SC Rules China-Based Northrail Contractor Not Immune from Suit; Allows RTC to Hear Validity of Northrail Contract and Loan Agreements` Posted: March 2, 2012; By Jay B. Rempillo

Supreme Court of the Philippines

See - http://sc.judiciary.gov.ph/pio/news/2012/03/03021202.php


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The Supreme Court has unanimously held that the China National Machinery & Equipment Corp. Group (CNMEG)’s Contract Agreement with North Luzon Railways Corporation (Northrail) for the construction of a railway line from Manila to San Fernando, La Union (Northrail Project) is not an executive agreement and that CNMEG “is not entitled to immunity from suit.” Thus it remanded Civil Case No. 06-203 to the Makati Regional Trial Court (RTC), Branch 145 for further proceedings on the validity of the said Contract Agreement, as well as the counterpart financial agreement (Loan Agreement) between the Philippine government and the Export Import Bank of China (EXIM Bank).

In a 23-page decision penned by Justice Maria Lourdes P. A. Sereno, the Court En Banc denied CNMEG’s petition assailing the dismissal by the Court of Appeals of its (CNMEG’s) petition for certiorari assailing the RTC’s denial of its (CNMEG’s) motion to dismiss Civil Case No. 06-203 for lack of jurisdiction.

The Court stressed that the Contract Agreement was not concluded between the government of the Philippines and China but between Northrail and CNMEG, which is neither a government nor a government agency of China but a corporation duly organized and created under the laws of the People’s Republic of China.

“Since the Contract Agreement explicitly provides that Philippine Law shall be applicable, the parties have effectively conceded that their rights and obligations thereunder are not governed by international law…It is therefore clear from therefore clear from the foregoing reasons that the Contract Agreement does not partake of the nature of an executive agreement. It is merely an ordinary commercial contract that can be questioned before the local courts,” the Court held.

The Court further ruled that CNMEG engaged in a propriety activity hence was not covered by sovereign immunity. The Memorandum of Understanding (MOU) between CNMEG and Northrail shows that CNMEG sought the construction of the Luzon Railways as a proprietary or commercial venture in the ordinary course of its business. “Clearly, it was CNMEG that initiated the undertaking, and not the Chinese government,” ruled the Court.

The Court further held that based on the MOU, the Loan Agreement, and the letter of Chinese Ambassador to the Philippines Wang Chungui stating CNMEG and not the Chinese government initiated the Northrail Project, it was clear that the Northrail Project was a purely commercial transaction.

The Court held that even assuming arguendo that CNMEG performs governmental functions, such claim does not automatically vest it with immunity. Following the Court’s ruling in Deutshe Gesellschaft Für Technische Zusammernarbeit v. CA, in the absence of evidence to the contrary, CNMEG is to be presumed as a government-owned and-controlled corporation without an original charter. As a result, it has the capacity to sue and be sued under Section 36 of the Corporation Code.  In this connection, the Court noted CNMEG failed to present a certification from the Department of Foreign Affairs that it is entitled to sovereign or diplomatic immunity.

The Court also held that an agreement to submit any dispute to arbitration may be construed as an implicit waiver of immunity from suit. Under the contract agreement, CNMEG and Northrail, if any dispute arises, are bound to submit the matter to the HKIAC for arbitration.

In September 2002, CNMEG entered into a MOU with Northrail for the conduct of a feasibility study on a possible railway line from Manila to San Fernando, La Union or known as the Northrail Project.

In August 2003, the EXIM Bank and the Department of Finance (DOF) entered into a MOU, wherein China agreed to extend Preferential Buyer’s Credit to the Philippine government to finance the Northrail Project. The Chinese government designated EXIM Bank as the lender, while the Philippine government named the DOF as the borrower. Under the August 30 MOU, EXIM Bank agreed to extend an amount not exceeding US$400,000,000 in favor of the DOF, payable in 20 years, with a 5-year grace period, and at the rate of 3% per annum.

In October 2003, Ambassador Wang wrote the DOF of CNMEG’s designation as the Prime Contractor for the Northrail Project.

On December 30, 2003, Northrail and CNMEG executive a Contract of Agreement for the Construction of Section 1, Phase 1 of the North Luzon Railway System from Caloocan to Malolos on a turnkey basis. The contract price for the Northrail Project was pegged at US$421,050,000.

On February 26, 2004, the Philippine government and EXIM Bank entered into a counterpart financial agreement – Buyer Credit Loan Agreement No. BLA 04055, where EXIM Bank agreed to extend Preferential Buyer’s Credit in the amount of US$400M in favor of RP to finance the construction of Phase I of the Northrail Project.

On February 13, 2006, respondent taxpayers filed in the Makati RTC a complaint for annulment of contract and injunction against CNMEG, the Office of the Executive Secretary, the DOF, the Department of Budget and Management (DBM), the National Economic Development Authority (NEDA), and Northrail before the RTC. The RTC set the case for hearing on the issuance of injunctive reliefs, prompting CNMEG to file an Urgent Motion for Reconsideration of this order. Before the RTC could rule on this, CNMEG filed a motion to dismiss the case arguing the RTC did not have jurisdiction over it.

On May 15, 2007, the RTC issued an omnibus order denying CNMEG’s motion to dismiss eventually prompting CNMEG to elevate case to the CA. (GR No. 185572, China National Machinery & Equipment Corp. Group v. Judge Santamaria, February 7, 2012)

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