When State enters into a business contract

87.​ USA v. Ruiz, 136 SCRA 487

Key Facts:

●​ At the time of the case, the United States had a naval base in Subic Bay, Zambales, as part of a
Military Bases Agreement between the United States and the Philippines.
●​ In May 1972, the U.S. government (representatives Capt. James E. Galloway, William I. Collins,
and Robert Gohier) invited bids for repairs to several facilities within the naval base, including
the Alava Wharf and the NAS Cubi shoreline, among others, as part of maintenance after typhoon
damage.
●​ Eligio de Guzman & Co., Inc., a Filipino company, responded to the bid invitations and submitted
proposals. The company received telegrams from the U.S. requesting confirmation of its price
proposals and asked for the name of its bonding company, which led the company to believe its
bids were accepted.
●​ The U.S. then informed Eligio de Guzman & Co. that its bids were rejected due to poor
performance in a previous contract. The U.S. awarded the contracts to other parties, and de
Guzman sued, seeking to compel the U.S. to allow it to perform the work or, alternatively, to pay
damages and issuance of writ of injunction to avoid US from entering contracts to awarded third
parties
●​ The company argued that the U.S. government, by entering into a business transaction (contract
bidding process), waived its immunity from being sued in Philippine courts
●​ The United States invoked state immunity, arguing that it had not waived its sovereign immunity
and could not be sued in a foreign court for acts related to its sovereign functions, including those
concerning its military bases.

Issues:

1.​ WON the United States can be sued in a Philippine court over a business contract when it has not
expressly waived its sovereign immunity and WON the contract stated is related to a
governmental function (jure imperii) or a commercial act (jure gestionis)?

Ruling:

●​ NO. The Court highlighted the difference between sovereign acts (jure imperii) and commercial
acts (jure gestionis). While a state may waive its immunity when entering into commercial
contracts, this waiver does not extend to contracts tied to sovereign functions. In this case, the
U.S. had entered into contracts for repairs at its Subic Bay Naval Base, which were related to its
defense operations. These activities, being part of the U.S.'s sovereign functions, did not waive its
immunity. Thus, the ruling established that when a state engages in sovereign functions like
military defense, it retains immunity from suit, even if the contracts involve private parties.

Suability not outright liability

Key Facts:
●​ On March 25, 1913, E. Merritt, while riding a motorcycle, was struck by an ambulance operated
by the General Hospital, which was owned by the Government of the Philippine Islands. The
ambulance driver turned abruptly into the wrong lane without signaling, causing the collision.
●​ Merritt sustained severe injuries, including a fractured skull and leg, brain damage, and long-term
physical and mental disabilities, which rendered him unable to perform his work as a contractor.
●​ Merritt filed a claim for damages against the Government of the Philippine Islands, arguing that
the accident was caused by the negligence of the ambulance driver, who was a government
employee.
●​ The Philippine Legislature passed Act No. 2457, which allowed Merritt to bring a lawsuit against
the government. The Act permitted the court to determine whether the government was
responsible for the accident and to assess damages, if any.
●​ The trial court found that the accident was caused solely by the negligence of the ambulance
driver and awarded Merritt ₱14,741 in damages. Both parties appealed the decision—Merritt
sought a higher compensation, while the government contested its liability.

Issues:

1.​ WON the waiver of state immunity under Act No. 2457 permit the government to be held liable
for the negligence of its employees, or does it merely allow for a judicial determination of
responsibility?

Ruling:
NO. the waiver of state immunity under Act No. 2457 does not automatically make the
government liable for the negligence of its employees. It only allows for judicial determination of
responsibility. Act No. 2457 permitted claims against the government but did not explicitly state
that the government would be liable for the negligence of its employees. Additionally, Article
1903 of the Civil Code limits government liability to cases involving "special agents" acting
outside their usual duties, and the concept of "special agent" does not cover the typical duties of
government employees like ambulance drivers. In this case, while Act No. 2457 allowed Merritt
to bring a suit against the government, it did not inherently make the government liable for all
acts of negligence. The Court examined whether the ambulance driver acted as a "special agent"
under Article 1903 of the Civil Code and determined that he was not, thus not satisfying the
conditions for government liability. Therefore, the waiver of state immunity provided by Act No.
2457 allows for the judicial determination of government responsibility but does not
automatically establish government liability for the negligence of its employees. Liability is
contingent upon whether the employee's actions fall under the category of a "special agent" as
defined by the Civil Code.

89.​ Fontanilla v. Maliaman, 194 SCRA 486

Key Facts:

●​ On August 21, 1976, at around 6:30 P.M., a government-owned pickup truck operated by the
National Irrigation Administration (NIA) collided with a bicycle on the Maharlika Highway in
San Jose City, Nueva Ecija. The pickup was driven by Hugo Garcia, a regular employee of NIA.
 ●​ The collision involved two individuals, Francisco Fontanilla and Restituto Deligo, who were
riding the bicycle at the time of the accident. Both sustained injuries and were rushed to the
hospital. Francisco Fontanilla was transferred to the Cabanatuan Provincial Hospital, where he
later died due to the severity of his injuries.
●​ The parents of the deceased, Jose and Virginia, filed a lawsuit against NIA, seeking compensation
for the wrongful death of their son. They argued that NIA, as the employer of the driver, was
liable for the damages caused by Garcia’s negligence.
●​ NIA argued that it should not be held liable, asserting that it was a government agency
performing governmental functions and that the driver was a regular employee, not a “special
agent.” NIA claimed that as a government entity, it was immune from liability for the negligence
of its regular employees.
●​ The trial court ruled in favor of the Fontanilla family, awarding them ₱12,000 in death benefits
and ₱3,389 for hospitalization and burial expenses. However, the court did not award moral or
exemplary damages, as the plaintiffs requested.
●​ NIA appealed the decision, maintaining that it was immune from suit. Meanwhile, the Fontanilla
family sought a review to include awards for moral and exemplary damages, arguing that the
negligent act warranted such compensation.

Issues:

1.​ WON the National Irrigation Administration (NIA), a government agency, enjoys immunity from
liability for damages caused by the negligence of its driver?

Ruling:

●​ NO. The Court emphasized that the state or its agencies can be sued when they perform
proprietary functions, and when they do, they assume liability like any private entity. Suability
allows the court to determine whether the government agency should be held liable, but it does
not automatically shield the agency from In this case, NIA was not engaged in purely
governmental functions, which are generally immune from suit. Instead, NIA’s work related to
irrigation systems and fee collection, activities typically undertaken by private businesses. These
are considered proprietary functions, where the government behaves like a private entity, and
thus, immunity does not apply.

NIA also argued that it was not liable because the driver was not a special agent as defined under
the law. However, the Court ruled that under Article 2180 of the Civil Code, an
employer—including the state or its agencies—can be held liable for the negligence of its
employees when engaged in proprietary functions. In this case, NIA had failed to exercise due
diligence in the supervision of its driver, as evidenced by the fact that Garcia was speeding in an
urban area and did not stop after the accident. NIA’s negligence in supervising its employee made
it liable for the damages.

Thus, the Supreme Court awarded the Fontanilla family ₱30,000 in moral damages, ₱8,000 in
exemplary damages, and attorney's fees in addition to the initial compensation for death and
burial expenses.

Consent to be sued does not include consent to execution

Key Facts:

●​ The case arose from an arbitration award given in favor of P.J. Kiener Co., Ltd., Gavino Unchuan,
and International Construction Corporation, against the Republic of the Philippines. The
arbitration was conducted in 1961, with the Republic being ordered to pay P1,712,396.40 for a
contractual dispute.
●​ On June 24, 1969, Judge Guillermo Villasor issued an order declaring the decision final and
executory and authorized the issuance of an alias writ of execution. The alias writ was directed
against the funds of the Armed Forces of the Philippines (AFP) in various banks, including the
Philippine Veterans Bank and the Philippine National Bank.
●​ The funds targeted were public funds appropriated for specific purposes like the payment of
pensions, salaries of military and civilian personnel, and the operational needs of the AFP.
●​ Upon learning about the garnishment of these funds, the Republic of the Philippines filed a
petition for certiorari and prohibition, arguing that the garnishment violated the doctrine of state
immunity from suit and public policy.

Issues:

●​ WON the consent of the State to be sued includes consent to the execution of judgment on public
funds?

Ruling:

NO. The decision rests on the doctrine of state immunity from execution, which provides that
while the State may be sued, its public funds cannot be subjected to execution without legislative
approval. This principle is intended to ensure that public funds are protected from garnishment to
maintain uninterrupted government services. In this instance, the court applied the rule to the
AFP's funds, which were specifically allocated for military pensions and salaries. These funds are
considered public and thus immune from execution unless authorized by a legislative
appropriation. The court held that issuing an alias writ of execution without such authorization
was unlawful, as it would jeopardize essential government operations, particularly the AFP's
functions. The Court emphasized that although the State may waive immunity to allow itself to be
sued, this does not extend to the execution of judgments against public funds. These funds remain
protected unless there is a lawful legislative appropriation, ensuring that public resources are used
only for their designated purposes.

91.​ Municipality of San Miguel v. Fernandez, 130 SCRA 56

Key Facts:

●​ The Municipality of San Miguel, Bulacan, was sued by the heirs of Carlos Imperio to reclaim
property that had been donated to the municipality.
●​ The Court of First Instance ruled in favor of the heirs, ordering the partial revocation of the Deed
of Donation and the return of certain lots. Additionally, the court ordered the Municipality to pay
the heirs P64,440 in rental fees and P3,000 in attorney’s fees, among other costs.
 ●​ After the judgment became final, the heirs moved for the execution of the decision, prompting the
issuance of an alias writ of execution by Judge Oscar C. Fernandez, directed at the Municipality's
funds held by the Municipal and Provincial Treasurers.
●​ The Municipality of San Miguel filed a motion to quash the writ, arguing that its funds were
public funds, which are exempt from execution.

Issues:

●​ WON the consent of the Municipality of San Miguel to be sued includes consent to the execution
of a judgment against its public funds?

Ruling:

●​ NO. The Court based its decision on the principle that public funds are exempt from execution.
This principle is rooted in the doctrine of state immunity, which, even when a government unit
consents to be sued, does not extend to the execution of public funds. Presidential Decree No. 477
(Local Fiscal Administration) further supports this, stating that no money can be disbursed from a
local treasury without a lawful appropriation or statutory authority. Public funds are intended for
the accomplishment of the purposes for which municipal corporations are created, and allowing
their execution would undermine these purposes. In this case, the Court applied this principle to
the funds of the Municipality of San Miguel, which were public funds allocated for government
functions. The court determined that the funds could not be garnished to satisfy a private
judgment since there was no legislative appropriation authorizing their use for this purpose. The
issuance of a writ of execution against the municipality’s funds was thus improper and unlawful.
The Court concluded that consent to be sued does not equate to consent to execution.