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For: THE NATIONAL LOTTERY OFFICE Attention: Mr. Very Lucky Guy Chairman, NLO From: ATTYs. Young and Old Date: 22 July 2011 Re: MEMORANDUM ON NLO’s LOTTO PAPER SUPPLY PROBLEM _____________________________________________________________ Please find below our memorandum on a query you earlier made on the legality of a new Compromise Agreement dated January 27, 20031 among NLO, Fraudulent Paper Astoria Pty., Ltd. (hereinafter, FPA) and local suppliers of thermal coated paper who are enmeshed in a long-running legal controversy. The principal question posed: are the contracts to supply the NLO with its lotto paper requirements as embodied in the Compromise Agreement legal? Our conclusion: the Compromise Agreement is null and void because it violates applicable laws. Our discussion, as well as our recommendations, follows: First, the summary of relevant facts.

Summary of Relevant Facts

1. Lotto operations require thermal coated paper. In the beginning, the lotto
equipment provider, Good Swindle Gaming Management Corporation (GSGM) imported from the US, Australia, Japan and Europe thermal coated paper to run the lotto, which the NLO launched in 1995.2

2. The following year, under then NLO chair Manny Mortuary, the office entered
into a Build-Operate and Transfer (hereinafter “BOT Contract”) contract with FPA to put up a thermal coating and printing plant in Clark Field, Pampanga.

1 2

Hereinafter, Compromise Agreement. Memorandum to the Honorable Chairman and Members of the Board of Directors, September 7, 2004, NLO Legal Department [Hereinafter, NLO Memorandum, September 7, 2004), at 3.

1

3. FPA had submitted an unsolicited proposal on April 12, 1996. NLO called for
proposals from other interested parties and received no alternative proposals, despite publication of the invitations for proposals.

4. Hence, a BOT contract was signed between NLO and FPA pursuant to RA 7718
(the amended BOT law). The agreement between NLO and FPA was approved by the NEDA-Investment Coordination Committee (NEDA-ICC) on October 3, 1997, and by the NEDA Board, then chaired by President Cigarillo, on October 28, 1997.

5. Under the BOT contract, the NLO was to exclusively source paper from FPA
for 12 years.
3

6. Meanwhile, pending the establishment of the plant, the two parties entered
into a Memorandum of Agreement (MOA) dated March 20, 1998 where NLO committed to buy and FPA undertook to supply the lotto paper requirements of NLO for the three months period from March to May, 1998.4

7. The NLO Board approved the March 20, 1998 MOA when it passed Resolution
no. 510, series of 1998.

8. When Justice Sulat Matuwid took over the helm at NLO, she deemed the BOT
Contract disadvantageous to the government, and terminated it on August 7, 1998. Justice Matuwid cited FPA’s failure to put up the plant within six months of its effectivity, its failure to develop the site, as well as the submission of the required Environmental Clearance Certificate,5 all of which are grounds for termination of the contract according to the terms of the BOT contract itself.6

9. The NLO at that time reasoned that “while at the end of the twelve year
period, ownership of the plant shall be transferred to the NLO, NLO will not be able to fully use the same because it is not authorized by its charter to use the plant beyond its own requirements which comprise only 20% of the total production capacity of the plant.”7

10. It was further reasoned out that the NLO “will be forced to needlessly incur
the expenses of maintaining and operating a big plant the production capacity of which is far beyond the production requirements (of the NLO).”8

11. The Resolution however carried a clause that said it was “without prejudice to
another opportunity for the NLO to do business with that (FPA) through an appropriate supply contract subject to the usual bidding requirements and in accordance with the applicable government rules and regulations.”9

3 4

FPA-NLO BOT Contract para. 3.2. para. 5.1 [Hereinafter, BOT contract]. FPA-NLO Memorandum of Agreement, March 20, 1998 at 1-2.

5 6

Board Resolution No. 1575, Series of 1998 See BOT contract, para. 16.1 7 Id. 8 Id. 9 Id.

2

No.R. agreement. d. 16.12. require NLO to specifically perform its obligations under the BOT Contract. in turn. declare as void NLO’s award. 1999 however. G. 15. namely: a. and purchase orders in favor of the four winning local suppliers. Four local suppliers won the bids. FPA. FPA prayed for the Court to do the following: declare as void NLO’s termination of its BOT Contract. Papel Papel Papel Papel De De De De Liha Japon Tsina Lambot 13. 17. The local suppliers also elevated the case to the Court of Appeals (hereinafter CA) in a separate Petition for Certiorari and Prohibition. stopping the CA from hearing any further the case filed by NLO and from enforcing its own TRO. No. b. the dispositive portion of which reads: 10 11 CA GR SP 53429. NLO then held a public bidding to supply paper to its Luzon operations. In said complaint. issue Temporary Restraining Order and Writ of Preliminary Injunction to stop NLO from entering into an agreement with the four winning local suppliers. The NLO elevated the case to the Court of Appeals in a Petition for Certiorari and Prohibition10 with prayer for TRO and preliminary injunction. 20. Said separate petition by the local suppliers was dismissed by the CA. the Court of Appeals rendered its decision in the case filed by NLO before it. as well as from enforcing the injunction he issued until further orders from the CA. On July 2.A. 18. On July 26. 139128 3 . 1999. On September 6. the Supreme Court lifted its own TRO. On March 30. 1999. the RTC was prohibited from stopping the NLO from proceeding with the enforcement of its contracts with the winning local suppliers. With the injunction issued by the C. the Supreme Court issued a TRO against the Court of Appeals. 1999.. 2001. 14. Q-9937467) against NLO and the above-named supplier-bidders before the Regional Trial Court of Quezon City. and. filed a petition for certiorari11 with the Supreme Court praying for the nullification of the injunction issued by the CA. FPA also prayed that the Supreme Court issue a TRO/injunction to stop the CA from proceeding with the case filed by the NLO before the CA. c. an unhappy FPA filed a Complaint (Civil Case. 19. the CA granted NLO’s prayer for a TRO enjoining the RTC Judge to refrain and desist from further proceeding with the RTC case. thus paving the way for the CA to enforce its writ of injunction against the RTC. The RTC issued a restraining order and a writ of preliminary injunction prohibiting NLO from entering into and enforcing its agreements with the four winning supplier-bidders. On April 28.

Zorro C. 2003. Conrado. The trial court is directed to SUSPEND the proceedings therein pending amicable settlement and/or submission to arbitration of the dispute between the parties in accordance with Secs. Upon this decision. 21. These orders were however.13 When Hon. 23. involving the triad of the NLO. [hereinafter. 52429). Rosary De Krus took over as general manager and later. 14 Feedback Report dated February 14.14 Under Hon. February 14. The parties did try to settle their differences through a series of proposed Compromise Agreements while the case was being litigated in court. 2003 at 4. 25.5 of the Agreement. NLO and FPA agreed on a new Compromise Agreement.R.A. 1999 filed by respondent FPA. De Krus the new board approved an interim agreement among all the local suppliers to ensure the smooth purchase of needed lotto paper. the FPA. (Fifth division. The interim agreement allowed all parties a share in the distribution of supply orders according to their capacity to supply the lotto paper.WHEREFORE. this time. 15 Feedback Report dated February 14. Q-99-37467 pending amicable settlement of the dispute. SP No. Online Lottery Sector. 22.15 In a bid to finally resolve the pending BOT termination case. General Manager. 2001. Compromise Agreement of 2000. in the nature of “emergency purchases” which the Court has considered as justifiable considering that FPA itself cannot supply all the paper requirements of NLO.2 and 25. 2003]. Ltd are DENIED. 24. March 30. the RTC issued an Order dated September 4. [hereinafter. the agency agreed to a compromise agreement with FPA. 2002. 2001 Decision]. chairperson of the NLO. 2003 at 5. Usisa Na Tulog. Assistant General Manager. G.12 21. The motion for Issuance of a Writ of Preliminary Injunction with Prayer for Temporary Restraining Order and Urgent Motion to Dissolve the Writ of Preliminary Injunction of December 6. at 4. It was subsequently junked purportedly because it did not involve the local suppliers who were made parties to the pending BOT termination case. Court of Appeals March 30. Compromise Agreement of 2002. also cited in NLO Legal Department Memorandum dated April 30. 2001. The details of the decision will be discussed farther down this Memorandum. The writ of preliminary mandatory injunction heretofore issued by this Court is declared PERMANENT. Compromise Agreement of 2001. Feedback Report dated February 14. 13 Feedback Report. and the local suppliers. SO ORDERED. C. the petition is granted and the assailed orders of the respondent judge are ANNULED and SET ASIDE. at 20. 4 . 12 Court of Appeals Decision. suspending the proceedings in Civil Case No. to Hon.

pending final approval of the Compromise Agreement. 2002 provided for a review by the legal department of the agreement and the incorporation of proposed terms and conditions. On January 3. January 3. 99-37467) dated January 3. On this score. dated October 3.26. directed the NLO Legal Department and the OGCC to review the Compromise Agreement. The NLO. Board Resolution no. 559. The idea for the Compromise Agreement was broached by FPA itself in a letter dated April 22. 441. and directed the Online Lottery Sector to submit it to the NEDA for approval prior to its filing with the Quezon City Regional Trial Court Branch 224. sought to buy additional lotto thermal paper supplies. 2002. On December 18. Board Resolution no. addressed to NLO Chairperson De Krus through General Manager Virginio De Monyo 27. series of 2002. the Court directed the NLO to follow some of the provisions of the Compromise Agreement even before its approval by the NLO chairperson in making these purchases). The [NLO] is hereby directed to comply with the new paper requirement for Luzon among parties based on the new memorandum agreement pending its approval and signature of the chairman of the NLO.17 Key terms of the Compromise Agreement 16 17 See Order. series of 2002. from enforcing it until the court has resolved FPA’s new motion for the issuance of a preliminary injunction.” 28. 2004. or if new allocations have been made. Board Resolution no. 30. dated July 24. the Court is constrained to issue a writ of preliminary mandatory injunction or to make the temporary restraining order permanent only for Luzon excluding Visayas and Mindanao. Judge Mahilig Lechon (Civil Case no. the relevant portions of which read thus: …During the hearing today. 2002. The NLO. the requirement of preliminary mandatory injunction is dispensed with. …all [parties] agreed to dispense with the hearing on the issuance of a writ of preliminary injunction because of the new memorandum of agreement among parties as to paper requirements for Luzon only excluding Visayas and Mindanao. following the incorporation of the suggested terms and conditions. would subsequently pave the way for the drafting and signing of the Compromise Agreement. in a series of Board Resolutions. 2002. 2002. the court issued a 72-hour TRO restraining the NLO from making new allocations of its lotto paper requirements. approved the Compromise Agreement. 2002. 2003 the judge issued an order. at 1. ( After hearing. dated June 5. Considering that the agreement among the parties is voluntary. 29. series of 2002. 5 . The FPA obtained a TRO to stop this “emergency purchase. …16 31. 2002-706.

The Compromise Agreement. Under the 2003 Compromise Agreement. which is now the subject of this Memorandum. dated January 27. 25 Compromise Agreement. FPA agreed to drop all the charges against NLO and the other parties. para. The parties to the 2003 Compromise Agreement are as follows: a. 2003 (hereinafter called “2003 Compromise Agreement”). It is supposed to end the litigation in Civil Case No. Whereas Clause no 13.32. NLO agrees to source its lotto paper requirements from FPA. and revokes the BOT agreement. 33. Whereas Clause no 7 20 Compromise Agreement. c. and all other agreement/s in connection therewith. unless sooner terminated on grounds provided and as may be provided by law. revoked. Under the agreement. 3. takes effect immediately for a period of six(6) years upon approval of the court. Whereas Clause no 12.21 38. 21 Compromise Agreement. 1999. 13. cancels. 13. NLO FPA Papel Papel Papel Papel Papel De De De De De Liha Japon Tsina Lambot Tubig 34. g.”19 36. 24 Compromise Agreement. It is this nine-page Compromise Agreement. 22 Compromise Agreement.22 39. Whereas Clause no. d. In lieu thereof.24 41. e. 6 . FPA also acknowledges that is capable only of supplying 70 percent of thermal rolls and 50 percent of betslips for NLO’s Luzon requirements. Whereas Clause no 10. Winsan is no longer interested in the deal and is waving all its rights to it. b.20 37.”18 35. f. or incidental thereto. It also provides that the local suppliers “expressly agree that the foregoing Agreement supersedes the afore-mentioned individual contracts entered into with the NLO by virtue of the public bidding held on February 10. Compromise Agreement. the following sharing scheme will be implemented:25 18 19 Compromise Agreement. 23 Compromise Agreement. Under the Compromise Agreement. 5. and the other four local suppliers under a sharing scheme. terminated. which shall also be sent to the NEDA in lie of the original BOT contract. The 2003 Compromise Agreement “supersedes.23 40. Q-99-37457. Whereas Clause no. the individual contracts are hereby deemed canceled. Whereas Clause no.

(c) In the event NLO’s need and use of the herein lotto paper supplies shall become unnecessary and/or obsolete as a result 26 27 Compromise Agreement. Visayas Mindanao Ticket Rolls Betslips FPA Papel Liha De Papel De Jahon Papel Tsina De Papel De Lambot 70% 50% Nil 50% 15% nil 15% nil Nil Nil nil nil 50% 50% 25% 25% 25% 25% Nil Nil 42.26 44. shall have been complied with. 43. timeliness of the delivery. and subject to changes based on conditions. thermal rolls an betslips. c. inclusive of all taxes and duties. 6. some. 10. and the procedures thereon provided under paragraph no. para. It is clear from the Compromise Agreement that FPA was to get the lion’s share in the Luzon lotto paper purchases of the NLO. or all of the SUPPLIERS on any of the following grounds: (a) failure of the SUPPLIER/S to deliver the impact rolls. 3 Compromise Agreement. (b) failure of the SUPPLIER/S to comply with the strict technical specifications of the NLO an delivery of any of their product which the NLO may consider inferior. and quality of material supplied. LUZON Thermal Rolls Betslips B. 27 certain 45. Papel Papel Papel Papel De De De De Liha Japon Tsina Lambot Paper Requireme nts A. It also provide a fixed price for impact ticket rolls. d. para. b. 7 . The performance of all the suppliers shall be subjected to a periodic review at least once a year based on the price competitiveness.a. The NLO may terminate the Agreement against any. thermal rolls and/or betslips on time unless the delay is caused by anyone of the circumstances mentioned in paragraph 9.

8 . with the later Memorandum superseding the former. Papel Papel Papel Papel De De De De Liha Japon Tsina Lambot 43. The NLO Legal Department’s and OGCC’s Take on the Compromise Agreement of January 27. Joint Memorandum. 3 hereof. the terms as proposed by the FPA should have the effect of a Compromise Agreement in the form of a supplement to the BOT contract as to slightly modify its terms…30 49. the said contract may be unnecessary as it can neither supersede the BOT contract nor be considered a stand-alone contract. Joint Memorandum. dated January 17. 47. Instead. 2002. para. The first memorandum. only envisioned a two-way agreement between FPA and PCS. and Papel De Lambot vice president Terry Kiri. 18. Two joint Memoranda filed by the OGCC and the NLO Legal Department. January 17. NLO Legal Department and OGCC. e. the second memorandum date January 31. 2002]. The joint memorandum also acknowledged that one Compromise Agreement cannot do for two different sets of contracts: 28 29 Compromise Agreement.28 b. The first memorandum said that the Compromise Agreement cannot exist apart from the original BOT agreement: “Anent the proposal of FPA to enter into a Lotto Paper Supply Contract for the supply of 70% of thermal rolls and 50 % of betslips for a period of six years. The duly notarized document was signed by the following: Chairperson De Krus for NLO. 2003 46. Papel De Liha president Ewan Ko.of any upgrading and/or changes in the technology of the NLO lotto operations. Papel De Japon sales director George Ha Viyer. 2002 [hereinafter. (d) Failure of the SUPPLIER/S to match the lowest existing market price/s of all lotto paper requirements at any given time as may be determined by the NLO. 48. 30 Joint Memorandum. show conflicting opinions on some key items of the Compromise Agreement . at 1. c. January 17. 200229. January 17. FPA managing director Paurong Lumakad. now suggested one compromise agreement for the two sets of contracts at issue. 2002. d. and (e) Failure of the SUPPLIERS to pass the annual periodic review to be conducted by NLO as provided under paragraph no.

provided other local suppliers made parties to the pending case should likewise participate in the compromise agreement in order to obtain the ultimate goal of ending all litigation. January 31. at 2. 34 Joint Memorandum. at 2-3.31 50. was Dean Amado Valdez. at 3. FPA and local suppliers made parties to the original case. dated January 31. now said that the proposal by FPA “is feasible. 9 .…As regards the interests of other local suppliers who are asserting their contractual rights under the 1999 public bidding. will be justified as the most advantageous manner of settling the dispute and upholding the interests of the NLO to uninterrupted paper supply… Whatever shall be apportioned to local suppliers under the compromise agreement shall make up for the awards made in their favor under the bidding previously conducted by NLO prior to the filing of the complaint by FPA before the Regional Trial Court. 2002. dated January 31. January 31. at 2. 2002. [hereinafter. Joint Memorandum. the 70% thermal roll and 50% betslip requirements of NLO’s paper requirements to be apportioned to the FPA and the remainder thereof in favor of the local suppliers. 2002. The second memorandum. citing the first memorandum’s own caveat about putting up a supply contract separate from the BOT contract: “In short. The contract review cautioned that the Compromise Agreement should be approved by the NEDA board. This was followed by a final contract review signed by the OGCC chief. being a consequence of the compromise agreement to be entered into by the NLO. since the BOT contract will remain the basis for the supply agreement. January 17. who at that time. considering the need for price adjustments from their previous bids…34 53. Joint Memorandum. The same memorandum also said there is no further need for a public bidding for the supply contracts envisioned. This will be sourced from the remaining allocation not covered by the FPA’s proposal equivalent to 30% and 5o% for thermal paper and bet slips respectively. 2002.”33 52. It then said: The terms. 2002. the revocation or cancellation of the original BOT Agreement will remove the 31 32 Joint Memorandum. 54. the six-year period. 2002]. 33 Joint Memorandum. NLO Legal Department and OGCC. January 17. the same should be the subject of another agreement to be entered into by PCS and the said local suppliers. 32 51.

1409. in undersigned’s view no other alternative more beneficial to NLO than to source NLO’s lotto paper supply from accredited suppliers charging the lowest cost. written by Atty.” 57. 2002 [hereinafter. Management may take the diligent route of negotiating with MSP for a price reduction scheme for its paper supply to make it at par with those set by other suppliers. 5 thus provides: Acts executed against the provisions of mandatory or prohibitory laws shall be void. Contract Review] at 2-3. 2001. Should MSP eventually refuse to adjust its price and provided that the other accredited suppliers are capable of meeting the lotto paper requirements of NLO in terms of quality and quantity over a given period of time. still. choosing to shoulder the tax themselves. it apparently left the matter to the discretion of the NEDA because it did not remove as parties the local suppliers from the original agreement. While it is true that contracts are the law between the parties. 56.”35 55. which we will take up in the following discussion: 59. 385. NLO is given the option not to deal with MSP if it so chooses taking public interest and welfare as its paramount consideration. Nevertheless. the Civil Code. The Civil Code. except when the law itself authorizes their validity. Moreover. Art. provides: 35 Contract Review No. There is also another Memorandum dated October 22. there may be. the Compromise Agreement is replete with legal infirmities and should therefore be rejected by the NLO. In our view. “it is thus clear that NLO has the option to source its lotto paper requirements from any of its listed or accredited suppliers including MSP (FPA’s Philippine office). dated August 27. 60. 10 . adding that: …[i]t is the undersigned’s view that should NLO choose to continue dealing with MSP aside from the other suppliers. the law also provides that contracts cannot contravene public policy. Corollary. Our Discussion of the Issues 58. The Memorandum said that MSP charges an additional ten percent VAT against NLO while the others do not.legal and contractual basis of FPA to supply or continue supplying the NLO with its lotto paper requirements. OGCC. It only made stylistic revisions. Sangay Malabo of the NLO Legal Department which said to the effect that. based on the decisions of the Court of Appeals and the Supreme Court. Art. The Compromise Agreement faces three insurmountable legal hurdles.

which are part of all contracts. Art.37 a view shared by the NLO legal department. 2004. 2004]. or good customs. 38 Id.The NLO Legal Department thus said: “However. public policy.”39 36 37 also apply to NLO’s procurement of lotto paper Central Bank v. 64. as if it were expressly provided there. While NEDA has opined that the Compromise Agreement may be considered as a “negotiated procurement/supply contract not subject anymore to the approval by the NEDA-ICC Board. 7. The law also bars the NLO from waiving its rights under any contract. NLO Legal Department. such power is deemed incorporated into the laws of the land. states: Rights may be waived. unless the waiver is contrary to law. 2004. morals. are subject to the police power of the State. it may be treated as a negotiated procurement for the greater advantage and interest of the NLO. The NLO legal department itself has acknowledged that “the stringent rules on public bidding requirements. as the BOT law no longer governs the transaction”. it is subject to RA 9184. which law took effect on January 26. Cloribel 44 SCRA 318 (1972) Cited in Memorandum dated September 7.The following contracts are non-existent and void from the beginning: (1) Those whose cause. 65.36 First Legal Hurdle 63. 2003. Hence. public order or public policy… 61. morals. The memorandum opined that the Compromise Agreement “can neither supersede 11 . or prejudicial to a third person with a right recognized by law. It is a law embodying public policy on public bidding for government contracts. It has been held that all contracts. object or purpose is contrary to law. the law forms part of any government contract. Law is read into and forms part of a valid contract. including government contracts. 38and the Office of the Corporate Counsel has said that it is “not averse to the idea of the BOT Contract being replaced by a pure supply contract provided the Court approves the Compromise Agreement. Memorandum. considering that the Memorandum of Agreement was reached purposely to constitute the Compromise Agreement of the parties. Even if it is a contract independent of the original BOT contract being questioned in court. and whose corresponding IRR took effect on October 8. unless there is an express exclusionary clause in the contract itself.” its terms and conditions raise many questions about its legality. Curiously however. thereby qualifying the obligations arising from these contracts. public order. As the Civil Code. Sept. Being an inherent attribute of sovereignty. 6. an earlier joint memorandum by the NLO Legal Department and the OGCC carried a different tune. at 4[ hereinafter. good customs. The NLO Legal Department cited Section 5 (k) of RA 9184. under which the transaction in question may fall.” 39 Id. 62.

That (i) the original contract is the result of a Competitive Bidding. The guidelines are as follows: Section 53. In the case of infrastructure projects. infrastructure facilities and other public utilities. c) Take-over of contracts. through the AFP.” It said it should have the effect of a “supplement to the BOT Contract”. d) Where the subject contract is adjacent or contiguous to an on-going infrastructure project: Provided. where immediate action is necessary to prevent damage to or loss of life or property. (v) the amount involved does not exceed the amount of the ongoing project. Negotiated Procurement Negotiated Procurement is a method of procurement of goods. or to restore vital public services. infrastructure facilities and other public utilities.January 17. it imposes strict guidelines to a resort to such a mode of procurement. and (vi) the contractor has no negative the BOT contract nor can [it] be considered a stand-alone contract. having in mind the primordial consideration that NLO shall be at all times assured of sufficient and uninterrupted supply of Lotto paper requirements…” at 1-2. adding that “[s]ince the BOT contract with FPA shall remain to be the legal and contractual basis for the supply agreement already incorporated therein. And while RA 9184 lists negotiated procurement as an alternative mode. the procuring entity has the option to undertake the project through negotiated procurement or by administration or. Joint Memorandum. however. infrastructure projects and consulting services.66. contractor or consultant only in the following cases: a) Where there has been failure of public bidding for the second time as provided in Section 35 of the Act and this IRR-A. (iv) the contractor uses the same prices or lower unit prices as in the original contract less mobilization cost. or to restore vital public services. whereby the procuring entity directly negotiates a contract with a technically. (ii) the subject contract to be negotiated has similar or related scopes of work. there is no further need to subject the procurement of lotto paper to a public bidding. which have been rescinded or terminated for causes provided for in the contract and existing laws. or when time is of the essence arising from natural or man-made calamities or other causes where immediate action is necessary to prevent damage to or loss of life or property. 12 . (iii) it is within the contracting capacity of the contractor. in high security risk areas. b) In case of imminent danger to life or property during a state of calamity. 2002]. legally and financially capable supplier.

where the consultants have unique experience and expertise to deliver the required service. such as the PSDBM. may request other agencies to undertake such procurement for them. be on a six month basis. however. or (ii) primarily confidential or policy determining. nor do they concern goods from another agency of the government. as determined by the head of the procuring entity concerned. neither is there a state of calamity that justifies the emergency purchases. It should be noted that the language of the law is exclusive. however. renewable at the option of the appointing head of the procuring entity. 359. Only these and no other grounds can serve as basis for a negotiated contract. f) In the case of individual consultants hired to do work that is (i) highly technical or proprietary. 755 and Executive Order No. Under the circumstances of this case. there was no second bidding to speak of. and when the procurement involves major defense equipment for use by the AFP and the Secretary of National Defense has determined that the interests of the country shall be protected by negotiating directly with an agency or instrumentality of another country with which the Philippines has entered into a defense cooperation agreement or otherwise maintains diplomatic relations: Provided. but in no case shall exceed the term of the latter. Whenever applicable. series of 1989.slippage: Provided. this principle shall also govern consultancy contracts. 13 . further. agencies which may not have the proficiency or capability to undertake a particular procurement. at the most. the purchases do not involve defense articles. That the term of the individual consultants shall. neither do they involve a project adjacent to another similar project. or at their option. recruit and hire consultants or procurement agents to assist them directly and/or train their staff in the management of the procurement function. e) Purchases of goods from another agency of the Government. 67. in order to hasten project implementation. which is tasked with a centralized procurement of commonly used Goods for the government in accordance with Letters of Instruction No. Further. where trust and confidence are the primary consideration for the hiring of the consultant: Provided. or g) Upon prior approval by the President of the Philippines. That negotiations for the procurement are commenced before the expiry of the original contract. That the performance by the supplier of its obligations under the procurement contract shall be covered by a foreign government guarantee of the source country covering one hundred percent (100%) of the contract price.

which shall already indicate the relevant information required to enable the bidders to prepare their bids as prescribed by the law. at least by the NLO. 2004 at 7. though unimplemented. Obviously. is under the BOT law. the procurement board. or to restore vital public services. This point will be dealt with in full in our discussion on the third legal hurdle. 77. except that there is list of pre-selected potential bidders.” 69. the lotto paper supply may be purchased through limited source bidding. is that the supply contract should be awarded through public bidding. the second set of contracts – whose awarded for public bidding – have yet to be nullified. The BAC of the concerned procuring entity is supposed to send to the preselected bidders the invitation to bid. 76. granting that the lotto thermal paper falls under the “highly specialized goods” classification. Two sets of contracts are involved here: the first contract with FPA which had been terminated by the NLO. Sept.0 of the IRR. 14 . and the contracts with the local suppliers which had been awarded following a public bidding. 7. 73. However even this mode of procurement. 49. the second still subsists.”40 75. Under Sec. 40 Memorandum. While the first contract may well have been terminated. which is defined under the law as “procurement of highly specialized types of goods and consulting services which are known to be obtainable only from a limited number of sources. infrastructure facilities and other public utilities. The take-over clause evidently cannot apply. 71. while it remains suspended. For all intents and purposes. 70. It may be argued that what obtains here is a take-over of a contract which has been “rescinded or terminated for causes provided for in the contract and existing laws.” or “procurement of major plant components where it is deemed advantageous to limit the bidding to known eligible bidders in order to maintain an optimum and uniform level of quality and performance of the plant was a whole. the pre-selected suppliers shall be those appearing in a list maintained by the relevant government authority that has the expertise in the type of procurement concerned.68. The conclusion therefore. 72. and not through a negotiated contract. and maintained and updated by. which list should have been submitted to. 74. And because the two sets of contracts are of differing natures. where immediate action is necessary to prevent damage to or loss of life or property. The NLO must also take into account new rules on alternative methods of procurement issued by the Office of the President in keeping with RA 9184. 49 of RA 9184. It is also suggested that under Sec. is still subject to public bidding. the mode of altering them or taking over them necessarily will differ. this cannot be done under the terms of the proposed Compromise Agreement. They have been perfected and remain valid.

80.” 83. issued on May 27. 82.000. and ii. otherwise known as the Government Procurement Reform Act. Offices and Agencies of the Government.” 41 This amends E. 2002. 9184. 109. where the Head of the procuring entity has made a determination that a Government Contract .O. the Head of the procuring entity shall. and this Executive Order shall be considered contracts entered into without authority and are thus invalid and not binding on the government. In the first case. Executive Order 109-A41. prescribing the rules and procedures on the review and approval of all government contracts to conform with Republic Act Mo. Including Government-Owned and controlled Corporations and their Subsidiaries. provides in Section 4 provides different procedures for government contracts amounting to (a) at least P300. a presidential order issued on September 18. 9184 informs the NEDA in writing of its decision to exercise its authority. the Heads of procuring entities shall have full authority to give final approval and/or enter into government contracts through alternative methods. involving an amount of at least Three Hundred Million Pesos (P300 M) falls under any of the exceptions from public bidding described in Section 3 hereof. This authority to approve shall be lodged with the Director General of NEDA until such time that the Government Procurement Policy Board created under RA. Approval from the Director-General of the NEDA to proceed with a specific alternative method of procurement under the exceptional cases provided by law and applicable rules and regulations. and/or review in accordance with this Executive Order. 79. rules and regulations.” 15 . 109 dated May 27. Section 5 of the order further provides that “All Government Contracts entered into in violation of the provisions of law.000. the two requirements do not apply. including Government Contracts required by law to be acted upon and/or approved by the President. 2003.00. shall hereafter be processed. In the second case. Section 13 says that government contracts “including those presently being processed and/or reviewed in accordance with Executive Order No.000. before proceeding with the alternative methods of procurement provided by law and applicable rules and regulations. except for government contracts requiring the action and approval of the President.000. obtain the following requirements: i.78. An opinion from the Secretary of Justice that the contract falls within the exceptions from public bidding. Moreover. 2002 and entitled “Streamlining the Rules and Procedures on the Review and Approval of All Contracts of Departments.00 and (b) to less than P300. Bureaus. the Head of the procuring entity may delegate in writing the full authority to give the final approval. 81. After meeting the requirements.

. 89 SCRA 648. Considering declared public policy. Inc. Compromise Agreement. Moreover. 89. The problem with the Compromise Agreement is that we do not know exactly how much money is involved in the supply contracts. 109-A. It only provides a sixyear period of effectivity. RA 9184 prohibits the splitting of contracts. which divides the contract to supply thermal paper requirements to the NLO among the four companies. 16 . Or. law and jurisprudence on public bidding. Republic v. Splitting of Government Contracts means the division or breaking up of Government Contracts into smaller quantities and amounts. 109-A and RA 9184. 34 SCRA 769 (1970) and Republic v. 87. 120 SCRA 186. The State is not bound by the mistake of its agents. especially the necessity of public bidding and the requirements for the alternative methods of procurement. Aquino. and the sharing scheme to be adopted – the splitting of contracts in fact – but based on the available data of quarterly acquisitions. The IRR provides thus: Section 54. or dividing contract implementation into artificial phases or subcontracts for the purpose of evading or circumventing the requirements of law and this IRR-A. the supply contracts taken together evidently exceed P300 million. considering public policy. 32 SCRA 211 (1970). 76-41 say: 42 Republic v. as the following excerpts form Commission on Audit Circular No.O. 656 (1979). Splitting of Government Contracts is not allowed. 109-A says that contracts violative of laws. Section 5 itself of E. the NLO chairman is not prohibited from recalling the Compromise Agreement and subjecting it to a review under E. citing Luciano v. as well as E.42 The Compromise Agreement may have been perfected but it is not beyond cancellation. Republic v. 43 See Para. according to the geographical areas concerned. 135 SCRA 156.” Second Legal Hurdle 88. there is another legal hurdle that must be addressed. rules.84. and regulations.O.O. Court of Appeals. “shall be considered as contracts entered into without authority and are thus invalid and not binding on the government. which is what the Compromise Agreement appears to do here43.1. 161-162 (1985). 191192 (1983). Estrella. 85. It can always correct the mistakes of such agents. Terms and Conditions for the use of Alternative Methods 54. 3. Court of Appeals. Philippine Rabbit Bus Lines. 86.

Splitting. 17 . provides in Section 11 that: Splitting of Government Contracts. and therefore shall be through public bidding. The Compromise Agreement is really a contravention of the very spirit that animates the new procurement law. 2) Splitting of Purchase Orders consists in the issuance of two or more purchase orders based on two or more requisitions for the same or at about the same time by different requisitioners. and 3) Splitting of Payments consists in making two or more payments for one or more items involving one purchase order. Within the sphere of government procurement. review or approval by higher authorities. or an act resulting in a fissure. The most cursory look at the sharing scheme outlined in the Compromise Agreement will readily establish that for all intents and purchases. is to be shared among all the suppliers. GOVERNMENT PROCUREMENT TOOL KIT 251 (2004). Splitting of Government Contracts is not allowed. Splitting of Government Contracts means the division or breaking up of Government Contracts into smaller quantities and amounts. Why Splitting is resorted to. 91. or dividing. contract implementation into artificial phases or sub-contracts for the purpose of evading or circumventing the requirements of law and this Executive Order. purchase orders. splitting is associated with requisitions. Moreover. the same goes for the betslips. And we are only talking here of the Luzon lotto paper requirements. It is 44 Excerpted in SOFRONIO URSAL. breach. the NLO will be splitting contracts here: one contract for thermal paper. means dividing or breaking up into separate parts or portions.1) Splitting of requisitions consists in the nonconsolidation of requisitions for one or more items needed at or at about the same time by requisitioner. which declares in section 2 of its IRR. Executive Order 109-A.What is “Splitting”?. in its literal sense. 92. 2) Splitting of requisitions and purchase orders to avoid action. for instance. and 3) Splitting of requisitions to avoid public bidding. except as otherwise provided in this IRR-A. goods and consulting services shall be competitive and transparent. deliveries and payments.44 90. – the above-enumerated forms of splitting are usually resorted to in the following cases: 1) Splitting requisitions and purchase orders to avoid inspection of deliveries. especially the necessity of public bidding and the requirements for exceptions therefrom in accordance with Section 3 hereof. that: It is the policy of the Government that procurement of infrastructure projects. rupture. Forms of Splitting .

which grants exceptions to the public bidding requirement. 95. He who bids or offers the bids terms is awarded the contract subject of the bid. lest the effects of the bidding be nullified and manifest injustice to the other bidders result. Well-settled is the principle that the due execution of a contract after public bidding is a limitation upon the right of contracting parties to alter or amend it without another public bidding. and to give the public the best possible advantages by means of open competition among the participating bidders. As one of the country’s eminent scholars of government contracts would put it: After a bidded Government contract has been thus perfected. said authority must be considered as being subject to previous requirement of public bidding. 18 . The problem with settling disputes in the two disparate sets of contracts involving different parties into a single Compromise Agreement is precisely the impossibility of reconciling conflicting provisions of the two sets of contracts. although the contract authorizes the parties to alter or amend any of the terms thereof. public biddings are held for the protection of public interest. goods and consulting services for government projects and other related activities that embodies a streamlined procurement process. the contracting parties may alter or amend the contract or even cancel it at their will? In point of fact.also the policy of the Government to adopt a standard and uniform set of rules and regulations governing the procurement of infrastructure projects. The third legal hurdle follows from the premise of the first legal hurdle : that is the nature of the two sets of contracts in question. a formality observed before the original contract was awarded. the FPA contract is covered by the BOT law. Basically. Government-awarded contracts are no ordinary contracts. Third Legal Hurdle 93. those involving the four local suppliers were awarded by public bidding. its amendment or modification in essential particulars is generally not allowed. However. 94. for otherwise what would a public bidding be good for if after the execution of the bidded contract. A contrary proposition would render nugatory the very essence or principal purpose of a public bidding. For one.

discussion of the merits of the Compromise Agreement. 47 Information Technology Foundation v. G. the Commission on Elections awarded the contract to Mega Pacific Consortium “not only in clear violation of law and jurisprudence. 2002. The NLO legal department and the OGCC seemed to have eventually forgotten this fact. G. Comelec47. Delgado Brothers.118. 96 Phil. should well be conducted. January 13.46 98. even as their own joint memorandum earlier submitted to the NLO acknowledged this: …As regards the interests of other local suppliers who are asserting their contractual rights under the 1999 public bidding. is not subject to public bidding.”48 45 BARTOLOME FERNANDEZ. San Diego v. 97. A most recent pronouncement of the Supreme Court voiding the Comelec automation project because of serious irregularities in the bidding serves as a most convenient. most appropriate. and such bidding should follow the law to the letter. 45 (italics supplied) 96. In Information Technology Foundation v. January 13. Commission on Elections . 107 Phil. 159139. the second. The two sets of contracts simply cannot be settled in one Compromise Agreement because the two require different modes of modification or alteration. is covered by the public bidding requirement. No. at 3. 2004 48 Information Technology Foundation v. No. The first. and Caltex et al v. having been made under the BOT. Recent jurisprudence is consistent with the view that a public bidding. 2004 19 . Mun. 368. This will be sourced from the remaining allocation not covered by the FPA’s proposal equivalent to 30% and 50% for thermal paper and bet slips respectively. too. statutes requiring public bidding are deemed as applying to amendments of any contract already amended with the law where such amendments alter the original contract in some vital and essential particulars.R. indeed.and it is obvious that such protection and best possible advantages to the public will disappear if the parties to the bidded contract may alter or amend it without another previous public bidding. So. 99. 159139. Commission on Elections . it has been held that contracts requiring public bidding affect public interest and to change them without complying with that requirement would be against public policy. the same should be the subject of another agreement to be entered into by PCS and the said local suppliers. A TREATISE ON GOVERNMENT CONTRACTS UNDER PHILIPPINE LAW 32-33 (2001) citing. however. January 17. where mandatory.R. In that regard. of Naujan. 46 Joint Memorandum. but also in reckless disregard of its own bidding rules and procedure.

103.100. 159139. In Information Technology Foundation v.R. where other parties should be afforded the opportunity to bid. requirements and limitations. Commission on Elections . on equal footing…”51 The Court continued: The essence of public bidding is. Things which cannot be said about the Compromise Agreement in question. technical and legal requirements. The case. the conditions under which the bid is won and those under which the awarded Contract will be complied with…52(italics in the original) 102. 2004 January 13. regulations and guidelines for public bidding. The contracts awarded to the four local suppliers were bidded out. as in this case. the High Court stressed the need for the strict application of pertinent rules. Fair basis for the precise comparison of bids. 159139. Commission on Elections . Commission on Elections . No. No. All other things being equal. G. with respect to the second set of contracts. all other things being equal. which concerns a contract already awarded.”49 It noted with alarm how Comelec accepted the computer hardware and software offered by Mega Pacific “even if. Thus. and a fair basis for the precise comparison of bids. 2004 January 13. No. 49 50 The terms and conditions of the Compromise Agreement. Other suppliers took part in that public bidding. or. after all. Commission on Elections . as was done in the first public bidding. Information Technology Foundation v. Level the playing field. The High Court said it was grave abuse of discretion on the part of Comelec to award the billion-peso undertaking “with inexplicable haste. 159139. Fair competition. No. at the time of the award. 105. G. they had undeniably failed to pass eight critical requirements designed to safeguard the integrity of elections. 52 Information Technology Foundation v.R. without adequately checking and observing mandatory financial. it is contrary to the very concept of public bidding to permit a variance between the conditions under which bids are invited and those under which proposals are submitted and approved.”50 101. 51 Information Technology Foundation v. Comelec. violates the equal protection of laws clause in January 13. actual or potential. These contracts cannot be modified or altered without conducting another public bidding. “… is for the purpose of placing each bidder. has many things to say about what a public bidding is all about – pronouncements which are very relevant the NLO’s predicament. an opportunity for fair competition. G. public bidding aims to “level the playing field. 104. and be subject to the same guidelines.R. so said the Court. In common parlance. 20 . 159139. 2004 Information Technology Foundation v. so that the best offer or lowest bid may be determined. The strict-application rule.” That means each bidder must bid under the same conditions. although with grave abuse of discretion. G.R. 2004 January 13.

57 Id. reads: The equal protection of the law clause is against undue favor and individual or class privilege. 112. the Plunder Law. 55 Republic v. III. 493. or property without due process of law. despite the NLO Legal Department’s and OGCC’s joint Memorandum which opined that “another public bidding will only suffer the same fate as that of the previous public bidding. Considering recent jurisprudential trends. That is the principle followed in a public bidding. 1 of the 1987 Charter: “No person shall be deprived of life. under like circumstances and conditions…” In other words.. as well as hostile discrimination or the oppression of inequality…it merely requires that all persons shall be treated alike. 110. the conduct and results of which were questioned in Court by FPA through an injunction case. under like circumstances and conditions both as to privileges conferred and liabilities enforced. Sec. It may also expose NLO officials to a criminal suit. 109. 53 The jurisprudential principle. 1997. 111.”57 53 Art. either under Republic Act 3019. The NLO leadership will be guilty of a grave abuse of discretion if it approves the Compromise Agreement. capriciously or arbitrarily out of malice. ill will or personal bias. the Anti-Graft and Corrupt Practices Act. 21 .54 (italics in the original) 106.56 107. 56 Tañada v. Obviously.. May 2. The only way to put a stop to the uncertainty plaguing the NLO’s lotto paper requirements is an honest-to-goodness public bidding conducted in accordance with the law. and jurisprudence. The operative clause is really this “…all persons shall be treated alike. Hernadez. 372 SCRA 462. as held in Ichong v.the Constitution with respect to all who participated in the first bidding for these contracts but did not make it through. liberty. at 3. Cocofed. It would be in a more difficult bind if it pursues a Compromise Agreement that in the end will not stand in court for reasons of illegality. There is grave abuse of discretion (1) when an act is done contrary to the Constitution. the law or jurisprudence. or RA 7080. people similarly situated should be similarly treated by law and under law. Angara. depending on the amount involved. the Compromise Agreement is a clear violation of law. the NLO should err on the side of caution and follow the prescriptions of the law on public bidding to the letter. 108. 272 SCRA 18.” 54 101 Phil 1155 (1957). 55 or (2) when it is executed whimsically. public policy. December 14. 79. nor shall any person be denied equal protection of laws. 2001.

petitioner did not deny the non-deliveries. there is an urgent and permanent necessity for the writ to prevent damage…. this Court agrees with movants that the shortage of paper supplies will paralyze its operations and consequently. Citing the Supreme Court’s decision above. but merely raised it as an excuse… Indeed. While the FPA has an enforceable right under the Agreement as NLO’s exclusive supplier of lottery paper. such right is not absolute as it is qualified by the proviso. jeopardize its integrity as the government’s lead public agency for charitable projects whose fund-raising activities depend on the continuous and uninterrupted supply of lotto quality bet slips or pay slips. the Court of Appeals and the Supreme Court having already ruled against its propriety. jeopardize its integrity as the government’s lead public agency for 116. The requisites before an injunctive writ may be issued are: (1) the invasion of the right is material and substantial. ‘unless [FPA] is unable to fulfill NLO’s order in terms of the agreed schedule. 6. GR No. Sept.Remedies Available 113.58 114. 115. ‘the shortage of [lottery] paper supplies will paralyze [NLO’s] operations. at 1-2. as the Supreme Court added. Notably. No less than the Supreme Court has observed that FPA never denied its alleged non-deliveries. and consequently. 139128). ruled in favor of NLO’s petition for certiorari against the Regional Trial Court’s rulings that favored the FPA. As the Supreme Court said: …This Court finds that the overriding consideration of public interest justified NLO in sourcing its paper requirements from other suppliers during the period that petitioner failed to deliver. So said the CA in its ruling: As to the legality of the injunction against petitioners. there is now no legal impediment to a new public bidding for a contract to supply lotto paper to NLO. 1999. Moreover. 22 . the Court of Appeal’s 5 th Division. As there is now no injunction to speak of against NLO in the first case filed by FPA. (ii) the right of complainant is clear and unmistakable. We rule that respondent judge committed grave abuse of discretion in issuing the same. 58 Supreme Court Resolution (First Division. and (iii). FPA merely raised as an excuse NLO’s nonpayment of its past due account. quantity and quality.

2001 Decision. So said the Court of Appeals: “No less than the Supreme Court has observed that FPA never denied its alleged non-deliveries. 120. 119. Consequently. at 17-18. Court of Appeals March 30.. 125. at 6-7. including the writ of preliminary injunction it had issued against the NLO and the other four suppliers. Both the Supreme Court and the Court of Appeals have ruled that the supply contracts can be bidded out. at18. for example. is the thermal plant it promised to put up? It therefore boggles the mind that despite these pronouncements and orders from the appellate courts. FPA merely raised as an excuse NLO’s non-payment of its past due account. 27-30. FPA and its lawyers are likewise liable for contempt of court for insisting on TROs despite the clear tenor of the orders from both the Supreme Court and the Court of Appeals. annulling and setting aside all its assailed orders.charitable projects whose fund-raising activities depend on the continuous and uninterrupted supply of lotto quality bet slips or pay slips. 124. according to the requirements of RA 9184 – and bid it annually. not quarterly. 23 . 123. Judge Leachon should have been haled to the Supreme Court on administrative charges. Both bodies have said the lower court cannot enjoin the NLO from seeking new supply contracts for lotto paper while the case is pending precisely because of the public interest involved in lotto operations.” Id. Where. 61 See paras. pending the resolution of the FPAinitiated case with Branch 224 of the Quezon City Regional Trial Court under Judge Mahilig Lechon. 2002 72-hour TRO he issued and that was discussed above.61 This constitutes gross ignorance of the law and contempt of court that should not be glossed over. In fact the two decisions from the appellate courts have also buttressed the NLO’s contentions that it has a ground for terminating the contract with FPA – its failure to perform its obligations as set out in the BOT contract. as in the case of the December 18. FPA has been able to delay the NLO’s operations in many ways .60 Yet with nothing to show for it (it has for example not put up the thermal plant as it had committed to do in the BOT contract). Judge Leachon could still issue TROs against the NLO. the NLO should bid the supply contracts out publicly. the Court of Appeals made permanent its injunction against Branch 224 of the Quezon City Regional Trial Court. 122. 121. 59 60 To stress. 118.’59 117. What the Supreme Court and Court of Appeals decisions were saying is that FPA has no basis whatsoever for its claim of injury in the face of public biddings for the NLO’s lotto paper requirements to merit the issuance of any TRO or preliminary mandatory injunction.

For six or so years now. all this time.as has been the practice of the NLO in the past. 130. why was FPA still included in the circle of paper suppliers to the NLO on an “emergency basis” that has practically been running year after year? 133. because in the event that its rights as stipulated in the BOT contract are upheld. it is highly irregular that after having terminated the contract with NLO for being disadvantageous to the government – NLO still dealt with PSA by buying lotto paper from FPA on emergency basis. the court can always revoke the purchase orders made and thereafter place into effect the provisions of the BOT contract. 127. which with their combined resources. NLO looked the other way. 131. 129. could well have provided for all of NLO’s requirements. We believe that there is no legal impediment to an annual purchase of lotto paper requirements. even if the trial of the first case drags on. it had already awarded contracts by public bidding to four local suppliers. after all. made in compliance with the requirements of the law. FPA has admitted it cannot meet all the supply requirements of NLO. 24 . the NLO can make annual projections of the paper supply demands. Instead. even after FPA filed a suit against the agency. FPA has apparently been making money from NLO’s coffers. NLO should have blacklisted FPA for its failure to comply with the terms of the first contract. And yet. despite the pendency of the cases. In fact. they have had their hands on NLO’s money through the emergency purchases the office had been making. 134. Neither the FPA nor the four local suppliers really have any reason to complain. and this. Hence. It is no excuse that NLO had been in constant need of a steady source of lotto paper. 132. to ensure that supply requirements are met the whole year round. On sheer delicadeza. if it isn’t farcical. and has been getting away with having a pending suit against NLO at the same time. it should also not unduly prejudice FPA in the pendency of the original BOT termination case on trial. the NLO can meet its lotto paper requirements adequately. It is in the best interest of the public – the NLO’s clients – that an annual bidding be conducted. Certainly. The four local suppliers’ resources pooled together certainly can meet all of NLO’s requirements. because they can still be classified as “emergency purchases” but this time. based on past acquisitions. 128. 126.

00 worth of 4D betslips.955. P6.250. P293. it should follow what public policy.00 worth of Thermal Rolls. dated November 2. and P351. 2004. P2. at 1. The NLO must put this to a stop.000. P1. ATTY. that’s what FPA has made out of NLO all this years. YOUNG ATTY. If it is any indication of how much FPA gets from NLO through “emergency purchases”. Very truly yours.900. 62 FPA officials must be laughing their way to the bank each payday. the NLO was to buy from FPA for its nationwide paper supplies requirement P18..346. OLD 62 See Memorandum of Assistant General Manager for Online Lottery Sector for the NLO chairman and Board of Directors. law and jurisprudence on public bidding say.338.647. For your information and guidance.00 worth of 6/49 betslips. Instead.000.135.00 worth of 6/42 betslips. 25 . A milking cow. 137.664.00 worth of 6D betslips. for the 4th Quarter of 2004 alone. 136.000.00 worth of 6/45 betslips.

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