MWSS vs.

DAWAY AND MAYNILAD

G.R. No. 160732.
June 21, 2004
FACTS MWSS granted Maynilad under a
Concession Agreement to manage, operate,
repair, decommission and refurbish the existing
MWSS water delivery and sewerage services in
the West Zone Service Area, for which Maynilad
undertook to pay the corresponding concession
fees which, among other things, consisted of
payments of petitioners mostly foreign loans
!o secure the concessionaires performance of
its obligations, Maynilad was re"uired under
Section #$ of said contract to put up a bond,
bank guarantee or other security acceptable to
MWSS
%n compliance with this re"uirement, Maynilad
arranged for a three&year facility with a number
of foreign banks, led by Citicorp %nt'l (td, for
the issuance of an %rrevocable Standby (etter
of Credit in favor of MWSS for the full and
prompt performance of Maynilads obligations
to MWSS as aforestated
(ater, the parties agreed to resolve the issues
between them )Maynilad is asking for a
mechanism by which it hoped to recover the
losses it had allegedly incurred and would be
incurring as a result of the depreciation of the
*hilippine *eso against the +S ,ollar and in
-ling to get what it desired, Maynilad
unilaterally suspended the payment of the
concession fees. through an amendment of the
Concession Agreement which was based on the
terms set down in MWSS /oard of !rustees
0esolution which provided inter alia for a
formula that would allow Maynilad to recover
foreign exchange losses it had incurred or
would incur under the terms of the Concession
Agreement
1owever Maynilad served upon MWSS a 2otice
of 3vent of !ermination, claiming that MWSS
failed to comply with its obligations under the
Concession Agreement and its Amendment
regarding the ad4ustment mechanism that
would cover Maynilads foreign exchange
losses Maynilad -led a 2otice of 3arly
!ermination of the concession, which was
challenged by MWSS !his matter was
eventually brought before the Appeals *anel by
MWSS the Appeals *anel ruled that there was
no 3vent of !ermination as de-ned under Art
567 8ii9 or 56: 8iii9 of the Concession
Agreement and that, therefore, Maynilad
should pay the concession fees that had fallen
due
!he award of the Appeals *anel became -nal
MWSS, thereafter, submitted a written notice to
Citicorp %nt'l (td, as agent for the participating
banks, that by virtue of Maynilads failure to
perform its obligations under the Concession
Agreement, it was drawing on the %rrevocable
Standby (etter of Credit and thereby
demanded payment
*rior to this, however, Maynilad had -led on a
petition for rehabilitation before the 0!C of
;ue<on City which resulted in the issuance of
the Stay =rder and the disputed =rder of
2ovember 7>, 766:
ISS!" W=2 the rehabilitation court sitting as
such, act in excess of its authority or
4urisdiction when it en4oined herein petitioner
from seeking the payment of the concession
fees from the banks that issued the %rrevocable
Standby (etter of Credit in its favor
#"LD the petition
for certiorari isgranted!he =rder of 2ovember
7>, 766: of the 0!C of ;ue<on City $6, is
hereby declared null and voidand set aside
?3S
@irst, the claim is not one against the debtor
but against an entity that respondent Maynilad
has procured to answer for its non&performance
of certain terms and conditions of the
Concession Agreement, particularly the
payment of concession fees
Secondly, Sec # 8b9 of 0ule A of the %nterim
0ules does not en4oin the enforcement of all
claims against guarantors and sureties, $u%
on&' %(ose )&*+,s *-*+ns% -u*.*n%o.s *n/
su.e%+es 0(o *.e no% so&+/*.+&' &+*$&e 0+%(
%(e /e$%o.. 0espondent Maynilads claim that
the banks are not solidarily liable with the
debtor does not -nd support in 4urisprudence
(etters of credit were developed for the
purpose of insuring to a seller payment of a
de-nite amount upon the presentation of
documentsand is thus a commitment by the
issuer that the party in whose favor it is issued
and who can collect upon it will have his credit
against the applicant of the letter, duly paid in
the amount speci-ed in the letter !hey are in
eBect absolute undertakings to pay the money
advanced or the amount for which credit is
5
given on the faith of the instrument !hey are
primary obligations and not accessory
contracts and while they are security
arrangements, they are not converted thereby
into contracts of guaranty What distinguishes
letters of credit from other accessory contracts,
is the engagement of the issuing bank to pay
the seller once the draft and other re"uired
shipping documents are presented to it !hey
are de-nite undertakings to pay at sight once
the documents stipulated therein are
presented
!he prohibition under Sec # 8b9 of 0ule A of the
%nterim 0ules does not apply to herein
petitioner as the prohibition is on the
enforcement of claims against guarantors or
sureties of the debtors whose obligations
are no% so&+/*.' with the debtor !he
participating banks obligation are solidary with
respondent Maynilad in that it is a primary,
direct, de-nite and an absolute undertaking to
pay and is not conditioned on the prior
exhaustion of the debtors assets !hese are the
same characteristics of a surety or solidary
obligor And being solidary, the claims against
them can be pursued separately from and
independently of the rehabilitation case
!he terms of the %rrevocable Standby (etter of
Credit do not show that the obligations of the
banks are not solidary with those of respondent
Maynilad =n the contrary, it is issued at the
re"uest of and for the account of Maynilad in
favor of the MWSS as a bond for the full and
prompt performance of the obligations by the
concessionaire under the Concession
Agreement and herein MWSS is authori<ed by
the banks to draw on it by the simple act of
delivering to the agent a written certi-cation
substantially in the form of the (etter of Credit
!aking into consideration our own rulings on
the nature of letters of credit and the customs
and usage developed over the years in the
banking and commercial practice of letters of
credit, we hold that except when a letter of
credit speci-cally stipulates otherwise, the
obligation of the banks issuing letters of credit
are so&+/*.' with that of the person or entity
re"uesting for its issuance, the same being a
direct, primary, absolute and de-nite
undertaking to pay the bene-ciary upon the
presentation of the set of documents re"uired
therein
!he public respondent, therefore, exceeded his
4urisdiction, in holding that he was competent
to act on the obligation of the banks under the
(etter of Credit under the argument that this
was not a solidary obligation with that of the
debtor /eing a solidary obligation, the letter of
credit is excluded from the 4urisdiction of the
rehabilitation court and therefore in en4oining
petitioner from proceeding against the Standby
(etters of Credit to which it had a clear right
under the law and the terms of said Standby
(etter of Credit, public respondent acted in
excess of his 4urisdiction
N1T"S
We held in Feati Bank & Trust Company v.
Court of Appeals that the concept of
guarantee visvis the concept of an irrevocable
letter of credit are inconsistent with
each other!heguarantee theory destroys the
independence of the banks responsibility from
the contract upon which it was opened and the
nature of both contracts is mutually in conCict
with each other %n contracts of guarantee, the
guarantors obligation is merely collateral and it
arises only upon the default of the person
primarily liable =n the other hand, in an
irrevocable letter of credit, the bank
undertakes a primary obligation We have also
de-ned a letter of credit as an engagement by
a bank or other person made at the re"uest of
a customer that the issuer shall honor drafts or
other demands of payment upon compliance
with the conditions speci-ed in the credit
DDDDDDDDDDDDDDDDDDDDDDD
!rans-eld *hilippines vs (u<on 1ydro 3lectric
Corp E0 2o 5A#>5>, 2ov 77, 766A
The independent nature of the letter of
credit may be: (a) independence in toto
7
where the credit is independent from the
justifcation aspect and is a separate
obligation from the underlying agreement
like for instance a typical standby; or (b)
independence may be only as to the
justifcation aspect like in a commercial
letter of credit or repayment standby,
which is identical with the same
obligations under the underlying
agreement. n both cases the payment
may be enjoined if in the light of the
purpose of the credit the payment of the
credit would constitute fraudulent abuse
of the credit.
@actsF !rans-eld *hilippines 8!rans-eld9 entered
into a turn&key contract with (u<on 1ydro Corp
8(1C9+nder the contract, !rans-eld were to
construct a hydro&electric plants in /enguet
and %locos !rans-eld was given the sole
responsibility for the design, construction,
commissioning, testing and completion of the
*ro4ect !he contract provides for a period for
which the pro4ect is to be completed and also
allows for the extension of the period provided
that the extension is based on 4usti-able
grounds such as fortuitous event %n order to
guarantee performance by !rans-eld, two
stand&by letters of credit were re"uired to be
opened ,uring the construction of the plant,
!rans-eld re"uested for extension of time citing
typhoon and various disputes delaying the
construction (1C did not give due course to
the extension of the period prayed for but
referred the matter to arbitration committee
/ecause of the delay in the construction of the
plant, (1C called on the stand&by letters of
credit because of default 1owever, the
demand was ob4ected by !rans-eld on the
ground that there is still pending arbitration on
their re"uest for extension of time
%ssueF Whether or not (1C can collect from the
letters of credit despite the pending arbitration
case
1eldF !rans-eld's argument that any dispute
must -rst be resolved by the parties, whether
through negotiations or arbitration, before the
bene-ciary is entitled to call on the letter of
credit in essence would convert the letter of
credit into a mere guarantee
!he independent nature of the letter of credit
may beF 8a9 independence in toto where the
credit is independent from the 4usti-cation
aspect and is a separate obligation from the
underlying agreement like for instance a
typical standbyG or 8b9 independence may be
only as to the 4usti-cation aspect like in a
commercial letter of credit or repayment
standby, which is identical with the same
obligations under the underlying agreement %n
both cases the payment may be en4oined if in
the light of the purpose of the credit the
payment of the credit would constitute
fraudulent abuse of the credit
Hurisprudence has laid down a clear distinction
between a letter of credit and a guarantee in
that the settlement of a dispute between the
parties is not a pre&re"uisite for the release of
funds under a letter of credit %n other words,
the argument is incompatible with the very
nature of the letter of credit %f a letter of credit
is drawable only after settlement of the dispute
on the contract entered into by the applicant
and the bene-ciary, there would be no
practical and bene-cial use for letters of credit
in commercial transactions
!he engagement of the issuing bank is to pay
the seller or bene-ciary of the credit once the
draft and the re"uired documents are
presented to it !he so&called Iindependence
principleJ assures the seller or the bene-ciary
of prompt payment independent of any breach
of the main contract and precludes the issuing
bank from determining whether the main
contract is actually accomplished or not +nder
this principle, banks assume no liability or
responsibility for the form, suKciency,
accuracy, genuineness, falsi-cation or legal
eBect of any documents, or for the general
andLor particular conditions stipulated in the
documents or superimposed thereon, nor do
:
they assume any liability or responsibility for
the description, "uantity, weight, "uality,
condition, packing, delivery, value or existence
of the goods represented by any documents, or
for the good faith or acts andLor omissions,
solvency, performance or standing of the
consignor, the carriers, or the insurers of the
goods, or any other person whomsoever
A