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. 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 Order[1] which states, in part, that the court was thereby: xxxxxxxxx 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

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2003 and DECLARES void any payment by the banks to MWSS in the event such written certification/notice of draw is not withdrawn by MWSS and/or MWSS receives payment by virtue of the aforesaid standby letter of credit.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 agreement[5] 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 Credit[6] 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

Subsequently, on November 27, 2003, public respondent, acting on two Urgent Ex Parte motions[2] filed by respondent Maynilad, issued the herein questioned Order[3] 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.

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 notice[11] 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

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

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 records[13] 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

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 nonperformance 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 Appeals[16] that 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 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 documents[18] 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 Appeals[23]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. Nery[25] 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 Appeals[26] 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 Agreement[28] 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

TRANSFIELD PHILIPPINES, INC., petitioner, vs. LUZON HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND BANKING GROUP LIMITED and SECURITY BANK CORPORATION, respondents. Subject of this case is the letter of credit which has evolved as the ubiquitous and most important device in international trade. A creation of commerce and businessmen, the letter of credit is also unique in the number of parties involved and its supranational character. Petitioner has appealed from the Decision of the Court of Appeals in CA-G.R. SP No. 61901 entitled Transfield Philippines, Inc. v. Hon. Oscar Pimentel, et al., promulgated on 31 January 2001. On 26 March 1997, petitioner and respondent Luzon Hydro Corporation (hereinafter, LHC) entered into a Turnkey Contract whereby petitioner, as Turnkey Contractor, undertook to construct, on a turnkey basis, a seventy (70)-Megawatt hydro-electric power station at the Bakun River in the provinces of Benguet and Ilocos Sur (hereinafter, the Project). Petitioner was given the sole responsibility for the design, construction, commissioning, testing and completion of the Project. The Turnkey Contract provides that: (1) the target completion date of the Project shall be on 1 June 2000, or such later date as may be agreed upon between petitioner and respondent LHC or otherwise determined in

accordance with the Turnkey Contract; and (2) petitioner is entitled to claim extensions of time (EOT) for reasons enumerated in the Turnkey Contract, among which are variations, force majeure, and delays caused by LHC itself. Further, in case of dispute, the parties are bound to settle their differences through mediation, conciliation and such other means enumerated under Clause 20.3 of the Turnkey Contract. To secure performance of petitioner s obligation on or before the target completion date, or such time for completion as may be determined by the parties agreement, petitioner opened in favor of LHC two (2) standby letters of credit both dated 20 March 2000 (hereinafter referred to as the Securities ), to wit: Standby Letter of Credit No. E001126/8400 with the local branch of respondent Australia and New Zealand Banking Group Limited (ANZ Bank) and Standby Letter of Credit No. IBDIDSB-00/4 with respondent Security Bank Corporation (SBC) each in the amount of US$8,988,907.00. In the course of the construction of the project, petitioner sought various EOT to complete the Project. The extensions were requested allegedly due to several factors which prevented the completion of the Project on target date, such as force majeure occasioned by typhoon Zeb, barricades and demonstrations. LHC denied the requests, however. This gave rise to a series of legal actions between the parties which culminated in the instant petition. The first of the actions was a Request for Arbitration which LHC filed before the Construction Industry Arbitration Commission (CIAC) on 1 June 1999.[10] This was followed by another Request for Arbitration, this time filed by petitioner before the International Chamber of Commerce (ICC)[11] on 3 November 2000. In both arbitration proceedings, the common issues presented were: [1) whether typhoon Zeb and any of its associated events constituted force majeure to justify the extension of time sought by petitioner; and [2) whether LHC had the right to terminate the Turnkey Contract for failure of petitioner to complete the Project on target date. Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent provisions of the Turnkey Contract,[12] petitioner in two separate letters[13] both dated 10 August 2000 advised respondent banks of the arbitration proceedings already pending before the CIAC and ICC in connection with its alleged default in the performance of its obligations. Asserting that LHC had no right to call on

the Securities until the resolution of disputes before the arbitral tribunals, petitioner warned respondent banks that any transfer, release, or disposition of the Securities in favor of LHC or any person claiming under LHC would constrain it to hold respondent banks liable for liquidated damages. As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner that pursuant to Clause 8.2[14] of the Turnkey Contract, it failed to comply with its obligation to complete the Project. Despite the letters of petitioner, however, both banks informed petitioner that they would pay on the Securities if and when LHC calls on them.[15] LHC asserted that additional extension of time would not be warranted; accordingly it declared petitioner in default/delay in the performance of its obligations under the Turnkey Contract and demanded from petitioner the payment of US$75,000.00 for each day of delay beginning 28 June 2000 until actual completion of the Project pursuant to Clause 8.7.1 of the Turnkey Contract. At the same time, LHC served notice that it would call on the securities for the payment of liquidated damages for the delay.[16] On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction, with prayer for temporary restraining order and writ of preliminary injunction, against herein respondents as defendants before the Regional Trial Court (RTC) of Makati.[17] Petitioner sought to restrain respondent LHC from calling on the Securities and respondent banks from transferring, paying on, or in any manner disposing of the Securities or any renewals or substitutes thereof. The RTC issued a seventy-two (72)hour temporary restraining order on the same day. The case was docketed as Civil Case No. 00-1312 and raffled to Branch 148 of the RTC of Makati. After appropriate proceedings, the trial court issued an Order on 9 November 2000, extending the temporary restraining order for a period of seventeen (17) days or until 26 November 2000.[18] The RTC, in its Order[19] dated 24 November 2000, denied petitioner s application for a writ of preliminary injunction. It ruled that petitioner had no legal right and suffered no irreparable injury to justify the issuance of the writ. Employing the principle of independent contract in letters of credit, the trial court ruled that LHC should be allowed to draw on the Securities for liquidated damages. It debunked

petitioner s contention that the principle of independent contract could be invoked only by respondent banks since according to it respondent LHC is the ultimate beneficiary of the Securities. The trial court further ruled that the banks were mere custodians of the funds and as such they were obligated to transfer the same to the beneficiary for as long as the latter could submit the required certification of its claims. Dissatisfied with the trial court s denial of its application for a writ of preliminary injunction, petitioner elevated the case to the Court of Appeals via a Petition for Certiorari under Rule 65, with prayer for the issuance of a temporary restraining order and writ of preliminary injunction.[20] Petitioner submitted to the appellate court that LHC s call on the Securities was premature considering that the issue of its default had not yet been resolved with finality by the CIAC and/or the ICC. It asserted that until the fact of delay could be established, LHC had no right to draw on the Securities for liquidated damages. Refuting petitioner s contentions, LHC claimed that petitioner had no right to restrain its call on and use of the Securities as payment for liquidated damages. It averred that the Securities are independent of the main contract between them as shown on the face of the two Standby Letters of Credit which both provide that the banks have no responsibility to investigate the authenticity or accuracy of the certificates or the declarant s capacity or entitlement to so certify. In its Resolution dated 28 November 2000, the Court of Appeals issued a temporary restraining order, enjoining LHC from calling on the Securities or any renewals or substitutes thereof and ordering respondent banks to cease and desist from transferring, paying or in any manner disposing of the Securities. However, the appellate court failed to act on the application for preliminary injunction until the temporary restraining order expired on 27 January 2001. Immediately thereafter, representatives of LHC trooped to ANZ Bank and withdrew the total amount of US$4,950,000.00, thereby reducing the balance in ANZ Bank to US$1,852,814.00. On 2 February 2001, the appellate court dismissed the petition for certiorari. The appellate court expressed conformity with the trial court s decision that LHC could call on the Securities pursuant to the first principle in credit law that the credit itself is independent of the underlying transaction and that as long as the beneficiary complied with

the credit, it was of no moment that he had not complied with the underlying contract. Further, the appellate court held that even assuming that the trial court s denial of petitioner s application for a writ of preliminary injunction was erroneous, it constituted only an error of judgment which is not correctible by certiorari, unlike error of jurisdiction. Undaunted, petitioner filed the instant Petition for Review raising the following issues for resolution: WHETHER THE INDEPENDENCE PRINCIPLE ON LETTERS OF CREDIT MAY BE INVOKED BY A BENEFICIARY THEREOF WHERE THE BENEFICIARY S CALL THEREON IS WRONGFUL OR FRAUDULENT. WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES BEFORE THE RESOLUTION OF PETITIONER S AND LHC S DISPUTES BY THE APPROPRIATE TRIBUNAL. WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN RELEASING THE AMOUNTS DUE UNDER THE SECURITIES DESPITE BEING NOTIFIED THAT LHC S CALL THEREON IS WRONGFUL. WHETHER OR NOT PETITIONER WILL IRREPARABLE DAMAGE IN THE EVENT THAT: SUFFER GRAVE AND

A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND SECURITY BANK ARE ALLOWED TO RELEASE, THE REMAINING BALANCE OF THE SECURITIES PRIOR TO THE RESOLUTION OF THE DISPUTES BETWEEN PETITIONER AND LHC. B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY DRAWN FROM THE SECURITIES.[21] Petitioner contends that the courts below improperly relied on the independence principle on letters of credit when this case falls squarely within the fraud exception rule. Respondent LHC deliberately misrepresented the supposed existence of delay despite its knowledge that the issue was still pending arbitration, petitioner continues.

Petitioner asserts that LHC should be ordered to return the proceeds of the Securities pursuant to the principle against unjust enrichment and that, under the premises, injunction was the appropriate remedy obtainable from the competent local courts. On 25 August 2003, petitioner filed a Supplement to the Petition[22] and Supplemental Memorandum,[23] alleging that in the course of the proceedings in the ICC Arbitration, a number of documentary and testimonial evidence came out through the use of different modes of discovery available in the ICC Arbitration. It contends that after the filing of the petition facts and admissions were discovered which demonstrate that LHC knowingly misrepresented that petitioner had incurred delays notwithstanding its knowledge and admission that delays were excused under the Turnkey Contract to be able to draw against the Securities. Reiterating that fraud constitutes an exception to the independence principle, petitioner urges that this warrants a ruling from this Court that the call on the Securities was wrongful, as well as contrary to law and basic principles of equity. It avers that it would suffer grave irreparable damage if LHC would be allowed to use the proceeds of the Securities and not ordered to return the amounts it had wrongfully drawn thereon. In its Manifestation dated 8 September 2003,[24] LHC contends that the supplemental pleadings filed by petitioner present erroneous and misleading information which would change petitioner s theory on appeal. In yet another Manifestation dated 12 April 2004,[25] petitioner alleges that on 18 February 2004, the ICC handed down its Third Partial Award, declaring that LHC wrongfully drew upon the Securities and that petitioner was entitled to the return of the sums wrongfully taken by LHC for liquidated damages. LHC filed a Counter-Manifestation dated 29 June 2004,[26] stating that petitioner s Manifestation dated 12 April 2004 enlarges the scope of its Petition for Review of the 31 January 2001 Decision of the Court of Appeals. LHC notes that the Petition for Review essentially dealt only with the issue of whether injunction could issue to restrain the beneficiary of an irrevocable letter of credit from drawing thereon. It adds that petitioner has filed two other proceedings, to wit: (1) ICC Case No. 11264/TE/MW, entitled Transfield Philippines Inc. v. Luzon Hydro Corporation, in which the parties made claims and counterclaims arising from petitioner s performance/misperformance of its obligations as contractor for LHC; and (2) Civil Case No. 04-332, entitled Transfield

Philippines, Inc. v. Luzon Hydro Corporation before Branch 56 of the RTC of Makati, which is an action to enforce and obtain execution of the ICC s partial award mentioned in petitioner s Manifestation of 12 April 2004. In its Comment to petitioner s Motion for Leave to File Addendum to Petitioner s Memorandum, LHC stresses that the question of whether the funds it drew on the subject letters of credit should be returned is outside the issue in this appeal. At any rate, LHC adds that the action to enforce the ICC s partial award is now fully within the Makati RTC s jurisdiction in Civil Case No. 04-332. LHC asserts that petitioner is engaged in forumshopping by keeping this appeal and at the same time seeking the suit for enforcement of the arbitral award before the Makati court. Respondent SBC in its Memorandum, dated 10 March 2003[27] contends that the Court of Appeals correctly dismissed the petition for certiorari. Invoking the independence principle, SBC argues that it was under no obligation to look into the validity or accuracy of the certification submitted by respondent LHC or into the latter s capacity or entitlement to so certify. It adds that the act sought to be enjoined by petitioner was already fait accompli and the present petition would no longer serve any remedial purpose. In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 2003[28] posits that its actions could not be regarded as unjustified in view of the prevailing independence principle under which it had no obligation to ascertain the truth of LHC s allegations that petitioner defaulted in its obligations. Moreover, it points out that since the Standby Letter of Credit No. E001126/8400 had been fully drawn, petitioner s prayer for preliminary injunction had been rendered moot and academic. At the core of the present controversy is the applicability of the independence principle and fraud exception rule in letters of credit. Thus, a discussion of the nature and use of letters of credit, also referred to simply as credits, would provide a better perspective of the case. The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is to recognize that it is an entity unto itself. The relationship between the beneficiary and the issuer of a letter of credit is not strictly contractual, because both privity and a meeting of the minds are lacking, yet strict compliance with its terms is an enforceable right. Nor is it a third-party beneficiary contract, because the issuer must

honor drafts drawn against a letter regardless of problems subsequently arising in the underlying contract. Since the bank s customer cannot draw on the letter, it does not function as an assignment by the customer to the beneficiary. Nor, if properly used, is it a contract of suretyship or guarantee, because it entails a primary liability following a default. Finally, it is not in itself a negotiable instrument, because it is not payable to order or bearer and is generally conditional, yet the draft presented under it is often negotiable.[29] In commercial transactions, a letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying.[30] The use of credits in commercial transactions serves to reduce the risk of nonpayment of the purchase price under the contract for the sale of goods. However, credits are also used in non-sale settings where they serve to reduce the risk of nonperformance. Generally, credits in the nonsale settings have come to be known as standby credits.[31] There are three significant differences between commercial and standby credits. First, commercial credits involve the payment of money under a contract of sale. Such credits become payable upon the presentation by the seller-beneficiary of documents that show he has taken affirmative steps to comply with the sales agreement. In the standby type, the credit is payable upon certification of a party's nonperformance of the agreement. The documents that accompany the beneficiary's draft tend to show that the applicant has not performed. The beneficiary of a commercial credit must demonstrate by documents that he has performed his contract. The beneficiary of the standby credit must certify that his obligor has not performed the contract.[32] By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the addressee to pay money or deliver goods to a third person and assumes responsibility for payment of debt therefor to the addressee.[33] A letter of credit, however, changes its nature as different transactions occur and if carried through to completion ends up as a binding contract between the issuing and honoring banks without any regard or relation to the underlying contract or disputes between the parties thereto.[34] Since letters of credit have gained general acceptability in

international trade transactions, the ICC has published from time to time updates on the Uniform Customs and Practice (UCP) for Documentary Credits to standardize practices in the letter of credit area. The vast majority of letters of credit incorporate the UCP.[35] First published in 1933, the UCP for Documentary Credits has undergone several revisions, the latest of which was in 1993.[36] In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,[37] this Court ruled that the observance of the UCP is justified by Article 2 of the Code of Commerce which provides that in the absence of any particular provision in the Code of Commerce, commercial transactions shall be governed by usages and customs generally observed. More recently, in Bank of America, NT & SA v. Court of Appeals,[38] this Court ruled that there being no specific provisions which govern the legal complexities arising from transactions involving letters of credit, not only between or among banks themselves but also between banks and the seller or the buyer, as the case may be, the applicability of the UCP is undeniable. Article 3 of the UCP provides that credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the credit. Consequently, the undertaking of a bank to pay, accept and pay draft(s) or negotiate and/or fulfill any other obligation under the credit is not subject to claims or defenses by the applicant resulting from his relationships with the issuing bank or the beneficiary. A beneficiary can in no case avail himself of the contractual relationships existing between the banks or between the applicant and the issuing bank. Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft and the required documents are presented to it. The so-called independence principle assures the seller or the beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing bank from determining whether the main contract is actually accomplished or not. Under this principle, banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or particular conditions stipulated in the documents or superimposed thereon, nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any documents, or for the

10

good faith or acts and/or omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of the goods, or any other person whomsoever.[39] The independent nature of the letter of credit may be: (a) independence in toto where the credit is independent from the justification aspect and is a separate obligation from the underlying agreement like for instance a typical standby; or (b) independence may be only as to the justification aspect like in a commercial letter of credit or repayment standby, which is identical with the same obligations under the underlying agreement. In both cases the payment may be enjoined if in the light of the purpose of the credit the payment of the credit would constitute fraudulent abuse of the credit.[40] Can the beneficiary invoke the independence principle? Petitioner insists that the independence principle does not apply to the instant case and assuming it is so, it is a defense available only to respondent banks. LHC, on the other hand, contends that it would be contrary to common sense to deny the benefit of an independent contract to the very party for whom the benefit is intended. As beneficiary of the letter of credit, LHC asserts it is entitled to invoke the principle. As discussed above, in a letter of credit transaction, such as in this case, where the credit is stipulated as irrevocable, there is a definite undertaking by the issuing bank to pay the beneficiary provided that the stipulated documents are presented and the conditions of the credit are complied with.[41] Precisely, the independence principle liberates the issuing bank from the duty of ascertaining compliance by the parties in the main contract. As the principle s nomenclature clearly suggests, the obligation under the letter of credit is independent of the related and originating contract. In brief, the letter of credit is separate and distinct from the underlying transaction. Given the nature of letters of credit, petitioner s argument that it is only the issuing bank that may invoke the independence principle on letters of credit does not impress this Court. To say that the independence principle may only be invoked by the issuing banks would render nugatory the purpose for which the letters of credit are used in commercial transactions. As it is, the independence doctrine works to the benefit of both the issuing bank and the beneficiary. Letters of credit are employed by the parties desiring to enter into

commercial transactions, not for the benefit of the issuing bank but mainly for the benefit of the parties to the original transactions. With the letter of credit from the issuing bank, the party who applied for and obtained it may confidently present the letter of credit to the beneficiary as a security to convince the beneficiary to enter into the business transaction. On the other hand, the other party to the business transaction, i.e., the beneficiary of the letter of credit, can be rest assured of being empowered to call on the letter of credit as a security in case the commercial transaction does not push through, or the applicant fails to perform his part of the transaction. It is for this reason that the party who is entitled to the proceeds of the letter of credit is appropriately called beneficiary. Petitioner s argument that any dispute must first be resolved by the parties, whether through negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit in essence would convert the letter of credit into a mere guarantee. Jurisprudence has laid down a clear distinction between a letter of credit and a guarantee in that the settlement of a dispute between the parties is not a pre-requisite for the release of funds under a letter of credit. In other words, the argument is incompatible with the very nature of the letter of credit. If a letter of credit is drawable only after settlement of the dispute on the contract entered into by the applicant and the beneficiary, there would be no practical and beneficial use for letters of credit in commercial transactions. Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the issue: The standby credit is an attractive commercial device for many of the same reasons that commercial credits are attractive. Essentially, these credits are inexpensive and efficient. Often they replace surety contracts, which tend to generate higher costs than credits do and are usually triggered by a factual determination rather than by the examination of documents. Because parties and courts should not confuse the different functions of the surety contract on the one hand and the standby credit on the other, the distinction between surety contracts and credits merits some reflection. The two commercial devices share a common purpose. Both ensure against the obligor s nonperformance. They function, however, in distinctly different ways.

11

Traditionally, upon the obligor s default, the surety undertakes to complete the obligor s performance, usually by hiring someone to complete that performance. Surety contracts, then, often involve costs of determining whether the obligor defaulted (a matter over which the surety and the beneficiary often litigate) plus the cost of performance. The benefit of the surety contract to the beneficiary is obvious. He knows that the surety, often an insurance company, is a strong financial institution that will perform if the obligor does not. The beneficiary also should understand that such performance must await the sometimes lengthy and costly determination that the obligor has defaulted. In addition, the surety s performance takes time. The standby credit has different expectations. He reasonably expects that he will receive cash in the event of nonperformance, that he will receive it promptly, and that he will receive it before any litigation with the obligor (the applicant) over the nature of the applicant s performance takes place. The standby credit has this opposite effect of the surety contract: it reverses the financial burden of parties during litigation. In the surety contract setting, there is no duty to indemnify the beneficiary until the beneficiary establishes the fact of the obligor s performance. The beneficiary may have to establish that fact in litigation. During the litigation, the surety holds the money and the beneficiary bears most of the cost of delay in performance. In the standby credit case, however, the beneficiary avoids that litigation burden and receives his money promptly upon presentation of the required documents. It may be that the applicant has, in fact, performed and that the beneficiary s presentation of those documents is not rightful. In that case, the applicant may sue the beneficiary in tort, in contract, or in breach of warranty; but, during the litigation to determine whether the applicant has in fact breached the obligation to perform, the beneficiary, not the applicant, holds the money. Parties that use a standby credit and courts construing such a credit should understand this allocation of burdens. There is a tendency in some quarters to overlook this distinction between surety contracts and standby credits and to reallocate burdens by permitting the obligor or the issuer to litigate the performance question before payment to the beneficiary.[42] While it is the bank which is bound to honor the credit, it is the

beneficiary who has the right to ask the bank to honor the credit by allowing him to draw thereon. The situation itself emasculates petitioner s posture that LHC cannot invoke the independence principle and highlights its puerility, more so in this case where the banks concerned were impleaded as parties by petitioner itself. Respondent banks had squarely raised the independence principle to justify their releases of the amounts due under the Securities. Owing to the nature and purpose of the standby letters of credit, this Court rules that the respondent banks were left with little or no alternative but to honor the credit and both of them in fact submitted that it was ministerial for them to honor the call for payment.[43] Furthermore, LHC has a right rooted in the Contract to call on the Securities. The relevant provisions of the Contract read, thus: 4.2.1. In order to secure the performance of its obligations under this Contract, the Contractor at its cost shall on the Commencement Date provide security to the Employer in the form of two irrevocable and confirmed standby letters of credit (the Securities ), each in the amount of US$8,988,907, issued and confirmed by banks or financial institutions acceptable to the Employer. Each of the Securities must be in form and substance acceptable to the Employer and may be provided on an annually renewable basis.[44] 8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the Employer by way of liquidated damages ( Liquidated Damages for Delay ) the amount of US$75,000 for each and every day or part of a day that shall elapse between the Target Completion Date and the Completion Date, provided that Liquidated Damages for Delay payable by the Contractor shall in the aggregate not exceed 20% of the Contract Price. The Contractor shall pay Liquidated Damages for Delay for each day of the delay on the following day without need of demand from the Employer. 8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of suchdamages from any monies due, or to become due to the Contractor and/or by drawing on the Security. [45] A contract once perfected, binds the parties not only to the fulfillment of what has been expressly stipulated but also to all the

12

consequences which according to their nature, may be in keeping with good faith, usage, and law.[46] A careful perusal of the Turnkey Contract reveals the intention of the parties to make the Securities answerable for the liquidated damages occasioned by any delay on the part of petitioner. The call upon the Securities, while not an exclusive remedy on the part of LHC, is certainly an alternative recourse available to it upon the happening of the contingency for which the Securities have been proffered. Thus, even without the use of the independence principle, the Turnkey Contract itself bestows upon LHC the right to call on the Securities in the event of default. Next, petitioner invokes the fraud exception principle. It avers that LHC s call on the Securities is wrongful because it fraudulently misrepresented to ANZ Bank and SBC that there is already a breach in the Turnkey Contract knowing fully well that this is yet to be determined by the arbitral tribunals. It asserts that the fraud exception exists when the beneficiary, for the purpose of drawing on the credit, fraudulently presents to the confirming bank, documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue. In such a situation, petitioner insists, injunction is recognized as a remedy available to it. Citing Dolan s treatise on letters of credit, petitioner argues that the independence principle is not without limits and it is important to fashion those limits in light of the principle s purpose, which is to serve the commercial function of the credit. If it does not serve those functions, application of the principle is not warranted, and the commonlaw principles of contract should apply. It is worthy of note that the propriety of LHC s call on the Securities is largely intertwined with the fact of default which is the self-same issue pending resolution before the arbitral tribunals. To be able to declare the call on the Securities wrongful or fraudulent, it is imperative to resolve, among others, whether petitioner was in fact guilty of delay in the performance of its obligation. Unfortunately for petitioner, this Court is not called upon to rule upon the issue of default such issue having been submitted by the parties to the jurisdiction of the arbitral tribunals pursuant to the terms embodied in their agreement.[47] Would injunction then be the proper remedy to restrain the alleged wrongful draws on the Securities?

Most writers agree that fraud is an exception to the independence principle. Professor Dolan opines that the untruthfulness of a certificate accompanying a demand for payment under a standby credit may qualify as fraud sufficient to support an injunction against payment.[48] The remedy for fraudulent abuse is an injunction. However, injunction should not be granted unless: (a) there is clear proof of fraud; (b) the fraud constitutes fraudulent abuse of the independent purpose of the letter of credit and not only fraud under the main agreement; and (c) irreparable injury might follow if injunction is not granted or the recovery of damages would be seriously damaged.[49] In its complaint for injunction before the trial court, petitioner alleged that it is entitled to a total extension of two hundred fifty-three (253) days which would move the target completion date. It argued that if its claims for extension would be found meritorious by the ICC, then LHC would not be entitled to any liquidated damages.[50] Generally, injunction is a preservative remedy for the protection of one s substantive right or interest; it is not a cause of action in itself but merely a provisional remedy, an adjunct to a main suit. The issuance of the writ of preliminary injunction as an ancillary or preventive remedy to secure the rights of a party in a pending case is entirely within the discretion of the court taking cognizance of the case, the only limitation being that this discretion should be exercised based upon the grounds and in the manner provided by law.[51] Before a writ of preliminary injunction may be issued, there must be a clear showing by the complaint that there exists a right to be protected and that the acts against which the writ is to be directed are violative of the said right.[52] It must be shown that the invasion of the right sought to be protected is material and substantial, that the right of complainant is clear and unmistakable and that there is an urgent and paramount necessity for the writ to prevent serious damage.[53] Moreover, an injunctive remedy may only be resorted to when there is a pressing necessity to avoid injurious consequences which cannot be remedied under any standard compensation.[54] In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain LHC s call on the Securities which would justify the issuance of preliminary injunction. By petitioner s own admission, the right of LHC to call on the Securities was contractually rooted and subject to the express stipulations in the Turnkey

13

Contract.[55] Indeed, the Turnkey Contract is plain and unequivocal in that it conferred upon LHC the right to draw upon the Securities in case of default, as provided in Clause 4.2.5, in relation to Clause 8.7.2, thus: 4.2.5 The Employer shall give the Contractor seven days notice of calling upon any of the Securities, stating the nature of the default for which the claim on any of the Securities is to be made, provided that no notice will be required if the Employer calls upon any of the Securities for the payment of Liquidated Damages for Delay or for failure by the Contractor to renew or extend the Securities within 14 days of their expiration in accordance with Clause 4.2.2.[56] 8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such damages from any monies due, or to become due, to the Contractor and/or by drawing on the Security.[57] The pendency of the arbitration proceedings would not per se make LHC s draws on the Securities wrongful or fraudulent for there was nothing in the Contract which would indicate that the parties intended that all disputes regarding delay should first be settled through arbitration before LHC would be allowed to call upon the Securities. It is therefore premature and absurd to conclude that the draws on the Securities were outright fraudulent given the fact that the ICC and CIAC have not ruled with finality on the existence of default. Nowhere in its complaint before the trial court or in its pleadings filed before the appellate court, did petitioner invoke the fraud exception rule as a ground to justify the issuance of an injunction.[58] What petitioner did assert before the courts below was the fact that LHC s draws on the Securities would be premature and without basis in view of the pending disputes between them. Petitioner should not be allowed in this instance to bring into play the fraud exception rule to sustain its claim for the issuance of an injunctive relief. Matters, theories or arguments not brought out in the proceedings below will ordinarily not be considered by a reviewing court as they cannot be raised for the first time on appeal.[59] The lower courts could thus not be faulted for not applying the fraud exception rule not only because the existence of fraud was fundamentally interwoven with the issue of default still pending before the arbitral tribunals, but more so, because petitioner never raised it as an issue in its pleadings filed in the courts below. At any rate, petitioner utterly failed to show that it had a clear and unmistakable right to prevent LHC s call upon

the Securities. Of course, prudence should have impelled LHC to await resolution of the pending issues before the arbitral tribunals prior to taking action to enforce the Securities. But, as earlier stated, the Turnkey Contract did not require LHC to do so and, therefore, it was merely enforcing its rights in accordance with the tenor thereof. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.[60] More importantly, pursuant to the principle of autonomy of contracts embodied in Article 1306 of the Civil Code,[61] petitioner could have incorporated in its Contract with LHC, a proviso that only the final determination by the arbitral tribunals that default had occurred would justify the enforcement of the Securities. However, the fact is petitioner did not do so; hence, it would have to live with its inaction. With respect to the issue of whether the respondent banks were justified in releasing the amounts due under the Securities, this Court reiterates that pursuant to the independence principle the banks were under no obligation to determine the veracity of LHC s certification that default has occurred. Neither were they bound by petitioner s declaration that LHC s call thereon was wrongful. To repeat, respondent banks undertaking was simply to pay once the required documents are presented by the beneficiary. At any rate, should petitioner finally prove in the pending arbitration proceedings that LHC s draws upon the Securities were wrongful due to the non-existence of the fact of default, its right to seek indemnification for damages it suffered would not normally be foreclosed pursuant to general principles of law. Moreover, in a Manifestation,[62] dated 30 March 2001, LHC informed this Court that the subject letters of credit had been fully drawn. This fact alone would have been sufficient reason to dismiss the instant petition. Settled is the rule that injunction would not lie where the acts sought to be enjoined have already become fait accompli or an accomplished or consummated act.[63] In Ticzon v. Video Post Manila, Inc.[64] this Court ruled that where the period within which the former employees were prohibited from engaging in or working for an enterprise that competed with their former employer the very purpose of the

14

preliminary injunction has expired, any declaration upholding the propriety of the writ would be entirely useless as there would be no actual case or controversy between the parties insofar as the preliminary injunction is concerned. In the instant case, the consummation of the act sought to be restrained had rendered the instant petition moot for any declaration by this Court as to propriety or impropriety of the non-issuance of injunctive relief could have no practical effect on the existing controversy.[65] The other issues raised by petitioner particularly with respect to its right to recover the amounts wrongfully drawn on the Securities, according to it, could properly be threshed out in a separate proceeding. One final point. LHC has charged petitioner of forum-shopping. It raised the charge on two occasions. First, in its Counter-Manifestation dated 29 June 2004[66] LHC alleges that petitioner presented before this Court the same claim for money which it has filed in two other proceedings, to wit: ICC Case No. 11264/TE/MW and Civil Case No. 04332 before the RTC of Makati. LHC argues that petitioner s acts constitutes forum-shopping which should be punished by the dismissal of the claim in both forums. Second, in its Comment to Petitioner s Motion for Leave to File Addendum to Petitioner s Memorandum dated 8 October 2004, LHC alleges that by maintaining the present appeal and at the same time pursuing Civil Case No. 04-332 wherein petitioner pressed for judgment on the issue of whether the funds LHC drew on the Securities should be returned petitioner resorted to forum-shopping. In both instances, however, petitioner has apparently opted not to respond to the charge. Forum-shopping is a very serious charge. It exists when a party repetitively avails of several judicial remedies in different courts, simultaneously or successively, all substantially founded on the same transactions and the same essential facts and circumstances, and all raising substantially the same issues either pending in, or already resolved adversely, by some other court.[67] It may also consist in the act of a party against whom an adverse judgment has been rendered in one forum, of seeking another and possibly favorable opinion in another forum other than by appeal or special civil action of certiorari, or the institution of two or more actions or proceedings grounded on the same cause on the supposition that one or the other court might look with favor upon the other party.[68] To determine whether a party violated the rule against forum-shopping, the test applied is whether the elements of litis pendentia are present or whether a final judgment in one case will amount

to res judicata in another.[69] Forum-shopping constitutes improper conduct and may be punished with summary dismissal of the multiple petitions and direct contempt of court.[70] Considering the seriousness of the charge of forum-shopping and the severity of the sanctions for its violation, the Court will refrain from making any definitive ruling on this issue until after petitioner has been given ample opportunity to respond to the charge. WHEREFORE, the instant petition is DENIED, with costs against petitioner. Petitioner is hereby required to answer the charge of forumshopping within fifteen (15) days from notice. SO ORDERED.

15

practices." (Rollo, p. 30.) The truth of this allegation has not been tested because the case has not reached the trial stage.] In June, 1972, the company received a letter which was signed by Wilham I. Collins, Director, Contracts Division, Naval Facilities Engineering Command, Southwest Pacific, Department of the Navy of the United States, who is one of the petitioners herein. The letter said that the company did not qualify to receive an award for the projects because of its previous unsatisfactory performance rating on a repair contract for the sea wall at the boat landings of the U.S. Naval Station in Subic Bay. The letter further said that the projects had been awarded to third parties. In the abovementioned Civil Case No. 779-M, the company sued the United States of America and Messrs. James E. Galloway, William I. Collins and Robert Gohier all members of the Engineering Command of the U.S. Navy. The complaint is to order the defendants to allow the plaintiff to perform the work on the projects and, in the event that specific performance was no longer possible, to order the defendants to pay damages. The company also asked for the issuance of a writ of preliminary injunction to restrain the defendants from entering into contracts with third parties for work on the projects. The defendants entered their special appearance for the purpose only of questioning the jurisdiction of this court over the subject matter of the complaint and the persons of defendants, the subject matter of the complaint being acts and omissions of the individual defendants as agents of defendant United States of America, a foreign sovereign which has not given her consent to this suit or any other suit for the causes of action asserted in the complaint." (Rollo, p. 50.) Subsequently the defendants filed a motion to dismiss the complaint which included an opposition to the issuance of the writ of preliminary injunction. The company opposed the motion. The trial court denied the motion and issued the writ. The defendants moved twice to reconsider but to no avail. Hence the instant petition which seeks to restrain perpetually the proceedings in Civil Case No. 779-M for lack of jurisdiction on the part of the trial court. The petition is highly impressed with merit. The traditional rule of State immunity exempts a State from being sued in

UNITED STATES OF AMERICA, CAPT. JAMES E. GALLOWAY, WILLIAM I. COLLINS and ROBERT GOHIER, petitioners,
vs.
HON. V. M. RUIZ, Presiding Judge of Branch XV, Court of First Instance of Rizal and ELIGIO DE GUZMAN & CO., INC., respondents. This is a petition to review, set aside certain orders and restrain the respondent judge from trying Civil Case No. 779M of the defunct Court of First Instance of Rizal. The factual background is as follows: At times material to this case, the United States of America had a naval base in Subic, Zambales. The base was one of those provided in the Military Bases Agreement between the Philippines and the United States. Sometime in May, 1972, the United States invited the submission of bids for the following projects 1. Repair offender system, Alava Wharf at the U.S. Naval Station Subic Bay, Philippines. 2. Repair typhoon damage to NAS Cubi shoreline; repair typhoon damage to shoreline revetment, NAVBASE Subic; and repair to Leyte Wharf approach, NAVBASE Subic Bay, Philippines. Eligio de Guzman & Co., Inc. responded to the invitation and submitted bids. Subsequent thereto, the company received from the United States two telegrams requesting it to confirm its price proposals and for the name of its bonding company. The company complied with the requests. [In its complaint, the company alleges that the United States had accepted its bids because "A request to confirm a price proposal confirms the acceptance of a bid pursuant to defendant United States' bidding

16

the courts of another State without its consent or waiver. This rule is a necessary consequence of the principles of independence and equality of States. However, the rules of International Law are not petrified; they are constantly developing and evolving. And because the activities of states have multiplied, it has been necessary to distinguish them-between sovereign and governmental acts (jure imperii) and private, commercial and proprietary acts (juregestionis). The result is that State immunity now extends only to acts jure imperil The restrictive application of State immunity is now the rule in the United States, the United Kingdom and other states in western Europe. (See Coquia and Defensor Santiago, Public International Law, pp. 207-209 [1984].) The respondent judge recognized the restrictive doctrine of State immunity when he said in his Order denying the defendants' (now petitioners) motion: " A distinction should be made between a strictly governmental function of the sovereign state from its private, proprietary or non- governmental acts (Rollo, p. 20.) However, the respondent judge also said: "It is the Court's considered opinion that entering into a contract for the repair of wharves or shoreline is certainly not a governmental function altho it may partake of a public nature or character. As aptly pointed out by plaintiff's counsel in his reply citing the ruling in the case of Lyons, Inc., [104 Phil. 594 (1958)], and which this Court quotes with approval, viz.: It is however contended that when a sovereign state enters into a contract with a private person, the state can be sued upon the theory that it has descended to the level of an individual from which it can be implied that it has given its consent to be sued under the contract. ... xxx xxx xxx We agree to the above contention, and considering that the United States government, through its agency at Subic Bay, entered into a contract with appellant for stevedoring and miscellaneous labor services within the Subic Bay Area, a U.S. Naval Reservation, it is evident that it can bring an action before our courts for any contractual liability that that political entity may assume under the contract. The trial court, therefore, has jurisdiction to entertain this case ... (Rollo, pp. 20-21.) The reliance placed on Lyons by the respondent judge is misplaced for the

following reasons: In Harry Lyons, Inc. vs. The United States of America, supra, plaintiff brought suit in the Court of First Instance of Manila to collect several sums of money on account of a contract between plaintiff and defendant. The defendant filed a motion to dismiss on the ground that the court had no jurisdiction over defendant and over the subject matter of the action. The court granted the motion on the grounds that: (a) it had no jurisdiction over the defendant who did not give its consent to the suit; and (b) plaintiff failed to exhaust the administrative remedies provided in the contract. The order of dismissal was elevated to this Court for review. In sustaining the action of the lower court, this Court said: It appearing in the complaint that appellant has not complied with the procedure laid down in Article XXI of the contract regarding the prosecution of its claim against the United States Government, or, stated differently, it has failed to first exhaust its administrative remedies against said Government, the lower court acted properly in dismissing this case.(At p. 598.) It can thus be seen that the statement in respect of the waiver of State immunity from suit was purely gratuitous and, therefore, obiter so that it has no value as an imperative authority. The restrictive application of State immunity is proper only when the proceedings arise out of commercial transactions of the foreign sovereign, its commercial activities or economic affairs. Stated differently, a State may be said to have descended to the level of an individual and can thus be deemed to have tacitly given its consent to be sued only when it enters into business contracts. It does not apply where the contract relates to the exercise of its sovereign functions. In this case the projects are an integral part of the naval base which is devoted to the defense of both the United States and the Philippines, indisputably a function of the government of the highest order; they are not utilized for nor dedicated to commercial or business purposes. That the correct test for the application of State immunity is not the conclusion of a contract by a State but the legal nature of the act is shown in Syquia vs. Lopez, 84 Phil. 312 (1949). In that case the plaintiffs leased

17

three apartment buildings to the United States of America for the use of its military officials. The plaintiffs sued to recover possession of the premises on the ground that the term of the leases had expired. They also asked for increased rentals until the apartments shall have been vacated. The defendants who were armed forces officers of the United States moved to dismiss the suit for lack of jurisdiction in the part of the court. The Municipal Court of Manila granted the motion to dismiss; sustained by the Court of First Instance, the plaintiffs went to this Court for review on certiorari. In denying the petition, this Court said: On the basis of the foregoing considerations we are of the belief and we hold that the real party defendant in interest is the Government of the United States of America; that any judgment for back or Increased rentals or damages will have to be paid not by defendants Moore and Tillman and their 64 co-defendants but by the said U.S. Government. On the basis of the ruling in the case of Land vs. Dollar already cited, and on what we have already stated, the present action must be considered as one against the U.S. Government. It is clear hat the courts of the Philippines including the Municipal Court of Manila have no jurisdiction over the present case for unlawful detainer. The question of lack of jurisdiction was raised and interposed at the very beginning of the action. The U.S. Government has not , given its consent to the filing of this suit which is essentially against her, though not in name. Moreover, this is not only a case of a citizen filing a suit against his own Government without the latter's consent but it is of a citizen filing an action against a foreign government without said government's consent, which renders more obvious the lack of jurisdiction of the courts of his country. The principles of law behind this rule are so elementary and of such general acceptance that we deem it unnecessary to cite authorities in support thereof. (At p. 323.) In Syquia,the United States concluded contracts with private individuals but the contracts notwithstanding the States was not deemed to have given or waived its consent to be sued for the reason that the contracts were for jure imperii and not for jure gestionis. WHEREFORE, the petition is granted; the questioned orders of the respondent judge are set aside and Civil Case No. is dismissed. Costs against the private respondent.

THE HOLY SEE, petitioner,
vs.
THE HON. ERIBERTO U. ROSARIO, JR., as Presiding Judge of the Regional Trial Court of Makati, Branch 61 and STARBRIGHT SALES ENTERPRISES, INC., respondents. This is a petition for certiorari under Rule 65 of the Revised Rules of Court to reverse and set aside the Orders dated June 20, 1991 and September 19, 1991 of the Regional Trial Court, Branch 61, Makati, Metro Manila in Civil Case No. 90-183. The Order dated June 20, 1991 denied the motion of petitioner to dismiss the complaint in Civil Case No. 90-183, while the Order dated September 19, 1991 denied the motion for reconsideration of the June 20,1991 Order. Petitioner is the Holy See who exercises sovereignty over the Vatican City in Rome, Italy, and is represented in the Philippines by the Papal Nuncio. Private respondent, Starbright Sales Enterprises, Inc., is a domestic corporation engaged in the real estate business. This petition arose from a controversy over a parcel of land consisting of 6,000 square meters (Lot 5-A, Transfer Certificate of Title No. 390440) located in the Municipality of Paraaque, Metro Manila and registered in the name of petitioner.

18

Said Lot 5-A is contiguous to Lots 5-B and 5-D which are covered by Transfer Certificates of Title Nos. 271108 and 265388 respectively and registered in the name of the Philippine Realty Corporation (PRC). The three lots were sold to Ramon Licup, through Msgr. Domingo A. Cirilos, Jr., acting as agent to the sellers. Later, Licup assigned his rights to the sale to private respondent. In view of the refusal of the squatters to vacate the lots sold to private respondent, a dispute arose as to who of the parties has the responsibility of evicting and clearing the land of squatters. Complicating the relations of the parties was the sale by petitioner of Lot 5-A to Tropicana Properties and Development Corporation (Tropicana). I On January 23, 1990, private respondent filed a complaint with the Regional Trial Court, Branch 61, Makati, Metro Manila for annulment of the sale of the three parcels of land, and specific performance and damages against petitioner, represented by the Papal Nuncio, and three other defendants: namely, Msgr. Domingo A. Cirilos, Jr., the PRC and Tropicana (Civil Case No.
90-183). The complaint alleged that: (1) on April 17, 1988, Msgr. Cirilos, Jr., on behalf of petitioner and the PRC, agreed to sell to Ramon Licup Lots 5-A, 5B and 5-D at the price of P1,240.00 per square meters; (2) the agreement to sell was made on the condition that earnest money of P100,000.00 be paid by Licup to the sellers, and that the sellers clear the said lots of squatters who were then occupying the same; (3) Licup paid the earnest money to Msgr. Cirilos; (4) in the same month, Licup assigned his rights over the property to private respondent and informed the sellers of the said assignment; (5) thereafter, private respondent demanded from Msgr. Cirilos that the sellers fulfill their undertaking and clear the property of squatters; however, Msgr. Cirilos informed private respondent of the squatters' refusal to vacate the lots, proposing instead either that private respondent undertake the eviction or that the earnest money be returned to the latter; (6) private respondent counterproposed that if it would undertake the eviction of the squatters, the purchase price of the lots should be reduced from P1,240.00 to P1,150.00 per square meter; (7) Msgr. Cirilos returned the earnest money of P100,000.00 and wrote

private respondent giving it seven days from receipt of the letter to pay the original purchase price in cash; (8) private respondent sent the earnest money back to the sellers, but later discovered that on March 30, 1989, petitioner and the PRC, without notice to private respondent, sold the lots to Tropicana, as evidenced by two separate Deeds of Sale, one over Lot 5-A, and another over Lots 5-B and 5-D; and that the sellers' transfer certificate of title over the lots were cancelled, transferred and registered in the name of Tropicana; (9) Tropicana induced petitioner and the PRC to sell the lots to it and thus enriched itself at the expense of private respondent; (10) private respondent demanded the rescission of the sale to Tropicana and the reconveyance of the lots, to no avail; and (11) private respondent is willing and able to comply with the terms of the contract to sell and has actually made plans to develop the lots into a townhouse project, but in view of the sellers' breach, it lost profits of not less than P30,000.000.00. Private respondent thus prayed for: (1) the annulment of the Deeds of Sale between petitioner and the PRC on the one hand, and Tropicana on the other; (2) the reconveyance of the lots in question; (3) specific performance of the agreement to sell between it and the owners of the lots; and (4) damages. On June 8, 1990, petitioner and Msgr. Cirilos separately moved to dismiss the complaint petitioner for lack of jurisdiction based on sovereign immunity from suit, and Msgr. Cirilos for being an improper party. An opposition to the motion was filed by private respondent. On June 20, 1991, the trial court issued an order denying, among others, petitioner's motion to dismiss after finding that petitioner "shed off [its] sovereign immunity by entering into the business contract in question" (Rollo, pp. 20-21). On July 12, 1991, petitioner moved for reconsideration of the order. On August 30, 1991, petitioner filed a "Motion for a Hearing for the Sole Purpose of Establishing Factual Allegation for claim of Immunity as a Jurisdictional Defense." So as to facilitate the determination of its defense of sovereign immunity, petitioner prayed that a hearing be conducted to allow it to establish certain facts upon which the said defense is based. Private respondent opposed this motion as well as the motion for reconsideration.

19

On October 1, 1991, the trial court issued an order deferring the resolution on the motion for reconsideration until after trial on the merits and directing petitioner to file its answer (Rollo, p. 22). Petitioner forthwith elevated the matter to us. In its petition, petitioner invokes the privilege of sovereign immunity only on its own behalf and on behalf of its official representative, the Papal Nuncio. On December 9, 1991, a Motion for Intervention was filed before us by the Department of Foreign Affairs, claiming that it has a legal interest in the outcome of the case as regards the diplomatic immunity of petitioner, and that it "adopts by reference, the allegations contained in the petition of the Holy See insofar as they refer to arguments relative to its claim of sovereign immunity from suit" (Rollo, p. 87). Private respondent opposed the intervention of the Department of Foreign Affairs. In compliance with the resolution of this Court, both parties and the Department of Foreign Affairs submitted their respective memoranda. II A preliminary matter to be threshed out is the procedural issue of whether the petition for certiorari under Rule 65 of the Revised Rules of Court can be availed of to question the order denying petitioner's motion to dismiss. The general rule is that an order denying a motion to dismiss is not reviewable by the appellate courts, the remedy of the movant being to file his answer and to proceed with the hearing before the trial court. But the general rule admits of exceptions, and one of these is when it is very clear in the records that the trial court has no alternative but to dismiss the complaint (Philippine National Bank v. Florendo, 206 SCRA 582 [1992]; Zagada v. Civil Service Commission, 216 SCRA 114 [1992]. In such a case, it would be a sheer waste of time and energy to require the parties to undergo the rigors of a trial. The other procedural question raised by private respondent is the personality or legal interest of the Department of Foreign Affairs to intervene in the case in behalf of the Holy See (Rollo, pp. 186-190). In Public International Law, when a state or international agency wishes

to plead sovereign or diplomatic immunity in a foreign court, it requests the Foreign Office of the state where it is sued to convey to the court that said defendant is entitled to immunity. In the United States, the procedure followed is the process of "suggestion," where the foreign state or the international organization sued in an American court requests the Secretary of State to make a determination as to whether it is entitled to immunity. If the Secretary of State finds that the defendant is immune from suit, he, in turn, asks the Attorney General to submit to the court a "suggestion" that the defendant is entitled to immunity. In England, a similar procedure is followed, only the Foreign Office issues a certification to that effect instead of submitting a "suggestion" (O'Connell, I International Law 130 [1965]; Note: Immunity from Suit of Foreign Sovereign Instrumentalities and Obligations, 50 Yale Law Journal 1088 [1941]). In the Philippines, the practice is for the foreign government or the international organization to first secure an executive endorsement of its claim of sovereign or diplomatic immunity. But how the Philippine Foreign Office conveys its endorsement to the courts varies. In International Catholic Migration Commission v. Calleja, 190 SCRA 130 (1990), the Secretary of Foreign Affairs just sent a letter directly to the Secretary of Labor and Employment, informing the latter that the respondent-employer could not be sued because it enjoyed diplomatic immunity. In World Health Organization v. Aquino, 48 SCRA 242 (1972), the Secretary of Foreign Affairs sent the trial court a telegram to that effect. In Baer v. Tizon, 57 SCRA 1 (1974), the U.S. Embassy asked the Secretary of Foreign Affairs to request the Solicitor General to make, in behalf of the Commander of the United States Naval Base at Olongapo City, Zambales, a "suggestion" to respondent Judge. The Solicitor General embodied the "suggestion" in a Manifestation and Memorandum as amicus curiae. In the case at bench, the Department of Foreign Affairs, through the Office of Legal Affairs moved with this Court to be allowed to intervene on the side of petitioner. The Court allowed the said Department to file its memorandum in support of petitioner's claim of sovereign immunity. In some cases, the defense of sovereign immunity was submitted directly to the local courts by the respondents through their private counsels

20

(Raquiza v. Bradford, 75 Phil. 50 [1945]; Miquiabas v. Philippine-Ryukyus Command, 80 Phil. 262 [1948]; United States of America v. Guinto, 182 SCRA 644 [1990] and companion cases). In cases where the foreign states bypass the Foreign Office, the courts can inquire into the facts and make their own determination as to the nature of the acts and transactions involved. III The burden of the petition is that respondent trial court has no jurisdiction over petitioner, being a foreign state enjoying sovereign immunity. On the other hand, private respondent insists that the doctrine of non-suability is not anymore absolute and that petitioner has divested itself of such a cloak when, of its own free will, it entered into a commercial transaction for the sale of a parcel of land located in the Philippines. A. The Holy See Before we determine the issue of petitioner's non-suability, a brief look into its status as a sovereign state is in order. Before the annexation of the Papal States by Italy in 1870, the Pope was the monarch and he, as the Holy See, was considered a subject of International Law. With the loss of the Papal States and the limitation of the territory under the Holy See to an area of 108.7 acres, the position of the Holy See in International Law became controversial (Salonga and Yap, Public International Law 36-37 [1992]). In 1929, Italy and the Holy See entered into the Lateran Treaty, where Italy recognized the exclusive dominion and sovereign jurisdiction of the Holy See over the Vatican City. It also recognized the right of the Holy See to receive foreign diplomats, to send its own diplomats to foreign countries, and to enter into treaties according to International Law (Garcia, Questions and Problems In International Law, Public and Private 81 [1948]). The Lateran Treaty established the statehood of the Vatican City "for the purpose of assuring to the Holy See absolute and visible independence and of guaranteeing to it indisputable sovereignty also in the field of

international relations" (O'Connell, I International Law 311 [1965]). In view of the wordings of the Lateran Treaty, it is difficult to determine whether the statehood is vested in the Holy See or in the Vatican City. Some writers even suggested that the treaty created two international persons the Holy See and Vatican City (Salonga and Yap, supra, 37). The Vatican City fits into none of the established categories of states, and the attribution to it of "sovereignty" must be made in a sense different from that in which it is applied to other states (Fenwick, International Law 124-125 [1948]; Cruz, International Law 37 [1991]). In a community of national states, the Vatican City represents an entity organized not for political but for ecclesiastical purposes and international objects. Despite its size and object, the Vatican City has an independent government of its own, with the Pope, who is also head of the Roman Catholic Church, as the Holy See or Head of State, in conformity with its traditions, and the demands of its mission in the world. Indeed, the world-wide interests and activities of the Vatican City are such as to make it in a sense an "international state" (Fenwick, supra., 125; Kelsen, Principles of International Law 160 [1956]). One authority wrote that the recognition of the Vatican City as a state has significant implication that it is possible for any entity pursuing objects essentially different from those pursued by states to be invested with international personality (Kunz, The Status of the Holy See in International Law, 46 The American Journal of International Law 308 [1952]). Inasmuch as the Pope prefers to conduct foreign relations and enter into transactions as the Holy See and not in the name of the Vatican City, one can conclude that in the Pope's own view, it is the Holy See that is the international person. The Republic of the Philippines has accorded the Holy See the status of a foreign sovereign. The Holy See, through its Ambassador, the Papal Nuncio, has had diplomatic representations with the Philippine government since 1957 (Rollo, p. 87). This appears to be the universal practice in international relations. B. Sovereign Immunity

21

As expressed in Section 2 of Article II of the 1987 Constitution, we have adopted the generally accepted principles of International Law. Even without this affirmation, such principles of International Law are deemed incorporated as part of the law of the land as a condition and consequence of our admission in the society of nations (United States of America v. Guinto, 182 SCRA 644 [1990]). There are two conflicting concepts of sovereign immunity, each widely held and firmly established. According to the classical or absolute theory, a sovereign cannot, without its consent, be made a respondent in the courts of another sovereign. According to the newer or restrictive theory, the immunity of the sovereign is recognized only with regard to public acts or acts jure imperii of a state, but not with regard to private acts or acts jure gestionis
(United States of America v. Ruiz, 136 SCRA 487 [1987]; Coquia and Defensor-Santiago, Public International Law 194 [1984]). Some states passed legislation to serve as guidelines for the executive or judicial determination when an act may be considered as jure gestionis. The United States passed the Foreign Sovereign Immunities Act of 1976, which defines a commercial activity as "either a regular course of commercial conduct or a particular commercial transaction or act." Furthermore, the law declared that the "commercial character of the activity shall be determined by reference to the nature of the course of conduct or particular transaction or act, rather than by reference to its purpose." The Canadian Parliament enacted in 1982 an Act to Provide For State Immunity in Canadian Courts. The Act defines a "commercial activity" as any particular transaction, act or conduct or any regular course of conduct that by reason of its nature, is of a "commercial character." The restrictive theory, which is intended to be a solution to the host of problems involving the issue of sovereign immunity, has created problems of its own. Legal treatises and the decisions in countries which follow the restrictive theory have difficulty in characterizing whether a contract of a sovereign state with a private party is an act jure gestionis or an act jure imperii. The restrictive theory came about because of the entry of sovereign states into purely commercial activities remotely connected with the discharge

of governmental functions. This is particularly true with respect to the Communist states which took control of nationalized business activities and international trading. This Court has considered the following transactions by a foreign state with private parties as acts jure imperii: (1) the lease by a foreign government of apartment buildings for use of its military officers (Syquia v. Lopez, 84 Phil. 312 [1949]; (2) the conduct of public bidding for the repair of a wharf at a United States Naval Station (United States of America v. Ruiz, supra.); and (3) the change of employment status of base employees (Sanders v. Veridiano, 162 SCRA 88 [1988]). On the other hand, this Court has considered the following transactions by a foreign state with private parties as acts jure gestionis: (1) the hiring of a cook in the recreation center, consisting of three restaurants, a cafeteria, a bakery, a store, and a coffee and pastry shop at the John Hay Air Station in Baguio City, to cater to American servicemen and the general public (United States of America v. Rodrigo, 182 SCRA 644 [1990]); and (2) the bidding for the operation of barber shops in Clark Air Base in Angeles City (United States of America v. Guinto, 182 SCRA 644 [1990]). The operation of the restaurants and other facilities open to the general public is undoubtedly for profit as a commercial and not a governmental activity. By entering into the employment contract with the cook in the discharge of its proprietary function, the United States government impliedly divested itself of its sovereign immunity from suit. In the absence of legislation defining what activities and transactions shall be considered "commercial" and as constituting acts jure gestionis, we have to come out with our own guidelines, tentative they may be. Certainly, the mere entering into a contract by a foreign state with a private party cannot be the ultimate test. Such an act can only be the start of the inquiry. The logical question is whether the foreign state is engaged in the activity in the regular course of business. If the foreign state is not engaged regularly in a business or trade, the particular act or transaction must then be tested by its nature. If the act is in pursuit of a sovereign activity, or an incident thereof, then it is an act jure imperii, especially when it is not undertaken for gain or profit. As held in United States of America v. Guinto, (supra):

22

There is no question that the United States of America, like any other state, will be deemed to have impliedly waived its non-suability if it has entered into a contract in its proprietary or private capacity. It is only when the contract involves its sovereign or governmental capacity that no such waiver may be implied. In the case at bench, if petitioner has bought and sold lands in the ordinary course of a real estate business, surely the said transaction can be categorized as an act jure gestionis. However, petitioner has denied that the acquisition and subsequent disposal of Lot 5-A were made for profit but claimed that it acquired said property for the site of its mission or the Apostolic Nunciature in the Philippines. Private respondent failed to dispute said claim. Lot 5-A was acquired by petitioner as a donation from the Archdiocese of Manila. The donation was made not for commercial purpose, but for the use of petitioner to construct thereon the official place of residence of the Papal Nuncio. The right of a foreign sovereign to acquire property, real or personal, in a receiving state, necessary for the creation and maintenance of its diplomatic mission, is recognized in the 1961 Vienna Convention on Diplomatic Relations (Arts. 20-22). This treaty was concurred in by the Philippine Senate and entered into force in the Philippines on November 15, 1965. In Article 31(a) of the Convention, a diplomatic envoy is granted immunity from the civil and administrative jurisdiction of the receiving state over any real action relating to private immovable property situated in the territory of the receiving state which the envoy holds on behalf of the sending state for the purposes of the mission. If this immunity is provided for a diplomatic envoy, with all the more reason should immunity be recognized as regards the sovereign itself, which in this case is the Holy See. The decision to transfer the property and the subsequent disposal thereof are likewise clothed with a governmental character. Petitioner did not sell Lot
5-A for profit or gain. It merely wanted to dispose off the same because the squatters living thereon made it almost impossible for petitioner to use it for the purpose of the donation. The fact that squatters have occupied and are still occupying the lot, and that they stubbornly refuse to leave the premises, has been admitted by private respondent in

its complaint (Rollo, pp. 26, 27). The issue of petitioner's non-suability can be determined by the trial court without going to trial in the light of the pleadings, particularly the admission of private respondent. Besides, the privilege of sovereign immunity in this case was sufficiently established by the Memorandum and Certification of the Department of Foreign Affairs. As the department tasked with the conduct of the Philippines' foreign relations (Administrative Code of 1987, Book IV, Title I, Sec. 3), the Department of Foreign Affairs has formally intervened in this case and officially certified that the Embassy of the Holy See is a duly accredited diplomatic mission to the Republic of the Philippines exempt from local jurisdiction and entitled to all the rights, privileges and immunities of a diplomatic mission or embassy in this country (Rollo, pp. 156-157). The determination of the executive arm of government that a state or instrumentality is entitled to sovereign or diplomatic immunity is a political question that is conclusive upon the courts (International Catholic Migration Commission v. Calleja, 190 SCRA 130 [1990]). Where the plea of immunity is recognized and affirmed by the executive branch, it is the duty of the courts to accept this claim so as not to embarrass the executive arm of the government in conducting the country's foreign relations (World Health Organization v. Aquino, 48 SCRA 242 [1972]). As in International Catholic Migration Commission and in World Health Organization, we abide by the certification of the Department of Foreign Affairs. Ordinarily, the procedure would be to remand the case and order the trial court to conduct a hearing to establish the facts alleged by petitioner in its motion. In view of said certification, such procedure would however be pointless and unduly circuitous (Ortigas & Co. Ltd. Partnership v. Judge Tirso Velasco, G.R. No. 109645, July 25, 1994). IV Private respondent is not left without any legal remedy for the redress of its grievances. Under both Public International Law and Transnational Law, a person who feels aggrieved by the acts of a foreign sovereign can ask his own government to espouse his cause through diplomatic channels. Private respondent can ask the Philippine government, through the

23

Foreign Office, to espouse its claims against the Holy See. Its first task is to persuade the Philippine government to take up with the Holy See the validity of its claims. Of course, the Foreign Office shall first make a determination of the impact of its espousal on the relations between the Philippine government and the Holy See (Young, Remedies of Private Claimants Against Foreign States, Selected Readings on Protection by Law of Private Foreign Investments 905, 919 [1964]). Once the Philippine government decides to espouse the claim, the latter ceases to be a private cause. According to the Permanent Court of International Justice, the forerunner of the International Court of Justice: By taking up the case of one of its subjects and by reporting to diplomatic action or international judicial proceedings on his behalf, a State is in reality asserting its own rights its right to ensure, in the person of its subjects, respect for the rules of international law (The Mavrommatis Palestine Concessions, 1 Hudson, World Court Reports 293, 302 [1924]). WHEREFORE, the petition for certiorari is GRANTED and the complaint in Civil Case No. 90-183 against petitioner is DISMISSED.

petitioners, vs. JAMES VINZON, doing business under the name and style of VINZON TRADE AND SERVICES, respondent. This is a petition for review on certiorari to set aside the Decision of the Court of Appeals dated May 30, 2002 and its Resolution dated August 16, 2002, in CA-G.R. SP No. 66894 entitled The Republic of Indonesia, His Excellency Ambassador Soeratmin and Minister Counselor Azhari Kasim v. Hon. Cesar Santamaria, Presiding Judge, RTC Branch 145, Makati City, and James Vinzon, doing business under the name and style of Vinzon Trade and Services. Petitioner, Republic of Indonesia, represented by its Counsellor, Siti Partinah, entered into a Maintenance Agreement in August 1995 with respondent James Vinzon, sole proprietor of Vinzon Trade and Services. The Maintenance Agreement stated that respondent shall, for a consideration, maintain specified equipment at the Embassy Main Building, Embassy Annex Building and the Wisma Duta, the official residence of petitioner Ambassador Soeratmin. The equipment covered by the Maintenance Agreement are air conditioning units, generator sets, electrical facilities, water heaters, and water motor pumps. It is likewise stated therein that the agreement shall be effective for a period of four years and will renew itself automatically unless cancelled by either party by giving thirty days prior written notice from the date of expiry.[1] Petitioners claim that sometime prior to the date of expiration of the said agreement, or before August 1999, they informed respondent that the renewal of the agreement shall be at the discretion of the incoming Chief of Administration, Minister Counsellor Azhari Kasim, who was expected to arrive in February 2000. When Minister Counsellor Kasim assumed the position of Chief of Administration in March 2000, he allegedly found respondent s work and services unsatisfactory and not in compliance with the standards set in the Maintenance Agreement. Hence, the Indonesian Embassy terminated the agreement in a letter dated August 31, 2000.[2] Petitioners claim, moreover, that they had earlier verbally informed respondent of their decision to terminate the agreement. On the other hand, respondent claims that the aforesaid termination was arbitrary and unlawful. Respondent cites various circumstances which purportedly negated petitioners alleged dissatisfaction over respondent s services: (a) in July 2000, Minister Counsellor Kasim still requested respondent to assign to the embassy an additional full-time

THE REPUBLIC OF INDONESIA, HIS EXCELLENCY AMBASSADOR SOERATMIN, and MINISTER COUNSELLOR AZHARI KASIM,

24

worker to assist one of his other workers; (b) in August 2000, Minister Counsellor Kasim asked respondent to donate a prize, which the latter did, on the occasion of the Indonesian Independence Day golf tournament; and (c) in a letter dated August 22, 2000, petitioner Ambassador Soeratmin thanked respondent for sponsoring a prize and expressed his hope that the cordial relations happily existing between them will continue to prosper and be strengthened in the coming years. Hence, on December 15, 2000, respondent filed a complaint[3] against petitioners docketed as Civil Case No. 18203 in the Regional Trial Court (RTC) of Makati, Branch 145. On February 20, 2001, petitioners filed a Motion to Dismiss, alleging that the Republic of Indonesia, as a foreign sovereign State, has sovereign immunity from suit and cannot be sued as a party-defendant in the Philippines. The said motion further alleged that Ambassador Soeratmin and Minister Counsellor Kasim are diplomatic agents as defined under the Vienna Convention on Diplomatic Relations and therefore enjoy diplomatic immunity.[4] In turn, respondent filed on March 20, 2001, an Opposition to the said motion alleging that the Republic of Indonesia has expressly waived its immunity from suit. He based this claim upon the following provision in the Maintenance Agreement: Any legal action arising out of this Maintenance Agreement shall be settled according to the laws of the Philippines and by the proper court of Makati City, Philippines. Respondent s Opposition likewise alleged that Ambassador Soeratmin and Minister Counsellor Kasim can be sued and held liable in their private capacities for tortious acts done with malice and bad faith.[5] On May 17, 2001, the trial court denied herein petitioners Motion to Dismiss. It likewise denied the Motion for Reconsideration subsequently filed. The trial court s denial of the Motion to Dismiss was brought up to the Court of Appeals by herein petitioners in a petition for certiorari and prohibition. Said petition, docketed as CA-G.R. SP No. 66894, alleged that the trial court gravely abused its discretion in ruling that the Republic of Indonesia gave its consent to be sued and voluntarily submitted itself to the laws and jurisdiction of Philippine courts and that petitioners Ambassador Soeratmin and Minister Counsellor Kasim waived their immunity from suit.

On May 30, 2002, the Court of Appeals rendered its assailed decision denying the petition for lack of merit.[6] On August 16, 2002, it denied herein petitioners motion for reconsideration.[7] Hence, this petition. In the case at bar, petitioners raise the sole issue of whether or not the Court of Appeals erred in sustaining the trial court s decision that petitioners have waived their immunity from suit by using as its basis the abovementioned provision in the Maintenance Agreement. The petition is impressed with merit. International law is founded largely upon the principles of reciprocity, comity, independence, and equality of States which were adopted as part of the law of our land under Article II, Section 2 of the 1987 Constitution.[8] The rule that a State may not be sued without its consent is a necessary consequence of the principles of independence and equality of States.[9] As enunciated in Sanders v. Veridiano II,[10] the practical justification for the doctrine of sovereign immunity is that there can be no legal right against the authority that makes the law on which the right depends. In the case of foreign States, the rule is derived from the principle of the sovereign equality of States, as expressed in the maxim par in parem non habet imperium. All states are sovereign equals and cannot assert jurisdiction over one another.[11] A contrary attitude would unduly vex the peace of nations. [12] The rules of International Law, however, are neither unyielding nor impervious to change. The increasing need of sovereign States to enter into purely commercial activities remotely connected with the discharge of their governmental functions brought about a new concept of sovereign immunity. This concept, the restrictive theory, holds that the immunity of the sovereign is recognized only with regard to public acts or acts jure imperii, but not with regard to private acts or acts jure gestionis.[13] In United States v. Ruiz,[14] for instance, we held that the conduct of public bidding for the repair of a wharf at a United States Naval Station is an act jure imperii. On the other hand, we considered as an act jure gestionis the hiring of a cook in the recreation center catering to American servicemen and the general public at the John Hay Air Station in Baguio City,[15] as well as the bidding for the operation of barber shops in Clark Air Base in Angeles City.[16]

25

Apropos the present case, the mere entering into a contract by a foreign State with a private party cannot be construed as the ultimate test of whether or not it is an act jure imperii or jure gestionis. Such act is only the start of the inquiry. Is the foreign State engaged in the regular conduct of a business? If the foreign State is not engaged regularly in a business or commercial activity, and in this case it has not been shown to be so engaged, the particular act or transaction must then be tested by its nature. If the act is in pursuit of a sovereign activity, or an incident thereof, then it is an act jure imperii.[17] Hence, the existence alone of a paragraph in a contract stating that any legal action arising out of the agreement shall be settled according to the laws of the Philippines and by a specified court of the Philippines is not necessarily a waiver of sovereign immunity from suit. The aforesaid provision contains language not necessarily inconsistent with sovereign immunity. On the other hand, such provision may also be meant to apply where the sovereign party elects to sue in the local courts, or otherwise waives its immunity by any subsequent act. The applicability of Philippine laws must be deemed to include Philippine laws in its totality, including the principle recognizing sovereign immunity. Hence, the proper court may have no proper action, by way of settling the case, except to dismiss it. Submission by a foreign state to local jurisdiction must be clear and unequivocal. It must be given explicitly or by necessary implication. We find no such waiver in this case. Respondent concedes that the establishment of a diplomatic mission is a sovereign function. On the other hand, he argues that the actual physical maintenance of the premises of the diplomatic mission, such as the upkeep of its furnishings and equipment, is no longer a sovereign function of the State.[18] We disagree. There is no dispute that the establishment of a diplomatic mission is an act jure imperii. A sovereign State does not merely establish a diplomatic mission and leave it at that; the establishment of a diplomatic mission encompasses its maintenance and upkeep. Hence, the State may enter into contracts with private entities to maintain the premises, furnishings and equipment of the embassy and the living quarters of its agents and officials. It is therefore clear that petitioner Republic of Indonesia was acting in pursuit of a sovereign activity when it entered into a contract with respondent for the upkeep or

maintenance of the air conditioning units, generator sets, electrical facilities, water heaters, and water motor pumps of the Indonesian Embassy and the official residence of the Indonesian ambassador. The Solicitor General, in his Comment, submits the view that, the Maintenance Agreement was entered into by the Republic of Indonesia in the discharge of its governmental functions. In such a case, it cannot be deemed to have waived its immunity from suit. As to the paragraph in the agreement relied upon by respondent, the Solicitor General states that it was not a waiver of their immunity from suit but a mere stipulation that in the event they do waive their immunity, Philippine laws shall govern the resolution of any legal action arising out of the agreement and the proper court in Makati City shall be the agreed venue thereof.[19] On the matter of whether or not petitioners Ambassador Soeratmin and Minister Counsellor Kasim may be sued herein in their private capacities, Article 31 of the Vienna Convention on Diplomatic Relations provides: xxx 1. A diplomatic agent shall enjoy immunity from the criminal jurisidiction of the receiving State. He shall also enjoy immunity from its civil and administrative jurisdiction, except in the case of: (a) a real action relating to private immovable property situated in the territory of the receiving State, unless he holds it on behalf of the sending State for the purposes of the mission; (b) an action relating to succession in which the diplomatic agent is involved as executor, administrator, heir or legatee as a private person and not on behalf of the sending State; (c) an action relating to any professional or commercial activity exercised by the diplomatic agent in the receiving State outside his official functions. xxx The act of petitioners Ambassador Soeratmin and Minister Counsellor Kasim in terminating the Maintenance Agreement is not covered by the exceptions provided in the abovementioned provision.

26

The Solicitor General believes that said act may fall under subparagraph (c) thereof,[20] but said provision clearly applies only to a situation where the diplomatic agent engages in any professional or commercial activity outside official functions, which is not the case herein. WHEREFORE, the petition is hereby GRANTED. The decision and resolution of the Court of Appeals in CA G.R. SP No. 66894 are REVERSED and SET ASIDE and the complaint in Civil Case No. 18203 against petitioners is DISMISSED.

27