Legal Opinion - Contract Bulk Water - Sept. 27, 2013 Final

7/27/2019 Legal Opinion - Contract Bulk Water - Sept. 27, 2013 Final

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September 27, 2013

Hon. Godofredo A. Estupigan

Municipal Hall of Majayjay,

Majayjay, Laguna

Re : CONTRACT FOR THE SUPPLY OF BULK

WATER DATED AUGUST 1, 2013 BETWEEN

MUNICIPALITY OF MAJAYJAY AND

ISRAEL BUILDERS AND DEVELOPMENT

CORPORATION (IBDC)

Sir:

This refers to your legal query of September 16, 2013 regarding the legalityand validity of the above-stated Contract for the Supply of Bulk Water (subject

contract for short) dated August 1, 2011.

After thoroughly studying the subject contract and the circumstances/

conditions attending to its execution, we opined that the subject contract is

inexistent and void from the beginning for reasons described below:

1. The subject contract did not comply with itsattached condition.

The subject contract was executed pursuant to the Unsolicited Proposal of

IBDC. In the Notice of Acceptance dated May 09, 2011 made by the former

Municipal Mayor Teofilo B. Guera of the said Unsolicited Proposal, it is expressly

stated therein that the acceptance of IBDCs Unsolicited Proposal is subject to the

confirmation and approval of the Indicative Rate of return by the Investment

Coordination Committee of the National Economic Development Authority(ICC-NEDA). A copy of the said Notice of Acceptance is hereto attached as

Annex A.


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However, after the execution of the subject contract, it was discovered that

the Indicative Reasonable Rate of Return was not approved by ICC-NEDAbecause the subject contract and IBDCs Unsolicited Proposal were not received

and approved by NEDA as shown in the attached Certifications both dated July 11,

2012 hereto attached as Annexes B and C, respectively.

Since the subject contract was executed in violation of the conditionprovided in the Notice of Acceptance dated May 9, 2011, then it is quite clear that

the subject contract is null and void as the consent to it by the Municipality ofMajayjay was not produced by the concurrence of the offer and the acceptance. In

other words, there is no consent to or acceptance of the Unsolicited Proposal of

IBDC for failure of IBDC to comply with the condition prescribed in the saidNotice of Acceptance. The Supreme Court has time and again declared that the

contract is void when one of the essential requisites of a valid contract as

provided for by Article 1318 of the Civil Code is totally wanting.1

The law oncontracts provide that consent of the contracting parties is an essential requisite ofa valid contract.2 Thus, the absence of consent of a contracting party renders the

contract null and void.3

The rule is that if the consent of one of the contracting party is predicated

upon the fulfillment of a condition, such condition shall first and foremost befulfilled before the contracting party actually gives his consent to the contract. The

fact that the Municipality of Majayjay gave a condition to IBDC before it

(Municipality of Majayjay) can give its acceptance to the Unsolicited Proposal of

IBDC, such conditional shall be fulfilled first before it can be said theMunicipality of Majayjay has indeed accepted the Unsolicited Proposal of IBDC.

In this case, however, IBDC failed to comply with the condition of theMunicipality of Majayjay.

2. The subject contract is contrary to BOT Law.A. The PROJECT did not comply with the

publication and approval requirement

under Section 4 or R.A. No. 7718.

1 Francisco vs. Herrera, G.R. No. 139982. November 21, 2002.2 Article 1318 (1), Civil Code of the Philippines.3 Spouses Guiang vs. Court of Appeals, G.R. No. 125172, June 26, 1998


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The subject contract states that Majayjay treated the Formal Proposal of

IBDC as unsolicited proposal in accordance with the issued GUIDELINES onJoint Venture (JVs) pursuant to Section 8 (Joint Venture Agreements) of executive

Order (EO) No. 423 dated April 30, 2005. But a closer look of the subject contract

will show that the same was entered into pursuant to BOT Law as it involved anunsolicited proposal from IBDC involving important and priority project of

Majayjay.

The provisions of the BOT Law were never complied with in the executionof the subject contract. The subject matter of the subject contract is the Majayjay

Water Project (PROJECT for short) involving the rehabilitation and improvement

of Majayjays existing water supply system and the development of a bulk waterfacilities as well as the operation and management of the water supply distribution

system of Majayjay, Laguna. It appears from the Water Contract that the

PROJECT is an important and priority project of Majayjay but there was nopublication and approval of the same as required under Section 4 of the R.A. No.7718 which mandates that:

SEC. 4. Section 4 of the same act is herebyamended to read as follows:

Sec. 4. Priority Projects. - All concerned

government agencies, including government-owned and-

controlled corporations and local government units, shall

include in their development programs those priorityprojects that may be financed, constructed, operated and

maintained by the private sector under the provisions ofthis Act. It shall be the duty of all concerned government

agencies to give wide publicity to all projects eligible for

financing under this Act, including publication in

national and,where applicable, international newspapersof general circulation once every six (6) months and

official notification of project proponents registered with

them.

The list of all such national projects must be part

of the development programs of the agencies concerned.The list of projects costing up to Five hundred million


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pesos (P500,000,000)4 shall be submitted to ICC of

NEDA for its approval and to the NEDA Board forprojects costing more than Five hundred million pesos

(P500,000,000)5. The list of projects submitted to ICC of

the NEDA Board shall be acted upon within thirty (30)working days.

The list of local projects to be implemented by

the local government units concerned shall be

submitted, for confirmation, to the municipal

development council for projects costing up to Twenty

million pesos; those costing above Twenty up to Fifty

million pesos, to the provincial development council;

those costing up to Fifty million, to the city

development council; above Fifty million up to Twohundred million pesos, to the regional development

councils; and those above Two hundred million pesos,

to ICC of NEDA. (Emphasis ours)

The PROJECT did not undergo the required publication of the project in

national newspaper of general circulation once every six (6) months. Neither isthere any record showing that the PROJECT was submitted for confirmation to the

Municipal Development Council or to the Provincial Development Council or the

Regional Development Council, as the case may be, or the project was submitted

to NEDA for its approval. In the first place, the PROJECT could not have beensubmitted for confirmation by Municipal Development Council or the Provincial

Development Council or the Regional Development Council or the approval byNEDA because the Water Contract does not state the COST of the PROJECT.

There is a complete absence of PROJECT COST in the Water Contract. Thus,

it is quite clear that the PROJECT and the Water Contract were made in gross

violation of Section 4 of R. A. No. 7718.

B. The PROJECT did not comply with thepublic bidding requirement underSections 5 and 6 of R.A. No. 7718.

4 As amended by ICC-NEDA5 As amended by ICC-NEDA


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The subject contract was executed pursuant to the Unsolicited Proposal of

IBDC but R.A. No. 7718 provides certain requirements to be considered asunsolicited proposal. Further, R.A. No. 7718 requires the publication of the

PROJECT and public bidding even for unsolicited proposal.

SEC. 5. A new section is hereby added after

Section 4 of the same Act and numbered as Section 4-A,to read as follows:

"SEC. 4-A. Unsolicited Proposals. - Unsolicited

proposals for projects may be accepted by any

government agency or local government unit on anegotiated basis: Provided, That, all the following

conditions are met: (1) such projects involve a new

concept or technology and/or are not part of the list ofpriority projects, (2) no direct government guarantee,

subsidy or equity is required, and (3) the government

agency or local government unit has invited by

publication, for three (3) consecutive weeks, in a

newspaper of general circulation, comparative or

competitive proposals and no other proposal is

received for a period of sixty (60) working days:

Provided, further, That in the event another proponent

submits a lower price proposal, the original proponent

shall have the right to match that price within thirty (30)working days." (Emphasis ours)

SEC. 6. Section 5 of the same Act is hereby

amended to read as follows:

"SEC. 5. Public Bidding of Projects. - Uponapproval of the projects mentioned in Section 4 of this

Act, the head of the infrastructure agency or local

government unit concerned shall forthwith cause tobe published, once every week for three (3)

consecutive weeks, in at least two (2) newspapers of

general circulation and in at least one (1) local

newspaper which is circulated in the region, province,

city or municipality in which the project is to be

constructed, a notice inviting all prospective


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infrastructure or development project proponents to

participate in a competitive public bidding for the

projects so approved.

"In the case of a build-operate-and-transferarrangement, the contract shall be awarded to the bidder

who, having satisfied the minimum financial, technical,organizational and legal standards required by this Act,

has submitted the lowest bid and most favorable termsfor the project, based on the present value of its proposed

tolls, fees, rentals and charges over a fixed term for the

facility to be constructed, rehabilitated, operated andmaintained according to the prescribed minimum design

and performance standards, plans and specifications. For

this purpose, the winning project proponent shall beautomatically granted by the appropriate agency thefranchise to operate and maintain the facility, including

the collection of tolls, fees, rentals, and charges in

accordance with Section 5 hereof.

xxx xxx xxxxxx xxx xxx

"The public bidding must be conducted under a

two-envelope/two-stage system: the first envelope tocontain the technical proposal and the second envelope to

contain the financial proposal. The procedures for thissystem shall be outlined in the implementing rules and

regulations of this Act.

"A copy of each contract involving a projectentered into under this Act shall forthwith be submitted

to Congress for its information." (Emphasis ours)

It does not appear from the subject contract that the supposed unsolicited

proposal of IBDC was published in a newspaper of general circulation for three

(3) consecutive weeks in at least two (2) newspapers of general circulation and

one (1) local newspaper which is circulated in the regions, province, city or

municipality in which the project is to be constructed. As provided in thesubject contract, what has been published on June 22, 2011 in Remate is merely


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the Invitation to Apply for Eligibility and to Submit Comparative Proposal. This

Invitation to Apply for Eligibility and to Submit Comparative Proposal is not therequired public bidding of the alleged unsolicited proposal of IBDC. Even then, the

said publication in Remate would not constitute as sufficient compliance with

Section 5 of R.A. No. 7718 because what is required therein is publication for three(3) consecutive weeks in newspaper of general circulation.

Worse, the period of time provided under Section 5 of R.A. 7718 for the

submission of the comparative proposal is for a period of sixty (60) working daysbut even before the expiration of these sixty (60) working days, Majayjay have

already executed the Water Contract with IBDC. The invitation to submit

comparative proposal was supposedly published on June 22, 2011 in Remate.Counting the said required period of sixty (60) working days from June 22, 2011,

the said sixty (60) working days will expire on September 15, 2011 but the Water

Contract was executed on August 1, 2011 or twenty eight (28) working daysbefore the expiration of the said 60 days period. On this score alone, the WaterContract has openly and grossly violated the BOT Law.

Further, assuming for the sake of argument without in any way concedingthat the alleged publication made on June 22, 2011 in Remate is a publication of

the questioned unsolicited proposal, still the same would not be a sufficientcompliance with the required publication under Section 6 of R.A. No. 7718

because what is required therein is publication of the unsolicited proposal once

every week for three (3) consecutive weeks, in at least two (2) newspaper of

general circulation and in at least one (1) local newspaper which is circulated inthe region, province, city or municipality in which the project is to be constructed.

Clearly then, the Water Contract was executed in flagrant violation of the requiredpublication and public bidding as provided under R. A. No. 7718.

C. The PROJECT did not comply with therepayment scheme requirement under

Sections 8 of R.A. No. 7718.

Moreover, not only did the subject contract violate Sections 5 and 6 of R.A.No. 7718 but the same has likewise violated Section 8 thereof which provides that:

SEC. 8. Section 6 of the same Act is herebyamended to read as follows:


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"SEC. 6. Repayment Scheme. - For the financing,

construction, operation and maintenance of anyinfrastructure project undertaken through the Build-

Operate-and-Transfer arrangement or any of its

variations pursuant to the provisions of this Act, theproject proponent shall be repaid by authorizing it to

charge and collect reasonable tolls, fees, and rentals forthe use of the project facility not exceeding those

incorporated in the contract and, where applicable, theproponent may likewise be repaid in the form of a share

in the revenue of the project or other non-monetary

payments, such as, but not limited to, the grant of aportion or percentage of the reclaimed land, subject to the

constitutional requirements with respect to the ownership

of land: Provided, That for negotiated contracts, and forprojects which have been granted a natural monopoly orwhere the public has no access to alternative facilities,

the appropriate government regulatory bodies, shall

approve the tolls, fees, rentals, and charges based on areasonable rate of return: Provided, further, That the

imposition and collection of tolls, fees, rentals, and

charges shall be for a fixed term as proposed in the

bid and incorporated in the contract but in no case

shall this term exceed fifty (50) years: Provided,

furthermore, That the tolls, fees, rentals, and charges maybe subject to adjustment during the life of the contract,

based on a predetermined formula using official priceindices and included in the instructions to bidders and in

the contract: Provided, also, That all tolls, fees, rentals,

and charges and adjustments thereof shall take into

account the reasonableness of said rates to the end-usersof private sector-built infrastructure: Provided, finally,

That during the lifetime of the franchise, the project

proponent shall undertake the necessary maintenance andrepair of the facility in accordance with standards

prescribed in the bidding documents and in the contract.

In the case of a Build-and-Transfer arrangement, the

repayment scheme is to be effected through

amortization payments by the government agency or

local government unit concerned to the project


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proponent according to the scheme proposed in the

bid and incorporated in the contract." (Emphasis ours)

Section 8 of R.A. No. 7718 clearly provides that the maximum term

of a BOT contract shall not exceed fifty (50) years. But the subject contractprovides for a mind boggling term of 100 years, inclusive of the 50 years

automatic extension. Not only that. The subject contract provides for a termof 100 years and the sharing scheme from the revenues to be generated from

the PROJECT in the proportion ofninety percent (90%) in favor of IBDCand ten percent (10%) only in favor of Majayjay but the subject

contract does not provide and specifically stipulate the COST of

PROJECT.

The subject contract is completely silent on the PROJECT Cost which

is material and essential not only for the approval of the PROJECT asmentioned-above but also to determine repayment scheme provided underSection 8 of R.A. No. 7718. Without the PROJECT COST, the repayment

scheme for the PROJECT cannot be determined. Thus, this is another clear

violation of the BOT Law. It is quite ridiculous that the subject contractallowed for a term of 100 years, inclusive of the 50 years automatic

extension, as well as provide for the stipulation on the sharing of therevenues in the proportion of ninety percent (90%) in favor of IBDC and ten

percent (10%) only in favor of Majayjay but it does not specifically stipulate

for the PROJECT COST which is the sole responsibility and obligation of

IBDC.

3. Section 8 of Executive Order No. 423 datedApril 30, 2005 is not applicable to the subject

contract and that the subject contract is

contrary to the Procurement Law.

It may be argued that the subject contract is not based upon the BOT

Law because the subject contract provides that the formal proposal of IBDC

was treated as an unsolicited proposal in accordance with the aforestatedGUIDELINES. However, the said GUIDELINES for JV pursuant to Section

8 of E.O. No. 423 dated April 30, 2005 will find no application to the subject

contract because Section 4.0 of E.O. No. 423, sub-paragraph 4.1, explicitlyprovides that Local Government Units (LGUs) are not covered by these

Guidelines.


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Assuming for the sake of argument without in any way conceding that

E.O. No. 423 dated April 30, 2005 is applicable to the subject contract, still,the subject contract is null and void for it was executed in violation of

Section 12 of E.O. No. 423 dated April 30, 2005 which explicitly provides

that Procurement contracts of local government units, regardless of the

source of funds, shall be subject to the provisions of Republic Act No.

9184 and its implementing Rules and Regulations.

The subject contract is, without a doubt, in violation of Republic ActNo. 9184 because the said law requires certain procedures on competitive

bidding. Republic Act No. 9184 requires preparation of bidding documents

following the standard forms and manuals prescribed by the GPPB,6

pre-procurement conference,7 advertising of invitation to bid,8 pre-bid

conference,9 eligibility requirements of a prospective bidder shall be made

under oath,10

submission of Bids shall have technical and financialcomponents,11 all Bids shall be accompanied by Bid security,12 opening ofall the Bids publicly at a specified date, time and place, 13Bid evaluation,14

post qualification,15 notice of Award,16 and performing security.17 In

awarding the subject contract to IBDC, it appears that there is no

record of compliance with the foregoing requirements of Republic Act

No. 9184. The subject contract is neither a negotiated procurement as itdoes not fall to any of the thirteen (13) types of a negotiated procurement

applicable in specific and distinct situation enumerated under the Revised

Implementing Rules and Regulation of Republic Act No. 9184.

4. The subject contract is contrary to morals andpublic policy.

The subject contract is contrary to morals and public policy because it

virtually granted to IBDC the exclusive right/authority and the sole control to

6 Section 17, Republic Act No. 9184.7 Section 20, Republic Act No. 9184.8

Section 21, Republic Act No. 9184.9 Section 22, Republic Act No. 9184.10 Section 23, Republic Act No. 9184.11 Section 25, Republic Act No. 9184.12 Section 27, Republic Act No. 9184.13 Section 28, Republic Act No. 9184.14 Article IX, Republic Act No. 9184.15 Article X, Republic Act No. 9184.16 Section 37, Republic Act No. 9184.17 Section 39, Republic Act No. 9184.


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extract, develop and manage all the water resources of Majayjay for the next100 years oruntil 2111. In other words, the subject contract practically limitedthe rights of Majayjay and its residents/inhabitants to exercise and enjoy its water

resources. Not only that. The subject contract explicitly provides for a sharing in

revenues generated from the PROJECT under the sharing agreement of 90% infavor of IBDC and only 10% in favor of Majayjay . Yet, the subject contract

does not provide and stipulate for the COST of the PROJECT which shall be thesole responsibility of IBDC. It has been held by the Supreme Court that the

governing principle is that parties may not contract away applicable provisions oflaw, especially peremptory provisions dealing with matters heavily impressed

with public interest.18 Otherwise, the contract is denied legal existence, deemed

inexistent and void from the beginning.19

It is a general rule that agreements against public policy are

illegal and void. Under the principles relating to the doctrine of publicpolicy, as applied to the law of contracts, courts of justice will not recognize

or uphold any transaction which, in its object operation, or tendency, is

calculated to be prejudicial to the public welfare, to sound morality, or to

civic honesty. The test is whether the parties have stipulated for somethinginhibited by the law or inimical to, or inconsistent with, the public welfare.

An agreement is against public policy if it is injurious to the interests of the

public, contravenes some established interest of society, violates some

public statute, is against good morals, ends to interfere with the public

welfare or society, or as it is sometimes put, if it is at war with the interestsof society and is in conflict with the morals of the time. An agreement either

to do anything which, or not to do anything the omission of which, is in any

degree clearly injurious to the public and an agreement of such a nature thatit cannot be carried into execution without reaching beyond the parties and

exercising an injurious influence over the community at large are against

public policy. xxx The question whether a contract is against public policy

depends upon its purpose and tendency, and not upon the fact that no harm

results from it. In other words all agreements the purpose of which is to

create a situation which tends to operate to the detriment of the public

interest are against public policy and void, whether in the particular case

the purpose of the agreement is or is not effectuated. For a particular

18 Ibid.19

Dacasin vs. Dacasin, G.R. No. 168785, February 5, 2010.


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undertaking to be against public policy actual injury need not be shown; it is

enough if the potentialities for harm are present. (12 Am. Jur., pp. 662-664).

20

As mentioned above, the subject contract grants sole and exclusiveauthority to IBDC to extract water from Mangulila, Patak-Patak, Sinabak

Spring, Gundala Springs and the surface water of Dalitiwan River. On top ofit, the subject contract granted IBDC the right to extract water from all watersources of Majayjay under the principle of right of first refusal.

In other words, by virtue of the subject contract, IBDC has the sole and

absolute control over all water resources of Majayjay, Laguna for the next 100years or until 2111. Stated differently, on account of the Water Contract,

Majayjay and its residents/inhabitants would be deprived of the rights to use andenjoy all water sources of Majayjay for the next 100 years or until 2111 in favor

of IBDC without need of public bidding and even if IBDC did not pay a singlecentavo to Majayjay for the award of such enormous water rights. The payment to

Majayjay will not come from the pocket of IBDC but from the ten percent (10%)share of Majayjay from the revenues to be generated from the PROJECT. As the

saying goes in the vernacular, ang Majayjay ay iginisa sa sarili nitongmantika. A true public servant with social conscience will not allow such thing

to happen to his beloved town.

Also, IBDC does not have any authority under its Articles of Incorporationto engage in water business. The primary and secondary purposes of the Articles

of Incorporation of IBDC do not show and indicate of any authority for IBDC toengage in waterworks and/or in the operation, management maintenance and

rehabilitation of waterworks and water facilities. IBDC is not a water utilitycompany or company engaged in water business but a company engaged in

realty business as stated in the primary purpose of its Articles of Incorporation.

More so, IBDC does not have the required experience and technical expertise for

water extraction and in the construction, rehabilitation, operation and managementof water facilities. A copy each of the original and amended Articles of

Incorporation of IBDC are hereto attached as Annex D and E, respectively.

However, notwithstanding, the absence of authority and power of IBDC to

enter into the business of waterworks and/or in the construction, installation,

operation and management of water facilities, IBDC entered into and executed the

20 Sy Suan and Price Incorporated vs. Regala, G.R. No. L-9506, June 30, 1956.


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subject contract, and the previous administration of Majayjay have knowingly and

willingly allowed it. This action of IBDC is an ultra vires act. Ultra vires acts

or acts which are clearly beyond the scope of ones authority are null and

void and cannot be given any effect.21

An act of the corporation which is

either illegal or outside of express, implied or incidental powers as soprovided by law or the charter would be void under Article 5 of the Civil

Code, and the act is not susceptible to ratification.22

5. The subject contract is greatly disadvantageousagainst the Municipality of Majayjay.

The subject contract is greatly disadvantageous and prejudicial againstMajayjay and its residents/inhabitants for reasons that:

a. For the next 100 years or until 2111, IBDC shall have the exclusiveright and authority to extract water not only from Mangulila, Patak-

Patak, Sinabak Spring, Gundala Springs and the surface water of

Dalitiwan River but from all water sources of Majayjay.

b. This exclusive right and authority granted to IBDC was madewithout any appropriate public bidding and/or in violation of

BOT Law and the Procurement Law and without payment ofeven a single centavo to Majayjay.

c. IBDC was granted such exclusive right and sole authority toextract water from all sources in Majayjay without specifically

stipulating in clear term the COST of the PROJECT which is the

sole obligation and responsibility of IBDC. In other words, IBDCshall and will enjoy such exclusive water rights without

corresponding specific obligation on the COST of the PROJECT.

d. IBDC was granted the lion share from the revenues to be generatedfrom the PROJECT under the sharing agreement of 90% in favor ofIBDC and only 10% in favor of Majayjay but the corresponding

21 Acebedo Optical Company, Inc. vs. The Honorable Court of Appeals, G.R. No. 100152. March 31, 2000. 22 Rural Bank of Milaor (Camarines Sur) vs. Ocfemia, G.R. No. 137686, February 8, 2000, Separate Concurring

Opinion of Justice Vitug.


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obligation of IBDC for the PROJECT COST is not clearly and

specifically stipulated in the Water Contract.

e. IBDC was granted the exclusive right to extract water from all watersources of Majayjay beyond its corporate life. A corporation has acorporate life of fifty (50) years only. IBDC was incorporated and

registered with the Securities and Exchange Commission (SEC) onMay 20, 1993 or its corporate life is only until 2043. So, when it was

granted by the Municipality of Majayjay, Laguna of such water rights

the remaining corporate life of IBDC was only thirty two (32)

years but the term given to IBDC to exercise such right was for

100 years, inclusive of the 50 years automatic extension, or until2111. In other words, for the next 100 years or until 2111, or long

after the expiration of its corporate life, IBDC shall and will continue

to enjoy the exclusive right to extract all water sources of Majayjay.

f. IBDC was granted the exclusive right to extract water from all sourcesof Majayjay for the period of 100 years and under the sharing

agreement of 90% in favor of IBDC and only 10% in favor of theMunicipality of Majayjay but it appears from the Financial Statements

of IBDC for the years 2010 and 2009 that it does not have the requiredfinancial capacity to undertake the PROJECT. As provided in its

Balance Sheet (copy of which is enclosed hereto as Annex F)

attached to IBDCs Financial Statements for the years 2009 and 2010

submitted to SEC, IBDC has an authorized capitalization ofP10,000,000.00 but the Cash on Hand and in Bank of IBDC for 2009

was only P445,567.89, while for 2010 its Cash on Hand and in Bankwas only P450,721.35. This clearly shows that, at the time material to

the execution of the Water Contract, IBDC does not have the financial

capacity to undertake the PROJECT. State differently, IBDC will

finance its undertaking under the PROJECT not from its pocket butfrom the revenues to be generated from the PROJECT. Again, as the

saying goes in the vernacular, ang Majayjay ay iginisa sa sarili

nitong mantika.

6. The subject contract is inexistent and void fromthe beginning.

From the face of the subject contract, it will appear that it has a noblepurpose of improving the water distribution facilities of Majayjay at no cost to


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Majayjay. A closer examination, however, of the subject contract will show that its

object or purpose is not noble but devious. It appears that the ultimate and hiddenobject or purpose of the Water Contract is to enable IBDC to appropriate for itself

[and to the great prejudice of Majayjay and its residents/inhabitants] the exclusive

water rights and authority to extract all the water resources of Majayjay for thenext 100 years or until 2111, inclusive of the 50 years automatic extension,

without need of public bidding and without paying even a single centavo toMajayjay in consideration for the award of such water rights. This ultimate and

hidden object or purpose of the subject contract is contrary to law, morals, goodcustoms, public order or public policy.

This ultimate and hidden objective or purpose of the subject contract isshown from the fact that IBDC filed and submitted to Laguna Lake Development

Authority (LLDA) three (3) applications for issuance of water permits to its name

in three (3) separate locations in Majayjay, to wit: Brgys. Malinao, Piit andAmonoy, and upon verification from LLDA we have found that you have issued acertification to the effect that you have no objection to said water permit

applications of IBDC. A copy each of the said three (3) applications for water

permits of IBDC are hereto attached as Annexes G, H and I, respectively.

IBDC does not have the authority to apply under its name any water

permit from any and all sources of water in Majayjay because the subject

contract explicitly provides that such right to apply for water permit

exclusively belongs to Majayjay. Under the subject contract, the role of IBDC

in the application for water permit is merely to provide assistance in the

application of Majayjay. By giving no objection to said three (3) applications of

IBDC for water permits, the previous administration of Majayjay have in effectimpliedly authorized IBDC to appropriate for itself the water rights over the said

three (3) sources of water in Majayjay. Such act is undeniably greatly

disadvantageous and prejudicial to Majayjay and its residents/inhabitants. It is a

plain and simple betrayal of public trust. On account of which, the inhabitants andresidents of Majayjay were put under the whimps and caprices of a private

corporation which does not have any authority, experience, technical expertise and

financial capacity to operate a water system or water facility.

The subject contract is absolutely simulated and fictitious because, as

repeatedly mentioned above, it does not specifically stipulate the COST of thePROJECT. The subject contract is also completely silent on the consideration to be

paid by IBDC for the award to it of the questioned exclusive water rights over allwater resources of Majayjay. What is clear from the subject contract is that


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payment to Majayjay will not come from the pocket of IBDC but from the ten

percent (10%) share of Majayjay from the revenues to be generated from thePROJECT. Thus, the subject contract is absolutely simulated and fictitious as it

does not have stipulation on the specific consideration to be paid by IBDC to

Majayjay for the award to it of such water rights for a term of 100 years, inclusiveof the 50 years automatic extension.

Moreover, the object or purpose of Water Contract, among other things, is to

grant the award of water rights to IBDC over all water resources of Majayjay forthe next 100 years inclusive of the 50 years automatic extension. It bears to remind

that water rights belong to the State and not to Majayjay. Thus, water right is

outside the commerce of men. Only the State can grant and award water rights. Inshort, water rights are outside the commerce of men. In plain words, the object of

subject contract -water rights is beyond the commerce of men, thus, the Water

Contract is inexistent and void from the beginning. Article 1409 of the Civil Codemandates that:

Art. 1409. The following contracts are

inexistent and void from the beginning:

1. Those whose cause, object or purpose iscontrary to law, morals, good customs, public

order or public policy;

2. Those which are absolutely simulated orfictitious;

x x x x x x x x x

4. Those whose object is outside the commerceof men.

x x x x x x x x x

These contracts cannot be ratified. Neither can

the right to set up the defense of illegality be

waived.

Conclusion:

In view of the foregoing discussion, we opine that the subject contract is

void and inexistent from the beginning. The subject contract is not an ordinarycontract. It is a government contract. Unlike regular contracts and agreements,

government contracts should comply with all the requisites provided by laws.

Government contract are governed and regulated by special laws, failure to


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comply with which renders them void.23

The Supreme Court held in

COMELEC vs. Quijano-Padilla24 that the contract, as expressly declared by law,is inexistent and void ab initio. This is to say that the proposed contract

is without force and effect from the very beginning or from its incipiency, as if

it had never been entered into, and hence, cannot be validated either by lapse oftime or ratification. The Supreme Court also declared in Tatad vs. Garcia, Jr.25

that any government contract entered into without the required public bidding isnull and void and cannot adversely affect the rights of third parties.

The Supreme Court has time and again ruled that (a) void or inexistent

contract is one which has no force and effect from the very beginningit is as if it

has never been entered into and cannot be validated either by the passage of timeor ratification.26 It is worth stressing that (a) contract that violates the

Constitution and the law is null and void ab in itioand vests no rights and

creates no obligation.27

Recommendation:

Accordingly, we respectfully submit and recommend that the subject water

contract can be unilaterally cancelled by the local government of Majayjay as the

same is void and inexistent from the beginning. The Sangguniang Bayan ofMajayjay may pass a Resolution cancelling and setting aside the subject contract.

No judicial action is necessary to set aside a void contract. Such action would

be merely declaratory.

28

Thus, the Supreme Court declared in E. Razon, Inc. vs.Philippine Ports Authority29 that the Philippine Ports Authority could unilaterallycancel a void management contract. In the same vein, the Municipality of

Majayjay can unilaterally cancel the subject contract as the case of E. Razonsquarely applies in this case. In both cases, the contract is a government contract

which is contrary to law and thus in itself null and void. As the Supreme Courtdeclared in E. Razon case, it was well within the rights of the Philippine Ports

Authority to unilaterally cancel and treat as avoided the Management Contractand no arbitrariness may be attached to its exercise of this right.

23 Department of Health vs. C.V. Conchela & Associates Architects, 475 SCRA 218 [2005].24 438 Phil. 72 [2002].25 243 SCRA 436.26 Yun Kwan Byung vs. Philippine Amusement and Gaming Corporation, 608 SCRA 107 [2009].27 Chavez vs. Presidential Commission on Good Government, 307 SCRA 394.28 Aquino, Ramon C., The Civil Code of the Philippines, vol. 2, 1990 ed., p. 492.29 151 SCRA 233 [1987].


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Most importantly, we strongly recommend that the Municipality of

Majayjay should stop the implementation of the subject water contract. In

other words, the Municipality of Majayjay cannot and should not enforce or

implement the subject water contract for it will be a blatant violation of the

well-established jurisprudence that a void contract cannot be enforced. Thus,

the Municipality of Majayjay cannot and should not make any payment to

IBDC; otherwise, such payment will most likely be disallowed by the

Commission On Audit (COA) and for which the responsible public officers

shall be liable to make corresponding reimbursement for whatever payment

received by IBDC.

The Supreme Court had ruled in numerous occasions that a void contract

cannot be enforced. In Dacasin vs. Dacasin,30 the Supreme Court held that the

trial court cannot enforce the Agreement which is contrary to law. In Ty vs.

Banco Filipino and Savings Bank,31

the Supreme Court declared that a void trustagreement cannot be enforced. In Flores vs. Bagaoisan,32 the Supreme Courtdeclared that the conveyance of a homestead before the expiration of the five-year

prohibitory period following the issuance of the homestead patent is null and void

and cannot be enforced, for it is not within the competence of any citizen to barteraway what public policy by law seeks to preserve. There is, therefore, no doubt

that the Deed of Confirmation and Quitclaim, which was executed three years afterthe homestead patent was issued, is void and cannot be enforced.

Finally, once the contract is contrary to law, morals, good customs, public

order, or public policy, such contract is denied legal existence and it shall bedeemed inexistent and void from the beginning and hence cannot be enforced.

A void contract is equivalent to nothing and is absolutely wanting in civileffects. It cannot be validated either by ratification or prescription.33 The

rationale behind this is that a void contract vests no rights and creates no

obligation. If the contract does not create any right and obligation, there is

therefore nothing to enforce.

Please be guided accordingly.

30 G.R. No. 168785, February 5, 2010.31 G.R. No. 188302, June 27, 2012.32 G.R. No. 173365, April 15, 2010.33 Fuentes vs. Roca, G.R. No. 178902, April 21, 2010.


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Very truly yours,

PATERNO L. ESMAQUEL

MEILINE C. MEDALLA-MAQUILING

Cc:

Hon. Victorino Z. Rodillas

Municipal Mayor

Majayjay, Laguna

The Sangguniang Bayan of

Majayjay, Laguna

c/o Hon. Lauro C. MentillaVice Mayor

Majayjay, Laguna

Documents

Legal Opinion - Contract Bulk Water - Sept. 27, 2013 Final