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CASES ON LETTERS OF CREDIT 1. 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.

2. Mico Metals v. Court of Appeals G.R. No. 117914. 1 February 2002. De Leon,J.
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.

3. Transfield Philippines vs Luzon Hydro Electric Corp. (GR No 146717, Nov 22, 2004)
FACT: Petitioner entered into a turn-key contract with Luzon Hydro Corp. (LHC).Under the contract, petitioner were to construct a hydro-electric plants in Benguet and Ilocos. 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 petitioner, two stand-by letters of credit were required to be opened. During the construction of the plant, petitioner requested for extension of time citing fortuitous events brought about by typhoon, barricades and demonstration. LHC did not give due course to the extension of the period prayed for but referred the matter to arbitration committee. The LHC has brought the matters for arbitration at the Constructions Industry Arbitration Commission (CIAC), while the petitioner has brought the same with International Chamber of Commerce (ICC). In the meanwhile, 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 petitioner on the ground that there is still pending arbitration on their request for extension of time. LHC invoked the independence principle. On the other hand, petitioner claims fraud on the par t of LHC on calling the stand-by letters of credit. Under the independence principle, a LC accommodation is entirely distinct and separate, independent agreement. It is not supposed to be affected by the main contract upon which it rests. ISSUE: Whether or not LHC is allowed to call on the securities notwithstanding the matter of delay was still pending arbitration. Whether or not LHCs representation in withdrawing proceeds from security was not fraudulent. RULING: The court held for the LHC. Following the independence principle, even granting that there is still issue to be resolved arising from the turn-key project. This issue is not supposed to affect the obligation of the bank to pay the letter of credit in question. The court stressed that a LC accommodation is intended to benefit not only the beneficiary therein but the applicant thereon. On the issue of fraud, the SC held that there is nothing in the turn-key contract which states that all issues between the parties must be resolved first before LHC can call on the stand-by LC but the contract provides that if Transfield defaults, then LHC can call on these stand-by LC.