In an 18-page decision penned by Justice Adolf Azcuna, the Supreme Court nullified a Nov. 27, 2003 order of Quezon City Regional Trial Court Judge Reynaldo Daway that stopped the government-run MWSS from going after Maynilad, its guarantors and sureties not "solidarily" liable with the Lopez-owned utility firm.
The MWSS is collecting $98.2 million from a consortium of foreign banks led by the Hong Kong-based Citicorp International Limited, where Maynilad arranged for a three-year facility for the issuance of an "irrevocable standby letter of credit" of $120 million in favor of MWSS.
This was the "bond, bank guarantee or other security acceptable" to the MWSS to ensure the full and prompt settlement of Maynilad’s obligations as required under their 1997 concession agreement.
Maynilad has unilaterally suspended the payment of concession fees and even sought the termination of its agreement with the MWSS. But an appeals panel ruled in favor of MWSS and said that there was no termination of agreement and that Maynilad should pay the concession fees due.
When the award of the appeals panel became final on Nov. 24, 2003, the MWSS demanded $98.2 million from Citicorp — being the agent of participating banks — as payment for Maynilad’s concession fees.
Prior to this, however, Maynilad had filed on Nov. 13, 2003 a petition for rehabilitation before Daway’s court, resulting in the issuance of the Nov. 7 stay order.
In its ruling, the SC said the lower court judge exceeded his jurisdiction in holding that he was competent to act on the obligation of the banks under the "letter of credit."
The judge argued that this was not a "solidary" obligation with that of Maynilad, or which is characterized by a community of interests and responsibilities.
But the SC held that in an irrevocable letter of credit, the banks undertake a primary obligation.
A letter of credit is an engagement by a bank or other person made at the request of a customer, that the issuer should honor drafts or other demands of payment upon compliance with the conditions specified.
"(Letters of credit) are in effect absolute undertakings to pay the money advanced or the amount for which credit is given on the faith of the instrument," the SC explained. "They are primary obligations and not accessory contracts and while they are security arrangements, they are not converted thereby into contracts of guaranty."
The High Court said 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 primary liable.
According to the SC, the participating banks’ obligations are solidary with Maynilad.
These obligations, the court said, are a primary, direct and definite and absolute undertaking to pay and are not conditioned on the prior exhaustion of the debtor’s assets.
"The terms of the letter of credit do not show that obligations of the banks are not solidary with those of respondent Maynilad," the high tribunal ruled.
"On the contrary, it is issued at the request of and for the account of Maynilad in favor of MWSS as a bond for the full and prompt performance of its obligations under the concession agreement."
"(MWSS) is authorized by the banks to draw on it by the simple act of delivering to the agent a written certification. It provides that for as long as the standby letter of credit is valid and subsisting, the banks shall honor any written certification made by the MWSS in accordance with the provision of the letter of credit regardless of the date on which the event giving rise to such written certification arose," the SC added.
Being solidary, the SC said, the claims against the banks can be pursued separately from and independently from the rehabilitation case as held by the court in previous cases "that property of the surety could not be taken into custody by the rehabilitation receiver and said surety can be sued separately to enforce his liability as surety for the debts or obligations of the debtor (Maynilad.)"
"Being a solidary obligation, the letter of credit is excluded from the jurisdiction of the rehabilitation court and in enjoining MWSS from proceeding against the standby letters of credit to which it had a clear right under the law and terms of said standby letter of credit," the High Court said.
But the SC also pointed out the decision will have no bearing on whether the petition for rehabilitation of Maynilad has merit or not, rather it is a separate issue that the RTC took cognizance of.