Metropolitan Waterworks and Sewerage System V. Hon. Reynaldo B.

Daway
G.R. No. 160732. June 21, 2004

Facts:
Maynilad obtained a 20-year concession to manage, repair, refurbish, and upgrade
existing Metropolitan Waterworks and Sewerage System (MWSS) water delivery and
sewerage services in Metro Manila’s west zone. Maynilad, under the concession
agreement undertook to pay concession fees and itsforeign loans. To secure its
obligations, Maynilad was required under Section 9 of the concession contract to put up
a bond, bank guarantee or other security acceptable to MWSS. Pursuant to this
requirement, Maynilad arranged on for a three-year facility with a number of foreign
banks led by Citicorp Intl for the issuance of an irrevocable standby letter of credit (SLC)
in the amount of $ 120 million in favor of MWSS for the full and prompt payment of
Maynilad’s obligations to MWSS. Due to devaluation of the peso and other business
reversals of Maynilad, MWSS filed a notice of early termination of the concession
contract. Upon certification of the non performance of Maynilad obligation, the MWSS
moved to collect from Citicorp on the standby letters of credit issued. Maynilad filed for
corporate rehabilitation. Judge Daway stayed the payment of the letter of credit by
Citicorp pursuant to Sec 6 (b) of Rule 4 of the Interim Rules on Corporate Rehabilitation.

Issue: Whether or not the payment of the standby of letter of credit can be stayed by
filing of a petition for rehabilitation

Held:
No. The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to the
the standby letter of credit issued by the bank as the former prohibition is on the
enforcement of claims against guarantors or sureties of the debtors whose obligations
are not solidary with the debtor.

The participating bank’s obligation under the letter of credit 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.

Issuing banks under the letters of credit are not equivalent to guarantors. The concept
of guarantee vis-à-vis the concept of an irrevocable letter of credit are inconsistent with
each other. The guarantee theory destroys the independence of the bank’s
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
guarantor’s 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.
A Standby Letter of Credit is not a guaranty because under a Standby Letter of Credit,
the bank undertakes a primary obligation. On the other hand, a guarantor undertakes a
collateral obligation which arises only upon the debtor’s default. A Standby Letter of
Credit is a primary obligation and not an accessory contract.