Standby Letters of Credit vs Counter-Bonds: Safeguarding Preliminary Attachments in Philippine Litigation

The Supreme Court has clarified a critical point in Philippine civil procedure: a standby letter of credit cannot replace the counter-bond required to discharge a writ of preliminary attachment. In Coca-Cola Beverages Philippines, Inc. v. Pacific Sugar Holdings Corporation (G.R. No. 241333, June 27, 2022), the Court reversed lower court rulings that allowed a standby letter of credit to lift an attachment, emphasizing that courts cannot invent remedies outside those expressly provided by the Rules of Court. The decision protects attaching creditors from losing their security on property through substitutes that impose heavier conditions than the rules allow.

The Dispute Behind the Attachment

Coca-Cola and Pacific Sugar entered into supply agreements for refined sugar. When Pacific Sugar unilaterally terminated the agreements, Coca-Cola sued and prayed for a writ of preliminary attachment against Pacific Sugar's properties. The trial court granted the writ, conditioned on Coca-Cola posting a bond of over P347 million.

Instead of filing the counter-bond required by the Rules of Court to discharge the attachment, Pacific Sugar moved to dissolve the writ by submitting a standby letter of credit from East West Bank. The trial court granted the motion, and the Court of Appeals affirmed, holding that a standby letter of credit serves the same purpose as a counter-bond.

The Issue Before the Supreme Court

Two questions were raised: (1) whether the trial court erred in acting on the dissolution of the attachment while a petition for certiorari was pending before the Court of Appeals, and (2) whether a standby letter of credit may substitute for a counter-bond under Rule 57, Section 12 of the Rules of Court.

The Ruling: No Substitute for a Counter-Bond

The Supreme Court ruled in favor of Coca-Cola. On the procedural issue, the Court held that the trial court should have observed judicial courtesy and deferred action on the attachment while the same issue was pending appellate review. The trial court's continued action rendered the certiorari petition moot.

On the substantive issue, the Court was emphatic: Rule 57, Sections 12 and 13 provide the only ways to discharge a preliminary attachment — by posting a cash deposit or counter-bond, or by proving the attachment was improperly issued, the bond insufficient, or the attachment excessive. A standby letter of credit is not among them.

The Court explained that a counter-bond is a surety arrangement where the surety is liable as a solidary debtor — the attaching party may recover directly upon demand and summary hearing, without first pursuing the principal debtor. In contrast, the standby letter of credit in this case required Coca-Cola to certify that Pacific Sugar was given 15 days to satisfy the judgment, failed to comply, and left the amount unpaid. This made the letter a mere guarantee of the debtor's solvency, not a surety of the debt. The conditions were more onerous, not more favorable, to the attaching party.

The Court also noted a practical risk: a standby letter of credit introduces a third-party bank that could renege on its obligation, leaving the attaching party with no security on the specific property already earmarked for judgment satisfaction.

Practical Takeaways

• A counter-bond or cash deposit is the only way to discharge an attachment by giving security. A standby letter of credit, no matter how well-worded, is not a permissible substitute under Rule 57, Section 12.
• Attachment bonds and counter-bonds are surety arrangements. The surety is directly and primarily liable to the attaching party upon demand and summary hearing, without the need to exhaust remedies against the principal debtor.
• A guarantee is not a surety. Instruments that require proof the debtor failed to pay before the issuer becomes liable are guarantees, which do not provide the same protection as a counter-bond.
• Judicial courtesy applies during pending certiorari. A trial court should not act on a matter already elevated to a higher court if doing so would render the appellate review moot.
• Courts cannot create new remedies. When the Rules of Court enumerate specific procedures, courts must apply them as written and cannot substitute alternatives, even if they appear more convenient.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.