DOJ Opinion No. 053, s. 1986

DOJ OPINION NO. 053 , s. 1986 June 17, 1986 Minister Jose Antonio Gonzales Chairman, Philippine Tourism Authority Manila Sir : This refers to your query whether or not the government may terminate/revoke the franchise granted to The Tourist Duty Free Shop, Inc. (TDFS). Presidential Decree No. 1193 granted the TDFS the authority to establish, operate and maintain duty and tax free stores at all international airports and seaports as well as selected hotels, tourist resorts and commercial or trading centers throughout the country. Under this decree, the TDFS is authorized to sell imported articles/merchandise duty/tax free (Sec. 6), to import equipment, fixtures and other materials necessary for its operations duty and tax free (Sec. 8), and it shall, in lieu of the payment of all business and income taxes, whether imposed by the national or local governments, pay annually seven percentum (7%) of its annual net sales (Sec. 10) and enjoy this exclusive grant for a period of 25 years from date of the Decree (Sec. 11). The legislative authority granted to TDFS to operate duty and tax free stores and to pay franchise tax in lieu of all other taxes, is in the nature of a franchise, because it confers a special privilege that does not belong to the citizens by common right (See Op. No. 33, s. 1974). As such, it constitutes a contract between the government and the grantee (Dartmouth College vs. Woodward, 4 Wheat. 578; MRR vs. Fafferty, 40 Phil. 224; 2 Willoughby, U.S. Constitutional Law, p. 1224), the obligation of which is secured from non-impairment by the Constitution (Art. IV, Sec. 11, 1973 Constitution in relation to Art. I, Sec. 1, Provisional Constitution). It is well-settled, however, that in appropriate cases the non-impairment clause cannot be invoked as against the right of the state to exercise its police power (U.S. vs. Gomez-Jesus, 31 Phil. 218; Vda. de Ongsiako vs. Gamboa, 47 O.G. 5313). Not only are existing laws read into contracts in order to fix obligations as between the parties, but the reservation of essential attributes of sovereign power is also read into contracts as a postulate of the legal order (See Home Building and Loan Association vs. Blaisdell, 290 U.S. 398). Thus, it has been held that the legislature, in the public interest, could put a stop to a lottery established under express state authority because "the legislature cannot bargain away the public health or the public morals" (Stone vs. Mississippi, 101 U.S. 814-819; see also Fertilizing Co. vs. Hyde Park, 97 U.S. 659). So may the economic interests of the state justify the exercise of its continuing and dominant protective power notwithstanding interference with contracts (Manigault vs. Springs, 199 U.S. 473; Hudson Water Co. vs. McCarter, 209 U.S. 349, 52 L. ed. 828). Neither the "contract clause" nor the "due process clause" has the effect of overriding the police power of the state, which cannot be abdicated nor bargained away, and which is inalienable even by express grant, all contract and property rights being held subject to its fair exercise (Atlantic Coast Line vs. Goldborough, 232 U.S. 548). The question is whether legislation is addressed to a legitimate end and the measures taken are reasonable and appropriate to that end (Home Building and Loan Assn., vs. Blaisdell, supra ). In this connection, the Constitution expressly provides that no franchise or right shall be granted except under the condition that it shall be subject to amendment, alteration or repeal by the National Assembly when the public interest so requires (Sec. 5, Art. XIV, 1973 Constitution in relation to Sec. 3, Art. I, Provisional Constitution). While this provision relates to franchises, certificates or other form of authorization to operate public utilities, such as railroads, carriers, telephone companies, electric light systems, ice plants and similar public service enterprises, it has been held that public markets are public services or utilities as much as the public supply and sale of gasoline and electricity, water and public transportation are (Co Chiong vs. Cuaderno, 83 Phil. 242). Thus, the establishment and maintenance and operation of public markets are governmental in nature, being among the public functions of the State, and therefore the opportunity of occupying stalls in public markets is a privilege that can be granted or withdrawn without impairing any one of the guarantees embodied in the Bill of Rights of the Constitution (Co. Chiong vs. Mayor of Manila, 83 Phil. 257). In analogous manner, it is believed that the operation of duty free shops may be deemed governmental in nature, and may be classified among the public functions of the state. It is a vital part of the tourism service, serving as an effective resource base for accelerated tourism development in the country (1st Whereas clause, P.D. 1493). For this reason, the TDFS was given tax benefits (Sections 8 and 10) and the exclusive authority to maintain tax-free stores, and its operations are subject to supervision and monitoring by the Central Bank and the Bureau of Customs (Secs. 2, 3 and 4). Clearly, the business is impressed with a public character, and the grant of authority should be deemed a license more than it is a contract with the state. Finally, in the light of the constitutional recognition of the power of the state to regulate or prohibit private monopolies when the public interest so requires (Sec. 2, Art. XIV), and in times of national emergency, to temporarily take over or direct the operation of any business affected with public interest (Sec. 7, Art. XIV), any assertion on the invalidity of legislation violation of the police power on the ground of a possible violation of contractual rights is not likely to meet with judicial approval. Accordingly, it is believed that the TDFS franchise may be terminated in the proper exercise of the police power. As to the necessity for invoking this sovereign power, this is a matter primarily of legislative judgment that would require further inquiry into the facts and circumstances of the case. prcd Very truly yours, (SGD.) NEPTALI A. GONZALES Minister of Justice