TATAD vs.
Sec of DOE including the temporary adjustment of the levels of prices of petroleum products and the
he petitions at bar challenge the constitutionality of Republic Act No. 8180 entitled "An Act
Deregulating the Downstream Oil Industry and For Other Purposes". 1 R.A. No. 8180 ends
twenty six (26) years of government regulation of the downstream oil industry. Few cases
carry a surpassing importance on the life of every Filipino as these petitions for the upswing
and downswing of our economy materially depend on the oscillation of oil.
First, the facts without the fat. Prior to 1971, there was no government agency regulating
the oil industry other than those dealing with ordinary commodities. Oil companies were
free to enter and exit the market without any government interference. There were four (4)
refining companies (Shell, Caltex, Bataan Refining Company and Filoil Refining) and six (6)
petroleum marketing companies (Esso, Filoil, Caltex, Getty, Mobil and Shell), then
operating in the country.2
In 1971, the country was driven to its knees by a crippling oil crisis. The government,
realizing that petroleum and its products are vital to national security and that their
continued supply at reasonable prices is essential to the general welfare, enacted the Oil
Industry Commission Act.3 It created the Oil Industry Commission (OIC) to regulate the
business of importing, exporting, re-exporting, shipping, transporting, processing, refining,
storing, distributing, marketing and selling crude oil, gasoline, kerosene, gas and other
refined petroleum products. The OIC was vested with the power to fix the market prices of
petroleum products, to regulate the capacities of refineries, to license new refineries and to
regulate the operations and trade practices of the industry.4
In addition to the creation of the OIC, the government saw the imperious need for a more
active role of Filipinos in the oil industry. Until the early seventies, the downstream oil
industry was controlled by multinational companies. All the oil refineries and marketing
companies were owned by foreigners whose economic interests did not always coincide
with the interest of the Filipino. Crude oil was transported to the country by foreign-
controlled tankers. Crude processing was done locally by foreign-owned refineries and
petroleum products were marketed through foreign-owned retail outlets. On November 9,
1973, President Ferdinand E. Marcos boldly created the Philippine National Oil Corporation
(PNOC) to break the control by foreigners of our oil industry. 5 PNOC engaged in the
business of refining, marketing, shipping, transporting, and storing petroleum. It acquired
ownership of ESSO Philippines and Filoil to serve as its marketing arm. It bought the
controlling shares of Bataan Refining Corporation, the largest refinery in the
country.6 PNOC later put up its own marketing subsidiary — Petrophil. PNOC operated
under the business name PETRON Corporation. For the first time, there was a Filipino
presence in the Philippine oil market.
In 1984, President Marcos through Section 8 of Presidential Decree No. 1956, created
the Oil Price Stabilization Fund (OPSF) to cushion the effects of frequent changes in the
price of oil caused by exchange rate adjustments or increase in the world market prices of
crude oil and imported petroleum products. The fund is used (1) to reimburse the oil
companies for cost increases in crude oil and imported petroleum products resulting from
exchange rate adjustment and/or increase in world market prices of crude oil, and (2) to
reimburse oil companies for cost underrecovery incurred as a result of the reduction of
domestic prices of petroleum products. Under the law, the OPSF may be sourced from:
1. any increase in the tax collection from ad valorem tax or
customs duty imposed on petroleum products subject to tax
under P.D. No. 1956 arising from exchange rate adjustment,
2. any increase in the tax collection as a result of the lifting of tax
exemptions of government corporations, as may be determined
by the Minister of Finance in consultation with the Board of
Energy,
3. any additional amount to be imposed on petroleum products
to augment the resources of the fund through an appropriate
order that may be issued by the Board of Energy requiring
payment of persons or companies engaged in the business of
importing, manufacturing and/or marketing petroleum products,
or
4. any resulting peso costs differentials in case the actual peso
costs paid by oil companies in the importation of crude oil and
petroleum products is less than the peso costs computed using
the reference foreign exchange rate as fixed by the Board of
Energy.7
By 1985, only three (3) oil companies were operating in the country — Caltex, Shell and the
government-owned PNOC.
In May, 1987, President Corazon C. Aquino signed Executive Order No. 172 creating
the Energy Regulatory Boardto regulate the business of importing, exporting, re-exporting,
shipping, transporting, processing, refining, marketing and distributing energy resources
"when warranted and only when public necessity requires." The Board had the following
powers and functions:
1. Fix and regulate the prices of petroleum products;
2. Fix and regulate the rate schedule or prices of piped gas to be charged by duly
franchised gas companies which distribute gas by means of underground pipe system;
3. Fix and regulate the rates of pipeline concessionaries under the provisions of R.A. No.
387, as amended . . . ;
4. Regulate the capacities of new refineries or additional capacities of existing refineries
and license refineries that may be organized after the issuance of (E.O. No. 172) under
such terms and conditions as are consistent with the national interest; and
5. Whenever the Board has determined that there is a shortage of any petroleum product,
or when public interest so requires, it may take such steps as it may consider necessary,
payment to the Oil Price Stabilization Fund . . . by persons or entities engaged in the
petroleum industry of such amounts as may be determined by the Board, which may enable
the importer to recover its cost of importation.8
On December 9, 1992, Congress enacted R.A. No. 7638 which created the Department of
Energy to prepare, integrate, coordinate, supervise and control all plans, programs,
projects, and activities of the government in relation to energy exploration, development,
utilization, distribution and conservation.9 The thrust of the Philippine energy program under
the law was toward privatization of government agencies related to energy, deregulation of
the power and energy industry and reduction of dependency on oil-fired plants.10 The law
also aimed to encourage free and active participation and investment by the private sector
in all energy activities. Section 5(e) of the law states that "at the end of four (4) years from
the effectivity of this Act, the Department shall, upon approval of the President, institute the
programs and timetable of deregulation of appropriate energy projects and activities of the
energy industry."
Pursuant to the policies enunciated in R.A. No. 7638, the government approved
the privatization of Petron Corporation in 1993. On December 16, 1993, PNOC sold 40% of
its equity in Petron Corporation to the Aramco Overseas Company.
In March 1996, Congress took the audacious step of deregulating the downstream oil
industry. It enacted R.A. No.8180, entitled the "Downstream Oil Industry Deregulation Act of
1996." Under the deregulated environment, "any person or entity may import or purchase
any quantity of crude oil and petroleum products from a foreign or domestic source, lease
or own and operate refineries and other downstream oil facilities and market such crude oil
or use the same for his own requirement," subject only to monitoring by the Department of
Energy.11
The deregulation process has two phases: the transition phase and the full deregulation
phase. During the transition phase, controls of the non-pricing aspects of the oil industry
were to be lifted. The following were to be accomplished: (1) liberalization of oil importation,
exportation, manufacturing, marketing and distribution, (2) implementation of an automatic
pricing mechanism, (3) implementation of an automatic formula to set margins of dealers
and rates of haulers, water transport operators and pipeline concessionaires, and (4)
restructuring of oil taxes. Upon full deregulation, controls on the price of oil and the foreign
exchange cover were to be lifted and the OPSF was to be abolished.
The first phase of deregulation commenced on August 12, 1996.
On February 8, 1997, the President implemented the full deregulation of the Downstream
Oil Industry through E.O.No. 372.
The petitions at bar assail the constitutionality of various provisions of R.A No. 8180 and
E.O. No. 372.
In G.R. No. 124360, petitioner Francisco S. Tatad seeks the annulment of section 5(b) of
R.A. No. 8180. Section 5(b) provides:
b) Any law to the contrary notwithstanding and starting with the effectivity of
this Act, tariff duty shall be imposed and collected on imported crude oil at the
rate of three percent (3%) and imported refined petroleum products at the rate
of seven percent (7%), except fuel oil and LPG, the rate for which shall be the
same as that for imported crude oil: Provided, That beginning on January 1,
2004 the tariff rate on imported crude oil and refined petroleum products shall
be the same: Provided, further, That this provision may be amended only by
an Act of Congress.
The petition is anchored on three arguments:
First, that the imposition of different tariff rates on imported crude oil and imported refined
petroleum products violates the equal protection clause. Petitioner contends that the 3%-
7% tariff differential unduly favors the three existing oil refineries and discriminates against
prospective investors in the downstream oil industry who do not have their own refineries
and will have to source refined petroleum products from abroad.
Second, that the imposition of different tariff rates does not deregulate the downstream oil
industry but instead controls the oil industry, contrary to the avowed policy of the law.
Petitioner avers that the tariff differential between imported crude oil and imported refined
petroleum products bars the entry of other players in the oil industry because it effectively
protects the interest of oil companies with existing refineries. Thus, it runs counter to the
objective of the law "to foster a truly competitive market."
Third, that the inclusion of the tariff provision in section 5(b) of R.A. No. 8180 violates
Section 26(1) Article VI of the Constitution requiring every law to have only one subject
which shall be expressed in its title. Petitioner contends that the imposition of tariff rates in
section 5(b) of R.A. No. 8180 is foreign to the subject of the law which is the deregulation of
the downstream oil industry.
In G.R. No. 127867, petitioners Edcel C. Lagman, Joker P. Arroyo, Enrique Garcia,
Wigberto Tanada, Flag Human Rights Foundation, Inc., Freedom from Debt Coalition
(FDC) and Sanlakas contest the constitutionality of section 15 of R.A. No. 8180 and E.O.
No. 392. Section 15 provides:
Sec. 15. Implementation of Full Deregulation. — Pursuant to Section 5(e) of
Republic Act No. 7638, the DOE shall, upon approval of the President,
implement the full deregulation of the downstream oil industry not later than
March 1997. As far as practicable, the DOE shall time the full deregulation
when the prices of crude oil and petroleum products in the world market are
declining and when the exchange rate of the peso in relation to the US dollar
is stable. Upon the implementation of the full deregulation as provided herein,
the transition phase is deemed terminated and the following laws are deemed
repealed:
xxx xxx xxx
E.O. No. 372 states in full, viz.:
WHEREAS, Republic Act No. 7638, otherwise known as the "Department of
Energy Act of 1992," provides that, at the end of four years from its effectivity
last December 1992, "the Department (of Energy) shall, upon approval of the
President, institute the programs and time table of deregulation of appropriate
energy projects and activities of the energy sector;"
WHEREAS, Section 15 of Republic Act No. 8180, otherwise known as the
"Downstream Oil Industry Deregulation Act of 1996," provides that "the DOE
shall, upon approval of the President, implement full deregulation of the
downstream oil industry not later than March, 1997. As far as practicable, the
DOE shall time the full deregulation when the prices of crude oil and
petroleum products in the world market are declining and when the exchange
rate of the peso in relation to the US dollar is stable;"
WHEREAS, pursuant to the recommendation of the Department of Energy,
there is an imperative need to implement the full deregulation of the
downstream oil industry because of the following recent developments: (i)
depletion of the buffer fund on or about 7 February 1997 pursuant to the
Energy Regulatory Board's Order dated 16 January 1997; (ii) the prices of
crude oil had been stable at $21-$23 per barrel since October 1996 while
prices of petroleum products in the world market had been stable since mid-
December of last year. Moreover, crude oil prices are beginning to soften for
the last few days while prices of some petroleum products had already
declined; and (iii) the exchange rate of the peso in relation to the US dollar
has been stable for the past twelve (12) months, averaging at around P26.20
to one US dollar;
WHEREAS, Executive Order No. 377 dated 31 October 1996 provides for an
institutional framework for the administration of the deregulated industry by
defining the functions and responsibilities of various government agencies;
WHEREAS, pursuant to Republic Act No. 8180, the deregulation of the
industry will foster a truly competitive market which can better achieve the
social policy objectives of fair prices and adequate, continuous supply of
environmentally-clean and high quality petroleum products;
NOW, THEREFORE, I, FIDEL V. RAMOS, President of the Republic of the
Philippines, by the powers vested in me by law, do hereby declare the full
deregulation of the downstream oil industry.
In assailing section 15 of R.A. No. 8180 and E.O. No. 392, petitioners offer the following
submissions:
First, section 15 of R.A. No. 8180 constitutes an undue delegation of legislative power to
the President and the Secretary of Energy because it does not provide a determinate or
determinable standard to guide the Executive Branch in determining when to implement the
full deregulation of the downstream oil industry. Petitioners contend that the law does not
define when it is practicable for the Secretary of Energy to recommend to the President the
full deregulation of the downstream oil industry or when the President may consider it
practicable to declare full deregulation. Also, the law does not provide any specific standard
to determine when the prices of crude oil in the world market are considered to be declining
nor when the exchange rate of the peso to the US dollar is considered stable.
Second, petitioners aver that E.O. No. 392 implementing the full deregulation of the
downstream oil industry is arbitrary and unreasonable because it was enacted due to the
alleged depletion of the OPSF fund — a condition not found in R.A. No. 8180.
Third, section 15 of R.A. No. 8180 and E.O. No. 392 allow the formation of a de facto cartel
among the three existing oil companies — Petron, Caltex and Shell — in violation of the
constitutional prohibition against monopolies, combinations in restraint of trade and unfair
competition.
Respondents, on the other hand, fervently defend the constitutionality of R.A. No. 8180 and
E.O. No. 392. In addition, respondents contend that the issues raised by the petitions are
not justiciable as they pertain to the wisdom of the law. Respondents further aver that
petitioners have no locus standi as they did not sustain nor will they sustain direct injury as
a result of the implementation of R.A. No. 8180.
The petitions were heard by the Court on September 30, 1997. On October 7, 1997, the
Court ordered the private respondents oil companies "to maintain the status quo and to
cease and desist from increasing the prices of gasoline and other petroleum fuel products
for a period of thirty (30) days . . . subject to further orders as conditions may warrant."
We shall now resolve the petitions on the merit. The petitions raise procedural and
substantive issues bearing on the constitutionality of R.A. No. 8180 and E.O. No. 392.
The procedural issues are: (1) whether or not the petitions raise a justiciable controversy,
and (2) whether or not the petitioners have the standing to assail the validity of the subject
law and executive order. The substantive issues are: (1) whether or not section 5 (b)
violates the one title — one subject requirement of the Constitution; (2) whether or not the
same section violates the equal protection clause of the Constitution; (3) whether or not
section 15 violates the constitutional prohibition on undue delegation of power; (4) whether
or not E.O. No. 392 is arbitrary and unreasonable; and (5) whether or not R.A. No. 8180
violates the constitutional prohibition against monopolies, combinations in restraint of trade
and unfair competition.
We shall first tackle the procedural issues. Respondents claim that the avalanche of
arguments of the petitioners assail the wisdom of R.A. No. 8180. They aver that
deregulation of the downstream oil industry is a policy decision made by Congress and it
cannot be reviewed, much less be reversed by this Court. In constitutional parlance,
respondents contend that the petitions failed to raise a justiciable controversy.
Respondents' joint stance is unnoteworthy. Judicial power includes not only the duty of the
courts to settle actual controversies involving rights which are legally demandable and
enforceable, but also the duty to determine whether or not there has been grave abuse of
discretion amounting to lack or excess of jurisdiction on the part of any branch or
instrumentality of the government.12 The courts, as guardians of the Constitution, have the
inherent authority to determine whether a statute enacted by the legislature transcends the
limit imposed by the fundamental law. Where a statute violates the Constitution, it is not
only the right but the duty of the judiciary to declare such act as unconstitutional and
void.13 We held in the recent case of Tanada v. Angara:14
xxx xxx xxx
In seeking to nullify an act of the Philippine Senate on the ground that it
contravenes the Constitution, the petition no doubt raises a justiciable
controversy. Where an action of the legislative branch is seriously alleged to
have infringed the Constitution, it becomes not only the right but in fact the
duty of the judiciary to settle the dispute. The question thus posed is judicial
rather than political. The duty to adjudicate remains to assure that the
supremacy of the Constitution is upheld. Once a controversy as to the
application or interpretation of a constitutional provision is raised before this
Court, it becomes a legal issue which the Court is bound by constitutional
mandate to decide.
Even a sideglance at the petitions will reveal that petitioners have raised constitutional
issues which deserve the resolution of this Court in view of their seriousness and their value
as precedents. Our statement of facts and definition of issues clearly show that petitioners
are assailing R.A. No. 8180 because its provisions infringe the Constitution and not
because the law lacks wisdom. The principle of separation of power mandates that
challenges on the constitutionality of a law should be resolved in our courts of justice while
doubts on the wisdom of a law should be debated in the halls of Congress. Every now and
then, a law may be denounced in court both as bereft of wisdom and constitutionally
infirmed. Such denunciation will not deny this Court of its jurisdiction to resolve the
constitutionality of the said law while prudentially refusing to pass on its wisdom.
The effort of respondents to question the locus standi of petitioners must also fall on barren
ground. In language too lucid to be misunderstood, this Court has brightlined its liberal
stance on a petitioner's locus standi where the petitioner is able to craft an issue of
transcendental significance to the people. 15 In Kapatiran ng mga Naglilingkod sa
Pamahalaan ng Pilipinas, Inc. v. Tan,16 we stressed:
xxx xxx xxx
Objections to taxpayers' suit for lack of sufficient personality, standing or
interest are, however, in the main procedural matters. Considering the
importance to the public of the cases at bar, and in keeping with the Court's
duty, under the 1987 Constitution, to determine whether or not the other
branches of government have kept themselves within the limits of the
Constitution and the laws and that they have not abused the discretion given
to them, the Court has brushed aside technicalities of procedure and has
taken cognizance of these petitions.
There is not a dot of disagreement between the petitioners and the respondents on the far
reaching importance of the validity of RA No. 8180 deregulating our downstream oil
industry. Thus, there is no good sense in being hypertechnical on the standing of petitioners
for they pose issues which are significant to our people and which deserve our forthright
resolution.
We shall now track down the substantive issues. In G.R. No. 124360 where petitioner is
Senator Tatad, it is contended that section 5(b) of R.A. No. 8180 on tariff differential
violates the provision17 of the Constitution requiring every law to have only one subject
which should be expressed in its title. We do not concur with this contention. As a policy,
this Court has adopted a liberal construction of the one title — one subject rule. We have
consistently ruled18 that the title need not mirror, fully index or catalogue all contents and
minute details of a law. A law having a single general subject indicated in the title may
contain any number of provisions, no matter how diverse they may be, so long as they are
not inconsistent with or foreign to the general subject, and may be considered in
furtherance of such subject by providing for the method and means of carrying out the
general subject.19 We hold that section 5(b) providing for tariff differential is germane to the
subject of R.A. No. 8180 which is the deregulation of the downstream oil industry. The
section is supposed to sway prospective investors to put up refineries in our country and
make them rely less on imported petroleum. 20 We shall, however, return to the validity of
this provision when we examine its blocking effect on new entrants to the oil market.
We shall now slide to the substantive issues in G.R. No. 127867. Petitioners assail section
15 of R.A. No. 8180 which fixes the time frame for the full deregulation of the downstream
oil industry. We restate its pertinent portion for emphasis, viz.:
Sec. 15. Implementation of Full Deregulation — Pursuant to section 5(e) of
Republic Act No. 7638, the DOE shall, upon approval of the President,
implement the full deregulation of the downstream oil industry not later than
March 1997. As far as practicable, the DOE shall time the full deregulation
when the prices of crude oil and petroleum products in the world market
are declining and when the exchange rate of the peso in relation to the US
dollar is stable . . .
Petitioners urge that the phrases "as far as practicable," "decline of crude oil prices in the
world market" and "stability of the peso exchange rate to the US dollar" are ambivalent,
unclear and inconcrete in meaning. They submit that they do not provide the "determinate
or determinable standards" which can guide the President in his decision to fully deregulate
the downstream oil industry. In addition, they contend that E.O. No. 392 which advanced
the date of full deregulation is void for it illegally considered the depletion of the OPSF fund
as a factor.
The power of Congress to delegate the execution of laws has long been settled by this
Court. As early as 1916 in Compania General de Tabacos de Filipinas vs. The Board of
Public Utility Commissioners,21 this Court thru, Mr. Justice Moreland, held that "the true
distinction is between the delegation of power to make the law, which necessarily involves a
discretion as to what it shall be, and conferring authority or discretion as to its execution, to
be exercised under and in pursuance of the law. The first cannot be done; to the latter no
valid objection can be made." Over the years, as the legal engineering of men's relationship
became more difficult, Congress has to rely more on the practice of delegating the
execution of laws to the executive and other administrative agencies. Two tests have been
developed to determine whether the delegation of the power to execute laws does not
involve the abdication of the power to make law itself. We delineated the metes and bounds
of these tests in Eastern Shipping Lines, Inc. VS. POEA,22 thus:
There are two accepted tests to determine whether or not there is a valid
delegation of legislative power, viz: the completeness test and the sufficient
standard test. Under the first test, the law must be complete in all its terms
and conditions when it leaves the legislative such that when it reaches the
delegate the only thing he will have to do is to enforce it. Under the sufficient
standard test, there must be adequate guidelines or limitations in the law to
map out the boundaries of the delegate's authority and prevent the delegation
from running riot. Both tests are intended to prevent a total transference of
legislative authority to the delegate, who is not allowed to step into the shoes
of the legislature and exercise a power essentially legislative.
The validity of delegating legislative power is now a quiet area in our constitutional
landscape. As sagely observed, delegation of legislative power has become an inevitability
in light of the increasing complexity of the task of government. Thus, courts bend as far
back as possible to sustain the constitutionality of laws which are assailed as unduly
delegating legislative powers. Citing Hirabayashi v. United States23 as authority, Mr. Justice
Isagani A. Cruz states "that even if the law does not expressly pinpoint the standard, the
courts will bend over backward to locate the same elsewhere in order to spare the statute, if
it can, from constitutional infirmity."24
Given the groove of the Court's rulings, the attempt of petitioners to strike down section 15
on the ground of undue delegation of legislative power cannot prosper. Section 15 can
hurdle both the completeness test and the sufficient standard test. It will be noted that
Congress expressly provided in R.A. No. 8180 that full deregulation will start at the end of
March 1997, regardless of the occurrence of any event. Full deregulation at the end of
March 1997 is mandatory and the Executive has no discretion to postpone it for any
purported reason. Thus, the law is complete on the question of the final date of full
deregulation. The discretion given to the President is to advance the date of full
deregulation before the end of March 1997. Section 15 lays down the standard to guide the
judgment of the President — he is to time it as far as practicable when the prices of crude
oil and petroleum products in the world market are declining and when the exchange rate of
the peso in relation to the US dollar is stable.
Petitioners contend that the words "as far as practicable," "declining" and "stable" should
have been defined in R.A. No. 8180 as they do not set determinate or determinable
standards. The stubborn submission deserves scant consideration. The dictionary
meanings of these words are well settled and cannot confuse men of reasonable
intelligence. Webster defines "practicable" as meaning possible to practice or perform,
"decline" as meaning to take a downward direction, and "stable" as meaning firmly
established.25 The fear of petitioners that these words will result in the exercise of executive
discretion that will run riot is thus groundless. To be sure, the Court has sustained the
validity of similar, if not more general standards in other cases.26
It ought to follow that the argument that E.O. No. 392 is null and void as it was based on
indeterminate standards set by R.A. 8180 must likewise fail. If that were all to the attack
against the validity of E.O. No. 392, the issue need not further detain our discourse. But
petitioners further posit the thesis that the Executive misapplied R.A. No. 8180 when it
considered the depletion of the OPSF fund as a factor in fully deregulating the downstream
oil industry in February 1997. A perusal of section 15 of R.A. No. 8180 will readily reveal
that it only enumerated two factors to be considered by the Department of Energy and the
Office of the President, viz.: (1) the time when the prices of crude oil and petroleum
products in the world market are declining, and (2) the time when the exchange rate of the
peso in relation to the US dollar is stable. Section 15 did not mention the depletion of the
OPSF fund as a factor to be given weight by the Executive before ordering full deregulation.
On the contrary, the debates in Congress will show that some of our legislators wanted to
impose as a pre-condition to deregulation a showing that the OPSF fund must not be in
deficit.27 We therefore hold that the Executive department failed to follow faithfully the
standards set by R.A. No. 8180 when it considered the extraneous factor of depletion of the
OPSF fund. The misappreciation of this extra factor cannot be justified on the ground that
the Executive department considered anyway the stability of the prices of crude oil in the
world market and the stability of the exchange rate of the peso to the dollar. By considering
another factor to hasten full deregulation, the Executive department rewrote the standards
set forth in R.A. 8180. The Executive is bereft of any right to alter either by subtraction or
addition the standards set in R.A. No. 8180 for it has no power to make laws. To cede to
the Executive the power to make law is to invite tyranny, indeed, to transgress the principle
of separation of powers. The exercise of delegated power is given a strict scrutiny by courts
for the delegate is a mere agent whose action cannot infringe the terms of agency. In the
cases at bar, the Executive co-mingled the factor of depletion of the OPSF fund with the
factors of decline of the price of crude oil in the world market and the stability of the peso to
the US dollar. On the basis of the text of E.O. No. 392, it is impossible to determine the
weight given by the Executive department to the depletion of the OPSF fund. It could well
be the principal consideration for the early deregulation. It could have been accorded an
equal significance. Or its importance could be nil. In light of this uncertainty, we rule that the
early deregulation under E.O. No. 392 constitutes a misapplication of R.A. No. 8180.
We now come to grips with the contention that some provisions of R.A. No. 8180 violate
section 19 of Article XII of the 1987 Constitution. These provisions are:
(1) Section 5 (b) which states — "Any law to the contrary notwithstanding and
starting with the effectivity of this Act, tariff duty shall be imposed and
collected on imported crude oil at the rate of three percent (3%) and imported
refined petroleum products at the rate of seven percent (7%) except fuel oil
and LPG, the rate for which shall be the same as that for imported crude oil.
Provided, that beginning on January 1, 2004 the tariff rate on imported crude
oil and refined petroleum products shall be the same. Provided, further, that
this provision may be amended only by an Act of Congress."
(2) Section 6 which states — "To ensure the security and continuity of
petroleum crude and products supply, the DOE shall require the refiners and
importers to maintain a minimum inventory equivalent to ten percent (10%) of
their respective annual sales volume or forty (40) days of supply, whichever is
lower," and
(3) Section 9 (b) which states — "To ensure fair competition and prevent
cartels and monopolies in the downstream oil industry, the following acts shall
be prohibited:
xxx xxx xxx
(b) Predatory pricing which means selling or
offering to sell any product at a price unreasonably
below the industry average cost so as to attract
customers to the detriment of competitors.
On the other hand, section 19 of Article XII of the Constitution allegedly violated by the
aforestated provisions of R.A. No. 8180 mandates: "The State shall regulate or prohibit
monopolies when the public interest so requires. No combinations in restraint of trade or
unfair competition shall be allowed."
A monopoly is a privilege or peculiar advantage vested in one or more persons or
companies, consisting in the exclusive right or power to carry on a particular business or
trade, manufacture a particular article, or control the sale or the whole supply of a particular
commodity. It is a form of market structure in which one or only a few firms dominate the
total sales of a product or service.28 On the other hand, a combination in restraint of trade is
an agreement or understanding between two or more persons, in the form of a contract,
trust, pool, holding company, or other form of association, for the purpose of unduly
restricting competition, monopolizing trade and commerce in a certain commodity,
controlling its, production, distribution and price, or otherwise interfering with freedom of
trade without statutory authority.29 Combination in restraint of trade refers to the means
while monopoly refers to the end.30
Article 186 of the Revised Penal Code and Article 28 of the New Civil Code breathe life to
this constitutional policy. Article 186 of the Revised Penal Code penalizes monopolization
and creation of combinations in restraint of
trade, 31 while Article 28 of the New Civil Code makes any person who shall engage in
unfair competition liable for damages.32
Respondents aver that sections 5(b), 6 and 9(b) implement the policies and objectives of
R.A. No. 8180. They explain that the 4% tariff differential is designed to encourage new
entrants to invest in refineries. They stress that the inventory requirement is meant to
guaranty continuous domestic supply of petroleum and to discourage fly-by-night operators.
They also submit that the prohibition against predatory pricing is intended to protect
prospective entrants. Respondents manifested to the Court that new players have entered
the Philippines after deregulation and have now captured 3% — 5% of the oil market.
The validity of the assailed provisions of R.A. No. 8180 has to be decided in light of the
letter and spirit of our Constitution, especially section 19, Article XII. Beyond doubt, the
Constitution committed us to the free enterprise system but it is a system impressed with its
own distinctness. Thus, while the Constitution embraced free enterprise as an economic
creed, it did not prohibit per se the operation of monopolies which can, however, be
regulated in the public interest.33 Thus too, our free enterprise system is not based on a
market of pure and unadulterated competition where the State pursues a strict hands-off
policy and follows the let-the-devil devour the hindmost rule. Combinations in restraint of
trade and unfair competitions are absolutely proscribed and the proscription is directed both
against the State as well as the private sector. 34 This distinct free enterprise system is
dictated by the need to achieve the goals of our national economy as defined by section 1,
Article XII of the Constitution which are: more equitable distribution of opportunities, income
and wealth; a sustained increase in the amount of goods and services produced by the
nation for the benefit of the people; and an expanding productivity as the key to raising the
quality of life for all, especially the underprivileged. It also calls for the State to protect
Filipino enterprises against unfair competition and trade practices.
Section 19, Article XII of our Constitution is anti-trust in history and in spirit. It espouses
competition. The desirability of competition is the reason for the prohibition against restraint
of trade, the reason for the interdiction of unfair competition, and the reason for regulation
of unmitigated monopolies. Competition is thus the underlying principle of section 19, Article
XII of our Constitution which cannot be violated by R.A. No. 8180. We subscribe to the
observation of Prof. Gellhorn that the objective of anti-trust law is "to assure a competitive
economy, based upon the belief that through competition producers will strive to satisfy
consumer wants at the lowest price with the sacrifice of the fewest resources. Competition
among producers allows consumers to bid for goods and services, and thus matches their
desires with society's opportunity costs."35 He adds with appropriateness that there is a
reliance upon "the operation of the 'market' system (free enterprise) to decide what shall be
produced, how resources shall be allocated in the production process, and to whom the
various products will be distributed. The market system relies on the consumer to decide
what and how much shall be produced, and on competition, among producers to determine
who will manufacture it."
Again, we underline in scarlet that the fundamental principle espoused by section 19, Article
XII of the Constitution is competition for it alone can release the creative forces of the
market. But the competition that can unleash these creative forces is competition that is
fighting yet is fair. Ideally, this kind of competition requires the presence of not one, not just
a few but several players. A market controlled by one player (monopoly) or dominated by a
handful of players (oligopoly) is hardly the market where honest-to-goodness competition
will prevail. Monopolistic or oligopolistic markets deserve our careful scrutiny and laws
which barricade the entry points of new players in the market should be viewed with
suspicion.
Prescinding from these baseline propositions, we shall proceed to examine whether the
provisions of R.A. No. 8180 on tariff differential, inventory reserves, and predatory prices
imposed substantial barriers to the entry and exit of new players in our downstream oil
industry. If they do, they have to be struck down for they will necessarily inhibit the
formation of a truly competitive market. Contrariwise, if they are insignificant impediments,
they need not be stricken down.
In the cases at bar, it cannot be denied that our downstream oil industry is operated and
controlled by an oligopoly, a foreign oligopoly at that. Petron, Shell and Caltex stand as the
only major league players in the oil market. All other players belong to the lilliputian league.
As the dominant players, Petron, Shell and Caltex boast of existing refineries of various
capacities. The tariff differential of 4% therefore works to their immense benefit. Yet, this is
only one edge of the tariff differential. The other edge cuts and cuts deep in the heart of
their competitors. It erects a high barrier to the entry of new players. New players that
intend to equalize the market power of Petron, Shell and Caltex by building refineries of
their own will have to spend billions of pesos. Those who will not build refineries but
compete with them will suffer the huge disadvantage of increasing their product cost by 4%.
They will be competing on an uneven field. The argument that the 4% tariff differential is
desirable because it will induce prospective players to invest in refineries puts the cart
before the horse. The first need is to attract new players and they cannot be attracted by
burdening them with heavy disincentives. Without new players belonging to the league of
Petron, Shell and Caltex, competition in our downstream oil industry is an idle dream.
The provision on inventory widens the balance of advantage of Petron, Shell and Caltex
against prospective new players. Petron, Shell and Caltex can easily comply with the
inventory requirement of R.A. No. 8180 in view of their existing storage facilities.
Prospective competitors again will find compliance with this requirement difficult as it will
entail a prohibitive cost. The construction cost of storage facilities and the cost of inventory
can thus scare prospective players. Their net effect is to further occlude the entry points of
new players, dampen competition and enhance the control of the market by the three (3)
existing oil companies.
Finally, we come to the provision on predatory pricing which is defined as ". . . selling or
offering to sell any product at a price unreasonably below the industry average cost so as to
attract customers to the detriment of competitors." Respondents contend that this provision
works against Petron, Shell and Caltex and protects new entrants. The ban on predatory
pricing cannot be analyzed in isolation. Its validity is interlocked with the barriers imposed
by R.A. No. 8180 on the entry of new players. The inquiry should be to determine whether
predatory pricing on the part of the dominant oil companies is encouraged by the provisions
in the law blocking the entry of new players. Text-writer
Hovenkamp,36 gives the authoritative answer and we quote:
xxx xxx xxx
The rationale for predatory pricing is the sustaining of losses today that will
give a firm monopoly profits in the future. The monopoly profits will never
materialize, however, if the market is flooded with new entrants as soon as
the successful predator attempts to raise its price. Predatory pricing will be
profitable only if the market contains significant barriers to new entry.
As aforediscsussed, the 4% tariff differential and the inventory requirement are significant
barriers which discourage new players to enter the market. Considering these significant
barriers established by R.A. No. 8180 and the lack of players with the comparable clout of
PETRON, SHELL and CALTEX, the temptation for a dominant player to engage in
predatory pricing and succeed is a chilling reality. Petitioners' charge that this provision on
predatory pricing is anti-competitive is not without reason.
Respondents belittle these barriers with the allegation that new players have entered the
market since deregulation. A scrutiny of the list of the alleged new players will, however,
reveal that not one belongs to the class and category of PETRON, SHELL and CALTEX.
Indeed, there is no showing that any of these new players intends to install any refinery and
effectively compete with these dominant oil companies. In any event, it cannot be gainsaid
that the new players could have been more in number and more impressive in might if the
illegal entry barriers in R.A. No. 8180 were not erected.
We come to the final point. We now resolve the total effect of the untimely deregulation, the
imposition of 4% tariff differential on imported crude oil and refined petroleum products, the
requirement of inventory and the prohibition on predatory pricing on the constitutionality of
R.A. No. 8180. The question is whether these offending provisions can be individually
struck down without invalidating the entire R.A. No. 8180. The ruling case law is well stated
by author Agpalo,37 viz.:
xxx xxx xxx
The general rule is that where part of a statute is void as repugnant to the
Constitution, while another part is valid, the valid portion, if separable from the
invalid, may stand and be enforced. The presence of a separability clause in a
statute creates the presumption that the legislature intended separability,
rather than complete nullity of the statute. To justify this result, the valid
portion must be so far independent of the invalid portion that it is fair to
presume that the legislature would have enacted it by itself if it had supposed
that it could not constitutionally enact the other. Enough must remain to make
a complete, intelligible and valid statute, which carries out the legislative
intent. . . .
The exception to the general rule is that when the parts of a statute are so
mutually dependent and connected, as conditions, considerations,
inducements, or compensations for each other, as to warrant a belief that the
legislature intended them as a whole, the nullity of one part will vitiate the rest.
In making the parts of the statute dependent, conditional, or connected with
one another, the legislature intended the statute to be carried out as a whole
and would not have enacted it if one part is void, in which case if some parts
are unconstitutional, all the other provisions thus dependent, conditional, or
connected must fall with them.
R.A. No. 8180 contains a separability clause. Section 23 provides that "if for any reason,
any section or provision of this Act is declared unconstitutional or invalid, such parts not
affected thereby shall remain in full force and effect." This separability clause
notwithstanding, we hold that the offending provisions of R.A. No. 8180 so permeate its
essence that the entire law has to be struck down. The provisions on tariff differential,
inventory and predatory pricing are among the principal props of R.A. No. 8180. Congress
could not have deregulated the downstream oil industry without these provisions.
Unfortunately, contrary to their intent, these provisions on tariff differential, inventory and
predatory pricing inhibit fair competition, encourage monopolistic power and interfere with
the free interaction of market forces. R.A. No. 8180 needs provisions to vouchsafe free and
fair competition. The need for these vouchsafing provisions cannot be overstated. Before
deregulation, PETRON, SHELL and CALTEX had no real competitors but did not have a
free run of the market because government controls both the pricing and non-pricing
aspects of the oil industry. After deregulation, PETRON, SHELL and CALTEX remain
unthreatened by real competition yet are no longer subject to control by government with
respect to their pricing and non-pricing decisions. The aftermath of R.A. No. 8180 is a
deregulated market where competition can be corrupted and where market forces can be
manipulated by oligopolies.
The fall out effects of the defects of R.A. No. 8180 on our people have not escaped
Congress. A lot of our leading legislators have come out openly with bills seeking the repeal
of these odious and offensive provisions in R.A. No. 8180. In the Senate, Senator Freddie
Webb has filed S.B. No. 2133 which is the result of the hearings conducted by the Senate
Committee on Energy. The hearings revealed that (1) there was a need to level the playing
field for the new entrants in the downstream oil industry, and (2) there was no law punishing
a person for selling petroleum products at unreasonable prices. Senator Alberto
G. Romulo also filed S.B. No. 2209 abolishing the tariff differential beginning January 1,
1998. He declared that the amendment ". . . would mean that instead of just three (3) big oil
companies there will be other major oil companies to provide more competitive prices for
the market and the consuming public." Senator Heherson T . Alvarez, one of the principal
proponents of R.A. No. 8180, also filed S.B. No. 2290 increasing the penalty for violation of
its section 9. It is his opinion as expressed in the explanatory note of the bill that the present
oil companies are engaged in cartelization despite R.A. No. 8180, viz,:
xxx xxx xxx
Since the downstream oil industry was fully deregulated in February 1997,
there have been eight (8) fuel price adjustments made by the three oil majors,
namely: Caltex Philippines, Inc.; Petron Corporation; and Pilipinas Shell
Petroleum Corporation. Very noticeable in the price adjustments made,
however, is the uniformity in the pump prices of practically all petroleum
products of the three oil companies. This, despite the fact, that their selling
rates should be determined by a combination of any of the following factors:
the prevailing peso-dollar exchange rate at the time payment is made for
crude purchases, sources of crude, and inventory levels of both crude and
refined petroleum products. The abovestated factors should have resulted in
different, rather than identical prices.
The fact that the three (3) oil companies' petroleum products are uniformly
priced suggests collusion, amounting to cartelization, among Caltex
Philippines, Inc., Petron Corporation and Pilipinas Shell Petroleum
Corporation to fix the prices of petroleum products in violation of paragraph
(a), Section 9 of R.A. No. 8180.
To deter this pernicious practice and to assure that present and prospective
players in the downstream oil industry conduct their business with conscience
and propriety, cartel-like activities ought to be severely penalized.
Senator Francisco S. Tatad also filed S.B. No. 2307 providing for a uniform tariff rate on
imported crude oil and refined petroleum products. In the explanatory note of the bill, he
declared in no uncertain terms that ". . . the present set-up has raised serious public
concern over the way the three oil companies have uniformly adjusted the prices of oil in
the country, an indication of a possible existence of a cartel or a cartel-like situation within
the downstream oil industry. This situation is mostly attributed to the foregoing provision on
tariff differential, which has effectively discouraged the entry of new players in the
downstream oil industry."
In the House of Representatives, the moves to rehabilitate R.A. No. 8180 are equally
feverish. Representative Leopoldo E. San Buenaventura has filed H.B. No. 9826 removing
the tariff differential for imported crude oil and imported refined petroleum products. In the
explanatory note of the bill, Rep. Buenaventura explained:
xxx xxx xxx
As we now experience, this difference in tariff rates between imported crude
oil and imported refined petroleum products, unwittingly provided a built-in-
advantage for the three existing oil refineries in the country and eliminating
competition which is a must in a free enterprise economy. Moreover, it
created a disincentive for other players to engage even initially in the
importation and distribution of refined petroleum products and ultimately in the
putting up of refineries. This tariff differential virtually created a monopoly of
the downstream oil industry by the existing three oil companies as shown by
their uniform and capricious pricing of their products since this law took effect,
to the great disadvantage of the consuming public.
Thus, instead of achieving the desired effects of deregulation, that of free
enterprise and a level playing field in the downstream oil industry, R.A. 8180
has created an environment conducive to cartelization, unfavorable,
increased, unrealistic prices of petroleum products in the country by the three
existing refineries.
Representative Marcial C. Punzalan, Jr., filed H.B. No. 9981 to prevent collusion among the
present oil companies by strengthening the oversight function of the government,
particularly its ability to subject to a review any adjustment in the prices of gasoline and
other petroleum products. In the explanatory note of the bill, Rep. Punzalan, Jr., said:
xxx xxx xxx
To avoid this, the proposed bill seeks to strengthen the oversight function of
government, particularly its ability to review the prices set for gasoline and
other petroleum products. It grants the Energy Regulatory Board (ERB) the
authority to review prices of oil and other petroleum products, as may be
petitioned by a person, group or any entity, and to subsequently compel any
entity in the industry to submit any and all documents relevant to the
imposition of new prices. In cases where the Board determines that there
exist collusion, economic conspiracy, unfair trade practice, profiteering and/or
overpricing, it may take any step necessary to protect the public, including the
readjustment of the prices of petroleum products. Further, the Board may also
impose the fine and penalty of imprisonment, as prescribed in Section 9 of
R.A. 8180, on any person or entity from the oil industry who is found guilty of
such prohibited acts.
By doing all of the above, the measure will effectively provide Filipino
consumers with a venue where their grievances can be heard and
immediately acted upon by government.
Thus, this bill stands to benefit the Filipino consumer by making the price-
setting process more transparent and making it easier to prosecute those who
perpetrate such prohibited acts as collusion, overpricing, economic conspiracy
and unfair trade.
Representative Sergio A.F . Apostol filed H.B. No. 10039 to remedy an omission in R.A. No.
8180 where there is no agency in government that determines what is "reasonable"
increase in the prices of oil products. Representative Dente O. Tinga, one of the principal
sponsors of R.A. No. 8180, filed H.B. No. 10057 to strengthen its anti-trust provisions. He
elucidated in its explanatory note:
xxx xxx xxx
The definition of predatory pricing, however, needs to be tightened up
particularly with respect to the definitive benchmark price and the specific anti-
competitive intent. The definition in the bill at hand which was taken from
the Areeda-Turner test in the United States on predatory pricing resolves the
questions. The definition reads, "Predatory pricing means selling or offering to
sell any oil product at a price below the average variable cost for the purpose
of destroying competition, eliminating a competitor or discouraging a
competitor from entering the market."
The appropriate actions which may be resorted to under the Rules of Court in
conjunction with the oil deregulation law are adequate. But to stress their
availability and dynamism, it is a good move to incorporate all the remedies in
the law itself. Thus, the present bill formalizes the concept of government
intervention and private suits to address the problem of antitrust violations.
Specifically, the government may file an action to prevent or restrain any act
of cartelization or predatory pricing, and if it has suffered any loss or damage
by reason of the antitrust violation it may recover damages. Likewise, a
private person or entity may sue to prevent or restrain any such violation
which will result in damage to his business or property, and if he has already
suffered damage he shall recover treble damages. A class suit may also be
allowed.
To make the DOE Secretary more effective in the enforcement of the law, he
shall be given additional powers to gather information and to require reports.
Representative Erasmo B. Damasing filed H.B. No. 7885 and has a more unforgiving view
of R.A. No. 8180. He wants it completely repealed. He explained:
xxx xxx xxx
Contrary to the projections at the time the bill on the Downstream Oil Industry
Deregulation was discussed and debated upon in the plenary session prior to
its approval into law, there aren't any new players or investors in the oil
industry. Thus, resulting in practically a cartel or monopoly in the oil industry
by the three (3) big oil companies, Caltex, Shell and Petron. So much so, that
with the deregulation now being partially implemented, the said oil companies
have succeeded in increasing the prices of most of their petroleum products
with little or no interference at all from the government. In the month of
August, there was an increase of Fifty centavos (50¢) per liter by subsidizing
the same with the OPSF, this is only temporary as in March 1997, or a few
months from now, there will be full deregulation (Phase II) whereby the
increase in the prices of petroleum products will be fully absorbed by the
consumers since OPSF will already be abolished by then. Certainly, this
would make the lives of our people, especially the unemployed ones, doubly
difficult and unbearable.
The much ballyhooed coming in of new players in the oil industry is quite
remote considering that these prospective investors cannot fight the existing
and well established oil companies in the country today, namely, Caltex, Shell
and Petron. Even if these new players will come in, they will still have no
chance to compete with the said three (3) existing big oil companies
considering that there is an imposition of oil tariff differential of 4% between
importation of crude oil by the said oil refineries paying only 3% tariff rate for
the said importation and 7% tariff rate to be paid by businessmen who have
no oil refineries in the Philippines but will import finished petroleum/oil
products which is being taxed with 7% tariff rates.
So, if only to help the many who are poor from further suffering as a result of
unmitigated increase in oil products due to deregulation, it is a must that the
Downstream Oil Industry Deregulation Act of 1996, or R.A.8180 be repealed
completely.
Various resolutions have also been filed in the Senate calling for an immediate and
comprehensive review of R.A. No. 8180 to prevent the downpour of its ill effects on the
people. Thus, S. Res. No. 574 was filed by Senator Gloria M. Macapagal entitled
Resolution "Directing the Committee on Energy to Inquire Into The Proper Implementation
of the Deregulation of the Downstream Oil Industry and Oil Tax Restructuring As Mandated
Under R.A. Nos. 8180 and 8184, In Order to Make The Necessary Corrections In the
Apparent Misinterpretation Of The Intent And Provision Of The Laws And Curb The Rising
Tide Of Disenchantment Among The Filipino Consumers And Bring About The Real
Intentions And Benefits Of The Said Law." Senator Blas P. Ople filed S. Res. No. 664
entitled resolution "Directing the Committee on Energy To Conduct An Inquiry In Aid Of
Legislation To Review The Government's Oil Deregulation Policy In Light Of The
Successive Increases In Transportation, Electricity And Power Rates, As well As Of Food
And Other Prime Commodities And Recommend Appropriate Amendments To Protect The
Consuming Public." Senator Ople observed:
xxx xxx xxx
WHEREAS, since the passage of R.A. No. 8180, the Energy Regulatory
Board (ERB) has imposed successive increases in oil prices which has
triggered increases in electricity and power rates, transportation fares, as well
as in prices of food and other prime commodities to the detriment of our
people, particularly the poor;
WHEREAS, the new players that were expected to compete with the oil
cartel-Shell, Caltex and Petron-have not come in;
WHEREAS, it is imperative that a review of the oil deregulation policy be
made to consider appropriate amendments to the existing law such as an
extension of the transition phase before full deregulation in order to give the
competitive market enough time to develop;
WHEREAS, the review can include the advisability of providing some
incentives in order to attract the entry of new oil companies to effect a
dynamic competitive market;
WHEREAS, it may also be necessary to defer the setting up of the
institutional framework for full deregulation of the oil industry as mandated
under Executive Order No. 377 issued by President Ramos last October 31,
1996 . . .
Senator Alberto G. Romulo filed S. Res. No. 769 entitled resolution "Directing the
Committees on Energy and Public Services In Aid Of Legislation To Assess The Immediate
Medium And Long Term Impact of Oil Deregulation On Oil Prices And The Economy."
Among the reasons for the resolution is the finding that "the requirement of a 40-day stock
inventory effectively limits the entry of other oil firms in the market with the consequence
that instead of going down oil prices will rise."
Parallel resolutions have been filed in the House of Representatives. Representative Dante
O. Tinga filed H. Res. No. 1311 "Directing The Committee on Energy To Conduct An
Inquiry, In Aid of Legislation, Into The Pricing Policies And Decisions Of The Oil Companies
Since The Implementation of Full Deregulation Under the Oil Deregulation Act (R.A. No.
8180) For the Purpose of Determining In the Context Of The Oversight Functions Of
Congress Whether The Conduct Of The Oil Companies, Whether Singly Or Collectively,
Constitutes Cartelization Which Is A Prohibited Act Under R.A. No. 8180, And What
Measures Should Be Taken To Help Ensure The Successful Implementation Of The Law In
Accordance With Its Letter And Spirit, Including Recommending Criminal Prosecution Of
the Officers Concerned Of the Oil Companies If Warranted By The Evidence, And For
Other Purposes." Representatives Marcial C. Punzalan, Jr. Dante O. Tinga and Antonio
E. Bengzon III filed H.R. No. 894 directing the House Committee on Energy to inquire into
the proper implementation of the deregulation of the downstream oil industry. House
Resolution No. 1013 was also filed by Representatives Edcel C. Lagman, Enrique
T . Garcia, Jr. and Joker P.Arroyo urging the President to immediately suspend the
implementation of E.O. No. 392.
In recent memory there is no law enacted by the legislature afflicted with so much
constitutional deformities as R.A. No. 8180. Yet, R.A. No. 8180 deals with oil, a commodity
whose supply and price affect the ebb and flow of the lifeblood of the nation. Its shortage of
supply or a slight, upward spiral in its price shakes our economic foundation. Studies show
that the areas most impacted by the movement of oil are food manufacture, land transport,
trade, electricity and water.38 At a time when our economy is in a dangerous downspin, the
perpetuation of R.A. No. 8180 threatens to multiply the number of our people with bent
backs and begging bowls. R.A. No. 8180 with its anti-competition provisions cannot be
allowed by this Court to stand even while Congress is working to remedy its defects.
The Court, however, takes note of the plea of PETRON, SHELL and CALTEX to lift our
restraining order to enable them to adjust upward the price of petroleum and petroleum
products in view of the plummeting value of the peso. Their plea, however, will now have to
be addressed to the Energy Regulatory Board as the effect of the declaration of
unconstitutionality of R.A. No. 8180 is to revive the former laws it repealed. 39 The length of
our return to the regime of regulation depends on Congress which can fasttrack the writing
of a new law on oil deregulation in accord with the Constitution.
With this Decision, some circles will chide the Court for interfering with an economic
decision of Congress. Such criticism is charmless for the Court is annulling R.A. No. 8180
not because it disagrees with deregulation as an economic policy but because as cobbled
by Congress in its present form, the law violates the Constitution. The right call therefor
should be for Congress to write a new oil deregulation law that conforms with the
Constitution and not for this Court to shirk its duty of striking down a law that offends the
Constitution. Striking down R.A. No. 8180 may cost losses in quantifiable terms to the oil
oligopolists. But the loss in tolerating the tampering of our Constitution is not quantifiable in
pesos and centavos. More worthy of protection than the supra-normal profits of private
corporations is the sanctity of the fundamental principles of the Constitution. Indeed when
confronted by a law violating the Constitution, the Court has no option but to strike it down
dead. Lest it is missed, the Constitution is a covenant that grants and guarantees both the
political and economic rights of the people. The Constitution mandates this Court to be the
guardian not only of the people's political rights but their economic rights as well. The
protection of the economic rights of the poor and the powerless is of greater importance to
them for they are concerned more with the exoterics of living and less with the esoterics of
liberty. Hence, for as long as the Constitution reigns supreme so long will this Court be
vigilant in upholding the economic rights of our people especially from the onslaught of the
powerful. Our defense of the people's economic rights may appear heartless because it
cannot be half-hearted.
IN VIEW WHEREOF, the petitions are granted. R.A. No. 8180 is declared unconstitutional
and E.O. No. 372 void.
OPINION OF THE COURT
AMERICAN NEEDLE, INC. V. NATIONALFOOTBALL LEAGUE
560 U. S. ____ (2010)
AMERICAN NEEDLE, INC., PETITIONER v. NATIONAL FOOTBALL LEAGUE et al.
on writ of certiorari to the united states court of appeals for the seventh circuit
[May 24, 2010]
Justice Stevens delivered the opinion of the Court.
“Every contract, combination in the form of a trust or otherwise, or, conspiracy, in restraint
of trade” is made illegal by §1 of the Sherman Act, ch. 647, 26 Stat. 209, as amended, 15
U. S. C. §1. The question whether an arrangement is a contract, combination, or conspiracy
is different from and antecedent to the question whether it unreasonably restrains trade.
This case raises that antecedent question about the business of the 32 teams in the
National Football League (NFL) and a corporate entity that they formed to manage their
intellectual property. We conclude that the NFL’s licensing activities constitute concerted
action that is not categorically beyond the coverage of §1. The legality of that concerted
action must be judged under the Rule of Reason.
I independent centers of decisionmaking that competition assumes and demands.” Id., at
Originally organized in 1920, the NFL is an unincorporated association that now includes
32 separately owned professional football teams.[Footnote 1] Each team has its own name,
colors, and logo, and owns related intellectual property. Like each of the other teams in the
league, the New Orleans Saints and the Indianapolis Colts, for example, have their own
distinctive names, colors, and marks that are well known to millions of sports fans.
Prior to 1963, the teams made their own arrangements for licensing their intellectual
property and marketing trademarked items such as caps and jerseys. In 1963, the teams
formed National Football League Properties (NFLP) to develop, license, and market their
intellectual property. Most, but not all, of the substantial revenues generated by NFLP have
either been given to charity or shared equally among the teams. However, the teams are
able to and have at times sought to withdraw from this arrangement.
Between 1963 and 2000, NFLP granted nonexclusive licenses to a number of vendors,
permitting them to manufacture and sell apparel bearing team insignias. Petitioner,
American Needle, Inc., was one of those licensees. In December 2000, the teams voted to
authorize NFLP to grant exclusive licenses, and NFLP granted Reebok International Ltd. an
exclusive 10-year license to manufacture and sell trademarked headwear for all 32 teams.
It thereafter declined to renew American Needle’s nonexclusive license.
American Needle filed this action in the Northern District of Illinois, alleging that the
agreements between the NFL, its teams, NFLP, and Reebok violated §§1 and 2 of the
Sherman Act. In their answer to the complaint, the defendants averred that the teams, NFL,
and NFLP were incapable of conspiring within the meaning of §1 “because they are a single
economic enterprise, at least with respect to the conduct challenged.” App. 99. After limited
discovery, the District Court granted summary judgment on the question “whether, with
regard to the facet of their operations respecting exploitation of intellectual property rights,
the NFL and its 32 teams are, in the jargon of antitrust law, acting as a single
entity.” American Needle, Inc. v. New Orleans La. Saints, 496 F. Supp. 2d 941, 943 (2007).
The court concluded “that in that facet of their operations they have so integrated their
operations that they should be deemed a single entity rather than joint ventures cooperating
for a common purpose.” Ibid.
The Court of Appeals for the Seventh Circuit affirmed. The panel observed that “in some
contexts, a league seems more aptly described as a single entity immune from antitrust
scrutiny, while in others a league appears to be a joint venture between independently
owned teams that is subject to review under §1.” 538 F. 3d, 736, 741 (2008). Relying on
Circuit precedent, the court limited its inquiry to the particular conduct at issue, licensing of
teams’ intellectual property. The panel agreed with petitioner that “when making a single-
entity determination, courts must examine whether the conduct in question deprives the
marketplace of the independent sources of economic control that competition
assumes.” Id., at 742. The court, however, discounted the significance of potential
competition among the teams regarding the use of their intellectual property because the
teams “can function only as one source of economic power when collectively producing
NFL football.” Id., at 743. The court noted that football itself can only be carried out jointly.
See ibid. (“Asserting that a single football team could produce a football game … is a Zen
riddle: Who wins when a football team plays itself ”). Moreover, “NFL teams share a vital
economic interest in collectively promoting NFL football … [to] compet[e] with other forms of
entertainment.” Ibid. “It thus follows,” the court found, “that only one source of economic
power controls the promotion of NFL football,” and “it makes little sense to assert that each
individual team has the authority, if not the responsibility, to promote the jointly produced
NFL football.” Ibid. Recognizing that NFL teams have “license[d] their intellectual property
collectively” since 1963, the court held that §1 did not apply. Id., at 744.
We granted certiorari. 557 U. S. __ (2009).
II
As the case comes to us, we have only a narrow issue to decide: whether the NFL
respondents are capable of engaging in a “contract, combination … , or conspiracy” as
defined by §1 of the Sherman Act, 15 U. S. C. §1, or, as we have sometimes phrased it,
whether the alleged activity by the NFL respondents “must be viewed as that of a single
enterprise for purposes of §1.” Copperweld Corp. v. Independence Tube Corp., 467 U. S.
752, 771 (1984).
Taken literally, the applicability of §1 to “every contract, combination … or conspiracy”
could be understood to cover every conceivable agreement, whether it be a group of
competing firms fixing prices or a single firm’s chief executive telling her subordinate how to
price their company’s product. But even though, “read literally,” §1 would address “the
entire body of private contract,” that is not what the statute means. National Soc. of
Professional Engineers v. United States, 435 U. S. 679, 688 (1978); see also Texaco
Inc. v. Dagher, 547 U. S. 1, 5 (2006) (“This Court has not taken a literal approach to this
language”); cf. Board of Trade of Chicago v. United States, 246 U. S. 231, 238 (1918)
(reasoning that the term “restraint of trade” in §1 cannot possibly refer to any restraint on
competition because “[e]very agreement concerning trade, every regulation of trade,
restrains. To bind, to restrain, is of their very essence”). Not every instance of co- operation
between two people is a potential “contract, combination … , or conspiracy, in restraint of
trade.” 15 U. S. C. §1.
The meaning of the term “contract, combination … or conspiracy” is informed by the
“ ‘basic distinction’ ” in the Sherman Act “ ‘between concerted and independent action’ ” that
distinguishes §1 of the Sherman Act from §2. Copperweld, 467 U. S., at 767
(quoting Monsanto Co. v. Spray-Rite Service Corp., 465 U. S. 752, 761 (1984)). Section 1
applies only to concerted action that restrains trade. Section 2, by contrast, covers both
concerted and independent action, but only if that action “monopolize[s],” 15 U. S. C. §2, or
“threatens actual monopolization,” Copperweld, 467 U. S., at 767, a category that is
narrower than restraint of trade. Monopoly power may be equally harmful whether it is the
product of joint action or individual action.
Congress used this distinction between concerted and independent action to deter
anticompetitive conduct and compensate its victims, without chilling vigorous competition
through ordinary business operations. The distinction also avoids judicial scrutiny of routine,
internal business decisions.
Thus, in §1 Congress “treated concerted behavior more strictly than unilateral
behavior.” Id., at 768. This is so because unlike independent action, “[c]oncerted activity
inherently is fraught with anticompetitive risk” insofar as it “deprives the marketplace of
768–769. And because concerted action is discrete and distinct, a limit on such activity
leaves untouched a vast amount of business conduct. As a result, there is less risk of
deterring a firm’s necessary conduct; courts need only examine discrete agreements; and
such conduct may be remedied simply through prohibition.[Footnote 2] See Areeda &
Hovenkamp ¶1464c, at 206. Concerted activity is thus “judged more sternly than unilateral
activity under §2,” Copperweld, 467 U. S., at 768. For these reasons, §1 prohibits any
concerted action “in restraint of trade or commerce,” even if the action does not “threate[n]
monopolization,” Ibid. And therefore, an arrangement must embody concerted action in
order to be a “contract, combination … or conspiracy” under §1.
III
We have long held that concerted action under §1 does not turn simply on whether the
parties involved are legally distinct entities. Instead, we have eschewed such formalistic
distinctions in favor of a functional consideration of how the parties involved in the alleged
anticompetitive conduct actually operate.
As a result, we have repeatedly found instances in which members of a legally single
entity violated §1 when the entity was controlled by a group of competitors and served, in
essence, as a vehicle for ongoing concerted activity. In United States v. Sealy, Inc., 388 U.
S. 350 (1967), for example, a group of mattress manufacturers operated and controlled
Sealy, Inc., a company that licensed the Sealy trademark to the manufacturers, and
dictated that each operate within a specific geographic area. Id., at 352–353. The
Government alleged that the licensees and Sealy were conspiring in violation of §1, and we
agreed. Id., at 352–354. We explained that “[w]e seek the central substance of the
situation” and therefore “we are moved by the identity of the persons who act, rather than
the label of their hats.” Id., at 353. We thus held that Sealy was not a “separate entity, but
… an instrumentality of the individual manufacturers.” Id., at 356. In similar circumstances,
we have found other formally distinct business organizations covered by §1.
See, e.g.,Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.
S. 284 (1985); National Collegiate Athletic Assn. v. Board of Regents of Univ. of Okla., 468
U. S. 85 (1984) (NCAA); United States v. Topco Associates, Inc., 405 U. S. 596, 609
(1972); Associated Press v. United States, 326 U. S. 1 (1945); id., at 26 (Frankfurter, J.,
concurring); United States v. Terminal Railroad Assn. of St. Louis, 224 U. S. 383 (1912);
see also Rock, Corporate Law Through an Antitrust Lens, 92 Colum. L. Rev. 497, 506–510
(1992) (discussing cases). We have similarly looked past the form of a legally “single entity”
when competitors were part of professional organizations[Footnote 3] or trade
groups.[Footnote 4]
Conversely, there is not necessarily concerted action simply because more than one
legally distinct entity is involved. Although, under a now-defunct doctrine known as the
“intraenterprise conspiracy doctrine,” we once treated cooperation between legally separate
entities as necessarily covered by §1, we now embark on a more functional analysis.
The roots of this functional analysis can be found in the very decision that established the
intraenterprise conspiracy doctrine. In United States v. Yellow Cab Co., 332 U. S.
218 (1947), we observed that “corporate interrelationships … are not determinitive of the
applicability of the Sherman Act” because the Act “is aimed at substance rather than
form.” Id., at 227. We nonetheless held that cooperation between legally separate entities
was necessarily covered by §1 because an unreasonable restraint of trade “may result as
readily from a conspiracy among those who are affiliated or integrated under common
ownership as from a conspiracy among those who are otherwise independent.” Ibid.; see
also Kiefer-Stewart Co. v. Joseph E. Seagram & Sons, Inc., 340 U. S. 211, 215 (1951).
The decline of the intraenterprise conspiracy doctrine began in Sunkist Growers,
Inc. v. Winckler & Smith Citrus Products Co., 370 U. S. 19 (1962). In that case, several
agricultural cooperatives that were owned by the same farmers were sued for violations of
§1 of the Sherman Act. Id., at 24–25. Applying a specific immunity provision for agricultural
cooperatives, we held that the three cooperatives were “in practical effect” one
“organization,” even though the controlling farmers “have formally organized themselves
into three separate legal entities.” Id., at 29. “To hold otherwise,” we explained, “would be to
impose grave legal consequences upon organizational distinctions that are of de
minimis meaning and effect” insofar as “use of separate corporations had [no] economic
significance.” Ibid.
Next, in United States v. Citizens & Southern Nat. Bank, 422 U. S. 86 (1975), a large
bank, Citizens and Southern (C&S), formed a holding company that operated de
facto suburban branch banks in the Atlanta area through ownership of the maximum
amount of stock in each local branch that was allowed by law, “ownership of much of the
remaining stock by parties friendly to C&S, use by the suburban banks of the C&S
logogram and all of C&S’s banking services, and close C&S oversight of the operation and
governance of the suburban banks.” Id., at 89 (footnote omitted). The Government
challenged the cooperation between the banks. In our analysis, we observed that
“ ‘corporate interrelationships … are not determinative,’ ” id., at 116, “looked to economic
substance,” and observed that “because the sponsored banks were not set up to be
competitors, §1 did not compel them to compete.” Areeda & Hovenkamp ¶1463, at 200–
201; see also Citizens & Southern, 422 U. S., at 119–120; Areeda, Intraenterprise
Conspiracy in Decline, 97 Harv. L. Rev. 451, 461 (1983).
We finally reexamined the intraenterprise conspiracy doctrine in Copperweld
Corp. v. Independence Tube Corp., 467 U. S. 752 (1984), and concluded that it was
inconsistent with the “ ‘basic distinction between concerted and independent action.’ ” Id., at
767. Considering it “perfectly plain that an internal agreement to implement a single, unitary
firm’s policies does not raise the antitrust dangers that §1 was designed to police,” id., at
769, we held that a parent corporation and its wholly owned subsidiary “are incapable of
conspiring with each other for purposes of §1 of the Sherman Act,” id., at 777. We
explained that although a parent corporation and its wholly owned subsidiary are “separate”
for the purposes of incorporation or formal title, they are controlled by a single center of
decisionmaking and they control a single aggregation of economic power. Joint conduct by
two such entities does not “depriv[e] the marketplace of independent centers of
decisionmaking,” id., at 769, and as a re- sult, an agreement between them does not
constitute a “contract, combination … or conspiracy” for the purposes of §1.[Footnote 5]
IV
As Copperweld exemplifies, “substance, not form, should determine whether a[n] … entity
is capable of conspiring under §1.” 467 U. S., at 773, n. 21. This inquiry is sometimes
described as asking whether the alleged conspirators are a single entity. That is perhaps a
misdescription, however, because the question is not whether the defendant is a legally
single entity or has a single name; nor is the question whether the parties involved “seem”
like one firm or multiple firms in any metaphysical sense. The key is whether the alleged
“contract, combination … , or conspiracy” is concerted action—that is, whether it joins
together separate decisionmakers. The relevant inquiry, therefore, is whether there is a
“contract, combination … or conspiracy” amongst “separate economic actors pursuing
separate economic interests,” id., at 769, such that the agreement “deprives the
marketplace of independent centers of decisionmaking,” ibid., and therefore of “diversity of
entrepreneurial interests,” Fraser v. Major League Soccer, L. L. C., 284 F. 3d 47, 57 (CA1
2002) (Boudin, C. J.), and thus of actual or potential competition, see Freeman v. San
Diego Assn. of Realtors, 322 F. 3d 1133, 1148–1149 (CA9 2003) (Kozinski, J.); Rothery
Storage & Van Co. v. Atlas Van Line, Inc., 792 F. 2d 210, 214–215 (CADC 1986) (Bork, J.);
see also Areeda & Hovenkamp ¶1462b, at 193–194 (noting that the “central evil addressed
by Sherman Act §1” is the “elimin[ation of] competition that would otherwise exist”).
Thus, while the president and a vice president of a firm could (and regularly do) act in
combination, their joint action generally is not the sort of “combination” that §1 is intended to
cover. Such agreements might be described as “really unilateral behavior flowing from
decisions of a single enterprise.” Copperweld, 467 U. S., at 767. Nor, for this reason, does
§1 cover “internally coordinated conduct of a corporation and one of its unincorporated
divisions,” id., at 770, because “[a] division within a corporate structure pursues the
common interests of the whole,” ibid., and therefore “coordination between a corporation
and its division does not represent a sudden joining of two independent sources of
economic power previously pursuing separate interests,” id., at 770–771. Nor, for the same
reasons, is “the coordinated activity of a parent and its wholly owned subsidiary” covered.
See id., at 771. They “have a complete unity of interest” and thus “[w]ith or without a formal
‘agreement,’ the subsidiary acts for the benefit of the parent, its sole shareholder.” Ibid.
Because the inquiry is one of competitive reality, it is not determinative that two parties to
an alleged §1 violation are legally distinct entities. Nor, however, is it determinative that two
legally distinct entities have organized themselves under a single umbrella or into a
structured joint venture. The question is whether the agreement joins together “independent
centers of decisionmaking.” Id., at 769. If it does, the entities are capable of conspiring
under §1, and the court must decide whether the restraint of trade is an unreasonable and
therefore illegal one.
V For that reason, decisions by the NFLP regarding the teams’ separately owned
The NFL teams do not possess either the unitary decisionmaking quality or the single
aggregation of economic power characteristic of independent action. Each of the teams is a
substantial, independently owned, and independently managed business. “[T]heir general
corporate actions are guided or determined” by “separate corporate consciousnesses,” and
“[t]heir objectives are” not “common.” Copperweld, 467 U. S., at 771; see also North
American Soccer League v. NFL, 670 F. 2d 1249, 1252 (CA2 1982) (discussing ways that
“the financial performance of each team, while related to that of the others, does not …
necessarily rise and fall with that of the others”). The teams compete with one another, not
only on the playing field, but to attract fans, for gate receipts and for contracts with
managerial and playing personnel. See Brown v. Pro Football, Inc., 518 U. S. 231, 249
(1996); Sullivan v. NFL, 34 F. 3d 1091, 1098 (CA1 1994); Mid-South Grizzlies v. NFL, 720
F. 2d 772, 787 (CA3 1983); cf. NCAA, 468 U. S., at 99.
Directly relevant to this case, the teams compete in the market for intellectual property. To
a firm making hats, the Saints and the Colts are two potentially competing suppliers of
valuable trademarks. When each NFL team licenses its intellectual property, it is not
pursuing the “common interests of the whole” league but is instead pursuing interests of
each “corporation itself,” Copperweld, 467 U. S., at 770; teams are acting as “separate
economic actors pursuing separate economic interests,” and each team therefore is a
potential “independent cente[r] of decisionmaking,” id., at 769. Decisions by NFL teams to
license their separately owned trademarks collectively and to only one vendor are decisions
that “depriv[e] the marketplace of independent centers of decisionmaking,” ibid., and
therefore of actual or potential competition. See NCAA, 468 U. S., at 109, n. 39 (observing
a possible §1 violation if two separately owned companies sold their separate products
through a “single selling agent”); cf. Areeda & Hovenkamp ¶1478a, at 318 (“Obviously, the
most significant competitive threats arise when joint venture participants are actual or
potential competitors”).
In defense, respondents argue that by forming NFLP, they have formed a single entity,
akin to a merger, and market their NFL brands through a single outlet. But it is not
dispositive that the teams have organized and own a legally separate entity that centralizes
the management of their intellectual property. An ongoing §1 violation cannot evade §1
scrutiny simply by giving the ongoing violation a name and label. “Perhaps every agreement
and combination in restraint of trade could be so labeled.” Timken Roller Bearing
Co. v. United States, 341 U. S. 593, 598 (1951).
The NFL respondents may be similar in some sense to a single enterprise that owns
several pieces of intellectual property and licenses them jointly, but they are not similar in
the relevant functional sense. Although NFL teams have common interests such as
promoting the NFL brand, they are still separate, profit-maximizing entities, and their
interests in licensing team trademarks are not necessarily aligned. See generally
Hovenkamp, Exclusive Joint Ventures and Antitrust Policy, 1995 Colum. Bus. L. Rev. 1,
52–61 (1995); Shishido, Conflicts of Interest and Fiduciary Duties in the Operation of a Joint
Venture, 39 Hastings L. J. 63, 69–81 (1987). Common interests in the NFL brand
“partially unit[e] the economic interests of the parent firms,” Broadley, Joint Ventures and
Antitrust Policy, 95 Harv. L. Rev. 1521, 1526 (1982) (emphasis added), but the teams still
have distinct, potentially competing interests.
It may be, as respondents argue, that NFLP “has served as the ‘single driver’’ of the
teams’ “promotional vehicle,” “ ‘pursu[ing] the common interests of the whole.’ ” Brief for
NFL Respondents 28 (quoting Copperweld, 467 U. S., at 770–771; brackets in original). But
illegal restraints often are in the common interests of the parties to the restraint, at the
expense of those who are not parties. It is true, as respondents describe, that they have for
some time marketed their trademarks jointly. But a history of concerted activity does not
immunize conduct from §1 scrutiny. “Absence of actual competition may simply be a
manifestation of the anticompetitive agreement itself.” Freeman, 322 F. 3d, at 1149.
Respondents argue that nonetheless, as the Court of Appeals held, they constitute a
single entity because without their cooperation, there would be no NFL football. It is true
that “the clubs that make up a professional sports league are not completely independent
economic competitors, as they depend upon a degree of cooperation for economic
survival.” Brown, 518 U. S., at 248. But the Court of Appeals’ reasoning is unpersuasive.
The justification for cooperation is not relevant to whether that cooperation is concerted or
independent action.[Footnote 6] A “contract, combination … or conspiracy,” §1, that is
necessary or useful to a joint venture is still a “contract, combination … or conspiracy” if it
“deprives the marketplace of independent centers of decisionmaking,” Copperweld, 467 U.
S., at 769. See NCAA, 468 U. S., at 113 (“[J]oint ventures have no immunity from antitrust
laws”). Any joint venture involves multiple sources of economic power cooperating to
produce a product. And for many such ventures, the participation of others is necessary.
But that does not mean that necessity of cooperation transforms concerted action into
independent action; a nut and a bolt can only operate together, but an agreement between
nut and bolt manufacturers is still subject to §1 analysis. Nor does it mean that once a
group of firms agree to produce a joint product, cooperation amongst those firms must be
treated as independent conduct. The mere fact that the teams operate jointly in some sense
does not mean that they are immune.[Footnote 7]
The question whether NFLP decisions can constitute concerted activity covered by §1 is
closer than whether decisions made directly by the 32 teams are covered by §1. This is so
both because NFLP is a separate corporation with its own management and because the
record indicates that most of the revenues generated by NFLP are shared by the teams on
an equal basis. Nevertheless we think it clear that for the same reasons the 32 teams’
conduct is covered by §1, NFLP’s actions also are subject to §1, at least with regards to its
marketing of property owned by the separate teams. NFLP’s licensing decisions are made
by the 32 potential competitors, and each of them actually owns its share of the jointly
managed assets. Cf. Sealy, 388 U. S., at 352–354. Apart from their agreement to cooperate
in exploiting those assets, including their decisions as the NFLP, there would be nothing to
prevent each of the teams from making its own market decisions relating to purchases of
apparel and headwear, to the sale of such items, and to the granting of licenses to use its
trademarks.
We generally treat agreements within a single firm as independent action on the
presumption that the components of the firm will act to maximize the firm’s profits. But in
rare cases, that presumption does not hold. Agreements made within a firm can constitute
concerted action covered by §1 when the parties to the agreement act on interests separate
from those of the firm itself,[Footnote 8] and the intrafirm agreements may simply be a
formalistic shell for ongoing concerted action. See, e.g., Topco Associates, Inc., 405 U. S.,
at 609; Sealy, 388 U. S., at 352–354.
intellectual property constitute concerted action. Thirty-two teams operating independently
through the vehicle of the NFLP are not like the components of a single firm that act to
maximize the firm’s profits. The teams remain separately controlled, potential competitors
with economic interests that are distinct from NFLP’s financial well-being. See generally
Hovenkamp, 1995 Colum. Bus. L. Rev., at 52–61. Unlike typical decisions by corporate
shareholders, NFLP licensing decisions effectively require the assent of more than a mere
majority of shareholders. And each team’s decision reflects not only an interest in NFLP’s
profits but also an interest in the team’s individual profits. See generally Shusido, 39
Hastings L. J., at 69–71. The 32 teams capture individual economic benefits separate and
apart from NFLP profits as a result of the decisions they make for the NFLP. NFLP’s
decisions thus affect each team’s profits from licensing its own intellectual property.
“Although the business interests of” the teams “will often coincide with those of the” NFLP
“as an entity in itself, that commonality of interest exists in every cartel.” Los Angeles
Memorial Coliseum Comm’n v. NFL, 726 F. 2d 1381, 1389 (CA9 1984) (emphasis added).
In making the relevant licensing decisions, NFLP is therefore “an instrumentality” of the
teams. Sealy, 388 U. S., at 352–354; see also Topco Associates, Inc., 405 U. S., at 609.
If the fact that potential competitors shared in profits or losses from a venture meant that
the venture was immune from §1, then any cartel “could evade the antitrust law simply by
creating a ‘joint venture’ to serve as the exclusive seller of their competing products.” Major
League Baseball Properties, Inc. v. Salvino, Inc., 542 F. 3d 290, 335 (CA2 2008)
(Sotomayor, J., concurring in judgment). “So long as no agreement,” other than one made
by the cartelists sitting on the board of the joint venture, “explicitly listed the prices to be
charged, the companies could act as monopolies through the ‘joint venture.’ ” Ibid. (Indeed,
a joint venture with a single management structure is generally a better way to operate a
cartel because it decreases the risks of a party to an illegal agreement defecting from that
agreement). However, competitors “cannot simply get around” antitrust liability by acting
“through a third-party intermediary or ‘joint venture’.” Id., at 336.[Footnote 9]
VI
Football teams that need to cooperate are not trapped by antitrust law. “[T]he special
characteristics of this industry may provide a justification” for many kinds of
agreements. Brown, 518 U. S., at 252 (Stevens, J., dissenting). The fact that NFL teams
share an interest in making the entire league successful and profitable, and that they must
cooperate in the production and scheduling of games, provides a perfectly sensible
justification for making a host of collective decisions. But the conduct at issue in this case is
still concerted activity under the Sherman Act that is subject to §1 analysis.
 When “restraints on competition are essential if the product is to be available at all,” per
se rules of illegality are inapplicable, and instead the restraint must be judged according to
the flexible Rule of Reason.[Footnote 10] NCAA, 468 U. S., at 101; see id., at 117 (“Our
decision not to apply a per se rule to this case rests in large part on our recognition that a
certain degree of cooperation is necessary if the type of competition that petitioner and its
member institutions seek to market is to be preserved”); see also Dagher, 547 U. S., at 6. In
such instances, the agreement is likely to survive the Rule of Reason. See Broadcast
Music, Inc. v. Columbia Broadcasting System, Inc., 441 U. S. 1, 23 (1979) (“Joint ventures
and other cooperative arrangements are also not usually unlawful… where the agreement
… is necessary to market the product at all”). And depending upon the concerted activity in
question, the Rule of Reason may not require a detailed analysis; it “can sometimes be
applied in the twinkling of an eye.” NCAA, 468 U. S., at 109, n. 39.
Other features of the NFL may also save agreements amongst the teams. We have
recognized, for example, “that the interest in maintaining a competitive balance” among
“athletic teams is legitimate and important,” NCAA, 468 U. S., at 117. While that same
interest applies to the teams in the NFL, it does not justify treating them as a single entity
for §1 purposes when it comes to the marketing of the teams’ individually owned intellectual
property. It is, however, unquestionably an interest that may well justify a variety of
collective decisions made by the teams. What role it properly plays in applying the Rule of
Reason to the allegations in this case is a matter to be considered on remand.
Accordingly, the judgment of the Court of Appeals is reversed, and the case is remanded
for further proceedings consistent with this opinion.
It is so ordered.
Footnote 1
The NFL was founded in Canton, Ohio as the “American Professional Football
Association.” United States Football League v. National Football League, 842 F. 2d 1335,
1343 (CA2 1988). It took its current name in 1922.Ibid. Forty-one franchises failed in the
first forty-one years of the League’s existence. Ibid.
Footnote 2
If Congress prohibited independent action that merely restrains trade (even if it does not
threaten monopolization), that prohibition could deter perfectly competitive conduct by firms
that are fearful of litigation costs and judicial error. See Copperweld, 467 U. S., at 768
(“Judging unilateral conduct in this manner reduces the risk that the antitrust laws will
dampen the competitive zeal of a single aggressive competitor”); cf. United States v. United
States Gypsum Co., 438 U. S. 422, 441 (1978) (“[S]alutary and procompetitive conduct …
might be shunned by businessmen who chose to be excessively cautious in the face of
uncertainty”). Moreover, if every unilateral action that restrained trade were subject to
antitrust scrutiny, then courts would be forced to judge almost every internal business
decision. See 7 P. Areeda & H. Hovenkamp, Antitrust Law ¶1464c, at 206 (2d ed. 2003)
(hereinafter Areeda & Hovenkamp) (unilateral behavior is “often difficult to evaluate or
remedy”).
Footnote 3
See, e.g., FTC v. Indiana Federation of Dentists, 476 U. S.
447 (1986); Arizona v. Maricopa County Medical Soc., 457 U. S. 332 (1982); National Soc.
of Professional Engineers v. United States, 435 U. S. 679 (1978); Goldfarb v. Virginia State
Bar, 421 U. S. 773 (1975).
Footnote 4
See, e.g., Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U. S. 492 (1988); Radiant
Burners, Inc. v. Peoples Gas Light & Coke Co., 364 U. S. 656 (1961) (per curiam); Fashion
Originators’ Guild of America, Inc. v. FTC, 312 U. S. 457 (1941).
Footnote 5
This focus on “substance, not, form,” Copperweld, 467 U. S., at 773, n. 21, can also be
seen in our cases about whether a company and its agent are capable of conspiring under
§1. See, e.g., Simpson v. Union Oil Co. of Cal., 377 U. S. 13, 20–21 (1964); see also E.
Elhauge & D. Geradin, Global Antitrust Law and Economics 787–788, and n. 7 (2007)
(hereinafter Elhauge & Geradin) (explaining the functional difference
between Simpson and United States v. General Elec. Co., 272 U. S. 476 (1926), in which
we treated a similar agreement as beyond the reach of §1).
Footnote 6
As discussed infra, necessity of cooperation is a factor relevant to whether the agreement
is subject to the Rule of Reason. See NCAA, 468 U. S., at 101 (holding that NCAA
restrictions on televising college football games are subject to Rule of Reason analysis for
the “critical” reason that “horizontal restraints on competition are essential if the product is
to be available at all”).
Footnote 7
In any event, it simply is not apparent that the alleged conduct was necessary at all.
Although two teams are needed to play a football game, not all aspects of elaborate
interleague cooperation are necessary to produce a game. Moreover, even if leaguewide
agreements are necessary to produce football, it does not follow that concerted activity in
marketing intellectual property is necessary to produce football.
The Court of Appeals carved out a zone of antitrust immunity for conduct arguably related
to league operations by reasoning that coordinated team trademark sales are necessary to
produce “NFL football,” a single NFL brand that competes against other forms of
entertainment. But defining the product as “NFL football” puts the cart before the horse: Of
course the NFL produces NFL football; but that does not mean that cooperation amongst
NFL teams is immune from §1 scrutiny. Members of any cartel could insist that their
cooperation is necessary to produce the “cartel product” and compete with other products.
Footnote 8
See Areeda & Hovenkamp ¶1471; Elhauge & Geradin 786–787, and n. 6; see also Capital
Imaging Assoc. v. Mohawk Valley Medical Assoc., Inc., 996 F. 2d 537, 544 (CA2
1993); Bolt v. Halifax Hospital Medical Center, 891 F. 2d 810, 819 (CA11
1990); Oksanen v. Page Memorial Hospital, 945 F. 2d 696, 706 (CA4 1991); Motive Parts
Warehouse v. Facet Enterprises, 774 F. 2d 380, 387–388 (CA10 1985); Victorian House,
Inc. v. Fisher Camuto Corp., 769 F. 2d 466, 469 (CA8 1985); Weiss v. York Hospital, 745
F. 2d 786, 828 (CA3 1984).
Footnote 9
For the purposes of resolving this case, there is no need to pass upon the Government’s
position that entities are incapable of conspiring under §1 if they “have effectively merged
the relevant aspect of their operations, thereby eliminating actual and potential competition
… in that operational sphere” and “the challenged restraint [does] not significantly affect
actual or potential competition … outside their merged operations.” Brief for United States
as Amicus Curiae 17. The Government urges that the choices “to offer only a blanket
license” and “to have only a single headwear licensee” might not constitute concerted
action under its test. Id., at 32. However, because the teams still own their own trademarks
and are free to market those trademarks as they see fit, even those two choices were
agreements amongst potential competitors and would constitute concerted action under the
Government’s own standard. At any point, the teams could decide to license their own
trademarks. It is significant, moreover, that the teams here control NFLP. The two choices
that the Government might treat as independent action, although nominally made by NFLP,
are for all functional purposes choices made by the 32 entities with potentially competing
interests.
Footnote 10
Justice Brandeis provided the classic formulation of the Rule of Reason in Board of Trade
of Chicago v. United States, 246 U. S. 231, 238 (1918):
“The true test of legality is whether the restraint imposed is such as merely regulates and
perhaps thereby promotes competition or whether it is such as may suppress or even
destroy competition. To determine that question the court must ordinarily consider the facts
peculiar to the business to which the restraint is applied; its condition before and after the
restraint is imposed; the nature of the restraint and its effect, actual or probable. The history
of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the
purpose or end sought to be attained, are all relevant facts. This is not because a good
intention will save an otherwise objectionable regulation or the reverse; but because
knowledge of intent may help the court to interpret facts and to predict consequences.” See
also Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U. S. 877, 885–887
(2007); National Soc. of Professional Engineers, 435 U. S., at 688–691.
AGAN v. PIATCO
FACTS:
On October 5, 1994, AEDC submitted an unsolicited proposal to the Government through
the DOTC/MIAA for the development of NAIA International Passenger Terminal III (NAIA
IPT III).
DOTC constituted the Prequalification Bids and Awards Committee (PBAC) for the
implementation of the project and submitted with its endorsement proposal to the NEDA,
which approved the project.
On June 7, 14, and 21, 1996, DOTC/MIAA caused the publication in two daily newspapers
of an invitation for competitive or comparative proposals on AEDC’s unsolicited proposal, in
accordance with Sec. 4-A of RA 6957, as amended.
On September 20, 1996, the consortium composed of People’s Air Cargo and Warehousing
Co., Inc. (Paircargo), Phil. Air and Grounds Services, Inc. (PAGS) and Security Bank Corp.
(Security Bank) (collectively, Paircargo Consortium) submitted their competitive proposal to
the PBAC. PBAC awarded the project to Paircargo Consortium. Because of that, it was
incorporated into Philippine International Airport Terminals Co., Inc.
AEDC subsequently protested the alleged undue preference given to PIATCO and
reiterated its objections as regards the prequalification of PIATCO.
On July 12, 1997, the Government and PIATCO signed the “Concession Agreement for the
Build-Operate-and-Transfer Arrangement of the NAIA Passenger Terminal III” (1997
Concession Agreement). The Government granted PIATCO the franchise to operate and
maintain the said terminal during the concession period and to collect the fees, rentals and
other charges in accordance with the rates or schedules stipulated in the 1997 Concession
Agreement. The Agreement provided that the concession period shall be for twenty-five
(25) years commencing from the in-service date, and may be renewed at the option of the
Government for a period not exceeding twenty-five (25) years. At the end of the
concession period, PIATCO shall transfer the development facility to MIAA.
Meanwhile, the MIAA which is charged with the maintenance and operation of the NAIA
Terminals I and II, had existing concession contracts with various service providers to offer
international airline airport services, such as in-flight catering, passenger handling, ramp
and ground support, aircraft maintenance and provisions, cargo handling and warehousing,
and other services, to several international airlines at the NAIA.
On September 17, 2002, the workers of the international airline service providers, claiming
that they would lose their job upon the implementation of the questioned agreements, filed
a petition for prohibition. Several employees of MIAA likewise filed a petition assailing the
legality of the various agreements.
During the pendency of the cases, PGMA, on her speech, stated that she will not “honor
(PIATCO) contracts which the Executive Branch’s legal offices have concluded (as) null
and void.”
ISSUE:
Whether or not the State can temporarily take over a business affected with public interest.
RULING:
Yes. PIATCO cannot, by mere contractual stipulation, contravene the Constitutional
provision on temporary government takeover and obligate the government to pay
“reasonable cost for the use of the Terminal and/or Terminal Complex.”
Article XII, Section 17 of the 1987 Constitution provides:
Section 17. In times of national emergency, when the public interest so requires, the State
may, during the emergency and under reasonable terms prescribed by it, temporarily take
over or direct the operation of any privately owned public utility or business affected with
public interest.
The above provision pertains to the right of the State in times of national emergency, and in
the exercise of its police power, to temporarily take over the operation of any business
affected with public interest. The duration of the emergency itself is the determining factor
as to how long the temporary takeover by the government would last. The temporary
takeover by the government extends only to the operation of the business and not to the
ownership thereof. As such the government is not required to compensate the private
entity-owner of the said business as there is no transfer of ownership, whether
permanent or temporary. The private entity-owner affected by the temporary takeover
cannot, likewise, claim just compensation for the use of the said business and its properties
as the temporary takeover by the government is in exercise of its police power and not of its
power of eminent domain.
Article XII, section 17 of the 1987 Constitution envisions a situation wherein the exigencies
of the times necessitate the government to “temporarily take over or direct the operation of
any privately owned public utility or business affected with public interest.” It is the welfare
and interest of the public which is the paramount consideration in determining whether or
not to temporarily take over a particular business. Clearly, the State in effecting the
temporary takeover is exercising its police power. Police power is the “most essential,
insistent, and illimitable of powers.” Its exercise therefore must not be unreasonably
hampered nor its exercise be a source of obligation by the government in the absence of
damage due to arbitrariness of its exercise. Thus, requiring the government to pay
reasonable compensation for the reasonable use of the property pursuant to the operation
of the business contravenes the Constitution.
AGAN Full Case
Petitioners and petitioners-in-intervention filed the instant petitions for prohibition under
Rule 65 of the Revised Rules of Court seeking to prohibit the Manila International Airport
Authority (MIAA) and the Department of Transportation and Communications (DOTC) and
its Secretary from implementing the following agreements executed by the Philippine
Government through the DOTC and the MIAA and the Philippine International Air Terminals
Co., Inc. (PIATCO): (1) the Concession Agreement signed on July 12, 1997, (2) the
Amended and Restated Concession Agreement dated November 26, 1999, (3) the First
Supplement to the Amended and Restated Concession Agreement dated August 27, 1999,
(4) the Second Supplement to the Amended and Restated Concession Agreement dated
September 4, 2000, and (5) the Third Supplement to the Amended and Restated
Concession Agreement dated June 22, 2001 (collectively, the PIATCO Contracts).
The facts are as follows:
In August 1989, the DOTC engaged the services of Aeroport de Paris (ADP)
to conduct a comprehensive study of the Ninoy Aquino International Airport
(NAIA) and determine whether the present airport can cope with the traffic
development up to the year 2010. The study consisted of two parts: first,
traffic forecasts, capacity of existing facilities, NAIA future requirements,
proposed master plans and development plans; and second, presentation of
the preliminary design of the passenger terminal building. The ADP submitted
a Draft Final Report to the DOTC in December 1989.
Some time in 1993, six business leaders consisting of John Gokongwei,
Andrew Gotianun, Henry Sy, Sr., Lucio Tan, George Ty and Alfonso
Yuchengco met with then President Fidel V. Ramos to explore the possibility
of investing in the construction and operation of a new international airport
terminal. To signify their commitment to pursue the project, they formed the
Asia's Emerging Dragon Corp. (AEDC) which was registered with the
Securities and Exchange Commission (SEC) on September 15, 1993.
On October 5, 1994, AEDC submitted an unsolicited proposal to the
Government through the DOTC/MIAA for the development of NAIA
International Passenger Terminal III (NAIA IPT III) under a build-operate-and-
transfer arrangement pursuant to RA 6957 as amended by RA 7718 (BOT
Law).1
On December 2, 1994, the DOTC issued Dept. Order No. 94-832 constituting the
Prequalification Bids and Awards Committee (PBAC) for the implementation of the NAIA
IPT III project.
On March 27, 1995, then DOTC Secretary Jose Garcia endorsed the proposal of AEDC to
the National Economic and Development Authority (NEDA). A revised proposal, however,
was forwarded by the DOTC to NEDA on December 13, 1995. On January 5, 1996, the
NEDA Investment Coordinating Council (NEDA ICC) – Technical Board favorably endorsed
the project to the ICC – Cabinet Committee which approved the same, subject to certain
conditions, on January 19, 1996. On February 13, 1996, the NEDA passed Board
Resolution No. 2 which approved the NAIA IPT III project.
On June 7, 14, and 21, 1996, DOTC/MIAA caused the publication in two daily newspapers
of an invitation for competitive or comparative proposals on AEDC's unsolicited proposal, in
accordance with Sec. 4-A of RA 6957, as amended. The alternative bidders were required
to submit three (3) sealed envelopes on or before 5:00 p.m. of September 20, 1996. The
first envelope should contain the Prequalification Documents, the second envelope the
Technical Proposal, and the third envelope the Financial Proposal of the proponent.
On June 20, 1996, PBAC Bulletin No. 1 was issued, postponing the availment of the Bid
Documents and the submission of the comparative bid proposals. Interested firms were
permitted to obtain the Request for Proposal Documents beginning June 28, 1996, upon
submission of a written application and payment of a non-refundable fee of P50,000.00
(US$2,000).
The Bid Documents issued by the PBAC provided among others that the proponent must
have adequate capability to sustain the financing requirement for the detailed engineering,
design, construction, operation, and maintenance phases of the project. The proponent
would be evaluated based on its ability to provide a minimum amount of equity to the
project, and its capacity to secure external financing for the project.
On July 23, 1996, the PBAC issued PBAC Bulletin No. 2 inviting all bidders to a pre-bid
conference on July 29, 1996.
On August 16, 1996, the PBAC issued PBAC Bulletin No. 3 amending the Bid Documents.
The following amendments were made on the Bid Documents:
a. Aside from the fixed Annual Guaranteed Payment, the proponent shall
include in its financial proposal an additional percentage of gross revenue
share of the Government, as follows:
i. First 5 years 5.0%
I i. Next 10 years 7.5%
iii. Next 10 years 10.0%
b. The amount of the fixed Annual Guaranteed Payment shall be subject of
the price challenge. Proponent may offer an Annual Guaranteed Payment
which need not be of equal amount, but payment of which shall start upon site
possession.
c. The project proponent must have adequate capability to sustain the
financing requirement for the detailed engineering, design, construction,
and/or operation and maintenance phases of the project as the case may be.
For purposes of pre-qualification, this capability shall be measured in terms of:
i. Proof of the availability of the project proponent and/or the
consortium to provide the minimum amount of equity for the
project; and
ii. a letter testimonial from reputable banks attesting that the
project proponent and/or the members of the consortium are
banking with them, that the project proponent and/or the
members are of good financial standing, and have adequate
resources.
d. The basis for the prequalification shall be the proponent's compliance with
the minimum technical and financial requirements provided in the Bid
Documents and the IRR of the BOT Law. The minimum amount of equity shall
be 30% of the Project Cost.
e. Amendments to the draft Concession Agreement shall be issued from time
to time. Said amendments shall only cover items that would not materially
affect the preparation of the proponent's proposal.
On August 29, 1996, the Second Pre-Bid Conference was held where certain clarifications
were made. Upon the request of prospective bidder People's Air Cargo & Warehousing Co.,
Inc (Paircargo), the PBAC warranted that based on Sec. 11.6, Rule 11 of the Implementing
Rules and Regulations of the BOT Law, only the proposed Annual Guaranteed Payment
submitted by the challengers would be revealed to AEDC, and that the challengers'
technical and financial proposals would remain confidential. The PBAC also clarified that
the list of revenue sources contained in Annex 4.2a of the Bid Documents was merely
indicative and that other revenue sources may be included by the proponent, subject to
approval by DOTC/MIAA. Furthermore, the PBAC clarified that only those fees and charges
denominated as Public Utility Fees would be subject to regulation, and those charges which
would be actually deemed Public Utility Fees could still be revised, depending on the
outcome of PBAC's query on the matter with the Department of Justice.
In September 1996, the PBAC issued Bid Bulletin No. 5, entitled "Answers to the Queries of
PAIRCARGO as Per Letter Dated September 3 and 10, 1996." Paircargo's queries and the
PBAC's responses were as follows:
1. It is difficult for Paircargo and Associates to meet the required minimum
equity requirement as prescribed in Section 8.3.4 of the Bid Documents
considering that the capitalization of each member company is so structured
to meet the requirements and needs of their current respective business
undertaking/activities. In order to comply with this equity requirement,
Paircargo is requesting PBAC to just allow each member of (sic) corporation
of the Joint Venture to just execute an agreement that embodies a
commitment to infuse the required capital in case the project is awarded to the
Joint Venture instead of increasing each corporation's current authorized
capital stock just for prequalification purposes.
In prequalification, the agency is interested in one's financial capability at the
time of prequalification, not future or potential capability.
A commitment to put up equity once awarded the project is not enough to
establish that "present" financial capability. However, total financial capability
of all member companies of the Consortium, to be established by submitting
the respective companies' audited financial statements, shall be acceptable.
2. At present, Paircargo is negotiating with banks and other institutions for the
extension of a Performance Security to the joint venture in the event that the
Concessions Agreement (sic) is awarded to them. However, Paircargo is
being required to submit a copy of the draft concession as one of the
documentary requirements. Therefore, Paircargo is requesting that they'd (sic)
be furnished copy of the approved negotiated agreement between the PBAC
and the AEDC at the soonest possible time.
A copy of the draft Concession Agreement is included in the Bid Documents.
Any material changes would be made known to prospective challengers
through bid bulletins. However, a final version will be issued before the award
of contract.
The PBAC also stated that it would require AEDC to sign Supplement C of the Bid
Documents (Acceptance of Criteria and Waiver of Rights to Enjoin Project) and to submit
the same with the required Bid Security.
On September 20, 1996, the consortium composed of People's Air Cargo and Warehousing
Co., Inc. (Paircargo), Phil. Air and Grounds Services, Inc. (PAGS) and Security Bank Corp.
(Security Bank) (collectively, Paircargo Consortium) submitted their competitive proposal to
the PBAC. On September 23, 1996, the PBAC opened the first envelope containing the
prequalification documents of the Paircargo Consortium. On the following day, September
24, 1996, the PBAC prequalified the Paircargo Consortium.
On September 26, 1996, AEDC informed the PBAC in writing of its reservations as regards
the Paircargo Consortium, which include:
a. The lack of corporate approvals and financial capability of PAIRCARGO;
b. The lack of corporate approvals and financial capability of PAGS;
c. The prohibition imposed by RA 337, as amended (the General Banking Act)
on the amount that Security Bank could legally invest in the project;
d. The inclusion of Siemens as a contractor of the PAIRCARGO Joint
Venture, for prequalification purposes; and
e. The appointment of Lufthansa as the facility operator, in view of the
Philippine requirement in the operation of a public utility.
The PBAC gave its reply on October 2, 1996, informing AEDC that it had considered the
issues raised by the latter, and that based on the documents submitted by Paircargo and
the established prequalification criteria, the PBAC had found that the challenger, Paircargo,
had prequalified to undertake the project. The Secretary of the DOTC approved the finding
of the PBAC.
The PBAC then proceeded with the opening of the second envelope of the Paircargo
Consortium which contained its Technical Proposal.
On October 3, 1996, AEDC reiterated its objections, particularly with respect to Paircargo's
financial capability, in view of the restrictions imposed by Section 21-B of the General
Banking Act and Sections 1380 and 1381 of the Manual Regulations for Banks and Other
Financial Intermediaries. On October 7, 1996, AEDC again manifested its objections and
requested that it be furnished with excerpts of the PBAC meeting and the accompanying
technical evaluation report where each of the issues they raised were addressed.
On October 16, 1996, the PBAC opened the third envelope submitted by AEDC and the
Paircargo Consortium containing their respective financial proposals. Both proponents
offered to build the NAIA Passenger Terminal III for at least $350 million at no cost to the
government and to pay the government: 5% share in gross revenues for the first five years
of operation, 7.5% share in gross revenues for the next ten years of operation, and 10%
share in gross revenues for the last ten years of operation, in accordance with the Bid
Documents. However, in addition to the foregoing, AEDC offered to pay the government a
total of P135 million as guaranteed payment for 27 years while Paircargo Consortium
offered to pay the government a total of P17.75 billion for the same period.
Thus, the PBAC formally informed AEDC that it had accepted the price proposal submitted
by the Paircargo Consortium, and gave AEDC 30 working days or until November 28, 1996
within which to match the said bid, otherwise, the project would be awarded to Paircargo.
As AEDC failed to match the proposal within the 30-day period, then DOTC Secretary
Amado Lagdameo, on December 11, 1996, issued a notice to Paircargo Consortium
regarding AEDC's failure to match the proposal.
On February 27, 1997, Paircargo Consortium incorporated into Philippine International
Airport Terminals Co., Inc. (PIATCO).
AEDC subsequently protested the alleged undue preference given to PIATCO and
reiterated its objections as regards the prequalification of PIATCO.
On April 11, 1997, the DOTC submitted the concession agreement for the second-pass
approval of the NEDA-ICC.
On April 16, 1997, AEDC filed with the Regional Trial Court of Pasig a Petition for
Declaration of Nullity of the Proceedings, Mandamus and Injunction against the Secretary
of the DOTC, the Chairman of the PBAC, the voting members of the PBAC and Pantaleon
D. Alvarez, in his capacity as Chairman of the PBAC Technical Committee.
On April 17, 1997, the NEDA-ICC conducted an ad referendum to facilitate the approval, on
a no-objection basis, of the BOT agreement between the DOTC and PIATCO. As the ad
referendum gathered only four (4) of the required six (6) signatures, the NEDA merely
noted the agreement.
On July 9, 1997, the DOTC issued the notice of award for the project to PIATCO.
On July 12, 1997, the Government, through then DOTC Secretary Arturo T. Enrile, and
PIATCO, through its President, Henry T. Go, signed the "Concession Agreement for the
Build-Operate-and-Transfer Arrangement of the Ninoy Aquino International Airport
Passenger Terminal III" (1997 Concession Agreement). The Government granted PIATCO
the franchise to operate and maintain the said terminal during the concession period and to
collect the fees, rentals and other charges in accordance with the rates or schedules
stipulated in the 1997 Concession Agreement. The Agreement provided that the
concession period shall be for twenty-five (25) years commencing from the in-service date,
and may be renewed at the option of the Government for a period not exceeding twenty-five
(25) years. At the end of the concession period, PIATCO shall transfer the development
facility to MIAA.
On November 26, 1998, the Government and PIATCO signed an Amended and Restated
Concession Agreement (ARCA). Among the provisions of the 1997 Concession Agreement
that were amended by the ARCA were: Sec. 1.11 pertaining to the definition of "certificate
of completion"; Sec. 2.05 pertaining to the Special Obligations of GRP; Sec. 3.02 (a)
dealing with the exclusivity of the franchise given to the Concessionaire; Sec. 4.04
concerning the assignment by Concessionaire of its interest in the Development Facility;
Sec. 5.08 (c) dealing with the proceeds of Concessionaire's insurance; Sec. 5.10 with
respect to the temporary take-over of operations by GRP; Sec. 5.16 pertaining to the taxes,
duties and other imposts that may be levied on the Concessionaire; Sec. 6.03 as regards
the periodic adjustment of public utility fees and charges; the entire Article VIII concerning
the provisions on the termination of the contract; and Sec. 10.02 providing for the venue of
the arbitration proceedings in case a dispute or controversy arises between the parties to
the agreement.
Subsequently, the Government and PIATCO signed three Supplements to the ARCA. The
First Supplement was signed on August 27, 1999; the Second Supplement on September
4, 2000; and the Third Supplement on June 22, 2001 (collectively, Supplements).
The First Supplement to the ARCA amended Sec. 1.36 of the ARCA defining "Revenues"
or "Gross Revenues"; Sec. 2.05 (d) of the ARCA referring to the obligation of MIAA to
provide sufficient funds for the upkeep, maintenance, repair and/or replacement of all
airport facilities and equipment which are owned or operated by MIAA; and further providing
additional special obligations on the part of GRP aside from those already enumerated in
Sec. 2.05 of the ARCA. The First Supplement also provided a stipulation as regards the
construction of a surface road to connect NAIA Terminal II and Terminal III in lieu of the
proposed access tunnel crossing Runway 13/31; the swapping of obligations between GRP
and PIATCO regarding the improvement of Sales Road; and the changes in the timetable. It
also amended Sec. 6.01 (c) of the ARCA pertaining to the Disposition of Terminal Fees;
Sec. 6.02 of the ARCA by inserting an introductory paragraph; and Sec. 6.02 (a) (iii) of the
ARCA referring to the Payments of Percentage Share in Gross Revenues.
The Second Supplement to the ARCA contained provisions concerning the clearing,
removal, demolition or disposal of subterranean structures uncovered or discovered at the
site of the construction of the terminal by the Concessionaire. It defined the scope of works;
it provided for the procedure for the demolition of the said structures and the consideration
for the same which the GRP shall pay PIATCO; it provided for time extensions, incremental
and consequential costs and losses consequent to the existence of such structures; and it
provided for some additional obligations on the part of PIATCO as regards the said
structures.
Finally, the Third Supplement provided for the obligations of the Concessionaire as regards
the construction of the surface road connecting Terminals II and III.
Meanwhile, the MIAA which is charged with the maintenance and operation of the NAIA
Terminals I and II, had existing concession contracts with various service providers to offer
international airline airport services, such as in-flight catering, passenger handling, ramp
and ground support, aircraft maintenance and provisions, cargo handling and warehousing,
and other services, to several international airlines at the NAIA. Some of these service
providers are the Miascor Group, DNATA-Wings Aviation Systems Corp., and the
MacroAsia Group. Miascor, DNATA and MacroAsia, together with Philippine Airlines (PAL),
are the dominant players in the industry with an aggregate market share of 70%.
On September 17, 2002, the workers of the international airline service providers, claiming
that they stand to lose their employment upon the implementation of the questioned
agreements, filed before this Court a petition for prohibition to enjoin the enforcement of
said agreements.2
On October 15, 2002, the service providers, joining the cause of the petitioning workers,
filed a motion for intervention and a petition-in-intervention.
On October 24, 2002, Congressmen Salacnib Baterina, Clavel Martinez and Constantino
Jaraula filed a similar petition with this Court.3
On November 6, 2002, several employees of the MIAA likewise filed a petition assailing the
legality of the various agreements.4
On December 11, 2002. another group of Congressmen, Hon. Jacinto V. Paras, Rafael P.
Nantes, Eduardo C. Zialcita, Willie B. Villarama, Prospero C. Nograles, Prospero A. Pichay,
Jr., Harlin Cast Abayon and Benasing O. Macaranbon, moved to intervene in the case as
Respondents-Intervenors. They filed their Comment-In-Intervention defending the validity of
the assailed agreements and praying for the dismissal of the petitions.
During the pendency of the case before this Court, President Gloria Macapagal Arroyo, on
November 29, 2002, in her speech at the 2002 Golden Shell Export Awards at Malacañang
Palace, stated that she will not "honor (PIATCO) contracts which the Executive Branch's
legal offices have concluded (as) null and void." 5
Respondent PIATCO filed its Comments to the present petitions on November 7 and 27,
2002. The Office of the Solicitor General and the Office of the Government Corporate
Counsel filed their respective Comments in behalf of the public respondents.
On December 10, 2002, the Court heard the case on oral argument. After the oral
argument, the Court then resolved in open court to require the parties to file simultaneously
their respective Memoranda in amplification of the issues heard in the oral arguments within
30 days and to explore the possibility of arbitration or mediation as provided in the
challenged contracts.
In their consolidated Memorandum, the Office of the Solicitor General and the Office of the
Government Corporate Counsel prayed that the present petitions be given due course and
that judgment be rendered declaring the 1997 Concession Agreement, the ARCA and the
Supplements thereto void for being contrary to the Constitution, the BOT Law and its
Implementing Rules and Regulations.
On March 6, 2003, respondent PIATCO informed the Court that on March 4, 2003 PIATCO
commenced arbitration proceedings before the International Chamber of Commerce,
International Court of Arbitration (ICC) by filing a Request for Arbitration with the Secretariat
of the ICC against the Government of the Republic of the Philippines acting through the
DOTC and MIAA.
In the present cases, the Court is again faced with the task of resolving complicated issues
made difficult by their intersecting legal and economic implications. The Court is aware of
the far reaching fall out effects of the ruling which it makes today. For more than a century
and whenever the exigencies of the times demand it, this Court has never shirked from its
solemn duty to dispense justice and resolve "actual controversies involving rights which are
legally demandable and enforceable, and to determine whether or not there has been grave
abuse of discretion amounting to lack or excess of jurisdiction." 6 To be sure, this Court will
not begin to do otherwise today.
We shall first dispose of the procedural issues raised by respondent PIATCO which they
allege will bar the resolution of the instant controversy.
Petitioners' Legal Standing to File
the present Petitions
a. G.R. Nos. 155001 and 155661
In G.R. No. 155001 individual petitioners are employees of various service
providers7 having separate concession contracts with MIAA and continuing service
agreements with various international airlines to provide in-flight catering, passenger
handling, ramp and ground support, aircraft maintenance and provisions, cargo handling
and warehousing and other services. Also included as petitioners are labor unions
MIASCOR Workers Union-National Labor Union and Philippine Airlines Employees
Association. These petitioners filed the instant action for prohibition as taxpayers and as
parties whose rights and interests stand to be violated by the implementation of the
PIATCO Contracts.
Petitioners-Intervenors in the same case are all corporations organized and existing under
Philippine laws engaged in the business of providing in-flight catering, passenger handling,
ramp and ground support, aircraft maintenance and provisions, cargo handling and
warehousing and other services to several international airlines at the Ninoy Aquino
International Airport. Petitioners-Intervenors allege that as tax-paying international airline
and airport-related service operators, each one of them stands to be irreparably injured by
the implementation of the PIATCO Contracts. Each of the petitioners-intervenors have
separate and subsisting concession agreements with MIAA and with various international
airlines which they allege are being interfered with and violated by respondent PIATCO.
In G.R. No. 155661, petitioners constitute employees of MIAA and Samahang
Manggagawa sa Paliparan ng Pilipinas - a legitimate labor union and accredited as the sole
and exclusive bargaining agent of all the employees in MIAA. Petitioners anchor their
petition for prohibition on the nullity of the contracts entered into by the Government and
PIATCO regarding the build-operate-and-transfer of the NAIA IPT III. They filed the petition
as taxpayers and persons who have a legitimate interest to protect in the implementation of
the PIATCO Contracts.
Petitioners in both cases raise the argument that the PIATCO Contracts contain stipulations
which directly contravene numerous provisions of the Constitution, specific provisions of the
BOT Law and its Implementing Rules and Regulations, and public policy. Petitioners
contend that the DOTC and the MIAA, by entering into said contracts, have committed
grave abuse of discretion amounting to lack or excess of jurisdiction which can be remedied
only by a writ of prohibition, there being no plain, speedy or adequate remedy in the
ordinary course of law.
In particular, petitioners assail the provisions in the 1997 Concession Agreement and the
ARCA which grant PIATCO the exclusive right to operate a commercial international
passenger terminal within the Island of Luzon, except those international airports already
existing at the time of the execution of the agreement. The contracts further provide that
upon the commencement of operations at the NAIA IPT III, the Government shall cause the
closure of Ninoy Aquino International Airport Passenger Terminals I and II as international
passenger terminals. With respect to existing concession agreements between MIAA and
international airport service providers regarding certain services or operations, the 1997
Concession Agreement and the ARCA uniformly provide that such services or operations
will not be carried over to the NAIA IPT III and PIATCO is under no obligation to permit
such carry over except through a separate agreement duly entered into with PIATCO. 8
With respect to the petitioning service providers and their employees, upon the
commencement of operations of the NAIA IPT III, they allege that they will be effectively
barred from providing international airline airport services at the NAIA Terminals I and II as
all international airlines and passengers will be diverted to the NAIA IPT III. The petitioning
service providers will thus be compelled to contract with PIATCO alone for such services,
with no assurance that subsisting contracts with MIAA and other international airlines will be
respected. Petitioning service providers stress that despite the very competitive market, the
substantial capital investments required and the high rate of fees, they entered into their
respective contracts with the MIAA with the understanding that the said contracts will be in
force for the stipulated period, and thereafter, renewed so as to allow each of the petitioning
service providers to recoup their investments and obtain a reasonable return thereon.
Petitioning employees of various service providers at the NAIA Terminals I and II and of
MIAA on the other hand allege that with the closure of the NAIA Terminals I and II as
international passenger terminals under the PIATCO Contracts, they stand to lose
employment.
The question on legal standing is whether such parties have "alleged such a personal stake
in the outcome of the controversy as to assure that concrete adverseness which sharpens
the presentation of issues upon which the court so largely depends for illumination of
difficult constitutional questions."9 Accordingly, it has been held that the interest of a person
assailing the constitutionality of a statute must be direct and personal. He must be able to
show, not only that the law or any government act is invalid, but also that he sustained or is
in imminent danger of sustaining some direct injury as a result of its enforcement, and not
merely that he suffers thereby in some indefinite way. It must appear that the person
complaining has been or is about to be denied some right or privilege to which he is lawfully
entitled or that he is about to be subjected to some burdens or penalties by reason of the
statute or act complained of.10
We hold that petitioners have the requisite standing. In the above-mentioned cases,
petitioners have a direct and substantial interest to protect by reason of the implementation
of the PIATCO Contracts. They stand to lose their source of livelihood, a property right
which is zealously protected by the Constitution. Moreover, subsisting concession
agreements between MIAA and petitioners-intervenors and service contracts between
international airlines and petitioners-intervenors stand to be nullified or terminated by the
operation of the NAIA IPT III under the PIATCO Contracts. The financial prejudice brought
about by the PIATCO Contracts on petitioners and petitioners-intervenors in these cases
are legitimate interests sufficient to confer on them the requisite standing to file the instant
petitions.
b. G.R. No. 155547
In G.R. No. 155547, petitioners filed the petition for prohibition as members of the House of
Representatives, citizens and taxpayers. They allege that as members of the House of
Representatives, they are especially interested in the PIATCO Contracts, because the
contracts compel the Government and/or the House of Representatives to appropriate
funds necessary to comply with the provisions therein.11 They cite provisions of the PIATCO
Contracts which require disbursement of unappropriated amounts in compliance with the
contractual obligations of the Government. They allege that the Government obligations in
the PIATCO Contracts which compel government expenditure without appropriation is a
curtailment of their prerogatives as legislators, contrary to the mandate of the Constitution
that "[n]o money shall be paid out of the treasury except in pursuance of an appropriation
made by law."12
Standing is a peculiar concept in constitutional law because in some cases, suits are not
brought by parties who have been personally injured by the operation of a law or any other
government act but by concerned citizens, taxpayers or voters who actually sue in the
public interest. Although we are not unmindful of the cases of Imus Electric Co. v.
Municipality of Imus 13 and Gonzales v. Raquiza14 wherein this Court held that
appropriation must be made only on amounts immediately demandable, public interest
demands that we take a more liberal view in determining whether the petitioners
suing as legislators, taxpayers and citizens have locus standi to file the instant
petition. In Kilosbayan, Inc. v. Guingona,15 this Court held "[i]n line with the liberal policy
of this Court on locus standi, ordinary taxpayers, members of Congress, and even
association of planters, and non-profit civic organizations were allowed to initiate and
prosecute actions before this Court to question the constitutionality or validity of laws, acts,
decisions, rulings, or orders of various government agencies or instrumentalities." 16 Further,
"insofar as taxpayers' suits are concerned . . . (this Court) is not devoid of discretion as to
whether or not it should be entertained."17 As such ". . . even if, strictly speaking, they [the
petitioners] are not covered by the definition, it is still within the wide discretion of the Court
to waive the requirement and so remove the impediment to its addressing and resolving the
serious constitutional questions raised."18 In view of the serious legal questions involved
and their impact on public interest, we resolve to grant standing to the petitioners.
Other Procedural Matters
Respondent PIATCO further alleges that this Court is without jurisdiction to review the
instant cases as factual issues are involved which this Court is ill-equipped to resolve.
Moreover, PIATCO alleges that submission of this controversy to this Court at the first
instance is a violation of the rule on hierarchy of courts. They contend that trial courts have
concurrent jurisdiction with this Court with respect to a special civil action for prohibition and
hence, following the rule on hierarchy of courts, resort must first be had before the trial
courts.
After a thorough study and careful evaluation of the issues involved, this Court is of the
view that the crux of the instant controversy involves significant legal questions. The facts
necessary to resolve these legal questions are well established and, hence, need not be
determined by a trial court.
The rule on hierarchy of courts will not also prevent this Court from assuming jurisdiction
over the cases at bar. The said rule may be relaxed when the redress desired cannot be
obtained in the appropriate courts or where exceptional and compelling circumstances
justify availment of a remedy within and calling for the exercise of this Court's primary
jurisdiction.19
It is easy to discern that exceptional circumstances exist in the cases at bar that call for
the relaxation of the rule. Both petitioners and respondents agree that these cases are
of transcendental importance as they involve the construction and operation of the
country's premier international airport. Moreover, the crucial issues submitted for resolution
are of first impression and they entail the proper legal interpretation of key provisions of the
Constitution, the BOT Law and its Implementing Rules and Regulations. Thus, considering
the nature of the controversy before the Court, procedural bars may be lowered to give way
for the speedy disposition of the instant cases.
Legal Effect of the Commencement
of Arbitration Proceedings by
PIATCO
There is one more procedural obstacle which must be overcome. The Court is aware that
arbitration proceedings pursuant to Section 10.02 of the ARCA have been filed at the
instance of respondent PIATCO. Again, we hold that the arbitration step taken by PIATCO
will not oust this Court of its jurisdiction over the cases at bar.
In Del Monte Corporation-USA v. Court of Appeals,20 even after finding that the arbitration
clause in the Distributorship Agreement in question is valid and the dispute between the
parties is arbitrable, this Court affirmed the trial court's decision denying petitioner's Motion
to Suspend Proceedings pursuant to the arbitration clause under the contract. In so ruling,
this Court held that as contracts produce legal effect between the parties, their assigns and
heirs, only the parties to the Distributorship Agreement are bound by its terms, including the
arbitration clause stipulated therein. This Court ruled that arbitration proceedings could be
called for but only with respect to the parties to the contract in question. Considering that
there are parties to the case who are neither parties to the Distributorship Agreement nor
heirs or assigns of the parties thereto, this Court, citing its previous ruling in Salas, Jr. v.
Laperal Realty Corporation,21 held that to tolerate the splitting of proceedings by allowing
arbitration as to some of the parties on the one hand and trial for the others on the other
hand would, in effect, result in multiplicity of suits, duplicitous procedure and
unnecessary delay.22 Thus, we ruled that the interest of justice would best be served if the
trial court hears and adjudicates the case in a single and complete proceeding.
It is established that petitioners in the present cases who have presented legitimate
interests in the resolution of the controversy are not parties to the PIATCO Contracts.
Accordingly, they cannot be bound by the arbitration clause provided for in the ARCA and
hence, cannot be compelled to submit to arbitration proceedings. A speedy and decisive
resolution of all the critical issues in the present controversy, including those raised
by petitioners, cannot be made before an arbitral tribunal. The object of arbitration is
precisely to allow an expeditious determination of a dispute. This objective would not be
met if this Court were to allow the parties to settle the cases by arbitration as there are
certain issues involving non-parties to the PIATCO Contracts which the arbitral tribunal will
not be equipped to resolve.
Now, to the merits of the instant controversy.
I
Is PIATCO a qualified bidder?
Public respondents argue that the Paircargo Consortium, PIATCO's predecessor, was not a
duly pre-qualified bidder on the unsolicited proposal submitted by AEDC as the Paircargo
Consortium failed to meet the financial capability required under the BOT Law and the Bid
Documents. They allege that in computing the ability of the Paircargo Consortium to meet
the minimum equity requirements for the project, the entire net worth of Security Bank, a
member of the consortium, should not be considered.
PIATCO relies, on the other hand, on the strength of the Memorandum dated October 14,
1996 issued by the DOTC Undersecretary Primitivo C. Cal stating that the Paircargo
Consortium is found to have a combined net worth of P3,900,000,000.00, sufficient to meet
the equity requirements of the project. The said Memorandum was in response to a letter
from Mr. Antonio Henson of AEDC to President Fidel V. Ramos questioning the financial
capability of the Paircargo Consortium on the ground that it does not have the financial
resources to put up the required minimum equity of P2,700,000,000.00. This contention is
based on the restriction under R.A. No. 337, as amended or the General Banking Act that a
commercial bank cannot invest in any single enterprise in an amount more than 15% of its
net worth. In the said Memorandum, Undersecretary Cal opined:
The Bid Documents, as clarified through Bid Bulletin Nos. 3 and 5, require
that financial capability will be evaluated based on total financial capability of
all the member companies of the [Paircargo] Consortium. In this connection,
the Challenger was found to have a combined net worth of P3,926,421,242.00
that could support a project costing approximately P13 Billion.
It is not a requirement that the net worth must be "unrestricted." To impose
that as a requirement now will be nothing less than unfair.
The financial statement or the net worth is not the sole basis in establishing
financial capability. As stated in Bid Bulletin No. 3, financial capability may
also be established by testimonial letters issued by reputable banks. The
Challenger has complied with this requirement.
To recap, net worth reflected in the Financial Statement should not be taken
as the amount of the money to be used to answer the required thirty percent
(30%) equity of the challenger but rather to be used in establishing if there is
enough basis to believe that the challenger can comply with the required 30%
equity. In fact, proof of sufficient equity is required as one of the conditions for
award of contract (Section 12.1 IRR of the BOT Law) but not for pre-
qualification (Section 5.4 of the same document). 23
Under the BOT Law, in case of a build-operate-and-transfer arrangement, the
contract shall be awarded to the bidder "who, having satisfied the minimum
financial, technical, organizational and legal standards" required by the
law, has submitted the lowest bid and most favorable terms of the
project.24 Further, the 1994 Implementing Rules and Regulations of the BOT
Law provide:
Section 5.4 Pre-qualification Requirements.
xxx xxx xxx
c. Financial Capability: The project proponent must have adequate capability
to sustain the financing requirements for the detailed engineering design,
construction and/or operation and maintenance phases of the project, as the
case may be. For purposes of pre-qualification, this capability shall be
measured in terms of (i) proof of the ability of the project proponent
and/or the consortium to provide a minimum amount of equity to the
project, and (ii) a letter testimonial from reputable banks attesting that
the project proponent and/or members of the consortium are banking
with them, that they are in good financial standing, and that they have
adequate resources. The government agency/LGU concerned shall
determine on a project-to-project basis and before pre-qualification, the
minimum amount of equity needed. (emphasis supplied)
Pursuant to this provision, the PBAC issued PBAC Bulletin No. 3 dated August 16, 1996
amending the financial capability requirements for pre-qualification of the project proponent
as follows:
6. Basis of Pre-qualification
The basis for the pre-qualification shall be on the compliance of the proponent
to the minimum technical and financial requirements provided in the Bid
Documents and in the IRR of the BOT Law, R.A. No. 6957, as amended by
R.A. 7718.
The minimum amount of equity to which the proponent's financial capability
will be based shall be thirty percent (30%) of the project cost instead of
the twenty percent (20%) specified in Section 3.6.4 of the Bid
Documents. This is to correlate with the required debt-to-equity ratio of 70:30
in Section 2.01a of the draft concession agreement. The debt portion of the
project financing should not exceed 70% of the actual project cost.
Accordingly, based on the above provisions of law, the Paircargo Consortium or any
challenger to the unsolicited proposal of AEDC has to show that it possesses the
requisite financial capability to undertake the project in the minimum amount of 30%
of the project cost through (i) proof of the ability to provide a minimum amount of equity to
the project, and (ii) a letter testimonial from reputable banks attesting that the project
proponent or members of the consortium are banking with them, that they are in good
financial standing, and that they have adequate resources.
As the minimum project cost was estimated to be US$350,000,000.00 or roughly
P9,183,650,000.00,25 the Paircargo Consortium had to show to the satisfaction of the PBAC
that it had the ability to provide the minimum equity for the project in the amount of at
least P2,755,095,000.00.
Paircargo's Audited Financial Statements as of 1993 and 1994 indicated that it had a net
worth of P2,783,592.00 and P3,123,515.00 respectively. 26 PAGS' Audited Financial
Statements as of 1995 indicate that it has approximately P26,735,700.00 to invest as its
equity for the project.27 Security Bank's Audited Financial Statements as of 1995 show that
it has a net worth equivalent to its capital funds in the amount of P3,523,504,377.00.28
We agree with public respondents that with respect to Security Bank, the entire amount of
its net worth could not be invested in a single undertaking or enterprise, whether allied or
non-allied in accordance with the provisions of R.A. No. 337, as amended or the General
Banking Act:
Sec. 21-B. The provisions in this or in any other Act to the contrary
notwithstanding, the Monetary Board, whenever it shall deem appropriate and
necessary to further national development objectives or support national
priority projects, may authorize a commercial bank, a bank authorized to
provide commercial banking services, as well as a government-owned
and controlled bank, to operate under an expanded commercial banking
authority and by virtue thereof exercise, in addition to powers
authorized for commercial banks, the powers of an Investment House as
provided in Presidential Decree No. 129, invest in the equity of a non-
allied undertaking, or own a majority or all of the equity in a financial
intermediary other than a commercial bank or a bank authorized to provide
commercial banking services: Provided, That (a) the total investment in
equities shall not exceed fifty percent (50%) of the net worth of the bank; (b)
the equity investment in any one enterprise whether allied or non-allied
shall not exceed fifteen percent (15%) of the net worth of the bank; (c)
the equity investment of the bank, or of its wholly or majority-owned
subsidiary, in a single non-allied undertaking shall not exceed thirty-five
percent (35%) of the total equity in the enterprise nor shall it exceed thirty-five
percent (35%) of the voting stock in that enterprise; and (d) the equity
investment in other banks shall be deducted from the investing bank's net
worth for purposes of computing the prescribed ratio of net worth to risk
assets.
xxx xxx xxx
Further, the 1993 Manual of Regulations for Banks provides:
SECTION X383. Other Limitations and Restrictions. — The following
limitations and restrictions shall also apply regarding equity investments of
banks.
a. In any single enterprise. — The equity investments of banks in any single
enterprise shall not exceed at any time fifteen percent (15%) of the net worth
of the investing bank as defined in Sec. X106 and Subsec. X121.5.
Thus, the maximum amount that Security Bank could validly invest in the Paircargo
Consortium is only P528,525,656.55, representing 15% of its entire net worth. The total net
worth therefore of the Paircargo Consortium, after considering the maximum amounts that
may be validly invested by each of its members is P558,384,871.55 or only 6.08% of the
project cost,29 an amount substantially less than the prescribed minimum equity
investment required for the project in the amount of P2,755,095,000.00 or 30% of the
project cost.
The purpose of pre-qualification in any public bidding is to determine, at the earliest
opportunity, the ability of the bidder to undertake the project. Thus, with respect to the
bidder's financial capacity at the pre-qualification stage, the law requires the government
agency to examine and determine the ability of the bidder to fund the entire cost of the
project by considering the maximum amounts that each bidder may invest in the
project at the time of pre-qualification.
The PBAC has determined that any prospective bidder for the construction, operation and
maintenance of the NAIA IPT III project should prove that it has the ability to provide equity
in the minimum amount of 30% of the project cost, in accordance with the 70:30 debt-to-
equity ratio prescribed in the Bid Documents. Thus, in the case of Paircargo Consortium,
the PBAC should determine the maximum amounts that each member of the consortium
may commit for the construction, operation and maintenance of the NAIA IPT III project at
the time of pre-qualification. With respect to Security Bank, the maximum amount which
may be invested by it would only be 15% of its net worth in view of the restrictions imposed
by the General Banking Act. Disregarding the investment ceilings provided by applicable
law would not result in a proper evaluation of whether or not a bidder is pre-qualified to
undertake the project as for all intents and purposes, such ceiling or legal restriction
determines the true maximum amount which a bidder may invest in the project.
Further, the determination of whether or not a bidder is pre-qualified to undertake the
project requires an evaluation of the financial capacity of the said bidder at the time the bid
is submitted based on the required documents presented by the bidder. The PBAC should
not be allowed to speculate on the future financial ability of the bidder to undertake the
project on the basis of documents submitted. This would open doors to abuse and defeat
the very purpose of a public bidding. This is especially true in the case at bar which involves
the investment of billions of pesos by the project proponent. The relevant government
authority is duty-bound to ensure that the awardee of the contract possesses the minimum
required financial capability to complete the project. To allow the PBAC to estimate the
bidder's future financial capability would not secure the viability and integrity of the project.
A restrictive and conservative application of the rules and procedures of public bidding is
necessary not only to protect the impartiality and regularity of the proceedings but also to
ensure the financial and technical reliability of the project. It has been held that:
The basic rule in public bidding is that bids should be evaluated based on the
required documents submitted before and not after the opening of bids.
Otherwise, the foundation of a fair and competitive public bidding would be
defeated. Strict observance of the rules, regulations, and guidelines of
the bidding process is the only safeguard to a fair, honest and
competitive public bidding.30
Thus, if the maximum amount of equity that a bidder may invest in the project at the time
the bids are submittedfalls short of the minimum amounts required to be put up by the
bidder, said bidder should be properly disqualified. Considering that at the pre-qualification
stage, the maximum amounts which the Paircargo Consortium may invest in the project fell
short of the minimum amounts prescribed by the PBAC, we hold that Paircargo Consortium
was not a qualified bidder. Thus the award of the contract by the PBAC to the Paircargo
Consortium, a disqualified bidder, is null and void.
While it would be proper at this juncture to end the resolution of the instant controversy, as
the legal effects of the disqualification of respondent PIATCO's predecessor would come
into play and necessarily result in the nullity of all the subsequent contracts entered by it in
pursuance of the project, the Court feels that it is necessary to discuss in full the pressing
issues of the present controversy for a complete resolution thereof.
II
Is the 1997 Concession Agreement valid?
Petitioners and public respondents contend that the 1997 Concession Agreement is invalid
as it contains provisions that substantially depart from the draft Concession Agreement
included in the Bid Documents. They maintain that a substantial departure from the draft
Concession Agreement is a violation of public policy and renders the 1997 Concession
Agreement null and void.
PIATCO maintains, however, that the Concession Agreement attached to the Bid
Documents is intended to be a draft, i.e., subject to change, alteration or modification, and
that this intention was clear to all participants, including AEDC, and DOTC/MIAA. It argued
further that said intention is expressed in Part C (6) of Bid Bulletin No. 3 issued by the
PBAC which states:
6. Amendments to the Draft Concessions Agreement
Amendments to the Draft Concessions Agreement shall be issued from time
to time. Said amendments shall only cover items that would not materially
affect the preparation of the proponent's proposal.
By its very nature, public bidding aims to protect the public interest by giving the public the
best possible advantages through open competition. Thus:
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.31
An essential element of a publicly bidded contract is that all bidders must be on equal
footing. Not simply in terms of application of the procedural rules and regulations imposed
by the relevant government agency, but more importantly, on the contract bidded upon.
Each bidder must be able to bid on the same thing. The rationale is obvious. If the winning
bidder is allowed to later include or modify certain provisions in the contract awarded such
that the contract is altered in any material respect, then the essence of fair competition in
the public bidding is destroyed. A public bidding would indeed be a farce if after the contract
is awarded, the winning bidder may modify the contract and include provisions which are
favorable to it that were not previously made available to the other bidders. Thus:
It is inherent in public biddings that there shall be a fair competition among the
bidders. The specifications in such biddings provide the common ground or
basis for the bidders. The specifications should, accordingly, operate equally
or indiscriminately upon all bidders.32
The same rule was restated by Chief Justice Stuart of the Supreme Court of Minnesota:
The law is well settled that where, as in this case, municipal authorities can
only let a contract for public work to the lowest responsible bidder, the
proposals and specifications therefore must be so framed as to permit free
and full competition. Nor can they enter into a contract with the best
bidder containing substantial provisions beneficial to him, not included
or contemplated in the terms and specifications upon which the bids
were invited.33
In fact, in the PBAC Bid Bulletin No. 3 cited by PIATCO to support its argument that the
draft concession agreement is subject to amendment, the pertinent portion of which was
quoted above, the PBAC also clarified that "[s]aid amendments shall only cover items
that would not materially affect the preparation of the proponent's proposal."
While we concede that a winning bidder is not precluded from modifying or amending
certain provisions of the contract bidded upon, 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. Hence, 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 other bidders. The alterations and modifications in the contract
executed between the government and the winning bidder must be such as to render such
executed contract to be an entirely different contract from the one that was bidded
upon.
In the case of Caltex (Philippines), Inc. v. Delgado Brothers, Inc.,34 this Court quoted
with approval the ruling of the trial court that an amendment to a contract awarded through
public bidding, when such subsequent amendment was made without a new public bidding,
is null and void:
The Court agrees with the contention of counsel for the plaintiffs that the due
execution of a contract after public bidding is a limitation upon the right of the
contracting parties to alter or amend it without another public bidding, for
otherwise what would a public bidding be good for if after the execution
of a contract after public bidding, the contracting parties may alter or
amend the contract, or even cancel it, at their will?Public biddings are
held for the protection of the public, and to give the public the best possible
advantages by means of open competition between the bidders. He who bids
or offers the best terms is awarded the contract subject of the bid, and it is
obvious that such protection and best possible advantages to the public will
disappear if the parties to a contract executed after public bidding may alter or
amend it without another previous public bidding. 35
Hence, the question that comes to fore is this: is the 1997 Concession Agreement the same
agreement that was offered for public bidding, i.e., the draft Concession Agreement
attached to the Bid Documents? A close comparison of the draft Concession Agreement
attached to the Bid Documents and the 1997 Concession Agreement reveals that the
documents differ in at least two material respects:
a. Modification on the Public
Utility Revenues and Non-Public
Utility Revenues that may be
collected by PIATCO
The fees that may be imposed and collected by PIATCO under the draft Concession
Agreement and the 1997 Concession Agreement may be classified into three distinct
categories: (1) fees which are subject to periodic adjustment of once every two years in
accordance with a prescribed parametric formula and adjustments are made effective only
upon written approval by MIAA; (2) fees other than those included in the first category
which maybe adjusted by PIATCO whenever it deems necessary without need for consent
of DOTC/MIAA; and (3) new fees and charges that may be imposed by PIATCO which
have not been previously imposed or collected at the Ninoy Aquino International Airport
Passenger Terminal I, pursuant to Administrative Order No. 1, Series of 1993, as amended.
The glaring distinctions between the draft Concession Agreement and the 1997 Concession
Agreement lie in the types of fees included in each category and the extent of the
supervision and regulation which MIAA is allowed to exercise in relation thereto.
For fees under the first category, i.e., those which are subject to periodic adjustment in
accordance with a prescribed parametric formula and effective only upon written approval
by MIAA, the draft Concession Agreementincludes the following:36
(1) aircraft parking fees;
(2) aircraft tacking fees;
(3) groundhandling fees;
(4) rentals and airline offices;
(5) check-in counter rentals; and
(6) porterage fees.
Under the 1997 Concession Agreement, fees which are subject to adjustment and
effective upon MIAA approval are classified as "Public Utility Revenues" and include: 37
(1) aircraft parking fees;
(2) aircraft tacking fees;
(3) check-in counter fees; and
(4) Terminal Fees.
The implication of the reduced number of fees that are subject to MIAA approval is best
appreciated in relation to fees included in the second category identified above. Under
the 1997 Concession Agreement, fees which PIATCO may adjust whenever it deems
necessary without need for consent of DOTC/MIAA are "Non-Public Utility Revenues" and
is defined as "all other income not classified as Public Utility Revenues derived from
operations of the Terminal and the Terminal Complex." 38 Thus, under the 1997 Concession
Agreement, ground handling fees, rentals from airline offices and porterage fees are no
longer subject to MIAA regulation.
Further, under Section 6.03 of the draft Concession Agreement, MIAA reserves the right
to regulate (1) lobby and vehicular parking fees and (2) other new fees and charges that
may be imposed by PIATCO. Such regulation may be made by periodic adjustment and is
effective only upon written approval of MIAA. The full text of said provision is quoted below:
Section 6.03. Periodic Adjustment in Fees and Charges. Adjustments in the
aircraft parking fees, aircraft tacking fees, groundhandling fees, rentals and
airline offices, check-in-counter rentals and porterage fees shall be allowed
only once every two years and in accordance with the Parametric Formula
attached hereto as Annex F. Provided that adjustments shall be made
effective only after the written express approval of the MIAA. Provided,
further, that such approval of the MIAA, shall be contingent only on the
conformity of the adjustments with the above said parametric formula. The
first adjustment shall be made prior to the In-Service Date of the Terminal.
The MIAA reserves the right to regulate under the foregoing terms and
conditions the lobby and vehicular parking fees and other new fees and
charges as contemplated in paragraph 2 of Section 6.01 if in its
 judgment the users of the airport shall be deprived of a free option for
the services they cover. 39
On the other hand, the equivalent provision under the 1997 Concession
Agreement reads:
Section 6.03 Periodic Adjustment in Fees and Charges.
(c) Concessionaire shall at all times be judicious in fixing fees and charges
constituting Non-Public Utility Revenues in order to ensure that End Users are
not unreasonably deprived of services. While the vehicular parking fee,
porterage fee and greeter/well wisher fee constitute Non-Public Utility
Revenues of Concessionaire, GRP may intervene and require
Concessionaire to explain and justify the fee it may set from time to
time, if in the reasonable opinion of GRP the said fees have become
exorbitant resulting in the unreasonable deprivation of End Users of such
services.40
Thus, under the 1997 Concession Agreement, with respect to (1) vehicular parking fee,
(2) porterage fee and (3) greeter/well wisher fee, all that MIAA can do is to require PIATCO
to explain and justify the fees set by PIATCO. In the draft Concession
Agreement, vehicular parking fee is subject to MIAA regulation and approval under the
second paragraph of Section 6.03 thereof while porterage fee is covered by the first
paragraph of the same provision. There is an obvious relaxation of the extent of control and
regulation by MIAA with respect to the particular fees that may be charged by PIATCO.
Moreover, with respect to the third category of fees that may be imposed and collected by
PIATCO, i.e., new fees and charges that may be imposed by PIATCO which have not been
previously imposed or collected at the Ninoy Aquino International Airport Passenger
Terminal I, under Section 6.03 of the draft Concession Agreement MIAA has reserved the
right to regulate the same under the same conditions that MIAA may regulate fees under
the first category, i.e., periodic adjustment of once every two years in accordance with a
prescribed parametric formula and effective only upon written approval by MIAA. However,
under the 1997 Concession Agreement, adjustment of fees under the third category is not
subject to MIAA regulation.
With respect to terminal fees that may be charged by PIATCO, 41 as shown earlier, this was
included within the category of "Public Utility Revenues" under the 1997 Concession
Agreement. This classification is significant because under the 1997 Concession
Agreement, "Public Utility Revenues" are subject to an "Interim Adjustment" of fees upon
the occurrence of certain extraordinary events specified in the agreement.42 However,
under the draft Concession Agreement, terminal fees are not included in the types of fees
that may be subject to "Interim Adjustment."43
Finally, under the 1997 Concession Agreement, "Public Utility Revenues," except terminal
fees, are denominated in US Dollars44 while payments to the Government are in Philippine
Pesos. In the draft Concession Agreement,no such stipulation was included. By
stipulating that "Public Utility Revenues" will be paid to PIATCO in US Dollars while
payments by PIATCO to the Government are in Philippine currency under the 1997
Concession Agreement, PIATCO is able to enjoy the benefits of depreciations of the
Philippine Peso, while being effectively insulated from the detrimental effects of exchange
rate fluctuations.
When taken as a whole, the changes under the 1997 Concession Agreement with respect
to reduction in the types of fees that are subject to MIAA regulation and the relaxation of
such regulation with respect to other fees are significant amendments that substantially
distinguish the draft Concession Agreement from the 1997 Concession Agreement. The
1997 Concession Agreement, in this respect, clearly gives PIATCO more favorable
terms than what was available to other bidders at the time the contract was bidded
out. It is not very difficult to see that the changes in the 1997 Concession Agreement
translate to direct and concrete financial advantages for PIATCO which were not
available at the time the contract was offered for bidding. It cannot be denied that under the
1997 Concession Agreement only "Public Utility Revenues" are subject to MIAA regulation.
Adjustments of all other fees imposed and collected by PIATCO are entirely within its
control. Moreover, with respect to terminal fees, under the 1997 Concession Agreement,
the same is further subject to "Interim Adjustments" not previously stipulated in the draft
Concession Agreement. Finally, the change in the currency stipulated for "Public Utility
Revenues" under the 1997 Concession Agreement, except terminal fees, gives PIATCO an
added benefit which was not available at the time of bidding.
b. Assumption by the
Government of the liabilities of
PIATCO in the event of the latter's
default thereof
Under the draft Concession Agreement, default by PIATCO of any of its obligations to
creditors who have provided, loaned or advanced funds for the NAIA IPT III project does
not result in the assumption by the Government of these liabilities. In fact, nowhere in the
said contract does default of PIATCO's loans figure in the agreement. Such default does
not directly result in any concomitant right or obligation in favor of the Government.
However, the 1997 Concession Agreement provides:
Section 4.04 Assignment.
(b) In the event Concessionaire should default in the payment of an Attendant
Liability, and the default has resulted in the acceleration of the payment due
date of the Attendant Liability prior to its stated date of maturity, the Unpaid
Creditors and Concessionaire shall immediately inform GRP in writing of such
default. GRP shall, within one hundred eighty (180) Days from receipt of the
joint written notice of the Unpaid Creditors and Concessionaire, either (i) take
over the Development Facility and assume the Attendant Liabilities, or (ii)
allow the Unpaid Creditors, if qualified, to be substituted as concessionaire
and operator of the Development Facility in accordance with the terms and
conditions hereof, or designate a qualified operator acceptable to GRP to
operate the Development Facility, likewise under the terms and conditions of
this Agreement; Provided that if at the end of the 180-day period GRP shall
not have served the Unpaid Creditors and Concessionaire written notice of its
choice, GRP shall be deemed to have elected to take over the Development
Facility with the concomitant assumption of Attendant Liabilities.
(c) If GRP should, by written notice, allow the Unpaid Creditors to be
substituted as concessionaire, the latter shall form and organize a concession
company qualified to take over the operation of the Development Facility. If
the concession company should elect to designate an operator for the
Development Facility, the concession company shall in good faith identify and
designate a qualified operator acceptable to GRP within one hundred eighty
(180) days from receipt of GRP's written notice. If the concession company,
acting in good faith and with due diligence, is unable to designate a qualified
operator within the aforesaid period, then GRP shall at the end of the 180-day
period take over the Development Facility and assume Attendant Liabilities.
The term "Attendant Liabilities" under the 1997 Concession Agreement is defined as:
Attendant Liabilities refer to all amounts recorded and from time to time
outstanding in the books of the Concessionaire as owing to Unpaid
Creditors who have provided, loaned or advanced funds actually used
for the Project, including all interests, penalties, associated fees, charges,
surcharges, indemnities, reimbursements and other related expenses, and
further including amounts owed by Concessionaire to its suppliers, contractors
and sub-contractors.
Under the above quoted portions of Section 4.04 in relation to the definition of "Attendant
Liabilities," default by PIATCO of its loans used to finance the NAIA IPT III project
triggers the occurrence of certain events that leads to the assumption by the
Government of the liability for the loans. Only in one instance may the Government
escape the assumption of PIATCO's liabilities, i.e., when the Government so elects and
allows a qualified operator to take over as Concessionaire. However, this circumstance is
dependent on the existence and availability of a qualified operator who is willing to
take over the rights and obligations of PIATCO under the contract, a circumstance
that is not entirely within the control of the Government.
Without going into the validity of this provision at this juncture, suffice it to state that Section
4.04 of the 1997 Concession Agreement may be considered a form of security for the loans
PIATCO has obtained to finance the project, an option that was not made available in the
draft Concession Agreement. Section 4.04 is an important amendment to the 1997
Concession Agreement because it grants PIATCO a financial advantage or benefit
which was not previously made available during the bidding process. This financial
advantage is a significant modification that translates to better terms and conditions for
PIATCO.
PIATCO, however, argues that the parties to the bidding procedure acknowledge that the
draft Concession Agreement is subject to amendment because the Bid Documents permit
financing or borrowing. They claim that it was the lenders who proposed the amendments
to the draft Concession Agreement which resulted in the 1997 Concession Agreement.
We agree that it is not inconsistent with the rationale and purpose of the BOT Law to allow
the project proponent or the winning bidder to obtain financing for the project, especially in
this case which involves the construction, operation and maintenance of the NAIA IPT III.
Expectedly, compliance by the project proponent of its undertakings therein would involve a
substantial amount of investment. It is therefore inevitable for the awardee of the contract to
seek alternate sources of funds to support the project. Be that as it may, this Court
maintains that amendments to the contract bidded upon should always conform to the
general policy on public bidding if such procedure is to be faithful to its real nature and
purpose. By its very nature and characteristic, competitive public bidding aims to protect the
public interest by giving the public the best possible advantages through open
competition.45 It has been held that the three principles in public bidding are (1) the offer to
the public; (2) opportunity for competition; and (3) a basis for the exact comparison of bids.
A regulation of the matter which excludes any of these factors destroys the distinctive
character of the system and thwarts the purpose of its adoption.46 These are the basic
parameters which every awardee of a contract bidded out must conform to, requirements of
financing and borrowing notwithstanding. Thus, upon a concrete showing that, as in this
case, the contract signed by the government and the contract-awardee is an entirely
different contract from the contract bidded, courts should not hesitate to strike down said
contract in its entirety for violation of public policy on public bidding. A strict adherence on
the principles, rules and regulations on public bidding must be sustained if only to preserve
the integrity and the faith of the general public on the procedure.
Public bidding is a standard practice for procuring government contracts for public service
and for furnishing supplies and other materials. It 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.47 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.
In view of the above discussion, the fact that the foregoing substantial amendments were
made on the 1997 Concession Agreement renders the same null and void for
being contrary to public policy. These amendments convert the 1997 Concession
Agreement to an entirely different agreement from the contract bidded out or the draft
Concession Agreement. It is not difficult to see that the amendments on (1) the types of
fees or charges that are subject to MIAA regulation or control and the extent thereof and (2)
the assumption by the Government, under certain conditions, of the liabilities of
PIATCO directly translates concrete financial advantages to PIATCO that were
previously not available during the bidding process. These amendments cannot be
taken as merely supplements to or implementing provisions of those already existing in the
draft Concession Agreement. The amendments discussed above present new terms and
conditions which provide financial benefit to PIATCO which may have altered the technical
and financial parameters of other bidders had they known that such terms were available.
III
Direct Government Guarantee
Article IV, Section 4.04(b) and (c), in relation to Article 1.06, of the 1997 Concession
Agreement provides:
Section 4.04 Assignment
xxx xxx xxx
(b) In the event Concessionaire should default in the payment of an
Attendant Liability, and the default resulted in the acceleration of the
payment due date of the Attendant Liability prior to its stated date of maturity,
the Unpaid Creditors and Concessionaire shall immediately inform GRP in
writing of such default. GRP shall within one hundred eighty (180) days from
receipt of the joint written notice of the Unpaid Creditors and Concessionaire,
either (i) take over the Development Facility and assume the Attendant
Liabilities, or (ii) allow the Unpaid Creditors, if qualified to be substituted as
concessionaire and operator of the Development facility in accordance with
the terms and conditions hereof, or designate a qualified operator acceptable
to GRP to operate the Development Facility, likewise under the terms and
conditions of this Agreement; Provided, that if at the end of the 180-day period
GRP shall not have served the Unpaid Creditors and Concessionaire written
notice of its choice, GRP shall be deemed to have elected to take over the
Development Facility with the concomitant assumption of Attendant
Liabilities.
(c) If GRP, by written notice, allow the Unpaid Creditors to be substituted as
concessionaire, the latter shall form and organize a concession company
qualified to takeover the operation of the Development Facility. If the
concession company should elect to designate an operator for the
Development Facility, the concession company shall in good faith identify and
designate a qualified operator acceptable to GRP within one hundred eighty
(180) days from receipt of GRP's written notice. If the concession company,
acting in good faith and with due diligence, is unable to designate a qualified
operator within the aforesaid period, then GRP shall at the end of the 180-day
period take over the Development Facility and assume Attendant
Liabilities.
….
Section 1.06. Attendant Liabilities
Attendant Liabilities refer to all amounts recorded and from time to time
outstanding in the books of the Concessionaire as owing to Unpaid
Creditors who have provided, loaned or advanced funds actually used for the
Project, including all interests, penalties, associated fees, charges,
surcharges, indemnities, reimbursements and other related expenses, and
further including amounts owed by Concessionaire to its suppliers, contractors
and sub-contractors.48
It is clear from the above-quoted provisions that Government, in the event that PIATCO
defaults in its loan obligations, is obligated to pay "all amounts recorded and from time
to time outstanding from the books" of PIATCO which the latter owes to its
creditors.49 These amounts include "all interests, penalties, associated fees, charges,
surcharges, indemnities, reimbursements and other related expenses." 50 This obligation of
the Government to pay PIATCO's creditors upon PIATCO's default would arise if the
Government opts to take over NAIA IPT III. It should be noted, however, that even if the
Government chooses the second option, which is to allow PIATCO's unpaid creditors
operate NAIA IPT III, the Government is still at a risk of being liable to PIATCO's creditors
should the latter be unable to designate a qualified operator within the prescribed
period.51 In effect, whatever option the Government chooses to take in the event of
PIATCO's failure to fulfill its loan obligations, the Government is still at a risk of
assuming PIATCO's outstanding loans. This is due to the fact that the Government
would only be free from assuming PIATCO's debts if the unpaid creditors would be able to
designate a qualified operator within the period provided for in the contract. Thus, the
Government's assumption of liability is virtually out of its control. The Government
under the circumstances provided for in the 1997 Concession Agreement is at the mercy of
the existence, availability and willingness of a qualified operator. The above contractual
provisions constitute a direct government guarantee which is prohibited by law.
One of the main impetus for the enactment of the BOT Law is the lack of government funds
to construct the infrastructure and development projects necessary for economic growth
and development. This is why private sector resources are being tapped in order to finance
these projects. The BOT law allows the private sector to participate, and is in fact
encouraged to do so by way of incentives, such as minimizing the unstable flow of
returns,52 provided that the government would not have to unnecessarily expend scarcely
available funds for the project itself. As such, direct guarantee, subsidy and equity by the
government in these projects are strictly prohibited. 53 This is but logical for if the
government would in the end still be at a risk of paying the debts incurred by the
private entity in the BOT projects, then the purpose of the law is subverted.
Section 2(n) of the BOT Law defines direct guarantee as follows:
(n) Direct government guarantee — An agreement whereby the government
or any of its agencies or local government units assume responsibility for
the repayment of debt directly incurred by the project proponent in
implementing the project in case of a loan default.
Clearly by providing that the Government "assumes" the attendant liabilities, which consists
of PIATCO's unpaid debts, the 1997 Concession Agreement provided for a direct
government guarantee for the debts incurred by PIATCO in the implementation of the NAIA
IPT III project. It is of no moment that the relevant sections are subsumed under the title of
"assignment". The provisions providing for direct government guarantee which is prohibited
by law is clear from the terms thereof.
The fact that the ARCA superseded the 1997 Concession Agreement did not cure this fatal
defect. Article IV, Section 4.04(c), in relation to Article I, Section 1.06, of the ARCA
provides:
Section 4.04 Security
xxx xxx xxx
(c) GRP agrees with Concessionaire (PIATCO) that it shall negotiate in
good faith and enter into direct agreement with the Senior Lenders, or
with an agent of such Senior Lenders (which agreement shall be subject to
the approval of the Bangko Sentral ng Pilipinas), in such form as may be
reasonably acceptable to both GRP and Senior Lenders, with regard, inter
alia, to the following parameters:
xxx xxx xxx
(iv) If the Concessionaire [PIATCO] is in default under a
payment obligation owed to the Senior Lenders, and as a
result thereof the Senior Lenders have become entitled to
accelerate the Senior Loans, the Senior Lenders shall have the
right to notify GRP of the same, and without prejudice to any
other rights of the Senior Lenders or any Senior Lenders' agent
may have (including without limitation under security interests
granted in favor of the Senior Lenders), to either in good faith
identify and designate a nominee which is qualified under sub-
clause (viii)(y) below to operate the Development Facility [NAIA
Terminal 3] or transfer the Concessionaire's [PIATCO] rights and
obligations under this Agreement to a transferee which is
qualified under sub-clause (viii) below;
xxx xxx xxx
(vi) if the Senior Lenders, acting in good faith and using
reasonable efforts, are unable to designate a nominee or effect
a transfer in terms and conditions satisfactory to the Senior
Lenders within one hundred eighty (180) days after giving GRP
notice as referred to respectively in (iv) or (v) above, then GRP
and the Senior Lenders shall endeavor in good faith to enter into
any other arrangement relating to the Development Facility
[NAIA Terminal 3] (other than a turnover of the Development
Facility [NAIA Terminal 3] to GRP) within the following one
hundred eighty (180) days. If no agreement relating to the
Development Facility [NAIA Terminal 3] is arrived at by GRP
and the Senior Lenders within the said 180-day period, then at
the end thereof the Development Facility [NAIA Terminal 3]
shall be transferred by the Concessionaire [PIATCO] to
GRP or its designee and GRP shall make a termination
payment to Concessionaire [PIATCO] equal to the
Appraised Value (as hereinafter defined) of the
Development Facility [NAIA Terminal 3] or the sum of the
Attendant Liabilities, if greater. Notwithstanding Section
8.01(c) hereof, this Agreement shall be deemed terminated
upon the transfer of the Development Facility [NAIA Terminal 3]
to GRP pursuant hereto;
xxx xxx xxx
Section 1.06. Attendant Liabilities
Attendant Liabilities refer to all amounts in each case supported by
verifiable evidence from time to time owed or which may become owing by
Concessionaire [PIATCO] to Senior Lenders or any other persons or
entities who have provided, loaned, or advanced funds or provided
financial facilities to Concessionaire [PIATCO] for the Project [NAIA
Terminal 3], including, without limitation, all principal, interest,
associated fees, charges, reimbursements, and other related
expenses (including the fees, charges and expenses of any agents or
trustees of such persons or entities), whether payable at maturity, by
acceleration or otherwise, and further including amounts owed by
Concessionaire [PIATCO] to its professional consultants and advisers,
suppliers, contractors and sub-contractors.54
It is clear from the foregoing contractual provisions that in the event that PIATCO fails to
fulfill its loan obligations to its Senior Lenders, the Government is obligated to directly
negotiate and enter into an agreement relating to NAIA IPT III with the Senior Lenders,
should the latter fail to appoint a qualified nominee or transferee who will take the place of
PIATCO. If the Senior Lenders and the Government are unable to enter into an agreement
after the prescribed period, the Government must then pay PIATCO, upon transfer of NAIA
IPT III to the Government, termination payment equal to the appraised value of the
project or the value of the attendant liabilities whichever is greater. Attendant liabilities
as defined in the ARCA includes all amounts owed or thereafter may be owed by PIATCO
not only to the Senior Lenders with whom PIATCO has defaulted in its loan obligations but
to all other persons who may have loaned, advanced funds or provided any other type of
financial facilities to PIATCO for NAIA IPT III. The amount of PIATCO's debt that the
Government would have to pay as a result of PIATCO's default in its loan obligations -- in
case no qualified nominee or transferee is appointed by the Senior Lenders and no other
agreement relating to NAIA IPT III has been reached between the Government and the
Senior Lenders -- includes, but is not limited to, "all principal, interest, associated fees,
charges, reimbursements, and other related expenses . . . whether payable at maturity, by
acceleration or otherwise."55
It is clear from the foregoing that the ARCA provides for a direct guarantee by the
government to pay PIATCO's loans not only to its Senior Lenders but all other
entities who provided PIATCO funds or services upon PIATCO's default in its loan
obligation with its Senior Lenders. The fact that the Government's obligation to pay
PIATCO's lenders for the latter's obligation would only arise after the Senior Lenders fail to
appoint a qualified nominee or transferee does not detract from the fact that, should the
conditions as stated in the contract occur, the ARCA still obligates the Government to pay
any and all amounts owed by PIATCO to its lenders in connection with NAIA IPT III. Worse,
the conditions that would make the Government liable for PIATCO's debts is triggered by
PIATCO's own default of its loan obligations to its Senior Lenders to which loan contracts
the Government was never a party to. The Government was not even given an option as to
what course of action it should take in case PIATCO defaulted in the payment of its senior
loans. The Government, upon PIATCO's default, would be merely notified by the Senior
Lenders of the same and it is the Senior Lenders who are authorized to appoint a qualified
nominee or transferee. Should the Senior Lenders fail to make such an appointment, the
Government is then automatically obligated to "directly deal and negotiate" with the Senior
Lenders regarding NAIA IPT III. The only way the Government would not be liable for
PIATCO's debt is for a qualified nominee or transferee to be appointed in place of PIATCO
to continue the construction, operation and maintenance of NAIA IPT III. This "pre-
condition", however, will not take the contract out of the ambit of a direct guarantee by the
government as the existence, availability and willingness of a qualified nominee or
transferee is totally out of the government's control. As such the Government is virtually
at the mercy of PIATCO (that it would not default on its loan obligations to its Senior
Lenders), the Senior Lenders (that they would appoint a qualified nominee or transferee or
agree to some other arrangement with the Government) and the existence of a qualified
nominee or transferee who is able and willing to take the place of PIATCO in NAIA IPT III.
The proscription against government guarantee in any form is one of the policy
considerations behind the BOT Law. Clearly, in the present case, the ARCA obligates
the Government to pay for all loans, advances and obligations arising out of financial
facilities extended to PIATCO for the implementation of the NAIA IPT III project should
PIATCO default in its loan obligations to its Senior Lenders and the latter fails to appoint a
qualified nominee or transferee. This in effect would make the Government liable for
PIATCO's loans should the conditions as set forth in the ARCA arise. This is a form of direct
government guarantee.
The BOT Law and its implementing rules provide that in order for an unsolicited proposal
for a BOT project may be accepted, the following conditions must first be met: (1) the
project involves a new concept in technology and/or is not part of the list of priority
projects, (2) no direct government guarantee, subsidy or equity is required, and (3) the
government agency or local government unit has invited by publication other interested
parties to a public bidding and conducted the same.56 The failure to meet any of the above
conditions will result in the denial of the proposal. It is further provided that the presence of
direct government guarantee, subsidy or equity will "necessarily disqualify a proposal from
being treated and accepted as an unsolicited proposal."57 The BOT Law clearly and strictly
prohibits direct government guarantee, subsidy and equity in unsolicited proposals that the
mere inclusion of a provision to that effect is fatal and is sufficient to deny the proposal. It
stands to reason therefore that if a proposal can be denied by reason of the existence of
direct government guarantee, then its inclusion in the contract executed after the said
proposal has been accepted is likewise sufficient to invalidate the contract itself. A
prohibited provision, the inclusion of which would result in the denial of a proposal cannot,
and should not, be allowed to later on be inserted in the contract resulting from the said
proposal. The basic rules of justice and fair play alone militate against such an occurrence
and must not, therefore, be countenanced particularly in this instance where the
government is exposed to the risk of shouldering hundreds of million of dollars in debt.
This Court has long and consistently adhered to the legal maxim that those that cannot be
done directly cannot be done indirectly. 58 To declare the PIATCO contracts valid despite
the clear statutory prohibition against a direct government guarantee would not only
make a mockery of what the BOT Law seeks to prevent -- which is to expose the
government to the risk of incurring a monetary obligation resulting from a contract of
loan between the project proponent and its lenders and to which the Government is
not a party to -- but would also render the BOT Law useless for what it seeks to
achieve –- to make use of the resources of the private sector in the "financing,
operation and maintenance of infrastructure and development projects" 59which are
necessary for national growth and development but which the government,
unfortunately, could ill-afford to finance at this point in time.
IV
Temporary takeover of business affected with public interest
Article XII, Section 17 of the 1987 Constitution provides:
Section 17. In times of national emergency, when the public interest so
requires, the State may, during the emergency and under reasonable terms
prescribed by it, temporarily take over or direct the operation of any privately
owned public utility or business affected with public interest.
The above provision pertains to the right of the State in times of national emergency, and in
the exercise of its police power, to temporarily take over the operation of any business
affected with public interest. In the 1986 Constitutional Commission, the term "national
emergency" was defined to include threat from external aggression, calamities or national
disasters, but not strikes "unless it is of such proportion that would paralyze government
service."60 The duration of the emergency itself is the determining factor as to how long the
temporary takeover by the government would last. 61 The temporary takeover by the
government extends only to the operation of the business and not to the ownership thereof.
As such the government is not required to compensate the private entity-owner of the
said business as there is no transfer of ownership, whether permanent or temporary.
The private entity-owner affected by the temporary takeover cannot, likewise, claim just
compensation for the use of the said business and its properties as the temporary takeover
by the government is in exercise of its police power and not of its power of eminent
domain.
Article V, Section 5.10 (c) of the 1997 Concession Agreement provides:
Section 5.10 Temporary Take-over of operations by GRP.
(c) In the event the development Facility or any part thereof and/or the
operations of Concessionaire or any part thereof, become the subject matter
of or be included in any notice, notification, or declaration concerning or
relating to acquisition, seizure or appropriation by GRP in times of war or
national emergency, GRP shall, by written notice to Concessionaire,
immediately take over the operations of the Terminal and/or the Terminal
Complex. During such take over by GRP, the Concession Period shall be
suspended; provided, that upon termination of war, hostilities or national
emergency, the operations shall be returned to Concessionaire, at which time,
the Concession period shall commence to run again. Concessionaire shall
be entitled to reasonable compensation for the duration of the
temporary take over by GRP, which compensation shall take into
account the reasonable cost for the use of the Terminal and/or Terminal
Complex, (which is in the amount at least equal to the debt service
requirements of Concessionaire, if the temporary take over should occur at
the time when Concessionaire is still servicing debts owed to project lenders),
any loss or damage to the Development Facility, and other consequential
damages. If the parties cannot agree on the reasonable compensation of
Concessionaire, or on the liability of GRP as aforesaid, the matter shall be
resolved in accordance with Section 10.01 [Arbitration]. Any amount
determined to be payable by GRP to Concessionaire shall be offset from the
amount next payable by Concessionaire to GRP. 62
PIATCO cannot, by mere contractual stipulation, contravene the Constitutional
provision on temporary government takeover and obligate the government to pay
"reasonable cost for the use of the Terminal and/or Terminal Complex."63 Article XII,
section 17 of the 1987 Constitution envisions a situation wherein the exigencies of the times
necessitate the government to "temporarily take over or direct the operation of any privately
owned public utility or business affected with public interest." It is the welfare and interest of
the public which is the paramount consideration in determining whether or not to
temporarily take over a particular business. Clearly, the State in effecting the temporary
takeover is exercising its police power. Police power is the "most essential, insistent, and
illimitable of powers."64 Its exercise therefore must not be unreasonably hampered nor its
exercise be a source of obligation by the government in the absence of damage due to
arbitrariness of its exercise.65 Thus, requiring the government to pay reasonable
compensation for the reasonable use of the property pursuant to the operation of the
business contravenes the Constitution.
V
Regulation of Monopolies
A monopoly is "a privilege or peculiar advantage vested in one or more persons or
companies, consisting in the exclusive right (or power) to carry on a particular business or
trade, manufacture a particular article, or control the sale of a particular commodity." 66 The
1987 Constitution strictly regulates monopolies, whether private or public, and even
provides for their prohibition if public interest so requires. Article XII, Section 19 of the 1987
Constitution states:
Sec. 19. The state shall regulate or prohibit monopolies when the public
interest so requires. No combinations in restraint of trade or unfair competition
shall be allowed.
Clearly, monopolies are not per se prohibited by the Constitution but may be permitted to
exist to aid the government in carrying on an enterprise or to aid in the performance of
various services and functions in the interest of the public.67 Nonetheless, a
determination must first be made as to whether public interest requires a monopoly. As
monopolies are subject to abuses that can inflict severe prejudice to the public, they are
subject to a higher level of State regulation than an ordinary business undertaking.
In the cases at bar, PIATCO, under the 1997 Concession Agreement and the ARCA, is
granted the "exclusive rightto operate a commercial international passenger terminal
within the Island of Luzon" at the NAIA IPT III. 68 This is with the exception of already
existing international airports in Luzon such as those located in the Subic Bay Freeport
Special Economic Zone ("SBFSEZ"), Clark Special Economic Zone ("CSEZ") and in Laoag
City.69 As such, upon commencement of PIATCO's operation of NAIA IPT III, Terminals 1
and 2 of NAIA would cease to function as international passenger terminals. This, however,
does not prevent MIAA to use Terminals 1 and 2 as domestic passenger terminals or in any
other manner as it may deem appropriate except those activities that would compete with
NAIA IPT III in the latter's operation as an international passenger terminal. 70 The right
granted to PIATCO to exclusively operate NAIA IPT III would be for a period of twenty-five
(25) years from the In-Service Date71 and renewable for another twenty-five (25) years at
the option of the government.72 Both the 1997 Concession Agreement and the ARCA
further provide that, in view of the exclusive right granted to PIATCO, the concession
contracts of the service providers currently servicing Terminals 1 and 2 would no
longer be renewed and those concession contracts whose expiration are subsequent
to the In-Service Date would cease to be effective on the said date. 73
The operation of an international passenger airport terminal is no doubt an undertaking
imbued with public interest. In entering into a Build–Operate-and-Transfer contract for the
construction, operation and maintenance of NAIA IPT III, the government has determined
that public interest would be served better if private sector resources were used in its
construction and an exclusive right to operate be granted to the private entity undertaking
the said project, in this case PIATCO. Nonetheless, the privilege given to PIATCO is
subject to reasonable regulation and supervision by the Government through the MIAA,
which is the government agency authorized to operate the NAIA complex, as well as
DOTC, the department to which MIAA is attached.74
This is in accord with the Constitutional mandate that a monopoly which is not prohibited
must be regulated.75 While it is the declared policy of the BOT Law to encourage private
sector participation by "providing a climate of minimum government regulations," 76 the
same does not mean that Government must completely surrender its sovereign power to
protect public interest in the operation of a public utility as a monopoly. The operation of
said public utility can not be done in an arbitrary manner to the detriment of the public which
it seeks to serve. The right granted to the public utility may be exclusive but the exercise of
the right cannot run riot. Thus, while PIATCO may be authorized to exclusively operate
NAIA IPT III as an international passenger terminal, the Government, through the MIAA,
has the right and the duty to ensure that it is done in accord with public interest. PIATCO's
right to operate NAIA IPT III cannot also violate the rights of third parties.
Section 3.01(e) of the 1997 Concession Agreement and the ARCA provide:
3.01 Concession Period
(e) GRP confirms that certain concession agreements relative to certain
services and operations currently being undertaken at the Ninoy Aquino
International Airport passenger Terminal I have a validity period extending
beyond the In-Service Date. GRP through DOTC/MIAA, confirms that these
 services and operations shall not be carried over to the Terminal and the
Concessionaire is under no legal obligation to permit such carry-
over except through a separate agreement duly entered into with
Concessionaire. In the event Concessionaire becomes involved in any
litigation initiated by any such concessionaire or operator, GRP undertakes
and hereby holds Concessionaire free and harmless on full indemnity basis
from and against any loss and/or any liability resulting from any such litigation,
including the cost of litigation and the reasonable fees paid or payable to
Concessionaire's counsel of choice, all such amounts shall be fully deductible
by way of an offset from any amount which the Concessionaire is bound to
pay GRP under this Agreement.

During the oral arguments on December 10, 2002, the counsel for the
petitioners-in-intervention for G.R. No. 155001 stated that there are two
service providers whose contracts are still existing and whose validity extends
beyond the In-Service Date. One contract remains valid until 2008 and the
other until 2010.77

We hold that while the service providers presently operating at NAIA Terminal 1 do not
have an absolute right for the renewal or the extension of their respective contracts, those
contracts whose duration extends beyond NAIA IPT III's In-Service-Date should not be
unduly prejudiced. These contracts must be respected not just by the parties thereto but
also by third parties. PIATCO cannot, by law and certainly not by contract, render a valid
and binding contract nugatory. PIATCO, by the mere expedient of claiming an exclusive
right to operate, cannot require the Government to break its contractual obligations to the
service providers. In contrast to the arrastre and stevedoring service providers in the case
of Anglo-Fil Trading Corporation v. Lazaro78 whose contracts consist of temporary hold-
over permits, the affected service providers in the cases at bar, have a valid and binding
contract with the Government, through MIAA, whose period of effectivity, as well as the
other terms and conditions thereof, cannot be violated.

In fine, the efficient functioning of NAIA IPT III is imbued with public interest. The provisions
of the 1997 Concession Agreement and the ARCA did not strip government, thru the MIAA,
of its right to supervise the operation of the whole NAIA complex, including NAIA IPT III. As
the primary government agency tasked with the job,79 it is MIAA's responsibility to ensure
that whoever by contract is given the right to operate NAIA IPT III will do so within the
bounds of the law and with due regard to the rights of third parties and above all, the
interest of the public.

VI

CONCLUSION

In sum, this Court rules that in view of the absence of the requisite financial capacity of the
Paircargo Consortium, predecessor of respondent PIATCO, the award by the PBAC of the
contract for the construction, operation and maintenance of the NAIA IPT III is null and void.
Further, considering that the 1997 Concession Agreement contains material and substantial
amendments, which amendments had the effect of converting the 1997 Concession
Agreement into an entirely different agreement from the contract bidded upon, the 1997
Concession Agreement is similarly null and void for being contrary to public policy. The
provisions under Sections 4.04(b) and (c) in relation to Section 1.06 of the 1997
Concession Agreement and Section 4.04(c) in relation to Section 1.06 of the ARCA, which
constitute a direct government guarantee expressly prohibited by, among others, the BOT
Law and its Implementing Rules and Regulations are also null and void. The Supplements,
being accessory contracts to the ARCA, are likewise null and void.

WHEREFORE, the 1997 Concession Agreement, the Amended and Restated Concession
Agreement and the Supplements thereto are set aside for being null and void.