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. To secure the concessionaires performance of its obligations, Maynilad was required under Section 6.9 of said contract to put up a bond, bank guarantee or other security acceptable to MWSS. In compliance with this requirement, Maynilad arranged for a three-year facility with a number of foreign banks, led by Citicorp Intl Ltd., for the issuance of an Irrevocable Standby Letter of Credit in favor of MWSS for the full and prompt performance of Maynilads obligations to MWSS as aforestated. Later, 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 Philippine Peso against the US Dollar and in filing 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 Board of Trustees Resolution 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. However Maynilad served upon MWSS a Notice of Event of Termination, claiming that MWSS failed to comply with its obligations under the Concession Agreement and its Amendment regarding the adjustment mechanism that would cover Maynilads foreign exchange losses. Maynilad filed a Notice of Early Termination of the concession, which was challenged by MWSS. This matter was eventually brought before the Appeals Panel by MWSS. the Appeals Panel ruled that there was no Event of Termination 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. The award of the Appeals Panel became final. MWSS, thereafter, submitted a written notice to Citicorp Intl Ltd, 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 Irrevocable Standby Letter of Credit and thereby demanded payment. Prior to this, however, Maynilad had filed on a petition for rehabilitation before the RTC of Quezon City which resulted in the issuance of the Stay Order and the disputed Order of November 27, 2003. ISSUE: WON the rehabilitation court sitting as such, act in excess of its authority or jurisdiction when it enjoined herein petitioner from seeking the payment of the concession fees from the banks that issued the Irrevocable Standby Letter of Credit in its favor HELD: the petition for certiorari is granted.The Order of November 27, 2003 of the RTC of Quezon City 90, is hereby declared null and voidand set aside. YES First, 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. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all claims against guarantors and sureties, but only those claims against guarantors and sureties who are not solidarily liable with the debtor. Respondent Maynilads claim that the banks are not solidarily liable with the debtor does not find support in jurisprudence. Letters of credit were developed for the purpose of insuring to a seller payment of a definite 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 specified in the letter They are in effect

absolute undertakings to pay the money advanced or the amount for which credit is given on the faith of the instrument. They 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 required shipping documents are presented to it. They are definite undertakings to pay at sight once the documents stipulated therein are presented. The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules 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. The 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. These 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. The terms of the Irrevocable Standby Letter of Credit do not show that the 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 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 authorized by the banks to draw on it by the simple act of delivering to the agent a written certification substantially in the form of the Letter of Credit. Taking 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 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. The public respondent, therefore, exceeded his jurisdiction, in holding that he was competent to act on the obligation of the banks under the Letter of Credit under the argument that this was not a solidary obligation with that of the debtor. Being a solidary obligation, the letter of credit is excluded from the jurisdiction of the rehabilitation court and therefore in enjoining petitioner from proceeding against the Standby Letters of Credit to which it had a clear right under the law and the terms of said Standby Letter of Credit, public respondent acted in excess of his jurisdiction. NOTES: 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.The 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. In contracts of guarantee, 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 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 request of a customer that the issuer shall honor drafts or other demands of payment upon compliance with the conditions specified in the credit. FEATI BANK VS. CA FACTS: Note: Feati as a notifying bank is only obliged to notify and transmit to the seller the LC. Bernardo Villaluz (seller) agreed to sell to Christiansen (buyer) 2,000 cubic meters of lauan logs at a price of $27 per cubic meter FOB. Security Pacific National Bank of LA (Security) issued an Irrevocable Letter of Credit. Said letter of credit was mailed to FEATI bank and one of the documents required to be submitted by the seller to the bank is the Certification from Han Axel Christiansen that the logs have been approved prior to shipping in accordance with terms and conditions of corresponding purchase order. Also incorporated by reference in the letter of credit is the Uniform Customs and Practice for Documentary Credits (UCP).

The logs were thereafter loaded on the vessel Zenlin Glory which was chartered by Christiansen. It was certified to be in good condition and exportable. The logs arrived at Korea and were received by the consignee Hanmi Trade Devt Comp. and were subsequently sold to another party. However Christiansen failed and refused to issue the certificate despite repeated demands by Villaluz. Due to the absence of the said certificate, Feati Bank refused to advance the payment on the letter of credit. because of the situation of Villaluz, Central Bank issued a memorandum declaring that the requirement of CERTIFICATION is not allowed. However such memo only came out after the letter of credit has already lapsed. RTC ruled in favor of Villaluz and held Feati Bank and Christiansen solildarily liable, it held that: 1. Feati Bank is liable because it failed to negotiate the letter of credit in the absence of the certification even if the Central Bank held such requirement as void. 2. That because the LC is irrevocable, the issuing bank, Security, is deemed to honor the LC upon presentment. And by accepting the instructions from the issuing bank Feati assumed the same undertaking. 3. Under the principles and laws on both trust and estoppels. When Feati Bank accepted its role as the notifying and negotiating bank in behalf of the issuing bank, it in effect accepted a trust reposed on it and became a trustee in relation to Villaluz. CA affirmed and further held: 1. The LC was a confirmed LC in which the notifying bank gives its assurance also that the opening banks obligation will be performed. The notifying bank in such a case will not simply transmit but will confirm the opening banks obligation by making it also its own understanding, commitment or guaranty or obligation. ISSUE: 1. W/N Feati Bank can be held liable for the LC absence the certification required by the LC. RULING: NO, Feati Bank is not liable. It is already a settled rule in Commercial transaction involving letter of credit that the documents tendered must strictly conform to the terms of the LC. In this case, the mere fact that the certification was required by the LC means that the document is of vital importance to the buyer and therefore must be submitted before the notifying bank is compelled to honor the LC. Thus failure of Villaluz to surrender the Certification is fatal. Under the UCP1 the bank may negotiate, accept or pay, if the documents tendered to it are on their face in accordance with the terms and

Article 3. An irrevocable credit is a definite undertaking on the part of the issuing bank and constitutes the engagement of that bank to the beneficiary and bona fide holders of drafts drawn and/or documents presented thereunder, that the provisions for payment, acceptance or negotiation contained in the credit will be duly fulfilled, provided that all the terms and conditions of the credit are complied with. An irrevocable credit may be advised to a beneficiary through another bank (the advising bank) without engagement on the part of that bank , but when an issuing bank authorizes or requests another bank to confirm its irrevocable credit and the latter does so, such confirmation constitutes a definite undertaking of the confirming bank. . . . Article 7. Banks must examine all documents with reasonable care to ascertain that they appear on their face to be in accordance with the terms and conditions of the credit," Article 8. Payment, acceptance or negotiation against documents which appear on their face to be in accordance with the terms and conditions of a credit by a bank authorized to do so, binds the party giving the authorization to take up documents and reimburse the bank which has effected the payment, acceptance or negotiation. (Emphasis Supplied)

conditions of the documentary credit. And since Feati Bank deals only with documents, the absence of any document required in the LC justifies the refusal by the correspondent bank to negotiate, accept, or pay the beneficiary, as it is not its obligation to look beyond the documents. It merely has to rely on the completeness of the documents. SC also held that the decision of the TC was wrong in holding that irrevocable and confirmed credit is synonymous. It held that an irrevocable credit refers to the duration of the LC. On the other hand confirmed letter pertains to the obligation assumed by the bank, in this case, the correspondent bank gives an assurance to the beneficiary that it will undertake the issuing banks obligation as its own according to the terms and conditions of the credit. Hence it does not mean that the mere fact that a LC is irrevocable imply that the Correspondent bank in accepting the instructions of the issuing bank has also confirmed the LC. The SC also held that in this case Feati Bank was merely a notifying bank2 and not a negotiating bank3 nor a confirming bank4. In this case the LC merely provided Feati Bank forward the enclosed original credit to Villaluz. As a notifying bank, its responsibility was solely to notify and/or transmit the documentary of credit to Villaluz and its obligation ends there. There is neither proof that Feati Bank confirmed the letter, the $75,000 loan granted by Feati Bank to Villaluz was not in anticipation of the loan but was an isolated transaction, the logical conclusion is that the LC was merely a collateral. By extending the loan it assumed the character of a negotiating bank but even then Feati bank was still not liable because there was no contractual relationship between Feati and Villaluz. Neither was there a trust 5 between Feati Bank (trustee) and Villaluz (beneficiary). the mere opening of a LC does not involve a specific appropriation of a sum of money in favor of the beneficiary. It only signifies that the beneficiary may be able to draw funds upon the letter of credit up to the designated amount specified in the LC. The correspondent bank does not receive in advance the sum of money from the issuing bank. On the contrary, when they accept the tender and pays the amount, it gets the money from its own funds and then later seeks reimbursement from the issuing bank. Also as notifying bank it cannot be held liable even if there is a trust created. Neither was there a guarantee. It is fundamental that an irrevocable credit is independent not only of the contract between the buyer and the seller but also of the credit agreement between the issuing bank and the buyer. Feati Bank has no business with the relationship of Christiansen and Security it merely being a notifying bank. Feati Bank was only following instruction of the issuing bank. But even if all of this argument existed (trust, guarantee, and confirming bank, Feati Bank cannot be compelled to pay because there was a failure on the part of Villaluz to comply with the terms of the LC which is the absence of the certificate. It cannot be argued that such a requirement is illegal because such pronouncement by the Central Bank was only done after the issuance of the LC, when the LC was issued there was still no such prohibition.

In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to the beneficiary the existence of the letter of credit. (no contractual relationship with seller/benificiary) 3 A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft under the letter of credit. Its liability is dependent upon the stage of the negotiation. If before negotiation, it has no liability with respect to the seller but after negotiation, a contractual relationship will then prevail between the negotiating bank and the seller. (no contractual relationship with seller/benificiary) 4 a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability is a primary one as if the correspondent bank itself had issued the letter of credit. 5 trust has been defined as the "right, enforceable solely in equity, to the beneficial enjoyment of property the legal title to which is vested to another." Therefore, In order therefore for the trust theory to be sustained, Feati Bank should have had in its possession a sum of money as specific fund advanced to it by the issuing bank and to be held in trust by it in favor Viallaluz. This does not obtain in this case.