Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. 121413        January 29, 2001

PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR BANK OF ASIA AND AMERICA),petitioner, vs.COURT OF APPEALS and FORD PHILIPPINES, INC. and CITIBANK, N.A., respondents.

G.R. No. 121479        January 29, 2001

FORD PHILIPPINES, INC., petitioner-plaintiff, vs.COURT OF APPEALS and CITIBANK, N.A. and PHILIPPINE COMMERCIAL INTERNATIONAL BANK,respondents.

G.R. No. 128604        January 29, 2001

FORD PHILIPPINES, INC., petitioner, vs.CITIBANK, N.A., PHILIPPINE COMMERCIAL INTERNATIONAL BANK and COURT OF APPEALS, respondents.

QUISUMBING, J.:

These consolidated petitions involve several fraudulently negotiated checks.

The original actions a quo were instituted by Ford Philippines to recover from the drawee bank, CITIBANK, N.A. (Citibank) and collecting bank, Philippine Commercial International Bank (PCIBank) [formerly Insular Bank of Asia and America], the value of several checks payable to the Commissioner of Internal Revenue, which were embezzled allegedly by an organized syndicate. 1âwphi1.nêt

G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27, 1995 Decision1 of the Court of Appeals in CA-G.R. CV No. 25017, entitled "Ford Philippines, Inc. vs. Citibank, N.A. and Insular Bank of Asia and America (now Philipppine Commercial International Bank), and the August 8, 1995 Resolution,2 ordering the collecting bank, Philippine Commercial International Bank, to pay the amount of Citibank Check No. SN-04867.

In G.R. No. 128604, petitioner Ford Philippines assails the October 15, 1996 Decision3 of the Court of Appeals and its March 5, 1997 Resolution4 in CA-G.R. No. 28430 entitled "Ford Philippines, Inc. vs. Citibank, N.A. and Philippine Commercial International Bank," affirming in toto the judgment of the trial court holding the defendant drawee bank, Citibank, N.A., solely liable to pay the amount of

P12,163,298.10 as damages for the misapplied proceeds of the plaintiff's Citibanl Check Numbers SN-10597 and 16508.

I. G.R. Nos. 121413 and 121479

The stipulated facts submitted by the parties as accepted by the Court of Appeals are as follows:

"On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check No. SN-04867 in the amount of P4,746,114.41, in favor of the Commissioner of Internal Revenue as payment of plaintiff;s percentage or manufacturer's sales taxes for the third quarter of 1977.

The aforesaid check was deposited with the degendant IBAA (now PCIBank) and was subsequently cleared at the Central Bank. Upon presentment with the defendant Citibank, the proceeds of the check was paid to IBAA as collecting or depository bank.

The proceeds of the same Citibank check of the plaintiff was never paid to or received by the payee thereof, the Commissioner of Internal Revenue.

As a consequence, upon demand of the Bureau and/or Commissioner of Internal Revenue, the plaintiff was compelled to make a second payment to the Bureau of Internal Revenue of its percentage/manufacturers' sales taxes for the third quarter of 1977 and that said second payment of plaintiff in the amount of P4,746,114.41 was duly received by the Bureau of Internal Revenue.

It is further admitted by defendant Citibank that during the time of the transactions in question, plaintiff had been maintaining a checking account with defendant Citibank; that Citibank Check No. SN-04867 which was drawn and issued by the plaintiff in favor of the Commissioner of Internal Revenue was a crossed check in that, on its face were two parallel lines and written in between said lines was the phrase "Payee's Account Only"; and that defendant Citibank paid the full face value of the check in the amount of P4,746,114.41 to the defendant IBAA.

It has been duly established that for the payment of plaintiff's percentage tax for the last quarter of 1977, the Bureau of Internal Revenue issued Revenue Tax Receipt No. 18747002, dated October 20, 1977, designating therein in Muntinlupa, Metro Manila, as the authorized agent bank of Metrobanl, Alabang branch to receive the tax payment of the plaintiff.

On December 19, 1977, plaintiff's Citibank Check No. SN-04867, together with the Revenue Tax Receipt No. 18747002, was deposited with defendant IBAA, through its Ermita Branch. The latter accepted the check and sent it to the Central Clearing House for clearing on the samd day, with the indorsement at the back "all prior indorsements and/or lack of indorsements guaranteed." Thereafter, defendant IBAA presented the check for payment to defendant Citibank on same date, December 19, 1977, and the latter paid the face value of the check in the amount of P4,746,114.41. Consequently, the amount of P4,746,114.41 was debited in plaintiff's account with the defendant Citibank and the check was returned to the plaintiff.

Upon verification, plaintiff discovered that its Citibank Check No. SN-04867 in the amount of P4,746,114.41 was not paid to the Commissioner of Internal Revenue. Hence, in separate letters dated October 26, 1979, addressed to the defendants, the plaintiff notified the latter

that in case it will be re-assessed by the BIR for the payment of the taxes covered by the said checks, then plaintiff shall hold the defendants liable for reimbursement of the face value of the same. Both defendants denied liability and refused to pay.

In a letter dated February 28, 1980 by the Acting Commissioner of Internal Revenue addressed to the plaintiff - supposed to be Exhibit "D", the latter was officially informed, among others, that its check in the amount of P4, 746,114.41 was not paid to the government or its authorized agent and instead encashed by unauthorized persons, hence, plaintiff has to pay the said amount within fifteen days from receipt of the letter. Upon advice of the plaintiff's lawyers, plaintiff on March 11, 1982, paid to the Bureau of Internal Revenue, the amount of P4,746,114.41, representing payment of plaintiff's percentage tax for the third quarter of 1977.

As a consequence of defendant's refusal to reimburse plaintiff of the payment it had made for the second time to the BIR of its percentage taxes, plaintiff filed on January 20, 1983 its original complaint before this Court.

On December 24, 1985, defendant IBAA was merged with the Philippine Commercial International Bank (PCI Bank) with the latter as the surviving entity.

Defendant Citibank maintains that; the payment it made of plaintiff's Citibank Check No. SN-04867 in the amount of P4,746,114.41 "was in due course"; it merely relied on the clearing stamp of the depository/collecting bank, the defendant IBAA that "all prior indorsements and/or lack of indorsements guaranteed"; and the proximate cause of plaintiff's injury is the gross negligence of defendant IBAA in indorsing the plaintiff's Citibank check in question.

It is admitted that on December 19, 1977 when the proceeds of plaintiff's Citibank Check No. SN-048867 was paid to defendant IBAA as collecting bank, plaintiff was maintaining a checking account with defendant Citibank."5

Although it was not among the stipulated facts, an investigation by the National Bureau of Investigation (NBI) revealed that Citibank Check No. SN-04867 was recalled by Godofredo Rivera, the General Ledger Accountant of Ford. He purportedly needed to hold back the check because there was an error in the computation of the tax due to the Bureau of Internal Revenue (BIR). With Rivera's instruction, PCIBank replaced the check with two of its own Manager's Checks (MCs). Alleged members of a syndicate later deposited the two MCs with the Pacific Banking Corporation.

Ford, with leave of court, filed a third-party complaint before the trial court impleading Pacific Banking Corporation (PBC) and Godofredo Rivera, as third party defendants. But the court dismissed the complaint against PBC for lack of cause of action. The course likewise dismissed the third-party complaint against Godofredo Rivera because he could not be served with summons as the NBI declared him as a "fugitive from justice".

On June 15, 1989, the trial court rendered its decision, as follows:

"Premises considered, judgment is hereby rendered as follows:

"1. Ordering the defendants Citibank and IBAA (now PCI Bank), jointly and severally, to pay the plaintiff the amount of P4,746,114.41 representing the face value of plaintiff's Citibank Check No. SN-04867, with interest thereon at the legal rate

starting January 20, 1983, the date when the original complaint was filed until the amount is fully paid, plus costs;

"2. On defendant Citibank's cross-claim: ordering the cross-defendant IBAA (now PCI Bank) to reimburse defendant Citibank for whatever amount the latter has paid or may pay to the plaintiff in accordance with next preceding paragraph;

"3. The counterclaims asserted by the defendants against the plaintiff, as well as that asserted by the cross-defendant against the cross-claimant are dismissed, for lack of merits; and

"4. With costs against the defendants.

SO ORDERED."6

Not satisfied with the said decision, both defendants, Citibank and PCIBank, elevated their respective petitions for review on certiorari to the Courts of Appeals. On March 27, 1995, the appellate court issued its judgment as follows:

"WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed decision with modifications.

The court hereby renderes judgment:

1. Dismissing the complaint in Civil Case No. 49287 insofar as defendant Citibank N.A. is concerned;

2. Ordering the defendant IBAA now PCI Bank to pay the plaintiff the amount of P4,746,114.41 representing the face value of plaintiff's Citibank Check No. SN-04867, with interest thereon at the legal rate starting January 20, 1983, the date when the original complaint was filed until the amount is fully paid;

3. Dismissing the counterclaims asserted by the defendants against the plaintiff as well as that asserted by the cross-defendant against the cross-claimant, for lack of merits.

Costs against the defendant IBAA (now PCI Bank).

IT IS SO ORDERED."7

PCI Bank moved to reconsider the above-quoted decision of the Court of Appeals, while Ford filed a "Motion for Partial Reconsideration." Both motions were denied for lack of merit.

Separately, PCIBank and Ford filed before this Court, petitions for review by certiorari under Rule 45.

In G.R. No. 121413, PCIBank seeks the reversal of the decision and resolution of the Twelfth Division of the Court of Appeals contending that it merely acted on the instruction of Ford and such casue of action had already prescribed.

PCIBank sets forth the following issues for consideration:

I. Did the respondent court err when, after finding that the petitioner acted on the check drawn by respondent Ford on the said respondent's instructions, it nevertheless found the petitioner liable to the said respondent for the full amount of the said check.

II. Did the respondent court err when it did not find prescription in favor of the petitioner.8

In a counter move, Ford filed its petition docketed as G.R. No. 121479, questioning the same decision and resolution of the Court of Appeals, and praying for the reinstatement in toto of the decision of the trial court which found both PCIBank and Citibank jointly and severally liable for the loss.

In G.R. No. 121479, appellant Ford presents the following propositions for consideration:

I. Respondent Citibank is liable to petitioner Ford considering that:

1. As drawee bank, respondent Citibank owes to petitioner Ford, as the drawer of the subject check and a depositor of respondent Citibank, an absolute and contractual duty to pay the proceeds of the subject check only to the payee thereof, the Commissioner of Internal Revenue.

2. Respondent Citibank failed to observe its duty as banker with respect to the subject check, which was crossed and payable to "Payee's Account Only."

3. Respondent Citibank raises an issue for the first time on appeal; thus the same should not be considered by the Honorable Court.

4. As correctly held by the trial court, there is no evidence of gross negligence on the part of petitioner Ford.9

II. PCI Bank is liable to petitioner Ford considering that:

1. There were no instructions from petitioner Ford to deliver the proceeds of the subject check to a person other than the payee named therein, the Commissioner of the Bureau of Internal Revenue; thus, PCIBank's only obligation is to deliver the proceeds to the Commissioner of the Bureau of Internal Revenue.10

2. PCIBank which affixed its indorsement on the subject check ("All prior indorsement and/or lack of indorsement guaranteed"), is liable as collecting bank.11

3. PCIBank is barred from raising issues of fact in the instant proceedings.12

4. Petitioner Ford's cause of action had not prescribed.13

II. G.R. No. 128604

The same sysndicate apparently embezzled the proceeds of checks intended, this time, to settle Ford's percentage taxes appertaining to the second quarter of 1978 and the first quarter of 1979.

The facts as narrated by the Court of Appeals are as follows:

Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of P5,851,706.37 representing the percentage tax due for the second quarter of 1978 payable to the Commissioner of Internal Revenue. A BIR Revenue Tax Receipt No. 28645385 was issued for the said purpose.

On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the amount of P6,311,591.73, representing the payment of percentage tax for the first quarter of 1979 and payable to the Commissioner of Internal Revenue. Again a BIR Revenue Tax Receipt No. A-1697160 was issued for the said purpose.

Both checks were "crossed checks" and contain two diagonal lines on its upper corner between, which were written the words "payable to the payee's account only."

The checks never reached the payee, CIR. Thus, in a letter dated February 28, 1980, the BIR, Region 4-B, demanded for the said tax payments the corresponding periods above-mentioned.

As far as the BIR is concernced, the said two BIR Revenue Tax Receipts were considered "fake and spurious". This anomaly was confirmed by the NBI upon the initiative of the BIR. The findings forced Ford to pay the BIR a new, while an action was filed against Citibank and PCIBank for the recovery of the amount of Citibank Check Numbers SN-10597 and 16508.

The Regional Trial Court of Makati, Branch 57, which tried the case, made its findings on the modus operandi of the syndicate, as follows:

"A certain Mr. Godofredo Rivera was employed by the plaintiff FORD as its General Ledger Accountant. As such, he prepared the plaintiff's check marked Ex. 'A' [Citibank Check No. Sn-10597] for payment to the BIR. Instead, however, fo delivering the same of the payee, he passed on the check to a co-conspirator named Remberto Castro who was a pro-manager of the San Andres Branch of PCIB.* In connivance with one Winston Dulay, Castro himself subsequently opened a Checking Account in the name of a fictitious person denominated as 'Reynaldo reyes' in the Meralco Branch of PCIBank where Dulay works as Assistant Manager.

After an initial deposit of P100.00 to validate the account, Castro deposited a worthless Bank of America Check in exactly the same amount as the first FORD check (Exh. "A", P5,851,706.37) while this worthless check was coursed through PCIB's main office enroute to the Central Bank for clearing, replaced this worthless check with FORD's Exhibit 'A' and accordingly tampered the accompanying documents to cover the replacement. As a result, Exhibit 'A' was cleared by defendant CITIBANK, and the fictitious deposit account of 'Reynaldo Reyes' was credited at the PCIB Meralco Branch with the total amount of the FORD check Exhibit 'A'. The same method was again utilized by the syndicate in profiting from Exh. 'B' [Citibank Check No. SN-16508] which was subsequently pilfered by Alexis Marindo, Rivera's Assistant at FORD.

From this 'Reynaldo Reyes' account, Castro drew various checks distributing the sahres of the other participating conspirators namely (1) CRISANTO BERNABE, the mastermind who formulated the method for the embezzlement; (2) RODOLFO R. DE LEON a customs broker who negotiated the initial contact between Bernabe, FORD's Godofredo Rivera and PCIB's Remberto Castro; (3) JUAN VASTILLO who assisted de Leon in the initial arrangements; (4) GODOFREDO RIVERA, FORD's accountant who passed on the first check (Exhibit "A") to Castro; (5) REMERTO CASTRO, PCIB's pro-manager at San Andres who performed the switching of checks in the clearing process and opened the fictitious Reynaldo Reyes account at the PCIB Meralco Branch; (6) WINSTON DULAY, PCIB's Assistant Manager at its

Meralco Branch, who assisted Castro in switching the checks in the clearing process and facilitated the opening of the fictitious Reynaldo Reyes' bank account; (7) ALEXIS MARINDO, Rivera's Assistant at FORD, who gave the second check (Exh. "B") to Castro; (8) ELEUTERIO JIMENEZ, BIR Collection Agent who provided the fake and spurious revenue tax receipts to make it appear that the BIR had received FORD's tax payments.

Several other persons and entities were utilized by the syndicate as conduits in the disbursements of the proceeds of the two checks, but like the aforementioned participants in the conspiracy, have not been impleaded in the present case. The manner by which the said funds were distributed among them are traceable from the record of checks drawn against the original "Reynaldo Reyes" account and indubitably identify the parties who illegally benefited therefrom and readily indicate in what amounts they did so."14

On December 9, 1988, Regional Trial Court of Makati, Branch 57, held drawee-bank, Citibank, liable for the value of the two checks while adsolving PCIBank from any liability, disposing as follows:

"WHEREFORE, judgment is hereby rendered sentencing defendant CITIBANK to reimburse plaintiff FORD the total amount of P12,163,298.10 prayed for in its complaint, with 6% interest thereon from date of first written demand until full payment, plus P300,000.00 attorney's fees and expenses litigation, and to pay the defendant, PCIB (on its counterclaim to crossclaim) the sum of P300,000.00 as attorney's fees and costs of litigation, and pay the costs.

SO ORDERED."15

Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the decision of the trial court. Hence, this petition.

Petitioner Ford prays that judgment be rendered setting aside the portion of the Court of Appeals decision and its resolution dated March 5, 1997, with respect to the dismissal of the complaint against PCIBank and holding Citibank solely responsible for the proceeds of Citibank Check Numbers SN-10597 and 16508 for P5,851,706.73 and P6,311,591.73 respectively.

Ford avers that the Court of Appeals erred in dismissing the complaint against defendant PCIBank considering that:

I. Defendant PCIBank was clearly negligent when it failed to exercise the diligence required to be exercised by it as a banking insitution.

II. Defendant PCIBank clearly failed to observe the diligence required in the selection and supervision of its officers and employees.

III. Defendant PCIBank was, due to its negligence, clearly liable for the loss or damage resulting to the plaintiff Ford as a consequence of the substitution of the check consistent with Section 5 of Central Bank Circular No. 580 series of 1977.

IV. Assuming arguedo that defedant PCIBank did not accept, endorse or negotiate in due course the subject checks, it is liable, under Article 2154 of the Civil Code, to return the money which it admits having received, and which was credited to it its Central bank account.16

The main issue presented for our consideration by these petitions could be simplified as follows: Has petitioner Ford the right to recover from the collecting bank (PCIBank) and the drawee bank (Citibank) the value of the checks intended as payment to the Commissioner of Internal Revenue? Or has Ford's cause of action already prescribed?

Note that in these cases, the checks were drawn against the drawee bank, but the title of the person negotiating the same was allegedly defective because the instrument was obtained by fraud and unlawful means, and the proceeds of the checks were not remitted to the payee. It was established that instead of paying the checks to the CIR, for the settlement of the approprite quarterly percentage taxes of Ford, the checks were diverted and encashed for the eventual distribution among the mmbers of the syndicate. As to the unlawful negotiation of the check the applicable law is Section 55 of the Negotiable Instruments Law (NIL), which provides:

"When title defective -- The title of a person who negotiates an instrument is defective within the meaning of this Act when he obtained the instrument, or any signature thereto, by fraud, duress, or fore and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith or under such circumstances as amount to a fraud."

Pursuant to this provision, it is vital to show that the negotiation is made by the perpetator in breach of faith amounting to fraud. The person negotiating the checks must have gone beyond the authority given by his principal. If the principal could prove that there was no negligence in the performance of his duties, he may set up the personal defense to escape liability and recover from other parties who. Though their own negligence, alowed the commission of the crime.

In this case, we note that the direct perpetrators of the offense, namely the embezzlers belonging to a syndicate, are now fugitives from justice. They have, even if temporarily, escaped liability for the embezzlement of millions of pesos. We are thus left only with the task of determining who of the present parties before us must bear the burden of loss of these millions. It all boils down to thequestion of liability based on the degree of negligence among the parties concerned.

Foremost, we must resolve whether the injured party, Ford, is guilty of the "imputed contributory negligence" that would defeat its claim for reimbursement, bearing ing mind that its employees, Godofredo Rivera and Alexis Marindo, were among the members of the syndicate.

Citibank points out that Ford allowed its very own employee, Godofredo Rivera, to negotiate the checks to his co-conspirators, instead of delivering them to the designated authorized collecting bank (Metrobank-Alabang) of the payee, CIR. Citibank bewails the fact that Ford was remiss in the supervision and control of its own employees, inasmuch as it only discovered the syndicate's activities through the information given by the payee of the checks after an unreasonable period of time.

PCIBank also blames Ford of negligence when it allegedly authorized Godofredo Rivera to divert the proceeds of Citibank Check No. SN-04867, instead of using it to pay the BIR. As to the subsequent run-around of unds of Citibank Check Nos. SN-10597 and 16508, PCIBank claims that the proximate cause of the damge to Ford lies in its own officers and employees who carried out the fradulent schemes and the transactions. These circumstances were not checked by other officers of the company including its comptroller or internal auditor. PCIBank contends that the inaction of Ford despite the enormity of the amount involved was a sheer negligence and stated that, as between two innocent persons, one of whom must suffer the consequences of a breach of trust, the one who made it possible, by his act of negligence, must bear the loss.

For its part, Ford denies any negligence in the performance of its duties. It avers that there was no evidence presented before the trial court showing lack of diligence on the part of Ford. And, citing the case of Gempesaw vs. Court of Appeals,17 Ford argues that even if there was a finding therein that the drawer was negligent, the drawee bank was still ordered to pay damages.

Furthermore, Ford contends the Godofredo rivera was not authorized to make any representation in its behalf, specifically, to divert the proceeds of the checks. It adds that Citibank raised the issue of imputed negligence against Ford for the first time on appeal. Thus, it should not be considered by this Court.

On this point, jurisprudence regarding the imputed negligence of employer in a master-servant relationship is instructive. Since a master may be held for his servant's wrongful act, the law imputes to the master the act of the servant, and if that act is negligent or wrongful and proximately results in injury to a third person, the negligence or wrongful conduct is the negligence or wrongful conduct of the master, for which he is liable.18 The general rule is that if the master is injured by the negligence of a third person and by the concuring contributory negligence of his own servant or agent, the latter's negligence is imputed to his superior and will defeat the superior's action against the third person, asuming, of course that the contributory negligence was the proximate cause of the injury of which complaint is made.19

Accordingly, we need to determine whether or not the action of Godofredo Rivera, Ford's General Ledger Accountant, and/or Alexis Marindo, his assistant, was the proximate cause of the loss or damage. AS defined, proximate cause is that which, in the natural and continuous sequence, unbroken by any efficient, intervening cause produces the injury and without the result would not have occurred.20

It appears that although the employees of Ford initiated the transactions attributable to an organized syndicate, in our view, their actions were not the proximate cause of encashing the checks payable to the CIR. The degree of Ford's negligence, if any, could not be characterized as the proximate cause of the injury to the parties.

The Board of Directors of Ford, we note, did not confirm the request of Godofredo Rivera to recall Citibank Check No. SN-04867. Rivera's instruction to replace the said check with PCIBank's Manager's Check was not in theordinary course of business which could have prompted PCIBank to validate the same.

As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was established that these checks were made payable to the CIR. Both were crossed checks. These checks were apparently turned around by Ford's emploees, who were acting on their own personal capacity.

Given these circumstances, the mere fact that the forgery was committed by a drawer-payor's confidential employee or agent, who by virtue of his position had unusual facilities for perpertrating the fraud and imposing the forged paper upon the bank, does notentitle the bank toshift the loss to the drawer-payor, in the absence of some circumstance raising estoppel against the drawer.21 This rule likewise applies to the checks fraudulently negotiated or diverted by the confidential employees who hold them in their possession.

With respect to the negligence of PCIBank in the payment of the three checks involved, separately, the trial courts found variations between the negotiation of Citibank Check No. SN-04867 and the misapplication of total proceeds of Checks SN-10597 and 16508. Therefore, we have to scrutinize, separately, PCIBank's share of negligence when the syndicate achieved its ultimate agenda of stealing the proceeds of these checks.

G.R. Nos. 121413 and 121479

Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita Branch. It was coursed through the ordinary banking transaction, sent to Central Clearing with the indorsement at the back "all prior indorsements and/or lack of indorsements guaranteed," and was presented to Citibank for payment. Thereafter PCIBank, instead of remitting the proceeds to the CIR, prepared two of its Manager's checks and enabled the syndicate to encash the same.

On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate the checks. The neglect of PCIBank employees to verify whether his letter requesting for the replacement of the Citibank Check No. SN-04867 was duly authorized, showed lack of care and prudence required in the circumstances.

Furthermore, it was admitted that PCIBank is authorized to collect the payment of taxpayers in behalf of the BIR. As an agent of BIR, PCIBank is duty bound to consult its principal regarding the unwarranted instructions given by the payor or its agent. As aptly stated by the trial court, to wit:

"xxx. Since the questioned crossed check was deposited with IBAA [now PCIBank], which claimed to be a depository/collecting bank of BIR, it has the responsibility to make sure that the check in question is deposited in Payee's account only.

xxx      xxx      xxx

As agent of the BIR (the payee of the check), defendant IBAA should receive instructions only from its principal BIR and not from any other person especially so when that person is not known to the defendant. It is very imprudent on the part of the defendant IBAA to just rely on the alleged telephone call of the one Godofredo Rivera and in his signature considering that the plaintiff is not a client of the defendant IBAA."

It is a well-settled rule that the relationship between the payee or holder of commercial paper and the bank to which it is sent for collection is, in the absence of an argreement to the contrary, that of principal and agent.22 A bank which receives such paper for collection is the agent of the payee or holder.23

Even considering arguendo, that the diversion of the amount of a check payable to the collecting bank in behalf of the designated payee may be allowed, still such diversion must be properly authorized by the payor. Otherwise stated, the diversion can be justified only by proof of authority from the drawer, or that the drawer has clothed his agent with apparent authority to receive the proceeds of such check.

Citibank further argues that PCI Bank's clearing stamp appearing at the back of the questioned checks stating that ALL PRIOR INDORSEMENTS AND/OR LACK OF INDORSEMENTS GURANTEED should render PCIBank liable because it made it pass through the clearing house and therefore Citibank had no other option but to pay it. Thus, Citibank had no other option but to pay it. Thus, Citibank assets that the proximate cause of Ford's injury is the gross negligence of PCIBank. Since the questione dcrossed check was deposited with PCIBank, which claimed to be a depository/collecting bank of the BIR, it had the responsibility to make sure that the check in questions is deposited in Payee's account only.

Indeed, the crossing of the check with the phrase "Payee's Account Only," is a warning that the check should be deposited only in the account of the CIR. Thus, it is the duty of the collecting bank

PCIBank to ascertain that the check be deposited in payee's account only. Therefore, it is the collecting bank (PCIBank) which is bound to scruninize the check and to know its depositors before it could make the clearing indorsement "all prior indorsements and/or lack of indorsement guaranteed".

In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation,24 we ruled:

"Anent petitioner's liability on said instruments, this court is in full accord with the ruling of the PCHC's Board of Directors that:

'In presenting the checks for clearing and for payment, the defendant made an express guarantee on the validity of "all prior endorsements." Thus, stamped at the back of the checks are the defedant's clear warranty: ALL PRIOR ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff would not have paid on the checks.'

No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the warranty has proven to be false and inaccurate, the defendant is liable for any damage arising out of the falsity of its representation."25

Lastly, banking business requires that the one who first cashes and negotiates the check must take some percautions to learn whether or not it is genuine. And if the one cashing the check through indifference or othe circumstance assists the forger in committing the fraud, he should not be permitted to retain the proceeds of the check from the drawee whose sole fault was that it did not discover the forgery or the defect in the title of the person negotiating the instrument before paying the check. For this reason, a bank which cashes a check drawn upon another bank, without requiring proof as to the identity of persons presenting it, or making inquiries with regard to them, cannot hold the proceeds against the drawee when the proceeds of the checks were afterwards diverted to the hands of a third party. In such cases the drawee bank has a right to believe that the cashing bank (or the collecting bank) had, by the usual proper investigation, satisfied itself of the authenticity of the negotiation of the checks. Thus, one who encashed a check which had been forged or diverted and in turn received payment thereon from the drawee, is guilty of negligence which proximately contributed to the success of the fraud practiced on the drawee bank. The latter may recover from the holder the money paid on the check.26

Having established that the collecting bank's negligence is the proximate cause of the loss, we conclude that PCIBank is liable in the amount corresponding to the proceeds of Citibank Check No. SN-04867.

G.R. No. 128604

The trial court and the Court of Appeals found that PCIBank had no official act in the ordinary course of business that would attribute to it the case of the embezzlement of Citibank Check Numbers SN-10597 and 16508, because PCIBank did not actually receive nor hold the two Ford checks at all. The trial court held, thus:

"Neither is there any proof that defendant PCIBank contributed any official or conscious participation in the process of the embezzlement. This Court is convinced that the switching operation (involving the checks while in transit for "clearing") were the clandestine or hidden actuations performed by the members of the syndicate in their own personl, covert and private capacity and done without the knowledge of the defendant PCIBank…"27

In this case, there was no evidence presented confirming the conscious particiapation of PCIBank in the embezzlement. As a general rule, however, a banking corporation is liable for the wrongful or tortuous acts and declarations of its officers or agents within the course and scope of their employment.28 A bank will be held liable for the negligence of its officers or agents when acting within the course and scope of their employment. It may be liable for the tortuous acts of its officers even as regards that species of tort of which malice is an essential element. In this case, we find a situation where the PCIBank appears also to be the victim of the scheme hatched by a syndicate in which its own management employees had particiapted.

The pro-manager of San Andres Branch of PCIBank, Remberto Castro, received Citibank Check Numbers SN-10597 and 16508. He passed the checks to a co-conspirator, an Assistant Manager of PCIBank's Meralco Branch, who helped Castro open a Checking account of a fictitious person named "Reynaldo Reyes." Castro deposited a worthless Bank of America Check in exactly the same amount of Ford checks. The syndicate tampered with the checks and succeeded in replacing the worthless checks and the eventual encashment of Citibank Check Nos. SN 10597 and 16508. The PCIBank Ptro-manager, Castro, and his co-conspirator Assistant Manager apparently performed their activities using facilities in their official capacity or authority but for their personal and private gain or benefit.

A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the frauds these officers or agents were enabled to perpetrate in the apparent course of their employment; nor will t be permitted to shirk its responsibility for such frauds, even though no benefit may accrue to the bank therefrom. For the general rule is that a bank is liable for the fraudulent acts or representations of an officer or agent acting within the course and apparent scope of his employment or authority.29 And if an officer or employee of a bank, in his official capacity, receives money to satisfy an evidence of indebetedness lodged with his bank for collection, the bank is liable for his misappropriation of such sum.30

Moreover, as correctly pointed out by Ford, Section 531 of Central Bank Circular No. 580, Series of 1977 provides that any theft affecting items in transit for clearing, shall be for the account of sending bank, which in this case is PCIBank.

But in this case, responsibility for negligence does not lie on PCIBank's shoulders alone.

The evidence on record shows that Citibank as drawee bank was likewise negligent in the performance of its duties. Citibank failed to establish that its payment of Ford's checjs were made in due course and legally in order. In its defense, Citibank claims the genuineness and due execution of said checks, considering that Citibank (1) has no knowledge of any informity in the issuance of the checks in question (2) coupled by the fact that said checks were sufficiently funded and (3) the endorsement of the Payee or lack thereof was guaranteed by PCI Bank (formerly IBAA), thus, it has the obligation to honor and pay the same.

For its part, Ford contends that Citibank as the drawee bank owes to Ford an absolute and contractual duty to pay the proceeds of the subject check only to the payee thereof, the CIR. Citing Section 6232 of the Negotiable Instruments Law, Ford argues that by accepting the instrument, the acceptro which is Citibank engages that it will pay according to the tenor of its acceptance, and that it will pay only to the payee, (the CIR), considering the fact that here the check was crossed with annotation "Payees Account Only."

As ruled by the Court of Appeals, Citibank must likewise answer for the damages incurred by Ford on Citibank Checks Numbers SN 10597 and 16508, because of the contractual relationship existing between the two. Citibank, as the drawee bank breached its contractual obligation with Ford and

such degree of culpability contributed to the damage caused to the latter. On this score, we agree with the respondent court's ruling.

Citibank should have scrutinized Citibank Check Numbers SN 10597 and 16508 before paying the amount of the proceeds thereof to the collecting bank of the BIR. One thing is clear from the record: the clearing stamps at the back of Citibank Check Nos. SN 10597 and 16508 do not bear any initials. Citibank failed to notice and verify the absence of the clearing stamps. Had this been duly examined, the switching of the worthless checks to Citibank Check Nos. 10597 and 16508 would have been discovered in time. For this reason, Citibank had indeed failed to perform what was incumbent upon it, which is to ensure that the amount of the checks should be paid only to its designated payee. The fact that the drawee bank did not discover the irregularity seasonably, in our view, consitutes negligence in carrying out the bank's duty to its depositors. The point is that as a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.33

Thus, invoking the doctrine of comparative negligence, we are of the view that both PCIBank and Citibank failed in their respective obligations and both were negligent in the selection and supervision of their employees resulting in the encashment of Citibank Check Nos. SN 10597 AND 16508. Thus, we are constrained to hold them equally liable for the loss of the proceeds of said checks issued by Ford in favor of the CIR.

Time and again, we have stressed that banking business is so impressed with public interest where the trust and confidence of the public in general is of paramount umportance such that the appropriate standard of diligence must be very high, if not the highest, degree of diligence.34 A bank's liability as obligor is not merely vicarious but primary, wherein the defense of exercise of due diligence in the selection and supervision of its employees is of no moment.35

Banks handle daily transactions involving millions of pesos.36 By the very nature of their work the degree of responsibility, care and trustworthiness expected of their employees and officials is far greater than those of ordinary clerks and employees.37 Banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees.38

On the issue of prescription, PCIBank claims that the action of Ford had prescribed because of its inability to seek judicial relief seasonably, considering that the alleged negligent act took place prior to December 19, 1977 but the relief was sought only in 1983, or seven years thereafter.

The statute of limitations begins to run when the bank gives the depositor notice of the payment, which is ordinarily when the check is returned to the alleged drawer as a voucher with a statement of his account,39 and an action upon a check is ordinarily governed by the statutory period applicable to instruments in writing.40

Our laws on the matter provide that the action upon a written contract must be brought within ten year from the time the right of action accrues.41 hence, the reckoning time for the prescriptive period begins when the instrument was issued and the corresponding check was returned by the bank to its depositor (normally a month thereafter). Applying the same rule, the cause of action for the recovery of the proceeds of Citibank Check No. SN 04867 would normally be a month after December 19, 1977, when Citibank paid the face value of the check in the amount of P4,746,114.41. Since the original complaint for the cause of action was filed on January 20, 1984, barely six years had lapsed. Thus, we conclude that Ford's cause of action to recover the amount of Citibank Check No. SN 04867 was seasonably filed within the period provided by law.

Finally, we also find thet Ford is not completely blameless in its failure to detect the fraud. Failure on the part of the depositor to examine its passbook, statements of account, and cancelled checks and to give notice within a reasonable time (or as required by statute) of any discrepancy which it may in the exercise of due care and diligence find therein, serves to mitigate the banks' liability by reducing the award of interest from twelve percent (12%) to six percent (6%) per annum. As provided in Article 1172 of the Civil Code of the Philippines, respondibility arising from negligence in the performance of every kind of obligation is also demandable, but such liability may be regulated by the courts, according to the circumstances. In quasi-delicts, the contributory negligence of the plaintiff shall reduce the damages that he may recover.42

WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 25017 areAFFIRMED. PCIBank, know formerly as Insular Bank of Asia and America, id declared solely responsible for the loss of the proceeds of Citibank Check No SN 04867 in the amount P4,746,114.41, which shall be paid together with six percent (6%) interest thereon to Ford Philippines Inc. from the date when the original complaint was filed until said amount is fully paid.

However, the Decision and Resolution of the Court of Appeals in CA-G.R. No. 28430 are MODIFIED as follows: PCIBank and Citibank are adjudged liable for and must share the loss, (concerning the proceeds of Citibank Check Numbers SN 10597 and 16508 totalling P12,163,298.10) on a fifty-fifty ratio, and each bank is ORDEREDto pay Ford Philippines Inc. P6,081,649.05, with six percent (6%) interest thereon, from the date the complaint was filed until full payment of said amount.1âwphi1.nêt

Costs against Philippine Commercial International Bank and Citibank N.A.

SO ORDERED.

Bellosillo, Mendoza, Buena, De Leon, Jr., JJ, concur.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-8527             March 30, 1914

WEST COAST LIFE INSURANCE CO., plaintiff, vs.GEO N. HURD, Judge of Court of First Instance, defendant.

Southworth, Hargis & Springer for plaintiff.Haussermann, Cohn & Fisher for defendant.

MORELAND, J.:

This is an action for the issuance of a writ of prohibition against the defendant "commanding the defendant to desist or refrain from further proceedings in a criminal action pending in that court."

The petitioner is a foreign life-insurance corporation, duly organized under and by virtue of the laws of the State of California, doing business regularly and legally in the Philippine Islands pursuant to its laws.

On the 16th of December, 1912, the assistant prosecuting attorney of the city of Manila filed an information in a criminal action in the Court of First Instance of that city against the plaintiff, said corporation, and also against John Northcott and Manuel C. Grey, charging said corporation and said individuals with the crime of libel. On the 17th day of December the defendant in his official capacity as judge of the court of First Instance signed and issued a process directed to the plaintiff and the other accused in said criminal action, which said process reads as follows:

UNITED STATES OF AMERICA,

PHILIPPINE ISLANDS.

In the Court of First Instance of the Judicial District of Manila.

THE UNITED STATES No. 9661versus Libel.

WEST COAST LIFE INSURANCE CO., JOHN NORTHCOTT, AND MANUEL C. GREY.

To West Coast Life Insurance Co., John Northcott, and Manuel C. Grey, Manila.

SUMMONS.

You are hereby summoned to appear before the Court of First Instance of the city of Manila P.I., on the 18th day of December, 1912, at the hour of 8 a.m., to answer the charge made against you upon the information of F. H. Nesmith, assistant prosecuting attorney of the city of Manila, for libel, as set forth in the said information filed in this copurt on December 16, 1912, a copy of which is hereto attached and herewith served upon you.

Dated at the city of Manila, P. I., this 17th day of December, 1912.

(Sgd.) GEO N. HURD,Judge, Court of First Instance.

The information upon which said process was issued is as follows:

The undersigned accuses the West Coast Life Insurance Company, John Northcott, and Manuel C. Grey of the crime of libel, committed as follows:

That on or about the 14th day of September, 1912, and continuously thereafter up to and including the date of this complaint, in the city of Manila, P. I., the said defendant West Coast Life Insurance Company was and has been a foreign corporation duly organized in the State of California, United States of America, and registered and doing business in the Philippine Islands; that the said defendant John Nortcott then and there was and has been the general agent and manager for the Philippine Islands of the said defendant corporation West Coast Life Insurance Company, and the said defendant Manuel C. Grey was and has been an agent and employee of the said defendant corporation West Coast Life Insurance Company,

acting in the capacity of treasurer of the branch of the said defendant corporation in the Philippine Islands; that on or about the said 14th day of September, 1912, and for some time thereafter, to wit, during the months of September and October, 1912, in the city of Manila, P.I., the said defendants West Coast Life Insurance Company, John Northcott, and Manuel C. Grey, conspiring and confederating together, did then and there willfully, unlawfully, and maliciously, and to the damage of the Insular Life Insurance Company, a domestic corporation duly organized, registered, and doing business in the Philippine Islands, and with intent o cause such damage and to expose the said Insular Life Insurance Company to public hatred, contempt, and ridicule, compose and print, and cause to be printed a large number of circulars, and, in numerous printings in the form of said circulars, did publish and distribute, and cause to be published and distributed, among other persons, to policy holders and prospective policy holders of the said Insular Life Insurance Company, among other things, a malicious defamation and libel in the Spanish language, of the words and tenor following:

"First. For some time past various rumors are current to the effect that the Insular Life Insurance Company is not in as good a condition as i should be at the present time, and that really it is in bad shape. Nevertheless, the investigations made by the representative of the "Bulletin" have failed fully to confirm these rumors. It is known that the Insular Auditor has examined the books of the company and has found that its capital has diminished, and that by direction of said official the company has decided to double the amount of its capital, and also to pay its reserve fund. All this is true."

That the said circulars, and the matters therein contained hereinbefore set forth in this information, tend to impeach and have impeached the honesty, virtue, and reputation of the said Insular Life Insurance Company by exposing it to public hatred, contempt, and ridicule; that by the matters printed in said circulars, and hereinbefore set forth in this information, the said defendants West Coast Life Insurance Company, John Northcott, and Manuel C. Grey meant and intended to state and represent to those to whom the said defendants delivered said circulars as aforesaid, that the said Insular Life Insurance Company was then and there in a dangerous financial condition and on the point of going into insolvency, to the detriment of the policy holders of the said Insular Life Insurance Company, and of those with whom the said Insular Life Insurance Company have and have had business transactions, and each and all of said persons to whom the said defendants delivered said circulars, and all persons as well who read said circulars understood the said matters in said circulars to have said libelous sense and meaning. Contrary to law.

On the 20th day of December, 1912, the plaintiff, together with the other persons named as accused in said process through their attorneys, served upon the prosecuting attorney and filed with the clerk of the court a motion to quash said summons and the service thereof, on the ground that the court had no jurisdiction over the said company, there being no authority in the court for the issuance of the process, Exhibit B, the order under which it was issued being void. The court denied the motion and directed plaintiff to appear before it on the 28th day of December, 1912, and to plead to the information, to which order the plaintiff then and there duly excepted.

It is alleged in the complaint that "unless restrained by this Court the respondent will proceed to carry out said void order and compel your petitioner to appear before his court and plead and submit to criminal prosecution without having acquired any jurisdiction whatever over your petitioner."

The prayer of the complaint is, "your petitioner prays judgment for the issuance of a writ of prohibition against the respondent, commanding the respondent absolutely to desist or refrain from further proceedings against your petitioner in the said criminal action."

The basis of the action is that the Court of First Instance has no power or authority, under the laws of the Philippine Islands, to proceed against a corporation, as such, criminally, to bring it into court for the purpose of making it amenable to the criminal laws. It is contended that the court had no jurisdiction to issue the process in evidence against the plaintiff corporation; that the issuance and service thereof upon the plaintiff corporation were outside of the authority and jurisdiction of the court, were authorized by no law, conferred no jurisdiction over said corporation, and that they were absolutely void and without force or effect.

The plaintiff, further attacking said process, alleges that the process is a mixture of civil and criminal process, that it is not properly signed, that it does not direct or require an arrest; that it s an order to appear and answer on a date certain without restraint of the person, and that it is not in the form required by law.

Section 5 of General Orders, No. 58, defines an information as "accusation in writing charging a period with a public offense." Section 6 provide that a complaint or information is sufficient it if shows "the name of the defendant, or if his name cannot be discovered, that he is described under a fictitious name with a statement that his true name is unknown to the informant or official signing the same. His true name may be inserted at any stage of the proceedings instituted against him, whenever ascertained." These provisions, as well as those which relate to arraignment and counsel, and to demurrers and pleas, indicate clearly that the maker of the Code of Criminal Procedure had no intention or expectation that corporations would be included among those who would fall within the provisions thereof. The only process known to the Code of Criminal Procedure, or which any court is by that order authorized to issue, is an order of arrest. The Code of Criminal Procedure provides that "if the magistrate be satisfied from the investigation that the crime complained of has been committed, and there is reasonable ground to believe that the party charged has committed it, he must issue an order for his arrest. If the offense be bailable, and the defendant offer a sufficient security, he shall be admitted to bail; otherwise he shall be committed to prison." There is no authority for the issuance of any other process than an order of arrest. As a necessary consequence, the process issued in the case before us is without express authorization of statute.

The question remains as to whether or not he court may, of itself and on its own motion, create not only a process but a procedure by which the process may be made effective.

We do not believe that the authority of the courts of the Philippine Islands extends so far. While having the inherent powers which usually go with courts of general jurisdiction, we are of the opinion that, under the circumstances of their creation, they have only such authority in criminal matters as is expressly conferred upon them by statute or which it is necessary to imply from such authority in order to carry out fully and adequately the express authority conferred. We do not feel that Courts of First Instance have authority to create new procedure and new processes in criminal law. The exercise of such power verges too closely on legislation. Even though it be admitted, a question we do not now decide, that there are various penal laws in the Philippine Islands which corporation as such may violate, still we do not believe that the courts are authorized to go to the extent of creating special procedure and special processes for the purpose of carrying out those penal statutes, when the legislature itself has neglected to do so. To bring a corporation into court criminally requires many additions to the present criminal procedure. While it may be said to be the duty of courts to see to it that criminals are punished, it is no less their duty to follow prescribed forms of procedure and to go out upon unauthorized ways or act in an unauthorized manner.

There are many cases cited by counsel for the defendant which show that corporations have been proceeded against criminally by indictment and otherwise and have been punished as malefactors by the courts. Of this, of course, there can be no doubt; but it is clear that, in those cases, the statute, by express words or by necessary intendment, included corporations within the persons who could offend against the criminal laws; and the legislature, at the same time established a procedure applicable to corporations. No case has been cited to us where a corporation has been proceeded against under a criminal statute where the court did not exercise its common law powers or where there was not in force a special procedure applicable to corporations.

The courts of the Philippine Islands are creatures of statute and, as we have said, have only those powers conferred upon them by statute and those which are required to exercise that authority fully and adequately. The courts here have no common law jurisdiction or powers. If they have any powers not conferred by statute, expressly or impliedly, they would naturally come from Spanish and not from common law sources. It is undoubted that, under the Spanish criminal law and procedure, a corporation could not have been proceeded against criminally, as such, if such an entity as a corporation in fact existed under the Spanish law, and as such it could not have committed a crime in which a willful purpose or a malicious intent was required. Criminal actions would have been restricted or limited, under that system, to the officials of such corporations and never would have been directed against the corporation itself. This was the rule with relation to associations or combinations of persons approaching, more or less, the corporation as it is now understood, and it would undoubtedly have been the rue with corporations. From this source, then, the courts derive no authority to bring corporations before them in criminal actions, nor to issue processes for that purpose.

The case was submitted to this Court on an agreed statement of facts with a stipulation for a decision upon the merits. We are of the opinion that the plaintiff is entitled, under that stipulation, to the remedy prayed for.

It is adjudged that the Court of First Instance of the city of Manila be and it is hereby enjoined and prohibited from proceeding further in the criminal cause which is before us in this proceeding, entitled United States vs. West Coast Life Insurance Company, a corporation, John Northcott and Manuel C. Grey, so far as said proceedings relate to the said West Coast Life Insurance Company, a corporation, the plaintiff in the case.

Arellano, C.J. and Araullo, J., concur.Carson, J., concurs in the result.

THIRD DIVISION

[G.R. No. 121171.  December 29, 1998]

ASSET PRIVATIZATION TRUST, petitioner, vs., COURT OF APPEALS, JESUS S. CABARRUS, SR., JESUS S. CABARRUS, JR., JAIME T. CABARRUS, JOSE MIGUEL CABARRUS, ALEJANDRO S. PASTOR, JR., ANTONIO U. MIRANDA, and MIGUEL M.

ANTONIO, as Minority Stock Holders of Marinduque Mining and Industrial Corporation, respondents.

D E C I S I O N

KAPUNAN, J.:

The petition for review on certiorari before us seeks us to reverse and set aside the decision of the Court of Appeals which denied due course to the petition for certiorari filed by the Asset Privatization Trust (APT) assailing the order of the Regional Trial Court (RTC) Branch 62, Makati City.  The Makati RTC’s order upheld and confirmed the award made by the Arbitration Committee in favor of Marinduque Mining and Industrial Corporation (MMIC) and against the Government, represented by herein petitioner APT for damages in the amount of P2.5 BILLION (or approximately P4.5 BILLION, including interest).

Ironically, the staggering amount of damages was imposed on the Government for exercising its legitimate right of foreclosure as creditor against the debtor MMIC as a consequence of the latter’s failure to pay its overdue and unpaid obligation of P22 billion to the Philippine National Bank (PNB) and the Development Bank of the Philippines (DBP).

The antecedent facts of the case

The development, exploration and utilization of the mineral deposits in the Surigao Mineral Reservation have been authorized by Republic Act No. 1828, as amended by Republic Acts No. 2077 and 4167, by virtue of which laws, a Memorandum of Agreement was drawn on July 3, 1968, whereby the Republic of the Philippines thru the Surigao Mineral Reservation Board, granted MMIC the exclusive right to explore, develop and exploit nickel, cobalt and other minerals in the Surigao mineral reservation.[1] MMIC is a domestic corporation engaged in mining with respondents Jesus S. Cabarrus, Sr. as President and among its original stockholders.

The Philippine Government undertook to support the financing of MMIC by purchase of MMIC debenture and extension of guarantees.  Further, the Philippine Government obtained a firm, commitment from the DBP and/or other government financing institutions to subscribed in MMIC and issue guarantee/s for foreign loans or deferred payment arrangements secured from the US Eximbank, Asian Development Bank, Kobe Steel, of amount not exceeding US$100 Million.[2]

DBP approved guarantees in favor of MMIC and subsequent requests for guarantees were based on the unutilized portion of the Government commitment.  Thereafter, the Government extended accommodations to MMIC in various amounts.

On July 13, 1981, MMIC, PNB and DBP executed a Mortgage Trust Agreement [3] whereby MMIC, as mortgagor, agreed to constitute a mortgage in favor of PNB and DBP as mortgagees, over all MMIC’s assets, subject of real estate and chattel mortgage executed by the mortgagor, and additional assets described and identified, including assets of whatever kind, nature or description, which the mortgagor may acquire whether in substitution of, in replenishment, or in addition thereto.

Article IV of the Mortgage Trust Agreement provides for Events of Default, which expressly includes the event that the MORTGAGOR shall fail to pay any amount secured by this Mortgage Trust Agreement when due.[4]

Article V of the Mortgage Trust Agreement prescribes in detail, and in addition to the enumerated events of defaults, circumstances by which the mortgagor may be declared in default, the procedure therefor, waiver of period to foreclose, authority of Trustee before, during and after foreclosure, including taking possession of the mortgaged properties.[5]

In various request for advances/remittances of loans of huge amounts, Deeds of Undertakings, Promissory Notes, Loans Documents, Deeds of Real Estate Mortgages, MMIC invariably committed to pay either on demand or under certain terms the loans and accommodations secured from or guaranteed by both DBP and PNB.

By 1984, DBP and PNB’s financial exposure both in loans and in equity in MMIC had reached tremendous proportions, and MMIC was having a difficult time meeting its financial obligations.  MMIC had an outstanding loan with DBP in the amount of P13,792,607,565.92 as of August 31, 1984 and in the amount of P8,789,028,249.38 as of July 15, 1984 or a total Government exposure of Twenty Two Billion Six Hundred Sixty-Eight Million Five Hundred Thirty-Seven Thousand Seven Hundred Seventy and 05/100 (P22,668,537,770.05), Philippine Currency.[6] Thus, a financial restructuring plan (FRP) designed to reduce MMIC'’ interest expense through debt conversion to equity was drafted by the Sycip Gorres Velayo accounting firm.[7] On April 30, 1984, the FRP was approved by the Board of Directors of the MMIC.[8] However, the proposed FRP had never been formally adopted, approved or ratified by either PNB or DBP.[9]

In August and September 1984, as the various loans and advances made by DBP and PNB to MMIC had become overdue and since any restructuring program relative to the loans was no longer feasible, and in compliance with the directive of Presidential Decree No. 385, DBP and PNB as mortgagees of MMIC assets, decided to exercise their right to extrajudicially foreclose the mortgages in accordance with the Mortgage Trust Agreement.[10]

The foreclosed assets were sold to PNB as the lone bidder and were assigned to three newly formed corporations, namely, Nonoc Mining Corporation, Maricalum Mining and Industrial Corporation, and Island Cement Corporation.  In 1986, these assets were transferred to the Asset Privatization Trust (APT).[11]

On February 28, 1985, Jesus S. Cabarrus, Sr., together with the other stockholders of MMIC, filed a derivative suit against DBP and PNB before the RTC of Makati, Branch 62, for Annulment of Foreclosures, Specific Performance and Damages.[12] The suit, docketed as Civil Case No. 9900, prayed that the court: (1) annul the foreclosure, restore the foreclosed assets to MMIC, and require the banks to account for their use and operation in the interim; (2) direct the banks to honor and perform their commitments under the alleged FRP; and (3) pay moral and exemplary damages, attorney’s fees, litigation expenses and costs.

In the course of the trial, private respondents and petitioner APT, as successor of the DBP and PNB’s interest in MMIC, mutually agreed to submit the case to arbitration by entering into a “Compromise and Arbitration Agreement,” stipulating, inter alia:

NOW, THEREFORE, for and in consideration of the foregoing premises and the mutual covenants contain herein, the parties agreed as follows:

1. Withdrawal and Compromise.  The parties have agreed to withdraw their respective claims from the Trial Court and to resolve their dispute through arbitration by praying to the Trial Court to issue a Compromise Judgment based on this Compromise and Arbitration Agreement.

In withdrawing their dispute form the court and in choosing to resolve it through arbitration, the parties have agreed that:

(a)    their respective money claims shall be reduced to purely money claims; and

(b)    as successor and assignee of the PNB and DBP interest in MMIC and the MMIC accounts, APT shall likewise succeed to the rights and obligations of PNB and DBP in respect of the controversy subject of Civil Case No. 9900 to be transferred to arbitration and any arbitral award/order against either PNB and/or DBP shall be the responsibility of, be discharged by and be enforceable against APT, the partied having agreed to drop PNB and DBP from the arbitration.

2. Submission.  The parties hereby agree that (a) the controversy in Civil Case No. 9900 shall be submitted instead to arbitration under RA 876 and (b) the reliefs prayed for in Civil Case No. 9900 shall, with the approval of the Trial Court of this Compromise and Arbitration Agreement, be transferred and reduced to pure pecuniary/money claims with the parties waiving and foregoing all other forms of reliefs which they prayed for or should have payed for in Civil Case No. 9900.[13]

The Compromise and Arbitration Agreement limited the issues to the following:

5. Issues.  The issues to be submitted for the Committee’s resolution shall be: (a) Whether PLAINTIFFS have the capacity or the personality to institute this derivative suit in behalf of the MMIC or its directors; (b) Whether or not the actions leading to, and including, the PNB-DBP foreclosure of the MMIC assets were proper, valid and in good faith.[14]

This agreement was presented for approval to the trial court.  On October 14, 1992, the Makati RTC, Branch 62, issued an order, to wit:

WHEREFORE, this Court orders:

1.        Substituting PNB and DBP with the Asset Privatization Trust as party defendant.

2.        Approving the Compromise and Arbitration Agreement dated October 6, 1992, attached as Annex “C” of the Omnibus Motion.

3.        Approving the Transformation of the reliefs prayed for [by] the plaintiffs in this case into pure money claims; and

4.        The Complaint is hereby DISMISSED.[15]

The Arbitration Committee was composed of retired Supreme Court Justice Abraham Sarmiento as Chairman, Atty. Jose C. Sison and former Court of Appeals Justice Magdangal Elma as Members.  On November 24, 1993, after conducting several hearings, the Arbitration Committee rendered a majority decision in favor of MMIC, the pertinent portions of which read as follows:

Since, as this Committee finds, there is no foreclosure at all was not legally and validly done, the Committee holds and so declares that the loans of PNB and DBP to MMIC, for the payment and recovery of which the void foreclosure sales were undertaken, continue to remain outstanding and unpaid. Defendant APT as the successor-in-interest of PNB and DBP to the said loans is therefore entitled and retains the right, to collect the same from MMIC pursuant to and based on the loan documents signed by MMIC, subject to the legal and valid defenses that the latter may duly and seasonably interpose. Such loans shall, however, be reduced by the amount which APT may have realized from the sale of the seized assets of MMIC which by agreement should no longer be returned even if the foreclosure were found to be null and void.

The documentary evidence submitted and adopted by both parties (Exhibits “3”, “3-B”; Exhibits “100”; and also Exhibit “ZZZ”) as their exhibits would show that the total outstanding obligation due to DBP and PNB as of the date of foreclosure is P22,668,537,770.05, more or less.

Therefore, defendant APT can, and is still entitled to, collect the outstanding obligations of MMIC to PNB and DBP amounting to P22,668.537,770.05, more or less, with interest thereon as stipulated in the loan documents from the date of foreclosure up to the time they are fully paid less the proportionate liability of DBP as owner of 87% of the total capitalization of MMIC under the FRP.  Simply put, DBP shall share in the award of damages to, and in obligations of MMIC in proportion to its 87% equity in the total capital stock of MMIC.

x x x.

As this Committee holds that the FRP is valid, DBP’s equity in MMIC is raised to 87%.  So pursuant to the above provision of the Compromise and Arbitration Agreement, the 87% equity of DBP is hereby deducted from the actual damages of P19,486,118,654.00 resulting in the net actual damages ofP2,531,635,425.02 plus interest.

DISPOSITION

WHEREFORE, premises considered, judgment is hereby rendered:

1. Ordering the defendant to pay to the Marinduque Mining and Industrial Corporation, except the DBP, the sum of P2,531,635,425.02 with interest thereon at the legal rate of six per cent (6%) per annum reckoned from August 3, 9, and 24, 1984, pari passu, as and for actual damages.  Payment of these actual damages shall be offset by APT from the outstanding and unpaid loans of the MMIC with DBP and PNB, which have not been converted into equity.  Should there be any balance due to the MMIC after the offsetting, the same shall be satisfied from the funds representing the purchase price of the sale of the shares of Island Cement Corporation in the amount of P503,000,000.00 held under escrow pursuant to the Escrow Agreement dated April 22, 1988 or to such subsequent escrow agreement that would supercede [sic] it pursuant to paragraph (9) of the Compromise and Arbitration Agreement;

2. Ordering the defendant to pay to the Marinduque Mining and Industrial Corporation, except the DBP, the sum of P13,000,000.00 as and for moral and exemplary damages.  Payment of these moral and exemplary damages shall be offset by APT from the outstanding and unpaid loans of MMIC with DBP and PNB, which have not been converted into equity.  Should there be any balance due to MMIC after the offsetting, the same shall be satisfied from the funds representing the purchase price of the sale of the shares of Island Cement Corporation in the of P503,000,000.00 held under escrow pursuant to the Escrow Agreement dated April 22, 1988 or to such subsequent escrow agreement that would supercede [sic] it pursuant to paragraph (9) of the Compromise and Arbitration Agreement;

3. Ordering the defendant to pay to the plaintiff, Jesus Cabarrus, Sr., the sum of P10,000,000.00, to be satisfied likewise from the funds held under escrow pursuant to the Escrow Agreement dated April 22, 1988 or to such subsequent escrow agreement that would supercede it, pursuant to paragraph (9) of the Compromise and Arbitration Agreement, as and for moral damages; and

4. Ordering the defendant to pay arbitration costs.

This Decision is FINAL and EXECUTORY.

IT IS SO ORDERED.[16]

Motions for reconsiderations were filed by both parties, but the same were denied.

On October 17, 1994, private respondents filed in the same Civil Case No. 9900 an “Application/Motion for Confirmation of Arbitration Award.” Petitioner countered with an “Opposition and Motion to Vacate Judgment” raising the following grounds:

1. The plaintiff’s Application/Motion is improperly filed with this branch of the Court, considering that the said motion is neither a part nor the continuation of the proceedings in Civil Case No. 9900 which was dismissed upon motion of the parties.  In fact, the defendants in the said Civil Case No. 9900 were the Development Bank of the Philippines and the Philippine National Bank (PNB);

2. Under Section 22 of Rep. Act 876, an arbitration under a contract or submission shall be deemed a special proceedings and a party to the controversy which was arbitrated may apply to the court having jurisdiction, (not necessarily with this Honorable Court) for an order confirming the award;

3. The issues submitted for arbitration have been limited to two: (1) propriety of the plaintiffs filing the derivative suit and (2) the regularity of the foreclosure proceedings.  The arbitration award sought to be confirmed herein far exceeded the issues submitted and even granted moral damages to one of the herein plaintiffs;

4. Under Section 24 of Rep. Act 876, the Court must make an order vacating the award where the arbitrators exceeded their powers, or so imperfectly executed them, that a mutual final and definite award upon the subject matter submitted to them was not made.[17]

Private respondents filed a “REPLY AND OPPOSITION” dated November 10, 1984, arguing that a dismissal of Civil case No. 9900 was merely a “qualified dismissal” to pave the way for the submission of the controversy to arbitration, and operated simply as “a mere suspension of the proceedings.” They denied that the Arbitration Committee had exceeded its powers.

In an Order dated November 28, 1994, the trial court confirmed the award of the Arbitration Committee.  The dispositive portion of said order reads:

WHEREFORE, premises considered, and in the light of the parties [sic] Compromise and Arbitration Agreement dated October 6, 1992, the Decision of the Arbitration Committee promulgated on November 24, 1993, as affirmed in a Resolution dated July 26, 1994, and finally settled and clarified in the Separate Opinion dated September 2, 1994 of Committee Member Elma, and the pertinent provisions of RA 876,also known as the Arbitration Law, this Court GRANTS PLAINTIFFS’ APPLICATION AND THUS CONFIRMS THE ARBITRATION AWARD, AND JUDGMENT IS HEREBY RENDERED:

(a) Ordering the defendant APT to the Marinduque Mining and Industrial Corporation (MMIC, except the DBP, the sum of P3,811,757,425.00, as and for actual damages, which shall be partially satisfied from the funds held under escrow in the amount of P503,000,000.00 pursuant to the Escrow Agreement dated April 22, 1988.  The Balance of the award, after the escrow funds are fully applied, shall be executed against the APT;

(b) Ordering the defendant to pay to the MMIC, except the DBP, the sum of P13,000,000.00 as and moral and exemplary damages;

(c) Ordering the defendant to pay to Jesus S. Cabarrus, Sr., the sum of P10,000,000.00 as and for moral damages; and

(d) Ordering the defendant to pay the herein plaintiffs/applicants/movants the sum of P1,705,410.22 as arbitration costs.

In reiteration of the mandates of Stipulation No. 10 and Stipulation No. 8 paragraph 2 of the Compromise and Arbitration Agreement, and the final edict of the Arbitration Committee’s decision, and with this Court’s Confirmation, the issuance of the Arbitration Committee’s Award shall henceforth be final and executory.

SO ORDERED.[18]

On December 27, 1994, petitioner filed its motion for reconsideration of the Order dated November 28, 1994.  Private respondents, in turn, submitted their reply and opposition thereto.

On January 18, 1995, the trial court handed down its order denying APT’s motion for reconsideration for lack of merit and for having been filed out of time.  The trial court declared that “considering that the defendant APT through counsel, officially and actually received a copy of the Order of this Court dated November 28, 1994 on December 6, 1994, the Motion for Reconsideration thereof filed by the defendant APT on December 27, 1994, or after the lapse of 21 days, was clearly filed beyond the 15-day reglementary period prescribed or provided for by law for the filing of an appeal from final orders, resolutions, awards, judgments or decisions of any court in all cases, and by necessary implication for the filling of a motion for reconsideration thereof.”

On February 7, 1995, petitioner received private respondents’ motion for Execution and Appointment of Custodian of Proceeds of Execution dated February 6, 1995.

Petitioner thereafter filed with the Court of Appeals a special civil action for certiorari with temporary restraining order and/or preliminary injunction dated February 13, 1996 to annul and declare as void the Orders of the RTC-Makati dated November 28, 1994 and January 18, 1995 for having been issued without or in excess of jurisdiction and/or with grave abuse of discretion.[19] As ground therefor, petitioner alleged that:

I

THE RESPONDENT JUDGE HAS NOT VALIDLY ACQUIRED JURISDICTION MUCH LESS, HAS THE COURT AUTHORITY, TO CONFIRM THE ARBITRAL AWARD CONSIDERING THAT THE ORIGINAL CASE, CIVIL CASE NO. 9900, HAD PREVIOUSLY BEEN DISMISSED.

II

THE RESPONDENT JUDGE COMMITTED GRAVE ABUSE OF DISCRETION AND ACTED WITHOUT OR IN EXCESS OF JURISDICTION, IN ISSUING THE QUESTIONED ORDERS CONFIRMING THE ARBITRAL AWARD AND DENYING THE MOTION FOR RECONSIDERATION OF ORDER OF AWARD.

III

THE RESPONDENT JUDGE GROSSLY ABUSED HIS DISCRETION AND ACTED WITHOUT OR IN EXCESS OF AND WITHOUT JURISDICTION IN RECKONING THE COUNTING OF THE PERIOD TO FILE MOTION FOR RECONSIDERATION, NOT FROM THE DATE OF SERVICE OF THE COURT’S COPY CONFIRMING THE AWARD, BUT FROM RECEIPT OF A  XEROX COPY OF WHAT PRESUMABLY IS THE OPPOSING COUNSEL’S COPY THEREOF.[20]

On July 12, 1995, the Court of Appeals, through its fifth Division denied due course and dismissed the petition for certiorari.

Hence, the instant petition for review on certiorari imputing to the Court of Appeals the following errors.

ASSIGNMENT OF ERRORS

I

THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE MAKATI REGIONAL TRIAL COURT, BRANCH 62 WHICH HAS PREVIOULSY DISMISSED CIVIL CASE NO. 9900 HAD LOST JURISDICTION TO CONFIRM THE ARBITRAL AWARD UNDER THE SAME CIVIL CASE AND IN NOT RULING THAT THE APPLICATION FOR CONFIRMATION SHOULD HAVE BEEN FILED AS A NEW CASE TO BE RAFFLED OFF AMONG THE DIFFERENT BRANCHES OF THE RTC.

II

THE COURT OF APPEALS LIKEWISE ERRED IN HOLDING THAT PETITIONER WAS ESTOPPED FROM QUESTIONING THE ARBITRATION AWARD, WHEN PETITIONER QUESTIONED THE JURISDICTION OF THE

RTC-MAKATI, BRANCH 62 AND AT THE SAME TIME MOVED TO VACATE THE ARBITRAL AWARD.

III

THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE RESPONDENT TRIAL COURT SHOULD HAVE EITHER DISMISSED/DENIED PRIVATE RESPONDENTS’ MOTION/PETITION FOR CONFIRMATION OF ARBITRATION AWARD AND/OR SHOULD HAVE CONSIDERED THE MERITS OF THE MOTION TO VACATE ARBITRAL AWARD.

IV

THE COURT OF APPEALS ERRED IN NOT TREATING PETITIONER APT’S PETITION FOR CERTIORARI AS AN APPEAL TAKEN FROM THE ORDER CONFIRMING THE AWARD

V

THE COURT OF APPEALS ERRED IN NOT RULING ON THE LEGAL ISSUE OF WHEN TO RECKON THE COUNTING OF THE PERIOD TO FILE A MOTION FOR RECONSIDERATION.[21]

The petition is impressed with merit.

I

The RTC of Makati, Branch 62, did not have jurisdiction to confirm the arbitral award

The use of the term “dismissed” is not a “mere semantic imperfection.”  The dispositive portion of the Order of the trial court dated October 14, 1992 stated in no uncertain terms:

4. The Complaint is hereby DISMISSED.[22]

The term “dismiss” has a precise definition in law.  “To dispose of an action suit, or motion without trial on the issues involved.  Conclude, discontinue, terminate, quash.”[23]

Admittedly the correct procedure was for the parties to go back to the court where the case was pending to have the award confirmed by said court. However, Branch 62 made the fatal mistake of issuing a final order dismissing the case.  While Branch 62 should have merely suspended the case and not dismissed it,[24] neither of the parties questioned said dismissal.  Thus, both parties as well as said court are bound by such error.

It is erroneous then to argue, as private respondents do, that petitioner APT was charged with the knowledge that the “case was merely stayed until arbitration finished,” as again, the

order of Branch 62 in very clear terms stated that the “complaint was dismissed.”   By its own action, Branch 62 had lost jurisdiction over the vase.  It could not have validly reacquired jurisdiction over the said case on mere motion of one of the parties.  The Rules of Court is specific on how a new case may be initiated and such is not done by mere motion in a particular branch of the RTC.  Consequently, as there was no “pending action” to speak of, the petition to confirm the arbitral award should have been filed as a new case and raffled accordingly to one of the branches of the Regional Trial Court.

II

Petitioner was not estopped from questioning the jurisdiction of Branch 62 of the RTC of Makati.

The Court of Appeals ruled that APT was already estopped to question the jurisdiction of the RTC to confirm the arbitral award because it sought affirmative relief in said court by asking that the arbitral award be vacated.

The rule is that “Where the court itself clearly has no jurisdiction over the subject matter or the nature of the action, the invocation of this defense may de done at any time.   It is neither for the courts nor for the parties to violate or disregard that rule, let alone to confer that jurisdiction, this matter being legislative in character.”[25] As a rule the, neither waiver nor estoppel shall apply to confer jurisdiction upon a court barring highly meritorious and exceptional circumstances.[26] One such exception was enunciated in Tijam vs. Sibonghanoy,[27] where it was held that “after voluntarily submitting a cause and encountering an adverse decision on the merits, it is too late for the loser to question the jurisdiction or power of the court."

Petitioner’s situation is different because from the outset, it has consistently held the position that the RTC, Branch 62 had no jurisdiction to confirm the arbitral award; consequently, it cannot be said that it was estopped from questioning the RTC’s jurisdiction.  Petitioner’s prayer for the setting aside of the arbitral award was not inconsistent with its disavowal of the court’s jurisdiction.

III

Appeal of petitioner to the Court of Appeals thru certiorari under Rule 65 was proper.

The Court of Appeals in dismissing APT’s petition for certiorari upheld the trial court’s denial of APT’s motion for reconsideration of the trial court’s order confirming the arbitral award, on the ground that said motion was filed beyond the 15-day reglementary period; consequently, the petition for certiorari could not be resorted to as substitute to the lost right of appeal.

We do not agree.

Section 29 of Republic Act No. 876,[28] provides that:

x x x An appeal may be taken from an order made in a proceeding under this Act, or from a judgment entered upon an award through certiorariproceedings, but such appeals shall be limited to question of law. x x x.

The aforequoted provision, however, does not preclude a party aggrieved by the arbitral award from resorting to the extraordinary remedy ofcertiorari under Rule 65 of the Rules of Court where, as in this case, the Regional Trial Court to which the award was submitted for confirmation has acted without jurisdiction, or with grave abuse of discretion and there is no appeal, nor any plain, speedy remedy in the course of law.

Thus, Section 1 of Rule 65 provides:

SEC 1. Petition for Certiorari: - When any tribunal, board or officer exercising judicial functions, has acted without or in excess of its or his jurisdiction, or with grave abuse of discretion and there is no appeal, nor any plain, speedy, and adequate remedy in the ordinary course of law, a person aggrieved thereby may file a verified petition in the proper court alleging the facts with certainty and praying that judgment be rendered annulling or modifying the proceedings, as the law requires, of such tribunal, board or officer.

In the instant case, the respondent court erred in dismissing the special civil action for certiorari, it being from the pleadings and the evidence that the trial court lacked jurisdiction and/or committed grave abuse of discretion in taking cognizance of private respondent’ motion to confirm the arbitral award and, worse, in confirming said award which is grossly and patently not in accord with the arbitration agreement, as will be hereinafter demonstrated.

IV

The nature and limits of the Arbitrators’ powers.

As a rule, the award of an arbitrator cannot be set aside for mere errors of judgment either as to the law or as to the facts.[29] Courts are without power to amend or overrule merely because of disagreement with matters of law or facts determined by the arbitrators. [30] They will not review the findings of law and fact contained in an award, and will not undertake to substitute their judgment for that of the arbitrators, since any other rule would make an award the commencement, not the end, of litigation.[31] Errors of law and fact, or an erroneous decision of matters submitted to the judgment of the arbitrators, are insufficient to invalidate an award fairly and honestly made.[32] Judicial review of an arbitration is, thus, more limited than judicial review of a trial.[33]

Nonetheless, the arbitrators’ awards is not absolute and without exceptions.  The arbitrators cannot resolve issues beyond the scope of the submission agreement.[34] The parties to such an agreement are bound by the arbitrators’ award only to the extent and in the manner prescribed by the contract and only if the award is rendered in conformity thereto. [35] Thus, Sections 24 and 25 of the Arbitration Law provide grounds for vacating, rescinding or modifying an arbitration

award.  Where the conditions described in Articles 2038,[36] 2039[37] and 2040[38] of the Civil Code applicable to compromises and arbitration are attendant, the arbitration award may also be annulled.

In Chung Fu Industries (Phils.) vs. Court of Appeals,[39] we held:

x x x.  It is stated explicitly under Art. 2044 of the Civil Code that the finality of the arbitrators’ awards is not absolute and without exceptions.  Where the conditions described in Articles 2038, 2039, and 2040 applicable to both compromises and arbitration are obtaining, the arbitrators' award may be annulled or rescinded.  Additionally, under Sections 24 and 25, of the Arbitration Law, there are grounds for vacating, modifying or rescinding an arbitrator’s award.  Thus, if and when the factual circumstances referred to in the above-cited provisions are present, judicial review of the award is properly warranted.

Accordingly, Section 20 of R.A. 876 provides:

SEC. 20.  Form and contents of award. – The award must be made in writing and signed and acknowledged by a majority of the arbitrators, if more than one; and by the sole arbitrator, if there is only one.  Each party shall be furnished with a copy of the award.  The arbitrators in their award may grant any remedy or relief which they deem just and equitable and within the scope of the agreement of the parties, which shall include, but not be limited to, the specific performance of a contract.

xxx

The arbitrators shall have the power to decide only those matters which have been submitted to them.     The terms of the award shall be confined to such disputes.  (Underscoring ours).

xxx.

Section 24 of the same law enumerating the grounds for vacating an award states:

SEC. 24.  Grounds for vacating award. – In any one of the following cases, the court must make an order vacating the award upon the petition of any party to the controversy when such party proves affirmatively that in the arbitration proceedings:

(a) The award was procured by corruption, fraud, or other undue means; or

(b) That there was evident partiality or corruption in arbitrators or any of them; or

(c) That the arbitrators were guilty of misconduct in refusing to postpone the hearing upon sufficient cause shown, or in refusing to hear evidence pertinent and material to

the controversy; that one or more of the arbitrators was disqualified to act as such under section nine hereof, and willfully refrained from disclosing such disqualifications or any other misbehavior by which the rights of any party have been materially prejudiced; or

(d) That the arbitrators exceeded their powers, or so imperfectly executed them, that a mutual, final and definite award upon the subject matter submitted to them was not made.     (Underscoring ours).

xxx.

Section 25 which enumerates the grounds for modifying the award provides:

SEC. 25.  Grounds for modifying or correcting award – In anyone of the following cases, the court must make an order modifying or correcting the award, upon the application of any party to the controversy which was arbitrated:

(a) Where there was an evident miscalculation of figures, or an evident mistake in the description of any person, thing or property referred to in the award; or

(b) Where the arbitrators have awarded upon a matter not submitted to them, not affecting the merits of the decision upon the matter submitted; or

(c) Where the award is imperfect in a matter of form not affecting the merits of the controversy, and if it had been a commissioner’s report, the defect could have been amended or disregarded by the court.

x x x.

Finally, it should be stressed that while a court is precluded from overturning an award for errors in determination of factual issues, nevertheless, if an examination of the record reveals no support whatever for the arbitrators’ determinations, their award must be vacated. [40] In the same manner, an award must be vacated if it was made in “manifest disregard of the law.”[41]

Against the backdrop of the foregoing provisions and principles, we find that the arbitrators came out with an award in excess of their powers and palpably devoid of factual and legal basis.

V

There was no financial structuring program; foreclosure of mortgage was fully justified.

The point need not be belabored that PNB and DBP had the legitimate right to foreclose of the mortgages of MMIC whose obligations were past due. The foreclosure was not a wrongful act of the banks and, therefore, could not be the basis of any award of damages.  There was no

financial restructuring agreement to speak of that could have constituted an impediment to the exercise of the bank’s right to foreclose.

As correctly stated by Mr. Jose C. Sison, a member of the Arbitration Committee who wrote a separate opinion:

1. The various loans and advances made by DBP and PNB to MMIC have become overdue and remain unpaid.  The fact that a FRP was drawn up is enough to establish that MMIC has not been complying with the terms of the loan agreement.  Restructuring simply connotes that the obligations are past due that is why it is “restructurable”;

2. When MMIC thru its board and the stockholders agreed and adopted the FRP, it only means that MMIC had been informed or notified that its obligations were past due and that foreclosure is forthcoming;

3. At that stage, MMIC also knew that PNB-DBP had the option of either approving the FRP or proceeding with the foreclosure.  Cabarrus, who filed this case supposedly in behalf of MMIC should have insisted on the FRP.  Yet Cabarrus himself opposed the FRP;

4. So when PNB-DBP proceeded with the foreclosure, it was done without bad faith but with honest and sincere belief that foreclosure was the only alternative; a decision further explained by Dr. Placido Mapa who testified that foreclosure was, in the judgment of PNB, the best move to save MMIC itself.

“Q    :  Now in this portion of Exh. “L” which was marked as Exh. “L-1”, and we adopted as Exh. 37-A for the respondent, may I know from you, Dr. Mapa what you meant by “that the decision to foreclose was neither precipitate nor arbitrary”?

A      :  Well, it is not a whimsical decision but rather decision arrived at after weighty considerations of the information that we have received, and listening to the prospects which reported to us that we had assumed would be the premises of the financial rehabilitation plan was not materialized nor expected to materialized.

Q      :  And this statement that “it was premised upon the known fact” that means, it was referring to the decision to foreclose, was premised upon the known fact that the rehabilitation plan earlier approved by the stockholders was no longer feasible, just what is meant “by no longer feasible”?

A      :  Because the revenue that they were counting on to make the rehabilitation plan possible, was not anymore expected to be forthcoming because it will result in a short fall compared to the prices that were actually taking place in the market.

Q      :  And I supposed that was you were referring to when you stated that the production targets and assumed prices of MMIC’s products, among other projections, used in the financial reorganization program that will make it viable were  not met nor expected to be met?

A      :  Yes.”

xxx

Which brings me to my last point in this separate opinion.  Was PNB and DBP absolutely unjustified in foreclosing the mortgages?

In this connection, it can readily be seen and it cannot quite be denied that MMIC accounts in PNB-DBP were past due.  The drawing up of the FRP is the best proof of this.  When MMIC adopted a restructuring program for its loan, it only meant that these loans were already due and unpaid.  If these loans were restructurable because they were already due and unpaid, they are likewise “forecloseable”.  The option is with the PNB-DBP on what steps to take.

The mere fact that MMIC adopted the FRP does not mean that DBP-PNB lost the option to foreclose.  Neither does it mean that the FRP is legally binding and implementable.  It must be pointed that said FRP will, in effect, supersede the existing and past due loans of MMIC with PNB-DBP.  It will become the new loan agreement between the lenders and the borrowers.  As in all other contracts, there must therefore be a meeting of minds of the parties; the PNB and DBP must have to validly adopt and ratify such FRP before they can be bound by it; before it can be implemented.  In this case, not an iota of proof has been presented by the  PLAINTIFFS showing that PNB and DBP ratified and adopted the FRP. PLAINTIFFS simply relied on a legal doctrine of promissory estoppel to support its allegation in this regard.[42]

Moreover, PNB and DBP had to initiate foreclosure proceedings as mandated by P.D. No. 385, which took effect on January 31, 1974.  The decree requires government financial institutions to foreclose collaterals for loans where the arrearages amount to 20% of the total outstanding obligations.  The pertinent provisions of said decree read as follows:

SEC. 1. It shall be mandatory for government financial institutions, after the lapse of sixty (60) days from the issuance of this Decree to foreclose the collaterals and/or securities for any loan, credit, accommodations, and/or guarantees granted by them whenever the arrearages on such account, including accrued interest and other charges, amount to at least twenty percent (20%) of the total outstanding obligations, including interest and other charges, as appearing in the books of account and/or related records of the financial institutions concerned.  This shall be without prejudice to the  exercise by the government financial institutions of such rights and/or remedies available to them under their respective contracts with their debtor, including the right to foreclosure on loans, credits, accommodations and/or guarantees on which the arrearages are less than twenty percent (20%).

SEC. 2.  No restraining order, temporary or permanent injunction shall be issued by the court against any government financial institution in any action taken by such institution in compliance with the mandatory foreclosure provided in Section 1 hereof, whether such restraining order, temporary or permanent injunction is sought by the

borrower(s) or any third party or parties, except after due hearing in which it is established by the borrower and admitted by the government financial institution concerned that twenty percent (20%) of the outstanding arrearages has been paid after the filing of foreclosure proceedings.  (Underscoring supplied.)

Private respondents’ thesis that the foreclosure proceedings were null and void because of lack of publication in the newspaper is nothing more than a mere unsubstantiated allegation not borne out by the evidence.  In any case, a disputable presumption exists in favor of petitioner that official duty has been regularly performed and ordinary course of business has been followed.[43]

VI

Not only was the foreclosure rightfully exercised by the PNB and DBP, but also, from the facts of the case, the arbitrators in making the award went beyond the arbitration agreement.

In their complaint filed before the trial court, private respondent Cabarrus, et al. prayed for judgment in their favor:

1. Declaring the foreclosure effected by the defendants DBP and PNB on the assets of MMIC null and void and directing said defendants to restore the foreclosed assets to the possession of MMIC, to render an accounting of their use and/or operation of said assets and to indemnify MMIC for the loss occasioned by its dispossession or the deterioration thereof;

2. Directing the defendants DBP and PNB to honor and perform their commitments under the financial reorganization plan which was approved at the annual stockholders’ meeting of MMIC on 30 April 1984;

3. Condemning the defendants DBP and PNB, jointly and severally to pay the plaintiffs actual damages consisting of the loss of value of their investment amounting to not less than   P 80,000,000.00, the damnum emerges and lucrum cessans in such amount as may be establish during the trial, moral damages in such amount as this Honorable Court may deem just and equitable in the premises, exemplary damages in such amount as this Honorable Court may consider appropriate for the purpose of setting an example for the public good, attorney’s fees and litigation expenses in such amounts as may be proven during the trial, and the costs legally taxable in this litigation.

Further, Plaintiffs pray for such other reliefs as may be just and equitable in the premises.[44]

Upon submission for arbitration, the Compromise and Arbitration Agreement of the parties clearly and explicitly defined and limited the issues to the following:

(a) whether PLAINTIFFS have the capacity or the personality to institute this derivative suit in behalf of the MMIC or its directors;

(b) whether or not the actions leading to, and including, the PNB-DBP foreclosure of the MMIC assets were proper, valid and in good faith.[45]

Item No. 8 of the Agreement provides for the period by which the Committee was to render its decision, as well as the nature thereof:

8. Decision.  The committee shall issue a decision on the controversy not later than six (6) months from the date of its constitution.

In the event the committee finds that PLAINTIFFS have the personality to file this suit and extra-judicial foreclosure of the MMIC assets wrongful, it shall make an award in favor of the PLAINTIFFS (excluding DBP), in an amount as may be established or warranted by the evidence which shall be payable in Philippine Pesos at the time of the award.  Such award shall be paid by the APT or its successor-in-interest within sixty (60) days from the date of the award in accordance with the provisions of par. 9 hereunder.  x x x.  The PLAINTIFFS’ remedies under this Section shall be in addition to other remedies that may be available to the PLAINTIFFS, all such remedies being cumulative and not exclusive of each other.

On the other hand, in case the arbitration committee finds that PLAINTIFFS have no capacity to sue and/or that the extra-judicial foreclosure is valid and legal, it shall also make an award in favor of APT based on the counterclaims of DBP and PNB in an amount as may be established or warranted by the evidence.  This decision of the arbitration committee in favor of APT shall likewise finally settle all issues regarding the foreclosure of the MMIC assets so that the funds held in escrow mentioned in par. 9 hereunder will thus be released in full in favor of APT.[46]

The clear and explicit terms of the submission notwithstanding, the Arbitration Committee clearly exceeded its powers or so imperfectly executed them: (a) in ruling on and declaring valid the FRP; (b) in awarding damages to MMIC which was not a party to the derivative suit; and (c) in awarding moral damages to Jesus S. Cabarrus, Sr.

The arbiters overstepped their powers by declaring as valid proposed Financial Restructuring Program.

The Arbitration Committee went beyond its mandate and thus acted in excess of its powers when it ruled on the validity of, and gave effect to, the proposed FRP.

In submitting the case to arbitration, the parties had mutually agreed to limit the issue to the “validity of the foreclosure” and to transform the reliefs prayed for therein into pure money claims.

There is absolutely no evidence that the DBP and PNB agreed, expressly or impliedly, to the proposed FRP.  It cannot be overemphasized that a FRP, as a contract, requires the consent of the parties thereto.[47] The contract must bind both contracting parties.[48] Private respondents even by their own admission recognized that the FRP had yet not been carried out and that the loans of MMIC had not yet been converted into equity.[49]

However, the arbitration Committee not only declared the FRP valid and effective, but also converted the loans of MMIC into equity raising the equity of DBP to 87%.[50]

The Arbitration Committee ruled that there was “a commitment to carry out the FRP” [51] on the ground of promissory estoppel.

Similarly, the principle of promissory estoppel applies in the present case considering as we observed, the fact that the government (that is Alfredo Velayo) was the FRP’s proponent.  Although the plaintiffs are agreed that the government executed no formal agreement, the fact remains that the DBP itself which made representations that the FRP constituted a “way out” for MMIC.  The Committee believes that although the DBP did not formally agree (assuming that the board and stockholders’ approvals were not formal enough), it is bound nonetheless if only for its conspicuous representations.

Although the DBP sat in the board in a dual capacity-as holder of 36% of MMIC’s equity (at that time) and as MMIC’s creditor-the DBP can not validly renege on its commitments simply because at the same time, it held interest against the MMIC.

The fact, of course, is that as APT itself asserted, the FRP was being “carried out” although apparently, it would supposedly fall short of its targets. Assuming that the FRP would fail to meet its targets, the DBP-and so this Committee holds-can not, in any event, brook any denial that it was bound to begin with, and the fact is that adequate or not (the FRP), the government is still bound by virtue of its acts.

The FRP, of course, did not itself promise a resounding success, although it raised DBP’s equity in MMIC to 87%.  It is not excuse, however, for the government to deny its commitments.[52]

Atty. Sison, however, did not agree and correctly observed that:

But the doctrine of promissory estoppel can hardly find application here.  The nearest that there can be said of any estoppel being present in this case is the fact that the board of MMIC was, at the time the FRP was adopted, mostly composed of PNB and DBP representatives.  But those representatives, singly or collectively, are not themselves PNB or DBP.  They are individuals with personalities separate and distinct from the banks they represent.  PNB and DBP have different boards with different members who may have different decisions.  It is unfair to impose upon them the decision of the board of another company and thus pin them down on the equitable principle of estoppel.  Estoppel is a principle based on equity and it is certainly not equitable to apply it in this particular situation.  Otherwise the rights of entirely separate, distinct and autonomous legal entities like PNB and DBP with thousands of stockholders will be suppressed and rendered nugatory.[53]

As a rule, a corporation exercises its powers, including the power to enter into contracts, through its board of directors.  While a corporation may appoint agents to enter into a contract in its behalf, the agent, should not exceed his authority.[54] In the case at bar, there was no showing

that the representatives of PNB and DBP in MMIC even had the requisite authority to enter into a debt-for-equity swap.  And if they had such authority, there was no showing that the banks, through their board of directors, had ratified the FRP.

Further, how could the MMIC be entitled to a big amount of moral damages when its credit reputation was not exactly something to be considered sound and wholesome.  Under Article 2217 of the Civil Code, moral damages include besmirched reputation which a corporation may possibly suffer.  A corporation whose overdue and unpaid debts to the Government alone reached a tremendous amount of P22 Billion Pesos cannot certainly have a solid business reputation to brag about.  As Atty. Sison in his separate opinion persuasively put it:

Besides, it is not yet a well settled jurisprudence that corporations are entitled to moral damages.  While the Supreme Court may have awarded moral damages to a corporation for besmirched reputation in Mambulao vs. PNB 22 SCRA 359, such ruling cannot find application in this case.  It must be pointed out that when the supposed wrongful act of foreclosure was done, MMIC’s credit reputation was no longer a desirable one.  The company then was already suffering from serious financial crisis which definitely projects an image not compatible with good and wholesome reputation.  So it could not be said that there was a “reputation” besmirches by the act of foreclosure.[55]

The arbiters exceeded their authority in awarding damages to MMIC, which is not impleaded as a party to the derivative suit.

Civil Code No. 9900 filed before the RTC being a derivative suit, MMIC should have been impleaded as a party.  It was not joined as a party plaintiff or party defendant at any stage of the proceedings.  As it is, the award of damages to MMIC, which was not a party before the Arbitration Committee, is a complete nullity.

Settled is the doctrine that in a derivative suit, the corporation is the real party in interest while the stockholder filing suit for the corporation’s behalf is only nominal party.  The corporation should be included as a party in the suit.

An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued or hold the control of the corporation.  In such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in interest.  x x x.[56]

It is a condition sine qua non that the corporation be impleaded as a party because-

x x x.  Not only is the corporation an indispensible party, but it is also the present rule that it must be served with process.  The reason given is that the judgment must be made binding upon the corporation and in order that the corporation may get the benefit of the suit and may not bring a subsequent suit against the same defendants for the same cause of action.  In other words the corporations must be joined as party because it is its cause of action that is being litigated and because judgment must be a res ajudicata against it.[57]

The reasons given for not allowing direct individual suit are:

(1) x x x “the universally recognized doctrine that a stockholder in a corporation has no title legal or equitable to the corporate property; that both of these are in the corporation itself for the benefit of the stockholders.”  In other words, to allow shareholders to sue separately would conflict with the separate corporate entity principle;

(2) x x x that the prior rights of the creditors may be prejudiced.  Thus, our Supreme Court held in the case of Evangelista v. Santos, that “the stockholders may not directly claim those damages for themselves for that would result in the appropriation by, and the distribution among them of part of the corporate assets before the dissolution of the corporation and the liquidation of its debts and liabilities, something which cannot be legally done in view of section 16 of the Corporation Law xxx;”

(3) the filing of such suits would conflict with the duty of the management to sue for the protection of all concerned;

(4) it would produce wasteful multiplicity of suits; and

(5) it would involve confusion in a ascertaining the effect of partial recovery by an individual on the damages recoverable by the corporation for the same act.[58]

If at all an award was due MMIC, which it was not, the same should have been given sans deduction, regardless of whether or not the party liable had equity in the corporation, in view of the doctrine that a corporation has a personality separate and distinct from its individual stockholders or members. DBP’s alleged equity, even if it were indeed 87%, did not give it ownership over any corporate property, including the monetary award, its right over said corporate property being a mere expectancy or inchoate right.[59]Notably, the stipulation even had the effect of prejudicing the other creditors of MMIC.

The arbiters, likewise, exceeded their authority in awarding moral damages to Jesus Cabarrus, Sr.

It is perplexing how the Arbitration Committee can in one breath rule that the case before it is a derivative suit, in which the aggrieved party or the real party in interest is supposedly the MMIC, and at the same time award moral damages to an individual stockholder, to wit:

WHEREFORE, premises considered, judgment is hereby rendered:

xxx.

3. Ordering the defendant to pay to the plaintiff, Jesus S. Cabarrus, Sr., the sum of P10,000,000.00, to be satisfied likewise from the funds held under escrow pursuant

to the Escrow Agreement dated April 22, 1988 or to such subsequent escrow agreement that would supersede it, pursuant to paragraph (9), Compromise and Arbitration Agreement, as and for moral damages; x x x[60]

The majority decision of the Arbitration Committee sought to justify its award of moral damages to Jesus S. Cabarrus, Sr. by pointing to the fact that among the assets seized by the government were assets belonging to Industrial Enterprise Inc. (IEI), of which Cabarrus is the majority stockholder.  It then acknowledge that Cabarrus had already recovered said assets in the RTC, but that “he won no more than actual damages.  While the Committee cannot possibly speak for the RTC, there is no doubt that Jesus S. Cabarrus, Sr., suffered moral damages on account of that specific foreclosure, damages the Committee believes and so holds, he Jesus S. Cabarrus, Sr., may be awarded in this proceeding.”[61]

Cabarrus’ cause of action for the seizure of the assets belonging to IEI, of which he is the majority stockholder, having been ventilated in a complaint he previously filed with the RTC, from which he obtained actual damages, he was barred res judicata from filing a similar case in another court, this time asking for moral damages which he failed to get from the earlier case.[62] Worse, private respondents violated the rule against non-forum shopping.

It is a basic postulate that s corporation has a personality separate and distinct from its stockholders.[63] The properties foreclosed belonged to MMIC, not to its stockholders.  Hence, if wrong was committed in the foreclosure, it was done against the corporation.  Another reason is that Jesus S. Cabarrus, Sr. cannot directly claim those damages for himself that would result in the appropriation by, and the distribution to, him part of the corporation’s assets before the dissolution of the corporation and the liquidation of its debts and liabilities.  The Arbitration Committee, therefore, passed upon matters not submitted to it.  Moreover, said cause of action had already been decided in a separate case.  It is thus quite patent that the arbitration committee exceeded the authority granted to it by the parties’ Compromise and Arbitration Agreement by awarding moral damages to Jesus S. Cabarrus, Sr.

Atty. Sison, in his separate opinion, likewise expressed befuddlement to the award of moral damages to Jesus S. Cabarrus, Sr.:

It is clear and it cannot be disputed therefore that based on these stipulated issues, the parties themselves have agreed that the basic ingredient of the causes of action in this case is the wrong committed on the corporation   (MMIC) for the alleged illegal foreclosure of its assets.  By agreeing to this stipulation, PLAINTIFFS themselves (Cabarrus, et al.) admit that the cause of action pertains only to the corporation   (MMIC) and that they are filing this for and in behalf of MMIC.

Perforce this has to be so because it is the basic rule in Corporation Law that “the shareholders have no title, legal or equitable to the property which is owned by the corporation (13 Am. Jur. 165; Pascual vs. Oresco, 14 Phil. 83).  In Ganzon & Sons vs. Register of Deeds, 6 SCRA 373, the rule has been reiterated that ‘a stockholder is not the co-owner of corporate property.’  Since the property or assets foreclosed belongs [sic] to MMIC, the wrong committed, if any, is done against the corporation.  There is

therefore no direct injury or direct violation of the rights of Cabarrus et al.  There is no way, legal or equitable, by which Cabarrus et al. could recover damages in their personal capacities even assuming or just because the foreclosure is improper or invalid.  The Compromise and Arbitration Agreement itself and the elementary principles of Corporation Law say so.  Therefore, I am constrained to dissent from the award of moral damages to Cabarrus.[64]

From the foregoing discussions, it is evident that, not only did the arbitration committee exceed its powers or so imperfectly execute them, but also, its findings and conclusions are palpably devoid of any factual basis and in manifest disregard of the law.

We do not find it necessary to remand this case to the RTC for appropriate action.  The pleadings and memoranda filed with this Court, as well as in the Court of Appeals, raised and extensively discussed the issues on the merits.  Such being the case, there is sufficient basis for us to resolve the controversy between the parties anchored on the records and the pleadings before us.[65]

WHEREFORE, the Decision of the Court of Appeals dated July 17, 1995, as well as the Orders of the Regional Trial Court of Makati, Branch 62, dated November 28, 1994 and January 19, 1995, is hereby REVERSED and SET ASIDE, and the decision of the Arbitration Committee is hereby VACATED.

SO ORDERED

Romero (Chairman) J., Please see Dissenting Opinion.Purisima, J., concur and also joined the separate concurring opinion of J. Pardo.Pardo, J., see separate concurring opinion.

[1] Rollo, pp. 261-262.

[2] Id., at 262-263.

[3] CA Rollo, p. 130.

[4] Rollo, p. 264.

[5] Ibid.

[6] Id., at 261.

[7] Id., at 265.

[8] CA Rollo, p. 134.

[9] Id., at 149.

[10] CA Rollo, pp. 134-135.

[11] Id., at 135-136.

[12] Rollo, p. 266.

[13] CA Rollo, pp. 109-110.

[14] Id., at 111-112.

[15] Id., at 111.

[16] Id., at 168-172.  Underscoring in the original.

[17] Id., at 287-288.

[18] CA Rollo, pp. 51-52.

[19] Rollo, p. 38.

[20] CA Rollo, p. 18.

[21] Rollo, pp. 21-22

[22] CA Rollo, p. 11

[23] WEST’S LEGAL THESAURUS DICTIONARY, 1986 ed.

[24] Bengson v.Chan, 75 SCRA 112 [1972].

[25] La Naval Drug Co. v. CA, 236 SCRA 78 [1994].

[26] Ibid.

[27]  23 SCRA 29 [1968].

[28] Entitled “AN ACT TO AUTHORIZED THE MAKING OF ARBITRATION AND SUBMISSION AGREEMENTS, TO PROVIDE FOR THE APPOINTMENT OF ARBITRATORS AND THE PROCEDURE FOR ARBITRATION IN CIVIL CONTROVERSIES, AND OTHER PURPOSES,” otherwise known as “The Arbitration Law.”

[29] The Hartbridge, 62F. 2d 72 [1932].

[30] Jame Richardson & Sons v. W.E. Hedger Transp. Corp., 98F. 2d 55 [1938].

[31] General Construction Co. v. Hering Realty Co., 201 F. Supp. 487 [1962].

[32] Coleman Company v. International Union, Etc., 317 P. 2d 831 [1957].

[33] Bernhardt v. Polygraphic Co., 100 L ed 199 [1956].

[34] Allstate Insurance Company v. Cook, 519 P. 2d 66 [1974].

[35] Coleman Company v. International Union, Etc., supra: Local 63, Textile Workers Union v. Cheney Brothers, 109 A. 2d 240 [1954]

[36] ART. 2038 A compromise in which there is mistake, fraud, violence, intimidation, undue influence, or falsity of documents, is subject to the provisions of article 1330 of this Code.

[37] ART. 2039.  When the parties compromise generally on all differences which they might have with each other, the discovery of documents referring to one or more but not to all of the questions settled shall not itself be a cause for annulment or rescission of the compromise, unless said documents have been concealed by one of the parties.

But the compromise may be annulled or rescinded if it refers only to one thing to which one of the parties has no right, as shown by the newly-discovered documents.

[38] ART 2040.  If after a litigation has been decided by a final judgment, a compromise should be agreed upon, either or both parties being unaware of the existence of the final judgment, the compromise may be rescinded.

[39]  206 SCRA 545, 553-555 [1992].

[40] Storer Broadcasting v. American Federation of Tel., 600 F. 2d 45 [1979].

[41] See Wilko v Swan, 346 U.S. 427, 74 S. Ct. 182, 98 L. 168 [1953].

Note: U.S. laws on voluntary arbitration as alternative mode of setting disputes provide substantially similar grounds to vacate an award as those in Philippine laws.  Under the Uniform Arbitration Act, the grounds for vacation of an award are as follows:

· Procurement by corruption, fraud, or other undue means

· Partialilty on the part of an arbitrator appointed as neutral

· Misconduct or corruptions of the arbitrators

· Exceeding of powers by the arbitrators

· Refusal of arbitrators to hear material evidence, or to give a postponement where there was sufficient cause

· Prejudicial misconduct of the hearing

· Lack of a valid arbitration agreement, the issue not having been determined

· Similar grounds for vacation of the award are stated in the United States Arbitration Act:

· Corruption, fraud or undue means.

· Evident partiality or corruption.

· Misconduct in refusal to postpone the hearing or to hear material evidence, or any other misbehavior prejudicial to the rights of any party.

· The arbitrators exceeded their powers or so imperfectly executed them that a mutual, final and definite award was not made.  [4 Am Jur 2d., 235-236]

[42] CA Rollo, pp. 176-179.

[43] Sec. 3 (m) and (q), Rule 131, Rules of Court.

[44] CA Rollo, pp. 76-77.  Underscoring in the original.

[45] Id., at 111-112.

[46] Id., at 102.  Underscoring in the original.

[47] Article 1318, Civil Code.

[48] Article 1308, id.

[49] CA Rollo p. 140.

[50] In the computation of the award the Arbitration Committee deducted the share of DBP, thus:

As this Committee holds that the FRP is valid, DBP’s equity in MMIC is raised to 87%.  So pursuant to the provision of the Compromise and Arbitration Agreement, the 87% equity of DBP is hereby deducted from the actual damages x x x. (See note 16.)

[51] CA Rollo, p. 137.

[52] Id., at 148-150.

[53] Id., at 179-180.

[54] Article 1887, Civil Code.

[55] CA Rollo, p. 178.

[56] Gamboa vs. Victoriano, 90 SCRA 40, 47 [1979].

[57] Agbayani’s Commercial Law of the Philippines, Vol. III, p. 566, citing Ballantine, pp. 366-367.

[58] Id., at 565-566.

[59] See Evangelista vs. Santos, 86 Phil. 387 [1950].

[60] CA Rollo, pp. 170-172.

[61] Id., at 167.[62] Sec 4 of the Rules of the Court (before its amendment by the 1998 Rules of Court Procedure) provides:Sec. 4.  Effect of splitting a single cause of action. – If two or more complaints are brought for different parts of a single cause of action, the filing of the first may be pleaded in abatement of the other or others, in accordance with section 1(e) of Rule 16, and a judgment upon the merits in any one is available as a bar to the other.[63] Article 2, Corporation Code.[64] CA Rollo, pp. 174-175.  Underscoring in the original.[65] Caneda, Jr. vs. Court of Appeals, 181 SCRA 762 {1990]; Quisumbing vs. Court of Appeals, 122 SCRA 703 [1983]; Board of Liquidators vs. Zulueta, 115 SCRA 548 [1982].

FIRST DIVISION

[G.R. No. 141855.  February 6, 2001]

ZACARIAS COMETA and HERCO REALTY & AGRICULTURAL CORPORATION, petitioners, vs. COURT OF APPEALS and JOSE FRANCO, respondents.

D E C I S I O N

YNARES-SANTIAGO, J.:

Challenged in this petition for review under Rule 45 of the Rules of Court is the Decision of the Court of Appeals dated January 25, 1999[1] in CA-G.R. SP No. 48277, entitled “Zacarias Cometa, et al. v. Hon. Perfecto Laggui, et al.,” and the Resolution dated January 27, 2000[2] denying petitioner’s motion for reconsideration.

The pertinent factual antecedents are matters of record or are otherwise uncontroverted.

On July 2, 1976, the quondam Court of First Instance (CFI) of Rizal, Branch 15 [3] at Makati rendered a Decision in Civil Case No. 17585 for Damages, entitled “Jose Franco v. Zacarias Cometa,” awarding to herein private respondent Jose Franco, the sum of P57,396.85.[4]

The judgment became final on March 9, 1978.  Subsequently, a writ of execution was issued.  Pursuant thereto, the sheriff levied on execution three (3) commercial lots of petitioner Zacarias Cometa[5] located at Guadalupe, Makati.

On October 17, 1978, two (2) of the lots were sold to respondent Franco at public auction for the amount of P57,396.85. The sheriff’s return was made on March 12, 1981.[6]

On November 17, 1981, petitioner Herco Realty & Agricultural Development Corporation (Herco) filed Civil Case No. 43846 with the same CFI Rizal, Branch 15, to annul the levy on execution and sale at public auction of the real properties.[7] The complaint alleged that the ownership of the lots had been transferred by Cometa to Herco before the execution sale.   It assailed the validity of the levy and sale on the ground that the sheriff, in disregard of the proper

procedural practice, immediately proceeded against Cometa’s real properties without first exhausting his personal properties; that the lots were sold en masse and not by parcel; and that the said properties which are commercial lots situated in Guadalupe, Makati, and are conservatively valued at P500,000.00, were sold only for P57,396.85, the amount of the judgment.[8]

Meanwhile, on March 22, 1982, the same court, now designated as Regional Trial Court, Branch 60, issued an order in Civil Case No. 17585 directing the Register of Deeds of Rizal to cancel petitioner Cometa’s certificates of title to the lots and to issue new ones in favor of respondent Franco. Cometa, who died during the pendency of the proceedings, was substituted by his heirs, who filed before this Court a petition for certiorari questioning the said order.  The petition was, however, dismissed on February 28, 1983.[9]

On May 13, 1983, Franco filed with the Regional Trial Court of Makati, Branch 140, a motion for issuance of writ of possession.  Cometa opposed the motion on the ground that there was pending before another Regional Trial Court an action for annulment of levy and sale of the properties in question.[10]

On August 12, 1983, the trial court issued an order granting the motion; but the same was reconsidered and set aside on November 18, 1983 on the ground that the issuance of the writ of possession was premature,[11] considering that the RTC of Makati, Branch 60, had not yet decided the case filed by Herco and Cometa for the annulment of the levy and sale of the properties.

Franco then instituted a special civil action for certiorari  with this Court on June 27, 1984, but the case was referred to the Intermediate Appellate Court, which subsequently reversed the ruling of the RTC, Branch 140, on October 4, 1984, and granted the issuance of the writ of possession in Franco’s favor.[12]

Cometa and Herco elevated their cause to this Court, where the same was docketed as G.R. No. L-69294 and entitled, “Zacarias Cometa and Herco Realty and Agricultural Development Corporation v. IAC and Jose Franco.” In a Decision dated June 30, 1987,[13] this Court reversed the appellate court and withheld the granting of the writ of possession pending the promulgation of the resolution of the RTC, Branch 60, on the issue of whether or not the levy and sale of Cometa’s properties are valid.  In the said judgment, this Court said:

In the case at bar, the validity of the levy and sale of the properties is directly put in issue in another case by the petitioners.  This Court finds it an issue which requires pre-emptive resolution.  For if the respondent acquired no interest in the property by virtue of the levy and sale, then, he is not entitled to its possession.

The respondent appellate court’s emphasis on the failure of the petitioner to redeem the properties within the period required by law is misplaced because redemption, in this case, is inconsistent with petitioner’s claim of invalidity of levy and sale.  Redemption is an implied admission of the regularity of the sale and would estop the petitioner from later impugning its validity on that ground.[14]

Moreover, equitable considerations constrain us to reverse the decision of respondent court.  The fact is undisputed that the properties in question were sold at an unusually

lower price than their true value.  Properties worth at least P500,000.00 were sold for only P57,396.85.  We do not comment on the consequences of the inadequacy because that is the very issue which confronts the court below in the pending case.  It appearing, however, that the issuance of the writ of possession would and might work injustice because the petitioner might not be entitled thereto, we rule that it be withheld.

Thereafter, in Civil Case No. 43846, Branch 60 of the Makati RTC issued an order dated July 21, 1993 dismissing the case on the ground of “lack of interest in the prosecution of the complaint” for failure of the representatives of Cometa and Herco to appear.

The order of dismissal was affirmed by the Court of Appeals on July 16, 1996 and by this Court on January 20, 1997 in G.R. No. 126760. On February 26, 1997, this Court’s Resolution which, in effect, upheld the validity of the assailed levy and sale, became final and executory.

On May 2, 1997, Franco again filed, this time with Branch 60 of the RTC of Makati City, a motion for issuance of writ of possession and cancellation of lis pendens.  The heirs of Cometa opposed the motion claiming that they intended to redeem the properties.

On December 4, 1997, Cometa’s heirs consigned with the Office of the Clerk of Court, RTC, Makati City, the sum of P38,761.05 as purchase price for the lots, plus interest of P78,762.69 and P1,175.25 as realty tax.

On June 8, 1998, Branch 60 of the Makati City RTC issued an order [15] which reads in part as follows:

6.2.  With the dismissal of Civil Case No. 43846, did HERCO and the HEIRS still have the right to redeem?

x x x       x x x       x x x

11.            What may be inferred from the aforesaid decisions (except Sumerariz v. DBP) is that the running of the period of redemption is suspended if the validity of the sale is questioned at any time within the said period of redemption.

12.            When the validity of the sale is questioned after the period of redemption has expired, the rule that the filing of the action questioning such validity suspends the running of the period for redemption no longer applies.  This is only logical – for there would no longer be any period to be suspended – it has already expired.  Where the sale is declared void in such action, there would be no right of redemption to speak of thereafter, for legally speaking, there was no sale at all.  A void sale would be inconsistent with a right of redemption.  For in such case, the buyer has not acquired any right over the property sold to him.  Hence, there is nothing that could be redeemed by the owner of the property.

13.            The certificate of sale of the two (2) lots was registered and annotated in the corresponding certificates of title on January 25, 1980.  The period of redemption expired twelve (12) months thereafter (Section 30, Rule 39, Rules of Court) – or on January 20, 1981.  Civil Case No. 43846 was filed on November 27, 1981 – or more than ten (10) months after the period of redemption expired.  Hence, when Civil Case No. 43846 was filed, there was no longer any period of redemption that could be suspended.

x x x       x x x       x x x

23.3     Accordingly:

23.3.1.            The Officer-in-Charge [is ordered] to issue the corresponding writ of possession over the lots covered by Transfer Certificates of Title Nos. 113114 and 113115 in favor of JOSE FRANCO.

Dissatisfied, Cometa’s heirs and Herco filed a petition for certiorari with the Court of Appeals, docketed as CA-G.R. SP No. 48227, asserting that –

I

RESPONDENT JUDGE GRAVELY ABUSED HIS DISCRETION IN DISREGARDING NO LESS THAN THE SUPREME COURT’S DECLARATION IN COMETA v. INTERMEDIATE APPELLATE COURT THAT COMETA STILL HAS A RIGHT TO REDEEM.

II

RESPONDENT JUDGE GRAVELY ABUSED HIS DISCRETION IN DENYING COMETA’S REDEMPTION IN THAT EVEN ABSENT THE SUPREME COURT’S PRONOUNCEMENT IN COMETA v. INTERMEDIATE APPELLATE COURT, COMETA WOULD STILL HAVE THE RIGHT TO REDEEM UNDER SETTLED JURISPRUDENCE.

III

RESPONDENT JUDGE GRAVELY ABUSED HIS DISCRETION IN DENYING COMETA’S REDEMPTION IN THAT AT THE VERY LEAST THE LAW RESOLVES ALL DOUBTS IN FAVOR OF THE RIGHT TO REDEEM.

The appellate court’s 10th Division thereafter promulgated a Decision dated January 25, 1999,[16] affirming the order of respondent presiding Judge of Branch 60, Makati City RTC, and denying due course to the petition.

A motion for reconsideration of the said decision was likewise denied by a Special Division of Five Justices.

Hence, this petition for review on the following grounds:

THE COURT OF APPEALS HAS DECIDED A QUESTION OF SUBSTANCE NOT HERETOFORE DECIDED BY THIS HONORABLE COURT OR HAS DECIDED IT NOT IN ACCORD WITH THE APPLICABLE DECISIONS OF THIS HONORABLE COURT IN THAT:

A.     COMETA v. INTERMEDIATE APPELLATE COURT HAS ALREADY DETERMINED THAT COMETA STILL HAS A RIGHT TO REDEEM

B.     EVEN ABSENT THE PRONOUNCEMENT IN COMETA v. INTERMEDIATE APPELLATE COURT, COMETA WOULD STILL HAVE THE RIGHT TO REDEEM UNDER SETTLED JURISPRUDENCE

C.     AT THE VERY LEAST, THE LAW RESOLVES ALL DOUBTS IN FAVOR OF THE RIGHT TO REDEEM.

Considering the pleadings filed by the parties, this Court resolved to dispense with the filing of memoranda, give due course to the petition and decide the same.

The questions raised by petitioners can be reduced to the primordial issue of whether or not petitioners can still redeem the properties subject of this litigation.

In ruling in the negative, the appellate court opined, among others, that –

Section 30, Rule 39 of the Revised Rules of Court is very explicit: “(t)he judgment debtor or redemptioner may redeem the property from the purchaser at any time within twelve (12) months after the sale, xxx.” (italics ours) In the case at bar, the sale took place on October 17, 1978.  The Certificate of Sale was registered and annotated on the TCT Nos. S-79894 and 79895 on January 25, 1980.  The Officer’s Final Deed of Sale was executed in favor of Franco on March 2, 1981.  Petitioners questioned the validity of the sale only on November 27, 1981 or more than three (3) years after the said sale.  We agree with respondent judge that “(w)hen the validity of the sale is questioned after the period of redemption has expired, the rule that the finding of the action questioning such validity suspends the running of the redemption period, no longer applies.  This is only logical – for there would no longer be any period to be suspended – it has already expired.” We likewise agree that to still allow redemption “counted from February 26, 1997, when the Resolution in G.R. L-126760 became final and executory xxx would give rise to mischievous legal consequences.  For this would be a device to revive a lost right of redemption.  Under this theory, a party who lost the right of redemption could just file an action to set aside the sale on the ground that it was a nullity confident that if the action does not prosper, he would still be entitled to redeem thereafter.  This could not be validly done.” xxx The failure of petitioners to redeem the properties after the expiration of

the redemption period vests title over the property to private respondent.[17] The Supreme Court has uniformly ruled that redemption from execution sales under ordinary judgments pursuant to Section 30, Rule 39 of the Rules of Court should be made within twelve (12) months[18] from the registration of the same xxx.”[19] In Juan Mateo vs. The Court of Appeals and Severino Alberto, 99 Phil. 1042 (unreported), the High Court categorically said that “(t)he right of redemption in execution sales being statutory, it must, to make it effective, be exercised in the mode prescribed by the statute.” We therefore find petitioners’ invocation of the liberal ruling of the Supreme Court on the exercise of the right to redemption to have neither factual nor legal basis.  The Court has no alternative but to apply Section 35 of Rule 39 of the Rules of Court to the letter.[20]

We disagree.

Paraphrasing what we trenchantly pointed out in Hermoso v. CA,[21] we test a law by its result.  A law should not be interpreted so as to cause an injustice.  There are laws which are generally valid but may seem arbitrary when applied in a particular sense because of its peculiar circumstances.  We are not bound to apply them in servile subservience to their language.  More explicitly –

. . . we interpret and apply the law not independently of but in consonance with justice.  Law and justice are inseparable, and we must keep them so.  To be sure, there are some laws that, while generally valid, may seem arbitrary when applied in a particular case because of its peculiar circumstances.  In such a situation, we are not bound, because only of our nature and functions, to apply them just the same, in slavish obedience to their language. What we do instead is find a balance between the word and the will, that justice may be done even as the law is obeyed.

As judges, we are not automatons.  We do not and must not unfeelingly apply the law as it is worded, yielding like robots to the literal command without regard to its cause and consequence. “Courts are apt to err by sticking too closely to the words of the law,” so we were warned, by Justice Holmes again, “where these words import a policy that goes beyond them.”[22] While we admittedly may not legislate, we nevertheless have the power to interpret the law in such a way as to reflect the will of the legislature.  While we may not read into the law a purpose that is not there, we nevertheless have the right to read out of it the reason for its enactment.  In doing so, we defer not to “the letter that killeth” but to the “the spirit that vivifieth,” to give effect to the lawmaker’s will.

The spirit rather than the letter of the statute determines its construction, hence, a statute must be read according to its spirit or intent.  For what is within the spirit is within the statute although it is not within the letter thereof, and that which is within the letter but not within the spirit is not within the statute.  Stated differently, a thing which is within the intent of the lawmaker is as much within the statute as if within the letter; and a thing which is within the letter of the statute is not within the statute unless within the intent of the lawmakers.[23]

Stated differently, the legal perspective within which the right to redeem can still be availed of or not must be viewed in the light of the dictum thatthe policy of the law is to aid rather than defeat the right of redemption.[24] In short, the statute, being remedial, is to be construed liberally to effectuate the remedy and carry out its evident spirit and purpose.[25] Thus, the Court allowed parties in several cases to perfect their right of redemption even beyond the period prescribed therefor.[26] We can do no less vis-à-vis the prevailing facts of this case for the following reasons:

First, we are confronted with the grossly and patently iniquitous spectacle of petitioners being made to pay a money judgment amounting to P57,396.85 with their two (2) parcels of prime land conservatively valued at that time at P500,000.00, on account of the lapse of the period given for exercising their right – despite their apparent willingness and ability to pay the money judgment.  Although this was the very fact in issue in the second case, the gross disparity of the money judgment to the value of the levied real properties was not lost on the Court when, in Cometa v. IAC,[27] it said that –

Moreover, equitable considerations constrain us to reverse the decision of the respondent court (Intemediate Appellate Court).  The fact is undisputed that the properties in question were sold at an unusually lower price than their true value.  Properties worth at least P500,000.00 were sold for only P57,396.85.  We do not comment on the consequences of the inadequacy because that is the very issue which confronts the court below in the pending case.  It appearing, however, that the issuance of the writ of possession would and might work injustice because the petitioner might not be entitled thereto, we rule that it be withheld.

There is no question that petitioners were remiss in attending with dispatch to the protection of their interests as regards the subject lots, and for that reason the case in the lower court was dismissed on a technicality and no definitive pronouncement on the inadequacy of the price paid for the levied properties was ever made.  In this regard, it bears stressing that procedural rules are not to be belittled or dismissed simply because their non-observance may have resulted in prejudice to a party’s substantive rights as in this case.  Like all rules, they are required to be followed except only when for the most persuasive of reasons they may be relaxed to relieve a litigant of an injustice not commensurate with the degree of his thoughtlessness in not complying with the procedure prescribed.[28]

Such compelling justifications for taking exception to the general rule are strewn all over the factual landscape of this case.  Pertinently, in Dayag v. Canizares,[29] we said that –

…where a rigid application of the rule will result in a manifest failure or miscarriage of justice, technicalities may be disregarded in order to resolve the case.  Litigations should, as much as possible, be decided on the merits and not on technicalities.[30] xxx Given the foregoing, it seems improper to nullify Young’s motion on a mere technicality.  Petitioner’s averments should be given scant consideration to give way to the more substantial matter of equitably determining the rights and obligations of the parties.  It need not be emphasized that rules of procedure must be interpreted in a manner that will help secure and not defeat justice.[31] (emphasis and italics supplied)

In short, since rules of procedure are mere tools designed to facilitate the attainment of justice, their strict and rigid application which would result in technicalities that tend to frustrate rather than promote substantial justice must always be avoided. [32] Technicality should not be allowed to stand in the way of equitably and completely resolving the rights and obligations of the parties.[33] It was thus towards this sacrosanct goal that this Court in the recent case of Paz Reyes Aguam v. CA, et al.[34] held:

. . .The law abhors technicalities that impede the cause of justice. The court’s primary duty is to render or dispense justice[35] “A litigation is not a game of technicalities.”[36] “Law suits unlike duels are not to be won by a rapier’s thrust.  Technicality, when it deserts its proper office as an aid to justice and becomes its great hindrance and chief enemy, deserves scant consideration from courts.”[37] Litigations must be decided on their merits and not on technicality.[38] Every party litigant must be afforded the amplest opportunity for the proper and just determination of his cause, free from the unacceptable plea of technicalities.[39]. . the rules of procedure ought not to be applied in a very rigid, technical sense; rules of procedure are used only to help secure, not override substantial justice.[40] It is a far better and more prudent course of action for the court to excuse a technical lapse and afford the parties a review of the case on appeal to attain the ends of justice rather than dispose of the case on technicality and cause a grave injustice to the parties, giving a false impression of speedy disposal of cases while actually resulting in more delay, if not miscarriage of justice. (emphasis and italics ours)

Second, while there is no dispute that mere inadequacy of the price per se will not set aside a judicial sale of real property, nevertheless, where the inadequacy of the price is purely shocking to the conscience,[41] such that the mind revolts at it and such that a reasonable man would neither directly or indirectly be likely to consent to it, [42] the same will be set aside.[43] Thus, in one case,[44] the judicial sale of land worth P60,000.00 for P867.00 was considered shocking to the conscience.  So also, the sale of properties at around 10% of their values, as when a radio worth P1,000.00 was sold for P100.00 and a matrimonial bed costing P500.00 was sold for P50.00, the price was held to be grossly inadequate.[45] How much more the judicial sale of two (2) prime commercial lots located in Guadalupe, Makati, conservatively valued at P500,000.00 in 1987, to satisfy a money judgment of P57,396.85?

Third, the questionable manner in which the said lots were levied upon and sold at public auction has, likewise, caught the attention of the Court.  The manner of execution of money judgments is governed by Section 15, Rule 39 of the Rules of Court, which was then in force, thus:

SEC. 15.  Execution of money judgments. – The officer must enforce an execution of a money judgment by levying on all the property, real and personal property of every name and nature whatsoever, and which may be disposed of for value, of the judgment debtor not exempt from execution, or on a sufficient amount of such property, if there be sufficient, and selling the same, and paying to the judgment

creditor or his attorney, so much of the proceeds as will satisfy the judgment.  Any excess in the proceeds over the judgment and the accruing costs must be delivered to the judgment debtor, unless otherwise directed by the judgment or order of the court. When there is more property of the judgment debtor than is sufficient to satisfy the judgment and accruing costs, within the view of the officer, he must levy only on such part of the property as is amply sufficient to satisfy the judgmentand costs. xxx (emphasis and italics supplied)

In relation to the foregoing, Section 21, also of Rule 39, provides that –

SEC. 21.  How property sold on execution; Who may direct manner and order of sale. – All sales of property under execution must be made at public auction, to the highest bidder, between the hours of nine in the morning and five in the afternoon.  After sufficient property has been sold to satisfy the execution, no more shall be sold.  When the sale is of real property, consisting of several known lots, they must be sold separately; or, when a portion of such real property is claimed by a third person, he may require it to be sold separately.  When the sale is of personal property capable of manual delivery, it must be sold within view of those attending the sale and in such parcels as are likely to bring the highest price.  The judgment debtor, if present at the sale, may direct the order in which property, real or personal, shall be sold, when such property shall consist of several known lots or parcels which can be sold to advantage separately.  Neither the officer holding the execution nor his deputy can become a purchaser, nor be interested directly or indirectly in any purchase at such sale. (emphasis and italics supplied)

In the case at bar, the subject lots were sold en masse, not separately as above provided.  The unusually low price for which they were sold to the vendee, not to mention his vehement unwillingness to allow redemption therein, only serves to heighten the dubiousness of the transfer.

Fourth, with regard to the applicability of prescription and laches, there can be no question that they operate as a bar in equity.  However, it must be pointed out that the question of prescription or laches can not work to defeat justice or to perpetrate fraud and injustice. [46] As explicitly stated by this Court in Santiago v. Court of Appeals:[47]

As for laches, its essence is the failure or neglect, for an unreasonable and unexplained length of time to do that which, by the exercise of due diligence, could or should have been done earlier; it is the negligence or omission to assert a right within a reasonable time, warranting a presumption that the party entitled to assert it either has abandoned it or declined to assert it.[48] But there is, to be sure, no absolute rule as to what constitutes laches or staleness of demand; each case is to be determined according to its particular circumstances.  The question of laches is addressed to the sound discretion of the court and since laches is an equitable doctrine, its application

is controlled by equitable considerations.  It cannot be worked to defeat justice or to perpetrate fraud and injustice.[49] In the case under consideration, it would not only be impractical but well-nigh unjust and patently iniquitous to apply laches against private respondent and vest ownership over a valuable piece of real property in favor of petitioners . . . It is the better rule that courts under the principle of equity, will not be guided or bound strictly by the statute of limitations or the doctrine of laches when to do so, manifest wrong or injustice would result.[50] (Emphasis provided)

Lastly, petitioners have demonstrated, albeit tardily, an earnest and sincere desire to redeem the subject properties when Cometa’s heirs, on December 4, 1997, consigned with the Office of the Clerk of Court, RTC Makati, the sum of P38,761.05 as purchase price for the lots, plus interest of P78,762.69 and P1,175.25 as realty tax.  The rule on redemption is liberally construed in favor of the original owner of the property and the policy of the law is to aid rather than defeat him in the exercise of his right of redemption.[51] Thus, we allowed parties in several cases to perfect their right of redemption even beyond the period prescribed therefor.[52]

WHEREFORE, in view of all the foregoing, the challenged Decision of the Court of Appeals dated January 25, 1999, which affirmed the trial court’s denial of petitioners’ right of redemption, as well as the subsequent Resolution dated January 27, 2000, in CA-G.R. SP No. 48227 entitled “Zacarias Cometa, et al. v. Hon. Pedro Laggui, et al.,” are REVERSED and SET ASIDE; and another one hereby rendered ordering respondent Jose Franco to accept the tender of redemption made by petitioners and to deliver the proper certificate of redemption to the latter.

SO ORDERED.

Puno, Kapunan, and Pardo, JJ., concur.Davide, Jr., C.J. (Chairman), in the result.

[1] Rollo, pp. 35-38.

[2] Ibid., pp. 39-40.

[3] Which later became Branch 60 of the Regional Trial Court of Makati as per Section 14, B.P. Blg. 129.

[4] See Cometa v. IAC, 151 SCRA 563, 565 [1987].

[5] Ibid.

[6] Id.

[7] Id.

[8] Id., pp. 565-566.

[9] Id., p. 566.

[10] Id.

[11] Id.

[12] Id.

[13] See 151 SCRA 563 [1987].

[14] Citing Castillo v. Nagtalon, 4 SCRA 48 [1962].

[15] Rollo, pp. 76-84.

[16] Ibid., pp. 34-38.

[17] Citing Palma v. CA, 232 SCRA 714 [1994].

[18] Rule 39, Section 28 of the 1997 Rules of Civil Procedure now provides that the period for redemption shall be “at any time within one (1) year from the date of registration of the certificate of sale,” so that the period is now to be understood as composed of 365 days.

[19] Citing Quimson v. PNB, 36 SCRA 26 [1970].

[20] Citing CMS Stock Brokerage v. CA, 275 SCRA 790 [1997].

[21] 300 SCRA 516 [1998].

[22] Dissenting in Olmstead v. U.S., 277 U.S. 438.

[23] Alonzo v. IAC, 150 SCRA 259 [1987], citing Agpalo R.E., Statutory Construction, pp. 64-65 [1986], citing U.S. v. Go Chico, 14 Phil. 128 [1909]; Roa v. Collector of Customs, 23 Phil. 315 [1912]; Manila Race Horse Trainer’s Association v. De la Fuente, 88 Phil. 60 [1951]; Go Chi v. Go Cho, 96 Phil. 622 [1955]; Villanueva v. City of Iloilo, 26 SCRA 578 [1969]; Hidalgo v. Hidalgo, 33 SCRA 105 [1970]; People v. Purisima, 86 SCRA 542 [1978].

[24] Bodiongan v. CA, 248 SCRA 496 [1995], citing Tibajia v. CA, 193 SCRA 581 [1991]; De Los Reyes v. IAC, 176 SCRA 394 [1989]; Sulit v. CA, 268 SCRA 441 [1997]; Lee Chuy Realty Corporation v. CA, 250 SCRA 596 [1995].

[25] II Moran, Rules of Court, p. 403, 1996 ed., citing Enage v. Vda. de Hijos de Escano, 38 Phil. 657 [1918], citing Schuck v. Gerlach, 101 Ill. 338.

[26] Ysmael v. CA, 318 SCRA 215, 226 [1999], citing Castillo v. Nagtalon, 114 Phil. 7 [1962]; De Los Reyes v. IAC, supra; and Bodiongan v. CA, supra.

[27] 151 SCRA 563 [1987].

[28] Limpot v. CA, 170 SCRA 367 [1989].

[29] 287 SCRA 181 [1998].

[30] People v. Leviste, 255 SCRA 238 [1996].

[31] El Toro Security Agency v. NLRC, 256 SCRA 363 [1996].

[32] RCPI  v. NLRC, 210 SCRA 222 [1992].

[33] Casa Filipina Realty Corporation v. Office of the President, 241 SCRA 165 [1995], citing Rapid Manpower Consultants, Inc. v. NLRC, 190 SCRA 747 [1990].

[34] G.R. No. 137672, 31 May 2000.

[35] Alonso v. Villamor, 16 Phil. 315 [1910]; Aguinaldo v. Aguinaldo, 36 SCRA 137 [1970]; Canlas v. CA, 164 SCRA 160 [1988].

[36] Alonso v. Villamor, supra; Canlas v. CA, supra.

[37] Alonso v. Villamor, supra; Canlas v. CA, supra; American Express International, Inc. v. IAC, 167 SCRA 209 [1988].

[38] Tan Boon Bee & Co., Inc. v. Judge Jarencio, 163 SCRA 205 [1988], citing de las Alas v. CA, 83 SCRA 200 [1978]; Nerves v. CSC, 276 SCRA 610 [1997].

[39] Tan Boon Bee & Co., Inc. v. Judge Jarencio, supra, citing Heirs of Ceferino Morales v. CA, 67 SCRA 304 [1975]; A-One Feeds, Inc. v. CA, 100 SCRA 590 [1980].

[40] American Home Insurance Co. v. CA, 109 SCRA 180 [1981] concurring opinion, citing Gregorio v. CA, supra; Catindig v. CA, supra; Nerves v. CSC, supra.

[41] Cachola v. CA, 208 SCRA 496 [1992], citing Vda. de Cruzo v. Cariaga, 174 SCRA 330 [1989] and Prudential Bank v. Martinez, 189 SCRA 612 [1990].

[42] Vda. de Alvarez v. CA, 231 SCRA 309 [1994].

[43] Director of Lands v. Abarca, 60 Phil. 70 [1934].

[44] Director of Lands v. Abarca, supra.

[45] Provincial Sheriff of Rizal v. CA, L-23114, 12 December 1975.

[46] Jimenez v. Fernandez, 184 SCRA 190 [1990].

[47] 278 SCRA 98,112-113 [1997].

[48] Felix v. Buenaseda, 240 SCRA 139 [1995], citing Cristobal v. Melchor, 78 SCRA 175 [1977].

[49] Jimenez v. Fernandez, supra.

[50] Raneses v. IAC, 187 SCRA 397 [1990], citing Cristobal v. Melchor, supra.

[51] Ysmael, Jr. v. CA, supra; see also Lee Chuy Realty Corp. v. CA, 250 SCRA 596 [1995].

[52] Ibid.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

 

G.R. No. 114222 April 6, 1995

FRANCISCO S. TATAD, JOHN H. OSMENA and RODOLFO G. BIAZON, petitioners, vs.HON. JESUS B. GARCIA, JR., in his capacity as the Secretary of the Department of Transportation and Communications, and EDSA LRT CORPORATION, LTD., respondents.

 

QUIASON, J.:

This is a petition under Rule 65 of the Revised Rules of Court to prohibit respondents from further implementing and enforcing the "Revised and Restated Agreement to Build, Lease and Transfer a Light Rail Transit System for EDSA" dated April 22, 1992, and the "Supplemental Agreement to the 22 April 1992 Revised and Restated Agreement To Build, Lease and Transfer a Light Rail Transit System for EDSA" dated May 6, 1993.

Petitioners Francisco S. Tatad, John H. Osmena and Rodolfo G. Biazon are members of the Philippine Senate and are suing in their capacities as Senators and as taxpayers. Respondent Jesus

B. Garcia, Jr. is the incumbent Secretary of the Department of Transportation and Communications (DOTC), while private respondent EDSA LRT Corporation, Ltd. is a private corporation organized under the laws of Hongkong.

I

In 1989, DOTC planned to construct a light railway transit line along EDSA, a major thoroughfare in Metropolitan Manila, which shall traverse the cities of Pasay, Quezon, Mandaluyong and Makati. The plan, referred to as EDSA Light Rail Transit III (EDSA LRT III), was intended to provide a mass transit system along EDSA and alleviate the congestion and growing transportation problem in the metropolis.

On March 3, 1990, a letter of intent was sent by the Eli Levin Enterprises, Inc., represented by Elijahu Levin to DOTC Secretary Oscar Orbos, proposing to construct the EDSA LRT III on a Build-Operate-Transfer (BOT) basis.

On March 15, 1990, Secretary Orbos invited Levin to send a technical team to discuss the project with DOTC.

On July 9, 1990, Republic Act No. 6957 entitled "An Act Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector, and For Other Purposes," was signed by President Corazon C. Aquino. Referred to as the Build-Operate-Transfer (BOT) Law, it took effect on October 9, 1990.

Republic Act No. 6957 provides for two schemes for the financing, construction and operation of government projects through private initiative and investment: Build-Operate-Transfer (BOT) or Build-Transfer (BT).

In accordance with the provisions of R.A. No. 6957 and to set the EDSA LRT III project underway, DOTC, on January 22, 1991 and March 14, 1991, issued Department Orders Nos. 91-494 and 91-496, respectively creating the Prequalification Bids and Awards Committee (PBAC) and the Technical Committee.

After its constitution, the PBAC issued guidelines for the prequalification of contractors for the financing and implementation of the project The notice, advertising the prequalification of bidders, was published in three newspapers of general circulation once a week for three consecutive weeks starting February 21, 1991.

The deadline set for submission of prequalification documents was March 21, 1991, later extended to April 1, 1991. Five groups responded to the invitation namely, ABB Trazione of Italy, Hopewell Holdings Ltd. of Hongkong, Mansteel International of Mandaue, Cebu, Mitsui & Co., Ltd. of Japan, and EDSA LRT Consortium, composed of ten foreign and domestic corporations: namely, Kaiser Engineers International, Inc., ACER Consultants (Far East) Ltd. and Freeman Fox, Tradeinvest/CKD Tatra of the Czech and Slovak Federal Republics, TCGI Engineering All Asia Capital and Leasing Corporation, The Salim Group of Jakarta, E. L. Enterprises, Inc., A.M. Oreta & Co. Capitol Industrial Construction Group, Inc, and F. F. Cruz & co., Inc.

On the last day for submission of prequalification documents, the prequalification criteria proposed by the Technical Committee were adopted by the PBAC. The criteria totalling 100 percent, are as follows: (a) Legal aspects — 10 percent; (b) Management/Organizational capability — 30 percent; and (c) Financial capability — 30 percent; and (d) Technical capability — 30 percent (Rollo, p. 122).

On April 3, 1991, the Committee, charged under the BOT Law with the formulation of the Implementation Rules and Regulations thereof, approved the same.

After evaluating the prequalification, bids, the PBAC issued a Resolution on May 9, 1991 declaring that of the five applicants, only the EDSA LRT Consortium "met the requirements of garnering at least 21 points per criteria [sic], except for Legal Aspects, and obtaining an over-all passing mark of at least 82 points" (Rollo, p. 146). The Legal Aspects referred to provided that the BOT/BT contractor-applicant meet the requirements specified in the Constitution and other pertinent laws (Rollo, p. 114).

Subsequently, Secretary Orbos was appointed Executive Secretary to the President of the Philippines and was replaced by Secretary Pete Nicomedes Prado. The latter sent to President Aquino two letters dated May 31, 1991 and June 14, 1991, respectively recommending the award of the EDSA LRT III project to the sole complying bidder, the EDSA LRT Consortium, and requesting for authority to negotiate with the said firm for the contract pursuant to paragraph 14(b) of the Implementing Rules and Regulations of the BOT Law (Rollo, pp. 298-302).

In July 1991, Executive Secretary Orbos, acting on instructions of the President, issued a directive to the DOTC to proceed with the negotiations. On July 16, 1991, the EDSA LRT Consortium submitted its bid proposal to DOTC.

Finding this proposal to be in compliance with the bid requirements, DOTC and respondent EDSA LRT Corporation, Ltd., in substitution of the EDSA LRT Consortium, entered into an "Agreement to Build, Lease and Transfer a Light Rail Transit System for EDSA" under the terms of the BOT Law (Rollo, pp. 147-177).

Secretary Prado, thereafter, requested presidential approval of the contract.

In a letter dated March 13, 1992, Executive Secretary Franklin Drilon, who replaced Executive Secretary Orbos, informed Secretary Prado that the President could not grant the requested approval for the following reasons: (1) that DOTC failed to conduct actual public bidding in compliance with Section 5 of the BOT Law; (2) that the law authorized public bidding as the only mode to award BOT projects, and the prequalification proceedings was not the public bidding contemplated under the law; (3) that Item 14 of the Implementing Rules and Regulations of the BOT Law which authorized negotiated award of contract in addition to public bidding was of doubtful legality; and (4) that congressional approval of the list of priority projects under the BOT or BT Scheme provided in the law had not yet been granted at the time the contract was awarded (Rollo, pp. 178-179).

In view of the comments of Executive Secretary Drilon, the DOTC and private respondents re-negotiated the agreement. On April 22, 1992, the parties entered into a "Revised and Restated Agreement to Build, Lease and Transfer a Light Rail Transit System for EDSA" (Rollo, pp. 47-78) inasmuch as "the parties [are] cognizant of the fact the DOTC has full authority to sign the Agreement without need of approval by the President pursuant to the provisions of Executive Order No. 380 and that certain events [had] supervened since November 7, 1991 which necessitate[d] the revision of the Agreement" (Rollo, p. 51). On May 6, 1992, DOTC, represented by Secretary Jesus Garcia vice Secretary Prado, and private respondent entered into a "Supplemental Agreement to the 22 April 1992 Revised and Restated Agreement to Build, Lease and Transfer a Light Rail Transit System for EDSA" so as to "clarify their respective rights and responsibilities" and to submit [the] Supplemental Agreement to the President, of the Philippines for his approval" (Rollo, pp. 79-80).

Secretary Garcia submitted the two Agreements to President Fidel V. Ramos for his consideration and approval. In a Memorandum to Secretary Garcia on May 6, 1993, approved the said Agreements, (Rollo, p. 194).

According to the agreements, the EDSA LRT III will use light rail vehicles from the Czech and Slovak Federal Republics and will have a maximum carrying capacity of 450,000 passengers a day, or 150 million a year to be achieved-through 54 such vehicles operating simultaneously. The EDSA LRT III will run at grade, or street level, on the mid-section of EDSA for a distance of 17.8 kilometers from F.B. Harrison, Pasay City to North Avenue, Quezon City. The system will have its own power facility (Revised and Restated Agreement, Sec. 2.3 (ii); Rollo p. 55). It will also have thirteen (13) passenger stations and one depot in 16-hectare government property at North Avenue (Supplemental Agreement, Sec. 11; Rollo, pp. 91-92).

Private respondents shall undertake and finance the entire project required for a complete operational light rail transit system (Revised and Restated Agreement, Sec. 4.1; Rollo, p. 58). Target completion date is 1,080 days or approximately three years from the implementation date of the contract inclusive of mobilization, site works, initial and final testing of the system (Supplemental Agreement, Sec. 5; Rollo, p. 83). Upon full or partial completion and viability thereof, private respondent shall deliver the use and possession of the completed portion to DOTC which shall operate the same (Supplemental Agreement, Sec. 5; Revised and Restated Agreement, Sec. 5.1; Rollo, pp. 61-62, 84). DOTC shall pay private respondent rentals on a monthly basis through an Irrevocable Letter of Credit. The rentals shall be determined by an independent and internationally accredited inspection firm to be appointed by the parties (Supplemental Agreement, Sec. 6; Rollo, pp. 85-86) As agreed upon, private respondent's capital shall be recovered from the rentals to be paid by the DOTC which, in turn, shall come from the earnings of the EDSA LRT III (Revised and Restated Agreement, Sec. 1, p. 5; Rollo, p. 54). After 25 years and DOTC shall have completed payment of the rentals, ownership of the project shall be transferred to the latter for a consideration of only U.S. $1.00 (Revised and Restated Agreement, Sec. 11.1; Rollo, p. 67).

On May 5, 1994, R.A. No. 7718, an "Act Amending Certain Sections of Republic Act No. 6957, Entitled "An Act Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector, and for Other Purposes" was signed into law by the President. The law was published in two newspapers of general circulation on May 12, 1994, and took effect 15 days thereafter or on May 28, 1994. The law expressly recognizes BLT scheme and allows direct negotiation of BLT contracts.

II

In their petition, petitioners argued that:

(1) THE AGREEMENT OF APRIL 22, 1992, AS AMENDED BY THE SUPPLEMENTAL AGREEMENT OF MAY 6, 1993, INSOFAR AS IT GRANTS EDSA LRT CORPORATION, LTD., A FOREIGN CORPORATION, THE OWNERSHIP OF EDSA LRT III, A PUBLIC UTILITY, VIOLATES THE CONSTITUTION AND, HENCE, IS UNCONSTITUTIONAL;

(2) THE BUILD-LEASE-TRANSFER SCHEME PROVIDED IN THE AGREEMENTS IS NOT DEFINED NOR RECOGNIZED IN R.A. NO. 6957 OR ITS IMPLEMENTING RULES AND REGULATIONS AND, HENCE, IS ILLEGAL;

(3) THE AWARD OF THE CONTRACT ON A NEGOTIATED BASIS VIOLATES R; A. NO. 6957 AND, HENCE, IS UNLAWFUL;

(4) THE AWARD OF THE CONTRACT IN FAVOR OF RESPONDENT EDSA LRT CORPORATION, LTD. VIOLATES THE REQUIREMENTS PROVIDED IN THE IMPLEMENTING RULES AND REGULATIONS OF THE BOT LAW AND, HENCE, IS ILLEGAL;

(5) THE AGREEMENTS VIOLATE EXECUTIVE ORDER NO 380 FOR THEIR FAILURE TO BEAR PRESIDENTIAL APPROVAL AND, HENCE, ARE ILLEGAL AND INEFFECTIVE; AND

(6) THE AGREEMENTS ARE GROSSLY DISADVANTAGEOUS TO THE GOVERNMENT (Rollo, pp. 15-16).

Secretary Garcia and private respondent filed their comments separately and claimed that:

(1) Petitioners are not the real parties-in-interest and have no legal standing to institute the present petition;

(2) The writ of prohibition is not the proper remedy and the petition requires ascertainment of facts;

(3) The scheme adopted in the Agreements is actually a build-transfer scheme allowed by the BOT Law;

(4) The nationality requirement for public utilities mandated by the Constitution does not apply to private respondent;

(5) The Agreements executed by and between respondents have been approved by President Ramos and are not disadvantageous to the government;

(6) The award of the contract to private respondent through negotiation and not public bidding is allowed by the BOT Law; and

(7) Granting that the BOT Law requires public bidding, this has been amended by R.A No. 7718 passed by the Legislature On May 12, 1994, which provides for direct negotiation as a mode of award of infrastructure projects.

III

Respondents claimed that petitioners had no legal standing to initiate the instant action. Petitioners, however, countered that the action was filed by them in their capacity as Senators and as taxpayers.

The prevailing doctrines in taxpayer's suits are to allow taxpayers to question contracts entered into by the national government or government-owned or controlled corporations allegedly in contravention of the law (Kilosbayan, Inc. v. Guingona, 232 SCRA 110 [1994]) and to disallow the same when only municipal contracts are involved (Bugnay Construction and Development Corporation v. Laron, 176 SCRA. 240 [1989]).

For as long as the ruling in Kilosbayan on locus standi is not reversed, we have no choice but to follow it and uphold the legal standing of petitioners as taxpayers to institute the present action.

IV

In the main, petitioners asserted that the Revised and Restated Agreement of April 22, 1992 and the Supplemental Agreement of May 6, 1993 are unconstitutional and invalid for the following reasons:

(1) the EDSA LRT III is a public utility, and the ownership and operation thereof is limited by the Constitution to Filipino citizens and domestic corporations, not foreign corporations like private respondent;

(2) the Build-Lease-Transfer (BLT) scheme provided in the agreements is not the BOT or BT Scheme under the law;

(3) the contract to construct the EDSA LRT III was awarded to private respondent not through public bidding which is the only mode of awarding infrastructure projects under the BOT law; and

(4) the agreements are grossly disadvantageous to the government.

1. Private respondent EDSA LRT Corporation, Ltd. to whom the contract to construct the EDSA LRT III was awarded by public respondent, is admittedly a foreign corporation "duly incorporated and existing under the laws of Hongkong" (Rollo, pp. 50, 79). There is also no dispute that once the EDSA LRT III is constructed, private respondent, as lessor, will turn it over to DOTC, as lessee, for the latter to operate the system and pay rentals for said use.

The question posed by petitioners is:

Can respondent EDSA LRT Corporation, Ltd., a foreign corporation own EDSA LRT III; a public utility? (Rollo, p. 17).

The phrasing of the question is erroneous; it is loaded. What private respondent owns are the rail tracks, rolling stocks like the coaches, rail stations, terminals and the power plant, not a public utility. While a franchise is needed to operate these facilities to serve the public, they do not by themselves constitute a public utility. What constitutes a public utility is not their ownership but their use to serve the public (Iloilo Ice & Cold Storage Co. v. Public Service Board, 44 Phil. 551, 557 558 [1923]).

The Constitution, in no uncertain terms, requires a franchise for the operation of a public utility. However, it does not require a franchise before one can own the facilities needed to operate a public utility so long as it does not operate them to serve the public.

Section 11 of Article XII of the Constitution provides:

No franchise, certificate or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least sixty per centum of whose capital is owned by such citizens, nor shall such franchise, certificate or authorization be exclusive character or for a longer period than fifty years . . . (Emphasis supplied).

In law, there is a clear distinction between the "operation" of a public utility and the ownership of the facilities and equipment used to serve the public.

Ownership is defined as a relation in law by virtue of which a thing pertaining to one person is completely subjected to his will in everything not prohibited by law or the concurrence with the rights

of another (Tolentino, II Commentaries and Jurisprudence on the Civil Code of the Philippines 45 [1992]).

The exercise of the rights encompassed in ownership is limited by law so that a property cannot be operated and used to serve the public as a public utility unless the operator has a franchise. The operation of a rail system as a public utility includes the transportation of passengers from one point to another point, their loading and unloading at designated places and the movement of the trains at pre-scheduled times (cf. Arizona Eastern R.R. Co. v. J.A.. Matthews, 20 Ariz 282, 180 P.159, 7 A.L.R. 1149 [1919] ;United States Fire Ins. Co. v. Northern P.R. Co., 30 Wash 2d. 722, 193 P. 2d 868, 2 A.L.R. 2d 1065 [1948]).

The right to operate a public utility may exist independently and separately from the ownership of the facilities thereof. One can own said facilities without operating them as a public utility, or conversely, one may operate a public utility without owning the facilities used to serve the public. The devotion of property to serve the public may be done by the owner or by the person in control thereof who may not necessarily be the owner thereof.

This dichotomy between the operation of a public utility and the ownership of the facilities used to serve the public can be very well appreciated when we consider the transportation industry. Enfranchised airline and shipping companies may lease their aircraft and vessels instead of owning them themselves.

While private respondent is the owner of the facilities necessary to operate the EDSA. LRT III, it admits that it is not enfranchised to operate a public utility (Revised and Restated Agreement, Sec. 3.2; Rollo, p. 57). In view of this incapacity, private respondent and DOTC agreed that on completion date, private respondent will immediately deliver possession of the LRT system by way of lease for 25 years, during which period DOTC shall operate the same as a common carrier and private respondent shall provide technical maintenance and repair services to DOTC (Revised and Restated Agreement, Secs. 3.2, 5.1 and 5.2; Rollo, pp. 57-58, 61-62). Technical maintenance consists of providing (1) repair and maintenance facilities for the depot and rail lines, services for routine clearing and security; and (2) producing and distributing maintenance manuals and drawings for the entire system (Revised and Restated Agreement, Annex F).

Private respondent shall also train DOTC personnel for familiarization with the operation, use, maintenance and repair of the rolling stock, power plant, substations, electrical, signaling, communications and all other equipment as supplied in the agreement (Revised and Restated Agreement, Sec. 10; Rollo, pp. 66-67). Training consists of theoretical and live training of DOTC operational personnel which includes actual driving of light rail vehicles under simulated operating conditions, control of operations, dealing with emergencies, collection, counting and securing cash from the fare collection system (Revised and Restated Agreement, Annex E, Secs. 2-3). Personnel of DOTC will work under the direction and control of private respondent only during training (Revised and Restated Agreement, Annex E, Sec. 3.1). The training objectives, however, shall be such that upon completion of the EDSA LRT III and upon opening of normal revenue operation, DOTC shall have in their employ personnel capable of undertaking training of all new and replacement personnel (Revised and Restated Agreement, Annex E Sec. 5.1). In other words, by the end of the three-year construction period and upon commencement of normal revenue operation, DOTC shall be able to operate the EDSA LRT III on its own and train all new personnel by itself.

Fees for private respondent' s services shall be included in the rent, which likewise includes the project cost, cost of replacement of plant equipment and spare parts, investment and financing cost, plus a reasonable rate of return thereon (Revised and Restated Agreement, Sec. 1; Rollo, p. 54).

Since DOTC shall operate the EDSA LRT III, it shall assume all the obligations and liabilities of a common carrier. For this purpose, DOTC shall indemnify and hold harmless private respondent from any losses, damages, injuries or death which may be claimed in the operation or implementation of the system, except losses, damages, injury or death due to defects in the EDSA LRT III on account of the defective condition of equipment or facilities or the defective maintenance of such equipment facilities (Revised and Restated Agreement, Secs. 12.1 and 12.2; Rollo, p. 68).

In sum, private respondent will not run the light rail vehicles and collect fees from the riding public. It will have no dealings with the public and the public will have no right to demand any services from it.

It is well to point out that the role of private respondent as lessor during the lease period must be distinguished from the role of the Philippine Gaming Management Corporation (PGMC) in the case of Kilosbayan Inc. v. Guingona, 232 SCRA 110 (1994). Therein, the Contract of Lease between PGMC and the Philippine Charity Sweepstakes Office (PCSO) was actually a collaboration or joint venture agreement prescribed under the charter of the PCSO. In the Contract of Lease; PGMC, the lessor obligated itself to build, at its own expense, all the facilities necessary to operate and maintain a nationwide on-line lottery system from whom PCSO was to lease the facilities and operate the same. Upon due examination of the contract, the Court found that PGMC's participation was not confined to the construction and setting up of the on-line lottery system. It spilled over to the actual operation thereof, becoming indispensable to the pursuit, conduct, administration and control of the highly technical and sophisticated lottery system. In effect, the PCSO leased out its franchise to PGMC which actually operated and managed the same.

Indeed, a mere owner and lessor of the facilities used by a public utility is not a public utility (Providence and W.R. Co. v. United States, 46 F. 2d 149, 152 [1930]; Chippewa Power Co. v. Railroad Commission of Wisconsin, 205 N.W. 900, 903, 188 Wis. 246 [1925]; Ellis v. Interstate Commerce Commission, Ill 35 S. Ct. 645, 646, 237 U.S. 434, 59 L. Ed. 1036 [1914]). Neither are owners of tank, refrigerator, wine, poultry and beer cars who supply cars under contract to railroad companies considered as public utilities (Crystal Car Line v. State Tax Commission, 174 p. 2d 984, 987 [1946]).

Even the mere formation of a public utility corporation does not ipso facto characterize the corporation as one operating a public utility. The moment for determining the requisite Filipino nationality is when the entity applies for a franchise, certificate or any other form of authorization for that purpose (People v. Quasha, 93 Phil. 333 [1953]).

2. Petitioners further assert that the BLT scheme under the Agreements in question is not recognized in the BOT Law and its Implementing Rules and Regulations.

Section 2 of the BOT Law defines the BOT and BT schemes as follows:

(a) Build-operate-and-transfer scheme — A contractual arrangement whereby the contractor undertakes the construction including financing, of a given infrastructure facility, and the operation and maintenance thereof. The contractor operates the facility over a fixed term during which it is allowed to charge facility users appropriate tolls, fees, rentals and charges sufficient to enable the contractor to recover its operating and maintenance expenses and its investment in the project plus a reasonable rate of return thereon. The contractor transfers the facility to the government agency or local government unit concerned at the end of the fixed term which shall not exceed fifty (50) years. For the construction stage, the contractor may obtain financing from foreign and/or domestic sources and/or engage the services of a foreign and/or Filipino constructor [sic]: Provided, That the ownership structure of

the contractor of an infrastructure facility whose operation requires a public utility franchise must be in accordance with the Constitution: Provided, however, That in the case of corporate investors in the build-operate-and-transfer corporation, the citizenship of each stockholder in the corporate investors shall be the basis for the computation of Filipino equity in the said corporation: Provided, further, That, in the case of foreign constructors [sic], Filipino labor shall be employed or hired in the different phases of the construction where Filipino skills are available: Provided, furthermore, that the financing of a foreign or foreign-controlled contractor from Philippine government financing institutions shall not exceed twenty percent (20%) of the total cost of the infrastructure facility or project: Provided, finally, That financing from foreign sources shall not require a guarantee by the Government or by government-owned or controlled corporations. The build-operate-and-transfer scheme shall include a supply-and-operate situation which is a contractual agreement whereby the supplier of equipment and machinery for a given infrastructure facility, if the interest of the Government so requires, operates the facility providing in the process technology transfer and training to Filipino nationals.

(b) Build-and-transfer scheme — "A contractual arrangement whereby the contractor undertakes the construction including financing, of a given infrastructure facility, and its turnover after completion to the government agency or local government unit concerned which shall pay the contractor its total investment expended on the project, plus a reasonable rate of return thereon. This arrangement may be employed in the construction of any infrastructure project including critical facilities which for security or strategic reasons, must be operated directly by the government (Emphasis supplied).

The BOT scheme is expressly defined as one where the contractor undertakes the construction and financing in infrastructure facility, and operates and maintains the same. The contractor operates the facility for a fixed period during which it may recover its expenses and investment in the project plus a reasonable rate of return thereon. After the expiration of the agreed term, the contractor transfers the ownership and operation of the project to the government.

In the BT scheme, the contractor undertakes the construction and financing of the facility, but after completion, the ownership and operation thereof are turned over to the government. The government, in turn, shall pay the contractor its total investment on the project in addition to a reasonable rate of return. If payment is to be effected through amortization payments by the government infrastructure agency or local government unit concerned, this shall be made in accordance with a scheme proposed in the bid and incorporated in the contract (R.A. No. 6957, Sec. 6).

Emphasis must be made that under the BOT scheme, the owner of the infrastructure facility must comply with the citizenship requirement of the Constitution on the operation of a public utility. No such a requirement is imposed in the BT scheme.

There is no mention in the BOT Law that the BOT and BT schemes bar any other arrangement for the payment by the government of the project cost. The law must not be read in such a way as to rule out or unduly restrict any variation within the context of the two schemes. Indeed, no statute can be enacted to anticipate and provide all the fine points and details for the multifarious and complex situations that may be encountered in enforcing the law (Director of Forestry v. Munoz, 23 SCRA 1183 [1968]; People v. Exconde, 101 Phil. 1125 [1957]; United States v. Tupasi Molina, 29 Phil. 119 [1914]).

The BLT scheme in the challenged agreements is but a variation of the BT scheme under the law.

As a matter of fact, the burden on the government in raising funds to pay for the project is made lighter by allowing it to amortize payments out of the income from the operation of the LRT System.

In form and substance, the challenged agreements provide that rentals are to be paid on a monthly basis according to a schedule of rates through and under the terms of a confirmed Irrevocable Revolving Letter of Credit (Supplemental Agreement, Sec. 6; Rollo, p. 85). At the end of 25 years and when full payment shall have been made to and received by private respondent, it shall transfer to DOTC, free from any lien or encumbrances, all its title to, rights and interest in, the project for only U.S. $1.00 (Revised and Restated Agreement, Sec. 11.1; Supplemental Agreement, Sec; 7; Rollo, pp. 67, .87).

A lease is a contract where one of the parties binds himself to give to another the enjoyment or use of a thing for a certain price and for a period which may be definite or indefinite but not longer than 99 years (Civil Code of the Philippines, Art. 1643). There is no transfer of ownership at the end of the lease period. But if the parties stipulate that title to the leased premises shall be transferred to the lessee at the end of the lease period upon the payment of an agreed sum, the lease becomes a lease-purchase agreement.

Furthermore, it is of no significance that the rents shall be paid in United States currency, not Philippine pesos. The EDSA LRT III Project is a high priority project certified by Congress and the National Economic and Development Authority as falling under the Investment Priorities Plan of Government (Rollo, pp. 310-311). It is, therefore, outside the application of the Uniform Currency Act (R.A. No. 529), which reads as follows:

Sec. 1. — Every provision contained in, or made with respect to, any domestic obligation to wit, any obligation contracted in the Philippines which provisions purports to give the obligee the right to require payment in gold or in a particular kind of coin or currency other than Philippine currency or in an amount of money of the Philippines measured thereby, be as it is hereby declared against public policy, and null, void, and of no effect, and no such provision shall be contained in, or made with respect to, any obligation hereafter incurred. The above prohibition shall not apply to (a) . . .; (b) transactions affecting high-priority economic projects for agricultural, industrial and power development as may be determined bythe National Economic Council which are financed by or through foreign funds; . . . .

3. The fact that the contract for the construction of the EDSA LRT III was awarded through negotiation and before congressional approval on January 22 and 23, 1992 of the List of National Projects to be undertaken by the private sector pursuant to the BOT Law (Rollo, pp. 309-312) does not suffice to invalidate the award.

Subsequent congressional approval of the list including "rail-based projects packaged with commercial development opportunities" (Rollo, p. 310) under which the EDSA LRT III projects falls, amounts to a ratification of the prior award of the EDSA LRT III contract under the BOT Law.

Petitioners insist that the prequalifications process which led to the negotiated award of the contract appears to have been rigged from the very beginning to do away with the usual open international public bidding where qualified internationally known applicants could fairly participate.

The records show that only one applicant passed the prequalification process. Since only one was left, to conduct a public bidding in accordance with Section 5 of the BOT Law for that lone participant will be an absurb and pointless exercise (cf. Deloso v. Sandiganbayan, 217 SCRA 49, 61 [1993]).

Contrary to the comments of the Executive Secretary Drilon, Section 5 of the BOT Law in relation to Presidential Decree No. 1594 allows the negotiated award of government infrastructure projects.

Presidential Decree No. 1594, "Prescribing Policies, Guidelines, Rules and Regulations for Government Infrastructure Contracts," allows the negotiated award of government projects in exceptional cases. Sections 4 of the said law reads as follows:

Bidding. — Construction projects shall generally be undertaken by contract after competitive public bidding. Projects may be undertaken by administration or force account or by negotiated contract only in exceptional cases where time is of the essence, or where there is lack of qualified bidders or contractors, or where there is conclusive evidence that greater economy and efficiency would be achieved through this arrangement, and in accordance with provision of laws and acts on the matter, subject to the approval of the Minister of Public Works and Transportation and Communications, the Minister of Public Highways, or the Minister of Energy, as the case may be, if the project cost is less than P1 Million, and the President of the Philippines, upon recommendation of the Minister, if the project cost is P1 Million or more (Emphasis supplied).

xxx xxx xxx

Indeed, where there is a lack of qualified bidders or contractors, the award of government infrastructure contracts may he made by negotiation. Presidential Decree No. 1594 is the general law on government infrastructure contracts while the BOT Law governs particular arrangements or schemes aimed at encouraging private sector participation in government infrastructure projects. The two laws are not inconsistent with each other but are inpari materia and should be read together accordingly.

In the instant case, if the prequalification process was actually tainted by foul play, one wonders why none of the competing firms ever brought the matter before the PBAC, or intervened in this case before us (cf. Malayan Integrated Industries Corp. v. Court of Appeals, 213 SCRA 640 [1992]; Bureau Veritas v. Office of the President, 205 SCRA 705 [1992]).

The challenged agreements have been approved by President Ramos himself. Although then Executive Secretary Drilon may have disapproved the "Agreement to Build, Lease and Transfer a Light Rail Transit System for EDSA," there is nothing in our laws that prohibits parties to a contract from renegotiating and modifying in good faith the terms and conditions thereof so as to meet legal, statutory and constitutional requirements. Under the circumstances, to require the parties to go back to step one of the prequalification process would just be an idle ceremony. Useless bureaucratic "red tape" should be eschewed because it discourages private sector participation, the "main engine" for national growth and development (R.A. No. 6957, Sec. 1), and renders the BOT Law nugatory.

Republic Act No. 7718 recognizes and defines a BLT scheme in Section 2 thereof as:

(e) Build-lease-and-transfer — A contractual arrangement whereby a project proponent is authorized to finance and construct an infrastructure or development facility and upon its completion turns it over to the government agency or local government unit concerned on a lease arrangement for a fixed period after which

ownership of the facility is automatically transferred to the government unit concerned.

Section 5-A of the law, which expressly allows direct negotiation of contracts, provides:

Direct Negotiation of Contracts. — Direct negotiation shall be resorted to when there is only one complying bidder left as defined hereunder.

(a) If, after advertisement, only one contractor applies for prequalification and it meets the prequalification requirements, after which it is required to submit a bid proposal which is subsequently found by the agency/local government unit (LGU) to be complying.

(b) If, after advertisement, more than one contractor applied for prequalification but only one meets the prequalification requirements, after which it submits bid/proposal which is found by the agency/local government unit (LGU) to be complying.

(c) If, after prequalification of more than one contractor only one submits a bid which is found by the agency/LGU to be complying.

(d) If, after prequalification, more than one contractor submit bids but only one is found by the agency/LGU to be complying. Provided, That, any of the disqualified prospective bidder [sic] may appeal the decision of the implementing agency, agency/LGUs prequalification bids and awards committee within fifteen (15) working days to the head of the agency, in case of national projects or to the Department of the Interior and Local Government, in case of local projects from the date the disqualification was made known to the disqualified bidder: Provided, furthermore, That the implementing agency/LGUs concerned should act on the appeal within forty-five (45) working days from receipt thereof.

Petitioners' claim that the BLT scheme and direct negotiation of contracts are not contemplated by the BOT Law has now been rendered moot and academic by R.A. No. 7718. Section 3 of this law authorizes all government infrastructure agencies, government-owned and controlled corporations and local government units to enter into contract with any duly prequalified proponent for the financing, construction, operation and maintenance of any financially viable infrastructure or development facility through a BOT, BT, BLT, BOO (Build-own-and-operate), CAO (Contract-add-operate), DOT (Develop-operate-and-transfer), ROT (Rehabilitate-operate-and-transfer), and ROO (Rehabilitate-own-operate) (R.A. No. 7718, Sec. 2 [b-j]).

From the law itself, once and applicant has prequalified, it can enter into any of the schemes enumerated in Section 2 thereof, including a BLT arrangement, enumerated and defined therein (Sec. 3).

Republic Act No. 7718 is a curative statute. It is intended to provide financial incentives and "a climate of minimum government regulations and procedures and specific government undertakings in support of the private sector" (Sec. 1). A curative statute makes valid that which before enactment of the statute was invalid. Thus, whatever doubts and alleged procedural lapses private respondent and DOTC may have engendered and committed in entering into the questioned contracts, these have now been cured by R.A. No. 7718 (cf. Development Bank of the Philippines v. Court of Appeals, 96 SCRA 342 [1980]; Santos V. Duata, 14 SCRA 1041 [1965]; Adong V. Cheong Seng Gee, 43 Phil. 43 [1922].

4. Lastly, petitioners claim that the agreements are grossly disadvantageous to the government because the rental rates are excessive and private respondent's development rights over the 13 stations and the depot will rob DOTC of the best terms during the most productive years of the project.

It must be noted that as part of the EDSA LRT III project, private respondent has been granted, for a period of 25 years, exclusive rights over the depot and the air space above the stations for development into commercial premises for lease, sublease, transfer, or advertising (Supplemental Agreement, Sec. 11; Rollo, pp. 91-92). For and in consideration of these development rights, private respondent shall pay DOTC in Philippine currency guaranteed revenues generated therefrom in the amounts set forth in the Supplemental Agreement (Sec. 11;Rollo, p. 93). In the event that DOTC shall be unable to collect the guaranteed revenues, DOTC shall be allowed to deduct any shortfalls from the monthly rent due private respondent for the construction of the EDSA LRT III (Supplemental Agreement, Sec. 11; Rollo, pp. 93-94). All rights, titles, interests and income over all contracts on the commercial spaces shall revert to DOTC upon expiration of the 25-year period. (Supplemental Agreement, Sec. 11; Rollo, pp. 91-92).

The terms of the agreements were arrived at after a painstaking study by DOTC. The determination by the proper administrative agencies and officials who have acquired expertise, specialized skills and knowledge in the performance of their functions should be accorded respect absent any showing of grave abuse of discretion (Felipe Ysmael, Jr. & Co. v. Deputy Executive Secretary, 190 SCRA 673 [1990]; Board of Medical Education v. Alfonso, 176 SCRA 304 [1989]).

Government officials are presumed to perform their functions with regularity and strong evidence is necessary to rebut this presumption. Petitioners have not presented evidence on the reasonable rentals to be paid by the parties to each other. The matter of valuation is an esoteric field which is better left to the experts and which this Court is not eager to undertake.

That the grantee of a government contract will profit therefrom and to that extent the government is deprived of the profits if it engages in the business itself, is not worthy of being raised as an issue. In all cases where a party enters into a contract with the government, he does so, not out of charity and not to lose money, but to gain pecuniarily.

5. Definitely, the agreements in question have been entered into by DOTC in the exercise of its governmental function. DOTC is the primary policy, planning, programming, regulating and administrative entity of the Executive branch of government in the promotion, development and regulation of dependable and coordinated networks of transportation and communications systems as well as in the fast, safe, efficient and reliable postal, transportation and communications services (Administrative Code of 1987, Book IV, Title XV, Sec. 2). It is the Executive department, DOTC in particular that has the power, authority and technical expertise determine whether or not a specific transportation or communication project is necessary, viable and beneficial to the people. The discretion to award a contract is vested in the government agencies entrusted with that function (Bureau Veritas v. Office of the President, 205 SCRA 705 [1992]).

WHEREFORE, the petition is DISMISSED.

SO ORDERED

Bellosillo and Kapunan, JJ., concur.

Padilla and Regalado, JJ., concurs in the result.

Romero, J., is on leave.

 

 

 

Separate Opinions

 

MENDOZA, J., concurring:

I concur in all but Part III of the majority opinion. Because I hold that petitioners do not have standing to sue, I join to dismiss the petition in this case. I write only to set forth what I understand the grounds for our decisions on the doctrine of standing are and, why in accordance with these decisions, petitioners do not have the rights to sue, whether as legislators, taxpayers or citizens. As members of Congress, because they allege no infringement of prerogative as legislators. 1 As taxpayers because petitioners allege neither an unconstitutional exercise of the taxing or spending powers of Congress (Art VI, §§24-25 and 29) 2 nor an illegal disbursement of public money. 3 As this Court pointed out in Bugnay Const. and Dev. Corp. v. Laron, 4 a party suing as taxpayer "must specifically prove that he has sufficient interest in preventing the illegal expenditure of money raised by taxation and that he will sustain a direct injury as a result of the enforcement of the questioned statute or contract. It is not sufficient that he has merely a general interest common to all members of the public." In that case, it was held that a contract, whereby a local government leased property to a private party with the understanding that the latter would build a market building and at the end of the lease would transfer the building of the lessor, did not involve a disbursement of public funds so as to give taxpayer standing to question the legality of the contract. I see no substantial difference, as far as the standing is of taxpayers to question public contracts is concerned, between the contract there and the build-lease-transfer (BLT) contract being questioned by petitioners in this case.

Nor do petitioners have standing to bring this suit as citizens. In the cases 5 in which citizens were authorized to sue, this Court found standing because it thought the constitutional claims pressed for decision to be of "transcendental importance," as in fact it subsequently granted relief to petitioners by invalidating the challenged statutes or governmental actions. Thus in the Lotto case 6 relied upon by the majority for upholding petitioners standing, this Court took into account the "paramount public interest" involved which "immeasurably affect[ed] the social, economic, and moral well-being of the people . . . and the counter-productive and retrogressive effects of the envisioned on-line lottery system:" 7 Accordingly, the Court invalidated the contract for the operation of lottery.

But in the case at bar, the Court precisely finds the opposite by finding petitioners' substantive contentions to be without merit To the extent therefore that a party's standing is affected by a determination of the substantive merit of the case or a preliminary estimate thereof, petitioners in the case at bar must be held to be without standing. This is in line with our ruling in Lawyers League for a Better Philippines v. Aquino 8 and In re Bermudez 9 where we dismissed citizens' actions on the ground that petitioners had no personality to sue and their petitions did not state a cause of action. The holding that petitioners did not have standing followed from the finding that they did not have a cause of action.

In order that citizens' actions may be allowed a party must show that he personally has suffered some actual or threatened injury as a result of the allegedly illegal conduct of the government; the injury is fairly traceable to the challenged action; and the injury is likely to be redressed by a favorable action. 10 As the U.S. Supreme Court has held:

Typically, . . . the standing inquiry requires careful judicial examination of a complaint's allegation to ascertain whether the particular plaintiff is entitled to an adjudication of the particular claims asserted. Is the injury too abstract, or otherwise not appropriate, to be considered judicially cognizable? Is the line of causation between the illegal conduct and injury too attenuated? Is the prospect of obtaining relief from the injury as a result of a favorable ruling too speculative? These questions and any others relevant to the standing inquiry must be answered by reference to the Art III notion that federal courts may exercise power only "in the last resort, and as a necessity, Chicago & Grand Trunk R. Co. v. Wellman, 143 US 339, 345, 36 L Ed 176,12 S Ct 400 (1892), and only when adjudication is "consistent with a system of separated powers and [the dispute is one] traditionally thought to be capable of resolution through the judicial process," Flast v Cohen, 392 US 83, 97, 20 L Ed 2d 947, 88 S Ct 1942 (1968). See Valley Forge, 454 US, at 472-473, 70 L Ed 2d 700, 102 S Ct 752. 11

Today's holding that a citizen, qua citizen, has standing to question a government contract unduly expands the scope of public actions and sweeps away the case and controversy requirement so carefully embodied in Art. VIII, §5 in defining the jurisdiction of this Court. The result is to convert the Court into an office of ombudsman for the ventilation of generalized grievances. Consistent with the view that this case has no merit I submit with respect that petitioners, as representatives of the public interest, have no standing.

Narvasa, C.J., Bidin, Melo, Puno, Vitug and Francisco, JJ., concur.

DAVIDE, JR., J., dissenting:

After wading through the record of the vicissitudes of the challenged contract and evaluating the issues raised and the arguments adduced by the parties, I find myself unable to joint majority in the well-written ponencia of Mr. Justice Camilo P. Quiason.

I most respectfully submit that the challenged contract is void for at least two reasons: (a) it is an-ultra-vires act of the Department of Transportation and Communications (DOTC) since under R.A. 6957 the DOTC has no authority to enter into a Build-Lease-and-Transfer (BLT) contract; and (b) even assuming arguendo that it has, the contract was entered into without complying with the mandatory requirement of public bidding.

I

Respondents admit that the assailed contract was entered into under R.A. 6957. This law, fittingly entitled "An Act Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector, and For Other Purposes," recognizes only two (2) kinds of contractual arrangements between the private sector and government infrastructure agencies: (a) the Build-Operate-and-Transfer (BOT) scheme and (b) the Build-and-Transfer (BT) scheme. This conclusion finds support in Section 2 thereof which defines only the BOT and BT schemes, in Section 3 which explicitly provides for said schemes thus:

Sec. 3 Private Initiative in Infrastructure. — All government infrastructure agencies, including government-owned and controlled corporations and local government units, are hereby authorized to enter into contract with any duly prequalified private contractor for the financing, construction, operation and maintenance of any financially viable infrastructure facilities through the build-operate-and transfer or

build-and-transfer scheme, subject to the terms and conditions hereinafter set forth; (Emphasis supplied).

and in Section 5 which requires public bidding of projects under both schemes.

All prior acts and negotiations leading to the perfection of the challenged contract were clearly intended and pursued for such schemes.

A Build-Lease-and-Transfer (BLT) scheme is not authorized under the said law, and none of the aforesaid prior acts and negotiations were designed for such unauthorized scheme. Hence, the DOTC is without any power or authority to enter into the BLT contract in question.

The majority opinion maintains, however, that since "[t]here is no mention in the BOT Law that the BOT and the BT schemes bar any other arrangement for the payment by the government of the project cost," then "[t]he law must not be read in such a way as to rule outer unduly restrict any variation within the context of the two schemes." This interpretation would be correct if the law itself provides a room for flexibility. We find no such provisions in R.A. No. 6957 if it intended to include a BLT scheme, then it should have so stated, for contracts of lease are not unknown in our jurisdiction, and Congress has enacted several laws relating to leases. That the BLT scheme was never intended as a permissible variation "within the context" of the BOT and BT schemes is conclusively established by the passage of R.A. No. 7718 which amends:

a. Section 2 by adding to the original BOT and BT schemes the following schemes:

(1) Build-own-and-operate (BOO)

(2) Build-Lease-and-transfer (BLT)

(3) Build-transfer-and-operate (BTO)

(4) Contract-add-and-operate (CAO)

(5) Develop-operate-and-transfer (DOT)

(6) Rehabilitate-operate-and-transfer (ROT)

(7) Rehabilitate-own-and-operate (ROO).

b) Section 3 of R.A. No. 6957 by deleting therefrom the phrase "through the build-operate-and-transfer or build-and-transfer scheme."

II

Public bidding is mandatory in R.A. No. 6957. Section 5 thereof reads as follows:

Sec. 5 Public Bidding of Projects. — Upon approval of the projects mentioned in Section 4 of this Act, the concerned head of the infrastructure agency or local government unit shall forthwith cause to be published, once every week for three (3) consecutive weeks, in at least two (2) newspapers of general circulation and in at least one (1) local newspaper which is circulated in the region, province, city or municipality in which the project is to be constructed a notice inviting all duly prequalified infrastructure contractors to participate in the public bidding for the projects so approved. In the case of a build-operate-and-transfer arrangement, the contract shall be awarded to the lowest complying bidder based on the present value of its proposed tolls, fees, rentals, and charges over a fixed term for the facility to be constructed, operated, and maintained according to the prescribed minimum design

and performance standards plans, and specifications. For this purpose, the winning contractor shall be automatically granted by the infrastructure agency or local government unit the franchise to operate and maintain the facility, including the collection of tolls, fees, rentals; and charges in accordance with Section 6 hereof.

In the case of a build-and-transfer arrangement, the contract shall be awarded to the lowest complying bidder based on the present value of its proposed, schedule of amortization payments for the facility to be constructed according to the prescribed minimum design and performance standards, plans and specifications: Provided, however, That a Filipino constructor who submits an equally advantageous bid shall be given preference.

A copy of each build-operate-and-transfer or build-and-transfer contract shall forthwith be submitted to Congress for its information.

The requirement of public bidding is not an idle ceremony. It has been aptly said that in our jurisdiction "public bidding is the policy and medium adhered to in Government procurement and construction contracts under existing laws and regulations. It is the accepted method for arriving at a fair and reasonable price and ensures that overpricing, favoritism, and other anomalous practices are eliminated or minimized. And any Government contract entered into without the required bidding is null and void and cannot adversely affect the rights of third parties." (Bartolome C. Fernandez, Jr., A TREATISE ON GOVERNMENT CONTRACTS UNDER PHILIPPINE LAW 25 [rev. ed. 1991], citing Caltex vs. Delgado Bros., 96 Phil. 368 [1954]).

The Office of the President, through then Executive Secretary Franklin Drilon Correctly disapproved the contract because no public bidding is strict compliance with Section 5 of R.A. No. 6957 was conducted. Secretary Drilon Further bluntly stated that the provision of the Implementing Rules of said law authorizing negotiated contracts was of doubtful legality. Indeed, it is null and void because the law itself does not recognize or allow negotiated contracts.

However the majority opinion posits the view that since only private respondent EDSA LRT was prequalified, then a public bidding would be "an absurd and pointless exercise." I submit that the mandatory requirement of public bidding cannot be legally dispensed with simply because only one was qualified to bid during the prequalification proceedings. Section 5 mandates that the BOT or BT contract should be awarded "to the lowest complying bidder," which logically means that there must at least be two (2) bidders. If this minimum requirement is not met, then the proposed bidding should be deferred and a new prequalification proceeding be scheduled. Even those who were earlier disqualified may by then have qualified because they may have, in the meantime, exerted efforts to meet all the qualifications.

This view of the majority would open the floodgates to the rigging of prequalification proceedings or to unholy conspiracies among prospective bidders, which would even include dishonest government officials. They could just agree, for a certain consideration, that only one of them qualify in order that the latter would automatically corner the contract and obtain the award.

That section 5 admits of no exception and that no bidding could be validly had with only one bidder is likewise conclusively shown by the amendments introduced by R.A. No. 7718 Per section 7 thereof, a new section denominated as Section 5-A was introduced in R.A. No. 6957 to allow direct negotiation contracts. This new section reads:

Sec. 5-A. Direct Negotiation Of Contracts — Direct negotiation, shall be resorted to when there is only one complying bidder left as defined hereunder.

(a) If, after advertisement, only one contractor applies for prequalification requirements, after which it is required to submit a bid/proposal which subsequently found by the agency/local government unit (LGU) to be complying.

(b) If, after advertisement, more than one contractor applied for prequalification but only one meets the prequalification requirements, after which it submits bid/proposal which is found by the agency/local government unit (LGU) to be complying,

(c) If after prequalification of more than one contractor only one submits a bid which is found by the agency/LGU to be complying.

(d) If, after prequalification, more than one contractor, only one submit bids but only one is found by the agency/LGU to be complying: Provided, That, any of the disqualified prospective bidder may appeal the decision contractor of the implementing agency/LGUs prequalification bids an award committee within fifteen (15) working days to the head of the agency, in case of national projects or to the Department of the Interior and Local Government, in case of local projects from the date the disqualification was made known to the disqualified bidder Provided, That the implementing agency/LGUs concerned should act on the appeal within forty-five (45) working days from receipt thereof.

Can this amendment be given retroactive effect to the challenged contract so that it may now be considered a permissible negotiated contract? I submit that it cannot be R.A. No. 7718 does not provide that it should be given retroactive effect to pre-existing contracts. Section 18 thereof says that it "shall take effect fifteen (15) days after its publication in at least two (2) newspapers of general circulation." If it were the intention of Congress to give said act retroactive effect then it would have so expressly provided. Article 4 of the Civil Code provides that "[l]aws shall have no retroactive effect, unless the contrary is provided."

The presumption is that all laws operate prospectively, unless the contrary clearly appears or is clearly, plainly, and unequivocally expressed or necessarily implied. In every case of doubt, the doubt will be resolved against the retroactive application of laws. (Ruben E Agpalo, STATUTORY CONSTRUCTION 225 [2d ed. 1990]). As to amendatory acts, or acts which change an existing statute, Sutherland states:

In accordance with the rule applicable to original acts, it is presumed that provisions added by the amendment affecting substantive rights are intended to operate prospectively. Provisions added by the amendment that affect substantive rights will not be construed to apply to transactions and events completed prior to its enactment unless the legislature has expressed its intent to that effect or such intent is clearly implied by the language of the amendment or by the circumstances surrounding its enactment. (1 Frank E. Horack, Jr., SUTHERLAND'S STATUTES AND STATUTORY CONSTRUCTION 434-436 [1943 ed.]).

I vote then to grant the instant petition and to declare void the challenged contract and its supplement.

FELICIANO, J., dissenting:

After considerable study and effort, and with much reluctance, I find I must dissent in the instant case. I agree with many of the things set out in the majority opinion written by my distinguished brother in the Court Quiason, J. At the end of the day, however, I find myself unable to join in the result reached by the majority.

I join in the dissenting opinion written by Mr. Justice. Davide, Jr; which is appropriately drawn on fairly narrow grounds. At the same time; I wish to address briefly one of the points made by Justice Quiason in the majority opinion in his effort to meet the difficulties posed by Davide Jr., J.

I refer to the invocation of the provisions of presidential Decree No. 1594 dated 11 June 1978 entitled: "Prescribing policies, Guidelines, Rules and Regulations for Government Infrastructure Contracts·" More specifically, the majority opinion invokes paragraph 1 of Section 4 of this Degree which reads as follows:

Sec. 4. Bidding. — Construction projects shall, generally be undertaken by contract after competitive public bidding. Projects may be undertaken by administration or force account or by negotiated contract only in exceptional cases where time is of the essence, or where there is lack of qualified bidders or contractors, or where there is a conclusive evidence that greater economy and efficiency would be achieved through this arrangement, and in accordance with provisions of laws and acts on the matter, subject to the approval of the Ministry of public Works, Transportation and Communications, the Minister of Public Highways, or the Minister of Energy, as the case may be, if the project cost is less than P1 Million, and of the President of the Philippines, upon the recommendation of the Minister, if the project cost is P1 Million or more.

xxx xxx xxx

I understand the unspoken theory in the majority opinion to be that above Section 4 and presumably the rest of Presidential Decree No. 1594 continue to exist and to run parallel to the provisions of Republic Act No. 6957, whether in its original form or as amended by Republic Act No. 7718.

A principal difficulty with this approach is that Presidential Decree No. 1594 purports to apply to all "government contracts for infrastructure and other construction projects." But Republic Act No. 6957 as amended by Republic Act No. 7718, relates only to "infrastructure projects" which are financed, constructed, operated and maintained "by the private sector" "through the build/operate-and-transfer or build-and-transfer scheme" under Republic Act No. 6597 and under a series of other comparable schemes under Republic Act No. 7718. In other words, Republic Act No. 6957 and Republic Act. No. 7718 must be held, in my view, to be special statutes applicable to a more limited field of "infrastructure projects" than the wide-ranging scope of application of the general statute i.e., Presidential Decree No. 1594. Thus, the high relevance of the point made by Mr. Justice Davide that Republic Act No. 6957 in specific connection with BCT- and BLT type and BLT type of contracts imposed an unqualifiedrequirement of public bidding set out in Section 5 thereof.

It should also be pointed out that under Presidential Decree No. 1594, projects may be undertaken "by administration or force account or by negotiated contract only"

(1) in exceptional cases where time is of the essence; or

(2) where there is lack of bidders or contractors; or

(3) where there is a conclusive evidence that greater economy and efficiency would be achieved through these arrangements, and in accordance with provision[s] of laws and acts on the matter.

It must, upon the one hand, be noted that the special law Republic Act No. 6957 made absolutely no mention of negotiated contracts being permitted to displace the requirement of public bidding. Upon the other hand, Section 5-a, inserted in Republic Act No. 6957 by the amending statute Republic Act No. 7718, does not purport to authorize direct negotiation of contracts situations where there is a lack of pre-qualified contractors or, complying bidders. Thus, even under the amended special statute, entering into contracts by negotiation is not permissiblein the other (2) categories of cases referred to in Section 4 of Presidential Decree No. 1594, i.e., "in exceptional cases where time is of the essence" and "when there is conclusive evidence that greater economy and efficiency would be achieved through these arrangements, etc."

The result I reach is that insofar as BOT, etc.-types of contracts are concerned, the applicable public bidding requirement is that set out in Republic Act No. 6957 and, with respect to such type of contracts opened for pre-qualification and bidding after the date of effectivity of Republic Act No. 7718, The provision of Republic Act No. 7718. The assailed contract was entered into before Republic Act. No. 7718 was enacted.

The difficulties. of applying the provisions of Presidential Degree No. 1594 to the Edsa LRT-type of contracts are aggravated when one considers the detailed "Implementing Rules and Regulations as amended April 1988" issued under that Presidential Decree. 1 For instance:

IB [2.5.2] 2.4.2 By Negotiated Contract

xxx xxx xxx

a. In times of emergencies arising from natural calamities where immediate action is necessary to prevent imminent loss of life and/or property.

b. Failure to award the contract after competitive public bidding for valid cause or causes [such as where the prices obtained through public bidding are all above the AAE and the bidders refuse to reduce their prices to the AAE].

In these cases, bidding may be undertaken through sealed canvass of at least three (3) qualified contractors. Authority to negotiate contracts for projects under these exceptional cases shall be subject to prior approval by heads of agencies within their limits of approving authority.

c. Where the subject project is adjacent or contiguous to an on-going project and it could be economically prosecuted by the same contractor provided that he has no negative slippage and has demonstrated a satisfactory performance. (Emphasis supplied).

Note that there is no reference at all in these Presidential Decree No. 1594 Implementing Rules and Regulations to absence of pre-qualified applicants and bidders as justifying negotiation of contracts as distinguished from requiring public bidding or a second public bidding.

Note also the following provision of the same Implementing Rules and Regulations:

IB 1 Prequalification

The following may be become contractors for government projects:

1 Filipino

a. Citizens (single proprietorship)

b. Partnership of corporation duly organized under the laws of the Philippines, and at least seventy five percent (75%) of the capital stock of which belongs to Filipino citizens.

2. Contractors forming themselves into a joint venture, i.e., a group of two or more contractors that intend to be jointly and severally responsible for a particular contract, shall for purposes of bidding/tendering comply with LOI 630, and, aside from being currently and properly accredited by the Philippine Contractors Accreditation Board, shall comply with the provisions of R.A. 4566, provided that joint ventures in which Filipino ownership is less than seventy five percent ( 75%) may be prequalified where the structures to be built require the application of techniques and/or technologies which are not adequately possessed by a Filipino entity as defined above.

[The foregoing shall not negate any existing and future commitments with respect to the bidding and aware of contracts financed partly or wholly with funds from international lending institutions like the Asian Development Bank and the Worlds Bank as well as from bilateral and other similar sources.(Emphases supplied)

The record of this case is entirely silent on the extent of Philippine equity in the Edsa LRT Corporation; there is no suggestion that this corporation is organized under Philippine law and is at least seventy-five (75%) percent owned by Philippine citizens.

Public bidding is the normal method by which a government keeps contractors honest and is able to assure itself that it would be getting the best possible value for its money in any construction or similar project. It is not for nothing that multilateral financial organizations like the World Bank and the Asian Development Bank uniformly require projects financed by them to be implemented and carried out by public bidding. Public bidding is much too important a requirement casually to loosen by a latitudinarian exercise in statutory construction.

The instant petition should be granted and the challenged contract and its supplement should be nullified and set aside. A true public bidding, complete with a new prequalification proceeding, should be required for the Edsa LRT Project.

 

Separate Opinions

MENDOZA, J., concurring:

I concur in all but Part III of the majority opinion. Because I hold that petitioners do not have standing to sue, I join to dismiss the petition in this case. I write only to set forth what I understand the grounds for our decisions petitioners do not have the rights to sue, whether as legislators, taxpayers or citizens. As members of Congress, because they allege no infringement of prerogative as legislators. 1 As taxpayers because petitioners allege neither an unconstitutional exercise of the taxing or spending powers of Congress (Art VI, §§24-25 and 29) 2 nor an illegal disbursement of public money. 3 As this Court pointed out in Bugnay Const. and Dev. Corp. v. Laron, 4 a party suing as taxpayer "must specifically prove that he has sufficient interest in preventing the illegal expenditure of money raised by taxation and that he will sustain a direct injury as a result of the enforcement of the questioned statute or contract, It is not sufficient that has merely a general interest common to all members of the public." In that case, it was held that a contract, whereby a local government leased property to a private party with the understanding that the latter would build a market building and at the end of the lease would transfer the building of the lessor, did not involve a disbursement of public funds so as to give taxpayer standing to question the legality of the contract contracts I see no substantial difference, as far as the standing is of taxpayers is concerned, between the contract there and the build-lease-transfer (BLT) contract being questioned by petitioners in this case.

Nor do petitioners have standing to bring this suit as citizens. In the cases 5 in which citizens were authorized to sue, this Court found standing because it thought the constitutional claims pressed for decision to be of "transcendental importance," as in fact it subsequently granted relief to petitioners by invalidating the challenged statutes or governmental actions. Thus in the Lotto case 6 relied upon by the majority for upholding petitioners standing, this Court took into account the "paramount public interest" involved which "immeasurably affect[ed] the social, economic, and moral well-being of the people . . . and the counter-productive and retrogressive effects of the envisioned on-line lottery system:" 7 Accordingly, the Court invalidated the contract for the operation of lottery.

But in the case at bar, the Court precisely finds the opposite by finding petitioners' substantive contentions to be without merit To the extent therefore that a party's standing is affected by a determination of the substantive merit of the case or a preliminary estimate thereof, petitioners in the case at bar must be held to be without standing. This is in line with our ruling in Lawyers League for a Better Philippines v. Aquino 8 and In re Bermudez 9 where we dismissed citizens' actions on the ground that petitioners had no personality to sue and their petitions did not state a cause of action. The holding that petitioners did not have standing followed from the finding that they did not have a cause of action.

In order that citizens' actions may be allowed a party must show that he personally has suffered some actual or threatened injury as a result of the allegedly illegal conduct of the government; the injury is fairly traceable to the challenged action; and the injury is likely to be redressed by a favorable action. 10 As the U.S. Supreme Court has held:

Typically, . . . the standing inquiry requires careful judicial examination of a complaint's allegation to ascertain whether the particular plaintiff is entitled to an adjudication of the particular claims asserted. Is the injury too abstract, or otherwise not appropriate, to be considered judicially cognizable? Is the line of causation between the illegal conduct and injury too attenuated? Is the prospect of obtaining relief from the injury as a result of a favorable ruling too speculative? These questions and any others relevant to the standing inquiry must be answered by reference to the Art III notion that federal courts may exercise power only "in the last resort, and as a necessity, Chicago & Grand Trunk R. Co. v. Wellman, 143 US 339, 345, 36 L Ed 176,12 S Ct 400 (1892), and only when adjudication is "consistent with a system of separated powers and [the dispute is one] traditionally thought to be capable of resolution through the judicial process," Flast v Cohen, 392 US 83, 97, 20 L Ed 2d 947, .88 S Ct 1942 (1968). See Valley Forge, 454 US, at 472-473, 70 L Ed 2d 700, 102 S Ct 752. 11

Today's holding that a citizen, qua citizen, has standing to question a government contract unduly expands the scope of public actions and sweeps away the case and controversy requirement so carefully embodied in Art. VIII, §5 in defining the jurisdiction of this Court. The result is to convert the Court into an office of ombudsman for the ventilation of generalized grievances. Consistent with the view that this case has no merit I submit with respect that petitioners, as representatives of the public interest, have no standing.

Narvasa, C.J., Bidin, Melo, Puno, Vitug and Francisco, JJ., concur.

DAVIDE, JR., J., dissenting:

After wading through the record of the vicissitudes of the challenged contract and evaluating the issues raised and the arguments adduced by the parties, I find myself unable to joint majority in the well-written ponencia of Mr. Justice Camilo P. Quiason.

I most respectfully submit that the challenged contract is void for at least two reasons: (a) it is an-ultra-vires act of the Department of Transportation and Communications (DOTC) since under R.A. 6957 the DOTC has no authority to enter into a Build-Lease-and-Transfer (BLT) contract; and (b) even assuming arguendo that it has, the contract was entered into without complying with the mandatory requirement of public bidding.

I

Respondents admit that the assailed contract was entered into under R.A. 6957. This law, fittingly entitled "An Act Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector, and For Other Purposes," recognizes only two (2) kinds of contractual arrangements between the private sector and government infrastructure agencies: (a) the Build-Operate-and-Transfer (BOT) scheme and (b) the Build-and-Transfer (BT) scheme. This conclusion finds support in Section 2 thereof which defines only the BOT and BT schemes, in Section 3 which explicitly provides for said schemes thus:

Sec. 3 Private Initiative in Infrastructure. — All government infrastructure agencies, including government-owned and controlled corporations and local government units, are hereby authorized to enter into contract with any duly prequalified private contractor for the financing, construction, operation and maintenance of any financially viable infrastructure facilities through the build-operate-and transfer or build-and-transfer scheme, subject to the terms and conditions hereinafter set forth; (Emphasis supplied).

and in Section 5 which requires public bidding of projects under both schemes.

All prior acts and negotiations leading to the perfection of the challenged contract were clearly intended and pursued for such schemes.

A Build-Lease-and-Transfer (BLT) scheme is not authorized under the said law, and none of the aforesaid prior acts and negotiations were designed for such unauthorized scheme. Hence, the DOTC is without any power or authority to enter into the BLT contract in question.

The majority opinion maintains, however, that since "[t]here is no mention in the BOT Law that the BOT and the BT schemes bar any other arrangement for the payment by the government of the project cost," then "[t]he law must not be read in such a way as to rule outer unduly restrict any

variation within the context of the two schemes." This interpretation would be correct if the law itself provides a room for flexibility. We find no such provisions in R.A. No. 6957 if it intended to include a BLT scheme, then it should have so stated, for contracts of lease are not unknown in our jurisdiction, and Congress has enacted several laws relating to leases. That the BLT scheme was never intended as a permissible variation "within the context" of the BOT and BT schemes is conclusively established by the passage of R.A. No. 7718 which amends:

a. Section. 2 by adding to the original BOT and BT schemes the following schemes:

1) Build-own-and-operate (BOO)

2) Build-Lease-and-transfer (BLT)

3) Build-transfer-and-operate (BTO)

4) Contract-add-and-operate (CAO)

5) Develop-operate-and-transfer (DOT)

6) Rehabilitate-operate-and-transfer (ROT)

7) Rehabilitate-own-and-operate (ROO).

b) Section 3 of R.A. No. 6957 by deleting therefrom the phrase "through the build-operate-and-transfer or build-and-transfer scheme.

II

Public bidding is mandatory in R.A. No. 6957. Section 5 thereof reads as follows:

Sec. 5 Public Bidding of Projects. — Upon approval of the projects mentioned in Section 4 of this Act, the concerned head of the infrastructure agency or local government unit shall forthwith cause to be published, once every week for three (3) consecutive weeks, in at least two (2) newspapers of general circulation and in at least one (1) local newspaper which is circulated in the region, province, city or municipality in which the project is to be constructed a notice inviting all duly prequalified infrastructure contractors to participate in the public bidding for the projects so approved. In the case of a build-operate-and-transfer arrangement, the contract shall be awarded to the lowest complying bidder based on the present value of its proposed tolls, fees, rentals, and charges over a fixed term for the facility to be constructed, operated, and maintained according to the prescribed minimum design and performance standards plans, and specifications. For this purpose, the winning contractor shall be automatically granted by the infrastructure agency or local government unit the franchise to operate and maintain the facility, including the collection of tolls, fees, rentals; and charges in accordance with Section 6 hereof.

In the case of a build-and-transfer arrangement, the contract shall be awarded to the lowest complying bidder based on the present value of its proposed, schedule of amortization payments for the facility to be constructed according to the prescribed minimum design and performance standards, plans and specifications: Provided, however, That a Filipino constructor who submits an equally advantageous bid shall be given preference.

A copy of each build-operate-and-transfer or build-and-transfer contract shall forthwith be submitted to Congress for its information.

The requirement of public bidding is not an idle ceremony. It has been aptly said that in our jurisdiction "public bidding is the policy and medium adhered to in Government procurement and construction contracts under existing laws and regulations. It is the accepted method for arriving at a fair and reasonable price and ensures that overpricing, favoritism, and other anomalous practices are eliminated or minimized. And any Government contract entered into without the required bidding is null and void and cannot adversely affect the rights of third parties." (Bartolome C. Fernandez, Jr., A TREATISE ON GOVERNMENT CONTRACTS UNDER PHILIPPINE LAW 25 [rev. ed. 1991], citing Caltex vs. Delgado Bros., 96 Phil. 368 [1954]).

The Office of the president secretary through then Executive Secretary Franklin Drilon Correctly disapproved the contract because no public bidding is strict compliance with Section 5 of R.A. No. 6957 was conducted. Secretary Drilon Further bluntly stated that the provision of the Implementing Rules of said law authorizing negotiated contracts was of doubtful legality. Indeed, it is null and void because the law itself does not recognize or allow negotiated contracts.

However the majority opinion posits the view that since only private respondent EDSA LRT was prequalified, then a public bidding would be "an absurd and pointless exercise." I submit that the mandatory requirement of public bidding cannot be legally dispensed with simply because only one was qualified to bid during the prequalification proceedings. Section 5 mandates that the BOT or BT contract should be awarded "to the lowest complying bidder," which logically means that there must at least be two (2) bidders. If this minimum requirement is not met, then the proposed bidding should be deferred and a new prequalification proceeding be scheduled. Even those who were earlier disqualified may by then have qualified because they may have, in the meantime, exerted efforts to meet all the qualifications.

This view of the majority would open the floodgates to the rigging of prequalification proceedings or to unholy conspiracies among prospective bidders, which would even include dishonest government officials. They could just agree, for a certain consideration, that only one of them qualify in order that the latter would automatically corner the contract and obtain the award.

That section 5 admits of no exception and that no bidding could be validly had with only one bidder is likewise conclusively shown by the amendments introduced by R.A. No. 7718 Per section 7 thereof, a new section denominated as Section 5-A was introduced in R.A. No. 6957 to allow direct negotiation contracts. This new section reads:

Sec. 5-A. Direct Negotiation Of Contracts — Direct negotiation, shall be resorted to when there is only one complying bidder left as defined hereunder.

(a) If, after advertisement, only one contractor applies for prequalification requirements submit a bid/proposal which subsequently found by the agency/local government unit (LGU) to be complying.

(b) If, after advertisement, more than one contractor applied for prequalification but only one meets the prequalification .requirements, after which it submits bid/proposal which is found by the agency/local government unit (LGU) to be complying,

(c) If after prequalification of more than one contractor only one submits a bid which is found by the agency/LGU to be complying.

(d) If, after prequalification, more than one contractor, only one submit bids but only one is found by the agency/LGU to be complying: Provided, That, any of the disqualified prospective bidder may appeal the decision contractor of the implementing agency/LGUs prequalification bids an award committee within fifteen (15) working days to the head of the agency of national projects or to the Department of the Interior and Local Government, in case of local projects from the date the disqualification was made known to the disqualified bidder Provided, That the implementing agency/LGUs concerned should act on the appeal within forty-five (45) working days from receipt thereof.

Can this amendment be given retroactive effect to the challenged contract so that it may now be considered a permissible negotiated contract? I submit that it cannot be R.A. No. 7718 does not provide that it should be given retroactive effect to pre-existing contracts. Section 18 thereof says that it "shall take effect fifteen (15) after its publication in at least two (2) newspapers of general circulation." If it were the intention of Congress to give said act retroactive effect then it would have so expressly provided. Article 4 of the Civil Code provides that "[l]aws shall have no retroactive effect, unless the contrary is provided."

The presumption is that all laws operate prospectively, unless the contrary clearly appears or is clearly, plainly, and unequivocally expressed or necessarily implied. In every case of doubt, the doubt will be resolved against the retroactive application of laws. (Ruben E Agpalo, STATUTORY CONSTRUCTION 225 [2d ed. 1990]). As to amendatory acts, or acts which change an existing statute, Sutherland states:

In accordance with the rule applicable to original acts, it is presumed that provisions added by the amendment affecting substantive rights are intended to operate prospectively. Provisions added by the amendment that affect substantive rights will not be construed to apply to transactions and events completed prior to its enactment unless the legislature has expressed its intent to that effect or such intent is clearly implied by the language of the amendment or by the circumstances surrounding its enactment. (1 Frank E. Horack, Jr., SUTHERLAND'S STATUTES AND STATUTORY CONSTRUCTION 434-436 [1943 ed.]).

I vote then to grant the instant petition and to declare void the challenged contract and its supplement.

FELICIANO, J., dissenting:

After considerable study and effort, and with much reluctance, I find I must dissent in the instant case. I agree with many of the things set out in the majority opinion written by my distinguished brother in the Court Quiason, J. At the end of the day, however, I find myself unable to join in the result reached by the majority.

I join in the dissenting opinion written by Mr. Justice. Davide, Jr; which is appropriately drawn on fairly narrow grounds. At the same time; I wish to address briefly one of Justice Quiason in the majority opinion in his effort to meet the difficulties posed by Davide Jr., J.

I refer to the invocation of the provisions of presidential Decree No. 1594 dated 11 June 1978 entitled: "Prescribing policies, Guidelines, Rules and Regulations for Government Infrastructure

Contracts·" More specifically, the majority opinion invokes paragraph 1 of Section 4 of this Degree which reads as follows:

Sec. 4. Bidding. — Construction projects shall, generally be undertaken by contract after competitive public bidding. Projects may be undertaken by administration or force account or by negotiated contract only in exceptional cases where time is of the essence, or where there is lack of qualified bidders or contractors, or where there is a conclusive evidence that greater economy and efficiency would be achieved through this arrangement, and in accordance with provisions of laws and acts on the matter, subject to the approval of the Ministry of public Works, Transportation and Communications, the Minister of Public Highways, or the Minister of Energy, as the case may be, if the project cost is less than P1 Million, and of the president of the Philippines, upon the recommendation of the Minister, if the project cost is P1 Million or more.

xxx xxx xxx

I understand the unspoken theory in the majority opinion utility and the ownership of the facilities used to serve the public can be very w1594 continue to exist and to run parallel to the provisions of Republic Act No. 6957, whether in its original form or as amended by Republic Act No. 7718.

A principal difficulty with this approach is that Presidential Decree No. 1594 purports to apply to all "government contracts for infrastructure and other construction projects" But Republic Act No. 6957 as amended by Republic Act No. 7718, relates on to "infrastructure projects" which are financed, constructed, operated and maintained "by the private sector" "through the build/operate-and-transfer or build-and-transfer scheme" under Republic Act No. 6597 and under a series of other comparable schemes under Republic Act No. 7718. In other words, Republic Act No. 6957 and Republic Act. No: 7718 must be held, in my view, to be special statutes applicable to a more limited field of "infrastructure projects" than the wide-ranging scope of application of the general statute i.e., Presidential Decree No. 1594. Thus, the high relevance of the point made by Mr. Justice Davide that Republic Act No. 6957 in specific connection with BCT- and BLT type and BLT type of contracts imposed an unqualified requirement of public bidding set out in Section 5 thereof.

It should also be pointed out that under Presidential Decree No. 1594, projects may be undertaken "by administration or force account or by negotiated contract only "

(1) in exceptional cases where time is of the essence; or

(2) where there is lack of bidders or contractors; or

(3) where there is a conclusive evidence that greater economy and efficiency would be achieved through these arrangements, and in accordance with provision[s] of laws and acts on the matter.

It must, upon the one hand, be noted that the special law Republic Act- No. 6957 made absolutely no mention ofnegotiated contracts being permitted to displace the requirement of public bidding. Upon the other hand, Section 5-a, inserted in Republic Act No. 6957 by the amending statute Republic Act No. 7718, does not purport to authorize direct negotiation of contracts situations where there is a lack of pre-qualified contractors or, complying bidders. Thus, even under the amended special statute, entering into contracts by negotiation is not permissiblein the other (2) categories of cases referred to in Section 4 of Presidential Decree No. 1594, i.e., "in

exceptional cases where time is of the essence" and "when there is conclusive evidence that greater economy and efficiency would be achieved through these arrangements, etc."

The result I reach is that insofar as BOT, etc.-types of contracts are concerned, the applicable public bidding requirement is that set out in Republic Act No. 6957 and, with respect to such type of contracts opened for pre-qualification and bidding after the date of effectivity of Republic Act No. 7718. The provision of Republic Act No. 7718. The assailed contract was entered into before Republic Act. No. 7718 was enacted.

The difficulties. of applying the provisions of presidential Degree No. 1594 to the Edsa LRT-type of contracts are aggravated when one considers the detailed" Implementing Rules and Regulations as amended April 1988" issued under that Presidential Decree. 1 For instance:

IB [2.5.2] 2.4.2 By Negotiated Contract

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a. In times of emergencies arising from natural calamities where immediate action is necessary to prevent imminent loss of life and/or property.

b. Failure to award the contract after competitive public bidding for valid cause or causes [such as where the prices obtained through public bidding are all above the AAE and the bidders refuse to reduce their prices to the AAE].

In these cases, bidding may be undertaken through sealed canvass of at least three (3) qualified contractors. Authority to negotiate contracts for projects under these exceptional cases shall be subject to prior approval by heads of agencies within their limits of approving authority.

c. Where the subject project is adjacent or contiguous to an on-going project and it could be economically prosecuted by the same contractor provided that he has no negative slippage and has demonstrated a satisfactory performance. (Emphasis supplied).

Note that there is no reference at all in these presidential Decree No. 1594 Implementing Rules and Regulations to absence of pre-qualified applicants and bidders as justifying negotiation of contracts as distinguished from requiring public bidding or a second public bidding.

Note also the following provision of the same Implementing Rules and Regulations:

IB 1 Prequalification

The following may be become contractors for government projects:

1 Filipino

a. Citizens (single proprietorship)

b. Partnership of corporation duly organized under the laws of the Philippines, and at least seventy five percent (75%) of the capital stock of which belongs to Filipino citizens.

2. Contractors forming themselves into a joint venture, i.e., a group of two or more contractors that intend to be jointly and severally responsible for a particular contract, shall for purposes of bidding/tendering comply with LOI 630, and, aside from being currently and properly accredited by the Philippine Contractors Accreditation Board, shall comply with the provisions of R.A. 4566, provided that joint ventures in which Filipino ownership is less than seventy five percent ( 75%) may be prequalified where the structures to be built require the application of techniques and/or technologies which are not adequately possessed by a Filipino entity as defined above.

[The foregoing shall not negate any existing and future commitments with respect to the bidding and aware of contracts financed partly or wholly with funds from international lending institutions like the Asian Development Bank and the Worlds Bank as well as from bilateral and other similar sources.(Emphases supplied)

The record of this case is entirely silent on the extent of Philippine equity in the Edsa LRT Corporation; there is no suggestion that this corporation is organized under Philippine law and is at least seventy-five (75%) percent owned by Philippine citizens.

Public bidding is the normal method by which a government keeps contractors honest and is able to assure itself that it would be getting the best possible value for its money in any construction or similar project. It is not for nothing that multilateral financial organizations like the World Bank and the Asian Development Bank uniformly require projects financed by them to be implemented and carried out by public bidding. Public bidding is much too important a requirement casually to loosen by a latitudinarian exercise in statutory construction.

The instant petition should be granted and the challenged contract and its supplement should be nullified and set aside. A true public bidding, complete with a new prequalification proceeding, should be required for the Edsa LRT Project.

Footnotes

MENDOZA, J., concurring:

1 Philconsa v. Enriquez, 235 SCRA 506 (1994); Gonzales v. Macaraig, 191 SCRA 452 (1990); Tolentino v. Comelec, 41 SCRA 702 (1971).

2 Flast v. Cohen, 392 U.S. 83, 20 L. Ed. 2d 947 (1968), cited in Igot v. Comelec, 95 SCRA 392 (1980).

3 Pascual v. Secretary of Public Works, 110 Phil 331 (1960); Sanidad v Comelec, 73 SCRA 333 (1976).

4 176 SCRA 240, 251-2 (1989).

5 Emergency Powers Cases [Araneta v. Dinglasan]. 84 Phil. 368 (1949), Iloilo Palay and Corn Planters Ass'n. v. Feliciano, 121 Phil. 358 (1965); Philconsa v. Gimenez. 122 Phil. 894 (1965); CLU v. Executive Secretary, 194 SCRA 317 (1991).

6 Kilosbayan, Inc. v. Guingona, 232 SCRA 110 (1994).

7 Id. at 139.

8 G.R Nos. 73748, 73972, and 73990, May 22, 1986. (Questioning the legitimacy of the Provisional Government of President Aquino).

9 145 SCRA 160 (1986). (Questioning whether President Aquino and Vice President Laurel were the "President and Vice-President elected in the February 7, 1986 election" within the meaning of Art XVIII, §5 of the Constitution.

10 Valley Forge College v. Americans 

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. 88404 October 18, 1990

PHILIPPINE LONG DISTANCE TELEPHONE CO. [PLDT], petitioner, vs.THE NATIONAL TELECOMMUNICATIONS COMMISSION AND CELLCOM, INC., (EXPRESS TELECOMMUNICATIONS CO., INC. [ETCI]), respondents.

Alampan & Manhit Law Offices for petitioner.

Gozon, Fernandez, Defensor & Parel for private respondent.

 

MELENCIO-HERRERA, J.:

Petitioner Philippine Long Distance Telephone Company (PLDT) assails, by way of certiorari and Prohibition under Rule 65, two (2) Orders of public respondent National Telecommunications Commission (NTC), namely, the Order of 12 December 1988 granting private respondent Express Telecommunications Co., Inc. (ETCI) provisional authority to install, operate and maintain a Cellular Mobile Telephone System in Metro-Manila (Phase A) in accordance with specified conditions, and the Order, dated 8 May 1988, denying reconsideration.

On 22 June 1958, Rep. Act No. 2090, was enacted, otherwise known as "An Act Granting Felix Alberto and Company, Incorporated, a Franchise to Establish Radio Stations for Domestic and Transoceanic Telecommunications." Felix Alberto & Co., Inc. (FACI) was the original corporate name, which was changed to ETCI with the amendment of the Articles of Incorporation in 1964. Much later, "CELLCOM, Inc." was the name sought to be adopted before the Securities and Exchange Commission, but this was withdrawn and abandoned.

On 13 May 1987, alleging urgent public need, ETCI filed an application with public respondent NTC (docketed as NTC Case No. 87-89) for the issuance of a Certificate of Public Convenience and Necessity (CPCN) to construct, install, establish, operate and maintain a Cellular Mobile Telephone System and an Alpha Numeric Paging System in Metro Manila and in the Southern Luzon regions, with a prayer for provisional authority to operate Phase A of its proposal within Metro Manila.

PLDT filed an Opposition with a Motion to Dismiss, based primarily on the following grounds: (1) ETCI is not capacitated or qualified under its legislative franchise to operate a systemwide telephone or network of telephone service such as the one proposed in its application; (2) ETCI lacks the facilities needed and indispensable to the successful operation of the proposed cellular mobile telephone system; (3) PLDT has itself a pending application with NTC, Case No. 86-86, to install and operate a Cellular Mobile Telephone System for domestic and international service not only in Manila but also in the provinces and that under the "prior operator" or "protection of investment" doctrine, PLDT has the priority or preference in the operation of such service; and (4) the provisional authority, if granted, will result in needless, uneconomical and harmful duplication, among others.

In an Order, dated 12 November 1987, NTC overruled PLDT's Opposition and declared that Rep. Act No. 2090 (1958) should be liberally construed as to include among the services under said franchise the operation of a cellular mobile telephone service.

In the same Order, ETCI was required to submit the certificate of registration of its Articles of Incorporation with the Securities and Exchange Commission, the present capital and ownership structure of the company and such other evidence, oral or documentary, as may be necessary to prove its legal, financial and technical capabilities as well as the economic justifications to warrant the setting up of cellular mobile telephone and paging systems. The continuance of the hearings was also directed.

After evaluating the reconsideration sought by PLDT, the NTC, in October 1988, maintained its ruling that liberally construed, applicant's franchise carries with it the privilege to operate and maintain a cellular mobile telephone service.

On 12 December 1988, NTC issued the first challenged Order. Opining that "public interest, convenience and necessity further demand a second cellular mobile telephone service provider and finds PRIMA FACIE evidence showing applicant's legal, financial and technical capabilities to provide a cellular mobile service using the AMPS system," NTC granted ETCI provisional authority to install, operate and maintain a cellular mobile telephone system initially in Metro Manila, Phase A only, subject to the terms and conditions set forth in the same Order. One of the conditions prescribed (Condition No. 5) was that, within ninety (90) days from date of the acceptance by ETCI of the terms and conditions of the provisional authority, ETCI and PLDT "shall enter into an interconnection agreement for the provision of adequate interconnection facilities between applicant's cellular mobile telephone switch and the public switched telephone network and shall jointly submit such interconnection agreement to the Commission for approval."

In a "Motion to Set Aside the Order" granting provisional authority, PLDT alleged essentially that the interconnection ordered was in violation of due process and that the grant of provisional authority was jurisdictionally and procedurally infirm. On 8 May 1989, NTC denied reconsideration and set the date for continuation of the hearings on the main proceedings. This is the second questioned Order.

PLDT urges us now to annul the NTC Orders of 12 December 1988 and 8 May 1989 and to order ETCI to desist from, suspend, and/or discontinue any and all acts intended for its implementation.

On 15 June 1989, we resolved to dismiss the petition for its failure to comply fully with the requirements of Circular No. 1-88. Upon satisfactory showing, however, that there was, in fact, such compliance, we reconsidered the order, reinstated the Petition, and required the respondents NTC and ETCI to submit their respective Comments.

On 27 February 1990, we issued a Temporary Restraining Order enjoining NTC to "Cease and Desist from all or any of its on-going proceedings and ETCI from continuing any and all acts intended or related to or which will amount to the implementation/execution of its provisional authority." This was upon PLDT's urgent manifestation that it had been served an NTC Order, dated 14 February 1990, directing immediate compliance with its Order of 12 December 1988, "otherwise the Commission shall be constrained to take the necessary measures and bring to bear upon PLDT the full sanctions provided by law."

We required PLDT to post a bond of P 5M. It has complied, with the statement that it was "post(ing) the same on its agreement and/or consent to have the same forfeited in favor of Private Respondent ETCI/CELLCOM should the instant Petition be dismissed for lack of merit." ETCI took exception to the sufficiency of the bond considering its initial investment of approximately P 225M, but accepted the forfeiture proferred.

ETCI moved to have the TRO lifted, which we denied on 6 March 1990. We stated, however, that the inaugural ceremony ETCI had scheduled for that day could proceed, as the same was not covered by the TRO.

PLDT relies on the following grounds for the issuance of the Writs prayed for:

1. Respondent NTC's subject order effectively licensed and/or authorized a corporate entity without any franchise to operate a public utility, legislative or otherwise, to establish and operate a telecommunications system.

2. The same order validated stock transactions of a public service enterprise contrary to and/or in direct violation of Section 20(h) of the Public Service Act.

3. Respondent NTC adjudicated in the same order a controverted matter that was not heard at all in the proceedings under which it was promulgated.

As correctly pointed out by respondents, this being a special civil action for certiorari and Prohibition, we only need determine if NTC acted without jurisdiction or with grave abuse of discretion amounting to lack or excess of jurisdiction in granting provisional authority to ETCI under the NTC questioned Orders of 12 December 1988 and 8 May 1989.

The case was set for oral argument on 21 August 1990 with the parties directed to address, but not limited to, the following issues: (1) the status and coverage of Rep. Act No. 2090 as a franchise; (2) the transfer of shares of stock of a corporation holding a CPCN; and (3) the principle and procedure of interconnection. The parties were thereafter required to submit their respective Memoranda, with which they have complied.

We find no grave abuse of discretion on the part of NTC, upon the following considerations:

1. NTC Jurisdiction

There can be no question that the NTC is the regulatory agency of the national government with jurisdiction over all telecommunications entities. It is legally clothed with authority and given ample discretion to grant a provisional permit or authority. In fact, NTC may, on its own initiative, grant such relief even in the absence of a motion from an applicant.

Sec. 3. Provisional Relief. — Upon the filing of an application, complaint or petition or at any stage thereafter, the Board may grant on motion of the pleaders or on its own initiative, the relief prayed for, based on the pleading, together with the affidavits and supporting documents attached thereto, without prejudice to a final decision after completion of the hearing which shall be called within thirty (30) days from grant of authority asked for. (Rule 15, Rules of Practice and Procedure Before the Board of Communications (now NTC).

What the NTC granted was such a provisional authority, with a definite expiry period of eighteen (18) months unless sooner renewed, and which may be revoked, amended or revised by the NTC. It is also limited to Metro Manila only. What is more, the main proceedings are clearly to continue as stated in the NTC Order of 8 May 1989.

The provisional authority was issued after due hearing, reception of evidence and evaluation thereof, with the hearings attended by various oppositors, including PLDT. It was granted only after a prima facie showing that ETCI has the necessary legal, financial and technical capabilities and that public interest, convenience and necessity so demanded.

PLDT argues, however, that a provisional authority is nothing short of a Certificate of Public Convenience and Necessity (CPCN) and that it is merely a "distinction without a difference." That is not so. Basic differences do exist, which need not be elaborated on. What should be borne in mind is that provisional authority would be meaningless if the grantee were not allowed to operate. Moreover, it is clear from the very Order of 12 December 1988 itself that its scope is limited only to the first phase, out of four, of the proposed nationwide telephone system. The installation and operation of an alpha numeric paging system was not authorized. The provisional authority is not exclusive. Its lifetime is limited and may be revoked by the NTC at any time in accordance with law. The initial expenditure of P130M more or less, is rendered necessary even under a provisional authority to enable ETCI to prove its capability. And as pointed out by the Solicitor General, on behalf of the NTC, if what had been granted were a CPCN, it would constitute a final order or award reviewable only by ordinary appeal to the Court of Appeals pursuant to Section 9(3) of BP Blg. 129, and not by certiorari before this Court.

The final outcome of the application rests within the exclusive prerogative of the NTC. Whether or not a CPCN would eventually issue would depend on the evidence to be presented during the hearings still to be conducted, and only after a full evaluation of the proof thus presented.

2. The Coverage of ETCI's Franchise

Rep. Act No. 2090 grants ETCI (formerly FACI) "the right and privilege of constructing, installing, establishing and operating in the entire Philippines radio stations for reception and transmission of messages on radio stations in the foreign and domestic public fixed point-to-point and public base, aeronautical and land mobile stations, ... with the corresponding relay stations for the reception and transmission of wireless messages on radiotelegraphy and/or radiotelephony ...." PLDT maintains that the scope of the franchise is limited to "radio stations" and excludes telephone services such as the establishment of the proposed Cellular Mobile Telephone System (CMTS). However, in its Order of 12 November 1987, the NTC construed the technical term "radiotelephony" liberally as to include the operation of a cellular mobile telephone system. It said:

In resolving the said issue, the Commission takes into consideration the different definitions of the term "radiotelephony." As defined by the New International Webster Dictionary the term "radiotelephony" is defined as a telephone carried on by aid of radiowaves without connecting wires. The International Telecommunications Union (ITU) defines a "radiotelephone call" as a "telephone call, originating in or intended on all or part of its route over the radio communications channels of the mobile service or of the mobile satellite service." From the above definitions, while under Republic Act 2090 a system-wide telephone or network of telephone service by means of connecting wires may not have been contemplated, it can be construed liberally that the operation of a cellular mobile telephone service which carries messages, either voice or record, with the aid of radiowaves or a part of its route carried over radio communication channels, is one included among the services under said franchise for which a certificate of public convenience and necessity may be applied for.

The foregoing is the construction given by an administrative agency possessed of the necessary special knowledge, expertise and experience and deserves great weight and respect (Asturias Sugar Central, Inc. v. Commissioner of Customs, et al., L-19337, September 30, 1969, 29 SCRA 617). It can only be set aside on proof of gross abuse of discretion, fraud, or error of law (Tupas Local Chapter No. 979 v. NLRC, et al., L-60532-33, November 5, 1985, 139 SCRA 478). We discern none of those considerations sufficient to warrant judicial intervention.

3. The Status of ETCI Franchise

PLDT alleges that the ETCI franchise had lapsed into nonexistence for failure of the franchise holder to begin and complete construction of the radio system authorized under the franchise as explicitly required in Section 4 of its franchise, Rep. Act No. 2090. 1 PLDT also invokes Pres. Decree No. 36, enacted on 2 November 1972, which legislates the mandatory cancellation or invalidation of all franchises for the operation of communications services, which have not been availed of or used by the party or parties in whose name they were issued.

However, whether or not ETCI, and before it FACI, in contravention of its franchise, started the first of its radio telecommunication stations within (2) years from the grant of its franchise and completed the construction within ten (10) years from said date; and whether or not its franchise had remained unused from the time of its issuance, are questions of fact beyond the province of this Court, besides the well-settled procedural consideration that factual issues are not subjects of a special civil action for certiorari (Central Bank of the Philippines vs. Court of Appeals, G.R. No. 41859, 8 March 1989, 171 SCRA 49; Ygay vs. Escareal, G.R. No. 44189, 8 February 1985, 135 SCRA 78; Filipino Merchant's Insurance Co., Inc. vs. Intermediate Appellate Court, G.R. No. 71640, 27 June 1988, 162 SCRA 669). Moreover, neither Section 4, Rep. Act No. 2090 nor Pres. Decree No. 36 should be construed as self-executing in working a forfeiture. Franchise holders should be given an opportunity to be heard, particularly so, where, as in this case, ETCI does not admit any breach, in consonance with the rudiments of fair play. Thus, the factual situation of this case differs from that in Angeles Ry Co. vs. City of Los Angeles (92 Pacific Reporter 490) cited by PLDT, where the grantee therein admitted its failure to complete the conditions of its franchise and yet insisted on a decree of forfeiture.

More importantly, PLDT's allegation partakes of a Collateral attack on a franchise Rep. Act No. 2090), which is not allowed. A franchise is a property right and cannot be revoked or forfeited without due process of law. The determination of the right to the exercise of a franchise, or whether the right to enjoy such privilege has been forfeited by non-user, is more properly the subject of the prerogative writ of quo warranto, the right to assert which, as a rule, belongs to the State "upon

complaint or otherwise" (Sections 1, 2 and 3, Rule 66, Rules of Court), 2 the reason being that the abuse of a franchise is a public wrong and not a private injury. A forfeiture of a franchise will have to be declared in a direct proceeding for the purpose brought by the State because a franchise is granted by law and its unlawful exercise is primarily a concern of Government.

A ... franchise is ... granted by law, and its ... unlawful exercise is the concern primarily of the Government. Hence, the latter as a rule is the party called upon to bring the action for such ... unlawful exercise of franchise. (IV-B V. FRANCISCO, 298 [1963 ed.], citing Cruz vs. Ramos, 84 Phil. 226).

4. ETCI's Stock Transactions

ETCI admits that in 1964, the Albertos, as original owners of more than 40% of the outstanding capital stock sold their holdings to the Orbes. In 1968, the Albertos re-acquired the shares they had sold to the Orbes. In 1987, the Albertos sold more than 40% of their shares to Horacio Yalung. Thereafter, the present stockholders acquired their ETCI shares. Moreover, in 1964, ETCI had increased its capital stock from P40,000.00 to P360,000.00; and in 1987, from P360,000.00 to P40M.

PLDT contends that the transfers in 1987 of the shares of stock to the new stockholders amount to a transfer of ETCI's franchise, which needs Congressional approval pursuant to Rep. Act No. 2090, and since such approval had not been obtained, ETCI's franchise had been invalidated. The provision relied on reads, in part, as follows:

SECTION 10. The grantee shall not lease, transfer, grant the usufruct of, sell or assign this franchise nor the rights and privileges acquired thereunder to any person, firm, company, corporation or other commercial or legal entity nor merge with any other person, company or corporation organized for the same purpose, without the approval of the Congress of the Philippines first had. ...

It should be noted, however, that the foregoing provision is, directed to the "grantee" of the franchise, which is the corporation itself and refers to a sale, lease, or assignment of that franchise. It does not include the transfer or sale of shares of stock of a corporation by the latter's stockholders.

The sale of shares of stock of a public utility is governed by another law, i.e., Section 20(h) of the Public Service Act (Commonwealth Act No. 146). Pursuant thereto, the Public Service Commission (now the NTC) is the government agency vested with the authority to approve the transfer of more than 40% of the subscribed capital stock of a telecommunications company to a single transferee, thus:

SEC. 20. Acts requiring the approval of the Commission. Subject to established stations and exceptions and saving provisions to the contrary, it shall be unlawful for any public service or for the owner, lessee or operator thereof, without the approval and authorization of the Commission previously had

xxx xxx xxx

(h) To sell or register in its books the transfer or sale of shares of its capital stock, if the result of that sale in itself or in connection with another previous sale, shall be to vest in the transferee more than forty per centum of the subscribed capital of said public service. Any transfer made in violation of this provision shall be void and of no

effect and shall not be registered in the books of the public service corporation. Nothing herein contained shall be construed to prevent the holding of shares lawfully acquired. (As amended by Com. Act No. 454).

In other words, transfers of shares of a public utility corporation need only NTC approval, not Congressional authorization. What transpired in ETCI were a series of transfers of shares starting in 1964 until 1987. The approval of the NTC may be deemed to have been met when it authorized the issuance of the provisional authority to ETCI. There was full disclosure before the NTC of the transfers. In fact, the NTC Order of 12 November 1987 required ETCI to submit its "present capital and ownership structure." Further, ETCI even filed a Motion before the NTC, dated 8 December 1987, or more than a year prior to the grant of provisional authority, seeking approval of the increase in its capital stock from P360,000.00 to P40M, and the stock transfers made by its stockholders.

A distinction should be made between shares of stock, which are owned by stockholders, the sale of which requires only NTC approval, and the franchise itself which is owned by the corporation as the grantee thereof, the sale or transfer of which requires Congressional sanction. Since stockholders own the shares of stock, they may dispose of the same as they see fit. They may not, however, transfer or assign the property of a corporation, like its franchise. In other words, even if the original stockholders had transferred their shares to another group of shareholders, the franchise granted to the corporation subsists as long as the corporation, as an entity, continues to exist The franchise is not thereby invalidated by the transfer of the shares. A corporation has a personality separate and distinct from that of each stockholder. It has the right of continuity or perpetual succession (Corporation Code, Sec. 2).

To all appearances, the stock transfers were not just for the purpose of acquiring the ETCI franchise, considering that, as heretofore stated, a series of transfers was involved from 1964 to 1987. And, contrary to PLDT's assertion, the franchise was not the only property of ETCI of meaningful value. The "zero" book value of ETCI assets, as reflected in its balance sheet, was plausibly explained as due to the accumulated depreciation over the years entered for accounting purposes and was not reflective of the actual value that those assets would command in the market.

But again, whether ETCI has offended against a provision of its franchise, or has subjected it to misuse or abuse, may more properly be inquired into in quo warranto proceedings instituted by the State. It is the condition of every franchise that it is subject to amendment, alteration, or repeal when the common good so requires (1987 Constitution, Article XII, Section 11).

5. The NTC Interconnection Order

In the provisional authority granted by NTC to ETCI, one of the conditions imposed was that the latter and PLDT were to enter into an interconnection agreement to be jointly submitted to NTC for approval.

PLDT vehemently opposes interconnection with its own public switched telephone network. It contends: that while PLDT welcomes interconnections in the furtherance of public interest, only parties who can establish that they have valid and subsisting legislative franchises are entitled to apply for a CPCN or provisional authority, absent which, NTC has no jurisdiction to grant them the CPCN or interconnection with PLDT; that the 73 telephone systems operating all over the Philippines have a viability and feasibility independent of any interconnection with PLDT; that "the NTC is not empowered to compel such a private raid on PLDT's legitimate income arising out of its gigantic investment;" that "it is not public interest, but purely a private and selfish interest which will be served by an interconnection under ETCI's terms;" and that "to compel PLDT to interconnect

merely to give viability to a prospective competitor, which cannot stand on its own feet, cannot be justified in the name of a non-existent public need" (PLDT Memorandum, pp. 48 and 50).

PLDT cannot justifiably refuse to interconnect.

Rep. Act No. 6849, or the Municipal Telephone Act of 1989, approved on 8 February 1990, mandates interconnection providing as it does that "all domestic telecommunications carriers or utilities ... shall be interconnected to the public switch telephone network." Such regulation of the use and ownership of telecommunications systems is in the exercise of the plenary police power of the State for the promotion of the general welfare. The 1987 Constitution recognizes the existence of that power when it provides.

SEC. 6. The use of property bears a social function, and all economic agents shall contribute to the common good. Individuals and private groups, including corporations, cooperatives, and similar collective organizations, shall have the right to own, establish, and operate economic enterprises, subject to the duty of the State to promote distributive justice and to intervene when the common good so demands (Article XII).

The interconnection which has been required of PLDT is a form of "intervention" with property rights dictated by "the objective of government to promote the rapid expansion of telecommunications services in all areas of the Philippines, ... to maximize the use of telecommunications facilities available, ... in recognition of the vital role of communications in nation building ... and to ensure that all users of the public telecommunications service have access to all other users of the service wherever they may be within the Philippines at an acceptable standard of service and at reasonable cost" (DOTC Circular No. 90-248). Undoubtedly, the encompassing objective is the common good. The NTC, as the regulatory agency of the State, merely exercised its delegated authority to regulate the use of telecommunications networks when it decreed interconnection.

The importance and emphasis given to interconnection dates back to Ministry Circular No. 82-81, dated 6 December 1982, providing:

Sec. 1. That the government encourages the provision and operation of public mobile telephone service within local sub-base stations, particularly, in the highly commercialized areas;

Sec. 5. That, in the event the authority to operate said service be granted to other applicants, other than the franchise holder, the franchise operator shall be under obligation to enter into an agreement with the domestic telephone network, under an interconnection agreement;

Department of Transportation and Communication (DOTC) Circular No. 87-188, issued in 1987, also decrees:

12. All public communications carriers shall interconnect their facilities pursuant to comparatively efficient interconnection (CEI) as defined by the NTC in the interest of economic efficiency.

The sharing of revenue was an additional feature considered in DOTC Circular No. 90-248, dated 14 June 1990, laying down the "Policy on Interconnection and Revenue Sharing by Public Communications Carriers," thus:

WHEREAS, it is the objective of government to promote the rapid expansion of telecommunications services in all areas of the Philippines;

WHEREAS, there is a need to maximize the use of telecommunications facilities available and encourage investment in telecommunications infrastructure by suitably qualified service providers;

WHEREAS, in recognition of the vital role of communications in nation building, there is a need to ensure that all users of the public telecommunications service have access to all other users of the service wherever they may be within the Philippines at an acceptable standard of service and at reasonable cost.

WHEREFORE, ... the following Department policies on interconnection and revenue sharing are hereby promulgated:

1. All facilities offering public telecommunication services shall be interconnected into the nationwide telecommunications network/s.

xxx xxx xxx

4. The interconnection of networks shall be effected in a fair and non-discriminatory manner and within the shortest time-frame practicable.

5. The precise points of interface between service operators shall be as defined by the NTC; and the apportionment of costs and division of revenues resulting from interconnection of telecommunications networks shall be as approved and/or prescribed by the NTC.

xxx xxx xxx

Since then, the NTC, on 12 July 1990, issued Memorandum Circular No. 7-13-90 prescribing the "Rules and Regulations Governing the Interconnection of Local Telephone Exchanges and Public Calling Offices with the Nationwide Telecommunications Network/s, the Sharing of Revenue Derived Therefrom, and for Other Purposes."

The NTC order to interconnect allows the parties themselves to discuss and agree upon the specific terms and conditions of the interconnection agreement instead of the NTC itself laying down the standards of interconnection which it can very well impose. Thus it is that PLDT cannot justifiably claim denial of clue process. It has been heard. It will continue to be heard in the main proceedings. It will surely heard in the negotiations concerning the interconnection agreement.

As disclosed during the hearing, the interconnection sought by ETCI is by no means a "parasitic dependence" on PLDT. The ETCI system can operate on its own even without interconnection, but it will be limited to its own subscribers. What interconnection seeks to accomplish is to enable the system to reach out to the greatest number of people possible in line with governmental policies laid down. Cellular phones can access PLDT units and vice versa in as wide an area as attainable. With the broader reach, public interest and convenience will be better served. To be sure, ETCI could provide no mean competition (although PLDT maintains that it has nothing to fear from the "innocuous interconnection"), and eat into PLDT's own toll revenue cream PLDT revenue," in its own words), but all for the eventual benefit of all that the system can reach.

6. Ultimate Considerations

The decisive consideration are public need, public interest, and the common good. Those were the overriding factors which motivated NTC in granting provisional authority to ETCI. Article II, Section 24 of the 1987 Constitution, recognizes the vital role of communication and information in nation building. It is likewise a State policy to provide the environment for the emergence of communications structures suitable to the balanced flow of information into, out of, and across the country (Article XVI, Section 10, Ibid.). A modern and dependable communications network rendering efficient and reasonably priced services is also indispensable for accelerated economic recovery and development. To these public and national interests, public utility companies must bow and yield.

Despite the fact that there is a virtual monopoly of the telephone system in the country at present. service is sadly inadequate. Customer demands are hardly met, whether fixed or mobile. There is a unanimous cry to hasten the development of a modern, efficient, satisfactory and continuous telecommunications service not only in Metro Manila but throughout the archipelago. The need therefor was dramatically emphasized by the destructive earthquake of 16 July 1990. It may be that users of the cellular mobile telephone would initially be limited to a few and to highly commercialized areas. However, it is a step in the right direction towards the enhancement of the telecommunications infrastructure, the expansion of telecommunications services in, hopefully, all areas of the country, with chances of complete disruption of communications minimized. It will thus impact on, the total development of the country's telecommunications systems and redound to the benefit of even those who may not be able to subscribe to ETCI.

Free competition in the industry may also provide the answer to a much-desired improvement in the quality and delivery of this type of public utility, to improved technology, fast and handy mobile service, and reduced user dissatisfaction. After all, neither PLDT nor any other public utility has a constitutional right to a monopoly position in view of the Constitutional proscription that no franchise certificate or authorization shall be exclusive in character or shall last longer than fifty (50) years (ibid., Section 11; Article XIV Section 5, 1973 Constitution; Article XIV, Section 8, 1935 Constitution). Additionally, the State is empowered to decide whether public interest demands that monopolies be regulated or prohibited (1987 Constitution. Article XII, Section 19).

WHEREFORE, finding no grave abuse of discretion, tantamount to lack of or excess of jurisdiction, on the part of the National Telecommunications Commission in issuing its challenged Orders of 12 December 1988 and 8 May 1989 in NTC Case No. 87-39, this Petition is DISMISSED for lack of merit. The Temporary Restraining Order heretofore issued is LIFTED. The bond issued as a condition for the issuance of said restraining Order is declared forfeited in favor of private respondent Express Telecommunications Co., Inc. Costs against petitioner.

SO ORDERED.