1
THIRD DIVISION price within one month from the signing of the Deed of Sale. Montecillos
G.R. No. 138018 July 26, 2002
RIDO MONTECILLO, petitioner,
vs.
IGNACIA REYNES and SPOUSES REDEMPTOR and ELISA
ABUCAY, respondents.
CARPIO, J.:
The Case
On March 24, 1993, the Regional Trial Court of Cebu City, Branch 18,
rendered a Decision1 declaring the deed of sale of a parcel of land in favor of
petitioner null and void ab initio. The Court of Appeals, 2 in its July 16, 1998
Decision3 as well as its February 11, 1999 Order4 denying petitioners
Motion for Reconsideration, affirmed the trial courts decision in toto.
Before this Court now is a Petition for Review on Certiorari 5 assailing the
Court of Appeals decision and order.
The Facts
Respondents Ignacia Reynes ("Reynes" for brevity) and Spouses Abucay
("Abucay Spouses" for brevity) filed on June 20, 1984 a complaint for
Declaration of Nullity and Quieting of Title against petitioner Rido
Montecillo ("Montecillo" for brevity). Reynes asserted that she is the owner
of a lot situated in Mabolo, Cebu City, covered by Transfer Certificate of
Title No. 74196 and containing an area of 448 square meters ("Mabolo Lot"
for brevity). In 1981, Reynes sold 185 square meters of the Mabolo Lot to
the Abucay Spouses who built a residential house on the lot they bought.
Reynes alleged further that on March 1, 1984 she signed a Deed of Sale of
the Mabolo Lot in favor of Montecillo ("Montecillos Deed of Sale" for
brevity). Reynes, being illiterate, 6 signed by affixing her thumb-mark7 on the
document. Montecillo promised to pay the agreed P47,000.00 purchase
Deed of Sale states as follows:
"That I, IGNACIA T. REYNES, of legal age, Filipino, widow, with
residence and postal address at Mabolo, Cebu City, Philippines, for
and in consideration of FORTY SEVEN THOUSAND (P47,000.00)
PESOS, Philippine Currency, to me in hand paid by RIDO
MONTECILLO, of legal age, Filipino, married, with residence and
postal address at Mabolo, Cebu City, Philippines, the receipt hereof
is hereby acknowledged, have sold, transferred, and conveyed,
unto RIDO MONTECILLO, his heirs, executors, administrators, and
assigns, forever, a parcel of land together with the improvements
thereon, situated at Mabolo, Cebu City, Philippines, free from all
liens and encumbrances, and more particularly described as follows:
A parcel of land (Lot 203-B-2-B of the subdivision plan Psd-
07-01-00 2370, being a portion of Lot 203-B-2, described on
plan (LRC) Psd-76821, L.R.C. (GLRO) Record No. 5988),
situated in the Barrio of Mabolo, City of Cebu. Bounded on
the SE., along line 1-2 by Lot 206; on the SW., along line 2-3,
by Lot 202, both of Banilad Estate; on the NW., along line 4-
5, by Lot 203-B-2-A of the subdivision of Four Hundred Forty
Eight (448) square meters, more or less.
of which I am the absolute owner in accordance with the provisions
of the Land Registration Act, my title being evidenced by Transfer
Certificate of Title No. 74196 of the Registry of Deeds of the City of
Cebu, Philippines. That This Land Is Not Tenanted and Does Not Fall
Under the Purview of P.D. 27."8 (Emphasis supplied)
Reynes further alleged that Montecillo failed to pay the purchase price after
the lapse of the one-month period, prompting Reynes to demand from
Montecillo the return of the Deed of Sale. Since Montecillo refused to
return the Deed of Sale, 9 Reynes executed a document unilaterally revoking
the sale and gave a copy of the document to Montecillo.
Subsequently, on May 23, 1984 Reynes signed a Deed of Sale transferring to
the Abucay Spouses the entire Mabolo Lot, at the same time confirming the

previous sale in 1981 of a 185-square meter portion of the lot. This Deed of
Sale states:
"I, IGNACIA T. REYNES, of legal age, Filipino, widow and resident of
Mabolo, Cebu City, do hereby confirm the sale of a portion of Lot
No. 74196 to an extent of 185 square meters to Spouses Redemptor
Abucay and Elisa Abucay covered by Deed per Doc. No. 47, Page No.
9, Book No. V, Series of 1981 of notarial register of Benedicto Alo, of
which spouses is now in occupation;
That for and in consideration of the total sum of FIFTY THOUSAND
(P50,000) PESOS, Philippine Currency, received in full and receipt
whereof is herein acknowledged from SPOUSES REDEMPTOR
ABUCAY and ELISA ABUCAY, do hereby in these presents, SELL,
TRANSFER and CONVEY absolutely unto said Spouses Redemptor
Abucay and Elisa Abucay, their heirs, assigns and successors-in-
interest the whole parcel of land together with improvements
thereon and more particularly described as follows:
TCT No. 74196
A parcel of land (Lot 203-B-2-B of the subdivision plan psd-
07-01-002370, being a portion of Lot 203-B-2, described on
plan (LRC) Psd 76821, LRC (GLRO) Record No. 5988) situated
in Mabolo, Cebu City, along Arcilla Street, containing an
area of total FOUR HUNDRED FORTY EIGHT (448) Square
meters.
of which I am the absolute owner thereof free from all liens and
encumbrances and warrant the same against claim of third persons
and other deeds affecting said parcel of land other than that to the
said spouses and inconsistent hereto is declared without any effect.
In witness whereof, I hereunto signed this 23rd day of May, 1984 in
Cebu City, Philippines."10
2
Reynes and the Abucay Spouses alleged that on June 18, 1984 they received
information that the Register of Deeds of Cebu City issued Certificate of
Title No. 90805 in the name of Montecillo for the Mabolo Lot.
Reynes and the Abucay Spouses argued that "for lack of consideration there
(was) no meeting of the minds"11between Reynes and Montecillo. Thus, the
trial court should declare null and void ab initio Montecillos Deed of Sale,
and order the cancellation of Certificate of Title No. 90805 in the name of
Montecillo.
In his Answer, Montecillo, a bank executive with a B.S. Commerce
degree,12 claimed he was a buyer in good faith and had actually paid
the P47,000.00 consideration stated in his Deed of Sale. Montecillo,
however, admitted he still owed Reynes a balance of P10,000.00. He also
alleged that he paid P50,000.00 for the release of the chattel mortgage
which he argued constituted a lien on the Mabolo Lot. He further alleged
that he paid for the real property tax as well as the capital gains tax on the
sale of the Mabolo Lot.
In their Reply, Reynes and the Abucay Spouses contended that Montecillo
did not have authority to discharge the chattel mortgage, especially after
Reynes revoked Montecillos Deed of Sale and gave the mortgagee a copy of
the document of revocation. Reynes and the Abucay Spouses claimed that
Montecillo secured the release of the chattel mortgage through
machination. They further asserted that Montecillo took advantage of the
real property taxes paid by the Abucay Spouses and surreptitiously caused
the transfer of the title to the Mabolo Lot in his name.
During pre-trial, Montecillo claimed that the consideration for the sale of
the Mabolo Lot was the amount he paid to Cebu Ice and Cold Storage
Corporation ("Cebu Ice Storage" for brevity) for the mortgage debt of
Bienvenido Jayag ("Jayag" for brevity). Montecillo argued that the release of
the mortgage was necessary since the mortgage constituted a lien on the
Mabolo Lot.
Reynes, however, stated that she had nothing to do with Jayags mortgage
debt except that the house mortgaged by Jayag stood on a portion of the
Mabolo Lot. Reynes further stated that the payment by Montecillo to

release the mortgage on Jayags house is a matter between Montecillo and
Jayag. The mortgage on the house, being a chattel mortgage, could not be
interpreted in any way as an encumbrance on the Mabolo Lot. Reynes
further claimed that the mortgage debt had long prescribed since the
P47,000.00 mortgage debt was due for payment on January 30, 1967.
The trial court rendered a decision on March 24, 1993 declaring the Deed of
Sale to Montecillo null and void. The trial court ordered the cancellation of
Montecillos Transfer Certificate of Title No. 90805 and the issuance of a
new certificate of title in favor of the Abucay Spouses. The trial court found
that Montecillos Deed of Sale had no cause or consideration because
Montecillo never paid Reynes the P47,000.00 purchase price, contrary to
what is stated in the Deed of Sale that Reynes received the purchase price.
The trial court ruled that Montecillos Deed of Sale produced no effect
whatsoever for want of consideration. The dispositive portion of the trial
courts decision reads as follows:
"WHEREFORE, in view of the foregoing consideration, judgment is
hereby rendered declaring the deed of sale in favor of defendant
null and void and of no force and effect thereby ordering the
cancellation of Transfer Certificate of Title No. 90805 of the Register
of Deeds of Cebu City and to declare plaintiff Spouses Redemptor
and Elisa Abucay as rightful vendees and Transfer Certificate of Title
to the property subject matter of the suit issued in their names. The
defendants are further directed to pay moral damages in the sum
of P20,000.00 and attorneys fees in the sum of P2,000.00 plus cost
of the suit.
xxx"
Not satisfied with the trial courts Decision, Montecillo appealed the same
to the Court of Appeals.
Ruling of the Court of Appeals
The appellate court affirmed the Decision of the trial court in toto and
dismissed the appeal13 on the ground that Montecillos Deed of Sale is void
3
for lack of consideration. The appellate court also denied Montecillos
Motion for Reconsideration 14 on the ground that it raised no new
arguments.
Still dissatisfied, Montecillo filed the present petition for review on
certiorari.
The Issues
Montecillo raises the following issues:
1. "Was there an agreement between Reynes and Montecillo that
the stated consideration of P47,000.00 in the Deed of Sale be paid
to Cebu Ice and Cold Storage to secure the release of the Transfer
Certificate of Title?"
2. "If there was none, is the Deed of Sale void from the beginning or
simply rescissible?"15
The Ruling of the Court
The petition is devoid of merit.
First issue: manner of payment of the P47,000.00 purchase price.
Montecillos Deed of Sale does not state that the P47,000.00 purchase price
should be paid by Montecillo to Cebu Ice Storage. Montecillo failed to
adduce any evidence before the trial court showing that Reynes had agreed,
verbally or in writing, that the P47,000.00 purchase price should be paid to
Cebu Ice Storage. Absent any evidence showing that Reynes had agreed to
the payment of the purchase price to any other party, the payment to be
effective must be made to Reynes, the vendor in the sale. Article 1240 of
the Civil Code provides as follows:
"Payment shall be made to the person in whose favor the obligation
has been constituted, or his successor in interest, or any person
authorized to receive it."

Thus, Montecillos payment to Cebu Ice Storage is not the payment that
would extinguish16 Montecillos obligation to Reynes under the Deed of
Sale.
It militates against common sense for Reynes to sell her Mabolo Lot
for P47,000.00 if this entire amount would only go to Cebu Ice Storage,
leaving not a single centavo to her for giving up ownership of a valuable
property. This incredible allegation of Montecillo becomes even more
absurd when one considers that Reynes did not benefit, directly or
indirectly, from the payment of the P47,000.00 to Cebu Ice Storage.
The trial court found that Reynes had nothing to do with Jayags mortgage
debt with Cebu Ice Storage. The trial court made the following findings of
fact:
"x x x. Plaintiff Ignacia Reynes was not a party to nor privy of the
obligation in favor of the Cebu Ice and Cold Storage Corporation,
the obligation being exclusively of Bienvenido Jayag and wife who
mortgaged their residential house constructed on the land subject
matter of the complaint. The payment by the defendant to release
the residential house from the mortgage is a matter between him
and Jayag and cannot by implication or deception be made to
appear as an encumbrance upon the land." 17
Thus, Montecillos payment to Jayags creditor could not possibly redound
to the benefit18 of Reynes. We find no reason to disturb the factual findings
of the trial court. In petitions for review on certiorari as a mode of appeal
under Rule 45, as in the instant case, a petitioner can raise only questions of
law.19 This Court is not the proper venue to consider a factual issue as it is
not a trier of facts.
Second issue: whether the Deed of Sale is void ab initio or only rescissible.
Under Article 1318 of the Civil Code, "[T]here is no contract unless the
following requisites concur: (1) Consent of the contracting parties; (2)
Object certain which is the subject matter of the contract; (3) Cause of the
4
obligation which is established." Article 1352 of the Civil Code also provides
that "[C]ontracts without cause x x x produce no effect whatsoever."
Montecillo argues that his Deed of Sale has all the requisites of a valid
contract. Montecillo points out that he agreed to purchase, and Reynes
agreed to sell, the Mabolo Lot at the price of P47,000.00. Thus, the three
requisites for a valid contract concur: consent, object certain and
consideration. Montecillo asserts there is no lack of consideration that
would prevent the existence of a valid contract. Rather, there is only non-
payment of the consideration within the period agreed upon for payment.
Montecillo argues there is only a breach of his obligation to pay the full
purchase price on time. Such breach merely gives Reynes a right to ask for
specific performance, or for annulment of the obligation to sell the Mabolo
Lot. Montecillo maintains that in reciprocal obligations, the injured party
can choose between fulfillment and rescission, 20 or more properly
cancellation, of the obligation under Article 119121 of the Civil Code. This
Article also provides that the "court shall decree the rescission claimed,
unless there be just cause authorizing the fixing of the period." Montecillo
claims that because Reynes failed to make a demand for payment, and
instead unilaterally revoked Montecillos Deed of Sale, the court has a just
cause to fix the period for payment of the balance of the purchase price.
These arguments are not persuasive.
Montecillos Deed of Sale states that Montecillo paid, and Reynes received,
the P47,000.00 purchase price on March 1, 1984, the date of signing of the
Deed of Sale. This is clear from the following provision of the Deed of Sale:
"That I, IGNACIA T. REYNES, x x x for and in consideration of FORTY
SEVEN THOUSAND (P47,000.00) PESOS, Philippine Currency, to me
in hand paid by RIDO MONTECILLO xxx, receipt of which is hereby
acknowledged, have sold, transferred, and conveyed, unto RIDO
MONTECILLO, x x x a parcel of land x x x."
On its face, Montecillos Deed of Absolute Sale22 appears supported by a
valuable consideration. However, based on the evidence presented by both

Reynes and Montecillo, the trial court found that Montecillo never paid to
Reynes, and Reynes never received from Montecillo, the P47,000.00
purchase price. There was indisputably a total absence of consideration
contrary to what is stated in Montecillos Deed of Sale. As pointed out by
the trial court
"From the allegations in the pleadings of both parties and the oral
and documentary evidence adduced during the trial, the court is
convinced that the Deed of Sale (Exhibits "1" and "1-A") executed by
plaintiff Ignacia Reynes acknowledged before Notary Public
Ponciano Alvinio is devoid of any consideration. Plaintiff Ignacia
Reynes through the representation of Baudillo Baladjay had
executed a Deed of Sale in favor of defendant on the promise that
the consideration should be paid within one (1) month from the
execution of the Deed of Sale. However, after the lapse of said
period, defendant failed to pay even a single centavo of the
consideration. The answer of the defendant did not allege clearly
why no consideration was paid by him except for the allegation that
he had a balance of only P10,000.00. It turned out during the pre-
trial that what the defendant considered as the consideration was
the amount which he paid for the obligation of Bienvenido Jayag
with the Cebu Ice and Cold Storage Corporation over which plaintiff
Ignacia Reynes did not have a part except that the subject of the
mortgage was constructed on the parcel of land in question.
Plaintiff Ignacia Reynes was not a party to nor privy of the obligation
in favor of the Cebu Ice and Cold Storage Corporation, the
obligation being exclusively of Bienvenido Jayag and wife who
mortgaged their residential house constructed on the land subject
matter of the complaint. The payment by the defendant to release
the residential house from the mortgage is a matter between him
and Jayag and cannot by implication or deception be made to
appear as an encumbrance upon the land. " 23
Factual findings of the trial court are binding on us, especially if the Court of
Appeals affirms such findings.24 We do not disturb such findings unless the
evidence on record clearly does not support such findings or such findings
are based on a patent misunderstanding of facts, 25 which is not the case
here. Thus, we find no reason to deviate from the findings of both the trial
5
and appellate courts that no valid consideration supported Montecillos
Deed of Sale.
This is not merely a case of failure to pay the purchase price, as Montecillo
claims, which can only amount to a breach of obligation with rescission as
the proper remedy. What we have here is a purported contract that lacks a
cause - one of the three essential requisites of a valid contract. Failure to
pay the consideration is different from lack of consideration. The former
results in a right to demand the fulfillment or cancellation of the obligation
under an existing valid contract26 while the latter prevents the existence of a
valid contract
Where the deed of sale states that the purchase price has been paid but in
fact has never been paid, the deed of sale is null and void ab initio for lack of
consideration. This has been the well-settled rule as early as Ocejo Perez &
Co. v. Flores,27 a 1920 case. As subsequently explained in Mapalo v.
Mapalo28
"In our view, therefore, the ruling of this Court in Ocejo Perez & Co.
vs. Flores, 40 Phil. 921, is squarely applicable herein. In that case we
ruled that a contract of purchase and sale is null and void and
produces no effect whatsoever where the same is without cause or
consideration in that the purchase price which appears thereon as
paid has in fact never been paid by the purchaser to the vendor."
The Court reiterated this rule in Vda. De Catindig v. Heirs of Catalina
Roque,29 to wit
"The Appellate Courts finding that the price was not paid or that
the statement in the supposed contracts of sale (Exh. 6 to 26) as to
the payment of the price was simulated fortifies the view that the
alleged sales were void. "If the price is simulated, the sale is void . .
." (Art. 1471, Civil Code)
A contract of sale is void and produces no effect whatsoever where
the price, which appears thereon as paid, has in fact never been
paid by the purchaser to the vendor (Ocejo, Perez & Co. vs. Flores
 6

and Bas, 40 Phil. 921; Mapalo vs. Mapalo, L-21489, May 19, 1966,
64 O.G. 331, 17 SCRA 114, 122). Such a sale is non-existent
(Borromeo vs. Borromeo, 98 Phil. 432) or cannot be considered
consummated (Cruzado vs. Bustos and Escaler, 34 Phil. 17;
Garanciang vs. Garanciang, L-22351, May 21, 1969, 28 SCRA 229)."
Applying this well-entrenched doctrine to the instant case, we rule that
Montecillos Deed of Sale is null and voidab initio for lack of consideration.
Montecillo asserts that the only issue in controversy is "the mode and/or
manner of payment and/or whether or not payment has been
made."30 Montecillo implies that the mode or manner of payment is
separate from the consideration and does not affect the validity of the
contract. In the recent case of San Miguel Properties Philippines, Inc. v.
Huang,31 we ruled that
Reynes expected Montecillo to pay him directly the P47,000.00 purchase
price within one month after the signing of the Deed of Sale. On the other
hand, Montecillo thought that his agreement with Reynes required him to
pay the P47,000.00 purchase price to Cebu Ice Storage to settle Jayags
mortgage debt. Montecillo also acknowledged a balance of P10,000.00 in
favor of Reynes although this amount is not stated in Montecillos Deed of
Sale. Thus, there was no consent, or meeting of the minds, between Reynes
and Montecillo on the manner of payment. This prevented the existence of
a valid contract because of lack of consent.
In summary, Montecillos Deed of Sale is null and void ab initio not only for
lack of consideration, but also for lack of consent. The cancellation of TCT
No. 90805 in the name of Montecillo is in order as there was no valid
contract transferring ownership of the Mabolo Lot from Reynes to
Montecillo.

"In Navarro v. Sugar Producers Cooperative Marketing Association, WHEREFORE, the petition is DENIED and the assailed Decision dated July 16,
Inc. (1 SCRA 1181 [1961]), we laid down the rule that the manner of 1998 of the Court of Appeals in CA-G.R. CV No. 41349 is AFFIRMED. Costs
payment of the purchase price is an essential element before a against petitioner.
valid and binding contract of sale can exist. Although the Civil Code
does not expressly state that the minds of the parties must also SO ORDERED.
meet on the terms or manner of payment of the price, the same is
needed, otherwise there is no sale. As held in Toyota Shaw, Inc. v.
Court of Appeals (244 SCRA 320 [1995]), agreement on the manner
of payment goes into the price such that a disagreement on the
manner of payment is tantamount to a failure to agree on the
price." (Emphasis supplied)

One of the three essential requisites of a valid contract is consent of the

parties on the object and cause of the contract. In a contract of sale, the
parties must agree not only on the price, but also on the manner of
payment of the price. An agreement on the price but a disagreement on the
manner of its payment will not result in consent, thus preventing the
existence of a valid contract for lack of consent. This lack of consent is
separate and distinct from lack of consideration where the contract states
that the price has been paid when in fact it has never been paid.

EN BANC
G.R. No. 155001 May 5, 2003
DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI B.
REUNILLA, MANUEL ANTONIO B. BOE, MAMERTO S. CLARA, REUEL E.
DIMALANTA, MORY V. DOMALAON, CONRADO G. DIMAANO, LOLITA R.
HIZON, REMEDIOS P. ADOLFO, BIENVENIDO C. HILARIO, MIASCOR
WORKERS UNION - NATIONAL LABOR UNION (MWU-NLU), and PHILIPPINE
AIRLINES EMPLOYEES ASSOCIATION (PALEA),petitioners,
vs.
PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA
INTERNATIONAL AIRPORT AUTHORITY, DEPARTMENT OF
TRANSPORTATION AND COMMUNICATIONS and SECRETARY LEANDRO M.
MENDOZA, in his capacity as Head of the Department of Transportation
and Communications, respondents,
MIASCOR GROUNDHANDLING CORPORATION, DNATA-WINGS AVIATION
SYSTEMS CORPORATION, MACROASIA-EUREST SERVICES, INC.,
MACROASIA-MENZIES AIRPORT SERVICES CORPORATION, MIASCOR
CATERING SERVICES CORPORATION, MIASCOR AIRCRAFT MAINTENANCE
CORPORATION, and MIASCOR LOGISTICS CORPORATION, petitioners-in-
intervention,
PUNO, J.:
Petitioners and petitioners-in-intervention filed the instant petitions for
prohibition under Rule 65 of the Revised Rules of Court seeking to prohibit
the Manila International Airport Authority (MIAA) and the Department of
Transportation and Communications (DOTC) and its Secretary from
implementing the following agreements executed by the Philippine
Government through the DOTC and the MIAA and the Philippine
International Air Terminals Co., Inc. (PIATCO): (1) the Concession Agreement
signed on July 12, 1997, (2) the Amended and Restated Concession
Agreement dated November 26, 1999, (3) the First Supplement to the
Amended and Restated Concession Agreement dated August 27, 1999, (4)
the Second Supplement to the Amended and Restated Concession
Agreement dated September 4, 2000, and (5) the Third Supplement to the
7
Amended and Restated Concession Agreement dated June 22, 2001
(collectively, the PIATCO Contracts).
The facts are as follows:
In August 1989, the DOTC engaged the services of Aeroport de Paris
(ADP) to conduct a comprehensive study of the Ninoy Aquino
International Airport (NAIA) and determine whether the present
airport can cope with the traffic development up to the year 2010.
The study consisted of two parts: first, traffic forecasts, capacity of
existing facilities, NAIA future requirements, proposed master plans
and development plans; and second, presentation of the
preliminary design of the passenger terminal building. The ADP
submitted a Draft Final Report to the DOTC in December 1989.
Sometime in 1993, six business leaders consisting of John
Gokongwei, Andrew Gotianun, Henry Sy, Sr., Lucio Tan, George Ty
and Alfonso Yuchengco met with then President Fidel V. Ramos to
explore the possibility of investing in the construction and operation
of a new international airport terminal. To signify their commitment
to pursue the project, they formed the Asia's Emerging Dragon
Corp. (AEDC) which was registered with the Securities and Exchange
Commission (SEC) on September 15, 1993.
On October 5, 1994, AEDC submitted an unsolicited proposal to the
Government through the DOTC/MIAA for the development of NAIA
International Passenger Terminal III (NAIA IPT III) under a build-
operate-and-transfer arrangement pursuant to RA 6957 as
amended by RA 7718 (BOT Law). 1
On December 2, 1994, the DOTC issued Dept. Order No. 94-832 constituting
the Prequalification Bids and Awards Committee (PBAC) for the
implementation of the NAIA IPT III project.
On March 27, 1995, then DOTC Secretary Jose Garcia endorsed the proposal
of AEDC to the National Economic and Development Authority (NEDA). A
revised proposal, however, was forwarded by the DOTC to NEDA on

December 13, 1995. On January 5, 1996, the NEDA Investment Coordinating
Council (NEDA ICC) Technical Board favorably endorsed the project to the
ICC Cabinet Committee which approved the same, subject to certain
conditions, on January 19, 1996. On February 13, 1996, the NEDA passed
Board Resolution No. 2 which approved the NAIA IPT III project.
On June 7, 14, and 21, 1996, DOTC/MIAA caused the publication in two daily
newspapers of an invitation for competitive or comparative proposals on
AEDC's unsolicited proposal, in accordance with Sec. 4-A of RA 6957, as
amended. The alternative bidders were required to submit three (3) sealed
envelopes on or before 5:00 p.m. of September 20, 1996. The first envelope
should contain the Prequalification Documents, the second envelope the
Technical Proposal, and the third envelope the Financial Proposal of the
proponent.
On June 20, 1996, PBAC Bulletin No. 1 was issued, postponing the availment
of the Bid Documents and the submission of the comparative bid proposals.
Interested firms were permitted to obtain the Request for Proposal
Documents beginning June 28, 1996, upon submission of a written
application and payment of a non-refundable fee of P50,000.00 (US$2,000).
The Bid Documents issued by the PBAC provided among others that the
proponent must have adequate capability to sustain the financing
requirement for the detailed engineering, design, construction, operation,
and maintenance phases of the project. The proponent would be evaluated
based on its ability to provide a minimum amount of equity to the project,
and its capacity to secure external financing for the project.
On July 23, 1996, the PBAC issued PBAC Bulletin No. 2 inviting all bidders to
a pre-bid conference on July 29, 1996.
On August 16, 1996, the PBAC issued PBAC Bulletin No. 3 amending the Bid
Documents. The following amendments were made on the Bid Documents:
a. Aside from the fixed Annual Guaranteed Payment, the proponent
shall include in its financial proposal an additional percentage of
gross revenue share of the Government, as follows:
8
i. First 5 years 5.0%
ii. Next 10 years 7.5%
iii. Next 10 years 10.0%
b. The amount of the fixed Annual Guaranteed Payment shall be
subject of the price challenge. Proponent may offer an Annual
Guaranteed Payment which need not be of equal amount, but
payment of which shall start upon site possession.
c. The project proponent must have adequate capability to sustain
the financing requirement for the detailed engineering, design,
construction, and/or operation and maintenance phases of the
project as the case may be. For purposes of pre-qualification, this
capability shall be measured in terms of:
i. Proof of the availability of the project proponent and/or
the consortium to provide the minimum amount of equity
for the project; and
ii. a letter testimonial from reputable banks attesting that
the project proponent and/or the members of the
consortium are banking with them, that the project
proponent and/or the members are of good financial
standing, and have adequate resources.
d. The basis for the prequalification shall be the proponent's
compliance with the minimum technical and financial requirements
provided in the Bid Documents and the IRR of the BOT Law. The
minimum amount of equity shall be 30% of the Project Cost.
e. Amendments to the draft Concession Agreement shall be issued
from time to time. Said amendments shall only cover items that
would not materially affect the preparation of the proponent's
proposal.

On August 29, 1996, the Second Pre-Bid Conference was held where certain
clarifications were made. Upon the request of prospective bidder People's
Air Cargo & Warehousing Co., Inc (Paircargo), the PBAC warranted that
based on Sec. 11.6, Rule 11 of the Implementing Rules and Regulations of
the BOT Law, only the proposed Annual Guaranteed Payment submitted by
the challengers would be revealed to AEDC, and that the challengers'
technical and financial proposals would remain confidential. The PBAC also
clarified that the list of revenue sources contained in Annex 4.2a of the Bid
Documents was merely indicative and that other revenue sources may be
included by the proponent, subject to approval by DOTC/MIAA.
Furthermore, the PBAC clarified that only those fees and charges
denominated as Public Utility Fees would be subject to regulation, and
those charges which would be actually deemed Public Utility Fees could still
be revised, depending on the outcome of PBAC's query on the matter with
the Department of Justice.
In September 1996, the PBAC issued Bid Bulletin No. 5, entitled "Answers to
the Queries of PAIRCARGO as Per Letter Dated September 3 and 10, 1996."
Paircargo's queries and the PBAC's responses were as follows:
1. It is difficult for Paircargo and Associates to meet the required
minimum equity requirement as prescribed in Section 8.3.4 of the
Bid Documents considering that the capitalization of each member
company is so structured to meet the requirements and needs of
their current respective business undertaking/activities. In order to
comply with this equity requirement, Paircargo is requesting PBAC
to just allow each member of (sic) corporation of the Joint Venture
to just execute an agreement that embodies a commitment to infuse
the required capital in case the project is awarded to the Joint
Venture instead of increasing each corporation's current authorized
capital stock just for prequalification purposes.
In prequalification, the agency is interested in one's financial
capability at the time of prequalification, not future or potential
capability.
A commitment to put up equity once awarded the project is not
enough to establish that "present" financial capability. However,
9
total financial capability of all member companies of the
Consortium, to be established by submitting the respective
companies' audited financial statements, shall be acceptable.
2. At present, Paircargo is negotiating with banks and other
institutions for the extension of a Performance Security to the joint
venture in the event that the Concessions Agreement (sic) is
awarded to them. However, Paircargo is being required to submit a
copy of the draft concession as one of the documentary
requirements. Therefore, Paircargo is requesting that they'd (sic) be
furnished copy of the approved negotiated agreement between the
PBAC and the AEDC at the soonest possible time.
A copy of the draft Concession Agreement is included in the Bid
Documents. Any material changes would be made known to
prospective challengers through bid bulletins. However, a final
version will be issued before the award of contract.
The PBAC also stated that it would require AEDC to sign Supplement C of
the Bid Documents (Acceptance of Criteria and Waiver of Rights to Enjoin
Project) and to submit the same with the required Bid Security.
On September 20, 1996, the consortium composed of People's Air Cargo
and Warehousing Co., Inc. (Paircargo), Phil. Air and Grounds Services, Inc.
(PAGS) and Security Bank Corp. (Security Bank) (collectively, Paircargo
Consortium) submitted their competitive proposal to the PBAC. On
September 23, 1996, the PBAC opened the first envelope containing the
prequalification documents of the Paircargo Consortium. On the following
day, September 24, 1996, the PBAC prequalified the Paircargo Consortium.
On September 26, 1996, AEDC informed the PBAC in writing of its
reservations as regards the Paircargo Consortium, which include:
a. The lack of corporate approvals and financial capability of
PAIRCARGO;
b. The lack of corporate approvals and financial capability of PAGS;

c. The prohibition imposed by RA 337, as amended (the General
Banking Act) on the amount that Security Bank could legally invest
in the project;
d. The inclusion of Siemens as a contractor of the PAIRCARGO Joint
Venture, for prequalification purposes; and
e. The appointment of Lufthansa as the facility operator, in view of
the Philippine requirement in the operation of a public utility.
The PBAC gave its reply on October 2, 1996, informing AEDC that it had
considered the issues raised by the latter, and that based on the documents
submitted by Paircargo and the established prequalification criteria, the
PBAC had found that the challenger, Paircargo, had prequalified to
undertake the project. The Secretary of the DOTC approved the finding of
the PBAC.
The PBAC then proceeded with the opening of the second envelope of the
Paircargo Consortium which contained its Technical Proposal.
On October 3, 1996, AEDC reiterated its objections, particularly with respect
to Paircargo's financial capability, in view of the restrictions imposed by
Section 21-B of the General Banking Act and Sections 1380 and 1381 of the
Manual Regulations for Banks and Other Financial Intermediaries. On
October 7, 1996, AEDC again manifested its objections and requested that it
be furnished with excerpts of the PBAC meeting and the accompanying
technical evaluation report where each of the issues they raised were
addressed.
On October 16, 1996, the PBAC opened the third envelope submitted by
AEDC and the Paircargo Consortium containing their respective financial
proposals. Both proponents offered to build the NAIA Passenger Terminal III
for at least $350 million at no cost to the government and to pay the
government: 5% share in gross revenues for the first five years of operation,
7.5% share in gross revenues for the next ten years of operation, and 10%
share in gross revenues for the last ten years of operation, in accordance
with the Bid Documents. However, in addition to the foregoing, AEDC
10
offered to pay the government a total of P135 million as guaranteed
payment for 27 years while Paircargo Consortium offered to pay the
government a total of P17.75 billion for the same period.
Thus, the PBAC formally informed AEDC that it had accepted the price
proposal submitted by the Paircargo Consortium, and gave AEDC 30 working
days or until November 28, 1996 within which to match the said bid,
otherwise, the project would be awarded to Paircargo.
As AEDC failed to match the proposal within the 30-day period, then DOTC
Secretary Amado Lagdameo, on December 11, 1996, issued a notice to
Paircargo Consortium regarding AEDC's failure to match the proposal.
On February 27, 1997, Paircargo Consortium incorporated into Philippine
International Airport Terminals Co., Inc. (PIATCO).
AEDC subsequently protested the alleged undue preference given to PIATCO
and reiterated its objections as regards the prequalification of PIATCO.
On April 11, 1997, the DOTC submitted the concession agreement for the
second-pass approval of the NEDA-ICC.
On April 16, 1997, AEDC filed with the Regional Trial Court of Pasig a
Petition for Declaration of Nullity of the Proceedings, Mandamus and
Injunction against the Secretary of the DOTC, the Chairman of the PBAC, the
voting members of the PBAC and Pantaleon D. Alvarez, in his capacity as
Chairman of the PBAC Technical Committee.
On April 17, 1997, the NEDA-ICC conducted an ad referendum to facilitate
the approval, on a no-objection basis, of the BOT agreement between the
DOTC and PIATCO. As the ad referendum gathered only four (4) of the
required six (6) signatures, the NEDA merely noted the agreement.
On July 9, 1997, the DOTC issued the notice of award for the project to
PIATCO.

On July 12, 1997, the Government, through then DOTC Secretary Arturo T.
Enrile, and PIATCO, through its President, Henry T. Go, signed the
"Concession Agreement for the Build-Operate-and-Transfer Arrangement of
the Ninoy Aquino International Airport Passenger Terminal III" (1997
Concession Agreement). The Government granted PIATCO the franchise to
operate and maintain the said terminal during the concession period and to
collect the fees, rentals and other charges in accordance with the rates or
schedules stipulated in the 1997 Concession Agreement. The Agreement
provided that the concession period shall be for twenty-five (25) years
commencing from the in-service date, and may be renewed at the option of
the Government for a period not exceeding twenty-five (25) years. At the
end of the concession period, PIATCO shall transfer the development facility
to MIAA.
On November 26, 1998, the Government and PIATCO signed an Amended
and Restated Concession Agreement (ARCA). Among the provisions of the
1997 Concession Agreement that were amended by the ARCA were: Sec.
1.11 pertaining to the definition of "certificate of completion"; Sec. 2.05
pertaining to the Special Obligations of GRP; Sec. 3.02 (a) dealing with the
exclusivity of the franchise given to the Concessionaire; Sec. 4.04 concerning
the assignment by Concessionaire of its interest in the Development Facility;
Sec. 5.08 (c) dealing with the proceeds of Concessionaire's insurance; Sec.
5.10 with respect to the temporary take-over of operations by GRP; Sec.
5.16 pertaining to the taxes, duties and other imposts that may be levied on
the Concessionaire; Sec. 6.03 as regards the periodic adjustment of public
utility fees and charges; the entire Article VIII concerning the provisions on
the termination of the contract; and Sec. 10.02 providing for the venue of
the arbitration proceedings in case a dispute or controversy arises between
the parties to the agreement.
Subsequently, the Government and PIATCO signed three Supplements to
the ARCA. The First Supplement was signed on August 27, 1999; the Second
Supplement on September 4, 2000; and the Third Supplement on June 22,
2001 (collectively, Supplements).
The First Supplement to the ARCA amended Sec. 1.36 of the ARCA defining
"Revenues" or "Gross Revenues"; Sec. 2.05 (d) of the ARCA referring to the
obligation of MIAA to provide sufficient funds for the upkeep, maintenance,
11
repair and/or replacement of all airport facilities and equipment which are
owned or operated by MIAA; and further providing additional special
obligations on the part of GRP aside from those already enumerated in Sec.
2.05 of the ARCA. The First Supplement also provided a stipulation as
regards the construction of a surface road to connect NAIA Terminal II and
Terminal III in lieu of the proposed access tunnel crossing Runway 13/31;
the swapping of obligations between GRP and PIATCO regarding the
improvement of Sales Road; and the changes in the timetable. It also
amended Sec. 6.01 (c) of the ARCA pertaining to the Disposition of Terminal
Fees; Sec. 6.02 of the ARCA by inserting an introductory paragraph; and Sec.
6.02 (a) (iii) of the ARCA referring to the Payments of Percentage Share in
Gross Revenues.
The Second Supplement to the ARCA contained provisions concerning the
clearing, removal, demolition or disposal of subterranean structures
uncovered or discovered at the site of the construction of the terminal by
the Concessionaire. It defined the scope of works; it provided for the
procedure for the demolition of the said structures and the consideration
for the same which the GRP shall pay PIATCO; it provided for time
extensions, incremental and consequential costs and losses consequent to
the existence of such structures; and it provided for some additional
obligations on the part of PIATCO as regards the said structures.
Finally, the Third Supplement provided for the obligations of the
Concessionaire as regards the construction of the surface road connecting
Terminals II and III.
Meanwhile, the MIAA which is charged with the maintenance and operation
of the NAIA Terminals I and II, had existing concession contracts with
various service providers to offer international airline airport services, such
as in-flight catering, passenger handling, ramp and ground support, aircraft
maintenance and provisions, cargo handling and warehousing, and other
services, to several international airlines at the NAIA. Some of these service
providers are the Miascor Group, DNATA-Wings Aviation Systems Corp., and
the MacroAsia Group. Miascor, DNATA and MacroAsia, together with
Philippine Airlines (PAL), are the dominant players in the industry with an
aggregate market share of 70%.

On September 17, 2002, the workers of the international airline service
providers, claiming that they stand to lose their employment upon the
implementation of the questioned agreements, filed before this Court a
petition for prohibition to enjoin the enforcement of said agreements. 2
On October 15, 2002, the service providers, joining the cause of the
petitioning workers, filed a motion for intervention and a petition-in-
intervention.
On October 24, 2002, Congressmen Salacnib Baterina, Clavel Martinez and
Constantino Jaraula filed a similar petition with this Court. 3
On November 6, 2002, several employees of the MIAA likewise filed a
petition assailing the legality of the various agreements. 4
On December 11, 2002. another group of Congressmen, Hon. Jacinto V.
Paras, Rafael P. Nantes, Eduardo C. Zialcita, Willie B. Villarama, Prospero C.
Nograles, Prospero A. Pichay, Jr., Harlin Cast Abayon and Benasing O.
Macaranbon, moved to intervene in the case as Respondents-Intervenors.
They filed their Comment-In-Intervention defending the validity of the
assailed agreements and praying for the dismissal of the petitions.
During the pendency of the case before this Court, President Gloria
Macapagal Arroyo, on November 29, 2002, in her speech at the 2002
Golden Shell Export Awards at Malacaang Palace, stated that she will not
"honor (PIATCO) contracts which the Executive Branch's legal offices have
concluded (as) null and void."5
Respondent PIATCO filed its Comments to the present petitions on
November 7 and 27, 2002. The Office of the Solicitor General and the Office
of the Government Corporate Counsel filed their respective Comments in
behalf of the public respondents.
On December 10, 2002, the Court heard the case on oral argument. After
the oral argument, the Court then resolved in open court to require the
parties to file simultaneously their respective Memoranda in amplification
of the issues heard in the oral arguments within 30 days and to explore the
12
possibility of arbitration or mediation as provided in the challenged
contracts.
In their consolidated Memorandum, the Office of the Solicitor General and
the Office of the Government Corporate Counsel prayed that the present
petitions be given due course and that judgment be rendered declaring the
1997 Concession Agreement, the ARCA and the Supplements thereto void
for being contrary to the Constitution, the BOT Law and its Implementing
Rules and Regulations.
On March 6, 2003, respondent PIATCO informed the Court that on March 4,
2003 PIATCO commenced arbitration proceedings before the International
Chamber of Commerce, International Court of Arbitration (ICC) by filing a
Request for Arbitration with the Secretariat of the ICC against the
Government of the Republic of the Philippines acting through the DOTC and
MIAA.
In the present cases, the Court is again faced with the task of resolving
complicated issues made difficult by their intersecting legal and economic
implications. The Court is aware of the far reaching fall out effects of the
ruling which it makes today. For more than a century and whenever the
exigencies of the times demand it, this Court has never shirked from its
solemn duty to dispense justice and resolve "actual controversies involving
rights which are legally demandable and enforceable, and to determine
whether or not there has been grave abuse of discretion amounting to lack
or excess of jurisdiction."6 To be sure, this Court will not begin to do
otherwise today.
We shall first dispose of the procedural issues raised by respondent PIATCO
which they allege will bar the resolution of the instant controversy.
Petitioners' Legal Standing to File
the present Petitions
a. G.R. Nos. 155001 and 155661

In G.R. No. 155001 individual petitioners are employees of various service
providers7 having separate concession contracts with MIAA and continuing
service agreements with various international airlines to provide in-flight
catering, passenger handling, ramp and ground support, aircraft
maintenance and provisions, cargo handling and warehousing and other
services. Also included as petitioners are labor unions MIASCOR Workers
Union-National Labor Union and Philippine Airlines Employees Association.
These petitioners filed the instant action for prohibition as taxpayers and as
parties whose rights and interests stand to be violated by the
implementation of the PIATCO Contracts.
Petitioners-Intervenors in the same case are all corporations organized and
existing under Philippine laws engaged in the business of providing in-flight
catering, passenger handling, ramp and ground support, aircraft
maintenance and provisions, cargo handling and warehousing and other
services to several international airlines at the Ninoy Aquino International
Airport. Petitioners-Intervenors allege that as tax-paying international
airline and airport-related service operators, each one of them stands to be
irreparably injured by the implementation of the PIATCO Contracts. Each of
the petitioners-intervenors have separate and subsisting concession
agreements with MIAA and with various international airlines which they
allege are being interfered with and violated by respondent PIATCO.
In G.R. No. 155661, petitioners constitute employees of MIAA and
Samahang Manggagawa sa Paliparan ng Pilipinas - a legitimate labor union
and accredited as the sole and exclusive bargaining agent of all the
employees in MIAA. Petitioners anchor their petition for prohibition on the
nullity of the contracts entered into by the Government and PIATCO
regarding the build-operate-and-transfer of the NAIA IPT III. They filed the
petition as taxpayers and persons who have a legitimate interest to protect
in the implementation of the PIATCO Contracts.
Petitioners in both cases raise the argument that the PIATCO Contracts
contain stipulations which directly contravene numerous provisions of the
Constitution, specific provisions of the BOT Law and its Implementing Rules
and Regulations, and public policy. Petitioners contend that the DOTC and
the MIAA, by entering into said contracts, have committed grave abuse of
discretion amounting to lack or excess of jurisdiction which can be remedied
13
only by a writ of prohibition, there being no plain, speedy or adequate
remedy in the ordinary course of law.
In particular, petitioners assail the provisions in the 1997 Concession
Agreement and the ARCA which grant PIATCO the exclusive right to operate
a commercial international passenger terminal within the Island of Luzon,
except those international airports already existing at the time of the
execution of the agreement. The contracts further provide that upon the
commencement of operations at the NAIA IPT III, the Government shall
cause the closure of Ninoy Aquino International Airport Passenger Terminals
I and II as international passenger terminals. With respect to existing
concession agreements between MIAA and international airport service
providers regarding certain services or operations, the 1997 Concession
Agreement and the ARCA uniformly provide that such services or operations
will not be carried over to the NAIA IPT III and PIATCO is under no obligation
to permit such carry over except through a separate agreement duly
entered into with PIATCO. 8
With respect to the petitioning service providers and their employees, upon
the commencement of operations of the NAIA IPT III, they allege that they
will be effectively barred from providing international airline airport services
at the NAIA Terminals I and II as all international airlines and passengers will
be diverted to the NAIA IPT III. The petitioning service providers will thus be
compelled to contract with PIATCO alone for such services, with no
assurance that subsisting contracts with MIAA and other international
airlines will be respected. Petitioning service providers stress that despite
the very competitive market, the substantial capital investments required
and the high rate of fees, they entered into their respective contracts with
the MIAA with the understanding that the said contracts will be in force for
the stipulated period, and thereafter, renewed so as to allow each of the
petitioning service providers to recoup their investments and obtain a
reasonable return thereon.
Petitioning employees of various service providers at the NAIA Terminals I
and II and of MIAA on the other hand allege that with the closure of the
NAIA Terminals I and II as international passenger terminals under the
PIATCO Contracts, they stand to lose employment.

The question on legal standing is whether such parties have "alleged such a
personal stake in the outcome of the controversy as to assure that concrete
adverseness which sharpens the presentation of issues upon which the
court so largely depends for illumination of difficult constitutional
questions."9 Accordingly, it has been held that the interest of a person
assailing the constitutionality of a statute must be direct and personal. He
must be able to show, not only that the law or any government act is
invalid, but also that he sustained or is in imminent danger of sustaining
some direct injury as a result of its enforcement, and not merely that he
suffers thereby in some indefinite way. It must appear that the person
complaining has been or is about to be denied some right or privilege to
which he is lawfully entitled or that he is about to be subjected to some
burdens or penalties by reason of the statute or act complained of. 10
We hold that petitioners have the requisite standing. In the above-
mentioned cases, petitioners have a direct and substantial interest to
protect by reason of the implementation of the PIATCO Contracts. They
stand to lose their source of livelihood, a property right which is zealously
protected by the Constitution. Moreover, subsisting concession agreements
between MIAA and petitioners-intervenors and service contracts between
international airlines and petitioners-intervenors stand to be nullified or
terminated by the operation of the NAIA IPT III under the PIATCO Contracts.
The financial prejudice brought about by the PIATCO Contracts on
petitioners and petitioners-intervenors in these cases are legitimate
interests sufficient to confer on them the requisite standing to file the
instant petitions.
b. G.R. No. 155547
In G.R. No. 155547, petitioners filed the petition for prohibition as members
of the House of Representatives, citizens and taxpayers. They allege that as
members of the House of Representatives, they are especially interested in
the PIATCO Contracts, because the contracts compel the Government
and/or the House of Representatives to appropriate funds necessary to
comply with the provisions therein. 11 They cite provisions of the PIATCO
Contracts which require disbursement of unappropriated amounts in
compliance with the contractual obligations of the Government. They allege
that the Government obligations in the PIATCO Contracts which compel
14
government expenditure without appropriation is a curtailment of their
prerogatives as legislators, contrary to the mandate of the Constitution that
"[n]o money shall be paid out of the treasury except in pursuance of an
appropriation made by law."12
Standing is a peculiar concept in constitutional law because in some cases,
suits are not brought by parties who have been personally injured by the
operation of a law or any other government act but by concerned citizens,
taxpayers or voters who actually sue in the public interest. Although we are
not unmindful of the cases of Imus Electric Co. v. Municipality of
Imus13 and Gonzales v. Raquiza14 wherein this Court held that appropriation
must be made only on amounts immediately demandable, public interest
demands that we take a more liberal view in determining whether the
petitioners suing as legislators, taxpayers and citizens have locus standi to
file the instant petition. In Kilosbayan, Inc. v. Guingona,15 this Court held
"[i]n line with the liberal policy of this Court on locus standi, ordinary
taxpayers, members of Congress, and even association of planters, and non-
profit civic organizations were allowed to initiate and prosecute actions
before this Court to question the constitutionality or validity of laws, acts,
decisions, rulings, or orders of various government agencies or
instrumentalities."16 Further, "insofar as taxpayers' suits are concerned . . .
(this Court) is not devoid of discretion as to whether or not it should be
entertained."17 As such ". . . even if, strictly speaking, they [the petitioners]
are not covered by the definition, it is still within the wide discretion of the
Court to waive the requirement and so remove the impediment to its
addressing and resolving the serious constitutional questions raised." 18 In
view of the serious legal questions involved and their impact on public
interest, we resolve to grant standing to the petitioners.
Other Procedural Matters
Respondent PIATCO further alleges that this Court is without jurisdiction to
review the instant cases as factual issues are involved which this Court is ill -
equipped to resolve. Moreover, PIATCO alleges that submission of this
controversy to this Court at the first instance is a violation of the rule on
hierarchy of courts. They contend that trial courts have concurrent
jurisdiction with this Court with respect to a special civil action for

prohibition and hence, following the rule on hierarchy of courts, resort must
first be had before the trial courts.
After a thorough study and careful evaluation of the issues involved, this
Court is of the view that the crux of the instant controversy involves
significant legal questions. The facts necessary to resolve these legal
questions are well established and, hence, need not be determined by a
trial court.
The rule on hierarchy of courts will not also prevent this Court from
assuming jurisdiction over the cases at bar. The said rule may be relaxed
when the redress desired cannot be obtained in the appropriate courts or
where exceptional and compelling circumstances justify availment of a
remedy within and calling for the exercise of this Court's primary
jurisdiction.19
It is easy to discern that exceptional circumstances exist in the cases at bar
that call for the relaxation of the rule. Both petitioners and respondents
agree that these cases are of transcendental importance as they involve the
construction and operation of the country's premier international airport.
Moreover, the crucial issues submitted for resolution are of first impression
and they entail the proper legal interpretation of key provisions of the
Constitution, the BOT Law and its Implementing Rules and Regulations.
Thus, considering the nature of the controversy before the Court,
procedural bars may be lowered to give way for the speedy disposition of
the instant cases.
Legal Effect of the Commencement of Arbitration Proceedings by PIATCO
There is one more procedural obstacle which must be overcome. The Court
is aware that arbitration proceedings pursuant to Section 10.02 of the ARCA
have been filed at the instance of respondent PIATCO. Again, we hold that
the arbitration step taken by PIATCO will not oust this Court of its
jurisdiction over the cases at bar.
In Del Monte Corporation-USA v. Court of Appeals, 20 even after finding that
the arbitration clause in the Distributorship Agreement in question is valid
15
and the dispute between the parties is arbitrable, this Court affirmed the
trial court's decision denying petitioner's Motion to Suspend Proceedings
pursuant to the arbitration clause under the contract. In so ruling, this Court
held that as contracts produce legal effect between the parties, their assigns
and heirs, only the parties to the Distributorship Agreement are bound by
its terms, including the arbitration clause stipulated therein. This Court
ruled that arbitration proceedings could be called for but only with respect
to the parties to the contract in question. Considering that there are parties
to the case who are neither parties to the Distributorship Agreement nor
heirs or assigns of the parties thereto, this Court, citing its previous ruling in
Salas, Jr. v. Laperal Realty Corporation, 21 held that to tolerate the splitting of
proceedings by allowing arbitration as to some of the parties on the one
hand and trial for the others on the other hand would, in effect, result
in multiplicity of suits, duplicitous procedure and unnecessary
delay.22 Thus, we ruled that the interest of justice would best be served if
the trial court hears and adjudicates the case in a single and complete
proceeding.
It is established that petitioners in the present cases who have presented
legitimate interests in the resolution of the controversy are not parties to
the PIATCO Contracts. Accordingly, they cannot be bound by the arbitration
clause provided for in the ARCA and hence, cannot be compelled to submit
to arbitration proceedings. A speedy and decisive resolution of all the
critical issues in the present controversy, including those raised by
petitioners, cannot be made before an arbitral tribunal. The object of
arbitration is precisely to allow an expeditious determination of a dispute.
This objective would not be met if this Court were to allow the parties to
settle the cases by arbitration as there are certain issues involving non-
parties to the PIATCO Contracts which the arbitral tribunal will not be
equipped to resolve.
Now, to the merits of the instant controversy.
I
Is PIATCO a qualified bidder?

Public respondents argue that the Paircargo Consortium, PIATCO's
predecessor, was not a duly pre-qualified bidder on the unsolicited proposal
submitted by AEDC as the Paircargo Consortium failed to meet the financial
capability required under the BOT Law and the Bid Documents. They allege
that in computing the ability of the Paircargo Consortium to meet the
minimum equity requirements for the project, the entire net worth of
Security Bank, a member of the consortium, should not be considered.
PIATCO relies, on the other hand, on the strength of the Memorandum
dated October 14, 1996 issued by the DOTC Undersecretary Primitivo C. Cal
stating that the Paircargo Consortium is found to have a combined net
worth of P3,900,000,000.00, sufficient to meet the equity requirements of
the project. The said Memorandum was in response to a letter from Mr.
Antonio Henson of AEDC to President Fidel V. Ramos questioning the
financial capability of the Paircargo Consortium on the ground that it does
not have the financial resources to put up the required minimum equity of
P2,700,000,000.00. This contention is based on the restriction under R.A.
No. 337, as amended or the General Banking Act that a commercial bank
cannot invest in any single enterprise in an amount more than 15% of its net
worth. In the said Memorandum, Undersecretary Cal opined:
The Bid Documents, as clarified through Bid Bulletin Nos. 3 and 5,
require that financial capability will be evaluated based on total
financial capability of all the member companies of the [Paircargo]
Consortium. In this connection, the Challenger was found to have a
combined net worth of P3,926,421,242.00 that could support a
project costing approximately P13 Billion.
It is not a requirement that the net worth must be "unrestricted."
To impose that as a requirement now will be nothing less than
unfair.
The financial statement or the net worth is not the sole basis in
establishing financial capability. As stated in Bid Bulletin No. 3,
financial capability may also be established by testimonial letters
issued by reputable banks. The Challenger has complied with this
requirement.
16
To recap, net worth reflected in the Financial Statement should not
be taken as the amount of the money to be used to answer the
required thirty percent (30%) equity of the challenger but rather to
be used in establishing if there is enough basis to believe that the
challenger can comply with the required 30% equity. In fact, proof
of sufficient equity is required as one of the conditions for award of
contract (Section 12.1 IRR of the BOT Law) but not for pre-
qualification (Section 5.4 of the same document). 23
Under the BOT Law, in case of a build-operate-and-transfer
arrangement, the contract shall be awarded to the bidder "who,
having satisfied the minimum financial, technical, organizational
and legal standards" required by the law, has submitted the lowest
bid and most favorable terms of the project. 24 Further, the 1994
Implementing Rules and Regulations of the BOT Law provide:
Section 5.4 Pre-qualification Requirements.
c. Financial Capability: The project proponent must have adequate
capability to sustain the financing requirements for the detailed
engineering design, construction and/or operation and maintenance
phases of the project, as the case may be. For purposes of pre-
qualification, this capability shall be measured in terms of (i) proof
of the ability of the project proponent and/or the consortium to
provide a minimum amount of equity to the project, and (ii) a
letter testimonial from reputable banks attesting that the project
proponent and/or members of the consortium are banking with
them, that they are in good financial standing, and that they have
adequate resources. The government agency/LGU concerned shall
determine on a project-to-project basis and before pre-
qualification, the minimum amount of equity needed. (emphasis
supplied)
Pursuant to this provision, the PBAC issued PBAC Bulletin No. 3 dated
August 16, 1996 amending the financial capability requirements for pre-
qualification of the project proponent as follows:

6. Basis of Pre-qualification
The basis for the pre-qualification shall be on the compliance of the
proponent to the minimum technical and financial requirements
provided in the Bid Documents and in the IRR of the BOT Law, R.A.
No. 6957, as amended by R.A. 7718.
The minimum amount of equity to which the proponent's financial
capability will be based shall be thirty percent (30%) of the project
cost instead of the twenty percent (20%) specified in Section 3.6.4
of the Bid Documents. This is to correlate with the required debt-
to-equity ratio of 70:30 in Section 2.01a of the draft concession
agreement. The debt portion of the project financing should not
exceed 70% of the actual project cost.
Accordingly, based on the above provisions of law, the Paircargo
Consortium or any challenger to the unsolicited proposal of AEDC has to
show that it possesses the requisite financial capability to undertake the
project in the minimum amount of 30% of the project cost through (i)
proof of the ability to provide a minimum amount of equity to the project,
and (ii) a letter testimonial from reputable banks attesting that the project
proponent or members of the consortium are banking with them, that they
are in good financial standing, and that they have adequate resources.
As the minimum project cost was estimated to be US$350,000,000.00 or
roughly P9,183,650,000.00, 25 the Paircargo Consortium had to show to the
satisfaction of the PBAC that it had the ability to provide the minimum
equity for the project in the amount of at least P2,755,095,000.00.
Paircargo's Audited Financial Statements as of 1993 and 1994 indicated that
it had a net worth of P2,783,592.00 and P3,123,515.00 respectively. 26 PAGS'
Audited Financial Statements as of 1995 indicate that it has approximately
P26,735,700.00 to invest as its equity for the project. 27 Security Bank's
Audited Financial Statements as of 1995 show that it has a net worth
equivalent to its capital funds in the amount of P3,523,504,377.00. 28
17
We agree with public respondents that with respect to Security Bank,
the entire amount of its net worth could not be invested in a single
undertaking or enterprise, whether allied or non-allied in accordance with
the provisions of R.A. No. 337, as amended or the General Banking Act:
Sec. 21-B. The provisions in this or in any other Act to the contrary
notwithstanding, the Monetary Board, whenever it shall deem
appropriate and necessary to further national development
objectives or support national priority projects, may authorize a
commercial bank, a bank authorized to provide commercial
banking services, as well as a government-owned and controlled
bank, to operate under an expanded commercial banking
authority and by virtue thereof exercise, in addition to powers
authorized for commercial banks, the powers of an Investment
House as provided in Presidential Decree No. 129, invest in the
equity of a non-allied undertaking, or own a majority or all of the
equity in a financial intermediary other than a commercial bank or a
bank authorized to provide commercial banking services: Provided,
That (a) the total investment in equities shall not exceed fifty
percent (50%) of the net worth of the bank; (b) the equity
investment in any one enterprise whether allied or non-allied shall
not exceed fifteen percent (15%) of the net worth of the bank; (c)
the equity investment of the bank, or of its wholly or majority-
owned subsidiary, in a single non-allied undertaking shall not
exceed thirty-five percent (35%) of the total equity in the enterprise
nor shall it exceed thirty-five percent (35%) of the voting stock in
that enterprise; and (d) the equity investment in other banks shall
be deducted from the investing bank's net worth for purposes of
computing the prescribed ratio of net worth to risk assets.
Further, the 1993 Manual of Regulations for Banks provides:
SECTION X383. Other Limitations and Restrictions. The following
limitations and restrictions shall also apply regarding equity
investments of banks.
a. In any single enterprise. The equity investments of banks in
any single enterprise shall not exceed at any time fifteen percent

(15%) of the net worth of the investing bank as defined in Sec. X106
and Subsec. X121.5.
Thus, the maximum amount that Security Bank could validly invest in the
Paircargo Consortium is only P528,525,656.55, representing 15% of its
entire net worth. The total net worth therefore of the Paircargo
Consortium, after considering the maximum amounts that may be validly
invested by each of its members isP558,384,871.55 or only 6.08% of the
project cost,29 an amount substantially less than the prescribed minimum
equity investment required for the project in the amount of
P2,755,095,000.00 or 30% of the project cost.
The purpose of pre-qualification in any public bidding is to determine, at the
earliest opportunity, the ability of the bidder to undertake the project. Thus,
with respect to the bidder's financial capacity at the pre-qualification stage,
the law requires the government agency to examine and determine the
ability of the bidder to fund the entire cost of the project by considering the
maximum amounts that each bidder may invest in the project at the time
of pre-qualification.
The PBAC has determined that any prospective bidder for the construction,
operation and maintenance of the NAIA IPT III project should prove that it
has the ability to provide equity in the minimum amount of 30% of the
project cost, in accordance with the 70:30 debt-to-equity ratio prescribed in
the Bid Documents. Thus, in the case of Paircargo Consortium, the PBAC
should determine the maximum amounts that each member of the
consortium may commit for the construction, operation and maintenance of
the NAIA IPT III project at the time of pre-qualification. With respect to
Security Bank, the maximum amount which may be invested by it would
only be 15% of its net worth in view of the restrictions imposed by the
General Banking Act. Disregarding the investment ceilings provided by
applicable law would not result in a proper evaluation of whether or not a
bidder is pre-qualified to undertake the project as for all intents and
purposes, such ceiling or legal restriction determines the true maximum
amount which a bidder may invest in the project.
Further, the determination of whether or not a bidder is pre-qualified to
undertake the project requires an evaluation of the financial capacity of the
18
said bidder at the time the bid is submitted based on the required
documents presented by the bidder. The PBAC should not be allowed to
speculate on the future financial abilityof the bidder to undertake the
project on the basis of documents submitted. This would open doors to
abuse and defeat the very purpose of a public bidding. This is especially true
in the case at bar which involves the investment of billions of pesos by the
project proponent. The relevant government authority is duty-bound to
ensure that the awardee of the contract possesses the minimum required
financial capability to complete the project. To allow the PBAC to estimate
the bidder's future financial capability would not secure the viability and
integrity of the project. A restrictive and conservative application of the
rules and procedures of public bidding is necessary not only to protect the
impartiality and regularity of the proceedings but also to ensure the
financial and technical reliability of the project. It has been held that:
The basic rule in public bidding is that bids should be evaluated
based on the required documents submitted before and not after
the opening of bids. Otherwise, the foundation of a fair and
competitive public bidding would be defeated. Strict observance of
the rules, regulations, and guidelines of the bidding process is the
only safeguard to a fair, honest and competitive public bidding. 30
Thus, if the maximum amount of equity that a bidder may invest in the
project at the time the bids are submitted falls short of the minimum
amounts required to be put up by the bidder, said bidder should be properly
disqualified. Considering that at the pre-qualification stage, the maximum
amounts which the Paircargo Consortium may invest in the project fell short
of the minimum amounts prescribed by the PBAC, we hold that Paircargo
Consortium was not a qualified bidder. Thus the award of the contract by
the PBAC to the Paircargo Consortium, a disqualified bidder, is null and void.
While it would be proper at this juncture to end the resolution of the instant
controversy, as the legal effects of the disqualification of respondent
PIATCO's predecessor would come into play and necessarily result in the
nullity of all the subsequent contracts entered by it in pursuance of the
project, the Court feels that it is necessary to discuss in full the pressing
issues of the present controversy for a complete resolution thereof.

II
Is the 1997 Concession Agreement valid?
Petitioners and public respondents contend that the 1997 Concession
Agreement is invalid as it contains provisions that substantially depart from
the draft Concession Agreement included in the Bid Documents. They
maintain that a substantial departure from the draft Concession Agreement
is a violation of public policy and renders the 1997 Concession Agreement
null and void.
PIATCO maintains, however, that the Concession Agreement attached to
the Bid Documents is intended to be adraft, i.e., subject to change,
alteration or modification, and that this intention was clear to all
participants, including AEDC, and DOTC/MIAA. It argued further that said
intention is expressed in Part C (6) of Bid Bulletin No. 3 issued by the PBAC
which states:
6. Amendments to the Draft Concessions Agreement
Amendments to the Draft Concessions Agreement shall be issued
from time to time. Said amendments shall only cover items that
would not materially affect the preparation of the proponent's
proposal.
By its very nature, public bidding aims to protect the public interest by
giving the public the best possible advantages through open competition.
Thus:
Competition must be legitimate, fair and honest. In the field of
government contract law, competition requires, not only `bidding
upon a common standard, a common basis, upon the same thing,
the same subject matter, the same undertaking,' but also that it be
legitimate, fair and honest; and not designed to injure or defraud
the government.31
19
An essential element of a publicly bidded contract is that all bidders must be
on equal footing. Not simply in terms of application of the procedural rules
and regulations imposed by the relevant government agency, but more
importantly, on the contract bidded upon. Each bidder must be able to bid
on the same thing. The rationale is obvious. If the winning bidder is allowed
to later include or modify certain provisions in the contract awarded such
that the contract is altered in any material respect, then the essence of fair
competition in the public bidding is destroyed. A public bidding would
indeed be a farce if after the contract is awarded, the winning bidder may
modify the contract and include provisions which are favorable to it that
were not previously made available to the other bidders. Thus:
It is inherent in public biddings that there shall be a fair competition
among the bidders. The specifications in such biddings provide the
common ground or basis for the bidders. The specifications should,
accordingly, operate equally or indiscriminately upon all bidders. 32
The same rule was restated by Chief Justice Stuart of the Supreme Court of
Minnesota:
The law is well settled that where, as in this case, municipal
authorities can only let a contract for public work to the lowest
responsible bidder, the proposals and specifications therefore must
be so framed as to permit free and full competition. Nor can they
enter into a contract with the best bidder containing substantial
provisions beneficial to him, not included or contemplated in the
terms and specifications upon which the bids were invited. 33
In fact, in the PBAC Bid Bulletin No. 3 cited by PIATCO to support its
argument that the draft concession agreement is subject to amendment,
the pertinent portion of which was quoted above, the PBAC also clarified
that"[s]aid amendments shall only cover items that would not materially
affect the preparation of the proponent's proposal."
While we concede that a winning bidder is not precluded from modifying or
amending certain provisions of the contract bidded upon, such
changes must not constitute substantial or material amendments that
would alter the basic parameters of the contract and would constitute a

denial to the other bidders of the opportunity to bid on the same terms.
Hence, the determination of whether or not a modification or amendment
of a contract bidded out constitutes a substantial amendment rests on
whether the contract, when taken as a whole, would contain substantially
different terms and conditions that would have the effect of altering the
technical and/or financial proposals previously submitted by other bidders.
The alterations and modifications in the contract executed between the
government and the winning bidder must be such as to render such
executed contract to be an entirely different contract from the one that
was bidded upon.
In the case of Caltex (Philippines), Inc. v. Delgado Brothers, Inc.,34 this
Court quoted with approval the ruling of the trial court that an amendment
to a contract awarded through public bidding, when such subsequent
amendment was made without a new public bidding, is null and void:
The Court agrees with the contention of counsel for the plaintiffs
that the due execution of a contract after public bidding is a
limitation upon the right of the contracting parties to alter or
amend it without another public bidding, for otherwise what would
a public bidding be good for if after the execution of a contract
after public bidding, the contracting parties may alter or amend
the contract, or even cancel it, at their will? Public biddings are
held for the protection of the public, and to give the public the best
possible advantages by means of open competition between the
bidders. He who bids or offers the best terms is awarded the
contract subject of the bid, and it is obvious that such protection
and best possible advantages to the public will disappear if the
parties to a contract executed after public bidding may alter or
amend it without another previous public bidding. 35
Hence, the question that comes to fore is this: is the 1997 Concession
Agreement the same agreement that was offered for public bidding, i.e., the
draft Concession Agreement attached to the Bid Documents? A close
comparison of the draft Concession Agreement attached to the Bid
Documents and the 1997 Concession Agreement reveals that the
documents differ in at least two material respects:
20
a. Modification on the Public Utility Revenues and Non-Public Utility
Revenues that may be collected by PIATCO
The fees that may be imposed and collected by PIATCO under the draft
Concession Agreement and the 1997 Concession Agreement may be
classified into three distinct categories: (1) fees which are subject to
periodic adjustment of once every two years in accordance with a
prescribed parametric formula and adjustments are made effective only
upon written approval by MIAA; (2) fees other than those included in the
first category which maybe adjusted by PIATCO whenever it deems
necessary without need for consent of DOTC/MIAA; and (3) new fees and
charges that may be imposed by PIATCO which have not been previously
imposed or collected at the Ninoy Aquino International Airport Passenger
Terminal I, pursuant to Administrative Order No. 1, Series of 1993, as
amended. The glaring distinctions between the draft Concession Agreement
and the 1997 Concession Agreement lie in the types of fees included in each
category and the extent of the supervision and regulation which MIAA is
allowed to exercise in relation thereto.
For fees under the first category, i.e., those which are subject to periodic
adjustment in accordance with a prescribed parametric formula and
effective only upon written approval by MIAA, the draft Concession
Agreement includes the following:36
(1) aircraft parking fees;
(2) aircraft tacking fees;
(3) groundhandling fees;
(4) rentals and airline offices;
(5) check-in counter rentals; and
(6) porterage fees.

Under the 1997 Concession Agreement, fees which are subject to
adjustment and effective upon MIAA approval are classified as "Public
Utility Revenues" and include:37
(1) aircraft parking fees;
(2) aircraft tacking fees;
(3) check-in counter fees; and
(4) Terminal Fees.
The implication of the reduced number of fees that are subject to MIAA
approval is best appreciated in relation to fees included in the second
category identified above. Under the 1997 Concession Agreement, fees
which PIATCO may adjust whenever it deems necessary without need for
consent of DOTC/MIAA are "Non-Public Utility Revenues" and is defined as
"all other income not classified as Public Utility Revenues derived from
operations of the Terminal and the Terminal Complex." 38 Thus, under the
1997 Concession Agreement, ground handling fees, rentals from airline
offices and porterage fees are no longer subject to MIAA regulation.
Further, under Section 6.03 of the draft Concession Agreement, MIAA
reserves the right to regulate (1) lobby and vehicular parking fees and (2)
other new fees and charges that may be imposed by PIATCO. Such
regulation may be made by periodic adjustment and is effective only upon
written approval of MIAA. The full text of said provision is quoted below:
Section 6.03. Periodic Adjustment in Fees and Charges. Adjustments
in the aircraft parking fees, aircraft tacking fees, groundhandling
fees, rentals and airline offices, check-in-counter rentals and
porterage fees shall be allowed only once every two years and in
accordance with the Parametric Formula attached hereto as Annex
F. Provided that adjustments shall be made effective only after the
written express approval of the MIAA. Provided, further, that such
approval of the MIAA, shall be contingent only on the conformity of
the adjustments with the above said parametric formula. The first
21
adjustment shall be made prior to the In-Service Date of the
Terminal.
The MIAA reserves the right to regulate under the foregoing terms
and conditions the lobby and vehicular parking fees and other new
fees and charges as contemplated in paragraph 2 of Section 6.01 if
in its judgment the users of the airport shall be deprived of a free
option for the services they cover.39
On the other hand, the equivalent provision under the 1997 Concession
Agreement reads:
Section 6.03 Periodic Adjustment in Fees and Charges.
(c) Concessionaire shall at all times be judicious in fixing fees and
charges constituting Non-Public Utility Revenues in order to ensure
that End Users are not unreasonably deprived of services. While the
vehicular parking fee, porterage fee and greeter/well wisher fee
constitute Non-Public Utility Revenues of Concessionaire, GRP may
intervene and require Concessionaire to explain and justify the fee
it may set from time to time, if in the reasonable opinion of GRP
the said fees have become exorbitant resulting in the unreasonable
deprivation of End Users of such services.40
Thus, under the 1997 Concession Agreement, with respect to (1) vehicular
parking fee, (2) porterage fee and (3) greeter/well wisher fee, all that MIAA
can do is to require PIATCO to explain and justify the fees set by PIATCO. In
the draft Concession Agreement, vehicular parking fee is subject to MIAA
regulation and approval under the second paragraph of Section 6.03 thereof
while porterage fee is covered by the first paragraph of the same provision.
There is an obvious relaxation of the extent of control and regulation by
MIAA with respect to the particular fees that may be charged by PIATCO.
Moreover, with respect to the third category of fees that may be imposed
and collected by PIATCO, i.e., new fees and charges that may be imposed by
PIATCO which have not been previously imposed or collected at the Ninoy
Aquino International Airport Passenger Terminal I, under Section 6.03 of

the draft Concession Agreement MIAA has reserved the right to regulate
the same under the same conditions that MIAA may regulate fees under the
first category, i.e., periodic adjustment of once every two years in
accordance with a prescribed parametric formula and effective only upon
written approval by MIAA. However, under the 1997 Concession
Agreement, adjustment of fees under the third category is not subject to
MIAA regulation.
With respect to terminal fees that may be charged by PIATCO, 41 as shown
earlier, this was included within the category of "Public Utility Revenues"
under the 1997 Concession Agreement. This classification is significant
because under the 1997 Concession Agreement, "Public Utility Revenues"
are subject to an "Interim Adjustment" of fees upon the occurrence of
certain extraordinary events specified in the agreement.42 However, under
the draft Concession Agreement, terminal fees are not included in the types
of fees that may be subject to "Interim Adjustment." 43
Finally, under the 1997 Concession Agreement, "Public Utility Revenues,"
except terminal fees, are denominated in US Dollars 44 while payments to
the Government are in Philippine Pesos. In the draft Concession
Agreement, no such stipulation was included. By stipulating that "Public
Utility Revenues" will be paid to PIATCO in US Dollars while payments by
PIATCO to the Government are in Philippine currency under the 1997
Concession Agreement, PIATCO is able to enjoy the benefits of
depreciations of the Philippine Peso, while being effectively insulated from
the detrimental effects of exchange rate fluctuations.
When taken as a whole, the changes under the 1997 Concession Agreement
with respect to reduction in the types of fees that are subject to MIAA
regulation and the relaxation of such regulation with respect to other fees
are significant amendments that substantially distinguish the draft
Concession Agreement from the 1997 Concession Agreement. The 1997
Concession Agreement, in this respect, clearly gives PIATCO more
favorable terms than what was available to other bidders at the time the
contract was bidded out. It is not very difficult to see that the changes in
the 1997 Concession Agreement translate to direct and concrete financial
advantages for PIATCO which were not available at the time the contract
was offered for bidding. It cannot be denied that under the 1997 Concession
22
Agreement only "Public Utility Revenues" are subject to MIAA regulation.
Adjustments of all other fees imposed and collected by PIATCO are entirely
within its control. Moreover, with respect to terminal fees, under the 1997
Concession Agreement, the same is further subject to "Interim
Adjustments" not previously stipulated in the draft Concession Agreement.
Finally, the change in the currency stipulated for "Public Utility Revenues"
under the 1997 Concession Agreement, except terminal fees, gives PIATCO
an added benefit which was not available at the time of bidding.
b. Assumption by the Government of the liabilities of PIATCO in the event
of the latter's default thereof
Under the draft Concession Agreement, default by PIATCO of any of its
obligations to creditors who have provided, loaned or advanced funds for
the NAIA IPT III project does not result in the assumption by the
Government of these liabilities. In fact, nowhere in the said contract does
default of PIATCO's loans figure in the agreement. Such default does not
directly result in any concomitant right or obligation in favor of the
Government.
However, the 1997 Concession Agreement provides:
Section 4.04 Assignment.
(b) In the event Concessionaire should default in the payment of an
Attendant Liability, and the default has resulted in the acceleration
of the payment due date of the Attendant Liability prior to its stated
date of maturity, the Unpaid Creditors and Concessionaire shall
immediately inform GRP in writing of such default. GRP shall, within
one hundred eighty (180) Days from receipt of the joint written
notice of the Unpaid Creditors and Concessionaire, either (i) take
over the Development Facility and assume the Attendant Liabilities,
or (ii) allow the Unpaid Creditors, if qualified, to be substituted as
concessionaire and operator of the Development Facility in
accordance with the terms and conditions hereof, or designate a
qualified operator acceptable to GRP to operate the Development
Facility, likewise under the terms and conditions of this Agreement;
Provided that if at the end of the 180-day period GRP shall not have

served the Unpaid Creditors and Concessionaire written notice of its
choice, GRP shall be deemed to have elected to take over the
Development Facility with the concomitant assumption of
Attendant Liabilities.
(c) If GRP should, by written notice, allow the Unpaid Creditors to be
substituted as concessionaire, the latter shall form and organize a
concession company qualified to take over the operation of the
Development Facility. If the concession company should elect to
designate an operator for the Development Facility, the concession
company shall in good faith identify and designate a qualified
operator acceptable to GRP within one hundred eighty (180) days
from receipt of GRP's written notice. If the concession company,
acting in good faith and with due diligence, is unable to designate a
qualified operator within the aforesaid period, then GRP shall at the
end of the 180-day period take over the Development Facility and
assume Attendant Liabilities.
The term "Attendant Liabilities" under the 1997 Concession Agreement is
defined as:
Attendant Liabilities refer to all amounts recorded and from time to
time outstanding in the books of the Concessionaire as owing to
Unpaid Creditors who have provided, loaned or advanced funds
actually used for the Project, including all interests, penalties,
associated fees, charges, surcharges, indemnities, reimbursements
and other related expenses, and further including amounts owed by
Concessionaire to its suppliers, contractors and sub-contractors.
Under the above quoted portions of Section 4.04 in relation to the
definition of "Attendant Liabilities," default by PIATCO of its loans used to
finance the NAIA IPT III project triggers the occurrence of certain events
that leads to the assumption by the Government of the liability for the
loans. Only in one instance may the Government escape the assumption of
PIATCO's liabilities, i.e., when the Government so elects and allows a
qualified operator to take over as Concessionaire. However, this
circumstance is dependent on the existence and availability of a qualified
operator who is willing to take over the rights and obligations of PIATCO
23
under the contract, a circumstance that is not entirely within the control
of the Government.
Without going into the validity of this provision at this juncture, suffice it to
state that Section 4.04 of the 1997 Concession Agreement may be
considered a form of security for the loans PIATCO has obtained to finance
the project, an option that was not made available in the draft Concession
Agreement. Section 4.04 is an important amendment to the 1997
Concession Agreement because it grants PIATCO a financial advantage or
benefit which was not previously made available during the bidding
process. This financial advantage is a significant modification that translates
to better terms and conditions for PIATCO.
PIATCO, however, argues that the parties to the bidding procedure
acknowledge that the draft Concession Agreement is subject to amendment
because the Bid Documents permit financing or borrowing. They claim that
it was the lenders who proposed the amendments to the draft Concession
Agreement which resulted in the 1997 Concession Agreement.
We agree that it is not inconsistent with the rationale and purpose of the
BOT Law to allow the project proponent or the winning bidder to obtain
financing for the project, especially in this case which involves the
construction, operation and maintenance of the NAIA IPT III. Expectedly,
compliance by the project proponent of its undertakings therein would
involve a substantial amount of investment. It is therefore inevitable for the
awardee of the contract to seek alternate sources of funds to support the
project. Be that as it may, this Court maintains that amendments to the
contract bidded upon should always conform to the general policy on public
bidding if such procedure is to be faithful to its real nature and purpose. By
its very nature and characteristic, competitive public bidding aims to protect
the public interest by giving the public the best possible advantages through
open competition. 45 It has been held that the three principles in public
bidding are (1) the offer to the public; (2) opportunity for competition; and
(3) a basis for the exact comparison of bids. A regulation of the matter
which excludes any of these factors destroys the distinctive character of the
system and thwarts the purpose of its adoption. 46 These are the basic
parameters which every awardee of a contract bidded out must conform to,
requirements of financing and borrowing notwithstanding. Thus, upon a

concrete showing that, as in this case, the contract signed by the
government and the contract-awardee is an entirely different contract from
the contract bidded, courts should not hesitate to strike down said contract
in its entirety for violation of public policy on public bidding. A strict
adherence on the principles, rules and regulations on public bidding must be
sustained if only to preserve the integrity and the faith of the general public
on the procedure.
Public bidding is a standard practice for procuring government contracts for
public service and for furnishing supplies and other materials. It aims to
secure for the government the lowest possible price under the most
favorable terms and conditions, to curtail favoritism in the award of
government contracts and avoid suspicion of anomalies and it places all
bidders in equal footing.47 Any government action which permits any
substantial variance between the conditions under which the bids are
invited and the contract executed after the award thereof is a grave abuse
of discretion amounting to lack or excess of jurisdiction which warrants
proper judicial action.
In view of the above discussion, the fact that the foregoing substantial
amendments were made on the 1997 Concession Agreement renders the
same null and void for being contrary to public policy. These amendments
convert the 1997 Concession Agreement to an entirely different
agreement from the contract bidded out or the draft Concession
Agreement. It is not difficult to see that the amendments on (1) the types of
fees or charges that are subject to MIAA regulation or control and the
extent thereof and (2) the assumption by the Government, under certain
conditions, of the liabilities of PIATCO directly translates concrete financial
advantages to PIATCO that were previously not available during the
bidding process. These amendments cannot be taken as merely
supplements to or implementing provisions of those already existing in the
draft Concession Agreement. The amendments discussed above present
new terms and conditions which provide financial benefit to PIATCO which
may have altered the technical and financial parameters of other bidders
had they known that such terms were available.
24
III
Direct Government Guarantee
Article IV, Section 4.04(b) and (c), in relation to Article 1.06, of the 1997
Concession Agreement provides:
Section 4.04 Assignment
(b) In the event Concessionaire should default in the payment of an
Attendant Liability, and the default resulted in the acceleration of
the payment due date of the Attendant Liability prior to its stated
date of maturity, the Unpaid Creditors and Concessionaire shall
immediately inform GRP in writing of such default. GRP shall within
one hundred eighty (180) days from receipt of the joint written
notice of the Unpaid Creditors and Concessionaire, either (i) take
over the Development Facility and assume the Attendant
Liabilities, or (ii) allow the Unpaid Creditors, if qualified to be
substituted as concessionaire and operator of the Development
facility in accordance with the terms and conditions hereof, or
designate a qualified operator acceptable to GRP to operate the
Development Facility, likewise under the terms and conditions of
this Agreement; Provided, that if at the end of the 180-day period
GRP shall not have served the Unpaid Creditors and Concessionaire
written notice of its choice, GRP shall be deemed to have elected
to take over the Development Facility with the concomitant
assumption of Attendant Liabilities.
(c) If GRP, by written notice, allow the Unpaid Creditors to be
substituted as concessionaire, the latter shall form and organize a
concession company qualified to takeover the operation of the
Development Facility. If the concession company should elect to
designate an operator for the Development Facility, the concession
company shall in good faith identify and designate a qualified
operator acceptable to GRP within one hundred eighty (180) days
from receipt of GRP's written notice. If the concession company,
acting in good faith and with due diligence, is unable to designate a
qualified operator within the aforesaid period, then GRP shall at the

end of the 180-day period take over the Development Facility and
assume Attendant Liabilities.
Section 1.06. Attendant Liabilities
Attendant Liabilities refer to all amounts recorded and from time
to time outstanding in the books of the Concessionaire as owing to
Unpaid Creditors who have provided, loaned or advanced funds
actually used for the Project, including all interests, penalties,
associated fees, charges, surcharges, indemnities, reimbursements
and other related expenses, and further including amounts owed by
Concessionaire to its suppliers, contractors and sub-contractors.48
It is clear from the above-quoted provisions that Government, in the event
that PIATCO defaults in its loan obligations, is obligated to pay "all
amounts recorded and from time to time outstanding from the books" of
PIATCO which the latter owes to its creditors. 49 These amounts include "all
interests, penalties, associated fees, charges, surcharges, indemnities,
reimbursements and other related expenses."50 This obligation of the
Government to pay PIATCO's creditors upon PIATCO's default would arise if
the Government opts to take over NAIA IPT III. It should be noted, however,
that even if the Government chooses the second option, which is to allow
PIATCO's unpaid creditors operate NAIA IPT III, the Government is still at a
risk of being liable to PIATCO's creditors should the latter be unable to
designate a qualified operator within the prescribed period.51 In
effect,whatever option the Government chooses to take in the event of
PIATCO's failure to fulfill its loan obligations, the Government is still at a
risk of assuming PIATCO's outstanding loans. This is due to the fact that the
Government would only be free from assuming PIATCO's debts if the unpaid
creditors would be able to designate a qualified operator within the period
provided for in the contract. Thus, the Government's assumption of liability
is virtually out of its control. The Government under the circumstances
provided for in the 1997 Concession Agreement is at the mercy of the
existence, availability and willingness of a qualified operator. The above
contractual provisions constitute a direct government guarantee which is
prohibited by law.
25
One of the main impetus for the enactment of the BOT Law is the lack of
government funds to construct the infrastructure and development projects
necessary for economic growth and development. This is why private sector
resources are being tapped in order to finance these projects. The BOT law
allows the private sector to participate, and is in fact encouraged to do so by
way of incentives, such as minimizing the unstable flow of
returns,52 provided that the government would not have to unnecessarily
expend scarcely available funds for the project itself. As such, direct
guarantee, subsidy and equity by the government in these projects are
strictly prohibited.53 This is but logical for if the government would in the
end still be at a risk of paying the debts incurred by the private entity in
the BOT projects, then the purpose of the law is subverted.
Section 2(n) of the BOT Law defines direct guarantee as follows:
(n) Direct government guarantee An agreement whereby the
government or any of its agencies or local government units assume
responsibility for the repayment of debt directly incurred by the
project proponent in implementing the project in case of a loan
default.
Clearly by providing that the Government "assumes" the attendant
liabilities, which consists of PIATCO's unpaid debts, the 1997 Concession
Agreement provided for a direct government guarantee for the debts
incurred by PIATCO in the implementation of the NAIA IPT III project. It is of
no moment that the relevant sections are subsumed under the title of
"assignment". The provisions providing for direct government guarantee
which is prohibited by law is clear from the terms thereof.
The fact that the ARCA superseded the 1997 Concession Agreement did not
cure this fatal defect. Article IV, Section 4.04(c), in relation to Article I,
Section 1.06, of the ARCA provides:
Section 4.04 Security
(c) GRP agrees with Concessionaire (PIATCO) that it shall negotiate
in good faith and enter into direct agreement with the Senior

Lenders, or with an agent of such Senior Lenders (which agreement
shall be subject to the approval of the Bangko Sentral ng Pilipinas),
in such form as may be reasonably acceptable to both GRP and
Senior Lenders, with regard, inter alia, to the following parameters:
(iv) If the Concessionaire [PIATCO] is in default under a
payment obligation owed to the Senior Lenders, and as a
result thereof the Senior Lenders have become entitled to
accelerate the Senior Loans, the Senior Lenders shall have
the right to notify GRP of the same, and without prejudice
to any other rights of the Senior Lenders or any Senior
Lenders' agent may have (including without limitation under
security interests granted in favor of the Senior Lenders), to
either in good faith identify and designate a nominee which
is qualified under sub-clause (viii)(y) below to operate the
Development Facility [NAIA Terminal 3] or transfer the
Concessionaire's [PIATCO] rights and obligations under this
Agreement to a transferee which is qualified under sub-
clause (viii) below;
(vi) if the Senior Lenders, acting in good faith and using
reasonable efforts, are unable to designate a nominee or
effect a transfer in terms and conditions satisfactory to the
Senior Lenders within one hundred eighty (180) days after
giving GRP notice as referred to respectively in (iv) or (v)
above, then GRP and the Senior Lenders shall endeavor in
good faith to enter into any other arrangement relating to
the Development Facility [NAIA Terminal 3] (other than a
turnover of the Development Facility [NAIA Terminal 3] to
GRP) within the following one hundred eighty (180) days. If
no agreement relating to the Development Facility [NAIA
Terminal 3] is arrived at by GRP and the Senior Lenders
within the said 180-day period, then at the end thereof
the Development Facility [NAIA Terminal 3] shall be
transferred by the Concessionaire [PIATCO] to GRP or its
designee and GRP shall make a termination payment to
Concessionaire [PIATCO] equal to the Appraised Value (as
hereinafter defined) of the Development Facility [NAIA
26
Terminal 3] or the sum of the Attendant Liabilities, if
greater. Notwithstanding Section 8.01(c) hereof, this
Agreement shall be deemed terminated upon the transfer
of the Development Facility [NAIA Terminal 3] to GRP
pursuant hereto;
Section 1.06. Attendant Liabilities
Attendant Liabilities refer to all amounts in each case supported by
verifiable evidence from time to timeowed or which may become
owing by Concessionaire [PIATCO] to Senior Lenders or any other
persons or entities who have provided, loaned, or advanced funds
or provided financial facilities to Concessionaire [PIATCO] for the
Project [NAIA Terminal 3], including, without limitation, all
principal, interest, associated fees, charges, reimbursements, and
other related expenses (including the fees, charges and expenses of
any agents or trustees of such persons or entities), whether payable
at maturity, by acceleration or otherwise, and further including
amounts owed by Concessionaire [PIATCO] to its professional
consultants and advisers, suppliers, contractors and sub-
contractors.54
It is clear from the foregoing contractual provisions that in the event that
PIATCO fails to fulfill its loan obligations to its Senior Lenders, the
Government is obligated to directly negotiate and enter into an agreement
relating to NAIA IPT III with the Senior Lenders, should the latter fail to
appoint a qualified nominee or transferee who will take the place of
PIATCO. If the Senior Lenders and the Government are unable to enter into
an agreement after the prescribed period, the Government must then pay
PIATCO, upon transfer of NAIA IPT III to the Government, termination
payment equal to the appraised value of the project or the value of the
attendant liabilities whichever is greater. Attendant liabilities as defined in
the ARCA includes all amounts owed or thereafter may be owed by PIATCO
not only to the Senior Lenders with whom PIATCO has defaulted in its loan
obligations but to all other persons who may have loaned, advanced funds
or provided any other type of financial facilities to PIATCO for NAIA IPT III.
The amount of PIATCO's debt that the Government would have to pay as a
result of PIATCO's default in its loan obligations -- in case no qualified

nominee or transferee is appointed by the Senior Lenders and no other
agreement relating to NAIA IPT III has been reached between the
Government and the Senior Lenders -- includes, but is not limited to, "all
principal, interest, associated fees, charges, reimbursements, and other
related expenses . . . whether payable at maturity, by acceleration or
otherwise."55
It is clear from the foregoing that the ARCA provides for a direct guarantee
by the government to pay PIATCO's loans not only to its Senior Lenders
but all other entities who provided PIATCO funds or services upon
PIATCO's default in its loan obligation with its Senior Lenders. The fact that
the Government's obligation to pay PIATCO's lenders for the latter's
obligation would only arise after the Senior Lenders fail to appoint a
qualified nominee or transferee does not detract from the fact that, should
the conditions as stated in the contract occur, the ARCA still obligates the
Government to pay any and all amounts owed by PIATCO to its lenders in
connection with NAIA IPT III. Worse, the conditions that would make the
Government liable for PIATCO's debts is triggered by PIATCO's own default
of its loan obligations to its Senior Lenders to which loan contracts the
Government was never a party to. The Government was not even given an
option as to what course of action it should take in case PIATCO defaulted in
the payment of its senior loans. The Government, upon PIATCO's default,
would be merely notified by the Senior Lenders of the same and it is the
Senior Lenders who are authorized to appoint a qualified nominee or
transferee. Should the Senior Lenders fail to make such an appointment, the
Government is then automatically obligated to "directly deal and negotiate"
with the Senior Lenders regarding NAIA IPT III. The only way the
Government would not be liable for PIATCO's debt is for a qualified
nominee or transferee to be appointed in place of PIATCO to continue the
construction, operation and maintenance of NAIA IPT III. This "pre-
condition", however, will not take the contract out of the ambit of a direct
guarantee by the government as the existence, availability and willingness
of a qualified nominee or transferee is totally out of the government's
control. As such the Government is virtually at the mercy of PIATCO (that it
would not default on its loan obligations to its Senior Lenders), the Senior
Lenders (that they would appoint a qualified nominee or transferee or agree
to some other arrangement with the Government) and the existence of a
27
qualified nominee or transferee who is able and willing to take the place of
PIATCO in NAIA IPT III.
The proscription against government guarantee in any form is one of the
policy considerations behind the BOT Law. Clearly, in the present case, the
ARCA obligates the Government to pay for all loans, advances and
obligations arising out of financial facilities extended to PIATCO for the
implementation of the NAIA IPT III project should PIATCO default in its loan
obligations to its Senior Lenders and the latter fails to appoint a qualified
nominee or transferee. This in effect would make the Government liable for
PIATCO's loans should the conditions as set forth in the ARCA arise. This is a
form of direct government guarantee.
The BOT Law and its implementing rules provide that in order for an
unsolicited proposal for a BOT project may be accepted, the following
conditions must first be met: (1) the project involves a new concept in
technology and/or is not part of the list of priority projects, (2) no direct
government guarantee, subsidy or equity is required, and (3) the
government agency or local government unit has invited by publication
other interested parties to a public bidding and conducted the same. 56 The
failure to meet any of the above conditions will result in the denial of the
proposal. It is further provided that the presence of direct government
guarantee, subsidy or equity will "necessarily disqualify a proposal from
being treated and accepted as an unsolicited proposal."57 The BOT Law
clearly and strictly prohibits direct government guarantee, subsidy and
equity in unsolicited proposals that the mere inclusion of a provision to that
effect is fatal and is sufficient to deny the proposal. It stands to reason
therefore that if a proposal can be denied by reason of the existence of
direct government guarantee, then its inclusion in the contract executed
after the said proposal has been accepted is likewise sufficient to invalidate
the contract itself. A prohibited provision, the inclusion of which would
result in the denial of a proposal cannot, and should not, be allowed to later
on be inserted in the contract resulting from the said proposal. The basic
rules of justice and fair play alone militate against such an occurrence and
must not, therefore, be countenanced particularly in this instance where
the government is exposed to the risk of shouldering hundreds of million of
dollars in debt.

This Court has long and consistently adhered to the legal maxim that those
that cannot be done directly cannot be done indirectly. 58 To declare the
PIATCO contracts valid despite the clear statutory prohibition against a
direct government guarantee would not only make a mockery of what the
BOT Law seeks to prevent -- which is to expose the government to the risk
of incurring a monetary obligation resulting from a contract of loan
between the project proponent and its lenders and to which the
Government is not a party to -- but would also render the BOT Law useless
for what it seeks to achieve - to make use of the resources of the private
sector in the "financing, operation and maintenance of infrastructure and
development projects" 59 which are necessary for national growth and
development but which the government, unfortunately, could ill-afford to
finance at this point in time.
IV
Temporary takeover of business affected with public interest
Article XII, Section 17 of the 1987 Constitution provides:
Section 17. In times of national emergency, when the public interest
so requires, the State may, during the emergency and under
reasonable terms prescribed by it, temporarily take over or direct
the operation of any privately owned public utility or business
affected with public interest.
The above provision pertains to the right of the State in times of national
emergency, and in the exercise of its police power, to temporarily take over
the operation of any business affected with public interest. In the 1986
Constitutional Commission, the term "national emergency" was defined to
include threat from external aggression, calamities or national disasters, but
not strikes "unless it is of such proportion that would paralyze government
service."60 The duration of the emergency itself is the determining factor as
to how long the temporary takeover by the government would last.61 The
temporary takeover by the government extends only to the operation of the
business and not to the ownership thereof. As such the government is not
required to compensate the private entity-owner of the said business as
there is no transfer of ownership, whether permanent or temporary. The
28
private entity-owner affected by the temporary takeover cannot, likewise,
claim just compensation for the use of the said business and its properties
as the temporary takeover by the government is in exercise of its police
power and not of its power of eminent domain.
Article V, Section 5.10 (c) of the 1997 Concession Agreement provides:
Section 5.10 Temporary Take-over of operations by GRP.
(c) In the event the development Facility or any part thereof and/or
the operations of Concessionaire or any part thereof, become the
subject matter of or be included in any notice, notification, or
declaration concerning or relating to acquisition, seizure or
appropriation by GRP in times of war or national emergency, GRP
shall, by written notice to Concessionaire, immediately take over
the operations of the Terminal and/or the Terminal Complex.
During such take over by GRP, the Concession Period shall be
suspended; provided, that upon termination of war, hostilities or
national emergency, the operations shall be returned to
Concessionaire, at which time, the Concession period shall
commence to run again. Concessionaire shall be entitled to
reasonable compensation for the duration of the temporary take
over by GRP, which compensation shall take into account the
reasonable cost for the use of the Terminal and/or Terminal
Complex, (which is in the amount at least equal to the debt service
requirements of Concessionaire, if the temporary take over should
occur at the time when Concessionaire is still servicing debts owed
to project lenders), any loss or damage to the Development Facility,
and other consequential damages. If the parties cannot agree on
the reasonable compensation of Concessionaire, or on the liability
of GRP as aforesaid, the matter shall be resolved in accordance with
Section 10.01 [Arbitration]. Any amount determined to be payable
by GRP to Concessionaire shall be offset from the amount next
payable by Concessionaire to GRP. 62
PIATCO cannot, by mere contractual stipulation, contravene the
Constitutional provision on temporary government takeover and obligate
the government to pay "reasonable cost for the use of the Terminal

and/or Terminal Complex." 63 Article XII, section 17 of the 1987 Constitution
envisions a situation wherein the exigencies of the times necessitate the
government to "temporarily take over or direct the operation of any
privately owned public utility or business affected with public interest." It is
the welfare and interest of the public which is the paramount consideration
in determining whether or not to temporarily take over a particular
business. Clearly, the State in effecting the temporary takeover is exercising
its police power. Police power is the "most essential, insistent, and
illimitable of powers."64 Its exercise therefore must not be unreasonably
hampered nor its exercise be a source of obligation by the government in
the absence of damage due to arbitrariness of its exercise. 65 Thus, requiring
the government to pay reasonable compensation for the reasonable use of
the property pursuant to the operation of the business contravenes the
Constitution.
V Concession Agreement and the ARCA further provide that, in view of the
Regulation of Monopolies
A monopoly is "a privilege or peculiar advantage vested in one or more
persons or companies, consisting in the exclusive right (or power) to carry
on a particular business or trade, manufacture a particular article, or control
the sale of a particular commodity."66 The 1987 Constitution strictly
regulates monopolies, whether private or public, and even provides for
their prohibition if public interest so requires. Article XII, Section 19 of the
1987 Constitution states:
Sec. 19. The state shall regulate or prohibit monopolies when the
public interest so requires. No combinations in restraint of trade or
unfair competition shall be allowed.
Clearly, monopolies are not per se prohibited by the Constitution but may
be permitted to exist to aid the government in carrying on an enterprise or
to aid in the performance of various services and functions in the interest of
the public.67 Nonetheless, a determination must first be made as to
whether public interest requires a monopoly. As monopolies are subject to
abuses that can inflict severe prejudice to the public, they are subject to a
higher level of State regulation than an ordinary business undertaking.
29
In the cases at bar, PIATCO, under the 1997 Concession Agreement and the
ARCA, is granted the "exclusive right to operate a commercial international
passenger terminal within the Island of Luzon" at the NAIA IPT III. 68This is
with the exception of already existing international airports in Luzon such as
those located in the Subic Bay Freeport Special Economic Zone ("SBFSEZ"),
Clark Special Economic Zone ("CSEZ") and in Laoag City. 69 As such, upon
commencement of PIATCO's operation of NAIA IPT III, Terminals 1 and 2 of
NAIA would cease to function as international passenger terminals. This,
however, does not prevent MIAA to use Terminals 1 and 2 as domestic
passenger terminals or in any other manner as it may deem appropriate
except those activities that would compete with NAIA IPT III in the latter's
operation as an international passenger terminal. 70 The right granted to
PIATCO to exclusively operate NAIA IPT III would be for a period of twenty-
five (25) years from the In-Service Date 71 and renewable for another
twenty-five (25) years at the option of the government.72 Both the 1997
exclusive right granted to PIATCO, the concession contracts of the service
providers currently servicing Terminals 1 and 2 would no longer be
renewed and those concession contracts whose expiration are subsequent
to the In-Service Date would cease to be effective on the said date. 73
The operation of an international passenger airport terminal is no doubt an
undertaking imbued with public interest. In entering into a BuildOperate-
and-Transfer contract for the construction, operation and maintenance of
NAIA IPT III, the government has determined that public interest would be
served better if private sector resources were used in its construction and
an exclusive right to operate be granted to the private entity undertaking
the said project, in this case PIATCO. Nonetheless, the privilege given to
PIATCO is subject to reasonable regulation and supervision by the
Government through the MIAA, which is the government agency authorized
to operate the NAIA complex, as well as DOTC, the department to which
MIAA is attached.74
This is in accord with the Constitutional mandate that a monopoly which is
not prohibited must be regulated.75While it is the declared policy of the BOT
Law to encourage private sector participation by "providing a climate of
minimum government regulations,"76 the same does not mean that
Government must completely surrender its sovereign power to protect

public interest in the operation of a public utility as a monopoly. The
operation of said public utility can not be done in an arbitrary manner to the
detriment of the public which it seeks to serve. The right granted to the
public utility may be exclusive but the exercise of the right cannot run riot.
Thus, while PIATCO may be authorized to exclusively operate NAIA IPT III as
an international passenger terminal, the Government, through the MIAA,
has the right and the duty to ensure that it is done in accord with public
interest. PIATCO's right to operate NAIA IPT III cannot also violate the rights
of third parties.
Section 3.01(e) of the 1997 Concession Agreement and the ARCA provide:
3.01 Concession Period
(e) GRP confirms that certain concession agreements relative to
certain services and operations currently being undertaken at the
Ninoy Aquino International Airport passenger Terminal I have a
validity period extending beyond the In-Service Date. GRP through
DOTC/MIAA, confirms that these services and operations shall not
be carried over to the Terminal and the Concessionaire is under no
legal obligation to permit such carry-over except through a
separate agreement duly entered into with Concessionaire. In the
event Concessionaire becomes involved in any litigation initiated by
any such concessionaire or operator, GRP undertakes and hereby
holds Concessionaire free and harmless on full indemnity basis from
and against any loss and/or any liability resulting from any such
litigation, including the cost of litigation and the reasonable fees
paid or payable to Concessionaire's counsel of choice, all such
amounts shall be fully deductible by way of an offset from any
amount which the Concessionaire is bound to pay GRP under this
Agreement.
During the oral arguments on December 10, 2002, the counsel for
the petitioners-in-intervention for G.R. No. 155001 stated that there
are two service providers whose contracts are still existing and
whose validity extends beyond the In-Service Date. One contract
remains valid until 2008 and the other until 2010. 77
30
We hold that while the service providers presently operating at NAIA
Terminal 1 do not have an absolute right for the renewal or the extension of
their respective contracts, those contracts whose duration extends beyond
NAIA IPT III's In-Service-Date should not be unduly prejudiced. These
contracts must be respected not just by the parties thereto but also by third
parties. PIATCO cannot, by law and certainly not by contract, render a valid
and binding contract nugatory. PIATCO, by the mere expedient of claiming
an exclusive right to operate, cannot require the Government to break its
contractual obligations to the service providers. In contrast to the arrastre
and stevedoring service providers in the case of Anglo-Fil Trading
Corporation v. Lazaro78 whose contracts consist of temporary hold-over
permits, the affected service providers in the cases at bar, have a valid and
binding contract with the Government, through MIAA, whose period of
effectivity, as well as the other terms and conditions thereof, cannot be
violated.
In fine, the efficient functioning of NAIA IPT III is imbued with public
interest. The provisions of the 1997 Concession Agreement and the ARCA
did not strip government, thru the MIAA, of its right to supervise the
operation of the whole NAIA complex, including NAIA IPT III. As the primary
government agency tasked with the job, 79 it is MIAA's responsibility to
ensure that whoever by contract is given the right to operate NAIA IPT III
will do so within the bounds of the law and with due regard to the rights of
third parties and above all, the interest of the public.
VI
CONCLUSION
In sum, this Court rules that in view of the absence of the requisite financial
capacity of the Paircargo Consortium, predecessor of respondent PIATCO,
the award by the PBAC of the contract for the construction, operation and
maintenance of the NAIA IPT III is null and void. Further, considering that
the 1997 Concession Agreement contains material and substantial
amendments, which amendments had the effect of converting the 1997
Concession Agreement into an entirely different agreement from the
contract bidded upon, the 1997 Concession Agreement is similarly null and
void for being contrary to public policy. The provisions under Sections
 31

4.04(b) and (c) in relation to Section 1.06 of the 1997 Concession Agreement
and Section 4.04(c) in relation to Section 1.06 of the ARCA, which constitute
a direct government guarantee expressly prohibited by, among others, the
BOT Law and its Implementing Rules and Regulations are also null and void.
The Supplements, being accessory contracts to the ARCA, are likewise null
and void.

WHEREFORE, the 1997 Concession Agreement, the Amended and Restated

Concession Agreement and the Supplements thereto are set aside for being
null and void.

SO ORDERED.

THIRD DIVISION
G.R. No. 153201 January 26, 2005
JOSE MENCHAVEZ, JUAN MENCHAVEZ JR., SIMEON MENCHAVEZ,
RODOLFO MENCHAVEZ, CESAR MENCHAVEZ, REYNALDO, MENCHAVEZ,
ALMA MENCHAVEZ, ELMA MENCHAVEZ, CHARITO M. MAGA, FE M.
POTOT, THELMA M. REROMA, MYRNA M. YBAEZ, and SARAH M.
VILLABER, petitioners,
vs.
FLORENTINO TEVES JR., respondent.
DE CISION
PANGANIBAN, J.:
Avoid contract is deemed legally nonexistent. It produces no legal effect. As
a general rule, courts leave parties to such a contract as they are, because
they are in pari delicto or equally at fault. Neither party is entitled to legal
protection.
The Case
Before us is a Petition for Review 1 under Rule 45 of the Rules of Court,
assailing the February 28, 2001 Decision 2and the April 16, 2002
Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 51144. The
challenged Decision disposed as follows:
"WHEREFORE, the assailed decision is hereby MODIFIED, as follows:
"1. Ordering [petitioners] to jointly and severally pay the [respondent] the
amount of P128,074.40 as actual damages, and P50,000.00 as liquidated
damages;
"2. Dismissing the third party complaint against the third party defendants;
32
"3. Upholding the counterclaims of the third party defendants against the
[petitioners. Petitioners] are hereby required to pay [the] third party
defendants the sum of P30,000.00 as moral damages for the clearly
unfounded suit;
"4. Requiring the [petitioners] to reimburse the third party defendants the
sum of P10,000.00 in the concept of attorneys fees and appearance fees
of P300.00 per appearance;
"5. Requiring the [petitioners] to reimburse the third party defendants the
sum of P10,000.00 as exemplary damages pro bono publico and litigation
expenses including costs, in the sum of P5,000.00."4
The assailed Resolution denied petitioners Motion for Reconsideration.
The Facts
On February 28, 1986, a "Contract of Lease" was executed by Jose S.
Menchavez, Juan S. Menchavez Sr., Juan S. Menchavez Jr., Rodolfo
Menchavez, Simeon Menchavez, Reynaldo Menchavez, Cesar Menchavez,
Charito M. Maga, Fe M. Potot, Thelma R. Reroma, Myrna Ybaez, Sonia S.
Menchavez, Sarah Villaver, Alma S. Menchavez, and Elma S. Menchavez, as
lessors; and Florentino Teves Jr. as lessee.l^vvphi1.net The pertinent
portions of the Contract are herein reproduced as follows:
"WHEREAS, the LESSORS are the absolute and lawful co-owners of that area
covered by FISHPOND APPLICATION No. VI-1076 of Juan Menchavez, Sr.,
filed on September 20, 1972, at Fisheries Regional Office No. VII, Cebu City
covering an area of 10.0 hectares more or less located at Tabuelan, Cebu;
"NOW, THEREFORE, for and in consideration of the mutual covenant and
stipulations hereinafter set forth, the LESSORS and the LESSEE have agreed
and hereby agree as follows:
"1. The TERM of this LEASE is FIVE (5) YEARS, from and after the
execution of this Contract of Lease, renewable at the OPTION of the
LESSORS;

"2. The LESSEE agrees to pay the LESSORS at the residence of JUAN
MENCHAVEZ SR., one of the LESSORS herein, the sum of FORTY
THOUSAND PESOS (P40,000.00) Philippine Currency, annually x x x;
"3. The LESSORS hereby warrant that the above-described parcel of
land is fit and good for the intended use as FISHPOND;
"4. The LESSORS hereby warrant and assure to maintain the LESSEE
in the peaceful and adequate enjoyment of the lease for the entire
duration of the contract;
"5. The LESSORS hereby further warrant that the LESSEE can and
shall enjoy the intended use of the leased premises as FISHPOND
FOR THE ENTIRE DURATION OF THE CONTRACT;
"6. The LESSORS hereby warrant that the above-premises is free
from all liens and encumbrances, and shall protect the LESSEE of his
right of lease over the said premises from any and all claims
whatsoever;
"7. Any violation of the terms and conditions herein provided, more
particularly the warranties above-mentioned, the parties of this
Contract responsible thereof shall pay liquidated damages in the
amount of not less than P50,000.00 to the offended party of this
Contract; in case the LESSORS violated therefor, they bound
themselves jointly and severally liable to the LESSEE;"
On June 2, 1988, Cebu RTC Sheriffs Gumersindo Gimenez and Arturo
Cabigon demolished the fishpond dikes constructed by respondent and
delivered possession of the subject property to other parties. 6 As a result,
he filed a Complaint for damages with application for preliminary
attachment against petitioners. In his Complaint, he alleged that the lessors
had violated their Contract of Lease, specifically the peaceful and adequate
enjoyment of the property for the entire duration of the Contract. He
claimed P157,184.40 as consequential damages for the demolition of the
fishpond dikes, P395,390.00 as unearned income, and an amount not less
than P100,000.00 for rentals paid. 7
33
Respondent further asserted that the lessors had withheld from him the
findings of the trial court in Civil Case No. 510-T, entitled "Eufracia Colongan
and Paulino Pamplona v. Juan Menchavez Sr. and Sevillana S. Menchavez."
In that case involving the same property, subject of the lease, the
Menchavez spouses were ordered to remove the dikes illegally constructed
and to pay damages and attorneys fees. 8
Petitioners filed a Third Party Complaint against Benny and Elizabeth Allego,
Albino Laput, Adrinico Che and Charlemagne Arendain Jr., as agents of
Eufracia Colongan and Paulino Pamplona. The third-party defendants
maintained that the Complaint filed against them was unfounded. As agents
of their elderly parents, they could not be sued in their personal capacity.
Thus, they asserted their own counterclaims. 9
After trial on the merits, the RTC ruled thus:
"[The court must resolve the issues one by one.] As to the question of
whether the contract of lease between Teves and the [petitioners] is valid,
we must look into the present law on the matter of fishponds. And this is
Pres. Decree No. 704 which provides in Sec. 24:
Lease of fishponds-Public lands available for fishpond development
including those earmarked for family-size fishponds and not yet leased prior
to November 9, 1972 shall be leased only to qualified persons, associations,
cooperatives or corporations, subject to the following conditions.
1. The lease shall be for a period of twenty five years (25), renewable for
another twenty five years;
2. Fifty percent of the area leased shall be developed and be producing in
commercial scale within three years and the remaining portion shall be
developed and be producing in commercial scale within five years; both
periods begin from the execution of the lease contract;
3. All areas not fully developed within five years from the date of the
execution of the lease contract shall automatically revert to the public
domain for disposition of the bureau; provided that a lessee who failed to

develop the area or any portion thereof shall not be permitted to reapply
for said area or any portion thereof or any public land under this decree;
and/or any portion thereof or any public land under this decree;
4. No portion of the leased area shall be subleased.
The Constitution, (Sec. 2 & 3, Art. XII of the 1987 Constitution) states:
Sec. 2 - All lands of the public domain, waters, minerals, coal, petroleum
and other mineral oils, all forces of potential energy, fisheries, forests, or
timber, wild life, flora and fauna and other natural resources are owned by
the state.
Sec. 3 - Lands of the public domain are classified into agricultural, forest or
timber, mineral lands and national parks. Agricultural lands of the public
domain may be further classified by law according to the uses to which they
may be devoted. Alienable lands of the public domain shall be limited to
agricultural lands x x x.
"As a consequence of these provisions, and the declared public policy of the
State under the Regalian Doctrine, the lease contract between Florentino
Teves, Jr. and Juan Menchavez Sr. and his family is a patent nullity. Being a
patent nullity, [petitioners] could not give any rights to Florentino Teves, Jr.
under the principle: NEMO DAT QUOD NON HABET - meaning ONE
CANNOT GIVE WHAT HE DOES NOT HAVE, considering that this property in
litigation belongs to the State and not to [petitioners]. Therefore, the first
issue is resolved in the negative, as the court declares the contract of lease
as invalid and void ab-initio.
"On the issue of whether [respondent] and [petitioners] are guilty of mutual
fraud, the court rules that the [respondent] and [petitioners] are in pari-
delicto. As a consequence of this, the court must leave them where they are
found. x x x.
"x x x. Why? Because the defendants ought to have known that they cannot
lease what does not belong to them for as a matter of fact, they themselves
34
are still applying for a lease of the same property under litigation from the
government.
"On the other hand, Florentino Teves, being fully aware that [petitioners
were] not yet the owner[s], had assumed the risks and under the principle
of VOLENTI NON FIT INJURIA NEQUES DOLUS - He who voluntarily assumes
a risk, does not suffer damage[s] thereby. As a consequence, when Teves
leased the fishpond area from [petitioners]- who were mere holders or
possessors thereof, he took the risk that it may turn out later that his
application for lease may not be approved.
"Unfortunately however, even granting that the lease of [petitioners] and
[their] application in 1972 were to be approved, still [they] could not
sublease the same. In view therefore of these, the parties must be left in the
same situation in which the court finds them, under the principle IN PARI
DELICTO NON ORITOR ACTIO, meaning[:] Where both are at fault, no one
can found a claim.
"On the third issue of whether the third party defendants are liable for
demolishing the dikes pursuant to a writ of execution issued by the lower
court[, t]his must be resolved in the negative, that the third party
defendants are not liable.l^vvphi1.net First, because the third party
defendants are mere agents of Eufracia Colongan and Eufenio Pamplona,
who are the ones who should be made liable if at all, and considering that
the demolition was pursuant to an order of the court to restore the
prevailing party in that Civil Case 510-T, entitled: Eufracia Colongan v.
Menchavez.
"After the court has ruled that the contract of lease is null and void ab-initio,
there is no right of the [respondent] to protect and therefore[,] there is no
basis for questioning the Sheriffs authority to demolish the dikes in order to
restore the prevailing party, under the principle VIDETUR NEMO QUISQUAM
ID CAPERE QUOD EI NECESSE EST ALII RESTITUERE - He will not be
considered as using force who exercise his rights and proceeds by the force
of law.
"WHEREFORE, in view of all foregoing [evidence] and considerations, this
court hereby renders judgment as follows:

"1. Dismissing the x x x complaint by the [respondent] against the
[petitioners];
"2. Dismissing the third party complaint against the third party defendants;
"3. Upholding the counterclaims of the third party defendants against the
[petitioners. The petitioners] are hereby required to pay third party
defendants the sum of P30,000.00 as moral damages for this clearly
unfounded suit;
"4. Requiring the [petitioners] to reimburse the third party defendants the
sum of P10,000.00 in the concept of attorneys fees and appearance fees
of P300.00 per appearance;
"5. Requiring the [petitioners] to pay to the third party defendants the sum
of P10,000.00 as exemplary damages probono publico and litigation
expenses including costs, in the sum of P5,000.00."10(Underscoring in the
original)
Respondent elevated the case to the Court of Appeals, where it was
docketed as CA-GR CV No. 51144.
Ruling of the Court of Appeals
The CA disagreed with the RTCs finding that petitioners and respondent
were in pari delicto. It contended that while there was negligence on the
part of respondent for failing to verify the ownership of the subject
property, there was no evidence that he had knowledge of petitioners lack
of ownership.11 It held as follows:
"x x x. Contrary to the findings of the lower court, it was not duly proven
and established that Teves had actual knowledge of the fact that
[petitioners] merely usurped the property they leased to him. What Teves
admitted was that he did not ask for any additional document other than
those shown to him, one of which was the fishpond application. In fact,
[Teves] consistently claimed that he did not bother to ask the latter for their
title to the property because he relied on their representation that they are
35
the lawful owners of the fishpond they are holding for lease. (TSN, July 11,
1991, pp. 8-11)"121awphi1.nt
The CA ruled that respondent could recover actual damages in the amount
of P128,074.40. Citing Article 135613of the Civil Code, it further awarded
liquidated damages in the amount of P50,000, notwithstanding the nullity of
the Contract.14
Hence, this Petition.15
The Issues
Petitioners raise the following issues for our consideration:
"1. The Court of Appeals disregarded the evidence, the law and
jurisprudence when it modified the trial courts decision when it
ruled in effect that the trial court erred in holding that the
respondent and petitioners are in pari delicto, and the courts must
leave them where they are found;
"2. The Court of Appeals disregarded the evidence, the law and
jurisprudence in modifying the decision of the trial court and ruled
in effect that the Regional Trial Court erred in dismissing the
respondents Complaint."16
The Courts Ruling
The Petition has merit.
Main Issue:
Were the Parties in Pari Delicto?
The Court shall discuss the two issues simultaneously.

In Pari Delicto Rule on Void Contracts
The parties do not dispute the finding of the trial and the appellate courts
that the Contract of Lease was void. 17Indeed, the RTC correctly held that it
was the State, not petitioners, that owned the fishpond. The 1987
Constitution specifically declares that all lands of the public domain,
waters, fisheries and other natural resources belong to the State.18 Included
here are fishponds, which may not be alienated but only
leased.19 Possession thereof, no matter how long, cannot ripen into
ownership.20
Being merely applicants for the lease of the fishponds, petitioners had no
transferable right over them. And even if the State were to grant their
application, the law expressly disallowed sublease of the fishponds to
respondent.21Void are all contracts in which the cause, object or purpose is
contrary to law, public order or public policy. 22
A void contract is equivalent to nothing; it produces no civil effect. 23 It does
not create, modify or extinguish a juridical relation.24 Parties to a void
agreement cannot expect the aid of the law; the courts leave them as they
are, because they are deemed in pari delicto or "in equal fault."25 To this
rule, however, there are exceptions that permit the return of that which
may have been given under a void contract. 26 One of the exceptions is found
in Article 1412 of the Civil Code, which states:
"Art. 1412. If the act in which the unlawful or forbidden cause consists does
not constitute a criminal offense, the following rules shall be observed:
"(1) When the fault is on the part of both contracting parties,
neither may recover what he has given by virtue of the contract, or
demand the performance of the others undertaking;
"(2) When only one of the contracting parties is at fault, he cannot
recover what he has given by reason of the contract, or ask for the
fulfillment of what has been promised him. The other, who is not at
fault, may demand the return of what he has given without any
obligation to comply with his promise."
36
On this premise, respondent contends that he can recover from petitioners,
because he is an innocent party to the Contract of Lease. 27 Petitioners
allegedly induced him to enter into it through serious misrepresentation.28
Finding of In Pari Delicto:
A Question of Fact
The issue of whether respondent was at fault or whether the parties were
in pari delicto is a question of fact not normally taken up in a petition for
review on certiorari under Rule 45 of the Rules of Court. 29 The present case,
however, falls under two recognized exceptions to this rule. 30 This Court is
compelled to review the facts, since the CAs factual findings are (1)
contrary to those of the trial court;31 and (2) premised on an absence of
evidence, a presumption that is contradicted by the evidence on record. 32
Unquestionably, petitioners leased out a property that did not belong to
them, one that they had no authority to sublease. The trial court correctly
observed that petitioners still had a pending lease application with the State
at the time they entered into the Contract with respondent. 33
Respondent, on the other hand, claims that petitioners misled him into
executing the Contract. 34 He insists that he relied on their assertions
regarding their ownership of the property. His own evidence, however,
rebuts his contention that he did not know that they lacked ownership. At
the very least, he had notice of their doubtful ownership of the fishpond.
Respondent himself admitted that he was aware that the petitioners lease
application for the fishpond had not yet been approved.35 Thus, he
knowingly entered into the Contract with the risk that the application might
be disapproved. Noteworthy is the fact that the existence of a fishpond
lease application necessarily contradicts a claim of ownership. That
respondent did not know of petitioners lack of ownership is therefore
incredible.
The evidence of respondent himself shows that he negotiated the lease of
the fishpond with both Juan Menchavez Sr. and Juan Menchavez Jr. in the

office of his lawyer, Atty. Jorge Esparagoza. 36 His counsels presence during
the negotiations, prior to the parties meeting of minds, further debunks his
claim of lack of knowledge. Lawyers are expected to know that fishponds
belong to the State and are inalienable. It was reasonably expected of the
counsel herein to advise his client regarding the matter of ownership.
Indeed, the evidence presented by respondent demonstrates the
contradictory claims of petitioners regarding their alleged ownership of the
fishpond. On the one hand, they claimed ownership and, on the other, they
assured him that their fishpond lease application would be approved. 37 This
circumstance should have been sufficient to place him on notice. It should
have compelled him to determine their right over the fishpond, including
their right to lease it.
The Contract itself stated that the area was still covered by a fishpond
application.38 Nonetheless, although petitioners declared in the Contract
that they co-owned the property, their erroneous declaration should not be
used against them. A cursory examination of the Contract suggests that it
was drafted to favor the lessee. It can readily be presumed that it was he or
his counsel who prepared it -- a matter supported by petitioners
evidence.39 The ambiguity should therefore be resolved against him, being
the one who primarily caused it. 40
The CA erred in finding that petitioners had failed to prove actual
knowledge of respondent of the ownership status of the property that had
been leased to him. On the contrary, as the party alleging the fact, it was he
who had the burden of proving through a preponderance of evidence 41 --
that they misled him regarding the ownership of the fishpond. His evidence
fails to support this contention. Instead, it reveals his fault in entering into a
void Contract. As both parties are equally at fault, neither may recover
against the other.42
Liquidated Damages Not Proper
The CA erred in awarding liquidated damages, notwithstanding its finding
that the Contract of Lease was void. Even if it was assumed that respondent
was entitled to reimbursement as provided under paragraph 1 of Article
37
1412 of the Civil Code, the award of liquidated damages was contrary to
established legal principles.1a\^/phi1.net
Liquidated damages are those agreed upon by the parties to a contract, to
be paid in case of a breach thereof. 43Liquidated damages are identical to
penalty insofar as legal results are concerned. 44 Intended to ensure the
performance of the principal obligation, such damages are accessory and
subsidiary obligations. 45 In the present case, it was stipulated that the party
responsible for the violation of the terms, conditions and warranties of the
Contract would pay not less than P50,000 as liquidated damages. Since the
principal obligation was void, there was no contract that could have been
breached by petitioners; thus, the stipulation on liquidated damages was
inexistent. The nullity of the principal obligation carried with it the nullity of
the accessory obligation of liquidated damages. 46
As explained earlier, the applicable law in the present factual milieu is
Article 1412 of the Civil Code. This law merely allows innocent parties to
recover what they have given without any obligation to comply with their
prestation. No damages may be recovered on the basis of a void contract;
being nonexistent, the agreement produces no juridical tie between the
parties involved. Since there is no contract, the injured party may only
recover through other sources of obligations such as a law or a quasi-
contract.47 A party recovering through these other sources of obligations
may not claim liquidated damages, which is an obligation arising from a
contract.
WHEREFORE, the Petition is GRANTED and the assailed Decision and
Resolution SET ASIDE. The Decision of the trial court is hereby REINSTATED.
No pronouncement as to costs.
SO ORDERED.
 38

MENCHAVEZ v. TEVES
26 January 2005
FACTS:
Menchavez and Tevesentered into a Contract of Lease for an area coveredfor a fishpond
application for a periodof five years. During this period, Cebu RTC sheriffsdemolishedthe
fishpond dikesconstructed by Teves. As a consequence, Teves filed for damageswith
application for preliminary attachment against Menchavez. InhisComplaint, he alleged
that the lessors had violated their Contract of Lease, specifically the provisionon peaceful
and adequate enjoyment of the property for the entire duration of the Contract.
Respondent further asserted thatthe lessors had withheldfrom him the findingsof the trial
court in Civil Case No.510-T, entitled"Eufracia Colongan and PaulinoPamplona v.Juan
Menchavez Sr. and Sevillana S.Menchavez." Inthat case involving the same property,
subject of the lease, the Menchavezspouseswere ordered to remove the dikes illegally
constructed and to pay damagesand attorney's fees.

ISSUE:
Whether or not Menchavez is liable for Teves for the sheriffs act of
demolishing the constructeddikes.

HELD:
No. A void contract is deemedlegally non-existent. It producesno legal effect. As a
general rule, courts leave parties to such a contract as they are, because
they are in pari delicto or equally at fault. Neither party is entitled to legal protection.

RATIO:
The defendants ought to have known that they cannot lease what does not belong to
them for as a matter of fact, they themselves are still applying for a lease ofthe same
property under litigation fromthe government. On the other hand, Florentino Teves, being
fully aware that petitioners were notyet the owners, had assumed the risks and under the
principle ofVOLENTINONFIT INJURIA NEQUES DOLUS He who voluntarily assumes a
risk, does not suffer damages thereby. As a consequence, when Teves leased the fishpond
area from petitionerswho were mere holders or possessors thereof, he took the riskthat
it may turn out later that hisapplication for lease maynot be approved.Unfortunately
however, even granting that the lease of petitionersand their applicationin 1972were to
be approved, still they could not sublease the same. In view therefore of these,the parties
must be left in the same situationin which the court finds them, under the principle INPARI
DELICTO NONORITOR ACTIO, meaning: Where both are at fault,no one can found a claim.

SECOND DIVISION
G.R. No. 132887. August 11, 2005
THE MANILA BANKING CORPORATION, Petitioners,
vs.
EDMUNDO S. SILVERIO and THE COURT OF APPEALS, Respondent.
DE CISION
CHICO-NAZARIO, J.:
Before the Court is a petition for review on certiorari of the Decision1 and
Resolution2 of the Court of Appeals reversing the dismissal by the Regional
Trial Court (RTC) of Makati City of the petition of private respondent for
cancellation of notice of levy on attachment and writ of attachment on two
(2) parcels of land located in Paraaque City.
The facts that gave rise to the present controversy are as follows:
Purificacion Ver was the registered owner of two parcels of land located at
La Huerta, Paraaque City, covered by Transfer Certificates of Title (TCTs)
No. 31444 (452448) and No. 45926 (452452) of the Registry of Deeds of
Paraaque City.3
On 16 April 1979, Purificacion Ver sold the properties to Ricardo C. Silverio,
Sr. (Ricardo, Sr.) for P1,036,475.00.4The absolute deed of sale evidencing
the transaction was not registered; hence, title remained with the seller,
Purificacion Ver.
On 22 February 1990, herein petitioner, The Manila Banking Corporation
(TMBC), filed a complaint with the RTC of Makati City for the collection of a
sum of money with application for the issuance of a writ of preliminary
attachment against Ricardo, Sr. and the Delta Motors Corporation docketed
as Civil Case No. 90-513.5 On 02 July 1990, by virtue of an Order of Branch
62 of the RTC of Makati City, notice of levy on attachment of real property
and writ of attachment were inscribed on TCTs No. 31444 (452448) and No.
39
45926 (452452).6 On 29 March 1993, the trial court rendered its Decision in
favor of TMBC and against Ricardo, Sr. and the Delta Motors
Corporation.7 The Decision was brought up to the Court of Appeals for
review.8
In the meantime, on 22 July 1993, herein private respondent, Edmundo S.
Silverio (Edmundo), the nephew 9 of judgment debtor Ricardo, Sr., requested
TMBC to have the annotations on the subject properties cancelled as the
properties were no longer owned by Ricardo, Sr. 10 This letter was referred
to the Bangko Sentral Ng Pilipinas, TMBCs statutory receiver. 11 No steps
were taken to have the annotations cancelled.12 Thus, on 17 December
1993, Edmundo filed in the RTC of Makati City a case for "Cancellation of
Notice of Levy on Attachment and Writ of Attachment on Transfer
Certificates of Title Nos. 452448 and 452452 of the Office of the Registrar of
Land Titles and Deeds of Paraaque, Metro Manila." In his petition,
Edmundo alleged that as early as 11 September 1989, the properties,
subject matter of the case, were already sold to him by Ricardo, Sr. As such,
these properties could not be levied upon on 02 July 1990 to answer for the
debt of Ricardo, Sr. who was no longer the owner thereof. In its Answer
with Compulsory Counterclaim, TMBC alleged, among other things, that the
sale in favor of Edmundo was void, therefore, the properties levied upon
were still owned by Ricardo, Sr., the debtor in Civil Case No. 90-513.
On 02 May 1995, after trial on the merits, the lower court rendered its
Decision dismissing Edmundos petition. TMBCs counterclaim was likewise
dismissed for lack of sufficient merit. The trial court held:
After a careful study of the facts proven in the instant case, the Court is
compelled to rule that the petitioner is not entitled to a cancellation of the
annotations/inscriptions of the notice of levy on attachment and writ of
attachment appearing on Transfer Certificates of Title Nos. 45228 31444
and (452452) 45926 of the Registry of Deeds of Paraaque, Metro Manila.
The Court is inclined to agree with the contention of oppositor that the
supposed deed of sale in favor of herein petitioner is fictitious and
simulated and thus void ab initio. The all-important factor that what
appears in the notarial register of the notary public, albeit in loose form, is
not a deed of sale but a mere affidavit of a different person Maria J.
Segismundo --, as shown in Exhibit 10-A, is sufficient to prove that no

effective, valid and legal sale of the properties in question was executed
between the Silverio uncle and nephew. There being no valid sale to him,
petitioner has no right at all to ask for the cancellation of the
aforementioned annotations.
WHEREFORE, the instant petition is hereby dismissed, with costs against
petitioner. Oppositors counterclaim is ordered dismissed for lack of
sufficient merit.13
The Court of Appeals, upon reviewing the case at the instance of Edmundo,
reversed and set aside the trial courts ruling. The dispositive portion of its
Decision reads:
WHEREFORE, foregoing considered, the appealed decision is hereby
REVERSED and SET-ASIDE. A new one is rendered ORDERING the Register of
Deeds of Paraaque City to cancel the Notice of Levy on Attachment and
the Writ of Attachment made on TCT Nos. 452448 and 452452.
Costs against oppositor-appellee.14
The motion for reconsideration filed by TMBC was denied for lack of merit
in a Resolution dated 25 February 1998. 15
Hence, the present petition, TMBC imputing upon the Court of Appeals
grave error in:
I.
. . . HOLDING THAT PETITIONER TMBC CANNOT QUESTION THE VALIDITY OF
THE SALE OF THE PROPERTIES COVERED BY TCT NO. 31444 (452448) AND
45926 (452452); UNDER ARTICLE 1421 OF THE CIVIL CODE, THE DEFENSE OF
NULLITY OF A CONTRACT IS AVAILABLE TO THIRD PERSONS WHOSE
INTERESTS ARE DIRECTLY AFFECTED.
40
II.
ORDERING THE CANCELLATION OF THE NOTICE OF LEVY ON
ATTACHMENT AND THE WRIT OF ATTACHMENT MADE ON TCT NO. 452448
AND 452452 SINCE AS AGAINST TWO (2) TRANSACTIONS CONCERNING THE
SAME LAND, THE REGISTERED TRANSACTION PREVAILS OVER THE ALLEGED
EARLIER UNREGISTERED RIGHT.
III.
FINDING THAT PETITIONER TMBC IS GUILTY OF BAD FAITH IN FAILING TO
MAKE INQUIRIES ON THE RIGHTS OF RICARDO SILVERIO, SR. OVER THE
SUBJECT PROPERTIES.
Basic is the rule that only properties belonging to the debtor can be
attached, and an attachment and sale of properties belonging to a third
party are void.16 At the pith of the controversy, therefore, is the issue of
ownership of the subject properties at the time of the levy thereof as the
right of petitioner TMBC, as creditor, depends on whether such properties
were still owned by its debtor, Ricardo, Sr., and not by Edmundo, who is
concededly not a debtor of TMBC. If the properties were validly transferred
to Edmundo before the levy thereof then cancellation of the annotation is in
order. If, however, the sale was absolutely simulated and was entered into
between uncle and nephew for the lone reason of removing the properties
from the reach of TMBC, then the annotation should stay.
The issue of whether the contract is simulated or real is factual in nature,
and the Court eschews factual examination in a petition for review under
Rule 45 of the Rules of Court. 17 This rule, however, is not without
exceptions, one of which is when there exists a conflict between the factual
findings of the trial court and of the appellate court, 18 as in the case at bar.
The trial court, in ruling that TMBC was well within its rights to cause the
levy of the properties through a writ of preliminary attachment, held that
the sale between Ricardo, Sr. and his nephew, Edmundo, ostensibly effected
before the levy of the subject properties, was void for being absolutely
simulated. The fictitious nature of the sale between the uncle and nephew,

according to the trial court, is made evident by the "all-important factor that
what appears in the notarial register of the notary public, albeit in loose
form, is not a deed of sale but a mere affidavit of a different person Maria
J. Segismundo -- as shown in Exhibit 10-A." The trial court thus concluded
that as the sale was void, the properties were still owned by Ricardo, Sr. at
the time the levy thereon was effected.
In reversing the trial court, the Court of Appeals reasoned, among other
things, that the sale between Ricardo, Sr. and Edmundo was not void and
that assuming it to be void, only the parties to the sale and/or their assigns
can impugn or assail its validity. Moreover, assailing the validity of a sale for
being in fraud of creditors is a remedy of last resort, i.e., accion pauliana can
be availed of only after the creditor has had exhausted all the properties of
the debtor not exempt from execution.19 In herein case, it does not appear
that TMBC sought other properties of Ricardo, Sr. other than the subject
properties alleged to have been transferred in fraud of creditors. Thus, as
the sale of the subject properties was not void, it rightfully transferred
ownership to Edmundo who is not a debtor of TMBC. Consequently, TMBC
could not legally attach the same under Section 5, Rule 57 of the Rules of
Civil Procedure.
The validity of the contract of sale being the focal point in the two courts
decision, we begin our analysis into the matter with two veritable
presumptions: first, that there was sufficient consideration of the
contract20 and, second, that it was the result of a fair and regular private
transaction.21 As we held in Suntay v. Court of Appeals,22 if shown to hold,
these presumptions infer prima facie the transactions validity, except that
it must yield to the evidence adduced.
Between the disparate positions of the trial court and the Court of Appeals,
we find those of the trial court to be more in accord with the evidence on
hand and the laws applicable thereto.
It will be noted that the Court of Appeals never justified its ruling that the
lower court erred in finding the subject sale was void. On the other hand,
the evidence is overwhelming that the sale dated 11 September 1989
between Ricardo Sr. and Edmundo was absolutely simulated and that it was
41
non-existent prior to its initial appearance on 22 July 1993 when the latter
wrote TMBC to cause the cancellation of its lien.
An absolutely simulated contract, under Article 1346 of the Civil Code, is
void.23 It takes place when the parties do not intend to be bound at
all.24 The characteristic of simulation is the fact that the apparent contract is
not really desired or intended to produce legal effects or in any way alter
the juridical situation of the parties.25 Thus, where a person, in order to
place his property beyond the reach of his creditors, simulates a transfer of
it to another, he does not really intend to divest himself of his title and
control of the property; hence, the deed of transfer is but a sham. 26 Lacking,
therefore, in a fictitious and simulated contract is consent which is essential
to a valid and enforceable contract. 27
In herein case, badges of fraud and simulation permeate the whole
transaction, thus, we cannot but refuse to give the sale validity and
legitimacy. Consider the following circumstances:
1) There is no proof that the said sale took place prior to the date of the
attachment. The notarized deed of sale, which would have served as the
best evidence of the transaction, did not materialize until 22 July 1993, or
three (3) years after TMBC caused the annotation of its lien on the titles
subject matter of the alleged sale. Mr. Jerry Tanchuan, Archivist 1 of the
Records Management of the Archives Office (RMAO), testified that the
procedure being followed with respect to notarized documents is that the
Records Section of the RTC will transmit to the RMAO copies in its
possession of the original documents notarized by a notary public together
with the Notarial Registry Book. 28 In herein case, the RTC did not transmit
any book of Atty. Anacleto T. Lacanilao, Jr., the notary public who allegedly
notarized the deed of sale between Ricardo, Sr. and Edmundo for the year
1989.29 Instead, what the RMAO was in possession of was only a loose leaf
entry form for "Document No. 444, Page 90, Book No. 17, Series of 1989"
which is an affidavit of one Maria J. Segismundo dated 11 September
1989.30 The RMAO did not have available in its file the particular deed of
sale acknowledged by Atty. Lacanilao as Document No. 444, Page 90, Book
No. 17, Series of 1989. 31 In Tala Realty Services Corporation v. Banco Filipino
Savings and Mortgage Bank,32 as reiterated in two other Tala cases,33 the
Court rejected a notarized deed that was not reported to the Clerk of Court

of the RTC by the notary public who notarized it. The Court held that this
fact militates against the use of the document as basis to uphold the
petitioners claim. The same is true in this case. The fact that the assailed
deed of sale is not one of those submitted by Atty. Lacanilao to the Clerk of
Court of the RTC of Makati City 34 renders it virtually worthless in the
absence of corroboration as to its due execution other than petitioner (now
private respondent) Edmundos self-serving statements. This being the case,
Edmundo could simply have presented the witnesses to the transaction (his
wife and his lawyer), Atty. Lacanilao or the seller himself, Ricardo Sr., to
testify as to the execution of the contract of sale on 11 September 1989.
This he did not do, thus lending more credence to the theory of TMBC that
the sale was entered into only as an afterthought, hatched to prevent the
transfer of the properties to TMBC after the latter had already annotated its
lien thereon.
2) Edmundo, to say the least, was very evasive when questioned regarding
details of the alleged sale. The deed of sale mentioned Three Million One
Hundred Nine Thousand and Four Hundred Twenty-Five pesos
(P3,109,425.00) as the contract price paid by hand during the execution of
the contract, yet, when asked on cross-examination, Edmundo could not
remember if he paid directly to Ricardo, Sr.35 Worse, he could not
remember where Ricardo, Sr. was at the time of the sale. 36 Thus:
Q: Now, Mr. Silverio, there is on page 2 marked as Exhibit "D-1" a signature
over the typewritten name Edmundo S. Silverio, will you please tell us
whose signature is that?
A. My signature.
Q. And again, there is a signature over the typewritten name Ricardo
Silverio, vendor, will you please tell us whose signature is that?
A: That is the signature of the seller.
Q: And why do you say or how did you know that this is the signature of
Ricardo Silverio?
42
A: Because the Deed of Absolute Sale was executed and signed infront of
me.37
...
Q: And Mr. Witness, at the time of the Deed of Sale on September 11, 1989,
was Ricardo Silverio in the country at that time?
A: I cannot give the exact presence of him. I cannot remember now.
Q: But at the time of the Deed of Sale on September 11, 1989, you know if
he was in the country or not?
A: I cannot remember.
Q: With respect to the consideration for the purchase of subject parcels of
land, what was the manner of payment for said consideration?
A: It is already mentioned in the Deed of Absolute Sale.
Q: In the deed of Absolute Sale there is mentioned made by hand, can you
explain that?
A: The Deed of Absolute Sale clearly specified already the payment on which
the payment was made.
Q: The Deed of Absolute Sale mentioned by hand, what does that mean
that you personally handed the payment to Mr. Silverio?
A: Payment was made to him.
Q: By hand you mean he was present?
A: When you said date, there was an exemption of payments made.
Q: But you gave the payment personally to Mr. Silverio?

A: I have to recall.
Q: So you cannot recall?
A: I cannot recall.38
If it were true that money indeed changed hands on 11 September 1989 as
evidenced by the assailed deed of sale, then, at the very least, Edmundo, as
buyer, would definitely not have forgotten personally handingP3,109,425.00
to the seller, Ricardo, Sr. It goes against ordinary human experience for a
person to simply forget the details of the day when he became poorer
by P3,109,425.00 cash. The only logical conclusion is that there was actually
no consideration for the said sale. Verily, a deed of sale in which the stated
consideration has not in fact been paid is a false contract that is void ab
initio.39 Likewise, "a contract of purchase and sale is null and void and
produces no effect whatsoever where it appears that [the] same is without
cause or consideration which should have been the motive thereof, or the
purchase price appears thereon as paid but which in fact has never been
paid by the purchaser to the vendor." 40
3) As correctly pointed out by TMBC, an indication of simulation of contract
is the complete absence of an attempt in any manner on the part of the
ostensible buyer to assert rights of ownership over the subject properties. In
herein case, Edmundo did not attempt to have the 1989 deed of sale
registered until 1993.41 He was not in possession of the properties.42 He did
not have a contract of lease with the actual occupant of the properties.43As
late as 1991, it was Ricardo, Sr. who was claiming to be the rightful owner of
the properties in connection with an ejectment case he filed against third
persons.44 When asked to explain why it was Ricardo, Sr. who was asserting
ownership over the properties, Edmundo lamely replied "because I am
asking him so."45
Taken together with the other circumstances surrounding the sale,
Edmundos failure to exercise acts of dominium over the subject properties
buttresses TMBCs position that the former did not at all intend to be bound
by the contract of sale. In Suntay,46 as reiterated in such cases as Santiago v.
Court of Appeals,47 Cruz v. Bancom Finance Corporation 48 and Ramos v. Heirs
of Ramos, Sr.,49 we held that "the most proturberant index of simulation is
43
the complete absence of an attempt in any manner on the part of the
[ostensible buyer] to assert his rights of ownership over the [properties] in
question." The supposed buyers failure to take exclusive possession of the
property allegedly sold or, in the alternative, to collect rentals, is contrary to
the principle of ownership. 50 Such failure is a clear badge of simulation that
renders the whole transaction void pursuant to Article 1409 of the Civil
Code.51
When a contract is void, the right to set-up its nullity or non-existence is
available to third persons whose interests are directly affected
thereby.52 The material interest of TMBC need not be belabored. Suffice it
to say that as judgment creditor of Ricardo, Sr., it has the right to protect its
lien acquired through a writ of preliminary attachment as security for the
satisfaction of any judgment in its favor.
The Court of Appeals, however, erroneously ruled that TMBC should first go
after the properties of its debtor, Ricardo, Sr., and, failing therein would be
the only time it will acquire a material interest over the subject properties,
thus:
Article 117 of the New Civil Code is very explicit that the right or remedy of
the creditor to impugn the acts which the debtor may have done to defraud
them is subsidiary in nature. It can only be availed of in the absence of any
other legal remedy to obtain reparation for the injury. Otherwise stated, the
right of accion pauliana can be availed of only AFTER the creditor have
exhausted all the properties of the debtor not exempt from executions.
This fact is not present in this case. Not a single proof was offered to show
that oppositor-appellee had exhausted all the properties of Ricardo Silverio
before it tried to question the validity of the contract of sale. In fact,
oppositor-appellee never alleged in its pleadings that it had exhausted all
the properties of Ricardo Silverio before it impugned the validity of the sale
made by Ricardo Silverio to petitioner-appellant.
This being the case, oppositor-appellee cannot and is not in the proper
position to question the validity of the sale of the subject properties by
Ricardo Silverio to petitioner-appellant. Oppositor-appellee has not shown
that it has the material interest to question the sale.53
 44

Contrary to the position taken by the Court of Appeals, TMBC need not look cancellation of the annotation of such lien for the reasons stated in his
farther than the subject properties to protect its rights. The remedy petition.
of accion pauliana is available when the subject matter is a conveyance,
otherwise valid undertaken in fraud of creditors. 54 Such a contract is WHEREFORE, premises considered, the Decision of the Court of Appeals
governed by the rules on rescission which prescribe, under Art. 1383 of the dated 17 October 1997 and its Resolution dated 25 February 1998 are
Civil Code, that such action can be instituted only when the party suffering hereby REVERSED and SET ASIDE. The Decision of the Regional Trial Court of
damage has no other legal means to obtain reparation for the same. The Makati City, Branch 145, dated 02 May 1995, is REINSTATED, dismissing the
contract of sale before us, albeit undertaken as well in fraud of creditors, is petition for Cancellation of Notice of Levy on Attachment and Writ of
not merely rescissible but is void ab initio for lack of consent of the parties Attachment on Transfer Certificates of Title No. 31444 (452448) and No.
to be bound thereby. A void or inexistent contract is one which has no force 45926 (452452) of the Registry of Deeds of Paraaque City. With costs.
and effect from the very beginning, as if it had never been entered into; it
produces no effect whatsoever either against or in favor of SO ORDERED.
anyone.55 Rescissible contracts, on the other hand, are not void ab
initio, and the principle, "quod nullum est nullum producit effectum," in void
and inexistent contracts is inapplicable. 56 Until set aside in an appropriate
action, rescissible contracts are respected as being legally valid, binding and
in force.57 Tolentino, a noted civilist, distinguished between these two types
of contracts entered into in fraud of creditors, thus:

Absolute simulation implies that there is no existing contract, no real act

executed; while fraudulent alienation means that there is a true and existing
transfer or contract. The former can be attacked by any creditor, including
one subsequent to the contract; while the latter can be assailed only by the
creditors before the alienation. In absolute simulation, the insolvency of the
debtor making the simulated transfer is not a prerequisite to the nullity of
the contract; while in fraudulent alienation, the action to rescind, or accion
pauliana, requires that the creditor cannot recover in any other manner
what is due him. Finally, the action to declare a contract absolutely
simulated does not prescribe (articles 1409 and 1410); while the accion
pauliana to rescind a fraudulent alienation prescribes in four years (article
1389).58

IN SUM, considering that an absolutely simulated contract is not a

recognized mode of acquiring ownership, 59 the levy of the subject
properties on 02 July 1990 pursuant to a writ of preliminary attachment
duly issued by the RTC in favor of TMBC and against its debtor, Ricardo, Sr.,
was validly made as the properties were invariably his. Consequently,
Edmundo, who has no legal interest in these properties, cannot cause the
 45

GRABE SORRY HINDI KO KINAYA HANAPIN YUNG 5TH CASE. SOBRA

SOBRAAAAANG LABO TALAGA AND HNDI KO MABASA SA PHONE. TULOG
KA NA NGAYON KAYA HNDI NAMAN KITA MAGISING HANAPIN KO
NALANG NA PAHABOL PAGKAGISING MO. LABYU

SECOND DIVISION
G.R. No. 119857 July 28, 2010
GOLDEN APPLE REALTY AND DEVELOPMENT CORPORATION AND
ROSVIBON REALTY CORPORATION, Petitioners,
vs.
SIERRA GRANDE REALTY CORPORATION, MANPHIL INVESTMENT
CORPORATION, RENAN V. SANTOS AND PATRICIO
MAMARIL, Respondents.
DE CISION
PERALTA, J.:
This is a petition for review1 on certiorari under Rule 45 of the Rules of Court
seeking to nullify and set aside the Decision2 of the Court of Appeals (CA)
dated January 23, 1995 and the Resolution 3 dated March 28, 1995 in CA-
G.R. CV No. 40961.
The antecedent facts are the following:
On December 1, 1981, Hayari Trading Corporation (Hayari), through a Loan
Agreement,4 borrowed from Manphil Investment Corporation (Manphil) the
amount of Two Million Five Hundred Thousand Pesos (P2,500,000.00) for
the benefit of Filipinas Textile Mills, Inc. (Filtex).
On the same date, Hayari President Yu Han Yat, Jr., his wife Terry Villanueva
Yu and the latter's uncle, Bernardino Villanueva, executed an Assumption of
Joint and Solidary Liability 5 for and in consideration of the loan granted to
Hayari, assuming joint and solidary liability with Hayari for the due and
punctual payment of all and/or any amortizations on the loan, as well as all
amounts payable to Manphil, in connection therewith and for the strict
performance and fulfillment of the obligation of Hayari.
In connection therewith, Valiant Realty and Development Corporation,
represented by its General Manager Bernardino Villanueva, and Sierra
46
Grande Realty Corporation (Sierra Grande), represented by Terry Villanueva
Yu, executed a Third Party Real Estate Mortgage 6 in favor of Manphil over a
parcel of land, otherwise known as the Roberts property.
Filtex also constituted a real estate mortgage over certain parcels of land
that it owned and also constituted a chattel mortgage over the machinery of
Hayari in order to secure payment of the loan.
Thereafter, Bernardino Villanueva suggested that the Roberts property be
subdivided to make it easier for Sierra Grande to sell the same. On June 22,
1985, as suggested, the Board of Directors of Sierra Grande, composed of
brothers and sisters Robert Villanueva, Daniel Villanueva, Terry Villanueva
Yu, Susan Villanueva and Eden Villanueva, passed a resolution7 authorizing
General Manager Bernardino Villanueva, brother of their deceased father,
to hire a geodetic engineer and cause the subdivision plan to be approved
by the Land Registration Commission, and to sell the subdivided lots after
approval of the subdivision plan, if found to be necessary and for which the
corporation may need to carry its purpose.
Eventually, on June 22, 1985, Bernardino Villanueva executed a Contract to
Sell 8 the Roberts property with Golden Apple Realty and Development, Inc.
(Golden Apple), majority of its stocks are owned by Elmer Tan, a first cousin
of the Villanueva brothers and sisters, and Rosvibon Realty Corporation
(Rosvibon), majority of its stocks are owned by Rosita So, another sister of
the father of the Villanueva brothers and sisters, for the amount
ofP441,032.00. The amount of P10,000.00 of the purchase price will have to
be paid to the vendor upon the signing of the contract and the balance to
be paid to the mortgagee Manphil, on or before October 31, 1987.
On June 29, 1985, the Roberts property was surveyed and subdivided into
four lots,9 subject to the approval of the subdivision plan.
On July 26, 1985, Sierra Grande, through Bernardino Villanueva, finally
executed a Deed of Sale 10 of Lots 1, 2 and 3, with a total land area of 1,402
square meters, to Golden Apple, for P382,080.00 and another Deed of
Sale 11 of Lot 4, with a total land area of 499 sq. m., to Rosvibon
for P119,760.00.

Meanwhile, Sierra Grande's Board, on August 29, 1985, passed a
resolution12 revoking the authority of Bernardo Villanueva to sell
the Roberts property. Hayari President Yu Han Yat, Jr., husband of Sierra
Grande director Terry Villanueva Yu, advised Manphil, through a
letter13 dated August 30, 1985, that all dealings with respect to its loan or
credit facility with Manphil shall be coursed through or effected with the
express knowledge, representation or consent of the President of Hayari.
Thereafter, a resolution14 notarized on September 3, 1985 was passed by
the directors of Sierra Grande revoking the authority previously granted to
Bernardino Villanueva to negotiate and contract the sale of the Roberts
property and any other property, in behalf of the corporation and place on
notice all prospective buyers or vendees not to negotiate or contract with
any party other than the duly authorized officer or officers of the
corporation who are expressly empowered to enter into such transaction
and who can exhibit a formal board resolution duly certified by the board
secretary and signed by the majority of the board of directors who are also
the majority stockholders representing at least 2/3 of the capital stock .
Nevertheless, on September 16, 1985, Elmer Tan, on behalf of the buyer
corporations, paid to Manphil for Hayari's account an amortization
of P57,819.72, for the principal sum due on July 27, 1985; P42,192.30, for
Int.-CBP; P27,329.05, for interest; and P3,423.40, as penalties. 15
Sometime in January 1986, Sierra Grande learned that Bernardino
Villanueva16 tried to secure the duplicate original title 17 of the subject parcel
of land from Manphil claiming to be the President of Hayari. As a result, on
November 20, 1986, Sierra Grande, through Susan Villanueva Tan, the
Corporate Secretary, wrote 18 Manphil stating that Bernardino Villanueva
was not in any way connected officially with Sierra Grande and was not
authorized to deal in any way with the Roberts property nor borrow the
transfer certificate title to the same property. Susan Tan also wrote 19 the
Bangko Sentral ng Pilipinas (BSP), as the subject property was already on
receivership, informing the latter of the following: that Hayari had not made
any request to borrow any duplicate original title; that Bernardino
Villanueva was not connected in any way with Hayari; that Bernardino
Villanueva had no authority to borrow any duplicate original title; and that
whatever authorization Bernardo Villanueva had in dealing with the Roberts
property had been withdrawn and abrogated under a board resolution. The
47
letter also requested that even if payments were made on the loan of
Hayari by a third party, the subject duplicate original title must not be
released without the express consent of Hayari.
Later, on August 15, 1988, Terry Villanueva Yu, the President of Sierra
Grande at that time, informed20 Manphil that Bernardino Villanueva and
Elmer Tan had attempted to pre-terminate Hayari's loan in order to obtain
the duplicate original title of the subject lot. It was also mentioned in the
letter that Hayari may opt to pre-terminate the loan itself and be
subrogated in the right of action against Bernardino Villanueva.
However, on October 20, 1988, Manphil allowed Elmer Tan to pre-
terminate Hayari's obligation after making total payments to Manphil in the
amount of P3,134,921.00.21
Hence, Golden Apple and Rosvibon, on November 28, 1988, filed with the
Regional Trial Court of Pasay City, a Complaint22 against Sierra Grande and
Manphil for specific performance and damages.
On February 27, 1991, the trial court rendered its Decision,23 the dispositive
portion of which reads:
WHEREFORE, the Court hereby renders judgment for the plaintiffs and
against the defendants, ordering,
1) all defendants to surrender and deliver to plaintiffs corporations
the owner's duplicate copy of TCT No. 19801 of the Registry of
Deeds for Pasay City;
2) defendants Sierra Grande to pay plaintiffs the sums of P50,000.00
by way of moral and exemplary damages, respectively;
3) defendant Sierra Grande to pay plaintiffs the sum of P50,000.00
as and for attorney's fees and costs of suit.
The Counterclaim is hereby DISMISSED.

SO ORDERED.
On April 3, 1991, Sierra Grande filed a Motion for Reconsideration24 of the
decision, which was eventually denied by the trial court. 25
The respondents herein filed their appeal with the CA, which reversed the
decision of the trial court in its Decision 26 dated January 23, 1995. The
dispositive portion of the said Decision reads as follows:
WHEREFORE, the Court REVERSES the appealed decision. We DISMISS the
plaintiffs' complaint and on defendant Sierra Grande's counterclaim, we
SENTENCE plaintiffs to pay defendant Sierra Grande P20,000.00, as
attorney's fees and costs.
SO ORDERED.
The Motion for Reconsideration 27 dated February 3, 1995 filed by herein
petitioners was later on denied by the CA. 28 Thus, the present petition.
Petitioners raised the following assignment of errors:
ASSIGNMENT OF ERRORS
The respondent Court of Appeals grievously erred in:
4.1 invalidating the Deeds of Absolute Sale between "Golden Apple"
and "Rosvibon," as vendees, and "Sierra Grande," as vendor, on the
primordial premise that "badges of fraud" attended their execution;
4.2 applying Article 1602 of the Civil Code to the case at bar;
4.3 overextending Article 1602 of the Civil Code to include lack of
capacity, notarial infirmity, and conflict of interest to the concept of
"badges of fraud";
4.4 invalidating the contracts on the ground of insufficiency of
consideration;
48
4.5 invalidating the contracts on the ground of lack of legal
personality of vendee "Rosvibon Realty";
4.6 invalidating the contracts on the ground of irregularity in its
execution and in concluding that the deeds of sale were ante-dated;
4.7 invalidating the contracts on the ground of conflict of interest;
and finally
4.8 disallowing damages awarded by the trial court to the
petitioners.
The petition is unmeritorious.
In reversing the decision of the trial court, the CA, in a short and succinct
manner, made factual conclusions that necessitated its finding that the
contracts in question were invalid.
The said ruling of the CA is contrary to the factual findings of the trial court.
In Guillang v. Bedania,29 this Court reiterated that it is not a trier of facts,
but certain exceptions apply, thus:
The principle is well-established that this Court is not a trier of facts.
Therefore, in an appeal by certiorari under Rule 45 of the Rules of Court,
only questions of law may be raised.1avvphi1 The resolution of factual
issues is the function of the lower courts whose findings on these matters
are received with respect and are, as a rule, binding on this Court. 30
However, this rule is subject to certain exceptions. One of these is when the
findings of the appellate court are contrary to those of the trial
court.31 Findings of fact of the trial court and the Court of Appeals may also
be set aside when such findings are not supported by the evidence or where
the lower courts' conclusions are based on a misapprehension of facts. 32
Obviously, the contrary findings of the trial court and the CA leave this Court
with no other alternative but to re-examine some of the facts raised in the
present petition.

Petitioners claim that the CA misused the term badges of fraud in reaching
its decision. According to them, Article 1602, upon which the term badges
of fraud refers to, is not applicable, because the said article refers to a sale
with a right to repurchase, whereas the subject invalidated contracts were
absolute sales. They cited a case 33where this Court pronounced that, badges
of fraud is a circumstance in Article 1602 of the Civil Code, which, if present
in any given transaction, gives rise to the presumption that it is not a sale
but an equitable mortgage. Thus, according to petitioners, the CA confused
Article 1602 (1) with that of Article 1470, 34 because both articles deal with
sale in general and have inadequacy of price as subject matter. Either way,
they argue, the inadequacy of the price does not result in the cancellation
or invalidation of contracts.
However, the above argument of petitioners is speculative. A close reading
of the CA Decision would reveal that the said court used the phrase badges
of fraud to refer to certain fraudulent acts that attended the execution of
the Contract to Sell and the Deeds of Absolute Sale which would eventually
tend to prove that the same transactions were indeed suspicious as the said
contracts were antedated, simulated and fraudulent. The said findings were
pointed out by the CA in this manner:
We declare the contracts invalid.
We find that there were badges of fraud showing that the contracts were
simulated and fraudulent.
First, one of the vendees, Rosvibon, was incorporated only on July 8, 1985
(Exhibit "17-A"). Thus, at the time the Contract to Sell was executed,
Rosvibon Realty Corporation had no legal personality to purchase the
property.
Second, the deeds of absolute sale were executed irregularly. The notarial
acknowledgment did not indicate the residence certificates of the vendees
which were in fact obtained subsequent to the date of notarization. This is
an anomaly which shows that the deeds of sale were ante-dated to beat the
resolution revoking the vendor's authority to sell.
49
Third, there was no sufficient consideration paid for the property involved
and, worse, was attended with fraudulent conflict of interest because the
vendor, Bernardino Villanueva, was a stockholder of the buyer
corporations.35
This then refutes the whole discussion of petitioners as to the misuse or
misappreciation of the applicable laws by the CA in arriving at its judgment.
Again, an examination of the CAs Decision shows that the phrase did not
refer to any particular provision of a law, hence, the general and ordinary
meaning of the phrase prevails. In the same manner, this Court, in
numerous cases36 concerning various subjects, has used the same phrase in
its rulings referring to the said phrase's general and ordinary meaning.
Petitioners also contend that whether or not one of the vendee
corporations is not yet in existence at the time the Contract to Sell was
executed cannot be directly questioned by any party to a suit as the
existence of a corporation may only be attacked by the Government
through the Solicitor General in a quo warranto proceeding called for the
purpose and not by a collateral attack whereby the corporate existence is
questioned in some incidental proceedings not provided by law for the
express purpose of attacking the corporate existence.
That particular line of argument is an over-stretch. It is undisputed that
petitioner Rosvibon had no legal personality at the time of the execution of
the Contract to Sell. As stated by the petitioners themselves in their
petition:
x x x It is worthy to note at this juncture, that while it may be true that one
of the vendees corporation, Rosvibon, does not have the personality to
enter into a Contract to Sell on June 22, 1985, as it was only incorporated
on July 8, 1985, it cannot be said that said corporation does not have the
personality to enter into the Contract of Sale as the said contract was
executed on 26 July 1985. 37
It bears to stress, however, that the CA did not pass upon the corporate
personality of Rosvibon nor did it declare the same corporation's franchise
invalid. Thus, there is no need for a quo warranto proceeding as claimed by
petitioners. The CA merely made the finding which is undisputed by the

petitioners that Rosbivon had no legal personality at the time of the
execution of the Contract to Sell. According to the CA, because of Rosbivon's
lack of personality at the time of the execution of the Contract to Sell, its
presence as a party to the same transaction is taken as another indication
that fraud was indeed attendant. This is one of the situations included, and
comprising the phrase badges of fraud.
As to the contention of petitioners that the CA erred in invalidating the
contracts on the ground of notarial infirmity and concluding that they were
ante-dated, this Court finds the said argument devoid of any merit.
Petitioners claim that, since the representative of the corporation appeared
before the Notary Public, the acknowledgment was complied with, even if
they admitted that the representatives of the corporations which executed
the Deeds of Absolute Sale did not present their residence certificates nor
indicate the number, date and place of issue of the same residence
certificates in the acknowledgment. As shown in the records and in the
testimony of the Notary Public, Atty. Melanio L. Zoreta, the requirement of
the presentation of the residence certificate was missing. Thus, as testified:
On Cross-examination:
Atty. Alindato
Q: But you are sure, of course, that this document was completed in its
form without any additional data to be filled up, Mr. Witness, except your
signature and the date and the document number, and the page number,
etc. And of course, the dry seal?
A: I could remember, sir, that it took upon me to see that the residence
certificate of the corporation being represented by Mrs. Rosita So and Elmer
Tan did not have the residence certificate.
But upon the assurance of Mr. Bernardino Villanueva that they will just put
it afterwards, I notarized it because as far as I am concerned, as a notary
public, as long as I know the persons who appeared before me and they
50
have so identified themselves the company or entity that they are
representing would be of legal ground already.
Q: So you are changing your previous answer that this document was
represented to you was already complete when you said that in your latest
answer that there were numbers of residence certificate which are lacking?
A: Actually, I am changing my answer but you asked again for me for the
second time. That is why I took note that the residence certificate of the
two corporations were not yet then typewritten or given by the parties
involved.38
The CA then had a basis in concluding the defect in the notarial requirement
of the transaction. The pertinent provisions of the Notarial Law 39 applicable
at that time provides:
Sec. 251. Requirement as to notation of payment of cedula tax Every
contract, deed, or other document acknowledged before a notary public
shall have certified thereon that the parties thereto have presented their
proper cedula certificates or are exempt from the cedula tax, and these shall
be entered by the notary public as a part of such certification, the number,
the place of issues, and date of each cedula certificate as aforesaid.
Another issue raised by petitioners is that the CA erred in voiding the
contracts on the ground of insufficiency of consideration or price, because
the claim of inadequacy of price must be proven and that the respondents
belatedly questioned the contracts' validity. They further claim that the
consideration was substantial and adequate.
It must be noted that the property in question, subject of the Contract to
Sell for the sum of P441,032.00, is a land with a contained area of, more or
less, One Thousand Nine Hundred and One (1,901) sq. m. with a two-storey
residential building located in Pasay City. In claiming that the said price of
the property is not inadequate, petitioners stated that the payment of
Elmer Tan to pre-terminate Hayari's obligation amounting to Three Million
One Hundred Thirty-Four Thousand Nine Hundred Twenty-One Pesos
(P3,134,921.00) as part of the consideration paid for the property should be
 51

included. However, as correctly argued by respondent Sierra Grande, the Resolution dated March 28, 1995, of the Court of Appeals, are hereby
amortizations paid by Elmer Tan to Manphil was for a loan incurred by AFFIRMED.
Hayari and not by respondent Sierra Grande; thus, any payment of the
amortizations on the loan of Hayari cannot be considered as part of the SO ORDERED.
consideration for the sale of the land owned by respondent Sierra Grande. It
is then safe to declare that respondent Sierra Grande did not benefit from
the loan or from its pre-termination. Moreover, the records are bereft of
any evidence to support the claim of petitioners that the sum of money paid
by Elmer Tan, on behalf of Hayari, was part of the consideration for the
same property. What only appears is that the only consideration paid for
the sale of the Roberts property was the sum contained in the Contract to
Sell, which was P441,032.00 which, considering the size 40 and location41 of
the property, is inadequate. What prompted Elmer Tan to pay the total
amount of P3,134,921.00 cannot be gleaned from the records, except that it
was for the loan incurred by Hayari, which is an independent juridical entity,
separate and distinct from Sierra Grande. Hence, the CA did not commit any
error in declaring that there was an insufficiency of consideration or price as
the same is shown on the very face of the Contract to Sell.

Anent the contention of petitioners that inadequacy of price does not

invalidate a contract, the said rule is not without an exception. As provided
in the Civil Code:

Art. 1355. Except in cases specified by law, lesion or inadequacy of cause

shall not invalidate a contract, unless there has been fraud, mistake or
undue influence.

The CA was clear as to its main reason for invalidating the contracts in
question there was fraud. The inadequacy of price was merely one of the
circumstances upon which the CA was able to find the existence of fraud
and not the main cause for the invalidation of the subject contracts.

All the other sub-issues raised by petitioners are rendered inconsequential

by the above disquisitions of this Court.

WHEREFORE, the petition for review on certiorari dated May 3, 1995

is DENIED. Consequently, the Decision dated January 23, 1995 and the