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185572

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Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 185572 February 7, 2012

CHINA NATIONAL MACHINERY & EQUIPMENT CORP. (GROUP), Petitioner,

vs.
HON. CESAR D. SANTAMARIA, in his official capacity as Presiding Judge of Branch 145, Regional Trial
Court of Makati City, HERMINIO HARRY L. ROQUE, JR., JOEL R. BUTUYAN, ROGER R. RAYEL, ROMEL R.
BAGARES, CHRISTOPHER FRANCISCO C. BOLASTIG, LEAGUE OF URBAN POOR FOR ACTION (LUPA),
KILUSAN NG MARALITA SA MEYCAUAYAN (KMM-LUPA CHAPTER), DANILO M. CALDERON, VICENTE C.
ALBAN, MERLYN M. VAAL, LOLITA S. QUINONES, RICARDO D. LANOZO, JR., CONCHITA G. GOZO, MA.
TERESA D. ZEPEDA, JOSEFINA A. LANOZO, and SERGIO C. LEGASPI, JR., KALIPUNAN NG DAMAYANG
MAHIHIRAP (KADAMAY), EDY CLERIGO, RAMMIL DINGAL, NELSON B. TERRADO, CARMEN DEUNIDA, and
EDUARDO LEGSON, Respondents.

DECISION

SERENO, J.:

This is a Petition for Review on Certiorari with Prayer for the Issuance of a Temporary Restraining Order (TRO)
and/or Preliminary Injunction assailing the 30 September 2008 Decision and 5 December 2008 Resolution of the
Court of Appeals (CA) in CA–G.R. SP No. 103351.1

On 14 September 2002, petitioner China National Machinery & Equipment Corp. (Group) (CNMEG), represented by
its chairperson, Ren Hongbin, entered into a Memorandum of Understanding with the North Luzon Railways
Corporation (Northrail), represented by its president, Jose L. Cortes, Jr. for the conduct of a feasibility study on a
possible railway line from Manila to San Fernando, La Union (the Northrail Project).2

On 30 August 2003, the Export Import Bank of China (EXIM Bank) and the Department of Finance of the Philippines
(DOF) entered into a Memorandum of Understanding (Aug 30 MOU), wherein China agreed to extend Preferential
Buyer’s Credit to the Philippine government to finance the Northrail Project.3 The Chinese government designated
EXIM Bank as the lender, while the Philippine government named the DOF as the borrower.4 Under the Aug 30
MOU, EXIM Bank agreed to extend an amount not exceeding USD 400,000,000 in favor of the DOF, payable in 20
years, with a 5-year grace period, and at the rate of 3% per annum.5

On 1 October 2003, the Chinese Ambassador to the Philippines, Wang Chungui (Amb. Wang), wrote a letter to DOF
Secretary Jose Isidro Camacho (Sec. Camacho) informing him of CNMEG’s designation as the Prime Contractor for
the Northrail Project.6

On 30 December 2003, Northrail and CNMEG executed a Contract Agreement for the construction of Section I,
Phase I of the North Luzon Railway System from Caloocan to Malolos on a turnkey basis (the Contract
Agreement).7 The contract price for the Northrail Project was pegged at USD 421,050,000.8

On 26 February 2004, the Philippine government and EXIM Bank entered into a counterpart financial agreement –
Buyer Credit Loan Agreement No. BLA 04055 (the Loan Agreement).9 In the Loan Agreement, EXIM Bank agreed to
extend Preferential Buyer’s Credit in the amount of USD 400,000,000 in favor of the Philippine government in order
to finance the construction of Phase I of the Northrail Project.10

On 13 February 2006, respondents filed a Complaint for Annulment of Contract and Injunction with Urgent Motion
for Summary Hearing to Determine the Existence of Facts and Circumstances Justifying the Issuance of Writs of
Preliminary Prohibitory and Mandatory Injunction and/or TRO against CNMEG, the Office of the Executive
Secretary, the DOF, the Department of Budget and Management, the National Economic Development Authority and
Northrail.11 The case was docketed as Civil Case No. 06-203 before the Regional Trial Court, National Capital

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Judicial Region, Makati City, Branch 145 (RTC Br. 145). In the Complaint, respondents alleged that the Contract
Agreement and the Loan Agreement were void for being contrary to (a) the Constitution; (b) Republic Act No. 9184
(R.A. No. 9184), otherwise known as the Government Procurement Reform Act; (c) Presidential Decree No. 1445,
otherwise known as the Government Auditing Code; and (d) Executive Order No. 292, otherwise known as the
Administrative Code.12

RTC Br. 145 issued an Order dated 17 March 2006 setting the case for hearing on the issuance of injunctive
reliefs.13 On 29 March 2006, CNMEG filed an Urgent Motion for Reconsideration of this Order.14 Before RTC Br. 145
could rule thereon, CNMEG filed a Motion to Dismiss dated 12 April 2006, arguing that the trial court did not have
jurisdiction over (a) its person, as it was an agent of the Chinese government, making it immune from suit, and (b)
the subject matter, as the Northrail Project was a product of an executive agreement.15

On 15 May 2007, RTC Br. 145 issued an Omnibus Order denying CNMEG’s Motion to Dismiss and setting the case
for summary hearing to determine whether the injunctive reliefs prayed for should be issued.16 CNMEG then filed a
Motion for Reconsideration,17 which was denied by the trial court in an Order dated 10 March 2008.18 Thus, CNMEG
filed before the CA a Petition for Certiorari with Prayer for the Issuance of TRO and/or Writ of Preliminary Injunction
dated 4 April 2008.19

In the assailed Decision dated 30 September 2008, the appellate court dismissed the Petition for Certiorari.20
Subsequently, CNMEG filed a Motion for Reconsideration,21 which was denied by the CA in a Resolution dated 5
December 2008.22 Thus, CNMEG filed the instant Petition for Review on Certiorari dated 21 January 2009, raising
the following issues: 23

Whether or not petitioner CNMEG is an agent of the sovereign People’s Republic of China.

Whether or not the Northrail contracts are products of an executive agreement between two sovereign states.

Whether or not the certification from the Department of Foreign Affairs is necessary under the foregoing
circumstances.

Whether or not the act being undertaken by petitioner CNMEG is an act jure imperii.

Whether or not the Court of Appeals failed to avoid a procedural limbo in the lower court.

Whether or not the Northrail Project is subject to competitive public bidding.

Whether or not the Court of Appeals ignored the ruling of this Honorable Court in the Neri case.

CNMEG prays for the dismissal of Civil Case No. 06-203 before RTC Br. 145 for lack of jurisdiction. It likewise
requests this Court for the issuance of a TRO and, later on, a writ of preliminary injunction to restrain public
respondent from proceeding with the disposition of Civil Case No. 06-203.

The crux of this case boils down to two main issues, namely:

1. Whether CNMEG is entitled to immunity, precluding it from being sued before a local court.

2. Whether the Contract Agreement is an executive agreement, such that it cannot be questioned by or before
a local court.

First issue: Whether CNMEG is entitled to immunity

This Court explained the doctrine of sovereign immunity in Holy See v. Rosario,24 to wit:

There are two conflicting concepts of sovereign immunity, each widely held and firmly established. According to the
classical or absolute theory, a sovereign cannot, without its consent, be made a respondent in the courts of
another sovereign. According to the newer or restrictive theory, the immunity of the sovereign is recognized
only with regard to public acts or acts jure imperii of a state, but not with regard to private acts or acts jure
gestionis. (Emphasis supplied; citations omitted.)

xxx xxx xxx

The restrictive theory came about because of the entry of sovereign states into purely commercial activities remotely
connected with the discharge of governmental functions. This is particularly true with respect to the Communist
states which took control of nationalized business activities and international trading.

In JUSMAG v. National Labor Relations Commission,25 this Court affirmed the Philippines’ adherence to the
restrictive theory as follows:

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The doctrine of state immunity from suit has undergone further metamorphosis. The view evolved that the existence
of a contract does not, per se, mean that sovereign states may, at all times, be sued in local courts. The complexity
of relationships between sovereign states, brought about by their increasing commercial activities, mothered a more
restrictive application of the doctrine.

xxx xxx xxx

As it stands now, the application of the doctrine of immunity from suit has been restricted to sovereign or
governmental activities (jure imperii). The mantle of state immunity cannot be extended to commercial, private and
proprietary acts (jure gestionis).26 (Emphasis supplied.)

Since the Philippines adheres to the restrictive theory, it is crucial to ascertain the legal nature of the act involved –
whether the entity claiming immunity performs governmental, as opposed to proprietary, functions. As held in United
States of America v. Ruiz –27

The restrictive application of State immunity is proper only when the proceedings arise out of commercial
transactions of the foreign sovereign, its commercial activities or economic affairs. Stated differently, a State may be
said to have descended to the level of an individual and can thus be deemed to have tacitly given its consent to be
sued only when it enters into business contracts. It does not apply where the contract relates to the exercise of its
sovereign functions.28

A. CNMEG is engaged in a proprietary activity.

A threshold question that must be answered is whether CNMEG performs governmental or proprietary functions. A
thorough examination of the basic facts of the case would show that CNMEG is engaged in a proprietary activity.

The parties executed the Contract Agreement for the purpose of constructing the Luzon Railways, viz:29

WHEREAS the Employer (Northrail) desired to construct the railways form Caloocan to Malolos, section I, Phase I
of Philippine North Luzon Railways Project (hereinafter referred to as THE PROJECT);

AND WHEREAS the Contractor has offered to provide the Project on Turnkey basis, including design,
manufacturing, supply, construction, commissioning, and training of the Employer’s personnel;

AND WHEREAS the Loan Agreement of the Preferential Buyer’s Credit between Export-Import Bank of China and
Department of Finance of Republic of the Philippines;

NOW, THEREFORE, the parties agree to sign this Contract for the Implementation of the Project.

The above-cited portion of the Contract Agreement, however, does not on its own reveal whether the construction of
the Luzon railways was meant to be a proprietary endeavor. In order to fully understand the intention behind and the
purpose of the entire undertaking, the Contract Agreement must not be read in isolation. Instead, it must be
construed in conjunction with three other documents executed in relation to the Northrail Project, namely: (a) the
Memorandum of Understanding dated 14 September 2002 between Northrail and CNMEG;30 (b) the letter of Amb.
Wang dated 1 October 2003 addressed to Sec. Camacho;31 and (c) the Loan Agreement.32

1. Memorandum of Understanding dated 14 September 2002

The Memorandum of Understanding dated 14 September 2002 shows that CNMEG sought the construction of the
Luzon Railways as a proprietary venture. The relevant parts thereof read:

WHEREAS, CNMEG has the financial capability, professional competence and technical expertise to assess the
state of the [Main Line North (MLN)] and recommend implementation plans as well as undertake its rehabilitation
and/or modernization;

WHEREAS, CNMEG has expressed interest in the rehabilitation and/or modernization of the MLN from Metro
Manila to San Fernando, La Union passing through the provinces of Bulacan, Pampanga, Tarlac, Pangasinan and
La Union (the ‘Project’);

WHEREAS, the NORTHRAIL CORP. welcomes CNMEG’s proposal to undertake a Feasibility Study (the "Study") at
no cost to NORTHRAIL CORP.;

WHEREAS, the NORTHRAIL CORP. also welcomes CNMEG’s interest in undertaking the Project with Supplier’s
Credit and intends to employ CNMEG as the Contractor for the Project subject to compliance with Philippine and
Chinese laws, rules and regulations for the selection of a contractor;

WHEREAS, the NORTHRAIL CORP. considers CNMEG’s proposal advantageous to the Government of the
Republic of the Philippines and has therefore agreed to assist CNMEG in the conduct of the aforesaid Study;
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xxx xxx xxx

II. APPROVAL PROCESS

2.1 As soon as possible after completion and presentation of the Study in accordance with Paragraphs 1.3 and 1.4
above and in compliance with necessary governmental laws, rules, regulations and procedures required from both
parties, the parties shall commence the preparation and negotiation of the terms and conditions of the Contract (the
"Contract") to be entered into between them on the implementation of the Project. The parties shall use their best
endeavors to formulate and finalize a Contract with a view to signing the Contract within one hundred twenty (120)
days from CNMEG’s presentation of the Study.33 (Emphasis supplied)

Clearly, it was CNMEG that initiated the undertaking, and not the Chinese government. The Feasibility Study was
conducted not because of any diplomatic gratuity from or exercise of sovereign functions by the Chinese
government, but was plainly a business strategy employed by CNMEG with a view to securing this commercial
enterprise.

2. Letter dated 1 October 2003

That CNMEG, and not the Chinese government, initiated the Northrail Project was confirmed by Amb. Wang in his
letter dated 1 October 2003, thus:

1. CNMEG has the proven competence and capability to undertake the Project as evidenced by the ranking
of 42 given by the ENR among 225 global construction companies.

2. CNMEG already signed an MOU with the North Luzon Railways Corporation last September 14, 2000
during the visit of Chairman Li Peng. Such being the case, they have already established an initial working
relationship with your North Luzon Railways Corporation. This would categorize CNMEG as the state
corporation within the People’s Republic of China which initiated our Government’s involvement in the Project.

3. Among the various state corporations of the People’s Republic of China, only CNMEG has the advantage
of being fully familiar with the current requirements of the Northrail Project having already accomplished a
Feasibility Study which was used as inputs by the North Luzon Railways Corporation in the approvals (sic)
process required by the Republic of the Philippines.34 (Emphasis supplied.)

Thus, the desire of CNMEG to secure the Northrail Project was in the ordinary or regular course of its business as a
global construction company. The implementation of the Northrail Project was intended to generate profit for
CNMEG, with the Contract Agreement placing a contract price of USD 421,050,000 for the venture.35 The use of the
term "state corporation" to refer to CNMEG was only descriptive of its nature as a government-owned and/or -
controlled corporation, and its assignment as the Primary Contractor did not imply that it was acting on behalf of
China in the performance of the latter’s sovereign functions. To imply otherwise would result in an absurd situation,
in which all Chinese corporations owned by the state would be automatically considered as performing
governmental activities, even if they are clearly engaged in commercial or proprietary pursuits.

3. The Loan Agreement

CNMEG claims immunity on the ground that the Aug 30 MOU on the financing of the Northrail Project was signed by
the Philippine and Chinese governments, and its assignment as the Primary Contractor meant that it was bound to
perform a governmental function on behalf of China. However, the Loan Agreement, which originated from the same
Aug 30 MOU, belies this reasoning, viz:

Article 11. xxx (j) Commercial Activity The execution and delivery of this Agreement by the Borrower constitute, and
the Borrower’s performance of and compliance with its obligations under this Agreement will constitute, private and
commercial acts done and performed for commercial purposes under the laws of the Republic of the
Philippines and neither the Borrower nor any of its assets is entitled to any immunity or privilege (sovereign
or otherwise) from suit, execution or any other legal process with respect to its obligations under this
Agreement, as the case may be, in any jurisdiction. Notwithstanding the foregoing, the Borrower does not waive
any immunity with respect of its assets which are (i) used by a diplomatic or consular mission of the Borrower and
(ii) assets of a military character and under control of a military authority or defense agency and (iii) located in the
Philippines and dedicated to public or governmental use (as distinguished from patrimonial assets or assets
dedicated to commercial use). (Emphasis supplied.)

(k) Proceedings to Enforce Agreement In any proceeding in the Republic of the Philippines to enforce this
Agreement, the choice of the laws of the People’s Republic of China as the governing law hereof will be recognized
and such law will be applied. The waiver of immunity by the Borrower, the irrevocable submissions of the Borrower
to the non-exclusive jurisdiction of the courts of the People’s Republic of China and the appointment of the
Borrower’s Chinese Process Agent is legal, valid, binding and enforceable and any judgment obtained in the
People’s Republic of China will be if introduced, evidence for enforcement in any proceedings against the Borrower

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and its assets in the Republic of the Philippines provided that (a) the court rendering judgment had jurisdiction over
the subject matter of the action in accordance with its jurisdictional rules, (b) the Republic had notice of the
proceedings, (c) the judgment of the court was not obtained through collusion or fraud, and (d) such judgment was
not based on a clear mistake of fact or law.36

Further, the Loan Agreement likewise contains this express waiver of immunity:

15.5 Waiver of Immunity The Borrower irrevocably and unconditionally waives, any immunity to which it or its
property may at any time be or become entitled, whether characterized as sovereign immunity or otherwise, from
any suit, judgment, service of process upon it or any agent, execution on judgment, set-off, attachment prior to
judgment, attachment in aid of execution to which it or its assets may be entitled in any legal action or proceedings
with respect to this Agreement or any of the transactions contemplated hereby or hereunder. Notwithstanding the
foregoing, the Borrower does not waive any immunity in respect of its assets which are (i) used by a diplomatic or
consular mission of the Borrower, (ii) assets of a military character and under control of a military authority or
defense agency and (iii) located in the Philippines and dedicated to a public or governmental use (as distinguished
from patrimonial assets or assets dedicated to commercial use).37

Thus, despite petitioner’s claim that the EXIM Bank extended financial assistance to Northrail because the bank was
mandated by the Chinese government, and not because of any motivation to do business in the Philippines,38 it is
clear from the foregoing provisions that the Northrail Project was a purely commercial transaction.

Admittedly, the Loan Agreement was entered into between EXIM Bank and the Philippine government, while the
Contract Agreement was between Northrail and CNMEG. Although the Contract Agreement is silent on the
classification of the legal nature of the transaction, the foregoing provisions of the Loan Agreement, which is an
inextricable part of the entire undertaking, nonetheless reveal the intention of the parties to the Northrail Project to
classify the whole venture as commercial or proprietary in character.

Thus, piecing together the content and tenor of the Contract Agreement, the Memorandum of Understanding dated
14 September 2002, Amb. Wang’s letter dated 1 October 2003, and the Loan Agreement would reveal the desire of
CNMEG to construct the Luzon Railways in pursuit of a purely commercial activity performed in the ordinary course
of its business.

B. CNMEG failed to adduce evidence that it is immune from suit under Chinese law.

Even assuming arguendo that CNMEG performs governmental functions, such claim does not automatically vest it
with immunity. This view finds support in Malong v. Philippine National Railways, in which this Court held that "
(i)mmunity from suit is determined by the character of the objects for which the entity was organized."39

In this regard, this Court’s ruling in Deutsche Gesellschaft Für Technische Zusammenarbeit (GTZ) v. CA40 must be
examined. In Deutsche Gesellschaft, Germany and the Philippines entered into a Technical Cooperation Agreement,
pursuant to which both signed an arrangement promoting the Social Health Insurance–Networking and
Empowerment (SHINE) project. The two governments named their respective implementing organizations: the
Department of Health (DOH) and the Philippine Health Insurance Corporation (PHIC) for the Philippines, and GTZ
for the implementation of Germany’s contributions. In ruling that GTZ was not immune from suit, this Court held:

The arguments raised by GTZ and the [Office of the Solicitor General (OSG)] are rooted in several indisputable
facts. The SHINE project was implemented pursuant to the bilateral agreements between the Philippine and
German governments. GTZ was tasked, under the 1991 agreement, with the implementation of the contributions of
the German government. The activities performed by GTZ pertaining to the SHINE project are governmental in
nature, related as they are to the promotion of health insurance in the Philippines. The fact that GTZ entered into
employment contracts with the private respondents did not disqualify it from invoking immunity from suit, as held in
cases such as Holy See v. Rosario, Jr., which set forth what remains valid doctrine:

Certainly, the mere entering into a contract by a foreign state with a private party cannot be the ultimate test. Such
an act can only be the start of the inquiry. The logical question is whether the foreign state is engaged in the activity
in the regular course of business. If the foreign state is not engaged regularly in a business or trade, the particular
act or transaction must then be tested by its nature. If the act is in pursuit of a sovereign activity, or an incident
thereof, then it is an act jure imperii, especially when it is not undertaken for gain or profit.

Beyond dispute is the tenability of the comment points (sic) raised by GTZ and the OSG that GTZ was not
performing proprietary functions notwithstanding its entry into the particular employment contracts. Yet there is an
equally fundamental premise which GTZ and the OSG fail to address, namely: Is GTZ, by conception, able to enjoy
the Federal Republic’s immunity from suit?

The principle of state immunity from suit, whether a local state or a foreign state, is reflected in Section 9, Article XVI
of the Constitution, which states that "the State may not be sued without its consent." Who or what consists of "the

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State"? For one, the doctrine is available to foreign States insofar as they are sought to be sued in the courts of the
local State, necessary as it is to avoid "unduly vexing the peace of nations."

If the instant suit had been brought directly against the Federal Republic of Germany, there would be no doubt that it
is a suit brought against a State, and the only necessary inquiry is whether said State had consented to be sued.
However, the present suit was brought against GTZ. It is necessary for us to understand what precisely are the
parameters of the legal personality of GTZ.

Counsel for GTZ characterizes GTZ as "the implementing agency of the Government of the Federal Republic
of Germany," a depiction similarly adopted by the OSG. Assuming that the characterization is correct, it does not
automatically invest GTZ with the ability to invoke State immunity from suit. The distinction lies in whether the
agency is incorporated or unincorporated.

xxx xxx xxx

State immunity from suit may be waived by general or special law. The special law can take the form of the original
charter of the incorporated government agency. Jurisprudence is replete with examples of incorporated government
agencies which were ruled not entitled to invoke immunity from suit, owing to provisions in their charters manifesting
their consent to be sued.

xxx xxx xxx

It is useful to note that on the part of the Philippine government, it had designated two entities, the Department of
Health and the Philippine Health Insurance Corporation (PHIC), as the implementing agencies in behalf of the
Philippines. The PHIC was established under Republic Act No. 7875, Section 16 (g) of which grants the corporation
the power "to sue and be sued in court." Applying the previously cited jurisprudence, PHIC would not enjoy immunity
from suit even in the performance of its functions connected with SHINE, however, (sic) governmental in nature as
(sic) they may be.

Is GTZ an incorporated agency of the German government? There is some mystery surrounding that
question. Neither GTZ nor the OSG go beyond the claim that petitioner is "the implementing agency of the
Government of the Federal Republic of Germany." On the other hand, private respondents asserted before the
Labor Arbiter that GTZ was "a private corporation engaged in the implementation of development projects." The
Labor Arbiter accepted that claim in his Order denying the Motion to Dismiss, though he was silent on that point in
his Decision. Nevertheless, private respondents argue in their Comment that the finding that GTZ was a private
corporation "was never controverted, and is therefore deemed admitted." In its Reply, GTZ controverts that finding,
saying that it is a matter of public knowledge that the status of petitioner GTZ is that of the "implementing agency,"
and not that of a private corporation.

In truth, private respondents were unable to adduce any evidence to substantiate their claim that GTZ was a "private
corporation," and the Labor Arbiter acted rashly in accepting such claim without explanation. But neither has GTZ
supplied any evidence defining its legal nature beyond that of the bare descriptive "implementing agency."
There is no doubt that the 1991 Agreement designated GTZ as the "implementing agency" in behalf of the
German government. Yet the catch is that such term has no precise definition that is responsive to our
concerns. Inherently, an agent acts in behalf of a principal, and the GTZ can be said to act in behalf of the
German state. But that is as far as "implementing agency" could take us. The term by itself does not supply
whether GTZ is incorporated or unincorporated, whether it is owned by the German state or by private
interests, whether it has juridical personality independent of the German government or none at all.

xxx xxx xxx

Again, we are uncertain of the corresponding legal implications under German law surrounding "a private
company owned by the Federal Republic of Germany." Yet taking the description on face value, the
apparent equivalent under Philippine law is that of a corporation organized under the Corporation Code but
owned by the Philippine government, or a government-owned or controlled corporation without original
charter. And it bears notice that Section 36 of the Corporate Code states that "[e]very corporation
incorporated under this Code has the power and capacity x x x to sue and be sued in its corporate name."

It is entirely possible that under German law, an entity such as GTZ or particularly GTZ itself has not been vested or
has been specifically deprived the power and capacity to sue and/or be sued. Yet in the proceedings below and
before this Court, GTZ has failed to establish that under German law, it has not consented to be sued despite
it being owned by the Federal Republic of Germany. We adhere to the rule that in the absence of evidence to
the contrary, foreign laws on a particular subject are presumed to be the same as those of the Philippines,
and following the most intelligent assumption we can gather, GTZ is akin to a governmental owned or
controlled corporation without original charter which, by virtue of the Corporation Code, has expressly
consented to be sued. At the very least, like the Labor Arbiter and the Court of Appeals, this Court has no basis in
fact to conclude or presume that GTZ enjoys immunity from suit.41 (Emphasis supplied.)
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Applying the foregoing ruling to the case at bar, it is readily apparent that CNMEG cannot claim immunity from suit,
even if it contends that it performs governmental functions. Its designation as the Primary Contractor does not
automatically grant it immunity, just as the term "implementing agency" has no precise definition for purposes of
ascertaining whether GTZ was immune from suit. Although CNMEG claims to be a government-owned corporation,
it failed to adduce evidence that it has not consented to be sued under Chinese law. Thus, following this Court’s
ruling in Deutsche Gesellschaft, in the absence of evidence to the contrary, CNMEG is to be presumed to be a
government-owned and -controlled corporation without an original charter. As a result, it has the capacity to sue and
be sued under Section 36 of the Corporation Code.

C. CNMEG failed to present a certification from the Department of Foreign Affairs.

I­n Holy See,42 this Court reiterated the oft-cited doctrine that the determination by the Executive that an entity is
entitled to sovereign or diplomatic immunity is a political question conclusive upon the courts, to wit:

In Public International Law, when a state or international agency wishes to plead sovereign or diplomatic immunity in
a foreign court, it requests the Foreign Office of the state where it is sued to convey to the court that said defendant
is entitled to immunity.

xxx xxx xxx

In the Philippines, the practice is for the foreign government or the international organization to first secure an
executive endorsement of its claim of sovereign or diplomatic immunity. But how the Philippine Foreign Office
conveys its endorsement to the courts varies. In International Catholic Migration Commission v. Calleja, 190 SCRA
130 (1990), the Secretary of Foreign Affairs just sent a letter directly to the Secretary of Labor and Employment,
informing the latter that the respondent-employer could not be sued because it enjoyed diplomatic immunity. In
World Health Organization v. Aquino, 48 SCRA 242 (1972), the Secretary of Foreign Affairs sent the trial court a
telegram to that effect. In Baer v. Tizon, 57 SCRA 1 (1974), the U.S. Embassy asked the Secretary of Foreign Affairs
to request the Solicitor General to make, in behalf of the Commander of the United States Naval Base at Olongapo
City, Zambales, a "suggestion" to respondent Judge. The Solicitor General embodied the "suggestion" in a
Manifestation and Memorandum as amicus curiae.

In the case at bench, the Department of Foreign Affairs, through the Office of Legal Affairs moved with this Court to
be allowed to intervene on the side of petitioner. The Court allowed the said Department to file its memorandum in
support of petitioner’s claim of sovereign immunity.

In some cases, the defense of sovereign immunity was submitted directly to the local courts by the respondents
through their private counsels (Raquiza v. Bradford, 75 Phil. 50 [1945]; Miquiabas v. Philippine-Ryukyus Command,
80 Phil. 262 [1948]; United States of America v. Guinto, 182 SCRA 644 [1990] and companion cases). In cases
where the foreign states bypass the Foreign Office, the courts can inquire into the facts and make their own
determination as to the nature of the acts and transactions involved.43 (Emphasis supplied.)

The question now is whether any agency of the Executive Branch can make a determination of immunity from suit,
which may be considered as conclusive upon the courts. This Court, in Department of Foreign Affairs (DFA) v.
National Labor Relations Commission (NLRC),44 emphasized the DFA’s competence and authority to provide such
necessary determination, to wit:

The DFA’s function includes, among its other mandates, the determination of persons and institutions covered by
diplomatic immunities, a determination which, when challenge, (sic) entitles it to seek relief from the court so as not
to seriously impair the conduct of the country's foreign relations. The DFA must be allowed to plead its case
whenever necessary or advisable to enable it to help keep the credibility of the Philippine government before the
international community. When international agreements are concluded, the parties thereto are deemed to have
likewise accepted the responsibility of seeing to it that their agreements are duly regarded. In our country, this task
falls principally of (sic) the DFA as being the highest executive department with the competence and authority to so
act in this aspect of the international arena.45 (Emphasis supplied.)

Further, the fact that this authority is exclusive to the DFA was also emphasized in this Court’s ruling in Deutsche
Gesellschaft:

It is to be recalled that the Labor Arbiter, in both of his rulings, noted that it was imperative for petitioners to secure
from the Department of Foreign Affairs "a certification of respondents’ diplomatic status and entitlement to diplomatic
privileges including immunity from suits." The requirement might not necessarily be imperative. However, had GTZ
obtained such certification from the DFA, it would have provided factual basis for its claim of immunity that would, at
the very least, establish a disputable evidentiary presumption that the foreign party is indeed immune which the
opposing party will have to overcome with its own factual evidence. We do not see why GTZ could not have secured
such certification or endorsement from the DFA for purposes of this case. Certainly, it would have been highly
prudential for GTZ to obtain the same after the Labor Arbiter had denied the motion to dismiss. Still, even at this
juncture, we do not see any evidence that the DFA, the office of the executive branch in charge of our diplomatic
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relations, has indeed endorsed GTZ’s claim of immunity. It may be possible that GTZ tried, but failed to secure such
certification, due to the same concerns that we have discussed herein.

Would the fact that the Solicitor General has endorsed GTZ’s claim of State’s immunity from suit before this Court
sufficiently substitute for the DFA certification? Note that the rule in public international law quoted in Holy See
referred to endorsement by the Foreign Office of the State where the suit is filed, such foreign office in the
Philippines being the Department of Foreign Affairs. Nowhere in the Comment of the OSG is it manifested that the
DFA has endorsed GTZ’s claim, or that the OSG had solicited the DFA’s views on the issue. The arguments raised
by the OSG are virtually the same as the arguments raised by GTZ without any indication of any special and distinct
perspective maintained by the Philippine government on the issue. The Comment filed by the OSG does not inspire
the same degree of confidence as a certification from the DFA would have elicited.46 (Emphasis supplied.)

In the case at bar, CNMEG offers the Certification executed by the Economic and Commercial Office of the
Embassy of the People’s Republic of China, stating that the Northrail Project is in pursuit of a sovereign activity.47
Surely, this is not the kind of certification that can establish CNMEG’s entitlement to immunity from suit, as Holy See
unequivocally refers to the determination of the "Foreign Office of the state where it is sued."

Further, CNMEG also claims that its immunity from suit has the executive endorsement of both the OSG and the
Office of the Government Corporate Counsel (OGCC), which must be respected by the courts. However, as
expressly enunciated in Deutsche Gesellschaft, this determination by the OSG, or by the OGCC for that matter,
does not inspire the same degree of confidence as a DFA certification. Even with a DFA certification, however, it
must be remembered that this Court is not precluded from making an inquiry into the intrinsic correctness of such
certification.

D. An agreement to submit any dispute to arbitration may be construed as an implicit waiver of immunity from suit.

In the United States, the Foreign Sovereign Immunities Act of 1976 provides for a waiver by implication of state
immunity. In the said law, the agreement to submit disputes to arbitration in a foreign country is construed as an
implicit waiver of immunity from suit. Although there is no similar law in the Philippines, there is reason to apply the
legal reasoning behind the waiver in this case.

The Conditions of Contract,48 which is an integral part of the Contract Agreement,49 states:

33. SETTLEMENT OF DISPUTES AND ARBITRATION

33.1. Amicable Settlement

Both parties shall attempt to amicably settle all disputes or controversies arising from this Contract before the
commencement of arbitration.

33.2. Arbitration

All disputes or controversies arising from this Contract which cannot be settled between the Employer and the
Contractor shall be submitted to arbitration in accordance with the UNCITRAL Arbitration Rules at present in force
and as may be amended by the rest of this Clause. The appointing authority shall be Hong Kong International
Arbitration Center. The place of arbitration shall be in Hong Kong at Hong Kong International Arbitration Center
(HKIAC).

Under the above provisions, if any dispute arises between Northrail and CNMEG, both parties are bound to submit
the matter to the HKIAC for arbitration. In case the HKIAC makes an arbitral award in favor of Northrail, its
enforcement in the Philippines would be subject to the Special Rules on Alternative Dispute Resolution (Special
Rules). Rule 13 thereof provides for the Recognition and Enforcement of a Foreign Arbitral Award. Under Rules 13.2
and 13.3 of the Special Rules, the party to arbitration wishing to have an arbitral award recognized and enforced in
the Philippines must petition the proper regional trial court (a) where the assets to be attached or levied upon is
located; (b) where the acts to be enjoined are being performed; (c) in the principal place of business in the
Philippines of any of the parties; (d) if any of the parties is an individual, where any of those individuals resides; or
(e) in the National Capital Judicial Region.

From all the foregoing, it is clear that CNMEG has agreed that it will not be afforded immunity from suit. Thus, the
courts have the competence and jurisdiction to ascertain the validity of the Contract Agreement.

Second issue: Whether the Contract Agreement is an executive agreement

Article 2(1) of the Vienna Convention on the Law of Treaties (Vienna Convention) defines a treaty as follows:

[A]n international agreement concluded between States in written form and governed by international law, whether
embodied in a single instrument or in two or more related instruments and whatever its particular designation.

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In Bayan Muna v. Romulo, this Court held that an executive agreement is similar to a treaty, except that the former
(a) does not require legislative concurrence; (b) is usually less formal; and (c) deals with a narrower range of subject
matters.50

Despite these differences, to be considered an executive agreement, the following three requisites provided under
the Vienna Convention must nevertheless concur: (a) the agreement must be between states; (b) it must be written;
and (c) it must governed by international law. The first and the third requisites do not obtain in the case at bar.

A. CNMEG is neither a government nor a government agency.

The Contract Agreement was not concluded between the Philippines and China, but between Northrail and
CNMEG.51 By the terms of the Contract Agreement, Northrail is a government-owned or -controlled corporation,
while CNMEG is a corporation duly organized and created under the laws of the People’s Republic of China.52 Thus,
both Northrail and CNMEG entered into the Contract Agreement as entities with personalities distinct and separate
from the Philippine and Chinese governments, respectively.

Neither can it be said that CNMEG acted as agent of the Chinese government. As previously discussed, the fact that
Amb. Wang, in his letter dated 1 October 2003,53 described CNMEG as a "state corporation" and declared its
designation as the Primary Contractor in the Northrail Project did not mean it was to perform sovereign functions on
behalf of China. That label was only descriptive of its nature as a state-owned corporation, and did not preclude it
from engaging in purely commercial or proprietary ventures.

B. The Contract Agreement is to be governed by Philippine law.

Article 2 of the Conditions of Contract,54 which under Article 1.1 of the Contract Agreement is an integral part of the
latter, states:

APPLICABLE LAW AND GOVERNING LANGUAGE

The contract shall in all respects be read and construed in accordance with the laws of the Philippines.

The contract shall be written in English language. All correspondence and other documents pertaining to the
Contract which are exchanged by the parties shall be written in English language.

Since the Contract Agreement explicitly provides that Philippine law shall be applicable, the parties have effectively
conceded that their rights and obligations thereunder are not governed by international law.

It is therefore clear from the foregoing reasons that the Contract Agreement does not partake of the nature of an
executive agreement. It is merely an ordinary commercial contract that can be questioned before the local courts.

WHEREFORE, the instant Petition is DENIED. Petitioner China National Machinery & Equipment Corp. (Group) is
not entitled to immunity from suit, and the Contract Agreement is not an executive agreement. CNMEG’s prayer for
the issuance of a TRO and/or Writ of Preliminary Injunction is DENIED for being moot and academic. This case is
REMANDED to the Regional Trial Court of Makati, Branch 145, for further proceedings as regards the validity of the
contracts subject of Civil Case No. 06-203.

No pronouncement on costs of suit.

SO ORDERED.

MARIA LOURDES P. A. SERENO

Associate Justice

WE CONCUR:

RENATO C. CORONA
Chief Justice

ANTONIO T. CARPIO PRESBITERO J. VELASCO, JR.

Associate Justice Associate Justice

TERESITA J. LEONARDO-DE CASTRO ARTURO D. BRION

Associate Justice Associate Justice

DIOSDADO M. PERALTA LUCAS P. BERSAMIN

Associate Justice Associate Justice

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MARIANO C. DEL CASTILLO ROBERTO A. ABAD

Associate Justice Associate Justice

MARTIN S. VILLARAMA, JR. JOSE PORTUGAL PEREZ

Associate Justice Associate Justice

JOSE C. MENDOZA BIENVENIDO L. REYES

Associate Justice Associate Justice

ESTELA M. PERLAS-BERNABE
Associate Justice

C E RTI F I CATI O N

Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above Decision had been
reached in consultation before the case was assigned to the writer of the opinion of the Court.

RENATO C. CORONA
Chief Justice

Footnotes
1
China National Machinery & Equipment Corporation (Group) v. Hon. Cesar D. Santamaria, et al.
2
Petition, rollo, Vol. I, p. 25; Memorandum of Understanding dated 14 September 2002, rollo, Vol. I, pp. 400-
406.
3
Petition, rollo, Vol. I, pp. 25-26; Memorandum of Understanding dated 30 August 2003, rollo, Vol. I, pp. 308-
310, 407-409.
4
Id.
5
Memorandum of Understanding dated 30 August 2003, rollo, Vol. I, pp. 308-310, 407-409.
6
Petition, rollo, Vol. I, p. 26; Letter dated 1 October 2003, rollo, Vol. I, pp. 311-312.
7
Contract Agreement, rollo, Vol. I, pp. 126-130, 412-414.
8
Memorandum of Agreement dated December 2003, rollo, Vol. I, pp. 198-201.
9
Loan Agreement, rollo, Vol. I, pp. 242-282.
10
Id.
11
Complaint, rollo, Vol. I, pp. 102-125.
12
Id.
13
Order dated 17 March 2006, rollo, Vol. I, pp. 290-291.
14
Urgent Motion for Reconsideration, rollo, Vol. I, pp. 292-307
15
Motion to Dismiss, rollo, Vol. I, pp. 324-369.
16
Omnibus Order dated 15 May 2007, rollo, Vol. I, pp. 648-658.
17
Motion for Reconsideration, rollo, Vol. I, pp. 663-695.
18
Order dated 10 March 2008, rollo, Vol. I, p. 737.
19
Petition for Certiorari, rollo, Vol. I, pp. 738-792.
20
CA Decision, rollo, Vol. I, pp. 81-99.

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21
Motion for Reconsideration, rollo, Vol. I, pp. 971-1001.
22
CA Resolution, rollo, Vol. I, pp. 100-102.
23
Petition, rollo, Vol. I, pp. 27-28.
24
G.R. No. 101949, 1 December 1994, 238 SCRA 524, 535.
25
G.R. No. 108813, 15 December 1994, 239 SCRA 224.
26
Id. at 231-232.
27
221 Phil. 179 (1985).
28
Id. at 184.
29
Contract Agreement, rollo, Vol. I, pp. 127, 413.
30
Supra note 2.
31
Supra note 6.
32
Supra note 9.
33
Supra note 2, at 400-402.
34
Supra note 6.
35
Supra note 8.
36
Supra note 9, at 260-261.
37
Id. at 268-269.
38
Petition, rollo, Vol. I, p. 47.
39
222 Phil 381, 384 (1985).
40
G.R. No. 152318, 16 April 2009, 585 SCRA 150.
41
Id. at 165-173.
42
Supra note 24.
43
Id. at 531-533.
44
330 Phil 573 (1996).
45
Id. at 587-588.
46
Supra note 40, at 174-175.
47
Petition, rollo, Vol. I, p. 30.
48
Conditions of Contract, rollo, Vol. I, pp. 202-241, 415-455.
49
Supra note 7. Clause 1.1 of the Contract Agreement provides:

The following documents shall constitute the Contract between the Employer and the Contractor, and
each shall be read and construed as an integral part of the Contract:

(1) Contract Agreement

(2) Amendments, if any to the Contract documents agreed by the Parties

(3) Conditions of Contract

(4) Technical Documents

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(5) Preliminary Engineering Design including Bill of Quantities

(6) Technical Specification

50
G.R. No. 159618, 1 February 2011, 641 SCRA 244, 258-259.
51
Supra note 7.
52
Id.
53
Supra note 6.
54
Supra note 48.

The Lawphil Project - Arellano Law Foundation

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