REPUBLIC OF THE PHILIPPINES, PLAINTIFF-APPELLANT, VS. PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, DEFENDANT-APPELLANT.

Republic versus Philippine Long Distance Telephone Company

The Case

This is the case of the Republic versus Philippine Long Distance Telephone Company, decided in January 1969. The Republic, acting through its Bureau of Telecommunications, sued the telephone company to compel it to keep the government's telephone system connected to the company's lines, and to restrain the company from cutting those connections. The company, in turn, insisted it had the right to disconnect because the government was competing with it. The case matters because it tells us how far the State may go when a public utility refuses to deal with it: not by forcing a contract, but by the sovereign power of eminent domain.

Procedural History

The Republic filed its complaint in the Court of First Instance of Manila, together with an application for a preliminary injunction. The trial court immediately issued a mandatory order requiring the company to reconnect the severed trunk lines and to keep the connections open. After trial, the court ruled that it could not compel the company to enter into an agreement, since the parties had not agreed on its terms. It also held that the Bureau was not limited to serving government offices alone, and that the Bureau was not guilty of fraud or misuse of the company's poles. Because of the serious public prejudice that disconnection would cause, the court made the preliminary injunction permanent, yet it dismissed both the complaint and the counterclaims. Both parties appealed directly to the Supreme Court upon a joint record on appeal.

Facts

The Bureau of Telecommunications was created in July 1947 under Executive Order Number 94. Soon after, it set up its own Government Telephone System, using its own appropriation and equipment, and renting trunk lines from the Philippine Long Distance Telephone Company so that government offices could call private parties. The application for these trunk lines was in the usual form, binding the applicant to the company's rules, one of which prohibited public use of a subscriber's service. From 1948 onward, however, the Bureau extended its service to the general public, using the same rented trunk lines and prescribing its own schedule of rates.

Meanwhile, the company had a long-standing arrangement with RCA Communications, Incorporated, whereby overseas telephone messages received by RCA's station were automatically transferred to the company's lines, and the tolls were divided between them. In February 1956, the company gave RCA notice that it would terminate that contract in February 1958. In early 1958, the Bureau entered into a joint overseas telephone service with RCA, and it began operating this service on the very day the company's notice took effect.

In April 1958, the company complained to the Bureau that the trunk lines were being used not only for government offices but for the general public, in competition with its business, and warned that it would sever the connections if the violations were not stopped. Receiving no reply, the company disconnected the trunk lines at midnight on 12 April 1958. The result was the isolation of the Philippines from the rest of the world in telephone services, except the United States. At that time the Bureau was maintaining 5,000 telephones with 5,000 pending applications, while the company was maintaining 60,000 telephones with 20,000 pending applications. Neither could fill the demand. The Republic then sued.

Issues

• Whether or not the Republic may compel the telephone company to enter into an interconnecting contract against its will.
• Whether or not the Republic may, in the exercise of the power of eminent domain, require the company to permit interconnection of the two telephone systems upon payment of just compensation.
• Whether or not the Court of First Instance had jurisdiction over the action, rather than the Public Service Commission.
• Whether or not the Bureau of Telecommunications was empowered to engage in commercial telephone business and to serve the general public.
• Whether or not the company was justified in disconnecting the trunk lines.
• Whether or not the company is entitled to compensation for the use of its poles by the Bureau.

Applicable Provisions

Section 79 of Executive Order Number 94, reorganizing the Bureau of Telecommunications, provides:

SEC. 79. The Bureau of Telecommunications shall exercise the following powers and duties: (b) To investigate, consolidate, negotiate for, operate and maintain wire-telephone or radio telephone communication service throughout the Philippines by utilizing such existing facilities in cities, towns, and provinces as may be found feasible and under such terms and conditions or arrangements with the present owners or operators thereof as may be agreed upon to the satisfaction of all concerned; (c) To prescribe, subject to approval by the Department Head, equitable rates of charges for messages handled by the system and/or for time-calls and other services that may be rendered by said system;

These powers are the basis for holding that the Bureau may serve the general public and charge rates, and that nothing in them excludes condemnation where unreasonable terms are exacted.

Section 14 of the company's charter, Act Number 3436, provides:

Sec. 14. The rights herein granted shall not be exclusive, and the rights and power to grant to any corporation, association or person other than the grantee franchise for the telephone or electrical transmission of messages or signals shall not be impaired or affected by the granting of this franchise: ---.

This defeats the claim of unfair competition, because the company's franchise is expressly non-exclusive.

Section 19 of the same charter provides:

the privilege without compensation of using the poles of the grantee to attach one ten-pin cross-arm, and to install, maintain and operate wires of its telegraph system thereon: Provided, however, That the Bureau of Posts shall have the right to place additional cross-arms and wires on the poles of the grantee by paying a compensation, the rate of which is to be agreed upon by the Director of Posts and the grantee;

This is the provision invoked by the company in its counterclaim for the use of its poles, which the Court rejected.

Ruling

On the first issue, the Court agreed that parties cannot be coerced to enter into a contract where there is no agreement on its principal terms and conditions. Freedom to stipulate is of the essence of our contractual system, and a contract tainted by violence, intimidation or undue influence may be annulled.

On the second issue, however, the Court held that while the Republic may not compel a contract, it may, in the exercise of the sovereign power of eminent domain, require the telephone company to permit interconnection, subject to payment of just compensation to be determined by the court. The power of eminent domain need not take title or possession; it may impose only a burden on the property, as in an easement of right of way. The beneficiary would be the users of both systems, so the condemnation is for public use. The Court then treated the case as one of condemnation of services independently of contract, and directed the trial court to determine just and reasonable compensation instead of dismissing the petition.

On the third issue, the Court held that the trial court had jurisdiction. The Public Service Commission has no authority to pass upon actions for the taking of private property under the sovereign right of eminent domain. Moreover, the government's network is a public service owned by the Republic and operated by a national instrumentality, hence exempt from the Commission's jurisdiction, supervision and control.

On the fourth issue, the Court held that the Bureau was empowered to serve the general public. Nothing in its powers limits it to non-commercial activities. Erroneous application of the law by public officers does not block its subsequent correct application, and the Government is never estopped by the mistake or error of its agents.

On the fifth issue, the Court held that the disconnection was unjustified. The competition was merely hypothetical, since demand far exceeded what either could supply. The franchise was non-exclusive. The company knew or should have known that the use by the Bureau was public and all-embracing, and its acceptance of rentals for years implied assent to the extended use. Having voluntarily made the connection and allowed the public to patronize it, the company could not unilaterally sever it.

On the sixth issue, the Court found no proof that the telephone wires strained the poles more than telegraph wires, or that more than one ten-pin cross-arm was attached. So long as the burden on the poles is not increased, the reservation in favor of the government's telegraph wires extends to its telephone lines.

Doctrine

A public utility cannot be compelled to enter into a contract where the parties have not agreed on its principal terms and conditions, because freedom to stipulate is of the essence of our contractual system. But the State may, in the exercise of the sovereign power of eminent domain, require a public utility to permit interconnection of telephone systems and to render services in the general interest, upon payment of just compensation. This burden may be imposed without loss of title and possession, as in an easement of right of way. The Public Service Commission has no authority over actions for the taking of private property under eminent domain, and the government's own public services are exempt from its jurisdiction. A non-exclusive franchise, coupled with the utility's inability to meet demand and its long acquiescence in the interconnection, bars it from unilaterally severing the connection.

Disposition

The Supreme Court affirmed the trial court's ruling that the Bureau may serve the public and that the disconnection was unjustified, but set aside the dismissal of the Republic's complaint and remanded the case for determination of just compensation for the use of the company's facilities.

Remember This

The single line to memorize: the State cannot force a contract, but it can condemn the service through eminent domain upon just compensation. Examiners use this case to test the distinction between contractual consent and the sovereign power of eminent domain over public utilities.