Traders Royal Bank vs. Intermediate Appellate Court

A government instrumentality that enters into a proprietary contract which is not a necessary incident of its prime governmental function impliedly waives its immunity from suit, the test being whether the non-governmental function is undertaken as an incident to the entity's governmental function. However, even when the state consents to be sued, public funds and properties may not be seized under writs of execution or garnishment to satisfy judgments, since disbursements of public funds must be covered by corresponding appropriations as required by law.

Traders Royal Bank is a banking institution operating under Philippine laws. The National Media Production Center (NMPC) is a government instrumentality tasked with the function of disseminating government information, programs, and policies, and was under the supervision of the Office of the President. Production Specialists, Inc. (PSI) is a corporation duly organized and existing under Philippine laws. The NMPC was created on July 1, 1953 as a joint venture of the Philippine Council for U.S. Aid (PHILCUSA) and the Foreign Operations Agency of the government, and had been transferred among various supervising authorities over the years, eventually being placed directly under the Office of the President. The doctrine of state immunity from suits is constitutionally recognized and germane to the concept of sovereignty, and may be waived by general or special law or by implied consent.

On April 9, 1981, Traders Royal Bank entered into a loan agreement with the National Media Production Center (NMPC), a government instrumentality tasked with disseminating government information, represented by Director Gregorio S. Cendana, and Production Specialists, Inc. (PSI), a private corporation represented by its president, Romeo G. Jalosjos. Under the loan agreement, Traders approved a credit accommodation of P2,520,000 in favor of NMPC and PSI through a domestic stand-by letter of credit to guarantee payment of the coverage or broadcast rights for the 1981 season of the Philippine Basketball Association (PBA). Among the conditions imposed were that NMPC and PSI would deposit with Traders all collections obtained from sponsoring companies and maintain a balance of at least P500,000 or 20% of the face value of the letter of credit in their current account.

As of July 27, 1981, the PBA had drawn against the letter of credit the total amount of P340,000. Because NMPC and PSI did not make any payments on their obligation nor comply with the conditions, Traders filed a complaint in the Court of First Instance of Rizal at Pasay City to collect the whole amount of P2,520,000, alleging that the defendants were selling or disposing of substantial portions of their assets. The lower court issued the writ of preliminary attachment after Traders filed a bond of P2,520,000. Pursuant to the writ, the deputy sheriff collected P1,046,816.75 from PSI, whose president requested that the amount be considered partial payment of the principal obligation, interest, and attorney's fees; Traders acceded, and the court granted the prayer.

A few months later, NMPC, through the Office of the Solicitor General, filed a motion to dismiss on the ground of lack of jurisdiction, claiming immunity from suit as an entity under the Office of the President performing governmental functions. On September 21, 1982, the lower court denied the motion. In its answer, NMPC reiterated its immunity claim and alleged that the claim should have been filed with the Commission on Audit pursuant to the 1973 Constitution and Section 26 of Presidential Decree No. 1445. NMPC also filed a cross-claim against PSI alleging that it merely acted as a guarantor of PSI in the loan agreement. In the meantime, the deputy sheriff garnished collections from sponsoring companies in the amount of P1,391,699.57 and another P420,189.27 from NMPC's account with Traders, for a total of P1,811,888.84.

Before trial, NMPC filed another motion to dismiss reiterating its immunity claim. On January 5, 1984, the lower court issued an order stating that the September 21, 1982 order denying the motion to dismiss should be respected. Consequently, NMPC filed before the Intermediate Appellate Court a petition for certiorari, prohibition and mandamus, alleging grave abuse of discretion in denying the motion to dismiss and in failing to dissolve the writ of attachment on the grounds that government property cannot be attached and that the attachment bond was not renewed. The appellate court granted the petition on July 17, 1984, finding that NMPC, as an unincorporated instrumentality of the government under the Office of the President, may not be sued without its consent, and that entering into a contract did not constitute a voluntary waiver of immunity. Traders moved for reconsideration, which was denied, prompting the instant petition.

• Implied Consent by Proprietary Function: Traders contended that although NMPC is a government instrumentality and may not be sued without its consent, by entering into a loan agreement for the benefit of the PBA, it exercised a proprietary function, thereby abandoning its sovereign capacity and impliedly consenting to be sued.
• Impropriety of Certiorari: Traders asserted that NMPC's petition for certiorari, prohibition and mandamus in the appellate court was improper.

• Immunity from Suit: NMPC argued that it was immune from suit, being an entity under the Office of the President performing governmental functions, and that the claim should have been filed with the Commission on Audit pursuant to Article XII, D, Section 2(1) of the 1973 Constitution and Section 26 of Presidential Decree No. 1445.
• Guarantor Status: NMPC alleged that it merely acted as a guarantor of PSI in the loan agreement, having appointed PSI as production manager and exclusive marketing manager for the 1979, 1980 and 1981 PBA seasons.
• Improper Attachment: NMPC asserted that government property cannot be attached, removed, concealed or disposed of, and that the attachment bond of Traders was not renewed. It also claimed that partial availment of the letter of credit in the amount of P340,000 was "already more than satisfied" and that as regards the undrawn balance, NMPC already terminated the loan agreement.

• Propriety of Certiorari: Whether NMPC properly filed a petition for certiorari, prohibition and mandamus before the Intermediate Appellate Court.
• Suability of NMPC: Whether the NMPC, a government instrumentality, may be sued without its consent despite having entered into a loan agreement with Traders.
• Garnishment of Public Funds: Whether the trial court had the power to garnish NMPC deposits to answer for any eventual judgment against it.

• Propriety of Certiorari: Yes. The NMPC properly filed the petition for certiorari, prohibition and mandamus in the Intermediate Appellate Court because it needed an adequate and expeditious relief from the garnishment of government funds.
• Suability of NMPC: Yes, the NMPC is suable. The Court ruled for the petitioner on this issue, finding that the NMPC's undertaking was not incidental to its governmental function of disseminating government information, and thus it impliedly waived its immunity from suit.
• Garnishment of Public Funds: No. The trial court did not have the power to garnish NMPC deposits to answer for any eventual judgment against it, as public funds are not within the reach of any garnishment or attachment proceedings.

• Propriety of Certiorari: Although review on certiorari of an order denying a motion to dismiss is not ordinarily availing, a petition for certiorari would nonetheless be proper if the jurisdictional competence of the Court is raised because jurisdiction may be raised at any point in the proceedings. The NMPC needed an adequate and expeditious relief from the garnishment of government funds, which justified the extraordinary remedy.

• Suability of NMPC: The doctrine of state immunity from suits is constitutionally recognized and germane to the concept of sovereignty. Immunity may be waived by general or special law, or by implied consent to be sued, as when the state, through its officers and agents, enters into a contract in furtherance of a legitimate aim and purpose. By doing so, the state descends to the level of the citizen and its consent to be sued is implied from the very act of entering into such contract. The test of the state's suability when a government entity enters into a proprietary contract is whether the non-governmental function is undertaken as an incident to its governmental function; if it is a necessary incident of its prime governmental function, the entity is immune from suit. The Court examined the records and found that the NMPC was engaged in an undertaking which was not incidental to disseminating governmental information. The loan agreement referred to both NMPC and PSI collectively as "clients" and "accountees," with no distinction as to the nature of their liability, indicating that the NMPC was engaged in a business undertaking beyond its governmental function. The general and bare allegation of non-suability was weak, especially given NMPC's own admission that it was "in truth and in fact merely acting as guarantor" for PSI, with no explanation of what liabilities it had as such guarantor. While statutory provisions expressly waiving state immunity are construed in strictissimi juris, and extreme caution should be exercised in determining the existence of implied consent, when the state itself, through the acts of a duly authorized official of an agency, exceeds its authority, the doctrine may not be invoked as a shield in the same manner that it cannot serve as an instrument for perpetrating an injustice.

• Garnishment of Public Funds: The NMPC's implied consent to be sued notwithstanding, the trial court did not have the power to garnish NMPC deposits to answer for any eventual judgment against it. Being public funds, the deposits are not within the reach of any garnishment or attachment proceedings. The universal rule is that where the State gives its consent to be sued by private parties, it may limit the claimant's action only up to the completion of proceedings anterior to the stage of execution, and the power of the Courts ends when the judgment is rendered, since government funds and properties may not be seized under writs of execution or garnishment to satisfy such judgments. This is based on considerations of public policy: disbursements of public funds must be covered by corresponding appropriations as required by law, and the functions and public services rendered by the State cannot be allowed to be paralyzed or disrupted by the diversion of public funds from their legitimate and specific objects. There is more reason to apply this doctrine in this case considering that the waiver of non-suability is only implied and not expressly allowed by statute. The proceedings below should continue to determine the liabilities of PSI and NMPC; should the court find that NMPC is liable, then after judgment, the procedure outlined in Sections 91-93 of Presidential Decree No. 1445 regarding claims against the government shall be observed.

• Doctrine of State Immunity from Suit — The doctrine is constitutionally recognized and germane to the concept of sovereignty. It may be waived by general or special law, or by implied consent to be sued, as when the state, through its officers and agents, enters into a contract in furtherance of a legitimate aim and purpose. By doing so, the state descends to the level of the citizen and its consent to be sued is implied from the very act of entering into such contract.

• Necessary-Incident Test — When a government entity, though unincorporated and not possessed of a distinct juridical personality, enters into a contract which is proprietary in character, the test of the state's suability is whether the non-governmental function is undertaken as an incident to its governmental function. If the transaction, contract, or operation undertaken by the government entity is a necessary incident of its prime governmental function, the entity is immune from suit; if not, the entity impliedly waives its immunity.

• Strictissimi Juris Rule on Waiver — Statutory provisions expressly waiving state immunity from suit are construed in strictissimi juris, and extreme caution should be exercised in determining the existence of an implied consent of the state. However, when the state itself, through the acts of a duly authorized official of an agency, exceeds its authority, the doctrine may not be invoked as a shield in the same manner that it cannot serve as an instrument for perpetrating an injustice.

• Immunity of Public Funds from Garnishment — Public funds are not within the reach of any garnishment or attachment proceedings. Where the State gives its consent to be sued by private parties, it may limit the claimant's action only up to the completion of proceedings anterior to the stage of execution, and the power of the Courts ends when the judgment is rendered, since government funds and properties may not be seized under writs of execution or garnishment to satisfy such judgments. Disbursements of public funds must be covered by corresponding appropriations as required by law, and the functions and public services rendered by the State cannot be allowed to be paralyzed or disrupted by the diversion of public funds from their legitimate and specific objects.

• "If said non-governmental function is undertaken as an incident to its governmental function, there is no waiver thereby of the sovereign immunity from suit extended to such government entity. In other words, if the transaction, contract or operation undertaken by the government entity is a necessary incident of its prime governmental function, said entity is immune from suit." — This passage articulates the necessary-incident test for determining whether a government entity that enters into a proprietary contract has waived its immunity from suit, and is the controlling doctrine in this case.

• "The universal rule that where the State gives its consent to be sued by private parties either by general or special law, it may limit claimant's action only up to the completion of proceedings anterior to the stage of execution and that the power of the Courts ends when the judgment is rendered, since government funds and properties may not be seized under writs of execution or garnishment to satisfy such judgments, is based on obvious considerations of public policy." — This passage, quoted from Commissioner of Public Highways vs. San Diego, states the canonical rule that consent to be sued does not extend to execution against public funds, and is the basis for lifting the garnishment in this case.

• "While it is true that even statutory provisions expressly waiving state immunity from suit are construed in strictissimi juris, and therefore, extreme caution should be exercised in determining the existence of an implied consent of the state, when the state itself, through the acts of a duly authorized official of an agency, exceeds its authority, the doctrine may not be invoked as a shield in the same manner that it cannot serve as an instrument for perpetrating an injustice." — This passage balances the strict construction of waivers of immunity against the principle that the immunity doctrine cannot be used to perpetrate injustice, supporting the Court's finding of implied waiver in this case.

• Harry Lyons, Inc. vs. The United States of America, 104 Phil. 593 — Cited by the trial court in denying NMPC's first motion to dismiss, for the proposition that the state may be sued without its consent if it entered into a contract with a private person.
• Cadiao vs. Estenzo, L-42408, September 21, 1984, 132 SCRA 93 — Cited for the proposition that a petition for certiorari is proper when the jurisdictional competence of the court is raised, because jurisdiction may be raised at any point in the proceedings.
• Santos vs. Santos, 92 Phil. 281 — Cited for the proposition that immunity from suit may be waived by implied consent when the state enters into a contract through its officers and agents.
• Mobil Philippines Exploration, Inc. vs. Customs Arrastre Service, L-23139, December 17, 1966, 18 SCRA 1121 — Cited for the necessary-incident test: if a non-governmental function is undertaken as an incident to the governmental function, there is no waiver of immunity.
• Union Insurance Society of Canton, Ltd. vs. Republic, L-26409, July 31, 1972, 46 SCRA 120 — Cited for the proposition that if the transaction, contract, or operation undertaken by the government entity is a necessary incident of its prime governmental function, the entity is immune from suit.
• Insurance Company of North America vs. Warner, Barnes & Co., Ltd., L-24106, October 31, 1967, 21 SCRA 765 — Cited for the rule that statutory provisions expressly waiving state immunity from suit are construed in strictissimi juris.
• Amigable vs. Cueva, L-26400, February 29, 1972, 43 SCRA 360 — Cited for the proposition that the immunity doctrine may not be invoked as a shield when the state exceeds its authority.
• Ministerio vs. CFI of Cebu, L-31635, August 31, 1971, 40 SCRA 464 — Cited for the proposition that the immunity doctrine cannot serve as an instrument for perpetrating an injustice.
• Commissioner of Public Highways vs. San Diego, L-30098, February 18, 1970, 31 SCRA 616 — Cited for the universal rule that where the State consents to be sued, it may limit the claimant's action up to the completion of proceedings anterior to the stage of execution, and that government funds and properties may not be seized under writs of execution or garnishment.
• United States of America, et al. vs. Hon. Rodolfo D. Rodrigo, etc. and Fabian Genove, G.R. No. 79470, February 26, 1990 — Cited in support of the Court's finding that the NMPC was engaged in a business undertaking beyond its governmental function.

• Article XVI, Section 3, 1987 Constitution; Article XV, Section 16, 1973 Constitution — The constitutional recognition of the doctrine of state immunity from suits, which is germane to the concept of sovereignty and may be waived by general or special law.
• Article XII, D, Section 2(1), 1973 Constitution — Cited by NMPC in its answer, providing that claims against the government should be filed with the Commission on Audit.
• Section 26, Presidential Decree No. 1445 (Government Auditing Code of the Philippines) — Cited by NMPC as the basis for its claim that the action should have been filed with the Commission on Audit.
• Sections 91-93, Presidential Decree No. 1445 — The procedure regarding claims against the government that shall be observed after judgment if the court finds NMPC liable.
• Presidential Decree No. 473 — Appropriated thirty-six million pesos for the purchase and installation of equipment for the use of NMPC, and described the NMPC as "responsible for the production of various publications that disseminate information to the general public in the Philippines and abroad."
• Executive Order No. 100 — Issued on December 24, 1986 by President Aquino, which abolished the NMPC by creating the Philippine Information Agency to which all records, assets and equipment of the NMPC were transferred.

• Gutierrez, Jr., J.
• Bidin, J.