MWSS v.

Daway & Maynilad Water

Facts:
MWSS granted Maynilad under a Concession Agreement to manage, operate abd repair the
existing MWSS water delivery and sewerage services in the West Zone Service Area, for which
Maynilad undertook to pay the corresponding concession fees on the dates agreed upon in said
agreement 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, Maynilad arranged a three'year facility with a number of foreign banks, led by
Citicorp &nternational (imited, 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!
)espondent Maynilad re#uested MWSS 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! -ailing to get what it desired, Maynilad issued a -orce Ma.eure
/otice and unilaterally suspended the payment of the concession fees! "he parties entered into
a Memorandum of Agreement 0M1A2 wherein Maynilad was allowed to recover foreign exchange
losses under a formula agreed upon between them!
3owever, Maynilad served upon MWSS a /otice of 4vent of "ermination, claiming that MWSS
failed to comply with its obligations under the Concession Agreement! Maynilad filed a /otice of
4arly "ermination of the concession, which was challenged by MWSS! "his matter was
eventually brought before the Appeals *anel by MWSS! 1n /ovember 5, 6778, the Appeals
*anel ruled that there was no 4vent of "ermination, therefore, Maynilad should pay the
concession fees that had fallen due!
*rior to this, however, Maynilad had filed a petition for rehabilitation before the court a quo which
resulted in the issuance of the Stay 1rder!
Issues:
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&n support of the first issue, petitioner maintains that as a matter of law, the +SB967 Million
Standby (etter of Credit and *erformance ;ond are not property of the estate of the debtor
Maynilad and, therefore, not sub.ect to the in rem rehabilitation .urisdiction of the trial court!
*etitioner argues that a call made on the Standby (etter of Credit does not involve any asset of
Maynilad but only assets of the banks! -urthermore, a call on the Standby (etter of Credit cannot
also be considered a CclaimC falling under the purview of the stay order as alleged by respondent
as it is not directed against the assets of respondent Maynilad!
*etitioner concludes that the public respondent erred in declaring and holding that the
commencement of the process for the payment of +SB%D million is a violation of the order issued
on /ovember 95, 6778!
RESPONDENT MAYNILADS CASE
)espondent Maynilad seeks to refute this argument by alleging thatE
a2 the order ob.ected to was strictly and precisely worded and issued after carefully
considering:evaluating the import of the arguments and documents referred to by
Maynilad, MWSS and:or creditors Chinatrust Commercial ;ank and SueF in relation to
admissions, pleadings and:or pertinent records
98
and that public respondent had the
authority to issue the sameG
b2 public respondent never considered nor held that the *erformance bond or assets of
the issuing banks are part or property of the estate of respondent Maynilad sub.ect to
rehabilitation and which respondent Maynilad has not and has never claimed to beG
9H
c2 what is relevant is not whether the performance bond or assets of the issuing banks
are part of the estate of respondent Maynilad but whether the act of petitioner in
commencing the process for the payment by the banks of +SB%D million out of the
+SB967 million performance bond is covered and:or prohibited under sub'paragraphs 6!2
and H!2 of the stay order dated /ovember 95, 6778G
d2 the .urisdiction of public respondent extends not only to the assets of respondent
Maynilad but also over persons and assets of Call those affected by the proceedings x x x
upon publication of the notice of commencementG
9I
C and
e2 the obligations under the Standby (etter of Credit are not solidary and are not exempt
from the coverage of the stay order!
OUR RULING
We will discuss the first two issues raised by petitioner as these are interrelated and make up the
main issue of the petition before us which is, did the rehabilitation court sitting as such, act in
excess of its authority or .urisdiction when it en.oined herein petitioner from seeking the payment
of the concession fees from the banks that issued the &rrevocable Standby (etter of Credit in its
favor and for the account of respondent MayniladJ
"he public respondent relied on Sec! 9, )ule 8 of the &nterim )ules on Corporate )ehabilitation
to support its .urisdiction over the &rrevocable Standby (etter of Credit and the banks that issued
it! "he section reads in part Cthat .urisdiction over those affected by the proceedings is
considered ac#uired upon the publication of the notice of commencement of proceedings in a
newspaper of general circulationC and goes further to define rehabilitation as an in
rem proceeding! "his provision is a logical conse#uence of the in rem nature of the proceedings,
where .urisdiction is ac#uired by publication and where it is necessary that the assets of the
debtor come within the courts .urisdiction to secure the same for the benefit of creditors! "he
reference to Call those affected by the proceedingsC covers creditors or such other persons or
entities holding assets belonging to the debtor under rehabilitation which should be reflected in
its audited financial statements! "he banks do not hold any assets of respondent Maynilad that
would be material to the rehabilitation proceedings nor is Maynilad liable to the banks at this
point!
)espondent Maynilads -inancial Statement as of ,ecember 89, 6779 and 6776 do not show the
&rrevocable Standby (etter of Credit as part of its assets or liabilities, and by respondent
Maynilads own admission it is not! &n issuing the clarificatory order of /ovember 65, 6778,
en.oining petitioner from claiming from an asset that did not belong to the debtor and over which
it did not ac#uire .urisdiction, the rehabilitation court acted in excess of its .urisdiction!
)espondent Maynilad insists, however, that it is Sec! $ 0b2, )ule H of the &nterim )ules that
supports its claim that the commencement of the process to draw on the Standby (etter of Credit
is an enforcement of claim prohibited by and under the &nterim )ules and the order of public
respondent!
)espondent Maynilad would persuade us that the above provision .ustifies a leap to the
conclusion that such an enforcement is prohibited by said section because it is a Cclaim against
the debtor, its guarantors and sureties not solidarily liable with the debtorC and that there is
nothing in the Standby (etter of Credit nor in law nor in the nature of the obligation that would
show or re#uire the obligation of the banks to be solidary with the respondent Maynilad!
We disagree!
-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! $ 0b2 of )ule H of the &nterim )ules does not en.oin the enforcement of all claims
against guarantors and sureties, but only tose cla!"s a#a!nst #ua$anto$s an% su$et!es &o
a$e not sol!%a$!ly l!able &!t te %ebto$! )espondent Maynilads claim that the banks are not
solidarily liable with the debtor does not find support in .urisprudence!
We held in Feati Bank & Trust Company v. Court of Appeals
9$
that the concept of guarantee vis-
-vis the concept of an irrevocable letter of credit are inconsistent with each other! "he guarantee
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 conflict 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! 1n the other hand, in an irrevocable letter of credit, the bank
undertakes a primary obligation! We have also defined 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 specified in the credit!
95
(etters of credit were developed for the purpose of insuring to a seller payment of a definite
amount upon the presentation of documents
9D
and 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 specified in the letter!
9%
"hey are in
effect absolute undertakings to pay the money advanced or the amount for which credit is 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!
67
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!
69
"hey are definite undertakings to pay at sight once the documents stipulated
therein are presented!
(etters of Credits have long been and are still governed by the provisions of the +niform
Customs and *ractice for ,ocumentary Credits of the &nternational Chamber of Commerce! &n
the 9%%8 )evision it provides in Art! 6 that Cthe expressions ,ocumentary Credit0s2 and Standby
(etter0s2 of Credit mean any arrangement, however made or described, whereby a bank acting
at the re#uest and on instructions of a customer or on its own behalf is to make payment against
stipulated document0s2C and Art! % thereof defines the liability of the issuing banks on an
irrevocable letter of credit as a Cdefinite undertaking of the issuing bank, provided that the
stipulated documents are presented to the nominated bank or the issuing bank and the terms
and conditions of the Credit are complied with, to pay at sight if the Credit provides for sight
payment!C
66
We have accepted, in Feati Bank and Trust Company v. Court of Appeals
68
and Bank of America
NT & SA v. Court of Appeals,
6H
to the extent that they are pertinent, the application in our
.urisdiction of the international credit regulatory set of rules known as the +niform Customs and
*ractice for ,ocumentary Credits 0+!C!*2 issued by the &nternational Chamber of Commerce,
which we said in Bank of te !ilippine "slands v. Nery
6I
was .ustified under Art! 6 of the Code of
Commerce, which statesE
CActs of commerce, whether those who execute them be merchants or not, and whether
specified in this Code or not should be governed by the provisions contained in itG in their
absence, by the usages of commerce generally observed in each placeG and in the
absence of both rules, by those of the civil law!C
"he prohibition under Sec $ 0b2 of )ule H of the &nterim )ules 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 not solidary with the debtor! "he participating banks obligation are
solidary with respondent Maynilad in that it is a primary, direct, definite 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!
;eing solidary, the claims against them can be pursued separately from and independently of the
rehabilitation case, as held in Traders #oyal Bank v. Court of Appeals
6$
and reiterated
in !ilippine Bloomin$ %ills& "nc. v. Court of Appeals,
65
where we said that property of the surety
cannot be taken into custody by the rehabilitation receiver 0S4C2 and said surety can be sued
separately to enforce his liability as surety for the debts or obligations of the debtor! "he debts or
obligations for which a surety may be liable include future debts, an amount which may not be
known at the time the surety is given!
"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! 1n the contrary, it is issued at the
re#uest of and for the account of Maynilad Water Services, &nc!, in favor of the Metropolitan
Waterworks and Sewerage System, as a bond for the full and prompt performance of the
obligations by the concessionaire under the Concession Agreement
6D
and herein petitioner is
authoriFed by the banks to draw on it by the simple act of delivering to the agent a written
certification substantially in the form Annex C;C of the (etter of Credit! &t provides further in Sec!
$, that for as long as the Standby (etter of Credit is valid and subsisting, the ;anks shall honor
any written Certification made by MWSS in accordance with Sec! 6, of the Standby (etter of
Credit regardless of the date on which the event giving rise to such Written Certification arose!
6%
"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 specifically stipulates otherwise, the obligation of the
banks issuing letters of credit are solidary with that of the person or entity re#uesting for its
issuance, the same being a direct, primary, absolute and definite undertaking to pay the
beneficiary upon the presentation of the set of documents re#uired therein!
"he public respondent, therefore, exceeded his .urisdiction, 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 .urisdiction of the rehabilitation court and therefore in en.oining 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 .urisdiction!
ADDITIONAL ISSUES
We proceed to consider the other issues raised in the oral arguments and included in the parties
memorandaE
9! )espondent Maynilad argues that petitioner had a plain, speedy and ade#uate remedy
under the &nterim )ules itself which provides in Sec! 96, )ule H that the court may on
motion or motu proprio, terminate, modify or set conditions for the continuance of the stay
order or relieve a claim from coverage thereof! We find, however, that the public
respondent had already accomplished this during the hearing set for the two +rgent '(
!arte motions filed by respondent Maynilad on /ovember 69 and 6H, 6778,
87
where the
parties including the creditors, SueF and Chinatrust Commercial Cpresented their
respective arguments!C
89
"he public respondent then ruled, Cafter carefully
considering:evaluating the import of the arguments and documents referred to by
Maynilad, MWSS and:or the creditors Chinatrust Commercial ;ank and SueF in relation
to the admissions, the pleadings, and:or pertinent portions of the records, this court is of
the considered and humble view that the issue must perforce be resolved in favor of
Maynilad!C
86
3ence to pursue their opposition before the same court would result in the
presentation of the same arguments and issues passed upon by public respondent!
-urthermore, Sec! I, )ule 8 of the &nterim )ules would preclude any other effective
remedy #uestioning the orders of the rehabilitation court since they are immediately
executory and a petition for review or an appeal therefrom shall not stay the execution of
the order unless restrained or en.oined by the appellate court!C &n this situation, it had no
other remedy but to seek recourse to us through this petition for certiorari!
&n Silvestre v. Torres and )*en,
88
we said that it is not enough that a remedy is available
to prevent a party from making use of the extraordinary remedy of certiorari but that such
remedy be an ade#uate remedy which is e#ually beneficial, speedy and sufficient, not
only a remedy which at some time in the future may offer relief but a remedy which will
promptly relieve the petitioner from the in.urious acts of the lower tribunal! &t is the
inade#uacy '' not the mere absence '' of all other legal remedies and the danger of
failure of .ustice without the writ, that must usually determine the propriety of certiorari!
8H
6! )espondent Maynilad argues that by commencing the process for payment under the
Standby (etter of Credit, petitioner violated an immediately executory order of the court
and, therefore, comes to Court with unclean hands and should therefore be denied any
relief!
&t is true that the stay order is immediately executory! &t is also true, however, that the
Standby (etter of Credit and the banks that issued it were not within the .urisdiction of the
rehabilitation court! "he call on the Standby (etter of Credit, therefore, could not be
considered a violation of the Stay 1rder!
8! )espondents claim that the filing of the petition pre'empts the original .urisdiction of
the lower court is without merit! "he purpose of the initial hearing is to determine whether
the petition for rehabilitation has merit or not! "he propriety of the stay order as well as
the clarificatory order had already been passed upon in the hearing previously had for
that purpose! "he determination of whether the public respondent was correct in
en.oining the petitioner from drawing on the Standby (etter of Credit will have no bearing
on the determination to be made by public respondent whether the petition for
rehabilitation has merit or not! 1ur decision on the instant petition does not pre'empt the
original .urisdiction of the rehabilitation court!
'(EREFORE, the petition for certiorari is granted! "he 1rder of /ovember 65, 6778 of the
)egional "rial Court of KueFon City, ;ranch %7, is hereby declared NULL AND )OID and SET
ASIDE! "he status quo 1rder herein previously issued is hereby LIFTED! &n view of the urgency
attending this case, this decision is immediately executory!