AGAN JR. VS. PHILIPPINE INTERNATIONAL AIR TERMINAL CO., INC.

Facts: In August 1989 the DOTC had a study conducted to determine whether or not the
present Ninoy Aquino International Airport (NAIA) can cope with traffic development up to the year 2010. A draft final report was submitted to the DOTC in December 1989. Four years later, in 1993, six Filipino-Chinese business leaders met with then President Fidel Ramos to explore the possibility of investing in the construction and operation of a new international airport terminal. The six later formed the Asias Emerging Dragon Corp (AEDC) which submitted an unsolicited proposal for the development of NAIA International Passenger Terminal III more than a year after the first meeting with Ramos, in October 1994. In March 1995, the DOTC endorsed the AEDC proposal to the National Economic and Development Authority (NEDA). In January 1996, NEDA passed Board Resolution No. 2 which approved the NAIA IPT III project. In June 1996, the DOTC published an invitation for competitive bidding in two daily newspapers, as required by law (sec 4-A of RA6957). The alternative bidders had to submit three envelopes. The first contains the prequalification documents, the second the technical proposal, and the third the financial proposal of the proponent. The bidding was scheduled on September 20, 1996. The bid documents issued by the Prequalification Bids and Awards Committee said the proponent must have adequate capability to sustain the financing requirement for the engineering, design, construction, operation, and maintenance phases of the project. The proponent must have an equity that is at least 30% of the project cost, and be able to secure external financing for the project. Government was also guaranteed a five percent share in the gross revenue of the project for the first five years; 7.5% in the next 10 years, and 10% in the next 10 years. This would be in addition to a fixed annual guaranteed payment to the government. The basis for the prequalification shall be the proponents compliance with the minimum technical and financial requirements provided in the bid documents and the IRR of the BOT (build operate and transfer) Law. The bid documents allowed amendments to the draft concession agreement, but said that these should cover only items that would not materially affect the preparation of the proponents proposal. In August 1996, during the second pre-bid conference, the PBAC made several clarifications, upon the request of Peoples Air Cargo & Warehousing Co. Inc (PAIRCARGO), which wanted to challenge the AEDC bid. The PBAC said the list of revenue sources mentioned in the bid documents were merely indicative. The project proponent may add other revenue sources, subject to approval by the DOTC/MIAA. Also, only fees and charges denominated as public utility fees would be subject to regulation, and these could still be revised, because the PBAC has a pending query with the justice department. In September 1996, PBAC issued a bid bulletin in which it said that since PAIRCARGO could not meet the required minimum equity prescribed in the bid documents, it would accept instead an audited financial statement of the financial capability of all member companies of the consortium. In September 1996, PAIRCARGO submitted their competitive proposal to the PBAC. The first envelope, containing the prequalification documents, was opened on September 23, 1996, and PBAC prequalified the PAIRCARGO consortium the following day. On September 26, AEDC filed with PBAC its reservations regarding PAIRCARGo, noting the lack of corporate approvals and financial capability of PAIRCARGO. For one, PAIRCARGO included in the computation of its financial capability the total net worth of Security Bank, when the Banking Law limits to 15% the total investment that a bank may make on one project. It also questioned the appointment of Lufthansa as facility operator, because Philippine laws limit to Filipinos the operation of a public utility. The PBAC, however, said on October 2, 1996 that based on the documents submitted and the prequalification criteria, PAIRCARGO was prequalified. The DOTC secretary approved PBACs findings. The AEDC reiterated its objections two more times. On October 16, the third envelope containing the financial proposals were opened, and PAIRCARGO had offered to pay the government higher. Both PAIRCARGO and AEDC offered to build the NAIA Passenger Terminal III for at least $350 million at no cost to the

government and to pay the government a 5% share in gross revenues for the first five years of operation; a 7.5% share in gross revenues for the next 10 years of operation; and a 10% share in gross revenues for the last 10 years of operation. In addition to this, AEDC offered to pay the government P135 million as guaranteed payment for 27 years. Paircargo Consortium offered a total of P17.75 billion for the same period. PBAC informed AEDC it had accepted Paircagos price proposal, and given AEDC 30 working days to match the bid. When AEDC failed to do so, the DOTC issued a notice on December 11 1996 regarding AEDCs failure to match the proposal. In February 1997, Paircargo Consortium incorporated into Philippine International Airport Terminals Co Inc (PIATCO). AEDC protested the alleged undue preference given to PIATCO and reiterated its objections regarding the prequalification of PIATCO. In April 1997, it filed before the Pasig RTC a petition for declaration of nullity of the proceedings, mandamus and injunction against the DOTC secretary, the PBAC chair and its voting members, and the chair of the PBAC technical committee. On April 17, the NEDA ICC conducted an ad referendum to facilitate the approval of the BOT agreement between the DOTC and PIATCO. Because there were only four instead of the required six signatures, the NEDA merely noted the agreement. On July 9, 1997, the DOTC issued the notice of award for the project to PIATCO. The Concession Agreement was signed on July 12, 1997, granting PIATCO the franchise to operate and maintain the NAIA Passenger Terminal III for 25 years, with an option to renew for a period not exceeding 25 years. PIATCO was allowed to collect fees, rentals and other charges in accordance with the rates or schedules in the 1997 Concession Agreement. At the end of the concession period, PIATCO will transfer the airport to MIAA. In November 1998, the government and PIATCO signed an Amended and Restated Concession Agreement (ARCA). The ARCA amended provisions on the special obligations of the government, the exclusivity of the franchise given to PIATCO, the proceeds of the insurance, the taxes, duties and other charges that may be levied PIATCO, and the provisions on the termination of the contract. Three more supplements to the ARCA were signed afterwards: in August 1999, in September 2000, and in June 2001. The first redefined revenues, required government to construct an access road connecting NAIA II and III, and added to the special obligations of government. The second supplement required government to clear structures at the construction site and to pay PIATCO for these. The third provided for PIATCOs obligations regarding the construction of the surface road connecting Terminals II and III. In September 2002, workers of the international airline service providers filed before the Supreme Court a petition for prohibition enjoining the enforcement of the agreements. They said the transfer to NAIA III could cost them their jobs, since under the agreements, PIATCO is not required to honor MIAAs existing concession contracts with various service providers for international airline airport services. In October 2002, the service providers filed a motion for intervention and a petition in intervention, joining the cause of the petitioning workers. Three congressmen Salacnib Baterina, Clavel Martinez and Constantino Jaraula filed a similar petition shortly after. In November 2002, several MIAA employees also filed a petition questioning the legality of the agreements. In December 2002, another group of congressmen Jacinto Paras, Rafael Nantes, Eduardo Zialcita, Willie Villarama, Prospero Nograles, Prospero Pichay Jr., Harlin Cast Abayon and Benasing Macarambon filed their comment in intervention defending the validity of the agreements and praying for the dismissal of the petitions. On December 10, 2002, the court heard the case on oral argument, the required the parties to file their respective memoranda, and to explore the possibility of arbitration as provided in the challenged contracts.

In their consolidated memorandum, the Office of the Solicitor General and the Office of the Government Corporate Counsel prayed that the petitions be given due course and that the 1997 Concession Agreement, the ARCA and the supplements be declared void for being contrary to the Constitution, the BOT Law and its implementing rules and regulations. In March 2003, PIATCO commenced arbitration proceedings before the International Chamber of Commerce, International Court of Arbitration.

Issue: Did the PIATCO agreements the 1997 Concession Agreement, the ARCA, and the
three supplemental agreements violate the Constitution and the BOT Law?

Held/Decision: YES. In the first place, PIATCO was not a qualified bidder. The minimum
project cost was estimated to be P9.183 billion, which meant that Paircargo Consortium had to prove it could provide at least P2.755 billion. Paircargos audited financial statement for 1994 showed it had a net worth of P3.123 billion, but that was because it included in the computation the total net worth of Security Bank, which as of 1995 was at P3.523 billion. Since banks are allowed to invest only 15% of it entire net worth, Security Bank could only invest P528 million, which brings down Paircargos equity to P558.384 million, or only 6% of the project cost. Disregarding the investment ceilings provided by applicable law would not result in a proper evaluation of whether or not a bidder is pre-qualified to undertake the project as for all intents and purposes, such ceiling or legal restriction determines the true maximum amount which a bidder may invest in the projectIf the maximum amount of equity that a bidder may invest in the project at the time the bids are submitted falls short of the minimum amounts required to be put up by the bidder, said bidder should be properly disqualifiedwe hold that Paircargo Consortium was not a qualified bidder. Thus the award of the contract by the PBAC to the Paircargo consortium is null and void.

Other issues:
1. The signed agreement was different from the draft that was bidded on. Under the law, substantial changes require another bidding. The three principles in public bidding are: an offer to the public; opportunity for competition; and basis for the exact comparison of bids. Changing the parameters would change the agreement, which might have changed the technical and financial parameters of other bidders had they known that such terms were available. The 1997 Concession Agreement signed between PIATCO and the government was substantially different from the draft concession agreement that was bidded on. While it was a draft and was expected to amended from time to time, the PBAC bid bulletin also said that the amendments should only cover items that would not materially affect the preparation of the proposal. The changes should not be substantial or material enough to alter the basic parameters of the contract, and constitute a denial to the other bidders of the opportunity to bid on the same terms. There were two main differences between the draft agreement and the one that was signed. These concerned the fees that may be imposed and collected by PIATCO, and the extent of control and regulation that MIAA has over the fees that PIATCO will charge. The draft agreement classified aircraft parking and tacking fees, groundhandling fees, rentals and airlines offices, check-in counter rentals and porterage fees under those that are regulated subject to periodic adjustment of once every two years and in accordance to a certain formula. The signed agreement said fees subject to MIAA approval are public utility fees and took out groundhandling and rentals and airlines offices from the list. There was also an obvious relaxation of the extent of control and regulation by MIAA with respect to the particular fees that may be charged by PIATCO. The signed agreement also allowed PIATCO to charge in US dollars, while paying the government in pesos.

When taken as a whole, the changes under the 1997 Concession Agreement with respect to reduction in the types of fees that are subject to MIAA regulation and the relaxation of such regulation with respect to other fees are significant amendments that substantially distinguish the draft Concession Agreement from the 1997 Concession Agreement. The 1997 Concession Agreement, in this respect, clearly gives PIATCO more favorable terms than what was available to other bidders at the time the contract was bidded out. It is not very difficult to see that the changes in the 1997 Concession Agreement translate to direct and concrete financial advantages for PIATCO which were not available at the time the contract was offered for bidding. It cannot be denied that under the 1997 Concession Agreement only Public Utility Revenues are subject to MIAA regulation. Adjustments of all other fees imposed and collected by PIATCO are entirely within its control. Moreover, with respect to terminal fees, under the 1997 Concession Agreement, the same is further subject to Interim Adjustments not previously stipulated in the draft Concession Agreement. Finally, the change in the currency stipulated for Public Utility Revenues under the 1997 Concession Agreement, except terminal fees, gives PIATCO an added benefit which was not available at the time of bidding. 2. Under the draft Concession Agreement, default by PIATCO of its obligations does not result in the assumption by government of these liabilities. Under the signed agreement, default by PIATCO of its loans used to finance the project eventually leads to government assumption of the liability for the loans. This is in violation of the BOT Law, which prohibits direct government guarantees. If a proposal can be denied by reason of the existence of direct government guarantee, then its inclusion in the contract executed after the said proposal has been accepted is likewise sufficient to invalidate the contract itselfTo declare the PIATCO contracts valid despite the clear statutory prohibition against a direct government guarantee would not only make a mockery of what the BOT Law seeks to prevent which is to expose the government to the risk of incurring a monetary obligation resulting from a contract of loan between the project proponent and its lenders and to which the Government is not a party to but would also render the BOT Law useless for what it seeks to achieve to make use of the resources of the private sector in the financing, operation and maintenance of infrastructure and development projects which are necessary for national growth and development but which the government, unfortunately, could illafford to finance at this point in time. 3. Sec. 5.10 of the 1997 Concession Agreement violates Article XII, Sec. 12 of the 1987 Constitution. The Constitutional provision allows for temporary takeover of public facilities in times of national emergency. Since the takeover is temporary and extends only to the operation of the business and not the ownership, government is not required to compensate the owner. Neither can the owner claim just compensation for the use of the business and its properties because the takeover is in exercise of the States police power and not of its power of eminent domain. The 1997 Concession Agreement, on the other hand, says that in the event of a takeover, Concessionaire shall be entitled to reasonable compensation for the duration of the temporary takeover PIATCO cannot, by mere contractual stipulation, contravene the Constitutional provision on temporary government and obligate the government pay reasonable cost for the use of Terminal and/or Terminal Complex. Police power is the most essential, insistent, and illimitable of powers. Its exercise must not be unreasonably hampered nor its exercise be a source of obligation by the government in the absence of damage due to arbitrariness of its exercise. 4. The 1987 Constitution strictly regulates monopolies. Art XII, Sec. 19 says: The State shall regulate or prohibit monopolies when the public interest so requires. The 1997 Concession Agreement gave PIATCO the exclusive right to operate a commercial international passenger terminal within the island of Luzon, with the exception of already existing terminals such as those in the Subic Bay Freeport, Clark Special Economic Zone, and in

Laoag City. This privilege, however, is subject to reasonable regulation and supervision and should not violate the rights of third parties. There are service providers at the NAIA I with existing contracts with the MIAA valid until 2010; since the 1997 Concession Agreement says PIATCO is not bound to honor existing contracts with MIAA, transferring operations from NAIA I to NAIA III would unduly prejudice them. PIATCO cannot, by law and certainly not by contract, render a valid and binding contract nugatory. PIATCO, by the mere expedient claiming an exclusive right to operate, cannot require the Government to break its contractual obligations to the service providers. IN SUM, THIS COURT RULES THAT IN VIEW OF THE ABSENCE OF THE REQUISITE FINANCIAL CAPACITY OF THE PAIRCARGO CONSORTIUM, PREDECESSOR OF RESPONDENT PIATCO, THE AWARD BY THE PBAC OF THE CONTRACT FOR THE CONSTRUCTION, OPERATION AND MAINTENANCE OF THE NAIA IPT III IS NULL AND VOID. FURTHER, CONSIDERING THAT THE 1997 CONCESSION AGREEMENT CONTAINS MATERIAL AND SUBSTANTIAL AMENDMENTS, WHICH AMENDMENTS HAD THE EFFECT OF CONVERTING THE 1997 CONCESSION AGREEMENT INTO AN ENTIRELY DIFFERENT AGREEMENT FROM THE CONTRACT BIDDED UPON, THE 1997 CONCESSION AGREEMENT IS SIMILARLY NULL AND VOID FOR BEING CONTRARY TO PUBLIC POLICY. THE PROVISIONS UNDER SECTIONS 4.04(B) AND (C) IN RELATION TO SECTION 1.06 OF THE 1997 CONCESSION AGREEMENT AND SECTION 4.04 (C) IN RELATION TO SECTION 1.06 OF THE ARCA, WHICH CONSTITUTE A DIRECT GOVERNMENT GUARANTEE EXPRESSLY PROHIBITED BY, AMONG OTHERS, THE BOT LAW AND ITS IMPLEMENTING RULES AND REGULATIONS ARE ALSO NULL AND VOID. THE SUPPLEMENTS, BEING ACCESSORY CONTRACTS TO THE ARCA, ARE LIKEWISE NULL AND VOID.

JUDGMENT: The 1997 Concession Agreement, the Amended and Restated Concession
Agreement and the Supplements thereto are set aside for being null and void. ***VITUG: separate opinion court has no jurisdiction. Petition prays for nullification of contract and does not involve judicial, quasi-judicial or ministerial functions. The parties allege contentious evidentiary facts and it would be difficult to decide the jurisdictional issue on the basis of the contradictory factual submissions made by the parties. ***issues on standing: piatco tried to raise the issue of jurisdiction saying they had filed a case with the international chamber of commerce, international court of arbitration for arbitration. The court however pointed out that it includes multiple contracts and not all of the petitioners are parties to the contract.