G.R. No. L-21484 November 29, 1969 2.
1969 2. Whether or not the collective bargaining agreement between the petitioner and the respondent
THE AGRICULTURAL CREDIT and COOPERATIVE FINANCING ADMINISTRATION (ACCFA), petitioner,
vs.
ACCFA SUPERVISORS' ASSOCIATION, ACCFA WORKERS' ASSOCIATION, and THE COURT OF
INDUSTRIAL RELATIONS, respondents.
MAKALINTAL, J.:
These are two separate appeals by certiorari from the decision dated March 25, 1963 (G.R. No. L-21484) and
the order dated May 21, 1964 (G.R. No. L-23605) as affirmed by the resolutions en banc, of the Court of
Industrial Relations, in Cases Nos. 3450-ULP and 1327-MC, respectively. The parties, except the
Confederation of Unions in Government Corporations and Offices (CUGCO), being practically the same and
the principal issues involved related, only one decision is now rendered in these two cases.
The Agricultural Credit and Cooperative Financing Administration (ACCFA) was a government agency created
under Republic Act No. 821, as amended. Its administrative machinery was reorganized and its name
changed to Agricultural Credit Administration (ACA) under the Land Reform Code (Republic Act No. 3844). On
the other hand, the ACCFA Supervisors' Association (ASA) and the ACCFA Workers' Association (AWA),
hereinafter referred to as the Unions, are labor organizations composed of the supervisors and the rank-and-
file employees, respectively, in the ACCFA (now ACA).
G.R. No. L-21484
On September 4, 1961 a collective bargaining agreement, which was to be effective for a period of one (1)
year from July 1, 1961, was entered into by and between the Unions and the ACCFA. A few months thereafter,
the Unions started protesting against alleged violations and non-implementation of said agreement. Finally, on
October 25, 1962 the Unions declared a strike, which was ended when the strikers voluntarily returned to work
on November 26, 1962.
On October 30, 1962 the Unions, together with its mother union, the Confederation of Unions in Government
Corporations and Offices (CUGCO), filed a complaint with the Court of Industrial Relations against the ACCFA
(Case No. 3450-ULP) for having allegedly committed acts of unfair labor practice, namely: violation of the
collective bargaining agreement in order to discourage the members of the Unions in the exercise of their right
to self-organization, discrimination against said members in the matter of promotions, and refusal to bargain.
The ACCFA denied the charges and interposed as affirmative and special defenses lack of jurisdiction of the
CIR over the case, illegality of the bargaining contract, expiration of said contract and lack of approval by the
office of the President of the fringe benefits provided for therein. Brushing aside the foregoing defenses, the
CIR in its decision dated March 25, 1963 ordered the ACCFA:
1. To cease and desist from committing further acts tending to discourage the members of
complainant unions in the exercise of their right to self-organization;
2. To comply with and implement the provision of the collective bargaining contract executed on
September 4, 1961, including the payment of P30.00 a month living allowance;
3. To bargain in good faith and expeditiously with the herein complainants.
The ACCFA moved to reconsider but was turned down in a resolution dated April 25, 1963 of the CIR en banc.
Thereupon it brought this appeal by certiorari.
The ACCFA raises the following issues in its petition, to wit:
1. Whether or not the respondent court has jurisdiction over this case, which in turn depends on
whether or not ACCFA exercised governmental or proprietary functions.
union is valid; if valid, whether or not it has already lapsed; and if not, whether or not its (sic) fringe
benefits are already enforceable.
3. Whether or not there is a legal and/or factual basis for the finding of the respondent court that
the petitioner had committed acts of unfair labor practice.
4. Whether or not it is within the competence of the court to enforce the collective bargaining
agreement between the petitioner and the respondent unions, the same having already expired.
G.R. No. L-23605
During the pendency of the above mentioned case (G.R. No. L-21484), specifically on August 8, 1963, the
President of the Philippines signed into law the Agricultural Land Reform Code (Republic Act No. 3844), which
among other things required the reorganization of the administrative machinery of the Agricultural Credit and
Cooperative Financing Administration (ACCFA) and changed its name to Agricultural Credit Administration
(ACA). On March 17, 1964 the ACCFA Supervisors' Association and the ACCFA Workers' Association filed a
petition for certification election with the Court of Industrial Relations (Case No. 1327-MC) praying that they be
certified as the exclusive bargaining agents for the supervisors and rank-and-file employees, respectively, in
the ACA. The trial Court in its order dated March 30, 1964 directed the Manager or Officer-in-Charge of the
ACA to allow the posting of said order "for the information of all employees and workers thereof," and to
answer the petition. In compliance therewith, the ACA, while admitting most of the allegations in the petition,
denied that the Unions represented the majority of the supervisors and rank-and-file workers, respectively, in
the ACA. It further alleged that the petition was premature, that the ACA was not the proper party to be notified
and to answer the petition, and that the employees and supervisors could not lawfully become members of the
Unions, nor be represented by them. However, in a joint manifestation of the Unions dated May 7, 1964, with
the conformity of the ACA Administrator and of the Agrarian Counsel in his capacity as such and as counsel
for the National Land Reform Council, it was agreed "that the union petitioners in this case represent the
majority of the employees in their respective bargaining units" and that only the legal issues raised would be
submitted for the resolution of the trial Court.
Finding the remaining grounds for ACA's opposition to the petition to be without merit, the trial Court in its
order dated May 21, 1964 certified "the ACCFA Workers' Association and the ACCFA Supervisors'
Association as the sole and exclusive bargaining representatives of the rank-and-file employees and
supervisors, respectively, of the Agricultural Credit Administration." Said order was affirmed by the CIR en
banc in its resolution dated August 24, 1964.
On October 2, 1964 the ACA filed in this Court a petition for certiorari with urgent motion to stay the CIR order
of May 21, 1964. In a resolution dated October 6, 1964, this Court dismissed the petition for "lack of adequate
allegations," but the dismissal was later reconsidered when the ACA complied with the formal requirement
stated in said resolution. As prayed for, this Court ordered the CIR to stay the execution of its order of May 21,
1964.
In this appeal, the ACA in effect challenges the jurisdiction of the CIR to entertain the petition of the Unions for
certification election on the ground that it (ACA) is engaged in governmental functions. The Unions join the
issue on this single point, contending that the ACA forms proprietary functions.
Under Section 3 of the Agricultural Land Reform Code the ACA was established, among other governmental
agencies,1 to extend credit and similar assistance to agriculture, in pursuance of the policy enunciated in
Section 2 as follows:
SEC. 2. Declaration of Policy. It is the policy of the State:
(1) To establish owner-cultivatorships and the economic family-size farm as the basis of Philippine
agriculture and, as a consequence, divert landlord capital in agriculture to industrial development;
(2) To achieve a dignified existence for the small farmers free from pernicious institutional
restraints and practices;
 (3) To create a truly viable social and economic structure in agriculture conducive to greater
productivity and higher farm incomes;
(4) To apply all labor laws equally and without discrimination to both industrial and agricultural
wage earners;
(5) To provide a more vigorous and systematic land resettlement program and public land
distribution; and
(6) To make the small farmers more independent, self-reliant and responsible citizens, and a
source of genuine strength in our democratic society.
The implementation of the policy thus enunciated, insofar as the role of the ACA therein is concerned, is
spelled out in Sections 110 to 118, inclusive, of the Land Reform Code. Section 110 provides that "the
administrative machinery of the ACCFA shall be reorganized to enable it to align its activities with the
requirements and objective of this Code and shall be known as the Agricultural Credit Administration." Under
Section 112 the sum of P150,000,000 was appropriated out of national funds to finance the additional credit
functions of the ACA as a result of the land reform program laid down in the Code. Section 103 grants the
ACA the privilege of rediscounting with the Central Bank, the Development Bank of the Philippines and the
Philippine National Bank. Section 105 directs the loaning activities of the ACA "to stimulate the development of
farmers' cooperatives," including those "relating to the production and marketing of agricultural products and
those formed to manage and/or own, on a cooperative basis, services and facilities, such as irrigation and
transport systems, established to support production and/or marketing of agricultural products." Section 106
deals with the extension by ACA of credit to small farmers in order to stimulate agricultural production.
Sections 107 to 112 lay down certain guidelines to be followed in connection with the granting of loans, such
as security, interest and supervision of credit. Sections 113 to 118, inclusive, invest the ACA with certain rights
and powers not accorded to non-governmental entities, thus:
SEC. 113. Auditing of Operations. For the effective supervision of farmers' cooperatives, the
head of the Agricultural Credit Administration shall have the power to audit their operations,
records and books of account and to issue subpoena and subpoena duces tecum to compel the
attendance of witnesses and the production of books, documents and records in the conduct of
such audit or of any inquiry into their affairs. Any person who, without lawful cause, fails to obey
such subpoena or subpoena duces tecum shall, upon application of the head of Agricultural Credit
Administration with the proper court, be liable to punishment for contempt in the manner provided
by law and if he is an officer of the Association, to suspension or removal from office.
SEC. 114. Prosecution of officials. The Agricultural Credit Administration, through the
appropriate provincial or city fiscal, shall have the power to file and prosecute any and all actions
which it may have against any and all officials or employees of farmers' cooperatives arising from
misfeasance or malfeasance in office.
SEC. 115. Free Notarial Service. Any justice of the peace, in his capacity as notary ex-officio,
shall render service free of charge to any person applying for a loan under this Code either in
administering the oath or in the acknowledgment of instruments relating to such loan.
SEC. 116. Free Registration of Deeds. Any register of deeds shall accept for registration, free of
charge any instrument relative to a loan made under this Code.
SEC. 117. Writing-off Unsecured and Outstanding Loans. Subject to the approval of the
President upon recommendation of the Auditor General, the Agricultural Credit Administration may
write-off from its books, unsecured and outstanding loans and accounts receivable which may
become uncollectible by reason of the death or disappearance of the debtor, should there be no
visible means of collecting the same in the foreseeable future, or where the debtor has been
verified to have no income or property whatsoever with which to effect payment. In all cases, the
writing-off shall be after five years from the date the debtor defaults.
SEC. 118. Exemption from Duties, Taxes and Levies. The Agricultural Credit Administration is
hereby exempted from the payment of all duties, taxes, levies, and fees, including docket and
sheriff's fees, of whatever nature or kind, in the performance of its functions and in the exercise of
its powers hereunder.
The power to audit the operations of farmers' cooperatives and otherwise inquire into their affairs, as given by
Section 113, is in the nature of the visitorial power of the sovereign, which only a government agency specially
delegated to do so by the Congress may legally exercise.
On March 19, 1964 Executive Order No. 75 was promulgated. It is entitled: "Rendering in Full Force and Effect
the Plan of Reorganization Proposed by the Special Committee on Reorganization of Agencies for Land
Reform for the Administrative Machinery of the Agricultural Land Reform Code," and contains the following
pertinent provisions:
Section 3. The Land Reform Project Administration2 shall be considered a single organization and
the personnel complement of the member agencies including the legal officers of the Office of the
Agrarian Counsel which shall provide legal services to the LRPA shall be regarded as one
personnel pool from which the requirements of the operations shall be drawn and subject only to
the civil service laws, rules and regulations, persons from one agency may be freely assigned to
positions in another agency within the LRPA when the interest of the service so demands.
Section 4. The Land Reform Project Administration shall be considered as one organization with
respect to the standardization of job descriptions position classification and wage and salary
structures to the end that positions involving the same or equivalent qualifications and equal
responsibilities and effort shall have the same remuneration.
Section 5. The Civil Service laws, rules and regulations with respect to promotions, particularly in
the consideration of person next in rank, shall be made applicable to the Land Reform Project
Administration as a single agency so that qualified individuals in one member agency must be
considered in considering promotion to higher positions in another member agency.
The implementation of the land reform program of the government according to Republic Act No. 3844 is most
certainly a governmental, not a proprietary, function; and for that purpose Executive Order No. 75 has placed
the ACA under the Land Reform Project Administration together with the other member agencies, the
personnel complement of all of which are placed in one single pool and made available for assignment from
one agency to another, subject only to Civil Service laws, rules and regulations, position classification and
wage structures.
The appointing authority in respect of the officials and employees of the ACA is the President of the
Philippines, as stated in a 1st indorsement by his office to the Chairman of the National Reform Council dated
May 22, 1964, as follows:
Appointments of officials and employees of the National Land Reform Council and its agencies
may be made only by the President, pursuant to the provisions of Section 79(D) of the Revised
Administrative Code. In accordance with the policy and practice, such appointments should be
prepared for the signature of the Executive Secretary, "By Authority ofthe President".3
When the Agricultural Reform Code was being considered by the Congress, the nature of the ACA was the
subject of the following exposition on the Senate floor:
Senator Tolentino: . . . . "The ACA is not going to be a profit making institution. It is supposed to be
a public service of the government to the lessees and farmer-owners of the lands that may be
bought after expropriation from owners. It is the government here that is the lender. The
government should not exact a higher interest than what we are telling a private landowner now in
his relation to his tenants if we give to their farmers a higher rate of interest . . . ." (pp. 17 & 18,
Senate Journal No. 16, July 3, 1963)
The reason is obvious, to pinpoint responsibility for many losses in the government, in order to avoid
irresponsible lending of government money to pinpoint responsibility for many losses . . . .
 Senator Manglapus: ". . . But assuming that hypothesis, that is the reason why we are
appropriating P150,000,000.00 for the Agricultural Credit Administration which will go to intensified
credit operations on the barrio level . . ." (p. 3, Senate Journal No. 7).
That it is the reason why we are providing for the expansion of the ACCFA and the weeding out of the
cooperative activity of the ACCFA and turning this over to the Agricultural Productivity Commission, so that the
Agricultural Credit Administration will concentrate entirely on the facilitation of credit on the barrio level with the
massive support of 150 million provided by the government. . . . (pp. 4 & 5 of Senate Journal No. 7, July 3,
1963)
. . . But by releasing them from this situation, we feel that we are putting them in a much better condition than
that in which they are found by providing them with a business-like way of obtaining credit, not depending on a
paternalistic system but one which is business-like that is to say, a government office, which on the barrio
level will provide them that credit directly . . . . (p. 40, Senate Journal No. 7, July 3, 1963) (emphasis supplied).
The considerations set forth above militate quite strongly against the recognition of collective bargaining
powers in the respondent Unions within the context of Republic Act No. 875, and hence against the grant of
their basic petition for certification election as proper bargaining units. The ACA is a government office or
agency engaged in governmental, not proprietary functions. These functions may not be strictly what
President Wilson described as "constituent" (as distinguished from "ministrant"),4 such as those relating to the
maintenance of peace and the prevention of crime, those regulating property and property rights, those
relating to the administration of justice and the determination of political duties of citizens, and those relating to
national defense and foreign relations. Under this traditional classification, such constituent functions are
exercised by the State as attributes of sovereignty, and not merely to promote the welfare, progress and
prosperity of the people these letter functions being ministrant he exercise of which is optional on the part of
the government.
The growing complexities of modern society, however, have rendered this traditional classification of the
functions of government quite unrealistic, not to say obsolete. The areas which used to be left to private
enterprise and initiative and which the government was called upon to enter optionally, and only "because it
was better equipped to administer for the public welfare than is any private individual or group of
individuals,"5 continue to lose their well-defined boundaries and to be absorbed within activities that the
government must undertake in its sovereign capacity if it is to meet the increasing social challenges of the
times. Here as almost everywhere else the tendency is undoubtedly towards a greater socialization of
economic forces. Here of course this development was envisioned, indeed adopted as a national policy, by the
Constitution itself in its declaration of principle concerning the promotion of social justice.
It was in furtherance of such policy that the Land Reform Code was enacted and the various agencies, the
ACA among them, established to carry out its purposes. There can be no dispute as to the fact that the land
reform program contemplated in the said Code is beyond the capabilities of any private enterprise to translate
into reality. It is a purely governmental function, no less than, say, the establishment and maintenance of
public schools and public hospitals. And when, aside from the governmental objectives of the ACA, geared as
they are to the implementation of the land reform program of the State, the law itself declares that the ACA is a
government office, with the formulation of policies, plans and programs vested no longer in a Board of
Governors, as in the case of the ACCFA, but in the National Land Reform Council, itself a government
instrumentality; and that its personnel are subject to Civil Service laws and to rules of standardization with
respect to positions and salaries, any vestige of doubt as to the governmental character of its functions
disappears.
In view of the foregoing premises, we hold that the respondent Unions are not entitled to the certification
election sought in the Court below. Such certification is admittedly for purposes of bargaining in behalf of the
employees with respect to terms and conditions of employment, including the right to strike as a coercive
economic weapon, as in fact the said unions did strike in 1962 against the ACCFA (G.R. No. L-21824).6 This is
contrary to Section 11 of Republic Act No. 875, which provides:
SEC. 11. Prohibition Against Strike in the Government The terms and conditions of employment
in the Government, including any political subdivision or instrumentality thereof, are governed by
law and it is declared to be the policy of this Act that employees therein shall not strike for the
purposes of securing changes or modification in their terms and conditions of employment. Such
employees may belong to any labor organization which does not impose the obligation to strike or
to join in strike: Provided, However, that this section shall apply only to employees employed in
governmental functions of the Government including but not limited to governmental corporations.7
With the reorganization of the ACCFA and its conversion into the ACA under the Land Reform Code and in
view of our ruling as to the governmental character of the functions of the ACA, the decision of the respondent
Court dated March 25, 1963, and the resolution en banc affirming it, in the unfair labor practice case filed by
the ACCFA, which decision is the subject of the present review in G. R. No. L-21484, has become moot and
academic, particularly insofar as the order to bargain collectively with the respondent Unions is concerned.
What remains to be resolved is the question of fringe benefits provided for in the collective bargaining contract
of September 4, 1961. The position of the ACCFA in this regard is that the said fringe benefits have not
become enforceable because the condition that they should first be approved by the Office of the President
has not been complied with. The Unions, on the other hand, contend that no such condition existed in the
bargaining contract, and the respondent Court upheld this contention in its decision.
It is to be listed that under Section 3, Article XIV, of the agreement, the same "shall not become effective
unless and until the same is duly ratified by the Board of Governors of the Administration." Such approval was
given even before the formal execution of the agreement, by virtue of "Resolution No. 67, Regular Meeting No.
7, FY 1960-61, held on August 17, 1961," but with the proviso that "the fringe benefits contained therein shall
take effect only if approved by the office of the President." The condition is, therefore, deemed to be
incorporated into the agreement by reference.
On October 23, 1962 the Office of the President, in a letter signed by the Executive Secretary, expressed its
approval of the bargaining contract "provided the salaries and benefits therein fixed are not in conflict with
applicable laws and regulations, are believed to be reasonable considering the exigencies of the service and
the welfare of the employees, and are well within the financial ability of the particular corporation to bear."
On July 1, 1963 the ACCFA management and the Unions entered into an agreement for the implementation of
the decision of the respondent Court concerning the fringe benefits, thus:
In the meantime, only Cost of Living Adjustment, Longevity Pay, and Night Differential Benefits
accruing from July 1, 1961 to June 30, 1963 shall be paid to all employees entitled thereto, in the
following manner:
A) The sum of P180,000 shall be set aside for the payment of:
1) Night differential benefits for Security Guards.
2) Cost of Living Adjustment and Longevity Pay.
3) The unpaid balance due employees on Item A (1) and (2) this paragraph shall be paid in
monthly installments as finances permit but not beyond December 20, 1963.
3. All benefits accruing after July 1, 1963, shall be allowed to accumulate but payable only after all
benefits accruing up to June 30, 1963, as per CIR decision hereinabove referred to shall have
been settled in full; provided, however, that commencing July 1, 1963 and for a period of only two
(2) months thereafter (during which period the ACCFA and the Unions shall negotiate a new
Collective Bargaining Agreement) the provisions of the September 4, 1961 Collective Bargaining
Agreement shall be temporarily suspended, except as to Cost of Living Adjustment and "political"
or non-economic privileges and benefits thereunder.
On July 24, 1963 the ACCFA Board of Governors ratified the agreement thus entered into, pursuant to the
provision thereof requiring such ratification, but with the express qualification that the same was "without
prejudice to the pending appeal in the Supreme Court . . . in Case No. 3450-ULP." The payment of the fringe
benefits agreed upon, to our mind, shows that the same were within the financial capability of the ACCFA then,
and hence justifies the conclusion that this particular condition imposed by the Office of the President in its
approval of the bargaining contract was satisfied.
We hold, therefore, that insofar as the fringe benefits already paid are concerned, there is no reason to set
aside the decision of the respondent Court, but that since the respondent Unions have no right to the
certification election sought by them nor, consequently, to bargain collectively with the petitioner, no further
fringe benefits may be demanded on the basis of any collective bargaining agreement.
The decisions and orders appealed from are set aside and/or modified in accordance with the foregoing
pronouncements. No costs.
Concepcion, C.J., Reyes, J.B.L., Dizon, Sanchez, Castro, Teehankee and Barredo, JJ., concur.
Zaldivar, J., concurs in the result.
Separate Opinions
FERNANDO, J., concurring:
The decision reached by this Court so ably given expression in the opinion of Justice Makalintal, characterized
with vigor, clarity and precision, represents what for me is a clear tendency not to be necessarily bound by our
previous pronouncements on what activities partake of a nature that is governmental.1 Of even greater
significance, there is a definite rejection of the "constituent-ministrant" criterion of governmental functions,
followed in Bacani v. National Coconut Corporation.2 That indeed is cause for gratification. For me at least,
there is again full adherence to the basic philosophy of the Constitution as to the extensive and vast power
lodged in our government to cope with the social and economic problems that even now sorely beset us.
There is therefore full concurrence on my part to the opinion of the Court, distinguished by its high quality of
juristic craftsmanship. I feel however that the matter is of such vital importance that a separate concurring
opinion is not inappropriate. It will also serve to give expression to my view, which is that of the Court likewise,
that our decision today does not pass upon the rights of labor employed in instrumentalities of the state
discharging governmental functions.
1. In the above Bacani decision, governmental functions are classified into constituent and ministrant. "The
former are those which constitute the very bonds of society and are compulsory in nature; the latter are those
that are undertaken only by way of advancing the general interests of society, and are merely optional.
President Wilson enumerates the constituent functions as follows: '(1) The keeping of order and providing for
the protection of persons and property from violence and robbery. (2) The fixing of the legal relations between
man and wife and between parents and children. (3) The regulation of the holding, transmission, and
interchange of property, and the determination of its liabilities for debt or for crime. (4) The determination of
contract rights between individuals. (5) The definition and punishment of crime. (6) The administration of
justice in civil cases. (7) The determination of the political duties, privileges, and relations of citizens. (8)
Dealings of the state with foreign powers: the preservation of the state from external danger or encroachment
and the advancement of its international interests.' "3
The ministrant functions were then enumerated, followed by a statement of the basis that would justify
engaging in such activities. Thus: "The most important of the ministrant functions are: public works, public
education, public charity, health and safety regulations, and regulations of trade and industry. The principles
determining whether or not a government shall exercise certain of these optional functions are: (1) that a
government should do for the public welfare those things which private capital would not naturally undertake
and (2) that a government should do these things which by its very nature it is better equipped to administer
for the public welfare than is any private individual or group of individuals."4
Reference is made in the Bacani decision to the first of the many publications of Justice Malcolm on the
Philippine government, which appeared in 1916,5 adopting the formulation of the then Professor, later
President, Woodrow Wilson of the United States, in a textbook on political science the first edition of which
was published in 1898. The Wilson classification reflected the primacy of the dominant laissez-faire concept
carried into the sphere of government.
A most spirited defense of such a view was given by former President Hadley of Yale in a series of three
lectures delivered at Oxford University in 1914. According to President Hadley: "I shall begin with a proposition
which may sound somewhat startling, but which I believe to be literally true. The whole American political and
social system is based on industrial property right, far more completely than has ever been the case in any
European country. In every nation of Europe there has been a certain amount of traditional opposition
between the government and the industrial classes. In the United States no such tradition exists. In the public
law of European communities industrial freeholding is a comparatively recent development. In the United
States, on the contrary, industrial freeholding is the foundation on which the whole social order has been
established and built up."6
The view is widely accepted that such a fundamental postulate did influence American court decisions on
constitutional law. As was explicitly stated by Justice Cardozo, speaking of that era: "Laissez-faire was not
only a counsel of caution which statesmen would do well to heed. It was a categorical imperative which
statesmen as well as judges, must obey."7 For a long time, legislation tending to reduce economic inequality
foundered on the rock that was the due process clause, enshrining as it did the liberty of contract. To cite only
one instance, the limitation of employment in bakeries to sixty hours a week and ten hours a day under a New
York statute was stricken down for being tainted with a due process objection in Lochner v. New York.8 It
provoked one of the most vigorous dissents of Justice Holmes, who was opposed to the view that the United
States Constitution did embody laissez-faire. Thus: "General propositions do not decide concrete cases. The
decision will depend on a judgment or intuition more subtle than any articulate major premise. But I think that
the proposition just stated, if it is accepted, will carry us far toward the end. Every opinion tends to become a
law. I think that the word 'liberty,' in the 14th Amendment, is perverted when it is held to prevent the natural
outcome of a dominant opinion, unless it can be said that a rational and fair man necessarily would admit that
the statute proposed would infringe fundamental principles as they have been understood by the traditions of
our people and our law. It does not need research to show that no such sweeping condemnation can be
passed upon the statute before us. A reasonable man might think it a proper measure on the score of health.
Men whom I certainly could not pronounce unreasonable would uphold it as a first installment of a general
regulation of the hours of work. Whether in the latter aspect it would be open to the charge of inequality I think
it unnecessary to discuss." It was not until 1908, in Muller v. Oregon,9 that the American Supreme Court held
valid a ten-hour maximum for women workers in laundries and not until 1917 in Bunting v. Oregon10 that such
a regulatory ten-hour law applied to men and women passed the constitutional test.
Similarly, state legislation fixing minimum wages was deemed offensive to the due process clause in a 1923
decision in Adkins v. Children's Hospital.11 Only in 1937, in the leading case of West Coast Hotel v.
Parrish,12 was the Adkins case overruled and a minimum wage law New York statute upheld. The same
unsympathetic attitude arising from the laissez-faire concept was manifest in decisions during such period,
there being the finely-spun distinctions in the Wolff Packing Co. v. Court of Industrial Relations13 decision, as
to when certain businesses could be classified as affected with public interest to justify state regulation as to
prices. After eleven years, in 1934, in Nebbia v. New York,14 the air of unreality was swept away by this explicit
pronouncement from the United States Supreme Court: "The phrase 'affected with a public interest' can, in the
nature of things, mean no more than that an industry, for adequate reason, is subject to control for the public
good."
It is thus apparent that until the administration of President Roosevelt, the laissez-faire principle resulted in the
contraction of the sphere where governmental entry was permissible. The object was to protect property even
if thereby the needs of the general public would be left unsatisfied. This was emphatically put forth in a work of
former Attorney General, later Justice, Jackson, citing an opinion of Judge Van Orsdel. Thus: "It should be
remembered that of the three fundamental principles which underlie government, and for which government
exists, the protection of life, liberty, and property, the chief of these is property . . . ."15 The above excerpt from
Judge Van Orsdel forms part of his opinion in Children's Hospital v. Adkins, when decided by the Circuit Court
of Appeals.16
Nonetheless, the social and economic forces at work in the United States to which the new deal administration
of President Roosevelt was most responsive did occasion, as of 1937, greater receptivity by the American
Supreme Court to a philosophy less rigid in its obeisance to property rights. Earlier legislation deemed
offensive to the laissez-faire concept had met a dismal fate. Their nullity during his first term could, more often
than not, be expected.17
As a matter of fact, even earlier, in 1935, Professor Coker of Yale, speaking as a historian, could already
discern a contrary drift. Even then he could assert that the range of governmental activity in the United States
had indeed expanded. According to him: "Thus both liberals and conservatives approve wide and varied
governmental intervention; the latter condemning it, it is true, when the former propose it, but endorsing it,
after it has become a fixed part of the status quo, as so beneficial in its effects that no more of it is needed.
Our history for the last half-century shows that each important governmental intervention we have adopted has
been called socialistic or communistic by contemporary conservatives, and has later been approved by equally
conservative men who now accept it both for its proved benefits and for the worthy traditions it has come to
represent. Both liberal and conservative supporters of our large-scale business under private ownership
advocate or concede the amounts and kinds of governmental limitation and aid which they regard as
necessary to make the system work efficiently and humanely. Sooner or later, they are willing to have
government intervene for the purpose of preventing the system from being too oppressive to the masses of
the people, protecting it from its self-destructive errors, and coming to its help in other ways when it appears
not to be able to take care of itself."18
At any rate, by 1943, the United States was reconciled to laissez-faire having lost its dominance. In the
language of Justice Jackson in the leading case of West Virginia State Board of Education v. Barnette:19 "We
must transplant these rights to a soil in which the laissez-faire concept or principle of non-interference has
withered at least as to economic affairs, and social advancements are increasingly sought through closer
integration of society and through expanded and strengthened governmental controls."
2. The influence exerted by American constitutional doctrines unavoidable when the Philippines was still under
American rule notwithstanding, an influence that has not altogether vanished even after independence,
the laissez-faire principle never found full acceptance in this jurisdiction, even during the period of its full
flowering in the United States. Moreover, to erase any doubts, the Constitutional Convention saw to it that our
fundamental law embodies a policy of the responsibility thrust on government to cope with social and
economic problems and an earnest and sincere commitment to the promotion of the general welfare through
state action. It would thus follow that the force of any legal objection to regulatory measures adversely
affecting property rights or to statutes organizing public corporations that may engage in competition with
private enterprise has been blunted. Unless there be a clear showing of any invasion of rights guaranteed by
the Constitution, their validity is a foregone conclusion. No fear need be entertained that thereby spheres
hitherto deemed outside government domain have been enchroached upon. With our explicit disavowal of the
"constituent-ministrant" test, the ghost of the laissez-faire concept no longer stalks the juridical stage.
As early as 1919, in the leading case of Rubi V. Provincial Board of Mindoro,20 Justice Malcolm already had
occasion to affirm: "The doctrines of laissez-faire and of unrestricted freedom of the individual, as axioms of
economic and political theory, are of the past. The modern period has shown a widespread belief in the
amplest possible demonstration of governmental activity. The Courts unfortunately have sometimes seemed
to trail after the other two branches of the Government in this progressive march."
It was to be expected then that when he spoke for the Court in Government of the Philippine Islands v.
Springer,21 a 1927 decision, he found nothing objectionable in the government itself organizing and investing
public funds in such corporations as the National Coal Co., the Phil. National Bank, the National Petroleum
Co., the National Development Co., the National Cement Co. and the National Iron Co. There was not even a
hint that thereby the laissez-faire concept was not honored at all. It is true that Justice Malcolm concurred with
the majority in People v. Pomar,22 a 1924 opinion, which held invalid under the due process clause a provision
providing for maternity leave with pay thirty days before and thirty days after confinement. It could be that he
had no other choice as the Philippines was then under the United States, and only recently the year before,
the above-cited case of Adkins v. Children's Hospital,23 in line with the laissez-faire principle, did hold that a
statute providing for minimum wages was constitutionally infirm on the same ground.
Our constitution which took effect in 1935, upon the inauguration of the Commonwealth of the Philippines,
erased whatever doubts there might be on that score. Its philosophy is antithetical to the laissez-faire concept.
Delegate, later President, Manuel Roxas, one of the leading members of the Constitutional Convention, in
answer precisely to an objection of Delegate Jose Reyes of Sorsogon, who noted the "vast extensions in the
sphere of governmental functions" and the "almost unlimited power to interfere in the affairs of industry and
agriculture as well as to compete with existing business" as "reflections of the fascination exerted by [the then]
current tendencies" in other jurisdictions,24 spoke thus: "My answer is that this constitution has a definite and
well defined philosophy, not only political but social and economic. A constitution that in 1776 or in 1789 was
sufficient in the United States, considering the problems they had at that time, may not now be sufficient with
the growing and ever-widening complexities of social and economic problems and relations. If the United
States of America were to call a constitutional convention today to draft a constitution for the United States,
does any one doubt that in the provisions of that constitution there will be found definite declarations of policy
as to economic tendencies; that there will be matters which are necessary in accordance with the experience
of the American people during these years when vast organizations of capital and trade have succeeded to a
certain degree to control the life and destiny of the American people? If in this constitution the gentleman will
find declarations of economic policy, they are there because they are necessary to safeguard the interests and
welfare of the Filipino people because we believe that the days have come when in self-defense, a nation may
provide in its constitution those safeguards, the patrimony, the freedom to grow, the freedom to develop
national aspirations and national interests, not to be hampered by the artificial boundaries which a
constitutional provision automatically imposes."25
Delegate Roxas continued further: "The government is the creature of the people and the government
exercises its powers and functions in accordance with the will and purposes of the people. That is the first
principle, the most important one underlying this document. Second, the government established in this
document is, in its form, in our opinion, the most adapted to prevailing conditions, circumstances and the
political outlook of the Filipino people. Rizal said, 'Every people has the kind of government that they deserve.'
That is just another form of expressing the principle in politics enunciated by the French philosophers when
they said: 'Every people has the right to establish the form of government which they believe is most
conducive to their welfare and their liberty.' Why have we preferred the government that is established in this
draft? Because it is the government with which we are familiar. It is the form of government fundamentally
such as it exists today; because it is the only kind of government that our people understand; it is the kind of
government we have found to be in consonance with our experience, with the necessary modification, capable
of permitting a fair play of social forces and allowing the people to conduct the affairs of that government." 26
One of the most prominent delegates, a leading intellectual, former President Rafael Palma of the University of
the Philippines, stressed as a fundamental principle in the draft of the Constitution the limitation on the right to
property. He pointed out that the then prevailing view allowed the accumulation of wealth in one family down to
the last remote descendant, resulting in a grave disequilibrium and bringing in its wake extreme misery side by
side with conspicuous luxury. He did invite attention to the few millionaires at one extreme with the vast
masses of Filipinos deprived of the necessities of life at the other. He asked the Convention whether the
Filipino people could long remain indifferent to such a deplorable situation. For him to speak of a democracy
under such circumstances would be nothing but an illusion. He would thus emphasize the urgent need to
remedy the grave social injustice that had produced such widespread impoverishment, thus recognizing the
vital role of government in this sphere.27
Another delegate, Tomas Confesor of Iloilo, was quite emphatic in his assertion for the need of a social justice
provision which is a departure from the laissez-faire principle. Thus: "Take the case of the tenancy system in
the Philippines. You have a tenant. There are hundreds of thousands of tenants working day in and day out,
cultivating the fields of their landlords. He puts all his time, all his energy, the labor and the assistance of his
wife and children, in cultivating a piece of ground for his landlord but when the time comes for the partition of
the products of his toil what happens? If he produces 25 cavanes of rice, he gets only perhaps five and the
twenty goes to the landlord. Now can he go to court? Has he a chance to go to court in order to secure his just
share of the products of his toil? No. Under our present regime of law, under our present regime of justice, you
do not give that to the poor tenant. Gentlemen, you go to the Cagayan Valley and see the condition under
which those poor farmers are being exploited day in and day out. Can they go to court under our present
regime of justice, of liberty, or democracy? The other day, workmen were shot by the police just because they
wanted to increase or they desired that their wages be increased from thirty centavos a day to forty or fifty
centavos. Is it necessary to spill human blood just to secure an increase of ten centavos in the daily wages of
an ordinary laborer? And yet under our present regime of social justice, liberty and democracy, these things
are happening; these things, I say, are happening. Are those people getting any justice? No. They cannot get
justice now from our courts. For this reason, I say it is necessary that we insert 'social justice' here and that
social justice must be established by law. Proper legal provisions, proper legal facilities must be provided in
order that there be a regime not of justice alone, because we have that now and we are seeing the oppression
arising from such a regime. Consequently, we must emphasize the term 'social justice'." 28
Delegate Ventenilla of Pangasinan reflected the attitude of the Convention as to why laissez-faire was no
longer acceptable. After speaking of times having changed, he proceeded: "Since then new problems have
arisen. The spiritual mission of government has descended to the level of the material. Then its function was
primarily to soothe the aching spirit. Now, it appears, it must also appease hunger. Now that we may read
history backwards, we know for instance, that the old theory of 'laissez-faire' has degenerated into 'big
business affairs' which are gradually devouring the rights of the people the same rights intended to be
guarded and protected by the system of constitutional guaranties. Oh, if the Fathers were now alive to see the
changes that the centuries have wrought in our life! They might contemplate the sad spectacle of organized
exploitation greedily devouring the previous rights of the individual. They might also behold the gradual
disintegration of society, the fast disappearance of the bourgeois the middle class, the backbone of the
nation and the consequent drifting of the classes toward the opposite extremes the very rich and the
very poor."29
Shortly after the establishment of the Commonwealth, the then Justice Jose P. Laurel, himself one of the
foremost delegates of the Constitutional Convention, in a concurring opinion, later quoted with approval in the
leading case of Antamok Goldfields Mining Co. v. Court of Industrial Relations,30 decided in 1940, explained
clearly the need for the repudiation of the laissez-faire doctrine. Thus: "It should be observed at the outset that
our Constitution was adopted in the midst of surging unrest and dissatisfaction resulting from economic and
social distress which was threatening the stability of governments the world over. Alive to the social and
economic forces at work, the framers of our Constitution boldly met the problems and difficulties which faced
them and endeavored to crystallize, with more or less fidelity, the political, social and economic propositions of
their age, and this they did, with the consciousness that the political and philosophical aphorism of their
generation will, in the language of a great jurist, 'be doubted by the next and perhaps entirely discarded by the
third.' . . . Embodying the spirit of the present epoch, general provisions were inserted in the Constitution which
are intended to bring about the needed social and economic equilibrium between component elements of
society through the application of what may be termed as the justitia communis advocated by Grotius and
Leibnits many years ago to be secured through the counterbalancing of economic and social forces and
opportunities which should be regulated, if not controlled, by the State or placed, as it were, in custodia
societatis. 'The promotion of social justice to insure the well-being and economic security of all the people' was
thus inserted as vital principle in our Constitution. ... ."31 In the course of such concurring opinion and after
noting the changes that have taken place stressing that the policy of laissez-faire had indeed given way to the
assumption by the government of the right to intervene although qualified by the phrase "to some extent", he
made clear that the doctrine in People v. Pomar no longer retain, "its virtuality as a living principle."32
3. It must be made clear that the objection to the "constituent-ministrant" classification of governmental
functions is not to its formulation as such. From the standpoint of law as logic, it is not without merit. It has
neatness and symmetry. There are hardly any loose ends. It has the virtue of clarity. It may be said in its favor
likewise that it reflects all-too-faithfully the laissez-faire notion that government cannot extend its operation
outside the maintenance of peace and order, protection against external security, and the administration of
justice, with private rights, especially so in the case of property, being safeguarded and a hint that the general
welfare is not to be entirely ignored.
It must not be lost sight of though that logic and jural symmetry while undoubtedly desirable are not the prime
consideration. This is especially so in the field of public law. What was said by Holmes, almost nine decades
ago, carry greater conviction now. "The life of the law has not been logic; it has been experience. The felt
necessities of the time, the prevalent moral and political theories, intuitions of public policy avowed or
unconscious, even the prejudices which judges share with their fellow-men, have had a good deal more to do
than the syllogism in determining the rules by which men should be governed." 33 Then too, there was the
warning of Geny cited by Cardozo that undue stress or logic may result in confining the entire system of
positive law, "within a limited number of logical categories, predetermined in essence, immovable in basis,
governed by inflexible dogmas," thus rendering it incapable of responding to the ever varied and changing
exigencies of life.34,
It is cause enough for concern if the objection to the Bacani decision were to be premised on the score alone
that perhaps there was fidelity to the requirements of logic and jural symmetry carried to excess. What
appears to me much more deplorable is that it did fail to recognize that there was a repudiation of the laissez-
faire concept in the Constitution. As was set forth in the preceding pages, the Constitution is distinguished
precisely by a contrary philosophy. The regime of liberty if provided for, with the realization that under the then
prevalent social and economic conditions, it may be attained only through a government with its sphere of
activity ranging far and wide, not excluding matters hitherto left to the operation of free enterprise. As rightfully
stressed in our decision today in line with what was earlier expressed by Justice Laurel, the government that
we have established has as a fundamental principle the promotion of social justice.35 The same jurist gave it a
comprehensive and enduring definition as the "promotion of the welfare of all the people, the adoption by the
government of measures calculated to insure economic stability of all the component elements of society,
through the maintenance of a proper economic and social equilibrium in the interrelations of the members of
the community, constitutionally, through the adoption of measures legally justifiable, or extra-constitutionally,
through the exercise of powers underlying the existence of all governments in the time honored principle
of salus populi estsuprema lex."36
There is thus from the same distinguished pen, this time writing for the Court, a reiteration of the view of
the laissez-faire doctrine being repugnant to the fundamental law. It must be added though that the reference
to extra-constitutional measures being allowable must be understood in the sense that there is no infringement
of specific constitutional guarantees. Otherwise, the judiciary will be hard put to sustain their validity if
challenged in an appropriate legal proceeding.
The regime of liberty contemplated in the Constitution with social justice as a fundamental principle to
reinforce the pledge in the preamble of promoting the general welfare reflects traditional concepts of a
democratic policy infused with an awareness of the vital and pressing need for the government to assume a
much more active and vigorous role in the conduct of public affairs. The framers of our fundamental law were
as one in their strongly-held belief that thereby the grave and serious infirmity then confronting our body-politic,
on the whole still with us now, of great inequality of wealth and mass poverty, with the great bulk of our people
ill-clad, ill-housed, ill-fed, could be remedied. Nothing else than communal effort, massive in extent and
earnestly engaged in, would suffice.
To paraphrase Laski, with the necessary modification in line with such worthy constitutional ends, we look
upon the state as an organization to promote the happiness of individuals, its authority as a power bound by
subordination to that purpose, liberty while to be viewed negatively as absence of restraint impressed with a
positive aspect as well to assure individual self-fulfillment in the attainment of which greater responsibility is
thrust on government; and rights as boundary marks defining areas outside its domain.37 From which it would
follow as Laski so aptly stated that it is the individual's "happiness and not its well-being [that is] the criterion
by which its behavior [is] to be judged. His interests, and not its power, set the limits to the authority it [is]
entitled to exercise."38 We have under such a test enlarged its field of competence. 4. With the decision
reached by us today, the government is freed from the compulsion exerted by the Bacani doctrine of the
"constituent-ministrant" test as a criterion for the type of activity in which it may engage. Its constricting effect
is consigned to oblivion. No doubts or misgivings need assail us that governmental efforts to promote the
public weal, whether through regulatory legislation of vast scope and amplitude or through the undertaking of
business activities, would have to face a searching and rigorous scrutiny. It is clear that their legitimacy cannot
be challenged on the ground alone of their being offensive to the implications of the laissez-faire concept.
Unless there be a repugnancy then to the limitations expressly set forth in the Constitution to protect individual
rights, the government enjoys a much wider latitude of action as to the means it chooses to cope with grave
social and economic problems that urgently press for solution. For me, at least, that is to manifest deference to
the philosophy of our fundamental law. Hence my full concurrence, as announced at the outset.
5. The opinion of Justice Makalintal contains this footnote: "It must be stated, however, that we do not here
decide the question not at issue in this case of whether or not a labor organization composed employees
discharging governmental functions, which is allowed under the legal provision just quoted, provided such
organization does not impose the obligation to strike or to join in strike, may petition for a certification election
and compel the employer to bargain collectively with it for purposes other than to secure changes or
conditions in the terms and conditions of employment."
With such an affirmation as to the scope of our decision there being no holding on the vexing question of the
effects on the rights of labor in view of the conclusion reached that the function engaged in is governmental in
character, I am in full agreement. The answer to such a vital query must await another day.
G.R. No. 85285 July 28, 1989
DANVILLE MARITIME, INC., petitioner,
vs.
COMMISSION ON AUDIT, respondent.
G.R. No. 87150 July 28, 1989
COMMISSION ON AUDIT, petitioner,
vs.
REGIONAL TRIAL COURT, NATIONAL CAPITAL JUDICIAL REGION, Branch 140, Makati, Metro Manila,
presided by HONORABLE JUDGE LETICIA P. MORALES, and DANVILLE MARITIME, INC., respondents.
RESOLUTION
GANCAYCO, J.:
In the petition for review in G.R. No. 85285, petitioner seeks to set aside the letter-directive of respondent
Commission on Audit (COA for brevity) disapproving the result of the public bidding held by the Philippine
National Oil Company (PNOC for brevity) of the sale of its tanker-vessel "T/T Andres Bonifacio" on the ground
that only one bidder submitted a bid and to direct COA to approve the said sale.
In the early part of 1988, the PNOC, through its Board of Directors, passed a resolution authorizing the sale by
public bidding of its fourteen-year old turbine tanker named "T/T Andres Bonifacio" due to old age and the high
cost of maintenance. Accordingly, a Disposal Committee was created to undertake the auction sale subject to
existing rules and regulations of the COA. Under the "Amended Terms and Conditions of the Bidding," 1 its
floor price was pegged at US$14 million with sealed bids to be dropped at the designated bid box not later
than the scheduled bidding date on September 1, 1988 together with the bid deposit at 10% of the floor price.
Notice of the bidding was advertised in newspapers of general circulation, here and abroad, for 3 consecutive
days. Sixty-five foreign embassies were also formally notified.
The bidding did not take place as originally scheduled and instead it was held on September 15,1988 with
representatives of various local and international companies in attendance. Petitioner Danville Maritime, Inc., a
Liberian corporation, was the sole bidder with a bid of US$14,158,888.88. The Disposal Committee declared
the bid of petitioner to be the winning bid and directed it to transmit to the PNOC 10% of their bid which they
immediately complied with.
On September 17,1988, the PNOC and petitioner executed a "Memorandum of Agreement" for the sale of the
"T/T Andres Bonifacio" which provides among others that:
1. The sale of the Vessel is subject to the Seller obtaining all clean Philippine
Government's approvals and/or clearances required under existing laws, rules and
regulations including such approvals from the Office of the President of the Philippines,
the Commission on Audit (COA), The Board of Directors of PNOC, the Maritime
Industry Authority (MARINA), the Philippine Coast Guard (PCG), The Central Bank of
the Philippines (CB), (Export Licence), and any Philippine documentation necessary,
within thirty (30) calendar days from the date of this Agreement. In the event of the
approvals from either of the government agencies mentioned aboved being
unobtainable within the state period, or such request for approval is denied, then this
Agreement shag be null and void and the Seller is not liable for any damages
whatsoever. 2
On September 20, 1988, the COA thru its State Auditor IV Tobias P. Lozada issued a memorandum to the
Chairman of the Disposal Committee advising the latter to wit 1) that the proposed contract must first be
submitted to COA for review before it is signed; 2) that the public bidding conducted suffers from the
deficiency of lack of competition as there was only one bidder and; 3) that the alternative mode of award, i.e.,
negotiation with the lone bidder may not be resorted to as there has been less than two public biddings held. 3
In a letter of September 28, 1988, the PNOC thru its President Manuel Estrella requested for the formal
approval of the COA of the sale of the subject vessel in favor of petitioner. 4
On October 6, 1988, the PNOC received a telex from Fearnly Finans, a Norwegian company, offering to buy
the vessel on negotiated sale for a price of at least US$1 million higher than the bid given on September 15,
1988 by petitioner. 5 This offer was rejected by the PNOC in a telex of the following day. 6
On October 12,1988, the PNOC received the now questioned letter- directive of the COA dated October 10,
1988 denying the request of PNOC for approval of the proposed sale to the petitioner which reads as follows:
October 10,1988
President Manuel A. Estrella
Philippine National Oil Company
Makati, Metro Manila
Dear President Estrella:
This refers to your letter dated September 28, 1988 requesting the approval of this Commission of the sale of
the vessel 'Andres Bonifacio' in favor of Danville Maritime Ltd. of Liberia.
The only issue to be resolved is whether a single bid, which satisfies the minimum price requirement, may be
accepted without undertaking a second bid solicitation as required in COA Circular No. 86-264 as follows:
b. If the first bidding fails, readvertise and conduct a second bidding.
c. If the second bidding fails, a negotiated sale may be resorted to subject to the
approval of the Commission on Audit.' (Sec. 4.1.4, COA Circular No. 86-264).
Bidding Failure
The aforecited COA Circular No. 86-264, which is entitled 'General Guidelines on the divestment of assets of
government-owned and/ or controlled corporations, and their subsidiaries,' does not provide what constitute a
failure in public bidding. However, the 1988 Amendments to the Implementing Rules and Regulations to P.D.
No. 1594 (Prescribing Policies, Guidelines, Rules and Regulations for Government Infrastructure Contracts)
provides, in so far as pertinent, as follows:
IB 2-3 EVALUATION OF BIDS
xxx
At the time of opening of bids, there shall be at least two (2) competing bidders. In case there is only one
bidder, the bid shall be returned unopened and the project shall be advertised anew for bidding. Should after
rebiding, there be still only one bidder, the project, may be undertaken by administration or thru negotiated
contract giving preference to the lone bidder.
While P.D. No. 1594 pertains only to infrastructure service contracts, its provisions governing the evaluation of
bids partake of a National Government policy in the matter of public biddings, and hence are equally
applicable to those conducted for assets disposition.
Another Interested Buyer
Only last week, I received a telex from Per Olav Karlsen, Managing Director, Fearnley
Finans (Prosjekt), manifesting interest in buying the vessel T/T Andres Bonifacio for a
guaranteed price of at least US $ l million higher than the bid offer of Danville Maritime
Ltd. In the same telex it was informed that a separate communication was sent to the
President, PNOC, quoted as follows:
RE: SALE OF T/T ANDRES BONIFACIO
WE WOULD LIKE TO REITERATE OUR INTEREST IN BUYING THE T/T ANDRES
BONIFACIO. WE ARE WILLING TO GUARANTEE A PRICE OF AT LEAST US$ 1
MILLION HIGHER THAN THE BID GIVEN ON SEPTEMBER 15,1988, ON A
NEGOTIATED SALE.
On the same day you will recall that we discussed over the phone the matter of Mr.
Karlsen's offer, which you described as a 'nuisance offer,' and to which I replied that
the only way to find out if such is so, is to accept Mr. Karlsen's offer. It, therefore,
surprises us no end to receive a copy of your cable replay to Mr. Karlsen dated
October 7, 1988 categorically rejecting his offer of at least US$ 1 million over and
above the bid of Danville Maritime Ltd., purportedly for the reason that existing
government policy as well as the disposal rules approved by ... Board do not allow
PNOC to accept the terms and conditions under which you have offered to buy the
tanker.
COA Position
 This Commission cannot see its way clear why the Disposal Committee took upon itself
to award the vessel, in apparent haste, to the lone bidder Danville Maritime, Ltd. in
spite of the aforecited regulations. On top of this is your perfunctory rejection of a bid
offer which will benefit your Corporation with US$ 1 million more in terms of sales
proceeds. In order, therefore, to cast aside any cloud of doubt as to the motives of the
management of PNOC especially in view of the significantly higher price offer of
Fearnly Finans, coupled with the fact that the Government is presently so concerned
about transparency in government transactions, this Commission hereby directs a
public rebidding of the vessel 'Andres Bonifacio,' copy of the notice of such rebidding
furnished Fearnly Finans.
Please be guided accordingly.
Very truly yours,
(SGD.)EUFEMIO C. DOMINGO
Chairman 7
The following day, petitioner was informed that the PNOC Board of Directors had ordered a rebidding for the
sale of the vessel pursuant to the COA directive.
In a letter dated October 13, 1988, petitioner requested the PNOC to join them in a contemplated appeal to
this Court to question the COA directive. 8 This request was not answered by the PNOC. Hence, this petition
for certiorari wherein petitioner questions the letter-directive of the COA dated October 10, 1988.
Simultaneously with this petition, a separate complaint for injunction and damages was filed by petitioner
before the Regional Trial Court of Makati seeking to enjoin the PNOC from conducting a rebidding and/or from
selling to other parties the vessel "T/T Andres Bonifacio" due to the COA directive disapproving the proposed
sale to petitioner which is docketed as Civil Case No. 88-2194, to extend the period of compliance with
paragraph No. 1 of the Memorandum Agreement and for damages. 9
The principal question in this petition is whether or not the public respondent COA committed a grave abuse of
discretion when it ruled that there was a failure of bidding when only one bid was submitted and subsequently
ordered a rebidding.
Petitioner's argument is as follows: The COA was in grave error in its perception that when there is only one
actual bid submitted, there is consequently no competition and thus there is a "failure of bidding." Competition
as an essential element of public bidding merely means that the bidding be conducted fairly and openly, with
equal opportunity among potential bidders to submit bids without being stifled by factors other than those
contained in properly promulgated guidelines. In the bidding conducted on September 15, 1988, every
potential bidder was given a fair and equal opportunity to bid. The fact that it was only petitioner which
submitted a bid does not affect the validity of the bidding conducted, more so, since it was conducted in the
presence of and without objections from the COA representative.
Petitioner further argues that the disposal of government assets is governed by Section 79 of P.D. 1445,
otherwise known as "The Government Auditing Code of the Philippines" which provides:
SECTION 79. Destruction or sale of unserviceable property. When government
property has become unserviceable for any cause, or is no longer needed, it shall,
upon application of the officer accountable therefor, be inspected by the head of the
agency or his duly authorized representative in the presence of the auditor concerned
and, if found to be valueless or unsaleable, it may be destroyed in their presence. If
found to be valuable, it may be sold at public auction to the highest bidder under the
supervision of the proper committee on award or similar body in the presence of the
auditor concerned or other duly authorized representative of the Commission, after
advertising by printed notice in the Official Gazette, or for not less than three
consecutive days in any newspaper of general circulation, or where the value of the
property does not warrant the expense of publication, by notices posted for a like
period in at least three public places in the locality where the property is to be sold. In
the event that the public auction fails, the property may be sold at a private sale at such
price as may be fixed by the same committee or body concerned and approved by the
Commission.
and COA Circular No. 86-264, prescribing the general guidelines for the divestment or disposal of assets of
government-owned and/or controlled corporation, and their subsidiaries, which sets forth the following
procedure:
4. 1.4.
xxx xxx xxx
b. If the first bidding fails, readvertise and conduct a second
bidding.
c. If the second bidding fails, a negotiated sale may be resorted
to subject to the approval of the Commission on Audit.
Petitioner points out that both P.D. 1445 and COA Circular No. 86- 264 do not define "failure of public
bidding," so the COA committed a grave error when it declared that a one-bidder situation constitutes such
"failure of public bidding."
COA in its questioned letter-directive acknowledged the fact that COA Circular No. 86-264 does not define
what constitutes a failure of public bidding. Nevertheless, as aforestated COA applied the provisions of the
1988 Amendments to the Implementing Rules and Regulations to P.D. 1594 (Prescribing Policies, Guidelines,
Rules and Regulations for Government Infrastructure Contracts), hereinabove reproduced in the COA letter as
follows-
IB 2-3 EVALUATION OF BIDS
xxx
At the time of opening of bids, there shall be at least two (2) competing bidders. In case
there is only one bidder, the bid shall be returned unopened and the project shall be
advertised anew for bidding. Should after rebidding, there be still only one bidder, the
project may be undertaken by administration or thru negotiated contract giving
preference to the lone bidder.
The COA opined that while P.D. No. 1594 pertains only to infrastructure contracts, its provisions governing the
evaluation of bids partake of a national government policy in the matter of public bidding, and hence, are
equally applicable to those conducted for disposition of government assets.
The COA earlier informed the PNOC in its Memorandum dated September 20, 1988 that the award of the
contract to a lone bidder suffers from the deficiency of lack of competition, which is a condition sine qua non in
public biddings. For this reason it declared the bidding conducted to be a failure in its subsequent letter of
October 10, 1988.
We see no reason to disturb the interpretation given by the COA to the term "public bidding" and what
constitutes its "failure." No less than the Constitution has ordained that the COA shall have exclusive authority
to define the scope of its audit and examination, establish the techniques and methods required therefore, and
promulgate accounting and auditing rules and regulations, including those for the prevention and disallowance
of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures, or use of government
funds and properties. 10
The COA, realizing that the applicable law and rules and regulations as to the disposal of government assets
failed to provide for a clear definition of "failure of public bidding," of government assets, properly considered
the definition under the implementing rules of P.D. 1594 which governs infrastructure projects to be applicable
in the disposition of government assets.
There is no doubt that awards of public contracts thru public bidding is a matter of public policy as can be
gleaned from Section 4 of P.D. 1594 which provides that construction projects shall generally be undertaken
by contract after "competitive public bidding." Section 79 of P.D. 1445 likewise requires public auction to be
the primary mode of disposal of public assets. By its very nature and characteristic, a competitive public
bidding aims to protect the public interest by giving the public the best possible advantages thru open
competition. 11 Another self-evident purpose of public bidding is to avoid or preclude suspicion of favoritism
and anomalies in the execution of public contracts. 12 Public bidding of government contracts and for
disposition of government assets have the same purpose and objectives. Their only difference, if at all, is that
in the public bidding for public contracts the award is generally given to the lowest bidder while in the
disposition of government assets the award is to the highest bidder.
It must be in this light, that the COA declared the subject public bidding to be a failure in this case, applying
the same policy as in government infrastructure contracts.
The phrase "public auction" or "public bidding" imports a sale to the highest bidder with absolute freedom for
competitive bidding. 13 Competitive bidding requires that there be at least two (2) bidders who shall compete
with each other on an equal footing for winning the award. If there is only one participating bidder, the bidding
is non-competitive and, hence, falls short of the requirement. There would, in fact, be no bidding at all since,
obviously, the lone participant cannot compete against himself. 14
Moreover, the "Amended Terms and Conditions of Bidding/ Sale" in this case provides.
6. If there is/are any other qualified bid(s) submitted lower than by not more than
US$500,000 from the highest qualified bid submitted, an open auction shall be
conducted exclusively among all of such bidders, inclusive of the bidder making the
highest (sealed) bid; however, only those who submitted bids of at least
US$14,000,000 shall be qualified to participate therein. The open auction shall be
conducted between 5:00 P.M. to 8:00 P.M. of the bidding date upon opening of the
sealed bids; for this reason, it is suggested that all bidders be represented during the
bid-opening processes, possessed of sufficient authorizations from their respective
principals to bid the latter in the open auction, the original copies of which
authorizations should be readily available for examination by the Seller as to the
authenticity and sufficiency thereof.
xxx x x x xxx
9. The bid deposit of losing bidders will be returned to them as soon as the highest bid
has been determined. However, the next highest bidder may elect to leave his deposit
if he wishes to automatically succeed the highest bidder should the highest bidder
default on its obligations under paragraph 12 hereof. 15
From the foregoing terms and conditions of the bid one can easily glean that it is
contemplated that there be at least two bidders. This is evident from the foregoing
provisions that when the next highest qualified bid submitted is lower than by not more
than $ 500,000 from the highest qualified bid submitted, an open auction shall be
conducted exclusively among all such bidders; and that the next highest bidder instead
of withdrawing his bid deposit may elect to leave his deposit so he may automatically
succeed the highest bidder should the latter default in his obligation.
Under COA Circular No. 88-264 hereinabove reproduced, it is provided that if the first bidding fails, a second
bidding must be conducted after advertising same. It is only when the second bidding fails that a negotiated
sale may be undertaken. Thus a negotiated sale with a single bidder is allowed only after the second bidding
fails. The only logical conclusion therefrom is that in the lst and 2nd bidding, there should at least be two (2)
bidders, otherwise there is a failure of bidding.
Petitioner acknowledges that in a public bidding there must be competition that is legitimate, fair and honest
invoking the following citations:
Competition must be legitimate, fair and honest. In the field of government contract law,
competition requires, not only bidding upon a common standard, a common basis,
upon the same thing, the same subject matter, the same undertaking,' but also that it
be legitimate, fair and honest; and not designed to injure or defraud the government.
Any form of agreement entered into between bidders which has a tendency to restrain
natural rivalry and competition of the parties, or operates to stifle or suppress
competition is against public policy and therefore void. As stated by the Court in Re
Salmon, 145 Fed. 649, 652. 'It is a uniform, inflexible rule of law that all such
combinations, the effect of which is to stifle competition in bidding at public or private
sales, or in the letting of public works ... are immoral, vicious, and void."
(Lucenario, Ibid, pp. 70-71; citing Flynn Const., et al., Leininger, et al., supra 43 Am.
Jur. 774; Hunt v. Elliot, 80 Ind. 245, 41 Am. Repl. 794; Pike v. Balch, 38 Mc. 302, 61
Am. Dec. 248; Smith v. Ullman, 58 Md. 183, 42 Am. Rep. 329; 2 R.C.L. Sec. 18, p. 134;
45 A.L.R. 549; As to the rule on the matter in England and Canada, see annotation in
45 A.L.R. 553; 20 Ann. Cas. 387.)
Competitive bidding is an essential element of an auction sale, and such a sale should
be conducted fairly and openly with full and free opportunity for competition among
bidders. It is the policy of the law that a fair price be received by the parties interested
in the property sold and that this be not prevented by the stifling of competition among
bidders.' (7 Am. Jur. 2d p. 246). 16
It is imperative that such "extraneous" factors as "any conduct, artifice, agreement or combination the purpose
and effect of which is to stifle fair competition and chill bidding" 17 must be avoided in public bidding. Examples
of these stifled biddings are the following:
l) Agreement to combine interest and divide the profit;
2) Agreement to withdraw from the bidding;
3) Agreement to bid on separate portion of the work;
4) Pre-arranged or rigged bidding;
5) Combination among bidders and a public official; and
6) Agreement to submit identical or uniform bids. 18
No doubt a one bidder situation tends to stifle fair competition. The requirement of having at least two bidders
prevents any such conduct, artifice, agreement or combination that jeopardizes the integrity of the bidding.
Well settled is the rule that the construction by the office charged with implementing and enforcing the
provisions of a statute should be given controlling weight. 19 In the absence of error or abuse of power or lack
of jurisdiction or grave abuse of discretion already conflicting with either the letter or the spirit of a legislative
enactment creating or charging a governmental agency with the administration and enforcement thereof, the
action of the agency would not be disturbed by the judicial department. 20
In the case at bar, there is no showing that the COA committed grave abuse of discretion. COA has clearly
shown its position to the PNOC in its questioned letter-directive advising the latter of its misgivings as to why
the award was given to the lone bidder inspite of regulations previously made known to PNOC and to top it all,
why the PNOC perfunctorily rejected a much higher bid which appears to be more beneficial to the corporation.
Rather than condemn the COA as petitioner proposes, the COA should be commended for its zeal and care in
insuring that the disposition of the subject vessel would be in a manner most advantageous to the government.
A rebidding removes any suspicion that may arise out of the sale of the vessel to petitioner under present
circumstances.
The Court holds that a second public bidding is ordained so that all government transactions would be
competitive and above board.
Under COA Circular No. 86-257, a proposed contract for the disposal of capital assets shall be submitted for
examination and review of the head of the auditing unit concerned before the same is signed by the
contracting government official. The transaction constituting the disposal of capital assets shall be audited
before the transaction is consummated. 21 COA had advised the PNOC in its memorandum of September
20,1988 that the proposed contract of sale for the vessel should be reviewed by COA before it is signed.
Unfortunately, PNOC proceeded with the execution of the Memorandum of Agreement much earlier, that is on
September 17, 1988, before the COA was asked to pass upon the same. Nevertheless, it is therein stipulated
that the sale of the vessel is subject to the seller (PNOC) obtaining all required clearances which includes
approval of the COA, otherwise, the agreement shall be null and void. 22
Petitioner cannot argue that the bidding was valid as the COA representative then present made no objections
to the same. The role of said COA representative at the time of bidding was only as a witness to insure
documentary integrity, i.e., by ensuring that every document is properly Identified and/or marked and that the
records of the bidding are securely kept. 23 Nevertheless as above stated, soon after the bidding, the COA
sent its memorandum to the PNOC that there is a failure of public bidding due to the one-bidder situation.
Moreover, said memorandum of agreement with the PNOC was still subject to COA approval as embodied in
the same and in consonance with existing rules and regulations. Nonetheless, the subsequent disapproval of
the sale by COA did not thereby bar petitioner from participating in the rebidding ordered by the COA.
The Court takes note of the fact that simultaneously with the filing of the instant petition on October 17, 1988,
as above related petitioner filed a similar complaint for injunction and damages against the PNOC before the
Regional Trial Court of Makati. This is clearly a case of forum shopping which calls for the dismissal of both
actions, in this Court as well as in the lower court. 24 A reading of the allegations of the complaint filed with
Regional Trial Court and those of the instant petition show that both actions arose from the same transaction,
involving the same subject matter, facts and circumstances.
In the attempt to make the two actions appear to be different, petitioner impleaded different respondents
therein PNOC in the case before the lower court and the COA in the case before this Court and sought
what seems to be different reliefs. Petitioner asks this Court to set aside the questioned letter-directive of the
COA dated October 10, 1988 and to direct said body to approve the Memorandum of Agreement entered into
by and between the PNOC and petitioner, while in the complaint before the lower court petitioner seeks to
enjoin the PNOC from conducting a rebidding and from selling to other parties the vessel "T/T Andres
Bonifacio," and for an extension of time for it to comply with the paragraph I of the memorandum of agreement
and damages. One can see that although the relief prayed for in the two (2) actions are ostensibly different,
the ultimate objective in both actions is the same, that is, the approval of the sale of vessel in favor of
petitioner, and to overturn the letter-directive of the COA of October 10, 1988 disapproving the sale.
Thus, on March 3, 1989, COA filed in this Court the petition for prohibition with prayer for a temporary
restraining order, docketed as G.R. No. 87150, against RTC Judge Leticia P. Morales who is the Presiding
Judge of Branch 40, of the RTC of Makati, Metro Manila to whom said RTC case (Civil Case No. 88-194) is
assigned and the herein petitioner in G.R. No. 85285, on the ground that under the Constitution only this Court
can pass upon a decision of the COA as the letter-directive in question 25 so that the respondent court has no
jurisdiction over the subject matter. On March 8, 1989, this Court required respondents to comment on the
petition and issued a restraining order enjoining the respondent judge from proceeding with the case. Said
comment has been submitted.
In the meanwhile petitioner in G.R. No. 85285 asked leave to file a reply to the respondents' comment. The
reply having been filed by petitioner, upon order of the court, respondent filed a rejoinder. A supplementary
reply was also filed by petitioner.
In the recent case of Palm Avenue Realty Development Corporation, et al. vs. Presidential Commission on
Good Government, et al., 26 this Court held
...The filing by the petitioners of the instant special civil action for certiorari and
prohibition in this Court despite the pendency of their action in the Makati Regional
Trial Court, is a species of forum-shopping. Both actions unquestionably involve the
same transactions, the same essential facts and circumstances. The petitioners' claim
of absence of Identity simply because the PCGG had not been impleaded in the RTC
suit and the suit did not involve certain acts which transpired after its commencements
is specious. In the RTC action, as in the action before this Court, the validity of the
contract to purchase and sell of September 1, 1986, i.e., whether or not it had been
efficaciously rescinded, and the propriety of implementing the same (by paying the
pledgee banks the amount of their loans, obtaining the release of the pledged shares,
etc.) were the basic issues. So, too, the relief was the same the prevention of such
implementation and/or the restoration of the status quo ante. When the acts sought to
be restrained took place anyway despite the issuance by the Trial Court of a temporary
restraining order, the RTC, suit did not become functus officio. It remained an effective
vehicle for obtention of relief and petitioners' remedy in the premises was plain and
patent: the filing of an amended and supplemental pleading in the RTC suit, so as to
include the PCGG as defendant and seek nullification of the acts sought to be enjoined
but nonetheless done. The remedy was certainly not the institution of another action in
another forum based on essentially the same facts. The adoption of this latter recourse
renders the petitioners amenable to disciplinary action and both their actions, in this
Court as well as in the Court a quo is dismissible.
The said RTC case should therefore be dismissed for forum shopping as well as the herein petition in G.R. No.
85285.
And with more reason, as emphasized in the petition in G.R. No. 87150, the RTC court has no jurisdiction to
review a decision of the COA under the Constitution. 27 This is a matter within the exclusive jurisdiction of this
Court. Although apparently said Civil Case 88-2194 against PNOC was intended to stop a rebidding of the
vessel in question, necessarily in the same proceeding, the trial court must determine if the COA committed a
grave abuse of discretion in disapproving the sale of the vessel to respondent Danville Maritime, Inc. This it
has no power to do.
WHEREFORE, the herein petition in G.R. No. 85285 is hereby DISMISSED for lack of merit. On the other
hand, the petition in G.R. No. 87150 is granted, the restraining order this Court issued on March 8, 1989, is
hereby made permanent and the said RTC Civil Case No. 88-2194 of the Regional Trial Court of Makati is
hereby ordered DISMISSED. This decision is immediately executory.
SO ORDERED,
G.R. No. 95398 August 16, 1991
MARIO R. MELCHOR, petitioner,
vs.
COMMISSION ON AUDIT, respondent.
Polistico Law Office for petitioner
GUTIERREZ, JR., J.:
Is the petitioner personally liable for the amout paid for the construction of a public school building on the
ground that the infrastructure contract is null and void for want of one signature?
The facts are uncontroverted.
On July 15, 1983, petitioner Mario R. Melchor, in his capacity as Vocational School Administrator of
Alangalang Agro-Industrial School of Alangalang, Leyte, entered into a contract with Cebu Diamond
Construction (hereinafter referred to as contractors for the construction of Phase I of the home Technology
Building of said school for the price of P488,000. Pablo Narido, (thief accountant of the school, issued a
certificate of availability of funds to cover the construction cost. Narido, however, failed to sign as a Witness to
the contract, contrarily to the requirement of Section I of Letter of Instruction (LOI) No. 968.
The contract was approved by the then Minister of Education, Culture and Sports Onofre D. Corpuz. The
relevant parts of the contract are quoted below:
That for and in consideration of the sum of FOUR HUNDRED EIGHTY EIGHT THOUSAND
PESOS (P488,000.00), Philippine Currency, the CONTRACTOR, at his own proper cost and
expense willfully and faithfully perform all works, and unless otherwise provided, furnish all labor,
materials, equipment necessary for the construction and completion of Phase I of the Home
Technology Building for the Alangalang Agro-Industrial School of Alangalang, Leyte to be
completed in accordance with the plans and specifications and all terms, conditions and
instructions contained in the general and special conditions of contract, as well as those contained
in the Notice to Bidders, Tenderers or Advertisement, Instruction to Bidders Tenderers,
Supplemental Specifications, Bond Articles, and other essential related documents, which are
made and acknowledged as Integral parts of this Agreement, by reference and/or Incorporation,
including the permission of Administrative Order No. 81 of the President, dated January 17,
1964, ... (Rollo, p. 25)
While the construction of Phase I was under way, the contractor, in a letter dated November 8, 1983
addressed to Melchor, sought an additional charge of P73,000 equivalent to 15% of the stipulated amount due
to an increase in the cost of labor and construction materials.
In a letter dated November 17, 1983, the petitioner referred the contractor's request for additional charge to
the Regional Director, Ministry of Education, Culture and Sports (MECS). The petitioner in said letter asked for
approval of the contractor's additional charge, pointing out that such additional charge shall be taken from the
1984 non-infrastructure capital outlay and part of the 1984 maintenance and operating expenses. The
petitioner, in a second Indorsement dated November 22, 1983, requested the approval by the COA Regional
Director in Tacloban City of the contractor's request for adjustment of the cost of the contract.
In an Indorsement dated November 17, 1983, Servillano C. Dela Cruz, Acting Assistant Regional Director '
MECS Regional Office No. VIII, Tacloban City, approved the contractor's request for additional charge subject,
however, to the availability of funds and the imprimatur of the Resident Auditor of the School. On its part, the
COA Regional Office No. VIII, Tacloban City, through Regional Director, Sopronio Flores, Jr., advanced the
view that "the approval of the police escalation rests on the Minister or head of the agency concerned. Our
participation in this regard shall be on the post-audit of transactions as emphasized under COA Circular No.
82195."
Meanwhile, the contractor, anticipating that it could not meet the deadline for the project, requested a series of
extensions which the petitioner granted. However, on April 10, 1984, the contractor gave up the project mainly
to save itself from further losses due to, among other things, increased cost of construction materials and labor.
At the time the contractor ceased working on the project, it had accomplished only 61% of the construction
work valued at P344,430.88. However, as of September 13, 1984, the contractor had been paid the total
amount of P515,305.60. The excess paid on the value of the 61% accomplishment costing approximately
P172,003.26 represented the extra work done by the contractor which was found necessary.
Consequently, the petitioner wrote a letter dated September 19, 1984 to Ms. Gilda Ramos, COA Resident
Auditor of the school, requesting the latter to advise the former on whether to pursue condoning the contract or
institute a legal action for breach of contract against the contractor. In turn, Ms. Ramos referred the matter to
COA Regional Director in Tacloban City, Cesar A. Damole who in a third Indorsement dated April 8, 1985,
directed Ms. Ramos to disallow the payment of P515,305.60 in post-audit on the ground that the contract was
null and void for lack of signature of the chief accountant of the school as witness to it, as required under
Section 1 of LOI 968, for which reason the petitioner was made personally liable for the amount paid to the
contractor.
On May 3, 1985, the petitioner wrote a letter addressed to the Regional Director, COA Regional Office No. VIII,
Tacloban City, seeking reconsideration of his directive to the Resident Auditor of the school to disallow the
payment of P515,305.60 to the contractor. The petitioner sought reconsideration on the following grounds: a)
the Certificate of Availability of Funds signed by the chief accountant of the school, being an integral part, of
the contract, substantially complied with the requirement of LOI 968 that the signature of said accountant must
be affixed as witness to the contract, b) the petitioner did not exceed his authority because the contract was
approved by the head of the agency concerned c) the Resident Auditor of the school who had been furnished
a copy of the contract did not object to the contract because of that flaw; and d) the petitioner religiously
complied with the provisions of P.D. 1445 (otherwise known as "The Government Auditing Code of the Phils."),
specifically, Sections 85 and 86 as to the requirements in the execution of a government contract.
In a first Indorsement dated July 17, 1985, COA Regional Director of Tacloban City, Cesar A. Damole denied
the petitioner's motion for reconsideration. Immediately, petitioner Melchor appealed to the COA Head Office
which dismissed his appeal for lack of merit. The COA Head Office likewise denied the petitioner's requests for
reconsideration.
Hence, this petition.
The sole issue of this Court's consideration is whether or not petitioner Melchor should be held personally
liable for the amount of P515,305.60 paid to the contractor. This P515,305.60 may be broken down into:
1) P344,430.80 representing 6l% of equivalent payment for the work done by the contractor within the
contract specifications, and
2) P172,003.206 representing payment for extra work orders, not included in the contract specifications,
which were incurred to make the building structure strong.
The amounts of P344,430.80 and P172,003.26, when added together, do not equal P515,305.60. The records
do not explain the reason for the discrepancy. At any rate, the contending parties do not question the
correctness of these amounts.
Respondent COA maintains that the contract entered into by the petitioner with Cebu Diamond Construction is
null and void since the chief accountant did not affix his signature to the contract, in violate on of the
requirements of LOI 968.
Section 1 of LOI 968, dated December 17, 1979, provides:
1. All contracts for capital projects and for the supply of commodities and services, including
equipment, maintenance contracts., and other agreements requiring payments which are
chargeable to agency current operating or capital expenditure funds, shall be signed by agency
heads or other duly authorized official only when there are available funds. The Chief Accountant
of the contracting agency shall sign such contracts as witness and contracts without such witness
hall be considered as null and void.
According to COA, since there was no compliance with the above provision, then the amount of P344,430.80
should be disallowed iii post-audit and the petitioner should be personally able for said amount.
The petitioner reasons that the absence of the accountant's signature as witness to the contract should not
militate against its validity. He cites Section 86 of PD 1445, which states:
Certificate Showing Appropriation to Meet Contract ... no contract involving the expenditure of
public fund by any government agency shall be entered into or authorized unless the proper
accounting official of the agency concerned shall have certified to the officer entering into the
obligation that funds have been duly appropriated for the purpose and that the amount necessary
to cover the proposed contract for the current fiscal year is available for expenditure on account
thereof, subject to verification, modification by the auditor concerned. The certificate, signed by the
proper accounting official and the, auditor who verified it, shall be attached to and become an
integral part of the proposed contract, and the sum so certified shall not thereafter be available for
expenditure for any other purpose until the obligation of the government agency concerned under
the contract is fully extinguished.
Petitioner Melchor urges that the issuance by the chief accountant of a "Certificate of Availability of Funds"
compensates for the latter's non-signing as a contract witness since under Section 86 of PD 1445, the
certificate is attached to and becomes an integral part of the contract. He argues that there was, in effect,
substantial compliance with the mandate of LOI 968.
Moreover the petitioner contends that assuming arguendo that the contract is null and void, he should still not
be made personally accountable for the amount paid to the contractor. He cites this Court's resolution in Royal
Trust Corporation v. Commission on Audit, G.R. No. 84202, November 22, 1988. In that case. despite the
absence of a specific covering appropriation as required under COA Resolution No. 86-58, the contractor was
allowed by the Court to be compensated on a quantum meruit basis.
Under the circumstances of this case, the Court finds that the contract executed by the petitioner and Cebu
Diamond Construction is enforceable and, therefore, the petitioner should not be made to personally pay for
the building already constructed.
LOI 968 and Sections 85 and 86 of PD 1445 implement and reinforce the constitutional mandate that "No
money shall be paid out of the Treasury except in pursuance of an appropriation made by law" (Constitution,
Article VI, Section 29 [1]).
Under Sections 85 and 86 of PD 1445, before a government agency can enter into a contract involving
expenditure of government funds there must be an appropriation for such expenditure and the proper
accounting official must certify that funds have been appropriated for the purpose. Under LOI 968, the chief
accountant of the government agency, as the verifier of the availability of funds, must sign such contracts as
witness. The uniform intent of these provisions is to ensure that government contracts are signed only when
supported by available funds.
In the case before us, the chief accountant issued a certificate of availability of funds but failed to sign the
contract as witness. But since Section 86 states that the certificate shall be attached to and become an
integral part of the proposed contract, then the failure of the chief accountant to affix his signature to the
contract was somehow made up by his own certification which is the basic and more important validating
document. The contract moreover provided that "other essential related documents xxx are made and
acknowledged as integral parts of this agreement, by reference and/or incorporation." This is not to say that
the heads of government offices or institutions should not read carefully the fine print of official regulations
governing contracts. However, under the peculiar circumstances of this case, we agree with the petitioner's
view that there was substantial compliance with the requirements of LOI 968 in the execution of the contract.
He has not been charged under some regulations governing negligence in not going over auditing and
accounting rules more carefully. But even assuming some kind of administrative responsibility for not being
more careful, he should not be made to pay for a school building already constructed and serving an urgent
need in his province.
It is a rule of statutory construction that the court may consider the spirit and reason of a statute where a literal
meaning would lead to absurdity, contradiction, injustice or would defeat the clear purpose of the lawmakers.
(People v. Manantan 5 SCRA 684 [1962]) For this Court to draw a narrow and stringent application of LOI 968
would be to lose sight of the purpose behind its enactment. The rationale for LOI 968, which is to ensure that
there are available funds to finance a proposed project, was already served by the chief accountant's issuance
of a certificate of fund availability.
Additionally, Section 2 of LOI 968 provides:
2. It shall be the responsibility of the Chief Accountant to verify the availability of funds, as duly
evidenced by programmed appropriations released by the Ministry of Budget and received by the
agency, from which such contract shall be ultimately payable. His signature shall be considered as
constituting a certification to that effect. (Emphasis Supplied)
Since, under the above proviso, the accountant's signature shall have the effect of a certification, then it may
be inferred that the accountant's certification, not his signature as a contract witness, is the more reliable
indicium of fund availability.
What further bolsters the contract's validity is the fact that the original contract for P488,000 and the 15% price
escalation of P73,000 bore the approval of the Minister of Education, Culture and Sports as required by COA
Circular No. 83-101-J (dated June 8, 1983) and the Implementing Rules of PD 1594. Under COA Circular 83-
101-J, the Minister of Education, Culture and Sports has the authority to approve infrastructure projects not
exceeding P2 Million. Under Section III, CIII of the Implementing Rules of PD 1594, the Minister is empowered
to approve contract price escalation not exceeding 18% of the original contract price.
Moreover, under COA Circular No. 76-34 dated July 15,1976, within 5 days from receipt of a copy of the
contract, the COA is required to call the attention of management regarding defects or deficiencies of the
contract and suggest such corrective measures as are appropriate and warranted to facilitate the process of
the claim upon presentation. In this case, respondent COA does not deny the petitioner's claim that it was
furnished copies of the contract, together with supporting documents, a few days after approval thereof by the
Minister of Education, Culture and Sports. If the respondent had complied with this requirement, then the
absence of the accountant's signature as a witness to the contract could have been remedied. COA was also
negligent.
No less compelling than the foregoing reasons is the undisputed fact that the construction of the Home
Technology Building had long been completed and that the building is now being utilized as part of the
Alangalang Industrial School. In People v. Purisima 86 SCRA 542 (1978), we held that there exists a valid
presumption that undesirable consequences were never intended by a legislative measure, and that a
construction of which the statute is fairly susceptible is favored, which will avoid all objectionable, mischievous,
indefensible, wrongful, evil and injurious consequences. In the present case we consider it highly inequitable
to compel the petitioner, who had substantially complied With the mandate of LOI 968, to shoulder the
construction cost of the building when it is not he, but the government, which is reaping benefits from it.
The Court therefore rules that respondent COA erred in disallowing in audit the amount of P344,430.88.
With respect to the remaining P12,003.26 paid by the petitioner to the contractor for extra work done, the COA
reasons that the extra work done. being more than 25% of the escalated original contract price, was null and
void because no supplemental agreement was executed. The respondent cites the implementing rules and
regulations of PD 1594 which provide:
5. A separate supplemental agreement may be entered into for all change orders or extra work
orders if the aggregate amount exceeds 25% of the escalated original contract price. (III CI
paragraphs 5;) (Emphasis supplied).
Under the facts of this case, we adjudge that respondent COA is not without legal basis in disallowing the
P172,003.26 payment for the extra work orders. However, since the word "may" was used in the Decree then
the requirement of a supplemental agreement under all circumstances may not always be mandatory. There is
no need to go into any possible exceptions because we find the rule applicable in this case.
Under COA Circular 83-101-J, supra, the Minister of Education, Culture and Sports has the authority to
approve extra work orders or other variation orders not exceeding 50% of the original contract price or P1
Million whichever is less. In this case, there is no showing that the extra work order was approved by the
Minister.
Moreover, a variation order (which may take the form of a change order, extra work or supplemental
agreement) is a contract by itself and involves the expenditure of public funds to cover the cost of the work
called for thereunder. (Fernandez, A Treatise on Government Contracts under Philippine Law, 115-116 [1985])
As such, it is subject to the restrictions imposed by Sections 85 and 86 of PD 1445 and LOI 968-COA Circular
No. 80-122, dated January 15, 1980, likewise ensures that an extra work order is approved only when
supported by available funds. Again, the petitioner has not presented proof of an appropriation to cover the
extra work order.
For a failure to show the approval by the proper authority and to submit the corresponding appropriation, We
declare the contract for extra works null and void. Section 87 of PD 1445 states:
Any contract entered into contrary to the requirements of the two immediately preceding sections
shall be void, and the officer or offices entering into the contract shall be liable to the government
or other contracting party for any consequent damage to the same extent as if the transaction had
been wholly between private parties. (Emphasis supplied)
This does not mean, however, that the petitioner should be held personally liable and automatically ordered to
return to the government the full amount of P172,003.26.
As previously discussed, it would be unjust to Order the petitioner to shoulder the expenditure when the
government had already received and accepted benefits from the utilization of the building.
In Royal Trust Construction v. Commission on Audit, supra, cited by the petitioner, the Court, in the interest of
substantial justice and equity, allowed payment to the contractor on a quantum meruit basis despite the
absence of a written contract and a covering appropriation.
In a more recent case, Dr. Rufino O. Eslao v. Commission on Audit, G.R. No. 89745, April 8, 1991, the Court
directed payment to the contractor on a quantum meruit basis despite the petitioner's failure to undertake a
public bidding. In that case, the Court held that "to deny payment to the contractor of the two buildings which
are almost fully completed and presently occupied by the university would be to allow the government to
unjustly enrich itself at the expense of another.1wphi1
Where payment is based on quantum meruit the amount of recovery would only be the reasonable value of
the thing or services rendered regardless of any agreement as to value. (Tantuico, State Audit Code of the
Philippines Annotated, 471 [1982])
Although the two cases mentioned above contemplated a situation where it is the contractor who is seeking
recovery, we find that the principle of payment by quantum meruit likewise applies to this case where the
contractor had already been paid and the government is seeking reimbursement from the public official who
heads the school. If, after COA determines the value of the extra works computed on the basis of quantum
meruit it finds that the petitioner made an excess or improper payment for these extra works, then petitioner
Melchor shall be liable only for such excess payment.
WHEREFORE, the petition is GRANTED. The decision of the respondent COA denominated as 11th
Indorsement dated November 11, 1988 and its resolution dated July 31, 1990 are hereby REVERSED and
SET ASIDE. Respondent COA is directed to allow in post-audit the payment of P344,430.80. Respondent
COA is likewise directed to determine on a quantum meruit basis the value of the extra works done, and after
such determination, to disallow in post-audit the excess payment, if any, made by the petitioner to the
contractor. The petitioner shall be personally liable for any such excess payment.
SO ORDERED.
AIR TRANSPORTATION OFFICE, G.R. No. 159402
Petitioner,
Present:
BRION, Acting Chairperson,**
- versus - BERSAMIN,
ABAD,***
VILLARAMA, JR., and
SERENO, JJ.
SPOUSES DAVID*
and
ELISEA RAMOS, Promulgated:
Respondents. February 23, 2011
x-----------------------------------------------------------------------------------------x
RESOLUTION
BERSAMIN, J.:
The States immunity from suit does not extend to the petitioner because it is an agency of the State engaged
in an enterprise that is far from being the States exclusive prerogative.
Under challenge is the decision promulgated on May 14, 2003,[1] by which the Court of Appeals
(CA) affirmed with modification the decision rendered on February 21, 2001 by the Regional Trial Court,
Branch 61 (RTC), in Baguio City in favor of the respondents.[2]
Antecedents
Spouses David and Elisea Ramos (respondents) discovered that a portion of their land registered under
Transfer Certificate of Title No. T-58894 of the Baguio City land records with an area of 985 square meters,
more or less, was being used as part of the runway and running shoulder of the Loakan Airport being operated
by petitioner Air Transportation Office (ATO). On August 11, 1995, the respondents agreed after negotiations
to convey the affected portion by deed of sale to the ATO in consideration of the amount
of P778,150.00.However, the ATO failed to pay despite repeated verbal and written demands.
Thus, on April 29, 1998, the respondents filed an action for collection against the ATO and some of
its officials in the RTC (docketed as Civil Case No. 4017-R and entitled Spouses David and Elisea Ramos v.
Air Transportation Office, Capt. Panfilo Villaruel, Gen. Carlos Tanega, and Mr. Cesar de Jesus).
In their answer, the ATO and its co-defendants invoked as an affirmative defense the issuance of
Proclamation No. 1358, whereby President Marcos had reserved certain parcels of land that included the
respondents affected portion for use of the Loakan Airport. They asserted that the RTC had no jurisdiction to
entertain the action without the States consent considering that the deed of sale had been entered into in the
performance of governmental functions.
On November 10, 1998, the RTC denied the ATOs motion for a preliminary hearing of the
affirmative defense.
After the RTC likewise denied the ATOs motion for reconsideration on December 10, 1998, the
ATO commenced a special civil action for certiorari in the CA to assail the RTCs orders. The CA dismissed the
petition for certiorari, however, upon its finding that the assailed orders were not tainted with grave abuse of
discretion.[3]
Subsequently, February 21, 2001, the RTC rendered its decision on the merits,[4] disposing:
WHEREFORE, the judgment is rendered ORDERING the defendant Air Transportation
Office to pay the plaintiffs DAVID and ELISEA RAMOS the following: (1) The amount
of P778,150.00 being the value of the parcel of land appropriated by the defendant
ATO as embodied in the Deed of Sale, plus an annual interest of 12% from August 11,
1995, the date of the Deed of Sale until fully paid; (2) The amount of P150,000.00 by
way of moral damages and P150,000.00 as exemplary damages; (3) the amount
of P50,000.00 by way of attorneys fees plus P15,000.00 representing the 10, more or
less, court appearances of plaintiffs counsel; (4) The costs of this suit.
SO ORDERED.
In due course, the ATO appealed to the CA, which affirmed the RTCs decision on May 14, 2003,[5] viz:
IN VIEW OF ALL THE FOREGOING, the appealed decision is
hereby AFFIRMED, with MODIFICATIONthat the awarded cost therein is deleted,
while that of moral and exemplary damages is reduced to P30,000.00 each, and
attorneys fees is lowered to P10,000.00.
No cost.
SO ORDERED.
Hence, this appeal by petition for review on certiorari.
Issue
The only issue presented for resolution is whether the ATO could be sued without the States consent.
Ruling
The petition for review has no merit.
The immunity of the State from suit, known also as the doctrine of sovereign immunity or non-suability of the
State, is expressly provided in Article XVI of the 1987 Constitution, viz:
Section 3. The State may not be sued without its consent.
 The immunity from suit is based on the political truism that the State, as a sovereign, can do no
wrong. Moreover, as the eminent Justice Holmes said in Kawananakoa v. Polyblank:[6]
The territory [of Hawaii], of course, could waive its exemption (Smith v. Reeves,
178 US 436, 44 L ed 1140, 20 Sup. Ct. Rep. 919), and it took no objection to the
proceedings in the cases cited if it could have done so. xxx But in the case at bar it did
object, and the question raised is whether the plaintiffs were bound to yield. Some
doubts have been expressed as to the source of the immunity of a sovereign power
from suit without its own permission, but the answer has been public property since
before the days of Hobbes. Leviathan, chap. 26, 2. A sovereign is exempt from suit,
not because of any formal conception or obsolete theory, but on the logical and
practical ground that there can be no legal right as against the authority that
makes the law on which the right depends. Car on peut bien recevoir loy d'autruy,
mais il est impossible par nature de se donner loy. Bodin, Republique, 1, chap. 8, ed.
1629, p. 132; Sir John Eliot, De Jure Maiestatis, chap. 3. Nemo suo statuto ligatur
necessitative. Baldus, De Leg. et Const. Digna Vox, 2. ed. 1496, fol. 51b, ed. 1539, fol.
61.[7]
Practical considerations dictate the establishment of an immunity from suit in favor of the
State.Otherwise, and the State is suable at the instance of every other individual, government service may be
severely obstructed and public safety endangered because of the number of suits that the State has to defend
against.[8]Several justifications have been offered to support the adoption of the doctrine in the Philippines, but
that offered in Providence Washington Insurance Co. v. Republic of the Philippines[9] is the most acceptable
explanation, according to Father Bernas, a recognized commentator on Constitutional Law,[10] to wit:
[A] continued adherence to the doctrine of non-suability is not to be deplored
for as against the inconvenience that may be caused private parties, the loss of
governmental efficiency and the obstacle to the performance of its multifarious
functions are far greater if such a fundamental principle were abandoned and the
availability of judicial remedy were not thus restricted. With the well-known propensity
on the part of our people to go to court, at the least provocation, the loss of time and
energy required to defend against law suits, in the absence of such a basic principle
that constitutes such an effective obstacle, could very well be imagined.
An unincorporated government agency without any separate juridical personality of its own enjoys
immunity from suit because it is invested with an inherent power of sovereignty. Accordingly, a claim for
damages against the agency cannot prosper; otherwise, the doctrine of sovereign immunity is
violated.[11]However, the need to distinguish between an unincorporated government agency performing
governmental function and one performing proprietary functions has arisen. The immunity has been upheld in
favor of the former because its function is governmental or incidental to such function; [12] it has not been
upheld in favor of the latter whose function was not in pursuit of a necessary function of government but was
essentially a business.[13]
Should the doctrine of sovereignty immunity or non-suability of the State be extended to the ATO?
In its challenged decision,[14] the CA answered in the negative, holding:
On the first assignment of error, appellants seek to impress upon Us that the
subject contract of sale partook of a governmental character. Apropos, the lower court
erred in applying the High Courts ruling in National Airports Corporation vs.
Teodoro (91 Phil. 203 [1952]), arguing that in Teodoro, the matter involved the
collection of landing and parking fees which is a proprietary function, while the case at
bar involves the maintenance and operation of aircraft and air navigational facilities and
services which are governmental functions.
We are not persuaded.
Contrary to appellants conclusions, it was not merely the collection of landing
and parking fees which was declared as proprietary in nature by the High Court
in Teodoro, but management and maintenance of airport operations as a whole, as
well. Thus, in the much later case of Civil Aeronautics Administration vs. Court of
Appeals (167 SCRA 28 [1988]), the Supreme Court, reiterating the pronouncements
laid down in Teodoro, declared that the CAA (predecessor of ATO) is an agency not
immune from suit, it being engaged in functions pertaining to a private entity. It went on
to explain in this wise:
xxx
The Civil Aeronautics Administration comes under the
category of a private entity. Although not a body corporate it was
created, like the National Airports Corporation, not to maintain a
necessary function of government, but to run what is essentially a
business, even if revenues be not its prime objective but rather
the promotion of travel and the convenience of the travelling
public. It is engaged in an enterprise which, far from being the
exclusive prerogative of state, may, more than the construction of
public roads, be undertaken by private concerns. [National
Airports Corp. v. Teodoro, supra, p. 207.]
xxx
True, the law prevailing in 1952 when the Teodoro case
was promulgated was Exec. Order 365 (Reorganizing the Civil
Aeronautics Administration and Abolishing the National Airports
Corporation). Republic Act No. 776 (Civil Aeronautics Act of
the Philippines), subsequently enacted on June 20, 1952, did not
alter the character of the CAAs objectives under Exec. Order
365. The pertinent provisions cited in the Teodoro case,
particularly Secs. 3 and 4 of Exec. Order 365, which led the Court
to consider the CAA in the category of a private entity were
retained substantially in Republic Act 776, Sec. 32(24) and
(25). Said Act provides:
Sec. 32. Powers and Duties of the Administrator. Subject
to the general control and supervision of the Department Head, the
Administrator shall have among others, the following powers and
duties:
xxx
(24) To administer, operate, manage, control, maintain and
develop the Manila International Airport and all government-owned
aerodromes except those controlled or operated by the Armed
Forces of the Philippines including such powers and duties as: (a)
to plan, design, construct, equip, expand, improve, repair or alter
aerodromes or such structures, improvement or air navigation
facilities; (b) to enter into, make and execute contracts of any kind
with any person, firm, or public or private corporation or entity;
(25) To determine, fix, impose, collect and receive landing
fees, parking space fees, royalties on sales or deliveries, direct or
indirect, to any aircraft for its use of aviation gasoline, oil and
lubricants, spare parts, accessories and supplies, tools, other
royalties, fees or rentals for the use of any of the property under its
management and control.
xxx
From the foregoing, it can be seen that the CAA is
tasked with private or non-governmental functions which operate
to remove it from the purview of the rule on State immunity from
suit. For the correct rule as set forth in the Teodoro case states:
xxx
Not all government entities, whether corporate or non-
corporate, are immune from suits.Immunity from suits is
determined by the character of the objects for which the entity
was organized.The rule is thus stated in Corpus Juris:
Suits against State agencies with
relation to matters in which they have
assumed to act in private or non-
governmental capacity, and various suits
against certain corporations created by the
 state for public purposes, but to engage in
matters partaking more of the nature of
ordinary business rather than functions of a
governmental or political character, are not
regarded as suits against the state. The latter
is true, although the state may own stock or
property of such a corporation for by engaging
in business operations through a corporation,
the state divests itself so far of its sovereign
character, and by implication consents to suits
against the corporation. (59 C.J., 313)
[National Airports Corporation v.
Teodoro, supra, pp. 206-207; Italics supplied.]
This doctrine has been reaffirmed in the recent case
of Malong v. Philippine National Railways[G.R. No. L-49930,
August 7, 1985, 138 SCRA 63], where it was held that the
Philippine National Railways, although owned and operated by
the government, was not immune from suit as it does not exercise
sovereign but purely proprietary and business
functions. Accordingly, as the CAA was created to undertake the
management of airport operations which primarily involve
proprietary functions, it cannot avail of the immunity from suit
accorded to government agencies performing strictly
governmental functions.[15]
In our view, the CA thereby correctly appreciated the juridical character of the ATO as an agency
of the Government not performing a purely governmental or sovereign function, but was instead involved in
the management and maintenance of the Loakan Airport, an activity that was not the exclusive prerogative of
the State in its sovereign capacity. Hence, the ATO had no claim to the States immunity from suit. We uphold
the CAs aforequoted holding.
TRANSITORTY PROVISIONS
Section 85. Abolition of the Air Transportation Office. The Air Transportation
Office (ATO) created under Republic Act No. 776, a sectoral office of the Department
of Transportation and Communications (DOTC), is hereby abolished.
All powers, duties and rights vested by law and exercised by the
ATO is hereby transferred to the Authority.
All assets, real and personal properties, funds and revenues owned by or
vested in the different offices of the ATO are transferred to the Authority. All
contracts, records and documents relating to the operations of the abolished
agency and its offices and branches are likewise transferred to the Authority. Any
real property owned by the national government or government-owned
corporation or authority which is being used and utilized as office or facility by the
ATO shall be transferred and titled in favor of the Authority.
Section 23 of R.A. No. 9497 enumerates the corporate powers vested in the CAAP, including the
power to sue and be sued, to enter into contracts of every class, kind and description, to construct, acquire,
own, hold, operate, maintain, administer and lease personal and real properties, and to settle, under such
terms and conditions most advantageous to it, any claim by or against it.[18]
With the CAAP having legally succeeded the ATO pursuant to R.A. No. 9497, the obligations that the ATO had
incurred by virtue of the deed of sale with the Ramos spouses might now be enforced against the CAAP.
WHEREFORE, the Court denies the petition for review on certiorari, and affirms the decision promulgated by
the Court of Appeals.
No pronouncement on costs of suit.
SO ORDERED.

We further observe the doctrine of sovereign immunity cannot be successfully invoked to defeat a
valid claim for compensation arising from the taking without just compensation and without the proper
expropriation proceedings being first resorted to of the plaintiffs property.[16] Thus, in De los Santos v.
Intermediate Appellate Court,[17] the trial courts dismissal based on the doctrine of non-suability of the State of
two cases (one of which was for damages) filed by owners of property where a road 9 meters wide and 128.70
meters long occupying a total area of 1,165 square meters and an artificial creek 23.20 meters wide and
128.69 meters long occupying an area of 2,906 square meters had been constructed by the provincial
engineer of Rizal and a private contractor without the owners knowledge and consent was reversed and the
cases remanded for trial on the merits. The Supreme Court ruled that the doctrine of sovereign immunity was
not an instrument for perpetrating any injustice on a citizen. In exercising the right of eminent domain, the
Court explained, the State exercised its jus imperii, as distinguished from its proprietary rights, or jus
gestionis; yet, even in that area, where private property had been taken in expropriation without just
compensation being paid, the defense of immunity from suit could not be set up by the State against an action
for payment by the owners. ARCHBISHOP FERNANDO R. CAPALLA, OMAR SOLITARIO ALI and MARY ANNE L. SUSANO,
Petitioners,
Lastly, the issue of whether or not the ATO could be sued without the States consent has been - versus -
rendered moot by the passage of Republic Act No. 9497, otherwise known as the Civil Aviation Authority Act
of 2008. THE HONORABLE COMMISSION ON ELECTIONS,
Respondent.
R.A. No. 9497 abolished the ATO, to wit:

Section 4. Creation of the Authority. There is hereby created an independent DECISION

regulatory body with quasi-judicial and quasi-legislative powers and possessing
corporate attributes to be known as the Civil Aviation Authority of the Philippines
(CAAP), herein after referred to as the Authority attached to the Department of
Transportation and Communications (DOTC) for the purpose of policy
coordination. For this purpose, the existing Air transportation Office created
under the provisions of Republic Act No. 776, as amended is hereby abolished.
xxx
Under its Transitory Provisions, R.A. No. 9497 established in place of the ATO the Civil Aviation Authority of
the Philippines (CAAP), which thereby assumed all of the ATOs powers, duties and rights, assets, real and
personal properties, funds, and revenues, viz:
PERALTA, J.:
Pursuant to its authority to use an Automated Election System (AES) under Republic Act (RA) No. 8436, as
amended by RA No. 9369, or the Automation Law and in accordance with RA No. 9184, otherwise known as
the Government Procurement Reform Act, the Commission on Elections (Comelec) posted and published an
invitation to apply for eligibility and to bid for the 2010 Poll Automation Project [1] (the Project). On March 18,
2009, the Comelec approved and issued a Request for Proposal[2] (RFP) for the Project consisting of the
following components:

CHAPTER XII Component 1: Paper-Based Automation Election System (AES)


1-A. Election Management System (EMS)
1-B. Precinct Count Optical Scan (PCOS) System
1-C. Consolidation/Canvassing System (CCS)
Component 2: Provision for Electronic Transmission of Election Results using Public
Telecommunications Network
Component 3: Overall Project Management[3]
On June 9, 2009, the Comelec issued Resolution No. 8608 awarding the contract for the Project to
respondent Smartmatic-TIM.[4] On July 10, 2009, the Comelec and Smartmatic-TIM entered into a Contract for
the Provision of an Automated Election System for the May 10, 2010 Synchronized National and Local
Elections,[5] (AES Contract, for brevity). The contract between the Comelec and Smartmatic-TIM was one of
lease of the AES with option to purchase (OTP) the goods listed in the contract. In said contract, the Comelec
was given until December 31, 2010 within which to exercise the option.
On September 23, 2010, the Comelec partially exercised its OTP 920 units of PCOS machines with
corresponding canvassing/consolidation system (CCS) for the special elections in certain areas in the
provinces of Basilan, Lanao del Sur and Bulacan.[6] In a letter[7] dated December 18, 2010, Smartmatic-TIM,
through its Chairman Cesar Flores (Flores), proposed a temporary extension of the option period on the
remaining 81,280 PCOS machines until March 31, 2011, waiving the storage costs and covering the
maintenance costs. The Comelec did not exercise the option within the extended period. Several extensions
were given for the Comelec to exercise the OTP until its final extension on March 31, 2012.
On March 6, 2012, the Comelec issued Resolution No. 9373[8] resolving to seriously consider
exercising the OTP subject to certain conditions. On March 21, 2012, the Comelec issued Resolution No.
9376[9] resolving to exercise the OTP the PCOS and CCS hardware and software in accordance with the AES
contract between the Comelec and Smartmatic-TIM in connection with the May 10, 2010 elections subject to
the following conditions: (1) the warranties agreed upon in the AES contract shall be in full force and effect; (2)
the original price for the hardware and software covered by the OTP as specified in the AES contract shall be
maintained, excluding the cost of the 920 units of PCOS and related peripherals previously purchased for use
in the 2010 special elections; and (3) all other services related to the 2013 AES shall be subject to public
bidding. On March 29, 2012, the Comelec issued Resolution No. 9377[10] resolving to accept Smartmatic-TIMs
offer to extend the period to exercise the OTP until March 31, 2012 and to authorize Chairman Brillantes to
sign for and on behalf of the Comelec the Agreement on the Extension of the OTP Under the AES
Contract[11] (Extension Agreement, for brevity). The aforesaid Extension Agreement was signed on March 30,
2012.[12] On even date, the Comelec issued Resolution No. 9378[13] resolving to approve the Deed of Sale
between the Comelec and Smartmatic-TIM to purchase the latters PCOS machines (hardware and software)
to be used in the upcoming May 2013 elections and to authorize Chairman Brillantes to sign the Deed of Sale
for and on behalf of the Comelec. The Deed of Sale[14] was forthwith executed.
Claiming that the foregoing issuances of the Comelec, as well as the transactions entered
pursuant thereto, are illegal and unconstitutional, petitioners come before the Court in four separate Petitions
for Certiorari, Prohibition, and Mandamus imputing grave abuse of discretion amounting to lack or excess of
jurisdiction on the part of the Comelec in issuing the assailed Resolutions and in executing the assailed
Extension Agreement and Deed.
G.R. No. 201112
In G.R. No. 201112, petitioners Archbishop Fernando R. Capalla, Omar Solitario Ali and Mary
Anne L. Susano pray that a Temporary Restraining Order (TRO) be issued enjoining the Comelec from
purchasing the PCOS machines until after final judgment of the instant case; a writ of prohibition be issued
against the Comelec for the purchase of these defective PCOS machines; a writ of mandamus be issued
compelling the Comelec to conduct the necessary bidding for the equipment and facilities which shall be used
for the 2013 National and Local Elections; and to declare Comelec Resolution Nos. 9376, 9377, and 9378, on
the purchase of PCOS machines, null and void.
Petitioners argue that if there is a necessity to purchase the PCOS machines, the Comelec should
follow RA 9184 requiring competitive public bidding. They likewise argue that the OTP clause embodied in the
contract with Smartmatic-TIM should be rendered invalid not only because the OTP has already lapsed but
because of the fact that the OTP clause is a circumvention of the explicit provisions of RA 9184. Petitioners
add that the current PCOS machines do not meet the rigorous requirements of RA 9369 that the system
procured must have demonstrated capability and should have been successfully used in a prior electoral
exercise here or abroad. Petitioners submit that there are intrinsic technical infirmities as regards the PCOS
machines used during the 2010 elections which rendered it incapable for future use. Lastly, petitioners claim
that the Comelec does not have the capability to purchase and maintain the PCOS machines, because of lack
of trained manpower and technical expertise to properly maintain the PCOS machines; thus, the purchase is
unfavorable to the general public.
G.R. No. 201121
In G.R. No. 201121, petitioners Solidarity for Sovereignty (S4S), represented by Ma. Linda Olaguer, Ramon
Pedrosa, Benjamin Paulino, Sr., Evelyn Coronel, Ma. Linda Olaguer Montayre and Nelson T. Montayre, pray
that a TRO be issued directing the Comelec to desist from implementing the contract; that Resolution No.
9376 be declared unconstitutional and all acts made pursuant thereto, including the purchase of the PCOS
machines unlawful and void; that an Injunction be issued prohibiting the Comelec from further pursuing any act
pursuant to Resolution No. 9376.[15]
Petitioners argue that the Comelecs act of exercising its OTP the PCOS machines from
Smartmatic-TIM after the period had already lapsed is illegal and unlawful.[16] They explain that the period
within which the Comelec may exercise the OTP could last only until December 31, 2010 without extension as
provided in the Comelecs bid bulletin.[17] They further assert that the Comelecs acceptance of Smartmatic-
TIMs unilateral extension of the option period constitutes substantial amendment to the AES contract giving
undue benefit to the winning bidder not available to the other bidders.[18] Petitioners also contend that the
Comelecs decision to purchase and use the PCOS machines is unconstitutional, as it allows the Comelec to
abrogate its constitutional duty to safeguard the election process by subcontracting the same to an
independent provider (Smartmatic-TIM), who controls the software that safeguards the entire election process.
The purchase of the PCOS machines for use in the May 2013 elections would be tantamount to a complete
surrender and abdication of the Comelecs constitutional mandate in favor of Smartmatic-TIM. The control of
the software and process verification systems places the Comelec at the end of the process as it merely
receives the report of Smartmatic-TIM. This, according to petitioners, amounts to a direct transgression of the
exclusive mandate of the Comelec completely to take charge of the enforcement and administration of the
conduct of elections. [19]Lastly, petitioners aver that the Comelecs act of deliberately ignoring the palpable
infirmities and defects of the PCOS machines, as duly confirmed by forensic experts, is in violation of Section
2, Article V of the Constitution, as it fails to safeguard the integrity of the votes. They went on by saying that
the subject PCOS machines lack security features which can guaranty the secrecy and sanctity of our votes in
direct contravention of RA 9369 which requires that the automated election system must at least possess an
adequate security feature against unauthorized access. In deciding to purchase the PCOS machines despite
the above-enumerated defects, the Comelecs decision are claimed to be unconstitutional.[20]
G.R. No. 201127
In G.R. No. 201127, petitioners Teofisto Guingona, Bishop Broderick S. Pabillo, Solita Collas Monsod, Maria
Corazon Mendoza Acol, Fr. Jose Dizon, Nelson Java Celis, Pablo R. Manalastas, Georgina R. Encanto and
Anna Leah E. Colina pray that the Court issue a TRO enjoining and restraining respondents Comelec and
Smartmatic-TIM from implementing Comelec Resolution No. 9376 and the Deed of Sale for the acquisition
and purchase of the PCOS machines and related equipment; issue writ of preliminary injunction; declare
Comelec Resolution No. 9376 void and unconstitutional and annul the Deed of Sale; and direct the Comelec
to conduct public bidding soonest for the automated election system to be used for the 2013 elections.[21]
Petitioners fault the Comelec in totally disregarding the recommendation of the Comelec Advisory
Council (CAC) not to exercise the OTP. They point out that in its Resolution No. 2012-2003, the CAC resolved
to recommend that the Comelec should exert all efforts to procure the necessary AES only through public
bidding. The CAC likewise allegedly recommended that the OTP should not be exercised if as a consequence,
the rest of the system must come from the same vendor as the Comelec would lose the opportunity to look for
better technology; would prevent the Comelec from taking advantage of the best possible technology available;
would prevent other prospective vendors from competitively participating in the bidding process; and may
erode the public trust and confidence in the electoral process. In its report to the Congressional Oversight
Committee after the 2010 elections, the CAC supposedly concluded that the Comelec does not need to use
the same PCOS machines and that the Comelec would be better off not exercising the OTP the PCOS
machines so it can look for an even better solution for the May 2013 elections.[22] Like the other petitioners, it is
their position that Comelec Resolution No. 9376 is totally null and void having been issued in violation of the
express provisions of RA 9184 and the AES contract. According to petitioners, the Comelec itself provided in
its bid bulletins for a fixed and determinate period, and such period ended on December 31, 2010. Thus,
Smartmatic-TIM could not have unilaterally extended the option period and the Comelec could not have also
given its consent to the extension. In extending the option period, it is tantamount to giving the winning bidder
a benefit that was not known and available to all bidders during the bidding of the 2010 AES, which is a clear
violation of the bidding rules and the equal protection clause of the Constitution.[23] Considering that the option
period already expired, the purchase of the PCOS machines requires competitive public bidding. Lastly,
petitioners claim that the Comelec committed grave abuse of discretion in opting to buy the PCOS machines
and allied paraphernalia of Smartmatic-TIM for the 2013 elections, despite incontrovertible findings of the
glitches, malfunctions, bugs, and defects of the same.[24]
 G.R. No. 201418
In G.R. No. 201418, petitioners Tanggulang Demokrasya (Tan Dem), Inc., Evelyn L. Kilayko,
Teresita D. Baltazar, Pilar L. Calderon and Elita T. Montilla pray that the Court annul Resolution No. 9376 and
the March 30, 2012 Deed of Sale, and prohibit the Comelec and Smartmatic-TIM from implementing the same;
and declare said Resolution and Deed of Sale invalid for having been issued and executed by the Comelec
with grave abuse of discretion and for violating the provisions of R.A. 9184.[25]
Petitioners claim that the Comelec committed grave abuse of discretion amounting to lack or
excess of jurisdiction in contracting for the purchase of AES goods and services from Smartmatic-TIM in spite
of the below par performance of the latters PCOS machines, CCS and other software and hardware in the
May 2010 elections and non-compliance with the minimum functional capabilities required by law.[26] They
echo the other petitioners contention that the Comelecs decision to buy the CCS, PCOS machines, software
and hardware of Smartmatic violates RA 9184s requirement of a prior competitive public bidding. Since the
Comelec is bent on pursuing the purchase of the subject goods, which is an entirely new procurement,
petitioners contend that there must be a public bidding. They argue that there is enough time to conduct public
bidding for the 2013 elections, considering that for the May 2010 elections, the Comelec only had 10 months
and they were able to conduct the public bidding. Petitioners are of the view that there is no more OTP to
speak of, because the option period already lapsed and could not be revived by the unilateral act of one of the
contracting parties.[27]
On April 24, 2012, the Court issued a TRO enjoining the implementation of the assailed contract of
sale. The consolidated cases were later set for Oral Arguments on the following issues:
I. Whether or not the Commission on Elections may validly accept the
extension of time unilaterally given by Smartmatic-TIM Corporation within which to
exercise the option to purchase under Article 4 of the Contract for the Provision of an
Automated Election System for the May 2010 Synchronized National and Local
Elections; and
II. Whether or not the acceptance of the extension and the issuance of
Comelec En Banc Resolution No. 9376 violate Republic Act No. 9184 or the
Government Procurement Reform Act and its Implementing Rules, and Republic Act
No. 9369 or the Automated Election Systems Act.
The parties were, thereafter, required to submit their Memoranda.
The petitions are without merit.
Simply stated, petitioners assail the validity and constitutionality of the Comelec Resolutions for the
purchase of the subject PCOS machines as well as the Extension Agreement and the Deed of Sale covering
said goods mainly on three grounds: (1) the option period provided for in the AES contract between the
Comelec and Smartmatic-TIM had already lapsed and, thus, could no longer be extended, such extension
being prohibited by the contract; (2) the extension of the option period and the exercise of the option without
competitive public bidding contravene the provisions of RA 9184; and, (3) despite the palpable infirmities and
defects of the PCOS machines, the Comelec purchased the same in contravention of the standards laid down
in RA 9369.
For its part, the Comelec defends the validity and constitutionality of its decision to purchase the subject
PCOS machines, pursuant to the OTP under the AES contract with Smartmatic-TIM, on the following grounds:
(1) Article 6.6 of the AES contract which states the option period was amended by the extension agreement;
(2) the exercise of the OTP is not covered by RA 9184, because it is merely an implementation of a previously
bidded contract; (3) taking into account the funds available for the purpose, exercising the OTP was the
prudent choice for the Comelec and is more advantageous to the government; and (4) the exercise of the OTP
is consistent with the technical requirements of RA 9369.
Stated in another way, Smartmatic-TIM insists on the validity of the subject transaction based on
the following grounds: (1) there is no prohibition either in the contract or provision of law for it to extend the
option period; rather, the contract itself allows the parties to amend the same; (2) the OTP is not an
independent contract in itself, but is a provision contained in the valid and existing AES contract that had
already satisfied the public bidding requirements of RA 9184; (3) exercising the option was the most
advantageous option of the Comelec; and (4) Smartmatic-TIM has an established track record in providing
effective and accurate electoral solutions and its satisfactory performance has been proven during the 2010
elections. The alleged glitches in the May 2010 elections, if at all, are not attributable to the PCOS machines.
We agree with respondents.
At the outset, we brush aside the procedural barriers (i.e., locus standi of petitioners and the non-observance
of the hierarchy of courts) that supposedly prevent the Court from entertaining the consolidated petitions. As
we held in Guingona, Jr. v. Commission on Elections:[28]
There can be no doubt that the coming 10 May 2010 [in this case, May 2013] elections
is a matter of great public concern. On election day, the country's registered voters will
come out to exercise the sacred right of suffrage. Not only is it an exercise that ensures
the preservation of our democracy, the coming elections also embodies our people's
last ounce of hope for a better future. It is the final opportunity, patiently awaited by our
people, for the peaceful transition of power to the next chosen leaders of our country. If
there is anything capable of directly affecting the lives of ordinary Filipinos so as to
come within the ambit of a public concern, it is the coming elections, more so with the
alarming turn of events that continue to unfold. The wanton wastage of public funds
brought about by one bungled contract after another, in staggering amounts, is in itself
a matter of grave public concern.[29]
Thus, in view of the compelling significance and transcending public importance of the issues raised by
petitioners, the technicalities raised by respondents should not be allowed to stand in the way, if the ends of
justice would not be subserved by a rigid adherence to the rules of procedure.[30]
Now on the substantive issues. In order to achieve the modernization program of the Philippine
Electoral System, which includes the automation of the counting, transmission and canvassing of votes for the
May 2010 national and local elections with systems integration and over-all project management in a
comprehensive and well-managed manner,[31] the Comelec entered into an AES contract with Smartmatic-TIM
for the lease of goods and purchase of services under the contract, with option to purchase the goods.
The option contract between the Comelec and Smartmatic-TIM is embodied in Article 4.3 of the
AES contract to wit:
Article 4
Contract Fee and Payment
xxxx
4.3. OPTION TO PURCHASE
In the event the COMELEC exercises its option to purchase the Goods as listed in
Annex L, COMELEC shall pay the PROVIDER an additional amount of Two Billion One
Hundred Thirty Million Six Hundred Thirty- Five Thousand Forty-Eight Pesos and
Fifteen Centavos (Php2,130,635,048.15) as contained in the Financial Proposal of the
joint venture partners Smartmatic and TIM.
In case COMELEC should exercise its option to purchase, a warranty shall be required
in order to assure that: (a) manufacturing defects shall be corrected; and/or (b)
replacements shall be made by the PROVIDER, for a minimum period of three (3)
months, in the case of supplies, and one (1) year, in the case of equipment, after
performance of this Contract. The obligation for the warranty shall be covered by
retention money of ten percent (10%) of every option to purchase payment made.
The retention money will be returned within five (5) working days after the expiration of
the above warranty, provided, however, that the goods supplied are in good operating
condition free from patent and latent defects, all the conditions imposed under the
purchase contract have been fully met, and any defective machines, except to those
attributable to the COMELEC, have been either repaired at no additional charge or
replaced or deducted from the price under the Option to Purchase.[32]
Article 6.6 thereof, in turn provides for the period within which the Comelec could exercise the
option, thus:
Article 6
COMELECs Responsibilities
xxxx
6.6. COMELEC shall notify the PROVIDER on or before 31 December 2010 of its
option to purchase the Goods as listed in Annex L.[33]
The Comelec did not exercise the option within the period stated in the above provision. Smartmatic, however,
unilaterally extended the same until its final extension on March 31, 2012. The Comelec, thereafter, accepted
the option and eventually executed a Deed of Sale involving said goods. Now, petitioners come before the
Court assailing the validity of the extension, the exercise of the option and the Deed of Sale. In light of the
AES contract, can Smartmatic-TIM unilaterally extend the option period? Can the Comelec accept the
extension?
We answer in the affirmative.
It is a basic rule in the interpretation of contracts that an instrument must be construed so as to give effect to
all the provisions of the contract.[34] In essence, the contract must be read and taken as a whole.[35] While the
contract indeed specifically required the Comelec to notify Smartmatic-TIM of its OTP the subject goods until
December 31, 2010, a reading of the other provisions of the AES contract would show that the parties are
given the right to amend the contract which may include the period within which to exercise the option. There
is, likewise, no prohibition on the extension of the period, provided that the contract is still effective.
Article 2 of the AES contract lays down the effectivity of the contract, viz.:
Article 2
EFFECTIVITY
2.1. This Contract shall take effect upon the fulfillment of all of the following conditions:
(a) Submission by the PROVIDER of the Performance Security;
(b) Signing of this Contract in seven (7) copies by the parties;
and
(c) Receipt by the PROVIDER of the Notice to Proceed.
2.2. The Term of this Contract begins from the date of effectivity until the release
of the Performance Security, without prejudice to the surviving provisions of this
Contract, including the warranty provision as prescribed in Article 8.3 and the
period of the option to purchase (Emphasis supplied).[36]
Obviously, the contract took effect even prior to the 2010 elections. The only question now is whether its
existence already ceased. Pursuant to the above-quoted provision, it is important to determine whether or not
the performance security had already been released to Smartmatic-TIM. In Article 8 of the AES contract,
performance security was defined and the rules in releasing said security were laid down, to wit:
Article 8
Performance Security and Warranty
8.1. Within three (3) days from receipt by the PROVIDER of the formal Notice of Award
from COMELEC, the PROVIDER shall furnish COMELEC with a Performance Security
in an amount equivalent to five percent (5%) of the Contract Amount; which
Performance Security as of this date has been duly received by COMELEC.
Within seven (7) days from delivery by the PROVIDER to COMELEC of the Over-all
Project Management Report after successful conduct of the May 10, 2010 elections,
COMELEC shall release to the PROVIDER the above-mentioned Performance
Security without need of demand.[37]
Smartmatic-TIM categorically stated in its Consolidated Comment to the petitions that the Comelec still
retains P50M of the amount due Smartmatic-TIM as performance security.[38] In short, the performance
security had not yet been released to Smartmatic-TIM which indicates that the AES contract is still effective
and not yet terminated. Consequently, pursuant to Article 19[39] of the contract, the provisions thereof may still
be amended by mutual agreement of the parties provided said amendment is in writing and signed by the
parties. In light of the provisions of the AES contract, there is, therefore, nothing wrong with the execution of
the Extension Agreement.
Considering, however, that the AES contract is not an ordinary contract as it involves procurement by a
government agency, the rights and obligations of the parties are governed not only by the Civil Code but also
by RA 9184. In this jurisdiction, public bidding is the established procedure in the grant of government
contracts. The award of public contracts, through public bidding, is a matter of public policy. [40] The parties are,
therefore, not at full liberty to amend or modify the provisions of the contract bidded upon.
The three principles of public bidding are: (1) the offer to the public; (2) an opportunity for competition; and (3)
a basis for the exact comparison of bids.[41] By its very nature, public bidding aims to protect public interest by
giving the public the best possible advantages through open competition.[42] Competition requires not only
bidding upon a common standard, a common basis, upon the same thing, the same subject matter, and the
same undertaking, but also that it be legitimate, fair and honest and not designed to injure or defraud the
government.[43] The essence of competition in public bidding is that the bidders are placed on equal footing
which means that all qualified bidders have an equal chance of winning the auction through their
bids.[44]Another self-evident purpose of public bidding is to avoid or preclude suspicion of favoritism and
anomalies in the execution of public contracts.[45]
A winning bidder is not precluded from modifying or amending certain provisions of the contract bidded upon.
However, such changes must not constitute substantial or material amendments that would alter the basic
parameters of the contract and would constitute a denial to the other bidders of the opportunity to bid on the
same terms.[46] The determination of whether or not a modification or amendment of a contract bidded out
constitutes a substantial amendment rests on whether the contract, when taken as a whole, would contain
substantially different terms and conditions that would have the effect of altering the technical and/or financial
proposals previously submitted by the other bidders. The modifications in the contract executed between the
government and the winning bidder must be such as to render the executed contract to be an entirely different
contract from the one bidded upon.[47]
Public bidding aims to secure for the government the lowest possible price under the most
favorable terms and conditions, to curtail favoritism in the award of government contracts and avoid suspicion
of anomalies, and it places all bidders in equal footing. Any government action which permits any substantial
variance between the conditions under which the bids are invited and the contract executed after the award
thereof is a grave abuse of discretion amounting to lack or excess of jurisdiction which warrants proper judicial
action.[48] 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.[49]
In Power Sector Assets and Liabilities Management Corporation (PSALM) v. Pozzolanic
Philippines Incorporated,[50] the Court nullified the right of first refusal granted to respondent therein in the
Batangas Contract for being contrary to public policy. The Court explained that the same violated the
requirement of competitive public bidding in the government contract, because the grant of the right of first
refusal did not only substantially amend the terms of the contract bidded upon so that resultantly the other
bidders thereto were deprived of the terms and opportunities granted to respondent therein after it won the
public auction, but also altered the bid terms by effectively barring any and all true bidding in the future.[51]
Also in Agan, Jr. v. Philippine International Air Terminals Co., Inc., (PIATCO), [52] this Court
declared as null and void, for being contrary to public policy, the Concession Agreement entered into by the
government with PIATCO, because it contained provisions that substantially departed from the Draft
Concession Agreement included in the bid documents. The Court considered the subject contracts a mockery
of the bidding process, because they were substantially amended after their award to the successful bidder on
terms more beneficial to PIATCO and prejudicial to public interest.[53]
The same conclusions cannot be applied in the present case.
One. Smartmatic-TIM was not granted additional right that was not previously available to the other
bidders.Admittedly, the AES contract was awarded to Smartmatic-TIM after compliance with all the
requirements of a competitive public bidding. The RFP, Bid Bulletins and the AES contract identified the
contract as one of lease with option to purchase. The AES contract is primarily a contract of lease of
goods[54] listed in the contract and purchase of services[55] also stated in the contract. Section 4.3 thereof gives
the Comelec the OTP the goods agreed upon. The same provision states the conditions in exercising the
option, including the additional amount that the Comelec is required to pay should it exercise such right. It is,
therefore, undisputed that this grant of option is recognized by both parties and is already a part of the
principal contract of lease. Having been included in the RFP and the bid bulletins, this right given to the
Comelec to exercise the option was known to all the bidders and was considered in preparing their bids. The
bidders were apprised that aside from the lease of goods and purchase of services, their proposals should
include an OTP the subject goods. Although the AES contract was amended after the award of the contract to
Smartmatic-TIM, the amendment only pertains to the period within which the Comelec could exercise the
option because of its failure to exercise the same prior to the deadline originally agreed upon by the parties.
Unlike in PSALM, wherein the winning bidder was given the right of first refusal which substantially amended
the terms of the contract bidded upon, thereby depriving the other bidders of the terms and opportunities
granted to winning bidder after it won the public auction; and in Agan, Jr., wherein the Concession Agreement
entered into by the government with PIATCO contained provisions that substantially departed from the draft
Concession Agreement included in the bid documents; the option contract in this case was already a part of
the original contract and not given only after Smartmatic-TIM emerged as winner. The OTP was actually a
requirement by the Comelec when the contract of lease was bidded upon. To be sure, the Extension
Agreement does not contain a provision favorable to Smartmatic-TIM not previously made available to the
other bidders.
Two. The amendment of the AES contract is not substantial. The approved budget for the contract
was P11,223,618,400.00[56] charged against the supplemental appropriations for election modernization. Bids
were, therefore, accepted provided that they did not exceed said amount. After the competitive public bidding,
Smartmatic-TIM emerged as winner and the AES contract was thereafter executed. As repeatedly stated
above, the AES contract is a contract of lease with OTP giving the Comelec the right to purchase the goods
agreed upon if it decides to do so. The AES contract not only indicated the contract price for the lease of
goods and purchase of services which is P7,191,484,739.48, but also stated the additional amount that the
Comelec has to pay if it decides to exercise the option which is P2,130,635,048.15. Except for the period
within which the Comelec could exercise the OTP, the terms and conditions for such exercise are maintained
and respected. Admittedly, the additional amount the Comelec needed to pay was maintained (less the
amount already paid when it purchased 920 units of PCOS machines with corresponding CCS for the special
elections in certain areas in the provinces of Basilan, Lanao del Sur and Bulacan) subject to the warranties
originally agreed upon in the AES contract. The contract amount not only included that for the contract of lease
but also for the OTP. Hence, the competitive public bidding conducted for the AES contract was sufficient. A
new public bidding would be a superfluity.
higher price. This is especially true in this case as the terms and conditions for the exercise of the option
including the purchase price, had been included in the AES contract previously bidded upon. The parties are
bound to observe the limitations embodied therein, otherwise, a new public bidding would be needed.
We agree with respondents that the exercise of the option is more advantageous to the Comelec, because
the P7,191,484,739.48 rentals paid for the lease of goods and purchase of services under the AES contract
was considered part of the purchase price. For the Comelec to own the subject goods, it was required to pay
only P2,130,635,048.15. If the Comelec did not exercise the option, the rentals already paid would just be one
of the government expenses for the past election and would be of no use to future elections. Assuming that
the exercise of the option is nullified, the Comelec would again conduct another public bidding for the AES for
the 2013 elections with its available budget of P7 billion. Considering that the said amount is the available fund
for the whole election process, the amount for the purchase or lease of new AES will definitely be less than P7
billion. Moreover, it is possible that Smartmatic-TIM would again participate in the public bidding and could win
at a possibly higher price. The Comelec might end up acquiring the same PCOS machines but now at a higher
price.

The Solicitor General himself clarified during the oral arguments that the purchase price of the remaining The advantage to the government of the exercise of the OTP was even recognized by petitioners, shown
PCOS machines stated in the assailed Deed of Sale was the price stated in Article 4.3 of the AES contract. during the oral arguments:
Therefore, the said amount was already part of the original amount bidded upon in 2009 for the AES contract
which negates the need for another competitive bidding.[57] ASSOCIATE JUSTICE PERALTA:
Third. More importantly, the amendment of the AES contract is more advantageous to the May I just ask you, do you know the total value of the subject matter of this contract?
Comelec and the public.

The nature of an option contract was thoroughly explained in Eulogio v. Apeles,[58] to wit: DEAN ESPEJO:
Php1.8 billion pesos, Your Honor.
An option is a contract by which the owner of the property agrees with
another person that the latter shall have the right to buy the former's property at a fixed
price within a certain time. It is a condition offered or contract by which the owner ASSOCIATE JUSTICE PERALTA:
stipulates with another that the latter shall have the right to buy the property at a fixed Youre referring to the Deed of Sale.
price within a certain time, or under, or in compliance with certain terms and conditions;
or which gives to the owner of the property the right to sell or demand a sale. An option DEAN ESPEJO:
is not of itself a purchase, but merely secures the privilege to buy. It is not a sale of Yes, Your Honor.
property but a sale of the right to purchase. It is simply a contract by which the owner
of the property agrees with another person that he shall have the right to buy his ASSOCIATE JUSTICE PERALTA:
property at a fixed price within a certain time. He does not sell his land; he does not The whole, the whole equipment, subject matter of the contract.
then agree to sell it; but he does sell something, i.e., the right or privilege to buy at the
election or option of the other party. Its distinguishing characteristic is that it imposes DEAN ESPEJO:
no binding obligation on the person holding the option, aside from the consideration for I think roughly, the original contract something like 10 billion I am not sure, Your Honor.
the offer.[59]
ASSOCIATE JUSTICE PERALTA:
Also in Carceller v. Court of Appeals,[60] the Court described an option in this wise: 10 billion pesos.

An option is a preparatory contract in which one party grants to the other, for a fixed DEAN ESPEJO:
period and under specified conditions, the power to decide, whether or not to enter into Yes, Your Honor.
a principal contract. It binds the party who has given the option, not to enter into the
principal contract with any other person during the period designated and, within that ASSOCIATE JUSTICE PERALTA:
period, to enter into such contract with the one to whom the option was granted, if the Okay. Now, in the original contract of July 10, 2009, the contract was not actually a
latter should decide to use the option. It is a separate agreement distinct from the purchase contract but merely a lease contract.
contract which the parties may enter into upon the consummation of the option.[61]
In Adelfa Properties, Inc. v. CA,[62] the Court described an option as: DEAN ESPEJO:
Yes, Your Honor.
An option, as used in the law on sales, is a continuing offer or contract by which the
owner stipulates with another that the latter shall have the right to buy the property at a ASSOCIATE JUSTICE PERALTA:
fixed price within a certain time, or under, or in compliance with, certain terms and And the lease contract is 7.1 billion.
conditions, or which gives to the owner of the property the right to sell or demand a
sale. It is sometimes called an unaccepted offer. x x x[63] DEAN ESPEJO:
It says 7.1 billion.
From the foregoing jurisprudential pronouncements, an option is only a preparatory contract and a continuing
offer to enter into a principal contract. Under the set-up, the owner of the property, which is Smartmatic-TIM, ASSOCIATE JUSTICE PERALTA:
gives the optionee, which is the Comelec, the right to accept the formers offer to purchase the goods listed in Okay. But it is here [denominated] as a lease contract.
the contract for a specified amount, and within a specified period. Thus, the Comelec is given the right to DEAN ESPEJO:
decide whether or not it wants to purchase the subject goods. It is, therefore, uncertain whether or not the Yes, Your Honor.
principal contract would be entered into. The owner of the property would then have to wait for the optionee to
make a decision. A longer option period would mean that more time would be given to the optionee to ASSOCIATE JUSTICE PERALTA:
consider circumstances affecting its decision whether to purchase the goods or not. On the part of So the value was 10 billion pesos then you just pay the difference between ten (10)
Smartmatic-TIM, it would have to wait for a longer period to determine whether the subject goods will be sold and seven (7) you get 3 billion pesos to purchase all of these equipment.
to the Comelec or not, instead of freely selling or leasing them to other persons or governments possibly at a
DEAN ESPEJO:
Yes, Your Honor.
ASSOCIATE JUSTICE PERALTA:
Okay. Now, you look at your Deed of Sale, this is annexed to your petition, the value of
the Deed of Sale is something like two billion one hundred thirty million
(Php2,130,000,000).
DEAN ESPEJO:
Around that much, Your Honor.
ASSOCIATE JUSTICE PERALTA:
You add this at two [billion] one hundred thirty million and so to seven billion one
ninety-one the subject matter of your original contract; you come up with something like
over 9 billion pesos.
DEAN ESPEJO:
Close to Ten, Your Honor.
ASSOCIATE JUSTICE PERALTA:
Close to Ten.
DEAN ESPEJO:
Yes, Your Honor.
ASSOCIATE JUSTICE PERALTA:
So thats practically less than the total value of the equipment, because according to
you the total value would come up to 10 billion pesos, you add up the Lease Contract
of 7 billion and two billion, plus under this Deed of Sale which is the subject matter of
this petition, you will come up with a little more than 9 billion pesos even less than the
10 billion pesos. Do you think that is disadvantageous to the government?
DEAN ESPEJO:
May I be allowed to explain?
ASSOCIATE JUSTICE PERALTA:
Go ahead, you go ahead, you have all the time.
DEAN ESPEJO:
It may appear advantageous, Your Honor please, but on the other hand, there are
certain disadvantages there. For one thing, these are not brand new machines; these
are refurbished existing machines which could be suffering from hardware or software
problem. For the COMELEC to accept this, Your Honor please, each machine will have
to be checked as to its hardware and software. Eighty-two thousand (82,000) PCOS
machines, Your Honor please, what if half of them, [turn out] to be white elephants or
malfunctioning, Your Honor please, then we will be acquiring eighty-two thousand
(82,000) with fifty percent (50%) malfunctioning machines. There is a danger, Your
Honor please, that does not appear to the naked eye. In any event, with respect to the
financial figures there appears to be some advantages, Your Honor, please.
ASSOCIATE JUSTICE PERALTA:
x x x these are merely speculative. Yourre only speculating that there are dangers, the
dangers might not come, in fact, it might even be void or favorable. Okay, now my
other question is, do you think that if this was bidden out under R.A. 9184 for the
purchase of all these equipment, do you think that a bidder will come up with a bid of
less than 2 billion pesos for the whole equipment? When according to you, the
equipment in 2009 is 10 billion, and elections are very near already 2013, the filing of
certificates of candidacy will be on the second to the last month of this year?
DEAN ESPEJO:
May I be allowed to answer that by way of a speculation, Your Honor.
ASSOCIATE JUSTICE PERALTA:
Go ahead, please.
DEAN ESPEJO:
I think bidder will find it difficult to match that.
xxxx
ASSOCIATE JUSTICE PERALTA:
Okay. My other question is this. Okay, now you admitted that the original
value is 10 billion. Are you also aware that the budget of the COMELEC when they
come up with this contract is 7 billion?
DEAN ESPEJO:
Yes, Your Honor.
ASSOCIATE JUSTICE PERALTA:
And the total value of the original contract is 10 billion. Do you think that the COMELEC
will have money to purchase equipment valued at 10 billion pesos with only 7 billion
pesos for the elections of 2013? Because the budget of 7 billion is not for the purpose
only of the purchase of the equipment, but also includes for the budget of the elections,
pre, during and post elections expenses.
DEAN ESPEJO:
Well, Your Honor please, the shortfall of 3 billion pesos can be remedied if Congress
will appropriate additional amounts, if the President of this Republic will convince the
legislature to appropriate an additional amount, I see no problem why the shortfall of 3
billion cannot be remedied, Your Honor please.
ASSOCIATE JUSTICE PERALTA:
Oh, thats again speculative.
DEAN ESPEJO:
Again, thats unfortunate thats my speculation.
ASSOCIATE JUSTICE PERALTA:
You will have first to go to Congress, then you go to Senate, and then you go to the
President discounting the possibility of filing a petition to question the allocation of
additional amount for the 2013 elections, by the time that all of these exercises are
finished then election is there already.
DEAN ESPEJO:
Well, Im hopeful, Your Honor please, that our Congressmen and our Senators will rise
to the occasion and move fast and appropriate the needed amount of 3 billion pesos to
help the COMELEC acquire the proper Automated election System.
x x x[64]
Another reason posed by petitioners for their objection to the exercise of the option and the eventual execution
of the March 30, 2012 Deed of Sale is the existence of the alleged defects, glitches, and infirmities of the
subject goods. The technology provided by Smartmatic-TIM was not perfect, because of some technical
problems that were experienced during the 2010 elections. Petitioners herein doubt that the integrity and
sanctity of the ballots are protected because of these defects.
We do not agree.
Prior to the execution of the Deed of Sale, the Comelec and Smartmatic-TIM had agreed that the
latter would undertake fixes and enhancements to the hardware and software to make sure that the subject
goods are in working condition to ensure a free, honest, and credible elections. As former Commissioner
Augusto C. Lagman admitted[65] during the oral arguments, there are possible software solutions to the alleged
problems on the PCOS machines and it is not inherently impossible to remedy the technical problems that
have been identified. While there is skepticism that Smartmatic-TIM would be able to correct the supposed
defects prior to the 2013 elections because of its inaction during the two years prior to the exercise of the
option, we agree with the opinion of Chairman Sixto S. Brillantes, Jr. that it is absurd to expect Smartmatic-
TIM to invest time, money and resources in fixing the PCOS machines to the specifications and requirements
of the Comelec when prior to the exercise of the OTP, they do not have the assurance from the Comelec that
the latter will exercise the option.[66]
Moreover, as to the digital signature which appears to be the major concern of petitioners, it has
been clarified during the oral arguments that the PCOS machines are capable of producing digitally-signed
transmissions:
JUSTICE CARPIO:
I have some questions. Counsel, the law requires that the election returns that are ATTY. LAZATIN:
electronically transmitted must be digitally signed, correct? As I said, Your Honor, it is not a personal or customized signature. It is just like

ATTY. LAZATIN: JUSTICE CARPIO:

Thats right, Your Honor. It is a machine ID, in other words?

JUSTICE CARPIO: ATTY. LAZATIN:

Now, but in the 2010 elections, all election returns electronically transmitted No, let me explain it this way, Your Honor. The best example I can give, Your Honor, is
were NOT digitally signed, correct?
JUSTICE CARPIO:
ATTY. LAZATIN: Okay, let us define first what a digital signature means.

They were, Your Honors, please ATTY. LAZATIN:

The Rules of Court, Your Honor, defines digital signature as the first one it is electronic
JUSTICE CARPIO: signature consisting of a transformation of an electronic document or an electronic data
Why? How? message using an asymmetric or public Cryptosystem such that a person having the
initial untransformed electronic document and the signers public key can accurately
ATTY. LAZATIN: determine: (i) whether the transformation was created using the private key that
Your Honor, as we explained in our presentation, the iButtons, Your Honor, contain the corresponds to the signers public key; and (ii) whether the initial electronic document
digital signatures has been altered after the transformation was made.

JUSTICE CARPIO: JUSTICE CARPIO:

Yes, I understand that Therefore, digital signature requires private key and public key

ATTY. LAZATIN: ATTY. LAZATIN:

and the iButtons [interrupted] Yes, Your Honor.

JUSTICE CARPIO: JUSTICE CARPIO:

because they are there, the machine is capable of producing digitally-signed and this private key and public key are generated by an algorithm, correct?
transmissions. But you just said that the BEI Chairman did not input their private keys
because there was no time. It requires five (5) months. ATTY. LAZATIN:
Yes, thats right, Your Honor.
ATTY. LAZATIN:
Your Honor, as I said, there is a digital signature that was assigned to the BEIto the JUSTICE CARPIO:
BEIs, your Honor, okay. I am saying that there is digital signature. What I also said, And there is another algorithm which, if you matchif you put together the private key
Your Honor, is that there is also a possibility that another digital certificate or signature and the message, will generate the signature.
can come from another certification authority xxx ATTY. LAZATIN:
Thats right, Your Honor.
JUSTICE CARPIO:
No, thats a third partythats a third-party certifier, but thats an option. The law does not JUSTICE CARPIO:
require a third-party certification. It merely says that transmission must be digitally
signed. And the third algorithm, that if you put together the public key and the signature it will
accept or reject the message, thats correct?
ATTY. LAZATIN:
Thats right. ATTY. LAZATIN:
Thats correct, Your Honor.
JUSTICE CARPIO:
Thats why Chairman Melo told Congress that it will cost one (1) billion to get a third- JUSTICE CARPIO:
party certifier, but the law does not require it even now, if you said in your presentation Now, was that used in the 2010 elections?
that the BEI Chairman could not input their private key, thats generated because it
takes five (5) months to do that and the list of BEI Chairman is known only one (1) ATTY. LAZATIN:
month before the election, then how could there be a digital signature? Yes, your Honor.

ATTY. LAZATIN: JUSTICE CARPIO:

Your Honor, as I mentioned it is anot a customized or personal digital signature. It is a How was that private key generated?
digital signature that is assigned by COMELEC.
ATTY. LAZATIN:
JUSTICE CARPIO: Again, Your Honor, as I said
Assigned by COMELEC? How canwho inputs that digital signature?
JUSTICE CARPIO:
ATTY. LAZATIN: Did the BEI Chairman know what that private key is?
It is cranked out, Your Honor, and
ATTY. LAZATIN:
JUSTICE CARPIO: Your Honor, allow me to explain, Your Honor. The names, Your Honor, or the private
No, yourit is trusted that the list of the BEI Chairman is known only one (1) month keys arewere assigned to the BEIs Your Honor. In the same way, Your Honor, in the
before, so how can the BEI Chairman input their digital signature five (5) months before? office my code name, Your Honor, or assigned to me is 00 xxx
JUSTICE CARPIO: ATTY. LAZATIN:
You mean to say the private key is embedded in the machine? Thats my understanding, Your Honor.
ATTY. LAZATIN:
No, Your Honor, it is embedded in the iButton and they are given a x x x JUSTICE CARPIO:
And there was no certifying agency because it cost too much and the law did not
JUSTICE CARPIO: require that?
Yes, in the machinethe iButton is in the machine.
ATTY. LAZATIN:
ATTY. LAZATIN: Thats correct, Your Honor. But the machine, Your Honor, as I mentioned, is capable of
No, Your Honor. accepting any number of digital signatures whether self-generated or by a third-party
certification authority, Your Honor.
JUSTICE CARPIO:
Where is it? JUSTICE CARPIO:
Okay. So, whoever is in possession of that iButton and in possession of the four (4)
ATTY. LAZATIN: PINS, the set of PINs, for the other BEI number, can send a transmission?
It is a gadget, Your Honors, that is usedit is a separate gadget, your Honor xxx This is
a sample of an iButton, your Honor, and in fact we said that we are prepared to ATTY. LAZATIN:
demonstrate, Your Honor, and to show to this Court Yes, Your Honor.

xxxx JUSTICE CARPIO:

The moment you are in possession of the iButton and the four (4) sets of
JUSTICE CARPIO: PINs
On election Day, where was the iButton placed? In the machine?
ATTY. LAZATIN:
ATTY. LAZATIN: Thats correct, Your Honor.
To start the machine, Your Honor, you have to put it on top of that Button xxx
JUSTICE CARPIO:
JUSTICE CARPIO: If they can send an electronic transmission thats digitally signed and when received by
In other words, whoever is in possession of that iButton can make a digitally- the COMELEC and matched with the public key will result with an official election
transmitted election return, correct? return, correct?
ATTY. LAZATIN:
ATTY. LAZATIN: Thats correct. In the same way, Your Honor, that even if someone keeps his key or
Thats correct, Your Honor. Your Honor, together with the other BEIs because apart private key, Your Honor, if he is under threat he will also divulge it, Your Honor. Its the
from this iButton, Your Honor, for authentication the BEIs, three of them, Your Honor, same.
have an 8-digit PIN, Your Honor.
JUSTICE CARPIO:
JUSTICE CARPIO: Okay, so whoever wants to send it, he will have to get the private key from the BEI
How is that 8-digit PIN given to them? Chairman and the PIN numbers from the other members

ATTY. LAZATIN: ATTY. LAZATIN:

In a sealed envelope, Your Honor, these are x x x Yes, Your Honor.
JUSTICE CARPIO:
And then they also input that in the keyboard? JUSTICE CARPIO:
before they can send the electronic transmission.
ATTY. LAZATIN:
Yes, Your Honor. ATTY. LAZATIN:
Yes, Your Honor.
JUSTICE CARPIO:
In the display? JUSTICE CARPIO:
Okay. That clarifies things. x x x[67]
ATTY. LAZATIN:
Yes, Your Honor. As the Comelec is confronted with time and budget constraints, and in view of the Comelecs
JUSTICE CARPIO: mandate to ensure free, honest, and credible elections, the acceptance of the extension of the option period,
So, that iButton contains the private key? the exercise of the option, and the execution of the Deed of Sale, are the more prudent choices available to
the Comelec for a successful 2013 automated elections. The alleged defects in the subject goods have been
ATTY. LAZATIN: determined and may be corrected as in fact fixes and enhancements had been undertaken by Smartmatic-TIM.
Yes, Your Honor, thats my understanding. Petitioners could not even give a plausible alternative to ensure the conduct of a successful 2013 automated
elections, in the event that the Court nullifies the Deed of Sale.
JUSTICE CARPIO:
And who controls the public key? Who control[led] the public key in the last election? WHEREFORE, premises considered, the petitions are DISMISSED. The Temporary Restraining Order issued
by the Court on April 24, 2012 is LIFTED.
ATTY. LAZATIN:
My understanding, Your honor, is COMELEC, your Honor. SO ORDERED.

JUSTICE CARPIO:
COMELEC had the public key?