Lao, Jr. vs. LGU of Cagayan De Oro City

City councilors have locus standi to file a suit for the declaration of nullity of a contract entered into by the city mayor without prior authorization from the sangguniang panlungsod, because the requirement of prior authorization under Section 455(b)(1)(vi) of the Local Government Code is a measure of check and balance, and the city councilors, as the very source of the mayor's authority, have the right and duty to question the basis of that authority.

The petitioners were elected officials of Cagayan de Oro City: Barangay Captain Enrico D. Salcedo of Gusa and City Councilors Teodulfo E. Lao, Jr., Roger A. Abaday, and Zaldy O. Ocon. The respondents included the City Government of Cagayan de Oro, its incumbent officials led by Mayor Constantino Jaraula, and MEGA Integrated Agro-Livestock Farm Corporation (Mega Farm) through its President Erwin Bryan See. The dispute concerned a Build-Operate-Transfer (BOT) scheme for the redevelopment of the Agora Complex into a modern integrated terminal, public market, and vegetable landing area, which was governed by Republic Act No. 6957, as amended by Republic Act No. 7718 (the BOT Law), and Republic Act No. 8975, which prohibits lower courts from issuing injunctive relief against national government projects.

On March 19, 2007, the City Council of Cagayan de Oro passed City Ordinance No. 10557-2007, which approved the unsolicited proposal of Erwin Bryan See for the redevelopment of the Agora Complex into a Modern Integrated Terminal, Public Market, and Vegetable Landing Area under a build-operate-transfer scheme. At that time, Vicente Y. Emano was the City Mayor. The proposal became the basis of a draft BOT Contract with Mega Farm as project proponent. The City Council resolved not to object to the draft contract in Resolution No. 8651-2007 dated June 25, 2007, but deferred consideration of proposed Ordinance No. 2007-210, which would have authorized the mayor to enter into the contract, referring it to the Committee on Economic Enterprises.

The Cagayan de Oro City Government published an Invitation to Qualify and to Bid for Comparative Proposal for the Agora Complex redevelopment in the Manila Standard Today on July 2, 9, and 16, 2007, signed by Mayor Emano and supposedly based on Resolution No. 8651-2007. On October 24, 2007, the city Bids and Awards Committee issued Resolution No. 41-2007, declaring that no bid was submitted to compete with Mega Farm's proposal. On January 27, 2009, Mega Farm, through See, and the newly elected Mayor Constantino Jaraula executed the Build-Operate-Transfer Contract for the Redevelopment of Agora Complex, the terms and conditions of which were allegedly different from those in the draft contract covered by Resolution No. 8651-2007.

On March 19, 2009, petitioners filed their Complaint for Declaration of Nullity of the contract with the Regional Trial Court of Misamis Oriental, against the City Government, the incumbent city officials in their personal and official capacities, and Mega Farm and See. They alleged that the contract was issued in bad faith and through fraudulent maneuvers between Mega Farm and the City Government; that Mega Farm was unqualified to undertake the redevelopment because construction and remodeling were not its primary corporate purposes; that Mega Farm had no financial capacity to undertake the P250,000,000.00 project when it only had a paid-up capital of P625,000.00; and that the contract provisions were disadvantageous to the City Government. They prayed for the contract to be declared null and void, for moral and exemplary damages, and for a temporary restraining order, alleging that the contract would result in irreparable damage to the local government unit and its constituent taxpayers.

The public respondents filed an Urgent Omnibus Motion to Dismiss or, alternatively, for a Bill of Particulars, alleging that the trial court had not acquired jurisdiction because petitioners did not pay the required docket fees for damages; that RA 8975 prohibits the RTC from issuing TROs against national government projects; that the issue did not fall within the exception under Section 3 of RA 8975; and that petitioners had no cause of action because the respondent city councilors had not yet been elected when the 2007 ordinances were enacted. Petitioners objected, arguing that Section 3 of RA 8975 did not apply because the contract was a local government contract, not a national government contract, and that even if it were covered, it fell within the exception as it involved constitutional violations and an urgent issue because Mayor Jaraula lacked authority to enter into the contract.

• Propriety of Direct Resort to the Supreme Court: Petitioners argued that their petition involved only questions of law and was thus cognizable by this Court under Rule 45, contrary to respondents' claim that it involved questions of fact.
• Jurisdiction of the RTC over the Main Case: Petitioners maintained that what RA 8975 prohibits is only the issuance of TROs or writs of preliminary injunction by the RTC, and that the trial court still retains jurisdiction over the main cause of action for the declaration of nullity of the contract.
• Unconstitutionality of the Contract: Petitioners alleged that the Agora Complex BOT Contract is unconstitutional because its terms are monopolistic, particularly the exclusivity of fruits and vegetables landing and the bus terminal, in violation of Article III, Section 1 of the Constitution and the principle of free enterprise, citing Lucena Grand Central Terminal, Inc. vs. JAC Liner, Inc.
• Lack of Authority of the Mayors: Petitioners averred that the contract is null and void from the beginning because Mayor Emano and Mayor Jaraula had no authority to enter into it, the City Council having issued no ordinance authorizing them to do so.
• Lack of Financial Capacity of Mega Farm: Petitioners claimed that Mega Farm lacks financial capability to undertake the project, and that the determination of its financial capability should have been made in the pre-qualification stage, which was not done.
• Locus Standi: Petitioners argued that they have legal standing to file the complaint, claiming that the principle of lack of personality presupposes the existence of a valid or voidable contract with a private subject matter; since the contract is null and void from the beginning, the principle of locus standi is inapplicable. They also argued that they can file the case not merely as taxpayers but as elected officers who look out for the funds of the city, and that while there is no actual disbursement of P250,000,000.00, the money represents the profit that would be generated from the public once the redeveloped Agora Complex is operational.
• Verification and Certification of Non-Forum Shopping: Petitioners claimed that their Verification and Certification of Non-Forum Shopping is sufficient, having been duly subscribed and sworn to before a notary public.

• Impropriety of Direct Resort to the Supreme Court: Private respondents Mega Farm and See argued that it was improper for petitioners to directly file the petition with the Supreme Court because it involves both questions of fact and law.
• Defective Verification: Private respondents argued that the Verification and Certification of Non-Forum Shopping attached to the petition is improperly subscribed, there being no statement that the affiants were personally known to the notary public or that competent evidence of their identities was presented.
• No Error in the Dismissal: Private respondents alleged that in dismissing the case for lack of jurisdiction and lack of legal standing, the RTC in effect dismissed the complaint based on lack of, or failure to state, a cause of action.
• Lis Mota Not Constitutional: Private respondents argued that the constitutionality of the law or city ordinance connected to the contract is not the lis mota of the case but the validity of the contract itself.
• Mootness of TRO Prayer: Private respondents pointed out that the prayer for TRO has become moot since ordinances have been issued, the contract has been signed, and construction has begun.
• Lack of Locus Standi: Private respondents claimed that petitioners have no locus standi because they are not businessmen, fruit or vegetable vendors, or jeepney operators who would be directly affected by the alleged unconstitutional part of the contract; neither can they sue as taxpayers because there is no appropriation of public funds; and they cannot sue as public officers because they failed to show material interest in the project.
• RA 8975 Prohibition: Public respondents alleged that RA 8975 prohibits the RTC from issuing TROs unless an urgent constitutional issue is involved, which petitioners failed to show.
• Basis of Dismissal: Public respondents claimed that the complaint was dismissed not exclusively on lack of jurisdiction but on the premise that petitioners failed to show they were the proper parties to question the contract.
• Lack of Direct Injury: Public respondents argued that petitioners failed to show that the execution of the contract caused them direct, personal, and substantial injury, and that they could not complain as taxpayers because there was no disbursement of public funds required for the project.

• Propriety of Direct Resort to the Supreme Court: Whether it was proper for petitioners to file a Petition for Review under Rule 45 directly with the Supreme Court.
• Defect in Verification and Certification of Non-Forum Shopping: Whether petitioners' Verification and Certification of Non-Forum Shopping is fatally defective as to warrant the dismissal of the Petition for Review.
• Denial of the Temporary Restraining Order: Whether the Regional Trial Court correctly denied the issuance of the temporary restraining order against the Agora Complex Build-Operate-Transfer Contract.
• Locus Standi of Petitioners: Whether petitioners have locus standi to file a complaint to have the Agora Complex Build-Operate-Transfer Contract declared null and void.

• Propriety of Direct Resort to the Supreme Court: Partly yes. Among the four errors assigned, two are questions of fact — the nullity of the contract due to the mayor's alleged lack of authority and the alleged failure to determine the project proponent's financial capacity — which require the reception and examination of evidence and are not cognizable in a petition for review under Rule 45. However, whether the RTC correctly denied the TRO and dismissed the complaint due to lack of jurisdiction and standing is a question of law which may be resolved by the Supreme Court.
• Defect in Verification and Certification of Non-Forum Shopping: Yes, the verification is defective for failure to state that the affiants were personally known to the notary public or presented competent evidence of identity under the 2004 Rules on Notarial Practice, but the defect may be overlooked in view of the merits of the case.
• Denial of the Temporary Restraining Order: Yes. The RTC correctly denied the issuance of a TRO because the Agora Complex BOT Contract, being covered by the BOT Law, is a national government project under Section 2 of RA 8975, and petitioners failed to discharge the burden of proving a clear and compelling breach of a constitutional provision to fall within the exception.
• Locus Standi of Petitioners: No. The dismissal of the complaint due to petitioners' lack of personality was erroneous. Petitioners, as members of the City Council of Cagayan de Oro, may file a case to question a contract entered into by the city mayor allegedly without the City Council's authority, as they are part of the very body in which authority is allegedly being undermined.

• Propriety of Direct Resort to the Supreme Court: Under Rule 41, Section 2 of the Rules of Court, appeal by certiorari to the Supreme Court is proper only when questions of law are raised. A question of law exists when there is doubt as to which law should be applied to a particular set of facts, and it does not require that the truth or falsehood of facts be determined or evidence be received and examined. The nullity of the contract due to the mayor's alleged lack of authority and the alleged failure to determine Mega Farm's financial capacity require the reception and examination of evidence, making them questions of fact. Nonetheless, the issues of whether the RTC correctly denied the TRO and dismissed the complaint due to lack of jurisdiction and standing are questions of law properly cognizable by the Supreme Court.

• Defect in Verification and Certification of Non-Forum Shopping: Under the 2004 Rules on Notarial Practice, an individual appearing before a notary public to take an oath must be personally known to the notary or identified through competent evidence of identity, which includes at least one current identification document issued by an official agency bearing the photograph and signature of the individual, or the oath of one credible witness not privy to the instrument. Neither the petition's Verification and Compliance with Non-Forum Shopping Law nor its Affidavit of Proof of Service contains any statement that the affiants were personally known to the notary public or presented competent evidence of identity. The notary public, Atty. Manolo Z. Tagarda, Sr., who also serves as counsel for petitioners, failed to observe the "highest degree of care" in ensuring compliance with the Notarial Rules, violating not only those rules but also Canon 1, Rule 1.01 of the Code of Professional Responsibility. However, the defect may be overlooked in view of the merits of the case, although the notary public should show cause why he should not be made administratively liable.

• Denial of the Temporary Restraining Order: The RTC did not dismiss the complaint on the basis of lack of jurisdiction pursuant to RA 8975; it only denied the issuance of a TRO on that basis. Trial courts still retain jurisdiction over the main cause of action to nullify or implement a national government contract despite RA 8975. Section 3 of RA 8975 expressly prohibits all courts, except the Supreme Court, from issuing TROs, preliminary injunctions, or preliminary mandatory injunctions against national government projects. Section 2 defines "national government projects" to include all projects covered by RA 6957, as amended by RA 7718, the BOT Law. In GV Diversified International, Inc. vs. Court of Appeals, the Court affirmed that BOT projects of local government units are covered by RA 8975. The only exception is when the matter is of extreme urgency involving a constitutional issue, such that unless a TRO is issued, grave injustice and irreparable injury will arise. The party seeking injunctive relief must discharge the burden of proving a clear and compelling breach of a constitutional provision; mere allegation or invocation of constitutionally protected rights will not automatically result in the issuance of injunctive relief. Here, petitioners' claim that the contract would violate the "constitutional right of citizens to free enterprise" does not entitle them to a TRO because, apart from mere allegations, they have not pointed to any grave injustice or irreparable injury to constitutional rights that would be sustained if no injunctive relief were issued.

• Locus Standi of Petitioners: Under Rule 3, Section 2 of the Rules of Court, a real party in interest is the party who stands to be benefited or injured by the judgment in the suit. The real party in interest which may file a case questioning the validity of a contract entered into by the city mayor, who is alleged to have no authority to do so, is the city itself, and the city councilors merely represent the city in the suit. Citing City Council of Cebu vs. Cuizon, the Court explained that a suit filed by city councilors is not a personal suit but a representative suit on behalf and for the benefit of the city. Under Section 455(b)(1)(vi) of the Local Government Code, the city mayor may sign all bonds, contracts, and obligations on behalf of a city only upon authority of the sangguniang panlungsod or pursuant to law or ordinance. This requirement was deliberately added as a measure of check and balance to temper the authority of the local chief executive. As the City Council is the source of the mayor's power to execute contracts for the city, its members have the authority, interest, and even duty to file cases in behalf of the city to restrain the execution of contracts entered into in violation of the Local Government Code. Here, petitioners are members of the City Council of Cagayan de Oro and have alleged that Mayor Jaraula entered into the contract without being authorized by the City Council, in violation of Section 455(b)(1)(vi). As they are part of the very body in which authority is allegedly being undermined by the city mayor, they have the right and duty to question the basis of the mayor's authority to sign a contract which binds the city.

• Locus standi of sangguniang panlungsod members to question contracts of the city mayor — City councilors, as members of the sangguniang panlungsod from which the city mayor derives authority to bind the city in contracts, have the authority, interest, and duty to file suits in behalf of the city to question contracts entered into without the required prior authorization. The suit is a representative suit for the benefit of the city, not a personal suit, and the city is the real party in interest. The Court applied this doctrine in holding that the RTC erred in dismissing the complaint for lack of personality.

• Prior authorization requirement under Section 455(b)(1)(vi) of the Local Government Code — The city mayor may represent the city in business transactions and sign bonds, contracts, and obligations on its behalf only upon authority of the sangguniang panlungsod or pursuant to law or ordinance. This requirement is a measure of check and balance, tempering the authority of the local chief executive in recognition that the corporate powers of the local government unit are wielded as much by its chief executive as by its council.

• Prohibition on injunctive relief against national government projects under RA 8975 — No court except the Supreme Court may issue TROs, preliminary injunctions, or preliminary mandatory injunctions against the government to restrain, prohibit, or compel acts involving national government projects, which include all projects covered by the BOT Law. The exception applies only when the matter is of extreme urgency involving a constitutional issue, such that unless a TRO is issued, grave injustice and irreparable injury will arise. The party seeking the writ must discharge the burden of proving a clear and compelling breach of a constitutional provision; mere allegation of constitutional violations is insufficient.

• Competent evidence of identity under the 2004 Rules on Notarial Practice — A notary public must ensure that an affiant is personally known to him or identified through competent evidence of identity, which refers to at least one current identification document issued by an official agency bearing the photograph and signature of the individual, or the oath of one credible witness not privy to the instrument. Failure to indicate compliance in the notarized document violates the Notarial Rules and Canon 1, Rule 1.01 of the Code of Professional Responsibility.

• "As the City Council is the source of the mayor's power to execute contracts for the city, its members have the authority, interest, and even duty to file cases in behalf of the city, to restrain the execution of contracts entered into in violation of the Local Government Code." — This passage articulates the ratio decidendi on the issue of locus standi, establishing that city councilors may sue to question contracts entered into without the sangguniang panlungsod's prior authorization.

• "The requirement was deliberately added as a measure of check and balance, to temper the authority of the local chief executive, and in recognition of the fact that the corporate powers of the local government unit are wielded as much by its chief executive as by its council." — This passage explains the policy rationale behind the prior authorization requirement in Section 455(b)(1)(vi) of the Local Government Code, which is central to the Court's holding on standing.

• "Mere allegation or invocation that constitutionally protected rights were violated will not automatically result in the issuance of injunctive relief. The plaintiff or the petitioner should discharge the burden to show a clear and compelling breach of a constitutional provision." — This passage states the standard for invoking the exception to the RA 8975 prohibition on injunctive relief, requiring a clear and compelling showing of a constitutional breach rather than mere allegations.

• City Council of Cebu vs. Cuizon, 150-C Phil. 116 (1972) — Controlling precedent on the standing of city councilors to file representative suits on behalf of the city, holding that a suit by city councilors questioning contracts entered into by the city mayor without lawful authority is a representative suit for the benefit of the city, not a personal suit.

• GV Diversified International, Inc. vs. Court of Appeals, 532 Phil. 296 (2006) — Followed, affirming that BOT projects of local government units are covered by RA 8975 as national government projects, and that a preliminary injunction issued by a lower court to restrain bidding or awarding of such projects is void.

• Dynamic Builders & Construction Co. (Phil.), Inc. vs. Hon. Presbitero, Jr., 757 Phil. 454 (2015) — Cited for the standard that the party seeking injunctive relief as an exception to RA 8975 must discharge the burden of proving a clear and compelling breach of a constitutional provision.

• Quisumbing vs. Garcia, 593 Phil. 655 (2008) — Cited for the proposition that the prior authorization requirement in the Local Government Code was deliberately added as a measure of check and balance on the powers of the local chief executive.

• Lucena Grand Central Terminal, Inc. vs. JAC Liner, Inc., 492 Phil. 314 (2005) — Cited by petitioners in support of their claim that the exclusivity provision in the contract violated the principle of free enterprise, though the Court did not rely on it in its ruling.

• Section 455(b)(1)(vi), Republic Act No. 7160 (Local Government Code) — Provides that the city mayor may represent the city in all its business transactions and sign in its behalf all bonds, contracts, and obligations upon authority of the sangguniang panlungsod or pursuant to law or ordinance. The Court applied this provision in holding that city councilors have standing to question contracts entered into without such authority.

• Sections 2 and 3, Republic Act No. 8975 — Section 2 defines "national government projects" to include all projects covered by the BOT Law, and Section 3 prohibits all courts except the Supreme Court from issuing TROs, preliminary injunctions, or preliminary mandatory injunctions against such projects, with an exception for matters of extreme urgency involving constitutional issues. The Court applied these provisions in affirming the denial of the TRO.

• Rule 45, Section 1, Rules of Court — Governs appeals by certiorari to the Supreme Court, which are permitted only when questions of law are raised or involved. The Court applied this provision in determining which of the assigned errors were properly cognizable.

• Rule 41, Section 2, Rules of Court — Provides the three modes of appeal from judgments or final orders of the RTC, including appeal by certiorari to the Supreme Court where only questions of law are raised.

• Rule 3, Section 2, Rules of Court — Defines the real party in interest as the party who stands to be benefited or injured by the judgment in the suit. The Court applied this provision in determining that the city is the real party in interest and that city councilors represent the city in the suit.

• Rule II, Sections 2, 6, and 12, 2004 Rules on Notarial Practice — Defines the requirements for affirmation or oath, jurat, and competent evidence of identity. The Court applied these provisions in finding the verification defective for failure to state that the affiants were personally known to the notary or presented competent evidence of identity.

• Canon 1, Rule 1.01, Code of Professional Responsibility — Provides that a lawyer shall not engage in unlawful, dishonest, immoral, or deceitful conduct. The Court cited this provision in connection with the notary public's failure to comply with the Notarial Rules.

• Article III, Section 1, 1987 Constitution — Provides that no person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws. Cited by petitioners in support of their claim that the contract was unconstitutional.

Velasco, Jr. (Chairperson), Bersamin, Martires, and Gesmundo, JJ., concurred.