CONSTITUTIONAL LAW 1

AGAN JR. v. PIATCO

May 5, 2003 Decision and January 21, 2004 Resolution | J. Puno
Topic: Economic Order - State Operation of Private Enterprises
Doctrine: Government take over of private enterprises during national emergency is an exercise of police
power and cannot be limited. Neither is the government required to compensate the owner of the private
enterprise for such a take over.

FACTS
● 1989 Aug → DOTC commissioned a study of the Ninoy Aquino International Airport (NAIA) to determine whether
the present airport can cope with traffic development up to 2010
● 1993 → 6 business leaders met with Pres. Ramos to explore possibility of investing in a new international
airport. They formed the Asian Emerging Dragon Corp. (AEDC)
● 1994 Oct 5 → AEDC submitted an unsolicited proposal through DOTC/MIAA for the development of the NAIA
International Passenger Terminal III (NAIA IPT III, NAIA 3 in digest for brevity)
● 1884 Dec 2 → Prequalification Bids and Awards Committee (PBAC) formed for NAIA 3 project
● 1996 → BIDDING PROCESS. Note 3 envelope requirement (1st contains prequalification documents, 2nd contains
technical proposal, 3rd contains financial proposal)
○ Jan 19 → NEDA Investment Coordinating Council (NEDA-ICC) approved proposal
○ Feb 13 → NEDA Board issued Resolution No. 2 approving the project
○ June → start of bidding process (announcement in newspapers)
○ Aug 16 → amendment to bidding docs (Bulletin No. 3). The minimum amount of
equity to which the proponents financial capability will be based shall be thirty
percent (30%) of the project cost instead of the twenty percent (20%) specified in
Section 3.6.4 of the Bid Documents. Another relevant amendment is statement of
requirement showing adequate capability to sustain financing requirement measured
in terms of:
■ Proof of availability of the project proponent/consortium to provide the minimum
amount of equity for the project (30% of the total project cost or ________)
■ Letter testimonial from reputable banks attesting that the proponents/consortium
members are banking with them, are of good financial standing, and have adequate
resources
○ Sept 20 → Paircargo Consortium (including People’s Air Cargo and Warehousing Co., Inc.,
Phil. Air and Grounds Services Inc., Security Bank Corp.) submitted proposal
○ Sept 23 → PBAC opened first envelope containing prequalification documents, approved the next day
○ Sept 26 → AEDC submitted objection chiefly based on Paircargo’s incapacity to provide required
minimum equity. Objection noted by DOTC but Paircargo approval maintained .
○ Oct. 16 → opened 3rd envelope, and accepted Paircargo’s proposal vs AEDC
proposal
■ AEDC proposal: P 135 million guaranteed payment
■ Paircargo proposal: P 17.75 billion guaranteed payment
■ Note: AEDC informed about decision and given 30 days to match bid but was unable to do so
● 1997 → AGREEMENTS negotiation with Paircargo/PIATCO
○ Feb 27 → Paircargo consortium incorporated into Philippine International Air
Terminals Co. Inc. (PIATCO)
○ April 16 → AEDC filed petition for Declaration of Nullity of Proceedings, Mandamus
& Injunction
○ April 17 → NEDA-ICC conducted ad referendum for approval of Build-Operate-Transfer
(BOT) agreement between DOTC and PIATCO. Since only 4 out of 6 votes required were
gathered, NEDA merely noted agreement
○ July 9 → DOTC issued notice of award to PIATCO
○ July 12 → 1997 Concession Agreement signed granting PIATCO the
franchise to construct, operate and maintain NAIA 3 during the
concession period (25 years) and to collect fees, rentals and other
charges. Other agreements signed were Amended and Restated Concession Agreement
(ARCA) in 1998, First Supplement (1999), Second Supplement (2000), and Third Supplement
(2001)
● 2002 → PETITIONS filed (Sept to Dec)
Ablaza & Garen | A2022
Original digest: 7 Oct 2018; Revised: 8 Nov 2018
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○ Nov 29 → Pres. Arroyo gave speech stating she will not honor PIATCO contracts which the Executive
Branch’s legal offices have concluded to be null and void
● 2003 March → PIATCO informed Court that they have commenced arbitration proceedings
with the International Chamber of Commerce, International Court of Arbitration (ICC)
against the Philippine government acting through DOTC and MIAA

RELEVANT PROVISIONS:
● RA 337 (General Banking Act) + Manual of Regulations for Banks Sec. X383 stating maximum equity that Security Bank can
put in a single investment is 15% of its total net worth
● RA 6957 as amended by RA 7718 (BOT Law) → direct gov’t guarantee not allowed
● Art. XII Sec. 17 → gov’t takeover of enterprises in national emergencies
● Art. XII Sec. 19 → gov’t regulation of monopolies

Petitioner’s Argument Respondent’s Argument

Paircargo Consortium (PIATCO’s predecessor)
was not a duly qualified bidder due to failure to
meet the financial capability required under the
BOT Law and the Bid Documents. In computing
the Paircargo Consortium minimum equity
requirements, the entire net worth of Security
Bank, a member of the consortium, should not be
considered.
October 14, 1996 Memorandum issued by DOTC
Usec. Cal stating that Paircargo has a combined
net worth of P3,900,000,000.00 proves that they
meet the equity requirements of the project. Also,
letters testimonial provided.
Note: Memo was issued as a response to a letter of Antonio
Henson (AEDC) to President FVR stating that Paircargo does
not have the required minimum equity.

Substantial amendments between draft Draft Concession agreement is a draft and can still
Concession Agreement and 1997 Concession be modified. Even so, there were no substantial or
Agreement is against public policy of fair & equal material amendments on technical and financial
bidding features of project

BOT Law prohibits direct government guarantee in Provisions in 1997 Concession Agreement and
BOT projects, but the provisions of Sec 4.04 (b) ARCA simply limits rights of creditors (i.e. they
and (c) in relation to Sec 1.06 of 1997 Concession cannot foreclose) and provides compensation to
Agreement essentially provide this PIATCO in case of gov’t buy-out or take-over

PIATCO agreements compel gov’t to compensate This take-over is an exercise of the State’s power
PIATCO in case of take-over of private enterprises of eminent domain so reasonable compensation
in national emergencies warranted

Existing contracts with MIAA under NAIA 1 and 2 BOT policy is to encourage private sector
are threatened by the PIATCO contracts which do participation in gov’t projects. Exclusivity of
not provide guarantee that their contracts will be franchise means that PIATCO has freedom to
honored form their own contracts with service providers.

In Motion for Reconsideration (see Resolution):

Entire contracts must not be struck down as there
are separability clauses in the agreements

In Motion for Reconsideration (see Resolution):

Congressional investigations found the contracts
valid and this finding must be given respect

PROCEDURAL HISTORY
● Direct petition to the Court

ISSUES + HOLDING
PROCEDURAL
1) W/N petitioners have standing - YES

Ablaza & Garen | A2022

Original digest: 7 Oct 2018; Revised: 8 Nov 2018
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a) Workers and NAIA 1 and 2 Concessionaires have standing because they stand to lose source of livelihood/income;
Members of House of Representatives (also filing as taxpayers and citizens) declared have standing, because Court
can relax this requirement
2) W/N the issues are a question of fact and beyond the ambit of the Court - NO
a) Question of whether supplements create new obligations and whether there was departure from draft agreement are
questions of law, interpreting contractual provisions
b) Question of whether NEDA-ICC approved the project is immaterial as there are other, more substantial reasons for
declaring contracts null and void (see Resolution)
3) W/N the petitions violate the hierarchy of courts - NO
a) Rule may be relaxed when redress cannot be obtained in proper court of when there are compelling or exceptional
circumstances (which exist in this case given estimated _________)
4) W/N the arbitration clause and existing proceedings may be considered binding - NO
a) Some petitioners are not parties to the PIATCO Contracts and cannot be bound by arbitration

SUBSTANTIVE
1) W/N PIATCO is a qualified bidder → NO
a) Under the BOT Law, in case of a build-operate-and-transfer arrangement, the contract shall
be awarded to the bidder who, having satisfied the minimum financial, technical,
organizational and legal standards required by the law, has submitted the lowest bid and
most favorable terms of the project.
Section 5.4: Pre-qualification Requirements - Financial Capability
(1) proof of the ability of the project proponent and/or the consortium to provide a minimum amount of
equity to the project
(2) a letter testimonial from reputable banks attesting that the project proponent and/or members of
the consortium are banking with them, that they are in good financial standing, and that they have
adequate resources.
b) PBAC Bulletin No. 3 govern prequalification requirement on financial ability. The minimum
project cost was estimated to be US$350,000,000.00 or roughly P9,183,650,000.00.
c) The Paircargo Consortium/PIATCO had to show that it had the ability to provide the minimum
equity for the project in the amount of at least P2,755,095,000.00.
d) SC: In computing the total net worth of Paircargo, they should not consider Security Bank’s
entire net worth, only the portion that it can invest in Paircargo which is P558,384,871.55 or
only 6.08% of the project cost. This means that they cannot meet the requirement of
P2.7Bn.
e) CONCLUSION: PIATCO is not a qualified bidder because 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
disqualified.

2) W/N the 1997 Concession Agreement is valid → NO

a) The 1997 Concession Agreement differs from the Draft Agreement attached to the bid
documents in two aspects:
i) Modification on the Public Utility Revenues and Non-Public Utility Revenues that may
be collected by PIATCO (Bid Document Sec 4.2.3.1: Fees that may be imposed by
PIATCO):
(1) Category 1 “Public Utility Revenues”: fees which are subject to periodic adjustment of once
every two years in accordance with a prescribed parametric formula and adjustments are made
effective only upon written approval by MIAA
(2) Category 2 “Non-Public Utility Revenues”: fees other than those included in the first category
which may be adjusted by PIATCO whenever it deems necessary without need for consent of
DOTC/MIAA
(3) Category 3 “New Fees and Charges”: new fees and charges that may be imposed by PIATCO
which have not been previously imposed or collected at the NAIA t Passenger Terminal I,
pursuant to Administrative Order No. 1, Series of 1993, as amended. (with approval)
ii) Differences:
DRAFT Agreement 1997 Agreement

1. aircraft parking fees; 1. aircraft parking fees;

2. aircraft tacking fees; 2. aircraft tacking fees;

Ablaza & Garen | A2022

Original digest: 7 Oct 2018; Revised: 8 Nov 2018
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3. groundhandling fees;* 3. check-in counter fees; and

4. rentals and airline offices;* 4. Terminal Fees**
5. check-in counter rentals; * removed from Cat 1 and moved to Cat 2
6. porterage fees* ** not in Cat 2; newly added

MIAA has right to regulate fees in Cat 2 MIAA may only ask PIATCO to explain and
approve new fees (no regulation)

b) Assumption by the Government of the liabilities of PIATCO in the event of the latters default
thereof
DRAFT 1997

Default by PIATCO on any obligation will Default by PIATCO of its loans used to finance the NAIA IPT III
NOT be assumed by the Government project triggers the occurrence of certain events that leads to the
assumption by the Government of the liability for the loans

c) CONCLUSION: 1997 Concession Agreement is null and void for being contrary to public policy
as violating the basic element of publicly bidded contracts. There could have been no other
purpose but to dilute the extent of MIAA regulation.
i) Essential element of publicly bidded contracts: all bidders must be on equal footing,
able to bid on “common standard, common basis, upon the same thing, the same subject
matter, the same undertaking”
ii) While winning bidder is not precluded from modifying or amending certain provisions of
the contract bidded upon, such changes must not constitute basic parameters of the
contract and would constitute a denial to the other bidders of the opportunity to bid on
the same terms
iii) Also in Resolution: Bid Doc. 4.2.3.1 “adjustments in the fees and charges, whether or
not falling within the purview of public utility revenues, shall be allowed only once every 2
years…”

3. Direct Government Guarantee

● There are provisions in the 1997 Concession Agreement that in the event that PIATCO defaults in
its loan obligations, the Government is obligated to pay its outstanding loans.
● To 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 ill-afford to finance at this point in time.

4. Temporary takeover of business affected with public interest

● Art. XII, Sec. 17. In times of national emergency, when the public interest so requires, the State may,
during the emergency and under reasonable terms prescribed by it, temporarily take over or direct the
operation of any privately owned public utility or business affected with public interest.
○ The temporary takeover by the government extends only to the operation of the business and
not to the ownership thereof.
○ As such the government is not required to compensate the private entity-owner of the
said business as there is no transfer of ownership, whether permanent or temporary.
● PIATCO cannot, by mere contractual stipulation, contravene the Constitutional provision on temporary
government takeover and obligate the government to pay reasonable cost for the use of the Terminal
and/or Terminal Complex

Ablaza & Garen | A2022

Original digest: 7 Oct 2018; Revised: 8 Nov 2018
CONSTITUTIONAL LAW 1

5. Regulation of Monopolies
● Monopolies are not prohibited, but highly regulated by the Constitution.
○ Art. XII, Sec. 19. The state shall regulate or prohibit monopolies when the public interest so
requires. No combinations in restraint of trade or unfair competition shall be allowed.
○ May be permitted to exist to aid the government in performing services and functions for
public interest
● Under the 1997 Concession Agreement, PIATCO is granted the exclusive right to operate a
commercial international passenger terminal within the Island of Luzon at the NAIA IPT III
○ The efficient functioning of NAIA IPT III is imbued with public interest.
○ The provisions of the 1997 Concession Agreement and the ARCA did not strip government of
its right to supervise the operation of the whole NAIA complex.
○ As the primary government agency tasked with the job, it is MIAA’s responsibility to ensure
that whoever by contract is given the right to operate NAIA IPT III will do so within the bounds
of the law and with due regard to the rights of third parties and above all, the interest of the
public.
○ The 2 service providers whose contracts whose duration extends beyond NAIA 3’s In-Service
date should not be unduly prejudiced

RULING: PIATCO Contracts are null and void in their entirety

Ablaza & Garen | A2022

Original digest: 7 Oct 2018; Revised: 8 Nov 2018