(DIGEST)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.

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Mico Metals v. Court of Appeals
G.R. No. 117914. 1 February 2002.

FACTS:
Mico Metals Corporation (MCC) applied for two
domestic letters of credit (L/C) with the Philippine Bank of
Communications (PBC) which applications were eventually
granted. Thereafter, the domestic L/Cs were negotiated and
accepted by MCC as evidenced by the corresponding bank
draft issued for the purpose. After MCCs supplier was paid, a

trust receipt (T/R), upon MCCs own initiative, was executed in

favor of PBC. A few months later, MCC applied for authority
to open foreign L/Cs with PBC which applications were
eventually approved. Negotiation and proper acceptance of
the L/C were then made by MCC. Again, a corresponding T/R
was executed by MCC in favor of PBC.
In all the transactions involving foreign L/C, PBC turned over
to MCC the necessary
documents such as the bills of lading and commercial
invoices to enable the latter to withdraw the goods from the
port of Manila. About five months later, MCC obtained from
PBC a loan covered by a promissory note (P/N). Upon maturity
of all credit availments obtained by MCC from PBC, the latter
made a demand for payment which demand was left
unheeded.
ISSUE: Whether or not PBC failed to prove that it actually
made payments under the L/C since the bank drafts
presented as evidence show that they were made in favor of
two corresponding banks, and as such it (PBC) is not entitled
to reimbursement?
HELD: No. Modern L/Cs are usually not made between
natural persons. They involve bank to bank transactions.
Historically, L/Cs was developed to facilitate the sale of goods
between, distant and unfamiliar buyers and sellers. It was an
arrangement under which a bank, whose credit was
acceptable to the seller, would at the instance of the buyer
agree to pay drafts drawn on it by the seller, provided that
certain documents are presented such as bills of lading
accompanying the corresponding drafts. Consequently, there
is nothing unusual in the fact that the drafts presented in
evidence by PBC were not made payable to it (PBC). 24 of
the Negotiable Instruments Law (NIL) provides that every
negotiable instrument is deemed prima facie to have been
issued for valuable consideration and every person whose
signature appears thereon to have become a party for value.
Nevertheless, while that presumption found under the NIL
may not necessarily be applicable to T/R and L/C, the
presumption that the drafts drawn in connection with
the L/C have sufficient consideration prevails. More

importantly, under 3(r), Rule 131 of the Rules of Court there

is also a presumption that sufficient consideration was given
in a contract. Hence, MCC should have presented credible
evidence to rebut that presumption as well as the evidence
presented by PBC. The L/C show that the pertinent
materials/merchandise have been received by MCC. The drafts signed by
the beneficiary/suppliers in connection with the corresponding L/C proved
that said suppliers were paid by PBC for the account of MCC. On the other
hand, aside from its bare denials MCC did not present sufficient and
competent evidence to rebut the evidence of PBC. MCC did not proffer a
single piece of evidence, apart from its bare denial, to support its allegation
that the loan transactions, L/Cs and T/Rs were issued allegedly without any
consideration.

Transfield Philippines vs Luzon Hydro Electric Corp. GR No 146717,

Nov 22, 2004
MARCH 15, 2014LEAVE A COMMENT
The independent nature of the letter of credit may be: (a) independence in
toto where the credit is independent from the justification 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 justification
aspect like in a commercial letter of credit or repayment standby, which is
identical with the same obligations under the underlying agreement. In
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

Commercial
Law;
Negotiable
Instruments
Law;
Essential Requisites of a Negotiable Instrument; Letters of credit and trustre
ceipts are not negotiable instruments.
Negotiable instruments which are meant to be substitutes for
money, must conform to the following requisites to be considered as such
a) it must be in writing; b) it must be signed by the maker or drawer; c) it
must contain an unconditional promise or order to pay a sum certain in
money; d) it must be payable on demand or at a fixed or determinable
future time; e) it must be payable to order or bearer; and f) where it is a bill
of exchange, the drawee must be named or otherwise indicated with reasonable
certainty. Negotiable instruments include promissory notes, bills of exchange
and checks. Letters of credit and trust receipts are, however, not negotiable
instruments. But drafts issued in connection with letters of credit are
negotiable instruments.

the credit.
Facts: Transfield Philippines (Transfield) entered into a turn-key contract
with Luzon Hydro Corp. (LHC).Under the contract, Transfield were to
construct a hydro-electric plants in Benguet and Ilocos. Transfield was given
the sole responsibility for the design, construction, commissioning, testing
and completion of the Project. The contract provides for a period for which
the project is to be completed and also allows for the extension of the
period provided that the extension is based on justifiable grounds such as
fortuitous event. In order to guarantee performance by Transfield, two
stand-by letters of credit were required to be opened. During the

Same; Same; Same; A trust receipt is a document of security pursuant

to which a bank acquires a security interest in the good sunder trust
receipt
.A trust receipt is considered as a security transaction intended to aid in
financing importers and retail dealers who do not have sufficient funds or
resources to finance the importation or purchase of merchandise, and who
may not be able to acquire credit except through utilization, as collateral of
the merchandise imported or purchased. A trust receipt, therefor, is document of
security pursuant to which a bank acquires a security interest in the
goods under trust receipt. Under a letter of credit-trust receipt
arrangement, a bank extends a loan covered by a letter
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construction of the plant, Transfield requested for extension of time citing

typhoon and various disputes delaying the construction. LHC did not give
due course to the extension of the period prayed for but referred the matter
to arbitration committee. Because of the delay in the construction of the
plant, LHC called on the stand-by letters of credit because of default.
However, the demand was objected by Transfield on the ground that there
is still pending arbitration on their request for extension of time.

Issue: Whether or not LHC can collect from the letters of credit despite the

credit. If a letter of credit is drawable only after settlement of the dispute

pending arbitration case

on the contract entered into by the applicant and the beneficiary, there
would be no practical and beneficial use for letters of credit in commercial

Held: Transfields argument that any dispute must first be resolved by the

transactions.

parties, whether through negotiations or arbitration, before the beneficiary

is entitled to call on the letter of credit in essence would convert the letter

The engagement of the issuing bank is to pay the seller or beneficiary of

of credit into a mere guarantee.

the credit once the draft and the required documents are presented to it.
The so-called independence principle assures the seller or the beneficiary

The independent nature of the letter of credit may be: (a) independence in

of prompt payment independent of any breach of the main contract and

toto where the credit is independent from the justification aspect and is a

precludes the issuing bank from determining whether the main contract is

separate obligation from the underlying agreement like for instance a

actually accomplished or not. Under this principle, banks assume no liability

typical standby; or (b) independence may be only as to the justification

or

aspect like in a commercial letter of credit or repayment standby, which is

falsification or legal effect of any documents, or for the general and/or

identical with the same obligations under the underlying agreement. In

particular conditions stipulated in the documents or superimposed thereon,

both cases the payment may be enjoined if in the light of the purpose of

nor do they assume any liability or responsibility for the description,

the credit the payment of the credit would constitute fraudulent abuse of

quantity, weight, quality, condition, packing, delivery, value or existence of

the credit.

the goods represented by any documents, or for the good faith or acts

responsibility

for

the

form,

sufficiency,

accuracy,

genuineness,

and/or omissions, solvency, performance or standing of the consignor, the

Jurisprudence 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-requisite for the release of funds under a letter of credit. In other
words, the argument is incompatible with the very nature of the letter of

carriers, or the insurers of the goods, or any other person whomsoever.