(51) MWSS v HON. REYNALDO B.

DAWAY, IN HIS CAPACITY AS PRESIDING Nov 7, 2003, the Appeals Panel ruled that there was no Event of Termination as
JUDGE OF THE RTC QC AND MAYNILAD WATER SERVICES, INC. June 21 2004 defined under Art. 10.2 (ii) or 10.3 (iii) of the Concession Agreement and that,
Summary: therefore, Maynilad should pay the concession fees that had fallen due. The
Feb 21, 1997, MWSS granted Maynilad under a Concession Agreement: award of the Appeals Panel became final on Nov 22, 2003.
- term was for 20-year period
- to manage, operate, repair, decommission and refurbish the existing MWSS MWSS, thereafter, submitted a written notice on Nov 24, 2003, to Citicorp
water delivery and sewerage services in the West Zone Service Area International Limited, as agent for the participating banks, that by virtue of
- in turn, Maynilad undertook to pay the corresponding concession fees which, Maynilad's failure to perform its obligations under the Concession Agreement, it
among other things, consisted of payments of MWSS's mostly foreign loans. was drawing on the Irrevocable Standby Letter of Credit and thereby demanded
- (to secure the performance of its obligations) Maynilad was required to put up payment in the amount of US$98,923,640.15.
a bond, bank guarantee or other security acceptable to MWSS.
Prior to this, however, Maynilad had filed on Nov 13, 2003, a petition for
Thus, Maynilad arranged for a 3-year facility with a number of foreign banks, led rehabilitation with Prayer for Suspension of Actions and Proceedings filed by
by Citicorp International Limited, for the issuance of an Irrevocable Standby L/C Maynilad before the RTC QC.
in the amount of US$120M in favor of MWSS for the full and prompt
performance of Maynilad's obligations to MWSS. On Nov 17, 2003, the RTC QC made a determination that the petition conformed
substantially to the provisions of S2, R4 of the Interim Rules of Procedure on
In Sept 2000, Maynilad requested MWSS for a mechanism by which it hoped to Corporate Rehabilitation (Interim Rules). It forthwith issued a Stay Order which:
recover the losses it had allegedly incurred and would be incurring as a result of - stayed the enforcement of all claims, whether for money or otherwise and
the depreciation of the PH Peso against the US Dollar. whether such enforcement is by court action or otherwise, against Maynilad, its
- parties failed to agree Maynilad unilaterally suspended the payment of the guarantors and sureties not solidarily liable with Maynilad.
concession fees->parties entered into a MOA, but still disputes arose the
matter was referred to the Appeals Panel for arbitration this resulted to an Subsequently, on Nov 27, 2003, RTC, acting on two Urgent Ex Parte motions filed
amendment of the Concession Agreement known as Amendment No. 1, which by Maynilad, issued the questioned Order which:
provided inter alia for a formula that would allow Maynilad to recover foreign - DECLARED that the act of MWSS in commencing the process for the payment
exchange losses it had incurred or would incur under the terms of the by the banks of US$98M out of the US$120M standby letter of credit or any
Concession Agreement. similar act for that matter, violative of the dispositive portion of the Nov 17 Stay
Order.
However, on Nov 5, 2002, Maynilad served upon MWSS a Notice of Event of
Termination, claiming that MWSS failed to comply with its obligations under the Aggrieved by this Order, MWSS filed a petition for review by way of certiorari
Concession Agreement and Amendment No. 1 regarding the adjustment under R65 questioning the legality of said order.
mechanism that would cover Maynilad's foreign exchange losses. Soon ----------------------------------------
thereafter, Maynilad filed a Notice of Early Termination of the concession, MWSS's Position:
which was challenged by MWSS. (1) RTC judge GAD in considering the performance bond or assets of the issuing
banks as part or property of the estate of the Maynilad subject to rehabilitation.
This matter was eventually brought before the Appeals Panel by MWSS. As a matter of law, the US$120M Standby Letter of Credit and Performance Bond
are not property of the estate of the Maynilad and, therefore, not subject to the
in rem rehabilitation jurisdiction of the trial court.
A call made on the Standby Letter of Credit does not involve any asset of Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the
Maynilad but only assets of the banks. Furthermore, a call on the Standby Letter enforcement of all claims against guarantors and sureties, but only those claims
of Credit cannot also be considered a claim falling under the purview of the stay against guarantors and sureties who are not solidarily liable with the debtor.
order as it is not directed against the assets of Maynilad. Maynilad's claim that the banks are not solidarily liable with the debtor does not
(2) RTC judge erred in declaring and holding that the commencement of the find support in jurisprudence.
process for the payment of US$98M is a violation of the Nov 17 order.
(3) the performance bond obligations of the banks were solidary in nature. Letters of credit were developed for the purpose of insuring to a seller payment
of a definite amount upon the presentation of documents and is thus a
Maynilad's Position: commitment by the issuer that the party in whose favor it is issued and who can
(1) RTC judge never considered nor held that the Performance bond or assets of collect upon it will have his credit against the applicant of the letter, duly paid
the issuing banks are part or property of the estate of Maynilad subject to in the amount specified in the letter. They are in effect absolute undertakings to
rehabilitation and which Maynilad has not and has never claimed to be. pay the money advanced or the amount for which credit is given on the faith of
(2) S6 (b), R4 of the Interim Rules prohibits the commencement of the process to the instrument. They are primary obligations and not accessory contracts and
draw on the Standby Letter of Credit because it is a claim against the debtor, its while they are security arrangements, they are not converted thereby into
guarantors and sureties not solidarily liable with the debtor and that there is contracts of guaranty.
nothing in the Standby Letter of Credit nor in law nor in the nature of the
obligation that would show or require the obligation of the banks to be solidary The participating banks obligation are solidary with Maynilad in that it is a
with Maynilad. primary, direct, definite and an absolute undertaking to pay and is not
(3) the jurisdiction of the RTC extends not only to the assets of Maynilad but conditioned on the prior exhaustion of the debtors assets. These are the same
also over persons and assets of all those affected by the proceedings upon characteristics of a surety or solidary obligor. Being solidary, the claims against
publication of the notice of commencement. them can be pursued separately from and independently of the rehabilitation
------------------------------------------- case.
SC declared null and void the Nov 27 Order of the RTC. It ruled that the
rehabilitation court acted in GAD when it enjoined MWSS from seeking the Doctrine:
payment of the concession fees from the banks that issued the Irrevocable When a letter of credit specifically stipulates otherwise, the obligation of the
Standby Letter of Credit in its favor and for the account of Maynilad. banks issuing letters of credit are solidary with that of the person or entity
(1) RTC has no jurisdiction over the Irrevocable Standby Letter of Credit. requesting for its issuance, the same being a direct, primary, absolute and
- Maynilad's Financial Statement as of December 31, 2001 and 2002 do not show definite undertaking to pay the beneficiary upon the presentation of the set of
the Irrevocable Standby Letter of Credit as part of its assets or liabilities, and by documents required therein.
Maynilad's own admission it is not.
(2) The commencement of the process for the payment of US$98M does not
violate Sec. 6 (b), Rule 4 of the Interim Rules as the performance bond
obligations of the banks were solidary in nature.
First, the claim is not one against the debtor but against an entity that Maynilad
has procured to answer for its non-performance of certain terms and conditions
of the Concession Agreement, particularly the payment of concession fees.
AZCUNA, J As part of this agreement, Maynilad committed, among other things, to:
FACTS a) infuse the amount of UD$80M as addt'l funding support from its stockholders;
Feb 21, 1997, MWSS granted Maynilad under a Concession Agreement: b) resume payment of the concession fees; and
- term was for 20-year period c) mutually seek the dismissal of the cases pending before the CA and with
- to manage, operate, repair, decommission and refurbish the existing MWSS Minor Dispute Appeals Panel.
water delivery and sewerage services in the West Zone Service Area
- in turn, Maynilad undertook to pay the corresponding concession fees which, However, on Nov 5, 2002, Maynilad served upon MWSS a Notice of Event of
among other things, consisted of payments of MWSS's mostly foreign loans. Termination, claiming that MWSS failed to comply with its obligations under the
- (to secure the Maynilad's performance of its obligations) Maynilad was Concession Agreement and Amendment No. 1 regarding the adjustment
required under S6.9 of said contract to put up a bond, bank guarantee or other mechanism that would cover Maynilad's foreign exchange losses.
security acceptable to MWSS.
Dec 9, 2002, Maynilad filed a Notice of Early Termination of the concession,
In compliance with this requirement, Maynilad arranged on July 14, 2000 for a 3- which was challenged by MWSS. This matter was eventually brought before the
year facility with a number of foreign banks, led by Citicorp International Appeals Panel on January 7, 2003 by MWSS.
Limited, for the issuance of an Irrevocable Standby Letter of Credit in the
amount of US$120M in favor of MWSS for the full and prompt performance of On Nov 7, 2003, the Appeals Panel ruled that there was no Event of Termination
Maynilad's obligations to MWSS. as defined under Art. 10.2 (ii) or 10.3 (iii) of the Concession Agreement and that,
therefore, Maynilad should pay the concession fees that had fallen due.
In Sept 2000, Maynilad requested 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 award of the Appeals Panel became final on Nov 22, 2003.
the depreciation of the PH Peso against the US Dollar. Failing to get what it
desired, Maynilad issued a Force Majeure Notice on March 8, 2001 and MWSS, thereafter, submitted a written notice on Nov 24, 2003, to Citicorp
unilaterally suspended the payment of the concession fees. International Limited, as agent for the participating banks, that by virtue of
Maynilad's failure to perform its obligations under the Concession Agreement, it
In an effort to salvage the Concession Agreement, the parties entered into a was drawing on the Irrevocable Standby Letter of Credit and thereby demanded
MOA on June 8, 2001 wherein Maynilad was allowed to recover foreign exchange payment in the amount of US$98,923,640.15.
losses under a formula agreed upon between them.
Prior to this, however, Maynilad had filed on Nov 13, 2003, a petition for
Sometime in Aug 2001 Maynilad again filed another Force Majeure Notice and, rehabilitation with Prayer for Suspension of Actions and Proceedings filed by
since MWSS could not agree with the terms of said Notice, the matter was Maynilad before the RTC QC.
referred to the Appeals Panel for arbitration.
This resulted in the parties agreeing to resolve the issues through an On Nov 17, 2003, the RTC QC made a determination that the petition conformed
amendment of the Concession Agreement known as Amendment No. 1, which substantially to the provisions of S2, R4 of the Interim Rules of Procedure on
provided inter alia for a formula that would allow Maynilad to recover foreign Corporate Rehabilitation (Interim Rules). It forthwith issued a Stay Order which:
exchange losses it had incurred or would incur under the terms of the
Concession Agreement. - stayed the enforcement of all claims, whether for money or otherwise and
whether such enforcement is by court action or otherwise, against Maynilad, its
guarantors and sureties not solidarily liable with Maynilad; the issuing banks are part or property of the estate of Maynilad subject to
- prohibited Maynilad from selling, encumbering, transferring, or disposing in rehabilitation and which Maynilad has not and has never claimed to be.
any manner any of its properties except in the ordinary course of business; and (2) S6 (b), R4 of the Interim Rules prohibits the commencement of the process to
from making any payment of its outstanding liabilities; draw on the Standby Letter of Credit because it is a claim against the debtor, its
guarantors and sureties not solidarily liable with the debtor and that there is
Subsequently, on Nov 27, 2003, RTC, acting on two Urgent Ex Parte motions filed nothing in the Standby Letter of Credit nor in law nor in the nature of the
by Maynilad, issued the questioned Order which: obligation that would show or require the obligation of the banks to be solidary
- DECLARED that the act of MWSS in commencing the process for the payment with Maynilad.
by the banks of US$98M out of the US$120M standby letter of credit or any (3) the jurisdiction of the RTC extends not only to the assets of Maynilad but
similar act for that matter, violative of the dispositive portion of the Nov 17 Stay also over persons and assets of all those affected by the proceedings upon
Order. publication of the notice of commencement.
- ORDERED MWSS through its officers/officials to withdraw under pain of -------------------------------------------
contempt the written certification/notice of draw to Citicorp International Did the rehabilitation court sitting as such, act in excess of its authority or
Limited dated November 24, 2003 and jurisdiction when it enjoined MWSS from seeking the payment of the
- DECLARED void any payment by the banks to MWSS in the event such written concession fees from the banks that issued the Irrevocable Standby Letter
certification/notice of draw is not withdrawn by MWSS and/or MWSS receives of Credit in its favor and for the account of Maynilad?
payment by virtue of the aforesaid standby letter of credit. Held: Yes
(1) RTC has no jurisdiction over the Irrevocable Standby Letter of Credit
Aggrieved by this Order, MWSS filed a petition for review by way of certiorari RTC relied on S1, R3 of the Interim Rules on Corporate Rehabilitation to support
under R65 questioning the legality of said order. its jurisdiction over the Irrevocable Standby Letter of Credit and the banks that
---------------------------------------- issued it. The section reads in part that jurisdiction over those affected by the
MWSS's Position: proceedings is considered acquired upon the publication of the notice of
(1) RTC judge GAD in considering the performance bond or assets of the issuing commencement of proceedings in a newspaper of general circulation and goes
banks as part or property of the estate of the Maynilad subject to rehabilitation. further to define rehabilitation as an in rem proceeding. This provision is a
As a matter of law, the US$120M Standby Letter of Credit and Performance Bond logical consequence of the in rem nature of the proceedings, where jurisdiction
are not property of the estate of the Maynilad and, therefore, not subject to the is acquired by publication and where it is necessary that the assets of the debtor
in rem rehabilitation jurisdiction of the trial court. come within the courts jurisdiction to secure the same for the benefit of
A call made on the Standby Letter of Credit does not involve any asset of creditors. The reference to all those affected by the proceedings covers creditors
Maynilad but only assets of the banks. Furthermore, a call on the Standby Letter or such other persons or entities holding assets belonging to the debtor under
of Credit cannot also be considered a claim falling under the purview of the stay rehabilitation which should be reflected in its audited financial statements. The
order as it is not directed against the assets of Maynilad. banks do not hold any assets of Maynilad that would be material to the
(2) RTC judge erred in declaring and holding that the commencement of the rehabilitation proceedings nor is Maynilad liable to the banks at this point.
process for the payment of US$98M is a violation of the Nov 17 order.
(3) the performance bond obligations of the banks were solidary in nature. Maynilad's Financial Statement as of December 31, 2001 and 2002 do not show
the Irrevocable Standby Letter of Credit as part of its assets or liabilities, and by
Maynilad's Position: Maynilad's own admission it is not. In issuing the clarificatory order of Nov 27,
(1) RTC judge never considered nor held that the Performance bond or assets of 2003, enjoining MWSS from claiming from an asset that did not belong to the
debtor(Maynilad) and over which RTC did not acquire jurisdiction, the and other required shipping documents are presented to it. They are definite
rehabilitation court acted in excess of its jurisdiction. undertakings to pay at sight once the documents stipulated therein are
presented.
(2) The commencement of the process for the payment of US$98M does not
violate Sec. 6 (b), Rule 4 of the Interim Rules. Letters of Credits have long been and are still governed by the provisions of the
First, the claim is not one against the debtor but against an entity that Maynilad Uniform Customs and Practice for Documentary Credits of the International
has procured to answer for its non-performance of certain terms and conditions Chamber of Commerce. In the 1993 Revision it provides in Art. 2 that the
of the Concession Agreement, particularly the payment of concession fees. expressions Documentary Credit(s) and Standby Letter(s) of Credit mean any
arrangement, however made or described, whereby a bank acting at the request
Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the and on instructions of a customer or on its own behalf is to make payment
enforcement of all claims against guarantors and sureties, but only those claims against stipulated document(s) and Art. 9 thereof defines the liability of the
against guarantors and sureties who are not solidarily liable with the debtor. issuing banks on an irrevocable letter of credit as a definite undertaking of the
Maynilad's claim that the banks are not solidarily liable with the debtor does not issuing bank, provided that the stipulated documents are presented to the
find support in jurisprudence. 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.
We held in [Feati Bank & Trust Company v. CA] that the concept of guarantee
vis--vis the concept of an irrevocable letter of credit are inconsistent with each The participating banks obligation are solidary with Maynilad in that it is a
other. The guarantee theory destroys the independence of the bank's primary, direct, definite and an absolute undertaking to pay and is not
responsibility from the contract upon which it was opened and the nature of conditioned on the prior exhaustion of the debtors assets. These are the same
both contracts is mutually in conflict with each other. In contracts of guarantee, characteristics of a surety or solidary obligor.
the guarantors obligation is merely collateral and it arises only upon the default
of the person primarily liable. On the other hand, in an irrevocable letter of Being solidary, the claims against them can be pursued separately from and
credit, the bank undertakes a primary obligation. We have also defined a letter independently of the rehabilitation case.
of credit as an engagement by a bank or other person made at the request of a
customer that the issuer shall honor drafts or other demands of payment upon The terms of the Irrevocable Standby Letter of Credit do not show that the
compliance with the conditions specified in the credit. obligations of the banks are not solidary with those of respondent Maynilad. On
the contrary, it is issued at the request of and for the account of Maynilad Water
Letters of credit were developed for the purpose of insuring to a seller payment Services, Inc., in favor of the Metropolitan Waterworks and Sewerage System, as
of a definite amount upon the presentation of documents and is thus a a bond for the full and prompt performance of the obligations by the
commitment by the issuer that the party in whose favor it is issued and who can concessionaire under the Concession Agreement[28] and herein petitioner is
collect upon it will have his credit against the applicant of the letter, duly paid authorized by the banks to draw on it by the simple act of delivering to the
in the amount specified in the letter. They are in effect absolute undertakings to agent a written certification substantially in the form Annex B of the Letter of
pay the money advanced or the amount for which credit is given on the faith of Credit. It provides further in Sec. 6, that for as long as the Standby Letter of
the instrument. They are primary obligations and not accessory contracts and Credit is valid and subsisting, the Banks shall honor any written Certification
while they are security arrangements, they are not converted thereby into made by MWSS in accordance with Sec. 2, of the Standby Letter of Credit
contracts of guaranty. What distinguishes letters of credit from other accessory regardless of the date on which the event giving rise to such Written
contracts, is the engagement of the issuing bank to pay the seller once the draft Certification arose.
HOLDING: 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 requesting 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 required therein.

Additional Issues
- Maynilad argues that by commencing the process for payment under the
Standby Letter 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.

It is true that the stay order is immediately executory. It is also true, however,
that the Standby Letter of Credit and the banks that issued it were not within
the jurisdiction of the rehabilitation court. The call on the Standby Letter of
Credit, therefore, could not be considered a violation of the Stay Order.

WHEREFORE, the petition for certiorari is GRANTED. The Order of the RTC QC is
hereby declared NULL AND VOID and SET ASIDE.