City Council of Cebu City vs. Cuizon

City councilors and taxpayers have legal standing to file a representative suit on behalf of their city to question the validity of contracts executed by the city mayor without lawful authority and to prevent the unlawful disbursement of public funds. The real party in interest requirement does not bar such a suit because the action is brought for the benefit of the City, which is the real party in interest, and the mayor, who would ordinarily institute such proceedings, cannot be expected to sue to nullify his own contracts.

The plaintiffs-appellants were seven majority members of the City Council of Cebu City, suing "by themselves and representing the City Council of Cebu, as majority members thereof" and as citizens of the city. The defendants were the City Mayor, the Acting City Treasurer, the Philippine National Bank, and Tropical Commercial Company, Inc. The dispute concerned the authority of the City Mayor to contract for the purchase of road construction equipment on behalf of the city, governed by the Revised Charter of Cebu City (Republic Act No. 3857) and Sections 607 and 608 of the Revised Administrative Code, which require certification by the city treasurer that funds have been appropriated and are available before a contract is valid.

The seven plaintiffs-appellants, composing the majority of the Cebu City Council, filed a complaint on May 31, 1966, against the City Mayor, the Acting City Treasurer, the Philippine National Bank, and Tropical Commercial Company, Inc. They sought to declare null and void ab initio a contract entered into on February 5, 1966, by the City Mayor on behalf of the city for the purchase of road construction equipment from Tropical, and the corresponding letters of credit opened with the bank. The contract totaled $685,767.30 on a five-year deferred payment plan.

On November 20, 1965, the City Council approved Resolution No. 1648 authorizing the City Mayor to negotiate and contract for, by public bidding, U.S. or European made road construction equipment for the City of Cebu. On December 23, 1965, Resolution No. 1831 authorized the Mayor to utilize the City's time deposit with the Philippine National Bank as bond guarantee in opening a letter of credit. Because the bidding requirements restricted bidders to exclusive distributors with sales and service outlets in Cebu City, the bid was awarded to the only bidder, Tropical. On January 20, 1966, the City Council approved Resolution No. 122 requesting the Award Committee to forward the pertinent bidding papers for ratification by the Council.

Notwithstanding Resolution No. 122, the City Mayor signed the contract with Tropical on February 5, 1966, without having been duly authorized through a proper resolution and without compliance with Resolution No. 122. On February 14, 1966, the City Council, without knowledge that the contract had already been signed, approved Resolution No. 292 reiterating the request for the bidding papers. On March 10, 1966, the City Council approved Resolution No. 473 revoking Resolutions No. 1648 and No. 1831, discontinuing the purchase of road construction equipment, and advising all bidders of the Council's action.

On March 18, 1966, the presiding officer of the City Council sent a telegram to the manager of the Philippine National Bank informing him that the Council had revoked the Mayor's authority. On the same date, the Acting City Treasurer refused the bank's request to withhold P3,000,000.00 from the city's time deposit on the ground that no appropriation for the purchase of heavy equipment had been made by the City Council. Notwithstanding knowledge of the revocation, the City Mayor continued with the transaction by placing an order with the Equipment Division of the Continental Ore Corporation of New York for the purchase of the heavy equipment.

The Auditor General issued an endorsement affirming the city auditor's prior endorsement of nullity ab initio of the questioned contract for non-compliance with the requirements of Sections 607 and 608 of the Revised Administrative Code, stating that the City Council had not appropriated funds for the contract and the City Treasurer could not have made the required certification. The lower court dismissed the complaint, reasoning that the plaintiffs, as city councilors or taxpayers, were not parties to the contract and would not suffer injury different from that of the public in general, and that under Section 20(c) of the Revised Charter of Cebu City, only the City Mayor was empowered to institute judicial proceedings on behalf of the city.

• Legal Capacity as City Officials and Taxpayers: Plaintiffs asserted their right as city officials and taxpayers to question the validity of the contract entered into by the defendant city mayor and to contest the expenditures of the city's funds therefor beyond the mayor's authority or the disposition thereof in an unlawful or prohibited manner.
• Representative Suit on Behalf of the City: Plaintiffs maintained that their complaint was filed not as a personal suit but as a representative suit on behalf and for the benefit of the City of Cebu, in pursuance of their prerogative and duty as city councilors and taxpayers.
• Estoppel Cannot Be Founded on an Illegal Act: Plaintiffs refuted the mayor's claim of estoppel by citing the principle that estoppel cannot be founded upon an illegal act, submitting the Auditor General's endorsement affirming the nullity ab initio of the questioned contract.

• Lack of Legal Capacity to Sue: Defendant bank moved to dismiss the complaint on the grounds of plaintiffs' lack of legal capacity to sue and failure of the complaint to state a cause of action against it; defendants mayor and Tropical raised the same ground as an affirmative defense.
• Real Party in Interest: Defendants argued that plaintiffs, acting either as members of the city council or as private citizens, were not bound by the contract and could not maintain an action to annul the same since they would not be benefited or prejudiced by the judgment, and that the City of Cebu, being the party to the contract, must institute any action in its own name through the person authorized to do so.
• Mayor's Counterclaim: Defendant mayor contended that the suit was unfounded and intended to harass and embarrass him, praying for actual and temperate damages, P1-million moral damages, P50,000 exemplary damages, and P50,000 attorney's fees.
• Tropical's Counterclaim: Defendant Tropical prayed for judgment against the City of Cebu in the total sum of P242,939.90 with legal interest, representing bank charges it had advanced in cash for two letters of credit opened by the bank to cover the price of the equipment contracted for by the city mayor.

• Legal Capacity of City Councilors: Whether the majority members of the City Council of Cebu have legal capacity to institute a suit on behalf of the City to question the validity of a contract executed by the City Mayor without lawful authority.
• Legal Capacity of Taxpayers: Whether the plaintiffs, as taxpayers, have legal standing to file a suit to prevent the unlawful disbursement of public funds under contracts entered into by the City Mayor without legal authority.
• Applicability of Article 1397 of the Civil Code: Whether Article 1397 of the Civil Code, which limits actions for annulment of contracts to those obliged principally or subsidiarily, applies to bar the plaintiffs' suit.
• Applicability of Section 20(c) of the City Charter: Whether Section 20(c) of Republic Act No. 3857, empowering the City Mayor to institute judicial proceedings on behalf of the city, is the exclusive provision authorizing suits on behalf of the City.

• Legal Capacity of City Councilors: Yes. The suit was a representative suit on behalf of the City of Cebu, not a personal suit, and the plaintiffs, as city councilors exclusively empowered to make appropriations and who were the source of the mayor's authority, possessed the necessary authority, interest, and duty to file the suit on behalf of the City.
• Legal Capacity of Taxpayers: Yes. The plaintiffs' right and legal interest as taxpayers to file the suit to prevent what they believed to be an attempt to unlawfully disburse public funds of the city have long received the Court's sanction and recognition.
• Applicability of Article 1397 of the Civil Code: No. Article 1397 applies only to personal suits for annulment of contracts between other contracting parties; it does not apply to a representative suit filed on behalf of the City to question contracts executed without authority and contrary to law.
• Applicability of Section 20(c) of the City Charter: No. Section 20(c) has no applicability to the present suit, which is not one to recover properties and funds of the city or a suit against the city, but rather a representative suit on behalf of and purportedly for the benefit of the city, which the city mayor is loath to institute.

• Legal Capacity of City Councilors: The lower court's fundamental error was in treating plaintiffs' complaint as a personal suit on their own behalf and applying the test that plaintiffs should show personal interest as parties who would be benefited or injured by the judgment sought. The plaintiffs' suit is patently not a personal suit; they clearly and by the express terms of their complaint filed the suit as a representative suit on behalf and for the benefit of the City of Cebu. The lower court's narrow construction of the city charter cannot receive the Court's sanction because where the defendant city mayor's acts and contracts are precisely questioned as unlawful, ultra vires, and beyond the scope of his authority, the city mayor would be the last person to file such a suit on behalf of the city, since he precisely maintains the contrary position that his acts have been lawful and duly bind the city. To adhere to the lower court's narrow interpretation would mean that no action against a city mayor's actuations and contract could ever be questioned in court, since no city mayor would file such an action to nullify contracts he executed and which he naturally believes to be valid. In the same manner that a stockholder of a corporation is permitted to institute derivative or representative suits as nominal party plaintiff for the benefit of the corporation which is the real party in interest, more so may plaintiffs as city councilors exclusively empowered by the city charter to make all appropriations for the expenses of the government of the city, and who were the very source of the authority granted to the city mayor, be deemed to possess the necessary authority, and interest, if not duty, to file the present suit on behalf of the City.
• Legal Capacity of Taxpayers: The plaintiffs' right and legal interest as taxpayers to file the suit below and seek judicial assistance to prevent what they believe to be an attempt to unlawfully disburse public funds of the city and to contest the expenditure of public funds under contracts and commitments which they assert to have been entered into by the mayor without legal authority and against the express prohibition of law have long received the Court's sanction and recognition. Citing Gonzales vs. Hechanova, the Court noted that since the purchase of the commodity would have to be effected with public funds mainly raised by taxation, and as a taxpayer the petitioner has sufficient personality and interest to seek judicial assistance with a view to restraining what he believes to be an attempt to unlawfully disburse said funds.
• Applicability of Article 1397 of the Civil Code: The lower court founded its erroneous conclusion on the equally erroneous premise of citing and applying Article 1397 of the Civil Code that the action for the annulment of contracts may be instituted only by all who are thereby obliged principally or subsidiarily. The plaintiffs' suit is clearly not one brought by them in their personal capacity for the annulment of a particular contract entered into between two other contracting parties, in which situation Article 1397 may rightfully be invoked to question their legal capacity or interest to file the action. On the contrary, plaintiffs' suit is one filed on behalf of the City of Cebu, instituted by them in pursuance of their prerogative and duty as city councilors and taxpayers, in order to question and declare null and void a contract which according to their complaint was executed by defendant city mayor purportedly on behalf of the city without valid authority and which had been expressly declared by the Auditor-General to be null and void ab initio.
• Applicability of Section 20(c) of the City Charter: Section 20(c) of the city charter invoked by the lower court has no applicability to the present suit, which is not one to recover properties and funds of the city or a suit against the city, but rather a representative suit on behalf of and purportedly for the benefit of the city, which the city mayor is however loath to institute. The allegations of the complaint, taken by themselves without considering the contrary evidence or defenses that might properly be set up by defendants at the trial, state a sufficient cause of action on the basis of which judgment could be validly rendered by the lower court declaring the nullity of the questioned contract and letters of credit and declaring the City of Cebu exempt and free from any and all liability on account thereof.

• Taxpayer's Suit — A taxpayer has sufficient personality and interest to seek judicial assistance to restrain what he believes to be an attempt to unlawfully disburse public funds, since the purchase of commodities or services with public funds mainly raised by taxation directly affects the taxpayer. The Court applied this doctrine in recognizing the plaintiffs' right as taxpayers to contest the expenditure of city funds under contracts entered into by the mayor without legal authority.
• Representative Suit by City Councilors — In the same manner that a stockholder of a corporation is permitted to institute derivative or representative suits as nominal party plaintiff for the benefit of the corporation which is the real party in interest, city councilors exclusively empowered by the city charter to make appropriations may be deemed to possess the necessary authority, interest, and duty to file a suit on behalf of the city to prevent the disbursement of city funds under contracts impugned to have been entered into without lawful authority.
• Real Party in Interest — The real party in interest is the party who would be benefited or injured by the judgment, or the party entitled to the avails of the suit. In a representative suit, the real party in interest is the entity on whose behalf the suit is brought, not the nominal party plaintiff; the Court held that the City of Cebu was the real party in interest in the plaintiffs' representative suit.

• "The lower court's fundamental error was in treating plaintiffs' complaint as a personal suit on their own behalf and applying the test in such cases that plaintiffs should show personal interest as parties who would be benefited or injured by the judgment sought. Plaintiffs' suit is patently not a personal suit. Plaintiffs clearly and by the express terms of their complaint filed the suit as a representative suit on behalf and for the benefit of the city of Cebu." — This passage articulates the central ratio decidendi distinguishing a representative suit from a personal suit and correcting the lower court's misapplication of the real party in interest test.
• "To adhere to the lower court's narrow and unrealistic interpretation would mean that no action against a city mayor's actuations and contract in the name and on behalf of the city could ever be questioned in court and subjected to judicial action for a declaration of nullity and invalidity, since no city mayor would file such an action on behalf of the city to question, much less nullify, contracts executed by him on behalf of the city and which he naturally believes to be valid and within his authority." — This passage states the policy rationale for recognizing the standing of city councilors to file representative suits when the mayor himself would not challenge his own acts.
• "Under such circumstances, in the same manner that a stockholder of a corporation is permitted to institute derivative or representative suits as nominal party plaintiff for the benefit of the corporation which is the real party in interest, more so may plaintiffs as city councilors exclusively empowered by the city charter to 'make all appropriations for the expenses of the government of the city' and who were the very source of the authority granted to the city mayor to enter into the questioned transactions which authority was later revoked by them, as per the allegations of the complaint at bar, be deemed to possess the necessary authority, and interest, if not duty, to file the present suit on behalf of the City and to prevent the disbursement of city funds under contracts impugned by them to have been entered into by the city mayor without lawful authority and in violation of law." — This passage establishes the analogy between stockholder derivative suits and representative suits by city councilors, forming the doctrinal basis for recognizing the councilors' standing.

• Gonzales vs. Hechanova, 9 SCRA 230 (1963) — Cited as controlling authority for the proposition that a taxpayer has sufficient personality and interest to seek judicial assistance to restrain what he believes to be an attempt to unlawfully disburse public funds.
• Gonzales vs. Comelec, 27 SCRA 835 (1969) — Cited for the proposition that in this jurisdiction, the rule has been sufficiently relaxed to allow a taxpayer to bring an action to restrain the expenditure of public funds through the enforcement of an invalid or unconstitutional legal measure.
• Evangelista vs. Santos, 86 Phil. 387 — Cited as authority for the principle that a stockholder of a corporation is permitted to institute derivative or representative suits as nominal party plaintiff for the benefit of the corporation which is the real party in interest.
• Republic Bank vs. Cuaderno, 19 SCRA 671 — Cited together with Evangelista vs. Santos for the same proposition regarding stockholder derivative suits.
• Salonga vs. Warner Barnes & Co. Ltd., L-2246, Jan. 1, 1951 — Cited by the lower court for the definition of real party in interest; the Supreme Court implicitly rejected its application to the facts of the present case because the suit was representative, not personal.

• Article 1397, Civil Code — Provides that the action for annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily. The Court held this provision inapplicable because the plaintiffs' suit was a representative suit on behalf of the City, not a personal suit for annulment of a contract between other parties.
• Section 607, Revised Administrative Code — Requires the city treasurer to certify that funds have been duly appropriated and are available for expenditure before a contract is valid. The Auditor General found that the City Council had not appropriated funds for the contract, so the City Treasurer could not have made the required certification.
• Section 608, Revised Administrative Code — Makes the officer assuming to make a contract without the required certification liable to the government or other contracting party for any consequent damage to the same extent as if the transaction had been wholly between private parties. The Auditor General concluded that the contract was null and void ab initio for non-compliance with this provision.
• Section 20(c), Republic Act No. 3857 (Revised Charter of Cebu City) — Empowers the City Mayor to cause to be instituted judicial proceedings to recover properties and funds of the city and to cause to be defended all suits against the city. The Court held this provision inapplicable because the suit was not one to recover properties or funds or a suit against the city, but a representative suit on behalf of the city.
• Sections 29 and 31(2), Republic Act No. 3857 — Empowers the city council to make all appropriations for the expenses of the government of the city. The Court cited these provisions to support the councilors' authority, interest, and duty to file the suit on behalf of the City.
• Section 2, Rule 3, Rules of Court — Provides that every action must be prosecuted in the name of the real party in interest. The Court held that the City of Cebu was the real party in interest in the representative suit, and the plaintiffs were nominal parties acting on its behalf.

Concepcion, C.J., Zaldivar, Castro, Fernando, Barredo, Makasiar, Antonio, and Esguerra, JJ., concurred. Makalintal, J., was on leave.