DOJ Opinion No. 043, s. 2004

DOJ OPINION NO. 043, s. 2004 April 28, 2004 Secretary Leandro R. Mendoza Department of Transportation and Communications (DOTC) 17/F The Columbia Tower Brgy. Wack-Wack, Ortigas Avenue Mandaluyong City Sir : This refers to your request for confirmation by this Department of Opinion No. 047 dated March 18, 2004 rendered by the Office of the Government Corporate Counsel (OGCC) on the legality, validity, and enforceability of the Amended and Restated Settlement Agreement among the Light Rail Transit Authority ("LRTA"),Manila Bay Area Rapid Transit Corporation ("MBART"),and SNC-Lavalin International Inc. ("SLII") dated February 11, 2004 (the "Amended and Restated Settlement Agreement") for the LRT Line 1 Extension Project (the "Project"). By way of a background, you state the following information: LRTA and SLII entered into a Joint Venture Agreement dated September 4, 2000 ("JVA"),for the purpose of developing, financing and constructing the extension of the existing LRT Line 1 system from Baclaran to Bacoor, Cavite, integrating the extension and the existing line (the "Integrated System"),and operating and maintaining the Integrated System. On December 20, 2001, LRTA and SLII entered into an Implementation Agreement ("IA") that sets out the details of the Project's implementation and of the parties' respective rights and obligations in connection therewith. Under the JVA and the IA, SLII is responsible for designing, building and installing the civil works ("Civil Works") and the electro-mechanical systems ("E&M Systems");financing the Civil Works, through loans to be obtained by SLII from private lenders, and the E&M Systems, through private loans and equity of SLII. Upon completion, the Civil Works will be transferred to LRTA. The E&M Systems will be transferred to LRTA for a nominal consideration at the end of the 30-year term of the joint venture. SLII will contract all the loans and raise the equity required for the financing of the Civil Works and E&M Systems. iatdc2004 On the other hand, LRTA is responsible for contributing to the joint venture the use of the existing line and the completed Civil Works; acquiring the required land and rights of way; repaying SLII for the Civil Works out of its share of the revenues derived from the operation of the Integrated System or otherwise; operating the Integrated System; and obtaining national government guarantee for some of its obligations under the JVA. The JVA and IA provide for the creation of a Joint Management Advisory Committee ("JMAC") to be established by LRTA and SLII, which shall be responsible for the overall implementation of the Project. In this capacity, the JMAC will supervise all arrangements for the tendering, construction, installation, supply and financing of the Civil Works and the E&M Systems, as well as the Operation and Maintenance of the Integrated System. The JMAC will be composed of four members, two members to be appointed by LRTA, and two members to be appointed by SLII. The LRTA Administrator will be the Chairman of the Committee. To minimize completion and integration risks, the JVA and the IA provide that SLII provide a single point of responsibility for the financing, execution and delivery of the Civil Works and the E&M Systems according to schedule. Under the terms of the JVA and the IA, SLII will control and guarantee the performance of Civil Works and E&M Systems construction contractors and suppliers. It will also take charge of integrating the existing line and the extension and the Civil Works and the E&M Systems. cCDAHE By an Assignment Agreement dated February 13, 2002, between SLII and MBART, MBART assumed all of SLII's rights and obligations under the JVA and the IA and MBART became a party to such agreements. On March 15, 2003, LRTA gave its consent to such assignment. In line with the government's policy of transparency and competitive bidding in implementing infrastructure projects and in the course of implementing the JVA and the IA, the Government proposed and SLII and MBART agreed that the JVA be submitted as an unsolicited proposal under the BOT Law. In an opinion dated September 4, 2002, the Department of Justice confirmed that the "JVA may be accepted as an unsolicited proposal under Section 4-A of the BOT Law, subject to the required governmental approvals for unsolicited proposals under said law." On January 27, 2003, LRTA and SLII/MBART entered into a Settlement Agreement to set forth the terms of an amicable settlement of certain issues raised in connection with the JVA and the IA, and to pave the way for the Project to be submitted as an unsolicited proposal and implemented as such under the BOT Law. The Department of Justice has issued Opinion 7, Series of 2003, dated March 27, 2003 confirming the legality, enforceability and validity of the Settlement Agreement. Administrative requirements of the GoP have made it necessary to amend certain provisions of the Settlement Agreement and the Amended and Restated Settlement Agreement was entered into on February 11, 2004. The Amended and Restated Settlement Agreement contains the following provisions, among others. (Terms used in the following but not defined in the present letter have the same meaning as under the Amended and Restated Settlement Agreement): 1. SLII and MBART will amend the JVA and IA in the following manner and submit to LRTA the Amended JVA and the Amended IA: (a) A major portion of the Civil Works (the "Agreed Tendered Scope") will be subjected to competitive bidding through the JMAC. Prior to making an award for the Agreed Tendered Scope, SLII/MBART will submit to the JMAC the results of the bidding for confirmation that they conform to the JMAC-approved set of qualifications and technical, commercial and, where applicable, financing evaluation criteria, based on internationally accepted competitive bidding practices, provided, however, that if no action is taken by the JMAC within 5 Business days from such submission, then the award will be deemed confirmed by the JMAC; (b) SLII/MBART will retain full responsibility for the completion of the Extension and assume the integration and delivery risks thereof. To this end, the financing by MBART of the Civil Works Total Cost and E&M Systems Total Cost shall require that the Project Integration and Management Scope be undertaken directly by SLII/MBART; (c) The Project Schedule and Critical Milestone Dates and, where appropriate, the revenue sharing arrangements under the JVA and IA will be adjusted to account for the delays brought about by the comparative proposal process and the bidding of the Agreed Tendered Scope; (d) There will be a ceiling on the estimated price of the Agreed Tendered Scope. If, as a result of the competitive bidding of the entire Agreed Tendered Scope, the actual aggregate price of the Agreed Tendered Scope is lower than the price ceiling, LRTA agrees to share with MBART, on a 50%/50% basis, the difference between the price ceiling and the actual aggregate price of the Agreed Tendered Scope (the "Savings").In consideration for such share in the Savings, MBART agrees to assume 100% of any cost of the Agreed Tendered Scope in excess of the agreed price ceiling. LRTA's share of the Savings will be applied towards the reduction of the Civil Works Contract Price. SLII/MBART will not drawdown from the Civil Works Loan the amount corresponding to LRTA's share of such Savings. LRTA's Civil Works Payments will reflect the above adjustment in the Civil Works Loan drawdown. MBART's share of the Savings will not be considered as a reduction in the Civil Works Contract Price. SLII/MBART will be allowed to drawdown from the Civil Works Loan the amount corresponding to MBART's share in the Savings. 2. Upon receipt by LRTA of the Amended JVA and the Amended IA, LRTA, MBART, and SLII will negotiate and agree on the final terms of such agreements. The Amended JVA and Amended IA, as accepted by LRTA, will constitute SLII and MBART's unsolicited proposal ("Unsolicited Proposal").The Unsolicited Proposal shall be processed and accepted in accordance with the requirements of the BOT Law and its implementing rules and regulations ("IRR"). 3. SLII/MBART has incurred costs associated with the development of the Project (the "Development Costs"),which are detailed and estimated in the Amended and Restated Settlement Agreement. The Amended and Restated Settlement Agreement sets out the procedures for the valuation, certification, and payment of the Development Costs. LRTA, MBART, and SLII will jointly appoint an independent certification engineer ("ICE"),who will estimate and certify the Developments Costs. The ICE will be selected through competitive bidding to be undertaken by a committee composed of representatives from SLII/MBART and LRTA/DOTC. The appointment of the ICE is subject to the approval of the respective Boards of Directors of LRTA, SLII, and MBART. The amount of Development Costs, as certified by the ICE, plus additional amount to cover applicable taxes thereon (together referred to as the "Amounts Payable") shall be payable by LRTA to SLII in the amount or proportion set out herein below: a) an Earnest Money Deposit of United States Dollars USD 5,000,000.00 shall be payable by LRTA to SLII within fifteen (15) business days from the effective date of the Amended and Restated Settlement Agreement; b) fifty percent (50%) of the Amounts Payable, less the Earnest Money Deposit, shall be payable by LRTA to SLII, if and when the Parties do not reach an agreement on the terms of the Unsolicited Proposal within ninety (90) days from LRTA's receipt of the Amended JVA and Amended IA; TcHCDI c) One hundred percent (100%) of the Amounts Payable, less the Earnest Money Deposit, shall be payable by LRTA to SLII within fifteen (15) business days from the occurrence of any one the following events; (i) LRTA fails to proceed with the public call for competing proposal in conformity with the BOT Law and the IRR within two hundred and forty (240) Days from the date of effectivity of the Amended and Restated Settlement Agreement; (ii) LRTA issues a Notice of Award to a competing bidder; (iii) the Notice of Award is not issued within four hundred and eighty (480) Days from the effective date of the Amended and Restated Settlement Agreement for reasons not attributable to SLII/MBART; or (iv) the Notice of Award is issued to SLII/MBART but the Contract does not become effective within sixty (60) Days from such issuance (or such longer period as may be agreed upon in writing between the Parties) for reasons not attributable to SLII/MBART. Upon payment of the Development Costs to SLII, SLII/MBART will transfer to LRTA ownership of all Project assets (including, but not limited to, the Civil Works drawings and the E&M Systems plans and design). 4. Unless and until any one of the following events has occurred: i) Failure of SLII/MBART to submit the Amended JVA and Amended IA in accordance with the Amended and Restated Settlement Agreement; or ii) Receipt by SLII/MBART of all Amounts Payable pursuant to the Amended and Restated Settlement Agreement, and full written release by LRTA of the Bid Security, to the extent such may have been issued by SLII/MBART pursuant to the Amended and Restated Settlement Agreement; or iii) Following issuance of the Notice of Award to SLII/MBART, the Contract becomes effective as provided ( sic ) the Amended and Restated Settlement Agreement; or iv) Following issuance of the Notice of Award to SLII/MBART, the Contract does not becomes effective within sixty (60) Days from such issuance (or such longer period as may be agreed upon in writing between the Parties) for reasons attributable to SLII/MBART; SLII's and MBART's rights under the JVA and the IA, including termination payment and payment of the Development Costs, shall remain in full force and effect. 5. LRTA confirms that the evaluation process conducted by LRTA in respect of the JVA is the same process required under Section 10.6 (evaluation of unsolicited proposals) of the IRR. Accordingly, LRTA grants to SLII and MBART Original Proponent status and will promptly endorse the Unsolicited Proposal to the NEDA-ICC for clearance in accordance with the requirements of the BOT Law and the IRR. LRTA likewise confirms that MBART and SLII are deemed to have satisfied the qualification requirements of Section 10.13 of the IRR in light of their pre-qualification in respect of the JVA. 6. The procedure for inviting and evaluating comparative proposals will follow provisions of the BOT Law and the IRR. The preparation of the Terms of Reference will be in accordance with the rules and principles set out in the IRR. The OGCC, in its Opinion No. 047, current series, upheld the legality, validity and enforceability of the Amended and Restated Settlement Agreement on the following grounds: 1. LRTA is duly organized and validly existing under Philippine laws, and it has the power and authority to own properties and assets and to undertake the activities for which it was created; 2. Subject to its sound discretion, the same being a business decision, LRTA has the power to enter into and deliver the Amended and Restated Settlement Agreement and to exercise its rights and perform its obligations stated thereunder, and all actions required to authorize the execution and delivery by LRTA of the Amended and Restated Settlement Agreement and the performance by it of its obligations have been duly taken; 3. The obligations expressly assumed by LRTA under the Amended and Restated Settlement Agreement are, under LRTA's charter and other laws and regulations of the Philippines, legal, valid and binding obligations of LRTA and are enforceable against it in accordance with the terms of the Amended and Restated Settlement Agreement except corporate income taxes, payment of which, shall solely be the responsibility of MBART/SLII under Section 1.6.4 of the Amended and Restated Settlement Agreement. Further, the Supreme Court in the case of Republic of the Philippines, et al . vs . Manila Electric Company [ G . R . No . 141314, November 15, 2002 ] it was ruled that: "The ERB correctly ruled that income tax should not be included in the computation of operating expenses of a public utility .Income tax paid by a public utility is inconsistent with the nature of operating expenses. In general, operating expenses are those which are reasonably incurred in connection with business operations to yield further revenue or income. They are items of expenses which contribute or are attributable to the production of income or revenue. As correctly put by the ERB, operating expenses "should be a requisite of or necessary in the operation of a utility, recurring, and that it redounds to the service or benefit of customers." Income tax, it should be stressed, is imposed on an individual or entity as a form of excise tax or a tax on the privilege of earning income. In exchange for the protection extended by the State to the taxpayer, the government collects the taxes as a source of revenue to finance its activities. Clearly, by its nature, income tax payments of a public utility are not expenses which contribute to or are incurred in connection with the production of profit of a public utility. Income tax should be borne by the taxpayer alone as they are payments made in exchange for benefits received by the taxpayer from the State. No benefit is derived by the customers of a public utility for purposes of generating revenue or profit. Accordingly, the burden of paying income tax should be Meralco's alone and should not be shifted to the customers by including the same in the computation of its operating expenses ." (italics and quotation marks found in the original Decision). 4. All acts, conditions, necessary approvals, and things to be done, fulfilled, obtained or performed, including, without limitation, all consents, licenses, permits or approvals of or from any governmental agency or other authority in the Philippines in order to enable LRTA to enter into, exercise its rights and perform its obligations under the Amended and Restated Settlement Agreement and to make said Agreement admissible in evidence in any court or tribunal in the Philippines have been done, fulfilled, obtained, approved or caused to be done or approved in accordance with the Constitution, LRTA Charter, and other applicable laws of the Philippines. cETCID 5. Except as modified by the ruling in the Republic, et al . vs . Meralco case above-quoted, the execution, delivery and performance by LRTA of the Amended and Restated Settlement Agreement, do not contravene or violate the LRTA charter or any other laws of the Philippines or conflict with, or constitute a breach or default or an event that, with the giving of notice or lapse of time, would constitute a breach or default under any contract, undertaking or agreement to which LRTA is a party or which is binding upon it or any of its property or assets. 6. LRTA is, in relation to the Amended and Restated Settlement Agreement, subject to commercial law and suit, and neither it, nor its property is entitled to sovereign immunity or any other type of immunity from jurisdiction of any court, legal process, suit, judgment, execution on a judgment or attachment under the laws of the Philippines or in any action to enforce the Amended and Restated Settlement Agreement taken in the Philippines. The performance by LRTA of its obligations under the Amended and Restated Settlement Agreement constitutes commercial acts. 7. The Amended and Restated Settlement Agreement is in proper legal form under the laws of the Philippines for any legal proceeding for the enforcement thereof in the Philippines. 8. Under the Constitution of the Philippines, it is recognized that no law impairing the obligations of contracts shall be passed. In giving the opinion below, this Department has made the following assumptions: (1) that all documents submitted to this Department as copy or specimen documents conform to the originals thereof; (2) that all documents have been validly authorized, executed and delivered by all the parties thereto; (3) that the signatures on the originals of all the documents submitted are genuine; and (4) that the statements of fact made in the documents are true, correct and accurate. However, this Department has not taken into account the financial and technical merits of the Amended and Restated Settlement Agreement because they are within the official competence and jurisdiction of the LRTA and the National Economic and Development Authority. Based on the statements of fact you submitted and our reading of the Amended and Restated Settlement Agreement, it is our understanding that: 1. Administrative requirements of the government have made it necessary to amend certain provisions of the Settlement Agreement and the Amended and Restated Settlement Agreement was executed and signed by the parties in the light of the policy of transparency and competitive bidding, and to ensure that the government will get the most advantageous proposal for the Project. 2. Such government requirements were not reflected in either the JVA and the IA or the Settlement Agreement, and were not contemplated in the signed JVA, IA and Settlement Agreement. 3. In order to mitigate the effects upon the parties of the possible termination of the JVA and the IA, including the Settlement Agreement, the parties mutually agreed to execute the Amended and Restated Settlement Agreement. 4. Consistent with our Opinion dated September 4, 2002, 1 the JVA and the IA may be accepted as an unsolicited proposal under the framework of the BOT Law. 5. The Amended and Restated Settlement Agreement provides the principles and procedures in settling amicably certain issues affecting the termination of the JVA and the IA. After due consideration of the facts and issues involved in this instant request, this Department, consistent with the opinion expressed by the OGCC, believes that the LRTA can validly and legally enter into such Amended and Restated Settlement Agreement. Under the Civil Code of the Philippines, a contract is the law between the parties thereto. As such, the contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy. 2 As correctly pointed out by OGCC in its opinion, the LRTA, being a corporate entity and consistent with its charter, can enter into such agreement and be bound by it. The act was a business judgment of the LRTA as a corporation. Moreover, it appears that the purpose of the execution of the Amended and Restated Settlement Agreement is to give effect to the government's policy of undertaking government projects through a competitive bidding, aside from ensuring that the government will get the most advantageous proposal for the Project. Public bidding has long been the established general rule for government procurements at all levels. Resort to the public bidding process is mandatory, dictated, as it is, by public policy to promote fair competition and to ensure protection of government interest. This Department has had the occasion to echo the reason for public bidding in its Opinion No. 19, series of 1999, and Opinion No. 7, series of 2003, thus: The spirit behind the requirement of public bidding, as institutionalized by Presidential Decree No. 1594, is the promotion of fair competition among several bidders with end-in-view of curbing, if not preventing favoritism, fraud and corruption in government procurement and construction contracts ( see San Diego v . Municipality of Naujan, Province of Mindoro, 107 Phils . 118, citing 3 MC Quillin, Municipal Corporations, 2nd Ed . ,p . 1170 ; Harles Gaslight Co . v . New York, 83 N. Y. 309 ; and Dillon, Municipal Corporations, p . 1219 );(see also Caltex et al . ,v . Delgado Bros . ,et al . 96 Phil . 368 ).The design of the Legislature in requiring public bidding is to establish genuine and open competition after due public advertisement to prevent favoritism in awarding contracts and to secure honest methods of letting contracts of the public interest (see Morse v . City of Boston, 148 N.E. 813, 815 [1925] ).By its very nature and characteristic, a competitive public bidding aims to protect the public interest by giving the public the best possible advantages thru open competition ( Danville Maritime, Inc . v . Commission on Audit, 175 SCRA 701, 711 [1989] ).It is a mechanism that enables the government agency to avoid or preclude anomalies in the execution of public contracts ( National Food Authority v . Court of Appeals, 253 SCRA 471, 481 [1996] ). Premises considered, we hereby confirm OGCC Opinion No. 047, current series. Very truly yours, (SGD.) MA. MERCEDITAS N. GUTIERREZ Acting Secretary Footnotes 1. Opinion No. 74, series of 2002. 2. Article 1306, Civil Code of the Philippines .