Waterfront Philippines, Inc. vs. Social Security System

A contract entered into by government officers without actual authority as required by law, and which violates statutory restrictions on the use of public funds, is void ab initio as an illegal ultra vires act that cannot be ratified or validated by estoppel, requiring the parties to mutually restore what they received thereunder with legal interest.

Waterfront Philippines, Inc. (WPI), Wellex Industries, Inc. (WII), and The Wellex Group, Inc. (WGI) obtained a P375 million loan from the Social Security System (SSS) in 1999, secured by real estate mortgages over WII's properties and shares of stock held in escrow. After defaulting on interest payments and failing to complete a dacion en pago agreement due to tax constraints, SSS foreclosed the mortgage and sought recovery of a substantial deficiency balance. The borrowers contested the suit on the ground that the loan contract was void for lack of proper authority and for violating the SSS Charter's investment restrictions.

• The Loan Transaction: On October 28, 1999, petitioners WPI, WII, and WGI executed a Contract of Loan with Real Estate Mortgage with Option to Convert to Shares of Stock with respondent SSS for P375,000,000.00, payable in five years with interest at the equivalent rate of 364-day Philippine T-bill plus 3% but not lower than 14.5% per annum, re-priced annually. The contract was signed for SSS by Executive Vice President Leopoldo S. Veroy and Senior Vice President Edgar Solilapsi, not by the SSS President.
• Security Arrangements: WII constituted a real estate mortgage over two parcels of land in Quezon City (TCT Nos. N-153395 and N-153396) to secure the loan. WGI delivered 200,000,000 of its common shares to an escrow agent for SSS's account. Additional shares from WPI and WII were later assigned to maintain collateral cover.
• Default and Restructuring Attempts: WPI made partial payments totaling P35,827,695.87 but failed to pay the initial interest due in full. On March 14, 2001, the parties executed a Deed of Assignment (dacion en pago) for the mortgaged properties valued at P267,508,000.00, but WPI could not effect the transfer due to inability to pay capital gains tax. SSS rejected WPI's subsequent restructuring proposal and declared the entire obligation due.
• Foreclosure and Deficiency Claim: SSS extrajudicially foreclosed the mortgaged properties on August 7, 2003, emerging as highest bidder at P198,638,000.00. Despite the foreclosure, SSS claimed a remaining balance of P452,750,886.28 as of March 31, 2004, prompting the filing of the deficiency suit.
• Lower Court Findings: The RTC found that WII and WGI were not solidarily liable with WPI. It also found that the contract was void because the signatories lacked authority under Section 3(b) of Republic Act No. 8282, which vests contracting authority exclusively in the SSS President, and because the loan was not a permitted investment under Section 26 of the same law.

• Lack of Authority: Petitioners argued that under Section 3(b) of R.A. No. 8282, only the SSS President has authority to enter into contracts, and the EVP and SVP who signed lacked actual authority, rendering the contract void.
• Ultra Vires Transaction: The loan contract was ultra vires because Section 26 of R.A. No. 8282 enumerates specific allowable investments for SSS reserve funds, and direct commercial loans to private corporations are not included; by expressio unius est exclusio alterius, such loans are prohibited.
• Inapplicability of Estoppel: Estoppel cannot operate to validate an act that is void or ultra vires, particularly one involving illegal use of public funds.
• Timeliness of Defense: The issue of authority was timely raised through objections during trial and was impliedly included in the pre-trial order as it pertains to the contract's validity.

• Procedural Bar: SSS contended that the issue of authority was raised for the first time in petitioners' memorandum before the RTC, violating due process, and that petitioners stipulated to the contract's genuineness and due execution during pre-trial.
• Ratification and Estoppel: SSS maintained that its officials were authorized and that petitioners, having voluntarily entered the contract and enjoyed its benefits, were estopped from questioning its validity.
• Factual Nature of Issues: SSS argued that the Petition raised questions of fact regarding authority and foreclosure, which are improper under Rule 45.

• Authority of Officers: Whether the SSS officers who signed the contract had actual authority to bind the SSS.
• Validity of Principal Contract: Whether the loan contract was valid or ultra vires under R.A. No. 8282.
• Validity of Accessory Contract: Whether the real estate mortgage was valid given the status of the principal obligation.
• Effect of Estoppel: Whether petitioners are estopped from questioning the contract's validity.

• Authority of Officers: The EVP and SVP lacked actual authority to contract for SSS. Section 3(b) of R.A. No. 8282 vests the general conduct of SSS operations and management functions in the President as chief executive officer, making the President the exclusive contracting authority. No evidence of delegation or ratification by the President was presented.
• Ultra Vires Nature: The contract was an illegal ultra vires act. Section 26 of R.A. No. 8282 contains an exhaustive enumeration of permissible investments for SSS reserve funds; direct loans to private corporations for general business purposes are not included. Under expressio unius est exclusio alterius, the enumeration excludes all others. Even if arguendo it fell under real estate or collateralized loans, SSS failed to prove compliance with statutory conditions (e.g., percentage limits of the Investment Reserve Fund).
• Voidness of Mortgage: The real estate mortgage was void as an accessory contract to a void principal obligation.
• Estoppel Inapplicable: Estoppel cannot validate an illegal ultra vires act or give effect to a contract executed in violation of mandatory statutory provisions governing public funds.
• Mutual Restitution: Pursuant to Article 22 of the Civil Code, parties to a void contract must mutually restore what they received. WPI was ordered to return the P375,000,000.00 principal with legal interest (12% from October 28, 1999 to June 30, 2013; 6% from July 1, 2013 until full payment). SSS was ordered to return all payments received, the foreclosed properties, and all escrowed shares with fruits and income, subject to the same interest rates.

• Illegal Ultra Vires Acts — Corporate acts performed in violation of mandatory statutory provisions restricting the use of public funds are illegal ultra vires acts that are void ab initio and cannot be ratified or validated by estoppel, unlike mere ultra vires acts which are outside the scope of articles of incorporation but not illegal.
• Government Contracting Authority — Government officers contracting on behalf of the State possess only such actual authority as conferred by law; acts beyond this scope do not bind the government.
• Expressio Unius Est Exclusio Alterius — The express mention of specific persons, things, or consequences in a statute implies the exclusion of all others, preventing the extension of statutory provisions to matters not expressly included.
• Accessory Follows Principal — A mortgage contract, being accessory to the principal obligation, is void if the principal obligation is void.

• "The authority of government officials to represent the government in any contract must proceed from an express provision of law or a valid delegation of authority. Without such actual authority possessed by EVP Veroy and SVP Solilapsi, there could be no real consent, much less, a perfected contract to speak of."
• "Under the rules of statutory construction, the express mention of one person, thing, or consequence implies the exclusion of all others – expressio unius est exclusio alterius. Thus, where a statute, by its terms, is expressly limited to certain matters, it may not, by interpretation or construction, be extended to other matters."
• "The doctrine of estoppel cannot operate to give effect to an act which is otherwise null and void or ultra vires. Estoppel cannot be predicated on an illegal act."
• "Courts shall not turn a blind eye against the express provisions of the law."

• Sargasso Construction & Development Corp./Pick & Shovel, Inc./Atlantic Erectors, Inc. (Joint Venture) v. Philippine Ports Authority, 637 Phil. 259 (2010) — Cited for the principle that government contracting officers possess only actual authority derived from law, and acts beyond such authority do not bind the government.
• University of Mindanao, Inc. v. Bangko Sentral ng Pilipinas, 776 Phil. 401 (2016) — Distinguished between illegal ultra vires acts (void) and mere ultra vires acts (voidable).
• Nacar v. Gallery Frames, 716 Phil. 267 (2013) — Applied for the computation of legal interest (12% per annum from date of judicial demand or contract date until June 30, 2013; 6% per annum thereafter until full payment).

• Section 3(b), Republic Act No. 8282 (Social Security Act of 1997) — Vests the general conduct of SSS operations and management in the President as chief executive officer, establishing exclusive contracting authority.
• Section 26, Republic Act No. 8282 — Enumerates the exclusive list of permissible investments for SSS reserve funds, excluding direct commercial loans not falling within specified categories.
• Article 22, Civil Code — Basis for mutual restitution where a void contract has been performed, preventing unjust enrichment.

Gesmundo, C.J., Caguioa, Carandang, and Zalameda, JJ.