimed for damages due to Reliance’s breach of the July 1980 contract. The trial court ruled Daewoo was liable for the short shipment but Reliance was liable for breach of contract for failing to open the letter of credit. The Court of Appeals affirmed the trial court’s decision regarding Reliance’s liability.

ISSUE

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.

RULING

Yes. The Supreme Court denied the petition and affirmed the decision of the Court of Appeals. The failure of a buyer to seasonably furnish an agreed letter of credit is a breach of the contract between buyer and seller. The opening of the letter of credit was not a condition precedent to the effectivity of the contract but was the agreed mode of payment, a standard practice in international trade involving foreign exchange. Where the buyer fails to open a letter of credit as stipulated, the seller is entitled to claim damages for such breach, which may include the loss of profit reasonably expected from the transaction. The Court found that the non-opening of the letter of credit was due to Reliance’s own failure to comply with its contractual duty, as it had already exhausted its foreign exchange allocation. The damages incurred by Daewoo were sufficiently proven.