MWSS vs DAWAY

DOCTRINE: "The expressions Documentary Credit(s) and Standby Letter(s) of Credit mean any arrangement,
however made or described, whereby a bank acting at the request and on instructions of a customer or on its
own behalf is to make payment against stipulated document(s)" and Art. 9 thereof defines the liability of the
issuing banks on an irrevocable letter of credit as a "definite undertaking of the issuing bank, provided that the
stipulated documents are presented to the 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."

FACTS: In 1997, MWSS granted Maynilad under a Concession Agreement 20-yr period to manage, operate,
repair, decommission and refurbish MWSS water delivery and sewerage services in the West Zone Service
Area, andMaynilad undertook to pay concession fees on dates agreed upon in said agreement.Maynilad was
required under Section 6.9 of said contract to put up a bond, bank guarantee or other security to
MWSS.Maynilad arranged 3-yr facility with a number of foreign banks, led by Citicorp International Limited, for
the issuance of an Irrevocable Standby Letter of Credit in the amount of US$120M for performance of
Maynilad’s obligations.Respondent Maynilad requested MWSS for a mechanism by which it hoped to recover
losses from depreciation of Philippine Peso against US Dollar. Failing to get what it desired, Maynilad issued a
Force Majeure Notice and unilaterally suspended the payment of the concession fees. In an effort to salvage
the Concession Agreement, the parties entered into a Memorandum of Agreement (MOA) wherein
Mayniladwas allowed to recover foreign exchange losses under a formula agreed upon between them. After 2
months, Maynilad again filed another Force Majeure Notice and, since MWSS could not agree with the terms
of said Notice, they underwent arbitration. Amendment No. 1 on the agreement provided 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. In 2002, Maynilad served upon MWSS a Notice of Event of Termination, claiming that
MWSS failed to comply with its obligations under the Concession Agreement and Amendment No. 1 regarding
the adjustment mechanism that would cover Maynilad’s foreign exchange losses.Maynilad filed a Notice of
Early Termination of the concession, which was challenged by MWSS. Appeals Panel ruled that there was no
Event of Termination as defined under the Concession Agreement and that, Maynilad should pay the
concession fees that had fallen due. Prior to the award of the Appeals Panel, Maynilad had filed a petition for
rehabilitation before the court a quo which resulted in the issuance of the Stay Order

ISSUE: W/N, rehabilitation court act in excess of its authority or jurisdiction when it enjoined petitioner from
seeking the payment of the concession fees from banks that issued the Irrevocable Standby Letter of Credit in
its favor and for the account of respondent Maynilad?

RULING:Yes. 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.The
determination of whether the public respondent was correct in enjoining petitioner from drawing on the Standby
Letter of Credit will have no bearing on the determination to be made by public respondent whether the petition
for rehabilitation has merit or not.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 Maynilad’s claim that the banks are not solidarily liable with
the debtor does not find support in jurisprudence. In an irrevocable letter of credit, the bank undertakes a
primary obligation. Aletter 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.

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 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.Letters of Credits have long
been and are still governed by the provisions of the Uniform Customs and Practice for Documentary
Credits of the International Chamber of Commerce. In the 1993 Revision it provides in Art. 2 that "the
expressions Documentary Credit(s) and Standby Letter(s) of Credit mean any arrangement, however made or
described, whereby a bank acting at the request and on instructions of a customer or on its own behalf is to
make payment against stipulated document(s)" and Art. 9 thereof defines the liability of the issuing banks on
an irrevocable letter of credit as a "definite undertaking of the issuing bank, provided that the stipulated
documents are presented to the 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."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 Water Services, Inc., in
favor of MWSS, as a bond for the full and prompt performance of the obligations by the concessionaire under
the Concession Agreement and petitioner 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 Annex "B" of the Letter of Credit. It
provides further in Sec. 6, that for as long as the Standby Letter of Credit is valid and subsisting, the Banks
shall honor any written Certification made by MWSS in accordance with Sec. 2, of the Standby Letter of Credit
regardless of the date on which the event giving rise to such Written Certification arose. 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.

G.R. No. 74834 November 17, 1988

INSULAR BANK OF ASIA vs IAC

DOCTRINE: Irrevocable Standby Letters of Credit are credit secures the payment of any obligation of the
accountee to you under that Loan Agreement xxx, including those pertaining to (a) surcharges on defaulted
account; stallments, (b) increased interest charges, and (c) liabilities connected with taxes stipulated to be for
Accountee's and provided however, that our maximum liabilities hereunder shall not exceed the amount of
P500,000.00 (Pl00.000.00 for the other LC).

FACTS:Sps Ben and Juanita Mendoza obtained 2 loans from Phil-AmLife for P600,000.00 to finance the
construction of their residential house inMandaue City at 14% interest for 5 years. Philam Life required that
amortizations be guaranteed by an irrevocable standby letter of credit of a commercial bank. Mendozas thus
contracted with Insular Bankfor the issuance of 2 irrevocable standby Letters of Credit in favor of Philam (one
for 500K and second for 100K) which was secured by a real estate mortgage for the same amount on the
property of Respondent Spouses in favor of IBAA. In 2 promissory notes for the 100k, both Notes authorized
IBAA "to sell at public or private sale such securities or things for the purpose of applying their proceeds to
such payments" of many particular obligation or obligations" the Mendozas may have to IBAA. Mendozas
failed to pay Philam Life the amortizationso Philam Life informed IBAA that it was declaring both loans as
"entirely due and demandable" and demanded payment of P492,996.30. However, because IBAA contested
the propriety of calling the entire loan, Philam Life desisted and resumed availing of the L/Cs by drawing 5
more amortizations.Philam Life then demanded payment from IBAA but averred they are mere guarantor of the
Mendozas who are the principal debtors. The REM which secured the 2 standby L/Cs was extrajudicially
foreclosed by, and sold at public auction for P775,000.00, to petitioner IBAA as the lone and highest bidder.
Philam Life filed suit against Respondent Spouses and IBAA before RTC Manila for recovery of the sum of
P274,779.56, the amount allegedly still owed under the loan. After trial, said Court rendered a Decision finding
that IBAA had paid Philam Life only P342,127.05 and not P372,227.65, as claimed by IBAA, because of a stale
IBAA Manager's check in the amount of P30,100.60, which had to be deducted. Both parties appealed with
IAC, and which reversed the Trial Court and ruled instead that IBAA's liability was not reduced by virtue of the
payments made by the Mendozas.

IBAA stresses that it has no more liability to Philam Life under the 2 standby LCs and, instead, is entitled to a
refund. Whereas Philam Life and the Mendoza spouses separately maintain that IBAA's obligation under said
2 LCs is original and primary and is not reduced by the direct payments made by the Mendozas to Philam Life.

ISSUE: W/N the partial payments made by the principal obligors (SPS MENDOZAS) reduced the liability of
petitioner IBAA as guarantor or surety under the terms of the standby LCs in question.

HELD: NO. While LCs are a security arrangement, they are not converted thereby into contracts of guaranty.
That would make them ultra vires rather than a letter of credit, which is within the powers of a bank (Section
74[e], RA 337, General Banking Act). 1 The standby L/Cs are, "in effect an absolute undertaking to pay the
money advanced or the amount for which credit is given on the faith of the instrument." (Scribner v. Rutherford,
22 N.W. 670, 65 Iowa 551; Duval v. Trask,, 12 Mass. 154, cited in 38 CJS, Sec. 7, p. 1142). They are primary
obligations and not accessory contracts. Being separate and independent agreements, the payments made by
the Mendozascannot be added in computing IBAA's liability under its own standby letters of credit. Payments
made by the Mendozas directly to Philam Life are in compliance with their own prestation under the loan
agreements. And although these payments could result in the reduction of the actual amount which could
ultimately be collected from IBAA, the latter's separate undertaking under its L/Cs remains.

In construing the terms of a Letter of Credit, as in other contracts, it is the intention of the parties that must
govern.Letters of credit and contracts for the issuance of such letters are subject to the same rules of
construction as are ordinary commercial contracts. They are to receive a reasonable and not a technical
construction and although usage and custom cannot control express terms in letters of credit, they are to be
construed with reference to all the surrounding facts and circumstances, to the particular and often varying
terms in which they may be expressed, the circumstances and intention of the parties to them, and the usages
of the particular trade of business contemplated.

The terms of the subject Irrevocable Standby Letters of Credit read, in part, as follows:

This credit secures the payment of any obligation of the accountee to you under that Loan Agreement
xxx, including those pertaining to (a) surcharges on defaulted account; stallments, (b) increased interest
charges, and (c) liabilities connected with taxes stipulated to be for Accountee's and provided however,
that our maximum liabilities hereunder shall not exceed the amount of P500,000.00 (Pl00.000.00 for the
other LC).

From the terms of the subject standby LCs itself, the LCs are to secure the payment of any obligation of the
Mendozas to Philam Life including all interests, surcharges and expenses thereon but not to exceed
P600,000.00.

Both the Trial Court and the Appellate Court found, as a fact, that there still remains a balance on the loan.
Pursuant to its absolute undertaking under the L/Cs, therefore, IBAA cannot escape the obligation to pay
Philam Life for this unexpended balance. The amount of P222,000.00, therefore, considered as "any obligation
of the accountee" under the L/Cs will still have to be paid by IBAA under the explicit terms thereof, which IBAA
had itself supplied. Letters of credit are strictly construed to the end that the rights of those directly parties to
them may be preserved and their interest safeguarded. > Like any other writing, it will be construed most
strongly against the writer and so as to be reasonable and consistent with honest intentions.