TRANSPO – CONSTI PROVISIONS - OWNERSHIP Thereafter, First Pacific announced that it would exercise its right of first refusal
t Pacific announced that it would exercise its right of first refusal as a PTIC
G.R. No. 176579 June 28, 2011
WILSON P. GAMBOA, Petitioner,
vs.
FINANCE SECRETARY MARGARITO B. TEVES, FINANCE UNDERSECRETARY JOHN P. SEVILLA, AND
COMMISSIONER RICARDO ABCEDE OF THE PRESIDENTIAL COMMISSION ON GOOD
GOVERNMENT (PCGG) IN THEIR CAPACITIES AS CHAIR AND MEMBERS, RESPECTIVELY, OF THE
PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC CO., LTD. IN HIS
CAPACITY AS DIRECTOR OF METRO PACIFIC ASSET HOLDINGS INC., CHAIRMAN MANUEL V.
PANGILINAN OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS
MANAGING DIRECTOR OF FIRST PACIFIC CO., LTD., PRESIDENT NAPOLEON L. NAZARENO OF
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, CHAIR FE BARIN OF THE SECURITIES
EXCHANGE COMMISSION, and PRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK EXCHANGE,
Respondents.
PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioners-in-Intervention.
DECISION
CARPIO, J.:
The Case
This is an original petition for prohibition, injunction, declaratory relief and declaration of nullity of
the sale of shares of stock of Philippine Telecommunications Investment Corporation (PTIC) by the
government of the Republic of the Philippines to Metro Pacific Assets Holdings, Inc. (MPAH), an
affiliate of First Pacific Company Limited (First Pacific).
The Antecedents
The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine Long Distance
Telephone Company (PLDT), are as follows:1
On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which granted PLDT a
franchise and the right to engage in telecommunications business. In 1969, General Telephone and
Electronics Corporation (GTE), an American company and a major PLDT stockholder, sold 26 percent
of the outstanding common shares of PLDT to PTIC. In 1977, Prime Holdings, Inc. (PHI) was
incorporated by several persons, including Roland Gapud and Jose Campos, Jr. Subsequently, PHI
became the owner of 111,415 shares of stock of PTIC by virtue of three Deeds of Assignment
executed by PTIC stockholders Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 shares
of stock of PTIC held by PHI were sequestered by the Presidential Commission on Good Government
(PCGG). The 111,415 PTIC shares, which represent about 46.125 percent of the outstanding capital
stock of PTIC, were later declared by this Court to be owned by the Republic of the Philippines. 2
In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm, acquired the
remaining 54 percent of the outstanding capital stock of PTIC. On 20 November 2006, the Inter-
Agency Privatization Council (IPC) of the Philippine Government announced that it would sell the
111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC, through a public
bidding to be conducted on 4 December 2006. Subsequently, the public bidding was reset to 8
December 2006, and only two bidders, Parallax Venture Fund XXVII (Parallax) and Pan-Asia Presidio
Capital, submitted their bids. Parallax won with a bid of ₱25.6 billion or US$510 million.
stockholder and buy the 111,415 PTIC shares by matching the bid price of Parallax. However, First
Pacific failed to do so by the 1 February 2007 deadline set by IPC and instead, yielded its right to
PTIC itself which was then given by IPC until 2 March 2007 to buy the PTIC shares. On 14 February
2007, First Pacific, through its subsidiary, MPAH, entered into a Conditional Sale and Purchase
Agreement of the 111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC,
with the Philippine Government for the price of ₱25,217,556,000 or US$510,580,189. The sale was
completed on 28 February 2007.
Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of 46.125 percent of PTIC
shares is actually an indirect sale of 12 million shares or about 6.3 percent of the outstanding
common shares of PLDT. With the sale, First Pacific’s common shareholdings in PLDT increased
from 30.7 percent to 37 percent, thereby increasing the common shareholdings of foreigners in
PLDT to about 81.47 percent. This violates Section 11, Article XII of the 1987 Philippine Constitution
which limits foreign ownership of the capital of a public utility to not more than 40 percent.3
On the other hand, public respondents Finance Secretary Margarito B. Teves, Undersecretary John
P. Sevilla, and PCGG Commissioner Ricardo Abcede allege the following relevant facts:
On 9 November 1967, PTIC was incorporated and had since engaged in the business of investment
holdings. PTIC held 26,034,263 PLDT common shares, or 13.847 percent of the total PLDT
outstanding common shares. PHI, on the other hand, was incorporated in 1977, and became the
owner of 111,415 PTIC shares or 46.125 percent of the outstanding capital stock of PTIC by virtue
of three Deeds of Assignment executed by Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the
111,415 PTIC shares held by PHI were sequestered by the PCGG, and subsequently declared by this
Court as part of the ill-gotten wealth of former President Ferdinand Marcos. The sequestered PTIC
shares were reconveyed to the Republic of the Philippines in accordance with this Court’s decision 4
which became final and executory on 8 August 2006.
The Philippine Government decided to sell the 111,415 PTIC shares, which represent 6.4 percent of
the outstanding common shares of stock of PLDT, and designated the Inter-Agency Privatization
Council (IPC), composed of the Department of Finance and the PCGG, as the disposing entity. An
invitation to bid was published in seven different newspapers from 13 to 24 November 2006. On 20
November 2006, a pre-bid conference was held, and the original deadline for bidding scheduled on
4 December 2006 was reset to 8 December 2006. The extension was published in nine different
newspapers.
During the 8 December 2006 bidding, Parallax Capital Management LP emerged as the highest
bidder with a bid of ₱25,217,556,000. The government notified First Pacific, the majority owner of
PTIC shares, of the bidding results and gave First Pacific until 1 February 2007 to exercise its right of
first refusal in accordance with PTIC’s Articles of Incorporation. First Pacific announced its intention
to match Parallax’s bid.
On 31 January 2007, the House of Representatives (HR) Committee on Good Government
conducted a public hearing on the particulars of the then impending sale of the 111,415 PTIC shares.
Respondents Teves and Sevilla were among those who attended the public hearing. The HR
Committee Report No. 2270 concluded that: (a) the auction of the government’s 111,415 PTIC
shares bore due diligence, transparency and conformity with existing legal procedures; and (b) First
Pacific’s intended acquisition of the government’s 111,415 PTIC shares resulting in First Pacific’s
100% ownership of PTIC will not violate the 40 percent constitutional limit on foreign ownership
of a public utility since PTIC holds only 13.847 percent of the total outstanding common shares of
PLDT.5 On 28 February 2007, First Pacific completed the acquisition of the 111,415 shares of stock
of PTIC.
Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted a public bidding
for the sale of 111,415 PTIC shares or 46 percent of the outstanding capital stock of PTIC (the
remaining 54 percent of PTIC shares was already owned by First Pacific and its affiliates); (b) Parallax
offered the highest bid amounting to ₱25,217,556,000; (c) pursuant to the right of first refusal in
favor of PTIC and its shareholders granted in PTIC’s Articles of Incorporation, MPAH, a First Pacific
affiliate, exercised its right of first refusal by matching the highest bid offered for PTIC shares on 13
February 2007; and (d) on 28 February 2007, the sale was consummated when MPAH paid IPC
₱25,217,556,000 and the government delivered the certificates for the 111,415 PTIC shares.
Respondent Pangilinan denies the other allegations of facts of petitioner.
On 28 February 2007, petitioner filed the instant petition for prohibition, injunction, declaratory
relief, and declaration of nullity of sale of the 111,415 PTIC shares. Petitioner claims, among others,
that the sale of the 111,415 PTIC shares would result in an increase in First Pacific’s common
shareholdings in PLDT from 30.7 percent to 37 percent, and this, combined with Japanese NTT
DoCoMo’s common shareholdings in PLDT, would result to a total foreign common shareholdings
in PLDT of 51.56 percent which is over the 40 percent constitutional limit.6 Petitioner asserts:
If and when the sale is completed, First Pacific’s equity in PLDT will go up from 30.7 percent to 37.0
percent of its common – or voting- stockholdings, x x x. Hence, the consummation of the sale will
put the two largest foreign investors in PLDT – First Pacific and Japan’s NTT DoCoMo, which is the
world’s largest wireless telecommunications firm, owning 51.56 percent of PLDT common equity. x
x x With the completion of the sale, data culled from the official website of the New York Stock
Exchange (www.nyse.com) showed that those foreign entities, which own at least five percent of
common equity, will collectively own 81.47 percent of PLDT’s common equity. x x x
x x x as the annual disclosure reports, also referred to as Form 20-K reports x x x which PLDT
submitted to the New York Stock Exchange for the period 2003-2005, revealed that First Pacific and
several other foreign entities breached the constitutional limit of 40 percent ownership as early as
2003. x x x"7
Petitioner raises the following issues: (1) whether the consummation of the then impending sale of
111,415 PTIC shares to First Pacific violates the constitutional limit on foreign ownership of a public
utility; (2) whether public respondents committed grave abuse of discretion in allowing the sale of
the 111,415 PTIC shares to First Pacific; and (3) whether the sale of common shares to foreigners in
excess of 40 percent of the entire subscribed common capital stock violates the constitutional limit
on foreign ownership of a public utility.8
On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for Leave to Intervene
and Admit Attached Petition-in-Intervention. In the Resolution of 28 August 2007, the Court granted
the motion and noted the Petition-in-Intervention.
Petitioners-in-intervention "join petitioner Wilson Gamboa x x x in seeking, among others, to enjoin
and/or nullify the sale by respondents of the 111,415 PTIC shares to First Pacific or assignee."
Petitioners-in-intervention claim that, as PLDT subscribers, they have a "stake in the outcome of the
controversy x x x where the Philippine Government is completing the sale of government owned
assets in [PLDT], unquestionably a public utility, in violation of the nationality restrictions of the
Philippine Constitution."
The Issue
This Court is not a trier of facts. Factual questions such as those raised by petitioner, 9 which
indisputably demand a thorough examination of the evidence of the parties, are generally beyond
this Court’s jurisdiction. Adhering to this well-settled principle, the Court shall confine the resolution
of the instant controversy solely on the threshold and purely legal issue of whether the term
"capital" in Section 11, Article XII of the Constitution refers to the total common shares only or to
the total outstanding capital stock (combined total of common and non-voting preferred shares) of
PLDT, a public utility.
The Ruling of the Court
The petition is partly meritorious.
Petition for declaratory relief treated as petition for mandamus
At the outset, petitioner is faced with a procedural barrier. Among the remedies petitioner seeks,
only the petition for prohibition is within the original jurisdiction of this court, which however is not
exclusive but is concurrent with the Regional Trial Court and the Court of Appeals. The actions for
declaratory relief,10 injunction, and annulment of sale are not embraced within the original
jurisdiction of the Supreme Court. On this ground alone, the petition could have been dismissed
outright.
While direct resort to this Court may be justified in a petition for prohibition, 11 the Court shall
nevertheless refrain from discussing the grounds in support of the petition for prohibition since on
28 February 2007, the questioned sale was consummated when MPAH paid IPC ₱25,217,556,000
and the government delivered the certificates for the 111,415 PTIC shares.
However, since the threshold and purely legal issue on the definition of the term "capital" in Section
11, Article XII of the Constitution has far-reaching implications to the national economy, the Court
treats the petition for declaratory relief as one for mandamus. 12
In Salvacion v. Central Bank of the Philippines,13 the Court treated the petition for declaratory relief
as one for mandamus considering the grave injustice that would result in the interpretation of a
banking law. In that case, which involved the crime of rape committed by a foreign tourist against a
Filipino minor and the execution of the final judgment in the civil case for damages on the tourist’s
dollar deposit with a local bank, the Court declared Section 113 of Central Bank Circular No. 960,
exempting foreign currency deposits from attachment, garnishment or any other order or process
of any court, inapplicable due to the peculiar circumstances of the case. The Court held that
"injustice would result especially to a citizen aggrieved by a foreign guest like accused x x x" that
would "negate Article 10 of the Civil Code which provides that ‘in case of doubt in the interpretation
or application of laws, it is presumed that the lawmaking body intended right and justice to prevail.’"
The Court therefore required respondents Central Bank of the Philippines, the local bank, and the
accused to comply with the writ of execution issued in the civil case for damages and to release the
dollar deposit of the accused to satisfy the judgment.
In Alliance of Government Workers v. Minister of Labor,14 the Court similarly brushed aside the
procedural infirmity of the petition for declaratory relief and treated the same as one for
mandamus. In Alliance, the issue was whether the government unlawfully excluded petitioners,
who were government employees, from the enjoyment of rights to which they were entitled under
the law. Specifically, the question was: "Are the branches, agencies, subdivisions, and
instrumentalities of the Government, including government owned or controlled corporations
included among the four ‘employers’ under Presidential Decree No. 851 which are required to pay
their employees x x x a thirteenth (13th) month pay x x x ?" The Constitutional principle involved
therein affected all government employees, clearly justifying a relaxation of the technical rules of
procedure, and certainly requiring the interpretation of the assailed presidential decree.
In short, it is well-settled that this Court may treat a petition for declaratory relief as one for
mandamus if the issue involved has far-reaching implications. As this Court held in Salvacion:
The Court has no original and exclusive jurisdiction over a petition for declaratory relief. However,
exceptions to this rule have been recognized. Thus, where the petition has far-reaching
implications and raises questions that should be resolved, it may be treated as one for
mandamus.15 (Emphasis supplied)
In the present case, petitioner seeks primarily the interpretation of the term "capital" in Section 11,
Article XII of the Constitution. He prays that this Court declare that the term "capital" refers to
common shares only, and that such shares constitute "the sole basis in determining foreign equity
in a public utility." Petitioner further asks this Court to declare any ruling inconsistent with such
interpretation unconstitutional.
The interpretation of the term "capital" in Section 11, Article XII of the Constitution has far-reaching
implications to the national economy. In fact, a resolution of this issue will determine whether
Filipinos are masters, or second class citizens, in their own country. What is at stake here is whether
Filipinos or foreigners will have effective control of the national economy. Indeed, if ever there is a
legal issue that has far-reaching implications to the entire nation, and to future generations of
Filipinos, it is the threshhold legal issue presented in this case.
The Court first encountered the issue on the definition of the term "capital" in Section 11, Article
XII of the Constitution in the case of Fernandez v. Cojuangco, docketed as G.R. No. 157360.16 That
case involved the same public utility (PLDT) and substantially the same private respondents. Despite
the importance and novelty of the constitutional issue raised therein and despite the fact that the
petition involved a purely legal question, the Court declined to resolve the case on the merits, and
instead denied the same for disregarding the hierarchy of courts.17 There, petitioner Fernandez
assailed on a pure question of law the Regional Trial Court’s Decision of 21 February 2003 via a
petition for review under Rule 45. The Court’s Resolution, denying the petition, became final on 21
December 2004.
The instant petition therefore presents the Court with another opportunity to finally settle this
purely legal issue which is of transcendental importance to the national economy and a
fundamental requirement to a faithful adherence to our Constitution. The Court must forthwith
seize such opportunity, not only for the benefit of the litigants, but more significantly for the benefit
of the entire Filipino people, to ensure, in the words of the Constitution, "a self-reliant and
independent national economy effectively controlled by Filipinos."18 Besides, in the light of vague
and confusing positions taken by government agencies on this purely legal issue, present and future
foreign investors in this country deserve, as a matter of basic fairness, a categorical ruling from this
Court on the extent of their participation in the capital of public utilities and other nationalized
businesses.
Despite its far-reaching implications to the national economy, this purely legal issue has remained
unresolved for over 75 years since the 1935 Constitution. There is no reason for this Court to evade
this ever recurring fundamental issue and delay again defining the term "capital," which appears
not only in Section 11, Article XII of the Constitution, but also in Section 2, Article XII on co-
production and joint venture agreements for the development of our natural resources, 19 in Section
7, Article XII on ownership of private lands,20 in Section 10, Article XII on the reservation of certain
investments to Filipino citizens,21 in Section 4(2), Article XIV on the ownership of educational
institutions,22 and in Section 11(2), Article XVI on the ownership of advertising companies.23
Petitioner has locus standi
There is no dispute that petitioner is a stockholder of PLDT. As such, he has the right to question the
subject sale, which he claims to violate the nationality requirement prescribed in Section 11, Article
XII of the Constitution. If the sale indeed violates the Constitution, then there is a possibility that
PLDT’s franchise could be revoked, a dire consequence directly affecting petitioner’s interest as a
stockholder.
More importantly, there is no question that the instant petition raises matters of transcendental
importance to the public. The fundamental and threshold legal issue in this case, involving the
national economy and the economic welfare of the Filipino people, far outweighs any perceived
impediment in the legal personality of the petitioner to bring this action.
In Chavez v. PCGG,24 the Court upheld the right of a citizen to bring a suit on matters of
transcendental importance to the public, thus:
In Tañada v. Tuvera, the Court asserted that when the issue concerns a public right and the object
of mandamus is to obtain the enforcement of a public duty, the people are regarded as the real
parties in interest; and because it is sufficient that petitioner is a citizen and as such is interested
in the execution of the laws, he need not show that he has any legal or special interest in the
result of the action. In the aforesaid case, the petitioners sought to enforce their right to be
informed on matters of public concern, a right then recognized in Section 6, Article IV of the 1973
Constitution, in connection with the rule that laws in order to be valid and enforceable must be
published in the Official Gazette or otherwise effectively promulgated. In ruling for the petitioners’
legal standing, the Court declared that the right they sought to be enforced ‘is a public right
recognized by no less than the fundamental law of the land.’
Legaspi v. Civil Service Commission, while reiterating Tañada, further declared that ‘when a
mandamus proceeding involves the assertion of a public right, the requirement of personal
interest is satisfied by the mere fact that petitioner is a citizen and, therefore, part of the general
‘public’ which possesses the right.’
Further, in Albano v. Reyes, we said that while expenditure of public funds may not have been
involved under the questioned contract for the development, management and operation of the
Manila International Container Terminal, ‘public interest [was] definitely involved considering the
important role [of the subject contract] . . . in the economic development of the country and the
magnitude of the financial consideration involved.’ We concluded that, as a consequence, the
disclosure provision in the Constitution would constitute sufficient authority for upholding the
petitioner’s standing. (Emphasis supplied)
Clearly, since the instant petition, brought by a citizen, involves matters of transcendental public
importance, the petitioner has the requisite locus standi.
Definition of the Term "Capital" in
Section 11, Article XII of the 1987 Constitution
Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution mandates the
Filipinization of public utilities, to wit:
Section 11. 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
in character or for a longer period than fifty years. Neither shall any such franchise or right be
granted except under the condition that it shall be subject to amendment, alteration, or repeal by
the Congress when the common good so requires. The State shall encourage equity participation in
public utilities by the general public. The participation of foreign investors in the governing body of
any public utility enterprise shall be limited to their proportionate share in its capital, and all the
executive and managing officers of such corporation or association must be citizens of the
Philippines. (Emphasis supplied)
The above provision substantially reiterates Section 5, Article XIV of the 1973 Constitution, thus:
Section 5. 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 the capital of which is
owned by such citizens, nor shall such franchise, certificate, or authorization be exclusive in
character or for a longer period than fifty years. Neither shall any such franchise or right be granted
except under the condition that it shall be subject to amendment, alteration, or repeal by the
National Assembly when the public interest so requires. The State shall encourage equity
participation in public utilities by the general public. The participation of foreign investors in the
governing body of any public utility enterprise shall be limited to their proportionate share in the
capital thereof. (Emphasis supplied)
The foregoing provision in the 1973 Constitution reproduced Section 8, Article XIV of the 1935
Constitution, viz:
Section 8. 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 other entities
organized under the laws of the Philippines sixty per centum of the capital of which is owned by
citizens of the Philippines, nor shall such franchise, certificate, or authorization be exclusive in
character or for a longer period than fifty years. No franchise or right shall be granted to any
individual, firm, or corporation, except under the condition that it shall be subject to amendment,
alteration, or repeal by the Congress when the public interest so requires. (Emphasis supplied)
Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional Commission, reminds
us that the Filipinization provision in the 1987 Constitution is one of the products of the spirit of
nationalism which gripped the 1935 Constitutional Convention.25 The 1987 Constitution "provides
for the Filipinization of public utilities by requiring that any form of authorization for the operation
of public utilities should be granted only 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.’ The provision is [an express] recognition of the sensitive and vital
position of public utilities both in the national economy and for national security." 26 The evident
purpose of the citizenship requirement is to prevent aliens from assuming control of public utilities,
which may be inimical to the national interest.27 This specific provision explicitly reserves to Filipino
citizens control of public utilities, pursuant to an overriding economic goal of the 1987 Constitution:
to "conserve and develop our patrimony"28 and ensure "a self-reliant and independent national
economy effectively controlled by Filipinos."29
Any citizen or juridical entity desiring to operate a public utility must therefore meet the minimum
nationality requirement prescribed in Section 11, Article XII of the Constitution. Hence, for a
corporation to be granted authority to operate a public utility, at least 60 percent of its "capital"
must be owned by Filipino citizens.
The crux of the controversy is the definition of the term "capital." Does the term "capital" in Section
11, Article XII of the Constitution refer to common shares or to the total outstanding capital stock
(combined total of common and non-voting preferred shares)?
Petitioner submits that the 40 percent foreign equity limitation in domestic public utilities refers
only to common shares because such shares are entitled to vote and it is through voting that control
over a corporation is exercised. Petitioner posits that the term "capital" in Section 11, Article XII of
the Constitution refers to "the ownership of common capital stock subscribed and outstanding,
which class of shares alone, under the corporate set-up of PLDT, can vote and elect members of the
board of directors." It is undisputed that PLDT’s non-voting preferred shares are held mostly by
Filipino citizens.30 This arose from Presidential Decree No. 217,31 issued on 16 June 1973 by then
President Ferdinand Marcos, requiring every applicant of a PLDT telephone line to subscribe to non-
voting preferred shares to pay for the investment cost of installing the telephone line.32
Petitioners-in-intervention basically reiterate petitioner’s arguments and adopt petitioner’s
definition of the term "capital."33 Petitioners-in-intervention allege that "the approximate foreign
ownership of common capital stock of PLDT x x x already amounts to at least 63.54% of the total
outstanding common stock," which means that foreigners exercise significant control over PLDT,
patently violating the 40 percent foreign equity limitation in public utilities prescribed by the
Constitution.
Respondents, on the other hand, do not offer any definition of the term "capital" in Section 11,
Article XII of the Constitution. More importantly, private respondents Nazareno and Pangilinan of
PLDT do not dispute that more than 40 percent of the common shares of PLDT are held by
foreigners.
In particular, respondent Nazareno’s Memorandum, consisting of 73 pages, harps mainly on the
procedural infirmities of the petition and the supposed violation of the due process rights of the
"affected foreign common shareholders." Respondent Nazareno does not deny petitioner’s
allegation of foreigners’ dominating the common shareholdings of PLDT. Nazareno stressed mainly
that the petition "seeks to divest foreign common shareholders purportedly exceeding 40% of the
total common shareholdings in PLDT of their ownership over their shares." Thus, "the foreign
natural and juridical PLDT shareholders must be impleaded in this suit so that they can be heard." 34
Essentially, Nazareno invokes denial of due process on behalf of the foreign common shareholders.
While Nazareno does not introduce any definition of the term "capital," he states that "among the
factual assertions that need to be established to counter petitioner’s allegations is the uniform
interpretation by government agencies (such as the SEC), institutions and corporations (such as
the Philippine National Oil Company-Energy Development Corporation or PNOC-EDC) of including
both preferred shares and common shares in "controlling interest" in view of testing compliance
with the 40% constitutional limitation on foreign ownership in public utilities."35
Similarly, respondent Manuel V. Pangilinan does not define the term "capital" in Section 11, Article
XII of the Constitution. Neither does he refute petitioner’s claim of foreigners holding more than 40
percent of PLDT’s common shares. Instead, respondent Pangilinan focuses on the procedural flaws
of the petition and the alleged violation of the due process rights of foreigners. Respondent
Pangilinan emphasizes in his Memorandum (1) the absence of this Court’s jurisdiction over the
petition; (2) petitioner’s lack of standing; (3) mootness of the petition; (4) non-availability of
declaratory relief; and (5) the denial of due process rights. Moreover, respondent Pangilinan alleges
that the issue should be whether "owners of shares in PLDT as well as owners of shares in companies
holding shares in PLDT may be required to relinquish their shares in PLDT and in those companies
without any law requiring them to surrender their shares and also without notice and trial."
Respondent Pangilinan further asserts that "Section 11, [Article XII of the Constitution] imposes no
nationality requirement on the shareholders of the utility company as a condition for keeping
their shares in the utility company." According to him, "Section 11 does not authorize taking one
person’s property (the shareholder’s stock in the utility company) on the basis of another party’s
alleged failure to satisfy a requirement that is a condition only for that other party’s retention of
another piece of property (the utility company being at least 60% Filipino-owned to keep its
franchise)."36
The OSG, representing public respondents Secretary Margarito Teves, Undersecretary John P.
Sevilla, Commissioner Ricardo Abcede, and Chairman Fe Barin, is likewise silent on the definition of
the term "capital." In its Memorandum37 dated 24 September 2007, the OSG also limits its
discussion on the supposed procedural defects of the petition, i.e. lack of standing, lack of
jurisdiction, non-inclusion of interested parties, and lack of basis for injunction. The OSG does not
present any definition or interpretation of the term "capital" in Section 11, Article XII of the
Constitution. The OSG contends that "the petition actually partakes of a collateral attack on PLDT’s
franchise as a public utility," which in effect requires a "full-blown trial where all the parties in
interest are given their day in court."38
Respondent Francisco Ed Lim, impleaded as President and Chief Executive Officer of the Philippine
Stock Exchange (PSE), does not also define the term "capital" and seeks the dismissal of the petition
on the following grounds: (1) failure to state a cause of action against Lim; (2) the PSE allegedly
implemented its rules and required all listed companies, including PLDT, to make proper and timely
disclosures; and (3) the reliefs prayed for in the petition would adversely impact the stock market.
In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to be a stockholder
of record of PLDT, contended that the term "capital" in the 1987 Constitution refers to shares
entitled to vote or the common shares. Fernandez explained thus:
The forty percent (40%) foreign equity limitation in public utilities prescribed by the Constitution
refers to ownership of shares of stock entitled to vote, i.e., common shares, considering that it is
through voting that control is being exercised. x x x
Obviously, the intent of the framers of the Constitution in imposing limitations and restrictions on
fully nationalized and partially nationalized activities is for Filipino nationals to be always in control
of the corporation undertaking said activities. Otherwise, if the Trial Court’s ruling upholding
respondents’ arguments were to be given credence, it would be possible for the ownership
structure of a public utility corporation to be divided into one percent (1%) common stocks and
ninety-nine percent (99%) preferred stocks. Following the Trial Court’s ruling adopting respondents’
arguments, the common shares can be owned entirely by foreigners thus creating an absurd
situation wherein foreigners, who are supposed to be minority shareholders, control the public
utility corporation.
xxxx
Thus, the 40% foreign ownership limitation should be interpreted to apply to both the beneficial
ownership and the controlling interest.
xxxx
Clearly, therefore, the forty percent (40%) foreign equity limitation in public utilities prescribed by
the Constitution refers to ownership of shares of stock entitled to vote, i.e., common shares.
Furthermore, ownership of record of shares will not suffice but it must be shown that the legal and
beneficial ownership rests in the hands of Filipino citizens. Consequently, in the case of petitioner
PLDT, since it is already admitted that the voting interests of foreigners which would gain entry to
petitioner PLDT by the acquisition of SMART shares through the Questioned Transactions is
equivalent to 82.99%, and the nominee arrangements between the foreign principals and the
Filipino owners is likewise admitted, there is, therefore, a violation of Section 11, Article XII of the
Constitution.
Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987 cited by the Trial Court to
support the proposition that the meaning of the word "capital" as used in Section 11, Article XII of
the Constitution allegedly refers to the sum total of the shares subscribed and paid-in by the
shareholder and it allegedly is immaterial how the stock is classified, whether as common or
preferred, cannot stand in the face of a clear legislative policy as stated in the FIA which took effect
in 1991 or way after said opinions were rendered, and as clarified by the above-quoted
Amendments. In this regard, suffice it to state that as between the law and an opinion rendered by
an administrative agency, the law indubitably prevails. Moreover, said Opinions are merely advisory
and cannot prevail over the clear intent of the framers of the Constitution.
In the same vein, the SEC’s construction of Section 11, Article XII of the Constitution is at best merely
advisory for it is the courts that finally determine what a law means.39
On the other hand, respondents therein, Antonio O. Cojuangco, Manuel V. Pangilinan, Carlos A.
Arellano, Helen Y. Dee, Magdangal B. Elma, Mariles Cacho-Romulo, Fr. Bienvenido F. Nebres, Ray C.
Espinosa, Napoleon L. Nazareno, Albert F. Del Rosario, and Orlando B. Vea, argued that the term
"capital" in Section 11, Article XII of the Constitution includes preferred shares since the Constitution
does not distinguish among classes of stock, thus:
16. The Constitution applies its foreign ownership limitation on the corporation’s "capital," without
distinction as to classes of shares. x x x
In this connection, the Corporation Code – which was already in force at the time the present (1987)
Constitution was drafted – defined outstanding capital stock as follows:
Section 137. Outstanding capital stock defined. – The term "outstanding capital stock", as used in
this Code, means the total shares of stock issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or partially paid, except treasury shares.
Section 137 of the Corporation Code also does not distinguish between common and preferred
shares, nor exclude either class of shares, in determining the outstanding capital stock (the
"capital") of a corporation. Consequently, petitioner’s suggestion to reckon PLDT’s foreign equity
only on the basis of PLDT’s outstanding common shares is without legal basis. The language of the
Constitution should be understood in the sense it has in common use.
xxxx
17. But even assuming that resort to the proceedings of the Constitutional Commission is necessary,
there is nothing in the Record of the Constitutional Commission (Vol. III) – which petitioner
misleadingly cited in the Petition x x x – which supports petitioner’s view that only common shares
should form the basis for computing a public utility’s foreign equity.
xxxx
18. In addition, the SEC – the government agency primarily responsible for implementing the
Corporation Code, and which also has the responsibility of ensuring compliance with the
Constitution’s foreign equity restrictions as regards nationalized activities x x x – has categorically
ruled that both common and preferred shares are properly considered in determining outstanding
capital stock and the nationality composition thereof.40
We agree with petitioner and petitioners-in-intervention. The term "capital" in Section 11, Article
XII of the Constitution refers only to shares of stock entitled to vote in the election of directors, and
thus in the present case only to common shares,41 and not to the total outstanding capital stock
comprising both common and non-voting preferred shares.
The Corporation Code of the Philippines42 classifies shares as common or preferred, thus:
Sec. 6. Classification of shares. - The shares of stock of stock corporations may be divided into classes
or series of shares, or both, any of which classes or series of shares may have such rights, privileges
or restrictions as may be stated in the articles of incorporation: Provided, That no share may be
deprived of voting rights except those classified and issued as "preferred" or "redeemable"
shares, unless otherwise provided in this Code: Provided, further, That there shall always be a class
or series of shares which have complete voting rights. Any or all of the shares or series of shares
may have a par value or have no par value as may be provided for in the articles of incorporation:
Provided, however, That banks, trust companies, insurance companies, public utilities, and building
and loan associations shall not be permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference in the distribution of
the assets of the corporation in case of liquidation and in the distribution of dividends, or such other
preferences as may be stated in the articles of incorporation which are not violative of the provisions
of this Code: Provided, That preferred shares of stock may be issued only with a stated par value.
The Board of Directors, where authorized in the articles of incorporation, may fix the terms and
conditions of preferred shares of stock or any series thereof: Provided, That such terms and
conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange
Commission.
Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and
the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto:
Provided; That shares without par value may not be issued for a consideration less than the value
of five (₱5.00) pesos per share: Provided, further, That the entire consideration received by the
corporation for its no-par value shares shall be treated as capital and shall not be available for
distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring compliance with
constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the certificate of stock,
each share shall be equal in all respects to every other share.
Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code,
the holders of such shares shall nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the
corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with this
Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary to approve a
particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting
rights.
Indisputably, one of the rights of a stockholder is the right to participate in the control or
management of the corporation.43 This is exercised through his vote in the election of directors
because it is the board of directors that controls or manages the corporation. 44 In the absence of
provisions in the articles of incorporation denying voting rights to preferred shares, preferred shares
have the same voting rights as common shares. However, preferred shareholders are often
excluded from any control, that is, deprived of the right to vote in the election of directors and on
other matters, on the theory that the preferred shareholders are merely investors in the
corporation for income in the same manner as bondholders. 45 In fact, under the Corporation Code
only preferred or redeemable shares can be deprived of the right to vote.46 Common shares cannot
be deprived of the right to vote in any corporate meeting, and any provision in the articles of
incorporation restricting the right of common shareholders to vote is invalid.47
Considering that common shares have voting rights which translate to control, as opposed to
preferred shares which usually have no voting rights, the term "capital" in Section 11, Article XII of
the Constitution refers only to common shares. However, if the preferred shares also have the right
to vote in the election of directors, then the term "capital" shall include such preferred shares
because the right to participate in the control or management of the corporation is exercised
through the right to vote in the election of directors. In short, the term "capital" in Section 11,
Article XII of the Constitution refers only to shares of stock that can vote in the election of
directors.
This interpretation is consistent with the intent of the framers of the Constitution to place in the
hands of Filipino citizens the control and management of public utilities. As revealed in the
deliberations of the Constitutional Commission, "capital" refers to the voting stock or controlling
interest of a corporation, to wit:
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign
equity; namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in Section 15.
MR. VILLEGAS. That is right.
MR. NOLLEDO. In teaching law, we are always faced with this question: "Where do we base the
equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the
paid-up capital stock of a corporation"? Will the Committee please enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law
Center who provided us a draft. The phrase that is contained here which we adopted from the UP
draft is "60 percent of voting stock."
MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.
MR. VILLEGAS. That is right.
MR. NOLLEDO. Thank you.
With respect to an investment by one corporation in another corporation, say, a corporation with
60-40 percent equity invests in another corporation which is permitted by the Corporation Code,
does the Committee adopt the grandfather rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.
MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes.48
xxxx
MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.
MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase "voting stock
or controlling interest."
MR. AZCUNA. Hence, without the Davide amendment, the committee report would read:
"corporations or associations at least sixty percent of whose CAPITAL is owned by such citizens."
MR. VILLEGAS. Yes.
MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital to be
owned by citizens.
MR. VILLEGAS. That is right.
MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let us say
40 percent of the capital is owned by them, but it is the voting capital, whereas, the Filipinos own
the nonvoting shares. So we can have a situation where the corporation is controlled by foreigners
despite being the minority because they have the voting capital. That is the anomaly that would
result here.
MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973 and 1935
Constitutions is that according to Commissioner Rodrigo, there are associations that do not have
stocks. That is why we say "CAPITAL."
MR. AZCUNA. We should not eliminate the phrase "controlling interest."
MR. BENGZON. In the case of stock corporations, it is assumed.49 (Emphasis supplied)
Thus, 60 percent of the "capital" assumes, or should result in, "controlling interest" in the
corporation. Reinforcing this interpretation of the term "capital," as referring to controlling interest
or shares entitled to vote, is the definition of a "Philippine national" in the Foreign Investments Act
of 1991,50 to wit:
SEC. 3. Definitions. - As used in this Act:
a. The term "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership
or association wholly owned by citizens of the Philippines; or a corporation organized under the
laws of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and
entitled to vote is owned and held by citizens of the Philippines; or a corporation organized abroad
and registered as doing business in the Philippines under the Corporation Code of which one
hundred percent (100%) of the capital stock outstanding and entitled to vote is wholly owned by
Filipinos or a trustee of funds for pension or other employee retirement or separation benefits,
where the trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue to
the benefit of Philippine nationals: Provided, That where a corporation and its non-Filipino
stockholders own stocks in a Securities and Exchange Commission (SEC) registered enterprise, at
least sixty percent (60%) of the capital stock outstanding and entitled to vote of each of both
corporations must be owned and held by citizens of the Philippines and at least sixty percent (60%)
of the members of the Board of Directors of each of both corporations must be citizens of the
Philippines, in order that the corporation, shall be considered a "Philippine national." (Emphasis
supplied)
In explaining the definition of a "Philippine national," the Implementing Rules and Regulations of
the Foreign Investments Act of 1991 provide:
b. "Philippine national" shall mean a citizen of the Philippines or a domestic partnership or
association wholly owned by the citizens of the Philippines; or a corporation organized under the
laws of the Philippines of which at least sixty percent [60%] of the capital stock outstanding and
entitled to vote is owned and held by citizens of the Philippines; or a trustee of funds for pension
or other employee retirement or separation benefits, where the trustee is a Philippine national and
at least sixty percent [60%] of the fund will accrue to the benefit of the Philippine nationals;
Provided, that where a corporation its non-Filipino stockholders own stocks in a Securities and
Exchange Commission [SEC] registered enterprise, at least sixty percent [60%] of the capital stock
outstanding and entitled to vote of both corporations must be owned and held by citizens of the
Philippines and at least sixty percent [60%] of the members of the Board of Directors of each of both
corporation must be citizens of the Philippines, in order that the corporation shall be considered a
Philippine national. The control test shall be applied for this purpose.
Compliance with the required Filipino ownership of a corporation shall be determined on the
basis of outstanding capital stock whether fully paid or not, but only such stocks which are
generally entitled to vote are considered.
For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal
title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks,
coupled with appropriate voting rights is essential. Thus, stocks, the voting rights of which have
been assigned or transferred to aliens cannot be considered held by Philippine citizens or
Philippine nationals.
Individuals or juridical entities not meeting the aforementioned qualifications are considered as
non-Philippine nationals. (Emphasis supplied)
Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required in the
Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with
60 percent of the voting rights, is required. The legal and beneficial ownership of 60 percent of the
outstanding capital stock must rest in the hands of Filipino nationals in accordance with the
constitutional mandate. Otherwise, the corporation is "considered as non-Philippine national[s]."
Under Section 10, Article XII of the Constitution, Congress may "reserve to citizens of the Philippines
or to corporations or associations at least sixty per centum of whose capital is owned by such
citizens, or such higher percentage as Congress may prescribe, certain areas of investments." Thus,
in numerous laws Congress has reserved certain areas of investments to Filipino citizens or to
corporations at least sixty percent of the "capital" of which is owned by Filipino citizens. Some of
these laws are: (1) Regulation of Award of Government Contracts or R.A. No. 5183; (2) Philippine
Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro, Small and Medium Enterprises
or R.A. No. 6977; (4) Philippine Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic
Shipping Development Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009
or R.A. No. 10055; and (7) Ship Mortgage Decree or P.D. No. 1521. Hence, the term "capital" in
Section 11, Article XII of the Constitution is also used in the same context in numerous laws
reserving certain areas of investments to Filipino citizens.
To construe broadly the term "capital" as the total outstanding capital stock, including both
common and non-voting preferred shares, grossly contravenes the intent and letter of the
Constitution that the "State shall develop a self-reliant and independent national economy
effectively controlled by Filipinos." A broad definition unjustifiably disregards who owns the all-
important voting stock, which necessarily equates to control of the public utility.
We shall illustrate the glaring anomaly in giving a broad definition to the term "capital." Let us
assume that a corporation has 100 common shares owned by foreigners and 1,000,000 non-voting
preferred shares owned by Filipinos, with both classes of share having a par value of one peso
(₱1.00) per share. Under the broad definition of the term "capital," such corporation would be
considered compliant with the 40 percent constitutional limit on foreign equity of public utilities
since the overwhelming majority, or more than 99.999 percent, of the total outstanding capital
stock is Filipino owned. This is obviously absurd.
In the example given, only the foreigners holding the common shares have voting rights in the
election of directors, even if they hold only 100 shares. The foreigners, with a minuscule equity of
less than 0.001 percent, exercise control over the public utility. On the other hand, the Filipinos,
holding more than 99.999 percent of the equity, cannot vote in the election of directors and hence,
have no control over the public utility. This starkly circumvents the intent of the framers of the
Constitution, as well as the clear language of the Constitution, to place the control of public utilities
in the hands of Filipinos. It also renders illusory the State policy of an independent national economy
effectively controlled by Filipinos.
The example given is not theoretical but can be found in the real world, and in fact exists in the
present case.
Holders of PLDT preferred shares are explicitly denied of the right to vote in the election of directors.
PLDT’s Articles of Incorporation expressly state that "the holders of Serial Preferred Stock shall not
be entitled to vote at any meeting of the stockholders for the election of directors or for any other
purpose or otherwise participate in any action taken by the corporation or its stockholders, or to
receive notice of any meeting of stockholders."51
On the other hand, holders of common shares are granted the exclusive right to vote in the election
of directors. PLDT’s Articles of Incorporation52 state that "each holder of Common Capital Stock shall
have one vote in respect of each share of such stock held by him on all matters voted upon by the
stockholders, and the holders of Common Capital Stock shall have the exclusive right to vote for
the election of directors and for all other purposes."53
In short, only holders of common shares can vote in the election of directors, meaning only common
shareholders exercise control over PLDT. Conversely, holders of preferred shares, who have no
voting rights in the election of directors, do not have any control over PLDT. In fact, under PLDT’s
Articles of Incorporation, holders of common shares have voting rights for all purposes, while
holders of preferred shares have no voting right for any purpose whatsoever.
It must be stressed, and respondents do not dispute, that foreigners hold a majority of the common
shares of PLDT. In fact, based on PLDT’s 2010 General Information Sheet (GIS), 54 which is a
document required to be submitted annually to the Securities and Exchange Commission, 55
foreigners hold 120,046,690 common shares of PLDT whereas Filipinos hold only 66,750,622
common shares.56 In other words, foreigners hold 64.27% of the total number of PLDT’s common
shares, while Filipinos hold only 35.73%. Since holding a majority of the common shares equates to
control, it is clear that foreigners exercise control over PLDT. Such amount of control unmistakably
exceeds the allowable 40 percent limit on foreign ownership of public utilities expressly mandated
in Section 11, Article XII of the Constitution.
Moreover, the Dividend Declarations of PLDT for 2009,57 as submitted to the SEC, shows that per
share the SIP58 preferred shares earn a pittance in dividends compared to the common shares. PLDT
declared dividends for the common shares at ₱70.00 per share, while the declared dividends for the
preferred shares amounted to a measly ₱1.00 per share.59 So the preferred shares not only cannot
vote in the election of directors, they also have very little and obviously negligible dividend earning
capacity compared to common shares.
As shown in PLDT’s 2010 GIS,60 as submitted to the SEC, the par value of PLDT common shares is
₱5.00 per share, whereas the par value of preferred shares is ₱10.00 per share. In other words,
preferred shares have twice the par value of common shares but cannot elect directors and have
only 1/70 of the dividends of common shares. Moreover, 99.44% of the preferred shares are owned
by Filipinos while foreigners own only a minuscule 0.56% of the preferred shares. 61 Worse, preferred
shares constitute 77.85% of the authorized capital stock of PLDT while common shares constitute
only 22.15%.62 This undeniably shows that beneficial interest in PLDT is not with the non-voting
preferred shares but with the common shares, blatantly violating the constitutional requirement of
60 percent Filipino control and Filipino beneficial ownership in a public utility.
The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the
hands of Filipinos in accordance with the constitutional mandate. Full beneficial ownership of 60
percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is
constitutionally required for the State’s grant of authority to operate a public utility. The undisputed
fact that the PLDT preferred shares, 99.44% owned by Filipinos, are non-voting and earn only 1/70
of the dividends that PLDT common shares earn, grossly violates the constitutional requirement of
60 percent Filipino control and Filipino beneficial ownership of a public utility.
In short, Filipinos hold less than 60 percent of the voting stock, and earn less than 60 percent of
the dividends, of PLDT. This directly contravenes the express command in Section 11, Article XII of
the Constitution that "[n]o franchise, certificate, or any other form of authorization for the
operation of a public utility shall be granted except to x x x corporations x x x organized under the
laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens x x x."
To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of shares exercises
the sole right to vote in the election of directors, and thus exercise control over PLDT; (2) Filipinos
own only 35.73% of PLDT’s common shares, constituting a minority of the voting stock, and thus do
not exercise control over PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting
rights; (4) preferred shares earn only 1/70 of the dividends that common shares earn;63 (5) preferred
shares have twice the par value of common shares; and (6) preferred shares constitute 77.85% of
the authorized capital stock of PLDT and common shares only 22.15%. This kind of ownership and
control of a public utility is a mockery of the Constitution.
Incidentally, the fact that PLDT common shares with a par value of ₱5.00 have a current stock
market value of ₱2,328.00 per share,64 while PLDT preferred shares with a par value of ₱10.00 per
share have a current stock market value ranging from only ₱10.92 to ₱11.06 per share,65 is a glaring
confirmation by the market that control and beneficial ownership of PLDT rest with the common
shares, not with the preferred shares.
Indisputably, construing the term "capital" in Section 11, Article XII of the Constitution to include
both voting and non-voting shares will result in the abject surrender of our telecommunications
industry to foreigners, amounting to a clear abdication of the State’s constitutional duty to limit
control of public utilities to Filipino citizens. Such an interpretation certainly runs counter to the
constitutional provision reserving certain areas of investment to Filipino citizens, such as the
exploitation of natural resources as well as the ownership of land, educational institutions and
advertising businesses. The Court should never open to foreign control what the Constitution has
expressly reserved to Filipinos for that would be a betrayal of the Constitution and of the national
interest. The Court must perform its solemn duty to defend and uphold the intent and letter of the
Constitution to ensure, in the words of the Constitution, "a self-reliant and independent national
economy effectively controlled by Filipinos."
Section 11, Article XII of the Constitution, like other provisions of the Constitution expressly
reserving to Filipinos specific areas of investment, such as the development of natural resources and
ownership of land, educational institutions and advertising business, is self-executing. There is no
need for legislation to implement these self-executing provisions of the Constitution. The rationale
why these constitutional provisions are self-executing was explained in Manila Prince Hotel v.
GSIS,66 thus:
x x x Hence, unless it is expressly provided that a legislative act is necessary to enforce a
constitutional mandate, the presumption now is that all provisions of the constitution are self-
executing. If the constitutional provisions are treated as requiring legislation instead of self-
executing, the legislature would have the power to ignore and practically nullify the mandate of the
fundamental law. This can be cataclysmic. That is why the prevailing view is, as it has always been,
that —
. . . in case of doubt, the Constitution should be considered self-executing rather than non-self-
executing. . . . Unless the contrary is clearly intended, the provisions of the Constitution should be
considered self-executing, as a contrary rule would give the legislature discretion to determine
when, or whether, they shall be effective. These provisions would be subordinated to the will of
the lawmaking body, which could make them entirely meaningless by simply refusing to pass the
needed implementing statute. (Emphasis supplied)
In Manila Prince Hotel, even the Dissenting Opinion of then Associate Justice Reynato S. Puno, later
Chief Justice, agreed that constitutional provisions are presumed to be self-executing. Justice Puno
stated:
Courts as a rule consider the provisions of the Constitution as self-executing, rather than as requiring
future legislation for their enforcement. The reason is not difficult to discern. For if they are not
treated as self-executing, the mandate of the fundamental law ratified by the sovereign people
can be easily ignored and nullified by Congress. Suffused with wisdom of the ages is the unyielding
rule that legislative actions may give breath to constitutional rights but congressional inaction
should not suffocate them.
Thus, we have treated as self-executing the provisions in the Bill of Rights on arrests, searches and
seizures, the rights of a person under custodial investigation, the rights of an accused, and the
privilege against self-incrimination. It is recognized that legislation is unnecessary to enable courts
to effectuate constitutional provisions guaranteeing the fundamental rights of life, liberty and the
protection of property. The same treatment is accorded to constitutional provisions forbidding the
taking or damaging of property for public use without just compensation. (Emphasis supplied)
Thus, in numerous cases,67 this Court, even in the absence of implementing legislation, applied
directly the provisions of the 1935, 1973 and 1987 Constitutions limiting land ownership to Filipinos.
In Soriano v. Ong Hoo,68 this Court ruled:
x x x As the Constitution is silent as to the effects or consequences of a sale by a citizen of his land
to an alien, and as both the citizen and the alien have violated the law, none of them should have a
recourse against the other, and it should only be the State that should be allowed to intervene and
determine what is to be done with the property subject of the violation. We have said that what
the State should do or could do in such matters is a matter of public policy, entirely beyond the
scope of judicial authority. (Dinglasan, et al. vs. Lee Bun Ting, et al., 6 G. R. No. L-5996, June 27,
1956.) While the legislature has not definitely decided what policy should be followed in cases of
violations against the constitutional prohibition, courts of justice cannot go beyond by declaring
the disposition to be null and void as violative of the Constitution. x x x (Emphasis supplied)
To treat Section 11, Article XII of the Constitution as not self-executing would mean that since the
1935 Constitution, or over the last 75 years, not one of the constitutional provisions expressly
reserving specific areas of investments to corporations, at least 60 percent of the "capital" of which
is owned by Filipinos, was enforceable. In short, the framers of the 1935, 1973 and 1987
Constitutions miserably failed to effectively reserve to Filipinos specific areas of investment, like the
operation by corporations of public utilities, the exploitation by corporations of mineral resources,
the ownership by corporations of real estate, and the ownership of educational institutions. All the
legislatures that convened since 1935 also miserably failed to enact legislations to implement these
vital constitutional provisions that determine who will effectively control the national economy,
Filipinos or foreigners. This Court cannot allow such an absurd interpretation of the Constitution.
This Court has held that the SEC "has both regulatory and adjudicative functions."69 Under its
regulatory functions, the SEC can be compelled by mandamus to perform its statutory duty when it
unlawfully neglects to perform the same. Under its adjudicative or quasi-judicial functions, the SEC
can be also be compelled by mandamus to hear and decide a possible violation of any law it
administers or enforces when it is mandated by law to investigate such violation.1awphi1
Under Section 17(4)70 of the Corporation Code, the SEC has the regulatory function to reject or
disapprove the Articles of Incorporation of any corporation where "the required percentage of
ownership of the capital stock to be owned by citizens of the Philippines has not been complied
with as required by existing laws or the Constitution." Thus, the SEC is the government agency
tasked with the statutory duty to enforce the nationality requirement prescribed in Section 11,
Article XII of the Constitution on the ownership of public utilities. This Court, in a petition for
declaratory relief that is treated as a petition for mandamus as in the present case, can direct the
SEC to perform its statutory duty under the law, a duty that the SEC has apparently unlawfully
neglected to do based on the 2010 GIS that respondent PLDT submitted to the SEC.
Under Section 5(m) of the Securities Regulation Code, 71 the SEC is vested with the "power and
function" to "suspend or revoke, after proper notice and hearing, the franchise or certificate of
registration of corporations, partnerships or associations, upon any of the grounds provided by
law." The SEC is mandated under Section 5(d) of the same Code with the "power and function" to
"investigate x x x the activities of persons to ensure compliance" with the laws and regulations
that SEC administers or enforces. The GIS that all corporations are required to submit to SEC
annually should put the SEC on guard against violations of the nationality requirement prescribed
in the Constitution and existing laws. This Court can compel the SEC, in a petition for declaratory
relief that is treated as a petition for mandamus as in the present case, to hear and decide a possible
violation of Section 11, Article XII of the Constitution in view of the ownership structure of PLDT’s
voting shares, as admitted by respondents and as stated in PLDT’s 2010 GIS that PLDT submitted to
SEC.
WHEREFORE, we PARTLY GRANT the petition and rule that the term "capital" in Section 11, Article
XII of the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors,
and thus in the present case only to common shares, and not to the total outstanding capital stock
(common and non-voting preferred shares). Respondent Chairperson of the Securities and
Exchange Commission is DIRECTED to apply this definition of the term "capital" in determining the
extent of allowable foreign ownership in respondent Philippine Long Distance Telephone Company,
and if there is a violation of Section 11, Article XII of the Constitution, to impose the appropriate
sanctions under the law.
SO ORDERED.
TRANSPO – CONSTI PROVISIONS - OWNERSHIP
G.R. NOS. 174457-59
EXPRESS INVESTMENTS III PRIVATE LTD. AND EXPORT DEVELOPMENT CANADA, Petitioner,
vs.
DAYAN TELECOMMUNICATIONS, INC., THE BANK OF NEW YORK (AS TRUSTEE FOR THE HOLDERS OF THE
US$200,000,000 13.5% SENIOR NOTES OF DAYAN TELECOMMUNICATIONS, INC.) AND ATTY. REMIGIO A.
NOVAL (AS THE COURT-APPOINTED REHABILITATION RECEIVER OF BAYANTEL), Respondents.
x---------------x
G.R. Nos. 175418-20
IN THE MATTER OF:
THE CORPORATE REHABILITATION OF DAYAN TELECOMMUNICATIONS, INC. PURSUANT TO THE INTERIM
RULES OF PROCEDURE ON CORPORATE REHABILITATION (A.M. NO. 00-8-10-SC)
THE BANK OF NEW YORK AS TRUSTEE FOR THE HOLDERS OF THE US$200,000,000 13.5% SENIOR NOTES OF
DAYAN TELECOMMUNICATIONS, INC.
DUE 2006 ACTING ON THE INSTRUCTIONS OF THE INFORMAL STEERING COMMITTEE: AVENUE ASIA
INVESTMENTS, L.P., AVENUE ASIA INTERNATIONAL, LTD., AVENUE ASIA SPECIAL SITUATIONS FUND II, L.P.
AND AVENUE ASIA CAPITAL PARTNERS, L.P., Petitioner,
vs.
DAYAN TELECOMMUNICATIONS, INC., Respondents.
x---------------x
IN THE MATTER OF:
THE CORPORATE REHABILITATION OF BAY AN TELECOMMUNICATIONS, INC. PURSUANT TO THE INTERIM
RULES OF PROCEDURE ON CORPORATE REHABILITATION (A.M. NO. 00-8-10-SC)
AVENUE ASIA INVESTMENTS, L.P., AVENUE ASIA INTERNATIONAL, LTD., AVENUE ASIA SPECIAL SITUATIONS
FUND II, L.P., AVENUE ASIA CAPITAL PARTNERS, L.P. AND AVENUE ASIA SPECIAL SITUATIONS FUND III, L.P.,
Petitioner,
vs.
DAYAN TELECOMMUNICATIONS, INC., Respondents.
x---------------x
G.R. No. 177270 December 5, 2012
THE BANK OF NEW YORK AS TRUSTEE FOR THE HOLDERS OF THE US$200,000,000 13.5% SENIOR NOTES OF
BAY AN TELECOMMUNICATIONS, INC., Petitioner,
vs.
BAY AN TELECOMMUNICATIONS, INC., Respondents.
DECISION
VILLARAMA, JR., J.:
Before us are seven consolidated petitions for review on certiorari filed m connection with the
corporate rehabilitation of Bayan Telecommunications, Inc. (Bayantel).
The Petition for Partial Review on Certiorari1 in G.R. Nos. 174457-59 was filed by Express
Investments III Private Ltd. and Export Development Canada to assail the August 18, 2006 Decision2
of the Court of Appeals in CA-G.R. SP No. 87203.
On the other hand, the Petition for Review on Certiorari3 in G.R. Nos. 175418-20 was filed by The
Bank of New York; Avenue Asia Investments, L.P.; Avenue Asia International, Ltd.; Avenue Asia
Special Situations Fund II, L.P.; Avenue Asia Capital Partners, L.P. and Avenue Asia Special Situations
Fund III, L.P. Said petition questions as well the said August 18, 2006 Court of Appeals Decision, and
also the November 8, 2006 Resolution 4 of the Court of Appeals in CA-G.R. SP Nos. 87100 and 87111
affirming the June 28, 2004 Decision5 of the Regional Trial Court (RTC) of Pasig City, Branch 158, in
SEC Case No. 03-25.
Meanwhile, the Petition for Review on Certiorari6 in G.R. No. 177270 was filed by The Bank of New
York, in its capacity as trustee for the holders of the US$200 million 13.5% Senior Notes of Bayantel
and upon the instructions of the Informal Steering Committee, to contest the Decision 7 and
Resolution8 of the Court of Appeals in CA-G.R. SP No. 89894 which nullified the November 9, 2004
and March 15, 2005 Orders of the Pasig RTC, Branch 158, in SEC Case No. 03-25 insofar as it defined
the powers and functions of the Monitoring Committee.
The facts, as culled from the records of these cases, follow:
Respondent Bayantel is a duly organized domestic corporation engaged in the business of providing
telecommunication services. It is 98.6% owned by Bayan Telecommunications Holdings Corporation
(BTHC), which in turn is 85.4% owned by the Lopez Group of Companies and Benpres Holdings
Corporation.
On various dates between the years 1995 and 2001, Bayantel entered into several credit
agreements with Express Investments III Private Ltd. And Export Development Canada (petitioners
in G.R. Nos. 174457-59), Asian Finance and Investment Corporation, Bayerische Landesbank
(Singapore Branch) and Clearwater Capital Partners Singapore Pte Ltd., as agent for Credit Industriel
et Commercial (Singapore), Deutsche Bank AG, Equitable PCI Bank, JP Morgan Chase Bank,
Metropolitan Bank and Trust Co., P.T. Bank Negara Indonesia (Persero), TBK, Hong Kong Branch,
Rizal Commercial Banking Corporation and Standard Chartered Bank. To secure said loans, Bayantel
executed an Omnibus Agreement dated September 19, 1995 and an EVTELCO Mortgage Trust
Indenture9 dated December 12, 1997.10
Pursuant to the Omnibus Agreement, Bayantel executed an Assignment Agreement in favor of the
lenders under the Omnibus Agreement (hereinafter, Omnibus Creditors, Bank Creditors, or secured
creditors). In the Assignment Agreement, Bayantel bound itself to assign, convey and transfer to the
Collateral Agent, the following properties as collateral security for the prompt and complete
payment of its obligations to the Omnibus Creditors:
(i) all monies payable to Bayantel under the Project Documents (as the term is defined by the
Omnibus Agreement);
(ii) all Project Documents and all Contract Rights arising thereunder;
(iii) all receivables;
(iv) all general intangibles;
(v) each of the Accounts (as the term is defined by the Omnibus Agreement);
(vi) all amounts maintained in the Accounts and all monies, securities and instruments deposited
or required to be deposited in the Accounts;
(vii) all other chattel paper and documents;
(viii) all other property, assets and revenues of Bayantel, whether tangible or intangible; and
(ix) all proceeds and products of any and all of the foregoing.11
In July 1999, Bayantel issued US$200 million worth of 13.5% Senior Notes pursuant to an
Indenture12 dated July 22, 1999 that it entered into with The Bank of New York (petitioner in G.R.
Nos. 175418-20) as trustee for the holders of said notes. Pursuant to the said Indenture, the notes
are due in 2006 and Bayantel shall pay interest on them semi-annually. Bayantel managed to make
two interest payments, on January 15, 2000 and July 15, 2000, before it defaulted on its obligation.
Foreseeing the impossibility of further meeting its obligations, Bayantel sent, in October 2001, a
proposal for the restructuring of its debts to the Bank Creditors and the Holders of Notes. To
facilitate the negotiations between Bayantel and its creditors, an Informal Steering Committee was
formed composed of Avenue Asia Investments, L.P., Avenue Asia International, Ltd., Avenue Asia
Special Situations Fund II, L.P., Avenue Asia Capital Partners, L.P. (petitioners in G.R. Nos. 175418-
20) and Van Eck Global Opportunity Masterfund, Ltd. The members of the Informal Steering
Committee are the assignees of the unsecured credits extended to Bayantel by J.P. Morgan Europe,
Ltd., Bayerische Landesbank Singapore Branch and Deutsche Bank AG, London in the total principal
amount of US$13,637,485.20. They are holders, as well, of the Notes issued by Bayantel pursuant
to the Indenture dated July 22, 1999.
In its initial proposal called the "First Term Sheet," Bayantel suggested a 25% write-off of the
principal owing to the Holders of Notes. The Informal Steering Committee rejected the idea, but
accepted Bayantel’s proposal to pay the restructured debt, pari passu,13 out of its cash flow. This
pari passu or equal treatment of debts, however, was opposed by the Bank Creditors who invoked
their security interest under the Assignment Agreement.
Bayantel continued to pay reduced interest on its debt to the Bank Creditors but stopped paying
the Holders of Notes starting July 17, 2000. By May 31, 2003, Bayantel’s total indebtedness had
reached US$674 million or P35.928 billion in unpaid principal and interest, based on the prevailing
conversion rate of US$1 = P53.282. Out of its total liabilities, Bayantel allegedly owes 43.2% or
US$291 million (P15.539 billion) to the Holders of the Notes.
On July 25, 2003, The Bank of New York, as trustee for the Holders of the Notes, wrote Bayantel an
Acceleration Letter declaring immediately due and payable the principal, premium interest, and
other monetary obligations on all outstanding Notes. Then, on July 30, 2003, The Bank of New York
filed a petition14 for the corporate rehabilitation of Bayantel upon the instructions of the Informal
Steering Committee.
On August 8, 2003, the Pasig RTC, Branch 158, issued a Stay Order 15 which directed, among others,
the suspension of all claims against Bayantel and required the latter’s creditors and other interested
parties to file a comment or opposition to the petition. The court appointed Dr. Conchita L. Manabat
to act as rehabilitation receiver but the latter declined.16 In her stead, the court appointed Atty.
Remigio A. Noval (Atty. Noval) who took his oath and posted a bond on September 26, 2003.17
On November 28, 2003, the Rehabilitation Court gave due course to the petition and directed the
Rehabilitation Receiver to submit his recommendations to the court within 120 days from the initial
hearing.18 After several extensions, Atty. Noval filed on March 22, 2004 a Compliance and
Submission of the Report as Compelling Evidence that Bayantel may be Successfully Rehabilitated.19
In his report, Atty. Noval classified Bayantel’s debts into three: (1) those owed to secured Bank
Creditors pursuant to the Omnibus Agreements (Omnibus Creditors) in the total amount of US$334
million or P17.781 billion; (2) those owed to Holders of the Senior Notes and Bank Creditors
combined (Chattel Creditors), comprising US$625 million, of which US$473 million (P25.214 billion)
is principal and US$152 million (P8.106 billion) is accrued unpaid interest; and (3) those that
Bayantel owed to persons other than Financial Creditors/unsecured creditors in the amount of
US$49 million or P2.608 billion.
According to The Bank of New York, out of the US$674 million that respondent owes its creditors
under groups 2 and 3 above, the amount outstanding under the Senior Notes represent 43.2% of
its liabilities as of May 31, 2003. Subsequently, negotiations for the restructuring of Bayantel’s debt
reached an impasse when the Informal Steering Committee insisted on a pari passu treatment of
the claims of both secured and unsecured creditors.
Meanwhile, on January 20, 2004, Bayantel filed a "Motion to Include Radio Communications
Philippines, Inc. [RCPI] and Naga Telephone Company [Nagatel] as Debtor-Corporations for
Rehabilitation x x x."20
The Rehabilitation Court denied said motion in an Order21 dated April 19, 2004. The fallo of said
order reads:
WHEREFORE, the Court resolves the pending incidents as follows:
1. The Urgent Motion to Resolve of petitioner is hereby granted. The creditors of Bayantel,
whether secured or unsecured, should be treated equally and on the same footing or pari passu
until the rehabilitation proceedings is terminated in accordance with the Interim Rules;
2. The Motion of Bayantel to Include RCPI and Nagatel in the present rehabilitation proceedings
as debtor-corporations is denied;
3. The Motion of Bayantel to Exempt from the Stay Order the payment of the compensation
package of its former employees per Annex "A" attached to said motion is granted, subject to the
verification and confirmation of the items therein by the Rehabilitation Receiver;
4. The Motion of Petitioner to Strike Out the proposed rehabilitation plan of Bayantel is denied.
SO ORDERED.22
On June 28, 2004, the Pasig RTC, Branch 158, acting as a Rehabilitation Court, approved the Report
and Recommendations23 attached by the Receiver to his "Submission with Prayer for Further
Guidance from the Honorable Court,"24 subject to the following clarifications and/or amendments:
1. The ruling on the pari passu treatment of all creditors whose claims are subject to restructuring
shall be maintained and shall extend to all payment terms and treatment of past due interest.
2. Due regard shall be given to the rights of the secured creditors and no changes in the security
positions of the creditors shall be granted as a result of the rehabilitation plan as amended and
approved herein.
3. The level of sustainable debt of the rehabilitation plan, as amended, shall be reduced to the
amount of [US]$325,000,000 for a period of 19 years.
4. Unsustainable debt shall be converted into an appropriate instrument that shall not be a
financial burden for Bayantel.
5. All provisions relating to equity in the rehabilitation plan, as approved and amended, must
strictly conform to the requirements of the Constitution limiting foreign ownership to 40%.
6. A Monitoring Committee shall be formed composed of representatives from all classes of the
restructured debt. The Rehabilitation Receiver’s role shall be limited to the powers of monitoring
and oversight as provided in the Interim Rules.
All powers provided for in the Report and Recommendations, which exceed the monitoring and
oversight functions mandated by the Interim Rules shall be amended accordingly.
SO ORDERED.25
Dissatisfied, The Bank of New York filed a Notice of Appeal26 on August 6, 2004. So did Avenue Asia
Investments, L.P., Avenue Asia International, Ltd., Avenue Asia Special Situations Fund II, L.P.,
Avenue Asia Capital Partners, L.P., and Avenue Asia Special Situations Fund III, L.P. which filed a Joint
Record on Appeal27 on August 9, 2004.
On September 28, 2004, Bayantel submitted an Implementing Term Sheet to the Rehabilitation
Court and the Receiver. Claiming that said Term Sheet was inadequate to protect the interest of the
creditors, The Bank of New York (petitioner in G.R. No. 177270) filed a Manifestation 28 dated
October 15, 2004 praying for the constitution of a Monitoring Committee and the creation of a
convertible debt instrument to cover the unsustainable portion of the restructured debt.
On November 9, 2004, the Rehabilitation Court issued an Order29 directing the creation of a
Monitoring Committee to be composed of one member each from the group of Omnibus Creditors
and unsecured creditors, and a third member to be chosen by the unanimous vote of the first two
members. In the same Order, the court defined the scope of the Monitoring Committee’s authority,
as follows:
x x x The Monitoring Committee shall participate with the Receiver in monitoring and overseeing
the actions of the Board of Directors of Bayantel and may, by majority vote, adopt, modify, revise
or substitute, any of the following items:
(1) any proposed Annual OPEX Budgets;
(2) any proposed Annual CAPEX Budgets;
(3) any proposed Reschedule;
(4) any proposed actions by the Receiver on a payment default;
(5) terms of Management Incentivisation Scheme and Management Targets;
(6) the EBITDA/Revenue ratios set by the Bayantel Board of Directors; and
(7) any other proposed actions by the Bayantel Board of Directors including, without limitation,
issuance of new shares, sale of core and noncore assets, change of business, etc. that will
materially affect the terms and conditions of the rehabilitation plan and its implementation.
In case of disagreement between the Monitoring Committee and the Board of Directors of Bayantel
on any of the foregoing matters, the same shall be submitted to the Court for resolution. 30
On November 16, 2004, The Bank of New York filed a Petition for Review31 before the Court of
Appeals. The petition was docketed as CAG. R. SP No. 87100 in the Fifteenth Division of the Court
of Appeals. On even date, Avenue Asia Investments, L.P., Avenue Asia International, Ltd., Avenue
Asia Special Situations Fund II, L.P., Avenue Asia Capital Partners, L.P., and Avenue Asia Special
Situations Fund III, L.P (Avenue Asia Capital Group) filed a similar petition32 which was docketed as
CA-G.R. SP No. 87111 in the Second Division of the Court of Appeals. Both petitions contest the
Rehabilitation Court’s June 28, 2004 Decision for, among others, fixing the level of Bayantel’s
sustainable debt at US$325 million to be paid in 19 years.
Thereafter, on November 30, 2004, petitioners Express Investments III Private Ltd. and Export
Development Canada along with Bayerische Landesbank (Singapore Branch), Credit Industriel et
Commercial, Deutsche Bank AG, P.T. Bank Negara Indonesia (Persero), TBK, Hong Kong Branch and
Rizal Commercial Banking Corporation filed a Petition for Review 33 which was docketed as CA-G.R.
No. 87203 in the Tenth Division of the Court of Appeals. The secured creditors likewise assailed the
Rehabilitation Court’s June 28, 2004 Decision insofar as it ordered the pari passu treatment of all
claims against Bayantel. Said petitioners invoke a lien over the cash flow and receivables of Bayantel
by virtue of the Assignment Agreement.
On December 23, 2004, Bayantel filed an Omnibus Motion34 for the consolidation of CA-G.R. SP Nos.
87111 and CA-G.R. SP No. 87203 with CA-G.R. SP No. 87100, the lowest-numbered case.
In a Resolution dated January 20, 2005, the Court of Appeals, Fifteenth Division, ordered the
consolidation of CA-G.R. SP No. 87203 with CA-G.R. SP No. 87100. This was accepted by the Court
of Appeals, Seventh Division, in a Resolution35 dated March 29, 2005. Then, in the Resolution36 dated
June 10, 2005, the Court of Appeals, First Division, ordered the consolidation of CA-G.R. SP No.
87111 with 87100 and the transmittal of the records of the three cases to the Seventh Division.
Meanwhile, on January 10, 2005, Atty. Noval submitted to the Rehabilitation Court an Implementing
Term Sheet37 to serve as a guide for Bayantel’s Rehabilitation. The same was approved in an Order38
dated March 15, 2005. In the same Order, the Rehabilitation Court appointed Avenue Asia
Investments L.P. and Export Development Canada to represent the unsecured and secured
creditors, respectively, in the Monitoring Committee.
On May 26, 2005, Bayantel filed a petition for certiorari and Prohibition39 docketed as CA-G.R. SP
No. 89894 in the Court of Appeals. Said petition assailed the Rehabilitation Court’s Orders dated
November 9, 2004 and March 15, 2005, for purportedly conferring upon the Monitoring Committee,
powers of management and control over its operations.
The Court of Appeals Decision in CA-G.R. Nos. 87100, 87111 and 87203
In the assailed August 18, 2006 Decision, the Court of Appeals dismissed the petitions in CA-G.R. SP
Nos. 87100, 87111 and 87203 for lack of merit. The appellate court upheld the Rehabilitation Court’s
determination of Bayantel’s sustainable debt at US$325 million payable in 19 years. It rejected the
Receiver’s proposal to set the sustainable debt at US$370 million payable in 15 years, and the
proposal of the Avenue Asia Capital Group to set it at US$471 million payable in 12 years.
The Court of Appeals agreed with the Rehabilitation Court that it is reasonable to adopt a level of
sustainable debt that approximates respondent Bayantel’s proposal because the latter is in the best
position to determine the level of sustainable debt that it can manage. It found Bayantel’s proposal
more credible considering that it was prepared using "updated financial information with realistic
cash flow figures."[40] The appellate court noted that Bayantel’s proposal was drafted without
regard for its status as a "niche player" in the telecommunications market and after factoring the
cost of reorganization. In contrast, it expressed concern that the proposals submitted by Avenue
Asia Capital Group and the Receiver might eventually leave Bayantel with an unworkable financial
debt-to-revenue ratio.
The Court of Appeals also confirmed the Rehabilitation Court’s authority to approve, reject,
substitute, or even change the rehabilitation plans submitted by the Receiver and the parties. It
upheld the trial court in adopting the Receiver’s recommendation to limit the equity conversion of
Bayantel’s unsustainable debt to 40% of its paid-up capital. This percentage, the appellate court
explains, is consistent with the constitutional limitation on the allowable foreign equity in Filipino
corporations. It also maintained the write-off of penalties and default interest and recomputation
of Bayantel’s past due interest, as a valid exercise of discretion by the Rehabilitation Court under
the Interim Rules of Procedure on Corporate Rehabilitation (Interim Rules). The appellate court
negated any violation of the pari passu principle with the use of these measures since they shall
apply to all classes of creditors.
As to the claim of the secured creditors in CA-G.R. SP No. 87203, the Court of Appeals ruled that
while rehabilitation is ongoing, the sole control over the security on the receivables and cash flow
of Bayantel is vested in the Rehabilitation Court. To allow otherwise would not only violate the Stay
Order but interfere as well with the duty of the Receiver to "take possession, control and custody
of the debtor’s assets." 41 Ultimately, the Court of Appeals ruled that preference in payment cannot
be accorded the secured creditors since preference applies only in liquidation proceedings.
Discontented, The Bank of New York and the Avenue Asia Capital Group (petitioners in CA-G.R. SP
Nos. 87100 and 87111) filed a Motion for Partial Reconsideration.42 Said motion was, however,
denied in the Resolution dated November 8, 2006.
In the meantime, Express Investments III Private Ltd. and Export Development Canada had filed
before this Court a Petition for Partial Review on Certiorari of the Court of Appeals Decision
docketed as G.R. Nos. 174457-59. According to petitioners, the other secured creditors who were
also petitioners in CA-G.R. SP No. 87203 had not remained in contact with them and had not
authorized them to file further petitions on their behalf.
On December 28, 2006, The Bank of New York and the Avenue Asia Capital Group also filed their
own Petition for Review on Certiorari which was docketed as G.R. Nos. 175418-20.
The Court of Appeals Decision in CA-G.R. SP No. 89894
In CA-G.R. SP No. 89894, the Court of Appeals rendered the assailed Decision dated October 27,
2006 declaring null and void the November 9, 2004 and March 15, 2005 Orders of the Rehabilitation
Court insofar as they defined the powers and functions of the Monitoring Committee.
The appellate court found grave abuse of discretion on the part of the Rehabilitation Court for
conferring upon the Monitoring Committee the power to modify, reverse or overrule the proposals
of Bayantel’s Board of Directors relative to operations. It stressed that the Committee’s functions
are confined to monitoring and overseeing the operations of Bayantel to ensure its compliance with
the terms and conditions of the Rehabilitation Plan. To conform therewith, the appellate court
restated the Committee’s powers as follows:
The Monitoring Committee shall participate with the Receiver in monitoring and overseeing the
operations of Bayantel to ensure compliance by Bayantel with the terms and conditions of the
Rehabilitation Plan. In the event Bayantel fails to meet any of the milestones under the
Rehabilitation Plan or fails to comply with any material provision thereunder, the Monitoring
Committee may, by majority vote, recommend modifications, revisions and substitutions of the
following items:
x x x x43 (Emphasis supplied)
The Court of Appeals likewise approved of the Implementing Term Sheet, clarifying that the same
is not intended to address every contingency that may arise in the implementation of the Plan. It
assured that any doubt in the interpretation of the Term Sheet shall be resolved by the
Rehabilitation Court.
Lastly, the appellate court affirmed the creation of a convertible debt instrument to cover the
unsustainable portion of respondent’s debt. It perceives such instrument as a tool to generate
surplus cash to satisfy Bayantel’s debt under Tranche B. As well, it serves as a buy-back scheme for
the assignment and transfer of credits by the Financial Creditors in a manner that will not unduly
burden Bayantel.
Issues
44 filed
On October 19, 2006, Express Investments III Private Ltd. and Export Development Canada a
Petition for Partial Review on Certiorari which was docketed as G.R. Nos. 174457-59. Said petition,
which seeks the reversal of the August 18, 2006 Decision of the Court of Appeals insofar as it
dismissed the petition of the secured creditors in CA-G.R. SP No. 87203, essentially proffers the
following issues for resolution: (1) whether the claims of secured and unsecured creditors should
be treated pari passu during rehabilitation; (2) whether the pari passu treatment of creditors during
rehabilitation impairs the Assignment Agreement between respondent and petitioners; (3) whether
an impairment in the security position of petitioners can be justified as a valid exercise of police
power.
On the other hand, The Bank of New York and the Avenue Asia Capital Group filed a Petition for
Review on Certiorari docketed as G.R. Nos. 175418-20, to question the appellate court’s August 18,
2006 Decision as well as its November 8, 2006 Resolution in CA-G.R. SP Nos. 87100 and 87111. This
second consolidated petition raises the following issues: (1) whether the Court of Appeals erred in
setting Bayantel’s sustainable debt at US$325 million, payable in 19 years; (2) whether a debtor may
submit a rehabilitation plan in a creditor-initiated rehabilitation; (3) whether the conversion of debt
to equity in excess of 40% of the outstanding capital stock in favor of petitioners violates the
constitutional limit on foreign ownership of a public utility; (4) whether the write-off of respondent’s
penalties and default interest and recomputation of its past due interest violate the pari passu
principle; and (5) whether petitioners are entitled to costs.
On February 22, 2007, respondent Bayantel moved for the consolidation of G.R. Nos. 174457-59
with G.R. Nos. 175418-20. In a Resolution45 dated April 23, 2007, we directed the Division Clerk of
Court to study the feasibility of consolidating said cases. In a Memorandum Report 46 dated May 17,
2007, the First Division Clerk of Court recommended the consolidation of G.R. Nos. 174457-59 with
G.R. Nos. 175418-20.
On May 21, 2007, The Bank of New York, as trustee for the Holders of the Senior Notes, filed a
Petition for Review on Certiorari, docketed as G.R. No. 177270, to assail the October 27, 2006
Decision and March 23, 2007 Resolution of the Court of Appeals in CA-G.R. SP No. 89894. Amplified,
the petition presents the lone issue of whether the Monitoring Committee in this case may exercise
control over Bayantel’s operations.
In a Resolution47 dated June 6, 2007, we directed the Division Clerk of Court to study the feasibility
of consolidating G.R. No. 177270 with G.R. Nos. 174457-59 and G.R. Nos. 175418-20. To avoid
conflicting decisions on related cases, the Assistant Clerk of Court recommended the consolidation
of the three cases. By Resolution48 dated July 11, 2007, the Court ordered the consolidation of G.R.
No. 177270 with G.R. Nos. 174457- 59 and G.R. Nos. 175418-20.
The Parties’ Arguments
In G.R. Nos. 174457-59
The petitioners/secured creditors argue primarily that the pari passu treatment of creditors during
rehabilitation has no basis in law. According to petitioners, all that Presidential Decree No. 902-A49
(PD 902-A) provides is the suspension of all claims against the debtor corporation during
rehabilitation so that the Receiver can exercise his powers free from judicial or extrajudicial
interference. If the equity policy is to be considered at all, they believe that the equity policy should
be construed to accord creditors with similar rights or uniform treatment. In line with this,
petitioners assert priority under the Assignment Agreement to receive from Bayantel’s surplus cash
flow and to be paid in full, ahead of all other creditors.
The petitioners/secured creditors contend that the pari passu treatment of claims impairs the
Omnibus Agreement and the Assignment Agreement. Such impairment, they posit, cannot be
justified as a proper exercise of police power for three reasons: first, there is no law which
authorizes the equal treatment of claims; second, there is no enabling law; and third, it is not
reasonably necessary for the success of the rehabilitation.
Petitioners point out that the Interim Rules mandates instead that the rehabilitation plan shall give
due regard to the interest of the secured creditors. For petitioners, the preservation of Bayantel’s
chattels alone is inadequate to meet said requirement since the value thereof depreciates over
time. They go on to invoke international practices on bankruptcy and rehabilitation which
purportedly recognize the distinction between the rights of secured and unsecured creditors.
Petitioners warn of dire consequences to the international credit standing of the Philippines, the
financial market, and the influx of foreign investments if the pari passu principle would be upheld.
Finally, petitioners maintain that a "Trigger Event" 50 had occurred which rendered respondent’s
obligations due and demandable. Thus, despite their failure to notify respondent of the alleged
Events of Default, petitioners believe that they can rightfully proceed against the securities.
For its part, respondent Bayantel reasons that enforcing preference in payment at this stage of the
rehabilitation would only disrupt the progress it has made so far. It assures petitioners that their
security rights are adequately protected in case the collateral assets are disposed. Respondent adds
that no single payment scheme is applicable in all rehabilitation proceedings and the peculiar
circumstances of its case warrant the pari passu treatment of its creditors.
In G.R. Nos. 175418-20
Mainly, petitioners Bank of New York and Avenue Asia Capital Group impute error on the Court of
Appeals for affirming the Rehabilitation Court’s decision which adopted the sustainable debt level
Bayantel proposed. The court a quo fixed respondent’s sustainable debt at US$325 million payable
within 19 years against the Receiver’s proposal of US$370 million payable in 15 years. Petitioners
dispute Bayantel’s financial projections as unreliable and contrived, designed to bear out a reduced
level of sustainable debt and justify a substantial write-off of its debts. In order to arrive at a
reasonable level of sustainable debt, they believe that the prospective cash flow of Bayantel must
be reckoned against industry standards. Petitioners point out that the Interim Rules only allows the
debtor, in a creditor-initiated petition for corporate rehabilitation, to file a comment or opposition
but not to submit its own rehabilitation plan. They warn that if the fulfillment of the obligation
would be made to depend on the sole will of Bayantel, the entire obligation would be void.
Petitioners fault the trial court for basing the sustainable debt on the state of the
telecommunications industry in the country rather than consulting the financial projections and
business models submitted by petitioners and the Receiver. They stress that the state of the
telecommunications industry is not among those which the court may take judicial notice of by
discretion.
Petitioners maintain that converting the unsustainable debt to 77.7% equity in Bayantel will not
violate the nationality requirement of the 1987 Constitution. They aver that the debts to domestic
bank creditors51 account is US$473 million or 70.18% of Bayantel’s total liabilities. Considering the
substantial write-off of penalties and default interest in the amount of US$34,044,553.00 and past
due interest of US$25,243,381.07, petitioners believe that it is only fair to accord the Financial
Creditors greater equity in Bayantel to compensate for said losses.
Moreover, it is the petitioners’ view that the write-off contravenes the pari passu principle because
they would suffer greater losses than the Omnibus Creditors. According to petitioners,
approximately 82% of the penalties and interests shall be borne by the unsecured creditors and the
Holders of Notes. In the same vein, petitioners protest the recomputation of past due interest in
accordance with the rate proposed by the Receiver. They claim that recomputation would result in
the condonation of 89% of the accrued interest owing them. The Receiver’s report shows that as of
the filing of the present petition, the total accrued interest amounts to US$106,054,197.66, of
which, US$91,100,000 are due the Holders of Notes.
Finally, petitioners reiterate their claim for costs. In its Order dated March 15, 2005, the
Rehabilitation Court awarded costs of suit to petitioner Bank of New York. In particular, it granted
the latter’s prayer for the payment of filing fees, costs of publication and professional fees. Even
then, petitioner bank claims that a huge amount of its expenses for the professional fees of counsels
and advisers remain unpaid. More importantly, it asserts precedence in payment over the preferred
creditors. In the alternative, the Bank of New York prays that the costs of suit be incorporated in the
award to the nonfinancial or trade creditors. Similarly, the Avenue Asia Capital Group seeks
reimbursement for the docket fees, publication expenses and the professional fees it has paid its
counsels and financial adviser. It invokes Article 2208 of the Civil Code and the provisions of the
Indenture as legal bases therefor.
Meanwhile, the secured creditors in G.R. Nos. 174457-59 filed a Memorandum52 dated April 30,
2009 with a prayer for the dismissal of the bondholders’ petition in G.R. Nos. 175418-20. For the
secured creditors, the sustainable debt set by the Courts of Appeals is a more manageable and
realistic undertaking compared to herein petitioners’ proposal. They add that the fact that
Bayantel’s actual revenues are lower than its cash flow projections belies any scheme to avoid
paying its debts in full. The secured creditors agree with the appellate court in limiting the
conversion of the unsustainable debt to a maximum of 40% shares in Bayantel as more in keeping
with the Constitution.
Further, the secured creditors point out that there is nothing in the Interim Rules which prohibits a
debtor company from submitting an alternative rehabilitation plan in creditor-initiated proceedings.
In support of this, they cite Section 22,53 Rule 4 of said rules which permits the debtor to modify its
proposed plan or submit a revised or substitute plan. According to them, Bayantel’s suggestion as
to the terms of payment does not constitute a potestative condition that would render the
obligation void.
The secured creditors, however, join petitioners in protesting the condonation of penalties and
default interest. Rather than observing absolute equality, they insist that the pari passu principle
should be applied such that creditors within the same class are treated alike.
In response, respondent Bayantel submitted on May 21, 2009, a Consolidated Memorandum 54 in
G.R. Nos. 175418-20 and G.R. No. 177270. It practically echoed the ratio decidendi of the Court of
Appeals in dismissing both petitions.
In G.R. Nos. 175418-20, Bayantel defends the Rehabilitation Court for adopting the sustainable debt
level it proposed. Such approval by the court alone, Bayantel reasons, did not make the payment of
its debt a condition whose fulfillment rests on its sole will, as to render the obligation void under
Article 118255 of the Civil Code. Respondent maintains that among the stakeholders, it is in the best
position to determine the level of debt that it can pay. Moreover, it believes that a majority of the
secured creditors are comfortable with the approved sustainable debt since only two of them
appealed. Respondent insists that altering the sustainable debt at this point would be
counterproductive.
Respondent equally opposes the Bondholders’ proposal to reduce the company’s capital
expenditures to between 9% and 11% to make more funds available for debt servicing. This
approach, according to Bayantel, ignores its need to make significant investments in new
infrastructure in order to cope with competitors. Respondent disputes the value of petitioners’
projections which were derived by benchmarking Bayantel’s income, as a company under
rehabilitation, against those of the major players, PLDT and Digitel.
Furthermore, respondent maintains that its rehabilitation plan was based on accurate financial data
and operation reports. It insists that the Interim Rules allows a debtor, in creditor-initiated
rehabilitation proceedings, to submit an alternative plan. It agrees with the Rehabilitation Court’s
decision to restrict conversion of the unsustainable debt to 40% of fully paid-up capital in Bayantel.
Respondent believes that the waiver of penalties and default interest and the recomputation of
past due interest will not violate the pari passu principle because said measures shall apply equally
to all creditors. Lastly, respondent admits limited liability for costs pursuant to the Assignment
Agreement but not for those incurred by petitioners under "non-consensual scenarios."
In G.R. No. 177270
In this petition for review, the Bank of New York, as trustee for the holders of the 13.5% Senior
Notes of respondent Bayantel, challenges the Court of Appeals decision nullifying the Monitoring
Committee’s power to modify, reverse or overrule the decision of Bayantel’s Board of Directors on
certain matters. It invokes Section 23,56 Rule 4 of the Interim Rules as legal basis to justify the
Rehabilitation Court’s grant of extensive powers to the Monitoring Committee. The pertinent
portion of said Rule states:
In approving the rehabilitation plan, the court shall issue the necessary orders or processes for its
immediate and successful implementation. It may impose such terms, conditions, or restrictions as
the effective implementation and monitoring thereof may reasonably require, or for the protection
and preservation of the interests of the creditors should the plan fail.
Petitioner contends that the magnitude and complexity of respondent’s business necessitate close
monitoring of its operations to ensure successful rehabilitation. Specifically, the Bank of New York
expresses concern over Bayantel’s taciturn disposition as regards its budget and expansion costs.
Petitioner believes that such lack of transparency can be addressed by empowering the Monitoring
Committee to approve measures that will ultimately affect respondent’s ability to settle its debts.
Moreover, petitioner assures that the Implementing Term Sheet provides safeguards against the
improvident disapproval by the Monitoring Committee of proposed measures. Petitioner is of the
view that the functions of the Monitoring Committee would be rendered illusory if all
disagreements on key areas would have to be heard by the Rehabilitation Court. Petitioner explains
that the Monitoring Committee’s powers do not in any way supplant those of the Board of Directors.
The Bank of New York claims that it is customary to allow creditors to monitor and supervise the
debtor’s operations as demonstrated by the restructuring experiences of certain Asian countries.
Petitioner submits that the Rehabilitation Court did not intend to give the Monitoring Committee
powers that are concurrent with those of the Receiver on account of the differing interests that
they represent in rehabilitation. It argues that if at all, the court a quo committed a mere error of
judgment not correctible by certiorari. Petitioner adds that even if a petition for certiorari was
proper, the 60-day reglementary period provided by the Rules of Court had already lapsed when
Bayantel filed its petition on May 27, 2005. It contends that Bayantel’s Manifestation and Motion
for Clarification dated December 15, 2004 was in truth a motion for reconsideration which is a
prohibited pleading under Section 1,57 Rule 3 of the Interim Rules. Petitioner concludes that such
pleadings did not toll the period for filing a petition and, therefore, the Rehabilitation Court’s
decision had become final.
In its Consolidated Memorandum dated May 21, 2009, Bayantel counters that Section 23, Rule 4 of
the Interim Rules should be understood as delineating the purpose of the court’s orders and
processes to mere implementation and monitoring of the plan. Respondent opposes any
interpretation of said provision which authorizes the Committee to substitute its judgment for those
of the Board or vest it with powers greater than those of the Receiver. It argues that vesting the
Committee with veto power over certain decisions of the Board would effectively give it control and
management over Bayantel’s operations. The necessary effect, according to Bayantel, is that every
disagreement between the Committee and the Board would have to be settled in court. Respondent
points out that petitioner failed to cite proof of its claim that it is customary among Asian countries
to allow the Monitoring Committee active participation during rehabilitation.
Bayantel perceive the instant petition as an underhanded attempt by petitioner to create a
Management Committee without satisfying the requisites therefor. It reiterates that the functions
of the Monitoring Committee are confined to ensuring that Bayantel meets the debt reduction
milestones under the plan. Respondent avers that even without a Monitoring Committee, it is
obliged under the Plan to comply with certain information covenants and reportorial requirements.
It adds that the Plan provides a mechanism for dispute resolution through which creditors can
enforce compliance.
Penultimately, respondent assails the validity of the Order dated November 9, 2004 for lack of
notice. Allegedly, Bayantel learned of said Order only after petitioner furnished it a copy of its
Compliance to which the same was made an attachment. Thus, respondent insists that the
reglementary period to file an appeal or a petition for certiorari did not run against it.
The Court’s Ruling
In G.R. Nos. 174457-59
Rehabilitation is an attempt to conserve and administer the assets of an insolvent corporation in
the hope of its eventual return from financial stress to solvency.58 It contemplates the continuance
of corporate life and activities in an effort to restore and reinstate the corporation to its former
position of successful operation and liquidity. The purpose of rehabilitation proceedings is precisely
to enable the company to gain a new lease on life and thereby allow creditors to be paid their claims
from its earnings.59
Rehabilitation shall be undertaken when it is shown that the continued operation of the corporation
is economically feasible and its creditors can recover, by way of the present value of payments
projected in the plan, more, if the corporation continues as a going concern than if it is immediately
liquidated.60
The law governing rehabilitation and suspension of actions for claims against corporations is PD
902-A, as amended. On December 15, 2000, the Court promulgated A.M. No. 00-8-10-SC or the
Interim Rules of Procedure on Corporate Rehabilitation, which applies to petitions for rehabilitation
filed by corporations, partnerships and associations pursuant to PD 902-A.
In January 2004, Republic Act No. 8799 (RA 8799), otherwise known as the Securities Regulation
Code, amended Section 5 of PD 902-A, and transferred to the Regional Trial Courts the jurisdiction
of the Securities and Exchange Commission (SEC) over petitions of corporations, partnerships or
associations to be declared in the state of suspension of payments in cases where the corporation,
partnership or association possesses property to cover all its debts but foresees the impossibility of
meeting them when they respectively fall due or in cases where the corporation, partnership or
association has no sufficient assets to cover its liabilities, but is under the management of a
rehabilitation receiver or a management committee.
In order to effectively exercise such jurisdiction, Section 6(c), PD 902-A empowers the Regional Trial
Court to appoint one or more receivers of the property, real and personal, which is the subject of
the pending action before the Commission whenever necessary in order to preserve the rights of
the parties-litigants and/or protect the interest of the investing public and creditors.
Under Section 6, Rule 4 of the Interim Rules, if the court finds the petition to be sufficient in form
and substance, it shall issue, not later than five (5) days from the filing of the petition, an Order with
the following pertinent effects:
(a) appointing a Rehabilitation Receiver and fixing his bond;
(b) staying enforcement of all claims, whether for money or otherwise and whether such
enforcement is by court action or otherwise, against the debtor, its guarantors and sureties not
solidarily liable with the debtor;
(c) prohibiting the debtor from selling, encumbering, transferring, or disposing in any manner any
of its properties except in the ordinary course of business;
(d) prohibiting the debtor from making any payment of its liabilities outstanding as at the date of
filing of the petition; x x x
(Emphasis supplied)
The stay order shall be effective from the date of its issuance until the dismissal of the petition or
the termination of the rehabilitation proceedings.61 Under the Interim Rules, the petition shall be
dismissed if no rehabilitation plan is approved by the court upon the lapse of 180 days from the
date of the initial hearing. The court may grant an extension beyond this period only if it appears by
convincing and compelling evidence that the debtor may successfully be rehabilitated. In no
instance, however, shall the period for approving or disapproving a rehabilitation plan exceed 18
months from the date of filing of the petition.62
On the other hand, Section 27, Rule 4 of the Interim Rules provides when the rehabilitation
proceedings is deemed terminated:
SEC. 27. Termination of Proceedings. – In case of the failure of the debtor to submit the
rehabilitation plan, or the disapproval thereof by the court, or the failure of the rehabilitation of the
debtor because of failure to achieve the desired targets or goals as set forth therein, or the failure
of the said debtor to perform its obligations under the said plan, or a determination that the
rehabilitation plan may no longer be implemented in accordance with its terms, conditions,
restrictions, or assumptions, the court shall upon motion, motu proprio, or upon the
recommendation of the Rehabilitation Receiver, terminate the proceedings. The proceedings shall
also terminate upon the successful implementation of the rehabilitation plan. (Emphasis supplied)
Hence, unless the petition is dismissed for any reason, the stay order shall be effective until the
rehabilitation plan has been successfully implemented. In the meantime, the debtor is prohibited
from paying any of its outstanding liabilities as of the date of the filing of the petition except those
authorized in the plan under Section 24(c), Rule 4 of the Interim Rules.
In this case, in an Order dated April 19, 2004, the Rehabilitation Court held that "[t]he creditors of
Bayantel, whether secured or unsecured, should be treated equally and on the same footing or pari
passu until the rehabilitation proceedings is terminated in accordance with the Interim Rules."63 The
court reiterated this pronouncement in its Decision dated June 28, 2004.
Before us, petitioners contend that such pari passu treatment of claims violates not only the "due
regard" provision in the Interim Rules but also the Contract Clause in the 1987 Constitution.
Petitioners assert precedence in the payment of claims during rehabilitation by virtue of the
Assignment Agreement dated September 19, 1995. Under said Agreement, Bayantel assigned,
charged, conveyed and transferred to a Collateral Agent, the following properties as collateral for
the prompt and complete payment of its obligations to secured creditors:
(i) All land, buildings, machinery and equipment currently owned, and to be acquired in the future
by Bayantel;
(ii) All monies payable to Bayantel under the Project Documents (as the term is defined by the
Omnibus Agreement);
(iii) All Project Documents and all Contract Rights arising thereunder;
(iv) All receivables;
(v) Each of the Accounts (as the term is defined by the Omnibus Agreement);
(vi) All amounts maintained in the Accounts and all monies, securities and instruments deposited
or required to be deposited in the Accounts;
(vii) All other Chattel Paper and Documents;
(viii) All other property, assets and revenues of Bayantel, whether tangible or intangible;
(ix) All General Intangibles; and
(x) All proceeds and products of any and all of the foregoing.64
In particular, petitioners refer to Section 4.02 of the Assignment Agreement as basis for demanding
full payment, ahead of other creditors, out of respondent’s revenue from operations during
rehabilitation. The relevant provision reads:
Section 4.02. Payments Under Contracts and Receivables.
If during the continuance of a Trigger Event the Company shall receive directly from any party to
any Assigned Agreement or from any account debtor or other obligor under any Receivable, any
payments under such agreements or the Receivables, the Company shall receive such payments in
a constructive trust for the benefit of the Secured Parties, shall segregate such payments from its
other funds, and shall forthwith transmit and deliver such payments to the Collateral Agent in the
same form as so received (with any necessary endorsement) along with a description of the sources
of such payments. All amounts received by the Collateral Agent pursuant to this Section 4.02 shall
be applied as set forth in Part L and in the [Inter-creditor] Agreement.65 (Underscoring in the original;
emphasis supplied)
The resolution of the issue at hand rests on a determination of whether secured creditors may
enforce preference in payment during rehabilitation by virtue of a contractual agreement.
Section 6(c), PD 902-A provides that upon the appointment of a management committee,
rehabilitation receiver, board or body, all actions for claims against corporations, partnerships or
associations under management or receivership pending before any court, tribunal, board or body
shall be suspended accordingly.66 The suspension of action for claims against the corporation under
a rehabilitation receiver or management committee embraces all phases of the suit, be it before
the trial court or any tribunal or before this Court.67
The justification for suspension of actions for claims is to enable the management committee or
rehabilitation receiver to effectively exercise its/his powers free from any judicial or extrajudicial
interference that might unduly hinder or prevent the "rescue" of the debtor company. 68 It is
intended to give enough breathing space for the management committee or rehabilitation receiver
to make the business viable again without having to divert attention and resources to litigation in
various fora.69
In the 1990 case of Alemar’s Sibal & Sons, Inc. v. Judge Elbinias,70 the Court first enunciated the
prevailing principle which governs the relationship among creditors during rehabilitation. In said
case, G.A. Yupangco sought the issuance of a writ of execution to implement a final and executory
default judgment in its favor and after Alemar’s Sibal & Sons, Inc. was placed under rehabilitation.
In ordering the stay of execution, the Court held:
During rehabilitation receivership, the assets are held in trust for the equal benefit of all creditors
to preclude one from obtaining an advantage or preference over another by the expediency of an
attachment, execution or otherwise. For what would prevent an alert creditor, upon learning of
the receivership, from rushing posthaste to the courts to secure judgments for the satisfaction of
its claims to the prejudice of the less alert creditors.
As between the creditors, the key phrase is "equality is equity." When a corporation threatened
by bankruptcy is taken over by a receiver, all the creditors should stand on equal footing. Not
anyone of them should be given any preference by paying one or some of them ahead of the
others. This is precisely the reason for the suspension of all pending claims against the corporation
under receivership. Instead of creditors vexing the courts with suits against the distressed firm, they
are directed to file their claims with the receiver who is a duly appointed officer of the SEC. 71
(Emphasis supplied)
Since then, the principle of equality in equity has been cited as the basis for placing secured and
unsecured creditors in equal footing or in pari passu with each other during rehabilitation. In legal
parlance, pari passu is used especially of creditors who, in marshaling assets, are entitled to receive
out of the same fund without any precedence over each other.72
In Rizal Commercial Banking Corporation v. Intermediate Appellate Court, 73 the Court disallowed
the foreclosure of the debtor company’s property after the latter had filed a Petition for
Rehabilitation and Declaration of Suspension of Payments with the SEC. We ruled that whenever a
distressed corporation asks the SEC for rehabilitation and suspension of payments, preferred
creditors may no longer assert preference but shall stand on equal footing with other creditors.
Foreclosure shall be disallowed so as not to prejudice other creditors, or cause discrimination
among them. In 1999, the Court qualified this ruling by stating that preferred creditors of distressed
corporations shall stand on equal footing with all other creditors only after a rehabilitation receiver
or management committee has been appointed. 74 More importantly, the Court laid the guidelines
for the treatment of claims against corporations undergoing rehabilitation:
1. All claims against corporations, partnerships, or associations that are pending before any court,
tribunal, or board, without distinction as to whether or not a creditor is secured or unsecured,
shall be suspended effective upon the appointment of a management committee, rehabilitation
receiver, board, or body in accordance with the provisions of Presidential Decree No. 902-A.
2. Secured creditors retain their preference over unsecured creditors, but enforcement of such
preference is equally suspended upon the appointment of a management committee,
rehabilitation receiver, board, or body. In the event that the assets of the corporation,
partnership, or association are finally liquidated, however, secured and preferred credits under
the applicable provisions of the Civil Code will definitely have preference over unsecured ones. 75
(Emphasis supplied)
Basically, once a management committee or rehabilitation receiver has been appointed in
accordance with PD 902-A, no action for claims may be initiated against a distressed corporation
and those already pending in court shall be suspended in whatever stage they may be.
Notwithstanding, secured creditors shall continue to have preferred status but the enforcement
thereof is likewise held in abeyance. However, if the court later determines that the rehabilitation
of the distressed corporation is no longer feasible and its assets are liquidated, secured claims shall
enjoy priority in payment.
We perceive no good reason to depart from established jurisprudence. While Section 24(d), Rule 4
of the Interim Rules states that contracts and other arrangements between the debtor and its
creditors shall be interpreted as continuing to apply, this holds true only to the extent that they do
not conflict with the provisions of the plan.
Here, the stipulation in the Assignment Agreement to the effect that respondent Bayantel shall pay
petitioners in full and ahead of other creditors out of its cash flow during rehabilitation directly
impinges on the provision of the approved Rehabilitation Plan that "[t]he creditors of Bayantel,
whether secured or unsecured, should be treated equally and on the same footing or pari passu
until the rehabilitation proceedings is terminated in accordance with the Interim Rules."
During rehabilitation, the only payments sanctioned by the Interim Rules are those made to
creditors in accordance with the provisions of the plan. Pertinent to this is Section 5(b), Rule 4 of
the Interim Rules which states that the terms and conditions of the rehabilitation plan shall include
the manner of its implementation, giving due regard to the interests of secured creditors. This very
phrase is what petitioners invoke as basis for demanding priority in payment out of respondent’s
cash flow.
But petitioners’ reliance thereon is misplaced.
By definition, due regard means consideration in a degree appropriate to the demands of a
particular case.76 On the other hand, security interest is a form of interest in property which provides
that the property may be sold on default in order to satisfy the obligation for which the security
interest is given. Often, the term "lien" is used as a synonym, although lien most commonly refers
only to interests providing security that are created by operation of law, not through agreement of
the debtor and creditor. In contrast, the term "security interest" means any interest in property
acquired by contract for the purpose of securing payment or performance of an obligation or
indemnifying against loss or liability.77
Under the Interim Rules, the only pertinent reference to creditor security is found in Section 12,
Rule 4 on relief from, modification or termination of stay order. Said provision states that the
creditor is regarded as lacking adequate protection if it can be shown that: (a) the debtor fails or
refuses to honor a pre-existing agreement with the creditor to keep the property insured; (b) the
debtor fails or refuses to take commercially reasonable steps to maintain the property; or (c) the
property has depreciated to an extent that the creditor is undersecured.
Upon a showing that the creditor is lacking in protection, the court shall order the rehabilitation
receiver to take steps to ensure that the property is insured or maintained or to make payment or
provide replacement security such that the obligation is fully secured. If such arrangements are not
feasible, the court may allow the secured creditor to enforce its claim against the debtor.
Nonetheless, the court may deny the creditor the foregoing remedies if allowing so would prevent
the continuation of the debtor as a going concern or otherwise prevent the approval and
implementation of a rehabilitation plan.78
In the context of the foregoing provisions, "giving due regard to the interests of secured creditors"
primarily entails ensuring that the property comprising the collateral is insured, maintained or
replacement security is provided such that the obligation is fully secured. The reason for this rule is
simple, in the event that the court terminates the proceedings for reasons other than the successful
implementation of the plan, the secured creditors may foreclose the securities and the proceeds
thereof applied to the satisfaction of their preferred claims.
When the Rules of Procedure on Corporate Rehabilitation took effect on January 16, 2009, the "due
regard" provision was amended to read:
SEC. 18. Rehabilitation Plan. – The rehabilitation plan shall include (a) the desired business targets
or goals and the duration and coverage of the rehabilitation; (b) the terms and conditions of such
rehabilitation which shall include the manner of its implementation, giving due regard to the
interests of secured creditors such as, but not limited, to the non-impairment of their security liens
or interests; x x x. (Emphasis supplied)
Despite the additional phrase, however, it is our view that the amendment simply amplifies the
meaning of the "due regard provision" in the Interim Rules. First, the amendment exemplifies what
giving "due regard to the interests of secured creditors" contemplates, mainly, the nonimpairment
of securities. At the same time, the specific reference to "security liens" and "interests," separated
by the disjunctive "or," describes what "the interests of secured creditors" consist of. Again, lien
pertains only to interests providing security that are created by operation of law while security
interests include those acquired by contract for the purpose of securing payment or performance
of an obligation or indemnifying against loss or liability. Lastly, the addition of the phrase "but not
limited" in the amendment shuns a rigid application of the provision by recognizing that "giving due
regard to the interest of secured creditors" may be rendered in other ways than taking care that the
security liens and interests of secured creditors are adequately protected.
In this case, petitioners Express Investments III Private Ltd. And Export Development Canada are
concerned, not so much with the adequacy of the securities offered by respondent, but with the
devaluation of such securities over time. Petitioners fear that the proceeds of respondent’s
collateral would be insufficient to cover their claims in the event of liquidation.
On this point, suffice it to state that petitioners are not without any remedy to address a deficiency
in securities, if and when it comes about. Under Section 12, Rule 4 of the Interim Rules, a secured
creditor may file a motion with the Rehabilitation Court for the modification or termination of the
stay order. If petitioners can show that arrangements to insure or maintain the property or to make
payment or provide additional security therefor is not feasible, the court shall modify the stay order
to allow petitioners to enforce their claim − that is, to foreclose the mortgage and apply the
proceeds thereof to their claims. Be that as it may, the court may deny the creditor this remedy if
allowing so would prevent the continuation of the debtor as a going concern or otherwise prevent
the approval and implementation of a rehabilitation plan.
Indeed, neither the "due regard provision" nor contractual arrangements can shackle the
Rehabilitation Court in determining the best means of rehabilitating a distressed corporation. Truth
be told, the Rehabilitation Court may approve a rehabilitation plan even over the opposition of
creditors holding a majority of the total liabilities of the debtor if, in its judgment, the rehabilitation
of the debtor is feasible and the opposition of the creditors is manifestly unreasonable. In
determining whether or not the opposition of the creditors is manifestly unreasonable, the court
shall consider the following: (a) That the plan would likely provide the objecting class of creditors
with compensation greater than that which they would have received if the assets of the debtor
were sold by a liquidator within a three-month period; (b) That the shareholders or owners of the
debtor lose at least their controlling interest as a result of the plan; and (c) The Rehabilitation
Receiver has recommended approval of the plan.79
According to the Liquidation Analysis80 prepared by KPMG at the request of the Receiver, the Fair
Market Value of respondent’s fixed assets is P18.7 billion while its Forced Liquidation Value is P9.3
billion. Together with cash and receivables in the amount of P911 million, respondent’s total
liquidation assets are valued at P10.2 billion. From this amount, the estimated liquidation return to
the Omnibus Creditors is P6,102,150,000 or approximately 52.9% of their claims in the amount of
P11,539,776,000. Meanwhile, Chattel Creditors can recoup 61% of its claims. As regards the
Unsecured Creditors, they will share in the pool of assets that respondents have acquired since
1998, which were not specifically registered under the Omnibus Agreement Mortgage Supplements.
Said assets are estimated to have a value of P3.5 Billion. This accounts for 10.7% of the Unsecured
Creditors’ claims.
Reckoned from these figures, the Receiver concluded that the shareholders shall receive nothing on
respondent’s liquidation while the latter’s creditors can expect significantly less than full
repayment. Moreover, regardless of whether the shareholders will lose at least their controlling
interest as a result of the plan, petitioners, in their Memorandum dated April 30, 2009, have
signified their conformity with the Court of Appeals decision to limit the conversion of the
unsustainable debt to a maximum of 40% of the fully-paid up capital of respondent corporation.
Lastly, the Receiver not only recommended the approval of the Plan by the Rehabilitation Court, he,
himself, prepared it. The concurrence of these conditions renders the opposition of petitioners
manifestly unreasonable.
As regards the second issue, petitioners submit that the pari passu treatment of claims offends the
Contract Clause under the 1987 Constitution. Article III, Section 10 of the Constitution mandates
that no law impairing the obligation of contracts shall be passed. Any law which enlarges, abridges,
or in any manner changes the intention of the parties, necessarily impairs the contract itself. And
even when the change in the contract is done by indirection, there is impairment nonetheless.81
At this point, it bears stressing that the non-impairment clause is a limitation on the exercise of
legislative power and not of judicial or quasijudicial power. In Lim, Sr. v. Secretary of Agriculture &
Natural Resources, et al.,82 we held:
x x x. For it is well-settled that a law within the meaning of this constitutional provision has reference
primarily to statutes and ordinances of municipal corporations. Executive orders issued by the
President whether derived from his constitutional powers or valid statutes may likewise be
considered as such. It does not cover, therefore, the exercise of the quasi-judicial power of a
department head even if affirmed by the President. The administrative process in such a case
partakes more of an adjudicatory character. It is bereft of any legislative significance. It falls outside
the scope of the non-impairment clause. x x x.83
The prohibition embraces enactments of a governmental law-making body pertaining to its
legislative functions. Strictly speaking, it does not cover the exercise by such law-making body of
quasi-judicial power.
Verily, the Decision dated June 28, 2004 of the Rehabilitation Court is not a proper subject of the
Non-impairment Clause.
In view of the foregoing, we find no need to discuss the third issue posed in this petition
In G.R. Nos. 175418-20
Prefatorily, we restate the time honored principle that in a petition for review on certiorari under
Rule 45 of the Rules of Court, only questions of law may be raised. Thus, in a petition for review on
certiorari, the scope of the Supreme Court's judicial review is limited to reviewing only errors of law,
not of fact.84 It is not our function to weigh all over again evidence already considered in the
proceedings below, our jurisdiction is limited to reviewing only errors of law that may have been
committed by the lower court.85
Before us, petitioners Bank of New York and Avenue Asia Capital Group raise a question of fact
which is not proper in a petition for review on certiorari. A question of law arises when there is
doubt as to what the law is on a certain state of facts, while there is a question of fact when the
doubt arises as to the truth or falsity of the alleged facts. For a question to be one of law, the same
must not involve an examination of the probative value of the evidence presented by the litigants
or any of them. The resolution of the issue must rest solely on what the law provides on the given
set of circumstances. Once it is clear that the issue invites a review of the evidence presented, the
question posed is one of fact.86
Whether the Court of Appeals erred in affirming the sustainable debt fixed by the Rehabilitation
Court is a question of fact that calls for a recalibration of the evidence presented by the parties
before the trial court. In order to resolve said issue, petitioners would have this Court reassess the
state of respondent Bayantel’s finances at the onset of rehabilitation and gauge the practical value
of the plans submitted by the parties vis-à-vis the financial models prepared by the experts engaged
by them. These tasks are certainly not for this Court to accomplish. The resolution of factual issues
is the function of lower courts, whose findings on these matters are received with respect.87 This is
especially true in rehabilitation proceedings where certain courts are designated to hear the case
on account of their expertise and specialized knowledge on the subject matter. Though this doctrine
admits of several exceptions,88 none is applicable in the case at bar
Notably, the Interim Rules is silent on the manner by which the sustainable debt of the debtor shall
be determined. Yet, Section 2 of the Interim Rules prescribe that the Rules shall be liberally
construed to carry out the objectives of Sections 5(d),89 6(c)90 and 6(d)91 of PD 902-A.
Section 5(d), PD 902-A vested jurisdiction upon the SEC over petitions for rehabilitation. Later, RA
8799 or the Securities Regulation Code, amended Section 5(d) of PD 902-A by transferring SEC’s
jurisdiction over said petitions to the RTC. Meanwhile, Section 6(c) of PD 902-A provides for the
appointment of a receiver of the subject property whenever necessary in order to preserve the
rights of the parties and to protect the interest of the investing public and the creditors. Upon the
appointment of such receiver, all actions for claims against the corporation pending before any
court, tribunal, board or body shall be suspended accordingly. On the other hand, Section 5(d), PD
902-A expands the power of the Commission to allow the creation and appointment of a
management committee to undertake the management of the corporation when there is imminent
danger of dissipation, loss, wastage or destruction of assets or other properties or paralyzation of
the business of the corporation which may be prejudicial to the interest of minority stockholders,
parties-litigants or the general public.
The underlying objective behind these provisions is to foster the rehabilitation of the debtor by
insulating it against claims, preserving its assets and taking steps to ensure that the rights of all
parties concerned are adequately protected.
This Court is convinced that the Court of Appeals ruled in accord with this policy when it upheld the
Rehabilitation Court’s determination of respondent’s sustainable debt. We find the sustainable debt
of US$325 million, spread over 19 years, to be a more realistically achievable amount considering
respondent’s modest revenue projections. Bayantel projected a constant rise in its revenues at the
range of 1.16%-4.91% with periodic reverses every two years.92 On the other hand, petitioner’s
proposal of a sustainable debt of US$471 million to be paid in 12 years and the Receiver’s proposal
of US$370 million to be paid in 15 years betray an over optimism that could leave Bayantel with
nothing to spend for its operations.
Next, petitioners contest the admission of respondent’s rehabilitation plan for being filed in
violation of the Interim Rules. It is petitioner’s view that in a creditor-initiated petition for
rehabilitation, the debtor may only submit either a comment or opposition but not its own
rehabilitation plan.
We cannot agree.
Rule 4 of the Interim Rules treats of rehabilitation in general, without distinction as to who between
the debtor and the creditor initiated the petition. Nowhere in said Rule is there any provision that
prohibits the debtor in a creditor-initiated petition to file its own rehabilitation plan for
consideration by the court. Quite the reverse, one of the functions and powers of the rehabilitation
receiver under Section 14(m) of said Rule is to study the rehabilitation plan proposed by the debtor
or any rehabilitation plan submitted during the proceedings, together with any comments made
thereon. This provision makes particular reference to a debtor-initiated proceeding in which the
debtor principally files a rehabilitation plan. In such case, the receiver is tasked, among other things,
to study the rehabilitation plan presented by the debtor along with any rehabilitation plan
submitted during the proceedings. This implies that the creditors of the distressed corporation, and
even the receiver, may file their respective rehabilitation plans. We perceive no good reason why
the same option should not be available, by analogy, to a debtor in creditor-initiated proceedings,
which is also found in Rule 4 of the Interim Rules.
Third, petitioners fault the Court of Appeals for ruling that the debt-toequity conversion rate of
77.7%, as proposed by The Bank of New York, violates the Filipinization provision of the
Constitution. Petitioners explain that the acquisition of shares by foreign Omnibus and Financial
Creditors shall be done, both directly and indirectly in order to meet the control test principle under
RA 704293 or the Foreign Investments Act of 1991. Under the proposed structure, said creditors shall
own 40% of the outstanding capital stock of the telecommunications company on a direct basis,
while the remaining 40% of shares shall be registered to a holding company that shall retain, on a
direct basis, the other 60% equity reserved for Filipino citizens.
Moreover, petitioners maintain that it is only fair to impose upon the Omnibus and Financial
Creditors a bigger equity conversion in Bayantel considering that petitioners will bear the bulk of
the accrued interests and penalties to be written off. Initially, the Rehabilitation Court approved the
Receiver’s recommendation to write-off interests and penalties in the amount of US$34,044,553.00.
The Rehabilitation Court likewise ordered a re-computation of past due interest in accordance with
the rate proposed by the Receiver. Following this, petitioners estimate the total unpaid accrued
interest of Bayantel as of July 30, 2003 to be at US$140,098,750.66 while the Rehabilitation Court
arrived at the total amount of past due interest and penalties of US$114,855,369.59 upon
recomputation. This makes for a difference of US$25,243,381.07 which, petitioners claim,
represents an additional write-off to be borne by them for a total write-off of US$59,287,934.07.
The provision adverted to is Article XII, Section 11 of the 1987 Constitution which states:
SEC. 11. 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 in character or for a
longer period than fifty years. Neither shall any such franchise or right be granted except under the
condition that it shall be subject to amendment, alteration, or repeal by the Congress when the
common good so requires. The State shall encourage equity participation in public utilities by the
general public. The participation of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its capital, and all the executive and
managing officers of such corporation or association must be citizens of the Philippines.
This provision explicitly reserves to Filipino citizens control over public utilities, pursuant to an
overriding economic goal of the 1987 Constitution: to "conserve and develop our patrimony" and
ensure "a selfreliant and independent national economy effectively controlled by Filipinos."94
In the recent case of Gamboa v. Teves,95 the Court settled once and for all the meaning of "capital"
in the above-quoted Constitutional provision limiting foreign ownership in public utilities. In said
case, we held that considering that common shares have voting rights which translate to control as
opposed to preferred shares which usually have no voting rights, the term "capital" in Section 11,
Article XII of the Constitution refers only to common shares. However, if the preferred shares also
have the right to vote in the election of directors, then the term "capital" shall include such
preferred shares because the right to participate in the control or management of the corporation
is exercised through the right to vote in the election of directors. In short, the term "capital" in
Section 11, Article XII of the Constitution refers only to shares of stock that can vote in the election
of directors.
Applying this, two steps must be followed in order to determine whether the conversion of debt to
equity in excess of 40% of the outstanding capital stock violates the constitutional limit on foreign
ownership of a public utility: First, identify into which class of shares the debt shall be converted,
whether common shares, preferred shares that have the right to vote in the election of directors or
non-voting preferred shares; Second, determine the number of shares with voting right held by
foreign entities prior to conversion. If upon conversion, the total number of shares held by foreign
entities exceeds 40% of the capital stock with voting rights, the constitutional limit on foreign
ownership is violated. Otherwise, the conversion shall be respected.
In its Rehabilitation Plan,96 among the material financial commitments made by respondent
Bayantel is that its shareholders shall "relinquish the agreed-upon amount of common stock[s] as
payment to Unsecured Creditors as per the Term Sheet." 97 Evidently, the parties intend to convert
the unsustainable portion of respondent's debt into common stocks, which have voting rights. If we
indulge petitioners on their proposal, the Omnibus Creditors which are foreign corporations, shall
have control over 77.7% of Bayantel, a public utility company. This is precisely the scenario
proscribed by the Filipinization provision of the Constitution. Therefore, the Court of Appeals acted
correctly in sustaining the 40% debt-to-equity ceiling on conversion.
As to the fourth issue, petitioners insist that the write-off of the default interest and penalties along
with the re-computation of past due interest violate the pari passu treatment of creditors.
Petitioner’s argument lacks merit.
Section 5(d), Rule 4 of the Interim Rules provides that the rehabilitation plan shall include the means
for the execution of the rehabilitation plan, which may include conversion of the debts or any
portion thereof to equity, restructuring of the debts, dacion en pago, or sale of assets or of the
controlling interest.
Debt restructuring may involve conversion of the debt or any portion thereof to equity, sale of the
assets of the distressed company and application of the proceeds to the obligation, dacion en pago,
debt relief or reduction, modification of the terms of the loan or a combination of these schemes.
In this case, the approved Rehabilitation Plan provided for a longer period of payment, the
conversion of debt to 40% equity in respondent company, modification of interest rates on the
restructured debt and accrued interest and a write-off or relief from penalties and default interest.
These recommendations by the Receiver are perfectly within the powers of the Rehabilitation Court
to adopt and approve, as it did adopt and approve. In so doing, no reversible error can be attributed
to the Rehabilitation Court.
The pertinent portion of the fallo of said court’s Decision dated June 28, 2004 states:
1. The ruling on the pari passu treatment of all creditors whose claims are subject to restructuring
shall be maintained and shall extend to all payment terms and treatment of past due interest.[98
(Emphasis supplied)
Thus, the court a quo provided for a uniform application of the pari passu principle among creditor
claims and the terms by which they shall be paid, including past due interest. This is consistent with
the interpretation accorded by jurisprudence to the pari passu principle that during rehabilitation,
the assets of the distressed corporation are held in trust for the equal benefit of all creditors to
preclude one from obtaining an advantage or preference over another. All creditors should stand
on equal footing. Not any one of them should be given preference by paying one or some of them
ahead of the others.99
As applied to this case, the pari passu treatment of claims during rehabilitation entitles all creditors,
whether secured or unsecured, to receive payment out of Bayantel’s cash flow. Despite their
preferred position, therefore, the secured creditors shall not be paid ahead of the unsecured
creditors but shall receive payment only in the proportion owing to them.
In any event, the debt restructuring schemes complained of shall be implemented among all
creditors regardless of class. Both secured and unsecured creditors shall suffer a write-off of
penalties and default interest and the escalating interest rates shall be equally imposed on them.
We repeat, the commitment embodied in the pari passu principle only goes so far as to ensure that
the assets of the distressed corporation are held in trust for the equal benefit of all creditors. It does
not espouse absolute equality in all aspects of debt restructuring.
As regards petitioners’ claims for costs, petitioner Bank of New York filed before the Rehabilitation
Court a Notice of Claim100 dated February 19, 2004 for the payment of US$1,255,851.30,
representing filing fee, deposit for expenses and the professional fees of its counsels and financial
advisers. Earlier, said bank had filed a claim for the payment of US$863,829.98 for professional fees
of its counsels and professional advisers and P2,850,305.00 for docket fees and publication
expenses. On its end, the Avenue Asia Capital Group claims a total of US$535,075.64 to defray the
professional fees of its financial adviser, Price Waterhouse & Cooper and the Bondholder
Communications Group.
In an Order101 dated March 15, 2005, the Rehabilitation Court approved the claims for costs of
petitioner Bank of New York as follows:
i. filing fees of P2,701,750.00 as evidenced by O.R. Nos. 18463998, 18466286 and 0480246 all
dated August 13, 2003 of the Regional Trial Court (of Pasig City);
ii. costs of publication of the Stay Order in the amount of P47,550.00 as evidenced by O.R. No.
86384 dated August 13, 2003 of the Peoples Independent Media, Inc., the same being judicial
costs authorized under Sec. 1, Rule 142 of the Rules of Court;
iii. payments of professional fees to its Philippine Counsel, Belo Gozon Elma Parel Asuncion &
Lucila, in the total amount of US$152,784.32 as evidenced by the Affidavit of Atty. Roberto Rafael
V. Lucila and the Statements of Account attached thereto;
which the Court considers to be reasonable and finds authorized under Sec. 6.11 and 6.12 of the
Indenture attached as Annex "E" to the Petition;
The Receiver is hereby directed to cause the settlement of payment of the accounts within a period
of sixteen (16) months from receipt of this Order.102
The trial court made no pronouncement on the claims for cost of petitioner Avenue Asia Capital
Group, either in the same Order or in a subsequent order.
Before us, petitioners reiterate their claims for costs based on Sections 6.11103 and 6.12104 of the
Indenture105 dated July 22, 1999, which was executed by respondent in their favor.
It bears stressing at this point that the subject of petitioners’ appeal before the Court of Appeals
was the Rehabilitation Court’s Decision dated June 28, 2004. Said Decision, however, bore no
discussion on either petitioners’ claim for costs from which they may appeal. Notably, the assailed
Order of the Rehabilitation Court was promulgated on March 15, 2005 or four (4) months after
petitioners had appealed the Decision dated June 28, 2004 to the Court of Appeals on November
16, 2004. Evidently, the appellate court could not have acquired jurisdiction to review said Order.
Nonetheless, we doubt the propriety of the Rehabilitation Court’s award for costs. A perusal of the
Order dated March 15, 2005 reveals that the award to petitioner Bank of New York was made
pursuant to Section 1, Rule 142 of the Rules of Court, which states:
SECTION 1. Costs ordinarily follow results of suit.- Unless otherwise provided in these Rules, costs
shall be allowed to the prevailing party as a matter of course, but the court shall have power, for
special reasons, to adjudge that either party shall pay the costs of an action, or that the same be
divided, as may be equitable. No costs shall be allowed against the Republic of the Philippines unless
otherwise provided by law. (Emphasis supplied)
However, there is no prevailing party in rehabilitation proceedings which is non-adversarial in
nature.106 Unlike in adversarial proceedings, the court in rehabilitation proceedings appoints a
receiver to study the best means to revive the debtor and to ensure that the value of the debtor’s
property is reasonably maintained pending the determination of whether or not the debtor should
be rehabilitated, as well as implement the rehabilitation plan after its approval.107 The main thrust
of rehabilitation is not to adjudicate opposing claims but to restore the debtor to a position of
successful operation and solvency. Under the Interim Rules, reasonable fees and expenses are
allowed the Receiver and the persons hired by him,108 for those expenses incurred in the ordinary
course of business of the debtor after the issuance of the stay order but excluding interest to
creditors.109
Moreover, while it is true that the Indenture between petitioners and respondent corporation
authorizes the Trustee to file proofs of claim for the payment of reasonable expenses and
disbursements of the Trustee, its agents and counsel, accountants and experts, such remedy is
available only in cases where the Trustee files a collection suit against respondent company.
Indubitably, the rehabilitation proceedings in the case at bar is not a collection suit, which is
adversarial in nature.
In G.R. No. 177270
At issue in this petition for review on certiorari is the extent of power that the Monitoring
Committee can exercise.
The pertinent portion of the fallo of the Decision dated June 28, 2004 provides:
6. A Monitoring Committee shall be formed composed of representatives from all classes of the
restructured debt. The Rehabilitation Receiver’s role shall be limited to the powers of monitoring
and oversight as provided in the Interim Rules. All powers provided for in the Report and
Recommendations, which exceed the monitoring and oversight functions mandated by the Interim
Rules shall be amended accordingly.110
On October 15, 2004, petitioner Bank of New York filed a Manifestation with the Rehabilitation
Court for the creation of a monitoring committee in accordance with the aforequoted
pronouncement. Petitioner espouses the view that it is essential to "provide for a strong and
effective Monitoring Committee x x x which gives the Financial Creditors meaningful and substantial
participation in Bayantel."111 It went on to propose the powers that the Monitoring Committee
should possess, specifically:
The role of the Monitoring Committee shall be to work with the Receiver (on precise terms to be
agreed as discussed below) to Oversee the actions of the BTI New Board of Directors, making key
Decisions and approving, amongst other things,
(i) Any proposed Events of Rescheduling;
(ii) Any other proposed actions by the receiver on a payment default;
(iii) Operating Expenses Budgets;
(iv) Capital Expenditure Budgets;
(v) Asset Sales Programs; and
(vi) Terms of Incentive Scheme for New Management and Management Targets. 112
Subsequently, in an Order113 dated November 9, 2004, the Rehabilitation Court adopted petitioner’s
proposal by constituting a Monitoring Committee that
shall participate with the Receiver in monitoring and overseeing the actions of the Board of
Directors of Bayantel and may, by majority vote, adopt, modify, revise or substitute any of the
following items:
(1) any proposed Annual OPEX Budgets;
(2) any proposed Annual CAPEX Budgets;
(3) any proposed Reschedule;
(4) any proposed actions by the Receiver on a payment default;
(5) terms of Management Incentivisation Scheme and Management Targets;
(6) the EBITDA/Revenue ratios set by the Bayantel Board of Directors; and,
(7) any other proposed actions by the Bayantel Board of Directors including, without limitation,
issuance of new shares, sale of core and non-core assets, change of business, etc. that will
materially affect the terms and conditions of the rehabilitation plan and its implementation.114
(Emphasis supplied)
From said Order, respondent Bayantel filed a Manifestation and Motion for Clarification while the
secured creditors moved for an increase in the membership of the monitoring committee from
three to five members. For his part, the Receiver submitted a Compliance and Manifestation dated
January 10, 2005.
In an Order115 dated March 15, 2005, the Rehabilitation Court affirmed the creation of a monitoring
committee but denied the motion for the appointment of additional members therein. It also made
the following dispositions relative to the functions of the Monitoring Committee:
(d) to approve the Implementing Term Sheet submitted by the Receiver subject to the following
conditions:
xxxx
ii. the Receiver shall design and formulate with the participation of the Monitoring Committee
and Bayantel the convertible debt instrument, as directed of him in the earlier Order of November
9, 2004, for the unsustainable portion of the restructured debt of Bayantel and submit the same to
the Court within thirty (30) days from receipt of this Order. Costs, expenses and taxes that may be
due on the execution of the convertible debt instrument shall be charged to Bayantel as costs of
the rehabilitation proceedings;
xxxx
iv. the Receiver shall devise a mode or procedure whereby the Monitoring Committee can have
immediate and direct access to any information that the Receiver has obtained or received from
Bayantel or the Monitoring Accountant in regard to the management and business operations of
Bayantel;
v. the trading of debt mentioned in the Implementing Term Sheet shall be governed by the pre-
petition documents which do not conflict with the Decision of this Court and provided that no
transfer shall be made to the Bayantel Group Companies, or any controlling shareholders thereof
including Bayan Telecommunications Holdings Corporation ("BTHC"); however, any "buy back"
scheme as may be approved by the Monitoring Committee and Bayantel shall be open to all
creditors whether secured or unsecured;116 (Emphasis supplied)
On appeal, the Court of Appeals nullified the Orders dated November 9, 2004 and March 15, 2005
insofar as they defined the powers and functions of the Monitoring Committee. The appellate court
ruled that the Rehabilitation Court committed grave abuse of discretion in vesting the Monitoring
Committee with powers beyond monitoring and overseeing Bayantel’s operations.
Before us, petitioner contends that the Rehabilitation Court intended for the Monitoring Committee
to exercise powers greater than those of the Receiver.
We find no merit in petitioner’s argument.
In the Decision dated June 28, 2004, the Rehabilitation Court discussed the circumstances
surrounding the creation of the monitoring committee, thus:
Both Bayantel and the Opposing Creditors contend that the Rehabilitation Receiver, under his
Report and Recommendations, appear to be vested with too much discretion in the implementation
of his proposed rehabilitation plan. Bayantel and the Opposing Creditors for one, argue against the
power of the Rehabilitation Receiver to be able to further restructure Restructured Debt as well as
the Rehabilitation Receiver's power relating to matters of Bayantel’s budget.
The [c]ourt wishes to stress that the Interim Rules prohibit the Rehabilitation Receiver from taking
over the management and control of the company under rehabilitation, and limit his role to merely
overseeing and monitoring the operations of the company (Section 14, Rule 4, Interim Rules).
However, the [c]ourt also appreciates that the Rehabilitation Receiver must oversee the
implementation of the rehabilitation plan as approved by the [c]ourt. In line with petitioner’s
proposal, the creation of a Monitoring Committee composed of representatives from all classes
of the restructured debt addresses the concerns raised by the creditors.117 (Emphasis supplied)
It can be gleaned from the foregoing that the Rehabilitation Court’s decision to form a monitoring
committee was borne out of creditors’ concerns over the possession of vast powers by the Receiver.
While the Rehabilitation Court was quick to delineate the Receiver’s authority, it nevertheless,
underscored the value of his role in overseeing the implementation of the Plan. It was on this
premise that the Rehabilitation Court appointed the Monitoring Committee - to "[address] the
concerns raised by the creditors." Yet, in its Orders dated November 9, 2004 and March 15, 2005,
the Rehabilitation Court equipped the Monitoring Committee with powers well beyond those of the
Receiver’s. Apart from control over respondent’s budget, the Monitoring Committee may also
adopt, modify, revise or even substitute any other proposed actions by respondent’s Board of
Directors, including, without limitation issuance of new shares, sale of core and non-core assets,
change of business and others that will materially affect the terms and conditions of the
rehabilitation plan and its implementation. Ironically, the court a quo diluted the seeming
concentration of power in the hands of the Receiver but appointed a Committee possessed of even
wider discretion over respondent’s operations.
From all indications, however, the tenor of the Rehabilitation Court’s Decision dated June 28, 2004
does not contemplate the creation of a Monitoring Committee with broader powers than the
Receiver. As the name of the Monitoring Committee itself suggests, its job is "to watch, observe or
check especially for a special purpose."118 In the context of the Decision dated June 28, 2004, the
fundamental task of the Monitoring Committee herein is to oversee the implementation of the
rehabilitation plan as approved by the court. This should not be confused with the functions of the
Receiver under the Interim Rules or a management committee under PD 902-A.
dissipation, loss, wastage or destruction of assets or other properties or paralyzation of business
operations of such corporations which may be prejudicial to the interest of minority stockholders,
parties-litigants or the general public. In the case of corporations supervised or regulated by
government agencies, such as banks and insurance companies, the appointment shall be made
upon the request of the government agency concerned. Otherwise, the Rehabilitation Court may,
upon petition or motu proprio, appoint such management committee.
The management committee or rehabilitation receiver, board or body shall have the following
powers: (1) to take custody of, and control over, all the existing assets and property of the distressed
corporation; (2) to evaluate the existing assets and liabilities, earnings and operations of the
corporation; (3) to determine the best way to salvage and protect the interest of the investors and
creditors; (4) to study, review and evaluate the feasibility of continuing operations and restructure
and rehabilitate such entities if determined to be feasible by the Rehabilitation Court; and (5) it may
overrule or revoke the actions of the previous management and board of directors of the entity or
entities under management notwithstanding any provision of law, articles of incorporation or by-
laws to the contrary.1âwphi1
In this case, petitioner neither filed a petition for the appointment of a management committee nor
presented evidence to show that there is imminent danger of dissipation, loss, wastage or
destruction of assets or other properties or paralyzation of business operations of respondent
corporation which may be prejudicial to the interest of the minority stockholders, the creditors or
the public. Unless petitioner satisfies these requisites, we cannot sanction the exercise by the
Monitoring Committee of powers that will amount to management of respondent’s operations.
WHEREFORE, the Court hereby RESOLVES to dispose of these consolidated petitions, as follows:
(1) The petition for review on certiorari in G.R. Nos. 174457-59 is DENIED. The Decision dated
August 18, 2006 of the Court of Appeals in CA-G.R. SP No. 87203 is AFFIRMED;
(2) The petition for review on certiorari in G.R. Nos. 175418-20 is DENIED. The Decision dated
August 18, 2006 and Resolution dated November 8, 2006 of the Court of Appeals in CA-G.R. SP
Nos. 87100 and 87111 are AFFIRMED; and
(3) The petition for review on certiorari in G.R. No. 177270 is DENIED. The Decision dated October
27, 2006 and Resolution dated March 23, 2007 of the Court of Appeals in CA-G.R. SP No. 89894
are AFFIRMED.
No pronouncement as to costs.
SO ORDERED.

Under Section 14, Rule 4 of the Interim Rules, the Receiver shall not take over the management and
control of the debtor but shall closely oversee and monitor its operations during the pendency of
the rehabilitation proceeding. The Rehabilitation Receiver shall be considered an officer of the court
and his core duty is to assess how best to rehabilitate the debtor and to preserve its assets pending
the determination of whether or not it should be rehabilitated and to implement the approved plan.

It is a basic precept in Corporation Law that the corporate powers of all corporations formed under
Batas Pambansa Blg. 68 or the Corporation Code shall be exercised, all business conducted and all
property of such corporations controlled and held by the board of directors or trustees.
Nonetheless, PD 902-A presents an exception to this rule.

Section 6(d)119 of PD 902-A empowers the Rehabilitation Court to create and appoint a management
committee to undertake the management of corporations when there is imminent danger of
TRANSPO – CONSTI PROVISIONS - EXCLUSIVITY
G.R. No. 168914 July 4, 2007
METROPOLITAN CEBU WATER DISTRICT (MCWD), Petitioner,
vs.
MARGARITA A. ADALA, Respondent.
DECISION
CARPIO MORALES, J.:
The Decision of the Regional Trial Court (RTC) of Cebu dated February 10, 2005, which affirmed in
toto the Decision of the National Water Resources Board (NWRB) dated September 22, 2003 in favor
of Margarita A. Adala, respondent, is being challenged in the present petition for review on
certiorari.
Respondent filed on October 24, 2002 an application with the NWRB for the issuance of a Certificate
of Public Convenience (CPC) to operate and maintain waterworks system in sitios San Vicente,
Fatima, and Sambag in Barangay Bulacao, Cebu City.
At the initial hearing of December 16, 2002 during which respondent submitted proof of compliance
with jurisdictional requirements of notice and publication, herein petitioner Metropolitan Cebu
Water District, a government-owned and controlled corporation created pursuant to P.D. 1981
which took effect upon its issuance by then President Marcos on May 25, 1973, as amended,
appeared through its lawyers to oppose the application.
While petitioner filed a formal opposition by mail, a copy thereof had not, on December 16, 2002,
yet been received by the NWRB, the day of the hearing. Counsel for respondent, who received a
copy of petitioner’s Opposition dated December 12, 2002 earlier that morning, volunteered to give
a copy thereof to the hearing officer.2
In its Opposition, petitioner prayed for the denial of respondent’s application on the following
grounds: (1) petitioner’s Board of Directors had not consented to the issuance of the franchise
applied for, such consent being a mandatory condition pursuant to P.D. 198, (2) the proposed
waterworks would interfere with petitioner’s water supply which it has the right to protect, and (3)
the water needs of the residents in the subject area was already being well served by petitioner.
After hearing and an ocular inspection of the area, the NWRB, by Decision dated September 22,
2003, dismissed petitioner’s Opposition "for lack of merit and/or failure to state the cause of
action"3 and ruled in favor of respondent as follows:
PREMISES ALL CONSIDERED, and finding that Applicant is legally and financially qualified to operate
and maintain the subject waterworks system, and that said operation shall redound to the benefit
of the of the [sic] consumers of Sitio’s San Vicente, Fatima and Sambag at Bulacao Pardo, Cebu City,
thereby promoting public service in a proper and suitable manner, the instant application for a
Certificate of Public Convenience (CPC) is, hereby, GRANTED for a period of five (5) years with
authority to charge the proposed rates herein set effective upon approval as follows:
Consumption Blocks Proposed Rates
0-10 cu. m. P125.00(min. charge)
11-20 cu. m. 13.50 per cu. m.
21-30 cu. m. 14.50 per cu. m.
31-40 cu. m. 35.00 per cu. m.
41-50 cu. m. 37.00 per cu. m.
51-60 cu. m. 38.00 per cu. m.
61-70 cu. m. 40.00 per cu. m.
71-100 cu. m. 45.00 per cu. m.
Over 100 cu. m. 50.00 per cu. m.
The Rules and Regulations, hereto, attached for the operation of the waterworks system should be
strictly complied with.
Since the average production is below average day demand, it is recommended to construct another
well or increase the well horsepower from 1.5 - 3.00 Hp to satisfy the water requirement of the
consumers.
Moreover, the rates herein approved should be posted by GRANTEE at conspicuous places within
the area serviced by it, within seven (7) calendar days from notice of this Decision.
SO ORDERED.4
Its motion for reconsideration having been denied by the NWRB by Resolution of May 17, 2004,
petitioner appealed the case to the RTC of Cebu City. As mentioned early on, the RTC denied the
appeal and upheld the Decision of the NWRB by Decision dated February 10, 2005. And the RTC
denied too petitioner’s motion for reconsideration by Order of May 13, 2005.
Hence, the present petition for review raising the following questions of law:
i. WHETHER OR NOT THE CONSENT OF THE BOARD OF DIRECTORS OF THE WATER DISTRICT IS A
CONDITION SINE QUA NON TO THE GRANT OF CERTIFICATE OF PUBLIC CONVENIENCE BY THE
NATIONAL WATER RESOURCES BOARD UPON OPERATORS OF WATERWORKS WITHIN THE
SERVICE AREA OF THE WATER DISTRICT?
ii. WHETHER THE TERM FRANCHISE AS USED IN SECTION 47 OF PRESIDENTIAL DECREE 198, AS
AMENDED MEANS A FRANCHISE GRANTED BY CONGRESS THROUGH LEGISLATION ONLY OR DOES
IT ALSO INCLUDE IN ITS MEANING A CERTIFICATE OF PUBLIC CONVENIENCE ISSUED BY THE
NATIONAL WATER RESOURCES BOARD FOR THE MAINTENANCE OF WATERWORKS SYSTEM OR
WATER SUPPLY SERVICE?5
Before discussing these substantive issues, a resolution of the procedural grounds raised by
respondent for the outright denial of the petition is in order.
By respondent’s claim, petitioner’s General Manager, Engineer Armando H. Paredes, who filed the
present petition and signed the accompanying verification and certification of non-forum shopping,
was not specifically authorized for that purpose. Respondent cites Premium Marble Resources v.
Court of Appeals6 where this Court held that, in the absence of a board resolution authorizing a
person to act for and in behalf of a corporation, the action filed in its behalf must fail since "the
power of the corporation to sue and be sued in any court is lodged with the board of directors that
exercises its corporate powers."
Respondent likewise cites ABS-CBN Broadcasting Corporation v. Court of Appeals7 where this Court
held that "[f]or such officers to be deemed fully clothed by the corporation to exercise a power of
the Board, the latter must specially authorize them to do so." (Emphasis supplied by respondent)
That there is a board resolution authorizing Engineer Paredes to file cases in behalf of petitioner is
not disputed. Attached to the petition is petitioner’s Board of Director’s Resolution No. 015-2004,
the relevant portion of which states:
RESOLVE[D], AS IT IS HEREBY RESOLVED, to authorize the General Manager, ENGR. ARMANDO H.
PAREDES, to file in behalf of the Metropolitan Cebu Water District expropriation and other cases
and to affirm and confirm above-stated authority with respect to previous cases filed by MCWD.
x x x x8 (Emphasis and underscoring supplied)
To respondent, however, the board resolution is invalid and ineffective for being a roving authority
and not a specific resolution pursuant to the ruling in ABS-CBN.
That the subject board resolution does not authorize Engineer Paredes to file the instant petition in
particular but "expropriation and other cases" does not, by itself, render the authorization invalid
or ineffective.
In BA Savings Bank v. Sia,9 the therein board resolution, couched in words similar to the questioned
resolution, authorized persons to represent the corporation, not for a specific case, but for a general
class of cases. Significantly, the Court upheld its validity:
In the present case, the corporation's board of directors issued a Resolution specifically
authorizing its lawyers "to act as their agents in any action or proceeding before the Supreme
Court, the Court of Appeals, or any other tribunal or agency[;] and to sign, execute and deliver in
connection therewith the necessary pleadings, motions, verification, affidavit of merit, certificate
of non-forum shopping and other instruments necessary for such action and proceeding." The
Resolution was sufficient to vest such persons with the authority to bind the corporation and
was specific enough as to the acts they were empowered to do. (Emphasis and underscoring
supplied, italics in the original)
Nonetheless, while the questioned resolution sufficiently identifies the kind of cases which Engineer
Paredes may file in petitioner’s behalf, the same does not authorize him for the specific act of
signing verifications and certifications against forum shopping. For it merely authorizes Engineer
Paredes to file cases in behalf of the corporation. There is no mention of signing verifications and
certifications against forum shopping, or, for that matter, any document of whatever nature.
A board resolution purporting to authorize a person to sign documents in behalf of the corporation
must explicitly vest such authority. BPI Leasing Corporation v. Court of Appeals10 so instructs:
Corporations have no powers except those expressly conferred upon them by the Corporation Code
and those that are implied by or are incidental to its existence. These powers are exercised through
their board of directors and/or duly authorized officers and agents. Hence, physical acts, like the
signing of documents, can be performed only by natural persons duly authorized for the purpose
by corporate bylaws or by specific act of the board of directors.
The records are bereft of the authority of BLC's [BPI Leasing Corporation] counsel to institute the
present petition and to sign the certification of non-forum shopping. While said counsel may be
the counsel of record for BLC, the representation does not vest upon him the authority to execute
the certification on behalf of his client. There must be a resolution issued by the board of directors
that specifically authorizes him to institute the petition and execute the certification, for it is only
then that his actions can be legally binding upon BLC. (Emphasis, italics and underscoring supplied)
It bears noting, moreover, that Rule 13 Section 2 of the Rules of Court merely defines filing as "the
act of presenting the pleading or other paper to the clerk of court." Since the signing of verifications
and certifications against forum shopping is not integral to the act of filing, this may not be deemed
as necessarily included in an authorization merely to file cases.
Engineer Paredes not having been specifically authorized to sign the verification and certification
against forum shopping in petitioner’s behalf, the instant petition may be dismissed outright.
Technicality aside, the petition just the same merits dismissal.
In support of its contention that the consent of its Board of Directors is a condition sine qua non for
the grant of the CPC applied for by respondent, petitioner cites Section 47 of P.D. 19811 which states:
Sec. 47. Exclusive Franchise. — No franchise shall be granted to any other person or agency for
domestic, industrial or commercial water service within the district or any portion thereof unless
and except to the extent that the board of directors of said district consents thereto by resolution
duly adopted, such resolution, however, shall be subject to review by the Administration. (Emphasis
and underscoring supplied)
There being no such consent on the part of its board of directors, petitioner concludes that
respondent’s application for CPC should be denied.
Both parties’ arguments center, in the main, on the scope of the word "franchise" as used in the
above-quoted provision.
Petitioner contends that "franchise" should be broadly interpreted, such that the prohibition
against its grant to other entities without the consent of the district’s board of directors extends to
the issuance of CPCs. A contrary reading, petitioner adds, would result in absurd consequences, for
it would mean that Congress’ power to grant franchises for the operation of waterworks systems
cannot be exercised without the consent of water districts.
Respondent, on the other hand, proffers that the same prohibition only applies to franchises in the
strict sense – those granted by Congress by means of statute – and does not extend to CPCs granted
by agencies such as the NWRB.
Respondent quotes the NWRB Resolution dated May 17, 2004 which distinguished a franchise from
a CPC, thus:
A CPC is formal written authority issued by quasi-judicial bodies for the operation and maintenance
of a public utility for which a franchise is not required by law and a CPC issued by this Board is an
authority to operate and maintain a waterworks system or water supply service. On the other hand,
a franchise is privilege or authority to operate appropriate private property for public use vested by
Congress through legislation. Clearly, therefore, a CPC is different from a franchise and Section 47
of Presidential Decree 198 refers only to franchise. Accordingly, the possession of franchise by a
water district does not bar the issuance of a CPC for an area covered by the water district.
(Emphasis and underscoring supplied by respondent)
Petitioner’s position that an overly strict construction of the term "franchise" as used in Section 47
of P.D. 198 would lead to an absurd result impresses. If franchises, in this context, were strictly
understood to mean an authorization issuing directly from the legislature, it would follow that, while
Congress cannot issue franchises for operating waterworks systems without the water district’s
consent, the NWRB may keep on issuing CPCs authorizing the very same act even without such
consent. In effect, not only would the NWRB be subject to less constraints than Congress in issuing
franchises. The exclusive character of the franchise provided for by Section 47 would be illusory.
Moreover, this Court, in Philippine Airlines, Inc. v. Civil Aeronautics Board,12 has construed the term
"franchise" broadly so as to include, not only authorizations issuing directly from Congress in the
form of statute, but also those granted by administrative agencies to which the power to grant
franchises has been delegated by Congress, to wit:
Congress has granted certain administrative agencies the power to grant licenses for, or to
authorize the operation of certain public utilities. With the growing complexity of modern life,
the multiplication of the subjects of governmental regulation, and the increased difficulty of
administering the laws, there is a constantly growing tendency towards the delegation of greater
powers by the legislature, and towards the approval of the practice by the courts. It is generally
recognized that a franchise may be derived indirectly from the state through a duly designated
agency, and to this extent, the power to grant franchises has frequently been delegated, even to
agencies other than those of a legislative nature. In pursuance of this, it has been held that
privileges conferred by grant by local authorities as agents for the state constitute as much a
legislative franchise as though the grant had been made by an act of the Legislature.13
That the legislative authority – in this instance, then President Marcos14 – intended to delegate its
power to issue franchises in the case of water districts is clear from the fact that, pursuant to the
procedure outlined in P.D. 198, it no longer plays a direct role in authorizing the formation and
maintenance of water districts, it having vested the same to local legislative bodies and the Local
Water Utilities Administration (LWUA).
Sections 6 and 7 of P.D. 198, as amended, state:
SECTION 6. Formation of District. — This Act is the source of authorization and power to form and
maintain a district. Once formed, a district is subject to the provisions of this Act and not under the
jurisdiction of any political subdivision. For purposes of this Act, a district shall be considered as a
quasi-public corporation performing public service and supplying public wants. As such, a district
shall exercise the powers, rights and privileges given to private corporations under existing laws, in
addition to the powers granted in, and subject to such restrictions imposed, under this Act. To form
a district, the legislative body of any city, municipality or province shall enact a resolution
containing the following:
(a) The name of the local water district, which shall include the name of the city, municipality, or
province, or region thereof, served by said system, followed by the words "Water District".
(b) A description of the boundary of the district. In the case of a city or municipality, such
boundary may include all lands within the city or municipality. A district may include one or more
municipalities, cities or provinces, or portions thereof: Provided, That such municipalities, cities
or provinces, or portions thereof, cover a contiguous area.
(c) A statement completely transferring any and all waterworks and/or sewerage facilities
managed, operated by or under the control of such city, municipality or province to such district
upon the filing of resolution forming the district.
(d) A statement identifying the purpose for which the district is formed, which shall include those
purposes outlined in Section 5 above.
(e) The names of the initial directors of the district with the date of expiration of the term of office
for each which shall be on the 31st of December of first, second, or third even-numbered year
after assuming office, as set forth in Section 11 hereof.
(f) A statement that the district may only be dissolved on the grounds and under the conditions
set forth in Section 45 of this Title.
(g) A statement acknowledging the powers, rights and obligations as set forth in Section 25 of this
Title.
Nothing in the resolution of formation shall state or infer that the local legislative body has the
power to dissolve, alter or affect the district beyond that specifically provided for in this Act.
If two or more cities, municipalities or provinces, or any combination thereof, desire to form a single
district, a similar resolution shall be adopted in each city, municipality and province; or the city,
municipality or province in which 75% of the total active service connections are situated shall pass
an initial resolution to be concurred in by the other cities, municipalities or provinces.
SECTION 7. Filing of Resolution. — A certified copy of the resolution or resolutions forming a
district shall be forwarded to the office of the Secretary of Administration. If found by the
Administration to conform to the requirements of Section 6 and the policy objectives in Section
2, the resolution shall be duly filed. The district shall be deemed duly formed and existing upon
the date of such filing. A certified copy of said resolution showing the stamp of the Administration
shall be maintained in the office of the district. Upon such filing, the local government or
governments concerned shall lose ownership, supervision and control or any right whatsoever over
the district except as provided herein. (Emphasis and underscoring supplied)
It bears noting that once a district is "duly formed and existing" after following the above procedure,
it acquires the "exclusive franchise" referred to in Section 47. Thus, P.D. 198 itself, in harmony with
Philippine Airlines, Inc. v. Civil Aeronautics Board,15 gives the name "franchise" to an authorization
that does not proceed directly from the legislature.
It would thus be incongruous to adopt in this instance the strict interpretation proffered by
respondent and exclude from the scope of the term "franchise" the CPCs issued by the NWRB. 16
Nonetheless, while the prohibition in Section 47 of P.D. 198 applies to the issuance of CPCs for
the reasons discussed above, the same provision must be deemed void ab initio for being
irreconcilable with Article XIV Section 5 of the 1973 Constitution which was ratified on January 17,
1973 – the constitution in force when P.D. 198 was issued on May 25, 1973. Thus, Section 5 of Art.
XIV of the 1973 Constitution reads:
SECTION 5. 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 the capital of which is owned
by such citizens, nor shall such franchise, certificate, or authorization be exclusive in character or
for a longer period than fifty years. Neither shall any such franchise or right be granted except
under the condition that it shall be subject to amendment, alteration, or repeal by the Batasang
Pambansa when the public interest so requires. The State shall encourage equity participation in
public utilities by the general public. The participation of foreign investors in the governing body of
any public utility enterprise shall be limited to their proportionate share in the capital thereof.
(Emphasis and underscoring supplied)

This provision has been substantially reproduced in Article XII Section 11 of the 1987 Constitution,
including the prohibition against exclusive franchises.17

In view of the purposes for which they are established,18 water districts fall under the term "public
utility" as defined in the case of National Power Corporation v. Court of Appeals:191avvphil

A "public utility" is a business or service engaged in regularly supplying the public with some
commodity or service of public consequence such as electricity, gas, water, transportation,
telephone or telegraph service. x x x (Emphasis and underscoring supplied)

It bears noting, moreover, that as early as 1933, the Court held that a particular water district – the
Metropolitan Water District – is a public utility.20

The ruling in National Waterworks and Sewerage Authority v. NWSA Consolidated Unions 21 is also
instructive:

We agree with petitioner that the NAWASA is a public utility because its primary function is to
construct, maintain and operate water reservoirs and waterworks for the purpose of supplying
water to the inhabitants, as well as consolidate and centralize all water supplies and drainage
systems in the Philippines. x x x (Emphasis supplied)

Since Section 47 of P.D. 198, which vests an "exclusive franchise" upon public utilities, is clearly
repugnant to Article XIV, Section 5 of the 1973 Constitution, 22 it is unconstitutional and may not,
therefore, be relied upon by petitioner in support of its opposition against respondent’s application
for CPC and the subsequent grant thereof by the NWRB.

WHEREFORE, Section 47 of P.D. 198 is unconstitutional. The Petition is thus, in light of the foregoing
discussions, DISMISSED.

SO ORDERED.
TRANSPO – CONSTI PROVISIONS – SUBJECT TO AMENDMENT
G.R. No. L-68729 May 29, 1987
RADIO COMMUNICATIONS OF THE PHILIPPINES, INC., petitioner,
vs.
NATIONAL TELECOMMUNICATIONS COMMISSION and KAYUMANGGI RADIO NETWORK
INCORPORATED, respondents.
GUTIERREZ, JR, J.:
This petition seeks the reversal of the decision of the National Telecommunications Commission
(NTC) which ordered petitioner Radio Communications of the Philippines, Incorporated (RCPI) to
desist from operating its radio telephone services in Catarman, Northern Samar; San Jose,
Occidental Mindoro; and Sorsogon, Sorsogon.
Petitioner has been operating a radio communications system since 1957 under its legislative
franchise granted by Republic Act No. 2036 which was enacted on June 23, 1957.
In 1968, the petitioner established a radio telegraph service in Sorsogon, Sorsogon. In 1971, another
radio telegraph service was put up in San Jose, Mindoro followed by another in Catarman, Samar in
1976. The installation of radio telephone services started in 1971 in San Jose, Mindoro; then in
Sorsogon, Sorsogon and Catarman, Samar in 1983.
In a decision dated June 24, 1980 in NTC Case No. 80-08, private respondent Kayumanggi Radio
Network Incorporated was authorized by the public respondent to operate radio communications
systems in Catarman, Samar and in San Jose, Mindoro.
On December 14, 1983, the private respondent filed a complaint with the NTC alleging that the
petitioner was operating in Catarman, Samar and in San Jose, Mindoro without a certificate of public
covenience and necessity. The petitioner, on the other hand, counter-alleged that its telephone
services in the places subject of the complaint are covered by the legislative franchise recognized
by both the public respondent and its predecessor, the Public Service Commission. In its
supplemental reply, the petitioner further stated that it has been in operation in the questioned
places long before private respondent Kayumanggi filed its application to operate in the same
places.
After conducting a hearing, NTC, in its decision dated August 22, 1984 ordered petitioner RCPI to
immediately cease or desist from the operation of its radio telephone services in Catarman Northern
Samar; San Jose, Occidental Mindoro; and Sorsogon, Sorsogon stating that under Executive Order
No. 546, a certificate of public convenience and necessity is mandatory for the operation of
communication utilities and services including radio communications.
On September 4, 1984, the petitioner filed a motion for reconsideration which was denied in an
order dated September 12, 1984.
On October 1, 1984, the present petition was filed raising the issue of whether or not petitioner
RCPI, a grantee of a legislative franchise to operate a radio company, is required to secure a
certificate of public convenience and necessity before it can validly operate its radio stations
including radio telephone services in Catarman, Northern Samar; San Jose, Occidental Mindoro; and
Sorsogon, Sorsogon.
The petitioner's main argument states that the abolition of the Public Service Commission under
Presidential Decree No. 1 and the creation of the National Telecommunications Commission under
Executive Order No. 546 to replace the defunct Public Service Commission did not affect sections
14 and 15 of the Public Service Law (Commonwealth Act. No. 146, as amended).
The provisions of the Public Service Law pertinent to the petitioner's allegation are as follows:
Section 13. (a) the Commission shall have jurisdiction, supervision, and control over all public
services and their franchises, equipment and other properties, and in the exercise of its authority,
it shall have the necessary powers and the aid of public force: ...
Section 14. The following are exempted from the provisions of the preceding section:
xxx xxx xxx
(d) Radio companies except with respect to the fixing of rates;
xxx xxx xxx
Section 15. With the exception of those enumerated in the preceding section, no public service
shall operate in the Philippines without possessing a valid and subsisting certificate from the
Public Service Commission, known as "certificate of public convenience," or "certificate of
convenience and public necessity," as the case may be, to the effect that the operation of said
service and the authorization to do business will promote the public interests in a proper and
suitable manner. ...
We find no merit in the petitioner's contention.
Pursuant to Presidential Decree No. 1 dated September 23,1972, reorganizing the executive branch
of the National Government, the Public Service Commission was abolished and its functions were
transferred to three specialized regulatory boards, as follows: the Board of Transportation, the
Board of Communications and the Board of Power and Waterworks. The functions so transferred
were still subject to the limitations provided in sections 14 and 15 of the Public Service Law, as
amended. With the enactment of Executive Order No. 546 on July 23, 1979 implementing P.D. No.1,
the Board of Communications and the Telecommunications Control Bureau were abolished and
their functions were transferred to the National Telecommunications Commission (Sec. 19(d),
Executive Order No. 546). Section 15 of said Executive Order spells out the functions of the National
Telecommunications Commission as follows:
Sec. 15. Functions of the Commission.-The Commission shall exercise the following functions:
a. Issue Certificate of Public Convenience for the operation of communications utilities and
services, radio communications petitions systems, wire or wireless telephone or telegraph
system, radio and television broadcasting system and other similar public utilities;
b. Establish, prescribe and regulate areas of operation of particular operators of public service
communications; and determine and prescribe charges or rates pertinent to the operation of
such public utility facilities and services except in cases where charges or rates are established by
international bodies or associations of which the Philippines is a participating member or by
bodies recognized by the Philippine Government as the proper arbiter of such charges or rates;
c. Grant permits for the use of radio frequencies for wireless telephone and telegraph systems
and radio communication systems including amateur radio stations and radio and television
broadcasting systems;
d. Sub-allocate series of frequencies of bands allocated by the International Telecommunications
Union to the specific services;
 e. Establish and prescribe rules, regulations, standards, specifications in all cases related to the
issued Certificate of Public Convenience and administer and enforce the same;
f. Coordinate and cooperate with government agencies and other entities concerned with any
aspect involving communications with a view to continuously improve the communications
service in the country;
g. Promulgate such rules and regulations, as public safety and interest may require, to encourage
a larger and more effective use of communications, radio and television broadcasting facilities,
and to maintain effective competition among private entities in these activities whenever the
Commission finds it reasonably feasible;
h. Supervise and inspect the operation of radio stations and telecommunications facilities;
i. Undertake the examination and licensing of radio operators;
j. Undertake, whenever necessary, the registration of radio transmitters and transceivers; and
k. Perform such other functions as may be prescribed by law.
It is clear from the aforequoted provision that the exemption enjoyed by radio companies from the
jurisdiction of the Public Service Commission and the Board of Communications no longer exists
because of the changes effected by the Reorganization Law and implementing executive orders.
The petitioner's claim that its franchise cannot be affected by Executive Order No. 546 on the
ground that it has long been in operation since 1957 cannot be sustained.
A franchise started out as a "royal privilege or (a) branch of the King's prerogative, subsisting in the
hands of a subject." This definition was given by Finch, adopted by Blackstone, and accepted by
every authority since (State v. Twin Village Water Co., 98 Me 214, 56 A 763 (1903)). Today, a
franchise, being merely a privilege emanating from the sovereign power of the state and owing its
existence to a grant, is subject to regulation by the state itself by virtue of its police power through
its administrative agencies. We ruled in Pangasinan transportation Co., Inc. v. Public Service
Commission (70 Phil. 221) that:
... statutes enacted for the regulation of public utilities, being a proper exercise by the State of its
police power, are applicable not only to those public utilities coming into existence after its
passage, but likewise to those already established and in operation ...
Executive Order No. 546, being an implementing measure of P.D. No. I insofar as it amends the
Public Service Law (CA No. 146, as amended) is applicable to the petitioner who must be bound by
its provisions. The petitioner cannot install and operate radio telephone services on the basis of its
legislative franchise alone.
The position of the petitioner that by the mere grant of its franchise under RA No. 2036 it can
operate a radio communications system anywhere within the Philippines is erroneous. Section 1 of
said statute reads:
Section 1. Subject to the provisions of the Constitution, and to the provisions, not inconsistent
herewith, of Act Numbered Three thousand eight hundred and forty-six, entitled.' An Act
providing for the regulation of radio stations and radio communications in the Philippine Islands,
and for other purposes;' Commonwealth Act Numbered One hundred forty-six, known as the
Public Service Act, and their amendments, and other applicable laws, there is hereby granted to
the Radio Communications of the Philippines, its successors or assigns, the right and privilege of
constructing, installing, establishing and operating in the Philippines, at such places as the said
corporation may select and the Secretary of Public Works and Communications may approve,
radio stations for the reception and transmission of wireless messages on radiotelegraphy and/or
radiotelephone, including both coastal and marine telecommunications, each station to consist
of two radio apparatus comprising of a receiving and sending radio apparatus. (Emphasis
supplied).
Section 4(a) of the same Act further provides that:
Sec. 4(a). This franchise shall not take effect nor shall any powers thereunder be exercised by the
grantee until the Secretary of Public works and Communications shall have allotted to the grantee
the frequencies and wave lengths to be used, and issued to the grantee a license for such case.
(Emphasis supplied)
Thus, in the words of R.A. No. 2036 itself, approval of the then Secretary of Public Works and
Communications was a precondition before the petitioner could put up radio stations in areas
where it desires to operate. It has been repeated time and again that where the statutory norm
speaks unequivocally, there is nothing for the courts to do except to apply it. The law, leaving no
doubt as to the scope of its operation, must be obeyed. (Gonzaga v. Court of Appeals, 51 SCRA 381).
The records of the case do not show any grant of authority from the then Secretary of Public Works
and Communications before the petitioner installed the questioned radio telephone services in San
Jose, Mindoro in 1971. The same is true as regards the radio telephone services opened in Sorsogon,
Sorsogon and Catarman, Samar in 1983. No certificate of public convenience and necessity appears
to have been secured by the petitioner from the public respondent when such certificate,was
required by the applicable public utility regulations (See executive Order No. 546, sec. 15, supra.;
Philippine Long Distance Telephone Co. v. City of Davao, 15 SCRA 75; Olongapo Electric Light and
Power Corp. v. National Power Corporation, et al., G.R. No. L-24912, promulgated April 9, 1987.)
It was well within the powers of the public respondent to authorize the installation by the private
respondent network of radio communications systems in Catarman, Samar and San Jose, Mindoro.
Under the circumstances of this case, the mere fact that the petitioner possesses a franchise to put
up and operate a radio communications system in certain areas is not an insuperable obstacle to
the public respondent's issuing the proper certificate to an applicant desiring to extend the same
services to those areas. The Constitution mandates that a franchise cannot be exclusive in nature
nor can a franchise be granted except that it must be subject to amendment, alteration, or even
repeal by the legislature when the common good so requires. (Art. XII, sec. 11 of the 1986
Constitution). There is an express provision in the petitioner's franchise which provides compliance
with the above mandate R.A. 2036, sec. 15).
In view of the foregoing, we find no reason to disturb the public respondent's findings of fact, and
conclusions of law insofar as the private respondent was authorized to operate in Catarman, Samar
and San Jose, Mindoro. As a rule, the Commission's findings of fact, if supported by substantial
evidence, are conclusive upon this Court. We may modify or ignore them only when it clearly
appears that there is no evidence to support reasonably such a conclusion. (Halili v. Daplas, 14 SCRA
14). The petitioner has not shown why the private respondent should be denied the authority to
operate its services in Samar and Mindoro. It has not overcome the presumption that when the
public respondent disturbed the petitioner's monopoly in certain areas, it was doing so pursuant to
public interest and the common good.
WHEREFORE, the challenged order of the public respondent dated August 22, 1984 is hereby
AFFIRMED. The petition is dismissed for lack of merit.
SO ORDERED.
TRANSPO – CONSTI PROVISIONS – FIXED-TERM
G.R. No. 166910 October 19, 2010
ERNESTO B. FRANCISCO, JR. and JOSE MA. O. HIZON, Petitioners,
vs.
TOLL REGULATORY BOARD, PHILIPPINE NATIONAL CONSTRUCTION CORPORATION, MANILA NORTH
TOLLWAYS CORPORATION, BENPRES HOLDINGS CORPORATION, FIRST PHILIPPINE INFRASTRUCTURE
DEVELOPMENT CORPORATION, TOLLWAY MANAGEMENT CORPORATION, PNCC SKYWAY CORPORATION,
CITRA METRO MANILA TOLLWAYS CORPORATION and HOPEWELL CROWN INFRASTRUCTURE, INC.,
Respondents.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 169917
HON. IMEE R. MARCOS, RONALDO B. ZAMORA, CONSUMERS UNION OF THE PHILIPPINES, INC., QUIRINO A.
MARQUINEZ, HON. LUIS A. ASISTIO, HON. ERICO BASILIO A. FABIAN, HON. RENATO "KA RENE" B.
MAGTUBO, HON. RODOLFO G. PLAZA, HON. ANTONIO M. SERAPIO, HON. EMMANUEL JOEL J. VILLANUEVA,
HON. ANIBAN NG MGA MANGGAGAWA SA AGRIKULTURA (AMA), INC., ANIBAN NG MGA MAGSASAKA,
MANGINGISDA AT MANGGAGAWA SA AGRIKULTURA-KATIPUNAN, INC., KAISAHAN NG MGA MAGSASAKA
SA AGRIKULTURA, INC., KILUSAN NG MANGAGAWANG MAKABAYAN, Petitioners,
vs.
The REPUBLIC OF THE PHILIPPINES, acting by and through the TOLL REGULATORY BOARD, MANILA NORTH
TOLLWAYS CORPORATION, PHILIPPINE NATIONAL CONSTRUCTION CORPORATION, and FIRST PHILIPPINE
INFRASTRUCTURE DEVELOPMENT CORP., Respondents.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 173630
GISING KABATAAN MOVEMENT, INC., BARANGAY COUNCIL OF SAN ANTONIO, MUNICIPALITY OF SAN
PEDRO, LAGUNA [as Represented by COUNCILOR CARLON G. AMBAYEC], and YOUNG PROFESSIONALS AND
ENTREPRENEURS OF SAN PEDRO, LAGUNA Petitioners,
vs.
THE REPUBLIC OF THE PHILIPPINES, acting through the TOLL REGULATORY BOARD (TRB), PHILIPPINE
NATIONAL CONSTRUCTION CORPORATION (PNCC), Respondents.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 183599
THE REPUBLIC OF THE PHILIPPINES, represented by the TOLL REGULATORY BOARD, Petitioner,
vs.
YOUNG PROFESSIONALS AND ENTREPRENEURS OF SAN PEDRO, LAGUNA, Respondent.
DECISION
VELASCO, JR., J.:
Before us are four petitions; the first three are special civil actions under Rule 65, assailing and
seeking to nullify certain statutory provisions, presidential actions and implementing orders, toll
operation-related contracts and issuances on the construction, maintenance and operation of the
major tollway systems in Luzon. The petitions likewise seek to restrain and permanently prohibit
the implementation of the allegedly illegal toll fee rate hikes for the use of the North Luzon
Expressway ("NLEX"), South Luzon Expressway ("SLEX") and the South Metro Manila Skyway
("SMMS"). The fourth, a petition for review under Rule 45, seeks to annul and set aside the decision
dated June 23, 2008 of the Regional Trial Court ("RTC") of Pasig, in SCA No. 3138-PSG, enjoining the
original toll operating franchisee from collecting toll fees in the SLEX.
By Resolution of March 20, 2007, the Court ordered the consolidation of the first three petitions,
docketed as G.R. Nos. 166910, 169917 and 173630, respectively. The fourth petition, G.R. No.
183599, would later be ordered consolidated with the earlier three petitions.
The Facts
The antecedent facts are as follows—
On March 31, 1977, then President Ferdinand E. Marcos issued Presidential Decree No. ("P.D.")
1112, authorizing the establishment of toll facilities on public improvements. 1 This issuance, in its
preamble, explicitly acknowledged "the huge financial requirements" and the necessity of tapping
"the resources of the private sector" to implement the government’s infrastructure programs. In
order to attract private sector involvement, P.D. 1112 allowed "the collection of toll fees for the use
of certain public improvements that would allow a reasonable rate of return on investments." The
same decree created the Toll Regulatory Board ("TRB") and invested it under Section 3 (a) (d) and
(e) with the power to enter, for the Republic, into contracts for the construction, maintenance and
operation of tollways, grant authority to operate a toll facility, issue therefor the necessary Toll
Operation Certificate ("TOC") and fix initial toll rates, and, from time to time, adjust the same after
due notice and hearing.
On the same date, P.D. 1113 was issued, granting to the Philippine National Construction
Corporation ("PNCC"), then known as the Construction and Development Corporation of the
Philippines ("CDCP"), for a period of thirty years from May 1977 – or up to May 2007 – a franchise
to construct, maintain and operate toll facilities in the North Luzon and South Luzon Expressways,
with the right to collect toll fees at such rates as the TRB may fix and/or authorize. Particularly,
Section 1 of P.D. 1113 delineates the coverage of the expressways from Balintawak, Caloocan City
to Carmen, Rosales, Pangasinan and from Nichols, Pasay City to Lucena, Quezon. And because the
franchise is not self-executing, as it was in fact made subject, under Section 3 of P.D. 1113, to "such
conditions as may be imposed by the Board in an appropriate contract to be executed for such
purpose," TRB and PNCC signed in October 1977, a Toll Operation Agreement ("TOA") on the North
Luzon and South Luzon Tollways, providing for the detailed terms and conditions for the
construction, maintenance and operation of the expressway.2
On December 22, 1983, P.D. 1894 was issued therein further granting PNCC a franchise over the
Metro Manila Expressway ("MMEX"), and the expanded and delineated NLEX and SLEX. Particularly,
PNCC was granted the "right, privilege and authority to construct, maintain and operate any and all
such extensions, linkages or stretches, together with the toll facilities appurtenant thereto, from any
part of the North Luzon Expressway, South Luzon Expressway and/or Metro Manila Expressway
and/or to divert the original route and change the original end-points of the North Luzon Expressway
and/or South Luzon Expressway as may be approved by the [TRB]." 3 Under Section 2 of P.D. 1894,
"the franchise granted the [MMEX] and all extensions, linkages, stretches and diversions after the
approval of the decree that may be constructed after the approval of this decree [on December 22,
1983] shall likewise have a term of thirty (30) years, commencing from the date of completion of the
project."
As expressly set out in P.D. 1113 and reiterated in P.D. 1894, PNCC may sell or assign its franchise
thereunder granted or cede the usufruct4 thereof upon the President’s approval.5 This same
provision on franchise transfer and cession of usufruct is likewise found in P.D. 1112.6
Then came the 1987 Constitution with its franchise provision.7
In 1993, the Government Corporate Counsel ("GCC"), acting on PNCC’s request, issued Opinion No.
224, s. 1993,8 later affirmed by the Secretary of Justice,9 holding that PNCC may, subject to certain
clearance and approval requirements, enter into a joint venture ("JV") agreement ("JVA") with
private entities without going into public bidding in the selection of its JV partners. PNCC’s query
was evidently prompted by the need to seek out alternative sources of financing for expanding and
improving existing expressways, and to link them to economic zones in the north and to the
CALABARZON area in the south.
MOU for the construction, rehabilitation
and expansion of expressways
On February 8, 1994, the Department of Public Works and Highways ("DPWH"), TRB, PNCC, Benpres
Holdings Corporation ("Benpres") and First Philippine Holdings Corporation ("FPHC"), among other
private and government entities/agencies, executed a Memorandum of Understanding ("MOU")
envisaged to open the door for the entry of private capital in the rehabilitation, expansion (to Subic
and Clark) and extension, as flagship projects, of the expressways north of Manila, over which PNCC
has a franchise. To carry out their undertakings under the MOU, Benpres and FPHC formed, as their
infrastructure holding arm, the First Philippine Infrastructure and Development Corporation
("FPIDC").
Consequent to the MOU execution, PNCC entered into financial and/or technical JVAs with private
entities/investors for the toll operation of its franchised areas following what may be considered as
a standard pattern, viz.: (a) after a JVA is concluded and the usual government approval of the
assignment by PNCC of the usufruct in the franchise under P.D. 1113, as amended, secured, a new
JV company is specifically formed to undertake a defined toll road project; (b) the Republic of the
Philippines, through the TRB, as grantor, PNCC, as operator, and the new corporation, as
investor/concessionaire, with its lender, as the case may be, then execute a Supplemental Toll
Operation Agreement ("STOA") to implement the TOA previously issued; and (c) once the requisite
STOA approval is given, project prosecution starts and upon the completion of the toll road project
or of a divisible phase thereof, the TRB fixes or approves the initial toll rate after which, it passes a
board resolution prescribing the periodic toll rate adjustment.
The STOA defines the scope of the road project coverage, the terminal date of the concession, and
includes provisions on initial toll rate and a built-in formula for adjustment of toll rates, investment
recovery clauses and contract termination in the event of the concessionaire’s, PNCC’s or TRB’s
default, as the case may be.
The following events or transactions, involving the personalities as indicated, transpired with
respect to the following projects:
The South Metro Manila Skyway (SMMS)
(Buendia – Bicutan elevated stretch) Project
PNCC entered into a JV partnership arrangement with P.T. Citra, an Indonesian company, and
created, for the SMMS project, the Citra Metro Manila Tollways Corporation ("CMMTC").
On November 27, 1995, TRB, PNCC and CMMTC executed a STOA for the SMMS project ("CITRA
STOA"). And on April 7, 1996, then President Fidel V. Ramos approved the CITRA STOA.
Phase I of the SMMS project – the Bicutan to Buendia elevated expressway stretch – was completed
in December 1998, and the consequent initial toll rates for its use implemented a month after. On
November 26, 2004, the TRB passed Resolution No. 2004-53, approving the periodic toll rate
adjustment for the SMMS.
The NLEX Expansion Project (Rehabilitated and Widened NLEX, Subic Expressway,
Circumferential Road C-5)
In reply to the query of the then TRB Chairman, the Department of Justice ("DOJ") issued DOJ
Opinion No. 79, s. of 1994, echoing an earlier opinion of the GCC, that the TRB can implement the
NLEX expansion project through a JV scheme with private investors possessing the requisite
technical and financial capabilities.
On May 16, 1995, then President Ramos approved the assignment of PNCC’s usufructuary rights as
franchise holder to a JV company to be formed by PNCC and FPIDC. PNCC and FPIDC would later ink
a JVA for the rehabilitation and modernization of the NLEX – referred in certain pleadings as the
North Luzon Tollway project.10 The Manila North Tollways Corporation ("MNTC") was formed for
the purpose.
On April 30, 1998, the Republic, through the TRB, PNCC and MNTC, executed a STOA for the North
Luzon Tollway project ("MNTC STOA") in which MNTC was authorized, inter alia, to subcontract the
operation and maintenance of the project, provided that the majority of the outstanding shares of
the contractor shall be owned by MNTC. The MNTC STOA covers three phases comprising of ten
segments, including the rehabilitated and widened NLEX, the Subic Expressway and the
circumferential Road C-5.11 The STOA is to be effective for thirty years, reckoned from the issuance
of the toll operation permit for the last completed phase or until December 31, 2030, whichever is
earlier. The Office of the President ("OP") approved the STOA on June 15, 1998.
On August 2, 2000, pursuant to the MNTC STOA, the Tollways Management Corporation ("TMC")—
formerly known as the Manila North Tollways Operation and Maintenance Corporation—was
created to undertake the operation and maintenance of the NLEX tollway facilities, interchanges
and related works.
On January 27, 2005, the TRB issued Resolution No. 2005-04 approving the initial authorized toll
rates for the closed and flat toll systems applicable to the new NLEX.
The South Luzon Expressway Project (Nichols to Lucena City)
For the SLEX expansion project, PNCC and Hopewell Holdings Limited ("HHL"), as JV partners,
executed a Memorandum of Agreement ("MOA"),12 which eventually led to the formation of a JV
company – Hopewell Crown Infrastructure, Inc. ("HCII"), now MTD Manila Expressways, Inc.,
("MTDME"). And pursuant to the PNCC-MTDME JVA, the South Luzon Tollway Corporation ("SLTC")
and the Manila Toll Expressway Systems, Inc. ("MATES") were incorporated to undertake the
financing, construction, operation and maintenance of the resulting Project Toll Roads forming part
of the SLEX. The toll road projects are divisible toll sections or segments, each segment defined as
to its starting and end points and each with the corresponding distance coverage. The proposed
JVA, as later amended, between PNCC and MTDME was approved by the OP on June 30, 2000.
Eventually, or on February 1, 2006, a STOA13 for the financing, design, construction, lane expansion
and maintenance of the Project Toll Roads (PTR) of the rehabilitated and improved SLEX was
executed by and among the Republic, PNCC, SLTC, as investor, and MATES, as operator. To be
precise, the PTRs, under the STOA, comprise and contemplated the full rehabilitation and/or
roadway widening of the following existing toll roads or facilities: PTR 1 – that portion of the tollway
commencing at the end of South MM Skyway to the Filinvest exit at Alabang (1-242 km); PTR 2 –
the tollway from Alabang to Calamba, Laguna (27.28 km); PTR 3 – the tollway from Calamba to Sto.
Tomas, Batangas (7.6 km) and PTR 4 – the tollway from Sto. Tomas to Lucena City (54.27 km).14
Under Clause 6.03 of the STOA, the Operator, after substantially completing a TPR, shall file an
application for a Toll Operation Permit over the relevant completed TPR or segment, which shall
include a request for a review and approval by the TRB of the calculation of the new current
authorized toll rate.
G.R. No. 166910
Petitioners Francisco and Hizon, as taxpayers and expressway users, seek to nullify the various
STOAs adverted to above and the corresponding TRB resolutions, i.e. Res. Nos. 2004-53 and 2005-
04, fixing initial rates and/or approving periodic toll rate adjustments therefor. To the petitioners,
the STOAs and the toll rate-fixing resolutions violate the Constitution in that they veritably impose
on the public the burden of financing tollways by way of exorbitant fees and thus depriving the
public of property without due process. These STOAs are also alleged to be infirm as they effectively
awarded purported "build-operate-transfer" ("BOT") projects without public bidding in violation of
the BOT Law (R.A. 6957, as amended by R.A. 7718).
Petitioners likewise assail the constitutionality of Sections 3 (a) and (d) of P.D. 1112 in relation to
Section 8 (b) of P.D. 1894 insofar as they vested the TRB, on one hand, toll operation awarding
power while, on the other hand, granting it also the power to issue, modify and promulgate toll rate
charges. The TRB, so petitioners bemoan, cannot be an awarding party of a TOA and, at the same
time, be the regulator of the tollway industry and an adjudicator of rate exactions disputes.
Additionally, petitioners also seek to nullify certain provisions of P.D. 1113 and P.D. 1894, which
uniformly grant the President the power to approve the transfer or assignment of usufruct or the
rights and privileges thereunder by the tollway operator to third parties, particularly the transfer
effected by PNCC to MNTC. As argued, the authority to approve partakes of an exercise of legislative
power under Article VI, Section 1 of the Constitution.15
In the meantime, or on April 8, 2010, the TRB issued a Certificate of Substantial Completion 16 with
respect to PTR 1 (Alabang-Filinvest stretch) and PTR 2 (Alabang-Calamba segments) of SLEX,
signifying the completion of the full rehabilitation/expansion of both segments and the
linkages/interchanges in between pursuant to the requirements of the corresponding STOA. TRB on
even date issued a Toll Operation Permit in favor of MATES over said PTRs 1 and 2. 17 Accordingly,
upon due application, the TRB approved the publication of the toll rate matrix for PTRs 1 and 2, the
rate to take effect on June 30, 2010.18 The implementation of the published rate would, however,
be postponed to August 2010.
On July 5, 2010, petitioner Francisco filed a Supplemental Petition with prayer for the issuance of a
temporary restraining order ("TRO") and/or status quo order focused on the impending collection
of what was perceived to be toll rate increases in the SLEX. The assailed adjustments were made
public in a TRB notice of toll rate increases for the SLEX from Alabang to Calamba on June 6, 2010,
and were supposed to have been implemented on June 30, 2010. On August 13, 2010, the Court
granted the desired TRO, enjoining the respondents in the consolidated cases from implementing
the toll rate increases in the SLEX.
In their Consolidated Comment/Opposition to the Supplemental Petition, respondents SLTC et al.,
aver that the disputed rates are actually initial and opening rates, not an increase or adjustment of
the prevailing rate, for the new expanded and rehabilitated SLEX. In fine, the new toll rates are, per
SLTC, for a new and upgraded facility, i.e. the aforementioned Project Toll Roads 1 and 2 put up
pursuant to the 2006 Republic-PNCC-SLTC-MATES STOA adverted to.
G.R. No. 169917
While they raise, for the most part, the same issues articulated in G.R. No. 166910, such as the
public bidding requirement, the power of the President to approve the assignment of PNCC’s
usufructuary rights to cover (as petitioners Imee R. Marcos, et al., would stress) even the assignment
of the expressway from Balintawak to Tabang, the virtual amendment and extension of a statutory
franchise by way of administrative action (e.g., the execution of a STOA or issuance of a TOC),
petitioners in G.R. No. 169917 – some of them then and still are members of the House of
Representatives – have, as their main focus, the North Luzon Tollway project and the agreements
and devices entered in relation therewith.
Petitioners also assail the MNTC STOA on the ground that it granted the lenders (Asian Development
Bank/World Bank) of MNTC, as project concessionaire, the unrestricted rights to appoint a
substitute entity to replace MNTC in case of an MNTC Default before prepayment of the loans, while
also granting said lenders, in appropriate cases, the option to extend the "concession or franchise"
for a period not exceeding fifty years coinciding with the full payment of the loans.
G.R. No. 173630
Apart from those taken up in the other petitions for certiorari and prohibition, petitioners, in G.R.
No. 173630, whose members and constituents allegedly traverse SLEX daily, aver that TRB ought to
have applied the provisions of R.A. 6957 [BOT Law] and R.A. 9184 [Government Procurement
Reform Act], which require public bidding for the prosecution of the SLEX project.
G.R. No. 183599
Civil Case – SCA No. 3138-PSG before the RTC
On September 14, 2007, the Young Professionals and Entrepreneurs of San Pedro, Laguna ("YPES"),
one of the petitioners in G.R. No. 173630, filed before the RTC, Branch 155, in Pasig City, a special
civil action for certiorari, etc., against the TRB, docketed as SCA No. 3138-PSG, containing practically
identical issues raised in G.R. No. 173630. Like its petition in G.R. No. 173630, YPES, before the RTC,
assailed and sought to nullify the April 27, 2007 TOC, which TRB issued to PNCC inasmuch as the
TOC worked to extend PNCC’s tollway operation franchise for the SLEX. As YPES argued, only the
Congress can extend the term of PNCC’s franchise which expired on May 1, 2007.
Ruling of the RTC in SCA No. 3138-PSG
By Decision19 dated June 23, 2008, the RTC, for the main stated reason that the authority to grant
or renew franchises belongs only to Congress, granted YPES’ petition, disposing as follows:
ACCORDINGLY, the instant Petition for Certiorari, Prohibition and Mandamus is hereby GRANTED
and the questioned Toll Operation Certificate (TOC) covering the [SLEX] issued by respondent TRB
in April, 2007, is hereby ordered ANNULLED and SET ASIDE.
FURTHER, respondent PNCC is hereby immediately PROHIBITED from collecting toll fess along the
SLEX facilities as it no longer has the power and authority to do so.
FINALLY, as mandated under Section 9 of PD No. 1113, respondent PNCC is hereby COMMANDED
to turn over without further delay the physical assets and facilities of the SLEX including
improvements thereon, together with the equipment and appurtenances directly related to their
operations, without any cost, to the Government through the Toll Regulatory Board x x x.20
Thus, the instant petition for review on certiorari under Rule 45, filed by the TRB on pure questions
of law, docketed as G.R. No. 183599.
In their separate comments, public and private respondents uniformly seek the dismissal of the
three special civil actions on the threshold issue of the absence of a justiciable case and lack of locus
standi on the part of the petitioners therein. Other grounds raised range from the impropriety of
certiorari to nullify toll operation agreements; the inapplicability of the public bidding rules in the
selection by PNCC of its JV partners and the authority of the President to approve TOAs and the
transfer of usufructuary rights. PNCC argues, in esse, that its continuous toll operations did not
constitute an extension of its franchise, its authority to operate after the expiry date thereof in May
2007 being based on the valid authority of TRB to issue TOC.
The Issues
The principal consolidated but interrelated issues tendered before the Court, most of which with
constitutional undertones, may be reduced into six (6) and formulated in the following wise: first,
whether or not an actual case or controversy exists and, relevantly, whether petitioners in the first
three petitions have locus standi; second, whether the TRB is vested with the power and authority
to grant what amounts to a franchise over tollway facilities; third, corollary to the second, whether
the TRB can enter into TOAs and, at the same time, promulgate toll rates and rule on petitions for
toll rate adjustments; fourth, whether the President is duly authorized to approve contracts,
inclusive of assignment of contracts, entered into by the TRB relative to tollway operations; fifth,
whether the subject STOAs covering the NLEX, SLEX and SMMS and their respective extensions,
linkages, etc. are valid; sixth, whether a public bidding is required or mandatory for these tollway
projects.
Expressly prayed, if not subsumed, in the first three petitions, is to prohibit TRB and its
concessionaires from collecting toll fees along the Skyway and Luzon Tollways.
Preliminary Issues
Existence of an Actual Controversy, its Ripeness and
the Locus Standi to Sue
The power of judicial review can only be exercised in connection with a bona fide controversy
involving a statute, its implementation or a government action.21 Withal, courts will decline to pass
upon constitutional issues through advisory opinions, bereft as they are of authority to resolve
hypothetical or moot questions.22 The limitation on the power of judicial review to actual cases and
controversies defines the role assigned to the judiciary in a tripartite allocation of power, to assure
that the courts will not intrude into areas committed to the other branches of government. 23
In The Province of North Cotabato v. The Government of the Republic of the Philippines Peace Panel
on Ancestral Domain (GRP), the Court has expounded anew on the concept of actual case or
controversy and the requirement of ripeness for judicial review, thus:
An actual case or controversy involves a conflict of legal rights, an assertion of opposite legal claims,
susceptible of judicial resolution as distinguished from a hypothetical or abstract difference or
dispute. There must be a contrariety of legal rights x x x. The Court can decide the constitutionality
of an act x x x only when a proper case between opposing parties is submitted for judicial
determination.
Related to the requirement of an actual case or controversy is the requirement of ripeness. A
question is ripe for adjudication when the act being challenged has had a direct adverse effect on
the individual challenging it. x x x [I]t is a prerequisite that something had then been accomplished
or performed by either branch before a court may come into the picture, and the petitioner must
allege the existence of an immediate or threatened injury to itself as a result of the challenged
action. He must show that he has sustained or is immediately in danger of sustaining some direct
injury as a result of the act complained of.24
But even with the presence of an actual case or controversy, the Court may refuse judicial review
unless the constitutional question or the assailed illegal government act is brought before it by a
party who possesses what in Latin is technically called locus standi or the standing to challenge it.25
To have standing, one must establish that he has a "personal and substantial interest in the case
such that he has sustained, or will sustain, direct injury as a result of its enforcement."26 Particularly,
he must show that (1) he has suffered some actual or threatened injury as a result of the allegedly
illegal conduct of the government; (2) the injury is fairly traceable to the challenged action; and (3)
the injury is likely to be redressed by a favorable action.27
Petitions for certiorari and prohibition are, as here, appropriate remedies to raise constitutional
issues and to review and/or prohibit or nullify, when proper, acts of legislative and executive
officials.28 The present petitions allege that then President Ramos had exercised vis-à-vis an
assignment of franchise, a function legislative in character. As alleged, too, the TRB, in the guise of
entering into contracts or agreements with PNCC and other juridical entities, virtually enlarged,
modified to the core and/or extended the statutory franchise of PNCC, thereby usurping a legislative
prerogative. The usurpation came in the form of executing the assailed STOAs and the issuance of
TOCs. Grave abuse of discretion is also laid on the doorstep of the TRB for its act of entering into
these same contracts or agreements without the required public bidding mandated by law,
specifically the BOT Law (R.A. 6957, as amended) and the Government Procurement Reform Act
(R.A. 9184).
In fine, the certiorari petitions impute on then President Ramos and the TRB, the commission of
acts that translate inter alia into usurpation of the congressional authority to grant franchises and
violation of extant statutes. The petitions make a prima facie case for certiorari and prohibition; an
actual case or controversy ripe for judicial review exists. Verily, when an act of a branch of
government is seriously alleged to have infringed the Constitution, it becomes not only the right but
in fact the duty of the judiciary to settle the dispute. In doing so, the judiciary merely defends the
sanctity of its duties and powers under the Constitution.29
In any case, the rule on standing is a matter of procedural technicality, which may be relaxed when
the subject in issue or the legal question to be resolved is of transcendental importance to the
public.30 Hence, even absent any direct injury to the suitor, the Court can relax the application of
legal standing or altogether set it aside for non-traditional plaintiffs, like ordinary citizens, when the
public interest so requires.31 There is no doubt that individual petitioners, Marcos, et al., in G.R. No.
169917, as then members of the House of Representatives, possess the requisite legal standing
since they assail acts of the executive they perceive to injure the institution of Congress. On the
other hand, petitioners Francisco, Hizon, and the other petitioning associations, as taxpayers and/or
mere users of the tollways or representatives of such users, would ordinarily not be clothed with
the requisite standing. While this is so, the Court is wont to presently relax the rule on locus standi
owing primarily to the transcendental importance and the paramount public interest involved in
the implementation of the laws on the Luzon tollways, a roadway complex used daily by hundreds
of thousands of motorists. What we said a century ago in Severino v. Governor General is just as
apropos today:
When the relief is sought merely for the protection of private rights, x x x [the relator’s] right must
clearly appear. On the other hand, when the question is one of public right and the object of the
mandamus is to procure the enforcement of a public duty, the people are regarded as the real
party in interest, and the relator at whose instigation the proceedings are instituted need not
show that he has any legal or special interest in the result, it being sufficient to show that he is a
citizen and as such interested in the execution of the laws.32 (Words in bracket and emphasis
added.)
Accordingly, We take cognizance of the present case on account of its transcendental importance
to the public.
Second Issue: TRB Empowered to Grant Authority to Operate
Toll Facility /System
It is abundantly clear that Sections 3 (a) and (e) of P.D. 1112 in relation to Section 4 of P.D. 1894
have invested the TRB with sufficient power to grant a qualified person or entity with authority to
construct, maintain, and operate a toll facility and to issue the corresponding toll operating permit
or TOC.
Sections 3 (a) and (e) of P.D. 1112 and Section 4 of P.D. 1894 amply provide the power to grant
authority to operate toll facilities:
Section 3. Powers and Duties of the Board. The Board shall have in addition to its general powers of
administration the following powers and duties:
(a) Subject to the approval of the President of the Philippines, to enter into contracts in behalf of
the Republic of the Philippines with persons, natural or juridical, for the construction, operation and
maintenance of toll facilities such as but not limited to national highways, roads, bridges, and public
thoroughfares. Said contract shall be open to citizens of the Philippines and/or to corporations or
associations qualified under the Constitution and authorized by law to engage in toll operations;
xxxx
(e) To grant authority to operate a toll facility and to issue therefore the necessary "Toll Operation
Certificate" subject to such conditions as shall be imposed by the Board including inter alia the
following:
(1) That the Operator shall desist from collecting toll upon the expiration of the Toll Operation
Certificate.
(2) That the entire facility operated as a toll system including all operation and maintenance
equipment directly related thereto shall be turned over to the government immediately upon the
expiration of the Toll Operation Certificate.
(3) That the toll operator shall not lease, transfer, grant the usufruct of, sell or assign the rights
or privileges acquired under the Toll Operation Certificate to any person, firm, company,
corporation or other commercial or legal entity, nor merge with any other company or
corporation organized for the same purpose, without the prior approval of the President of the
Philippines. In the event of any valid transfer of the Toll Operation Certificate, the Transferee shall
be subject to all the conditions, terms, restrictions and limitations of this Decree as fully and
completely and to the same extent as if the Toll Operation Certificate has been granted to the
same person, firm, company, corporation or other commercial or legal entity.
(4) That in time of war, rebellion, public peril, emergency, calamity, disaster or disturbance of
peace and order, the President of the Philippines may cause the total or partial closing of the toll
facility or order to take over thereof by the Government without prejudice to the payment of just
compensation.
(5) That no guarantee, Certificate of Indebtedness, collateral, securities, or bonds shall be issued
by any government agency or government-owned or controlled corporation on any financing
program of the toll operator in connection with his undertaking under the Toll Operation
Certificate.
(6) The Toll Operation Certificate may be amended, modified or revoked whenever the public
interest so requires.
(a) The Board shall promulgate rules and regulations governing the procedures for the grant of
Toll Certificates. The rights and privileges of a grantee under a Toll Operation Certificate shall
be defined by the Board.
(b) To issue rules and regulations to carry out the purposes of this Decree.
SECTION 4. The Toll Regulatory Board is hereby given jurisdiction and supervision over the GRANTEE
with respect to the Expressways, the toll facilities necessarily appurtenant thereto and, subject to
the provisions of Section 8 and 9 hereof, the toll that the GRANTEE will charge the users thereof.
By explicit provision of law, the TRB was given the power to grant administrative franchise for toll
facility projects.
The concerned petitioners would argue, however, that PNCC’s [then CDCP’s] franchise, as toll
operator, was granted via P.D. 1113, on the same day P.D. 1112, creating the TRB, was issued. It is
thus pointed out that P.D. 1112 could not have plausibly granted the TRB with the power and
jurisdiction to issue a similar franchise. Pushing the point, they maintain that only Congress has,
under the 1987 Constitution, the exclusive prerogative to grant franchise to operate public utilities.
We are unable to agree with petitioners’ stance and their undue reliance on Article XII, Section 11
of the Constitution, which states that:
SEC. 11. 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 in character or for a
longer period than fifty years. Neither shall any such franchise or right be granted except under the
condition that it shall be subject to amendment, alteration, or repeal by the Congress when the
common good so requires x x x.
The limiting thrust of the foregoing constitutional provision on the grant of franchise or other forms
of authorization to operate public utilities may, in context, be stated as follows: (a) the grant shall
be made only in favor of qualified Filipino citizens or corporations; (b) Congress can impair the
obligation of franchises, as contracts; and (c) no such authorization shall be exclusive or exceed fifty
years.
A franchise is basically a legislative grant of a special privilege to a person.33 Particularly, the term,
franchise, "includes not only authorizations issuing directly from Congress in the form of statute,
but also those granted by administrative agencies to which the power to grant franchise has been
delegated by Congress."34 The power to authorize and control a public utility is admittedly a
prerogative that stems from the Legislature. Any suggestion, however, that only Congress has the
authority to grant a public utility franchise is less than accurate. As stressed in Albano v. Reyes—a
case decided under the aegis of the 1987 Constitution—there is nothing in the Constitution
remotely indicating the necessity of a congressional franchise before "each and every public utility
may operate," thus:
That the Constitution provides x x x that the issuance of a franchise, certificate or other form of
authorization for the operation of a public utility shall be subject to amendment, alteration or repeal
by Congress does not necessarily imply x x x that only Congress has the power to grant such
authorization. Our statute books are replete with laws granting specified agencies in the Executive
Branch the power to issue such authorization for certain classes of public utilities.35 (Emphasis ours.)
In such a case, therefore, a special franchise directly emanating from Congress is not necessary if
the law already specifically authorizes an administrative body to grant a franchise or to award a
contract.36 This is the same view espoused by the Secretary of Justice in his opinion dated January
9, 2006, when he stated:
That the administrative agencies may be vested with the authority to grant administrative
franchises or concessions over the operation of public utilities under their respective jurisdiction
and regulation, without need of the grant of a separate legislative franchise, has been upheld by the
Supreme Court x x x.37
Under the 1987 Constitution, Congress has an explicit authority to grant a public utility franchise.
However, it may validly delegate its legislative authority, under the power of subordinate
legislation,38 to issue franchises of certain public utilities to some administrative agencies. In
Kilusang Mayo Uno Labor Center v. Garcia, Jr., We explained the reason for the validity of
subordinate legislation, thus:
Such delegation of legislative power to an administrative agency is permitted in order to adapt to
the increasing complexity of modern life. As subjects for governmental regulation multiply, so does
the difficulty of administering the laws. Hence, specialization even in legislation has become
necessary.39 (Emphasis ours.)
As aptly pointed out by the TRB and other private respondents, the Land Transportation Franchising
and Regulatory Board ("LTFRB"), the Civil Aeronautics Board ("CAB"), the National
Telecommunications Commission ("NTC"), and the Philippine Ports Authority ("PPA"), to name a
few, have been such delegates. The TRB may very well be added to the growing list, having been
statutorily endowed, as earlier indicated, the power to grant to qualified persons, authority to
construct road projects and operate thereon toll facilities. Such grant, as evidenced by the
corresponding TOC or set out in a TOA, "may be amended, modified, or revoked [by the TRB]
whenever the public interest so requires."40
In Philippine Airlines, Inc. v. Civil Aeronautics Board,41 the Court reiterated its holding in Albano that
the CAB, like the PPA, has sufficient statutory powers under R.A. 776 to issue a Certificate of Public
Convenience and Necessity, or Temporary Operating Permit to a domestic air transport operator
who, although not possessing a legislative franchise, meets all the other requirements prescribed
by law. We held therein that "there is nothing in the law nor in the Constitution which indicates that
a legislative franchise is an indispensable requirement for an entity to operate as a domestic air
transport operator."42 We further explicated:
Congress has granted certain administrative agencies the power to grant licenses for, or to authorize
the operation of certain public utilities. With the growing complexity of modern life, the
multiplication of the subjects of governmental regulation, and the increased difficulty of
administering the laws, there is a constantly growing tendency towards the delegation of greater
powers by the legislature, and towards the approval of the practice by the courts. It is generally
recognized that a franchise may be derived indirectly from the state through a duly designated
agency, and to this extent, even the power to grant franchises has frequently been delegated, even
to agencies other than those of a legislative nature. In pursuance of this, it has been held that
privileges conferred by grant by local authorities as agents for the state constitute as much a
legislative franchise as though the grant had been made by an act of the Legislature. 43 (Emphasis
ours.)
The validity of the delegation by Congress of its franchising prerogative is beyond cavil. So it was
that in Tatad v. Secretary of the Department of Energy,44 We again ruled that the delegation of
legislative power to administrative agencies is valid. In the instant case, the certiorari petitioners
assume and harp on the lack of authority of PNCC to continue with its NLEX, SLEX, MMEX operations,
in joint venture with private investors, after the lapse of its P.D. 1113 franchise. None of these
petitioners seemed to have taken due stock of and appreciated the valid delegation of the
appropriate power to TRB under P.D. 1112, as enlarged in P.D. 1894. To be sure, a franchise may be
derived indirectly from the state through a duly designated agency, and to this extent, the power
to grant franchises has frequently been delegated, even to agencies other than those of a legislative
nature.45 Consequently, it has been held that privileges conferred by grant by administrative
agencies as agents for the state constitute as much a legislative franchise as though the grant had
been made by an act of the Legislature.46
While it may be, as held in Strategic Alliance Development Corporation v. Radstock Securities
Limited,47 that PNCC’s P.D. 1113 franchise had already expired effective May 1, 2007, this fact of
expiration did not, however, carry with it the cancellation of PNCC’s authority and that of its JV
partners granted under P.D. 1112 in relation to Section 1 of P.D. 1894 to construct, operate and
maintain "any and all such extensions, linkages or stretches, together with the toll facilities
appurtenant thereto, from any part of the North Luzon Expressway, South Luzon Expressway and/or
Metro Manila Expressway and/or to divert the original route and change the original end-points of
the [NLEX]and/or [SLEX] as may be approved by the [TRB]. And to highlight the point, the succeeding
Section 2 of P.D. 1894 specifically provides that the franchise for the extension and toll road projects
constructed after the approval of P.D. 1894 shall be thirty years, counted from project completion.
Indeed, prior to the expiration of PNCC’s original franchise in May 2007, the TRB, in the exercise of
its special powers under P.D. 1112, signed supplemental TOAs with PNCC and its JV partners. These
STOAs covered the expansion and rehabilitation of NLEX and SLEX, as the case may be, and/or the
construction, operation and maintenance of toll road projects contemplated in P.D.1894. And there
can be no denying that the corresponding toll operation permits have been issued.
In fine, the STOAs48 TRB entered with PNCC and its JV partners had the effect of granting authorities
to construct, operate and maintain toll facilities, but with the injection of additional private sector
investments consistent with the intent of P.D. Nos. 1112, 1113 and 1894.49 The execution of these
STOAs came in 1995, 1998 and 2006, or before the expiration of PNCC’s original franchise on May
1, 2007. In accordance with applicable laws, these transactions have actually been authorized and
approved by the President of the Philippines.50 And as a measure to ensure the legality of the said
transactions and in line with due diligence requirements, a review thereof was secured from the
GCC and the DOJ, prior to their execution.
Inasmuch as its charter empowered the TRB to authorize the PNCC and like entities to maintain and
operate toll facilities, it may be stated as a corollary that the TRB, subject to certain qualifications,
infra, can alter the conditions of such authorization. Well settled is the rule that a legislative
franchise cannot be modified or amended by an administrative body with general delegated powers
to grant authorities or franchises. However, in the instant case, the law granting a direct franchise
to PNCC51 evidently and specifically conferred upon the TRB the power to impose conditions in an
appropriate contract.52 And to reiterate, Section 3 of P.D. 1113 provides that "[t]his [PNCC] franchise
is granted subject to such conditions as may be imposed by the [TRB] in an appropriate contract to
be executed for this purpose, and with the understanding and upon the condition that it shall be
subject to amendment, alteration or repeal when public interest so requires."53 A similarly worded
proviso is found in Section 6 of P.D. 1894. It is in this light that the TRB entered into the subject
STOAs in order to allow the infusion of additional investments in the subject infrastructure projects.
Prior to the expiration of PNCC’s franchise on May 1, 2007, the STOAs merely imposed additional
conditionalities, or as aptly pointed out by SLTC et al., obviously having in mind par. 16.06 of its
STOA with TRB,54 served as supplement, to the existing TOA of PNCC with TRB. We have carefully
gone over the different STOAs and discovered that the tollway projects covered thereby were all
undertaken under the P.D. 1113 franchise of PNCC. And it cannot be over-emphasized that the
respective STOAs of MNTC and SLTC each contain provisions addressing the eventual expiration of
PNCC’s P.D. 1113 franchise and authorizing, thru the issuance by the TRB of a TOC, the
implementation of a given toll project even after May 1, 2007. Thus:
MNTC STOA
2.6 CONCESSION PERIOD. In order to sustain the financial viability and integrity of the Project,
GRANTOR [TRB] hereby grants MNTC the CONCESSION for the PROJECT ROADS for a period
commencing upon the date that this [STOA] comes into effect under Clause 4.1 until 31 December
2030 or thirty years after the issuance of the corresponding TOLL OPERATION PERMIT for the last
completed phase…. Accordingly, unless the PNCC FRANCHISE is further extended beyond its expiry
on 01 May 2007, GRANTOR undertakes to issue the necessary [TOC] for the rehabilitated and
refurbished [NLEX] six months prior to the expiry of the PNCC FRANCHISE on 01 May 2007….
SLTC STOA
2.03 Authority of Investor and Operator to Undertake the Project
(1) The GRANTOR [TRB] has determined that the Project Toll Roads are within the existing SLEX
and are thus covered by the PNCC Franchise that is due to expire on May 1, 2007. PNCC has
committed to exert its best efforts to obtain an extension x x x It is understood and agreed that
in the event the PNCC Franchise is not renewed beyond the said expiry date, this [STOA] and the
Concession granted x x x will stand in place of the PNCC Franchise and serve as a new concession,
or authority, pursuant to Section 3 (a) of the TRB Charter, for the Investor to undertake the
Project and for the Operator to Operate and Maintain the Project Toll Roads immediately upon
the expiration of the PNCC Franchise, without need of the execution x x x of any other document
to effect the same.
(2) x x x in the event it is subsequently decreed by competent authority that the issuance by the
Grantor of a [TOC] is necessary x x x the Grantor shall x x x cause the TRB x x x to issue such [TOC]
in favor of the Operator, embodying the terms and conditions of this Agreement.
The foregoing notwithstanding, there are to be sure certain aspects in PNCC’s legislative franchise
beyond the altering reach of TRB. We refer to the coverage area of the tollways and the expiry date
of PNCC’s original franchise, which is May 1, 2007, as expressly stated under Sections 1 and 2 of P.D.
1894, respectively. The fact that these two items were specifically and expressly defined by law, i.e.
P.D. 1113, indicates an intention that any alteration, modification or repeal thereof should only be
done through the same medium. We said as much in Radstock, thus: "[T]he term of the x x x
franchise, ‘which is 30 years from 1 May 1977, shall remain the same,’ as expressly provided in the
first sentence of x x x Section 2 of P.D. 1894."55 It is likewise worth noting what We further held in
that case:
The TRB does not have the power to give back to PNCC the toll assets and facilities which were
automatically turned over to the Government, by operation of law, upon the expiration of the
franchise of the PNCC on 1 May 2007. Whatever power the TRB may have to grant authority to
operate a toll facility or to issue a "[TOC]," such power does not obviously include the authority to
transfer back to PNCC ownership of National Government assets, like the toll assets and facilities,
which have become National Government property upon the expiry of PNCC’s franchise x x x. 56
(Emphasis in the original.)
Verily, upon the expiration of PNCC’s legislative franchise on May 1, 2007, the new authorities to
construct, maintain and operate the subject tollways and toll facilities granted by the TRB pursuant
to the validly executed STOAs and TOCs, shall begin to operate and be treated as administrative
franchises or authorities. Pursuant to Section 3 (e) P.D. 1112, TRB possesses the power and duty,
inter alia to:
x x x grant authority to operate a toll facility and to issue therefore the necessary "Toll Operation
Certificate" subject to such conditions as shall be imposed by the [TRB] including inter alia x x x.
This is likewise consistent with the position of the Secretary of Justice in Opinion No. 122 on
November 24, 1995,57 thus:
TRB has no authority to extend the legislative franchise of PNCC over the existing NSLE (North and
South Luzon Expressways). However, TRB is not precluded under Section 3 (e) of P.D. No. 1112 (TRB
Charter) to grant PNCC and its joint venture partner the authority to operate the existing toll facility
of the NSLE and to issue therefore the necessary "Toll Operation Certificate x x x.
It should be noted that the existing franchise of PNCC over the NSLE, which will expire on May 1,
2007, gives it the "right, privilege and authority to construct, maintain and operate" the NSLE. The
Toll Operation Certificate which TRB may issue to the PNCC and its joint venture partner after the
expiration of its franchise on May 1, 2007 is an entirely new authorization, this time for the
operation and maintenance of the NSLE x x x. In other words, the right of PNCC and its joint venture
partner, after May 7, 2007 [sic] to operate and maintain the existing NSLE will no longer be founded
on its legislative franchise which is not thereby extended, but on the new authorization to be
granted by the TRB pursuant to Section 3 (e), above quoted, of P.D. No. 1112. (Emphasis ours.)
The same opinion was thereafter made by the Secretary of Justice on January 9, 2006, in Opinion
No. 1,58 stating that:
The existing franchise of PNCC over the NSLE, which will expire on May 1, 2007, gives it the "right,
privilege and authority to construct, maintain and operate the NSLE." The Toll Operation Certificate
which the TRB may issue to the PNCC and its joint venture partner after the expiration of its
franchise on May 1, 2007 is an entirely new authorization, this time for the operation and
maintenance of the NSLE…. [T]he right of PNCC and its joint venture partner, after May 1, 2007, to
operate and maintain the existing NSLE will no longer be founded on its legislative franchise which
is not thereby extended, but on the new authorization to be granted by the TRB pursuant to Section
3 (e) of PD No. 1112.
It appears therefore, that the effect of the STOA is not to extend the Franchise of PNCC, but rather,
to grant a new Concession over the SLEX Project and the OMCo., entities which are separate and
distinct from PNCC. While initially, the authority of SLTC and OMCo. to enter into the STOA with the
TRB and thereby become grantees of the Concession, will stem from and be based on the JVA and
the assignment by PNCC to the OMCo. of the Usufruct in the Franchise, we submit that upon the
execution by SLTC and the TRB of the STOA, the right to the Concession will emanate from the STOA
itself and from the authority of the TRB under Section 3 (a) of the TRB Charter. Such being the case,
the expiration of the Franchise on 1 May 2007, since such Concession is an entirely new and distinct
concession from the Franchise and is, as stated, granted to entities other than PNCC.
Finally, with regards (sic) the authority of the TRB this Office in Secretary of Justice Opinion No. 92,
s. 2000, stated that:
"Suffice it to say that official acts of the President enjoy full faith and confidence of the Government
of the Republic of the Philippines which he represents. Furthermore, considering that the queries
raised herein relates to the exercise by the TRB of its regulatory powers over toll road project, the
same falls squarely within the exclusive jurisdiction of TRB pursuant to P.D. No. 1112. Consequently,
it is, therefore, solely within TRB’s prerogative and determination as to what rule shall govern and
is made applicable to a specific toll road project proposal."
The STOA is an explicit grant of the Concession by the Republic of the Philippines, through the TRB
pursuant to P.D. (No.) 1112 and as approved by the President xxx. The foregoing grant is in full
accord with the provisions of P.D. (No.) 1112 which authorizes TRB to enter into contracts on behalf
of the Republic of the Philippines for the construction, operation and maintenance of toll facilities.
Such being the case, we opine that no other legal requirement is necessary to make the STOA
effective of to confirm MNTC’s (In this case, SLTC and the OMCO) rights and privileges granted
therein." (Emphasis in the original.)
Considering, however, that all toll assets and facilities pertaining to PNCC pursuant to its P.D. 1113
franchise are deemed to have already been turned over to the National Government on May 1,
2007,59 whatever participation that PNCC may have in the new authorities to construct, maintain
and operate the subject tollways, shall be limited to doing the same in trust for the National
Government. In Radstock, the Court held that "[w]ith the expiration of PNCC’s franchise, [its] assets
and facilities … were automatically turned over, by operation of law, to the government at no
cost."60 The Court went on further to state that the Government’s ownership of PNCC’s toll assets
inevitably resulted in its owning too of the toll fees and the net income derived, after May 1, 2007,
from the toll assets and facilities.61 But as We have earlier discussed, the tollways and toll facilities
should remain functioning in accordance with the validly executed STOAs and TOCs. However,
PNCC’s assets and facilities, or, in short, its very share/participation in the JVAs and the STOAs,
inclusive of its percentage share in the toll fees collected by the JV companies currently operating
the tollways shall likewise automatically accrue to the Government.
In fine, petitioners’ claim about PNCC’s franchise being amenable to an amendment only by an act
of Congress, or, what practically amounts to the same thing, that the TRB is without authority at all
to modify the terms and conditions of PNCC’s franchise, i.e. by amending its TOA/TOC, has to be
rejected. Their lament then that the TRB, through the instrumentality of mere contracts and an
administrative operating certificate, or STOAs and TOC, to be precise, effectively, but invalidly
amended PNCC legislative franchise, are untenable. For, the bottom line is, the TRB has, through
the interplay of the pertinent provisions of P.D. Nos. 1112, 1113 and 1894, the power to grant the
authority to construct and operate toll road projects and toll facilities by way of a TOA and the
corresponding TOC. What is otherwise a legislative power to grant or renew a franchise is not
usurped by the issuance by the TRB of a TOC. But to emphasize, the case of the TRB is quite
peculiarly unique as the special law conferring the legislative franchise likewise vested the TRB with
the power to impose conditions on the franchise, albeit in a limited sense, by excluding from the
investiture the power to amend or modify the stated lifetime of the franchise, its coverage and the
ownership arrangement of the toll assets following the expiration of the legislative franchise.62
At this juncture, the Court wishes to express the observation that P.D. Nos. 1112, 1113 and 1894,
as couched and considered as a package, very well endowed the TRB with extraordinary powers.
For, subject to well-defined limitations and approval requirements, the TRB can, by way of STOAs,
allow and authorize, as it has allowed and authorized, a legislative franchisee, PNCC, to share its
concession with another entity or JV partners, the authorization effectively covering periods beyond
May 2007. However, this unpalatable reality, a leftover of the martial law regime, presents issues
on the merits and the wisdom of the economic programs, which properly belong to the legislature
or the executive to address. The TRB is not precluded from granting PNCC and its joint venture
partners authority, through a TOC for a period following the term of the proposed SMMS, with the
said TOC serving as an entirely new authorization upon the expiration of PNCC’s franchise on May
1, 2007. In short, after May 1, 2007, the operation and maintenance of the NLEX and the other
subject tollways will no longer be founded on P.D. 1113 or portions of P.D. 1894 (PNCC’s original
franchise) but on an entirely new authorization, i.e. a TOC, granted by the TRB pursuant to its
statutory authority under Sections 3 (a) and (e) of P.D. 1112.
Likewise needing no extended belaboring, in the light of the foregoing dispositions, is the untenable
holding of the RTC in SCA No. 3138-PSG that the TRB is without power to issue a TOC to PNCC,
amend or renew its authority over the SLEX tollways without separate legislative enactment. And
lest it be overlooked, the TRB may validly issue an entirely new authorization to a JV company after
the lapse of PNCC’s franchise under P.D. 1113. Its thirty-year concession under P.D. 1894, however,
does not have the quality of definiteness as to its start, as by the terms of the issuance, it
commences and is to be counted "from the date of approval of the project," the term project
obviously referring to "Metro Manila Expressways and all extensions, linkages, stretches and
diversions refurbishing and rehabilitation of the existing NLEX and SLEX constructed after the
approval of the decree in December 1983." The suggestion, therefore, of the petitioners in G.R. No.
169917, citing a 1989 Court of Appeals ("CA") decision in CA-G.R. 13235 (Republic v. Guerrero, et
al.), that the Balintawak to Tabang portion of the expressway no longer forms part of PNCC’s
franchise and, therefore, PNCC is without any right to assign the same to MNTC via a JVA, is
specious. Firstly, in its Decision63 in G.R. No. 89557, a certiorari proceeding commenced by PNCC to
nullify the CA decision adverted to, the Court approved a compromise agreement, which referred
to (1) the PNCC’s authority to collect toll and maintenance fees; and (2) the supervision, approval
and control by the DPWH64 of the construction of additional facilities, on the questioned portion of
the NLEX.65 And still in another Decision,66 the Court ruled that the Balintawak to Tabang stretch
was recognized as "part of the franchise of, or otherwise restored as toll facilities to be operated by
x x x PNCC."67 Once stamped with judicial imprimatur, and unless amended, modified or revoked by
the parties, a compromise agreement becomes more than a mere binding contract; as thus
sanctioned, the agreement constitutes the court’s determination of the controversy, enjoining the
parties to faithfully comply thereto.68 Verily, like any other judgment, it has the effect and authority
of res judicata.69
At any rate, the PNCC was likewise granted temporary or interim authority by the TRB to operate
the SLEX,70 to ensure the continued development, operations and progress of the projects. We have
ruled in Oroport Cargohandling Services, Inc. v. Phividec Industrial Authority that an administrative
agency vested by law with the power to grant franchises or authority to operate can validly grant
the same in the interim when it is necessary, temporary and beneficial to the public.71 The grant by
the TRB to PNCC as interim operator of the SLEX was certainly intended to guarantee the continued
operation of the said tollway facility, and to ensure the want of any delay and inconvenience to the
motoring public.
All given, the cited CA holding is not a binding precedent. The time limitation on PNCC’s franchise
under either P.D. 1113 or P.D. 1894 does not detract from or diminish the TRB’s delegated authority
under P.D. 1112 to enter into separate toll concessions apart and distinct from PNCC’s original
legislative franchise.
Third Issue: TRB’s Power to Enter into Contracts; Issue,
Modify And Promulgate Toll Rates; and to Rule on Petitions
Relative to Toll Rates Level and Increases Valid
The petitioners in the special civil actions cases would have the Court declare as invalid (a) Section
3 (a) and (d) of P.D. 1112 (which accord the TRB, on one hand, the power to enter into contracts for
the construction, and operation of toll facilities, while, on the other hand, granting it the power to
issue and promulgate toll rates) and (b) Section 8 (b) of P.D. 1894 (granting TRB adjudicatory
jurisdiction over matters involving toll rate movements). As submitted, granting the TRB the power
to award toll contracts is inconsistent with its quasi-judicial function of adjudicating petitions for
initial toll and periodic toll rate adjustments. There cannot, so petitioners would postulate, be
impartiality in such a situation.
The assailed provisions of P.D. 1112 and P.D. 1894 read:
P.D. 1112
Section 3. Powers and Duties of the Board. The Board shall have in addition to its general powers of
administration the following powers and duties:
(a) Subject to the approval of the President of the Philippines, to enter into contracts in behalf of
the Republic of the Philippines with persons, natural or juridical, for the construction, operation
and maintenance of toll facilities such as but not limited to national highways, roads, bridges, and
public thoroughfares. Said contract shall be open to citizens of the Philippines and/or to
corporations or associations qualified under the Constitution and authorized by law to engage in
toll operations;
(d) Issue, modify and promulgate from time to time the rates of toll that will be charged the direct
users of toll facilities and upon notice and hearing, to approve or disapprove petitions for the
increase thereof. Decisions of the Board on petitions for the increase of toll rate shall be
appealable to the Office of the President within ten (10) days from the promulgation thereof.
Such appeal shall not suspend the imposition of the new rates, provided however, that pending
the resolution of the appeal, the petitioner for increased rates in such case shall deposit in a trust
fund such amounts as may be necessary to reimburse toll payers affected in case a reversal of
the decision. (Emphasis ours.)
P.D. 1894
SECTION 8. x x x
(b) For the Metro Manila Expressway and such extensions, linkages, stretches and diversions of the
Expressways which may henceforth be constructed, maintained and operated by the GRANTEE, the
GRANTEE shall collect toll at such rates as shall initially be approved by the Toll Regulatory Board.
The Toll Regulatory Board shall have the authority to approve such initial toll rates without the
necessity of any notice and hearing, except as provided in the immediately succeeding paragraph
of this Section. For such purpose, the GRANTEE shall submit for the approval of the Toll Regulatory
Board the toll proposed to be charged the users. After approval of the toll rate(s) by the Toll
Regulatory Board and publication thereof by the GRANTEE once in a newspaper of general
circulation, the toll shall immediately be enforceable and collectible upon opening of the
expressway to traffic use.
Any interested Expressways users shall have the right to file, within a period of ninety (90) days after
the date of publication of the initial toll rate, a petition with the Toll Regulatory Board for a review
of the initial toll rate; provided, however, that the filing of such petition and the pendency of the
resolution thereof shall not suspend the enforceability and collection of the toll in question. The Toll
Regulatory Board, at a public hearing called for the purpose after due notice, shall then conduct a
review of the initial toll shall be appealable (sic) to the Office of the President within ten (10) days
from the promulgation thereof. The GRANTEE may be required to post a bond in such amount and
from such surety or sureties and under such terms and conditions as the Toll Regulatory Board shall
fix in case of any petition for review of, or appeal from, decisions of the Toll Regulatory Board.
In case it is finally determined, after a review by the Toll Regulatory Board or appeal therefrom, that
the GRANTEE is not entitled, in whole or in part, to the initial toll, the GRANTEE shall deposit in the
escrow account the amount collected under the approved initial toll fee and such amount shall be
refunded to Expressways users who had paid said toll in accordance with the procedure as may be
prescribed or promulgated by the Toll Regulatory Board. (Emphasis ours.)
The petitioners are indulging in gratuitous, if not unfair, conclusion as to the capacity of the TRB to
act as a fair and objective tribunal on matters of toll fee fixing.
Administrative bodies have expertise in specific matters within the purview of their respective
jurisdictions. Accordingly, the law concedes to them the power to promulgate implementing rules
and regulations ("IRR") to carry out declared statutory policies – provided that the IRR conforms to
the terms and standards prescribed by that statute.72
The Court does not perceive an irreconcilable clash in the enumerated TRB’s statutory powers, such
that the exercise of one negates another. The ascription of impartiality on the part of the TRB
cannot, under the premises, be accorded cogency. Petitioners have not shown that the TRB lacks
the expertise, competence and capacity to implement its mandate of balancing the interests of the
toll-paying motoring public and the imperative of allowing the concessionaires to recoup their
investment with reasonable profits. As it were, Section 9 of P.D. 1894 provides a parametric formula
for adjustment of toll rates that takes into account the Peso-US Dollar exchange rate, interest rate
and construction materials price index, among other verifiable and quantifiable variables.
While not determinative of the issue immediately at hand, the grant to and the exercise by an
administrative agency of regulating and allowing the operation of public utilities and, at the same
time, fixing the fees that they may charge their customers is now commonplace. It must be
presumed that the Congress, in creating said agencies and clothing them with both adjudicative
powers and contract-making prerogatives, must have carefully studied such dual authority and
found the same not breaching any constitutional principle or concept. 73 So must it be for P.D. Nos.
1112 and 1894.
The Court can take judicial cognizance of the exercise by the LTFRB and NTC – both spin-off agencies
of the now defunct Public Service Commission – of similar concurrent powers. The LTFRB, under
Executive Order No. ("E.O.") 202,74 series of 1987, is empowered,75 among others, to regulate the
operation of public utilities or "for hire" vehicles and to grant franchises or certificates of public
convenience ("CPC"); and to fix rates or fares, to approve petitions for fare rate increases and to
resolve oppositions to such petitions.
The NTC, on the other hand, has been granted similar powers of granting franchises, allocating areas
of operations, rate-fixing and to rule on petitions for rate increases under E.O. 546,76 s. of 1979.
The Energy Regulatory Commission ("ERC") likewise enjoys on the one hand, the power (a) to grant,
modify or revoke an authority to operate facilities used in the generation of electricity, and on the
other, (b) to determine, fix and approve rates and tariffs of transmission, and distribution retail
wheeling charges and tariffs of franchise electric utilities and all electric power rates including that
which is charged to end-users.77 In Chamber of Real Estate and Builders’ Association, Inc. v. ERC, We
even categorically stated that the ERC is a "quasi-judicial and quasi-legislative regulatory body
created under Section 38 of the EPIRA, [and] x x x an administrative agency vested with broad
regulatory and monitoring functions over the Philippine electric industry to ensure its successful
restructuring and modernization x x x."78
To summarize, the fact that an administrative agency is exercising its administrative or executive
functions (such as the granting of franchises or awarding of contracts) and at the same time
exercising its quasi-legislative (e.g. rule-making) and/or quasi-judicial functions (e.g. rate-fixing),
does not support a finding of a violation of due process or the Constitution. In C.T. Torres
Enterprises, Inc. v. Hibionada,79 We explained the rationale, thus:
It is by now commonplace learning that many administrative agencies exercise and perform
adjudicatory powers and functions, though to a limited extent only. Limited delegation of judicial or
quasi-judicial authority to administrative agencies (e.g. the Securities and Exchange Commission
and the National Labor Relations Commission) is well recognized in our jurisdiction, basically
because the need for special competence and experience has been recognized as essential in the
resolution of questions of complex or specialized character and because of a companion recognition
that the dockets of our regular courts have remained crowded and clogged.
xxxx
As a result of the growing complexity of the modern society, it has become necessary to create more
and more administrative bodies to help in the regulation of its ramified activities. Specialized in the
particular fields assigned to them, they can deal with the problems thereof with more expertise and
dispatch than can be expected from the legislature or the courts of justice. This is the reason for the
increasing vesture of quasi-legislative and quasi-judicial powers in what is now not unquestionably
called the fourth department of the government.
xxxx
There is no question that a statute may vest exclusive original jurisdiction in an administrative
agency over certain disputes and controversies falling within the agency's special expertise. The very
definition of an administrative agency includes its being vested with quasi-judicial powers. The ever
increasing variety of powers and functions given to administrative agencies recognizes the need for
the active intervention of administrative agencies in matters calling for technical knowledge and
speed in countless controversies which cannot possibly be handled by regular courts. (Emphasis
ours.)
Fourth Issue: President Amply Vested With Statutory
Power To Approve TRB Contracts
Just like their parallel stance on the grant to TRB of the power to enter into toll agreements, e.g.,
TOAs or STOAs, the petitioners in the first three petitions would assert that the grant to the
President of the power to peremptorily authorize the assignment by PNCC, as franchise holder, of
its franchise or the usufruct in its franchise is unconstitutional. It is unconstitutional, so petitioners
would claim, for being an encroachment of legislative power.
As earlier indicated, Section 3 (a) of P.D. 1112 requires approval by the President of any contract
TRB may have entered into or effected for the construction and operation of toll facilities.
Complementing Section 3 (a) is 3 (e) (3) of P.D. 1112 enjoining the transfer of the usufruct of PNCC’s
franchise without the President’s prior approval. For perspective, Section 3 (e) (3) of P.D. 1112
provides:
That the toll operator shall not lease, transfer, grant the usufruct of, sell or assign the rights or
privileges acquired under the [TOC] to any person x x x or legal entity nor merge with any other
company or corporation organized for the same purpose without the prior approval of the President
of the Philippines. In the event of any valid transfer of the TOC, the Transferee shall be subject to
all the conditions, terms, restrictions and limitations of this Decree x x x.80
The President’s approving authority is of statutory origin. To us, there is nothing illegal, let alone
unconstitutional, with the delegation to the President of the authority to approve the assignment
by PNCC of its rights and interest in its franchise, the assignment and delegation being circumscribed
by restrictions in the delegating law itself. As the Court stressed in Kilosbayan v. Guingona, Jr.,81 the
rights and privileges conferred under a franchise may be assigned if authorized by a statute, subject
to such restrictions as may be provided by law, such as the prior approval of the grantor or a
government agency.82
There can, therefore, be no serious challenge to this presidential- approving prerogative. Should
grave abuse of discretion in some way infect the exercise of the prerogative, then the approval
action may be nullified for that reason, but not on the ground that the underlying authority is
constitutionally doubtful. If the TRB may validly be empowered to grant private entities the
authority to operate toll facilities, would a delegation of a lesser authority to approve the grant to
the head of the administrative machinery of the government be objectionable?
The fact that P.D. 1112 partakes of a martial law issuance does not per se provide an objectionable
feature to the decree, albeit it may be argued with some plausibility that then President Marcos
intended to have the final say as to who shall act as the toll operators of the Luzon expressways. Be
that as it may, "all proclamations, orders, decrees, instructions, and acts promulgated, issued, or
done by the former President (Ferdinand E. Marcos) are part of the law of the land, and shall remain
valid, legal, binding, and effective, unless modified, revoked or superseded by subsequent
proclamations, orders, decrees, instructions, or other acts of the President." 83 To emphasize, Padua
v. Ranada cited Association of Small Landowners in the Philippines, Inc. v. Secretary of Agrarian
Reform, quoting that:
The Court wryly observes that during the past dictatorship, every presidential issuance, by whatever
name it was called, had the force and effect of law because it came from President Marcos. Such
are the ways of despots. Hence, it is futile to argue … that LOI 474 could not have repealed P.D. No.
27 because the former was only a letter of instruction. The important thing is that it was issued by
President Marcos, whose word was law during that time.84
Fifth Issue: Assailed STOAs Validly Entered
This brings us to the issue of the validity of certain provisions of the STOAs and related agreements
entered into by the TRB, as duly approved by the President.
Relying on Clause 17.4.185 of the MNTC STOA that the lenders have the unrestricted right to appoint
a substitute entity in case of default of MNTC or of the occurrence of an event of default in respect
of the loans, petitioners argue that since MNTC is the assignee or transferee of PNCC’s franchise,
then it steps into the shoes of PNCC. They contend that the act of replacing MNTC as grantee is
tantamount to an amendment or alteration of the PNCC’s original franchise and hence
unconstitutional, considering that the constitutional power to appoint a new franchise holder is
reserved to Congress.86
This contention is bereft of merit.
Petitioners’ presupposition that only Congress has the power to directly grant franchises is
misplaced. Time and again, We have held that administrative agencies may be empowered by the
Legislature by means of a law to grant franchises or similar authorizations. 87 And this, We have
sufficiently addressed in the present case.88 To reiterate, We discussed in Albano that our statute
books are replete with laws granting administrative agencies the power to issue authorizations. 89
This delegation of legislative power to administrative agencies is allowed "in order to adapt to the
increasing complexity of modern life."90 Consequently, We have held that the "privileges conferred
by grant by local authorities as agents for the state constitute as much a legislative franchise as
though the grant had been made by an act of the Legislature." 91
In this case, the TRB’s charter itself, or Section 3 (e) of P.D. 1112, specifically empowers it to "grant
authority to operate a toll facility and to issue therefore the necessary ‘Toll Operation Certificate’
subject to such conditions as shall be imposed by the [TRB]x x x."92 Section 3 (a) of the same law
permits the TRB to enter into contracts for the construction, operation and maintenance of toll
facilities. Clearly, there is no question that the TRB is vested by the Legislature, through P.D. 1112,
with the power not only to grant an authority to operate a toll facility, but also to enter into
contracts for the construction, operation and maintenance thereof.
Petitioners also contend that substituting MNTC as the grantee in case of its default with respect to
its loans is tantamount to an amendment of PNCC’s original franchise and is hence, unconstitutional.
We also find this assertion to be without merit. Besides holding that the Legislature may properly
empower administrative agencies to grant franchises pursuant to a law, We have also earlier
explained in this case that P.D. 1113 and the amendatory P.D. 1894 both vested the TRB with the
power to impose conditions on PNCC’s franchise in an appropriate contract and may therefore
amend or alter the same when public interest so requires;93 save for the conditions stated in
Sections 1 and 2 of P.D. 1894, which relates to the coverage area of the tollways and the expiration
of PNCC’s original franchise.94 P.D. 1112 provided further that the TRB has the power to amend or
modify a Toll Operation Certificate that it issued when public interest so requires.95 Accordingly, to
Our mind, there is nothing infirm much less questionable about the provision in the STOA, allowing
the substitution of MNTC in case it defaults in its loans.
Furthermore, in the subject provision (Clause 17.4.196),the "unrestricted right" of the lender to
appoint a substituted entity is never intended to afford such lender a plenary power to do so. The
subject clause states:
17.4.1 The PARTIES acknowledge that following a Notice of Substitution under clauses 17.2 or 17.3
the LENDERS have, subject to the provisions of Clause 17.4.3, the unrestricted right to appoint a
SUBSTITUTED ENTITY in place of MNTC following the declaration of the occurrence of a MNTC
DEFAULT prior to full repayment of the LOANS or of an event of default in respect of the LOANS.
GRANTOR shall extend all reasonable assistance to the AGENT to put in place a SUBSTITUTED
ENTITY. MNTC shall make available all necessary information to potential SUBSTITUTED ENTITY to
enable such entity to evaluate the Project. (Emphasis ours.)
It is clear from the above-quoted provision that Clause 17.4.1 should always be construed and read
in conjunction with Clauses 17.2, 17.3, 17.4.2, 17.4.3 and 20.12. Clauses 17.2 and 17.3 discuss the
procedures that must be followed and undertaken in case of MNTC’s default prior to the full
repayment of the loans, and before the substitution under Clause 17.4.1 could take place. These
clauses provide the following process:
Prior to Full Repayment of the LOANS:
17.2 Upon occurrence of an MNTC DEFAULT under Clause 17.1(a) and (e) prior to full repayment of
the LOANS, GRANTOR shall serve a written Notice of Default to MNTC with copy to the AGENT giving
a reasonable period of time to cure the MNTC DEFAULT, such period being three (3) months from
receipt of the notice or such longer period as may be approved by GRANTOR, taking due
consideration of the nature of the default and of the repair works required. If MNTC fails to remedy
such default during such three (3) month or [sic] curing period, GRANTOR may issue a Notice of
Substitution on MNTC, copy furnished to the AGENT, which shall take effect upon the assumption
and take over by the SUBSTITUTED ENTITY pursuant to the provisions of Clause 17.4 hereof;
Provided, However, that prior to such assumption and take over by the SUBSTITUTED ENTITY, MNTC
shall continue to operate and maintain the project roads and shall place in an escrow account the
toll revenues, save such amounts as may be needed to primarily cover the operating costs and as
may be owing and due to the lenders under the loans and, secondarily, to cover the PNCC Gross Toll
Revenue Share, Provided, Further, that upon the assumption and take over by the SUBSTITUTED
ENTITY, such assumption and take over shall have the effect of revoking the rights, privileges and
obligations of MNTC under this AGREEMENT in favor of the SUBSTITUTED ENTITY and MNTC shall
cease to be a PARTY to this AGREEMENT.
17.3 If prior to full repayment of the LOANS MNTC fails to remedy MNTC DEFAULT under Clause
17.1 (b) or an MNTC DEFAULT occurs under Clause 17.1 (c), (d) or (f) prior to full repayment of the
LOANS, GRANTOR shall serve a Notice of Substitution on MNTC, copy furnished to the AGENT, as
provided under Clause 17.4.97 (Emphasis ours)
It is apparent from the above-quoted provision that it is the TRB – representing the Republic of the
Philippines as Grantor – which has control over the situation before Clause 17.4.1 could come into
place. To stress, following the condition under Clause 17.4.1, it is only when Clauses 17.2 and 17.3
have been complied with that the entire Clause 17.4 could begin to materialize.
Clauses 17.4.2 and 17.4.3 also provide for certain parameters as to when a substituted entity could
be considered acceptable, and enumerate the conditions that should be undertaken and complied
with.98 Particularly, the subject provisions state:
17.4.2 The SUBSTITUTED ENTITY shall be required to provide evidence to GRANTOR that at the time
of substitution:
(i) it is legally and validly nominated by the AGENT as MNTC’s substitute to continue the
implementation of the PROJECT.
(ii) it is legally and validly constituted and has the capability to enter into such agreement as may
be required to give effect to the substitution;
17.4.3 The AGENT shall have one (1) year to effect a substitution under Clause 17.4; Provided,
However, that during this time the AGENT shall not take any action which may jeopardize the
continuity of the service and shall take the necessary action to ensure its continuation. To effect
such substitution, the AGENT shall notify its intention to GRANTOR and shall, at the same time, give
all necessary information to GRANTOR. GRANTOR shall, within one (1) month following such
notification, inform the AGENT of its acceptance of the substitution, if the conditions set forth in
Clause 17.4.2 have been satisfied. The SUBSTITUTED ENTITY shall be permitted a reasonable period
to cure any MNTC DEFAULT under Clause 17.1 (a), (b) or (e).
From the foregoing, it is clear that the lenders do not actually have an absolute or "unrestricted"
right to appoint the SUBSTITUTED ENTITY in view of TRB’s right to accept or reject the substitution
within one (1) month from notice and such right to appoint comes into force only if and when the
TRB decides to effectuate the substitution of MNTC as allowed in Clause 17.2 of the MNTC STOA.
At the same time, Clause 17.4.4 particularizes the conditions upon which the substitution shall
become effective, to wit:
17.4.4 The Substitution shall be effective upon:
(a) the appointment of a SUBSTITUTED ENTITY in accordance with the provisions of this Clause
17.4; and,
(b) assumption by the SUBSTITUTED ENTITY of all of the rights and obligations of MNTC under
this AGREEMENT, including the payment of PNCC’s Gross Toll Revenue Share under the JOINT
VENTURE AGREEMENT dated 29 August 1995 and all other agreements in connection with this
agreement signed and executed by and between PNCC and MNTC.
The afore-quoted Section (a) of Clause 17.4.4 reiterates the necessity of compliance by the
substituted entity with all the conditions provided under Clause 17.4. Furthermore, following the
above-quoted conditions veritably protects the interests of the Government. As previously
discussed supra, PNCC’s assets with respect to its legislative franchise under P.D. 1113, as amended,
has already been automatically turned over to the Government. And whatever share PNCC has in
relation to the currently implemented administrative authority granted by the TRB is merely being
held in trust by it in favor of the Government. Accordingly, the fact that Section "b" of Clause 17.4.4
ensures that the obligation to pay PNCC’s Gross Toll Revenue Share is assumed by the substituted
entity, necessarily means that the Government’s Gross Toll Revenue Share is safeguarded and kept
intact.
The MNTC STOA also states that only in case no substituted entity is established in accordance with
Clause 17.4 that Clause 17.5 shall be applied. Clause 17.5 grants the lenders the power to extend
the concession in case the Grantor (Republic of the Philippines) takes over the same, for a period
not exceeding fifty years, until full payment of the loans.99 Petitioners contend that the option to
extend the concession for that stated period is, however, unconstitutional.
This assertion is impressed with merit. At the outset, Clause 17.5 does not actually grant the lenders
of the defaulting concessionaire, the power to unilaterally extend the concession for a period not
exceeding fifty years. For reference, the pertinent provision states:
17.5 Only if no SUBSTITUTE ENTITY is established … shall the GRANTOR [TRB] be entitled to take-
over the CONCESSION with no commitment on the LOANS in which case the OPERATION AND
MAINTENANCE CONTRACT shall be assigned to any entity that the AGENT 100 may designate
provided such entity has a sufficient legal and technical capacity to perform and assume the
obligations of the OPERATION AND MAINTENANCE CONTRACT under this AGREEMENT. The
LENDERS shall receive all TOLL, excepting PNCC’s revenue share provided for under the JOINT
INVESTMENT PROPOSAL (vide: Annex "C" hereof), for as long as required until full repayment of the
LOANS including if necessary an extension of the CONCESSION PERIOD which in no case shall exceed
fifty (50) years; Provided that the LENDERS support all amounts payable under the OPERATION AND
MAINTENANCE CONTRACT. For avoidance of doubt, the GRANTOR will have no obligation in relation
to liabilities incurred by MNTC prior to such take-over.101 (Emphasis supplied)
The afore-quoted provision should be read in conjunction with Clause 20.12, which expressly
provides that the MNTC STOA is "made under and shall be governed by and construed in accordance
with" the laws of the Philippines, and particularly, by the provisions of P.D. Nos. 1112, 1113 and
1894. Under the applicable laws, the TRB may very well amend, modify, alter or revoke the
authority/franchise "whenever the public interest so requires."102 In a word, the power to
determine whether or not to continue or extend the authority granted to a concessionaire to
operate and maintain a tollway is vested to the TRB by the applicable laws. The necessity of whether
or not to extend the concession or the authority to construct, operate and maintain a tollway rests,
by operation of law, with the TRB. As such, the lenders cannot unilaterally extend the concession
period, or, with like effect, impose upon or demand that the TRB agree to extend such concession.
Be that as it may, it must be noted, however, that while the TRB is vested by law with the power to
extend the administrative franchise or authority that it granted, nevertheless, it cannot do so for an
accumulated period exceeding fifty years. Otherwise, it would violate the proscription under Article
XII, Section 11 of the 1987 Constitution, which states that:103
Sec. 11. 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 in character or for a
longer period than fifty years. Neither shall any such franchise or right be granted except under the
condition that it shall be subject to amendment, alteration or repeal by the Congress when the
common good so requires. The State shall encourage equity participation in public utilities by the
general public. The participation of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its capital, and all the executive and
managing officers of such corporation or associations must be citizens of the Philippines. (Emphasis
Ours)
In this case, the MNTC STOA already has an original stipulated period of thirty years. 104 Clause 17.5
allows the extension of this period if necessary to fully repay the loans made by MNTC to the
lenders, thus:
x x x The LENDERS shall receive all TOLL, excepting PNCC’s revenue share provided for under the
JOINT INVESTMENT PROPOSAL (vide: Annex "C" hereof), for as long as required until full repayment
of the LOANS including if necessary an extension of the CONCESSION PERIOD which in no case shall
exceed a maximum period of fifty (50) years; x x x (Emphasis ours.)
If the maximum extension as provided for in Clause 17.5, i.e. fifty years, shall be utilized, the
accumulated concession period that would be granted in this case would effectively be eighty years.
To Us, this is a clear violation of the fifty-year franchise threshold set by the Constitution. It is in this
regard that we strike down the above-quoted clause, "including if necessary an extension of the
CONCESSION PERIOD which in no case shall exceed a maximum period of fifty (50) years" in Clause
17.5 as void for being violative of the Constitution.105 It must be made abundantly clear, however,
that the nullity shall be limited to such extension beyond the 50-year constitutional limit.
All told, petitioners’ allegations that the TRB acted with grave abuse of discretion and with gross
disadvantage to the Government with respect to Clauses 17.4.1 and 17.5 of the MNTC STOA are
unfounded and speculative.
Petitioners also allege that the MNTC STOA is grossly disadvantageous to the Government since
under Clause 11.7 thereof, the Government, through the TRB, guarantees the viability of the
financing program of a toll operator. Under Clause 11.7 of the MNTC STOA, the TRB agreed to pay
monthly, the difference in the toll fees actually collected by MNTC and that which it could have
realized under the STOA. The pertinent provisions states:
11.7 To insure the viability and integrity of the Project, the Parties recognize the necessity for
adjustments of the AUTHORIZED TOLL RATE …. In the event that said adjustment are not effected
as provided under this Agreement for reasons not attributable to MNTC, the GRANTOR [TRB]
warrants and so undertakes to compensate, on a monthly basis, the resulting loss of revenue due
to the difference between the AUTHORIZED TOLL RATE actually collected and the AUTHORIZED TOLL
RATE which MNTC would have been able to collect had the … adjustments been implemented.
(Emphasis ours)
As set out in the preamble of P.D. 1112, the need to encourage the infusion of private capital in
tollway projects is the underlying rationale behind the enactment of said decree. Owing to the
scarce capital available to bankroll a huge capital-intensive project, such as the North Luzon Tollway
project, it is well-nigh inevitable that the financing of these types of projects is sourced from private
investors. Quite naturally, the investors expect the regularity of the cash flow. It is perhaps in this
broad context that the obligation of the Grantor under Clause 11.7 of the MNTC STOA was included
in the STOA. To Us, Clause 11.7 is not only grossly disadvantageous to the Government but a
manifest violation of the Constitution.
Section 3 (e) (5) of P.D. 1112 explicitly states:
[t]hat no guarantee, Certificate of Indebtedness, collateral securities, or bonds shall be issued by
any government agency or government-owned or controlled corporation on any financing program
of the toll operator in connection with his undertaking under the Toll Operation Certificate.
What the law seeks to prevent in this situation is the eventuality that the Government, through any
of its agencies, could be obligated to pay or secure, whether directly or indirectly, the financing by
the private investor of the project. In this case, under Clause 11.7 of the MNTC STOA, the Republic
of the Philippines (through the TRB) guaranteed the security of the project against revenue losses
that could result, in case the TRB, based on its determination of a just and reasonable toll fee,
decides not to effect a toll fee adjustment under the STOA’s periodic/interim adjustment formula.
The OSG, in its Comment, admitted that "the amounts the government undertook to pay in case of
Clause 11.7 violation … is … an undertaking to pay compensatory damage for something akin to a
breach of contract."106 As P.D. 1112 itself expressly prohibits the guarantee of a security in the
financing of the toll operator pursuant to its tollway project, Clause 11.7 cannot be a valid
stipulation in the STOA.
This is more so for being in violation of the Constitution. Article VI, Section 29 (1) of the Constitution
mandates that "[n]o money shall be paid out of the Treasury except in pursuance of an
appropriation made by law."107 We have held in Radstock that "government funds or property shall
be spent or used solely for public purposes, as expressly mandated by Section 4 (2) of PD 1445 or
the Government Auditing Code."108 Particularly, We held in Radstock case that:
[t]he power to appropriate money from the General Funds of the Government belongs exclusively
to the Legislature. Any act in violation of this iron-clad rule is unconstitutional.
Reinforcing this Constitutional mandate, Sections 84 and 85 of PD 1445 require that before a
government agency can enter into a contract involving the expenditure of government funds, there
must be an appropriation law for such expenditure, thus:
Section 84. Disbursement of government funds.
1. Revenue funds shall not be paid out of any public treasury or depository except in pursuance of
an appropriation law or other specific statutory authority.
xxxx
Section 85. Appropriation before entering into contract.
No contract involving the expenditure of public funds shall be entered into unless there is an
appropriation therefor, the unexpended balance of which, free of other obligations, is sufficient to
cover the proposed expenditure.
xxxx
Section 86 of PD 1445, on the other hand, requires that the proper accounting official must certify
that funds have been appropriated for the purpose. Section 87 of PD 1445 provides that any
contract entered into contrary to the requirements of Sections 85 and 86 shall be void…. 109
(Emphasis ours.)
In the instant case, the TRB, by warranting to compensate MNTC with the loss of revenue resulting
from the non-implementation of the periodic and interim toll fee adjustments, violates the very
constitutionally guaranteed power of the Legislature, to exclusively appropriate money for public
purpose from the General Funds of the Government. The TRB veritably accorded unto itself the
exclusive authority granted to Congress to appropriate money that comes from the General Funds,
by making a warranty to compensate a revenue loss under Clause 11.7 of the MNTC STOA. There is
not even a badge of indication that the aforementioned requisites under the Constitution and P.D.
1445 in respect of appropriation of money from the General Funds of the Government have been
properly complied with. Worse, P.D. 1112 expressly prohibits the guarantee of security of the
financing of a toll operator in connection with his undertaking under the Toll Operation Certificate.
Accordingly, Clause 11.7 of the MNTC STOA, under which the TRB warrants and undertakes to
compensate MNTC’s loss of revenue resulting from the non-implementation of the periodic and
interim toll fee adjustments, is illegal, unconstitutional and hence void.
Parenthetically, We also find a similar provision in the SLTC STOA under Clause 8.08 thereof, which
states that:110
(2) In the event the Authorized Toll Rate and adjustments thereto are not implemented or made
effective in accordance with the provisions of this Agreement, for reasons not attributable to the
fault of the Investor and/or the Operator, including the reversal by the TRB or by any competent
court or authority of any such adjustment in the Authorized Toll Rate previously approved by the
TRB, except where such reversal is by reason of a determination of the misapplication of the
Authorized Toll Rates, the Grantor shall compensate the Operator, on a monthly basis and within
thirty (30) days of submission by the Operator of a notice thereof, without interest, for the
resulting loss of revenue computed as the difference between:
(a) the actual traffic volume for the month in question multiplied by the Current Authorized
Toll Rate as escalated and/or adjusted, that should be in effect; and
(b) the Gross Toll Revenue for the month in question.
(3) The obligation of the Grantor to compensate the Operator shall continue until the applicable
Current Authorized Toll Rate is implemented.
Akin to what is contemplated in Clause 11.7 of the MNTC STOA, Clauses 8.08 (2) and (3) of the SLTC
STOA, under which the TRB warrants or is obligated to compensate the Operator for its loss of
revenue resulting from the non-implementation of the calculation/formula of authorized toll price
and toll rate adjustments found in Clause 8 thereof, are illegal, unconstitutional and, hence, void.
This ruling is consistent with the TRB’s power to determine, without any influence or compulsion –
direct or indirect – as to whether a change in the toll fee rates is warranted. We will discuss the
same below.
Petitioners argue that the CITRA, SLTC and MNTC STOAs tie the hands of the TRB as it is bound by
the stipulated periodic and interim toll rate adjustments provided therein. Petitioners contend that
the SMMS (CITRA STOA), the SLTC and the MNTC STOA’s provisions on initial toll rates and
periodic/interim toll rate adjustments, by using a built-in automatic toll rate adjustment formula,111
allegedly guaranteed fixed returns for the investors and negated the public hearing requirement.
This contention is erroneous. The requisite public hearings under Section 3 (d) of P.D. 1112 and
Section 8 (b) of P.D. 1894 are not negated by the fixing of the initial toll rates and the periodic
adjustments under the STOA.
Prefatorily, a clear distinction must be made between the statutory prescription on the fixing of
initial toll rates, on the one hand, and of periodic/interim or subsequent toll rates, on the other.
First, the hearing required under the said provisos refers to notice and hearing for the approval or
denial of petitions for toll rate adjustments – or the subsequent toll rates, not to the fixing of initial
toll rates. By express legal provision, the TRB is authorized to approve the initial toll rates without
the necessity of a hearing. It is only when a challenge on the initial toll rates fixed ensues that public
hearings are required. Section 8 of P.D. 1894 says so:
x x x the GRANTEE shall collect toll at such rates as shall initially be approved by the [TRB]. The [TRB]
shall have the authority to approve such initial toll rates without the necessity of any notice and
hearing, except as provided in the immediately succeeding paragraph of this Section. For such
purpose, the GRANTEE shall submit for the approval of the [TRB] the toll proposed to be charged
the users. After approval of the toll rate(s) by the [TRB] and publication thereof by the GRANTEE
once in a newspaper of general circulation, the toll shall immediately be enforceable and collectible
upon opening of the expressway to traffic use.
Any interested Expressways users shall have the right to file, within x x x (90) days after the date
of publication of the initial toll rate, a petition with the [TRB] for a review of the initial toll rate;
provided, however, that the filing of such petition and the pendency of the resolution thereof shall
not suspend the enforceability and collection of the toll in question. The [TRB], at a public hearing
called for the purpose … shall then conduct a review of the initial toll (sic) shall be appealable to the
[OP] within ten (10) days from the promulgation thereof. (Emphasis ours.)
Of the same tenor is Section 3 (d) of P.D. 1112 stating that the TRB has the power and duty to:
[i]ssue, modify and promulgate from time to time the rates of toll that will be charged the direct
users of toll facilities and upon notice and hearing, to approve or disapprove petitions for the
increase thereof. Decisions of the [TRB] on petitions for the increase of toll rate shall be appealable
to the [OP] within ten (10) days from the promulgation thereof. Such appeal shall not suspend the
imposition of the new rates, provided however, that pending the resolution of the appeal, the
petitioner for increased rates in such case shall deposit in a trust fund such amounts as may be
necessary to reimburse toll payers affected in case a (sic) reversal of the decision.112 (Emphasis
Ours.)
Similarly in Padua v. Ranada, the fixing of provisional toll rates by the TRB without a public hearing
was held to be valid, such procedure being expressly provided by law.113 To be very clear, it is only
the fixing of the initial and the provisional toll rates where a public hearing is not a vitiating
requirement. Accordingly, subsequent toll rate adjustments are mandated by law to undergo both
the requirements of public hearing and publication.
In Manila International Airport Authority ("MIAA") v. Blancaflor, the Court expounded on the
necessity of a public hearing in rate fixing/increases scenario. There, the Court ruled that the MIAA,
being an agency attached to the Department of Transportation and Communications ("DOTC"), is
governed by Administrative Code of 1987,114 Book VII, Section 9 of which specifically mandates the
conduct of a public hearing.115 Accordingly, the MIAA’s resolutions, which increased the rates and
charges for the use of its facilities without the required hearing, were struck down as void. 116
Similarly, as We do concede, the TRB, being likewise an agency attached to the DOTC,117 is governed
by the same Code and consequently requires public hearing in appropriate cases. It is, therefore,
imperative that in implementing and imposing new, i.e. subsequent toll rates arrived at using the
toll rate adjustment formula, the subject tollway operators and the TRB must necessarily comply
not only with the requirement of publication but also with the equally important public hearing.
Accordingly, any fixing of the toll rate, which did not or does not comply with the twin requirements
of public hearing and publication, must therefore be struck down as void. In such case, the
previously valid toll rate shall consequently apply, pending compliance with the twin requirements
for the new toll rate.
In the instant consolidated cases, the fixing of the initial toll rates may have indeed come to pass
without any public hearing.118 Unfortunately for petitioners, and notwithstanding its presumptive
validity, they did not assail the initial toll rates within the timeframe provided in P.D. 1112 and P.D.
1894.119 Besides, as earlier explicated, the STOA provisions on periodic rate adjustments are not a
bar to a public hearing as the formula set forth therein remains constant, serving only as a guide in
the determination of the level of toll rates that may be allowed.
It is apropos to state at this juncture that, in determining the reasonableness of the subsequent toll
rate increases, it behooves the TRB to seek out the Commission on Audit ("COA") for assistance in
examining and auditing the financial books of the public utilities concerned. Section 22, Chapter 4,
Subtitle B, Title 1, Book V of the Administrative Code of 1987 expressly authorizes the COA to
examine the aforementioned documents in connection with the fixing of rates of every nature,
including as in this case, the fixing of toll fees.120 We have on certain occasions applied this provision.
Manila Electric Company, Inc. v. Lualhati easily comes to mind where this Court tasked the Energy
Regulatory Commission to seek the assistance of the COA in determining the reasonableness of the
rate increases that MERALCO intended to implement.121 We have consistently held that "the law is
deemed written into every contract."122 Being a provision of law, this authority of the COA under
the Administrative Code should therefore be deemed written in the subject contracts i.e. the STOAs.
In this regard, during the examination and audit, the public utilities concerned are mandated to
"produce all the reports, records, books of accounts and such other papers as may be required,"
and the COA is empowered to "examine under oath any official or employee of the said public
utilit[ies]."123 Any public utility unreasonably denying COA access to the aforementioned
documents, unnecessarily obstructs the examination and audit and may be adjudged liable "of
concealing any material information concerning its financial status, shall be subject to the penalties
provided by law."124 Finally, the TRB is further obliged to take the appropriate action on the COA
Report with respect to its finding of reasonableness of the proposed rate increases.125
Furthermore, while the periodic, interim and other toll rate adjustment formulas are indicated in
the STOAs,126 it does not necessarily mean that the TRB should accept a rate adjustment predicated
on the economic data, references or assumptions adopted by the toll operator. At the end of the
day, the final figures should be those of the TRB based on its appreciation of the relevant rate-
influencing data. In fine, the TRB should exercise its rate-fixing powers vested to it by law within the
context of the agreed formula, but always having in mind that the rates should be just and
reasonable. Conversely, it is very well within the power of the TRB under the law to approve the
change in the current toll fees.127 Section 3 (d) of P.D. 1112 grants the TRB the power to "[i]ssue,
modify and promulgate from time to time the rates of toll that will be charged the direct users of
toll facilities." But the reasonableness of a possible increase in the fees must first be clearly and
convincingly established by the petitioning entities, i.e. the toll operators. Otherwise, the same
should not be granted by the approving authority concerned. In Philippine Communications Satellite
Corporation v. Alcuaz,128 the Court had the opportunity to explain what is meant by a just and
reasonable fixing of rates, thus:
Hence, the inherent power and authority of the State, or its authorized agent, to regulate the rates
charged by public utilities should be subject always to the requirement that the rates so fixed shall
be reasonable and just. A commission has no power to fix rates which are unreasonable or to
regulate them arbitrarily. This basic requirement of reasonableness comprehends such rates which
must not be so low as to be confiscatory, or too high as to be oppressive.
What is a just and reasonable rate is not a question of formula but of sound business judgment
based upon the evidence it is a question of fact calling for the exercise of discretion, good sense,
and a fair, enlightened and independent judgment. In determining whether a rate is confiscatory, it
is essential also to consider the given situation, requirements and opportunities of the utility. A
method often employed in determining reasonableness is the fair return upon the value of the
property to the public utility x x x. (Emphasis ours.)
If in case the TRB finds the change in the rates to be reasonable and therefore merited, the increase
shall then be implemented after the formalities of public hearing and publication are complied with.
In this case, it is clear that the change in the toll fees is immediately effective and implementable.
This is notwithstanding that, in case of an increase in the toll fees, an appeal thereon is filed. The
law is clear. Thus:
x x x Decisions of the [TRB] on petitions for the increase of toll rate shall be appealable to the Office
of the President within ten (10) days from the promulgation thereof. Such appeal shall not suspend
the imposition of the new rates, provided however, that pending the resolution of the appeal, the
petitioner for increased rates in such case shall deposit in a trust fund such amounts as may be
necessary to reimburse toll payers affected in case a reversal of the decision.129 (Emphasis ours.)
Besides the settled rule under Section 3 (d) of P.D. 1112 that the power to issue, modify and
promulgate toll fees rests with the TRB, it must also be underscored that the periodic and the
interim adjustments found in Clauses 11.4 to 11.6 of the MNTC STOA do not necessarily guarantee
an increase in the toll fees. To stress, the formula is based on many variable factors that could mean
either an increase or a decrease in the toll fees, depending, inter alia, on how well certain economies
are doing; and on the projections and figures published by the Bangko Sentral ng Pilipinas ("BSP"). 130
It is therefore arduous to contemplate a grossness in a disadvantage that could only possibly arise
in case of a non-implementation of a change – particularly, an increase – in the toll rates.
Petitioners have not incidentally shown that it is the traveling public, the users of the expressways,
who shouldered or will shoulder the completion of the projects by way of exorbitant fees payment,
with the investors ending up with a "killing" therefrom. This conclusion, for all its factual dimension,
is too simplistic for acceptance. And it does not consider the reality that the Court is not a trier of
facts. Neither does it take stock of the nature and function of toll roads and toll fees paid by
motorists, as aptly elucidated in North Negros Sugar Co., Inc. v. Hidalgo,131 thus:
"Toll" is the price of the privilege to travel over that particular highway, and it is a quid pro quo. It
rests on the principle that he who, receives the toll does or has done something as an equivalent to
him who pays it. Every traveler has the right to use the turnpike as any other highway, but he must
pay the toll.132
A toll road is a public highway, differing from the ordinary public highways chiefly in this: that the
cost of its construction in the first instance is borne by individuals, or by a corporation, having
authority from the state to build it, and, further, in the right of the public to use the road after
completion, subject only to the payment of toll.133
Toll roads are in a limited sense public roads, and are highways for travel, but we do not regard
them as public roads in a just sense, since there is in them a private proprietary right x x x.134
(Emphasis ours.)
Parenthetically, our review of Section 7 of the SMMS STOA readily yields the information that the
level of the initial toll rates hinges on a mix of factors. Tax holidays that may be granted and the tax
treatment of dividends may be mentioned. On the other hand, the subsequent periodic adjustments
are provided to address factors that usually weigh on the financial condition of any business
endeavor, such as currency devaluation, inflation and the usual increases in maintenance and
operational costs incorporated into the formula provided therefor. Even with the existence of an
automatic toll rate adjustment formula, compliance by the TRB and the other respondents with the
twin requirements of public hearing and publication is still mandatory. To reiterate, laws always
occupy a plane higher than mere contract provisions. In case the minimum statutory requirements
are stiffer than that of a contract, or when the contract does not expressly stipulate the minimum
requirements of the law, then We rule that compliance with such minimum legal requirements
should be done. To summarize, any toll fee increase should comply with the legal twin requirements
of publication and public hearing, the absence of which will nullify the imposition and collection of
the new toll fees.
In all, the initial toll rates and periodic adjustments appear to Us as simply predicated on the basic
rationale for investing in a toll project, which to repeat is: a reasonable rate of return for the
investment. Section 2 (o) of the BOT Law, as amended, provides for a definition for a reasonable
rate of return on investments and operating and maintenance cost. 135 Running through the gamut
of our statutes providing for and encouraging partnership of the public and private sector is the
paramount common good for infrastructure projects and the equally important factor of giving a
reasonable rate of return to private sector’s investments. The viability of any infrastructure project
depends on the returns – which should be reasonable – of the investment coming from the private
sector.
While the interests of the public are ideally to be accorded primacy in considering government
contracts, the reality on the ground is that the tollway projects may not at all be possible or would
be difficult to realize without the involvement of the investing private sector, which expects its usual
share of profit. Thus, the Court is at a loss to understand how the level of the initial toll rates, which
depended on several factors indicated above, and the subsequent adjustments resulted in the
charging of exorbitant toll fees that, to petitioners, enabled the investors to shift the burden of
financing the completion of the projects on the motoring public.
Neither does the alleged drastic—if we may characterize it as such—steep increase in the level of
toll rates for NLEX constitute a "killing" for PNCC and its partner MNTC. Petitioners make much of
the amount of the toll fees vis-à-vis the then prevailing minimum wage. These plays of figures
detract from the essential concern on the propriety of the level of the toll rates vis-à-vis the
investments sunk in the NLEX project with a view, on the part of private investors, to a reasonable
return on their investment. Where no substantial figures were provided on the investments, the
projected operating and maintenance costs vis-à-vis the projected revenue from the toll fees, no
substantial conclusions may reasonably be deduced therefrom. Besides, to be taken into account in
relation to the costs of the construction and rehabilitation of the NLEX is the length of the tollway
and for which motorists have to pay the corresponding toll. Certainly, the allegations and
conclusions of petitioners as to the unreasonable increase of the toll rates are without adequate
factual mooring.
The use of a tollway is a privilege that comes at a cost. The toll is a price paid for the use of a privilege.
There are to be sure alternative roads and routes, which motorists may fall back on if they are
unwilling to pay the toll. The toll, as might be expected, is pegged at a level that makes the
developmental projects and their maintenance viable; otherwise, no investment can be expected
for the furtherance of the projects.
Petitioners Francisco and Hizon alleged that, per the minutes of the TRB meetings, the Board
deliberately refrained, particularly with respect to the Skyway project, from conducting public
hearings for the grant of the initial toll rates and on the rate adjustment formula to be used in order
to accelerate the implementation of the projects. The allegation is far from correct. A perusal of the
pertinent minutes of the TRB meetings, particularly that held on August 17, 1995, 136 in fact would
disclose a picture different from that depicted by said petitioners. Nothing in the minutes of said
meeting tends to indicate that the TRB resolved to dispense with public hearings. We, therefore,
find petitioners Francisco and Hizon’s attempt to mislead the Court by falsely citing supposed
portions137 of the August 17, 1995 TRB meeting very unfortunate. They quoted a correction on the
minutes of the Special Board Meeting No. 95-05 held on July 26, 1995, which was taken up in the
August 17, 1995 meeting for the approval of the minutes of the previous meeting. In said special
meeting of July 26, 1995,138 the Board deliberated on the recommendation of ADG Santos for the
conduct of a public hearing or soliciting the endorsement of the Metro Manila Development
Authority ("MMDA").139 But the TRB did not resolve to omit a public hearing with respect to the toll
rates. In fact, the deliberations used the words "in the event the Board decides" and "if the Board
conducts," clearly conveying the notion that the TRB had not decided or resolved the issue of public
hearings. Be that as it may, We rule that the TRB is mandated to comply with the twin requirements
of public hearing and publication.
Petitioners Francisco and Hizon’s lament about the TRB merely relying on, if not yielding to, the
recommendation and findings of the Technical Working Group ("TWG") of the DPWH on matters
relative to STOA stipulations and toll-rate fixing cannot be accorded cogency. In the area involving
big finance and complex project planning, banking on the data supplied by technicians and experts
is at once practical as it is inevitable. The Court cannot see its way clear to understand why
petitioners would begrudge the TRB for tapping the technical know-how of others. And it cannot be
overemphasized that a recommendation is no more than an exhortation or an urging as to what is
advisable or expedient, not binding on the person to which it is being made. 140 To recommend
involves the idea that another has the final decision.141 The ultimate decision still rests with the TRB
whether or not to accept the findings of the TWG. The minutes of the TRB meetings show that its
members went through the tedious process of deliberating on the formula to be used in computing
the toll rates. The fact that the TRB might have adopted the TWG’s recommendation would not, on
that ground alone, vitiate the bona fides of the former’s decision nor stain the proceedings leading
to such decision. In any case, as earlier held, the toll rate adjustment formula does not and cannot
contravene the legal twin requirements of public hearing and publication.
In another bid to nullify the STOAs in question, petitioners would foist on the Court the arguments
that, firstly, President Ramos twisted the arms of the TRB towards entering into the agreements in
question and, secondly, that the CITRA STOA contained restrictive confidentiality provisions barring
the public from knowing their contents and the details of the negotiations related thereto.
We are not persuaded by the first ground, not necessarily because the pressure brought to bear on
TRB rendered the STOAs infirm, but because the allegations on pressure-tactics allegedly employed
by President Ramos are too speculative for acceptance.
On the second ground, We fail to see how the insertion of the alleged confidentiality clause in the
CITRA STOA translates into grave abuse of discretion or a violation of the Constitution, particularly
Article III, Section 7142 thereof. First off, the Court can take judicial notice that most commercial
contracts, including finance-related project agreements carry the standard confidentiality clause to
protect proprietary data and/or intellectual property rights. This protection angle appears to be the
intent of Clause 14.04(l)143 of the CITRA STOA. And as may be noted, the succeeding Clause 14.04
(2)144 removes from the ambit of the confidentiality restriction the following: disclosure of any
information: (a) not otherwise done by the parties; (b) which is required by law to be disclosed to
any person who is authorized by law to receive the same; (c) to a tribunal hearing pertinent
proceedings relative to the contract or agreement; and (d) to confidential entities and persons
relative to the disclosing party like its banks, consultants, financiers and advisors. The second (item
b) exception provides a reasonable dimension to the assailed confidentiality clause.
Needless to stress, the obligation of the government to make information available cannot be
exaggerated.145 The constitutional right to information does not mean that every day and every
hour is open house in government offices having custody of the desired documents.146 Petitioners
have not sufficiently shown, thus cannot really be heard to complain, that they had been
unreasonably denied access to information with regard to the MNTC or SMMS STOA. Besides, the
remedy for unreasonable denial of information that is a matter of public concern is by way of
mandamus.147
Finally, as to petitioners’ catch-all claim that the STOAs are disadvantageous to the government, as
therein represented by the TRB, suffice it to state for the nonce that behind these agreements are
the Board’s expertise and policy determination on technical, financial and operational matters
involving expressways and tollways. It is not for courts to look into the wisdom and practicalities
behind the exercise by the TRB of its contract-making prerogatives under P.D. Nos. 1112, 1113 and
1894, absent proof of grave abuse of discretion which would justify judicial review. In this regard,
the Court recalls what it wrote in G & S Transport Corporation v. Court of Appeals,148 to wit:
x x x courts, as a rule, refuse to interfere with proceedings undertaken by administrative bodies or
officials in the exercise of administrative functions. This is because such bodies are generally better
equipped technically to decide administrative questions and that non-legal factors, such as
government policy on the matter are usually involved in the decision.
Sixth Issue: Public Bidding Not Required
Private petitioners would finally maintain that public bidding is required for the SMMS and the
North Luzon/South Luzon Tollways, partaking as these projects allegedly do of the nature of a BOT
infrastructure undertaking under the BOT Law. Prescinding from this premise, they would conclude
that the STOAs in question and related preliminary and post-STOA agreements are null and void for
want of the necessary public bidding required for government infrastructure projects.
The contention is patently flawed.
The BOT Law does not squarely apply to the peculiar case of PNCC, which exercised its prerogatives
and obligations under its franchise to pursue the construction, rehabilitation and expansion of the
tollways with chosen partners. The tollway projects may very well qualify as a build-operate-transfer
undertaking. However, given that the projects in the instant case have been undertaken by PNCC in
the exercise of its franchise under P.D. Nos. 1113 and 1894, in joint partnership with its chosen
partners at the time when it was held valid to do so by the OGCC and the DOJ, the public bidding
provisions under the BOT Law do not strictly apply. For, as aptly noted by the OSG, the subject STOAs
are not ordinary contracts for the construction of government infrastructure projects, which
requires under the Government Procurement Reform Act or the now-repealed P.D. 1594,149 public
bidding as the preferred mode of contract award. Neither are they contracts where financing or
financial guarantees for the project are obtained from the government. Rather, the STOAs actually
constitute a statutorily-authorized transfer or assignment of usufruct of PNCC’s existing franchise
to construct, maintain and operate expressways.150
The conclusion would perhaps be different if the tollway projects were to be prosecuted by an outfit
completely different from, and not related to, PNCC. In such a scenario, the entity awarded the
winning bid in a BOT-scheme infrastructure project will have to construct, operate and maintain the
tollways through an automatic grant of a franchise or TOC, in which case, public bidding is required
under the law.
Where, in the instant case, a franchisee undertakes the tollway projects of construction,
rehabilitation and expansion of the tollways under its franchise, there is no need for a public bidding.
In pursuing the projects with the vast resource requirements, the franchisee can partner with other
investors, which it may choose in the exercise of its management prerogatives. In this case, no public
bidding is required upon the franchisee in choosing its partners as such process was done in the
exercise of management prerogatives and in pursuit of its right of delectus personae.151 Thus, the
subject tollway projects were undertaken by companies, which are the product of the joint ventures
between PNCC and its chosen partners.
Petitioners Francisco and Hizon’s assertions about the TRB awarding the tollway projects to favored
companies, unsubstantiated as they are, need no belaboring. Suffice it to state that the discretion
to choose who shall stand as critical JV partners remained all along with PNCC, at least theoretically.
Needless to say, the records do not show that the TRB committed an oversight as an administrative
body over any aspect of tollway operations with regard to PNCC’s selection of partners.
The foregoing disquisitions considered, there is no more point in passing upon the propriety of
prohibiting or enjoining, on the ground of unconstitutionality or grave abuse of discretion, the
implementation of the initial toll rates and/or the adjusted toll rates for the SMSS, expanded NLEX
and SLEX, as authorized by the separate TRB resolutions, subject of and originally challenged in
these proceedings.
These TRB resolutions and the STOAs upon which they are predicated have long been in effect. The
parties have acted on these issuances and contracts whose existence, as an operative fact, cannot
be ignored, let alone erased, even if the charge of unconstitutionality is given currency.
While not exactly of governing applicability in this case, what the Court wrote in De Agbayani v.
Philippine National Bank,152 on the operative fact doctrine is apropos:
x x x 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." ….
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 constitutionality], is an operative fact and may have consequences
which cannot justly be ignored. The past cannot always be erased by a new judicial declaration x
x x." (Emphasis in the original.)
The petitioners in the first three (3) petitions and the respondent in the fourth have not so said
explicitly, but their brief is against the issuance of P.D. Nos. 1112, 1113 and 1894, which conferred
a package of express and implied powers and discretion to the TRB and the President resulting in
the execution of what is perceived to be offending STOAs and the runaway collection of illegal toll
fees. And they have come to the Court to strike down all these issuances, agreements and exactions.
While the Court is not insensitive to their concerns, the rule is that all reasonable doubts should be
resolved in favor of the constitutionality of a statute,153 and the validity of the acts taken in pursuant
thereof. It follows, therefore, that the Court will not set aside a law as violative of the Constitution
except in a clear case of breach154 and only as a last resort.155 And as the theory of separation of
powers prescribes, the Court does not pass upon questions of wisdom, expediency and justice of
legislation. To Us, petitioners and respondent YPES in the fourth petition have not discharged the
heavy burden of demonstrating in a clear and convincing manner the unconstitutionality of the
decrees challenged or the invalidity of assailed acts of the President and the TRB. Because they
failed to do so, the Court must uphold the presumptive constitutionality and validity of the
provisions of the three decrees in question, and the subject contracts and TOCs.
Regarding petitioner Francisco’s Supplemental Petition, the toll rates, the collection of which in the
amount based on the formula and assumptions set forth in the law, and the adverted STOA dated
February 1, 2006 and subject of the TRO issued on August 13, 2010, has been duly published156 and
approved by the TRB, as required by Section 5 of P.D. 1112.157 And the party-concessionaires have
adequately demonstrated, and the TRB has virtually acknowledged158 that the said rates subject of
the TRO partake of the nature of opening or initial toll rates, which have not yet been implemented
since the time the SLTC STOA took effect.159 To note, the toll rates subject of the TRO were approved
and are to be implemented in connection with the new facility, such as Project Toll Roads 1 and 2
pursuant to the new SLTC STOA and the expanded and rehabilitated SLEX. 160 As earlier discussed,
public hearing is not required in the fixing and implementation of initial toll rates. But an interested
party aggrieved by the initial rates imposed is not without any resource as he may, within the time
frame provided by Section 8 (b) of P.D. 1894, repair to the TRB for review and thereafter to the
OP.161 As expressly provided in the same section, however, the pendency of the petition for review,
if there be any, shall not suspend the enforceability and collection of the toll in question. In net
effect, the challenge before the Court of the SLEX toll rate imposition is premature. However, the
Court treats this Supplemental Petition assailing the toll rates covered by the TRB Notice of Toll
Rates published on June 6, 2010 as a petition for review filed under P.D. 1894, and hereby remands
the same to the TRB for a review of the questioned rates to determine the propriety thereof.
WHEREFORE, the petitions in G.R. Nos. 166910 and 173630 are hereby DENIED for lack of merit.
Accordingly, We declare as VALID AND CONSTITUTIONAL the following:
1. the Supplemental Toll Operation Agreement dated April 30, 1998 covering the North Luzon
Tollway Project and the TRB Board Resolution No. 2005-4 issued pursuant thereto;
2. the Supplemental Toll Operation Agreement dated November 27, 1995 covering the South
Metro Manila Skyway and the TRB Board Resolution No. 2004-53 and previous TRB resolutions
issued pursuant thereto;
3. the Supplemental Toll Operation Agreement covering the South Luzon Tollway Project or South
Luzon Expressway and the TRB Board resolutions issued pursuant to the said agreement,
particularly the TRB Board resolutions allowing the toll rate increases that are supposed to have
been implemented on June 30, 2010;
4. Section 3, paragraph (a) of Presidential Decree No. 1112, otherwise known as the "Toll
Operation Decree," in relation to Section 3, paragraph (d) thereof and Section 8, paragraph (b) of
Presidential Decree No. 1894; and
5. Section 3, paragraph (e) 3 of P.D. No. 1112 and Section 13 of P.D. No. 1894.
We however declare Clause 11.7 of the Supplemental Toll Operation Agreement between the
Republic of the Philippines, represented by respondent TRB, as grantor, the Philippine National
Construction Corporation, as franchisee, and the Manila North Tollways Corporation ("MNTC")
dated April 30, 1998; and the clause "including if necessary an extension of the CONCESSION PERIOD
which in no case shall exceed a maximum period of fifty (50) years" in Clause 17.5 of the same STOA,
as VOID and UNCONSTITUTIONAL for being contrary to Section 2, Article XII of the 1987
Constitution. We likewise declare Clauses 8.08 (2) & (3) of the Supplemental Toll Operation
Agreement between the Republic of the Philippines, represented by respondent TRB, as grantor,
the Philippine National Construction Corporation as franchisee, the South Luzon Tollway
Corporation as investor, and the Manila Toll Expressway Systems, Inc. as operator, dated February
1, 2006, as VOID and UNCONSTITUTIONAL.
The petition in G.R. No. 169917 is likewise hereby DENIED for lack of merit. We declare as VALID
and CONSTITUTIONAL the following:
1. Notice of Approval dated May 16, 1995 by former President Fidel V. Ramos on the assignment
of PNCC’s usufructuary rights;
 2. the Joint Venture Agreement dated August 29, 1995;

3. the Joint Investment Proposal, etc. dated June 16, 1996;

4. the Supplemental Toll Operation Agreement ("STOA") dated April 30, 1998 and the Notice of
Approval of said STOA dated June 15, 1998 by former President Fidel V. Ramos; and

5. the provisional toll rate increases published February 9, 2005, granted by the TRB.

The petition in G.R. No. 183599 is GRANTED. Accordingly, the Decision dated June 23, 2008 of the
Regional Trial Court, Branch 155 in Pasig City, docketed as SCA No. 3138-PSG, annulling the TOC
covering the SLEX, enjoining the original toll operating franchisee from collecting toll fees in the
SLEX, and ordering the turnover of related assets to the Government, is hereby REVERSED and SET
ASIDE, and the petition filed therein by the Young Professionals and Entrepreneurs of San Pedro,
Laguna with the RTC of Pasig is DISMISSED for lack of merit.

In view of the foregoing dispositions in the petitions at bar, the TRO issued by the Court on August
13, 2010 is hereby ordered lifted, with respect to the petitions in G.R. Nos. 166910, 169917, 173630
and 183599.

The challenge contained in the Supplemental Petition in G.R. No. 166910 against the toll rates
subject of the TRB Notice of Toll Rates published on June 6, 2010, for the SLEX projects, Toll Road
Projects 1 and 2 of the new SLTC STOA, and the expanded and rehabilitated SLEX, is remanded to
the TRB for a review of the assailed toll rates to determine whether SLTC and MATES are entitled to
the toll fees.

No Cost.

SO ORDERED.
TRANSPO – CONSTI PROVISIONS – TAKE-OVER POWER SENGA, IN HIS CAPACITY AS CHIEF OF STAFF OF THE ARMED FORCES OF THE PHILIPPINES (AFP); AND
EDUARDO ERMITA, IN HIS CAPACITY AS EXECUTIVE SECRETARY, Respondents.
G.R. No. 171396 May 3, 2006
PROF. RANDOLF S. DAVID, LORENZO TAÑADA III, RONALD LLAMAS, H. HARRY L. ROQUE, JR., JOEL RUIZ
BUTUYAN, ROGER R. RAYEL, GARY S. MALLARI, ROMEL REGALADO BAGARES, CHRISTOPHER F.C. BOLASTIG, DECISION
Petitioners,
vs. SANDOVAL-GUTIERREZ, J.:
GLORIA MACAPAGAL-ARROYO, AS PRESIDENT AND COMMANDER-IN-CHIEF, EXECUTIVE SECRETARY
EDUARDO ERMITA, HON. AVELINO CRUZ II, SECRETARY OF NATIONAL DEFENSE, GENERAL GENEROSO All powers need some restraint; practical adjustments rather than rigid formula are necessary. 1
SENGA, CHIEF OF STAFF, ARMED FORCES OF THE PHILIPPINES, DIRECTOR GENERAL ARTURO LOMIBAO, Superior strength – the use of force – cannot make wrongs into rights. In this regard, the courts
CHIEF, PHILIPPINE NATIONAL POLICE, Respondents. should be vigilant in safeguarding the constitutional rights of the citizens, specifically their liberty.
x-------------------------------------x
G.R. No. 171409 May 3, 2006 Chief Justice Artemio V. Panganiban’s philosophy of liberty is thus most relevant. He said: "In cases
NIÑEZ CACHO-OLIVARES AND TRIBUNE PUBLISHING CO., INC., Petitioners, involving liberty, the scales of justice should weigh heavily against government and in favor of the
vs.
poor, the oppressed, the marginalized, the dispossessed and the weak." Laws and actions that
HONORABLE SECRETARY EDUARDO ERMITA AND HONORABLE DIRECTOR GENERAL ARTURO C. LOMIBAO,
Respondents.
restrict fundamental rights come to the courts "with a heavy presumption against their
x-------------------------------------x constitutional validity."2
G.R. No. 171485 May 3, 2006
FRANCIS JOSEPH G. ESCUDERO, JOSEPH A. SANTIAGO, TEODORO A. CASINO, AGAPITO A. AQUINO, MARIO J. These seven (7) consolidated petitions for certiorari and prohibition allege that in issuing
AGUJA, SATUR C. OCAMPO, MUJIV S. HATAMAN, JUAN EDGARDO ANGARA, TEOFISTO DL. GUINGONA III, Presidential Proclamation No. 1017 (PP 1017) and General Order No. 5 (G.O. No. 5), President Gloria
EMMANUEL JOSEL J. VILLANUEVA, LIZA L. MAZA, IMEE R. MARCOS, RENATO B. MAGTUBO, JUSTIN MARC SB. Macapagal-Arroyo committed grave abuse of discretion. Petitioners contend that respondent
CHIPECO, ROILO GOLEZ, DARLENE ANTONINO-CUSTODIO, LORETTA ANN P. ROSALES, JOSEL G. VIRADOR, officials of the Government, in their professed efforts to defend and preserve democratic
RAFAEL V. MARIANO, GILBERT C. REMULLA, FLORENCIO G. NOEL, ANA THERESIA HONTIVEROS-BARAQUEL, institutions, are actually trampling upon the very freedom guaranteed and protected by the
IMELDA C. NICOLAS, MARVIC M.V.F. LEONEN, NERI JAVIER COLMENARES, MOVEMENT OF CONCERNED Constitution. Hence, such issuances are void for being unconstitutional.
CITIZENS FOR CIVIL LIBERTIES REPRESENTED BY AMADO GAT INCIONG, Petitioners,
vs. Once again, the Court is faced with an age-old but persistently modern problem. How does the
EDUARDO R. ERMITA, EXECUTIVE SECRETARY, AVELINO J. CRUZ, JR., SECRETARY, DND RONALDO V. PUNO, Constitution of a free people combine the degree of liberty, without which, law becomes tyranny,
SECRETARY, DILG, GENEROSO SENGA, AFP CHIEF OF STAFF, ARTURO LOMIBAO, CHIEF PNP, Respondents.
with the degree of law, without which, liberty becomes license?3
x-------------------------------------x
G.R. No. 171483 May 3, 2006 On February 24, 2006, as the nation celebrated the 20th Anniversary of the Edsa People Power I,
KILUSANG MAYO UNO, REPRESENTED BY ITS CHAIRPERSON ELMER C. LABOG AND SECRETARY GENERAL
President Arroyo issued PP 1017 declaring a state of national emergency, thus:
JOEL MAGLUNSOD, NATIONAL FEDERATION OF LABOR UNIONS – KILUSANG MAYO UNO (NAFLU-KMU),
REPRESENTED BY ITS NATIONAL PRESIDENT, JOSELITO V. USTAREZ, ANTONIO C. PASCUAL, SALVADOR T.
NOW, THEREFORE, I, Gloria Macapagal-Arroyo, President of the Republic of the Philippines and
CARRANZA, EMILIA P. DAPULANG, MARTIN CUSTODIO, JR., AND ROQUE M. TAN, Petitioners,
vs.
Commander-in-Chief of the Armed Forces of the Philippines, by virtue of the powers vested upon
HER EXCELLENCY, PRESIDENT GLORIA MACAPAGAL-ARROYO, THE HONORABLE EXECUTIVE SECRETARY, me by Section 18, Article 7 of the Philippine Constitution which states that: "The President. . .
EDUARDO ERMITA, THE CHIEF OF STAFF, ARMED FORCES OF THE PHILIPPINES, GENEROSO SENGA, AND THE whenever it becomes necessary, . . . may call out (the) armed forces to prevent or suppress. .
PNP DIRECTOR GENERAL, ARTURO LOMIBAO, Respondents. .rebellion. . .," and in my capacity as their Commander-in-Chief, do hereby command the Armed
x-------------------------------------x Forces of the Philippines, to maintain law and order throughout the Philippines, prevent or
G.R. No. 171400 May 3, 2006 suppress all forms of lawless violence as well as any act of insurrection or rebellion and to enforce
ALTERNATIVE LAW GROUPS, INC. (ALG), Petitioner, obedience to all the laws and to all decrees, orders and regulations promulgated by me personally
vs.
or upon my direction; and as provided in Section 17, Article 12 of the Constitution do hereby
EXECUTIVE SECRETARY EDUARDO R. ERMITA, LT. GEN. GENEROSO SENGA, AND DIRECTOR GENERAL
ARTURO LOMIBAO, Respondents.
declare a State of National Emergency.
G.R. No. 171489 May 3, 2006
She cited the following facts as bases:
JOSE ANSELMO I. CADIZ, FELICIANO M. BAUTISTA, ROMULO R. RIVERA, JOSE AMOR M. AMORADO, ALICIA A.
RISOS-VIDAL, FELIMON C. ABELITA III, MANUEL P. LEGASPI, J.B. JOVY C. BERNABE, BERNARD L. DAGCUTA,
WHEREAS, over these past months, elements in the political opposition have conspired with
ROGELIO V. GARCIA AND INTEGRATED BAR OF THE PHILIPPINES (IBP), Petitioners,
vs. authoritarians of the extreme Left represented by the NDF-CPP-NPA and the extreme Right,
HON. EXECUTIVE SECRETARY EDUARDO ERMITA, GENERAL GENEROSO SENGA, IN HIS CAPACITY AS AFP represented by military adventurists – the historical enemies of the democratic Philippine State
CHIEF OF STAFF, AND DIRECTOR GENERAL ARTURO LOMIBAO, IN HIS CAPACITY AS PNP CHIEF, Respondents. – who are now in a tactical alliance and engaged in a concerted and systematic conspiracy, over a
x-------------------------------------x broad front, to bring down the duly constituted Government elected in May 2004;
G.R. No. 171424 May 3, 2006
LOREN B. LEGARDA, Petitioner, WHEREAS, these conspirators have repeatedly tried to bring down the President;
vs.
GLORIA MACAPAGAL-ARROYO, IN HER CAPACITY AS PRESIDENT AND COMMANDER-IN-CHIEF; ARTURO WHEREAS, the claims of these elements have been recklessly magnified by certain segments of
LOMIBAO, IN HIS CAPACITY AS DIRECTOR-GENERAL OF THE PHILIPPINE NATIONAL POLICE (PNP); GENEROSO the national media;
WHEREAS, this series of actions is hurting the Philippine State – by obstructing governance including
hindering the growth of the economy and sabotaging the people’s confidence in government and
their faith in the future of this country;
WHEREAS, these actions are adversely affecting the economy;
WHEREAS, these activities give totalitarian forces of both the extreme Left and extreme Right the
opening to intensify their avowed aims to bring down the democratic Philippine State;
WHEREAS, Article 2, Section 4 of the our Constitution makes the defense and preservation of the
democratic institutions and the State the primary duty of Government;
WHEREAS, the activities above-described, their consequences, ramifications and collateral effects
constitute a clear and present danger to the safety and the integrity of the Philippine State and of
the Filipino people;
On the same day, the President issued G. O. No. 5 implementing PP 1017, thus:
WHEREAS, over these past months, elements in the political opposition have conspired with
authoritarians of the extreme Left, represented by the NDF-CPP-NPA and the extreme Right,
represented by military adventurists - the historical enemies of the democratic Philippine State –
and who are now in a tactical alliance and engaged in a concerted and systematic conspiracy, over
a broad front, to bring down the duly-constituted Government elected in May 2004;
WHEREAS, these conspirators have repeatedly tried to bring down our republican government;
WHEREAS, the claims of these elements have been recklessly magnified by certain segments of the
national media;
WHEREAS, these series of actions is hurting the Philippine State by obstructing governance,
including hindering the growth of the economy and sabotaging the people’s confidence in the
government and their faith in the future of this country;
WHEREAS, these actions are adversely affecting the economy;
WHEREAS, these activities give totalitarian forces; of both the extreme Left and extreme Right the
opening to intensify their avowed aims to bring down the democratic Philippine State;
WHEREAS, Article 2, Section 4 of our Constitution makes the defense and preservation of the
democratic institutions and the State the primary duty of Government;
WHEREAS, the activities above-described, their consequences, ramifications and collateral effects
constitute a clear and present danger to the safety and the integrity of the Philippine State and of
the Filipino people;
WHEREAS, Proclamation 1017 date February 24, 2006 has been issued declaring a State of National
Emergency;
NOW, THEREFORE, I GLORIA MACAPAGAL-ARROYO, by virtue of the powers vested in me under
the Constitution as President of the Republic of the Philippines, and Commander-in-Chief of the
Republic of the Philippines, and pursuant to Proclamation No. 1017 dated February 24, 2006, do
hereby call upon the Armed Forces of the Philippines (AFP) and the Philippine National Police (PNP),
to prevent and suppress acts of terrorism and lawless violence in the country;
I hereby direct the Chief of Staff of the AFP and the Chief of the PNP, as well as the officers and men
of the AFP and PNP, to immediately carry out the necessary and appropriate actions and measures
to suppress and prevent acts of terrorism and lawless violence.
On March 3, 2006, exactly one week after the declaration of a state of national emergency and after
all these petitions had been filed, the President lifted PP 1017. She issued Proclamation No. 1021
which reads:
WHEREAS, pursuant to Section 18, Article VII and Section 17, Article XII of the Constitution,
Proclamation No. 1017 dated February 24, 2006, was issued declaring a state of national
emergency;
WHEREAS, by virtue of General Order No.5 and No.6 dated February 24, 2006, which were issued
on the basis of Proclamation No. 1017, the Armed Forces of the Philippines (AFP) and the Philippine
National Police (PNP), were directed to maintain law and order throughout the Philippines, prevent
and suppress all form of lawless violence as well as any act of rebellion and to undertake such action
as may be necessary;
WHEREAS, the AFP and PNP have effectively prevented, suppressed and quelled the acts lawless
violence and rebellion;
NOW, THEREFORE, I, GLORIA MACAPAGAL-ARROYO, President of the Republic of the Philippines,
by virtue of the powers vested in me by law, hereby declare that the state of national emergency
has ceased to exist.
In their presentation of the factual bases of PP 1017 and G.O. No. 5, respondents stated that the
proximate cause behind the executive issuances was the conspiracy among some military officers,
leftist insurgents of the New People’s Army (NPA), and some members of the political opposition in
a plot to unseat or assassinate President Arroyo.4 They considered the aim to oust or assassinate
the President and take-over the reigns of government as a clear and present danger.
During the oral arguments held on March 7, 2006, the Solicitor General specified the facts leading
to the issuance of PP 1017 and G.O. No. 5. Significantly, there was no refutation from petitioners’
counsels.
The Solicitor General argued that the intent of the Constitution is to give full discretionary powers
to the President in determining the necessity of calling out the armed forces. He emphasized that
none of the petitioners has shown that PP 1017 was without factual bases. While he explained that
it is not respondents’ task to state the facts behind the questioned Proclamation, however, they are
presenting the same, narrated hereunder, for the elucidation of the issues.
On January 17, 2006, Captain Nathaniel Rabonza and First Lieutenants Sonny Sarmiento, Lawrence
San Juan and Patricio Bumidang, members of the Magdalo Group indicted in the Oakwood mutiny,
escaped their detention cell in Fort Bonifacio, Taguig City. In a public statement, they vowed to
remain defiant and to elude arrest at all costs. They called upon the people to "show and proclaim
our displeasure at the sham regime. Let us demonstrate our disgust, not only by going to the streets
in protest, but also by wearing red bands on our left arms." 5
On February 17, 2006, the authorities got hold of a document entitled "Oplan Hackle I " which
detailed plans for bombings and attacks during the Philippine Military Academy Alumni
Homecoming in Baguio City. The plot was to assassinate selected targets including some cabinet
members and President Arroyo herself.6 Upon the advice of her security, President Arroyo decided
not to attend the Alumni Homecoming. The next day, at the height of the celebration, a bomb was
found and detonated at the PMA parade ground.
On February 21, 2006, Lt. San Juan was recaptured in a communist safehouse in Batangas province.
Found in his possession were two (2) flash disks containing minutes of the meetings between
members of the Magdalo Group and the National People’s Army (NPA), a tape recorder, audio
cassette cartridges, diskettes, and copies of subversive documents.7 Prior to his arrest, Lt. San Juan
announced through DZRH that the "Magdalo’s D-Day would be on February 24, 2006, the 20th
Anniversary of Edsa I."
On February 23, 2006, PNP Chief Arturo Lomibao intercepted information that members of the PNP-
Special Action Force were planning to defect. Thus, he immediately ordered SAF Commanding
General Marcelino Franco, Jr. to "disavow" any defection. The latter promptly obeyed and issued a
public statement: "All SAF units are under the effective control of responsible and trustworthy
officers with proven integrity and unquestionable loyalty."
On the same day, at the house of former Congressman Peping Cojuangco, President Cory Aquino’s
brother, businessmen and mid-level government officials plotted moves to bring down the Arroyo
administration. Nelly Sindayen of TIME Magazine reported that Pastor Saycon, longtime Arroyo
critic, called a U.S. government official about his group’s plans if President Arroyo is ousted. Saycon
also phoned a man code-named Delta. Saycon identified him as B/Gen. Danilo Lim, Commander of
the Army’s elite Scout Ranger. Lim said "it was all systems go for the planned movement against
Arroyo."8
B/Gen. Danilo Lim and Brigade Commander Col. Ariel Querubin confided to Gen. Generoso Senga,
Chief of Staff of the Armed Forces of the Philippines (AFP), that a huge number of soldiers would
join the rallies to provide a critical mass and armed component to the Anti-Arroyo protests to be
held on February 24, 2005. According to these two (2) officers, there was no way they could possibly
stop the soldiers because they too, were breaking the chain of command to join the forces foist to
unseat the President. However, Gen. Senga has remained faithful to his Commander-in-Chief and
to the chain of command. He immediately took custody of B/Gen. Lim and directed Col. Querubin
to return to the Philippine Marines Headquarters in Fort Bonifacio.
Earlier, the CPP-NPA called for intensification of political and revolutionary work within the military
and the police establishments in order to forge alliances with its members and key officials. NPA
spokesman Gregorio "Ka Roger" Rosal declared: "The Communist Party and revolutionary
movement and the entire people look forward to the possibility in the coming year of accomplishing
its immediate task of bringing down the Arroyo regime; of rendering it to weaken and unable to rule
that it will not take much longer to end it."9
On the other hand, Cesar Renerio, spokesman for the National Democratic Front (NDF) at North
Central Mindanao, publicly announced: "Anti-Arroyo groups within the military and police are
growing rapidly, hastened by the economic difficulties suffered by the families of AFP officers and
enlisted personnel who undertake counter-insurgency operations in the field." He claimed that with
the forces of the national democratic movement, the anti-Arroyo conservative political parties,
coalitions, plus the groups that have been reinforcing since June 2005, it is probable that the
President’s ouster is nearing its concluding stage in the first half of 2006.
Respondents further claimed that the bombing of telecommunication towers and cell sites in
Bulacan and Bataan was also considered as additional factual basis for the issuance of PP 1017 and
G.O. No. 5. So is the raid of an army outpost in Benguet resulting in the death of three (3) soldiers.
And also the directive of the Communist Party of the Philippines ordering its front organizations to
join 5,000 Metro Manila radicals and 25,000 more from the provinces in mass protests.10
By midnight of February 23, 2006, the President convened her security advisers and several cabinet
members to assess the gravity of the fermenting peace and order situation. She directed both the
AFP and the PNP to account for all their men and ensure that the chain of command remains solid
and undivided. To protect the young students from any possible trouble that might break loose on
the streets, the President suspended classes in all levels in the entire National Capital Region.
For their part, petitioners cited the events that followed after the issuance of PP 1017 and G.O.
No. 5.
Immediately, the Office of the President announced the cancellation of all programs and activities
related to the 20th anniversary celebration of Edsa People Power I; and revoked the permits to hold
rallies issued earlier by the local governments. Justice Secretary Raul Gonzales stated that political
rallies, which to the President’s mind were organized for purposes of destabilization, are
cancelled.Presidential Chief of Staff Michael Defensor announced that "warrantless arrests and
take-over of facilities, including media, can already be implemented."11
Undeterred by the announcements that rallies and public assemblies would not be allowed, groups
of protesters (members of Kilusang Mayo Uno [KMU] and National Federation of Labor Unions-
Kilusang Mayo Uno [NAFLU-KMU]), marched from various parts of Metro Manila with the intention
of converging at the EDSA shrine. Those who were already near the EDSA site were violently
dispersed by huge clusters of anti-riot police. The well-trained policemen used truncheons, big fiber
glass shields, water cannons, and tear gas to stop and break up the marching groups, and scatter
the massed participants. The same police action was used against the protesters marching forward
to Cubao, Quezon City and to the corner of Santolan Street and EDSA. That same evening, hundreds
of riot policemen broke up an EDSA celebration rally held along Ayala Avenue and Paseo de Roxas
Street in Makati City.12
According to petitioner Kilusang Mayo Uno, the police cited PP 1017 as the ground for the dispersal
of their assemblies.
During the dispersal of the rallyists along EDSA, police arrested (without warrant) petitioner Randolf
S. David, a professor at the University of the Philippines and newspaper columnist. Also arrested
was his companion, Ronald Llamas, president of party-list Akbayan.
At around 12:20 in the early morning of February 25, 2006, operatives of the Criminal Investigation
and Detection Group (CIDG) of the PNP, on the basis of PP 1017 and G.O. No. 5, raided the Daily
Tribune offices in Manila. The raiding team confiscated news stories by reporters, documents,
pictures, and mock-ups of the Saturday issue. Policemen from Camp Crame in Quezon City were
stationed inside the editorial and business offices of the newspaper; while policemen from the
Manila Police District were stationed outside the building.13
A few minutes after the search and seizure at the Daily Tribune offices, the police surrounded the
premises of another pro-opposition paper, Malaya, and its sister publication, the tabloid Abante.
The raid, according to Presidential Chief of Staff Michael Defensor, is "meant to show a ‘strong
presence,’ to tell media outlets not to connive or do anything that would help the rebels in bringing
down this government." The PNP warned that it would take over any media organization that would
not follow "standards set by the government during the state of national emergency." Director
General Lomibao stated that "if they do not follow the standards – and the standards are - if they
would contribute to instability in the government, or if they do not subscribe to what is in General
Order No. 5 and Proc. No. 1017 – we will recommend a ‘takeover.’" National Telecommunications’
Commissioner Ronald Solis urged television and radio networks to "cooperate" with the
government for the duration of the state of national emergency. He asked for "balanced reporting"
from broadcasters when covering the events surrounding the coup attempt foiled by the
government. He warned that his agency will not hesitate to recommend the closure of any
broadcast outfit that violates rules set out for media coverage when the national security is
threatened.14
Also, on February 25, 2006, the police arrested Congressman Crispin Beltran, representing the
Anakpawis Party and Chairman of Kilusang Mayo Uno (KMU), while leaving his farmhouse in
Bulacan. The police showed a warrant for his arrest dated 1985. Beltran’s lawyer explained that the
warrant, which stemmed from a case of inciting to rebellion filed during the Marcos regime, had
long been quashed. Beltran, however, is not a party in any of these petitions.
When members of petitioner KMU went to Camp Crame to visit Beltran, they were told they could
not be admitted because of PP 1017 and G.O. No. 5. Two members were arrested and detained,
while the rest were dispersed by the police.
Bayan Muna Representative Satur Ocampo eluded arrest when the police went after him during a
public forum at the Sulo Hotel in Quezon City. But his two drivers, identified as Roel and Art, were
taken into custody.
Retired Major General Ramon Montaño, former head of the Philippine Constabulary, was arrested
while with his wife and golfmates at the Orchard Golf and Country Club in Dasmariñas, Cavite.
Attempts were made to arrest Anakpawis Representative Satur Ocampo, Representative Rafael
Mariano, Bayan Muna Representative Teodoro Casiño and Gabriela Representative Liza Maza.
Bayan Muna Representative Josel Virador was arrested at the PAL Ticket Office in Davao City. Later,
he was turned over to the custody of the House of Representatives where the "Batasan 5" decided
to stay indefinitely.
Let it be stressed at this point that the alleged violations of the rights of Representatives Beltran,
Satur Ocampo, et al., are not being raised in these petitions.
On March 3, 2006, President Arroyo issued PP 1021 declaring that the state of national emergency
has ceased to exist.
In the interim, these seven (7) petitions challenging the constitutionality of PP 1017 and G.O. No. 5
were filed with this Court against the above-named respondents. Three (3) of these petitions
impleaded President Arroyo as respondent.
In G.R. No. 171396, petitioners Randolf S. David, et al. assailed PP 1017 on the grounds that (1) it
encroaches on the emergency powers of Congress; (2) itis a subterfuge to avoid the constitutional
requirements for the imposition of martial law; and (3) it violates the constitutional guarantees of
freedom of the press, of speech and of assembly.
In G.R. No. 171409, petitioners Ninez Cacho-Olivares and Tribune Publishing Co., Inc. challenged the
CIDG’s act of raiding the Daily Tribune offices as a clear case of "censorship" or "prior restraint."
They also claimed that the term "emergency" refers only to tsunami, typhoon, hurricane and similar
occurrences, hence, there is "absolutely no emergency" that warrants the issuance of PP 1017.
In G.R. No. 171485, petitioners herein are Representative Francis Joseph G. Escudero, and twenty
one (21) other members of the House of Representatives, including Representatives Satur Ocampo,
Rafael Mariano, Teodoro Casiño, Liza Maza, and Josel Virador. They asserted that PP 1017 and G.O.
No. 5 constitute "usurpation of legislative powers"; "violation of freedom of expression" and "a
declaration of martial law." They alleged that President Arroyo "gravely abused her discretion in
calling out the armed forces without clear and verifiable factual basis of the possibility of lawless
violence and a showing that there is necessity to do so."
In G.R. No. 171483,petitioners KMU, NAFLU-KMU, and their members averred that PP 1017 and
G.O. No. 5 are unconstitutional because (1) they arrogate unto President Arroyo the power to enact
laws and decrees; (2) their issuance was without factual basis; and (3) they violate freedom of
expression and the right of the people to peaceably assemble to redress their grievances.
In G.R. No. 171400, petitioner Alternative Law Groups, Inc. (ALGI) alleged that PP 1017 and G.O. No.
5 are unconstitutional because they violate (a) Section 415 of Article II, (b) Sections 1,16 2,17 and 418
of Article III, (c) Section 2319 of Article VI, and (d) Section 1720 of Article XII of the Constitution.
In G.R. No. 171489, petitioners Jose Anselmo I. Cadiz et al., alleged that PP 1017 is an "arbitrary and
unlawful exercise by the President of her Martial Law powers." And assuming that PP 1017 is not
really a declaration of Martial Law, petitioners argued that "it amounts to an exercise by the
President of emergency powers without congressional approval." In addition, petitioners asserted
that PP 1017 "goes beyond the nature and function of a proclamation as defined under the Revised
Administrative Code."
And lastly, in G.R. No. 171424,petitionerLoren B. Legarda maintained that PP 1017 and G.O. No. 5
are "unconstitutional for being violative of the freedom of expression, including its cognate rights
such as freedom of the press and the right to access to information on matters of public concern, all
guaranteed under Article III, Section 4 of the 1987 Constitution." In this regard, she stated that these
issuances prevented her from fully prosecuting her election protest pending before the Presidential
Electoral Tribunal.
In respondents’ Consolidated Comment, the Solicitor General countered that: first, the petitions
should be dismissed for being moot; second,petitioners in G.R. Nos. 171400 (ALGI), 171424
(Legarda), 171483 (KMU et al.), 171485 (Escudero et al.) and 171489 (Cadiz et al.) have no legal
standing; third, it is not necessary for petitioners to implead President Arroyo as respondent; fourth,
PP 1017 has constitutional and legal basis; and fifth, PP 1017 does not violate the people’s right to
free expression and redress of grievances.
On March 7, 2006, the Court conducted oral arguments and heard the parties on the above
interlocking issues which may be summarized as follows:
A. PROCEDURAL:
1) Whether the issuance of PP 1021 renders the petitions moot and academic.
2) Whether petitioners in 171485 (Escudero et al.), G.R. Nos. 171400 (ALGI),
171483 (KMU et al.), 171489 (Cadiz et al.), and 171424 (Legarda) have legal
standing.
B. SUBSTANTIVE:
1) Whetherthe Supreme Court can review the factual bases of PP 1017.
2) Whether PP 1017 and G.O. No. 5 are unconstitutional.
a. Facial Challenge
b. Constitutional Basis
c. As Applied Challenge
A. PROCEDURAL
First, we must resolve the procedural roadblocks.
I- Moot and Academic Principle
One of the greatest contributions of the American system to this country is the concept of judicial
review enunciated in Marbury v. Madison.21 This concept rests on the extraordinary simple
foundation --
The Constitution is the supreme law. It was ordained by the people, the ultimate source of all
political authority. It confers limited powers on the national government. x x x If the government
consciously or unconsciously oversteps these limitations there must be some authority
competent to hold it in control, to thwart its unconstitutional attempt, and thus to vindicate and
preserve inviolate the will of the people as expressed in the Constitution. This power the courts
exercise. This is the beginning and the end of the theory of judicial review.22
But the power of judicial review does not repose upon the courts a "self-starting capacity."23 Courts
may exercise such power only when the following requisites are present: first, there must be an
actual case or controversy; second, petitioners have to raise a question of constitutionality; third,
the constitutional question must be raised at the earliest opportunity; and fourth, the decision of
the constitutional question must be necessary to the determination of the case itself.24
Respondents maintain that the first and second requisites are absent, hence, we shall limit our
discussion thereon.
An actual case or controversy involves a conflict of legal right, an opposite legal claims susceptible
of judicial resolution. It is "definite and concrete, touching the legal relations of parties having
adverse legal interest;" a real and substantial controversy admitting of specific relief.25 The Solicitor
General refutes the existence of such actual case or controversy, contending that the present
petitions were rendered "moot and academic" by President Arroyo’s issuance of PP 1021.
Such contention lacks merit.
A moot and academic case is one that ceases to present a justiciable controversy by virtue of
supervening events,26 so that a declaration thereon would be of no practical use or value.27
Generally, courts decline jurisdiction over such case28 or dismiss it on ground of mootness.29
The Court holds that President Arroyo’s issuance of PP 1021 did not render the present petitions
moot and academic. During the eight (8) days that PP 1017 was operative, the police officers,
according to petitioners, committed illegal acts in implementing it. Are PP 1017 and G.O. No. 5
constitutional or valid? Do they justify these alleged illegal acts? These are the vital issues that
must be resolved in the present petitions. It must be stressed that "an unconstitutional act is not a
law, it confers no rights, it imposes no duties, it affords no protection; it is in legal contemplation,
inoperative."30
The "moot and academic" principle is not a magical formula that can automatically dissuade the
courts in resolving a case. Courts will decide cases, otherwise moot and academic, if: first, there is
a grave violation of the Constitution;31 second, the exceptional character of the situation and the
paramount public interest is involved;32 third, when constitutional issue raised requires formulation
of controlling principles to guide the bench, the bar, and the public;33 and fourth, the case is capable
of repetition yet evading review.34
All the foregoing exceptions are present here and justify this Court’s assumption of jurisdiction over
the instant petitions. Petitioners alleged that the issuance of PP 1017 and G.O. No. 5 violates the
Constitution. There is no question that the issues being raised affect the public’s interest, involving
as they do the people’s basic rights to freedom of expression, of assembly and of the press.
Moreover, the Court has the duty to formulate guiding and controlling constitutional precepts,
doctrines or rules. It has the symbolic function of educating the bench and the bar, and in the
present petitions, the military and the police, on the extent of the protection given by constitutional
guarantees.35 And lastly, respondents’ contested actions are capable of repetition. Certainly, the
petitions are subject to judicial review.
In their attempt to prove the alleged mootness of this case, respondents cited Chief Justice Artemio
V. Panganiban’s Separate Opinion in Sanlakas v. Executive Secretary.36 However, they failed to take
into account the Chief Justice’s very statement that an otherwise "moot" case may still be decided
"provided the party raising it in a proper case has been and/or continues to be prejudiced or
damaged as a direct result of its issuance." The present case falls right within this exception to the
mootness rule pointed out by the Chief Justice.
II- Legal Standing
In view of the number of petitioners suing in various personalities, the Court deems it imperative to
have a more than passing discussion on legal standing or locus standi.
Locus standi is defined as "a right of appearance in a court of justice on a given question."37 In private
suits, standing is governed by the "real-parties-in interest" rule as contained in Section 2, Rule 3 of
the 1997 Rules of Civil Procedure, as amended. It provides that "every action must be prosecuted
or defended in the name of the real party in interest." Accordingly, the "real-party-in interest" is
"the party who stands to be benefited or injured by the judgment in the suit or the party entitled
to the avails of the suit."38 Succinctly put, the plaintiff’s standing is based on his own right to the
relief sought.
The difficulty of determining locus standi arises in public suits. Here, the plaintiff who asserts a
"public right" in assailing an allegedly illegal official action, does so as a representative of the general
public. He may be a person who is affected no differently from any other person. He could be suing
as a "stranger," or in the category of a "citizen," or ‘taxpayer." In either case, he has to adequately
show that he is entitled to seek judicial protection. In other words, he has to make out a sufficient
interest in the vindication of the public order and the securing of relief as a "citizen" or "taxpayer.
Case law in most jurisdictions now allows both "citizen" and "taxpayer" standing in public actions.
The distinction was first laid down in Beauchamp v. Silk,39 where it was held that the plaintiff in a
taxpayer’s suit is in a different category from the plaintiff in a citizen’s suit. In the former, the
plaintiff is affected by the expenditure of public funds, while in the latter, he is but the mere
instrument of the public concern. As held by the New York Supreme Court in People ex rel Case v.
Collins:40 "In matter of mere public right, however…the people are the real parties…It is at least
the right, if not the duty, of every citizen to interfere and see that a public offence be properly
pursued and punished, and that a public grievance be remedied." With respect to taxpayer’s suits,
Terr v. Jordan41 held that "the right of a citizen and a taxpayer to maintain an action in courts to
restrain the unlawful use of public funds to his injury cannot be denied."
However, to prevent just about any person from seeking judicial interference in any official policy
or act with which he disagreed with, and thus hinders the activities of governmental agencies
engaged in public service, the United State Supreme Court laid down the more stringent "direct
injury" test in Ex Parte Levitt,42 later reaffirmed in Tileston v. Ullman.43 The same Court ruled that
for a private individual to invoke the judicial power to determine the validity of an executive or
legislative action, he must show that he has sustained a direct injury as a result of that action, and
it is not sufficient that he has a general interest common to all members of the public.
This Court adopted the "direct injury" test in our jurisdiction. In People v. Vera,44 it held that the
person who impugns the validity of a statute must have "a personal and substantial interest in the
case such that he has sustained, or will sustain direct injury as a result." The Vera doctrine was
upheld in a litany of cases, such as, Custodio v. President of the Senate,45 Manila Race Horse Trainers’
Association v. De la Fuente,46 Pascual v. Secretary of Public Works47 and Anti-Chinese League of the
Philippines v. Felix.48
However, being a mere procedural technicality, the requirement of locus standi may be waived by
the Court in the exercise of its discretion. This was done in the 1949 Emergency Powers Cases,
Araneta v. Dinglasan,49 where the "transcendental importance" of the cases prompted the Court
to act liberally. Such liberality was neither a rarity nor accidental. In Aquino v. Comelec,50 this Court
resolved to pass upon the issues raised due to the "far-reaching implications" of the petition
notwithstanding its categorical statement that petitioner therein had no personality to file the suit.
Indeed, there is a chain of cases where this liberal policy has been observed, allowing ordinary
citizens, members of Congress, and civic organizations to prosecute actions involving the
constitutionality or validity of laws, regulations and rulings.51
Thus, the Court has adopted a rule that even where the petitioners have failed to show direct injury,
they have been allowed to sue under the principle of "transcendental importance." Pertinent are
the following cases:
(1) Chavez v. Public Estates Authority,52 where the Court ruled that the enforcement of the
constitutional right to information and the equitable diffusion of natural resources are
matters of transcendental importance which clothe the petitioner with locus standi;
(2) Bagong Alyansang Makabayan v. Zamora,53 wherein the Court held that "given the
transcendental importance of the issues involved, the Court may relax the standing
requirements and allow the suit to prosper despite the lack of direct injury to the parties
seeking judicial review" of the Visiting Forces Agreement;
(3) Lim v. Executive Secretary,54 while the Court noted that the petitioners may not file suit in
their capacity as taxpayers absent a showing that "Balikatan 02-01" involves the exercise of
Congress’ taxing or spending powers, it reiterated its ruling in Bagong Alyansang Makabayan v.
Zamora,55that in cases of transcendental importance, the cases must be settled promptly and
definitely and standing requirements may be relaxed.
By way of summary, the following rules may be culled from the cases decided by this Court.
Taxpayers, voters, concerned citizens, and legislators may be accorded standing to sue, provided
that the following requirements are met:
(1) the cases involve constitutional issues;
(2) for taxpayers, there must be a claim of illegal disbursement of public funds or that the tax
measure is unconstitutional;
(3) for voters, there must be a showing of obvious interest in the validity of the election law in
question;
(4) for concerned citizens, there must be a showing that the issues raised are of transcendental
importance which must be settled early; and
(5) for legislators, there must be a claim that the official action complained of infringes upon their
prerogatives as legislators.
Significantly, recent decisions show a certain toughening in the Court’s attitude toward legal
standing.
In Kilosbayan, Inc. v. Morato,56 the Court ruled that the status of Kilosbayan as a people’s
organization does not give it the requisite personality to question the validity of the on-line lottery
contract, more so where it does not raise any issue of constitutionality. Moreover, it cannot sue as
a taxpayer absent any allegation that public funds are being misused. Nor can it sue as a concerned
citizen as it does not allege any specific injury it has suffered.
In Telecommunications and Broadcast Attorneys of the Philippines, Inc. v. Comelec,57 the Court
reiterated the "direct injury" test with respect to concerned citizens’ cases involving constitutional
issues. It held that "there must be a showing that the citizen personally suffered some actual or
threatened injury arising from the alleged illegal official act."
In Lacson v. Perez,58 the Court ruled that one of the petitioners, Laban ng Demokratikong Pilipino
(LDP), is not a real party-in-interest as it had not demonstrated any injury to itself or to its leaders,
members or supporters.
In Sanlakas v. Executive Secretary,59 the Court ruled that only the petitioners who are members of
Congress have standing to sue, as they claim that the President’s declaration of a state of rebellion
is a usurpation of the emergency powers of Congress, thus impairing their legislative powers. As
to petitioners Sanlakas, Partido Manggagawa, and Social Justice Society, the Court declared them
to be devoid of standing, equating them with the LDP in Lacson.
Now, the application of the above principles to the present petitions.
The locus standi of petitioners in G.R. No. 171396, particularly David and Llamas, is beyond doubt.
The same holds true with petitioners in G.R. No. 171409, Cacho-Olivares and Tribune Publishing Co.
Inc. They alleged "direct injury" resulting from "illegal arrest" and "unlawful search" committed by
police operatives pursuant to PP 1017. Rightly so, the Solicitor General does not question their legal
standing.
In G.R. No. 171485, the opposition Congressmen alleged there was usurpation of legislative powers.
They also raised the issue of whether or not the concurrence of Congress is necessary whenever the
alarming powers incident to Martial Law are used. Moreover, it is in the interest of justice that those
affected by PP 1017 can be represented by their Congressmen in bringing to the attention of the
Court the alleged violations of their basic rights.
In G.R. No. 171400, (ALGI), this Court applied the liberality rule in Philconsa v. Enriquez,60 Kapatiran
Ng Mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan,61 Association of Small Landowners in
the Philippines, Inc. v. Secretary of Agrarian Reform,62 Basco v. Philippine Amusement and Gaming
Corporation,63 and Tañada v. Tuvera,64 that when the issue concerns a public right, it is sufficient
that the petitioner is a citizen and has an interest in the execution of the laws.
In G.R. No. 171483, KMU’s assertion that PP 1017 and G.O. No. 5 violated its right to peaceful
assembly may be deemed sufficient to give it legal standing. Organizations may be granted standing
to assert the rights of their members.65 We take judicial notice of the announcement by the Office
of the President banning all rallies and canceling all permits for public assemblies following the
issuance of PP 1017 and G.O. No. 5.
In G.R. No. 171489, petitioners, Cadiz et al., who are national officers of the Integrated Bar of the
Philippines (IBP) have no legal standing, having failed to allege any direct or potential injury which
the IBP as an institution or its members may suffer as a consequence of the issuance of PP No. 1017
and G.O. No. 5. In Integrated Bar of the Philippines v. Zamora,66 the Court held that the mere
invocation by the IBP of its duty to preserve the rule of law and nothing more, while undoubtedly
true, is not sufficient to clothe it with standing in this case. This is too general an interest which is
shared by other groups and the whole citizenry. However, in view of the transcendental importance
of the issue, this Court declares that petitioner have locus standi.
In G.R. No. 171424, Loren Legarda has no personality as a taxpayer to file the instant petition as
there are no allegations of illegal disbursement of public funds. The fact that she is a former Senator
is of no consequence. She can no longer sue as a legislator on the allegation that her prerogatives
as a lawmaker have been impaired by PP 1017 and G.O. No. 5. Her claim that she is a media
personality will not likewise aid her because there was no showing that the enforcement of these
issuances prevented her from pursuing her occupation. Her submission that she has pending
electoral protest before the Presidential Electoral Tribunal is likewise of no relevance. She has not
sufficiently shown that PP 1017 will affect the proceedings or result of her case. But considering
once more the transcendental importance of the issue involved, this Court may relax the standing
rules.
It must always be borne in mind that the question of locus standi is but corollary to the bigger
question of proper exercise of judicial power. This is the underlying legal tenet of the "liberality
doctrine" on legal standing. It cannot be doubted that the validity of PP No. 1017 and G.O. No. 5 is
a judicial question which is of paramount importance to the Filipino people. To paraphrase Justice
Laurel, the whole of Philippine society now waits with bated breath the ruling of this Court on this
very critical matter. The petitions thus call for the application of the "transcendental importance"
doctrine, a relaxation of the standing requirements for the petitioners in the "PP 1017
cases."1avvphil.net
This Court holds that all the petitioners herein have locus standi.
Incidentally, it is not proper to implead President Arroyo as respondent. Settled is the doctrine that
the President, during his tenure of office or actual incumbency, 67 may not be sued in any civil or
criminal case, and there is no need to provide for it in the Constitution or law. It will degrade the
dignity of the high office of the President, the Head of State, if he can be dragged into court
litigations while serving as such. Furthermore, it is important that he be freed from any form of
harassment, hindrance or distraction to enable him to fully attend to the performance of his official
duties and functions. Unlike the legislative and judicial branch, only one constitutes the executive
branch and anything which impairs his usefulness in the discharge of the many great and important
duties imposed upon him by the Constitution necessarily impairs the operation of the Government.
However, this does not mean that the President is not accountable to anyone. Like any other official,
he remains accountable to the people68 but he may be removed from office only in the mode
provided by law and that is by impeachment.69
B. SUBSTANTIVE
I. Review of Factual Bases
Petitioners maintain that PP 1017 has no factual basis. Hence, it was not "necessary" for President
Arroyo to issue such Proclamation.
The issue of whether the Court may review the factual bases of the President’s exercise of his
Commander-in-Chief power has reached its distilled point - from the indulgent days of Barcelon v.
Baker70 and Montenegro v. Castaneda71 to the volatile era of Lansang v. Garcia,72 Aquino, Jr. v.
Enrile,73 and Garcia-Padilla v. Enrile.74 The tug-of-war always cuts across the line defining "political
questions," particularly those questions "in regard to which full discretionary authority has been
delegated to the legislative or executive branch of the government."75 Barcelon and Montenegro
were in unison in declaring that the authority to decide whether an exigency has arisen belongs to
the President and his decision is final and conclusive on the courts. Lansang took the opposite
view. There, the members of the Court were unanimous in the conviction that the Court has the
authority to inquire into the existence of factual bases in order to determine their constitutional
sufficiency. From the principle of separation of powers, it shifted the focus to the system of checks
and balances, "under which the President is supreme, x x x only if and when he acts within the
sphere allotted to him by the Basic Law, and the authority to determine whether or not he has so
acted is vested in the Judicial Department, which in this respect, is, in turn, constitutionally
supreme."76 In 1973, the unanimous Court of Lansang was divided in Aquino v. Enrile.77 There, the
Court was almost evenly divided on the issue of whether the validity of the imposition of Martial
Law is a political or justiciable question.78 Then came Garcia-Padilla v. Enrile which greatly diluted
Lansang. It declared that there is a need to re-examine the latter case, ratiocinating that "in times
of war or national emergency, the President must be given absolute control for the very life of
the nation and the government is in great peril. The President, it intoned, is answerable only to
his conscience, the People, and God."79
The Integrated Bar of the Philippines v. Zamora80 -- a recent case most pertinent to these cases at
bar -- echoed a principle similar to Lansang. While the Court considered the President’s "calling-
out" power as a discretionary power solely vested in his wisdom, it stressed that "this does not
prevent an examination of whether such power was exercised within permissible constitutional
limits or whether it was exercised in a manner constituting grave abuse of discretion."This ruling
is mainly a result of the Court’s reliance on Section 1, Article VIII of 1987 Constitution which fortifies
the authority of the courts to determine in an appropriate action the validity of the acts of the
political departments. Under the new definition of judicial power, the courts are authorized not only
"to settle actual controversies involving rights which are legally demandable and enforceable," but
also "to 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 instrumentality of the government." The
latter part of the authority represents a broadening of judicial power to enable the courts of justice
to review what was before a forbidden territory, to wit, the discretion of the political departments
of the government.81 It speaks of judicial prerogative not only in terms of power but also of duty.82
As to how the Court may inquire into the President’s exercise of power, Lansang adopted the test
that "judicial inquiry can go no further than to satisfy the Court not that the President’s decision is
correct," but that "the President did not act arbitrarily." Thus, the standard laid down is not
correctness, but arbitrariness.83 In Integrated Bar of the Philippines, this Court further ruled that "it
is incumbent upon the petitioner to show that the President’s decision is totally bereft of factual
basis" and that if he fails, by way of proof, to support his assertion, then "this Court cannot
undertake an independent investigation beyond the pleadings."
Petitioners failed to show that President Arroyo’s exercise of the calling-out power, by issuing PP
1017, is totally bereft of factual basis. A reading of the Solicitor General’s Consolidated Comment
and Memorandum shows a detailed narration of the events leading to the issuance of PP 1017, with
supporting reports forming part of the records. Mentioned are the escape of the Magdalo Group,
their audacious threat of the Magdalo D-Day, the defections in the military, particularly in the
Philippine Marines, and the reproving statements from the communist leaders. There was also the
Minutes of the Intelligence Report and Security Group of the Philippine Army showing the growing
alliance between the NPA and the military. Petitioners presented nothing to refute such events.
Thus, absent any contrary allegations, the Court is convinced that the President was justified in
issuing PP 1017 calling for military aid.
Indeed, judging the seriousness of the incidents, President Arroyo was not expected to simply fold
her arms and do nothing to prevent or suppress what she believed was lawless violence, invasion
or rebellion. However, the exercise of such power or duty must not stifle liberty.
II. Constitutionality of PP 1017 and G.O. No. 5
Doctrines of Several Political Theorists
on the Power of the President in Times of Emergency
This case brings to fore a contentious subject -- the power of the President in times of emergency.
A glimpse at the various political theories relating to this subject provides an adequate backdrop for
our ensuing discussion.
John Locke, describing the architecture of civil government, called upon the English doctrine of
prerogative to cope with the problem of emergency. In times of danger to the nation, positive law
enacted by the legislature might be inadequate or even a fatal obstacle to the promptness of action
necessary to avert catastrophe. In these situations, the Crown retained a prerogative "power to act
according to discretion for the public good, without the proscription of the law and sometimes
even against it."84 But Locke recognized that this moral restraint might not suffice to avoid abuse
of prerogative powers. Who shall judge the need for resorting to the prerogative and how may its
abuse be avoided? Here, Locke readily admitted defeat, suggesting that "the people have no other
remedy in this, as in all other cases where they have no judge on earth, but to appeal to Heaven."85
Jean-Jacques Rousseau also assumed the need for temporary suspension of democratic processes
of government in time of emergency. According to him:
The inflexibility of the laws, which prevents them from adopting themselves to circumstances, may,
in certain cases, render them disastrous and make them bring about, at a time of crisis, the ruin of
the State…
It is wrong therefore to wish to make political institutions as strong as to render it impossible to
suspend their operation. Even Sparta allowed its law to lapse...
If the peril is of such a kind that the paraphernalia of the laws are an obstacle to their preservation,
the method is to nominate a supreme lawyer, who shall silence all the laws and suspend for a
moment the sovereign authority. In such a case, there is no doubt about the general will, and it clear
that the people’s first intention is that the State shall not perish.86
Rosseau did not fear the abuse of the emergency dictatorship or "supreme magistracy" as he
termed it. For him, it would more likely be cheapened by "indiscreet use." He was unwilling to rely
upon an "appeal to heaven." Instead, he relied upon a tenure of office of prescribed duration to
avoid perpetuation of the dictatorship.87
John Stuart Mill concluded his ardent defense of representative government: "I am far from
condemning, in cases of extreme necessity, the assumption of absolute power in the form of a
temporary dictatorship."88
Nicollo Machiavelli’s view of emergency powers, as one element in the whole scheme of limited
government, furnished an ironic contrast to the Lockean theory of prerogative. He recognized and
attempted to bridge this chasm in democratic political theory, thus:
Now, in a well-ordered society, it should never be necessary to resort to extra –constitutional
measures; for although they may for a time be beneficial, yet the precedent is pernicious, for if the
practice is once established for good objects, they will in a little while be disregarded under that
pretext but for evil purposes. Thus, no republic will ever be perfect if she has not by law provided
for everything, having a remedy for every emergency and fixed rules for applying it. 89
Machiavelli – in contrast to Locke, Rosseau and Mill – sought to incorporate into the constitution a
regularized system of standby emergency powers to be invoked with suitable checks and controls
in time of national danger. He attempted forthrightly to meet the problem of combining a capacious
reserve of power and speed and vigor in its application in time of emergency, with effective
constitutional restraints.90
Contemporary political theorists, addressing themselves to the problem of response to emergency
by constitutional democracies, have employed the doctrine of constitutional dictatorship.91
Frederick M. Watkins saw "no reason why absolutism should not be used as a means for the
defense of liberal institutions," provided it "serves to protect established institutions from the
danger of permanent injury in a period of temporary emergency and is followed by a prompt
return to the previous forms of political life."92 He recognized the two (2) key elements of the
problem of emergency governance, as well as all constitutional governance: increasing
administrative powers of the executive, while at the same time "imposing limitation upon that
power."93 Watkins placed his real faith in a scheme of constitutional dictatorship. These are the
conditions of success of such a dictatorship: "The period of dictatorship must be relatively
short…Dictatorship should always be strictly legitimate in character…Final authority to determine
the need for dictatorship in any given case must never rest with the dictator himself…"94 and the
objective of such an emergency dictatorship should be "strict political conservatism."
Carl J. Friedrich cast his analysis in terms similar to those of Watkins.95 "It is a problem of
concentrating power – in a government where power has consciously been divided – to cope with…
situations of unprecedented magnitude and gravity. There must be a broad grant of powers, subject
to equally strong limitations as to who shall exercise such powers, when, for how long, and to what
end."96 Friedrich, too, offered criteria for judging the adequacy of any of scheme of emergency
powers, to wit: "The emergency executive must be appointed by constitutional means – i.e., he
must be legitimate; he should not enjoy power to determine the existence of an emergency;
emergency powers should be exercised under a strict time limitation; and last, the objective of
emergency action must be the defense of the constitutional order."97
Clinton L. Rossiter, after surveying the history of the employment of emergency powers in Great
Britain, France, Weimar, Germany and the United States, reverted to a description of a scheme of
"constitutional dictatorship" as solution to the vexing problems presented by emergency.98 Like
Watkins and Friedrich, he stated a priori the conditions of success of the "constitutional
dictatorship," thus:
1) No general regime or particular institution of constitutional dictatorship should be initiated
unless it is necessary or even indispensable to the preservation of the State and its constitutional
order…
2) …the decision to institute a constitutional dictatorship should never be in the hands of the man
or men who will constitute the dictator…
3) No government should initiate a constitutional dictatorship without making specific provisions
for its termination…
4) …all uses of emergency powers and all readjustments in the organization of the government
should be effected in pursuit of constitutional or legal requirements…
5) … no dictatorial institution should be adopted, no right invaded, no regular procedure altered
any more than is absolutely necessary for the conquest of the particular crisis . . .
6) The measures adopted in the prosecution of the a constitutional dictatorship should never be
permanent in character or effect…
7) The dictatorship should be carried on by persons representative of every part of the citizenry
interested in the defense of the existing constitutional order. . .
 8) Ultimate responsibility should be maintained for every action taken under a constitutional
dictatorship. . .
9) The decision to terminate a constitutional dictatorship, like the decision to institute one should
never be in the hands of the man or men who constitute the dictator. . .
10) No constitutional dictatorship should extend beyond the termination of the crisis for which it
was instituted…
11) …the termination of the crisis must be followed by a complete return as possible to the
political and governmental conditions existing prior to the initiation of the constitutional
dictatorship…99
Rossiter accorded to legislature a far greater role in the oversight exercise of emergency powers
than did Watkins. He would secure to Congress final responsibility for declaring the existence or
termination of an emergency, and he places great faith in the effectiveness of congressional
investigating committees.100
Scott and Cotter, in analyzing the above contemporary theories in light of recent experience, were
one in saying that, "the suggestion that democracies surrender the control of government to an
authoritarian ruler in time of grave danger to the nation is not based upon sound constitutional
theory." To appraise emergency power in terms of constitutional dictatorship serves merely to
distort the problem and hinder realistic analysis. It matters not whether the term "dictator" is used
in its normal sense (as applied to authoritarian rulers) or is employed to embrace all chief executives
administering emergency powers. However used, "constitutional dictatorship" cannot be divorced
from the implication of suspension of the processes of constitutionalism. Thus, they favored instead
the "concept of constitutionalism" articulated by Charles H. McIlwain:
A concept of constitutionalism which is less misleading in the analysis of problems of emergency
powers, and which is consistent with the findings of this study, is that formulated by Charles H.
McIlwain. While it does not by any means necessarily exclude some indeterminate limitations upon
the substantive powers of government, full emphasis is placed upon procedural limitations, and
political responsibility. McIlwain clearly recognized the need to repose adequate power in
government. And in discussing the meaning of constitutionalism, he insisted that the historical and
proper test of constitutionalism was the existence of adequate processes for keeping government
responsible. He refused to equate constitutionalism with the enfeebling of government by an
exaggerated emphasis upon separation of powers and substantive limitations on governmental
power. He found that the really effective checks on despotism have consisted not in the weakening
of government but, but rather in the limiting of it; between which there is a great and very
significant difference. In associating constitutionalism with "limited" as distinguished from
"weak" government, McIlwain meant government limited to the orderly procedure of law as
opposed to the processes of force. The two fundamental correlative elements of
constitutionalism for which all lovers of liberty must yet fight are the legal limits to arbitrary
power and a complete political responsibility of government to the governed.101
In the final analysis, the various approaches to emergency of the above political theorists –- from
Lock’s "theory of prerogative," to Watkins’ doctrine of "constitutional dictatorship" and, eventually,
to McIlwain’s "principle of constitutionalism" --- ultimately aim to solve one real problem in
emergency governance, i.e., that of allotting increasing areas of discretionary power to the Chief
Executive, while insuring that such powers will be exercised with a sense of political responsibility
and under effective limitations and checks.
Our Constitution has fairly coped with this problem. Fresh from the fetters of a repressive regime,
the 1986 Constitutional Commission, in drafting the 1987 Constitution, endeavored to create a
government in the concept of Justice Jackson’s "balanced power structure."102 Executive, legislative,
and judicial powers are dispersed to the President, the Congress, and the Supreme Court,
respectively. Each is supreme within its own sphere. But none has the monopoly of power in times
of emergency. Each branch is given a role to serve as limitation or check upon the other. This
system does not weaken the President, it just limits his power, using the language of McIlwain. In
other words, in times of emergency, our Constitution reasonably demands that we repose a certain
amount of faith in the basic integrity and wisdom of the Chief Executive but, at the same time, it
obliges him to operate within carefully prescribed procedural limitations.
a. "Facial Challenge"
Petitioners contend that PP 1017 is void on its face because of its "overbreadth." They claim that its
enforcement encroached on both unprotected and protected rights under Section 4, Article III of
the Constitution and sent a "chilling effect" to the citizens.
A facial review of PP 1017, using the overbreadth doctrine, is uncalled for.
First and foremost, the overbreadth doctrine is an analytical tool developed for testing "on their
faces" statutes in free speech cases, also known under the American Law as First Amendment
cases.103
A plain reading of PP 1017 shows that it is not primarily directed to speech or even speech-related
conduct. It is actually a call upon the AFP to prevent or suppress all forms of lawless violence. In
United States v. Salerno,104 the US Supreme Court held that "we have not recognized an
‘overbreadth’ doctrine outside the limited context of the First Amendment" (freedom of speech).
Moreover, the overbreadth doctrine is not intended for testing the validity of a law that "reflects
legitimate state interest in maintaining comprehensive control over harmful, constitutionally
unprotected conduct." Undoubtedly, lawless violence, insurrection and rebellion are considered
"harmful" and "constitutionally unprotected conduct." In Broadrick v. Oklahoma,105 it was held:
It remains a ‘matter of no little difficulty’ to determine when a law may properly be held void on its
face and when ‘such summary action’ is inappropriate. But the plain import of our cases is, at the
very least, that facial overbreadth adjudication is an exception to our traditional rules of practice
and that its function, a limited one at the outset, attenuates as the otherwise unprotected
behavior that it forbids the State to sanction moves from ‘pure speech’ toward conduct and that
conduct –even if expressive – falls within the scope of otherwise valid criminal laws that reflect
legitimate state interests in maintaining comprehensive controls over harmful, constitutionally
unprotected conduct.
Thus, claims of facial overbreadth are entertained in cases involving statutes which, by their terms,
seek to regulate only "spoken words" and again, that "overbreadth claims, if entertained at all,
have been curtailed when invoked against ordinary criminal laws that are sought to be applied to
protected conduct."106 Here, the incontrovertible fact remains that PP 1017 pertains to a spectrum
of conduct, not free speech, which is manifestly subject to state regulation.
Second, facial invalidation of laws is considered as "manifestly strong medicine," to be used
"sparingly and only as a last resort," and is "generally disfavored;"107 The reason for this is obvious.
Embedded in the traditional rules governing constitutional adjudication is the principle that a
person to whom a law may be applied will not be heard to challenge a law on the ground that it
may conceivably be applied unconstitutionally to others, i.e., in other situations not before the
Court.108 A writer and scholar in Constitutional Law explains further:
The most distinctive feature of the overbreadth technique is that it marks an exception to some
of the usual rules of constitutional litigation. Ordinarily, a particular litigant claims that a statute
is unconstitutional as applied to him or her; if the litigant prevails, the courts carve away the
unconstitutional aspects of the law by invalidating its improper applications on a case to case
basis. Moreover, challengers to a law are not permitted to raise the rights of third parties and can
only assert their own interests. In overbreadth analysis, those rules give way; challenges are
permitted to raise the rights of third parties; and the court invalidates the entire statute "on its
face," not merely "as applied for" so that the overbroad law becomes unenforceable until a properly
authorized court construes it more narrowly. The factor that motivates courts to depart from the
normal adjudicatory rules is the concern with the "chilling;" deterrent effect of the overbroad
statute on third parties not courageous enough to bring suit. The Court assumes that an overbroad
law’s "very existence may cause others not before the court to refrain from constitutionally
protected speech or expression." An overbreadth ruling is designed to remove that deterrent effect
on the speech of those third parties.
In other words, a facial challenge using the overbreadth doctrine will require the Court to examine
PP 1017 and pinpoint its flaws and defects, not on the basis of its actual operation to petitioners,
but on the assumption or prediction that its very existence may cause others not before the Court
to refrain from constitutionally protected speech or expression. In Younger v. Harris,109 it was held
that:
[T]he task of analyzing a proposed statute, pinpointing its deficiencies, and requiring correction of
these deficiencies before the statute is put into effect, is rarely if ever an appropriate task for the
judiciary. The combination of the relative remoteness of the controversy, the impact on the
legislative process of the relief sought, and above all the speculative and amorphous nature of the
required line-by-line analysis of detailed statutes,...ordinarily results in a kind of case that is wholly
unsatisfactory for deciding constitutional questions, whichever way they might be decided.
And third, a facial challenge on the ground of overbreadth is the most difficult challenge to mount
successfully, since the challenger must establish that there can be no instance when the assailed
law may be valid. Here, petitioners did not even attempt to show whether this situation exists.
Petitioners likewise seek a facial review of PP 1017 on the ground of vagueness. This, too, is
unwarranted.
Related to the "overbreadth" doctrine is the "void for vagueness doctrine" which holds that "a law
is facially invalid if men of common intelligence must necessarily guess at its meaning and differ
as to its application."110 It is subject to the same principles governing overbreadth doctrine. For
one, it is also an analytical tool for testing "on their faces" statutes in free speech cases. And like
overbreadth, it is said that a litigant may challenge a statute on its face only if it is vague in all its
possible applications. Again, petitioners did not even attempt to show that PP 1017 is vague in all
its application. They also failed to establish that men of common intelligence cannot understand
the meaning and application of PP 1017.
b. Constitutional Basis of PP 1017
Now on the constitutional foundation of PP 1017.
The operative portion of PP 1017 may be divided into three important provisions, thus:
First provision:
"by virtue of the power vested upon me by Section 18, Artilce VII … do hereby command the Armed
Forces of the Philippines, to maintain law and order throughout the Philippines, prevent or suppress
all forms of lawless violence as well any act of insurrection or rebellion"
Second provision:
"and to enforce obedience to all the laws and to all decrees, orders and regulations promulgated by
me personally or upon my direction;"
Third provision:
"as provided in Section 17, Article XII of the Constitution do hereby declare a State of National
Emergency."
First Provision: Calling-out Power
The first provision pertains to the President’s calling-out power. In Sanlakas v. Executive
Secretary,111 this Court, through Mr. Justice Dante O. Tinga, held that Section 18, Article VII of the
Constitution reproduced as follows:
Sec. 18. The President shall be the Commander-in-Chief of all armed forces of the Philippines and
whenever it becomes necessary, he may call out such armed forces to prevent or suppress lawless
violence, invasion or rebellion. In case of invasion or rebellion, when the public safety requires it,
he may, for a period not exceeding sixty days, suspend the privilege of the writ of habeas corpus or
place the Philippines or any part thereof under martial law. Within forty-eight hours from the
proclamation of martial law or the suspension of the privilege of the writ of habeas corpus, the
President shall submit a report in person or in writing to the Congress. The Congress, voting jointly,
by a vote of at least a majority of all its Members in regular or special session, may revoke such
proclamation or suspension, which revocation shall not be set aside by the President. Upon the
initiative of the President, the Congress may, in the same manner, extend such proclamation or
suspension for a period to be determined by the Congress, if the invasion or rebellion shall persist
and public safety requires it.
The Congress, if not in session, shall within twenty-four hours following such proclamation or
suspension, convene in accordance with its rules without need of a call.
The Supreme Court may review, in an appropriate proceeding filed by any citizen, the sufficiency of
the factual bases of the proclamation of martial law or the suspension of the privilege of the writ or
the extension thereof, and must promulgate its decision thereon within thirty days from its filing.
A state of martial law does not suspend the operation of the Constitution, nor supplant the
functioning of the civil courts or legislative assemblies, nor authorize the conferment of jurisdiction
on military courts and agencies over civilians where civil courts are able to function, nor
automatically suspend the privilege of the writ.
The suspension of the privilege of the writ shall apply only to persons judicially charged for rebellion
or offenses inherent in or directly connected with invasion.
During the suspension of the privilege of the writ, any person thus arrested or detained shall be
judicially charged within three days, otherwise he shall be released.
grants the President, as Commander-in-Chief, a "sequence" of graduated powers. From the most to
the least benign, these are: the calling-out power, the power to suspend the privilege of the writ of
habeas corpus, and the power to declare Martial Law. Citing Integrated Bar of the Philippines v.
Zamora,112 the Court ruled that the only criterion for the exercise of the calling-out power is that
"whenever it becomes necessary," the President may call the armed forces "to prevent or suppress
lawless violence, invasion or rebellion." Are these conditions present in the instant cases? As stated
earlier, considering the circumstances then prevailing, President Arroyo found it necessary to issue
PP 1017. Owing to her Office’s vast intelligence network, she is in the best position to determine
the actual condition of the country.
Under the calling-out power, the President may summon the armed forces to aid him in suppressing
lawless violence, invasion and rebellion. This involves ordinary police action. But every act that
goes beyond the President’s calling-out power is considered illegal or ultra vires. For this reason, a
President must be careful in the exercise of his powers. He cannot invoke a greater power when he
wishes to act under a lesser power. There lies the wisdom of our Constitution, the greater the
power, the greater are the limitations.
It is pertinent to state, however, that there is a distinction between the President’s authority to
declare a "state of rebellion" (in Sanlakas) and the authority to proclaim a state of national
emergency. While President Arroyo’s authority to declare a "state of rebellion" emanates from her
powers as Chief Executive, the statutory authority cited in Sanlakas was Section 4, Chapter 2, Book
II of the Revised Administrative Code of 1987, which provides:
SEC. 4. – Proclamations. – Acts of the President fixing a date or declaring a status or condition of
public moment or interest, upon the existence of which the operation of a specific law or regulation
is made to depend, shall be promulgated in proclamations which shall have the force of an executive
order.
President Arroyo’s declaration of a "state of rebellion" was merely an act declaring a status or
condition of public moment or interest, a declaration allowed under Section 4 cited above. Such
declaration, in the words of Sanlakas, is harmless, without legal significance, and deemed not
written. In these cases, PP 1017 is more than that. In declaring a state of national emergency,
President Arroyo did not only rely on Section 18, Article VII of the Constitution, a provision calling
on the AFP to prevent or suppress lawless violence, invasion or rebellion. She also relied on Section
17, Article XII, a provision on the State’s extraordinary power to take over privately-owned public
utility and business affected with public interest. Indeed, PP 1017 calls for the exercise of an
awesome power. Obviously, such Proclamation cannot be deemed harmless, without legal
significance, or not written, as in the case of Sanlakas.
Some of the petitioners vehemently maintain that PP 1017 is actually a declaration of Martial Law.
It is no so. What defines the character of PP 1017 are its wordings. It is plain therein that what the
President invoked was her calling-out power.
The declaration of Martial Law is a "warn[ing] to citizens that the military power has been called
upon by the executive to assist in the maintenance of law and order, and that, while the emergency
lasts, they must, upon pain of arrest and punishment, not commit any acts which will in any way
render more difficult the restoration of order and the enforcement of law."113
In his "Statement before the Senate Committee on Justice" on March 13, 2006, Mr. Justice Vicente
V. Mendoza,114 an authority in constitutional law, said that of the three powers of the President as
Commander-in-Chief, the power to declare Martial Law poses the most severe threat to civil
liberties. It is a strong medicine which should not be resorted to lightly. It cannot be used to stifle
or persecute critics of the government. It is placed in the keeping of the President for the purpose
of enabling him to secure the people from harm and to restore order so that they can enjoy their
individual freedoms. In fact, Section 18, Art. VII, provides:
A state of martial law does not suspend the operation of the Constitution, nor supplant the
functioning of the civil courts or legislative assemblies, nor authorize the conferment of jurisdiction
on military courts and agencies over civilians where civil courts are able to function, nor
automatically suspend the privilege of the writ.
Justice Mendoza also stated that PP 1017 is not a declaration of Martial Law. It is no more than a
call by the President to the armed forces to prevent or suppress lawless violence. As such, it cannot
be used to justify acts that only under a valid declaration of Martial Law can be done. Its use for any
other purpose is a perversion of its nature and scope, and any act done contrary to its command is
ultra vires.
Justice Mendoza further stated that specifically, (a) arrests and seizures without judicial warrants;
(b) ban on public assemblies; (c) take-over of news media and agencies and press censorship; and
(d) issuance of Presidential Decrees, are powers which can be exercised by the President as
Commander-in-Chief only where there is a valid declaration of Martial Law or suspension of the writ
of habeas corpus.
Based on the above disquisition, it is clear that PP 1017 is not a declaration of Martial Law. It is
merely an exercise of President Arroyo’s calling-out power for the armed forces to assist her in
preventing or suppressing lawless violence.
Second Provision: "Take Care" Power
The second provision pertains to the power of the President to ensure that the laws be faithfully
executed. This is based on Section 17, Article VII which reads:
SEC. 17. The President shall have control of all the executive departments, bureaus, and offices. He
shall ensure that the laws be faithfully executed.
As the Executive in whom the executive power is vested,115 the primary function of the President is
to enforce the laws as well as to formulate policies to be embodied in existing laws. He sees to it
that all laws are enforced by the officials and employees of his department. Before assuming office,
he is required to take an oath or affirmation to the effect that as President of the Philippines, he
will, among others, "execute its laws."116 In the exercise of such function, the President, if needed,
may employ the powers attached to his office as the Commander-in-Chief of all the armed forces of
the country,117 including the Philippine National Police118 under the Department of Interior and
Local Government.119
Petitioners, especially Representatives Francis Joseph G. Escudero, Satur Ocampo, Rafael Mariano,
Teodoro Casiño, Liza Maza, and Josel Virador argue that PP 1017 is unconstitutional as it arrogated
upon President Arroyo the power to enact laws and decrees in violation of Section 1, Article VI of
the Constitution, which vests the power to enact laws in Congress. They assail the clause "to enforce
obedience to all the laws and to all decrees, orders and regulations promulgated by me personally
or upon my direction."
Petitioners’ contention is understandable. A reading of PP 1017 operative clause shows that it was
lifted120 from Former President Marcos’ Proclamation No. 1081, which partly reads:
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines by virtue of the powers
vested upon me by Article VII, Section 10, Paragraph (2) of the Constitution, do hereby place the
entire Philippines as defined in Article 1, Section 1 of the Constitution under martial law and, in my
capacity as their Commander-in-Chief, do hereby command the Armed Forces of the Philippines,
to maintain law and order throughout the Philippines, prevent or suppress all forms of lawless
violence as well as any act of insurrection or rebellion and to enforce obedience to all the laws
and decrees, orders and regulations promulgated by me personally or upon my direction.
We all know that it was PP 1081 which granted President Marcos legislative power. Its enabling
clause states: "to enforce obedience to all the laws and decrees, orders and regulations
promulgated by me personally or upon my direction." Upon the other hand, the enabling clause
of PP 1017 issued by President Arroyo is: to enforce obedience to all the laws and to all decrees,
orders and regulations promulgated by me personally or upon my direction."
Is it within the domain of President Arroyo to promulgate "decrees"?
PP 1017 states in part: "to enforce obedience to all the laws and decrees x x x promulgated by me
personally or upon my direction."
The President is granted an Ordinance Power under Chapter 2, Book III of Executive Order No. 292
(Administrative Code of 1987). She may issue any of the following:
Sec. 2. Executive Orders. — Acts of the President providing for rules of a general or permanent
character in implementation or execution of constitutional or statutory powers shall be
promulgated in executive orders.
Sec. 3. Administrative Orders. — Acts of the President which relate to particular aspect of
governmental operations in pursuance of his duties as administrative head shall be promulgated in
administrative orders.
Sec. 4. Proclamations. — Acts of the President fixing a date or declaring a status or condition of
public moment or interest, upon the existence of which the operation of a specific law or regulation
is made to depend, shall be promulgated in proclamations which shall have the force of an executive
order.
Sec. 5. Memorandum Orders. — Acts of the President on matters of administrative detail or of
subordinate or temporary interest which only concern a particular officer or office of the
Government shall be embodied in memorandum orders.
Sec. 6. Memorandum Circulars. — Acts of the President on matters relating to internal
administration, which the President desires to bring to the attention of all or some of the
departments, agencies, bureaus or offices of the Government, for information or compliance, shall
be embodied in memorandum circulars.
Sec. 7. General or Special Orders. — Acts and commands of the President in his capacity as
Commander-in-Chief of the Armed Forces of the Philippines shall be issued as general or special
orders.
President Arroyo’s ordinance power is limited to the foregoing issuances. She cannot issue decrees
similar to those issued by Former President Marcos under PP 1081. Presidential Decrees are laws
which are of the same category and binding force as statutes because they were issued by the
President in the exercise of his legislative power during the period of Martial Law under the 1973
Constitution.121
This Court rules that the assailed PP 1017 is unconstitutional insofar as it grants President Arroyo
the authority to promulgate "decrees." Legislative power is peculiarly within the province of the
Legislature. Section 1, Article VI categorically states that "[t]he legislative power shall be vested in
the Congress of the Philippines which shall consist of a Senate and a House of Representatives."
To be sure, neither Martial Law nor a state of rebellion nor a state of emergency can justify President
Arroyo’s exercise of legislative power by issuing decrees.
Can President Arroyo enforce obedience to all decrees and laws through the military?
As this Court stated earlier, President Arroyo has no authority to enact decrees. It follows that these
decrees are void and, therefore, cannot be enforced. With respect to "laws," she cannot call the
military to enforce or implement certain laws, such as customs laws, laws governing family and
property relations, laws on obligations and contracts and the like. She can only order the military,
under PP 1017, to enforce laws pertinent to its duty to suppress lawless violence.
Third Provision: Power to Take Over
The pertinent provision of PP 1017 states:
x x x and to enforce obedience to all the laws and to all decrees, orders, and regulations promulgated
by me personally or upon my direction; and as provided in Section 17, Article XII of the Constitution
do hereby declare a state of national emergency.
The import of this provision is that President Arroyo, during the state of national emergency under
PP 1017, can call the military not only to enforce obedience "to all the laws and to all decrees x x x"
but also to act pursuant to the provision of Section 17, Article XII which reads:
Sec. 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.
What could be the reason of President Arroyo in invoking the above provision when she issued PP
1017?
The answer is simple. During the existence of the state of national emergency, PP 1017 purports to
grant the President, without any authority or delegation from Congress, to take over or direct the
operation of any privately-owned public utility or business affected with public interest.
This provision was first introduced in the 1973 Constitution, as a product of the "martial law"
thinking of the 1971 Constitutional Convention.122 In effect at the time of its approval was President
Marcos’ Letter of Instruction No. 2 dated September 22, 1972 instructing the Secretary of National
Defense to take over "the management, control and operation of the Manila Electric Company, the
Philippine Long Distance Telephone Company, the National Waterworks and Sewerage Authority,
the Philippine National Railways, the Philippine Air Lines, Air Manila (and) Filipinas Orient Airways .
. . for the successful prosecution by the Government of its effort to contain, solve and end the present
national emergency."
Petitioners, particularly the members of the House of Representatives, claim that President Arroyo’s
inclusion of Section 17, Article XII in PP 1017 is an encroachment on the legislature’s emergency
powers.
This is an area that needs delineation.
A distinction must be drawn between the President’s authority to declare "a state of national
emergency" and to exercise emergency powers. To the first, as elucidated by the Court, Section 18,
Article VII grants the President such power, hence, no legitimate constitutional objection can be
raised. But to the second, manifold constitutional issues arise.
Section 23, Article VI of the Constitution reads:
SEC. 23. (1) The Congress, by a vote of two-thirds of both Houses in joint session assembled, voting
separately, shall have the sole power to declare the existence of a state of war.
(2) In times of war or other national emergency, the Congress may, by law, authorize the President,
for a limited period and subject to such restrictions as it may prescribe, to exercise powers necessary
and proper to carry out a declared national policy. Unless sooner withdrawn by resolution of the
Congress, such powers shall cease upon the next adjournment thereof.
It may be pointed out that the second paragraph of the above provision refers not only to war but
also to "other national emergency." If the intention of the Framers of our Constitution was to
withhold from the President the authority to declare a "state of national emergency" pursuant to
Section 18, Article VII (calling-out power) and grant it to Congress (like the declaration of the
existence of a state of war), then the Framers could have provided so. Clearly, they did not intend
that Congress should first authorize the President before he can declare a "state of national
emergency." The logical conclusion then is that President Arroyo could validly declare the existence
of a state of national emergency even in the absence of a Congressional enactment.
But the exercise of emergency powers, such as the taking over of privately owned public utility or
business affected with public interest, is a different matter. This requires a delegation from
Congress.
Courts have often said that constitutional provisions in pari materia are to be construed together.
Otherwise stated, different clauses, sections, and provisions of a constitution which relate to the
same subject matter will be construed together and considered in the light of each other. 123
Considering that Section 17 of Article XII and Section 23 of Article VI, previously quoted, relate to
national emergencies, they must be read together to determine the limitation of the exercise of
emergency powers.
Generally, Congress is the repository of emergency powers. This is evident in the tenor of Section
23 (2), Article VI authorizing it to delegate such powers to the President. Certainly, a body cannot
delegate a power not reposed upon it. However, knowing that during grave emergencies, it may
not be possible or practicable for Congress to meet and exercise its powers, the Framers of our
Constitution deemed it wise to allow Congress to grant emergency powers to the President, subject
to certain conditions, thus:
(1) There must be a war or other emergency.
(2) The delegation must be for a limited period only.
(3) The delegation must be subject to such restrictions as the Congress may prescribe.
(4) The emergency powers must be exercised to carry out a national policy declared by
Congress.124
Section 17, Article XII must be understood as an aspect of the emergency powers clause. The taking
over of private business affected with public interest is just another facet of the emergency powers
generally reposed upon Congress. Thus, when Section 17 states that the "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," it refers
to Congress, not the President. Now, whether or not the President may exercise such power is
dependent on whether Congress may delegate it to him pursuant to a law prescribing the
reasonable terms thereof. Youngstown Sheet & Tube Co. et al. v. Sawyer,125 held:
It is clear that if the President had authority to issue the order he did, it must be found in some
provision of the Constitution. And it is not claimed that express constitutional language grants this
power to the President. The contention is that presidential power should be implied from the
aggregate of his powers under the Constitution. Particular reliance is placed on provisions in Article
II which say that "The executive Power shall be vested in a President . . . .;" that "he shall take Care
that the Laws be faithfully executed;" and that he "shall be Commander-in-Chief of the Army and
Navy of the United States.
The order cannot properly be sustained as an exercise of the President’s military power as
Commander-in-Chief of the Armed Forces. The Government attempts to do so by citing a number
of cases upholding broad powers in military commanders engaged in day-to-day fighting in a theater
of war. Such cases need not concern us here. Even though "theater of war" be an expanding
concept, we cannot with faithfulness to our constitutional system hold that the Commander-in-
Chief of the Armed Forces has the ultimate power as such to take possession of private property
in order to keep labor disputes from stopping production. This is a job for the nation’s lawmakers,
not for its military authorities.
Nor can the seizure order be sustained because of the several constitutional provisions that grant
executive power to the President. In the framework of our Constitution, the President’s power to
see that the laws are faithfully executed refutes the idea that he is to be a lawmaker. The
Constitution limits his functions in the lawmaking process to the recommending of laws he thinks
wise and the vetoing of laws he thinks bad. And the Constitution is neither silent nor equivocal
about who shall make laws which the President is to execute. The first section of the first article
says that "All legislative Powers herein granted shall be vested in a Congress of the United States.
. ."126
Petitioner Cacho-Olivares, et al. contends that the term "emergency" under Section 17, Article XII
refers to "tsunami," "typhoon," "hurricane"and"similar occurrences." This is a limited view of
"emergency."
Emergency, as a generic term, connotes the existence of conditions suddenly intensifying the
degree of existing danger to life or well-being beyond that which is accepted as normal. Implicit in
this definitions are the elements of intensity, variety, and perception.127 Emergencies, as perceived
by legislature or executive in the United Sates since 1933, have been occasioned by a wide range of
situations, classifiable under three (3) principal heads: a) economic,128 b) natural disaster,129 and c)
national security.130
"Emergency," as contemplated in our Constitution, is of the same breadth. It may include rebellion,
economic crisis, pestilence or epidemic, typhoon, flood, or other similar catastrophe of nationwide
proportions or effect.131 This is evident in the Records of the Constitutional Commission, thus:
MR. GASCON. Yes. What is the Committee’s definition of "national emergency" which appears in
Section 13, page 5? It reads:
When the common good so requires, the State may temporarily take over or direct the operation
of any privately owned public utility or business affected with public interest.
MR. VILLEGAS. What I mean is threat from external aggression, for example, calamities or natural
disasters.
MR. GASCON. There is a question by Commissioner de los Reyes. What about strikes and riots?
MR. VILLEGAS. Strikes, no; those would not be covered by the term "national emergency."
MR. BENGZON. Unless they are of such proportions such that they would paralyze government
service.132
xxxxxx
MR. TINGSON. May I ask the committee if "national emergency" refers to military national
emergency or could this be economic emergency?"
MR. VILLEGAS. Yes, it could refer to both military or economic dislocations.
MR. TINGSON. Thank you very much.133
It may be argued that when there is national emergency, Congress may not be able to convene and,
therefore, unable to delegate to the President the power to take over privately-owned public utility
or business affected with public interest.
In Araneta v. Dinglasan,134 this Court emphasized that legislative power, through which
extraordinary measures are exercised, remains in Congress even in times of crisis.
"x x x
After all the criticisms that have been made against the efficiency of the system of the separation
of powers, the fact remains that the Constitution has set up this form of government, with all its
defects and shortcomings, in preference to the commingling of powers in one man or group of men.
The Filipino people by adopting parliamentary government have given notice that they share the
faith of other democracy-loving peoples in this system, with all its faults, as the ideal. The point is,
under this framework of government, legislation is preserved for Congress all the time, not
excepting periods of crisis no matter how serious. Never in the history of the United States, the
basic features of whose Constitution have been copied in ours, have specific functions of the
legislative branch of enacting laws been surrendered to another department – unless we regard as
legislating the carrying out of a legislative policy according to prescribed standards; no, not even
when that Republic was fighting a total war, or when it was engaged in a life-and-death struggle to
preserve the Union. The truth is that under our concept of constitutional government, in times of
extreme perils more than in normal circumstances ‘the various branches, executive, legislative, and
judicial,’ given the ability to act, are called upon ‘to perform the duties and discharge the
responsibilities committed to them respectively."
Following our interpretation of Section 17, Article XII, invoked by President Arroyo in issuing PP
1017, this Court rules that such Proclamation does not authorize her during the emergency to
temporarily take over or direct the operation of any privately owned public utility or business
affected with public interest without authority from Congress.
Let it be emphasized that while the President alone can declare a state of national emergency,
however, without legislation, he has no power to take over privately-owned public utility or
business affected with public interest. The President cannot decide whether exceptional
circumstances exist warranting the take over of privately-owned public utility or business affected
with public interest. Nor can he determine when such exceptional circumstances have ceased.
Likewise, without legislation, the President has no power to point out the types of businesses
affected with public interest that should be taken over. In short, the President has no absolute
authority to exercise all the powers of the State under Section 17, Article VII in the absence of an
emergency powers act passed by Congress.
c. "AS APPLIED CHALLENGE"
One of the misfortunes of an emergency, particularly, that which pertains to security, is that military
necessity and the guaranteed rights of the individual are often not compatible. Our history reveals
that in the crucible of conflict, many rights are curtailed and trampled upon. Here, the right against
unreasonable search and seizure; the right against warrantless arrest; and the freedom of speech,
of expression, of the press, and of assembly under the Bill of Rights suffered the greatest blow.
Of the seven (7) petitions, three (3) indicate "direct injury."
In G.R. No. 171396, petitioners David and Llamas alleged that, on February 24, 2006, they were
arrested without warrants on their way to EDSA to celebrate the 20th Anniversary of People Power
I. The arresting officers cited PP 1017 as basis of the arrest.
In G.R. No. 171409, petitioners Cacho-Olivares and Tribune Publishing Co., Inc. claimed that on
February 25, 2006, the CIDG operatives "raided and ransacked without warrant" their office. Three
policemen were assigned to guard their office as a possible "source of destabilization." Again, the
basis was PP 1017.
And in G.R. No. 171483, petitioners KMU and NAFLU-KMU et al. alleged that their members were
"turned away and dispersed" when they went to EDSA and later, to Ayala Avenue, to celebrate the
20th Anniversary of People Power I.
A perusal of the "direct injuries" allegedly suffered by the said petitioners shows that they resulted
from the implementation, pursuant to G.O. No. 5, of PP 1017.
Can this Court adjudge as unconstitutional PP 1017 and G.O. No 5 on the basis of these illegal acts?
In general, does the illegal implementation of a law render it unconstitutional?
Settled is the rule that courts are not at liberty to declare statutes invalid although they may be
abused and misabused135 and may afford an opportunity for abuse in the manner of
application.136 The validity of a statute or ordinance is to be determined from its general purpose
and its efficiency to accomplish the end desired, not from its effects in a particular case.137 PP 1017
is merely an invocation of the President’s calling-out power. Its general purpose is to command the
AFP to suppress all forms of lawless violence, invasion or rebellion. It had accomplished the end
desired which prompted President Arroyo to issue PP 1021. But there is nothing in PP 1017 allowing
the police, expressly or impliedly, to conduct illegal arrest, search or violate the citizens’
constitutional rights.
Now, may this Court adjudge a law or ordinance unconstitutional on the ground that its
implementor committed illegal acts? The answer is no. The criterion by which the validity of the
statute or ordinance is to be measured is the essential basis for the exercise of power, and not a
mere incidental result arising from its exertion.138 This is logical. Just imagine the absurdity of
situations when laws maybe declared unconstitutional just because the officers implementing them
have acted arbitrarily. If this were so, judging from the blunders committed by policemen in the
cases passed upon by the Court, majority of the provisions of the Revised Penal Code would have
been declared unconstitutional a long time ago.
President Arroyo issued G.O. No. 5 to carry into effect the provisions of PP 1017. General orders are
"acts and commands of the President in his capacity as Commander-in-Chief of the Armed Forces
of the Philippines." They are internal rules issued by the executive officer to his subordinates
precisely for the proper and efficient administration of law. Such rules and regulations create no
relation except between the official who issues them and the official who receives them. 139 They
are based on and are the product of, a relationship in which power is their source, and obedience,
their object.140 For these reasons, one requirement for these rules to be valid is that they must be
reasonable, not arbitrary or capricious.
G.O. No. 5 mandates the AFP and the PNP to immediately carry out the "necessary and appropriate
actions and measures to suppress and prevent acts of terrorism and lawless violence."
Unlike the term "lawless violence" which is unarguably extant in our statutes and the Constitution,
and which is invariably associated with "invasion, insurrection or rebellion," the phrase "acts of
terrorism" is still an amorphous and vague concept. Congress has yet to enact a law defining and
punishing acts of terrorism.
In fact, this "definitional predicament" or the "absence of an agreed definition of terrorism"
confronts not only our country, but the international community as well. The following observations
are quite apropos:
In the actual unipolar context of international relations, the "fight against terrorism" has become
one of the basic slogans when it comes to the justification of the use of force against certain states
and against groups operating internationally. Lists of states "sponsoring terrorism" and of terrorist
organizations are set up and constantly being updated according to criteria that are not always
known to the public, but are clearly determined by strategic interests.
The basic problem underlying all these military actions – or threats of the use of force as the most
recent by the United States against Iraq – consists in the absence of an agreed definition of
terrorism.
Remarkable confusion persists in regard to the legal categorization of acts of violence either by
states, by armed groups such as liberation movements, or by individuals.
The dilemma can by summarized in the saying "One country’s terrorist is another country’s freedom
fighter." The apparent contradiction or lack of consistency in the use of the term "terrorism" may
further be demonstrated by the historical fact that leaders of national liberation movements such
as Nelson Mandela in South Africa, Habib Bourgouiba in Tunisia, or Ahmed Ben Bella in Algeria, to
mention only a few, were originally labeled as terrorists by those who controlled the territory at the
time, but later became internationally respected statesmen.
What, then, is the defining criterion for terrorist acts – the differentia specifica distinguishing those
acts from eventually legitimate acts of national resistance or self-defense?
Since the times of the Cold War the United Nations Organization has been trying in vain to reach a
consensus on the basic issue of definition. The organization has intensified its efforts recently, but
has been unable to bridge the gap between those who associate "terrorism" with any violent act by
non-state groups against civilians, state functionaries or infrastructure or military installations, and
those who believe in the concept of the legitimate use of force when resistance against foreign
occupation or against systematic oppression of ethnic and/or religious groups within a state is
concerned.
The dilemma facing the international community can best be illustrated by reference to the
contradicting categorization of organizations and movements such as Palestine Liberation
Organization (PLO) – which is a terrorist group for Israel and a liberation movement for Arabs and
Muslims – the Kashmiri resistance groups – who are terrorists in the perception of India, liberation
fighters in that of Pakistan – the earlier Contras in Nicaragua – freedom fighters for the United
States, terrorists for the Socialist camp – or, most drastically, the Afghani Mujahedeen (later to
become the Taliban movement): during the Cold War period they were a group of freedom fighters
for the West, nurtured by the United States, and a terrorist gang for the Soviet Union. One could go
on and on in enumerating examples of conflicting categorizations that cannot be reconciled in any
way – because of opposing political interests that are at the roots of those perceptions.
How, then, can those contradicting definitions and conflicting perceptions and evaluations of one
and the same group and its actions be explained? In our analysis, the basic reason for these striking
inconsistencies lies in the divergent interest of states. Depending on whether a state is in the
position of an occupying power or in that of a rival, or adversary, of an occupying power in a given
territory, the definition of terrorism will "fluctuate" accordingly. A state may eventually see itself as
protector of the rights of a certain ethnic group outside its territory and will therefore speak of a
"liberation struggle," not of "terrorism" when acts of violence by this group are concerned, and vice-
versa.
The United Nations Organization has been unable to reach a decision on the definition of terrorism
exactly because of these conflicting interests of sovereign states that determine in each and every
instance how a particular armed movement (i.e. a non-state actor) is labeled in regard to the
terrorists-freedom fighter dichotomy. A "policy of double standards" on this vital issue of
international affairs has been the unavoidable consequence.
This "definitional predicament" of an organization consisting of sovereign states – and not of
peoples, in spite of the emphasis in the Preamble to the United Nations Charter! – has become even
more serious in the present global power constellation: one superpower exercises the decisive role
in the Security Council, former great powers of the Cold War era as well as medium powers are
increasingly being marginalized; and the problem has become even more acute since the terrorist
attacks of 11 September 2001 I the United States.141
The absence of a law defining "acts of terrorism" may result in abuse and oppression on the part of
the police or military. An illustration is when a group of persons are merely engaged in a drinking
spree. Yet the military or the police may consider the act as an act of terrorism and immediately
arrest them pursuant to G.O. No. 5. Obviously, this is abuse and oppression on their part. It must be
remembered that an act can only be considered a crime if there is a law defining the same as such
and imposing the corresponding penalty thereon.
So far, the word "terrorism" appears only once in our criminal laws, i.e., in P.D. No. 1835 dated
January 16, 1981 enacted by President Marcos during the Martial Law regime. This decree is entitled
"Codifying The Various Laws on Anti-Subversion and Increasing The Penalties for Membership in
Subversive Organizations." The word "terrorism" is mentioned in the following provision: "That one
who conspires with any other person for the purpose of overthrowing the Government of the
Philippines x x x by force, violence, terrorism, x x x shall be punished by reclusion temporal x x x."
P.D. No. 1835 was repealed by E.O. No. 167 (which outlaws the Communist Party of the Philippines)
enacted by President Corazon Aquino on May 5, 1985. These two (2) laws, however, do not define
"acts of terrorism." Since there is no law defining "acts of terrorism," it is President Arroyo alone,
under G.O. No. 5, who has the discretion to determine what acts constitute terrorism. Her judgment
on this aspect is absolute, without restrictions. Consequently, there can be indiscriminate arrest
without warrants, breaking into offices and residences, taking over the media enterprises,
prohibition and dispersal of all assemblies and gatherings unfriendly to the administration. All these
can be effected in the name of G.O. No. 5. These acts go far beyond the calling-out power of the
President. Certainly, they violate the due process clause of the Constitution. Thus, this Court
declares that the "acts of terrorism" portion of G.O. No. 5 is unconstitutional.
Significantly, there is nothing in G.O. No. 5 authorizing the military or police to commit acts beyond
what are necessary and appropriate to suppress and prevent lawless violence, the limitation of
their authority in pursuing the Order. Otherwise, such acts are considered illegal.
We first examine G.R. No. 171396 (David et al.)
The Constitution provides that "the right of the people to be secured in their persons, houses,
papers and effects against unreasonable search and seizure of whatever nature and for any purpose
shall be inviolable, and no search warrant or warrant of arrest shall issue except upon probable
cause to be determined personally by the judge after examination under oath or affirmation of the
complainant and the witnesses he may produce, and particularly describing the place to be searched
and the persons or things to be seized."142 The plain import of the language of the Constitution is
that searches, seizures and arrests are normally unreasonable unless authorized by a validly issued
search warrant or warrant of arrest. Thus, the fundamental protection given by this provision is that
between person and police must stand the protective authority of a magistrate clothed with power
to issue or refuse to issue search warrants or warrants of arrest. 143
In the Brief Account144 submitted by petitioner David, certain facts are established: first, he was
arrested without warrant; second, the PNP operatives arrested him on the basis of PP 1017; third,
he was brought at Camp Karingal, Quezon City where he was fingerprinted, photographed and
booked like a criminal suspect; fourth,he was treated brusquely by policemen who "held his head
and tried to push him" inside an unmarked car; fifth, he was charged with Violation of Batas
Pambansa Bilang No. 880145 and Inciting to Sedition; sixth, he was detained for seven (7) hours;
and seventh,he was eventually released for insufficiency of evidence.
Section 5, Rule 113 of the Revised Rules on Criminal Procedure provides:
Sec. 5. Arrest without warrant; when lawful. - A peace officer or a private person may, without a
warrant, arrest a person:
(a) When, in his presence, the person to be arrested has committed, is actually committing, or is
attempting to commit an offense.
(b) When an offense has just been committed and he has probable cause to believe based on
personal knowledge of facts or circumstances that the person to be arrested has committed it;
and
x x x.
Neither of the two (2) exceptions mentioned above justifies petitioner David’s warrantless arrest.
During the inquest for the charges of inciting to sedition and violation of BP 880, all that the
arresting officers could invoke was their observation that some rallyists were wearing t-shirts with
the invective "Oust Gloria Now" and their erroneous assumption that petitioner David was the
leader of the rally.146 Consequently, the Inquest Prosecutor ordered his immediate release on the
ground of insufficiency of evidence. He noted that petitioner David was not wearing the subject t-
shirt and even if he was wearing it, such fact is insufficient to charge him with inciting to sedition.
Further, he also stated that there is insufficient evidence for the charge of violation of BP 880 as it
was not even known whether petitioner David was the leader of the rally.147
But what made it doubly worse for petitioners David et al. is that not only was their right against
warrantless arrest violated, but also their right to peaceably assemble.
Section 4 of Article III guarantees:
No law shall be passed abridging the freedom of speech, of expression, or of the press, or the right
of the people peaceably to assemble and petition the government for redress of grievances.
"Assembly" means a right on the part of the citizens to meet peaceably for consultation in respect
to public affairs. It is a necessary consequence of our republican institution and complements the
right of speech. As in the case of freedom of expression, this right is not to be limited, much less
denied, except on a showing of a clear and present danger of a substantive evil that Congress has
a right to prevent. In other words, like other rights embraced in the freedom of expression, the right
to assemble is not subject to previous restraint or censorship. It may not be conditioned upon the
prior issuance of a permit or authorization from the government authorities except, of course, if the
assembly is intended to be held in a public place, a permit for the use of such place, and not for the
assembly itself, may be validly required.
The ringing truth here is that petitioner David, et al. were arrested while they were exercising their
right to peaceful assembly. They were not committing any crime, neither was there a showing of a
clear and present danger that warranted the limitation of that right. As can be gleaned from
circumstances, the charges of inciting to sedition and violation of BP 880 were mere afterthought.
Even the Solicitor General, during the oral argument, failed to justify the arresting officers’ conduct.
In De Jonge v. Oregon,148 it was held that peaceable assembly cannot be made a crime, thus:
Peaceable assembly for lawful discussion cannot be made a crime. The holding of meetings for
peaceable political action cannot be proscribed. Those who assist in the conduct of such meetings
cannot be branded as criminals on that score. The question, if the rights of free speech and peaceful
assembly are not to be preserved, is not as to the auspices under which the meeting was held but
as to its purpose; not as to the relations of the speakers, but whether their utterances transcend
the bounds of the freedom of speech which the Constitution protects. If the persons assembling
have committed crimes elsewhere, if they have formed or are engaged in a conspiracy against the
public peace and order, they may be prosecuted for their conspiracy or other violations of valid
laws. But it is a different matter when the State, instead of prosecuting them for such offenses,
seizes upon mere participation in a peaceable assembly and a lawful public discussion as the basis
for a criminal charge.
On the basis of the above principles, the Court likewise considers the dispersal and arrest of the
members of KMU et al. (G.R. No. 171483) unwarranted. Apparently, their dispersal was done merely
on the basis of Malacañang’s directive canceling all permits previously issued by local government
units. This is arbitrary. The wholesale cancellation of all permits to rally is a blatant disregard of the
principle that "freedom of assembly is not to be limited, much less denied, except on a showing
of a clear and present danger of a substantive evil that the State has a right to prevent."149
Tolerance is the rule and limitation is the exception. Only upon a showing that an assembly presents
a clear and present danger that the State may deny the citizens’ right to exercise it. Indeed,
respondents failed to show or convince the Court that the rallyists committed acts amounting to
lawless violence, invasion or rebellion. With the blanket revocation of permits, the distinction
between protected and unprotected assemblies was eliminated.
Moreover, under BP 880, the authority to regulate assemblies and rallies is lodged with the local
government units. They have the power to issue permits and to revoke such permits after due
notice and hearing on the determination of the presence of clear and present danger. Here,
petitioners were not even notified and heard on the revocation of their permits.150 The first time
they learned of it was at the time of the dispersal. Such absence of notice is a fatal defect. When a
person’s right is restricted by government action, it behooves a democratic government to see to it
that the restriction is fair, reasonable, and according to procedure.
G.R. No. 171409, (Cacho-Olivares, et al.) presents another facet of freedom of speech i.e., the
freedom of the press. Petitioners’ narration of facts, which the Solicitor General failed to refute,
established the following: first, the Daily Tribune’s offices were searched without warrant;second,
the police operatives seized several materials for publication; third, the search was conducted at
about 1:00 o’ clock in the morning of February 25, 2006; fourth, the search was conducted in the
absence of any official of the Daily Tribune except the security guard of the building; and fifth,
policemen stationed themselves at the vicinity of the Daily Tribune offices.
Thereafter, a wave of warning came from government officials. Presidential Chief of Staff Michael
Defensor was quoted as saying that such raid was "meant to show a ‘strong presence,’ to tell media
outlets not to connive or do anything that would help the rebels in bringing down this
government." Director General Lomibao further stated that "if they do not follow the standards –
and the standards are if they would contribute to instability in the government, or if they do not
subscribe to what is in General Order No. 5 and Proc. No. 1017 – we will recommend a ‘takeover.’"
National Telecommunications Commissioner Ronald Solis urged television and radio networks to get the clippings. Is that not in admission of the admissibility of these clippings that were taken from
"cooperate" with the government for the duration of the state of national emergency. He warned the Tribune?
that his agency will not hesitate to recommend the closure of any broadcast outfit that violates
SOLICITOR GENERAL BENIPAYO:
rules set out for media coverage during times when the national security is threatened.151
Under the law they would seem to be, if they were illegally seized, I think and I know, Your Honor,
The search is illegal. Rule 126 of The Revised Rules on Criminal Procedure lays down the steps in the and these are inadmissible for any purpose.155
conduct of search and seizure. Section 4 requires that a search warrant be issued upon probable
cause in connection with one specific offence to be determined personally by the judge after xxxxxxxxx
examination under oath or affirmation of the complainant and the witnesses he may produce.
SR. ASSO. JUSTICE PUNO:
Section 8 mandates that the search of a house, room, or any other premise be made in the presence
of the lawful occupant thereof or any member of his family or in the absence of the latter, in the These have been published in the past issues of the Daily Tribune; all you have to do is to get those
presence of two (2) witnesses of sufficient age and discretion residing in the same locality. And past issues. So why do you have to go there at 1 o’clock in the morning and without any search
Section 9 states that the warrant must direct that it be served in the daytime, unless the property warrant? Did they become suddenly part of the evidence of rebellion or inciting to sedition or what?
is on the person or in the place ordered to be searched, in which case a direction may be inserted
SOLGEN BENIPAYO:
that it be served at any time of the day or night. All these rules were violated by the CIDG operatives.
Well, it was the police that did that, Your Honor. Not upon my instructions.
Not only that, the search violated petitioners’ freedom of the press. The best gauge of a free and
democratic society rests in the degree of freedom enjoyed by its media. In the Burgos v. Chief of SR. ASSO. JUSTICE PUNO:
Staff152 this Court held that --
Are you saying that the act of the policeman is illegal, it is not based on any law, and it is not based
As heretofore stated, the premises searched were the business and printing offices of the on Proclamation 1017.
"Metropolitan Mail" and the "We Forum" newspapers. As a consequence of the search and seizure, SOLGEN BENIPAYO:
these premises were padlocked and sealed, with the further result that the printing and
publication of said newspapers were discontinued. It is not based on Proclamation 1017, Your Honor, because there is nothing in 1017 which says that
the police could go and inspect and gather clippings from Daily Tribune or any other newspaper.
Such closure is in the nature of previous restraint or censorship abhorrent to the freedom of the
press guaranteed under the fundamental law, and constitutes a virtual denial of petitioners' SR. ASSO. JUSTICE PUNO:
freedom to express themselves in print. This state of being is patently anathematic to a Is it based on any law?
democratic framework where a free, alert and even militant press is essential for the political
enlightenment and growth of the citizenry. SOLGEN BENIPAYO:
As far as I know, no, Your Honor, from the facts, no.
While admittedly, the Daily Tribune was not padlocked and sealed like the "Metropolitan Mail" and
"We Forum" newspapers in the above case, yet it cannot be denied that the CIDG operatives SR. ASSO. JUSTICE PUNO:
exceeded their enforcement duties. The search and seizure of materials for publication, the
stationing of policemen in the vicinity of the The Daily Tribune offices, and the arrogant warning of So, it has no basis, no legal basis whatsoever?
government officials to media, are plain censorship. It is that officious functionary of the repressive SOLGEN BENIPAYO:
government who tells the citizen that he may speak only if allowed to do so, and no more and no
less than what he is permitted to say on pain of punishment should he be so rash as to disobey.153 Maybe so, Your Honor. Maybe so, that is why I said, I don’t know if it is premature to say this, we
Undoubtedly, the The Daily Tribune was subjected to these arbitrary intrusions because of its anti- do not condone this. If the people who have been injured by this would want to sue them, they
government sentiments. This Court cannot tolerate the blatant disregard of a constitutional right can sue and there are remedies for this.156
even if it involves the most defiant of our citizens. Freedom to comment on public affairs is essential Likewise, the warrantless arrests and seizures executed by the police were, according to the Solicitor
to the vitality of a representative democracy. It is the duty of the courts to be watchful for the General, illegal and cannot be condoned, thus:
constitutional rights of the citizen, and against any stealthy encroachments thereon. The motto
should always be obsta principiis.154 CHIEF JUSTICE PANGANIBAN:

Incidentally, during the oral arguments, the Solicitor General admitted that the search of the
Tribune’s offices and the seizure of its materials for publication and other papers are illegal; and
that the same are inadmissible "for any purpose," thus:
JUSTICE CALLEJO:
You made quite a mouthful of admission when you said that the policemen, when inspected the
Tribune for the purpose of gathering evidence and you admitted that the policemen were able to
There seems to be some confusions if not contradiction in your theory.
SOLICITOR GENERAL BENIPAYO:
I don’t know whether this will clarify. The acts, the supposed illegal or unlawful acts committed on
the occasion of 1017, as I said, it cannot be condoned. You cannot blame the President for, as you
said, a misapplication of the law. These are acts of the police officers, that is their responsibility.157
The Dissenting Opinion states that PP 1017 and G.O. No. 5 are constitutional in every aspect and
"should result in no constitutional or statutory breaches if applied according to their letter."
The Court has passed upon the constitutionality of these issuances. Its ratiocination has been
exhaustively presented. At this point, suffice it to reiterate that PP 1017 is limited to the calling out
by the President of the military to prevent or suppress lawless violence, invasion or rebellion. When
in implementing its provisions, pursuant to G.O. No. 5, the military and the police committed acts
which violate the citizens’ rights under the Constitution, this Court has to declare such acts
unconstitutional and illegal.
In this connection, Chief Justice Artemio V. Panganiban’s concurring opinion, attached hereto, is
considered an integral part of this ponencia.
SUMMATION
In sum, the lifting of PP 1017 through the issuance of PP 1021 – a supervening event – would have
normally rendered this case moot and academic. However, while PP 1017 was still operative, illegal
acts were committed allegedly in pursuance thereof. Besides, there is no guarantee that PP 1017,
or one similar to it, may not again be issued. Already, there have been media reports on April 30,
2006 that allegedly PP 1017 would be reimposed "if the May 1 rallies" become "unruly and violent."
Consequently, the transcendental issues raised by the parties should not be "evaded;" they must
now be resolved to prevent future constitutional aberration.
The Court finds and so holds that PP 1017 is constitutional insofar as it constitutes a call by the
President for the AFP to prevent or suppress lawless violence. The proclamation is sustained by
Section 18, Article VII of the Constitution and the relevant jurisprudence discussed earlier. However,
PP 1017’s extraneous provisions giving the President express or implied power (1) to issue decrees;
(2) to direct the AFP to enforce obedience to all laws even those not related to lawless violence as
well as decrees promulgated by the President; and (3) to impose standards on media or any form
of prior restraint on the press, are ultra vires and unconstitutional. The Court also rules that under
Section 17, Article XII of the Constitution, the President, in the absence of a legislation, cannot take
over privately-owned public utility and private business affected with public interest.
In the same vein, the Court finds G.O. No. 5 valid. It is an Order issued by the President – acting as
Commander-in-Chief – addressed to subalterns in the AFP to carry out the provisions of PP 1017.
Significantly, it also provides a valid standard – that the military and the police should take only the
"necessary and appropriate actions and measures to suppress and prevent acts of lawless
violence."But the words "acts of terrorism" found in G.O. No. 5 have not been legally defined and
made punishable by Congress and should thus be deemed deleted from the said G.O. While
"terrorism" has been denounced generally in media, no law has been enacted to guide the military,
and eventually the courts, to determine the limits of the AFP’s authority in carrying out this portion
of G.O. No. 5.
On the basis of the relevant and uncontested facts narrated earlier, it is also pristine clear that (1)
the warrantless arrest of petitioners Randolf S. David and Ronald Llamas; (2) the dispersal of the
rallies and warrantless arrest of the KMU and NAFLU-KMU members; (3) the imposition of standards
on media or any prior restraint on the press; and (4) the warrantless search of the Tribune offices
and the whimsical seizures of some articles for publication and other materials, are not authorized
by the Constitution, the law and jurisprudence. Not even by the valid provisions of PP 1017 and G.O.
No. 5.
Other than this declaration of invalidity, this Court cannot impose any civil, criminal or
administrative sanctions on the individual police officers concerned. They have not been individually
identified and given their day in court. The civil complaints or causes of action and/or relevant
criminal Informations have not been presented before this Court. Elementary due process bars this
Court from making any specific pronouncement of civil, criminal or administrative liabilities.
It is well to remember that military power is a means to an end and substantive civil rights are
ends in themselves. How to give the military the power it needs to protect the Republic without
unnecessarily trampling individual rights is one of the eternal balancing tasks of a democratic
state.During emergency, governmental action may vary in breadth and intensity from normal times,
yet they should not be arbitrary as to unduly restrain our people’s liberty.
Perhaps, the vital lesson that we must learn from the theorists who studied the various competing
political philosophies is that, it is possible to grant government the authority to cope with crises
without surrendering the two vital principles of constitutionalism: the maintenance of legal limits
to arbitrary power, and political responsibility of the government to the governed.158
WHEREFORE, the Petitions are partly granted. The Court rules that PP 1017 is CONSTITUTIONAL
insofar as it constitutes a call by President Gloria Macapagal-Arroyo on the AFP to prevent or
suppress lawless violence. However, the provisions of PP 1017 commanding the AFP to enforce
laws not related to lawless violence, as well as decrees promulgated by the President, are declared
UNCONSTITUTIONAL. In addition, the provision in PP 1017 declaring national emergency under
Section 17, Article VII of the Constitution is CONSTITUTIONAL, but such declaration does not
authorize the President to take over privately-owned public utility or business affected with public
interest without prior legislation.
G.O. No. 5 is CONSTITUTIONAL since it provides a standard by which the AFP and the PNP should
implement PP 1017, i.e. whatever is "necessary and appropriate actions and measures to suppress
and prevent acts of lawless violence." Considering that "acts of terrorism" have not yet been
defined and made punishable by the Legislature, such portion of G.O. No. 5 is declared
UNCONSTITUTIONAL.
The warrantless arrest of Randolf S. David and Ronald Llamas; the dispersal and warrantless arrest
of the KMU and NAFLU-KMU members during their rallies, in the absence of proof that these
petitioners were committing acts constituting lawless violence, invasion or rebellion and violating
BP 880; the imposition of standards on media or any form of prior restraint on the press, as well as
the warrantless search of the Tribune offices and whimsical seizure of its articles for publication and
other materials, are declared UNCONSTITUTIONAL.
No costs.
SO ORDERED.
TRANSPO – CONSTI PROVISIONS – TAKE-OVER POWER
G.R. No. 155001 January 21, 2004
DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI B. REUNILLA, MANUEL ANTONIO B. BOÑE,
MAMERTO S. CLARA, REUEL E. DIMALANTA, MORY V. DOMALAON, CONRADO G. DIMAANO, LOLITA R.
HIZON, REMEDIOS P. ADOLFO, BIENVENIDO C. HILARIO, MIASCOR WORKERS UNION-NATIONAL LABOR
UNION (MWU-NLU), and PHILIPPINE AIRLINES EMPLOYEES ASSOCIATION (PALEA), petitioners,
vs.
PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT AUTHORITY,
DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS and SECRETARY LEANDRO M. MENDOZA, in
his capacity as Head of the Department of Transportation and Communications, respondents,
MIASCOR GROUNDHANDLING CORPORATION, DNATA-WINGS AVIATION SYSTEMS CORPORATION,
MACROASIA-EUREST SERVICES, INC., MACROASIA-MENZIES AIRPORT SERVICES CORPORATION, MIASCOR
CATERING SERVICES CORPORATION, MIASCOR AIRCRAFT MAINTENANCE CORPORATION, and MIASCOR
LOGISTICS CORPORATION, Petitioners-in-Intervention,
FLORESTE ALCONIS, GINA ALNAS, REY AMPOLOQUIO, ROSEMARIE ANG, EUGENE ARADA, NENETTE
BARREIRO, NOEL BARTOLOME, ALDRIN BASTADOR, ROLETTE DIVINE BERNARDO, MINETTE BRAVO, KAREN
BRECILLA, NIDA CAILAO, ERWIN CALAR, MARIFEL CONSTANTINO, JANETTE CORDERO, ARNOLD FELICITAS,
MARISSA GAYAGOY, ALEX GENERILLO, ELIZABETH GRAY, ZOILO HERICO, JACQUELINE IGNACIO, THELMA
INFANTE, JOEL JUMAO-AS, MARIETTA LINCHOCO, ROLLY LORICO, FRANCIS AUGUSTO MACATOL, MICHAEL
MALIGAT, DENNIS MANALO, RAUL MANGALIMAN, JOEL MANLANGIT, CHARLIE MENDOZA, HAZNAH
MENDOZA, NICHOLS MORALES, ALLEN OLAÑO, CESAR ORTAL, MICHAEL ORTEGA, WAYNE PLAZA, JOSELITO
REYES, ROLANDO REYES, AILEEN SAPINA, RAMIL TAMAYO, PHILLIPS TAN, ANDREW UY, WILLIAM VELASCO,
EMILIO VELEZ, NOEMI YUPANO, MARY JANE ONG, RICHARD RAMIREZ, CHERYLE MARIE ALFONSO, LYNDON
BAUTISTA, MANUEL CABOCAN AND NEDY LAZO, Respondents-in-Intervention,
NAGKAISANG MARALITA NG TAÑONG ASSOCIATION, INC., Respondents-in-Intervention,
x-------------------------x
G.R. No. 155547 January 21, 2004
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,
FLORESTE ALCONIS, GINA ALNAS, REY AMPOLOQUIO, ROSEMARIE ANG, EUGENE ARADA, NENETTE
BARREIRO, NOEL BARTOLOME, ALDRIN BASTADOR, ROLETTE DIVINE BERNARDO, MINETTE BRAVO, KAREN
BRECILLA, NIDA CAILAO, ERWIN CALAR, MARIFEL CONSTANTINO, JANETTE CORDERO, ARNOLD FELICITAS,
MARISSA GAYAGOY, ALEX GENERILLO, ELIZABETH GRAY, ZOILO HERICO, JACQUELINE IGNACIO, THELMA
INFANTE, JOEL JUMAO-AS, MARIETTA LINCHOCO, ROLLY LORICO, FRANCIS AUGUSTO MACATOL, MICHAEL
MALIGAT, DENNIS MANALO, RAUL MANGALIMAN, JOEL MANLANGIT, CHARLIE MENDOZA, HAZNAH
MENDOZA, NICHOLS MORALES, ALLEN OLAÑO, CESAR ORTAL, MICHAEL ORTEGA, WAYNE PLAZA, JOSELITO
REYES, ROLANDO REYES, AILEEN SAPINA, RAMIL TAMAYO, PHILLIPS TAN, ANDREW UY, WILLIAM VELASCO,
EMILIO VELEZ, NOEMI YUPANO, MARY JANE ONG, RICHARD RAMIREZ, CHERYLE MARIE ALFONSO, LYNDON
BAUTISTA, MANUEL CABOCAN AND NEDY LAZO, Respondents-in-Intervention,
NAGKAISANG MARALITA NG TAÑONG ASSOCIATION, INC., Respondents-in-Intervention,
x-------------------------x
G.R. No. 155661 January 21, 2004
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,
FLORESTE ALCONIS, GINA ALNAS, REY AMPOLOQUIO, ROSEMARIE ANG, EUGENE ARADA, NENETTE
BARREIRO, NOEL BARTOLOME, ALDRIN BASTADOR, ROLETTE DIVINE BERNARDO, MINETTE BRAVO, KAREN
BRECILLA, NIDA CAILAO, ERWIN CALAR, MARIFEL CONSTANTINO, JANETTE CORDERO, ARNOLD FELICITAS,
MARISSA GAYAGOY, ALEX GENERILLO, ELIZABETH GRAY, ZOILO HERICO, JACQUELINE IGNACIO, THELMA
INFANTE, JOEL JUMAO-AS, MARIETTA LINCHOCO, ROLLY LORICO, FRANCIS AUGUSTO MACATOL, MICHAEL
MALIGAT, DENNIS MANALO, RAUL MANGALIMAN, JOEL MANLANGIT, CHARLIE MENDOZA, HAZNAH
MENDOZA, NICHOLS MORALES, ALLEN OLAÑO, CESAR ORTAL, MICHAEL ORTEGA, WAYNE PLAZA, JOSELITO
REYES, ROLANDO REYES, AILEEN SAPINA, RAMIL TAMAYO, PHILLIPS TAN, ANDREW UY, WILLIAM VELASCO,
EMILIO VELEZ, NOEMI YUPANO, MARY JANE ONG, RICHARD RAMIREZ, CHERYLE MARIE ALFONSO, LYNDON
BAUTISTA, MANUEL CABOCAN AND NEDY LAZO, Respondents-in-Intervention,
NAGKAISANG MARALITA NG TAÑONG ASSOCIATION, INC., Respondents-in-Intervention.
RESOLUTION
PUNO, J.:
Before this Court are the separate Motions for Reconsideration filed by respondent Philippine
International Air Terminals Co., Inc. (PIATCO), respondents-intervenors Jacinto V. Paras, Rafael P.
Nantes, Eduardo C. Zialcita, Willie Buyson Villarama, Prospero C. Nograles, Prospero A. Pichay, Jr.,
Harlin Cast Abayon and Benasing O. Macaranbon, all members of the House of Representatives
(Respondent Congressmen),1 respondents-intervenors who are employees of PIATCO and other
workers of the Ninoy Aquino International Airport International Passenger Terminal III (NAIA IPT III)
(PIATCO Employees)2 and respondents-intervenors Nagkaisang Maralita ng Tañong Association,
Inc., (NMTAI)3 of the Decision of this Court dated May 5, 2003 declaring the contracts for the NAIA
IPT III project null and void.
Briefly, the proceedings. On October 5, 1994, Asia’s Emerging Dragon Corp. (AEDC) submitted an
unsolicited proposal to the Philippine Government through the Department of Transportation and
Communication (DOTC) and Manila International Airport Authority (MIAA) for the construction and
development of the NAIA IPT III under a build-operate-and-transfer arrangement pursuant to R.A.
No. 6957, as amended by R.A. No. 7718 (BOT Law).4 In accordance with the BOT Law and its
Implementing Rules and Regulations (Implementing Rules), the DOTC/MIAA invited the public for
submission of competitive and comparative proposals to the unsolicited proposal of AEDC. On
September 20, 1996 a consortium composed of the People’s Air Cargo and Warehousing Co., Inc.
(Paircargo), Phil. Air and Grounds Services, Inc. (PAGS) and Security Bank Corp. (Security Bank)
(collectively, Paircargo Consortium), submitted their competitive proposal to the Prequalification
Bids and Awards Committee (PBAC).
After finding that the Paircargo Consortium submitted a bid superior to the unsolicited proposal of
AEDC and after failure by AEDC to match the said bid, the DOTC issued the notice of award for the
NAIA IPT III project to the Paircargo Consortium, which later organized into herein respondent
PIATCO. Hence, 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). On November 26, 1998, the 1997 Concession Agreement was
superseded by the Amended and Restated Concession Agreement (ARCA) containing certain
revisions and modifications from the original contract. A series of supplemental agreements was
also entered into by the Government and PIATCO. 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 1997 Concession Agreement, ARCA and the Supplements
collectively referred to as the PIATCO Contracts).
On September 17, 2002, various petitions were filed before this Court to annul the 1997 Concession
Agreement, the ARCA and the Supplements and to prohibit the public respondents DOTC and MIAA
from implementing them.
In a decision dated May 5, 2003, this Court granted the said petitions and declared the 1997
Concession Agreement, the ARCA and the Supplements null and void.
Respondent PIATCO, respondent-Congressmen and respondents-intervenors now seek the reversal
of the May 5, 2003 decision and pray that the petitions be dismissed. In the alternative, PIATCO
prays that the Court should not strike down the entire 1997 Concession Agreement, the ARCA and
its supplements in light of their separability clause. Respondent-Congressmen and NMTAI also pray
that in the alternative, the cases at bar should be referred to arbitration pursuant to the provisions
of the ARCA. PIATCO-Employees pray that the petitions be dismissed and remanded to the trial
courts for trial on the merits or in the alternative that the 1997 Concession Agreement, the ARCA
and the Supplements be declared valid and binding.
I
Procedural Matters
a. Lack of Jurisdiction
Private respondents and respondents-intervenors reiterate a number of procedural issues which
they insist deprived this Court of jurisdiction to hear and decide the instant cases on its merits. They
continue to claim that the cases at bar raise factual questions which this Court is ill-equipped to
resolve, hence, they must be remanded to the trial court for reception of evidence. Further, they
allege that although designated as petitions for certiorari and prohibition, the cases at bar are
actually actions for nullity of contracts over which the trial courts have exclusive jurisdiction. Even
assuming that the cases at bar are special civil actions for certiorari and prohibition, they contend
that the principle of hierarchy of courts precludes this Court from taking primary jurisdiction over
them.
We are not persuaded.
There is a question of fact when doubt or difference arises as to the truth or falsity of the facts
alleged.5 Even a cursory reading of the cases at bar will show that the Court decided them by
interpreting and applying the Constitution, the BOT Law, its Implementing Rules and other relevant
legal principles on the basis of clearly undisputed facts. All the operative facts were settled, hence,
there is no need for a trial type determination of their truth or falsity by a trial court.
We reject the unyielding insistence of PIATCO Employees that the following factual issues are critical
and beyond the capability of this Court to resolve, viz: (a) whether the National Economic
Development Authority- Investment Coordinating Committee (NEDA-ICC) approved the
Supplements; (b) whether the First Supplement created ten (10) new financial obligations on the
part of the government; and (c) whether the 1997 Concession Agreement departed from the draft
Concession Agreement contained in the Bid Documents.6
The factual issue of whether the NEDA-ICC approved the Supplements is hardly relevant. It is clear
in our Decision that the PIATCO contracts were invalidated on other and more substantial grounds.
It did not rely on the presence or absence of NEDA-ICC approval of the Supplements. On the other
hand, the last two issues do not involve disputed facts. Rather, they involve contractual provisions
which are clear and categorical and need only to be interpreted. The interpretation of contracts
and the determination of whether their provisions violate our laws or contravene any public policy
is a legal issue which this Court may properly pass upon.
Respondents’ corollary contention that this Court violated the hierarchy of courts when it
entertained the cases at bar must also fail. The rule on hierarchy of courts in cases falling within the
concurrent jurisdiction of the trial courts and appellate courts generally applies to cases involving
warring factual allegations. For this reason, litigants are required to repair to the trial courts at the
first instance to determine the truth or falsity of these contending allegations on the basis of the
evidence of the parties. Cases which depend on disputed facts for decision cannot be brought
immediately before appellate courts as they are not triers of facts.
It goes without saying that when cases brought before the appellate courts do not involve factual
but legal questions, a strict application of the rule of hierarchy of courts is not necessary. As the
cases at bar merely concern the construction of the Constitution, the interpretation of the BOT Law
and its Implementing Rules and Regulations on undisputed contractual provisions and government
actions, and as the cases concern public interest, this Court resolved to take primary jurisdiction
over them. This choice of action follows the consistent stance of this Court to settle any controversy
with a high public interest component in a single proceeding and to leave no root or branch that
could bear the seeds of future litigation. The suggested remand of the cases at bar to the trial court
will stray away from this policy.7
b. Legal Standing
Respondent PIATCO stands pat with its argument that petitioners lack legal personality to file the
cases at bar as they are not real parties in interest who are bound principally or subsidiarily to the
PIATCO Contracts. Further, respondent PIATCO contends that petitioners failed to show any legally
demandable or enforceable right to justify their standing to file the cases at bar.
These arguments are not difficult to deflect. The determination of whether a person may institute
an action or become a party to a suit brings to fore the concepts of real party in interest, capacity
to sue and standing to sue. To the legally discerning, these three concepts are different although
commonly directed towards ensuring that only certain parties can maintain an action. 8 As defined
in the Rules of Court, a real party in interest is the party who stands to be benefited or injured by
the judgment in the suit or the party entitled to the avails of the suit. 9 Capacity to sue deals with a
situation where a person who may have a cause of action is disqualified from bringing a suit under
applicable law or is incompetent to bring a suit or is under some legal disability that would prevent
him from maintaining an action unless represented by a guardian ad litem. Legal standing is relevant
in the realm of public law. In certain instances, courts have allowed private parties to institute
actions challenging the validity of governmental action for violation of private rights or
constitutional principles.10 In these cases, courts apply the doctrine of legal standing by determining
whether the party has a direct and personal interest in the controversy and whether such party
has sustained or is in imminent danger of sustaining an injury as a result of the act complained of,
a standard which is distinct from the concept of real party in interest.11 Measured by this yardstick,
the application of the doctrine on legal standing necessarily involves a preliminary consideration of
the merits of the case and is not purely a procedural issue.12
Considering the nature of the controversy and the issues raised in the cases at bar, this Court affirms
its ruling that the petitioners have the requisite legal standing. The petitioners in G.R. Nos. 155001
and 155661 are employees of service providers operating at the existing international airports and
employees of MIAA while petitioners-intervenors are service providers with existing contracts with
MIAA and they will all sustain direct injury upon the implementation of the PIATCO Contracts. The
1997 Concession Agreement and the ARCA both provide that upon the commencement of
operations at the NAIA IPT III, NAIA Passenger Terminals I and II will cease to be used as international
passenger terminals.13 Further, the ARCA provides:
 (d) For the purpose of an orderly transition, MIAA shall not renew any expired concession
agreement relative to any service or operation currently being undertaken at the Ninoy Aquino
International Airport Passenger Terminal I, or extend any concession agreement which may
expire subsequent hereto, except to the extent that the continuation of the existing services and
operations shall lapse on or before the In-Service Date.14
Beyond iota of doubt, the implementation of the PIATCO Contracts, which the petitioners and
petitioners-intervenors denounce as unconstitutional and illegal, would deprive them of their
sources of livelihood. Under settled jurisprudence, one's employment, profession, trade, or calling
is a property right and is protected from wrongful interference. 15 It is also self evident that the
petitioning service providers stand in imminent danger of losing legitimate business investments in
the event the PIATCO Contracts are upheld.
Over and above all these, constitutional and other legal issues with far-reaching economic and social
implications are embedded in the cases at bar, hence, this Court liberally granted legal standing to
the petitioning members of the House of Representatives. First, at stake is the build-operate-and–
transfer contract of the country’s premier international airport with a projected capacity of 10
million passengers a year. Second, the huge amount of investment to complete the project is
estimated to be P13,000,000,000.00. Third, the primary issues posed in the cases at bar demand a
discussion and interpretation of the Constitution, the BOT Law and its implementing rules which
have not been passed upon by this Court in previous cases. They can chart the future inflow of
investment under the BOT Law.
Before writing finis to the issue of legal standing, the Court notes the bid of new parties to
participate in the cases at bar as respondents-intervenors, namely, (1) the PIATCO Employees and
(2) NMTAI (collectively, the New Respondents-Intervenors). After the Court’s Decision, the New
Respondents-Intervenors filed separate Motions for Reconsideration-In-Intervention alleging
prejudice and direct injury. PIATCO employees claim that "they have a direct and personal interest
[in the controversy]... since they stand to lose their jobs should the government’s contract with
PIATCO be declared null and void."16 NMTAI, on the other hand, represents itself as a corporation
composed of responsible tax-paying Filipino citizens with the objective of "protecting and sustaining
the rights of its members to civil liberties, decent livelihood, opportunities for social advancement,
and to a good, conscientious and honest government."17
The Rules of Court govern the time of filing a Motion to Intervene. Section 2, Rule 19 provides that
a Motion to Intervene should be filed "before rendition of judgment...." The New Respondents-
Intervenors filed their separate motions after a decision has been promulgated in the present cases.
They have not offered any worthy explanation to justify their late intervention. Consequently, their
Motions for Reconsideration-In-Intervention are denied for the rules cannot be relaxed to await
litigants who sleep on their rights. In any event, a sideglance at these late motions will show that
they hoist no novel arguments.
c. Failure to Implead an Indispensable Party
PIATCO next contends that petitioners should have impleaded the Republic of the Philippines as an
indispensable party. It alleges that petitioners sued the DOTC, MIAA and the DPWH in their own
capacities or as implementors of the PIATCO Contracts and not as a contract party or as
representatives of the Government of the Republic of the Philippines. It then leapfrogs to the
conclusion that the "absence of an indispensable party renders ineffectual all the proceedings
subsequent to the filing of the complaint including the judgment." 18
PIATCO’s allegations are inaccurate. The petitions clearly bear out that public respondents DOTC
and MIAA were impleaded as parties to the PIATCO Contracts and not merely as their
implementors. The separate petitions filed by the MIAA employees19 and members of the House of
Representatives20 alleged that "public respondents are impleaded herein because they either
executed the PIATCO Contracts or are undertaking acts which are related to the PIATCO Contracts.
They are interested and indispensable parties to this Petition." 21 Thus, public respondents DOTC
and MIAA were impleaded as parties to the case for having executed the contracts.
More importantly, it is also too late in the day for PIATCO to raise this issue. If PIATCO seriously
views the non-inclusion of the Republic of the Philippines as an indispensable party as fatal to the
petitions at bar, it should have raised the issue at the onset of the proceedings as a ground to
dismiss. PIATCO cannot litigate issues on a piecemeal basis, otherwise, litigations shall be like a
shore that knows no end. In any event, the Solicitor General, the legal counsel of the Republic,
appeared in the cases at bar in representation of the interest of the government.
II
Pre-qualification of PIATCO
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.22 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 has the financial capability to
carry it out. As a further measure to achieve this intent, it maintains a certain debt-to-equity ratio
for the project.
At the pre-qualification stage, it is most important for a bidder to show that it has the financial
capacity to undertake the project by proving that it can fulfill the requirement on minimum amount
of equity. For this purpose, the Bid Documents require in no uncertain terms:
The minimum amount of equity to which the proponent’s financial capability will be based shall
be thirty percent (30%) of the project cost instead of the twenty percent (20%) specified in
Section 3.6.4 of the Bid Documents. This is to correlate with the required debt-to-equity ratio of
70:30 in Section 2.01a of the draft concession agreement. The debt portion of the project
financing should not exceed 70% of the actual project cost.23
In relation thereto, section 2.01 (a) of the ARCA provides:
Section 2.01 Project Scope.
The scope of the project shall include:
(a) Financing the project at an actual Project cost of not less than Three Hundred Fifty Million
United States Dollars (US$350,000,000.00) while maintaining a debt-to-equity ratio of 70:30,
provided that if the actual Project costs should exceed the aforesaid amount, Concessionaire shall
ensure that the debt-to-equity ratio is maintained;24
Under the debt-to-equity restriction, a bidder may only seek financing of the NAIA IPT III Project up
to 70% of the project cost. Thirty percent (30%) of the cost must come in the form of equity or
investment by the bidder itself. It cannot be overly emphasized that the rules require a minimum
amount of equity to ensure that a bidder is not merely an operator or implementor of the project
but an investor with a substantial interest in its success. The minimum equity requirement also
guarantees the Philippine government and the general public, who are the ultimate beneficiaries of
the project, that a bidder will not be indifferent to the completion of the project. The discontinuance
of the project will irreparably damage public interest more than private interest.
In the cases at bar, after applying the investment ceilings provided under the General Banking Act
and considering the maximum amounts that each member of the consortium may validly invest in
the project, it is daylight clear that the Paircargo Consortium, at the time of pre-qualification, had a
net worth equivalent to only 6.08% of the total estimated project cost.25 By any reckoning, a
showing by a bidder that at the time of pre-qualification its maximum funds available for investment
amount to only 6.08% of the project cost is insufficient to satisfy the requirement prescribed by the
Implementing Rules that the project proponent must have the ability to provide at least 30% of the
total estimated project cost. In peso and centavo terms, at the time of pre-qualification, the
Paircargo Consortium had maximum funds available for investment to the NAIA IPT III Project only
in the amount of P558,384,871.55, when it had to show that it had the ability to provide at least
P2,755,095,000.00. The huge disparity cannot be dismissed as of de minimis importance considering
the high public interest at stake in the project.
PIATCO nimbly tries to sidestep its failure by alleging that it submitted not only audited financial
statements but also testimonial letters from reputable banks attesting to the good financial
standing of the Paircargo Consortium. It contends that in adjudging whether the Paircargo
Consortium is a pre-qualified bidder, the PBAC should have considered not only its financial
statements but other factors showing its financial capability.
Anent this argument, the guidelines provided in the Bid Documents are instructive:
3.3.4 FINANCING AND FINANCIAL PREQUALIFICATIONS REQUIREMENTS
· Minimum Amount of Equity
Each member of the proponent entity is to provide evidence of networth in cash and assets
representing the proportionate share in the proponent entity. Audited financial statements for
the past five (5) years as a company for each member are to be provided.
· Project Loan Financing
Testimonial letters from reputable banks attesting that each of the members of the ownership
entity are banking with them, in good financial standing and having adequate resources are to be
provided.26
It is beyond refutation that Paircargo Consortium failed to prove its ability to provide the amount
of at least P2,755,095,000.00, or 30% of the estimated project cost. Its submission of testimonial
letters attesting to its good financial standing will not cure this failure. At best, the said letters
merely establish its credit worthiness or its ability to obtain loans to finance the project. They do
not, however, prove compliance with the aforesaid requirement of minimum amount of equity in
relation to the prescribed debt-to-equity ratio. This equity cannot be satisfied through possible
loans.
In sum, we again hold that given the glaring gap between the net worth of Paircargo and PAGS
combined with the amount of maximum funds that Security Bank may invest by equity in a non-
allied undertaking, Paircargo Consortium, at the time of pre-qualification, failed to show that it had
the ability to provide 30% of the project cost and necessarily, its financial capability for the project
cannot pass muster.
III
Concession Agreement
Again, we brightline the principle that in public bidding, bids are submitted in accord with the
prescribed terms, conditions and parameters laid down by government and pursuant to the
requirements of the project bidded upon. In light of these parameters, bidders formulate competing
proposals which are evaluated to determine the bid most favorable to the government. Once the
contract based on the bid most favorable to the government is awarded, all that is left to be done
by the parties is to execute the necessary agreements and implement them. There can be no
substantial or material change to the parameters of the project, including the essential terms and
conditions of the contract bidded upon, after the contract award. If there were changes and the
contracts end up unfavorable to government, the public bidding becomes a mockery and the
modified contracts must be struck down.
Respondents insist that there were no substantial or material amendments in the 1997 Concession
Agreement as to the technical aspects of the project, i.e., engineering design, technical soundness,
operational and maintenance methods and procedures of the project or the technical proposal of
PIATCO. Further, they maintain that there was no modification of the financial features of the
project, i.e., minimum project cost, debt-to-equity ratio, the operations and maintenance budget,
the schedule and amount of annual guaranteed payments, or the financial proposal of PIATCO. A
discussion of some of these changes to determine whether they altered the terms and conditions
upon which the bids were made is again in order.
a. Modification on Fees and Charges to be collected by PIATCO
PIATCO clings to the contention that the removal of the groundhandling fees, airline office rentals
and porterage fees from the category of fees subject to MIAA regulation in the 1997 Concession
Agreement does not constitute a substantial amendment as these fees are not really public utility
fees. In other words, PIATCO justifies the re-classification under the 1997 Concession Agreement on
the ground that these fees are non-public utility revenues.
We disagree. The removal of groundhandling fees, airline office rentals and porterage fees from the
category of "Public Utility Revenues" under the draft Concession Agreement and its re-classification
to "Non-Public Utility Revenues" under the 1997 Concession Agreement is significant and has far
reaching consequence. The 1997 Concession Agreement provides that with respect to Non-Public
Utility Revenues, which include groundhandling fees, airline office rentals and porterage fees, 27
"[PIATCO] may make any adjustments it deems appropriate without need for the consent of GRP
or any government agency."28 In contrast, the draft Concession Agreement specifies these fees as
part of Public Utility Revenues and can be adjusted "only once every two years and in accordance
with the Parametric Formula" and "the adjustments shall be made effective only after the written
express approval of the MIAA."29 The Bid Documents themselves clearly provide:
4.2.3 Mechanism for Adjustment of Fees and Charges
4.2.3.1 Periodic Adjustment in Fees and Charges
Adjustments in the fees and charges enumerated hereunder, whether or not falling within the
purview of public utility revenues, shall be allowed only once every two years in accordance
with the parametric formula attached hereto as Annex 4.2f. Provided that the adjustments
shall be made effective only after the written express approval of MIAA. Provided, further, that
MIAA’s approval, shall be contingent only on conformity of the adjustments to the said
parametric formula. …
The fees and charges to be regulated in the above manner shall consist of the following:
....
c) groundhandling fees;
 d) rentals on airline offices;
....
(f) porterage fees;
. . . .30
The plain purpose in re-classifying groundhandling fees, airline office rentals and porterage fees as
non-public utility fees is to remove them from regulation by the MIAA. In excluding these fees from
government regulation, the danger to public interest cannot be downplayed.
We are not impressed by the effort of PIATCO to depress this prejudice to public interest by its
contention that in the 1997 Concession Agreement governing Non-Public Utility Revenues, it is
provided that "[PIATCO] 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."31 PIATCO then peddles the proposition that the said provision confers upon MIAA "full
regulatory powers to ensure that PIATCO is charging non-public utility revenues at judicious
rates."32 To the trained eye, the argument will not fly for it is obviously non sequitur. Fairly read, it
is PIATCO that wields the power to determine the judiciousness of the said fees and charges. In the
draft Concession Agreement the power was expressly lodged with the MIAA and any adjustment
can only be done once every two years. The changes are not insignificant specks as interpreted by
PIATCO.
PIATCO further argues that there is no substantial change in the 1997 Concession Agreement with
respect to fees and charges PIATCO is allowed to impose which are not covered by Administrative
Order No. 1, Series of 199333 as the "relevant provision of the 1997 Concession Agreement is
practically identical with the draft Concession Agreement."34
We are not persuaded. Under the draft Concession Agreement, PIATCO may impose fees and
charges other than those fees and charges previously imposed or collected at the Ninoy Aquino
International Airport Passenger Terminal I, subject to the written approval of MIAA. 35 Further, the
draft Concession Agreement provides that MIAA reserves the right to regulate these new fees and
charges if in its judgment the users of the airport shall be deprived of a free option for the services
they cover.36 In contrast, under the 1997 Concession Agreement, the MIAA merely retained the
right to approve any imposition of new fees and charges which were not previously collected at
the Ninoy Aquino International Airport Passenger Terminal I. The agreement did not contain an
equivalent provision allowing MIAA to reserve the right to regulate the adjustments of these new
fees and charges.37 PIATCO justifies the amendment by arguing that MIAA can establish terms
before approval of new fees and charges, inclusive of the mode for their adjustment.
PIATCO’s stance is again a strained one. There would have been no need for an amendment if there
were no change in the power to regulate on the part of MIAA. The deletion of MIAA’s reservation
of its right to regulate the price adjustments of new fees and charges can have no other purpose
but to dilute the extent of MIAA’s regulation in the collection of these fees. Again, the amendment
diminished the authority of MIAA to protect the public interest in case of abuse by PIATCO.
b. Assumption by the Government of the liabilities of PIATCO in the event of the latter’s default
PIATCO posits the thesis that the new provisions in the 1997 Concession Agreement in case of
default by PIATCO on its loans were merely meant to prescribe and limit the rights of PIATCO’s
creditors with regard to the NAIA Terminal III. PIATCO alleges that Section 4.04 of the 1997
Concession Agreement simply provides that PIATCO’s creditors have no right to foreclose the NAIA
Terminal III.
We cannot concur. The pertinent provisions of the 1997 Concession Agreement state:
Section 4.04 Assignment.
....
(b) In the event Concessionaire should default in the payment of an Attendant Liability, and the
default has resulted in the acceleration of the payment due date of the Attendant Liability prior
to its stated date of maturity, the Unpaid Creditors and Concessionaire shall immediately inform
GRP in writing of such default. GRP shall, within one hundred eighty (180) Days from receipt of
the joint written notice of the Unpaid Creditors and Concessionaire, either (i) take over the
Development Facility and assume the Attendant Liabilities, or (ii) allow the Unpaid Creditors, if
qualified, to be substituted as concessionaire and operator of the Development Facility in
accordance with the terms and conditions hereof, or designate a qualified operator acceptable
to GRP to operate the Development Facility, likewise under the terms and conditions of this
Agreement; Provided that if at the end of the 180-day period GRP shall not have served the
Unpaid Creditors and Concessionaire written notice of its choice, GRP shall be deemed to have
elected to take over the Development Facility with the concomitant assumption of Attendant
Liabilities.
(c) If GRP should, by written notice, allow the Unpaid Creditors to be substituted as
concessionaire, the latter shall form and organize a concession company qualified to take over
the operation of the Development Facility. If the concession company should elect to designate
an operator for the Development Facility, the concession company shall in good faith identify and
designate a qualified operator acceptable to GRP within one hundred eighty (180) days from
receipt of GRP’s written notice. If the concession company, acting in good faith and with due
diligence, is unable to designate a qualified operator within the aforesaid period, then GRP shall
at the end of the 180-day period take over the Development Facility and assume Attendant
Liabilities.
A plain reading of the above provision shows that it spells out in limpid language the obligation of
government in case of default by PIATCO on its loans. There can be no blinking from the fact that in
case of PIATCO’s default, the government will assume PIATCO’s Attendant Liabilities as defined in
the 1997 Concession Agreement.38 This obligation is not found in the draft Concession Agreement
and the change runs roughshod to the spirit and policy of the BOT Law which was crafted precisely
to prevent government from incurring financial risk.
In any event, PIATCO pleads that the entire agreement should not be struck down as the 1997
Concession Agreement contains a separability clause.
The plea is bereft of merit. The contracts at bar which made a mockery of the bidding process cannot
be upheld and must be annulled in their entirety for violating law and public policy. As
demonstrated, the contracts were substantially amended after their award to the successful bidder
on terms more beneficial to PIATCO and prejudicial to public interest. If this flawed process would
be allowed, public bidding will cease to be competitive and worse, government would not be
favored with the best bid. Bidders will no longer bid on the basis of the prescribed terms and
conditions in the bid documents but will formulate their bid in anticipation of the execution of a
future contract containing new and better terms and conditions that were not previously available
at the time of the bidding. Such a public bidding will not inure to the public good. The resulting
contracts cannot be given half a life but must be struck down as totally lawless.
IV.
Direct Government Guarantee
The respondents further contend that the PIATCO Contracts do not contain direct government
guarantee provisions. They assert that section 4.04 of the ARCA, which superseded sections 4.04(b)
and (c), Article IV of the 1997 Concession Agreement, is but a "clarification and explanation"39 of
the securities allowed in the bid documents. They allege that these provisions merely provide for
"compensation to PIATCO"40 in case of a government buy-out or takeover of NAIA IPT III. The
respondents, particularly respondent PIATCO, also maintain that the guarantee contained in the
contracts, if any, is an indirect guarantee allowed under the BOT Law, as amended.41
We do not agree. Section 4.04(c), Article IV42 of the ARCA should be read in conjunction with section
1.06, Article I,43 in the same manner that sections 4.04(b) and (c), Article IV of the 1997 Concession
Agreement should be related to Article 1.06 of the same contract. Section 1.06, Article I of the ARCA
and its counterpart provision in the 1997 Concession Agreement define in no uncertain terms the
meaning of "attendant liabilities." They tell us of the amounts that the Government has to pay in
the event respondent PIATCO defaults in its loan payments to its Senior Lenders and no qualified
transferee or nominee is chosen by the Senior Lenders or is willing to take over from respondent
PIATCO.
A reasonable reading of all these relevant provisions would reveal that the ARCA made the
Government liable to pay "all amounts ... 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]."44 These amounts include "without limitation, all principal, interest,
associated fees, charges, reimbursements, and other related expenses... whether payable at
maturity, by acceleration or otherwise."45 They further include amounts owed by respondent
PIATCO to its "professional consultants and advisers, suppliers, contractors and sub-contractors" as
well as "fees, charges and expenses of any agents or trustees" of the Senior Lenders or any other
persons or entities who have provided loans or financial facilities to respondent PIATCO in relation
to NAIA IPT III.46 The counterpart provision in the 1997 Concession Agreement specifying the
attendant liabilities that the Government would be obligated to pay should PIATCO default in its
loan obligations is equally onerous to the Government as those contained in the ARCA. According
to the 1997 Concession Agreement, in the event the Government is forced to prematurely take over
NAIA IPT III as a result of respondent PIATCO’s default in the payment of its loan obligations to its
Senior Lenders, it would be liable to pay the following amounts as "attendant liabilities":
Section 1.06. Attendant Liabilities
Attendant Liabilities refer to all amounts recorded and from time to time outstanding in the
books of the Concessionaire as owing to Unpaid Creditors who have provided, loaned or
advanced funds actually used for the Project, including all interests, penalties, associated fees,
charges, surcharges, indemnities, reimbursements and other related expenses, and further
including amounts owed by Concessionaire to its suppliers, contractors and sub-contractors.47
These provisions reject respondents’ contention that what the Government is obligated to pay, in
the event that respondent PIATCO defaults in the payment of its loans, is merely termination
payment or just compensation for its takeover of NAIA IPT III. It is clear from said section 1.06 that
what the Government would pay is the sum total of all the debts, including all interest, fees and
charges, that respondent PIATCO incurred in pursuance of the NAIA IPT III Project. This reading is
consistent with section 4.04 of the ARCA itself which states that the Government "shall make a
termination payment to Concessionaire [PIATCO] equal to the Appraised Value (as hereinafter
defined) of the Development Facility [NAIA Terminal III] or the sum of the Attendant Liabilities, if
greater." For sure, respondent PIATCO will not receive any amount less than sufficient to cover
its debts, regardless of whether or not the value of NAIA IPT III, at the time of its turn over to the
Government, may actually be less than the amount of PIATCO’s debts. The scheme is a form of
direct government guarantee for it is undeniable that it leaves the government no option but to pay
the "attendant liabilities" in the event that the Senior Lenders are unable or unwilling to appoint a
qualified nominee or transferee as a result of PIATCO’s default in the payment of its Senior Loans.
As we stressed in our Decision, this Court cannot depart from the legal maxim that "those that
cannot be done directly cannot be done indirectly."
This is not to hold, however, that indirect government guarantee is not allowed under the BOT Law,
as amended. The intention to permit indirect government guarantee is evident from the Senate
deliberations on the amendments to the BOT Law. The idea is to allow for reasonable government
undertakings, such as to authorize the project proponent to undertake related ventures within the
project area, in order to encourage private sector participation in development projects. 48 An
example cited by then Senator Gloria Macapagal-Arroyo, one of the sponsors of R.A. No. 7718, is
the Mandaluyong public market which was built under the Build-and-Transfer ("BT") scheme
wherein instead of the government paying for the transfer, the project proponent was allowed to
operate the upper floors of the structure as a commercial mall in order to recoup their
investments.49 It was repeatedly stressed in the deliberations that in allowing indirect government
guarantee, the law seeks to encourage both the government and the private sector to formulate
reasonable and innovative government undertakings in pursuance of BOT projects. In no way,
however, can the government be made liable for the debts of the project proponent as this would
be tantamount to a direct government guarantee which is prohibited by the law. Such liability would
defeat the very purpose of the BOT Law which is to encourage the use of private sector resources
in the construction, maintenance and/or operation of development projects with no, or at least
minimal, capital outlay on the part of the government.
The respondents again urge that should this Court affirm its ruling that the PIATCO Contracts contain
direct government guarantee provisions, the whole contract should not be nullified. They rely on
the separability clause in the PIATCO Contracts.
We are not persuaded.
The BOT Law and its implementing rules provide that there are three (3) essential requisites for an
unsolicited proposal to be accepted: (1) the project involves a new concept in technology and/or is
not part of the list of priority projects, (2) no direct government guarantee, subsidy or equity is
required, and (3) the government agency or local government unit has invited by publication other
interested parties to a public bidding and conducted the same. 50 The failure to fulfill any of the
requisites will result in the denial of the proposal. Indeed, it is further provided that a direct
government guarantee, subsidy or equity provision will "necessarily disqualify a proposal from being
treated and accepted as an unsolicited proposal."51 In fine, the mere inclusion of a direct
government guarantee in an unsolicited proposal is fatal to the proposal. There is more reason to
invalidate a contract if a direct government guarantee provision is inserted later in the contract via
a backdoor amendment. Such an amendment constitutes a crass circumvention of the BOT Law and
renders the entire contract void.
Respondent PIATCO likewise claims that in view of the fact that other BOT contracts such as the
JANCOM contract, the Manila Water contract and the MRT contract had been considered valid, the
PIATCO contracts should be held valid as well.52 There is no parity in the cited cases. For instance, a
reading of Metropolitan Manila Development Authority v. JANCOM Environmental Corporation53
will show that its issue is different from the issues in the cases at bar. In the JANCOM case, the main
issue is whether there is a perfected contract between JANCOM and the Government. The
resolution of the issue hinged on the following: (1) whether the conditions precedent to the
perfection of the contract were complied with; (2) whether there is a valid notice of award; and (3)
whether the signature of the Secretary of the Department of Environment and Natural Resources is
sufficient to bind the Government. These issue and sub-issues are clearly distinguishable and
different. For one, the issue of direct government guarantee was not considered by this Court when
it held the JANCOM contract valid, yet, it is a key reason for invalidating the PIATCO Contracts. It is
a basic principle in law that cases with dissimilar facts cannot have similar disposition.
This Court, however, is not unmindful of the reality that the structures comprising the NAIA IPT III
facility are almost complete and that funds have been spent by PIATCO in their construction. For
the government to take over the said facility, it has to compensate respondent PIATCO as builder of
the said structures. The compensation must be just and in accordance with law and equity for the
government can not unjustly enrich itself at the expense of PIATCO and its investors.
II.
Temporary takeover of business affected with public interest in times of national emergency
Section 17, Article XII of the 1987 Constitution grants the State in times of national emergency the
right to temporarily take over the operation of any business affected with public interest. This right
is an exercise of police power which is one of the inherent powers of the State.
Police power has been defined as the "state authority to enact legislation that may interfere with
personal liberty or property in order to promote the general welfare."54 It consists of two essential
elements. First, it is an imposition of restraint upon liberty or property. Second, the power is
exercised for the benefit of the common good. Its definition in elastic terms underscores its all-
encompassing and comprehensive embrace.55 It is and still is the "most essential, insistent, and
illimitable"56 of the State’s powers. It is familiar knowledge that unlike the power of eminent
domain, police power is exercised without provision for just compensation for its paramount
consideration is public welfare.57
It is also settled that public interest on the occasion of a national emergency is the primary
consideration when the government decides to temporarily take over or direct the operation of a
public utility or a business affected with public interest. The nature and extent of the emergency is
the measure of the duration of the takeover as well as the terms thereof. It is the State that
prescribes such reasonable terms which will guide the implementation of the temporary takeover
as dictated by the exigencies of the time. As we ruled in our Decision, this power of the State can
not be negated by any party nor should its exercise be a source of obligation for the State.
Section 5.10(c), Article V of the ARCA provides that respondent PIATCO "shall be entitled to
reasonable compensation for the duration of the temporary takeover by GRP, which compensation
shall take into account the reasonable cost for the use of the Terminal and/or Terminal Complex."58
It clearly obligates the government in the exercise of its police power to compensate respondent
PIATCO and this obligation is offensive to the Constitution. Police power can not be diminished, let
alone defeated by any contract for its paramount consideration is public welfare and interest.59
public interest. Such regulation may be called for, especially in sensitive areas such as the operation
of the country’s premier international airport, considering the public interest at stake.
By virtue of the PIATCO contracts, NAIA IPT III would be the only international passenger airport
operating in the Island of Luzon, with the exception of those already operating in Subic Bay Freeport
Special Economic Zone ("SBFSEZ"), Clark Special Economic Zone ("CSEZ") and in Laoag City.
Undeniably, the contracts would create a monopoly in the operation of an international commercial
passenger airport at the NAIA in favor of PIATCO.
The grant to respondent PIATCO of the exclusive right to operate NAIA IPT III should not exempt it
from regulation by the government. The government has the right, indeed the duty, to protect the
interest of the public. Part of this duty is to assure that respondent PIATCO’s exercise of its right
does not violate the legal rights of third parties. We reiterate our ruling that while the service
providers presently operating at NAIA Terminals I and II do not have the right to demand for the
renewal or extension of their contracts to continue their services in NAIA IPT III, those who have
subsisting contracts beyond the In-Service Date of NAIA IPT III can not be arbitrarily or unreasonably
treated.
Finally, the Respondent Congressmen assert that at least two (2) committee reports by the House
of Representatives found the PIATCO contracts valid and contend that this Court, by taking
cognizance of the cases at bar, reviewed an action of a co-equal body.61 They insist that the Court
must respect the findings of the said committees of the House of Representatives. 62 With due
respect, we cannot subscribe to their submission. There is a fundamental difference between a case
in court and an investigation of a congressional committee. The purpose of a judicial proceeding is
to settle the dispute in controversy by adjudicating the legal rights and obligations of the parties to
the case. On the other hand, a congressional investigation is conducted in aid of legislation.63 Its aim
is to assist and recommend to the legislature a possible action that the body may take with regard
to a particular issue, specifically as to whether or not to enact a new law or amend an existing one.
Consequently, this Court cannot treat the findings in a congressional committee report as binding
because the facts elicited in congressional hearings are not subject to the rigors of the Rules of Court
on admissibility of evidence. The Court in assuming jurisdiction over the petitions at bar simply
performed its constitutional duty as the arbiter of legal disputes properly brought before it,
especially in this instance when public interest requires nothing less.
WHEREFORE, the motions for reconsideration filed by the respondent PIATCO, respondent
Congressmen and the respondents-in-intervention are DENIED with finality.
SO ORDERED.

Again, respondent PIATCO’s reliance on the case of Heirs of Suguitan v. City of Mandaluyong60 to
justify its claim for reasonable compensation for the Government’s temporary takeover of NAIA IPT
III in times of national emergency is erroneous. What was involved in Heirs of Suguitan is the
exercise of the state’s power of eminent domain and not of police power, hence, just compensation
was awarded. The cases at bar will not involve the exercise of the power of eminent domain.

III.
Monopoly

Section 19, Article XII of the 1987 Constitution mandates that the State prohibit or regulate
monopolies when public interest so requires. Monopolies are not per se prohibited. Given its
susceptibility to abuse, however, the State has the bounden duty to regulate monopolies to protect
TRANSPO – CONSTI PROVISIONS PRIVATIZATION OF STATE-OPERATED PUBLIC UTILITIES
G.R. No. 156087 May 8, 2009
KUWAIT AIRWAYS, CORPORATION, Petitioner,
vs.
PHILIPPINE AIRLINES, INC., Respondent.
DECISION
TINGA, J.:
This petition for review1 filed by the duly designated air carrier of the Kuwait Government assails a
decision2 dated 25 October 2002 of the Makati Regional Trial Court (RTC), Branch 60, ordering
Kuwait Airways to pay respondent Philippine Airlines the amount of US$1,092,690.00, plus interest,
attorney’s fees, and cost of suit.3 The principal liability represents the share to Philippine Airlines in
the revenues the foreign carrier had earned for the uplift of passengers and cargo in its flights to
and from Kuwait and Manila which the foreign carrier committed to remit as a contractual
obligation.
On 21 October 1981, Kuwait Airways and Philippine Airlines entered into a Commercial Agreement,4
annexed to which was a Joint Services Agreement5 between the two airlines. The Commercial
Agreement covered a twice weekly Kuwait Airways flight on the route Kuwait-Bangkok-Manila and
vice versa.6 The agreement stipulated that "only 3rd and 4th freedom traffic rights between Kuwait
and Manila and vice versa will be exercised. No 5th freedom traffic rights will be exercised between
Manila on the one hand and Bangkok on the other."7
The "freedom traffic rights" referred to in the Agreement are the so-called "five freedoms"
contained in the International Air Transport Agreement (IATA) signed in Chicago on 7 December
1944. Under the IATA, each contracting State agreed to grant to the other contracting states, five
"freedoms of air." Among these freedoms were "[t]he privilege to put down passengers, mail and
cargo taken on in
the territory of the State whose nationality the aircraft possesses" (Third Freedom); "[t]he privilege
to take on passengers, mail or cargo destined for the territory of the State whose nationality the
aircraft possesses" (Fourth Freedom); and the right to carry passengers from one's own country to
a second country, and from that country to a third country (Fifth Freedom). In essence, the Kuwait
Airways flight was authorized to board passengers in Kuwait and deplane them in Manila, as well as
to board passengers in Manila and deplane them in Kuwait. At the same time, with the limitation in
the exercise of Fifth Freedom traffic rights, the flight was barred from boarding passengers in
Bangkok and deplaning them in Manila, or boarding passengers in Manila and deplaning them in
Bangkok.
The Commercial Agreement likewise adverted to the annexed Joint Services Agreement covering
the Kuwait-Manila (and vice versa) route, which both airlines had entered into "[i]n order to reflect
the high level of friendly relationships between [Kuwait Airways] and [Philippine Airlines] and to
assist each other to develop traffic on the route."8 The Agreement likewise stipulated that "[u]ntil
such time as [Philippine Airlines] commences its operations to or via Kuwait, the Joint Services shall
be operated with the use of [Kuwait Airways] aircraft and crew."9 By virtue of the Joint Services
Agreement, Philippine Airlines was entitled to seat allocations on specified
Kuwait Airways sectors, special prorates for use by Philippine Airlines to specified Kuwait Airways
sectors, joint advertising by both carriers in each other’s timetables and other general advertising,
and mutual assistance to each other with respect to the development of traffic on the route. 10
Most pertinently for our purposes, under Article 2.1 of the Commercial Agreement, Kuwait Airways
obligated itself to "share with Philippine Airlines revenue earned from the uplift of passengers
between Kuwait and Manila and vice versa."11 The succeeding paragraphs of Article 2 stipulated the
basis for the shared revenue earned from the uplift of passengers.
The Commercial Agreement and the annexed Joint Services Agreement was subsequently amended
by the parties six times between 1981 and 1994. At one point, in 1988, the agreement was amended
to authorize Philippine Airlines to operate provisional services, referred to as "ad hoc joint services,"
on the Manila-Kuwait (and vice versa) route for the period between April to June 1988.12 In 1989,
another amendment was agreed to by the parties, subjecting the uplift of cargo between Kuwait
and Manila to the same revenue sharing arrangement as the uplift of passengers. 13 From 1981 until
when the present incidents arose in 1995, there seems to have been no serious disagreements
relating to the contract.
In April of 1995, delegations from the Philippines and Kuwait (Philippine Panel and Kuwait Panel)
met in Kuwait. The talks culminated in a Confidential Memorandum of Understanding (CMU)
entered into in Kuwait on 12 April 1995. Among the members of the Philippine Panel were officials
of the Civil Aeronautics Board (CAB), the Department of Foreign Affairs (DFA), and four officials of
Philippine Airlines: namely its Vice-President for Marketing, Director for International Relations,
Legal Counsel, and a Senior International Relations Specialist. Dr. Victor S. Linlingan, the Head of the
Delegation and Executive Director of the CAB, signed the CMU in behalf of the Government of the
Republic of the Philippines.
The present controversy stems from the fourth paragraph of the CMU, which read:
4. The two delegations agreed that the unilateral operation and the exercise of third and fourth
freedom traffic rights shall not be subject to any royalty payment or commercial arrangements, as
from the date of signing of this [CMU].
The aeronautical authorities of the two Contracting Parties will bless and encourage any
cooperation between the two designated airlines.
The designated airlines shall enter into commercial arrangements for the unilateral exercise of fifth
freedom traffic rights. Such arrangements will be subject to the approval of the aeronautical
authorities of both contracting parties.14
On 15 May 1995, Philippine Airlines received a letter from Dawoud M. Al-Dawoud, the Deputy
Marketing & Sales Director for International Affairs of Kuwait Airways, addressed to Ms. Socorro
Gonzaga, the Director for International Relations of Philippine Airlines.15 Both Al-Dawoud and
Gonzaga were members of their country’s respective delegations that had met in Kuwait the
previous month. The letter stated in part:
Regarding the [Kuwait Airways/Philippine Airlines] Commercial Agreement, pursuant to item 4 of
the new MOU[,] we will advise our Finance Department that the Agreement concerning royalty for
3rd/4th freedom traffic will be terminated effective April 12, 1995. Although the royalty agreement
will no longer be valid, we are very keen on seeing that [Philippine Airlines] continues to enjoy direct
participation in the Kuwait/Philippines market through the Block Space Agreement and to that
extent we would like to maintain the Jt. Venture (Block Space) Agreement, although with some
minor modifications.16
To this, Gonzaga replied to Kuwait Airways in behalf of Philippine Airlines in a letter dated 22 June
1995.17 Philippine Airlines called attention to Section 6.5 of the Commercial Agreement, which read:
This agreement may be terminated by either party by giving ninety (90) days notice in writing to the
other party. However, any termination date must be the last day of any traffic period, e.g.[,] 31st
March or 31st October.18
Pursuant to this clause, Philippine Airlines acknowledged the 15 May 1995 letter as the requisite
notice of termination. However, it also pointed out that the agreement could only be effectively
terminated on 31 October 1995, or the last day of the then current traffic period. Thus, Philippine
Airlines insisted that the provisions of the Commercial Agreement "shall continue to be enforced
until such date."19
Subsequently, Philippine Airlines insisted that Kuwait Airways pay it the principal sum of
US$1,092,690.00 as revenue for the uplift of passengers and cargo for the period 13 April 1995 until
28 October 1995.20 When Kuwait Airways refused to pay, Philippine Airlines filed a Complaint21
against the foreign airline with the Regional Trial Court (RTC) of Makati City, seeking the payment
of the aforementioned sum with interest, attorney’s fees, and costs of suit. In its Answer, 22 Kuwait
Airways invoked the CMU and argued that its obligations under the Commercial Agreement were
terminated as of the effectivity date of the CMU, or on 12 April 1995. Philippine Airlines countered
in its Reply that it was "not privy to the [CMU],"23 though it would eventually concede the existence
of the CMU.24
An exhaustive trial on the merits was had. On 25 October 2002, the RTC rendered a Decision in favor
of Philippine Airlines. The RTC noted that "the only issue to resolve in this case is a legal one,"
particularly whether Philippine Airlines is entitled to the sums claimed under the terms of the
Commercial Agreement. The RTC also considered as a corollary issue whether Kuwait Airways
"validly terminated the Commercial Agreement x x x, plaintiff’s contention being that [Kuwait
Airways] had not complied with the terms of termination provided for in the Commercial
Agreement."
The bulk of the RTC’s discussion centered on the Philippine Airlines’ claim that the execution of the
CMU could not prejudice its existing rights under the Commercial Agreement, and that the CMU
could only be deemed effective only after 31 October 1995, the purported effectivity date of
termination under the Commercial Agreement. The rationale for this position of Philippine Airlines
was that the execution of the CMU could not divest its proprietary rights under the Commercial
Agreement.
On this crucial point, the RTC agreed with Philippine Airlines. It asserted the obligatory force of
contracts between contracting parties as the source of vested rights which may not be modified or
impaired. After recasting Kuwait Airway’s arguments on this point as being that "the Confidential
Memorandum of Understanding is superior to the Commercial Agreement[,] the same having been
supposedly executed by virtue of the state’s sovereign power," the RTC rejected the argument,
holding that "[t]he fact that the [CMU] may have been executed by a Philippine Panel consisting of
representative [sic] of CAB, DFA, etc. does not necessarily give rise to the conclusion that the [CMU]
is a superior contract[,] for the exercise of the State’s sovereign power cannot be arbitrarily and
indiscriminately utilized specifically to impair contractual vested rights." 25
Instead, the RTC held that "[t]he Commercial Agreement and its specific provisions on revenue
sharing having been freely and voluntarily agreed upon by the affected parties x x x has the force of
law between the parties and they are bound to the fulfillment of what has been expressly stipulated
therein."26 Accordingly, "the provision of the [CMU] must be applied in such a manner that it does
not impair the vested rights of the parties."
From this Decision, Kuwait Airways directly filed with this Court the present Petition for Review,
raising pure questions of law. Kuwait Airways poses three questions of law for resolution: whether
the designated air carrier of the Republic of the Philippines can have better rights than the
government itself; whether the bilateral agreement between the Republic of the Philippines and
the State of Kuwait is superior to the Commercial Agreement; and whether the enforcement of the
CMU violates the non-impairment clause of the Constitution.
Let us review the factual backdrop to appreciate the underlying context behind the Commercial
Agreement and the CMU. The Commercial Agreement was entered into in 1981 at a time when
Philippine Airlines had not provided a route to Kuwait while Kuwait Airways had a route to Manila.
The Commercial Agreement established a joint commercial arrangement whereby Philippine
Airlines and Kuwait Airways were to jointly operate the Manila-Kuwait (and vice versa) route,
utilizing the planes and services of Kuwait Airways. Based on the preambular paragraphs of the Joint
Services Agreement, as of 1981, Kuwait Airways was interested in establishing a "second frequency"
(or an increase of its Manila flights to two) and that "as a result of cordial and frank discussions the
concept of a joint service emerged as the most desirable alternative option."27
As a result, the revenue-sharing agreement was reached between the two airlines, an agreement
which stood as an alternative to both carriers offering competing flights servicing the Manila-Kuwait
route. An apparent concession though by Philippine Airlines was the preclusion of the exercise of
one of the fundamental air traffic rights, the Fifth Freedom traffic rights with respect to the Manila-
Bangkok-Kuwait, thereby precluding the deplaning of passengers from Manila in Bangkok and the
boarding in Bangkok of passengers bound for Manila.
The CMU effectively sought to end the 1981 agreement between Philippine Airlines and Kuwait
Airways, by precluding any commercial arrangements in the exercise of the Third and Fourth
freedom traffic rights. As a result, both Kuwait and the Philippines had the respective right to board
passengers from their respective countries and deplane them in the other country, without having
to share any revenue or enter into any commercial arrangements to exercise such rights. In
exchange, the designated airline or airlines of each country was entitled to operate six frequencies
per week in each direction. In addition, the designated airlines were allowed to enter into
commercial arrangements for the unilateral exercise of the Fifth Freedom traffic rights.
Another notable point, one not touched upon by the parties or the trial court. It is well known that
at the time of the execution of the 1981 agreements, Philippine Airlines was controlled by the
Philippine government, with the Government Service Insurance System (GSIS) holding the majority
of shares. However, in 1992, Philippine Airlines was privatized, with a private consortium acquiring
67% of the shares of the carrier.28 Thus, at the time of the signing of the CMU, Philippine Airlines
was a private corporation no longer controlled by the Government. This fact is significant. Had
Philippine Airlines remained a government owned or controlled corporation at the time the CMU
was executed in 1995, its status as such would have bound Philippine Airlines to the commitments
made in the document by no less than the Philippine government. However, since Philippine Airlines
had already become a private corporation at that juncture, the question of impairment of private
rights may come into consideration.
In this regard, we observe that the RTC appears to have been under the impression that the CMU
was brought about by machinations of the Philippine Panel and the Kuwait Panel of which Philippine
Airlines was not aware or in which it had a part. This impression is not exactly borne by the record
since no less than four of the nine members of the Philippine Panel were officials of Philippine
Airlines. It should be noted though that one of these officials, Senior International Relations
Specialist Arnel Vibar, testified for Philippine Airlines that the airline voiced its opposition to the
withdrawal of the commercial agreements under the CMU even months before the signing of the
CMU, but the objections were overruled.
Now, the arguments raised in the petition.
One line of argument raised by Kuwait Airways can be dismissed outright. Kuwait Airways points
out that the third Whereas clause of the 1981 Commercial Agreement stated: "NOW, it is hereby
agreed, subject to and without prejudice to any existing or future agreements between the
Government Authorities of the Contracting Parties hereto …" That clause, it is argued, evinces
acknowledgement that from the beginning Philippine Airlines had known fully well that its rights
under the Commercial Agreement would be limited by whatever agreements the Philippine and
Kuwait governments may enter into later.
But can a perambulatory clause, which is what the adverted "Whereas" clause is, impose a binding
obligation or limitation on the contracting parties? In the case of statutes, while a preamble
manifests the reasons for the passage of the statute and aids in the interpretation of any ambiguities
within the statute to which it is prefixed, it nonetheless is not an essential part of an act, and it
neither enlarges nor confers powers.29 Philippine Airlines submits that the same holds true as to the
preambular whereas clauses of a contract.
What was the intention of the parties in forging the "Whereas" clause and the contexts the parties
understood it in 1981? In order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered,30 and in doing so, the courts
may consider the relations existing between the parties and the purpose of the contract.31 In 1981,
Philippine Airlines was still owned by the Philippine government. In that context, it is evident that
the Philippine government, as owner Philippine Airlines, could enter into agreements with the
Kuwait government that would supersede the Commercial Agreement entered into by one of its
GOCCs, a scenario that changed once Philippine Airlines fell to private ownership. Philippine Airlines
argues before us that the cited preambular stipulation is in fact superfluous, and we can agree in
the sense that as of the time of the execution of the Commercial Agreement, it was evident, without
need of stipulation, that the Philippine government could enter into an agreement with the Kuwait
government that would prejudice the terms of the commercial arrangements between the two
airlines. After all, Philippine Airlines then would not have been in a position to challenge the wishes
of its then majority stockholder – the Philippine government.
Yet by the time ownership of Philippine Airlines was transferred into private hands, the
controverted "Whereas" clause had taken on a different complexion, for it was newly evident that
an act of the Philippine government negating the commercial arrangement between the two airlines
would infringe the vested rights of a private individual. The original intention of the "Whereas"
clause was to reflect what was then a given fact relative to the nationalized status of Philippine
Airlines. With the change of ownership of Philippine Airlines, the "Whereas" clause had ceased to
be reflective of the current situation as it now stands as a seeming invitation to the Philippine
government to erode private vested rights. We would have no problem according the interpretation
preferred by Kuwait Airways of the "Whereas" clause had it been still reflective of the original intent
to waive vested rights of private persons, rather than the rights in favor of the government by a
GOCC. That is not the case, and we are not inclined to give effect to the "Whereas" clause in a
manner that does not reflect the original intention of the contracting parties.
Thusly, the proper focus of our deliberation should be whether the execution of the CMU between
the Philippine and Kuwait governments could have automatically terminated the Commercial
Agreement, as well as the Joint Services Agreement between Philippine Airlines and Kuwait Airways.
Philippine Airlines is the grantee of a legislative franchise authorizing it to provide domestic and
international air services.32 Its initial franchise was granted in 1935 through Act No. 4271, which
underwent substantial amendments in 1959 through Republic Act No. 2360.33 It was granted a new
franchise in 1979 through Presidential Decree No. 1590, wherein statutory recognition was
accorded to Philippine Airlines as the "national flag carrier." P.D. No. 1590 also recognized that the
"ownership, control, and management" of Philippine Airlines had been reacquired by the
Government. Section 19 of P.D. No. 1590 authorized Philippine Airlines to contract loans, credits
and indebtedness from foreign sources, including foreign governments, with the unconditional
guarantee of the Republic of the Philippines.
At the same time, Section 8 of P.D. No. 1590 subjects Philippine Airlines "to the laws of the
Philippines now existing or hereafter enacted." After pointing to this provision, Kuwait Airways
correlates it to Republic Act (R.A.) No. 776, or the Civil Aeronautics Act of the Philippines, which
grants the Civil Aeronautics Board (CAB) "the power to regulate the economic aspect of air
transportation, [its] general supervision and regulation of, and jurisdiction and control over, air
carriers as well as their property, property rights, equipment, facilities, and franchise." R.A. No. 776
also mandates that the CAB "shall take into consideration the obligation assumed by the Republic
of the Philippines in any treaty, convention or agreement with foreign countries on matters
affecting civil aviation."
There is no doubt that Philippine Airlines forebears under several regulatory perspectives. First, its
authority to operate air services in the Philippines derives from its legislative franchise and is
accordingly bound by whatever limitations that are presently in place or may be subsequently
incorporated in its franchise. Second, Philippine Airlines is subject to the other laws of the
Philippines, including R.A. No. 776, which grants regulatory power to the CAB over the economic
aspect of air transportation. Third, there is a very significant public interest in state regulation of air
travel in view of considerations of public safety, domestic and international commerce, as well as
the fact that air travel necessitates steady traversal of international boundaries, the amity between
nations.
At the same time, especially since Philippine Airlines was already under private ownership at the
time the CMU was entered into, we cannot presume that any and all commitments made by the
Philippine government are unilaterally binding on the carrier even if this comes at the expense of
diplomatic embarrassment. While it may have been, prior to the privatization of Philippine Airlines,
that the Philippine Government had the authority to bind the airline in its capacity as owner of the
airline, under the post-privatization era, however, whatever authority of the Philippine Government
to bind Philippine Airlines can only come in its capacity as regulator.1awphi1
As with all regulatory subjects of the government, infringement of property rights can only avail
with due process of law. Legislative regulation of public utilities must not have the effect of
depriving an owner of his property without due process of law, nor of confiscating or appropriating
private property without due process of law, nor of confiscating or appropriating private property
without just compensation, nor of limiting or prescribing irrevocably vested rights or privileges
lawfully acquired under a charter or franchise. The power to regulate is subject to these
constitutional limits.34
We can deem that the CAB has ample power under its organizing charter, to compel Philippine
Airlines to terminate whatever commercial agreements the carrier may have. After all, Section 10
of R.A. No. 776 grants to the CAB the "general supervision and regulation of, and jurisdiction and
control over, air carriers as well as their property, property rights, equipment, facilities and
franchise," and this power correlates to Section 4(c) of the same law, which mandates that the
Board consider in the exercise of its functions "the regulation of air transportation in such manner
as to recognize and preserve the inherent advantages of, assure the highest degree of safety in, and
foster sound economic condition in, such transportation, and to improve the relations between,
and coordinate transportation by air carriers."
We do not doubt that the CAB, in the exercise of its statutory mandate, has the power to compel
Philippine Airlines to immediately terminate its Commercial Agreement with Kuwait Airways
pursuant to the CMU. Considering that it is the Philippine government that has the sole authority
to charter air policy and negotiate with foreign governments with respect to air traffic rights, the
government through the CAB has the indispensable authority to compel local air carriers to comply
with government determined policies, even at the expense of economic rights. The airline industry
is a sector where government abjuration is least desired.
However, this is not a case where the CAB had duly exercised its regulatory authority over a local
airline in order to implement or further government air policy. What happened instead was an
officer of the CAB, acting in behalf not of the Board but of the Philippine government, had
committed to a foreign nation the immediate abrogation of Philippine Airlines’s commercial
agreement with Kuwait Airways. And while we do not question that ability of that member of the
CAB to represent the Philippine government in signing the CMU, we do question whether such
member could have bound Philippine Airlines in a manner that can be accorded legal recognition
by our courts.
entire Board. The Board is disabled from performing as such without a quorum. For another, the
Executive Director of the CAB is not even a member of the Board, per R.A. No. 776, as amended.
Even granting that the police power of the State, as given flesh in the various laws governing the
regulation of the airline industry in the Philippines, may be exercised to impair the vested rights of
privately-owned airlines, the deprivation of property still requires due process of law. In order to
validate petitioner’s position, we will have to concede that the right to due process may be
extinguished by executive command. While we sympathize with petitioner, who reasonably could
rely on the commitment made to it by the Philippine government, we still have to respect the
segregate identity of the government and that of a private corporation and give due meaning to
that segregation, vital as it is to the very notion of democracy.
WHEREFORE, the petition is DENIED. No pronouncement as to costs.

Imagine if the President of the Philippines, or one of his alter egos, acceded to the demands of a SO ORDERED.
foreign counterpart and agreed to shut down a particular Filipino business or enterprise, going as
far as to co-sign a document averring that the business "will be shut down immediately." Granting
that there is basis in Philippine law for the closure of such business, could the mere declaration of
the President have the legal effect of immediately rendering business operations illegal? We, as
magistrates in a functioning democratic State with a fully fleshed Bill of Rights and a Constitution
that emphatically rejects "l’etat cest moi" as the governing philosophy, think not. There is nothing
to prevent the Philippine government from utilizing all the proper channels under law to enforce
such closure, but unless and until due process is observed, it does not have legal effect in this
jurisdiction. Even granting that the "agreement" between the two governments or their
representatives creates a binding obligation under international law, it remains incumbent for each
contracting party to adhere to its own internal law in the process of complying with its obligations.

The promises made by a Philippine president or his alter egos to a foreign monarch are not
transubstantiated by divine right so as to ipso facto render legal rights of private persons obviated.
Had Philippine Airlines remained a government-owned or controlled corporation, it would have
been bound, as part of the executive branch, to comply with the dictates of the President or his
alter egos since the President has executive control and supervision over the components of the
executive branch. Yet Philippine Airlines has become, by this time, a private corporation – one that
may have labored under the conditions of its legislative franchise that allowed it to conduct air
services, but private in character nonetheless. The President or his alter egos do not have the legal
capacity to dictate insuperable commands to private persons. And that undesirable trait would be
refuted on the President had petitioner’s position prevailed, since it is imbued with the presumption
that the commitment made to a foreign government becomes operative without complying with
the internal processes for the divestiture of private rights.

Herein, we do not see why the Philippine government could not have observed due process of law,
should it have desired to see the Commercial Agreement immediately terminated in order to adhere
to its apparent commitment to the Kuwait government. The CAB, with its ample regulatory power
over the economic affairs of local airliners, could have been called upon to exercise its jurisdiction
to make it so. A remedy even exists in civil law–the judicial annulment or reformation of contracts–
which could have been availed of to effect the immediate termination of the Commercial
Agreement. No such remedy was attempted by the government.

Nor can we presume, simply because Dr. Linlingan, Executive Director of the CAB had signed the
CMU in behalf of the Philippine Panel, that he could have done so bearing the authority of the Board,
in the exercise of regulatory jurisdiction over Philippine Airlines. For one, the CAB is a collegial body
composed of five members,35 and no one member–even the chairman–can act in behalf of the