Obligations and Contracts

July 15, 2009 NATIONAL POWER CORPORATION (PETITIONER) VS. PROVINCE OF QUEZON AND MUNICPALITY OF PAGBILAO (RESPONDENTS) GR. NO. 171586 Facts:  Petitioner NPC entered in to Energy Conversion Agreement with Mirant Corp. to generate electricity in its coal-fired thermal plant, stipulating among others a build-operate-transfer arrangement after 25 years and that NPC will pay for all the tax liabilities that the government may impose on the former.  Later on, in a letter dated March 2, 2000, the Municipality of Pagbilao assessed Mirant’s real property taxes on the power plant and its machineries in the total amount of P1,538,076,000.00 for the period of 1997 to 2000. The Municipality of Pagbilao furnished the NPC a copy of the assessment letter.  The NPC objected to the assessment against Mirant on the claim that it (the NPC) is entitled to the tax exemptions provided in Section 234, paragraphs (c) and (e) of the Local Government Code. To protect its interest, NPC filed a petition before the Local Board of Assessment Appeal, who however dismissed the petition. Aggrieved, NPC filed an appeal with the Central Board of Assessment Appeals who, however, affirmed the dismissal of the petition before the LBAA. An appeal before the Court of Tax Appeals met with a similar fate. Issue:  WON NPC is the proper party in interest?  WON the municipality of Pagbilao can impose a real estate tax on the Mirant Property despite the ECA with NPC? Held:  First: No. The tax assessment is directed to Mirant’s property only and petitioner has failed to prove that it has direct interest or ownership of those properties under the ECA. For it to be a proper party to contest the tax assessment, it should have a legal interest that is actual and material, direct and immediate, not simply contingent or expectant. In the present case, the NPC is neither the owner, nor the possessor or user of the property taxed. No interest on its part thus justifies any tax liability on its part other than its voluntary contractual undertaking. Under this legal situation, only Mirant as the contractual obligor, not the local government unit, can enforce the tax liability that the NPC contractually assumed; the NPC does not have the “legal interest” that the law and jurisprudence require to give it personality to protest the tax imposed by law on Mirant.  Second: Yes. Although NPC assumed responsibility for the taxes due on the power plant and its machineries, this agreement, however is only binding on both NPC and Mirant and not to third parties. Therefore, it’s assumption of the tax liability of Mirant does not automatically grant tax exemption to the properties in question. By law, the tax liability rests on Mirant based on its ownership, use, and possession of the plant and its machineries.  To reiterate, only the parties to the ECA agreement can exact and demand the enforcement of the rights and obligations it established – only Mirant can demand compliance from the NPC for the payment of the real property tax the NPC assumed to pay. The local government units as third parties to the ECA, cannot demand payment from the NPC. Corollarily, the local government units can neither be compelled to recognize the protest of a tax assessment from the NPC, an entity against whom it cannot enforce the tax liability.  Court: All we declare is that the stipulation is entirely between the NPC and Mirant, and does not bind third persons who are not privy to the contract between these parties. We say this pursuant to the principle of relativity of contracts under Article 1311 of the Civil Code which postulates that contracts take effect only between the parties, their assigns and heirs. (Rule on relativity of contracts). An exception to the rule on relativity of contracts is provided under the same Article 1311 as follows: “If the contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person.” The respondents however, do not fall within the exception, as they are neither conferred any express benefit nor was there any implied benefit it can receive from the ECA.

Bernz Velo Tumaru

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