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SC rules Northrail contractor not immune from suit

By Ina Reformina, ABS-CBN News Posted at 03/08/2012 12:55 PM | Updated as of 03/08/2012 4:37 PM MANILA, Philippines - The Supreme Court (SC) has given a Makati City trial court the green light to proceed with the civil case against China's China National Machinery & Equipment Corp. Group (CNMEG) in connection with the multi-million dollar Northrail project from Manila to San Fernando, La Union. In a unanimous Decision, the High Court en banc held that the China-based contractor is not immune from suit, and remanded the civil case on the validity of CNMEG's contract agreement with North Luzon Railways Corporation (Northrail), as well as the counterpart financial agreement (loan agreement) between the Philippine government and the Export Import Bank of China (EXIM) to Makati City Regional Trial Court (RTC) Branch 145. The High Court held that the agreement between CNMEG and Northrail is not an executive agreement; it was not concluded between the government of the Philippines and China but between Northrail and CNMEG, which is neither a government nor a government agency of China but a corporation duly organized and created under the laws of the Peoples Republic of China . The 23-page Decision penned by Associate Justice Ma. Lourdes Sereno denied CNMEGs petition assailing the dismissal by the Court of Appeals (CA) of its petition for certiorari assailing the RTC's denial of its motion to dismiss the civil case. Since the Contract Agreement explicitly provides that Philippine Law shall be applicable, the parties have effectively conceded that their rights and obligations thereunder are not governed by international law It is therefore clear from therefore clear from the foregoing reasons that the Contract Agreement does not partake of the nature of an executive agreement. It is merely an ordinary commercial contract that can be questioned before the local courts, the Decision read. The High Court ruled that the Northrail Project was a purely commercial transaction based on the Memorandum of Understanding (MOU) between CNMEG and Northrail, the Loan Agreement, and the letter of Chinese Ambassador to the Philippines Wang Chungui stating CNMEG and not the Chinese government initiated the Northrail Project. The High Court said CNMEG was not covered by sovereign immunity since it engaged in a proprietary activity . The MOU between CNMEG and Northrail shows

that the former sought the construction of the Luzon Railways as a proprietary or commercial venture. Clearly, it was CNMEG that initiated the undertaking, and not the Chinese government, the Decision read. The High Court also held that an agreement to submit any dispute between the parties to arbitration may be construed as an implicit waiver of immunity from suit. Under the contract agreement, CNMEG and Northrail are bound to submit any dispute to the Hong Kong International Arbitration Centre (HKIAK). CNMEG entered into a MOU with Northrail in Sept. 2002 for a feasibility study on a railway line connecting Manila to San Fernando, La Union. In August 2003, the EXIM Bank and the Department of Finance (DOF) entered into a MOU, wherein China agreed to extend Preferential Buyers Credit to the Philippine government to finance the Northrail Project. EXIM Bank was designated as the lender by the Chinese government Bank, while the Philippine government named the DOF as the borrower. Under the MOU, EXIM Bank agreed to extend an amount not exceeding US $400 million in favor of DOF, payable in 20 years, with a 5-year grace period, and at the rate of 3% per annum. In October 2003, Chinese Ambassador Wang wrote the DOF of CNMEGs designation as the Prime Contractor for the Northrail Project. On December 30, 2003, Northrail and CNMEG executed a Contract of Agreement for the Construction of Section 1, Phase 1 of the North Luzon Railway System from Caloocan to Malolos on a turnkey basis. The contract price for the Northrail Project was pegged at US $421 million. On February 26, 2004, the Philippine government and EXIM Bank entered into a counterpart financial agreement where EXIM Bank agreed to extend Preferential Buyers Credit in the amount of US $400M in favor of the Republic of the Philippines to finance the construction of Phase I. On February 13, 2006, several taxpayers filed in the Makati RTC a complaint for annulment of contract and injunction against CNMEG, the Office of the Executive Secretary, the DOF, the Department of Budget and Management (DBM), the National Economic Development Authority (NEDA), and Northrail.

The trial court set the case for hearing on the issuance of injunctive reliefs. CNMEG subsequently filed an Urgent Motion for Reconsideration and before a ruling could be made by the trial court, CNMEG filed a motion to dismiss claiming that the RTC did not have jurisdiction over it. The RTC issued an omnibus order dated May 15, 2007 denying CNMEGs motion to dismiss prompting CNMEG to elevate the case to the appellate court.