1. Tuason v. Bolanos, 98 Phil. 106 (Bellingan, Gracerlyn, Yusup, Jhenilyn)

2. Kilosbayan, Inc. v. Guingona, 232 SCRA110 (Benigay, Preceious, Villarmea, Mithi)

Kilosbayan Inc. vs. Guingona

G.R. No. 113375, May 5 1994, 232 SCRA 110

Facts

Philippine Charity Sweepstakes Office (PCSO) decided to establish an online lottery system for the purpose of increasing its revenue base and diversifying its sources of funds. A bidding was made, and Philippine Gaming Management Corporation (PGMC) made the highest bid. Thereafter, a contract of lease was awarded in favor of PGMC.

Under the contract: 1.) The lessor shall build, furnish and maintain at its own expense and risk, all the facilities needed to operate and maintain the on-line lottery system of PCSO. 2.) For and the consideration of the performance of the lessor of its obligations, PCSO shall pay the lessor of a fixed 4.9 % of the gross receipts of the ticket sales. 3.) The period of lease shall commence 90 days from the effectivity of this contract and shall run for a period of eight years, unless sooner terminated.

Petitioners then filed a special civil action for prohibition and injunction which seeks to prohibit and restrain the implementation of the “Contract of Lease” executed by the PCSO and PGMC. They contend that the PCSO cannot validly enter into the assailed Contract of Lease with the PGMC because it is an arrangement wherein the PCSO would hold and conduct the on-line lottery system in "collaboration" or "association" with the PGMC, in violation of Section 1(B) of R.A. No. 1169, as amended by B.P. Blg. 42, which prohibits the PCSO from holding and conducting charity sweepstakes races, lotteries, and other similar activities "in collaboration, association or joint venture with any person, association, company or entity, foreign or domestic."

Respondents submit that it is merely an independent contractor for a piece of work and as such, is not a co-operator of the lottery franchise with PCSO, nor is PCSO sharing its franchise, in ‘collaboration, association or joint venture’ with PGMC.

Issue

Whether or not the contract entered into between PGMC and PCSO is one of contract of lease or a joint venture.

Ruling

A careful analysis and evaluation of the provisions of the contract and a consideration of the contemporaneous acts of the PCSO and PGMC indubitably disclose that the contract is not in reality a contract of lease under which the PGMC is merely an independent contractor

for a piece of work, but one where the statutorily proscribed collaboration or association, in the least, or joint venture, at the most, exists between the contracting parties.

The language of the section is indisputably clear that with respect to its franchise or privilege “to hold and conduct charity sweepstakes races, lotteries and other similar activities,” the PCSO cannot exercise it “in collaboration, association or joint venture” with any other party. Whether the contract in question is one of lease or whether the PGMC is merely an independent contractor should not be decided on the basis of the title or designation of the contract but by the intent of the parties, which may be gathered from the provisions of the contract itself.

The language of the section is indisputably clear that with respect to its franchise or privilege “to hold and conduct charity sweepstakes races, lotteries and other similar activities,” the PCSO cannot exercise it “in collaboration, association or joint venture” with any other party. Whether the contract in question is one of lease or whether the PGMC is merely an independent contractor should not be decided on the basis of the title or designation of the contract but by the intent of the parties, which may be gathered from the provisions of the contract itself.

Concurring Opinion of Cruz, J.

PGMC is plainly a partner of PCSO in violation of law no matter how PGMC’s assistance is called or the contract is denominated. And when PCSO does avail itself of such assistance, how will it be operating the lottery? Undoubtedly, it will be doing so "in collaboration, association or joint venture" with PGMC, which, let it be added, will not be serving as a mere "hired help" of PCSO subject to its control. PGMC will be functioning independently in the discharge of its own assigned role as stipulated in detail under the contract. PGMC is plainly a partner of PCSO in violation of law, no matter how PGMC's assistance is called or the contract is denominated.

Concurring Opinion of Padilla, J.

The contract of lease is a joint venture between PCSO and PGMC. On a slightly different plane and, perhaps simplified, I consider the agreement or arrangement between the PCSO and PGMC a joint venture because each party to the contract contributes its share in the enterprise or project. PGMC contributes its facilities, equipment and know-how (expertise). PCSO contributes (aside from its charter) the market, directly or through dealers — and this to me is most important — in the totality or mass of the Filipino gambling elements who will invest in lotto tickets. PGMC will get its 4.9% of gross receipts (with assumption of certain risks in the course of lotto operations); the residue of the whole exercise will go to PCSO. To any person with a minimum of business know-how, this is a joint venture between PCSO and PGMC, plain and simple.

The supreme court took pains in explaining further…

…why they considered the contract as joint venture, because as the ponente remarked: “[the Contract of Lease] is outstanding for its careful and meticulous drafting designed to give an immediate impression that it is a contract of lease” and Associate Justice Cruz, in his concurring opinion, agreed, “It is a clever instrument, to be sure, but we are, gratifyingly, not deluded. Lawyers have a special talent to disguise the real intention of

the parties in a contract to make it come ostensibly within the provisions of a law although the real if furtive purpose is to violate it. That talent has been exercised in this case, but not convincingly enough.”

Cited are stipulations from the contract that further proves that it is a joint venture:

1. Rent is not in fixed amount. The 4.9% may be drastically reduced and in extreme cases, nothing may be due or demandable at all because PGMC binds itself to bear all risks if revenue from ticket sales are insufficient to pay the entire prize money. This risk-bearing provision is unusual in a lessor-lesse relationship.

Associate Justice Cruz, in his concurring opinion added: “The flexibility of this amount is significant. As may be expected, it will induce in PGMC an active interest and participation in the success of PCSO that is not expected of an ordinary detached lessor who gets to be paid his rentals — not a rental fee — whether the lessee's business prospers or not. PGMC's share in the operation depends on its own performance and the effectiveness of its collaboration with PCSO. Although the contract pretends otherwise, PGMC is a co-investor with PCSO in what is practically, if not in a strictly legal sense, a joint venture.”

2. Payment of investment in the event of contract suspension / breach. If the contract were indeed one of lease, the payment of the expected profits or rentals for the unexpired portion of the term of the contract would be enough.

3. The prohibition of PGMC to directly or indirectly undertake activities adverse to PCSO online lottery. If the PGMC is engaged in the business of leasing equipment and technology for an online lottery system, we fail to see any acceptable reason why it should allow a restriction on the pursuit of such business.

4. Requiring the listing in the local stock exchange and offer at least 25% of its equity to the public. If the PGMC is merely a lessor, this imposition is unreasonable and whimsical, and could only be tied up to the fact that the PGMC will actually operate and manage the system; hence, increasing public participation in the corporation would enhance public interest.

5. Designation of PCSO the necessary personnel to monitor and audit the daily performance of the online lottery system, hence, confirming that it is the PGMC which will operate the system and the PCSO may, for the protection of its interest, monitor and audit the daily performance of the system.

6. PCSO’s authority to validly terminate the contract if the PGMC becomes insolvent or bankrupt or is unable to pay its debts.

These in effect, exhibit and demonstrate the parties’ indivisible community of interest in the conception, birth and growth of the online lottery, and, above all, in its profits, with each having a right in the formulation and implementation of policies related to the business and sharing, as well, in the losses.

3. Information Technology Foundation of the Philippines v. COMELEC, 419 SCRA 141 (Cadiz, Jethro, Tam, Leoni)

4. Aurbach v. Sanitary Wares Manufacturing Corporation, 180 SCRA 130 (Cuevas, Leslie, Subrian, Chandrina)

Aurbach vs. Sanitary Wares Manufacturing Corporation

180 SCRA 130

December 15, 1989

FACTS

In 1961, Saniwares, a domestic corporation was incorporated for the primary purpose of manufacturing and marketing sanitary wares. One of the incorporators, Mr. Baldwin Young went abroad to look for foreign partners, European or American who could help in its expansion plans.

In 1962, American Standards Inc. (ASI), a Delaware corporation, entered into an Agreement with Saniwares and some Filipino investors whereby ASI and the Filipino investors agreed to participate in the ownership of an enterprise, taking 40% equity in the venture and the Filipino Group taking 60% which would engage primarily in the business of manufacturing in the Philippines and selling here and abroad vitreous china and sanitary wares.

The parties agreed that the business operations in the Philippines shall be carried on by an incorporated enterprise and that the name of the corporation shall be “Sanitary Wares Manufacturing Corporation”. The Agreement contained provisions on the Management of the joint venture corporation and the manner by which the two groups would elect the BOD:

“5. Management:

(a) The management of the Corporation shall be vested in a Board of Directors, which shall consist of nine individuals. As long as American-Standard shall own at least 30% of the outstanding stock of the Corporation, three of the nine directors shall be designated by American-Standard, and the other six shall be designated by the other stockholders of the Corporation.

The joint enterprise thus entered into by the Filipino investors and the American corporation prospered. Later, the 30% capital stock of ASI was increased to 40%. Unfortunately, along with the business success came the deterioration of the relationship between the two groups. The friction came to a head when the American group wanted to cast their votes during the annual stockholders’ meeting, not only on their 3 nominees, but also on the nominees of the Filipino group on the ground that Section 24 of the Corporation Code which provided for cumulative voting for stock corporations, they had a right to cast their votes on all nominees for the BOD.

It was the contention of the ASI that the actual intention of the parties should be viewed strictly on the “Agreement “ wherein it was clearly stated that the parties’ intention was to form a corporation and not a joint venture. On the contrary, the Lagdameo and Young Group pleaded that the Agreement failed to express the true intent of the parties as such disclaimer is directed at third parties for tax purposes and liabilities.

ISSUE

• What is the nature of the business established by the parties—a joint venture or a corporation?

RULING

The basic doctrine when it comes to joint venture arrangement, which like any partnership arrangement, it is primarily contractual in character. The rule is that whether the parties to a particular contract have thereby established among themselves a joint venture or some other relation depends upon their actual intention which is determined in accordance with the rules governing the interpretation and construction of contracts. The Court resolved that in the instant case that the parties agreed to establish a joint venture and not a corporation. Under the Agreement, there are two groups of stockholders who established the corporation with provisions for a special contractual relationship between the parties. Moreover, ASI in its communications referred to the enterprise as joint venture.

ISSUE

• May the ASI group vote their additional 10% equity during the elections of Saniwares’ Board of Directors?

RULING

The correct view would be that the resolution of the question of whether or not the ASI Group may vote their additional equity lies in the agreement of the parties. The Court upheld the agreement of the parties as regards the allocation of director seats and the right of each group of stockholders to cumulative voting in the process of determining who the group’s nominees would be. As pointed out by the SEC, Section 5(a) of the Agreement relates to the manner of nominating the members of the board of directors while Section 3(a)(1) relates to the manner of voting for these nominees. ASI should not be allowed to interfere in the voting within the Filipino Group otherwise, ASI would be able to designate more than three directors and may even get a majority board seats, which is clearly contrary to the contractual intent of the parties and a possible violation or circumvention of the Anti-Dummy Law and the nationalization requirement of the Constitution. The joint venture character of the enterprise must always be taken into account so long as the company exists under its original agreement. Cumulative voting may not be used as a device to enable ASI to achieve stealthily or indirectly what they cannot accomplish openly.

ISSUE

• Who were the duly-elected directors of Saniwares for 1983 during its annual stockholders’ meeting on March 8, 1983?

RULING

The duly-elected directors of Saniwares were: Wolfgang Aurbach John Griffin, David Whittingham Emesto V. Lagdameo, Baldwin Young, Raul A. Boncan, Ernesto R. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee.

5. JG Summit Holdings, Inc. v. CA, 412 SCRA 10 (Cui, Ma. Chiarra, Sanchez, Frances)

JG SUMMIT HOLDINGS, INC vs. Court of Appeals, Committee on Privatization; Asset Privatization Trust and Philyards Holdings, Inc.

G.R. No. 124293, September 4, 2003

Facts:

On January 27, 1977 the National Investment and Development Corporation (NDIC), a government corporation, entered into a Joint Venture Agreement (JVA) with Kawasaki Heavy Industries, Ltd. Of Kobe Japan (KAWASAKI) for the construction, operation, and management of the Subic National Shipyard, Inc. which subsequently became the Philippine Shipyard and Engineering Corporation (PHILSECO). In the JVA, the NIDC and KAWASAKI will contribute 330 million pesos for the capitalization of PHILSECO in the proportion of 60%-40% respectively, and also that either party could exercise the right of first refusal should the other party decide to sell, assign, or transfer its interest in the joint venture. This provision does not apply if the transferee is a corporation owned of controlled by the Government or by a KAWASAKI affiliate.

Nine years later NIDC transferred all its rights, title, and interest in PHILSECO to the Philippines National Bank which was later transferred to the National Government due to Proclamation No 50, which established the Committee of Privatization (COP) and the Asset Privatization Trust (APT) to manage and dispose of non-performing assts of the National Government. Thus a trust agreement was entered into by the National Government and the APT.

It was deemed best to sell the National Government’s share in PHILSECO to private entities. The APT and KAWASAKI agreed that the latter’s right of first refusal originally agreed upon in the JVA be exchanged for the right to top, by 5%, the highest bidder for the said shares. Also, it was agreed that KAWASAKI be entitled to name a company in which it was a stockholder, which could exercise that right to top the bid. Later, KAWASAKI informed APT that Philyards Holdings, Inc. (PHI) would exercise this right to top the highest bid.

At the public bidding for the 896,869,942 shares of stock (or 87% share in PHILSECO) JG Summit Holdings, Inc. had the highest bid of 2 billion pesos. Petitioner was declared as the highest bidder, subject to the right of KAWASAKI/PHI to top the bid by 5%. PHI exercised its

right to top JG’s bid. Thus JG argued that PHILSECO is a public utility which must be 60% Filipino owned and consequently the right to top the JG’s bid by KAWASAKI is illegal because it allows foreign corporations to own more than 40% equity in the shipyard.

Issues:

1. Whether under the 1977 Joint Venture Agreement, KAWASAKI can purchase only a maximum of 40% of PHILSECO’s total capitalization.

2. Whether the right to top granted to KAWASAKI in exchange for its right of first refusal violates the principles of competitive bidding

Ruling:

1. The 1977 JVA reveals that there is nothing that prevents KAWASAKI from acquiring more than 40% of PHILSECO’s total capitalization.

1.3 of the JVA states that: “The authorized capital stock of PHILSECO shall be 330 million pesos. The parties shall there after increase their subscription in PHILSECO as may be necessary and as called by the Board of Directors, maintaining a proportion of 60%40% for MIDC and KAWASAKI, respectively, up to a total subscribed and paid-up capital stock of 312 million pesos.”

The phrase “maintaining a proportion of 60%-40%” refers to their respective share of the burden each time the Board of Directors decides to increase the subscription to reach the target paid-up capital of 312 million pesos. It does not bind the parties to maintain the sharing scheme throughout the existence of their partnership.

Likewise, the right to first refusal agreed to in the JVA is to protect the original or remaining joint venturer(s) or shareholder(s) from the entry of third persons who are not acceptable to it as co-venturer(s) or co-shareholder(s). The joint venture between the Philppines Government and KAWASAKI is in the nature of a partnership which unlike an ordinary corporation, is based on delectus personae (choice of persons). No one can become member of the partnership association without the consent of all the other associates. The right of first refusal thus ensures that all the parties are given control over who may become a new partner in substitution or in addition to the original partners.

The theory that KAWASAKI can acquire, as a maximum, only 40% of PHILSECO’s shares is correct only if a shipyard is a public utility. In such instance, the non-selling partner an alien can acquire only a maximum of 40% of the total capitalization of a public utility despite the grant of first refusal. The partners cannot, by mere agreement, avoid the constitutional proscription. But as afore-discussed, PHILSECO is not a public utility and no other restriction is present that would limit the right of KAWASAKI to purchase the Government’s share to 40% of Philseco’s total capitalization.

2. None of the parties questions the existence of KAWASAKI’s right of first refusal, which is concededly the basis for the grant of the right to top. Under KAWASAKI’s right of first refusal, the National Government is under the obligation to give preferential right to KAWASAKI in the event it decides to sell its shares in PHILSECO. It has to offer to KAWASAKI the shares and give it the option to buy or refuse under the same terms for which it is willing to sell the said shares to third parties. Along with the reasons previously stated, KAWASAKI is not a

mere non-bidder. It is a partner in the joint venture; the incidents of which are governed by the law on contracts and on partnership. Thus, the agreement to top the winning bid is justifiable due to KAWASAKI’s right to first refusal.

6. Hrs. of Tan Eng Kee v. CA, 341 SCRA 740 (Descallar, Hannah, Salon, Marchell)

7. Philex Mining Corporation v. Commissioner of Internal Revenue (Herrera, Norman, Salon, Epraim)

8. Traveno v. Bobongan Banana Growers Multi-Purpose Cooperative, 598 SCRA 27 (Magcanta, Brian, Real, Tara)

9. Mendoza v. Paule, 579 SCRA 341 (Maxino, Izzy, Moleta, Karen)