[10] JG Summit Holdings Inc. v.
CA in control of a public utility must have devoted it to such use that the public generally
G.R. No. 124293 | September 24, 2003 | Puno, J.
TOPIC: Not a public utility
SUMMARY: National Investment and Development Corporation (NIDC) and Kawasaki
Heavy Industries, Ltd. (Kawasaki), a Japanese Corporation, entered into a joint
venture agreement (JVA) for a shipyard business, Philippine Shipyard and Engineering
Corporation (PHILSECO), with an agreement of a shareholding proportion of 60%-40
respectively and a right of first refusal to Kawasaki. Thereafter, NIDC transferred all
its rights, title, and interest to the Philippine National Bank (PNB). After several
months, by virtue of AO 14, PNB's interest in PHILSECO was transferred to the
National Government. Then President Aquino’s Proclamation No. 50 was issued
establishing the Committee on Privatization (COP) and the Asset Privatization Trust
(APT) to take title to and possession of, conserve, manage, and dispose of non-
performing assets of the National Government. A trust agreement was entered into
between the National Government and the APT by virtue of which the latter was
named the trustee of the National Government's share in PHILSECO. As a result of a
quasi-reorganization of PHILSECO to settle its huge obligations to PNB, the National
Government's shareholdings in PHILSECO increased to 97.41% thereby reducing
Kawasaki's shareholdings to 2.59%. After negotiations, it was agreed that Kawasaki’s
right of first refusal under the JVA be “exchanged” for the right to top by 5% the
highest bid for said shares. Kawasaki informed that Philyards Holdings, Inc. (PHI), in
which it was a stockholder, would exercise this right in its stead. JG Summit Holdings
was declared highest bidder. Even so, because of the right to top by 5% percent the
highest bid, Kawasaki/PHI’s was able to top the winning bid. JG Summit protested,
contending that PHILSECO, as a shipyard is a public utility and, hence, must observe
the 60%-40% Filipino-foreign capitalization. By buying 87.67% of PHILSECO’s capital
stock at bidding, Kawasaki/PHI in effect now owns more than 40% of the stock, thus
violative of the laws. The Court ruled that PHILSECO is not considered as a public
utility.
DOCTRINE: 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." To constitute a
public utility, the facility must be necessary for the maintenance of life and
occupation of the residents. However, the fact that a business offers services or
goods that promote public good and serve the interest of the public does not
automatically make it a public utility. Public' use is not synonymous with public
interest. As its name indicates, the term "public utility" implies public use and service
to the public.
The principal determinative characteristic of a public utility is that of service to, or
readiness to serve, an indefinite public or portion of the public as such which has a
legal right to demand and receive its services or commodities. The owner or person
or that part of the public which has been served and has accepted the service, has the
right to demand that use or service so long as it is continued, with reasonable
efficiency and under proper charges. Unlike a private enterprise which independently
determines whom it will serve, a "public utility holds out generally and may not refuse
legitimate demand for service."
FACTS:
● NIDC entered into a JVA with Kawasaki for the construction, operation, and
management of the Subic National Shipyard (SNS) which subsequently became
PHILSECO.
● Under the JVA, NIDC and Kawasaki will contribute P330M for the capitalization of
PHILSECO, in the proportion of 60-40% respectively.
o Grant of right of first refusal should either of them decide to sell, assign, or
transfer its interest in the JVA
● NIDC transferred all its rights, title, and interest in PHILSECO to PNB.
o This was subsequently transferred to the government pursuant to AO
No. 14.
● President Aquino issued Proclamation No. 50 establishing the COP and APT to
take title to, and possession of, conserve, manage, and dispose of non-
performing assets of the government.
o A trust agreement was entered into between the government and APT
wherein APT was named the trustee of the government’s share in
PHILSECO.
● In a result of a quasi-reorganization of PHILSECO to settle its huge obligation to
PNB, the government shareholdings in PHILSECO increased to 97.41% reducing
Kawasaki’s shareholdings to 2.59%
● In the interest of national economy and the government, COP and APT deemed
it best to sell the government’s share in PHILSECO to private entities. APT and
KAWASAKI agreed that Kawasaki’s right to first refusal under the JVA be
exchanged for the right to top by 5% the highest bid.
o Also agreed that KAWASAKI would be entitled to name a company in
which it was a stockholder, which could exercise the right to top.
o Kawasaki informed APT that PHI would exercise its right to top.
● At the pre-bidding conference, interested bidders were given copies of the JVA
and Asset Specific Bidding Rules (ASBR).
o The provisions of ASBR were explained to the bidders who were notified
of the date of bidding
● PUBLIC BIDDING
o JG Summit submitted a bid of P2.03B with an acknowledgment of
Kawasaki/PHI’s right to top.
o JG Summit was declared the highest bidder. COP approved the sale,
subject to the right of KAWASAKI/PHI to top the bid by 5%.
o JG Summit informed APT that it was protesting the offer of PHI to top
its bid on the grounds that:
 ▪ Kawasaki/PHI consortium composed of Kawasaki, PHI, Mitsui,
Keppel SM Group, ICTSI, and Insular Life violated the ASBR
because the last four companies were losing bidders thereby
circumventing the law and prejudicing the weak winning bidder
▪ Only Kawasaki could exercise the right to top
▪ Giving the same option to top to PHI constituted unwarranted
benefit to a third party
▪ No right of first refusal can be exercised in a public bidding or
auction sale
▪ JG Summit consortium was not estopped from questioning
proceedings
▪ JG Summit was notified that PHI had fully paid the balance of
the purchase price of the bidding – APT notified JG SUMMIT
that PHI had exercised its option to top the highest bid and that
COP had approved it
▪ APT and PHI executed a Stock Purchase Agreement
● JG SUMMIT filed with SC a petition for mandamus. This was referred to the CA.
● CA denied.
o Petition not the right remedy to question constitutionality or legality of
the right of first refusal and right to top
o Right to first refusal and right to top are prima facie legal and that JG
SUMMIT in participating in the bidding with full knowledge of the right to
top granted is estopped from questioning validity of the award given to
PHI. MR denied.
● Petition for Certiorari was filed before the Supreme Court.
● ASSAILED SC DECISION: CA erred when it dismissed the petition on the sole
ground of impropriety of the special civil action of mandamus because the
petition was also one for certiorari
o A shipyard, like PHILSECO, is a public utility whose capitalization must be
60% Filipino owned.
o The right to top granted to Kawasaki under ASBR drafted for the sale of
equity of the government is illegal – not only because it violates the rules on
competitive bidding but because it allows foreign corporation to own 40%
equity in the shipyard.
ISSUES + RATIO:
1. [RELEVANT] Is PHILSECO a public utility? No.
A. By nature, a shipyard is not a public utility.
● PUBLIC UTILITY: 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.
● To constitute a public utility, the facility must be necessary for the
maintenance of life and occupation of the residents
● Implies public use and service to the public
● Principal Determinative Characteristic = that of service to, or readiness
to serve, an indefinite public or portion of the public as such which has a
legal right to demand and receive its services or commodities.
● The owner or person in control of a public utility must have devoted it to
such use that the public generally or that part of the public which has
been served and has accepted the service, has the right to demand that
use or service so long as it is continued, with reasonable efficiency and
under proper charges.
● Unlike a private enterprise which independently determines whom it will
serve, a public utility holds out generally and may not refuse legitimate
demand for service.
Iloilo Ice and Cold Storage Co v. Public Utility Board: Public use means the same as
use by the public. The essential feature of the public use is that it is not confined to
privileged individuals but is open to the indefinite public. It is this indefinite or
unrestricted quality that gives it its public character. 
● Whether a use is public: look not only to the character of the business to be
done, but also to the proposed mode of doing it
● If the use is merely optional with the owners, or the public benefit is merely
incidental: it is not public use, authorizing the exercise of jurisdiction of the
public utility commission
● There must be, in general, a right which the law compels the owner to give to the
general public – not enough that the general prosperity of the public is promoted
● PUBLIC USE IS NOT SYNONYMOUS WITH PUBLIC INTEREST
● The true criterion by which to judge the character of the use is whether the
public may enjoy it by right or only by permission
In this case, a shipyard is not a public utility.
● A shipyard is a place or enclosure where ships are built or repaired – its nature
dictates that it serves but a limited clientele whom it may choose to serve at its
discretion.
● While it offers its facilities to whoever may wish to avail of its services,  a
shipyard is not legally obliged to render its services indiscriminately to the
public. It has no legal obligation to render the services sought by each and every
client. The fact that it publicly offers its services does not give the public a legal
right to demand that such services be rendered.
● A private business operated under private contracts with selected customers and
not devoted to public use cannot, by legislative fiat or by order of a public service
commission, be declared a public utility since that would amount to taking
private property for public use without just compensation
● Unlike commodities or services traditionally regarded as public utilities such as
electricity, gas, water, transportation, telephone or telegraph service,
automobile, aircraft manufacturing, ship building, and ship repair serve the
public only incidentally.
 B. There is no law declaring a shipyard as public utility.
● Since the enactment of Act No. 2307 creating the Public Utility
Commission until its repeal by CA No. 146, establishing the Public
Service Commission, a shipyard, by legislative declaration, has been
considered a public utility
o A Certificate of Public Convenience from PSC to the effect that the
operation of the said service and the authorization to do business
will promote the public interests in a proper and suitable manner is
required before any person or corporation may operate a shipyard
o Section 8, Art XIII 1935 Constitution – citizenship requirement
(60% owned by citizens of the PH)
● To accelerate development of shipbuilding and ship repair industry,
Pres. Marcos issued PD No. 666 granting incentives such as exemption
from taxes, accelerated depreciation, etc. PD 666 removed the industry
from the list of public utilities thereby freeing it from the citizenship
requirement and from the need to obtain a Certificate from PSC
● BP Blg. 391 Investment Incentive Policy – laid down general policy of the
government to encourage private domestic and foreign investments in the
various sectors of the economy
o With the new incentive regime, BP Blg. 391 repealed Sec 1 PD 666
(consequence = provisions of CA 146 impliedly repealed by PD 666
were revived = shipyard reverted back to its status as public utility)
● EO No. 226 – did not revive Sec 1 PD 666; revival of Sec 13(b) and 15 of CA
146 had no more leg to stand on (A repealed statute cannot be the basis for
classifying shipyards as public utilities)
This interpretation is in accord with the uniform interpretation placed upon it by the
Board of Investments which had consistently classified shipyards as part of the
manufacturing sector and not of the public utilities sector
● Of the 441 Ship Building and Ship Repair entitles registered with MARINA, none
appears to have an existing franchise
OTHER ISSUES:
1. Under the 1977 Joint Venture Agreement, can Kawasaki purchase only a
maximum of 40% of PHILSECO’s total capitalization? NO.
a. Under the JVA, the parties agreed to the amount of P330M as the total
capitalization of the joint venture – no mention of the amount of their
initial subscription
i. The phrase maintaining a proportion of 60%-40% refers to their
respective share of the burden each time the Board of
Directors decides to increase the subscription to reach the
target paid-up capital of P312 million. It does not bind the
parties to maintain the sharing scheme all throughout the
existence of their partnership.
ii. The theory that KAWASAKI can acquire, as a maximum, only
40% of PHILSECOs shares is correct only if a shipyard is a
public utility. (Since it is not, and no other restriction is
present, there is nothing to limit the right of KAWASAKI to
purchase the government’s share to 40% of PHILSECO’s total
capitalization)
2. Is the right to top granted to KAWASAKI in exchange for its right of first refusal
violative of the principles of competitive bidding? NO.
a. In this case, the sale was publicly known. All interested bidders were
welcomed. The basis for comparing the bids were laid down. All bids
were accepted, sealed and were opened and read in the presence of the
COAs official representative and before all interested bidders. Existence
of KAWASAKI’s right to top does not destroy the essence of competitive
bidding so as to say that the bidders did not have an opportunity for
competition
b. RESPONDENTS did not circumvent the requirements for bidding by
granting Kawasaki, a non-bidder, the right to top the highest bidder.
c. None of the parties questions the existence of Kawasaki’s right of first
refusal, which is the basis for the grant of the right to top. Under
Kawasaki’s right of first refusal, the government is under the obligation
to give preferential right to KAWASAKI in the event it decides to sell its
shares in PHILSECO. It has to offer to KAWASAKI the shares and give it
the option to buy or refuse under the same terms for which it is willing
to sell the said shares to third parties. KAWASAKI is not a mere non-
bidder. It is a partner in the joint venture; the incidents of which are
governed by the law on contracts and on partnership.
d. Assuming that the parties did not swap KAWASAKIs right of first refusal
with the right to top, KAWASAKI would have been able to buy the
National Governments shares in PHILSECO under the same terms as
offered by the highest bidder (by the exercise of his right of first refusal).
RULING: WHEREFORE, MR granted; CA affirmed.
PROVISIONS:
Section 8, Article XIII, 1935 Constitution
Sec. 8. No franchise, certificate, or any other form or 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 National Assembly when the public interest so requires. 
PD No. 666 the Armed Forces of the Philippines or by foreign governments pursuant to a
SECTION 1. Shipbuilding and ship repair yards duly registered with the Maritime treaty or agreement. 
Industry Authority shall be entitled to the following incentive benefits:
(a) Exemption from import duties and taxes.- The importation of machinery,
equipment and materials for shipbuilding, ship repair and/or alteration, including
indirect import, as well as replacement and spare parts for the repair and
overhaul of vessels such as steel plates, electrical machinery and electronic
parts, shall be exempt from the payment of customs duty and compensating tax:
Provided, however, That the Maritime Industry Authority certifies that the item or
items imported are not produced locally in sufficient quantity and acceptable
quality at reasonable prices, and that the importation is directly and actually
needed and will be used exclusively for the construction, repair, alteration, or
overhaul of merchant vessels, and other watercrafts; Provided, further, That if the
above machinery, equipment, materials and spare parts are sold to non-tax
exempt persons or entities, the corresponding duties and taxes shall be paid by
the original importer; Provided, finally, That local dealers and/or agents who sell
machinery, equipment, materials and accessories to shipyards for shipbuilding
and ship repair are entitled to tax credits, subject to approval by the total tariff
duties and compensating tax paid for said machinery, equipment, materials and
accessories.
(b) Accelerated depreciation.- Industrial plant and equipment may, at the option of
the shipbuilder and ship repairer, be depreciated for any number of years
between five years and expected economic life.
(c) Exemption from contractors percentage tax.- The gross receipts derived by
shipbuilders and ship repairers from shipbuilding and ship repairing activities
shall be exempt from the Contractors Tax provided in Section 91 of the National
Internal Revenue Code during the first ten years from registration with the
Maritime Industry Authority, provided that such registration is effected not later
than the year 1990; Provided, That any and all amounts which would otherwise
have been paid as contractors tax shall be set aside as a separate fund, to be
known as Shipyard Development Fund, by the contractor for the purpose of
expansion, modernization and/or improvement of the contractors own
shipbuilding or ship repairing facilities; Provided, That, for this purpose, the
contractor shall submit an annual statement of its receipts to the Maritime
Industry Authority; and Provided, further, That any disbursement from such fund
for any of the purposes hereinabove stated shall be subject to approval by the
Maritime Industry Authority.
(d) Registration required but not as a Public Utility.- The business of constructing
and repairing vessels or parts thereof shall not be considered a public utility and
no Certificate of Public Convenience shall be required therefor. However, no
shipyard, graving dock, marine railway or marine repair shop and no person or
enterprise shall engage in construction and/or repair of any vessel, or any phase
or part thereof, without a valid Certificate of Registration and license for this
purpose from the Maritime Industry Authority, except those owned or operated by