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G.R. No.

146364 June 3, 2004

COLITO T. PAJUYO, petitioner,


vs.
COURT OF APPEALS and EDDIE GUEVARRA, respondents.

DECISION

CARPIO, J.:

The Case

Before us is a petition for review1 of the 21 June 2000 Decision2 and 14 December 2000 Resolution
of the Court of Appeals in CA-G.R. SP No. 43129. The Court of Appeals set aside the 11 November
1996 decision3 of the Regional Trial Court of Quezon City, Branch 81,4 affirming the 15 December
1995 decision5 of the Metropolitan Trial Court of Quezon City, Branch 31.6

The Antecedents

In June 1979, petitioner Colito T. Pajuyo ("Pajuyo") paid ₱400 to a certain Pedro Perez for the rights
over a 250-square meter lot in Barrio Payatas, Quezon City. Pajuyo then constructed a house made
of light materials on the lot. Pajuyo and his family lived in the house from 1979 to 7 December 1985.

On 8 December 1985, Pajuyo and private respondent Eddie Guevarra ("Guevarra") executed
a Kasunduan or agreement. Pajuyo, as owner of the house, allowed Guevarra to live in the house
for free provided Guevarra would maintain the cleanliness and orderliness of the house. Guevarra
promised that he would voluntarily vacate the premises on Pajuyo’s demand.

In September 1994, Pajuyo informed Guevarra of his need of the house and demanded that
Guevarra vacate the house. Guevarra refused.

Pajuyo filed an ejectment case against Guevarra with the Metropolitan Trial Court of Quezon City,
Branch 31 ("MTC").

In his Answer, Guevarra claimed that Pajuyo had no valid title or right of possession over the lot
where the house stands because the lot is within the 150 hectares set aside by Proclamation No.
137 for socialized housing. Guevarra pointed out that from December 1985 to September 1994,
Pajuyo did not show up or communicate with him. Guevarra insisted that neither he nor Pajuyo has
valid title to the lot.

On 15 December 1995, the MTC rendered its decision in favor of Pajuyo. The dispositive portion of
the MTC decision reads:

WHEREFORE, premises considered, judgment is hereby rendered for the plaintiff and
against defendant, ordering the latter to:

A) vacate the house and lot occupied by the defendant or any other person or
persons claiming any right under him;

B) pay unto plaintiff the sum of THREE HUNDRED PESOS (₱300.00) monthly as
reasonable compensation for the use of the premises starting from the last demand;
C) pay plaintiff the sum of ₱3,000.00 as and by way of attorney’s fees; and

D) pay the cost of suit.

SO ORDERED.7

Aggrieved, Guevarra appealed to the Regional Trial Court of Quezon City, Branch 81 ("RTC").

On 11 November 1996, the RTC affirmed the MTC decision. The dispositive portion of the RTC
decision reads:

WHEREFORE, premises considered, the Court finds no reversible error in the decision
appealed from, being in accord with the law and evidence presented, and the same is hereby
affirmed en toto.

SO ORDERED.8

Guevarra received the RTC decision on 29 November 1996. Guevarra had only until 14 December
1996 to file his appeal with the Court of Appeals. Instead of filing his appeal with the Court of
Appeals, Guevarra filed with the Supreme Court a "Motion for Extension of Time to File Appeal by
Certiorari Based on Rule 42" ("motion for extension"). Guevarra theorized that his appeal raised pure
questions of law. The Receiving Clerk of the Supreme Court received the motion for extension on 13
December 1996 or one day before the right to appeal expired.

On 3 January 1997, Guevarra filed his petition for review with the Supreme Court.

On 8 January 1997, the First Division of the Supreme Court issued a Resolution9 referring the motion
for extension to the Court of Appeals which has concurrent jurisdiction over the case. The case
presented no special and important matter for the Supreme Court to take cognizance of at the first
instance.

On 28 January 1997, the Thirteenth Division of the Court of Appeals issued a Resolution10 granting
the motion for extension conditioned on the timeliness of the filing of the motion.

On 27 February 1997, the Court of Appeals ordered Pajuyo to comment on Guevara’s petition for
review. On 11 April 1997, Pajuyo filed his Comment.

On 21 June 2000, the Court of Appeals issued its decision reversing the RTC decision. The
dispositive portion of the decision reads:

WHEREFORE, premises considered, the assailed Decision of the court a quo in Civil Case
No. Q-96-26943 is REVERSED and SET ASIDE; and it is hereby declared that the ejectment
case filed against defendant-appellant is without factual and legal basis.

SO ORDERED.11

Pajuyo filed a motion for reconsideration of the decision. Pajuyo pointed out that the Court of
Appeals should have dismissed outright Guevarra’s petition for review because it was filed out of
time. Moreover, it was Guevarra’s counsel and not Guevarra who signed the certification against
forum-shopping.
On 14 December 2000, the Court of Appeals issued a resolution denying Pajuyo’s motion for
reconsideration. The dispositive portion of the resolution reads:

WHEREFORE, for lack of merit, the motion for reconsideration is hereby DENIED. No costs.

SO ORDERED.12

The Ruling of the MTC

The MTC ruled that the subject of the agreement between Pajuyo and Guevarra is the house and
not the lot. Pajuyo is the owner of the house, and he allowed Guevarra to use the house only by
tolerance. Thus, Guevarra’s refusal to vacate the house on Pajuyo’s demand made Guevarra’s
continued possession of the house illegal.

The Ruling of the RTC

The RTC upheld the Kasunduan, which established the landlord and tenant relationship between
Pajuyo and Guevarra. The terms of the Kasunduan bound Guevarra to return possession of the
house on demand.

The RTC rejected Guevarra’s claim of a better right under Proclamation No. 137, the Revised
National Government Center Housing Project Code of Policies and other pertinent laws. In an
ejectment suit, the RTC has no power to decide Guevarra’s rights under these laws. The RTC
declared that in an ejectment case, the only issue for resolution is material or physical possession,
not ownership.

The Ruling of the Court of Appeals

The Court of Appeals declared that Pajuyo and Guevarra are squatters. Pajuyo and Guevarra
illegally occupied the contested lot which the government owned.

Perez, the person from whom Pajuyo acquired his rights, was also a squatter. Perez had no right or
title over the lot because it is public land. The assignment of rights between Perez and Pajuyo, and
the Kasunduan between Pajuyo and Guevarra, did not have any legal effect. Pajuyo and Guevarra
are in pari delicto or in equal fault. The court will leave them where they are.

The Court of Appeals reversed the MTC and RTC rulings, which held that the Kasunduan between
Pajuyo and Guevarra created a legal tie akin to that of a landlord and tenant relationship. The Court
of Appeals ruled that the Kasunduan is not a lease contract but a commodatum because the
agreement is not for a price certain.

Since Pajuyo admitted that he resurfaced only in 1994 to claim the property, the appellate court held
that Guevarra has a better right over the property under Proclamation No. 137. President Corazon
C. Aquino ("President Aquino") issued Proclamation No. 137 on 7 September 1987. At that time,
Guevarra was in physical possession of the property. Under Article VI of the Code of Policies
Beneficiary Selection and Disposition of Homelots and Structures in the National Housing Project
("the Code"), the actual occupant or caretaker of the lot shall have first priority as beneficiary of the
project. The Court of Appeals concluded that Guevarra is first in the hierarchy of priority.

In denying Pajuyo’s motion for reconsideration, the appellate court debunked Pajuyo’s claim that
Guevarra filed his motion for extension beyond the period to appeal.
The Court of Appeals pointed out that Guevarra’s motion for extension filed before the Supreme
Court was stamped "13 December 1996 at 4:09 PM" by the Supreme Court’s Receiving Clerk. The
Court of Appeals concluded that the motion for extension bore a date, contrary to Pajuyo’s claim that
the motion for extension was undated. Guevarra filed the motion for extension on time on 13
December 1996 since he filed the motion one day before the expiration of the reglementary period
on 14 December 1996. Thus, the motion for extension properly complied with the condition imposed
by the Court of Appeals in its 28 January 1997 Resolution. The Court of Appeals explained that the
thirty-day extension to file the petition for review was deemed granted because of such compliance.

The Court of Appeals rejected Pajuyo’s argument that the appellate court should have dismissed the
petition for review because it was Guevarra’s counsel and not Guevarra who signed the certification
against forum-shopping. The Court of Appeals pointed out that Pajuyo did not raise this issue in his
Comment. The Court of Appeals held that Pajuyo could not now seek the dismissal of the case after
he had extensively argued on the merits of the case. This technicality, the appellate court opined,
was clearly an afterthought.

The Issues

Pajuyo raises the following issues for resolution:

WHETHER THE COURT OF APPEALS ERRED OR ABUSED ITS AUTHORITY AND


DISCRETION TANTAMOUNT TO LACK OF JURISDICTION:

1) in GRANTING, instead of denying, Private Respondent’s Motion for an Extension


of thirty days to file petition for review at the time when there was no more period to
extend as the decision of the Regional Trial Court had already become final and
executory.

2) in giving due course, instead of dismissing, private respondent’s Petition for


Review even though the certification against forum-shopping was signed only by
counsel instead of by petitioner himself.

3) in ruling that the Kasunduan voluntarily entered into by the parties was in fact
a commodatum, instead of a Contract of Lease as found by the Metropolitan Trial
Court and in holding that "the ejectment case filed against defendant-appellant is
without legal and factual basis".

4) in reversing and setting aside the Decision of the Regional Trial Court in Civil
Case No. Q-96-26943 and in holding that the parties are in pari delicto being both
squatters, therefore, illegal occupants of the contested parcel of land.

5) in deciding the unlawful detainer case based on the so-called Code of Policies of
the National Government Center Housing Project instead of deciding the same under
the Kasunduan voluntarily executed by the parties, the terms and conditions of which
are the laws between themselves.13

The Ruling of the Court

The procedural issues Pajuyo is raising are baseless. However, we find merit in the substantive
issues Pajuyo is submitting for resolution.
Procedural Issues

Pajuyo insists that the Court of Appeals should have dismissed outright Guevarra’s petition for
review because the RTC decision had already become final and executory when the appellate court
acted on Guevarra’s motion for extension to file the petition. Pajuyo points out that Guevarra had
only one day before the expiry of his period to appeal the RTC decision. Instead of filing the petition
for review with the Court of Appeals, Guevarra filed with this Court an undated motion for extension
of 30 days to file a petition for review. This Court merely referred the motion to the Court of Appeals.
Pajuyo believes that the filing of the motion for extension with this Court did not toll the running of the
period to perfect the appeal. Hence, when the Court of Appeals received the motion, the period to
appeal had already expired.

We are not persuaded.

Decisions of the regional trial courts in the exercise of their appellate jurisdiction are appealable to
the Court of Appeals by petition for review in cases involving questions of fact or mixed questions of
fact and law.14 Decisions of the regional trial courts involving pure questions of law are appealable
directly to this Court by petition for review.15These modes of appeal are now embodied in Section 2,
Rule 41 of the 1997 Rules of Civil Procedure.

Guevarra believed that his appeal of the RTC decision involved only questions of law. Guevarra thus
filed his motion for extension to file petition for review before this Court on 14 December 1996. On 3
January 1997, Guevarra then filed his petition for review with this Court. A perusal of Guevarra’s
petition for review gives the impression that the issues he raised were pure questions of law. There
is a question of law when the doubt or difference is on what the law is on a certain state of
facts.16 There is a question of fact when the doubt or difference is on the truth or falsity of the facts
alleged.17

In his petition for review before this Court, Guevarra no longer disputed the facts. Guevarra’s petition
for review raised these questions: (1) Do ejectment cases pertain only to possession of a structure,
and not the lot on which the structure stands? (2) Does a suit by a squatter against a fellow squatter
constitute a valid case for ejectment? (3) Should a Presidential Proclamation governing the lot on
which a squatter’s structure stands be considered in an ejectment suit filed by the owner of the
structure?

These questions call for the evaluation of the rights of the parties under the law on ejectment and the
Presidential Proclamation. At first glance, the questions Guevarra raised appeared purely legal.
However, some factual questions still have to be resolved because they have a bearing on the legal
questions raised in the petition for review. These factual matters refer to the metes and bounds of
the disputed property and the application of Guevarra as beneficiary of Proclamation No. 137.

The Court of Appeals has the power to grant an extension of time to file a petition for review.
In Lacsamana v. Second Special Cases Division of the Intermediate Appellate Court,18 we
declared that the Court of Appeals could grant extension of time in appeals by petition for review.
In Liboro v. Court of Appeals,19 we clarified that the prohibition against granting an extension of
time applies only in a case where ordinary appeal is perfected by a mere notice of appeal. The
prohibition does not apply in a petition for review where the pleading needs verification. A petition for
review, unlike an ordinary appeal, requires preparation and research to present a persuasive
position.20The drafting of the petition for review entails more time and effort than filing a notice of
appeal.21 Hence, the Court of Appeals may allow an extension of time to file a petition for review.
In the more recent case of Commissioner of Internal Revenue v. Court of Appeals,22 we held
that Liboro’sclarification of Lacsamana is consistent with the Revised Internal Rules of the Court of
Appeals and Supreme Court Circular No. 1-91. They all allow an extension of time for filing petitions
for review with the Court of Appeals. The extension, however, should be limited to only fifteen days
save in exceptionally meritorious cases where the Court of Appeals may grant a longer period.

A judgment becomes "final and executory" by operation of law. Finality of judgment becomes a fact
on the lapse of the reglementary period to appeal if no appeal is perfected.23 The RTC decision could
not have gained finality because the Court of Appeals granted the 30-day extension to Guevarra.

The Court of Appeals did not commit grave abuse of discretion when it approved Guevarra’s motion
for extension. The Court of Appeals gave due course to the motion for extension because it
complied with the condition set by the appellate court in its resolution dated 28 January 1997. The
resolution stated that the Court of Appeals would only give due course to the motion for extension if
filed on time. The motion for extension met this condition.

The material dates to consider in determining the timeliness of the filing of the motion for extension
are (1) the date of receipt of the judgment or final order or resolution subject of the petition, and (2)
the date of filing of the motion for extension.24 It is the date of the filing of the motion or pleading, and
not the date of execution, that determines the timeliness of the filing of that motion or pleading. Thus,
even if the motion for extension bears no date, the date of filing stamped on it is the reckoning point
for determining the timeliness of its filing.

Guevarra had until 14 December 1996 to file an appeal from the RTC decision. Guevarra filed his
motion for extension before this Court on 13 December 1996, the date stamped by this Court’s
Receiving Clerk on the motion for extension. Clearly, Guevarra filed the motion for extension exactly
one day before the lapse of the reglementary period to appeal.

Assuming that the Court of Appeals should have dismissed Guevarra’s appeal on technical grounds,
Pajuyo did not ask the appellate court to deny the motion for extension and dismiss the petition for
review at the earliest opportunity. Instead, Pajuyo vigorously discussed the merits of the case. It was
only when the Court of Appeals ruled in Guevarra’s favor that Pajuyo raised the procedural issues
against Guevarra’s petition for review.

A party who, after voluntarily submitting a dispute for resolution, receives an adverse decision on the
merits, is estopped from attacking the jurisdiction of the court.25 Estoppel sets in not because the
judgment of the court is a valid and conclusive adjudication, but because the practice of attacking
the court’s jurisdiction after voluntarily submitting to it is against public policy.26

In his Comment before the Court of Appeals, Pajuyo also failed to discuss Guevarra’s failure to sign
the certification against forum shopping. Instead, Pajuyo harped on Guevarra’s counsel signing the
verification, claiming that the counsel’s verification is insufficient since it is based only on "mere
information."

A party’s failure to sign the certification against forum shopping is different from the party’s failure to
sign personally the verification. The certificate of non-forum shopping must be signed by the party,
and not by counsel.27 The certification of counsel renders the petition defective.28

On the other hand, the requirement on verification of a pleading is a formal and not a jurisdictional
requisite.29 It is intended simply to secure an assurance that what are alleged in the pleading are true
and correct and not the product of the imagination or a matter of speculation, and that the pleading is
filed in good faith.30 The party need not sign the verification. A party’s representative, lawyer or any
person who personally knows the truth of the facts alleged in the pleading may sign the verification.31

We agree with the Court of Appeals that the issue on the certificate against forum shopping was
merely an afterthought. Pajuyo did not call the Court of Appeals’ attention to this defect at the early
stage of the proceedings. Pajuyo raised this procedural issue too late in the proceedings.

Absence of Title over the Disputed Property will not Divest the Courts of Jurisdiction to
Resolve the Issue of Possession

Settled is the rule that the defendant’s claim of ownership of the disputed property will not divest the
inferior court of its jurisdiction over the ejectment case.32 Even if the pleadings raise the issue of
ownership, the court may pass on such issue to determine only the question of possession,
especially if the ownership is inseparably linked with the possession.33 The adjudication on the issue
of ownership is only provisional and will not bar an action between the same parties involving title to
the land.34 This doctrine is a necessary consequence of the nature of the two summary actions of
ejectment, forcible entry and unlawful detainer, where the only issue for adjudication is the physical
or material possession over the real property.35

In this case, what Guevarra raised before the courts was that he and Pajuyo are not the owners of
the contested property and that they are mere squatters. Will the defense that the parties to the
ejectment case are not the owners of the disputed lot allow the courts to renounce their jurisdiction
over the case? The Court of Appeals believed so and held that it would just leave the parties where
they are since they are in pari delicto.

We do not agree with the Court of Appeals.

Ownership or the right to possess arising from ownership is not at issue in an action for recovery of
possession. The parties cannot present evidence to prove ownership or right to legal possession
except to prove the nature of the possession when necessary to resolve the issue of physical
possession.36 The same is true when the defendant asserts the absence of title over the property.
The absence of title over the contested lot is not a ground for the courts to withhold relief from the
parties in an ejectment case.

The only question that the courts must resolve in ejectment proceedings is - who is entitled to the
physical possession of the premises, that is, to the possession de facto and not to the possession de
jure.37 It does not even matter if a party’s title to the property is questionable,38 or when both parties
intruded into public land and their applications to own the land have yet to be approved by the proper
government agency.39 Regardless of the actual condition of the title to the property, the party in
peaceable quiet possession shall not be thrown out by a strong hand, violence or terror.40 Neither is
the unlawful withholding of property allowed. Courts will always uphold respect for prior possession.

Thus, a party who can prove prior possession can recover such possession even against the owner
himself.41Whatever may be the character of his possession, if he has in his favor prior possession in
time, he has the security that entitles him to remain on the property until a person with a better right
lawfully ejects him.42 To repeat, the only issue that the court has to settle in an ejectment suit is the
right to physical possession.

In Pitargue v. Sorilla,43 the government owned the land in dispute. The government did not
authorize either the plaintiff or the defendant in the case of forcible entry case to occupy the land.
The plaintiff had prior possession and had already introduced improvements on the public land. The
plaintiff had a pending application for the land with the Bureau of Lands when the defendant ousted
him from possession. The plaintiff filed the action of forcible entry against the defendant. The
government was not a party in the case of forcible entry.

The defendant questioned the jurisdiction of the courts to settle the issue of possession because
while the application of the plaintiff was still pending, title remained with the government, and the
Bureau of Public Lands had jurisdiction over the case. We disagreed with the defendant. We ruled
that courts have jurisdiction to entertain ejectment suits even before the resolution of the application.
The plaintiff, by priority of his application and of his entry, acquired prior physical possession over
the public land applied for as against other private claimants. That prior physical possession enjoys
legal protection against other private claimants because only a court can take away such physical
possession in an ejectment case.

While the Court did not brand the plaintiff and the defendant in Pitargue44 as squatters, strictly
speaking, their entry into the disputed land was illegal. Both the plaintiff and defendant entered the
public land without the owner’s permission. Title to the land remained with the government because
it had not awarded to anyone ownership of the contested public land. Both the plaintiff and the
defendant were in effect squatting on government property. Yet, we upheld the courts’ jurisdiction to
resolve the issue of possession even if the plaintiff and the defendant in the ejectment case did not
have any title over the contested land.

Courts must not abdicate their jurisdiction to resolve the issue of physical possession because of the
public need to preserve the basic policy behind the summary actions of forcible entry and unlawful
detainer. The underlying philosophy behind ejectment suits is to prevent breach of the peace and
criminal disorder and to compel the party out of possession to respect and resort to the law alone to
obtain what he claims is his.45 The party deprived of possession must not take the law into his own
hands.46 Ejectment proceedings are summary in nature so the authorities can settle speedily actions
to recover possession because of the overriding need to quell social disturbances.47

We further explained in Pitargue the greater interest that is at stake in actions for recovery of
possession. We made the following pronouncements in Pitargue:

The question that is before this Court is: Are courts without jurisdiction to take cognizance of
possessory actions involving these public lands before final award is made by the Lands
Department, and before title is given any of the conflicting claimants? It is one of utmost
importance, as there are public lands everywhere and there are thousands of settlers,
especially in newly opened regions. It also involves a matter of policy, as it requires the
determination of the respective authorities and functions of two coordinate branches of the
Government in connection with public land conflicts.

Our problem is made simple by the fact that under the Civil Code, either in the old, which
was in force in this country before the American occupation, or in the new, we have a
possessory action, the aim and purpose of which is the recovery of the physical possession
of real property, irrespective of the question as to who has the title thereto. Under the
Spanish Civil Code we had the accion interdictal, a summary proceeding which could be
brought within one year from dispossession (Roman Catholic Bishop of Cebu vs. Mangaron,
6 Phil. 286, 291); and as early as October 1, 1901, upon the enactment of the Code of Civil
Procedure (Act No. 190 of the Philippine Commission) we implanted the common law action
of forcible entry (section 80 of Act No. 190), the object of which has been stated by this Court
to be "to prevent breaches of the peace and criminal disorder which would ensue from
the withdrawal of the remedy, and the reasonable hope such withdrawal would create
that some advantage must accrue to those persons who, believing themselves
entitled to the possession of property, resort to force to gain possession rather than
to some appropriate action in the court to assert their claims." (Supia and Batioco vs.
Quintero and Ayala, 59 Phil. 312, 314.) So before the enactment of the first Public Land Act
(Act No. 926) the action of forcible entry was already available in the courts of the country.
So the question to be resolved is, Did the Legislature intend, when it vested the power and
authority to alienate and dispose of the public lands in the Lands Department, to exclude the
courts from entertaining the possessory action of forcible entry between rival claimants or
occupants of any land before award thereof to any of the parties? Did Congress intend that
the lands applied for, or all public lands for that matter, be removed from the jurisdiction of
the judicial Branch of the Government, so that any troubles arising therefrom, or any
breaches of the peace or disorders caused by rival claimants, could be inquired into only by
the Lands Department to the exclusion of the courts? The answer to this question seems to
us evident. The Lands Department does not have the means to police public lands; neither
does it have the means to prevent disorders arising therefrom, or contain breaches of the
peace among settlers; or to pass promptly upon conflicts of possession. Then its power is
clearly limited to disposition and alienation, and while it may decide conflicts of
possession in order to make proper award, the settlement of conflicts of possession
which is recognized in the court herein has another ultimate purpose, i.e., the
protection of actual possessors and occupants with a view to the prevention of
breaches of the peace. The power to dispose and alienate could not have been
intended to include the power to prevent or settle disorders or breaches of the peace
among rival settlers or claimants prior to the final award. As to this, therefore, the
corresponding branches of the Government must continue to exercise power and jurisdiction
within the limits of their respective functions. The vesting of the Lands Department with
authority to administer, dispose, and alienate public lands, therefore, must not be
understood as depriving the other branches of the Government of the exercise of the
respective functions or powers thereon, such as the authority to stop disorders and
quell breaches of the peace by the police, the authority on the part of the courts to
take jurisdiction over possessory actions arising therefrom not involving, directly or
indirectly, alienation and disposition.

Our attention has been called to a principle enunciated in American courts to the effect that
courts have no jurisdiction to determine the rights of claimants to public lands, and that until
the disposition of the land has passed from the control of the Federal Government, the courts
will not interfere with the administration of matters concerning the same. (50 C. J. 1093-
1094.) We have no quarrel with this principle. The determination of the respective rights of
rival claimants to public lands is different from the determination of who has the actual
physical possession or occupation with a view to protecting the same and preventing
disorder and breaches of the peace. A judgment of the court ordering restitution of the
possession of a parcel of land to the actual occupant, who has been deprived thereof by
another through the use of force or in any other illegal manner, can never be "prejudicial
interference" with the disposition or alienation of public lands. On the other hand, if courts
were deprived of jurisdiction of cases involving conflicts of possession, that threat of
judicial action against breaches of the peace committed on public lands would be
eliminated, and a state of lawlessness would probably be produced between
applicants, occupants or squatters, where force or might, not right or justice, would
rule.

It must be borne in mind that the action that would be used to solve conflicts of possession
between rivals or conflicting applicants or claimants would be no other than that of forcible
entry. This action, both in England and the United States and in our jurisdiction, is a
summary and expeditious remedy whereby one in peaceful and quiet possession may
recover the possession of which he has been deprived by a stronger hand, by violence or
terror; its ultimate object being to prevent breach of the peace and criminal disorder. (Supia
and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) The basis of the remedy is mere
possession as a fact, of physical possession, not a legal possession. (Mediran vs.
Villanueva, 37 Phil. 752.) The title or right to possession is never in issue in an action of
forcible entry; as a matter of fact, evidence thereof is expressly banned, except to prove the
nature of the possession. (Second 4, Rule 72, Rules of Court.) With this nature of the action
in mind, by no stretch of the imagination can conclusion be arrived at that the use of the
remedy in the courts of justice would constitute an interference with the alienation,
disposition, and control of public lands. To limit ourselves to the case at bar can it be
pretended at all that its result would in any way interfere with the manner of the alienation or
disposition of the land contested? On the contrary, it would facilitate adjudication, for the
question of priority of possession having been decided in a final manner by the courts, said
question need no longer waste the time of the land officers making the adjudication or award.
(Emphasis ours)

The Principle of Pari Delicto is not Applicable to Ejectment Cases

The Court of Appeals erroneously applied the principle of pari delicto to this case.

Articles 1411 and 1412 of the Civil Code48 embody the principle of pari delicto. We explained the
principle of pari delicto in these words:

The rule of pari delicto is expressed in the maxims ‘ex dolo malo non eritur actio’ and ‘in pari
delicto potior est conditio defedentis.’ The law will not aid either party to an illegal agreement.
It leaves the parties where it finds them.49

The application of the pari delicto principle is not absolute, as there are exceptions to its application.
One of these exceptions is where the application of the pari delicto rule would violate well-
established public policy.50

In Drilon v. Gaurana,51 we reiterated the basic policy behind the summary actions of forcible entry
and unlawful detainer. We held that:

It must be stated that the purpose of an action of forcible entry and detainer is that,
regardless of the actual condition of the title to the property, the party in peaceable quiet
possession shall not be turned out by strong hand, violence or terror. In affording this remedy
of restitution the object of the statute is to prevent breaches of the peace and criminal
disorder which would ensue from the withdrawal of the remedy, and the reasonable hope
such withdrawal would create that some advantage must accrue to those persons who,
believing themselves entitled to the possession of property, resort to force to gain
possession rather than to some appropriate action in the courts to assert their claims. This is
the philosophy at the foundation of all these actions of forcible entry and detainer which are
designed to compel the party out of possession to respect and resort to the law alone to
obtain what he claims is his.52

Clearly, the application of the principle of pari delicto to a case of ejectment between squatters is
fraught with danger. To shut out relief to squatters on the ground of pari delicto would openly invite
mayhem and lawlessness. A squatter would oust another squatter from possession of the lot that the
latter had illegally occupied, emboldened by the knowledge that the courts would leave them where
they are. Nothing would then stand in the way of the ousted squatter from re-claiming his prior
possession at all cost.
Petty warfare over possession of properties is precisely what ejectment cases or actions for recovery
of possession seek to prevent.53 Even the owner who has title over the disputed property cannot take
the law into his own hands to regain possession of his property. The owner must go to court.

Courts must resolve the issue of possession even if the parties to the ejectment suit are squatters.
The determination of priority and superiority of possession is a serious and urgent matter that cannot
be left to the squatters to decide. To do so would make squatters receive better treatment under the
law. The law restrains property owners from taking the law into their own hands. However, the
principle of pari delicto as applied by the Court of Appeals would give squatters free rein to
dispossess fellow squatters or violently retake possession of properties usurped from them. Courts
should not leave squatters to their own devices in cases involving recovery of possession.

Possession is the only Issue for Resolution in an Ejectment Case

The case for review before the Court of Appeals was a simple case of ejectment. The Court of
Appeals refused to rule on the issue of physical possession. Nevertheless, the appellate court held
that the pivotal issue in this case is who between Pajuyo and Guevarra has the "priority right as
beneficiary of the contested land under Proclamation No. 137."54 According to the Court of Appeals,
Guevarra enjoys preferential right under Proclamation No. 137 because Article VI of the Code
declares that the actual occupant or caretaker is the one qualified to apply for socialized housing.

The ruling of the Court of Appeals has no factual and legal basis.

First. Guevarra did not present evidence to show that the contested lot is part of a relocation site
under Proclamation No. 137. Proclamation No. 137 laid down the metes and bounds of the land that
it declared open for disposition to bona fide residents.

The records do not show that the contested lot is within the land specified by Proclamation No. 137.
Guevarra had the burden to prove that the disputed lot is within the coverage of Proclamation No.
137. He failed to do so.

Second. The Court of Appeals should not have given credence to Guevarra’s unsubstantiated claim
that he is the beneficiary of Proclamation No. 137. Guevarra merely alleged that in the survey the
project administrator conducted, he and not Pajuyo appeared as the actual occupant of the lot.

There is no proof that Guevarra actually availed of the benefits of Proclamation No. 137. Pajuyo
allowed Guevarra to occupy the disputed property in 1985. President Aquino signed Proclamation
No. 137 into law on 11 March 1986. Pajuyo made his earliest demand for Guevarra to vacate the
property in September 1994.

During the time that Guevarra temporarily held the property up to the time that Proclamation No. 137
allegedly segregated the disputed lot, Guevarra never applied as beneficiary of Proclamation No.
137. Even when Guevarra already knew that Pajuyo was reclaiming possession of the property,
Guevarra did not take any step to comply with the requirements of Proclamation No. 137.

Third. Even assuming that the disputed lot is within the coverage of Proclamation No. 137 and
Guevarra has a pending application over the lot, courts should still assume jurisdiction and resolve
the issue of possession. However, the jurisdiction of the courts would be limited to the issue of
physical possession only.
In Pitargue,55 we ruled that courts have jurisdiction over possessory actions involving public land to
determine the issue of physical possession. The determination of the respective rights of rival
claimants to public land is, however, distinct from the determination of who has the actual physical
possession or who has a better right of physical possession.56 The administrative disposition and
alienation of public lands should be threshed out in the proper government agency.57

The Court of Appeals’ determination of Pajuyo and Guevarra’s rights under Proclamation No. 137
was premature. Pajuyo and Guevarra were at most merely potential beneficiaries of the law. Courts
should not preempt the decision of the administrative agency mandated by law to determine the
qualifications of applicants for the acquisition of public lands. Instead, courts should expeditiously
resolve the issue of physical possession in ejectment cases to prevent disorder and breaches of
peace.58

Pajuyo is Entitled to Physical Possession of the Disputed Property

Guevarra does not dispute Pajuyo’s prior possession of the lot and ownership of the house built on
it. Guevarra expressly admitted the existence and due execution of the Kasunduan.
The Kasunduan reads:

Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo. Payatas, Quezon City, ay nagbibigay
pahintulot kay G. Eddie Guevarra, na pansamantalang manirahan sa nasabing bahay at lote ng
"walang bayad." Kaugnay nito, kailangang panatilihin nila ang kalinisan at kaayusan ng bahay at
lote.

Sa sandaling kailangan na namin ang bahay at lote, sila’y kusang aalis ng walang reklamo.

Based on the Kasunduan, Pajuyo permitted Guevarra to reside in the house and lot free of rent, but
Guevarra was under obligation to maintain the premises in good condition. Guevarra promised to
vacate the premises on Pajuyo’s demand but Guevarra broke his promise and refused to heed
Pajuyo’s demand to vacate.

These facts make out a case for unlawful detainer. Unlawful detainer involves the withholding by a
person from another of the possession of real property to which the latter is entitled after the
expiration or termination of the former’s right to hold possession under a contract, express or
implied.59

Where the plaintiff allows the defendant to use his property by tolerance without any contract, the
defendant is necessarily bound by an implied promise that he will vacate on demand, failing which,
an action for unlawful detainer will lie.60 The defendant’s refusal to comply with the demand makes
his continued possession of the property unlawful.61 The status of the defendant in such a case is
similar to that of a lessee or tenant whose term of lease has expired but whose occupancy continues
by tolerance of the owner.62

This principle should apply with greater force in cases where a contract embodies the permission or
tolerance to use the property. The Kasunduan expressly articulated Pajuyo’s forbearance. Pajuyo
did not require Guevarra to pay any rent but only to maintain the house and lot in good condition.
Guevarra expressly vowed in the Kasunduan that he would vacate the property on demand.
Guevarra’s refusal to comply with Pajuyo’s demand to vacate made Guevarra’s continued
possession of the property unlawful.

We do not subscribe to the Court of Appeals’ theory that the Kasunduan is one of commodatum.
In a contract of commodatum, one of the parties delivers to another something not consumable so
that the latter may use the same for a certain time and return it.63 An essential feature
of commodatum is that it is gratuitous. Another feature of commodatum is that the use of the thing
belonging to another is for a certain period.64 Thus, the bailor cannot demand the return of the thing
loaned until after expiration of the period stipulated, or after accomplishment of the use for which
the commodatum is constituted.65 If the bailor should have urgent need of the thing, he may demand
its return for temporary use.66 If the use of the thing is merely tolerated by the bailor, he can demand
the return of the thing at will, in which case the contractual relation is called a precarium.67 Under the
Civil Code, precarium is a kind of commodatum.68

The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not
essentially gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated him to
maintain the property in good condition. The imposition of this obligation makes the Kasunduan a
contract different from a commodatum. The effects of the Kasunduan are also different from that of
a commodatum. Case law on ejectment has treated relationship based on tolerance as one that is
akin to a landlord-tenant relationship where the withdrawal of permission would result in the
termination of the lease.69 The tenant’s withholding of the property would then be unlawful. This is
settled jurisprudence.

Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum,
Guevarra as bailee would still have the duty to turn over possession of the property to Pajuyo, the
bailor. The obligation to deliver or to return the thing received attaches to contracts for safekeeping,
or contracts of commission, administration and commodatum.70 These contracts certainly involve the
obligation to deliver or return the thing received.71

Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo is also a
squatter. Squatters, Guevarra pointed out, cannot enter into a contract involving the land they
illegally occupy. Guevarra insists that the contract is void.

Guevarra should know that there must be honor even between squatters. Guevarra freely entered
into the Kasunduan. Guevarra cannot now impugn the Kasunduan after he had benefited from it.
The Kasunduan binds Guevarra.

The Kasunduan is not void for purposes of determining who between Pajuyo and Guevarra has a
right to physical possession of the contested property. The Kasunduan is the undeniable evidence of
Guevarra’s recognition of Pajuyo’s better right of physical possession. Guevarra is clearly a
possessor in bad faith. The absence of a contract would not yield a different result, as there would
still be an implied promise to vacate.

Guevarra contends that there is "a pernicious evil that is sought to be avoided, and that is allowing
an absentee squatter who (sic) makes (sic) a profit out of his illegal act."72 Guevarra bases his
argument on the preferential right given to the actual occupant or caretaker under Proclamation No.
137 on socialized housing.

We are not convinced.

Pajuyo did not profit from his arrangement with Guevarra because Guevarra stayed in the property
without paying any rent. There is also no proof that Pajuyo is a professional squatter who rents out
usurped properties to other squatters. Moreover, it is for the proper government agency to decide
who between Pajuyo and Guevarra qualifies for socialized housing. The only issue that we are
addressing is physical possession.
Prior possession is not always a condition sine qua non in ejectment.73 This is one of the distinctions
between forcible entry and unlawful detainer.74 In forcible entry, the plaintiff is deprived of physical
possession of his land or building by means of force, intimidation, threat, strategy or stealth. Thus,
he must allege and prove prior possession.75 But in unlawful detainer, the defendant unlawfully
withholds possession after the expiration or termination of his right to possess under any contract,
express or implied. In such a case, prior physical possession is not required.76

Pajuyo’s withdrawal of his permission to Guevarra terminated the Kasunduan. Guevarra’s transient
right to possess the property ended as well. Moreover, it was Pajuyo who was in actual possession
of the property because Guevarra had to seek Pajuyo’s permission to temporarily hold the property
and Guevarra had to follow the conditions set by Pajuyo in the Kasunduan. Control over the property
still rested with Pajuyo and this is evidence of actual possession.

Pajuyo’s absence did not affect his actual possession of the disputed property. Possession in the
eyes of the law does not mean that a man has to have his feet on every square meter of the ground
before he is deemed in possession.77 One may acquire possession not only by physical occupation,
but also by the fact that a thing is subject to the action of one’s will.78 Actual or physical occupation is
not always necessary.79

Ruling on Possession Does not Bind Title to the Land in Dispute

We are aware of our pronouncement in cases where we declared that "squatters and intruders who
clandestinely enter into titled government property cannot, by such act, acquire any legal right to
said property."80 We made this declaration because the person who had title or who had the right to
legal possession over the disputed property was a party in the ejectment suit and that party instituted
the case against squatters or usurpers.

In this case, the owner of the land, which is the government, is not a party to the ejectment case.
This case is between squatters. Had the government participated in this case, the courts could have
evicted the contending squatters, Pajuyo and Guevarra.

Since the party that has title or a better right over the property is not impleaded in this case, we
cannot evict on our own the parties. Such a ruling would discourage squatters from seeking the aid
of the courts in settling the issue of physical possession. Stripping both the plaintiff and the
defendant of possession just because they are squatters would have the same dangerous
implications as the application of the principle of pari delicto. Squatters would then rather settle the
issue of physical possession among themselves than seek relief from the courts if the plaintiff and
defendant in the ejectment case would both stand to lose possession of the disputed property. This
would subvert the policy underlying actions for recovery of possession.

Since Pajuyo has in his favor priority in time in holding the property, he is entitled to remain on the
property until a person who has title or a better right lawfully ejects him. Guevarra is certainly not that
person. The ruling in this case, however, does not preclude Pajuyo and Guevarra from introducing
evidence and presenting arguments before the proper administrative agency to establish any right to
which they may be entitled under the law.81

In no way should our ruling in this case be interpreted to condone squatting. The ruling on the issue
of physical possession does not affect title to the property nor constitute a binding and conclusive
adjudication on the merits on the issue of ownership.82 The owner can still go to court to recover
lawfully the property from the person who holds the property without legal title. Our ruling here does
not diminish the power of government agencies, including local governments, to condemn, abate,
remove or demolish illegal or unauthorized structures in accordance with existing laws.
Attorney’s Fees and Rentals

The MTC and RTC failed to justify the award of ₱3,000 attorney’s fees to Pajuyo. Attorney’s fees as
part of damages are awarded only in the instances enumerated in Article 2208 of the Civil
Code.83 Thus, the award of attorney’s fees is the exception rather than the rule.84 Attorney’s fees are
not awarded every time a party prevails in a suit because of the policy that no premium should be
placed on the right to litigate.85 We therefore delete the attorney’s fees awarded to Pajuyo.

We sustain the ₱300 monthly rentals the MTC and RTC assessed against Guevarra. Guevarra did
not dispute this factual finding of the two courts. We find the amount reasonable compensation to
Pajuyo. The ₱300 monthly rental is counted from the last demand to vacate, which was on 16
February 1995.

WHEREFORE, we GRANT the petition. The Decision dated 21 June 2000 and Resolution dated 14
December 2000 of the Court of Appeals in CA-G.R. SP No. 43129 are SET ASIDE. The Decision
dated 11 November 1996 of the Regional Trial Court of Quezon City, Branch 81 in Civil Case No. Q-
96-26943, affirming the Decision dated 15 December 1995 of the Metropolitan Trial Court of Quezon
City, Branch 31 in Civil Case No. 12432, is REINSTATEDwith MODIFICATION. The award of
attorney’s fees is deleted. No costs.

SO ORDERED.
G.R. No. 155001 May 5, 2003

DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI B. REUNILLA, MANUEL


ANTONIO B. BOÑE, 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,

x---------------------------------------------------------x

G.R. No. 155547 May 5, 2003

SALACNIB F. BATERINA, CLAVEL A. MARTINEZ and CONSTANTINO G.


JARAULA, petitioners,
vs.
PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT
AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS, DEPARTMENT
OF PUBLIC WORKS AND HIGHWAYS, SECRETARY LEANDRO M. MENDOZA, in his capacity
as Head of the Department of Transportation and Communications, and SECRETARY
SIMEON A. DATUMANONG, in his capacity as Head of the Department of Public Works and
Highways, respondents,
JACINTO V. PARAS, RAFAEL P. NANTES, EDUARDO C. ZIALCITA, WILLY BUYSON
VILLARAMA, PROSPERO C. NOGRALES, PROSPERO A. PICHAY, JR., HARLIN CAST
ABAYON, and BENASING O. MACARANBON, respondents-intervenors,

x---------------------------------------------------------x

G.R. No. 155661 May 5, 2003

CEFERINO C. LOPEZ, RAMON M. SALES, ALFREDO B. VALENCIA, MA. TERESA V.


GAERLAN, LEONARDO DE LA ROSA, DINA C. DE LEON, VIRGIE CATAMIN RONALD
SCHLOBOM, ANGELITO SANTOS, MA. LUISA M. PALCON and SAMAHANG MANGGAGAWA
SA PALIPARAN NG PILIPINAS (SMPP), petitioners,
vs.
PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT
AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS, SECRETARY
LEANDRO M. MENDOZA, in his capacity as Head of the Department of Transportation and
Communications, respondents.

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 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.

Some time 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:

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, 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
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, 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 Malacañang 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 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 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
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 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.

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.

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.

xxx xxx xxx

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

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.

xxx xxx xxx

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 is P558,384,871.55 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 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 ability of 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 submittedfalls 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 a draft, 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

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:

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 Agreementincludes 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 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.

xxx xxx xxx


(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 Dollars44 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 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.

xxx xxx xxx

(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 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.

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

xxx xxx xxx

(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.

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

xxx xxx xxx

(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:

xxx xxx xxx

(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;

xxx xxx xxx

(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
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;

xxx xxx xxx

Section 1.06. Attendant Liabilities


Attendant Liabilities refer to all amounts in each case supported by verifiable evidence
from time to time owed 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 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"59which 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 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.

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.

In the cases at bar, PIATCO, under the 1997 Concession Agreement and the ARCA, is granted the
"exclusive rightto operate a commercial international passenger terminal within the Island of Luzon"
at the NAIA IPT III.68 This 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 Date71 and renewable for another twenty-five (25) years at the option of the
government.72 Both the 1997 Concession Agreement and the ARCA further provide that, in
view of the 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 Build–Operate-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.75 While 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

xxx xxx xxx

(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

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 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.

Davide, Jr., C.J., Bellosillo, Ynares-Santiago, Sandoval-Gutierrez, Austria-Martinez, Corona, and


Carpio-Morales, JJ., concur.
Vitug, J., see separate (dissenting) opinion.
Panganiban, J., please see separate opinion.
Quisumbing, J., no jurisdiction, please see separate opinion of J. Vitug in which he concurs.
Carpio, J., no part.
Callejo, Sr., J., also concur in the separate opinion of J. Panganiban.
Azcuna, J., joins the separate opinion of J. Vitug.

SEPARATE OPINIONS

VITUG, J.:

This Court is bereft of jurisdiction to hear the petitions at bar. The Constitution provides that the
Supreme Court shall exercise original jurisdiction over, among other actual controversies, petitions
for certiorari, prohibition, mandamus, quo warranto, and habeas corpus.1 The cases in question,
although denominated to be petitions for prohibition, actually pray for the nullification of the PIATCO
contracts and to restrain respondents from implementing said agreements for being illegal and
unconstitutional.

Section 2, Rule 65 of the Rules of Court states:

"When the proceedings of any tribunal, corporation, board, officer or person, whether
exercising judicial, quasi-judicial or ministerial functions, are without or in excess of its or his
jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction, and
there is no appeal or any other plain, speedy and adequate remedy in the ordinary course of
law, a person aggrieved thereby may file a verified petition in the proper court, alleging the
facts with certainty and praying that judgment be rendered commanding the respondent to
desist from further proceedings in the action or matter specified therein, or otherwise
granting such incidental reliefs as law and justice may require."

The rule is explicit. A petition for prohibition may be filed against a tribunal, corporation, board,
officer or person, exercising judicial, quasi-judicial or ministerial functions. What the petitions seek
from respondents do not involve judicial, quasi-judicial or ministerial functions. In prohibition, only
legal issues affecting the jurisdiction of the tribunal, board or officer involved may be resolved on the
basis of undisputed facts.2 The parties allege, respectively, contentious evidentiary facts. It would be
difficult, if not anomalous, to decide the jurisdictional issue on the basis of the contradictory factual
submissions made by the parties.3 As the Court has so often exhorted, it is not a trier of facts.

The petitions, in effect, are in the nature of actions for declaratory relief under Rule 63 of the Rules
of Court. The Rules provide that any person interested under a contract may, before breach or
violation thereof, bring an action in the appropriate Regional Trial Court to determine any question of
construction or validity arising, and for a declaration of his rights or duties thereunder.4 The Supreme
Court assumes no jurisdiction over petitions for declaratory relief which are cognizable by regional
trial courts.5

As I have so expressed in Tolentino vs. Secretary of Finance,6 reiterated in Santiago vs. Guingona,
Jr.7 , the Supreme Court should not be thought of as having been tasked with the awesome
responsibility of overseeing the entire bureaucracy. Pervasive and limitless, such as it may seem to
be under the 1987 Constitution, judicial power still succumbs to the paramount doctrine of separation
of powers. The Court may not at good liberty intrude, in the guise of sovereign imprimatur, into every
affair of government. What significance can still then remain of the time-honored and widely
acclaimed principle of separation of powers if, at every turn, the Court allows itself to pass upon at
will the disposition of a co-equal, independent and coordinate branch in our system of government. I
dread to think of the so varied uncertainties that such an undue interference can lead to.

Accordingly, I vote for the dismissal of the petition.

Quisumbing, and Azcuna, JJ., concur.

PANGANIBAN, J.:

The five contracts for the construction and the operation of Ninoy Aquino International Airport (NAIA)
Terminal III, the subject of the consolidated Petitions before the Court, are replete with outright
violations of law, public policy and the Constitution. The only proper thing to do is declare them all
null and void ab initio and let the chips fall where they may. Fiat iustitia ruat coelum.

The facts leading to this controversy are already well presented in the ponencia. I shall not burden
the readers with a retelling thereof. Instead, I will cut to the chase and directly address the two sets
of gut issues:

1. The first issue is procedural: Does the Supreme Court have original jurisdiction to hear and decide
the Petitions? Corollarily, do petitioners have locus standi and should this Court decide the cases
without any mandatory referral to arbitration?

2. The second one is substantive in character: Did the subject contracts violate the Constitution, the
laws, and public policy to such an extent as to render all of them void and inexistent?

My answer to all the above questions is a firm "Yes."

The Procedural Issue:


Jurisdiction, Standing and Arbitration
Definitely and surely, the issues involved in these Petitions are clearly of transcendental importance
and of national interest. The subject contracts pertain to the construction and the operation of the
country's premiere international airport terminal - an ultramodern world-class public utility that will
play a major role in the country's economic development and serve to project a positive image of our
country abroad. The five build-operate-&-transfer (BOT) contracts, while entailing the investment of
billions of pesos in capital and the availment of several hundred millions of dollars in loans, contain
provisions that tend to establish a monopoly, require the disbursements of public funds sans
appropriations, and provide government guarantees in violation of statutory prohibitions, as well as
other provisions equally offensive to law, public policy and the Constitution. Public interest will
inevitably be affected thereby.

Thus, objections to these Petitions, grounded upon (a) the hierarchy of courts, (b) the need for
arbitration prior to court action, and (c) the alleged lack of sufficient personality, standing or interest,
being in the main procedural matters, must now be set aside, as they have been in past cases. This
Court must be permitted to perform its constitutional duty of determining whether the other agencies
of government have acted within the limits of the Constitution and the laws, or if they have gravely
abused the discretion entrusted to them.1

Hierarchy of Courts

The Court has, in the past, held that questions relating to gargantuan government contracts ought to
be settled without delay.2 This holding applies with greater force to the instant cases. Respondent
Piatco is partly correct in averring that petitioners can obtain relief from the regional trial courts via
an action to annul the contracts.

Nevertheless, the unavoidable consequence of having to await the rendition and the finality of any
such judgment would be a prolonged state of uncertainty that would be prejudicial to the nation, the
parties and the general public. And, in light of the feared loss of jobs of the petitioning workers,
consequent to the inevitable pretermination of contracts of the petitioning service providers that will
follow upon the heels of the impending opening of NAIA Terminal III, the need for relief is patently
urgent, and therefore, direct resort to this Court through the special civil action of prohibition is thus
justified.3

Contrary to Piatco's argument that the resolution of the issues raised in the Petitions will require
delving into factual questions,4 I submit that their disposition ultimately turns on questions of
law.5 Further, many of the significant and relevant factual questions can be easily addressed by an
examination of the documents submitted by the parties. In any event, the Petitions raise some novel
questions involving the application of the amended BOT Law, which this Court has seen fit to tackle.

Arbitration

Should the dispute be referred to arbitration prior to judicial recourse? Respondent Piatco claims that
Section 10.02 of the Amended and Restated Concession Agreement (ARCA) provides for arbitration
under the auspices of the International Chamber of Commerce to settle any dispute or controversy
or claim arising in connection with the Concession Agreement, its amendments and supplements.
The government disagrees, however, insisting that there can be no arbitration based on Section
10.02 of the ARCA, since all the Piatco contracts are void ab initio. Therefore, all contractual
provisions, including Section 10.02 of the ARCA, are likewise void, inexistent and inoperative. To
support its stand, the government cites Chavez v. Presidential Commission on Good
Government:6"The void agreement will not be rendered operative by the parties' alleged
performance (partial or full) of their respective prestations. A contract that violates the Constitution
and the law is null and void ab initio and vests no rights and creates no obligations. It produces no
legal effect at all."

As will be discussed at length later, the Piatco contracts are indeed void in their entirety; thus, a
resort to the aforesaid provision on arbitration is unavailing. Besides, petitioners and petitioners-in-
intervention have pointed out that, even granting arguendo that the arbitration clause remained a
valid provision, it still cannot bind them inasmuch as they are not parties to the Piatco contracts. And
in the final analysis, it is unarguable that the arbitration process provided for under Section 10.02 of
the ARCA, to be undertaken by a panel of three (3) arbitrators appointed in accordance with the
Rules of Arbitration of the International Chamber of Commerce, will not be able to address,
determine and definitively resolve the constitutional and legal questions that have been raised in the
Petitions before us.

Locus Standi

Given this Court's previous decisions in cases of similar import, no one will seriously doubt that,
being taxpayers and members of the House of Representatives, Petitioners Baterina et al.
have locus standi to bring the Petition in GR No. 155547. In Albano v. Reyes,7 this Court held that
the petitioner therein, suing as a citizen, taxpayer and member of the House of Representatives, was
sufficiently clothed with standing to bring the suit questioning the validity of the assailed contract.
The Court cited the fact that public interest was involved, in view of the important role of the Manila
International Container Terminal (MICT) in the country's economic development and the magnitude
of the financial consideration. This, notwithstanding the fact that expenditure of public funds was not
required under the assailed contract.

In the cases presently under consideration, petitioners' personal and substantial interest in the
controversy is shown by the fact that certain provisions in the Piatco contracts create obligations on
the part of government (through the DOTC and the MIAA) to disburse public funds without prior
congressional appropriations.

Petitioners thus correctly assert that the injury to them has a twofold aspect: (1) they are adversely
affected as taxpayers on account of the illegal disbursement of public funds; and (2) they are
prejudiced qua legislators, since the contractual provisions requiring the government to incur
expenditures without appropriations also operate as limitations upon the exclusive power and
prerogative of Congress over the public purse. As members of the House of Representatives, they
are actually deprived of discretion insofar as the inclusion of those items of expenditure in the budget
is concerned. To prevent such encroachment upon the legislative privilege and obviate injury to the
institution of which they are members, petitioners-legislators have locus standi to bring suit.

Messrs. Agan et al. and Lopez et al., are likewise taxpayers and thus possessed of standing to
challenge the illegal disbursement of public funds. Messrs. Agan et al., in particular, are employees
(or representatives of employees) of various service providers that have (1) existing concession
agreements with the MIAA to provide airport services necessary to the operation of the NAIA and (2)
service agreements to furnish essential support services to the international airlines operating at the
NAIA.

On the other hand, Messrs. Lopez et al. are employees of the MIAA. These petitioners (Messrs.
Agan et al. and Messrs. Lopez et al.) are confronted with the prospect of being laid off from their jobs
and losing their means of livelihood when their employer-companies are forced to shut down or
otherwise retrench and cut back on manpower. Such development would result from the imminent
implementation of certain provisions in the contracts that tend toward the creation of a monopoly in
favor of Piatco, its subsidiaries and related companies.
Petitioners-in-intervention are service providers in the business of furnishing airport-related services
to international airlines and passengers in the NAIA and are therefore competitors of Piatco as far as
that line of business is concerned. On account of provisions in the Piatco contracts, petitioners-in-
intervention have to enter into a written contract with Piatco so as not to be shut out of NAIA
Terminal III and barred from doing business there. Since there is no provision to ensure or safeguard
free and fair competition, they are literally at its mercy. They claim injury on account of their
deprivation of property (business) and of the liberty to contract, without due process of law.

And even if petitioners and petitioners-in-intervention were not sufficiently clothed with legal
standing, I have at the outset already established that, given its impact on the public and on national
interest, this controversy is laden with transcendental importance and constitutional significance.
Hence, I do not hesitate to adopt the same position as was enunciated in Kilosbayan v. Guingona
Jr.8 that "in cases of transcendental importance, the Court may relax the standing requirements and
allow a suit to prosper even when there is no direct injury to the party claiming the right of judicial
review."9

The Substantive Issue:


Violations of the Constitution and the Laws

From the Outset, the Bidding Process Was Flawed and Tainted

After studying the documents submitted and arguments advanced by the parties, I have no doubt
that, right at the outset, Piatco was not qualified to participate in the bidding process for the Terminal
III project, but was nevertheless permitted to do so. It even won the bidding and was helped along by
what appears to be a series of collusive and corrosive acts.

The build-operate-and-transfer (BOT) project for the NAIA Passenger Terminal III comes under the
category of an "unsolicited proposal," which is the subject of Section 4-A of the BOT Law.10 The
unsolicited proposal was originally submitted by the Asia's Emerging Dragon Corporation (AEDC) to
the Department of Transportation and Communications (DOTC) and the Manila International Airport
Authority (MIAA), which reviewed and approved the proposal.

The draft of the concession agreement as negotiated between AEDC and DOTC/MIAA was
endorsed to the National Economic Development Authority (NEDA-ICC), which in turn reviewed it on
the basis of its scope, economic viability, financial indicators and risks; and thereafter approved it for
bidding.

The DOTC/MIAA then prepared the Bid Documents, incorporating therein the negotiated Draft
Concession Agreement, and published invitations for public bidding, i.e., for the submission of
comparative or competitive proposals. Piatco's predecessor-in-interest, the Paircargo Consortium,
was the only company that submitted a competitive bid or price challenge.

At this point, I must emphasize that the law requires the award of a BOT project to the bidder that
has satisfied the minimum requirements; and met the technical, financial, organizational and legal
standards provided in the BOT Law. Section 5 of this statute states:

"Sec. 5. Public bidding of projects. - . . .

"In the 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 this Act, has submitted the lowest bid and most favorable
terms for the project, based on the present value of its proposed tolls, fees, rentals and
charges over a fixed term for the facility to be constructed, rehabilitated, operated and
maintained according to the prescribed minimum design and performance standards, plans
and specifications. . . ." (Emphasis supplied.)

The same provision requires that the price challenge via public bidding "must be conducted under a
two-envelope/two-stage system: the first envelope to contain the technical proposal and the second
envelope to contain the financial proposal." Moreover, the 1994 Implementing Rules and
Regulations (IRR) provide that only those bidders that have passed the prequalification stage are
permitted to have their two envelopes reviewed.

In other words, prospective bidders must prequalify by submitting their prequalification documents
for evaluation; and only the pre-qualified bidders would be entitled to have their bids opened,
evaluated and appreciated. On the other hand, disqualified bidders are to be informed of the reason
for their disqualification. This procedure was confirmed and reiterated in the Bid Documents, which I
quote thus: "Prequalified proponents will be considered eligible to move to second stage technical
proposal evaluation. The second and third envelopes of pre-disqualified proponents will be
returned."11

Aside from complying with the legal and technical requirements (track record or experience of the
firm and its key personnel), a project proponent desiring to prequalify must also demonstrate its
financial capacity to undertake the project. To establish such capability, a proponent must prove that
it is able to raise the minimum amount of equity required for the project and to procure the loans or
financing needed for it. Section 5.4(c) of the 1994 IRR provides:

"Sec. 5.4. Prequalification Requirements. - To pre-qualify, a project proponent must comply


with the following requirements:

xxx xxx xxx

"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
prequalification, 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 prequalification, the minimum
amount of equity needed. . . . ." (Italics supplied)

Since the minimum amount of equity for the project was set at 30 percent12 of the minimum project
cost of US$350 million, the minimum amount of equity required of any proponent stood at US$105
million. Converted to pesos at the exchange rate then of P26.239 to US$1.00 (as quoted by the
Bangko Sentral ng Pilipinas), the peso equivalent of the minimum equity was P2,755,095,000.

However, the combined equity or net worth of the Paircargo consortium stood at only
P558,384,871.55.13 This amount was only slightly over 6 percent of the minimum project cost and
very much short of the required minimum equity, which was equivalent to 30 percent of the project
cost. Such deficiency should have immediately caused the disqualification of the Paircargo
consortium. This matter was brought to the attention of the Prequalification and Bidding Committee
(PBAC).
Notwithstanding the glaring deficiency, DOTC Undersecretary Primitivo C. Cal, concurrent chair of
the PBAC, declared in a Memorandum dated 14 October 1996 that "the Challenger (Paircargo
consortium) was found to have a combined net worth of P3,926,421,242.00 that could support a
project costing approximately P13 billion." To justify his conclusion, he asserted: "It is not a
requirement that the networth must be `unrestricted'. To impose this as a requirement now will be
nothing less than unfair."

He further opined, "(T)he networth reflected in the Financial Statement should not be taken as the
amount of money to be used to answer the required thirty (30%) percent 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 (Sec. 12.1 of IRR of the BOT Law) but not for prequalification (Sec. 5.4 of same
document)."

On the basis of the foregoing dubious declaration, the Paircargo consortium was deemed
prequalified and thus permitted to proceed to the other stages of the bidding process.

By virtue of the prequalified status conferred upon the Paircargo, Undersecretary Cal's findings in
effect relieved the consortium of the need to comply with the financial capability requirement
imposed by the BOT Law and IRR. This position is unmistakably and squarely at odds with the
Supreme Court's consistent doctrine emphasizing the strict application of pertinent rules, regulations
and guidelines for the public bidding process, in order to place each bidder - actual or potential - on
the same footing. Thus, it is unarguably irregular and contrary to the very concept of public bidding
to permit a variance between the conditions under which bids are invited and those under which
proposals are submitted and approved.

Republic v. Capulong,14 teaches that if one bidder is relieved from having to conform to the
conditions that impose some duty upon it, that bidder is not contracting in fair competition with those
bidders that propose to be bound by all conditions. The essence of public bidding is, after all, an
opportunity for fair competition and a basis for the precise comparison of bids.15 Thus, each bidder
must bid under the same conditions; and be subject to the same guidelines, requirements and
limitations. The desired result is to be able to determine the best offer or lowest bid, all things being
equal.

Inasmuch as the Paircargo consortium did not possess the minimum equity equivalent to 30 percent
of the minimum project cost, it should not have been prequalified or allowed to participate further in
the bidding. The Prequalification and Bidding Committee (PBAC) should therefore not have opened
the two envelopes of the consortium containing its technical and financial proposals; required AEDC
to match the consortium's bid; 16 or awarded the Concession Agreement to the consortium's
successor-in-interest, Piatco.

As there was effectively no public bidding to speak of, the entire bidding process having been flawed
and tainted from the very outset, therefore, the award of the concession to Paircargo's successor
Piatco was void, and the Concession Agreement executed with the latter was likewise void ab initio.
For this reason, Piatco cannot and should not be allowed to benefit from that Agreement.17

AEDC Was Deprived of the Right to Match PIATCO's Price Challenge

In DOTC PBAC Bid Bulletin No. 4 (par. 3), Undersecretary Cal declared that, for purposes of
matching the price challenge of Piatco, AEDC as originator of the unsolicited proposal would be
permitted access only to the schedule of proposed Annual Guaranteed Payments submitted by
Piatco, and not to the latter's financial and technical proposals that constituted the basis for the price
challenge in the first place. This was supposedly in keeping with Section 11.6 of the 1994 IRR, which
provides that proprietary information is to be respected, protected and treated with utmost
confidentiality, and is therefore not to form part of the bidding/tender and related documents.

This pronouncement, I believe, was a grievous misapplication of the mentioned provision. The
"proprietary information" referred to in Section 11.6 of the IRR pertains only to the proprietary
information of the originator of an unsolicited proposal, and not to those belonging to a challenger.
The reason for the protection accorded proprietary information at all is the fact that, according to
Section 4-A of the BOT Law as amended, a proposal qualifies as an "unsolicited proposal" when it
pertains to a project that involves "a new concept or technology", and/or a project that is not on the
government's list of priority projects.

To be considered as utilizing a new concept or technology, a project must involve the possession of
exclusive rights (worldwide or regional) over a process; or possession of intellectual property rights
over a design, methodology or engineering concept.18 Patently, the intent of the BOT Law is to
encourage individuals and groups to come up with creative innovations, fresh ideas and new
technology. Hence, the significance and necessity of protecting proprietary information in connection
with unsolicited proposals. And to make the encouragement real, the law also extends to such
individuals and groups what amounts to a "right of first refusal" to undertake the project they
conceptualized, involving the use of new technology or concepts, through the mechanism of
matching a price challenge.

A competing bid is never just any figure conjured from out of the blue; it is arrived at after studying
economic, financial, technical and other, factors; it is likewise based on certain assumptions as to
the nature of the business, the market potentials, the probable demand for the product or service,
the future behavior of cost items, political and other risks, and so on. It is thus self-evident that in
order to be able to intelligently match a bid or price challenge, a bidder must be given access to the
assumptions and the calculations that went into crafting the competing bid.

In this instance, the financial and technical proposals of Piatco would have provided AEDC with the
necessary information to enable it to make a reasonably informed matching bid. To put it more
simply, a bidder unable to access the competitor's assumptions will never figure out how the
competing bid came about; requiring him to "counter-propose" is like having him shoot at a target in
the dark while blindfolded.

By withholding from AEDC the challenger's financial and technical proposals containing the critical
information it needed, Undersecretary Cal actually and effectively deprived AEDC of the ability to
match the price challenge. One could say that AEDC did not have the benefit of a "level playing
field." It seems to me, though, that AEDC was actually shut out of the game altogether.

At the end of the day, the bottom line is that the validity and the propriety of the award to Piatco had
been irreparably impaired.

Delayed Issuance of the Notice of Award Violated the BOT Law and the IRR

Section 9.5 of the IRR requires that the Notice of Award must indicate the time frame within which
the winner of the bidding (and therefore the prospective awardee) shall submit the prescribed
performance security, proof of commitment of equity contributions, and indications of sources of
financing (loans); and, in the case of joint ventures, an agreement showing that the members are
jointly and severally responsible for the obligations of the project proponent under the contract.
The purpose of having a definite and firm timetable for the submission of the aforementioned
requirements is not only to prevent delays in the project implementation, but also to expose and
weed out unqualified proponents, who might have unceremoniously slipped through the earlier
prequalification process, by compelling them to put their money where their mouths are, so to speak.

Nevertheless, this provision can be easily circumvented by merely postponing the actual issuance of
the Notice of Award, in order to give the favored proponent sufficient time to comply with the
requirements. Hence, to avert or minimize the manipulation of the post-bidding process, the IRR not
only set out the precise sequence of events occurring between the completion of the evaluation of
the technical bids and the issuance of the Notice of Award, but also specified the timetables for each
such event. Definite allowable extensions of time were provided for, as were the consequences of a
failure to meet a particular deadline.

In particular, Section 9.1 of the 1994 IRR prescribed that within 30 calendar days from the time the
second-stage evaluation shall have been completed, the Committee must come to a decision
whether or not to award the contract and, within 7 days therefrom, the Notice of Award must be
approved by the head of agency or local government unit (LGU) concerned, and its issuance must
follow within another 7 days thereafter.

Section 9.2 of the IRR set the procedure applicable to projects involving substantial government
undertakings as follows: Within 7 days after the decision to award is made, the draft contract shall be
submitted to the ICC for clearance on a no-objection basis. If the draft contract includes government
undertakings already previously approved, then the submission shall be for information only.

However, should there be additional or new provisions different from the original government
undertakings, the draft shall have to be reviewed and approved. The ICC has 15 working days to act
thereon, and unless otherwise specified, its failure to act on the contract within the specified time
frame signifies that the agency or LGU may proceed with the award. The head of agency or LGU
shall approve the Notice of Award within seven days of the clearance by the ICC on a no-objection
basis, and the Notice itself has to be issued within seven days thereafter.

The highly regulated time-frames within which the agents of government were to act evinced the
intent to impose upon them the duty to act expeditiously throughout the process, to the end that the
project be prosecuted and implemented without delay. This regulated scenario was likewise
intended to discourage collusion and substantially reduce the opportunity for agents of government
to abuse their discretion in the course of the award process.

Despite the clear timetables set out in the IRR, several lengthy and still-unexplained delays occurred
in the award process, as can be observed from the presentation made by the counsel for public
respondents,19 quoted hereinbelow:

"11 Dec. 1996 - The Paircargo Joint Venture was informed by the PBAC that AEDC failed to
match and that negotiations preparatory to Notice of Award should be commenced. This was
the decision to award that should have commenced the running of the 7-day period to
approve the Notice of Award, as per Section 9.1 of the IRR, or to submit the draft contract to
the ICC for approval conformably with Section 9.2.

"01 April 1997 - The PBAC resolved that a copy of the final draft of the Concession
Agreement be submitted to the NEDA for clearance on a no-objection basis. This resolution
came more than 3 months too late as it should have been made on the 20th of December
1996 at the latest.
"16 April 1997 - The PBAC resolved that the period of signing the Concession Agreement be
extended by 15 days.

"18 April 1997 - NEDA approved the Concession Agreement. Again this is more than 3
months too late as the NEDA's decision should have been released on the 16th of January
1997 or fifteen days after it should have been submitted to it for review.

"09 July 1997 - The Notice of Award was issued to PIATCO. Following the provisions of the
IRR, the Notice of Award should have been issued fourteen days after NEDA's approval, or
the 28th of January 1997. In any case, even if it were to be assumed that the release of
NEDA's approval on the 18th of April was timely, the Notice of Award should have been
issued on the 9th of May 1997. In both cases, therefore, the release of the Notice of Award
occurred in a decidedly less than timely fashion."

This chronology of events bespeaks an unmistakable disregard, if not disdain, by the persons in
charge of the award process for the time limitations prescribed by the IRR. Their attitude flies in the
face of this Court's solemn pronouncement in Republic v. Capulong,20 that "strict observance of the
rules, regulations and guidelines of the bidding process is the only safeguard to a fair, honest and
competitive public bidding."

From the foregoing, the only conclusion that can possibly be drawn is that the BOT law and its IRR
were repeatedly violated with unmitigated impunity - and by agents of government, no less! On
account of such violation, the award of the contract to Piatco, which undoubtedly gained time and
benefited from the delays, must be deemed null and void from the beginning.

Further Amendments Resulted in a Substantially Different Contract, Awarded Without Public


Bidding

But the violations and desecrations did not stop there. After the PBAC made its decision on
December 11, 1996 to award the contract to Piatco, the latter negotiated changes to the Contract
bidded out and ended up with what amounts to a substantially new contract without any public
bidding. This Contract was subsequently further amended four more times through negotiation and
without any bidding. Thus, the contract actually executed between Piatco and DOTC/MIAA on July
12, 1997 (the Concession Agreement or "CA") differed from the contract bidded out (the draft
concession agreement or "DCA") in the following very significant respects:

1. The CA inserted stipulations creating a monopoly in favor of Piatco in the business of


providing airport-related services for international airlines and passengers.21

2. The CA provided that government is to answer for Piatco's unpaid loans and debts
(lumped under the term Attendant Liabilities) in the event Piatco fails to pay its senior
lenders.22

3. The CA provided that in case of termination of the contract due to the fault of government,
government shall pay all expenses that Piatco incurred for the project plus the appraised
value of the Terminal.23

4. The CA imposed new and special obligations on government, including delivery of clean
possession of the site for the terminal; acquisition of additional land at the government's
expense for construction of road networks required by Piatco's approved plans and
specifications; and assistance to Piatco in securing site utilities, as well as all necessary
permits, licenses and authorizations.24
5. Where Section 3.02 of the DCA requires government to refrain from competing with the
contractor with respect to the operation of NAIA Terminal III, Section 3.02(b) of the CA
excludes and prohibits everyone, including government, from directly or indirectly competing
with Piatco, with respect to the operation of, as well as operations in, NAIA Terminal
III. Operations in is sufficiently broad to encompass all retail and other commercial business
enterprises operating within Terminal III, inclusive of the businesses of providing various
airport-related services to international airlines, within the scope of the prohibition.

6. Under Section 6.01 of the DCA, the following fees are subject to the written approval of
MIAA: lease/rental charges, concession privilege fees for passenger services, food services,
transportation utility concessions, groundhandling, catering and miscellaneous concession
fees, porterage fees, greeter/well-wisher fees, carpark fees, advertising fees, VIP facilities
fees and others. Moreover, adjustments to the groundhandling fees, rentals and porterage
fees are permitted only once every two years and in accordance with a parametric formula,
per DCA Section 6.03. However, the CA as executed with Piatco provides in Section 6.06
that all the aforesaid fees, rentals and charges may be adjusted without MIAA's approval or
intervention. Neither are the adjustments to these fees and charges subject to or limited by
any parametric formula.25

7. Section 1.29 of the DCA provides that the terminal fees, aircraft tacking fees, aircraft
parking fees, check-in counter fees and other fees are to be quoted and paid in Philippine
pesos. But per Section 1.33 of the CA, all the aforesaid fees save the terminal fee are
denominated in US Dollars.

8. Under Section 8.07 of the DCA, the term attendant liabilities refers to liabilities pertinent to
NAIA Terminal III, such as payment of lease rentals and performance of other obligations
under the Land Lease Agreement; the obligations under the Tenant Agreements; and
payment of all taxes, fees, charges and assessments of whatever kind that may be imposed
on NAIA Terminal III or parts thereof. But in Section 1.06 of the CA, Attendant
Liabilities refers to unpaid debts of Piatco: "All amounts recorded and from time to time
outstanding in the books of (Piatco) 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 [Piatco] to its suppliers, contractors and subcontractors."

9. Per Sections 8.04 and 8.06 of the DCA, government may, on account of the contractors
breach, rescind the contract and select one of four options: (a) take over the terminal and
assume all its attendant liabilities; (b) allow the contractor's creditors to assign the Project to
another entity acceptable to DOTC/MIAA; (c) pay the contractor rent for the facilities and
equipment the DOTC may utilize; or (d) purchase the terminal at a price established by
independent appraisers. Depending on the option selected, government may take immediate
possession and control of the terminal and its operations. Government will be obligated to
compensate the contractor for the "equivalent or proportionate contract costs actually
disbursed," but only where government is the one in breach of the contract. But under
Section 8.06(a) of the CA, whether on account of Piatco's breach of contract or its inability to
pay its creditors, government is obliged to either (a) take over Terminal III and assume all of
Piatco's debts or (b) permit the qualified unpaid creditors to be substituted in place of Piatco
or to designate a new operator. And in the event of government's breach of contract, Piatco
may compel it to purchase the terminal at fair market value, per Section 8.06(b) of the CA.

10. Under the DCA, any delay by Piatco in the payment of the amounts due the government
constitutes breach of contract. However, under the CA, such delay does not necessarily
constitute breach of contract, since Piatco is permitted to suspend payments to the
government in order to first satisfy the claims of its secured creditors, per Section 8.04(d) of
the CA.

It goes without saying that the amendment of the Contract bidded out (the DCA or draft concession
agreement) - in such substantial manner, without any public bidding, and after the bidding process
had been concluded on December 11, 1996 - is violative of public policy on public biddings, as well
as the spirit and intent of the BOT Law. The whole point of going through the public bidding exercise
was completely lost. Its very rationale was totally subverted by permitting Piatco to amend the
contract for which public bidding had already been concluded. Competitive bidding aims to obtain
the best deal possible by fostering transparency and preventing favoritism, collusion and fraud in the
awarding of contracts. That is the reason why procedural rules pertaining to public bidding demand
strict observance.26

In a relatively early case, Caltex v. Delgado Brothers,27 this Court made it clear that substantive
amendments to a contract for which a public bidding has already been finished should only be
awarded after another public bidding:

"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."28

The aforementioned case dealt with the unauthorized amendment of a contract executed after public
bidding; in the situation before us, the amendments were made also after the bidding, but prior to
execution. Be that as it may, the same rationale underlying Caltex applies to the present situation
with equal force. Allowing the winning bidder to renegotiate the contract for which the bidding
process has ended is tantamount to permitting it to put in anything it wants. Here, the winning bidder
(Piatco) did not even bother to wait until after actual execution of the contract before rushing to
amend it. Perhaps it believed that if the changes were made to a contract already won through
bidding (DCA) instead of waiting until it is executed, the amendments would not be noticed or
discovered by the public.

In a later case, Mata v. San Diego,29 this Court reiterated its ruling as follows:

"It is true that modification of government contracts, after the same had been awarded after a
public bidding, is not allowed because such modification serves to nullify the effects of the
bidding and whatever advantages the Government had secured thereby and may also result
in manifest injustice to the other bidders. This prohibition, however, refers to a change in vital
and essential particulars of the agreement which results in a substantially new contract."

Piatco's counter-argument may be summed up thus: There was nothing in the 1994 IRR that
prohibited further negotiations and eventual amendments to the DCA even after the bidding had
been concluded. In fact, PBAC Bid Bulletin No. 3 states: "[A]mendments to the Draft Concession
Agreement shall be issued from time to time. Said amendments will only cover items that would not
materially affect the preparation of the proponent's proposal."
I submit that accepting such warped argument will result in perverting the policy underlying public
bidding. The BOT Law cannot be said to allow the negotiation of contractual stipulations resulting in
a substantially new contract after the bidding process and price challenge had been concluded. In
fact, the BOT Law, in recognition of the time, money and effort invested in an unsolicited proposal,
accords its originator the privilege of matching the challenger's bid.

Section 4-A of the BOT Law specifically refers to a "lower price proposal" by a competing bidder; and
to the right of the original proponent "to match the price" of the challenger. Thus, only the price
proposals are in play. The terms, conditions and stipulations in the contract for which public bidding
has been concluded are understood to remain intact and not be subject to further negotiation.
Otherwise, the very essence of public bidding will be destroyed - there will be no basis for an exact
comparison between bids.

Moreover, Piatco misinterpreted the meaning behind PBAC Bid Bulletin No. 3. The
phrase amendments . . . from time to time refers only to those amendments to the draft concession
agreement issued by the PBAC prior to the submission of the price challenge; it certainly does not
include or permit amendments negotiated for and introduced after the bidding process, has been
terminated.

Piatco's Concession Agreement Was Further Amended, (ARCA) Again Without Public
Bidding

Not satisfied with the Concession Agreement, Piatco - once more without bothering with public
bidding - negotiated with government for still more substantial changes. The result was the Amended
and Restated Concession Agreement (ARCA) executed on November 26, 1998. The following
changes were introduced:

1. The definition of Attendant Liabilities was further amended with the result that the unpaid
loans of Piatco, for which government may be required to answer, are no longer limited to
only those loans recorded in Piatco's books or loans whose proceeds were actually used in
the Terminal III project.30

2. Although the contract may be terminated due to breach by Piatco, it will not be liable to
pay the government any Liquidated Damages if a new operator is designated to take over
the operation of the terminal.31

3. The Liquidated Damages which government becomes liable for in case of its breach of
contract were substantially increased.32

4. Government's right to appoint a comptroller for Piatco in case the latter encounters
liquidity problems was deleted.33

5. Government is made liable for Incremental and Consequential Costs and Losses in case it
fails to comply or cause any third party under its direct or indirect control to comply with the
special obligations imposed on government.34

6. The insurance policies obtained by Piatco covering the terminal are now required to be
assigned to the Senior Lenders as security for the loans; previously, their proceeds were to
be used to repair and rehabilitate the facility in case of damage.35
7. Government bound itself to set the initial rate of the terminal fee, to be charged when
Terminal III begins operations, at an amount higher than US$20.36

8. Government waived its defense of the illegality of the contract and even agreed to be
liable to pay damages to Piatco in the event the contract was declared illegal.37

9. Even though government may be entitled to terminate the ARCA on account of breach by
Piatco, government is still liable to pay Piatco the appraised value of Terminal III or the
Attendant Liabilities, if the termination occurs before the In-Service Date.38 This condition
contravenes the BOT Law provision on termination compensation.

10. Government is obligated to take the administrative action required for Piatco's imposition,
collection and application of all Public Utility Revenues.39 No such obligation existed
previously.

11. Government is now also obligated to perform and cause other persons and entities under
its direct or indirect control to perform all acts necessary to perfect the security interests to be
created in favor of Piatco's Senior Lenders.40 No such obligation existed previously.

12. DOTC/MIAA's right of intervention in instances where Piatco's Non-Public Utility


Revenues become exorbitant or excessive has been removed.41

13. The illegality and unenforceability of the ARCA or any of its material provisions was
made an event of default on the part of government only, thus constituting a ground for
Piatco to terminate the ARCA.42

14. Amounts due from and payable by government under the contract were made
payable on demand - net of taxes, levies, imposts, duties, charges or fees of any kind except
as required by law.43

15. The Parametric Formula in the contract, which is utilized to compute for
adjustments/increases to the public utility revenues (i.e., aircraft parking and tacking fees,
check-in counter fee and terminal fee), was revised to permit Piatco to input its more costly
short-term borrowing rates instead of the longer-terms rates in the computations for
adjustments, with the end result that the changes will redound to its greater financial benefit.

16. The Certificate of Completion simply deleted the successful performance-testing of the
terminal facility in accordance with defined performance standards as a pre-condition for
government's acceptance of the terminal facility.44

In sum, the foregoing revisions and amendments as embodied in the ARCA constitute very material
alterations of the terms and conditions of the CA, and give further manifestly undue advantage to
Piatco at the expense of government. Piatco claims that the changes to the CA were necessitated by
the demands of its foreign lenders. However, no proof whatsoever has been adduced to buttress this
claim.

In any event, it is quite patent that the sum total of the aforementioned changes resulted
in drastically weakening the position of government to a degree that seems quite excessive, even
from the standpoint of a businessperson who regularly transacts with banks and foreign lenders, is
familiar with their mind-set, and understands what motivates them. On the other hand, whatever it
was that impelled government officials concerned to accede to those grossly disadvantageous
changes, I can only hazard a guess.

There is no question in my mind that the ARCA was unauthorized and illegal for lack of public
bidding and for being patently disadvantageous to government.

The Three Supplements Imposed New Obligations on Government, Also Without Prior Public
Bidding

After Piatco had managed to breach the protective rampart of public bidding, it recklessly went on a
rampage of further assaults on the ARCA.

The First Supplement Is as Void as the ARCA

In the First Supplement ("FS") executed on August 27, 1999, the following changes were made to
the ARCA:

1. The amounts payable by Piatco to government were reduced by allowing additional


exceptions to the Gross Revenues in which government is supposed to participate.45

2. Made part of the properties which government is obliged to construct and/or maintain and
keep in good repair are (a) the access road connecting Terminals II and III - the construction
of this access road is the obligation of Piatco, in lieu of its obligation to construct an Access
Tunnel connecting Terminals II and III; and (b) the taxilane and taxiway - these are likewise
part of Piatco's obligations, since they are part and parcel of the project as described in
Clause 1.3 of the Bid Documents .46

3. The MIAA is obligated to provide funding for the maintenance and repair of the airports
and facilities owned or operated by it and by third persons under its control. It will also be
liable to Piatco for the latter's losses, expenses and damages as well as liability to third
persons, in case MIAA fails to perform such obligations. In addition, MIAA will also be liable
for the incremental and consequential costs of the remedial work done by Piatco on account
of the former's default.47

4. The FS also imposed on government ten (10) "Additional Special Obligations," including
the following:

(a) Working for the removal of the general aviation traffic from the NAIA airport
complex48

(b) Providing through MIAA the land required by Piatco for the taxilane and one
taxiway at no cost to Piatco49

(c) Implementing the government's existing storm drainage master plan50

(d) Coordinating with DPWH the financing, the implementation and the completion of
the following works before the In-Service Date: three left-turning overpasses (EDSA
to Tramo St., Tramo to Andrews Ave., and Manlunas Road to Sales Ave.);51 and a
road upgrade and improvement program involving widening, repair and resurfacing
of Sales Road, Andrews Avenue and Manlunas Road; improvement of Nichols
Interchange; and removal of squatters along Andrews Avenue.52
(e) Dealing directly with BCDA and the Phil. Air Force in acquiring additional land or
right of way for the road upgrade and improvement program.53

5. Government is required to work for the immediate reversion to MIAA of the Nayong
Pilipino National Park.54

6. Government's share in the terminal fees collected was revised from a flat rate of P180 to
36 percent thereof; together with government's percentage share in the gross revenues of
Piatco, the amount will be remitted to government in pesos instead of US dollars.55 This
amendment enables Piatco to benefit from the further erosion of the peso-dollar exchange
rate, while preventing government from building up its foreign exchange reserves.

7. All payments from Piatco to government are now to be invoiced to MIAA, and payments
are to accrue to the latter's exclusive benefit.56 This move appears to be in support of the
funds MIAA advanced to DPWH.

I must emphasize that the First Supplement is void in two respects. First, it is merely an amendment
to the ARCA, upon which it is wholly dependent; therefore, since the ARCA is void, inexistent and
not capable of being ratified or amended, it follows that the FS too is void, inexistent and
inoperative. Second, even assuming arguendo that the ARCA is somehow remotely valid,
nonetheless the FS, in imposing significant new obligations upon government, altered the
fundamental terms and stipulations of the ARCA, thus necessitating a public bidding all over again.
That the FS was entered into sans public bidding renders it utterly void and inoperative.

The Second Supplement Is Similarly Void and Inexistent

The Second Supplement ("SS") was executed between the government and Piatco on September 4,
2000. It calls for Piatco, acting not as concessionaire of NAIA Terminal III but as a public works
contractor, to undertake - in the government's stead - the clearing, removal, demolition and disposal
of improvements, subterranean obstructions and waste materials at the project site.57

The scope of the works, the procedures involved, and the obligations of the contractor are provided
for in Parts II and III of the SS. Section 4.1 sets out the compensation to be paid, listing specific rates
per cubic meter of materials for each phase of the work - excavation, leveling, removal and disposal,
backfilling and dewatering. The amounts collectible by Piatco are to be offset against the Annual
Guaranteed Payments it must pay government.

Though denominated as Second Supplement, it was nothing less than an entirely new public works
contract. Yet it, too, did not undergo any public bidding, for which reason it is also void and
inoperative.

Not surprisingly, Piatco had to subcontract the works to a certain Wintrack Builders, a firm reputedly
owned by a former high-ranking DOTC official. But that is another story altogether.

The Third Supplement Is Likewise Void and Inexistent

The Third Supplement ("TS"), executed between the government and Piatco on June 22, 2001,
passed on to the government certain obligations of Piatco as Terminal III concessionaire, with
respect to the surface road connecting Terminals II and III.
By way of background, at the inception of and forming part of the NAIA Terminal III project was the
proposed construction of an access tunnel crossing Runway 13/31, which. would connect Terminal
III to Terminal II. The Bid Documents in Section 4.1.2.3[B][i] declared that the said access tunnel
was subject to further negotiation; but for purposes of the bidding, the proponent should submit a bid
for it as well. Therefore, the tunnel was supposed to be part and parcel of the Terminal III project.

However, in Section 5 of the First Supplement, the parties declared that the access tunnel was not
economically viable at that time. In lieu thereof, the parties agreed that a surface access road (now
called the T2-T3 Road) was to be constructed by Piatco to connect the two terminals. Since it was
plainly in substitution of the tunnel, the surface road construction should likewise be considered part
and parcel of the same project, and therefore part of Piatco's obligation as well. While the access
tunnel was estimated to cost about P800 million, the surface road would have a price tag in the
vicinity of about P100 million, thus producing significant savings for Piatco.

Yet, the Third Supplement, while confirming that Piatco would construct the T2-T3 Road,
nevertheless shifted to government some of the obligations pertaining to the former, as follows:

1. Government is now obliged to remove at its own expense all tenants, squatters,
improvements and/or waste materials on the site where the T2-T3 road is to be
constructed.58 There was no similar obligation on the part of government insofar as the
access tunnel was concerned.

2. Should government fail to carry out its obligation as above described, Piatco may
undertake it on government's behalf, subject to the terms and conditions (including
compensation payments) contained in the Second Supplement.59

3. MIAA will answer for the operation, maintenance and repair of the T2-T3 Road.60

The TS depends upon and is intended to supplement the ARCA as well as the First Supplement,
both of which are void and inexistent and not capable of being ratified or amended. It follows that the
TS is likewise void, inexistent and inoperative. And even if, hypothetically speaking, both ARCA and
FS are valid, still, the Third Supplement - imposing as it does significant new obligations upon
government - would in effect alter the terms and stipulations of the ARCA in material respects, thus
necessitating another public bidding. Since the TS was not subjected to public bidding, it is
consequently utterly void as well. At any rate, the TS created new monetary obligations on the part
of government, for which there were no prior appropriations. Hence it follows that the same is void
ab initio.

In patiently tracing the progress of the Piatco contracts from their inception up to the present, I noted
that the whole process was riddled with significant lapses, if not outright irregularity and wholesale
violations of law and public policy. The rationale of beginning at the beginning, so to speak, will
become evident when the question of what to do with the five Piatco contracts is discussed later on.

In the meantime, I shall take up specific, provisions or changes in the contracts and highlight the
more prominent objectionable features.

Government Directly Guarantees Piatco Debts

Certainly the most discussed provision in the parties' arguments is the one creating an unauthorized,
direct government guarantee of Piatco's obligations in favor of the lenders.
Section 4-A of the BOT Law as amended states that unsolicited proposals, such as the NAIA
Terminal III Project, may be accepted by government provided inter alia that no direct government
guarantee, subsidy or equity is required. In short, such guarantee is prohibited in unsolicited
proposals. Section 2(n) of the same legislation defines direct government guarantee as "an
agreement whereby the government or any of its agencies or local government units (will) assume
responsibility for the repayment of debt directly incurred by the project proponent in implementing
the project in case of a loan default."

Both the CA and the ARCA have provisions that undeniably create such prohibited government
guarantee. Section 4.04 (c)(iv) to (vi) of the ARCA, which is similar to Section 4.04 of the CA,
provides thus:

"(iv) that if Concessionaire 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 . . .;

(v) . . . the Senior Lenders may after written notification to GRP, transfer the
Concessionaire's rights and obligations to a transferee . . .;

(vi) if the Senior Lenders . . . are unable to . . . effect a transfer . . ., then GRP and the Senior
Lenders shall endeavor . . . to enter into any other arrangement relating to the Development
Facility . . . If no agreement relating to the Development Facility is arrived at by GRP and the
Senior Lenders within the said 180-day period, then at the end thereof the Development
Facility shall be transferred by the Concessionaire to GRP or its designee and GRP shall
make a termination payment to Concessionaire equal to the Appraised Value (as hereinafter
defined) of the Development Facility or the sum of the Attendant Liabilities, if greater. . . ."

In turn, the term Attendant Liabilities is defined in Section 1.06 of the ARCA as follows:

"Attendant Liabilities refer to all amounts in each case supported by verifiable evidence from
time to time owed or which may become, owing by Concessionaire to Senior Lenders or any
other persons or entities who have provided, loaned or advanced funds or provided financial
facilities to Concessionaire for the Project, 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 to its professional consultants and advisers, suppliers, contractors and sub-
contractors."

Government's agreement to pay becomes effective in the event of a default by Piatco on any of
its loan obligations to the Senior Lenders, and the amount to be paid by government is the greater
of either the Appraised Value of Terminal III or the aggregate amount of the moneys owed by
Piatco - whether to the Senior Lenders or to other entities, including its suppliers, contractors and
subcontractors. In effect, therefore, this agreement already constitutes the prohibited assumption by
government of responsibility for repayment of Piatco's debts in case of a loan default. In fine, a direct
government guarantee.

It matters not that there is a roundabout procedure prescribed by Section 4.04(c)(iv), (v) and (vi) that
would require, first, an attempt (albeit unsuccessful) by the Senior Lenders to transfer Piatco's rights
to a transferee of their choice; and, second, an effort (equally unsuccessful) to "enter into any other
arrangement" with the government regarding the Terminal III facility, before government is required
to make good on its guarantee. What is abundantly clear is the fact that, in the devious labyrinthine
process detailed in the aforesaid section, it is entirely within the Senior Lenders' power, prerogative
and control - exercisable via a mere refusal or inability to agree upon "a transferee" or "any other
arrangement" regarding the terminal facility - to push the process forward to the ultimate contractual
cul-de-sac, wherein government will be compelled to abjectly surrender and make good on its
guarantee of payment.

Piatco also argues that there is no proviso requiring government to pay the Senior Lenders in the
event of Piatco's default. This is literally true, in the sense that Section 4.04(c)(vi) of ARCA speaks of
government making the termination payment to Piatco, not to the lenders. However, it is almost a
certainty that the Senior Lenders will already have made Piatco sign over to them, ahead of time, its
right to receive such payments from government; and/or they may already have had themselves
appointed its attorneys-in-fact for the purpose of collecting and receiving such payments.

Nevertheless, as petitioners-in-intervention pointed out in their Memorandum,61 the termination


payment is to be made to Piatco, not to the lenders; and there is no provision anywhere in the
contract documents to prevent it from diverting the proceeds to its own benefit and/or to ensure that
it will necessarily use the same to pay off the Senior Lenders and other creditors, in order to avert
the foreclosure of the mortgage and other liens on the terminal facility. Such deficiency puts the
interests of government at great risk. Indeed, if the unthinkable were to happen, government would
be paying several hundreds of millions of dollars, but the mortgage liens on the facility may still be
foreclosed by the Senior Lenders just the same.

Consequently, the Piatco contracts are also objectionable for grievously failing to adequately protect
government's interests. More accurately, the contracts would consistently weaken and do away with
protection of government interests. As such, they are therefore grossly lopsided in favor of Piatco
and/or its Senior Lenders.

While on this subject, it is well to recall the earlier discussion regarding a particularly noticeable
alteration of the concept of "Attendant Liabilities." In Section 1.06 of the CA defining the term, the
Piatco debts to be assumed/paid by government were qualified by the phrases recorded and from
time to time outstanding in the books of the Concessionaire and actually used for the project. These
phrases were eliminated from the ARCA's definition of Attendant Liabilities.

Since no explanation has been forthcoming from Piatco as to the possible justification for such a
drastic change, the only conclusion, possible is that it intends to have all of its debts covered by the
guarantee, regardless of whether or not they are disclosed in its books. This has particular reference
to those borrowings which were obtained in violation of the loan covenants requiring Piatco to
maintain a minimum 70:30 debt-to-equity ratio, and even if the loan proceeds were not actually used
for the project itself.

This point brings us back to the guarantee itself. In Section 4.04(c)(vi) of ARCA, the amount which
government has guaranteed to pay as termination payment is the greater of either (i) the Appraised
Value of the terminal facility or (ii) the aggregate of the Attendant Liabilities. Given that the Attendant
Liabilities may include practically any Piatco debt under the sun, it is highly conceivable that their
sum may greatly exceed the appraised value of the facility, and government may end up paying very
much more than the real worth of Terminal III. (So why did government have to bother with public
bidding anyway?)

In the final analysis, Section 4.04(c)(iv) to (vi) of the ARCA is diametrically at odds with the spirit and
the intent of the BOT Law. The law meant to mobilize private resources (the private sector) to take
on the burden and the risks of financing the construction, operation and maintenance of relevant
infrastructure and development projects for the simple reason that government is not in a position to
do so. By the same token, government guarantee was prohibited, since it would merely defeat the
purpose and raison d'être of a build-operate-and-transfer project to be undertaken by the private
sector.

To the extent that the project proponent is able to obtain loans to fund the project, those risks are
shared between the project proponent on the one hand, and its banks and other lenders on the
other. But where the proponent or its lenders manage to cajol or coerce the government into
extending a guarantee of payment of the loan obligations, the risks assumed by the lenders are
passed right back to government. I cannot understand why, in the instant case, government
cheerfully assented to re-assuming the risks of the project when it gave the prohibited guarantee and
thus simply negated the very purpose of the BOT Law and the protection it gives the government.

Contract Termination Provisions in the Piatco Contracts Are Void

The BOT Law as amended provides for contract termination as follows:

"Sec. 7. Contract Termination. - In the event that a project is revoked, cancelled or


terminated by the government through no fault of the project proponent or by mutual
agreement, the Government shall compensate the said project proponent for its actual
expenses incurred in the project plus a reasonable rate of return thereon not exceeding that
stated in the contract as of the date of such revocation, cancellation or termination: Provided,
That the interest of the Government in this instances [sic] shall be duly insured with the
Government Service Insurance System or any other insurance entity duly accredited by the
Office of the Insurance Commissioner: Provided, finally, That the cost of the insurance
coverage shall be included in the terms and conditions of the bidding referred to above.

"In the event that the government defaults on certain major obligations in the contract and
such failure is not remediable or if remediable shall remain unremedied for an unreasonable
length of time, the project proponent/contractor may, by prior notice to the concerned
national government agency or local government unit specifying the turn-over date, terminate
the contract. The project proponent/contractor shall be reasonably compensated by the
Government for equivalent or proportionate contract cost as defined in the contract."

The foregoing statutory provision in effect provides for the following limited instances when
termination compensation may be allowed:

1. Termination by the government through no fault of the project proponent

2. Termination upon the parties' mutual agreement

3. Termination by the proponent due to government's default on certain major contractual


obligations

To emphasize, the law does not permit compensation for the project proponent when contract
termination is due to the proponent's own fault or breach of contract.

This principle was clearly violated in the Piatco Contracts. The ARCA stipulates that government is
to pay termination compensation to Piatco even when termination is initiated by government for the
following causes:
"(i) Failure of Concessionaire to finish the Works in all material respects in accordance with
the Tender Design and the Timetable;

(ii) Commission by Concessionaire of a material breach of this Agreement . . .;

(iii) . . . a change in control of Concessionaire arising from the sale, assignment, transfer or
other disposition of capital stock which results in an ownership structure violative of statutory
or constitutional limitations;

(iv) A pattern of continuing or repeated non-compliance, willful violation, or non-performance


of other terms and conditions hereof which is hereby deemed a material breach of this
Agreement . . ."62

As if that were not bad enough, the ARCA also inserted into Section 8.01 the phrase "Subject to
Section 4.04." The effect of this insertion is that in those instances where government may terminate
the contract on account of Piatco's breach, and it is nevertheless required under the ARCA to make
termination compensation to Piatco even though unauthorized by law, such compensation is to be
equivalent to the payment amount guaranteed by government - either a) the Appraised Value of the
terminal facility or (b) the aggregate of the Attendant Liabilities, whichever amount is greater!

Clearly, this condition is not in line with Section 7 of the BOT Law. That provision permits a project
proponent to recover the actual expenses it incurred in the prosecution of the project plus a
reasonable rate of return not in excess of that provided in the contract; or to be compensated for the
equivalent or proportionate contract cost as defined in the contract, in case the government is in
default on certain major contractual obligations.

Furthermore, in those instances where such termination compensation is authorized by the BOT
Law, it is indispensable that the interest of government be duly insured. Section 5.08 the ARCA
mandates insurance coverage for the terminal facility; but all insurance policies are to be assigned,
and all proceeds are payable, to the Senior Lenders. In brief, the interest being secured by such
coverage is that of the Senior Lenders, not that of government. This can hardly be considered
compliance with law.

In essence, the ARCA provisions on termination compensation result in another unauthorized


government guarantee, this time in favor of Piatco.

A Prohibited Direct Government Subsidy, Which at the Same Time Is an Assault on the
National Honor

Still another contractual provision offensive to law and public policy is Section 8.01(d) of the ARCA,
which is a "bolder and badder" version of Section 8.04(d) of the CA.

It will be recalled that Section 4-A of the BOT Law as amended prohibits not only direct government
guarantees, but likewise a direct government subsidy for unsolicited proposals. Section 13.2. b. iii. of
the 1999 IRR defines a direct government subsidy as encompassing "an agreement whereby the
Government . . . will . . . postpone any payments due from the proponent."

Despite the statutory ban, Section 8.01 (d) of the ARCA provides thus:

"(d) The provisions of Section 8.01(a) notwithstanding, and for the purpose of preventing a
disruption of the operations in the Terminal and/or Terminal Complex, in the event that at any
time Concessionaire is of the reasonable opinion that it shall be unable to meet a payment
obligation owed to the Senior Lenders, Concessionaire shall give prompt notice to GRP,
through DOTC/MIAA and to the Senior Lenders. In such circumstances, the Senior Lenders
(or the Senior Lenders' Representative) may ensure that after making provision for
administrative expenses and depreciation, the cash resources of Concessionaire shall first
be used and applied to meet all payment obligations owed to the Senior Lenders. Any
excess cash, after meeting such payment obligations, shall be earmarked for the payment of
all sums payable by Concessionaire to GRP under this Agreement. If by reason of the
foregoing GRP should be unable to collect in full all payments due to GRP under this
Agreement, then the unpaid balance shall be payable within a 90-day grace period counted
from the relevant due date, with interest per annum at the rate equal to the average 91-day
Treasury Bill Rate as of the auction date immediately preceding the relevant due date. If
payment is not effected by Concessionaire within the grace period, then a spread of five
(5%) percent over the applicable 91-day Treasury Bill Rate shall be added on the unpaid
amount commencing on the expiry of the grace period up to the day of full payment. When
the temporary illiquidity of Concessionaire shall have been corrected and the cash position of
Concessionaire should indicate its ability to meet its maturing obligations, then the provisions
set forth under this Section 8.01(d) shall cease to apply. The foregoing remedial measures
shall be applicable only while there remains unpaid and outstanding amounts owed to the
Senior Lenders." (Emphasis supplied)

By any manner of interpretation or application, Section 8.01(d) of the ARCA clearly mandates
the indefinitepostponement of payment of all of Piatco's obligations to the government, in order to
ensure that Piatco's obligations to the Senior Lenders are paid in full first. That is nothing more or
less than the direct government subsidy prohibited by the BOT Law and the IRR. The fact that Piatco
will pay interest on the unpaid amounts owed to government does not change the situation or render
the prohibited subsidy any less unacceptable.

But beyond the clear violations of law, there are larger issues involved in the ARCA. Earlier, I
mentioned that Section 8.01(d) of the ARCA completely eliminated the proviso in Section 8.04(d) of
the CA which gave government the right to appoint a financial controller to manage the cash position
of Piatco during situations of financial distress. Not only has government been deprived of any
means of monitoring and managing the situation; worse, as can be seen from Section 8.01(d)
above-quoted, the Senior Lenders have effectively locked in on the right to exercise financial
controllership over Piatco and to allocate its cash resources to the payment of all amounts owed to
the Senior Lenders before allowing any payment to be made to government.

In brief, this particular provision of the ARCA has placed in the hands of foreign lenders the power
and the authority to determine how much (if at all) and when the Philippine government (as grantor
of the franchise) may be allowed to receive from Piatco. In that situation, government will be at the
mercy of the foreign lenders. This is a situation completely contrary to the rationale of the BOT Law
and to public policy.

The aforesaid provision rouses mixed emotions - shame and disgust at the parties'
(especially the government officials') docile submission and abject servitude and surrender
to the imperious and excessive demands of the foreign lenders, on the one hand; and
vehement outrage at the affront to the sovereignty of the Republic and to the national honor,
on the other. It is indeed time to put an end to such an unbearable, dishonorable situation.

The Piatco Contracts Unarguably Violate Constitutional Injunctions

I will now discuss the manner in which the Piatco Contracts offended the Constitution.
The Exclusive Right Granted to Piatco to Operate a Public Utility Is Prohibited by the Constitution

While Section 2.02 of the ARCA spoke of granting to Piatco "a franchise to operate and maintain the
Terminal Complex," Section 3.02(a) of the same ARCA granted to Piatco, for the entire term of the
concession agreement, "the exclusive right to operate a commercial international passenger
terminal within the Island of Luzon" with the exception of those three terminals already existing63 at
the time of execution of the ARCA.

Section 11 of Article XII of the Constitution prohibits the grant of a "franchise, certificate, or any other
form of authorization for the operation of a public utility" that is "exclusive in character."

In its Opinion No. 078, Series of 1995, the Department of justice held that "the NAIA Terminal III
which . . . is a 'terminal for public use' is a public utility." Consequently, the constitutional prohibition
against the exclusivity of a franchise applies to the franchise for the operation of NAIA Terminal III as
well.

What was granted to Piatco was not merely a franchise, but an "exclusive right" to operate an
international passenger terminal within the "Island of Luzon." What this grant effectively means is
that the government is now estopped from exercising its inherent power to award any other person
another franchise or a right to operate such a public utility, in the event public interest in Luzon
requires it. This restriction is highly detrimental to government and to the public interest. Former
Secretary of Justice Hernando B. Perez expressed this point well in his Memorandum for the
President dated 21 May 2002:

"Section 3.02 on 'Exclusivity'

"This provision gives to PIATCO (the Concessionaire) the exclusive right to operate a
commercial international airport within the Island of Luzon with the exception of those
already existing at the time of the execution of the Agreement, such as the airports at Subic,
Clark and Laoag City. In the case of the Clark International Airport, however, the provision
restricts its operation beyond its design capacity of 850,000 passengers per annum and the
operation of new terminal facilities therein until after the new NAIA Terminal III shall have
consistently reached or exceeded its design capacity of ten (10) million passenger capacity
per year for three (3) consecutive years during the concession period.

"This is an onerous and disadvantageous provision. It effectively grants PIATCO a monopoly


in Luzon and ties the hands of government in the matter of developing new airports which
may be found expedient and necessary in carrying out any future plan for an inter-modal
transportation system in Luzon.

"Additionally, it imposes an unreasonable restriction on the operation of the Clark


International Airport which could adversely affect the operation and development of the Clark
Special Economic Zone to the economic prejudice of the local constituencies that are being
benefited by its operation." (Emphasis supplied)

While it cannot be gainsaid that an enterprise that is a public utility may happen to constitute a
monopoly on account of the very nature of its business and the absence of competition, such a
situation does not however constitute justification to violate the constitutional prohibition and grant
an exclusive franchise or exclusive right to operate a public utility.

Piatco's contention that the Constitution does not actually prohibit monopolies is beside the point. As
correctly argued,64 the existence of a monopoly by a public utility is a situation created by
circumstances that do not encourage competition. This situation is different from the grant of a
franchise to operate a public utility, a privilege granted by government. Of course, the grant of a
franchise may result in a monopoly. But making such franchise exclusive is what is expressly
proscribed by the Constitution.

Actually, the aforementioned Section 3.02 of the ARCA more than just guaranteed exclusivity; it also
guaranteed that the government will not improve or expand the facilities at Clark - and in fact is
required to put a cap on the latter's operations - until after Terminal III shall have been operated at or
beyond its peak capacity for three consecutive years.65 As counsel for public respondents pointed
out, in the real world where the rate of influx of international passengers can fluctuate substantially
from year to year, it may take many years before Terminal III sees three consecutive years'
operations at peak capacity. The Diosdado Macapagal International Airport may thus end up
stagnating for a long time. Indeed, in order to ensure greater profits for Piatco, the economic
progress of a region has had to be sacrificed.

The Piatco Contracts Violate the Time Limitation on Franchises

Section 11 of Article XII of the Constitution also provides that "no franchise, certificate or any other
form of authorization for the operation of a public utility shall be . . . for a longer period than fifty
years." After all, a franchise held for an unreasonably long time would likely give rise to the same
evils as a monopoly.

The Piatco Contracts have come up with an innovative way to circumvent the prohibition and obtain
an extension. This fact can be gleaned from Section 8.03(b) of the ARCA, which I quote thus:

"Sec. 8.03. Termination Procedure and Consequences of Termination. -

a) x x x xxx xxx

b) In the event the Agreement is terminated pursuant to Section 8.01 (b) hereof,
Concessionaire shall be entitled to collect the Liquidated Damages specified in
Annex 'G'. The full payment by GRP to Concessionaire of the Liquidated Damages
shall be a condition precedent to the transfer by Concessionaire to GRP of the
Development Facility. Prior to the full payment of the Liquidated Damages,
Concessionaire shall to the extent practicable continue to operate the Terminal and
the Terminal Complex and shall be entitled to retain and withhold all payments to
GRP for the purpose of offsetting the same against the Liquidated Damages. Upon
full payment of the Liquidated Damages, Concessionaire shall immediately transfer
the Development Facility to GRP on 'as-is-where-is' basis."

The aforesaid easy payment scheme is less beneficial than it first appears. Although it enables
government to avoid having to make outright payment of an obligation that will likely run into billions
of pesos, this easy payment plan will nevertheless cost government considerable loss of income,
which it would earn if it were to operate Terminal III by itself. Inasmuch as payments to the
concessionaire (Piatco) will be on "installment basis," interest charges on the remaining unpaid
balance would undoubtedly cause the total outstanding balance to swell. Piatco would thus be
entitled to remain in the driver's seat and keep operating the terminal for an indefinite length of time.

The Contracts Create Two Monopolies for Piatco

By way of background, two monopolies were actually created by the Piatco contracts. The first and
more obvious one refers to the business of operating an international passenger terminal in Luzon,
the business end of which involves providing international airlines with parking space for their
aircraft, and airline passengers with the use of departure and arrival areas, check-in counters,
information systems, conveyor systems, security equipment and paraphernalia, immigrations and
customs processing areas; and amenities such as comfort rooms, restaurants and shops.

In furtherance of the first monopoly, the Piatco Contracts stipulate that the NAIA Terminal III will be
the only facility to be operated as an international passenger terminal;66 that NAIA Terminals I and II
will no longer be operated as such;67 and that no one (including the government) will be allowed to
compete with Piatco in the operation of an international passenger terminal in the NAIA
Complex.68 Given that, at this time, the government and Piatco are the only ones engaged in the
business of operating an international passenger terminal, I am not acutely concerned with this
particular monopolistic situation.

There was however another monopoly within the NAIA created by the subject contracts for Piatco -
in the business of providing international airlines with the following: groundhandling, in-flight catering,
cargo handling, and aircraft repair and maintenance services. These are lines of business activity in
which are engaged many service providers (including the petitioners-in-intervention), who will be
adversely affected upon full implementation of the Piatco Contracts, particularly Sections
3.01(d)69 and (e)70 of both the ARCA and the CA.

On the one hand, Section 3.02(a) of the ARCA makes Terminal III the only international passenger
terminal at the NAIA, and therefore the only place within the NAIA Complex where the business of
providing airport-related services to international airlines may be conducted. On the other hand,
Section 3.01(d) of the ARCA requires government, through the MIAA, not to allow service providers
with expired MIAA contracts to renew or extend their contracts to render airport-related services to
airlines. Meanwhile, Section 3.01(e) of the ARCA requires government, through the DOTC and
MIAA, not to allow service providers - those with subsisting concession agreements for services and
operations being conducted at Terminal I - to carry over their concession agreements, services and
operations to Terminal III, unless they first enter into a separate agreement with Piatco.

The aforementioned provisions vest in Piatco effective and exclusive control over which service
provider may and may not operate at Terminal III and render the airport-related services needed by
international airlines. It thereby possesses the power to exclude competition. By necessary
implication, it also has effective control over the fees and charges that will be imposed and collected
by these service providers.

This intention is exceedingly clear in the declaration by Piatco that it is "completely within its rights to
exclude any party that it has not contracted with from NAIA Terminal III."71

Worse, there is nothing whatsoever in the Piatco Contracts that can serve to restrict, control or
regulate the concessionaire's discretion and power to reject any service provider and/or impose any
term or condition it may see fit in any contract it enters into with a service provider. In brief, there is
no safeguard whatsoever to ensure free and fair competition in the service-provider sector.

In the meantime, and not surprisingly, Piatco is first in line, ready to exploit the unique business
opportunity. It announced72 that it has accredited three groundhandlers for Terminal III. Aside from
the Philippine Airlines, the other accredited entities are the Philippine Airport and Ground Services
Globeground, Inc. ("PAGSGlobeground") and the Orbit Air Systems, Inc. ("Orbit").
PAGSGlobeground is a wholly-owned subsidiary of the Philippine Airport and Ground Services, Inc.
or PAGS,73 while Orbit is a wholly-owned subsidiary of Friendship Holdings, Inc.,74 which is in turn
owned 80 percent by PAGS.75 PAGS is a service provider owned 60 percent by the Cheng
Family;76 it is a stockholder of 35 percent of Piatco77 and is the latter's designated contractor-operator
for NAIA Terminal III.78

Such entry into and domination of the airport-related services sector appear to be very much in line
with the following provisions contained in the First Addendum to the Piatco Shareholders
Agreement,79 executed on July 6, 1999, which appear to constitute a sort of master plan to create a
monopoly and combinations in restraint of trade:

"11. The Shareholders shall ensure:

a. x x x xxx x x x.;

b. That (Phil. Airport and Ground Services, Inc.) PAGS and/or its designated Affiliates shall,
at all times during the Concession Period, be exclusively authorized by (PIATCO) to engage
in the provision of ground-handling, catering and fueling services within the Terminal
Complex.

c. That PAIRCARGO and/or its designated Affiliate shall, during the Concession Period, be
the only entities authorized to construct and operate a warehouse for all cargo handling and
related services within the Site."

Precisely, proscribed by our Constitution are the monopoly and the restraint of trade being fostered
by the Piatco Contracts through the erection of barriers to the entry of other service providers into
Terminal III. In Tatad v. Secretary of the Department of Energy,80 the Court ruled:

". . . [S]ection 19 of Article XII of the Constitution . . . mandates: '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.'

"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 or the whole supply of a particular
commodity. It is a form of market structure in which one or only a few firms dominate the total
sales of a product or service. On the other hand, a combination in restraint of trade is an
agreement or understanding between two or more persons, in the form of a contract, trust,
pool, holding company, or other form of association, for the purpose of unduly restricting
competition, monopolizing trade and commerce in a certain commodity, controlling its
production, distribution and price, or otherwise interfering with freedom of trade without
statutory authority. Combination in restraint of trade refers to the means while monopoly
refers to the end.

"x x x xxx xxx

"Section 19, Article XII of our Constitution is anti-trust in history and in spirit. It espouses
competition. The desirability of competition is the reason for the prohibition against restraint
of trade, the reason for the interdiction of unfair competition, and the reason for regulation of
unmitigated monopolies. Competition is thus the underlying principle of [S]ection 19, Article
XII of our Constitution, . . ."81

Gokongwei Jr. v. Securities and Exchange Commission82 elucidates the criteria to be employed: "A
'monopoly' embraces any combination the tendency of which is to prevent competition in the broad
and general sense, or to control prices to the detriment of the public. In short, it is the concentration
of business in the hands of a few. The material consideration in determining its existence is not that
prices are raised and competition actually excluded, but that power exists to raise prices or exclude
competition when desired."83 (Emphasis supplied)

The Contracts Encourage Monopolistic Pricing, Too

Aside from creating a monopoly, the Piatco contracts also give the concessionaire virtually limitless
power over the charging of fees, rentals and so forth. What little "oversight function" the government
might be able and minded to exercise is less than sufficient to protect the public interest, as can be
gleaned from the following provisions:

"Sec. 6.06. Adjustment of Non-Public Utility Fees and Charges

"For fees, rentals and charges constituting Non-Public Utility Revenues, Concessionaire may
make any adjustments it deems appropriate without need for the consent of GRP or any
government agency subject to Sec. 6.03(c)."

Section 6.03(c) in turn provides:

"(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/wellwisher fee constitute
Non-Public Utility Revenues of Concessionaire, GRP may 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."

It will be noted that the above-quoted provision has no teeth, so the concessionaire can defy the
government without fear of any sanction. Moreover, Section 6.06 - taken together with Section
6.03(c) of the ARCA - falls short of the standard set by the BOT Law as amended, which expressly
requires in Section 2(b) that the project proponent is "allowed to charge facility users appropriate
tolls, fees, rentals and charges not exceeding those proposed in its bid or as negotiated and
incorporated in the contract x x x."

The Piatco Contracts Violate Constitutional Prohibitions Against


Impairment of Contracts and Deprivation of Property Without Due Process

Earlier, I discussed how Section 3.01(e)84 of both the CA and the ARCA requires government,
through DOTC/MIAA, not to permit the carry-over to Terminal III of the services and operations of
certain service providers currently operating at Terminal I with subsisting contracts.

By the In-Service Date, Terminal III shall be the only facility to be operated as an international
passenger terminal at the NAIA;85 thus, Terminals I and II shall no longer operate as such,86 and no
one shall be allowed to compete with Piatco in the operation of an international passenger terminal
in the NAIA.87 The bottom line is that, as of the In-Service Date, Terminal III will be the only terminal
where the business of providing airport-related services to international airlines and passengers may
be conducted at all.
Consequently, government through the DOTC/MIAA will be compelled to cease honoring existing
contracts with service providers after the In-Service Date, as they cannot be allowed to operate in
Terminal III.

In short, the CA and the ARCA obligate and constrain government to break its existing contracts with
these service providers.

Notably, government is not in a position to require Piatco to accommodate the displaced service
providers, and it would be unrealistic to think that these service providers can perform their service
contracts in some other international airport outside Luzon. Obviously, then, these displaced service
providers are - to borrow a quaint expression - up the river without a paddle. In plainer terms, they
will have lost their businesses entirely, in the blink of an eye.

What we have here is a set of contractual provisions that impair the obligation of contracts and
contravene the constitutional prohibition against deprivation of property without due process of law.88

Moreover, since the displaced service providers, being unable to operate, will be forced to close
shop, their respective employees - among them Messrs. Agan and Lopez et al. - have very grave
cause for concern, as they will find themselves out of employment and bereft of their means of
livelihood. This situation comprises still another violation of the constitution prohibition against
deprivation of property without due process.

True, doing business at the NAIA may be viewed more as a privilege than as a right. Nonetheless,
where that privilege has been availed of by the petitioners-in-intervention service providers for years
on end, a situation arises, similar to that in American Inter-fashion v. GTEB.89 We held therein that a
privilege enjoyed for seven years "evolved into some form of property right which should not be
removed x x x arbitrarily and without due process." Said pronouncement is particularly relevant and
applicable to the situation at bar because the livelihood of the employees of petitioners-intervenors
are at stake.

The Piatco Contracts Violate Constitutional Prohibition


Against Deprivation of Liberty Without Due Process

The Piatco Contracts by locking out existing service providers from entry into Terminal III and
restricting entry of future service providers, thereby infringed upon the freedom - guaranteed to and
heretofore enjoyed by international airlines - to contract with local service providers of their choice,
and vice versa.

Both the service providers and their client airlines will be deprived of the right to liberty, which
includes the right to enter into all contracts,90 and/or the right to make a contract in relation to one's
business.91

By Creating New Financial Obligations for Government,


Supplements to the ARCA Violate the Constitutional
Ban on Disbursement of Public Funds Without Valid Appropriation

Clearly prohibited by the Constitution is the disbursement of public funds out of the treasury, except
in pursuance of an appropriation made by law.92 The immediate effect of this constitutional ban is
that all the various agencies of government are constrained to limit their expenditures to the amounts
appropriated by law for each fiscal year; and to carefully count their cash before taking on
contractual commitments. Giving flesh and form to the injunction of the fundamental law, Sections 46
and 47 of Executive Order 292, otherwise known as the Administrative Code of 1987, provide as
follows:

"Sec. 46. Appropriation Before Entering into Contract. - (1) No contract involving the
expenditure of public funds shall be entered into unless there is an appropriation therefor, the
unexpended balance of which, free of other obligations, is sufficient to cover the proposed
expenditure; and . .

"Sec. 47. Certificate Showing Appropriation to Meet Contract. - Except in the case of a
contract for personal service, for supplies for current consumption or to be carried in stock
not exceeding the estimated consumption for three (3) months, or banking transactions of
government-owned or controlled banks, no contract involving the expenditure of public funds
by any government agency shall be entered into or authorized unless the proper accounting
official of the agency concerned shall have certified to the officer entering into the obligation
that funds have been duly appropriated for the purpose and that the amount necessary to
cover the proposed contract for the current calendar year is available for expenditure on
account thereof, subject to verification by the auditor concerned. The certificate signed by the
proper accounting official and the auditor who verified it, shall be attached to and become an
integral part of the proposed contract, and the sum so certified shall not thereafter be
available for expenditure for any other purpose until the obligation of the government agency
concerned under the contract is fully extinguished."

Referring to the aforequoted provisions, this Court has held that "(I)t is quite evident from the tenor of
the language of the law that the existence of appropriations and the availability of funds are
indispensable pre-requisites to or conditions sine qua non for the execution of government contracts.
The obvious intent is to impose such conditions as a priori requisites to the validity of the proposed
contract."93

Notwithstanding the constitutional ban, statutory mandates and Jurisprudential precedents, the three
Supplements to the ARCA, which were not approved by NEDA, imposed on government the
additional burden of spending public moneys without prior appropriation.

In the First Supplement ("FS") dated August 27, 1999, the following requirements were imposed on
the government:

• To construct, maintain and keep in good repair and operating condition all airport support
services, facilities, equipment and infrastructure owned and/or operated by MIAA, which are
not part of the Project or which are located outside the Site, even though constructed by
Concessionaire - including the access road connecting Terminals II and III and the taxilane,
taxiways and runways

• To obligate the MIAA to provide funding for the upkeep, maintenance and repair of the
airports and facilities owned or operated by it and by third persons under its control in order
to ensure compliance with international standards; and holding MIAA liable to Piatco for the
latter's losses, expenses and damages as well as for the latter's liability to third persons, in
case MIAA fails to perform such obligations; in addition, MIAA will also be liable for the
incremental and consequential costs of the remedial work done by Piatco on account of the
former's default.

• Section 4 of the FS imposed on government ten (10) "Additional Special Obligations,"


including the following:
o Providing thru MIAA the land required by Piatco for the taxilane and one taxiway, at
no cost to Piatco
o Implementing the government's existing storm drainage master plan
o Coordinating with DPWH the financing, implementation and completion of the
following works before the In-Service Date: three left-turning overpasses (Edsa to
Tramo St., Tramo to Andrews Ave., and Manlunas Road to Sales Ave.) and a road
upgrade and improvement program involving widening, repair and resurfacing of
Sales Road, Andrews Avenue and Manlunas Road; improvement of Nichols
Interchange; and removal of squatters along Andrews Avenue
o Dealing directly with BCDA and the Philippine Air Force in acquiring additional land
or right of way for the road upgrade and improvement program
o Requiring government to work for the immediate reversion to MIAA of the Nayong
Pilipino National Park, in order to permit the building of the second west parallel
taxiway

• Section 5 of the FS also provides that in lieu of the access tunnel, a surface access road
(T2-T3) will be constructed. This provision requires government to expend funds to purchase
additional land from Nayong Pilipino and to clear the same in order to be able to deliver
clean possession of the site to Piatco, as required in Section 5(c) of the FS.

On the other hand, the Third Supplement ("TS") obligates the government to deliver, within 120 days
from date thereof, clean possession of the land on which the T2-T3 Road is to be constructed.

The foregoing contractual stipulations undeniably impose on government the expenditures of public
funds not included in any congressional appropriation or authorized by any other statute. Piatco
however attempts to take these stipulations out of the ambit of Sections 46 and 47 of the
Administrative Code by characterizing them as stipulations for compliance on a "best-efforts basis"
only.

To determine whether the additional obligations under the Supplements may really be undertaken on
a best-efforts basis only, the nature of each of these obligations must be examined in the context of
its relevance and significance to the Terminal III Project, as well as of any adverse impact that may
result if such obligation is not performed or undertaken on time. In short, the criteria for determining
whether the best-efforts basis will apply is whether the obligations are critical to the success of the
Project and, accordingly, whether failure to perform them (or to perform them on time) could result in
a material breach of the contract.

Viewed in this light, the "Additional Special Obligations" set out in Section 4 of the FS take on a
different aspect. In particular, each of the following may all be deemed to play a major role in the
successful and timely prosecution of the Terminal III Project: the obtention of land required by
PIATCO for the taxilane and taxiway; the implementation of government's existing storm drainage
master plan; and coordination with DPWH for the completion of the three left-turning overpasses
before the In-Service Date, as well as acquisition and delivery of additional land for the construction
of the T2-T3 access road.

Conversely, failure to deliver on any of these obligations may conceivably result in substantial
prejudice to the concessionaire, to such an extent as to constitute a material breach of the Piatco
Contracts. Whereupon, the concessionaire may outrightly terminate the Contracts pursuant to
Section 8.01(b)(i) and (ii) of the ARCA and seek payment of Liquidated Damages in accordance with
Section 8.02(a) of the ARCA; or the concessionaire may instead require government to pay the
Incremental and Consequential Losses under Section 1.23 of the ARCA.94The logical conclusion
then is that the obligations in the Supplements are not to be performed on a best-efforts basis only,
but are unarguably mandatory in character.

Regarding MIAA's obligation to coordinate with the DPWH for the complete implementation of the
road upgrading and improvement program for Sales, Andrews and Manlunas Roads (which provide
access to the Terminal III site) prior to the In-Service Date, it is essential to take note of the fact that
there was a pressing need to complete the program before the opening of Terminal III.95 For that
reason, the MIAA was compelled to enter into a memorandum of agreement with the DPWH in order
to ensure the timely completion of the road widening and improvement program. MIAA agreed to
advance the total amount of P410.11 million to DPWH for the works, while the latter was committed
to do the following:

"2.2.8. Reimburse all advance payments to MIAA including but not limited to interest, fees,
plus other costs of money within the periods CY2004 and CY2006 with payment of no less
than One Hundred Million Pesos (PhP100M) every year.

"2.2.9. Perform all acts necessary to include in its CY2004 to CY2006 budget allocation the
repayments for the advances made by MIAA, to ensure that the advances are fully repaid by
CY2006. For this purpose, DPWH shall include the amounts to be appropriated for
reimbursement to MIAA in the "Not Needing Clearance" column of their Agency Budget
Matrix (ABM) submitted to the Department of Budget and Management."

It can be easily inferred, then, that DPWH did not set aside enough funds to be able to complete the
upgrading program for the crucially situated access roads prior to the targeted opening date of
Terminal III; and that, had MIAA not agreed to lend the P410 Million, DPWH would not have been
able to complete the program on time. As a consequence, government would have been in breach of
a material obligation. Hence, this particular undertaking of government may likewise not be
construed as being for best-efforts compliance only.

They also Infringe on the Legislative Prerogative and Power Over the Public Purse

But the particularly sad thing about this transaction between MIAA and DPWH is the fact that both
agencies were maneuvered into (or allowed themselves to be maneuvered into) an agreement that
would ensure delivery of upgraded roads for Piatco's benefit, using funds not allocated for that
purpose. The agreement would then be presented to Congress as a done deal. Congress would
thus be obliged to uphold the agreement and support it with the necessary allocations and
appropriations for three years, in order to enable DPWH to deliver on its committed repayments to
MIAA. The net result is an infringement on the legislative power over the public purse and a
diminution of Congress' control over expenditures of public funds - a development that would not
have come about, were it not for the Supplements. Very clever but very illegal!

EPILOGUE
What Do We Do Now?

In the final analysis, there remains but one ultimate question, which I raised during the Oral
Argument on December 10, 2002: What do we do with the Piatco Contracts and Terminal
III?96 (Feeding directly into the resolution of the decisive question is the other nagging issue: Why
should we bother with determining the legality and validity of these contracts, when the Terminal
itself has already been built and is practically complete?)

Prescinding from all the foregoing disquisition, I find that all the Piatco contracts, without exception,
are void ab initio, and therefore inoperative. Even the very process by which the contracts came into
being - the bidding and the award - has been riddled with irregularities galore and blatant violations
of law and public policy, far too many to ignore. There is thus no conceivable way, as proposed by
some, of saving one (the original Concession Agreement) while junking all the rest.

Neither is it possible to argue for the retention of the Draft Concession Agreement (referred to in the
various pleadings as the Contract Bidded Out) as the contract that should be kept in force and effect
to govern the situation, inasmuch as it was never executed by the parties. What Piatco and the
government executed was the Concession Agreement which is entirely different from the Draft
Concession Agreement.

Ultimately, though, it would be tantamount to an outrageous, grievous and unforgivable mutilation of


public policy and an insult to ourselves if we opt to keep in place a contract - any contract - for to do
so would assume that we agree to having Piatco continue as the concessionaire for Terminal III.

Despite all the insidious contraventions of the Constitution, law and public policy Piatco perpetrated,
keeping Piatco on as concessionaire and even rewarding it by allowing it to operate and profit from
Terminal III - instead of imposing upon it the stiffest sanctions permissible under the laws - is
unconscionable.

It is no exaggeration to say that Piatco may not really mind which contract we decide to keep in
place. For all it may care, we can do just as well without one, if we only let it continue and operate
the facility. After all, the real money will come not from building the Terminal, but from actually
operating it for fifty or more years and charging whatever it feels like, without any competition at all.
This scenario must not be allowed to happen.

If the Piatco contracts are junked altogether as I think they should be, should not AEDC
automatically be considered the winning bidder and therefore allowed to operate the facility? My
answer is a stone-cold 'No'. AEDC never won the bidding, never signed any contract, and never built
any facility. Why should it be allowed to automatically step in and benefit from the greed of another?

Should government pay at all for reasonable expenses incurred in the construction of the Terminal?
Indeed it should, otherwise it will be unjustly enriching itself at the expense of Piatco and, in
particular, its funders, contractors and investors - both local and foreign. After all, there is no
question that the State needs and will make use of Terminal III, it being part and parcel of the critical
infrastructure and transportation-related programs of government.

In Melchor v. Commission on Audit,97 this Court held that even if the contract therein was void, the
principle of payment by quantum meruit was found applicable, and the contractor was allowed to
recover the reasonable value of the thing or services rendered (regardless of any agreement as to
the supposed value), in order to avoid unjust enrichment on the part of government. The principle
of quantum meruit was likewise applied in Eslao v. Commission on Audit,98 because to deny
payment for a building almost completed and already occupied would be to permit government to
unjustly enrich itself at the expense of the contractor. The same principle was applied in Republic v.
Court of Appeals.99

One possible practical solution would be for government - in view of the nullity of the Piatco
contracts and of the fact that Terminal III has already been built and is almost finished - to bid out the
operation of the facility under the same or analogous principles as build-operate-and-transfer
projects. To be imposed, however, is the condition that the winning bidder must pay the builder of
the facility a price fixed by government based on quantum meruit; on the real, reasonable - not
inflated - value of the built facility.
How the payment or series of payments to the builder, funders, investors and contractors will be
staggered and scheduled, will have to be built into the bids, along with the annual guaranteed
payments to government. In this manner, this whole sordid mess could result in something truly
beneficial for all, especially for the Filipino people.

WHEREFORE, I vote to grant the Petitions and to declare the subject contracts NULL and VOID.
G.R. No. 194366 October 10, 2012

NAPOLEON D. NERI, ALICIA D. NERI-MONDEJAR, VISMINDA D. NERI-CHAMBERS, ROSA D.


NERI-MILLAN, DOUGLAS D. NERI, EUTROPIA D. ILLUT-COCKINOS AND VICTORIA D. ILLUT-
PIALA, Petitioners,
vs.
HEIRS OF HADJI YUSOP UY AND JULPHA* IBRAHIM UY, Respondents.

DECISION

PERLAS-BERNABE, J.:

In this Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, petitioners Napoleon D.
Neri (Napoleon), Alicia D. Neri-Mondejar (Alicia), Visminda D. Neri-Chambers (Visminda), Rosa D.
Neri-Millan (Rosa), Douglas D. Neri (Douglas), Eutropia D. Illut-Cockinos (Eutropia), and Victoria D.
Illut-Piala (Victoria) seek to reverse and set aside the April 27, 2010 Decision2 and October 18, 2010
Resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 01031-MIN which annulled the October
25, 2004 Decision4 of the Regional Trial Court (RTC) of Panabo City, Davao del Norte and instead,
entered a new one dismissing petitioners’ complaint for annulment of sale, damages and attorney’s
feesagainst herein respondents heirs of spouses Hadji Yusop Uy and Julpha Ibrahim Uy (heirs of
Uy).

The Facts

During her lifetime, Anunciacion Neri (Anunciacion) had seven children, two (2) from her first
marriage with Gonzalo Illut (Gonzalo), namely: Eutropia and Victoria, and five (5) from her second
marriage with Enrique Neri (Enrique), namely: Napoleon, Alicia, Visminda, Douglas and Rosa.
Throughout the marriage of spouses Enrique and Anunciacion, they acquired several homestead
properties with a total area of 296,555 square meters located in Samal, Davao del Norte, embraced
by Original Certificate of Title (OCT) Nos. (P-7998) P-21285 , (P-14608) P-51536and P-20551 (P-
8348)7 issued on February 15, 1957, August 27, 1962 and July 7, 1967, respectively.

On September 21, 1977, Anunciacion died intestate. Her husband, Enrique, in his personal capacity
and as natural guardian of his minor children Rosa and Douglas, together with Napoleon, Alicia, and
Vismindaexecuted an Extra-Judicial Settlement of the Estate with Absolute Deed of Sale8 on July 7,
1979, adjudicating among themselves the said homestead properties, and thereafter, conveying
themto the late spouses Hadji Yusop Uy and Julpha Ibrahim Uy (spouses Uy)for a consideration of ₱
80,000.00.

On June 11, 1996, the children of Enrique filed a complaint for annulment of saleof the said
homestead properties against spouses Uy (later substituted by their heirs)before the RTC, docketed
as Civil Case No.96-28, assailing the validity of the sale for having been sold within the prohibited
period. Thecomplaint was later amended to include Eutropia and Victoriaas additional plaintiffs for
having been excluded and deprived of their legitimes as childrenof Anunciacion from her first
marriage.

In their amended answer with counterclaim, the heirs of Uy countered that the sale took place
beyond the 5-year prohibitory period from the issuance of the homestead patents. They also denied
knowledge of Eutropia and Victoria’s exclusionfrom the extrajudicial settlement and sale of the
subject properties, and interposed further the defenses of prescription and laches.

The RTC Ruling


On October 25, 2004, the RTC rendered a decision ordering, among others, the annulment of the
Extra-Judicial Settlement of the Estate with Absolute Deed of Sale. It ruled that while the sale
occurred beyond the 5-year prohibitory period, the sale is still void because Eutropia and Victoria
were deprived of their hereditary rights and that Enrique had no judicial authority to sell the shares of
his minor children, Rosa and Douglas.

Consequently, it rejected the defenses of laches and prescription raised by spouses Uy, who
claimed possession of the subject properties for 17 years, holding that co-ownership rights are
imprescriptible.

The CA Ruling

On appeal, the CAreversed and set aside the ruling of the RTC in its April 27, 2010 Decision and
dismissed the complaint of the petitioners. It held that, while Eutropia and Victoria had no knowledge
of the extrajudicial settlement and sale of the subject properties and as such, were not bound by it,
the CA found it unconscionable to permit the annulment of the sale considering spouses Uy’s
possession thereof for 17 years, and thatEutropia and Victoriabelatedlyfiled their actionin 1997,
ormore than two years fromknowledge of their exclusion as heirs in 1994 when their stepfather died.
It, however, did not preclude the excluded heirs from recovering their legitimes from their co-heirs.

Similarly, the CA declared the extrajudicial settlement and the subsequent saleas valid and binding
with respect to Enrique and hischildren, holding that as co-owners, they have the right to dispose of
their respective shares as they consider necessary or fit.While recognizing Rosa and Douglas to be
minors at that time, they were deemed to have ratified the sale whenthey failed to question it upon
reaching the age of majority.Italso found laches to have set in because of their inaction for a long
period of time.

The Issues

In this petition, petitioners imputeto the CA the following errors:

I. WHEN IT UPHELDTHE VALIDITY OF THE "EXTRA JUDICIAL SETTLEMENT OF THE ESTATE


WITH ABSOLUTE DEED OF SALE" AS FAR AS THE SHARES OF EUTROPIA AND VICTORIA
WERE CONCERNED, THEREBY DEPRIVING THEM OF THEIR INHERITANCE;

II. WHEN IT DID NOT NULLIFY OR ANNUL THE "EXTRA JUDICIAL SETTLEMENT OF THE
ESTATE WITH ABSOLUTE DEED OF SALE" WITH RESPECT TO THE SHARESOF ROSA AND
DOUGLAS, THEREBY DEPRIVING THEM OF THEIR INHERITANCE; and

III. WHEN IT FOUND THAT LACHES OR PRESCRIPTION HAS SET IN.

The Ruling of the Court

The petitionis meritorious.

It bears to stress that all the petitioners herein are indisputably legitimate children of Anunciacion
from her first and second marriages with Gonzalo and Enrique, respectively, and consequently, are
entitled to inherit from her in equal shares, pursuant to Articles 979 and 980 of the Civil Code which
read:
ART. 979. Legitimate children and their descendants succeed the parents and other ascendants,
without distinction as to sex or age, and even if they should come from different marriages.

xxx

ART. 980. The children of the deceased shall always inherit from him in their own right, dividing the
inheritance in equal shares.

As such, upon the death of Anunciacion on September 21, 1977, her children and Enrique acquired
their respective inheritances,9 entitling them to their pro indiviso shares in her whole estate, as
follows:

Enrique 9/16 (1/2 of the conjugal assets + 1/16)


Eutropia 1/16
Victoria 1/16
Napoleon 1/16
Alicia 1/16
Visminda 1/16
Rosa 1/16
Douglas 1/16

Hence, in the execution of the Extra-Judicial Settlement of the Estate with Absolute Deed of Sale in
favor of spouses Uy, all the heirs of Anunciacionshould have participated. Considering that Eutropia
and Victoria were admittedly excluded and that then minors Rosa and Douglas were not properly
represented therein, the settlement was not valid and binding uponthem and consequently, a total
nullity.

Section 1, Rule 74 of the Rules of Court provides:

SECTION 1. Extrajudicial settlement by agreement between heirs. – x x x

The fact of the extrajudicial settlement or administration shall be published in a newspaper of


general circulation in the manner provided in the next succeeding section; but no extrajudicial
settlement shall be binding upon any person who has not participated therein or had no notice
thereof. (Underscoring added)

The effect of excluding the heirs in the settlement of estate was further elucidated in Segura v.
Segura,10 thus:

It is clear that Section 1 of Rule 74 does not apply to the partition in question which was null and void
as far as the plaintiffs were concerned. The rule covers only valid partitions. The partition in the
present case was invalid because it excluded six of the nine heirs who were entitled to equal shares
in the partitioned property. Under the rule "no extrajudicial settlement shall be binding upon any
person who has not participated therein or had no notice thereof." As the partition was a total nullity
and did not affect the excluded heirs, it was not correct for the trial court to hold that their right to
challenge the partition had prescribed after two years from its execution…
However, while the settlement of the estate is null and void, the subsequent sale of the subject
propertiesmade by Enrique and his children, Napoleon, Alicia and Visminda, in favor of the
respondents isvalid but only with respect to their proportionate shares therein.It cannot be denied
that these heirs have acquired their respective shares in the properties of Anunciacion from the
moment of her death11 and that, as owners thereof, they can very well sell their undivided share in the
estate.12

With respect to Rosa and Douglas who were minors at the time of the execution of the settlement
and sale, their natural guardian and father, Enrique, represented them in the transaction. However,
on the basis of the laws prevailing at that time, Enrique was merely clothed with powers of
administration and bereft of any authority to dispose of their 2/16 shares in the estate of their mother,
Anunciacion.

Articles 320 and 326 of the Civil Code, the laws in force at the time of the execution of the settlement
and sale, provide:

ART. 320. The father, or in his absence the mother, is the legal administrator of the property
pertaining to the child under parental authority. If the property is worth more than two thousand
pesos, the father or mother shall give a bond subject to the approval of the Court of First Instance.

ART. 326. When the property of the child is worth more than two thousand pesos, the father or
mother shall be considered a guardian of the child’s property, subject to the duties and obligations of
guardians under the Rules of Court.

Corollarily, Section 7, Rule 93 of the Rules of Court also provides:

SEC. 7. Parents as Guardians. – When the property of the child under parental authority is worth two
thousand pesos or less, the father or the mother, without the necessity of court appointment, shall be
his legal guardian. When the property of the child is worth more than two thousand pesos, the father
or the mother shall be considered guardian of the child’s property, with the duties and obligations of
guardians under these Rules, and shall file the petition required by Section 2 hereof. For good
reasons, the court may, however, appoint another suitable persons.

Administration includes all acts for the preservation of the property and the receipt of fruits according
to the natural purpose of the thing. Any act of disposition or alienation, or any reduction in the
substance of the patrimony of child, exceeds the limits of administration.13 Thus, a father or mother,
as the natural guardian of the minor under parental authority, does not have the power to dispose or
encumber the property of the latter. Such power is granted by law only to a judicial guardian of the
ward’s property and even then only with courts’ prior approval secured in accordance with the
proceedings set forth by the Rules of Court.14

Consequently, the disputed sale entered into by Enrique in behalf of his minor children without the
proper judicial authority, unless ratified by them upon reaching the age of majority,15 is unenforceable
in accordance with Articles 1317 and 1403(1) of the Civil Code which provide:

ART. 1317. No one may contract in the name of another without being authorized by the latter or
unless he has by law a right to represent him.

A contract entered into in the name of another by one who has no authority or legal representation,
or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or
impliedly, by the person on whose behalf it has been executed, before it is revoked by the other
contracting party.
ART. 1403. The following contracts are unenforceable, unless they are ratified:

(1) Those entered into the name of another person by one who has been given no authority or legal
representation, or who has acted beyond his powers;

xxx

Ratification means that one under no disability voluntarily adopts and gives sanction to some
unauthorized act or defective proceeding, which without his sanction would not be binding on him. It
is this voluntary choice, knowingly made, which amounts to a ratification of what was theretofore
unauthorized, and becomes the authorized act of the party so making the ratification.16 Once ratified,
expressly or impliedly such as when the person knowingly received benefits from it, the contract is
cleansed from all its defects from the moment it was constituted,17 as it has a retroactive effect.

Records, however, show that Rosa had ratified the extrajudicial settlement of the estate with
absolute deed of sale. In Napoleon and Rosa’s Manifestation18 before the RTC dated July 11,
1997,they stated:

"Concerning the sale of our parcel of land executed by our father, Enrique Neri concurred in and
conformed to by us and our other two sisters and brother (the other plaintiffs), in favor of Hadji
Yusop Uy and his spouse Hadja Julpa Uy on July 7, 1979, we both confirmed that the same was
voluntary and freely made by all of us and therefore the sale was absolutely valid and enforceable as
far as we all plaintiffs in this case are concerned;" (Underscoring supplied)

In their June 30, 1997 Joint-Affidavit,19 Napoleon and Rosa also alleged:

"That we are surprised that our names are included in this case since we do not have any intention
to file a case against Hadji Yusop Uy and Julpha Ibrahim Uy and their family and we respect and
acknowledge the validity of the Extra-Judicial Settlement of the Estate with Absolute Deed of Sale
dated July 7, 1979;" (Underscoring supplied)

Clearly, the foregoing statements constitutedratification of the settlement of the estate and the
subsequent sale, thus, purging all the defects existing at the time of its execution and legitimizing the
conveyance of Rosa’s 1/16 share in the estate of Anunciacion to spouses Uy. The same, however,
is not true with respect to Douglas for lack of evidence showing ratification.

Considering, thus, that the extrajudicial settlement with sale is invalid and therefore, not binding on
Eutropia, Victoria and Douglas, only the shares ofEnrique, Napoleon, Alicia, Visminda and Rosa in
the homestead properties have effectivelybeen disposed in favor of spouses Uy. "A person can only
sell what he owns, or is authorized to sell and the buyer can as a consequence acquire no more
than what the sellercan legally transfer."20 On this score, Article 493 of the Civil Codeis relevant,
which provides:

Each co-owner shall have the full ownership of his part and of the fruits and benefits pertaining
thereto, and he may therefore alienate, assign or mortgage it, and even substitute another person in
its enjoyment, except when personal rights are involved. But the effect of the alienation or the
mortgage, with respect to the co-owners, shall be limited to the portion which may be allotted to him
in the division upon the termination of the co-ownership.

Consequently, spouses Uy or their substituted heirs became pro indiviso co-owners of the
homestead properties with Eutropia, Victoria and Douglas, who retained title to their respective 1/16
shares. They were deemed to be holding the 3/16 shares of Eutropia, Victoria and Douglas under an
implied constructive trust for the latter’s benefit, conformably with Article 1456 of the Civil Code
which states:"if property is acquired through mistake or fraud, the person obtaining it is, by force of
law, considered a trustee of an implied trust for the benefit of the person from whom the property
comes." As such, it is only fair, just and equitable that the amount paid for their shares equivalent to
₱ 5,000.0021 each or a total of ₱ 15,000.00 be returned to spouses Uy with legal interest.

On the issue of prescription, the Court agrees with petitioners that the present action has not
prescribed in so far as it seeks to annul the extrajudicial settlement of the estate. Contrary to the
ruling of the CA, the prescriptive period of 2 years provided in Section 1 Rule 74 of the Rules of

Court reckoned from the execution of the extrajudicial settlement finds no application to petitioners
Eutropia, Victoria and Douglas, who were deprived of their lawful participation in the subject estate.
Besides, an "action or defense for the declaration of the inexistence of a contract does not prescribe"
in accordance with Article 1410 of the Civil Code.

However, the action to recover property held in trust prescribes after 10 years from the time the
cause of action accrues,22 which is from the time of actual notice in case of unregistered deed.23 In this
case, Eutropia, Victoria and Douglas claimed to have knowledge of the extrajudicial settlement with
sale after the death of their father, Enrique, in 1994 which spouses Uy failed to refute. Hence, the
complaint filed in 1997 was well within the prescriptive period of 10 years.

WHEREFORE, the instant petition is GRANTED. The April 27, 2010 Decision and October 18, 2010
Resolution of the Court of Appeals are REVERSED and SET ASIDE and a new judgment is entered:

1. Declaring the Extra-Judicial Settlement of the Estate of Anunciacion Neri NULL and VOID;

2. Declaring the Absolute Deed of Sale in favor of the late spouses Hadji Yusop Uy and
Julpha Ibrahim Uy as regards the 13/16 total shares of the late Enrique Neri, Napoleon Neri,
Alicia D. Neri-Mondejar, Visminda D. Neri-Chambers and Rosa D. Neri-Millan VALID;

3. Declaring Eutropia D. Illut-Cockinos, Victoria D. Illut-Piala and Douglas D. Neri as


the LAWFUL OWNERSof the 3/16 portions of the subject homestead properties, covered by
Original Certificate of Title Nos. (P-7998) P-2128, (P-14608) P-5153 and P-20551 (P-8348);
and

4. Ordering the estate of the late Enrique Neri, as well as Napoleon Neri, Alicia D. Neri-
Mondejar, Visminda D. Neri-Chambers and Rosa D. Neri-Millan to return to the respondents
jointly and solidarily the amount paid corresponding to the 3/16 shares of Eutropia, Victoria
and Douglas in the total amount of ₱ 15,000.00, with legal interest at 6% per annum
computed from the time of payment until finality of this decision and 12% per annum
thereafter until fully paid.

No pronouncement as to costs.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 128690 January 21, 1999

ABS-CBN BROADCASTING CORPORATION, petitioner,


vs.
HONORABLE COURT OF APPEALS, REPUBLIC BROADCASTING CORP, VIVA PRODUCTION,
INC., and VICENTE DEL ROSARIO, respondents.

DAVIDE, JR., CJ.:

In this petition for review on certiorari, petitioner ABS-CBN Broadcasting Corp. (hereafter ABS-CBN)
seeks to reverse and set aside the decision 1 of 31 October 1996 and the resolution 2 of 10 March
1997 of the Court of Appeals in CA-G.R. CV No. 44125. The former affirmed with modification the
decision 3 of 28 April 1993 of the Regional Trial Court (RTC) of Quezon City, Branch 80, in Civil Case
No. Q-92-12309. The latter denied the motion to reconsider the decision of 31 October 1996.

The antecedents, as found by the RTC and adopted by the Court of Appeals, are as follows:

In 1990, ABS-CBN and Viva executed a Film Exhibition Agreement (Exh. "A")
whereby Viva gave ABS-CBN an exclusive right to exhibit some Viva films.
Sometime in December 1991, in accordance with paragraph 2.4 [sic] of said
agreement stating that —.

1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) Viva
films for TV telecast under such terms as may be agreed upon by the parties hereto,
provided, however, that such right shall be exercised by ABS-CBN from the actual
offer in writing.

Viva, through defendant Del Rosario, offered ABS-CBN, through its vice-president
Charo Santos-Concio, a list of three(3) film packages (36 title) from which ABS-CBN
may exercise its right of first refusal under the afore-said agreement (Exhs. "1" par,
2, "2," "2-A'' and "2-B"-Viva). ABS-CBN, however through Mrs. Concio, "can tick off
only ten (10) titles" (from the list) "we can purchase" (Exh. "3" - Viva) and therefore
did not accept said list (TSN, June 8, 1992, pp. 9-10). The titles ticked off by Mrs.
Concio are not the subject of the case at bar except the film ''Maging Sino Ka Man."

For further enlightenment, this rejection letter dated January 06, 1992 (Exh "3" -
Viva) is hereby quoted:

6 January 1992

Dear Vic,
This is not a very formal business letter I am writing to you as I would like to express
my difficulty in recommending the purchase of the three film packages you are
offering ABS-CBN.

From among the three packages I can only tick off 10 titles we can purchase. Please
see attached. I hope you will understand my position. Most of the action pictures in
the list do not have big action stars in the cast. They are not for primetime. In line
with this I wish to mention that I have not scheduled for telecast several action
pictures in out very first contract because of the cheap production value of these
movies as well as the lack of big action stars. As a film producer, I am sure you
understand what I am trying to say as Viva produces only big action pictures.

In fact, I would like to request two (2) additional runs for these movies as I can only
schedule them in our non-primetime slots. We have to cover the amount that was
paid for these movies because as you very well know that non-primetime advertising
rates are very low. These are the unaired titles in the first contract.

1. Kontra Persa [sic].

2. Raider Platoon.

3. Underground guerillas

4. Tiger Command

5. Boy de Sabog

6. Lady Commando

7. Batang Matadero

8. Rebelyon

I hope you will consider this request of mine.

The other dramatic films have been offered to us before and have been rejected
because of the ruling of MTRCB to have them aired at 9:00 p.m. due to their very
adult themes.

As for the 10 titles I have choosen [sic] from the 3 packages please consider
including all the other Viva movies produced last year. I have quite an attractive offer
to make.

Thanking you and with my warmest regards.

(Signe
d)

Charo
Santos
-
Concio

On February 27, 1992, defendant Del Rosario approached ABS-CBN's Ms. Concio,
with a list consisting of 52 original movie titles (i.e. not yet aired on television)
including the 14 titles subject of the present case, as well as 104 re-runs (previously
aired on television) from which ABS-CBN may choose another 52 titles, as a total of
156 titles, proposing to sell to ABS-CBN airing rights over this package of 52
originals and 52 re-runs for P60,000,000.00 of which P30,000,000.00 will be in cash
and P30,000,000.00 worth of television spots (Exh. "4" to "4-C" Viva; "9" -Viva).

On April 2, 1992, defendant Del Rosario and ABS-CBN general manager, Eugenio
Lopez III, met at the Tamarind Grill Restaurant in Quezon City to discuss the
package proposal of Viva. What transpired in that lunch meeting is the subject of
conflicting versions. Mr. Lopez testified that he and Mr. Del Rosario allegedly agreed
that ABS-CRN was granted exclusive film rights to fourteen (14) films for a total
consideration of P36 million; that he allegedly put this agreement as to the price and
number of films in a "napkin'' and signed it and gave it to Mr. Del Rosario (Exh. D;
TSN, pp. 24-26, 77-78, June 8, 1992). On the other hand, Del Rosario denied having
made any agreement with Lopez regarding the 14 Viva films; denied the existence of
a napkin in which Lopez wrote something; and insisted that what he and Lopez
discussed at the lunch meeting was Viva's film package offer of 104 films (52
originals and 52 re-runs) for a total price of P60 million. Mr. Lopez promising [sic]to
make a counter proposal which came in the form of a proposal contract Annex "C" of
the complaint (Exh. "1"·- Viva; Exh. "C" - ABS-CBN).

On April 06, 1992, Del Rosario and Mr. Graciano Gozon of RBS Senior vice-
president for Finance discussed the terms and conditions of Viva's offer to sell the
104 films, after the rejection of the same package by ABS-CBN.

On April 07, 1992, defendant Del Rosario received through his secretary, a
handwritten note from Ms. Concio, (Exh. "5" - Viva), which reads: "Here's the draft of
the contract. I hope you find everything in order," to which was attached a draft
exhibition agreement (Exh. "C''- ABS-CBN; Exh. "9" - Viva, p. 3) a counter-proposal
covering 53 films, 52 of which came from the list sent by defendant Del Rosario and
one film was added by Ms. Concio, for a consideration of P35 million. Exhibit "C"
provides that ABS-CBN is granted films right to 53 films and contains a right of first
refusal to "1992 Viva Films." The said counter proposal was however rejected by
Viva's Board of Directors [in the] evening of the same day, April 7, 1992, as Viva
would not sell anything less than the package of 104 films for P60 million pesos (Exh.
"9" - Viva), and such rejection was relayed to Ms. Concio.

On April 29, 1992, after the rejection of ABS-CBN and following several negotiations
and meetings defendant Del Rosario and Viva's President Teresita Cruz, in
consideration of P60 million, signed a letter of agreement dated April 24, 1992.
granting RBS the exclusive right to air 104 Viva-produced and/or acquired films (Exh.
"7-A" - RBS; Exh. "4" - RBS) including the fourteen (14) films subject of the present
case. 4

On 27 May 1992, ABS-CBN filed before the RTC a complaint for specific performance with a prayer
for a writ of preliminary injunction and/or temporary restraining order against private respondents
Republic Broadcasting Corporation 5 (hereafter RBS ), Viva Production (hereafter VIVA), and Vicente
Del Rosario. The complaint was docketed as Civil Case No. Q-92-12309.

On 27 May 1992, RTC issued a temporary restraining order 6 enjoining private respondents from
proceeding with the airing, broadcasting, and televising of the fourteen VIVA films subject of the
controversy, starting with the film Maging Sino Ka Man, which was scheduled to be shown on private
respondents RBS' channel 7 at seven o'clock in the evening of said date.

On 17 June 1992, after appropriate proceedings, the RTC issued an


order 7 directing the issuance of a writ of preliminary injunction upon ABS-CBN's posting of P35
million bond. ABS-CBN moved for the reduction of the bond, 8 while private respondents moved for
reconsideration of the order and offered to put up a counterbound. 9

In the meantime, private respondents filed separate answers with counterclaim. 10 RBS also set up a
cross-claim against VIVA..

On 3 August 1992, the RTC issued an order 11 dissolving the writ of preliminary injunction upon the
posting by RBS of a P30 million counterbond to answer for whatever damages ABS-CBN might
suffer by virtue of such dissolution. However, it reduced petitioner's injunction bond to P15 million as
a condition precedent for the reinstatement of the writ of preliminary injunction should private
respondents be unable to post a counterbond.

At the pre-trial 12 on 6 August 1992, the parties, upon suggestion of the court, agreed to explore the
possibility of an amicable settlement. In the meantime, RBS prayed for and was granted reasonable
time within which to put up a P30 million counterbond in the event that no settlement would be
reached.

As the parties failed to enter into an amicable settlement RBS posted on 1 October 1992 a
counterbond, which the RTC approved in its Order of 15 October 1992.13

On 19 October 1992, ABS-CBN filed a motion for reconsideration 14 of the 3 August and 15 October
1992 Orders, which RBS opposed. 15

On 29 October 1992, the RTC conducted a pre-trial. 16

Pending resolution of its motion for reconsideration, ABS-CBN filed with the Court of Appeals a
petition17challenging the RTC's Orders of 3 August and 15 October 1992 and praying for the
issuance of a writ of preliminary injunction to enjoin the RTC from enforcing said orders. The case
was docketed as CA-G.R. SP No. 29300.

On 3 November 1992, the Court of Appeals issued a temporary restraining order18 to enjoin the
airing, broadcasting, and televising of any or all of the films involved in the controversy.

On 18 December 1992, the Court of Appeals promulgated a decision 19 dismissing the petition in CA
-G.R. No. 29300 for being premature. ABS-CBN challenged the dismissal in a petition for review
filed with this Court on 19 January 1993, which was docketed as G.R. No. 108363.

In the meantime the RTC received the evidence for the parties in Civil Case No. Q-192-1209.
Thereafter, on 28 April 1993, it rendered a decision 20 in favor of RBS and VIVA and against ABS-
CBN disposing as follows:
WHEREFORE, under cool reflection and prescinding from the foregoing, judgments
is rendered in favor of defendants and against the plaintiff.

(1) The complaint is hereby dismissed;

(2) Plaintiff ABS-CBN is ordered to pay defendant RBS the following:

a) P107,727.00, the amount of premium paid by RBS


to the surety which issued defendant RBS's bond to
lift the injunction;

b) P191,843.00 for the amount of print advertisement


for "Maging Sino Ka Man" in various newspapers;

c) Attorney's fees in the amount of P1 million;

d) P5 million as and by way of moral damages;

e) P5 million as and by way of exemplary damages;

(3) For defendant VIVA, plaintiff ABS-CBN is ordered to pay


P212,000.00 by way of reasonable attorney's fees.

(4) The cross-claim of defendant RBS against defendant VIVA is


dismissed.

(5) Plaintiff to pay the costs.

According to the RTC, there was no meeting of minds on the price and terms of the offer. The
alleged agreement between Lopez III and Del Rosario was subject to the approval of the VIVA
Board of Directors, and said agreement was disapproved during the meeting of the Board on 7 April
1992. Hence, there was no basis for ABS-CBN's demand that VIVA signed the 1992 Film Exhibition
Agreement. Furthermore, the right of first refusal under the 1990 Film Exhibition Agreement had
previously been exercised per Ms. Concio's letter to Del Rosario ticking off ten titles acceptable to
them, which would have made the 1992 agreement an entirely new contract.

On 21 June 1993, this Court denied21 ABS-CBN's petition for review in G.R. No. 108363, as no
reversible error was committed by the Court of Appeals in its challenged decision and the case had
"become moot and academic in view of the dismissal of the main action by the court a quo in its
decision" of 28 April 1993.

Aggrieved by the RTC's decision, ABS-CBN appealed to the Court of Appeals claiming that there
was a perfected contract between ABS-CBN and VIVA granting ABS-CBN the exclusive right to
exhibit the subject films. Private respondents VIVA and Del Rosario also appealed seeking moral
and exemplary damages and additional attorney's fees.

In its decision of 31 October 1996, the Court of Appeals agreed with the RTC that the contract
between ABS-CBN and VIVA had not been perfected, absent the approval by the VIVA Board of
Directors of whatever Del Rosario, it's agent, might have agreed with Lopez III. The appellate court
did not even believe ABS-CBN's evidence that Lopez III actually wrote down such an agreement on
a "napkin," as the same was never produced in court. It likewise rejected ABS-CBN's insistence on
its right of first refusal and ratiocinated as follows:

As regards the matter of right of first refusal, it may be true that a Film Exhibition
Agreement was entered into between Appellant ABS-CBN and appellant VIVA under
Exhibit "A" in 1990, and that parag. 1.4 thereof provides:

1.4 ABS-CBN shall have the right of first refusal to the next twenty-
four (24) VIVA films for TV telecast under such terms as may be
agreed upon by the parties hereto, provided, however, that such right
shall be exercised by ABS-CBN within a period of fifteen (15) days
from the actual offer in writing (Records, p. 14).

[H]owever, it is very clear that said right of first refusal in favor of ABS-CBN shall still
be subject to such terms as may be agreed upon by the parties thereto, and that the
said right shall be exercised by ABS-CBN within fifteen (15) days from the actual
offer in writing.

Said parag. 1.4 of the agreement Exhibit "A" on the right of first refusal did not fix the
price of the film right to the twenty-four (24) films, nor did it specify the terms thereof.
The same are still left to be agreed upon by the parties.

In the instant case, ABS-CBN's letter of rejection Exhibit 3 (Records, p. 89) stated
that it can only tick off ten (10) films, and the draft contract Exhibit "C" accepted only
fourteen (14) films, while parag. 1.4 of Exhibit "A'' speaks of the next twenty-four (24)
films.

The offer of V1VA was sometime in December 1991 (Exhibits 2, 2-A. 2-B; Records,
pp. 86-88; Decision, p. 11, Records, p. 1150), when the first list of VIVA films was
sent by Mr. Del Rosario to ABS-CBN. The Vice President of ABS-CBN, Ms. Charo
Santos-Concio, sent a letter dated January 6, 1992 (Exhibit 3, Records, p. 89) where
ABS-CBN exercised its right of refusal by rejecting the offer of VIVA.. As aptly
observed by the trial court, with the said letter of Mrs. Concio of January 6, 1992,
ABS-CBN had lost its right of first refusal. And even if We reckon the fifteen (15) day
period from February 27, 1992 (Exhibit 4 to 4-C) when another list was sent to ABS-
CBN after the letter of Mrs. Concio, still the fifteen (15) day period within which ABS-
CBN shall exercise its right of first refusal has already expired.22

Accordingly, respondent court sustained the award of actual damages consisting in the cost of print
advertisements and the premium payments for the counterbond, there being adequate proof of the
pecuniary loss which RBS had suffered as a result of the filing of the complaint by ABS-CBN. As to
the award of moral damages, the Court of Appeals found reasonable basis therefor, holding that
RBS's reputation was debased by the filing of the complaint in Civil Case No. Q-92-12309 and by the
non-showing of the film "Maging Sino Ka Man." Respondent court also held that exemplary damages
were correctly imposed by way of example or correction for the public good in view of the filing of the
complaint despite petitioner's knowledge that the contract with VIVA had not been perfected, It also
upheld the award of attorney's fees, reasoning that with ABS-CBN's act of instituting Civil Case No,
Q-92-1209, RBS was "unnecessarily forced to litigate." The appellate court, however, reduced the
awards of moral damages to P2 million, exemplary damages to P2 million, and attorney's fees to
P500, 000.00.
On the other hand, respondent Court of Appeals denied VIVA and Del Rosario's appeal because it
was "RBS and not VIVA which was actually prejudiced when the complaint was filed by ABS-CBN."

Its motion for reconsideration having been denied, ABS-CBN filed the petition in this case,
contending that the Court of Appeals gravely erred in

. . . RULING THAT THERE WAS NO PERFECTED CONTRACT BETWEEN


PETITIONER AND PRIVATE RESPONDENT VIVA NOTWITHSTANDING
PREPONDERANCE OF EVIDENCE ADDUCED BY PETITIONER TO THE
CONTRARY.

II

. . . IN AWARDING ACTUAL AND COMPENSATORY DAMAGES IN FAVOR OF


PRIVATE RESPONDENT RBS.

III

. . . IN AWARDING MORAL AND EXEMPLARY DAMAGES IN FAVOR OF PRIVATE


RESPONDENT RBS.

IV

. . . IN AWARDING ATTORNEY'S FEES IN FAVOR OF RBS.

ABS-CBN claims that it had yet to fully exercise its right of first refusal over twenty-four titles under
the 1990 Film Exhibition Agreement, as it had chosen only ten titles from the first list. It insists that
we give credence to Lopez's testimony that he and Del Rosario met at the Tamarind Grill
Restaurant, discussed the terms and conditions of the second list (the 1992 Film Exhibition
Agreement) and upon agreement thereon, wrote the same on a paper napkin. It also asserts that the
contract has already been effective, as the elements thereof, namely, consent, object, and
consideration were established. It then concludes that the Court of Appeals' pronouncements were
not supported by law and jurisprudence, as per our decision of 1 December 1995 in Limketkai Sons
Milling, Inc. v. Court of Appeals, 23 which cited Toyota Shaw, Inc. v. Court of Appeals, 24 Ang Yu
Asuncion v. Court of Appeals, 25 and Villonco Realty Company v. Bormaheco. Inc.26

Anent the actual damages awarded to RBS, ABS-CBN disavows liability therefor. RBS spent for the
premium on the counterbond of its own volition in order to negate the injunction issued by the trial
court after the parties had ventilated their respective positions during the hearings for the purpose.
The filing of the counterbond was an option available to RBS, but it can hardly be argued that ABS-
CBN compelled RBS to incur such expense. Besides, RBS had another available option, i.e., move
for the dissolution or the injunction; or if it was determined to put up a counterbond, it could have
presented a cash bond. Furthermore under Article 2203 of the Civil Code, the party suffering loss or
injury is also required to exercise the diligence of a good father of a family to minimize the damages
resulting from the act or omission. As regards the cost of print advertisements, RBS had not
convincingly established that this was a loss attributable to the non showing "Maging Sino Ka Man";
on the contrary, it was brought out during trial that with or without the case or the injunction, RBS
would have spent such an amount to generate interest in the film.
ABS-CBN further contends that there was no clear basis for the awards of moral and exemplary
damages. The controversy involving ABS-CBN and RBS did not in any way originate from business
transaction between them. The claims for such damages did not arise from any contractual dealings
or from specific acts committed by ABS-CBN against RBS that may be characterized as wanton,
fraudulent, or reckless; they arose by virtue only of the filing of the complaint, An award of moral and
exemplary damages is not warranted where the record is bereft of any proof that a party acted
maliciously or in bad faith in filing an action. 27 In any case, free resort to courts for redress of wrongs
is a matter of public policy. The law recognizes the right of every one to sue for that which he
honestly believes to be his right without fear of standing trial for damages where by lack of sufficient
evidence, legal technicalities, or a different interpretation of the laws on the matter, the case would
lose ground. 28 One who makes use of his own legal right does no injury. 29 If damage results front the
filing of the complaint, it is damnum absque injuria. 30 Besides, moral damages are generally not
awarded in favor of a juridical person, unless it enjoys a good reputation that was debased by the
offending party resulting in social humiliation.31

As regards the award of attorney's fees, ABS-CBN maintains that the same had no factual, legal, or
equitable justification. In sustaining the trial court's award, the Court of Appeals acted in clear
disregard of the doctrines laid down in Buan v. Camaganacan 32 that the text of the decision should
state the reason why attorney's fees are being awarded; otherwise, the award should be disallowed.
Besides, no bad faith has been imputed on, much less proved as having been committed by, ABS-
CBN. It has been held that "where no sufficient showing of bad faith would be reflected in a party' s
persistence in a case other than an erroneous conviction of the righteousness of his cause,
attorney's fees shall not be recovered as cost." 33

On the other hand, RBS asserts that there was no perfected contract between ABS-CBN and VIVA
absent any meeting of minds between them regarding the object and consideration of the alleged
contract. It affirms that the ABS-CBN's claim of a right of first refusal was correctly rejected by the
trial court. RBS insist the premium it had paid for the counterbond constituted a pecuniary loss upon
which it may recover. It was obliged to put up the counterbound due to the injunction procured by
ABS-CBN. Since the trial court found that ABS-CBN had no cause of action or valid claim against
RBS and, therefore not entitled to the writ of injunction, RBS could recover from ABS-CBN the
premium paid on the counterbond. Contrary to the claim of ABS-CBN, the cash bond would prove to
be more expensive, as the loss would be equivalent to the cost of money RBS would forego in case
the P30 million came from its funds or was borrowed from banks.

RBS likewise asserts that it was entitled to the cost of advertisements for the cancelled showing of
the film "Maging Sino Ka Man" because the print advertisements were put out to announce the
showing on a particular day and hour on Channel 7, i.e., in its entirety at one time, not a series to be
shown on a periodic basis. Hence, the print advertisement were good and relevant for the particular
date showing, and since the film could not be shown on that particular date and hour because of the
injunction, the expenses for the advertisements had gone to waste.

As regards moral and exemplary damages, RBS asserts that ABS-CBN filed the case and secured
injunctions purely for the purpose of harassing and prejudicing RBS. Pursuant then to Article 19 and
21 of the Civil Code, ABS-CBN must be held liable for such damages. Citing Tolentino,34 damages
may be awarded in cases of abuse of rights even if the act done is not illicit and there is abuse of
rights were plaintiff institutes and action purely for the purpose of harassing or prejudicing the
defendant.

In support of its stand that a juridical entity can recover moral and exemplary damages, private
respondents RBS cited People v. Manero,35 where it was stated that such entity may recover moral
and exemplary damages if it has a good reputation that is debased resulting in social humiliation. it
then ratiocinates; thus:

There can be no doubt that RBS' reputation has been debased by ABS-CBN's acts in
this case. When RBS was not able to fulfill its commitment to the viewing public to
show the film "Maging Sino Ka Man" on the scheduled dates and times (and on two
occasions that RBS advertised), it suffered serious embarrassment and social
humiliation. When the showing was canceled, late viewers called up RBS' offices and
subjected RBS to verbal abuse ("Announce kayo nang announce, hindi ninyo naman
ilalabas," "nanloloko yata kayo") (Exh. 3-RBS, par. 3). This alone was not something
RBS brought upon itself. it was exactly what ABS-CBN had planned to happen.

The amount of moral and exemplary damages cannot be said to be excessive. Two
reasons justify the amount of the award.

The first is that the humiliation suffered by RBS is national extent. RBS operations as
a broadcasting company is [sic] nationwide. Its clientele, like that of ABS-CBN,
consists of those who own and watch television. It is not an exaggeration to state,
and it is a matter of judicial notice that almost every other person in the country
watches television. The humiliation suffered by RBS is multiplied by the number of
televiewers who had anticipated the showing of the film "Maging Sino Ka Man" on
May 28 and November 3, 1992 but did not see it owing to the cancellation. Added to
this are the advertisers who had placed commercial spots for the telecast and to
whom RBS had a commitment in consideration of the placement to show the film in
the dates and times specified.

The second is that it is a competitor that caused RBS to suffer the humiliation. The
humiliation and injury are far greater in degree when caused by an entity whose
ultimate business objective is to lure customers (viewers in this case) away from the
competition. 36

For their part, VIVA and Vicente del Rosario contend that the findings of fact of the trial court and the
Court of Appeals do not support ABS-CBN's claim that there was a perfected contract. Such factual
findings can no longer be disturbed in this petition for review under Rule 45, as only questions of law
can be raised, not questions of fact. On the issue of damages and attorneys fees, they adopted the
arguments of RBS.

The key issues for our consideration are (1) whether there was a perfected contract between VIVA
and ABS-CBN, and (2) whether RBS is entitled to damages and attorney's fees. It may be noted that
the award of attorney's fees of P212,000 in favor of VIVA is not assigned as another error.

I.

The first issue should be resolved against ABS-CBN. A contract is a meeting of minds between two
persons whereby one binds himself to give something or to render some service to another 37 for a
consideration. there is no contract unless the following requisites concur: (1) consent of the
contracting parties; (2) object certain which is the subject of the contract; and (3) cause of the
obligation, which is established.38 A contract undergoes three stages:

(a) preparation, conception, or generation, which is the period of negotiation and


bargaining, ending at the moment of agreement of the parties;
(b) perfection or birth of the contract, which is the moment when the parties come to
agree on the terms of the contract; and

(c) consummation or death, which is the fulfillment or performance of the terms


agreed upon in the contract. 39

Contracts that are consensual in nature are perfected upon mere meeting of the minds, Once there
is concurrence between the offer and the acceptance upon the subject matter, consideration, and
terms of payment a contract is produced. The offer must be certain. To convert the offer into a
contract, the acceptance must be absolute and must not qualify the terms of the offer; it must be
plain, unequivocal, unconditional, and without variance of any sort from the proposal. A qualified
acceptance, or one that involves a new proposal, constitutes a counter-offer and is a rejection of the
original offer. Consequently, when something is desired which is not exactly what is proposed in the
offer, such acceptance is not sufficient to generate consent because any modification or variation
from the terms of the offer annuls the offer.40

When Mr. Del Rosario of VIVA met with Mr. Lopez of ABS-CBN at the Tamarind Grill on 2 April 1992
to discuss the package of films, said package of 104 VIVA films was VIVA's offer to ABS-CBN to
enter into a new Film Exhibition Agreement. But ABS-CBN, sent, through Ms. Concio, a counter-
proposal in the form of a draft contract proposing exhibition of 53 films for a consideration of P35
million. This counter-proposal could be nothing less than the counter-offer of Mr. Lopez during his
conference with Del Rosario at Tamarind Grill Restaurant. Clearly, there was no acceptance of
VIVA's offer, for it was met by a counter-offer which substantially varied the terms of the offer.

ABS-CBN's reliance in Limketkai Sons Milling, Inc. v. Court of


Appeals 41 and Villonco Realty Company v. Bormaheco, Inc., 42 is misplaced. In these cases, it was
held that an acceptance may contain a request for certain changes in the terms of the offer and yet
be a binding acceptance as long as "it is clear that the meaning of the acceptance is positively and
unequivocally to accept the offer, whether such request is granted or not." This ruling was, however,
reversed in the resolution of 29 March 1996, 43 which ruled that the acceptance of all offer must be
unqualified and absolute, i.e., it "must be identical in all respects with that of the offer so as to
produce consent or meeting of the minds."

On the other hand, in Villonco, cited in Limketkai, the alleged changes in the revised counter-offer
were not material but merely clarificatory of what had previously been agreed upon. It cited the
statement in Stuart v. Franklin Life Insurance Co.44 that "a vendor's change in a phrase of the offer to
purchase, which change does not essentially change the terms of the offer, does not amount to a
rejection of the offer and the tender of a counter-offer." 45However, when any of the elements of the
contract is modified upon acceptance, such alteration amounts to a counter-offer.

In the case at bar, ABS-CBN made no unqualified acceptance of VIVA's offer. Hence, they
underwent a period of bargaining. ABS-CBN then formalized its counter-proposals or counter-offer in
a draft contract, VIVA through its Board of Directors, rejected such counter-offer, Even if it be
conceded arguendo that Del Rosario had accepted the counter-offer, the acceptance did not bind
VIVA, as there was no proof whatsoever that Del Rosario had the specific authority to do so.

Under Corporation Code,46 unless otherwise provided by said Code, corporate powers, such as the
power; to enter into contracts; are exercised by the Board of Directors. However, the Board may
delegate such powers to either an executive committee or officials or contracted managers. The
delegation, except for the executive committee, must be for specific purposes, 47 Delegation to
officers makes the latter agents of the corporation; accordingly, the general rules of agency as to the
bindings effects of their acts would
apply. 48 For such officers to be deemed fully clothed by the corporation to exercise a power of the
Board, the latter must specially authorize them to do so. That Del Rosario did not have the authority
to accept ABS-CBN's counter-offer was best evidenced by his submission of the draft contract to
VIVA's Board of Directors for the latter's approval. In any event, there was between Del Rosario and
Lopez III no meeting of minds. The following findings of the trial court are instructive:

A number of considerations militate against ABS-CBN's claim that a contract was


perfected at that lunch meeting on April 02, 1992 at the Tamarind Grill.

FIRST, Mr. Lopez claimed that what was agreed upon at the Tamarind Grill referred
to the price and the number of films, which he wrote on a napkin. However, Exhibit
"C" contains numerous provisions which, were not discussed at the Tamarind Grill, if
Lopez testimony was to be believed nor could they have been physically written on a
napkin. There was even doubt as to whether it was a paper napkin or a cloth napkin.
In short what were written in Exhibit "C'' were not discussed, and therefore could not
have been agreed upon, by the parties. How then could this court compel the parties
to sign Exhibit "C" when the provisions thereof were not previously agreed upon?

SECOND, Mr. Lopez claimed that what was agreed upon as the subject matter of the
contract was 14 films. The complaint in fact prays for delivery of 14 films. But Exhibit
"C" mentions 53 films as its subject matter. Which is which If Exhibits "C" reflected
the true intent of the parties, then ABS-CBN's claim for 14 films in its complaint is
false or if what it alleged in the complaint is true, then Exhibit "C" did not reflect what
was agreed upon by the parties. This underscores the fact that there was no meeting
of the minds as to the subject matter of the contracts, so as to preclude perfection
thereof. For settled is the rule that there can be no contract where there is no object
which is its subject matter (Art. 1318, NCC).

THIRD, Mr. Lopez [sic] answer to question 29 of his affidavit testimony (Exh. "D")
states:

We were able to reach an agreement. VIVA gave us the exclusive


license to show these fourteen (14) films, and we agreed to pay Viva
the amount of P16,050,000.00 as well as grant Viva commercial slots
worth P19,950,000.00. We had already earmarked this P16,
050,000.00.

which gives a total consideration of P36 million (P19,950,000.00 plus


P16,050,000.00. equals P36,000,000.00).

On cross-examination Mr. Lopez testified:

Q. What was written in this napkin?

A. The total price, the breakdown the known Viva movies, the 7
blockbuster movies and the other 7 Viva movies because the price
was broken down accordingly. The none [sic] Viva and the seven
other Viva movies and the sharing between the cash portion and the
concerned spot portion in the total amount of P35 million pesos.

Now, which is which? P36 million or P35 million? This weakens ABS-CBN's claim.
FOURTH. Mrs. Concio, testifying for ABS-CBN stated that she transmitted Exhibit
"C" to Mr. Del Rosario with a handwritten note, describing said Exhibit "C" as a
"draft." (Exh. "5" - Viva; tsn pp. 23-24 June 08, 1992). The said draft has a well
defined meaning.

Since Exhibit "C" is only a draft, or a tentative, provisional or preparatory writing


prepared for discussion, the terms and conditions thereof could not have been
previously agreed upon by ABS-CBN and Viva Exhibit "C'' could not therefore legally
bind Viva, not having agreed thereto. In fact, Ms. Concio admitted that the terms and
conditions embodied in Exhibit "C" were prepared by ABS-CBN's lawyers and there
was no discussion on said terms and conditions. . . .

As the parties had not yet discussed the proposed terms and conditions in Exhibit
"C," and there was no evidence whatsoever that Viva agreed to the terms and
conditions thereof, said document cannot be a binding contract. The fact that Viva
refused to sign Exhibit "C" reveals only two [sic] well that it did not agree on its terms
and conditions, and this court has no authority to compel Viva to agree thereto.

FIFTH. Mr. Lopez understand [sic] that what he and Mr. Del Rosario agreed upon at
the Tamarind Grill was only provisional, in the sense that it was subject to approval
by the Board of Directors of Viva. He testified:

Q. Now, Mr. Witness, and after that Tamarind meeting ... the second
meeting wherein you claimed that you have the meeting of the minds
between you and Mr. Vic del Rosario, what happened?

A. Vic Del Rosario was supposed to call us up and tell us specifically


the result of the discussion with the Board of Directors.

Q. And you are referring to the so-called agreement which you wrote
in [sic] a piece of paper?

A. Yes, sir.

Q. So, he was going to forward that to the board of Directors for


approval?

A. Yes, sir. (Tsn, pp. 42-43, June 8, 1992)

Q. Did Mr. Del Rosario tell you that he will submit it to his Board for
approval?

A. Yes, sir. (Tsn, p. 69, June 8, 1992).

The above testimony of Mr. Lopez shows beyond doubt that he knew Mr. Del
Rosario had no authority to bind Viva to a contract with ABS-CBN until and unless its
Board of Directors approved it. The complaint, in fact, alleges that Mr. Del Rosario "is
the Executive Producer of defendant Viva" which "is a corporation." (par. 2,
complaint). As a mere agent of Viva, Del Rosario could not bind Viva unless what he
did is ratified by its Board of Directors. (Vicente vs. Geraldez, 52 SCRA 210; Arnold
vs. Willetsand Paterson, 44 Phil. 634). As a mere agent, recognized as such by
plaintiff, Del Rosario could not be held liable jointly and severally with Viva and his
inclusion as party defendant has no legal basis. (Salonga vs. Warner Barner [sic] ,
COLTA , 88 Phil. 125; Salmon vs. Tan, 36 Phil. 556).

The testimony of Mr. Lopez and the allegations in the complaint are clear admissions
that what was supposed to have been agreed upon at the Tamarind Grill between
Mr. Lopez and Del Rosario was not a binding agreement. It is as it should be
because corporate power to enter into a contract is lodged in the Board of Directors.
(Sec. 23, Corporation Code). Without such board approval by the Viva board,
whatever agreement Lopez and Del Rosario arrived at could not ripen into a valid
contract binding upon Viva (Yao Ka Sin Trading vs. Court of Appeals, 209 SCRA
763). The evidence adduced shows that the Board of Directors of Viva rejected
Exhibit "C" and insisted that the film package for 140 films be maintained (Exh. "7-1"
- Viva ). 49

The contention that ABS-CBN had yet to fully exercise its right of first refusal over twenty-four films
under the 1990 Film Exhibition Agreement and that the meeting between Lopez and Del Rosario
was a continuation of said previous contract is untenable. As observed by the trial court, ABS-CBN
right of first refusal had already been exercised when Ms. Concio wrote to VIVA ticking off ten films,
Thus:

[T]he subsequent negotiation with ABS-CBN two (2) months after this letter was sent,
was for an entirely different package. Ms. Concio herself admitted on cross-
examination to having used or exercised the right of first refusal. She stated that the
list was not acceptable and was indeed not accepted by ABS-CBN, (TSN, June 8,
1992, pp. 8-10). Even Mr. Lopez himself admitted that the right of the first refusal
may have been already exercised by Ms. Concio (as she had). (TSN, June 8, 1992,
pp. 71-75). Del Rosario himself knew and understand [sic] that ABS-CBN has lost its
rights of the first refusal when his list of 36 titles were rejected (Tsn, June 9, 1992,
pp. 10-11) 50

II

However, we find for ABS-CBN on the issue of damages. We shall first take up actual damages.
Chapter 2, Title XVIII, Book IV of the Civil Code is the specific law on actual or compensatory
damages. Except as provided by law or by stipulation, one is entitled to compensation for actual
damages only for such pecuniary loss suffered by him as he has duly proved. 51 The indemnification
shall comprehend not only the value of the loss suffered, but also that of the profits that the obligee
failed to obtain. 52 In contracts and quasi-contracts the damages which may be awarded are
dependent on whether the obligor acted with good faith or otherwise, It case of good faith, the
damages recoverable are those which are the natural and probable consequences of the breach of
the obligation and which the parties have foreseen or could have reasonably foreseen at the time of
the constitution of the obligation. If the obligor acted with fraud, bad faith, malice, or wanton attitude,
he shall be responsible for all damages which may be reasonably attributed to the non-performance
of the obligation. 53 In crimes and quasi-delicts, the defendant shall be liable for all damages which
are the natural and probable consequences of the act or omission complained of, whether or not
such damages has been foreseen or could have reasonably been foreseen by the defendant.54

Actual damages may likewise be recovered for loss or impairment of earning capacity in cases of
temporary or permanent personal injury, or for injury to the plaintiff's business standing or
commercial credit.55
The claim of RBS for actual damages did not arise from contract, quasi-contract, delict, or quasi-
delict. It arose from the fact of filing of the complaint despite ABS-CBN's alleged knowledge of lack
of cause of action. Thus paragraph 12 of RBS's Answer with Counterclaim and Cross-claim under
the heading COUNTERCLAIM specifically alleges:

12. ABS-CBN filed the complaint knowing fully well that it has no cause of action
RBS. As a result thereof, RBS suffered actual damages in the amount of
P6,621,195.32. 56

Needless to state the award of actual damages cannot be comprehended under the above law on
actual damages. RBS could only probably take refuge under Articles 19, 20, and 21 of the Civil
Code, which read as follows:

Art. 19. Every person must, in the exercise of his rights and in the performance of his
duties, act with justice, give everyone his due, and observe honesty and good faith.

Art. 20. Every person who, contrary to law, wilfully or negligently causes damage to
another, shall indemnify the latter for tile same.

Art. 21. Any person who wilfully causes loss or injury to another in a manner that is
contrary to morals, good customs or public policy shall compensate the latter for the
damage.

It may further be observed that in cases where a writ of preliminary injunction is issued, the damages
which the defendant may suffer by reason of the writ are recoverable from the injunctive bond. 57 In
this case, ABS-CBN had not yet filed the required bond; as a matter of fact, it asked for reduction of
the bond and even went to the Court of Appeals to challenge the order on the matter, Clearly then, it
was not necessary for RBS to file a counterbond. Hence, ABS-CBN cannot be held responsible for
the premium RBS paid for the counterbond.

Neither could ABS-CBN be liable for the print advertisements for "Maging Sino Ka Man" for lack of
sufficient legal basis. The RTC issued a temporary restraining order and later, a writ of preliminary
injunction on the basis of its determination that there existed sufficient ground for the issuance
thereof. Notably, the RTC did not dissolve the injunction on the ground of lack of legal and factual
basis, but because of the plea of RBS that it be allowed to put up a counterbond.

As regards attorney's fees, the law is clear that in the absence of stipulation, attorney's fees may be
recovered as actual or compensatory damages under any of the circumstances provided for in
Article 2208 of the Civil Code. 58

The general rule is that attorney's fees cannot be recovered as part of damages because of the
policy that no premium should be placed on the right to litigate.59 They are not to be awarded every
time a party wins a suit. The power of the court to award attorney's fees under Article 2208 demands
factual, legal, and equitable justification.60Even when claimant is compelled to litigate with third
persons or to incur expenses to protect his rights, still attorney's fees may not be awarded where no
sufficient showing of bad faith could be reflected in a party's persistence in a case other than
erroneous conviction of the righteousness of his cause. 61

As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book IV of the Civil Code. Article
2217 thereof defines what are included in moral damages, while Article 2219 enumerates the cases
where they may be recovered, Article 2220 provides that moral damages may be recovered in
breaches of contract where the defendant acted fraudulently or in bad faith. RBS's claim for moral
damages could possibly fall only under item (10) of Article 2219, thereof which reads:

(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.

Moral damages are in the category of an award designed to compensate the claimant for actual
injury suffered. and not to impose a penalty on the wrongdoer.62 The award is not meant to enrich the
complainant at the expense of the defendant, but to enable the injured party to obtain means,
diversion, or amusements that will serve to obviate then moral suffering he has undergone. It is
aimed at the restoration, within the limits of the possible, of the spiritual status quo ante, and should
be proportionate to the suffering inflicted.63 Trial courts must then guard against the award of
exorbitant damages; they should exercise balanced restrained and measured objectivity to avoid
suspicion that it was due to passion, prejudice, or corruption on the part of the trial court. 64

The award of moral damages cannot be granted in favor of a corporation because, being an artificial
person and having existence only in legal contemplation, it has no feelings, no emotions, no senses,
It cannot, therefore, experience physical suffering and mental anguish, which call be experienced
only by one having a nervous system. 65 The statement in People v. Manero 66 and Mambulao
Lumber Co. v. PNB 67 that a corporation may recover moral damages if it "has a good reputation that
is debased, resulting in social humiliation" is an obiter dictum. On this score alone the award for
damages must be set aside, since RBS is a corporation.

The basic law on exemplary damages is Section 5, Chapter 3, Title XVIII, Book IV of the Civil Code.
These are imposed by way of example or correction for the public good, in addition to moral,
temperate, liquidated or compensatory damages. 68 They are recoverable in criminal cases as part of
the civil liability when the crime was committed with one or more aggravating circumstances; 69 in
quasi-contracts, if the defendant acted with gross negligence; 70 and in contracts and quasi-contracts,
if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.71

It may be reiterated that the claim of RBS against ABS-CBN is not based on contract, quasi-contract,
delict, or quasi-delict, Hence, the claims for moral and exemplary damages can only be based on
Articles 19, 20, and 21 of the Civil Code.

The elements of abuse of right under Article 19 are the following: (1) the existence of a legal right or
duty, (2) which is exercised in bad faith, and (3) for the sole intent of prejudicing or injuring another.
Article 20 speaks of the general sanction for all other provisions of law which do not especially
provide for their own sanction; while Article 21 deals with acts contra bonus mores, and has the
following elements; (1) there is an act which is legal, (2) but which is contrary to morals, good
custom, public order, or public policy, and (3) and it is done with intent to injure. 72

Verily then, malice or bad faith is at the core of Articles 19, 20, and 21. Malice or bad faith implies a
conscious and intentional design to do a wrongful act for a dishonest purpose or moral
obliquity. 73 Such must be substantiated by evidence. 74

There is no adequate proof that ABS-CBN was inspired by malice or bad faith. It was honestly
convinced of the merits of its cause after it had undergone serious negotiations culminating in its
formal submission of a draft contract. Settled is the rule that the adverse result of an action does
not per se make the action wrongful and subject the actor to damages, for the law could not have
meant to impose a penalty on the right to litigate. If damages result from a person's exercise of a
right, it is damnum absque injuria.75
WHEREFORE, the instant petition is GRANTED. The challenged decision of the Court of Appeals in
CA-G.R. CV No, 44125 is hereby REVERSED except as to unappealed award of attorney's fees in
favor of VIVA Productions, Inc.
1âw phi 1.nêt

No pronouncement as to costs.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 159709 June 27, 2012

HEIRS OF SERVANDO FRANCO, Petitioners,


vs.
SPOUSES VERONICA AND DANILO GONZALES, Respondents.

DECISION

BERSAMIN, J.:

There is novation when there is an irreconcilable incompatibility between the old and the new
obligations. There is no novation in case of only slight modifications; hence, the old obligation
prevails.

The petitioners challenge the decision promulgated on March 19, 2003,1 whereby the Court of
Appeals (CA) upheld the issuance of a writ of execution by the Regional Trial Court (RTC), Branch
16, in Malolos, Bulacan.

Antecedents

The Court adopts the following summary of the antecedents rendered by the Court in Medel v. Court
of Appeals,2the case from which this case originated, to wit:

On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and Leticia)
obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was engaged in the money
lending business under the name "Gonzales Credit Enterprises", in the amount of ₱50,000.00,
payable in two months. Veronica gave only the amount of ₱47,000.00, to the borrowers, as she
retained ₱3,000.00, as advance interest for one month at 6% per month. Servado and Leticia
executed a promissory note for ₱50,000.00, to evidence the loan, payable on January 7, 1986.

On November 19, 1985, Servando and Leticia obtained from Veronica another loan in the amount of
₱90,000.00, payable in two months, at 6% interest per month. They executed a promissory note to
evidence the loan, maturing on January 19, 1986. They received only ₱84,000.00, out of the
proceeds of the loan.

On maturity of the two promissory notes, the borrowers failed to pay the indebtedness.

On June 11, 1986, Servando and Leticia secured from Veronica still another loan in the amount of
₱300,000.00, maturing in one month, secured by a real estate mortgage over a property belonging
to Leticia Makalintal Yaptinchay, who issued a special power of attorney in favor of Leticia Medel,
authorizing her to execute the mortgage. Servando and Leticia executed a promissory note in favor
of Veronica to pay the sum of ₱300,000.00, after a month, or on July 11, 1986. However, only the
sum of ₱275,000.00, was given to them out of the proceeds of the loan.

Like the previous loans, Servando and Medel failed to pay the third loan on maturity.
On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel, consolidated all
their previous unpaid loans totaling ₱440,000.00, and sought from Veronica another loan in the
amount of ₱60,000.00, bringing their indebtedness to a total of ₱500,000.00, payable on August 23,
1986. They executed a promissory note, reading as follows:

"Baliwag, Bulacan July 23, 1986

"Maturity Date August 23, 1986

"₱500,000.00

"FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the order of VERONICA R.
GONZALES doing business in the business style of GONZALES CREDIT ENTERPRISES, Filipino,
of legal age, married to Danilo G. Gonzales, Jr., of Baliwag Bulacan, the sum of PESOS ........ FIVE
HUNDRED THOUSAND ..... (P500,000.00) Philippine
Currency with interest thereon at the rate of 5.5PER CENT per month plus 2% service charge per an
num from date hereof until fully paid according to the amortization schedule contained herein.
(Underscoring supplied)

"Payment will be made in full at the maturity date.

"Should I/WE fail to pay any amortization or portion hereof when due, all the other installments
together with all interest accrued shall immediately be due and payable and I/WE hereby agree to
pay
an additional amount equivalent to one per cent (1%) per month of the amount due and demandable
aspenalty charges in the form of liquidated damages until fully paid; and the
further sum of TWENTYFIVE PER CENT (25%) thereof in full, without
deductions as Attorney's Fee whether actually incurred or not, of the total amount due and
demandable, exclusive of costs and judicial or extra judicial expenses. (Underscoring supplied)

"I, WE further agree that in the event the present rate of interest on loan is increased by law or the
Central Bank of the Philippines, the holder shall have the option to apply and collect the increased
interest charges without notice although the original interest have already been collected wholly or
partially unless the contrary is required by law.

"It is also a special condition of this contract that the parties herein agree that the amount of peso-
obligation under this agreement is based on the present value of peso, and if there be any change in
the value thereof, due to extraordinary inflation or deflation, or any other cause or reason, then the
peso-obligation herein contracted shall be adjusted in accordance with the value of the peso then
prevailing at the time of the complete fulfillment of obligation.

"Demand and notice of dishonor waived. Holder may accept partial payments and grant renewals of
this note or extension of payments, reserving rights against each and all indorsers and all parties to
this note.

"IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the debtors waive all his/their
rights under the provisions of Section 12, Rule 39, of the Revised Rules of Court."

On maturity of the loan, the borrowers failed to pay the indebtedness of ₱500,000.00, plus interests
and penalties, evidenced by the above-quoted promissory note.
On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G. Gonzales, filed with
the Regional Trial Court of Bulacan, Branch 16, at Malolos, Bulacan, a complaint for collection of the
full amount of the loan including interests and other charges.

In his answer to the complaint filed with the trial court on April 5, 1990, defendant Servando alleged
that he did not obtain any loan from the plaintiffs; that it was defendants Leticia and Dr. Rafael Medel
who borrowed from the plaintiffs the sum of ₱500,000.00, and actually received the amount and
benefited therefrom; that the loan was secured by a real estate mortgage executed in favor of the
plaintiffs, and that he (Servando Franco) signed the promissory note only as a witness.

In their separate answer filed on April 10,1990, defendants Leticia and Rafael Medel alleged that the
loan was the transaction of Leticia Yaptinchay, who executed a mortgage in favor of the plaintiffs
over a parcel of real estate situated in San Juan, Batangas; that the interest rate is excessive at
5.5% per month with additional service charge of 2% per annum, and penalty charge of 1% per
month; that the stipulation for attorney's fees of 25% of the amount due is unconscionable, illegal
and excessive, and that substantial payments made were applied to interest, penalties and other
charges.

After due trial, the lower court declared that the due execution and genuineness of the four
promissory notes had been duly proved, and ruled that although the Usury Law had been repealed,
the interest charged by the plaintiffs on the loans was unconscionable and "revolting to the
conscience". Hence, the trial court applied "the provision of the New [Civil] Code" that the "legal rate
of interest for loan or forbearance of money, goods or credit is 12% per annum."

Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive portion of which
reads as follows:

"WHEREFORE, premises considered, judgment is hereby rendered, as follows:

"1. Ordering the defendants Servando Franco and Leticia Medel, jointly and severally, to pay
plaintiffs the amount of ₱47,000.00 plus 12% interest per annum from November 7, 1985 and 1%
per month as penalty, until the entire amount is paid in full.

"2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs, jointly and severally
the amount of ₱84,000.00 with 12% interest per annum and 1% per cent per month as penalty from
November 19,1985 until the whole amount is fully paid;

"3. Ordering the defendants to pay the plaintiffs, jointly and severally, the amount of ₱285,000.00
plus 12% interest per annum and 1% per month as penalty from July 11, 1986, until the whole
amount is fully paid;

"4. Ordering the defendants to pay plaintiffs, jointly and severally, the amount of ₱50,000.00 as
attorney's fees;

"5. All counterclaims are hereby dismissed.

"With costs against the defendants."

In due time, both plaintiffs and defendants appealed to the Court of Appeals.
In their appeal, plaintiffs-appellants argued that the promissory note, which consolidated all the
unpaid loans of the defendants, is the law that governs the parties. They further argued that Circular
No. 416 of the Central Bank prescribing the rate of interest for loans or forbearance of money, goods
or credit at 12% per annum, applies only in the absence of a stipulation on interest rate, but not
when the parties agreed thereon.

The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that "the Usury Law
having become ‘legally inexistent’ with the promulgation by the Central Bank in 1982 of Circular No.
905, the lender and borrower could agree on any interest that may be charged on the loan". The
Court of Appeals further held that "the imposition of ‘an additional amount equivalent to 1% per
month of the amount due and demandable as penalty charges in the form of liquidated damages
until fully paid’ was allowed by law".

Accordingly, on March 21, 1997, the Court of Appeals promulgated it decision reversing that of the
Regional Trial Court, disposing as follows:

"WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are hereby
ordered to pay the plaintiffs the sum of ₱500,000.00, plus 5.5% per month interest and 2% service
charge per annum effective July 23, 1986, plus 1% per month of the total amount due and
demandable as penalty charges effective August 24, 1986, until the entire amount is fully paid.

"The award to the plaintiffs of ₱50,000.00 as attorney's fees is affirmed. And so is the imposition of
costs against the defendants.

"SO ORDERED."

On April 15, 1997, defendants-appellants filed a motion for reconsideration of the said decision. By
resolution dated November 25, 1997, the Court of Appeals denied the motion.3

On review, the Court in Medel v. Court of Appeals struck down as void the stipulation on the interest
for being iniquitous or unconscionable, and revived the judgment of the RTC rendered on December
9, 1991, viz:

WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of Appeals
promulgated on March 21, 1997, and its resolution dated November 25, 1997. Instead, we render
judgment REVIVING and AFFIRMING the decision dated December 9, 1991, of the Regional Trial
Court of Bulacan, Branch 16, Malolos, Bulacan, in Civil Case No. 134-M-90, involving the same
parties.

No pronouncement as to costs in this instance.

SO ORDERED.4

Upon the finality of the decision in Medel v. Court of Appeals, the respondents moved for
execution.5 Servando Franco opposed,6 claiming that he and the respondents had agreed to fix the
entire obligation at ₱775,000.00.7According to Servando, their agreement, which was allegedly
embodied in a receipt dated February 5, 1992,8whereby he made an initial payment of ₱400,000.00
and promised to pay the balance of ₱375,000.00 on February 29, 1992, superseded the July 23,
1986 promissory note.

The RTC granted the motion for execution over Servando’s opposition, thus:
There is no doubt that the decision dated December 9, 1991 had already been affirmed and had
already become final and executory. Thus, in accordance with Sec. 1 of Rule 39 of the 1997 Rules
of Civil Procedure, execution shall issue as a matter of right. It has likewise been ruled that a
judgment which has acquired finality becomes immutable and unalterable and hence may no longer
be modified at any respect except only to correct clerical errors or mistakes (Korean Airlines Co. Ltd.
vs. C.A., 247 SCRA 599). In this respect, the decision deserves to be respected.

The argument about the modification of the contract or non-participation of defendant Servando
Franco in the proceedings on appeal on the alleged belief that the payment he made had already
absolved him from liability is of no moment. Primarily, the decision was for him and Leticia Medel to
pay the plaintiffs jointly and severally the amounts stated in the Decision. In other words, the liability
of the defendants thereunder is solidary. Based on this aspect alone, the new defense raised by
defendant Franco is unavailing.

WHEREFORE, in the light of all the foregoing, the Court hereby grants the Motion for Execution of
Judgment.

Accordingly, let a writ of execution be issued for implementation by the Deputy Sheriff of this Court.

SO ORDERED.9

On March 8, 2001, the RTC issued the writ of execution.10

Servando moved for reconsideration,11 but the RTC denied his motion.12

On March 19, 2003, the CA affirmed the RTC through its assailed decision, ruling that the execution
was proper because of Servando’s failure to comply with the terms of the compromise agreement,
stating:13

Petitioner cannot deny the fact that there was no full compliance with the tenor of the compromise
agreement. Private respondents on their part did not disregard the payments made by the petitioner.
They even offered that whatever payments made by petitioner, it can be deducted from the principal
obligation including interest. However, private respondents posit that the payments made cannot
alter, modify or revoke the decision of the Supreme Court in the instant case.

In the case of Prudence Realty and Development Corporation vs. Court of Appeals, the Supreme
Court ruled that:

"When the terms of the compromise judgment is violated, the aggrieved party must move for its
execution, not its invalidation."

It is clear from the aforementioned jurisprudence that even if there is a compromise agreement and
the terms have been violated, the aggrieved party, such as the private respondents, has the right to
move for the issuance of a writ of execution of the final judgment subject of the compromise
agreement.

Moreover, under the circumstances of this case, petitioner does not stand to suffer any harm or
prejudice for the simple reason that what has been asked by private respondents to be the subject of
a writ of execution is only the balance of petitioner’s obligation after deducting the payments made
on the basis of the compromise agreement.
WHEREFORE, premises considered, the instant petition is hereby DENIED DUE COURSE and
consequently DISMISSED for lack of merit.

SO ORDERED.

His motion for reconsideration having been denied,14 Servando appealed. He was eventually
substituted by his heirs, now the petitioners herein, on account of his intervening death. The
substitution was pursuant to the resolution dated June 15, 2005.15

Issue

The petitioners submit that the CA erred in ruling that:

THE 9 DECEMBER 1991 DECISION OF BRANCH 16 OF THE REGIONAL TRIAL COURT


OF MALOLOS, BULACAN WAS NOT NOVATED BY THE COMPROMISE AGREEMENT
BETWEEN THE PARTIES ON 5 FEBRUARY 1992.

II

THE LIABILITY OF THE PETITIONER TO RESPONDENTS SHOULD BE BASED ON THE


DECEMBER 1991 DECISION OF BRANCH 16 OF THE REGIONAL TRIAL COURT OF
MALOLOS, BULACAN AND NOT ON THE COMPROMISE AGREEMENT EXECUTED IN
1992.

The petitioners insist that the RTC could not validly enforce a judgment based on a promissory note
that had been already novated; that the promissory note had been impliedly novated when the
principal obligation of ₱500,000.00 had been fixed at ₱750,000.00, and the maturity date had been
extended from August 23, 1986 to February 29, 1992.

In contrast, the respondents aver that the petitioners seek to alter, modify or revoke the final and
executory decision of the Court; that novation did not take place because there was no complete
incompatibility between the promissory note and the memorandum receipt; that Servando’s previous
payment would be deducted from the total liability of the debtors based on the RTC’s decision.

Issue

Was there a novation of the August 23, 1986 promissory note when respondent Veronica Gonzales
issued the February 5, 1992 receipt?

Ruling

The petition lacks merits.

Novation did not transpire because no


irreconcilable incompatibility existed
between the promissory note and the receipt
To buttress their claim of novation, the petitioners rely on the receipt issued on February 5, 1992 by
respondent Veronica whereby Servando’s obligation was fixed at ₱750,000.00. They insist that even
the maturity date was extended until February 29, 1992. Such changes, they assert, were
incompatible with those of the original agreement under the promissory note.

The petitioners’ assertion is wrong.

A novation arises when there is a substitution of an obligation by a subsequent one that extinguishes
the first, either by changing the object or the principal conditions, or by substituting the person of the
debtor, or by subrogating a third person in the rights of the creditor.16 For a valid novation to take
place, there must be, therefore: (a) a previous valid obligation; (b) an agreement of the parties to
make a new contract; (c) an extinguishment of the old contract; and (d) a valid new contract.17 In
short, the new obligation extinguishes the prior agreement only when the substitution is
unequivocally declared, or the old and the new obligations are incompatible on every point. A
compromise of a final judgment operates as a novation of the judgment obligation upon compliance
with either of these two conditions.18

The receipt dated February 5, 1992, excerpted below, did not create a new obligation incompatible
with the old one under the promissory note, viz:

February 5, 1992

Received from SERVANDO FRANCO BPI Manager’s Check No. 001700 in the amount of
₱400,00.00 as partial payment of loan. Balance of ₱375,000.00 to be paid on or before FEBRUARY
29, 1992. In case of default an interest will be charged as stipulated in the promissory note subject of
this case.

(Sgd)
V. Gonzalez19

To be clear, novation is not presumed. This means that the parties to a contract should expressly
agree to abrogate the old contract in favor of a new one. In the absence of the express agreement,
the old and the new obligations must be incompatible on every point.20 According to California Bus
Lines, Inc. v. State Investment House, Inc.:21

The extinguishment of the old obligation by the new one is a necessary element of novation which
may be effected either expressly or impliedly. The term "expressly" means that the contracting
1âwphi1

parties incontrovertibly disclose that their object in executing the new contract is to extinguish the old
one. Upon the other hand, no specific form is required for an implied novation, and all that is
prescribed by law would be an incompatibility between the two contracts. While there is really no
hard and fast rule to determine what might constitute to be a sufficient change that can bring about
novation, the touchstone for contrariety, however, would be an irreconcilable incompatibility between
the old and the new obligations.

There is incompatibility when the two obligations cannot stand together, each one having its
independent existence. If the two obligations cannot stand together, the latter obligation novates the
first.22 Changes that breed incompatibility must be essential in nature and not merely accidental. The
incompatibility must affect any of the essential elements of the obligation, such as its object, cause
or principal conditions thereof; otherwise, the change is merely modificatory in nature and insufficient
to extinguish the original obligation.23
In light of the foregoing, the issuance of the receipt created no new obligation. Instead, the
respondents only thereby recognized the original obligation by stating in the receipt that the
₱400,000.00 was "partial payment of loan" and by referring to "the promissory note subject of the
case in imposing the interest." The loan mentioned in the receipt was still the same loan involving
the ₱500,000.00 extended to Servando. Advertence to the interest stipulated in the promissory note
indicated that the contract still subsisted, not replaced and extinguished, as the petitioners claim.

The receipt dated February 5, 1992 was only the proof of Servando’s payment of his obligation as
confirmed by the decision of the RTC. It did not establish the novation of his agreement with the
respondents. Indeed, the Court has ruled that an obligation to pay a sum of money is not novated by
an instrument that expressly recognizes the old, or changes only the terms of payment, or adds
other obligations not incompatible with the old ones, or the new contract merely supplements the old
one.24 A new contract that is a mere reiteration, acknowledgment or ratification of the old contract with
slight modifications or alterations as to the cause or object or principal conditions can stand together
with the former one, and there can be no incompatibility between them.25 Moreover, a creditor’s
acceptance of payment after demand does not operate as a modification of the original contract.26

Worth noting is that Servando’s liability was joint and solidary with his co-debtors. In a solidary
obligation, the creditor may proceed against any one of the solidary debtors or some or all of them
simultaneously.27 The choice to determine against whom the collection is enforced belongs to the
creditor until the obligation is fully satisfied.28 Thus, the obligation was being enforced against
Servando, who, in order to escape liability, should have presented evidence to prove that his
obligation had already been cancelled by the new obligation or that another debtor had assumed his
place. In case of change in the person of the debtor, the substitution must be clear and
express,29 and made with the consent of the creditor.30 Yet, these circumstances did not obtain herein,
proving precisely that Servando remained a solidary debtor against whom the entire or part of the
obligation might be enforced.

Lastly, the extension of the maturity date did not constitute a novation of the previous agreement. It
is settled that an extension of the term or period of the maturity date does not result in novation.31

II

Total liability to be reduced by ₱400,000.00

The petitioners argue that Servando’s remaining liability amounted to only ₱375,000.00, the balance
indicated in the February 5, 1992 receipt. Accordingly, the balance was not yet due because the
respondents did not yet make a demand for payment.

The petitioners cannot be upheld.

The balance of ₱375,000.00 was premised on the taking place of a novation. However, as found
now, novation did not take place. Accordingly, Servando’s obligation, being solidary, remained to be
that decreed in the December 9, 1991 decision of the RTC, inclusive of interests, less the amount of
₱400,000.00 that was meanwhile paid by him.

WHEREFORE, the Court AFFIRMS the decision of the Court of Appeals promulgated on March 19,
2003; ORDERS the Regional Trial Court, Branch 16, in Malolos, Bulacan to proceed with the
execution based on its decision rendered on December 9, 1991, deducting the amount of
₱400,000.00 already paid by the late Servando Franco; and DIRECTS the petitioners to pay the
costs of suit.
Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 175490 September 17, 2009

ILEANA DR. MACALINAO, Petitioner,


vs.
BANK OF THE PHILIPPINE ISLANDS, Respondent.

DECISION

VELASCO, JR., J.:

The Case

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking to
reverse and set aside the June 30, 2006 Decision1 of the Court of Appeals (CA) and its November
21, 2006 Resolution2 denying petitioner’s motion for reconsideration.

The Facts

Petitioner Ileana Macalinao was an approved cardholder of BPI Mastercard, one of the credit card
facilities of respondent Bank of the Philippine Islands (BPI).3 Petitioner Macalinao made some
purchases through the use of the said credit card and defaulted in paying for said purchases. She
subsequently received a letter dated January 5, 2004 from respondent BPI, demanding payment of
the amount of one hundred forty-one thousand five hundred eighteen pesos and thirty-four centavos
(PhP 141,518.34), as follows:

Statement Previous Purchases Penalty Finance Balance


Date Balance (Payments) Interest Charges Due
10/27/2002 94,843.70 559.72 3,061.99 98,456.41
11/27/2002 98,465.41 (15,000) 0 2,885.61 86,351.02
12/31/2002 86,351.02 30,308.80 259.05 2,806.41 119,752.28
1/27/2003 119,752.28 618.23 3,891.07 124,234.58
2/27/2003 124,234.58 990.93 4,037.62 129,263.13
3/27/2003 129,263.13 (18,000.00) 298.72 3,616.05 115,177.90
4/27/2003 115,177.90 644.26 3,743.28 119,565.44
5/27/2003 119,565.44 (10,000.00) 402.95 3,571.71 113,540.10
8,362.50
6/29/2003 113,540.10 323.57 3,607.32 118,833.49
(7,000.00)
7/27/2003 118,833.49 608.07 3,862.09 123,375.65
8/27/2003 123,375.65 1,050.20 4,009.71 128,435.56
9/28/2003 128,435.56 1,435.51 4,174.16 134,045.23
10/28/2003
11/28/2003
12/28/2003
1/27/2004 141,518.34 8,491.10 4,599.34 154,608.78

Under the Terms and Conditions Governing the Issuance and Use of the BPI Credit and BPI
Mastercard, the charges or balance thereof remaining unpaid after the payment due date indicated
on the monthly Statement of Accounts shall bear interest at the rate of 3% per month and an
additional penalty fee equivalent to another 3% per month. Particularly:

8. PAYMENT OF CHARGES – BCC shall furnish the Cardholder a monthly Statement of Account
(SOA) and the Cardholder agrees that all charges made through the use of the CARD shall be paid
by the Cardholder as stated in the SOA on or before the last day for payment, which is twenty (20)
days from the date of the said SOA, and such payment due date may be changed to an earlier date
if the Cardholder’s account is considered overdue and/or with balances in excess of the approved
credit limit, or to such other date as may be deemed proper by the CARD issuer with notice to the
Cardholder on the same monthly SOA. If the last day fall on a Saturday, Sunday or a holiday, the
last day for the payment automatically becomes the last working day prior to said payment date.
However, notwithstanding the absence or lack of proof of service of the SOA of the Cardholder, the
latter shall pay any and all charges made through the use of the CARD within thirty (30) days from
date or dates thereof. Failure of the Cardholder to pay the charges made through the CARD within
the payment period as stated in the SOA or within thirty (30) days from actual date or dates of
purchase whichever occur earlier, shall render him in default without the necessity of demand from
BCC, which the Cardholder expressly waives. The charges or balance thereof remaining unpaid
after the payment due date indicated on the monthly Statement of Accounts shall bear interest at the
rate of 3% per month for BPI Express Credit, BPI Gold Mastercard and an additional penalty fee
equivalent to another 3% of the amount due for every month or a fraction of a month’s delay.
PROVIDED that if there occurs any change on the prevailing market rates, BCC shall have the
option to adjust the rate of interest and/or penalty fee due on the outstanding obligation with prior
notice to the cardholder. The Cardholder hereby authorizes BCC to correspondingly increase the
rate of such interest [in] the event of changes in the prevailing market rates, and to charge additional
service fees as may be deemed necessary in order to maintain its service to the Cardholder. A
CARD with outstanding balance unpaid after thirty (30) days from original billing statement date shall
automatically be suspended, and those with accounts unpaid after ninety (90) days from said original
billing/statement date shall automatically be cancel (sic), without prejudice to BCC’s right to suspend
or cancel any card anytime and for whatever reason. In case of default in his obligation as provided
herein, Cardholder shall surrender his/her card to BCC and in addition to the interest and penalty
charges aforementioned , pay the following liquidated damages and/or fees (a) a collection fee of
25% of the amount due if the account is referred to a collection agency or attorney; (b) service fee
for every dishonored check issued by the cardholder in payment of his account without prejudice,
however, to BCC’s right of considering Cardholder’s account, and (c) a final fee equivalent to 25% of
the unpaid balance, exclusive of litigation expenses and judicial cost, if the payment of the account is
enforced though court action. Venue of all civil suits to enforce this Agreement or any other suit
directly or indirectly arising from the relationship between the parties as established herein, whether
arising from crimes, negligence or breach thereof, shall be in the process of courts of the City of
Makati or in other courts at the option of BCC.4 (Emphasis supplied.) 1avv phi1
For failure of petitioner Macalinao to settle her obligations, respondent BPI filed with the Metropolitan
Trial Court (MeTC) of Makati City a complaint for a sum of money against her and her husband,
Danilo SJ. Macalinao. This was raffled to Branch 66 of the MeTC and was docketed as Civil Case
No. 84462 entitled Bank of the Philippine Islands vs. Spouses Ileana Dr. Macalinao and Danilo SJ.
Macalinao.5

In said complaint, respondent BPI prayed for the payment of the amount of one hundred fifty-four
thousand six hundred eight pesos and seventy-eight centavos (PhP 154,608.78) plus 3.25% finance
charges and late payment charges equivalent to 6% of the amount due from February 29, 2004 and
an amount equivalent to 25% of the total amount due as attorney’s fees, and of the cost of suit.6

After the summons and a copy of the complaint were served upon petitioner Macalinao and her
husband, they failed to file their Answer.7 Thus, respondent BPI moved that judgment be rendered in
accordance with Section 6 of the Rule on Summary Procedure.8 This was granted in an Order dated
June 16, 2004.9 Thereafter, respondent BPI submitted its documentary evidence.10 1avv phi 1

In its Decision dated August 2, 2004, the MeTC ruled in favor of respondent BPI and ordered
petitioner Macalinao and her husband to pay the amount of PhP 141,518.34 plus interest and
penalty charges of 2% per month, to wit:

WHEREFORE, finding merit in the allegations of the complaint supported by documentary evidence,
judgment is hereby rendered in favor of the plaintiff, Bank of the Philippine Islands and against
defendant-spouses Ileana DR Macalinao and Danilo SJ Macalinao by ordering the latter to pay the
former jointly and severally the following:

1. The amount of PESOS: ONE HUNDRED FORTY ONE THOUSAND FIVE HUNDRED
EIGHTEEN AND 34/100 (P141,518.34) plus interest and penalty charges of 2% per month
from January 05, 2004 until fully paid;

2. P10,000.00 as and by way of attorney’s fees; and

3. Cost of suit.

SO ORDERED.11

Only petitioner Macalinao and her husband appealed to the Regional Trial Court (RTC) of Makati
City, their recourse docketed as Civil Case No. 04-1153. In its Decision dated October 14, 2004, the
RTC affirmed in toto the decision of the MeTC and held:

In any event, the sum of P141,518.34 adjudged by the trial court appeared to be the result of a
recomputation at the reduced rate of 2% per month. Note that the total amount sought by the
plaintiff-appellee was P154,608.75 exclusive of finance charge of 3.25% per month and late
payment charge of 6% per month.

WHEREFORE, the appealed decision is hereby affirmed in toto.

No pronouncement as to costs.

SO ORDERED.12
Unconvinced, petitioner Macalinao filed a petition for review with the CA, which was docketed as
CA-G.R. SP No. 92031. The CA affirmed with modification the Decision of the RTC:

WHEREFORE, the appealed decision is AFFIRMED but MODIFIED with respect to the total amount
due and interest rate. Accordingly, petitioners are jointly and severally ordered to pay respondent
Bank of the Philippine Islands the following:

1. The amount of One Hundred Twenty Six Thousand Seven Hundred Six Pesos and
Seventy Centavos plus interest and penalty charges of 3% per month from January 5, 2004
until fully paid;

2. P10,000.00 as and by way of attorney’s fees; and

3. Cost of Suit.

SO ORDERED.13

Although sued jointly with her husband, petitioner Macalinao was the only one who filed the petition
before the CA since her husband already passed away on October 18, 2005.14

In its assailed decision, the CA held that the amount of PhP 141,518.34 (the amount sought to be
satisfied in the demand letter of respondent BPI) is clearly not the result of the re-computation at the
reduced interest rate as previous higher interest rates were already incorporated in the said amount.
Thus, the said amount should not be made as basis in computing the total obligation of petitioner
Macalinao. Further, the CA also emphasized that respondent BPI should not compound the interest
in the instant case absent a stipulation to that effect. The CA also held, however, that the MeTC
erred in modifying the amount of interest rate from 3% monthly to only 2% considering that petitioner
Macalinao freely availed herself of the credit card facility offered by respondent BPI to the general
public. It explained that contracts of adhesion are not invalid per se and are not entirely prohibited.

Petitioner Macalinao’s motion for reconsideration was denied by the CA in its Resolution dated
November 21, 2006. Hence, petitioner Macalinao is now before this Court with the following
assigned errors:

I.

THE REDUCTION OF INTEREST RATE, FROM 9.25% TO 2%, SHOULD BE UPHELD SINCE THE
STIPULATED RATE OF INTEREST WAS UNCONSCIONABLE AND INIQUITOUS, AND THUS
ILLEGAL.

II.

THE COURT OF APPEALS ARBITRARILY MODIFIED THE REDUCED RATE OF INTEREST


FROM 2% TO 3%, CONTRARY TO THE TENOR OF ITS OWN DECISION.

III.

THE COURT A QUO, INSTEAD OF PROCEEDING WITH A RECOMPUTATION, SHOULD HAVE


DISMISSED THE CASE FOR FAILURE OF RESPONDENT BPI TO PROVE THE CORRECT
AMOUNT OF PETITIONER’S OBLIGATION, OR IN THE ALTERNATIVE, REMANDED THE CASE
TO THE LOWER COURT FOR RESPONDENT BPI TO PRESENT PROOF OF THE CORRECT
AMOUNT THEREOF.

Our Ruling

The petition is partly meritorious.

The Interest Rate and Penalty Charge of 3% Per Month or 36% Per Annum Should Be
Reduced to 2% Per Month or 24% Per Annum

In its Complaint, respondent BPI originally imposed the interest and penalty charges at the rate of
9.25% per month or 111% per annum. This was declared as unconscionable by the lower courts for
being clearly excessive, and was thus reduced to 2% per month or 24% per annum. On appeal, the
CA modified the rate of interest and penalty charge and increased them to 3% per month or 36% per
annum based on the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card,
which governs the transaction between petitioner Macalinao and respondent BPI.

In the instant petition, Macalinao claims that the interest rate and penalty charge of 3% per month
imposed by the CA is iniquitous as the same translates to 36% per annum or thrice the legal rate of
interest.15 On the other hand, respondent BPI asserts that said interest rate and penalty charge are
reasonable as the same are based on the Terms and Conditions Governing the Issuance and Use of
the BPI Credit Card.16

We find for petitioner. We are of the opinion that the interest rate and penalty charge of 3% per
month should be equitably reduced to 2% per month or 24% per annum.

Indeed, in the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, there
was a stipulation on the 3% interest rate. Nevertheless, it should be noted that this is not the first
time that this Court has considered the interest rate of 36% per annum as excessive and
unconscionable. We held in Chua vs. Timan:17

The stipulated interest rates of 7% and 5% per month imposed on respondents’ loans must be
equitably reduced to 1% per month or 12% per annum. We need not unsettle the principle we had
affirmed in a plethora of cases that stipulated interest rates of 3% per month and higher are
excessive, iniquitous, unconscionable and exorbitant. Such stipulations are void for being contrary to
morals, if not against the law. While C.B. Circular No. 905-82, which took effect on January 1, 1983,
effectively removed the ceiling on interest rates for both secured and unsecured loans, regardless of
maturity, nothing in the said circular could possibly be read as granting carte blanche authority to
lenders to raise interest rates to levels which would either enslave their borrowers or lead to a
hemorrhaging of their assets. (Emphasis supplied.)

Since the stipulation on the interest rate is void, it is as if there was no express contract thereon.
Hence, courts may reduce the interest rate as reason and equity demand.18

The same is true with respect to the penalty charge. Notably, under the Terms and Conditions
Governing the Issuance and Use of the BPI Credit Card, it was also stated therein that respondent
BPI shall impose an additional penalty charge of 3% per month. Pertinently, Article 1229 of the Civil
Code states:
Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly
or irregularly complied with by the debtor. Even if there has been no performance, the penalty may
also be reduced by the courts if it is iniquitous or unconscionable.

In exercising this power to determine what is iniquitous and unconscionable, courts must consider
the circumstances of each case since what may be iniquitous and unconscionable in one may be
totally just and equitable in another.19

In the instant case, the records would reveal that petitioner Macalinao made partial payments to
respondent BPI, as indicated in her Billing Statements.20 Further, the stipulated penalty charge of 3%
per month or 36% per annum, in addition to regular interests, is indeed iniquitous and
unconscionable.

Thus, under the circumstances, the Court finds it equitable to reduce the interest rate pegged by the
CA at 1.5% monthly to 1% monthly and penalty charge fixed by the CA at 1.5% monthly to 1%
monthly or a total of 2% per month or 24% per annum in line with the prevailing jurisprudence and in
accordance with Art. 1229 of the Civil Code.

There Is No Basis for the Dismissal of the Case,

Much Less a Remand of the Same for Further Reception of Evidence

Petitioner Macalinao claims that the basis of the re-computation of the CA, that is, the amount of
PhP 94,843.70 stated on the October 27, 2002 Statement of Account, was not the amount of the
principal obligation. Thus, this allegedly necessitates a re-examination of the evidence presented by
the parties. For this reason, petitioner Macalinao further contends that the dismissal of the case or its
remand to the lower court would be a more appropriate disposition of the case.

Such contention is untenable. Based on the records, the summons and a copy of the complaint were
served upon petitioner Macalinao and her husband on May 4, 2004. Nevertheless, they failed to file
their Answer despite such service. Thus, respondent BPI moved that judgment be rendered
accordingly.21 Consequently, a decision was rendered by the MeTC on the basis of the evidence
submitted by respondent BPI. This is in consonance with Sec. 6 of the Revised Rule on Summary
Procedure, which states:

Sec. 6. Effect of failure to answer. — Should the defendant fail to answer the complaint within the
period above provided, the court, motu proprio, or on motion of the plaintiff, shall render judgment as
may be warranted by the facts alleged in the complaint and limited to what is prayed for therein:
Provided, however, that the court may in its discretion reduce the amount of damages and attorney’s
fees claimed for being excessive or otherwise unconscionable. This is without prejudice to the
applicability of Section 3(c), Rule 10 of the Rules of Court, if there are two or more defendants. (As
amended by the 1997 Rules of Civil Procedure; emphasis supplied.)

Considering the foregoing rule, respondent BPI should not be made to suffer for petitioner
Macalinao’s failure to file an answer and concomitantly, to allow the latter to submit additional
evidence by dismissing or remanding the case for further reception of evidence. Significantly,
petitioner Macalinao herself admitted the existence of her obligation to respondent BPI, albeit with
reservation as to the principal amount. Thus, a dismissal of the case would cause great injustice to
respondent BPI. Similarly, a remand of the case for further reception of evidence would unduly
prolong the proceedings of the instant case and render inutile the proceedings conducted before the
lower courts.
Significantly, the CA correctly used the beginning balance of PhP 94,843.70 as basis for the re-
computation of the interest considering that this was the first amount which appeared on the
Statement of Account of petitioner Macalinao. There is no other amount on which the re-computation
could be based, as can be gathered from the evidence on record. Furthermore, barring a showing
that the factual findings complained of are totally devoid of support in the record or that they are so
glaringly erroneous as to constitute serious abuse of discretion, such findings must stand, for this
Court is not expected or required to examine or contrast the evidence submitted by the parties.22

In view of the ruling that only 1% monthly interest and 1% penalty charge can be applied to the
beginning balance of PhP 94,843.70, this Court finds the following computation more appropriate:

Penalty Total Amount


Statement Previous Purchases Interest
Balance Charge Due for the
Date Balance (Payments) (1%)
(1%) Month
10/27/2002 94,843.70 94,843.70 948.44 948.44 96,740.58
11/27/2002 94,843.70 (15,000) 79,843.70 798.44 798.44 81,440.58
12/31/2002 79,843.70 30,308.80 110,152.50 1,101.53 1,101.53 112,355.56
1/27/2003 110,152.50 110,152.50 1,101.53 1,101.53 112,355.56
2/27/2003 110,152.50 110,152.50 1,101.53 1,101.53 112,355.56
3/27/2003 110,152.50 (18,000.00) 92,152.50 921.53 921.53 93,995.56
4/27/2003 92,152.50 92,152.50 921.53 921.53 93,995.56
5/27/2003 92,152.50 (10,000.00) 82,152.50 821.53 821.53 83,795.56
8,362.50
6/29/2003 82,152.50 83,515.00 835.15 835.15 85,185.30
(7,000.00)
7/27/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
8/27/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
9/28/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
10/28/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
11/28/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
12/28/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
1/27/2004 83,515.00 83,515.00 835.15 835.15 85,185.30
TOTAL 83,515.00 14,397.26 14,397.26 112,309.52

WHEREFORE, the petition is PARTLY GRANTED. The CA Decision dated June 30, 2006 in CA-
G.R. SP No. 92031 is hereby MODIFIED with respect to the total amount due, interest rate, and
penalty charge. Accordingly, petitioner Macalinao is ordered to pay respondent BPI the following:

(1) The amount of one hundred twelve thousand three hundred nine pesos and fifty-two
centavos (PhP 112,309.52) plus interest and penalty charges of 2% per month from January
5, 2004 until fully paid;
(2) PhP 10,000 as and by way of attorney’s fees; and

(3) Cost of suit.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 171545 December 19, 2007

EQUITABLE PCI BANK,* AIMEE YU and BEJAN LIONEL APAS, Petitioners,


vs.
NG SHEUNG NGOR** doing business under the name and style "KEN MARKETING," KEN
APPLIANCE DIVISION, INC. and BENJAMIN E. GO, Respondents.

DECISION

CORONA, J.:

This petition for review on certiorari1 seeks to set aside the decision2 of the Court of Appeals (CA) in
CA-G.R. SP No. 83112 and its resolution3 denying reconsideration.

On October 7, 2001, respondents Ng Sheung Ngor,4 Ken Appliance Division, Inc. and Benjamin E.
Go filed an action for annulment and/or reformation of documents and contracts5 against petitioner
Equitable PCI Bank (Equitable) and its employees, Aimee Yu and Bejan Lionel Apas, in the Regional
Trial Court (RTC), Branch 16 of Cebu City.6 They claimed that Equitable induced them to avail of its
peso and dollar credit facilities by offering low interest rates7 so they accepted Equitable's proposal
and signed the bank's pre-printed promissory notes on various dates beginning 1996. They,
however, were unaware that the documents contained identical escalation clauses granting
Equitable authority to increase interest rates without their consent.8

Equitable, in its answer, asserted that respondents knowingly accepted all the terms and conditions
contained in the promissory notes.9 In fact, they continuously availed of and benefited from
Equitable's credit facilities for five years.10

After trial, the RTC upheld the validity of the promissory notes. It found that, in 2001 alone, Equitable
restructured respondents' loans amounting to US$228,200 and ₱1,000,000.11 The trial court,
however, invalidated the escalation clause contained therein because it violated the principle of
mutuality of contracts.12 Nevertheless, it took judicial notice of the steep depreciation of the peso
during the intervening period13 and declared the existence of extraordinary deflation.14 Consequently,
the RTC ordered the use of the 1996 dollar exchange rate in computing respondents' dollar-
denominated loans.15 Lastly, because the business reputation of respondents was (allegedly)
severely damaged when Equitable froze their accounts,16 the trial court awarded moral and
exemplary damages to them.17

The dispositive portion of the February 5, 2004 RTC decision18 provided:

WHEREFORE, premises considered, judgment is hereby rendered:

A) Ordering [Equitable] to reinstate and return the amount of [respondents'] deposit placed
on hold status;
B) Ordering [Equitable] to pay [respondents] the sum of ₱12 [m]illion [p]esos as moral
damages;

C) Ordering [Equitable] to pay [respondents] the sum of ₱10 [m]illion [p]esos as exemplary
damages;

D) Ordering defendants Aimee Yu and Bejan [Lionel] Apas to pay [respondents], jointly and
severally, the sum of [t]wo [m]illion [p]esos as moral and exemplary damages;

E) Ordering [Equitable, Aimee Yu and Bejan Lionel Apas], jointly and severally, to pay
[respondents'] attorney's fees in the sum of ₱300,000; litigation expenses in the sum of
₱50,000 and the cost of suit;

F) Directing plaintiffs Ng Sheung Ngor and Ken Marketing to pay [Equitable] the unpaid
principal obligation for the peso loan as well as the unpaid obligation for the dollar
denominated loan;

G) Directing plaintiff Ng Sheung Ngor and Ken Marketing to pay [Equitable] interest as
follows:

1) 12% per annum for the peso loans;

2) 8% per annum for the dollar loans. The basis for the payment of the dollar
obligation is the conversion rate of P26.50 per dollar availed of at the time of
incurring of the obligation in accordance with Article 1250 of the Civil Code of the
Philippines;

H) Dismissing [Equitable's] counterclaim except the payment of the aforestated unpaid


principal loan obligations and interest.

SO ORDERED.19

Equitable and respondents filed their respective notices of appeal.20

In the March 1, 2004 order of the RTC, both notices were denied due course because Equitable and
respondents "failed to submit proof that they paid their respective appeal fees."21

WHEREFORE, premises considered, the appeal interposed by defendants from the Decision in the
above-entitled case is DENIED due course. As of February 27, 2004, the Decision dated
February 5, 2004, is considered final and executory in so far as [Equitable, Aimee Yu and
Bejan Lionel Apas] are concerned.22 (emphasis supplied)

Equitable moved for the reconsideration of the March 1, 2004 order of the RTC23 on the ground that
it did in fact pay the appeal fees. Respondents, on the other hand, prayed for the issuance of a writ
of execution.24

On March 24, 2004, the RTC issued an omnibus order denying Equitable's motion for
reconsideration for lack of merit25 and ordered the issuance of a writ of execution in favor of
respondents.26 According to the RTC, because respondents did not move for the reconsideration of
the previous order (denying due course to the parties’ notices of appeal),27 the February 5, 2004
decision became final and executory as to both parties and a writ of execution against Equitable was
in order.28

A writ of execution was thereafter issued29 and three real properties of Equitable were levied upon.30

On March 26, 2004, Equitable filed a petition for relief in the RTC from the March 1, 2004 order.31 It,
however, withdrew that petition on March 30, 200432 and instead filed a petition for certiorari with an
application for an injunction in the CA to enjoin the implementation and execution of the March 24,
2004 omnibus order.33

On June 16, 2004, the CA granted Equitable's application for injunction. A writ of preliminary
injunction was correspondingly issued.34

Notwithstanding the writ of injunction, the properties of Equitable previously levied upon were sold in
a public auction on July 1, 2004. Respondents were the highest bidders and certificates of sale were
issued to them.35

On August 10, 2004, Equitable moved to annul the July 1, 2004 auction sale and to cite the sheriffs
who conducted the sale in contempt for proceeding with the auction despite the injunction order of
the CA.36

On October 28, 2005, the CA dismissed the petition for certiorari.37 It found Equitable guilty of forum
shopping because the bank filed its petition for certiorari in the CA several hours before withdrawing
its petition for relief in the RTC.38 Moreover, Equitable failed to disclose, both in the statement of
material dates and certificate of non-forum shopping (attached to its petition for certiorari in the CA),
that it had a pending petition for relief in the RTC.39

Equitable moved for reconsideration40 but it was denied.41 Thus, this petition.

Equitable asserts that it was not guilty of forum shopping because the petition for relief was
withdrawn on the same day the petition for certiorari was filed.42 It likewise avers that its petition for
certiorari was meritorious because the RTC committed grave abuse of discretion in issuing the
March 24, 2004 omnibus order which was based on an erroneous assumption. The March 1, 2004
order denying its notice of appeal for non payment of appeal fees was erroneous because it had in
fact paid the required fees.43 Thus, the RTC, by issuing its March 24, 2004 omnibus order, effectively
prevented Equitable from appealing the patently wrong February 5, 2004 decision.44

This petition is meritorious.

Equitable Was Not Guilty Of Forum shopping

Forum shopping exists when two or more actions involving the same transactions, essential facts
and circumstances are filed and those actions raise identical issues, subject matter and causes of
action.45 The test is whether, in two or more pending cases, there is identity of parties, rights or
causes of actions and reliefs.46

Equitable's petition for relief in the RTC and its petition for certiorari in the CA did not have identical
causes of action. The petition for relief from the denial of its notice of appeal was based on the
RTC’s judgment or final order preventing it from taking an appeal by "fraud, accident, mistake or
excusable negligence."47 On the other hand, its petition for certiorari in the CA, a special civil action,
sought to correct the grave abuse of discretion amounting to lack of jurisdiction committed by the
RTC.48

In a petition for relief, the judgment or final order is rendered by a court with competent jurisdiction.
In a petition for certiorari, the order is rendered by a court without or in excess of its jurisdiction.

Moreover, Equitable substantially complied with the rule on non-forum shopping when it moved to
withdraw its petition for relief in the RTC on the same day (in fact just four hours and forty minutes
after) it filed the petition for certiorari in the CA. Even if Equitable failed to disclose that it had a
pending petition for relief in the RTC, it rectified what was doubtlessly a careless oversight by
withdrawing the petition for relief just a few hours after it filed its petition for certiorari in the CA ― a
clear indication that it had no intention of maintaining the two actions at the same time.

The Trial Court Committed Grave Abuse of Discretion In Issuing Its March 1, 2004 and March
24, 2004 Orders

Section 1, Rule 65 of the Rules of Court provides:

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

The petition shall be accompanied by a certified true copy of the judgment, order or resolution
subject thereof, copies of all pleadings and documents relevant and pertinent thereto, and a sworn
certificate of non-forum shopping as provided in the third paragraph of Section 3, Rule 46.

There are two substantial requirements in a petition for certiorari. These are:

1. that the tribunal, board or officer exercising judicial or quasi-judicial functions acted without
or in excess of his or its jurisdiction or with grave abuse of discretion amounting to lack or
excess of jurisdiction; and

2. that there is no appeal or any plain, speedy and adequate remedy in the ordinary course
of law.

For a petition for certiorari premised on grave abuse of discretion to prosper, petitioner must show
that the public respondent patently and grossly abused his discretion and that abuse amounted to an
evasion of positive duty or a virtual refusal to perform a duty enjoined by law or to act at all in
contemplation of law, as where the power was exercised in an arbitrary and despotic manner by
reason of passion or hostility.49

The March 1, 2004 order denied due course to the notices of appeal of both Equitable and
respondents. However, it declared that the February 5, 2004 decision was final and executory only
with respect to Equitable.50 As expected, the March 24, 2004 omnibus order denied Equitable's
motion for reconsideration and granted respondents' motion for the issuance of a writ of execution.51
The March 1, 2004 and March 24, 2004 orders of the RTC were obviously intended to prevent
Equitable, et al. from appealing the February 5, 2004 decision. Not only that. The execution of the
decision was undertaken with indecent haste, effectively obviating or defeating Equitable's right to
avail of possible legal remedies. No matter how we look at it, the RTC committed grave abuse of
discretion in rendering those orders.

With regard to whether Equitable had a plain, speedy and adequate remedy in the ordinary course of
law, we hold that there was none. The RTC denied due course to its notice of appeal in the March 1,
2004 order. It affirmed that denial in the March 24, 2004 omnibus order. Hence, there was no way
Equitable could have possibly appealed the February 5, 2004 decision.52

Although Equitable filed a petition for relief from the March 24, 2004 order, that petition was not a
plain, speedy and adequate remedy in the ordinary course of law.53 A petition for relief under Rule 38
is an equitable remedy allowed only in exceptional circumstances or where there is no other
available or adequate remedy.54

Thus, we grant Equitable's petition for certiorari and consequently give due course to its appeal.

Equitable Raised Pure Questions of Law in Its Petition For Review

The jurisdiction of this Court in Rule 45 petitions is limited to questions of law.55 There is a question
of law "when the doubt or controversy concerns the correct application of law or jurisprudence to a
certain set of facts; or when the issue does not call for the probative value of the evidence
presented, the truth or falsehood of facts being admitted."56

Equitable does not assail the factual findings of the trial court. Its arguments essentially focus on the
nullity of the RTC’s February 5, 2004 decision. Equitable points out that that decision was patently
erroneous, specially the exorbitant award of damages, as it was inconsistent with existing law
and jurisprudence.57

The Promissory Notes Were Valid

The RTC upheld the validity of the promissory notes despite respondents’ assertion that those
documents were contracts of adhesion.

A contract of adhesion is a contract whereby almost all of its provisions are drafted by one
party.58 The participation of the other party is limited to affixing his signature or his "adhesion" to the
contract.59 For this reason, contracts of adhesion are strictly construed against the party who drafted
it.60

It is erroneous, however, to conclude that contracts of adhesion are invalid per se. They are, on the
contrary, as binding as ordinary contracts. A party is in reality free to accept or reject it. A contract of
adhesion becomes void only when the dominant party takes advantage of the weakness of the other
party, completely depriving the latter of the opportunity to bargain on equal footing.61

That was not the case here. As the trial court noted, if the terms and conditions offered by Equitable
had been truly prejudicial to respondents, they would have walked out and negotiated with another
bank at the first available instance. But they did not. Instead, they continuously availed of Equitable's
credit facilities for five long years.
While the RTC categorically found that respondents had outstanding dollar- and peso-denominated
loans with Equitable, it, however, failed to ascertain the total amount due (principal, interest and
penalties, if any) as of July 9, 2001. The trial court did not explain how it arrived at the amounts of
US$228,200 and ₱1,000,000.62 In Metro Manila Transit Corporation v. D.M. Consunji,63 we reiterated
that this Court is not a trier of facts and it shall pass upon them only for compelling reasons which
unfortunately are not present in this case.64 Hence, we ordered the partial remand of the case for the
sole purpose of determining the amount of actual damages.65

Escalation Clause Violated The Principle Of Mutuality Of Contracts

Escalation clauses are not void per se. However, one "which grants the creditor an unbridled right to
adjust the interest independently and upwardly, completely depriving the debtor of the right to assent
to an important modification in the agreement" is void. Clauses of that nature violate the principle of
mutuality of contracts.66 Article 130867 of the Civil Code holds that a contract must bind both
contracting parties; its validity or compliance cannot be left to the will of one of them.68

For this reason, we have consistently held that a valid escalation clause provides:

1. that the rate of interest will only be increased if the applicable maximum rate of interest is
increased by law or by the Monetary Board; and

2. that the stipulated rate of interest will be reduced if the applicable maximum rate of interest is
reduced by law or by the Monetary Board (de-escalation clause).69

The RTC found that Equitable's promissory notes uniformly stated:

If subject promissory note is extended, the interest for subsequent extensions shall be at such rate
as shall be determined by the bank.70

Equitable dictated the interest rates if the term (or period for repayment) of the loan was extended.
Respondents had no choice but to accept them. This was a violation of Article 1308 of the Civil
Code. Furthermore, the assailed escalation clause did not contain the necessary provisions for
validity, that is, it neither provided that the rate of interest would be increased only if allowed by law
or the Monetary Board, nor allowed de-escalation. For these reasons, the escalation clause was
void.

With regard to the proper rate of interest, in New Sampaguita Builders v. Philippine National
Bank71 we held that, because the escalation clause was annulled, the principal amount of the loan
was subject to the original or stipulated rate of interest. Upon maturity, the amount due was subject
to legal interest at the rate of 12% per annum.72

Consequently, respondents should pay Equitable the interest rates of 12.66% p.a. for their dollar-
denominated loans and 20% p.a. for their peso-denominated loans from January 10, 2001 to July 9,
2001. Thereafter, Equitable was entitled to legal interest of 12% p.a. on all amounts due.

There Was No Extraordinary Deflation

Extraordinary inflation exists when there is an unusual decrease in the purchasing power of currency
(that is, beyond the common fluctuation in the value of currency) and such decrease could not be
reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the
obligation. Extraordinary deflation, on the other hand, involves an inverse situation.73
Article 1250 of the Civil Code provides:

Article 1250. In case an extraordinary inflation or deflation of the currency stipulated should
intervene, the value of the currency at the time of the establishment of the obligation shall be the
basis of payment, unless there is an agreement to the contrary.

For extraordinary inflation (or deflation) to affect an obligation, the following requisites must be
proven:

1. that there was an official declaration of extraordinary inflation or deflation from the Bangko
Sentral ng Pilipinas (BSP);74

2. that the obligation was contractual in nature;75 and

3. that the parties expressly agreed to consider the effects of the extraordinary inflation or
deflation.76

Despite the devaluation of the peso, the BSP never declared a situation of extraordinary inflation.
Moreover, although the obligation in this instance arose out of a contract, the parties did not agree to
recognize the effects of extraordinary inflation (or deflation).77 The RTC never mentioned that there
was a such stipulation either in the promissory note or loan agreement. Therefore, respondents
should pay their dollar-denominated loans at the exchange rate fixed by the BSP on the date of
maturity.78

The Award Of Moral And Exemplary Damages Lacked Basis

Moral damages are in the category of an award designed to compensate the claimant for actual
injury suffered, not to impose a penalty to the wrongdoer.79 To be entitled to moral damages, a
claimant must prove:

1. That he or she suffered besmirched reputation, or physical, mental or psychological


suffering sustained by the claimant;

2. That the defendant committed a wrongful act or omission;

3. That the wrongful act or omission was the proximate cause of the damages the claimant
sustained;

4. The case is predicated on any of the instances expressed or envisioned by Article


221980 and 222081 . 82

In culpa contractual or breach of contract, moral damages are recoverable only if the defendant
acted fraudulently or in bad faith or in wanton disregard of his contractual obligations.83 The breach
must be wanton, reckless, malicious or in bad faith, and oppressive or abusive.84

The RTC found that respondents did not pay Equitable the interest due on February 9, 2001 (or any
month thereafter prior to the maturity of the loan)85 or the amount due (principal plus interest) due on
July 9, 2001.86Consequently, Equitable applied respondents' deposits to their loans upon maturity.

The relationship between a bank and its depositor is that of creditor and debtor.87 For this reason, a
bank has the right to set-off the deposits in its hands for the payment of a depositor's indebtedness.88
Respondents indeed defaulted on their obligation. For this reason, Equitable had the option to
exercise its legal right to set-off or compensation. However, the RTC mistakenly (or, as it now
appears, deliberately) concluded that Equitable acted "fraudulently or in bad faith or in wanton
disregard" of its contractual obligations despite the absence of proof. The undeniable fact was that,
whatever damage respondents sustained was purely the consequence of their failure to pay
their loans. There was therefore absolutely no basis for the award of moral damages to them.

Neither was there reason to award exemplary damages. Since respondents were not entitled to
moral damages, neither should they be awarded exemplary damages.89 And if respondents were not
entitled to moral and exemplary damages, neither could they be awarded attorney's fees and
litigation expenses.90

ACCORDINGLY, the petition is hereby GRANTED.

The October 28, 2005 decision and February 3, 2006 resolution of the Court of Appeals in CA-G.R.
SP No. 83112 are hereby REVERSED and SET ASIDE.

The March 24, 2004 omnibus order of the Regional Trial Court, Branch 16, Cebu City in Civil Case
No. CEB-26983 is hereby ANNULLED for being rendered with grave abuse of discretion amounting
to lack or excess of jurisdiction. All proceedings undertaken pursuant thereto are likewise declared
null and void.

The March 1, 2004 order of the Regional Trial Court, Branch 16 of Cebu City in Civil Case No. CEB-
26983 is hereby SET ASIDE. The appeal of petitioners Equitable PCI Bank, Aimee Yu and Bejan
Lionel Apas is therefore given due course. 1avv phi1

The February 5, 2004 decision of the Regional Trial Court, Branch 16 of Cebu City in Civil Case No.
CEB-26983 is accordingly SET ASIDE. New judgment is hereby entered:

1. ordering respondents Ng Sheung Ngor, doing business under the name and style of "Ken
Marketing," Ken Appliance Division, Inc. and Benjamin E. Go to pay petitioner Equitable PCI
Bank the principal amount of their dollar- and peso-denominated loans;

2. ordering respondents Ng Sheung Ngor, doing business under the name and style of "Ken
Marketing," Ken Appliance Division, Inc. and Benjamin E. Go to pay petitioner Equitable PCI
Bank interest at:

a) 12.66% p.a. with respect to their dollar-denominated loans from January 10, 2001
to July 9, 2001;

b) 20% p.a. with respect to their peso-denominated loans from January 10, 2001 to
July 9, 2001;91

c) pursuant to our ruling in Eastern Shipping Lines v. Court of Appeals,92 the total
amount due on July 9, 2001 shall earn legal interest at 12% p.a. from the time
petitioner Equitable PCI Bank demanded payment, whether judicially or extra-
judicially; and

d) after this Decision becomes final and executory, the applicable rate shall be 12%
p.a. until full satisfaction;
3. all other claims and counterclaims are dismissed.

As a starting point, the Regional Trial Court, Branch 16 of Cebu City shall compute the exact
amounts due on the respective dollar-denominated and peso-denominated loans, as of July 9, 2001,
of respondents Ng Sheung Ngor, doing business under the name and style of "Ken Marketing," Ken
Appliance Division and Benjamin E. Go.

SO ORDERED.
G.R. No. 142305 December 10, 2003

SINGAPORE AIRLINES LIMITED, petitioner,


vs.
ANDION FERNANDEZ, respondent.

DECISION

CALLEJO, SR., J.:

This is a petition for review on certiorari assailing the Decision1 of the Court of Appeals which
affirmed in toto the decision2 of the Regional Trial Court of Pasig City, Branch 164 in Civil Case No.
60985 filed by the respondent for damages.

The Case for the Respondent

Respondent Andion Fernandez is an acclaimed soprano here in the Philippines and abroad. At the
time of the incident, she was availing an educational grant from the Federal Republic of Germany,
pursuing a Master’s Degree in Music majoring in Voice.3

She was invited to sing before the King and Queen of Malaysia on February 3 and 4, 1991. For this
singing engagement, an airline passage ticket was purchased from petitioner Singapore Airlines
which would transport her to Manila from Frankfurt, Germany on January 28, 1991. From Manila,
she would proceed to Malaysia on the next day.4 It was necessary for the respondent to pass by
Manila in order to gather her wardrobe; and to rehearse and coordinate with her pianist her
repertoire for the aforesaid performance.

The petitioner issued the respondent a Singapore Airlines ticket for Flight No. SQ 27, leaving
Frankfurt, Germany on January 27, 1991 bound for Singapore with onward connections from
Singapore to Manila. Flight No. SQ 27 was scheduled to leave Frankfurt at 1:45 in the afternoon of
January 27, 1991, arriving at Singapore at 8:50 in the morning of January 28, 1991. The connecting
flight from Singapore to Manila, Flight No. SQ 72, was leaving Singapore at 11:00 in the morning of
January 28, 1991, arriving in Manila at 2:20 in the afternoon of the same day.5

On January 27, 1991, Flight No. SQ 27 left Frankfurt but arrived in Singapore two hours late or at
about 11:00 in the morning of January 28, 1991. By then, the aircraft bound for Manila had left as
scheduled, leaving the respondent and about 25 other passengers stranded in the Changi Airport in
Singapore.6

Upon disembarkation at Singapore, the respondent approached the transit counter who referred her
to the nightstop counter and told the lady employee thereat that it was important for her to reach
Manila on that day, January 28, 1991. The lady employee told her that there were no more flights to
Manila for that day and that respondent had no choice but to stay in Singapore. Upon respondent’s
persistence, she was told that she can actually fly to Hong Kong going to Manila but since her ticket
was non-transferable, she would have to pay for the ticket. The respondent could not accept the
offer because she had no money to pay for it.7 Her pleas for the respondent to make arrangements to
transport her to Manila were unheeded.8

The respondent then requested the lady employee to use their phone to make a call to Manila. Over
the employees’ reluctance, the respondent telephoned her mother to inform the latter that she
missed the connecting flight. The respondent was able to contact a family friend who picked her up
from the airport for her overnight stay in Singapore.9

The next day, after being brought back to the airport, the respondent proceeded to petitioner’s
counter which says: "Immediate Attention To Passengers with Immediate Booking." There were four
or five passengers in line. The respondent approached petitioner’s male employee at the counter to
make arrangements for immediate booking only to be told: "Can’t you see I am doing something."
She explained her predicament but the male employee uncaringly retorted: "It’s your problem, not
ours."10

The respondent never made it to Manila and was forced to take a direct flight from Singapore to
Malaysia on January 29, 1991, through the efforts of her mother and travel agency in Manila. Her
mother also had to travel to Malaysia bringing with her respondent’s wardrobe and personal things
needed for the performance that caused them to incur an expense of about P50,000.11

As a result of this incident, the respondent’s performance before the Royal Family of Malaysia was
below par. Because of the rude and unkind treatment she received from the petitioner’s personnel in
Singapore, the respondent was engulfed with fear, anxiety, humiliation and embarrassment causing
her to suffer mental fatigue and skin rashes. She was thereby compelled to seek immediate medical
attention upon her return to Manila for "acute urticaria."12

On June 15, 1993, the RTC rendered a decision with the following dispositive portion:

ACCORDINGLY and as prayed for, defendant Singapore Airlines is ordered to pay herein plaintiff
Andion H. Fernandez the sum of:

1. FIFTY THOUSAND (P50,000.00) PESOS as compensatory or actual damages;

2. TWO HUNDRED and FIFTY THOUSAND (P250,000.00) PESOS as moral damages


considering plaintiff’s professional standing in the field of culture at home and abroad;

3. ONE HUNDRED THOUSAND (P100,000.00) PESOS as exemplary damages;

4. SEVENTY-FIVE THOUSAND (P75,000.00) PESOS as attorney’s fees; and

5. To pay the costs of suit.

SO ORDERED.13

The petitioner appealed the decision to the Court of Appeals.

On June 10, 1998, the CA promulgated the assailed decision finding no reversible error in the
appealed decision of the trial court.14

Forthwith, the petitioner filed the instant petition for review, raising the following errors:

THE HONORABLE COURT OF APPEALS ERRED IN AFFIRMING IN TOTO THE DECISION OF


THE TRIAL COURT THAT AWARDED DAMAGES TO RESPONDENT FOR THE ALLEGED
FAILURE OF THE PETITIONER TO EXERCISE EXTRAORDINARY DILIGENCE.
II

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE PETITIONER ACTED
IN BAD FAITH.

III

THE HONORABLE COURT OF APPEALS ERRED IN DISMISSING THE PETITIONER’S


COUNTERCLAIMS.15

The petitioner assails the award of damages contending that it exercised the extraordinary diligence
required by law under the given circumstances. The delay of Flight No. SQ 27 from Frankfurt to
Singapore on January 28, 1991 for more than two hours was due to a fortuitous event and beyond
petitioner’s control. Inclement weather prevented the petitioner’s plane coming from Copenhagen,
Denmark to arrive in Frankfurt on time on January 27, 1991. The plane could not take off from the
airport as the place was shrouded with fog. This delay caused a "snowball effect" whereby the other
flights were consequently delayed. The plane carrying the respondent arrived in Singapore two (2)
hours behind schedule.16 The delay was even compounded when the plane could not travel the
normal route which was through the Middle East due to the raging Gulf War at that time. It had to
pass through the restricted Russian airspace which was more congested.17

Under these circumstances, petitioner therefore alleged that it cannot be faulted for the delay in
arriving in Singapore on January 28, 1991 and causing the respondent to miss her connecting flight
to Manila.

The petitioner further contends that it could not also be held in bad faith because its personnel did
their best to look after the needs and interests of the passengers including the respondent. Because
the respondent and the other 25 passengers missed their connecting flight to Manila, the petitioner
automatically booked them to the flight the next day and gave them free hotel accommodations for
the night. It was respondent who did not take petitioner’s offer and opted to stay with a family friend
in Singapore.

The petitioner also alleges that the action of the respondent was baseless and it tarnished its good
name and image earned through the years for which, it was entitled to damages in the amount of
₱1,000,000; exemplary damages of ₱500,000; and attorney’s fees also in the amount of ₱500,000.18

The petition is barren of merit.

When an airline issues a ticket to a passenger, confirmed for a particular flight on a certain date, a
contract of carriage arises. The passenger then has every right to expect that he be transported on
that flight and on that date. If he does not, then the carrier opens itself to a suit for a breach of
contract of carriage.19

The contract of air carriage is a peculiar one. Imbued with public interest, the law requires common
carriers to carry the passengers safely as far as human care and foresight can provide, using the
utmost diligence of very cautious persons with due regard for all the circumstances.20 In an action for
breach of contract of carriage, the aggrieved party does not have to prove that the common carrier
was at fault or was negligent. All that is necessary to prove is the existence of the contract and the
fact of its non-performance by the carrier.21
In the case at bar, it is undisputed that the respondent carried a confirmed ticket for the two-legged
trip from Frankfurt to Manila: 1) Frankfurt-Singapore; and 2) Singapore-Manila. In her contract of
carriage with the petitioner, the respondent certainly expected that she would fly to Manila on Flight
No. SQ 72 on January 28, 1991. Since the petitioner did not transport the respondent as covenanted
by it on said terms, the petitioner clearly breached its contract of carriage with the respondent. The
respondent had every right to sue the petitioner for this breach. The defense that the delay was due
to fortuitous events and beyond petitioner’s control is unavailing. In PAL vs. CA,22 we held that:

.... Undisputably, PAL’s diversion of its flight due to inclement weather was a fortuitous event.
Nonetheless, such occurrence did not terminate PAL’s contract with its passengers. Being in the
business of air carriage and the sole one to operate in the country, PAL is deemed to be equipped to
deal with situations as in the case at bar. What we said in one case once again must be stressed,
i.e., the relation of carrier and passenger continues until the latter has been landed at the port of
destination and has left the carrier’s premises. Hence, PAL necessarily would still have to exercise
extraordinary diligence in safeguarding the comfort, convenience and safety of its stranded
passengers until they have reached their final destination...

...

"...If the cause of non-fulfillment of the contract is due to a fortuitous event, it has to be the sole and
only cause (Art. 1755 C.C., Art. 1733 C.C.). Since part of the failure to comply with the obligation of
common carrier to deliver its passengers safely to their destination lay in the defendant’s failure to
provide comfort and convenience to its stranded passengers using extraordinary diligence, the
cause of non-fulfillment is not solely and exclusively due to fortuitous event, but due to something
which defendant airline could have prevented, defendant becomes liable to plaintiff."

Indeed, in the instant case, petitioner was not without recourse to enable it to fulfill its obligation to
transport the respondent safely as scheduled as far as human care and foresight can provide to her
destination. Tagged as a premiere airline as it claims to be and with the complexities of air travel, it
was certainly well-equipped to be able to foresee and deal with such situation. The petitioner’s
indifference and negligence by its absence and insensitivity was exposed by the trial court, thus:

(a) Under Section 9.1 of its Traffic Manual (Exhibit 4) "…flights can be delayed to await the
uplift of connecting cargo and passengers arriving on a late in-bound flight…" As adverted to
by the trial court,…"Flight SQ-27/28 maybe delayed for about half an hour to transfer plaintiff
to her connecting flight. As pointed out above, delay is normal in commercial air
transportation" (RTC Decision, p. 22); or

(b) Petitioner airlines could have carried her on one of its flights bound for Hongkong and
arranged for a connecting flight from Hongkong to Manila all on the same date. But then the
airline personnel who informed her of such possibility told her that she has to pay for that
flight. Regrettably, respondent did not have sufficient funds to pay for it. (TSN, 30 March
1992, pp.8-9; RTC Decision, pp. 22-23) Knowing the predicament of the respondent,
petitioner did not offer to shoulder the cost of the ticket for that flight; or

(c) As noted by the trial court from the account of petitioner’s witness, Bob Khkimyong, that
"a passenger such as the plaintiff could have been accommodated in another international
airline such as Lufthansa to bring the plaintiff to Singapore early enough from Frankfurt
provided that there was prior communication from that station to enable her to catch the
connecting flight to Manila because of the urgency of her business in Manila…(RTC
Decision, p. 23)
The petitioner’s diligence in communicating to its passengers the consequences of the delay in their
flights was wanting. As elucidated by the trial court:

It maybe that delay in the take off and arrival of commercial aircraft could not be avoided and may be
caused by diverse factors such as those testified to by defendant’s pilot. However, knowing fully well
that even before the plaintiff boarded defendant’s Jumbo aircraft in Frankfurt bound for Singapore, it
has already incurred a delay of two hours. Nevertheless, defendant did not take the trouble of
informing plaintiff, among its other passengers of such a delay and that in such a case, the usual
practice of defendant airline will be that they have to stay overnight at their connecting airport; and
much less did it inquire from the plaintiff and the other 25 passengers bound for Manila whether they
are amenable to stay overnight in Singapore and to take the connecting flight to Manila the next day.
Such information should have been given and inquiries made in Frankfurt because even the
defendant airline’s manual provides that in case of urgency to reach his or her destination on the
same date, the head office of defendant in Singapore must be informed by telephone or telefax so
as the latter may make certain arrangements with other airlines in Frankfurt to bring such a
passenger with urgent business to Singapore in such a manner that the latter can catch up with her
connecting flight such as S-27/28 without spending the night in Singapore…23

The respondent was not remiss in conveying her apprehension about the delay of the flight when
she was still in Frankfurt. Upon the assurance of petitioner’s personnel in Frankfurt that she will be
transported to Manila on the same date, she had every right to expect that obligation fulfilled. She
testified, to wit:

Q: Now, since you were late, when the plane that arrived from Frankfurt was late, did you not make
arrangements so that your flight from Singapore to Manila would be adjusted?

A: I asked the lady at the ticket counter, the one who gave the boarding pass in Frankfurt and I
asked her, "Since my flight going to Singapore would be late, what would happen to my Singapore-
Manila flight?" and then she said, "Don’t worry, Singapore Airlines would be responsible to bring you
to Manila on the same date." And then they have informed the name of the officer, or whatever, that
our flight is going to be late.24

When a passenger contracts for a specific flight, he has a purpose in making that choice which must
be respected. This choice, once exercised, must not be impaired by a breach on the part of the
airline without the latter incurring any liability.25 For petitioner’s failure to bring the respondent to her
destination, as scheduled, we find the petitioner clearly liable for the breach of its contract of carriage
with the respondent.

We are convinced that the petitioner acted in bad faith. Bad faith means a breach of known duty
1âwphi1

through some motive of interest or ill will. Self-enrichment or fraternal interest, and not personal ill
will, may well have been the motive; but it is malice nevertheless.26 Bad faith was imputed by the trial
court when it found that the petitioner’s employees at the Singapore airport did not accord the
respondent the attention and treatment allegedly warranted under the circumstances. The lady
employee at the counter was unkind and of no help to her. The respondent further alleged that
without her threats of suing the company, she was not allowed to use the company’s phone to make
long distance calls to her mother in Manila. The male employee at the counter where it says:
"Immediate Attention to Passengers with Immediate Booking" was rude to her when he curtly
retorted that he was busy attending to other passengers in line. The trial court concluded that this
inattentiveness and rudeness of petitioner’s personnel to respondent’s plight was gross enough
amounting to bad faith. This is a finding that is generally binding upon the Court which we find no
reason to disturb.
Article 2232 of the Civil Code provides that in a contractual or quasi-contractual relationship,
exemplary damages may be awarded only if the defendant had acted in a "wanton, fraudulent,
reckless, oppressive or malevolent manner." In this case, petitioner’s employees acted in a wanton,
oppressive or malevolent manner. The award of exemplary damages is, therefore, warranted in this
case.

WHEREFORE, the Petition is DENIED. The Decision of the Court of Appeals is AFFIRMED.

SO ORDERED.
G.R. No. 150843 March 14, 2003

CATHAY PACIFIC AIRWAYS, LTD., petitioner,


vs.
SPOUSES DANIEL VAZQUEZ and MARIA LUISA MADRIGAL VAZQUEZ, respondents.

DAVIDE, JR., C.J.:

Is an involuntary upgrading of an airline passenger’s accommodation from one class to a more


superior class at no extra cost a breach of contract of carriage that would entitle the passenger to an
award of damages? This is a novel question that has to be resolved in this case.

The facts in this case, as found by the Court of Appeals and adopted by petitioner Cathay Pacific
Airways, Ltd., (hereinafter Cathay) are as follows:

Cathay is a common carrier engaged in the business of transporting passengers and goods by air.
Among the many routes it services is the Manila-Hongkong-Manila course. As part of its marketing
strategy, Cathay accords its frequent flyers membership in its Marco Polo Club. The members enjoy
several privileges, such as priority for upgrading of booking without any extra charge whenever an
opportunity arises. Thus, a frequent flyer booked in the Business Class has priority for upgrading to
First Class if the Business Class Section is fully booked.

Respondents-spouses Dr. Daniel Earnshaw Vazquez and Maria Luisa Madrigal Vazquez are
frequent flyers of Cathay and are Gold Card members of its Marco Polo Club. On 24 September
1996, the Vazquezes, together with their maid and two friends Pacita Cruz and Josefina Vergel de
Dios, went to Hongkong for pleasure and business.

For their return flight to Manila on 28 September 1996, they were booked on Cathay’s Flight CX-905,
with departure time at 9:20 p.m. Two hours before their time of departure, the Vazquezes and their
companions checked in their luggage at Cathay’s check-in counter at Kai Tak Airport and were given
their respective boarding passes, to wit, Business Class boarding passes for the Vazquezes and
their two friends, and Economy Class for their maid. They then proceeded to the Business Class
passenger lounge.

When boarding time was announced, the Vazquezes and their two friends went to Departure Gate
No. 28, which was designated for Business Class passengers. Dr. Vazquez presented his boarding
pass to the ground stewardess, who in turn inserted it into an electronic machine reader or computer
at the gate. The ground stewardess was assisted by a ground attendant by the name of Clara Lai
Han Chiu. When Ms. Chiu glanced at the computer monitor, she saw a message that there was a
"seat change" from Business Class to First Class for the Vazquezes.

Ms. Chiu approached Dr. Vazquez and told him that the Vazquezes’ accommodations were
upgraded to First Class. Dr. Vazquez refused the upgrade, reasoning that it would not look nice for
them as hosts to travel in First Class and their guests, in the Business Class; and moreover, they
were going to discuss business matters during the flight. He also told Ms. Chiu that she could have
other passengers instead transferred to the First Class Section. Taken aback by the refusal for
upgrading, Ms. Chiu consulted her supervisor, who told her to handle the situation and convince the
Vazquezes to accept the upgrading. Ms. Chiu informed the latter that the Business Class was fully
booked, and that since they were Marco Polo Club members they had the priority to be upgraded to
the First Class. Dr. Vazquez continued to refuse, so Ms. Chiu told them that if they would not avail
themselves of the privilege, they would not be allowed to take the flight. Eventually, after talking to
his two friends, Dr. Vazquez gave in. He and Mrs. Vazquez then proceeded to the First Class Cabin.
Upon their return to Manila, the Vazquezes, in a letter of 2 October 1996 addressed to Cathay’s
Country Manager, demanded that they be indemnified in the amount of P1million for the "humiliation
and embarrassment" caused by its employees. They also demanded "a written apology from the
management of Cathay, preferably a responsible person with a rank of no less than the Country
Manager, as well as the apology from Ms. Chiu" within fifteen days from receipt of the letter.

In his reply of 14 October 1996, Mr. Larry Yuen, the assistant to Cathay’s Country Manager Argus
Guy Robson, informed the Vazquezes that Cathay would investigate the incident and get back to
them within a week’s time.

On 8 November 1996, after Cathay’s failure to give them any feedback within its self-imposed
deadline, the Vazquezes instituted before the Regional Trial Court of Makati City an action for
damages against Cathay, praying for the payment to each of them the amounts of P250,000 as
temperate damages; P500,000 as moral damages; P500,000 as exemplary or corrective damages;
and P250,000 as attorney’s fees.

In their complaint, the Vazquezes alleged that when they informed Ms. Chiu that they preferred to
stay in Business Class, Ms. Chiu "obstinately, uncompromisingly and in a loud, discourteous and
harsh voice threatened" that they could not board and leave with the flight unless they go to First
Class, since the Business Class was overbooked. Ms. Chiu’s loud and stringent shouting annoyed,
embarrassed, and humiliated them because the incident was witnessed by all the other passengers
waiting for boarding. They also claimed that they were unjustifiably delayed to board the plane, and
when they were finally permitted to get into the aircraft, the forward storage compartment was
already full. A flight stewardess instructed Dr. Vazquez to put his roll-on luggage in the overhead
storage compartment. Because he was not assisted by any of the crew in putting up his luggage, his
bilateral carpal tunnel syndrome was aggravated, causing him extreme pain on his arm and wrist.
The Vazquezes also averred that they "belong to the uppermost and absolutely top elite of both
Philippine Society and the Philippine financial community, [and that] they were among the wealthiest
persons in the Philippine[s]."

In its answer, Cathay alleged that it is a practice among commercial airlines to upgrade passengers
to the next better class of accommodation, whenever an opportunity arises, such as when a certain
section is fully booked. Priority in upgrading is given to its frequent flyers, who are considered
favored passengers like the Vazquezes. Thus, when the Business Class Section of Flight CX-905
was fully booked, Cathay’s computer sorted out the names of favored passengers for involuntary
upgrading to First Class. When Ms. Chiu informed the Vazquezes that they were upgraded to First
Class, Dr. Vazquez refused. He then stood at the entrance of the boarding apron, blocking the
queue of passengers from boarding the plane, which inconvenienced other passengers. He shouted
that it was impossible for him and his wife to be upgraded without his two friends who were traveling
with them. Because of Dr. Vazquez’s outburst, Ms. Chiu thought of upgrading the traveling
companions of the Vazquezes. But when she checked the computer, she learned that the
Vazquezes’ companions did not have priority for upgrading. She then tried to book the Vazquezes
again to their original seats. However, since the Business Class Section was already fully booked,
she politely informed Dr. Vazquez of such fact and explained that the upgrading was in recognition
of their status as Cathay’s valued passengers. Finally, after talking to their guests, the Vazquezes
eventually decided to take the First Class accommodation.

Cathay also asserted that its employees at the Hong Kong airport acted in good faith in dealing with
the Vazquezes; none of them shouted, humiliated, embarrassed, or committed any act of disrespect
against them (the Vazquezes). Assuming that there was indeed a breach of contractual obligation,
Cathay acted in good faith, which negates any basis for their claim for temperate, moral, and
exemplary damages and attorney’s fees. Hence, it prayed for the dismissal of the complaint and for
payment of P100,000 for exemplary damages and P300,000 as attorney’s fees and litigation
expenses.

During the trial, Dr. Vazquez testified to support the allegations in the complaint. His testimony was
corroborated by his two friends who were with him at the time of the incident, namely, Pacita G. Cruz
and Josefina Vergel de Dios.

For its part, Cathay presented documentary evidence and the testimonies of Mr. Yuen; Ms. Chiu;
Norma Barrientos, Comptroller of its retained counsel; and Mr. Robson. Yuen and Robson testified
on Cathay’s policy of upgrading the seat accommodation of its Marco Polo Club members when an
opportunity arises. The upgrading of the Vazquezes to First Class was done in good faith; in fact, the
First Class Section is definitely much better than the Business Class in terms of comfort, quality of
food, and service from the cabin crew. They also testified that overbooking is a widely accepted
practice in the airline industry and is in accordance with the International Air Transport Association
(IATA) regulations. Airlines overbook because a lot of passengers do not show up for their flight.
With respect to Flight CX-905, there was no overall overbooking to a degree that a passenger was
bumped off or downgraded. Yuen and Robson also stated that the demand letter of the Vazquezes
was immediately acted upon. Reports were gathered from their office in Hong Kong and immediately
forwarded to their counsel Atty. Remollo for legal advice. However, Atty. Remollo begged off
because his services were likewise retained by the Vazquezes; nonetheless, he undertook to solve
the problem in behalf of Cathay. But nothing happened until Cathay received a copy of the complaint
in this case. For her part, Ms. Chiu denied that she shouted or used foul or impolite language against
the Vazquezes. Ms. Barrientos testified on the amount of attorney’s fees and other litigation
expenses, such as those for the taking of the depositions of Yuen and Chiu.

In its decision1 of 19 October 1998, the trial court found for the Vazquezes and decreed as follows:

WHEREFORE, finding preponderance of evidence to sustain the instant complaint, judgment


is hereby rendered in favor of plaintiffs Vazquez spouses and against defendant Cathay
Pacific Airways, Ltd., ordering the latter to pay each plaintiff the following:

a) Nominal damages in the amount of P100,000.00 for each plaintiff;

b) Moral damages in the amount of P2,000,000.00 for each plaintiff;

c) Exemplary damages in the amount of P5,000,000.00 for each plaintiff;

d) Attorney’s fees and expenses of litigation in the amount of P1,000,000.00 for each
plaintiff; and

e) Costs of suit.

SO ORDERED.

According to the trial court, Cathay offers various classes of seats from which passengers are
allowed to choose regardless of their reasons or motives, whether it be due to budgetary constraints
or whim. The choice imposes a clear obligation on Cathay to transport the passengers in the class
chosen by them. The carrier cannot, without exposing itself to liability, force a passenger to
involuntarily change his choice. The upgrading of the Vazquezes’ accommodation over and above
their vehement objections was due to the overbooking of the Business Class. It was a pretext to
pack as many passengers as possible into the plane to maximize Cathay’s revenues. Cathay’s
actuations in this case displayed deceit, gross negligence, and bad faith, which entitled the
Vazquezes to awards for damages.

On appeal by the petitioners, the Court of Appeals, in its decision of 24 July 2001,2 deleted the
award for exemplary damages; and it reduced the awards for moral and nominal damages for each
of the Vazquezes to P250,000 and P50,000, respectively, and the attorney’s fees and litigation
expenses to P50,000 for both of them.

The Court of Appeals ratiocinated that by upgrading the Vazquezes to First Class, Cathay novated
the contract of carriage without the former’s consent. There was a breach of contract not because
Cathay overbooked the Business Class Section of Flight CX-905 but because the latter pushed
through with the upgrading despite the objections of the Vazquezes.

However, the Court of Appeals was not convinced that Ms. Chiu shouted at, or meant to be
discourteous to, Dr. Vazquez, although it might seemed that way to the latter, who was a member of
the elite in Philippine society and was not therefore used to being harangued by anybody. Ms. Chiu
was a Hong Kong Chinese whose fractured Chinese was difficult to understand and whose manner
of speaking might sound harsh or shrill to Filipinos because of cultural differences. But the Court of
Appeals did not find her to have acted with deliberate malice, deceit, gross negligence, or bad faith.
If at all, she was negligent in not offering the First Class accommodations to other passengers.
Neither can the flight stewardess in the First Class Cabin be said to have been in bad faith when she
failed to assist Dr. Vazquez in lifting his baggage into the overhead storage bin. There is no proof
that he asked for help and was refused even after saying that he was suffering from "bilateral carpal
tunnel syndrome." Anent the delay of Yuen in responding to the demand letter of the Vazquezes, the
Court of Appeals found it to have been sufficiently explained.

The Vazquezes and Cathay separately filed motions for a reconsideration of the decision, both of
which were denied by the Court of Appeals.

Cathay seasonably filed with us this petition in this case. Cathay maintains that the award for moral
damages has no basis, since the Court of Appeals found that there was no "wanton, fraudulent,
reckless and oppressive" display of manners on the part of its personnel; and that the breach of
contract was not attended by fraud, malice, or bad faith. If any damage had been suffered by the
Vazquezes, it was damnum absque injuria, which is damage without injury, damage or injury inflicted
without injustice, loss or damage without violation of a legal right, or a wrong done to a man for
which the law provides no remedy. Cathay also invokes our decision in United Airlines, Inc. v. Court
of Appeals3 where we recognized that, in accordance with the Civil Aeronautics Board’s Economic
Regulation No. 7, as amended, an overbooking that does not exceed ten percent cannot be
considered deliberate and done in bad faith. We thus deleted in that case the awards for moral and
exemplary damages, as well as attorney’s fees, for lack of proof of overbooking exceeding ten
percent or of bad faith on the part of the airline carrier.

On the other hand, the Vazquezes assert that the Court of Appeals was correct in granting awards
for moral and nominal damages and attorney’s fees in view of the breach of contract committed by
Cathay for transferring them from the Business Class to First Class Section without prior notice or
consent and over their vigorous objection. They likewise argue that the issuance of passenger
tickets more than the seating capacity of each section of the plane is in itself fraudulent, malicious
and tainted with bad faith.

The key issues for our consideration are whether (1) by upgrading the seat accommodation of the
Vazquezes from Business Class to First Class Cathay breached its contract of carriage with the
Vazquezes; (2) the upgrading was tainted with fraud or bad faith; and (3) the Vazquezes are entitled
to damages.

We resolve the first issue in the affirmative.

A contract is a meeting of minds between two persons whereby one agrees to give something or
render some service to another for a consideration. There is no contract unless the following
requisites concur: (1) consent of the contracting parties; (2) an object certain which is the subject of
the contract; and (3) the cause of the obligation which is established.4 Undoubtedly, a contract of
carriage existed between Cathay and the Vazquezes. They voluntarily and freely gave their consent
to an agreement whose object was the transportation of the Vazquezes from Manila to Hong Kong
and back to Manila, with seats in the Business Class Section of the aircraft, and whose cause or
consideration was the fare paid by the Vazquezes to Cathay.

The only problem is the legal effect of the upgrading of the seat accommodation of the Vazquezes.
Did it constitute a breach of contract?

Breach of contract is defined as the "failure without legal reason to comply with the terms of a
contract."5 It is also defined as the "[f]ailure, without legal excuse, to perform any promise which
forms the whole or part of the contract."6

In previous cases, the breach of contract of carriage consisted in either the bumping off of a
passenger with confirmed reservation or the downgrading of a passenger’s seat accommodation
from one class to a lower class. In this case, what happened was the reverse. The contract between
the parties was for Cathay to transport the Vazquezes to Manila on a Business Class
accommodation in Flight CX-905. After checking-in their luggage at the Kai Tak Airport in Hong
Kong, the Vazquezes were given boarding cards indicating their seat assignments in the Business
Class Section. However, during the boarding time, when the Vazquezes presented their boarding
passes, they were informed that they had a seat change from Business Class to First Class. It
turned out that the Business Class was overbooked in that there were more passengers than the
number of seats. Thus, the seat assignments of the Vazquezes were given to waitlisted passengers,
and the Vazquezes, being members of the Marco Polo Club, were upgraded from Business Class to
First Class.

We note that in all their pleadings, the Vazquezes never denied that they were members of Cathay’s
Marco Polo Club. They knew that as members of the Club, they had priority for upgrading of their
seat accommodation at no extra cost when an opportunity arises. But, just like other privileges, such
priority could be waived. The Vazquezes should have been consulted first whether they wanted to
avail themselves of the privilege or would consent to a change of seat accommodation before their
seat assignments were given to other passengers. Normally, one would appreciate and accept an
upgrading, for it would mean a better accommodation. But, whatever their reason was and however
odd it might be, the Vazquezes had every right to decline the upgrade and insist on the Business
Class accommodation they had booked for and which was designated in their boarding passes.
They clearly waived their priority or preference when they asked that other passengers be given the
upgrade. It should not have been imposed on them over their vehement objection. By insisting on
the upgrade, Cathay breached its contract of carriage with the Vazquezes.

We are not, however, convinced that the upgrading or the breach of contract was attended by fraud
or bad faith. Thus, we resolve the second issue in the negative.

Bad faith and fraud are allegations of fact that demand clear and convincing proof. They are serious
accusations that can be so conveniently and casually invoked, and that is why they are never
presumed. They amount to mere slogans or mudslinging unless convincingly substantiated by
whoever is alleging them.

Fraud has been defined to include an inducement through insidious machination. Insidious
machination refers to a deceitful scheme or plot with an evil or devious purpose. Deceit exists where
the party, with intent to deceive, conceals or omits to state material facts and, by reason of such
omission or concealment, the other party was induced to give consent that would not otherwise have
been given.7

Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or
some moral obliquity and conscious doing of a wrong, a breach of a known duty through some
motive or interest or ill will that partakes of the nature of fraud.8

We find no persuasive proof of fraud or bad faith in this case. The Vazquezes were not induced to
agree to the upgrading through insidious words or deceitful machination or through willful
concealment of material facts. Upon boarding, Ms. Chiu told the Vazquezes that their
accommodations were upgraded to First Class in view of their being Gold Card members of
Cathay’s Marco Polo Club. She was honest in telling them that their seats were already given to
other passengers and the Business Class Section was fully booked. Ms. Chiu might have failed to
consider the remedy of offering the First Class seats to other passengers. But, we find no bad faith
in her failure to do so, even if that amounted to an exercise of poor judgment.

Neither was the transfer of the Vazquezes effected for some evil or devious purpose. As testified to
by Mr. Robson, the First Class Section is better than the Business Class Section in terms of comfort,
quality of food, and service from the cabin crew; thus, the difference in fare between the First Class
and Business Class at that time was $250.9Needless to state, an upgrading is for the better condition
and, definitely, for the benefit of the passenger.

We are not persuaded by the Vazquezes’ argument that the overbooking of the Business Class
Section constituted bad faith on the part of Cathay. Section 3 of the Economic Regulation No. 7 of
the Civil Aeronautics Board, as amended, provides:

Sec 3. Scope. – This regulation shall apply to every Philippine and foreign air carrier with
respect to its operation of flights or portions of flights originating from or terminating at, or
serving a point within the territory of the Republic of the Philippines insofar as it denies
boarding to a passenger on a flight, or portion of a flight inside or outside the Philippines, for
which he holds confirmed reserved space. Furthermore, this Regulation is designed to cover
only honest mistakes on the part of the carriers and excludes deliberate and willful acts of
non-accommodation. Provided, however, that overbooking not exceeding 10% of the seating
capacity of the aircraft shall not be considered as a deliberate and willful act of non-
accommodation.

It is clear from this section that an overbooking that does not exceed ten percent is not considered
deliberate and therefore does not amount to bad faith.10 Here, while there was admittedly an
overbooking of the Business Class, there was no evidence of overbooking of the plane beyond ten
percent, and no passenger was ever bumped off or was refused to board the aircraft.

Now we come to the third issue on damages.

The Court of Appeals awarded each of the Vazquezes moral damages in the amount of P250,000.
Article 2220 of the Civil Code provides:
Article 2220. Willful injury to property may be a legal ground for awarding moral damages if
the court should find that, under the circumstances, such damages are justly due. The same
rule applies to breaches of contract where the defendant acted fraudulently or in bad faith.

Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation, and similar injury. Although incapable
of pecuniary computation, moral damages may be recovered if they are the proximate result of the
defendant’s wrongful act or omission.11 Thus, case law establishes the following requisites for the
award of moral damages: (1) there must be an injury clearly sustained by the claimant, whether
physical, mental or psychological; (2) there must be a culpable act or omission factually established;
(3) the wrongful act or omission of the defendant is the proximate cause of the injury sustained by
the claimant; and (4) the award for damages is predicated on any of the cases stated in Article 2219
of the Civil Code.12

Moral damages predicated upon a breach of contract of carriage may only be recoverable in
instances where the carrier is guilty of fraud or bad faith or where the mishap resulted in the death of
a passenger.13 Where in breaching the contract of carriage the airline is not shown to have acted
fraudulently or in bad faith, liability for damages is limited to the natural and probable consequences
of the breach of the obligation which the parties had foreseen or could have reasonably foreseen. In
such a case the liability does not include moral and exemplary damages.14

In this case, we have ruled that the breach of contract of carriage, which consisted in the involuntary
upgrading of the Vazquezes’ seat accommodation, was not attended by fraud or bad faith. The Court
of Appeals’ award of moral damages has, therefore, no leg to stand on.

The deletion of the award for exemplary damages by the Court of Appeals is correct. It is a requisite
in the grant of exemplary damages that the act of the offender must be accompanied by bad faith or
done in wanton, fraudulent or malevolent manner.15 Such requisite is absent in this case. Moreover,
to be entitled thereto the claimant must first establish his right to moral, temperate, or compensatory
damages.16 Since the Vazquezes are not entitled to any of these damages, the award for exemplary
damages has no legal basis. And where the awards for moral and exemplary damages are
eliminated, so must the award for attorney’s fees.17

The most that can be adjudged in favor of the Vazquezes for Cathay’s breach of contract is an
award for nominal damages under Article 2221 of the Civil Code, which reads as follows:

Article 2221 of the Civil Code provides:

Article 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which has
been violated or invaded by the defendant, may be vindicated or recognized, and not for the
purpose of indemnifying the plaintiff for any loss suffered by him.

Worth noting is the fact that in Cathay’s Memorandum filed with this Court, it prayed only for the
deletion of the award for moral damages. It deferred to the Court of Appeals’ discretion in awarding
nominal damages; thus:

As far as the award of nominal damages is concerned, petitioner respectfully defers to the
Honorable Court of Appeals’ discretion. Aware as it is that somehow, due to the resistance of
respondents-spouses to the normally-appreciated gesture of petitioner to upgrade their
accommodations, petitioner may have disturbed the respondents-spouses’ wish to be with
their companions (who traveled to Hong Kong with them) at the Business Class on their flight
to Manila. Petitioner regrets that in its desire to provide the respondents-spouses with
additional amenities for the one and one-half (1 1/2) hour flight to Manila, unintended tension
ensued.18

Nonetheless, considering that the breach was intended to give more benefit and advantage to the
Vazquezes by upgrading their Business Class accommodation to First Class because of their valued
status as Marco Polo members, we reduce the award for nominal damages to P5,000.

Before writing finis to this decision, we find it well-worth to quote the apt observation of the Court of
Appeals regarding the awards adjudged by the trial court:

We are not amused but alarmed at the lower court’s unbelievable alacrity, bordering on the
scandalous, to award excessive amounts as damages. In their complaint, appellees asked for P1
million as moral damages but the lower court awarded P4 million; they asked for P500,000.00 as
exemplary damages but the lower court cavalierly awarded a whooping P10 million; they asked for
P250,000.00 as attorney’s fees but were awarded P2 million; they did not ask for nominal damages
but were awarded P200,000.00. It is as if the lower court went on a rampage, and why it acted that
way is beyond all tests of reason. In fact the excessiveness of the total award invites the suspicion
that it was the result of "prejudice or corruption on the part of the trial court."

The presiding judge of the lower court is enjoined to hearken to the Supreme Court’s
admonition in Singson vs. CA (282 SCRA 149 [1997]), where it said:

The well-entrenched principle is that the grant of moral damages depends upon the
discretion of the court based on the circumstances of each case. This discretion is
limited by the principle that the amount awarded should not be palpably and
scandalously excessive as to indicate that it was the result of prejudice or corruption
on the part of the trial court….

and in Alitalia Airways vs. CA (187 SCRA 763 [1990], where it was held:

Nonetheless, we agree with the injunction expressed by the Court of Appeals that
passengers must not prey on international airlines for damage awards, like "trophies
in a safari." After all neither the social standing nor prestige of the passenger should
determine the extent to which he would suffer because of a wrong done, since the
dignity affronted in the individual is a quality inherent in him and not conferred by
these social indicators. 19

We adopt as our own this observation of the Court of Appeals.

WHEREFORE, the instant petition is hereby partly GRANTED. The Decision of the Court of Appeals
of 24 July 2001 in CA-G.R. CV No. 63339 is hereby MODIFIED, and as modified, the awards for
moral damages and attorney’s fees are set aside and deleted, and the award for nominal damages
is reduced to P5,000.

No pronouncement on costs.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 126297 January 31, 2007

PROFESSIONAL SERVICES, INC., Petitioner,


vs.
NATIVIDAD and ENRIQUE AGANA, Respondents.

x-----------------------x

G.R. No. 126467 January 31, 2007

NATIVIDAD (Substituted by her children MARCELINO AGANA III, ENRIQUE AGANA, JR.,
EMMA AGANA ANDAYA, JESUS AGANA, and RAYMUND AGANA) and ENRIQUE
AGANA, Petitioners,
vs.
JUAN FUENTES, Respondent.

x- - - - - - - - - - - - - - - - - - - -- - - - x

G.R. No. 127590 January 31, 2007

MIGUEL AMPIL, Petitioner,


vs.
NATIVIDAD AGANA and ENRIQUE AGANA, Respondents.

DECISION

SANDOVAL-GUTIERREZ, J.:

Hospitals, having undertaken one of mankind’s most important and delicate endeavors, must
assume the grave responsibility of pursuing it with appropriate care. The care and service dispensed
through this high trust, however technical, complex and esoteric its character may be, must meet
standards of responsibility commensurate with the undertaking to preserve and protect the health,
and indeed, the very lives of those placed in the hospital’s keeping.1

Assailed in these three consolidated petitions for review on certiorari is the Court of Appeals’
Decision2 dated September 6, 1996 in CA-G.R. CV No. 42062 and CA-G.R. SP No. 32198 affirming
with modification the Decision3dated March 17, 1993 of the Regional Trial Court (RTC), Branch 96,
Quezon City in Civil Case No. Q-43322 and nullifying its Order dated September 21, 1993.

The facts, as culled from the records, are:

On April 4, 1984, Natividad Agana was rushed to the Medical City General Hospital (Medical City
Hospital) because of difficulty of bowel movement and bloody anal discharge. After a series of
medical examinations, Dr. Miguel Ampil, petitioner in G.R. No. 127590, diagnosed her to be suffering
from "cancer of the sigmoid."
On April 11, 1984, Dr. Ampil, assisted by the medical staff4 of the Medical City Hospital, performed
an anterior resection surgery on Natividad. He found that the malignancy in her sigmoid area had
spread on her left ovary, necessitating the removal of certain portions of it. Thus, Dr. Ampil obtained
the consent of Natividad’s husband, Enrique Agana, to permit Dr. Juan Fuentes, respondent in G.R.
No. 126467, to perform hysterectomy on her.

After Dr. Fuentes had completed the hysterectomy, Dr. Ampil took over, completed the operation
and closed the incision.

However, the operation appeared to be flawed. In the corresponding Record of Operation dated April
11, 1984, the attending nurses entered these remarks:

"sponge count lacking 2

"announced to surgeon searched (sic) done but to no avail continue for closure."

On April 24, 1984, Natividad was released from the hospital. Her hospital and medical bills, including
the doctors’ fees, amounted to P60,000.00.

After a couple of days, Natividad complained of excruciating pain in her anal region. She consulted
both Dr. Ampil and Dr. Fuentes about it. They told her that the pain was the natural consequence of
the surgery. Dr. Ampil then recommended that she consult an oncologist to examine the cancerous
nodes which were not removed during the operation.

On May 9, 1984, Natividad, accompanied by her husband, went to the United States to seek further
treatment. After four months of consultations and laboratory examinations, Natividad was told she
was free of cancer. Hence, she was advised to return to the Philippines.

On August 31, 1984, Natividad flew back to the Philippines, still suffering from pains. Two weeks
thereafter, her daughter found a piece of gauze protruding from her vagina. Upon being informed
about it, Dr. Ampil proceeded to her house where he managed to extract by hand a piece of gauze
measuring 1.5 inches in width. He then assured her that the pains would soon vanish.

Dr. Ampil’s assurance did not come true. Instead, the pains intensified, prompting Natividad to seek
treatment at the Polymedic General Hospital. While confined there, Dr. Ramon Gutierrez detected
the presence of another foreign object in her vagina -- a foul-smelling gauze measuring 1.5 inches in
width which badly infected her vaginal vault. A recto-vaginal fistula had formed in her reproductive
organs which forced stool to excrete through the vagina. Another surgical operation was needed to
remedy the damage. Thus, in October 1984, Natividad underwent another surgery.

On November 12, 1984, Natividad and her husband filed with the RTC, Branch 96, Quezon City a
complaint for damages against the Professional Services, Inc. (PSI), owner of the Medical City
Hospital, Dr. Ampil, and Dr. Fuentes, docketed as Civil Case No. Q-43322. They alleged that the
latter are liable for negligence for leaving two pieces of gauze inside Natividad’s body and
malpractice for concealing their acts of negligence.

Meanwhile, Enrique Agana also filed with the Professional Regulation Commission (PRC) an
administrative complaint for gross negligence and malpractice against Dr. Ampil and Dr. Fuentes,
docketed as Administrative Case No. 1690. The PRC Board of Medicine heard the case only with
respect to Dr. Fuentes because it failed to acquire jurisdiction over Dr. Ampil who was then in the
United States.
On February 16, 1986, pending the outcome of the above cases, Natividad died and was duly
substituted by her above-named children (the Aganas).

On March 17, 1993, the RTC rendered its Decision in favor of the Aganas, finding PSI, Dr. Ampil and
Dr. Fuentes liable for negligence and malpractice, the decretal part of which reads:

WHEREFORE, judgment is hereby rendered for the plaintiffs ordering the defendants
PROFESSIONAL SERVICES, INC., DR. MIGUEL AMPIL and DR. JUAN FUENTES to pay to the
plaintiffs, jointly and severally, except in respect of the award for exemplary damages and the
interest thereon which are the liabilities of defendants Dr. Ampil and Dr. Fuentes only, as follows:

1. As actual damages, the following amounts:

a. The equivalent in Philippine Currency of the total of US$19,900.00 at the rate of


P21.60-US$1.00, as reimbursement of actual expenses incurred in the United States
of America;

b. The sum of P4,800.00 as travel taxes of plaintiffs and their physician daughter;

c. The total sum of P45,802.50, representing the cost of hospitalization at Polymedic


Hospital, medical fees, and cost of the saline solution;

2. As moral damages, the sum of P2,000,000.00;

3. As exemplary damages, the sum of P300,000.00;

4. As attorney’s fees, the sum of P250,000.00;

5. Legal interest on items 1 (a), (b), and (c); 2; and 3 hereinabove, from date of filing of the
complaint until full payment; and

6. Costs of suit.

SO ORDERED.

Aggrieved, PSI, Dr. Fuentes and Dr. Ampil interposed an appeal to the Court of Appeals, docketed
as CA-G.R. CV No. 42062.

Incidentally, on April 3, 1993, the Aganas filed with the RTC a motion for a partial execution of its
Decision, which was granted in an Order dated May 11, 1993. Thereafter, the sheriff levied upon
certain properties of Dr. Ampil and sold them for P451,275.00 and delivered the amount to the
Aganas.

Following their receipt of the money, the Aganas entered into an agreement with PSI and Dr.
Fuentes to indefinitely suspend any further execution of the RTC Decision. However, not long
thereafter, the Aganas again filed a motion for an alias writ of execution against the properties of PSI
and Dr. Fuentes. On September 21, 1993, the RTC granted the motion and issued the
corresponding writ, prompting Dr. Fuentes to file with the Court of Appeals a petition for certiorari
and prohibition, with prayer for preliminary injunction, docketed as CA-G.R. SP No. 32198. During its
pendency, the Court of Appeals issued a Resolution5 dated October 29, 1993 granting Dr. Fuentes’
prayer for injunctive relief.
On January 24, 1994, CA-G.R. SP No. 32198 was consolidated with CA-G.R. CV No. 42062.

Meanwhile, on January 23, 1995, the PRC Board of Medicine rendered its Decision6 in
Administrative Case No. 1690 dismissing the case against Dr. Fuentes. The Board held that the
prosecution failed to show that Dr. Fuentes was the one who left the two pieces of gauze inside
Natividad’s body; and that he concealed such fact from Natividad.

On September 6, 1996, the Court of Appeals rendered its Decision jointly disposing of CA-G.R. CV
No. 42062 and CA-G.R. SP No. 32198, thus:

WHEREFORE, except for the modification that the case against defendant-appellant Dr. Juan
Fuentes is hereby DISMISSED, and with the pronouncement that defendant-appellant Dr. Miguel
Ampil is liable to reimburse defendant-appellant Professional Services, Inc., whatever amount the
latter will pay or had paid to the plaintiffs-appellees, the decision appealed from is hereby
AFFIRMED and the instant appeal DISMISSED.

Concomitant with the above, the petition for certiorari and prohibition filed by herein defendant-
appellant Dr. Juan Fuentes in CA-G.R. SP No. 32198 is hereby GRANTED and the challenged order
of the respondent judge dated September 21, 1993, as well as the alias writ of execution issued
pursuant thereto are hereby NULLIFIED and SET ASIDE. The bond posted by the petitioner in
connection with the writ of preliminary injunction issued by this Court on November 29, 1993 is
hereby cancelled.

Costs against defendants-appellants Dr. Miguel Ampil and Professional Services, Inc.

SO ORDERED.

Only Dr. Ampil filed a motion for reconsideration, but it was denied in a Resolution7 dated December
19, 1996.

Hence, the instant consolidated petitions.

In G.R. No. 126297, PSI alleged in its petition that the Court of Appeals erred in holding that: (1) it is
estopped from raising the defense that Dr. Ampil is not its employee; (2) it is solidarily liable with Dr.
Ampil; and (3) it is not entitled to its counterclaim against the Aganas. PSI contends that Dr. Ampil is
not its employee, but a mere consultant or independent contractor. As such, he alone should answer
for his negligence.

In G.R. No. 126467, the Aganas maintain that the Court of Appeals erred in finding that Dr. Fuentes
is not guilty of negligence or medical malpractice, invoking the doctrine of res ipsa loquitur. They
contend that the pieces of gauze are prima facie proofs that the operating surgeons have been
negligent.

Finally, in G.R. No. 127590, Dr. Ampil asserts that the Court of Appeals erred in finding him liable for
negligence and malpractice sans evidence that he left the two pieces of gauze in Natividad’s vagina.
He pointed to other probable causes, such as: (1) it was Dr. Fuentes who used gauzes in performing
the hysterectomy; (2) the attending nurses’ failure to properly count the gauzes used during surgery;
and (3) the medical intervention of the American doctors who examined Natividad in the United
States of America.
For our resolution are these three vital issues: first, whether the Court of Appeals erred in holding Dr.
Ampil liable for negligence and malpractice; second, whether the Court of Appeals erred in absolving
Dr. Fuentes of any liability; and third, whether PSI may be held solidarily liable for the negligence of
Dr. Ampil.

I - G.R. No. 127590

Whether the Court of Appeals Erred in Holding Dr. Ampil

Liable for Negligence and Malpractice.

Dr. Ampil, in an attempt to absolve himself, gears the Court’s attention to other possible causes of
Natividad’s detriment. He argues that the Court should not discount either of the following
possibilities: first, Dr. Fuentes left the gauzes in Natividad’s body after performing hysterectomy;
second, the attending nurses erred in counting the gauzes; and third, the American doctors were the
ones who placed the gauzes in Natividad’s body.

Dr. Ampil’s arguments are purely conjectural and without basis. Records show that he did not
present any evidence to prove that the American doctors were the ones who put or left the gauzes in
Natividad’s body. Neither did he submit evidence to rebut the correctness of the record of operation,
particularly the number of gauzes used. As to the alleged negligence of Dr. Fuentes, we are mindful
that Dr. Ampil examined his (Dr. Fuentes’) work and found it in order.

The glaring truth is that all the major circumstances, taken together, as specified by the Court of
Appeals, directly point to Dr. Ampil as the negligent party, thus:

First, it is not disputed that the surgeons used gauzes as sponges to control the bleeding of
the patient during the surgical operation.

Second, immediately after the operation, the nurses who assisted in the surgery noted in
their report that the ‘sponge count (was) lacking 2’; that such anomaly was ‘announced to
surgeon’ and that a ‘search was done but to no avail’ prompting Dr. Ampil to ‘continue for
closure’ x x x.

Third, after the operation, two (2) gauzes were extracted from the same spot of the body of
Mrs. Agana where the surgery was performed.

An operation requiring the placing of sponges in the incision is not complete until the sponges are
properly removed, and it is settled that the leaving of sponges or other foreign substances in the
wound after the incision has been closed is at least prima facie negligence by the operating
surgeon.8 To put it simply, such act is considered so inconsistent with due care as to raise an
inference of negligence. There are even legions of authorities to the effect that such act is
negligence per se.9

Of course, the Court is not blind to the reality that there are times when danger to a patient’s life
precludes a surgeon from further searching missing sponges or foreign objects left in the body. But
this does not leave him free from any obligation. Even if it has been shown that a surgeon was
required by the urgent necessities of the case to leave a sponge in his patient’s abdomen, because
of the dangers attendant upon delay, still, it is his legal duty to so inform his patient within a
reasonable time thereafter by advising her of what he had been compelled to do. This is in order that
she might seek relief from the effects of the foreign object left in her body as her condition might
permit. The ruling in Smith v. Zeagler10 is explicit, thus:

The removal of all sponges used is part of a surgical operation, and when a physician or surgeon
fails to remove a sponge he has placed in his patient’s body that should be removed as part of the
operation, he thereby leaves his operation uncompleted and creates a new condition which imposes
upon him the legal duty of calling the new condition to his patient’s attention, and endeavoring with
the means he has at hand to minimize and avoid untoward results likely to ensue therefrom.

Here, Dr. Ampil did not inform Natividad about the missing two pieces of gauze. Worse, he even
misled her that the pain she was experiencing was the ordinary consequence of her operation. Had
he been more candid, Natividad could have taken the immediate and appropriate medical remedy to
remove the gauzes from her body. To our mind, what was initially an act of negligence by Dr. Ampil
has ripened into a deliberate wrongful act of deceiving his patient.

This is a clear case of medical malpractice or more appropriately, medical negligence. To


successfully pursue this kind of case, a patient must only prove that a health care provider either
failed to do something which a reasonably prudent health care provider would have done, or that he
did something that a reasonably prudent provider would not have done; and that failure or action
caused injury to the patient.11 Simply put, the elements are duty, breach, injury and proximate
causation. Dr, Ampil, as the lead surgeon, had the duty to remove all foreign objects, such as
gauzes, from Natividad’s body before closure of the incision. When he failed to do so, it was his duty
to inform Natividad about it. Dr. Ampil breached both duties. Such breach caused injury to Natividad,
necessitating her further examination by American doctors and another surgery. That Dr. Ampil’s
negligence is the proximate cause12 of Natividad’s injury could be traced from his act of closing the
incision despite the information given by the attending nurses that two pieces of gauze were still
missing. That they were later on extracted from Natividad’s vagina established the causal link
between Dr. Ampil’s negligence and the injury. And what further aggravated such injury was his
deliberate concealment of the missing gauzes from the knowledge of Natividad and her family.

II - G.R. No. 126467

Whether the Court of Appeals Erred in Absolving

Dr. Fuentes of any Liability

The Aganas assailed the dismissal by the trial court of the case against Dr. Fuentes on the ground
that it is contrary to the doctrine of res ipsa loquitur. According to them, the fact that the two pieces
of gauze were left inside Natividad’s body is a prima facie evidence of Dr. Fuentes’ negligence.

We are not convinced.

Literally, res ipsa loquitur means "the thing speaks for itself." It is the rule that the fact of the
occurrence of an injury, taken with the surrounding circumstances, may permit an inference or raise
a presumption of negligence, or make out a plaintiff’s prima facie case, and present a question of
fact for defendant to meet with an explanation.13 Stated differently, where the thing which caused the
injury, without the fault of the injured, is under the exclusive control of the defendant and the injury is
such that it should not have occurred if he, having such control used proper care, it affords
reasonable evidence, in the absence of explanation that the injury arose from the defendant’s want
of care, and the burden of proof is shifted to him to establish that he has observed due care and
diligence.14
From the foregoing statements of the rule, the requisites for the applicability of the doctrine of res
ipsa loquitur are: (1) the occurrence of an injury; (2) the thing which caused the injury was under the
control and management of the defendant; (3) the occurrence was such that in the ordinary course
of things, would not have happened if those who had control or management used proper care; and
(4) the absence of explanation by the defendant. Of the foregoing requisites, the most instrumental
is the "control and management of the thing which caused the injury."15

We find the element of "control and management of the thing which caused the injury" to be wanting.
Hence, the doctrine of res ipsa loquitur will not lie.

It was duly established that Dr. Ampil was the lead surgeon during the operation of Natividad. He
requested the assistance of Dr. Fuentes only to perform hysterectomy when he (Dr. Ampil) found
that the malignancy in her sigmoid area had spread to her left ovary. Dr. Fuentes performed the
surgery and thereafter reported and showed his work to Dr. Ampil. The latter examined it and finding
everything to be in order, allowed Dr. Fuentes to leave the operating room. Dr. Ampil then resumed
operating on Natividad. He was about to finish the procedure when the attending nurses informed
him that two pieces of gauze were missing. A "diligent search" was conducted, but the misplaced
gauzes were not found. Dr. Ampil then directed that the incision be closed. During this entire period,
Dr. Fuentes was no longer in the operating room and had, in fact, left the hospital.

Under the "Captain of the Ship" rule, the operating surgeon is the person in complete charge of the
surgery room and all personnel connected with the operation. Their duty is to obey his orders.16 As
stated before, Dr. Ampil was the lead surgeon. In other words, he was the "Captain of the Ship."
That he discharged such role is evident from his following conduct: (1) calling Dr. Fuentes to perform
a hysterectomy; (2) examining the work of Dr. Fuentes and finding it in order; (3) granting Dr.
Fuentes’ permission to leave; and (4) ordering the closure of the incision. To our mind, it was this act
of ordering the closure of the incision notwithstanding that two pieces of gauze remained
unaccounted for, that caused injury to Natividad’s body. Clearly, the control and management of the
thing which caused the injury was in the hands of Dr. Ampil, not Dr. Fuentes.

In this jurisdiction, res ipsa loquitur is not a rule of substantive law, hence, does not per se create or
constitute an independent or separate ground of liability, being a mere evidentiary rule.17 In other
words, mere invocation and application of the doctrine does not dispense with the requirement of
proof of negligence. Here, the negligence was proven to have been committed by Dr. Ampil and not
by Dr. Fuentes.

III - G.R. No. 126297

Whether PSI Is Liable for the Negligence of Dr. Ampil

The third issue necessitates a glimpse at the historical development of hospitals and the resulting
theories concerning their liability for the negligence of physicians.

Until the mid-nineteenth century, hospitals were generally charitable institutions, providing medical
services to the lowest classes of society, without regard for a patient’s ability to pay.18 Those who
could afford medical treatment were usually treated at home by their doctors.19 However, the days of
house calls and philanthropic health care are over. The modern health care industry continues to
distance itself from its charitable past and has experienced a significant conversion from a not-for-
profit health care to for-profit hospital businesses. Consequently, significant changes in health law
have accompanied the business-related changes in the hospital industry. One important legal
change is an increase in hospital liability for medical malpractice. Many courts now allow claims for
hospital vicarious liability under the theories of respondeat superior, apparent authority, ostensible
authority, or agency by estoppel. 20

In this jurisdiction, the statute governing liability for negligent acts is Article 2176 of the Civil Code,
which reads:

Art. 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is
obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual
relation between the parties, is called a quasi-delict and is governed by the provisions of this
Chapter.

A derivative of this provision is Article 2180, the rule governing vicarious liability under the doctrine of
respondeat superior, thus:

ART. 2180. The obligation imposed by Article 2176 is demandable not only for one’s own acts or
omissions, but also for those of persons for whom one is responsible.

x x x x x x

The owners and managers of an establishment or enterprise are likewise responsible for damages
caused by their employees in the service of the branches in which the latter are employed or on the
occasion of their functions.

Employers shall be liable for the damages caused by their employees and household helpers acting
within the scope of their assigned tasks even though the former are not engaged in any business or
industry.

x x x x x x

The responsibility treated of in this article shall cease when the persons herein mentioned prove that
they observed all the diligence of a good father of a family to prevent damage.

A prominent civilist commented that professionals engaged by an employer, such as physicians,


dentists, and pharmacists, are not "employees" under this article because the manner in which they
perform their work is not within the control of the latter (employer). In other words, professionals are
considered personally liable for the fault or negligence they commit in the discharge of their duties,
and their employer cannot be held liable for such fault or negligence. In the context of the present
case, "a hospital cannot be held liable for the fault or negligence of a physician or surgeon in the
treatment or operation of patients."21

The foregoing view is grounded on the traditional notion that the professional status and the very
nature of the physician’s calling preclude him from being classed as an agent or employee of a
hospital, whenever he acts in a professional capacity.22 It has been said that medical practice strictly
involves highly developed and specialized knowledge,23 such that physicians are generally free to
exercise their own skill and judgment in rendering medical services sans interference.24 Hence, when
a doctor practices medicine in a hospital setting, the hospital and its employees are deemed to
subserve him in his ministrations to the patient and his actions are of his own responsibility.25

The case of Schloendorff v. Society of New York Hospital26 was then considered an authority for this
view. The "Schloendorff doctrine" regards a physician, even if employed by a hospital, as an
independent contractor because of the skill he exercises and the lack of control exerted over his
work. Under this doctrine, hospitals are exempt from the application of the respondeat superior
principle for fault or negligence committed by physicians in the discharge of their profession.

However, the efficacy of the foregoing doctrine has weakened with the significant developments in
medical care. Courts came to realize that modern hospitals are increasingly taking active role in
supplying and regulating medical care to patients. No longer were a hospital’s functions limited to
furnishing room, food, facilities for treatment and operation, and attendants for its patients. Thus, in
Bing v. Thunig,27 the New York Court of Appeals deviated from the Schloendorff doctrine, noting that
modern hospitals actually do far more than provide facilities for treatment. Rather, they regularly
employ, on a salaried basis, a large staff of physicians, interns, nurses, administrative and manual
workers. They charge patients for medical care and treatment, even collecting for such services
through legal action, if necessary. The court then concluded that there is no reason to exempt
hospitals from the universal rule of respondeat superior.

In our shores, the nature of the relationship between the hospital and the physicians is rendered
inconsequential in view of our categorical pronouncement in Ramos v. Court of Appeals28 that for
purposes of apportioning responsibility in medical negligence cases, an employer-employee
relationship in effect exists between hospitals and their attending and visiting physicians. This Court
held:

"We now discuss the responsibility of the hospital in this particular incident. The unique practice
(among private hospitals) of filling up specialist staff with attending and visiting "consultants," who
are allegedly not hospital employees, presents problems in apportioning responsibility for negligence
in medical malpractice cases. However, the difficulty is more apparent than real.

In the first place, hospitals exercise significant control in the hiring and firing of consultants and in the
conduct of their work within the hospital premises. Doctors who apply for ‘consultant’ slots, visiting or
attending, are required to submit proof of completion of residency, their educational qualifications,
generally, evidence of accreditation by the appropriate board (diplomate), evidence of fellowship in
most cases, and references. These requirements are carefully scrutinized by members of the
hospital administration or by a review committee set up by the hospital who either accept or reject
the application. x x x.

After a physician is accepted, either as a visiting or attending consultant, he is normally required to


attend clinico-pathological conferences, conduct bedside rounds for clerks, interns and residents,
moderate grand rounds and patient audits and perform other tasks and responsibilities, for the
privilege of being able to maintain a clinic in the hospital, and/or for the privilege of admitting patients
into the hospital. In addition to these, the physician’s performance as a specialist is generally
evaluated by a peer review committee on the basis of mortality and morbidity statistics, and
feedback from patients, nurses, interns and residents. A consultant remiss in his duties, or a
consultant who regularly falls short of the minimum standards acceptable to the hospital or its peer
review committee, is normally politely terminated.

In other words, private hospitals, hire, fire and exercise real control over their attending and visiting
‘consultant’ staff. While ‘consultants’ are not, technically employees, x x x, the control exercised, the
hiring, and the right to terminate consultants all fulfill the important hallmarks of an employer-
employee relationship, with the exception of the payment of wages. In assessing whether such a
relationship in fact exists, the control test is determining. Accordingly, on the basis of the foregoing,
we rule that for the purpose of allocating responsibility in medical negligence cases, an employer-
employee relationship in effect exists between hospitals and their attending and visiting physicians. "
But the Ramos pronouncement is not our only basis in sustaining PSI’s liability. Its liability is also
anchored upon the agency principle of apparent authority or agency by estoppel and the doctrine of
corporate negligence which have gained acceptance in the determination of a hospital’s liability for
negligent acts of health professionals. The present case serves as a perfect platform to test the
applicability of these doctrines, thus, enriching our jurisprudence.

Apparent authority, or what is sometimes referred to as the "holding

out" theory, or doctrine of ostensible agency or agency by estoppel,29 has its origin from the law of
agency. It imposes liability, not as the result of the reality of a contractual relationship, but rather
because of the actions of a principal or an employer in somehow misleading the public into believing
that the relationship or the authority exists.30 The concept is essentially one of estoppel and has
been explained in this manner:

"The principal is bound by the acts of his agent with the apparent authority which he knowingly
permits the agent to assume, or which he holds the agent out to the public as possessing. The
question in every case is whether the principal has by his voluntary act placed the agent in such a
situation that a person of ordinary prudence, conversant with business usages and the nature of the
particular business, is justified in presuming that such agent has authority to perform the particular
act in question.31

The applicability of apparent authority in the field of hospital liability was upheld long time ago in
Irving v. Doctor Hospital of Lake Worth, Inc.32 There, it was explicitly stated that "there does not
appear to be any rational basis for excluding the concept of apparent authority from the field of
hospital liability." Thus, in cases where it can be shown that a hospital, by its actions, has held out a
particular physician as its agent and/or employee and that a patient has accepted treatment from
that physician in the reasonable belief that it is being rendered in behalf of the hospital, then the
hospital will be liable for the physician’s negligence.

Our jurisdiction recognizes the concept of an agency by implication or estoppel. Article 1869 of the
Civil Code reads:

ART. 1869. Agency may be express, or implied from the acts of the principal, from his silence or lack
of action, or his failure to repudiate the agency, knowing that another person is acting on his behalf
without authority.

In this case, PSI publicly displays in the lobby of the Medical City Hospital the names and
specializations of the physicians associated or accredited by it, including those of Dr. Ampil and Dr.
Fuentes. We concur with the Court of Appeals’ conclusion that it "is now estopped from passing all
the blame to the physicians whose names it proudly paraded in the public directory leading the
public to believe that it vouched for their skill and competence." Indeed, PSI’s act is tantamount to
holding out to the public that Medical City Hospital, through its accredited physicians, offers quality
health care services. By accrediting Dr. Ampil and Dr. Fuentes and publicly advertising their
qualifications, the hospital created the impression that they were its agents, authorized to perform
medical or surgical services for its patients. As expected, these patients, Natividad being one of
them, accepted the services on the reasonable belief that such were being rendered by the hospital
or its employees, agents, or servants. The trial court correctly pointed out:

x x x regardless of the education and status in life of the patient, he ought not be burdened with the
defense of absence of employer-employee relationship between the hospital and the independent
physician whose name and competence are certainly certified to the general public by the hospital’s
act of listing him and his specialty in its lobby directory, as in the case herein. The high costs of
today’s medical and health care should at least exact on the hospital greater, if not broader, legal
responsibility for the conduct of treatment and surgery within its facility by its accredited physician or
surgeon, regardless of whether he is independent or employed."33

The wisdom of the foregoing ratiocination is easy to discern. Corporate entities, like PSI, are capable
of acting only through other individuals, such as physicians. If these accredited physicians do their
job well, the hospital succeeds in its mission of offering quality medical services and thus profits
financially. Logically, where negligence mars the quality of its services, the hospital should not be
allowed to escape liability for the acts of its ostensible agents.

We now proceed to the doctrine of corporate negligence or corporate responsibility.

One allegation in the complaint in Civil Case No. Q-43332 for negligence and malpractice is that PSI
as owner, operator and manager of Medical City Hospital, "did not perform the necessary
supervision nor exercise diligent efforts in the supervision of Drs. Ampil and Fuentes and its nursing
staff, resident doctors, and medical interns who assisted Drs. Ampil and Fuentes in the performance
of their duties as surgeons."34 Premised on the doctrine of corporate negligence, the trial court held
that PSI is directly liable for such breach of duty.

We agree with the trial court.

Recent years have seen the doctrine of corporate negligence as the judicial answer to the problem
of allocating hospital’s liability for the negligent acts of health practitioners, absent facts to support
the application of respondeat superior or apparent authority. Its formulation proceeds from the
judiciary’s acknowledgment that in these modern times, the duty of providing quality medical service
is no longer the sole prerogative and responsibility of the physician. The modern hospitals have
changed structure. Hospitals now tend to organize a highly professional medical staff whose
competence and performance need to be monitored by the hospitals commensurate with their
inherent responsibility to provide quality medical care.35

The doctrine has its genesis in Darling v. Charleston Community Hospital.36 There, the Supreme
Court of Illinois held that "the jury could have found a hospital negligent, inter alia, in failing to have a
sufficient number of trained nurses attending the patient; failing to require a consultation with or
examination by members of the hospital staff; and failing to review the treatment rendered to the
patient." On the basis of Darling, other jurisdictions held that a hospital’s corporate negligence
extends to permitting a physician known to be incompetent to practice at the hospital.37 With the
passage of time, more duties were expected from hospitals, among them: (1) the use of reasonable
care in the maintenance of safe and adequate facilities and equipment; (2) the selection and
retention of competent physicians; (3) the overseeing or supervision of all persons who practice
medicine within its walls; and (4) the formulation, adoption and enforcement of adequate rules and
policies that ensure quality care for its patients.38 Thus, in Tucson Medical Center, Inc. v.
Misevich,39 it was held that a hospital, following the doctrine of corporate responsibility, has the duty
to see that it meets the standards of responsibilities for the care of patients. Such duty includes the
proper supervision of the members of its medical staff. And in Bost v. Riley,40 the court concluded
that a patient who enters a hospital does so with the reasonable expectation that it will attempt to
cure him. The hospital accordingly has the duty to make a reasonable effort to monitor and oversee
the treatment prescribed and administered by the physicians practicing in its premises.

In the present case, it was duly established that PSI operates the Medical City Hospital for the
purpose and under the concept of providing comprehensive medical services to the public.
Accordingly, it has the duty to exercise reasonable care to protect from harm all patients admitted
into its facility for medical treatment. Unfortunately, PSI failed to perform such duty. The findings of
the trial court are convincing, thus:

x x x PSI’s liability is traceable to its failure to conduct an investigation of the matter reported in the
nota bene of the count nurse. Such failure established PSI’s part in the dark conspiracy of silence
and concealment about the gauzes. Ethical considerations, if not also legal, dictated the holding of
an immediate inquiry into the events, if not for the benefit of the patient to whom the duty is primarily
owed, then in the interest of arriving at the truth. The Court cannot accept that the medical and the
healing professions, through their members like defendant surgeons, and their institutions like PSI’s
hospital facility, can callously turn their backs on and disregard even a mere probability of mistake or
negligence by refusing or failing to investigate a report of such seriousness as the one in Natividad’s
case.

It is worthy to note that Dr. Ampil and Dr. Fuentes operated on Natividad with the assistance of the
Medical City Hospital’s staff, composed of resident doctors, nurses, and interns. As such, it is
reasonable to conclude that PSI, as the operator of the hospital, has actual or constructive
knowledge of the procedures carried out, particularly the report of the attending nurses that the two
pieces of gauze were missing. In Fridena v. Evans,41 it was held that a corporation is bound by the
knowledge acquired by or notice given to its agents or officers within the scope of their authority and
in reference to a matter to which their authority extends. This means that the knowledge of any of
the staff of Medical City Hospital constitutes knowledge of PSI. Now, the failure of PSI, despite the
attending nurses’ report, to investigate and inform Natividad regarding the missing gauzes amounts
to callous negligence. Not only did PSI breach its duties to oversee or supervise all persons who
practice medicine within its walls, it also failed to take an active step in fixing the negligence
committed. This renders PSI, not only vicariously liable for the negligence of Dr. Ampil under Article
2180 of the Civil Code, but also directly liable for its own negligence under Article 2176. In Fridena,
the Supreme Court of Arizona held:

x x x In recent years, however, the duty of care owed to the patient by the hospital has expanded.
The emerging trend is to hold the hospital responsible where the hospital has failed to monitor and
review medical services being provided within its walls. See Kahn Hospital Malpractice Prevention,
27 De Paul . Rev. 23 (1977).

Among the cases indicative of the ‘emerging trend’ is Purcell v. Zimbelman, 18 Ariz. App. 75,500 P.
2d 335 (1972). In Purcell, the hospital argued that it could not be held liable for the malpractice of a
medical practitioner because he was an independent contractor within the hospital. The Court of
Appeals pointed out that the hospital had created a professional staff whose competence and
performance was to be monitored and reviewed by the governing body of the hospital, and the court
held that a hospital would be negligent where it had knowledge or reason to believe that a doctor
using the facilities was employing a method of treatment or care which fell below the recognized
standard of care.

Subsequent to the Purcell decision, the Arizona Court of Appeals held that a hospital has certain
inherent responsibilities regarding the quality of medical care furnished to patients within its walls
and it must meet the standards of responsibility commensurate with this undertaking. Beeck v.
Tucson General Hospital, 18 Ariz. App. 165, 500 P. 2d 1153 (1972). This court has confirmed the
rulings of the Court of Appeals that a hospital has the duty of supervising the competence of the
doctors on its staff. x x x.

x x x x x x
In the amended complaint, the plaintiffs did plead that the operation was performed at the hospital
with its knowledge, aid, and assistance, and that the negligence of the defendants was the
proximate cause of the patient’s injuries. We find that such general allegations of negligence, along
with the evidence produced at the trial of this case, are sufficient to support the hospital’s liability
based on the theory of negligent supervision."

Anent the corollary issue of whether PSI is solidarily liable with Dr. Ampil for damages, let it be
emphasized that PSI, apart from a general denial of its responsibility, failed to adduce evidence
showing that it exercised the diligence of a good father of a family in the accreditation and
supervision of the latter. In neglecting to offer such proof, PSI failed to discharge its burden under
the last paragraph of Article 2180 cited earlier, and, therefore, must be adjudged solidarily liable with
Dr. Ampil. Moreover, as we have discussed, PSI is also directly liable to the Aganas.

One final word. Once a physician undertakes the treatment and care of a patient, the law imposes
on him certain obligations. In order to escape liability, he must possess that reasonable degree of
learning, skill and experience required by his profession. At the same time, he must apply
reasonable care and diligence in the exercise of his skill and the application of his knowledge, and
exert his best judgment.

WHEREFORE, we DENY all the petitions and AFFIRM the challenged Decision of the Court of
Appeals in CA-G.R. CV No. 42062 and CA-G.R. SP No. 32198.

Costs against petitioners PSI and Dr. Miguel Ampil.

SO ORDERED.