B2022 REPORTS ANNOTATED
Kilosbayan v Guingona Kilosbayan v Guingona
I. Recit-ready summary
Kilosbayan is filing to protest PCSO’s entering into a Contract of
Lease with Berjaya Group Berhadto to establish an on-line lottery system.
Berjaya set up a local company, PGMC, through which assistance would
be offered to PCSO. The contract provides that PGMC will build and
maintain all facilities needed at its own expense, and at the end of the 8-
year lease term, the facilities would revert to PCSO. Kilosbayan is
claiming that this violates section 1 of RA 1169 (the PCSO charter),
which prohibits PCSO from holding lotteries in collaboration, association,
or joint venture with any person, association, or entity.
Issue is WON the Lease Contract is legal and valid vis-à-vis RA 1169 as
amended by BP 42 which prohibits PCSO from holding and conducting
lotteries "in collaboration, association or joint venture with any person,
association, company or entity, whether domestic or foreign." No, the
Contract of Lease violates the Charter and is therefore invalid.
Section 1 of RA 1169 as amended by BP 42 prohibits the PCSO from
holding and conducting lotteries “in collaboration, association, or joint
venture with any person, association, company or entity, whether
domestic and foreign.” Collaboration is defined as the acts of working
together in a joint project. Association means the act of a number of
persons in uniting together for some special purpose or business. Joint
venture is defined as an association of persons or companies jointly
undertaking some commercial enterprise; generally all contribute assets
and share risks. The
SC believes that, despite the name of the contract being a “Contract of
Lease”, it is actually either a collaboration, an association, or a joint
venture. The terms of the contract reveal that PCSO will provide its
franchise to operate the on-line lottery system, while everything else,
including the risks, shall be borne by the bidder PGMC (maintain and
upgrade the facilities, bear all expenses needed to operate the on-line
lottery system, comply with rules, and train PCSO personnel for eventual
take-over of the on-line lottery system. These conditions show that PGMC
is indispensable in the running of the on-line lottery system; they show
that both parties have interest in the on-line lottery, and in fact it is PGMC
bearing the greater burden of expenses and risks, and thus clearly a joint
G.R. NO 113375
ARTICLE; TOPIC OF CASE: Joint Ventures—Informal JV arrangements
May 5, 1994
venture exists. Petition granted, lease contract declared invalid for being
contrary to law
II. Facts of the case
This is a petition seeking to prohibit and restrain the implementation of
the “Contract of Lease” executed by PCSO and Philippine Gaming
Management Corporation (PGMC) in connection with online lottery system
—also known as “lotto.”
Pursuant to Sec. 1 of PCSO’s charter, which granted to them the
authority to hold and conduct “charity sweepstakes races, lotteries, and
other similar activities,” PCSO decided to establish an online lottery system
to increase their revenue base and diversify the source of their funds. Upon
learning of this, the Berjaya Group Berhad (Group), a multinational
company in Malaysia engaged in successful lottery operations in Asia,
running both Lotto and Digit games, thru its subsidiary, Sports Toto
Malaysia," with its "affiliate, the International Totalizator Systems, Inc., . . .
an American public company engaged in the international sale or provision
of computer systems, became interested and offered their services and
resources to PCSO.
Thus, the Group and some Filipino investors organized a Philippine
corporation known as the Philippine Gaming Management Corporation
(PGMC) intended to be the medium where the technical and management
services required for the project would be offered and delivered to PCSO.
PCSO then formally issued a Request for Proposal for the Lease
Contract of on-line lottery system for PCSO. (Provisions are in the notes).
Considering the citizenship requirement, PGMC claims that the Group will
reduce their equity stake to 40% by selling 35% out of the 75% foreign
stockholdings to the local investors. Thereafter, PGMC submitted their bid
to PCSO. This was then submitted to the Office of the President.
The OP gave the go-signal to PGMC to operate the online lottery
system and that the implementing contract would be submitted not later
than Nov. 8, 1993 for final clearance and approval by the Chief Executive.
This was published in various newspapers of general circulation.
PONENTE: Davide, J.
DIGEST MAKER: Alec
 B2022 REPORTS ANNOTATED
Kilosbayan v Guingona
On Nov. 4, 1993, KILOSBAYAN sent an open letter to President Fidel
V. Ramos opposing the setting up of the lottery system, claiming that it has
serious moral and ethical considerations. But despite this, it was reported by
the media that Malacañang will push through with it and that it is PCSO
which will operate the lottery while the winning corporate bidders are
merely the “lessors.” KILOSBAYAN requested copies of all documents
related to the lottery aware from Executive Secretary Guingona, who
promised to deliver it before the end of the month. But on that same day, an
agreement entitled “Contract of Lease” was finally executed by PCSO and
PGMC and this was approved by the President. (Contract of Lease
provisions in notes)
Thus, KILOSBAYAN, with its co-petitioners filed a petition where
they claim that that the Office of the President, Executive Secretary, PCSO
GADALEJ-ed by: (1) approving the award of the contract to and (2)
entering into the “contract of lease” with PGMC for the installation and
operation of the online lottery system considering that:
1. PCSO is prohibiting from holding and conducting lotteries in
collaboration, association, or joint venture with any person,
association, company or entity (based on their charter)
2. A congressional franchise is required before any person can
establish and operate a telecommunication system (Under Act
3846)
3. PGMC is disqualified from operating a public service with less
than 60% Filipino-owned and/or controlled corporation (Under
Art. XII of Constitution)
4. PGMC is not authorized by its character and under Foreign
Investment Act to install, establish, and operate online lotto and
telecommunication systems.
Thus, petitioners pray that SC issue a temporary restraining order and a
writ of preliminary injunction commanding the respondents to cease and
desist from implementing the challenged Contract of Lease and, render
judgment declaring the Contract of Lease void and without effect and
making the injunction permanent.
In reply, PGMC asserts that:
1. They are only an independent contractor of a piece of work and not
a co-operator of the lottery franchise with PCSO,
G.R. NO 113375
ARTICLE; TOPIC OF CASE: Joint Ventures—Informal JV arrangements
May 5, 1994
Kilosbayan v Guingona
a. Thus they are not engaged in gambling or in public
service relative to telecommunications network, which
petitioners regard as an indispensable requirement of an
online lottery system
2. PCSO is not sharing franchise in collaboration, association, or
joint venture with PGMC
3. It states that the execution and implementation of the contract does
not violate the Constitution and the laws;
4. The issue on the "morality" of the lottery franchise granted to the
PCSO is political and not judicial or legal, which should be
ventilated in another forum
5. Petitioners do not appear to have the legal standing or real interest
in the subject contract and in obtaining the reliefs sought.
The SolGen, Executive Secretary Guingona, Assistant Executive Secretary
Renato Corona, and PCSO maintain the ff.:
1. Petitioners’ interpretation of “in collaboration, association or joint
venture” ignores the reality that PCSO, as a corporate entity, is
vested with the basic and essential prerogative to enter into all
kinds of transactions or contracts which are necessary to attain
their purpose and objectives.
a. What PCSO Charter seeks to prohibit is an agreement
akin to a joint venture or partnership where there is a
community of interest in the business, sharing of profits
and losses, and a mutual right of control, a characteristic
which is not present in the contract of lease.
b. The role of PGMC is limited to that of a lessor of the
facilities for the online lottery system, much like a
contract of a piece of work.
c. They further claim that the establishment of the
telecommunications system stipulated in the Contract of
Lease does not require a congressional franchise because
PGMC will not operate a public utility;
i. Even granting arguendo that PGMC is a public
utility, it can establish a telecommunications
system even without a legislative franchise
because not every public utility is required to
secure a legislative franchise before it could
establish, maintain, and operate the service
PONENTE: Davide, J.
DIGEST MAKER: Alec
 B2022 REPORTS ANNOTATED
Kilosbayan v Guingona
In the deliberations of the case, the court sought to consider only the
following issues and ruled as follows:
1. Locus standi of petitioners  7 justices voted to sustain locus
standi while 6 didn’t
2. Legality and validity of Lease Contract vis-à-vis RA 1169 as
amended by BP 42 which prohibits PCSO from holding and
conducting lotteries "in collaboration, association or joint venture
with any person, association, company or entity, whether
domestic or foreign."  7 justices held that the Contract of Lease
is invalid, while 6 didn’t want to express any opinion since they
considered the petitioners to have no standing. CJ didn’t take part
because his brother-in-law is one of the Directors of PCSO
III. Issue/s
WON the Lease Contract is legal and valid vis-à-vis RA 1169 as amended
by BP 42 which prohibits PCSO from holding and conducting lotteries "in
collaboration, association or joint venture with any person, association,
company or entity, whether domestic or foreign." No, the Contract of
Lease violates the Charter and is therefore invalid.
IV. Ratio/Legal Basis
Section 1 of RA 1169 amended by BP 42 provides:
"Sec. 1. The Philippine Charity Sweepstakes Office.— The
Philippine Charity Sweepstakes Office, hereinafter designated the
Office, shall be the principal government agency for raising and
providing for funds for health programs, medical assistance and
services and charities of national character, and as such shall have
the general powers conferred in section thirteen of Act Numbered
One thousand four hundred fifty-nine, as amended, and shall have
the authority:
A. To hold and conduct charity sweepstakes races, lotteries and
other similar activities, in such frequency and manner, as shall be
determined, and subject to such rules and regulations as shall be
promulgated by the Board of Directors.
G.R. NO 113375
ARTICLE; TOPIC OF CASE: Joint Ventures—Informal JV arrangements
May 5, 1994
Kilosbayan v Guingona
B. Subject to the approval of the Minister of Human Settlements, to
engage in health and welfare-related investments, programs, projects
and activities which may be profit-oriented, by itself or in
collaboration, association or joint venture with any person,
association, company or entity, whether domestic or foreign, except
for the activities mentioned in the preceding paragraph (A), for the
purpose of providing for permanent and continuing sources of funds
for health programs, including the expansion of existing ones, medical
assistance and services, and/or charitable grants: Provided, That such
investments will not compete with the private sector in areas where
investments are adequate as may be determined by the National
Economic and Development Authority." (emphasis supplied)
SC held that by the exception explicitly made in paragraph B, Sec. 1
of the PCSO Charter, PCSO can’t share its franchise with another by way of
collaboration, association, or joint venture. It cannot also assign, transfer or
lease such franchise.
Moreover, SC agrees with the petitioners that, notwithstanding the
denomination or designation of the contract as a Contract of Lease, it still
violates the exceptions in Sec. 1, which prohibits PCSO from holding and
conducting lotteries “in collaboration, association, or joint venture” with
another. SC is also unconvinced by the argument of petitioners that they are
only an independent contract of a piece of work, thus they do not
contravene the law. Because the intention of the parties, which may be
gathered from the provisions of the contract itself, clearly show otherwise.
A careful analysis and evaluation of the provisions of the contract
and a consideration of the contemporaneous acts of the PCSO and
PGMC indubitably show that the contract is not in reality a contract of
lease under which PGMC is merely an independent contractor for a piece of
work, but one where the statutorily proscribed collaboration or association,
in the least, or joint venture, at the most, exists between the contracting
parties.
Collaboration means working together in a joint project. Association
means the act of a number of persons in uniting together for some special
purpose or business. Joint venture is an association of persons or
companies jointly undertaking some commercial enterprise; generally all
PONENTE: Davide, J.
DIGEST MAKER: Alec
 B2022 REPORTS ANNOTATED
Kilosbayan v Guingona
contribute assets and share risks. It requires a community of interest in the
performance of the subject matter, a right to direct and govern the policy in
connection therewith, and duty, which may be altered by agreement to share
both in profit and losses.
The contemporaneous acts of PCSO and PGMC reveals that PCSO
had neither funds of its own nor expertise to operate and manage an online
lottery system. These contemporaneous acts are:
1. PCSO said that they are seeking a suitable contractor to build, at
its own expense, all the facilities needed to operate and maintain
the system and
2. They will exclusively bear “all capital, operating expenses, and
expansion expenses and risks” and;
3. Submit a comprehensive nationwide lottery development
plan ...which will include the game, the marketing of the games,
and the logistics to introduce the game to all the cities and
municipalities of the country within five (5) years, and;
4. The operation of the on-line lottery system should be "at no
expense or risk to the government" — meaning itself, since it is a
government-owned and controlled agency.
In short, the only contribution PCSO will make is its franchise or
authority to operate the online lottery system, with the rest, including the
risk of business, borne by the proponent or bidder. This is why PCSO
warned that the proponent must be able to prove that it is an entitle able to
take on the role of responsible maintainer of the online lottery system.
PCSO made it clear that the proponent can propose a period of the contract
that doesn’t exceed 15 years and that it is assured of the rental which
doesn’t exceed 12% of gross receipts.
PGMC even admitted that upon learning of PCSO’s decision, the
Group and its affiliates wanted to offer their services and resources to
PCSO, thus they organized the PGMC as a medium which the technical and
management of the services for the project would be offered and delivered
to PCSO. This just proves that the Group knew that PCSO had nothing but
its franchise, which PCSO solemnly guaranteed it had as stated in the
General Information of their Request for Proposal. Thus, both parties knew,
from the inception, that necessarily leave to the PGMC the technical,
operations, and management aspects of the on-line lottery system while the
G.R. NO 113375
ARTICLE; TOPIC OF CASE: Joint Ventures—Informal JV arrangements
May 5, 1994
Kilosbayan v Guingona
PCSO would, primarily, provide the franchise. This intention is
incorporated in the Contract of Lease.
Thus, the Contract of Lease is not what it purports to be. It is
carefully crafted to provide a built-in defense in the event that the
agreement is violative of the exception is Sec. 1(B) of the PCSO charter.
But, it can be seen within its provisions that the parities intended to be
in or to have a joint venture for a period of 8 years in the operation and
maintenance of the online lottery system.
The joint venture is established by the following which confirm
PGMC’s indispensable role in the pursuit, operation, conduct, and
management of the online lottery system—with the PGMC bearing the
greatest burden because of its assumption of expenses and risks, and the
PCSO the least, because of its confessed unwillingness to bear expenses and
risks.
1. The risk-bearing provision in the rent, as defined in the lease
contract (which is the amount to be paid to PGMC as
compensation for the fulfillment of its obligation, including but
not limited to the lease of Facilities) is not a fixed amount but it
may be drastically reduced, or in extreme cases, nothing may be
due or demandable because PGMC binds itself to “bear all risks
of the revenue from the ticket sales,” is inherent in a joint-venture
and not in a lessor-lessee relationship
2. In event of any pre-termination of contract or suspension of
operation of the online lottery system in breach of the contract
and through no fault of PGMC, PCSO binds itself to “promptly,
and in any event not later than sixty (60) days, reimburse the
LESSOR the amount of its total investment cost associated with
the On-Line Lottery System, including but not limited to the cost
of the Facilities, and further compensate the LESSOR for loss of
expected net profit after tax, computed over the unexpired term of
the lease” is inherent in a joint venture because the payment of
expected profits or rentals for the unexpired portion should be
enough, if it were a contract of lease.
3. If it truly were a contract of lease, SC cannot comprehend why
PGMC should allow a restriction on the pursuit of “any activity or
business in competition with or adverse to the online lottery
system of PCSO unless it obtains their consent.”
PONENTE: Davide, J.
DIGEST MAKER: Alec
 B2022 REPORTS ANNOTATED May 5, 1994

Kilosbayan v Guingona Kilosbayan v Guingona

4. If PGMC was really only a lessor, the imposition of their Gaming Management Corporation (PGMC) is hereby DECLARED
obligation to provide PCSO with the audited Annual Report sent contrary to law and invalid.
to its stockholders, and within 2 years from the effectivity of the
contract, cause itself to be listed in the local stock exchange and VI. Notes
offer at least 25% of its equity to the public, is unreasonable and
whimsical and and could only be tied up to the fact that the
PGMC will actually operate and manage the system; hence,
increasing public participation in the corporation would enhance
public interest.
5. The PGMC shall put an Escrow Deposit of P300,000,000.00
pursuant to the requirements of the RFP, which it may, at its
option, maintain as its initial performance bond required to ensure
its faithful compliance with the terms of the contract.
6. The fact that PCSO shall designate the necessary personnel to
monitor and audit the daily performance of the on-line lottery
system; and promulgate procedural and coordinating rules
governing all activities relating to the on- line lottery system
confirms that PGMC will be the one to operate the system and
PCSO may monitor and audit the daily performance of the
system. This admits of coordinating and cooperative powers and
functions of the parties.
7. The PCSO may validly terminate the contract if the PGMC
becomes insolvent or bankrupt or is unable to pay its debts, or if it
stops or suspends or threatens to stop or suspend payment of all or
a material part of its debts.

Finally, SC held that in the light of the PCSO's Request for Proposal and the
above highlighted provisions (the reasons above why it is a joint venture),
as well as the "Hold Harmless Clause" of the Contract of Lease, it is safe to
conclude that the actual lessor in this case is the PCSO and the subject
matter thereof is its franchise to hold and conduct lotteries since it is, in
reality, the PGMC which operates and manages the on-line lottery system
for a period of eight years.

V. Disposition

WHEREFORE, the instant petition is hereby GRANTED and the

challenged Contract of Lease executed on 17 December 1993 by respondent
Philippine Charity Sweepstakes Office (PCSO) and respondent Philippine

G.R. NO 113375 PONENTE: Davide, J.

ARTICLE; TOPIC OF CASE: Joint Ventures—Informal JV arrangements DIGEST MAKER: Alec