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FIRST DIVISION

G.R. No. 160732 June 21, 2004

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner,

vs.
HON. REYNALDO B. DAWAY, in his capacity as Presiding Judge of the Regional Trial Court of Quezon City,
Branch 90 and Maynilad Water Services, Inc., respondents

DECISION

AZCUNA, J.:

On November 17, 2003, the Regional Trial Court (RTC) of Quezon City, Branch 90, made a determination that the
Petition for Rehabilitation with Prayer for Suspension of Actions and Proceedings filed by Maynilad Water Services,
Inc. (Maynilad) conformed substantially to the provisions of Sec. 2, Rule 4 of the Interim Rules of Procedure on
Corporate Rehabilitation (Interim Rules). It forthwith issued a Stay Order1 which states, in part, that the court was
thereby:

xxx xxx xxx

2. Staying enforcement of all claims, whether for money or otherwise and whether such enforcement is by
court action or otherwise, against the petitioner, its guarantors and sureties not solidarily liable with the
petitioner;

3. Prohibiting the petitioner from selling, encumbering, transferring, or disposing in any manner any of its
properties except in the ordinary course of business;

4. Prohibiting the petitioner from making any payment of its liabilities, outstanding as at the date of the filing of
the petition;

xxx xxx xxx

Subsequently, on November 27, 2003, public respondent, acting on two Urgent Ex Parte motions2 filed by
respondent Maynilad, issued the herein questioned Order3 which stated that it thereby:

"1. DECLARES that the act of MWSS in commencing on November 24, 2003 the process for the payment by
the banks of US$98 million out of the US$120 million standby letter of credit so the banks have to make good
such call/drawing of payment of US$98 million by MWSS not later than November 27, 2003 at 10:00 P. M. or
any similar act for that matter, is violative of the above-quoted sub-paragraph 2.) of the dispositive portion of
this Court’s Stay Order dated November 17, 2003.

2. ORDERS MWSS through its officers/officials to withdraw under pain of contempt the written
certification/notice of draw to Citicorp International Limited dated November 24, 2003 and DECLARES void
any payment by the banks to MWSS in the event such written certification/notice of draw is not withdrawn by
MWSS and/or MWSS receives payment by virtue of the aforesaid standby letter of credit."

Aggrieved by this Order, petitioner Manila Waterworks & Sewerage System (MWSS) filed this petition for review by
way of certiorari under Rule 65 of the Rules of Court questioning the legality of said order as having been issued
without or in excess of the lower court’s jurisdiction or that the court a quo acted with grave abuse of discretion
amounting to lack or excess of jurisdiction.4

ANTECEDENTS OF THE CASE

On February 21, 1997, MWSS granted Maynilad under a Concession Agreement a twenty-year period 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 on the dates agreed
upon in said agreement5 which, among other things, consisted of payments of petitioner’s mostly foreign loans.

To secure the concessionaire’s performance of its obligations under the Concession Agreement, 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 on July 14, 2000 for a three-year facility with a number of
foreign banks, led by Citicorp International Limited, for the issuance of an Irrevocable Standby Letter of Credit6 in
the amount of US$120,000,000 in favor of MWSS for the full and prompt performance of Maynilad’s obligations to
MWSS as aforestated.

Sometime in September 2000, respondent Maynilad requested MWSS 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. Failing to get what it desired, Maynilad issued a Force Majeure Notice on March 8, 2001
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)7 on June 8, 2001 wherein Maynilad was allowed to
recover foreign exchange losses under a formula agreed upon between them. Sometime in August 2001 Maynilad
again filed another Force Majeure Notice and, since MWSS could not agree with the terms of said Notice, the matter
was referred on August 30, 2001 to the Appeals Panel for arbitration. This resulted in the parties agreeing to resolve
the issues through an amendment of the Concession Agreement on October 5, 2001, known as Amendment No. 1,8
which was based on the terms set down in MWSS Board of Trustees Resolution No. 457-2001, as amended by
MWSS Board of Trustees Resolution No. 487-2001,9 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.

As part of this agreement, Maynilad committed, among other things, to:

a) infuse the amount of UD$80.0 million as additional funding support from its stockholders;

b) resume payment of the concession fees; and

c) mutually seek the dismissal of the cases pending before the Court of Appeals and with Minor Dispute
Appeals Panel.

However, on November 5, 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. On December 9, 2002, Maynilad filed
a Notice of Early Termination of the concession, which was challenged by MWSS. This matter was eventually
brought before the Appeals Panel on January 7, 2003 by MWSS.10 On November 7, 2003, 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 on November 22, 2003. MWSS, thereafter, submitted a written
notice11 on November 24, 2003, to Citicorp International Limited, as agent for the participating banks, that by virtue
of Maynilad’s failure to perform its obligations under the Concession Agreement, it was drawing on the Irrevocable
Standby Letter of Credit and thereby demanded payment in the amount of US$98,923,640.15.

Prior to this, however, Maynilad had filed on November 13, 2003, a petition for rehabilitation before the court a quo
which resulted in the issuance of the Stay Order of November 17, 2003 and the disputed Order of November 27,
2003.12

PETITIONER’S CASE

Petitioner hereby raises the following issues:

1. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR AND/OR ACT PATENTLY WITHOUT
JURISDICTION OR IN EXCESS OF JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN CONSIDERING THE PERFORMANCE BOND
 OR ASSETS OF THE ISSUING BANKS AS PART OR PROPERTY OF THE ESTATE OF THE PRIVATE
RESPONDENT MAYNILAD SUBJECT TO REHABILITATION.

2. DID THE HONORABLE PRESIDING JUDGE ACT WITH LACK OR EXCESS OF JURISDICTION OR
COMMIT A GRAVE ERROR OF LAW IN HOLDING THAT THE PERFORMANCE BOND OBLIGATIONS OF
THE BANKS WERE NOT SOLIDARY IN NATURE.

3. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR IN ALLOWING MAYNILAD TO IN EFFECT
SEEK A REVIEW OR APPEAL OF THE FINAL AND BINDING DECISION OF THE APPEALS PANEL.

In support of the first issue, petitioner maintains that as a matter of law, the US$120 Million Standby Letter of Credit
and Performance Bond are not property of the estate of the debtor Maynilad and, therefore, not subject to the in rem
rehabilitation jurisdiction of the trial court.

Petitioner argues that a call made on the Standby Letter of Credit does not involve any asset of Maynilad but only
assets of the banks. Furthermore, a call on the Standby Letter of Credit cannot also be considered a "claim" falling
under the purview of the stay order as alleged by respondent as it is not directed against the assets of respondent
Maynilad.

Petitioner concludes that the public respondent erred in declaring and holding that the commencement of the
process for the payment of US$98 million is a violation of the order issued on November 17, 2003.

RESPONDENT MAYNILAD’S CASE

Respondent Maynilad seeks to refute this argument by alleging that:

a) the order objected to was strictly and precisely worded and issued after carefully considering/evaluating the
import of the arguments and documents referred to by Maynilad, MWSS and/or creditors Chinatrust
Commercial Bank and Suez in relation to admissions, pleadings and/or pertinent records13 and that public
respondent had the authority to issue the same;

b) public respondent never considered nor held that the Performance bond or assets of the issuing banks are
part or property of the estate of respondent Maynilad subject to rehabilitation and which respondent Maynilad
has not and has never claimed to be;14

c) what is relevant is not whether the performance bond or assets of the issuing banks are part of the estate
of respondent Maynilad but whether the act of petitioner in commencing the process for the payment by the
banks of US$98 million out of the US$120 million performance bond is covered and/or prohibited under sub-
paragraphs 2.) and 4.) of the stay order dated November 17, 2003;

d) the jurisdiction of public respondent extends not only to the assets of respondent Maynilad but also over
persons and assets of "all those affected by the proceedings x x x upon publication of the notice of
commencement;15" and

e) the obligations under the Standby Letter of Credit are not solidary and are not exempt from the coverage of
the stay order.

OUR RULING

We will discuss the first two issues raised by petitioner as these are interrelated and make up the main issue of the
petition before us which is, did 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 and for the account of respondent Maynilad?

The public respondent relied on Sec. 1, Rule 3 of the Interim Rules on Corporate Rehabilitation to support its
jurisdiction over the Irrevocable Standby Letter of Credit and the banks that issued it. The section reads in part "that
jurisdiction over those affected by the proceedings is considered acquired upon the publication of the notice of
commencement of proceedings in a newspaper of general circulation" and goes further to define rehabilitation as an
in rem proceeding. This provision is a logical consequence of the in rem nature of the proceedings, where
jurisdiction is acquired by publication and where it is necessary that the assets of the debtor come within the court’s
jurisdiction to secure the same for the benefit of creditors. The reference to "all those affected by the proceedings"
covers creditors or such other persons or entities holding assets belonging to the debtor under rehabilitation which
should be reflected in its audited financial statements. The banks do not hold any assets of respondent Maynilad
that would be material to the rehabilitation proceedings nor is Maynilad liable to the banks at this point.

Respondent Maynilad’s Financial Statement as of December 31, 2001 and 2002 do not show the Irrevocable
Standby Letter of Credit as part of its assets or liabilities, and by respondent Maynilad’s own admission it is not. In
issuing the clarificatory order of November 27, 2003, enjoining petitioner from claiming from an asset that did not
belong to the debtor and over which it did not acquire jurisdiction, the rehabilitation court acted in excess of its
jurisdiction.

Respondent Maynilad insists, however, that it is Sec. 6 (b), Rule 4 of the Interim Rules that supports its claim that
the commencement of the process to draw on the Standby Letter of Credit is an enforcement of claim prohibited by
and under the Interim Rules and the order of public respondent.

Respondent Maynilad would persuade us that the above provision justifies a leap to the conclusion that such an
enforcement is prohibited by said section because it is a "claim against the debtor, its guarantors and sureties not
solidarily liable with the debtor" and that there is nothing in the Standby Letter of Credit nor in law nor in the nature
of the obligation that would show or require the obligation of the banks to be solidary with the respondent Maynilad.

We disagree.

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 Maynilad’s claim that the banks are not solidarily liable with the debtor does not find support in
jurisprudence.

We held in Feati Bank & Trust Company v. Court of Appeals16 that 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.17

Letters of credit were developed for the purpose of insuring to a seller payment of a definite amount upon the
presentation of documents18 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.19 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.20 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.21 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."22

We have accepted, in Feati Bank and Trust Company v. Court of Appeals23 and Bank of America NT & SA v. Court
of Appeals,24 to the extent that they are pertinent, the application in our jurisdiction of the international credit
regulatory set of rules known as the Uniform Customs and Practice for Documentary Credits (U.C.P) issued by the
International Chamber of Commerce, which we said in Bank of the Philippine Islands v. Nery25 was justified under
Art. 2 of the Code of Commerce, which states:

"Acts of commerce, whether those who execute them be merchants or not, and whether specified in this
Code or not should be governed by the provisions contained in it; in their absence, by the usages of
commerce generally observed in each place; and in the absence of both rules, by those of the civil law."

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 debtor’s assets.
These are the same characteristics of a surety or solidary obligor.

Being solidary, the claims against them can be pursued separately from and independently of the rehabilitation
case, as held in Traders Royal Bank v. Court of Appeals26 and reiterated in Philippine Blooming Mills, Inc. v. Court
of Appeals,27 where we said that property of the surety cannot be taken into custody by the rehabilitation receiver
(SEC) and said surety can be sued separately to enforce his liability as surety for the debts or obligations of the
debtor. The debts or obligations for which a surety may be liable include future debts, an amount which may not be
known at the time the surety is given.

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 the Metropolitan Waterworks and Sewerage System, as a bond for the full and
prompt performance of the obligations by the concessionaire under the Concession Agreement28 and herein
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.29

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.

ADDITIONAL ISSUES

We proceed to consider the other issues raised in the oral arguments and included in the parties’ memoranda:

1. Respondent Maynilad argues that petitioner had a plain, speedy and adequate remedy under the Interim
Rules itself which provides in Sec. 12, Rule 4 that the court may on motion or motu proprio, terminate, modify
or set conditions for the continuance of the stay order or relieve a claim from coverage thereof. We find,
however, that the public respondent had already accomplished this during the hearing set for the two Urgent
Ex Parte motions filed by respondent Maynilad on November 21 and 24, 2003,30 where the parties including
the creditors, Suez and Chinatrust Commercial "presented their respective arguments."31 The public
respondent then ruled, "after carefully considering/evaluating the import of the arguments and documents
referred to by Maynilad, MWSS and/or the creditors Chinatrust Commercial Bank and Suez in relation to the
admissions, the pleadings, and/or pertinent portions of the records, this court is of the considered and humble
view that the issue must perforce be resolved in favor of Maynilad."32 Hence to pursue their opposition before
the same court would result in the presentation of the same arguments and issues passed upon by public
respondent.

Furthermore, Sec. 5, Rule 3 of the Interim Rules would preclude any other effective remedy questioning the
orders of the rehabilitation court since they are immediately executory and a petition for review or an appeal
therefrom shall not stay the execution of the order unless restrained or enjoined by the appellate court." In this
situation, it had no other remedy but to seek recourse to us through this petition for certiorari.

In Silvestre v. Torres and Oben,33 we said that it is not enough that a remedy is available to prevent a party
from making use of the extraordinary remedy of certiorari but that such remedy be an adequate remedy which
is equally beneficial, speedy and sufficient, not only a remedy which at some time in the future may offer relief
but a remedy which will promptly relieve the petitioner from the injurious acts of the lower tribunal. It is the
inadequacy -- not the mere absence -- of all other legal remedies and the danger of failure of justice without
the writ, that must usually determine the propriety of certiorari.34

2. Respondent Maynilad argues that by commencing the process for payment under the Standby Letter of
Credit, petitioner violated an immediately executory order of the court and, therefore, comes to Court with
unclean hands and should therefore be denied any relief.
 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.

3. Respondent’s claim that the filing of the petition pre-empts the original jurisdiction of the lower court is
without merit. The purpose of the initial hearing is to determine whether the petition for rehabilitation has merit
or not. The propriety of the stay order as well as the clarificatory order had already been passed upon in the
hearing previously had for that purpose. The determination of whether the public respondent was correct in
enjoining the 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. Our decision on the
instant petition does not pre-empt the original jurisdiction of the rehabilitation court.

WHEREFORE, the petition for certiorari is granted. The Order of November 27, 2003 of the Regional Trial Court of
Quezon City, Branch 90, is hereby declared NULL AND VOID and SET ASIDE. The status quo Order herein
previously issued is hereby LIFTED. In view of the urgency attending this case, this decision is immediately
executory.

No costs.

SO ORDERED.

Davide, Jr., Panganiban, Ynares-Santiago, and Carpio, JJ., concur.

Footnotes
*
On Leave.

1 Rollo, pp. 41-42.

2 Rollo, pp. 129-138.

3 Rollo, pp.36-38.

4 Rollo, p. 5.

5 Rollo, pp. 700-702.

6 Rollo, pp. 449-454.

7 See, MWSS Board Resolution No. 487-2001; Rollo, p. 373.

8 Rollo, pp. 708-710.

9 Rollo, pp. 711-715.

10 Rollo, p. 275.

11 Rollo, p. 542.

12 Rollo, pp. 41-42.

13 Rollo, pp. 412-415.

14 Rollo, p. 425.

15 Rollo, pp.425-426.

16 196 SCRA 576 (1991).

17 Prudential Bank v. Intermediate Appellate Court, 216 SCRA 257 (1992).

18 Ibid, p. 270.
 19 Isidro Climaco v. Central Bank of the Philippines, 63 O.G. No. 6, p. 1348.

20 Insular Bank of Asia & America v. Intermediate Appellate Court, 167 SCRA 450 (1988).

21 Bank of America, NT & SA v. Court of Appeals, 228 SCRA 357 (1993).

22 Rollo, pp. 824-825.

23 Supra, note 16.

24 Supra, note 21.

25 35 SCRA 256 (1970).

26 177 SCRA 788 (1989).

27 G.R. No. 142381, October 15, 2003.

28 Rollo, pp. 208-212.

29 Rollo, pp. 814-815.

30 Rollo, pp. 129-137.

31 Rollo, p. 36.

32 Rollo, p. 37.

33 57 Phil. 890 (1933).

34 Jaca v. Davao Lumber Company, 113 SCRA 107, 129 (1982).

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