Osmeña III vs. PSALM

A right to top (or right of first refusal) in a government land lease agreement is void unless founded on the grantee's legitimate interest over the object over which the right is to be exercised and the government stands to benefit from the stipulation. Where the property subject of the right is outside the leased premises, covers an entire power plant complex rather than merely adjacent land, and the grantee never operated the facility underlying the lease, no such legitimate interest exists and the provision contravenes public policy on competitive bidding.

PSALM is a government-owned and controlled corporation created under Republic Act No. 9136 (EPIRA) with the principal purpose of managing the orderly sale, disposition, and privatization of NPC's generation assets, real estate, and other disposable assets, as well as IPP contracts, to liquidate NPC's financial obligations in an optimal manner. SPC is a joint venture between Salcon Power Corporation and Korea Power Corporation. TPVI is a subsidiary of AboitizPower. The Naga Land-Based Gas Turbine (LBGT) is located inside the same compound as the Naga Power Plant Complex (NPPC) in Barangay Colon, Naga, Cebu. The EPIRA's implementing rules require that all NPC assets be sold in an open and transparent manner through public bidding, and Section 78 of the EPIRA provides that its implementation may not be restrained or enjoined except by order of the Supreme Court.

PSALM, a government-owned and controlled corporation created under Republic Act No. 9136 (EPIRA), was tasked with managing the privatization of the National Power Corporation's generation assets, including the Naga Power Plant Complex (NPPC) and the Naga Land-Based Gas Turbine (LBGT), both located in Barangay Colon, Naga, Cebu. The NPPC consists of a 52.5 MW Cebu 1 coal-fired thermal power plant, a 56.8 MW Cebu 2 coal-fired thermal power plant, and a 43.8 MW Cebu Diesel Power Plant 1, with a total rated capacity of 153.10 MW spread over 209,000 square meters. The 55-MW Naga LBGT, with a land area of 5,504.02 square meters, is located inside the same compound as the NPPC.

On October 16, 2009, PSALM privatized the 55-MW Naga LBGT by way of negotiated sale after a failed bidding, conducted in accordance with the LBGT Bidding Procedures. SPC acquired the LBGT through an Asset Purchase Agreement (LBGT-APA) and leased the underlying land under a Land Lease Agreement (LBGT-LLA) for a period of ten years, expiring on January 29, 2020. The LBGT-LLA contained Section 3.02, granting SPC the right to top the price of the winning bidder by five percent (5%) for the sale or lease of any property in the vicinity of the leased premises not part of the leased premises, exercisable within thirty (30) days from receipt of written notice of the bidding result.

On December 27, 2013, the PSALM Board of Directors approved the commencement of the 3rd Round of Bidding for the sale of the 153.1-MW NPPC. Only SPC and TPVI submitted bids. TPVI's financial bid totaled Php1,088,800,000.00, comprising a purchase price of Php441,191,500.00, rentals of Php588,735,000.00, and an option price of Php58,873,500.00. SPC's financial bid totaled Php858,999,888.88, with a lower purchase price of Php211,391,388.88 but identical rental and option price components. On March 31, 2014, TPVI was declared the highest bidder, and a Notice of Award was issued to TPVI on April 30, 2014, expressly subject to SPC's right to top under Section 3.02 of the LBGT-LLA as previously stated in Section 1B-20 of the Bidding Procedures.

On April 29, 2014, PSALM notified SPC of TPVI's winning bid, advising that the lease of the land would likewise expire on January 29, 2020. In a letter-reply dated May 7, 2014, SPC confirmed its exercise of the right to top and tendered Php1,143,240,000.00, equivalent to TPVI's winning bid plus five percent (5%). SPC insisted, however, that the lease term should be twenty-five (25) years from the closing date, arguing that the bid for the lease component was computed on the basis of a twenty-five-year term as reflected in the Draft Land Lease Agreement forming part of the bid documents, and that the remaining term under the LBGT-LLA would give SPC less than six years of use. PSALM sought the opinion of the Office of the Government Corporate Counsel (OGCC), which initially upheld PSALM's position in Opinion No. 098, Series of 2014, that the NPPC-LLA was a separate and distinct transaction inapplicable to SPC's right to top. Upon re-evaluation, however, the OGCC concluded that the right to top was a right to top on a sale, governed by the NPPC-APA and LLA provisions, and referred the matter to the Secretary of Justice.

On June 16, 2014, Senator Sergio R. Osmeña III filed the present petition. Meanwhile, on July 25, 2014, PSALM's Board of Directors, taking into account the OGCC and DOJ opinions, declared SPC as the winning bidder for the NPPC. A Notice of Award and Certificate of Effectivity were issued to SPC on July 28, 2014. The NPPC-APA and LLA were signed and delivered to SPC, and on September 25, 2014, PSALM turned over the properties to SPC. The Court found that SPC never operated the Naga LBGT, as confirmed by PSALM itself, and that only SPC and TPVI participated in the 3rd Round of Bidding for the NPPC.

• Nature of the Right to Top as Option Contract: Petitioner asserted that the right to top provision in the LBGT-LLA is an option contract which must be supported by a consideration separate from the lease contract and may be withdrawn at any time by PSALM in the absence of such consideration. He characterized SPC's preferential right as a gratuitous concession, likely part of a scheme to bar competition and restrict energy production.
• Lack of Vested Interest: Citing PSALM vs. Pozzolanic Philippines Incorporated, petitioner argued that the right of first refusal is upheld only where the holder has an existing or vested interest in the object for which the right is to be exercised. Even if SPC had a legal interest in the vicinity lots, its right to top could no longer be exercised because SPC was not operating the Naga LBGT itself.
• Violation of Public Bidding Policy: Petitioner contended that by granting SPC the right to top, PSALM violated the express provisions of R.A. No. 9136 (EPIRA) and R.A. No. 9184 (Procurement Law) on public bidding by failing to maintain bidders on equal footing, thereby denying the government the best possible offer for public assets being sold or leased. The provision enabled SPC to skirt eligibility requirements for a qualified bidder.
• Illegal Cause and Indeterminate Object: Petitioner alleged that SPC's right to top was without a determinate object and founded on illegal cause, having been intended merely to maintain SPC's dominance and assist it in restricting competition. He further cited SPC's alleged anomalous track record since 1994 and argued that the 2009 Naga LBGT contract should have been terminated for SPC's failure to comply with its obligations.

• Standing (SPC): SPC questioned petitioner's legal standing, arguing that he failed to establish any personal benefit if relief were granted and that no expenditure of public funds was involved to impress the petition with the character of a taxpayer's suit. SPC maintained that petitioner could not invoke his office as Senator absent a claim that official action infringed legislative prerogatives, nor could he anchor standing on his status as a citizen absent a showing of personal injury.
• Procedural Defenses (SPC): SPC sought dismissal on the ground that there was no basis for annulling PSALM's acts by way of certiorari or prohibition, and that the petition was not filed within the 60-day reglementary period from the 2009 award of the LBGT contract or from the DOJ opinion dated January 9, 2013 upholding SPC's right to top.
• Substantive Validity of Right to Top (SPC): SPC asserted that the right to top is not an option contract and that the Naga LBGT was validly awarded through public bidding. Citing JG Summit Holdings, Inc. vs. Court of Appeals, SPC maintained that the right to top did not violate competitive bidding rules and was more advantageous to the Government, assuring an additional 5% over the highest reasonable bid. SPC argued that no law invalidates such a provision and that its vested right should not be disregarded.
• Disclosure and Good Faith (PSALM): PSALM noted that similar right to top provisions appear in several other land lease agreements and that it duly disclosed the right to top in the 2013 Bidding Procedures. PSALM averred that it acted in good faith in complying with the DOJ and OGCC opinions, which were persuasive.
• Concurrence and Additional Grounds (TPVI): TPVI concurred with the petition's allegations sufficient to vest standing upon petitioner as citizen, taxpayer, Senator, and Chairman of the Joint Congressional Power Committee. TPVI argued that certiorari was the proper remedy given PSALM's grave abuse of discretion in determining the terms of reference and qualifications of bidders, and that the petition was timely filed since SPC exercised its right to top only on May 29, 2014. Citing LTFRB vs. Stronghold Insurance, TPVI contended that right of first refusal and right to top provisions contravene public policy on competitive bidding and are valid only in specific cases. TPVI further argued that SPC's right to top did not stand on the same footing as those in other PSALM lease agreements, that SPC continuously breached its obligation to operate the Naga LBGT, and that SPC failed to timely exercise the right to top within the period provided. TPVI also maintained that SPC's insistence on a 25-year term instead of the remaining term of the LBGT-LLA constituted an erroneous and invalid exercise of the right.

• Propriety of Remedy: Whether certiorari is the proper remedy and whether it was timely filed.
• Legal Standing: Whether petitioner possesses legal standing to institute the present action questioning the validity of SPC's right to top.
• Validity of Right to Top: Whether right to top provisions in land lease agreements entered into by PSALM contravene public policy on competitive bidding.
• Grave Abuse of Discretion: Whether PSALM gravely abused its discretion in allowing SPC's exercise of the right to top under the LBGT-LLA.

• Propriety of Remedy: Yes. Certiorari was proper and justified, the Constitution expressly directing the Judiciary to determine whether there has been grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the Government, and Section 78 of the EPIRA providing that its implementation may not be enjoined except by order of the Supreme Court.
• Legal Standing: Yes. While petitioner's position as Committee Chairperson was insufficient by itself, the rule on standing was relaxed as the privatization of power plants pursuant to the EPIRA is an issue of paramount public interest and transcendental importance, and the mere fact that petitioner is a citizen satisfies the requirement of personal interest when the proceeding involves the assertion of a public right.
• Validity of Right to Top: Yes, the right to top provision is void. Right of first refusal or right to top stipulations in government contracts contravene public policy on competitive bidding unless founded on the beneficiary's legitimate interest over the object of the right and the government stands to benefit from the stipulation; SPC lacked such interest.
• Grave Abuse of Discretion: Yes. PSALM gravely abused its discretion in allowing SPC's exercise of the right to top, as the right was void for lack of a legitimate interest, and the chilling effect on potential bidders negated any price advantage to the government.

• Propriety of Remedy: The Constitution under Section 1, Article VIII directs the Judiciary to determine whether there has been grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the Government. R.A. No. 9136 created PSALM to undertake the mandated privatization of NPC assets in an optimal manner, subject to all existing laws, rules, and regulations. The implementing rules require that all NPC assets be sold in an open and transparent manner through public bidding. Any act of PSALM that violates these provisions may constitute grave abuse of discretion, defined as an act done contrary to the Constitution, the law, or jurisprudence, or executed whimsically, capriciously, or arbitrarily. Section 78 of the EPIRA provides that its implementation may not be restrained or enjoined except by order of the Supreme Court, making petitioner's direct recourse to the Court proper and justified.

• Legal Standing: Legislators have standing to maintain inviolate the prerogatives, powers, and privileges vested by the Constitution in their office. However, petitioner sued as Chairperson of the Committee created pursuant to Section 62 of R.A. No. 9136, whose enumerated functions are basically "in aid of legislation," and there was no allegation of usurpation of legislative function. Notwithstanding, the rule on standing is a matter of procedure that may be relaxed for nontraditional plaintiffs like ordinary citizens, taxpayers, and legislators when the public interest so requires, such as when the matter is of transcendental importance or paramount public interest. The privatization of power plants ensuring the reliability and affordability of electricity pursuant to the EPIRA is such an issue. When a proceeding involves the assertion of a public right, the mere fact that the petitioner is a citizen satisfies the requirement of personal interest. PSALM itself admitted that right to top provisions are found in several other land lease agreements, underscoring the broad public interest at stake.

• Validity of Right to Top: A right to top is a variation of the right of first refusal. The Court distinguished an option contract, which must be supported by separate consideration, from a right of first refusal, whose exercise depends on the grantor's eventual intention to enter a binding relation and on terms yet to be firmed up. Citing PUP vs. Golden Horizon Realty Corporation, the Court rejected petitioner's theory that the right of first refusal required separate consideration, holding that where the stipulation forms part of the entire lease contract, the consideration for the lease includes the consideration for the grant of the right of first refusal. However, where such right is incorporated in contracts involving public assets, courts go beyond ascertaining the parties' intent, because public bidding is the established procedure in the grant of government contracts and is a matter of public policy. In JG Summit Holdings, Inc. vs. Court of Appeals, the Court upheld a right to top because all bidders were exposed to the same risk and condition, the right was based on an existing right of first refusal held by a joint venture partner with a vested interest in the subject shares, and the government benefited from the 5% increase. In PSALM vs. Pozzolanic Philippines Incorporated, the right of first refusal was held invalid because it dispensed with public bidding for future sale of fly ash from plants not yet constructed, the grantee had no vested interest in the inexistent subject, and the provision effectively barred future competitive bidding. In LTFRB vs. Stronghold Insurance, the Court declared that right of first refusal and right to top stipulations in government contracts are weighed with the taint of invalidity for contravening the policy on competitive bidding, escaping invalidity only in the narrow instance where the right is founded on the beneficiary's interest over the object and the government stands to benefit. Applying these principles, SPC's right to top was void for three reasons: first, the property subject of the right was outside the leased premises covered by the LBGT-LLA; second, the right referred not only to land but to any property within the vicinity, including an entire power plant complex with far greater generating capacity than SPC's gas turbine; and third, SPC's cited concerns regarding security, right of way, or operational requirements were not analogous to a lessee's legitimate interest in the property being leased, and SPC never operated the Naga LBGT as confirmed by PSALM itself. SPC's argument that the right to top was more advantageous to the Government because it yielded a higher price was untenable, because whatever initial gain was negated by the chilling effect on potential bidders—only SPC and TPVI participated in the 3rd Round of Bidding. Attracting as many bidders as possible remains the better means to secure the best bid and achieve the EPIRA's objective of privatizing NPC assets in the most optimal manner.

• Grave Abuse of Discretion: Grave abuse of discretion exists when an act is done contrary to the Constitution, the law, or jurisprudence, or when it is executed whimsically, capriciously, or arbitrarily. PSALM's allowance of SPC's exercise of the right to top constituted grave abuse of discretion because the underlying right was void for lack of a legitimate interest over the object, and its enforcement contravened the EPIRA's mandate that NPC assets be sold in an open and transparent manner through public bidding, optimizing privatization value to the National Government.

• Validity of Right of First Refusal / Right to Top in Government Contracts — Right of first refusal and right to top stipulations in government contracts are weighed with a taint of invalidity for contravening the policy requiring government contracts to be awarded through public bidding. They escape invalidity only in the narrow instance where: (1) the right is founded on the beneficiary's legitimate interest over the object over which the right of first refusal is to be exercised (such as a tenant with respect to the land occupied, a lessee vis-à-vis the property leased, a stockholder as regards shares of stock, and a mortgagee in relation to the subject of the mortgage); and (2) the government stands to benefit from the stipulation. In this case, SPC's right to top was void because the NPPC was outside the leased premises, covered an entire power plant complex rather than merely adjacent land, and SPC never operated the Naga LBGT—negating any legitimate or vested interest analogous to the recognized categories.

• Distinction Between Option Contract and Right of First Refusal — An option is a preparatory contract granting a privilege to buy or sell at a fixed period and determined price, binding the grantor not to enter the principal contract with any other person during the designated period, and must be supported by consideration. A right of first refusal, by contrast, is dependent on the grantor's eventual intention to enter a binding juridical relation and on terms, including price, that are yet to be firmed up. A right of first refusal embodied in a lease contract does not require separate consideration, as the consideration for the lease includes the consideration for the grant of the right.

• Relaxation of the Rule on Standing for Matters of Transcendental Importance — The rule on standing is a matter of procedure that may be relaxed for nontraditional plaintiffs like ordinary citizens, taxpayers, and legislators when the public interest so requires, such as when the matter is of transcendental importance, of overreaching significance to society, or of paramount public interest. When a proceeding involves the assertion of a public right, the mere fact that the petitioner is a citizen satisfies the requirement of personal interest.

• "These clauses escape the taint of invalidity only in the narrow instance where the right of first refusal (or 'right to top') is founded on the beneficiary's 'interest on the object over which the right of first refusal is to be exercised' (such as a 'tenant with respect to the land occupied, a lessee vis-a-vis the property leased, a stockholder as regards shares of stock, and a mortgagor in relation to the subject of the mortgage') and the government stands to benefit from the stipulation." — This passage articulates the controlling two-pronged test for the validity of right of first refusal and right to top clauses in government contracts, serving as the ratio decidendi for the nullification of SPC's right to top.

• "In the field of public contracts, these stipulations are weighed with the taint of invalidity for contravening the policy requiring government contracts to be awarded through public bidding." — This formulation establishes the default presumption of invalidity for right of first refusal and right to top provisions in government contracts, placing the burden on the proponent to show compliance with the narrow exception.

• "Whatever initial gain from the higher price obtained for the NPPC compared to the original bid price of TPVI is negated by the fact that SPC's right to top had discouraged more potential buyers from submitting their bids, knowing that even their most reasonable bid can be defeated by SPC's exercise of its right to top." — This passage explains why the mere fact of a higher price does not rescue an otherwise invalid right to top, as the chilling effect on bidder participation defeats the broader objective of securing the best possible offer through open competition.

• "there is no basis whatsoever for the grant to respondent of the right of first refusal with respect to the fly ash of NPC power plants since the right to purchase at the time of bidding is that which is precisely the bidding subject, not yet existent much more vested in respondent." — Quoted from PSALM vs. Pozzolanic, this passage articulates the principle that a right of first refusal cannot attach to an object that does not yet exist or in which the grantee has no vested interest at the time of bidding, a principle applied by analogy to SPC's lack of interest in the NPPC.

• JG Summit Holdings, Inc. vs. Court of Appeals, 458 Phil. 581 (2003) — Applied and distinguished. The Court upheld the right to top in that case because it was based on an existing right of first refusal held by a joint venture partner with a vested interest in the subject shares, all bidders were exposed to the same condition, and the government benefited from the 5% increase. The present case was distinguished because SPC lacked a legitimate interest over the NPPC, which was outside the leased premises and far exceeded SPC's operational needs.

• Power Sector Assets and Liabilities Management Corporation vs. Pozzolanic Philippines Incorporated, 671 Phil. 731 (2011) — Applied. The right of first refusal was held invalid there because it dispensed with public bidding for future sale of fly ash from plants not yet constructed, the grantee had no vested interest in the inexistent subject, and the provision barred future competitive bidding. The principle that a right of first refusal requires an existing or vested interest in the object was applied to SPC's right to top over the NPPC.

• LTFRB vs. Stronghold Insurance Company, Inc., G.R. No. 200740, October 2, 2013, 706 SCRA 675 — Applied. The Court declared void a "right to match" clause in a government memorandum of agreement, holding that right of first refusal and right to top stipulations in public contracts are tainted with invalidity unless founded on the beneficiary's interest over the object and the government benefits. This framework was applied to nullify SPC's right to top.

• Polytechnic University of the Philippines vs. Golden Horizon Realty Corporation, 629 Phil. 462 (2010) — Followed. The Court relied on this case for the proposition that a right of first refusal embodied in a lease contract does not require separate consideration, as the consideration for the lease includes the consideration for the grant of the right.

• Spouses Vasquez vs. Ayala Corporation, 485 Phil. 612 (2004) — Cited for the distinction between an option contract and a right of first refusal, the latter being dependent on the grantor's eventual intention and on terms yet to be firmed up.

• Section 1, Article VIII, 1987 Constitution — Empowers and directs the Judiciary to determine whether there has been grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the Government. Applied to uphold the Court's duty to take cognizance of allegations of grave abuse of discretion in PSALM's privatization of the NPPC.

• Sections 50 and 51(m), Republic Act No. 9136 (EPIRA) — Created PSALM and empowered it to restructure the sale, privatization, or disposition of NPC assets and IPP contracts on terms optimizing the value and sale prices of said assets. Applied to define PSALM's mandate and the parameters within which its acts may constitute grave abuse of discretion.

• Section 4, Rule 23, Implementing Rules of R.A. No. 9136 — Provides that all NPC assets shall be sold in an open and transparent manner through public bidding, and that the privatization value to the National Government shall be optimized. Applied as the standard against which SPC's right to top was measured and found wanting.

• Section 78, Republic Act No. 9136 (EPIRA) — Provides that the implementation of EPIRA may not be restrained or enjoined except by order of the Supreme Court. Applied to justify petitioner's direct recourse to the Supreme Court for injunctive relief.

• Section 62, Republic Act No. 9136 (EPIRA) — Created the Joint Congressional Power Committee, of which petitioner was Chairperson. Considered in evaluating but ultimately found insufficient by itself to vest legislator standing.

• Republic Act No. 9184 (Government Procurement Reform Act) — Cited by petitioner as requiring competitive public bidding for government contracts and maintaining bidders on equal footing. Referenced in the context of the public policy on competitive bidding violated by the right to top provision.

Peralta, Perez, and Jardeleza, JJ., concurred. Velasco, Jr. (Chairperson), J., wrote a concurring opinion, the text of which is not included in the provided material.