Republic of the Philippines v. Mupas

In determining just compensation for expropriated specialized properties such as airport terminals, the depreciated replacement cost method—which deducts physical deterioration and all relevant forms of obsolescence from the current gross replacement cost—is the appropriate standard, rather than the new replacement cost method, provided the valuation is adjusted to the date of taking and equity is considered.

In 1994, Asia's Emerging Dragon Corp. (AEDC) submitted an unsolicited proposal to the Department of Transportation and Communications (DOTC) for the construction of NAIA-IPT III under a build-operate-transfer (BOT) scheme. After a competitive bidding, the Paircargo Consortium (later incorporated as Philippine International Air Terminals Co., Inc. or PIATCO) was awarded the project. PIATCO engaged Takenaka Corporation and Asahikosan Corporation as subcontractors for construction and procurement. In 2002, President Arroyo declared the Government would not honor the PIATCO contracts. In Agan v. PIATCO (2003), the Supreme Court nullified the contracts for violating the BOT Law and the General Banking Act, but recognized PIATCO's right to just compensation as the builder.

• The BOT Contract and Nullification: In 1997, the Government executed a Concession Agreement with PIATCO for the NAIA-IPT III project, later superseded by the Amended and Restated Concession Agreement (ARCA) and supplemental agreements. In Agan v. PIATCO (2003), the Supreme Court nullified these contracts because Paircargo Consortium was not a duly pre-qualified bidder and Security Bank violated the General Banking Act by investing its entire net worth. The Court ruled that PIATCO must receive just compensation before the Government could take over the facility.
• The Expropriation Proceedings: On December 21, 2004, the Government filed an expropriation complaint, depositing ₱3,002,125,000.00 (the assessed value) and obtaining a writ of possession. Takenaka and Asahikosan intervened as unpaid subcontractors, claiming they were the actual builders and seeking to enforce London arbitration awards against PIATCO.
• Valuation Evidence: The Government's appraiser (Gleeds) valued the terminal at $300,206,693.00 (as of December 2002) using the Principle Quantities approach, deducting depreciation ($35,076,295.00) and deterioration ($1,738,318.00) to arrive at a December 2004 value of $263,392,081.00, and further deducting $113,944,044.00 for non-compliance with bid documents and inferior quality. PIATCO claimed $360,969,790.82 in construction costs plus $70,197,802.00 in attendant costs, adjusted for inflation to $470,450,825.00. The BOC recommended $376,149,742.56 using the new replacement cost method.
• Structural Defects Controversy: The Government claimed the terminal suffered from massive structural defects (failed structural elements, inferior materials, seismic issues), supported by reports from Ove Arup and TCGI. PIATCO and the subcontractors countered with reports from Meinhardt and Scott Wilson asserting the structure was sound and compliant with the 1992 National Structural Code of the Philippines (NSCP) applicable at the time of construction.
• Procedural History: The RTC adopted the Government's valuation with modifications, excluding "unnecessary areas" and attendant costs. The CA reversed, adopting the new replacement cost method, excluding deductions for depreciation and structural defects, and including interest at 6%.

• Depreciated Replacement Cost (Government): Argued that the depreciated replacement cost method (deducting depreciation and obsolescence) is the internationally accepted standard for valuing used assets, not the new replacement cost method adopted by the CA. The Government contended that the CA's method would overcompensate PIATCO for a terminal that was not brand new and suffered from wear and tear.
• Structural Defects (Government): Asserted that the terminal suffered from massive structural defects requiring retrofitting costs of over $113 million, which should be deducted from the replacement cost.
• Attendant Costs (Government): Contended that attendant costs were already included in the "General Requirements and Conditions" of the Gleeds Report and that PIATCO failed to substantiate its claimed $70 million in attendant costs with original documents.
• Interest (Government): Argued that PIATCO should not receive interest because the delay was caused by PIATCO's own illegal acts (void contracts) and failure to produce documents; alternatively, that unliquidated claims do not earn interest.
• Escrow Account (Government): Sought to deposit just compensation in an escrow account pending determination of entitled claimants, fearing liens from PIATCO's creditors.
• Independent Appraiser (Government in G.R. No. 181892): Argued that the RTC had no authority to appoint DG Jones and Partners as an independent appraiser under RA 8974, which only authorizes the implementing agency to engage appraisers.
• Entitlement to Just Compensation (Takenaka and Asahikosan): Argued that as the actual builders and unpaid subcontractors with London arbitration awards in their favor, they were entitled to have just compensation set aside in an escrow account to satisfy PIATCO's debt to them.
• Structural Soundness (Takenaka and Asahikosan): Denied structural defects, asserting the terminal was built according to the 1992 NSCP and that the Government's experts applied incorrect standards (2001 NSCP).
• BOC Expenses (Takenaka and Asahikosan): Contended they should not share in BOC expenses as they were not parties to the expropriation complaint.

• Due Process (PIATCO): Claimed the RTC decision was void for failure to furnish copies of the BOC Final Report before the May 23, 2011 decision, violating Rule 67.
• Valuation (PIATCO): Argued for the new replacement cost method, asserting that depreciation is merely an accounting concept and that the terminal was a specialized asset that does not depreciate like ordinary property. Claimed attendant costs of $70 million were substantiated by Reyes Tacandong & Co.
• Interest (PIATCO): Asserted entitlement to 12% interest from December 21, 2004 until full payment, and to the fruits/income of the terminal.
• Exclusive Entitlement (PIATCO): Argued that as the owner, it is exclusively entitled to just compensation, and the subcontractors' claims should be resolved in separate proceedings (G.R. No. 202166).
• Support for CA Ruling (Government as Respondent): Supported the CA's ruling on the new replacement cost method but opposed the escrow account for subcontractors.

• Due Process: Whether the RTC's May 23, 2011 decision is null and void for violation of procedural due process due to non-receipt of the BOC Final Report.
• Valuation Method: Whether the depreciated replacement cost method or new replacement cost method applies in determining just compensation for NAIA-IPT III.
• Construction Cost: Whether the Government's computation of construction cost ($300 million) or PIATCO's ($360 million) is supported by evidence; whether the terminal suffered from structural defects requiring deduction from the base value.
• Attendant Costs: Whether PIATCO is entitled to separate attendant costs and whether the 10% industry standard applies.
• Depreciation: Whether depreciation and deterioration should be deducted from the replacement cost.
• Inflation: Whether the replacement cost should be adjusted to December 2004 values using the Consumer Price Index.
• Interest: Whether the CA erred in imposing 6% interest instead of 12%, and from what date interest should accrue.
• Recipient of Compensation: Whether PIATCO or Takenaka and Asahikosan (or both) are entitled to receive just compensation.
• Escrow Account: Whether the Government may deposit just compensation in an escrow account pending determination of claimants.
• Costs: Whether Takenaka and Asahikosan should share in the BOC's expenses.
• Mootness: Whether the appointment of DG Jones as independent appraiser is moot.

• Due Process: The RTC's May 23, 2011 decision is valid. The essence of procedural due process is the right to be heard, which was satisfied as the parties were given ample opportunity to present evidence before the BOC and the RTC. The mere failure to receive the BOC Final Report before the decision did not nullify the proceedings where the parties had exhaustively litigated their positions.
• Valuation Method: The depreciated replacement cost method is the appropriate standard. The new replacement cost method would unjustly enrich PIATCO by compensating it for a brand new terminal when the expropriated asset was not brand new and had suffered loss of value from wear and tear, technological changes, and environmental factors. This method is consistent with Section 10 of RA 8974 IRR which requires consideration of the kinds and quantities of materials used and the physical features of the property.
• Construction Cost: The Government's Gleeds Report ($300,206,693.00 as of December 2002) is more reliable than PIATCO's unsubstantiated claims. However, the "unnecessary areas" (retail mall and excess concession space) valued at $13,890,757.00 must be included as the Government expropriated the entire terminal. The alleged structural defects were not established by preponderance of evidence; the Government's experts and PIATCO's experts presented equiponderant evidence, but the Government bore the burden of proof and failed to establish defects by preponderance. However, $20,713,901.00 for actual retrofitting costs incurred (based on the 2012 DOTC retrofit project) is deductible.
• Attendant Costs: PIATCO failed to substantiate its claimed attendant costs with original documents or proper foundation under the best evidence rule. The summary by Reyes Tacandong & Co. is inadmissible double hearsay. The Government's valuation already includes attendant costs under "General Requirements and Conditions" ($27,093,375.28).
• Depreciation: Depreciation ($35,076,295.00) and deterioration ($1,738,318.00) totaling $36,814,613.00 must be deducted from the December 2002 base value, resulting in a net construction cost of $263,392,081.00 as of December 2002.
• Inflation Adjustment: The replacement cost must be adjusted to December 2004 values (the date of filing) using the inflation rate of 1.0971, resulting in a replacement cost of $326,932,221.26.
• Interest: Interest is due from the date of taking (September 11, 2006, when the writ of possession was reinstated) because just compensation must be paid from that date under the Constitution. The rate is 12% per annum from September 11, 2006 to June 30, 2013, and 6% per annum from July 1, 2013 until full payment (applying BSP Circular No. 799).
• Recipient of Compensation: PIATCO is the sole recipient of just compensation as the owner of the property. Takenaka and Asahikosan, as subcontractors, are not entitled to direct payment or escrow of just compensation; their claims against PIATCO must be pursued in separate proceedings (G.R. No. 202166). The determination of just compensation in eminent domain is binding only as to the amount and the recipient (PIATCO), but does not preclude subsequent actions to determine ownership or liens.
• Escrow Account: The Government's proposal to pay through an escrow account is rejected; RA 8974 requires direct payment to the owner.
• Costs: The Government shall bear the BOC expenses (₱3,500,000.00) as the plaintiff under Section 12, Rule 67 of the Rules of Court. Takenaka and Asahikosan need not share.
• Mootness: The issue regarding the appointment of DG Jones and Partners is moot and academic as the RTC has already rendered judgment on just compensation.

• Depreciated Replacement Cost Method: In expropriation of specialized properties (those rarely sold in the open market), just compensation is determined by the depreciated replacement cost method—calculating the current cost of replacing the asset with a modern equivalent, then deducting physical deterioration and all relevant forms of obsolescence (functional and economic) to reflect the actual condition of the property at the time of taking.
• Interest on Just Compensation: Legal interest accrues from the date of taking (or filing of complaint, whichever is earlier) until full payment as a constitutional requirement to make the owner whole. The rate is 12% per annum until June 30, 2013, and 6% per annum thereafter pursuant to BSP Circular No. 799.
• Recipient of Just Compensation: In eminent domain, just compensation is paid exclusively to the owner of the property at the time of taking. Subcontractors or creditors claiming liens must pursue their claims against the owner in separate proceedings and cannot intervene to receive direct payment from the condemnor unless ownership is uncertain or conflicting claims exist (Section 9, Rule 67, Rules of Court).
• Due Process in Expropriation: Procedural due process is satisfied by the opportunity to present evidence before the commissioners and the court; technical non-compliance with service of the commissioners' report does not invalidate the judgment where parties have actually been heard.

• "Just compensation is defined as 'the full and fair equivalent of the property taken from its owner by the expropriator.' The word 'just' is used to qualify the meaning of the word 'compensation' and to convey the idea that the amount to be tendered for the property to be taken shall be real, substantial, full and ample."
• "The use of depreciated replacement cost method is consistent with the principle that the property owner shall be compensated for his actual loss... Injustice would result if we award PIATCO just compensation based on the new replacement cost of the NAIA-IPT III, and disregard the fact that the Government expropriated a terminal that is not brand new."
• "Interest in eminent domain cases runs as a matter of law and follows as a matter of course from the right of the landowner to be placed in as good a position as money can accomplish, as of the date of taking."
• "The person who is solely entitled to just compensation is the owner of the property at the time of the taking... Takenaka and Asahikosan, as subcontractors in the nullified NAIA-IPT III project, are not entitled to just compensation directly from the Government."

• Agan v. PIATCO, G.R. No. 155001 (2003) — Nullification of PIATCO contracts; recognition of right to just compensation.
• Republic v. Gingoyon, G.R. No. 166429 (2005) — Application of RA 8974; requirement of direct payment before writ of possession.
• Republic v. Court of Appeals, G.R. No. 146587 (2002) — Interest on just compensation as forbearance of money; 12% rate.
• Eastern Shipping Lines, Inc. v. Court of Appeals, G.R. No. 97412 (1994) — Basis for 12% interest rate on forbearance of money.
• Calvo v. Zandueta, 49 Phil. 605 (1926) — Procedure when ownership is uncertain; payment to court.
• De Knecht v. Court of Appeals, 352 Phil. 833 (1998) — Only persons with lawful interest may intervene in expropriation.

• Section 9, Article III, 1987 Constitution — Private property shall not be taken for public use without just compensation.
• Republic Act No. 8974 — An Act to Facilitate the Acquisition of Right-of-Way, Site or Location for National Government Infrastructure Projects (specifically Sections 4, 5, 7, and IRR Section 10 on replacement cost method).
• Rules of Court, Rule 67 — Eminent Domain (Sections 4, 5, 7, 8, 9, 12 on commissioners, reports, and costs).
• BSP Circular No. 799, Series of 2013 — Reduced legal interest rate to 6% per annum effective July 1, 2013.
• Civil Code, Article 2242 — Preferred claims on immovable property (cited regarding subcontractors' liens).

Maria Lourdes P.A. Sereno (Chief Justice), Antonio T. Carpio, Diosdado M. Peralta, Lucas P. Bersamin, Mariano C. Del Castillo, Martin S. Villarama, Jr., Jose Portugal Perez, Jose Catral Mendoza, Bienvenido L. Reyes (on leave), Estela M. Perlas-Bernabe, Marvic M.V.F. Leonen, Francis H. Jardeleza.