5. Metropolitan Waterworks and Sewerage System v.

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 Manilas west zone.
Maynilad, under the concession agreement, undertook to pay concession fees and its foreign 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 for a three-year facility with a
number of foreign banks led by Citicorp International Limited (Citicorp) 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 Maynilads
obligations to MWSS. Due to the 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 nonperformance of Maynilads
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 the payment of the standby 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 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 banks 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--vis
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.
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
debtors default. A Standby Letter of Credit is a primary obligation and not an accessory contract.