Republic of the Philippines vs. Palacio

The waiver of state immunity from suit does not extend to making public funds and property liable to execution or garnishment. Even when the State consents to be sued, the power of the courts ends when judgment is rendered; the State remains at liberty to determine whether to pay the judgment, and execution cannot issue against state property absent express statutory provision.

The Irrigation Service Unit (ISU) was an office originally created under the Department of Agriculture and Natural Resources by virtue of a Memorandum Agreement between the governments of the Philippines and the United States, dated August 13, 1952. It was later transferred to the Department of Public Works and Communications to prosecute the rehabilitation of pump systems and settle the obligations of the former Irrigation Pump Administration. The ISU's budgetary requirements were financed by withdrawals from the Counterpart Fund-Special Account, established in the Central Bank pursuant to the Bilateral Agreement between the Philippines and the United States of April 27, 1951. The Pump Irrigation Trust Fund was later established in the Philippine National Bank, to which all authorized releases from the Counterpart Fund-Special Account were transferred to finance the peso-cost of the Irrigation Pump Project.

On April 2, 1960, Ildefonso Ortiz instituted Civil Case No. 4886 in the Court of First Instance of Camarines Sur against the Handong Irrigation Association, Inc., a corporation with principal place of business in Libmanan, Camarines Sur, and the Irrigation Service Unit, an office or agency under the Department of Public Works and Communications, to recover possession, with damages, of a 958 square-meter lot located in Handong, San Juan, Libmanan, Camarines Sur, which the Irrigation Association allegedly entered and occupied at the instance of its co-defendant. For failure to appear and answer the complaint, the Irrigation Service Unit was declared in default.

On June 3, 1960, the Republic of the Philippines, through the Solicitor General, moved for the dismissal of the complaint, claiming that the Irrigation Service Unit has no juridical personality to sue and be sued. By order of June 11, 1960, this motion was denied on the ground that the said defendant, although a mere agency of the Republic of the Philippines, is engaged in the private business of selling irrigation pumps and construction materials on an installment plan. The Solicitor General's motion for reconsideration was also denied on July 19, 1960, and no appeal appears to have been taken.

On January 29, 1962, the Solicitor General was served with a copy of the writ of execution issued by the court against the defendants. On February 16, 1962, an order of garnishment was served by the Sheriff of Manila against the deposits and/or pump irrigation trust fund in the account of the Irrigation Service Unit at the Philippine National Bank, Manila, to cover the sum of P14,874.40. A previous order of garnishment served on the Philippine National Bank, Naga branch, was returned unsatisfied, the trust fund having been transferred to the Manila office.

On March 8, 1962, the Solicitor General, on behalf of the Republic, filed with the lower court an urgent motion to lift the order of garnishment, for the reason that the funds subject matter thereof are public funds and exempt from attachment or execution. Upon denial of this motion, as well as of the motion for reconsideration of said denial, the Solicitor General commenced certiorari and prohibition proceedings in the Court of Appeals.

The Pump Irrigation Trust Fund was established in the Philippine National Bank, to which all authorized releases to the ISU from the Counterpart Fund-Special Account were transferred. The sales of irrigation pumps to farmers by ISU were governed by the terms of Supplemental Agreement No. 2 to Counterpart Project No. 409, which provided that pumps are sold to farmers' associations under conditional sales contracts, with total payment equal to the landed cost of equipment, cost of installation and construction, cost of fuel and oil financed for the first crop season, ten percent of the total of the landed cost and installation cost to cover administration and technical assistance, and the compensating use tax, plus interest at six percent per annum on any unpaid balance. All principal and interest payments received by the ISU from farmers' associations were to be deposited immediately in the Trust Fund, and whenever the total value of deposits from contract payments exceeded the total releases from the Counterpart Fund-Special Account, the excess deposits were to be transferred back to the Counterpart Fund-Special Account as "proceeds of sale" and "advance deposits."

The Court of Appeals sustained the propriety of the garnishment order and dismissed the Government's petition, on the basis of the trial court's finding that the ISU is engaged in a private business of purchase and sale of irrigation pumps and systems, and following the ruling in National Airports Corporation vs. Teodoro, et al., that by engaging in private business, the Government had actually consented to the suit.

• Public Nature of the Fund: Petitioner maintained that the Pump Irrigation Trust Fund is a fund belonging to the National Government, which was not a party to Civil Case No. 4886, and is therefore exempt from garnishment.
• Effect of Waiver of Immunity: Petitioner argued that even if the State had waived its immunity from suit by engaging in private business, such waiver does not make its property and funds liable to seizure under legal process; execution cannot issue against a judgment against the State.
• Tort Liability: Petitioner argued that the ISU's alleged liability arose from tort and not from contract, and under Article 2180 of the Civil Code, the State is liable only for torts caused by its special agents specially commissioned to carry out the acts complained of, and there was no proof that the tortious inducement was authorized.

• Consent to Suit Through Private Business: Respondents argued that the ISU, by engaging in the private business of purchasing and selling irrigation pumps on an installment basis, had waived its governmental immunity and, by implication, consented to the suit, following the ruling in National Airports Corporation vs. Teodoro, et al.
• Private Venture Proceeds: Respondents claimed that the trust fund was purely the proceeds of a private venture by the government and was therefore subject to garnishment.

• Nature of the Trust Fund: Whether the Pump Irrigation Trust Fund deposited with the Philippine National Bank in the account of the Irrigation Service Unit is a public fund belonging to the National Government or purely the proceeds of a private venture by the government.
• Garnishability of Public Funds: Whether the Pump Irrigation Trust Fund may be garnished to satisfy a money judgment against the Irrigation Service Unit notwithstanding the State's waiver of immunity from suit.

• Nature of the Trust Fund: The Pump Irrigation Trust Fund is a public fund. The ISU is an office in the Government of the Republic of the Philippines created to promote a specific economic policy, and its activity of selling irrigation pumps to farmers on an installment basis is not intended to earn profit or financial gain; the installment payments and interests are to replenish the counterpart funds utilized in furtherance of the project.
• Garnishability of Public Funds: No. The waiver of state immunity from suit does not render public property and funds liable to seizure under legal process. Even when the State consents to be sued, execution cannot issue against a judgment on the State, and the State is at liberty to determine whether to pay the judgment.

• Nature of the Trust Fund: The Court examined the records and documents submitted to the Court of Appeals, including the Supplemental Agreement No. 2 to Counterpart Project No. 409, and found that the ISU is not only an office in the Government of the Republic of the Philippines created to promote a specific economic policy, but also that its activity of selling irrigation pumps to farmers on an installment basis is not intended to earn profit or financial gain to its operator. The mere fact that interests are collected on the unpaid balance does not convert this economic project of the government into a corporate activity. The installment payments and interests receivable from the farmers are to be used to replenish the counterpart funds utilized in furtherance of the operation of the project. The primary purpose of the irrigation pump project is to extend irrigation facilities through the installation of irrigation pumps to provide water to communities of small farmers whose fields depend solely upon natural rainfall during the rainy season and are left uncultivated during the dry season.

• Garnishability of Public Funds: The Court held that the Court of Appeals' decision suffered from the erroneous assumption that because the State has waived its immunity, its property and funds become liable to seizure under legal process. Citing Merritt vs. Insular Government, 34 Phil. 311, the Court emphasized that even though the rule as to immunity of a state from suit is relaxed, the power of the courts ends when the judgment is rendered. Although the liability of the state has been judicially ascertained, the state is at liberty to determine for itself whether to pay the judgment or not, and execution cannot issue on a judgment against the state. Such statutes do not authorize a seizure of state property to satisfy judgments recovered, and only convey the implication that the legislature will recognize such judgment as final and make provision for the satisfaction thereof. Judgments against a state, in cases where it has consented to be sued, generally operate merely to liquidate and establish the plaintiff's claim in the absence of express provision; otherwise they cannot be enforced by processes of law, and it is for the legislature to provide for their payment in such manner as it sees fit. To allow the levying under execution of the ISU funds would amount to diverting them from the purpose originally contemplated by the P.I.U.S. Bilateral Agreement and would amount to a disbursement without any proper appropriation as required by law.

• Tort Liability: The Court further noted a second infirmity in the decision under appeal: the initial complaint against the ISU was that it had induced the Handong Irrigation Association, Inc. to invade and occupy the land of the plaintiff. The ISU liability thus arose from tort and not from contract. Under Article 2180 of the Civil Code of the Philippines, the State is liable only for torts caused by its special agents specially commissioned to carry out the acts complained of outside of such agent's regular duties. There being no proof that the making of the tortious inducement was authorized, neither the State nor its funds can be made liable therefor.

• Doctrine of State Immunity from Suit and Execution — The rule that the State may not be sued without its consent is distinct from the question of whether state property may be levied upon execution. Even when the State has consented to be sued, the power of the courts ends when judgment is rendered; the State is at liberty to determine for itself whether to pay the judgment, and execution cannot issue on a judgment against the State. The Court applied this doctrine by holding that even assuming the ISU's engagement in private business constituted a waiver of immunity from suit, such waiver did not render the Pump Irrigation Trust Fund liable to garnishment.

• Public Purpose Doctrine in Government Economic Activities — A government activity that is not intended to earn profit or financial gain does not convert an economic project of the government into a corporate activity. The Court applied this doctrine in determining that the ISU's sale of irrigation pumps to farmers on an installment basis, with interest, was not a private business venture but a government economic project, since the payments were to replenish counterpart funds used in furtherance of the project.

• State Liability for Torts of Special Agents — Under Article 2180 of the Civil Code, the State is liable only for torts caused by its special agents specially commissioned to carry out the acts complained of outside of such agent's regular duties. The Court applied this doctrine to hold that since there was no proof that the alleged tortious inducement was authorized, neither the State nor its funds could be made liable.

• "It is apparent that this decision of the Court of Appeals suffers from the erroneous assumption that because the State has waived its immunity, its property and funds become liable to seizure under the legal process. This emphatically is not the law (Merritt vs. Insular Government, 34 Phil. 311)." — This passage articulates the central error of the Court of Appeals and establishes the distinction between waiver of immunity from suit and liability of state property to execution.

• "Even though the rule as to immunity of a state from suit is relaxed, the power of the courts ends when the judgment is rendered. Although the liability of the state has been judicially ascertained, the state is at liberty to determine for itself whether to pay the judgment or not, and execution can not issue on a judgment against the state." — This is the canonical formulation of the doctrine that consent to suit does not imply consent to execution against state property.

• "It needs no stressing that to allow the levying under execution of the ISU funds would amount to diverting them from the purpose originally contemplated by the P.I.U.S. Bilateral Agreement, and would amount to a disbursement without any proper appropriation as required by law." — This passage explains the practical and constitutional consequences of allowing execution against public funds, emphasizing the requirement of proper appropriation.

• National Airports Corporation vs. Teodoro, et al., L-5122, April 30, 1952 (91 Phil. 203) — Cited by the Court of Appeals as authority for the proposition that the Government, by engaging in private business, had consented to the suit. The Supreme Court did not overturn this case but distinguished the issue of consent to suit from the issue of execution against public funds.

• Merritt vs. Insular Government, 34 Phil. 311 — Controlling precedent cited by the Supreme Court for the proposition that waiver of state immunity does not render state property and funds liable to seizure under legal process.

• Rosete vs. Auditor General, 81 Phil. 453 — Cited in support of the rule that the State is liable only for torts caused by its special agents specially commissioned to carry out the acts complained of.

• Article 2180, Civil Code of the Philippines — The Court applied this provision to hold that the State is liable only for torts caused by its special agents specially commissioned to carry out the acts complained of outside of such agent's regular duties. Since there was no proof that the alleged tortious inducement was authorized, neither the State nor its funds could be made liable.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro, and Angeles, JJ., concurred. Fernando, J., was on leave.

N/A — No dissenting opinions are noted in the case text.