COMMERCIAL SPECIAL LAWS_CASES

THIRD DIVISION

AIR PHILIPPINES CORPORATION, Petitioner,

G.R. No. 172835 Present: YNARES-SANTIAGO, J. Chairperson, AUSTRIA-MARTINEZ, CHICO-NAZARIO, NACHURA, and REYES, JJ. Promulgated:

- versus -

PENNSWELL, INC. Respondent.

December 13, 2007 x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CHICO-NAZARIO, J.:

Petitioner Air Philippines Corporation seeks, via the instant Petition for Review under Rule 45 of the [1] [2] Rules of Court, the nullification of the 16 February 2006 Decision and the 25 May 2006 Resolution of the [3] Court of Appeals in CA-G.R. SP No. 86329, which affirmed the Order dated 30 June 2004 of the Regional Trial Court (RTC), Makati City, Branch 64, in Civil Case No. 00-561. Petitioner Air Philippines Corporation is a domestic corporation engaged in the business of air transportation services. On the other hand, respondent Pennswell, Inc. was organized to engage in the business of manufacturing and selling industrial chemicals, solvents, and special lubricants. On various dates, respondent delivered and sold to petitioner sundry goods in trade, covered by Sales [4] [5] [6] [7] Invoices No. 8846, 9105, 8962, and 8963, which correspond to Purchase Orders No. 6433, 6684, 6634 and 6633, respectively. Under the contracts, petitioners total outstanding obligation amounted toP449,864.98 with interest at 14% per annum until the amount would be fully paid. For failure of the petitioner to comply with [8] its obligation under said contracts, respondent filed a Complaint for a Sum of Money on 28 April 2000 with the RTC. In its Answer, petitioner contended that its refusal to pay was not without valid and justifiable reasons. In particular, petitioner alleged that it was defrauded in the amount of P592,000.00 by respondent for its previous sale of four items, covered by Purchase Order No. 6626. Said items were misrepresented by respondent as belonging to a new line, but were in truth and in fact, identical with products petitioner had previously purchased from respondent. Petitioner asserted that it was deceived by respondent which merely altered the names and labels of such goods. Petitioner specifically identified the items in question, as follows:
[9]

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Label/Description 1. a. Anti-Friction Fluid b. Excellent Corrosion (fake) Rust

Item No. MPL-800 MPL-008

Amount 153,941.40 155,496.00

P.O. 5714 5888

Date 05/20/99 06/20/99

2. a. Contact Grease b. Connector Grease (fake) 3. a. Trixohtropic Grease b. Di-Electric Strength Protective Coating (fake) 4. a. Dry Lubricant b. Anti-Seize Compound (fake)

COG #2 CG EPC EPC#2

115,236.00 230,519.52 81,876.96 81,876.96

5540 6327 4582 5446

04/26/99 08/05/99 01/29/99 04/21/99

ASC-EP ASC-EP 2000

87,346.52 124,108.10

5712 4763 5890

&

05/20/99 02/16/99 &06/24/99

According to petitioner, respondents products, namely Excellent Rust Corrosion, Connector Grease, Electric Strength Protective Coating, and Anti-Seize Compound, are identical with its Anti-Friction Fluid, Contact Grease, Thixohtropic Grease, and Dry Lubricant, respectively. Petitioner asseverated that had respondent been forthright about the identical character of the products, it would not have purchased the items complained of. Moreover, petitioner alleged that when the purported fraud was discovered, a conference was held between petitioner and respondent on 13 January 2000, whereby the parties agreed that respondent would return to petitioner the amount it previously paid. However, petitioner was surprised when it received a letter from the respondent, demanding payment of the amount of P449,864.94, which later became the subject of respondents Complaint for Collection of a Sum of Money against petitioner. During the pendency of the trial, petitioner filed a Motion to Compel respondent to give a detailed list of the ingredients and chemical components of the following products, to wit: (a) Contact Grease and Connector Grease; (b) Thixohtropic Grease and Di-Electric Strength Protective Coating; and (c) Dry Lubricant and Anti[11] Seize Compound. It appears that petitioner had earlier requested the Philippine Institute of Pure and Applied Chemistry (PIPAC) for the latter to conduct a comparison of respondents goods. On 15 March 2004, the RTC rendered an Order granting the petitioners motion. It disposed, thus: The Court directs [herein respondent] Pennswell, Inc. to give [herein petitioner] Air Philippines Corporation[,] a detailed list of the ingredients or chemical components of the following chemical products: a. b. c. Contact Grease to be compared with Connector Grease; Thixohtropic Grease to be compared with Di-Electric Strength Dry Lubricant to be compared with Anti-Seize Compound[.] Protective Coating; and
[10]

[Respondent] Pennswell, Inc. is given fifteen (15) days from receipt of this Order to submit to [petitioner] Air Philippines Corporation the chemical components of all the above-mentioned products for chemical [12] comparison/analysis.

Respondent sought reconsideration of the foregoing Order, contending that it cannot be compelled to disclose the chemical components sought because the matter is confidential. It argued that what petitioner endeavored to inquire upon constituted a trade secret which respondent cannot be forced to

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divulge. Respondent maintained that its products are specialized lubricants, and if their components were revealed, its business competitors may easily imitate and market the same types of products, in violation of its proprietary rights and to its serious damage and prejudice. The RTC gave credence to respondents reasoning, and reversed itself. It issued an Order dated 30 June 2004, finding that the chemical components are respondents trade secrets and are privileged in character. A priori, it rationalized: The Supreme Court held in the case of Chavez vs. Presidential Commission on Good Government, 299 SCRA 744, p. 764, that the drafters of the Constitution also unequivocally affirmed that aside from national security matters and intelligence information, trade or industrial secrets (pursuant to the Intellectual Property Code and other related laws) as well as banking transactions (pursuant to the Secrecy of Bank Deposit Act) are also exempted from compulsory disclosure. Trade secrets may not be the subject of compulsory disclosure. By reason of [their] confidential and privileged character, ingredients or chemical components of the products ordered by this Court to be disclosed constitute trade secrets lest [herein respondent] would eventually be exposed to unwarranted business competition with others who may imitate and market the same kinds of products in violation of [respondents] proprietary rights. Being privileged, the detailed list of ingredients or chemical components may not be the subject of mode of discovery under Rule 27, Section 1 of the Rules of Court, which expressly makes privileged [13] information an exception from its coverage.

Alleging grave abuse of discretion on the part of the RTC, petitioner filed a Petition for Certiorari under Rule 65 of the Rules of Court with the Court of Appeals, which denied the Petition and affirmed the Order dated 30 June 2004 of the RTC. The Court of Appeals ruled that to compel respondent to reveal in detail the list of ingredients of its lubricants is to disregard respondents rights over its trade secrets. It was categorical in declaring that the chemical formulation of respondents products and their ingredients are embraced within the meaning of trade secrets. In disallowing the disclosure, the Court of Appeals expounded, thus: The Supreme Court in Garcia v. Board of Investments (177 SCRA 374 [1989]) held that trade secrets and confidential, commercial and financial information are exempt from public scrutiny. This is reiterated in Chavez v. Presidential Commission on Good Government (299 SCRA 744 [1998]) where the Supreme Court enumerated the kinds of information and transactions that are recognized as restrictions on or privileges against compulsory disclosure. There, the Supreme Court explicitly stated that: The drafters of the Constitution also unequivocally affirmed that, aside from national security matters and intelligence information, trade or industrial secrets (pursuant to the Intellectual Property Code and other related laws) as well as banking transactions (pursuant to the Secrecy of Bank Deposits Act) re also exempt from compulsory disclosure. It is thus clear from the foregoing that a party cannot be compelled to produce, release or disclose documents, papers, or any object which are considered trade secrets. In the instant case, petitioner [Air Philippines Corporation] would have [respondent] Pennswell produce a detailed list of ingredients or composition of the latters lubricant products so that a chemical comparison and analysis thereof can be obtained. On this note, We believe and so hold that the ingredients or composition of [respondent] Pennswells lubricants are trade secrets which it cannot be compelled to disclose. [Respondent] Pennswell has a proprietary or economic right over the ingredients or components of its lubricant products. The formulation thereof is not known to the general public and is peculiar only to [respondent] Pennswell. The legitimate and economic interests of business enterprises in protecting their manufacturing and business secrets are well-recognized in our system.

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[Respondent] Pennswell has a right to guard its trade secrets, manufacturing formulas, marketing strategies and other confidential programs and information against the public. Otherwise, such information can be illegally and unfairly utilized by business competitors who, through their access to [respondent] Pennswells business secrets, may use the same for their own private gain and to the irreparable prejudice of the latter. xxxx In the case before Us, the alleged trade secrets have a factual basis, i.e., it comprises of the ingredients and formulation of [respondent] Pennswells lubricant products which are unknown to the public and peculiar only to Pennswell. All told, We find no grave abuse of discretion amounting to lack or excess of jurisdiction on the part of public respondent Judge in finding that the detailed list of ingredients or composition of the subject lubricant products which petitioner [Air Philippines Corporation] seeks to be disclosed are trade secrets of [respondent] [14] Pennswell; hence, privileged against compulsory disclosure. Petitioners Motion for Reconsideration was denied. Unyielding, petitioner brought the instant Petition before us, on the sole issue of: WHETHER THE COURT OF APPEALS RULED IN ACCORDANCE WITH PREVAILING LAWS AND JURISPRUDENCE WHEN IT UPHELD THE RULING OF THE TRIAL COURT THAT THE CHEMICAL COMPONENTS OR INGREDIENTS OF RESPONDENTS PRODUCTS ARE TRADE SECRETS OR [15] INDUSTRIAL SECRETS THAT ARE NOT SUBJECT TO COMPULSORY DISCLOSURE.

Petitioner seeks to convince this Court that it has a right to obtain the chemical composition and ingredients of respondents products to conduct a comparative analysis of its products. Petitioner assails the conclusion reached by the Court of Appeals that the matters are trade secrets which are protected by law and beyond public scrutiny. Relying on Section 1, Rule 27 of the Rules of Court, petitioner argues that the use of modes of discovery operates with desirable flexibility under the discretionary control of the trial court. Furthermore, petitioner posits that its request is not done in bad faith or in any manner as to annoy, embarrass, or oppress respondent. A trade secret is defined as a plan or process, tool, mechanism or compound known only to its owner and [16] those of his employees to whom it is necessary to confide it. The definition also extends to a secret formula or process not patented, but known only to certain individuals using it in compounding some article of trade having [17] a commercial value. A trade secret may consist of any formula, pattern, device, or compilation of information that: (1) is used in one's business; and (2) gives the employer an opportunity to obtain an advantage over [18] competitors who do not possess the information. Generally, a trade secret is a process or device intended for continuous use in the operation of the business, for example, a machine or formula, but can be a price list or [19] catalogue or specialized customer list. It is indubitable that trade secrets constitute proprietary rights. The inventor, discoverer, or possessor of a trade secret or similar innovation has rights therein which may be treated as property, and ordinarily an injunction will be granted to prevent the disclosure of the trade secret by one who [20] obtained the information "in confidence" or through a "confidential relationship." American jurisprudence has [21] utilized the following factors to determine if an information is a trade secret, to wit: (1) (2) (3) (4) the extent to which the information is known outside of the employer's business; the extent to which the information is known by employees and others involved in the business; the extent of measures taken by the employer to guard the secrecy of the information; the value of the information to the employer and to competitors;

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(5) (6) [22] source.

the amount of effort or money expended by the company in developing the information; and the extent to which the information could be easily or readily obtained through an independent

In Cocoland Development Corporation v. National Labor Relations Commission, the issue was the legality of an employees termination on the ground of unauthorized disclosure of trade secrets. The Court laid down the rule that any determination by management as to the confidential nature of technologies, processes, formulae or other so-called trade secrets must have a substantial factual basis which can pass judicial scrutiny. The Court rejected the employers naked contention that its own determination as to what constitutes a trade secret should be binding and conclusive upon the NLRC. As a caveat, the Court said that to rule otherwise would be to permit an employer to label almost anything a trade secret, and thereby create a weapon with which he/it may arbitrarily dismiss an employee on the pretext that the latter somehow disclosed a trade secret, even if [24] in fact there be none at all to speak of. Hence, in Cocoland, the parameters in the determination of trade secrets were set to be such substantial factual basis that can withstand judicial scrutiny. The chemical composition, formulation, and ingredients of respondents special lubricants are trade secrets within the contemplation of the law. Respondent was established to engage in the business of general manufacturing and selling of, and to deal in, distribute, sell or otherwise dispose of goods, wares, merchandise, products, including but not limited to industrial chemicals, solvents, lubricants, acids, alkalies, salts, paints, oils, varnishes, colors, pigments and similar preparations, among others. It is unmistakable to our minds that the manufacture and production of respondents products proceed from a formulation of a secret list of ingredients. In the creation of its lubricants, respondent expended efforts, skills, research, and resources. What it had achieved by virtue of its investments may not be wrested from respondent on the mere pretext that it is necessary for petitioners defense against a collection for a sum of money. By and large, the value of the information to respondent is crystal clear. The ingredients constitute the very fabric of respondents production and business. No doubt, the information is also valuable to respondents competitors. To compel its disclosure is to cripple respondents business, and to place it at an undue disadvantage. If the chemical composition of respondents lubricants are opened to public scrutiny, it will stand to lose the backbone on which its business is founded. This would result in nothing less than the probable demise of respondents business. Respondents proprietary interest over the ingredients which it had developed and expended money and effort on is incontrovertible. Our conclusion is that the detailed ingredients sought to be revealed have a commercial value to respondent. Not only do we acknowledge the fact that the information grants it a competitive advantage; we also find that there is clearly a glaring intent on the part of respondent to keep the information confidential and not available to the prying public. We now take a look at Section 1, Rule 27 of the Rules of Court, which permits parties to inspect documents or things upon a showing of good cause before the court in which an action is pending. Its entire provision reads: SECTION 1. Motion for production or inspection order. Upon motion of any party showing good cause therefore, the court in which an action is pending may (a) order any party to produce and permit the inspection and copying or photographing, by or on behalf of the moving party, of any designated documents, papers, books, accounts, letters, photographs, objects or tangible things, not privileged, which constitute or contain evidence material to any matter involved in the action and which are in his possession, custody or control; or (b) order any party to permit entry upon designated land or other property in his possession or control for the purpose of inspecting, measuring, surveying, or photographing the property or any designated relevant object or operation thereon. The order shall specify the time, place and manner of making the inspection and taking copies and photographs, and may prescribe such terms and conditions as are just.

[23]

A more than cursory glance at the above text would show that the production or inspection of documents or things as a mode of discovery sanctioned by the Rules of Court may be availed of by any party upon a showing of good cause therefor before the court in which an action is pending. The court may order any party: a) to produce and permit the inspection and copying or photographing of any designated documents, papers,

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books, accounts, letters, photographs, objects or tangible things, which are not privileged; which constitute or contain evidence material to any matter involved in the action; and which are in his possession, custody or control; or b) to permit entry upon designated land or other property in his possession or control for the purpose of inspecting, measuring, surveying, or photographing the property or any designated relevant object or operation thereon. Rule 27 sets an unequivocal proviso that the documents, papers, books, accounts, letters, photographs, [26] objects or tangible things that may be produced and inspected should not be privileged. The documents [27] must not be privileged against disclosure. On the ground of public policy, the rules providing for production and inspection of books and papers do not authorize the production or inspection of privileged matter; that is, books and papers which, because of their confidential and privileged character, could not be received in [28] evidence. Such a condition is in addition to the requisite that the items be specifically described, and must constitute or contain evidence material to any matter involved in the action and which are in the partys possession, custody or control. Section 24 of Rule 130 draws the types of disqualification by reason of privileged communication, to wit: (a) communication between husband and wife; (b) communication between attorney and client; (c) communication between physician and patient; (d) communication between priest and penitent; and (e) public officers and public interest. There are, however, other privileged matters that are not mentioned by Rule 130. Among them are the following: (a) editors may not be compelled to disclose the source of published news; (b) voters may not be compelled to disclose for whom they voted; (c) trade secrets; (d) information contained in [30] tax census returns; and (d) bank deposits. We, thus, rule against the petitioner. We affirm the ruling of the Court of Appeals which upheld the finding of the RTC that there is substantial basis for respondent to seek protection of the law for its proprietary rights over the detailed chemical composition of its products. That trade secrets are of a privileged nature is beyond quibble. The protection that this jurisdiction affords to trade secrets is evident in our laws. The Interim Rules of Procedure on Government Rehabilitation, effective 15 December 2000, which applies to: (1) petitions for rehabilitation filed by corporations, partnerships, [31] and associations pursuant to Presidential Decree No. 902-A, as amended; and (2) cases for rehabilitation transferred from the Securities and Exchange Commission to the RTCs pursuant to Republic Act No. 8799, otherwise known as The Securities Regulation Code, expressly provides that the court may issue an order to protect trade secrets or other confidential research, development, or commercial information belonging [32] to the debtor. Moreover, the Securities Regulation Code is explicit that the Securities and Exchange Commission is not required or authorized to require the revelation of trade secrets or processes in [33] any application, report or document filed with the Commission. This confidentiality is made paramount as a limitation to the right of any member of the general public, upon request, to have access to all information [34] filed with the Commission. Furthermore, the Revised Penal Code endows a cloak of protection to trade secrets under the following articles: Art. 291. Revealing secrets with abuse of office. The penalty of arresto mayor and a fine not exceeding 500 pesos shall be imposed upon any manager, employee or servant who, in such capacity, shall learn the secrets of his principal or master and shall reveal such secrets. Art. 292. Revelation of industrial secrets. The penalty of prision correccional in its minimum and medium periods and a fine not exceeding 500 pesos shall be imposed upon the person in charge, employee or workman of any manufacturing or industrial establishment who, to the prejudice of the owner thereof, shall reveal the secrets of the industry of the latter.
[29]

[25]

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Similarly, Republic Act No. 8424, otherwise known as the National Internal Revenue Code of 1997, has a restrictive provision on trade secrets, penalizing the revelation thereof by internal revenue officers or employees, to wit: SECTION 278. Procuring Unlawful Divulgence of Trade Secrets. - Any person who causes or procures an officer or employee of the Bureau of Internal Revenue to divulge any confidential information regarding the business, income or inheritance of any taxpayer, knowledge of which was acquired by him in the discharge of his official duties, and which it is unlawful for him to reveal, and any person who publishes or prints in any manner whatever, not provided by law, any income, profit, loss or expenditure appearing in any income tax return, shall be punished by a fine of not more than two thousand pesos (P2,000), or suffer imprisonment of not less than six (6) months nor more than five (5) years, or both.

Republic Act No. 6969, or the Toxic Substances and Hazardous and Nuclear Wastes Control Act of 1990, enacted to implement the policy of the state toregulate, restrict or prohibit the importation, manufacture, processing, sale, distribution, use and disposal of chemical substances and mixtures that present unreasonable risk and/or injury to health or the environment, also contains a provision that limits the right of the public to have access to records, reports or information concerning chemical substances and mixtures including safety data submitted and data on emission or discharge into the environment, if the matter is confidential such that it would divulge trade secrets, production or sales figures; or methods, production or processes unique to such manufacturer, processor or distributor; or would otherwise tend [35] to affect adversely the competitive position of such manufacturer, processor or distributor. Clearly, in accordance with our statutory laws, this Court has declared that intellectual and industrial [36] property rights cases are not simple property cases. Without limiting such industrial property rights to trademarks and trade names, this Court has ruled that all agreements concerning intellectual property are [37] intimately connected with economic development. The protection of industrial property encourages investments in new ideas and inventions and stimulates creative efforts for the satisfaction of human needs. It speeds up transfer of technology and industrialization, and thereby bring about social and economic [38] progress. Verily, the protection of industrial secrets is inextricably linked to the advancement of our economy and fosters healthy competition in trade. Jurisprudence has consistently acknowledged the private character of trade secrets. There is a privilege [39] not to disclose ones trade secrets. Foremost, this Court has declared that trade secrets and banking transactions are among the recognized restrictions to the right of the people to information as embodied in the [40] Constitution. We said that the drafters of the Constitution also unequivocally affirmed that, aside from national security matters and intelligence information, trade or industrial secrets (pursuant to the Intellectual Property Code and other related laws) as well as banking transactions (pursuant to the Secrecy of Bank Deposits Act), [41] are also exempted from compulsory disclosure. Significantly, our cases on labor are replete with examples of a protectionist stance towards the trade secrets of employers. For instance, this Court upheld the validity of the policy of a pharmaceutical company prohibiting its employees from marrying employees of any competitor company, on the rationalization that the company has a right to guard its trade secrets, manufacturing formulas, marketing strategies and other [42] confidential programs and information from competitors. Notably, it was in a labor-related case that this Court made a stark ruling on the proper determination of trade secrets.
[43]

In the case at bar, petitioner cannot rely on Section 77 of Republic Act 7394, or the Consumer Act of the Philippines, in order to compel respondent to reveal the chemical components of its products. While it is true that all consumer products domestically sold, whether manufactured locally or imported, shall indicate their general make or active ingredients in their respective labels of packaging, the law does not apply to respondent. Respondents specialized lubricants -- namely, Contact Grease, Connector Grease, Thixohtropic Grease, Di-Electric Strength Protective Coating, Dry Lubricant and Anti-Seize Compound -- are not consumer [44] products. Consumer products, as it is defined in Article 4(q), refers to goods, services and credits, debts or obligations which are primarily for personal, family, household or agricultural purposes, which shall include, but

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not be limited to, food, drugs, cosmetics, and devices. This is not the nature of respondents products. Its products are not intended for personal, family, household or agricultural purposes. Rather, they are for industrial use, specifically for the use of aircraft propellers and engines. Petitioners argument that Republic Act No. 8203, or the Special Law on Counterfeit Drugs, requires the [45] disclosure of the active ingredients of a drug is also on faulty ground. Respondents products are outside the [46] scope of the cited law. They do not come within the purview of a drug which, as defined therein, refers to any chemical compound or biological substance, other than food, that is intended for use in the treatment, prevention or diagnosis of disease in man or animals. Again, such are not the characteristics of respondents products. What is clear from the factual findings of the RTC and the Court of Appeals is that the chemical formulation of respondents products is not known to the general public and is unique only to it. Both courts uniformly ruled that these ingredients are not within the knowledge of the public. Since such factual findings are generally not reviewable by this Court, it is not duty-bound to analyze and weigh all over again the evidence [47] already considered in the proceedings below. We need not delve into the factual bases of such findings as questions of fact are beyond the pale of Rule 45 of the Rules of Court. Factual findings of the trial court when [48] affirmed by the Court of Appeals, are binding and conclusive on the Supreme Court. We do not find merit or applicability in petitioners invocation of Section 12 of the Toxic Substances and Hazardous and Nuclear Wastes Control Act of 1990, which grants the public access to records, reports or information concerning chemical substances and mixtures, including safety data submitted, and data on [50] emission or discharge into the environment. To reiterate, Section 12 of said Act deems as confidential matters, which may not be made public, those that would divulge trade secrets, including production or sales figures or methods; production or processes unique to such manufacturer, processor or distributor, or would otherwise tend to affect adversely the competitive position of such manufacturer, processor or distributor. It is true that under the same Act, the Department of Environment and Natural Resources may release information; however, the clear import of the law is that said authority is limited by the right to confidentiality of the manufacturer, processor or distributor, which information may be released only to a medical research or scientific institution where the information is needed for the purpose of medical diagnosis or treatment of a person exposed to the chemical substance or mixture. The right to confidentiality is recognized by said Act as primordial. Petitioner has not made the slightest attempt to show that these circumstances are availing in the case at bar. Indeed, the privilege is not absolute; the trial court may compel disclosure where it is indispensable for [51] doing justice. We do not, however, find reason to except respondents trade secrets from the application of the rule on privilege. The revelation of respondents trade secrets serves no better purpose to the disposition of the main case pending with the RTC, which is on the collection of a sum of money. As can be gleaned from the facts, petitioner received respondents goods in trade in the normal course of business. To be sure, there are defenses under the laws of contracts and sales available to petitioner. On the other hand, the greater interest of justice ought to favor respondent as the holder of trade secrets. If we were to weigh the conflicting interests between the parties, we rule in favor of the greater interest of respondent. Trade secrets should receive greater protection from discovery, because they derive economic value from being generally unknown [52] and not readily ascertainable by the public. To the mind of this Court, petitioner was not able to show a compelling reason for us to lift the veil of confidentiality which shields respondents trade secrets. WHEREFORE, the Petition is DENIED. The Decision dated 16 February 2006, and the Resolution dated 25 May 2006, of the Court of Appeals in CA-G.R. SP No. 86329 are AFFIRMED. No costs. SO ORDERED.
[49]

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Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. 78413 November 8, 1989 CAGAYAN VALLEY ENTERPRISES, INC., Represented by its President, Rogelio Q. Lim, petitioner, vs. THE HON. COURT OF APPEALS and LA TONDEA, INC., respondents. Efren M. Cacatian for petitioners. San Jose, Enrique, Lacas, Santos and Borje for private respondent. REGALADO, J.: This petition for review on certiorari seeks the nullification of the decision of the Court of Appeals of December 5, 1986 in CA-G.R. CV No. 06685 which reversed the decision of the trial court, and its resolution dated May 5, 1987 denying petitioner's motion for reconsideration. The following antecedent facts generative of the present controversy are not in dispute. Sometime in 1953, La Tondea, Inc. (hereafter, LTI for short) registered with the Philippine Patent Office 1 pursuant to Republic Act No. 623 the 350 c.c. white flint bottles it has been using for its gin popularly known as 2 "Ginebra San Miguel". This registration was subsequently renewed on December 4, 1974. On November 10, 1981, LTI filed Civil Case No. 2668 for injunction and damages in the then Branch 1, Court of First Instance of Isabela against Cagayan Valley Enterprises, Inc. (Cagayan, for brevity) for using the 350 c.c., white flint bottles with the mark "La Tondea Inc." and "Ginebra San Miguel" stamped or blown-in therein by filling the same with Cagayan's liquor product bearing the label "Sonny Boy" for commercial sale and distribution, without LTI's written consent and in violation of Section 2 of Republic Act No. 623, as amended by Republic Act No. 5700. On the same date, LTI further filed an ex parte petition for the issuance of a writ of preliminary 3 injunction against the defendant therein. On November 16, 1981, the court a quo issued a temporary restraining order against Cagayan and its officers and employees from using the 350 c.c. bottles with the marks 4 "La Tondea" and "Ginebra San Miguel." Cagayan, in its answer, alleged the following defenses: 1. LTI has no cause of action due to its failure to comply with Section 21 of Republic Act No. 166 which requires the giving of notice that its aforesaid marks are registered by displaying and printing the words "Registered in the Phil. Patent Office" or "Reg Phil. Pat. Off.," hence no suit, civil or criminal, can be filed against Cagayan; 2. LTI is not entitled to any protection under Republic Act No. 623, as amended by Republic Act No. 5700, because its products, consisting of hard liquor, are not among those contemplated therein. What is protected under said law are beverages like Coca-cola, Royal Tru-Orange, Lem-o-Lime and similar beverages the bottles whereof bear the words "Reg Phil. Pat. Off.;" 3. No reservation of ownership on its bottles was made by LTI in its sales invoices nor does it require any deposit for the retention of said bottles; and
5

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4. There was no infringement of the goods or products of LTI since Cagayan uses its own labels and trademark on its product. In its subsequent pleadings, Cagayan contended that the bottles they are using are not the registered bottles of LTI since the former was using the bottles marked with "La Tondea, Inc." and "Ginebra San Miguel" but without the words "property of" indicated in said bottles as stated in the sworn statement attached to the certificate of registration of LTI for said bottles. On December 18, 1981, the lower court issued a writ of preliminary injunction, upon the filing of a bond by LTI in the sum of P50,000.00, enjoining Cagayan, its officers and agents from using the aforesaid registered bottles of 6 LTI. After a protracted trial, which entailed five (5) motions for contempt filed by LTI against Cagayan, the trial court 7 rendered judgment in favor of Cagayan, ruling that the complaint does not state a cause of action and that Cagayan was not guilty of contempt. Furthermore, it awarded damages in favor of Cagayan. LTI appealed to the Court of Appeals which, on December 5, 1986 rendered a decision in favor of said appellant, the dispositive portion whereof reads: WHEREFORE, the decision appealed from is hereby SET ASIDE and judgment is rendered permanently enjoining the defendant, its officers and agents from using the 350 c.c. white flint bottles with the marks of ownership "La Tondea, Inc." and "Ginebra San Miguel", blown-in or stamped on said bottles as containers for defendant's products. The writ of preliminary injunction issued by the trial court is therefore made permanent. Defendant is ordered to pay the amounts of: (1) P15,000.00 as nominal or temperate damages; (2) P50,000.00 as exemplary damages; (3) P10,000.00 as attorney's fees; and (4) Costs of suit.
8

On December 23, 1986, Cagayan filed a motion for reconsideration which was denied by the respondent court in its resolution dated May 5, 1987, hence the present petition, with the following assignment of errors: I. The Court of Appeals gravely erred in the decision granting that "there is, therefore, no need for plaintiff to display the words "Reg. Phil. Pat. Off." in order for it to succeed in bringing any injunction suit against defendant for the illegal use of its bottles. Rep. Act No. 623, as amended by Rep. Act No. 5700 simply provides and requires that the marks or names shall be stamped or marked on the containers." II. The Court of Appeals gravely erred in deciding that "neither is there a reason to distinguish between the two (2) sets of marked bottles-those which contain the marks "Property of La Tondea, Inc., Ginebra San Miguel," and those simply marked La Tondea Inc., Ginebra San Miguel'. By omitting the words "property of" plaintiff did not open itself to violation of Republic Act No. 623, as amended, as having registered its marks or names it is protected under the law." III. The Honorable Court of Appeals gravely erred in deciding that the words "La Tondea, Inc. and Ginebra San Miguel" are sufficient notice to the defendant which should have inquired from the plaintiff or the Philippine Patent Office, if it was lawful for it to re-use the empty bottles of the plaintiff.

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IV. The Honorable Court of Appeals gravely erred in deciding that defendant-appellee cannot claim good faith from using the bottles of plaintiff with marks "La Tondea, Inc." alone, short for the description contained in the sworn statement of Mr. Carlos Palanca, Jr., which was a requisite of its original and renewal registrations. V. The Honorable Court of Appeals gravely erred in accommodating the appeal on the dismissals of the five (5) contempt charges. VI. The Honorable Court of Appeals gravely erred in deciding that the award of damages in favor of the defendant-appellee, petitioner herein, is not in order. Instead it awarded nominal or temperate, exemplary 9 damages and attorney's fees without proof of bad faith. The pertinent provisions of Republic Act No. 623, as amended by Republic Act No. 5700, provides: SECTION 1. Persons engaged or licensed to engage in the manufacture, bottling, or selling of soda water, mineral or aerated waters, cider, milk, cream or other lawful beverages in bottles, boxes, casks, kegs, or barrels and other similar containers, or in the manufacturing, compressing or selling of gases such as oxygen, acytelene, nitrogen, carbon dioxide ammonia, hydrogen, chloride, helium, sulphur, dioxide, butane, propane, freon, melthyl chloride or similar gases contained in steel cylinders, tanks, flasks, accumulators or similar containers, with the name or the names of their principals or products, or other marks of ownership stamped or marked thereon, may register with the Philippine Patent Office a description of the names or marks, and the purpose for which the containers so marked and used by them, under the same conditions, rules, and regulations, made applicable by law or regulation to the issuance of trademarks. SEC. 2. It shall be unlawful for any person, without the written consent of the manufacturer, bottler, or seller, who has succesfully registered the marks of ownership in accordance with the provisions of the next preceding section, to fill such bottles, boxes, kegs, barrels, steel cylinders, tanks, flasks, accumulators or other similar containers so marked or stamped, for the purpose of sale, or to sell, disposed of, buy or traffic in, or wantonly destroy the same, whether filled or not, to use the same, for drinking vessels or glasses or drain pipes, foundation pipes, for any other purpose than that registered by the manufacturer, bottler or seller. Any violation of this section shall be punished by a fine of not more than one thousand pesos or imprisonment of not more than one year or both. SEC. 3. The use by any person other than the registered manufacturer, bottler or seller, without written permission of the latter of any such bottle, cask, barrel, keg, box, steel cylinders, tanks, flask, accumulators, or other similar containers, or the possession thereof without written permission of the manufacturer, by any junk dealer or dealer in casks, barrels, kegs boxes, steel cylinders, tanks, flasks, accumulators or other similar containers, the same being duly marked or stamped and registered as herein provided, shall give rise to a prima facie presumption that such use or possession is unlawful. The above-quoted provisions grant protection to a qualified manufacturer who successfully registered with the Philippine Patent Office its duly stamped or marked bottles, boxes, casks and other similar containers. The mere use of registered bottles or containers without the written consent of the manufacturer is prohibited, the only 10 exceptions being when they are used as containers for "sisi," bagoong," "patis" and similar native products. It is an admitted fact that herein petitioner Cagayan buys from junk dealers and retailers bottles which bear the marks or names La Tondea Inc." and "Ginebra San Miguel" and uses them as containers for its own liquor products. The contention of Cagayan that the aforementioned bottles without the words "property of" indicated thereon are not the registered bottles of LTI, since they do not conform with the statement or description in the supporting affidavits attached to the original registration certificate and renewal, is untenable. Republic Act No. 623 which governs the registration of marked bottles and containers merely requires that the bottles, in order to be eligible for registration, must be stamped or marked with the names of the manufacturers or the names of their principals or products, or other marks of ownership. No drawings or labels are required but, instead, two photographs of the container, duly signed by the applicant, showing clearly and legibly the names

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and other marks of ownership sought to be registered and a bottle showing the name or other mark or 11 ownership, irremovably stamped or marked, shall be submitted. The term "Name or Other Mark of Ownership" means the name of the applicant or the name of his principal, or of the product, or other mark of ownership. The second set of bottles of LTI without the words "property of" substantially complied with the requirements of Republic Act No. 623, as amended, since they bear the name of the principal, La Tondea Inc., and of its product, Ginebra San Miguel. The omitted words "property of" are not of such vital indispensability such that the omission thereof will remove the bottles from the protection of the law. The owner of a trade-mark or trade-name, and in this case the marked containers, does not abandon it by 13 making minor modifications in the mark or name itself. With much more reason will this be true where what is involved is the mere omission of the words "property of" since even without said words the ownership of the bottles is easily Identifiable. The words "La Tondea Inc." and "Ginebra San Miguel" stamped on the bottles, even without the words "property of," are sufficient notice to the public that those bottles so marked are owned by LTI. The claim of petitioner that hard liquor is not included under the term "other lawful beverages" as provided in Section I of Republic Act No. 623, as amended by Republic Act No. 5700, is without merit. The title of the law itself, which reads " An Act to Regulate the Use of Duly Stamped or Marked Bottles, Boxes, Casks, Kegs, Barrels and Other Similar Containers" clearly shows the legislative intent to give protection to all marked bottles and containers of all lawful beverages regardless of the nature of their contents. The words "other lawful beverages" is used in its general sense, referring to all beverages not prohibited by law. Beverage is defined as a liquor or 14 liquid for drinking. Hard liquor, although regulated, is not prohibited by law, hence it is within the purview and coverage of Republic Act No. 623, as amended. Republic Act No. 623, as amended, has for its purpose the protection of the health of the general public and the prevention of the spread of contagious diseases. It further seeks to safeguard the property rights of an important 15 16 sector of Philippine industry. As held by this Court in Destileria Ayala, Inc. vs. Tan Tay & Co., the purpose of then Act 3070, was to afford a person a means of Identifying the containers he uses in the manufacture, preservation, packing or sale of his products so that he may secure their registration with the Bureau of Commerce and Industry and thus prevent other persons from using them. Said Act 3070 was substantially 17 reenacted as Republic Act No. 623. The proposition that Republic Act No. 623, as amended, protects only the containers of the soft drinks enumerated by petitioner and those similar thereto, is unwarranted and specious. The rule of ejusdem generiscannot be applied in this case. To limit the coverage of the law only to those enumerated or of the same kind or class as those specifically mentioned will defeat the very purpose of the law. Such rule of ejusdem generis is to be resorted to only for the purpose of determining what the intent of the legislature was in enacting the law. If that intent clearly appears from other parts of the law, and such intent thus clearly manifested is contrary to the result which would be reached by the appreciation of the rule of ejusdem generis, the latter must 18 give way. Moreover, the above conclusions are supported by the fact that the Philippine Patent Office, which is the proper and competent government agency vested with the authority to enforce and implement Republic Act No. 623, registered the bottles of respondent LTI as containers for gin and issued in its name a certificate of registration with the following findings: It appearing, upon due examination that the applicant is entitled to have the said MARKS OR NAMES registered under R.A. No. 623, the said marks or names have been duly registered this day in the PATENT OFFICE under 19 the said Act, for gin, Ginebra San Miguel. While executive construction is not necessarily binding upon the courts, it is entitled to great weight and consideration. The reason for this is that such construction comes from the particular branch of government 20 called upon to implement the particular law involved.
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Just as impuissant is petitioners contention that respondent court erred in holding that there is no need for LTI to display the words "Reg Phil. Pat. Off." in order to succeed in its injunction suit against Cagayan for the illegal use of the bottles. To repeat, Republic Act No. 623 governs the registration of marked bottles and containers and merely requires that the bottles and/or containers be marked or stamped by the names of the manufacturer or the names of their principals or products or other marks of ownership. The owner upon registration of its marked bottles, is vested by law with an exclusive right to use the same to the exclusion of others, except as a container for native products. A violation of said right gives use to a cause of action against the violator or infringer. While Republic Act No. 623, as amended, provides for a criminal action in case of violation, a civil action for damages is proper under Article 20 of the Civil Code which provides that every person who, contrary to law, wilfully or negligently causes damage to another, shall indemnify the latter for the same. This particular provision of the Civil Case was clearly meant to complement all legal provisions which may have inadvertently failed to provide for indemnification or reparation of damages when proper or called for. In the language of the Code Commission "(t)he foregoing rule pervades the entire legal system, and renders it impossible that a person who suffers damage because another has violated some legal provisions, should find himself without 21 relief." Moreover, under Section 23 of Republic Act No. 166, as amended, a person entitled to the exclusive use of a registered mark or tradename may recover damages in a civil action from any person who infringes his rights. He may also, upon proper showing, be granted injunction. It is true that the aforesaid law on trademarks provides: SEC. 21. Requirements of notice of registration of trade-mark.-The registrant of a trade-mark, heretofore registered or registered under the provisions of this Act, shall give notice that his mark is registered by displaying with the same as used the words 'Registered in the Philippines Patent Office' or 'Reg Phil. Pat. Off.'; and in any suit for infringement under this Act by a registrant failing so to mark the goods bearing the registered trade-mark, no damages shall be recovered under the provisions of this Act, unless the defendant has actual notice of the registration. Even assuming that said provision is applicable in this case, the failure of LTI to make said marking will not bar civil action against petitioner Cagayan. The aforesaid requirement is not a condition sine qua non for filing of a civil action against the infringer for other reliefs to which the plaintiff may be entitled. The failure to give notice of registration will not deprive the aggrieved party of a cause of action against the infringer but, at the most, such failure may bar recovery of damages but only under the provisions of Republic Act No. 166. However, in this case an award of damages to LTI is ineluctably called for. Petitioner cannot claim good faith. The record shows that it had actual knowledge that the bottles with the blown-in marks "La Tondea Inc." and "Ginebra San Miguel" are duly registered. In Civil Case No. 102859 of the Court of First Instance of Manila, entitled "La Tondea Inc. versus Diego Lim, doing business under the name and style 'Cagayan Valley Distillery,' " a decision was rendered in favor of plaintiff therein on the basis of the admission and/or acknowledgment made by the defendant that the bottles marked only with the words "La Tondea Inc." and "Ginebra San Miguel" are 22 registered bottles of LTI. Petitioner cannot avoid the effect of the admission and/or acknowledgment made by Diego Lim in the said case. While a corporation is an entity separate and distinct from its stock-holders and from other corporations with which it may be connected, where the discreteness of its personality is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons, or in the case of two corporations, merge them into one. When the corporation is the mere alter ego or business conduit 23 of a person, it may be disregaded. Petitioner's claim that it is separate and distinct from the former Cagayan Valley Distillery is belied by the evidence on record. The following facts warrant the conclusion that petitioner, as a corporate entity, and Cagayan Valley Distillery are one and the same. to wit: (1) petitioner is being managed by Rogelio Lim, the son 24 of Diego Lim, the owner and manager of Cagayan Valley Distellery; (2) it is a family corporation; (3) it is an 25 admitted fact that before petitioner was incorporated it was under a single proprietorship; (4) petitioner is

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engaged in the same business as Cagayan Valley Distillery, the manufacture of wines and liquors; and (5) the factory of petitioner is located in the same place as the factory of the former Cagayan Valley Distillery. It is thus clear that herein petitioner is a mere continuation and successor of Cagayan Valley Distillery. It is likewise indubitable that the admission made in the former case, as earlier explained, is binding on it as cogent proof that even before the filing of this case it had actual knowledge that the bottles in dispute were registered containers of LTI As held in La Campana Coffee Factory, Inc., et al. vs. Kaisahan Ng Mga Manggagawa sa La 26 Campana (KKM), et al., where the main purpose in forming the corporation was to evade one's subsidiary liability for damages in a criminal case, the corporation may not be heard to say that it has a personality separate and distinct from its members, because to allow it to do so would be to sanction the use of the fiction of corporate entity as a shield to further an end subversive of justice. Anent the several motions of private respondent LTI to have petitioner cited for contempt, we reject the argument of petitioner that an appeal from a verdict of acquittal in a contempt, proceeding constitutes double jeopardy. A 27 failure to do something ordered by the court for the benefit of a party constitutes civil contempt. As we held inConverse Rubber Corporation vs. Jacinto Rubber & Plastics Co., Inc.: ...True it is that generally, contempt proceedings are characterized as criminal in nature, but the more accurate juridical concept is that contempt proceedings may actually be either civil or criminal, even if the distinction between one and the other may be so thin as to be almost imperceptible. But it does exist in law. It is criminal when the purpose is to vindicate the authority of the court and protect its outraged dignity. It is civil when there is failure to do something ordered by a court to be done for the benefit of a party (3 Moran Rules of Court, pp. 343344, 1970 ed.; see also Perkins vs. Director of Prisons, 58 Phil. 272; Harden vs. Director of Prisons, 81 Phil. 741.) And with this distinction in mind, the fact that the injunction in the instant case is manifestly for the benefit of plaintiffs makes of the contempt herein involved civil, not criminal. Accordingly, the conclusion is inevitable that appellees have been virtually found by the trial court guilty of civil contempt, not criminal contempt, hence, the 28 rule on double jeopardy may not be invoked. The contempt involved in this case is civil and constructive in nature, it having arisen from the act of Cagayan in violating the writ of preliminary injunction of the lower court which clearly defined the forbidden act, to wit: NOW THEREFORE, pending the resolution of this case by the court, you are enjoined from using the 350 c.c. white flint bottles with the marks La Tondea Inc.,' and 'Ginebra San Miguel' blown-in or stamped into the bottles 19 as containers for the defendant's products. On this incident, two considerations must be borne in mind. Firstly, an injunction duly issued must be obeyed, however erroneous the action of the court may be, until its decision is overruled by itself or by a higher 30 court. Secondly, the American rule that the power to judge a contempt rests exclusively with the court contemned does not apply in this Jurisdiction. The provision of the present Section 4, Rule 71 of the Rules of Court as to where the charge may be filed is permissive in nature and is merely declaratory of the inherent power of courts to punish contumacious conduct. Said rules do not extend to the determination of the jurisdiction of 31 Philippine courts. In appropriate case therefore, this Court may, in the interest of expedient justice, impose sanctions on contemners of the lower courts. Section 3 of Republic Act No. 623, as amended, creates a prima facie presumption against Cagayan for its unlawful use of the bottles registered in the name of LTI Corollarily, the writ of injunction directing petitioner to desist from using the subject bottles was properly issued by the trial court. Hence, said writ could not be simply disregarded by Cagayan without adducing proof sufficient to overcome the aforesaid presumption. Also, based on the findings of respondent court, and the records before us being sufficient for arbitrament without remanding the incident to the court a quo petitioner can be adjudged guilty of contempt and imposed a sanction in this appeal since it is a cherished rule of procedure for this Court to always strive to settle the entire controversy in a 32 single proceeding, We so impose such penalty concordant with the preservative principle and as demanded by the respect due the orders, writs and processes of the courts of justice.

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WHEREFORE, judgment is hereby rendered DENYING the petition in this case and AFFIRMING the decision of respondent Court of Appeals. Petitioner is hereby declared in contempt of court and ORDERED to pay a fine of One Thousand Pesos (P1,000.00), with costs. SO ORDERED. Paras, Padilla and Sarmiento, JJ., concur. Melencio-Herrera (Chairperson), J., is on leave. FIRST DIVISION [G.R. No. 120961. October 2, 1997] DISTILLERIA WASHINGTON, INC. or WASHINGTON DISTILLERY, INC., petitioner vs LA TONDEA DISTILLERS, INC. and THE HONORABLE COURT OF APPEALS, respondents. RESOLUTION KAPUNAN, J.: On October 17, 1996, this court rendered a decision in the above-entitled case, the dispositive portion of which reads, as follows: WHEREFORE, the decision of the appellate court is MODIFIED by ordering LTDI to pay petitioner just compensation for the seized bottles. Instead, however, of remanding the case to the Court of Appeals to receive evidence on, and thereafter resolve, the assessment thereof, this Court accepts and accordingly adopts the quantification of P18,157.00 made the the trial court. No costs. With the deanial of the Motion for Reconsideration ,petitioner sought a second reconsideration with leave of court of our decision raising new issues, to wit: 1.01.d. The Supreme Court, in its Decision of October 17, 1996, modified the decision of the Court of Appeals. It held that ownership of the bottles has passed to the consumer, ultimately, to Washington Distillery, Inc., thereby upholding the finding of the Regional Trial Court and reversing the ruling or the Court of Appeals; nonetheless, while ruling that the ownership over the bottles had passed to Washington Distillery, Inc.,it held that Washington Distillery, Inc. may not use the bottles because of the trademark protection to the registrant (La Tondea Distillers, Inc.). Instead of directing the return to the bottles to Washington Distillery, Inc., the Court ordered La Tondea Distillers, Inc. to pay Washington Distillery, Inc. the amount of P18,157.00. 2.00. The decision of the Supreme Court itself therefore raises new issues. As owner of the bottles, should not Washington Distillery, Inc. be given possession of the bottles? Would its use of the bottles violate the trademark protection of the registrant, La Tondea Distillers, Inc. afforded by R.A. 623, as amended? 3.00. The Motion for Reconsideration of the petitioner Washington Distillery, Inc. is addressed to these new issues. They had not been previously addressed by the parties. They could not have been previously passed upon. It could hardly be said that no substantial argument, not previously raised, is made in the Motion for Reconsideration to warrant a modification of the Courts decision. On May 21, 1997, the Court resolved to set for hearing the motion for reconsideration on May 28, 1997 for its judicious disposition. Thereafter, the parties as required by the Court filed their simultaneous memoranda to expound and lay particular emphasis on the provision of Section 5 of R.A. 623 which proscribes the filing of an action against any person to whom registered manufacturer, bottler or seller has transferred by way of sale, any to the containers. The parties complied.

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A reexamination of the arguments raised by petitioner in its Second Motion for Reconsideration filed on February 13, 1997, in the hearing on May 28, 1997 and in the subsequent memorandum filed thereafter, convinces us the merits of its position. To recall, La Tondea Distillers, Inc. (La Tondea, for short) filed before the Regional Trial Court for the recovery, under its claim of ownership, of possession or replevin against Distilleria Washington, Inc. or Washington Distillery, Inc. (Distilleria Washington) of 18,157 empty 350 c.c. white flint bottles bearing the blown-in marks of La Tondea Inc. and Ginebra San Miguel, averring that Distilleria Washington was using the bottles for its own Gin Seven products without the consent of Distilleria Washington in violation of Republic Act 623. The trial court in its decision dismissed the complaint, upholding Distilleria Washingtons contention that a purchaser of liquor pays only a single price for the liquor and the bottle and is not required to return the bottle at any time. The Court of Appeals reversed the trial courts decision, ruling that under Republic Act 623, the use of marked bottles by any person other than the manufacturer, bottler or seller, without the latters written consent, is unlawful. It emphasized that the marks of La Tondea s ownership stamped or blown-in to the bottles are sufficient notice to the public that the bottles are La Tondeas property; hence, Distilleria Washington cannot be considered a purchaser on good faith. While our decision of October 17, 1996 affirmed with modification the Court of Appeals decision, we at least implicitly acknowledge that there was a valid transfer of the bottles to Distilleria Washington, except that its possession of the bottles without the written consent of La Tondea gives rise to a prima facie presumption of illegal use under R.A. 623. In seeking reconsideration of the decision of this Court, petitioner advances, among others, the following arguments: (1) If, as the Court found in its decision of October 17, 1996, Distilleria Washington had acquired ownership of the bottles, La Tondeas suit for replevin, where the sole issue is possession, should be denied. (2) Since the right of ownership over the bottles gives rise, accordiing to the Courts own language, to its own elements of jus posidendi, jus utendi, jus fruendi, jus disponendi, and jus abutendi, along with the applicable jus lex, to allow La Tondea to keep the bottles is to deny Distilleria Washington, the very attributes or elements of its ownership. (3) There is no showing--and it cannot be assumed--that if Distilleria Washington would have possession of the bottles, it will exercise the other attributes of ownership, along with the applicable jus lex, over the marks of ownership stamped or marked on the bottles. (4) The provision in Sec. 3 of Republic Act 623 to the effect that the use by any person other than the registered manufacturer, bottler or seller without the written permission of the latter of any such bottle, etc. shall give rise to a prima facie presumption that such use or possession is unlawful, does not arise in the instant case because the Court has itself found Section 5 of the same law applicable. Additionally, petitioner argues with persuasion the following points in its memorandum: (5) It is absurd to hold the buyer such as Distilleria Washington, liable for the possession and use of its own bottles without the written consent of La Tondea who is no longer the owner thereof and for which it has received payment in full. (6) To hold the buyer liable under Sections 2 and 3 would grant La Tondea the extraordinary right not only of possession and use of the bottles which it has sold and no longer owns, but also to sell said bottles ad infinitum, thus enriching itself unjustly.

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(7) It is manifestly unjust and unconscionable that millions of buyers of Ginebra San Miguel, who pay not only for gin but also for the bottles containing it should run the risk of criminal prosecution by the mere fact of possession of the empty bottles after consuming the liquor. Distilleria Washingtons motion raises the novel issue that if, as we ruled in our decision of October 17, 1996, petitioner became the owner over the bottles seized from it by replevin, then it has the right to their possession and use as attributes of ownership, unless their use violates the trademark or incorporeal rights accorded private respondent by R.A 623 which has not really been established in this case. As pointed out in our decision, Parenthetically, petitioner is not here being charged with violation of Sec. 2 of R.A. 623 or the Trademark Law. The instant case is one for replevin (manual delivery) where the claimant must be able to show convincingly that he is either the owner or clearly entitled to the possession of the object sought to be recovered. Replevin is a possessory action. The gist of which focuses on the right of possession that in turn, is dependent on a legal basis that, not infrequently, looks to the ownership of the object sought to be replevied. Since replevin as a possessory action is dependent upon ownership, it is relevant to ask: Did La Tondea Distillers, Inc. transfer ownership of its marked bottles or containers when it sold its products in the market? Were the marked bottles or containers part of the products sold to the public? In our decision sought to be reconsidered, we categorically answered the question in the affirmative in this wise: R.A. No. 623 does not disallow the sale or transfer of ownership of the marked bottles or containers. In fact, the contrary is implicit in the law thus: SEC. 5. x x x. SEC. 6. x x x Scarcely disputed are certain and specific industry practices in the sale of gin. The manufacturer sells the product in marked containers, through dealers, to the public in supermarkets, grocery shops, retail stores and other sales outlets. The buyer takes the item; he is neither required to return the bottle nor required to make a deposit to assure its return to the seller. He could return the bottle and get a refund. A number of bottles at times find their way to commercial users. It cannot be gainsaid that ownership of the containers does pass on the consumer albeit subject to the statutory limitations on the use of the registered containers and to the trademark rights of the registrant. The statement in Section 5 of R.A. 623 to the effect that the sale of beverage contained the said containers shall not include the sale of the containers unless specifically so provided is not a rule of proscription. It is a rule of construction that, in keeping with the spirit and intent of the law, establishes at best a presumption (of non-conveyance of the container) and which by no means can be taken to be either interdictive or conclusive in character. Upon the other hand, LTDIs sales invoice, stipulating that the sale does not include the bottles with the blown-in marks of ownership of La Tondea Distillers, cannot affect those who are not privies thereto. In plain terms, therefore, La Tondea not only sold its gin products but also the marked bottles or containers, as well. And when these products were transferred by way of sale, then ownership over the bottles and all its attributes (jus utendi, jus abutendi, just fruendi, jus disponendi) passed to the buyer. It necessarily follows that the transferee has the right to possession of the bottles unless he uses them in violation of the original owners registered or incorporeal rights. After practically saying that La Tondea has surrendered ownership and consequently, possession of the marked bottles or container, it is incongrous and, certainly, it does not seem fair and just to still allow La Tondea, citing the prima facie presumption of illegal use under Sec. 3 of R.A. 623., to retain possession of the seized bottles by simply requiring payment of just compensation to petitioner.

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The pertinent provisions of R.A. 623 are as follows: SEC. 2. It shall be unlawful for any person, without the written consent of the manufacturer, bottler, or seller (underscoring supplied) who has successfully registered the marks of ownership in accordance with the provisions of the next preceding section, to fill such bottles, boxes, kegs, barrels, steel cylinders, tanks, flasks, accumulators, or other similar containers so marked or stamped, for the purpose of sale, or to sell, dispose of, buy or traffic in, or wantonly destroy the same, whether filled or not to use the same for drinking vessels or glasses or drain pipes, foundation pipers, for any other purpose than that registered by the manufacturer, bottler or seller. Any violation of this section shall be punished by a fine of not more than one thousand pesos or imprisonment of not more than one year or both. SEC. 3. The use by any person other than the registered manufacturer, bottler or seller, without written permission of the latter (underscoring supplied) of any such bottle, cask, barrel, keg, box, steel cylinders, tanks, flask, accumulators, or other similar containers, or the possession thereof without written permission of the manufacturer, by any junk dealer or dealer in casks, barrels, keg, boxes, steel cylinders, tanks, flask, accumulators or other similar containers, the same being duly marked or stamped and registered as herein provided, shall give rise to a prima facie presumption that such use or possession is unlawful. xxx SEC. 5. No action shall be brought under this Act (underscoring supplied) against any person to whom the registered manufacturer, bottler or seller, has transferred by way of sale, (underscoring supplied) any of the containers herein referred to, but the sale of the beverage contained in the said containers shall not include the sale of the containers unless specifically so provided. In resolving that petitioner is the owner of the bottles, this Court applied Section 5 of R.A. 623; and in withholding possession of the bottles from the petitioner and in concluding that use or possession thereof without the written permission of the registered owner would constitute prima facie presumption of illegal use, this Court invoked Sections 2 and 3 of the same law. A careful reading of Sections 2, 3 and 5 of R.A. 623 would lead to the conclusion that they contemplate situations separate and distinct from each other. Section 2 prohibits any person from using, selling or otherwise disposing of registered containers without the written consent of the registrant. Such rights belong exclusively to the registrant. Under Section 3, mere possession of such registered containers without the written consent of the registrant is prima facie presumed unlawful. It appears - and this is the critical point - that Sections 2 and 3 apply only when the filling up of the bottle or the use of the bottle is without the written permission of the registered manufacturer, bottler, or seller, who has registered the marks of ownership of the bottles. It is thus implicit that Sections 2 and 3 apply only when the registered manufacturer, bottler, or seller retain ownership of the bottles. Upon the other hand, when the bottles have been transferred by way of sale, Section 5 applies, thereby precluding the institution of any action under this Act, meaning to say, including any action under Sections 2 and 3. The general rule on ownership, therefore, must apply and petitioner be allowed to enjoy all the rights of an owner in regard the bottles in question, to wit: the jus utendi or the right to receive from the thing what it produces; the jus abutendi or the right to consume the thing by its use; the jus disponendi or the power of the owner to alienate, encumber, transform and even destroy the thing owned; and the jus vindicandi or the right to exclude from the possession of the thing owned any other person to whom the owner has not transmitted such thing. What is proscribed is the use of the bottles in infringement of anothers trademark or incorporeal rights. Since the Court has found that the bottles have been transferred by way of sale then, La Tondea has relinquished all its proprietary rights over the bottles in favor of Distilleria Washington who has obtained them in due course. Now as owner, it can exercise all attributes of ownership over the bottles. This is the import of the decision that La Tondea had transferred ownership over its marked bottles or containers when it sold its gin products to the public. While others may argue that Section 5 is applicable only to the immediate transferee of

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the marked bottles or container, this matter is best discussed where the applicability of Sec. 5, R.A. 623 is squarely raised. It must be recalled, however, that this is a case of replevin, not a violation of the "trademark protection of the registrant" under R.A. 623 or of the Trademark Law. A query may be posed: Would use of the bottles constitute a violation of the incorporeal rights of La Tondea Distillers, Inc. over its marks of ownership embossed on the bottles? While apparently relevant, it would be improper and premature for this Court to rule on the point because: First, because violation of the marks of ownership of La Tondea Distillers, Inc, on the bottles has not been put in issue, the parties did not have the opportunity to ventilate their respective positions on the matter. Thus, a ruling would be violative of due process. Second, the question calls for a factual investigation which this Court has generally not taken upon itself to undertake because it is not a trier of facts; and Third, disregarding the above, the facts before this Court do not provide a sufficient basis for a fair and intelligent resolution of the question. Moreover, our decision added that the Court sees no other insistence to keep the bottles, except for such continued use. This, to our mind, is rather speculative at this point; something which was never touched upon in the proceedings below. We cannot also be oblivious of the fact that if La Tondeas thesis that every possession of the bottles without the requisite written consent is illegal, thousands upon thousands of buyers of Ginebra San Miguel would be exposed to criminal prosecution by the mere fact of possession of the empty bottles after consuming the content. One last point. It may not be amiss to state that La Tondea is a big and established distillery which already has captured a big share of the gin market, estimated to be 90%. Distilleria Washington, on the other hand, together with other small distillers - around 40 in number; admittedly concedes that it cannot fight this giant but only asks a share of the market. It cannot afford to manufacture its own bottles and just have to rely on recycled bottles to sell its products. To disallow the use of these recycled products would necessarily deprive it a share of the market which La Tondea seeks to monopolize. We recognize the role of large industry in the growth of our nascent economy. However, small industries likewise play a vital role in economic growth, playing a significant part in the success of such tiger economies as Korea, Taiwan and Thailand. Industries, big and small, should adopt symbiotic relationship, not the animosity of Goliath and David. Our holding today merely recognizes that in the countrys march toward economic development and independence, it is essential that a balance protecting small industries and large scale businesses be maintained. IN VIEW OF THE FOREGOING, the Court RESOLVED to RECONSIDER its Decision promulgated on October 17, 1996 and render another judgment REVERSING in toto the Decision of the Court of Appeals promulgated on January 11, 1995 and its Resolution of June 23, 1995. The decision of the Regional Trial Court of December 3, 1991 is REINSTATED. SO ORDERED.

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FIRST DIVISION [G.R. No. 123248. October 16, 1997] TWIN ACE HOLDINGS CORPORATION, petitioner, vs. COURT OF APPEALS and LORENZANA FOOD CORPORATION, respondents. DECISION BELLOSILLO, J.: TWIN ACE HOLDINGS CORPORATION (TWIN ACE) is a manufacturer, distiller and bottler of distillery products, e.g., rhum, gin, brandy, whiskey, vodka, liquor and cordial under the name and style of Tanduay Distillers, Inc. (TANDUAY). Lorenzana Food Corporation (LORENZANA), on the other hand, manufactures and exports processed foods and other related products, e.g., patis, toyo, bagoong, vinegar and other food [1] seasonings. On 16 January 1992 TWIN ACE filed a complaint for replevin to recover three hundred eighty thousand (380,000) bottles of 350 ml., 375 ml. and 750 ml. allegedly owned by it but detained and used by [2] LORENZANA as containers for native products without its express permission, in violation of RA No. 623. This law prohibits the use of registered bottles and other containers for any purpose other than that for which they were registered without the express permission of the owner. LORENZANA moved to dismiss the complaint on the ground that RA No. 623 could not be invoked by TWIN ACE because the law contemplated containers of non-alcoholic beverages only. But, assuming arguendo that the law applied in TWIN ACE's favor, the right of LORENZANA to use the bottles as [3] containers for its patis and other native products was expressly sanctioned by Sec. 6 of the same law and [4] upheld by this Court in Cagayan Valley Enterprises, Inc. v. Court of Appeals. On 16 March 1992 the Regional Trial Court of Manila dismissed the complaint. TWIN ACE appealed to respondent Court of Appeals which affirmed the action of the trial court. In its Decision dated 22 December [6] 1995 respondent court ruled that while bottles and containers of alcoholic beverages were indeed covered within the protective mantle of RA No. 623, as correctly argued by TWIN ACE, nevertheless the Supreme Court in Cagayan Valley Enterprises, Inc. v. Court of Appeals expressly recognized the exception granted in Sec. 6 thereof to those who used the bottles as containers for sisi, bagoong, patis and other native products. Hence, no injunctive relief and damages could be obtained against LORENZANA for exercising what was precisely allowed by the law. Petitioner TWIN ACE contends that Sec. 6 notwithstanding, respondent LORENZANA is obliged to pay just compensation for the use of the subject bottles because Sec. 6 exempts the user from criminal sanction only but does not shield him from civil liability arising from the use of the registered bottles without the express consent of the registered owner. Such civil liability arises from the fact that Sec. 5 of RA No 623 expressly reserves for the registered owner the ownership of the containers notwithstanding the sale of the beverage contained therein. Private respondent, on the other hand, contends that petitioner's bottles used as containers for hard liquor are not protected by RA No. 623. But even assuming the applicability of the law, LORENZANA invokes the exemption granted in Sec. 6 thereof. We deny the petition. The question of whether registered containers of hard liquor such as rhum, gin, brandy and the like are protected by RA No. 623 has already been settled inCagayan Valley Enterprises, Inc. v. [7] Court of Appeals. In that case, the Court dealt squarely with the issue and ruled in the affirmative reasoning that hard liquor, although regulated, is not prohibited by law, hence, still within the purview of the phrase "other lawful beverages" protected by RA No. 623, as amended. Consequently petitioner therein Cagayan Valley Enterprises, Inc. was enjoined from using the 350 ml. white flint bottles of La Tondea, Inc., with the marks of ownership "La Tondea, Inc." and "Ginebra San Miguel" for its own liquor products. But while we adopt the foregoing precedent and rule in accordance therewith, we will not decide this case in favor of petitioner because it is quite clear that respondent falls within the exemption granted in Sec. 6 which states: "The provisions of this Act shall not be interpreted as prohibiting the use of bottles as containers for "sisi," "bagoong," "patis," and similar native products."
[5]

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Petitioner itself alleges that respondent LORENZANA uses the subject 350 ml., 375 ml. and 750 ml. bottles as containers for processed foods and other related products such aspatis, toyo, bagoong, vinegar and other food seasonings. Hence, Sec. 6 squarely applies in private respondent's favor. Obviously, the contention of TWIN ACE that the exemption refers only to criminal liability but not to civil liability is without merit. It is inconceivable that an act specifically allowed by law, in other words legal, can be the subject of injunctive relief and damages. Besides, the interpretation offered by petitioner defeats the very purpose for which the exemption was provided. Republic Act No. 623, "An Act to Regulate the Use of Duly Stamped or Marked Bottles, Boxes, Casks, [8] Kegs, Barrels and Other Similar Containers," as amended by RA No. 5700, was meant to protect the intellectual property rights of the registrants of the containers and prevent unfair trade practices and fraud on the [9] public. However, the exemption granted in Sec. 6 thereof was deemed extremely necessary to provide assistance and incentive to the backyard, cottage and small-scale manufacturers of indigenous native products such as patis, sisi and toyo who do not have the capital to buy brand new bottles as containers nor afford to pass [10] the added cost to the majority of poor Filipinos who use the products as their daily condiments or viands. If the contention of petitioner is accepted, i.e., to construe the exemption as to apply to criminal liability only but not to civil liability, the very purpose for which the exemption was granted will be defeated. None of the small-scale manufacturers of the indigenous native products protected would possibly wish to use the registered bottles if they are vulnerable to civil suits. The effect is a virtual elimination of the clear and unqualified exemption [11] embodied in Sec. 6. It is worthy to note that House Bill No. 20585 was completely rejected because it sought to expressly and directly eliminate that which petitioner indirectly proposes to do with this petition. Petitioner cannot seek refuge in Sec. 5 of RA No. 623 to support its claim of continuing ownership over [13] the subject bottles. In United States v. Manuel we held that since the purchaser at his discretion could either retain or return the bottles, the transaction must be regarded as a sale of the bottles when the purchaser actually exercised that discretion and decided not to return them to the vendor. We also take judicial notice of the [14] standard practice today that the cost of the container is included in the selling price of the product such that the buyer of liquor or any such product from any store is not required to return the bottle nor is the liquor placed [15] in a plastic container that possession of the bottle is retained by the store. WHEREFORE, the questioned decision and resolution of the Court of Appeals are AFFIRMED. Costs against petitioner. SO ORDERED. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. 132451 December 17, 1999 CONGRESSMAN ENRIQUE T. GARCIA, petitioner, vs. HON. RENATO C. CORONA, in his capacity as the Executive Secretary, HON. FRANCISCO VIRAY, in his capacity as the Secretary of Energy, CALTEX PHILIPPINES INC., PILIPINAS SHELL PETROLEUM CORP. and PETRON CORP., respondents. YNARES-SANTIAGO, J.: On November 5, 1997, this Court in Tatad v. Secretary of the Department of Energy and Lagman, et 1 al., v. Hon.Ruben Torres, et al., declared Republic Act No. 8180, entitled "An Act Deregulating the Downstream Oil Industry and For Other Purposes", unconstitutional, and its implementing Executive Order No. 392 void.
[12]

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R.A. 8180 was struck down as invalid because three key provisions intended to promote free competition were shown to achieve the opposite result. More specifically, this Court ruled that its provisions on tariff differential, stocking of inventories, and predatory pricing inhibit fair competition, encourage monopolistic power, and interfere with the free interaction of the market forces. While R.A. 8180 contained a separability clause, it was declared unconstitutional in its entirety since the three (3) offending provisions so permeated the law that they were so intimately the esse of the law. Thus, the whole statute had to be invalidated. As a result of the Tatad decision, Congress enacted Republic Act No. 8479, a new deregulation law without the offending provisions of the earlier law. Petitioner Enrique T. Garcia, a member of Congress, has now brought this petition seeking to declare Section 19 thereof, which sets the time of full deregulation, unconstitutional. After failing in his attempts to have Congress incorporate in the law the economic theory he espouses, petitioner now asks us, in the name of upholding the Constitution, to undo a violation which he claims Congress has committed. The assailed Section 19 of R.A. 8479 states in full: Sec. 19. Start of Full Deregulation. Full deregulation of the Industry shall start five (5) months following the effectivity of this Act: Provided, however, That when the public interest so requires, the President may accelerate the start of full deregulation upon the recommendation of the DOE and the Department of Finance (DOF) when the prices of crude oil and petroleum products in the world market are declining and the value of the peso in relation to the US dollar is stable, taking into account relevant trends and prospects; Provided, further, That the foregoing provision notwithstanding, the five (5)-month Transition Phase shall continue to apply to LPG, regular gasoline and kerosene as socially-sensitive petroleum products and said petroleum products shall be covered by the automatic pricing mechanism during the said period. Upon the implementation of full deregulation as provided herein, the Transition Phase is deemed terminated and the following laws are repealed: a) Republic Act No. 6173, as amended; b) Section 5 of Executive Order No. 172, as amended; c) Letter of Instruction No. 1431, dated October 15, 1984; d) Letter of Instruction No. 1441, dated November 20, 1984, as amended; e) Letter of Instruction No. 1460, dated May 9, 1985; f) Presidential Decree No. 1889; and g) Presidential Decree No. 1956, as amended by Executive Order No. 137: Provided, however, That in case full deregulation is started by the President in the exercise of the authority provided in this Section, the foregoing laws shall continue to be in force and effect with respect to LPG, regular gasoline and kerosene for the rest of the five (5)-month period. Petitioner contends that Section 19 of R.A. 8479, which prescribes the period for the removal of price control on gasoline and other finished products and for the full deregulation of the local downstream oil industry, is patently contrary to public interest and therefore unconstitutional because within the short span of five months, the market is still dominated and controlled by an oligopoly of the three (3) private respondents, namely, Shell, Caltex and Petron.

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The objective of the petition is deceptively simple. It states that if the constitutional mandate against monopolies and combinations in restraint of 2 trade is to be obeyed, there should be indefinite and open-ended price controls on gasoline and other oil products for as long as necessary. This will allegedly prevent the "Big 3" Shell, Caltex and Petron from price-fixing and overpricing. Petitioner calls the indefinite retention of price controls as "partial deregulation". The grounds relied upon in the petition are: A. Sec. 19 OF R.A. NO. 8479 WHICH PROVIDES FOR FULL DEREGULATION FIVE (5) MONTHS OR EARLIER FOLLOWING THE EFFECTIVITY OF THE LAW, IS GLARINGLY PRO-OLIGOPOLY, ANTI-COMPETITION AND ANTI-PEOPLE, AND IS THEREFORE PATENTLY UNCONSTITUTIONAL FOR BEING IN GROSS AND CYNICAL CONTRAVENTION OF THE CONSTITUTIONAL POLICY AND COMMAND EMBODIED IN ARTCLE XII, SECTION 19 OF THE 1987 CONSTITUTION AGAINST MONOPOLIES AND COMBINATIONS IN RESTRAINT OF TRADE. B. SAID SECTION 19 OF R.A. No. 8479 IS GLARINGLY PRO-OLIGOPOLY, ANTI-COMPETITION AND ANTIPEOPLE, FOR THE FURTHER REASON THAT IT PALPABLY AND CYNICALLY VIOLATES THE VERY OBJECTIVE AND PURPOSE OF R.A. NO. 8479, WHICH IS TO ENSURE A TRULY COMPETITIVE MARKET UNDER A REGIME OF FAIR PRICES. C. SAID SECTION 19 OF R.A. No. 8479, BEING GLARINGLY PRO-OLIGOPOLY, ANTI-COMPETITION AND ANTI-PEOPLE, BEING PATENTLY UNCONSTITUTIONAL AND BEING PALPABLY VIOLATIVE OF THE LAW'S POLICY AND PURPOSE OF ENSURING A TRULY COMPETITIVE MARKET UNDER A REGIME OF FAIR PRICES, IS A VERY GRAVE AND GRIEVOUS ABUSE OF DISCRETION ON THE PART OF THE LEGISLATIVE AND EXECUTIVE BRANCHES OF GOVERNMENT. D. PREMATURE FULL DEREGULATION UNDER SECTION 19 OF R.A. NO. 8479 MAY AND SHOULD THEREFORE BE DECLARED NULL AND VOID EVEN AS THE REST OF ITS PROVISIONS REMAIN IN FORCE, SUCH AS THE TRANSITION PHASE OR PARTIAL DEREGULATION WITH PRICE CONTROLS THAT ENSURES THE PROTECTION OF THE PUBLIC INTEREST BY PREVENTING THE BIG 3 3 OLIGOPOLY'S PRICE-FIXING AND OVERPRICING. The issues involved in the deregulation of the downstream oil industry are of paramount significance. The ramifications, international and local in scope, are complex. The impact on the nation's economy is pervasive and far-reaching. The amounts involved in the oil business are immense. Fluctuations in the supply and price of oil products have a dramatic effect on economic development and public welfare. As pointed out in the Tatad decision, few cases carry a surpassing importance on the daily life of every Filipino. The issues affect everybody from the poorest wage-earners and their families to the richest entrepreneurs, from industrial giants to humble consumers. Our decision in this case is complicated by the unstable oil prices in the world market. Even as this case is pending, the price of OPEC oil is escalating to record levels. We have to emphasize that our decision has nothing to do with worldwide fluctuations in oil prices and the counter-measures of Government each time a new development takes place.

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The most important part of deregulation is freedom from price control. Indeed, the free play of market forces through deregulation and when to implement it represent one option to solve the problems of the oil-consuming public. There are other considerations which may be taken into account such as the reduction of taxes on oil products, the reinstitution of an Oil Price Stabilization Fund, the choice between government subsidies taken from the regular taxpaying public on one hand and the increased costs being shouldered only by users of oil products on the other, and most important, the immediate repeal of the oil deregulation law as wrong policy. Petitioner wants the setting of prices to be done by Government instead of being determined by free market forces. His preference is continued price control with no fixed end in sight. A simple glance at the factors surrounding the present problems besetting the oil industry shows that they are economic in nature. R.A. 8479, the present deregulation law, was enacted to implement Article XII, Section 19 of the Constitution which provides: 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. This is so because the Government believes that deregulation will eventually prevent monopoly. The simplest form of monopoly exists when there is only one seller or producer of a product or service for which there are no substitutes. In its more complex form, monopoly is defined as the joint acquisition or maintenance by members of a conspiracy, formed for that purpose, of the power to control and dominate trade and commerce in a commodity to such an extent that they are able, as a group, to exclude actual or potential competitors from the field, 4 accompanied with the intention and purpose to exercise such power. Where two or three or a few companies act in concert to control market prices and resultant profits, the monopoly is called an oligopoly or cartel. It is a combination in restraint of trade. The perennial shortage of oil supply in the Philippines is exacerbated by the further fact that the importation, refining, and marketing of this precious commodity are in the hands of a cartel, local but made up of foreignowned corporations. Before the start of deregulation, the three private respondents controlled the entire oil industry in the Philippines. It bears reiterating at the outset that the deregulation of the oil industry is a policy determination of the highest 5 order. It is unquestionably a priority program of Government. The Department of Energy Act of 1992 expressly mandates that the development and updating of the existing Philippine energy program "shall include a policy direction towards deregulation of the power and energy industry." Be that as it may, we are not concerned with whether or not there should be deregulation. This is outside our jurisdiction. The judgment on the issue is a settled matter and only Congress can reverse it. Rather, the question that we should address here is are the method and the manner chosen by Government to accomplish its cherished goal offensive to the Constitution? Is indefinite price control in the manner proposed by petitioner the only feasible and legal way to achieve it? Petitioner has taken upon himself a most challenging task. Unquestionably, the direction towards which the nation's efforts at economic and social upliftment should be addressed is a function of Congress and the President. In the exercise of this function, Congress and the President have obviously determined that speedy deregulation is the answer to the acknowledged dominion by oligopolistic forces of the oil industry. Thus, immediately after R.A. 8180 was declared unconstitutional in the Tatad case, Congress took resolute steps to fashion new legislation towards the objective of the earlier law. Invoking the Constitution, petitioner now wants to slow down the process. While the Court respects the firm resolve displayed by Congress and the President, all departments of Government are equally bound by the sovereign will expressed in the commands of the Constitution. There is a need for utmost care if this Court is to faithfully discharge its duties as arbitral guardian of the Constitution. We cannot encroach on the policy functions of the two other great departments of Government. But neither can we

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ignore any overstepping of constitutional limitations. Locating the correct balance between legality and policy, constitutional boundaries and freedom of action, and validity and expedition is this Court's dilemma as it resolves the legitimacy of a Government program aimed at giving every Filipino a more secure, fulfilling and abundant life. Our ruling in Tatad is categorical that the Constitution's Article XII, Section 19, is anti-trust in history and spirit. It espouses competition. We have stated that only competition which is fair can release the creative forces of the market. We ruled that the principle which underlies the constitutional provision is competition. Thus: Sec. 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 section 19, Article XII of our Constitution which cannot be violated by R.A. No. 8180. We subscribe to the observation of Prof. Gellhorn that the objective of anti-trust law is "to assure a competitive economy, based upon the belief that through competition producers will strive to satisfy consumer wants at the lowest price with the sacrifice of the fewest resources. Competition among producers allows consumers to bid for goods and services, and thus matches their desires with society's opportunity costs." He adds with appropriateness that there is a reliance upon "the operation of the "market" system (free enterprise) to decide what shall be produced, how resources shall be allocated in the production process, and to whom the various products will be distributed. The market system relies on the consumer to decide what and how much shall be produced, and on competition, 6 among producers to determine who will manufacture it." In his recital of the antecedent circumstances, petitioner repeats in abbreviated form the factual findings and conclusions which led the Court to declare R.A. 8180 unconstitutional. The foreign oligopoly or cartel formed by respondents Shell, Caltex and Petron, their indulging in price-fixing and overpricing, their blockade tactics which effectively obstructed the entry of genuine competitors, the dangers posed by the oil cartel to national security and economic development, and other prevailing sentiments are stated as axiomatic truths. They are repeated in capsulized context as the current background facts of the present petition. The empirical existence of this deplorable situation was precisely the reason why Congress enacted the oil deregulation law. The evils arising from conspiratorial acts of monopoly are recognized as clear and present. But the enumeration of the evils by our Tatad decision was not for the purpose of justifying continued government control, especially price control. The objective was, rather, the opposite. The evils were emphasized to show the need for free competition in a deregulated industry. And to be sure, the measures to address these evils are for Congress to determine, but they have to meet the test of constitutional validity. The Court respects the legislative finding that deregulation is the policy answer to the problems. It bears stressing that R.A. 8180 was declared invalid not because deregulation is unconstitutional. The law was struck down because, as crafted, three key provisions plainly encouraged the continued existence if not the proliferation of the constitutionally proscribed evils of monopoly and restraint of trade. In sharp contrast, the present petition lacks a factual foundation specifically highlighting the need to declare the challenged provision unconstitutional. There is a dearth of relevant, reliable, and substantial evidence to support petitioner's theory that price control must continue even as Government is trying its best to get out of regulating the oil industry. The facts of the petition are, in the main, a general dissertation on the evils of monopoly. Petitioner overlooks the fact that Congress enacted the deregulation law exactly because of the monopoly evils he mentions in his petition. Congress instituted the lifting of price controls in the belief that free and fair competition was the best remedy against monopoly power. In other words, petitioner's facts are also the reasons why Congress lifted price controls and why the President accelerated the process. The facts adduced in favor of continued and indefinite price control are the same facts which supported what Congress believes is an exercise of wisdom and discretion when it chose the path of speedy deregulation and rejected Congressman Garcia's economic theory.

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The petition states that it is using the very thoughts and words of the Court in its Tatad decision. Those thoughts and words, however, were directed against the tariff differential, the inventory requirement, and predatory pricing, not against deregulation as a policy and not against the lifting of price controls. A dramatic, at times expansive and grandiloquent, reiteration of the same background circumstances narrated inTatad does not squarely sustain petitioner's novel thesis that there can be deregulation without lifting price controls. Petitioner may call the industry subject to price controls as deregulated. In enacting the challenged provision, Congress, on the other hand, has declared that any industry whose prices and profits are fixed by government authority remains a highly regulated one. Petitioner, therefore, engages in a legal paradox. He fails to show how there can be deregulation while retaining government price control. Deregulation means the lifting of control, governance and direction through rule or regulation. It means that the regulated industry is freed from the controls, guidance, and restrictions to which it used to be subjected. The use of the word "partial" to qualify deregulation is sugar-coating. Petitioner is really against deregulation at this time. Petitioner states that price control is good. He claims that it was the regulation of the importation of finished oil products which led to the exit of competitors and the consolidation and dominion of the market by an oligopoly, not price control. Congress and the President think otherwise. The argument that price control is not the villain in the intrusion and growth of monopoly appears to be pure theory not validated by experience. There can be no denying the fact that the evils mentioned in the petition arose while there was price control. The dominance of the so-called "Big 3" became entrenched during the regime of price control. More importantly, the ascertainment of the cause and the method of dismantling the oligopoly thus created are a matter of legislative and executive choice. The judicial process is equipped to handle legality but not wisdom of choice and the efficacy of solutions. Petitioner engages in another contradiction when he puts forward what he calls a self-evident truth. He states that a truly competitive market and fair prices cannot be legislated into existence. However, the truly competitive market is not being created or fashioned by the challenged legislation. The market is simply freed from legislative controls and allowed to grow and develop free from government interference. R.A. 8479 actually allows the free play of supply and demand to dictate prices. Petitioner wants a government official or board to continue performing this task. Indefinite and open-ended price control as advocated by petitioner would be to continue a regime of legislated regulation where free competition cannot possibly flourish. Control is the antithesis of competition. To grant the petition would mean that the Government is not keen on allowing a free market to develop. Petitioner's "self-evident truth" thus supports the validity of the provision of law he opposes. New players in the oil industry intervened in this case. According to them, it is the free market policy and atmosphere of deregulation which attracted and brought the new participants, themselves included, into the market. The intervenors express their fear that this Court would overrule legislative policy and replace it with petitioner's own legislative program. The factual allegations of the intervenors have not been refuted and we see no reason to doubt them. Their argument that the co-existence of many viable rivals create free market conditions induces competition in product quality and performance and makes available to consumers an expanded range of choices cannot be seriously disputed. On the other hand, the pleadings of public and private respondents both put forth the argument that the challenged provision is a policy decision of Congress and that the wisdom of the provision is outside the 7 authority of this Court to consider. We agree. As we have ruled in Morfe v. Mutuc :

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(I)t is well to remember that this Court, in the language of Justice Laurel, "does not pass upon question or wisdom, justice or expediency of legislation." As expressed by Justice Tuason: "It is not the province of the courts to supervise legislation and keep it within the bounds of propriety and common sense. That is primarily and exclusively a legislative concern." There can be no possible objection then to the observation of Justice Montemayor: "As long as laws do not violate any Constitutional provision, the Courts merely interpret and apply them regardless of whether or not they are wise or salutary." For they, according to Justice Labrador, "are not supposed to override legitimate policy and . . . never inquire into the wisdom of the law." It is thus settled, to paraphrase Chief Justice Concepcion in Gonzales v. Commission on Elections, that only congressional power or competence, not the wisdom of the action taken, may be the basis for declaring a statute invalid. This is as it ought to be: The principle of separation of powers has in the main wisely allocated the respective authority of each department and confined its jurisdiction to such a sphere. There would then be intrusion not allowable under the Constitution if on a matter left to the discretion of a coordinate branch, the judiciary would substitute its own. If there be adherence to the rule of law, as there ought to be, the last offender should be the courts of justice, to which rightly litigants submit their controversy precisely to maintain unimpaired the supremacy of legal norms and prescriptions. The attack on the validity of the challenged provision likewise insofar as there may be objections, even if valid and cogent, on its wisdom cannot be sustained. In this petition, Congressman Garcia seeks to revive the long settled issue of the timeliness of full deregulation, which issue he had earlier submitted to this Court by way of a Partial Motion for Reconsideration in the Tatadcase. In our Resolution dated December 3, 1997, which has long become final and executory, we stated: We shall first resolve petitioner Garcia's linchpin contention that the full deregulation decreed by R.A. No. 8180 to start at the end of March 1997 is unconstitutional. For prescinding from this premise, petitioner suggests that "we simply go back to the transition period, price control will be revived through the automatic pricing mechanism based on Singapore Posted Prices. The Energy Regulatory Board . . . would play a limited and ministerial role of computing the monthly price ceiling of each and every petroleum fuel product, using the automatic pricing formula. While the OPSF would return, this coverage would be limited to monthly price increases in excess of P0.50 per liter. We are not impressed by petitioner Garcia's submission. Petitioner has no basis in condemning as unconstitutional per se the date fixed by Congress for the beginning of the full deregulation of the downstream oil industry. Our Decision merely faulted the Executive for factoring the depletion of OPSF in advancing the date of full deregulation to February 1997. Nonetheless, the error of the Executive is now a non-issue for the full deregulation set by Congress itself at the end of March 1997 has already come to pass. March 1997 is not an arbitrary date. By that date, the transition period has ended and it was expected that the people would have adjusted to the role of market forces in shaping the prices of petroleum and its products. The choice of March 1997 as the date of full deregulation is a judgment of Congress and its judgment call cannot be impugned by this 8 Court. Reduced to its basic arguments, it can be seen that the challenge in this petition is not against the legality of deregulation. Petitioner does not expressly challenge deregulation. The issue, quite simply, is the timeliness or the wisdom of the date when full deregulation should be effective. In this regard, what constitutes reasonable time is not for judicial determination. Reasonable time involves the appraisal of a great variety of relevant conditions, political, social and economic. They are not within the appropriate range of evidence in a court of justice. It would be an extravagant extension of judicial authority to 9 assert judicial notice as the basis for the determination. We repeat that what petitioner decries as unsuccessful is not a final result. It is only a beginning. The Court is not inclined to stifle deregulation as enacted by Congress from its very start. We leave alone the program of deregulation at this stage. Reasonable time will prove the wisdom or folly of the deregulation program for which Congress and not the Court is accountable.

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Petitioner argues further that the public interest requires price controls while the oligopoly exists, for that is the only way the public can be protected from monopoly or oligopoly pricing. But is indefinite price control the only feasible and legal way to enforce the constitutional mandate against oligopolies? Art. 186 of the Revised Penal Code, as amended, punishes as a felony the creation of monopolies and combinations in restraint of trade. The Solicitor General, on the other hand, cites provisions of R.A. 8479 intended to prevent competition from being corrupted or manipulated. Section 11, entitled "Anti-Trust Safeguards", defines and prohibits cartelization and predatory pricing. It penalizes the persons and officers involved with imprisonment of three (3) to seven (7) years and fines ranging from One million to Two million pesos. For this purpose, a Joint Task Force from the Department of Energy and Department of Justice is created under Section 14 to investigate and order the prosecution of violations. Sec. 8 and 9 of the Act, meanwhile, direct the Departments of Foreign Affairs, Trade and Industry, and Energy to undertake strategies, incentives and benefits, including international information campaigns, tax holidays and various other agreements and utilizations, to invite and encourage the entry of new participants. Section 6 provides for uniform tariffs at three percent (3%). Sec. 13 of the Act provides for "Remedies", under which the filing of actions by government prosecutors and the investigation of private complaints by the Task Force is provided. Sections 14 and 15 provide how the Department of Energy shall monitor and prevent the occurrence of collusive pricing in the industry. It can be seen, therefore, that instead of the price controls advocated by the petitioner, Congress has enacted anti-trust measures which it believes will promote free and fair competition. Upon the other hand, the disciplined, determined, consistent and faithful execution of the law is the function of the President. As stated by public respondents, the remedy against unreasonable price increases is not the nullification of Section 19 of R.A. 8479 but the setting into motion of its various other provisions. For this Court to declare unconstitutional the key provision around which the law's anti-trust measures are clustered would mean a constitutionally interdicted distrust of the wisdom of Congress and of the determined exercise of executive power. Having decided that deregulation is the policy to follow, Congress and the President have the duty to set up the proper and effective machinery to ensure that it works. This is something which cannot be adjudicated into existence. This Court is only an umpire of last resort whenever the Constitution or a law appears to have been violated. There is no showing of a constitutional violation in this case. WHEREFORE, the petition is DISMISSED. SO ORDERED. SECOND DIVISION [G.R. No. 134217. May 11, 2000] KENNETH ROY SAVAGE/K ANGELIN EXPORT TRADING, owned and managed by GEMMA DEMORALSAVAGE, petitioners, vs. JUDGE APRONIANO B. TAYPIN, Presiding Judge, RTC-BR. 12, Cebu City, CEBU PROVINCIAL PROSECUTOR'S OFFICE, NATIONAL BUREAU OF INVESTIGATION, Region VII, Cebu City, JUANITA NG MENDOZA, MENDCO DEVELOPMENT CORPORATION, ALFREDO SABJON and DANTE SOSMEA, respondents. DECISION BELLOSILLO, J.:

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Petitioners KENNETH ROY SAVAGE and K ANGELIN EXPORT TRADING, owned and managed by GEMMA DEMORAL-SAVAGE, seek to nullify the search warrant issued by respondent Judge Aproniano B. Taypin of the Regional Trial Court, Br. 12 Cebu City, which resulted in the seizure of certain pieces of wrought iron furniture from the factory of petitioners located in Biasong, Talisay, Cebu. Their motion to quash the search warrant was denied by respondent Judge as well as their motion to reconsider the denial. Hence, this petition for certiorari. The antecedent facts: Acting on a complaint lodged by private respondent Eric Ng Mendoza, president and [1] general manager of Mendco Development Corporation (MENDCO), Supervising Agent Jose Ermie Monsanto of the National Bureau of Investigation (NBI) filed an application for search warrant with the Regional Trial Court of [2] Cebu City. The application sought the authorization to search the premises of K Angelin Export International located in Biasong, Talisay, Cebu, and to seize the pieces of wrought iron furniture found therein which were allegedly the object of unfair competition involving design patents, punishable under Art. 189 of the Revised Penal Code as amended. The assailed Search Warrant No. 637-10-1697-12 was issued by respondent Judge [3] on 16 October 1997 and executed in the afternoon of the following day by NBI agents. Seized from the factory were several pieces of furniture, indicated in the Inventory Sheet attached to the Return of Search Warrant, and [4] all items seized have remained in NBI custody up to the present. On 30 October 1997 petitioners moved to quash the search warrant alleging that: (a) the crime they were accused of did not exist; (b) the issuance of the warrant was not based on probable cause; (c) the judge failed to ask the witnesses searching questions; and, (d) the warrant did not particularly describe the things to be [5] seized. On 10 November 1997 petitioners filed a Supplemental Motion to Quash where they additionally alleged that the [6] assailed warrant was applied for without a certification against forum shopping. On 30 January 1998 [7] respondent Judge denied the Motion to Quash and the Supplemental Motion to Quash. On 2 March 1998 petitioners moved to reconsider the denial of their motion to quash and alleged substantially the same grounds found in their original Motion to Quash but adding thereto two (2) new grounds, namely: (a) respondent court has no jurisdiction over the subject-matter; and, (b) respondent court failed to "substantiate" the order sought to be [8] [9] reconsidered. The denial of their last motion prompted petitioners to come to this Court. Court The principal issues that must be addressed in this petition are: (a) questions involving jurisdiction over the offense; (b) the need for a certification of non-forum shopping; and, (c) the existence of the crime. Petitioners claim that respondent trial court had no jurisdiction over the offense since it was not designated as a special court for Intellectual Property Rights (IPR), citing in support thereof Supreme Court Administrative Order No. 113-95 designating certain branches of the Regional Trial Courts, Metropolitan Trial Courts and Municipal Trial Courts in Cities as Special Courts for IPR. The courts enumerated therein are mandated to try and decide violations of IPR including Art. 189 of the Revised Penal Code committed within their respective territorial jurisdictions. The sala of Judge Benigno G. Gaviola of the RTC-Br. 9, Cebu City, was designated Special Court [10] for IPR for the 7th Judicial Region. Subsequently Supreme Court Administrative Order No.104-96 was issued [11] providing that jurisdiction over all violations of IPR was thereafter confined to the Regional Trial Courts. The authority to issue search warrants was not among those mentioned in the administrative orders. But the Court has consistently ruled that a search warrant is merely a process issued by the court in the exercise of its [12] ancillary jurisdiction and not a criminal action which it may entertain pursuant to its original jurisdiction. The authority to issue search warrants is inherent in all courts and may be effected outside their territorial [13] jurisdiction. In the instant case, the premises searched located in Biasong, Talisay, Cebu, are well within the [14] territorial jurisdiction of the respondent court. Petitioners apparently misconstrued the import of the designation of Special Courts for IPR. Administrative Order No. 113-95 merely specified which court could "try and decide" cases involving violations of IPR. It did not, and could not, vest exclusive jurisdiction with regard to all matters (including the issuance of search warrants and other judicial processes) in any one court. Jurisdiction is conferred upon courts by substantive law; in this case, [15] BP Blg.129, and not by a procedural rule, much less by an administrative order. The power to issue search

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warrants for violations of IPR has not been exclusively vested in the courts enumerated in Supreme Court Administrative Order No.113-95. J lexj Petitioners next allege that the application for a search warrant should have been dismissed outright since it was not accompanied by a certification of non-forum shopping, citing as authority therefor Washington Distillers, Inc. [16] v. Court of Appeals. In that case, we sustained the quashal of the search warrant because the applicant had been guilty of forum shopping as private respondent sought a search warrant from the Manila Regional Trial Court only after he was denied by the courts of Pampanga. The instant case differs significantly, for here there is no allegation of forum-shopping, only failure to acquire a certification against forum-shopping. The Rules of Court [17] as amended requires such certification only from initiatory pleadings, omitting any mention of "applications." In contrast, Supreme Court Circular 04-94, the old rule on the matter, required such certification even from "applications." Our ruling in Washington Distillers required no such certification from applications for search warrants. Hence, the absence of such certification will not result in the dismissal of an application for search warrant. The last question to be resolved is whether unfair competition involving design patents punishable under Art. 189 of the Revised Penal Code exists in this case. Prosecutor Ivan Herrero seems to agree as he filed the [18] corresponding Information against petitioners on 17 March 1998. However, since the IPR Code took effect on 1 January 1998 any discussion contrary to the view herein expressed would be pointless. The repealing clause of the Code provides All Acts and parts of Acts inconsistent herewith, more particularly, Republic Act No. 165, as amended; Republic Act No. 166, as amended; and Articles 188 and 189 of the Revised Penal Code; Presidential Decree No. 49, [19] including Presidential Decree No. 285, as amended, are hereby repealed (italics ours). The issue involving the existence of "unfair competition" as a felony involving design patents, referred to in Art. 189 of the Revised Penal Code, has been rendered moot and academic by the repeal of the article. The search warrant cannot even be issued by virtue of a possible violation of the IPR Code. The assailed acts specifically alleged were the manufacture and fabrication of wrought iron furniture similar to that patented by MENDCO, without securing any license or patent for the same, for the purpose of deceiving or defrauding [20] Mendco and the buying public. The Code defines "unfair competition" thus - Lexj uris 168.2. Any person who shall employ deception or any other means contrary to good faith by which he shall pass off the goods manufactured by him or in which he deals, or his business, or services for those of the one having established such goodwill, or shall commit any acts calculated to produce said result, shall be guilty of unfair competition, and shall be subject to an action therefor. 168.3. In particular, and without in any way limiting the scope of protection against unfair competition, the following shall be deemed guilty of unfair competition: (a) Any person who is selling his goods and gives them the general appearance of goods of another manufacturer or dealer, either as to the goods themselves or in the wrapping of the packages in which they are contained, or the devices or words thereon, or in any other feature of their appearance which would be likely to influence purchasers to believe that the goods offered are those of a manufacturer or dealer, other than the actual manufacturer or dealer, or who otherwise clothes the goods with such appearance as shall deceive the public and defraud another of his legitimate trade, or any subsequent vendor of such goods or any agent of any vendor engaged in selling such goods with a like purpose; (b) Any person who by any artifice, or device, or who employs any other means calculated to induce the false belief that such person is offering the services of another who has identified such services in the mind of the public; or

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(c) Any person who shall make any false statement in the course of trade or who shall commit any other act [21] contrary to good faith of a nature calculated to discredit goods, businesses or services of another. There is evidently no mention of any crime of "unfair competition" involving design patents in the controlling provisions on Unfair Competition. It is therefore unclear whether the crime exists at all, for the enactment of RA 8293 did not result in the reenactment of Art. 189 of the Revised Penal Code. In the face of this ambiguity, we [22] must strictly construe the statute against the State and liberally in favor of the accused, for penal statutes [23] cannot be enlarged or extended by intendment, implication or any equitable consideration. Respondents [24] invoke jurisprudence to support their contention that "unfair competition" exists in this case. However, we are prevented from applying these principles, along with the new provisions on Unfair Competition found in the IPR Code, to the alleged acts of the petitioners, for such acts constitute patent infringement as defined by the same Code-Juri smis Sec. 76. Civil Action for Infringement. - 76.1. The making, using, offering for sale, selling, or importing a patented product or a product obtained directly or indirectly from a patented process, or the use of a patented process [25] without authorization of the patentee constitutes patent infringement. Although this case traces its origins to the year 1997 or before the enactment of the IPR Code, we are constrained to invoke the provisions of the Code. Article 22 of the Revised Penal Code provides that penal laws [26] shall be applied retrospectively, if such application would be beneficial to the accused. Since the IPR Code effectively obliterates the possibility of any criminal liability attaching to the acts alleged, then that Code must be applied here. In the issuance of search warrants, the Rules of Court requires a finding of probable cause in connection with one specific offense to be determined personally by the judge after examination of the complainant and the witnesses he may produce, and particularly describing the place to be searched and the things to be [27] seized. Hence, since there is no crime to speak of, the search warrant does not even begin to fulfill these stringent requirements and is therefore defective on its face. The nullity of the warrant renders moot and academic the other issues raised in petitioners' Motion to Quash and Motion for Reconsideration. Since the assailed search warrant is null and void, all property seized by virtue thereof should be returned to petitioners in [28] accordance with established jurisprudence. In petitioners' Reply with Additional Information they allege that the trial court denied their motion to transfer their case to a Special Court for IPR. We have gone through the records and we fail to find any trace of such motion or even a copy of the order denying it. All that appears in the records is a copy of an order granting a similar [29] motion filed by a certain Minnie Dayon with regard to Search Warrant No. 639-10-1697-12. This attachment being immaterial we shall give it no further attention. Jjj uris WHEREFORE, the Order of the Regional Trial Court, Br. 12, Cebu City, dated 30 January 1998, denying the Motion to Quash Search Warrant No. 637-10-1697-12 dated 30 October 1997 and the Supplemental Motion to Quash dated 10 November 1997 filed by petitioners, as well as the Order dated 8 April 1998 denying petitioners' Motion for Reconsideration dated 2 March 1998, is SET ASIDE. Search Warrant No. 637-10-1697-12 issued on 16 October 1997 is ANNULLED and SET ASIDE, and respondents are ordered to return to petitioners the property seized by virtue of the illegal search warrant. SO ORDERED. EN BANC [G.R. No. 155001. May 5, 2003] DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI B. REUNILLA, MANUEL ANTONIO B. BOE, MAMERTO S. CLARA, REUEL E. DIMALANTA, MORY V. DOMALAON, CONRADO G. DIMAANO, LOLITA R. HIZON, REMEDIOS P. ADOLFO, BIENVENIDO C. HILARIO, MIASCOR WORKERS UNION NATIONAL LABOR UNION (MWU-NLU), and PHILIPPINE AIRLINES EMPLOYEES ASSOCIATION

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(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,

[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,

[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. DECISION 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:

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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 Asias 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[1] transfer arrangement pursuant to RA 6957 as amended by RA 7718 (BOT Law). 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 AEDCs 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 nonrefundable 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. ii. iii. First 5 years Next 10 years Next 10 years 5.0% 7.5% 10.0%

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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 proponents 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 proponents proposal. On August 29, 1996, the Second Pre-Bid Conference was held where certain clarifications were made. Upon the request of prospective bidder Peoples 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 PBACs 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. Paircargos queries and the PBACs 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 corporations current authorized capital stock just for prequalification purposes. In prequalification, the agency is interested in ones 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,

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Paircargo is being required to submit a copy of the draft concession as one of the documentary requirements. Therefore, Paircargo is requesting that theyd (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 Peoples 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 Paircargos 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.

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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 AEDCs 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 Concessionaires 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

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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 [2] petition for prohibition to enjoin the enforcement of said agreements. 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 [3] similar petition with this Court. On November 6, 2002, several employees of the MIAA likewise filed a petition assailing the legality of the [4] various agreements. 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-InIntervention defending the validity of the assailed agreements and praying for the dismissal of the petitions. During the pendency of the case before this Court, President Gloria Macapagal Arroyo, on November 29, 2002, in her speech at the 2002 Golden Shell Export Awards at Malacaang Palace, stated that she will not [5] honor (PIATCO) contracts which the Executive Branchs legal offices have concluded (as) null and void. 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.

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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 [6] abuse of discretion amounting to lack or excess of jurisdiction. 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 providers 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 [8] permit such carry over except through a separate agreement duly entered into with PIATCO. 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
[7]

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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 [9] the court so largely depends for illumination of difficult constitutional questions. 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 [10] reason of the statute or act complained of. 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 [11] of Representatives to appropriate funds necessary to comply with the provisions therein. 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 [12] in pursuance of an appropriation made by law. 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 [13] [14] of Imus Electric Co. v. Municipality of Imus and Gonzales v. Raquiza 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 [15] have locus standi to file the instant petition. In Kilosbayan, Inc. v. Guingona, 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 [16] government agencies or instrumentalities. Further, insofar as taxpayers' suits are concerned . . . (this Court) [17] is not devoid of discretionas to whether or not it should be entertained. 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

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questions raised. 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 [19] the exercise of this Courts primary jurisdiction. 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 countrys 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, 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 courts decision denying petitioners 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 [21] its previous ruling in Salas, Jr. v. Laperal Realty Corporation, 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 [22] delay. 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.
[20]

[18]

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Now, to the merits of the instant controversy. I Is PIATCO a qualified bidder? Public respondents argue that the Paircargo Consortium, PIATCOs predecessor, was not a duly prequalified 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 [23] not for pre-qualification (Section 5.4 of the same document). 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 [24] required by the law, has submitted the lowest bid and most favorable terms of the project. Further, the 1994 Implementing Rules and Regulations of the BOT Law provide: Section 5.4 Pre-qualification Requirements. . c. Financial Capability: The project proponent must have adequate capability to sustain the financing requirements for the detailed engineering design, construction and/or operation and maintenance phases of the project, as the case may be. For purposes of pre-qualification, this capability shall be measured in terms of (i) proof of the ability of the project proponent and/or the consortium to provide a minimum amount of equity to the project, and (ii) a letter testimonial from reputable banks attesting that the project proponent and/or members of the consortium are banking with them, that they are in good financial standing, and that they have adequate resources. The government agency/LGU concerned shall determine

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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 proponents 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 requisitefinancial 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, 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. Paircargos Audited Financial Statements as of 1993 and 1994 indicated that it had a net worth [26] of P2,783,592.00 and P3,123,515.00 respectively. PAGS Audited Financial Statements as of 1995 indicate [27] that it has approximately P26,735,700.00 to invest as its equity for the project. Security Banks Audited Financial Statements as of 1995 show that it has a net worth equivalent to its capital funds in the amount [28] of P3,523,504,377.00. 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.
[25]

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. 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 [29] is P558,384,871.55 or only 6.08% of the project cost, 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 bidders 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 bidders 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 [30] safeguard to a fair, honest and competitive public bidding. Thus, if the maximum amount of equity that a bidder may invest in the project at the time the bids are submitted falls short of the minimum amounts required to be put up by the bidder, said bidder should be properly disqualified. Considering that at the pre-qualification stage, the maximum amounts which the Paircargo Consortium may invest in the project fell short of the minimum amounts prescribed by the PBAC, we hold that

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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 PIATCOs 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 proponents 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 [31] government. 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, [32] operate equally or indiscriminately upon all bidders. 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 [33] the bids were invited.

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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 proponents 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., 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 [35] previous public bidding. 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 [36] Agreement includes the following: (1) aircraft parking fees; (2) aircraft tacking fees;
[34]

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(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 [37] approval are classified as Public Utility Revenues and include: (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 [38] derived from operations of the Terminal and the Terminal Complex. Thus, under the 1997 Concession Agreement, groundhandling 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 [39] in its judgment the users of the airport shall be deprived of a free option for the services they cover. On the other hand, the equivalent provision under the 1997 Concession Agreement reads: Section 6.03 Periodic Adjustment in Fees and Charges. . (c) Concessionaire shall at all times be judicious in fixing fees and charges constituting Non-Public Utility Revenues in order to ensure that End Users are not unreasonably deprived of services. While the vehicular parking fee, porterage fee and greeter/well wisher fee constitute Non-Public Utility Revenues of Concessionaire, GRP may intervene and require Concessionaire to explain and justify the fee it may set

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from time to time, if in the reasonable opinion of GRP the said fees have become exorbitant resulting in the [40] unreasonable deprivation of End Users of such services. 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, 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 [42] Adjustment of fees upon the occurrence of certain extraordinary events specified in the agreement. However, under the draft Concession Agreement, terminal fees are not included in the types of fees that may be subject [43] to Interim Adjustment. Finally, under the 1997 Concession Agreement, Public Utility Revenues, except terminal fees, are [44] denominated in US Dollars 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 latters 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 PIATCOs 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:
[41]

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Section 4.04 .

Assignment.

(b) In the event Concessionaire should default in the payment of an Attendant Liability, and the default has resulted in the acceleration of the payment due date of the Attendant Liability prior to its stated date of maturity, the Unpaid Creditors and Concessionaire shall immediately inform GRP in writing of such default. GRP shall, within one hundred eighty (180) Days from receipt of the joint written notice of the Unpaid Creditors and Concessionaire, either (i) take over the Development Facility and assume the Attendant Liabilities, or (ii) allow the Unpaid Creditors, if qualified, to be substituted as concessionaire and operator of the Development Facility in accordance with the terms and conditions hereof, or designate a qualified operator acceptable to GRP to operate the Development Facility, likewise under the terms and conditions of this Agreement; Provided that if at the end of the 180-day period GRP shall not have served the Unpaid Creditors and Concessionaire written notice of its choice, GRP shall be deemed to have elected to take over the Development Facility with the concomitant assumption of Attendant Liabilities. (c) If GRP should, by written notice, allow the Unpaid Creditors to be substituted as concessionaire, the latter shall form and organize a concession company qualified to take over the operation of the Development Facility. If the concession company should elect to designate an operator for the Development Facility, the concession company shall in good faith identify and designate a qualified operator acceptable to GRP within one hundred eighty (180) days from receipt of GRPs 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 PIATCOs 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

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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 [45] through open competition. 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 [46] its adoption. 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 [47] anomalies and it places all bidders in equal footing. 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 beingcontrary 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 . (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

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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 GRPs 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 [48] suppliers, contractors and sub-contractors. 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 [49] of PIATCO which the latter owes to its creditors. These amounts include all interests, penalties, associated [50] fees, charges, surcharges, indemnities, reimbursements and other related expenses. This obligation of the Government to pay PIATCOs creditors upon PIATCOs 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 PIATCOs unpaid creditors operate NAIA IPT III, the Government is still at a risk of being liable to PIATCOs creditors should the latter be unable to designate a qualified operator within the prescribed [51] period. In effect, whatever option the Government chooses to take in the event of PIATCOs failure to fulfill its loan obligations, the Government is still at a risk of assuming PIATCOs outstanding loans. This is due to the fact that the Government would only be free from assuming PIATCOs debts if the unpaid creditors would be able to designate a qualified operator within the period provided for in the contract. Thus, the Governments 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 [52] returns, 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 [53] prohibited. 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 PIATCOs 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.

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The fact that the ARCA superseded the 1997 Concession Agreement did not cure this fatal defect. Article IV, Section 4.04(c), in relation to Article I, Section 1.06, of the ARCA provides: Section 4.04 Security . (c) GRP agrees with Concessionaire (PIATCO) that it shall negotiate in good faith and enter into direct agreement with the Senior Lenders, or with an agent of such Senior Lenders (which agreement shall be subject to the approval of the Bangko Sentral ng Pilipinas), in such form as may be reasonably acceptable to both GRP and Senior Lenders, with regard, inter alia, to the following parameters: . (iv) If the Concessionaire [PIATCO] is in default under a payment obligation owed to the Senior Lenders, and as a result thereof the Senior Lenders have become entitled to accelerate the Senior Loans, the Senior Lenders shall have the right to notify GRP of the same, and without prejudice to any other rights of the Senior Lenders or any Senior Lenders agent may have (including without limitation under security interests granted in favor of the Senior Lenders), to either in good faith identify and designate a nominee which is qualified under sub-clause (viii)(y) below to operate the Development Facility [NAIA Terminal 3] or transfer the Concessionaires [PIATCO] rights and obligations under this Agreement to a transferee which is qualified under sub-clause (viii) below; . (vi) if the Senior Lenders, acting in good faith and using reasonable efforts, are unable to designate a nominee or effect a transfer in terms and conditions satisfactory to the Senior Lenders within one hundred eighty (180) days after giving GRP notice as referred to respectively in (iv) or (v) above, then GRP and the Senior Lenders shall endeavor in good faith to enter into any other arrangement relating to the Development Facility [NAIA Terminal 3] (other than a turnover of the Development Facility [NAIA Terminal 3] to GRP) within the following one hundred eighty (180) days. If no agreement relating to the Development Facility [NAIA Terminal 3] is arrived at by GRP and the Senior Lenders within the said 180-day period, then at the end thereof the Development Facility [NAIA Terminal 3] shall be transferred by the Concessionaire [PIATCO] to GRP or its designee and GRP shall make a termination payment to Concessionaire [PIATCO] equal to the Appraised Value (as hereinafter defined) of the Development Facility [NAIA Terminal 3] or the sum of the Attendant Liabilities, if greater. Notwithstanding Section 8.01(c) hereof, this Agreement shall be deemed terminated upon the transfer of the Development Facility [NAIA Terminal 3] to GRP pursuant hereto; . Section 1.06. Attendant Liabilities

Attendant Liabilities refer to all amounts in each case supported by verifiable evidence from time to 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 [54] consultants and advisers, suppliers, contractors and sub-contractors. 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

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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 PIATCOs debt that the Government would have to pay as a result of PIATCOs 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, [55] reimbursements, and other related expenses . . . whether payable at maturity, by acceleration or otherwise. It is clear from the foregoing that the ARCA provides for a direct guarantee by the government to pay PIATCOs loans not only to its Senior Lenders but all other entities who provided PIATCO funds or services upon PIATCOs default in its loan obligation with its Senior Lenders. The fact that the Governments obligation to pay PIATCOs lenders for the latters 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 PIATCOs debts is triggered by PIATCOs 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 PIATCOs 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 PIATCOs 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 governments 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 PIATCOs 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 [56] interested parties to a public bidding and conducted the same. 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 [57] proposal. 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.

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This Court has long and consistently adhered to the legal maxim that those that cannot be done directly [58] cannot be done indirectly. 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 [59] development projects which are necessary for national growth and development but which the government, unfortunately, could ill-afford to finance at this point in time. IV Temporary takeover of business affected with public interest Article XII, Section 17 of the 1987 Constitution provides: Section 17. In times of national emergency, when the public interest so requires, the State may, during the emergency and under reasonable terms prescribed by it, temporarily take over or direct the operation of any privately owned public utility or business affected with public interest. The above provision pertains to the right of the State in times of national emergency, and in the exercise of its police power, to temporarily take over the operation of any business affected with public interest. In the 1986 Constitutional Commission, the term national emergency was defined to include threat from external aggression, calamities or national disasters, but not strikes unless it is of such proportion that would paralyze [60] government service. The duration of the emergency itself is the determining factor as to how long the [61] temporary takeover by the government would last. 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 [62] shall be offset from the amount next payable by Concessionaire to GRP. 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 [63] Terminal and/or Terminal Complex. Article XII, section 17 of the 1987 Constitution envisions a situation

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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 [64] the most essential, insistent, and illimitable of powers. 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 [65] arbitrariness of its exercise. Thus, requiring the government to pay reasonable compensation for the reasonable use of the property pursuant to the operation of the business contravenes the Constitution. V 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 [66] control the sale of a particular commodity. 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 [67] interest of the public. 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 right to operate a commercial international passenger terminal within the Island of Luzon at the [68] NAIA IPT III. 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 [69] Laoag City. As such, upon commencement of PIATCOs 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 latters operation as an international passenger [70] terminal. The right granted to PIATCO to exclusively operate NAIA IPT III would be for a period of twenty[71] five (25) years from the In-Service Date and renewable for another twenty-five (25) years at the option of the [72] government. 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 [73] subsequent to the In-Service Date would cease to be effective on the said date. The operation of an international passenger airport terminal is no doubt an undertaking imbued with public interest. In entering into a BuildOperate-and-Transfer contract for the construction, operation and maintenance of NAIA IPT III, the government has determined that public interest would be served better if private sector resources were used in its construction and an exclusive right to operate be granted to the private entity undertaking the said project, in this case PIATCO. Nonetheless, the privilege given to PIATCO is subject to reasonable regulation and supervision by the Government through the MIAA, which is the government agency [74] authorized to operate the NAIA complex, as well as DOTC, the department to which MIAA is attached. This is in accord with the Constitutional mandate that a monopoly which is not prohibited must be [75] regulated. While it is the declared policy of the BOT Law to encourage private sector participation by [76] providing a climate of minimum government regulations, 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

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passenger terminal, the Government, through the MIAA, has the right and the duty to ensure that it is done in accord with public interest. PIATCOs right to operate NAIA IPT III cannot also violate the rights of third parties. Section 3.01(e) of the 1997 Concession Agreement and the ARCA provide: 3.01 Concession Period . (e) GRP confirms that certain concession agreements relative to certain services and operations currently being undertaken at the Ninoy Aquino International Airport passenger Terminal I have a validity period extending beyond the In-Service Date. GRP through DOTC/MIAA, confirms that these services and operations shall not be carried over to the Terminal and the Concessionaire is under no legal obligation to permit such carry-over except through a separate agreement duly entered into with Concessionaire. In the event Concessionaire becomes involved in any litigation initiated by any such concessionaire or operator, GRP undertakes and hereby holds Concessionaire free and harmless on full indemnity basis from and against any loss and/or any liability resulting from any such litigation, including the cost of litigation and the reasonable fees paid or payable to Concessionaires 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 [77] extends beyond the In-Service Date. One contract remains valid until 2008 and the other until 2010. 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 IIIs 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 [78] arrastre and stevedoring service providers in the case ofAnglo-Fil Trading Corporation v. Lazaro 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 [79] job, it is MIAAs 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.

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WHEREFORE, the 1997 Concession Agreement, the Amended and Restated Concession Agreement and the Supplements thereto are set aside for being null and void. SO ORDERED.

THIRD DIVISION [G.R. No. 149717. October 7, 2003] EASTERN ASSURANCE & SURETY CORPORATION (EASCO), petitioner, vs. LAND TRANSPORTATION FRANCHISING and REGULATORY BOARD (LTFRB), respondent. DECISION PANGANIBAN, J.: The operation of monopolies is not totally banned by the Constitution. However, the State shall regulate them when public interest so requires. In the present case, the two consortia of insurance companies that have been authorized to issue passenger insurance policies are adequately regulated by the Land Transportation Franchising and Regulatory Board (LTFRB) to protect the riding public. While individual insurance companies may somehow be adversely affected by this scheme, the paramount public interest involved must be upheld. In any event, all legitimate insurance companies are allowed to become members of the consortia. Thus, there is no restraint of trade or unfair competition involved.

The Case Before us is a Petition for Review under Rule 45 of the Rules of Court, seeking to set aside the August 20, [2] [3] 2001 Decision of the Court of Appeals (CA) in CA-GR SP No. 63149. The dispositive portion of the assailed Decision reads as follows: WHEREFORE, in view of the foregoing premises, the Petition is hereby DISMISSED for lack of merit. No [4] costs.
[1]

The Facts The factual antecedents of the case are summarized by the CA as follows: [I]n its desire to improve public service and its assistance to the victims of road accidents involving PUVs [public utility vehicles], the [Land Transportation Franchising and Regulatory] Board conducted a thorough investigation on the sufficiency of existing insurance policies for PUVs. In the course of its investigation, the Board discovered that insurance coverage of PUVs was only P50,000.00 for the entire vehicle regardless of the number of passengers or persons killed or injured. The Board, then, undertook x x x nationwide consultations among the transport operators and insurance companies and held meetings with the officials of the Insurance Commission. Thereafter, the Board issued Memorandum Circular No. 99-011 fixing the insurance coverage of PUVs on the basis of the number of persons that may be killed or injured instead of the entire vehicle alone. The coverage is denominated as Passenger Accident Insurance Coverage (PAIC), which fixes the coverage of P50,000.00 per passenger.

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During the effectivity of Memorandum Circular No. 99-011, the Board received several complaints from various transport organizations such as the Federation of Jeepney Operators and Drivers Association of the Philippines (FEJODAP), Pagkakaisa ng mga Samahan ng Tsuper at Operator Nationwide (PISTON), and the Philippine Confederation of Drivers Organization, Alliance of Concerned Transport Operators (PCDOACTO). The thrust of their complaints are: (1) the proliferation of fake insurance policies; (2) the predatory pricing among competing insurance firms; (3) the proliferation of fixers in the premises of the LTFRB endorsing certain insurance companies; and (4) the moonlighting by personnel of the LTFRB who induced operators to secure their policies from favored companies. To address these complaints, the Board held a series of meetings with the officers of various transport groups composed of operators of bus, jeepney and taxi as well as representatives of several insurance companies and officials of the Insurance Commission. In a meeting held on 12 December 2000, where herein petitioner Eastern Assurance & Surety Corporation (EASCO, for brevity) was represented by a certain Dante Baronia, the transport groups proposed the creation of [a] two-group system and of [a] blacklisting scheme. In a letter dated 19 January 2001, the aforesaid proposal was then referred by the Board to the Insurance Commission for confirmation, to wit: 1. The Commission interposes no objection to, there being no legal obstacle to the same, x x x the suggestion of various insurance groups to allow only two (2) groups to participate in the Passenger Accident Insurance Program (PAIP) of the LTFRB. It is understood that all insurance companies accredited by the Commission may participate in the program by joining any of the groups. 2. The Commission interposes no objection, there being no legal obstacle to the same, to the suggestion of the various transport groups to create an accreditation and de-listing criteria to be used in the implementation of the PAIP, x x x and 3. The Commission also is of the position that the LTFRB may, on its own set up, require and implement the two groups system and/or the accreditation and de-listing criteria without need of prior approval from the Commission. x x x On 30 January 2001, Insurance Commissioner Eduardo Malinis wrote LTFRB Chairman Dante M. Lantin, the whole text of which, reads: We hereby confirm the points enumerated in your letter of January 19, 2001 regarding the implementation of the Passenger Personal Accident Insurance Program (PAIP) of the LTFRB, as the same aim to achieve a simple and systematic implementation of said program. Thus, on 1 February 2001, public respondent LTFRB issued the herein assailed Memorandum Circular No. 2001-001 that reads, as follows: MEMORANDUM CIRCULAR NO. 2001-001 SUBJECT: Amending Memorandum Circular No. 99-011 (Passenger Accident Insurance Requirement of PUV Operators) I. PREFATORY STATEMENT

In response to numerous complaints from passenger accident victims involving public utility vehicles, the Board passed Memorandum Circular No. 99-011 dated June 22, 1999 requiring all public utility vehicles to secure a no

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fault passenger accident insurance. This circular was further refined with the passage of Memorandum Circular No. 2000-010 dated March 27, 2000. After a year of implementation, the Board now has received numerous complaints coming from various transport groups and from its regional offices. These complaints [range] from non-payment or late payment of claims, fake certificates of cover, predatory pricing, non-payment or under payment of taxes, graft and corruption, and the non implementation of the computerized data bank of all public utility vehicles. In addressing these concerns, the different transport groups proposed the creation of a two (2) group system whereby all insurance companies who would like to participate in the passenger accident insurance program of the LTFRB must join any of the two groups, and that the passenger insurance requirement of the PUV operators be divided between these two groups on the basis of the number of their respective LTO license plates. The transport group argue that through this scheme the following objectives will be attained: 1. Fake certificates of cover will be minimized, if not eradicated, due to better monitoring of operations as there would only be two kinds of certificates that would be circulating. 2. Payment of the proper taxes can be assured.

3. Graft and corruption will be minimized, if not eliminated, since discretion as to which insurance company to patronize will be removed. 4. Payment of claims will be prompt due to better monitoring.

5. The proposed computerized data bank of all PUV[,] nationwide will be attained without a single cost to government. It must be noted that the passenger accident insurance program of the LTFRB was implemented after numerous dialogues with all the transport organizations nationwide, and only after all issues raised have been sufficiently addressed. More importantly, this program is without any cost to the government. The added insurance expense is shouldered by the PUV operators. In pursuing this proposal further, the Board conducted meetings and conferences with the transport operators and with the insurance companies. It also met [with] the Insurance Commission where the latter, in its letter dated January 30, 2001, confirmed that it has no objection to the proposal of the various transport groups, there being no legal impediment to the same. II. AMENDMENTS TO M.C. NO. 99-011 IN VIEW OF THE FOREGOING PREMISES, and upon the clamor of the transport operators who are the ones paying the added insurance cost, paragraph seven (7) of Memorandum Circular No. 99-011 is hereby amended to read as follows: In order to make sure that future claims of PUV operators and passenger accident victims are paid within the required time, and in order to minimize, if not eliminate, fake certificates of cover and graft and corruption, as well as to ensure the payment of the proper taxes much needed by the government, as well as to create a computerized data bank without any cost to the government which is necessary for transport planning[,] the Board will only accept, as proof of compliance of this program, insurance polic[i]es/certificates of cover duly approved by the Insurance Commission specifically for this project, and issued by any of the two groups as authorized by the Board. AMENDMENTS

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CREATION OF THE TWO GROUP SYSTEM Accordingly, as there is already one group duly authorized by the Board to participate in this program in the person of the Passenger Accident Managers, Inc. (PAMI for brevity), THERE IS A NEED TO FORM ANOTHER GROUP IN ORDER TO FULLY IMPLEMENT THE PROGRAM. All other insurance companies who wish to continue participating in the program, therefore, are hereby required to either join PAMI or form a second group. In order to maintain their good standing with the Board, each group must maintain and present to the Board proof of compliance with the following minimum requirements: 1. Membership of at least ten (10) insurance companies with valid and subsisting license issued by the Insurance Commission; 2. 3. 4. Aggregate paid-up capitalization of P500 Million; Compliance with the computerized dat[a] as required by the Board; Payment of all claims within seven (7) calendar days from submission of all documents;

5. Issuance of one (1) certificate of cover with the standard form and contents duly approved by the Insurance Commission and the Board; and 6. Submission and compliance with all other reports x x x and requirements of the Board.

ODD-EVEN SYSTEM In order to address the issue of graft and corruption, there is a need to remove discretion on the part of government officials. Accordingly, the Board supports the proposal of the transport groups and hereby adopts the following system: All PUVs covered by this program whose LTO license plate, as per latest LTO Official Receipt, has an even middle number must have an insurance policy/certificate cover coming from the first insurance group (in its case PAMI), while those with an odd middle number must have a policy/cover coming from the second group. This odd-even system shall be interchanged on a year to year basis in order to ensure equality and fairness in distribution. Accordingly, the Board will not accept, as proof of compliance with this program, any insurance policy/cover that does not comply with this odd-even scheme, except in the following cases where the operator may choose the insurance group of its choice provided if is one of the two authorized by the Board, to wit: 1. Where the operator or franchise holder has 50 or more operating units registered in its name;

2. Where the operator files a verified petition with the Board justifying his preference over the other group. In this case, the Board may allow a switch if it can be shown that there are more benefits to be attained [from] the insurance group of his choice, and provided further that these benefits are legal and do not result to any form of predatory pricing, such as x x x unjustified commissions and discounts. Other than [for] these reasons[,] no switch may be allowed by any officer of the LTFRB unless otherwise duly approved by the Board en banc. EFFECTIVITY OF THE TWO GROUP SYSTEM The effectivity of the two group system will take place on March 1, 2001, unless otherwise extended by the Board en banc.

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III.

INTERIM GUIDELINES

In the meantime, in order to immediately address the concerns of the transport groups, the following should be strictly complied with: 1. No insurance company, its agents and employees shall resort to predatory pricing[,] which means selling or offering to sell any product at a price unreasonably below the industry average cost so as to attract customers to the detriment of competitors. 2. The amount of commission/discount which a company will offer in the market should be in writing and duly approved by the LTFRB, who, in turn, will coordinate the same with the Insurance Commission. Any violation of the declared commission/discount shall be subject to the penalties provided for herein. 3. Only branch offices duly identified by the company, together with the designated officer-in-charge, and submitted in writing to the LTFRB shall issue, distribute, market or release the required policy/certificate of cover. 4. Payment of all claims should be made within seven (7) calendar days from submission of all the required x x x documents. Accordingly, the company shall provide the LTFRB with the list of required documents. Any insurance company found to have violated any of the above prohibitions shall, after notice and hearing, be banned permanently from participating in the program either directly or indirectly, including its principal stockholders, key officers and successors-in-interest if evidence warrants. The Board, may, in the interest of the public, issue a cease and desist order enjoining a company from participating in the program for not more than thirty (30) days pending full investigation. All insurance companies who are blacklisted in any government agency or instrumentality including court and other quasi-judicial agencies are automatically disallowed to participate in this program. Accordingly, no policy or certificate of cover shall be accepted from these companies as proof of compliance with this program. The Board shall issue from time to time the list of the blacklisted or suspended companies. All insurance policies[/]certificates of cover issued by their insurance companies in their individual capacities prior to the effectivity of the Two Group System shall remain in full force and effect until its expiration, and said companies shall be primarily liable for the payment of claims subject of said policies/certificates of cover. xxx xxx xxx

For the dissemination and implementation of the aforequoted Memorandum, the LTFRB made a one month nationwide information campaign on the nature of the two-group system and of the blacklisting scheme. And in a meeting with the different insurance companies, including the representative of petitioner EASCO, the Insurance Commission representative [read] before the participants the insurance firms blacklisted by the Regional Trial Court of Quezon City which includes petitioner EASCO. The purpose of this information is to [5] afford the blacklisted firms an opportunity to clear their records and settle the claims against them. Claiming that Memorandum Circular No. 2001-001 and the implementing Circulars had deprived it of its right to engage in the passenger accident insurance business, Eastern Assurance & Surety Corporation (EASCO) filed a Petition for Certiorari and Prohibition with the CA questioning the validity of those issuances.

Ruling of the Court of Appeals

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The CA ruled that Memorandum Circular No. 2001-001 had not been issued ultra vires by the LTFRB and constituted a valid exercise of police power. Hence, the appellate court ruled: x x x [T]he Board has the power to require as a condition for the issuance of certificate of public convenience an insurance policy or certificate provided by a member of one of the two accredited groups. The clear purpose of the condition is to ensure the benefit of the riding public and pedestrians who may become victims of accidents involving PUVs. For this purpose, the Board may, as it did, coordinate with the Insurance Commission, the governmental agency regulating the insurance business, for the adoption of the two-group and blacklisting system to enhance the insurance coverage of passengers and persons who become victims of accident for their benefit or of their heirs. Without doubt, the imposition of the requirements is germane to the powers, functions and purpose of the Board [6] as a regulatory body in charge of administering public utilities. x x x. Moreover, the CA found that the Circular had not violated the provisions of the Constitution on free enterprise, equal protection and substantive due process. The appellate court explained that PAIC II and PAMI merely serve as service arms of their respective members. In other words, these two (2) groups, strictly speaking, are not engaged in insurance business. Moreover, the two-group / consortium scheme under the Memorandum Circular No. 2001-001 is open to all insurance firms [that] want to join any of the two groups. It does not vest any privilege or advantage to any single firm or group to carry out the business of providing the insurance coverage under the program. The fact that the program is open to all insurance firms including petitioner negates its pretense of exclusivity. No firm is discriminated against since the two consortia cannot [7] refuse membership in their respective groups to any interested firm [that] wants and is qualified to join. Hence, this Petition.
[8]

The Issues In its Memorandum, petitioner raises the following issues for our consideration: a) the assailed LTFRB circulars with [their] implementing circulars violat[e] the constitutional proscription against monopoly, combination in restraint of trade and unfair competition[;] b) there is a violation of [the] equal protection clause; c) LTFRB exceeded its legal mandate because it exercised administrative control/jurisdiction over insurance companies which properly and exclusively belongs to the Insurance Commission[;] d) EASCO, petitioner, was disenfranchise[d] of its legitimate insurance business; x x x e) the Court of Appeals erred in ruling that the [P]etition for [C]ertiorari which raises purely legal issues is not exempt from the rule on exhaustion of administrative remedies, contrary to existing jurisprudence on the matter[; f)] the Court of Appeals committed grave abuse in completely disregarding vital facts borne by the records and admissions by the parties; and x x x [g)] x x x noted the assailed LTFRB memorandum circular did not comply with publication requirements for its [9] validity. The main issue in the case before us, as in the Court of Appeals, is the validity of Memorandum Circular Nos. 2001-001 and 2001-010.

The Courts Ruling The Petition has no merit. Main Issue: Validity of the LTFRB Memorandum Circulars

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Petitioner contends that Memorandum Circular No. 2001-001 and the subsequent implementing Circulars violate the constitutional proscription against monopoly as well as unfair competition and combination in restraint of trade. Petitioner further argues that these were issued with grave abuse of discretion and without jurisdiction on the part of the LTFRB. Monopoly The constitutional provision on monopolies is found in Article XII as follows: 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. While embracing free enterprise as an economic creed, the Constitution does not totally prohibit the [10] operation of monopolies. However, it mandates the State to regulate them when public interest so requires. Intense competition has led insurance companies/agents offering insurance policies for public utility vehicles to resort to ruinous tactics to sell their services. Notorious agents of these companies have engaged in predatory pricing -- selling the compulsory insurance coverage at an unbelievable discount of sixty to eighty percent (60 to 80%) off the market rate. The huge coverage and liability under the no-fault clause of the passenger accident insurance are grossly disproportionate to the small premiums actually being paid. Moreover, different persons or operators were issued certificates of cover (COC) or policies bearing the same number. Thus, claims under these policies were not paid, or payments were unreasonably delayed, resulting in prejudice to the riding public. The present case shows a clear public necessity to regulate the proliferation of such insurance companies. Because of the PUV operators complaints, the LTFRB thus assessed the situation. It found that in order to protect the interests of the riding public and to resolve problems involving the passenger insurance coverage of PUVs, it had to issue Memorandum Circular No. 2001-001 authorizing the two-group system. Subsequently, it promulgated Memorandum Circular No. 2001-010 accrediting PAMI and PAIC II as the two groups allowed to participate in the program. Memorandum Circular No. 2001-010 required that [a]ll public utility vehicles whose LTO license plate, as per latest LTO Official Receipt, with an EVEN middle number (0, 2, 4, 6 and 8) shall be insured with UCPB insurance (PAMI), while those with an ODD middle number (1, 3, 5, 7 and 9) shall be insured with Great [11] Domestic Insurance (PAIC 2) x x x. Undoubtedly, Memorandum Circular No. 2001-010 authorized and regulated two separate monopolies. [12] In Garcia v. Corona, the Court stated: The simplest form of monopoly exists when there is only one seller or producer of a product or service for which there are no substitute. In its more complex form, monopoly is defined as the joint acquisition or maintenance by members of a conspiracy formed for that purpose, of the power to control and dominate trade and commerce in a commodity to such an extent that they are able, as a group, to exclude actual or potential competitors from the [13] field, accompanied with the intention or purpose to exercise such power. It should be stressed that PUVs, as common carriers, are engaged in a business affected with public [14] interest. Under Article 1756 of the Civil Code, in cases of death or injuries to passengers, common carriers are presumed to be at fault and are required to compensate the victims, unless they observed extraordinary [15] diligence. To assure this compensation, PUVs are required to obtain insurance policies. Even with this insurance requirement, the riding public remains at risk of inadequate cover, because many insurance companies are individually incapable of meeting the compensation standards. Worse, the pernicious competition and fraudulent practices described above have resulted in failure to meet the compensation requirements of the law. Indeed, in authorizing and regulating the two insurance monopolies, the LTFRB acted within its prerogatives in promoting public interest and protecting the riding public. After all, the consortia are open to all insurance

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companies, including petitioner. There is no discrimination against any legitimate insurer. On the whole, the public is given protection without unfair competition or undue restraint of trade. As the Court of Appeals pointed out, the two consortia are not engaged in the insurance business; they merely serve as service arms of their respective members. At bottom, the subject Memorandum Circulars were issued for the stated purpose of promoting public interest; and of protecting the riding public and PUV operators from being defrauded by fake, undervalued or misrepresented insurance policies.

Grave Abuse of Discretion In alleging grave abuse of discretion on the part of the LTFRB, petitioner describes at length potential disasters to the insuring public that may result from the two-group system authorized by the assailed Circulars. Petitioner calls into question the wisdom of those Circulars by projecting scenarios which, however, cannot be properly addressed and resolved in the present case. Litigations are limited to resolving actual, not hypothetical, controversies. Doubts on the capability of the assailed Circulars to provide an adequate long-term solution to PUV operators insurance problems are not legally sufficient to strike down those Circulars. In our form of government, courts cannot inquire into the wisdom or the expediency of the acts of the executive or the legislative branches of government, unless there is a clear showing that those acts are constitutionally infirm or have been committed with grave abuse of discretion amounting to lack or excess of jurisdiction. In Angara v. Electoral Commission, Justice Laurel made it clear that the judiciary does not pass upon questions of wisdom, justice or expediency of legislation. And fittingly so for in the exercise of judicial power, we are allowed only to settle actual controversies involving rights which are legally demandable and enforceable, and may not annul an act of the political departments simply because we feel it is unwise or impractical. It is true that, under the expanded concept of the political question, we may now also determine whether or not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or [16] instrumentality of the Government. By grave abuse of discretion is meant such capricious and whimsical exercise of judgment equivalent to lack of jurisdiction. Mere abuse of discretion is not enough. It must begrave, as when it is exercised arbitrarily or despotically by reason of passion or personal hostility; and such abuse must be so patent and so gross as to amount to an evasion of a positive duty or to a virtual refusal to perform the duty enjoined or to act at all in [17] contemplation of law. The jurisprudential elements of arbitrariness, despotism, passion and hostility have not been shown to exist under the present circumstances. Further, petitioner argues that the LTFRBs haste in accrediting PAMI and PAIC II is an indication of grave abuse of discretion. However, since the two-group system was to take effect starting March 1, 2001, accrediting the two groups on February 28, 2001 was not unreasonable. In the absence of contrary evidence, we must [18] uphold the presumption of regularity in the performance of duties by public officers.

Authority and Jurisdiction Petitioner contends that in issuing the assailed Circulars, the LTFRB effectively delimited, regulated and controlled the business of passenger accident insurance. It argues that the Board acted without jurisdiction and usurped the exclusive jurisdiction of the Insurance Commission. Executive Order No. 202,
[19]

which created the LTFRB, conferred the following powers on the Board:

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SEC. 5. Powers and Functions of the Land Transportation Franchising and Regulatory Board. The Board shall have the following powers and functions: xxx xxx xxx

b. To issue, amend, revise, suspend or cancel Certificates of Public Convenience or permits authorizing the operation of public land transportation services provided by motorized vehicles, and to prescribe the appropriate terms and conditions therefore; xxx xxx xxx

k. To formulate, promulgate, administer, implement and enforce rules and regulations on land transportation public utilities, standards of measurements and/or design, and rules and regulations requiring operators of any public land transportation service to equip, install and provide in their utilities and in their stations such devices, equipment facilities and operating procedures and techniques as may promote safety, protection, comfort and convenience to persons and property in their charges as well as the safety of persons and property within their areas of operations; l. To coordinate and cooperate with other government agencies and entities concerned with any aspect involving public land transportation services with the end in view of effecting continuing improvement of such services; and m. To perform such other functions and duties as may be provided by law, or as may be necessary, or proper or incidental to the purposes and objectives of this Executive Order. (Italics supplied) Paragraph b gives the LTFRB the power to prescribe appropriate terms and conditions for the issuance, amendment, revision, and suspension or cancellation of certificates of public convenience (CPC) or of permits authorizing the operation of public land transportation services. Under this paragraph, the Board has the prerogative to require, as a condition for the issuance of CPCs, that an applicant get insurance coverage from a particular group of insurance companies. Corollary to this power must necessarily be construed the authority of the LTFRB to require insurance companies to group themselves for the purpose of providing passenger accident insurance coverage. Paragraph m directly authorizes it to perform such other functions as may be necessary or incidental to the purposes and objectives of EO 202. By providing passenger accident insurance policies to operators of PUVs, insurance companies and their businesses directly affect public land transportation. By limiting its regulation of such companies to the segment of their business that directly affects public land transportation, the LTFRB has acted within its jurisdiction in issuing the assailed Circulars. Administrative bodies like the LTFRB have expertise in specific matters within the purview of their respective jurisdictions. Thus, the law concedes to them the power to promulgate rules and regulations to implement the policies of a given statute -- provided such rules and regulations conform to the terms and [20] standards prescribed by that statute and purport to carry its general policies into effect. It should also be pointed out that before issuing the Circulars, the LTFRB made proper representation and coordination with the Insurance Commission, which had no objection to the two-consortia scheme.

EASCOs Business Since petitioner has failed to show any cogent reason to strike down the assailed Circulars, their implementation cannot be restrained. They may indeed adversely affect its business, but the protection of the general welfare is of paramount importance. Petitioners individual business interests must be subordinated to [21] the benefit of the greater number.Salus populi est suprema lex. Sic utere tuo ut alienum non laedas.

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Publication Petitioner raises for the first time in its Memorandum the issue of the alleged noncompliance with the publication requirement, which must first be met before the assailed Circulars can be deemed valid. This argument is improper at this stage. Points of law, theories, issues and arguments not adequately brought to the attention of the lower court need not be -- and ordinarily will not be -- considered by a reviewing court, as they [22] cannot be raised for the first time on appeal. Indeed, it is settled jurisprudence that an issue that was neither raised in the complaint or in the court below cannot be raised for the first time on appeal, as to do so would be [23] offensive to the basic rules of fair play, justice, and due process. WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner. SO ORDERED. Puno (Chairman), Sandoval-Gutierrez and Carpio-Morales, JJ., concur. Corona, J., on leave. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. 114222 April 6, 1995 FRANCISCO S. TATAD, JOHN H. OSMENA and RODOLFO G. BIAZON, petitioners, vs. HON. JESUS B. GARCIA, JR., in his capacity as the Secretary of the Department of Transportation and Communications, and EDSA LRT CORPORATION, LTD., respondents. QUIASON, J.: This is a petition under Rule 65 of the Revised Rules of Court to prohibit respondents from further implementing and enforcing the "Revised and Restated Agreement to Build, Lease and Transfer a Light Rail Transit System for EDSA" dated April 22, 1992, and the "Supplemental Agreement to the 22 April 1992 Revised and Restated Agreement To Build, Lease and Transfer a Light Rail Transit System for EDSA" dated May 6, 1993. Petitioners Francisco S. Tatad, John H. Osmena and Rodolfo G. Biazon are members of the Philippine Senate and are suing in their capacities as Senators and as taxpayers. Respondent Jesus B. Garcia, Jr. is the incumbent Secretary of the Department of Transportation and Communications (DOTC), while private respondent EDSA LRT Corporation, Ltd. is a private corporation organized under the laws of Hongkong. I In 1989, DOTC planned to construct a light railway transit line along EDSA, a major thoroughfare in Metropolitan Manila, which shall traverse the cities of Pasay, Quezon, Mandaluyong and Makati. The plan, referred to as EDSA Light Rail Transit III (EDSA LRT III), was intended to provide a mass transit system along EDSA and alleviate the congestion and growing transportation problem in the metropolis. On March 3, 1990, a letter of intent was sent by the Eli Levin Enterprises, Inc., represented by Elijahu Levin to DOTC Secretary Oscar Orbos, proposing to construct the EDSA LRT III on a Build-Operate-Transfer (BOT) basis.

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On March 15, 1990, Secretary Orbos invited Levin to send a technical team to discuss the project with DOTC. On July 9, 1990, Republic Act No. 6957 entitled "An Act Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector, and For Other Purposes," was signed by President Corazon C. Aquino. Referred to as the Build-Operate-Transfer (BOT) Law, it took effect on October 9, 1990. Republic Act No. 6957 provides for two schemes for the financing, construction and operation of government projects through private initiative and investment: Build-Operate-Transfer (BOT) or Build-Transfer (BT). In accordance with the provisions of R.A. No. 6957 and to set the EDSA LRT III project underway, DOTC, on January 22, 1991 and March 14, 1991, issued Department Orders Nos. 91-494 and 91-496, respectively creating the Prequalification Bids and Awards Committee (PBAC) and the Technical Committee. After its constitution, the PBAC issued guidelines for the prequalification of contractors for the financing and implementation of the project The notice, advertising the prequalification of bidders, was published in three newspapers of general circulation once a week for three consecutive weeks starting February 21, 1991. The deadline set for submission of prequalification documents was March 21, 1991, later extended to April 1, 1991. Five groups responded to the invitation namely, ABB Trazione of Italy, Hopewell Holdings Ltd. of Hongkong, Mansteel International of Mandaue, Cebu, Mitsui & Co., Ltd. of Japan, and EDSA LRT Consortium, composed of ten foreign and domestic corporations: namely, Kaiser Engineers International, Inc., ACER Consultants (Far East) Ltd. and Freeman Fox, Tradeinvest/CKD Tatra of the Czech and Slovak Federal Republics, TCGI Engineering All Asia Capital and Leasing Corporation, The Salim Group of Jakarta, E. L. Enterprises, Inc., A.M. Oreta & Co. Capitol Industrial Construction Group, Inc, and F. F. Cruz & co., Inc. On the last day for submission of prequalification documents, the prequalification criteria proposed by the Technical Committee were adopted by the PBAC. The criteria totalling 100 percent, are as follows: (a) Legal aspects 10 percent; (b) Management/Organizational capability 30 percent; and (c) Financial capability 30 percent; and (d) Technical capability 30 percent (Rollo, p. 122). On April 3, 1991, the Committee, charged under the BOT Law with the formulation of the Implementation Rules and Regulations thereof, approved the same. After evaluating the prequalification, bids, the PBAC issued a Resolution on May 9, 1991 declaring that of the five applicants, only the EDSA LRT Consortium "met the requirements of garnering at least 21 points per criteria [sic], except for Legal Aspects, and obtaining an over-all passing mark of at least 82 points" (Rollo, p. 146). The Legal Aspects referred to provided that the BOT/BT contractor-applicant meet the requirements specified in the Constitution and other pertinent laws (Rollo, p. 114). Subsequently, Secretary Orbos was appointed Executive Secretary to the President of the Philippines and was replaced by Secretary Pete Nicomedes Prado. The latter sent to President Aquino two letters dated May 31, 1991 and June 14, 1991, respectively recommending the award of the EDSA LRT III project to the sole complying bidder, the EDSA LRT Consortium, and requesting for authority to negotiate with the said firm for the contract pursuant to paragraph 14(b) of the Implementing Rules and Regulations of the BOT Law (Rollo, pp. 298-302). In July 1991, Executive Secretary Orbos, acting on instructions of the President, issued a directive to the DOTC to proceed with the negotiations. On July 16, 1991, the EDSA LRT Consortium submitted its bid proposal to DOTC. Finding this proposal to be in compliance with the bid requirements, DOTC and respondent EDSA LRT Corporation, Ltd., in substitution of the EDSA LRT Consortium, entered into an "Agreement to Build, Lease and Transfer a Light Rail Transit System for EDSA" under the terms of the BOT Law (Rollo, pp. 147-177).

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Secretary Prado, thereafter, requested presidential approval of the contract. In a letter dated March 13, 1992, Executive Secretary Franklin Drilon, who replaced Executive Secretary Orbos, informed Secretary Prado that the President could not grant the requested approval for the following reasons: (1) that DOTC failed to conduct actual public bidding in compliance with Section 5 of the BOT Law; (2) that the law authorized public bidding as the only mode to award BOT projects, and the prequalification proceedings was not the public bidding contemplated under the law; (3) that Item 14 of the Implementing Rules and Regulations of the BOT Law which authorized negotiated award of contract in addition to public bidding was of doubtful legality; and (4) that congressional approval of the list of priority projects under the BOT or BT Scheme provided in the law had not yet been granted at the time the contract was awarded (Rollo, pp. 178-179). In view of the comments of Executive Secretary Drilon, the DOTC and private respondents re-negotiated the agreement. On April 22, 1992, the parties entered into a "Revised and Restated Agreement to Build, Lease and Transfer a Light Rail Transit System for EDSA" (Rollo, pp. 47-78) inasmuch as "the parties [are] cognizant of the fact the DOTC has full authority to sign the Agreement without need of approval by the President pursuant to the provisions of Executive Order No. 380 and that certain events [had] supervened since November 7, 1991 which necessitate[d] the revision of the Agreement" (Rollo, p. 51). On May 6, 1992, DOTC, represented by Secretary Jesus Garcia vice Secretary Prado, and private respondent entered into a "Supplemental Agreement to the 22 April 1992 Revised and Restated Agreement to Build, Lease and Transfer a Light Rail Transit System for EDSA" so as to "clarify their respective rights and responsibilities" and to submit [the] Supplemental Agreement to the President, of the Philippines for his approval" (Rollo, pp. 79-80). Secretary Garcia submitted the two Agreements to President Fidel V. Ramos for his consideration and approval. In a Memorandum to Secretary Garcia on May 6, 1993, approved the said Agreements, (Rollo, p. 194). According to the agreements, the EDSA LRT III will use light rail vehicles from the Czech and Slovak Federal Republics and will have a maximum carrying capacity of 450,000 passengers a day, or 150 million a year to be achieved-through 54 such vehicles operating simultaneously. The EDSA LRT III will run at grade, or street level, on the mid-section of EDSA for a distance of 17.8 kilometers from F.B. Harrison, Pasay City to North Avenue, Quezon City. The system will have its own power facility (Revised and Restated Agreement, Sec. 2.3 (ii); Rollo p. 55). It will also have thirteen (13) passenger stations and one depot in 16-hectare government property at North Avenue (Supplemental Agreement, Sec. 11; Rollo, pp. 91-92). Private respondents shall undertake and finance the entire project required for a complete operational light rail transit system (Revised and Restated Agreement, Sec. 4.1; Rollo, p. 58). Target completion date is 1,080 days or approximately three years from the implementation date of the contract inclusive of mobilization, site works, initial and final testing of the system (Supplemental Agreement, Sec. 5; Rollo, p. 83). Upon full or partial completion and viability thereof, private respondent shall deliver the use and possession of the completed portion to DOTC which shall operate the same (Supplemental Agreement, Sec. 5; Revised and Restated Agreement, Sec. 5.1; Rollo, pp. 61-62, 84). DOTC shall pay private respondent rentals on a monthly basis through an Irrevocable Letter of Credit. The rentals shall be determined by an independent and internationally accredited inspection firm to be appointed by the parties (Supplemental Agreement, Sec. 6; Rollo, pp. 85-86) As agreed upon, private respondent's capital shall be recovered from the rentals to be paid by the DOTC which, in turn, shall come from the earnings of the EDSA LRT III (Revised and Restated Agreement, Sec. 1, p. 5; Rollo, p. 54). After 25 years and DOTC shall have completed payment of the rentals, ownership of the project shall be transferred to the latter for a consideration of only U.S. $1.00 (Revised and Restated Agreement, Sec. 11.1; Rollo, p. 67). On May 5, 1994, R.A. No. 7718, an "Act Amending Certain Sections of Republic Act No. 6957, Entitled "An Act Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector, and for Other Purposes" was signed into law by the President. The law was published in two newspapers of general circulation on May 12, 1994, and took effect 15 days thereafter or on May 28, 1994. The law expressly recognizes BLT scheme and allows direct negotiation of BLT contracts.

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II In their petition, petitioners argued that: (1) THE AGREEMENT OF APRIL 22, 1992, AS AMENDED BY THE SUPPLEMENTAL AGREEMENT OF MAY 6, 1993, INSOFAR AS IT GRANTS EDSA LRT CORPORATION, LTD., A FOREIGN CORPORATION, THE OWNERSHIP OF EDSA LRT III, A PUBLIC UTILITY, VIOLATES THE CONSTITUTION AND, HENCE, IS UNCONSTITUTIONAL; (2) THE BUILD-LEASE-TRANSFER SCHEME PROVIDED IN THE AGREEMENTS IS NOT DEFINED NOR RECOGNIZED IN R.A. NO. 6957 OR ITS IMPLEMENTING RULES AND REGULATIONS AND, HENCE, IS ILLEGAL; (3) THE AWARD OF THE CONTRACT ON A NEGOTIATED BASIS VIOLATES R; A. NO. 6957 AND, HENCE, IS UNLAWFUL; (4) THE AWARD OF THE CONTRACT IN FAVOR OF RESPONDENT EDSA LRT CORPORATION, LTD. VIOLATES THE REQUIREMENTS PROVIDED IN THE IMPLEMENTING RULES AND REGULATIONS OF THE BOT LAW AND, HENCE, IS ILLEGAL; (5) THE AGREEMENTS VIOLATE EXECUTIVE ORDER NO 380 FOR THEIR FAILURE TO BEAR PRESIDENTIAL APPROVAL AND, HENCE, ARE ILLEGAL AND INEFFECTIVE; AND (6) THE AGREEMENTS ARE GROSSLY DISADVANTAGEOUS TO THE GOVERNMENT (Rollo, pp. 15-16). Secretary Garcia and private respondent filed their comments separately and claimed that: (1) Petitioners are not the real parties-in-interest and have no legal standing to institute the present petition; (2) The writ of prohibition is not the proper remedy and the petition requires ascertainment of facts; (3) The scheme adopted in the Agreements is actually a build-transfer scheme allowed by the BOT Law; (4) The nationality requirement for public utilities mandated by the Constitution does not apply to private respondent; (5) The Agreements executed by and between respondents have been approved by President Ramos and are not disadvantageous to the government; (6) The award of the contract to private respondent through negotiation and not public bidding is allowed by the BOT Law; and (7) Granting that the BOT Law requires public bidding, this has been amended by R.A No. 7718 passed by the Legislature On May 12, 1994, which provides for direct negotiation as a mode of award of infrastructure projects. III Respondents claimed that petitioners had no legal standing to initiate the instant action. Petitioners, however, countered that the action was filed by them in their capacity as Senators and as taxpayers. The prevailing doctrines in taxpayer's suits are to allow taxpayers to question contracts entered into by the national government or government-owned or controlled corporations allegedly in contravention of the law

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(Kilosbayan, Inc. v. Guingona, 232 SCRA 110 [1994]) and to disallow the same when only municipal contracts are involved (Bugnay Construction and Development Corporation v. Laron, 176 SCRA. 240 [1989]). For as long as the ruling in Kilosbayan on locus standi is not reversed, we have no choice but to follow it and uphold the legal standing of petitioners as taxpayers to institute the present action. IV In the main, petitioners asserted that the Revised and Restated Agreement of April 22, 1992 and the Supplemental Agreement of May 6, 1993 are unconstitutional and invalid for the following reasons: (1) the EDSA LRT III is a public utility, and the ownership and operation thereof is limited by the Constitution to Filipino citizens and domestic corporations, not foreign corporations like private respondent; (2) the Build-Lease-Transfer (BLT) scheme provided in the agreements is not the BOT or BT Scheme under the law; (3) the contract to construct the EDSA LRT III was awarded to private respondent not through public bidding which is the only mode of awarding infrastructure projects under the BOT law; and (4) the agreements are grossly disadvantageous to the government. 1. Private respondent EDSA LRT Corporation, Ltd. to whom the contract to construct the EDSA LRT III was awarded by public respondent, is admittedly a foreign corporation "duly incorporated and existing under the laws of Hongkong" (Rollo, pp. 50, 79). There is also no dispute that once the EDSA LRT III is constructed, private respondent, as lessor, will turn it over to DOTC, as lessee, for the latter to operate the system and pay rentals for said use. The question posed by petitioners is: Can respondent EDSA LRT Corporation, Ltd., a foreign corporation own EDSA LRT III; a public utility? (Rollo, p. 17). The phrasing of the question is erroneous; it is loaded. What private respondent owns are the rail tracks, rolling stocks like the coaches, rail stations, terminals and the power plant, not a public utility. While a franchise is needed to operate these facilities to serve the public, they do not by themselves constitute a public utility. What constitutes a public utility is not their ownership but their use to serve the public (Iloilo Ice & Cold Storage Co. v. Public Service Board, 44 Phil. 551, 557 558 [1923]). The Constitution, in no uncertain terms, requires a franchise for the operation of a public utility. However, it does not require a franchise before one can own the facilities needed to operate a public utility so long as it does not operate them to serve the public. Section 11 of Article XII of the Constitution provides: No franchise, certificate or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least sixty per centum of whose capital is owned by such citizens, nor shall such franchise, certificate or authorization be exclusive character or for a longer period than fifty years . . . (Emphasis supplied). In law, there is a clear distinction between the "operation" of a public utility and the ownership of the facilities and equipment used to serve the public.

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Ownership is defined as a relation in law by virtue of which a thing pertaining to one person is completely subjected to his will in everything not prohibited by law or the concurrence with the rights of another (Tolentino, II Commentaries and Jurisprudence on the Civil Code of the Philippines 45 [1992]). The exercise of the rights encompassed in ownership is limited by law so that a property cannot be operated and used to serve the public as a public utility unless the operator has a franchise. The operation of a rail system as a public utility includes the transportation of passengers from one point to another point, their loading and unloading at designated places and the movement of the trains at pre-scheduled times (cf. Arizona Eastern R.R. Co. v. J.A.. Matthews, 20 Ariz 282, 180 P.159, 7 A.L.R. 1149 [1919] ;United States Fire Ins. Co. v. Northern P.R. Co., 30 Wash 2d. 722, 193 P. 2d 868, 2 A.L.R. 2d 1065 [1948]). The right to operate a public utility may exist independently and separately from the ownership of the facilities thereof. One can own said facilities without operating them as a public utility, or conversely, one may operate a public utility without owning the facilities used to serve the public. The devotion of property to serve the public may be done by the owner or by the person in control thereof who may not necessarily be the owner thereof. This dichotomy between the operation of a public utility and the ownership of the facilities used to serve the public can be very well appreciated when we consider the transportation industry. Enfranchised airline and shipping companies may lease their aircraft and vessels instead of owning them themselves. While private respondent is the owner of the facilities necessary to operate the EDSA. LRT III, it admits that it is not enfranchised to operate a public utility (Revised and Restated Agreement, Sec. 3.2; Rollo, p. 57). In view of this incapacity, private respondent and DOTC agreed that on completion date, private respondent will immediately deliver possession of the LRT system by way of lease for 25 years, during which period DOTC shall operate the same as a common carrier and private respondent shall provide technical maintenance and repair services to DOTC (Revised and Restated Agreement, Secs. 3.2, 5.1 and 5.2; Rollo, pp. 57-58, 61-62). Technical maintenance consists of providing (1) repair and maintenance facilities for the depot and rail lines, services for routine clearing and security; and (2) producing and distributing maintenance manuals and drawings for the entire system (Revised and Restated Agreement, Annex F). Private respondent shall also train DOTC personnel for familiarization with the operation, use, maintenance and repair of the rolling stock, power plant, substations, electrical, signaling, communications and all other equipment as supplied in the agreement (Revised and Restated Agreement, Sec. 10; Rollo, pp. 66-67). Training consists of theoretical and live training of DOTC operational personnel which includes actual driving of light rail vehicles under simulated operating conditions, control of operations, dealing with emergencies, collection, counting and securing cash from the fare collection system (Revised and Restated Agreement, Annex E, Secs. 2-3). Personnel of DOTC will work under the direction and control of private respondent only during training (Revised and Restated Agreement, Annex E, Sec. 3.1). The training objectives, however, shall be such that upon completion of the EDSA LRT III and upon opening of normal revenue operation, DOTC shall have in their employ personnel capable of undertaking training of all new and replacement personnel (Revised and Restated Agreement, Annex E Sec. 5.1). In other words, by the end of the three-year construction period and upon commencement of normal revenue operation, DOTC shall be able to operate the EDSA LRT III on its own and train all new personnel by itself. Fees for private respondent' s services shall be included in the rent, which likewise includes the project cost, cost of replacement of plant equipment and spare parts, investment and financing cost, plus a reasonable rate of return thereon (Revised and Restated Agreement, Sec. 1; Rollo, p. 54). Since DOTC shall operate the EDSA LRT III, it shall assume all the obligations and liabilities of a common carrier. For this purpose, DOTC shall indemnify and hold harmless private respondent from any losses, damages, injuries or death which may be claimed in the operation or implementation of the system, except losses, damages, injury or death due to defects in the EDSA LRT III on account of the defective condition of equipment or facilities or the defective maintenance of such equipment facilities (Revised and Restated Agreement, Secs. 12.1 and 12.2; Rollo, p. 68).

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In sum, private respondent will not run the light rail vehicles and collect fees from the riding public. It will have no dealings with the public and the public will have no right to demand any services from it. It is well to point out that the role of private respondent as lessor during the lease period must be distinguished from the role of the Philippine Gaming Management Corporation (PGMC) in the case of Kilosbayan Inc. v. Guingona, 232 SCRA 110 (1994). Therein, the Contract of Lease between PGMC and the Philippine Charity Sweepstakes Office (PCSO) was actually a collaboration or joint venture agreement prescribed under the charter of the PCSO. In the Contract of Lease; PGMC, the lessor obligated itself to build, at its own expense, all the facilities necessary to operate and maintain a nationwide on-line lottery system from whom PCSO was to lease the facilities and operate the same. Upon due examination of the contract, the Court found that PGMC's participation was not confined to the construction and setting up of the on-line lottery system. It spilled over to the actual operation thereof, becoming indispensable to the pursuit, conduct, administration and control of the highly technical and sophisticated lottery system. In effect, the PCSO leased out its franchise to PGMC which actually operated and managed the same. Indeed, a mere owner and lessor of the facilities used by a public utility is not a public utility (Providence and W.R. Co. v. United States, 46 F. 2d 149, 152 [1930]; Chippewa Power Co. v. Railroad Commission of Wisconsin, 205 N.W. 900, 903, 188 Wis. 246 [1925]; Ellis v. Interstate Commerce Commission, Ill 35 S. Ct. 645, 646, 237 U.S. 434, 59 L. Ed. 1036 [1914]). Neither are owners of tank, refrigerator, wine, poultry and beer cars who supply cars under contract to railroad companies considered as public utilities (Crystal Car Line v. State Tax Commission, 174 p. 2d 984, 987 [1946]). Even the mere formation of a public utility corporation does not ipso facto characterize the corporation as one operating a public utility. The moment for determining the requisite Filipino nationality is when the entity applies for a franchise, certificate or any other form of authorization for that purpose (People v. Quasha, 93 Phil. 333 [1953]). 2. Petitioners further assert that the BLT scheme under the Agreements in question is not recognized in the BOT Law and its Implementing Rules and Regulations. Section 2 of the BOT Law defines the BOT and BT schemes as follows: (a) Build-operate-and-transfer scheme A contractual arrangement whereby the contractor undertakes the construction including financing, of a given infrastructure facility, and the operation and maintenance thereof. The contractor operates the facility over a fixed term during which it is allowed to charge facility users appropriate tolls, fees, rentals and charges sufficient to enable the contractor to recover its operating and maintenance expenses and its investment in the project plus a reasonable rate of return thereon. The contractor transfers the facility to the government agency or local government unit concerned at the end of the fixed term which shall not exceed fifty (50) years. For the construction stage, the contractor may obtain financing from foreign and/or domestic sources and/or engage the services of a foreign and/or Filipino constructor [sic]: Provided, That the ownership structure of the contractor of an infrastructure facility whose operation requires a public utility franchise must be in accordance with the Constitution: Provided, however, That in the case of corporate investors in the build-operate-and-transfer corporation, the citizenship of each stockholder in the corporate investors shall be the basis for the computation of Filipino equity in the said corporation: Provided, further, That, in the case of foreign constructors [sic], Filipino labor shall be employed or hired in the different phases of the construction where Filipino skills are available: Provided, furthermore, that the financing of a foreign or foreigncontrolled contractor from Philippine government financing institutions shall not exceed twenty percent (20%) of the total cost of the infrastructure facility or project: Provided, finally, That financing from foreign sources shall not require a guarantee by the Government or by government-owned or controlled corporations. The build-operateand-transfer scheme shall include a supply-and-operate situation which is a contractual agreement whereby the supplier of equipment and machinery for a given infrastructure facility, if the interest of the Government so requires, operates the facility providing in the process technology transfer and training to Filipino nationals.

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(b) Build-and-transfer scheme "A contractual arrangement whereby the contractor undertakes the construction including financing, of a given infrastructure facility, and its turnover after completion to the government agency or local government unit concerned which shall pay the contractor its total investment expended on the project, plus a reasonable rate of return thereon. This arrangement may be employed in the construction of any infrastructure project including critical facilities which for security or strategic reasons, must be operated directly by the government (Emphasis supplied). The BOT scheme is expressly defined as one where the contractor undertakes the construction and financing in infrastructure facility, and operates and maintains the same. The contractor operates the facility for a fixed period during which it may recover its expenses and investment in the project plus a reasonable rate of return thereon. After the expiration of the agreed term, the contractor transfers the ownership and operation of the project to the government. In the BT scheme, the contractor undertakes the construction and financing of the facility, but after completion, the ownership and operation thereof are turned over to the government. The government, in turn, shall pay the contractor its total investment on the project in addition to a reasonable rate of return. If payment is to be effected through amortization payments by the government infrastructure agency or local government unit concerned, this shall be made in accordance with a scheme proposed in the bid and incorporated in the contract (R.A. No. 6957, Sec. 6). Emphasis must be made that under the BOT scheme, the owner of the infrastructure facility must comply with the citizenship requirement of the Constitution on the operation of a public utility. No such a requirement is imposed in the BT scheme. There is no mention in the BOT Law that the BOT and BT schemes bar any other arrangement for the payment by the government of the project cost. The law must not be read in such a way as to rule out or unduly restrict any variation within the context of the two schemes. Indeed, no statute can be enacted to anticipate and provide all the fine points and details for the multifarious and complex situations that may be encountered in enforcing the law (Director of Forestry v. Munoz, 23 SCRA 1183 [1968]; People v. Exconde, 101 Phil. 1125 [1957]; United States v. Tupasi Molina, 29 Phil. 119 [1914]). The BLT scheme in the challenged agreements is but a variation of the BT scheme under the law. As a matter of fact, the burden on the government in raising funds to pay for the project is made lighter by allowing it to amortize payments out of the income from the operation of the LRT System. In form and substance, the challenged agreements provide that rentals are to be paid on a monthly basis according to a schedule of rates through and under the terms of a confirmed Irrevocable Revolving Letter of Credit (Supplemental Agreement, Sec. 6; Rollo, p. 85). At the end of 25 years and when full payment shall have been made to and received by private respondent, it shall transfer to DOTC, free from any lien or encumbrances, all its title to, rights and interest in, the project for only U.S. $1.00 (Revised and Restated Agreement, Sec. 11.1; Supplemental Agreement, Sec; 7; Rollo, pp. 67, .87). A lease is a contract where one of the parties binds himself to give to another the enjoyment or use of a thing for a certain price and for a period which may be definite or indefinite but not longer than 99 years (Civil Code of the Philippines, Art. 1643). There is no transfer of ownership at the end of the lease period. But if the parties stipulate that title to the leased premises shall be transferred to the lessee at the end of the lease period upon the payment of an agreed sum, the lease becomes a lease-purchase agreement. Furthermore, it is of no significance that the rents shall be paid in United States currency, not Philippine pesos. The EDSA LRT III Project is a high priority project certified by Congress and the National Economic and Development Authority as falling under the Investment Priorities Plan of Government (Rollo, pp. 310-311). It is, therefore, outside the application of the Uniform Currency Act (R.A. No. 529), which reads as follows:

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Sec. 1. Every provision contained in, or made with respect to, any domestic obligation to wit, any obligation contracted in the Philippines which provisions purports to give the obligee the right to require payment in gold or in a particular kind of coin or currency other than Philippine currency or in an amount of money of the Philippines measured thereby, be as it is hereby declared against public policy, and null, void, and of no effect, and no such provision shall be contained in, or made with respect to, any obligation hereafter incurred. The above prohibition shall not apply to (a) . . .; (b) transactions affecting high-priority economic projects for agricultural, industrial and power development as may be determined by the National Economic Council which are financed by or through foreign funds; . . . . 3. The fact that the contract for the construction of the EDSA LRT III was awarded through negotiation and before congressional approval on January 22 and 23, 1992 of the List of National Projects to be undertaken by the private sector pursuant to the BOT Law (Rollo, pp. 309-312) does not suffice to invalidate the award. Subsequent congressional approval of the list including "rail-based projects packaged with commercial development opportunities" (Rollo, p. 310) under which the EDSA LRT III projects falls, amounts to a ratification of the prior award of the EDSA LRT III contract under the BOT Law. Petitioners insist that the prequalifications process which led to the negotiated award of the contract appears to have been rigged from the very beginning to do away with the usual open international public bidding where qualified internationally known applicants could fairly participate. The records show that only one applicant passed the prequalification process. Since only one was left, to conduct a public bidding in accordance with Section 5 of the BOT Law for that lone participant will be an absurb and pointless exercise (cf. Deloso v. Sandiganbayan, 217 SCRA 49, 61 [1993]). Contrary to the comments of the Executive Secretary Drilon, Section 5 of the BOT Law in relation to Presidential Decree No. 1594 allows the negotiated award of government infrastructure projects. Presidential Decree No. 1594, "Prescribing Policies, Guidelines, Rules and Regulations for Government Infrastructure Contracts," allows the negotiated award of government projects in exceptional cases. Sections 4 of the said law reads as follows: Bidding. Construction projects shall generally be undertaken by contract after competitive public bidding. Projects may be undertaken by administration or force account or by negotiated contract only in exceptional cases where time is of the essence, or where there is lack of qualified bidders or contractors, or where there is conclusive evidence that greater economy and efficiency would be achieved through this arrangement, and in accordance with provision of laws and acts on the matter, subject to the approval of the Minister of Public Works and Transportation and Communications, the Minister of Public Highways, or the Minister of Energy, as the case may be, if the project cost is less than P1 Million, and the President of the Philippines, upon recommendation of the Minister, if the project cost is P1 Million or more (Emphasis supplied). xxx xxx xxx Indeed, where there is a lack of qualified bidders or contractors, the award of government infrastructure contracts may he made by negotiation. Presidential Decree No. 1594 is the general law on government infrastructure contracts while the BOT Law governs particular arrangements or schemes aimed at encouraging private sector participation in government infrastructure projects. The two laws are not inconsistent with each other but are inpari materia and should be read together accordingly. In the instant case, if the prequalification process was actually tainted by foul play, one wonders why none of the competing firms ever brought the matter before the PBAC, or intervened in this case before us (cf. Malayan Integrated Industries Corp. v. Court of Appeals, 213 SCRA 640 [1992]; Bureau Veritas v. Office of the President, 205 SCRA 705 [1992]).

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The challenged agreements have been approved by President Ramos himself. Although then Executive Secretary Drilon may have disapproved the "Agreement to Build, Lease and Transfer a Light Rail Transit System for EDSA," there is nothing in our laws that prohibits parties to a contract from renegotiating and modifying in good faith the terms and conditions thereof so as to meet legal, statutory and constitutional requirements. Under the circumstances, to require the parties to go back to step one of the prequalification process would just be an idle ceremony. Useless bureaucratic "red tape" should be eschewed because it discourages private sector participation, the "main engine" for national growth and development (R.A. No. 6957, Sec. 1), and renders the BOT Law nugatory. Republic Act No. 7718 recognizes and defines a BLT scheme in Section 2 thereof as: (e) Build-lease-and-transfer A contractual arrangement whereby a project proponent is authorized to finance and construct an infrastructure or development facility and upon its completion turns it over to the government agency or local government unit concerned on a lease arrangement for a fixed period after which ownership of the facility is automatically transferred to the government unit concerned. Section 5-A of the law, which expressly allows direct negotiation of contracts, provides: Direct Negotiation of Contracts. Direct negotiation shall be resorted to when there is only one complying bidder left as defined hereunder. (a) If, after advertisement, only one contractor applies for prequalification and it meets the prequalification requirements, after which it is required to submit a bid proposal which is subsequently found by the agency/local government unit (LGU) to be complying. (b) If, after advertisement, more than one contractor applied for prequalification but only one meets the prequalification requirements, after which it submits bid/proposal which is found by the agency/local government unit (LGU) to be complying. (c) If, after prequalification of more than one contractor only one submits a bid which is found by the agency/LGU to be complying. (d) If, after prequalification, more than one contractor submit bids but only one is found by the agency/LGU to be complying. Provided, That, any of the disqualified prospective bidder [sic] may appeal the decision of the implementing agency, agency/LGUs prequalification bids and awards committee within fifteen (15) working days to the head of the agency, in case of national projects or to the Department of the Interior and Local Government, in case of local projects from the date the disqualification was made known to the disqualified bidder: Provided, furthermore, That the implementing agency/LGUs concerned should act on the appeal within forty-five (45) working days from receipt thereof. Petitioners' claim that the BLT scheme and direct negotiation of contracts are not contemplated by the BOT Law has now been rendered moot and academic by R.A. No. 7718. Section 3 of this law authorizes all government infrastructure agencies, government-owned and controlled corporations and local government units to enter into contract with any duly prequalified proponent for the financing, construction, operation and maintenance of any financially viable infrastructure or development facility through a BOT, BT, BLT, BOO (Build-own-and-operate), CAO (Contract-add-operate), DOT (Develop-operate-and-transfer), ROT (Rehabilitate-operate-and-transfer), and ROO (Rehabilitate-own-operate) (R.A. No. 7718, Sec. 2 [b-j]). From the law itself, once and applicant has prequalified, it can enter into any of the schemes enumerated in Section 2 thereof, including a BLT arrangement, enumerated and defined therein (Sec. 3). Republic Act No. 7718 is a curative statute. It is intended to provide financial incentives and "a climate of minimum government regulations and procedures and specific government undertakings in support of the private

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sector" (Sec. 1). A curative statute makes valid that which before enactment of the statute was invalid. Thus, whatever doubts and alleged procedural lapses private respondent and DOTC may have engendered and committed in entering into the questioned contracts, these have now been cured by R.A. No. 7718 (cf. Development Bank of the Philippines v. Court of Appeals, 96 SCRA 342 [1980]; Santos V. Duata, 14 SCRA 1041 [1965]; Adong V. Cheong Seng Gee, 43 Phil. 43 [1922]. 4. Lastly, petitioners claim that the agreements are grossly disadvantageous to the government because the rental rates are excessive and private respondent's development rights over the 13 stations and the depot will rob DOTC of the best terms during the most productive years of the project. It must be noted that as part of the EDSA LRT III project, private respondent has been granted, for a period of 25 years, exclusive rights over the depot and the air space above the stations for development into commercial premises for lease, sublease, transfer, or advertising (Supplemental Agreement, Sec. 11; Rollo, pp. 91-92). For and in consideration of these development rights, private respondent shall pay DOTC in Philippine currency guaranteed revenues generated therefrom in the amounts set forth in the Supplemental Agreement (Sec. 11;Rollo, p. 93). In the event that DOTC shall be unable to collect the guaranteed revenues, DOTC shall be allowed to deduct any shortfalls from the monthly rent due private respondent for the construction of the EDSA LRT III (Supplemental Agreement, Sec. 11; Rollo, pp. 93-94). All rights, titles, interests and income over all contracts on the commercial spaces shall revert to DOTC upon expiration of the 25-year period. (Supplemental Agreement, Sec. 11; Rollo, pp. 91-92). The terms of the agreements were arrived at after a painstaking study by DOTC. The determination by the proper administrative agencies and officials who have acquired expertise, specialized skills and knowledge in the performance of their functions should be accorded respect absent any showing of grave abuse of discretion (Felipe Ysmael, Jr. & Co. v. Deputy Executive Secretary, 190 SCRA 673 [1990]; Board of Medical Education v. Alfonso, 176 SCRA 304 [1989]). Government officials are presumed to perform their functions with regularity and strong evidence is necessary to rebut this presumption. Petitioners have not presented evidence on the reasonable rentals to be paid by the parties to each other. The matter of valuation is an esoteric field which is better left to the experts and which this Court is not eager to undertake. That the grantee of a government contract will profit therefrom and to that extent the government is deprived of the profits if it engages in the business itself, is not worthy of being raised as an issue. In all cases where a party enters into a contract with the government, he does so, not out of charity and not to lose money, but to gain pecuniarily. 5. Definitely, the agreements in question have been entered into by DOTC in the exercise of its governmental function. DOTC is the primary policy, planning, programming, regulating and administrative entity of the Executive branch of government in the promotion, development and regulation of dependable and coordinated networks of transportation and communications systems as well as in the fast, safe, efficient and reliable postal, transportation and communications services (Administrative Code of 1987, Book IV, Title XV, Sec. 2). It is the Executive department, DOTC in particular that has the power, authority and technical expertise determine whether or not a specific transportation or communication project is necessary, viable and beneficial to the people. The discretion to award a contract is vested in the government agencies entrusted with that function (Bureau Veritas v. Office of the President, 205 SCRA 705 [1992]). WHEREFORE, the petition is DISMISSED. SO ORDERED

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Republic of the Philippines SUPREME COURT Manila

EN BANC

FRANCISCO I. CHAVEZ, Petitioner,

G.R. No. 164527 Present: PUNO, CJ, QUISUMBING, YNARES-SANTIAGO, SANDOVAL-GUTIERREZ, CARPIO, AUSTRIA-MARTINEZ, CORONA, CARPIO MORALES, AZCUNA, TINGA, CHICO-NAZARIO, GARCIA, VELASCO, NACHURA, and REYES, JJ.

- versus -

NATIONAL HOUSING AUTHORITY, R-II BUILDERS, INC., R-II HOLDINGS, INC., HARBOUR CENTRE PORT TERMINAL, INC., and Promulgated: MR. REGHIS ROMERO II, Respondents. August 15, 2007 x-----------------------------------------------------------------------------------------x DECISION VELASCO, JR., J.:

In this Petition for Prohibition and Mandamus with Prayer for Temporary Restraining Order and/or Writ of Preliminary Injunction under Rule 65, petitioner, in his capacity as taxpayer, seeks: to declare NULL AND VOID the Joint Venture Agreement (JVA) dated March 9, 1993 between the National Housing Authority and R-II Builders, Inc. and the Smokey Mountain Development and Reclamation Project embodied therein; the subsequent amendments to the said JVA; and all other agreements signed and executed in relation thereto including, but not limited to the Smokey Mountain Asset Pool Agreement dated 26 September 1994 and the separate agreements for Phase I and Phase II of the Projectas well as all other transactions which emanated therefrom, for being UNCONSTITUTIONAL and INVALID; to enjoin respondentsparticularly respondent NHAfrom further implementing and/or enforcing the said project and other agreements related thereto, and from further deriving and/or enjoying any rights, privileges and interest therefrom x x x; and to compel respondents to disclose all documents and information relating to the projectincluding, but not limited to, any subsequent agreements with respect to the different phases of the project, the revisions over the original plan, the additional works incurred thereon, the current financial condition of respondent R-II Builders, [1] Inc., and the transactions made respecting the project.

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The Facts On March 1, 1988, then President Corazon C. Aquino issued Memorandum Order No. (MO) [2] 161 approving and directing the implementation of the Comprehensive and Integrated Metropolitan Manila Waste Management Plan (the Plan). The Metro Manila Commission, in coordination with various government agencies, was tasked as the lead agency to implement the Plan as formulated by the Presidential Task Force on [3] Waste Management created by Memorandum Circular No. 39. A day after, on March 2, 1988, MO 161-A was issued, containing the guidelines which prescribed the functions and responsibilities of fifteen (15) various government departments and offices tasked to implement the Plan, namely: Department of Public Works and Highway (DPWH), Department of Health (DOH), Department of Environment and Natural Resources (DENR), Department of Transportation and Communication, Department of Budget and Management, National Economic and Development Authority (NEDA), Philippine Constabulary Integrated National Police, Philippine Information Agency and the Local Government Unit (referring to the City of Manila), Department of Social Welfare and Development, Presidential Commission for Urban Poor, National Housing Authority (NHA), Department of Labor and Employment, Department of Education, Culture and Sports (now Department of Education), and Presidential Management Staff. Specifically, respondent NHA was ordered to conduct feasibility studies and develop low-cost housing [4] projects at the dumpsite and absorb scavengers in NHA resettlement/low-cost housing projects. On the other hand, the DENR was tasked to review and evaluate proposed projects under the Plan with regard to their environmental impact, conduct regular monitoring of activities of the Plan to ensure compliance with [5] environmental standards and assist DOH in the conduct of the study on hospital waste management. At the time MO 161-A was issued by President Aquino, Smokey Mountain was a wasteland in Balut, Tondo, Manila, where numerous Filipinos resided in subhuman conditions, collecting items that may have some monetary value from the garbage. The Smokey Mountain dumpsite is bounded on the north by the Estero Marala, on the south by the property of the National Government, on the east by the property of B and I Realty Co., and on the west by Radial Road 10 (R-10). Pursuant to MO 161-A, NHA prepared the feasibility studies of the Smokey Mountain low-cost housing project which resulted in the formulation of the Smokey Mountain Development Plan and Reclamation of the Area Across R-10 or the Smokey Mountain Development and Reclamation Project (SMDRP; the Project). The Project aimed to convert the Smokey Mountain dumpsite into a habitable housing project, inclusive of the reclamation of the area across R-10, adjacent to the Smokey Mountain as the enabling component of the [6] project. Once finalized, the Plan was submitted to President Aquino for her approval. On July 9, 1990, the Build-Operate-and-Transfer (BOT) Law (Republic Act No. [RA] 6957) was [7] enacted. Its declared policy under Section 1 is [t]o recognize the indispensable role of the private sector as the main engine for national growth and development and provide the most appropriate favorable incentives to mobilize private resources for the purpose. Sec. 3 authorized and empowered [a]ll government infrastructure agencies, including government-owned and controlled corporations and local government units x x x to enter into contract with any duly pre-qualified private contractor for the financing, construction, operation and maintenance of any financially viable infrastructure facilities through the build-operate-transfer or build and transfer scheme. RA 6957 defined build-and-transfer scheme as [a] contractual arrangement whereby the contractor undertakes the construction, including financing, of a given infrastructure facility, and its turnover after the completion to the government agency or local government unit concerned which shall pay the contractor its total investment expended on the project, plus reasonable rate of return thereon. The last paragraph of Sec. 6 of the BOT Law provides that the repayment scheme in the case of land reclamation or the building of industrial estates may consist of [t]he grant of a portion or percentage of the reclaimed land or industrial estate built, subject to the constitutional requirements with respect to the ownership of lands. On February 10, 1992, Joint Resolution No. 03 resolution provided, among other things, that:
[8]

was passed by both houses of Congress. Sec. 1 of this

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Section 1. There is hereby approved the following national infrastructure projects for implementation under the provisions of Republic Act No. 6957 and its implementing rules and regulations: xxxx (d) xxxx (k) Land reclamation, dredging and other related development facilities; Port infrastructure like piers, wharves, quays, storage handling, ferry service and related facilities;

(l) Industrial estates, regional industrial centers and export processing zones including steel mills, iron-making and petrochemical complexes and related infrastructure and utilities; xxxx (p) Environmental and solid waste management-related facilities such as collection equipment, composting plants, incinerators, landfill and tidal barriers, among others; and (q) Development of new townsites and communities and related facilities.

This resolution complied with and conformed to Sec. 4 of the BOT Law requiring the approval of all national infrastructure projects by the Congress. On January 17, 1992, President Aquino proclaimed MO 415 of the SMDRP. Secs. 3 and 4 of the Memorandum Order stated:
[9]

approving and directing the implementation

Section 3. The National Housing Authority is hereby directed to implement the Smokey Mountain Development Plan and Reclamation of the Area Across R-10 through a private sector joint venture scheme at the least cost to the government. Section 4. The land area covered by the Smokey Mountain dumpsite is hereby conveyed to the National Housing Authority as well as the area to be reclaimed across R-10. (Emphasis supplied.)

In addition, the Public Estates Authority (PEA) was directed to assist in the evaluation of proposals regarding the technical feasibility of reclamation, while the DENR was directed to (1) facilitate titling of Smokey Mountain and of the area to be reclaimed and (2) assist in the technical evaluation of proposals [10] regarding environmental impact statements. In the same MO 415, President Aquino created an Executive Committee (EXECOM) to oversee the implementation of the Plan, chaired by the National Capital Region-Cabinet Officer for Regional Development (NCR-CORD) with the heads of the NHA, City of Manila, DPWH, PEA, Philippine Ports Authority (PPA), DENR, [11] and Development Bank of the Philippines (DBP) as members. The NEDA subsequently became a member of [12] the EXECOM. Notably, in a September 2, 1994Letter, PEA General Manager Amado Lagdameo approved the plans for the reclamation project prepared by the NHA. In conformity with Sec. 5 of MO 415, an inter-agency technical committee (TECHCOM) was created composed of the technical representatives of the EXECOM [t]o assist the NHA in the evaluation of the project proposals, assist in the resolution of all issues and problems in the project to ensure that all aspects of the development from squatter relocation, waste management, reclamation, environmental protection, land and [13] house construction meet governing regulation of the region and to facilitate the completion of the project.

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Subsequently, the TECHCOM put out the Public Notice and Notice to Pre-Qualify and Bid for the right to become NHAs joint venture partner in the implementation of the SMDRP. The notices were published in newspapers of general circulation on January 23 and 26 and February 1, 14, 16, and 23, 1992, respectively. Out of the thirteen (13) contractors who responded, only five (5) contractors fully complied with the required prequalification documents. Based on the evaluation of the pre-qualification documents, the EXECOM declared the [14] New San Jose Builders, Inc. and R-II Builders, Inc. (RBI) as the top two contractors. Thereafter, the TECHCOM evaluated the bids (which include the Pre-feasibility Study and Financing Plan) of the top two (2) contractors in this manner: (1) The DBP, as financial advisor to the Project, evaluated their Financial Proposals;

(2) The DPWH, PPA, PEA and NHA evaluated the Technical Proposals for the Housing Construction and Reclamation; (3) The DENR evaluated Technical Proposals on Waste Management and Disposal by conducting the Environmental Impact Analysis; and (4) The NHA and the City of Manila evaluated the socio-economic benefits presented by the proposals.

On June 30, 1992, Fidel V. Ramos assumed the Office of the President (OP) of the Philippines. On August 31, 1992, the TECHCOM submitted its recommendation to the EXECOM to approve the R-II Builders, Inc. (RBI) proposal which garnered the highest score of 88.475%.

Subsequently, the EXECOM made a Project briefing to President Ramos. As a result, President Ramos [15] issued Proclamation No. 39 on September 9, 1992, which reads: WHEREAS, the National Housing Authority has presented a viable conceptual plan to convert the Smokey Mountain dumpsite into a habitable housing project, inclusive of the reclamation of the area across Road Radial 10 (R-10) adjacent to the Smokey Mountain as the enabling component of the project; xxxx These parcels of land of public domain are hereby placed under the administration and disposition of the National Housing Authority to develop, subdivide and dispose to qualified beneficiaries, as well as its development for mix land use (commercial/industrial) to provide employment opportunities to on-site families and additional areas for port-related activities. In order to facilitate the early development of the area for disposition, the Department of Environment and Natural Resources, through the Lands and Management Bureau, is hereby directed to approve the boundary and subdivision survey and to issue a special patent and title in the name of the National Housing Authority, subject to final survey and private rights, if any there be. (Emphasis supplied.)

On October 7, 1992, President Ramos authorized NHA to enter into a Joint Venture Agreement with RBI [16] [s]ubject to final review and approval of the Joint Venture Agreement by the Office of the President. On March 19, 1993, the NHA and RBI entered into a Joint Venture Agreement (JVA) for the development of the Smokey Mountain dumpsite and the reclamation of the area across R-10 based on [18] Presidential Decree No. (PD) 757 which mandated NHA [t]o undertake the physical and socio-economic upgrading and development of lands of the public domain identified for housing, MO 161-A which required NHA to conduct the feasibility studies and develop a low-cost housing project at the Smokey Mountain, and MO 415 as amended by MO 415-A which approved the Conceptual Plan for Smokey Mountain and creation of the EXECOM and TECHCOM. Under the JVA, the Project involves the clearing of Smokey Mountain for eventual
[17]

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development into a low cost medium rise housing complex and industrial/commercial site with the reclamation of [19] the area directly across [R-10] to act as the enabling component of the Project. The JVA covered a lot in Tondo, Manila with an area of two hundred twelve thousand two hundred thirty-four (212,234) square meters and another lot to be reclaimed also in Tondo with an area of four hundred thousand (400,000) square meters. The Scope of Work of RBI under Article II of the JVA is as follows: a) To fully finance all aspects of development of Smokey Mountain and reclamation of no more than 40 hectares of Manila Bay area across Radial Road 10. b) To immediately commence on the preparation of feasibility report and detailed engineering with emphasis to the expedient acquisition of the Environmental Clearance Certificate (ECC) from the DENR. c) The construction activities will only commence after the acquisition of the ECC, and

d) Final details of the contract, including construction, duration and delivery timetables, shall be based on the approved feasibility report and detailed engineering.

Other obligations of RBI are as follows: 2.02 The [RBI] shall develop the PROJECT based on the Final Report and Detailed Engineering as approved by the Office of the President. All costs and expenses for hiring technical personnel, date gathering, permits, licenses, appraisals, clearances, testing and similar undertaking shall be for the account of the [RBI]. 2.03 The [RBI] shall undertake the construction of 3,500 temporary housing units complete with basic amenities such as plumbing, electrical and sewerage facilities within the temporary housing project as staging area to temporarily house the squatter families from the Smokey Mountain while development is being undertaken. These temporary housing units shall be turned over to the [NHA] for disposition. 2.04 The [RBI] shall construct 3,500 medium rise low cost permanent housing units on the leveled Smokey Mountain complete with basic utilities and amenities, in accordance with the plans and specifications set forth in the Final Report approved by the [NHA]. Completed units ready for mortgage take out shall be turned over by the [RBI] to NHA on agreed schedule. 2.05 The [RBI] shall reclaim forty (40) hectares of Manila Bay area directly across [R-10] as contained in Proclamation No. 39 as the enabling component of the project and payment to the [RBI] as its asset share. 2.06 The [RBI] shall likewise furnish all labor materials and equipment necessary to complete all herein development works to be undertaken on a phase to phase basis in accordance with the work program stipulated therein.

The profit sharing shall be based on the approved pre-feasibility report submitted to the EXECOM, viz: For the developer (RBI): 1. 2. To own the forty (40) hectares of reclaimed land. To own the commercial area at the Smokey Mountain area composed of 1.3 hectares, and

3. To own all the constructed units of medium rise low cost permanent housing units beyond the 3,500 units share of the [NHA].

For the NHA:

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1.

To own the temporary housing consisting of 3,500 units.

2. To own the cleared and fenced incinerator site consisting of 5 hectares situated at the Smokey Mountain area. 3. To own the 3,500 units of permanent housing the Smokey Mountain area to be awarded to qualified on site residents. 4. 5. to be constructed by [RBI] at

To own the Industrial Area site consisting of 3.2 hectares, and To own the open spaces, roads and facilities within the Smokey Mountain area.

In the event of extraordinary increase in labor, materials, fuel and non-recoverability of total project [20] expenses, the OP, upon recommendation of the NHA, may approve a corresponding adjustment in the enabling component. The functions and responsibilities of RBI and NHA are as follows: For RBI: 4.01 Immediately commence on the preparation of the FINAL REPORT with emphasis to the expedient acquisition, with the assistance of the [NHA] of Environmental Compliance Certificate (ECC) from the Environmental Management Bureau (EMB) of the [DENR]. Construction shall only commence after the acquisition of the ECC. The Environment Compliance Certificate (ECC) shall form part of the FINAL REPORT. The FINAL REPORT shall provide the necessary subdivision and housing plans, detailed engineering and architectural drawings, technical specifications and other related and required documents relative to the Smokey Mountain area. With respect to the 40-hectare reclamation area, the [RBI] shall have the discretion to develop the same in a manner that it deems necessary to recover the [RBIs] investment, subject to environmental and zoning rules. 4.02 PROJECT. 4.03 REPORT. Finance the total project cost for land development, housing construction and reclamation of the

Warrant that all developments shall be in compliance with the requirements of the FINAL

4.04 Provide all administrative resources for the submission of project accomplishment reports to the [NHA] for proper evaluation and supervision on the actual implementation. 4.05 Negotiate and secure, with the assistance of the [NHA] the grant of rights of way to the PROJECT, from the owners of the adjacent lots for access road, water, electrical power connections and drainage facilities. 4.06 Provide temporary field office and transportation vehicles (2 units), one (1) complete set of computer and one (1) unit electric typewriter for the [NHAs] field personnel to be charged to the PROJECT.

For the NHA: 4.07 The [NHA] shall be responsible for the removal and relocation of all squatters within Smokey Mountain to the Temporary Housing Complex or to other areas prepared as relocation areas with

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the assistance of the [RBI]. The [RBI] shall be responsible in releasing the funds allocated and committed for relocation as detailed in the FINAL REPORT. 4.08 Assist the [RBI] and shall endorse granting of exemption fees in the acquisition of all necessary permits, licenses, appraisals, clearances and accreditations for the PROJECT subject to existing laws, rules and regulations. 4.09 The [NHA] shall inspect, evaluate and monitor all works at the Smokey Mountain and Reclamation Area while the land development and construction of housing units are in progress to determine whether the development and construction works are undertaken in accordance with the FINAL REPORT. If in its judgment, the PROJECT is not pursued in accordance with the FINAL REPORT, the [NHA] shall require the [RBI] to undertake necessary remedial works. All expenses, charges and penalties incurred for such remedial, if any, shall be for the account of the [RBI]. 4.10 The [NHA] shall assist the [RBI] in the complete electrification of the PROJECT. x x x

4.11 Handle the processing and documentation of all sales transactions related to its assets shares from the venture such as the 3,500 units of permanent housing and the allotted industrial area of 3.2 hectares. 4.12 All advances outside of project costs made by the [RBI] to the [NHA] shall be deducted from the proceeds due to the [NHA]. 4.13 The [NHA] shall be responsible for the acquisition of the Mother Title for the Smokey Mountain and Reclamation Area within 90 days upon submission of Survey returns to the Land Management Sector. The land titles to the 40-hectare reclaimed land, the 1.3 hectare commercial area at the Smokey Mountain area and the constructed units of medium-rise permanent housing units beyond the 3,500 units share of the [NHA] shall be issued in the name of the [RBI] upon completion of the project. However, the [RBI] shall have the authority to pre-sell its share as indicated in this agreement. The final details of the JVA, which will include the construction duration, costs, extent of reclamation, and delivery timetables, shall be based on the FINAL REPORT which will be contained in a Supplemental Agreement to be executed later by the parties. The JVA may be modified or revised by written agreement between the NHA and RBI specifying the clauses to be revised or modified and the corresponding amendments. If the Project is revoked or terminated by the Government through no fault of RBI or by mutual agreement, the Government shall compensate RBI for its actual expenses incurred in the Project plus a reasonable rate of return not exceeding that stated in the feasibility study and in the contract as of the date of such revocation, cancellation, or termination on a schedule to be agreed upon by both parties. As a preliminary step in the project implementation, consultations and dialogues were conducted with the settlers of the Smokey Mountain Dumpsite Area. At the same time, DENR started processing the application for the Environmental Clearance Certificate (ECC) of the SMDRP. As a result however of the consultative dialogues, public hearings, the report on the on-site field conditions, the Environmental Impact Statement (EIS) published on April 29 and May 12, 1993 as required by the Environmental Management Bureau of DENR, the evaluation of the DENR, and the recommendations from other government agencies, it was discovered that [21] design changes and additional work have to be undertaken to successfully implement the Project. Thus, on February 21, 1994, the parties entered into another agreement denominated as the Amended [22] and Restated Joint Venture Agreement (ARJVA) which delineated the different phases of the Project. Phase I of the Project involves the construction of temporary housing units for the current residents of the SmokeyMountain dumpsite, the clearing and leveling-off of the dumpsite, and the construction of medium[23] rise low-cost housing units at the cleared and leveled dumpsite. Phase II of the Project involves the [24] construction of an incineration area for the on-site disposal of the garbage at the dumpsite. The enabling component or consideration for Phase I of the Project was increased from 40 hectares of reclaimed lands across

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R-10 to 79 hectares. The revision also provided for the enabling component for Phase II of 119 hectares of [26] reclaimed lands contiguous to the 79 hectares of reclaimed lands for Phase I. Furthermore, the amended contract delineated the scope of works and the terms and conditions of Phases I and II, thus: The PROJECT shall consist of Phase I and Phase II. Phase I shall involve the following: a. the construction of 2,992 units of temporary housing for the affected residents while clearing and development of Smokey Mountain [are] being undertaken b. the clearing of Smokey Mountain and the subsequent construction of 3,520 units of medium rise housing and the development of the industrial/commercial site within theSmokey Mountain area c. the reclamation and development of a 79 hectare area directly across Radial Road 10 to serve as the enabling component of Phase I Phase II shall involve the following: a. the construction and operation of an incinerator plant that will conform to the emission standards of the DENR b. the reclamation and development of 119-hectare area contiguous to that to be reclaimed under Phase I to serve as the enabling component of Phase II. Under the ARJVA, RBI shall construct 2,992 temporary housing units, a reduction from 3,500 units under [27] the JVA. However, it was required to construct 3,520 medium-rise low-cost permanent housing units instead of 3,500 units under the JVA. There was a substantial change in the design of the permanent housing units such that a loft shall be incorporated in each unit so as to increase the living space from 20 to 32 square meters. The additions and changes in the Original Project Component are as follows: ORIGINAL 1. TEMPORARY HOUSING Concrete/Steel Frame Structure Sheet usable life of 3 gauge 26 G.I. roofing sheets future 12 SM floor use as permanent structures for factory and warehouses 17 sm & 12 sm floor area. CHANGES/REVISIONS

[25]

Wood/Plywood, ga. 31 G.I. years, area. mixed 2. MEDIUM RISE MASS HOUSING Box type precast Shelter meter floor area with 2.4 meter units/ building.

Conventional and precast component 20 square concrete structures, 32 square meter floor area with loft floor height; bare type, 160 (sleeping quarter) 3.6 m. floor height, painted and improved architectural faade, 80 units/ building.

3. MITIGATING MEASURES wrk MLLW. Use of clean dredgefill material below the MLLW and SM material mixed with dredgefill above

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a. 100% use of Smokey Mountain material as dredgefill b. Concrete Sheet Piles short depth of embedment

Use of Steel Sheet Piles needed for longer depth of embedment.

c. Silt removal approximately Need to remove more than 3.0 [28] meters of silt after sub-soil investigation. These material and substantial modifications served as justifications for the increase in the share of RBI from 40 hectares to 79 hectares of reclaimed land. Under the JVA, the specific costs of the Project were not stipulated but under the ARJVA, the stipulated cost for Phase I was pegged at six billion six hundred ninety-three million three hundred eighty-seven thousand three hundred sixty-four pesos (PhP 6,693,387,364). In his February 10, 1994 Memorandum, the Chairperson of the SMDRP EXECOM submitted the ARJVA for approval by the OP. After review of said agreement, the OP directed that certain terms and conditions of the ARJVA be further clarified or amended preparatory to its approval. Pursuant to the Presidents directive, the parties reached an agreement on the clarifications and amendments required to be made on the ARJVA. On August 11, 1994, the NHA and RBI executed an Amendment To the Amended and Restated Joint [29] Venture Agreement (AARJVA) clarifying certain terms and condition of the ARJVA, which was submitted to President Ramos for approval, to wit:

Phase II shall involve the following: a. the construction and operation of an incinerator plant that will conform to the emission standards of the DENR b. the reclamation and development of 119-hectare area contiguous to that to be reclaimed under Phase I to serve as the enabling component of Phase II, the exact size and configuration of which shall be [30] approved by the SMDRP Committee

Other substantial amendments are the following:

4. Paragraph 2.05 of Article II of the ARJVA is hereby amended to read as follows: 2.05. The DEVELOPER shall reclaim seventy nine (79) hectares of the Manila Bay area directly across Radial Road 10 (R-10) to serve as payment to the DEVELOPER as its asset share for Phase I and to develop such land into commercial area with port facilities; provided, that the port plan shall be integrated with the Philippine Port Authoritys North Harbor plan for the Manila Bay area and provided further, that the final reclamation and port plan for said reclaimed area shall be submitted for approval by the Public Estates Authority and the Philippine Ports Authority, respectively: provided finally, that subject to par. 2.02 above, actual reclamation work may commence upon approval of the final reclamation plan by the Public Estates Authority. xxxx 9. A new paragraph to be numbered 5.05 shall be added to Article V of the ARJVA, and shall read as follows:

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5.05. In the event this Agreement is revoked, cancelled or terminated by the AUTHORITY through no fault of the DEVELOPER, the AUTHORITY shall compensate the DEVELOPER for the value of the completed portions of, and actual expenditures on the PROJECT plus a reasonable rate of return thereon, not exceeding that stated in the Cost Estimates of Items of Work previously approved by the SMDRP Executive Committee and the AUTHORITY and stated in this Agreement, as of the date of such revocation, cancellation, or termination, on a schedule to be agreed upon by the parties, provided that said completed portions of Phase I are in accordance with the approved FINAL REPORT. Afterwards, President Ramos issued Proclamation No. 465 dated August 31, 1994 [32] proposed area for reclamation across R-10 from 40 hectares to 79 hectares, to wit:
[31]

increasing the

NOW, THEREFORE, I, FIDEL V. RAMOS, President of the Republic of the Philippines, by virtue of the powers vested in me by the law, and as recommended by the SMDRP Executive Committee, do hereby authorize the increase of the area of foreshore or submerged lands of Manila Bay to be reclaimed, as previously authorized under Proclamation No. 39 (s. 1992) and Memorandum Order No. 415 (s. 1992), from Four Hundred Thousand (400,000) square meters, more or less, to Seven Hundred Ninety Thousand (790,000) square meters, more or less. On September 1, 1994, pursuant to Proclamation No. 39, the DENR issued Special Patent No. 3591 conveying in favor of NHA an area of 211,975 square meters covering the Smokey Mountain Dumpsite. In its September 7, 1994 letter to the EXECOM, the OP through then Executive Secretary Teofisto T. Guingona, Jr., approved the ARJVA as amended by the AARJVA. On September 8, 1994, the DENR issued Special Patent 3592 pursuant to Proclamation No. 39, conveying in favor of NHA a 401,485-square meter area. On September 26, 1994, the NHA, RBI, Home Insurance and Guaranty Corporation (HIGC), now known [33] as the Home Guaranty Corporation, and the Philippine National Bank (PNB) executed the Smokey Mountain [34] Asset Pool Formation Trust Agreement (Asset Pool Agreement). Thereafter, a Guaranty Contract was entered into by NHA, RBI, and HIGC. On June 23, 1994, the Legislature passed the Clean Air Act. The Act made the establishment of an incinerator illegal and effectively barred the implementation of the planned incinerator project under Phase [36] II. Thus, the off-site disposal of the garbage at the Smokey Mountain became necessary. The land reclamation was completed in August 1996.
[37] [35]

Sometime later in 1996, pursuant likewise to Proclamation No. 39, the DENR issued Special Patent No. 3598 conveying in favor of NHA an additional 390,000 square meter area. During the actual construction and implementation of Phase I of the SMDRP, the Inter-Agency Technical Committee found and recommended to the EXECOM on December 17, 1997 that additional works were necessary for the completion and viability of the Project. The EXECOM approved the recommendation and so, [38] NHA instructed RBI to implement the change orders or necessary works. Such necessary works comprised more than 25% of the original contract price and as a result, the Asset Pool incurred direct and indirect costs. Based on C1 12 A of the Implementing Rules and Regulations of PD 1594, a supplemental agreement is required for all change orders and extra work orders, the total aggregate cost of which being more than twenty-five (25%) of the escalated original contract price. The EXECOM requested an opinion from the Department of Justice (DOJ) to determine whether a bidding was required for the change orders and/or necessary works. The DOJ, through DOJ Opinion Nos. 119 and 155 dated August 26, 1993 and November 12, 1993, opined that a rebidding, pursuant to the aforequoted provisions of the implementing rules (referring to PD 1594) would not be necessary where the change orders

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inseparable from the original scope of the project, in which case, a negotiation with the incumbent contractor may be allowed. Thus, on February 19, 1998, the EXECOM issued a resolution directing NHA to enter into a supplemental agreement covering said necessary works. On March 20, 1998, the NHA and RBI entered into a Supplemental Agreement covering the aforementioned necessary works and submitted it to the President onMarch 24, 1998 for approval. Outgoing President Ramos decided to endorse the consideration of the Supplemental Agreement to incoming President Joseph E. Estrada. On June 30, 1998, Estrada became the 13th Philippine President. However, the approval of the Supplemental Agreement was unacted upon for five months. As a result, the utilities and the road networks were constructed to cover only the 79-hectare original enabling component granted under the ARJVA. The 220-hectare extension of the 79-hectare area was no longer technically feasible. Moreover, the financial crises and unreliable real estate situation made it difficult to sell the remaining reclaimed lots. The devaluation of the peso and the increase in interest cost led to the substantial increase in the cost of reclamation. On August 1, 1998, the NHA granted RBIs request to suspend work on the SMDRP due to the delay in the approval of the Supplemental Agreement, the consequent absence of an enabling component to cover the cost of the necessary works for the project, and the resulting inability to replenish the Asset Pool funds partially [39] used for the completion of the necessary works. As of August 1, 1998 when the project was suspended, RBI had already accomplished a portion of the necessary works and change orders which resulted in [RBI] and the Asset Pool incurring advances for direct and indirect cost which amount can no longer be covered by the 79-hectare enabling component under the [40] ARJVA. Repeated demands were made by RBI in its own capacity and on behalf of the asset pool on NHA for payment for the advances for direct and indirect costs subject to NHA validation. In November 1998, President Estrada issued Memorandum Order No. 33 reconstituting the SMDRP EXECOM and further directed it to review the Supplemental Agreement and submit its recommendation on the completion of the SMDRP. The reconstituted EXECOM conducted a review of the project and recommended the amendment of the March 20, 1998 Supplemental Agreement to make it more feasible and to identify and provide new sources of funds for the project and provide for a new enabling component to cover the payment for the necessary works [41] that cannot be covered by the 79-hectare enabling component under the ARJVA. The EXECOM passed Resolution Nos. 99-16-01 and 99-16-02 Supplemental Agreement, to wit: a) Approval of 150 hectares additional reclamation in order to the enabling component.
[42]

which approved the modification of the

make the reclamation feasible as part of

b) The conveyance of the 15-hectare NHA Vitas property (actually the SMDRP Asset Pool.

17 hectares based on surveys) to

c) The inclusion in the total development cost of other additional, necessary and indispensable infrastructure works and the revision of the original cost stated in the Supplemental Agreement dated March 20, 1998 from PhP 2,953,984,941.40 to PhP 2,969,134,053.13. d) Revision in the sharing agreement between the parties.

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In the March 23, 2000 OP Memorandum, the EXECOM was authorized to proceed and complete the SMDRP subject to certain guidelines and directives. After the parties in the case at bar had complied with the March 23, 2000 Memorandum, the NHA November 9, 2000 Resolution No. 4323 approved the conveyance of the 17-hectare Vitas property in favor of the existing or a newly created Asset Pool of the project to be developed into a mixed commercial-industrial area, subject to certain conditions. On January 20, 2001, then President Estrada was considered resigned. On the same day, President Gloria M. Arroyo took her oath as the 14th President of thePhilippines. As of February 28, 2001, the estimated total project cost of the SMDRP has reached P8.65 billion [43] comprising of P4.78 billion in direct cost and P3.87 billion in indirect cost, subject to validation by the NHA. On August 28, 2001, NHA issued Resolution No. 4436 to pay for the various necessary works/change orders to SMDRP, to effect the corresponding enabling component consisting of the conveyance of the NHAs Vitas Property and an additional 150-hectare reclamation area and to authorize the release by NHA of PhP 480 million as advance to the project to make the Permanent Housing habitable, subject to reimbursement from the [44] proceeds of the expanded enabling component. On November 19, 2001, the Amended Supplemental Agreement (ASA) was signed by the parties, and on February 28, 2002, the Housing and Urban Development Coordinating Council (HUDCC) submitted the agreement to the OP for approval. In the July 20, 2002 Cabinet Meeting, HUDCC was directed to submit the works covered by the PhP [45] 480 million [advance to the Project] and the ASA to public bidding. On August 28, 2002, the HUDCC informed RBI of the decision of the Cabinet. In its September 2, 2002 letter to the HUDCC Chairman, RBI lamented the decision of the government to bid out the remaining works under the ASA thereby unilaterally terminating the Project with RBI and all the agreements related thereto. RBI demanded the payment of just compensation for all accomplishments and costs incurred in developing the SMDRP plus a reasonable rate of return thereon pursuant to Section 5.05 of the [46] ARJVA and Section 6.2 of the ASA. Consequently, the parties negotiated the terms of the termination of the JVA and other subsequent agreements. On August 27, 2003, the NHA and RBI executed a Memorandum of Agreement (MOA) whereby both parties agreed to terminate the JVA and other subsequent agreements, thus:

1.

TERMINATION

1.1 In compliance with the Cabinet directive dated 30 July 2002 to submit the works covered by the P480 Million and the ASA to public bidding, the following agreements executed by and between the NHA and the DEVELOPER are hereby terminated, to wit: a. b. c. Joint Venture Agreement (JVA) dated 19 March 1993 Amended and Restated Joint Venture Agreement (ARJVA) dated 21 February 1994 Amendment and Restated Joint Venture Agreement dated 11 August 1994 d. Supplemental Agreement dated 24 March 1998 e. Amended Supplemental Agreement (ASA) dated 19 November 2001. xxxx 5. SETTLEMENT OF CLAIMS

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5.1 Subject to the validation of the DEVELOPERs claims, the NHA hereby agrees to initially compensate the Developer for the abovementioned costs as follows: a. a.1 Direct payment to DEVELOPER of the amounts herein listed in the following manner: P250 Million in cash from the escrow account in accordance with Section 2 herewith;

a.2 Conveyance of a 3 hectare portion of the Vitas Industrial area immediately after joint determination of the appraised value of the said property in accordance with the procedure herein set forth in the last paragraph of Section 5.3. For purposes of all payments to be made through conveyance of real properties, the parties shall secure from the NHA Board of Directors all documents necessary and sufficient to effect the transfer of title over the properties to be conveyed to RBI, which documents shall be issued within a reasonable period. 5.2 Any unpaid balance of the DEVELOPERS claims determined after the validation process referred to in Section 4 hereof, may be paid in cash, bonds or through the conveyance of properties or any combination thereof. The manner, terms and conditions of payment of the balance shall be specified and agreed upon later within a period of three months from the time a substantial amount representing the unpaid balance has been validated pursuant hereto including, but not limited to the programming of quarterly cash payments to be sourced by the NHA from its budget for debt servicing, from its income or from any other sources. 5.3 In any case the unpaid balance is agreed to be paid, either partially or totally through conveyance of properties, the parties shall agree on which properties shall be subject to conveyance. The NHA and DEVELOPER hereby agree to determine the valuation of the properties to be conveyed by getting the average of the appraisals to be made by two (2) mutually acceptable independent appraisers.

Meanwhile, respondent Harbour Centre Port Terminal, Inc. (HCPTI) entered into an agreement with the asset pool for the development and operations of a port in the Smokey Mountain Area which is a major component of SMDRP to provide a source of livelihood and employment for Smokey Mountain residents and spur economic growth. A Subscription Agreement was executed between the Asset Pool and HCPTI whereby the asset pool subscribed to 607 million common shares and 1,143 million preferred shares of HCPTI. The HCPTI preferred shares had a premium and penalty interest of 7.5% per annum and a mandatory redemption feature. The asset pool paid the subscription by conveying to HCPTI a 10-hectare land which it acquired from the NHA being a portion of the reclaimed land of the SMDRP. Corresponding certificates of titles were issued to HCPTI, namely: TCT Nos. 251355, 251356, 251357, and 251358. Due to HCPTIs failure to obtain a license to handle foreign containerized cargo from PPA, it suffered a net income loss of PhP 132,621,548 in 2002 and a net loss of PhP 15,540,063 in 2003. The Project Governing Board of the Asset Pool later conveyed by way of dacion en pago a number of HCPTI shares to RBI in lieu of cash payment for the latters work in SMDRP. On August 5, 2004, former Solicitor General Francisco I. Chavez, filed the instant petition which impleaded as respondents the NHA, RBI, R-II Holdings, Inc. (RHI), HCPTI, and Mr. Reghis Romero II, raising constitutional issues. The NHA reported that thirty-four (34) temporary housing structures and twenty-one (21) permanent housing structures had been turned over by respondent RBI. It claimed that 2,510 beneficiary-families belonging to the poorest of the poor had been transferred to their permanent homes and benefited from the Project.

The Issues The grounds presented in the instant petition are: I

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NEITHER RESPONDENT NHA NOR RESPONDENT R-II BUILDERS MAY VALIDLY RECLAIM FORESHORE AND SUBMERGED LAND BECAUSE: 1. RESPONDENT NHA AND R-II BUILDERS WERE NEVER GRANTED ANY POWER AND AUTHORITY TO RECLAIM LANDS OF THE PUBLIC DOMAIN AS THIS POWER IS VESTED EXCLUSIVELY WITH THE PEA. 2. EVEN ASSUMING THAT RESPONDENTS NHA AND R-II BUILDERS WERE GIVEN THE POWER AND AUTHORITY TO RECLAIM FORESHORE AND SUBMERGED LAND, THEY WERE NEVER GIVEN THE AUTHORITY BY THE DENR TO DO SO. II RESPONDENT R-II BUILDERS CANNOT ACQUIRE THE RECLAIMED FORESHORE AND SUBMERGED LAND AREAS BECAUSE: 1. THE RECLAIMED FORESHORE AND SUBMERGED PARCELS OF LAND ARE INALIENABLE PUBLIC LANDS WHICH ARE BEYOND THE COMMERCE OF MAN. 2. ASSUMING ARGUENDO THAT THE SUBJECT RECLAIMED FORESHORE AND SUBMERGED PARCELS OF LAND WERE ALREADY DECLARED ALIENABLE LANDS OF THE PUBLIC DOMAIN, RESPONDENT R-II BUILDERS STILL COULD NOT ACQUIRE THE SAME BECAUSE THERE WAS NEVER ANY DECLARATION THAT THE SAID LANDS WERE NO LONGER NEEDED FOR PUBLIC USE. 3. EVEN ASSUMING THAT THE SUBJECT RECLAIMED LANDS ARE ALIENABLE AND NO LONGER NEEDED FOR PUBLIC USE, RESPONDENT R-II BUILDERS STILL CANNOT ACQUIRE THE SAME BECAUSE THERE WAS NEVER ANY LAW AUTHORIZING THE SALE THEREOF. 4. THERE WAS NEVER ANY THE SUBJECT LAND TO RESPONDENT PUBLIC BIDDING R-II BUILDERS. AWARDING OWNERSHIP OF

5. ASSUMING THAT ALL THE REQUIREMENTS FOR A VALID TRANSFER OF ALIENABLE PUBLIC HAD BEEN PERFORMED, RESPONDENT R-II BUILDERS, BEING PRIVATE CORPORATION IS NONETHELESS EXPRESSLYPROHIBITED BY THE PHILIPPINE CONSTITUTION TO ACQUIRE LANDS OF THE PUBLIC DOMAIN. III RESPONDENT HARBOUR, BEING A PRIVATE CORPORATION WHOSE MAJORITY STOCKS ARE OWNED AND CONTROLLED BY RESPONDENT ROMEROS CORPORATIONS R-II BUILDERS AND R-II HOLDINGS IS DISQUALIFIED FROM BEING A TRANSFEREE OF PUBLIC LAND. IV RESPONDENTS MUST BE COMPELLED TO DISCLOSE ALL INFORMATION RELATED TO THE SMOKEY MOUNTAIN DEVELOPMENT AND RECLAMATION PROJECT. The Courts Ruling Before we delve into the substantive issues raised in this petition, we will first deal with several procedural matters raised by respondents. Whether petitioner has the requisite locus standi to file this case Respondents argue that petitioner Chavez has no legal standing to file the petition.

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Only a person who stands to be benefited or injured by the judgment in the suit or entitled to the avails of [47] the suit can file a complaint or petition. Respondents claim that petitioner is not a proper party-in-interest as he was unable to show that he has sustained or is in immediate or imminent danger of sustaining some direct and personal injury as a result of the execution and enforcement of the assailed contracts or [48] agreements. Moreover, they assert that not all government contracts can justify a taxpayers suit especially when no public funds were utilized in contravention of the Constitution or a law. [49] We explicated in Chavez v. PCGG that in cases where issues of transcendental public importance are presented, there is no necessity to show that petitioner has experienced or is in actual danger of suffering direct [50] and personal injury as the requisite injury is assumed. We find our ruling in Chavez v. PEA as conclusive authority on locus standi in the case at bar since the issues raised in this petition are averred to be in breach of the fair diffusion of the countrys natural resources and the constitutional right of a citizen to information which have been declared to be matters of transcendental public importance. Moreover, the pleadings especially those of respondents readily reveal that public funds have been indirectly utilized in the Project by means of Smokey Mountain Project Participation Certificates (SMPPCs) bought by some government agencies. Hence, petitioner, as a taxpayer, is a proper party to the instant petition before the court. Whether petitioners direct recourse to this Court was proper Respondents are one in asserting that petitioner circumvents the principle of hierarchy of courts in his petition. Judicial hierarchy was made clear in the case ofPeople v. Cuaresma, thus: There is after all a hierarchy of courts. That hierarchy is determinative of the venue of appeals, and should also serve as a general determinant of the appropriate forum for petitions for the extraordinary writs. A becoming regard for that judicial hierarchy most certainly indicates that petitions for the issuance of extraordinary writs against first level (inferior) courts should be filed with the Regional Trial Court, and those against the latter, with the Court of Appeals. A direct invocation of the Supreme Courts original jurisdiction to issue these writs should be allowed only when there are special and important reasons therefor, clearly and specifically set out in the petition. This is established policy. It is a policy that is necessary to prevent inordinate demands upon the Courts time and attention which are better devoted to those matters within its exclusive jurisdiction, and to prevent [51] further over-crowding of the Courts docket. x x x The OSG claims that the jurisdiction over petitions for prohibition and mandamus is concurrent with other lower courts like the Regional Trial Courts and the Court of Appeals. Respondent NHA argues that the instant petition is misfiled because it does not introduce special and important reasons or exceptional and compelling circumstances to warrant direct recourse to this Court and that the lower courts are more equipped for factual issues since this Court is not a trier of facts. Respondents RBI and RHI question the filing of the petition as this Court should not be unduly burdened with repetitions, invocation of jurisdiction over constitutional questions it had previously resolved and settled. In the light of existing jurisprudence, we find paucity of merit in respondents postulation. While direct recourse to this Court is generally frowned upon and discouraged, we have however ruled in Santiago v. Vasquez that such resort to us may be allowed in certain situations, wherein this Court ruled that petitions for certiorari, prohibition, or mandamus, though cognizable by other courts, may directly be filed with us if the redress desired cannot be obtained in the appropriate courts or where exceptional compelling circumstances justify availment of a remedy within and calling for the exercise of [this Courts] primary [52] jurisdiction. The instant petition challenges the constitutionality and legality of the SMDRP involving several hectares of government land and hundreds of millions of funds of several government agencies. Moreover, serious constitutional challenges are made on the different aspects of the Project which allegedly affect the right of Filipinos to the distribution of natural resources in the country and the right to information of a citizenmatters which have been considered to be of extraordinary significance and grave consequence to the public in general. These concerns in the instant action compel us to turn a blind eye to the judicial structure meant to

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provide an orderly dispensation of justice and consider the instant petition as a justified deviation from an established precept. Core factual matters undisputed Respondents next challenge the projected review by this Court of the alleged factual issues intertwined in the issues propounded by petitioner. They listed a copious number of questions seemingly factual in nature [53] which would make this Court a trier of facts. We find the position of respondents bereft of merit. For one, we already gave due course to the instant petition in our January 18, 2005 Resolution. In said issuance, the parties were required to make clear and concise statements of established facts upon which our decision will be based. Secondly, we agree with petitioner that there is no necessity for us to make any factual findings since the facts needed to decide the instant petition are well established from the admissions of the parties in their [55] pleadings and those derived from the documents appended to said submissions. Indeed, the core facts which are the subject matter of the numerous issues raised in this petition are undisputed. Now we will tackle the issues that prop up the instant petition. Since petitioner has cited our decision in PEA as basis for his postulations in a number of issues, we first resolve the queryis PEA applicable to the case at bar? A juxtaposition of the facts in the two cases constrains the Court to rule in the negative. The Court finds that PEA is not a binding precedent to the instant petition because the facts in said case are substantially different from the facts and circumstances in the case at bar, thus: (1) The reclamation project in PEA was undertaken through a JVA entered into between PEA and AMARI. The reclamation project in the instant NHA case was undertaken by the NHA, a national government agency in consultation with PEA and with the approval of two Philippine Presidents; (2) In PEA, AMARI and PEA executed a JVA to develop the Freedom Islands and reclaim submerged areas without public bidding on April 25, 1995. In the instant NHA case, the NHA and RBI executed a JVA after RBI was declared the winning bidder on August 31, 1992 as the JVA partner of the NHA in the SMDRP after compliance with the requisite public bidding. (3) In PEA, there was no law or presidential proclamation classifying the lands to be reclaimed as alienable and disposal lands of public domain. In this RBI case, MO 415 of former President Aquino and Proclamation No. 39 of then President Ramos, coupled with Special Patents Nos. 3591, 3592, and 3598, classified the reclaimed lands as alienable and disposable; (4) In PEA, the Chavez petition was filed before the amended JVA was executed by PEA and AMARI. In this NHA case, the JVA and subsequent amendments were already substantially implemented. Subsequently, the Project was terminated through a MOA signed on August 27, 2003. Almost one year later onAugust 5, 2004, the Chavez petition was filed; (5) In PEA, AMARI was considered to be in bad faith as it signed the amended JVA after the Chavez petition was filed with the Court and after Senate Committee Report No. 560 was issued finding that the subject lands are inalienable lands of public domain. In the instant petition, RBI and other respondents are considered to have signed the agreements in good faith as the Project was terminated even before the Chavez petition was filed;
[54]

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(6) The PEA-AMARI JVA was executed as a result of direct negotiation between the parties and not in accordance with the BOT Law. The NHA-RBI JVA and subsequent amendments constitute a BOT contract governed by the BOT Law; and (7) In PEA, the lands to be reclaimed or already reclaimed were transferred to PEA, a government entity [56] tasked to dispose of public lands under Executive Order No. (EO) 525. In the NHA case, the reclaimed lands were transferred to NHA, a government entity NOT tasked to dispose of public land and therefore said alienable [57] lands were converted to patrimonial lands upon their transfer to NHA. Thus the PEA Decision cannot be considered an authority or precedent to the instant case. The [59] principle of stare decisis has no application to the different factual setting of the instant case. We will now dwell on the substantive issues raised by petitioner. After a perusal of the grounds raised in this petition, we find that most of these issues are moored on our PEA Decision which, as earlier discussed, has no application to the instant petition. For this reason alone, the petition can already be rejected. Nevertheless, on the premise of the applicability of said decision to the case at bar, we will proceed to resolve said issues.
[58]

First Issue: Whether respondents NHA and RBI have been granted the power and authority to reclaim lands of the public domain as this power is vested exclusively in PEA as claimed by petitioner

Petitioner contends that neither respondent NHA nor respondent RBI may validly reclaim foreshore and submerged land because they were not given any power and authority to reclaim lands of the public domain as this power was delegated by law to PEA. Asserting that existing laws did not empower the NHA and RBI to reclaim lands of public domain, the Public Estates Authority (PEA), petitioner claims, is the primary authority for the reclamation of all foreshore and submerged lands of public domain, and relies on PEA where this Court held: Moreover, Section 1 of Executive Order No. 525 provides that PEA shall be primarily responsible for integrating, directing, and coordinating all reclamation projects for and on behalf of the National Government. The same section also states that [A]ll reclamation projects shall be approved by the President upon recommendation of the PEA, and shall be undertaken by the PEA or through a proper contract executed by it with any person or entity; x x x. Thus, under EO No. 525, in relation to PD No. 3-A and PD No. 1084, PEA became the primary implementing agency of the National Government to reclaim foreshore and submerged lands of the public domain. EO No. 525 recognized PEA as the government entity to undertake the reclamation of lands and ensure their maximum utilization in promoting public welfare and interests. Since large portions of these reclaimed lands would obviously be needed for public service, there must be a formal declaration [60] segregating reclaimed lands no longer needed for public service from those still needed for public service.

In the Smokey Mountain Project, petitioner clarifies that the reclamation was not done by PEA or through a contract executed by PEA with another person or entity but by the NHA through an agreement with respondent RBI. Therefore, he concludes that the reclamation is null and void. Petitioners contention has no merit. EO 525 reads:

Section 1. The Public Estates Authority (PEA) shall be primarily responsible for integrating, directing, and coordinating all reclamation projects for and on behalf of the National Government. All reclamation projects shall be approved by the President upon recommendation of the PEA, and shall be undertaken by the PEA or

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through a proper contract executed by it with any person or entity; Provided, that, reclamation projects of any national government agency or entity authorized under its charter shall be undertaken in consultation with the PEA upon approval of the President. (Emphasis supplied.)

The aforequoted provision points to three (3) requisites for a legal and valid reclamation project, viz: (1) (2) (3) approval by the President; favorable recommendation of PEA; and undertaken by any of the following:

a. by PEA b. by any person or entity pursuant to a contract it executed with PEA c. by the National Government agency or entity authorized under its charter to reclaim lands subject to consultation with PEA Without doubt, PEA under EO 525 was designated as the agency primarily responsible for integrating, directing, and coordinating all reclamation projects. Primarily means mainly, principally, mostly, generally. Thus, not all reclamation projects fall under PEAs authority of supervision, integration, and coordination. The very [61] charter of PEA, PD 1084, does not mention that PEA has the exclusive and sole power and authority to reclaim lands of public domain. EO 525 even reveals the exceptionreclamation projects by a national government agency or entity authorized by its charter to reclaim land. One example is EO 405 which authorized the Philippine Ports Authority (PPA) to reclaim and develop submerged areas for port related purposes. Under its charter, PD 857, PPA has the power to reclaim, excavate, enclose or raise any of the lands vested in it. Thus, while PEA under PD 1084 has the power to reclaim land and under EO 525 is primarily responsible for integrating, directing and coordinating reclamation projects, such authority is NOT exclusive and such power to reclaim may be granted or delegated to another government agency or entity or may even be undertaken by the National Government itself, PEA being only an agency and a part of the National Government. Let us apply the legal parameters of Sec. 1, EO 525 to the reclamation phase of SMDRP. After a scrutiny of the facts culled from the records, we find that the project met all the three (3) requirements, thus: 1. There was ample approval by the President of the Philippines; as a matter of fact, two Philippine Presidents approved the same, namely: Presidents Aquino and Ramos. President Aquino sanctioned the reclamation of both the SMDRP housing and commercial-industrial sites through MO 415 (s. 1992) which approved the SMDRP under Sec. 1 and directed NHA x x x to implement the Smokey Mountain Development Plan and Reclamation of the Area across R-10through a private sector joint venture scheme at the least cost to government under Section 3. For his part, then President Ramos issued Proclamation No. 39 (s. 1992) which expressly reserved the Smokey Mountain Area and the Reclamation Area for a housing project and related commercial/industrial development. Moreover, President Ramos issued Proclamation No. 465 (s. 1994) which authorized the increase of the Reclamation Area from 40 hectares of foreshore and submerged land of the Manila Bay to 79 hectares. It speaks of the reclamation of 400,000 square meters, more or less, of the foreshore and submerged lands of Manila Bay adjoining R-10 as an enabling component of the SMDRP. As a result of Proclamations Nos. 39 and 465, Special Patent No. 3591 covering 211,975 square meters of Smokey Mountain, Special Patent No. 3592 covering 401,485 square meters of reclaimed land, and Special Patent No. 3598 covering another 390,000 square meters of reclaimed land were issued by the DENR. Thus, the first requirement of presidential imprimatur on the SMDRP has been satisfied.

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2. The requisite favorable endorsement of the reclamation phase was impliedly granted by PEA. President Aquino saw to it that there was coordination of the project with PEA by designating its general manager as member of the EXECOM tasked to supervise the project implementation. The assignment was made in Sec. 2 of MO 415 which provides: Section 2. An Executive Committee is hereby created to oversee the implementation of the Plan, chaired by the NCR-CORD, with the heads of the following agencies as members: The National Housing Authority, the City of Manila, the Department of Public Works and Highways, the Public Estates Authority, the Philippine Ports Authority, the Department of Environment and Natural Resources and the Development Bank of the Philippines. (Emphasis supplied.)

The favorable recommendation by PEA of the JVA and subsequent amendments were incorporated as part of the recommendations of the EXECOM created under MO 415. While there was no specific recommendation on the SMDRP emanating solely from PEA, we find that the approbation of the Project and the land reclamation as an essential component by the EXECOM of which PEA is a member, and its submission of the SMDRP and the agreements on the Project to the President for approval amply met the second requirement of EO 525. 3. The third element was also presentthe reclamation was undertaken either by PEA or any person or entity under contract with PEA or by the National Government agency or entity authorized under its charter to reclaim lands subject to consultation with PEA. It cannot be disputed that the reclamation phase was not done by PEA or any person or entity under contract with PEA. However, the reclamation was implemented by the NHA, a national government agency whose authority to reclaim lands under consultation with PEA is derived [62] from its charterPD 727 and other pertinent lawsRA 7279 and RA 6957 as amended by RA 7718. While the authority of NHA to reclaim lands is challenged by petitioner, we find that the NHA had more than enough authority to do so under existing laws. While PD 757, the charter of NHA, does not explicitly mention reclamation in any of the listed powers of the agency, we rule that the NHA has an implied power to reclaim land as this is vital or incidental to effectively, logically, and successfully implement an urban land reform and housing program enunciated in Sec. 9 of Article XIII of the 1987 Constitution. Basic in administrative law is the doctrine that a government agency or office has express and implied powers based on its charter and other pertinent statutes. Express powers are those powers granted, allocated, and delegated to a government agency or office by express provisions of law. On the other hand, implied [63] powers are those that can be inferred or are implicit in the wordings of the law or conferred by necessary or [64] fair implication in the enabling act. In Angara v. Electoral Commission, the Court clarified and stressed that when a general grant of power is conferred or duty enjoined, every particular power necessary for the exercise of [65] the one or the performance of the other is also conferred by necessary implication. It was also explicated that when the statute does not specify the particular method to be followed or used by a government agency in the exercise of the power vested in it by law, said agency has the authority to adopt any reasonable method to carry [66] out its functions.
[67]

3-A,

The power to reclaim on the part of the NHA is implicit from PD 757, RA 7279, MO 415, RA 6957, and PD viz: 1. NHAs power to reclaim derived from PD 757 provisions:

a.

Sec. 3 of PD 757 implies that reclamation may be resorted to in order to attain the goals of NHA:

Section 3. Progress and Objectives. The Authority shall have the following purposes and objectives: xxxx b) To undertake housing, development, resettlement or other activities as would enhance the provision of housing to every Filipino;

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c) To harness and promote private participation in housing ventures in terms of capital expenditures, land, expertise, financing and other facilities for the sustained growth of the housing industry. (Emphasis supplied.)

Land reclamation is an integral part of the development of resources for some of the housing requirements of the NHA. Private participation in housing projects may also take the form of land reclamation. b. Sec. 5 of PD 757 serves as proof that the NHA, as successor of the Tondo Foreshore Development Authority (TFDA), has the power to reclaim, thus: Section 5. Dissolution of Existing Housing Agencies. The People's Homesite and Housing Corporation (PHHC), the Presidential Assistant on Housing Resettlement Agency (PAHRA), the Tondo Foreshore Development Authority (TFDA), the Central Institute for the Training and Relocation of Urban Squatters (CITRUS), the Presidential Committee for Housing and Urban Resettlement (PRECHUR), Sapang Palay Development Committee, Inter-Agency Task Force to Undertake the Relocation of Families in Barrio Nabacaan, Villanueva, Misamis Oriental and all other existing government housing and resettlement agencies, task forces and ad-hoc committees, are hereby dissolved. Their powers and functions, balance of appropriations, records, assets, rights, and choses in action, are transferred to, vested in, and assumed by the Authority. x x x (Emphasis supplied.) PD 570 dated October 30, 1974 created the TFDA, which defined its objectives, powers, and functions. Sec. 2 provides:

Section 2. Objectives and Purposes. The Authority shall have the following purposes and objectives: a) To undertake all manner of activity, business or development projects for the establishment of harmonious, comprehensive, integrated and healthy living community in the Tondo Foreshoreland and its resettlement site; b) To undertake and promote the physical and socio-economic amelioration of the Tondo Foreshore residents in particular and the nation in general (Emphasis supplied.)

The powers and functions are contained in Sec. 3, to wit: a) To develop and implement comprehensive and integrated urban renewal programs for the Tondo Foreshore and Dagat-dagatan lagoon and/or any other additional/alternative resettlement site and to formulate and enforce general and specific policies for its development which shall ensure reasonable degree of compliance with environmental standards. b) To prescribe guidelines and standards for the reservation, conservation and utilization of public lands covering the Tondo Foreshore land and its resettlement sites; c) To construct, acquire, own, lease, operate and maintain infrastructure facilities, housing complex, sites and services; d) To determine, regulate and supervise the establishment and operation of housing, sites, services and commercial and industrial complexes and any other enterprises to be constructed or established within the Tondo Foreshore and its resettlement sites; e) To undertake and develop, by itself or through joint ventures with other public or private entities, all or any of the different phases of development of the Tondo Foreshore land and its resettlement sites;

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f) To acquire and own property, property-rights and interests, and encumber or otherwise dispose of the same as it may deem appropriate (Emphasis supplied.)

From the foregoing provisions, it is readily apparent that the TFDA has the explicit power to develop public lands covering the Tondo foreshore land and any other additional and alternative resettlement sites under letter b, Sec. 3 of PD 570. Since the additional and/or alternative sites adjacent to Tondo foreshore land cover foreshore and submerged areas, the reclamation of said areas is necessary in order to convert them into a comprehensive and integrated resettlement housing project for the slum dwellers and squatters of Tondo. Since the powers of TFDA were assumed by the NHA, then the NHA has the power to reclaim lands in the Tondo foreshore area which covers the 79-hectare land subject of Proclamations Nos. 39 and 465 and Special Patents Nos. 3592 and 3598. c. Sec. 6 of PD 757 delineates the functions and powers of the NHA which embrace the authority to reclaim land, thus: Sec. 6. Powers and functions of the Authority.The Authority shall have the following powers and functions to be exercised by the Board in accordance with its established national human settlements plan prepared by the Human Settlements Commission: (a) Develop and implement the comprehensive and integrated housing program provided for in Section hereof; xxxx (c) Prescribe guidelines and standards for the reservation, conservation and utilization of public lands identified for housing and resettlement; xxxx (e) Develop and undertake housing development and/or resettlement projects through joint ventures or other arrangements with public and private entities; xxxx (k) Enter into contracts whenever necessary under such terms and conditions as it may deem proper and reasonable; (l) Acquire property rights and interests and encumber or otherwise dispose the same as it may deem appropriate; xxxx (s) Perform such other acts not inconsistent with this Decree, as may be necessary to effect the policies and objectives herein declared. (Emphasis supplied.) The NHAs authority to reclaim land can be inferred from the aforequoted provisions. It can make use of public lands under letter (c) of Sec. 6 which includes reclaimed land as site for its comprehensive and integrated housing projects under letter (a) which can be undertaken through joint ventures with private entities under letter (e). Taken together with letter (s) which authorizes NHA to perform such other activities necessary to effect the policies and objectives of PD 757, it is safe to conclude that the NHAs power to reclaim lands is a power that is implied from the exercise of its explicit powers under Sec. 6 in order to effectively accomplish its policies and objectives under Sec. 3 of its charter. Thus, the reclamation of land is an indispensable component for the development and construction of the SMDRP housing facilities.

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2.

NHAs implied power to reclaim land is enhanced by RA 7279.

PD 757 identifies NHAs mandate to [d]evelop and undertake housing development and/or resettlement projects through joint ventures or other arrangements with public and private entities. The power of the NHA to undertake reclamation of land can be inferred from Secs. 12 and 29 of RA 7279, which provide:

Section 12. Disposition of Lands for Socialized Housing.The National Housing Authority, with respect to lands belonging to the National Government, and the local government units with respect to other lands within their respective localities, shall coordinate with each other to formulate and make available various alternative schemes for the disposition of lands to the beneficiaries of the Program. These schemes shall not be limited to those involving transfer of ownership in fee simple but shall include lease, with option to purchase, usufruct or such other variations as the local government units or the National Housing Authority may deem most expedient in carrying out the purposes of this Act. xxxx Section 29. Resettlement.With two (2) years from the effectivity of this Act, the local government units, in coordination with the National Housing Authority, shall implement therelocation and resettlement of persons living in danger areas such as esteros, railroad tracks, garbage dumps, riverbanks, shorelines, waterways, and in other public places as sidewalks, roads, parks, and playgrounds. The local government unit, in coordination with the National Housing Authority, shall provide relocation or resettlement sites with basic services and facilities and access to employment and livelihood opportunities sufficient to meet the basic needs of the affected families. (Emphasis supplied.) Lands belonging to the National Government include foreshore and submerged lands which can be reclaimed to undertake housing development and resettlement projects. 3. MO 415 explains the undertaking of the NHA in SMDRP:

WHEREAS, Memorandum Order No. 161-A mandated the National Housing Authority to conduct feasibility studies and develop low-cost housing projects at the dumpsites of Metro Manila; WHEREAS, the National Housing Authority has presented a viable Conceptual Plan to convert the Smokey Mountain dumpsite into a habitable housing project inclusive of the reclamation area across R-10 as enabling component of the Project; WHEREAS, the said Plan requires the coordinated and synchronized efforts of the City of Manila and other government agencies and instrumentalities to ensure effective and efficient implementation; WHEREAS, the government encourages private sector initiative in the implementation of its projects. (Emphasis supplied.)

Proceeding from these whereas clauses, it is unequivocal that reclamation of land in the Smokey Mountain area is an essential and vital power of the NHA to effectively implement its avowed goal of developing low-cost housing units at the Smokey Mountain dumpsites. The interpretation made by no less than the President of the Philippines as Chief of the Executive Branch, of which the NHA is a part, must necessarily command respect and much weight and credit. 4. RA 6957 as amended by RA 7718the BOT Lawserves as an exception to PD 1084 and EO 525.

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Based on the provisions of the BOT Law and Implementing Rules and Regulations, it is unequivocal that all government infrastructure agencies like the NHA can undertake infrastructure or development projects using the contractual arrangements prescribed by the law, and land reclamation is one of the projects that can be resorted to in the BOT project implementation under the February 10, 1992 Joint Resolution No. 3 of the 8th Congress. From the foregoing considerations, we find that the NHA has ample implied authority to undertake reclamation projects. Even without an implied power to reclaim lands under NHAs charter, we rule that the authority granted to NHA, a national government agency, by the President under PD 3-A reinforced by EO 525 is more than sufficient statutory basis for the reclamation of lands under the SMDRP. PD 3-A is a law issued by then President Ferdinand E. Marcos under his martial law powers on September 23, 1972. It provided that [t]he provisions of any law to the contrary notwithstanding, the reclamation of areas, underwater, whether foreshore or inland, shall be limited to the National Government or any person authorized by it under the proper contract. It repealed, in effect, RA 1899 which previously delegated the right to reclaim [68] lands to municipalities and chartered cities and revested it to the National Government. Under PD 3-A, national government can only mean the Executive Branch headed by the President. It cannot refer to Congress as it was dissolved and abolished at the time of the issuance of PD 3-A on September 23, 1972. Moreover, the Executive Branch is the only implementing arm in the government with the equipment, manpower, expertise, and capability by the very nature of its assigned powers and functions to undertake reclamation projects. Thus, under PD 3-A, the Executive Branch through the President can implement reclamation of lands through any of its departments, agencies, or offices. Subsequently, on February 4, 1977, President Marcos issued PD 1084 creating the PEA, which was granted, among others, the power to reclaim land, including foreshore and submerged areas by dredging, filling or other means or to acquire reclaimed lands. The PEAs power to reclaim is not however exclusive as can be gleaned from its charter, as the President retained his power under PD 3-A to designate another agency to reclaim lands. On February 14, 1979, EO 525 was issued. It granted PEA primary responsibility for integrating, directing, and coordinating reclamation projects for and on behalf of the National Government although other national government agencies can be designated by the President to reclaim lands in coordination with the PEA. Despite the issuance of EO 525, PD 3-A remained valid and subsisting. Thus, the National Government through the President still retained the power and control over all reclamation projects in the country. The power of the National Government through the President over reclamation of areas, that is, [69] underwater whether foreshore or inland, was made clear in EO 543 which took effect on June 24, 2006. Under EO 543, PEA was renamed the Philippine Reclamation Authority (PRA) and was granted the authority to approve reclamation projects, a power previously reposed in the President under EO 525. EO 543 reads: Section 1. The power of the President to approve reclamation projects is hereby delegated to the Philippine Reclamation Authority [formerly PEA], through its governing board, subject to compliance with existing laws and rules and subject to the condition that reclamation contracts to be executed with any person or entity go through public bidding. Section 2. Nothing in the Order shall be construed as diminishing the Presidents authority to modify, amend or nullify PRAs action. Section 3. All executive issuances inconsistent with this Executive Order are hereby repealed or amended accordingly. (Emphasis supplied.)

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Sec. 2 of EO 543 strengthened the power of control and supervision of the President over reclamation of lands as s/he can modify, amend, or nullify the action of PEA (now PRA). From the foregoing issuances, we conclude that the Presidents delegation to NHA, a national government agency, to reclaim lands under the SMDRP, is legal and valid, firmly anchored on PD 3-A buttressed by EO 525 notwithstanding the absence of any specific grant of power under its charter, PD 757.

Second Issue: Whether respondents NHA and RBI were given the power and authority by DENR to reclaim foreshore and submerged lands

Petitioner Chavez puts forth the view that even if the NHA and RBI were granted the authority to reclaim, they were not authorized to do so by the DENR. Again, reliance is made on our ruling in PEA where it was held that the DENRs authority is necessary in order for the government to validly reclaim foreshore and submerged lands. In PEA, we expounded in this manner:

As manager, conservator and overseer of the natural resources of the State, DENR exercises supervision and control over alienable and disposable public lands. DENR also exercises exclusive jurisdiction on the management and disposition of all lands of the public domain. Thus, DENR decides whether areas under water, like foreshore or submerged areas ofManila Bay, should be reclaimed or not. This means that PEA needs authorization from DENR before PEA can undertake reclamation projects in Manila Bay, or in any part of the country. DENR also exercises exclusive jurisdiction over the disposition of all lands of the public domain. Hence, DENR decides whether reclaimed lands of PEA should be classified as alienable under Sections 6 and 7 of CA No. 141. Once DENR decides that the reclaimed lands should be so classified, it then recommends to the President the issuance of a proclamation classifying the lands as alienable or disposable lands of the public domain open to disposition. We note that then DENR Secretary Fulgencio S. Factoran, Jr. countersigned Special Patent No. 3517 in compliance with the Revised Administrative Code and Sections 6 and 7 of CA No. 141. In short, DENR is vested with the power to authorize the reclamation of areas under water, while PEA is vested with the power to undertake the physical reclamation of areas under water, whether directly or through private contractors. DENR is also empowered to classify lands of the public domain into alienable or disposable lands subject to the approval of the President. On the other hand, PEA is tasked to develop, sell or lease the [70] reclaimed alienable lands of the public domain.

Despite our finding that PEA is not a precedent to the case at bar, we find after all that under existing laws, the NHA is still required to procure DENRs authorization before a reclamation project in Manila Bay or in any part of the Philippines can be undertaken. The requirement applies to PEA, NHA, or any other government agency or office granted with such power under the law. Notwithstanding the need for DENR permission, we nevertheless find petitioners position bereft of merit. The DENR is deemed to have granted the authority to reclaim in the Smokey Mountain Project for the following reasons: 1. Sec. 17, Art. VII of the Constitution provides that the President shall have control of all executive departments, bureaus and offices. The President is assigned the task of seeing to it that all laws are faithfully executed. Control, in administrative law, means the power of an officer to alter, modify, nullify or set aside

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what a subordinate officer has done in the performance of his duties and to substitute the judgment of the former [71] for that of the latter. As such, the President can exercise executive power motu proprio and can supplant the act or decision of a subordinate with the Presidents own. The DENR is a department in the executive branch under the President, and it is only an alter ego of the latter. Ordinarily the proposed action and the staff work are initially done by a department like the DENR and then submitted to the President for approval. However, there is nothing infirm or unconstitutional if the President decides on the implementation of a certain project or activity and requires said department to implement it. Such is a presidential prerogative as long as it involves the department or office authorized by law to supervise or execute the Project. Thus, as in this case, when the President approved and ordered the development of a housing project with the corresponding reclamation work, making DENR a member of the committee tasked to implement the project, the required authorization from the DENR to reclaim land can be deemed satisfied. It cannot be disputed that the ultimate power over alienable and disposable public lands is reposed in the President of the Philippines and not the DENR Secretary. To still require a DENR authorization on the Smokey Mountain when the President has already authorized and ordered the implementation of the Project would be a derogation of the powers of the President as the head of the executive branch. Otherwise, any department head can defy or oppose the implementation of a project approved by the head of the executive branch, which is patently illegal and unconstitutional. In Chavez v. Romulo, we stated that when a statute imposes a specific duty on the executive department, the President may act directly or order the said department to undertake an activity, thus: [A]t the apex of the entire executive officialdom is the President. Section 17, Article VII of the Constitution specifies [her] power as Chief executive departments, bureaus and offices. [She] shall ensure that the laws be faithfully executed. As Chief Executive, President Arroyo holds the steering wheel that controls the course of her government. She lays down policies in the execution of her plans and programs. Whatever policy she chooses, she has her subordinates to implement them. In short, she has the power of control. Whenever a specific function is entrusted by law or regulation to her subordinate, she may act directly or merely direct the [72] performance of a duty x x x. Such act is well within the prerogative of her office(emphasis supplied). Moreover, the power to order the reclamation of lands of public domain is reposed first in the Philippine President. The Revised Administrative Code of 1987 grants authority to the President to reserve lands of public domain for settlement for any specific purpose, thus: Section 14. Power to Reserve Lands of the Public and Private Domain of the Government.(1) The President shall have the power to reserve for settlement or public use, and for specific public purposes, any of the lands of the public domain, the use of which is not otherwise directed by law. The reserved land shall thereafter remain subject to the specific public purpose indicated until otherwise provided by law or proclamation. (Emphasis supplied.) President Aquino reserved the area of the Smokey Mountain dumpsite for settlement and issued MO 415 authorizing the implementation of the Smokey Mountain Development Project plus the reclamation of the area across R-10. Then President Ramos issued Proclamation No. 39 covering the 21-hectare dumpsite and the 40-hectare commercial/industrial area, and Proclamation No. 465 and MO 415 increasing the area of foreshore and submerged lands of Manila Bay to be reclaimed from 40 to 79 hectares. Having supervision and control over the DENR, both Presidents directly assumed and exercised the power granted by the Revised Administrative Code to the DENR Secretary to authorize the NHA to reclaim said lands. What can be done indirectly by the DENR can be done directly by the President. It would be absurd if the power of the President cannot be exercised simply because the head of a department in the executive branch has not acted favorably on a project already approved by the President. If such arrangement is allowed then the department head will become more powerful than the President. 2. Under Sec. 2 of MO 415, the DENR is one of the members of the EXECOM chaired by the NCRCORD to oversee the implementation of the Project. The EXECOM was the one which recommended approval of the project plan and the joint venture agreements. Clearly, the DENR retained its power of supervision and control over the laws affected by the Project since it was tasked to facilitate the titling of

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the Smokey Mountain and of the area to be reclaimed, which shows that it had tacitly given its authority to the NHA to undertake the reclamation. 3. Former DENR Secretary Angel C. Alcala issued Special Patents Nos. 3591 and 3592 while then Secretary Victor O. Ramos issued Special Patent No. 3598 that embraced the areas covered by the reclamation. These patents conveyed the lands to be reclaimed to the NHA and granted to said agency the administration and disposition of said lands for subdivision and disposition to qualified beneficiaries and for development for mix land use (commercial/industrial) to provide employment opportunities to on-site families and additional areas for port related activities. Such grant of authority to administer and dispose of lands of public domain under the SMDRP is of course subject to the powers of the EXECOM of SMDRP, of which the DENR is a member. 4. The issuance of ECCs by the DENR for SMDRP is but an exercise of its power of supervision and control over the lands of public domain covered by the Project. Based on these reasons, it is clear that the DENR, through its acts and issuances, has ratified and confirmed the reclamation of the subject lands for the purposes laid down in Proclamations Nos. 39 and 465.

Third Issue: Whether respondent RBI can acquire reclaimed foreshore and submerged lands considered as inalienable and outside the commerce of man

Petitioner postulates that respondent RBI cannot acquire the reclaimed foreshore and submerged areas as these are inalienable public lands beyond the commerce of man based on Art. 1409 of the Civil Code which provides: Article 1409. The following contracts are inexistent and void from the beginning: (1) public policy; xxxx (7) Those expressly prohibited or declared void by law. Those whose cause, object or purpose is contrary to law, morals, good customs, public order or

These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.

Secs. 2 and 3, Art. XII of the Constitution declare that all natural resources are owned by the State and they cannot be alienated except for alienable agricultural lands of the public domain. One of the States natural resources are lands of public domain which include reclaimed lands. Petitioner contends that for these reclaimed lands to be alienable, there must be a law or presidential proclamation officially classifying these reclaimed lands as alienable and disposable and open to disposition or concession. Absent such law or proclamation, the reclaimed lands cannot be the enabling component or consideration to be paid to RBI as these are beyond the commerce of man. We are not convinced of petitioners postulation. The reclaimed lands across R-10 were classified alienable and disposable lands of public domain of the State for the following reasons, viz: First, there were three (3) presidential proclamations classifying the reclaimed lands across R-10 as alienable or disposable hence open to disposition or concession, to wit:

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(1) MO 415 issued by President Aquino, of which Sec. 4 states that [t]he land covered by the Smokey Mountain Dumpsite is hereby conveyed to the National Housing Authority as well as the area to be reclaimed across R-10.

The directive to transfer the lands once reclaimed to the NHA implicitly carries with it the declaration that said lands are alienable and disposable. Otherwise, the NHA cannot effectively use them in its housing and resettlement project. (2) Proclamation No. 39 issued by then President Ramos by which the reclaimed lands were conveyed to NHA for subdivision and disposition to qualified beneficiaries and for development into a mixed land use (commercial/industrial) to provide employment opportunities to on-site families and additional areas for portrelated activities. Said directive carries with it the pronouncement that said lands have been transformed to alienable and disposable lands. Otherwise, there is no legal way to convey it to the beneficiaries. (3) Proclamation No. 465 likewise issued by President Ramos enlarged the reclaimed area to 79 hectares to be developed and disposed of in the implementation of the SMDRP. The authority put into the hands of the NHA to dispose of the reclaimed lands tacitly sustains the conversion to alienable and disposable lands. Secondly, Special Patents Nos. 3591, 3592, and 3598 issued by the DENR anchored on Proclamations Nos. 39 and 465 issued by President Ramos, without doubt, classified the reclaimed areas as alienable and disposable. Admittedly, it cannot be said that MO 415, Proclamations Nos. 39 and 465 are explicit declarations that the lands to be reclaimed are classified as alienable and disposable. We find however that such conclusion is derived and implicit from the authority given to the NHA to transfer the reclaimed lands to qualified beneficiaries. The query is, when did the declaration take effect? It did so only after the special patents covering the reclaimed areas were issued. It is only on such date that the reclaimed lands became alienable and disposable lands of the public domain. This is in line with the ruling in PEA where said issue was clarified and stressed: PD No. 1085, coupled with President Aquinos actual issuance of a special patent covering the Freedom Islands, is equivalent to an official proclamation classifying the Freedom Islands as alienable or disposable lands of the public domain. PD No. 1085 and President Aquinos issuance of a land patent also constitute a declaration that theFreedom Islands are no longer needed for public service. The Freedom Islands are thus alienable or disposable lands of the public domain, open to disposition [73] or concession to qualified parties. (Emphasis supplied.)

Thus, MO 415 and Proclamations Nos. 39 and 465 cumulatively and jointly taken together with Special Patent Nos. 3591, 3592, and 3598 more than satisfy the requirement in PEA that [t]here must be a law or presidential proclamation officially classifying these reclaimed lands as alienable or disposable and open to [74] disposition or concession (emphasis supplied). Apropos the requisite law categorizing reclaimed land as alienable or disposable, we find that RA 6957 as amended by RA 7718 provides ample authority for the classification of reclaimed land in the SMDRP for the repayment scheme of the BOT project as alienable and disposable lands of public domain. Sec. 6 of RA 6957 as amended by RA 7718 provides: For the financing, construction, operation and maintenance of any infrastructure projects undertaken through the build-operate-and transfer arrangement or any of its variations pursuant to the provisions of this Act, the project proponent x x x may likewise be repaid in the form of a share in the revenue of the project or other non-monetary payments, such as, but not limited to,the grant of a portion or percentage of the reclaimed land, subject to the constitutional requirements with respect to the ownership of the land. (Emphasis supplied.)

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While RA 6957 as modified by RA 7718 does not expressly declare that the reclaimed lands that shall serve as payment to the project proponent have become alienable and disposable lands and opened for disposition; nonetheless, this conclusion is necessarily implied, for how else can the land be used as the enabling component for the Project if such classification is not deemed made? It may be argued that the grant of authority to sell public lands, pursuant to PEA, does not convert alienable lands of public domain into private or patrimonial lands. We ruled in PEA that alienable lands of public domain must be transferred to qualified private parties, or to government entities not tasked to dispose of public lands, before these lands can become private or patrimonial lands (emphasis [75] supplied). To lands reclaimed by PEA or through a contract with a private person or entity, such reclaimed lands still remain alienable lands of public domain which can be transferred only to Filipino citizens but not to a private corporation. This is because PEA under PD 1084 and EO 525 is tasked to hold and dispose of alienable lands of public domain and it is only when it is transferred to Filipino citizens that it becomes patrimonial property. On the other hand, the NHA is a government agency not tasked to dispose of public lands under its charterThe Revised Administrative Code of 1987. The NHA is an end-user agency authorized by law to administer and dispose of reclaimed lands. The moment titles over reclaimed lands based on the special patents are transferred to the NHA by the Register of Deeds, they are automatically converted to patrimonial properties of the State which can be sold to Filipino citizens and private corporations, 60% of which are owned by Filipinos. The reason is obvious: if the reclaimed land is not converted to patrimonial land once transferred to NHA, then it would be useless to transfer it to the NHA since it cannot legally transfer or alienate lands of public domain. More importantly, it cannot attain its avowed purposes and goals since it can only transfer patrimonial lands to qualified beneficiaries and prospective buyers to raise funds for the SMDRP. From the foregoing considerations, we find that the 79-hectare reclaimed land has been declared alienable and disposable land of the public domain; and in the hands of NHA, it has been reclassified as patrimonial property. Petitioner, however, contends that the reclaimed lands were inexistent prior to the three (3) Presidential Acts (MO 415 and Proclamations Nos. 39 and 465) and hence, the declaration that such areas are alienable and disposable land of the public domain, citing PEA, has no legal basis. Petitioners contention is not well-taken. Petitioners sole reliance on Proclamations Nos. 39 and 465 without taking into consideration the special patents issued by the DENR demonstrates the inherent weakness of his proposition. As was ruled in PEA cited by petitioner himself, PD No. 1085, coupled with President Aquinos actual issuance of a special patent covering the Freedom Islands is equivalent to an official proclamation classifying the Freedom islands as alienable or disposable lands of public domain. In a similar vein, the combined and collective effect of Proclamations Nos. 39 and 465 with Special Patents Nos. 3592 and 3598 is tantamount to and can be considered to be an official declaration that the reclaimed lots are alienable or disposable lands of the public domain. The reclaimed lands covered by Special Patents Nos. 3591, 3592, and 3598, which evidence transfer of ownership of reclaimed lands to the NHA, are official acts of the DENR Secretary in the exercise of his power of supervision and control over alienable and disposable public lands and his exclusive jurisdiction over the management and disposition of all lands of public domain under the Revised Administrative Code of 1987. Special Patent No. 3592 speaks of the transfer of Lots 1 and 2, and RI-003901-000012-D with an area of 401,485 square meters based on the survey and technical description approved by the Bureau of Lands. Lastly, Special Patent No. 3598 was issued in favor of the NHA transferring to said agency a tract of land described in Plan RL-00-000013 with an area of 390,000 square meters based on the survey and technical descriptions approved by the Bureau of Lands. The conduct of the survey, the preparation of the survey plan, the computation of the technical description, and the processing and preparation of the special patent are matters within the technical area of expertise of administrative agencies like the DENR and the Land Management Bureau and are generally accorded not only [76] respect but at times even finality. Preparation of special patents calls for technical examination and a

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specialized review of calculations and specific details which the courts are ill-equipped to undertake; hence, the [77] latter defer to the administrative agency which is trained and knowledgeable on such matters. Subsequently, the special patents in the name of the NHA were submitted to the Register of Deeds of the City of Manila for registration, and corresponding certificates of titles over the reclaimed lots were issued based on said special patents. The issuance of certificates of titles in NHAs name automatically converts the reclaimed lands to patrimonial properties of the NHA. Otherwise, the lots would not be of use to the NHAs housing projects or as payment to the BOT contractor as the enabling component of the BOT contract. The laws of the land have to be applied and interpreted depending on the changing conditions and times. Tempora mutantur et legis mutantur in illis (time changes and laws change with it). One such law that should be treated differently is the BOT Law (RA 6957) which brought about a novel way of implementing government contracts by allowing reclaimed land as part or full payment to the contractor of a government project to satisfy the huge financial requirements of the undertaking. The NHA holds the lands covered by Special Patents Nos. 3592 and 3598 solely for the purpose of the SMDRP undertaken by authority of the BOT Law and for disposition in accordance with said special law. The lands become alienable and disposable lands of public domain upon issuance of the special patents and become patrimonial properties of the Government from the time the titles are issued to the NHA. As early as 1999, this Court in Baguio v. Republic laid down the jurisprudence that: It is true that, once a patent is registered and the corresponding certificate of title is issued, the land covered by them ceases to be part of the public domain and becomes private property, and the Torrens Title issued pursuant to the patent becomes indefeasible upon the expiration of one year from the date of issuance of [78] such patent.
[79]

The doctrine was reiterated in Republic v. Heirs of Felipe Alijaga, Sr., Heirs of Carlos Alcaraz v. [80] [81] Republic, and the more recent case of Doris Chiongbian-Oliva v. Republic of the Philippines. Thus, the 79hectare reclaimed land became patrimonial property after the issuance of certificates of titles to the NHA based on Special Patents Nos. 3592 and 3598. One last point. The ruling in PEA cannot even be applied retroactively to the lots covered by Special Patents Nos. 3592 (40 hectare reclaimed land) and 3598 (39-hectare reclaimed land). The reclamation of the land under SMDRP was completed in August 1996 while the PEA decision was rendered on July 9, 2002. In the meantime, subdivided lots forming parts of the reclaimed land were already sold to private corporations for value and separate titles issued to the buyers. The Project was terminated through a Memorandum of Agreement signed on August 27, 2003. The PEA decision became final through the November 11, 2003 Resolution. It is a settled precept that decisions of the Supreme Court can only be applied prospectively as they may prejudice vested rights if applied retroactively. In Benzonan v. Court of Appeals, the Court trenchantly elucidated the prospective application of its decisions based on considerations of equity and fair play, thus: At that time, the prevailing jurisprudence interpreting section 119 of R.A. 141 as amended was that enunciated in Monge and Tupas cited above. The petitioners Benzonan and respondent Pe and the DBP are bound by these decisions for pursuant to Article 8 of the Civil Code judicial decisions applying or interpreting the laws of the Constitution shall form a part of the legal system of the Philippines. But while our decisions form part of the law of the land, they are also subject to Article 4 of the Civil Code which provides that laws shall have no retroactive effect unless the contrary is provided. This is expressed in the familiar legal maxim lex prospicit, non respicit, the law looks forward not backward. The rationale against retroactivity is easy to perceive. The retroactive application of a law usually divests rights that have already become vested or impairs the obligations of contract and hence, is unconstitutional. The same consideration underlies our rulings giving only prospective effect to decisions enunciating new doctrines. Thus, we emphasized in People v. Jabinal, 55 SCRA 607 [1974] x x x when a doctrine of this Court is overruled and a different view is adopted, the new doctrine should be applied prospectively and should not [82] apply to parties who had relied on the old doctrine and acted on the faith thereof.

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Fourth Issue: Whether respondent RBI can acquire reclaimed lands when there was no declaration that said lands are no longer needed for public use Petitioner Chavez avers that despite the declaration that the reclaimed areas are alienable lands of the public domain, still, the reclamation is flawed for there was never any declaration that said lands are no longer needed for public use. We are not moved by petitioners submission. Even if it is conceded that there was no explicit declaration that the lands are no longer needed for public use or public service, there was however an implicit executive declaration that the reclaimed areas R-10 are not necessary anymore for public use or public service when President Aquino through MO 415 conveyed the same to the NHA partly for housing project and related commercial/industrial development intended for disposition to and enjoyment of certain beneficiaries and not the public in general and partly as enabling component to finance the project. President Ramos, in issuing Proclamation No. 39, declared, though indirectly, that the reclaimed lands of the Smokey Mountain project are no longer required for public use or service, thus: These parcels of land of public domain are hereby placed under the administration and disposition of the National Housing Authority to develop, subdivide and dispose to qualified beneficiaries, as well as its development for mix land use (commercial/industrial) to provide employment opportunities to on-site families and additional areas for port related activities. (Emphasis supplied.)

While numerical count of the persons to be benefited is not the determinant whether the property is to be devoted to public use, the declaration in Proclamation No. 39 undeniably identifies only particular individuals as beneficiaries to whom the reclaimed lands can be sold, namelythe Smokey Mountain dwellers. The rest of the Filipinos are not qualified; hence, said lands are no longer essential for the use of the public in general. In addition, President Ramos issued on August 31, 1994 Proclamation No. 465 increasing the area to be reclaimed from forty (40) hectares to seventy-nine (79) hectares, elucidating that said lands are undoubtedly set aside for the beneficiaries of SMDRP and not the publicdeclaring the power of NHA to dispose of land to be reclaimed, thus: The authority to administer, develop, or dispose lands identified and reserved by this Proclamation and Proclamation No. 39 (s.1992), in accordance with the SMDRP, as enhance, is vested with the NHA, subject to the provisions of existing laws. (Emphasis supplied.)

MO 415 and Proclamations Nos. 39 and 465 are declarations that proclaimed the non-use of the reclaimed areas for public use or service as the Project cannot be successfully implemented without the withdrawal of said lands from public use or service. Certainly, the devotion of the reclaimed land to public use or service conflicts with the intended use of the Smokey Mountain areas for housing and employment of the Smokey Mountain scavengers and for financing the Project because the latter cannot be accomplished without abandoning the public use of the subject land. Without doubt, the presidential proclamations on SMDRP together with the issuance of the special patents had effectively removed the reclaimed lands from public use. More decisive and not in so many words is the ruling in PEA which we earlier cited, that PD No. 1085 and President Aquinos issuance of a land patent also constitute a declaration that the Freedom Islands are no longer needed for public service. Consequently, we ruled in that case that the reclaimed lands are open to disposition [83] or concession to qualified parties. In a similar vein, presidential Proclamations Nos. 39 and 465 jointly with the special patents have classified the reclaimed lands as alienable and disposable and open to disposition or concession as they would be devoted to units for Smokey Mountain beneficiaries. Hence, said lands are no longer intended for public use [84] or service and shall form part of the patrimonial properties of the State under Art. 422 of the Civil Code. As

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discussed a priori, the lands were classified as patrimonial properties of the NHA ready for disposition when the titles were registered in its name by the Register of Deeds. Moreover, reclaimed lands that are made the enabling components of a BOT infrastructure project are necessarily reclassified as alienable and disposable lands under the BOT Law; otherwise, absurd and illogical consequences would naturally result. Undoubtedly, the BOT contract will not be accepted by the BOT contractor since there will be no consideration for its contractual obligations. Since reclaimed land will be conveyed to the contractor pursuant to the BOT Law, then there is an implied declaration that such land is no longer intended for public use or public service and, hence, considered patrimonial property of the State. Fifth Issue: Whether there is a law authorizing sale of reclaimed lands

Petitioner next claims that RBI cannot acquire the reclaimed lands because there was no law authorizing their sale. He argues that unlike PEA, no legislative authority was granted to the NHA to sell reclaimed land. This position is misplaced. Petitioner relies on Sec. 60 of Commonwealth Act (CA) 141 to support his view that the NHA is not empowered by any law to sell reclaimed land, thus:

Section 60. Any tract of land comprised under this title may be leased or sold, as the case may be, to any person, corporation or association authorized to purchase or lease public lands for agricultural purposes. The area of the land so leased or sold shall be such as shall, in the judgment of the Secretary of Agriculture and Natural Resources, be reasonably necessary for the purposes for which such sale or lease if requested and shall in no case exceed one hundred and forty-four hectares: Provided, however, That this limitation shall not apply to grants, donations, transfers, made to a province, municipality or branch or subdivision of the Government for the purposes deemed by said entities conducive to the public interest; but the land so granted donated or transferred to a province, municipality, or branch or subdivision of the Government shall not be alienated, encumbered, or otherwise disposed of in a manner affecting its title, except when authorized by Congress; Provided, further, That any person, corporation, association or partnership disqualified from purchasing public land for agricultural purposes under the provisions of this Act, may lease land included under this title suitable for industrial or residential purposes, but the lease granted shall only be valid while such land is used for the purposes referred to. (Emphasis supplied.) Reliance on said provision is incorrect as the same applies only to a province, municipality or branch or subdivision of the Government. The NHA is not a government unit but a government corporation performing governmental and proprietary functions. In addition, PD 757 is clear that the NHA is empowered by law to transfer properties acquired by it under the law to other parties, thus: Section 6. Powers and functions of the Authority. The Authority shall have the following powers and functions to be exercised by the Boards in accordance with the established national human settlements plan prepared by the Human Settlements Commission: xxxx (k) Enter into contracts whenever necessary under such terms and conditions as it may deem proper and reasonable; (l) Acquire property rights and interests, and encumber or otherwise dispose the same as it may deem appropriate (Emphasis supplied.)

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Letter (l) is emphatic that the NHA can acquire property rights and interests and encumber or otherwise dispose of them as it may deem appropriate. The transfer of the reclaimed lands by the National Government to the NHA for housing, commercial, and industrial purposes transformed them into patrimonial lands which are of course owned by the State in its private or proprietary capacity. Perforce, the NHA can sell the reclaimed lands to any Filipino citizen or qualified corporation.

Sixth Issue: Whether the transfer of reclaimed lands to RBI was done by public bidding

Petitioner also contends that there was no public bidding but an awarding of ownership of said reclaimed lands to RBI. Public bidding, he says, is required under Secs. 63 and 67 of CA 141 which read: Section 63. Whenever it is decided that lands covered by this chapter are not needed for public purposes, the Director of Lands shall ask the Secretary of Agriculture and Commerce for authority to dispose of the same. Upon receipt of such authority, the Director of Lands shall give notice by public advertisement in the same manner as in the case of leases or sales of agricultural public land, that the Government will lease or sell, as the case may be, the lots or blocks specified in the advertisement, for the purpose stated in the notice and subject to the conditions specified in this chapter. xxxx Section 67. The lease or sale shall be made through oral bidding; and adjudication shall be made to the highest bidder. However, where an applicant has made improvements on the land by virtue of a permit issued to him by competent authority, the sale or lease shall be made by sealed bidding as prescribed in section twentysix of this Act, the provisions of which shall be applied whenever applicable. If all or part of the lots remain unleased or unsold, the Director of Lands shall from time to time announce in the Official Gazette or in any other newspapers of general circulation, the lease of sale of those lots, if necessary.

He finds that the NHA and RBI violated Secs. 63 and 67 of CA 141, as the reclaimed lands were conveyed to RBI by negotiated contract and not by public bidding as required by law. This stand is devoid of merit. There is no doubt that respondent NHA conducted a public bidding of the right to become its joint venture partner in the Smokey Mountain Project. Notices or Invitations to Bid were published in the national dailies on January 23 and 26, 1992 and February 1, 14, 16, and 23, 1992. The bidding proper was done by the Bids and Awards Committee (BAC) on May 18, 1992. On August 31, 1992, the Inter-Agency Techcom made up of the NHA, PEA, DPWH, PPA, DBP, and DENR opened the bids and evaluated them, resulting in the award of the contract to respondent RBI on October 7, 1992. On March 19, 1993, respondents NHA and RBI signed the JVA. On February 23, 1994, said JVA was amended and restated into the ARJVA. On August 11, 1994, the ARJVA was again amended. On September 7, 1994, the OP approved the ARJVA and the amendments to the ARJVA. From these factual settings, it cannot be gainsaid that there was full compliance with the laws and regulations governing public biddings involving a right, concession, or property of the government. Petitioner concedes that he does not question the public bidding on the right to be a joint venture partner of the NHA, but the absence of bidding in the sale of alienable and disposable lands of public domain pursuant to CA 141 as amended. Petitioners theory is incorrect.

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Secs. 63 and 67 of CA 141, as amended, are in point as they refer to government sale by the Director of Lands of alienable and disposable lands of public domain. This is not present in the case at bar. The lands reclaimed by and conveyed to the NHA are no longer lands of public domain. These lands became proprietary lands or patrimonial properties of the State upon transfer of the titles over the reclaimed lands to the NHA and hence outside the ambit of CA 141. The NHA can therefore legally transfer patrimonial land to RBI or to any other interested qualified buyer without any bidding conducted by the Director of Lands because the NHA, unlike PEA, is a government agency not tasked to sell lands of public domain. Hence, it can only hold patrimonial lands and can dispose of such lands by sale without need of public bidding. Petitioner likewise relies on Sec. 79 of PD 1445 which requires public bidding when government property has become unserviceable for any cause or is no longer needed. It appears from the Handbook on Property and Supply Management System, Chapter 6, that reclaimed lands which have become patrimonial properties of the State, whose titles are conveyed to government agencies like the NHA, which it will use for its projects or programs, are not within the ambit of Sec. 79. We quote the determining factors in the Disposal of Unserviceable Property, thus: Determining Factors in the Disposal of Unserviceable Property Property, which can no longer be repaired or reconditioned; Property whose maintenance costs of repair more than outweigh the benefits and services that will be derived from its continued use; Property that has become obsolete or outmoded because of changes in technology; Serviceable property that has been rendered unnecessary due to change in the agencys function or mandate; Unused supplies, materials and spare parts that were procured in excess of requirements; and Unused supplies and materials that [have] become dangerous to use because of long storage or use of which [85] is determined to be hazardous.

Reclaimed lands cannot be considered unserviceable properties. The reclaimed lands in question are very much needed by the NHA for the Smokey Mountain Project because without it, then the projects will not be successfully implemented. Since the reclaimed lands are not unserviceable properties and are very much needed by NHA, then Sec. 79 of PD 1445 does not apply. More importantly, Sec. 79 of PD 1445 cannot be applied to patrimonial properties like reclaimed lands transferred to a government agency like the NHA which has entered into a BOT contract with a private firm. The reason is obvious. If the patrimonial property will be subject to public bidding as the only way of disposing of said property, then Sec. 6 of RA 6957 on the repayment scheme is almost impossible or extremely difficult to implement considering the uncertainty of a winning bid during public auction. Moreover, the repayment scheme of a BOT contract may be in the form of non-monetary payment like the grant of a portion or percentage of reclaimed land. Even if the BOT partner participates in the public bidding, there is no assurance that he will win the bid and therefore the payment in kind as agreed to by the parties cannot be performed or the winning bid prize might be below the estimated valuation of the land. The only way to harmonize Sec. 79 of PD 1445 with Sec. 6 of RA 6957 is to consider Sec. 79 of PD 1445 as inapplicable to BOT contracts involving patrimonial lands. The law does not intend anything impossible (lex non intendit aliquid impossibile).

Seventh Issue: Whether RBI, being a private corporation, is barred by the Constitution to acquire lands of public domain

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Petitioner maintains that RBI, being a private corporation, is expressly prohibited by the 1987 Constitution from acquiring lands of public domain. Petitioners proposition has no legal mooring for the following reasons: 1. RA 6957 as amended by RA 7718 explicitly states that a contractor can be paid a portion as percentage of the reclaimed land subject to the constitutional requirement that only Filipino citizens or corporations with at least 60% Filipino equity can acquire the same. It cannot be denied that RBI is a private corporation, where Filipino citizens own at least 60% of the stocks. Thus, the transfer to RBI is valid and constitutional. 2. When Proclamations Nos. 39 and 465 were issued, inalienable lands covered by said proclamations were converted to alienable and disposable lands of public domain. When the titles to the reclaimed lands were transferred to the NHA, said alienable and disposable lands of public domain were automatically classified as lands of the private domain or patrimonial properties of the State because the NHA is an agency NOT tasked to dispose of alienable or disposable lands of public domain. The only way it can transfer the reclaimed land in conjunction with its projects and to attain its goals is when it is automatically converted to patrimonial properties of the State. Being patrimonial or private properties of the State, then it has the power to sell the same to any qualified personunder the Constitution, Filipino citizens as private corporations, 60% of which is owned by Filipino citizens like RBI. 3. The NHA is an end-user entity such that when alienable lands of public domain are transferred to said agency, they are automatically classified as patrimonial properties. The NHA is similarly situated as BCDA which was granted the authority to dispose of patrimonial lands of the government under RA 7227. The nature of the property holdings conveyed to BCDA is elucidated and stressed in the May 6, 2003 Resolution in Chavez v. PEA, thus:

BCDA is an entirely different government entity. BCDA is authorized by law to sell specific government lands that have long been declared by presidential proclamations as military reservations for use by the different services of the armed forces under the Department of National Defense. BCDAs mandate is specific and limited in area, while PEAs mandate is general and national. BCDA holds government lands that have been granted to end-user government entitiesthe military services of the armed forces. In contrast, under Executive Order No. 525, PEA holds the reclaimed public lands, not as an enduser entity, but as the government agency primarily responsible for integrating, directing, and coordinating all reclamation projects for and on behalf of the National Government. x x x Well-settled is the doctrine that public land granted to an end-user government agency for a specific public use may subsequently be withdrawn by Congress from public use and declared patrimonial property to be sold to private parties. R.A. No. 7227 creating the BCDA is a law that declares specific military reservations no longer needed for defense or military purposes and reclassifies such lands as patrimonial property for sale to private parties. Government owned lands, as long as they are patrimonial property, can be sold to private parties, whether Filipino citizens or qualified private corporations. Thus, the so-called Friar Lands acquired by the government under Act No. 1120 are patrimonial property which even private corporations can acquire by purchase. Likewise, reclaimed alienable lands of the public domain if sold or transferred to a public or municipal corporation for a monetary consideration become patrimonial property in the hands of the public or municipal corporation. Once converted to patrimonial property, the land may be sold by the public or municipal corporation [86] to private parties, whether Filipino citizens or qualified private corporations. (Emphasis supplied.)

The foregoing Resolution makes it clear that the SMDRP was a program adopted by the Government under Republic Act No. 6957 (An Act Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector, and For Other Purposes), as amended by RA 7718, which is a special law similar to RA 7227. Moreover, since the implementation was assigned to the NHA, an end-user

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agency under PD 757 and RA 7279, the reclaimed lands registered under the NHA are automatically classified as patrimonial lands ready for disposition to qualified beneficiaries. The foregoing reasons likewise apply to the contention of petitioner that HCPTI, being a private corporation, is disqualified from being a transferee of public land. What was transferred to HCPTI is a 10hectare lot which is already classified as patrimonial property in the hands of the NHA. HCPTI, being a qualified corporation under the 1987 Constitution, the transfer of the subject lot to it is valid and constitutional. Eighth Issue: Whether respondents can be compelled to disclose all information related to the SMDRP

Petitioner asserts his right to information on all documents such as contracts, reports, memoranda, and the like relative to SMDRP. Petitioner asserts that matters relative to the SMDRP have not been disclosed to the public like the current stage of the Project, the present financial capacity of RBI, the complete list of investors in the asset pool, the exact amount of investments in the asset pool and other similar important information regarding the Project. He prays that respondents be compelled to disclose all information regarding the SMDRP and furnish him with originals or at least certified true copies of all relevant documents relating to the said project including, but not limited to, the original JVA, ARJVA, AARJVA, and the Asset Pool Agreement. This relief must be granted. The right of the Filipino people to information on matters of public concern is enshrined in the 1987 Constitution, thus:

ARTICLE II xxxx SEC. 28. Subject to reasonable conditions prescribed by law, the State adopts and implements a policy of full public disclosure of all its transactions involving public interest. ARTICLE III SEC. 7. The right of the people to information on matters of public concern shall be recognized. Access to official records, and to documents, and papers pertaining to official acts, transactions, or decisions, as well as to government research data used as basis for policy development, shall be afforded the citizen, subject to such limitations as may be provided by law.

In Valmonte v. Belmonte, Jr., this Court explicated this way: [A]n essential element of these freedoms is to keep open a continuing dialogue or process of communication between the government and the people. It is in the interest of the State that the channels for free political discussion be maintained to the end that the government may perceive and be responsive to the peoples will. Yet, this open dialogue can be effective only to the extent that the citizenry is informed and thus able to formulate its will intelligently. Only when the participants in the discussion are aware of the issues and [87] have access to information relating thereto can such bear fruit.

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In PEA, this Court elucidated the rationale behind the right to information: These twin provisions of the Constitution seek to promote transparency in policy-making and in the operations of the government, as well as provide the people sufficient information to exercise effectively other constitutional rights. These twin provisions are essential to the exercise of freedom of expression. If the government does not disclose its official acts, transactions and decisions to citizens, whatever citizens say, even if expressed without any restraint, will be speculative and amount to nothing. These twin provisions are also essential to hold public officials at all times x x x accountable to the people, for unless citizens have the proper information, they cannot hold public officials accountable for anything. Armed with the right information, citizens can participate in public discussions leading to the formulation of government policies and their effective [88] implementation. An informed citizenry is essential to the existence and proper functioning of any democracy. Sec. 28, Art. II compels the State and its agencies to fully disclose all of its transactions involving public interest. Thus, the government agencies, without need of demand from anyone, must bring into public view all the steps and negotiations leading to the consummation of the transaction and the contents of the perfected [89] contract. Such information must pertain to definite propositions of the government, meaning official recommendations or final positions reached on the different matters subject of negotiation. The government agency, however, need not disclose intra-agency or inter-agency recommendations or communications during the stage when common assertions are still in the process of being formulated or are in the exploratory stage. The limitation also covers privileged communication like information on military and diplomatic secrets; information affecting national security; information on investigations of crimes by law enforcement agencies before the prosecution of the accused; information on foreign relations, intelligence, and other classified information. It is unfortunate, however, that after almost twenty (20) years from birth of the 1987 Constitution, there is still no enabling law that provides the mechanics for the compulsory duty of government agencies to disclose information on government transactions. Hopefully, the desired enabling law will finally see the light of day if and when Congress decides to approve the proposed Freedom of Access to Information Act. In the meantime, it would suffice that government agencies post on their bulletin boards the documents incorporating the information on the steps and negotiations that produced the agreements and the agreements themselves, and if finances permit, to upload said information on their respective websites for easy access by interested parties. Without any law or regulation governing the right to disclose information, the NHA or any of the respondents cannot be faulted if they were not able to disclose information relative to the SMDRP to the public in general. The other aspect of the peoples right to know apart from the duty to disclose is the duty to allow access to information on matters of public concern under Sec. 7, Art. III of the Constitution. The gateway to information opens to the public the following: (1) official records; (2) documents and papers pertaining to official acts, transactions, or decisions; and (3) government research data used as a basis for policy development. Thus, the duty to disclose information should be differentiated from the duty to permit access to information. There is no need to demand from the government agency disclosure of information as this is mandatory under the Constitution; failing that, legal remedies are available. On the other hand, the interested party must first request or even demand that he be allowed access to documents and papers in the particular agency. A request or demand is required; otherwise, the government office or agency will not know of the desire of the interested party to gain access to such papers and what papers are needed. The duty to disclose covers only transactions involving public interest, while the duty to allow access has a broader scope of information which embraces not only transactions involving public interest, but any matter contained in official communications and public documents of the government agency. We find that although petitioner did not make any demand on the NHA to allow access to information, we treat the petition as a written request or demand. We order the NHA to allow petitioner access to its official records, documents, and papers relating to official acts, transactions, and decisions that are relevant to the said JVA and subsequent agreements relative to the SMDRP.

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Ninth Issue: Whether the operative fact doctrine applies to the instant petition Petitioner postulates that the operative fact doctrine is inapplicable to the present case because it is an equitable doctrine which could not be used to countenance an inequitable result that is contrary to its proper office. On the other hand, the petitioner Solicitor General argues that the existence of the various agreements implementing the SMDRP is an operative fact that can no longer be disturbed or simply ignored, citing Rieta v. [90] People of the Philippines. The argument of the Solicitor General is meritorious. The operative fact doctrine is embodied in De Agbayani v. Court of Appeals, wherein it is stated that a legislative or executive act, prior to its being declared as unconstitutional by the courts, is valid and must be complied with, thus: As the new Civil Code puts it: When the courts declare a law to be inconsistent with the Constitution, the former shall be void and the latter shall govern. Administrative or executive acts, orders and regulations shall be valid only when they are not contrary to the laws of the Constitution. It is understandable why it should be so, the Constitution being supreme and paramount. Any legislative or executive act contrary to its terms cannot survive. Such a view has support in logic and possesses the merit of simplicity. It may not however be sufficiently realistic. It does not admit of doubt that prior to the declaration of nullity such challenged legislative or executive act must have been in force and had to be complied with. This is so as until after the judiciary, in an appropriate case, declares its invalidity, it is entitled to obedience and respect. Parties may have acted under it and may have changed their positions. What could be more fitting than that in a subsequent litigation regard be had to what has been done while such legislative or executive act was in operation and presumed to be valid in all respects. It is now accepted as a doctrine that prior to its being nullified, its existence as a fact must be reckoned with. This is merely to reflect awareness that precisely because the judiciary is the governmental organ which has the final say on whether or not a legislative or executive measure is valid, a period of time may have elapsed before it can exercise the power of judicial review that may lead to a declaration of nullity. It would be to deprive the law of its quality of fairness and justice then, if there be no recognition of what had transpired prior to such adjudication. In the language of an American Supreme Court decision: The actual existence of a statute, prior to such a determination [of unconstitutionality], is an operative fact and may have consequences which cannot justly be ignored. The past cannot always be erased by a new judicial declaration. The effect of the subsequent ruling as to invalidity may have to be considered in various aspects, with respect to particular relations, individual and corporate, and particular conduct, private and official. This language has been quoted with approval in a resolution in Araneta v. Hill and the decision in Manila Motor Co., Inc. v. Flores. An even more recent instance is the opinion of Justice Zaldivar speaking for the Court inFernandez v. Cuerva and [91] Co. (Emphasis supplied.) This doctrine was reiterated in the more recent case of City of Makati v. Civil Service Commission, wherein we ruled that: Moreover, we certainly cannot nullify the City Governments order of suspension, as we have no reason to do so, much less retroactively apply such nullification to deprive private respondent of a compelling and valid reason for not filing the leave application. For as we have held, a void act though in law a mere scrap of paper nonetheless confers legitimacy upon past acts or omissions done in reliance thereof. Consequently, the existence of a statute or executive order prior to its being adjudged void is an operative fact to which legal consequences are attached. It would indeed be ghastly unfair to prevent [92] private respondent from relying upon the order of suspension in lieu of a formal leave application. (Emphasis supplied.)

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The principle was further explicated in the case of Rieta v. People of the Philippines, thus:

In similar situations in the past this Court had taken the pragmatic and realistic course set forth in Chicot County Drainage District vs. Baxter Bank to wit: The courts below have proceeded on the theory that the Act of Congress, having been found to be unconstitutional, was not a law; that it was inoperative, conferring no rights and imposing no duties, and hence affording no basis for the challenged decree. x x x It is quite clear, however, that such broad statements as to the effect of a determination of unconstitutionality must be taken with qualifications. The actual existence of a statute, prior to [the determination of its invalidity], is an operative fact and may have consequences which cannot justly be ignored. The past cannot always be erased by a new judicial declaration. The effect of the subsequent ruling as to invalidity may have to be considered in various aspects with respect to particular conduct, private and official. Questions of rights claimed to have become vested, of status, of prior determinations deemed to have finality and acted upon accordingly, of public policy in the light of the nature both of the statute and of its previous application, demand examination. These questions are among the most difficult of those which have engaged the attention of courts, state and federal, and it is manifest from numerous decisions that an all-inclusive statement of a principle of absolute retroactive invalidity cannot be justified.
[93] [94]

In the May 6, 2003 Resolution in Chavez v. PEA, we ruled that De Agbayani is not applicable to the case considering that the prevailing law did not authorize private corporations from owning land. The prevailing law at the time was the 1935 Constitution as no statute dealt with the same issue. In the instant case, RA 6957 was the prevailing law at the time that the joint venture agreement was signed. RA 6957, entitled An Act Authorizing The Financing, Construction, Operation And Maintenance Of Infrastructure Projects By The Private Sector And For Other Purposes, which was passed by Congress onJuly [95] 24, 1989, allows repayment to the private contractor of reclaimed lands. Such law was relied upon by respondents, along with the above-mentioned executive issuances in pushing through with the Project. The existence of such law and issuances is an operative fact to which legal consequences have attached. This Court is constrained to give legal effect to the acts done in consonance with such executive and legislative acts; to do otherwise would work patent injustice on respondents. Further, in the May 6, 2003 Resolution in Chavez v. PEA, we ruled that in certain cases, the transfer of land, although illegal or unconstitutional, will not be invalidated on considerations of equity and social justice. However, in that case, we did not apply the same considering that PEA, respondent in said case, was not entitled to equity principles there being bad faith on its part, thus: There are, moreover, special circumstances that disqualify Amari from invoking equity principles. Amari cannot claim good faith because even before Amari signed the Amended JVA on March 30, 1999, petitioner had already filed the instant case on April 27, 1998 questioning precisely the qualification of Amari to acquire the Freedom Islands. Even before the filing of this petition, two Senate Committees had already approved on September 16, 1997 Senate Committee Report No. 560. This Report concluded, after a well-publicized investigation into PEAs sale of the Freedom Islands to Amari, that the Freedom Islands are inalienable lands of the public domain. Thus, Amari signed the Amended JVA knowing and assuming all the attendant risks, [96] including the annulment of the Amended JVA.

Such indicia of bad faith are not present in the instant case. When the ruling in PEA was rendered by this Court on July 9, 2002, the JVAs were all executed. Furthermore, when petitioner filed the instant case against respondents on August 5, 2004, the JVAs were already terminated by virtue of the MOA between the NHA and RBI. The respondents had no reason to think that their agreements were unconstitutional or even questionable, as in fact, the concurrent acts of the executive department lent validity to the implementation of the Project. The SMDRP agreements have produced vested rights in favor of the slum dwellers, the buyers of reclaimed land who were issued titles over said land, and the agencies and investors who made investments in the project or who

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bought SMPPCs. These properties and rights cannot be disturbed or questioned after the passage of around ten (10) years from the start of the SMDRP implementation. Evidently, the operative fact principle has set in. The titles to the lands in the hands of the buyers can no longer be invalidated. The Courts Dispositions Based on the issues raised in this petition, we find that the March 19, 1993 JVA between NHA and RBI and the SMDRP embodied in the JVA, the subsequent amendments to the JVA and all other agreements signed and executed in relation to it, including, but not limited to, the September 26, 1994 Smokey Mountain Asset Pool Agreement and the agreement on Phase I of the Project as well as all other transactions which emanated from the Project, have been shown to be valid, legal, and constitutional. Phase II has been struck down by the Clean Air Act. With regard to the prayer for prohibition, enjoining respondents particularly respondent NHA from further implementing and/or enforcing the said Project and other agreements related to it, and from further deriving and/or enjoying any rights, privileges and interest from the Project, we find the same prayer meritless. Sec. 2 of Rule 65 of the 1997 Rules of Civil Procedure provides: Sec. 2. Petition for prohibition.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.

It has not been shown that the NHA exercised judicial or quasi-judicial functions in relation to the SMDRP and the agreements relative to it. Likewise, it has not been shown what ministerial functions the NHA has with regard to the SMDRP. A ministerial duty is one which is so clear and specific as to leave no room for the exercise of discretion in its performance. It is a duty which an officer performs in a given state of facts in a prescribed manner in obedience to the mandate of legal authority, without regard to the exercise of his/her own judgment upon the [97] propriety of the act done. Whatever is left to be done in relation to the August 27, 2003 MOA, terminating the JVA and other related agreements, certainly does not involve ministerial functions of the NHA but instead requires exercise of judgment. In fact, Item No. 4 of the MOA terminating the JVAs provides for validation of the developers (RBIs) [98] claims arising from the termination of the SMDRP through the various government agencies. Such validation requires the exercise of discretion. In addition, prohibition does not lie against the NHA in view of petitioners failure to avail and exhaust all administrative remedies. Clear is the rule that prohibition is only available when there is no adequate remedy in the ordinary course of law. More importantly, prohibition does not lie to restrain an act which is already a fait accompli. The operative fact doctrine protecting vested rights bars the grant of the writ of prohibition to the case at bar. It should be remembered that petitioner was the Solicitor General at the time SMDRP was formulated and implemented. He had the opportunity to question the SMDRP and the agreements on it, but he did not. The moment to challenge the Project had passed. On the prayer for a writ of mandamus, petitioner asks the Court to compel respondents to disclose all documents and information relating to the project, including, but not limited to, any subsequent agreements with respect to the different phases of the Project, the revisions of the original plan, the additional works incurred on the Project, the current financial condition of respondent RBI, and the transactions made with respect to the

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project. We earlier ruled that petitioner will be allowed access to official records relative to the SMDRP. That would be adequate relief to satisfy petitioners right to the information gateway. WHEREFORE, the petition is PARTIALLY GRANTED. The prayer for a writ of prohibition is DENIED for lack of merit. The prayer for a writ of mandamus is GRANTED. Respondent NHA is ordered to allow access to petitioner to all public documents and official records relative to the SMDRPincluding, but not limited to, the March 19, 1993 JVA between the NHA and RBI and subsequent agreements related to the JVA, the revisions over the original plan, and the additional works incurred on and the transactions made with respect to the Project. No costs. SO ORDERED.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. 169914 April 7, 2009

ASIA'S EMERGING DRAGON CORPORATION, petitioner, vs. DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS, SECRETARY LEANDRO R. MENDOZA and MANILA INTERNATIONAL AIRPORT AUTHORITY, Respondents. x - - - - - - - - - - - - - - - - - - - - - - -x G.R. No. 174166 April 7, 2009

REPUBLIC OF THE PHILIPPINES, represented by the DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS and MANILA INTERNATIONAL AIRPORT AUTHORITY, petitioners, vs. HON. COURT OF APPEALS and SALACNIB BATERINA, Respondents. RESOLUTION CHICO-NAZARIO, J.: In the Decision dated 18 April 2008, We dismissed the Petitions in G.R. No. 169914 and G.R. No. 174166 of Asias Emerging Dragon Corporation (AEDC) and Salacnib F. Baterina (Baterina), respectively. The fallo of the Decision reads: WHEREFORE, in view of the foregoing: a. The Petition in G.R. No. 169914 is hereby DISMISSED for lack of merit; and b. The Petition in G.R. No. 174166 is hereby likewise DISMISSED for being moot and academic.
1

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No costs. Presently before us are the separate Motions for Reconsideration of the aforementioned Decision filed by AEDC and Baterina. The Motion for Reconsideration of AEDC (G.R. No. 169914) AEDC invokes the following grounds for its Motion for Reconsideration: I. AEDC, BEING THE ORIGINAL PROPONENT OF THE [NINOY AQUINO INTERNATIONAL AIRPORTINTERNATIONAL PASSENGER TERMINAL III (NAIA IPT III)] PROJECT, THOUGH NOT ENTITLED TO ANY UNDUE PREFERENCE, HAS VESTED RIGHTS, BOTH LEGAL (UNDER THE BOT LAW) AND CONTRACTUAL, WHICH MUST BE RESPECTED AND/OR RECOGNIZED. A) THE DECISION MISTAKENLY CHARACTERIZED THE PROCESS OF UNSOLICITED PROPOSALS UNDER SECTION 4-A OF THE BOT LAW AS A BIDDING. AEDC, AS THE ORIGINAL PROPONENT, HAS RIGHTS UNDER THE BOT LAW, WHICH MUST BE RESPECTED AND RECOGNIZED. B) THE DECISION MISTAKENLY CONCLUDES THAT EVEN IF THE CHALLENGE WAS SUBSEQUENTLY DECLARED VOID, THE ORIGINAL PROPONENT IS LEFT WITHOUT ANY RIGHTS OR REMEDY SIMPLY BECAUSE THE DISQUALIFIED CHALLENGER HAS ALREADY PROCEEDED TO IMPLEMENT THE PROJECT. II. GIVEN THE DECLARATION OF THIS HONORABLE COURT THAT THE [PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC. (PIATCO)] CONTRACTS ARE VOID AB INITIO, AT THE VERY LEAST, THE [NAIA IPT III] PROJECT SHOULD BE COVERED ANEW BY SECTION 10.11, RULE 10 OF THE [IMPLEMENTING RULES AND REGULATIONS (IRR)] OF THE BOT LAW, WHEREIN INVITATIONS FOR COMPARATIVE PROPOSALS SHALL AGAIN BE MADE AND THE RIGHT OF AEDC AS THE ORIGINAL PROPONENT TO MATCH THE BEST OFFER SHOULD BE REINSTATED. III. WITH THE NULLIFICATION OF THE PIATCO CONTRACTS, GOVERNMENT SHOULD NOT HAVE INITIATED EXPROPRIATION PROCEEDINGS AGAINST THE [NAIA IPT III] FACILITIES. BUT HAVING DONE SO, THE GOVERNMENT MAY PROCEED WITH THE EXPROPRIATION AND THEN USE THE FAIR AND JUST VALUATION, AS MAY BE DETERMINED IN THE EXPROPRIATION PROCEEDINGS, AS THE FLOOR PRICE FOR THE NEW INVITATION FOR COMPARATIVE PROPOSALS FOR THE [NAIA IPT III] PROJECT. IV. IN THE EVENT OF A NEW INVITATION FOR COMPARATIVE PROPOSALS, LAW AND EQUITY DICTATES THAT GOVERNMENT SHOULD RECOGNIZE AND/OR REINSTATE AEDCS RIGHT TO MATCH THE LOWEST PRICE OFFER/PROPOSAL FOR THE [NAIA IPT III] PROJECT WITHIN THE PERIOD ALLOWED UNDER THE BOT LAW. V. THERE IS NO FACTUAL BASIS TO CONCLUDE THAT AEDC WAS NOT FINANCIALLY QUALIFIED TO UNDERTAKE THE [NAIA IPT III] PROJECT BECAUSE THIS MATTER WAS NOT PUT IN ISSUE BY THE

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PARTIES. A DECLARATION THAT AEDC WAS NOT QUALIFIED WILL JEOPARDIZE THE REPUBLICS POSITION IN THE INTERNATIONAL ARBITRATION CASES BECAUSE THE GOVERNMENT WILL BE VIEWED AS HAVING LET PIATCO TO BELIEVE THAT PIATCOS CONTRACTING PROCESS WAS LEGAL AND THAT PIATCO COMMITTED NO VIOLATION. CONSEQUENTLY, PIATCO MAY BE ENTITLED NOT ONLY TO COMPENSATION BUT ALSO TO DAMAGES. VI. [NAIA IPT III] WAS BUILT BY PIATCO WITH SIGNIFICANT DEVIATION FROM THE BID DOCUMENTS AND DRAFT CONCESSION AGREEMENT. AEDCS TAKING OVER OF [NAIA IPT III] WILL NOT RESULT IN AN AMENDMENT OF ITS PROPOSAL. INSTEAD AEDC WILL IMPLEMENT OR ENFORCE THE DRAFT CONCESSION AGREEMENT AND THE TECHNICAL SPECIFICATIONS APPROVED BY THE NEDA, ICC AND OTHER GOVERNMENT AGENCIES, THE MEMORANDUM OF UNDERSTANDING AND TERMS OF REFERENCE OR BID DOCUMENTS. VII. THIS HONORABLE COURT SHOULD NOT HAVE PASSED UPON EITHER THE AUTHENTICITY OR IMPORT OF THE MEMORANDUM OF UNDERSTANDING (MOU") BECAUSE IT WAS NOT A LITIGATED ISSUE. GOVERNMENT NEVER DISPUTED THE CAPACITY OF THE MOU TO CREATE RIGHTS AND OBLIGATIONS. TO CONCLUDE THAT THE MOU WAS VOID IS TO NECESSARILY ALSO CONCLUDE THAT THERE WAS NO CONTRACT TO OPEN UP TO CHALLENGE, AND THAT PIATCO WAS WRONGFULLY LED TO MOUNT A CHALLENGE THAT COULD NOT POSSIBLY BE VALID. BASED ON THIS PREMISE, GOVERNMENT IS ENTIRELY TO BLAME FOR THE [NAIA IPT III] DISASTER AND WILL ENTITLE PIATCO TO DAMAGES. VIII. AEDC RELIED ON AND ACTED DETRIMENTALLY IN RELYING ON THE MOU. IT IS A DANGEROUS JUDICIAL POLICY TO PERMIT GOVERNMENT TO UNILATERALLY BREACH CONTRACTUAL OBLIGATIONS WITHOUT CONSEQUENCE, ESPECIALLY WHEN THE OTHER PARTY IS NOT IN BREACH. IX. THE PETITION IS NOT BARRED BY THE DISMISSAL OF THE PASIG CASE. WHETHER THE DISMISSAL CONSTITUTES RES JUDICATA OR PRECLUDES AEDCS CLAIM IS NOT AMONG THE ISSUES RAISED AND LITIGATED BY THE PARTIES IN THIS CASE. HENCE, THE STATEMENT THAT THE INSTANT PETITION IS NOT BARRED BY RES JUDICATA SHOULD NOT HAVE BEEN MADE. TO UPHOLD THE DISMISSAL OF THE PASIG CASE AS A VALID JUDGMENT WOULD BE TO PUT GOVERNMENTS ARBITRATION CASES IN PERIL BECAUSE IT WOULD AFFIRM THAT GOVERNMENT, INCLUDING THE SOLICITOR GENERAL, AND NOT JUST MIAA OR DOTC, UPHELD THE VALIDITY OF THE PIATCO CONTRACTS, SUCH WOULD PLACE GOVERNMENT IN ESTOPPEL TO DENY CLAIMS FOR DAMAGES, IN ADDITION TO COMPENSATION, BY PIATCO. X. THE FUNDAMENTAL PREMISE FOR THE COMPROMISE AGREEEMENT (I.E. THE AMICABLE SETTLEMENT OF AEDCS AND PUBLIC RESPONDENTS CLAIMS) HAS CEASED TO EXIST IN VIEW OF PUBLIC RESPONDENTS ADOPTION OF AEDCS LEGAL POSITION THAT THE AWARD OF THE [NAIA IPT III] PROJECT TO PIATCO WAS ILLEGAL. THEREFORE, BOTH AEDC AND PUBLIC RESPONDENTS SHOULD BE RELEASED FROM THEIR MUTUAL OBLIGATIONS UNDER THE COMPROMISE AGREEMENT. XI.

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THE PETITION FOR MANDAMUS WAS TIMELY FILED WITHIN THE PERIOD PROVIDED UNDER THE 2 RULES OF COURT. At the end of its Motion, AEDC prays to this Court to reconsider the latters Decision of 18 April 2008, insofar as the formers Petition in G.R. No. 169914 is concerned, and render, in its stead, judgment 1. Directing Public Respondents, their officers, agents, successors, representatives or persons or entities acting on their behalf to recognize AEDCs rights as an Original Proponent of an unsolicited project as set forth above; 2. Directing Public Respondents to issue the appropriate Notice of Award of the Project to AEDC, sign the draft concession agreement with AEDC and implement the same; 3. Directing Public Respondents, their officers, agents, successors, representatives or persons or entities acting on their behalf to recognize AEDCs right to conduct an invasive inspection and valuation of the structures currently built as [NAIA IPT III] for an effective valuation and determination of the work to be conducted thereon; and 4. Permanently enjoining Public Respondents, their officers, agents, successors, representatives or persons or entities acting on their behalf, from negotiating, re-bidding, awarding or otherwise entering into any concession contract with PIATCO and other third parties, except as otherwise stated above, within the context of permitting AEDC to complete the construction and operation of the [NAIA IPT III] Project. 5. In the alternative, directing Public Respondents to effect a new invitation for comparative proposals for the [NAIA IPT III] Project in accordance with Rule 10 of the IRR of the BOT Law, as soon as practicable and in the process recognize and/or reinstate the right of AEDC to match the best offer. Other reliefs, just and equitable in the premises, are likewise prayed for.
3

AEDC persistently asserts its right to be awarded the NAIA IPT III Project as the original proponent thereof, following the declaration of nullity of the award of the said project to PIATCO in Agan, Jr. v. Philippine 4 International Air Terminals Co., Inc. Extensive as its Motion for Reconsideration may seem, it is mostly a reiteration of the arguments AEDC already raised in its Petition for Mandamus and Prohibition (with Application for Temporary Restraining Order), considered by this Court when it rendered its Decision dated 18 April 2008 dismissing said Petition. We are not persuaded, whether by the previous Petition or the present Motion, to grant AEDC the writs of mandamus and prohibition it prays for in the absence of a clear right to the same. The declaration of nullity of the award of the NAIA IPT III Project to PIATCO in Agan does not automatically entitle AEDC to the award of the said project on the mere basis that it was the original proponent thereof. The rights of the original proponent of an unsolicited proposal are rooted in Section 4-A of Republic Act No. 5 6957, more commonly known as the Build-Operate-Transfer (BOT) Law, as amended by Republic Act No. 7718, which reads: SEC. 4-A. Unsolicited proposals. Unsolicited proposals for projects may be accepted by any government agency or local government unit on a negotiated basis: Provided, That, all the following conditions are met: (1) such projects involve a new concept or technology and/or are 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, for three (3) consecutive weeks, in a newspaper of general circulation, comparative or competitive proposals and no other proposal is received for a period of sixty (60) working days: Provided, further, That in the event another proponent submits a lower price proposal, the original proponent shall have the right to match the price within thirty (30) working days.

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In his dissent to this Resolution, Mr. Justice Renato C. Corona submits that the original proponent of an unsolicited proposal for a BOT project, under Section 4-A of Republic Act No. 6957, as amended, is entitled to the award of the project in at least three circumstances: (1) no competitive bid was submitted; (2) there was a lower bid by a qualified bidder but the original proponent matched it; and (3) there was a lower bid but it was made by a person/entity not qualified to bid, in which case, it is as if no competitive bid had been made. Both Justice Corona and Mr. Justice Presbiterio J. Velasco, Jr., in their dissenting opinions, conclude that AEDC is entitled to the award of the NAIA IPT III project as the original proponent thereof because the third circumstance is extant in this case. We can only accept in part the afore-mentioned enumeration of the circumstances when an original proponent is entitled to the award of the project under Section 4-A of Republic Act No. 6957, as amended. In the 18 April 2008 Decision, we have already exhaustively scrutinized Section 4-A of the BOT Law, as amended, in relation to 6 its IRR, and in consideration of the intent of the legislators who crafted the BOT Law. We find no reason to disturb our conclusion therein that: The special rights or privileges of an original proponent thus come into play only when there are other proposals submitted during the public bidding of the infrastructure project. As can be gleaned from the plain language of the statutes and the IRR, the original proponent has: (1) the right to match the lowest or most advantageous proposal within 30 working days from notice thereof, and (2) in the event that the original proponent is able to match the lowest or most advantageous proposal submitted, then it has the right to be awarded the project. The second right or privilege is contingent upon the actual exercise by the original proponent of the first right or privilege. Before the project could be awarded to the original proponent, he must have been able to match the lowest or most advantageous proposal within the prescribed period. Hence, when the original proponent is able to timely match the lowest or most advantageous proposal, with all things being equal, it shall enjoy preference 7 in the awarding of the infrastructure project. It is without question that in a situation where there is no other competitive bid submitted for the BOT project that the project would be awarded to the original proponent thereof. However, when there are competitive bids submitted, the original proponent must be able to match the most advantageous or lowest bid; only when it is able to do so, will the original proponent enjoy the preferential right to the award of the project over the other bidder. These are the general circumstances covered by Section 4-A of Republic Act No. 6957, as amended. We cannot accede to include in such enumeration the situation in this case and categorically declare that the right of AEDC to the NAIA III Project is ensured and protected by Section 4-A of Republic Act No. 6957, as amended. What had happened in the proposal, bidding, and awarding process of the NAIA IPT III Project is indisputably unique and convoluted. We cannot subscribe to disposing of the controversy as regards the NAIA IPT III Project with a generalized rule, i.e., there was a lower bid but it was made by a person/entity not qualified to bid, in which case, it is as if no competitive bid had been made. As we said in the Decision of 18 April 2008, it would be a simplistic approach to what is a complex problem. In the instant case, AEDC may be the original proponent of the NAIA IPT III Project; however, the PreQualification Bids and Awards Committee (PBAC) also found the Peoples Air Cargo & Warehousing Co., Inc. Consortium (Paircargo), the predecessor of PIATCO, to be a qualified bidder for the project. Upon consideration of the bid of Paircargo/PIATCO, PBAC found the same to be far more advantageous than the original offer of AEDC. It is already an established fact in Agan that AEDC failed to match the more advantageous proposal 8 submitted by PIATCO by the time the 30-day working period expired on 28 November 1996; and since it did not exercise its right to match the most advantageous proposal within the prescribed period, it cannot assert its right to be awarded the project. Also, in Agan, the Court disqualified PIATCO from the NAIA IPT III Project for failure to put up the required minimum equity of P2.7 million. The feasibility, however, of the financial proposal of Paircargo/PIATCO was never put in issue. The proposals of AEDC and Paircargo/PIATCO contained the following terms:

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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 9 offered to pay the government a total of P17.75 billion for the same period. x x x. (Emphasis ours.) Clearly, the P17.75 billion guaranteed payment of PIATCO is more advantageous to the government. There is not a single allegation that such proposal is impossible to implement. It is true that AEDC instituted before the Regional Trial Court (RTC) of Pasig City Civil Case No. 66213, complaining that it was not given access to certain documents by which it could have evaluated the financial proposal of PIATCO and its ability to match the same. Thus, AEDC sought, among other things, the nullification of the proceedings before the PBAC and the declaration of the absence of any other competitive bid by a qualified bidder. Nevertheless, AEDC would also 10 later jointly move (with therein public respondents ) for the dismissal of Civil Case No. 66213 pursuant to a Concession Agreement it executed on 12 July 1997 with the Department of Transportation and Communications (DOTC). The Pasig City RTC granted the joint motion of the parties and accordingly dismissed with prejudice Civil Case No. 66213 in an Order dated 30 April 1999. Therefore, AEDC not only failed to match the more advantageous proposal of PIATCO, but it also agreed to no longer pursue its objections thereto. In the meantime, PIATCO already began building the NAIA IPT III facilities. By the time this Court promulgated its Decision in Agan, disqualifying PIATCO as a bidder and annulling the award of the NAIA IPT III Project to it, the NAIA IPT III facilities were substantially complete. The Court, in its Resolution in Agan, recognized the right of PIATCO to just compensation for the NAIA IPT III facilities, in accordance with law and equity. The Government, thereafter, instituted an expropriation case for the determination of the just compensation to be 11 12 paid to PIATCO. In Republic v. Gingoyon, the Court affirmed the application of Republic Act No. 8974 to the expropriation case and the right of the Government to take possession of the NAIA IPT III facilities upon the payment to PIATCO of the proffered value of the same. On 11 September 2006, the Manila International Airport Authority (MIAA) tendered a Land Bank check in the amount of P3,002,125,000.00 representing the proffered value of NAIA IPT III, which was received by a duly authorized representative of PIATCO. As a result, the MIAA and other concerned government agencies were able to take possession of the NAIA IPT III facilities and prepare them for operation. The NAIA IPT III opened for 13 14 domestic air travel on 22 July 2008. The first international flight took off from NAIA IPT III on 1 August 2008. These developments, as well as the implications and consequences thereof, cannot be conveniently ignored. The factual backdrop has significantly changed from the time of the bidding of the NAIA IPT III Project, which prevents us from concluding that, with the disqualification of PIATCO, AEDC shall automatically acquire NAIA IPT III Project as the original proponent thereof. The bidding and awarding process for the NAIA IPT III Project had long been closed. The Court could not just conveniently revert to the stage of bidding and awarding of the said project and ignore all the factual and legal developments that had already taken place. There is no point in subjecting the NAIA IPT III Project to another bidding and awarding process when it is substantially finished and, contrary to the averments of AEDC, already operational. Worth stressing is that the NAIA IPT III Project is a build-operate-transfer project. When the NAIA IPT III facilities have already been built, their possession transferred to the government, and are now being operated by the latter, nothing much remains of the project. The ultimate goal of a BOT project is for the government to eventually gain possession, ownership, and control of the infrastructure subject thereof from the private sector that undertook its building and financing, after allowing the latter to recoup its investments and reap reasonable profit. In this case, the government has already attained possession and control of the NAIA IPT III facilities. It would also acquire 15 ownership of said facilities once the just and equitable compensation due PIATCO as builder has been determined and paid in the ongoing expropriation proceedings, docketed as Case No. 04-0876CFM, before the Pasay City RTC. To return the NAIA IPT III facilities to the private sector would only be a step backwards.

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The lack of technical skill and competence of the Government to operate NAIA IPT III cannot justify turning over the same to AEDC. There are several other ways for the Government to cope, i.e., recruiting more qualified people, without it having to relinquish ownership, possession, and control of NAIA IPT III. The protestation by AEDC of our characterization of the process on unsolicited proposal as public bidding is specious. We call attention to the following relevant sections of Rule 10 of the IRR specifically on Unsolicited Proposals: Sec. 10.9. Negotiation With the Original Proponent. Immediately after ICC/Local Sanggunians clearance of the project, the Agency/LGU shall proceed with the in-depth negotiation of the project scope, implementation arrangements and concession agreement, all of which will be used in the Terms of Reference for the solicitation of comparative proposals. The Agency/LGU and the proponent are given ninety (90) days upon receipt of ICCs approval of the project to conclude negotiations. The Agency/LGU and the original proponent shall negotiate in good faith. However, should there be unresolvable differences during the negotiations, the Agency/LGU shall have the option to reject the proposal and bid out the project. On the other hand, if the negotiation is successfully concluded, the original proponent shall then be required to reformat and resubmit its proposal in accordance with the requirements of the Terms of Reference to facilitate comparison with the comparative proposals. The Agency/LGU shall validate the reformatted proposal if it meets the requirements of the TOR prior to the issuance of the invitation for comparative proposals. Sec. 10.10. Tender Documents. The qualification and tender documents shall be prepared along the lines specified under Rules 4 and 5 hereof. The concession agreement that will be part of the tender documents will be considered final and non-negotiable by the challengers. Proprietary information shall, however, be respected, protected and treated with utmost confidentiality. As such, it shall not form part of the bidding/tender and related documents. Sec. 10.11. Invitation for Comparative Proposals. The Agency/LGU shall publish the invitation for comparative or competitive proposals only after ICC/Local Sanggunian issues a no objection clearance of the draft contract. The invitation for comparative or competitive proposals should be published at least once every week for three (3) weeks in at least one (1) newspaper of general circulation. It shall indicate the time, which should not be earlier than the last date of publication, and place where tender/bidding documents could be obtained. It shall likewise explicitly specify a time of sixty (60) working days reckoned from the date of issuance of the tender/bidding documents upon which proposals shall be received. Beyond said deadline, no proposals shall be accepted. A pre-bid conference shall be conducted ten (10) working days after the issuance of the tender/bidding documents. Sec. 10.12. Posting of Bid Bond by Original Proponent. The original proponent shall be required at the date of the first date of the publication of the invitation for comparative proposals to submit a bid bond equal to the amount and in the form required of the challengers. Sec. 10.13. Simultaneous Qualification of the Original Proponent. The Agency/LGU shall qualify the original proponent based on the provisions of Rule 5 hereof, within thirty (30) days from start of negotiation. For consistency, the evaluation criteria used for qualifying the original proponent should be the same criteria used in the Terms of Reference for the challengers. Sec. 10.14. Submission of Proposal. The bidders are required to submit the proposal in three envelopes at the time and place specified in the Tender Documents. The first envelope shall contain the qualification documents, the second envelope the technical proposal as required under Sec. 7.1.(b), and the third envelope as required under Sec. 7.1.(c). Sec. 10.15. Evaluation of Proposals. In terms of procedure, the evaluation will be in three stages: Stage 1 is the evaluation of qualification documents; Stage 2, the technical proposal; and Stage 3, the financial proposal. Only those bids which passed the first stage will be considered for the second stage and similarly, only those

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which passed the second stage will be considered for the third stage evaluation. The Agency/LGU will return to the disqualified bidders the remaining envelopes unopened together with a letter explaining why they were disqualified. The criteria for evaluation will follow Rule 5 for the qualification of bidders and Rule 8 for the technical and financial proposals. The time frames under Rules 5 and 8 shall likewise be followed. Sec. 10.16. Disclosure of the Price Proposal. The disclosure of the price proposal of the original proponent in the Tender Documents will be left to the discretion of the Agency/LGU. However, if it was not disclosed in the Tender Documents, the original proponents price proposal should be revealed upon the opening of the financial proposals of the challengers. The right of the original proponent to match the best proposal within thirty (30) working days starts upon official notification by the Agency/LGU of the most advantageous financial proposal. (Emphasis ours.) After the concerned government agency or local government unit (LGU) has received, evaluated, and approved the pursuance of the project subject of the unsolicited proposal, the subsequent steps are fundamentally similar to the bidding process conducted for ordinary government projects. The three principles of public bidding are: the offer to the public, an opportunity for competition, and a basis for 16 an exact comparison of bids, all of which are present in Sec. 10.9 to Sec. 10.16 of the IRR. First, the project is offered to the public through the publication of the invitation for comparative proposals. Second, the challengers are given the opportunity to compete for the project through the submission of their tender/bid documents. And third, the exact comparison of the bids is ensured by using the same requirements/qualifications/criteria for the 17 original proponent and the challengers, to wit: the proposals of the original proponent and the challengers must all be in accordance with the requirements of the Terms of Reference (TOR) for the project; the original 18 proponent and the challengers are required to post bid bonds equal in amount and form; and the qualifications of the original proponent and the challengers shall be evaluated by the concerned agency/LGU using the same 19 evaluation criteria. 1avvphi1.zw+ A perusal of Sec. 10.9 to Sec. 10.16 of the IRR further reveals repeated mention of "comparative proposals" and "tender/bid documents"; as well as reference to and required compliance with the same rules followed in ordinary bidding of government projects, such as Rule 4 (Bid/Tender Documents); Rule 5 (Qualification of Bidders); and Sec. 7.1(b) and Sec. 7.1(c) of Rule 7 (Submission, Receipt and Opening of Bids) of the same IRR. Hence, the process of unsolicited proposals does involve public bidding where, in the end, the government is free to choose the bid or proposal most advantageous to it. However, by adoption of the Swiss Challenge, special consideration is given in said process to the original proponent of the project, namely, the right to be awarded the project should it be able to match the lowest or most advantageous proposal within 30 working days from notice. There is no truth to the averment of AEDC that by our Decision of 18 April 2008, we are allowing PIATCO to benefit from its own fraud and wrongdoing. Our refusal to award the NAIA IPT III Project to AEDC does not in any way benefit PIATCO. PIATCO cannot benefit from the NAIA IPT III Project when its Concession Agreements involving the same were set aside for being null and void, rendering it unable to derive profit therefrom. It is only entitled to just and equitable compensation for building the NAIA IPT III facilities, "for the government cannot 20 unjustly enrich itself at the expense of PIATCO and investors." AEDC takes exception to the doubts raised by this Court on the authenticity of the Memorandum of Understanding (MOU) dated 26 February 1996 it executed with the DOTC. To recall, our Decision of 18 April 2008 states: It is important to note, however, that the document attached as Annex "E" to the Petition of AEDC is a "certified photocopy of records on file." This Court cannot give much weight to said document considering that its existence and due execution have not been established. It is not notarized, so it does not enjoy the presumption of regularity of a public document. It is not even witnessed by anyone. It is not certified true by its supposed

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signatories, Secretary Jesus B. Garcia, Jr. for DOTC and Chairman Henry Sy, Sr. for AEDC, or by any government agency having its custody. It is certified as a photocopy of records on file by an Atty. Cecilia L. 21 Pesayco, the Corporate Secretary, of an unidentified corporation. AEDC itself invoked the provisions of the MOU and attached a copy thereof as one of the Annexes to its Petition in G.R. No. 169914. By submitting a copy of the MOU, AEDC subjects the said document to the scrutiny of the Court, which is duty-bound to examine and weigh the same in accordance with the rules. We are not obligated to receive a copy of the MOU just as AEDC offered it; and accept hook, line, and sinker, the references made by AEDC to the contents thereof without ascertaining that it was actually the very same document executed by the parties. Nowhere in our 18 April 2008 Decision did we expressly declare that there was no MOU between AEDC and the government. What we called attention to therein was the fact that the document attached to the Petition of AEDC was highly suspect, not being a clear copy and not being properly certified as a true copy of the MOU, for which reasons, it could not be given much weight and credence in establishing the exact contents of the MOU in question. Furthermore, it would do well for AEDC to remember that we did proceed, for the sake of argument, to rule on the contents of the MOU as follows: Even assuming for the sake of argument, that the said Memorandum of [Understanding], is in existence and duly executed, it does little to support the claim of AEDC to the award of the NAIA IPT III Project. The commitments undertaken by the DOTC and AEDC in the Memorandum of [Understanding] may be simply summarized as a commitment to comply with the procedure and requirements provided in Rules 10 and 11 of the IRR. It bears no commitment on the part of the DOTC to award the NAIA IPT III Project to AEDC. On the contrary, the document includes express stipulations that negate any such government obligation. Thus, in the first clause, the DOTC affirmed its commitment to pursue, implement and complete the NAIA IPT III Project on or before 1998, noticeably without mentioning that such commitment was to pursue the project specifically with AEDC. Likewise, in the second clause, it was emphasized that the DOTC shall pursue the project under Rules 10 and 11 of the IRR of Republic Act No. 6957, as amended by Republic Act No. 7718. And most significantly, the tenth clause of the same document provided: 10. Nothing in this Memorandum of Understanding shall be understood, interpreted or construed as permitting, allowing or authorizing the circumvention of, or non-compliance with, or as waiving, the provisions of, and 22 requirements and procedures under, existing laws, rules and regulations. Hence, even after a consideration of the contents of the MOU, we do not find therein an absolute undertaking on the part of the government, represented by the DOTC, to award the NAIA IPT III Project to AEDC. There is likewise no sufficient reason for us to reverse the pronouncements in our Decision dated 18 April 2008 that the Petition of AEDC in G.R. No. 169914 suffered from procedural defects: having been filed beyond reasonable time and being barred by res judicata. We have already adequately explained in our 18 April 2008 Decision our finding that the Petition of AEDC was filed beyond reasonable time, to wit: AEDC revived its hope to acquire the NAIA IPT III Project when this Court promulgated its Decision in Agan on 5 May 2003. The said Decision became final and executory on 17 February 2004 upon the denial by this Court of the Motion for Leave to File Second Motion for Reconsideration submitted by PIATCO. It is this Decision that declared the award of the NAIA IPT III Project to PIATCO as null and void; without the same, then the award of the NAIA IPT III Project to PIATCO would still subsist and other persons would remain precluded from acquiring rights thereto, including AEDC. Irrefutably, the present claim of AEDC is rooted in the Decision of this Court in Agan. However, AEDC filed the Petition at bar only 20 months after the promulgation of the Decision 23 in Agan on 5 May 2003.

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AEDC is merely reiterating in its Motion for Reconsideration the same disputation it previously made in its Petition that the period for filing of said Petition should only be counted from 21 September 2005, the date when it received the letter of the Solicitor General denying its offer to take over the NAIA IPT III Project and which we had already considered and rejected in our Decision dated 18 April 2008 for the following reasons: AEDC contends that the "reasonable time" within which it should have filed its petition should be reckoned only from 21 September 2005, the date when AEDC received the letter from the Office of the Solicitor General refusing to recognize the rights of AEDC to provide the available funds for the completion of the NAIA IPT III Project and to reimburse the costs of the structures already built by PIATCO. It has been unmistakable that even long before said letter especially when the Government instituted with the RTC of Pasay City expropriation proceedings for the NAIA IPT III on 21 December 2004 that the Government would not recognize any right that AEDC purportedly had over the NAIA IPT III Project and that the Government is intent on taking over and 24 operating the NAIA IPT III itself. Without any new argument on this issue, we are not persuaded to change our afore-quoted ruling. On the issue of res judicata, AEDC argues that we erred in taking cognizance thereof even when the issue was not raised by the parties. We disagree. Even if the public respondents in G.R. No. 169914 failed to plead res judicata in their Comment and is deemed to have waived the said defense, we may still motu proprio dismiss the Petition by reason thereof if it appears in the pleadings or the evidence on record that the said Petition is barred by prior judgment. Section 1, Rule 10 of the Revised Rules of Court provides: SECTION 1. Defenses and objections not pleaded. Defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed waived. However, when it appears from the pleadings or the evidence on record that the court has no jurisdiction over the subject matter, that there is another action pending between the same parties for the same cause, or that the action is barred by a prior judgment or by statute of limitations, the court shall dismiss the claim. (Emphasis ours.) Although the foregoing provision appears under the rules on proceedings before the trial court, the power to 25 dismiss provided therein is among the residual prerogatives which the Court of Appeals and even this Court 26 may exercise by virtue of Section 2, Rule 1 of the Revised Rules of Court. The Petition of AEDC itself brought to our attention the institution of, the developments in, as well as the eventual dismissal with prejudice of Civil Case No. 66213 by the Pasig City RTC. We had to take cognizance thereof, and after careful consideration, found that the dismissal with prejudice of Civil Case No. 66213 by the Pasig City RTC effectively bars the instant Petition of AEDC. AEDC had waived its right to challenge the award of the NAIA IPT III Project to PIATCO when it amicably settled Civil Case No. 66213 before the Pasig City RTC, resulting in the dismissal with prejudice of said case. We should not allow the revival by AEDC of its right to the NAIA IPT III Project as the original proponent thereof, after some other party secured the annulment of the award to PIATCO, not only because it is barred by res judicata, but also because it constitutes palpable opportunism. Finally, we find baseless the averment of AEDC that our judgment recognizing and respecting the final and immediately executory Order dated 30 April 1999 of the Pasig City RTC which granted, with prejudice, the Joint Motion to Dismiss Civil Case No. 66213 filed by the parties therein will imperil the position of the government in the international arbitration cases involving the NAIA IPT III Project still pending before the International Chamber of Commerce (ICC). AEDC points out that the position taken by the government in Civil Case No. 66213 (that PIATCO was qualified to participate in the bidding for the NAIA IPT III Project) is inconsistent with the position the latter is espousing in the international arbitration cases (that PIATCO was financially disqualified from bidding for the NAIA IPT III Project).
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It should be recalled, however, that in the Joint Motion to Dismiss Civil Case No. 66213, the parties, without admitting liability or conceding to the position taken by the other, agreed to release and forever discharge each other from any and all liabilities, whether criminal or civil, arising in connection with the case. Evidently, the parties consented to release and discharge each other from any liability regardless of whether the other party maintained or conceded its position. Stated otherwise, the position taken by the parties on the issues in the case was not material to their agreement to release and discharge each other from any liability. The Order dated 30 April 1999 of the Pasig City RTC merely granted the Joint Motion to Dismiss Civil Case No. 66213, the very terms of which rendered it unnecessary for the said court to consider or rule upon the positions of the parties. Thus, nothing in the said Order of the Pasig City RTC precludes the government in the international arbitration proceedings before the ICC from adopting the position that PIATCO was financially disqualified to bid for the NAIA IPT III Project. The Motion for Reconsideration of Baterina (G.R. No. 174166) Baterina presents the following arguments in support of his Motion for Reconsideration: The principles of res judicata and stare decisis, and the doctrine of the "law of the case," do not apply to Baterina because he was not a party to the previous cases; and because the issues raised here are not the same issues 28 litigated in Gingoyon. The issues advocated by Baterina, especially on the ownership of Terminal 3 and the propriety of paying just compensation to PIATCO, have not become moot and academic because these issues remain to be viable and justiciable controversies; a resolution on the merits of these issues will serve a useful purpose that will inure to 29 the benefit of the Filipino people. The issues advocated by Baterina remain to be viable and justiciable controversies because the 30 pronouncements relating thereto in AGan and in Gingoyon were not a final adjudication on the merits. Baterina was deprived of a fair opportunity to be heard because the Court may have unwittingly failed to explain the factual and legal reasons that led the Court to reject Baterinas arguments that the pronouncement in Gingoyon regarding PIATCOs ownership of Terminal 3 was not a final adjudication on the merits and may have 31 been improvident. A resolution on the merits of the ownership of Terminal 3 will serve a useful and practical purpose, and will inure to the benefit of the Filipino people, because it will determine the regime of compensation that must be applied to 32 PIATCO. Baterina then seeks from this Court the following: PRAYER WHEREFORE, premises considered, it is respectfully prayed that the Honorable Court RECONSIDER and SET ASIDE the Decision dated 18 April 2008, at least insofar as G.R. No. 174166 is concerned, and RENDER a new judgment as follows: 1. DECLARE that: (i) Terminal 3 as a matter of law, is public property and thus not a proper object of eminent domain proceedings; and (ii) PIATCO, as a matter of law, is merely the builder of Terminal 3 and, as such, it may file a claim for recovery on quantum meruit with the Commission on Audit for determination of the amount thereof, if any. 2. DIRECT the Regional Trial Court of Pasay City, Branch 117 to dismiss the expropriation case, Civil Case No. 04-0876-CFM.

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3. DECLARE that the Php3 Billion paid to PIATCO on 11 September 2006 (representing the proferred value of Terminal 3) as funds held in trust by PIATCO for the benefit of the Republic and subject to the outcome of the proceedings to determine recovery on quantum meruit due to PIATCO, if any. 4. DIRECT the Solicitor General to disclose the evidence it has gathered on the corruption, bribery, fraud, bad faith, etc., to this Honorable Court and the Commission on Audit, and to DECLARE such evidence to be admissible in any proceeding for the determination of any compensation due to PIATCO, if any. 5. In the alternative, to: i. SET ASIDE the expropriaton courts Order dated 08 August 2006 denying Baterinas motion for intervention in the expropriation case, and ii. DIRECT the expropriation court to hear and resolve the issue of ownership of Terminal 3 consistent with the Honorable Courts holding in Gingoyon that "the interests of the movants-in-intervention may be duly litigated in proceedings which are extant before lower courts." 6. As another alternative, even should this Honorable Court not reconsider its Decision dated 18 April 2008, to declare that the expropriation court is empowered and is mandated, by both law and to protect the public interest and to ensure good governance, to consider evidence of PIATCOs illegal activities and unreasonable expenses and to accordingly adjust the amount of just compensation due to PIATCO. Other reliefs, just and equitable in the premises, are likewise prayed for.
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Baterinas present Motion presents no new arguments for our consideration and only displays his obstinate refusal to acknowledge and respect our final and executory decisions in Agan and Gingoyon. We stand firm on our pronouncement in our Decision dated 18 April 2008 that the entitlement of PIATCO to just and equitable consideration for its construction of NAIA IPT III and the propriety of the Republics resort to expropriation proceedings were already recognized and upheld by this Court in Agan and Gingoyon. Undoubtedly, the Republic and PIATCO, the parties in Case No. 04-0876CFM, the expropriation case instituted by the Republic before the Pasay City RTC, are bound by Agan and Gingoyon by conclusiveness of judgment and law of the case. However, as to Baterina, a second hard look at this case convinces us that the issue of whether he is bound by Agan and Gingoyon is not even material, given the fact that he has repeatedly failed to establish to the satisfaction of the courts his interest and legal standing to intervene in previous or pending judicial proceedings involving the NAIA IPT III Project. Baterinas Motion for Intervention and Motion for Reconsideration-in-Intervention of the Decision in Gingoyon were denied by the Court, not only for having been belatedly filed, but also pursuant to the following significant observation: In the case of Representative Baterina, he invokes his prerogative as legislator to curtail the disbursement without appropriation of public funds to compensate PIATCO, as well as that as a taxpayer, as the basis of his legal standing to intervene. However, it should be noted that the amount which the Court directed to be paid by the Government to PIATCO was derived from the money deposited by the Manila International Airport Authority, an agency which enjoys corporate autonomy and possesses a legal personality separate and distinct from those 34 of the National Government and agencies thereof whose budgets have to be approved by Congress. True, we also noted that the interests of the movants-in-intervention in Gingoyon, which included Baterina, "may 35 be duly litigated in proceedings which are extant before the lower courts." But such statement simply recognized Baterinas option to pursue his intervention in Case No. 04-0876CFM before the Pasay City RTC,

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and contained no absolute assurance to Baterina or categorical directive to the trial court that his intervention shall be allowed and given due course. The Pasay City RTC can still exercise its discretion in granting or denying Baterinas Motion for Intervention and in admitting or rejecting his Petition in Intervention. In fact, in its exercise of said discretion, the Pasay City RTC issued an Order dated 8 August 2006 denying Baterinas Motion for Intervention and refusing to admit his Petition in Intervention in Case No. 04-0876CFM, ratiocinating thus: As regards Congressman Baterina, et.al., (sic) the Court finds that, as legislators and taxpayers, they have no legal interest to intervene in this case. xxxx There has been no showing up to this point that plaintiffs intend to use tax refunds in the course of their expropriation of NAIA IPT 3. In fact, the amount that plaintiffs initially deposited with the Land Bank of the Philippines for the purposes of this case comprised funds (sic) of plaintiff Manila International Authority (MIAA) (sic) and did not come from the collection of taxes. The reasoning behind the Supreme Courts denial of their motion to intervene in Republic vs. Gingoyon also applies here: xxxx More importantly, this Court itself will decide how much payment will be due from plaintiffs to defendant PIATCO, in accordance with law, since the determination of just compensation is a judicial function. The amount of just compensation is not for the plaintiffs or defendant PIATCO to decide. This, Congressman Baterina, Et (sic) al. could not possibly set up a petition against both plaintiffs and defendant for illegal disbursement of public funds when it is precisely the Court, not plaintiff or defendant, which will ensure that the determination and payment of just compensation to defendant PIATCO would be in compliance with Philippine laws. There is, therefore, no room in this expropriation case for a taxpayers intervention. Similarly, there is also no room in this expropriation case for the accommodation of a legislators petition. Plaintiffs exercise of the right of eminent domain does not infringe howsoever on legislative prerogatives, powers of (sic) privileges. xxxx The motion that private property may be taken without need for payment of just compensation, as espoused by Congressman Baterina, et al., is so foreign to Philippine Constitutional democracy that it has no place for consideration in an expropriation case. Congressman Baterina, et.al., (sic) also cannot rely on criminal charges filed against private individuals, not involving defendant PIATCO, to defeat the payment of just compensation for the taking of private property, which no less than the Philippine Constitution mandates. Those criminal cases are irrelevant to this expropriation. Neither may Congressman Baterina, et al., rely on the Supreme Courts ruling in Again vs. PIATCO (G.R. No. 155001, May 5, 2003) to establish legal standing here. Agan vs. PIATCO was an entirely different case, involving very different legal interests. It was not an expropriation case. Congressman Baterina, Et.al., (sic) cannot use this expropriation case as a venue to belatedly ventilate arguments that they may forgotten to raise in Agan vs. PIATCO. That is not allowed, especially since Congressman Baterina, Et.al., (sic) has (sic) every opportunity to seek reconsideration of the Supreme Courts decision in Agan vs. PIATCO. Furthermore, there is no basis under the Rules of Court or in jurisprudence for the allowance of a petition for prohibition being intermingled with a special civil action for expropriation. Finally, the Court notes that Congressman Baterina et.al. (sic) never paid filing fees for their petition for prohibition in intervention. This Court, therefore, never obtained jurisdiction over their petition and never acquired
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jurisdiction to permit their intervention. As the Supreme Court clarified in Serrano vs. Delica (G.R. No. 136325, July 29, 2005). (sic) It is not simply the filing of the complaint or appropriate initiatory pleading, but the payment of the prescribed docket fees that vests a trial court with jurisdiction over the subject matter or nature of the 37 action. There is no showing that Baterina filed a Motion for Reconsideration of the foregoing Order dated 8 August 2006 of the Pasay City RTC denying his Motion for Intervention; or that he appealed the said Order or challenged the same in a Petition for Certiorari before the higher courts. Baterinas Petition for Certiorari and Prohibition (With Urgent Prayer for the Issuance of a Temporary Restraining Order and Writ of Preliminary Injunction), docketed as CA-G.R. No. 95539, was filed before the Court of Appeals on 6 August 2006. It questioned the issuance by the Pasay City RTC, allegedly in grave abuse of discretion, of the Orders dated 27 March 2006 and 15 June 2006 and Writ of Execution dated 27 March 2006, which directed the MIAA and Land Bank of the Philippines to already pay PIATCO the proffered value of the NAIA IPT III facilities, so that the government could take possession of the said infrastructures. Thus, the 8 August 2006 Order denying Baterinas Motion for Intervention was clearly not among the orders of the Pasay City RTC assailed in CA-G.R. No. 95539. Additionally, it was the issuance by the Court of Appeals of a Temporary Restraining Order (TRO) in CA-G.R. No. 95539 that gave rise to the Petition for Certiorari and Prohibition of the Republic before this Court, docketed as G.R. No. 174166. The Republic sought to enjoin the appellate court from implementing the said TRO and from proceeding with CA-G.R. No. 95539. None of the afore-described proceedings before the Court of Appeals or this Court involve the Pasay City RTC Order dated 8 August 2006. Since Baterina failed to avail himself of any remedy from the denial of his Motion for Intervention in Case No. 040876CFM, the same has become final and executory as to him. Baterina, therefore, can no longer participate in the proceedings before the Pasay City RTC in Case No. 04-0876CFM, for he is already a stranger to said case. Having been barred from participating any further in Case No. 04-0876CFM before the Pasay City RTC, Baterina is attempting to have us rule on the merits of his Petition in Intervention (which was not admitted by the Pasay City RTC) by merely reiterating the contents thereof in his Comment on the Petition of the Republic in G.R. No. 174166. This is a blatant circumvention of the rules of procedure which we cannot countenance. In light of Baterinas failure to have the denial by the Pasay City RTC of his Motion for Intervention reversed, no court, not even this Court, can take cognizance of his Petition in Intervention, even if so cleverly presented as another pleading but with essentially the same prayer. WHEREFORE, premises considered, the Motions for Reconsideration of our 18 April 2008 Decision filed by Asias Emerging Dragon Corporation and Salacnib F. Baterina are hereby DENIED WITH FINALITY. SO ORDERED. Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 176657 September 1, 2010

DEPARTMENT OF FOREIGN AFFAIRS and BANGKO SENTRAL NG PILIPINAS, Petitioners, vs. HON. FRANCO T. FALCON, IN HIS CAPACITY AS THE PRESIDING JUDGE OF BRANCH 71 OF THE REGIONAL TRIAL COURT IN PASIG CITY and BCA INTERNATIONAL CORPORATION, Respondents. DECISION

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LEONARDO-DE CASTRO, J.: Before the Court is a Petition for Certiorari and prohibition under Rule 65 of the Rules of Court with a prayer for the issuance of a temporary restraining order and/or a writ of preliminary injunction filed by petitioners Department of Foreign Affairs (DFA) and Bangko Sentral ng Pilipinas (BSP). Petitioners pray that the Court 1 declare as null and void the Order dated February 14, 2007 of respondent Judge Franco T. Falcon (Judge Falcon) in Civil Case No. 71079, which granted the application for preliminary injunction filed by respondent BCA International Corporation (BCA). Likewise, petitioners seek to prevent respondent Judge Falcon from 2 implementing the corresponding Writ of Preliminary Injunction dated February 23, 2007 issued pursuant to the aforesaid Order. The facts of this case, as culled from the records, are as follows: Being a member state of the International Civil Aviation Organization (ICAO), the Philippines has to comply with 4 the commitments and standards set forth in ICAO Document No. 9303 which requires the ICAO member states 5 to issue machine readable travel documents (MRTDs) by April 2010. Thus, in line with the DFAs mandate to improve the passport and visa issuance system, as well as the storage and retrieval of its related application records, and pursuant to our governments ICAO commitments, the DFA secured the approval of the President of the Philippines, as Chairman of the Board of the National Economic and Development Authority (NEDA), for the implementation of the Machine Readable Passport and Visa Project (the MRP/V Project) under the Build-Operate-and-Transfer (BOT) scheme, provided for by Republic Act No. 6957, as amended by Republic Act No. 7718 (the BOT Law), and its Implementing Rules and Regulations (IRR). Thus, a Pre-qualification, Bids and Awards Committee (PBAC) published an invitation to pre-qualify and bid for the supply of the needed machine readable passports and visas, and conducted the public bidding for the MRP/V Project on January 10, 2000. Several bidders responded and BCA was among those that pre-qualified and submitted its technical and financial proposals. On June 29, 2000, the PBAC found BCAs bid to be the sole complying bid; hence, it permitted the DFA to engage in direct negotiations with BCA. On even date, the PBAC recommended to the DFA Secretary the award of the MRP/V Project to BCA on a BOT arrangement. In compliance with the Notice of Award dated September 29, 2000 and Section 11.3, Rule 11 of the IRR of the 6 BOT Law, BCA incorporated a project company, the Philippine Passport Corporation (PPC) to undertake and implement the MRP/V Project. On February 8, 2001, a Build-Operate-Transfer Agreement (BOT Agreement) between the DFA and PPC was signed by DFA Acting Secretary Lauro L. Baja, Jr. and PPC President Bonifacio Sumbilla. Under the BOT Agreement, the MRP/V Project was defined as follows: Section 1.02 MRP/V Project refers to all the activities and services undertaken in the fulfillment of the Machine Readable Passport and Visa Project as defined in the Request for Proposals (RFP), a copy of which is hereto attached as Annex A, including but not limited to project financing, systems development, installation and maintenance in the Philippines and Foreign Service Posts (FSPs), training of DFA personnel, provision of all project consumables (related to the production of passports and visas, such as printer supplies, etc.), scanning of application and citizenship documents, creation of data bases, issuance of machine readable passports and 8 visas, and site preparation in the Central Facility and Regional Consular Offices (RCOs) nationwide. On April 5, 2002, former DFA Secretary Teofisto T. Guingona and Bonifacio Sumbilla, this time as BCA 9 President, signed an Amended BOT Agreement in order to reflect the change in the designation of the parties 10 and to harmonize Section 11.3 with Section 11.8 of the IRR of the BOT Law. The Amended BOT Agreement was entered into by the DFA and BCA with the conformity of PPC. The two BOT Agreements (the original version signed on February 8, 2001 and the amended version signed April 5, 2002) contain substantially the same provisions except for seven additional paragraphs in the whereas
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clauses and two new provisions Section 9.05 on Performance and Warranty Securities and Section 20.15 on Miscellaneous Provisions. The two additional provisions are quoted below: Section 9.05. The PPC has posted in favor of the DFA the performance security required for Phase 1 of the MRP/V Project and shall be deemed, for all intents and purposes, to be full compliance by BCA with the provisions of this Article 9. xxxx Section 20.15 It is clearly and expressly understood that BCA may assign, cede and transfer all of its rights and obligations under this Amended BOT Agreement to PPC, as fully as if PPC is the original signatory to this Amended BOT Agreement, provided however that BCA shall nonetheless be jointly and severally liable with PPC 11 for the performance of all the obligations and liabilities under this Amended BOT Agreement. Also modified in the Amended BOT Agreement was the Project Completion date of the MRP/V Project which set the completion of the implementation phase of the project within 18 to 23 months from the date of effectivity of the Amended BOT Agreement as opposed to the previous period found in the original BOT Agreement which set the completion within 18 to 23 months from receipt of the NTP (Notice to Proceed) in accordance with the Project Master Plan. On April 12, 2002, an Assignment Agreement was executed by BCA and PPC, whereby BCA assigned and ceded its rights, title, interest and benefits arising from the Amended BOT Agreement to PPC. As set out in Article 8 of the original and the Amended BOT Agreement, the MRP/V Project was divided into six phases: Phase 1. Project Planning Phase The Project Proponent [BCA] shall prepare detailed plans and specifications in accordance with Annex A of this [Amended] BOT Agreement within three (3) months from issuance of the NTP (Notice to Proceed) [from the date of effectivity of this Amended BOT Agreement]. This phase shall be considered complete upon the review, acceptance and approval by the DFA of these plans and the resulting Master Plan, including the Master Schedule, the business process specifications, the acceptance criteria, among other plans. xxxx The DFA must approve all detailed plans as a condition precedent to the issuance of the CA [Certificate of Acceptance] for Phase 1. Phase 2. Implementation of the MRP/V Project at the Central Facility Within six (6) months from issuance of the CA for Phase 1, the PROJECT PROPONENT [BCA] shall complete the implementation of the MRP/V Project in the DFA Central Facility, and establish the network design between the DFA Central Facility, the ten (10) RCOs [Regional Consular Offices] and the eighty (80) FSPs [Foreign Service Posts]. xxxx Phase 3. Implementation of the MRP/V Project at the Regional Consular Offices This phase represents the replication of the systems as approved from the Central Facility to the RCOs throughout the country, as identified in the RFP [Request for Proposal]. The approved systems are those implemented, evaluated, and finally approved by DFA as described in Phase 1. The Project Proponent [BCA] will be permitted to begin site preparation and the scanning and database building operations in all offices as soon as the plans are agreed upon and accepted. This includes site preparation and database building operations in these Phase-3 offices.
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Within six (6) months from issuance of CA for Phase 2, the Project Proponent [BCA] shall complete site preparation and implementation of the approved systems in the ten (10) RCOs, including a fully functional network connection between all equipment at the Central Facility and the RCOs. Phase 4. Full Implementation, including all Foreign Service Posts Within three (3) to eight (8) months from issuance of the CA for Phase-3, the Project Proponent [BCA] shall complete all preparations and fully implement the approved systems in the eighty (80) FSPs, including a fully functional network connection between all equipment at the Central Facility and the FSPs. Upon satisfactory completion of Phase 4, a CA shall be issued by the DFA. Phase 5. In Service Phase Operation and maintenance of the complete MRP/V Facility to provide machine readable passports and visas in all designated locations around the world. Phase 6. Transition/Turnover Transition/Turnover to the DFA of all operations and equipment, to include an orderly transfer of ownership of all hardware, application system software and its source code and/or licenses (subject to Section 5.02 [H]), peripherals, leasehold improvements, physical and computer security improvements, Automated Fingerprint Identification Systems, and all other MRP/V facilities shall commence at least six (6) months prior to the end of the [Amended] BOT Agreement. The transition will include the training of DFA personnel who will be taking over the responsibilities of system operation and maintenance from the Project 13 Proponent [BCA]. The Project Proponent [BCA] shall bear all costs related to this transfer. (Words in brackets appear in the Amended BOT Agreement) To place matters in the proper perspective, it should be pointed out that both the DFA and BCA impute breach of the Amended BOT Agreement against each other. According to the DFA, delays in the completion of the phases permeated the MRP/V Project due to the submission of deficient documents as well as intervening issues regarding BCA/PPCs supposed financial incapacity to fully implement the project. On the other hand, BCA contends that the DFA failed to perform its reciprocal obligation to issue to BCA a Certificate of Acceptance of Phase 1 within 14 working days of operation purportedly required by Section 14.04 of the Amended BOT Agreement. BCA bewailed that it took almost three years for the DFA to issue the said Certificate allegedly because every appointee to the position of DFA Secretary wanted to review the award of the project to BCA. BCA further alleged that it was the DFAs refusal to approve the location of the DFA Central Facility which prevented BCA from proceeding with Phase 2 of the MRP/V Project. Later, the DFA sought the opinion of the Department of Finance (DOF) and the Department of Justice (DOJ) regarding the appropriate legal actions in connection with BCAs alleged delays in the completion of the MRP/V 14 Project. In a Letter dated February 21, 2005, the DOJ opined that the DFA should issue a final demand upon BCA to make good on its obligations, specifically on the warranties and responsibilities regarding the necessary capitalization and the required financing to carry out the MRP/V Project. The DOJ used as basis for said 15 recommendation, the Letter dated April 19, 2004 of DOF Secretary Juanita Amatong to then DFA Secretary Delia Albert stating, among others, that BCA may not be able to infuse more capital into PPC to use for the completion of the MRP/V Project. Thus, on February 22, 2005, DFA sent a letter to BCA, through its project company PPC, invoking BCAs 17 financial warranty under Section 5.02(A) of the Amended BOT Agreement. The DFA required BCA to submit (a) proof of adequate capitalization (i.e., full or substantial payment of stock subscriptions); (b) a bank guarantee indicating the availability of a credit facility of P700 million; and (c) audited financial statements for the years 2001 to 2004. In reply to DFAs letter, BCA, through PPC, informed the former of its position that its financial capacity was already passed upon during the prequalification process and that the Amended BOT Agreement did not call for any additional financial requirements for the implementation of the MRP/V Project. Nonetheless, BCA submitted
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its financial statements for the years 2001 and 2002 and requested for additional time within which to comply 18 with the other financial requirements which the DFA insisted on. According to the DFA, BCAs financial warranty is a continuing warranty which requires that it shall have the necessary capitalization to finance the MRP/V Project in its entirety and not on a "per phase" basis as BCA contends. Only upon sufficient proof of its financial capability to complete and implement the whole project will the DFAs obligation to choose and approve the location of its Central Facility arise. The DFA asserted that its approval of a Central Facility site was not ministerial and upon its review, BCAs proposed site for the Central Facility was purportedly unacceptable in terms of security and facilities. Moreover, the DFA allegedly received 19 conflicting official letters and notices from BCA and PPC regarding the true ownership and control of PPC. The DFA implied that the disputes among the shareholders of PPC and between PPC and BCA appeared to be part of the reason for the hampered implementation of the MRP/V Project. BCA, in turn, submitted various letters and documents to prove its financial capability to complete the MRP/V 20 Project. However, the DFA claimed these documents were unsatisfactory or of dubious authenticity. Then on August 1, 2005, BCA terminated its Assignment Agreement with PPC and notified the DFA that it would directly 21 implement the MRP/V Project. BCA further claims that the termination of the Assignment Agreement was upon the instance, or with the conformity, of the DFA, a claim which the DFA disputed. On December 9, 2005, the DFA sent a Notice of Termination to BCA and PPC due to their alleged failure to submit proof of financial capability to complete the entire MRP/V Project in accordance with the financial warranty under Section 5.02(A) of the Amended BOT Agreement. The Notice states: After a careful evaluation and consideration of the matter, including the reasons cited in your letters dated March 3, May 3, and June 20, 2005, and upon the recommendation of the Office of the Solicitor General (OSG), the Department is of the view that your continuing default in complying with the requisite bank guarantee and/or credit facility, despite repeated notice and demand, is legally unjustified. In light of the foregoing considerations and upon the instruction of the Secretary of Foreign Affairs, the Department hereby formally TERMINATE (sic) the Subject Amended BOT Agreement dated 5 April 2005 23 (sic) effective 09 December 2005. Further, and as a consequence of this termination, the Department formally DEMAND (sic) that you pay within ten (10) days from receipt hereof, liquidated damages equivalent to the corresponding performance security bond that you had posted for the MRP/V Project. Please be guided accordingly. On December 14, 2005, BCA sent a letter to the DFA demanding that it immediately reconsider and revoke its previous notice of termination, otherwise, BCA would be compelled to declare the DFA in default pursuant to the Amended BOT Agreement. When the DFA failed to respond to said letter, BCA issued its own Notice of Default 25 dated December 22, 2005 against the DFA, stating that if the default is not remedied within 90 days, BCA will be constrained to terminate the MRP/V Project and hold the DFA liable for damages. BCAs request for mutual discussion under Section 19.01 of the Amended BOT Agreement was purportedly ignored by the DFA and left the dispute unresolved through amicable means within 90 days. Consequently, BCA 27 filed its Request for Arbitration dated April 7, 2006 with the Philippine Dispute Resolution Center, Inc. (PDRCI), pursuant to Section 19.02 of the Amended BOT Agreement which provides: Section 19.02 Failure to Settle Amicably If the Dispute cannot be settled amicably within ninety (90) days by mutual discussion as contemplated under Section 19.01 herein, the Dispute shall be settled with finality by an arbitrage tribunal operating under International Law, hereinafter referred to as the "Tribunal", under the UNCITRAL Arbitration Rules contained in Resolution 31/98 adopted by the United Nations General Assembly on December 15, 1976, and entitled "Arbitration Rules on the United Nations Commission on the International Trade Law". The DFA and the BCA undertake to abide by and implement the arbitration award. The place of arbitration
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shall be Pasay City, Philippines, or such other place as may mutually be agreed upon by both parties. The 28 arbitration proceeding shall be conducted in the English language. As alleged in BCAs Request for Arbitration, PDRCI is a non-stock, non-profit organization composed of independent arbitrators who operate under its own Administrative Guidelines and Rules of Arbitration as well as under the United Nations Commission on the International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration and other applicable laws and rules. According to BCA, PDRCI can act as an arbitration center from whose pool of accredited arbitrators both the DFA and BCA may select their own nominee to become a member of the arbitral tribunal which will render the arbitration award. BCAs Request for Arbitration filed with the PDRCI sought the following reliefs: 1. A judgment nullifying and setting aside the Notice of Termination dated December 9, 2005 of Respondent [DFA], including its demand to Claimant [BCA] to pay liquidated damages equivalent to the corresponding performance security bond posted by Claimant [BCA]; 2. A judgment (a) confirming the Notice of Default dated December 22, 2005 issued by Claimant [BCA] to Respondent [DFA]; and (b) ordering Respondent [DFA] to perform its obligation under the Amended BOT Agreement dated April 5, 2002 by approving the site of the Central Facility at the Star Mall Complex on Shaw Boulevard, Mandaluyong City, within five days from receipt of the Arbitral Award; and 3. A judgment ordering respondent [DFA] to pay damages to Claimant [BCA], reasonably estimated atP50,000,000.00 as of this date, representing lost business opportunities; financing fees, costs and commissions; travel expenses; legal fees and expenses; and costs of arbitration, including the fees of the 29 arbitrator/s. PDRCI, through a letter dated April 26, 2006, invited the DFA to submit its Answer to the Request for Arbitration within 30 days from receipt of said letter and also requested both the DFA and BCA to nominate their chosen arbitrator within the same period of time. Initially, the DFA, through a letter dated May 22, 2006, requested for an extension of time to file its answer, "without prejudice to jurisdictional and other defenses and objections available to it under the law." 32 Subsequently, however, in a letter dated May 29, 2006, the DFA declined the request for arbitration before the PDRCI. While it expressed its willingness to resort to arbitration, the DFA pointed out that under Section 19.02 of the Amended BOT Agreement, there is no mention of a specific body or institution that was previously authorized by the parties to settle their dispute. The DFA further claimed that the arbitration of the dispute should be had before an ad hocarbitration body, and not before the PDRCI which has as its accredited arbitrators, two of BCAs counsels of record. Likewise, the DFA insisted that PPC, allegedly an indispensable party in the instant case, should also participate in the arbitration. The DFA then sought the opinion of the DOJ on the Notice of Termination dated December 9, 2005 that it sent to BCA with regard to the MRP/V Project. In DOJ Opinion No. 35 (2006) dated May 31, 2006, the DOJ concurred with the steps taken by the DFA, stating that there was basis in law and in fact for the termination of the MRP/V Project. Moreover, the DOJ recommended the immediate implementation of the project (presumably by a different contractor) at the soonest possible time. Thereafter, the DFA and the BSP entered into a Memorandum of Agreement for the latter to provide the former passports compliant with international standards. The BSP then solicited bids for the supply, delivery, installation 34 and commissioning of a system for the production of Electronic Passport Booklets or e-Passports.
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For BCA, the BSPs invitation to bid for the supply and purchase of e-Passports (the e-Passport Project) would only further delay the arbitration it requested from the DFA. Moreover, this new e-Passport Project by the BSP and the DFA would render BCAs remedies moot inasmuch as the e-Passport Project would then be replacing the MRP/V Project which BCA was carrying out for the DFA. Thus, BCA filed a Petition for Interim Relief under Section 28 of the Alternative Dispute Resolution Act of 2004 36 (R.A. No. 9285), with the Regional Trial Court (RTC) of Pasig City, Branch 71, presided over by respondent Judge Falcon. In that RTC petition, BCA prayed for the following: WHEREFORE, BCA respectfully prays that this Honorable Court, before the constitution of the arbitral tribunal in PDRCI Case No. 30-2006/BGF, grant petitioner interim relief in the following manner: (a) upon filing of this Petition, immediately issue an order temporarily restraining Respondents [DFA and BSP], their agents, representatives, awardees, suppliers and assigns (i) from awarding a new contract to implement the Project, or any similar electronic passport or visa project; or (ii) if such contract has been awarded, from implementing such Project or similar projects until further orders from this Honorable Court; (b) after notice and hearing, issue a writ of preliminary injunction ordering Respondents [DFA and BSP], their agents, representatives, awardees, suppliers and assigns to desist (i) from awarding a new contract to implement the Project or any similar electronic passport or visa project; or (ii) if such contract has been awarded, from implementing such Project or similar projects, and to maintain the status quo ante pending the resolution on the merits of BCAs Request for Arbitration; and (c) render judgment affirming the interim relief granted to BCA until the dispute between the parties shall have been resolved with finality. BCA also prays for such other relief, just and equitable under the premises.
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BCA alleged, in support for its application for a Temporary Restraining Order (TRO), that unless the DFA and the BSP were immediately restrained, they would proceed to undertake the project together with a third party to defeat the reliefs BCA sought in its Request for Arbitration, thus causing BCA to suffer grave and irreparable injury from the loss of substantial investments in connection with the implementation of the MRP/V Project. Thereafter, the DFA filed an Opposition (to the Application for Temporary Restraining Order and/or Writ of 38 Preliminary Injunction) dated January 18, 2007, alleging that BCA has no cause of action against it as the contract between them is for machine readable passports and visas which is not the same as the contract it has with the BSP for the supply of electronic passports. The DFA also pointed out that the Filipino people and the governments international standing would suffer great damage if a TRO would be issued to stop the e-Passport Project. The DFA mainly anchored its opposition on Republic Act No. 8975, which prohibits trial courts from issuing a TRO, preliminary injunction or mandatory injunction against the bidding or awarding of a contract or project of the national government. On January 23, 2007, after summarily hearing the parties oral arguments on BCAs application for the issuance of a TRO, the trial court ordered the issuance of a TRO restraining the DFA and the BSP, their agents, representatives, awardees, suppliers and assigns from awarding a new contract to implement the Project or any similar electronic passport or visa project, or if such contract has been awarded, from implementing such or 39 similar projects. The trial court also set for hearing BCAs application for preliminary injunction. Consequently, the DFA filed a Motion for Reconsideration of the January 23, 2007 Order. The BSP, in turn, also sought to lift the TRO and to dismiss the petition. In its Urgent Omnibus Motion dated February 1, 41 2007, the BSP asserted that BCA is not entitled to an injunction, as it does not have a clear right which ought to be protected, and that the trial court has no jurisdiction to enjoin the implementation of the e-Passport Project which, the BSP alleged, is a national government project under Republic Act No. 8975.
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In the hearings set for BCAs application for preliminary injunction, BCA presented as witnesses, Mr. Bonifacio Sumbilla, its President, Mr. Celestino Mercader, Jr. from the Independent Verification and Validation Contractor commissioned by the DFA under the Amended BOT Agreement, and DFA Assistant Secretary Domingo Lucenario, Jr. as adverse party witness. The DFA and the BSP did not present any witness during the hearings for BCAs application for preliminary injunction. According to the DFA and the BSP, the trial court did not have any jurisdiction over the case considering that BCA did not pay the correct docket fees and that only the Supreme Court could issue a TRO on the bidding for a national government project like the e-Passport Project pursuant to the provisions of Republic Act No. 8975. Under Section 3 of Republic Act No. 8975, the RTC could only issue a TRO against a national government project if it involves a matter of extreme urgency involving a constitutional issue, such that unless a TRO is issued, grave injustice and irreparable injury will arise. Thereafter, BCA filed an Omnibus Comment [on Opposition and Supplemental Opposition (To the Application for Temporary Restraining Order and/or Writ of Preliminary Injunction)] and Opposition [to Motion for Reconsideration (To the Temporary Restraining Order dated January 23, 2007)] and Urgent Omnibus Motion [(i) 42 To Lift Temporary Restraining Order; and (ii) To Dismiss the Petition] dated January 31, 2007. The DFA and 43 the BSP filed their separate Replies (to BCAs Omnibus Comment) dated February 9, 2007 and February 13, 44 2007, respectively. On February 14, 2007, the trial court issued an Order granting BCAs application for preliminary injunction, to wit: WHEREFORE, in view of the above, the court resolves that it has jurisdiction over the instant petition and to issue the provisional remedy prayed for, and therefore, hereby GRANTS petitioners [BCAs] application for preliminary injunction. Accordingly, upon posting a bond in the amount of Ten Million Pesos (P10,000,000.00), let a writ of preliminary injunction issue ordering respondents [DFA and BSP], their agents, representatives, awardees, suppliers and assigns to desist (i) from awarding a new contract to implement the project or any similar electronic passport or visa project or (ii) if such contract has been awarded from implementing such project or similar projects. The motion to dismiss is denied for lack of merit. The motions for reconsideration and to lift temporary restraining 45 Order are now moot and academic by reason of the expiration of the TRO. On February 16, 2007, BCA filed an Amended Petition, wherein paragraphs 3.3(b) and 4.3 were modified to add language to the effect that unless petitioners were enjoined from awarding the e-Passport Project, BCA would be deprived of its constitutionally-protected right to perform its contractual obligations under the original and amended BOT Agreements without due process of law. Subsequently, on February 26, 2007, the DFA and the BSP received the Writ of Preliminary Injunction dated February 23, 2007. Hence, on March 2, 2007, the DFA and the BSP filed the instant Petition for Certiorari and prohibition under Rule 65 of the Rules of Court with a prayer for the issuance of a temporary restraining order and/or a writ of preliminary injunction, imputing grave abuse of discretion on the trial court when it granted interim relief to BCA and issued the assailed Order dated February 14, 2007 and the writ of preliminary injunction dated February 23, 2007. The DFA and the BSP later filed an Urgent Motion for Issuance of a Temporary Restraining Order and/or Writ of 48 Preliminary Injunction dated March 5, 2007. On March 12, 2007, the Court required BCA to file its comment on the said petition within ten days from notice and granted the Office of the Solicitor Generals urgent motion for issuance of a TRO and/or writ of preliminary 49 injunction, thus: After deliberating on the petition for certiorari and prohibition with temporary restraining order and/or writ of preliminary injunction assailing the Order dated 14 February 2007 of the Regional Trial Court, Branch 71, Pasig
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City, in Civil Case No. 71079, the Court, without necessarily giving due course thereto, resolves to require respondents to COMMENT thereon (not to file a motion to dismiss) within ten (10) days from notice. The Court further resolves to GRANT the Office of the Solicitor Generals urgent motion for issuance of a temporary restraining order and/or writ of preliminary injunction dated 05 March 2007 and ISSUE a TEMPORARY RESTRAINING ORDER, as prayed for, enjoining respondents from implementing the assailed Order dated 14 February 2007 and the Writ of Preliminary Injunction dated 23 February 2007, issued by respondent Judge Franco T. Falcon in Civil Case No. 71079 entitled BCA International Corporation vs. Department of Foreign Affairs and Bangko Sentral ng Pilipinas, and from conducting further proceedings in said case until further orders from this Court. BCA filed on April 2, 2007 its Comment with Urgent Motion to Lift TRO, 51 their Reply dated August 14, 2007.
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to which the DFA and the BSP filed

In a Resolution dated June 4, 2007, the Court denied BCAs motion to lift TRO. BCA filed another Urgent Omnibus Motion dated August 17, 2007, for the reconsideration of the Resolution dated June 4, 2007, praying that the TRO issued on March 12, 2007 be lifted and that the petition be denied. In a Resolution dated September 10, 2007, the Court denied BCAs Urgent Omnibus Motion and gave due course to the instant petition. The parties were directed to file their respective memoranda within 30 days from notice of the Courts September 10, 2007 Resolution. Petitioners DFA and BSP submit the following issues for our consideration: Issues I Whether or not the respondent judge gravely abused his discretion amounting to lack or excess of jurisdiction when he issued the assailed order, which effectively enjoined the implementation of the e-passport project -- A national government project under Republic Act No. 8975. II Whether or not the respondent judge acted with grave abuse of discretion amounting to lack or excess of jurisdiction in granting respondent BCAs "interim relief" inasmuch as: (I) Respondent BCA has not established a clear right that can be protected by an injunction; and (II) Respondent BCA has not shown that it will sustain grave and irreparable injury that must be protected by an injunction. On the contrary, it is the Filipino people, who petitioners protect, that will sustain serious and severe 54 injury by the injunction. At the outset, we dispose of the procedural objections of BCA to the petition, to wit: (a) petitioners did not follow the hierarchy of courts by filing their petition directly with this Court, without filing a motion for reconsideration with the RTC and without filing a petition first with the Court of Appeals; (b) the person who verified the petition for the DFA did not have personal knowledge of the facts of the case and whose appointment to his position was highly irregular; and (c) the verification by the Assistant Governor and General Counsel of the BSP of only selected paragraphs of the petition was with the purported intent to mislead this Court. Although the direct filing of petitions for certiorari with the Supreme Court is discouraged when litigants may still resort to remedies with the lower courts, we have in the past overlooked the failure of a party to strictly adhere to
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the hierarchy of courts on highly meritorious grounds. Most recently, we relaxed the rule on court hierarchy in the 55 case of Roque, Jr. v. Commission on Elections, wherein we held: The policy on the hierarchy of courts, which petitioners indeed failed to observe, is not an iron-clad rule. For indeed the Court has full discretionary power to take cognizance and assume jurisdiction of special civil actions forcertiorari and mandamus filed directly with it for exceptionally compelling reasons or if warranted by the nature 56 of the issues clearly and specifically raised in the petition. (Emphases ours.) The Court deems it proper to adopt a similarly liberal attitude in the present case in consideration of the transcendental importance of an issue raised herein. This is the first time that the Court is confronted with the question of whether an information and communication technology project, which does not conform to our traditional notion of the term "infrastructure," is covered by the prohibition on the issuance of court injunctions found in Republic Act No. 8975, which is entitled "An Act to Ensure the Expeditious Implementation and Completion of Government Infrastructure Projects by Prohibiting Lower Courts from Issuing Temporary Restraining Orders, Preliminary Injunctions or Preliminary Mandatory Injunctions, Providing Penalties for Violations Thereof, and for Other Purposes." Taking into account the current trend of computerization and modernization of administrative and service systems of government offices, departments and agencies, the resolution of this issue for the guidance of the bench and bar, as well as the general public, is both timely and imperative. Anent BCAs claim that Mr. Edsel T. Custodio (who verified the Petition on behalf of the DFA) did not have personal knowledge of the facts of the case and was appointed to his position as Acting Secretary under purportedly irregular circumstances, we find that BCA failed to sufficiently prove such allegations. In any event, we have previously held that "[d]epending on the nature of the allegations in the petition, the verification may be 57 based either purely on personal knowledge, or entirely on authentic records, or on both sources." The alleged lack of personal knowledge of Mr. Custodio (which, as we already stated, BCA failed to prove) would not necessarily render the verification defective for he could have verified the petition purely on the basis of authentic records. As for the assertion that the partial verification of Assistant Governor and General Counsel Juan de Zuniga, Jr. was for the purpose of misleading this Court, BCA likewise failed to adduce evidence on this point. Good faith is always presumed. Paragraph 3 of Mr. Zunigas verification indicates that his partial verification is due to the fact that he is verifying only the allegations in the petition peculiar to the BSP. We see no reason to doubt that this is the true reason for his partial or selective verification. In sum, BCA failed to successfully rebut the presumption that the official acts (of Mr. Custodio and Mr. Zuniga) 58 were done in good faith and in the regular performance of official duty. Even assuming the verifications of the petition suffered from some defect, we have time and again ruled that "[t]he ends of justice are better served when cases are determined on the merits after all parties are given full opportunity to ventilate their causes 59 and defenses rather than on technicality or some procedural imperfections." In other words, the Court may 60 suspend or even disregard rules when the demands of justice so require. We now come to the substantive issues involved in this case. On whether the trial court had jurisdiction to issue a writ of preliminary injunction in the present case In their petition, the DFA and the BSP argue that respondent Judge Falcon gravely abused his discretion amounting to lack or excess of jurisdiction when he issued the assailed orders, which effectively enjoined the bidding and/or implementation of the e-Passport Project. According to petitioners, this violated the clear prohibition under Republic Act No. 8975 regarding the issuance of TROs and preliminary injunctions against national government projects, such as the e-Passport Project. The prohibition invoked by petitioners is found in Section 3 of Republic Act No. 8975, which reads:

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Section 3. Prohibition on the Issuance of Temporary Restraining Orders, Preliminary Injunctions and Preliminary Mandatory Injunctions. No court, except the Supreme Court, shall issue any temporary restraining order, preliminary injunction or preliminary mandatory injunction against the government, or any of its subdivisions, officials or any person or entity, whether public or private, acting under the governments direction, to restrain, prohibit or compel the following acts: (a) Acquisition, clearance and development of the right-of-way and/or site or location of any national government project; (b) Bidding or awarding of contract/project of the national government as defined under Section 2 hereof; (c) Commencement, prosecution, execution, implementation, operation of any such contract or project; (d) Termination or rescission of any such contract/project; and (e) The undertaking or authorization of any other lawful activity necessary for such contract/project. This prohibition shall apply in all cases, disputes or controversies instituted by a private party, including but not limited to cases filed by bidders or those claiming to have rights through such bidders involving such contract/project. This prohibition shall not apply when the matter is of extreme urgency involving a constitutional issue, such that unless a temporary restraining order is issued, grave injustice and irreparable injury will arise. The applicant shall file a bond, in an amount to be fixed by the court, which bond shall accrue in favor of the government if the court should finally decide that the applicant was not entitled to the relief sought. If after due hearing the court finds that the award of the contract is null and void, the court may, if appropriate under the circumstances, award the contract to the qualified and winning bidder or order a rebidding of the same, without prejudice to any liability that the guilty party may incur under existing laws. From the foregoing, it is indubitable that no court, aside from the Supreme Court, may enjoin a "national government project" unless the matter is one of extreme urgency involving a constitutional issue such that unless the act complained of is enjoined, grave injustice or irreparable injury would arise. What then are the "national government projects" over which the lower courts are without jurisdiction to issue the injunctive relief as mandated by Republic Act No. 8975? Section 2(a) of Republic Act No. 8975 provides: Section 2. Definition of Terms. (a) "National government projects" shall refer to all current and future national government infrastructure, engineering works and service contracts, including projects undertaken by government-owned and -controlled corporations, all projects covered by Republic Act No. 6975, as amended by Republic Act No. 7718, otherwise known as the Build-Operate-and-Transfer Law, and other related and necessary activities, such as site acquisition, supply and/or installation of equipment and materials, implementation, construction, completion, operation, maintenance, improvement, repair and rehabilitation, regardless of the source of funding. As petitioners themselves pointed out, there are three types of national government projects enumerated in Section 2(a), to wit: (a) current and future national government infrastructure projects, engineering works and service contracts, including projects undertaken by government-owned and controlled corporations;

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(b) all projects covered by R.A. No. 6975, as amended by R.A. No. 7718, or the Build-Operate-and-Transfer ( BOT) Law; and (c) other related and necessary activities, such as site acquisition, supply and/or installation of equipment and materials, implementation, construction, completion, operation, maintenance, improvement repair and rehabilitation, regardless of the source of funding. Under Section 2(a) of the BOT Law as amended by Republic Act No. 7718, private sector infrastructure or development projects are those normally financed and operated by the public sector but which will now be wholly or partly implemented by the private sector, including but not limited to, power plants, highways, ports, airports, canals, dams, hydropower projects, water supply, irrigation, telecommunications, railroads and railways, transport systems, land reclamation projects, industrial estates or townships, housing, government buildings, tourism projects, markets, slaughterhouses, warehouses, solid waste management, information technology networks and database infrastructure, education and health facilities, sewerage, drainage, dredging, and other infrastructure and development projects as may be authorized by the appropriate agency. In contrast, Republic Act No. 9184, also known as the Government Procurement Reform Act, defines infrastructure projects in Section 5(k) thereof in this manner: (k) Infrastructure Projects - include the construction, improvement, rehabilitation, demolition, repair, restoration or maintenance of roads and bridges, railways, airports, seaports, communication facilities, civil works components of information technology projects, irrigation, flood control and drainage, water supply, sanitation, sewerage and solid waste management systems, shore protection, energy/power and electrification facilities, national buildings, school buildings, hospital buildings and other related construction projects of the government. (Emphasis supplied.) In the present petition, the DFA and the BSP contend that the bidding for the supply, delivery, installation and commissioning of a system for the production of Electronic Passport Booklets, is a national government project within the definition of Section 2 of Republic Act No. 8975. Petitioners also point to the Senate deliberations on 63 Senate Bill No. 2038 (later Republic Act No. 8975) which allegedly show the legislatives intent to expand the scope and definition of national government projects to cover not only the infrastructure projects enumerated in Presidential Decree No. 1818, but also future projects that may likewise be considered national government infrastructure projects, like the e-Passport Project, to wit: Senator Cayetano. x x x Mr. President, the present bill, the Senate Bill No. 2038, is actually an improvement of P.D. No. 1818 and definitely not a repudiation of what I have earlier said, as my good friend clearly stated. But this is really an effort to improve both the scope and definition of the term "government projects" and to ensure that lower court judges obey and observe this prohibition on the issuance of TROs on infrastructure projects of the government. xxxx Senator Cayetano. That is why, Mr. President, I did try to explain why I would accept the proposed amendment, meaning the totality of the repeal of P.D. 1818 which is not found in the original version of the bill, because of my earlier explanation that the definition of the term government infrastructure project covers all of those enumerated in Section 1 of P.D. No. 1818. And the reason for that, as we know, is we do not know what else could be considered government infrastructure project in the next 10 or 20 years. x x x So, using the Latin maxim of expression unius est exclusion alterius, which means what is expressly mentioned is tantamount to an express exclusion of the others, that is the reason we did not include particularly an enumeration of certain activities of the government found in Section 1 of P.D. No. 1818. Because to do that, it may be a good excuse for a brilliant lawyer to say Well, you know, since it does not cover this particular activity, ergo, the Regional Trial Court may issue TRO.
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Using the foregoing discussions to establish that the intent of the framers of the law was to broaden the scope and definition of national government projects and national infrastructure projects, the DFA and the BSP submit that the said scope and definition had since evolved to include the e-Passport Project. They assert that the concept of "infrastructure" must now refer to any and all elements that provide support, framework, or structure for a given system or organization, including information technology, such as the e-Passport Project. Interestingly, petitioners represented to the trial court that the e-Passport Project is a BOT project but in their petition with this Court, petitioners simply claim that the e-Passport Project is a national government project under Section 2 of Republic Act No. 8975. This circumstance is significant, since relying on the claim that the ePassport Project is a BOT project, the trial court ruled in this wise: The prohibition against issuance of TRO and/or writ of preliminary injunction under RA 8975 applies only to national government infrastructure project covered by the BOT Law, (RA 8975, Sec 3[b] in relation to Sec. 2). The national government projects covered under the BOT are enumerated under Sec. 2 of RA6957, as amended, otherwise known as the BOT Law. Notably, it includes "information technology networks and database infrastructure." In relation to information technology projects, infrastructure projects refer to the "civil works components" thereof. 64 (R.A. No. 9184 [2003], Sec. 5[c]{sic}). Respondent BSPs request for bid, for the supply, delivery, installation and commissioning of a system for the production of Electronic Passport Booklets appears to be beyond the scope of the term "civil works." 65 Respondents did not present evidence to prove otherwise. (Emphases ours.) From the foregoing, it can be gleaned that the trial court accepted BCAs reasoning that, assuming the ePassport Project is a project under the BOT Law, Section 2 of the BOT Law must be read in conjunction with Section 5(c) of Republic Act No. 9184 or the Government Procurement Reform Act to the effect that only the civil works component of information technology projects are to be considered "infrastructure." Thus, only said civil works component of an information technology project cannot be the subject of a TRO or writ of injunction issued by a lower court. Although the Court finds that the trial court had jurisdiction to issue the writ of preliminary injunction, we cannot uphold the theory of BCA and the trial court that the definition of the term "infrastructure project" in Republic Act No. 9184 should be applied to the BOT Law. Section 5 of Republic Act No. 9184 prefaces the definition of the terms therein, including the term "infrastructure project," with the following phrase: "For purposes of this Act, the following terms or words and phrases shall mean or be understood as follows x x x." This Court has stated that the definition of a term in a statute is not conclusive as to the meaning of the same 66 term as used elsewhere. This is evident when the legislative definition is expressly made for the purposes of 67 the statute containing such definition. There is no legal or rational basis to apply the definition of the term "infrastructure project" in one statute to another statute enacted years before and which already defined the types of projects it covers. Rather, a reading of the two statutes involved will readily show that there is a legislative intent to treat information technology projects differently under the BOT Law and the Government Procurement Reform Act. In the BOT Law as amended by Republic Act No. 7718, the national infrastructure and development projects covered by said law are enumerated in Section 2(a) as follows: SEC. 2. Definition of Terms. - The following terms used in this Act shall have the meanings stated below:

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(a) Private sector infrastructure or development projects - The general description of infrastructure or development projects normally financed and operated by the public sector but which will now be wholly or partly implemented by the private sector, including but not limited to, power plants, highways, ports, airports, canals, dams, hydropower projects, water supply, irrigation, telecommunications, railroads and railways, transport systems, land reclamation projects, industrial estates of townships, housing, government buildings, tourism projects, markets, slaughterhouses, warehouses, solid waste management, information technology networks and database infrastructure, education and health facilities, sewerage, drainage, dredging, and other infrastructure and development projects as may be authorized by the appropriate agency pursuant to this Act. Such projects shall be undertaken through contractual arrangements as defined hereunder and such other variations as may be approved by the President of the Philippines. For the construction stage of these infrastructure projects, the project proponent may obtain financing from foreign and/or domestic sources and/or engage the services of a foreign and/or Filipino contractor: Provided, That, in case an infrastructure or a development facility's operation requires a public utility franchise, the facility operator must be a Filipino or if a corporation, it must be duly registered with the Securities and Exchange Commission and owned up to at least sixty percent (60%) by Filipinos: Provided, further, That in the case of foreign contractors, Filipino labor shall be employed or hired in the different phases of construction where Filipino skills are available: Provided, finally, That projects which would have difficulty in sourcing funds may be financed partly from direct government appropriations and/or from Official Development Assistance (ODA) of foreign governments or institutions not exceeding fifty percent (50%) of the project cost, and the balance to be provided by the project proponent. (Emphasis supplied.) A similar provision appears in the Revised IRR of the BOT Law as amended, to wit: SECTION 1.3 - DEFINITION OF TERMS For purposes of these Implementing Rules and Regulations, the terms and phrases hereunder shall be understood as follows: xxxx v. Private Sector Infrastructure or Development Projects - The general description of infrastructure or Development Projects normally financed, and operated by the public sector but which will now be wholly or partly financed, constructed and operated by the private sector, including but not limited to, power plants, highways, ports, airports, canals, dams, hydropower projects, water supply, irrigation, telecommunications, railroad and railways, transport systems, land reclamation projects, industrial estates or townships, housing, government buildings, tourism projects, public markets, slaughterhouses, warehouses, solid waste management, information technology networks and database infrastructure, education and health facilities, sewerage, drainage, dredging, and other infrastructure and development projects as may otherwise be authorized by the appropriate Agency/LGU pursuant to the Act or these Revised IRR. Such projects shall be undertaken through Contractual Arrangements as defined herein, including such other variations as may be approved by the President of the Philippines. xxxx SECTION 2.2 - ELIGIBLE TYPES OF PROJECTS The Construction, rehabilitation, improvement, betterment, expansion, modernization, operation, financing and maintenance of the following types of projects which are normally financed and operated by the public sector which will now be wholly or partly financed, constructed and operated by the private sector, including other infrastructure and development projects as may be authorized by the appropriate agencies, may be proposed under the provisions of the Act and these Revised IRR, provided however that such projects have a cost recovery component which covers at least 50% of the Project Cost, or as determined by the Approving Body:

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xxxx h. Information technology (IT) and data base infrastructure, including modernization of IT, geo-spatial resource mapping and cadastral survey for resource accounting and planning. (Underscoring supplied.) Undeniably, under the BOT Law, wherein the projects are to be privately funded, the entire information technology project, including the civil works component and the technological aspect thereof, is considered an infrastructure or development project and treated similarly as traditional "infrastructure" projects. All the rules applicable to traditional infrastructure projects are also applicable to information technology projects. In fact, the MRP/V Project awarded to BCA under the BOT Law appears to include both civil works (i.e., site preparation of the Central Facility, regional DFA offices and foreign service posts) and non-civil works aspects (i.e., development, installation and maintenance in the Philippines and foreign service posts of a computerized passport and visa issuance system, including creation of databases, storage and retrieval systems, training of personnel and provision of consumables). In contrast, under Republic Act No. 9184 or the Government Procurement Reform Act, which contemplates projects to be funded by public funds, the term "infrastructure project" was limited to only the "civil works component" of information technology projects. The non-civil works component of information technology projects would be treated as an acquisition of goods or consulting services as the case may be. This limited definition of "infrastructure project" in relation to information technology projects under Republic Act No. 9184 is significant since the IRR of Republic Act No. 9184 has some provisions that are particular to infrastructure projects and other provisions that are applicable only to procurement of goods or consulting 68 services. Implicitly, the civil works component of information technology projects are subject to the provisions on infrastructure projects while the technological and other components would be covered by the provisions on procurement of goods or consulting services as the circumstances may warrant. When Congress adopted a limited definition of what is to be considered "infrastructure" in relation to information technology projects under the Government Procurement Reform Act, legislators are presumed to have taken into account previous laws concerning infrastructure projects (the BOT Law and Republic Act No. 8975) and deliberately adopted the limited definition. We can further presume that Congress had written into law a different treatment for information technology projects financed by public funds vis-a-vis privately funded projects for a valid legislative purpose. The idea that the definitions of terms found in the Government Procurement Reform Act were not meant to be applied to projects under the BOT Law is further reinforced by the following provision in the IRR of the Government Procurement Reform Act: Section 1. Purpose and General Coverage This Implementing Rules and Regulations (IRR) Part A, hereinafter called "IRR-A," is promulgated pursuant to Section 75 of Republic Act No. 9184 (R.A. 9184), otherwise known as the "Government Procurement Reform Act" (GPRA), for the purpose of prescribing the necessary rules and regulations for the modernization, standardization, and regulation of the procurement activities of the government. This IRR-A shall cover all fully domestically-funded procurement activities from procurement planning up to contract implementation and termination, except for the following: a) Acquisition of real property which shall be governed by Republic Act No. 8974 (R.A. 8974), entitled "An Act to Facilitate the Acquisition of Right-of-Way Site or Location for National Government Infrastructure Projects and for Other Purposes," and other applicable laws; and

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b) Private sector infrastructure or development projects and other procurement covered by Republic Act No. 7718 (R.A. 7718), entitled "An Act Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector, and for Other Purposes," as amended: Provided, however, That for the portions financed by the Government, the provisions of this IRR-A shall apply. The IRR-B for foreign-funded procurement activities shall be the subject of a subsequent issuance. (Emphases supplied.) The foregoing provision in the IRR can be taken as an administrative interpretation that the provisions of Republic Act No. 9184 are inapplicable to a BOT project except only insofar as such portions of the BOT project that are financed by the government. Taking into account the different treatment of information technology projects under the BOT Law and the Government Procurement Reform Act, petitioners contention the trial court had no jurisdiction to issue a writ of preliminary injunction in the instant case would have been correct if the e-Passport Project was a project under the BOT Law as they represented to the trial court. However, petitioners presented no proof that the e-Passport Project was a BOT project. On the contrary, evidence adduced by both sides tended to show that the e-Passport Project was a procurement contract under Republic Act No. 9184. The BSPs on-line request for expression of interest and to bid for the e-Passport Project from the BSP website 70 and the newspaper clipping of the same request expressly stated that "[t]he two stage bidding procedure under Section 30.4 of the Implementing Rules and Regulation (sic) Part-A of Republic Act No. 9184 relative to the bidding and award of the contract shall apply." During the testimony of DFA Assistant Secretary Domingo Lucenario, Jr. before the trial court, he admitted that the e-Passport Project is a BSP procurement project and 71 72 that it is the "BSP that will pay the suppliers." In petitioners Manifestation dated July 29, 2008 and the 73 Erratum thereto, petitioners informed the Court that a contract "for the supply of a complete package of systems design, technology, hardware, software, and peripherals, maintenance and technical support, ecovers and datapage security laminates for the centralized production and personalization of Machine Readable Electronic Passport" was awarded to Francois Charles Oberthur Fiduciaire. In the Notice of Award dated July 2, 74 2008 attached to petitioners pleading, it was stated that the failure of the contractor/supplier to submit the required performance bond would be sufficient ground for the imposition of administrative penalty under Section 69 of the IRR-A of Republic Act No. 9184. Being a government procurement contract under Republic Act No. 9184, only the civil works component of the ePassport Project would be considered an infrastructure project that may not be the subject of a lower courtissued writ of injunction under Republic Act No. 8975. Could the e-Passport Project be considered as "engineering works or a service contract" or as "related and necessary activities" under Republic Act No. 8975 which may not be enjoined? We hold in the negative. Under Republic Act No. 8975, a "service contract" refers to "infrastructure contracts entered into by any department, office or agency of the national government with private entities and nongovernment organizations for services related or incidental to the functions and operations of the department, office or agency concerned." On the other hand, the phrase "other related and necessary activities" obviously refers to activities related to a government infrastructure, engineering works, service contract or project under the BOT Law. In other words, to be considered a service contract or related activity, petitioners must show that the e-Passport Project is an infrastructure project or necessarily related to an infrastructure project. This, petitioners failed to do for they saw fit not to present any evidence on the details of the e-Passport Project before the trial court and this Court. There is nothing on record to indicate that the e-Passport Project has a civil works component or is necessarily related to an infrastructure project.
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Indeed, the reference to Section 30.4 of the IRR of Republic Act No. 9184 (a provision specific to the procurement of goods) in the BSPs request for interest and to bid confirms that the e-Passport Project is a procurement of goods and not an infrastructure project. Thus, within the context of Republic Act No. 9184 which is the governing law for the e-Passport Project the said Project is not an infrastructure project that is protected from lower court issued injunctions under Republic Act No. 8975, which, to reiterate, has for its purpose the expeditious and efficient implementation and completion of government infrastructure projects. We note that under Section 28, Republic Act No. 9285 or the Alternative Dispute Resolution Act of 2004, the grant of an interim measure of protection by the proper court before the constitution of an arbitral tribunal is allowed: Sec. 28. Grant of Interim Measure of Protection. (a) It is not incompatible with an arbitration agreement for a party to request, before constitution of the tribunal, from a Court an interim measure of protection and for the Court to grant such measure. After constitution of the arbitral tribunal and during arbitral proceedings, a request for an interim measure of protection, or modification thereof, may be made with the arbitral tribunal or to the extent that the arbitral tribunal has no power to act or is unable to act effectively, the request may be made with the Court. The arbitral tribunal is deemed constituted when the sole arbitrator or the third arbitrator, who has been nominated, has accepted the nomination and written communication of said nomination and acceptance has been received by the party making the request. (a) The following rules on interim or provisional relief shall be observed: (1) Any party may request that provisional relief be granted against the adverse party. (2) Such relief may be granted: (i) to prevent irreparable loss or injury; (ii) to provide security for the performance of any obligation; (iii) to produce or preserve any evidence; or (iv) to compel any other appropriate act or omission. (3) The order granting provisional relief may be conditioned upon the provision of security or any act or omission specified in the order. (4) Interim or provisional relief is requested by written application transmitted by reasonable means to the Court or arbitral tribunal as the case may be and the party against whom the relief is sought, describing in appropriate detail the precise relief, the party against whom the relief is requested, the grounds for the relief, and the evidence supporting the request. (5) The order shall be binding upon the parties. (6) Either party may apply with the Court for assistance in implementing or enforcing an interim measure ordered by an arbitral tribunal. (7) A party who does not comply with the order shall be liable for all damages resulting from noncompliance, including all expenses and reasonable attorneys fees, paid in obtaining the orders judicial enforcement. Section 3(h) of the same statute provides that the "Court" as referred to in Article 6 of the Model Law shall mean a Regional Trial Court.
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Republic Act No. 9285 is a general law applicable to all matters and controversies to be resolved through alternative dispute resolution methods. This law allows a Regional Trial Court to grant interim or provisional relief, including preliminary injunction, to parties in an arbitration case prior to the constitution of the arbitral tribunal. This general statute, however, must give way to a special law governing national government projects, Republic Act No. 8975 which prohibits courts, except the Supreme Court, from issuing TROs and writs of preliminary injunction in cases involving national government projects. However, as discussed above, the prohibition in Republic Act No. 8975 is inoperative in this case, since petitioners failed to prove that the e-Passport Project is national government project as defined therein. Thus, the trial court had jurisdiction to issue a writ of preliminary injunction against the e-Passport Project. On whether the trial courts issuance of a writ of injunction was proper Given the above ruling that the trial court had jurisdiction to issue a writ of injunction and going to the second issue raised by petitioners, we answer the question: Was the trial courts issuance of a writ of injunction warranted under the circumstances of this case? Petitioners attack on the propriety of the trial courts issuance of a writ of injunction is two-pronged: (a) BCA purportedly has no clear right to the injunctive relief sought; and (b) BCA will suffer no grave and irreparable injury even if the injunctive relief were not granted. To support their claim that BCA has no clear right to injunctive relief, petitioners mainly allege that the MRP/V Project and the e-Passport Project are not the same project. Moreover, the MRP/V Project purportedly involves a technology (the 2D optical bar code) that has been rendered obsolete by the latest ICAO developments while the e-Passport Project will comply with the latest ICAO standards (the contactless integrated circuit). Parenthetically, and not as a main argument, petitioners imply that BCA has no clear contractual right under the Amended BOT Agreement since BCA had previously assigned all its rights and obligations under the said Agreement to PPC. BCA, on the other hand, claims that the Amended BOT Agreement also contemplated the supply and/or delivery of e-Passports with the integrated circuit technology in the future and not only the machine readable passport with the 2D optical bar code technology. Also, it is BCAs assertion that the integrated circuit technology is only optional under the ICAO issuances. On the matter of its assignment of its rights to PPC, BCA counters that it had already terminated (purportedly at DFAs request) the assignment agreement in favor of PPC and that even assuming the termination was not valid, the Amended BOT Agreement expressly stated that BCA shall remain solidarily liable with its assignee, PPC. Most of these factual allegations and counter-allegations already touch upon the merits of the main controversy between the DFA and BCA, i.e., the validity and propriety of the termination of the Amended BOT Agreement (the MRP/V Project) between the DFA and BCA. The Court deems it best to refrain from ruling on these matters since they should be litigated in the appropriate arbitration or court proceedings between or among the concerned parties. One preliminary point, however, that must be settled here is whether BCA retains a right to seek relief against the DFA under the Amended BOT Agreement in view of BCAs previous assignment of its rights to PPC. Without preempting any factual finding that the appropriate court or arbitral tribunal on the matter of the validity of the assignment agreement with PPC or its termination, we agree with BCA that it remained a party to the Amended BOT Agreement, notwithstanding the execution of the assignment agreement in favor of PPC, for it was stipulated in the Amended BOT Agreement that BCA would be solidarily liable with its assignee. For convenient reference, we reproduce the relevant provision of the Amended BOT Agreement here: Section 20.15. It is clearly and expressly understood that BCA may assign, cede and transfer all of its rights and obligations under this Amended BOT Agreement to PPC [Philippine Passport Corporation], as fully as if PPC is the original signatory to this Amended BOT Agreement, provided however that BCA shall nonetheless be

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jointly and severally liable with PPC for the performance of all the obligations and liabilities under this Amended BOT Agreement. (Emphasis supplied.) Furthermore, a review of the records shows that the DFA continued to address its correspondence regarding the MRP/V Project to both BCA and PPC, even after the execution of the assignment agreement. Indeed, the DFAs Notice of Termination dated December 9, 2005 was addressed to Mr. Bonifacio Sumbilla as President of both BCA and PPC and referred to the Amended BOT Agreement "executed between the Department of Foreign Affairs (DFA), on one hand, and the BCA International Corporation and/or the Philippine Passport Corporation (BCA/PPC)." At the very least, the DFA is estopped from questioning the personality of BCA to bring suit in relation to the Amended BOT Agreement since the DFA continued to deal with both BCA and PPC even after the signing of the assignment agreement. In any event, if the DFA truly believes that PPC is an indispensable party to the action, the DFA may take necessary steps to implead PPC but this should not prejudice the right of BCA to file suit or to seek relief for causes of action it may have against the DFA or the BSP, for undertaking the ePassport Project on behalf of the DFA. With respect to petitioners contention that BCA will suffer no grave and irreparable injury so as to justify the grant of injunctive relief, the Court finds that this particular argument merits consideration. The BOT Law as amended by Republic Act No. 7718, provides: 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 shall be duly insured with the Government Service Insurance System [GSIS] 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. (Emphases supplied.) In addition, the Amended BOT Agreement, which is the law between and among the parties to it, pertinently provides: Section 17.01 Default In case a party commits an act constituting an event of default, the non-defaulting party may terminate this Amended BOT Agreement by serving a written notice to the defaulting party specifying the grounds for termination and giving the defaulting party a period of ninety (90) days within which to rectify the default. If the default is not remedied within this period to the satisfaction of the non-defaulting party, then the latter will serve upon the former a written notice of termination indicating the effective date of termination. Section 17.02 Proponents Default If this Amended BOT Agreement is terminated by reason of the BCAs default, the DFA shall have the following options: A. Allow the BCAs unpaid creditors who hold a lien on the MRP/V Facility to foreclose on the MRP/V Facility. The right of the BCAs unpaid creditors to foreclose on the MRP/V Facility shall be valid for the duration of the effectivity of this Amended BOT Agreement; or,

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B. Allow the BCAs unpaid creditors who hold a lien on the MRP/V Facility to designate a substitute BCA for the MRP/V Project, provided the designated substitute BCA is qualified under existing laws and acceptable to the DFA. This substitute BCA shall hereinafter be referred to as the "Substitute BCA." The Substitute BCA shall assume all the BCAs rights and privileges, as well as the obligations, duties and responsibilities hereunder; provided, however, that the DFA shall at all times and its sole option, have the right to invoke and exercise any other remedy which may be available to the DFA under any applicable laws, rules and/or regulations which may be in effect at any time and from time to time. The DFA shall cooperate with the creditors with a view to facilitating the choice of a Substitute BCA, who shall take-over the operation, maintenance and management of the MRP/V Project, within three (3) months from the BCAs receipt of the notice of termination from the DFA. The Substituted BCA shall have all the rights and obligations of the previous BCA as contained in this Amended BOT Agreement; or C. Take-over the MRP/V Facility and assume all attendant liabilities thereof. D. In all cases of termination due to the default of the BCA, it shall pay DFA liquidated damagesequivalent to the applicable the (sic) Performance Security. Section 17.03 DFAs Default If this Amended BOT Agreement is terminated by the BCA by reason of the DFAs Default, the DFA shall: A. Be obligated to take over the MRP/V Facility on an "as is, where is" basis, and shall forthwith assume attendant liabilities thereof; and B. Pay liquidated damages to the BCA equivalent to the following amounts, which may be charged to the insurance proceeds referred to in Article 12: (1) In the event of termination prior to completion of the implementation of the MRP/V Project,damages shall be paid equivalent to the value of completed implementation, minus the aggregate amount of the attendant liabilities assumed by the DFA, plus ten percent (10%) thereof. The amount of such compensation shall be determined as of the date of the notice of termination and shall become due and demandable ninety (90) days after the date of this notice of termination. Under this Amended BOT Agreement, the term "Value of the Completed Implementation" shall mean the aggregate of all reasonable costs and expenses incurred by the BCA in connection with, in relation to and/or by reason of the MRP/V Project, excluding all interest and capitalized interest, as certified by a reputable and independent accounting firm to be appointed by the BCA and subject to the approval by the DFA, such approval shall not be unreasonably withheld. (2) In the event of termination after completion of design, development, and installation of the MRP/V Project, just compensation shall be paid equivalent to the present value of the net income which the BCA expects to earn or realize during the unexpired or remaining term of this Amended BOT Agreement using the internal rate of return on equity (IRRe) defined in the financial projections of the BCA and agreed upon by the parties, which is attached hereto and made as an integral part of this Amended BOT Agreement as Schedule "1". (Emphases supplied.) The validity of the DFAs termination of the Amended BOT Agreement and the determination of the party or parties in default are issues properly threshed out in arbitration proceedings as provided for by the agreement itself. However, even if we hypothetically accept BCAs contention that the DFA terminated the Amended BOT Agreement without any default or wrongdoing on BCAs part, it is not indubitable that BCA is entitled to injunctive relief. The BOT Law expressly allows the government to terminate a BOT agreement, even without fault on the part of the project proponent, subject to the payment of the actual expenses incurred by the proponent plus a reasonable rate of return.

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Under the BOT Law and the Amended BOT Agreement, in the event of default on the part of the government (in this case, the DFA) or on the part of the proponent, the non-defaulting party is allowed to terminate the agreement, again subject to proper compensation in the manner set forth in the agreement. Time and again, this Court has held that to be entitled to injunctive relief the party seeking such relief must be able to show grave, irreparable injury that is not capable of compensation. In Lopez v. Court of Appeals,
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we held:

Generally, injunction is a preservative remedy for the protection of one's substantive right or interest. It is not a cause of action in itself but merely a provisional remedy, an adjunct to a main suit. It is resorted to only when there is a pressing necessity to avoid injurious consequences which cannot be remedied under any standard compensation. The application of the injunctive writ rests upon the existence of an emergency or of a special reason before the main case can be regularly heard. The essential conditions for granting such temporary injunctive relief are that the complaint alleges facts which appear to be sufficient to constitute a proper basis for injunction and that on the entire showing from the contending parties, the injunction is reasonably necessary to protect the legal rights of the plaintiff pending the litigation. Two requisites are necessary if a preliminary injunction is to issue, namely, the existence of a right to be protected and the facts against which the injunction is to be directed are violative of said right. In particular, for a writ of preliminary injunction to issue, the existence of the right and the violation must appear in the allegation of the complaint and a preliminary injunction is proper only when the plaintiff (private respondent herein) appears to be entitled to the relief demanded in his complaint. (Emphases supplied.) We reiterated this point in Transfield Philippines, Inc. v. Luzon Hydro Corporation,
78

where we likewise opined:

Before a writ of preliminary injunction may be issued, there must be a clear showing by the complaint that there exists a right to be protected and that the acts against which the writ is to be directed are violative of the said right. It must be shown that the invasion of the right sought to be protected is material and substantial, that the right of complainant is clear and unmistakable and that there is an urgent and paramount necessity for the writ to prevent serious damage. Moreover, an injunctive remedy may only be resorted to when there is a pressing necessity to avoid injurious consequences which cannot be remedied under any standard compensation. (Emphasis supplied.) As the Court explained previously in Philippine Airlines, Inc. v. National Labor Relations Commission : An injury is considered irreparable if it is of such constant and frequent recurrence that no fair and reasonable redress can be had therefor in a court of law, or where there is no standard by which their amount can be measured with reasonable accuracy, that is, it is not susceptible of mathematical computation. It is considered irreparable injury when it cannot be adequately compensated in damages due to the nature of the injury itself or the nature of the right or property injured or when there exists no certain pecuniary standard for the measurement of damages. (Emphases supplied.) It is still contentious whether this is a case of termination by the DFA alone or both the DFA and BCA. The DFA contends that BCA, by sending its own Notice of Default, likewise terminated or "abandoned" the Amended BOT Agreement. Still, whether this is a termination by the DFA alone without fault on the part of BCA or a termination due to default on the part of either party, the BOT Law and the Amended BOT Agreement lay down the measure of compensation to be paid under the appropriate circumstances. Significantly, in BCAs Request for Arbitration with the PDRCI, it prayed for, among others, "a judgment ordering respondent [DFA] to pay damages to Claimant [BCA], reasonably estimated at P50,000,000.00 as of [the date of the Request for Arbitration], representing lost business opportunities; financing fees, costs and commissions; 80 travel expenses; legal fees and expenses; and costs of arbitration, including the fees of the arbitrator/s." All the purported damages that BCA claims to have suffered by virtue of the DFAs termination of the Amended BOT
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Agreement are plainly determinable in pecuniary terms and can be "reasonably estimated" according to BCAs own words. Indeed, the right of BCA, a party which may or may not have been in default on its BOT contract, to have the termination of its BOT contract reversed is not guaranteed by the BOT Law. Even assuming BCAs innocence of any breach of contract, all the law provides is that BCA should be adequately compensated for its losses in case of contract termination by the government. There is one point that none of the parties has highlighted but is worthy of discussion. In seeking to enjoin the government from awarding or implementing a machine readable passport project or any similar electronic passport or visa project and praying for the maintenance of the status quo ante pending the resolution on the merits of BCAs Request for Arbitration, BCA effectively seeks to enjoin the termination of the Amended BOT Agreement for the MRP/V Project. There is no doubt that the MRP/V Project is a project covered by the BOT Law and, in turn, considered a "national government project" under Republic Act No. 8795. Under Section 3(d) of that statute, trial courts are prohibited from issuing a TRO or writ of preliminary injunction against the government to restrain or prohibit the termination or rescission of any such national government project/contract. The rationale for this provision is easy to understand. For if a project proponent that the government believes to be in default is allowed to enjoin the termination of its contract on the ground that it is contesting the validity of said termination, then the government will be unable to enter into a new contract with any other party while the controversy is pending litigation. Obviously, a courts grant of injunctive relief in such an instance is prejudicial to public interest since government would be indefinitely hampered in its duty to provide vital public goods and services in order to preserve the private proprietary rights of the project proponent. On the other hand, should it turn out that the project proponent was not at fault, the BOT Law itself presupposes that the project proponent can be adequately compensated for the termination of the contract. Although BCA did not specifically pray for the trial court to enjoin the termination of the Amended BOT Agreement and thus, there is no direct violation of Republic Act No. 8795, a grant of injunctive relief as prayed for by BCA will indirectly contravene the same statute. Verily, there is valid reason for the law to deny preliminary injunctive relief to those who seek to contest the governments termination of a national government contract. The only circumstance under which a court may grant injunctive relief is the existence of a matter of extreme urgency involving a constitutional issue, such that unless a TRO or injunctive writ is issued, grave injustice and irreparable injury will result. Now, BCA likewise claims that unless it is granted injunctive relief, it would suffer grave and irreparable injury since the bidding out and award of the e-Passport Project would be tantamount to a violation of its right against deprivation of property without due process of law under Article III, Section 1 of the Constitution. We are unconvinced.1avvphi1 Article III, Section 1 of the Constitution provides "[n]o person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws." Ordinarily, this constitutional provision has been applied to the exercise by the State of its sovereign powers such as, its 81 82 83 legislative power, police power, or its power of eminent domain. In the instant case, the State action being assailed is the DFAs termination of the Amended BOT Agreement with BCA. Although the said agreement involves a public service that the DFA is mandated to provide and, therefore, is imbued with public interest, the relationship of DFA to BCA is primarily contractual and their dispute involves the adjudication of contractual rights. The propriety of the DFAs acts, in relation to the termination of the Amended BOT Agreement, should be gauged against the provisions of the contract itself and the applicable statutes to such contract. These contractual and statutory provisions outline what constitutes due process in the present case. In all, BCA failed to demonstrate that there is a constitutional issue involved in this case, much less a constitutional issue of extreme urgency.

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As for the DFAs purported failure to appropriate sufficient amounts in its budget to pay for liquidated damages to BCA, this argument does not support BCAs position that it will suffer grave and irreparable injury if it is denied injunctive relief. The DFAs liability to BCA for damages is contingent on BCA proving that it is entitled to such damages in the proper proceedings. The DFA has no obligation to set aside funds to pay for liquidated damages, or any other kind of damages, to BCA until there is a final and executory judgment in favor of BCA. It is illogical and impractical for the DFA to set aside a significant portion of its budget for an event that may never happen when such idle funds should be spent on providing necessary services to the populace. For if it turns out at the end of the arbitration proceedings that it is BCA alone that is in default, it would be the one liable for liquidated damages to the DFA under the terms of the Amended BOT Agreement. With respect to BCAs allegation that the e-Passport Project is grossly disadvantageous to the Filipino people since it is the government that will be spending for the project unlike the MRP/V Project which would have been privately funded, the same is immaterial to the issue at hand. If it is true that the award of the e-Passport Project is inimical to the public good or tainted with some anomaly, it is indeed a cause for grave concern but it is a matter that must be investigated and litigated in the proper forum. It has no bearing on the issue of whether BCA would suffer grave and irreparable injury such that it is entitled to injunctive relief from the courts. In all, we agree with petitioners DFA and BSP that the trial courts issuance of a writ of preliminary injunction, despite the lack of sufficient legal justification for the same, is tantamount to grave abuse of discretion. To be very clear, the present decision touches only on the twin issues of (a) the jurisdiction of the trial court to issue a writ of preliminary injunction as an interim relief under the factual milieu of this case; and (b) the entitlement of BCA to injunctive relief. The merits of the DFA and BCAs dispute regarding the termination of the Amended BOT Agreement must be threshed out in the proper arbitration proceedings. The civil case pending before the trial court is purely for the grant of interim relief since the main case is to be the subject of arbitration proceedings. BCAs petition for interim relief before the trial court is essentially a petition for a provisional remedy (i.e., preliminary injunction) ancillary to its Request for Arbitration in PDRCI Case No. 30-2006/BGF. BCA specifically prayed that the trial court grant it interim relief pending the constitution of the arbitral tribunal in the said PDRCI case. Unfortunately, during the pendency of this case, PDRCI Case No. 30-2006/BGF was dismissed by the PDRCI for lack of jurisdiction, in view of the lack of agreement between the parties to arbitrate before the 84 85 PDRCI. In Philippine National Bank v. Ritratto Group, Inc., we held: A writ of preliminary injunction is an ancillary or preventive remedy that may only be resorted to by a litigant to protect or preserve his rights or interests and for no other purpose during the pendency of the principal action. The dismissal of the principal action thus results in the denial of the prayer for the issuance of the writ. x x x. (Emphasis supplied.) In view of intervening circumstances, BCA can no longer be granted injunctive relief and the civil case before the trial court should be accordingly dismissed. However, this is without prejudice to the parties litigating the main controversy in arbitration proceedings, in accordance with the provisions of the Amended BOT Agreement, which should proceed with dispatch. It does not escape the attention of the Court that the delay in the submission of this controversy to arbitration was caused by the ambiguity in Section 19.02 of the Amended BOT Agreement regarding the proper body to which a dispute between the parties may be submitted and the failure of the parties to agree on such an arbitral tribunal. However, this Court cannot allow this impasse to continue indefinitely. The parties involved must sit down together in good faith and finally come to an understanding regarding the constitution of an arbitral tribunal mutually acceptable to them. WHEREFORE, the instant petition is hereby GRANTED. The assailed Order dated February 14, 2007 of the Regional Trial Court of Pasig in Civil Case No. 71079 and the Writ of Preliminary Injunction dated February 23, 2007 are REVERSED and SET ASIDE. Furthermore, Civil Case No. 71079 is hereby DISMISSED.

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No pronouncement as to costs. SO ORDERED. Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 192591 June 29, 2011

EFREN L. ALVAREZ, Petitioner, vs. PEOPLE OF THE PHILIPPINES, Respondent. DECISION VILLARAMA, JR., J.: Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, 1 2 seeking to reverse and set aside the Decision dated November 16, 2009 and Resolution dated June 9, 2010 of the Sandiganbayans Fourth Division finding the petitioner guilty beyond reasonable doubt of violation of Section 3(e) of Republic Act (R.A.) No. 3019, otherwise known as the Anti-Graft and Corrupt Practices Act. Petitioner Efren L. Alvarez, at the time of the subject transaction, was the Mayor of the Municipality (now Science City) of Muoz, Nueva Ecija. In July 1995, the Sangguniang Bayan (SB) of Muoz under Resolution No. 136, S95 invited Mr. Jess Garcia, President of the Australian-Professional, Inc. (API) in connection with the municipal governments plan to construct a four-storey shopping mall ("Wag-wag Shopping Mall"), a project included in its Multi-Development Plan. Subsequently, it approved the adoption of the project under the Build-Operate-Transfer (BOT) arrangement in the amount of P240 million, to be constructed on a 4,000-square-meter property of the municipal government which is located at the back of the Municipal Hall. API submitted its proposal on 3 November 7, 1995. On February 9, 1996, an Invitation for proposals to be submitted within thirty (30) days, was published in Pinoy tabloid. On April 12, 1996, the Pre-qualification, Bids and Awards Committee (PBAC) recommended the approval of the proposal submitted by the lone bidder, API. On April 15, 1996, the SB passed a resolution authorizing petitioner to enter into a Memorandum of Agreement (MOA) with API for the project. Consequently, on September 12, 1996, petitioner signed the MOA with API, represented by its President Jesus V. Garcia, for the construction of the Wag-Wag Shopping Mall under the BOT scheme whereby API undertook to finish the 4 construction within 730 calendar days. On February 14, 1997, the groundbreaking ceremony was held at the site once occupied by government structures which included the old Motor Pool, the old Health Center and a semi-concrete one-storey building that housed the Department of Agriculture, BIR Assessor, old Post Office, Commission on Elections and Department of Social Welfare and Development. These structures were demolished at the instance of petitioner to give way to the construction project. Thereafter, API proceeded with excavation on the area (3-meter deep) and a billboard was put up informing the public about the project and its contractor. However, no mall was constructed as API stopped work within just a few months. On August 10, 2006, petitioner was charged before the Sandiganbayan for violation of Section 3(e) of R.A. No. 3019 (SB-06-CRM-0389), under the following Information:

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That on or about 12 September 1996, and sometime prior or subsequent thereto, in the then Municipality (now Science City) of Muoz, Nueva Ecija, and within the jurisdiction of this Honorable Court, the above-named accused EFREN L. ALVAREZ, a high ranking public official, being then the Mayor of Muoz, Nueva Ecija, taking advantage of his official position and while in the discharge of his official or administrative functions, and committing the offense in relation to his office, acting with evident bad faith or gross inexcusable negligence or manifest partiality did then and there willfully, unlawfully and criminally give the Australian-Professional Incorporated (API) unwarranted benefits, advantage or preference, by awarding to the latter the contract for the construction of Wag-Wag Shopping Mall in the amount of Two Hundred Forty Million Pesos (Php 240,000,000.00) under a Buil[d]-Operate-Transfer Agreement, notwithstanding the fact that API was and is not a duly-licensed construction company as per records of the Philippine Construction Accreditation Board (PCAB), which construction license is a pre-requisite for API to engage in construction of works for the said municipal government and that API does not have the experience and financial qualifications to undertake such costly project among others, to the damage and prejudice of the public service. CONTRARY TO LAW.
5

On September 22, 2006, petitioner was duly arraigned, pleading not guilty to the charge. At the trial, petitioner testified that during his term as Mayor of Muoz, the municipal government planned to borrow money from GSIS to finance the proposed Wag-Wag Shopping Mall project. He learned about API when then Vice-Mayor Romeo Ruiz and other SB members showed him a copy of publication/advertisement in the Manila Bulletin and Business Bulletin showing that API was then building similar BOT projects for construction of shopping malls in Lemery, Batangas (P150 million) and in Calamba, Laguna (P300 million). Because it will not entail government funds and is an alternative to availment of GSIS loan, petitioner appointed Vice-Mayor Ruiz and other SB members to study the matter. A resolution was subsequently passed by the SB inviting API for detailed information on their mall projects. Thereafter, the SB approved the construction of Wag-Wag Shopping Mall under BOT scheme, which was favorably endorsed by the Municipal Development Council. A public hearing was also conducted by Municipal Engineer Armando E. Miranda. On November 8, 1995, the municipal government received the "unsolicited proposal" of API for the construction of Wag-Wag Shopping Mall. For three weeks, an Invitation to Bid was published in the Pinoy tabloid. But it was the lone bidder, API, whose proposal 6 was eventually recommended by the PBAC and approved by the SB. Petitioner emphasized that not a single centavo was spent by the municipal government for the Wag-Wag Shopping Mall project. It was an unsolicited proposal under the BOT law. API was required to submit prequalification statements containing, among others, their accomplished projects. Eventually the SB passed a resolution authorizing him to enter into the MOA with API. The municipal government issued the notice of award to API on September 16, 1996 in which it required the contractor to post notices prior to the start of the project and to submit other requirements such as performance bond. However, API did not comply as its counsel, Atty. Lydia Y. Marciano said these are not required under the BOT law (R.A. No. 7718) since there will be no government undertaking, equity or subsidy in the project. After securing an environmental clearance certificate from DENR, the groundbreaking ceremony was held on February 1, 1997. API, as promised, paid P500,000.00 as disturbance or relocation fee considering that the municipal government has caused the demolition of old 7 buildings at the site. A certification of such payment was issued by City Treasurer Luzviminda P. De Leon and City Accountant June Franklyn A. Fernandez on February 5, 2007. The materials were then utilized for the construction of the new motor pool and new City Library. Thereafter, API began excavating an area of 30 x 30 meters (1,000 sq. ms.), about 3 meters deep. However, only the sales office was constructed. The project was not completed and API gave as excuse the 1997 financial crisis. They wrote a letter to Mr. Garcia reminding him of the 730-days completion period but then he was nowhere to be found and did not answer the letter. Hence, the SB authorized him to file a case against API, and later also granted him authority to enter into a compromise agreement in Civil Case No. 161-SD 98). Their compromise agreement was approved but they could not find a copy anymore because the Regional Trial Court at Balok, Sto. Domingo, Nueva Ecija where the settlement was 8 done, was burned down. On cross-examination, petitioner claimed that had the municipal government then borrowed funds from the GSIS, they envisioned annual return of P5 million from a P40 million loan for a modest mall (but for an area of

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4,000 square meters, the loan would have to be P80 million). For a period of 8 years, the municipality would have an income of P40 million and the GSIS can be paid. As to the contractors financial capability, it presented a credit line of P150 million to P250 million for Australian-Professionals Realty, Inc. (APRI). Petitioner clarified that API and APRI were one and the same entity having the same board of directors, but when asked if he verified this from the Securities and Exchange Commission (SEC), he answered in the negative. Petitioner asserted that it was the Vice-Mayor who is accountable for this project as he headed the working panel. As to whether API was a licensed contractor, he admitted that he did not verify this before awarding the BOT contract involving an infrastructure project. He insisted that the Wag-Wag Shopping Mall Project, being an unsolicited proposal under BOT law, is exempt from the pre-qualification requirement although they still conducted it. As far as he knows, the project proponent in this case is the Municipality of Muoz. However, petitioner admitted that he is not familiar with the BOT law. He also admitted that the Invitation published stated a shorter period of submission of proposal (30 days instead of 60 days provided under the BOT law) and that he just signed the said 9 notice without consulting their legal counsel. On November 16, 2009, the Sandiganbayan rendered judgment convicting the petitioner after finding that: (1) petitioner railroaded the project; (2) there was no competitive bidding; (3) the contractor was totally unqualified to undertake the project; and (4) the provisions of the BOT law and relevant rules and regulations were disregarded and not followed. The said court also found that the municipal government suffered damage and prejudice with the resulting loss of several of its buildings and offices, and having deployed its resources including equipment, personnel and financial outlay for fuel and repairs in the demolition of the said structures. Damage suffered by the municipal government was quantified at P4.8 million, or 2% of the total project cost of P240 million, representing the amount of liquidated damages due under the performance security had the same been posted by the contractor as required by law. As to the allegation of conspiracy, the Sandiganbayan held that such was adequately shown by the evidence, noting that this is one case where the Ombudsman should have included the entire Municipal Council in the information for the latter had conspired if not abetted all the actions of the petitioner in his dealings with API to the damage and prejudice of the municipality. The dispositive portion of the decision reads: ACCORDINGLY, accused Efren L. Alvarez is found guilty beyond reasonable doubt for [sic] violation of Section 3 (e) of Republic Act No. 3019 and is sentenced to suffer in prison the penalty of 6 years and 1 month to 10 years. He also has to suffer perpetual disqualification from holding any public office and to indemnify the City Government of Muoz (now Science), Nueva Ecija the amount of Four Million Eight Hundred Thousand Pesos (Php 4,800,000.00) less the Five Hundred Thousand Pesos (Php 500,000.00) API earlier paid the municipality as damages. Costs against the accused. SO ORDERED.
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The Sandiganbayan likewise denied petitioners motion for reconsideration. It ruled that upon examination of Section 4-A of R.A. No. 6957 as amended by R.A. No. 7718, it was clear that petitioner, with manifest partiality and gross inexcusable negligence, failed to comply with the requirements and procedures for competitive bidding in unsolicited proposals. It also reiterated that API was a contractor and not a mere project proponent; hence, the license requirement applies to it. Petitioners defense that he merely executed the resolutions of the SB was also rejected because as Chief Executive of the Municipality of Muoz, it was his duty to protect the credits, rights and properties of the municipality and to exercise efficient, effective and economical governance for the general welfare of the municipality and its inhabitants under Section 444, R.A. No. 7160 (Local Government Code of 1991). Significant acts of the petitioner also showed that he opted to enter into the contract with API despite reckless disregard of the law. Hence, this petition raising the following issues:

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1. Whether or not the Honorable Sandiganbayan failed to observe the requirement of proof beyond reasonable doubt in convicting the Accused-Petitioner; 2. Whether or not the Honorable Sandiganbayan failed to appreciate the legal intent of the BOT project; 3. Whether or not the Honorable Sandiganbayan utterly failed to appreciate that the BOT was a lawful project of the Sangguniang Bayan and not the project of the Mayor Accused-Petitioner herein; and 4. Whether or not the Honorable Sandiganbayan utterly failed to appreciate that there was no damage on the 11 then Municipality of Muoz as contemplated by law, to warrant the conviction of the Accused-Petitioner. We deny the petition. Petitioner was charged with violation of Section 3(e) of R.A. No. 3019. To be convicted under the said provision, the following elements must be established: 1. The accused must be a public officer discharging administrative, judicial or official functions; 2. He must have acted with manifest partiality, evident bad faith or inexcusable negligence; and 3. That his action caused any undue injury to any party, including the government, or giving any private party 12 unwarranted benefits, advantage or preference in the discharge of his functions. In this case, the information alleged that while being a public official and in the discharge of his official functions and taking advantage of such position, petitioner "acting with evident bad faith or gross inexcusable negligence or manifest partiality" unlawfully gave API "unwarranted benefits, advantage or preference" by awarding to it the contract for the construction of the Wag-Wag Shopping Mall under the BOT scheme despite the fact that it was not a licensed contractor and "does not have the experience and financial qualifications to undertake such costly project, among others, to the damage and prejudice of the public service." Petitioner argues that he cannot be held liable under Section 3(e) of R.A. No. 3019 since the Municipality of Muoz did not disburse any money and the buildings demolished on the site of construction have been found to be a nuisance and declared structurally unsafe, as per notice issued by the Municipal Building Official. He points out that in fact, a demolition permit has been issued upon his application in behalf of the municipal government. API also paid P500,000.00 demolition/relocation fee. We disagree. This Court has clarified that the use of the disjunctive word "or" connotes that either act of (a) "causing any undue injury to any party, including the Government"; and (b) "giving any private party any unwarranted benefits, 13 advantage or preference," qualifies as a violation of Section 3(e) of R.A. No. 3019, as amended. The use of the disjunctive "or" connotes that the two modes need not be present at the same time. In other words, the presence 14 of one would suffice for conviction. As we explained in Bautista v. Sandiganbayan : Indeed, Sec. 3, par. (e), RA 3019, as amended, provides as one of its elements that the public officer should have acted by causing any undue injury to any party, including the government, or by giving any private party unwarranted benefits, advantage or preference in the discharge of his functions. The use of the disjunctive term "or" connotes that either act qualifies as a violation of Sec. 3, par. (e), or as aptly held in Santiago, as two (2) different modes of committing the offense. This does not, however, indicate that each mode constitutes a distinct 16 offense, but rather, that an accused may be charged under either mode or under both. (Underscoring supplied.)
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The Court En Banc likewise held in Fonacier v. Sandiganbayan that proof of the extent or quantum of damage is not essential. It is sufficient that the injury suffered or benefits received can be perceived to be substantial 18 enough and not merely negligible. Under the second mode of the crime defined in Section 3(e) of R.A. No. 3019 therefore, damage is not required. In order to be found guilty under the second mode, it suffices that the accused has given unjustified favor or benefit to another, in the exercise of his official, administrative or judicial 19 functions. The third element of Section 3(e) of R.A. No. 3019 may be committed in three ways, i.e., through manifest partiality, evident bad faith or gross inexcusable negligence. Proof of any of these three in connection with the 20 prohibited acts mentioned in Section 3(e) of R.A. No. 3019 is enough to convict. Damage or injury caused by petitioners acts though alleged in the information, thus need not be proven for as long as the act of giving any private party unwarranted benefits, advantage or preference either through manifest partiality, evident bad faith or gross inexcusable negligence was satisfactorily established. Contrary to petitioners assertion, the prosecution was able to successfully demonstrate that he acted with manifest partiality and gross inexcusable negligence in awarding the BOT contract to an unlicensed and financially unqualified private entity. R.A. No. 6957 as amended by R.A. No. 7718, requires that a BOT project be awarded to the bidder who has satisfied the minimum requirements, and met the technical, financial, organizational and legal standards provided in the BOT Law. Section 5 of said law provides: SEC. 5. Public Bidding of Projects. - x x x 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. x x x (Emphasis supplied.) Foremost of these minimum legal standards is the license accreditation of a contractor required under R.A. No. 4566 otherwise known as the Contractors License Law. The Philippine Licensing Board for Contractors created under said law is mandated to ensure that prospective contractors possess "at least two years of experience in the construction industry, and knowledge of the building, safety, health and lien laws of the Republic of the Philippines and the rudimentary administrative principles of the contracting business" which it deems necessary 21 "for the safety of the contracting business of the public." In fact, a contractor must show that he is licensed by 22 the board before his bid will be considered. As a general rule therefore, the prospective contractor for government infrastructure projects must have been duly licensed as such pursuant to R.A. No. 4566. API not 23 being a licensed contractor as per the Certification issued by Philippine Contractors Accreditation Board (PCAB) board secretary Aaron C. Tablazon, is thus not qualified to participate in the bidding and much less be awarded the BOT project for the construction of Wag-Wag Shopping Mall. Petitioner claimed that there was compliance with the law saying that API was not a contractor but a mere project proponent, for which a license is not a requisite to undertake BOT projects. But the Sandiganbayan correctly rejected this theory as the clear terms of the MOA itself confirm that API itself undertook to construct the Wag-Wag Shopping Mall, thus: TERMS AND CONDITIONS I. THE PROJECT SITE 1. The FIRST PARTY [Municipality of Muoz] shall make available unto the SECOND PARTY a FOUR THOUSAND (4,000) SQUARE METERS lot located at Muoz, Nueva Ecija where the SECOND PARTY [API] shall build for the FIRST PARTY a commercial building in accordance with this Memorandum of Agreement, RA 6957 AND RA 7718 as well as RA 7160 otherwise known as the Local Government Code of 1991.

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II. PLANS AND SPECIFICATIONS 1. The commercial building, to be known as the WAG-WAG SHOPPING MALL, shall be constructed by the SECOND PARTY strictly in accordance with plans, specifications, engineering and construction designs prepared by the SECOND PARTY and duly reviewed and approved by the FIRST PARTY. x x x xxxx III. CONSTRUCTION xxxx 3. The FIRST PARTY shall issue a written Notice to Proceed in favor of the SECOND PARTY. The SECOND PARTY, shall mobilize within 60 days from clearing of the site for official groundbreaking. 4. The SECOND PARTY hereby warrants that it shall finish the construction of the WAG-WAG SHOPPING MALL within SEVEN HUNDRED THIRTY (730) CALENDAR DAYS counted from the date of the official groundbreaking. xxxx 6. x x x Compliance with all existing laws, rules and regulations regarding the construction of the project shall be [the] responsibility of the SECOND PARTY itself to save and hold the FIRST PARTY harmless from any and all liabilities in respect thereto or arising from violations thereof. IV. BUILD-OPERATE-AND-TRANSFER SCHEME 1. The WAG-WAG SHOPPING MALL be constructed by the SECOND PARTY for the FIRST PARTY in accordance with this Memorandum of Agreement and with the Build-Operate-and-Transfer Scheme outlined RA 6957 and RA 7718. This Agreement is of course subject to the provisions of RA 7160 and other pertinent laws. xxxx
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Section 2 of R.A. No. 6957 as amended by R.A. No. 7718, defined the terms "Contractor" and "Project Proponent" as follows: (k) Project Proponent - The private sector entity which shall have contractual responsibility for the project and which shall have an adequate financial base to implement said project consisting of equity and firm commitments from reputable financial institutions to provide, upon award, sufficient credit lines to cover the total estimated cost of the project. (l) Contractor - Any entity accredited under Philippine laws which may or may not be the project proponent and which shall undertake the actual construction and/or supply of equipment for the project. Aside from the clear language of the MOA, the attendant circumstances unmistakably showed that API is both the project proponent and contractor of the BOT project, as it was the one who submitted the proposal and bid to the SB, through its President executed the MOA with petitioner, deployed manpower and equipment for the clearing of the site, conducted groundbreaking, performed excavation and initial construction works, and took responsibility for the stoppage and non-completion of the project when it entered into a compromise with the Municipality of Muoz. It is to be noted that even as project proponent, API failed to meet the minimum financial standard considering that it has no adequate financial base to implement the Wag-Wag Shopping Mall project. APIs paid-up capital was only P2.5 million, while its stand-by credit line issued by Brilliant Star Capital Lending Co., Inc. was only for the amount of P150 million, way below the P240 million total project cost.

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While APIs proposal passed through the pre-qualification stage, it failed to submit, except for the SEC registration certificate, a complete set of documents required for a BOT project, in accordance with the BOT Law Implementing Rules and Regulations (IRR): Sec. 5.4. Pre-qualification Requirements. - To pre-qualify, a project proponent must comply with the following requirements: a. Legal Requirements i. For projects to be implemented under the BOT scheme whose operations require a public utility franchise, the project proponent and the facility operator must be a Filipino or, if a corporation, must be duly registered with the Securities and Exchange Commission (SEC) and owned up to at least sixty percent (60%) by Filipinos. xxxx v. If the contractor to be engaged by the project proponent to undertake the construction works of the project under bidding needs to be pre-identified as prescribed in the published Invitation to Pre-qualify and Bid and is a Filipino, it must be duly licensed and accredited by the Philippine Contractors Accreditation Board (PCAB). However, if the contractor is a foreigner, PCAB registration will not be required at pre-qualification stage, rather it will be one of the contract milestones. b. Experience or Track Record: The proponent-applicant must possess adequate experience in terms of the following: i. Firm Experience: By itself or through the member-firms in case of a joint venture/consortium or through a contractor(s) which the project proponent may have engaged for the project, the project proponent and/or its contractor(s) must have successfully undertaken a project(s) similar or related to the subject infrastructure/development project to be bid. The individual firms and/or their contractor(s) may individually specialize on any or several phases of the project(s). A joint venture/consortium proponent shall be evaluated based on the individual or collective experience of the member-firms of the joint venture/consortium and of the contractor(s) that it has engaged for the project. xxxx vi. Key Personnel Experience: The key personnel of the proponent and/or its contractor(s) must have sufficient experience in the relevant aspect of schemes similar or related to the subject project, as specified by the Agency/LGU. e. 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 measured in terms of the net worth of the company or in the case of joint ventures or consortia the combined net worth of members or a set-aside deposit equivalent to the minimum equity required, and (ii) a letter testimonial from reputable banks attesting that the project proponent and/or members of the consortium are banking with them, and that they are in good financial standing. The government Agency/LGU concerned shall determine on a project-to-project basis, and before pre-qualification, the minimum amount of equity needed. In addition, the Agency/LGU will inform the proponents of the minimum debt-equity ratio required by the monetary authority for projects to be financed by foreign loans. x x x x (Emphasis supplied.)

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We have held that the Implementing Rules provide for the unyielding standards the PBAC should apply to determine the financial capability of a bidder for pre-qualification purposes: (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 evident intent of these standards is to protect the integrity and insure the viability of the project by seeing to it that the proponent 25 has the financial capability to carry it out. Unfortunately, none of these requirements was submitted by API during the pre-qualification stage. Petitioner assails the Sandiganbayan for allegedly failing to appreciate the legal intent of the BOT Law which allows contracts on a negotiated basis for unsolicited proposals like the Wag-Wag Shopping Mall project. It asserts that the procedure and requirements for bidding have been complied with when the Municipality of Muoz caused the publication of the invitation to submit comparative bids for the BOT project was published in Pinoy, a newspaper of general circulation for three consecutive weeks. Since no comparative bid/proposal was received within sixty (60) days, the BOT project was rightfully awarded to API, the original proponent. The contention fails. Unsolicited proposals refer to project proposals submitted by the private sector to undertake infrastructure or 26 development projects which may be entered into by a government agency or local government unit. Section 4a of R.A. No. 6957 as amended by R.A. No. 7718 governs unsolicited proposals: SEC. 4-A. Unsolicited Proposals. -- Unsolicited proposals for projects may be accepted by any government agency or local government unit on a negotiated basis: Provided, That, all the following conditions are met: (1) such projects involved a new concept or technology and/or are 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, for three (3) consecutive weeks, in a newspaper of general circulation, comparative or competitive proposals, and no other proposal is received for a period of sixty (60) working days: Provided, further, That in the event another proponent submits a lower price proposal, the original proponent shall have the right to match that price within thirty (30) working days. We note that it was the SB which invited the API to provide information on the construction of a shopping mall project under the BOT scheme. It cannot be said thus that the development project originated from the proponent/contractor. Nonetheless, even if the proposal is deemed unsolicited, still the requirements of the law have not been complied with. The IRR specified the requirement of publication of the invitation for submission of proposals, as follows: SEC. 10.11. Invitation for Comparative Proposals. - The Agency/LGU shall publish the invitation for comparative or competitive proposals only after ICC/Local Sanggunian issues a no objection clearance of the draft contract. The invitation for comparative or competitive proposals should be published at least once every week for three (3) weeks in at least one (1) newspaper of general circulation. It shall indicate the time, which should not be earlier than the last date of publication, and place where tender/bidding documents could be obtained. It shall likewise explicitly specify a time of sixty (60) working days reckoned from the date of issuance of the tender/bidding documents upon which proposals shall be received. Beyond said deadline, no proposals shall be accepted. A pre-bid conference shall be conducted ten (10) working days after the issuance of the tender/bidding documents. (Emphasis supplied.) The above provision highlighted other violations in the bidding procedure for the subject BOT project. First, there was no prior approval by the Investment Coordinating Committee of the National Economic Development Authority (ICC-NEDA) of the Wag-Wag Shopping Mall project. Under the BOT Law, local projects to be implemented by the local government units concerned costing above P200 million shall be submitted for 27 confirmation to the ICC-NEDA. Such requisite approval shall be applied for and should be secured by the head 28 of the LGU prior to the call for bids for the project. Second, the law requires publication in a newspaper of

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general circulation. To be a newspaper of general circulation, it is enough that it is published for the dissemination of local news and general information, that it has a bona fide subscription list of paying subscribers, and that it is published at regular intervals. Over and above all these, the newspaper must be 29 available to the public in general, and not just to a select few chosen by the publisher. Petitioner did not submit in evidence the affidavit of the publisher attesting to Pinoy tabloid as such newspaper of general circulation. And third, even assuming that Pinoy was indeed a newspaper of general circulation, the invitation published indicated a shorter period of submission of comparative proposals, only thirty (30) days instead of the prescribed sixty (60) days counted from the date of issuance of tender documents. There is likewise no showing that API complied with the submission of a complete proposal required under the IRR: SEC. 10.5 Submission of a Complete Proposal. - For a proposal to be considered by the Agency/LGU, the proponent has to submit a complete proposal which shall include a feasibility study, company profile as outlined in Annex A, and the basic contractual terms and conditions on the obligations of the proponent and the government. The Agency/LGU shall acknowledge receipt of the proposal and advice the proponent whether the proposal is complete or incomplete. If incomplete, it shall indicate what information is lacking or necessary. (Emphasis supplied.) As correctly pointed out by the Sandiganbayan, APIs proposal showed that it lacked the above requirements as it did not include a company profile and the basic contractual terms and conditions on the obligations of the proponent/contractor and the government. Had such company profile been required of API, the municipal government could have been apprised of the fact that said contractor/proponent had been in existence for only three months at that time and had not yet completed a project, although APRI, which actually undertook the Calamba and Lemery shopping centers also under BOT scheme, is allegedly the same entity as API which have the same set of incorporators and directors. But more important, the municipality could have realized earlier, on the basis of financial statements and experience in construction included in the company profile, that API could not possibly comply with the huge financial outlay for the Wag-Wag Shopping Mall project. It could have also noted the fact that the aforesaid BOT shopping centers in Lemery and Calamba being implemented by APRI at that time were not yet finished or completed. In any event, such existing BOT contract of APRI with another LGU neither justified non-compliance by API with the submission of a complete proposal for the Wag-Wag Shopping Mall project for a competent evaluation by the PBAC. Indeed, contrary to petitioners stance, the process of unsolicited proposals does involve public bidding where, in 30 the end, the government is free to choose the bid or proposal most advantageous to it. Thus we held in Asias 31 Emerging Dragon Corporation v. DOTC : The protestation by AEDC of our characterization of the process on unsolicited proposal as public bidding is specious. We call attention to the following relevant sections of Rule 10 of the IRR specifically on Unsolicited Proposals: Sec. 10.9. Negotiation With the Original Proponent. - Immediately after ICC/Local Sanggunians clearance of the project, the Agency/LGU shall proceed with the in-depth negotiation of the project scope, implementation arrangements and concession agreement, all of which will be used in the Terms of Reference for the solicitation of comparative proposals. The Agency/LGU and the proponent are given ninety (90) days upon receipt of ICCs approval of the project to conclude negotiations. The Agency/LGU and the original proponent shall negotiate in good faith. However, should there be unresolvable differences during the negotiations, the Agency/LGU shall have the option to reject the proposal and bid out the project. On the other hand, if the negotiation is successfully concluded, the original proponent shall then be required to reformat and resubmit its proposal in accordance with the requirements of the Terms of Reference to facilitate comparison with the comparative proposals. The Agency/LGU shall validate the reformatted proposal if it meets the requirements of the TOR prior to the issuance of the invitation for comparative proposals.

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Sec. 10.10. Tender Documents. - The qualification and tender documents shall be prepared along the lines specified under Rules 4 and 5 hereof. The concession agreement that will be part of the tender documents will be considered final and non-negotiable by the challengers. Proprietary information shall, however, be respected, protected and treated with utmost confidentiality. As such, it shall not form part of the bidding/tender and related documents. xxxx After the concerned government agency or local government unit (LGU) has received, evaluated, and approved the pursuance of the project subject of the unsolicited proposal, the subsequent steps are fundamentally similar to the bidding process conducted for ordinary government projects. The three principles of public bidding are: the offer to the public, an opportunity for competition, and a basis for an exact comparison of bids, all of which are present in Sec. 10.9 to Sec. 10.16 of the IRR. First, the project is offered to the public through the publication of the invitation for comparative proposals. Second, the challengers are given the opportunity to compete for the project through the submission of their tender/bid documents. And third, the exact comparison of the bids is ensured by using the same requirements/qualifications/criteria for the original proponent and the challengers, to wit: the proposals of the original proponent and the challengers must all be in accordance with the requirements of the Terms of Reference (TOR) for the project; the original proponent and the challengers are required to post bid bonds equal in amount and form; and the qualifications of the original proponent and the challengers shall be evaluated by the concerned agency/LGU using the same evaluation criteria. (Additional emphasis supplied.) In this case, the only attempt made to comply with the bidding requirements is the publication of the invitation which, as already mentioned, was even defective. As noted by the Sandiganbayan, there was no in-depth negotiation as to the project scope, implementation and arrangements and concession agreement, which are supposed to be used in the Terms of Reference (TOR). Such TOR would have provided the interested competitors the basis for their proposed cost, and its absence in this case is an indication that any possible competing proposal was intentionally avoided or altogether eliminated. The essence of competition in public 32 bidding is that the bidders are placed on equal footing. In the award of government contracts, the law requires a competitive public bidding. This is reasonable because "[a] competitive public bidding aims to protect the public interest by giving the public the best possible advantages thru open competition. It is a mechanism that enables 33 the government agency to avoid or preclude anomalies in the execution of public contracts." Despite APIs obvious lack of financial qualification and absence of basic terms and conditions in the submitted proposal, petitioner who chaired the PBAC, recommended the approval of APIs proposal just forty-five (45) days after the last publication of the invitation for comparative proposals, and subsequently requested the SB to pass a resolution authorizing him to enter into a MOA with API as the lone bidder for the project. It was only in the MOA that the details of the construction, terms and conditions of the parties obligations, were laid down at the time API was already awarded the project. Even the MOA provisions remain vague as to the parameters of the project, which the Sandiganbayan found as placing API "at an arbitrary position where it can do as it pleases without being accountable to the municipality in any way whatsoever." True enough, when API failed to execute the construction works and abandoned the project, the municipality found itself at extreme disadvantage without recourse to a performance security that API likewise failed to submit. Petitioner as the local chief executive failed to ensure that API which was awarded the BOT contract, will submit such other requirements specified under the IRR: Sec. 11.7. Conditions for Approval of Contract. - The Head of Agency/LGU shall ensure that all of the following conditions have been complied with before approving the contract: a. Submission of the required performance security as prescribed under Section 12.7 hereof;

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b. Proof of sufficient equity from the investors and firm commitments from reputable financial institution to provide sufficient credit lines to cover the total estimated cost of the project; c. ICC clearance of the contract on a no-objection basis; Failure by the winning project proponent to submit the requirements prescribed under items a, b and c above within the time period specified by the concerned Agency/LGU in the Notice of Award or failure to execute the contract within the specified time shall result in the disqualification of the bidder, as well as the forfeiture of the bid security of the bidder. xxxx Sec. 12.7. Performance Guarantee for Construction Works. - To guarantee the faithful performance by the project proponent of its obligations under the contract including the prosecution of the construction works related to the project, the project proponent shall post in favor of the Agency/LGU concerned, within the time and under the terms prescribed under the project contract, a performance security in the form of cash, managers check, cashiers check, bank draft or guarantee confirmed by a local bank (in the case of foreign bidders bonded by a foreign bank), letter of credit issued by a reputable bank, surety bond callable on demand issued by the Government Service Insurance System (GSIS) or by surety or insurance companies duly accredited by the Office of the Insurance Commissioner, or a combination thereof, in accordance with the following schedules: a. Cash, managers check, cashiers check, irrevocable letter of credit, bank draft a minimum of two percent (2%) of the total Project Cost. b. Bank Guarantee a minimum of five percent (5%) of the total Project Cost. c. Surety Bond a minimum of ten percent (10%) of the total Project Cost. (Emphasis supplied.) In the Notice of Award dated September 16, 1996, petitioner directed API to submit the above requirements. However, APIs counsel, Atty. Lydia Y. Marciano, wrote in reply that such requirements do not apply because APIs project does not involve any government undertaking. API at that point should have been disqualified and its bid security forfeited, pursuant to Section 11.7 of the IRR. Yet, API was allowed to proceed with the execution of the project albeit only the site clearing, excavation and construction of a sales office were accomplished. Under the facts established, it is clear that petitioner gave unwarranted benefits, advantage or preference to API considering that said proponent/contractor was not financially and technically qualified for the BOT project awarded to it, and without complying with the requirements of bidding and contract approval for BOT projects under existing laws, rules and regulations. The word "unwarranted" means lacking adequate or official support; unjustified; unauthorized or without justification or adequate reason. "Advantage" means a more favorable or improved position or condition; benefit, profit or gain of any kind; benefit from some course of action. "Preference" signifies priority or higher evaluation 34 or desirability; choice or estimation above another. As to "partiality," "bad faith," and "gross inexcusable negligence," we have explained the meaning of these terms, as follows: "Partiality" is synonymous with "bias" which "excites a disposition to see and report matters as they are wished for rather than as they are." "Bad faith does not simply connote bad judgment or negligence; it imputes a dishonest purpose or some moral obliquity and conscious doing of a wrong; a breach of sworn duty through some motive or intent or ill will; it partakes of the nature of fraud." "Gross negligence has been so defined as negligence characterized by the want of even slight care, acting or omitting to act in a situation where there is a duty to act, not inadvertently but wilfully and intentionally with a conscious indifference to consequences in so far

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as other persons may be affected. It is the omission of that care which even inattentive and thoughtless men 35 never fail to take on their own property." We sustain and affirm the Sandiganbayan in holding that petitioner violated Section 3(e) of R.A. No. 3019, and that he cannot shield himself from criminal liability simply because the SB passed the necessary resolutions adopting the BOT project and authorizing him to enter into the MOA. We find no error or grave abuse in its ruling, which we herein quote: It is apparent that the unwarranted benefit in this case lies in the very fact that API was allowed to present its proposal without compliance of [sic] the requirements provided under the relevant laws and rules. To begin with, the municipal government never conducted a public bidding prior to the execution of the contract. The project was immediately awarded to the API without delay and without any rival proponents, when it was not qualified to participate in the first place. The legality and propriety of the agreement executed with the contractor is totally absent based on the testimonies of both the prosecution and the defense. This Court also considers these particular acts significant. First. From the testimony of then Vice-Mayor Ruiz, Jesus V. Garcia, the president of API, attended the SB session after paying a courtesy call to the Accused who was then the Mayor. Second. It was the Accused who signed and posted the Invitation to Bid (Exhibit N) giving proponents 30 days to submit their proposals. Third. The Accused is the head of the Pre-Qualification Bids and Awards Committee which according to him recommended the approval of APIs proposal. This was the reason he used in requesting authority from the SB to grant him the authority to contract with API. Fourth. The Accused requested the SB to give him authority to enter into an agreement with API through a resolution (Exhibit S)[.] Fifth. It was the Accused who invited the SB members to go to the Mayors office to witness the signing of the 36 Memorandum of Agreement between the municipality and API. As the local chief executive, petitioner is not only expected to know the proper procedure in the bidding and award of infrastructure contracts such as BOT projects, he is also duty bound to follow the same and his failure 37 to discharge this duty constitutes gross and inexcusable negligence. Petitioner further assails the Sandiganbayan in not considering the previous dismissal of the criminal complaint filed by Alberto Castaeda against petitioner also involving the Wag-Wag Shopping Mall project. The Sandiganbayan pointed out that said case (OMB-1-97-1885) was dismissed by the Office of the Deputy Ombudsman for Luzon on March 26, 1999 at the time the construction works were supposedly only temporarily stopped by API, while in this case it is already apparent that the latter abandoned the project and reneged on its obligation. We find nothing illegal in the reversal by the Ombudsman upon review of the September 9, 2002 resolution of the Office of the Deputy Ombudsman for Luzon which recommended the dismissal of the complaint-affidavit filed by Domiciano R. Laurena IV upon the ground that a similar criminal complaint filed by Castaeda had been dismissed in OMB-1-97-1885. The Office of the Ombudsman Chief Legal Counsel granted the petition for review filed by complainant Laurena IV and recommended that petitioner be indicted before the Sandiganbayan for violation of Section 3(e) of R.A. No. 3019. It pointed out that the dismissal of OMB-1-97-1885 was premised on the authority of a local legislature to accept unsolicited proposals and enter into a BOT project under R.A. No. 6957 as amended by R.A. No. 7718, and the lack of any showing of undue injury to the Municipality of Muoz as a result of the temporary work stoppage. However, the issue of lack of APIs construction license was never brought out in the earlier case while in the present case, the PCAB attested to the fact that API is not a licensed contractor and petitioners approval of APIs proposal is a clear badge of giving unwarranted benefit, preference or advantage through manifest partiality, evident bad faith, or at the very least, gross inexcusable negligence. The OMB found that petitioner could have easily discovered such fact with basic prudence considering that a P240-million infrastructure was involved, but apparently he threw all caution to the wind and relied solely on the 38 self-serving representation of API that it possesses the requisite contractors license. This ruling of the OMB Chief Legal Counsel was affirmed upon review by the Special Prosecutor and approved by Ombudsman 39 Merceditas N. Gutierrez on August 4, 2006.

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It may be recalled that on motion of petitioner, the Ombudsman even conducted a reinvestigation of the case 40 pursuant to the January 15, 2007 directive of the Sandiganbayan. In a memorandum dated March 5, 2007, then Special Prosecutor Dennis M. Villa-Ignacio approved the finding of probable cause against the petitioner and the recommendation that the information already filed in this case, for which petitioner had already been arraigned, be maintained. Petitioner cannot claim denial of his right to due process, as he had been given ample opportunity to present evidence on his defense in the proceedings before the Ombudsman and Sandiganbayan. No grave abuse of discretion was committed by the Ombudsman in reversing the previous dismissal of a similar criminal complaint against the petitioner involving the anomalous award of the BOT contract to API. Indeed, the Ombudsman is not precluded from ordering another review of a complaint, for he or she may revoke, repeal or abrogate the acts or previous rulings of a predecessor in office. Thus we held in Trinidad v. Office of the 41 Ombudsman : Petitioners arguments that res judicata applies since the Office of the Ombudsman twice found no sufficient basis to indict him in similar cases earlier filed against him, and that the Agan cases cannot be a supervening event or evidence per se to warrant a reinvestigation on the same set of facts and circumstances do not lie. Res judicata is a doctrine of civil law and thus has no bearing on criminal proceedings. But even if petitioners argument were to be expanded to contemplate "res judicata in prison grey" or the criminal law concept of double jeopardy, this Court still finds it inapplicable to bar the reinvestigation conducted by the Office of the Ombudsman. For the dismissal of a case during preliminary investigation does not constitute double jeopardy, preliminary investigation not being part of the trial. Insisting that the case should be barred by the prior Joint Resolution of the Ombudsman, petitioner posits that repeated investigations are oppressive since he as respondent and other respondents would be made to suffer interminable prosecution since resolutions dismissing complaints would perpetually be subject to reopening at any time and by any party. Petitioner particularly points out that no new evidence was presented at the reinvestigation. Petitioners position fails to impress. The Ombudsman is not precluded from ordering another review of a complaint, for he or she may revoke, repeal or abrogate the acts or previous rulings of a predecessor in office. And Roxas v. Hon. Vasquez teaches that new matters or evidence are not prerequisites for a reinvestigation, which is simply a chance for the prosecutor, or in this case the Office of the Ombudsman, to review and re-evaluate its findings and the evidence already submitted. (Emphasis supplied.) As to the propriety of damages awarded by the Sandiganbayan, we find that the same is proper and justified.1avvphi1 The term "undue injury" in the context of Section 3(e) of the Anti-Graft and Corrupt Practices Act punishing the act of "causing undue injury to any party," has a meaning akin to that civil law concept of 42 "actual damage." Actual damage, in the context of these definitions, is akin to that in civil law. Article 2199 of the Civil Code provides that except as provided by law or by stipulation, one is entitled to an adequate compensation only for such pecuniary loss suffered by a party as he has duly proved. Liquidated damages, on the other hand, are those agreed upon by the parties to a contract, to be paid in case of a breach 43 thereof. For approved BOT contracts, it is mandatory that a performance security be posted by the contractor/proponent in favor of the LGU in the form of cash, managers check, cashiers check, irrevocable letter of credit or bank 44 draft in the minimum amount of 2% of the total project cost. In case the default occurred during the project construction stage, the LGU shall likewise forfeit the performance security of the erring project 45 proponent/contractor. The IRR thus provides:

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SEC. 12.13. Liquidated Damages. - Where the project proponent of a project fails to satisfactorily complete the work within the construction period prescribed in the contract, including any extension or grace period duly granted, and is thereby in default under the contract, the project proponent shall pay the Agency/LGU concerned liquidated damages, as may be agreed upon under the contract by the parties. The parties shall agree on the amount and schedule of payment of the liquidated damages. The performance security may be forfeited to answer for any liquidated damages due to the Agency/LGU. The amount of liquidated damages due for every calendar day of delay will be determined by the Agency/LGU. In no case however shall the delay exceed twenty percent (20%) of the approved construction time stipulated in the contract plus any time extension duly granted. In such an event the Agency/LGU concerned shall rescind the contract, forfeit the proponents performance security and proceed with the procedures prescribed under Section 12.19. b. Had the requirement of performance security been complied with, there is no dispute that the Municipality of Muoz would have been entitled to the forfeiture of performance security when API defaulted on its obligation to execute the construction contract, at the very least in an amount equivalent to 2% of the total project cost. Hence, said LGU is entitled to such damages which the law mandates to be incorporated in the BOT contract, the parties being at liberty only to stipulate the extent and amount thereof. To rule otherwise would mean a condonation of blatant disregard and violation of the provisions of the BOT law and its implementing rules and regulations which are designed to protect the public interest in transactions between government and private business entities. While petitioner claims to have entered into a compromise agreement as authorized by the SB and approved by the trial court, no evidence of such judicial compromise was submitted before the Sandiganbayan. WHEREFORE, the petition is DENIED. The Decision dated November 16, 2009 and Resolution dated June 9, 2010 of the Sandiganbayan in Criminal Case No. SB-06-CRM-0389 are AFFIRMED. With costs against the petitioner. SO ORDERED. Republic of the Philippines SUPREME COURT Manila THIRD DIVISION G.R. No. 119850 June 20, 1996 MANDARIN VILLA, INC., petitioner, vs. COURT OF APPEALS, and CLODUALDO DE JESUS, respondents. RESOLUTION FRANCISCO, J.:p With ample evidentiary support are the following antecedent facts: In the evening of October 19, 1989, private respondent, Clodualdo de Jesus, a practicing lawyer and businessman, hosted a dinner for his friends at the petitioner's restaurant, the Mandarin Villa Seafoods Village Greenhills, Mandaluyong City. After dinner the waiter handed to him the bill in the amount of P2,658.50. Private respondent offered to pay the bill through his credit card issued by Philippine Commercial Credit Card Inc. (BANKARD). This card was accepted by the waiter who immediately proceeded to the restaurant's cashier for card verification. Ten minutes later, however, the waiter returned and audibly informed private respondent that

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his credit card had expired. Private respondent remonstrated that said credit card had yet to expire on 2 September 1990, as embossed on its face. The waiter was unmoved, thus, private respondent and two of his guests approached the restaurant's cashier who again passed the credit card over the verification computer. The same information was produced, i.e., CARD EXPIRED. Private respondent and his guests returned to their table and at this juncture, Professor Lirag, another guest, uttered the following remarks: "Clody [referring to Clodualdo 3 de Jesus], may problema ba? Baka kailangang maghugas na kami ng pinggan?" Thereupon, private respondent left the restaurant and got his BPI Express Credit Card from his car and offered it to pay their bill. 4 This was accepted and honored by the cashier after verification. Petitioner and his companions left afterwards. The incident triggered the filing of a suit for damages by private respondent. Following a full-dress trial, judgment was rendered directing the petitioner and BANKARD to pay jointly and severally the private respondent: (a) moral damages in the amount of P250,000.00; (b) exemplary damages in the amount of P100,000.00, and (c) attorney's fees and litigation expenses in the amount of P50,000.00. Both the petitioner and BANKARD appealed to the respondent Court of Appeals which rendered a decision, thus: WHEREFORE, the decision appealed from is hereby MODIFIED by: 1. Finding appellant MANDARIN solely responsible for damages in favor of appellee; 2. Absolving appellant BANKARD of any responsibility for damages; 3. Reducing moral damages awarded to appellee to TWENTY FIVE THOUSAND and 00/100 (P25,000.00) PESOS; 4. Reducing exemplary damages awarded to appellee to TEN THOUSAND and 00/100 (P10,000.00) PESOS; 5. Reversing and setting aside the award of P250,000.00 for attorney's fees as well as interest awarded, and 6. AFFIRMING the dismissal of all counterclaims and cross-claims. Costs against appellant Mandarin. SO ORDERED.
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Mandarin Villa, thus, interposed this present petition, faulting the respondent court with six (6) assigned errors which may be reduced to the following issues, to wit: (1) whether or not petitioner is bound to accept payment by means of credit card; (2) whether or not petitioner is negligent under the circumstances obtaining in this case; and (3) if negligent, whether or not such negligence is the proximate cause of the private respondent's damage. Petitioner contends that it cannot be faulted for its cashier's refusal to accept private respondent's BANKARD credit card, the same not being a legal tender. It argues that private respondent's offer to pay by means of credit card partook of the nature of a proposal to novate an existing obligation for which petitioner, as creditor, must first give its consent otherwise there will be no binding contract between them. Petitioner cannot seek refuge behind this averment. We note that Mandarin Villa Seafood Village is affiliated with BANKARD. In fact, an "Agreement" entered into by petitioner and BANKARD dated June 23, 1989, provides inter alia: The MERCHANT shall honor validly issued PCCCI credit cards presented by their corresponding holders in the purchase of goods and/or services supplied by it provided that the card expiration date has not elapsed and the
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card number does not appear on the latest cancellation bulletin of lost, suspended and canceled PCCCI credit 7 cards and, no signs of tampering, alterations or irregularities appear on the face of the credit card. While private respondent, may not be a party to the said agreement, the above-quoted stipulation conferred a favor upon the private respondent, a holder of credit card validly issued by BANKARD. This stipulation is a stipulation pour autri and under Article 1311 of the Civil Code private respondent may demand its fulfillment 8 provided he communicated his acceptance to the petitioner before its revocation. In this case, private respondent's offer to pay by means of his BANKARD credit card constitutes not only an acceptance of the said stipulation but also an explicit communication of his acceptance to the obligor. In addition, the record shows that petitioner posted a logo inside Mandarin Villa Seafood Village stating that 9 "Bankard is accepted here. This representation is conclusive upon the petitioner which it cannot deny or disprove as against the private respondent, the party relying thereon. Petitioner, therefore, cannot disclaim its obligation to accept private respondent's BANKARD credit card without violating the equitable principle of 10 estoppel. Anent the second issue, petitioner insists that it is not negligent. In support thereof, petitioner cites its good faith in checking, not just once but twice, the validity of the aforementioned credit card prior to its dishonor. It argues that since the verification machine flashed an information that the credit card has expired, petitioner could not be expected to honor the same much less be adjudged negligent for dishonoring it. Further, petitioner asseverates that it only followed the guidelines and instructions issued by BANKARD in dishonoring the aforementioned credit card. The argument is untenable. The test for determining the existence of negligence in a particular case may be stated as follows: Did the defendant in doing the alleged negligent act use the reasonable care and caution which an ordinary prudent 11 person would have used in the same situation? If not, then he is guilty of negligence. The Point of Sale (POS) Guidelines which outlined the steps that petitioner must follow under the circumstances provides. xxx xxx xxx CARD EXPIRED a. Check expiry date on card. b. If unexpired, refer to CB. b.1. If valid, honor up to maximum of SPL only. b.2. If in CB as Lost, do procedures 2a to 2e., b.3. If in CB as Suspended/Cancelled, do not honor card. c. If expired, do not honor card.
12

A cursory reading of said rule reveals that whenever the words CARD EXPIRED flashes on the screen of the verification machine, petitioner should check the credit card's expiry date embossed on the card itself. If unexpired, petitioner should honor the card provided it is not invalid, cancelled or otherwise suspended. But if expired, petitioner should not honor the card. In this case, private respondent's BANKARD credit card has an 13 embossed expiry date of September 1990. Clearly, it has not yet expired on October 19, 1989, when the same was wrongfully dishonored by the petitioner. Hence, petitioner did not use the reasonable care and caution which an ordinary prudent person would have used in the same situation and as such petitioner is guilty of negligence. In this connection, we quote with approval the following observations of the respondent Court.

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Mandarin argues that based on the POS Guidelines (supra), it has three options in case the verification machine flashes "CARD EXPIRED". It chose to exercise option (c) by not honoring appellee's credit card. However, appellant apparently intentionally glossed over option "(a) Check expiry date on card" (id.) which would have shown without any shadow of doubt that the expiry date embossed on the BANKARD was "SEP 90". (Exhibit "D".) A cursory look at the appellee's BANKARD would also reveal that appellee had been as of that date a 14 cardholder since 1982, a fact which would have entitled the customer the courtesy of better treatment. Petitioner, however, argues that private respondent's own negligence in not bringing with him sufficient cash was the proximate cause of his damage. It likewise sought exculpation by contending that the remark of Professor 15 Lirag is a supervening event and at the same time the proximate cause of private respondent's injury. We find this contention also devoid of merit. While it is true that private respondent did not have sufficient cash on hand when he hosted a dinner at petitioner's restaurant, this fact alone does not constitute negligence on his part. Neither can it be claimed that the same was the proximate cause of private respondent's damage. We take 16 judicial notice of the current practice among major establishments, petitioner included, to accept payment by means of credit cards in lieu of cash. Thus, petitioner accepted private respondent's BPI Express Credit Card 1 after verifying its validity, 7 a fact which all the more refutes petitioner's imputation of negligence on the private respondent. Neither can we conclude that the remark of Professor Lirag was a supervening event and the proximate cause of private respondent's injury. The humiliation and embarrassment of the private respondent was brought about not by such a remark of Professor Lirag but by the fact of dishonor by the petitioner of private respondent's valid BANKARD credit card. If at all, the remark of Professor Lirag served only to aggravate the embarrassment then felt by private respondent, albeit silently within himself. WHEREFORE, the instant petition is hereby DISMISSED. SO ORDERED. Republic of the Philippines SUPREME COURT Manila THIRD DIVISION G.R. No. 119379 September 25, 1998 RODELO G. POLOTAN, SR., petitioner, vs. HON. COURT OF APPEALS (Eleventh Division), REGIONAL TRIAL COURT IN MAKATI CITY (Branch 132), and SECURITY DINERS INTERNATIONAL CORPORATION, respondents. ROMERO, J.: Assailed before this Court in a Petition for Review on Certiorari is the decision of the Court of Appeals in CAG.R. CV No. 33270 affirming the decision of Branch 132 of the Regional Trial Court of Makati City. Private respondent Security Diners International Corporation (Diners Club), a credit card company, extends credit accommodations to its cardholders for the purchase of goods and other services from member establishments. Said goods and services are reimbursed later on by cardholders upon proper billing. Petitioner Rodelo G. Polotan, Sr. applied for membership and credit accommodations with Diners Club in October 1985. The application form contained terms and conditions governing the use and availment of the
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Diners Club card, among which is for the cardholder to pay all charges made through the use of said card within the period indicated in the statement of account and any remaining unpaid balance to earn 3% interest per annum plus prime rate of Security Bank & Trust Company. Notably, in the application form submitted by petitioner, Ofricano Canlas obligated himself to pay jointly and severally with petitioner the latter's obligation to private respondent. Upon acceptance of his application, petitioner was issued Diners Club card No. 3651-212766-3005. As of May 8, 1987, petitioner incurred credit charges plus appropriate interest and service charges in the aggregate amount of P33,819.84 which had become due and demandable. Demands for payment made against petitioner proved futile. Hence, private respondent filed a Complaint for Collection of Sum of Money against petitioner before the lower court. The lower court rued, thus: WHEREFORE, judgment is hereby rendered ordering defendants to pay jointly and severally plaintiff: a) The amount of P33,819.84 and interest of 3% per annum plus prime rate of SBTC and service charges of 2% per month starting May 9, 1987 until the entire obligation is fully paid; b) An amount equivalent to 25% of any and all amounts due and payable as attorney's fees, plus costs of suit. With respect to the cross-claim of defendant Ofricano Canlas, defendant Rodelo G. Polotan, Sr. is ordered to indemnify and/or reimburse the former for whatever he may be ordered to pay plaintiff. The Court of Appeals affirmed the ruling of the lower court. Hence, this petition. Petitioner assigns the following errors: I RESPONDENT COURT OF APPEALS COMMITTED AN ERROR OF LAW IN RULING AS VALID AND LEGAL THE FOLLOWING PROVISION ON INTEREST IN THE DINERS CARD CONTRACT, TO WIT: PAYMENT OF CHARGES . . . The Cardholder agrees to pay interest per annum at 3% plus the prime rate of Security Bank and Trust Company. . . . Provided that if there occurs any change in the prevailing market rates the new interest rate shall be the guiding rate of computing the interest due on the outstanding obligation without need of serving notice to the Cardholder other than the required posting on the monthly statement served to the Cardholder. The Cardholder hereby authorizes Security Diners to correspondingly increase the rate of such interest in the event of changes in prevailing market rates and to charge additional service fees as may be deemed necessary in order to maintain its service to the Cardholder. II RESPONDENT COURT OF APPEALS COMMITTED AN ERROR OF LAW IN RULING IN EFFECT THAT PRIVATE RESPONDENT'S STATEMENT OF ACCOUNT (Exh. "2"). AS A JUDICIAL ADMISSION THAT MRS. POLOTAN HAD ALREADY PAID COULD BE CONTRADICTED WITHOUT THE PRIVATE RESPONDENT LAYING THE PROPER BASIS FOR THE INTRODUCTION OF CONTRARY EVIDENCE; III

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RESPONDENT COURT OF APPEALS COMMITTED A GRIEVOUS ERROR OF FACT IN FINDING AS CREDIBLE THE ILLOGICAL AND ABSURD EXPLANATION OF PRIVATE RESPONDENT'S MR. VICENTE; IV RESPONDENT COURT OF APPEALS ERRED IN NOT AWARDING DAMAGES TO PETITIONER. In the first assignment of error, petitioner argues that the provision on interest rate is "obscure and ambiguous and not susceptible of reasonable interpretation" particularly the terms "prime rate", "prevailing market rate" and "guiding rate". In effect, there was no meeting of minds. As such, this being a contract of adhesion, any ambiguity should be resolved against the one who caused it. Petitioner added that the said provision was also illegal as it violated the laws and Central Bank Circulars. While said proviso allowed for the escalation of interest, it did not allow for a downward adjustment of the same. In his second and third assignment of error, petitioner claimed that Diners Club admitted, through its statement of account, that petitioner's wife, Mrs. Polotan, had no more account with it. But then, he claimed that the lower court and the Court of Appeals allowed the testimony of one Mr. Vicente explaining that the reason why Mrs. Polotan had no more account with it was that being a supplementary cardholder, her account was consolidated with that of petitioner in accordance with its new policy. He argued that since Diners Club admitted that Mrs. Polotan had no more account with it, the only way it could contradict such admission was by declaring that the same was a result of a palpable mistake in accordance with Section 4 of Rule 129 of the Revised Rules on Evidence. In admitting said explanation, the lower court and the Court of Appeals violated the rule on the weight to be accorded conflicting evidence. In effect, petitioner insists that both courts favored the uncorroborated testimonial evidence of Mr. Vicente over the documentary evidence presented by petitioner and admitted by Diners Club. In its fourth assignment of error, petitioner claimed that he should have been awarded damages because of Diners Club's bad faith. This Court finds Petitioner's contentions without merit. The issues presented by petitioner are clearly questions of law. Notwithstanding petitioner's submission of the above errors, however, the core issue is basically one of fact. This case stemmed from a simple complaint for collection of sum of money. The lower court and the Court of Appeals found that petitioner indeed owed Diners Club the amount being demanded. In the case of Reyes v. CA, this Court held that factual findings of the trial court, adopted and confirmed by the Court of Appeals, are final and conclusive and may not be reviewed on appeal. The exceptions to this rule are as follows: (1) when the inference made is manifestly mistaken, absurd or impossible; (2) when there is a grave abuse of discretion; (3) when the finding is grounded entirely on speculations, surmises or conjectures; (4) when the judgment of the Court of Appeals is based on misapprehension of facts; (5) when the findings of fact are conflicting; (6) when the Court of Appeals, in making its findings, went beyond the issues of the case and the same is contrary to the admissions of both appellant and appellee; (7) when the findings of the Court of Appeals are contrary to those of the trial court; (8) when the findings of fact are conclusions without citation of specific evidence on which they are based; (9) when the Court of Appeals manifestly overlooked certain relevant facts not disputed by the parties and which, if properly considered, would justify a different conclusion and (10) when the findings of fact of the Court of Appeals are premised on the absence of evidence and are contradicted by the evidence on record. Only a clear showing that any of the above-cited exceptions exists would justify a review of the findings of fact made by the lower court and upheld by the Court of Appeals. In the instant case, a review of the decisions of the lower court, as well as the Court of Appeals, shows that the conclusions have been logically arrived at and substantially supported by the evidence presented by the parties.
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Be that as it may, this Court sees it fit and proper to discuss the merits of this petition based on petitioner's claim that since the contract he signed with Diners Club was a contract of adhesion, the obscure provision on interest should be resolved in his favor. A contract of adhesion is one in which one of the contracting parties imposes a ready-made form of contract which the other party may accept or reject, but cannot modify. One party prepares the stipulation in the contract, while the other party merely affixes his signature or his "adhesion" thereto, giving no room for negotiation and 3 depriving the latter of the opportunity to bargain on equal footing. Admittedly, the contract containing standard stipulations imposed upon those who seek to avail of its credit services was prepared by Diners Club. There is no way a prospective credit card holder can object to any onerous provision as it is offered on a take-it-or-leave-it basis. Being a contract of adhesion, any ambiguity in its provisions trust be construed against private respondent. Indeed, the terms "prime rate", "prevailing market rate", "2% penalty charge", "service fee", and "guiding rate" are technical terms which are beyond the ken of an ordinary layman. To be sure, petitioner hardly falls into the category of an "ordinary layman." As aptly observed by the Court of Appeals: . . . [A]ppellant by his own admission is a "lawyer by profession, a reputable businessman and a note leader of a number of socio-civic organizations." With such impressive credentials, this Court is hard-put to fathom someone 4 of his calibre entering into a contract with eyes "blindfolded". Nevertheless, these types of contracts have been declared as binding ordinary contracts, the reason being that 5 the party who adheres to the contract is free to reject it entirely. The binding effect of any agreement between parties to a contract is premised on two settled principles: (1) that any obligation arising from a contract has the force of law between the parties; and (2) that there must be mutuality between the parties based on their essential equality. Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation regarding 6 the validity or compliance of the contract which is left solely to the will of one of the parties, is likewise, invalid. It is important to stress that the Court is not precluded from ruling out blind adherence to their terms if the 7 attendant facts and circumstances show that they should be ignored for being obviously too one-sided. In this case, petitioner, in effect, claims that the subject contract is one-sided in that the contract allows for the escalation of interests, but does not provide for a downward adjustment of the same in violation of Central Bank Circular 905. The claim is without basis. First, by signing the contract, petitioner and private respondent agreed upon the rate 8 as stipulated in the subject contract. Such is now allowed by C.B. Circular 905. Second, petitioner failed to cite any particular provision of said Circular which was allegedly violated by the subject contract. Be that as it may, there is nothing inherently wrong with escalation clauses. Escalation clauses are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term 9 contracts. Petitioner further argues that the interest rate was unilaterally imposed and based on the standards and rate formulated solely by Diners Club. In Florendo v. CA,
10

this Court has held that:

. . . the unilateral determination and imposition of increased interest rates by the herein respondent bank is obviously violative of the principle of mutuality of contracts ordained in Article 1308 of the Civil Code. As this Court held in PNB v. CA (196 SCRA 536 [1991]):

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In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void. . . . The contractual provision in question states that "if there occurs any change in the prevailing market rates, the new interest rate shall be the guiding rate in computing the interest due on the outstanding obligation without need of serving notice to the Cardholder other than the required posting on the monthly statement served to the Cardholder." This could not be considered an escalation clause for the reason that it neither states all increase nor a decrease in interest rate. Said clause simply states that the interest rate should be based on the prevailing market rate. Interpreting it differently, while said clause does not expressly stipulate a reduction in interest rate, it nevertheless provides a leeway for the interest rate to be reduced in case the prevailing market rates dictate its reduction. Admittedly, the second paragraph of the questioned proviso which provides that "the Cardholder hereby authorizes Security Diners to correspondingly increase the rate of such interest in the event of changes in prevailing market rates . . ." is an escalation clause. However, it cannot be said to be dependent solely on the will of private respondent as it is also dependent on the prevailing market rates. Escalation clauses are not basically wrong or legally objectionable as long as they are not solely potestative but 11 based on reasonable and valid grounds. Obviously, the fluctuation in the markets rates is beyond the control of private respondent. As to the second and third assignments of error, it is misleading for petitioner to say that private respondent had judicially admitted that its statement of account is proof that Mrs. Polotan has already paid her account with private respondent. Proceeding from said premise, it is further misleading for petitioner to conclude that private respondent's testimonial evidence about a new policy contradicted its judicially admitted documentary evidence without laying the proper basis for the introduction of contrary evidence and in violation of Section 2, Rule 129 of the Revised Rules on Evidence, which provides that: Admissions made by the parties in the pleadings, or in the course of the trial or other proceedings do not require proof and can be contradicted unless previously shown to have been made through palpable mistake. Certainly, Diners Club could not deny the existence of Exhibit "2" which is the Statement of Account issued to Mrs. Polotan since, precisely, it was the one which issued said statement. But to conclude that said Statement of Account was likewise an admission that Mrs. Polotan has no more account with Diners Club would be equivocatory, or non-sequitur. While private respondent admitted the existence of Exhibit "2", it could not have agreed to the purpose for which the exhibit was presented. As satisfactorily found by the Court of Appeals and to which this Court agrees: Appellant's allegation is misleading. On the contrary, appellee's rebuttal witness, Alfredo Vicente, categorically stated that the reason the Statement of Account in the name of Alicia Polotan showed a zero balance (Exh. "2") was due to the fact that effective February 1989, under a new system, separate monthly statements were produced on supplementary card members. Prior to February 1989, the availment of Mr. and Mrs. Polotan were incorporated under one statement. Moreover, it is to be observed that while the Complaint was filed on 15 May 1987, the Diners Club Monthly Statement in the name of Alicia B. Polotan is dated almost two (2) years later or "02/08/89" (Exh. "2"). This bolsters the testimony of Alfredo Vicente regarding the entry of zero balance in Mrs. Polotan's name.

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Although said exhibit would, by itself, show that Mrs. Polotan had no more account with Diners Club, it would not have been conclusive to prove that said account was already paid. The proper evidence would have been a receipt of payment. Significantly, petitioner did not contest the purchases as indicated in the statements of account but merely alleged that some of the purchases being claimed to have been made by petitioner were not supported by 12 invoices. The lower court found otherwise. In light of the above, this Court sees no reason to award damages to petitioner. WHEREFORE, in view of the foregoing, the petition for certiorari is hereby DENIED and the Decision of the Court of Appeals AFFIRMED with the MODIFICATION that the attorney's fees are reduced to 15%. SO ORDERED. Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. 127246 April 21, 1999 SPOUSES LUIS M. ERMITAO and MANUELITA C. ERMITAO, petitioners, vs. THE COURT OF APPEALS AND BPI EXPRESS CARD CORP., respondents. QUISUMBING, J This petition for review under Rule 45, of the Rules of Court, seeks to set aside the decision of the Court of 1 Appeals in C.A.-G.R. CV No. 47888 reversing the trial court's judgment in Civil Case No. 61357, as well as the resolution of the Court of Appeals denying petitioners' motion for reconsideration. In dispute is the validity of the stipulation embodied in the standard application form for credit cards furnished by private respondent. The stipulation makes the cardholder liable for purchases made through his lost or stolen credit card until (a) notice of such loss or theft has been given to private respondent and (b) the latter has communicated such loss or theft to its member-establishments. The facts, as found by the trial court, are not disputed. Petitioner Luis Ermitao applied for a credit card from private respondent BPI Express Card Corp. (BECC) on October 8, 1986 with his wife, Manuelita, as extension cardholder. The spouses were given credit cards with a credit limit of P10,000.00. They often exceeded this credit limit without protest from BECC. On August 29, 1989, Manuelita's bag was snatched from her as she was shopping at the Greenbelt Mall in Makati, Metro Manila. Among the items inside the bag was her BECC credit card. That same night she informed, by telephone, BECC of the loss. The call was received by BECC offices through a certain Gina Banzon. This was followed by a letter dated August 30, 1989. She also surrendered Luis' credit card and requested for replacement cards. In her letter, Manuelita stated that she "shall not be responsible for any and all charges 2 incurred [through the use of the lost card] after August 29, 1989.

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However, when Luis received his monthly billing statement from BECC dated September 20, 1989, the charges included amounts for purchases made on August 30, 1989 through Manuelita's lost card. Two purchases were made, one amounting to P2,350.05 and the other, P607.50. Manuelita received a billing statement dated October 20, 1989 which required her to immediately pay the total amount of P3,197.70 covering the same (unauthorized) purchases. Manuelita again wrote BECC disclaiming responsibility for those charges, which were made after she had served BECC with notice of the loss of her card. Despite the spouses' refusal to pay and the fact that they repeatedly exceeded their monthly credit limit, BECC sent them a notice dated December 29, 1989 stating that their cards had been renewed until March 1991. Notwithstanding this, however, BECC continued to include in the spouses' billing statements those purchases made through Manuelita's lost card. Luis protested this billing in his letter dated June 20, 1990. However, BECC, in a letter dated July 13, 1990, pointed out to Luis the following stipulation in their contract: In the event the card is lost or stolen, the cardholder agrees to immediately report its loss or theft in writing to BECC . . . purchases made/incurred arising from the use of the lost/stolen card shall be for the exclusive account of the cardholder and the cardholder continues to be liable for the purchases made through the use of the lost/stolen BPI Express Card until after such notice has been given to BECC and the latter has communicated 3 such loss/theft to its member establishments. Pursuant to this stipulation, BECC held Luis liable for the amount of P3,197.70 incurred through the use of his wife's lost card, exclusive of interest and penalty charges. In his reply dated July 18, 1990, Luis stressed that the contract BECC was referring to was a contract of adhesion and warned that if BECC insisted on charging him and his wife for the unauthorized purchases, they will sue BECC for damages. This warning notwithstanding, BECC continued to bill the spouses for said 4 purchases. On April 10, 1991, Luis used his credit card to purchase gasoline at a Caltex station. The latter, however, dishonored his card. In reply to Luis' demand for an explanation, BECC wrote that it transferred the balance of his old credit card to his new one, including the unauthorized charges. Consequently, his outstanding balance exceeded his credit limit of P10,00000. He was informed that his credit card had not been cancelled but, since he exceeded his credit limit, he could not avail of his credit privileges. Once more, Luis pointed out that notice of the lost card was given to BECC before the purchases were made. Subsequently, BECC cancelled the spouses' credit cards and advised them to settle the account immediately or risk being sued for collection of said account. Constrained, petitioners sued BECC for damages. The trial court ruled in their favor, stating that there was a waiver on the part of BECC in enforcing the spouses' liability, as indicated by the following circumstances: (1) Its failure to inform the spouses that the unauthorized charges on the lost card would be carried over to their replacement cards; and (2) Its act of unqualifiedly replacing the lost card and Luis' card which were both surrendered by the spouses, even after the spouses unequivocally denied liability for the unauthorized purchases. The trial court further noted that the suspension of the spouses' credit cards was based upon the "lame excuse" that the credit limit had been exceeded, despite the fact that BECC allowed the spouses previously to exceed their credit limit, even for almost two years after the loss of Manuelita's card. Moreover, the credit limit was exceeded only after BECC added the unauthorized purchases to the liability of the spouses. BECC continued to

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send the spouses separate billing statements that included the unauthorized purchases, with interest and penalty charges. The trial court opined that the only purpose for the suspension of the spouses' credit privileges was to compel them to pay for the unauthorized purchases. The trial court ruled that the latter portion of the condition in the parties' contract, which states that liability for purchases made after a card is lost or stolen shall be for the account of the cardholder until after notice of the loss or theft has been given to BECC and after the latter has informed its member establishments, is void for being contrary to public policy and for being dependent upon the 5 sole will of the debtor. Moreover, the trial court observed that the contract between BECC and the Ermitaos was a contract of adhesion, whose terms must be construed strictly against BECC, the party that prepared it. The dispositive portion of the trial court's decision reads: WHEREFORE, and IN VIEW OF THE ALL THE FOREGOING CONSIDERATIONS, judgment is hereby rendered in favor of the plaintiffs, Spouses Luis M. Ermitao and Manuelita C. Ermitao and against defendant BPI Express Card Corporation: 1. Ordering the said defendant to pay the plaintiffs the sum of P100,000.00 as moral damages. 2. Ordering said defendant to pay the plaintiffs the sum of P50,000.00 as exemplary damages. 3. Ordering said defencant to pay the plaintiffs the sum equivalent to twenty per cent (20%) of the amounts abovementioned as and for attorney's fees and expenses of litigation, and 4. Ordering the said defendant to pay the costs of suit. SO ORDERED But, on appeal this decision was reversed. The Court of Appeals stated that the spouses should be bound by the contract, even though it was one of adhesion. It also said that Luis, being a lawyer, had "all the tools to drive a 6 7 hard bargain had he wanted to. It cited the case of Serra v. Court of Appeals wherein this Court ruled that contracts of adhesion are as binding as ordinary contracts. The petitioner in Serra was a CPA-lawyer, "a highly educated man 8 . . . who should have been more cautious in (his) transactions. . . The Court of Appeals therefore disposed of the appeal as follows: THE FOREGOING CONSIDERED, the contested decision is REVERSED. Plaintiffs/appellees are hereby directed to pay the defendant/appellant the amount of P3,197.70 with 3% interest per month and an additional 3% penalty equivalent to the amount due every month until full payment. Without cost. SO ORDERED.
9

Hence, this recourse by petitioners, in which they claim that the Court of Appeals gravely erred in: (i) Ruling that petitioners should be bound by the stipulations contained in the credit card application a document wholly prepared by private respondent itself taking into consideration the professional credentials of petitioner Luis M. Ermitao; (ii) Relying on the case of Serra v. Court of Appeals, 229 SCRA 60, because unlike that case, petitioners have no chance at all to contest the stipulations appearing in the credit card application that was drafted entirely by private respondent, thus, a clear contract of adhesion;

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(iii) Ruling that private respondent is not estopped by its subsequent acts after having been notified of the loss/theft of the credit card issued to petitioners, and (iv) Holding that the onerous and unconscionable condition in the credit card application that the cardholder continues to be liable for purchases made on lost or stolen credit cards not only after such notice has been given to appellant but also after the latter has communicated such loss/theft to its member establishments without any 10 specific time or period is valid. At the outset, we note that the contract between the parties in this case is indeed a contract of adhesion, socalled because its terms are prepared by only one party while the other party merely affixes his signature 11 12 signifying his adhesion thereto. Such contracts are not void in themselves. They are as binding as ordinary contracts. Parties who enter into such contracts are free to reject the stipulations entirely. This Court, however, will not hesitate to rule out blind adherence to such contracts if they prove to be too one-sided under the 13 attendant facts and circumstances. The resolution of this petition, in our view, hinges on the validity and fairness of the stipulation on notice required by private respondent in case of loss or theft of a BECC-issued credit card. Because of the peculiar nature of contracts of adhesion, the validity thereof must be determined in light of the circumstances under which the 14 stipulation is intended to apply. The stipulation in question reads: In the event the card is lost or stolen, the cardholder agrees to immediately report its loss or theft in citing to BECC . . . purchases made/incurred arising from the use of the lost/stolen card shall be for the exclusive account of the cardholder and the cardholder continues to be liable for the purchases made through the use of the lost/stolen BPI Express Card until after such notice has been given to BECC and the latter has communicated such loss/theft to its member establishments. For the cardholder to be absolved from liability for unauthorized purchases made through his lost or stolen card, two steps must be followed: (1) the cardholder must give written notice to BECC, and (2) BECC must notify its member establishments of such loss or theft, which, naturally, it may only do upon receipt of a notice from the cardholder. Both the cardholder and BECC, then, have a responsibility to perform, in order to free the cardholder from any liability arising from the use of a lost or stolen card. In this case, the cardholder, Manuelita, has complied with what was required of her under the contract with BECC. She immediately notified BECC of the loss of her card on the same day it was lost and, the following day, she sent a written notice of the loss to BECC. That she gave such notices to BECC is admitted by BECC in the 15 letter sent to Luis by Roberto L. Maniquiz, head of BECC's Collection Department. Having thus performed her part of the notification procedure, it was reasonable for Manuelita and Luis, for that matter to expect that BECC would perform its part of the procedure, which is to forthwith notify its memberestablishments. It is not unreasonable to assume that BECC would do this immediately, precisely to avoid any unauthorized charges. Clearly, what happened in this case was that BECC failed to notify promptly the establishment in which the unauthorized purchases were made with the use of Manuelita's lost card. Thus, Manuelita was being liable for those purchases, even if there is no showing that Manuelita herself had signed for said purchases, and after notice by her concerning her card's loss was already given to BECC. BECC asserts that the period that elapsed from the time of the loss of the card to the time of its unauthorized use was too short such that "it would be next to impossible for respondent to notify all its member-establishments 16 regarding the fact of the loss. Nothing, however, prevents said member-establishments from observing verification procedures including ascertaining the genuine signature and proper identification of the purported purchaser using the credit card.

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BECC states that, "between two persons who are negligent, the one who made the wrong possible should bear the loss." We take this to be an admission that negligence had occurred. In effect, BECC is saying that the company, and the member-establishments or the petitioners could be negligent. However, according to BECC, petitioners should be the ones to bear the loss since it was they who made possible the commission of a wrong. This conclusion, however, is self-serving and obviously untenable. From one perspective, it was not petitioners who made possible the commission of the wrong. It could be BECC for its failure to immediately notify its members-establishments, who appear lacking in care or instruction by BECC in proper procedures, regarding signatures and the identification of card users at the point of actual purchase of goods or services. For how else could an unauthorized person succeed to use Manuelita's lost card? The cardholder was no longer in control of the procedure after it has notified BECC of the card's loss or theft. It was already BECC's responsibility to inform its member-establishments of the loss or theft of the card at the soonest possible time. We note that BECC is not a neophyte financial institution, unaware of the intricacies and risks of providing credit privileges to a large number of people. It should have anticipated an occurrence such as the one in this case and devised effective ways and means to prevent it, or otherwise insure itself against such risk. Prompt notice by the cardholder to the credit card company of the loss or theft of his card should be enough to relieve the former of any liability occasioned by the unauthorized use of his lost or stolen card. The questioned stipulation in this case, which still requires the cardholder to wait until the credit card company has notified all its member-establishments, puts the cardholder at the mercy of the credit card company which may delay indefinitely the notification of its members to minimize if not to eliminate the possibility of incurring any loss from unauthorized purchases. Or, as in this case, the credit card company may for some reason fail to promptly notify its members through absolutely no fault of the cardholder. To require the cardholder to still pay for unauthorized purchases after he has given prompt notice of the loss or theft of his card to the credit card company would simply be unfair and unjust. The Court cannot give its assent to such a stipulation which could clearly run against 17 public policy. On the matter of the damages petitioners are seeking, we must delete the award of exemplary damages, absent any clear showing that BECC acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner, as required by Article 2232 of the Civil Code. We likewise reduce the amount of moral damages to P50,000.00, considering the circumstances of the parties to the case. WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 47888 is hereby REVERSED and the decision of the Regional Trial Court, Branch 157, Pasig City in Civil Case No. 61375 is REINSTATED, with the MODIFICATION that the award of exemplary damages in the amount of P50,000.00 is hereby deleted; and the amount of moral damages is reduced to P50,000.00; but private respondent is further ordered to pay P25,000 as attorney's fees and litigation expenses. Costs against private respondents.1wphi1.nt SO ORDERED.

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Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 155076 February 27, 2006

LUIS MARCOS P. LAUREL, Petitioner, vs. HON. ZEUS C. ABROGAR, Presiding Judge of the Regional Trial Court, Makati City, Branch 150, PEOPLE OF THE PHILIPPINES& PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, Respondents. DECISION CALLEJO, SR., J.: Before us is a Petition for Review on Certiorari of the Decision of the Court of Appeals (CA) in CA-G.R. SP No. 68841 affirming the Order issued by Judge Zeus C. Abrogar, Regional Trial Court (RTC), Makati City, Branch 150, which denied the "Motion to Quash (With Motion to Defer Arraignment)" in Criminal Case No. 99-2425 for theft. Philippine Long Distance Telephone Company (PLDT) is the holder of a legislative franchise to render local and 2 international telecommunication services under Republic Act No. 7082. Under said law, PLDT is authorized to establish, operate, manage, lease, maintain and purchase telecommunication systems, including transmitting, receiving and switching stations, for both domestic and international calls. For this purpose, it has installed an estimated 1.7 million telephone lines nationwide. PLDT also offers other services as authorized by Certificates of Public Convenience and Necessity (CPCN) duly issued by the National Telecommunications Commission (NTC), and operates and maintains an International Gateway Facility (IGF). The PLDT network is thus principally composed of the Public Switch Telephone Network (PSTN), telephone handsets and/or telecommunications equipment used by its subscribers, the wires and cables linking said telephone handsets and/or telecommunications equipment, antenna, the IGF, and other telecommunications equipment which provide 3 interconnections. 1avvphil.net PLDT alleges that one of the alternative calling patterns that constitute network fraud and violate its network integrity is that which is known as International Simple Resale (ISR). ISR is a method of routing and completing international long distance calls using International Private Leased Lines (IPL), cables, antenna or air wave or frequency, which connect directly to the local or domestic exchange facilities of the terminating country (the country where the call is destined). The IPL is linked to switching equipment which is connected to a PLDT telephone line/number. In the process, the calls bypass the IGF found at the terminating country, or in some 4 instances, even those from the originating country. One such alternative calling service is that offered by Baynet Co., Ltd. (Baynet) which sells "Bay Super Orient Card" phone cards to people who call their friends and relatives in the Philippines. With said card, one is entitled to a 27-minute call to the Philippines for about 37.03 per minute. After dialing the ISR access number indicated in the phone card, the ISR operator requests the subscriber to give the PIN number also indicated in the phone card. Once the callers identity (as purchaser of the phone card) is confirmed, the ISR operator will then provide a Philippine local line to the requesting caller via the IPL. According to PLDT, calls made through the IPL never pass the toll center of IGF operators in the Philippines. Using the local line, the Baynet card user is able to place 5 a call to any point in the Philippines, provided the local line is National Direct Dial (NDD) capable.
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PLDT asserts that Baynet conducts its ISR activities by utilizing an IPL to course its incoming international long distance calls from Japan. The IPL is linked to switching equipment, which is then connected to PLDT telephone lines/numbers and equipment, with Baynet as subscriber. Through the use of the telephone lines and other auxiliary equipment, Baynet is able to connect an international long distance call from Japan to any part of the Philippines, and make it appear as a call originating from Metro Manila. Consequently, the operator of an ISR is able to evade payment of access, termination or bypass charges and accounting rates, as well as compliance with the regulatory requirements of the NTC. Thus, the ISR operator offers international telecommunication 6 services at a lower rate, to the damage and prejudice of legitimate operators like PLDT. PLDT pointed out that Baynet utilized the following equipment for its ISR activities: lines, cables, and antennas or equipment or device capable of transmitting air waves or frequency, such as an IPL and telephone lines and equipment; computers or any equipment or device capable of accepting information applying the prescribed process of the information and supplying the result of this process; modems or any equipment or device that enables a data terminal equipment such as computers to communicate with other data terminal equipment via a telephone line; multiplexers or any equipment or device that enables two or more signals from different sources to pass through a common cable or transmission line; switching equipment, or equipment or device capable of connecting telephone lines; and software, diskettes, tapes or equipment or device used for recording and storing 7 information. PLDT also discovered that Baynet subscribed to a total of 123 PLDT telephone lines/numbers. Based on the Traffic Study conducted on the volume of calls passing through Baynets ISR network which bypass the IGF toll 9 center, PLDT incurred an estimated monthly loss of P10,185,325.96. Records at the Securities and Exchange Commission (SEC) also revealed that Baynet was not authorized to provide international or domestic long distance telephone service in the country. The following are its officers: Yuji Hijioka, a Japanese national (chairman of the board of directors); Gina C. Mukaida, a Filipina (board member and president); Luis Marcos P. Laurel, a Filipino (board member and corporate secretary); Ricky Chan Pe, a Filipino (board member and treasurer); and Yasushi Ueshima, also a Japanese national (board member). Upon complaint of PLDT against Baynet for network fraud, and on the strength of two search warrants issued by the RTC of Makati, Branch 147, National Bureau of Investigation (NBI) agents searched its office at the 7th Floor, SJG Building, Kalayaan Avenue, Makati City on November 8, 1999. Atsushi Matsuura, Nobuyoshi Miyake, Edourd D. Lacson and Rolando J. Villegas were arrested by NBI agents while in the act of manning the operations of Baynet. Seized in the premises during the search were numerous equipment and devices used in its ISR activities, such as multiplexers, modems, computer monitors, CPUs, antenna, assorted computer peripheral cords and microprocessors, cables/wires, assorted PLDT statement of accounts, parabolic antennae and voltage regulators. State Prosecutor Ofelia L. Calo conducted an inquest investigation and issued a Resolution on January 28, 2000, finding probable cause for theft under Article 308 of the Revised Penal Code and Presidential Decree No. 12 401 against the respondents therein, including Laurel. On February 8, 2000, State Prosecutor Calo filed an Information with the RTC of Makati City charging Matsuura, Miyake, Lacson and Villegas with theft under Article 308 of the Revised Penal Code. After conducting the requisite preliminary investigation, the State Prosecutor filed an Amended Information impleading Laurel (a partner in the law firm of Ingles, Laurel, Salinas, and, until November 19, 1999, a member of the board of directors and corporate secretary of Baynet), and the other members of the board of directors of said corporation, namely, Yuji Hijioka, Yasushi Ueshima, Mukaida, Lacson and Villegas, as accused for theft under Article 308 of the Revised Penal Code. The inculpatory portion of the Amended Information reads: On or about September 10-19, 1999, or prior thereto, in Makati City, and within the jurisdiction of this Honorable Court, the accused, conspiring and confederating together and all of them mutually helping and aiding one another, with intent to gain and without the knowledge and consent of the Philippine Long Distance Telephone (PLDT), did then and there willfully, unlawfully and feloniously take, steal and use the international long distance calls belonging to PLDT by conducting International Simple Resale (ISR), which is a method of routing and completing international long distance calls using lines, cables, antennae, and/or air wave frequency which
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connect directly to the local or domestic exchange facilities of the country where the call is destined, effectively stealing this business from PLDT while using its facilities in the estimated amount of P20,370,651.92 to the damage and prejudice of PLDT, in the said amount. CONTRARY TO LAW.
13

Accused Laurel filed a "Motion to Quash (with Motion to Defer Arraignment)" on the ground that the factual allegations in the Amended Information do not constitute the felony of theft under Article 308 of the Revised Penal Code. He averred that the Revised Penal Code, or any other special penal law for that matter, does not prohibit ISR operations. He claimed that telephone calls with the use of PLDT telephone lines, whether domestic or international, belong to the persons making the call, not to PLDT. He argued that the caller merely uses the facilities of PLDT, and what the latter owns are the telecommunication infrastructures or facilities through which the call is made. He also asserted that PLDT is compensated for the callers use of its facilities by way of rental; for an outgoing overseas call, PLDT charges the caller per minute, based on the duration of the call. Thus, no personal property was stolen from PLDT. According to Laurel, the P20,370,651.92 stated in the Information, if anything, represents the rental for the use of PLDT facilities, and not the value of anything owned by it. Finally, he averred that the allegations in the Amended Information are already subsumed under the Information for violation of Presidential Decree (P.D.) No. 401 filed and pending in the Metropolitan Trial Court of Makati City, docketed as Criminal Case No. 276766. The prosecution, through private complainant PLDT, opposed the motion, contending that the movant unlawfully took personal property belonging to it, as follows: 1) intangible telephone services that are being offered by PLDT and other telecommunication companies, i.e., the connection and interconnection to their telephone lines/facilities; 2) the use of those facilities over a period of time; and 3) the revenues derived in 15 connection with the rendition of such services and the use of such facilities. The prosecution asserted that the use of PLDTs intangible telephone services/facilities allows electronic voice signals to pass through the same, and ultimately to the called partys number. It averred that such service/facility is akin to electricity which, although an intangible property, may, nevertheless, be appropriated and be the subject of theft. Such service over a period of time for a consideration is the business that PLDT provides to its customers, which enables the latter to send various messages to installed recipients. The service rendered by PLDT is akin to merchandise which has specific value, and therefore, capable of appropriation by another, as in this case, through the ISR operations conducted by the movant and his co-accused. The prosecution further alleged that "international business calls and revenues constitute personal property envisaged in Article 308 of the Revised Penal Code." Moreover, the intangible telephone services/facilities belong to PLDT and not to the movant and the other accused, because they have no telephone services and facilities of their own duly authorized by the NTC; thus, the taking by the movant and his co-accused of PLDT services was with intent to gain and without the latters consent. The prosecution pointed out that the accused, as well as the movant, were paid in exchange for their illegal appropriation and use of PLDTs telephone services and facilities; on the other hand, the accused did not pay a single centavo for their illegal ISR operations. Thus, the acts of the accused were akin to the use of a "jumper" by a consumer to deflect the current from the house electric meter, thereby enabling one to steal electricity. The prosecution emphasized that its position is fortified by the Resolutions of the Department of Justice in PLDT v. Tiongson, et al. (I.S. No. 97-0925) and in PAOCTF-PLDT v. Elton John Tuason, et al. (I.S. No. 2000-370) which were issued on August 14, 2000 finding probable cause for theft against the respondents therein. On September 14, 2001, the RTC issued an Order denying the Motion to Quash the Amended Information. The court declared that, although there is no law that expressly prohibits the use of ISR, the facts alleged in the Amended Information "will show how the alleged crime was committed by conducting ISR," to the damage and prejudice of PLDT.
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Laurel filed a Motion for Reconsideration of the Order, alleging that international long distance calls are not personal property, and are not capable of appropriation. He maintained that business or revenue is not considered personal property, and that the prosecution failed to adduce proof of its existence and the subsequent loss of personal property belonging to another. Citing the ruling of the Court in United States v. De 18 Guzman, Laurel averred that the case is not one with telephone calls which originate with a particular caller and terminates with the called party. He insisted that telephone calls are considered privileged communications under the Constitution and cannot be considered as "the property of PLDT." He further argued that there is no kinship between telephone calls and electricity or gas, as the latter are forms of energy which are generated and consumable, and may be considered as personal property because of such characteristic. On the other hand, the movant argued, the telephone business is not a form of energy but is an activity. In its Order dated December 11, 2001, the RTC denied the movants Motion for Reconsideration. This time, it ruled that what was stolen from PLDT was its "business" because, as alleged in the Amended Information, the international long distance calls made through the facilities of PLDT formed part of its business. The RTC noted that the movant was charged with stealing the business of PLDT. To support its ruling, it cited Strochecker v. 20 Ramirez, where the Court ruled that interest in business is personal property capable of appropriation. It further declared that, through their ISR operations, the movant and his co-accused deprived PLDT of fees for international long distance calls, and that the ISR used by the movant and his co-accused was no different from the "jumper" used for stealing electricity. Laurel then filed a Petition for Certiorari with the CA, assailing the Order of the RTC. He alleged that the 21 respondent judge gravely abused his discretion in denying his Motion to Quash the Amended Information. As gleaned from the material averments of the amended information, he was charged with stealing the international long distance calls belonging to PLDT, not its business. Moreover, the RTC failed to distinguish between the business of PLDT (providing services for international long distance calls) and the revenues derived therefrom. He opined that a "business" or its revenues cannot be considered as personal property under Article 308 of the Revised Penal Code, since a "business" is "(1) a commercial or mercantile activity customarily engaged in as a means of livelihood and typically involving some independence of judgment and power of decision; (2) a commercial or industrial enterprise; and (3) refers to transactions, dealings or intercourse of any nature." On the other hand, the term "revenue" is defined as "the income that comes back from an investment (as in real or personal property); the annual or periodical rents, profits, interests, or issues of any species of real or personal 22 property." Laurel further posited that an electric companys business is the production and distribution of electricity; a gas companys business is the production and/or distribution of gas (as fuel); while a water companys business is the production and distribution of potable water. He argued that the "business" in all these cases is the commercial activity, while the goods and merchandise are the products of such activity. Thus, in prosecutions for theft of certain forms of energy, it is the electricity or gas which is alleged to be stolen and not the "business" of providing electricity or gas. However, since a telephone company does not produce any energy, goods or merchandise and merely renders a service or, in the words of PLDT, "the connection and interconnection to their telephone lines/facilities," such service cannot be the subject of theft as defined in Article 308 of the Revised 23 Penal Code. He further declared that to categorize "business" as personal property under Article 308 of the Revised Penal Code would lead to absurd consequences; in prosecutions for theft of gas, electricity or water, it would then be permissible to allege in the Information that it is the gas business, the electric business or the water business 24 which has been stolen, and no longer the merchandise produced by such enterprise. Laurel further cited the Resolution of the Secretary of Justice in Piltel v. Mendoza, where it was ruled that the Revised Penal Code, legislated as it was before present technological advances were even conceived, is not adequate to address the novel means of "stealing" airwaves or airtime. In said resolution, it was noted that the inadequacy prompted the filing of Senate Bill 2379 (sic) entitled "The Anti-Telecommunications Fraud of 1997" to deter cloning of cellular phones and other forms of communications fraud. The said bill "aims to protect in number (ESN) (sic) or Capcode, mobile identification number (MIN), electronic-international mobile equipment identity (EMEI/IMEI), or subscriber identity module" and "any attempt to duplicate the data on another cellular
25 19

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phone without the consent of a public telecommunications entity would be punishable by law." concluded, "there is no crime if there is no law punishing the crime."
27

26

Thus, Laurel

On August 30, 2002, the CA rendered judgment dismissing the petition. The appellate court ruled that a petition for certiorari under Rule 65 of the Rules of Court was not the proper remedy of the petitioner. On the merits of the petition, it held that while business is generally an activity which is abstract and intangible in form, it is nevertheless considered "property" under Article 308 of the Revised Penal Code. The CA opined that PLDTs business of providing international calls is personal property which may 28 be the object of theft, and cited United States v. Carlos to support such conclusion. The tribunal also cited 29 Strochecker v. Ramirez, where this Court ruled that one-half interest in a days business is personal property under Section 2 of Act No. 3952, otherwise known as the Bulk Sales Law. The appellate court held that the operations of the ISR are not subsumed in the charge for violation of P.D. No. 401. Laurel, now the petitioner, assails the decision of the CA, contending that THE COURT OF APPEALS ERRED IN RULING THAT THE PERSONAL PROPERTY ALLEGEDLY STOLEN PER THE INFORMATION IS NOT THE "INTERNATIONAL LONG DISTANCE CALLS" BUT THE "BUSINESS OF PLDT." THE COURT OF APPEALS ERRED IN RULING THAT THE TERM "BUSINESS" IS PERSONAL PROPERTY 30 WITHIN THE MEANING OF ART. 308 OF THE REVISED PENAL CODE. Petitioner avers that the petition for a writ of certiorari may be filed to nullify an interlocutory order of the trial court which was issued with grave abuse of discretion amounting to excess or lack of jurisdiction. In support of his petition before the Court, he reiterates the arguments in his pleadings filed before the CA. He further claims that while the right to carry on a business or an interest or participation in business is considered property under the New Civil Code, the term "business," however, is not. He asserts that the Philippine Legislature, which approved the Revised Penal Code way back in January 1, 1932, could not have contemplated to include international long distance calls and "business" as personal property under Article 308 thereof. In its comment on the petition, the Office of the Solicitor General (OSG) maintains that the amended information clearly states all the essential elements of the crime of theft. Petitioners interpretation as to whether an "international long distance call" is personal property under the law is inconsequential, as a reading of the amended information readily reveals that specific acts and circumstances were alleged charging Baynet, through its officers, including petitioner, of feloniously taking, stealing and illegally using international long distance calls belonging to respondent PLDT by conducting ISR operations, thus, "routing and completing international long distance calls using lines, cables, antenna and/or airwave frequency which connect directly to the local or domestic exchange facilities of the country where the call is destined." The OSG maintains that the international long distance calls alleged in the amended information should be construed to mean "business" of PLDT, which, 31 while abstract and intangible in form, is personal property susceptible of appropriation. The OSG avers that what was stolen by petitioner and his co-accused is the business of PLDT providing international long distance 32 calls which, though intangible, is personal property of the PLDT. For its part, respondent PLDT asserts that personal property under Article 308 of the Revised Penal Code comprehends intangible property such as electricity and gas which are valuable articles for merchandise, brought and sold like other personal property, and are capable of appropriation. It insists that the business of international calls and revenues constitute personal property because the same are valuable articles of merchandise. The respondent reiterates that international calls involve (a) the intangible telephone services that are being offered by it, that is, the connection and interconnection to the telephone network, lines or facilities; (b) the use of its telephone network, lines or facilities over a period of time; and (c) the income derived in connection 33 therewith.

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PLDT further posits that business revenues or the income derived in connection with the rendition of such services and the use of its telephone network, lines or facilities are personal properties under Article 308 of the Revised Penal Code; so is the use of said telephone services/telephone network, lines or facilities which allow electronic voice signals to pass through the same and ultimately to the called partys number. It is akin to electricity which, though intangible property, may nevertheless be appropriated and can be the object of theft. The use of respondent PLDTs telephone network, lines, or facilities over a period of time for consideration is the business that it provides to its customers, which enables the latter to send various messages to intended recipients. Such use over a period of time is akin to merchandise which has value and, therefore, can be appropriated by another. According to respondent PLDT, this is what actually happened when petitioner Laurel 34 and the other accused below conducted illegal ISR operations. The petition is meritorious. The issues for resolution are as follows: (a) whether or not the petition for certiorari is the proper remedy of the petitioner in the Court of Appeals; (b) whether or not international telephone calls using Bay Super Orient Cards through the telecommunication services provided by PLDT for such calls, or, in short, PLDTs business of providing said telecommunication services, are proper subjects of theft under Article 308 of the Revised Penal Code; and (c) whether or not the trial court committed grave abuse of discretion amounting to excess or lack of jurisdiction in denying the motion of the petitioner to quash the amended information. On the issue of whether or not the petition for certiorari instituted by the petitioner in the CA is proper, the general rule is that a petition for certiorari under Rule 65 of the Rules of Court, as amended, to nullify an order denying a motion to quash the Information is inappropriate because the aggrieved party has a remedy of appeal in the ordinary course of law. Appeal and certiorari are mutually exclusive of each other. The remedy of the aggrieved party is to continue with the case in due course and, when an unfavorable judgment is rendered, assail the order and the decision on appeal. However, if the trial court issues the order denying the motion to quash the Amended Information with grave abuse of discretion amounting to excess or lack of jurisdiction, or if such order is patently erroneous, or null and void for being contrary to the Constitution, and the remedy of appeal would not afford adequate and expeditious relief, the accused may resort to the extraordinary remedy of 35 certiorari. A special civil action for certiorari is also available where there are special circumstances clearly 36 demonstrating the inadequacy of an appeal. As this Court held in Bristol Myers Squibb (Phils.), Inc. v. Viloria: Nonetheless, the settled rule is that a writ of certiorari may be granted in cases where, despite availability of appeal after trial, there is at least a prima facie showing on the face of the petition and its annexes that: (a) the trial court issued the order with grave abuse of discretion amounting to lack of or in excess of jurisdiction; (b) appeal would not prove to be a speedy and adequate remedy; (c) where the order is a patent nullity; (d) the decision in the present case will arrest future litigations; and (e) for certain considerations such as public welfare 37 and public policy. In his petition for certiorari in the CA, petitioner averred that the trial court committed grave abuse of its discretion amounting to excess or lack of jurisdiction when it denied his motion to quash the Amended Information despite his claim that the material allegations in the Amended Information do not charge theft under Article 308 of the Revised Penal Code, or any offense for that matter. By so doing, the trial court deprived him of his constitutional right to be informed of the nature of the charge against him. He further averred that the order of the trial court is contrary to the constitution and is, thus, null and void. He insists that he should not be compelled to undergo the rigors and tribulations of a protracted trial and incur expenses to defend himself against a non-existent charge. Petitioner is correct. An information or complaint must state explicitly and directly every act or omission constituting an offense and 39 must allege facts establishing conduct that a penal statute makes criminal; and describes the property which is the subject of theft to advise the accused with reasonable certainty of the accusation he is called upon to meet at the trial and to enable him to rely on the judgment thereunder of a subsequent prosecution for the same 40 offense. It must show, on its face, that if the alleged facts are true, an offense has been committed. The rule is
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rooted on the constitutional right of the accused to be informed of the nature of the crime or cause of the accusation against him. He cannot be convicted of an offense even if proven unless it is alleged or necessarily included in the Information filed against him. As a general prerequisite, a motion to quash on the ground that the Information does not constitute the offense charged, or any offense for that matter, should be resolved on the basis of said allegations whose truth and 41 42 veracity are hypothetically committed; and on additional facts admitted or not denied by the prosecution. If the facts alleged in the Information do not constitute an offense, the complaint or information should be quashed by 43 the court. We have reviewed the Amended Information and find that, as mentioned by the petitioner, it does not contain material allegations charging the petitioner of theft of personal property under Article 308 of the Revised Penal Code. It, thus, behooved the trial court to quash the Amended Information. The Order of the trial court denying the motion of the petitioner to quash the Amended Information is a patent nullity. On the second issue, we find and so hold that the international telephone calls placed by Bay Super Orient Card holders, the telecommunication services provided by PLDT and its business of providing said services are not personal properties under Article 308 of the Revised Penal Code. The construction by the respondents of Article 308 of the said Code to include, within its coverage, the aforesaid international telephone calls, telecommunication services and business is contrary to the letter and intent of the law. The rule is that, penal laws are to be construed strictly. Such rule is founded on the tenderness of the law for the rights of individuals and on the plain principle that the power of punishment is vested in Congress, not in the 44 judicial department. It is Congress, not the Court, which is to define a crime, and ordain its punishment. Due respect for the prerogative of Congress in defining crimes/felonies constrains the Court to refrain from a broad interpretation of penal laws where a "narrow interpretation" is appropriate. The Court must take heed to language, legislative history and purpose, in order to strictly determine the wrath and breath of the conduct the 45 law forbids. However, when the congressional purpose is unclear, the court must apply the rule of lenity, that is, 46 ambiguity concerning the ambit of criminal statutes should be resolved in favor of lenity. Penal statutes may not be enlarged by implication or intent beyond the fair meaning of the language used; and may not be held to include offenses other than those which are clearly described, notwithstanding that the Court 47 may think that Congress should have made them more comprehensive. Words and phrases in a statute are to be construed according to their common meaning and accepted usage. As Chief Justice John Marshall declared, "it would be dangerous, indeed, to carry the principle that a case which is within the reason or mischief of a statute is within its provision, so far as to punish a crime not enumerated in the statute because it is 48 of equal atrocity, or of kindred character with those which are enumerated. When interpreting a criminal statute that does not explicitly reach the conduct in question, the Court should not base an expansive reading on 49 inferences from subjective and variable understanding. Article 308 of the Revised Penal Code defines theft as follows: Art. 308. Who are liable for theft. Theft is committed by any person who, with intent to gain but without violence, against or intimidation of persons nor force upon things, shall take personal property of another without the latters consent. The provision was taken from Article 530 of the Spanish Penal Code which reads: 1. Los que con nimo de lucrarse, y sin violencia o intimidacin en las personas ni fuerza en las cosas, toman 50 las cosas muebles ajenas sin la voluntad de su dueo.

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For one to be guilty of theft, the accused must have an intent to steal (animus furandi) personal property, meaning the intent to deprive another of his ownership/lawful possession of personal property which intent is apart from and concurrently with the general criminal intent which is an essential element of a felony of dolo (dolus malus). An information or complaint for simple theft must allege the following elements: (a) the taking of personal property; (b) the said property belongs to another; (c) the taking be done with intent to gain; and (d) the taking be 51 accomplished without the use of violence or intimidation of person/s or force upon things. One is apt to conclude that "personal property" standing alone, covers both tangible and intangible properties and are subject of theft under the Revised Penal Code. But the words "Personal property" under the Revised Penal Code must be considered in tandem with the word "take" in the law. The statutory definition of "taking" and movable property indicates that, clearly, not all personal properties may be the proper subjects of theft. The general rule is that, only movable properties which have physical or material existence and susceptible of 52 occupation by another are proper objects of theft. As explained by Cuelo Callon: "Cosa juridicamente es toda 53 sustancia corporal, material, susceptible de ser aprehendida que tenga un valor cualquiera." According to Cuello Callon, in the context of the Penal Code, only those movable properties which can be taken and carried from the place they are found are proper subjects of theft. Intangible properties such as rights and ideas are not subject of theft because the same cannot be "taken" from the place it is found and is occupied or appropriated. Solamente las cosas muebles y corporales pueden ser objeto de hurto. La sustraccin de cosas inmuebles y la cosas incorporales (v. gr., los derechos, las ideas) no puede integrar este delito, pues no es posible asirlas, tomarlas, para conseguir su apropiacin. El Codigo emplea la expresin "cosas mueble" en el sentido de cosa que es susceptible de ser llevada del lugar donde se encuentra, como dinero, joyas, ropas, etctera, asi que su 54 concepto no coincide por completo con el formulado por el Codigo civil (arts. 335 y 336). Thus, movable properties under Article 308 of the Revised Penal Code should be distinguished from the rights or interests to which they relate. A naked right existing merely in contemplation of law, although it may be very 55 valuable to the person who is entitled to exercise it, is not the subject of theft or larceny. Such rights or interests are intangible and cannot be "taken" by another. Thus, right to produce oil, good will or an interest in business, or the right to engage in business, credit or franchise are properties. So is the credit line represented by a credit card. However, they are not proper subjects of theft or larceny because they are without form or substance, the mere "breath" of the Congress. On the other hand, goods, wares and merchandise of businessmen and credit cards issued to them are movable properties with physical and material existence and may be taken by another; hence, proper subjects of theft. There is "taking" of personal property, and theft is consummated when the offender unlawfully acquires possession of personal property even if for a short time; or if such property is under the dominion and control of the thief. The taker, at some particular amount, must have obtained complete and absolute possession and 56 control of the property adverse to the rights of the owner or the lawful possessor thereof. It is not necessary that the property be actually carried away out of the physical possession of the lawful possessor or that he 57 should have made his escape with it. Neither asportation nor actual manual possession of property is required. 58 Constructive possession of the thief of the property is enough. The essence of the element is the taking of a thing out of the possession of the owner without his privity and 59 consent and without animus revertendi. Taking may be by the offenders own hands, by his use of innocent persons without any felonious intent, as well as any mechanical device, such as an access device or card, or any agency, animate or inanimate, with intent to gain. Intent to gain includes the unlawful taking of personal property for the purpose of deriving utility, 60 satisfaction, enjoyment and pleasure.

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We agree with the contention of the respondents that intangible properties such as electrical energy and gas are 61 proper subjects of theft. The reason for this is that, as explained by this Court in United States v. Carlos and 62 United States v. Tambunting, based on decisions of the Supreme Court of Spain and of the courts in England and the United States of America, gas or electricity are capable of appropriation by another other than the owner. 63 Gas and electrical energy may be taken, carried away and appropriated. In People v. Menagas, the Illinois State Supreme Court declared that electricity, like gas, may be seen and felt. Electricity, the same as gas, is a valuable article of merchandise, bought and sold like other personal property and is capable of appropriation by another. It is a valuable article of merchandise, bought and sold like other personal property, susceptible of being severed from a mass or larger quantity and of being transported from place to place. Electrical energy may, likewise, be taken and carried away. It is a valuable commodity, bought and sold like other personal property. It may be transported from place to place. There is nothing in the nature of gas used for illuminating purposes which renders it incapable of being feloniously taken and carried away. In People ex rel Brush Electric Illuminating Co. v. Wemple, the Court of Appeals of New York held that electric energy is manufactured and sold in determinate quantities at a fixed price, precisely as are coal, kerosene oil, and gas. It may be conveyed to the premises of the consumer, stored in cells of different capacity known as an accumulator; or it may be sent through a wire, just as gas or oil may be transported either in a close tank or forced through a pipe. Having reached the premises of the consumer, it may be used in any way he may desire, being, like illuminating gas, capable of being transformed either into heat, light, or power, at the option of the 65 purchaser. In Woods v. People, the Supreme Court of Illinois declared that there is nothing in the nature of gas used for illuminating purposes which renders it incapable of being feloniously taken and carried away. It is a valuable article of merchandise, bought and sold like other personal property, susceptible of being severed from a mass or larger quantity and of being transported from place to place. Gas and electrical energy should not be equated with business or services provided by business entrepreneurs to the public. Business does not have an exact definition. Business is referred as that which occupies the time, attention and labor of men for the purpose of livelihood or profit. It embraces everything that which a person can 66 be employed. Business may also mean employment, occupation or profession. Business is also defined as a 67 commercial activity for gain benefit or advantage. Business, like services in business, although are properties, are not proper subjects of theft under the Revised Penal Code because the same cannot be "taken" or "occupied." If it were otherwise, as claimed by the respondents, there would be no juridical difference between the taking of the business of a person or the services provided by him for gain, vis--vis, the taking of goods, 68 wares or merchandise, or equipment comprising his business. If it was its intention to include "business" as personal property under Article 308 of the Revised Penal Code, the Philippine Legislature should have spoken in language that is clear and definite: that business is personal property under Article 308 of the Revised Penal 69 Code. We agree with the contention of the petitioner that, as gleaned from the material averments of the Amended Information, he is charged of "stealing the international long distance calls belonging to PLDT" and the use thereof, through the ISR. Contrary to the claims of the OSG and respondent PLDT, the petitioner is not charged of stealing P20,370,651.95 from said respondent. Said amount of P20,370,651.95 alleged in the Amended Information is the aggregate amount of access, transmission or termination charges which the PLDT expected from the international long distance calls of the callers with the use of Baynet Super Orient Cards sold by Baynet Co. Ltd. In defining theft, under Article 308 of the Revised Penal Code, as the taking of personal property without the consent of the owner thereof, the Philippine legislature could not have contemplated the human voice which is converted into electronic impulses or electrical current which are transmitted to the party called through the PSTN of respondent PLDT and the ISR of Baynet Card Ltd. within its coverage. When the Revised Penal Code was approved, on December 8, 1930, international telephone calls and the transmission and routing of electronic voice signals or impulses emanating from said calls, through the PSTN, IPL and ISR, were still non-existent. Case law is that, where a legislative history fails to evidence congressional awareness of the scope of the statute claimed by the respondents, a narrow interpretation of the law is more consistent with the usual approach to the construction of the statute. Penal responsibility cannot be extended beyond the fair scope of the statutory 70 mandate.
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Respondent PLDT does not acquire possession, much less, ownership of the voices of the telephone callers or of the electronic voice signals or current emanating from said calls. The human voice and the electronic voice signals or current caused thereby are intangible and not susceptible of possession, occupation or appropriation by the respondent PLDT or even the petitioner, for that matter. PLDT merely transmits the electronic voice signals through its facilities and equipment. Baynet Card Ltd., through its operator, merely intercepts, reroutes the calls and passes them to its toll center. Indeed, the parties called receive the telephone calls from Japan. In this modern age of technology, telecommunications systems have become so tightly merged with computer systems that it is difficult to know where one starts and the other finishes. The telephone set is highly 71 computerized and allows computers to communicate across long distances. The instrumentality at issue in this case is not merely a telephone but a telephone inexplicably linked to a computerized communications system with the use of Baynet Cards sold by the Baynet Card Ltd. The corporation uses computers, modems and 72 software, among others, for its ISR. The conduct complained of by respondent PLDT is reminiscent of "phreaking" (a slang term for the action of making a telephone system to do something that it normally should not allow by "making the phone company bend over and grab its ankles"). A "phreaker" is one who engages in the act of manipulating phones and illegally 73 markets telephone services. Unless the phone company replaces all its hardware, phreaking would be impossible to stop. The phone companies in North America were impelled to replace all their hardware and adopted full digital switching system known as the Common Channel Inter Office Signaling. Phreaking occurred only during the 1960s and 1970s, decades after the Revised Penal Code took effect. The petitioner is not charged, under the Amended Information, for theft of telecommunication or telephone services offered by PLDT. Even if he is, the term "personal property" under Article 308 of the Revised Penal Code cannot be interpreted beyond its seams so as to include "telecommunication or telephone services" or computer services for that matter. The word "service" has a variety of meanings dependent upon the context, or the sense in which it is used; and, in some instances, it may include a sale. For instance, the sale of food by 74 restaurants is usually referred to as "service," although an actual sale is involved. It may also mean the duty or 75 labor to be rendered by one person to another; performance of labor for the benefit of another. In the case of PLDT, it is to render local and international telecommunications services and such other services as authorized by the CPCA issued by the NTC. Even at common law, neither time nor services may be taken and occupied or 76 appropriated. A service is generally not considered property and a theft of service would not, therefore, 77 constitute theft since there can be no caption or asportation. Neither is the unauthorized use of the equipment 78 and facilities of PLDT by the petitioner theft under the aforequoted provision of the Revised Penal Code. If it was the intent of the Philippine Legislature, in 1930, to include services to be the subject of theft, it should have incorporated the same in Article 308 of the Revised Penal Code. The Legislature did not. In fact, the Revised Penal Code does not even contain a definition of services. If taking of telecommunication services or the business of a person, is to be proscribed, it must be by special 79 statute or an amendment of the Revised Penal Code. Several states in the United States, such as New York, New Jersey, California and Virginia, realized that their criminal statutes did not contain any provisions penalizing the theft of services and passed laws defining and penalizing theft of telephone and computer services. The Pennsylvania Criminal Statute now penalizes theft of services, thus: (a) Acquisition of services. -(1) A person is guilty of theft if he intentionally obtains services for himself or for another which he knows are available only for compensation, by deception or threat, by altering or tampering with the public utility meter or measuring device by which such services are delivered or by causing or permitting such altering or tampering, by making or maintaining any unauthorized connection, whether physically, electrically or inductively, to a distribution or transmission line, by attaching or maintaining the attachment of any unauthorized device to any cable, wire or other component of an electric, telephone or cable television system or to a television receiving set connected to a cable television system, by making or maintaining any unauthorized modification or alteration to

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any device installed by a cable television system, or by false token or other trick or artifice to avoid payment for the service. In the State of Illinois in the United States of America, theft of labor or services or use of property is penalized: (a) A person commits theft when he obtains the temporary use of property, labor or services of another which are available only for hire, by means of threat or deception or knowing that such use is without the consent of the person providing the property, labor or services. In 1980, the drafters of the Model Penal Code in the United States of America arrived at the conclusion that labor and services, including professional services, have not been included within the traditional scope of the term "property" in ordinary theft statutes. Hence, they decided to incorporate in the Code Section 223.7, which defines and penalizes theft of services, thus: (1) A person is guilty of theft if he purposely obtains services which he knows are available only for compensation, by deception or threat, or by false token or other means to avoid payment for the service. "Services" include labor, professional service, transportation, telephone or other public service, accommodation in hotels, restaurants or elsewhere, admission to exhibitions, use of vehicles or other movable property. Where compensation for service is ordinarily paid immediately upon the rendering of such service, as in the case of hotels and restaurants, refusal to pay or absconding without payment or offer to pay gives rise to a presumption that the service was obtained by deception as to intention to pay; (2) A person commits theft if, having control over the disposition of services of others, to which he is not entitled, he knowingly diverts such services to his own benefit or to the benefit of another not entitled thereto. Interestingly, after the State Supreme Court of Virginia promulgated its decision in Lund v. 80 Commonwealth, declaring that neither time nor services may be taken and carried away and are not proper subjects of larceny, the General Assembly of Virginia enacted Code No. 18-2-98 which reads: Computer time or services or data processing services or information or data stored in connection therewith is hereby defined to be property which may be the subject of larceny under 18.2-95 or 18.2-96, or embezzlement under 18.2-111, or false pretenses under 18.2-178. In the State of Alabama, Section 13A-8-10(a)(1) of the Penal Code of Alabama of 1975 penalizes theft of services: "A person commits the crime of theft of services if: (a) He intentionally obtains services known by him to be available only for compensation by deception, threat, false token or other means to avoid payment for the services " In the Philippines, Congress has not amended the Revised Penal Code to include theft of services or theft of business as felonies. Instead, it approved a law, Republic Act No. 8484, otherwise known as the Access Devices Regulation Act of 1998, on February 11, 1998. Under the law, an access device means any card, plate, code, account number, electronic serial number, personal identification number and other telecommunication services, equipment or instrumentalities-identifier or other means of account access that can be used to obtain money, goods, services or any other thing of value or to initiate a transfer of funds other than a transfer originated solely by paper instrument. Among the prohibited acts enumerated in Section 9 of the law are the acts of obtaining money or anything of value through the use of an access device, with intent to defraud or intent to gain and fleeing thereafter; and of effecting transactions with one or more access devices issued to another person or persons to receive payment or any other thing of value. Under Section 11 of the law, conspiracy to commit access devices fraud is a crime. However, the petitioner is not charged of violation of R.A. 8484. Significantly, a prosecution under the law shall be without prejudice to any liability for violation of any provisions of the Revised Penal Code inclusive of theft under Rule 308 of the Revised Penal Code and estafa under Article 315 of the Revised Penal Code. Thus, if an individual steals a credit card and uses the same to obtain services,

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he is liable of the following: theft of the credit card under Article 308 of the Revised Penal Code; violation of Republic Act No. 8484; and estafa under Article 315(2)(a) of the Revised Penal Code with the service provider as the private complainant. The petitioner is not charged of estafa before the RTC in the Amended Information. Section 33 of Republic Act No. 8792, Electronic Commerce Act of 2000 provides: Sec. 33. Penalties. The following Acts shall be penalized by fine and/or imprisonment, as follows: a) Hacking or cracking which refers to unauthorized access into or interference in a computer system/server or information and communication system; or any access in order to corrupt, alter, steal, or destroy using a computer or other similar information and communication devices, without the knowledge and consent of the owner of the computer or information and communications system, including the introduction of computer viruses and the like, resulting on the corruption, destruction, alteration, theft or loss of electronic data messages or electronic documents shall be punished by a minimum fine of One hundred thousand pesos (P100,000.00) and a maximum commensurate to the damage incurred and a mandatory imprisonment of six (6) months to three (3) years. IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The assailed Orders of the Regional Trial Court and the Decision of the Court of Appeals are REVERSED and SET ASIDE. The Regional Trial Court is directed to issue an order granting the motion of the petitioner to quash the Amended Information. SO ORDERED. Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. NO. 147275 March 31, 2006

VICENTE ONGKEKO, Petitioner, vs. BPI EXPRESS CARD CORPORATION, Respondent. DECISION AUSTRIA-MARTINEZ, J.: Assailed in the present petition for review on certiorari are the Decision dated January 25, 2001 and Resolution 1 dated February 23, 2001, rendered by the Court of Appeals (CA) in CA-G.R. SP No. 61427. The facts that gave rise to the present case are undisputed. On September 13, 1990, Lina Lodovica (Lodovica) applied for a credit card with respondent, with Vicente Ongkeko (petitioner) acting as surety. Her application was approved and she was originally given a P3,000.00 credit limit. When Lodovicas card expired in 1991, it was renewed and her credit limit was increased to P10,000.00. As of May 12, 1996, Lodovica had an outstanding balance of P22,476.61. On May 28, 1996, respondent brought an action for sum of money against Lodovica and petitioner. Petitioner filed his Answer admitting his undertaking, but he maintained that he can only be liable for the original credit limit ofP3,000.00, and that the renewal of the credit card without his consent extinguished his undertaking.

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The Metropolitan Trial Court (MTC) of Makati, Branch 66, rendered judgment on January 31, 2000, finding petitioner liable. The dispositive portion of the Decision reads: WHEREFORE, judgment is rendered ordering defendant Ongkeko to pay plaintiff the following: 1. the amount of P22,476.61 as of May 12, 1996 plus the interest of 3% per month and 1% penalty charge per month from date of the filing of the complaint on May 28, 1996 until the account is fully paid; 2. 25% of the amount due as attorneys fees or P10,000.00 whichever is lesser; 3. cost of suit. SO ORDERED.
2

The Regional Trial Court (RTC) of Makati, Branch 135, in its Decision dated July 10, 2000 and Order dated 4 October 2, 2000, affirmed the MTC Decision. The CA also affirmed the lower courts decisions when it dismissed the petition for review filed before it. The CA, however, deleted the award of attorneys fees inasmuch as the MTC Decision does not contain any justification 5 6 for its award. The CA denied petitioners motion for reconsideration. Petitioner merely reiterated in the present petition the arguments he previously raised before the lower courts and the appellate court. Petitioner submits the following contentions: 1. Petitioner is not liable for the purchases made by Lodovica after the expiration of the original term of the credit card because he was not notified of the renewal of the credit and the increase of the credit limit; 2. The surety undertaking, being a contract of adhesion, should have been taken against Respondent; 3. Petitioner is not liable for the purchases made by Lodovica after the expiration of the original term of the credit card because the circumstances at the time he agreed to act as surety for Lodovica were no longer existing at 7 the time of the renewal. Petitioners case is not a novel one. In the analogous case of Molino v. Security Diners International 8 Corporation, the Court already had the occasion to rule that suretyship under these circumstances is a continuing one and the surety is bound by the liabilities of the principal until it has been fully paid. In the Molino case, Jeanette Molino, the petitioner, acted as a surety for her brother-in-law, Danilo Alto, in his application for a local credit card with the Security Diners International Corporation (SDIC). The card was subsequently upgraded and the credit limit increased. When Alto failed to pay his liability under the credit card, SDIC filed an action for collection against Alto and Molino. The Court summed up the issues as: whether Molino is liable as surety, and whether the upgrading of the card constituted a novation that will extinguish her obligation and undertaking, which was resolved in this wise, viz.: There is no doubt that the upgrading was a novation of the original agreement covering the first credit card issued to Danilo Alto, basically since it was committed with the intent of cancelling and replacing the said card. However, the novation did not serve to release petitioner from her surety obligations because in the Surety Undertaking she expressly waived discharge in case of change or novation in the agreement governing the use of the first credit card. The nature and extent of petitioners obligations are set out in clear and unmistakable terms in the Surety Undertaking. Thus:

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1. She bound herself jointly and severally with Danilo Alto to pay SDIC all obligations and charges in the use of the Diners Club Card, including fees, interest, attorneys fees, and costs; 2. She declared that "any change or novation in the Agreement or any extension of time granted by SECURITY DINERS to pay such obligation, charges, and fees, shall not release (her) from this Surety Undertaking"; 3. "(S)aid undertaking is a continuous one and shall subsist and bind (her) until all such obligations, charges, and fees have been fully paid and satisfied"; and 4. "The indication of a credit limit to the cardholder shall not relieve (her) of liability for charges and all other amounts voluntarily incurred by the cardholder in excess of said credit limit." We cannot give any additional meaning to the plain language of the subject undertaking. The extent of a suretys liability is determined by the language of the suretyship contract or bond itself. Article 1370 of the Civil Code provides: "If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control." This case is no different from Pacific Banking Corporation vs. IAC, supra, correctly applied by the Court of Appeals, which involved a Guarantors Undertaking (although thus denominated, it was in substance a contract of surety) signed by the husband for the credit card application of his wife. Like herein petitioner, the husband also argued that his liability should be limited to the credit limit allowed under his wifes card but the Court declared him liable to the full extent of his wifes indebtedness. x x x x x x Private respondent Roberto Regala, Jr., as surety of his wife, expressly bound himself up to the extent of the debtors (Celias) indebtedness likewise expressly waiving any "discharge in case of any change or novation of the terms and conditions in connection with the issuance of the Pacificard credit card." Roberto, in fact, made his commitment as a surety a continuing one, binding upon himself until all the liabilities of Celia Regala have been fully paid. All these were clear under the "Guarantors Undertaking" Roberto signed, thus: x x 9 x (Emphasis supplied) Petitioners undertaking in this case is similar to that of the petitioner in the Molino case and the Pacific Banking 10 Corporation case cited therein. It reads, in part: SURETY UNDERTAKING I/We, the undersigned, bind myself/ourselves, jointly and severally with ____________ and/or his/her extension card user, to pay the BPI EXPRESS CARD CORP. all the obligations, charges, and liabilities incurred under and with the use of the BPI EXPRESS CREDIT CARD or the renewals and extensions thereof, issued to said credit cardholder and/or extension user by the BPI EXPRESS CREDIT CARD in accordance with the terms, conditions, covenance and stipulations governing the issuance and use of the BPI EXPRESS CREDIT CARD set forth herewith. Notwithstanding any change or novation in the terms and conditions governing the issuance and use of the BPI EXPRESS CREDIT CARD, or any extension of time given the cardholder and/or extension user of the card to pay such obligations, charges and liabilities this undertaking shall continue to be binding upon me/us 11 until all such obligations, charges and liabilities shall have been fully paid and satisfied. (Underscoring supplied) Petitioners undertaking is clear and concise. He solidarily obliged himself to pay respondent all the liabilities incurred under the credit card account, whether under the principal, renewal, or extension card issued, regardless of the changes or novation in the terms and conditions in the issuance and use of the credit card. Petitioners liability shall be extinguished only when the obligations are fully paid and satisfied.

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Petitioner cannot seek sanctuary in his arguments considering that the terms and conditions of his undertaking are unambiguous and well defined; there is no room for any interpretation only application. Given that Lodovica reneged on her obligations covered by the credit card account, petitioner is, therefore, liable. Indeed, petitioners surety undertaking partakes the nature of a contract of adhesion, in that the stipulations were unilaterally prepared and imposed by respondent on a take-it-or-leave-it basis; however, the Court has also ruled that such a contract is "as binding as ordinary contracts, the reason being that the party who adheres to the 12 contract is free to reject it entirely." Petitioner is the employer of Lodovica. It is safe to assume that he takes great care of his affairs and he very well knows the potential consequences of his acts. He took on the responsibility freely and intelligently, and whatever liability he may have incurred in this case is one within bounds of the law. Finally, in the Molino case, the Court took time to exhort prospective sureties to exercise caution in signing surety undertakings prepared by credit card companies, and to read carefully the terms and conditions of the agreement. The Court finds the present case another opportune time to reiterate said exhortation, to wit: x x x Prospective sureties to credit card applicants would be well-advised to study carefully the terms of the agreements prepared by the credit card companies before giving their consent, and pay heed to stipulations that 13 could lead to onerous effects x x x. WHEREFORE, the petition is DENIED for lack of merit. Double costs against petitioner. SO ORDERED.

SECOND DIVISION MAGNA FINANCIAL SERVICES GROUP, INC., Petitioner, G.R. No. 158635 Present: PUNO, Chairman, AUSTRIA-MARTINEZ, CALLEJO, SR., TINGA, and CHICO-NAZARIO, JJ.

- versus -

Promulgated: ELIAS COLARINA, R e s p o n d e n t. December 9, 2005 x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION CHICO-NAZARIO, J.: The undisputed facts of this case show that on 11 June 1997, Elias Colarina bought on installment from Magna Financial Services Group, Inc., one (1) unit of Suzuki Multicab, more particularly described as follows:

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MAKE - SUZUKI MULTICAB MODEL - ER HT ENGINE NO. - 834963 FRAME NO. - LTO -067886-RO7-C [1] COLOR - WHITE

After making a down payment, Colarina executed a promissory note for the balance of P229,284.00 payable in thirty-six (36) equal monthly installments atP6,369.00 monthly, beginning 18 July 1997. To secure payment thereof, Colarina executed an integrated promissory note and deed of chattel mortgage over the motor vehicle. Colarina failed to pay the monthly amortization beginning January 1999, accumulating an unpaid balance of P131,607.00. Despite repeated demands, he failed to make the necessary payment. On 31 October 2000 [2] Magna Financial Services Group, Inc. filed a Complaint for Foreclosure of Chattel Mortgage with Replevin [3] before the Municipal Trial Court in Cities (MTCC), Branch 2, Legaspi City, docketed as Civil Case No. 4822. Upon the filing of a Replevin Bond, a Writ of Replevin was issued by the MTCC. On 27 December 2000, summons, together with a copy of the Writ of Replevin, was served on Colarina who voluntarily surrendered physical possession of the vehicle to the Sheriff, Mr. Antonio Lozano. On 02 January 2001, the aforesaid motor [4] vehicle was turned over by the sheriff to Magna Financial Services Group, Inc. On 12 July 2001, Colarina was declared in default for having filed his answer after more than six (6) months from the service of summons upon him. Thereupon, the trial court rendered judgment based on the facts alleged in the Complaint. In a decision [5] dated 23 July 2001, it held: WHEREFORE, judgment is hereby rendered in favor of plaintiff Magna Financial Services Group, Inc. and against the defendant Elias Colarina, ordering the latter: a) to pay plaintiff the principal sum of one hundred thirty one thousand six hundred seven (P131,607.00) pesos plus penalty charges at 4.5% per month computed from January, 1999 until fully paid; b) c) to pay plaintiff P10,000.00 for attorneys fees; and to pay the costs.

The foregoing money judgment shall be paid within ninety (90) days from the entry of judgment. In case of default in such payment, the one (1) unit of Suzuki Multicab, subject of the writ of replevin and chattel [6] mortgage, shall be sold at public auction to satisfy the said judgment.

Colarina appealed to the Regional Trial Court (RTC) of Legazpi City, Branch 4, where the case was docketed as Civil Case No. 10013. During the pendency of his appeal before the RTC, Colarina died and was [7] substituted in the case by his heirs. In a decision dated 30 January 2002, the RTC affirmed in toto the decision [8] of the MTCC. Colarina filed a Petition for Review before the Court of Appeals, docketed as CA-G.R. SP No. 69481. On [9] 21 January 2003, the Court of Appeals rendered its decision holding: . . . We find merit in petitioners assertion that the MTC and the RTC erred in ordering the defendant to pay the unpaid balance of the purchase price of the subject vehicle irrespective of the fact that the instant complaint was for the foreclosure of its chattel mortgage. The principal error committed by the said courts was their immediate grant, however erroneous, of relief in favor of the respondent for the payment of the unpaid balance without considering the fact that the very prayer it had sought was inconsistent with its allegation in the complaint.

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Verily, it is beyond cavil that the complaint seeks the judicial foreclosure of the chattel mortgage. The fact that the respondent had unconscionably sought the payment of the unpaid balance regardless of its complaint for the foreclosure of the said mortgage is glaring proof that it intentionally devised the same to deprive the defendant of his rights. A judgment in its favor will in effect allow it to retain the possession and ownership of the subject vehicle and at the same time claim against the defendant for the unpaid balance of its purchase price. In such a case, the respondent would luckily have its cake and eat it too. Unfortunately for the defendant, the lower courts had readily, probably unwittingly, made themselves abettors to respondents devise to the detriment of the defendant. ... WHEREFORE, finding error in the assailed decision, the instant petition is hereby GRANTED and the assailed decision is hereby REVERSED AND SET ASIDE. Let the records be remanded to the court of origin. Accordingly, the foreclosure of the chattel mortgage over the subject vehicle as prayed for by the respondent in its complaint without any right to seek the payment of the unpaid balance of the purchase price or any deficiency judgment against the petitioners pursuant to Article 1484 of the Civil Code of the Philippines, is hereby [10] ORDERED. A Motion for Reconsideration dated 11 February 2003 filed by Magna Financial Services Group, Inc., [12] was denied by the Court of Appeals in a resolution dated 22 May 2003. Hence, this Petition for Review on Certiorari based on the sole issue: WHAT IS THE TRUE NATURE OF A FORECLOSURE OF CHATTEL MORTGAGE, EXTRAJUDICIAL OR RD JUDICIAL, AS AN EXERCISE OF THE 3 OPTION UNDER ARTICLE 1484, PARAGRAPH 3 OF THE CIVIL CODE. In its Memorandum, petitioner assails the decision of the Court of Appeals and asserts that a mortgage is only an accessory obligation, the principal one being the undertaking to pay the amounts scheduled in the promissory note. To secure the payment of the note, a chattel mortgage is constituted on the thing sold. It argues that an action for foreclosure of mortgage is actually in the nature of an action for sum of money instituted to enforce the payment of the promissory note, with execution of the security. In case of an extrajudicial foreclosure of chattel mortgage, the petition must state the amount due on the obligation and the sheriff, after the sale, shall apply the proceeds to the unpaid debt. This, according to petitioner, is the true nature [13] of a foreclosure proceeding as provided under Rule 68, Section 2 of the Rules of Court. On the other hand, respondent countered that the Court of Appeals correctly set aside the trial courts decision due to the inconsistency of the remedies or reliefs sought by the petitioner in its Complaint where it prayed for the custody of the chattel mortgage and at the same time asked for the payment of the unpaid [14] balance on the motor vehicle. Article 1484 of the Civil Code explicitly provides: ART. 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies: (1) (2) Exact fulfillment of the obligation, should the vendee fail to pay; Cancel the sale, should the vendees failure to pay cover two or more installments;
[11]

(3) Foreclose the chattel mortgage or the thing sold, if one has been constituted, should the vendees failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void. Our Supreme Court in Bachrach Motor Co., Inc. v. Millan held: Undoubtedly the principal object of the above amendment (referring to Act 4122 amending Art. 1454, Civil Code of 1889) was to remedy the abuses
[15]

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committed in connection with the foreclosure of chattel mortgages. This amendment prevents mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price and then bringing the suit against the mortgagor for a deficiency judgment. The almost invariable result of this procedure was that the mortgagor found himself minus the property and still owing practically the full amount of his original indebtedness. In its Complaint, Magna Financial Services Group, Inc. made the following prayer: WHEREFORE, it is respectfully prayed that judgment render ordering defendant: 1. To pay the principal sum of P131,607.00 with penalty charges at 4.5% per month from January 1999 until paid plus liquidated damages. 2. Ordering defendant to reimburse the plaintiff for attorneys fee at 25% of the amount due plus expenses of litigation at not less than P10,000.00. 3. Ordering defendant to surrender to the plaintiff the possession of the Multicab described in paragraph 2 of the complaint. 4. Plaintiff prays for other reliefs just and equitable in the premises.

It is further prayed that pendent lite, an Order of Replevin issue commanding the Provincial Sheriff at Legazpi City or any of his deputies to take such multicab into his custody and, after judgment, upon default in the payment of the amount adjudged due to the plaintiff, to sell said chattel at public auction in accordance with the [16] chattel mortgage law. In its Memorandum before us, petitioner resolutely declared that it has opted for the remedy provided [17] under Article 1484(3) of the Civil Code, that is, toforeclose the chattel mortgage. It is, however, unmistakable from the Complaint that petitioner preferred to avail itself of the first and third remedies under Article 1484, at the same time suing for replevin. For this reason, the Court of Appeals justifiably set aside the decision of the RTC. Perusing the Complaint, the petitioner, under its prayer number 1, sought for the payment of the unpaid amortizations which is a remedy that is provided under Article 1484(1) of the Civil Code, allowing an unpaid vendee to exact fulfillment of the obligation. At the same time, petitioner prayed that Colarina be ordered to surrender possession of the vehicle so that it may ultimately be sold at public auction, which remedy is contained under Article 1484(3). Such a scheme is not only irregular but is a flagrant circumvention of the prohibition of the law. By praying for the foreclosure of the chattel, Magna Financial [18] Services Group, Inc. renounced whatever claim it may have under the promissory note. Article 1484, paragraph 3, provides that if the vendor has availed himself of the right to foreclose chattel mortgage, he shall have no further action against the purchaser to recover any unpaid balance of purchase price. Any agreement to the contrary shall be void. In other words, in all proceedings for foreclosure of chattel mortgages executed on chattels which have been sold on the installment plan, [19] mortgagee is limited to the property included in the mortgage. the the the the

Contrary to petitioners claim, a contract of chattel mortgage, which is the transaction involved in the present case, is in the nature of a conditional sale of personal property given as a security for the payment of a debt, or the performance of some other obligation specified therein, the condition being that the sale shall be [20] void upon the seller paying to the purchaser a sum of money or doing some other act named. If the condition is performed according to its terms, the mortgage and sale immediately become void, and the mortgagee is [21] thereby divested of his title. On the other hand, in case of non payment, foreclosure is one of the remedies available to a mortgagee by which he subjects the mortgaged property to the satisfaction of the obligation to secure that for which the mortgage was given. Foreclosure may be effected either judicially or extrajudicially, that is, by ordinary action or by foreclosure under power of sale contained in the mortgage. It may be effected by [22] the usual methods, including sale of goods at public auction. Extrajudicial foreclosure, as chosen by the petitioner, is attained by causing the mortgaged property to be seized by the sheriff, as agent of the mortgagee,

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and have it sold at public auction in the manner prescribed by Section 14 of Act No. 1508, or the Chattel [23] Mortgage Law. This rule governs extrajudicial foreclosure of chattel mortgage. In sum, since the petitioner has undeniably elected a remedy of foreclosure under Article 1484(3) of the Civil Code, it is bound by its election and thus may not be allowed to change what it has opted for nor to ask for more. On this point, the Court of Appeals correctly set aside the trial courts decision and instead rendered a judgment of foreclosure as prayed for by the petitioner. The next issue of consequence is whether or not there has been an actual foreclosure of the subject vehicle. In the case at bar, there is no dispute that the subject vehicle is already in the possession of the petitioner, Magna Financial Services Group, Inc. However, actual foreclosure has not been pursued, commenced or concluded by it. Where the mortgagee elects a remedy of foreclosure, the law requires the actual foreclosure of the [24] mortgaged chattel. Thus, in Manila Motor Co. v. Fernandez, our Supreme Court said that it is actual sale of the mortgaged chattel in accordance with Sec. 14 of Act No. 1508 that would bar the creditor (who chooses to [25] foreclose) from recovering any unpaid balance. And it is deemed that there has been foreclosure of the mortgage when all the proceedings of the foreclosure, including the sale of the property at public auction, have [26] been accomplished. That there should be actual foreclosure of the mortgaged vehicle was reiterated in the case of De la Cruz [27] v. Asian Consumer and Industrial Finance Corporation: It is thus clear that while ASIAN eventually succeeded in taking possession of the mortgaged vehicle, it did not pursue the foreclosure of the mortgage as shown by the fact that no auction sale of the vehicle was ever conducted. As we ruled in Filinvest Credit Corp. v. Phil. Acetylene Co., Inc. (G.R. No. 50449, 30 January 1982, 111 SCRA 421) Under the law, the delivery of possession of the mortgaged property to the mortgagee, the herein appellee, can only operate to extinguish appellants liability if the appellee had actually caused the foreclosure sale of the mortgaged property when it recovered possession thereof (Northern Motors, Inc. v. Sapinoso, 33 SCRA 356 [1970]; Universal Motors Corp. v. Dy Hian Tat, 28 SCRA 161 [1969]; Manila Motors Co., Inc. v. Fernandez, 99 Phil. 782 [1956]). Be that as it may, although no actual foreclosure as contemplated under the law has taken place in this case, since the vehicle is already in the possession of Magna Financial Services Group, Inc. and it has persistently and consistently avowed that it elects the remedy of foreclosure, the Court of Appeals, thus, ruled correctly in directing the foreclosure of the said vehicle without more. WHEREFORE, premises considered, the instant petition is DENIED for lack of merit and the decision of the Court of Appeals dated 21 January 2003 is AFFIRMED. Costs against petitioner. SO ORDERED.

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Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. L-25546 April 22, 1974 EVA ARANETA SERRA, petitioner, vs. HONORABLE JESUS S. RODRIGUEZ, Judge of the Court of First Instance of Iloilo, MANUEL LORING, JR., MILAGROS L. LORING, and THE PROVINCIAL SHERIFF OF ILOILO, respondents. Manuel O. Soriano and Associates for petitioner. E. B. Treas and C. Miraflores for respondent. MAKASIAR, J.:p Petitioner Eva Araneta Serra interposed this appeal by certiorari praying for the nullification of the order dated December 27, 1965 of the respondent Judge. It is undisputed that on September 13, 1965, private respondents-spouses Manuel Loring Jr. and Milagros L. Loring filed a complaint for the recovery of P101,000.00 against spouses Enrique Ordoez and Maria G, Ordoez based on a promissory note, docketed as Civil Case No. 6846 of the respondent Court of First Instance of Iloilo. Upon motion of said private respondents-spouses as plaintiffs in said civil case, pursuant to their prayer in their complaint, a writ of preliminary attachment was issued and on September 14, 1965, a notice of levy of said attachment was registered on TCT No. T-18847 covering the residential lot and the residential house of strong materials thereon of the Ordoez spouses. Because the value of the debtors' real estate levied upon as aforestated was insufficient to satisfy the claim, their personal properties consisting of pieces of furniture, chandeliers, silverware, electrical appliances, etc., were also attached on September 14, 1965. On September 30, 1965, debtor Maria G. Ordoez, alone by herself without the prior consent of or authority from her husband, debtor Enrique Ordoez, executed a deed of chattel mortgage over the aforementioned personal properties in favor of herein petitioner Eva Araneta Serra allegedly as security for a loan of P20,000.00 which was duly registered on October 1, 1965 (pp. 19-20, rec.) By virtue of said chattel mortgage, on November 2, 1965, about a month and two days from its execution, petitioner Serra filed a third-party claim over the attached personal assets with the respondent provincial sheriff alleging that the aforementioned enlisted properties are valued no less than P35,000.00 (Annex C, pp. 15-18, rec.). By virtue of the said third-party claim, the respondent provincial sheriff accordingly informed the Loring spouses and required them to file a bond in the amount of P22,000.00 within three days from receipt, otherwise, he will be obliged to turn over the personal properties to the third-party claimant, herein petitioner Eva Araneta Serra (Annex B, p. 27, rec.). In a motion dated November 23, 1965, private respondents Manuel Loring and Milagros L. Loring prayed for the disapproval of the third-party claim of Serra as improper and invalid on the ground that Serra has neither title to the personal assets of the debtors nor right of possession thereof within the purview of Section 13 of Rule 57 of the Revised Rules of Court; because a chattel mortgagee is not entitled to the possession of the mortgaged personal properties as the chattel mortgage is merely a security for the loan and if possession is delivered to the chattel mortgagee, the contract becomes a pledge and ceases to be a chattel mortgage (Art. 2140 of the New Civil Code of the Philippines). Sustaining the position of herein private respondents as creditors, respondent Court issued the questioned order dated December 27, 1965 directing the respondent provincial sheriff to re-attach the personal properties of the Ordoez spouses as listed in the third-party claim of herein petitioner Serra (Annex F, pp. 32-34).

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We affirm. Under Section 14 of Rule 57 of the Revised Rules of Court, a third-party claimant to a property levied upon by a writ of attachment must show that he has title thereto or right to the possession thereof. This excludes a chattel mortgagee because a chattel mortgage is merely a security for a loan and does not transfer title of the property mortgaged to the chattel mortgagee. Neither is a chattel mortgagee entitled to the possession of the property upon the execution of the chattel mortgage for otherwise the contract becomes a pledge and ceases to be a chattel mortgage (see concurring opinion of Mr. Justice Padilla in Contreras vs. Felix, 78 Phil. 570, 582). The old view that a chattel mortgage is a conditional sale and therefore transfers immediately the title to the chattel mortgagee who may thus properly file a third-party claim to a property subject matter of attachment (Contreras vs. Molina, 64 Phil. 1), has been expressly repudiated by Article 2140 of the new Civil Code, which defines a chattel mortgage, thus: ART. 2140. By chattel mortgage, personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. If the movable, instead of being recorded, is delivered to the creditor or a third person, the contract is a pledge and not a chattel mortgage. The change was deliberate according to the Code Commission, which categorically stated that the "definition of the chattel mortgage even in the Chattel Mortgage Law is inaccurate for it considers a chattel mortgage as a conditional sale. Therefore, a new definition is given in Article 2140" (Report of the Code Commission, p. 158). From the denial of a third-party claim to defeat the attachment caused to be levied by a creditor, neither an appeal nor a petition by certiorari is the proper remedy (see Santos vs. Mojica, L-19618, Feb. 18, 1964, 10 SCRA 318, 320-321; Potenciano vs. Dineros, 97 Phil. 196, 200). The remedy of petitioner would be to file a separate and independent action to determine the ownership of the attached property or to file a complaint for damages chargeable against the bond filed by the judgment creditor in favor of the provincial sheriff. Or herein petitioner could have filed a motion for intervention. However, such a motion is addressed to the wise discretion of the trial judge whose denial thereof may not be reviewed by this Court in the absence of grave abuse on his part. Moreover, the chattel mortgage executed alone by the wife, Maria G. Ordoez, is of doubtful validity since only the husband, as administrator of the conjugal assets (Art. 165, New Civil Code), has the power to dispose of the same for the benefit of the family, especially for the purposes specified in Articles 161 and 162 of the New Civil Code (Art. 171, New Civil Code). And the wife cannot bind the conjugal partnership without the husband's consent, except in cases provided by law (Art. 172, New Civil Code). There is no showing that the consent of the husband was obtained for the wife to execute the chattel mortgage or that the wife was granted special authority by the husband embodied in a public instrument to administer the conjugal assets (Art. 168, New Civil Code). Furthermore, the chattel mortgage may be rescinded on the ground that it refers to things under litigation and entered into by the defendant debtor "without the knowledge and approval of the litigants or of competent judicial authority" or that the same was executed "in fraud of creditors when the latter cannot in any other manner collect the claim from them" (pars. 3 & 4, Art. 1381, New Civil Code). It should be recalled that the personal assets were levied by virtue of the writ of preliminary attachment on September 14, 1965; while the chattel mortgage was executed on September 30, 1965 and registered only on October 1, 1965. The execution of said chattel mortgage was without the knowledge and approval of the private respondents creditors much less the court, in which case said chattel mortgage is patently rescissible under paragraph 4 of Article 1381 of the New Civil Code. As heretofore intimated, said chattel mortgage may likewise be rescinded as a fraudulent scheme to defeat the right of herein private respondents creditors under paragraph 3 of Article 1381 of the New Civil Code if it is shown that the creditor has no other remedy to completely recover his claim (Panlillo vs. Victoria, 35 Phil. 706), or because it is presumed to be fraudulent as the personal assets mortgaged had been levied upon under a writ of attachment 16 days prior to the execution of the chattel mortgage which was registered only on October 1, 1965, about 17 days after the writ of attachment (Art. 1397, New Civil Code; see Gaston vs, Hernaez, 58 Phil. 823; Gaspar vs. Dorado, et al., L-17884, Nov. 29, 1965, 15 SCRA 331).

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WHEREFORE, THE PETITION IS HEREBY DENIED AND THE ORDER DATED DECEMBER 27, 1965 IS HEREBY AFFIRMED, WITH COSTS AGAINST PETITIONER. Makalintal, C.J., Castro, Teehankee, Esguerra and Muoz Palma, JJ., concur. Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 149569 May 28, 2004

PHILIPPINE NATIONAL BANK, petitioner, vs. RBL ENTERPRISES, INC.; RAMON B. LACSON SR.; and Spouses EDWARDO and HERMINIA LEDESMA,respondents. DECISION PANGANIBAN, J.: Having released fifty percent of the loan proceeds on the basis of the signed loan and mortgage contracts, petitioner can no longer require the borrowers to secure the lessors conformity to the Mortgage Contract as a condition precedent to the release of the loan balance. The conformity of the lessor was not necessary to protect the banks interest, because respondents were unquestionably the absolute owners of the mortgaged property. Furthermore, the registration of the mortgage created a real right to the properties which, in subsequent transfers by the mortgagor, the transferees are legally bound to respect. The Case Before us is a Petition for Review under Rule 45 of the Rules of Court, seeking to set aside the August 22, 2001 2 Decision of the Court of Appeals (CA) in CA-GR CV No. 49749. The dispositive portion of the Decision reads as follows: "WHEREFORE, premises considered[,] the judgment appealed from is hereby AFFIRMED, with x x xMODIFICATION as follows: "1. The amount of actual damages and losses is reduced from P985,722.15 to merely P380,713.55 with legal interest from the date of the filing of the complaint. The interest payable on the loan is ordered reduced by using the agreed interest rate of 18% per annum in the computation[;] "2. The amount of moral damages is reduced from P100,000.00 to P50,000.00; "3. The amount of exemplary damages is reduced from P50,000.00 to P30,000.00; and "4. The award of attorneys fees is reduced from P200,000.00 to P50,000.00." The Facts The facts of the case are narrated in the assailed Decision of the CA, as follows:
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"1. On April 28, 1993, [respondents] instituted an action against [Petitioner] PNB and the Provincial Sheriff of Negros Occidental alleging among others, the following: "(a) Sometime in 1987, [respondents] opened a prawn hatchery in San Enrique, Negros Occidental, and for this purpose, leased from Nelly Bedrejo a parcel of land where the operations were conducted; "(b) In order to increase productions and improve the hatchery facilities, [respondents] applied for and was approved a loan of P2,000,000.00, by [Petitioner] PNB. To secure its payment, [respondents] executed in favor of PNB, a real estate mortgage over two (2) parcels of land, located at Bago City, Negros Occidental, covered by Transfer Certificate of Title Nos. T-13005 and T-12642 in the names of [respondents], and another real [estate] and chattel mortgage over the buildings, culture tanks and other hatchery facilities located in the leased property of Nelly Bedrejo; "(c) PNB partially released to [respondents] on several dates, the total sum of P1,000,000.00 less the advance interests, which amount [respondents] used for introducing improvements on the leased property where the hatchery business was located. "(d) During the mid-part of the construction of the improvements, PNB refused to release the balance of P1,000,000.00 allegedly because [respondents] failed to comply with the banks requirement that Nelly Bedrejo should execute an undertaking or a lessors conformity provided in Real Estate and Chattel Mortgage contract dated August 3, 1989, which states, par. 9.07. It is a condition of this mortgage that while the obligations remained unpaid, the acquisition by the lessor of the permanent improvements covered by this Real Estate Mortgage as provided for in the covering Lease Contract, shall be subject to this mortgage. For this purpose, the mortgagor hereby undertakes to secure the lessors conformity hereto. "(e) For said alleged failure of [respondents] to comply with the additional requirement and the demand of PNB to pay the released amount of P1,000,000.00, PNB foreclosed the mortgaged properties, to the detriment of [respondents]. "(f) Due to the non-release of the remaining balance of the loan applied for and approved, the productionsoperations of the business were disrupted causing losses to [respondents], and thereafter, to the closure of the business. "2. On June 29, 1990, [Petitioner] PNB filed its Answer with Counterclaim alleging that the lessors conformity was not an additional requirement but was already part of the terms and conditions contained in the Real Estate and Chattel Mortgage dated August 3, 1989, executed between [respondents] and [petitioner]; and that the release of the balance of the loan was conditioned on the compliance and submission by the [respondents] of the required lessors conformity. "3. On November 8, 1993, a writ of preliminary injunction was issued by the court a quo prohibiting PNB and the Provincial Sheriff of Negros Occidental from implementing the foreclosure proceedings including the auction sale 4 of the properties of the [respondents] subject matter of the real [estate] and chattel mortgages." The Regional Trial Court (RTC) ruled that Philippine National Bank (PNB) had breached its obligation under the Contract of Loan and should therefore be held liable for the consequential damages suffered by respondents. The trial court held that PNBs refusal to release the balance of the loan was unjustified for the following reasons: 1) the banks partial release of the loan of respondents had estopped it from requiring them to secure the lessors signature on the Real Estate and Chattel Mortgage Contract; 2) Nelly Bedrejo, the lessor, had no interest in the property and was not in any manner connected with respondents business; thus, the fulfillment of the condition was legally impossible; and 3) the interests of PNB were amply protected, as the loan had overly been secured by collaterals with a total appraised value of P3,088,000. The RTC further observed that while the loan would mature in three years, the lease contract between Bedrejo and respondents would expire in ten years. According to a provision in the Contract, upon its expiration, all

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improvements found on the leased premises would belong to the lessor. Thus, in the event of nonpayment of the loan at its maturity, PNB could still foreclose on those improvements, the subject of the chattel mortgage. Ruling of the Court of Appeals Affirming the lower court, the CA held that Nelly Bedrejo, who was not a party to the Mortgage Contract, could not be compelled to affix her signature thereto. The appellate court further ruled that the registration of the mortgage not only revealed PNBs intention to give full force and effect to the instrument but, more important, gave the mortgagee ample security against subsequent owners of the chattels. The CA, however, reduced the amount of actual damages for lack of competent proof of the lost income and the unrealized profits of RBL, as well as for the additional expenses and liabilities incurred by respondents as a result of petitioners refusal to release the balance of the loan. Moral and exemplary damages as well as attorneys fees were likewise lessened. Hence, this Petition. Issues Petitioner raises the following alleged errors for our consideration: "A. Whether or not the Court of Appeals committed serious error when it held that Petitioner PNB has no legal basis to require respondents to secure the conformity of the lessor and owner of the property where their hatchery business is being conducted notwithstanding that respondents obligated themselves in no uncertain terms to secure such conformity pursuant to par. 9.07 of the Real Estate and Chattel Mortgage and considering further that respondents authority to mortgage the lessors property and leasehold rights are annotated [on] the titles of the mortgage[d] properties. "B. Whether or not the Court of Appeals erred in holding Petitioner PNB liable for actual, moral and exemplary damages as well as attorneys fees for the non-release of the balance of the loan applied by respondents even 6 though there is no evidence that such non-release was attended by malice or bad faith." Simply put, the issues are as follows: 1) whether the non-release of the balance of the loan by PNB is justified; and 2) whether it is liable for actual, moral and exemplary damages as well as attorneys fees. The Courts Ruling The Petition is partly meritorious. First Issue: Was PNBs Non-Release of the Loan Justified? Petitioner maintains that the lessors signature in the conforme portion of the Real Estate and Chattel Mortgage Contract was a condition precedent to the release of the balance of the loan to respondents. Petitioner invokes paragraph 9.07 of the Contract as legal basis for insisting upon respondents fulfillment of the aforesaid clause.
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We are not persuaded. If the parties truly intended to suspend the release of the P1,000,000 balance of the loan until the lessors conformity to the Mortgage Contract would have been obtained, such condition should have been plainly stipulated either in that Contract or in the Credit Agreement. The tenor of the language used in paragraph. 9.07, as well as its position relative to the whole Contract, negated the supposed intention to make the release of the loan subject to the fulfillment of the clause. From a mere reading thereof, respondents could not reasonably be expected to know that it was petitioners unilateral intention to suspend the release of the P1,000,000 balance until the lessors conformity to the Mortgage Contract would have been obtained. Respondents had complied with all the requirements set forth in the recommendation and approval sheet forwarded by petitioners main office to the Bacolod branch for implementation; and the Credit Agreement had been executed thereafter. Naturally, respondents were led to believe and to expect the full release of their approved loan accommodation. This belief was bolstered by the initial release of the first P1,000,000 portion of the loan. We agree with the RTC in its ruling on this point: "x x x. In the instant case, there is a clear and categorical showing that when the parties have finally executed the contract of loan and the Real Estate and Chattel Mortgage Contract, the applicant complied with the terms and conditions imposed by defendant bank on the recommendation and approval sheet, hence, defendant bank waived its right to further require the plaintiffs other conditions not specified in the previous agreement. Should there [appear] any obscurity after such execution, the same should not favor the party who caused such obscurity. Therefore, such obscurity must be construed against the party who drew up the contract. Art. 1377 of the Civil Code applies x x x [even] with greater force [to] this type of contract where the contract is already 7 prepared by a big concern and [the] other party merely adheres to it." (Citations omitted) Conditions Precedent Conditions precedent are not favored. Unless impelled by plain and unambiguous language or by necessary implication, courts will not construe a stipulation as laden with such burden, particularly when that stipulation 8 would result in a forfeiture or in inequitable consequences. Nowhere did PNB explicitly state that the release of the second half of the loan accommodation was subject to the mortgagors procurement of the lessors conformity to the Mortgage Contract. Absent such a condition, the efficacy of the Credit Agreement stood, and petitioner was obligated to release the balance of the loan. Its refusal to do so constituted a breach of its reciprocal obligation under the Loan Agreement. Flimsy was the insistence of petitioner that the lessor should be compelled to sign the Mortgage Contract, since she was allegedly a beneficiary thereof. The chattel mortgage was a mere accessory to the contract of loan executed between PNB and RBL. The latter was undisputably the absolute owner of the properties covered by the chattel mortgage. Clearly, the lessor was never a party to either the loan or the Mortgage Contract. The Real Nature of a Mortgage The records show that all the real estate and chattel mortgages were registered with the Register of Deeds of Bago City, Negros Occidental, and annotated at the back of the mortgaged titles. Thus, petitioner had ample security to protect its interest. As correctly held by the appellate court, the lessors nonconformity to the Mortgage Contract would not cause petitioner any undue prejudice or disadvantage, because the registration and the annotation were considered sufficient notice to third parties that the property was subject to an 9 encumbrance. Article 2126 of the Civil Code describes the real nature of a mortgage: it is a real right following the property, such that in subsequent transfers by the mortgagor, the transferee must respect the mortgage. A registered 10 mortgage lien is considered inseparable from the property inasmuch as it is a right in rem. The mortgage

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creates a real right or a lien which, after being recorded, follows the chattel wherever it goes. Under Article 2129 of the same Code, the mortgage on the property may still be foreclosed despite the transfer. Indeed, even if the mortgaged property is in the possession of the debtor, the creditor is still protected. To protect the latter from the formers possible disposal of the property, the chattel mortgage is made effective against third persons by the process of registration. PNB violated the Loan Agreement when it refused to release the P1,000,000 balance. As regards the partial release of that amount, over which respondents executed three Promissory Notes, the bank is deemed to have complied with its reciprocal obligation. The Promissory Notes compelled them to pay that initial amount when it fell due. Their failure to pay any overdue amortizations under those Promissory Notes rendered them liable thereunder. Effect of Failure of Consideration Since PNB failed to release the P1,000,000 balance of the loan, the Real Estate and Chattel Mortgage Contract became unenforceable to that extent. Relevantly, we quote this Courts ruling in Central Bank of the Philippines 11 v. Court of Appeals: "The consideration of the accessory contract of real estate mortgage is the same as that of the principal contract. For the debtor, the consideration of his obligation to pay is the existence of a debt. Thus, in the accessory contract of real estate mortgage, the consideration of the debtor in furnishing the mortgage is the existence of a valid, voidable, or unenforceable debt. xxx xxx xxx

"[W]hen there is partial failure of consideration, the mortgage becomes unenforceable to the extent of such failure. Where the indebtedness actually owing to the holder of the mortgage is less than the sum named in the 12 mortgage, the mortgage cannot be enforced for more than the actual sum due." Second Issue: Propriety of Award for Damages and Attorneys Fees In reducing the award for actual damages from P985,722.15 to P380,713.55, the CA explained: "The alleged projected cash flow and net income for the 5-year period of operations were not substantiated by any other evidence to sufficiently establish the attainability of the projection. No evidence was also introduced to show the accounts payable of and other expenses incurred by [respondents]. The court a quo therefore, erred when it ruled that [respondents] incurred actual damages and losses amounting toP985,722.15 from 1990 to 1992, when no evidence was presented to establish the same. "Compensatory or actual damages cannot be presumed. They cannot be allowed if there are no specific facts, which should be a basis for measuring the amount. The trial court cannot rely on speculation as to the fact and amount of damages, but must depend on actual proof that damage had been suffered. The amount of loss must not only be capable of proof but must actually be proven with reasonable degree of certainty, premised upon competent proof or best evidence to support his claim for actual damages. "At most, the court a quo may declare as lost income and unrealized profits, the amount of P380,713.55 for the 3-year period of business operations from 1990 when PNB refused to release the loans until closure of business in 1992, based on the highest quarterly taxable income earned in 1989 in the amount ofP28,754.80, with a conservative and reasonable increase of 10% per year on the net income. The amount of actual damages is 13 therefore, reduced from P985,722.15 to P380,713.55 x x x."

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We see no reason to overturn these findings. True, indemnification for damages comprises not only the loss that was actually suffered, but also the profits -- referred to as compensatory damages -- that the obligee failed to obtain. To justify a grant of actual or compensatory damages, however, it would be necessary to prove the amount of loss with a reasonable degree of certainty, based upon competent proof and the best evidence 14 obtainable by the injured party. The quarterly income tax report of Respondent RBL Enterprises, Inc., which was presented by petitioner and used by the appellate court as basis for computing the average profits earned by respondents in their business, provided a reasonable means for ascertaining their claims for lost profits. Thus, we believe that the assessment by the Court of Appeals was fair and just. On the other hand, the award for moral and exemplary damages should be deleted, because respondents failed to prove malice or bad faith on the part of petitioner. Moral damages are explicitly authorized in breaches of contract when the defendant has acted fraudulently or in 15 bad faith. Concededly, the bank was remiss in its obligation to release the balance of the loan extended to respondents. Nothing in the findings of the trial and the appellate courts, however, sufficiently indicate a deliberate intent on the part of PNB to cause harm to respondents. Exemplary damages, in turn, are intended to serve as an example or a correction for the public good. Courts may award them if the defendant is found to have acted in a wanton, fraudulent, reckless, oppressive, or 16 malevolent manner. Given the above premises and the circumstances here obtaining, the exemplary damages granted by the courts a quo cannot be sustained. Finally, the award of attorneys fees as part of the damages is just and equitable under the 17 circumstances. Such fees may be awarded when parties are compelled to litigate or to incur expenses to 18 protect their interest by reason of an unjustified act of the opposing party. In the present case, petitioners refusal to release the balance of the loan has compelled respondents to institute an action for injunction and damages in order to protect their clear rights and interests. WHEREFORE, the Petition is PARTLY GRANTED. The assailed Decision is hereby AFFIRMED, with theMODIFICATION that the award of actual and exemplary damages is deleted. No costs. SO ORDERED. Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. L-68010 May 30, 1986 FILIPINAS MABLE CORPORATION, petitioner, vs. THE HONORABLE INTERMEDIATE APPELLATE COURT, THE HONORABLE CANDIDO VILLANUEVA, Presiding Judge of Br. 144, RTC, Makati, DEVELOPMENT BANK OF THE PHILIPPINES (DBP), BANCOM SYSTEMS CONTROL, INC. (Bancom), DON FERRY, CASIMERO TANEDO, EUGENIO PALILEO, ALVARO TORIO, JOSE T. PARDO, ROLANDO ATIENZA, SIMON A. MENDOZA, Sheriff NORVELL R. LIM, respondents. Vicente Millora for petitioner. Jesus A. Avencena and Bonifacio M. Abad for respondents.

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GUTIERREZ, JR., J.: This petition for review seeks to annul the decision and resolution of the appellate court which upheld the trial court's decision denying the petitioner's prayer to enjoin the respondent from foreclosing on its properties. On January 19, 1983, petitioner Filipinas Marble Corporation filed an action for nullification of deeds and damages with prayer for a restraining order and a writ of preliminary injunction against the private respondents. In its complaint, the petitioner alleged in substance that it applied for a loan in the amount of $5,000,000.00 with respondent Development Bank of the Philippines (DBP) in its desire to develop the fun potentials of its mining claims and deposits; that DBP granted the loan subject, however, to sixty onerous conditions, among which are: (a) petitioner shall have to enter into a management contract with respondent Bancom Systems Control, Inc. [Bancom]; (b) DBP shall be represented by no less than six (6) regular directors, three (3) to be nominated by Bancom and three (3) by DBP, in Filipinos Marble's board, one of whom shall continue to be the chairman of the board; (c) the key officers/executives [the President and the officers for finance, marketing and purchasing] to be chosen by Bancom for the corporation shall be appointed only with DBP's prior approval and all these officers are to be made directly responsible to DBP; DBP shall immediately designate Mr. Alvaro Torio, Assistant Manager of DBP's Accounting Department as DBP's Comptroller in the firm whose compensation shall be borne by Filipinas Marble; and (d) the $5 Million loan shall be secured by: 1) a final mortgage on the following assets with a total approved value of P48,630,756.00 ... ; 2) the joint and several signatures with Filipinas Marble of Mr. Pelagio M. Villegas, Sr., Trinidad Villegas, and Jose E. Montelibano and 3) assignment to DBP of the borrower firm's right over its mining claims; that pursuant to these above- mentioned and other "take it or leave it" conditions, the petitioner entered into a management contract with Bancom whereby the latter agreed to manage the plaintiff company for a period of three years; that under the management agreement, the affairs of the petitioner were placed under the complete control of DBP and Bancom including the disposition and disbursement of the $5,000,000 or P37,600,000 loan; that the respondents and their directors/officers mismanaged and misspent the loan, after which Bancom resigned with the approval of DBP even before the expiration date of the management contract, leaving petitioner desolate and devastated; that among the acts and omissions of the respondents are the following. (a) failure to purchase all the necessary machinery and equipment needed by the petitioner's project for which the approved loan was intended; (b) failure to construct a processing plant; (c) abandonment of imported machinery and equipment at the pier, (d) purchase of unsuitable lot for the processing plant at Binan; (e) failure to develop even a square meter of the quarries in Romblon or Cebu; and (f) nearly causing the loss of petitioner's rights over its Cebu claims; and that instead of helping petitioner get back on its feet, DBP completely abandoned the petitioner's project and proceeded to foreclose the properties mortgaged to it by petitioner without previous demand or notice. In essence, the petitioner in its complaint seeks the annulment of the deeds of mortgage and deed of assignment which it executed in favor of DBP in order to secure the $5,000,000.00 loan because it is petitioner's contention that there was no loan at all to secure since what DBP "lent" to petitioner with its right hand, it also got back with its left hand; and that, there was failure of consideration with regard to the execution of said deeds as the loan was never delivered to the petitioner. The petitioner further prayed that pending the trial on the merits of the case, the trial court immediately issue a restraining order and then a writ of preliminary injunction against the sheriffs to enjoin the latter from proceeding with the foreclosure and sale of the petitioner's properties in Metro Manila and in Romblon. Respondent DBP opposed the issuance of a writ of preliminary injunction stating that under Presidential Decree No. 385, DBP's right to foreclose is mandatory as the arrearages of petitioner had already amounted to P123,801,265.82 as against its total obligation of P151,957,641.72; that under the same decree, no court can issue any restraining order or injunction against it to stop the foreclosure since Filipinas Marble's arrearages had already reached at least twenty percent of its total obligations; that the alleged non-receipt of the loan proceeds by the petitioner could, at best, be accepted only in a technical sense because the money was received by the officers of the petitioner acting in such capacity and, therefore, irrespective of whoever is responsible for placing them in their positions, their receipt of the money was receipt by the petitioner corporation and that the complaint does not raise any substantial controversy as to the amount due under the mortgage as the issues raised therein refer to the propriety of the manner by which the proceeds of the loan were expended by the petitioner's

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management, the allegedly precipitate manner with which DBP proceeded with the foreclosure, and the capacity of the DBP to be an assignee of the mining lease rights. After a hearing on the preliminary injunction, the trial court issued an order stating: The Court has carefully gone over the evidence presented by both parties, and while it sympathizes with the plight of the plaintiff and of the pitiful condition it now has found itself, it cannot but adhere to the mandatory provisions of P.D. 385. While the evidence so far presented by the plaintiff corporation appears to be persuasive, the same may be considered material and relevant to the case. Hence, despite the impressive testimony of the plaintiff's witnesses, the Court believes that it cannot enjoin the defendant Development Bank of the Philippines from complying with the mandatory provisions of the said Presidential Decree. It having been shown that plaintiff's outstanding obligation as of December 31, 1982 amounted to P151,957,641.72 and with arrearages reaching up to 81 % against said total obligation, the Court finds the provisions of P.D. 385 applicable to the instant case. It is a settled rule that when the statute is clear and unambiguous, there is no room for interpretation, and all that it has to do is to apply the same. On appeal, the Intermediate Appellate Court upheld the trial court's decision and held: While petitioner concedes 'that Presidential Decree No. 385 applies only where it is clear that there was a loan or where the loan is not denied' (p. 14-petition), it disclaims receipt of the $5 million loan nor benefits derived therefrom and bewails the onerous conditions imposed by DBP Resolution No. 385 dated December 7, 1977, which allegedly placed the petitioner under the complete control of the private respondents DBP and Bancom Systems Control Inc. (Bancom, for short). The plausibility of petitioner's statement that it did Dot receive the $5 million loan is more apparent than real. At the hearing for injunction before the counsel for DBP stressed that $2,625,316.83 of the $5 million loan was earmarked to finance the acquisition of machinery, equipment and spare parts for petitioner's Diamond gangsaw which machineries were actually imported by petitioner Filipinas Marble Corporation and arrived in the Philippines. Indeed, a summary of releases to petitioner covering the period June 1978 to October 1979 (Exh. 2, Injunction) showed disbursements amounting to millions of pesos for working capital and opening of letter of credits for the acquisition of its machineries and equipment. Petitioner does not dispute that releases were made for the purchase of machineries and equipment but claims that such imported machineries were left to the mercy of the elements as they were never delivered to it. xxxxxxxxx Apart from the foregoing, petitioner is patently not entitled to a writ of preliminary injunction for it has not demonstrated that at least 20% of its outstanding arrearages has been paid after the foreclosure proceedings were initiated. Nowhere in the record is it shown or alleged that petitioner has paid in order that it may fall within the exception prescribed on Section 2, Presidential Decree No. 385. Dissatisfied with the appellate court's decision, the petitioner filed this instant petition with the following assignments of errors: 1. There being 'persuasive' evidence that the $5 million proceeds of the loan were not received and did not benefit the petitioner per finding of the lower court which should not be disturbed unless there is grave abuse of discretion, it must follow that PD 385 does not and cannot apply; 2. If there was no valid loan contract for failure of consideration, the mortgage cannot exist or stand by itself being a mere accessory contract. Additionally, the chattel mortgage has not been registered. Therefore, the same is null and void under Article 2125 of the New Civil Code; and 3. PD 385 is unconstitutional as a 'class legislation', and violative of the due process clause.

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With regard to the first assignment of error, the petitioner maintains that since the trial court found "persuasive evidence" that there might have been a failure of consideration on the contract of loan due to the manner in which the amount of $5 million was spent, said court committed grave abuse of discretion in holding that it had no recourse but to apply P.D. 385 because the application of this decree requires the existence of a valid loan which, however, is not present in petitioner's case. It likewise faults the appellate court for upholding the applicability of the said decree. Sections 1 and 2 of P.D. No. 385 respectively provide: Section 1. It shall be mandatory for government financial institutions after the lapse of sixty (60) days from the issuance of this Decree, to foreclose the collaterals and/or securities for any loan, credit accommodation, and/or guarantees granted by them whenever the arrearages on such account, including accrued interest and other charges, amount to at least twenty (20%) of the total outstanding obligations, including interest and other charges, as appearing in the book of accounts and/or related records of the financial institution concerned. This shall be without prejudice to the exercise by the government financial institution of such rights and/or remedies available to them under their respective contracts with their debtors, including the right to foreclose on loans, credits, accommodations, and/or guarantees on which the arrearages are less than twenty percent (20%). Section 2. No restraining order, temporary or permanent injunction shall be issued by the court against any government financial institution in any action taken by such institution in compliance with the mandatory foreclosure provided in Section 1 hereof, whether such restraining order, temporary or permanent injunction is sought by the borrower(s) or any third party or parties, except after due hearing in which it is established by the borrower, and admitted by the government financial institution concerned that twenty percent (20%) of the outstanding arrearages has been paid after the filing of foreclosure proceedings. Presidential Decree No. 385 was issued primarily to see to it that government financial institutions are not denied substantial cash inflows, which are necessary to finance development projects all over the country, by large borrowers who, when they become delinquent, resort to court actions in order to prevent or delay the government's collection of their debts and loans. The government, however, is bound by basic principles of fairness and decency under the due process clause of the Bill of Rights. P.D. 385 was never meant to protect officials of government lending institutions who take over the management of a borrower corporation, lead that corporation to bankruptcy through mismanagement or misappropriation of its funds, and who, after ruining it, use the mandatory provisions of the decree to avoid the consequences of their misdeeds. The designated officers of the government financing institution cannot simply walk away and then state that since the loans were obtained in the corporation's name, then P.D. 385 must be peremptorily applied and that there is no way the borrower corporation can prevent the automatic foreclosure of the mortgage on its properties once the arrearages reach twenty percent (20%) of the total obligation no matter who was responsible. In the case at bar, the respondents try to impress upon this Court that the $5,000,000.00 loan was actually granted and released to the petitioner corporation and whatever the composition of the management which received the loan is of no moment because this management was acting in behalf of the corporation. The respondents also argue that since the loan was extended to the corporation, the releases had to be made to the then officers of that borrower corporation. Precisely, what the petitioner is trying to point out is that the DBP and Bancom people who managed Filipinas Marble misspent the proceeds of the loan by taking advantage of the positions that they were occupying in the corporation which resulted in the latter's devastation instead of its rehabilitation. The petitioner does not question the authority under which the loan was delivered but stresses that it is precisely this authority which enabled the DBP and Bancom people to misspend and misappropriate the proceeds of the loan thereby defeating its very purpose, that is, to develop the projects of the corporation. Therefore, it is as if the loan was never delivered to it

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and thus, there was failure on the part of the respondent DBP to deliver the consideration for which the mortgage and the assignment of deed were executed. We cannot, at this point, conclude that respondent DBP together with the Bancom people actually misappropriated and misspent the $5 million loan in whole or in part although the trial court found that there is "persuasive" evidence that such acts were committed by the respondent. This matter should rightfully be litigated below in the main action. Pending the outcome of such litigation, P.D. 385 cannot automatically be applied for if it is really proven that respondent DBP is responsible for the misappropriation of the loan, even if only in part, then the foreclosure of the petitioner's properties under the provisions of P.D. 385 to satisfy the whole amount of the loan would be a gross mistake. It would unduly prejudice the petitioner, its employees and their families. Only after trial on the merits of the main case can the true amount of the loan which was applied wisely or not, for the benefit of the petitioner be determined. Consequently, the extent of the loan where there was no failure of consideration and which may be properly satisfied by foreclosure proceedings under P.D. 385 will have to await the presentation of evidence in a trial on the merits. As we have ruled in the case of Central Bank of the Philippines vs. Court of Appeals, (1 39 SCRA 46, 5253; 56): When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on April 28, 1965, they undertook reciprocal obligations, the obligation or promise of each party is the consideration for that of the othe. (Penacio vs. Ruaya, 110 SCRA 46 [1981]; ... xxxxxxxxx The fact that when Sulpicio M. Tolentino executed his real estate mortgage, no consideration was then in existence, as there was no debt yet because Island Savings Bank had not made any release on the loan, does not make the real estate mortgage void for lack of consideration. It is not necessary that any consideration should pass at the time of the execution of the contract of real mortgage (Bonnevie vs. Court of Appeals, 125 SCRA 122 [1983]. It may either be a prior or subsequent matter. But when the consideration is subsequent to the mortgage, the mortgage can take effect only when the debt secured by it is created as a binding contract to pay (Parks vs. Sherman, Vol. 2, pp. 5-6). And, when there is partial failure of consideration, the mortgage becomes unenforceable to the extent of such failure (Dow, et al. vs. Poore Vol. 172 N.E. p. 82, cited in Vol. 59, 1974 ed. C.J.S. p. 138). ... Under the admitted circumstances of this petition, we, therefore, hold that until the trial on the merits of the main case, P.D. 385 cannot be applied and thus, this Court can restrain the respondents from foreclosing on petitioner's properties pending such litigation. The respondents, in addition, assert that even if the $5 million loan were not existing, the mortgage on the properties sought to be foreclosed was made to secure previous loans of the petitioner with respondent and therefore, the foreclosure is still justified. This contention is untenable. Two of the conditions imposed by respondent DBP for the release of the $5 million loan embodied in its letter to petitioner dated December 21, 1977 state: A. The interim loan of $289,917.32 plus interest due thereon which was used for the importation of one Savage Diamond Gangsaw shall be liquidated out of the proceeds of this $5 million loan. In addition, FMC shall also pay DBP, out of the proceeds of above foreign currency loan, the past due amounts on obligation with DBP. xxxxxxxxx B. Conversion into preferred shares of P 2 million of FMCs total obligations with DBP as of the date the legal documents for this refinancing shall have been exempted or not later than 90 days from date of advice of approval of this accommodation.

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The above conditions lend credence to the petitioner's contention that the "original loan had been converted into 'equity shares', or preferred shares; therefore, to all intents and purposes, the only 'loan' which is the subject of the foreclosure proceedings is the $5 million loan in 1978. " As regards the second assignment of error, we agree with the petitioner that a mortgage is a mere accessory contract and, thus, its validity would depend on the validity of the loan secured by it. We, however, reject the petitioner's argument that since the chattel mortgage involved was not registered, the same is null and void. Article 2125 of the Civil Code clearly provides that the non-registration of the mortgage does not affect the immediate parties. It states: Art. 2125. In addition to the requisites stated in article 2085, it is indispensable, in order that a mortgage may be validly constituted that the document in which it appears be recorded in the Registry of Property. If the instrument is not recorded, the mortgage is nevertheless binding between the parties. xxxxxxxxx The petitioner cannot invoke the above provision to nullify the chattel mortgage it executed in favor of respondent DBP. We find no need to pass upon the constitutional issue raised in the third assignment of error. We follow the rule started in Alger Electric, Inc. vs. Court of Appeals, (135 SCRA 37, 45). We see no necessity of passing upon the constitutional issues raised by respondent Northern. This Court does not decide questions of a constitutional nature unless absolutely necessary to a decision of a case. If there exists some other grounds of construction, we decide the case on a non- constitutional determination. (See Burton vs. United States, 196 U.S. 283; Siler vs. Luisville & Nashville R. Co., 123 U.S. 175; Berta College vs. Kentucky, 211 U.S. 45). WHEREFORE, IN VIEW OF THE FOREGOING, the petition is GRANTED. The orders of the Intermediate Appellate Court dated April 17, 1984 and July 3, 1984 are hereby ANNULLED and SET ASIDE. The trial court is ordered to proceed with the trial on the merits of the main case. In the meantime, the temporary restraining order issued by this Court on July 23, 1984 shall remain in force until the merits of the main case are resolved. SO ORDERED. Feria (Chairman), Fernan, Alampay and Paras, JJ., concur. Republic of the Philippines SUPREME COURT Manila THIRD DIVISION G.R. No. 92989 July 8, 1991 PERFECTO DY, JR. petitioner, vs. COURT OF APPEALS, GELAC TRADING INC., and ANTONIO V. GONZALES, respondents. Zosa & Quijano Law Offices for petitioner. Expedito P. Bugarin for respondent GELAC Trading, Inc.

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GUTIERREZ, JR., J.:p This is a petition for review on certiorari seeking the reversal of the March 23, 1990 decision of the Court of Appeals which ruled that the petitioner's purchase of a farm tractor was not validly consummated and ordered a complaint for its recovery dismissed. The facts as established by the records are as follows: The petitioner, Perfecto Dy and Wilfredo Dy are brothers. Sometime in 1979, Wilfredo Dy purchased a truck and a farm tractor through financing extended by Libra Finance and Investment Corporation (Libra). Both truck and tractor were mortgaged to Libra as security for the loan. The petitioner wanted to buy the tractor from his brother so on August 20, 1979, he wrote a letter to Libra requesting that he be allowed to purchase from Wilfredo Dy the said tractor and assume the mortgage debt of the latter. In a letter dated August 27, 1979, Libra thru its manager, Cipriano Ares approved the petitioner's request. Thus, on September 4, 1979, Wilfredo Dy executed a deed of absolute sale in favor of the petitioner over the tractor in question. At this time, the subject tractor was in the possession of Libra Finance due to Wilfredo Dy's failure to pay the amortizations. Despite the offer of full payment by the petitioner to Libra for the tractor, the immediate release could not be effected because Wilfredo Dy had obtained financing not only for said tractor but also for a truck and Libra insisted on full payment for both. The petitioner was able to convince his sister, Carol Dy-Seno, to purchase the truck so that full payment could be made for both. On November 22, 1979, a PNB check was issued in the amount of P22,000.00 in favor of Libra, thus settling in full the indebtedness of Wilfredo Dy with the financing firm. Payment having been effected through an out-of-town check, Libra insisted that it be cleared first before Libra could release the chattels in question. Meanwhile, Civil Case No. R-16646 entitled "Gelac Trading, Inc. v. Wilfredo Dy", a collection case to recover the sum of P12,269.80 was pending in another court in Cebu. On the strength of an alias writ of execution issued on December 27, 1979, the provincial sheriff was able to seize and levy on the tractor which was in the premises of Libra in Carmen, Cebu. The tractor was subsequently sold at public auction where Gelac Trading was the lone bidder. Later, Gelac sold the tractor to one of its stockholders, Antonio Gonzales. It was only when the check was cleared on January 17, 1980 that the petitioner learned about GELAC having already taken custody of the subject tractor. Consequently, the petitioner filed an action to recover the subject tractor against GELAC Trading with the Regional Trial Court of Cebu City. On April 8, 1988, the RTC rendered judgment in favor of the petitioner. The dispositive portion of the decision reads as follows: WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant, pronouncing that the plaintiff is the owner of the tractor, subject matter of this case, and directing the defendants Gelac Trading Corporation and Antonio Gonzales to return the same to the plaintiff herein; directing the defendants jointly and

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severally to pay to the plaintiff the amount of P1,541.00 as expenses for hiring a tractor; P50,000 for moral damages; P50,000 for exemplary damages; and to pay the cost. (Rollo, pp. 35-36) On appeal, the Court of Appeals reversed the decision of the RTC and dismissed the complaint with costs against the petitioner. The Court of Appeals held that the tractor in question still belonged to Wilfredo Dy when it was seized and levied by the sheriff by virtue of the alias writ of execution issued in Civil Case No. R-16646. The petitioner now comes to the Court raising the following questions: A. WHETHER OR NOT THE HONORABLE COURT OF APPEALS MISAPPREHENDED THE FACTS AND ERRED IN NOT AFFIRMING THE TRIAL COURT'S FINDING THAT OWNERSHIP OF THE FARM TRACTOR HAD ALREADY PASSED TO HEREIN PETITIONER WHEN SAID TRACTOR WAS LEVIED ON BY THE SHERIFF PURSUANT TO AN ALIAS WRIT OF EXECUTION ISSUED IN ANOTHER CASE IN FAVOR OF RESPONDENT GELAC TRADING INC. B. WHETHER OR NOT THE HONORABLE COURT OF APPEALS EMBARKED ON MERE CONJECTURE AND SURMISE IN HOLDING THAT THE SALE OF THE AFORESAID TRACTOR TO PETITIONER WAS DONE IN FRAUD OF WILFREDO DY'S CREDITORS, THERE BEING NO EVIDENCE OF SUCH FRAUD AS FOUND BY THE TRIAL COURT. C. WHETHER OR NOT THE HONORABLE COURT OF APPEALS MISAPPREHENDED THE FACTS AND ERRED IN NOT SUSTAINING THE FINDING OF THE TRIAL COURT THAT THE SALE OF THE TRACTOR BY RESPONDENT GELAC TRADING TO ITS CO-RESPONDENT ANTONIO V. GONZALES ON AUGUST 2, 1980 AT WHICH TIME BOTH RESPONDENTS ALREADY KNEW OF THE FILING OF THE INSTANT CASE WAS VIOLATIVE OF THE HUMAN RELATIONS PROVISIONS OF THE CIVIL CODE AND RENDERED THEM LIABLE FOR THE MORAL AND EXEMPLARY DAMAGES SLAPPED AGAINST THEM BY THE TRIAL COURT. (Rollo, p. 13) The respondents claim that at the time of the execution of the deed of sale, no constructive delivery was effected since the consummation of the sale depended upon the clearance and encashment of the check which was issued in payment of the subject tractor. In the case of Servicewide Specialists Inc. v. Intermediate Appellate Court. (174 SCRA 80 [1989]), we stated that: xxx xxx xxx The rule is settled that the chattel mortgagor continues to be the owner of the property, and therefore, has the power to alienate the same; however, he is obliged under pain of penal liability, to secure the written consent of the mortgagee. (Francisco, Vicente, Jr., Revised Rules of Court in the Philippines, (1972), Volume IV-B Part 1, p. 525). Thus, the instruments of mortgage are binding, while they subsist, not only upon the parties executing them but also upon those who later, by purchase or otherwise, acquire the properties referred to therein. The absence of the written consent of the mortgagee to the sale of the mortgaged property in favor of a third person, therefore, affects not the validity of the sale but only the penal liability of the mortgagor under the Revised Penal Code and the binding effect of such sale on the mortgagee under the Deed of Chattel Mortgage.

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xxx xxx xxx The mortgagor who gave the property as security under a chattel mortgage did not part with the ownership over the same. He had the right to sell it although he was under the obligation to secure the written consent of the mortgagee or he lays himself open to criminal prosecution under the provision of Article 319 par. 2 of the Revised Penal Code. And even if no consent was obtained from the mortgagee, the validity of the sale would still not be affected. Thus, we see no reason why Wilfredo Dy, as the chattel mortgagor can not sell the subject tractor. There is no dispute that the consent of Libra Finance was obtained in the instant case. In a letter dated August 27, 1979, Libra allowed the petitioner to purchase the tractor and assume the mortgage debt of his brother. The sale between the brothers was therefore valid and binding as between them and to the mortgagee, as well. Article 1496 of the Civil Code states that the ownership of the thing sold is acquired by the vendee from the moment it is delivered to him in any of the ways specified in Articles 1497 to 1501 or in any other manner signing an agreement that the possession is transferred from the vendor to the vendee. We agree with the petitioner that Articles 1498 and 1499 are applicable in the case at bar. Article 1498 states: Art. 1498. When the sale is made through a public instrument, the execution thereof shall be equivalent to the delivery of the thing which is the object of the contract, if from the deed the contrary does not appear or cannot clearly be inferred. xxx xxx xxx Article 1499 provides: Article 1499. The delivery of movable property may likewise be made by the mere consent or agreement of the contracting parties, if the thing sold cannot be transferred to the possession of the vendee at the time of the sale, or if the latter already had it in his possession for any other reason. (1463a) In the instant case, actual delivery of the subject tractor could not be made. However, there was constructive delivery already upon the execution of the public instrument pursuant to Article 1498 and upon the consent or agreement of the parties when the thing sold cannot be immediately transferred to the possession of the vendee. (Art. 1499) The respondent court avers that the vendor must first have control and possession of the thing before he could transfer ownership by constructive delivery. Here, it was Libra Finance which was in possession of the subject tractor due to Wilfredo's failure to pay the amortization as a preliminary step to foreclosure. As mortgagee, he has the right of foreclosure upon default by the mortgagor in the performance of the conditions mentioned in the contract of mortgage. The law implies that the mortgagee is entitled to possess the mortgaged property because possession is necessary in order to enable him to have the property sold. While it is true that Wilfredo Dy was not in actual possession and control of the subject tractor, his right of ownership was not divested from him upon his default. Neither could it be said that Libra was the owner of the subject tractor because the mortgagee can not become the owner of or convert and appropriate to himself the property mortgaged. (Article 2088, Civil Code) Said property continues to belong to the mortgagor. The only remedy given to the mortgagee is to have said property sold at public auction and the proceeds of the sale applied to the payment of the obligation secured by the mortgagee. (See Martinez v. PNB, 93 Phil. 765, 767 [1953]) There is no showing that Libra Finance has already foreclosed the mortgage and that it was the new owner of the subject tractor. Undeniably, Libra gave its consent to the sale of the subject tractor to the petitioner. It was aware of the transfer of rights to the petitioner.

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Where a third person purchases the mortgaged property, he automatically steps into the shoes of the original mortgagor. (See Industrial Finance Corp. v. Apostol, 177 SCRA 521 [1989]). His right of ownership shall be subject to the mortgage of the thing sold to him. In the case at bar, the petitioner was fully aware of the existing mortgage of the subject tractor to Libra. In fact, when he was obtaining Libra's consent to the sale, he volunteered to assume the remaining balance of the mortgage debt of Wilfredo Dy which Libra undeniably agreed to. The payment of the check was actually intended to extinguish the mortgage obligation so that the tractor could be released to the petitioner. It was never intended nor could it be considered as payment of the purchase price because the relationship between Libra and the petitioner is not one of sale but still a mortgage. The clearing or encashment of the check which produced the effect of payment determined the full payment of the money obligation and the release of the chattel mortgage. It was not determinative of the consummation of the sale. The transaction between the brothers is distinct and apart from the transaction between Libra and the petitioner. The contention, therefore, that the consummation of the sale depended upon the encashment of the check is untenable. The sale of the subject tractor was consummated upon the execution of the public instrument on September 4, 1979. At this time constructive delivery was already effected. Hence, the subject tractor was no longer owned by Wilfredo Dy when it was levied upon by the sheriff in December, 1979. Well settled is the rule that only properties unquestionably owned by the judgment debtor and which are not exempt by law from execution should be levied upon or sought to be levied upon. For the power of the court in the execution of its judgment extends only over properties belonging to the judgment debtor. (Consolidated Bank and Trust Corp. v. Court of Appeals, G.R. No. 78771, January 23, 1991). The respondents further claim that at that time the sheriff levied on the tractor and took legal custody thereof no one ever protested or filed a third party claim. It is inconsequential whether a third party claim has been filed or not by the petitioner during the time the sheriff levied on the subject tractor. A person other than the judgment debtor who claims ownership or right over levied properties is not precluded, however, from taking other legal remedies to prosecute his claim. (Consolidated Bank and Trust Corp. v. Court of Appeals, supra) This is precisely what the petitioner did when he filed the action for replevin with the RTC. Anent the second and third issues raised, the Court accords great respect and weight to the findings of fact of the trial court. There is no sufficient evidence to show that the sale of the tractor was in fraud of Wilfredo and creditors. While it is true that Wilfredo and Perfecto are brothers, this fact alone does not give rise to the presumption that the sale was fraudulent. Relationship is not a badge of fraud (Goquiolay v. Sycip, 9 SCRA 663 [1963]). Moreover, fraud can not be presumed; it must be established by clear convincing evidence. We agree with the trial court's findings that the actuations of GELAC Trading were indeed violative of the provisions on human relations. As found by the trial court, GELAC knew very well of the transfer of the property to the petitioners on July 14, 1980 when it received summons based on the complaint for replevin filed with the RTC by the petitioner. Notwithstanding said summons, it continued to sell the subject tractor to one of its stockholders on August 2, 1980. WHEREFORE, the petition is hereby GRANTED. The decision of the Court of Appeals promulgated on March 23, 1990 is SET ASIDE and the decision of the Regional Trial Court dated April 8, 1988 is REINSTATED. SO ORDERED.

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Republic of the Philippines SUPREME COURT Manila THIRD DIVISION G.R. No. 106435 July 14, 1999 PAMECA WOOD TREATMENT PLANT, INC., HERMINIO G. TEVES, VICTORIA V. TEVES and HIRAM DIDAY R. PULIDO, petitioners, vs. HON. COURT OF APPEALS and DEVELOPMENT BANK OF THE PHILIPPINES, respondents. GONZAGA-REYES, J.: Before Us for review on certiorari is the decision of the respondent Court of Appeals in C.A. G.R. C.V. No. 1 2 27861, promulgated on April 23, 1992, affirming in toto the decision of the Regional Trial Court of Makati to a award respondent bank's deficiency claim, arising from a loan secured by chattel mortgage. The antecedents of the case are as follows: On April 17, 1980, petitioner PAMECA Wood Treatment Plant, Inc. (PAMECA) obtained a loan of US$267,881.67, or the equivalent of P2,000,000.00 from respondent Bank. By virtue of this loan, petitioner PAMECA, through its President, petitioner Herminio C. Teves, executed a promissory note for the said amount, promising to pay the loan by installment. As security for the said loan, a chattel mortgage was also executed over PAMECA's properties in Dumaguete City, consisting of inventories, furniture and equipment, to cover the whole value of the loan. On January 18, 1984, and upon petitioner PAMECA's failure to pay, respondent bank extrajudicially foreclosed the chattel mortgage, and, as sole bidder in the public auction, purchased the foreclosed properties for a sum of P322,350.00. On June 29, 1984, respondent bank filed a complaint for the collection of the balance of 3 P4,366,332.46 with Branch 132 of the Regional Trial Court of Makati City against petitioner PAMECA and private petitioners herein, as solidary debtors with PAMECA under the promissory note. On February 8, 1990, the RTC of Makati rendered a decision on the case, the dispositive portion of which we reproduce as follows: WHEREFORE, judgment is hereby rendered ordering the defendants to pay jointly and severally plaintiff the (1) sum of P4,366,332.46 representing the deficiency claim of the latter as of March 31, 1984, plus 21% interest per annum and other charges from April 1, 1984 until the whole amount is fully paid and (2) the costs of the suit. SO 4 ORDERED." The Court of Appeals affirmed the RTC decision. Hence, this Petition. The petition raises the following grounds: 1. Respondent appellate court gravely erred in not reversing the decision of the trial court, and in not holding that the public auction sale of petitioner PAMECA's chattels were tainted with fraud, as the chattels of the said petitioner were bought by private respondent as sole bidder in only 1/6 of the market value of the property, hence unconscionable and inequitable, and therefore null and void.

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2. Respondent appellate court gravely erred in not applying by analogy Article 1484 and Article 2115 of the Civil Code by reading the spirit of the law, and taking into consideration the fact that the contract of loan was a contract of adhesion. 3. The appellate court gravely erred in holding the petitioners Herminio Teves, Victoria Teves and Hiram Diday R. Pulido solidarily liable with PAMECA Wood Treatment Plant, Inc. when the intention of the parties was that the loan is only for the corporation's benefit. Relative to the first ground, petitioners contend that the amount of P322,350.00 at which respondent bank bid for and purchased the mortgaged properties was unconscionable and inequitable considering that, at the time of the public sale, the mortgaged properties had a total value of more than P2,000,000.00. According to petitioners, this 5 is evident from an inventory dated March 31, 1980 , which valued the properties at P2,518,621.00, in 6 accordance with the terms of the chattel mortgage contract between the parties that required that the inventories "be maintained at a level no less than P2 million". Petitioners argue that respondent bank's act of bidding and purchasing the mortgaged properties for P322,350.00 or only about 1/6 of their actual value in a public sale in which it was the sole bidder was fraudulent, unconscionable and inequitable, and constitutes sufficient ground for the annulment of the auction sale. To this, respondent bank contends that the above-cited inventory and chattel mortgage contract were not in fact submitted as evidence before the RTC of Makati, and that these documents were first produced by petitioners 7 only when the case was brought to the Court of Appeals. The Court of Appeals, in turn, disregarded these documents for petitioners' failure to present them in evidence, or to even allude to them in their testimonies 8 before the lower courtr. Instead, respondent court declared that it is not at all unlikely for the chattels to have 9 sufficiently deteriorated as to have fetched such a low price at the time of the auction sale. Neither did respondent court find anything irregular or fraudulent in the circumstance that respondent bank was the sole bidder in the sale, as all the legal procedures for the conduct of a foreclosure sale have been complied with, thus 10 giving rise to the presumption of regularity in the performance of public duties. Petitioners also question the ruling of respondent court, affirming the RTC, to hold private petitioners, officers and stockholders of petitioner PAMECA, liable with PAMECA for the obligation under the loan obtained from 11 respondent bank, contrary to the doctrine of separate and distinct corporate personality. Private petitioners contend that they became signatories to the promissory note "only as a matter of practice by the respondent bank", that the promissory note was in the nature of a contract of adhesion, and that the loan was for the benefit 12 of the corporation, PAMECA, alone. Lastly, invoking the equity jurisdiction of the Supreme Court, petitioners submit that Articles 1484 and 14 2115 of the Civil Code be applied in analogy to the instant case to preclude the recovery of a deficiency 15 claim. Petitioners are not the first to posit the theory of the applicability of Article 2115 to foreclosures of chattel 16 mortgage. In the leading case of Ablaza vs. Ignacio , the lower court dismissed the complaint for collection of deficiency judgment in view of Article 2141 of the Civil Code, which provides that the provisions of the Civil Code on pledge shall also apply to chattel mortgages, insofar as they are not in conflict with the Chattel Mortgage Law. It was the lower court's opinion that, by virtue of Article 2141, the provisions of Article 2115 which deny the creditor-pledgee the right to recover deficiency in case the proceeds of the foreclosire sale are less than the amount of the principal obligation, will apply. This Court reversed the ruling of the lower court and held that the provisions of the Chattel Mortgage Law regarding the effects of foreclosure of chattel mortgage, being contrary to the provisions of Article 2115, Article 2115, in relation to Article 2141, may not be applied to the case. Sec. 14 of Act No. 1508, as amended, or the chattel Mortgage Law, states: xxx xxx xxx
13

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The officer making the sale shall, within thirty days thereafter, make in writing a return of his doings and file the same in the office of the Registry of Deeds where the mortgage is recorded, and the Register of Deeds shall record the same. The fees of the officer for selling the property shall be the same as the case of sale on execution as provided in Act Numbered One Hundred and Ninety, and the amendments thereto, and the fees of the Register of Deeds for registering the officer's return shall be taxed as a part of the costs of sale, which the officer shall pay to the Register of Deeds. The return shall particularly describe the articles sold, and state the amount received for each article, and shall operate as a discharge of the lien thereon created by the mortgage. The proceeds of such sale shall be applied to the payment, first, of the costs and expenses of keeping and sale, and then to the payment of the demand or obligation secured by such mortgage, and the residue shall be paid to persons holding subsequent mortgages in their order, and the balance, after paying the mortgage, shall be paid to the mortgagor or persons holding under him on demand. (Emphasis supplied). It is clear from the above provision that the effects of foreclosure under the Chattel Mortgage Law run inconsistent with those of pledge under Article 2115. Whereas, in pledge, the sale of the thing pledged extinguishes the entire principal obligation, such that the pledgor may no longer recover proceeds of the sale in excess of the amount of the principal obligation, Section 14 of the Chattel Mortgage Law expressly entitles the mortgagor to the balance of the proceeds, upon satisfaction of the principal obligation and costs. Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining the excess of the sale proceeds there is a corollary obligation on the part of the debtor-mortgagee to pay the deficiency in case of a reduction in 17 the price at public auction. As explained in Manila Trading and Supply Co. vs. Tamaraw Plantation Co. , cited inAblaza vs. Ignacio, supra: While it is true that section 3 of Act No. 1508 provides that "a chattel mortgage is a conditional sale", it further provides that it "is a conditional sale of personal property as security for the payment of a debt, or for the performance of some other obligation specified therein." The lower court overlooked the fact that the chattels included in the chattel mortgage are only given as security and not as a payment of the debt, in case of a failure of payment. The theory of the lower court would lead to the absurd conclusion that if the chattels mentioned in the mortgage, given as security, should sell for more than the amount of the indebtedness secured, that the creditor would be entitled to the full amount for which it might be sold, even though that amount was greatly in excess of the indebtedness. Such a result certainly was not contemplated by the legislature when it adopted Act No. 1508. There seems to be no reason supporting that theory under the provision of the law. The value of the chattels changes greatly from time to time, and sometimes very rapidly. If for example, the chattels should greatly increase in value and a sale under that condition should result in largely overpaying the indebtedness, and if the creditor is not permitted to retain the excess, then the same token would require the debtor to pay the deficiency in case of a reduction in the price of the chattels between the date of the contract and a breach of the condition. Mr. Justice Kent, in the 12th Edition of his Commentaries, as well as other authors on the question of chattel mortgages, have said, that "in case of a sale under a foreclosure of a chattel mortgage, there is no question that the mortgagee or creditor may maintain an action for the deficiency, if any should occur." And the. fact that Act No. 1508 permits a private sale, such sale is not, in fact, a satisfaction of the debt, to any greater extent than the value of the property at the time of the sale. The amount received at the time of the sale, of course, always requiring good faith and honesty in the sale, is only a payment, pro tanto, and an action may be maintained for a deficiency in the debt. We find no reason to disturb the ruling in Ablaza vs Ignacio, and the cases reiterating it.
18

Neither do We find tenable the application by analogy of Article 1484 of the Civil Code to the instant case. As correctly pointed out by the trial court, the said article applies clearly and solely to the sale of personal property the price of which is payable in installments. Although Article 1484, paragraph (3) expressly bars any further action against the purchaser to recover an unpaid balance of the price, where the vendor opts to foreclose the

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chattel mortgage on the thing sold, should the vendee's failure to pay cover two or more installments, this provision is specifically applicable to a sale on installments. To accommodate petitioners' prayer even on the basis of equity would be to expand the application of the provisions of Article 1484 to situations beyond its specific purview, and ignore the language and intent of the Chattel Mortgage Law. Equity, which has been aptly described as "justice outside legality", is applied only in the 19 absence of, and never against, statutory law or judicial rules of procedure. We are also unable to find merit in petitioners' submission that the public auction sale is void on grounds of fraud and inadequacy of price. Petitioners never assailed the validity of the sale in the RTC, and only in the Court of Appeals did they attempt to prove inadequacy of price through the documents, i.e., the "Open-End Mortgage on Inventory" and inventory dated March 31, 1980, likewise attached to their Petition before this Court. Basic is the rule that parties may not bring on appeal issues that were not raised on trial. Having nonetheless examined the inventory and chattel mortgage document as part of the records, We are not convinced that they effectively prove that the mortgaged properties had a market value of at least P2,000,000.00 on January 18, 1984, the date of the foreclosure sale. At best, the chattel mortgage contract only indicates the obligation of the mortgagor to maintain the inventory at a value of at least P2,000,000.00, but does not evidence compliance therewith. The inventory, in turn, was as of March 31, 1980, or even prior to April 17, 1980, the date when the parties entered into the contracts of loan and chattel mortgage, and is far from being an accurate estimate of the market value of the properties at the time of the foreclosure sale four years thereafter. Thus, even assuming that the inventory and chattel mortgage contract were duly submitted as evidence before the trial court, it is clear that they cannot suffice to substantiate petitioners' allegation of inadequacy of price.1wphi1.nt Furthermore, the mere fact that respondent bank was the sole bidder for the mortgaged properties in the public sale does not warrant the conclusion that the transaction was attended with fraud. Fraud is a serious allegation 20 that requires full and convincing evidence, and may not be inferred from the lone circumstance that it was only respondent bank that bid in the sale of the foreclosed properties. The sparseness of petitioners' evidence in this regard leaves Us no discretion but to uphold the presumption of regularity in the conduct of the public sale. We likewise affirm private petitioners' joint and several liability with petitioner corporation in the loan. As found by the trial court and the Court of Appeals, the terms of the promissory note unmistakably set forth the solidary nature of private petitioners' commitment. Thus: On or before May 12, 1980, for value received, PAMECA WOOD TREATMENT PLANT, INC., a corporation organized and existing under the laws of the Philippines, with principal office at 304 El Hogar Filipina Building, San Juan, Manila, promise to pay to the order of DEVELOPMENT BANK OF THE PHILIPPINES at its office located at corner Buendia and Makati Avenues, Makati, Metro Manila, the principal sum of TWO HUNDRED SIXTY SEVEN THOUSAND EIGHT HUNDRED AND EIGHTY ONE & 67/100 US DOLLARS (US$ 267,881.67) with interest at the rate of three per cent (3%) per annum over DBP's borrowing rate for these funds. Before the date of maturity, we hereby bind ourselves, jointly and severally, to make partial payments as follows: xxx xxx xxx In case of default in the payment of any installment above, we bind ourselves to pay DBP for advances . . . xxx xxx xxx We further bind ourselves to pay additional interest and penalty charges on loan amortizations or portion thereof in arrears as follows: xxx xxx xxx

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In addition to the above, we also bind ourselves to pay for bank advances for insurance premiums, taxes . . . xxx xxx xxx We further bind ourselves to reimburse DBP on a pro-rata basis for all costs incurred by DBP on the foreign currency borrowings from where the loan shall be drawn . . . xxx xxx xxx In case of non-payment of the amount of this note or any portion of it on demand, when due, or any other amount or amounts due on account of this note, the entire obligation shall become due and demandable, and if, for the enforcement of the payment thereof, the DEVELOPMENT BANK OF THE PHILIPPINES is constrained to entrust the case to its attorneys, we jointly and severally bind ourselves to pay for attorney's fees as provided for in the mortgage contract, in addition to the legal fees and other incidental expenses. In the event of foreclosure of the mortgage securing this note, we further bind ourselves jointly and severally to pay the deficiency, if any. 21 (Emphasis supplied) The promissory note was signed by private petitioners in the following manner: PAMECA WOOD TREATMENT PLANT, INC. By: (Sgd) HERMINIO G. TEVES (For himself & as President of above-named corporation) (Sgd) HIRAM DIDAY PULIDO (Sgd) VICTORIA V. TEVES
22

From the foregoing, it is clear that private petitioners intended to bind themselves solidarily with petitioner PAMECA in the loan. As correctly submitted by respondent bank, private petitioners are not made to answer for the corporate act of petitioner PAMECA, but are made liable because they made themselves co-makers with PAMECA under the promissory note. IN VIEW OF THE FOREGOING, the Petition is DENIED and the Decision of the Court of Appeals dated April 23, 1992 in CA G.R. CV No. 27861 is hereby AFFIRMED. Costs against petitioners. SO ORDERED.

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Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 120098 October 2, 2001

RUBY L. TSAI, petitioner, vs. HON. COURT OF APPEALS, EVER TEXTILE MILLS, INC. and MAMERTO R VILLALUZ, respondents. x---------------------------------------------------------x [G.R. No. 120109. October 2, 2001.] PHILIPPINE BANK OF COMMUNICATIONS, petitioner, vs. HON. COURT OF APPEALS, EVER TEXTILE MILLS and MAMERTO R VILLALUZ, respondents. QUISUMBING, J.: These consolidated cases assail the decision of the Court of Appeals in CA-G.R. CV No. 32986, affirming the 2 decision of the Regional Trial Court of Manila, Branch 7, in Civil Case No. 89-48265. Also assailed is respondent court's resolution denying petitioners' motion for reconsideration. On November 26, 1975, respondent Ever Textile Mills, Inc. (EVERTEX) obtained a three million peso (P3,000,000.00) loan from petitioner Philippine Bank of Communications (PBCom). As security for the loan, EVERTEX executed in favor of PBCom, a deed of Real and Chattel Mortgage over the lot under TCT No. 372097, where its factory stands, and the chattels located therein as enumerated in a schedule attached to the mortgage contract. The pertinent portions of the Real and Chattel Mortgage are quoted below: MORTGAGE (REAL AND CHATTEL) xxx xxx xxx
1

The MORTGAGOR(S) hereby transfer(s) and convey(s), by way of First Mortgage, to the MORTGAGEE, . . . certain parcel(s) of land, together with all the buildings and improvements now existing or which may hereafter exist thereon, situated in . . . "Annex A" (Real and Chattel Mortgage executed by Ever Textile Mills in favor of PBCommunications continued) LIST OF MACHINERIES & EQUIPMENT A. Forty Eight (48) units of Vayrow Knitting Machines-Tompkins made in Hongkong: Serial Numbers Size of Machines

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xxx

xxx

xxx

B. Sixteen (16) sets of Vayrow Knitting Machines made in Taiwan. xxx xxx xxx

C. Two (2) Circular Knitting Machines made in West Germany. xxx xxx xxx

D. Four (4) Winding Machines. xxx xxx xxx

SCHEDULE "A" I. TCT # 372097 - RIZAL xxx xxx xxx

II. Any and all buildings and improvements now existing or hereafter to exist on the above-mentioned lot. III. MACHINERIES & EQUIPMENT situated, located and/or installed on the above-mentioned lot located at . . . (a) Forty eight sets (48) Vayrow Knitting Machines . . . (b) Sixteen sets (16) Vayrow Knitting Machines . . . (c) Two (2) Circular Knitting Machines . . . (d) Two (2) Winding Machines . . . (e) Two (2) Winding Machines . . . IV. Any and all replacements, substitutions, additions, increases and accretions to above properties. xxx xxx xxx
3

On April 23, 1979, PBCom granted a second loan of P3,356,000.00 to EVERTEX. The loan was secured by a Chattel Mortgage over personal properties enumerated in a list attached thereto. These listed properties were similar to those listed in Annex A of the first mortgage deed. After April 23, 1979, the date of the execution of the second mortgage mentioned above, EVERTEX purchased various machines and equipments. On November 19, 1982, due to business reverses, EVERTEX filed insolvency proceedings docketed as SP Proc. No. LP-3091-P before the defunct Court of First Instance of Pasay City, Branch XXVIII. The CFI issued an order on November 24, 1982 declaring the corporation insolvent. All its assets were taken into the custody of the Insolvency Court, including the collateral, real and personal, securing the two mortgages as abovementioned.

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In the meantime, upon EVERTEX's failure to meet its obligation to PBCom, the latter commenced extrajudicial foreclosure proceedings against EVERTEX under Act 3135, otherwise known as "An Act to Regulate the Sale of Property under Special Powers Inserted in or Annexed to Real Estate Mortgages" and Act 1506 or "The Chattel Mortgage Law". A Notice of Sheriff's Sale was issued on December 1, 1982. On December 15, 1982, the first public auction was held where petitioner PBCom emerged as the highest bidder and a Certificate of Sale was issued in its favor on the same date. On December 23, 1982, another public auction was held and again, PBCom was the highest bidder. The sheriff issued a Certificate of Sale on the same day. On March 7, 1984, PBCom consolidated its ownership over the lot and all the properties in it. In November 1986, it leased the entire factory premises to petitioner Ruby L. Tsai for P50,000.00 a month. On May 3, 1988, PBCom sold the factory, lock, stock and barrel to Tsai for P9,000,000.00, including the contested machineries. On March 16, 1989, EVERTEX filed a complaint for annulment of sale, reconveyance, and damages with the Regional Trial Court against PBCom, alleging inter alia that the extrajudicial foreclosure of subject mortgage was in violation of the Insolvency Law. EVERTEX claimed that no rights having been transmitted to PBCom over the assets of insolvent EVERTEX, therefore Tsai acquired no rights over such assets sold to her, and should reconvey the assets. Further, EVERTEX averred that PBCom, without any legal or factual basis, appropriated the contested properties, which were not included in the Real and Chattel Mortgage of November 26, 1975 nor in the Chattel Mortgage of April 23, 1979, and neither were those properties included in the Notice of Sheriff's Sale dated December 1, 1982 and Certificate of Sale . . . dated December 15, 1982. The disputed properties, which were valued at P4,000,000.00, are: 14 Interlock Circular Knitting Machines, 1 Jet Drying Equipment, 1 Dryer Equipment, 1 Raisin Equipment and 1 Heatset Equipment. The RTC found that the lease and sale of said personal properties were irregular and illegal because they were not duly foreclosed nor sold at the December 15, 1982 auction sale since these were not included in the schedules attached to the mortgage contracts. The trial court decreed: WHEREFORE, judgment is hereby rendered in favor of plaintiff corporation and against the defendants: 1. Ordering the annulment of the sale executed by defendant Philippine Bank of Communications in favor of defendant Ruby L. Tsai on May 3, 1988 insofar as it affects the personal properties listed in par. 9 of the complaint, and their return to the plaintiff corporation through its assignee, plaintiff Mamerto R. Villaluz, for disposition by the Insolvency Court, to be done within ten (10) days from finality of this decision; 2. Ordering the defendants to pay jointly and severally the plaintiff corporation the sum of P5,200,000.00 as compensation for the use and possession of the properties in question from November 1986 to February 1991 and P100,000.00 every month thereafter, with interest thereon at the legal rate per annum until full payment; 3. Ordering the defendants to pay jointly and severally the plaintiff corporation the sum of P50,000.00 as and for attorney's fees and expenses of litigation; 4. Ordering the defendants to pay jointly and severally the plaintiff corporation the sum of P200,000.00 by way of exemplary damages; 5. Ordering the dismissal of the counterclaim of the defendants; and 6. Ordering the defendants to proportionately pay the costs of suit.

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SO ORDERED.

Dissatisfied, both PBCom and Tsai appealed to the Court of Appeals, which issued its decision dated August 31, 1994, the dispositive portion of which reads: WHEREFORE, except for the deletion therefrom of the award; for exemplary damages, and reduction of the actual damages, from P100,000.00 to P20,000.00 per month, from November 1986 until subject personal properties are restored to appellees, the judgment appealed from is hereby AFFIRMED, in all other respects. No 5 pronouncement as to costs. Motion for reconsideration of the above decision having been denied in the resolution of April 28, 1995, PBCom and Tsai filed their separate petitions for review with this Court. In G.R No. 120098, petitioner Tsai ascribed the following errors to the respondent court: I THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN EFFECT MAKING A CONTRACT FOR THE PARTIES BY TREATING THE 1981 ACQUIRED MACHINERIES AS CHATTELS INSTEAD OF REAL PROPERTIES WITHIN THEIR EARLIER 1975 DEED OF REAL AND CHATTEL MORTGAGE OR 1979 DEED OF CHATTEL MORTGAGE. II THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN HOLDING THAT THE DISPUTED 1981 MACHINERIES ARE NOT REAL PROPERTIES DEEMED PART OF THE MORTGAGE DESPITE THE CLEAR IMPORT OF THE EVIDENCE AND APPLICABLE RULINGS OF THE SUPREME COURT. III THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN DEEMING PETITIONER A PURCHASER IN BAD FAITH. IV THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN ASSESSING PETITIONER ACTUAL DAMAGES, ATTORNEY'S FEES AND EXPENSES OF LITIGATION FOR WANT OF VALID FACTUAL AND LEGAL BASIS. V THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN HOLDING AGAINST 6 PETITIONER'S ARGUMENTS ON PRESCRIPTION AND LACHES. In G.R. No. 120098, PBCom raised the following issues: I. DID THE COURT OF APPEALS VALIDLY DECREE THE MACHINERIES LISTED UNDER PARAGRAPH 9 OF THE COMPLAINT BELOW AS PERSONAL PROPERTY OUTSIDE OF THE 1975 DEED OF REAL ESTATE MORTGAGE AND EXCLUDED THEM FROM THE REAL PROPERTY EXTRAJUDICIALLY FORECLOSED BY PBCOM DESPITE THE PROVISION IN THE 1975 DEED THAT ALL AFTER-ACQUIRED PROPERTIES

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DURING THE LIFETIME OF THE MORTGAGE SHALL FORM PART THEREOF, AND DESPITE THE UNDISPUTED FACT THAT SAID MACHINERIES ARE BIG AND HEAVY, BOLTED OR CEMENTED ON THE REAL PROPERTY MORTGAGED BY EVER TEXTILE MILLS TO PBCOM, AND WERE ASSESSED FOR REAL ESTATE TAX PURPOSES? II CAN PBCOM, WHO TOOK POSSESSION OF THE MACHINERIES IN QUESTION IN GOOD FAITH, EXTENDED CREDIT FACILITIES TO EVER TEXTILE MILLS WHICH AS OF 1982 TOTALLED P9,547,095.28, WHO HAD SPENT FOR MAINTENANCE AND SECURITY ON THE DISPUTED MACHINERIES AND HAD TO PAY ALL THE BACK TAXES OF EVER TEXTILE MILLS BE LEGALLY COMPELLED TO RETURN TO EVER THE SAID MACHINERIES OR IN LIEU THEREOF BE ASSESSED DAMAGES. IS THAT SITUATION 7 TANTAMOUNT TO A CASE OF UNJUST ENRICHMENT? The principal issue, in our view, is whether or not the inclusion of the questioned properties in the foreclosed properties is proper. The secondary issue is whether or not the sale of these properties to petitioner Ruby Tsai is valid. For her part, Tsai avers that the Court of Appeals in effect made a contract for the parties by treating the 1981 acquired units of machinery as chattels instead of real properties within their earlier 1975 deed of Real and 8 Chattel Mortgage or 1979 deed of Chattel Mortgage. Additionally, Tsai argues that respondent court erred in 9 holding that the disputed 1981 machineries are not real properties. Finally, she contends that the Court of 10 Appeals erred in holding against petitioner's arguments on prescription and laches and in assessing petitioner 11 actual damages, attorney's fees and expenses of litigation, for want of valid factual and legal basis. Essentially, PBCom contends that respondent court erred in affirming the lower court's judgment decreeing that the pieces of machinery in dispute were not duly foreclosed and could not be legally leased nor sold to Ruby Tsai. It further argued that the Court of Appeals' pronouncement that the pieces of machinery in question were personal properties have no factual and legal basis. Finally, it asserts that the Court of Appeals erred in assessing damages and attorney's fees against PBCom. In opposition, private respondents argue that the controverted units of machinery are not "real properties" but chattels, and, therefore, they were not part of the foreclosed real properties, rendering the lease and the 12 subsequent sale thereof to Tsai a nullity. Considering the assigned errors and the arguments of the parties, we find the petitions devoid of merit and ought to be denied. Well settled is the rule that the jurisdiction of the Supreme Court in a petition for review on certiorari under Rule 45 of the Revised Rules of Court is limited to reviewing only errors of law, not of fact, unless the factual findings complained of are devoid of support by the evidence on record or the assailed judgment is based on 13 misapprehension of facts. This rule is applied more stringently when the findings of fact of the RTC is affirmed 14 by the Court of Appeals. The following are the facts as found by the RTC and affirmed by the Court of Appeals that are decisive of the issues: (1) the "controverted machineries" are not covered by, or included in, either of the two mortgages, the Real Estate and Chattel Mortgage, and the pure Chattel Mortgage; (2) the said machineries were not included in the list of properties appended to the Notice of Sale, and neither were they included in the Sheriff's Notice of 15 Sale of the foreclosed properties. Petitioners contend that the nature of the disputed machineries, i.e., that they were heavy, bolted or cemented on the real property mortgaged by EVERTEX to PBCom, make them ipso facto immovable under Article 415 (3) and (5) of the New Civil Code. This assertion, however, does not settle the issue. Mere nuts and bolts do not foreclose the controversy. We have to look at the parties' intent.

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While it is true that the controverted properties appear to be immobile, a perusal of the contract of Real and Chattel Mortgage executed by the parties herein gives us a contrary indication. In the case at bar, both the trial and the appellate courts reached the same finding that the true intention of PBCOM and the owner, EVERTEX, is to treat machinery and equipment as chattels. The pertinent portion of respondent appellate court's ruling is quoted below: As stressed upon by appellees, appellant bank treated the machineries as chattels; never as real properties. Indeed, the 1975 mortgage contract, which was actually real and chattel mortgage, militates against appellants' posture. It should be noted that the printed form used by appellant bank was mainly for real estate mortgages. But reflective of the true intention of appellant PBCOM and appellee EVERTEX was the typing in capital letters, immediately following the printed caption of mortgage, of the phrase "real and chattel." So also, the "machineries and equipment" in the printed form of the bank had to be inserted in the blank space of the printed contract and connected with the word "building" by typewritten slash marks. Now, then, if the machineries in question were contemplated to be included in the real estate mortgage, there would have been no necessity to ink a chattel mortgage specifically mentioning as part III of Schedule A a listing of the machineries covered thereby. It would have sufficed to list them as immovables in the Deed of Real Estate Mortgage of the land and building involved. As regards the 1979 contract, the intention of the parties is clear and beyond question. It refers solely tochattels. The inventory list of the mortgaged properties is an itemization of sixty-three (63) individually described machineries while the schedule listed only machines and 2,996,880.50 worth of finished cotton fabrics and 16 natural cotton fabrics. In the absence of any showing that this conclusion is baseless, erroneous or uncorroborated by the evidence on record, we find no compelling reason to depart therefrom. Too, assuming arguendo that the properties in question are immovable by nature, nothing detracts the parties from treating it as chattels to secure an obligation under the principle of estoppel. As far back as Navarro v. Pineda, 9 SCRA 631 (1963), an immovable may be considered a personal property if there is a stipulation as when it is used as security in the payment of an obligation where a chattel mortgage is executed over it, as in the case at bar. In the instant case, the parties herein: (1) executed a contract styled as "Real Estate Mortgage and Chattel Mortgage," instead of just "Real Estate Mortgage" if indeed their intention is to treat all properties included therein as immovable, and (2) attached to the said contract a separate "LIST OF MACHINERIES & EQUIPMENT". These facts, taken together, evince the conclusion that the parties' intention is to treat these units of machinery as chattels. A fortiori, the contested after-acquired properties, which are of the same description as the units enumerated under the title "LIST OF MACHINERIES & EQUIPMENT," must also be treated as chattels. Accordingly, we find no reversible error in the respondent appellate court's ruling that inasmuch as the subject mortgages were intended by the parties to involve chattels, insofar as equipment and machinery were concerned, the Chattel Mortgage Law applies, which provides in Section 7 thereof that: "a chattel mortgage shall be deemed to cover only the property described therein and not like or substituted property thereafter acquired by the mortgagor and placed in the same depository as the property originally mortgaged, anything in the mortgage to the contrary notwithstanding." And, since the disputed machineries were acquired in 1981 and could not have been involved in the 1975 or 1979 chattel mortgages, it was consequently an error on the part of the Sheriff to include subject machineries with the properties enumerated in said chattel mortgages. As the auction sale of the subject properties to PBCom is void, no valid title passed in its favor. Consequently, the sale thereof to Tsai is also a nullity under the elementary principle of nemo dat quod non habet, one cannot 17 give what one does not have.

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Petitioner Tsai also argued that assuming that PBCom's title over the contested properties is a nullity, she is nevertheless a purchaser in good faith and for value who now has a better right than EVERTEX. To the contrary, however, are the factual findings and conclusions of the trial court that she is not a purchaser in good faith. Well-settled is the rule that the person who asserts the status of a purchaser in good faith and for 18 value has the burden of proving such assertion. Petitioner Tsai failed to discharge this burden persuasively. Moreover, a purchaser in good faith and for value is one who buys the property of another without notice that some other person has a right to or interest in such property and pays a full and fair price for the same, at the time of purchase, or before he has notice of the claims or interest of some other person in the 19 property. Records reveal, however, that when Tsai purchased the controverted properties, she knew of respondent's claim thereon. As borne out by the records, she received the letter of respondent's counsel, 20 21 apprising her of respondent's claim, dated February 27, 1987. She replied thereto on March 9, 1987. Despite her knowledge of respondent's claim, she proceeded to buy the contested units of machinery on May 3, 1988. Thus, the RTC did not err in finding that she was not a purchaser in good faith. Petitioner Tsai's defense of indefeasibility of Torrens Title of the lot where the disputed properties are located is equally unavailing. This defense refers to sale of lands and not to sale of properties situated therein. Likewise, the mere fact that the lot where the factory and the disputed properties stand is in PBCom's name does not automatically make PBCom the owner of everything found therein, especially in view of EVERTEX's letter to Tsai enunciating its claim. Finally, petitioners' defense of prescription and laches is less than convincing. We find no cogent reason to disturb the consistent findings of both courts below that the case for the reconveyance of the disputed properties was filed within the reglementary period. Here, in our view, the doctrine of laches does not apply. Note that upon petitioners' adamant refusal to heed EVERTEX's claim, respondent company immediately filed an action to recover possession and ownership of the disputed properties. There is no evidence showing any failure or neglect on its part, for an unreasonable and unexplained length of time, to do that which, by exercising due diligence, could or should have been done earlier. The doctrine of stale demands would apply only where by reason of the lapse of time, it would be inequitable to allow a party to enforce his legal rights. Moreover, except for very strong reasons, this Court is not disposed to apply the doctrine of laches to prejudice or defeat the rights 22 of an owner. As to the award of damages, the contested damages are the actual compensation, representing rentals for the contested units of machinery, the exemplary damages, and attorney's fees. As regards said actual compensation, the RTC awarded P100,000.00 corresponding to the unpaid rentals of the contested properties based on the testimony of John Chua, who testified that the P100,000.00 was based on the accepted practice in banking and finance, business and investments that the rental price must take into account the cost of money used to buy them. The Court of Appeals did not give full credence to Chua's projection and reduced the award to P20,000.00. Basic is the rule that to recover actual damages, the amount of loss must not only be capable of proof but must actually be proven with reasonable degree of certainty, premised upon competent proof or best evidence 23 obtainable of the actual amount thereof. However, the allegations of respondent company as to the amount of unrealized rentals due them as actual damages remain mere assertions unsupported by documents and other competent evidence. In determining actual damages, the court cannot rely on mere assertions, speculations, conjectures or guesswork but must depend on competent proof and on the best evidence obtainable regarding 24 the actual amount of loss. However, we are not prepared to disregard the following dispositions of the respondent appellate court: . . . In the award of actual damages under scrutiny, there is nothing on record warranting the said award of P5,200,000.00, representing monthly rental income of P100,000.00 from November 1986 to February 1991, and the additional award of P100,000.00 per month thereafter.

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As pointed out by appellants, the testimonial evidence, consisting of the testimonies of Jonh (sic) Chua and Mamerto Villaluz, is shy of what is necessary to substantiate the actual damages allegedly sustained by appellees, by way of unrealized rental income of subject machineries and equipments. The testimony of John Cua (sic) is nothing but an opinion or projection based on what is claimed to be a practice in business and industry. But such a testimony cannot serve as the sole basis for assessing the actual damages complained of. What is more, there is no showing that had appellant Tsai not taken possession of the machineries and equipments in question, somebody was willing and ready to rent the same for P100,000.00 a month. xxx xxx xxx

Then, too, even assuming arguendo that the said machineries and equipments could have generated a rental income of P30,000.00 a month, as projected by witness Mamerto Villaluz, the same would have been a gross income. Therefrom should be deducted or removed, expenses for maintenance and repairs . . . Therefore, in the determination of the actual damages or unrealized rental income sued upon, there is a good basis to calculate that at least four months in a year, the machineries in dispute would have been idle due to absence of a lessee or while being repaired. In the light of the foregoing rationalization and computation, We believe that a net 25 unrealized rental income of P20,000.00 a month, since November 1986, is more realistic and fair. As to exemplary damages, the RTC awarded P200,000.00 to EVERTEX which the Court of Appeals deleted. But according to the CA, there was no clear showing that petitioners acted malevolently, wantonly and oppressively. The evidence, however, shows otherwise.It is a requisite to award exemplary damages that the wrongful act 26 must be accompanied by bad faith, and the guilty acted in a wanton, fraudulent, oppressive, reckless or 27 malevolent manner. As previously stressed, petitioner Tsai's act of purchasing the controverted properties despite her knowledge of EVERTEX's claim was oppressive and subjected the already insolvent respondent to gross disadvantage. Petitioner PBCom also received the same letters of Atty. Villaluz, responding thereto on 28 March 24, 1987. Thus, PBCom's act of taking all the properties found in the factory of the financially handicapped respondent, including those properties not covered by or included in the mortgages, is equally oppressive and tainted with bad faith. Thus, we are in agreement with the RTC that an award of exemplary damages is proper. The amount of P200,000.00 for exemplary damages is, however, excessive. Article 2216 of the Civil Code provides that no proof of pecuniary loss is necessary for the adjudication of exemplary damages, their 29 assessment being left to the discretion of the court in accordance with the circumstances of each case. While the imposition of exemplary damages is justified in this case, equity calls for its reduction. In Inhelder Corporation v. Court of Appeals, G.R. No. L-52358, 122 SCRA 576, 585, (May 30, 1983), we laid down the rule that judicial discretion granted to the courts in the assessment of damages must always be exercised with balanced restraint and measured objectivity. Thus, here the award of exemplary damages by way of example for the public good should be reduced to P100,000.00. By the same token, attorney's fees and other expenses of litigation may be recovered when exemplary damages 30 are awarded. In our view, RTC's award of P50,000.00 as attorney's fees and expenses of litigation is reasonable, given the circumstances in these cases. WHEREFORE, the petitions are DENIED. The assailed decision and resolution of the Court of Appeals in CAG.R. CV No. 32986 are AFFIRMED WITH MODIFICATIONS. Petitioners Philippine Bank of Communications and Ruby L. Tsai are hereby ordered to pay jointly and severally Ever Textile Mills, Inc. the following: (1) P20,000.00 per month, as compensation for the use and possession of the properties in question from 31 November 1986 until subject personal properties are restored to respondent corporation; (2) P100,000.00 by way of exemplary damages, and (3) P50,000.00 as attorney's fees and litigation expenses. Costs against petitioners. SO ORDERED.

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Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. L-58469 May 16, 1983 MAKATI LEASING and FINANCE CORPORATION, petitioner, vs. WEAREVER TEXTILE MILLS, INC., and HONORABLE COURT OF APPEALS, respondents. Loreto C. Baduan for petitioner. Ramon D. Bagatsing & Assoc. (collaborating counsel) for petitioner. Jose V. Mancella for respondent. DE CASTRO, J.: Petition for review on certiorari of the decision of the Court of Appeals (now Intermediate Appellate Court) promulgated on August 27, 1981 in CA-G.R. No. SP-12731, setting aside certain Orders later specified herein, of Judge Ricardo J. Francisco, as Presiding Judge of the Court of First instance of Rizal Branch VI, issued in Civil Case No. 36040, as wen as the resolution dated September 22, 1981 of the said appellate court, denying petitioner's motion for reconsideration. It appears that in order to obtain financial accommodations from herein petitioner Makati Leasing and Finance Corporation, the private respondent Wearever Textile Mills, Inc., discounted and assigned several receivables with the former under a Receivable Purchase Agreement. To secure the collection of the receivables assigned, private respondent executed a Chattel Mortgage over certain raw materials inventory as well as a machinery described as an Artos Aero Dryer Stentering Range. Upon private respondent's default, petitioner filed a petition for extrajudicial foreclosure of the properties mortgage to it. However, the Deputy Sheriff assigned to implement the foreclosure failed to gain entry into private respondent's premises and was not able to effect the seizure of the aforedescribed machinery. Petitioner thereafter filed a complaint for judicial foreclosure with the Court of First Instance of Rizal, Branch VI, docketed as Civil Case No. 36040, the case before the lower court. Acting on petitioner's application for replevin, the lower court issued a writ of seizure, the enforcement of which was however subsequently restrained upon private respondent's filing of a motion for reconsideration. After several incidents, the lower court finally issued on February 11, 1981, an order lifting the restraining order for the enforcement of the writ of seizure and an order to break open the premises of private respondent to enforce said writ. The lower court reaffirmed its stand upon private respondent's filing of a further motion for reconsideration. On July 13, 1981, the sheriff enforcing the seizure order, repaired to the premises of private respondent and removed the main drive motor of the subject machinery. The Court of Appeals, in certiorari and prohibition proceedings subsequently filed by herein private respondent, set aside the Orders of the lower court and ordered the return of the drive motor seized by the sheriff pursuant to said Orders, after ruling that the machinery in suit cannot be the subject of replevin, much less of a chattel mortgage, because it is a real property pursuant to Article 415 of the new Civil Code, the same being attached to the ground by means of bolts and the only way to remove it from respondent's plant would be to drill out or destroy the concrete floor, the reason why all that the sheriff could do to enfore the writ was to take the main

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drive motor of said machinery. The appellate court rejected petitioner's argument that private respondent is estopped from claiming that the machine is real property by constituting a chattel mortgage thereon. A motion for reconsideration of this decision of the Court of Appeals having been denied, petitioner has brought the case to this Court for review by writ of certiorari. It is contended by private respondent, however, that the instant petition was rendered moot and academic by petitioner's act of returning the subject motor drive of respondent's machinery after the Court of Appeals' decision was promulgated. The contention of private respondent is without merit. When petitioner returned the subject motor drive, it made itself unequivocably clear that said action was without prejudice to a motion for reconsideration of the Court of 1 Appeals decision, as shown by the receipt duly signed by respondent's representative. Considering that petitioner has reserved its right to question the propriety of the Court of Appeals' decision, the contention of private respondent that this petition has been mooted by such return may not be sustained. The next and the more crucial question to be resolved in this Petition is whether the machinery in suit is real or personal property from the point of view of the parties, with petitioner arguing that it is a personality, while the respondent claiming the contrary, and was sustained by the appellate court, which accordingly held that the chattel mortgage constituted thereon is null and void, as contended by said respondent. A similar, if not Identical issue was raised in Tumalad v. Vicencio, 41 SCRA 143 where this Court, speaking through Justice J.B.L. Reyes, ruled: Although there is no specific statement referring to the subject house as personal property, yet by ceding, selling or transferring a property by way of chattel mortgage defendants-appellants could only have meant to convey the house as chattel, or at least, intended to treat the same as such, so that they should not now be allowed to make an inconsistent stand by claiming otherwise. Moreover, the subject house stood on a rented lot to which defendants-appellants merely had a temporary right as lessee, and although this can not in itself alone determine the status of the property, it does so when combined with other factors to sustain the interpretation that the parties, particularly the mortgagors, intended to treat the house as personality. Finally, unlike in the Iya cases, Lopez vs. Orosa, Jr. & Plaza Theatre, Inc. & Leung Yee vs. F.L. Strong Machinery & Williamson, wherein third persons assailed the validity of the chattel mortgage, it is the defendants-appellants themselves, as debtors-mortgagors, who are attacking the validity of the chattel mortgage in this case. The doctrine of estoppel therefore applies to the herein defendants-appellants, having treated the subject house as personality. Examining the records of the instant case, We find no logical justification to exclude the rule out, as the appellate court did, the present case from the application of the abovequoted pronouncement. If a house of strong materials, like what was involved in the above Tumalad case, may be considered as personal property for purposes of executing a chattel mortgage thereon as long as the parties to the contract so agree and no innocent third party will be prejudiced thereby, there is absolutely no reason why a machinery, which is movable in its nature and becomes immobilized only by destination or purpose, may not be likewise treated as such. This is really because one who has so agreed is estopped from denying the existence of the chattel mortgage. In rejecting petitioner's assertion on the applicability of the Tumalad doctrine, the Court of Appeals lays stress on the fact that the house involved therein was built on a land that did not belong to the owner of such house. But the law makes no distinction with respect to the ownership of the land on which the house is built and We should not lay down distinctions not contemplated by law. It must be pointed out that the characterization of the subject machinery as chattel by the private respondent is indicative of intention and impresses upon the property the character determined by the parties. As stated inStandard Oil Co. of New York v. Jaramillo, 44 Phil. 630, it is undeniable that the parties to a contract may by agreement treat as personal property that which by nature would be real property, as long as no interest of third parties would be prejudiced thereby.

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Private respondent contends that estoppel cannot apply against it because it had never represented nor agreed that the machinery in suit be considered as personal property but was merely required and dictated on by herein petitioner to sign a printed form of chattel mortgage which was in a blank form at the time of signing. This contention lacks persuasiveness. As aptly pointed out by petitioner and not denied by the respondent, the status of the subject machinery as movable or immovable was never placed in issue before the lower court and the Court of Appeals except in a supplemental memorandum in support of the petition filed in the appellate court. Moreover, even granting that the charge is true, such fact alone does not render a contract void ab initio, but can only be a ground for rendering said contract voidable, or annullable pursuant to Article 1390 of the new Civil Code, by a proper action in court. There is nothing on record to show that the mortgage has been annulled. Neither is it disclosed that steps were taken to nullify the same. On the other hand, as pointed out by petitioner and again not refuted by respondent, the latter has indubitably benefited from said contract. Equity dictates that one should not benefit at the expense of another. Private respondent could not now therefore, be allowed to impugn the efficacy of the chattel mortgage after it has benefited therefrom, From what has been said above, the error of the appellate court in ruling that the questioned machinery is real, not personal property, becomes very apparent. Moreover, the case of Machinery and Engineering Supplies, Inc. v. CA, 96 Phil. 70, heavily relied upon by said court is not applicable to the case at bar, the nature of the machinery and equipment involved therein as real properties never having been disputed nor in issue, and they were not the subject of a Chattel Mortgage. Undoubtedly, the Tumalad case bears more nearly perfect parity with the instant case to be the more controlling jurisprudential authority. WHEREFORE, the questioned decision and resolution of the Court of Appeals are hereby reversed and set aside, and the Orders of the lower court are hereby reinstated, with costs against the private respondent. SO ORDERED Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 103576 August 22, 1996 ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC, petitioners, vs. HON. COURT OF APPEALS, BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF CALOOCAN CITY,respondents. VITUG, J.:p Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise extend its coverage to obligations yet to be contracted or incurred? This question is the core issue in the instant petition for review oncertiorari. Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe, Rubber & Plastic Corporation," executed on 27 June 1978, for and in behalf of the company, a chattel mortgage in favor of private respondent Producers Bank of the Philippines. The mortgage stood by way of security for petitioner's corporate loan of three million pesos (P3,000,000.00). A provision in the chattel mortgage agreement was to this effect (c) If the MORTGAGOR, his heirs, executors or administrators shall well and truly perform the full obligation or obligations above-stated according to the terms thereof, then this mortgage shall be null and void. . . .

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In case the MORTGAGOR executes subsequent promissory note or notes either as a renewal of the former note, as an extension thereof, or as a new loan, or is given any other kind of accommodations such as overdrafts, letters of credit, acceptances and bills of exchange, releases of import shipments on Trust Receipts, etc., this mortgage shall also stand as security for the payment of the said promissory note or notes and/or accommodations without the necessity of executing a new contract and this mortgage shall have the same force and effect as if the said promissory note or notes and/or accommodations were existing on the date thereof. This mortgage shall also stand as security for said obligations and any and all other obligations of the MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether such obligations have been contracted before, during 1 or after the constitution of this mortgage. In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in 1981, it obtained 2 from respondent bank additional financial accommodations totalling P2,700,000.00. These borrowings were on due date also fully paid. On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan of one million pesos (P1,000,000.00) covered by four promissory notes for P250,000.00 each. Due to financial constraints, the loan 3 was not settled at maturity. Respondent bank thereupon applied for an extra judicial foreclosure of the chattel mortgage, herein before cited, with the Sheriff of Caloocan City, prompting petitioner corporation to forthwith file an action for injunction, with damages and a prayer for a writ of preliminary injunction, before the Regional Trial Court of Caloocan City (Civil Case No. C-12081). Ultimately, the court dismissed the complaint and ordered the foreclosure of the chattel mortgage. It held petitioner corporation bound by the stipulations, aforequoted, of the chattel mortgage. Petitioner corporation appealed to the Court of Appeals which, on 14 August 1991, affirmed, "in all respects," the decision of the court a quo. The motion for reconsideration was denied on 24 January 1992. The instant petition interposed by petitioner corporation was initially dinied on 04 March 1992 by this Court for having been insufficient in form and substance. Private respondent filed a motion to dismiss the petition while petitioner corporation filed a compliance and an opposition to private respondent's motion to dismiss. The Court denied petitioner's first motion for reconsideration but granted a second motion for reconsideration, thereby 5 reinstating the petition and requiring private respondent to comment thereon. Except in criminal cases where the penalty of reclusion perpetua or death is imposed which the Court so reviews as a matter of course, an appeal from judgments of lower courts is not a matter of right but of sound judicial discretion. The circulars of the Court prescribing technical and other procedural requirements are meant to weed out unmeritorious petitions that can unnecessarily clog the docket and needlessly consume the time of the Court. These technical and procedural rules, however, are intended to help secure, not suppress, substantial justice. A deviation from the rigid enforcement of the rules may thus be allowed to attain the prime objective for, after all, the dispensation of justice is the core reason for the existence of courts. In this instance, once again, the Court is constrained to relax the rules in order to give way to and uphold the paramount and overriding interest of justice. Contracts of security are either personal or real. In contracts of personal security, such as a guaranty or a suretyship, the faithful performance of the obligation by the principal debt or is secured by the personalcommitment of another (the guarantor or surety). In contracts of real security, such as a pledge, a mortgage or an antichresis, that fulfillment is secured by an encumbrance of property in pledge, the placing of movable property in the possession of the creditor; in chattel mortgage, by the execution of the corresponding deed substantially in the form prescribed by law; in real estate mortgage, by the execution of a public instrument encumbering the real property covered thereby; and in antichresis, by a written instrument granting to the creditor the right to receive the fruits of an immovable property with the obligation to apply such fruits to the payment of interest, if owing, and thereafter to the principal of his credit upon the essential condition that if the obligation becomes due and the debtor defaults, then the property encumbered can be alienated for the payment 7 of the obligation, but that should the obligation be duly paid, then the contract is automatically extinguished 8 proceeding from the accessory character of the agreement. As the law so puts it, once the obligation is 9 complied with, then the contract of security becomes, ipso facto, null and void.
6 4

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While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long 10 as these future debts are accurately described, a chattel mortgage, however, can only cover obligations existing at the time the mortgage is constituted. Although a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security itself, however, does not come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by concluding a fresh chattel mortgage or by amending the old contract 11 conformably with the form prescribed by the Chattel Mortgage Law. Refusal on the part of the borrower to execute the agreement so as to cover the after-incurred obligation can constitute an act of default on the part of the borrower of the financing agreement whereon the promise is written but, of course, the remedy of foreclosure can only cover the debts extant at the time of constitution and during the life of the chattel mortgage sought to be foreclosed. A chattel mortgage, as hereinbefore so intimated, must comply substantially with the form prescribed by the Chattel Mortgage Law itself. One of the requisites, under Section 5 thereof, is an affidavit of good faith. While it is not doubted that if such an affidavit is not appended to the agreement, the chattel mortgage would still be valid 12 between the parties (not against third persons acting in good faith ), the fact, however, that the statute has provided that the parties to the contract must execute an oath that . . . (the) mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and for no other purpose, and that the same is a just and valid obligation, and one not entered into for the purpose of 13 fraud. makes it obvious that the debt referred to in the law is a current, not an obligation that is yet merely contemplated. In the chattel mortgage here involved, the only obligation specified in the chattel mortgage contract was the P3,000,000.00 loan which petitioner corporation later fully paid. By virtue of Section 3 of the Chattel Mortgage Law, the payment of the obligation automatically rendered the chattel mortgage void or 14 terminated. In Belgian Catholic Missionaries, Inc., vs. Magallanes Press, Inc., et al., the Court said . . . A mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the 15 date the same are made and not from the date of the mortgage. The significance of the ruling to the instant problem would be that since the 1978 chattel mortgage had ceased to 16 exist coincidentally with the full payment of the P3,000,000.00 loan, there no longer was any chattel mortgage that could cover the new loans that were concluded thereafter. We find no merit in petitioner corporation's other prayer that the case should be remanded to the trial court for a specific finding on the amount of damages it has sustained "as a result of the unlawful action taken by 1 respondent bank against it." 7 This prayer is not reflected in its complaint which has merely asked for the 18 19 amount of P3,000,000.00 by way of moral damages. In LBC Express, Inc. vs. Court of Appeals, we have said: Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no senses; therefore, it cannot experience physical suffering and mental anguish. Mental suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows, and griefs of life all of which cannot be 20 suffered by respondent bank as an artificial person. While Chua Pac is included in the case, the complaint, however, clearly states that he has merely been so named as a party in representation of petitioner corporation.

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Petitioner corporation's counsel could be commended for his zeal in pursuing his client's cause. It instead turned out to be, however, a source of disappointment for this Court to read in petitioner's reply to private respondent's comment on the petition his so-called "One Final Word;" viz: In simply quoting in toto the patently erroneous decision of the trial court, respondent Court of Appeals should be required to justify its decision which completely disregarded the basic laws on obligations and contracts, as well as the clear provisions of the Chattel Mortgage Law and well-settled jurisprudence of this Honorable Court; that in the event that its explanation is wholly unacceptable, this Honorable Court should impose appropriate sanctions on the erring justices. This is one positive step in ridding our courts of law of incompetent and 21 dishonest magistrates especially members of a superior court of appellate jurisdiction. (Emphasis supplied.) The statement is not called for. The Court invites counsel's attention to the admonition in Guerrero 22 vs.Villamor; thus: (L)awyers . . . should bear in mind their basic duty "to observe and maintain the respect due to the courts of justice and judicial officers and . . . (to) insist on similar conduct by others." This respectful attitude towards the court is to be observed, "not for the sake of the temporary incumbent of the judicial office, but for the maintenance of its supreme importance." And it is through a scrupulous preference for respectful language that a 23 lawyer best demonstrates his observance of the respect due to the courts and judicial officers . . . The virtues of humility and of respect and concern for others must still live on even in an age of materialism. WHEREFORE, the questioned decisions of the appellate court and the lower court are set aside without prejudice to the appropriate legal recourse by private respondent as may still be warranted as an unsecured creditor. No costs. Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be circumspect in dealing with the courts. SO ORDERED. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. 34385 September 21, 1931

ALEJANDRA TORRES, ET AL., plaintiff-appellees, vs. FRANCISCO LIMJAP, Special Administrator of the estate of the deceased Jose B. Henson, defendantappellant. x---------------------------------------------------------x G.R. No. 34386 September 21, 1931

SABINA VERGARA VDA. DE TORRES, ET AL., plaintiffs-appellees, vs. FRANCISCO LIMJAP, Special Administration of the estate of the deceased Jose B. Henson, defendantappellant.

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Duran, Lim and Tuason for appellant. Guevara, Francisco and Recto for appellees. JOHNSON, J.: These two actions were commenced in the Court of First Instance of Manila on April 16, 1930, for the purpose of securing from the defendant the possession of two drug stores located in the City of Manila, covered by two chattel mortgages executed by the deceased Jose B. Henson in favor of the plaintiffs. In the first case the plaintiffs alleged that Jose B. Henson, in his lifetime, executed in their favor a chattel mortgage (Exhibit A) on his drug store at Nos. 101-103 Calle Rosario, known as Farmacia Henson, to secure a loan of P7,000, although it was made to appear in the instrument that the loan was for P20,000. In the second case the plaintiffs alleged that they were the heirs of the late Don Florentino Torres; and that Jose B. Henson, in his lifetime, executed in favor of Don Florentino Torres a chattel mortgage (also Exhibit A) on his three drug stores known as Henson's Pharmacy, Farmacia Henson and Botica Hensonina, to secure a loan of P50,000, which was later reduced to P26,000, and for which, Henson's Pharmacy at Nos. 71-73 Escolta, remained as the only security by agreement of the parties. In both cases the plaintiffs alleged that the defendant violated the terms of the mortgage and that, in consequence thereof they became entitled to the possession of the chattels and to foreclose their mortgages thereon. Upon the petition of the plaintiffs and after the filing of the necessary bonds, the court issued in each case an order directing the sheriff of the City of Manila to take immediate possession of said drug stores. The defendant filed practically the same answer to both complaints. He denied generally and specifically the plaintiffs' allegations, and set up the following special defenses: (1) That the chattel mortgages (Exhibit A, in G.R. No. 34385 and Exhibit A, in G.R. No. 34286) are null and void for lack of sufficient particularity in the description of the property mortgaged; and (2) That the chattels which the plaintiffs sought to recover were not the same property described in the mortgage. The defendant also filed a counterclaim for damages in the sum of P20,000 in the first case and P100,000 in the second case. Upon the issue thus raised by the pleadings, the two causes were tried together by agreement of the parties. After hearing the evidence adduced during the trial and on July 17, 1930, the Honorable Mariano Albert, judge, in a very carefully prepared opinion, arrived at the conclusion (a) that the defendant defaulted in the payment of interest on the loans secured by the mortgages, in violation of the terms thereof; (b) that by reason of said failure said mortgages became due, and (c) that the plaintiffs, as mortgagees, were entitled to the possession of the drug stores Farmacia Henson at Nos. 101-103 Calle Rosario and Henson's Pharmacy at Nos. 71-73 Escolta. Accordingly, a judgment was rendered in favor of the plaintiffs and against the defendant, confirming the attachment of said drug stores by the sheriff of the City of Manila and the delivery thereof to the plaintiffs. The dispositive part of the decision reads as follows: En virtud de todo lo expuesto, el Juzgado dicta sentencia confirmado en todas sus partes los ordenes de fechas 16 y 17 de abril de presente ano, dictadas en las causas Nos. 37096 y 37097, respectivamente, y declara definitiva la entrega hecha a los demandantes por el Sheriff de Manila de las boticas en cuestion. Se condena en costas al demandado en ambas causas. From the judgment the defendant appealed, and now makes the following assignments of error:

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I. The lower court erred in failing to make a finding on the question of the sufficiency of the description of the chattels mortgaged and in failing to hold that the chattel mortgages were null and void for lack of particularity in the description of the chattels mortgaged. II. The lower court erred in refusing to allow the defendant to introduce evidence tending to show that the stock of merchandise found in the two drug stores was not in existence or owned by the mortgagor at the time of the execution of the mortgages in question. III. The lower court erred in holding that the administrator of the deceased is now estopped from contesting the validity of the mortgages in question. IV. The lower court erred in failing to make a finding on the counterclaims of the defendant. With reference to the first assignment of error, we deem it unnecessary to discuss the question therein raised, inasmuch as according to our view on the question of estoppel, as we shall hereinafter set forth in our discussion of the third assignment of error, the defendant is estopped from questioning the validity of these chattel mortgages. In his second assignment of error the appellant attacks the validity of the stipulation in said mortgages authorizing the mortgagor to sell the goods covered thereby and to replace them with other goods thereafter acquired. He insists that a stipulation authorizing the disposal and substitution of the chattels mortgaged does not operate to extend the mortgage to after-acquired property, and that such stipulation is in contravention of the express provision of the last paragraph of section 7 Act No. 1508, which reads as follows: A chattel mortgage shall be deemed to cover only the property described therein and not like or substituted property thereafter acquired by the mortgagor and placed in the same depository as the property originally mortgaged, anything in the mortgage to the contrary notwithstanding. In order to give a correct construction to the above-quoted provision of our Chattel Mortgage Law (Act No. 1508), the spirit and intent of the law must first be ascertained. When said Act was placed on our statute books by the United States Philippine Commission on July 2, 1906, the primary aim of that law-making body was undoubtedly to promote business and trade in these Islands and to give impetus to the economic development of the country. Bearing this in mind, it could not have been the intention of the Philippine Commission to apply the provision of section 7 above quoted to stores open to the public for retail business, where the goods are constantly sold and substituted with new stock, such as drug stores, grocery stores, dry-goods stores, etc. If said provision were intended to apply to this class of business, it would be practically impossible to constitute a mortgage on such stores without closing them, contrary to the very spirit about a handicap to trade and business, would restrain the circulation of capital, and would defeat the purpose for which the law was enacted, to wit, the promotion of business and the economic development of the country. In the interpretation and construction of a statute the intent of the law-maker should always be ascertained and given effect, and courts will not follow the letter of a statute when it leads away from the true intent and purpose of the Legislature and to conclusions inconsistent with the spirit of the Act. On this subject, Sutherland, the foremost authority on statutory construction, says: The Intent of Statute is the Law. If a statute is valid it is to have effect according to the purpose and intent of the lawmaker. The intent is the vital part, the essence of the law, and the primary rule of construction is to ascertain and give effect to that intent. The intention of the legislature in enacting a law is the law itself, and must be enforced when ascertained, although it may not be consistent with the strict letter of the statute. Courts will not follow the letter of a statute when it leads away from the true intent and purpose of the legislature and to conclusions inconsistent with the general purpose of the act. Intent is the spirit which gives life to a legislative enactment. In construing statutes the proper course is to start out and follow the true intent of the legislature and to adopt that sense which harmonizes best with the content and promotes in the fullest manner the apparent policy and objects of the legislature. (Vol. II Sutherland, Statutory Construction, pp. 693-695.)

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A stipulation in the mortgage, extending its scope and effect to after-acquired property, is valid and binding . . . where the after-acquired property is in renewal of, or in substitution for, goods on hand when the mortgage was executed, or is purchased with the proceeds of the sale of such goods, etc. (11 C.J., p. 436.) Cobbey, a well-known authority on Chattel Mortgages, recognizes the validity of stipulations relating to afteracquired and substituted chattels. His views are based on the decisions of the supreme courts of several states of the Union. He says: "A mortgage may, by express stipulations, be drawn to cover goods put in stock in place of others sold out from time to time. A mortgage may be made to include future acquisitions of goods to be added to the original stock mortgaged, but the mortgage must expressly provide that such future acquisitions shall be held as included in the mortgage. ... Where a mortgage covering the stock in trade, furniture, and fixtures in the mortgagor's store provides that "all goods, stock in trade, furniture, and fixtures hereafter purchased by the mortgagor shall be included in and covered by the mortgage," the mortgage covers all afteracquired property of the classes mentioned, and, upon foreclosure, such property may be taken and sold by the mortgagee the same as the property in possession of the mortgagor at the time the mortgage was executed." (Vol. I, Cobbey on Chattel Mortgages, sec. 361, pp. 474, 475.) In harmony with the foregoing, we are of the opinion (a) that the provision of the last paragraph of section 7 of Act No. 1508 is not applicable to drug stores, bazaars and all other stores in the nature of a revolving and floating business; (b) that the stipulation in the chattel mortgages in question, extending their effect to afteracquired property, is valid and binding; and (c) that the lower court committed no error in not permitting the defendant-appellant to introduce evidence tending to show that the goods seized by the sheriff were in the nature of after-acquired property. With reference to the third assignment of error, we agree with the lower court that, from the facts of record, the defendant-appellant is estopped from contenting the validity of the mortgages in question. This feature of the case has been very ably and fully discussed by the lower court in its decision, and said discussion is made, by reference, a part of this opinion. As to the fourth assignment of error regarding the counterclaims of the defendant-appellant, it may be said that in view of the conclusions reached by the lower court, which are sustained by this court, the lower court committed no error in not making any express finding as to said counterclaims. As a matter of form, however, the counterclaims should have been dismissed, but as the trial court decided both cases in favor of the plaintiffs and confirmed and ratified the orders directing the sheriff to take possession of the chattels on behalf of the plaintiffs, there was, in effect, a dismissal of the defendant's counterclaims. For all of the foregoing, we are of the opinion and so hold that the judgment appealed from is in accordance with the facts and the law, and the same should be and is hereby affirmed, with costs. So ordered. Avancea, C.J., Street, Malcolm, Villamor, Ostrand, Romualdez, Villa-Real, and Imperial, JJ., concur. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. 42551 September 4, 1935

ALEKO E. LILIUS, for himself and as guardian ad litem of his minor child, Brita Marianne Lilius, and SONJA MARIA LILIUS, plaintiffs-appellees, vs. MANILA RAILROAD COMPANY, defendant.

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LAURA LINDLEY SHUMAN, MANILA WINE MERCHANTS, LTD., BANK OF THE PHILIPPINE ISLANDS AND MANILA MOTOR CO., INC., intervenors-appellants, and W.H. WATEROUS, M. MARFORI, JOHN R. MCFIE, JR., ERLANGER & GALINGER, INC., PHILIPPINE EDUCATION CO., INC., HAMILTON BROWN SHOE CO., ESTRELLA DEL NORTE and EASTERN & PHILIPPINE SHIPPING AGENCIES, LTD., intervenors-appellees. J.W. Ferrier for intervenor-appellant Shuman. Franco and Reinoso for intervenor-appellant Manila Wine Merchants, Ltd. Feria and La O for intervenor-appellant Bank of the Philippine Islands. Gibbs and McDonough for intervenor-appellant Manila Motor Co. Harvey and O'Brien for plaintiffs-appellees. John R. Mcfie, Jr., in his behalf and for the intervenors-appellees. GODDARD, J.: In this case Laura Lindley Shuman, the Manila Wine Merchants, Ltd., the Bank of the Philippine Islands and the Manila Motor Co., Inc., have appealed from an order of the Court of First Instance of Manila fixing the degree of preference of the claimants and distributing the proceeds of the judgment of this court in the case of Lilius vs. Manila Railroad Co. (59 Phil., 758), the amount of which judgment in the sum of P33,525.03, including interest and costs, was deposited by the railroad company with the clerk of the lower court in that case. After deducting the attorneys' fees in the sum of P8,016.88, which is not questioned, the net amount in the hands of the clerk of the lower court pertaining to each of the plaintiffs in the original action is follows: Aleko E. Lilius Sonja Maria Lilius Brita Marianne Lilius P13,181.33 8,218.54 4,109.28

There was a total of twenty-eight claimants to these funds, whose claims were presented and decided without objection in the original case in the lower court. The trial court in its order from which these appeals are taken, allowed: (a) As against the sum of P8,218.54, separately awarded to the plaintiff Sonja Lilius, the following claims or portions thereof in the order stated: One-half of the claim of Dr. W.H. Waterous by virtue of a written assignment of March 9, 1933, by the said Sonja Maria Lilius to him One-third of the claim of the appellant Laura Lindley Shuman by virtue of a joint judgement obtained by her on August 10, 1933, in the Case No. 44254 of the Court of First Instance of Manila, against the said Sonja Maria Lilius, Aleko E. Lilius and Brita Marianne Lilius One-third of the claim of the St. Paul's Hospital by virtue of a joint written assignment of September 21, 1933, by the said Sonja Maria Lilius, Aleko E. Lilius and Brita Marianne Lilius to it P1,500.00

661.13

518.19

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and the balance of the award was ordered paid to the said Brita Marianne Lilius, and (b) As against the sum of P4,109.28, separately awarded to the plaintiff Brita Marriane Lilius, the following claims or portions thereof in the order stated: One-third of the claim of Laura Lindley Shuman by virtue of a joint judgment obtained by her on August 10, 1933, in Case No. 44254 of the Court of First Instance of Manila, against the said Brita Marianne Lilius, Sonja Maria Lilius and Aleko E. Lilius One-third of the claim of St. Paul's Hospital by virtue of a joint written assignment of September 21, 1933, by the said Brita Marianne Lilius, Sonia Maria Lilius and Aleko E. Lilius P661.13

518.18

and the balance of the award was ordered paid to the said Brita Marianne Lilius, and (c) As against the sum of P13,181.33, awarded to the plaintiff Aleko E. Lilius, the following claims or portions thereof in the order stated: The other half of the claim of Dr. W.H. Waterous by virtue of the final judgement in the original case, G.R. No. 39587 The claim of Dr. M. Marfori, by virtue of the final judgment in the original case, G.R. No. 39587 The claim of John R. McFie, Jr., by virtue of a written assignment to him by the said Aleko E. Lilius of November 13, 1931 The balance of P10, 931.33 of the judgment pertaining to the said Aleko E. Lilius was allowed and distributed by the lower court proportionately among the following claimants by virtue of their written assignment of January 27, 1932: Erlanger & Galinger, Inc. Philippine Education Co., Inc., Hamilton Brown Shoe Co. Estrella del Norte Eastern & Philippine Shipping Agencies, Ltd. APPEAL OF LAURA LINDLEY SHUMAN 3,374.50 3,394.94 1,878.98 1,850.76 432.15

P1,500.00 250.00

500.00

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First assignments of error: "The lower court erred in holding that Dr. W.H. Waterous and Dr. M. Marfori had a claim against the plaintiff, Aleko E. Lilius superior to the claim of the appellant, Laura Lindley Shuman, against him." One of the contentions of this appellant under this assignment of error is that her claim, having been made the basis of the plaintiffs' action and of the award for damages, as shown in the original decision herein, should constitute, and does constitute a superior lien against the funds awarded said plaintiffs, to those of any other claimants, except the two doctors, the hospital and the other nurse, and that as to the claims of the two doctors, the hospital and the other nurse the claim of this appellant has equal preference with their claims. The following items were made the basis of a part of the judgment for damages awarded to the plaintiffs in the original action against the Manila Railroad Company: Por honorarios del Dr. Waterous (Exhibit N-2) Por la primera cura hecha en el Hospital de Calauang (Exhibit N-5) Por el alquiler de la ambulancia del Hospital General (Exhibit N-4) Por la estancia en el Hospital Saint Paul (Exhibit N-3) Por los servicios prestados por la enfermera Laura Shuman (Exhibit N-6) Por los servisios prestados por la enfermera Alejandra Alcayaga (Exhibit N-9) Porlos servicios prestados por la enfermera Carmen Villanueva (Exhibit N-11) Por la perdida de la camara fotografica, pluma fuente y lapiz (Exhibit N-1) Por trajes daados en el choque Total P3,000.00 250.00 10.00 3,355.00 2,156.00 1,450.00 240.00 43.00 131.00 10,635.00

The trial court in that case directed the defendant Railroad Company to pay P3,000 to Dr. Waterous and to pay to Dr. Marfori P250, but failed to direct the defendant to pay the corresponding sums to the other persons and entities mentioned in the portion of the decision copied above. It must be admitted that the amounts due Dr. Waterous and the others mentioned is the original decision, including the appellant Shuman, were all used as a basis for a part of the judgment which plaintiffs secured against the defendants Railroad Company. From the foregoing it is clear that the claim of this appellant rests upon the same ground as those of Doctors Waterous and Marfori. She was also among those who rendered services to plaintiffs in aid of their recover from the injuries received by them in the accident for which damages were awarded them in the case against the Railroad Company. The fact that the trial court did not direct the defendant Railroad Company to pay directly to this appellant the amount of her claim does not modify or do away with her equitable right to the same status as that given to the two doctors mentioned above. The inevitable conclusion is that the claims of Waterous and

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Marfori have no preference over her claim for her services as a nurse. This assignment of error should be and is hereby sustained. This appellant in her second assignment of error contends that the trial court erred in failing to allow her claim in the sum of P61.94 as costs in the case in which judgment was rendered in her favor against the herein plaintiffs-appellees. The record shows that the reason for the disallowance of this item was because no proof was offered as to the amount of such costs. The only thing appearing in the transcript on this point is the statement of counsel that the amount of costs in case No. 44254, as shown by the bill of costs, was P6l.94. Rule 38 of the Revised Rules of Courts of First Instance requires that ". . . costs shall be taxed by the clerk on five days' written notice given by the prevailing party to the adverse party, with which notice given by the prevailing party, verified by his oath or that of his attorney, shall be served. . . ." The proper evidence, therefore, of the costs in that case would have been the bill of costs and the taxation of such costs by the clerk. In order to recover such costs in a separate proceeding, such as this, evidence must be presented as to the amount of the same. As there was no evidence offered in this case as to the amount of said costs, the lower court was correct in disallowing that item. This assignment of error is overruled. Under her third assignment of error this appellant contends (1) that the funds separately awarded the wife, Sonja Maria Lilius, partake of the nature of conjugal property, at least to the extent of the sum of P800 awarded to her as interest on the principal award of P10,000 made in her favor by the trial court, and as such should respond for the support of the family, including medical expenses and (2) that even assuming that the sums awarded separately to Sonja Maria Lilius are not conjugal property, but her own paraphernal property, still under the provisions of the Civil Code payment may be required out of said funds, her husband being insolvent, under her liability for the medical expenses incurred by her husband, one of the obligations imposed by law upon the wife. The second contention under this assignment of error can be disposed of by calling attention to the fact that there is no proof in this case that her husband is insolvent. It has not been proved that Aleko E. Lilius had no other property outside of the sum awarded to him in the case against the Railroad Company. APPEAL OF THE MANILA WINE MERCHANTS, LTD., AND THE BANK OF THE PHILIPPINE ISLANDS. The appellants, the Manila Wine Merchants. Ltd., and the Bank of the Philippine islands also contend that the sum separately awarded Sonja Maria Lilius is conjugal property and therefore liable for the payment of the private debts of her husband, Aleko E. Lilius, contracted during her marriage. it is contended that the damages awarded for personal injury are not classified as separate property of each of the spouses in article 1396 of the Civil Code and they should therefore be resumed conjugal. In answer to this, article 1401 of the same Code, in enumerating the property belonging to the conjugal partnership, does not mention damages for personal injury. The question raised by these appellants is one of first impression in this jurisdiction and apparently has never been passed upon by the Supreme Court of Spain. The following comment is found in Colin y Capitant, Vol. 6, pages 217 and 218: "No esta resuelta expresamente en la legislacion espa__ola la cuestion de si las indemnizaciones debidas por accidentes del trabajo tienen la consideracion de gananciales o son bienes particulares de los conyuges. "Inclinan a la solucion de que estas indemnizaciones deben ser consideradas como gananciales, el hecho de que la sociedad pierde la capacidad de trabajo con el accidente, que a ella le pertenece, puesto que de la sociedad son los frutos de ese trabajo; en cambio, la consideracion de que de igual manera que los bienes que sustituyen a los que cada conyuge lleva al matrimonio como propios tienen el caracter de propios, hace pensar que las indemnizaciones que vengan a suplir la capacidad de trabajo aportada por cada conyuge a la sociedad,

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deben ser juridicamente reputadas como bienes propios del conyuge que haya sufrido el accidente. Asi se Ilega a la misma solucion aportada por la jurisprudencia francesa.". From the above it appears that there are two distinct theories as to whether damages rising from an injury suffered by one of the spouses should be considered conjugal or separate property of the injured spouse. The theory holding that such damages should form part of the conjugal partnership property is based wholly on the proposition, also advanced by the Manila Wine Merchants, Ltd., that by the injury the earning capacity of the injured spouse is diminished to the consequent prejudice of the conjugal partnership. Assuming the correctness of this theory, a reading of the decision of this court in G. R. No. 39587 will show that the sum of P10,000 was awarded to Sonja Maria Lilius "by way of indemnity for patrimonial and moral damages." The pertinent part of that decision on this point reads: "Taking into consideration the fact that the plaintiff Sonja Maria Lilius, wife of the plaintiff Aleko E. Lilius is-in the language of the court, which saw her at the trial "young and beautiful and the big scar, which she has on her forehead caused by the lacerated wound received by her from the accident, disfigures her face and that the fracture of her left leg has caused a permanent deformity which renders it very difficult for her to walk', and taking into further consideration her social standing, neither is the sum of P10,000, adjudicated to her by the said trial court by way, of indemnity for patrimonial and moral damages, excessive.". It should be added that the interest on that sum is part of the damages "patrimonial and moral" awarded to Sonja Maria Lilius. Furthermore it appears in the decision of the trial court in G. R. No. 39587 that Aleko E. Lilius claimed the sum of P10,000 as damages on account of the loss of the services of Sonja Maria Lilius as secretary and translator, her particular work as a member of the conjugal partnership. The trial court disallowed this claim and neither of the plaintiffs in that case appealed to this court. In view of the foregoing it is held that the sum of P10,000 with interest thereon awarded to Sonja Maria Lilius as damages is paraphernal property. The third assignment of error of the appellant Shuman, the second assignment of error of the appellant Bank of the Philippine Islands and the sole assignment of error of the appellant Manila Wine Merchants, Ltd., are overruled. In its first assignment of error it is contended by the Bank of the Philippines Islands that by virtue of its writ of garnishment served on the Manila Railroad Company of February 8, 1933, it acquired a lilen superior to the preference granted by article 1924 of the Civil Code to prior judgments. This error, if at all, is however nonprejudicial as the record shows that all the creditors declared by the court as having a right to participate in the proceeds of the judgment in favor of Aleko E. Lilius were so held by virtue of deeds of assignment executed prior to the date of the service of notice of the bank's writ of garnishment on the Manila Railroad Company. These creditors are John R. McFie, jr., whose claim is based on a deed of assignment dated November 13, 1931, and Erlanger & Galinger, Philippine Education Co., Inc., Hamilton Brown Shoe Co., Estrella del Norte and Eastern & Philippine Shipping Agencies, Ltd., whose claims are based on a deed of assignment dated November 17, 1931. As the record shows that whatever was left of the judgment in favor of Aleko E. Lilius is not sufficient to pay in full the credits of the above mentioned creditors and furthermore, in view of the fact that strictly speaking, there was no existing credit in favor of Aleko E. Lilius to be garnished on February 3, 1933, as it had been assigned, before that date, to his creditors, this assignment of error, therefore, must be overruled. APPEAL OF THE THE MANILA MOTOR CO., INC. The two error assigned by this appellant read as follows:

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"I. The lower court erred in considering the date of the date judgment, Exhibit A, Manila Motor Co., Inc., instead of the date of the public document upon which it was based in determining the preference among the several claims filed and litigated in this proceeding. "ll. The lower court erred in not holding the claim of the claimant-appellant, Manila Motor Co., Inc., preferred over all other claims against Aleko E. Lilius evidenced by public instruments and final judgments.". The claimant has not proven that its credit is evidenced by a public document within the meaning of article 1924 of the Civil Code. The only evidence offered by the Manila Motor Co., Inc., in support of its claim of preference against the fund of Aleko E. Lilius was a certified copy of its judgment against him in civil case No. 41159 of the Court of First Instance of Manila, together with a certified copy of the writ of execution and the garnishment issued by virtue of said judgment. These documents appear in the record as Exhibits A, B and C. The alleged public document evidencing its claim was not offered in evidence and counsel of the Manila Motor Co., Inc., merely stated at the hearing in the lower court that its judgment was based on a public document dated May 10, 1931. There is no explanation as to why it was not presented as evidence along with Exhibits A, B, and C. In their brief in this court, counsel for the Motor Co., Inc., merely assume that its credit is evidenced by a public document dated may 10, 1931, because the court, in its judgment in said civil case No. 41159, refers to a mortgage appearing in the evidence as Exhibit A, as the basis of its judgment, without mentioning the date of the execution of the exhibit. This reference in said judgment to a mortgage is not competent or satisfactory evidence as against third persons upon which to base a finding that the Manila Motor Company's credit evidenced by a public document within the meaning of article 1924 of the Civil Code. This court is not authorized to make use of that judgment as a basis for its findings of fact in this proceeding. This is shown by the decision of this court in the case of Martinez vs. Diza 920 Phil., 498). In that syllabus of that decision it is stated: "1. COURTS OF FIRST INSTANCE; JUDGMENT IN FORMER CIVIL ACTION AS BASIC FOR FINDINGS OF FACT; ERROR.-A person who was not a party to a former civil action, or who did not acquire his rights from one of the parties thereto after the entry of judgment therein, is not bound by such judgment; nor can it be used against him as a basis for the findings of fact in a judgment rendered in a subsequent action.". But even if the court is authorized to accept the statement in that judgment as a basis for its finding of fact in relation to this claim, still it would not establish the claim of preference of the Manila Motor Co., Inc. Granting that a mortgage existed between the Manila Motor Co., Inc., and Aleko E. Lilius, this does not warrant the conclusion that the instrument evidencing that mortgage is a public document entitled to preference under article 1924 of the Civil Code. Under section 5 of Act No. 1507 as amended by Act No. 2496, a chattel does not have to be acknowledge before a notary public. As against creditors and subsequent encumbrances, the law does require an affidavit of good faith appended to the mortgage and recorded with it. (See Giberson vs. A. N. Jureidini Bros., 44 Phil., 216, and Betita vs. Ganzon, 49 Phil., 87.) A chattel mortgage may, however, be valid as between the parties without such an affidavit of good faith. In 11 Corpus Juris, 482, the rule is expressly stated that as between the parties and as to third persons who have no rights against the mortgagor, no affidavit of good faith is necessary. It will thus be seen that under the law, a valid mortgage may exist between the parties without its being evidenced by a public document. This court would not be justified, merely from the reference by the lower court in that case to a mortgage, in assuming that its date appears in a public document. if the Manila motor Co., Inc., desired to rely upon a public document in the form of a mortgagor as establishing its preference in this case, it should have offered that document in evidence, so that the court might satisfy itself as to its nature and unquestionably fix the date of its execution. There is nothing either in the judgment relied upon or in the evidence to show the date of said mortgage. The burden was upon the claimant to prove that it actually had a public Code. It is essential that the nature and the date of the document be established by competent evidence before the court can allow a preference as against the other parties to this proceeding. Inasmuch as the claimant failed to establish its preference, based on a public document, the lower court properly held that its claim against the said Aleko E. Lilius was based on the final judgment in civil case No. 41159 of the Court of First Instance of Manila of May 3, 1932. The court, therefore, committed no error in holding that the claim of the Manila Motor Co., Inc., was inferior in preference to those of the appellees in this case.

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This appellant's assignments of error are overulled. In view of the foregoing the following portion of the dispositive part of the decision of the trial court is affirmed. "Por estas consideraciones, se ordena y se decreta (a) que del saldo de P8,219.54, que pertenece a Sonja Maria LIllius y que se halla depositado en la Escribana del Juzgado, se pague po el Escribano al Dr. W. H. Waterous la suma de mil quinientos pesos (P1,500), a Laura L. Shuman, seiscientos sesenta y un pesos con trece centavos (P661.13, y al St. Paul's Hospital, quinientos diez y ocho pesos con diez y ocho centavos (P518.18), y el remanente de cinco mil cuatrocientos setenta y siete pesos con veinticuatro centavos (P5,477.24), a Sonja Maria Lililus, o su apoderado; (b) que del saldo de P4,109.28 que pretence a Brita Marianne Lilius y que se halla deposito en la Escribania del Juzgado, se pague por el Escribano a Laura Shuman, la suma de seicientos sesenta y un pesos con trece centavos (P661.13); y al St. Paul's Hospital, quinientos diez y ocho pesos con diez y ocho centavos (P518.18)y, y el sado de dos mil ochocientos sesenta y siete pesos con noventa y siete centavos (P2,867.97), a Brita Marianne Lilius, por conducto de su tutor;". The remaining portion of the dispositive part of the decision of the trial court is modified as follows: "That from the sum of P13,181.33 pertaining to Aleko E. Lilius, which is deposited with the clerk of the trial court, the following claims shall first be paid: Dr. W.H. Waterous Dr. M. Marfori Laura Lindley Shuman John R. McFie, Jr. P1,500.00 250.00 661.13 500.00

and the balance of the sum pertaining to Aleko E. Lilius shall be divided among the following entities in proportion to their respective claims: Amount claim Erlanger & Galinger, Inc. Philippine Education Co., Inc. Hamilton-Brown Shoe Co. Estrella del Norte Eastern and Philippine Shipping Agencies, Ltd. So ordered without special pronouncement as to costs. Malcolm, Villa-Real, Imperial, and Butte, JJ., concur. P3,672.76 3,695.20 2045.00 2,014.45 470.38 of

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Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. L-48359. March 30, 1993. MANOLO P. CERNA, petitioner, vs. THE HONORABLE COURT OF APPEALS and CONRAD C. LEVISTE, respondents. Zosa & Quijano Law Offices for petitioner. Benjamin H. Aquino for private respondent. SYLLABUS 1. CIVIL LAW; OBLIGATIONS & CONTRACTS; SOLIDARY LIABILITY, NOT PRESUMED. Only Delgado signed the promissory note and accordingly, he was the only one bound by the contract of loan. Nowhere did it appear in the promissory note that petitioner was a co-debtor. The law is clear that "(c)ontracts take effect only between the parties . . ." But by some stretch of the imagination, petitioner was held solidarily liable for the debt allegedly because he was a co-mortgagor of the principal debtor, Delgado. This ignores the basic precept that "(t)here is solidarily liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity." The contract of loan, as evidenced by the promissory note, was signed by Delgado only. Petitioner had no part in the said contract. Thus, nowhere could it be seen from the agreement that petitioner was solidarily bound with Delgado for the payment of the loan. 2. ID.; ID.; SIGNATORY TO THE PRINCIPAL CONTRACT OF LOAN, PRIMARILY LIABLE; THIRD-PARTY MORTGAGOR NOT SOLIDARILY BOUND WITH THE PRINCIPAL DEBTOR. There is no legal provision nor jurisprudence in our jurisdiction which makes a third person who secures the fulfillment of another's obligation by mortgaging his own property to be solidarily bound with the principal obligor. A chattel mortgage may be "an accessory contract" to a contract of loan, but that fact alone does not make a third-party mortgagor solidarily bound with the principal debtor in fulfilling the principal obligation that is, to pay the loan. The signatory to the principal contract loan remains to be primarily bound. It is only upon the default of the latter that the creditor may have been recourse on the mortgagors by foreclosing the mortgaged properties in lieu of an action for the recovery of the amount of the loan. And the liability of the third-party mortgagors extends only to the property mortgaged. Should there be any deficiency, the creditors has recourse on the principal debtor. 3. ID.; ID.; ID.; A SPECIAL POWER OF ATTORNEY AUTHORIZING THE MORTGAGE OF CERTAIN PROPERTIES DID NOT MAKE THE ATTORNEY-IN-FACT A MORTGAGOR. The mortgage contract was also signed only by Delgado as mortgagor. The Special Power of Attorney did not make petitioner a mortgagor. All it did was to authorized Delgado to mortgage certain properties belonging to petitioner. And this is in compliance with the requirement in Article 2085 of the Civil Code which states that: "Art. 2085. The following requisites are essential to the contracts of pledge and mortgage: (3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose." In effect, petitioner lent his car to Delgado so that the latter may mortgage the same to secure his debt. Thus, from the contract itself, it was clear that only Delgado was the mortgagor regardless of the fact the he used properties belonging to a third person to secure his debt. 4. REMEDIAL LAW; CIVIL ACTIONS; FILING OF COLLECTION SUIT BARRED THE FORECLOSURE OF MORTGAGE. We agree with petitioner that the filing of collection suit barred the foreclosure of the mortgage. Thus: "A mortgage who files a suit for collection abandons the remedy of foreclosure of the chattel mortgage constituted over the personal property as security for the debt or value of the promissory note which he seeks to recover in the said collection suit." The reason for this rule is that: ". . . when, however, the mortgage elects to

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file a suit for collection, not foreclosure, thereby abandoning the chattel as basis for relief, he clearly manifest his lack of desire and interest to go after the mortgaged property as security for the promissory note . . ." 5. ID.; MORTGAGE DEBT DUE FROM ESTATE; OPTIONS GIVEN TO CREDITORS UNDER SEC. 7, RULE 86, NEW RULES OF COURT. Leviste, having chosen to file the collection suit, could not now run after petitioner for the satisfaction of the debt. This is even more true in this case because of the death of the principal debtor, Delgado. Leviste was pursuing a money claim against a deceased person. Section 7, Rule 86 of the Rules of Court provides: "Sec. 7. Mortgage debt due from estate. A creditor holding a claim against the deceased secured by mortgaged or other collateral security, may abandon the security and prosecute his claim in the manner provided in this rule, and share in the general distribution of the assets of the estate; or he may foreclose his mortgage or realize upon his security, by action in court, making the executor or administrator a party defendant, and if there is a judgment for a deficiency, after the sale of the mortgaged premises, or the property pledged, in the foreclosure or the other proceeding to realize upon security, he may claim his deficiency judgment in the manner provided in the preceding section; or he may upon his mortgage or other security alone, and foreclosure the same at any time within the period of the statue of limitations, and in that event he shall not be admitted as a creditor, and shall receive no share in the distribution of the other assets of the estate; . . ." DECISION CAMPOS, JR., J p: Before us is a Petition for Review on Certiorari of the decision ** of the Court of Appeals in CA G.R. No. SP07237, dated March 31, 1978. The facts of this case are as follows: On or about October 16, 1972, Celerino Delgado (Delgado) and Conrad Leviste (Leviste) entered into a loan agreement which was evidenced by a promissory note worded as follows: "FOR VALUE RECEIVED, I, CELERINO DELGADO, with postal address at 98 K-11 St., Kamias Rd., Quezon City, promise to pay to the order of CONRAD C. LEVISTE, NINETY (90) DAYS after date, at his office at 215 Buendia Ave., Makati Rizal, then total sum of SEVENTEEN THOUSAND FIVE HUNDRED (P17,500.00) PESOS, Philippine Currency without necessity of demand, with interest at the rate of TWELVE (12%) PERCENT per annum;" 1 On the same date, Delgado executed a chattel mortgage 2 over a Willy's jeep owned by him. And acting as the attorney-in-fact of herein petitioner, Manolo P. Cerna (petitioner), he also mortgage a "Taunus' car owned by the latter. The period lapsed without Delgado paying the loan. This prompted Leviste to a file a collection suit docketed as Civil Case No. 17507 3 with the Court of First Instance of Rizal, Branch XXII against Delgado and petitioner as solidary debtors. Herein petitioner filed his first Motion to Dismiss 4 on April 4, 1973. The grounds cited in the Motion were lank of cause of action against petitioner and the death of Delgado. Anent the latter, petitioner claimed that the claim should be filed in the proceedings for the settlement of Delgado's estate as the action did not survive Delgado's death. Moreover, he also stated that since Leviste already opted to collect on the note, he could no longer foreclose the mortgage. This Motion to Dismiss was denied on August 15, 1973 by Judge Nicanor S. Sison. Thereafter, petitioner filed with the Court of Appeals a special civil action for certiorari, mandamus, and prohibition with preliminary injunction docketed as CA G.R. No. 03088 on the ground that the respondent judge committed grave abuse of discretion in refusing to dismiss the complaint. On June 28, 1976, the Court of Appeals 5 denied the petition because herein petitioner failed to prove the death of Delgado and the consequent settlement proceedings regarding the latter's estate. Neither did petitioner adequately prove his claim that the special power of attorney in favor of Delgado was forged.

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On February 18, 1977, petitioner filed his second Motion to Dismiss on the ground that the trial court, now presided by Judge Nelly L. Romero Valdellon, acquired no jurisdiction over deceased defendant, that the claim did not survive, and that there was no cause of action against him. On May 13, 1977, the said judge dismissed the motion in an order hereunder quoted, to wit: "Considering the second motion to dismiss filed by respondent Manolo Cerna on March 4, 1977, as well as plaintiff's opposition thereto reiteration of the same grounds raised in the first motion to dismiss dated April 4, 1973, this Court hereby reiterates its resolution found in its order dated August 15, 1973." 6 Petitioner filed a motion to reconsider the said order but this was denied. Then, on October 17, 1977, he filed another petition for certiorari and prohibition docketed as CA G.R. No. SP-07237 with the Court of Appeals. This petition was dismissed by the said court in a decision which stated, thus: "WHEREFORE, the herein petition insofar as it alleges lack of cause of action on the part of the herein petitioner is concerned, is hereby dismissed and/or denied and the writ of preliminary injunction previously issued by this Court is hereby lifted and/or set aside; insofar, however, as the case against the deceased Celerino Delgado is concerned, the petition is granted, that is, the complaint in the lower court against Celerino Delgado should be dismissed. No costs." 7 Thereafter, the instant petition for review was filed. Petitioner raised the following legal issue: ". . . NOW, INASMUCH AS THE COMPLAINT IS ONLY FOR COLLECTION OF A SUM OF MONEY BASED ON THE PROMISSORY NOTE, SHOULD NOT THE COMPLAINANT BE DISMISSED FOR LACK OF CAUSE OF ACTION AS AGAINST MANOLO P. CERNA WHO IS NOT A DEBTOR UNDER THE PROMISSORY NOTE CONSIDERING THAT ACCORDING TO SETTLED JURISPRUDENCE THE FILING OF A COLLECTION SUIT IS DEEMED AN ABANDONMENT OF THE SECURITY OF THE CHATTEL MORTGAGE?" 8 In holding petitioner liable, the Court of Appeals held that petitioner and Delgado were solidary debtors. Thus, it held: "But the herein petitioner pleads that the complaint states no cause of actions against the defendants Manolo P. Cerna on the following grounds: 1) that the petitioner did not sign as joint obligator in the promissory note signed by the deceased Celerino Delgado hence, even if the allegations of the complaint are hypothetically admitted there is no cause of action against the herein petitioner because having proceeded against the promissory note he is deemed to have abandoned the foreclosure of the chattel mortgage contract. This contention deserves scant consideration. The chattel mortgage contract, prima facie shows that it created the joint and solidary obligation of petitioner and Celerino Delgado against private respondent." 9 (Emphasis Ours) We do not agree. Only Delgado signed the promissory note and accordingly, he was the only one bound by the contract of loan. Nowhere did it appear in the promissory note that petitioner was a co-debtor. The law is clear that "(c)ontracts take effect only between the parties . . ." 10 But by some stretch of the imagination, petitioner was held solidarily liable for the debt allegedly because he was a co-mortgagor of the principal debtor, Delgado. This ignores the basic precept that "(t)here is solidarily liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity." 11 We have already stated that the contract of loan, as evidenced by the promissory note, was signed by Delgado only. Petitioner had no part in the said contract. Thus, nowhere could it be seen from the agreement that petitioner was solidarily bound with Delgado for the payment of the loan. There is also no legal provision nor jurisprudence in our jurisdiction which makes a third person who secures the fulfillment of another's obligation by mortgaging his own property to be solidarily bound with the principal

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obligor. A chattel mortgage may be "an accessory contract" 12 to a contract of loan, but that fact alone does not make a third-party mortgagor solidarily bound with the principal debtor in fulfilling the principal obligation that is, to pay the loan. The signatory to the principal contract loan remains to be primarily bound. It is only upon the default of the latter that the creditor may have been recourse on the mortgagors by foreclosing the mortgaged properties in lieu of an action for the recovery of the amount of the loan. And the liability of the thirdparty mortgagors extends only to the property mortgaged. Should there be any deficiency, the creditors has recourse on the principal debtor. In this case, however, the mortgage contract was also signed only by Delgado as mortgagor. It is true that the contract stated the following: "That this CHATTEL MORTGAGE, made and entered into this 16th day of October, 1972 at Makati, Rizal, by and between: CELERINO DELGADO, . . . as Attorney-in -Fact of Manolo P. Cerna . . . by virtue of a Special Power of Attorney executed by said Manolo P. Cerna in my favor under the date of October 10, 1972 and acknowledged before Orlando J. Coruna . . . herein referred to as the MORTGAGOR; - and CONRAD C. LEVISTE, . . . hereinafter referred to as the MORTGAGEE." 13 But this alone does not make petitioner a co-mortgagor especially so since only Delgado singed the chattel mortgage as mortgagor. The Special Power of Attorney did not make petitioner a mortgagor. All it did was to authorized Delgado to mortgage certain properties belonging to petitioner. And this is in compliance with the requirement in Article 2085 of the Civil Code which states that: "Art. 2085. The following requisites are essential to the contracts of pledge and mortgage: xxx xxx xxx (3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose." (Emphasis Ours.) In effect, petitioner lent his car to Delgado so that the latter may mortgage the same to secure his debt. Thus, from the contract itself, it was clear that only Delgado was the mortgagor regardless of the fact the he used properties belonging to a third person to secure his debt. Granting, however, that petitioner was obligated under the mortgage contract to answer for Delgado's indebtedness, under the circumstances, petitioner could not be held liable because the complaint was for recovery of a sum of money, and not for the foreclosure of the security. We agree with petitioner that the filing of collection suit barred the foreclosure of the mortgage. Thus: "A mortgage who files a suit for collection abandons the remedy of foreclosure of the chattel mortgage constituted over the personal property as security for the debt or value of the promissory note which he seeks to recover in the said collection suit." 14 The reason for this rule is that: ". . . when, however, the mortgage elects to file a suit for collection, not foreclosure, thereby abandoning the chattel as basis for relief, he clearly manifest his lack of desire and interest to go after the mortgaged property as security for the promissory note . . ." 15

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Hence, Leviste, having chosen to file the collection suit, could not now run after petitioner for the satisfaction of the debt. This is even more true in this case because of the death of the principal debtor, Delgado. Leviste was pursuing a money claim against a deceased person. Section 7, Rule 86 of the Rules of Court Provides: "Sec. 7. Mortgage debt due from estate. A creditor holding a claim against the deceased secured by mortgaged or other collateral security, may abandon the security and prosecute his claim in the manner provided in this rule, and share in the general distribution of the assets of the estate; or he may foreclose his mortgage or realize upon his security, by action in court, making the executor or administrator a party defendant, and if there is a judgment for a deficiency, after the sale of the mortgaged premises, or the property pledged, in the foreclosure or the other proceeding to realize upon security, he may claim his deficiency judgment in the manner provided in the preceding section; or he may upon his mortgage or other security alone, and foreclosure the same at any time within the period of the statue of limitations, and in that event he shall not be admitted as a creditor, and shall receive no share in the distribution of the other assets of the estate; . . ." The above-quoted provision is substantially similar to Section 708 of the Code of Civil Procedure which states: "Sec. 708. A creditor holding against the deceased, secured by mortgage or other collateral security, may abandon the security and prosecute his claim before the committee, and share in the mortgage or realize upon his security, by ordinary action in court, making the executor or administrator a party defendant; . . ." The Supreme Court, in the case of Osorio vs. San Agustin, 16 has made the following interpretation of the said provision,, to wit: "It is clear by the provisions quoted section that a person holding a mortgage against the estate of a deceased person may abandon such security and prosecute his claim before the committee, and share in the distribution of the general assets of the estate. It provides also that he may, at his own election, foreclose the mortgage and realize upon his security. But the law does not provide that he may have both remedies. If he elects one he must abandon the other. If he fails in one he fails utterly." But while there is a merit in the substantial allegations of this petition, We are constrained to deny the petition on procedural grounds. The facts of this case reveal that the decision under review in the decision in the second certiorari and prohibition case lodged petitioner against the judge trying the civil case. It appeared that after the denial of the first motion to dismiss, petitioner filed CA-G.R. No. 03088 wherein petitioner alleged grave abuse of discretion on the part of Judge Sison. The first petition was denied by the Court of Appeals. The decision became final. The second motion to dismiss, based on the same grounds, was thereafter filed. It was likewise denied and another petition for certiorari and prohibition was again instituted. The decision in the latter case is now under review. We agree with the contention of private respondent, that the action has been barred by the principle of res judicata. It appears in this case that the second motion was filed to circumvent the effects of the finality of the decision of the Court of Appeals in Ca-G.R. No. 03088. Petitioner intended the second motion and the subsequent proceedings as remedies for his lapsed appeal. We cannot such behavior. It delayed the proceedings in this case and unduly burdened the courts. Petitioner should have allowed the trial of the case to go on where his defenses could still be presented and heard. WHEREFORE, in view of the forgoing,, the Petition is hereby DISMISSED. With costs. SO ORDERED.

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Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 115902 September 27, 1995 FILINVEST CREDIT CORPORATION, petitioner, vs. HON. COURT OF APPEALS and SPOUSES EDILBERTO and MARCIANA TADIAMAN, respondents. DAVIDE, JR., J.: This petition for review on certiorari seeks to set aside the decision of the Court of Appeals in CA-G.R. CV No. 1 30231 affirming in toto the decision of the Regional Trial Court (RTC) of San Fernando (Pampanga), Branch 2 46, in Civil Case No. 6599. The antecedent facts are summarized by the Court of Appeals as follows: Defendants-appellees, spouses Edilberto and Marciana Tadiaman, residents of Cabanatuan City, purchased a 10-wheeler Izusu cargo truck from Jordan Enterprises, Inc., in Quezon City, in installments. Said spouses executed a promissory note for P196,680.00 payable in 24 monthly installments in favor of Jordan Enterprises, Inc., and a Chattel Mortgage over the motor vehicle purchased to secure the payment of the promissory note. Jordan Enterprises, Inc. assigned its rights and interests over the said instruments to Filinvest Finance and Leasing Corporation, which in turn assigned them to plaintiff-appellant Filinvest Credit Corporation. Subsequently, the spouses Tadiaman defaulted in the payment of the installments due on the promissory note, and plaintiff-appellant filed an action for replevin and damages against them with the court below. Upon motion of the plaintiff-appellant, a writ of replevin was issued, and the truck was seized in the province of Isabela, by persons who represented themselves to be special sheriffs of the court, but who turned out to be employees of the plaintiff-appellant. The truck was brought by such persons all the way back to Metro Manila. Thereafter, defendant spouses filed a counterbond, and the lower court ordered the return of the truck. This was not immediately implemented because the defendant spouses were met with delaying tactics of the plaintiffappellant, and when they finally recovered the truck, they found the same to be "cannibalized". This was graphically recounted in the report (Exhibit "3") of Deputy Sheriff Anastacio Dizon, who assisted the spouses in recovering the vehicle, excerpts of which are as follows: On February 14, 1983, the undersigned contacted Mr. Villanueva, Branch Manager of the FILINVEST at Bo. Dolores, San Fernando, Pampanga and he gave the information that the said Isuzu Cargo Truck, subject of the aforesaid Court Order, was already delivered to their main garage at Bo. Talon, Las Pias; Metro Manila. Mr. Villanueva further told the undersigned that in order to effectively enforce the aforementioned Court Order, the undersigned should discuss the matter with Mr. Telesforo (Jun) Isidro, Collection in-charge, and Mr. Gaspar Antonio delos Santos, Vice President for Branch Administration of the FILINVEST main office at Makati, Metro Manila. On February 18, 1983, defendant Marciana Tadiaman, Atty. Benites and the undersigned contacted Messrs. Gaspar Antonio delos Santos and Telesforo (Jun) Isidro at the main office, FILINVEST at Paseo de Roxas, Makati, Metro Manila and we discussed the smooth retaking of possession by the defendants of the 10-wheeler Isuzu Cargo Truck with motor No. E 120-22041, Serial No. SPM 710164864. Messrs. Delos Santos and Isidro alternatively argued that the Traveler's Insurance Company is one of the black listed Insurance firm, so much so, it is only the company's lawyer who can direct the delivery of the above-cited Cargo Truck to us. They told

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us to wait for the arrival of their Lawyer at 5:40 p.m., and we agreed that in the meantime that their lawyer is not around, the said vehicle would not be transferred to any other place. Came 5:30 P.M., but the company's lawyer never arrived and we were told to go back on February 21, 1983. Mr. delos Santos finally told us that the company will not deliver to us the said Cargo Truck until and after their company lawyer would say so. On February 19, 1983, Mr. Felicisimo Hogaldo, Atty. Benites, defendant Marciana Tadiaman, three policemen of Las Pinas, Metro Manila, and the undersigned went directly to the FILINVEST garage at Bo. Talon, Las Pinas, Metro Manila and there contracted Mr. Ismael Pascual, Custodian of all repossessed vehicles of the said company, and Mr. Pedro Gervacio, Security Guard of the company assigned by the Allied Investigation Bureau at 6th Floor, Ramon Santos Bldg. They told us that the 10-wheeler Cargo Truck subject of the above-cited court order is not one of the vehicles listed in their in-coming and out-going ledger books and they told us to examine their books. Defendant Marciana Tadiaman told Messrs. Pedro Gervacio and Ismael Pascual that she saw the abovementioned Cargo-Truck last February 14, 1983 at the end corner of the garage. And for that purpose she requested us, including Mr. Pascual and the Security Guard, to inspect the site where the said truck was supposed to have been placed when she for the first time saw it on February 14, 1983. Unexpectedly, she saw and pointed to us on the site oil leaks on the ground which she believed came from the vehicle we were looking for. We also saw skid marks of tires of a truck starting from the site where the cargo truck was previously placed as pointed to by defendant Marciana Tadiaman up to around 20 meters before reaching the gate of the compound. The other skid larks of tires of a truck was also seen on a portion of a road leading to a compound owned by other person. Mr. Gervacio and Pascual strongly insisted that they do not know the whereabouts of the said Cargo Truck. The undersigned requested the Policemen of Las Pinas, Metro Manila, Atty. Benites and defendant Marciana Tadiaman to see for ourselves the road leading to a compound owned by another firm, about 1/3 of the Length of which road is completely blocked by a big and tall building. It was at this portion where the subject Cargo Truck was placed. Mr. Ismael Pascual called their main office, FILINVEST, by telephone about the discovery of the whereabouts of said cargo truck by the undersigned. Defendant Marciana Tadiaman to Mr. Pascual that there were missing parts and that other parts of the truck were completely changed with worn-out spare parts. Mr. Pascual told the undersigned that he will only affix his signature on the acknowledgment receipt, below the line "GIVEN BY", if the missing parts and replaced parts were not mentioned in said receipt. It was because of the said actuations of the plaintiff-appellant that the defendants-appellee [sic] filed a 3 counterclaim for damages. . . . After trial, the trial court rendered a decision the dispositive portion of which reads as follows: WHEREFORE, judgment is hereby rendered on the main action, in favor of plaintiff and against defendants, ordering the latter, jointly and severally, to pay the plaintiff the following sums: (a) The sum of P88,333.32 which is the balance of the promissory note as of September 26, 1982, with interest thereon at 14% per annum from said date. (b) The sum equivalent to 25% of the amount sued upon, as and for attorney's fees, that is P88,333.32 plus the stipulated interest; and (c) The costs of suit.

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On the Counterclaim: Plaintiff not having successfully rebutted the defendants' evidence respecting damages caused to them by virtue of the illegal seizure of the property, and hiding the truck in some other place not their garage, feigning knowledge that the same had been recorded in their incoming ledger books, the "cannibalizing" done while the truck was in the custody of plaintiff's garage, the frustrations which the defendants had to undergo for two weeks before the truck was finally placed in the hands of Sheriff Dizon, all point to the liability of plaintiff for its failure intentionally or otherwise "to observe certain norms that spring from the fountain of good conscience and guide human conduct to the end that law may approach its supreme ideal, which is the sway and dominance of justice. WHEREFORE, judgment is rendered in favor of counter-claimants defendants and against plaintiff, ordering the latter to pay to the defendants the following sums: (1) Actual damages representing lost spare parts while in the custody of plaintiff in its garage being hidden from defendants, in the sum of P50,000.00; (2) P50,000.00 as moral damages; (3) P20,000.00 as exemplary damages; (4) P20,000.00 as attorney's fee; and (5) Proportionate part of the costs adjudged against plaintiff. SO ORDERED.
4

Petitioner Filinvest Credit Corporation (hereinafter Filinvest) appealed that portion of the judgment on the counterclaim to the Court of Appeals (CA-G.R. CV No. 30231) and assigned the following errors of the lower court: I THE TRIAL COURT ERRED IN AWARDING DAMAGES; ACTUAL, MORAL, EXEMPLARY AND ATTORNEY'S FEES AND PROPORTIONATE PART OF THE COSTS IN FAVOR OF THE DEFENDANTS IN THEIR COUNTER-CLAIMS IN THE ABSENCE OF ANY ACTIONABLE LOSS SUSTAINED BY THEM FOR IT WAS THE DEFENDANTS WHO VIOLATED THEIR PROMISSORY NOTE AND CHATTEL MORTGAGE WITH THE PLAINTIFF. II THE TRIAL COURT ERRED IN HOLDING THAT THE PLAINTIFF OR ANY OF ITS REPRESENTATIVES HAD NO RIGHT TO TAKE THE MORTGAGED PROPERTY AFTER THE BREACH OF THE CONDITIONS IN THE 5 PROMISSORY NOTE AND CHATTEL MORTGAGE BY THE DEFENDANTS. In its decision of 26 May 1994, the Court of Appeals affirmed in toto the decision of the trial court. It found no merit in the appeal. Thus: The plaintiff-appellant argues that it had the right to seize the truck from the moment that the defendantsappellees defaulted in the payment of the monthly installments, and to institute an action for replevin preliminary to effecting a foreclosure of the property mortgaged extrajudicially. The plaintiff-appellant misses the point entirely. In the first place, it has not been held liable for filing an action for replevin in order to recover possession of the truck prior to its foreclosure, but for the manner in which it carried out the seizure of the

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vehicle. It is ironic that, in spite of plaintiff-appellant's apparent recognition of the necessity of legal means for the recovery of the truck, in the end, it utilized illegal means in the actual seizure of the vehicle by having its employees pose as special agents of the court in effecting the same. Plaintiff-appellant even went to the extent of asking the appointment of a special sheriff to enforce the order of seizure, but still had the truck seized by its own people instead. It is as if the plaintiff-appellant utilized the court only to clothe its employees with apparent authority to seize the vehicle concerned. In the second place, plaintiff-appellant was held liable for hiding the truck and making it difficult for the defendants-appellees to recover the same. Defendants-appell[ees] were able to have the writ of seizure quashed on the basis of a counterbond. Plaintiff-appellant should have been the first to obey the order for the return of the seized truck, considering its avowed adherence to law and order. And yet, it made it difficult for the defendants-appellees to actually recover the vehicle, as reported by the deputy sheriff above. In the third place, there is unrebutted evidence that the truck was "cannibalized" while in the custody of the plaintiff-appellant. The latter argues that such evidence is not credible, because, if the truck was stripped of vital parts, it could not have been driven by the defendants-appellees all the way back to Cabanatuan City. Plaintiffappellant conveniently overlooks the testimony of defendant-appellee Mrs. Tadiaman that they had to buy the 6 missing parts in order to make the truck run (t.s.n., p. 40, October 2, 1986, Exhibits "'9", "10" and "11"). Filinvest now comes to us alleging that the Court of Appeals: (a) . . . DECIDED A QUESTION OF SUBSTANCE IN A WAY NOT IN ACCORD WITH LAW AND THE APPLICABLE DECISIONS OF THIS HONORABLE COURT WHEN IT REVERSED THE DECISION OF THE REGIONAL TRIAL COURT OF MANILA, BRANCH 9; (b) . . . ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF JURISDICTION WHEN IT SUSTAINED THE ERRONEOUS DECISION OF THE HONORABLE REGIONAL TRIAL COURT BRANCH 46 OF SAN FERNANDO, PAMPANGA; (c) . . . ACTED WITH GRAVE ABUSE OF DISCRETION AND CONTRARY TO EXISTING LAW AND JURISPRUDENCE WHEN [IT] SUSTAINED THE SPECULATIVE FINDING OF THE RTC THAT THE PETITIONER "CANNIBALIZED" THE MORTGAGED VEHICLE; (d) . . . ERRED GRIEVOUSLY WHEN IT EXONERATED PRIVATE RESPONDENTS FROM PAYING THE PETITIONER ON THE LATTER'S LEGITIMATE CLAIMS UNDER THE COMPLAINT PARTICULARLY ON THE UNPAID PROMISSORY NOTE MADE BY THE PRIVATE RESPONDENTS; (e) . . . ACTED CONTRARY TO LAW WHEN IT IGNORED THE PLAIN ADMISSIONS IN THE ANSWER (AT PARAGRAPH 2, & 3, PAGE 1) OF THE DEFENDANTS (PRIVATE RESPONDENTS) THAT THEY HAVE DULY EXECUTED A PROMISSORY NOTE SECURED BY A DEED OF CHATTEL MORTGAGE AND THAT THE PRIVATE RESPONDENTS VIOLATED THE TERMS OF THE PROMISSORY NOTE IN FAILING TO PAY THE INSTALLMENTS DUE THEREON FOR NOV. 15, 1981 AND THE SUBSEQUENT 9 INSTALLMENTS OR UP TO AUGUST 15, 1982; (f) . . . ERRED IN REFUSING TO APPLY THE TERMS AND CONDITIONS OF THE PROMISSORY NOTE AND THE DEED OF CHATTEL MORTGAGE SIGNED BY THE PONCES "AS THE LAW BETWEEN THE 7 PARTIES" TO THE CONTRACT SUBJECT OF THE SUIT IN THE RTC. Additionally, Filinvest maintains that: (g) THERE IS NO PROOF TO SUSTAIN THE AWARD OF MORAL DAMAGES FOR P50,000.00 8 ACCORDINGLY THERE IS NO BASIS FOR THE AWARD OF EXEMPLARY DAMAGES.

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We gave due course to the petition and required the parties to submit their respective memoranda after the filing of the comment to the petition by the private respondents and of the reply thereto by Filinvest. The parties subsequently filed their memoranda which merely reiterated the arguments in their respective initiatory pleadings. The only relevant issue in this petition is whether or not the Court of Appeals committed reversible error in dismissing Filinvest's appeal from the decision of the trial court on the private respondents' counterclaim and in affirming in toto the said decision. The first ground raised herein by Filinvest is baseless since the discussions or arguments in Filinvest's petition and memorandum fail to disclose what the decision of Branch 9 of the RTC of Manila is all about. So is the fourth ground, for, the unappealed portion of the trial court's decision did in fact order the private respondents to pay Filinvest the unpaid balance of the promissory note, with interest and attorney's fees. All the other grounds are deemed waived for not having been raised in the appeal to the Court of Appeals. In any event, Filinvest's disquisitions on such irrelevant issues are confounded. As to the sole issue defined above, the Court of Appeals correctly ruled that Filinvest is liable for damages not because it commenced an action for replevin to recover possession of the truck prior to its foreclosure, but because of the manner it carried out the seizure of the vehicle. Sections 3 and 4, Rule 60 of the Rules of Court are very clear and direct as to the procedure for the seizure of property under a writ of replevin, thus: Sec. 3. Order. Upon the filing of such affidavit and bond with the clerk or judge of the court in which the action is pending, the judge of such court shall issue an order describing the personal property alleged to be wrongfully detained, and requiring the sheriff or other proper officer of the court forthwith to take such property into his custody. Sec. 4. Duty of the officer. Upon receiving such order the officer must serve a copy thereof on the defendant together with a copy of the application, affidavit and bond, and must forthwith take the property, if it be in the possession of the defendant or his agent, and retain it in his custody. . . . (emphasis supplied) In the instant case, it was not the sheriff or any other proper officer of the trial court who implemented the writ of replevin. Because it was aware that no other person can implement the writ, Filinvest asked the trial court to appoint a special sheriff. Yet, it used its own employees who misrepresented themselves as deputy sheriffs to seize the truck without having been authorized by the court to do so. Filinvest justified its seizure by citing a 9 statement in Bachrach Motor Co. vs. Summers, to wit, "the only restriction on the mode by which the mortgagee shall secure possession of the mortgaged property after breach of condition is that he must act in an orderly manner and without creating a breach of the peace, subjecting himself to an action for trespass." This justification is misplace and misleading for Bachrach itself had ruled that if a mortgagee cannot obtain possession of a mortgaged property for its sale on foreclosure, it must bring a civil action either to recover such possession as a preliminary step to the sale or to obtain judicial foreclosure. Pertinent portions of Bachrach read as follows: Where, however, debtor refuses to yield up the property, the creditor must institute an action, either to effect a judicial foreclosure directly, to secure possession as a preliminary to the sale contemplated in the provision above quoted. He cannot lawfully take the property by force against the will of the debtor. Upon this point the American authorities are even more harmonious that they are upon the point that the creditor is entitled to possession. As was said may years ago by the writer of this opinion in a monographic article contributed to an encyclopedic legal treatise, "if possession cannot be peaceably obtained the mortgagee must bring an action." (Trust Deeds and Power of Sale Mortgages, 28 Am. & Eng. Encyc. of Law, 2d ed., 783.) In the Article of Chattel Mortgages, in Corpus Juris, we find the following statement of the law on the same point: "The only restriction on the mode by which the mortgagee shall secure possession of the mortgaged property after breach of condition is that he must act in an orderly manner and without creating a breach of the peace, subjecting himself to an action to trespass. (11 C.J., 560; see also 5 R.C.L., 462.)

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The reason why the law does not allow the creditor to possess himself of the mortgaged property with violence and against the will of the debtor is to be found in the fact that the creditor's right of possession is conditioned upon the fact of default, and the existence of this fact may naturally be the subject of controversy. The debtor, for instance, may claim in good faith, and rightly or wrongly, that the debt is paid, or that for some other reason the alleged default is nonexistent. His possession in this situation is as fully entitled to protection as that of any other person, and in the language of article 446 of the Civil Code he must be respected therein. To allow the creditor to seize the property against the will of the debtor would make the former to a certain extent both judge and executioner in his own cause a thing which is inadmissible in the absence of unequivocal agreement in the contract itself or express provision to that effect in the statute. It will be observed that the law places the responsibility of conducting the sale upon "a public officer;" and it might be supposed that an officer, such as the sheriff, can seize the property where the creditor could not. This suggestion is, we think, without force, as it is manifest that the sheriff or other officer proceeding under the authority of the language already quoted from section 14 of the Chattel Mortgage Law, becomes pro hac vice the mere agent of the creditor. There is nothing in this provision which creates a specific duty on the part of the officer to seize the mortgaged property; and no intention on the part of the law-making body to impose such a duty can be implied. The conclusion is clear that for the recovery of possession, where the right is disputed, the creditor must proceed along the usual channels by action in court. Whether the sheriff, upon being indemnified by the creditor, could safely proceed to take the property from the debtor, is a point upon which we express no opinion. . . . But whatever conclusion may be drawn in the premises with respect to the true nature of a chattel mortgage, the result must in this case be the same; for whether the mortgagee becomes the real owner of the mortgaged property as some suppose or acquires only certain rights therein, it is none the less clear that he has after default the right of possession; though it cannot be admitted that he may take the law into his own hands and wrest the property violently from the possession of the mortgagor. Neither can he do through the medium of a public officer that which he cannot directly do himself. The consequence is that in such case the creditor must either resort to a civil action to recover possession as a preliminary to a sale, or preferably he may bring an action to obtain a judicial foreclosure in conformity, so far as with the provisions of the Chattel to Mortgage 10 Law. Replevin is, of course, the appropriate action to recover possession preliminary to the extrajudicial foreclosure of a chattel mortgage. Filinvest did in fact institute such an action and obtained a writ of replevin. And, by filing it, Filinvest admitted that it cannot acquire possession of the mortgaged vehicle in an orderly or peaceful manner. Accordingly, it should have left the enforcement of the writ in accordance with Rule 60 of the Rules of Court which it had voluntarily invoked. Parenthetically, it must be observed that the trial court erred in holding that the action for replevin was "not in 11 order as [Filinvest] is not the owner of the property (Sec, 2 par. (a) Rule 60)." It is not only the owner who can institute a replevin suit. A person "entitled to the possession" of the property also can, as provided in the same paragraph cited by the trial court, which reads: Sec. 2. Affidavit and bond. Upon applying for such order the plaintiff must show . . . (a) That the plaintiff is the owner of the property claimed, particularly describing it, or is entitled to the possession thereof; . . . (emphasis supplied) Upon the default by the mortgagor in his obligations, Filinvest, as a mortgagee, had the right to the possession 12 of the property mortgaged preparatory to its sale in a public auction. However, for employing subterfuge in seizing the truck by misrepresenting its employees as deputy sheriffs and then hiding and cannibalizing it, Filinvest committed bad faith in violation of Article 19 of the Civil Code which provides: 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.

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In common usage, good faith is ordinarily used to describe that state of mind denoting honesty of purpose, 13 freedom from intention to defraud, and, generally speaking, means being faithful to one's duty or obligation. It consists of the honest intention to abstain from taking an unconscionable and unscrupulous advantage of 14 another. This leaves us to the issue of damages and attorney's fees. In their answer with counterclaim, the private respondents asked for (a) actual damages of P50,000.00 for the spare parts found missing after their recovery of the truck and another P50,000.00 for unearned profits due to the failure to use the truck in their ricemill business; (b) moral damages of P50,000.00 for "the mental anguish, serious anxiety, physical suffering, wounded feelings, social humiliation, moral shock, sleepless nights and other similar injury" which they suffered as a "proximate result of the [petitioner's illegal, wrongful and unlawful acts"; (c) nominal damages of P30,000.00; (d) exemplary damages of P20,000.00; and (e) attorney's fees of P20,000.00 which they incurred "as a direct result of [petitioner's] illegal and unwarranted actuations and in 15 connection with the defense of this action." As to actual damages, the petitioner admits that per Exhibits "1," "9," and "10" of the private respondents, only 16 the sum of P33,222.00 and not P50,000.00 was "supposedly spent for the alleged lost spare parts." The petitioner may thus be held liable only for such amount for actual or compensatory damages. Anent the moral damages, the trial court ruled that the acts of the petitioner were in total disregard of Articles 17 19, 20, and 21 of the Civil Code. It added that the petitioner had not only caused actual damages in lost earnings, but had also caused the private respondents to suffer indignities at the hands of the petitioner's personnel in hiding the truck in question, misleading them, and making them work for the release of the truck for about two weeks, thereby justifying the award of moral damages along with the exemplary and other damages 18 in favor of the private respondents. We agree with this finding of the trial court. The petitioner's acts clearly fall within the contemplation of Articles 19 19 and 21 of the Civil Code. The acts of fraudulently taking the truck, hiding it from the private respondents, and removing its spare parts show nothing but a willful intention to cause loss to the private respondents that is punctuated with bad faith and is obviously contrary to good customs. Thus, the private respondents are entitled to the moral damages they prayed for, for under Article 2219 of the Civil Code, moral damages may be recovered in cases involving acts referred to in Article 21 of the same Code. The private respondents prayed for nominal damages of P30,000.00 which the trial court did not award them. Having failed to appeal this omission by the trial court, we cannot make anymore such award at this point. The award of exemplary damages is in order in view of the wanton, fraudulent, and oppressive manner by which the petitioner sought to enforce its right to the possession of the mortgaged vehicle. Article 2232 of the Civil Code provides: In contracts and quasi-contracts, the court may award exemplary damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. Of course, a plaintiff need not prove the actual extent of exemplary damages, for its determination is addressed to the sound discretion of the court upon proof of the plaintiff's entitlement to moral, temperate, or actual or compensatory damages. Article 2234 of the Civil Code thus provides in part as follows: While the amount of the exemplary damages need not be proved, the plaintiff must show that he is entitled to moral, temperate or compensatory damages before the court may consider the question of whether or not exemplary damages should be awarded. . . .

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The award for attorney's fees must, however, be set aside. There is no question that the petitioner filed in good faith its complaint for replevin and damages to protect its rights under the promissory note and the chattel mortgage. That the private respondents had defaulted in its obligation under the promissory note thereby authorizing the petitioner to seek enforcement of its claim thereunder and proceed against the mortgage of the vehicle was duly recognized by the trial court by its judgment against the private respondents incorporated in the first part of the dispositive portion. The private respondents did not appeal therefrom. There would then be no basis for awarding attorney's fees in favor of the private respondents for whatever physical suffering, mental anguish, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, or any other similar injury they had suffered, even if proven, were only such as are usually caused to parties haled into court as a defendant and which are not compensable, for the law could not have meant to impose a penalty on 20 the right to litigate. WHEREFORE, the assailed judgment of the Court of Appeals in CA-G.R. CV No. 30231 as well as that of the Regional Trial Court of San Fernando, Pampanga, Branch 46 in Civil Case No. 6599 on the counterclaim is AFFIRMED, subject to the modifications abovestated. As so modified, the petitioner is hereby ordered to pay the private respondents only the following: (a) actual damages in the reduced amount of P33,222.00; (b) moral damages in the amount of P50,000.00; and (c) exemplary damages in the amount of P20,000.00. No pronouncement as to costs. SO ORDERED. Republic of the Philippines SUPREME COURT Manila THIRD DIVISION G.R. No. L-40062 May 3, 1989 MONTELIBANO ESGUERRA, petitioner, vs. HON. COURT OF APPEALS, G.A. MACHINERIES, INC., JOSE TINO and MANUEL DORE respondents. G.R. No. L-40102 May 3, 1989 G.A. MACHINERIES, INC., petitioner, vs. HONORABLE COURT OF APPEALS and MONTELIBANO ESGUERRA, respondents. Dominguez, Fortuno, & Gervacio for petitioner, Montelibano Esguerra in L-40062. Bengzon, Villegas, Zarraga, Narciso & Cudala for petitioner in L-40102. BIDIN, J.:

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These are petitions for review on certiorari filed by G.A. Machineries, Inc. in L-40102 entitled G.A. Machineries Inc. v. Montelibano Esguerra et al. and by Montelibano Esguerra in L-40062 entitled Montelibano Esguerra v. Court of Appeals, et al., seeking to reserve and set aside the October 23, 1974 Decision of the Court Appeals ** in CA-G.R. No. 46900-R "Montelibano Esguerra v. G.A. Machineries Inc., et al.," setting aside the September 23, 1969 Decision of the then Court of First Instance of Cavite; and the January 14, 1975 Resolution of the same appellate Court denying the motions for reconsideration of said decision. This is a case for the recovery of a Ford-Trader cargo truck, alledgedly, unlawfully seized by the agents of G.A. Machineries, Inc. (GAMI for short). This said cargo truck, on October 21, 1964, was sold by GAMI to Hilario Lagmay and Bonifacio Masilungan. Subsequently, the right to the same was bought by Montelibano Esguerra, the latter assuming the unpaid purchase price of P20, 454.74. In so doing, Esguerra executed in favor of GAMI a promissory note and a chattel mortgage over the said truck (Partial Stipulation of Facts, par. 4, Record on Appeal, p. 99). On February 20, 1966, Esguerra having defaulted in his obligation and GAMI having granted his request for extension, a new chattel mortgage and a new promissory note were executed (Ibid., pars. 5 and 6, pp. 99-100) to secure the unpaid balance of P16,000.00 plus 1% per month, payable in monthly installments of P1,000.00, the first installment to be due on March 15, 1966 and the succeeding monthly installments on the 15th day of each month. On May 18, 1966, Esguerra had paid GAMI the total sum of P1,297.00 (Ibid., par. 7, p. 100), broken down as follows: AMOUNT PAID DATE P400.00 March 22, 1966 397.87 April 18, 1966 200.00 May 4, 1966 150.00 May 12, 1966 150.00 May 18, 1966 On June 3, 1966, the said truck was taken by GAMI'S agents while the same was in the possession of Esguerra's driver, Carlito Padua; and the same had remained in the possession of GAMI, notwithstanding demands for its return by Esguerra. On June 20, 1966, Esguerra filed a complaint with the then Court of First Instance of Cavite, Branch IV, Tagaytay City, presided by Hon. Jose G. Colayco, to recover said truck and for damages. The said complaint was docketed therein as Civil Case No. TG-64. In the said complaint, Esguerra alleged among others, that due to his failure to pay the installments due, the agents of GAMI, Jose Tino and Samuel Dore representing themselves as deputy sheriffs and with use of force, threats and intimidation, seized the cargo truck in question from his driver, Carlito Padua, while unloading gravel and sand in Pasay City; and that despite repeated demands, GAMI refused and failed to return the same. GAMI, et al. filed their answer with a counterclaim, alleging as affirmative defense that the plaintiff gave his consent to the taking of the truck by the agents of the corporation on condition that he be allowed to recover its possession upon payment of his back accounts (Record on Appeal p. 102). After trial, the lower court, in a Decision dated September 23, 1969, dismissed the complaint as well as the counterclaim as follows: Since it is admitted that Esguerra was in arrears in the payment of his account, the G.A. Machineries, Inc. therefore could exercise its option under the contract of mortgage to take possession of the truck without court action as long as the mortgagor agreed (Luna vs. Encarnacion, G.R. L-4637, June 30, 1952). Having chosen this remedy however, the mortgagee has no further action against Esguerra to recover the unpaid balance of the purchase price (Art. 1484, (3), Civil Code of the Phil.).

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WHEREFORE, the complaint as well as the counterclaim are hereby dismissed, without costs. (Rollo, L-40062, pp. 24-31). On appeal by Esguerra, the Court of Appeals sustained the findings of the trial court that it was not unlawful on the part of GAMI to repossess the cargo truck in question as Esguerra gave his consent to the repossession. However, said appellate court, took exception to GAMI's failure to sell at public auction said truck. It held that while it is true the chattel mortgage contract, the mortgagee can take possession of the chattel but such taking did not amount to the foreclosure of the mortgage. Otherwise stated, GAMI should have foreclosed the mortgage. Thus, in a Decision promulgated on October 23, 1974 (Ibid., pp. 34-35), respondent appellate court set aside the appealed decision and entered another one; the decretal portion of which reads: WHEREFORE, the judgment appealed from is hereby set aside, and another entered, sentencing the appellee to pay the appellant the sum of P2,000.00 in concept of attorney's fees and P1,000.00 and P2,000.00 by way of moral and exemplary damages, respectively, with costs against said appellee. Both Esguerra and GAMI, et al. moved for the reconsideration of the decision, but in a Resolution dated January 14, 1975 (Ibid., p. 57), both motions were denied. Hence, the instant petitions. Acting on GAMI'S petition, docketed as G.R. No. L-40102, the First Division of this Court, in a Resolution dated March 5, 1975, required Esguerra to comment (Ibid., p. 48), while the petition of Esguerra, docketed as G.R. No. L-40062, was denied by the same Division of this Court in a Resolution dated March 7, 1975 (Rollo of G.R. No. L-40062, p. 62). On April 4, 1975, Esguerra, in compliance with the March 5, 1975 Resolution of the First Division of this Court, filed his comment (Rollo of G.R. No. 40102, pp. 56-59). On April 18, 1975, Esguerra filed his Motion for Reconsideration of the March 7, 1975 Resolution denying his petition in G.R. No. L-40062, (Rollo, pp. 69-72). In the Resolution of May 16, 1975, the resolution of March 7, 1975, was reconsidered and both petitions were given due course. (Rollo of G.R. No. L-40102, p. 75). Esguerra raised three (3) assignments of errors, to wit: I THE RESPONDENT COURT ERRED IN NOT DECLARING AS ILLEGAL AND UNLAWFUL THE PROVISION OF THE CHATTEL MORTGAGE AUTHORIZING THE RESPONDENT-MORTGAGEE TO REPOSSESS THE CARGO TRUCK IN CASE OF DEFAULT IN THE PAYMENT OF ANY OBLIGATION. II THE RESPONDENT COURT GRAVELY ABUSED ITS DISCRETION WHEN AFTER SETTING ASIDE THE JUDGMENT APPEALED FROM AND AWARDING DAMAGES AND ATTORNEY'S FEES TO PETITIONER, THE SAID RESPONDENT COURT DENIED PETITIONER'S MAIN PRAYER IN HIS COMPLAINT, WHICH IS TO ORDER THE RETURN OF PETITIONER'S CARGO TRUCK AND TO PAY UNEARNED INCOME OF PETITIONER. III THE RESPONDENT COURT FINALLY ERRED WHEN AFTER DECLARING THAT THE TAKING OF APPELLANT'S TRUCK BY THE APPELLEE WITHOUT HAVING PROCEEDED TO SELL IT AT PUBLIC AUCTION BUT APPROPRIATING SAME IN PAYMENT OF APPELLANT'S INDEBTEDNESS AS NOT

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LAWFUL, SAID RESPONDENT COURT DID NOT ORDER THE RETURN OF SAID TRUCK OR THE SALE THEREOF AT PUBLIC AUCTION. GAMI, on the other hand, likewise, raised three (3) assignments of errors, to wit: I THE HONORABLE COURT OF APPEALS ERRED IN HOLDING, THAT PETITIONER, AS AN UNPAID SELLER MORTGAGE, WAS LEGALLY OBLIGATED TO FORECLOSE THE MORTGAGE OVER THE CHATTEL IN QUESTION AND TO SELL SAID CHATTEL AT PUBLIC AUCTION, NOTWITHSTANDING THAT PETITIONER, AS SUCH UNPAID SELLER, LEGALLY REPOSSESSED THE CHATTEL IN QUESTION AND THAT RESPONDENT MONTELIBANO ESGUERRA GAVE HIS CONSENT TO PETITIONER'S REPOSSESSION THEREOF. II THE HONORABLE COURT OF APPEALS ERRED IN NOT UPHOLDING THE RIGHT OF HEREIN PETITIONER TO CANCEL A CONTRACT OF SALE UPON NON-PAYMENT OR DEFAULT OF THE BUYER. III THE HONORABLE COURT OF APPEALS ERRED IN AWARDING DAMAGES TO RESPONDENT MONTELIBANO ESGUERRA IN THE FORM OF ATTORNEY'S FEES, MORAL DAMAGES AND EXEMPLARY DAMAGES. The pivotal issue in this case is whether or not the mortgage vendor of personal property sold on installment is legally obligated to foreclose the chattel mortgage and sell the chattel subject thereof at public auction in case the mortgagor-vendee defaults in the payment of the agreed installments. The Chattel Mortgage Contract provides: Should the mortgagor fail to make any of the payments as herein before provided or to pay the interest that may be due as provided herein or should he fail to comply with anyone of the obligations or conditions herein set forth, then the whole amount remaining unpaid under this mortgage shall automatically become due and demandable, and the mortgage on the property herein described may be foreclosed by the mortgagee either judicially or extra-judicially, at the option of the mortgagee in accordance with law. In case of foreclosure, it is expressly agreed that the sale may be made by the mortgagee itself and the mortgagor expressly consents that the mortgaged property may be taken by the mortgagee outside of the municipality or city where the mortgagee may conveniently sell the same. And in case of sale, the mortgagor further agrees to pay to the mortgagee an additional sum equivalent to twenty five (25%) per centum of the principal and interest due and unpaid, as liquidated damages which this mortgage is given as security and shall become a part thereof, and the mortgagor hereby waives reimbursements of the amounts heretofore paid by him to the mortgagee. (Decision CA-G.R. No. 46900-R, Rollo p. 37) Esguerra admitted that he is in arrears in the payments of his account. Consequently, the mortgagee, under the above cited provision of the mortgage contract has the option to foreclose the mortgage either judicially or extrajudicially and in case of foreclosure, it was expressly agreed by the parties that the mortgagee may take the property outside the municipality or city where the mortgagee may conveniently sell the same. Both the trial court and the Court of Appeals found that there was no forcible taking of the cargo truck. Esguerra consented to the repossession of the truck or at least did not make any objection thereto. He simply requested that he been given a chance to settle the account, which was evidently granted as on the following day, June 14, 1966, appellant sent his wife with P500.00 with which to partially settle his account (Rollo p. 40). Under the

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circumstances, both courts concluded that it was not unlawful on the part of the appellee to repossess the cargo truck in question. It is well settled that these findings are binding on the Supreme Court (Rizal Cement Co. Inc. v. Villareal, 135 SCRA 575 [1985]; Collector of Customs Manila v. Intermediate Appellate Court, 137 SCRA 3 [1985]), as it is not the function of this Court to analyze or weigh evidence all over again, its jurisdiction being limited to reviewing errors of law that might have been committed by the lower court (Baniqued v. Court of Appeals, 127 SCRA 636 [1984]). However, the respondent appellate court did not err in holding that while the mortgagee can take possession of the chattel, such taking did not amount to the foreclosure of the mortgage. Otherwise stated, the taking of Esguerra's truck without proceeding to the sale of the same at public auction, but instead, appropriating the same in payment of Esguerra's indebtedness, is not lawful. As clearly stated in the chattel mortgage contract, the express purpose of the taking of the mortgaged property is to sell the same and/or foreclose the mortgage constituted thereon either judicially or extrajudicially and thereby, liquidate the indebtedness in accordance with law. More than that, even if such automatic appropriation of the cargo truck in question can be inferred from or be contemplated under the aforesaid mortgage contract, such stipulation would be pactum commissorium which is expressly prohibited by Article 2088 of the Civil Code and therefore, null and void (Tan Chun Tic v. West Coast Life, 54 Phil., 361 [1933]; Reyes v. Nebrija 98 Phil. 639 [1955]; Ranjo v. Salmon, 15 Phil. 436 [1910]; Paras, 'Civil Code of the Philippines', pp. 814-815; Vol. V, Seventh Edition). Having opted to foreclose the chattel mortgage, respondent GAMI can no longer cancel the sale. The three remedies of the vendor in case the vendee defaults, in a contract of sale of personal property the price of which is payable in installment under Article 1484 of the Civil Code, are alternative and cannot be exercised simultaneously or cumulatively by the vendor-creditor. In Cruz vs. Filipinas Investment and Finance Corporation (23 SCRA 791, [19681; the Supreme Court construing Article 1484 of the Civil Code, held: Should the vendee or purchaser of a personal property default in the payment of two or more of the agreed installments, the vendor or seller has the option to avail of any one of these three remedies either to exact fulfillment by the purchaser of the obligation, or to cancel the sale, or to foreclose the mortgage on the purchased personal property, if one was constituted. These remedies have been recognized as alternative, not cumulative, that the exercise of one would bar the exercise of the others. It may also be stated that the established rule is to the effect that the foreclosure and actual sale of a mortgaged chattel bars further recovery by the vendor of any balance on the purchaser's outstanding obligation not so satisfied by the sale. It will be observed, however, that the award of exemplary damages is apparently unwarranted, there being no showing that the mortgagee acted in a wanton, fraudulent, reckless or oppressive manner (Dee Hua Liong Electrical Equipment Corp. v. Reyes, 145 SCRA 714 [1986]). The trial court did not find blatant fault on the part of the mortgagee for not immediately proceeding with the foreclosure of the mortgage, especially so where the filing of the instant case has put a legal obstacle to it. On the other hand, the appellate court is of the view and rightly so that the mortgagee should have immediately foreclosed the mortgage and offered the truck for sale at public auction as provided under the chattel mortgage contract. It will be recalled, that under the chattel mortgage contract, the mortgagee is expressly authorized to sell the mortgaged property and the mortgagee had already commenced foreclosure of the chattel mortgage (par. 13, amended answer) but the sale presumably could not be immediately made because of the request of the mortgagor himself to give him a chance to settle his account. WHEREFORE, the decision of the Court of Appeals is hereby AFFIRMED with the modification that the award of exemplary damages is deleted. Respondent GAMI is hereby ordered to foreclose the chattel mortgage by selling the subject cargo truck at public auction and liquidate the indebtedness in accordance with law.

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SO ORDERED. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-19752 January 29, 1968

LAND SETTLEMENT AND DEVELOPMENT CORPORATION, plaintiff-appellant, vs. AGUSTIN CARLOS, defendant-appellee, TARLAC DEVELOPMENT CORPORATION, third-party claimant. Alindogan and Paraiso for plaintiff-appellant. Ponce Enrile, Siguion Reyna, Montecillo and Belo for third party claimant. CASTRO, J.: On October 11, 1952 the defendant Agustin Carlos purchased a caterpillar tractor from the plaintiff Land 1 Settlement and Development Corporation (hereinafter referred to as the LASEDECO ) for the sum of P9,000 under a contract of sale with chattel mortgage and surety bond (exh. A). He made an initial payment of P2,250; the balance of P6,750 was to be paid on or before November 10, 1952. He thereafter made a second payment of P1,000, but failed to pay the rest (P5,750). So on June 18, 1957 the LASEDECO filed a complaint for specific performance (civil case 32878) with the Court of First Instance of Manila, praying that Carlos be ordered to pay the balance of P5,750, with legal interest thereon until fully paid, and, in accordance with the promissory note exh. B, the amount of P1,000 as liquidated damages, plus 30% of principal amount unpaid as attorney's fees and costs of suit. Carlos moved to dismiss the complaint on the ground that the plaintiff has no capacity to sue. When this motion was denied, Carlos filed an answer with counterclaim, as well as a third-party complaint against Nicanor Carag and Pio C. Calica. The third-party complaint alleges, among other things, that Carlos, in an assignment dated November 3, 1952 (exh. B) and for the consideration of P2,218.70, assigned and relinquished all the rights appertaining to him by virtue of the contract of sale in favor of the said third-party defendants, who undertook to pay the balance of P5,750 to the LASEDECO; and that the said third-party defendants, without Carlos' knowledge and consent and without priorly paying the sum of P5,750 to the LASEDECO, sold the tractor to the Central Azucarera de Tarlac. The third-party defendants failed to answer the third-party complaint, and were consequently declared in default. At the hearing of the case, the plaintiff and the defendant submitted a stipulation of facts wherein the latter admitted having purchased the tractor from the former, acknowledged the unpaid balance of P5,750 on the purchase price thereof, and reserved his right to present evidence against the third-party defendants. On February 16, 1959 the lower court rendered judgment (1) ordering the defendant to pay the plaintiff the sums of P5,750, P1,000 as liquidated damages, and 30% of P5,750 for and as attorney's fees, expenses and costs of suit; and (2) required the third-party defendants to reimburse the defendant whatever amount the latter may be required to pay, or has paid, to the plaintiff, aside from P100 as attorney's fees. The plaintiff and the defendant, after the judgment became final and executory, moved for its execution. The court a quo, in twin orders of April 4, 1959, issued writs "for the satisfaction of the judgment." On the following July 28, the deputy sheriff of Tarlac, Tarlac, levied on the tractor which he found in the possession of Agaton Arciaga in barrio Balaoang, Paniqui, Tarlac.

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On July 30, 1959 the Tarlac Development Corporation, as third-party claimant (hereinafter referred to as the TDC), filed an ex parte motion to lift the attachment on the tractor in the same civil case 32878, averring that it is the owner thereof, having purchased it in good faith from the Compaia General de Tabacos de Filipinas, the owner of the Central Azucarera de Tarlac; that it had been in possession of the property since April, 1958; that the tractor was being used in one of its agricultural projects; that delay in the lifting of the attachment would unduly prejudice the progress of the said project; and that the complaint in the said civil case for specific performance was an action in personam and, consequently, the decision rendered therein is not binding upon it. It posted a P10,000 bond to answer for damages the plaintiff might suffer by reason of the issuance of an order lifting the attachment. On July 30, 1959 the lower court issued an order granting the motion to lift attachment and ordering the deputy sheriff to return the tractor to the TDC. The LASEDECO filed a motion for reconsideration of the said order, signifying its willingness to file a bond in an amount equal to the value of the tractor. This motion, after due hearing thereon, was denied on February 12, 1962. Hence this appeal by the LASEDECO. Did the lower court err (1) in recognizing as valid the sale of the tractor by Carlos to the third-party defendants? (2) in not holding that the judgment in civil case 32878 can be enforced against the tractor? (3) in granting the motion to lift the attachment and ordering the return of the tractor to the TDC? The LASEDECO maintains that Carlos remained the owner of the tractor even after he assigned it to the third-party defendants, because that transaction did not transfer ownership to the latter, as it was effected without its (appellant's) consent; consequently, the latter could not have legally transferred ownership of the tractor to the Hacienda Luisita, which, in turn, could not also have validly transferred it to the TDC. This argument is predicated primarily on that portion of article 1505 of the new Civil Code which states that "where goods are sold by a person who is not the owner thereof, and who does not sell them under authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller had, unless the owner of the goods is by his conduct precluded from denying the seller's authority to sell." This argument is obviously unacceptable. The contract of sale, although with chattel mortgage and surety 2 bond (exh. A), was a straight sale of the tractor, and operated to transfer ownership thereof from the appellant to the defendant. Although the purchase price of P9,000 was to be paid in two separate sums, the sale cannot be regarded as one on installments because the balance after payment of the initial sum was to be paid in 3 totality on or before November 10, 1952. Proof of the transfer of ownership is the chattel mortgage on the 4 tractor, as the defendant could not have mortgaged it to the appellant without being its owner. The defendant Carlos being the owner of the tractor when he ceded all his rights thereto to the third-party defendants, subject of course to the lien thereon created by the chattel mortgage executed in favor of the appellant, we see no reason why the assignment of November 3, 1952, which is supported by a valid consideration, could not vest title in the third-party defendants without the consent of the appellant. Indeed, although the assignment did not 5 extinguish or discharge the appellant's lien on the tractor, this lien was nonetheless in effect abandoned by the institution by the LASEDECO of its complaint for specific performance which ultimately terminated in a favorable 6 judgment against the defendant mortgagor. The following observations of the court a quo are unassailable:1wph1.t The contract between the plaintiff and the defendant Agustin Carlos on October 11, 1952, was one of sale. A down payment of P2,250.00 on the purchase price of P9,000 was made, leaving a balance of P6,750.00 which, according to the contract, should be paid on or before November 10, 1952. Carlos then assigned his rights to third party defendants Nicanor Carag, and Pio C. Calica without the approval of the LASEDECO. ". . . Even if the assignment to the third-party defendants was not approved by the LASEDECO, the court in said decision recognized the third-party defendants' liability to Carlos. The same decision required Carlos to pay his obligation to the LASEDECO, but not to return or levy on a specific property. The sale of the tractor to defendant Carlos by the LASEDECO is recognized by the decision which also recognized its sale to the third-

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party defendants. Therefore, nobody should complain about its sale by the third-party defendants to the Hacienda Luisita owned by the Compaia General de Tabacos de Filipinas and the sale by the latter of the same tractor to the present claimant Tarlac Development Corporation. The Tarlac Development Corporation was a purchaser in good faith and the transaction was a legal transaction. It thus follows that the tractor, which is held by the TDC and which no longer belongs to the judgment debtor Carlos against whom the action for specific performance was brought and the writ of execution directed, 7 cannot be levied upon. It is finally contended that the lower court erred in granting the ex parte motion to lift the attachment. It is 8 argued that the motion was improper and irregular, as section 12 of Rule 50 of the old Rules of Court, upon which, it is claimed, the motion is predicated, can be availed of only "by a party or defendant to a case", and the TDC was not a party to civil case 32878; that the proper remedy under the circumstances is a third-party claim 9 under section 15 of Rule 39; and that granting arguendo that the TDC might avail of an ex parte motion, the one filed is ineffective to lift the attachment because of non-compliance with the essential requisites prescribed by said section 15, namely, (1) that the claim must be by a person other than the defendant or his agent; (2) that the action must be under oath or supported by affidavit stating the claimant's title to, or right to possession of, the property, and the grounds therefor; and (3) that it must be served upon the officer making the levy and a 10 copy thereof upon the judgment creditor. The appellant is in error. It is not true, as claimed by the LASEDECO, that in filing the ex parte motion, the TDC relied upon section 12 of Rule 59 of the old Rules of Court, as it is clear from the record that the latter 11 expressly invoked section 14 of Rule 59 and section 15 of Rule 39. These sections in essence provide that if the property taken or levied upon be claimed by any person other than the party against whom attachment had been issued, that other person may file a third-party claim with the sheriff or intervene in the action and ask that the writ of attachment on the property be quashed. Separate action was indeed said to be the correct and only procedure contemplated by Act 190, intervention being a new remedy introduced by the Rules of Court as addition to, but not in substitution of, the old process. The new Rules adopted petition 121 of Act No. 190 and added thereto Rule 24 (a) of the Federal Rules of Procedure. Combined, the two modes of redress are now section 1 of Rule 13, the last clause of which is the newly adopted provision. The result is that, whereas, "under the old procedure, the third person could not intervene, he having no interest in the debt (or damages) sued upon by a plaintiff," under the present Rules, "a third person claiming to be the owner of such property may, not only file a third-party claim with the sheriff, but also intervene in the action to ask that the writ of attachment be quashed." (I Moran's Comments on the Rules 12 of Court, 3rd Ed., 238, 239.) Thus, it has been held that a third person may object to the levy by filing a third-party claim in accordance 13 with section 14 of Rule 59 and section 15 of Rule 39. The remedy provided in the aforecited sections was precisely and exactly what the TDC availed of. As a third-party claimant, it averred in its verified motion that it is the absolute owner of the tractor; that it purchased the property in good faith from the Compaia General de Tabacos de Filipinas, the owner of Central Azucarera de Tarlac; that it had been in possession thereof since April of 1958, and that it was now in its agricultural project in barrio Balaoang, Paniqui, Tarlac, and in the care and custody of one Agaton Arciaga when attached. True that the verified motion is not supported by an affidavit stating the TDC's title to the tractor. This defect was, however cured by the subsequent tender in evidence by the TDC of a bill of sale of the tractor from the 14 Compaia General de Tabacos de Filipinas in its favor (exh. 1, also exh. 1-A), which tender was accepted by 15 the lower court on August 31, 1961 without objection from the counsel for the appellant. ACCORDINGLY, the orders a quo of July 30, 1959 and February 12, 1962 are affirmed. No pronouncement as to costs.

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Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Angeles and Fernando, JJ., concur. Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. 82040 August 27, 1991 BA FINANCE CORPORATION, Petitioner, vs. HON. COURT OF APPEALS, Hon. Presiding Judge of Regional Trial Court of Manila, Branch 43, MANUEL CUADY and LILIA CUADY, Respondents. PARAS, J.: This is a petition for review on certiorari which seeks to reverse and set aside (1) the decision of the Court of Appeals dated July 21, 1987 in CA-G.R. No. CV-06522 entitled "B.A. Finance Corporation, Plaintiff-Appellant, vs. Manuel Cuady and Lilia Cuady, Defendants-Appellees," affirming the decision of the Regional Trial Court of Manila, Branch 43, which dismissed the complaint in Civil Case No. 82-10478, and (2) the resolution dated February 9, 1988 denying petitioner's motion for reconsideration.c As gathered from the records, the facts are as follows: On July 15, 1977, private respondents Manuel Cuady and Lilia Cuady obtained from Supercars, Inc. a credit of P39,574.80, which amount covered the cost of one unit of Ford Escort 1300, four-door sedan. Said obligation was evidenced by a promissory note executed by private respondents in favor of Supercars, Inc., obligating themselves to pay the latter or order the sum of P39,574.80, inclusive of interest at 14% per annum, payable on monthly installments of P1,098.00 starting August 16, 1977, and on the 16th day of the next 35 months from September 16, 1977 until full payment thereof. There was also stipulated a penalty of P10.00 for every month of late installment payment. To secure the faithful and prompt compliance of the obligation under the said promissory note, the Cuady spouses constituted a chattel mortage on the aforementioned motor vehicle. On July 25, 1977, Supercars, Inc. assigned the promissory note, together with the chattel mortgage, to B.A. Finance Corporation. The Cuadys paid a total of P36,730.15 to the B.A. Finance Corporation, thus leaving an unpaid balance of P2,344.65 as of July 18, 1980. In addition thereto, the Cuadys owe B.A. Finance Corporation P460.00 representing penalties or surcharges for tardy monthly installments (Rollo, pp. 27-29). Parenthetically, the B.A. Finance Corporation, as the assignee of the mortgage lien obtained the renewal of the insurance coverage over the aforementioned motor vehicle for the year 1980 with Zenith Insurance Corporation, when the Cuadys failed to renew said insurance coverage themselves. Under the terms and conditions of the said insurance coverage, any loss under the policy shall be payable to the B.A. Finance Corporation (Memorandum for Private Respondents, pp. 3-4). On April 18, 1980, the aforementioned motor vehicle figured in an accident and was badly damaged. The unfortunate happening was reported to the B.A. Finance Corporation and to the insurer, Zenith Insurance Corporation. The Cuadys asked the B.A. Finance Corporation to consider the same as a total loss, and to claim from the insurer the face value of the car insurance policy and apply the same to the payment of their remaining account and give them the surplus thereof, if any. But instead of heeding the request of the Cuadys, B.A. Finance Corporation prevailed upon the former to just have the car repaired. Not long thereafter, however, the car bogged down. The Cuadys wrote B.A. Finance Corporation requesting the latter to pursue their prior instruction of enforcing the total loss provision in the insurance coverage. When B.A. Finance Corporation did not respond favorably to their request, the Cuadys stopped paying their monthly installments on the promissory note (Ibid., pp. 45).

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On June 29, 1982, in view of the failure of the Cuadys to pay the remaining installments on the note, B.A. Finance Corporation sued them in the Regional Trial Court of Manila, Branch 43, for the recovery of the said remaining installments (Memorandum for the Petitioner, p. 1). After the termination of the pre-trial conference, the case was set for trial on the merits on April 25, 1984. B.A. Finance Corporation's evidence was presented on even date and the presentation of Cuady's evidence was set on August 15, 1984. On August 7,1984, Atty. Noel Ebarle, counsel for the petitioner, filed a motion for postponement, the reason being that the "handling" counsel, Atty. Ferdinand Macibay was temporarily assigned in Cebu City and would not be back until after August 15, 1984. Said motion was, however, denied by the trial court on August 10, 1984. On August 15, 1984, the date of hearing, the trial court allowed private respondents to adduce evidence ex-parte in the form of an affidavit to be sworn to before any authorized officer. B.A. Finance Corporation filed a motion for reconsideration of the order of the trial court denying its motion for postponement. Said motion was granted in an order dated September 26, 1984, thus: The Court grants plaintiff's motion for reconsideration dated August 22, 1984, in the sense that plaintiff is allowed to adduce evidence in the form of counter-affidavits of its witnesses, to be sworn to before any person authorized to administer oaths, within ten days from notice hereof. (Ibid., pp. 1-2). B.A. Finance Corporation, however, never complied with the above-mentioned order, paving the way for the trial court to render its decision on January 18, 1985, the dispositive portion of which reads as follows: IN VIEW WHEREOF, the Court DISMISSES the complaint without costs.chanroblesvirtuallawlibrary chanrobles virtual law library SO ORDERED. (Rollo, p. 143) On appeal, the respondent appellate court * affirmed the decision of the trial court. The decretal portion of the said decision reads as follows: WHEREFORE, after consultation among the undersigned members of this Division, in compliance with the provision of Section 13, Article VIII of the Constitution; and finding no reversible error in the judgment appealed from, the same is hereby AFFIRMED, without any pronouncement as to costs. (Ibid., p. 33) B.A. Finance Corporation moved for the reconsideration of the above decision, but the motion was denied by the respondent appellate court in a resolution dated February 9, 1988 (Ibid., p. 38). Hence, this present recourse.chanroblesvirtuallawlibrary On July 11, 1990, this Court gave due course to the petition and required the parties to submit their respective memoranda. The parties having complied with the submission of their memoranda, the case was submitted for decision. The real issue to be resolved in the case at bar is whether or not B.A. Finance Corporation has waived its right to collect the unpaid balance of the Cuady spouses on the promissory note for failure of the former to enforce the total loss provision in the insurance coverage of the motor vehicle subject of the chattel mortgage. It is the contention of B.A. Finance Corporation that even if it failed to enforce the total loss provision in the insurance policy of the motor vehicle subject of the chattel mortgage, said failure does not operate to extinguish the unpaid balance on the promissory note, considering that the circumstances obtaining in the case at bar do not fall under Article 1231 of the Civil Code relative to the modes of extinguishment of obligations (Memorandum for the Petitioner, p. 11).

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On the other hand, the Cuadys insist that owing to its failure to enforce the total loss provision in the insurance policy, B.A. Finance Corporation lost not only its opportunity to collect the insurance proceeds on the mortgaged motor vehicle in its capacity as the assignee of the said insurance proceeds pursuant to the memorandum in the insurance policy which states that the "LOSS: IF ANY, under this policy shall be payable to BA FINANCE CORP., as their respective rights and interest may appear" (Rollo, p. 91) but also the remaining balance on the promissory note (Memorandum for the Respondents, pp. 16-17). The petition is devoid of merit. B.A. Finance Corporation was deemed subrogated to the rights and obligations of Supercars, Inc. when the latter assigned the promissory note, together with the chattel mortgage constituted on the motor vehicle in question in favor of the former. Consequently, B.A. Finance Corporation is bound by the terms and conditions of the chattel mortgage executed between the Cuadys and Supercars, Inc. Under the deed of chattel mortgage, B.A. Finance Corporation was constituted attorney-in-fact with full power and authority to file, follow-up, prosecute, compromise or settle insurance claims; to sign execute and deliver the corresponding papers, receipts and documents to the Insurance Company as may be necessary to prove the claim, and to collect from the latter the proceeds of insurance to the extent of its interests, in the event that the mortgaged car suffers any loss or damage (Rollo, p. 89). In granting B.A. Finance Corporation the aforementioned powers and prerogatives, the Cuady spouses created in the former's favor an agency. Thus, under Article 1884 of the Civil Code of the Philippines, B.A. Finance Corporation is bound by its acceptance to carry out the agency, and is liable for damages which, through its non-performance, the Cuadys, the principal in the case at bar, may suffer. Unquestionably, the Cuadys suffered pecuniary loss in the form of salvage value of the motor vehicle in question, not to mention the amount equivalent to the unpaid balance on the promissory note, when B.A. Finance Corporation steadfastly refused and refrained from proceeding against the insurer for the payment of a clearly valid insurance claim, and continued to ignore the yearning of the Cuadys to enforce the total loss provision in the insurance policy, despite the undeniable fact that Rea Auto Center, the auto repair shop chosen by the insurer itself to repair the aforementioned motor vehicle, misrepaired and rendered it completely useless and unserviceable (Ibid., p. 31). Accordingly, there is no reason to depart from the ruling set down by the respondent appellate court. In this connection, the Court of Appeals said: ... Under the established facts and circumstances, it is unjust, unfair and inequitable to require the chattel mortgagors, appellees herein, to still pay the unpaid balance of their mortgage debt on the said car, the nonpayment of which account was due to the stubborn refusal and failure of appellant mortgagee to avail of the insurance money which became due and demandable after the insured motor vehicle was badly damaged in a vehicular accident covered by the insurance risk. ... (Ibid.) On the allegation that the respondent court's findings that B.A. Finance Corporation failed to claim for the damage to the car was not supported by evidence, the records show that instead of acting on the instruction of the Cuadys to enforce the total loss provision in the insurance policy, the petitioner insisted on just having the motor vehicle repaired, to which private respondents reluctantly acceded. As heretofore mentioned, the repair shop chosen was not able to restore the aforementioned motor vehicle to its condition prior to the accident. Thus, the said vehicle bogged down shortly thereafter. The subsequent request of the Cuadys for the B.A. Finance Corporation to file a claim for total loss with the insurer fell on deaf ears, prompting the Cuadys to stop paying the remaining balance on the promissory note (Memorandum for the Respondents, pp. 4-5). Moreover, B.A. Finance Corporation would have this Court review and reverse the factual findings of the respondent appellate court. This, of course, the Court cannot and will not generally do. It is axiomatic that the judgment of the Court of Appeals is conclusive as to the facts and may not ordinarily be reviewed by the Supreme Court. The doctrine is, to be sure, subject to certain specific exceptions none of which, however, obtains in the instant case (Luzon Brokerage Corporation v. Court of Appeals, 176 SCRA 483 [1989]).

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Finally, B.A. Finance Corporation contends that respondent trial court committed grave abuses of discretion in two instances: First, when it denied the petitioner's motion for reconsideration praying that the counsel be allowed to cross-examine the affiant, and; second, when it seriously considered the evidence adduced exparte by the Cuadys, and heavily relied thereon, when in truth and in fact, the same was not formally admitted as part of the evidence for the private respondents (Memorandum for the Petitioner, p. 10). This Court does not have to unduly dwell on this issue which was only raised by B.A. Finance Corporation for the first time on appeal. A review of the records of the case shows that B.A. Finance Corporation failed to directly raise or ventilate in the trial court nor in the respondent appellate court the validity of the evidence adduced ex-parteby private respondents. It was only when the petitioner filed the instant petition with this Court that it later raised the aforementioned issue. As ruled by this Court in a long line of cases, issues not raised and/or ventilated in the trial court, let alone in the Court of Appeals, cannot be raised for the first time on appeal as it would be offensive to the basic rules of fair play, justice and due process (Galicia v. Polo, 179 SCRA 375 [1989]; Ramos v. Intermediate Appellate Court, 175 SCRA 70 [1989]; Dulos Realty & Development Corporation v. Court of Appeals, 157 SCRA 425 [1988]; Dihiansan, et al. v. Court of Appeals, et al., 153 SCRA 712 [1987]; De la Santa v. Court of Appeals, et al., 140 SCRA 44 [1985]). PREMISES CONSIDERED, the instant petition is DENIED, and the decision appealed from is AFFIRMED. SO ORDERED. Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 101163 January 11, 1993 STATE INVESTMENT HOUSE, INC., Petitioner, vs. COURT OF APPEALS and NORA B. MOULIC, Respondents. BELLOSILLO, J.: The liability to a holder in due course of the drawer of checks issued to another merely as security, and the right of a real estate mortgagee after extrajudicial foreclosure to recover the balance of the obligation, are the issues in this Petition for Review of the Decision of respondent Court of Appeals. Private respondent Nora B. Moulic issued to Corazon Victoriano, as security for pieces of jewelry to be sold on commission, two (2) post-dated Equitable Banking Corporation checks in the amount of Fifty Thousand Pesos (P50,000.00) each, one dated 30 August 1979 and the other, 30 September 1979. Thereafter, the payee negotiated the checks to petitioner State Investment House. Inc. (STATE). MOULIC failed to sell the pieces of jewelry, so she returned them to the payee before maturity of the checks. The checks, however, could no longer be retrieved as they had already been negotiated. Consequently, before their maturity dates, MOULIC withdrew her funds from the drawee bank. Upon presentment for payment, the checks were dishonored for insufficiency of funds. On 20 December 1979, STATE allegedly notified MOULIC of the dishonor of the checks and requested that it be paid in cash instead, although MOULIC avers that no such notice was given her. On 6 October 1983, STATE sued to recover the value of the checks plus attorney's fees and expenses of litigation.

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In her Answer, MOULIC contends that she incurred no obligation on the checks because the jewelry was never sold and the checks were negotiated without her knowledge and consent. She also instituted a Third-Party Complaint against Corazon Victoriano, who later assumed full responsibility for the checks. On 26 May 1988, the trial court dismissed the Complaint as well as the Third-Party Complaint, and ordered STATE to pay MOULIC P3,000.00 for attorney's fees. STATE elevated the order of dismissal to the Court of Appeals, but the appellate court affirmed the trial court on the ground that the Notice of Dishonor to MOULIC was made beyond the period prescribed by the Negotiable Instruments Law and that even if STATE did serve such notice on MOULIC within the reglementary period it would be of no consequence as the checks should never have been presented for payment. The sale of the jewelry was never effected; the checks, therefore, ceased to serve their purpose as security for the jewelry. We are not persuaded. The negotiability of the checks is not in dispute. Indubitably, they were negotiable. After all, at the pre-trial, the 1 parties agreed to limit the issue to whether or not STATE was a holder of the checks in due course. In this regard, Sec. 52 of the Negotiable Instruments Law provides Sec. 52. What constitutes a holder in due course. - A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it was previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. Culled from the foregoing, a prima facie presumption exists that the holder of a negotiable instrument is a holder 2 in due course. Consequently, the burden of proving that STATE is not a holder in due course lies in the person who disputes the presumption. In this regard, MOULIC failed. The evidence clearly shows that: (a) on their faces the post-dated checks were complete and regular: (b) 3 petitioner bought these checks from the payee, Corazon Victoriano, before their due dates; (c) petitioner took these checks in good faith and for value, albeit at a discounted price; and, (d) petitioner was never informed nor made aware that these checks were merely issued to payee as security and not for value. Consequently, STATE is indeed a holder in due course. As such, it holds the instruments free from any defect of title of prior parties, and from defenses available to prior parties among themselves; STATE may, therefore, 4 enforce full payment of the checks. MOULIC cannot set up against STATE the defense that there was failure or absence of consideration. MOULIC can only invoke this defense against STATE if it was privy to the purpose for which they were issued and therefore is not a holder in due course. That the post-dated checks were merely issued as security is not a ground for the discharge of the instrument as against a holder in due course. For the only grounds are those outlined in Sec. 119 of the Negotiable Instruments Law: Sec. 119. Instrument; how discharged. - A negotiable instrument is discharged: (a) By payment in due course by or on behalf of the principal debtor; (b) By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation; (c) By the intentional cancellation thereof by the holder; (d) By any other act which will discharge a simple contract for the payment of money; (e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right.

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Obviously, MOULIC may only invoke paragraphs (c) and (d) as possible grounds for the discharge of the instrument. But, the intentional cancellation contemplated under paragraph (c) is that cancellation effected by 5 6 destroying the instrument either by tearing it up, burning it, or writing the word "cancelled" on the instrument. The act of destroying the instrument must also be made by the holder of the instrument intentionally. Since MOULIC failed to get back possession of the post-dated checks, the intentional cancellation of the said checks is altogether impossible. On the other hand, the acts which will discharge a simple contract for the payment of money under paragraph (d) are determined by other existing legislations since Sec. 119 does not specify what these acts are, e.g., Art. 7 1231 of the Civil Code which enumerates the modes of extinguishing obligations. Again, none of the modes outlined therein is applicable in the instant case as Sec. 119 contemplates of a situation where the holder of the instrument is the creditor while its drawer is the debtor. In the present action, the payee, Corazon Victoriano, was no longer MOULIC's creditor at the time the jewelry was returned. Correspondingly, MOULIC may not unilaterally discharge herself from her liability by the mere expediency of withdrawing her funds from the drawee bank. She is thus liable as she has no legal basis to excuse herself from liability on her checks to a holder in due course. Moreover, the fact that STATE failed to give Notice of Dishonor to MOULIC is of no moment. The need for such notice is not absolute; there are exceptions under Sec. 114 of the Negotiable Instruments Law: Sec. 114. When notice need not be given to drawer. - Notice of dishonor is not required to be given to the drawer in the following cases: (a) Where the drawer and the drawee are the same person; (b) When the drawee is a fictitious person or a person not having capacity to contract; (c) When the drawer is the person to whom the instrument is presented for payment: (d) Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument; (e) Where the drawer had countermanded payment. Indeed, MOULIC'S actuations leave much to be desired. She did not retrieve the checks when she returned the jewelry. She simply withdrew her funds from her drawee bank and transferred them to another to protect herself. After withdrawing her funds, she could not have expected her checks to be honored. In other words, she was responsible for the dishonor of her checks, hence, there was no need to serve her Notice of Dishonor, which is simply bringing to the knowledge of the drawer or indorser of the instrument, either verbally or by writing, the fact that a specified instrument, upon proper proceedings taken, has not been accepted or has not 8 been paid, and that the party notified is expected to pay it. In addition, the Negotiable Instruments Law was enacted for the purpose of facilitating, not hindering or hampering transactions in commercial paper. Thus, the said statute should not be tampered with haphazardly 9 or lightly. Nor should it be brushed aside in order to meet the necessities in a single case. The drawing and negotiation of a check have certain effects aside from the transfer of title or the incurring of liability in regard to the instrument by the transferor. The holder who takes the negotiated paper makes a contract with the parties on the face of the instrument. There is an implied representation that funds or credit are 10 available for the payment of the instrument in the bank upon which it is drawn. Consequently, the withdrawal of the money from the drawee bank to avoid liability on the checks cannot prejudice the rights of holders in due course. In the instant case, such withdrawal renders the drawer, Nora B. Moulic, liable to STATE, a holder in due course of the checks. Under the facts of this case, STATE could not expect payment as MOULIC left no funds with the drawee bank 11 to meet her obligation on the checks, so that Notice of Dishonor would be futile. The Court of Appeals also held that allowing recovery on the checks would constitute unjust enrichment on the part of STATE Investment House, Inc. This is error.

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The record shows that Mr. Romelito Caoili, an Account Assistant, testified that the obligation of Corazon Victoriano and her husband at the time their property mortgaged to STATE was extrajudicially foreclosed 12 amounted to P1.9 million; the bid price at public auction was only P1 million. Thus, the value of the property foreclosed was not even enough to pay the debt in full. Where the proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure of mortgage, the 13 mortgagee is entitled to claim the deficiency from the debtor. The step thus taken by the mortgagee-bank in resorting to an extra-judicial foreclosure was merely to find a proceeding for the sale of the property and its 14 action cannot be taken to mean a waiver of its right to demand payment for the whole debt. For, while Act 3135, as amended, does not discuss the mortgagee's right to recover such deficiency, it does not contain any provision either, expressly or impliedly, prohibiting recovery. In this jurisdiction, when the legislature intends to foreclose the right of a creditor to sue for any deficiency resulting from foreclosure of a security given to guarantee an obligation, it so expressly provides. For instance, with respect to pledges, Art. 2115 of the Civil 15 Code does not allow the creditor to recover the deficiency from the sale of the thing pledged. Likewise, in the case of a chattel mortgage, or a thing sold on installment basis, in the event of foreclosure, the vendor "shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the 16 contrary will be void". It is clear then that in the absence of a similar provision in Act No. 3135, as amended, it cannot be concluded that the creditor loses his right recognized by the Rules of Court to take action for the recovery of any unpaid balance on the principal obligation simply because he has chosen to extrajudicially foreclose the real estate 17 mortgage pursuant to a Special Power of Attorney given him by the mortgagor in the contract of mortgage. The filing of the Complaint and the Third-Party Complaint to enforce the checks against MOULIC and the VICTORIANO spouses, respectively, is just another means of recovering the unpaid balance of the debt of the VICTORIANOs. In fine, MOULIC, as drawer, is liable for the value of the checks she issued to the holder in due course, STATE, without prejudice to any action for recompense she may pursue against the VICTORIANOs as Third-Party Defendants who had already been declared as in default. WHEREFORE, the petition is GRANTED. The decision appealed from is REVERSED and a new one entered declaring private respondent NORA B. MOULIC liable to petitioner STATE INVESTMENT HOUSE, INC., for the value of EBC Checks Nos. 30089658 and 30089660 in the total amount of P100,000.00, P3,000.00 as attorney's fees, and the costs of suit, without prejudice to any action for recompense she may pursue against the VICTORIANOs as Third-Party Defendants. Costs against private respondent. SO ORDERED.

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EN BANC G.R. No. L-25951 June 30, 1969

FILIPINAS INVESTMENT & FINANCE CORPORATION, plaintiff-appellant, -versusJULIAN R. VITUG, JR. and SUPREME SALES & DEVELOPMENT CORPORATION, defendants-appellees. Wilhelmina V. Joven for plaintiff-appellant. Antonio V. Borromeo for defendants-appellants. BARREDO, J.: Appeal from an order of dismissal by the Court of First Instance of Manila, in its Civil Case No. 60915, entitled Filipinas Investment & Finance Corporation vs. Julian R. Vitug, Jr. and Supreme Sales & Development Corporation, of the amended complaint of July 16, 1965 of plaintiff-appellant Filipinas Investment & Finance Corporation whereby it sought to recover from defendant-appellee Supreme Sales & Development Corporation the deficiency that resulted after it had foreclosed the chattel mortgage on and sold at public auction, the car of the other defendant, Julian Vitug, Jr. who had failed to pay to appellee installments due on the promissory note representing the purchase price of said car which he had bought from the same, appellant being the assignee of appellee of its rights in the said promissory note. The material allegations in appellant's amended complaint are: The defendant, Julian R. Vitug, executed and delivered to appellee a promissory note in the amount of P14,605.00 payable in monthly installments according to a schedule of payments; the payment of the aforesaid amount which was the purchase price of a motor vehicle, a 4-door Consul sedan, bought by said defendant from appellee, was secured by a chattel mortgage over such automobile; on the same day, appellee negotiated the above-mentioned promissory note in favor of appellant Filipinas Investment & Finance Corporation, assigning thereto all its rights, title and interests to the same, the assignment including the right of recourse against appellee; defendant Vitug defaulted in the payment of part of the installment which fell due on January 6, 1965, as well as the subsequent three consecutive monthly installments which he was supposed to have paid on February 6, March 6 and April 6, 1965; there being a provision in the aforesaid promissory note and chattel mortgage that failure to pay the installments due would result in the entire obligation becoming due and demandable, appellant demanded from appellee the payment of such outstanding balance; in turn, appellee "authorized (appellant) to take such action as may be necessary to enable (it) to take possession of the ... motor vehicle." Pursuant to such authority, appellant secured possession of the mortgaged vehicle by means of a writ of replevin duly obtained from the court, preparatory to the foreclosure of the mortgage, but said writ became unnecessary because upon learning of the same, defendant Vitug voluntarily surrendered the car to appellant; thereafter, the said car was sold at public auction, but the proceeds still left a deficiency of P8,349.35, plus interest of 12% per annum from April 21, 1965; and appellant, the above foreclosure and sale notwithstanding, would hold appellee liable for the payment of such outstanding balance, plus attorney's fees and costs. On August 4, 1965, appellee filed an urgent motion to dismiss on the ground, inter alia, that under Article 1484 of the Civil Code of the Philippines, which particular provision is otherwise known as the Recto Law, appellant has no cause of action against appellee. Said provision is as follows: ART. 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies: (1) Exact fulfillment of the obligation should the vendee fail

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to pay; (2) Cancel the sale, should the vendee's failure to pay cover two or more installments; (3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void. In its order of August 30, 1965, subject of this appeal, the lower court found the aforesaid ground to be meritorious and, as already stated, the amended complaint was dismissed as to appellee Supreme Sales & Development Corporation. According to the order of dismissal: It is undisputed in the instant case that the amount of P14,605.00 mentioned as consideration in both the promissory note and the chattel mortgage in the instant case represents the selling price of one (1) automobile New Ford Consul 315 4-door Sedan, payable in the installments mentioned in said documents. Under pars. 5 and 9 of the amended complaint, the writ of replevin was obtained in the instant case for purposes of foreclosure of mortgage. In applying for a writ of replevin, the plaintiff thereby made his choice, namely, to foreclose the mortgage covering said automobile; and having accepted said automobile from defendant Julian R. Vitug, Jr., what remains is for the plaintiff to sell said automobile through either a judicial or an extrajudicial foreclosure of said mortgage, without benefit of a deficiency judgment or deficiency collection ... should the proceeds of the foreclosure sale be less than the balance of the installment sale price of said automobile due and collectible. On September 23, 1965, appellant filed a motion for reconsideration but this was denied on October 26, 1965, hence, this appeal. The principal error assigned by appellant has reference to the applicability of Art. 1484 of the Civil Code, as amended, to the facts of this case. Appellant maintains that: . II THE TRIAL COURT ERRED IN HOLDING THAT ARTICLE 1484 OF THE CIVIL CODE OF THE PHILIPPINES IS APPLICABLE TO THE TRANSACTION BETWEEN PLAINTIFF-APPELLANT AND DEFENDANTAPPELLEE. Under the facts alleged in the amended complaint which are deemed admitted by the motion to 1 dismiss, this assignment of error must be sustained. The specific allegations in the amended complaint which have material bearing on the issue herein are: 4. On November 4, 1964, defendant Supreme Sales & Development Corporation, with notice to defendant Julian R. Vitug, Jr. negotiated in favor of (endorsed and delivered to) plaintiff the above-mentioned promissory note, Annex "A", on a with recourse basis whereby in case of the failure and/or refusal of the maker thereof, defendant Julian R. Vitug, Jr. to pay the obligation under the said promissory note, plaintiff shall have the right to recourse against the said defendant corporation. On the same date, the said defendant corporation, with notice to defendant Julian R. Vitug, Jr., assigned to plaintiff its rights, title, and interests to the aforesaid promissory note and chattel mortgage, Annexes "A" and "B" hereof, as shown by the Deed of Assignment executed by defendant Supreme Sales & Development Corporation in favor of plaintiff, a copy of which is hereto attached as Annex "C" and made an integral part hereof, which assignment is also subject to the right of recourse above-mentioned. 13. The defendant corporation is liable to plaintiff for the entire balance of the obligation covered by the promissory note, Annex "A", and secured by the chattel mortgage, Annex "B", as a general endorser of the promissory note, Annex "A", and assignor of the chattel mortgage on a with- recourse basis. But should plaintiff be able to sell the above-described motor vehicle, then the said defendant corporation is liable to the plaintiff for

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the payment of the balance of the obligation after applying thereto the proceeds of the sale of the said vehicle. (Record on Appeal, pp. 12 and 15.) Thus it can be seen that the assignment made by appellee to appellant of the promissory note and mortgage of defendant Vitug was on a with-recourse basis. In other words, there was a definite and clear agreement between appellant and appellee that should appellant fail to secure full recovery from defendant Vitug, the right was reserved to appellant to seek recourse for the deficiency against appellee. Accordingly, the question for resolution by the Court now is whether or not this provision regarding recourse contained in the agreement between appellant and appellee violates the Recto Law which declares null and void any agreement in contravention thereof. We do not believe that it does. As pointed out in appellant's brief, the transaction between appellant and appellee was purely an ordinary discounting transaction whereby the promissory note executed by defendant Vitug was negotiated by appellee in favor of appellant for a valuable consideration at a certain discount, accompanied by an assignment also of the chattel mortgage executed by said defendant to secure the payment of his promissory note and with the express stipulation that should there be any deficiency, recourse could be had against appellee. Stated otherwise, the remedy presently being sought is not against the buyer of the car or the defendant Vitug but against the seller, independent of whether or not such seller may have a right of recovery against the buyer, which, in this case, he does not have under the Recto Law. It is clear to Us, on the other hand, that under said law, what Congress seeks to protect are only the buyers on installment who more often than not have been victimized by sellers who, before the enactment of this law, succeeded in unjustly enriching themselves at the expense of the buyers because aside from recovering the goods sold, upon default of the buyer in the payment of two installments, still retained for themselves all amounts already paid, in addition, furthermore, to other damages, such as attorney's fees, and costs. Surely, Congress could not have intended to impair and much less do away with the right of the seller to make commercial use of his credit against the buyer, provided said buyer is not burdened beyond what this law allows. We are not unmindful that in the case of Cruz, et al. vs. the same Filipinas Investment & Finance Corporation, L-24772, May 27, 1968, 23 SCRA 791, this Court broadened the scope of the Recto Law beyond its letter and held that within its spirit, a seller of goods on installment does not have any right of action against a third party who, in addition to the buyer's mortgage of the goods sold, furnishes additional security for the payment of said installments or the purchase price of said goods. In that case, it was held:. It is here agreed that plaintiff Cruz failed to pay several installments as provided in the contract; that there was extrajudicial foreclosure of the chattel mortgage on the said motor vehicle; and that defendant-appellant itself bought it at the public auction duly held thereafter, for a sum less than the purchaser's outstanding obligation. Defendant-appellant, however, sought to collect the supposed deficiency by going against the real estate mortgage which was admittedly constituted on the land of plaintiff Reyes as additional security to guarantee the performance of Cruz' obligation, claiming that what is being withheld from the vendor, by the proviso of Article 1484 of the Civil Code, is only the right to recover against the purchaser, and not a recourse to the additional security put up, not by the purchaser himself, but by a third person. There is no merit in this contention. To sustain appellants argument is to overlook the fact that if the guarantor should be compelled to pay the balance of the purchase price, the guarantor will in turn be entitled to recover what she had paid from the debtor vendee (Art. 2066, Civil Code); so that ultimately, it will be the vendee who will be made to bear the payment of the balance of the price, despite the earlier foreclosure of the chattel mortgage given by him. Thus, the protection given by Article 1484 would be indirectly subverted, and public policy overturned. As can be seen, that ease of Cruz was entirely different from this one at bar. In that case, herein appellant Filipinas Investment & Finance Corporation was trying to recover from the guarantor of the buyer, whereas in the present case, it is precisely stipulated in effect, that the Filipinas Investment & Finance Corporation had a right of recourse against the seller should the buyer fail to pay the assigned credit in full.

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It is the contention of appellee that since what were assigned to appellant were only whatever rights it had against the buyer, it should follow that inasmuch as appellee has no right to recover from the defendant beyond the proceeds of the foreclosure sale, the appellant, as assignee, should also have no right to recover any deficiency. We do not view the matter that way. The very fact that the assignee was given the stipulated right of recourse against the assignor negates the idea that the parties contemplated to limit the recovery of the assignee to only the proceeds of the mortgage sale. ACCORDINGLY, the order of dismissal of the lower court is reversed and this case is ordered remanded to the lower court for further proceedings, with costs against appellee Supreme Sales & Development Corporation. Concepcion, C.J., Reyes, J.B.L., Makalintal, Zaldivar, Sanchez, Castro, Capistrano and Teehankee, JJ., concur. Dizon and Fernando, JJ., took no part. Endnotes
1

Evidence seems to have been presented by appellee and admitted by the trial court in connection with the motion to dismiss. While it is obvious that said evidence is relevant, the same cannot be taken into account, since the motion to dismiss is based on the ground that the amended complaint states no cause of action and, therefore, all material facts alleged in the complaint must be deemed admitted for purposes of said motion. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-28074 May 29, 1970 NORTHERN MOTORS, INC., plaintiff-appellant, vs. CASIANO SAPINOSO and "JOHN DOE", defendantsappellees. Sycip, Salazar, Luna, Manalo & Feliciano for plaintiff-appellant. David F. Barrera for defendants-appellees. VILLAMOR, J.: Direct appeal on questions of law from the portion of the judgment of the Court of First Instance of Manila, Branch XXII, in its Civil Case No. 66199, ordering the plaintiff to pay defendant Casiano Sapinoso the sum of P1,250.00. The facts of this case are as follows: On June 4, 1965, Casiano Sapinoso purchased from Northern Motors, Inc. an Opel Kadett car for the price of P12,171.00, making a down payment and executing a promissory note for the balance of P10,540.00 payable in installments with interest at 12% per annum, as follows: P361.00 on July 5, 1965, and P351.00 on the 5th day of each month beginning August, 1965, up to and including December, 1967. To secure the payment of the promissory note, Sapinoso executed in favor of Northern Motors, Inc. a chattel mortgage on the car. The mortgage contract provided, among others, that upon default by the mortgagor in the payment of any part of the principal or interest due, the mortgagee may elect any of the following remedies: (a) sale of the car by the mortgagee; (b) cancellation of the contract of sale; (c) extrajudicial foreclosure; (d) judicial foreclosure; (e)

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ordinary civil action to exact fulfillment of the mortgage contract. It was further stipulated that "[w]hichever remedy is elected by the mortgagee, the mortgagor expressly waives his right to reimbursement by the mortgagee of any and all amounts on the principal and interest already paid by him." c Sapinoso failed to pay the first installment of P361.00 due on July 5, 1965, and the second, third, fourth and fifth installments of P351.00 each due on the 5th day of August, September, October and November, 1965, respectively. Several payments were, however, made by Sapinoso, to wit: P530.52 on November 21, 1965, P480.00 on December 21, 1965, and P400.00 on April 30, 1966. The first and third payments aforesaid were applied to accrued interest up to April 17, 1966, while the second payment was applied partly (P158.10) to interest, and partly (P321.90) to the principal, thereby reducing the balance unpaid to P10,218.10. The vendee-mortgagor having failed to make further payments, Northern Motors, Inc. filed the present complaint on July 22, 1966, against Sapinoso and a certain person whose name, identity and address were still unknown to the plaintiff, hence denominated in the complaint as "John Doe." In its complaint, Northern Motors, Inc. stated that it was availing itself of the option given it under the mortgage contract of extrajudicially foreclosing the mortgage, and prayed that a writ of replevin be issued upon its filing of a bond for the seizure of the car and for its delivery to it; that after hearing, the plaintiff be adjudged to have the rightful possession and ownership of the car; that in default of delivery, the defendants be ordered to pay the plaintiff the sum of P10,218.10 with interest, at 12% per annum from April 18, 1966, until full payment of the said sum, as well as an amount equivalent to 25% of the sum due as and for attorney's fees and expenses of collection, and the costs of the suit. Plaintiff also prayed for such other remedy as might be deemed just and equitable in the premises. Subsequent to the commencement of the action, but before the filing of his answer, defendant Sapinoso made two payments on the promissory note, the first on August 22, 1966, for P500.00, and the second on September 27, 1966, for P750.00. In the meantime, on August 9, 1966, upon the plaintiff's filing of a bond, a writ of replevin was issued by the court. On October 20, 1966, copies of the summons, complaint and annexes thereto were served on defendant Sapinoso by the sheriff who executed the seizure warrant by seizing the car from defendant Sapinoso on the same date, and turning over its possession to the plaintiff on October 25, 1966. On November 12, 1966, defendant Sapinoso filed an answer admitting the allegations in the complaint with respect to the sale to him of the car, the terms thereof, the execution of the promissory note and of the chattel mortgage contract, and the options open to the plaintiff under the said contract. He alleged, however, that he had paid the total sum of P4,230.52, leaving a balance of only P5,987.58; that upon demand he immediately surrendered the possession of the car to the plaintiff's representative; and that the value of the car was only about P5,000.00, and not P10,000.00 as alleged in the complaint. As special defenses the said defendant alleged that he failed to pay the installments due because the car was defective, and the plaintiff failed to have it fixed although he had repeatedly called the plaintiff's attention thereto, hence, the defendant had to procrastinate in his payments in order to move the plaintiff to repair the car; and that although the car could not be used, he paid P700.00 to the plaintiff upon the latter's assurance that the car would be fixed, but that instead of having the car fixed, the plaintiff, in bad faith, filed the present complaint. The defendant prayed that the complaint be dismissed and that the plaintiff be ordered to return the car to him. He stated in his prayer that he would be very much willing to pay the car in a compromise agreement between him and the plaintiff. After trial, the court a quo, in its decision dated April 4, 1967, held that defendant Sapinoso having failed to pay more than two (2) installments, plaintiff-mortgagee acquired the right to foreclose the chattel mortgage, which it could avail of - as it has done in the present case - by filing an action of replevin to secure possession of the mortgaged car as a preliminary step to the foreclosure sale contemplated in the Chattel Mortgage Law; and that the foreclosure of the chattel mortgage and the recovery of the unpaid balance of the price are alternative remedies which may not be pursued conjunctively, so that in availing itself of its right to foreclose the chattel mortgage, the plaintiff thereby renounced whatever claim it may have had on the promissory note, and, therefore, the plaintiff has no more right to the collection of the attorney's fees stipulated in the promissory note, and should return to defendant Sapinoso the sum of P1,250.00 which the plaintiff had received from the latter after having filed the present case on July 22, 1966, and elected to foreclose the chattel mortgage. The dispositive portion of the decision reads:

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WHEREFORE, the Court finds that the plaintiff has the right to the possession of the OPEL KADETT two-door station wagon Model 3464-91.5, with engine No. 10-0354333, and the delivery thereof to the plaintiff is hereby ratified and confirmed but said party is sentenced to pay to the defendant the sum of P1,250, with legal interest on P500 from August 22, 1966 and or P750 from September 27, 1966, until fully paid, without any pronouncement as to costs. In this appeal plaintiff-appellant claims that the court a quo erred in ordering it to reimburse to defendantappellee Sapinoso the sum of P1,250.00 which the latter had paid. It contends that under Article 1484 of the Civil Code it is the exercise, not the mere election, of the remedy of foreclosure that bars the creditor from recovering the unpaid balance of the debt; that what the said Article 1484 prohibits is "further action" to collect payment of the deficiency after the creditor has foreclosed the mortgage; and that in paying plaintiff-appellant the sum of P1,250.00 before defendant-appellee Sapinoso filed his answer, and in not filing a counterclaim for the recovery thereof, the said defendant-appellee in effect renounced whatever right he might have had to recover the said amount. The appeal is meritorious. In issuing a writ of replevin, and, after trial, in upholding plaintiff-appellant's right to the possession of the car, and ratifying and confirming its delivery to the said plaintiff-appellant, the court below correctly considered the action as one of replevin to secure possession of the mortgaged vehicle as a preliminary step to this foreclosure sale contemplated in Section 14 of Act No. 1508 (Bachrach Motor Co. vs. Summers, 42 Phil., 3; Seo vs. Pestolante, G.R. No. L-11755, April 23, 1958). The said court however erred in concluding that the legal effect of the filing of the action was to bar plaintiff-appellant from accepting further payments on the promissory note. That the ultimate object of the action is the foreclosure of the chattel mortgage, is of no moment, for it is the fact of foreclosure and actual sale of the mortgaged chattel that bar further recovery by the vendor of any balance on the purchaser's outstanding obligation not satisfied by the sale. (Manila Motor Co., Inc. vs. Fernandez, 99 Phil., 782, 786; Bachrach Motor Co. vs. Millan, 61 Phil., 409; Manila Trading & Supply Co. vs. Reyes, 62 Phil. 461, 471; Cruz et al. vs. Filipinas Investment & Finance Corporation, G.R. No. L-24772, May 27, 1968 [23 SCRA 791, 796].) In any event, what Article 1484(3) prohibits is "further action against the purchaser to recover any unpaid balance of the price;" and although this Court has construed the word "action" in said Article 1484 to mean "any judicial or extrajudicial proceeding by virtue of which the vendor may lawfully be enabled to exact recovery of the supposed unsatisfied balance of the purchase price from the purchaser or his privy" (Cruz, et al. vs. Filipinas Investment & Finance Corporation, supra), there is no occasion at this stage to apply the restrictive provision of the said article, because there has not yet been a foreclosure sale resulting in a deficiency. The payment of the sum of P1,250.00 by defendant-appellee Sapinoso was a voluntary act on his part and did not result from a "further action" instituted by plaintiff-appellant. If the mortgage creditor, before the actual foreclosure sale, is not precluded from recovering the unpaid balance of the price although he has filed an action of replevin for the purpose of extrajudicial foreclosure, or if a mortgage creditor who has elected to foreclose but who subsequently desists from proceeding with the auction sale, without gaining any advantage or benefit, and without causing any disadvantage or harm to the vendee-mortgagor, is not barred from suing on the unpaid account (Radiowealth, Inc. vs. Lavin, et al., G.R. No. L-18563, April 27, 1963 [7 SCRA 804, 807]), there is no reason why a mortgage creditor should be barred from accepting, before a foreclosure sale, payments voluntarily tendered by the debtor-mortgagor who admits a subsisting indebtedness. PREMISES CONSIDERED, the judgment appealed from is modified by setting aside the portion thereof which orders plaintiff-appellant to pay defendant-appellee Sapinoso the sum of P1,250.00, with costs in this instance against the said defendant-appellee. Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Fernando and Teehankee, JJ., concur. Barredo, J., concurs in the result. Castro, J., is on leave.

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Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. L-27862 November 20, 1974 LORENZO PASCUAL and LEONILA TORRES, plaintiffs-appellees, vs. UNIVERSAL MOTORS CORPORATION, Defendant-Appellant. MAKALINTAL, C.J.: In the lower court the parties entered into the following stipulation of facts: 1. That the plaintiffs executed the real estate mortgage subject matter of this complaint on December 14, 1960 to secure the payment of the indebtedness of PDP Transit, Inc. for the purchase of five (5) units of Mercedez Benz trucks under invoices Nos. 2836, 2837, 2838, 2839 and 2840 with a total purchase price or principal obligation of P152,506.50 but plaintiffs' guarantee is not to exceed P50,000.00 which is the value of the mortgage. 2. That the principal obligation of P152,506.50 was to bear interest at 1% a month from December 14, 1960. 3. That as of April 5, 1961 with reference to the two units mentioned above and as of May 22, 1961 with reference to the three units, PDP Transit, Inc., plaintiffs' principal, had paid to the defendant Universal Motors Corporation the sum of P92,964.91, thus leaving a balance of P68,641.69 including interest due as of February 8, 1965. 4. That the aforementioned obligation guaranteed by the plaintiffs under the Real Estate Mortgage, subject of this action, is further secured by separate deeds of chattel mortgages on the Mercedez Benz units covered by the aforementioned invoices in favor of the defendant Universal Motors Corporation. 5. That on March 19, 1965, the defendant Universal Motors Corporation filed a complaint against PDP Transit, Inc. before, the Court of First Instance of Manila docketed as Civil Case No. 60201 with a petition for a writ of Replevin, to collect the balance due under the Chattel Mortgages and to repossess all the units to sold to plaintiffs' principal PDP Transit, Inc. including the five (5) units guaranteed under the subject Real (Estate) Mortgage. In addition to the foregoing the Universal Motors Corporation admitted during the hearing that in its suit (C.C. No. 60201) against the PDP Transit, Inc. it was able to repossess all the units sold to the latter, including the five (5) units guaranteed by the subject real estate mortgage, and to foreclose all the chattel mortgages constituted thereon, resulting in the sale of the trucks at public auction. With the foregoing background, the spouses Lorenzo Pascual and Leonila Torres, the real estate mortgagors, filed an action in the Court of First Instance of Quezon City (Civil Case No. 8189) for the cancellation of the 1 mortgage they constituted on two (2) parcels of land in favor of the Universal Motors Corporation to guarantee the obligation of PDP Transit, Inc. to the extent of P50,000. The court rendered judgment for the plaintiffs, ordered the cancellation of the mortgage, and directed the defendant Universal Motors Corporation to pay attorney's fees to the plaintiffs in the sum of P500.00. Unsatisfied with the decision, defendant interposed the present appeal. In rendering judgment for the plaintiffs the lower court said in part: "... there does not seem to be any doubt that 2 Art. 1484 of the New Civil Code may be applied in relation to a chattel mortgage constituted upon personal

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property on the installment basis (as in the present case) precluding the mortgagee to maintain any further action against the debtor for the purpose of recovering whatever balance of the debt secured, and even adding that any agreement to the contrary shall be null and void." The appellant now disputes the applicability of Article 1484 of the Civil Code to the case at bar on the ground that there is no evidence on record that the purchase by PDP Transit, Inc. of the five (5) trucks, the payment of the price of which was partly guaranteed by the real estate mortgage in question, was payable in installments and that the purchaser had failed to pay two or more installments. The appellant also contends that in any event what article 1484 prohibits is for the vendor to recover from the purchaser the unpaid balance of the price after he has foreclosed the chattel mortgage on the thing sold, but not a recourse against the security put up by a third party. Both arguments are without merit. The first involves an issue of fact: whether or not the sale was one on installments; and on this issue the lower court found that it was, and that there was failure to pay two or more installments. This finding is not subject to review by this Court. The appellant's bare allegation to the contrary cannot be considered at this stage of the case. The next contention is that what article 1484 withholds from the vendor is the right to recover any deficiency from the purchaser after the foreclosure of the chattel mortgage and not a recourse to the additional security put up by a third party to guarantee the purchaser's performance of his obligation. A similar argument has been answered by this Court in this wise: "(T)o sustain appellant's argument is to overlook the fact that if the guarantor should be compelled to pay the balance of the purchase price, the guarantor will in turn be entitled to recover what she has paid from the debtor vendee (Art. 2066, Civil Code); so that ultimately, it will be the vendee who will be made to bear the payment of the balance of the price, despite the earlier foreclosure of the chattel mortgage given by him. Thus, the protection given by Article 1484 would be indirectly subverted, and public policy overturned." (Cruz vs. Filipinas Investment & Finance Corporation, L-24772, May 27, 1968; 23 SCRA 791). The decision appealed from is affirmed, with costs against the defendant-appellant. Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. L-62415 August 20, 1990 BICOL SAVINGS & LOAN ASSOCIATION, Petitioner, vs. JAIME GUINHAWA and THE HON. PRESIDING JUDGE OF THE COURT OF FIRST INSTANCE OF CAMARINES SUR (10th JUDICIAL DISTRICT), BRANCH III, Respondents. PARAS, J.: Sometime on June 19, 1980, Victorio Depositario together with private respondent Jaime Guinhawa, acting as solidary co-maker, took a loan from petitioner Bicol Savings and Loan Association (BISLA for brevity) in the sum of P10,622.00, payable at P535.45 every 19th day of each month beginning July 1980 until maturity on June 19, 1982.chanroblesvirtualawlibrary chanrobles virtual law library To secure the payment of the foregoing loan obligation, the principal borrower Victorio Depositario put up as security a chattel mortgage which was a Yamaha Motorcycle. Said motorcycle was eventually foreclosed by reason of the failure of Depositario and private respondent Guinhawa to pay the loan. As a result of the

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foreclosure, there was a deficiency in the amount of P5,158.06 as of July 31, 1981, where BISLA made a demand to pay the same.chanroblesvirtualawlibrary chanrobles virtual law library Thus, on August 6, 1981, petitioner BISLA (plaintiff therein) filed in the City Court of Naga, Branch II, a complaint for the recovery of a sum of money constituting the deficiency after foreclosure of the chattel mortgage put up by the principal borrower Depositario against the latter and his solidary co-maker Guinhawa (herein private respondent) asdefendants. Eventually, a stipulation of facts was entered into between BISLA and Guinhawa. They agreed to drop Depositario, as "his whereabouts being unknown now and he could not be served with summons" (p. 8, Rollo). Said stipulation of facts reads: 1) That defendant admits that after the foreclosure of the chattel mortgage executed by defendant Victorio Depositario, the principal debtor, as security for the payment of the loan, there is left a deficiency in the sum of P5,158.06 as of July 31, 1981, aside from the agreed interest thereon at 17% per annum compounded monthly; 2) That defendant is only a co-maker in the aforementioned loan but that, however, under the promissory note he jointly and severally promised with Victorio Depositario to pay plaintiff the said loan; that he is not a party to the chattel mortgage; and that the same was foreclosed without notice to him; chanrobles virtual law library 3) That both parties agree that the only issue to be resolved is whether defendant herein is liable to pay plaintiff the sums mentioned in paragraph 1 hereof; 4) That in view thereof, both parties agree to submit this case for decision based on the foregoing stipulation of facts; 5) That should decision be in favor of the plaintiff the defendant agrees to pay plaintiff not only the sums mentioned in paragraph I hereof but an additional amount equivalent to 10% of the aggregate amount due the plaintiff as attorney's fees and to pay the costs. Should the decision, however, be in favor of the defendant, plaintiff will pay the defendant the same amount of attorney's fees that defendant would have paid if decision is in favor of the plaintiff, and for the latter also to pay the costs. (pp. 3-4, Petition; pp. 8-9, Rollo) On December 4, 1981, the City Court rendered a decision in favor of the petitioner, ruling in part: It is undisputed that the obligation of both defendants under the promissory note they executed in favor of the plaintiff is joint and several. That after the plaintiff foreclosed the chattel mortgage executed by defendant Victorio Depositario there remains a deficiency which is now the subject of this case. The right of the plaintiff to claim for the deficiency resulting between the price obtained in the sale of the property and the outstanding obligation at the time of the foreclosure is clear. (Philippine Bank of Commerce vs. De Vera, 6 SCRA 1026). Under Art. 1216 of the Civil Code, as quoted by the plaintiff in its memorandum, plaintiff has the right to proceed against any of the herein defendants who are solidary debtors or to both of them simultaneously. Said article further provides that a demand made against anyone of the solidary debtors shall not be an obstacle to those which may later on be directed against the others, so long as the debt has not been fully paid or collected. In the present case, the plaintiff first foreclosed the mortgage put up by defendant Depositario but since the debt was not fully paid out of the proceeds of the sale it is now proceeding against any or both of the defendants herein. Article 1216 of the Civil Code gives the plaintiff in this case the option who among the defendants as solidary debtors, should be sued, the debt not being fully paid (PNB vs. Concepcion Mining Co., Inc., 5 SCRA 745). (pp. 35-36, Rollo) On appeal to the respondent Court of First Instance of Camarines Sur, Branch III, it rendered a decision reversing the said lower court's decision, ruling in part:
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It is true that the assumed obligation by a co-maker is solidary in nature with respect to the principal debtor but when the creditor chose to foreclose the mortgage, it simply means that the creditor chose to collect from Depositario, one of the solidary debtors and not the appellant. If there is any deficiency in payment, how can the herein appellant be made to assume the deficiency since the appellee creditor choose to foreclose and collect through the mortgage of which the appellant in the first place was not a party to the said mortgage It is not disputed that a creditor can exact or collect payment of the indebtedness from any of the solidary debtors in a promissory note of which a co-maker assumes a character of one, the appellant herein can not evade or ignore the collection if the creditor sued upon the promissory note. But what did the creditor do? Instead of proceeding upon the promissory note of which the appealing co-maker stands as solidary debtor, the appellee chose the chattel mortgage and collect therefrom of which mortgage the appellant was never a party and having a deficiency therein, the creditor, the herein appellee, would like to collect from the promissory note. In a case of Identical setting, it was held that foreclosure of mortgage precludes any further action against the debtor and his guarantor (Pascual vs. Universal Motors, 61 SCRA 121). (p. 71, Rollo) Hence, this petition. The petition is impressed with merit. In a number of cases, We already held that if in an extrajudicial foreclosure of a chattel mortgage a deficiency exists, an independent civil action may be instituted for the recovery of said deficiency. If the mortgagee has foreclosed the mortgage judicially, he may ask for the execution of the judgment against any other property of the mortgagor for the payment of the balance. To deny to the mortgagee the right to maintain an action to recover the deficiency after foreclosure of the chattel mortgage would be to overlook the fact that the chattel mortgage is only given as a security and not as payment for the debt in case of failure of payment. (Bank of the Philippine Islands vn Olutanga Lumber Co., 47 Phil. 20; Manila Trading & Supply Co. v. Tamaraw Plantation Co., 47 Phil. 513.) The case of Pascual, as cited by the respondent court, is not applicable in this instant case because it was a case of sale on installment, where after foreclosure of the units the plaintiff guarantors who had likewise executed a real estate mortgage of up to P50,000, cannot be held answerable anymore for the deficiency. The conclusion therefore reached by the lower court was erroneous because in the case at bar, the obligation contracted by the principal debtor (Depositario) with a solidary co-maker (private respondent herein), was one of loan secured by a chattel mortgage, executed by the principal debtor, and not a sale where the price is payable on installments and where a chattel mortgage on the thing sold was constituted by the buyer and, further, the obligation to pay the installments having been guaranteed by another. Private respondent Guinhawa contends that he was not a party to the chattel mortgage executed by Depositario but merely a co-maker on the promissory note executed by the latter and therefore cannot be held liable for the deficiency. Under Article 1216 of the Civil Code, the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected. And therefore, where the private respondent binds himself solidarily with the principal debtor to pay the latter's debt, he may be proceeded against by the principal debtor. Private respondent as solidary co- maker is also a surety (Art. 2047) and that under the law, the bringing of an action against the principal debtor to enforce the payment of the obligation is not inconsistent with, and does not preclude, the bringing of another action to compel the surety to fulfill his obligation under the agreement. Article 2080 of the Civil Code which is relied on by private respondent has no application to the case at bar since his liability here is as a surety not as a guarantor.
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WHEREFORE, the appealed decision dated October 12, 1982 is hereby REVERSED and SET ASIDE and the decision of the City Court dated December 4, 1981 is hereby REINSTATED. Costs against the private respondent.chanroblesvirtualawlibrary chanrobles virtual law library SO ORDERED.

FIRST DIVISION [G.R. No. 106418. July 11, 1996] DANIEL L. BORDON II AND FRANCISCO L. BORBON, petitioners, vs. SERVICEWIDE SPECIALISTS, INC. & HON. COURT OF APPEALS, respondents. DECISION VITUG, J.: From the decision of the Court of Appeals in CA-G.R. CV No. 30693 which affirmed that of the Regional Trial Court, NCJR, Branch 39, Manila, in Civil Case No. 85-29954, confirming the disputed possession of a motor vehicle in favor of private respondent and ordering the payment to it by petitioners of liquidated damages and attorney's fees, the instant appeal was interposed. The appellate court adopted the factual findings of the court a quo, to wit: "The plaintiff's evidence shows among others that on December 7, 1984, defendants Daniel L. Borbon and Francisco Borbon signed a promissory note (Exh. A) which states among others as follows: "'PROMISSORY NOTE Acct. No. 115008276 Makati, Metro Manila, Philippines December 7, 1984 'P122,856.00 'For value received (installment price of the chattel/s purchased), I/We jointly and severally promised to pay Pangasinan Auto Mart, Inc. or order, at its office at NMI Bldg. Buendia Avenue, Makati, MM the sum of One Hundred Twenty Two Thousand Eight Hundred Fifty Six only (P122,856.00), Philippine Currency, to be payable without need of notice or demand, in installments of the amounts following and at the dates hereinafter set forth, to wit: P10,238.00 monthly for Twelve (12) months due and payable on the 7 day of each month starting January, 1985, provided that a late payment charge of 3% per month shall be added on each unpaid installment from due date thereof until fully paid. xxx xxx xxx

'It is further agreed that if upon such default, attorney's services are availed of, an additional sum equal to twenty five percent (25%) of the total sum due thereon, which shall not be less than five hundred pesos, shall be paid to the holder hereof for attorney's fees plus an additional sum equivalent to twenty five percent (25%) of the total sum due which likewise shall not be less than five hundred pesos for liquidated damages, aside from expenses of collection and the legal costs provided for in the Rules of Court.

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'It is expressly agreed that all legal actions arising out of this note or in connection with the chattel(s) subject hereof shall only be brought in or submitted to the jurisdiction of the proper court either in the City of Manila or in the province, municipality or city where the branch of the holder hereof is located. 'Acceptance by the holder hereof of payment of any installment or any part thereof after due dated (sic) shall not be considered as extending the time for the payment or any of the installments aforesaid or as a modification of any of the conditions hereof. Nor shall the failure of the holder hereof to exercise any of its right under this note constitute or be deemed as a waiver of such rights. 'Maker: (S/t) DANIEL L. BORBON, II

Address: 14 Colt St., Rancho Estate I, Concepcion Dos, Marikina, MM (S/t) FRANCISCO BORBON

Address: 73 Sterling Life Home Pamplona, Las Pias, MM "WITNESSES (illegible) 'PAY TO THE ORDER OF FILINVEST CREDIT CORPORATION without recourse, notice, presentment and demand waived PANGASINAN AUTO MART, INC. BY: (S/T) K.N. DULCE Dealer' "To secure the Promissory Note, the defendants executed a Chattel Mortgage (Exh. B) on 'One (1) Brand new 1984 Isuzu KCD 20 Crew Cab (Conv.) Serial No. KC20D0F 207685 Key No. 5509 (Exhs. A and B, p. 2 tsn, September 10, 1985) "The rights of Pangasinan Auto Mart, Inc. was later assigned to Filinvest Credit Corporation on December 10, 1984, with notice to the defendants (Exh. C, p. 10, Record). "On March 21, 1985, Filinvest Credit Corporation assigned all its rights, interest and title over the Promissory Note and the chattel mortgage to the plaintiff (Exh. D; p. 3, tsn, Sept. 30, 1985). ____(illegible)_____

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"The promissory note stipulates that the installment of P10,238.00 monthly should be paid on the 7th day of each month starting January 1985, but the defendants failed to comply with their obligation (p. 3, tsn, Sept. 30, 1985). "Because the defendants did not pay their monthly installments, Filinvest demanded from the defendants the payment of their installments due on January 29, 1985 by telegram (Exh. E; pp. 3-4, tsn, Sept. 30, 1985). "After the accounts were assigned to the plaintiff, the plaintiff attempted to collect by sending a demand letter to the defendants for them to pay their entire obligation which, as of March 12, 1985, totaled P185,257.80 (Exh. H; pp. 3-4, tsn, Sept. 30, 1985). "For their defense, the defendants claim that what they intended to buy from Pangasinan Auto Mart was a jeepney type Isuzu K. C. Cab. The vehicle that they bought was not delivered (pp. 11-12, tsn, Oct. 17, 1985). Instead, through misrepresentation and machination, the Pangasinan Motor, Inc. delivered an Isuzu crew cab, as this is the unit available at their warehouse. Later the representative of Pangasinan Auto Mart, Inc. (assignor) told the defendants that their available stock is an Isuzu Cab but minus the rear body, which the defendants agreed to deliver with the understanding that the Pangasinan Auto Mart, Inc. will refund the defendants the amount of P10,000.00 to have the rear body completed (pp. 12-34, Exhs. 2 to 3-3A). "Despite Communications with the Pangasinan Auto Mart, Inc., the latter was not able to replace the vehicle until the vehicle delivered was seized by order of this court. The defendants argue that an assignee stands in the place of an assignor which, to the mind of the court, is correct. The assignee exercise all the rights of the assignor (Gonzales vs. Rama Plantation Co., C.V. 08630, Dec. 2, 1986). "The defendants further claim that they are not in default of their obligation because the Pangasinan Auto Mart was first guilty of not fulfilling its obligation in the contract. The defendants claim that neither party incurs delay [1] if the other does not comply with his obligation. (citing Art. 1169, N.C.C.)" In sustaining the decision of the court a quo, the appellate court ruled that petitioners could not avoid liability under the promissory note and the chattel mortgage that secured it since private respondent took the note for value and in good faith. In their appeal to this Court, petitioners merely seek a modification of the decision of the appellate court insofar as it has upheld the court a quo in the award of liquidated damages and attorney's fees in favor of private respondent. Petitioners invoke the provisions of Article 1484 of the Civil Code which reads: ART. 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies: "(1) "(2) Exact fulfillment of the obligation, should the vendee fail to pay; Cancel the sale, should the vendee's failure to pay cover two or more installments;

"(3) Foreclose the chattel mortgage or the thing sold, if one has been constituted, should the vendee's failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void." The remedies under Article 1484 of the Civil Code are not cumulative but alternative and exclusive, which [3] means, as so held inNonato vs. Intermediate Appellate Court and Investor's Finance Corporation, that "x x x Should the vendee or purchaser of a personal property default in the payment of two or more of the agreed installments, the vendor or seller has the option to avail of any of these three remedies either to exact fulfillment by the purchaser of the obligation, or to cancel the sale, or to foreclose the mortgage on the purchased personal property, if one was constituted. These remedies have been recognized as alternative, not [4] cumulative, that the exercise of one would bar the exercise of the others."
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When the seller assigns his credit to another person, the latter is likewise bound by the same law. Accordingly, when the assignee forecloses on the mortgage, there can be no further recovery of the [5] [6] deficiency, and the seller-mortgagee is deemed to have renounced any right thereto. A contrario, in the event the seller-mortgagee first seeks, instead, the enforcement of the additional mortgages, guarantees or other security arrangements, he must then be held to have lost by waiver or non-choice his lien on the chattel mortgage of the personal property sold by any mortgaged back to him, although, similar to an action for specific performance, he may still levy on it. In ordinary alternative obligations, a mere choice categorically and unequivocally made and then communicated by the person entitled to exercise the option concludes the parties. The creditor may not thereafter exercise any other option, unless the chosen alternative proves to be ineffectual or unavailing due to no fault on his part. This rule, in essence, is the difference between alternative obligations, on the one hand, and alternative remedies, upon the other hand, where, in the latter case, the choice generally becomes conclusive only upon the exercise of the remedy. For instance, in one of the remedies expressed in Article 1484 of the Civil Code, it is only when there has been a foreclosure of the chattel mortgage that the vendeemortgagor would be permitted to escape from a deficiency liability. Thus, if the case is one for specific performance, even when this action is selected after the vendee has refused to surrender the mortgaged property to permit an extrajudicial foreclosure, that property may still be levied on execution and an alias writ [7] may be issued if the proceeds thereof are insufficient to satisfy the judgment credit. So, also, a mere demand [8] to surrender the object which is not heeded by the mortgagor will not amount to a foreclosure, but the repossession thereof by the vendor-mortgagee would have the effect of foreclosure. The parties here concede that the action for replevin has been instituted for the foreclosure of the vehicle in question (now in the possession of private respondent). The sole issue raised before us in this appeal is focused on the legal propriety of the affirmance by the appellate court of the awards made by the court a quo of liquidated damages and attorney's fees to private respondent. Petitioners hold that under Article 1484 of the Civil Code, aforequoted, the vendor-mortgagee or its assignees loses any right "to recover any unpaid balance of the price" and any "agreement to the contrary (would be) void." The argument is aptly made. In Macondray & Co. vs. Eustaquio we have said that the phrase "any unpaid balance" can only mean the deficiency judgment to which the mortgagee may be entitled to when the proceeds from the auction sale are insufficient to cover the "full amount of the secured obligation which x x x include interest on the principal, attorney's fees, expenses of collection, and costs." In sum, we have observed that the legislative intent is not to merely limit the proscription of any further action to the "unpaid balance of [10] the principal" but, as so later ruled in Luneta Motor Co. vs. Salvador, to all other claims that may likewise be called for in the accompanying promissory note against the buyer-mortgagor or his guarantor, including costs and attorney's fees. In Filipinas Investment & Finance Corporation vs. Ridad while we reiterated and expressed our agreement on the basic philosophy behind Article 1484, we stressed, nevertheless, that the protection given to the buyer-mortgagor should not be considered to be without circumscription or as being preclusive of all other laws or legal principles. Hence, borrowing from the examples made in Filipinas Investment, where the mortgagor unjustifiably refused to surrender the chattel subject of the mortgage upon failure of two or more installments, or if he concealed the chattel to place it beyond the reach of the mortgagee, that thereby constrained the latter to seek court relief, the expenses incurred for the prosecution of the case, such as attorney's fees, could rightly be awarded. Private respondent bewails the instant petition in that petitioners have failed to specifically raise the issue on liquidated damages and attorney's fees stipulated in the actionable documents. In several cases, we have ruled that as long as the questioned items bear relevance and close relation to those specifically raised, the interest of justice would dictate that they, too, must be considered and resolved and that the rule that only theories raised in the initial proceedings may be taken up by a party thereto on appeal should only refer to [12] independent, not concomitant matters, to support or oppose the cause of action. Given the circumstances, we must strike down the award for liquidated damages made by the court a quo but we uphold the grant of attorney's fees which we, like the appellate court, find to be reasonable. Parenthetically, while the promissory note may appear to have been a negotiable instrument,
[11] [9]

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private respondent, however, clearly cannot claim unawareness of its accompanying documents so as to thereby gain a right greater than that of the assignor. WHEREFORE, the appealed decision is MODIFIED by deleting therefrom the award for liquidated damages; in all other respects the judgment of the appellate court is AFFIRMED. No cost. SO ORDERED. Padilla (Chairman), Bellosillo, Kapunan, and Hermosisima, Jr., JJ., concur.

EN BANC [A.M. No. P-99-1290. May 19, 1999] FRANCISCO and SALVACION NICOL, complainants, vs. JOSE BLANCA, Sheriff IV, RTC, Legazpi City,respondent. DECISION PER CURIAM: On 9 September 1996, complainant Salvacion M. Nicol furnished the Office of the Court Administrator with [1] copies of two (2) criminal informations for Direct Bribery filed by the Office of the Deputy Ombudsman for Luzon against respondent Jose Blanca, Sheriff IV, Regional Trial Court, Legazpi City. The criminal informations accused respondent of taking advantage of his office as Sheriff by demanding and receiving a total amount of three thousand pesos (P3,000.00) from complainants Francisco and Salvacion Nicol for and in consideration of [2] discontinuing the auction sale of the latters motor vehicle (a mini-bus). She also called attention to Adm. Matter No. P-89-281 decided on 29 March 1990, where this Court found respondent guilty of abuse of authority [3] and conduct unbecoming of a public officer. The OCA treated the criminal informations as an administrative matter against respondent and required him to comment thereon. In his Comment dated 17 January 1997, respondent averred that the amount of P3,000.00 is a loan he obtained from Salvacion Nicol prior to the time he acted upon the petition for extra-judicial foreclosure of the mini-bus. He added that complainants charge is intended to harass him since he did not accede to their request to extend the date of the auction sale until such time that they have sufficient amount to pay their obligation to Radiowealth Finance Company, their creditor-mortgagee. On 20 May 1997, the OCA received another letter more details of their complaint.
[5] [4]

dated 19 April 1997 from Salvacion Nicol narrating

On recommendation of the OCA, the Court, on 21 July 1997, referred the complaint to Executive Judge Rafael P. Santelices for investigation, report and recommendation. The evidence for the complainants show that Salvacion Nicol and her husband were operators of a minibus. On 13 March 1993, they obtained a loan ofP204,000.00 from Radiowealth Finance Company (RFC) in [6] Legazpi City. In January 1994, the loan was restructured to P147,200.00 due to their failure to pay several monthly installments. As collateral to secure the restructured loan, they mortgaged their mini[7] bus. Subsequently, and with the approval of the manager of RFC, she pledged the mini-bus for two (2) months to a certain Engineer Rito for P50,000.00 to buy spare parts. They again defaulted on their payments to RFC and their chattel was threatened to be foreclosed. In the third week of February 1995, Salvacion went to the RFC office to request the non-foreclosure of their mortgage. There, she met respondent Jose Blanca who was introduced by RFCs manager as its sheriff. On 27 February 1995, respondent visited her office and told her that he would desist from the foreclosure if she would give him P5,000.00. She did not have P5,000.00 and instead offered respondent a check for P1,000.00 (Exhibit A). Respondent accepted the check and suspended the foreclosure. On 7 March 1995, respondent once again went to her office and told her that he would issue the notice of auction sale if she would not pay him. Again, she gave him a check worth P2,000.00 (Exhibit B), and respondent did not proceed with the auction sale. After a month, however, she received a

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notice of auction sale (Exhibit C) signed by respondent and scheduled on 21 April 1995, at the Office of the Bureau of Lands and Management Sector, Rizal Street, Legazpi City. She proceeded to the situs of the sale on the scheduled date, but nobody was there and no sale took place. She inquired from the Clerk of Court regarding the auction sale, and was advised to ask respondent. Respondent informed her that Jose Bragais won in the bidding. She checked with RFC and got the information that it was RFC that won in the bidding. She went to the office of RFC to arrange for the redemption of the mini-bus and met respondent there. This time, respondent told her that it was Elbert Vibal who won in the bidding and not RFC. She then [8] filed a letter-complainant with the Ombudsman (Exhibit H). Respondent denied complainants allegations. He alleged that the two (2) checks he received from Salvacion Nicol on 27 February 1995 and 7 March 1995, were loans. He contended that on these dates, the petition for extra-judicial foreclosure has not yet been filed. He declared she is in the business of lending money with interest. He maintained that he conducted an auction sale. The RFC filed the petition for extrajudicial foreclosure (Exhibit 1) on 10 April 1995. He found the mini-bus in the possession of Engineer Rito. On 12 April 1995, he sent RFC and the complainants a notice of auction sale (Exhibit 3) scheduled on 21 April 1995, at 10 oclock in the morning, at the Office of the Land Management Sector. The auction sale was conducted on the scheduled date, time and place with him, Jorge Santurcas representing RFC, Jose Villanueva, Jun Colicta and Elbert Vibal in attendance. As proof of the conduct of the auction sale, he presented the minutes of action sale dated 21 April 1995 (Exhibit 4), the written bids of the participants (Exhibit 5 and 6), the certificate of sale issued to Vibal as the winner in the bidding (Exhibit 7), a receipt representing the proceeds of the auction sale (Exhibit 8) and a receipt for the amount paid by Vibal (Exhibit 9). He opined that the charge was filed against him when he failed to accommodate Bragais who was recommended by Salvacion [9] Nicol to participate in the bidding. On rebuttal, Salvacion Nicol alleged that she could not have given respondent any loan since she was financially distressed at that time. For failing to meet her various financial obligations, she was charged with estafa and violation of B.P. 22 (Exhibits I, J, K, L, M, and N). She maintained that the auction sale never took place on the scheduled date and place. She also claimed that respondent never gave her the excess of the bid [10] price. On 18 March 1998, Judge Santelices submitted his Report and Recommendation. He recommended that respondent be suspended for six (6) months without pay, viz: xxx The malfeasance, wrongdoing or misconduct being charged herein is the alleged act of respondent (sic) asking some amounts from the complainants in consideration of not proceeding with the foreclosure/auction sale of the motor vehicle mortgaged by the complainants to the RFC. There is no doubting the fact that respondent received from the complainants the checks for P1,000.00 and P2,000.00 which were all encashed by the respondent. Except for the testimony of the respondent, there was no corroborating evidence presented to establish the fact that complainant Salvacion Nicol was indeed once upon a time engaged in the lending business. Salvacion Nicol, however, when she took the witness stand on rebuttal, never, refuted this alleged lending business of her. (sic) But it was also not shown that these amounts were already paid by the respondent if they were in fact loans. It might be argued that respondent could not have asked that amount in consideration of not proceeding with the foreclosure because on February 27 and March 7, 1995, no petition for extra-judicial foreclosure was yet filed. It must be noted however that on the same month of February 1995, before the first check was issued to respondent on February 27, complainant Salvacion Nicol went to RFC to request the latter not to first foreclose the chattel as she has a buyer for it. Respondent was then around and was introduced to the complainant by

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the manager of RFC as the Sheriff of RFC. There is then reasonable ground to believe that even if no petition for extra-judicial foreclosure was yet filed, respondent already knew about the impending foreclosure vehicle. Already knowing the threatened foreclosure of the chattel mortgaged by the complainants to RFC, the act of respondent (sic) approaching the complainants to ask for loans, even if it is admitted only for the sake of argument, does not speak well of the actuation of the respondent. As a sheriff, he must know that sooner or later, he will have to deal with the complainants in the event foreclosure takes place. Or that having obtained loans from the complainants, he should have inhibited himself from acting or taking cognizance of the foreclosure proceedings. This actuation of the respondent was not above-board, not expected of a public [11] servant." After a review of the evidence adduced by the parties, we reject respondents assertion that the checks he received from Salvacion Nicol represented loans. His testimony that Salvacion was engaged in lending money is foggy to say the least. We quote his testimony: xxx Q. How did you know that she was engaged in lending money? A. Through the pin boys, and for the last two years from the drivers of buses. Q. Did you ask that question if Mrs. Nicol is engaged in lending money? A. I can see only. Q. What did you see? A. That she is lending money. Q. Where do you see her that (sic) she is lending money? A. Sometimes she brought goods. Q. When was that (sic) when you saw Mrs. Nicol peddling goods? A. I cannot remember. Q. Sometime in 1995, do you remember Mrs. Nicol peddling goods in this place? A. I cannot remember. Q In 1995, do you know that Mrs. Nicol was already engaged in lending money to other persons? A. Before 1995." xxx As observed by the investigating judge, the charge that Salvacion was engaged in money lending with interest was not corroborated. Indeed, respondent even failed to testify on the terms and conditions of the alleged loans. Salvacions rebuttal testimony totally demolished respondents loan defense, viz: xxx ATTY. ABITRIA: Q. Respondent testified that two checks issued by you to him was (sic) a mere loan, what can you say to this? A In the name of God, that is not a loan. Q. Why do you say that the two checks given by you to Blanca was (sic) not a loan to Blanca? A. I am the one who is indebt (sic) to the RFC.
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Q. Why do you say that you are indebted to the RFC? WITNESS: (Answering) A. According to the evidence, I am the one who is in need of money. ATTY. MATA: We request you Honor that the witness be instructed to answer only those questions being asked. The answer is no longer responsive. ATTY. ABTRIA: (Continuing) Q. Do you have other evidence to prove that you [are] incapacitated in extending loans? A. There are cases filed against me by persons whom I was indebted, wherein (sic) I took some tires for the maintenance of my vehicle that was foreclosed. Q. Do you have any evidence to show? A. Yes, sir. I have. ATTY. ABITRIA: Which for purpose of identification (sic), we request that Crim. Case No. 18105 entitled People versus Salvacion Nicol be marked in evidence as our Exhibit I; Crim. Case No. 18102 entitled People versus Salvacion Nicol' for Estafa be marked in evidence as our Exhibit J'; Crim. Case No. 18103 entitled People versus Salvacion Nicol be marked in evidence as our Exhibit K; Crim. Case No. 18104 entitled People versus Salvacion Nicol for Violation of B.P. 22 be marked in evidence as our Exhibit L; Crim. Case No. 18085 entitled People versus Salvacion Nicol for Violation of B.P. 22 be marked in evidence as our Exhibit M; and Crim. Case No. 18086 entitled People versus Salvacion Nicol' for Violation of B.P. 22 be marked in evidence as our Exhibit N. COURT: Mark them. xxx Q. And you are working (sic) at the Be Lovely Bowling Lanes? A. Yes, sir. Q. And you are acquainted (sic) with the employees of the Be Lovely, particularly the pin boys? A. Yes, because as employees thereat, they are working (sic) as pin boys. Q. And these pin boys, because they belong to the lower class of social life, sometimes they come (sic) to you for financial aid? A. ATTY. ABITRIA: Incompetent your Honor. There is no testimony as regards to (sic) that matter.

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COURT: Never mind about (sic) that. COURT: (To the witness) Q. Was there anytime when these pin boys come (sic) to you for financial help? WITNESS: (Answering) A No, your Honor, because our procedure whenever they needed money, our cashier has (sic) an intended cash money for their advance or Bale. COURT: Continue. ATTY. MATA: (Continuing) Q. But if the maximum amount was already advanced by them and then the cashier refused to give them, they come (sic) to you? A. They never go (sic) to me and ask (sic) for financial help. Q. During the time when you are (sic) with Mrs. Aquino and was engaged in the selling of these T-shirts of RTW ATTY. ABITRIA: Objection your Honor. Not touched during the direct examination, your Honor. COURT: Witness may answer. WITNESS: (Answering) A. No, sir. ATTY. MATA: That is all, your Honor. xxx A careful examination of the aforestated exhibits reveals that Salvacion Nicol was backrupt and could not lend [14] money to anyone. Exhibits M and N are criminal informations for violation of B.P. 22 allegedly committed by [15] Salvacion against one Edwin Malit and involving a total amount of P31,650.00. Exhibits L and I are criminal [16] informations for violation of B.P. 22, while Exhibits J and K are criminal informations for estafa, all committed by Salvacion against one Lilita Lim and involving a total amount of P10,600.00. These criminal informations were filed on 27 February 1995 and 2 March 1995. They show that Salvacions indebtedness to Lim and Malit were still unpaid at the time she allegedly extended the loans to respondent on 27 February and 7 March 1995. It is, therefore, reasonable to believe Salvacions avowal that she could not have given loans amounting to P3,000.00 to respondent since she could not even afford to pay her debts. We are also unconvinced by respondents contention that he could not have asked money from Salvacion Nicol in consideration of not proceeding with the foreclosure since the petition for extra-judicial foreclosure was not yet filed on 27 February and 7 March 1995. We agree with the investigating judge that respondent already
[13]

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knew about the coming foreclosure of the mini-bus when he demanded money from her. Respondent was present when Salvacion asked RFC not to proceed with the foreclosure of the chattel as she has a buyer for it. In all likelihood, respondent used the information to exact money from the complainants. Finally, we find as inexcusable respondents failure to give the complainants the excess of the bid price. Respondent submitted a receipt issued by RFC showing that he turned over to RFC the proceeds of the auction sale in the amount of P108,750.75 (Exhibit 8). Respondents action violates Section 14 of the Chattel Mortgage Law (Act No. 1508, as amended) which provides, in part, that [t]he proceeds of such sale shall be applied to the payment, first, of the costs and expenses of keeping and sale, and then to the payment of the demand or obligation secured by such mortgage, and the residue shall be paid to persons holding subsequent mortgages in their order, and the balance, after paying the mortgages, shall be paid to the mortgagor or person holding under him on demand. Accordingly, we find respondent guilty of grave misconduct and of gross negligence in the performance of his duties. Considering the gravity of his offenses and his record showing a previous administrative conviction, we are not satisfied with the recommended penalty of suspension. Respondent not only failed to comply with the strict and rigorous standards required of all public officers and employees but worse, his act eroded the faith of the complainants in the judiciary. Thus, he must be punished with maximum severity because all involved in [17] the dispensation of justice must live up to the strictest standard of honesty and integrity in the public service. IN VIEW WHEREOF, respondent Jose Blanca, Sheriff IV, RTC, Legazpi City, is DISMISSED from service for gross neglect of duty and grave misconduct, with forfeiture of retirement benefits and accrued leave credits and disqualification for re-employment in government service including government owned and controlled corporations. This administrative penalty is imposed upon respondent without prejudice to the criminal cases filed against him. He is further REQUIRED to return the P3,000.00 exacted from the complainants. SO ORDERED.

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