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1.

THE EXECUTIVE SECRETARY V. CA 429 SCRA 81


(2004)

Republic Act No. 8042, otherwise known as the Migrant


Workers and Overseas Filipinos Act of 1995, took effect on
July 15, 1995. The Omnibus Rules and Regulations
Implementing the Migrant Workers and Overseas Filipino Act
of 1995 was, thereafter, published in the April 7, 1996 issue
of the Manila Bulletin. However, even before the law took
effect, the Asian Recruitment Council Philippine Chapter,
Inc. (ARCO-Phil.) filed, on July 17, 1995, a petition for
declaratory relief under Rule 63 of the Rules of Court with
the Regional Trial Court of Quezon City to declare as
unconstitutional Section 2, paragraph (g), Section 6,
paragraphs (a) to (j), (l) and (m), Section 7, paragraphs (a)
and (b), and Sections 9 and 10 of the law, with a plea for
the issuance of a temporary restraining order and/or writ of
preliminary injunction enjoining the respondents therein
from enforcing the assailed provisions of the law.
In a supplement to its petition, the ARCO-Phil. alleged that
Rep. Act No. 8042 was self-executory and that no
implementing rules were needed. It prayed that the court
issue a temporary restraining order to enjoin the
enforcement of Section 6, paragraphs (a) to (m) on illegal
recruitment, Section 7 on penalties for illegal recruitment,
and Section 9 on venue of criminal actions for illegal
recruitments, viz:
Viewed in the light of the foregoing discussions, there
appears to be urgent an imperative need for this Honorable
Court to maintain the status quo by enjoining the
implementation or effectivity of the questioned provisions of
RA 8042, by way of a restraining order otherwise, the
member recruitment agencies of the petitioner will suffer
grave or irreparable damage or injury. With the effectivity of
RA 8042, a great majority of the duly licensed recruitment
agencies have stopped or suspended their operations for
fear of being prosecuted under the provisions of a law that
are unjust and unconstitutional. This Honorable Court may
take judicial notice of the fact that processing of
deployment papers of overseas workers for the past weeks
have come to a standstill at the POEA and this has affected
thousands of workers everyday just because of the
enactment of RA 8042. Indeed, this has far reaching effects
not only to survival of the overseas manpower supply
industry and the active participating recruitment agencies,
the countrys economy which has survived mainly due to
the dollar remittances of the overseas workers but more
importantly, to the poor and the needy who are in dire need
of income-generating jobs which can only be obtained from
abroad. The loss or injury that the recruitment agencies will
suffer will then be immeasurable and irreparable. As of now,
even foreign employers have already reduced their
manpower requirements from the Philippines due to their
knowledge that RA 8042 prejudiced and adversely affected
the local recruitment agencies.3

(g) THE STATE RECOGNIZES THAT THE ULTIMATE


PROTECTION TO ALL MIGRANT WORKERS IS THE
POSSESSION OF SKILLS. PURSUANT TO THIS AND AS SOON
AS PRACTICABLE, THE GOVERNMENT SHALL DEPLOY
AND/OR ALLOW THE DEPLOYMENT ONLY OF SKILLED
FILIPINO WORKERS.4
Sec. 2 subsection (i, 2nd par.)
Nonetheless, the deployment of Filipino overseas workers,
whether land-based or sea-based, by local service
contractors and manning agents employing them shall be
encourages (sic). Appropriate incentives may be extended
to them.
II. ILLEGAL RECRUITMENT
SEC. 6. Definition. For purposes of this Act, illegal
recruitment shall mean any act of canvassing, enlisting,
contracting, transporting, utilizing, hiring, or procuring
workers and includes referring, contract services, promising
or advertising for employment abroad, whether for profit or
not, when undertaken by a non-licensee or non-holder of
authority contemplated under Article 13(f) of Presidential
Decree No. 442, as amended, otherwise known as the Labor
Code of the Philippines: Provided, That any such nonlicensee or non-holder who, in any manner, offers or
promises for a fee employment abroad to two or more
persons shall be deemed so engaged. It shall, likewise,
include the following acts, whether committed by any
person, whether a non-licensee, non-holder, licensee or
holder of authority:
(a) To charge or accept directly or indirectly any amount
greater than that specified in the schedule of allowable fees
prescribed by the Secretary of Labor and Employment, or to
make a worker pay any amount greater than that actually
received by him as a loan or advance;
(b) To furnish or publish any false notice or information or
document in relation to recruitment or employment;
(c) To give any false notice, testimony, information or
document or commit any act of misrepresentation for the
purpose of securing a license or authority under the Labor
Code;
(d) To induce or attempt to induce a worker already
employed to quit his employment in order to offer him
another unless the transfer is designed to liberate a worker
from oppressive terms and conditions of employment;
(e) To influence or attempt to influence any person or entity
not to employ any worker who has not applied for
employment through his agency;
(f) To engage in the recruitment or placement of workers in
jobs harmful to public health or morality or to the dignity of
the Republic of the Philippines;

On August 1, 1995, the trial court issued a temporary


restraining order effective for a period of only twenty (20)
days therefrom.

(g) To obstruct or attempt to obstruct inspection by the


Secretary of Labor and Employment or by his duly
authorized representative;

After the petitioners filed their comment on the petition, the


ARCO-Phil. filed an amended petition, the amendments
consisting in the inclusion in the caption thereof eleven (11)
other corporations which it alleged were its members and
which it represented in the suit, and a plea for a temporary
restraining order enjoining the respondents from enforcing
Section 6 subsection (i), Section 6 subsection (k) and
paragraphs 15 and 16 thereof, Section 8, Section 10,
paragraphs 1 and 2, and Sections 11 and 40 of Rep. Act No.
8042.

(h) To fail to submit reports on the status of employment,


placement vacancies, remittance of foreign exchange
earnings, separation from jobs, departures and such other
matters or information as may be required by the Secretary
of Labor and Employment;

The respondent ARCO-Phil. assailed Section 2(g) and (i),


Section 6 subsection (a) to (m), Section 7(a) to (b), and
Section 10 paragraphs (1) and (2), quoted as follows:

(i) To substitute or alter to the prejudice of the worker,


employment contracts approved and verified by the
Department of Labor and Employment from the time of
actual signing thereof by the parties up to and including the
period of the expiration of the same without the approval of
the Department of Labor and Employment;
(j) For an officer or agent of a recruitment or placement
agency to become an officer or member of the Board of any

corporation engaged in travel agency or to be engaged


directly or indirectly in the management of a travel agency;
(k) To withhold or deny travel documents from applicant
workers before departure for monetary or financial
considerations other than those authorized under the Labor
Code and its implementing rules and regulations;
(l) Failure to actually deploy without valid reason as
determined by the Department of Labor and Employment;
and
(m) Failure to reimburse expenses incurred by the worker in
connection with his documentation and processing for
purposes of deployment, in cases where the deployment
does not actually take place without the workers fault.
Illegal recruitment when committed by a syndicate or in
large scale shall be considered an offense involving
economic sabotage.
Illegal recruitment is deemed committed by a syndicate if
carried out by a group of three (3) or more persons
conspiring or confederating with one another. It is deemed
committed in large scale if committed against three (3) or
more persons individually or as a group.
The persons criminally liable for the above offenses are the
principals, accomplices and accessories. In case of juridical
persons, the officers having control, management or
direction of their business shall be liable.

SEC. 7. Penalties.
(a) Any person found guilty of illegal recruitment shall suffer
the penalty of imprisonment of not less than six (6) years
and one (1) day but not more than twelve (12) years and a
fine of not less than two hundred thousand pesos
(P200,000.00) nor more than five hundred thousand pesos
(P500,000.00).
(b) The penalty of life imprisonment and a fine of not less
than five hundred thousand pesos (P500,000.00) nor more
than one million pesos (P1,000,000.00) shall be imposed if
illegal recruitment constitutes economic sabotage as
defined herein.
Provided, however, That the maximum penalty shall be
imposed if the person illegally recruited is less than
eighteen (18) years of age or committed by a non-licensee
or non-holder of authority.
Sec. 8.
Prohibition on Officials and Employees. It shall be unlawful
for any official or employee of the Department of Labor and
Employment,
the
Philippine
Overseas
Employment
Administration (POEA), or the Overseas Workers Welfare
Administration (OWWA), or the Department of Foreign
Affairs, or other government agencies involved in the
implementation of this Act, or their relatives within the
fourth civil degree of consanguinity or affinity, to engage,
directly or indirectly, in the business of recruiting migrant
workers as defined in this Act. The penalties provided in the
immediate preceding paragraph shall be imposed upon
them. (underscoring supplied)

Sec. 10, pars. 1 & 2.


Money Claims. Notwithstanding any provision of law to the
contrary, the Labor Arbiters of the National Labor Relations
Commission (NLRC) shall have the original and exclusive
jurisdiction to hear and decide, within ninety (90) calendar
days after the filing of the complaint, the claims arising out
of an employer-employee relationship or by virtue of any

law or contract involving Filipino workers for overseas


deployment including claims for actual, moral, exemplary
and other forms of damages.
The
liability
of
the
principal/employer
and
the
recruitment/placement agency for any and all claims under
this section shall be joint and several. This provision shall be
incorporated in the contract for overseas employment and
shall be a condition precedent for its approval. The
performance bond to be filed by the recruitment/placement
agency, as provided by law, shall be answerable for all
money claims or damages that may be awarded to the
workers. If the recruitment/placement agency is a juridical
being, the corporate officers and directors and partners as
the case may be, shall themselves be jointly and solidarily
liable with the corporation or partnership for the aforesaid
claims and damages.

SEC. 11. Mandatory Periods for Resolution of Illegal


Recruitment Cases. The preliminary investigations of
cases under this Act shall be terminated within a period of
thirty (30) calendar days from the date of their filing. Where
the preliminary investigation is conducted by a prosecution
officer and a prima facie case is established, the
corresponding information shall be filed in court within
twenty-four (24) hours from the termination of the
investigation. If the preliminary investigation is conducted
by a judge and a prima facie case is found to exist, the
corresponding information shall be filed by the proper
prosecution officer within forty-eight (48) hours from the
date of receipt of the records of the case.
The respondent averred that the aforequoted provisions of
Rep. Act No. 8042 violate Section 1, Article III of the
Constitution.5 According to the respondent, Section 6(g)
and (i) discriminated against unskilled workers and their
families and, as such, violated the equal protection clause,
as well as Article II, Section 126 and Article XV, Sections 17
and 3(3) of the Constitution.8 As the law encouraged the
deployment of skilled Filipino workers, only overseas skilled
workers are granted rights. The respondent stressed that
unskilled workers also have the right to seek employment
abroad. According to the respondent, the right of unskilled
workers to due process is violated because they are
prevented from finding employment and earning a living
abroad. It cannot be argued that skilled workers are immune
from abuses by employers, while unskilled workers are
merely prone to such abuses. It was pointed out that both
skilled and unskilled workers are subjected to abuses by
foreign employers. Furthermore, the prohibition of the
deployment of unskilled workers abroad would only
encourage fly-by-night illegal recruiters.
According to the respondent, the grant of incentives to
service contractors and manning agencies to the exclusion
of all other licensed and authorized recruiters is an invalid
classification. Licensed and authorized recruiters are thus
deprived of their right to property and due process and to
the "equality of the person." It is understandable for the law
to prohibit illegal recruiters, but to discriminate against
licensed and registered recruiters is unconstitutional.
The respondent, likewise, alleged that Section 6,
subsections (a) to (m) is unconstitutional because licensed
and authorized recruitment agencies are placed on equal
footing with illegal recruiters. It contended that while the
Labor Code distinguished between recruiters who are
holders of licenses and non-holders thereof in the imposition
of penalties, Rep. Act No. 8042 does not make any
distinction. The penalties in Section 7(a) and (b) being
based on an invalid classification are, therefore, repugnant
to the equal protection clause, besides being excessive;
hence, such penalties are violative of Section 19(1), Article
III of the Constitution.9 It was also pointed out that the
penalty for officers/officials/employees of recruitment
agencies who are found guilty of economic sabotage or

large-scale illegal recruitment under Rep. Act No. 8042 is


life imprisonment. Since recruitment agencies usually
operate with a manpower of more than three persons, such
agencies are forced to shut down, lest their officers and/or
employees be charged with large scale illegal recruitment or
economic sabotage and sentenced to life imprisonment.
Thus, the penalty imposed by law, being disproportionate to
the prohibited acts, discourages the business of licensed
and registered recruitment agencies.
The respondent also posited that Section 6(m) and
paragraphs (15) and (16), Sections 8, 9 and 10, paragraph 2
of the law violate Section 22, Article III of the Constitution10
prohibiting ex-post facto laws and bills of attainder. This is
because the provisions presume that a licensed and
registered recruitment agency is guilty of illegal recruitment
involving economic sabotage, upon a finding that it
committed any of the prohibited acts under the law.
Furthermore, officials, employees and their relatives are
presumed guilty of illegal recruitment involving economic
sabotage upon such finding that they committed any of the
said prohibited acts.
The respondent further argued that the 90-day period in
Section 10, paragraph (1) within which a labor arbiter
should decide a money claim is relatively short, and could
deprive licensed and registered recruiters of their right to
due process. The period within which the summons and the
complaint would be served on foreign employees and,
thereafter, the filing of the answer to the complaint would
take more than 90 days. This would thereby shift on local
licensed and authorized recruiters the burden of proving the
defense of foreign employers. Furthermore, the respondent
asserted, Section 10, paragraph 2 of the law, which provides
for the joint and several liability of the officers and
employees, is a bill of attainder and a violation of the right
of the said corporate officers and employees to due process.
Considering that such corporate officers and employees act
with prior approval of the board of directors of such
corporation, they should not be liable, jointly and severally,
for such corporate acts.
The respondent asserted that the following provisions of the
law are unconstitutional:
SEC. 9. Venue. A criminal action arising from illegal
recruitment as defined herein shall be filed with the
Regional Trial Court of the province or city where the offense
was committed or where the offended party actually resides
at the time of the commission of the offense: Provided, That
the court where the criminal action is first filed shall acquire
jurisdiction to the exclusion of other courts: Provided,
however, That the aforestated provisions shall also apply to
those criminal actions that have already been filed in court
at the time of the effectivity of this Act.

SEC. 10. Money Claims. Notwithstanding any provision of


law to the contrary, the Labor Arbiters of the National Labor
Relations Commission (NLRC) shall have the original and
exclusive jurisdiction to hear and decide, within ninety (90)
calendar days after the filing of the complaint, the claims
arising out of an employer-employee relationship or by
virtue of any law or contract involving Filipino workers for
overseas deployment including claims for actual, moral,
exemplary and other forms of damages.
Sec. 40.
The departments and agencies charged with carrying out
the provisions of this Act shall, within ninety (90) days after
the effectiviy of this Act, formulate the necessary rules and
regulations for its effective implementation.
According to the respondent, the said provisions violate
Section 5(5), Article VIII of the Constitution11 because they

impair the power of the Supreme Court to promulgate rules


of procedure.
In their answer to the petition, the petitioners alleged, inter
alia, that (a) the respondent has no cause of action for a
declaratory relief; (b) the petition was premature as the
rules implementing Rep. Act No. 8042 not having been
released as yet; (c) the assailed provisions do not violate
any provisions of the Constitution; and, (d) the law was
approved by Congress in the exercise of the police power of
the State. In opposition to the respondents plea for
injunctive relief, the petitioners averred that:
As earlier shown, the amended petition for declaratory relief
is devoid of merit for failure of petitioner to demonstrate
convincingly that the assailed law is unconstitutional, apart
from the defect and impropriety of the petition. One who
attacks a statute, alleging unconstitutionality must prove its
invalidity beyond reasonable doubt (Caleon v. Agus
Development Corporation, 207 SCRA 748). All reasonable
doubts should be resolved in favor of the constitutionality of
a statute (People v. Vera, 65 Phil. 56). This presumption of
constitutionality is based on the doctrine of separation of
powers which enjoin upon each department a becoming
respect for the acts of the other departments (Garcia vs.
Executive Secretary, 204 SCRA 516 [1991]). Necessarily, the
ancillary remedy of a temporary restraining order and/or a
writ of preliminary injunction prayed for must fall. Besides,
an act of legislature approved by the executive is presumed
to be within constitutional bounds (National Press Club v.
Commission on Elections, 207 SCRA 1).12
After the respective counsels of the parties were heard on
oral arguments, the trial court issued on August 21, 1995,
an order granting the petitioners plea for a writ of
preliminary injunction upon a bond of P50,000. The
petitioner posted the requisite bond and on August 24,
1995, the trial court issued a writ of preliminary injunction
enjoining the enforcement of the following provisions of
Rep. Act No. 8042 pending the termination of the
proceedings:
Section 2, subsections (g) and (i, 2nd par.); Section 6,
subsections (a) to (m), and pars. 15 & 16; Section 7,
subsections (a) & (b); Section 8; Section 9; Section 10; pars.
1 & 2; Section 11; and Section 40 of Republic Act No. 8042,
otherwise known as the Migrant Workers and Overseas
Filipinos Act of 1995. 13
The petitioners filed a petition for certiorari with the Court of
Appeals assailing the order and the writ of preliminary
injunction issued by the trial court on the following grounds:
1. Respondent ARCO-PHIL. had utterly failed to show its
clear right/s or that of its member-agencies to be protected
by the injunctive relief and/or violation of said rights by the
enforcement of the assailed sections of R.A. 8042;
2. Respondent Judge fixed a P50,000 injunction bond which
is grossly inadequate to answer for the damage which
petitioner-officials may sustain, should respondent ARCOPHIL. be finally adjudged as not being entitled thereto.14
The petitioners asserted that the respondent is not the real
party-in-interest as petitioner in the trial court. It is
inconceivable how the respondent, a non-stock and nonprofit corporation, could sustain direct injury as a result of
the enforcement of the law. They argued that if, at all, any
damage would result in the implementation of the law, it is
the licensed and registered recruitment agencies and/or the
unskilled Filipino migrant workers discriminated against who
would sustain the said injury or damage, not the
respondent. The respondent, as petitioner in the trial court,
was burdened to adduce preponderant evidence of such
irreparable injury, but failed to do so. The petitioners further
insisted that the petition a quo was premature since the
rules and regulations implementing the law had yet to be
promulgated when such petition was filed. Finally, the

petitioners averred that the respondent failed to establish


the requisites for the issuance of a writ of preliminary
injunction against the enforcement of the law and the rules
and regulations issued implementing the same.

provisions of Rep. Act No. 8042 exposed its members to the


immediate and irreparable damage of being deprived of
their right to a livelihood without due process, a property
right protected under the Constitution.

On December 5, 1997, the appellate court came out with a


four-page decision dismissing the petition and affirming the
assailed order and writ of preliminary injunction issued by
the trial court. The appellate court, likewise, denied the
petitioners motion for reconsideration of the said decision.

The respondent contends that the commendable purpose of


the law to eradicate illegal recruiters should not be done at
the expense and to the prejudice of licensed and authorized
recruitment agencies. The writ of preliminary injunction was
necessitated by the great number of duly licensed
recruitment agencies that had stopped or suspended their
business operations for fear that their officers and
employees would be indicted and prosecuted under the
assailed oppressive penal provisions of the law, and meted
excessive penalties. The respondent, likewise, urges that
the Court should take judicial notice that the processing of
deployment papers of overseas workers have come to a
virtual standstill at the POEA.

The petitioners now come to this Court in a petition for


review on certiorari on the following grounds:
1. Private respondent ARCO-PHIL. had utterly failed to show
its clear right/s or that of its member-agencies to be
protected by the injunctive relief and/or violation of said
rights by the enforcement of the assailed sections of R.A.
8042;
2. The P50,000 injunction bond fixed by the court a quo and
sustained by the Court of Appeals is grossly inadequate to
answer for the damage which petitioners-officials may
sustain, should private respondent ARCO-PHIL. be finally
adjudged as not being entitled thereto.15
On February 16, 1998, this Court issued a temporary
restraining order enjoining the respondents from enforcing
the assailed order and writ of preliminary injunction.
The Issues
The core issue in this case is whether or not the trial court
committed grave abuse of its discretion amounting to
excess or lack of jurisdiction in issuing the assailed order
and the writ of preliminary injunction on a bond of only
P50,000 and whether or not the appellate court erred in
affirming the trial courts order and the writ of preliminary
injunction issued by it.
The petitioners contend that the respondent has no locus
standi. It is a non-stock, non-profit organization; hence, not
the real party-in-interest as petitioner in the action.
Although the respondent filed the petition in the Regional
Trial Court in behalf of licensed and registered recruitment
agencies, it failed to adduce in evidence a certified copy of
its Articles of Incorporation and the resolutions of the said
members authorizing it to represent the said agencies in the
proceedings. Neither is the suit of the respondent a class
suit so as to vest in it a personality to assail Rep. Act No.
8042; the respondent is service-oriented while the
recruitment agencies it purports to represent are profitoriented. The petitioners assert that the law is presumed
constitutional and, as such, the respondent was burdened to
make a case strong enough to overcome such presumption
and establish a clear right to injunctive relief.
The petitioners bewail the P50,000 bond fixed by the trial
court for the issuance of a writ of preliminary injunction and
affirmed by the appellate court. They assert that the
amount is grossly inadequate to answer for any damages
that the general public may suffer by reason of the nonenforcement of the assailed provisions of the law. The trial
court committed a grave abuse of its discretion in granting
the respondents plea for injunctive relief, and the appellate
court erred in affirming the order and the writ of preliminary
injunction issued by the trial court.
The respondent, for its part, asserts that it has duly
established its locus standi and its right to injunctive relief
as gleaned from its pleadings and the appendages thereto.
Under Section 5, Rule 58 of the Rules of Court, it was
incumbent on the petitioners, as respondents in the RTC, to
show cause why no injunction should issue. It avers that the
injunction bond posted by the respondent was more than
adequate to answer for any injury or damage the petitioners
may suffer, if any, by reason of the writ of preliminary
injunction issued by the RTC. In any event, the assailed

The Courts Ruling


The petition is meritorious.
The Respondent Has Locus Standi
To File the Petition in the RTC in Representation of the
Eleven Licensed and Registered Recruitment Agencies
Impleaded in the Amended Petition
The modern view is that an association has standing to
complain of injuries to its members. This view fuses the
legal identity of an association with that of its members.16
An association has standing to file suit for its workers
despite its lack of direct interest if its members are affected
by the action. An organization has standing to assert the
concerns of its constituents.17
In Telecommunications and Broadcast Attorneys of the
Philippines v. Commission on Elections,18 we held that
standing jus tertii would be recognized only if it can be
shown that the party suing has some substantial relation to
the third party, or that the right of the third party would be
diluted unless the party in court is allowed to espouse the
third partys constitutional claims.
In this case, the respondent filed the petition for declaratory
relief under Rule 64 of the Rules of Court for and in behalf of
its eleven (11) licensed and registered recruitment agencies
which are its members, and which approved separate
resolutions expressly authorizing the respondent to file the
said suit for and in their behalf. We note that, under its
Articles of Incorporation, the respondent was organized for
the purposes inter alia of promoting and supporting the
growth and development of the manpower recruitment
industry, both in the local and international levels;
providing, creating and exploring employment opportunities
for the exclusive benefit of its general membership;
enhancing and promoting the general welfare and
protection of Filipino workers; and, to act as the
representative of any individual, company, entity or
association on matters related to the manpower recruitment
industry, and to perform other acts and activities necessary
to accomplish the purposes embodied therein. The
respondent is, thus, the appropriate party to assert the
rights of its members, because it and its members are in
every practical sense identical. The respondent asserts that
the assailed provisions violate the constitutional rights of its
members and the officers and employees thereof. The
respondent is but the medium through which its individual
members seek to make more effective the expression of
their voices and the redress of their grievances.19
However, the respondent has no locus standi to file the
petition for and in behalf of unskilled workers. We note that
it even failed to implead any unskilled workers in its
petition. Furthermore, in failing to implead, as partiespetitioners, the eleven licensed and registered recruitment
agencies it claimed to represent, the respondent failed to

comply with Section 2 of Rule 6320 of the Rules of Court.


Nevertheless, since the eleven licensed and registered
recruitment agencies for which the respondent filed the suit
are specifically named in the petition, the amended petition
is deemed amended to avoid multiplicity of suits.21
The Assailed Order and Writ of
Preliminary Injunction Is Mooted
By Case Law
The respondent justified its plea for injunctive relief on the
allegation in its amended petition that its members are
exposed to the immediate and irreparable danger of being
deprived of their right to a livelihood and other
constitutional rights without due process, on its claim that a
great number of duly licensed recruitment agencies have
stopped or suspended their operations for fear that (a) their
officers and employees would be prosecuted under the
unjust and unconstitutional penal provisions of Rep. Act No.
8042 and meted equally unjust and excessive penalties,
including life imprisonment, for illegal recruitment and large
scale illegal recruitment without regard to whether the
recruitment agencies involved are licensed and/or
authorized; and, (b) if the members of the respondent,
which are licensed and authorized, decide to continue with
their businesses, they face the stigma and the curse of
being labeled "illegal recruiters." In granting the
respondents plea for a writ of preliminary injunction, the
trial court held, without stating the factual and legal basis
therefor, that the enforcement of Rep. Act No. 8042,
pendente lite, would cause grave and irreparable injury to
the respondent until the case is decided on its merits.
We note, however, that since Rep. Act No. 8042 took effect
on July 15, 1995, the Court had, in a catena of cases,
applied the penal provisions in Section 6, including
paragraph (m) thereof, and the last two paragraphs therein
defining large scale illegal recruitment committed by
officers and/or employees of recruitment agencies by
themselves and in connivance with private individuals, and
imposed the penalties provided in Section 7 thereof,
including the penalty of life imprisonment.22 The
Informations
therein
were
filed
after
preliminary
investigations as provided for in Section 11 of Rep. Act No.
8042 and in venues as provided for in Section 9 of the said
act. In People v. Chowdury,23 we held that illegal
recruitment is a crime of economic sabotage and must be
enforced.
In People v. Diaz,24 we held that Rep. Act No. 8042 is but an
amendment of the Labor Code of the Philippines and is not
an ex-post facto law because it is not applied retroactively.
In JMM Promotion and Management, Inc. v. Court of
Appeals,25 the issue of the extent of the police power of the
State to regulate a business, profession or calling vis--vis
the equal protection clause and the non-impairment clause
of the Constitution were raised and we held, thus:
A profession, trade or calling is a property right within the
meaning of our constitutional guarantees. One cannot be
deprived of the right to work and the right to make a living
because these rights are property rights, the arbitrary and
unwarranted deprivation of which normally constitutes an
actionable wrong.
Nevertheless, no right is absolute, and the proper regulation
of a profession, calling, business or trade has always been
upheld as a legitimate subject of a valid exercise of the
police power by the state particularly when their conduct
affects either the execution of legitimate governmental
functions, the preservation of the State, the public health
and welfare and public morals. According to the maxim, sic
utere tuo ut alienum non laedas, it must of course be within
the legitimate range of legislative action to define the mode
and manner in which every one may so use his own
property so as not to pose injury to himself or others.

In any case, where the liberty curtailed affects at most the


rights of property, the permissible scope of regulatory
measures is certainly much wider. To pretend that licensing
or accreditation requirements violates the due process
clause is to ignore the settled practice, under the mantle of
the police power, of regulating entry to the practice of
various trades or professions. Professionals leaving for
abroad are required to pass rigid written and practical
exams before they are deemed fit to practice their trade.
Seamen are required to take tests determining their
seamanship.
Locally,
the
Professional
Regulation
Commission has begun to require previously licensed
doctors and other professionals to furnish documentary
proof that they had either re-trained or had undertaken
continuing education courses as a requirement for renewal
of their licenses. It is not claimed that these requirements
pose an unwarranted deprivation of a property right under
the due process clause. So long as professionals and other
workers meet reasonable regulatory standards no such
deprivation exists.
Finally, it is a futile gesture on the part of petitioners to
invoke the non-impairment clause of the Constitution to
support their argument that the government cannot enact
the assailed regulatory measures because they abridge the
freedom to contract. In Philippine Association of Service
Exporters, Inc. vs. Drilon, we held that "[t]he nonimpairment clause of the Constitution must yield to the
loftier purposes targeted by the government." Equally
important, into every contract is read provisions of existing
law, and always, a reservation of the police power for so
long as the agreement deals with a subject impressed with
the public welfare.
A last point. Petitioners suggest that the singling out of
entertainers and performing artists under the assailed
department orders constitutes class legislation which
violates the equal protection clause of the Constitution. We
do not agree.
The equal protection clause is directed principally against
undue favor and individual or class privilege. It is not
intended to prohibit legislation which is limited to the object
to which it is directed or by the territory in which it is to
operate. It does not require absolute equality, but merely
that all persons be treated alike under like conditions both
as to privileges conferred and liabilities imposed. We have
held, time and again, that the equal protection clause of the
Constitution does not forbid classification for so long as
such classification is based on real and substantial
differences having a reasonable relation to the subject of
the particular legislation. If classification is germane to the
purpose of the law, concerns all members of the class, and
applies equally to present and future conditions, the
classification does not violate the equal protection
guarantee.26
The validity of Section 6 of R.A. No. 8042 which provides
that employees of recruitment agencies may be criminally
liable for illegal recruitment has been upheld in People v.
Chowdury:27
As stated in the first sentence of Section 6 of RA 8042, the
persons who may be held liable for illegal recruitment are
the principals, accomplices and accessories. An employee of
a company or corporation engaged in illegal recruitment
may be held liable as principal, together with his employer,
if it is shown that he actively and consciously participated in
illegal recruitment. It has been held that the existence of
the corporate entity does not shield from prosecution the
corporate agent who knowingly and intentionally causes the
corporation to commit a crime. The corporation obviously
acts, and can act, only by and through its human agents,
and it is their conduct which the law must deter. The
employee or agent of a corporation engaged in unlawful
business naturally aids and abets in the carrying on of such
business and will be prosecuted as principal if, with

knowledge of the business, its purpose and effect, he


consciously contributes his efforts to its conduct and
promotion, however slight his contribution may be. 28
By its rulings, the Court thereby affirmed the validity of the
assailed penal and procedural provisions of Rep. Act No.
8042, including the imposable penalties therefor. Until the
Court, by final judgment, declares that the said provisions
are unconstitutional, the enforcement of the said provisions
cannot be enjoined.
The RTC Committed Grave Abuse of Its Discretion
Amounting to Excess or Lack of Jurisdiction in Issuing the
Assailed Order and the Writ of Preliminary Injunction
The matter of whether to issue a writ of preliminary
injunction or not is addressed to the sound discretion of the
trial court. However, if the court commits grave abuse of its
discretion in issuing the said writ amounting to excess or
lack of jurisdiction, the same may be nullified via a writ of
certiorari and prohibition.
In Social Security Commission v. Judge Bayona,29 we ruled
that a law is presumed constitutional until otherwise
declared by judicial interpretation. The suspension of the
operation of the law is a matter of extreme delicacy
because it is an interference with the official acts not only of
the duly elected representatives of the people but also of
the highest magistrate of the land.
In Younger v. Harris, Jr.,30 the Supreme Court of the United
States emphasized, thus:
Federal injunctions against state criminal statutes, either in
their entirety or with respect to their separate and distinct
prohibitions, are not to be granted as a matter of course,
even if such statutes are unconstitutional. No citizen or
member of the community is immune from prosecution, in
good faith, for his alleged criminal acts. The imminence of
such a prosecution even though alleged to be unauthorized
and, hence, unlawful is not alone ground for relief in equity
which exerts its extraordinary powers only to prevent
irreparable injury to the plaintiff who seeks its aid. 752 Beal
v. Missouri Pacific Railroad Corp., 312 U.S. 45, 49, 61 S.Ct.
418, 420, 85 L.Ed. 577.
And similarly, in Douglas, supra, we made clear, after
reaffirming this rule, that:
"It does not appear from the record that petitioners have
been threatened with any injury other than that incidental
to every criminal proceeding brought lawfully and in good
faith " 319 U.S., at 164, 63 S.Ct., at 881.31
The possible unconstitutionality of a statute, on its face,
does not of itself justify an injunction against good faith
attempts to enforce it, unless there is a showing of bad
faith, harassment, or any other unusual circumstance that
would call for equitable relief.32 The "on its face"
invalidation of statutes has been described as "manifestly
strong medicine," to be employed "sparingly and only as a
last resort," and is generally disfavored.33
To be entitled to a preliminary injunction to enjoin the
enforcement of a law assailed to be unconstitutional, the
party must establish that it will suffer irreparable harm in
the absence of injunctive relief and must demonstrate that
it is likely to succeed on the merits, or that there are
sufficiently serious questions going to the merits and the
balance of hardships tips decidedly in its favor.34 The
higher standard reflects judicial deference toward
"legislation or regulations developed through presumptively
reasoned democratic processes." Moreover, an injunction
will alter, rather than maintain, the status quo, or will
provide the movant with substantially all the relief sought
and that relief cannot be undone even if the defendant
prevails at a trial on the merits.35 Considering that
injunction is an exercise of equitable relief and authority, in

assessing whether to issue a preliminary injunction, the


courts must sensitively assess all the equities of the
situation, including the public interest.36 In litigations
between governmental and private parties, courts go much
further both to give and withhold relief in furtherance of
public interest than they are accustomed to go when only
private interests are involved.37 Before the plaintiff may be
entitled to injunction against future enforcement, he is
burdened to show some substantial hardship.38
The fear or chilling-effect of the assailed penal provisions of
the law on the members of the respondent does not by itself
justify prohibiting the State from enforcing them against
those whom the State believes in good faith to be
punishable under the laws:
Just as the incidental "chilling effect" of such statutes
does not automatically render them unconstitutional, so the
chilling effect that admittedly can result from the very
existence of certain laws on the statute books does not in
itself justify prohibiting the State from carrying out the
important and necessary task of enforcing these laws
against socially harmful conduct that the State believes in
good faith to be punishable under its laws and the
Constitution.39
It must be borne in mind that subject to constitutional
limitations, Congress is empowered to define what acts or
omissions shall constitute a crime and to prescribe
punishments therefor.40 The power is inherent in Congress
and is part of the sovereign power of the State to maintain
peace and order. Whatever views may be entertained
regarding the severity of punishment, whether one believes
in its efficiency or its futility, these are peculiarly questions
of legislative policy.41 The comparative gravity of crimes
and whether their consequences are more or less injurious
are matters for the State and Congress itself to
determine.42 Specification of penalties involves questions
of legislative policy.43
Due process prohibits criminal stability from shifting the
burden of proof to the accused, punishing wholly passive
conduct, defining crimes in vague or overbroad language
and failing to grant fair warning of illegal conduct.44 Class
legislation is such legislation which denies rights to one
which are accorded to others, or inflicts upon one individual
a more severe penalty than is imposed upon another in like
case offending.45 Bills of attainder are legislative acts which
inflict punishment on individuals or members of a particular
group without a judicial trial. Essential to a bill of attainder
are a specification of certain individuals or a group of
individuals, the imposition of a punishment, penal or
otherwise, and the lack of judicial trial.46
Penalizing unlicensed and licensed recruitment agencies
and their officers and employees and their relatives
employed in government agencies charged with the
enforcement of the law for illegal recruitment and imposing
life imprisonment for those who commit large scale illegal
recruitment is not offensive to the Constitution. The accused
may be convicted of illegal recruitment and large scale
illegal recruitment only if, after trial, the prosecution is able
to prove all the elements of the crime charged.47
The possibility that the officers and employees of the
recruitment agencies, which are members of the
respondent, and their relatives who are employed in the
government agencies charged in the enforcement of the
law, would be indicted for illegal recruitment and, if
convicted sentenced to life imprisonment for large scale
illegal recruitment, absent proof of irreparable injury, is not
sufficient on which to base the issuance of a writ of
preliminary injunction to suspend the enforcement of the
penal provisions of Rep. Act No. 8042 and avert any
indictments under the law.48 The normal course of criminal
prosecutions cannot be blocked on the basis of allegations
which amount to speculations about the future.49

There is no allegation in the amended petition or evidence


adduced by the respondent that the officers and/or
employees of its members had been threatened with any
indictments for violations of the penal provisions of Rep. Act
No. 8042. Neither is there any allegation therein that any of
its members and/or their officers and employees committed
any of the acts enumerated in Section 6(a) to (m) of the law
for which they could be indicted. Neither did the respondent
adduce any evidence in the RTC that any or all of its
members or a great number of other duly licensed and
registered recruitment agencies had to stop their business
operations because of fear of indictments under Sections 6
and 7 of Rep. Act No. 8042. The respondent merely
speculated and surmised that licensed and registered
recruitment agencies would close shop and stop business
operations because of the assailed penal provisions of the
law. A writ of preliminary injunction to enjoin the
enforcement of penal laws cannot be based on such
conjectures or speculations. The Court cannot take judicial
notice that the processing of deployment papers of
overseas workers have come to a virtual standstill at the
POEA because of the assailed provisions of Rep. Act No.
8042. The respondent must adduce evidence to prove its
allegation, and the petitioners accorded a chance to adduce
controverting evidence.

enjoining the enforcement of the writ of preliminary


injunction issued by the trial court.
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED.
The assailed decision of the appellate court is REVERSED
AND SET ASIDE. The Order of the Regional Trial Court dated
August 21, 1995 in Civil Case No. Q-95-24401 and the Writ
of Preliminary Injunction issued by it in the said case on
August 24, 1995 are NULLIFIED. No costs.

The respondent even failed to adduce any evidence to


prove irreparable injury because of the enforcement of
Section 10(1)(2) of Rep. Act No. 8042. Its fear or
apprehension that, because of time constraints, its
members would have to defend foreign employees in cases
before the Labor Arbiter is based on speculations. Even if
true, such inconvenience or difficulty is hardly irreparable
injury.
The trial court even ignored the public interest involved in
suspending the enforcement of Rep. Act No. 8042 vis--vis
the eleven licensed and registered recruitment agencies
represented by the respondent. In People v. Gamboa,50 we
emphasized the primary aim of Rep. Act No. 8042:
Preliminarily, the proliferation of illegal job recruiters and
syndicates preying on innocent people anxious to obtain
employment abroad is one of the primary considerations
that led to the enactment of The Migrant Workers and
Overseas Filipinos Act of 1995. Aimed at affording greater
protection to overseas Filipino workers, it is a significant
improvement on existing laws in the recruitment and
placement of workers for overseas employment. Otherwise
known as the Magna Carta of OFWs, it broadened the
concept of illegal recruitment under the Labor Code and
provided stiffer penalties thereto, especially those that
constitute economic sabotage, i.e., Illegal Recruitment in
Large Scale and Illegal Recruitment Committed by a
Syndicate.51
By issuing the writ of preliminary injunction against the
petitioners sans any evidence, the trial court frustrated,
albeit temporarily, the prosecution of illegal recruiters and
allowed them to continue victimizing hapless and innocent
people desiring to obtain employment abroad as overseas
workers, and blocked the attainment of the salutary
policies52 embedded in Rep. Act No. 8042. It bears
stressing that overseas workers, land-based and sea-based,
had been remitting to the Philippines billions of dollars
which over the years had propped the economy.
In issuing the writ of preliminary injunction, the trial court
considered paramount the interests of the eleven licensed
and registered recruitment agencies represented by the
respondent, and capriciously overturned the presumption of
the constitutionality of the assailed provisions on the
barefaced claim of the respondent that the assailed
provisions of Rep. Act No. 8042 are unconstitutional. The
trial court committed a grave abuse of its discretion
amounting to excess or lack of jurisdiction in issuing the
assailed order and writ of preliminary injunction. It is for this
reason that the Court issued a temporary restraining order

2.

NARRA NICKEL MINING AND DEV. CORP. V.


REDMONT CONSOLIDATED MINES CORP G.R. NO.
195580 (2014)

Sometime in December 2006, respondent Redmont


Consolidated
Mines
Corp.
(Redmont),
a
domestic
corporation organized and existing under Philippine laws,
took interest in mining and exploring certain areas of the
province of Palawan. After inquiring with the Department of
Environment and Natural Resources (DENR), it learned that
the areas where it wanted to undertake exploration and
mining activities where already covered by Mineral
Production Sharing Agreement (MPSA) applications of
petitioners Narra, Tesoro and McArthur.
Petitioner McArthur, through its predecessor-in-interest Sara
Marie Mining, Inc. (SMMI), filed an application for an MPSA
and Exploration Permit (EP) with the Mines and GeoSciences Bureau (MGB), Region IV-B, Office of the
Department of Environment and Natural Resources (DENR).
Subsequently, SMMI was issued MPSA-AMA-IVB-153
covering an area of over 1,782 hectares in Barangay
Sumbiling, Municipality of Bataraza, Province of Palawan
and EPA-IVB-44 which includes an area of 3,720 hectares in
Barangay Malatagao, Bataraza, Palawan. The MPSA and EP
were then transferred to Madridejos Mining Corporation
(MMC) and, on November 6, 2006, assigned to petitioner
McArthur.2
Petitioner Narra acquired its MPSA from Alpha Resources
and Development Corporation and Patricia Louise Mining &
Development Corporation (PLMDC) which previously filed an
application for an MPSA with the MGB, Region IV-B, DENR on
January 6, 1992. Through the said application, the DENR
issued MPSA-IV-1-12 covering an area of 3.277 hectares in
barangays Calategas and San Isidro, Municipality of Narra,
Palawan. Subsequently, PLMDC conveyed, transferred
and/or assigned its rights and interests over the MPSA
application in favor of Narra.
Another MPSA application of SMMI was filed with the DENR
Region IV-B, labeled as MPSA-AMA-IVB-154 (formerly EPAIVB-47) over 3,402 hectares in Barangays Malinao and
Princesa Urduja, Municipality of Narra, Province of Palawan.
SMMI subsequently conveyed, transferred and assigned its
rights and interest over the said MPSA application to Tesoro.
On January 2, 2007, Redmont filed before the Panel of
Arbitrators (POA) of the DENR three (3) separate petitions
for the denial of petitioners applications for MPSA
designated as AMA-IVB-153, AMA-IVB-154 and MPSA IV-112.
In the petitions, Redmont alleged that at least 60% of the
capital stock of McArthur, Tesoro and Narra are owned and
controlled by MBMI Resources, Inc. (MBMI), a 100%
Canadian corporation. Redmont reasoned that since MBMI is
a considerable stockholder of petitioners, it was the driving
force behind petitioners filing of the MPSAs over the areas
covered by applications since it knows that it can only
participate in mining activities through corporations which
are deemed Filipino citizens. Redmont argued that given
that petitioners capital stocks were mostly owned by MBMI,
they were likewise disqualified from engaging in mining
activities through MPSAs, which are reserved only for
Filipino citizens.
In their Answers, petitioners averred that they were
qualified persons under Section 3(aq) of Republic Act No.
(RA) 7942 or the Philippine Mining Act of 1995 which
provided:
Sec. 3 Definition of Terms. As used in and for purposes of
this Act, the following terms, whether in singular or plural,
shall mean:
xxxx

(aq) "Qualified person" means any citizen of the Philippines


with capacity to contract, or a corporation, partnership,
association, or cooperative organized or authorized for the
purpose of engaging in mining, with technical and financial
capability to undertake mineral resources development and
duly registered in accordance with law at least sixty per
cent (60%) of the capital of which is owned by citizens of
the Philippines: Provided, That a legally organized foreignowned corporation shall be deemed a qualified person for
purposes of granting an exploration permit, financial or
technical assistance agreement or mineral processing
permit.
Additionally, they stated that their nationality as applicants
is immaterial because they also applied for Financial or
Technical Assistance Agreements (FTAA) denominated as
AFTA-IVB-09 for McArthur, AFTA-IVB-08 for Tesoro and AFTAIVB-07 for Narra, which are granted to foreign-owned
corporations. Nevertheless, they claimed that the issue on
nationality should not be raised since McArthur, Tesoro and
Narra are in fact Philippine Nationals as 60% of their capital
is owned by citizens of the Philippines. They asserted that
though MBMI owns 40% of the shares of PLMC (which owns
5,997 shares of Narra),3 40% of the shares of MMC (which
owns 5,997 shares of McArthur)4 and 40% of the shares of
SLMC (which, in turn, owns 5,997 shares of Tesoro),5 the
shares of MBMI will not make it the owner of at least 60% of
the capital stock of each of petitioners. They added that the
best tool used in determining the nationality of a
corporation is the "control test," embodied in Sec. 3 of RA
7042 or the Foreign Investments Act of 1991. They also
claimed that the POA of DENR did not have jurisdiction over
the issues in Redmonts petition since they are not
enumerated in Sec. 77 of RA 7942. Finally, they stressed
that Redmont has no personality to sue them because it has
no pending claim or application over the areas applied for
by petitioners.
On December 14, 2007, the POA issued a Resolution
disqualifying petitioners from gaining MPSAs. It held:
[I]t is clearly established that respondents are not qualified
applicants to engage in mining activities. On the other
hand, [Redmont] having filed its own applications for an EPA
over the areas earlier covered by the MPSA application of
respondents may be considered if and when they are
qualified under the law. The violation of the requirements
for the issuance and/or grant of permits over mining areas
is clearly established thus, there is reason to believe that
the cancellation and/or revocation of permits already issued
under the premises is in order and open the areas covered
to other qualified applicants.
xxxx
WHEREFORE, the Panel of Arbitrators finds the Respondents,
McArthur Mining Inc., Tesoro Mining and Development, Inc.,
and Narra Nickel Mining and Development Corp. as,
DISQUALIFIED for being considered as Foreign Corporations.
Their Mineral Production Sharing Agreement (MPSA) are
hereby x x x DECLARED NULL AND VOID.6
The POA considered petitioners as foreign corporations
being "effectively controlled" by MBMI, a 100% Canadian
company and declared their MPSAs null and void. In the
same Resolution, it gave due course to Redmonts EPAs.
Thereafter, on February 7, 2008, the POA issued an Order7
denying the Motion for Reconsideration filed by petitioners.
Aggrieved by the Resolution and Order of the POA, McArthur
and Tesoro filed a joint Notice of Appeal8 and Memorandum
of Appeal9 with the Mines Adjudication Board (MAB) while
Narra separately filed its Notice of Appeal10 and
Memorandum of Appeal.11
In their respective memorandum, petitioners emphasized
that they are qualified persons under the law. Also, through

a letter, they informed the MAB that they had their


individual MPSA applications converted to FTAAs. McArthurs
FTAA was denominated as AFTA-IVB-0912 on May 2007,
while Tesoros MPSA application was converted to AFTA-IVB0813 on May 28, 2007, and Narras FTAA was converted to
AFTA-IVB-0714 on March 30, 2006.
Pending the resolution of the appeal filed by petitioners with
the MAB, Redmont filed a Complaint15 with the Securities
and Exchange Commission (SEC), seeking the revocation of
the certificates for registration of petitioners on the ground
that they are foreign-owned or controlled corporations
engaged in mining in violation of Philippine laws. Thereafter,
Redmont filed on September 1, 2008 a Manifestation and
Motion to Suspend Proceeding before the MAB praying for
the suspension of the proceedings on the appeals filed by
McArthur, Tesoro and Narra.
Subsequently, on September 8, 2008, Redmont filed before
the Regional Trial Court of Quezon City, Branch 92 (RTC) a
Complaint16 for injunction with application for issuance of a
temporary restraining order (TRO) and/or writ of preliminary
injunction, docketed as Civil Case No. 08-63379. Redmont
prayed for the deferral of the MAB proceedings pending the
resolution of the Complaint before the SEC.
But before the RTC can resolve Redmonts Complaint and
applications for injunctive reliefs, the MAB issued an Order
on September 10, 2008, finding the appeal meritorious. It
held:
WHEREFORE, in view of the foregoing, the Mines
Adjudication Board hereby REVERSES and SETS ASIDE the
Resolution dated 14 December 2007 of the Panel of
Arbitrators of Region IV-B (MIMAROPA) in POA-DENR Case
Nos. 2001-01, 2007-02 and 2007-03, and its Order dated 07
February 2008 denying the Motions for Reconsideration of
the Appellants. The Petition filed by Redmont Consolidated
Mines Corporation on 02 January 2007 is hereby ordered
DISMISSED.17
Belatedly, on September 16, 2008, the RTC issued an
Order18 granting Redmonts application for a TRO and
setting the case for hearing the prayer for the issuance of a
writ of preliminary injunction on September 19, 2008.
Meanwhile, on September 22, 2008, Redmont filed a Motion
for Reconsideration19 of the September 10, 2008 Order of
the MAB. Subsequently, it filed a Supplemental Motion for
Reconsideration20 on September 29, 2008.
Before the MAB could resolve Redmonts Motion for
Reconsideration
and
Supplemental
Motion
for
Reconsideration, Redmont filed before the RTC a
Supplemental Complaint21 in Civil Case No. 08-63379.
On October 6, 2008, the RTC issued an Order22 granting the
issuance of a writ of preliminary injunction enjoining the
MAB from finally disposing of the appeals of petitioners and
from resolving Redmonts Motion for Reconsideration and
Supplement Motion for Reconsideration of the MABs
September 10, 2008 Resolution.
On July 1, 2009, however, the MAB issued a second Order
denying Redmonts Motion for Reconsideration and
Supplemental Motion for Reconsideration and resolving the
appeals filed by petitioners.
Hence, the petition for review filed by Redmont before the
CA, assailing the Orders issued by the MAB. On October 1,
2010, the CA rendered a Decision, the dispositive of which
reads:
WHEREFORE, the Petition is PARTIALLY GRANTED. The
assailed Orders, dated September 10, 2008 and July 1, 2009
of the Mining Adjudication Board are reversed and set aside.
The findings of the Panel of Arbitrators of the Department of
Environment and Natural Resources that respondents

McArthur, Tesoro and Narra are foreign corporations is


upheld and, therefore, the rejection of their applications for
Mineral
Product
Sharing
Agreement
should
be
recommended to the Secretary of the DENR.
With respect to the applications of respondents McArthur,
Tesoro and Narra for Financial or Technical Assistance
Agreement (FTAA) or conversion of their MPSA applications
to FTAA, the matter for its rejection or approval is left for
determination by the Secretary of the DENR and the
President of the Republic of the Philippines.
SO ORDERED.23
In a Resolution dated February 15, 2011, the CA denied the
Motion for Reconsideration filed by petitioners.
After a careful review of the records, the CA found that there
was doubt as to the nationality of petitioners when it
realized that petitioners had a common major investor,
MBMI, a corporation composed of 100% Canadians.
Pursuant to the first sentence of paragraph 7 of Department
of Justice (DOJ) Opinion No. 020, Series of 2005, adopting
the 1967 SEC Rules which implemented the requirement of
the Constitution and other laws pertaining to the
exploitation of natural resources, the CA used the
"grandfather rule" to determine the nationality of
petitioners. It provided:
Shares belonging to corporations or partnerships at least
60% of the capital of which is owned by Filipino citizens
shall be considered as of Philippine nationality, but if the
percentage of Filipino ownership in the corporation or
partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of
Philippine nationality. Thus, if 100,000 shares are registered
in the name of a corporation or partnership at least 60% of
the capital stock or capital, respectively, of which belong to
Filipino citizens, all of the shares shall be recorded as owned
by Filipinos. But if less than 60%, or say, 50% of the capital
stock or capital of the corporation or partnership,
respectively, belongs to Filipino citizens, only 50,000 shares
shall be recorded as belonging to aliens.24 (emphasis
supplied)
In determining the nationality of petitioners, the CA looked
into their corporate structures and their corresponding
common shareholders. Using the grandfather rule, the CA
discovered that MBMI in effect owned majority of the
common stocks of the petitioners as well as at least 60%
equity interest of other majority shareholders of petitioners
through joint venture agreements. The CA found that
through a "web of corporate layering, it is clear that one
common controlling investor in all mining corporations
involved x x x is MBMI."25 Thus, it concluded that
petitioners McArthur, Tesoro and Narra are also in
partnership with, or privies-in-interest of, MBMI.
Furthermore, the CA viewed the conversion of the MPSA
applications of petitioners into FTAA applications suspicious
in nature and, as a consequence, it recommended the
rejection of petitioners MPSA applications by the Secretary
of the DENR.
With regard to the settlement of disputes over rights to
mining areas, the CA pointed out that the POA has
jurisdiction over them and that it also has the power to
determine the of nationality of petitioners as a prerequisite
of the Constitution prior the conferring of rights to "coproduction, joint venture or production-sharing agreements"
of the state to mining rights. However, it also stated that
the POAs jurisdiction is limited only to the resolution of the
dispute and not on the approval or rejection of the MPSAs. It
stipulated that only the Secretary of the DENR is vested
with the power to approve or reject applications for MPSA.
Finally, the CA upheld the findings of the POA in its
December 14, 2007 Resolution which considered petitioners

McArthur, Tesoro and Narra as foreign corporations.


Nevertheless, the CA determined that the POAs declaration
that the MPSAs of McArthur, Tesoro and Narra are void is
highly improper.
While the petition was pending with the CA, Redmont filed
with the Office of the President (OP) a petition dated May 7,
2010 seeking the cancellation of petitioners FTAAs. The OP
rendered a Decision26 on April 6, 2011, wherein it canceled
and revoked petitioners FTAAs for violating and
circumventing the "Constitution x x x[,] the Small Scale
Mining Law and Environmental Compliance Certificate as
well as Sections 3 and 8 of the Foreign Investment Act and
E.O. 584."27 The OP, in affirming the cancellation of the
issued FTAAs, agreed with Redmont stating that petitioners
committed violations against the abovementioned laws and
failed to submit evidence to negate them. The Decision
further quoted the December 14, 2007 Order of the POA
focusing on the alleged misrepresentation and claims made
by petitioners of being domestic or Filipino corporations and
the admitted continued mining operation of PMDC using
their locally secured Small Scale Mining Permit inside the
area earlier applied for an MPSA application which was
eventually transferred to Narra. It also agreed with the
POAs estimation that the filing of the FTAA applications by
petitioners is a clear admission that they are "not capable of
conducting a large scale mining operation and that they
need the financial and technical assistance of a foreign
entity in their operation, that is why they sought the
participation of MBMI Resources, Inc."28 The Decision
further quoted:
The filing of the FTAA application on June 15, 2007, during
the pendency of the case only demonstrate the violations
and lack of qualification of the respondent corporations to
engage in mining. The filing of the FTAA application
conversion which is allowed foreign corporation of the
earlier MPSA is an admission that indeed the respondent is
not Filipino but rather of foreign nationality who is
disqualified under the laws. Corporate documents of MBMI
Resources, Inc. furnished its stockholders in their head
office in Canada suggest that they are conducting operation
only through their local counterparts.29
The Motion for Reconsideration of the Decision was further
denied by the OP in a Resolution30 dated July 6, 2011.
Petitioners then filed a Petition for Review on Certiorari of
the OPs Decision and Resolution with the CA, docketed as
CA-G.R. SP No. 120409. In the CA Decision dated February
29, 2012, the CA affirmed the Decision and Resolution of the
OP. Thereafter, petitioners appealed the same CA decision
to this Court which is now pending with a different division.
Thus, the instant petition for review against the October 1,
2010 Decision of the CA. Petitioners put forth the following
errors of the CA:
I.
The Court of Appeals erred when it did not dismiss the case
for mootness despite the fact that the subject matter of the
controversy, the MPSA Applications, have already been
converted into FTAA applications and that the same have
already been granted.
II.
The Court of Appeals erred when it did not dismiss the case
for lack of jurisdiction considering that the Panel of
Arbitrators has no jurisdiction to determine the nationality
of Narra, Tesoro and McArthur.
III.
The Court of Appeals erred when it did not dismiss the case
on account of Redmonts willful forum shopping.

The Court of Appeals ruling that Narra, Tesoro and McArthur


are foreign corporations based on the "Grandfather Rule" is
contrary to law, particularly the express mandate of the
Foreign Investments Act of 1991, as amended, and the FIA
Rules.
V.
The Court of Appeals erred when it applied the exceptions
to the res inter alios acta rule.
VI.
The Court of Appeals erred when it concluded that the
conversion of the MPSA Applications into FTAA Applications
were of "suspicious nature" as the same is based on mere
conjectures and surmises without any shred of evidence to
show the same.31
We find the petition to be without merit.
This case not moot and academic
The claim of petitioners that the CA erred in not rendering
the instant case as moot is without merit.
Basically, a case is said to be moot and/or academic when it
"ceases to present a justiciable controversy by virtue of
supervening events, so that a declaration thereon would be
of no practical use or value."32 Thus, the courts "generally
decline jurisdiction over the case or dismiss it on the ground
of mootness."33
The "mootness" principle, however, does accept certain
exceptions and the mere raising of an issue of "mootness"
will not deter the courts from trying a case when there is a
valid reason to do so. In David v. Macapagal-Arroyo (David),
the Court provided four instances where courts can decide
an otherwise moot case, thus:
1.) There is a grave violation of the Constitution;
2.) The exceptional character of
paramount public interest is involved;

the

situation

and

3.) When constitutional issue raised requires formulation of


controlling principles to guide the bench, the bar, and the
public; and
4.) The case is capable of repetition yet evading review.34
All of the exceptions stated above are present in the instant
case. We of this Court note that a grave violation of the
Constitution, specifically Section 2 of Article XII, is being
committed by a foreign corporation right under our
countrys nose through a myriad of corporate layering under
different, allegedly, Filipino corporations. The intricate
corporate layering utilized by the Canadian company, MBMI,
is of exceptional character and involves paramount public
interest since it undeniably affects the exploitation of our
Countrys natural resources. The corresponding actions of
petitioners during the lifetime and existence of the instant
case raise questions as what principle is to be applied to
cases with similar issues. No definite ruling on such
principle has been pronounced by the Court; hence, the
disposition of the issues or errors in the instant case will
serve as a guide "to the bench, the bar and the public."35
Finally, the instant case is capable of repetition yet evading
review, since the Canadian company, MBMI, can keep on
utilizing dummy Filipino corporations through various
schemes of corporate layering and conversion of
applications to skirt the constitutional prohibition against
foreign mining in Philippine soil.
Conversion of MPSA applications to FTAA applications

IV.

10

We shall discuss the first error in conjunction with the sixth


error presented by petitioners since both involve the
conversion of MPSA applications to FTAA applications.
Petitioners propound that the CA erred in ruling against
them since the questioned MPSA applications were already
converted into FTAA applications; thus, the issue on the
prohibition relating to MPSA applications of foreign mining
corporations is academic. Also, petitioners would want us to
correct the CAs finding which deemed the aforementioned
conversions of applications as suspicious in nature, since it
is based on mere conjectures and surmises and not
supported with evidence.
We disagree.
The CAs analysis of the actions of petitioners after the case
was filed against them by respondent is on point. The
changing of applications by petitioners from one type to
another just because a case was filed against them, in truth,
would raise not a few sceptics eyebrows. What is the
reason for such conversion? Did the said conversion not
stem from the case challenging their citizenship and to have
the case dismissed against them for being "moot"? It is
quite obvious that it is petitioners strategy to have the case
dismissed against them for being "moot."
Consider the history of this case and how petitioners
responded to every action done by the court or appropriate
government agency: on January 2, 2007, Redmont filed
three separate petitions for denial of the MPSA applications
of petitioners before the POA. On June 15, 2007, petitioners
filed a conversion of their MPSA applications to FTAAs. The
POA, in its December 14, 2007 Resolution, observed this
suspect change of applications while the case was pending
before it and held:
The filing of the Financial or Technical Assistance Agreement
application is a clear admission that the respondents are not
capable of conducting a large scale mining operation and
that they need the financial and technical assistance of a
foreign entity in their operation that is why they sought the
participation of MBMI Resources, Inc. The participation of
MBMI in the corporation only proves the fact that it is the
Canadian company that will provide the finances and the
resources to operate the mining areas for the greater
benefit and interest of the same and not the Filipino
stockholders who only have a less substantial financial
stake in the corporation.
xxxx
x x x The filing of the FTAA application on June 15, 2007,
during the pendency of the case only demonstrate the
violations and lack of qualification of the respondent
corporations to engage in mining. The filing of the FTAA
application conversion which is allowed foreign corporation
of the earlier MPSA is an admission that indeed the
respondent is not Filipino but rather of foreign nationality
who is disqualified under the laws. Corporate documents of
MBMI Resources, Inc. furnished its stockholders in their head
office in Canada suggest that they are conducting operation
only through their local counterparts.36
On October 1, 2010, the CA rendered a Decision which
partially granted the petition, reversing and setting aside
the September 10, 2008 and July 1, 2009 Orders of the
MAB. In the said Decision, the CA upheld the findings of the
POA of the DENR that the herein petitioners are in fact
foreign corporations thus a recommendation of the rejection
of their MPSA applications were recommended to the
Secretary of the DENR. With respect to the FTAA
applications or conversion of the MPSA applications to
FTAAs, the CA deferred the matter for the determination of
the Secretary of the DENR and the President of the Republic
of the Philippines.37
In their Motion for Reconsideration dated October 26, 2010,
petitioners prayed for the dismissal of the petition asserting

that on April 5, 2010, then President Gloria MacapagalArroyo signed and issued in their favor FTAA No. 05-2010IVB, which rendered the petition moot and academic.
However, the CA, in a Resolution dated February 15, 2011
denied their motion for being a mere "rehash of their claims
and defenses."38 Standing firm on its Decision, the CA
affirmed the ruling that petitioners are, in fact, foreign
corporations. On April 5, 2011, petitioners elevated the case
to us via a Petition for Review on Certiorari under Rule 45,
questioning the Decision of the CA. Interestingly, the OP
rendered a Decision dated April 6, 2011, a day after this
petition for review was filed, cancelling and revoking the
FTAAs, quoting the Order of the POA and stating that
petitioners are foreign corporations since they needed the
financial strength of MBMI, Inc. in order to conduct large
scale mining operations. The OP Decision also based the
cancellation on the misrepresentation of facts and the
violation of the "Small Scale Mining Law and Environmental
Compliance Certificate as well as Sections 3 and 8 of the
Foreign Investment Act and E.O. 584."39 On July 6, 2011,
the OP issued a Resolution, denying the Motion for
Reconsideration filed by the petitioners.
Respondent Redmont, in its Comment dated October 10,
2011, made known to the Court the fact of the OPs
Decision and Resolution. In their Reply, petitioners chose to
ignore the OP Decision and continued to reuse their old
arguments claiming that they were granted FTAAs and,
thus, the case was moot. Petitioners filed a Manifestation
and Submission dated October 19, 2012,40 wherein they
asserted that the present petition is moot since, in a
remarkable turn of events, MBMI was able to sell/assign all
its shares/interest in the "holding companies" to DMCI
Mining Corporation (DMCI), a Filipino corporation and, in
effect, making their respective corporations fully-Filipino
owned.
Again, it is quite evident that petitioners have been trying to
have this case dismissed for being "moot." Their final act,
wherein MBMI was able to allegedly sell/assign all its shares
and interest in the petitioner "holding companies" to DMCI,
only proves that they were in fact not Filipino corporations
from the start. The recent divesting of interest by MBMI will
not change the stand of this Court with respect to the
nationality of petitioners prior the suspicious change in their
corporate structures. The new documents filed by
petitioners are factual evidence that this Court has no
power to verify.
The only thing clear and proved in this Court is the fact that
the OP declared that petitioner corporations have violated
several mining laws and made misrepresentations and
falsehood in their applications for FTAA which lead to the
revocation of the said FTAAs, demonstrating that petitioners
are not beyond going against or around the law using shifty
actions and strategies. Thus, in this instance, we can say
that their claim of mootness is moot in itself because their
defense of conversion of MPSAs to FTAAs has been
discredited by the OP Decision.
Grandfather test
The main issue in this case is centered on the issue of
petitioners nationality, whether Filipino or foreign. In their
previous petitions, they had been adamant in insisting that
they were Filipino corporations, until they submitted their
Manifestation and Submission dated October 19, 2012
where they stated the alleged change of corporate
ownership to reflect their Filipino ownership. Thus, there is a
need to determine the nationality of petitioner corporations.
Basically, there are two acknowledged tests in determining
the nationality of a corporation: the control test and the
grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series
of 2005, adopting the 1967 SEC Rules which implemented
the requirement of the Constitution and other laws
pertaining to the controlling interests in enterprises

11

engaged in the exploitation of natural resources owned by


Filipino citizens, provides:

already been abandoned must be discredited for lack of


basis.

Shares belonging to corporations or partnerships at least


60% of the capital of which is owned by Filipino citizens
shall be considered as of Philippine nationality, but if the
percentage of Filipino ownership in the corporation or
partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of
Philippine nationality. Thus, if 100,000 shares are registered
in the name of a corporation or partnership at least 60% of
the capital stock or capital, respectively, of which belong to
Filipino citizens, all of the shares shall be recorded as owned
by Filipinos. But if less than 60%, or say, 50% of the capital
stock or capital of the corporation or partnership,
respectively, belongs to Filipino citizens, only 50,000 shares
shall be counted as owned by Filipinos and the other 50,000
shall be recorded as belonging to aliens.

Art. XII, Sec. 2 of the Constitution provides:

The first part of paragraph 7, DOJ Opinion No. 020, stating


"shares belonging to corporations or partnerships at least
60% of the capital of which is owned by Filipino citizens
shall be considered as of Philippine nationality," pertains to
the control test or the liberal rule. On the other hand, the
second part of the DOJ Opinion which provides, "if the
percentage of the Filipino ownership in the corporation or
partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as
Philippine nationality," pertains to the stricter, more
stringent grandfather rule.
Prior to this recent change of events, petitioners were
constant in advocating the application of the "control test"
under RA 7042, as amended by RA 8179, otherwise known
as the Foreign Investments Act (FIA), rather than using the
stricter grandfather rule. The pertinent provision under Sec.
3 of the FIA provides:
SECTION 3. Definitions. - As used in this Act:
a.) The term Philippine national shall mean a citizen of the
Philippines; or a domestic partnership or association wholly
owned by the citizens of the Philippines; a corporation
organized under the laws of the Philippines of which at least
sixty percent (60%) of the capital stock outstanding and
entitled to vote is wholly owned by Filipinos or a trustee of
funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine
national and at least sixty percent (60%) of the fund will
accrue to the benefit of Philippine nationals: Provided, That
were a corporation and its non-Filipino stockholders own
stocks in a Securities and Exchange Commission (SEC)
registered enterprise, at least sixty percent (60%) of the
capital stock outstanding and entitled to vote of each of
both corporations must be owned and held by citizens of
the Philippines and at least sixty percent (60%) of the
members of the Board of Directors, in order that the
corporation shall be considered a Philippine national.
(emphasis supplied)
The grandfather rule, petitioners reasoned, has no leg to
stand on in the instant case since the definition of a
"Philippine National" under Sec. 3 of the FIA does not
provide for it. They further claim that the grandfather rule
"has been abandoned and is no longer the applicable
rule."41 They also opined that the last portion of Sec. 3 of
the FIA admits the application of a "corporate layering"
scheme of corporations. Petitioners claim that the clear and
unambiguous wordings of the statute preclude the court
from construing it and prevent the courts use of discretion
in applying the law. They said that the plain, literal meaning
of the statute meant the application of the control test is
obligatory.
We disagree. "Corporate layering" is admittedly allowed by
the FIA; but if it is used to circumvent the Constitution and
pertinent laws, then it becomes illegal. Further, the
pronouncement of petitioners that the grandfather rule has

Sec. 2. All lands of the public domain, waters, minerals,


coal, petroleum and other mineral oils, all forces of potential
energy, fisheries, forests or timber, wildlife, flora and fauna,
and other natural resources are owned by the State. With
the exception of agricultural lands, all other natural
resources shall not be alienated. The exploration,
development, and utilization of natural resources shall be
under the full control and supervision of the State. The State
may directly undertake such activities, or it may enter into
co-production,
joint
venture
or
production-sharing
agreements with Filipino citizens, or corporations or
associations at least sixty per centum of whose capital is
owned by such citizens. Such agreements may be for a
period not exceeding twenty-five years, renewable for not
more than twenty-five years, and under such terms and
conditions as may be provided by law.
xxxx
The President may enter into agreements with Foreignowned corporations involving either technical or financial
assistance for large-scale exploration, development, and
utilization of minerals, petroleum, and other mineral oils
according to the general terms and conditions provided by
law, based on real contributions to the economic growth and
general welfare of the country. In such agreements, the
State shall promote the development and use of local
scientific and technical resources. (emphasis supplied)
The emphasized portion of Sec. 2 which focuses on the
State entering into different types of agreements for the
exploration, development, and utilization of natural
resources with entities who are deemed Filipino due to 60
percent ownership of capital is pertinent to this case, since
the issues are centered on the utilization of our countrys
natural resources or specifically, mining. Thus, there is a
need to ascertain the nationality of petitioners since, as the
Constitution so provides, such agreements are only allowed
corporations or associations "at least 60 percent of such
capital is owned by such citizens." The deliberations in the
Records of the 1986 Constitutional Commission shed light
on how a citizenship of a corporation will be determined:
Mr. BENNAGEN: Did I hear right that the Chairmans
interpretation of an independent national economy is
freedom from undue foreign control? What is the meaning of
undue foreign control?
MR. VILLEGAS: Undue foreign control is foreign control which
sacrifices national sovereignty and the welfare of the Filipino
in the economic sphere.
MR. BENNAGEN: Why does it have to be qualified still with
the word "undue"? Why not simply freedom from foreign
control? I think that is the meaning of independence,
because as phrased, it still allows for foreign control.
MR. VILLEGAS: It will now depend on the interpretation
because if, for example, we retain the 60/40 possibility in
the cultivation of natural resources, 40 percent involves
some control; not total control, but some control.
MR. BENNAGEN: In any case, I think in due time we will
propose some amendments.
MR. VILLEGAS: Yes. But we will be open to improvement of
the phraseology.
Mr. BENNAGEN: Yes.
Thank you, Mr. Vice-President.
xxxx

12

MR. NOLLEDO: In Sections 3, 9 and 15, the Committee


stated local or Filipino equity and foreign equity; namely,
60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in
Section 15.
MR. VILLEGAS: That is right.
MR. NOLLEDO: In teaching law, we are always faced with
the question: Where do we base the equity requirement, is
it on the authorized capital stock, on the subscribed capital
stock, or on the paid-up capital stock of a corporation? Will
the Committee please enlighten me on this?
MR. VILLEGAS: We have just had a long discussion with the
members of the team from the UP Law Center who provided
us with a draft. The phrase that is contained here which we
adopted from the UP draft is 60 percent of the voting
stock.
MR. NOLLEDO: That must be based on the subscribed
capital stock, because unless declared delinquent, unpaid
capital stock shall be entitled to vote.
MR. VILLEGAS: That is right.
MR. NOLLEDO: Thank you.
With respect to an investment by one corporation in another
corporation, say, a corporation with 60-40 percent equity
invests in another corporation which is permitted by the
Corporation Code, does the Committee adopt the
grandfather rule?
MR. VILLEGAS: Yes, that is the understanding of the
Committee.
MR. NOLLEDO: Therefore, we need additional Filipino
capital?
MR. VILLEGAS: Yes.42 (emphasis supplied)
It is apparent that it is the intention of the framers of the
Constitution to apply the grandfather rule in cases where
corporate layering is present.
Elementary in statutory construction is when there is
conflict between the Constitution and a statute, the
Constitution will prevail. In this instance, specifically
pertaining to the provisions under Art. XII of the Constitution
on National Economy and Patrimony, Sec. 3 of the FIA will
have no place of application. As decreed by the honorable
framers of our Constitution, the grandfather rule prevails
and must be applied.
Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005
provides:
The above-quoted SEC Rules provide for the manner of
calculating the Filipino interest in a corporation for
purposes, among others, of determining compliance with
nationality requirements (the Investee Corporation). Such
manner of computation is necessary since the shares in the
Investee Corporation may be owned both by individual
stockholders (Investing Individuals) and by corporations
and partnerships (Investing Corporation). The said rules
thus provide for the determination of nationality depending
on the ownership of the Investee Corporation and, in certain
instances, the Investing Corporation.
Under the above-quoted SEC Rules, there are two cases in
determining the nationality of the Investee Corporation. The
first case is the liberal rule, later coined by the SEC as the
Control Test in its 30 May 1990 Opinion, and pertains to the
portion in said Paragraph 7 of the 1967 SEC Rules which
states, (s)hares belonging to corporations or partnerships
at least 60% of the capital of which is owned by Filipino
citizens shall be considered as of Philippine nationality.

Under the liberal Control Test, there is no need to further


trace the ownership of the 60% (or more) Filipino
stockholdings of the Investing Corporation since a
corporation which is at least 60% Filipino-owned is
considered as Filipino.
The second case is the Strict Rule or the Grandfather Rule
Proper and pertains to the portion in said Paragraph 7 of the
1967 SEC Rules which states, "but if the percentage of
Filipino ownership in the corporation or partnership is less
than 60%, only the number of shares corresponding to such
percentage shall be counted as of Philippine nationality."
Under the Strict Rule or Grandfather Rule Proper, the
combined totals in the Investing Corporation and the
Investee Corporation must be traced (i.e., "grandfathered")
to determine the total percentage of Filipino ownership.
Moreover, the ultimate Filipino ownership of the shares must
first be traced to the level of the Investing Corporation and
added to the shares directly owned in the Investee
Corporation x x x.
xxxx
In other words, based on the said SEC Rule and DOJ Opinion,
the Grandfather Rule or the second part of the SEC Rule
applies only when the 60-40 Filipino-foreign equity
ownership is in doubt (i.e., in cases where the joint venture
corporation with Filipino and foreign stockholders with less
than 60% Filipino stockholdings [or 59%] invests in other
joint venture corporation which is either 60-40% Filipinoalien or the 59% less Filipino). Stated differently, where the
60-40 Filipino- foreign equity ownership is not in doubt, the
Grandfather Rule will not apply. (emphasis supplied)
After a scrutiny of the evidence extant on record, the Court
finds that this case calls for the application of the
grandfather rule since, as ruled by the POA and affirmed by
the OP, doubt prevails and persists in the corporate
ownership of petitioners. Also, as found by the CA, doubt is
present in the 60-40 Filipino equity ownership of petitioners
Narra, McArthur and Tesoro, since their common investor,
the 100% Canadian corporationMBMI, funded them.
However, petitioners also claim that there is "doubt" only
when the stockholdings of Filipinos are less than 60%.43
The assertion of petitioners that "doubt" only exists when
the stockholdings are less than 60% fails to convince this
Court. DOJ Opinion No. 20, which petitioners quoted in their
petition, only made an example of an instance where
"doubt" as to the ownership of the corporation exists. It
would be ludicrous to limit the application of the said word
only to the instances where the stockholdings of non-Filipino
stockholders are more than 40% of the total stockholdings
in a corporation. The corporations interested in
circumventing our laws would clearly strive to have "60%
Filipino Ownership" at face value. It would be senseless for
these applying corporations to state in their respective
articles of incorporation that they have less than 60%
Filipino stockholders since the applications will be denied
instantly. Thus, various corporate schemes and layerings
are utilized to circumvent the application of the
Constitution.
Obviously, the instant case presents a situation which
exhibits a scheme employed by stockholders to circumvent
the law, creating a cloud of doubt in the Courts mind. To
determine, therefore, the actual participation, direct or
indirect, of MBMI, the grandfather rule must be used.
McArthur Mining, Inc.
To establish the actual ownership, interest or participation of
MBMI in each of petitioners corporate structure, they have
to be "grandfathered."
As previously discussed, McArthur acquired its MPSA
application from MMC, which acquired its application from

13

SMMI. McArthur has a capital stock of ten million pesos (PhP


10,000,000) divided into 10,000 common shares at one
thousand pesos (PhP 1,000) per share, subscribed to by the
following:44
Interestingly, looking at the corporate structure of MMC, we
take note that it has a similar structure and composition as
McArthur. In fact, it would seem that MBMI is also a major
investor and "controls"45 MBMI and also, similar nominal
shareholders were present, i.e. Fernando B. Esguerra
(Esguerra), Lauro L. Salazar (Salazar), Michael T. Mason
(Mason) and Kenneth Cawkell (Cawkell):
Noticeably, Olympic Mines & Development Corporation
(Olympic) did not pay any amount with respect to the
number of shares they subscribed to in the corporation,
which is quite absurd since Olympic is the major stockholder
in MMC. MBMIs 2006 Annual Report sheds light on why
Olympic failed to pay any amount with respect to the
number of shares it subscribed to. It states that Olympic
entered into joint venture agreements with several
Philippine companies, wherein it holds directly and indirectly
a 60% effective equity interest in the Olympic Properties.46
Quoting the said Annual report:
On September 9, 2004, the Company and Olympic Mines &
Development Corporation ("Olympic") entered into a series
of agreements including a Property Purchase and
Development Agreement (the Transaction Documents) with
respect to three nickel laterite properties in Palawan,
Philippines (the "Olympic Properties"). The Transaction
Documents effectively establish a joint venture between the
Company and Olympic for purposes of developing the
Olympic Properties. The Company holds directly and
indirectly an initial 60% interest in the joint venture. Under
certain circumstances and upon achieving certain
milestones, the Company may earn up to a 100% interest,
subject to a 2.5% net revenue royalty.47 (emphasis
supplied)
Thus, as demonstrated in this first corporation, McArthur,
when it is "grandfathered," company layering was utilized
by MBMI to gain control over McArthur. It is apparent that
MBMI has more than 60% or more equity interest in
McArthur, making the latter a foreign corporation.
Tesoro Mining and Development, Inc.

structure, it is clear that MBMI is in control of Tesoro and


owns 60% or more equity interest in Tesoro. This makes
petitioner Tesoro a non-Filipino corporation and, thus,
disqualifies it to participate in the exploitation, utilization
and development of our natural resources.
Narra Nickel Mining and Development Corporation
Moving on to the last petitioner, Narra, which is the
transferee and assignee of PLMDCs MPSA application,
whose corporate structures arrangement is similar to that
of the first two petitioners discussed. The capital stock of
Narra is ten million pesos (PhP 10,000,000), which is divided
into ten thousand common shares (10,000) at one thousand
pesos (PhP 1,000) per share
Yet again, the usual players in petitioners corporate
structures are present. Similarly, the amount of money paid
by the 2nd tier majority stock holder, in this case, Palawan
Alpha South Resources and Development Corp. (PASRDC), is
zero.
Studying MBMIs Summary of Significant Accounting Policies
dated October 31, 2005 explains the reason behind the
intricate corporate layering that MBMI immersed itself in:
JOINT VENTURES The Companys ownership interests in
various mining ventures engaged in the acquisition,
exploration and development of mineral properties in the
Philippines is described as follows:
(a) Olympic Group
The Philippine companies holding the Olympic Property, and
the ownership and interests therein, are as follows:
Olympic- Philippines (the "Olympic Group")
Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%
Tesoro Mining & Development, Inc. (Tesoro) 60.0%
Pursuant to the Olympic joint venture agreement the
Company holds directly and indirectly an effective equity
interest in the Olympic Property of 60.0%. Pursuant to a
shareholders agreement, the Company exercises joint
control over the companies in the Olympic Group.

Tesoro, which acquired its MPSA application from SMMI, has


a capital stock of ten million pesos (PhP 10,000,000) divided
into ten thousand (10,000) common shares at PhP 1,000 per
share, as demonstrated below:

(b) Alpha Group

Except for the name "Sara Marie Mining, Inc.," the table
above shows exactly the same figures as the corporate
structure of petitioner McArthur, down to the last centavo.
All the other shareholders are the same: MBMI, Salazar,
Esguerra, Agcaoili, Mason and Cawkell. The figures under
"Nationality," "Number of Shares," "Amount Subscribed,"
and "Amount Paid" are exactly the same. Delving deeper,
we scrutinize SMMIs corporate structure:

Alpha- Philippines (the "Alpha Group")

After subsequently studying SMMIs corporate structure, it is


not farfetched for us to spot the glaring similarity between
SMMI and MMCs corporate structure. Again, the presence of
identical stockholders, namely: Olympic, MBMI, Amanti
Limson (Limson), Esguerra, Salazar, Hernando, Mason and
Cawkell. The figures under the headings "Nationality,"
"Number of Shares," "Amount Subscribed," and "Amount
Paid" are exactly the same except for the amount paid by
MBMI which now reflects the amount of two million seven
hundred ninety four thousand pesos (PhP 2,794,000). Oddly,
the total value of the amount paid is two million eight
hundred nine thousand nine hundred pesos (PhP
2,809,900).
Accordingly, after "grandfathering" petitioner Tesoro and
factoring in Olympics participation in SMMIs corporate

The Philippine companies holding the Alpha Property, and


the ownership interests therein, are as follows:

Patricia Louise Mining Development Inc. ("Patricia") 34.0%


Narra Nickel Mining & Development Corporation (Narra)
60.4%
Under a joint venture agreement the Company holds
directly and indirectly an effective equity interest in the
Alpha Property of 60.4%. Pursuant to a shareholders
agreement, the Company exercises joint control over the
companies in the Alpha Group.48 (emphasis supplied)
Concluding from the above-stated facts, it is quite safe to
say that petitioners McArthur, Tesoro and Narra are not
Filipino since MBMI, a 100% Canadian corporation, owns
60% or more of their equity interests. Such conclusion is
derived from grandfathering petitioners corporate owners,
namely: MMI, SMMI and PLMDC. Going further and adding to
the picture, MBMIs Summary of Significant Accounting
Policies statement regarding the "joint venture"
agreements that it entered into with the "Olympic" and
"Alpha" groupsinvolves SMMI, Tesoro, PLMDC and Narra.
Noticeably, the ownership of the "layered" corporations
boils down to MBMI, Olympic or corporations under the

14

"Alpha" group wherein MBMI has joint venture agreements


with, practically exercising majority control over the
corporations mentioned. In effect, whether looking at the
capital structure or the underlying relationships between
and among the corporations, petitioners are NOT Filipino
nationals and must be considered foreign since 60% or
more of their capital stocks or equity interests are owned by
MBMI.
Application of the res inter alios acta rule
Petitioners question the CAs use of the exception of the res
inter alios acta or the "admission by co-partner or agent"
rule and "admission by privies" under the Rules of Court in
the instant case, by pointing out that statements made by
MBMI should not be admitted in this case since it is not a
party to the case and that it is not a "partner" of petitioners.
Secs. 29 and 31, Rule 130 of the Revised Rules of Court
provide:
Sec. 29. Admission by co-partner or agent.- The act or
declaration of a partner or agent of the party within the
scope of his authority and during the existence of the
partnership or agency, may be given in evidence against
such party after the partnership or agency is shown by
evidence other than such act or declaration itself. The same
rule applies to the act or declaration of a joint owner, joint
debtor, or other person jointly interested with the party.
Sec. 31. Admission by privies.- Where one derives title to
property from another, the act, declaration, or omission of
the latter, while holding the title, in relation to the property,
is evidence against the former.
Petitioners claim that before the above-mentioned Rule can
be applied to a case, "the partnership relation must be
shown, and that proof of the fact must be made by evidence
other than the admission itself."49 Thus, petitioners assert
that the CA erred in finding that a partnership relationship
exists between them and MBMI because, in fact, no such
partnership exists.
Partnerships vs. joint venture agreements
Petitioners claim that the CA erred in applying Sec. 29, Rule
130 of the Rules by stating that "by entering into a joint
venture, MBMI have a joint interest" with Narra, Tesoro and
McArthur. They challenged the conclusion of the CA which
pertains to the close characteristics of
"partnerships" and "joint venture agreements." Further,
they asserted that before this particular partnership can be
formed, it should have been formally reduced into writing
since the capital involved is more than three thousand
pesos (PhP 3,000). Being that there is no evidence of
written agreement to form a partnership between
petitioners and MBMI, no partnership was created.
We disagree.
A partnership is defined as two or more persons who bind
themselves to contribute money, property, or industry to a
common fund with the intention of dividing the profits
among themselves.50 On the other hand, joint ventures
have been deemed to be "akin" to partnerships since it is
difficult to distinguish between joint ventures and
partnerships. Thus:
[T]he relations of the parties to a joint venture and the
nature of their association are so similar and closely akin to
a partnership that it is ordinarily held that their rights,
duties, and liabilities are to be tested by rules which are
closely analogous to and substantially the same, if not
exactly the same, as those which govern partnership. In
fact, it has been said that the trend in the law has been to
blur the distinctions between a partnership and a joint

venture, very little law being found applicable to one that


does not apply to the other.51
Though some claim that partnerships and joint ventures are
totally different animals, there are very few rules that
differentiate one from the other; thus, joint ventures are
deemed "akin" or similar to a partnership. In fact, in joint
venture agreements, rules and legal incidents governing
partnerships are applied.52
Accordingly, culled from the incidents and records of this
case, it can be assumed that the relationships entered
between and among petitioners and MBMI are no simple
"joint venture agreements." As a rule, corporations are
prohibited from entering into partnership agreements;
consequently, corporations enter into joint venture
agreements with other corporations or partnerships for
certain transactions in order to form "pseudo partnerships."
Obviously, as the intricate web of "ventures" entered into by
and among petitioners and MBMI was executed to
circumvent the legal prohibition against corporations
entering into partnerships, then the relationship created
should be deemed as "partnerships," and the laws on
partnership should be applied. Thus, a joint venture
agreement between and among corporations may be seen
as similar to partnerships since the elements of partnership
are present.
Considering that the relationships found between
petitioners and MBMI are considered to be partnerships,
then the CA is justified in applying Sec. 29, Rule 130 of the
Rules by stating that "by entering into a joint venture, MBMI
have a joint interest" with Narra, Tesoro and McArthur.
Panel of Arbitrators jurisdiction
We affirm the ruling of the CA in declaring that the POA has
jurisdiction over the instant case. The POA has jurisdiction
to settle disputes over rights to mining areas which
definitely involve the petitions filed by Redmont against
petitioners Narra, McArthur and Tesoro. Redmont, by filing
its petition against petitioners, is asserting the right of
Filipinos over mining areas in the Philippines against alleged
foreign-owned mining corporations. Such claim constitutes a
"dispute" found in Sec. 77 of RA 7942:
Within thirty (30) days, after the submission of the case by
the parties for the decision, the panel shall have exclusive
and original jurisdiction to hear and decide the following:
(a) Disputes involving rights to mining areas
(b) Disputes involving mineral agreements or permits
We held in Celestial Nickel Mining Exploration Corporation v.
Macroasia Corp.:53
The phrase "disputes involving rights to mining areas"
refers to any adverse claim, protest, or opposition to an
application for mineral agreement. The POA therefore has
the jurisdiction to resolve any adverse claim, protest, or
opposition to a pending application for a mineral agreement
filed with the concerned Regional Office of the MGB. This is
clear from Secs. 38 and 41 of the DENR AO 96-40, which
provide:
Sec. 38.
xxxx
Within thirty (30) calendar days from the last date of
publication/posting/radio announcements, the authorized
officer(s) of the concerned office(s) shall issue a
certification(s)
that
the
publication/posting/radio
announcement have been complied with. Any adverse
claim, protest, opposition shall be filed directly, within thirty
(30)
calendar
days
from
the
last
date
of

15

publication/posting/radio
announcement,
with
the
concerned Regional Office or through any concerned PENRO
or CENRO for filing in the concerned Regional Office for
purposes of its resolution by the Panel of Arbitrators
pursuant to the provisions of this Act and these
implementing rules and regulations. Upon final resolution of
any adverse claim, protest or opposition, the Panel of
Arbitrators shall likewise issue a certification to that effect
within five (5) working days from the date of finality of
resolution thereof. Where there is no adverse claim, protest
or opposition, the Panel of Arbitrators shall likewise issue a
Certification to that effect within five working days
therefrom.
xxxx
No Mineral Agreement shall be approved unless the
requirements under this Section are fully complied with and
any adverse claim/protest/opposition is finally resolved by
the Panel of Arbitrators.
Sec. 41.
xxxx

been made and that no adverse claim, protest or opposition


of whatever nature has been filed. On the other hand, if
there be any adverse claim, protest or opposition, the same
shall be filed within forty-five (45) days from the last date of
publication/posting, with the Regional Offices concerned, or
through the Departments Community Environment and
Natural
Resources
Officers
(CENRO)
or
Provincial
Environment and Natural Resources Officers (PENRO), to be
filed at the Regional Office for resolution of the Panel of
Arbitrators. However previously published valid and
subsisting mining claims are exempted from posted/posting
required under this Section.
No mineral agreement shall be approved unless the
requirements under this section are fully complied with and
any opposition/adverse claim is dealt with in writing by the
Director and resolved by the Panel of Arbitrators. (Emphasis
supplied.)
It has been made clear from the aforecited provisions that
the "disputes involving rights to mining areas" under Sec.
77(a) specifically refer only to those disputes relative to the
applications for a mineral agreement or conferment of
mining rights.

Within fifteen (15) working days form the receipt of the


Certification issued by the Panel of Arbitrators as provided
in Section 38 hereof, the concerned Regional Director shall
initially evaluate the Mineral Agreement applications in
areas outside Mineral reservations. He/She shall thereafter
endorse his/her findings to the Bureau for further evaluation
by the Director within fifteen (15) working days from receipt
of forwarded documents. Thereafter, the Director shall
endorse
the
same
to
the
secretary
for
consideration/approval within fifteen working days from
receipt of such endorsement.

The jurisdiction of the POA over adverse claims, protest, or


oppositions to a mining right application is further
elucidated by Secs. 219 and 43 of DENRO AO 95-936, which
reads:

In case of Mineral Agreement applications in areas with


Mineral Reservations, within fifteen (15) working days from
receipt of the Certification issued by the Panel of Arbitrators
as provided for in Section 38 hereof, the same shall be
evaluated and endorsed by the Director to the Secretary for
consideration/approval within fifteen days from receipt of
such endorsement. (emphasis supplied)

Sec. 43. Publication/Posting


Application.-

It has been made clear from the aforecited provisions that


the "disputes involving rights to mining areas" under Sec.
77(a) specifically refer only to those disputes relative to the
applications for a mineral agreement or conferment of
mining rights.
The jurisdiction of the POA over adverse claims, protest, or
oppositions to a mining right application is further
elucidated by Secs. 219 and 43 of DENR AO 95-936, which
read:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.Notwithstanding the provisions of Sections 28, 43 and 57
above, any adverse claim, protest or opposition specified in
said sections may also be filed directly with the Panel of
Arbitrators within the concerned periods for filing such
claim, protest or opposition as specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement.xxxx
The Regional Director or concerned Regional Director shall
also cause the posting of the application on the bulletin
boards of the Bureau, concerned Regional office(s) and in
the concerned province(s) and municipality(ies), copy
furnished the barangays where the proposed contract area
is located once a week for two (2) consecutive weeks in a
language generally understood in the locality. After fortyfive (45) days from the last date of publication/posting has
been made and no adverse claim, protest or opposition was
filed within the said forty-five (45) days, the concerned
offices shall issue a certification that publication/posting has

Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.Notwithstanding the provisions of Sections 28, 43 and 57
above, any adverse claim, protest or opposition specified in
said sections may also be filed directly with the Panel of
Arbitrators within the concerned periods for filing such
claim, protest or opposition as specified in said Sections.
of

Mineral

Agreement

xxxx
The Regional Director or concerned Regional Director shall
also cause the posting of the application on the bulletin
boards of the Bureau, concerned Regional office(s) and in
the concerned province(s) and municipality(ies), copy
furnished the barangays where the proposed contract area
is located once a week for two (2) consecutive weeks in a
language generally understood in the locality. After fortyfive (45) days from the last date of publication/posting has
been made and no adverse claim, protest or opposition was
filed within the said forty-five (45) days, the concerned
offices shall issue a certification that publication/posting has
been made and that no adverse claim, protest or opposition
of whatever nature has been filed. On the other hand, if
there be any adverse claim, protest or opposition, the same
shall be filed within forty-five (45) days from the last date of
publication/posting, with the Regional offices concerned, or
through the Departments Community Environment and
Natural
Resources
Officers
(CENRO)
or
Provincial
Environment and Natural Resources Officers (PENRO), to be
filed at the Regional Office for resolution of the Panel of
Arbitrators. However, previously published valid and
subsisting mining claims are exempted from posted/posting
required under this Section.
No mineral agreement shall be approved unless the
requirements under this section are fully complied with and
any opposition/adverse claim is dealt with in writing by the
Director and resolved by the Panel of Arbitrators. (Emphasis
supplied.)
These provisions lead us to conclude that the power of the
POA to resolve any adverse claim, opposition, or protest
relative to mining rights under Sec. 77(a) of RA 7942 is
confined only to adverse claims, conflicts and oppositions
relating to applications for the grant of mineral rights.

16

POAs jurisdiction is confined only to resolutions of such


adverse claims, conflicts and oppositions and it has no
authority to approve or reject said applications. Such power
is vested in the DENR Secretary upon recommendation of
the MGB Director. Clearly, POAs jurisdiction over "disputes
involving rights to mining areas" has nothing to do with the
cancellation of existing mineral agreements. (emphasis
ours)

proceeding before resort to the courts is had even if the


matter may well be within their proper jurisdiction.

Accordingly, as we enunciated in Celestial, the POA


unquestionably has jurisdiction to resolve disputes over
MPSA applications subject of Redmonts petitions. However,
said jurisdiction does not include either the approval or
rejection of the MPSA applications, which is vested only
upon the Secretary of the DENR. Thus, the finding of the
POA, with respect to the rejection of petitioners MPSA
applications being that they are foreign corporation, is valid.

As stated before, petitioners Manifestation and Submission


dated October 19, 2012 would want us to declare the
instant petition moot and academic due to the transfer and
conveyance of all the shareholdings and interests of MBMI
to DMCI, a corporation duly organized and existing under
Philippine laws and is at least 60% Philippine-owned.56
Petitioners reasoned that they now cannot be considered as
foreign-owned; the transfer of their shares supposedly cured
the "defect" of their previous nationality. They claimed that
their current FTAA contract with the State should stand
since "even wholly-owned foreign corporations can enter
into an FTAA with the State."57 Petitioners stress that there
should no longer be any issue left as regards their
qualification to enter into FTAA contracts since they are
qualified to engage in mining activities in the Philippines.
Thus, whether the "grandfather rule" or the "control test" is
used, the nationalities of petitioners cannot be doubted
since it would pass both tests.

Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts


that it is the regular courts, not the POA, that has
jurisdiction over the MPSA applications of petitioners.
This postulation is incorrect.
It is basic that the jurisdiction of the court is determined by
the statute in force at the time of the commencement of the
action.54
Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary
Reorganization
Act of 1980" reads:
Sec. 19. Jurisdiction in Civil Cases.Regional Trial Courts
shall exercise exclusive original jurisdiction:
1. In all civil actions in which the subject of the litigation is
incapable of pecuniary estimation.
On the other hand, the jurisdiction of POA is unequivocal
from Sec. 77 of RA 7942:
Section 77. Panel of Arbitrators.
x x x Within thirty (30) days, after the submission of the
case by the parties for the decision, the panel shall have
exclusive and original jurisdiction to hear and decide the
following:
(c) Disputes involving rights to mining areas
(d) Disputes involving mineral agreements or permits

Whatever may be the decision of the POA will eventually


reach the court system via a resort to the CA and to this
Court as a last recourse.
Selling of MBMIs shares to DMCI

The sale of the MBMI shareholdings to DMCI does not have


any bearing in the instant case and said fact should be
disregarded. The manifestation can no longer be considered
by us since it is being tackled in G.R. No. 202877 pending
before this Court.1wphi1 Thus, the question of whether
petitioners, allegedly a Philippine-owned corporation due to
the sale of MBMI's shareholdings to DMCI, are allowed to
enter into FTAAs with the State is a non-issue in this case.
In ending, the "control test" is still the prevailing mode of
determining whether or not a corporation is a Filipino
corporation, within the ambit of Sec. 2, Art. II of the 1987
Constitution, entitled to undertake the exploration,
development and utilization of the natural resources of the
Philippines. When in the mind of the Court there is doubt,
based on the attendant facts and circumstances of the case,
in the 60-40 Filipino-equity ownership in the corporation,
then it may apply the "grandfather rule."
WHEREFORE, premises considered, the instant petition is
DENIED. The assailed Court of Appeals Decision dated
October 1, 2010 and Resolution dated February 15, 2011
are hereby AFFIRMED.

It is clear that POA has exclusive and original jurisdiction


over any and all disputes involving rights to mining areas.
One such dispute is an MPSA application to which an
adverse claim, protest or opposition is filed by another
interested applicant.1wphi1 In the case at bar, the dispute
arose or originated from MPSA applications where
petitioners are asserting their rights to mining areas subject
of their respective MPSA applications. Since respondent filed
3 separate petitions for the denial of said applications, then
a controversy has developed between the parties and it is
POAs jurisdiction to resolve said disputes.
Moreover, the jurisdiction of the RTC involves civil actions
while what petitioners filed with the DENR Regional Office or
any concerned DENRE or CENRO are MPSA applications.
Thus POA has jurisdiction.
Furthermore, the POA has jurisdiction over the MPSA
applications under the doctrine of primary jurisdiction. Euromed Laboratories v. Province of Batangas55 elucidates:
The doctrine of primary jurisdiction holds that if a case is
such that its determination requires the expertise,
specialized training and knowledge of an administrative
body, relief must first be obtained in an administrative

17

3.

REGISTER OF DEEDS OF RIZAL V. UNG SUI SI


(1955)

The Register of Deeds for the province of Rizal refused to


accept for record a deed of donation executed in due form
on January 22, 1953, by Jesus Dy, a Filipino citizen,
conveying a parcel of residential land, in Caloocan, Rizal,
known as lot No. 2, block 48-D, PSD-4212, G.L.R.O. Record
No. 11267, in favor of the unregistered religious
organization "Ung Siu Si Temple", operating through three
trustees all of Chinese nationality. The donation was duly
accepted by Yu Juan, of Chinese nationality, founder and
deaconess of the Temple, acting in representation and in
behalf of the latter and its trustees.
The refusal of the Registrar was elevated en Consultato the
IVth Branch of the Court of First Instance of Manila. On
March 14, 1953, the Court upheld the action of the Rizal
Register of Deeds, saying:
The question raised by the Register of Deeds in the above
transcribed consulta is whether a deed of donation of a
parcel of land executed in favor of a religious organization
whose founder, trustees and administrator are Chinese
citizens should be registered or not.
It appearing from the record of the Consulta that UNG SIU SI
TEMPLE is a religious organization whose deaconess,
founder, trustees and administrator are all Chinese citizens,
this Court is of the opinion and so hold that in view of the
provisions of the sections 1 and 5 of Article XIII of the
Constitution of the Philippines limiting the acquisition of
land in the Philippines to its citizens, or to corporations or
associations at least sixty per centum of the capital stock of
which is owned by such citizens adopted after the
enactment of said Act No. 271, and the decision of the
Supreme Court in the case of Krivenko vs. the Register of
Deeds of Manila, the deed of donation in question should
not be admitted for admitted for registration. (Printed Rec.
App. pp 17-18).

public agricultural lands and other natural resources to


"corporations or associations at least sixty per centum of
the capital of which is owned by such citizens" (of the
Philippines).
The fact that the appellant religious organization has no
capital stock does not suffice to escape the Constitutional
inhibition, since it is admitted that its members are of
foreign nationality. The purpose of the sixty per centum
requirement is obviously to ensure that corporations or
associations allowed to acquire agricultural land or to
exploit natural resources shall be controlled by Filipinos; and
the spirit of the Constitution demands that in the absence of
capital stock, the controlling membership should be
composed of Filipino citizens.
To permit religious associations controlled by non-Filipinos to
acquire agricultural lands would be to drive the opening
wedge to revive alien religious land holdings in this country.
We can not ignore the historical fact that complaints against
land holdings of that kind were among the factors that
sparked the revolution of 1896.
As to the complaint that the disqualification under article
XIII is violative of the freedom of religion guaranteed by
Article III of the Constitution, we are by no means convinced
(nor has it been shown) that land tenure is indispensable to
the free exercise and enjoyment of religious profession or
worship; or that one may not worship the Deity according to
the dictates of his own conscience unless upon land held in
fee simple.
The resolution appealed from is affirmed, with costs against
appellant.

Not satisfied with the ruling of the Court of First Instance,


counsel for the donee Uy Siu Si Temple has appealed to this
Court, claiming: (1) that the acquisition of the land in
question, for religious purposes, is authorized and permitted
by Act No. 271 of the old Philippine Commission, providing
as follows:
SECTION 1. It shall be lawful for all religious associations, of
whatever sort or denomination, whether incorporated in the
Philippine Islands or in the name of other country, or not
incorporated at all, to hold land in the Philippine Islands
upon which to build churches, parsonages, or educational or
charitable institutions.
SEC. 2. Such religious institutions, if not incorporated, shall
hold the land in the name of three Trustees for the use of
such associations; . . .. (Printed Rec. App. p. 5.)
and (2) that the refusal of the Register of Deeds violates the
freedom of religion clause of our Constitution [Art. III, Sec.
1(7)].
We are of the opinion that the Court below has correctly
held that in view of the absolute terms of section 5, Title
XIII, of the Constitution, the provisions of Act No. 271 of the
old Philippine Commission must be deemed repealed since
the Constitution was enacted, in so far as incompatible
therewith. In providing that,
Save in cases of hereditary succession, no private
agricultural land shall be transferred or assigned except to
individuals, corporations or associations qualified to acquire
or hold lands of the public domain in the Philippines,
the Constitution makes no exception in favor of religious
associations. Neither is there any such saving found in
sections 1 and 2 of Article XIII, restricting the acquisition of

18

4.

KILOSBAYAN, INC. V. GUINGONA, JR. (1994)

This is a special civil action for prohibition and injunction,


with a prayer for a temporary restraining order and
preliminary injunction, which seeks to prohibit and restrain
the implementation of the "Contract of Lease" executed by
the Philippine Charity Sweepstakes Office (PCSO) and the
Philippine Gaming Management Corporation (PGMC) in
connection with the on- line lottery system, also known as
"lotto."

which will include the game, the marketing of the games,


and the logistics to introduce the games to all the cities and
municipalities of the country within five (5) years.
1.7.
The Lessor shall be selected based on its technical
expertise, hardware and software capability, maintenance
support, and financial resources. The Development Plan
shall have a substantial bearing on the choice of the Lessor.
The Lessor shall be a domestic corporation, with at least
sixty percent (60%) of its shares owned by Filipino
shareholders.

Petitioner Kilosbayan, Incorporated (KILOSBAYAN) avers that


it is a non-stock domestic corporation composed of civicspirited citizens, pastors, priests, nuns, and lay leaders who
are committed to the cause of truth, justice, and national
renewal. The rest of the petitioners, except Senators Freddie
Webb and Wigberto Taada and Representative Joker P.
Arroyo, are suing in their capacities as members of the
Board of Trustees of KILOSBAYAN and as taxpayers and
concerned citizens. Senators Webb and Taada and
Representative Arroyo are suing in their capacities as
members of Congress and as taxpayers and concerned
citizens of the Philippines.

xxx

xxx

xxx

The pleadings of the parties disclose the factual


antecedents which triggered off the filing of this petition.

2.2.

OBJECTIVES

Pursuant to Section 1 of the charter of the PCSO (R.A. No.


1169, as amended by B.P. Blg. 42) which grants it the
authority to hold and conduct "charity sweepstakes races,
lotteries and other similar activities," the PCSO decided to
establish an on- line lottery system for the purpose of
increasing its revenue base and diversifying its sources of
funds. Sometime before March 1993, after learning that the
PCSO was interested in operating an on-line lottery system,
the Berjaya Group Berhad, "a multinational company and
one of the ten largest public companies in Malaysia," long
"engaged in, among others, successful lottery operations in
Asia, running both Lotto and Digit games, thru its
subsidiary, Sports Toto Malaysia," with its "affiliate, the
International Totalizator Systems, Inc., . . . an American
public company engaged in the international sale or
provision of computer systems, softwares, terminals,
training and other technical services to the gaming
industry," "became interested to offer its services and
resources to PCSO." As an initial step, Berjaya Group Berhad
(through its individual nominees) organized with some
Filipino investors in March 1993 a Philippine corporation
known as the Philippine Gaming Management Corporation
(PGMC), which "was intended to be the medium through
which the technical and management services required for
the project would be offered and delivered to PCSO." 1
Before August 1993, the PCSO formally issued a Request for
Proposal (RFP) for the Lease Contract of an on-line lottery
system for the PCSO. 2 Relevant provisions of the RFP are
the following:
1.

EXECUTIVE SUMMARY

xxx

xxx

xxx

1.2.
PCSO is seeking a suitable contractor which shall
build, at its own expense, all the facilities ('Facilities')
needed to operate and maintain a nationwide on-line lottery
system. PCSO shall lease the Facilities for a fixed
percentage ofquarterly gross receipts. All receipts from
ticket sales shall be turned over directly to PCSO. All capital,
operating expenses and expansion expenses and risks shall
be for the exclusive account of the Lessor.
xxx

xxx

xxx

1.4.
The lease shall be for a period not exceeding
fifteen (15) years.
1.5.
The Lessor is expected to submit a comprehensive
nationwide lottery development plan ("Development Plan")

xxx

xxx

The Office of the President, the National Disaster Control


Coordinating Council, the Philippine National Police, and the
National Bureau of Investigation shall be authorized to use
the nationwide telecommunications system of the Facilities
Free of Charge.
1.8.
Upon expiration of the lease, the Facilities shall be
owned by PCSO without any additional consideration. 3
xxx

The objectives of PCSO in leasing the Facilities from a


private entity are as follows:
xxx

xxx

xxx

2.2.2.
Enable PCSO to operate a nationwide on-line
Lottery system at no expense or risk to the government.
xxx

xxx

xxx

2.4.

DUTIES AND RESPONSIBILITIES OF THE LESSOR

xxx

xxx

2.4.2.

THE LESSOR

xxx

The Proponent is expected to furnish and maintain the


Facilities, including the personnel needed to operate the
computers, the communications network and sales offices
under a build-lease basis. The printing of tickets shall be
undertaken under the supervision and control of PCSO. The
Facilities shall enable PCSO to computerize the entire
gaming system.
The Proponent is expected to formulate and design
consumer-oriented Master Games Plan suited to the
marketplace, especially geared to Filipino gaming habits
and preferences. In addition, the Master Games Plan is
expected to include a Product Plan for each game and
explain how each will be introduced into the market. This
will be an integral part of the Development Plan which PCSO
will require from the Proponent.
xxx

xxx

xxx

The Proponent is expected to provide upgrades to


modernize the entire gaming system over the life ofthe
lease contract.
The Proponent is expected to provide technology transfer to
PCSO technical personnel. 4
7.

GENERAL GUIDELINES FOR PROPONENTS

xxx

xxx

xxx

Finally, the Proponent must be able to stand the acid test of


proving that it is an entity able to take on the role of
responsible maintainer of the on-line lottery system, and
able to achieve PSCO's goal of formalizing an on-line lottery
system to achieve its mandated objective. 5

19

xxx

xxx

xxx

16.

DEFINITION OF TERMS

Facilities: All capital equipment, computers, terminals,


software, nationwide telecommunication network, ticket
sales offices, furnishings, and fixtures; printing costs; cost of
salaries and wages; advertising and promotion expenses;
maintenance costs; expansion and replacement costs;
security and insurance, and all other related expenses
needed to operate nationwide on-line lottery system. 6
Considering the above citizenship requirement, the PGMC
claims that the Berjaya Group "undertook to reduce its
equity stakes in PGMC to 40%," by selling 35% out of the
original 75% foreign stockholdings to local investors.
On 15 August 1993, PGMC submitted its bid to the PCSO. 7
The bids were evaluated by the Special Pre-Qualification
Bids and Awards Committee (SPBAC) for the on-line lottery
and its Bid Report was thereafter submitted to the Office of
the President. 8 The submission was preceded by
complaints by the Committee's Chairperson, Dr. Mita Pardo
de Tavera. 9
On 21 October 1993, the Office of the President announced
that it had given the respondent PGMC the go-signal to
operate the country's on-line lottery system and that the
corresponding implementing contract would be submitted
not later than 8 November 1993 "for final clearance and
approval by the Chief Executive." 10 This announcement
was published in the Manila Standard, Philippine Daily
Inquirer, and the Manila Times on 29 October 1993. 11
On 4 November 1993, KILOSBAYAN sent an open letter to
Presidential Fidel V. Ramos strongly opposing the setting up
to the on-line lottery system on the basis of serious moral
and ethical considerations. 12
At the meeting of the Committee on Games and
Amusements of the Senate on 12 November 1993,
KILOSBAYAN reiterated its vigorous opposition to the on-line
lottery on account of its immorality and illegality. 13
On 19 November 1993, the media reported that despite the
opposition, "Malacaang will push through with the
operation of an on-line lottery system nationwide" and that
it is actually the respondent PCSO which will operate the
lottery while the winning corporate bidders are merely
"lessors." 14
On 1 December 1993, KILOSBAYAN requested copies of all
documents pertaining to the lottery award from Executive
Secretary Teofisto Guingona, Jr. In his answer of 17
December 1993, the Executive Secretary informed
KILOSBAYAN that the requested documents would be duly
transmitted before the end of the month. 15. However, on
that same date, an agreement denominated as "Contract of
Lease" was finally executed by respondent PCSO and
respondent PGMC. 16 The President, per the press
statement issued by the Office of the President, approved it
on 20 December 1993. 17
In view of their materiality and relevance, we quote the
following salient provisions of the Contract of Lease:
1.

DEFINITIONS

The following words and terms shall have the following


respective meanings:
1.1
Rental Fee Amount to be paid by PCSO to the
LESSOR as compensation for the fulfillment of the
obligations of the LESSOR under this Contract, including,
but not limited to the lease of the Facilities.
xxx

xxx

xxx

1.3
Facilities All capital equipment, computers,
terminals, software (including source codes for the On-Line
Lottery
application
software
for
the
terminals,
telecommunications and central systems), technology,
intellectual property rights, telecommunications network,
and furnishings and fixtures.
1.4
Maintenance and Other Costs All costs and
expenses relating to printing, manpower, salaries and
wages, advertising and promotion, maintenance, expansion
and replacement, security and insurance, and all other
related expenses needed to operate an On-Line Lottery
System, which shall be for the account of the LESSOR. All
expenses relating to the setting-up, operation and
maintenance of ticket sales offices of dealers and retailers
shall be borne by PCSO's dealers and retailers.
1.5
Development Plan The detailed plan of all
games, the marketing thereof, number of players, value of
winnings and the logistics required to introduce the games,
including the Master Games Plan as approved by PCSO,
attached hereto as Annex "A", modified as necessary by the
provisions of this Contract.
xxx

xxx

xxx

1.8
Escrow Deposit The proposal deposit in the sum
of Three Hundred Million Pesos (P300,000,000.00)
submitted by the LESSOR to PCSO pursuant to the
requirements of the Request for Proposals.
2.

SUBJECT MATTER OF THE LEASE

The LESSOR shall build, furnish and maintain at its own


expense and risk the Facilities for the On-Line Lottery
System of PCSO in the Territory on an exclusive basis. The
LESSOR shall bear all Maintenance and Other Costs as
defined herein.
xxx

xxx

xxx

3.

RENTAL FEE

For and in consideration of the performance by the LESSOR


of its obligations herein, PCSO shall pay LESSOR a fixed
Rental Fee equal to four point nine percent (4.9%) of gross
receipts from ticket sales, payable net of taxes required by
law to be withheld, on a semi-monthly basis. Goodwill,
franchise and similar fees shall belong to PCSO.
4.

LEASE PERIOD

The period of the lease shall commence ninety (90) days


from the date of effectivity of this Contract and shall run for
a period of eight (8) years thereafter, unless sooner
terminated in accordance with this Contract.
5.
RIGHTS AND OBLIGATIONS OF PCSO AS OPERATOR
OF THE ON-LINE LOTTERY SYSTEM
PCSO shall be the sole and individual operator of the OnLine Lottery System. Consequently:
5.1
PCSO shall have sole responsibility to decide
whether to implement, fully or partially, the Master Games
Plan of the LESSOR. PCSO shall have the sole responsibility
to determine the time for introducing new games to the
market. The Master Games Plan included in Annex "A"
hereof is hereby approved by PCSO.
5.2
PCSO shall have control over revenues and receipts
of whatever nature from the On-Line Lottery System. After
paying the Rental Fee to the LESSOR, PCSO shall have
exclusive responsibility to determine the Revenue Allocation
Plan; Provided, that the same shall be consistent with the
requirement of R.A. No. 1169, as amended, which fixes a
prize fund of fifty five percent (55%) on the average.

20

5.3
PCSO shall have exclusive control over the printing
of tickets, including but not limited to the design, text, and
contents thereof.
5.4
PCSO shall have sole responsibility over the
appointment of dealers or retailers throughout the country.
PCSO shall appoint the dealers and retailers in a timely
manner with due regard to the implementation timetable of
the On-Line Lottery System. Nothing herein shall preclude
the LESSOR from recommending dealers or retailers for
appointment by PCSO, which shall act on said
recommendation within forty-eight (48) hours.
5.5
PCSO shall designate the necessary personnel to
monitor and audit the daily performance of the On-Line
Lottery System. For this purpose, PCSO designees shall be
given, free of charge, suitable and adequate space,
furniture and fixtures, in all offices of the LESSOR, including
but not limited to its headquarters, alternate site, regional
and area offices.
5.6
PCSO shall have the responsibility to resolve, and
exclusive jurisdiction over, all matters involving the
operation of the On-Line Lottery System not otherwise
provided in this Contract.
5.7
PCSO shall promulgate procedural and coordinating
rules governing all activities relating to the On-Line Lottery
System.
5.8
PCSO will be responsible for the payment of prize
monies, commissions to agents and dealers, and taxes and
levies (if any) chargeable to the operator of the On-Line
Lottery System. The LESSOR will bear all other Maintenance
and Other Costs, except as provided in Section 1.4.
5.9

PCSO shall assist the LESSOR in the following:

5.9.1

Work permits for the LESSOR's staff;

5.9.2

Approvals for importation of the Facilities;

5.9.3
Approvals and consents for the On-Line Lottery
System; and
5.9.4
Business and premises licenses for all offices of the
LESSOR and licenses for the telecommunications network.
5.10
In the event that PCSO shall pre-terminate this
Contract or suspend the operation of the On-Line Lottery
System, in breach of this Contract and through no fault of
the LESSOR, PCSO shall promptly, and in any event not later
than sixty (60) days, reimburse the LESSOR the amount of
its total investment cost associated with the On-Line Lottery
System, including but not limited to the cost of the Facilities,
and further compensate the LESSOR for loss of expected
net profit after tax, computed over the unexpired term of
the lease.
6.

DUTIES AND RESPONSIBILITIES OF THE LESSOR

The LESSOR is one of not more than three (3) lessors of


similar facilities for the nationwide On-Line Lottery System
of PCSO. It is understood that the rights of the LESSOR are
primarily those of a lessor of the Facilities, and
consequently, all rights involving the business aspects of
the use of the Facilities are within the jurisdiction of PCSO.
During the term of the lease, the LESSOR shall.
6.1
Maintain and preserve its corporate existence,
rights and privileges, and conduct its business in an orderly,
efficient, and customary manner.
6.2
Maintain
insurance coverage
acceptable to PCSO on all Facilities.

with

insurers

6.3
Comply with all laws, statues, rules and
regulations, orders and directives, obligations and duties by
which it is legally bound.
6.4
Duly pay and discharge all taxes, assessments and
government charges now and hereafter imposed of
whatever nature that may be legally levied upon it.
6.5
Keep all the Facilities in fail safe condition and, if
necessary, upgrade, replace and improve the Facilities from
time to time as new technology develops, in order to make
the On-Line Lottery System more cost-effective and/or
competitive, and as may be required by PCSO shall not
impose such requirements unreasonably nor arbitrarily.
6.6
Provide PCSO with management terminals which
will allow real-time monitoring of the On-Line Lottery
System.
6.7
Upon effectivity of this Contract, commence the
training of PCSO and other local personnel and the transfer
of technology and expertise, such that at the end of the
term of this Contract, PCSO will be able to effectively takeover the Facilities and efficiently operate the On-Line Lottery
System.
6.8
Undertake a positive advertising and promotions
campaign for both institutional and product lines without
engaging in negative advertising against other lessors.
6.9
Bear all expenses and risks relating to the Facilities
including, but not limited to, Maintenance and Other Costs
and:
xxx

xxx

xxx

6.10
Bear all risks if the revenues from ticket sales, on
an annualized basis, are insufficient to pay the entire prize
money.
6.11
Be, and is hereby, authorized to collect and retain
for its own account, a security deposit from dealers and
retailers, in an amount determined with the approval of
PCSO, in respect of equipment supplied by the LESSOR.
PCSO's approval shall not be unreasonably withheld.
xxx

xxx

xxx

6.12
Comply with procedural and coordinating rules
issued by PCSO.
7.

REPRESENTATIONS AND WARRANTIES

The LESSOR represents and warrants that:


7.1
The LESSOR is corporation duly organized and
existing under the laws of the Republic of the Philippines, at
least sixty percent (60%) of the outstanding capital stock of
which is owned by Filipino shareholders. The minimum
required Filipino equity participation shall not be impaired
through voluntary or involuntary transfer, disposition, or
sale of shares of stock by the present stockholders.
7.2
The LESSOR and its Affiliates have the full
corporate and legal power and authority to own and operate
their properties and to carry on their business in the place
where such properties are now or may be conducted. . . .
7.3
The LESSOR has or has access to all the financing
and funding requirements to promptly and effectively carry
out the terms of this Contract. . . .
7.4
The LESSOR has or has access to all the
managerial and technical expertise to promptly and
effectively carry out the terms of this Contract. . . .
xxx

xxx

xxx

21

10.

TELECOMMUNICATIONS NETWORK

The LESSOR shall establish a telecommunications network


that will connect all municipalities and cities in the Territory
in accordance with, at the LESSOR's option, either of the
LESSOR's proposals (or a combinations of both such
proposals) attached hereto as Annex "B," and under the
following PCSO schedule:
xxx

xxx

xxx

PCSO may, at its option, require the LESSOR to establish the


telecommunications network in accordance with the above
Timetable in provinces where the LESSOR has not yet
installed terminals. Provided, that such provinces have
existing nodes. Once a municipality or city is serviced by
land lines of a licensed public telephone company, and such
lines are connected to Metro Manila, then the obligation of
the LESSOR to connect such municipality or city through a
telecommunications network shall cease with respect to
such municipality or city. The voice facility will cover the
four offices of the Office of the President, National Disaster
Control Coordinating Council, Philippine National Police and
the National Bureau of Investigation, and each city and
municipality in the Territory except Metro Manila, and those
cities and municipalities which have easy telephone access
from these four offices. Voice calls from the four offices shall
be transmitted via radio or VSAT to the remote
municipalities which will be connected to this voice facility
through wired network or by radio. The facility shall be
designed to handle four private conversations at any one
time.
xxx

xxx

xxx

13.

STOCK DISPERSAL PLAN

Within two (2) years from the effectivity of this Contract, the
LESSOR shall cause itself to be listed in the local stock
exchange and offer at least twenty five percent (25%) of its
equity to the public.
14.

NON-COMPETITION

Performance Bond from a reputable insurance company or


companies acceptable to PCSO.
16.2
The Performance Bond shall be in the initial
amount of Three Hundred Million Pesos (P300,000,000.00),
to its U.S. dollar equivalent, and shall be renewed to cover
the duration of the Contract. However, the Performance
Bond shall be reduced proportionately to the percentage of
unencumbered terminals installed; Provided, that the
Performance Bond shall in no case be less than One
Hundred Fifty Million Pesos (P150,000,000.00).
16.3
The LESSOR may at its option maintain its Escrow
Deposit as the Performance Bond. . . .
17.

PENALTIES

17.1
Except as may be provided in Section 17.2, should
the LESSOR fail to take remedial measures within seven (7)
days, and rectify the breach within thirty (30) days, from
written notice by PCSO of any wilfull or grossly negligent
violation of the material terms and conditions of this
Contract, all unencumbered Facilities shall automatically
become the property of PCSO without consideration and
without need for further notice or demand by PCSO. The
Performance Bond shall likewise be forfeited in favor of
PCSO.
17.2
Should the LESSOR fail to comply with the terms of
the Timetables provided in Section 9 and 10, it shall be
subject to an initial Penalty of Twenty Thousand Pesos
(P20,000.00), per city or municipality per every month of
delay; Provided, that the Penalty shall increase, every ninety
(90) days, by the amount of Twenty Thousand Pesos
(P20,000.00) per city or municipality per month, whilst shall
failure to comply persists. The penalty shall be deducted by
PCSO from the rental fee.
xxx

xxx

xxx

20.

OWNERSHIP OF THE FACILITIES

The LESSOR shall not, directly or indirectly, undertake any


activity or business in competition with or adverse to the
On-Line Lottery System of PCSO unless it obtains the latter's
prior written consent thereto.

After expiration of the term of the lease as provided in


Section 4, the Facilities directly required for the On-Line
Lottery System mentioned in Section 1.3 shall automatically
belong in full ownership to PCSO without any further
consideration other than the Rental Fees already paid
during the effectivity of the lease.

15.

21.

HOLD HARMLESS CLAUSE

TERMINATION OF THE LEASE

15.1
The LESSOR shall at all times protect and defend,
at its cost and expense, PCSO from and against any and all
liabilities and claims for damages and/or suits for or by
reason of any deaths of, or any injury or injuries to any
person or persons, or damages to property of any kind
whatsoever, caused by the LESSOR, its subcontractors, its
authorized agents or employees, from any cause or causes
whatsoever.

PCSO may terminate this Contract for any breach of the


material provisions of this Contract, including the following:

15.2
The LESSOR hereby covenants and agrees to
indemnify and hold PCSO harmless from all liabilities,
charges, expenses (including reasonable counsel fees) and
costs on account of or by reason of any such death or
deaths, injury or injuries, liabilities, claims, suits or losses
caused by the LESSOR's fault or negligence.

21.2
An order is made or an effective resolution passed
for the winding up or dissolution of the LESSOR or when it
ceases or threatens to cease to carry on all or a material
part of its operations or business; or

15.3
The LESSOR shall at all times protect and defend,
at its own cost and expense, its title to the facilities and
PCSO's interest therein from and against any and all claims
for the duration of the Contract until transfer to PCSO of
ownership of the serviceable Facilities.
16.

SECURITY

16.1
To ensure faithful compliance by the LESSOR with
the terms of the Contract, the LESSOR shall secure a

21.1
The LESSOR is insolvent or bankrupt or unable to
pay its debts, stops or suspends or threatens to stop or
suspend payment of all or a material part of its debts, or
proposes or makes a general assignment or an arrangement
or compositions with or for the benefit of its creditors; or

21.3
Any material statement, representation or warranty
made or furnished by the LESSOR proved to be materially
false or misleading;
said termination to take effect upon receipt of written notice
of termination by the LESSOR and failure to take remedial
action within seven (7) days and cure or remedy the same
within thirty (30) days from notice.
Any suspension, cancellation or termination of this Contract
shall not relieve the LESSOR of any liability that may have
already accrued hereunder.

22

xxx

xxx

xxx

Considering the denial by the Office of the President of its


protest and the statement of Assistant Executive Secretary
Renato Corona that "only a court injunction can stop
Malacaang," and the imminent implementation of the
Contract of Lease in February 1994, KILOSBAYAN, with its
co-petitioners, filed on 28 January 1994 this petition.
In support of the petition, the petitioners claim that:
. . . X X THE OFFICE OF THE PRESIDENT, ACTING THROUGH
RESPONDENTS EXECUTIVE SECRETARY AND/OR ASSISTANT
EXECUTIVE SECRETARY FOR LEGAL AFFAIRS, AND THE PCSO
GRAVELY ABUSE[D] THEIR DISCRETION AND/OR FUNCTIONS
TANTAMOUNT TO LACK OF JURISDICTION AND/OR
AUTHORITY IN RESPECTIVELY: (A) APPROVING THE AWARD
OF THE CONTRACT TO, AND (B) ENTERING INTO THE SOCALLED "CONTRACT OF LEASE" WITH, RESPONDENT PGMC
FOR THE INSTALLATION, ESTABLISHMENT AND OPERATION
OF THE ON-LINE LOTTERY AND TELECOMMUNICATION
SYSTEMS REQUIRED AND/OR AUTHORIZED UNDER THE SAID
CONTRACT, CONSIDERING THAT:
a)
Under Section 1 of the Charter of the PCSO, the
PCSO is prohibited from holding and conducting lotteries "in
collaboration, association or joint venture with any person,
association, company or entity";
b)
Under Act No. 3846 and established jurisprudence,
a Congressional franchise is required before any person may
be
allowed
to
establish
and
operate
said
telecommunications system;
c)
Under Section 11, Article XII of the Constitution, a
less than 60% Filipino-owned and/or controlled corporation,
like the PGMC, is disqualified from operating a public
service, like the said telecommunications system; and
d)
Respondent PGMC is not authorized by its charter
and under the Foreign Investment Act (R.A. No. 7042) to
install, establish and operate the on-line lotto and
telecommunications systems. 18
Petitioners submit that the PCSO cannot validly enter into
the assailed Contract of Lease with the PGMC because it is
an arrangement wherein the PCSO would hold and conduct
the on-line lottery system in "collaboration" or "association"
with the PGMC, in violation of Section 1(B) of R.A. No. 1169,
as amended by B.P. Blg. 42, which prohibits the PCSO from
holding and conducting charity sweepstakes races, lotteries,
and other similar activities "in collaboration, association or
joint venture with any person, association, company or
entity, foreign or domestic." Even granting arguendo that a
lease of facilities is not within the contemplation of
"collaboration" or "association," an analysis, however, of the
Contract of Lease clearly shows that there is a
"collaboration, association, or joint venture between
respondents PCSO and PGMC in the holding of the On-Line
Lottery System," and that there are terms and conditions of
the Contract "showing that respondent PGMC is the actual
lotto operator and not respondent PCSO." 19
The petitioners also point out that paragraph 10 of the
Contract of Lease requires or authorizes PGMC to establish a
telecommunications network that will connect all the
municipalities and cities in the territory. However, PGMC
cannot do that because it has no franchise from Congress to
construct, install, establish, or operate the network pursuant
to Section 1 of Act No. 3846, as amended. Moreover, PGMC
is a 75% foreign-owned or controlled corporation and
cannot, therefore, be granted a franchise for that purpose
because of Section 11, Article XII of the 1987 Constitution.
Furthermore, since "the subscribed foreign capital" of the
PGMC "comes to about 75%, as shown by paragraph EIGHT
of its Articles of Incorporation," it cannot lawfully enter into
the contract in question because all forms of gambling
and lottery is one of them are included in the so-called

foreign investments negative list under the Foreign


Investments Act (R.A. No. 7042) where only up to 40%
foreign capital is allowed. 20
Finally, the petitioners insist that the Articles of
Incorporation of PGMC do not authorize it to establish and
operate an on-line lottery and telecommunications systems.
21
Accordingly, the petitioners pray that we issue a temporary
restraining order and a writ of preliminary injunction
commanding the respondents or any person acting in their
places or upon their instructions to cease and desist from
implementing the challenged Contract of Lease and, after
hearing the merits of the petition, that we render judgment
declaring the Contract of Lease void and without effect and
making the injunction permanent. 22
We required the respondents to comment on the petition.
In its Comment filed on 1 March 1994, private respondent
PGMC asserts that "(1) [it] is merely an independent
contractor for a piece of work, (i.e., the building and
maintenance of a lottery system to be used by PCSO in the
operation of its lottery franchise); and (2) as such
independent contractor, PGMC is not a co-operator of the
lottery franchise with PCSO, nor is PCSO sharing its
franchise, 'in collaboration, association or joint venture' with
PGMC as such statutory limitation is viewed from the
context, intent, and spirit of Republic Act 1169, as amended
by Batas Pambansa 42." It further claims that as an
independent contractor for a piece of work, it is neither
engaged in "gambling" nor in "public service" relative to the
telecommunications network, which the petitioners even
consider as an "indispensable requirement" of an on-line
lottery system. Finally, it states that the execution and
implementation of the contract does not violate the
Constitution and the laws; that the issue on the "morality"
of the lottery franchise granted to the PCSO is political and
not judicial or legal, which should be ventilated in another
forum; and that the "petitioners do not appear to have the
legal standing or real interest in the subject contract and in
obtaining the reliefs sought." 23
In their Comment filed by the Office of the Solicitor General,
public respondents Executive Secretary Teofisto Guingona,
Jr., Assistant Executive Secretary Renato Corona, and the
PCSO maintain that the contract of lease in question does
not violate Section 1 of R.A. No. 1169, as amended by B.P.
Blg. 42, and that the petitioner's interpretation of the
phrase "in collaboration, association or joint venture" in
Section 1 is "much too narrow, strained and utterly devoid
of logic" for it "ignores the reality that PCSO, as a corporate
entity, is vested with the basic and essential prerogative to
enter into all kinds of transactions or contracts as may be
necessary for the attainment of its purposes and
objectives." What the PCSO charter "seeks to prohibit is that
arrangement akin to a "joint venture" or partnership where
there is "community of interest in the business, sharing of
profits and losses, and a mutual right of control," a
characteristic which does not obtain in a contract of lease."
With respect to the challenged Contract of Lease, the "role
of PGMC is limited to that of a lessor of the facilities" for the
on-line lottery system; in "strict technical and legal sense,"
said contract "can be categorized as a contract for a piece
of work as defined in Articles 1467, 1713 and 1644 of the
Civil Code."
They further claim that the establishment of the
telecommunications system stipulated in the Contract of
Lease does not require a congressional franchise because
PGMC will not operate a public utility; moreover, PGMC's
"establishment of a telecommunications system is not
intended to establish a telecommunications business," and
it has been held that where the facilities are operated "not
for business purposes but for its own use," a legislative
franchise is not required before a certificate of public

23

convenience can be granted. 24 Even granting arguendo


that PGMC is a public utility, pursuant to Albano S.
Reyes, 25 "it can establish a telecommunications system
even without a legislative franchise because not every
public utility is required to secure a legislative franchise
before it could establish, maintain, and operate the
service"; and, in any case, "PGMC's establishment of the
telecommunications system stipulated in its contract of
lease with PCSO falls within the exceptions under Section 1
of Act No. 3846 where a legislative franchise is not
necessary for the establishment of radio stations."
They also argue that the contract does not violate the
Foreign Investment Act of 1991; that the Articles of
Incorporation of PGMC authorize it to enter into the Contract
of Lease; and that the issues of "wisdom, morality and
propriety of acts of the executive department are beyond
the ambit of judicial review."
Finally, the public respondents allege that the petitioners
have no standing to maintain the instant suit, citing our
resolution in Valmonte vs. Philippine Charity Sweepstakes
Office. 26
Several parties filed motions to intervene as petitioners in
this case, 27 but only the motion of Senators Alberto
Romulo, Arturo Tolentino, Francisco Tatad, Gloria MacapagalArroyo, Vicente Sotto III, John Osmea, Ramon Revilla, and
Jose Lina 28 was granted, and the respondents were
required to comment on their petition in intervention, which
the public respondents and PGMC did.
In the meantime, the petitioners filed with the Securities
and Exchange Commission on 29 March 1994 a petition
against PGMC for the nullification of the latter's General
Information Sheets. That case, however, has no bearing in
this petition.
On 11 April 1994, we heard the parties in oral arguments.
Thereafter, we resolved to consider the matter submitted
for resolution and pending resolution of the major issues in
this case, to issue a temporary restraining order
commanding the respondents or any person acting in their
place or upon their instructions to cease and desist from
implementing the challenged Contract of Lease.
In the deliberation on this case on 26 April 1994, we
resolved to consider only these issues: (a) the locus standi
of the petitioners, and (b) the legality and validity of the
Contract of Lease in the light of Section 1 of R.A. No. 1169,
as amended by B.P. Blg. 42, which prohibits the PCSO from
holding and conducting lotteries "in collaboration,
association or joint venture with any person, association,
company or entity, whether domestic or foreign." On the
first issue, seven Justices voted to sustain the locus standi
of the petitioners, while six voted not to. On the second
issue, the seven Justices were of the opinion that the
Contract of Lease violates the exception to Section 1(B) of
R.A. No. 1169, as amended by B.P. Blg. 42, and is, therefore,
invalid and contrary to law. The six Justices stated that they
wished to express no opinion thereon in view of their stand
on the first issue. The Chief Justice took no part because
one of the Directors of the PCSO is his brother-in-law.
This case was then assigned to this ponente for the writing
of the opinion of the Court.
The preliminary issue on the locus standi of the petitioners
should, indeed, be resolved in their favor. A party's standing
before this Court is a procedural technicality which it may,
in the exercise of its discretion, set aside in view of the
importance of the issues raised. In the landmark Emergency
Powers Cases, 29 this Court brushed aside this technicality
because "the transcendental importance to the public of
these cases demands that they be settled promptly and
definitely, brushing aside, if we must, technicalities of
procedure. (Avelino vs. Cuenco, G.R. No. L-2821)." Insofar as
taxpayers' suits are concerned, this Court had declared that

it "is not devoid of discretion as to whether or not it should


be entertained," 30 or that it "enjoys an open discretion to
entertain the same or not." 31 In De La Llana vs. Alba, 32
this Court declared:
1.
The argument as to the lack of standing of
petitioners is easily resolved. As far as Judge de la Llana is
concerned, he certainly falls within the principle set forth in
Justice Laurel's opinion in People vs. Vera [65 Phil. 56
(1937)]. Thus: "The unchallenged rule is that the person
who impugns the validity of a statute must have a personal
and substantial interest in the case such that he has
sustained, or will sustain, direct injury as a result of its
enforcement [Ibid, 89]. The other petitioners as members of
the bar and officers of the court cannot be considered as
devoid of "any personal and substantial interest" on the
matter. There is relevance to this excerpt from a separate
opinion in Aquino, Jr. v. Commission on Elections [L-40004,
January 31, 1975, 62 SCRA 275]: "Then there is the attack
on the standing of petitioners, as vindicating at most what
they consider a public right and not protecting their rights
as individuals. This is to conjure the specter of the public
right dogma as an inhibition to parties intent on keeping
public officials staying on the path of constitutionalism. As
was so well put by Jaffe; "The protection of private rights is
an essential constituent of public interest and, conversely,
without a well-ordered state there could be no enforcement
of private rights. Private and public interests are, both in a
substantive and procedural sense, aspects of the totality of
the legal order." Moreover, petitioners have convincingly
shown that in their capacity as taxpayers, their standing to
sue has been amply demonstrated. There would be a retreat
from the liberal approach followed in Pascual v. Secretary of
Public Works, foreshadowed by the very decision of People
v. Vera where the doctrine was first fully discussed, if we act
differently now. I do not think we are prepared to take that
step. Respondents, however, would hard back to the
American Supreme Court doctrine in Mellon v. Frothingham,
with their claim that what petitioners possess "is an interest
which is shared in common by other people and is
comparatively so minute and indeterminate as to afford any
basis and assurance that the judicial process can act on it."
That is to speak in the language of a bygone era, even in
the United States. For as Chief Justice Warren clearly
pointed out in the later case of Flast v. Cohen, the barrier
thus set up if not breached has definitely been lowered.
In Kapatiran ng mga Naglilingkod sa Pamahalaan ng
Pilipinas, Inc. vs. Tan, 33 reiterated in Basco vs. Philippine
Amusements and Gaming Corporation, 34 this Court stated:
Objections to taxpayers' suits 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,
this Court has brushed aside technicalities of procedure and
has taken cognizance of these petitions.
and in Association of Small Landowners in the Philippines,
Inc. vs. Secretary of Agrarian Reform, 35 it declared:
With particular regard to the requirement of proper party as
applied in the cases before us, we hold that the same is
satisfied by the petitioners and intervenors because each of
them has sustained or is in danger of sustaining an
immediate injury as a result of the acts or measures
complained of. [Ex Parte Levitt, 303 US 633]. And even if,
strictly speaking, they 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.

24

In the first Emergency Powers Cases, ordinary citizens and


taxpayers were allowed to question the constitutionality of
several executive orders issued by President Quirino
although they were invoking only an indirect and general
interest shared in common with the public. The Court
dismissed the objective that they were not proper parties
and ruled that the transcendental importance to the public
of these cases demands that they be settled promptly and
definitely, brushing aside, if we must, technicalities of
procedure. We have since then applied this exception in
many other cases. (Emphasis supplied)
In Daza vs. Singson, 36 this Court once more said:
. . . For another, we have early as in the Emergency Powers
Cases that where serious constitutional questions are
involved, "the transcendental importance to the public of
these cases demands that they be settled promptly and
definitely, brushing aside, if we must, technicalities of
procedure." The same policy has since then been
consistently followed by the Court, as in Gonzales vs.
Commission on Elections [21 SCRA 774] . . .
The Federal Supreme Court of the United States of America
has also expressed its discretionary power to liberalize the
rule on locus standi. In United States vs. Federal Power
Commission and Virginia Rea Association vs. Federal Power
Commission, 37 it held:
We hold that petitioners have standing. Differences of view,
however, preclude a single opinion of the Court as to both
petitioners. It would not further clarification of this
complicated specialty of federal jurisdiction, the solution of
whose problems is in any event more or less determined by
the specific circumstances of individual situations, to set out
the divergent grounds in support of standing in these cases.
In 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. Among such cases were those
assailing the constitutionality of (a) R.A. No. 3836 insofar as
it allows retirement gratuity and commutation of vacation
and sick leave to Senators and Representatives and to
elective officials of both Houses of Congress; 38 (b)
Executive Order No. 284, issued by President Corazon C.
Aquino on 25 July 1987, which allowed members of the
cabinet, their undersecretaries, and assistant secretaries to
hold other government offices or positions; 39 (c) the
automatic appropriation for debt service in the General
Appropriations Act; 40 (d) R.A. No. 7056 on the holding of
desynchronized elections; 41 (d) R.A. No. 1869 (the charter
of the Philippine Amusement and Gaming Corporation) on
the ground that it is contrary to morals, public policy, and
order; 42 and (f) R.A. No. 6975, establishing the Philippine
National
Police. 43
Other cases where we have followed a liberal policy
regarding locus standi include those attacking the validity or
legality of (a) an order allowing the importation of rice in the
light of the prohibition imposed by R.A. No. 3452; 44 (b) P.D.
Nos. 991 and 1033 insofar as they proposed amendments to
the Constitution and P.D. No. 1031 insofar as it directed the
COMELEC to supervise, control, hold, and conduct the
referendum-plebiscite on 16 October 1976; 45 (c) the
bidding for the sale of the 3,179 square meters of land at
Roppongi, Minato-ku, Tokyo, Japan; 46 (d) the approval
without hearing by the Board of Investments of the
amended application of the Bataan Petrochemical
Corporation to transfer the site of its plant from Bataan to
Batangas and the validity of such transfer and the shift of
feedstock from naphtha only to naphtha and/or liquefied
petroleum gas; 47 (e) the decisions, orders, rulings, and
resolutions of the Executive Secretary, Secretary of Finance,

Commissioner of Internal Revenue, Commissioner of


Customs, and the Fiscal Incentives Review Board exempting
the National Power Corporation from indirect tax and duties;
48 (f) the orders of the Energy Regulatory Board of 5 and 6
December 1990 on the ground that the hearings conducted
on the second provisional increase in oil prices did not allow
the petitioner substantial cross-examination; 49 (g)
Executive Order No. 478 which levied a special duty of
P0.95 per liter or P151.05 per barrel of imported crude oil
and P1.00 per liter of imported oil products; 50 (h)
resolutions of the Commission on Elections concerning the
apportionment, by district, of the number of elective
members of Sanggunians; 51 and (i) memorandum orders
issued by a Mayor affecting the Chief of Police of Pasay City.
52
In the 1975 case of Aquino vs. Commission on Elections, 53
this Court, despite its unequivocal ruling that the petitioners
therein had no personality to file the petition, resolved
nevertheless to pass upon the issues raised because of the
far-reaching implications of the petition. We did no less in
De Guia vs. COMELEC 54 where, although we declared that
De Guia "does not appear to have locus standi, a standing
in law, a personal or substantial interest," we brushed aside
the procedural infirmity "considering the importance of the
issue involved, concerning as it does the political exercise of
qualified voters affected by the apportionment, and
petitioner alleging abuse of discretion and violation of the
Constitution by respondent."
We find the instant petition to be of transcendental
importance to the public. The issues it raised are of
paramount public interest and of a category even higher
than those involved in many of the aforecited cases. The
ramifications of such issues immeasurably affect the social,
economic, and moral well-being of the people even in the
remotest barangays of the country and the counterproductive and retrogressive effects of the envisioned online lottery system are as staggering as the billions in pesos
it is expected to raise. The legal standing then of the
petitioners deserves recognition and, in the exercise of its
sound discretion, this Court hereby brushes aside the
procedural barrier which the respondents tried to take
advantage of.
And now on the substantive issue.
Section 1 of R.A. No. 1169, as amending by B.P. Blg. 42,
prohibits the PCSO from holding and conducting lotteries "in
collaboration, association or joint venture with any person,
association, company or entity, whether domestic or
foreign." Section 1 provides:
Sec. 1. The Philippine Charity Sweepstakes Office. The
Philippine
Charity
Sweepstakes
Office,
hereinafter
designated the Office, shall be the principal government
agency for raising and providing for funds for health
programs, medical assistance and services and charities of
national character, and as such shall have the general
powers conferred in section thirteen of Act Numbered One
thousand four hundred fifty-nine, as amended, and shall
have the authority:
A.
To hold and conduct charity sweepstakes races,
lotteries and other similar activities, in such frequency and
manner, as shall be determined, and subject to such rules
and regulations as shall be promulgated by the Board of
Directors.
B.
Subject to the approval of the Minister of Human
Settlements, to engage in health and welfare-related
investments, programs, projects and activities which may
be profit-oriented, by itself or in collaboration, association or
joint venture with any person, association, company or
entity, whether domestic or foreign, except for the activities
mentioned in the preceding paragraph (A), for the purpose
of providing for permanent and continuing sources of funds
for health programs, including the expansion of existing

25

ones, medical assistance and services, and/or charitable


grants: Provided, That such investment will not compete
with the private sector in areas where investments are
adequate as may be determined by the National Economic
and Development Authority. (emphasis supplied)
The language of the section is indisputably clear that with
respect to its franchise or privilege "to hold and conduct
charity sweepstakes races, lotteries and other similar
activities," the PCSO cannot exercise it "in collaboration,
association or joint venture" with any other party. This is the
unequivocal meaning and import of the phrase "except for
the activities mentioned in the preceding paragraph (A),"
namely, "charity sweepstakes races, lotteries and other
similar activities."
B.P. Blg. 42 originated from Parliamentary Bill No. 622,
which was covered by Committee Report No. 103 as
reported out by the Committee on Socio-Economic Planning
and Development of the Interim Batasang Pambansa. The
original text of paragraph B, Section 1 of Parliamentary Bill
No. 622 reads as follows:
To engage in any and all investments and related profitoriented projects or programs and activities by itself or in
collaboration, association or joint venture with any person,
association, company or entity, whether domestic or
foreign, for the main purpose of raising funds for health and
medical assistance and services and charitable grants. 55
During the period of committee amendments, the
Committee on Socio-Economic Planning and Development,
through Assemblyman Ronaldo B. Zamora, introduced an
amendment by substitution to the said paragraph B such
that, as amended, it should read as follows:
Subject to the approval of the Minister of Human
Settlements, to engage in health-oriented investments,
programs, projects and activities which may be profitoriented, by itself or in collaboration, association, or joint
venture with any person, association, company or entity,
whether domestic or foreign, for the purpose of providing
for permanent and continuing sources of funds for health
programs, including the expansion of existing ones, medical
assistance and services and/or charitable grants. 56
Before the motion of Assemblyman Zamora for the approval
of the amendment could be acted upon, Assemblyman
Davide introduced an amendment to the amendment:
MR. DAVIDE.
Mr. Speaker.
THE SPEAKER.
The gentleman from Cebu is recognized.
MR. DAVIDE.
May I introduce an amendment to the committee
amendment? The amendment would be to insert after
"foreign" in the amendment just read the following: EXCEPT
FOR THE ACTIVITY IN LETTER (A) ABOVE.
When it is joint venture or in collaboration with any entity
such collaboration or joint venture must not include activity
activity letter (a) which is the holding and conducting of
sweepstakes races, lotteries and other similar acts.
MR. ZAMORA.
We accept the amendment, Mr. Speaker.
MR. DAVIDE.
Thank you, Mr. Speaker.

THE SPEAKER.
Is there any objection to the amendment? (Silence) The
amendment, as amended, is approved. 57
Further amendments to paragraph B were introduced and
approved. When Assemblyman Zamora read the final text of
paragraph B as further amended, the earlier approved
amendment of Assemblyman Davide became "EXCEPT FOR
THE ACTIVITIES MENTIONED IN PARAGRAPH (A)"; and by
virtue of the amendment introduced by Assemblyman
Emmanuel Pelaez, the word PRECEDING was inserted before
PARAGRAPH. Assemblyman Pelaez introduced other
amendments. Thereafter, the new paragraph B was
approved. 58
This is now paragraph B, Section 1 of R.A. No. 1169, as
amended by B.P. Blg. 42.
No interpretation of the said provision to relax or circumvent
the prohibition can be allowed since the privilege to hold or
conduct charity sweepstakes races, lotteries, or other
similar activities is a franchise granted by the legislature to
the PCSO. It is a settled rule that "in all grants by the
government to individuals or corporations of rights,
privileges and franchises, the words are to be taken most
strongly against the grantee .... [o]ne who claims a
franchise or privilege in derogation of the common rights of
the public must prove his title thereto by a grant which is
clearly and definitely expressed, and he cannot enlarge it by
equivocal or doubtful provisions or by probable inferences.
Whatever is not unequivocally granted is withheld. Nothing
passes by mere implication." 59
In short then, by the exception explicitly made in paragraph
B, Section 1 of its charter, the PCSO cannot share its
franchise with another by way of collaboration, association
or joint venture. Neither can it assign, transfer, or lease
such franchise. It has been said that "the rights and
privileges conferred under a franchise may, without doubt,
be assigned or transferred when the grant is to the grantee
and assigns, or is authorized by statute. On the other hand,
the right of transfer or assignment may be restricted by
statute or the constitution, or be made subject to the
approval of the grantor or a governmental agency, such as
a public utilities commission, exception that an existing
right of assignment cannot be impaired by subsequent
legislation." 60
It may also be pointed out that the franchise granted to the
PCSO to hold and conduct lotteries allows it to hold and
conduct a species of gambling. It is settled that "a statute
which authorizes the carrying on of a gambling activity or
business should be strictly construed and every reasonable
doubt so resolved as to limit the powers and rights claimed
under its authority." 61
Does the challenged Contract of Lease violate or contravene
the exception in Section 1 of R.A. No. 1169, as amended by
B.P. Blg. 42, which prohibits the PCSO from holding and
conducting lotteries "in collaboration, association or joint
venture with" another?
We agree with the petitioners that it does, notwithstanding
its denomination or designation as a (Contract of Lease). We
are neither convinced nor moved or fazed by the insistence
and forceful arguments of the PGMC that it does not
because in reality it is only an independent contractor for a
piece of work, i.e., the building and maintenance of a lottery
system to be used by the PCSO in the operation of its
lottery franchise. Whether the contract in question is one of
lease or whether the PGMC is merely an independent
contractor should not be decided on the basis of the title or
designation of the contract but by the intent of the parties,
which may be gathered from the provisions of the contract
itself. Animus hominis est anima scripti. The intention of the
party is the soul of the instrument. In order to give life or
effect to an instrument, it is essential to look to the

26

intention of the individual who executed it. 62 And, pursuant


to Article 1371 of the Civil Code, "to determine the intention
of the contracting parties, their contemporaneous and
subsequent acts shall be principally considered." To put it
more bluntly, no one should be deceived by the title or
designation of a contract.
A careful analysis and evaluation of the provisions of the
contract and a consideration of the contemporaneous acts
of the PCSO and PGMC indubitably disclose that the contract
is not in reality a contract of lease under which the PGMC is
merely an independent contractor for a piece of work, but
one where the statutorily proscribed collaboration or
association, in the least, or joint venture, at the most, exists
between the contracting parties. Collaboration is defined as
the acts of working together in a joint project. 63
Association means the act of a number of persons in uniting
together for some special purpose or business. 64 Joint
venture is defined as an association of persons or
companies jointly undertaking some commercial enterprise;
generally all contribute assets and share risks. It requires a
community of interest in the performance of the subject
matter, a right to direct and govern the policy in connection
therewith, and duty, which may be altered by agreement to
share both in profit and
losses. 65
The contemporaneous acts of the PCSO and the PGMC
reveal that the PCSO had neither funds of its own nor the
expertise to operate and manage an on-line lottery system,
and that although it wished to have the system, it would
have it "at no expense or risks to the government." Because
of these serious constraints and unwillingness to bear
expenses and assume risks, the PCSO was candid enough to
state in its RFP that it is seeking for "a suitable contractor
which shall build, at its own expense, all the facilities
needed to operate and maintain" the system; exclusively
bear "all capital, operating expenses and expansion
expenses and risks"; and submit "a comprehensive
nationwide lottery development plan . . . which will include
the game, the marketing of the games, and the logistics to
introduce the game to all the cities and municipalities of the
country within five (5) years"; and that the operation of the
on-line lottery system should be "at no expense or risk to
the government" meaning itself, since it is a governmentowned and controlled agency. The facilities referred to
means "all capital equipment, computers, terminals,
software, nationwide telecommunications network, ticket
sales offices, furnishings and fixtures, printing costs, costs
of salaries and wages, advertising and promotions
expenses, maintenance costs, expansion and replacement
costs, security and insurance, and all other related
expenses needed to operate a nationwide on-line lottery
system."
In short, the only contribution the PCSO would have is its
franchise or authority to operate the on-line lottery system;
with the rest, including the risks of the business, being
borne by the proponent or bidder. It could be for this reason
that it warned that "the proponent must be able to stand to
the acid test of proving that it is an entity able to take on
the role of responsible maintainer of the on-line lottery
system." The PCSO, however, makes it clear in its RFP that
the proponent can propose a period of the contract which
shall not exceed fifteen years, during which time it is
assured of a "rental" which shall not exceed 12% of gross
receipts. As admitted by the PGMC, upon learning of the
PCSO's decision, the Berjaya Group Berhad, with its
affiliates, wanted to offer its services and resources to the
PCSO. Forthwith, it organized the PGMC as "a medium
through which the technical and management services
required for the project would be offered and delivered to
PCSO." 66
Undoubtedly, then, the
along that in connection
PCSO had nothing but
guaranteed it had in the

Berjaya Group Berhad knew all


with an on-line lottery system, the
its franchise, which it solemnly
General Information of the RFP. 67

Howsoever viewed then, from the very inception, the PCSO


and the PGMC mutually understood that any arrangement
between them would necessarily leave to the PGMC the
technical, operations, and management aspects of the online lottery system while the PCSO would, primarily, provide
the franchise. The words Gaming and Management in the
corporate name of respondent Philippine Gaming
Management Corporation could not have been conceived
just for euphemistic purposes. Of course, the RFP cannot
substitute for the Contract of Lease which was subsequently
executed by the PCSO and the PGMC. Nevertheless, the
Contract of Lease incorporates their intention and
understanding.
The so-called Contract of Lease is not, therefore, what it
purports to be. Its denomination as such is a crafty device,
carefully conceived, to provide a built-in defense in the
event that the agreement is questioned as violative of the
exception in Section 1 (B) of the PCSO's charter. The acuity
or skill of its draftsmen to accomplish that purpose easily
manifests itself in the Contract of Lease. It is outstanding for
its careful and meticulous drafting designed to give an
immediate impression that it is a contract of lease. Yet,
woven therein are provisions which negate its title and
betray the true intention of the parties to be in or to have a
joint venture for a period of eight years in the operation and
maintenance of the on-line lottery system.
Consistent with the above observations on the RFP, the
PCSO has only its franchise to offer, while the PGMC
represents and warrants that it has access to all managerial
and technical expertise to promptly and effectively carry out
the terms of the contract. And, for a period of eight years,
the PGMC is under obligation to keep all the Facilities in safe
condition and if necessary, upgrade, replace, and improve
them from time to time as new technology develops to
make the on-line lottery system more cost-effective and
competitive; exclusively bear all costs and expenses
relating to the printing, manpower, salaries and wages,
advertising and promotion, maintenance, expansion and
replacement, security and insurance, and all other related
expenses needed to operate the on-line lottery system;
undertake a positive advertising and promotions campaign
for both institutional and product lines without engaging in
negative advertising against other lessors; bear the salaries
and related costs of skilled and qualified personnel for
administrative and technical operations; comply with
procedural and coordinating rules issued by the PCSO; and
to train PCSO and other local personnel and to effect the
transfer of technology and other expertise, such that at the
end of the term of the contract, the PCSO will be able to
effectively take over the Facilities and efficiently operate the
on-line lottery system. The latter simply means that, indeed,
the managers, technicians or employees who shall operate
the on-line lottery system are not managers, technicians or
employees of the PCSO, but of the PGMC and that it is only
after the expiration of the contract that the PCSO will
operate the system. After eight years, the PCSO would
automatically become the owner of the Facilities without
any other further consideration.
For these reasons, too, the PGMC has the initial prerogative
to prepare the detailed plan of all games and the marketing
thereof, and determine the number of players, value of
winnings, and the logistics required to introduce the games,
including the Master Games Plan. Of course, the PCSO has
the reserved authority to disapprove them. 68 And, while
the PCSO has the sole responsibility over the appointment
of dealers and retailers throughout the country, the PGMC
may, nevertheless, recommend for appointment dealers
and retailers which shall be acted upon by the PCSO within
forty-eight hours and collect and retain, for its own account,
a security deposit from dealers and retailers in respect of
equipment supplied by it.
This joint venture is further established by the following:

27

(a)
Rent is defined in the lease contract as the amount
to be paid to the PGMC as compensation for the fulfillment
of its obligations under the contract, including, but not
limited to the lease of the Facilities. However, this rent is
not actually a fixed amount. Although it is stated to be 4.9%
of gross receipts from ticket sales, payable net of taxes
required by law to be withheld, it may be drastically
reduced or, in extreme cases, nothing may be due or
demandable at all because the PGMC binds itself to "bear all
risks if the revenue from the ticket sales, on an annualized
basis, are insufficient to pay the entire prize money." This
risk-bearing provision is unusual in a lessor-lessee
relationship, but inherent in a joint venture.

lottery system; and promulgate procedural and coordinating


rules governing all activities relating to the on-line lottery
system. The first further confirms that it is the PGMC which
will operate the system and the PCSO may, for the
protection of its interest, monitor and audit the daily
performance of the system. The second admits the
coordinating and cooperative powers and functions of the
parties.

(b)
In the event of pre-termination of the contract by
the PCSO, or its suspension of operation of the on-line
lottery system in breach of the contract and through no
fault of the PGMC, the PCSO binds itself "to promptly, and in
any event not later than sixty (60) days, reimburse the
Lessor the amount of its total investment cost associated
with the On-Line Lottery System, including but not limited to
the cost of the Facilities, and further compensate the
LESSOR for loss of expected net profit after tax, computed
over the unexpired term of the lease." If the contract were
indeed one of lease, the payment of the expected profits or
rentals for the unexpired portion of the term of the contract
would be enough.

All of the foregoing unmistakably confirm the indispensable


role of the PGMC in the pursuit, operation, conduct, and
management of the On-Line Lottery System. They exhibit
and demonstrate the parties' indivisible community of
interest in the conception, birth and growth of the on-line
lottery, and, above all, in its profits, with each having a right
in the formulation and implementation of policies related to
the business and sharing, as well, in the losses with the
PGMC bearing the greatest burden because of its
assumption of expenses and risks, and the PCSO the least,
because of its confessed unwillingness to bear expenses
and risks. In a manner of speaking, each is wed to the other
for better or for worse. In the final analysis, however, in the
light of the PCSO's RFP and the above highlighted
provisions, as well as the "Hold Harmless Clause" of the
Contract of Lease, it is even safe to conclude that the actual
lessor in this case is the PCSO and the subject matter
thereof is its franchise to hold and conduct lotteries since it
is, in reality, the PGMC which operates and manages the online lottery system for a period of eight years.

(c)
The PGMC cannot "directly or indirectly undertake
any activity or business in competition with or adverse to
the On-Line Lottery System of PCSO unless it obtains the
latter's prior written consent." If the PGMC is engaged in the
business of leasing equipment and technology for an on-line
lottery system, we fail to see any acceptable reason why it
should allow a restriction on the pursuit of such business.
(d)
The PGMC shall provide the PCSO the audited
Annual Report sent to its stockholders, and within two years
from the effectivity of the contract, cause itself to be listed
in the local stock exchange and offer at least 25% of its
equity to the public. If the PGMC is merely a lessor, this
imposition is unreasonable and whimsical, and could only be
tied up to the fact that the PGMC will actually operate and
manage the system; hence, increasing public participation
in the corporation would enhance public interest.
(e)
The PGMC shall put up an Escrow Deposit of
P300,000,000.00 pursuant to the requirements of the RFP,
which it may, at its option, maintain as its initial
performance bond required to ensure its faithful compliance
with the terms of the contract.
(f)
The PCSO shall designate the necessary personnel
to monitor and audit the daily performance of the on-line

(g)
The PCSO may validly terminate the contract if the
PGMC becomes insolvent or bankrupt or is unable to pay its
debts, or if it stops or suspends or threatens to stop or
suspend payment of all or a material part of its debts.

We thus declare that the challenged Contract of Lease


violates the exception provided for in paragraph B, Section
1 of R.A. No. 1169, as amended by B.P. Blg. 42, and is,
therefore, invalid for being contrary to law. This conclusion
renders unnecessary further discussion on the other issues
raised by the petitioners.
WHEREFORE, the instant petition is hereby GRANTED and
the challenged Contract of Lease executed on 17 December
1993 by respondent Philippine Charity Sweepstakes Office
(PCSO) and respondent Philippine Gaming Management
Corporation (PGMC) is hereby DECLARED contrary to law
and invalid.
The Temporary Restraining Order issued on 11 April 1994 is
hereby MADE PERMANENT.
No pronouncement as to costs.

28

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