Republic v. Manila Electric Co.

FIRST DIVISION

[G.R. No. 212268. September 28, 2022.]

REPUBLIC OF THE PHILIPPINES, petitioner,vs. MANILA ELECTRIC COMPANY, NATIONAL POWER CORPORATION and POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT CORPORATION, respondents.

NOTICE

Sirs/Mesdames :

Please take notice that the Court, First Division, issued a Resolution datedSeptember 28, 2022, which reads as follows:

"G.R. No. 212268 (Republic of the Philippines v. Manila Electric Company, National Power Corporation and Power Sector Assets and Liabilities Management Corporation). — In this Petition for Review on Certiorari1 (petition), petitioner Republic of the Philippines (the Republic) seeks to reverse and set aside the Decision dated 15 April 2014 2 promulgated by the Court of Appeals (CA) in CA-G.R. CV No. 99110.

Antecedents

The Republic, through the Office of the Solicitor General (OSG), initiated this petition questioning the validity of the Settlement Agreement 3 entered into between respondents National Power Corporation (NPC) and the Manila Electric Company (MERALCO) way back in 2003. 4

The Settlement Agreement covers some of the covenants by MERALCO under the "Contract for the Sale of Electricity" 5 (CSE) it previously entered into with the NPC, a government-owned and controlled corporation organized and existing under and by virtue of Republic Act No. (RA) 6395. 6

Based on its charter, the NPC is engaged in the generation, supply and sale of electricity to distribution utilities, electric cooperatives and certain end-users at rates approved by the government. 7 By virtue of Presidential Decree No. 40 8 dated 07 November 1972, the NPC became the sole owner and operator of all generating facilities supplying electric power to the grids set up by NPC. 9 However, on 10 July 1987, Executive Order No. 215 opened power generation to private sector involvement and allowed private corporations, cooperatives, or similar associations to construct and operate co-generation and electric generating plants which can sell to the grid. As a result, MERALCO, a private corporation, obtained a franchise to operate and maintain a distribution system in Metro Manila, Bulacan, Cavite, and Rizal, as well as certain municipalities, cities, and barangays in Batangas, Laguna, Quezon, and Pampanga. 10

RA 9209 11 authorized MERALCO to charge consumers within its service area. On 21 November 1994, MERALCO and NPC entered into a CSE 12 for a period of 10 years, specifically, from 01 January 1995 to 31 December 2004. Under the CSE, NPC was obligated to supply and MERALCO was required to purchase a minimum volume of power and energy from NPC (the minimum offtake quantities) at the rates approved by the Energy Regulatory Board, now the Energy Regulatory Commission (ERC). These minimum offtake quantities are prescribed below: 13

 

Year	Capacity	Energy (GWH)
1995	2,971	18,582
1996	3,271	20,093
1997	3,454	21,054
1998	3,498	20,516
1999	3,575	20,498
2000	3,556	19,692
2001	3,601	19,911
2002	3,601	19,883
2003	3,600	20,023
2004	3,602	20,186 14

 

Any proposed amendment to these rates should not reduce the contract demand to less than 3,600 megawatts beginning in the year 2001. 15

Despite its CSE with NPC, MERALCO still needed to source part of its power demand from the independent power producers (IPPs) because of the inadequacy and unreliability of NPC's energy supply and the economic advantage that MERALCO and its consumers could derive as a result thereof. 16 MERALCO's contracts with the IPPs contained take-or-pay provisions similar to the minimum offtake quantities under the CSE. CAIHTE

The CSE also obligated MERALCO to pay minimum monthly charges even if the actual volume of the power and energy drawn from the NPC falls below the stated minimum quantities. This provision was put to the test when between the years 2002 to 2004, MERALCO committed to purchase the minimum volume of 60,092-gigawatt hertz (GWH); but drew less than the minimum offtake quantities provided in the CSE and only paid for the energy actually drawn. NPC then served a claim upon MERALCO to pay up the minimum monthly charges. MERALCO not only resisted the claim but countered it with its own claims against the NPC, attributing the fault to the delay in the construction of NPC's transmission lines that prevented MERALCO from fully dispatching the electricity contracted with IPPs. MERALCO also claimed that NPC supplied energy directly to customers within MERALCO's franchise area, a direct violation of the CSE that prompted MERALCO to serve a notice of termination to NPC. 17

The parties brought the dispute to mediation which was overseen by the late Hon. Sedfrey A. Ordonez and former World Energy Council Chairman Antonio V. Del Rosario (Del Rosario). 18 NPC was represented by Edgardo M. del Fonso, then president of Power Sector Assets and Liabilities Management Corporation (PSALM), and Rogelio M. Murga (Murga), then president of the NPC. The State was also represented by Vincent S. Perez, Jr., then Secretary of the Department of Energy and a member of the NPC Board. On the other hand, MERALCO was represented by its President and Chief Operating Officer, a member of the Board of Directors, and its Regulatory Management Office Head. 19

On 15 July 2003, a Settlement Agreement 20 was reached by the parties after going through extensive negotiations. In the Settlement Agreement, MERALCO agreed to pay NPC the amount of P27,515,000,000.00 for 18,222 GWH, which represents the difference between the aggregate minimum offtake quantities for the years 2002, 2003 and 2004; and the amount actually purchased by MERALCO. NPC, however, extended credits to MERALCO in the amount of P7,465,000,000.00 for the delay in the completion of the transmission facilities as well as the corresponding sales NPC made directly to customers within MERALCO's franchise area. 21 Thus, MERALCO's payables were reduced to P20,050,000,000.00.

Between the years 2003 and 2004, MERALCO made payments to NPC that exceeded the parties' estimate. This was taken against the settlement amount, reducing it further by P14,000,000,000.00. 22 The remaining balance was to be gradually collected from the consumers, pursuant to a "pass-through provision" in the Settlement Agreement allowing MERALCO to pay NPC the balance from amounts paid by the customers. The provision, however, requires the approval of the ERC to become effective. An excerpt of the said provision is replicated below:

Section 1.2 NPC shall give MERALCO credit due to the delayed completion of transmission facilities as of the date of this Agreement as well as for energy corresponding to NPC's sales to directly connected customers located in MERALCO's existing franchise areas. These shall correspond to a combined amount of PESOS: SEVEN BILLION FOUR HUNDRED SIXTY-FIVE MILLION AND 00/100 (P7,465,000,000.00) ONLY inclusive of all charges; bringing the net amount payable to NPC to PESOS: TWENTY BILLION FIFTY MILLION AND 00/100 (P20,050,000,000.00) ONLY to be recovered from MERALCO's customers and settled with NPC, inclusive of all charges, in accordance with Annexes A1 and A2 hereof; provided that the actual recovery from the consumers and settlement with NPC, as approved by the ERC shall be subject to adjustments contemplated therein. In case MERALCO defaults in making the payments scheduled in Annexes A1 and A2 hereof, NPC may charge interest on the delinquent sum or sums in accordance with Section 4.2.2.1 of the CSE. In such event of default, NPC shall be relieved of the obligation to provide transmission rights under Section 2.1 hereof until the amount due is fully paid including accrued interests. (Emphasis supplied)

On 15 April 2004, MERALCO and NPC filed a Joint Application 23 with the ERC for the approval and implementation of the said pass-through provisions (ERC case). Initially, the OSG deputized NPC's lawyers to represent it during the proceedings. The Joint Application was tried and was deemed submitted for decision. However, after more than two years since its submission for resolution, the OSG itself intervened 24 and questioned the validity of the Settlement Agreement through an Opposition to the Joint Application, 25 based on the following grounds: DETACa

(i) The Settlement Agreement is grossly disadvantageous and prejudicial to the government as it waives amounts worth billions;

(ii) The Settlement Agreement was supposedly of no force and effect because it was neither submitted to, nor reviewed by, the OSG, in violation of the Revised Administrative Code of 1987 and the NPC Charter supposedly requiring the OSG's approval and legal guidance in connection with the Settlement Agreement;

(iii) MERALCO's and NPC's recourse to mediation, instead of arbitration as provided in the CSE, allegedly tainted the Settlement Agreement with invalidity;

(iv) NPC's Board of Directors, in approving the Settlement Agreement, supposedly committed an ultra vices act; and

(v) The Settlement Agreement should have been submitted to the Office of the President, Congress, and the COA for approval pursuant to Section 20 (1), Chapter 4, Subtitle B, Title I, Book V of the Revised Administrative Code regarding any settled claim or liability. 26

MERALCO objected the Opposition for being belatedly filed and that the issue raised on the validity of the Settlement Agreement was obtuse to the issue raised in the proceedings: which is the validity of the pass-through provisions. The ERC however, ruled that it had no authority to address the validity of the Settlement Agreement, thus, suspended the proceedings and deferred resolution on the Joint Application. 27

Consequently, MERALCO filed a Petition for Declaratory Relief 28 (Declaratory Petition) before the Regional Trial Court (RTC) of Pasig City on 28 November 2009 against NPC, the Republic, and PSALM (which was mandated under the Electric Power Industry Reform Act (EPIRA) to take over and assume NPC's assets and liabilities). MERALCO believed that NPC and its officials are threatened under pain of an administrative lawsuit should they implement the Settlement Agreement without its validity judicially declared. 29

In its Comment, PSALM claimed that it was not a party to the CSE, the Settlement Agreement, nor the proceedings before the ERC; that PSALM and NPC are separate and distinct public corporations. On the other hand, NPC stated that the Settlement Agreement was well within its authority to enter into and that NPC and MERALCO submitted their dispute to mediation, while allowing them to maintain their original positions in the event that the Settlement Agreement is not approved. 30

It appears that both MERALCO and NPC were in talks for a possible compromise, thus the former moved to suspend the proceedings until the parties have reached a settlement. The RTC granted the said motion but eventually, the compromise failed and the case was set for pre-trial on 16 September 2010.

The RTC also required the Republic to file its comment, which it did, through the OSG, asserting that the Settlement Agreement is inherently defective and invalid because it was never submitted for review by the OSG pursuant to the Revised Administrative Code of 1987, Executive Order No. 292, and the Charter of the NPC under RA 8395. The Republic also argued that the NPC Board breached its authority when it waived NPC's claims under the CSE; that such breach is considered ultra vires for being prejudicial to the proprietary interest; and that the NPC charter did not expressly grant to NPC the power to compromise or release any settled claim or liability, such power is vested with the Commission on Audit (COA). Also, since the Settlement Agreement resulted in a reduction of NPC's claims, it constituted as a waiver of a settled claim, which, under Section 20, Chapter 4, Subtitle B, Title I, Book V of the Revised Administrative Code, the compromise or release of any settled claim or liability to the government exceeding P100,000.00 without authorization from the President, the COA and Congress, is invalid or unenforceable at the least. Finally, the Republic claimed that the terms of the Settlement Agreement is grossly disadvantageous and prejudicial to the government, thus, it prayed that the proceedings before the RTC be stayed and both MERALCO and NPC be directed to resort to arbitration pursuant to the Arbitration Clause of their CSE. 31

The RTC noted the submissions made by the Republic in its comment. Subsequently, the parties filed their respective pre-trial briefs, including the Republic, but from then on, the latter questioned the proceedings every step of the way.

On 16 September 2010, the RTC denied the Republic's motion to suspend the proceedings (Order dated 16 September 2010) but moved the pre-trial to 07 October 2010. 32 The OSG then filed a Motion to Dismiss or Stay Proceedings and Refer the Parties to Arbitration dated 27 September 2010 (motion to dismiss), citing litis pendentia and non-compliance with a condition precedent, i.e., arbitration and moving again that the proceedings be stayed or suspended and that the parties be referred to arbitration. The Republic also filed an ad cautelam Amended Pre-Trial Brief and asked for the resetting of the pre-trial conference, which the RTC allowed.

During the pendency of the Motion to Dismiss, the Republic moved for the reconsideration 33 of the Order dated 16 September 2010 and insisted on its prayer to either dismiss the case or stay the proceedings and refer the parties to arbitration.

The RTC denied both the Republic's motion to dismiss and motion for reconsideration in an Order 34 dated 03 November 2010. It also moved the pre-trial to 24 November 2010 with a stern warning that the Republic's failure to appear on the said date would lead to its declaration in default. aDSIHc

On 22 November 2010, the Republic filed a Petition for Certiorari, Mandamus and Prohibition (Rule 65 Petition) 35 with the CA, assailing the orders of the RTC relative to the continuation of the proceedings with the said court despite the Republic's pleas to suspend the same and refer the case to arbitration. Meanwhile, the RTC proceeded to pre-trial conference as scheduled. The OSG, representing the Republic, walked-out of the courtroom and refused to participate in the proceedings, thus, the RTC declared the Republic in default and set the case for the reception ex parte of MERALCO's evidence on 10 December 2010.

Aggrieved, the Republic filed with the CA a Supplemental Petition assailing the RTC's Pre-Trial Order dated 24 November 2010 declaring the OSG to have waived its right to participate in pre-trial and present evidence on its behalf.

On 01 December 2010, the CA granted the Republic's application for the issuance of a temporary restraining order (TRO). Later on, this was converted into a writ of preliminary injunction (Injunctive Writ). In deference to the CA, the RTC suspended its proceedings and held in abeyance the ex parte reception of MERALCO's evidence.

Almost a year after, or on 14 October 2011, the CA dismissed the Rule 65 Petition absent grave abuse of discretion on the part of the trial court. 36 It stated that generally, when a written provision for arbitration is not complied with, the trial court should suspend the proceedings and order the parties to proceed to arbitration in accordance with the terms of their agreement; the exception is if referral to arbitration does not appear to be the most prudent action, as when the issue could not be speedily and efficiently resolved in its entirety by allowing simultaneous arbitration proceedings and trials. 37 The CA noted that the Settlement Agreement was the product of mediation between MERALCO and NPC; both mediation and arbitration tend to achieve the same end so it would unnecessarily drag the resolution of the case to require them to arbitrate anew. For the CA, the more prudent and speedier course of action is for the RTC to proceed with the trial of the action for Declaratory Relief. 38 The dispositive portion of the CA's Decision reads:

IN VIEW OF ALL THE FOREGOING, the instant Petition including its Supplemental Petition are hereby DENIED. The Regional Trial Court, Branch 71 of Pasig City is hereby ORDERED to proceed to trial in S.C.A. Case No. 3392, and to immediately resolve the same with dispatch.

Pursuant to this directive, and upon motion 39 by MERALCO, the RTC, in its Order 40 dated 16 March 2012, allowed MERALCO to present evidence ex parte, stating that the denial of the Rule 65 Petition ipso facto dissolved the Injunctive Writ even if a motion for reconsideration was then pending with the appellate court. The RTC likewise denied reconsideration 41 of its Order dated 16 March 2012. 42

During the ex-parte hearing, MERALCO presented the following witnesses: (i) Mr. Jesus P. Francisco; (ii) Atty. Christian S. Monsod; (iii) Murga; (iv) Del Rosario; (v) Ms. Ivanna G. dela Pena; and (vi) Mr. Ciprinilo C. Meneses. 43 In the same hearing, the RTC denied the OSG's motion to be allowed to cross-examine the witnesses because allowing the same will be contrary to the tenor of the proceedings. 44 Moreover, the OSG had already been deemed to have waived its right to participate in the pre-trial and present evidence on its behalf. For its part, NPC manifested that it would no longer cross-examine the witnesses presented by MERALCO and that it would no longer present witnesses on its behalf. 45

On 29 May 2012, the RTC rendered a Decision, arriving at the following conclusions: (i) the Settlement Agreement is a valid contract; (ii) the RTC will respect the "wisdom of the negotiations" that led to the execution of the Settlement Agreement; (iii) mediation between MERALCO and NPC was not improper; (iv) the filing of the Petition for Declaratory Relief was the proper remedy and the RTC had jurisdiction over the Petition for Declaratory Relief; and (v) the approval of the pass-through is an issue that is within the ERC's exclusive jurisdiction. The dispositive portion of the Decision provides:

WHEREFORE, the Petition for Declaratory Relief is GRANTED. The Settlement Agreement executed on July 15, 2003 between the Manila Electric Company and National Power Corporation, independent of the pass-through provision which is reserved for approval of the ERC, is hereby declared VALID AND BINDING.

SO ORDERED.46

On appeal, 47 the Republic raised the following errors committed by the RTC: (i) proceeding to receive evidence ex parte for MERALCO; (ii) refusing to allow the Republic to participate in the trial of the case; and (iii) granting MERALCO's Petition for Declaratory Relief notwithstanding the NPC's alleged lack of authority to enter into the Settlement Agreement and the invalidity of the Settlement Agreement for being contrary to law and public policy. 48 These are the very same objections which the Republic raised since the ERC case.

Meanwhile, the Rule 65 Petition ultimately reached this Court 49 via a Petition for Review on Certiorari50 which We dismissed with finality in Our Decision dated 11 December 2013. 51

On 15 April 2014, the CA rendered a Decision in the Petition for Declaratory Relief denying the Republic's appeal and affirming the RTC's Decision. The dispositive portion of the CA Decision states:

WHEREFORE, the appeal is DENIED. The Decision dated May 29, 2012 of the Regional Trial Court, Branch 71, Pasig City in Special Civil Action Case No. 3392-PSG, is AFFIRMED. No pronouncement on costs.

The CA ruled that the RTC appropriately proceeded to trial since the injunctive writ immediately lost its efficacy as a matter of course, despite the filing of a motion for reconsideration. 52 The CA also found that the RTC correctly declared the Republic "as in default" due to the OSG's refusal to participate in the pre-trial. In addition, the CA upheld the validity of the Settlement Agreement, stating that what the law prohibits is the compromise of a "settled claim" without the approval of Congress. In this case, the amounts mediated upon by MERALCO and NPC are not settled claims. 53 Since the Settlement Agreement possesses all the elements of a valid contract, then there is no reason to invalidate it. 54

At this point, most of the timelines have overlapped, thus, to avoid confusion, We deem it best to provide a bulleted summary of the events that led to the institution of the present Petition: ETHIDa

a) 21 November 1994 — MERALCO and NPC entered into a Contract for the Sale of Electricity (CSE); 55

b) 2003 — the parties submitted their dispute to mediation during which extensive negotiations totaling to twenty meetings took place; 56

c) 15 July 2003 — MERALCO and NPC entered into a Settlement Agreement; 57

d) 15 April 2004 — filed with the ERC a Joint Application seeking approval and implementation of the pass-through provisions; 58

e) 08 May 2008 — the OSG, representing the Republic, intervened; 59

f) 23 November 2009 — MERALCO filed the Declaratory Petition with the RTC; 60

g) 15 February 2010 — the OSG filed a Comment to the Declaratory Petition with a prayer to defer proceedings and refer the parties to arbitration; 61

h) 16 September 2010 — the RTC issued an Order denying the OSG's request to suspend the proceedings; 62

i) 30 September 2010 — the OSG filed a Motion to Dismiss or Stay the Proceedings and Refer the Parties to Arbitration; 63

j) 04 October 2010 — the OSG received a copy of the Order dated 16 September 2010 of the RTC; 64

k) 15 October 2010 — the OSG filed a motion for reconsideration of the Order dated 16 September 2010 of the RTC; 65

l) 07 October 2010 — the Republic filed an ad cautelam Amended Pre-Trial Brief; 66

m) 19 October 2010 — the Republic filed an Omnibus Motion to Dismiss and Motion for Reconsideration of Order dated 16 September 2010 of the Honorable Court and to Cancel date of Tentative Pre-Trial Conference; 67

n) 04 November 2010 — the RTC denied the Republic's Omnibus Motion to Dismiss and Motion for Reconsideration; 68

o) 22 November 2010 — the OSG filed a Petition for Certiorari, Mandamus, and Prohibition with prayer for the issuance of a TRO and/or preliminary injunction with the CA; 69

p) 24 November 2010 — the RTC issued Pre-Trial Order and declared the Republic in default; 70

q) 01 December 2010 — the CA granted the Republic's prayer for the issuance of a TRO; 71

r) 03 February 2011 — the CA converted the TRO to an Injuctive Writ; 72

s) 14 October 2011 — the CA rendered a Decision denying the petition for certiorari; 73

t) 16 March 2012 — the RTC allowed MERALCO to present evidence ex parte; 74

u) 25 April 2012 — the CA denied the Republic's motion for reconsideration in the Rule 65 Petition; 75

v) 29 May 2012 — RTC rendered a Decision upholding the validity of the Settlement Agreement; 76

w) 21 June 2012 — the Republic appealed the Rule 65 Petition to this Court; 77

x) 25 June 2012 — the Republic appealed the Petition for Declaratory Relief with the CA; 78

y) 11 December 2013 — this Court rendered a Decision dismissing the Republic's appeal in the Rule 65 Petition; 79 and

z) 15 April 2014 — the CA denied petitioner's appeal in the Declaratory Petition. 80

Issues

The Republic raises the following issues for the Court's consideration, to wit:

1) Whether the court a quo erred in upholding the RTC's jurisdiction over the petition for declaratory relief instead of submitting the case between MERALCO and NPC to arbitration;

2) Whether the court a quo erred in upholding the validity of the Settlement Agreement despite NPC's failure to obtain the consent of the President, the COA, and Congress;

3) Whether the court a quo erred in upholding the validity of the Settlement Agreement despite being grossly disadvantageous and prejudicial to the government, contrary to law, morals, public interest, and public policy; and

4) Whether the court a quo erred in upholding the validity of the Settlement Agreement that was entered into without the participation and legal guidance of the OSG.

Ruling of the Court

We find the instant petition to be devoid of merit as explained in the ensuing discussions. cSEDTC

The court a quo correctly upheld the

This very first issue should be answered in the negative. The Republic has persistently claimed that the RTC does not have jurisdiction over the Petition for Declaratory Relief and harped on the fact that MERALCO and NPC should have submitted any controversy that may arise under the CSE to arbitration.

We disagree. The RTC has original jurisdiction over the Petition for Declaratory Relief filed by MERALCO. This is very clear from Section 1, Rule 63 of the Revised Rules of Court which provides that:

Any person interested under a deed, will, contract or other written instrument, or whose rights are affected by a statute, executive order or regulation, ordinance, or any other governmental regulation may, before breach or violation thereof bring an action in the appropriate Regional Trial Court to determine any question of construction or validity arising, and for a declaration of his rights or duties, thereunder.

What is determinative of the court's jurisdiction over the subject matter of a case are the allegations in the complaint. 81 In this case, MERALCO's petition is very straight forward. All MERALCO wants, and as reflected in its petition, is a declaration of the validity of the Settlement Agreement that resulted from the mediation between it and NPC, independent of the validity of the pass-through provisions which it reserved for the approval by the ERC. 82 No other inference can be made from this since a petition that seeks a declaration of the validity of the Settlement Agreement is a petition for declaratory relief, the jurisdiction of which pertains to the RTC.

Anent its insistence for an arbitration, the Republic based its claim on Clause 9.3 of the CSE, which We quote in its entirety:

Section 9.3. SETTLEMENT OF DISPUTES: ARBITRATION. —

The parties shall utilize the arbitration procedures under the Philippine Arbitration Law for the settlement of disputes. The parties shall therefore establish an arbitration committee consisting of one representative appointed by each party and the two shall appoint a [Chairperson] acceptable to both parties. The decision of the arbitration committee shall be final and include how the expenses of the arbitration shall be allocated between the parties. 83

The dispute between MERALCO and the NPC over the CSE had already been resolved through the Settlement Agreement. As mentioned, the lingering question left is the validity of the Settlement Agreement, which is a separate and distinct contract from the CSE. This issue can hardly be considered a dispute, much less one arising from the CSE. It does not appear that the dispute resolution clause in the CSE was adopted in the Settlement Agreement. Hence, it would be erroneous to invoke the dispute resolution clause in the CSE to a case involving the Settlement Agreement.

Notably, the Republic is not a party to the CSE. The only parties to the CSE are MERALCO and NPC. The NPC has a personality of its own, distinct and separate from that of the Government or the Republic. 84 Not being a party to the CSE, the Republic cannot invoke the arbitration clause. 85 An arbitration agreement is binding only on the parties thereto, as well as their assigns and heirs. 86

Relatedly, it is settled that an agreement to arbitrate is a contract, the relation of the parties is contractual, and the rights and liabilities of the parties are controlled by the law of contracts. 87 A pivotal feature of arbitration as an alternative mode of dispute resolution is that it is, first and foremost, a product of party autonomy or the freedom of the parties to "make their own arrangements to resolve their own disputes." 88 Hence, the binding force of an arbitration clause primarily flows from the parties' agreement.

Being contractual in nature, the parties are free to waive their respective rights to demand arbitration, 89 and agree on another mode of dispute resolution. Otherwise put, in the same manner that the parties may agree to arbitrate, they may also agree not to arbitrate. After all, alternative modes of dispute resolution put primacy on party autonomy.

Thus, despite the presence of the arbitration clause in the Settlement Agreement, MERALCO and NPC are not precluded from adopting other modes of dispute resolution upon mutual agreement. Parties should not be barred from resorting to mediation, which, ordinarily, is a less adversarial and more conciliatory process than arbitration. If the parties agree that their objectives could be achieved through the less burdensome process of mediation, then such decision should be respected in the absence of any law or rule requiring compulsory arbitration. SDAaTC

Besides, a deliberate and careful evaluation of Clause 9.3 of the Settlement Agreement would yield that there is nothing that prevents the parties from resorting to other modes of dispute resolution. Clause 9.3 simply states the preferred mode and is by no means exclusive. It does not prevent MERALCO and NPC from availing of other means by which to resolve their contractual conflicts and differences should they deem so fit and provided that they are in agreement thereon.

The phrase "utilize the arbitration procedures under the Philippine Arbitration Law" does not mean it excludes any other mechanism for settling disputes such as mediation. As a matter of fact, mediation is recognized as one of the alternative modes of dispute resolution. In LM Power Engineering v. Capitol Industrial Construction Groups, Inc., 90 no less than this Court cited mediation as one of the recognized methods in this wise:

Being an inexpensive, speedy and amicable method of settling disputes, arbitration — along with mediation, conciliation and negotiation — is encouraged by the Supreme Court. Aside from unclogging judicial dockets, arbitration also hastens the resolution of disputes, especially of the commercial kind. It is thus regarded as the "wave of the future" in international civil and commercial disputes.

In addition, the Alternative Dispute Resolution Act 91 which is the present law on arbitration, promotes the freedom of the parties to make their own arrangements in resolving their disputes. Section 2 of said law states:

SEC. 2. Declaration of Policy. — It is hereby declared the policy of the State to actively promote party autonomy in the resolution of disputes or the freedom of the party to make their own arrangements to resolve their disputes. Towards this end, the State shall encourage and actively promote the use of Alternative Dispute Resolution (ADR) as an important means to achieve speedy and impartial justice and declog court dockets. As such, the State shall provide means for the use of ADR as an efficient tool and an alternative procedure for the resolution of appropriate cases. Likewise, the State shall enlist active private sector participation in the settlement of disputes through ADR. This Act shall be without prejudice to the adoption by the Supreme Court of any ADR system, such as mediation, conciliation, arbitration, or any combination thereof as a means of achieving speedy and efficient means of resolving cases pending before all courts in the Philippines which shall be governed by such rules as the Supreme Court may approve from time to time. (Emphasis supplied)

The foregoing policy anent party autonomy is, in turn, sought to be implemented by Rule 2.1 of the Special Rules of Court on Alternative Dispute Resolution 92 mandating that:

RULE 2.1. General Policies. — It is the policy of the State to actively promote the use of various mode of ADR and to respect party autonomy or the freedom of the parties to make their own arrangements in the resolution of disputes with the greatest cooperation of and the least intervention from the courts. To this end, the objectives of the Special ADR Rules are to encourage and promote the use of ADR, particularly arbitration and mediation, as an important means to achieve speedy and efficient resolution of disputes, impartial justice, curb a litigious culture and to de-clog court dockets. (Emphasis supplied.)

Section 18 of the Alternative Dispute Resolution Act therefore allows parties to refer one or more or all issues arising in a dispute or during its pendency to other forms of alternative dispute resolution such as but not limited to (a) the evaluation of a third person, or (b) a mini-trial, (c) mediation-arbitration, or a combination thereof.

In this case, despite the existence of an arbitration clause in the CSE, both MERALCO and NPC submitted their dispute to mediation, resulting to the Settlement Agreement. The validity of the Settlement Agreement became the subject of a Petition for Declaratory Relief which the RTC took cognizance of, to the Republic's behest. The Republic then, in a series of filings opposing the proceedings before the RTC, insisted for it to dismiss or suspend from progressing and refer the case to arbitration, to no avail. Upon elevation to the CA, the said court validated the RTC's actuations, and rightfully so.

Apart from the parties' waiver of their respective rights to demand arbitration, another exception to the applicability of an arbitration clause was laid down in the case of European Resources and Technologies, Inc. v. Ingenieuburo Birkhahn + Nolte, Ingeniurgesellschaft mbh93 where We had this to say:

Even if there is an arbitration clause, there are instances when referral to arbitration does not appear to be the most prudent action. The object of arbitration is to allow the expeditious determination of a dispute. Clearly, the issue before us could not be speedily and efficiently resolved in its entirety if we allow simultaneous arbitration proceedings and trial, or suspension of trial pending arbitration.

In the case at bar, the parties had already resorted to mediation and even eked out a Settlement Agreement as a result, only for the Republic to demand for both the NPC and MERALCO to resort to arbitration.

Clearly, arbitration is not, in the final analysis, the most prudent action to take insofar as MERALCO and NPC are concerned as it becomes duplicative and would incur further delay in the resolution of the petition. Under such circumstances, said parties were within their rights in agreeing to just resort to mediation despite a prior agreement to resort to arbitration. They jointly believed that it was an expeditious, flexible and least costly mode of reaching a fair, reasonable, and mutually beneficial solution to their dispute. 94 Absent any law expressly prohibiting MERALCO and NPC from resorting to mediation, their decision to do so was not only a prudent course of action but likewise one which was valid and legal. acEHCD

To reiterate, there is no longer any arbitrable dispute to speak of when MERALCO and NPC agreed to settle any dispute between them under the CSE through mediation, thereby causing them at length to execute the Settlement Agreement. Section 4.1 of the Settlement Agreement provides without equivocation that:

This Agreement hereby extinguishes and settles finally and absolutely all outstanding, putative and contingent claims of the respective parties against each other owing to the CSE and renders each party harmless and free from any damage or liability arising from the aforesaid claims as contemplated in the 10th whereas clause. 95

In the absence of any arbitrable dispute, then the RTC correctly assumed jurisdiction over the case. No fault may be attributed to the CA in recognizing the validity of the RTC's jurisdiction over the petition for declaratory relief.

The Settlement Agreement remains

As regards the validity of the Settlement Agreement, the Republic undauntedly posits the notion that the NPC Board of Directors' approval of the Settlement Agreement without the appropriate authority from the Office of the President, the COA, and Congress is invalid and unenforceable. 96

At this juncture and given its valiant albeit misplaced position, it perchance behooves Us to keep the Republic aware on the finer points of the Administrative Code. To be precise, Section 20 of the law clearly provides that:

When the interest of the government so requires, the Commission may compromise or release in whole or in part, any settled claim or liability to any government agency not exceeding ten thousand pesos arising out of any matter or case before it or within its jurisdiction, and with the written approval of the President, it may likewise compromise or release any similar claim or liability not exceeding one hundred thousand pesos. In case the claim or liability exceeds one hundred thousand pesos, the application for relief therefrom shall be submitted, through the Commission and the President, with their recommendations, to the Congress; 97 (Emphasis supplied.)

In Benedicto v. Board of Administrators of Television Stations RPN, BBC and IBC, 98 We elucidated further in this wise:

Prior congressional approval is not required for the PCGG to enter into a compromise agreement with persons against whom it has filed actions for recovery of ill-gotten wealth. Section 20, Chapter 4, Subtitle B, Title I, Book V of the Revised Administrative Code of 1987 (E.O. 292) cited by Senator Guingona is inapplicable as it refers to a settled claim or liability. The provision reads:

xxx xxx xxx

The government's claim against Benedicto is not yet settled, and the ownership of the alleged ill-gotten assets is still being litigated in the Sandiganbayan, hence, the PCGGs Compromise Agreement with Benedicto need not be submitted to the Congress for approval.

In the more recent case of Binga Hydroelectric Plant, Inc. v. Tan, 99 We emphasized —

x x x anew, the import of the word "settled" in Section 20(1), Chapter IV, Subtitle B, Title I, Book V of EO No. 292. Citing an earlier case, Benedicto v. The Board of Administrators of Television Stations RPN, BBC and IBC, 38 we held in Strategic that the mandatory congressional approval of the compromise is only for claims that are already settled. This is in harmony with the scope of the COA's authority to only take cognizance of money claims that are liquidated and uncontested.

Thus, it is clear that the operative words that would trigger the intervention of the Office of the President, the COA and Congress in the compromise by government agencies are "settled claims or liabilities." In the Binga Hydroelectric Plant case, this Court defined a "settled claim" to mean as:

["Settled claims"] means that claims must be determined or readily determinable from vouchers, invoices, and such other papers within reach of accounting officers. It may also mean that the claim no longer presents a justiciable question ripe for judicial determination. The liability or non-liability of the government shall no longer be in issue and shall no longer require the examination of evidence and the use of judicial discretion.

NPC's claims were far from being "settled." Prior to the start of the mediation, MERALCO had to vigorously dispute the same even raising its own claims against NPC. The fact alone that MERALCO and NPC had to go through mediation and subsequently execute the Settlement Agreement in order to resolve their claims against each other more than suffices to show that the claims in question were unsettled as of the time. Therefore, MERALCO and NPC's claims against each other, disputed and negotiated prior to the execution of the Settlement Agreement, cannot by any stretch, be deemed settled so as to require the approvals of the President, the COA and Congress.

Furthermore, that the amount itself under the Settlement Agreement is up for review and approval of the ERC completely negates its classification as a settled claim. The settlement amount represents the fixed costs that NPC actually incurred to generate electricity and supply power to MERALCO over the 10-year term of the CSE. SDHTEC

The Settlement Agreement is not

The Republic also questions the validity of the Settlement Agreement for being grossly disadvantageous and prejudicial to the government, contrary to law, morals, public interest, and public policy.

We disagree.

Contrary to the Republic's asseverations, the Settlement Agreement is not grossly disadvantageous and prejudicial to the government. The amounts and values in the Settlement Agreement were reached after the following factors were taken into consideration:

(i) NPC's original claim amounting to PhP42.9 billion was reduced to PhP27.515 billion. This amount represents the value of MERALCO's undrawn energy for the period 2002 to 2004. 100 The reduction in the amount of PhP15.385 billion pertains to variable costs which NPC agreed not to charge MERALCO as a matter of fairness considering that NPC did not incur actual costs for ungenerated and undelivered energy.

(ii) MERALCO's original claim of approximately PhP113 billion was reduced to PhP7.465 billion which amount represents the value of its claims for the (a) delay in the completion of transmission facilities; (b) transmission line constraint; and (c) foregone revenue of MERALCO arising from NPC's continuing energy sales to directly-connected customers. 101 MERALCO conceded all its other claims against NPC worth approximately PhP4 billion in exchange for the concessions granted by NPC under the Settlement Agreement. 102

(iii) MERALCO and NPC agreed to offset the PhP27.5 billion NPC claims against the PhP7.465 billion MERALCO claims resulting in the net balance of approximately PhP20.05 billion payable to NPC. 103 Such balance was subsequently reduced to around PhP14 billion when MERALCO drew more electricity from NPC than the parties had expected 104 which means that MERALCO actually paid NPC the difference of PhP6.5 billion. 105

Based on the foregoing, it is clear that MERALCO had legitimate claims against NPC that need to be offset from the total amount owed by it. The mere offsetting of valid claims against the government does not render the agreement grossly disadvantageous and prejudicial to the State's interest. Especially since these amounts represent MERALCO's foregone revenue because NPC directly supplied customers within the jurisdiction of MERALCO; not to mention the delay in the completion of the transmission facilities. The offsetting of MERALCO and NPC's respective claims against each other is likewise tremendously advantageous to NPC because MERALCO's counterclaims against NPC are substantially greater than the credit given by NPC to MERALCO under the Settlement Agreement. MERALCO appears to be at the shorter end of the Settlement Agreement for it had counterclaims that far exceeded NPC's claim, only for it to agree and pay some P20.05 Billion more.

Neither does it involve the fraudulent transfer of NPC's assets to MERALCO to the prejudice of the government. Rather, the implementation of the Settlement Agreement will infuse much needed cash to the government thereby improving its budget situation. As a consequence of consenting to the Settlement Agreement, MERALCO waived a sizable portion of its valid claims against NPC thereby shielding the latter from exposure to liability to the full extent of the latter's claims, aside from the steep costs and expenses, if not hassles of a protracted litigation. The Settlement Agreement safeguards the interests of the consumers as well in terms of reduction in electricity rates.

As for the allegation that the Settlement Agreement is contrary to law, morals, public custom, and public policy, this is rooted from the Republic's allegation that the Settlement Agreement was made without the required consent: a matter which We have extensively discussed above.

The Settlement Agreement remains

Finally, the Republic makes an issue on the fact that the Settlement Agreement was entered into without the participation and legal guidance of the OSG. 106

This is outright non sequitur. The OSG's participation and legal guidance, by themselves, were never prerequisites for the entry of the NPC's Board of Directors into a settlement agreement. There is no law that makes such requirements. At best, the OSG has to make do with and rely on Section 35, Chapter 12, Title III, Book IV of the Administrative Code of 1987 which states:

Sec. 35. Powers and Functions. — The Office of the Solicitor General shall represent the government of the Philippines, its agencies and instrumentalities and its officials and agents in any litigation, proceeding, investigation or matter requiring the services of a lawyer. When authorized by the President or head of the office concerned, it shall also represent government owned or controlled corporations. The Office of the Solicitor General shall constitute the law office of the government, and, as such, shall discharge duties requiring the services of a lawyer. It shall have the following specific powers and functions:

(1) Represent the government in the Supreme Court and the Court of Appeals in all criminal proceedings; represent the government and its officers in the Supreme Court, the Court of Appeals, and all other courts or tribunals in all civil actions and special proceedings in which the government or any officer thereof in his official capacity is a party.

xxx xxx xxx

(8) Deputize legal officers of government departments, bureaus, agencies and offices to assist the Solicitor General and appear or representthe government in cases involving their respective offices brought before the courts and exercise supervision and control over such legal Officers with respect to such cases. (Underscoring and emphasis supplied.)

Yet, the phraseology itself of or the very words used in the above-mentioned provisions dispel the Republic and/or the OSG's strained assertion that its intervention and guidance are required. AScHCD

Our ruling in Diaz v. Republic of the Philippines107(Diaz) may very well prove informative. Therein We said:

The lack of authority on the part of the OSG rendered the compromise agreement between the parties null and void because although it is the duty of the OSG to represent the State in cases involving land registration proceedings, it must do so only within the scope of the authority granted to it by its principal, the Republic of the Philippines.

In this case, although the OSG was authorized to appear as counsel for respondent, it was never given the specific or special authority to enter into a compromise agreement with petitioner. This is in violation of the provisions of Rule 138, Section 23, of the Rules of Court which requires 'special authority' for attorneys to bind their clients.

From the foregoing, it is clear that the OSG does not have the inherent power or authority to enter into agreements on behalf of its clients. It requires "specific authorization" from its client before it can bind its client into an agreement. This is exactly what happened in the Diaz case. The OSG entered into a compromise agreement with the petitioner and on behalf of the respondent. Although authorized to appear as counsel for the respondent, the OSG was never authorized by the latter to enter into compromise agreements on its behalf. Accordingly, this Court voided the compromise agreement.

There really is no special principle involved in this. This is simply part of the mechanics on how an attorney-client relationship works. Thus Section 23, Rule 138 of the Revised Rules of Court states:

Section 23. Authority of attorneys to bind clients. — Attorneys have authority to bind their clients in any case by any agreement in relation thereto made in writing, and in taking appeals, and in all matters of ordinary judicial procedure. But they cannot, without special authority, compromise their client's litigation, or receive anything in discharge of a client's claim but the full amount in cash.

For whatever reason the OSG has, it cannot insist that it, rather than its client, is the one who has the right and power to approve a compromise agreement. The OSG loses sight that as a lawyer, it is just the representative of its client who is the principal. It stands to reason that while lawyers cannot compromise the cause of their clients without the latter's full authority, clients have the right to compromise their cases even without the intervention of their lawyers. In Gubat v. National Power Corporation, 108 this Court made it clear that:

Contrary to petitioner's contention, a client has an undoubted right to settle a suit without the intervention of his lawyer, for he is generally conceded to have the exclusive control over the subject-matter of the litigation and may, at any time before judgment, if acting in good faith, compromise, settle, and adjust his cause of action out of court without his attorney's intervention, knowledge, or consent, even though he has agreed with his attorney not to do so.

The OSG even attempts to mislead this Court by making it appear that it deputized the lawyers of NPC and submit to it for review and approval important documents including compromise agreements. This is the clear import of the following statement made by the OSG in its present Petition:

In pursuit of such power, the Solicitor General issued to NPC lawyers a letter of deputization worded as follows:

2. They shall submit to the Solicitor General for review, approval, and signature, all important pleadings and motions, as well as compromise agreements; 109

But just to be clear, the letter of deputization was issued in 2008 after MERALCO and NPC have filed their Joint Application with the ERC. But the Settlement Agreement was executed in 2003, and at the time, there is yet no case or pending litigation so to speak. The mediation that took place in 2003 cannot be categorized as a case or pending litigation; its very purpose is exactly to prevent them from happening. Since no pending litigation or court case was instituted by either NPC or MERALCO in connection with the CSE prior to the execution of the Settlement Agreement, the OSG has no legal basis to insist on supervising the signing of the same agreement.

To reiterate, the extent of the OSG's involvement in NPC's legal affairs is limited to its acting in a supervisory capacity in the handling of court cases. The supervision adverted to refers to the handling of court cases and must not be interpreted to include intervention in the making of NPC's contracts, let alone the approval of such essentially corporate juridical acts. The OSG is not part of NPC's Board of Directors in whom all the corporate powers of NPC are legally vested. More importantly, the OSG should not be allowed to meddle in matters that are beyond its official competence, such as deciding the business and economic issues involved in compromises especially where such issues have not risen to the level of court litigation, which, as noted above, is the extent and limit of OSG's supervisory role in the NPC's legal affairs. AcICHD

All told, NPC cannot unilaterally repudiate the Settlement Agreement, which is a product of the parties' mutual resolution to submit their dispute to mediation; and later insist on arbitration. Having voluntarily agreed to undergo mediation and, thereafter, having signified its consent to be bound by the provisions of the Settlement Agreement, NPC should not be allowed to renege on its obligations thereunder simply because it belatedly had a change of mind. NPC is bound by the terms of the Settlement Agreement and must comply therewith in utmost good faith.

WHEREFORE, premises considered, the instant Petition for Review on Certiorari is hereby DENIED and the Decision of the Court of Appeals dated 15 April 2014 in CA-G.R. CV No. 99110 is AFFIRMED.

SO ORDERED."

By authority of the Court:

(SGD.) LIBRADA C. BUENADivision Clerk of Court

By:

MARIA TERESA B. SIBULODeputy Division Clerk of Court

Footnotes

1. Rollo, Vol. 1, pp. 41-98.

2. Id. at 10-39; penned by Associate Justice Victoria Isabel A. Paredes and concurred in by Associate Justices Isaias P. Dicdican and Zenaida T. Galapate-Laguilles.

3. Id. at 159-164.

4. Id. at 47.

5. Id. at 130-148.

6. Entitled "AN ACT REVISING THE CHARTER OF THE NATIONAL POWER CORPORATION." Approved: 10 September 1971.

7. Rollo, Vol. 1, p. 237.

8. Entitled "ESTABLISHING BASIC POLICIES FOR THE ELECTRIC POWER INDUSTRY." Approved: 07 November 1972.

9. Rollo, Vol. 1, p. 237.

10. Id. at 174.

11. Entitled "AN ACT GRANTING THE MANILA ELECTRIC COMPANY A FRANCHISE TO CONSTRUCT, OPERATE AND MAINTAIN A DISTRIBUTION SYSTEM FOR THE CONVEYANCE OF ELECTRIC POWER TO THE END-USERS IN THE CITIES/MUNICIPALITIES OF METRO MANILA, BULACAN, CAVITE AND RIZAL." Approved: 09 June 2003.

12. Rollo, Vol. 1. pp. 130-148.

13. Id. at 45.

14. Id.

15. Id.

16. Id. at 162.

17. Id. at 46.

18. Id. at 47.

19. Rollo, Vol. 2, p. 906.

20. Rollo, Vol. 1, pp. 159-164.

21. Id. at 161.

22. Id. at 13.

23. Id. at 173-180.

24. Id. at 193-197.

25. Id. at 201-231.

26. Id. at 184-188.

27. Id. at 14.

28. Id. at 235-248.

29. Id. at 245-246.

30. Id. at 16.

31. Id. at 18.

32. Id. at 301.

33. Id. at 302-319.

34. Id. at 384-388.

35. With very Urgent Application for the Immediate Issuance of a Temporary Restraining Order and/or Writ of Preliminary Injunction and Request for Special Raffle of the Case. Docketed as C.A.-G.R. SP No. 116863.

36. Rollo, Vol. 1, pp. 402-433. Penned by Associate Justice Jane Aurora C. Lantion and concurred in by Associate Justices Agnes Reyes-Carpio and Michael P. Elbinias; and Associate Justice Japar B. Dimaampao (now a Member of this Court) and Presiding Justice Andres B. Reyes, Jr. with separate opinions.

37. Id. at 421.

38. Id. at 423.

39. Id. at 446-454.

40. Id. at 476-479.

41. Id. at 480-488.

42. Id. at 494-495.

43. Id. at 23.

44. Id. at 33.

45. Id. at 23.

46. Id. at 915.

47. Id. at 916.

48. Id. at 931-932.

49. Via petition for review on certiorari. Id. at 834-900.

50. 723 Phil. 776 (2013).

51. Rollo, Vol. 1, pp. 901-903.

52. Id. at 30.

53. Id. at 36.

54. Id. at 38.

55. Id. at 11.

56. Id. at 12.

57. Id.

58. Id. at 173-181.

59. Id. at 50-51.

60. Id. at 235-249.

61. Id. at 263-292.

62. Id. at 301.

63. Id. at 322-336.

64. Id. at 303.

65. Id. at 302-321.

66. Id. at 412.

67. Id. at 379-383.

68. Id. at 413.

69. Id.

70. Id. at 414.

71. Id. at 414-415.

72. Id. at 415.

73. Id. at 402-433.

74. Id. at 112.

75. Id. at 56.

76. Id. at 904-915.

77. Rollo, Vol. 2, pp. 824-899.

78. Rollo, Vol. 1, p. 58.

79. Rollo, Vol. 2, pp. 901-903.

80. Rollo, Vol. 1, pp. 10-39.

81. See Bilag v. Ay-ay, 809 Phil. 236 (2017).

82. Rollo, Vol. 1, p. 248.

83. Id. at 145.

84. Rayo v. Court of First Instance of Bulacan, 196 Phil. 572, 576 (1981).

85. Gilat Satellite Networks, Ltd. v. UCPB General Insurance Co., Inc., 731 Phil. 464, 11 (2014).

86. Id.

87. Ormoc Sugarcane Planters' Association, Inc. v. Court of Appeals, 613 Phil. 240, 5 (2009).

88. Koppel, Inc. v. Makati Rotary Club Foundation, Inc., 717 Phil. 337, 361 (2013).

89. CIVIL CODE, Art. 6: "Rights may be waived, unless the waiver is contrary to law, public order, public policy, morals, or good customs, or prejudicial to a third person with a right recognized by law."

90. 447 Phil. 705, 714 (2003).

91. Republic Act No. 9285, Sec. 2.

92. A.M. No. 07-11-08-SC, 01 September 2009.

93. 479 Phil. 114, 127-128 (2004).

94. Rollo, Vol. 1, p. 160.

95. Id. at 163.

96. Id. at 72.

97. ADMINISTRATIVE CODE, Subtitle B, Book V, Title I, Chapter 4, Sec. 20 (1).

98. 207 Phil. 659, 667-668 (1992).

99. 836 Phil. 46, 59 (2018).

100. Rollo, p. 161.

101. Id.

102. Id.

103. Id.

104. Id.

105. Id.

106. Id. at 59.

107. 625 Phil. 243, 262 (2010).

108. 627 Phil. 551, 556 (2010).

109. Rollo, p. 90.