Airphil loses appeal filed vs sister-firm Allied Bank

by Lenie Lectura, Business Mirror

Posted at Oct 27 2010 01:40 AM | Updated as of Oct 27 2010 05:36 PM

MANILA, Philippines - Air Philippines, the low-cost affiliate of Philippine Airlines (PAL), lost an appeal it filed before the appellate court in relation to the letter of credit issued by Allied Bank as payment for aircraft lease.

In a 21-page order signed by Associate Justice Rosmari Carandang of the ninth division, the Court of Appeals (CA) said the main issue of the appeal is whether the court erred in dismissing the complaint against Allied Bank and London Forfaiting Co. Ltd. on the ground of failure to state a cause of action.

“The appeal lacks merit,” said the CA.

Air Philippines is 99-percent owned by the Lucio Tan Group, which also owns Allied Bank.

The airline was appealing the 1988 decisions issued by a Manila court which dismissed its case against Allied Bank and London Forfaiting.

The Tan-controlled bank issued a letter of credit worth $1.5 million to KFS-Japan which promised to lease to the airline eight YS-11 aircraft, with one standby plane. KFS-Japan transferred its interest in the letter of credit in favor of London Forfaiting Co. Ltd.

The letter of credit was for the purpose of assuring KFS-Japan of prompt payment of accruing monthly rentals.

Two years later, Air Philippines terminated the agreement after it found that the three aircraft from KFS-Japan were owned by another entity, Nihon Air Service Co. Ltd.

Air Philippines then asked Allied Bank not to allow the drawing of the outstanding balance of the letter of credit. It also filed complaints against KFS-Japan, KFS-Philippines and Allied Bank. The airline later on impleaded London Forfaiting.

London Forfaiting argued that Air Philippines failed to establish any cause of action against it. It pointed out that the termination of the lease between Air Philippines and KFS-Japan does not affect the obligations of the parties in the letter of credit.

It cited the provisions of the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce , which states that the letters of credit are separate and independent transactions from the underlying contract. “They are not a guarantee or an accessory contract dependent on the existence of the lease agreement.”

The CA sided with London Forfaiting. A letter of credit, it explained, is a binding contract between the issuing and honoring banks without any regard to the underlying contract or disputes between the parties. As such, the obligation of the issuing bank under the letter of credit subject has no bearing on the termination of the lease agreement between Air Philippines and KFS-Japan, said the CA.

It added: “The court correctly held that apart from the allegations in the complaint that London Forfaiting is claiming from the letter of credit as beneficiary, while Allied Bank was the issuing bank, there is really no wrongful act of omission or any breach that can be imputed to them. Hence, the complaint against London Forfaiting and Allied Bank was properly dismissed on the ground of failure to state a cause of action,” said the CA.

Also, the CA said the contention of Air Philippines that it was denied of due process when the court took judicial notice of the ICC-UCP and dismissed the complaint is untenable.

It said Air Philippines was directed to file its comment on the court’s intention to take judicial notice of the ICC-UCP and after its complaint was dismissed the airline filed a motion for reconsideration.

“In a long line of decision, the Supreme Court has ruled that the essence of due process is to be found in the reasonable opportunity to be heard and submit evidence one may have in support of one’s defense,” said the CA.