Clee Ayra S.

Carin ADR, JRMSU LAW II

KOPPEL, INC. VS. MAKATI ROTARY CLUB

FOUNDATION, INC.
G.R. No. 198075, September 04, 2013

FACTS:
Fedders Koppel, Incorporated (FKI), a manufacturer of air-conditioning
products, was the registered owner of a parcel of land located at Km. 16, South
Superhighway, Parañaque City (subject land). Within the subject land are buildings
and other improvements dedicated to the business of FKI.
In 1975, FKI bequeathed the subject land (exclusive of the improvements
thereon) in favor of herein respondent Makati Rotary Club Foundation, Incorporated
by way of a conditional donation. The respondent accepted the donation with all of
its conditions. On 26 May 1975, FKI and the respondent executed a Deed of
Donation evidencing their consensus.
The donation provides that the donee, Makati Rotary Club, was required to
lease the subject property to FKI under the terms specified in the Deed of Donation.
The stipulations in the donation provides that the period of lease shall be for 25
years (until May 25, 2000) and the annual rent for the first 25 years is P40,126. The
lease is subject to renewable for another 25 years upon mutual agreement of the
donor and donee. In case of disagreement, the matter shall be referred to a Board of
Arbitrators, appointed and with powers in accordance with the Arbitration Law of the
Philippines.
Before the lease contract was set to expire, FKI and Makati Rotary Club
executed another contract extending the lease for 5 years, with annual rents ranging
from P4,000,000 for the 1st year up to P4,900,00 for the 5th year.
The 2000 Lease contract an arbitration clause worded as: Any disagreement
as to the interpretation, application or execution of the contract shall be submitted to
a board of three (3) arbitrators constituted in accordance with the Arbitration Law of
the Philippines. The decision of the majority of the board shall be binding upon FKI
and respondent. After the 2000 Lease Contract expired, FKI and respondent agreed
to renew their lease for another 5 years at a fixed rate pf P4,200,000 per annum
(2005 Lease Contract). In addition, the contract also obligated FKI to make a yearly
“donation” of money to respondent ranging from P3 million for the 1st year up to P3.9
million for the 5th year.
The lease contract contained an arbitration clause similar to the 2000 lease
contract. From 2005 to 2008, FKI paid the rentals and “donations” due based on the
2005 Lease Contract. In Aug 2008, FKI assigned all its interest and obligations in
favor of petitioner Koppel Inc. The next year, Koppel discontinued the payment of the
rentals and “donations” under the 2005 Lease Contract. Koppel’s refusal to pay was
based on the premise that the subsequent lease contracts violated one of the
material conditions of the donation of the property, i.e. Item 2(g) of the Deed of
Donation states that the rent of the subject property over the second 25 years was
limited to only 3% of the fair market value of the subject property excluding the
improvements.
On June 1, 2009, Makati Rotary Club sent a demand letter notifying Koppel of
its default. Petitioner subsequently sent a reply expressing its disagreement over the
rental stipulations of the 2005 Lease Contract and offered to pay P80,502.79 instead
of P8,394,000 as demanded by respondent.

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Respondent sent a subsequent demand letter (Sept 25, 2009) ordering

Koppel Inc. to vacate the premises should it fail to pay its obligation within 7 days
from receipt of letter. Petitioner, Koppel refused to comply with the demands of the
respondent and instead, filed with RTC Paranaque a complaint for the rescission or
cancellation of the Deed of Donation.
Thereafter, Makati Rotary Club filed an unlawful detainer case against Koppel
before MTC Paranaque. In the ejectment suit, Koppel reiterated its objections over
the rental stipulations of the 2005 Lease Contract and questioned the jurisdiction of
the MTC in view of the arbitration clause contained in the Lease Contract.
In the ejectment case, RTC ruled in favor of Koppel Inc. While it did not
dismiss the action on the ground of arbitration, MTC sided with petitioner with
respect to the issues regarding the insufficiency of the respondent’s demand and the
nullity of the 2005 Lease contract.
On appeal, RTC reversed the MTC decision and ordered Koppel to vacate the
subject property. As to the existing improvements, RTC held that the same were built
in good faith subject to the provisions under Art 1678 NCC. CA affirmed. Arguments
against arbitration: The dispute between petitioner and respondent involves the
validity of the 2005 Lease Contract. Citing Gonzales v. Climax Mining: The validity of
contract cannot be subject the arbitration proceedings as such questions are legal in
nature and require the application of interpretation of laws and jurisprudence which is
necessarily a judicial function. Petitioner cannot validly invoke the arbitration clause
while at the same time, impugn such contract’s validity. Petitioner did not file a formal
application before the MTC so as to render the arbitration clause operational. The
parties underwent Judicial Dispute Resolution (JDR); further referral of the dispute to
arbitration would only be circuitous.

ISSUES:
1. Whether or not the present dispute is subject to arbitration.
2. What is the nature of an arbitration proceeding?
3. What are the legal effects of the arbitration clause?

RULING:
Yes. Respondent took the ruling in the Gonzales case out of context. PA-MGB
was devoid of any jurisdiction to take cognizance of the complaint for arbitration
because RA 7942 (Mining Act of 1995) grants PA-MGB with exclusive original
jurisdiction only over mining disputes. Since the complaint for arbitration in the
Gonzales case did not raise mining disputes as contemplated under RA 7942, the
SC held such complaint could not arbitrated before the PA-MGB. The Court in
Gonzales did not simply reject the complaint on the ground that the issue of validity
of contracts per se is non-arbitrable. The real consideration bind the ruling was the
limitation that was placed by RA 7942 upon the jurisdiction of PA-MGB as an arbitral
body. Petitioner may still invoke the arbitration clause of the 2005 Lease Contract
notwithstanding the fact that it assails the validity of such contract. This is due to the
doctrine of separability. Under said doctrine, an arbitration agreement is considered
as independent of the main contract. Being a separate contract in itself, the
arbitration agreement may thus be invoked regardless of the possible nullity or
invalidity of the main contract. The operation of the arbitration clause in this case is
not defeated by Koppel’s failure to file a formal “request” or application with the MTC.
In using the word “may” to qualify the act of filing a “request” under Sec 24 of RA

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9285 (Special ADR Rues) clearly did not intend to limit invocation of an arbitration
agreement in a pending suit solely via such request. After all, non-compliance with
an arbitration agreement is a valid defense to any offending suit and, as such, may
even be raised in an answer as provided in our ordinary rules of procedure. As early
as in its answer with counterclaim, Koppel had already apprised MTC of the
existence of the arbitration clause in the 2005 Lease Contract; such act is enough
valid invocation of his right to arbitrate. The fact that petitioner and respondent
already underwent through JDR proceedings before the RTC, will not make the
subsequent arbitration between the parties unnecessary or circuitous. The JDR
system is substantially different from arbitration proceedings. The JDR framework is
based on the processes of mediation, conciliation or early neutral evaluation which
entails the submission of a dispute before a “JDR judge” who shall merely “facilitate
settlement” between the parties in conflict or make a “non-binding evaluation or
assessment of the chances of each party’s case.” Thus in JDR, the JDR judge lacks
the authority to render a resolution of the dispute that is binding upon the parties in
conflict.
In arbitration, on the other hand, the dispute is submitted to an arbitrator—a
neutral third person or a group of thereof—who shall have the authority to render a
resolution binding upon the parties. A pivotal feature of arbitration as an alternative
mode of dispute resolution is that it is, first and foremost, a product of party
autonomy or the freedom of the parties to “make their own arrangements to resolve
their own disputes.” Arbitration agreements manifest not only the desire of the
parties in conflict for an expeditious resolution of their dispute. They also represent,
if not more so, the parties’ mutual aspiration to achieve such resolution outside of
judicial auspices, in a more informal and less antagonistic environment under the
terms of their choosing. Needless to state, this critical feature can never be satisfied
in an ejectment case no matter how summary it may be.

Since there really are no legal impediments to the application of the

arbitration clause of the 2005 Contract of Lease in this case, the unlawful detainer
action was instituted in violation of such clause. Under Sec 7, RA 9285, the instant
unlawful detainer action should have been stayed; the petitioner and the respondent
should have been referred to arbitration pursuant to the arbitration clause of the
2005 Lease Contract. The MTC, however, did not do so in violation of the law—
which violation was, in turn, affirmed by the RTC and Court of Appeals on appeal.
The violation by the MTC of the clear directives under R.A. Nos. 876 and 9285
renders invalid all proceedings it undertook in the ejectment case after the filing by
petitioner of its Answer with Counterclaim—the point when the petitioner and the
respondent should have been referred to arbitration. This case must, therefore, be
remanded to the MTC and be suspended at said point. Inevitably, the decisions of
the MTC, RTC and the Court of Appeals must all be vacated and set aside.

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Clee Ayra S. Carin ADR, JRMSU LAW II

J Plus Development Asia Corporation VS.

Utility Assurance Corporation
G.R. No. 199650, June 26, 2013

Facts:
Petitioner J Plus Asia Development Corporation and Seven Shades of Blue
Trading and Services, entered into a Construction Agreement, whereby the latter
undertook to build the former's 72-room condominium/hotel (Condotel Building 25).
The project was to be completed within one year reckoned from the first calendar
day after signing of the Notice of Award and Notice to Proceed and receipt of down
payment. The down payment was fully paid. Payment of the balance of the contract
price will be based on actual work finished within 15 days from receipt of the monthly
progress billings. Mabuhay also submitted the required Performance Bond in the
amount equivalent to 20% down payment. Mabunay commenced work at the project
site.
Thereafter, petitioner terminated the contract for the reason that respondent
incurred in delay and sent demand letters to Mabunay and respondent surety. As its
demands went unheeded, petitioner filed a Request for Arbitration before the
Construction Industry Arbitration Commission (CIAC).
Respondent filed a motion to dismiss on the ground that petitioner has no
cause of action and the complaint states no cause of action against it. The CIAC
denied the motion to dismiss. Respondent’s motion for reconsideration was likewise
denied.

Issue:

Whether or not CIAC arbitral award need not be confirmed by the regional
trial court to be executory.

Held:
A CIAC arbitral award need not be confirmed by the regional trial court to be
executory as provided under E.O. No. 1008.
Executive Order (EO) No. 1008 vests upon the CIAC original and exclusive
jurisdiction over disputes arising from, or connected with, contracts entered into by
parties involved in construction in the Philippines, whether the dispute arises before
or after the completion of the contract, or after the abandonment or breach thereof.
By express provision of Section 19 thereof, the arbitral award of the CIAC is final and
unappealable, except on questions of law, which are appealable to the Supreme
Court. With the amendments introduced by R.A. No. 7902 and promulgation of the
1997 Rules of Civil Procedure, as amended, the CIAC was included in the
enumeration of quasi-judicial agencies whose decisions or gawards may be
appealed to the CA in a petition for review under Rule 43. Such review of the CIAC
award may involve either questions of fact, of law, or of fact and law.


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Clee Ayra S. Carin ADR, JRMSU LAW II

Chung Fu Industries Inc. Vs Court of Appeals

G.R. No. 96283, February 25, 1992

Facts:
Petitioner Chung Fu entered into a construction agreement with Roblecor Phil.
Inc. for the corporations industrial factory with a total consideration of
P42,000,000.00. The said companies entered into 2 other ancillary construction
contracts amounting to P3,875,285.00 and P12,100,000.00. The construction
agreement contained a stipulation that in the event of disputes arising from the
performance of the contract, such issue shall be submitted for resolution before a
single arbitrator chosen by the parties. However, Roblecor failed to complete the
work despite the extension of time provided by Chung Fu which later on had to take
over the said construction. Roblecor then claimed for the unsatisfied account of
P10,500,000 and unpaid progress billings of P2,370,179.23 and filed a petition for
the compulsory arbitration with a prayer for a TRO, while Chung Fu prayed for the
dismissal of such petition.
The RTC approved the arbitration agreement and Engr. Asuncion was latter
appointed as the sole arbitrator. He then ordered the petitioners to pay the
respondent contractor P16,108,801.00 and declared such award as final and
unappealable. Chung Fu moved to remand the case for further hearing but the lower
court denied the motion and granted the Confirmation of the award in favour of
Roblecor. Chung Fu elevated the case to the CA via a petition for certiorari but the
CA only assailed the resolution of the lower court assailing that the signatories of the
Arbitration Agreement are bound to observe the stipulations thereof for the finality of
the award.

Issue:

Whether or not the decision of the arbitrator shall be deemed final and
unappealable and beyond the ambit of the court’s power of judicial review.

Ruling:
No. Per Art. 2044 of the Civil Code, the finality of the arbitrators award is not
absolute and without exceptions. It is also stated in Sections 24, 25 of the Arbitration
Law that there are grounds for vacating, modifying or rescinding an arbitrator’s
award. Thus, if there are factual circumstances which are referred to in the said
provisions be present, judicial review of the award is properly warranted. Also, even
decisions of an administrative agency which are declared as “final” are not exempt
from judicial review when so warranted. That is why a voluntary arbitrator, by the
very nature of their function, acts in a quasi judicial capacity in deciding such cases
is not to be construed as beyond the scope of the power of judicial review. The Court
then provided that the lower court committed grave abuse of discretion by not
looking into the merits of the case despite a prima facie showing of the existence of
grounds warranting judicial review. Finally, the case was remanded back to the court
of origin for further hearing.


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Clee Ayra S. Carin ADR, JRMSU LAW II

California and Hawaiian Sugar Company, et.al.

VS. Pioneer Insurance and Surety Corporation
G.R. No. 139273, Nov. 28, 2000

Facts:
On Nov 27, 1990, the vessel MV “SUGAR ISLANDER” arrived at the port of
Manila carrying a cargo of soybean meal in bulk consigned to several consignees,
one of which was the Metro Manila Feed Millers Association. Thereafter the
discharging of cargo from vessel to barges commenced on November 30, 1990.
From the barges, the cargo was allegedly offloaded, rebagged and reloaded on
consignee’s delivery trucks.
Pioneer Insurance, however, claims that when the cargo was weighed on a
licensed truck scale a shortage of 255.051 metric tons valued at P1,621,171.16 was
discovered. The above-mentioned shipment was insured with Pioneer Insurance
against all risk in the amount of P19,976,404.00.
Due to the alleged refusal of California and Hawaiian et al. to settle their
respective liabilities, Pioneer, as insurer, paid the consignee Metro Manila Feed
Miller’s Association.
On March 26, 1992, as alleged subrogee of Metro, Pioneer filed a complaint
for damages against California and Hawaiian et al. Within the reglementary period to
file an Answer, California and Hawaiian et al. filed a Motion to Dismiss the complaint
on the ground that Pioneer’s claim is premature, the same being arbitrable. Pioneer
filed its Opposition thereto and California and Hawaiian et al. filed their Reply to
Opposition.
The RTC issued an Order deferring the hearing on the Motion to Dismiss until
the trial and directing petitioners to file their Answer. California and Hawaiian et al.
then moved to reconsider said Order which was, however, denied by the RTC on the
ground that the reason relied upon by California and Hawaiian et al. in its Motion to
Dismiss and Motion for Reconsideration was a matter of defense which they must
prove with their evidence.
California and Hawaiian et al. filed their Answer with Counterclaim and Cross-
claim alleging therein that Pioneer did not comply with the arbitration clause of the
charter party; hence, the complaint was allegedly prematurely filed. The trial court
set the case for pre-trial on November 26, 1993.
California and Hawaiian et al. filed a Motion to Defer Pre-Trial and Motion to
Set for Preliminary Hearing the Affirmative Defense of Lack of Cause of Action for
Failure to comply with Arbitration Clause, respectively.
Pioneer did not file an Opposition to the said Motion to Set for Preliminary
Hearing. However the RTC denied the motion and the following Motion for
Reconsideration.
California and Hawaiian et al. filed a petition for certiorari with the CA wherein
which the latter ruled that the arbitration clause did not bind Pioneer Insurance,
which is a mere subrogee of Metro Manila Feed Millers Association citing Pan
Malayan Insurance vs. CA
Hence, this petition.

Issue:

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1. Whether or not the RTC erred in denying California and Hawaiian et al.’s Motion to
set for preliminary hearing.
2. Whether or not the arbitration clause is binding to Pioneer Insurance.

Ruling:
Yes. Section 6, Rule 16 of the 1997 Rules, specifically provides that a
preliminary hearing on the affirmative defenses may be allowed only when no motion
to dismiss has been filed. Section 6, however, must be viewed in the light of Section
3 of the same Rule, which requires courts to resolve a motion to dismiss and
prohibits them from deferring its resolution on the ground of indubitability.
Clearly then, Section 6 disallows a preliminary hearing of affirmative defenses
once a motion to dismiss has been filed because such defense should have already
been resolved.
In the present case, however, the trial court did not categorically resolve
petitioners’ Motion to Dismiss, but merely deferred resolution thereof.
Indeed, the present Rules are consistent with Section 5, Rule 16 of the
pre-1997 Rules of Court, because both presuppose that no motion to dismiss had
been filed; or in the case of the pre-1997 Rules, if one has been filed, it has not been
unconditionally denied. Hence, the ground invoked may still be pleaded as an
affirmative defense even if the defendant’s Motion to Dismiss has been filed but not
definitely resolved, or if it has been deferred as it could be under the pre-1997 Rules.
A preliminary hearing is not mandatory, but subject to the discretion of the trial
court. We note that the trial court deferred the resolution of petitioners’ Motion to
Dismiss because of a single issue. It was apparently unsure whether the charter
party that the bill of lading referred to was indeed the Baltimore Berth Grain Charter
Party submitted by petitioners.
Considering that there was only one question, which may even be deemed to
be the very touchstone of the whole case, the trial court had no cogent reason to
deny the Motion for Preliminary Hearing. Indeed, it committed grave abuse of
discretion when it denied a preliminary hearing on a simple issue of fact that could
have possibly settled the entire case. Verily, where a preliminary hearing appears to
suffice, there is no reason to go on to trial.
There was nothing in Pan Malayan, however, that prohibited the applicability
of the arbitration clause to the subrogee. That case merely discussed, inter alia, the
accrual of the right of subrogation and the legal basis therefor. This issue is
completely different from that of the consequences of such subrogation; that is, the
rights that the insurer acquires from the insured upon payment of the indemnity.
Hence, petition is granted. 


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Asset Privatization Trust v. Court of Appeals

G.R.121171, Dec. 29, 1998

Facts:
The development, exploration and utilization of the mineral deposits in the
Surigao Mineral Reservation have been authorized by the Republic Act No. 1528, as
amended by Republic Act No. 2077 and Republic Act No. 4167, by virtue of which
laws, a memorandum of agreement was drawn on July 3, 1968, whereby the
Republic of the Philippines thru the Surigao Mineral Reservation Board, granted
MMIC the exclusive right to explore, develop and exploit nickel, cobalt, and other
minerals in the Surigao Mineral Reservation.
MMIC is a domestic corporation engaged in mining with respondent Jesus S.
Cabarrus Sr. as president and among its original stockholders. The Philippine
government undertook to support the financing of MMIC by purchase of MMIC
debenture bonds and extension of guarantees. Further, from the DBP and/or the
government financing institutions to subscribe in MMIC and issue guarantee/s of
foreign loans or deferred payment arrangements secured from the US Eximbank,
Asian Development Bank (ADB), Kobe steel of amount not exceeding US$100
million.
On July 13, 1981, MMIC, PNB, and DBP executed a mortgage trust
agreement whereby MMIC as mortgagor, agreed to constitute a mortgage in favor of
PNB and DBP as mortgages, over all MMIC assets; subject of real estate and chattel
mortgage executed by the mortgagor, and additional assets described and identified,
including assets of whatever kind, nature or description, which the mortgagor may
acquire whether in substitution of, in replenishment or in addition thereto. Due to the
unsettled obligations, a financial restructuring plan (FRP) was suggested, however
not finalized. The obligations matured and the mortgage was
foreclosed. The foreclosed assets were sold to PNB as the lone bidder and were
assigned to the newly formed corporations namely Nonoc Mining Corporation,
Maricalum Mining and Industrial Corporation and Island Cement Corporation. In
1986, these assets were transferred to the asset privatization trust. On February 28,
1985, Jesus S. Cabarrus Sr. together with the other stockholders of MMIC, filed a
derivative suit against DBP and PNB before the RTC of Makati branch 62, for
annulment of foreclosures, specific performance and damages.
The suit docketed as civil case no. 9900, prayed that the court:

1. Annul the foreclosures, restore the foreclosed assets to MMIC, and require the
banks to account for their use and operation in the interim;
2. Direct the banks to honor and perform their commitments under the alleged FRP;
3. Pay moral and exemplary damages, attorney’s fees, litigation expenses and
costs.

A compromise and arbitration agreement was entered by the parties to which

committee awarded damages in favor of Cabarrus.

Issue:
Whether or not the award granted to Cabarrus was proper.
Ruling:

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No. Civil case no. 9900 filed before the RTC being a derivative suit, MMIC
should have been impleaded as a party. It was not joined as a part plaintiff or party
defendant at any stage before of the proceedings as it is, the award for damages to
MMIC, which was not party before the arbitration committee is a complete nullity.
Settled is the doctrine that in a derivative suit, the corporation is the real party
in interest while the stockholder filing suit for the corporation’s behalf is only a
nominal party. The corporation should be included s a party in the suit.
An individual stockholder is permitted to institute a derivative suit on behalf of
the corporation wherein he holds stock in order to protect or vindicate corporate
rights, whenever the officials of the corporation refuse to sue, or are the ones to be
sued or hold the control of the corporation. In such actions, the suing stockholder is
regarded as a nominal party, with the corporation as the real part in interest.
It is a condition sine qua non that the corporation be impleaded as a party
because – not only is the corporation an indispensable party, but it is also the
present rule that it must be served with process. The reason given is that the
judgement must be made binding upon the corporation in order that the corporation
may get the benefit of the suit and may not bring a subsequent suit against the same
defendants for the same cause of action. In other words the corporation must be
joined as a party because it is its cause of action that is being litigated and because
judgement must be a res judicata against it.
The reasons given for not allowing direct individual suit are:

1. That the prior rights of the creditors may be prejudiced. Thus, our Supreme Court
held in the case of Evangelista vs Santos that the “Stockholders may not directly
claim those damages for themselves for that would result in the appropriation by,
and the distribution among them of part of the corporate assets before the
dissolution of the corporation and the liquidation of its debts and liabilities,
something which cannot be legally done in view of section 16 of the Corporation
Law.
2. The universally recognized doctrine that a stockholder in a corporation has no
title legal or equitable to the corporate property; that both of these are in the
corporation itself for the benefit of the stockholders. In other words, to allow
shareholders to sue separately would conflict with the separate corporate entity
principle.
3. dissolution of the corporation and the liquidation of its debts and liabilities,
something which cannot be legally done in view of section 16 of the corporation
law.
4. The filing of such suits would conflict with the duty of the management to sue for
the protection of all concerned;
5. It would produce wasteful multiplicity of suits; and
6. It would involve confusion in ascertaining the effect of partial recovery by an
individual on the damages recoverable by the corporation for the same act.


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Clee Ayra S. Carin ADR, JRMSU LAW II

Agan, Jr., et.al. vs. Phil. International Air

Terminals Co.,Inc., et.al,
G.R. No. 155001, May 5, 2003

FACTS:
In August 1989, the DOTC engaged the services of Aeroport de Paris (ADP)
to conduct a comprehensive study of the Ninoy Aquino International Airport (NAIA)
and determine whether the present airport can cope with the traffic development up
to the year 2010.

On March 27, 1995, then DOTC Secretary Jose Garcia endorsed the proposal
of Asia's Emerging Dragon Corp. (unsolicited proposal dated Oct. 5, 1994) to the
National Economic and Development Authority (NEDA). A revised proposal,
however, was forwarded by the DOTC to NEDA on December 13, 1995. On January
5, 1996, the NEDA Investment Coordinating Council (NEDA ICC) — Technical Board
favorably endorsed the project to the ICC — Cabinet Committee which approved the
same, subject to certain conditions, on January 19, 1996. On February 13, 1996, the
NEDA passed Board Resolution No. 2 which approved the NAIA IPT III Project.

On August 29, 1996, the Second Pre-Bid Conference was held where certain
clarifications were made. Upon the request of prospective bidder People's Air Cargo
& Warehousing Co., Inc (Paircargo), the PBAC warranted that based on Sec. 11.6,
Rule 11 of the Implementing Rules and Regulations of the BOT Law, only the
proposed Annual Guaranteed Payment submitted by the challengers would be
revealed to AEDC, and that the challengers' technical and financial proposals would
remain confidential. The PBAC also clarified that the list of revenue sources
contained in Annex 4.2a of the Bid Documents was merely indicative and that other
revenue sources may be included by the proponent, subject to approval by DOTC/
MIAA. Furthermore, the PBAC clarified that only those fees and charges
denominated as Public Utility Fees would be subject to regulation, and those
charges which would be actually deemed Public Utility Fees could still be revised,
depending on the outcome of PBAC's query on the matter with the Department of
Justice.

On September 26, 1996, AEDC informed the PBAC in writing of its

reservations as regards the Paircargo Consortium, which include:
1. The lack of corporate approvals and financial capability of PAIRCARGO;
2. The lack of corporate approvals and financial capability of PAGS;
3. The prohibition imposed by RA 337, as amended (the General Banking Act) on
the amount that Security Bank could legally invest in the project;
4. The inclusion of Siemens as a contractor of the PAIRCARGO Joint Venture, for
prequalification purposes; and
5. The appointment of Lufthansa as the facility operator, in view of the Philippine
requirement in the operation of a public utility.

The PBAC gave its reply on October 2, 1996, informing AEDC that it had
considered the issues raised by the latter, and that based on the documents

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Clee Ayra S. Carin ADR, JRMSU LAW II

submitted by Paircargo and the established prequalification criteria, the PBAC had
found that the challenger, Paircargo, had prequalified to undertake the project. The
Secretary of the DOTC approved the finding of the PBAC.

On October 16, 1996, the PBAC opened the third envelope submitted by
AEDC and the Paircargo Consortium containing their respective financial proposals.
Both proponents offered to build the NAIA Passenger Terminal III for at least $350
million at no cost to the government and to pay the government: 5% share in gross
revenues for the first five years of operation, 7.5% share in gross revenues for the
next ten years of operation, and 10% share in gross revenues for the last ten years
of operation, in accordance with the Bid Documents.

As AEDC failed to match the proposal within the 30-day period, then DOTC
Secretary Amado Lagdameo, on December 11, 1996, issued a notice to Paircargo
Consortium regarding AEDC's failure to match the proposal. AEDC subsequently
protested the alleged undue preference given to PIATCO and reiterated its
objections as regards the prequalification of PIATCO.

On July 12, 1997, the Government, through then DOTC Secretary Arturo T.
Enrile, and PIATCO, through its President, Henry T. Go, signed the "Concession
Agreement for the Build-Operate-and-Transfer Arrangement of the Ninoy Aquino
International Airport Passenger Terminal III" (1997 Concession Agreement). The
Government granted PIATCO the franchise to operate and maintain the said terminal
during the concession period and to collect the fees, rentals and other charges in
accordance with the rates or schedules stipulated in the 1997 Concession
Agreement. The Agreement provided that the concession period shall be for twenty-
five (25) years commencing from the in-service date, and may be renewed at the
option of the Government for a period not exceeding twenty-five (25) years. At the
end of the concession period, PIATCO shall transfer the development facility to
MIAA.

During the pendency of the case before this Court, President Gloria
Macapagal Arroyo, on November 29, 2002, in her speech at the 2002 Golden Shell
Export Awards at Malacañang Palace, stated that she will not "honor (PIATCO)
contracts which the Executive Branch's legal offices have concluded (as) null and
void."

ISSUE:
Whether or not the State can temporarily take over a business affected with
public interest.

RULING:
Yes. PIATCO cannot, by mere contractual stipulation, contravene the
Constitutional provision on temporary government takeover and obligate the
government to pay “reasonable cost for the use of the Terminal and/or Terminal
Complex.”

Article XII, Section 17 of the 1987 Constitution provides, “In times of national
emergency, when the public interest so requires, the State may, during the

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Clee Ayra S. Carin ADR, JRMSU LAW II

emergency and under reasonable terms prescribed by it, temporarily take over or
direct the operation of any privately owned public utility or business affected with
public interest.”

The above provision pertains to the right of the State in times of national
emergency, and in the exercise of its police power, to temporarily take over the
operation of any business affected with public interest. The duration of the
emergency itself is the determining factor as to how long the temporary takeover by
the government would last. The temporary takeover by the government extends only
to the operation of the business and not to the ownership thereof. As such the
government is not required to compensate the private entity-owner of the said
business as there is no transfer of ownership, whether permanent or temporary. The
private entity-owner affected by the temporary takeover cannot, likewise, claim just
compensation for the use of the said business and its properties as the temporary
takeover by the government is in exercise of its police power and not of its power of
eminent domain.

Article XII, section 17 of the 1987 Constitution envisions a situation wherein

the exigencies of the times necessitate the government to “temporarily take over or
direct the operation of any privately owned public utility or business affected with
public interest.” It is the welfare and interest of the public which is the paramount
consideration in determining whether or not to temporarily take over a particular
business. Clearly, the State in effecting the temporary takeover is exercising its
police power. Police power is the “most essential, insistent, and illimitable of powers.”
Its exercise therefore must not be unreasonably hampered nor its exercise be a
source of obligation by the government in the absence of damage due to
arbitrariness of its exercise. Thus, requiring the government to pay reasonable
compensation for the reasonable use of the property pursuant to the operation of the
business contravenes the Constitution.

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