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For: THE NATIONAL LOTTERY OFFICE Attention: Mr. Very Lucky Guy Chairman, NLO From: ATTYs. Young and Old Date: 22 July 2011 Re: MEMORANDUM ON NLOs LOTTO PAPER SUPPLY PROBLEM _____________________________________________________________ Please find below our memorandum on a query you earlier made on the legality of a new Compromise Agreement dated January 27, 20031 among NLO, Fraudulent Paper Astoria Pty., Ltd. (hereinafter, FPA) and local suppliers of thermal coated paper who are enmeshed in a long-running legal controversy. The principal question posed: are the contracts to supply the NLO with its lotto paper requirements as embodied in the Compromise Agreement legal? Our conclusion: the Compromise Agreement is null and void because it violates applicable laws. Our discussion, as well as our recommendations, follows: First, the summary of relevant facts.

Summary of Relevant Facts

1. Lotto operations require thermal coated paper. In the beginning, the lotto
equipment provider, Good Swindle Gaming Management Corporation (GSGM) imported from the US, Australia, Japan and Europe thermal coated paper to run the lotto, which the NLO launched in 1995.2

2. The following year, under then NLO chair Manny Mortuary, the office entered
into a Build-Operate and Transfer (hereinafter BOT Contract) contract with FPA to put up a thermal coating and printing plant in Clark Field, Pampanga.

1 2

Hereinafter, Compromise Agreement. Memorandum to the Honorable Chairman and Members of the Board of Directors, September 7, 2004, NLO Legal Department [Hereinafter, NLO Memorandum, September 7, 2004), at 3.

3. FPA had submitted an unsolicited proposal on April 12, 1996. NLO called for
proposals from other interested parties and received no alternative proposals, despite publication of the invitations for proposals.

4. Hence, a BOT contract was signed between NLO and FPA pursuant to RA 7718
(the amended BOT law). The agreement between NLO and FPA was approved by the NEDA-Investment Coordination Committee (NEDA-ICC) on October 3, 1997, and by the NEDA Board, then chaired by President Cigarillo, on October 28, 1997.

5. Under the BOT contract, the NLO was to exclusively source paper from FPA
for 12 years.
3

6. Meanwhile, pending the establishment of the plant, the two parties entered
into a Memorandum of Agreement (MOA) dated March 20, 1998 where NLO committed to buy and FPA undertook to supply the lotto paper requirements of NLO for the three months period from March to May, 1998.4

7. The NLO Board approved the March 20, 1998 MOA when it passed Resolution
no. 510, series of 1998.

8. When Justice Sulat Matuwid took over the helm at NLO, she deemed the BOT
Contract disadvantageous to the government, and terminated it on August 7, 1998. Justice Matuwid cited FPAs failure to put up the plant within six months of its effectivity, its failure to develop the site, as well as the submission of the required Environmental Clearance Certificate,5 all of which are grounds for termination of the contract according to the terms of the BOT contract itself.6

9. The NLO at that time reasoned that while at the end of the twelve year
period, ownership of the plant shall be transferred to the NLO, NLO will not be able to fully use the same because it is not authorized by its charter to use the plant beyond its own requirements which comprise only 20% of the total production capacity of the plant.7

10. It was further reasoned out that the NLO will be forced to needlessly incur
the expenses of maintaining and operating a big plant the production capacity of which is far beyond the production requirements (of the NLO).8

11. The Resolution however carried a clause that said it was without prejudice to
another opportunity for the NLO to do business with that (FPA) through an appropriate supply contract subject to the usual bidding requirements and in accordance with the applicable government rules and regulations.9

3 4

FPA-NLO BOT Contract para. 3.2. para. 5.1 [Hereinafter, BOT contract]. FPA-NLO Memorandum of Agreement, March 20, 1998 at 1-2.

5 6

Board Resolution No. 1575, Series of 1998 See BOT contract, para. 16.1 7 Id. 8 Id. 9 Id.

12. NLO then held a public bidding to supply paper to its Luzon operations. Four
local suppliers won the bids, namely: a. b. c. d. Papel Papel Papel Papel De De De De Liha Japon Tsina Lambot

13. On April 28, 1999, an unhappy FPA filed a Complaint (Civil Case. No. Q-9937467) against NLO and the above-named supplier-bidders before the Regional Trial Court of Quezon City. In said complaint, FPA prayed for the Court to do the following: declare as void NLOs termination of its BOT Contract; declare as void NLOs award, agreement, and purchase orders in favor of the four winning local suppliers; require NLO to specifically perform its obligations under the BOT Contract, and; issue Temporary Restraining Order and Writ of Preliminary Injunction to stop NLO from entering into an agreement with the four winning local suppliers. The RTC issued a restraining order and a writ of preliminary injunction prohibiting NLO from entering into and enforcing its agreements with the four winning supplier-bidders.

14. The NLO elevated the case to the Court of Appeals in a Petition for Certiorari
and Prohibition10 with prayer for TRO and preliminary injunction.

15. The local suppliers also elevated the case to the Court of Appeals (hereinafter
CA) in a separate Petition for Certiorari and Prohibition. Said separate petition by the local suppliers was dismissed by the CA.

16. On July 2, 1999, the CA granted NLOs prayer for a TRO enjoining the RTC
Judge to refrain and desist from further proceeding with the RTC case, as well as from enforcing the injunction he issued until further orders from the CA.

17. FPA, in turn, filed a petition for certiorari11 with the Supreme Court praying for
the nullification of the injunction issued by the CA. FPA also prayed that the Supreme Court issue a TRO/injunction to stop the CA from proceeding with the case filed by the NLO before the CA.

18. On July 26, 1999, the Supreme Court issued a TRO against the Court of
Appeals, stopping the CA from hearing any further the case filed by NLO and from enforcing its own TRO.

19. On September 6, 1999 however, the Supreme Court lifted its own TRO, thus
paving the way for the CA to enforce its writ of injunction against the RTC. With the injunction issued by the C.A., the RTC was prohibited from stopping the NLO from proceeding with the enforcement of its contracts with the winning local suppliers.

20. On March 30, 2001, the Court of Appeals rendered its decision in the case
filed by NLO before it, the dispositive portion of which reads:

10 11

CA GR SP 53429. G.R. No. 139128

WHEREFORE, the petition is granted and the assailed orders of the respondent judge are ANNULED and SET ASIDE. The trial court is directed to SUSPEND the proceedings therein pending amicable settlement and/or submission to arbitration of the dispute between the parties in accordance with Secs. 21.2 and 25.5 of the Agreement. The writ of preliminary mandatory injunction heretofore issued by this Court is declared PERMANENT. The motion for Issuance of a Writ of Preliminary Injunction with Prayer for Temporary Restraining Order and Urgent Motion to Dissolve the Writ of Preliminary Injunction of December 6, 1999 filed by respondent FPA. Ltd are DENIED. SO ORDERED.12

21. Upon this decision,

the RTC issued an Order dated September 4, 2001, suspending the proceedings in Civil Case No. Q-99-37467 pending amicable settlement of the dispute.

22. The parties did try to settle their differences through a series of proposed
Compromise Agreements while the case was being litigated in court.

23. Compromise Agreement of 2000.13 When Hon. Rosary De Krus took over
as general manager and later, chairperson of the NLO, the agency agreed to a compromise agreement with FPA. It was subsequently junked purportedly because it did not involve the local suppliers who were made parties to the pending BOT termination case.

24. Compromise Agreement of 2001.14 Under Hon. De Krus the new board
approved an interim agreement among all the local suppliers to ensure the smooth purchase of needed lotto paper. The interim agreement allowed all parties a share in the distribution of supply orders according to their capacity to supply the lotto paper. These orders were however, in the nature of emergency purchases which the Court has considered as justifiable considering that FPA itself cannot supply all the paper requirements of NLO.

25. Compromise Agreement of 2002.15 In a bid to finally resolve the pending

BOT termination case, NLO and FPA agreed on a new Compromise Agreement, this time, involving the triad of the NLO, the FPA, and the local suppliers.

12

Court of Appeals Decision, March 30, 2001, (Fifth division, C.A. G.R. SP No. 52429), at 20. [hereinafter, Court of Appeals March 30, 2001 Decision], also cited in NLO Legal Department Memorandum dated April 30, 2002. The details of the decision will be discussed farther down this Memorandum. 13 Feedback Report, Zorro C. Conrado, Assistant General Manager, Online Lottery Sector, to Hon. Usisa Na Tulog, General Manager, February 14, 2003, at 4. [hereinafter, Feedback Report dated February 14, 2003]. 14 Feedback Report dated February 14, 2003 at 4. 15 Feedback Report dated February 14, 2003 at 5.

26. The idea for the Compromise Agreement was broached by FPA itself in a letter
dated April 22, 2002, addressed to NLO Chairperson De Krus through General Manager Virginio De Monyo

27. The NLO, pending final approval of the Compromise Agreement, sought to buy
additional lotto thermal paper supplies. The FPA obtained a TRO to stop this emergency purchase.

28. On December 18, 2002, the court issued a 72-hour TRO restraining the NLO
from making new allocations of its lotto paper requirements, or if new allocations have been made, from enforcing it until the court has resolved FPAs new motion for the issuance of a preliminary injunction. ( After hearing, the Court directed the NLO to follow some of the provisions of the Compromise Agreement even before its approval by the NLO chairperson in making these purchases).

29.

30. On January 3, 2003 the judge issued an order, the relevant portions of which read thus: During the hearing today, January 3, 2002, all [parties] agreed to dispense with the hearing on the issuance of a writ of preliminary injunction because of the new memorandum of agreement among parties as to paper requirements for Luzon only excluding Visayas and Mindanao. On this score, the Court is constrained to issue a writ of preliminary mandatory injunction or to make the temporary restraining order permanent only for Luzon excluding Visayas and Mindanao. Considering that the agreement among the parties is voluntary, the requirement of preliminary mandatory injunction is dispensed with. The [NLO] is hereby directed to comply with the new paper requirement for Luzon among parties based on the new memorandum agreement pending its approval and signature of the chairman of the NLO. 16

31. The NLO, in a series of Board Resolutions, would subsequently pave the way
for the drafting and signing of the Compromise Agreement.17

Key terms of the Compromise Agreement

16 17

See Order, Judge Mahilig Lechon (Civil Case no. 99-37467) dated January 3, 2004, at 1. Board Resolution no. 441, series of 2002, dated June 5, 2002 provided for a review by the legal department of the agreement and the incorporation of proposed terms and conditions; Board Resolution no. 559, series of 2002, dated July 24, 2002, following the incorporation of the suggested terms and conditions, directed the NLO Legal Department and the OGCC to review the Compromise Agreement; Board Resolution no. 2002-706, series of 2002, dated October 3, 2002, approved the Compromise Agreement, and directed the Online Lottery Sector to submit it to the NEDA for approval prior to its filing with the Quezon City Regional Trial Court Branch 224.

32. It is this nine-page Compromise Agreement, dated January 27, 2003

(hereinafter called 2003 Compromise Agreement), which is now the subject of this Memorandum. Under the 2003 Compromise Agreement, FPA agreed to drop all the charges against NLO and the other parties.

33. The parties to the 2003 Compromise Agreement are as follows:

a. b. c. d. e. f. g. NLO FPA Papel Papel Papel Papel Papel

De De De De De

Liha Japon Tsina Lambot Tubig

34. The 2003 Compromise Agreement supersedes, cancels, and revokes the
BOT agreement, and all other agreement/s in connection therewith, or incidental thereto.18

35. It also provides that the local suppliers expressly agree that the foregoing
Agreement supersedes the afore-mentioned individual contracts entered into with the NLO by virtue of the public bidding held on February 10, 1999. In lieu thereof, the individual contracts are hereby deemed canceled, terminated, revoked.19

36. Under the Compromise Agreement, NLO agrees to source its lotto paper
requirements from FPA, and the other four local suppliers under a sharing scheme.20

37. FPA also acknowledges that is capable only of supplying 70 percent of thermal
rolls and 50 percent of betslips for NLOs Luzon requirements.21

38. Winsan is no longer interested in the deal and is waving all its rights to it.22 39. The Compromise Agreement, which shall also be sent to the NEDA in lie of
the original BOT contract, takes effect immediately for a period of six(6) years upon approval of the court, unless sooner terminated on grounds provided and as may be provided by law.23

40. It is supposed to end the litigation in Civil Case No. Q-99-37457.24 41. Under the agreement, the following sharing scheme will be implemented:25
18 19

Compromise Agreement, Whereas Clause no. 5. Compromise Agreement, Whereas Clause no 7 20 Compromise Agreement, Whereas Clause no 10. 21 Compromise Agreement, Whereas Clause no 12. 22 Compromise Agreement, Whereas Clause no. 13. 23 Compromise Agreement, Whereas Clause no. 13. 24 Compromise Agreement, Whereas Clause no 13. 25 Compromise Agreement, para. 3.

a. b. c. d.

Papel Papel Papel Papel

De De De De

Liha Japon Tsina Lambot

Paper Requireme nts A. LUZON Thermal Rolls Betslips B. Visayas Mindanao Ticket Rolls Betslips

FPA

Papel Liha

De

Papel De Jahon

Papel Tsina

De

Papel De Lambot

70% 50%

Nil 50%

15% nil

15% nil

Nil Nil

nil nil

50% 50%

25% 25%

25% 25%

Nil Nil

42. It is clear from the Compromise Agreement that FPA was to get the lions
share in the Luzon lotto paper purchases of the NLO.

43. The performance of all the suppliers shall be subjected to a periodic review at
least once a year based on the price competitiveness, timeliness of the delivery, and quality of material supplied.26

44. It also provide a fixed price for impact ticket rolls, thermal rolls an betslips,
inclusive of all taxes and duties, and subject to changes based on conditions. 27 certain

45. The NLO may terminate the Agreement against any, some, or all of the
SUPPLIERS on any of the following grounds:

(a) failure of the SUPPLIER/S to deliver the impact rolls, thermal

rolls and/or betslips on time unless the delay is caused by anyone of the circumstances mentioned in paragraph 9, and the procedures thereon provided under paragraph no. 10, shall have been complied with;

(b) failure of the SUPPLIER/S to comply with the strict technical

specifications of the NLO an delivery of any of their product which the NLO may consider inferior;

(c) In the event NLOs need and use of the herein lotto paper
supplies shall become unnecessary and/or obsolete as a result
26 27

Compromise Agreement, para. 3 Compromise Agreement, para. 6.

of any upgrading and/or changes in the technology of the NLO lotto operations;

(d) Failure of the SUPPLIER/S to match the lowest existing market

price/s of all lotto paper requirements at any given time as may be determined by the NLO; and

(e) Failure of the SUPPLIERS to pass the annual periodic review to

be conducted by NLO as provided under paragraph no. 3 hereof.28 b. c. d. e. Papel Papel Papel Papel De De De De Liha Japon Tsina Lambot

43. The duly notarized document was signed by the following: Chairperson De Krus for NLO, Papel De Liha president Ewan Ko, FPA managing director Paurong Lumakad; Papel De Japon sales director George Ha Viyer, and Papel De Lambot vice president Terry Kiri. The NLO Legal Departments and OGCCs Take on the Compromise Agreement of January 27, 2003

46. Two joint Memoranda filed by the OGCC and the NLO Legal Department,
show conflicting opinions on some key items of the Compromise Agreement , with the later Memorandum superseding the former.

47. The first memorandum, dated January 17, 200229, only envisioned a two-way
agreement between FPA and PCS; the second memorandum date January 31, 2002, now suggested one compromise agreement for the two sets of contracts at issue.

48. The first memorandum said that the Compromise Agreement cannot exist
apart from the original BOT agreement: Anent the proposal of FPA to enter into a Lotto Paper Supply Contract for the supply of 70% of thermal rolls and 50 % of betslips for a period of six years, the said contract may be unnecessary as it can neither supersede the BOT contract nor be considered a stand-alone contract. Instead, the terms as proposed by the FPA should have the effect of a Compromise Agreement in the form of a supplement to the BOT contract as to slightly modify its terms30

49. The joint memorandum also acknowledged that one Compromise Agreement
cannot do for two different sets of contracts:
28 29

Compromise Agreement, para. 18. Joint Memorandum, NLO Legal Department and OGCC, January 17, 2002 [hereinafter, Joint Memorandum, January 17, 2002]. 30 Joint Memorandum, January 17, 2002, at 1.

As regards the interests of other local suppliers who are asserting their contractual rights under the 1999 public bidding, the same should be the subject of another agreement to be entered into by PCS and the said local suppliers. This will be sourced from the remaining allocation not covered by the FPAs proposal equivalent to 30% and 5o% for thermal paper and bet slips respectively.31

50.

The same memorandum also said there is no further need for a public bidding for the supply contracts envisioned, since the BOT contract will remain the basis for the supply agreement. 32

51.

The second memorandum, dated January 31, 2002, now said that the proposal by FPA is feasible, provided other local suppliers made parties to the pending case should likewise participate in the compromise agreement in order to obtain the ultimate goal of ending all litigation.33 52. It then said: The terms, being a consequence of the compromise agreement to be entered into by the NLO, FPA and local suppliers made parties to the original case, the six-year period, the 70% thermal roll and 50% betslip requirements of NLOs paper requirements to be apportioned to the FPA and the remainder thereof in favor of the local suppliers, will be justified as the most advantageous manner of settling the dispute and upholding the interests of the NLO to uninterrupted paper supply Whatever shall be apportioned to local suppliers under the compromise agreement shall make up for the awards made in their favor under the bidding previously conducted by NLO prior to the filing of the complaint by FPA before the Regional Trial Court, considering the need for price adjustments from their previous bids34 53. This was followed by a final contract review signed by the OGCC chief, who at that time, was Dean Amado Valdez.

54. The contract review cautioned that the Compromise Agreement should be
approved by the NEDA board, citing the first memorandums own caveat about putting up a supply contract separate from the BOT contract: In short, the revocation or cancellation of the original BOT Agreement will remove the
31 32

Joint Memorandum, January 17, 2002, at 3. Joint Memorandum, January 17, 2002, at 2. 33 Joint Memorandum, NLO Legal Department and OGCC, dated January 31, 2002, at 2. [hereinafter, Joint Memorandum, January 31, 2002]. 34 Joint Memorandum, January 31, 2002, at 2-3.

legal and contractual basis of FPA to supply or continue supplying the NLO with its lotto paper requirements.35

55. Nevertheless, it apparently left the matter to the discretion of the NEDA
because it did not remove as parties the local suppliers from the original agreement. It only made stylistic revisions.

56. There is also another Memorandum dated October 22, 2001, written by Atty.
Sangay Malabo of the NLO Legal Department which said to the effect that, based on the decisions of the Court of Appeals and the Supreme Court, it is thus clear that NLO has the option to source its lotto paper requirements from any of its listed or accredited suppliers including MSP (FPAs Philippine office). Corollary, NLO is given the option not to deal with MSP if it so chooses taking public interest and welfare as its paramount consideration.

57. The Memorandum said that MSP charges an additional ten percent VAT
against NLO while the others do not, choosing to shoulder the tax themselves, adding that: [i]t is the undersigneds view that should NLO choose to continue dealing with MSP aside from the other suppliers, Management may take the diligent route of negotiating with MSP for a price reduction scheme for its paper supply to make it at par with those set by other suppliers. Should MSP eventually refuse to adjust its price and provided that the other accredited suppliers are capable of meeting the lotto paper requirements of NLO in terms of quality and quantity over a given period of time, there may be, in undersigneds view no other alternative more beneficial to NLO than to source NLOs lotto paper supply from accredited suppliers charging the lowest cost. Our Discussion of the Issues

58. In our view, the Compromise Agreement is replete with legal infirmities and
should therefore be rejected by the NLO. The Compromise Agreement faces three insurmountable legal hurdles, which we will take up in the following discussion:

59. While it is true that contracts are the law between the parties, still, the law
also provides that contracts cannot contravene public policy. The Civil Code, Art. 5 thus provides: Acts executed against the provisions of mandatory or prohibitory laws shall be void, except when the law itself authorizes their validity. 60. Moreover, the Civil Code, Art. 1409, provides:
35

Contract Review No. 385, OGCC, dated August 27, 2002 [hereinafter, Contract Review] at 2-3.

10

The following contracts are non-existent and void from the beginning: (1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy

61. The law also bars the NLO from waiving its rights under any contract. As the
Civil Code, Art. 6, states: Rights may be waived, unless the waiver is contrary to law, public order, public policy, morals, or good customs, or prejudicial to a third person with a right recognized by law.

62. Hence, the law forms part of any government contract. Law is read into and
forms part of a valid contract, as if it were expressly provided there, unless there is an express exclusionary clause in the contract itself. It has been held that all contracts, including government contracts, are subject to the police power of the State. Being an inherent attribute of sovereignty, such power is deemed incorporated into the laws of the land, which are part of all contracts, thereby qualifying the obligations arising from these contracts.36

First Legal Hurdle

63. While NEDA has opined that the Compromise Agreement may be considered
as a negotiated procurement/supply contract not subject anymore to the approval by the NEDA-ICC Board, as the BOT law no longer governs the transaction,37 a view shared by the NLO legal department, 38and the Office of the Corporate Counsel has said that it is not averse to the idea of the BOT Contract being replaced by a pure supply contract provided the Court approves the Compromise Agreement, its terms and conditions raise many questions about its legality.

64. Even if it is a contract independent of the original BOT contract being

questioned in court, it is subject to RA 9184, which law took effect on January 26, 2003, and whose corresponding IRR took effect on October 8, 2004. It is a law embodying public policy on public bidding for government contracts.

65. The NLO legal department itself has acknowledged that the stringent rules
on public bidding requirements.39
36 37

also

apply

to

NLOs

procurement

of

lotto

paper

Central Bank v. Cloribel 44 SCRA 318 (1972) Cited in Memorandum dated September 7, 2004, NLO Legal Department, at 4[ hereinafter, Memorandum, Sept. 7, 2004]. 38 Id.The NLO Legal Department thus said: However, considering that the Memorandum of Agreement was reached purposely to constitute the Compromise Agreement of the parties, it may be treated as a negotiated procurement for the greater advantage and interest of the NLO. 39 Id. The NLO Legal Department cited Section 5 (k) of RA 9184, under which the transaction in question may fall. Curiously however, an earlier joint memorandum by the NLO Legal Department and the OGCC carried a different tune; The memorandum opined that the Compromise Agreement can neither supersede

11

66. And while RA 9184 lists negotiated procurement as an alternative mode, it

imposes strict guidelines to a resort to such a mode of procurement. The guidelines are as follows: Section 53. Negotiated Procurement Negotiated Procurement is a method of procurement of goods, infrastructure projects and consulting services, whereby the procuring entity directly negotiates a contract with a technically, legally and financially capable supplier, contractor or consultant only in the following cases: a) Where there has been failure of public bidding for the second time as provided in Section 35 of the Act and this IRR-A; b) In case of imminent danger to life or property during a state of calamity, or when time is of the essence arising from natural or man-made calamities or other causes where immediate action is necessary to prevent damage to or loss of life or property, or to restore vital public services, infrastructure facilities and other public utilities. In the case of infrastructure projects, the procuring entity has the option to undertake the project through negotiated procurement or by administration or, in high security risk areas, through the AFP; c) Take-over of contracts, which have been rescinded or terminated for causes provided for in the contract and existing laws, where immediate action is necessary to prevent damage to or loss of life or property, or to restore vital public services, infrastructure facilities and other public utilities; d) Where the subject contract is adjacent or contiguous to an on-going infrastructure project: Provided, however, That (i) the original contract is the result of a Competitive Bidding; (ii) the subject contract to be negotiated has similar or related scopes of work; (iii) it is within the contracting capacity of the contractor; (iv) the contractor uses the same prices or lower unit prices as in the original contract less mobilization cost; (v) the amount involved does not exceed the amount of the ongoing project; and (vi) the contractor has no negative the BOT contract nor can [it] be considered a stand-alone contract. It said it should have the effect of a supplement to the BOT Contract, adding that [s]ince the BOT contract with FPA shall remain to be the legal and contractual basis for the supply agreement already incorporated therein, there is no further need to subject the procurement of lotto paper to a public bidding, having in mind the primordial consideration that NLO shall be at all times assured of sufficient and uninterrupted supply of Lotto paper requirements at 1-2. Joint Memorandum,January 17, 2002].

12

slippage: Provided, further, That negotiations for the procurement are commenced before the expiry of the original contract. Whenever applicable, this principle shall also govern consultancy contracts, where the consultants have unique experience and expertise to deliver the required service; e) Purchases of goods from another agency of the Government, such as the PSDBM, which is tasked with a centralized procurement of commonly used Goods for the government in accordance with Letters of Instruction No. 755 and Executive Order No. 359, series of 1989. Further, in order to hasten project implementation, agencies which may not have the proficiency or capability to undertake a particular procurement, as determined by the head of the procuring entity concerned, may request other agencies to undertake such procurement for them, or at their option, recruit and hire consultants or procurement agents to assist them directly and/or train their staff in the management of the procurement function; f) In the case of individual consultants hired to do work that is (i) highly technical or proprietary; or (ii) primarily confidential or policy determining, where trust and confidence are the primary consideration for the hiring of the consultant: Provided, however, That the term of the individual consultants shall, at the most, be on a six month basis, renewable at the option of the appointing head of the procuring entity, but in no case shall exceed the term of the latter; or g) Upon prior approval by the President of the Philippines, and when the procurement involves major defense equipment for use by the AFP and the Secretary of National Defense has determined that the interests of the country shall be protected by negotiating directly with an agency or instrumentality of another country with which the Philippines has entered into a defense cooperation agreement or otherwise maintains diplomatic relations: Provided, however, That the performance by the supplier of its obligations under the procurement contract shall be covered by a foreign government guarantee of the source country covering one hundred percent (100%) of the contract price.

67. It should be noted that the language of the law is exclusive. Only these and
no other grounds can serve as basis for a negotiated contract. Under the circumstances of this case, there was no second bidding to speak of; neither is there a state of calamity that justifies the emergency purchases; the purchases do not involve defense articles, nor do they concern goods from another agency of the government; neither do they involve a project adjacent to another similar project;

13

68. It may be argued that what obtains here is a take-over of a contract which
has been rescinded or terminated for causes provided for in the contract and existing laws, where immediate action is necessary to prevent damage to or loss of life or property, or to restore vital public services, infrastructure facilities and other public utilities.

69. Two sets of contracts are involved here: the first contract with FPA which had
been terminated by the NLO, is under the BOT law, and the contracts with the local suppliers which had been awarded following a public bidding.

70. While the first contract may well have been terminated, at least by the NLO,
the second still subsists, while it remains suspended. The take-over clause evidently cannot apply.

71. For all intents and purposes, the second set of contracts whose awarded for
public bidding have yet to be nullified. They have been perfected and remain valid, though unimplemented.

72. And because the two sets of contracts are of differing natures, the mode of
altering them or taking over them necessarily will differ. This point will be dealt with in full in our discussion on the third legal hurdle.

73. The conclusion therefore, is that the supply contract should be awarded
through public bidding, and not through a negotiated contract.

74. It is also suggested that under Sec. 49 of RA 9184, the lotto paper supply
may be purchased through limited source bidding, which is defined under the law as procurement of highly specialized types of goods and consulting services which are known to be obtainable only from a limited number of sources, or procurement of major plant components where it is deemed advantageous to limit the bidding to known eligible bidders in order to maintain an optimum and uniform level of quality and performance of the plant was a whole.40

75. However even this mode of procurement, granting that the lotto thermal
paper falls under the highly specialized goods classification, is still subject to public bidding, except that there is list of pre-selected potential bidders. Under Sec. 49.0 of the IRR, the pre-selected suppliers shall be those appearing in a list maintained by the relevant government authority that has the expertise in the type of procurement concerned, which list should have been submitted to, and maintained and updated by, the procurement board. The BAC of the concerned procuring entity is supposed to send to the preselected bidders the invitation to bid, which shall already indicate the relevant information required to enable the bidders to prepare their bids as prescribed by the law.

76. Obviously, this cannot be done under the terms of the proposed Compromise
Agreement.

77. The NLO must also take into account new rules on alternative methods of
procurement issued by the Office of the President in keeping with RA 9184.
40

Memorandum, Sept. 7, 2004 at 7.

14

78. Executive Order 109-A41, a presidential order issued on September 18, 2003, prescribing the rules and procedures on the review and approval of all government contracts to conform with Republic Act Mo. 9184, otherwise known as the Government Procurement Reform Act, provides in Section 4 provides different procedures for government contracts amounting to (a) at least P300,000,000.00 and (b) to less than P300,000,000.00. 79. In the first case, where the Head of the procuring entity has made a determination that a Government Contract , including Government Contracts required by law to be acted upon and/or approved by the President, involving an amount of at least Three Hundred Million Pesos (P300 M) falls under any of the exceptions from public bidding described in Section 3 hereof, the Head of the procuring entity shall, before proceeding with the alternative methods of procurement provided by law and applicable rules and regulations, obtain the following requirements: i. An opinion from the Secretary of Justice that the contract falls within the exceptions from public bidding, and

ii.

Approval from the Director-General of the NEDA to proceed with a specific alternative method of procurement under the exceptional cases provided by law and applicable rules and regulations. This authority to approve shall be lodged with the Director General of NEDA until such time that the Government Procurement Policy Board created under RA. 9184 informs the NEDA in writing of its decision to exercise its authority.

80. After meeting the requirements, except for government contracts requiring the action and approval of the President, the Heads of procuring entities shall have full authority to give final approval and/or enter into government contracts through alternative methods. 81. In the second case, the two requirements do not apply. Moreover, the Head of the procuring entity may delegate in writing the full authority to give the final approval. 82. Section 5 of the order further provides that All Government Contracts entered into in violation of the provisions of law, rules and regulations, and this Executive Order shall be considered contracts entered into without authority and are thus invalid and not binding on the government. 83. Section 13 says that government contracts including those presently being processed and/or reviewed in accordance with Executive Order No. 109 dated May 27, 2002, shall hereafter be processed, and/or review in accordance with this Executive Order.

41

This amends E.O. 109, issued on May 27, 2002 and entitled Streamlining the Rules and Procedures on the Review and Approval of All Contracts of Departments, Bureaus, Offices and Agencies of the Government, Including Government-Owned and controlled Corporations and their Subsidiaries.

15

84. The problem with the Compromise Agreement is that we do not know exactly
how much money is involved in the supply contracts. It only provides a sixyear period of effectivity, and the sharing scheme to be adopted the splitting of contracts in fact but based on the available data of quarterly acquisitions, the supply contracts taken together evidently exceed P300 million,

85. Considering declared public policy, the NLO chairman is not prohibited from
recalling the Compromise Agreement and subjecting it to a review under E.O. 109-A and RA 9184.

86. The State is not bound by the mistake of its agents. It can always correct the
mistakes of such agents.42 The Compromise Agreement may have been perfected but it is not beyond cancellation, considering public policy, law and jurisprudence on public bidding.

87. Section 5 itself of E.O. 109-A says that contracts violative of laws, rules, and
regulations, as well as E.O. 109-A, shall be considered as contracts entered into without authority and are thus invalid and not binding on the government. Second Legal Hurdle

88. Moreover, there is another legal hurdle that must be addressed. RA 9184
prohibits the splitting of contracts, which is what the Compromise Agreement appears to do here43. The IRR provides thus:

Section 54. Terms and Conditions for the use of Alternative Methods 54.1. Splitting of Government Contracts is not allowed. Splitting of Government Contracts means the division or breaking up of Government Contracts into smaller quantities and amounts, or dividing contract implementation into artificial phases or subcontracts for the purpose of evading or circumventing the requirements of law and this IRR-A, especially the necessity of public bidding and the requirements for the alternative methods of procurement.

89. Or, as the following excerpts form Commission on Audit Circular No. 76-41
say:

42

Republic v. Court of Appeals, 135 SCRA 156, 161-162 (1985); Republic v. Aquino, 120 SCRA 186, 191192 (1983), citing Luciano v. Estrella, 34 SCRA 769 (1970) and Republic v. Philippine Rabbit Bus Lines, Inc., 32 SCRA 211 (1970); Republic v. Court of Appeals, 89 SCRA 648, 656 (1979). 43 See Para. 3, Compromise Agreement, which divides the contract to supply thermal paper requirements to the NLO among the four companies, according to the geographical areas concerned.

16

What is Splitting?- Splitting, in its literal sense, means dividing or breaking up into separate parts or portions, or an act resulting in a fissure, rupture, breach. Within the sphere of government procurement, splitting is associated with requisitions, purchase orders, deliveries and payments. Forms of Splitting - 1) Splitting of requisitions consists in the nonconsolidation of requisitions for one or more items needed at or at about the same time by requisitioner. 2) Splitting of Purchase Orders consists in the issuance of two or more purchase orders based on two or more requisitions for the same or at about the same time by different requisitioners; and 3) Splitting of Payments consists in making two or more payments for one or more items involving one purchase order. Why Splitting is resorted to. the above-enumerated forms of splitting are usually resorted to in the following cases: 1) Splitting requisitions and purchase orders to avoid inspection of deliveries; 2) Splitting of requisitions and purchase orders to avoid action, review or approval by higher authorities; and 3) Splitting of requisitions to avoid public bidding.44 90. Moreover, Executive Order 109-A, provides in Section 11 that:

Splitting of Government Contracts. Splitting of Government Contracts is not allowed. Splitting of Government Contracts means the division or breaking up of Government Contracts into smaller quantities and amounts, or dividing, contract implementation into artificial phases or sub-contracts for the purpose of evading or circumventing the requirements of law and this Executive Order, especially the necessity of public bidding and the requirements for exceptions therefrom in accordance with Section 3 hereof.

91. The most cursory look at the sharing scheme outlined in the Compromise
Agreement will readily establish that for all intents and purchases, the NLO will be splitting contracts here: one contract for thermal paper, for instance, is to be shared among all the suppliers; the same goes for the betslips. And we are only talking here of the Luzon lotto paper requirements.

92. The Compromise Agreement is really a contravention of the very spirit that
animates the new procurement law, which declares in section 2 of its IRR, that: It is the policy of the Government that procurement of infrastructure projects, goods and consulting services shall be competitive and transparent, and therefore shall be through public bidding, except as otherwise provided in this IRR-A. It is
44

Excerpted in SOFRONIO URSAL, GOVERNMENT PROCUREMENT TOOL KIT 251 (2004).

17

also the policy of the Government to adopt a standard and uniform set of rules and regulations governing the procurement of infrastructure projects, goods and consulting services for government projects and other related activities that embodies a streamlined procurement process.

Third Legal Hurdle

93. Government-awarded contracts are no ordinary contracts. The problem with

settling disputes in the two disparate sets of contracts involving different parties into a single Compromise Agreement is precisely the impossibility of reconciling conflicting provisions of the two sets of contracts. The third legal hurdle follows from the premise of the first legal hurdle : that is the nature of the two sets of contracts in question.

94. For one, the FPA contract is covered by the BOT law, which grants exceptions
to the public bidding requirement. However, those involving the four local suppliers were awarded by public bidding. 95. As one of the countrys eminent scholars of government contracts would put it: After a bidded Government contract has been thus perfected, its amendment or modification in essential particulars is generally not allowed, lest the effects of the bidding be nullified and manifest injustice to the other bidders result. Well-settled is the principle that the due execution of a contract after public bidding is a limitation upon the right of contracting parties to alter or amend it without another public bidding, for otherwise what would a public bidding be good for if after the execution of the bidded contract, the contracting parties may alter or amend the contract or even cancel it at their will? In point of fact, although the contract authorizes the parties to alter or amend any of the terms thereof, said authority must be considered as being subject to previous requirement of public bidding, a formality observed before the original contract was awarded. A contrary proposition would render nugatory the very essence or principal purpose of a public bidding. Basically, public biddings are held for the protection of public interest, and to give the public the best possible advantages by means of open competition among the participating bidders. He who bids or offers the bids terms is awarded the contract subject of the bid,

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and it is obvious that such protection and best possible advantages to the public will disappear if the parties to the bidded contract may alter or amend it without another previous public bidding. So, too, it has been held that contracts requiring public bidding affect public interest and to change them without complying with that requirement would be against public policy. In that regard, statutes requiring public bidding are deemed as applying to amendments of any contract already amended with the law where such amendments alter the original contract in some vital and essential particulars. 45 (italics supplied)

96. The two sets of contracts simply cannot be settled in one Compromise
Agreement because the two require different modes of modification or alteration. The first, having been made under the BOT, is not subject to public bidding; the second, however, is covered by the public bidding requirement.

97. The NLO legal department and the OGCC seemed to have eventually
forgotten this fact, even as their own joint memorandum earlier submitted to the NLO acknowledged this: As regards the interests of other local suppliers who are asserting their contractual rights under the 1999 public bidding, the same should be the subject of another agreement to be entered into by PCS and the said local suppliers. This will be sourced from the remaining allocation not covered by the FPAs proposal equivalent to 30% and 50% for thermal paper and bet slips respectively.46

98. Recent jurisprudence is consistent with the view that a public bidding, where
mandatory, should well be conducted, and such bidding should follow the law to the letter. A most recent pronouncement of the Supreme Court voiding the Comelec automation project because of serious irregularities in the bidding serves as a most convenient, indeed, most appropriate, discussion of the merits of the Compromise Agreement.

99. In Information Technology Foundation v. Comelec47, the Commission on

Elections awarded the contract to Mega Pacific Consortium not only in clear violation of law and jurisprudence, but also in reckless disregard of its own bidding rules and procedure.48

45

BARTOLOME FERNANDEZ, A TREATISE ON GOVERNMENT CONTRACTS UNDER PHILIPPINE LAW 32-33 (2001) citing; San Diego v. Mun. of Naujan, 107 Phil.118; and Caltex et al v. Delgado Brothers, 96 Phil. 368. 46 Joint Memorandum, January 17, 2002, at 3. 47 Information Technology Foundation v. Commission on Elections , G.R. No. 159139. January 13, 2004 48 Information Technology Foundation v. Commission on Elections , G.R. No. 159139. January 13, 2004

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100.

The High Court said it was grave abuse of discretion on the part of Comelec to award the billion-peso undertaking with inexplicable haste, without adequately checking and observing mandatory financial, technical and legal requirements.49 It noted with alarm how Comelec accepted the computer hardware and software offered by Mega Pacific even if, at the time of the award, they had undeniably failed to pass eight critical requirements designed to safeguard the integrity of elections.50

101.

The case, which concerns a contract already awarded, although with grave abuse of discretion, has many things to say about what a public bidding is all about pronouncements which are very relevant the NLOs predicament. In Information Technology Foundation v. Comelec, the High Court stressed the need for the strict application of pertinent rules, regulations and guidelines for public bidding. The strict-application rule, so said the Court, is for the purpose of placing each bidder, actual or potential, on equal footing51 The Court continued: The essence of public bidding is, after all, an opportunity for fair competition, and a fair basis for the precise comparison of bids. In common parlance, public bidding aims to level the playing field. That means each bidder must bid under the same conditions; and be subject to the same guidelines, requirements and limitations, so that the best offer or lowest bid may be determined, all other things being equal. Thus, it is contrary to the very concept of public bidding to permit a variance between the conditions under which bids are invited and those under which proposals are submitted and approved; or, as in this case, the conditions under which the bid is won and those under which the awarded Contract will be complied with52(italics in the original)

102.

103.

104.

Fair competition. Fair basis for the precise comparison of bids. Level the playing field. All other things being equal. Things which cannot be said about the Compromise Agreement in question. The contracts awarded to the four local suppliers were bidded out. Other suppliers took part in that public bidding. These contracts cannot be modified or altered without conducting another public bidding, where other parties should be afforded the opportunity to bid, as was done in the first public bidding.

105.
49 50

The terms and conditions of the Compromise Agreement, with respect to the second set of contracts, violates the equal protection of laws clause in January 13, 2004 January 13, 2004 January 13, 2004 January 13, 2004

Information Technology Foundation v. Commission on Elections , G.R. No. 159139. Information Technology Foundation v. Commission on Elections , G.R. No. 159139. 51 Information Technology Foundation v. Commission on Elections , G.R. No. 159139. 52 Information Technology Foundation v. Commission on Elections , G.R. No. 159139.

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the Constitution with respect to all who participated in the first bidding for these contracts but did not make it through. 53 The jurisprudential principle, as held in Ichong v. Hernadez, reads: The equal protection of the law clause is against undue favor and individual or class privilege, as well as hostile discrimination or the oppression of inequalityit merely requires that all persons shall be treated alike, under like circumstances and conditions both as to privileges conferred and liabilities enforced.54 (italics in the original)

106.

The operative clause is really this all persons shall be treated alike, under like circumstances and conditions In other words, people similarly situated should be similarly treated by law and under law. That is the principle followed in a public bidding. Obviously, the Compromise Agreement is a clear violation of law, public policy, and jurisprudence. The NLO leadership will be guilty of a grave abuse of discretion if it approves the Compromise Agreement. There is grave abuse of discretion (1) when an act is done contrary to the Constitution, the law or jurisprudence; 55 or (2) when it is executed whimsically, capriciously or arbitrarily out of malice, ill will or personal bias.56

107. 108.

109.

It may also expose NLO officials to a criminal suit, depending on the amount involved, either under Republic Act 3019, the Anti-Graft and Corrupt Practices Act, or RA 7080, the Plunder Law.

110.

Considering recent jurisprudential trends, the NLO should err on the side of caution and follow the prescriptions of the law on public bidding to the letter.

111.

It would be in a more difficult bind if it pursues a Compromise Agreement that in the end will not stand in court for reasons of illegality.

112.

The only way to put a stop to the uncertainty plaguing the NLOs lotto paper requirements is an honest-to-goodness public bidding conducted in accordance with the law, despite the NLO Legal Departments and OGCCs joint Memorandum which opined that another public bidding will only suffer the same fate as that of the previous public bidding, the conduct and results of which were questioned in Court by FPA through an injunction case.57

53

Art. III, Sec. 1 of the 1987 Charter: No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied equal protection of laws. 54 101 Phil 1155 (1957). 55 Republic v. Cocofed, 372 SCRA 462, 493, December 14, 2001. 56 Taada v. Angara, 272 SCRA 18, 79, May 2, 1997.. 57 Id., at 3.

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Remedies Available

113.

As there is now no injunction to speak of against NLO in the first case filed by FPA, the Court of Appeals and the Supreme Court having already ruled against its propriety, there is now no legal impediment to a new public bidding for a contract to supply lotto paper to NLO. As the Supreme Court said: This Court finds that the overriding consideration of public interest justified NLO in sourcing its paper requirements from other suppliers during the period that petitioner failed to deliver. Notably, petitioner did not deny the non-deliveries, but merely raised it as an excuse Indeed, this Court agrees with movants that the shortage of paper supplies will paralyze its operations and consequently, jeopardize its integrity as the governments lead public agency for charitable projects whose fund-raising activities depend on the continuous and uninterrupted supply of lotto quality bet slips or pay slips.58

114.

115.

Citing the Supreme Courts decision above, the Court of Appeals 5 th Division, ruled in favor of NLOs petition for certiorari against the Regional Trial Courts rulings that favored the FPA. So said the CA in its ruling: As to the legality of the injunction against petitioners, We rule that respondent judge committed grave abuse of discretion in issuing the same. The requisites before an injunctive writ may be issued are: (1) the invasion of the right is material and substantial; (ii) the right of complainant is clear and unmistakable, and (iii), there is an urgent and permanent necessity for the writ to prevent damage. While the FPA has an enforceable right under the Agreement as NLOs exclusive supplier of lottery paper, such right is not absolute as it is qualified by the proviso, unless [FPA] is unable to fulfill NLOs order in terms of the agreed schedule, quantity and quality. No less than the Supreme Court has observed that FPA never denied its alleged non-deliveries. FPA merely raised as an excuse NLOs nonpayment of its past due account. Moreover, as the Supreme Court added, the shortage of [lottery] paper supplies will paralyze [NLOs] operations, and consequently, jeopardize its integrity as the governments lead public agency for

116.

58

Supreme Court Resolution (First Division, GR No. 139128), Sept. 6, 1999, at 1-2.

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charitable projects whose fund-raising activities depend on the continuous and uninterrupted supply of lotto quality bet slips or pay slips.59

117.

Consequently, the Court of Appeals made permanent its injunction against Branch 224 of the Quezon City Regional Trial Court, annulling and setting aside all its assailed orders, including the writ of preliminary injunction it had issued against the NLO and the other four suppliers. Both the Supreme Court and the Court of Appeals have ruled that the supply contracts can be bidded out, pending the resolution of the FPAinitiated case with Branch 224 of the Quezon City Regional Trial Court under Judge Mahilig Lechon. Both bodies have said the lower court cannot enjoin the NLO from seeking new supply contracts for lotto paper while the case is pending precisely because of the public interest involved in lotto operations. In fact the two decisions from the appellate courts have also buttressed the NLOs contentions that it has a ground for terminating the contract with FPA its failure to perform its obligations as set out in the BOT contract.60 Yet with nothing to show for it (it has for example not put up the thermal plant as it had committed to do in the BOT contract), FPA has been able to delay the NLOs operations in many ways . What the Supreme Court and Court of Appeals decisions were saying is that FPA has no basis whatsoever for its claim of injury in the face of public biddings for the NLOs lotto paper requirements to merit the issuance of any TRO or preliminary mandatory injunction. Where, for example, is the thermal plant it promised to put up? It therefore boggles the mind that despite these pronouncements and orders from the appellate courts, Judge Leachon could still issue TROs against the NLO, as in the case of the December 18, 2002 72-hour TRO he issued and that was discussed above.61 This constitutes gross ignorance of the law and contempt of court that should not be glossed over. FPA and its lawyers are likewise liable for contempt of court for insisting on TROs despite the clear tenor of the orders from both the Supreme Court and the Court of Appeals. Judge Leachon should have been haled to the Supreme Court on administrative charges.

118.

119.

120.

121.

122.

123.

124.

125.
59 60

To stress, the NLO should bid the supply contracts out publicly, according to the requirements of RA 9184 and bid it annually, not quarterly,

Court of Appeals March 30, 2001 Decision, at 17-18. So said the Court of Appeals: No less than the Supreme Court has observed that FPA never denied its alleged non-deliveries. FPA merely raised as an excuse NLOs non-payment of its past due account. Id., at18. 61 See paras. 27-30, at 6-7.

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as has been the practice of the NLO in the past, to ensure that supply requirements are met the whole year round.

126. 127.

Certainly, the NLO can make annual projections of the paper supply demands, based on past acquisitions. It is in the best interest of the public the NLOs clients that an annual bidding be conducted. Hence, even if the trial of the first case drags on, the NLO can meet its lotto paper requirements adequately. We believe that there is no legal impediment to an annual purchase of lotto paper requirements, because they can still be classified as emergency purchases but this time, made in compliance with the requirements of the law; it should also not unduly prejudice FPA in the pendency of the original BOT termination case on trial, because in the event that its rights as stipulated in the BOT contract are upheld, the court can always revoke the purchase orders made and thereafter place into effect the provisions of the BOT contract.

128.

129.

Neither the FPA nor the four local suppliers really have any reason to complain; despite the pendency of the cases, all this time, they have had their hands on NLOs money through the emergency purchases the office had been making; In fact, if it isnt farcical, it is highly irregular that after having terminated the contract with NLO for being disadvantageous to the government NLO still dealt with PSA by buying lotto paper from FPA on emergency basis. On sheer delicadeza, NLO should have blacklisted FPA for its failure to comply with the terms of the first contract. Instead, NLO looked the other way, and this, even after FPA filed a suit against the agency.

130.

131.

132.

It is no excuse that NLO had been in constant need of a steady source of lotto paper; after all, it had already awarded contracts by public bidding to four local suppliers, which with their combined resources, could well have provided for all of NLOs requirements. FPA has admitted it cannot meet all the supply requirements of NLO. The four local suppliers resources pooled together certainly can meet all of NLOs requirements. And yet, why was FPA still included in the circle of paper suppliers to the NLO on an emergency basis that has practically been running year after year?

133.

134.

For six or so years now, FPA has apparently been making money from NLOs coffers, and has been getting away with having a pending suit against NLO at the same time.

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135.

If it is any indication of how much FPA gets from NLO through emergency purchases, for the 4th Quarter of 2004 alone, the NLO was to buy from FPA for its nationwide paper supplies requirement P18,664,338.00 worth of Thermal Rolls, P2,346,000.00 worth of 6/42 betslips, P1,955,000.00 worth of 6/45 betslips, P6,647,000.00 worth of 6/49 betslips, P293,250.00 worth of 6D betslips, and P351,900,.00 worth of 4D betslips. 62 FPA officials must be laughing their way to the bank each payday. A milking cow, thats what FPA has made out of NLO all this years. The NLO must put this to a stop. Instead, it should follow what public policy, law and jurisprudence on public bidding say. For your information and guidance.

136.

137.

Very truly yours.

ATTY. YOUNG

ATTY. OLD

62

See Memorandum of Assistant General Manager for Online Lottery Sector for the NLO chairman and Board of Directors, dated November 2, 2004, at 1.

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