PNOC v. KEPPEL Case Digest

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G.R. No.

202050, July 25, 2016

PHILIPPINE NATIONAL OIL COMPANY AND PNOC DOCKYARD & ENGINEERING CORPORATION,
Petitioners, v. KEPPEL PHILIPPINES HOLDINGS, INC., Respondent.

THE FACTS

The 1976 Lease Agreement and Option to Purchase

Almost 40 years ago or on 6 August 1976, the respondent Keppel Philippines Holdings, Inc.(Keppel) entered into a
lease agreement (the agreement) with Luzon Stevedoring Corporation (Lusteveco) covering 11 hectares of land located in
Bauan, Batangas. The lease was for a period of 25 years for a consideration of P2.1 million. At the option of Lusteveco, the
rental fee could be totally or partially converted into equity shares in Keppel.

At the end of the 25-year Jease period, Keppel was given the "firm and absolute option to purchase the land for
P4.09 million, provided that it had acquired the necessary qualification to own land under Philippine laws at the time the
option is exercised. Apparently, when the lease agreement was executed, less than 60% of Keppel's shareholding was
Filipino-owned, hence, it was not constitutionally qualified to acquire private lands in the country.

If, at the end of the 25-year lease period (or in 2001), Keppel remained unqualified to own private lands, the
agreement provided that the lease would be automatically renewed for another 25 years. Keppel was further allowed to
exercise the option to purchase the land up to the 30th year of the lease (or in 2006), also on the condition that, by then, it
would have acquired the requisite qualification to own land in the Philippines.

The petitioner Philippine National Oil Corporation(PNOC) acquired the land from Lusteveco and took over the
rights and obligations under the agreement, Keppel did not object to the assignment so long as the agreement was
annotated on PNOC's title. With PNOC's consent and cooperation, the agreement was recorded as Entry No. 65340 on
PNOC's Transfer of Certificate of Title No. T-50724.

On 8 December 2000, Keppel wrote PNOC informing the latter that at least 60% of its shares were now owned by
Filipinos17 Consequently, Keppel expressed its readiness to exercise its option to purchase the land. Keppel reiterated its
demand to purchase the land several times, but on every occasion, PNOC did not favourably respond.

To compel PNOC to comply with the Agreement, Keppel instituted a complaint for specific performance with the
RTC on 26 September 2003 against PNOC. PNOC countered Keppel's claims by contending that the agreement was
illegal for circumventing the constitutional prohibition against aliens holding lands in the Philippines. It further asserted that
the option contract was void, as it was unsupported by a separate valuable consideration. It also claimed that it was not
privy to the agreement.

After due proceedings, the RTC rendered a decision in favour of Keppel and ordered PNOC to execute a deed of
absolute sale upon payment by Keppel of the purchase price of P4.09 million.

PNOC elevated the case to the CA to appeal the RTC decision. Affirming the RTC decision in toto, the CA upheld
Keppel's right to acquire the land.It found that since the option contract was embodied in the agreement - a reciprocal
contract - the consideration was the obligation that each of the contracting party assumed. Since Keppel was already a
Filipino-owned corporation, it satisfied the condition that entitled it to purchase the land.

Failing to secure a reconsideration of the CA decision,29 PNOC filed the present Rule 45 petition before this Court
to assail the CA rulings.

ISSUES:

 The Constitutionality of the Agreement: Whether the terms of the Agreement amounted to a virtual sale of
the land to Keppel that was designed to circumvent the constitutional prohibition on aliens owning lands in
the Philippines.

 The validity of the option contract : Whether the option to purchase the land given to Keppel is supported
by a separate valuable consideration.

 If these issues are resolved in favour of Keppel, a third issue emerges: Whether Keppel's equity
ownership meets the 60% Filipino-owned capital requirement of trie Constitution, in accordance with th e
Court's ruling in Gamboa v. Teves.
THE COURT'S RULING:

I. The constitutionality of the Agreement

The Court affirms the constitutionality of the Agreement.

Under the 1935, 1973, and 1987 Constitutions, no private land shall be transferred, assigned, or conveyed
except to individuals, corporations, or associations qualified to acquire or hold lands of the public domain.
Consequently, only Filipino citizens, or corporations or associations whose capital is 60% owned by Filipinos citizens, are
constitutionally qualified to own private lands.

Upholding this nationalization policy, the Court has voided not only outright conveyances of land to foreigners,
but also arrangements where the rights of ownership were gradually transferred to foreigners. In Lui Shui, we considered
a 99-year lease agreement, which gave the foreigner-lessee the option to buy the land.

In the present case, PNOC submits that a similar scheme is apparent from the agreement's terms, but a review
of the overall circumstances leads us to reject PNOC's claim.

Undoubtedly, the establishment and operation of a shipyard business involve significant investments. Keppel's
uncontested testimony showed that it incurred P60 million costs solely for preliminary activities to make the land suitable
as a shipyard, and subsequently introduced improvements worth P177 million. Taking these investments into account
and the nature of the business that Keppel conducts on the land, we find it reasonable that the agreement's terms
provided for an extended duration of the lease and a restriction on the rights of Lusteveco.

Lusteveco was not completely denied its ownership rights during the course of the lease. It could dispose of the
lands or assign its rights thereto, provided it secured Keppel's prior written consent. That Lusteveco was able to convey
the land in favour of PNOC during the pendency of the lease should negate a finding that the agreement's terms
amounted to a virtual transfer of ownership of the land to Keppel.

II. The validity of the option contract

II.A.

An option contract must be supported by a separate consideration that is either clearly specified as such in the
contract or duly proven by the offeree/promisee.

An option contract is defined in the second paragraph of Article 1479 of the Civil Code.

Article 1479: An accepted promise to buy or to sell a determinate thing for a price certain is binding upon
the promissor if the promise is supported by a consideration distinct from the price.

An option contract is a contract where one person (the offeror/promissor) grants to another person (the
offeree/promisee) the right or privilege to buy (or to sell) a determinate thing at a fixed price, if he or she chooses to do
so within an agreed period.

As a contract, it must necessarily have the essential elements of subject matter, consent, and consideration.
Although an option contract is deemed a preparatory contract to the principal contract of sale, it is separate and distinct
therefrom, thus, its essential elements should be distinguished from those of a sale.

In an option contract, the subject matter is the right or privilege to buy (or to sell) a determinate thing for a price
certain, while in a sales contract, the subject matter is the determinate thing itself. The consent in an option contract is
the acceptance by the offeree of the offerer's promise to sell (or to buy) the determinate thing, i.e., the offeree agrees to
hold the right or privilege to buy (or to sell) within a specified period. This acceptance is different from the acceptance of
the offer itself whereby the offeree asserts his or her right or privilege to buy (or to sell), which constitutes as his or her
consent to the sales contract. The consideration in an option contract may be anything of value, unlike in a sale where
the purchase price must be in money or its equivalent. There is sufficient consideration for a promise if there is any benefit
to the offeree or any detriment to the offeror.

In the present case, PNOC claims the option contract is void for want of consideration distinct from the purchase
price for the land. The option is incorporated as paragraph 5 of the Agreement and reads as:
5. If within the period of the first [25] years [Keppel] becomes qualified to own land under the laws of the
Philippines, it has the firm and absolute option to purchase the above property for a total price of [P-4,090,000.00] at the
end of the 25th year, discounted at 16% annual for every year before the end of the 25th year, which amount may be
converted into equity of [Keppel] at book value prevailing at the time of sale, or paid in cash at Lusteveco's option.
However, if after the first [25] years, [Keppel] is still not qualified to own land under the laws of the Republic of
the Philippines, [Keppel's] lease of the above stated property shall be automatically renewed for another [25] years, under
the same terms and conditions save for the rental price which shall be for the sum of P4,090,000.00... and which sum
may be totally converted into equity of [Keppel] at book value prevailing at the time of conversion, or paid in cash at
Lusteveco's option.

If anytime within the second [25] years up to the [30th] year from the date of this agreement, [Keppel] becomes
qualified to own land under the laws of the Republic of the Philippines, [Keppel] has the firm and absolute option to buy
and Lusteveco hereby undertakes to sell the above stated property for the nominal consideration of [P100.00.00].

Keppel counters that a separate consideration is not necessary to support its option to buy because the option is
one of the stipulations of the lease contract. It claims that a separate consideration is required only when an option to
buy is embodied in an independent contract.

In the present case, paragraph 5 of the agreement provided that should Keppel exercise its option to buy,
Lusteveco could opt to convert the purchase price into equity in Keppel. May Lusteveco's option to convert the price for
shares be deemed as a sufficient separate consideration for Keppel's option to buy?

As earlier mentioned, the consideration for an option contract does not need to be monetary and may be
anything of value. However, when the consideration is not monetary, the consideration must be clearly specified as
such in the option contract or clause.

When the written agreement itself does not state the consideration for the option contract, the offeree or
promisee bears the burden of proving the existence of a separate consideration for the option.

The offeree cannot rely on Article 1354 of the Civil Code, which presumes the existence of consideration, since
Article 1479 of the Civil Code is a specific provision on option contracts that explicitly requires the existence of a
consideration distinct from the purchase price.

In the present case, none of the above rules were observed. We find nothing in paragraph 5 of the Agreement
indicating that the grant to Lusteveco of the option to convert the purchase price for Keppel shares was intended by the
parties as the consideration for Keppel's option to buy the land; Keppel itself as the offeree presented no evidence to
support this finding. On the contrary, the option to convert the purchase price for shares should be deemed part of the
consideration for the contract of sale itself, since the shares are merely an alternative to the actual cash price.

For uniformity and consistency in contract interpretation, the better rule to follow is that the consideration for the
option contract should be clearly specified as such in the option contract or clause. Otherwise, the offeree must bear the
burden of proving that a separate consideration for the option contract exists.

Given our finding that the Agreement did not categorically refer to any consideration to support Keppel's option to
buy and for Keppel's failure to present evidence in this regard, we cannot uphold the existence of an option contract in this
case.

II. B.

An option, though unsupported by a separate consideration, remains an offer that, if duly accepted, generates into
a contract to sell where the parties' respective obligations become reciprocally demandable.

The absence of a consideration supporting the option contract, however, does not invalidate an offer to buy (or to
sell). An option unsupported by a separate consideration stands as an unaccepted offer to buy (or to sell) which, when
properly accepted, ripens into a contract to sell.

On the other hand, when the offer is not supported by a separate consideration, the offer stands but, in the
absence of a binding contract, the offeror may withdraw it any time. In either case, once the acceptance of the offer is duly
communicated before the withdrawal of the offer, a bilateral contract to buy and sell is generated which, in accordance with
the first paragraph of Article 1479 of the Civil Code, becomes reciprocally demandable.

Accordingly, when an option to buy or to sell is not supported by a consideration separate from the purchase price,
the option constitutes as an offer to buy or to sell, which may be withdrawn by the offeror at any time prior to the
communication of the offeree's acceptance. When the offer is duly accepted, a mutual promise to buy and to sell under the
first paragraph of Article 1479 of the Civil Code ensues and the parties' respective obligations become reciprocally
demandable.

Applied to the present case, we find that the offer to buy the land was timely accepted by Keppel.
As early as 1994, Keppel expressed its desire to exercise its option to buy the land. Instead of rejecting outright
Keppel's acceptance, PNOC referred the matter to the Office of the Government Corporate Counsel (OGCC). In its Opinion
No. 160, series of 1994, the OGCC opined that Keppel "did not yet have the right to purchase the Bauan lands." On
account of the OGCC opinion, the PNOC did not agree with Keppel's attempt to buy the land; nonetheless, the PNOC
made no categorical withdrawal of the offer to sell provided under the Agreement.

By 2000, Keppel had met the required Filipino equity proportion and duly communicated its acceptance of the offer
to buy to PNOC. Keppel met with the board of directors and officials of PNOC who interposed no objection to the sale. It
was only when the amount of purchase price was raised that the conflict between the parties arose, with PNOC
backtracking in its position and questioning the validity of the option.

Thus, when Keppel communicated its acceptance, the offer to purchase the Bauan land stood, not having been
withdrawn by PNOC. The offer having been duly accepted, a contract to sell the land ensued which Keppel can rightfully
demand PNOC to comply with.

III. Keppel's constitutional right to acquire full title to the land

Filipinization is the spirit that pervades the constitutional provisions on national patrimony and economy. The
Constitution has reserved the ownership of public and private lands, the ownership and operation of public utilities, and
certain areas of investment to Filipino citizens, associations, and corporations. To qualify, sixty per cent (60%) of the
association or corporation's capital must be owned by Filipino citizens. Although the 60% Filipino equity proportion has
been adopted in our Constitution since 1935, it was only in 2011 that the Court interpreted what the term capital
constituted.

In Gamboa v. Teves, the Court declared that the "legal and beneficial ownership of 60 percent of the outstanding
capital stock must rest in the hands of Filipino nationals." Clarifying the ruling, the Court decreed that the 60% Filipino
ownership requirement applies separately to each class of shares, whether with or without voting rights.

Applying uniformly the 60-40 ownership requirement in favour of Filipino citizens to each class of shares,
regardless of differences in voting rights, privileges and restrictions, guarantees effective Filipino control of public utilities,
as mandated by the Constitution.

Although the ruling was made in the context of ownership and operation of public utilities, the same should be
applied to the ownership of public and private lands, since the same proportion of Filipino ownership is required and the
same nationalist policy pervades.

The uncontested fact is that, as of November 2000, Keppel's capital is 60% Filipino-owned. However, there is nothing
in the records showing the nature and composition of Keppel's shareholdings, i.e., whether its shareholdings are divided into
different classes, and 60% of each share class is legally and beneficially owned by Filipinos - understandably because when
Keppel exercised its option to buy the land in 2000, the Gamboa ruling had not yet been promulgated. The Court cannot deny
Keppel its option to buy the land by retroactively applying the Gamboa ruling without violating Keppel's vested right. Thus,
Keppel's failure to prove the nature and composition of its shareholdings in 2000 could not prevent it from validly exercising its
option to buy the land.

Nonetheless, the Court cannot completely disregard the effect of the Gamboa ruling; the 60% Filipino equity
proportion is a continuing requirement to hold land in the Philippines. Even in Gamboa, the Court prospectively applied its
ruling, thus enabling the public utilities to meet the nationality requirement before the Securities and Exchange Commission
commences administrative investigation and cases, and imposes sanctions for noncompliance on erring corporations. In
this case, Keppel must be allowed to prove whether it meets the required Filipino equity ownership and proportion in
accordance with the Gamboa ruling before it can acquire full title to the land.

In view of the foregoing, the Court AFFIRMS the decision dated 19 December 2011 and the resolution dated 14
May 2012 of the CA in CA-G.R. CV No. 86830 insofar as these rulings uphold the respondent Keppel Philippines Holdings,
Inc.'s option to buy the land, and REMANDS the case to the Regional Trial Court of Batangas City, Branch 84, for the
determination of whether the respondent Keppel Philippines Holdings, Inc. meets the required Filipino equity ownership
and proportion in accordance with the Court's ruling in Gamboa v. Teves, to allow it to acquire full title to the land.

SO ORDERED.

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