PIL - #

Lyons vs. USA (1958)

Doctrine:
 The general rule is that States cannot be sued unless it has given its consent. However, an exception to
this is when the state enters into a contract. In such case, the state may be sued even without its consent.
But before suing the state, administrative remedies shall first be exhausted.

Facts:
1. Harry Lyons, Inc. and USA entered into a contract for stevedoring service at the US Naval Base in Subic Bay.
The said contract is valid until June 30, 1956, and was entered into pursuant to the provisions of Sec. 2 (c)
(1) of the Armed Services Procurement Act of 1947 of the USA.
2. Harry Lyons Inc., brought this action before the CFI Manila to collect several sums of money arising from
the contract.
3. As a defense, the defendant USA filed a motion to dismiss. It argued that the CFI has no jurisdiction over
the defendant and over the subject matter of the action since the USA is a sovereign state which cannot
be sued without its consent. USA also argued that Lyons failed to exhaust the administrative remedies
provided for in Art. XXI of the contract.
4. On the other hand, Lyons contends that when a sovereign state enters into a contract with a private
person, the state can be sued upon the theory that it has descended to the level of an individual from
which it can be implied that it has given its consent to be sued under the contract. Lyons used the case of
Santos vs. Santos (92 Phil 280) as legal basis.
Issue/s:
1. WON the USA as a sovereign state may be sued when it enters into a contract - Yes
2. WON CFI erred in dismissing the complaint on the ground that Lyons has failed to comply with the
condition presented in the contract before an action could be taken in court against the US Government -
No
Held/Ratio:
1. Where and when the state or its government enters into a contract, the state itself may be sued even
without its consent.
a. As long as the contract is entered into through its officers or agents, in furtherance of a
legitimate aim and purpose and pursuant to constitutional legislative authority, whereby mutual
or reciprocal benefits accrue and rights and obligations arise therefrom, and if the law granting
the authority to enter into such contract does not provide for or name the officer against whom
action may be brought in the event of a breach thereof.
b. However, this is only an exception. It is still the general rule that a state cannot be sued without
its consent.
c. In the case at bar, the SC held the contract entered into (for stevedoring and miscellaneous labor
services within the Subic Bay area, a US Navy Reservation) by the US Government, through its
agency at Subic Bay, is a valid one. Thus, Lyons can bring an action before the Philippine courts
for any contractual liability that political entity may assume under the contract. Therefore, the
trial court has jurisdiction over the case.
2. The CFI did not err in dismissing the complaint on the ground that Lyons has failed to comply with the
condition presented in the contract before an action could be taken in court against the US Government.
a. Art. XXI of the contract (between Lyons & USA) lays down the procedure to be followed by Lyons
should it desire to obtain a remedy under the contract.
 i. It provides that the remedy is to file its claim with the Contracting Officer who is
empowered to act and render a decision. An appeal may be filed to the Secretary of the
Navy where the plaintiff will be afforded an opportunity to be heard & present evidence.
This decision by the Secretary of the Navy shall be final unless a court of competent
jurisdiction finds that the decision is fraudulent, arbitrary, capricious or so grossly
erroneous. In other words, it is only after the claim has been decided on appeal by the
secretary that Lyons can resort to a court of competent jurisdiction.
b. It is clear that Lyons did not follow this provision/procedure, thus his failure to exhaust
administrative remedies against USA. The CFI decision is thus affirmed.