KILOSBAYAN, INCORPORATED, JOVITO R. SALONGA, CIRILO A. RIGOS, ERME CAMBA, EMILIO C. CAPULONG, JR., JOSE T. APOLO, EPHRAIM TENDERO, FERNANDO SANTIAGO, JOSE ABCEDE, CHRISTINE TAN,…

This is a special civil action for prohibition and injunction,
with a prayer for a temporary restraining order and preliminary injunction,
which seeks to prohibit and restrain the implementation of the “Contract
of Lease” executed by the Philippine Charity Sweepstakes Office (PCSO) and
the Philippine Gaming Management Corporation (PGMC) in connection with the
on-line lottery system, also known as “lotto.”

Petitioner Kilosbayan, Incorporated (KILOSBAYAN) avers that it is
a non-stock domestic corporation composed of civic-spirited citizens, pastors,
priests, nuns, and lay leaders who are committed to the cause of truth,
justice, and national renewal. The rest
of the petitioners, except Senators Freddie Webb and Wigberto Tañada and
Representative Joker P. Arroyo, are suing in their capacities as members of the
Board of Trustees of KILOSBAYAN and as taxpayers and concerned citizens. Senators Webb and Tañada and Representative
Arroyo are suing in their capacities as members of Congress and as taxpayers
and concerned citizens of the Philippines.

The pleadings of the parties disclose the factual antecedents
which triggered off the filing of this petition.

Pursuant to Section 1 of the charter of the PCSO (R.A. No. 1169,
as amended by B.P. Blg. 42) which grants it the authority to hold and conduct
“charity sweepstakes races, lotteries and other similar activities,”
the PCSO decided to establish an on-line lottery system for the purpose of
increasing its revenue base and diversifying its sources of funds. Sometime before March 1993, after learning
that the PCSO was interested in operating an on-line lottery system, the
Berjaya Group Berhad, “a multinational company and one of the ten largest
public companies in Malaysia,” long “engaged in, among others,
successful lottery operations in Asia, running both Lotto and Digit games, thru
its subsidiary, Sports Toto Malaysia,” with its “affiliate, the
International Totalizator Systems, Inc., … an American public company engaged
in the international sale or provision of computer systems, softwares,
terminals, training and other technical services to the gaming industry,”
“became interested to offer its services and resources to PCSO.” As
an initial step, Berjaya Group Berhad (through its individual nominees)
organized with some Filipino investors in March 1993 a Philippine corporation
known as the Philippine Gaming Management Corporation (PGMC), which “was
intended to be the medium through which the technical and management services
required for the project would be offered and delivered to PCSO.”^[1]

Before August 1993, the PCSO formally issued a Request for
Proposal (RFP) for the Lease Contract of an on-line lottery system for the
PCSO.^[2]
Relevant provisions of the RFP are the following:

“1. EXECUTIVE SUMMARY

x x x

1.2. PCSO is seeking
a suitable contractor which shall build, at its own expense, all the facilities
(‘Facilities’) needed to operate and maintain a nationwide on-line lottery
system. PCSO shall lease the Facilities
for a fixed percentage of quarterly gross receipts. All receipts from ticket sales shall be turned over directly to
PCSO. All capital, operating expenses
and expansion expenses and risks shall be for the exclusive account of the
Lessor.

x x x

1.4. The lease shall be for a period not exceeding fifteen (15)
years.

1.5. The Lessor is
expected to submit a comprehensive nationwide lottery development plan
(‘Development Plan’) which will include the game, the marketing of the games,
and the logistics to introduce the games to all the cities and municipalities
of the country within five (5) years.

x x x

1.7. The Lessor
shall he selected based on its technical expertise, hardware and software
capability, maintenance support, and financial resources. The Development Plan shall have a
substantial bearing on the choice of the Lessor. The Lessor shall be a domestic corporation, with at least sixty
percent (60%) of its shares owned by Filipino shareholders. x x x

The Office of the
President, the National Disaster Control Coordinating Council, the Philippine
National Police, and the National Bureau of Investigation shall be authorized
to use the nationwide telecommunications system of the Facilities Free of
Charge.

1.8. Upon expiration of the lease, the Facilities
shall be owned by PCSO without any additional consideration.^[3]

x x x

2.2. OBJECTIVES

The objectives of PCSO
in leasing the Facilities from a private entity are as follows:

x x x

2.2.2.   Enable PCSO to operate a nationwide on-line
lottery system at no expense or risk to the government.

x x x

2.4. DUTIES AND RESPONSIBILITIES
OF THE LESSOR

x x x

2.4.2.   THE LESSOR

The Proponent is
expected to furnish and maintain the Facilities, including the personnel needed
to operate the computers, the communications network and sales offices under a
build-lease basis. The printing of
tickets shall be undertaken under the supervision and control of PCSO. The Facilities shall enable PCSO to
computerize the entire gaming system.

The Proponent is
expected to formulate and design consumer-oriented Master Games Plan suited to
the marketplace, especially geared to Filipino gaming habits and
preferences. In addition, the Master
Games Plan is expected to include a Product Plan for each game and explain how
each will be introduced into the market. This will be an integral part of the Development Plan which PCSO will
require from the Proponent.

x x x

The Proponent is
expected to provide upgrades to modernize the entire gaming system over the
life of the lease contract.

The Proponent is
expected to provide technology transfer to PCSO technical personnel.^[4]

x x x

7. GENERAL GUIDELINES FOR
PROPONENTS

x x x

Finally, the Proponent
must be able to stand the acid test of proving that it is an entity able to
take on the role of responsible maintainer of the on-line lottery system, and
able to achieve PCSO’s goal of formalizing an on-line lottery system to achieve
its mandated objective.^[5]

x x x

16. DEFINITION OF
TERMS

Facilities: All
capital equipment, computers, terminals, software, nationwide telecommunication
network, ticket sales offices, furnishings, and fixtures; printing costs; cost
of salaries and wages; advertising and promotion expenses; maintenance costs;
expansion and replacement costs; security and insurance, and all other related
expenses needed to operate nationwide on-line lottery system.”^[6]

Considering the above citizenship requirement, the PGMC claims
that the Berjaya Group “undertook to reduce its equity stakes in PGMC to
40%,” by selling 35% out of the original 75% foreign stockholdings to
local investors.

On 15 August 1993, PGMC submitted its bid to the PCSO.^[7]

The bids were evaluated by the Special Pre-Qualification Bids and
Awards Committee (SPBAC) for the on-line lottery and its Bid Report was
thereafter submitted to the Office of the President.^[8]
The submission was preceded by complaints by the Committee’s Chairperson, Dr.
Mita Pardo de Tavera.^[9]

On 21 October 1993, the Office of the President announced that it
had given the respondent PGMC the go-signal to operate the country’s on-line
lottery system and that the corresponding implementing contract would be
submitted not later than 8 November 1993 “for final clearance and approval
by the Chief Executive.”^[10]
This announcement was published in the Manila Standard, Philippine Daily
Inquirer, and the Manila Times on 29 October 1993.^[11]

On 4 November 1993, KILOSBAYAN sent an open letter to President
Fidel V. Ramos strongly opposing the setting up of the on-line lottery system
on the basis of serious moral and ethical considerations.^[12]

At the meeting of the Committee on Games and Amusements of the
Senate on 12 November 1993, KILOSBAYAN reiterated its vigorous opposition to
the on-line lottery on account of its immorality and illegality.^[13]

On 19 November 1993, the media reported that despite the
opposition, “Malacañang will push through with the operation of an on-line
lottery system nationwide and that it is actually the respondent PCSO which
will operate the lottery while the winning corporate bidders are merely
“lessors.”^[14]

On 1 December 1993, KILOSBAYAN requested copies of all documents
pertaining to the lottery award from Executive Secretary Teofisto Guingona,
Jr. In his answer of 17 December 1993,
the Executive Secretary informed KILOSBAYAN that the requested documents would
be duly transmitted before the end of the month.^[15] However, on that same date, an agreement
denominated as “Contract of Lease” was finally executed by respondent
PCSO and respondent PGMC.^[16]
The President, per the press statement issued by the Office of the President,
approved it on 20 December 1993.^[17]

In view of their materiality and relevance, we quote the
following salient provisions of the Contract of Lease:

“1. DEFINITIONS

The following words and terms shall have the following respective
meanings:

1.1      Rental Fee — Amount to be paid by PCSO to
the LESSOR as compensation for the fulfillment of the obligations of the LESSOR
under this Contract, including, but not limited to the lease of the Facilities.

x x x

1.3      Facilities — All capital equipment,
computers, terminals, software (including source codes for the On-Line Lottery
application software for the terminals, telecommunications and central
systems), technology, intellectual property rights, telecommunications network,
and furnishings and fixtures.

1.4      Maintenance and Other Costs — All costs
and expenses relating to printing, manpower, salaries and wages, advertising
and promotion, maintenance, expansion and replacement, security and insurance,
and all other related expenses needed to operate an On-Line Lottery System,
which shall be for the account of the LESSOR. All expenses relating to the setting-up, operation and maintenance of
ticket sales offices of dealers and retailers shall be borne by PCSO’s dealers
and retailers.

1.5      Development Plan — The detailed plan of
all games, the marketing thereof, number of players, value of winnings and the
logistics required to introduce the games, including the Master Games Plan as
approved by PCSO, attached hereto as Annex “A”, modified as necessary
by the provisions’ of this Contract.

x x x

1.8      Escrow Deposit — The proposal deposit in
the sum of Three Hundred Million Pesos (P300,000,000.00) submitted by the
LESSOR to PCSO pursuant to the requirements of the Request for Proposals.

2. SUBJECT MATTER OF THE LEASE

The LESSOR shall build,
furnish and maintain at its own expense and risk the Facilities for the On-Line
Lottery System of PCSO in the Territory on an exclusive basis. The LESSOR shall bear all Maintenance and
Other Costs as defined herein.

x x x

3.    RENTAL FEE

For and in consideration
of the performance by the LESSOR of its obligations herein, PCSO shall pay
LESSOR a fixed Rental Fee equal to four point nine percent (4.9%) of gross
receipts from ticket sales, payable net of taxes required by law to be
withheld, on a semi-monthly basis. Goodwill, franchise and similar fees shall belong to PCSO.

4.    LEASE PERIOD

The period of the lease
shall commence ninety (90) days from the date of effectivity of this Contract
and shall run for a period of eight (8) years thereafter, unless sooner
terminated in accordance with this Contract.

5.    RIGHTS AND OBLIGATIONS OF PCSO AS OPERATOR OF THE ON-LINE LOTTERY SYSTEM

PCSO shall be the sole and individual operator of the On-Line
Lottery System. Consequently:

5.1         PCSO shall have sole responsibility to
decide whether to implement, fully or partially, the Master Games Plan of the
LESSOR. PCSO shall have the sole
responsibility to determine the time for introducing new games to the
market. The Master Games Plan included
in Annex “A” hereof is hereby approved by PCSO.

5.2         PCSO shall have control over revenues
and receipts of whatever nature from the On-Line Lottery System. After paying the Rental Fee to the LESSOR,
PCSO shall have exclusive responsibility to determine the Revenue Allocation
Plan; Provided, that the same shall be consistent with the requirement of R.A.
No. 1169, as amended, which fixes a prize fund of fifty five percent (55%) on
the average.

5.3         PCSO shall have exclusive control over
the printing of tickets, including but not limited to the design, text, and
contents thereof.

5.4         PCSO shall have sole responsibility
over the appointment of dealers or retailers throughout the country. PCSO shall appoint the dealers and retailers
in a timely manner with due regard to the implementation timetable of the
On-Line Lottery System. Nothing herein
shall preclude the LESSOR from recommending dealers or retailers for
appointment by PCSO, which shall act on said recommendation within forty-eight
(48) hours.

5.5         PCSO shall designate the necessary
personnel to monitor and audit the daily performance of the On-Line Lottery
System. For this purpose, PCSO
designees shall be given, free of charge, suitable and adequate space, furniture
and fixtures, in all offices of the LESSOR, including but not limited to its
headquarters, alternate site, regional and area offices.

5.6         PCSO
shall have the responsibility to resolve, and exclusive jurisdiction
over, all matters involving the operation of the On-Line Lottery System not otherwise
provided in this Contract.

5.7         PCSO shall promulgate procedural and
coordinating rules governing all activities relating to the On-Line Lottery
System.

5.8         PCSO will be responsible for the
payment of prize monies, commissions to agents and dealers, and taxes and
levies (if any) chargeable to the operator of the On-Line Lottery System. The LESSOR will bear all other Maintenance
and Other Costs, except as provided in Section 1.4.

5.9         PCSO shall assist the LESSOR in the
following:

5.9.1      Work permits for the LESSOR’s staff;

5.9.2      Approvals for importation of the
Facilities;

5.9.3      Approvals and consents for the On-Line
Lottery System; and

5.9.4      Business and premises licenses for all
offices of the LESSOR and licenses for the telecommunications network.

5.10    In the event that PCSO shall pre-terminate
this Contract or suspend the operation of the On-Line Lottery System, in breach
of this Contract and through no fault of the LESSOR, PCSO shall promptly, and
in any event not later than sixty (60) days, reimburse the LESSOR the amount of
its total investment cost associated with the On-Line Lottery System, including
but not limited to the cost of the Facilities, and further compensate the
LESSOR for loss of expected net profit after tax, computed over the unexpired
term of the lease.

6.    DUTIES AND RESPONSIBILITIES OF THE LESSOR

The LESSOR is one of not
more than three (3) lessors of similar facilities for the nationwide On-Line
Lottery System of PCSO. It is
understood that the rights of the LESSOR are primarily those of a lessor of the
Facilities, and consequently, all rights involving the business aspects of the
use of the Facilities are within the jurisdiction of PCSO. During the term of the lease, the LESSOR
shall:

6.1 Maintain and preserve its corporate existence,
rights and privileges, and conduct its business in an orderly, efficient, and
customary manner.

6.2         Maintain insurance coverage with
insurers acceptable to PCSO on all Facilities.

6.3         Comply with all laws, statues, rules
and regulations, orders and directives, obligations and duties by which it is
legally bound.

6.4         Duly pay and discharge all taxes,
assessments and government charges now and hereafter imposed of whatever nature
that may be legally levied upon it.

6.5         Keep all the Facilities in fail safe
condition and, if necessary, upgrade, replace and improve the Facilities from
time to time as new technology develops, in order to make the On-Line Lottery
System more cost-effective and/or competitive, and as may be required by PCSO. PCSO shall not impose such requirements
unreasonably nor arbitrarily.

6.6         Provide PCSO with management terminals
which will allow real-time monitoring of the On-Line Lottery System.

6.7         Upon effectivity of this Contract,
commence the training of PCSO and other local personnel and the transfer of
technology and expertise, such that at the end of the term of this Contract,
PCSO will be able to effectively take-over the Facilities and efficiently
operate the On-Line Lottery System.

6.8         Undertake a positive advertising and
promotions campaign for both institutional and product lines without engaging
in negative advertising against other lessors.

6.9         Bear all expenses and risks relating to
the Facilities including, but not limited to, Maintenance and Other Costs and:

x x x

6.10 Bear all risks if the revenues from ticket
sales, on an annualized basis, are insufficient to pay the entire prize money.

6.11 Be, and is hereby, authorized to collect and
retain for its own account, a security deposit from dealers and retailers, in
an amount determined with the approval of PCSO, in respect of equipment
supplied by the LESSOR. PCSO’s approval
shall not be unreasonably withheld. x x
x

6.12     Comply with procedural and coordinating
rules issued by PCSO.

7.    REPRESENTATIONS AND WARRANTIES

The LESSOR represents and warrants that:

7.1 The LESSOR is a corporation duly organized
and existing under the laws of the Republic of the Philippines, at least sixty
percent (60%) of the outstanding capital stock of which is owned by Filipino
shareholders. The minimum required
Filipino equity participation shall not be impaired through voluntary or
involuntary transfer, disposition, or sale of shares of stock by the present
stockholders.

7.2 The LESSOR and its Affiliates have the full
corporate and legal power and authority to own and operate their properties and
to carry on their business in the place where such properties are now or may be
conducted. x x x

7.3 The LESSOR has or has access to all the
financing and funding requirements to promptly and effectively carry out the
terms of this Contract. x x x

7.4 The LESSOR has or has access to all the
managerial and technical expertise to promptly and effectively carry out the
terms of this Contract. x x x

x x x

10. TELECOMMUNICATIONS NETWORK

The LESSOR shall
establish a telecommunications network that will connect all municipalities and
cities in the Territory in accordance with, at the LESSOR’s option, either of
the LESSOR’s proposals (or a combinations of both such proposals) attached
hereto as Annex “B,” and under the following PCSO schedule:

x x x

PCSO may, at its option,
require the LESSOR to establish the telecommunications network in accordance
with the above Timetable in provinces where the LESSOR has not yet installed
terminals. Provided, that such
provinces have existing nodes. Once a
municipality or city is serviced by land lines of a licensed public telephone
company, and such lines are connected to Metro Manila, then the obligation of
the LESSOR to connect such municipality or city through a telecommunications
network shall cease with respect to such municipality or city.

The voice facility will
cover the four offices of the Office of the President, National Disaster
Control Coordinating Council, Philippine National Police and the National
Bureau of Investigation, and each city and municipality in the Territory except
Metro Manila, and those cities and municipalities which have easy telephone
access from these four offices. Voice calls
from the four offices shall be transmitted via radio or VSAT to the remote
municipalities which will be connected to this voice facility through wired
network or by radio. The facility shall
be designed to handle four private conversations at any one time.

x x x

13. STOCK DISPERSAL PLAN

Within two (2) years from
the effectivity of this Contract, the LESSOR shall cause itself to be listed in
the local stock exchange and offer at least twenty five percent (25%) of its
equity to the public.

14. NON-COMPETITION

The LESSOR shall not, directly
or indirectly, undertake any activity or business in competition with or
adverse to the On-Line Lottery System of PCSO unless it obtains the latter’s
prior written consent thereto.

15. HOLD HARMLESS CLAUSE

15.1 The LESSOR shall
at all times protect and defend, at its cost and expense, PCSO from and against
any and all liabilities and claims for damages and/or suits for or by reason of
any deaths of, or any injury or injuries to any person or persons, or damages
to property of any kind whatsoever, caused by the LESSOR, its subcontractors,
its authorized agents or employees, from any cause or causes whatsoever.

15.2 The LESSOR
hereby covenants and agrees to indemnify and hold PCSO harmless from all
liabilities, charges, expenses (including reasonable counsel fees) and costs on
account of or by reason of any such death or deaths, injury or injuries,
liabilities, claims, suits or losses caused by the LESSOR’S fault or
negligence.

15.3 The LESSOR shall
at all times protect and defend, at its own cost and expense, its title to the
facilities and PCSO’s interest therein from and against any and all claims for
the duration of the Contract until transfer to PCSO of ownership of the
serviceable Facilities.

16. SECURITY

16.1 To ensure
faithful compliance by the LESSOR with the terms of the Contract, the LESSOR
shall secure a Performance Bond from a reputable insurance company or companies
acceptable to PCSO.

16.2 The Performance
Bond shall be in the initial amount of Three Hundred Million Pesos
(P300,000,000.00), to its U.S. dollar equivalent, and shall be renewed to cover
the duration of the Contract. However,
the Performance Bond shall be reduced proportionately to the percentage of
unencumbered terminals installed; Provided, that the Performance Bond shall in
no case be less than One Hundred Fifty Million Pesos (P150,000,000.00).

16.3    The LESSOR may at its option maintain its
Escrow Deposit as the Performance Bond. x x x

17. PENALTIES

17.1    Except as may be provided in Section 17.2,
should the LESSOR fail to take remedial measures within seven (7) days, and
rectify the breach within thirty (30) days, from written notice by PCSO of any
wilfull or grossly negligent violation of the material terms and conditions of
this Contract, all unencumbered Facilities shall automatically become the
property of PCSO without consideration and without need for further notice or
demand by PCSO. The Performance Bond
Shall likewise be forfeited in favor of PCSO.

17.2    Should the LESSOR fail to comply with the
terms of the Timetables provided in Section 9 and 10, it shall be subject to an
initial Penalty of Twenty Thousand Pesos (P20,000.00), per city or municipality
per every month of delay; Provided, that the Penalty shall increase, every
ninety (90) days, by the amount of Twenty Thousand Pesos (P20,000.00) per city
or municipality per month, whilst shall failure to comply persists. The penalty shall be deducted by PCSO from
the rental fee.

x x x

20. OWNERSHIP OF THE FACILITIES

After expiration of the
term of the lease as provided in Section 4, the Facilities directly required
for the On-Line Lottery System mentioned in Section 1.3 shall automatically
belong in full ownership to PCSO without any further consideration other than
the Rental Fees already paid during the effectivity of the lease.

21. TERMINATION OF THE LEASE

PCSO may terminate this Contract for any breach of the material
provisions of this Contract, including the following:

21.1 The LESSOR is
insolvent or bankrupt or unable to pay its debts, stops or suspends or
threatens to stop or suspend payment of all or a material part of its debts, or
proposes or makes a general assignment or an arrangement or compositions with
or for the benefit of its creditors; or

21.2 An order is made
or an effective resolution passed for the winding up or dissolution of the
LESSOR or when it ceases or threatens to cease to carry on all or a material
part of its operations or business; or

21.3 Any material
statement, representation or warranty made or furnished by the LESSOR proved to
be materially false or misleading;

said termination to take
effect upon receipt of written notice of termination by the LESSOR and failure
to take remedial action within seven (7) days and cure or remedy the same
within thirty (30) days from notice.

Any suspension,
cancellation or termination of this Contract shall not relieve the LESSOR of
any liability that may have already accrued hereunder.”

x x x

Considering the denial by the Office of the President of its
protest and the statement of Assistant Executive Secretary Renato Corona that
“only a court injunction can stop Malacañang,” and the imminent
implementation of the Contract of Lease in February 1994, KILOSBAYAN, with its
co-petitioners, filed on 28 January 1994 this petition.

In support of the petition, the petitioners claim that:

“X X X THE OFFICE OF
THE PRESIDENT, ACTING THROUGH RESPONDENTS EXECUTIVE SECRETARY AND/OR ASSISTANT
EXECUTIVE SECRETARY FOR LEGAL AFFAIRS, AND THE PCSO GRAVELY ABUSE[D] THEIR
DISCRETION AND/OR FUNCTIONS TANTAMOUNT TO LACK OF JURISDICTION AND/OR AUTHORITY
IN RESPECTIVELY: (A) APPROVING THE
AWARD OF THE CONTRACT TO, AND (B) ENTERING INTO THE SO-CALLED ‘CONTRACT OF
LEASE’ WITH, RESPONDENT PGMC FOR THE INSTALLATION, ESTABLISHMENT AND OPERATION
OF THE ON-LINE LOTTERY AND TELECOMMUNICATION SYSTEMS REQUIRED AND/OR AUTHORIZED
UNDER THE SAID CONTRACT, CONSIDERING THAT:

a) Under Section 1 of the Charter of the PCSO,
the PCSO is prohibited from holding and conducting lotteries ‘in collaboration,
association or joint venture with any person, association, company or entity’;

b) Under Act No. 3846 and established
jurisprudence, a Congressional franchise is required before any person may be
allowed to establish and operate said telecommunications system;

c) Under Section 11, Article XII of the
Constitution, a less than 60% Filipino-owned and/or controlled corporation,
like the PGMC, is disqualified from operating a public service, like the said
telecommunications system; and

d) Respondent PGMC is not authorized by its
charter and under the Foreign Investments Act (R.A. No. 7042) to install,
establish and operate the on-line lotto and telecommunications systems.”^[18]

Petitioners submit that the PCSO cannot validly enter into the
assailed Contract of Lease with the PGMC because it is an arrangement wherein
the PCSO would hold and conduct the on-line lottery system in
“collaboration” or “association” with the PGMC, in violation
of Section 1(B) of R.A. No. 1169, as amended by B.P. Blg. 42, which prohibits
the PCSO from holding and conducting charity sweepstakes races, lotteries, and
other similar activities “in collaboration, association or joint venture
with any person, association, company or entity, foreign or domestic.”
Even granting arguendo that a lease of facilities is not within the
contemplation of “collaboration” or “association,” an
analysis, however, of the Contract of Lease clearly shows that there is a
“collaboration, association, or joint venture between respondents PCSO and
PGMC in the holding of the On-Line Lottery System,” and that there are
terms and conditions of the Contract “showing that respondent PGMC is the
actual lotto operator and not respondent PCSO.”^[19]

The petitioners also point out that paragraph 10 of the Contract
of Lease requires or authorizes PGMC to establish a telecommunications network
that will connect all the municipalities and cities in the territory. However, PGMC cannot do that because it has
no franchise from Congress to construct, install, establish, or operate the
network pursuant to Section 1 of Act No. 3846, as amended. Moreover, PGMC is a 75% foreign-owned or
controlled corporation and cannot, therefore, be granted a franchise for that
purpose because of Section 11, Article XII of the 1987 Constitution. Furthermore, since “the subscribed
foreign capital” of the PGMC “comes to about 75%, as shown by
paragraph EIGHT of its Articles of Incorporation,” it cannot lawfully
enter into the contract in question because all forms of gambling — and
lottery is one of them — are included in the so-called foreign investments
negative list under the Foreign Investments Act (R.A. No. 7042) where only up
to 40% foreign capital is allowed.^[20]

Finally, the petitioners insist that the Articles of
Incorporation of PGMC do not authorize it to establish and operate an on-line
lottery and telecommunications systems.^[21]

Accordingly, the petitioners pray that we issue a temporary
restraining order and a writ of preliminary injunction commanding the
respondents or any person acting in their places or upon their instructions to
cease and desist from implementing the challenged Contract of Lease and, after
hearing the merits of the petition, that we render judgment declaring the Contract
of Lease void and without effect and making the injunction permanent.^[22]

We required the respondents to comment on the petition.

In its Comment filed on 1 March 1994, private respondent PGMC
asserts that “(1) [it] is merely an independent contractor for a piece of
work, (i.e., the building and maintenance of a lottery system to be used
by PCSO in the operation of its lottery franchise); and (2) as such independent
contractor, PGMC is not a co-operator of the lottery franchise with PCSO, nor
is PCSO sharing its franchise, ‘in collaboration, association or joint venture’
with PGMC — as such statutory limitation is viewed from the context, intent,
and spirit of Republic Act 1169, as amended by Batas Pambansa 42.” It
further claims that as an independent contractor for a piece of work, it is
neither engaged in “gambling” nor in “public service”
relative to the telecommunications network, which the petitioners even consider
as an “indispensable requirement” of an on-line lottery system. Finally, it states that the execution and
implementation of the contract does not violate the Constitution and the laws;
that the issue on the “morality” of the lottery franchise granted to
the PCSO is political and not judicial or legal, which should be ventilated in
another forum; and that the “petitioners do not appear to have the legal
standing or real interest in the subject contract and in obtaining the reliefs
sought.”^[23]

In their Comment filed by the Office of the Solicitor General,
public respondents Executive Secretary Teofisto Guingona, Jr., Assistant
Executive Secretary Renato Corona, and the PCSO maintain that the contract of
lease in question does not violate Section 1 of R.A. No. 1169, as amended by
B.P. Blg. 42, and that the petitioners’ interpretation of the phrase “in
collaboration, association or joint venture” in Section 1 is “much
too narrow, strained and utterly devoid of logic” for it “ignores the
reality that PCSO, as a corporate entity, is vested with the basic and
essential prerogative to enter into all kinds of transactions or contracts as
may be necessary for the attainment of its purposes and objectives.” What
the PCSO charter “seeks to prohibit is that arrangement akin to a ‘joint
venture’ or partnership where there is ‘community of interest in the business,
sharing of profits and losses, and a mutual right of control,’ a characteristic
which does not obtain in a contract of lease.” With respect to the
challenged Contract of Lease, the “role of PGMC is limited to that of a
lessor of the facilities” for the on-line lottery system; in “strict
technical and legal sense,” said contract “can be categorized as a
contract for a­ piece of work as defined in Articles 1467, 1713 and 1644 of the
Civil Code.”

They further claim that the establishment of the telecommunications
system stipulated in the Contract of Lease does not require a congressional
franchise because PGMC will not operate a public utility; moreover, PGMC’s
“establishment of a telecommunications system is not intended to establish
a telecommunications business,” and it has been held that where the
facilities are operated “not for business purposes but for its own
use,” a legislative franchise is not required before a certificate of
public convenience can be granted.^[24]
Even granting arguendo that PGMC is a public utility, pursuant to Albano
S. Reyes,^[25]
“it can establish a telecommunications system even without a legislative
franchise because not every public utility is required to secure a legislative
franchise before it could establish, maintain, and operate the service”;
and, in any case, “PGMC’s establishment of the telecommunications system
stipulated in its contract of lease with PCSO falls within the exceptions under
Section 1 of Act No. 3846 where a legislative franchise is not necessary for
the establishment of radio stations.”

They also argue that the contract does not violate the Foreign
Investment Act of 1991; that the Articles of Incorporation of PGMC authorize it
to enter into the Contract of Lease; and that the issues of “wisdom,
morality and propriety of acts of the executive department are beyond the ambit
of judicial review.”

Finally, the public respondents allege that the petitioners have
no standing to maintain the instant suit, citing our resolution in Valmonte
vs. Philippine Charity Sweepstakes Office.^[26]

Several parties filed motions to intervene as petitioners in this
case,^[27]
but only the motion of Senators Alberto Romulo, Arturo Tolentino, Francisco
Tatad, Gloria Macapagal-Arroyo, Vicente Sotto III, John Osmeña, Ramon Revilla,
and Jose Lina^[28]
was granted, and the respondents were required to comment on their petition in
intervention, which the public respondents and PGMC did.

In the meantime, the petitioners filed with the Securities and
Exchange Commission on 29 March 1994 a petition against PGMC for the
nullification of the latter’s General Information Sheets. That case, however, has no bearing in this
petition.

On 11 April 1994, we heard the parties in oral arguments. Thereafter, we resolved to consider the
matter submitted for resolution and pending resolution of the major issues in
this case, to issue a temporary restraining order commanding the respondents or
any person acting in their place or upon their instructions to cease and desist
from implementing the challenged Contract of Lease.

In the deliberation on this case on 26 April 1994, we resolved to
consider only these issues: (a) the locus
standi of the petitioners, and (b) the legality and validity of the
Contract of Lease in the light of Section 1 of R.A. No. 1169, as amended by
B.P. Blg. 42, which prohibits the PCSO from holding and conducting lotteries
“in collaboration, association or joint venture with any person,
association, company or entity, whether domestic or foreign.” On the first
issue, seven Justices voted to sustain the locus standi of the
petitioners, while six voted not to. On
the second issue, the seven Justices were of the opinion that the Contract of
Lease violates the exception to Section 1(B) of R.A. No. 1169, as amended by
B.P. Blg. 42, and is, therefore, invalid and contrary to law. The six Justices stated that they wished to
express no opinion thereon in view of their stand on the first issue. The Chief Justice took no part because one
of the Directors of the PCSO is his brother-in-law.

This case was then assigned to this ponente for the
writing of the opinion of the Court.

The preliminary issue on the locus standi of the
petitioners should, indeed, be resolved in their favor. A party’s standing before this Court is a
procedural technicality which it may, in the exercise of its discretion, set
aside in view of the importance of the issues raised. In the landmark Emergency Powers Cases,^[29]
this Court brushed aside this technicality because “the transcendental
importance to the public of these cases demands that they be settled promptly
and definitely, brushing aside, if we must, technicalities of procedure. (Avelino vs. Cuenco, G.R. No.
L-2821).” Insofar as taxpayers’ suits are concerned, this Court had declared
that it “is not devoid of discretion as to whether or not it should be
entertained,”^[30]
or that it “enjoys an open discretion to entertain the same or not.”^[31]
In De La Llana vs. Alba,^[32]
this Court declared:

“1. The
argument as to the lack of standing of petitioners is easily resolved. As far as Judge de la Llana is concerned, he
certainly falls within the principle set forth in Justice Laurel’s opinion in
People vs. Vera [65 Phil. 56 (1937)]. Thus: ‘The unchallenged rule is
that the person who impugns the validity of a statue must have a personal and
substantial interest in the case such that he has sustained, or will sustain,
direct injury as a result of its enforcement [Ibid, 89].’ The other petitioners
as members of the bar and officers of the court cannot be considered as devoid
of ‘any personal and substantial interest’ on the matter. There is relevance to this excerpt from a
separate opinion in Aquino, Jr. v. Commission on Elections [L-40004, January
31, 1975, 62 SCRA 275]: ‘Then there is
the attack on the standing of petitioners, as vindicating at most what they
consider a public right and not protecting their rights as individuals. This is to conjure the specter of the public
right dogma as an inhibition to parties intent on keeping public officials
staying on the path of constitutionalism. As was so well put by Jaffe: “The protection of private rights is an essential constituent of
public interest and, conversely, without a well-ordered state there could be no
enforcement of private rights. Private
and public interests are, both in a substantive and procedural sense, aspects
of the totality of the legal order.” Moreover, petitioners have
convincingly shown that in their capacity as taxpayers, their standing to sue
has been amply demonstrated. There
would be a retreat from the liberal approach followed in Pascual v. Secretary
of Public Works, foreshadowed by the very decision of People v. Vera where the
doctrine was first fully discussed, if we act differently now. I do not think we are prepared to take that
step. Respondents, however, would hark
back to the American Supreme Court doctrine in Mellon v. Frothingham, with
their claim that what petitioners possess “is an interest which is shared
in common by other people and is comparatively so minute and indeterminate as to
afford any basis and assurance that the judicial process can act on it.”
That is to speak in the language of a bygone era, even in the United
States. For as Chief Justice Warren
clearly pointed out in the later case of Flast v. Cohen, the barrier thus set
up if not breached has definitely been lowered.”

In Kapatiran ng mga Naglilingkod sa
Pamahalaan ng Pilipinas, Inc. vs. Tan,^[33]
reiterated in Basco vs. Philippine Amusements and Gaming Corporation,^[34]
this Court stated:

“Objections to taxpayers’ suits for lack of sufficient
personality standing or interest are, however, in the main procedural
matters. Considering the importance to
the public of the cases at bar, and in keeping with the Court’s duty, under the
1987 Constitution, to determine whether or not the other branches of government
have kept themselves within the limits of the Constitution and the laws and
that they have not abused the discretion given to them, this Court has brushed
aside technicalities of procedure and has taken cognizance of these petitions.”

and in Association of Small Landowners
in the Philippines, Inc. vs. Secretary of Agrarian Reform,^[35]
it declared:

“With particular regard to the requirement of proper party as
applied in the cases before us, we hold that the same is satisfied by the
petitioners and intervenors because each of them has sustained or is in danger
of sustaining an immediate injury as a result of the acts or measures
complained of. [Ex Parte Levitt, 303 US
633]. And even if,
strictly speaking, they are not covered
by the definition, it is still within
the wide discretion of the Court to
waive the requirement and so remove the
impediment to its addressing and resolving
the serious constitutional questions raised.

In the first Emergency Powers Cases, ordinary citizens and
taxpayers were allowed to question the constitutionality of several executive
orders issued by President Quirino although they were invoking only an indirect
and general interest shared in common with the public. The Court dismissed the objective that they
were not proper parties and ruled that the transcendental importance to the
public of these cases demands that they be settled promptly and definitely,
brushing aside, if we must, technicalities of procedure. We have since then applied this exception in
many other cases.” (Emphasis supplied)

In Daza vs. Singson,^[36]
this Court once more said:

“x x x For another, we have early as in the Emergency Powers
Cases that where serious constitutional questions are involved, ‘the
transcendental importance to the public of these cases demands that they be
settled promptly and definitely, brushing aside, if we must, technicalities of
procedure.’ The same policy has since then been consistently followed by the
Court, as in Gonzales vs. Commission on Elections [21 SCRA 774] x x x.”

The Federal Supreme Court of the United States of America has
also expressed its discretionary power to liberalize the rule on locus
standi. In United States vs.
Federal Power Commission and Virginia Rea Association vs. Federal Power
Commission,^[37]
it held:

“We hold that petitioners have standing. Differences of view, however, preclude a
single opinion of the Court as to both petitioners. It would not further clarification of this complicated specialty
of federal jurisdiction, the solution of whose problems is in any event more or
less determined by the specific circumstances of individual situations, to set
out the divergent grounds in support of standing in these cases.”

In line with the liberal policy of this Court on locus standi,
ordinary taxpayers, members of Congress, and even association of planters, and
non-profit civic organizations were allowed to initiate and prosecute actions
before this Court to question the constitutionality or validity of laws, acts,
decisions, rulings, or orders of various government agencies or
instrumentalities. Among such cases
were those assailing the constitutionality of (a) R.A. No. 3836 insofar as it
allows retirement gratuity and commutation of vacation and sick leave to
Senators and Representatives and to elective officials of both Houses of
Congress;^[38]
(b) Executive Order No. 284, issued by President Corazon C. Aquino on 25 July
1987, which allowed members of the cabinet, their undersecretaries, and
assistant secretaries to hold other government offices or positions;^[39]
(c) the automatic appropriation for debt service in the General Appropriations
Act;^[40]
(d) R.A. No. 7056 on the holding of desynchronized elections;^[41]
(e) P.D. No. 1869 (the charter of the Philippine Amusement and Gaming
Corporation) on the ground that it is contrary to morals, public policy, and
order;^[42]
and (f) R.A. No. 6975, establishing the Philippine National Police.^[43]

Other cases where we have followed a liberal policy regarding locus
standi include those attacking the validity or legality of (a) an order
allowing the importation of rice in the light of the prohibition imposed by
R.A. No. 3452;^[44]
(b) P.D. Nos. 991 and 1033 insofar as they proposed amendments to the
Constitution and P.D. No. 1031 insofar as it directed the COMELEC to supervise,
control, hold, and conduct the referendum?plebiscite on 16 October 1976;^[45]
(c) the bidding for the sale of the 3,179 square meters of land at Roppongi,
Minato-ku, Tokyo, Japan;^[46]
(d) the approval without hearing by the Board of Investments of the amended
application of the Bataan Petrochemical Corporation to transfer the site of its
plant from Bataan to Batangas and the validity of such transfer and the shift
of feedstock from naphtha only to naphtha and/or liquefied petroleum gas;^[47]
(e) the decisions, orders, rulings, and resolutions of the Executive Secretary,
Secretary of Finance, Commissioner of Internal Revenue, Commissioner of
Customs, and the Fiscal Incentives Review Board exempting the National Power Corporation
from indirect tax and duties;^[48]
(f) the orders of the Energy Regulatory Board of 5 and 6 December 1990 on the
ground that the hearings conducted on the second provisional increase in oil
prices did not allow the petitioner substantial cross-­examination;^[49]
(g) Executive Order No. 478 which levied a special duty of P0.95 per liter or
P151.05 per barrel of imported crude oil and P1.00 per liter of imported oil
products;^[50]
(h) resolutions of the Commission on Elections concerning the apportionment, by
district, of the number of elective members of Sanggunians;^[51]
and (i) memorandum orders issued by a Mayor affecting the Chief of Police of
Pasay City.^[52]

In the 1975 case of Aquino vs. Commission on Elections,^[53]
this Court, despite its unequivocal ruling that the petitioners therein had no
personality to file the petition, resolved nevertheless to pass upon the issues
raised because of the far-reaching implications of the petition. We did no less in De Guia vs. COMELEC^[54]
where, although we declared that De Guia “does not appear to have locus
standi, a standing in law, a personal or substantial interest,” we
brushed aside the procedural infirmity “considering the importance of the
issue involved, concerning as it does the political exercise of qualified
voters affected by the apportionment, and petitioner alleging abuse of
discretion and violation of the Constitution by respondent.”

We find the instant petition to be of transcendental importance
to the public. The issues it raised are
of paramount public interest and of a category even higher than those involved
in many of the aforecited cases. The
ramifications of such issues immeasurably affect the social, economic, and
moral well­-being of the people even in the remotest barangays of the country
and the counter-productive and retrogressive effects of the envisioned on-line
lottery system are as staggering as the billions in pesos it is expected to
raise. The legal standing then of the
petitioners deserves recognition and, in the exercise of its sound discretion,
this Court hereby brushes aside the procedural barrier which the respondents
tried to take advantage of.

And now on the substantive issue.

Section 1 of R.A. No. 1169, as amended by B.P. Blg. 42, prohibits
the PCSO from holding and conducting lotteries “in collaboration,
association or joint venture with any person, association, company or entity,
whether domestic or foreign.” Section 1 provides:

“Sec. 1. The
Philippine Charity Sweepstakes Office. — The Philippine Charity Sweepstakes Office, hereinafter
designated the Office, shall be the principal government agency for raising and
providing for funds for health programs, medical assistance and services and
charities of national character, and as such shall have the general powers
conferred in section thirteen of Act Numbered One thousand four hundred
fifty-nine, as amended, and shall have the authority:

A. To hold and conduct charity sweepstakes
races, lotteries and other similar activities, in such frequency and manner, as
shall be determined, and subject to such rules and regulations as shall be
promulgated by the Board of Directors.

B. Subject to the approval of the Minister of
Human Settlements, to engage in health and welfare-related investments,
programs, projects and activities which may be profit-oriented,
by itself or in collaboration, association
or joint venture with any person, association, company or
entity, whether domestic or foreign, except for the activities
mentioned in the preceding paragraph (A),
for the purpose of providing for permanent and continuing sources of funds for
health programs, including the expansion of existing ones, medical assistance
and services, and/or charitable grants: Provided, That such investments will not compete with the private sector
in areas where investments are adequate as may be determined by the National
Economic and Development Authority.” (emphasis supplied)

The language of the section is indisputably clear that with
respect to its franchise or privilege “to hold and conduct charity
sweepstakes races, lotteries and other similar activities,” the PCSO cannot
exercise it “in collaboration, association or joint venture” with any
other party. This is the unequivocal
meaning and import of the phrase “except for the activities mentioned in
the preceding paragraph (A),” namely, “charity sweepstakes
races, lotteries and other similar activities.”

B.P. Blg. 42 originated from Parliamentary Bill No. 622, which
was covered by Committee Report No. 103 as reported out by the Committee on Socio-Economic
Planning and Development of the Interim Batasang Pambansa. The original text of paragraph B, Section 1
of Parliamentary Bill No. 622 reads as follows:

“To engage in any and all investments and related
profit-oriented projects or programs and activities by itself or in
collaboration, association or joint venture with any person, association,
company or entity, whether domestic or foreign, for the main purpose of raising
funds for health and medical assistance and services and charitable grants.”^[55]

During the period of committee amendments, the Committee on
Socio-Economic Planning and Development, through Assemblyman Ronaldo B. Zamora,
introduced an amendment by substitution to the said paragraph B such that, as amended,
it should read as follows:

“Subject to the approval of the Minister of Human Settlements,
to engage in health-oriented investments, programs, projects and activities
which may be profit-oriented, by itself or in collaboration, association, or
joint venture with any person, association, company or entity, whether domestic
or foreign, for the purpose of providing for permanent and continuing sources
of funds for health programs, including the expansion of existing ones, medical
assistance and services and/or charitable grants.”^[56]

Before the motion of Assemblyman Zamora for the approval of the
amendment could be acted upon, Assemblyman Davide introduced an amendment to
the amendment:

“MR. DAVIDE.

Mr. Speaker.

THE SPEAKER.

The gentleman from Cebu
is recognized.

MR. DAVIDE.

May I introduce an
amendment to the committee amendment? The amendment would be to insert after ‘foreign’ in the amendment just
read the following: EXCEPT FOR THE
ACTIVITY IN LETTER (A) ABOVE.

When it is
a joint venture or in collaboration with
any entity such collaboration or joint
venture must not include activity letter
(a) which is the holding and conducting
of sweepstakes races, lotteries and other
similar acts.

MR. ZAMORA.

We accept the amendment,
Mr. Speaker.

MR. DAVIDE.

Thank you, Mr. Speaker.

THE SPEAKER.

Is there any objection
to the amendment? (Silence) The
amendment, as amended, is approved.”^[57]

Further amendments to paragraph B were introduced and
approved. When Assemblyman Zamora read
the final text of paragraph B as further amended, the earlier approved
amendment of Assemblyman Davide became “EXCEPT FOR THE ACTIVITIES
MENTIONED IN PARAGRAPH (A)”; and by virtue of the amendment introduced by
Assemblyman Emmanuel Pelaez, the word PRECEDING was inserted before PARAGRAPH. Assemblyman Pelaez introduced other
amendments. Thereafter, the new
paragraph B was approved.^[58]
This is now paragraph B, Section 1 of R.A. No. 1169, as amended by B.P. Blg.
42.

No interpretation of the said provision to relax or circumvent
the prohibition can be allowed since the privilege to hold or conduct charity
sweepstakes races, lotteries, or other similar activities is a franchise
granted by the legislature to the PCSO. It is a settled rule that “in all grants by the government to
individuals or corporations of rights, privileges and franchises, the words are
to be taken most strongly against the grantee …. [o]ne who claims a franchise
or privilege in derogation of the common rights of the public must prove his
title thereto by a grant which is clearly and definitely expressed, and he
cannot enlarge it by equivocal or doubtful provisions or by probable
inferences. Whatever is not
unequivocally granted is withheld. Nothing passes by mere implication.”^[59]

In short then, by the exception explicitly made in paragraph B,
Section 1 of its charter, the PCSO cannot share its franchise with another by
way of collaboration, association or joint venture. Neither can it assign, transfer, or lease such franchise. It has been said that “the rights and
privileges conferred under a franchise may, without doubt, be assigned or
transferred when the grant is to the grantee and assigns, or is authorized by
statute. On the other hand, the right
of transfer or assignment may be restricted by statute or the constitution, or
be made subject to the approval of the grantor or a governmental agency, such
as a public utilities commission, except that an existing right of assignment
cannot be impaired by subsequent legislation.”^[60]

It may also be pointed out that the franchise granted to the PCSO
to hold and conduct lotteries allows it to hold and conduct a species of
gambling. It is settled that “a
statute which authorizes the carrying on of a gambling activity or business
should be strictly construed and every reasonable doubt so resolved as to limit
the powers and rights claimed under its authority.”^[61]

Does the challenged Contract of Lease violate or contravene the
exception in Section 1 of R.A. No. 1169, as amended by B.P. Blg. 42, which
prohibits the PCSO from holding and conducting lotteries “in
collaboration, association or joint venture with” another?

We agree with the petitioners that it does, notwithstanding its
denomination or designation as a Contract of Lease. We are neither convinced nor moved or fazed by
the insistence and forceful arguments of the PGMC that it does not because in
reality it is only an independent contractor for a piece of work, i.e.,
the building and maintenance of a lottery system to be used by the PCSO in the
operation of its lottery franchise. Whether the contract in question is one of lease or whether the PGMC is
merely an independent contractor should not be decided on the basis of the
title or designation of the contract but by the intent of the parties, which
may be gathered from the provisions of the contract itself. Animus hominis est anima scripti. The intention of the party is the soul of
the instrument. In order to give life
or effect to an instrument, it is essential to look to the intention of the
individual who executed it.^[62]
And; pursuant to Article 1371 of the Civil Code, “to determine the
intention of the contracting parties, their contemporaneous and subsequent acts
shall be principally considered.” To put it more bluntly, no one should be
deceived by the title or designation of a contract.

A careful analysis and evaluation of the provisions of the
contract and a consideration of the contemporaneous acts of the PCSO and PGMC
indubitably disclose that the contract is not in reality a contract of lease
under which the PGMC is merely an independent contractor for a piece of work,
but one where the statutorily proscribed collaboration or association,
in the least, or joint venture, at the most, exists between the
contracting parties. Collaboration
is defined as the acts of working together in a joint project.^[63]
Association means the act of a number of persons in uniting together for
some special purpose or business.^[64]
Joint venture is defined as an association of persons or
companies jointly undertaking some commercial enterprise; generally all
contribute assets and share risks. It
requires a community of interest in the performance of the subject matter, a
right to direct and govern the policy in connection therewith, and duty, which
may be altered by agreement to share both in profit and losses.^[65]

The contemporaneous acts of the PCSO and the PGMC reveal that the
PCSO had neither funds of its own nor the expertise to operate and manage an
on-line lottery system, and that although it wished to have the system, it
would have it “at no expense or risks to the government.” Because of
these serious constraints and unwillingness to bear expenses and assume risks,
the PCSO was candid enough to state in its RFP that it is seeking for “a
suitable contractor which shall build, at its own expense, all the facilities
needed to operate and maintain” the system; exclusively bear “all
capital, operating expenses and expansion expenses and risks”; and submit
“a comprehensive nationwide lottery development plan … which will
include the game, the marketing of the games, and the logistics to introduce
the game to all the cities and municipalities of the country within five (5)
years”; and that the operation of the on-line lottery system should be
“at no expense or risk to the government” — meaning itself,
since it is a government-owned and controlled agency. The facilities referred to means “all capital
equipment, computers, terminals, software, nationwide telecommunications
network, ticket sales offices, furnishings and fixtures, printing costs, costs
of salaries and wages, advertising and promotions expenses, maintenance costs,
expansion and replacement costs, security and insurance, and all other related
expenses needed to operate a nationwide on-line lottery system.”

In short, the only contribution the PCSO would have is its
franchise or authority to operate the on-line lottery system; with the rest,
including the risks of the business, being borne by the proponent or
bidder. It could be for this reason
that it warned that “the proponent must be able to stand to the acid test
of proving that it is an entity able to take on the
role of responsible maintainer of the
on-line lottery system.” The PCSO, however, makes it
clear in its RFP that the proponent can propose a period of the contract which
shall not exceed fifteen years, during which time it is assured of a
“rental” which shall not exceed 12% of gross receipts. As admitted by the PGMC, upon learning of
the PCSO’s decision, the Berjaya Group Berhad, with its affiliates, wanted to
offer its services and resources to the PCSO. Forthwith, it organized the PGMC as “a
medium through which the technical and management services
required for the project would be offered and delivered to PCSO.”^[66]

Undoubtedly, then, the Berjaya Group Berhad knew all along that
in connection with an on-line lottery system, the PCSO had nothing but its
franchise, which it solemnly guaranteed it had in the General Information of
the RFP.^[67]
Howsoever viewed then, from the very inception, the PCSO and the PGMC mutually
understood that any arrangement between them would necessarily leave to the
PGMC the technical, operations, and management
aspects of the on-line lottery system while the PCSO would, primarily, provide
the franchise. The words Gaming
and Management in the corporate name of respondent Philippine Gaming
Management Corporation could not have been conceived just for euphemistic
purposes. Of course, the RFP cannot
substitute for the Contract of Lease which was subsequently executed by the
PCSO and the PGMC. Nevertheless, the
Contract of Lease incorporates their intention and understanding.

The so-called Contract of Lease is not, therefore, what it
purports to be. Its denomination as
such is a crafty device, carefully conceived, to provide a built-in defense in
the event that the agreement is questioned as violative of the exception in
Section 1(B) of the PCSO’s charter. The
acuity or skill of its draftsmen to accomplish that purpose easily manifests
itself in the Contract of Lease. It is
outstanding for its careful and meticulous drafting designed to give an
immediate impression that it is a contract of lease. Yet, woven therein are provisions which negate its title and
betray the true intention of the parties to be in or to have a joint venture
for a period of eight years in the operation and maintenance of the on-line
lottery system.

Consistent with the above observations on the RFP, the PCSO has
only its franchise to offer, while the PGMC represents and warrants that it has
access to all managerial and technical expertise
to promptly and effectively carry out the terms of the contract. And, for a period of eight years, the PGMC
is under obligation to keep all the Facilities in safe condition and if
necessary, upgrade, replace, and improve them from time to time as new
technology develops to make the on-line lottery system more cost-effective and
competitive; exclusively bear all costs and expenses relating to the printing,
manpower, salaries and wages, advertising and promotion, maintenance, expansion
and replacement, security and insurance, and all other related expenses needed
to operate the on-line lottery system; undertake a positive advertising and
promotions campaign for both institutional and product lines without engaging
in negative advertising against other lessors; bear the salaries and related
costs of skilled and qualified personnel for administrative and technical
operations; comply with procedural and coordinating rules
issued by the PCSO; and to train PCSO and other local personnel and to effect
the transfer of technology and other expertise, such that at the end of the
term of the contract, the PCSO will be able to effectively take over the
Facilities and efficiently operate the on-line lottery system. The latter simply means that, indeed, the
managers, technicians or employees who shall operate the on-line lottery system
are not managers, technicians or employees of the PCSO, but of the PGMC and
that it is only after the expiration of the contract that the PCSO will operate
the system. After eight years, the PCSO
would automatically become the owner of the Facilities without any other
further consideration.

For these reasons, too, the PGMC has the initial prerogative to
prepare the detailed plan of all games and the marketing thereof, and determine
the number of players, value of winnings, and the logistics required to
introduce the games, including the Master Games Plan. Of course, the PCSO has the reserved authority to disapprove them.^[68]
And, while the PCSO has the sole responsibility over the appointment of dealers
and retailers throughout the country, the PGMC may, nevertheless, recommend for
appointment dealers and retailers which shall be acted upon by the PCSO within
forty-eight hours and collect and retain, for its own account, a security
deposit from dealers and retailers in respect of equipment supplied by it.

This joint venture is further established
by the following:

(a)       
Rent is defined in the lease contract as the amount to be paid
to the PGMC as compensation for the fulfillment of its obligations under the
contract, including, but not limited to the lease
of the Facilities. However, this rent
is not actually a fixed amount. Although it is stated to be 4.9% of gross receipts from ticket sales,
payable net of taxes required by law to be withheld, it may be drastically
reduced or, in extreme cases, nothing may be due or demandable at all because
the PGMC binds itself to “bear all risks if the revenue from the ticket
sales, on an annualized basis, are insufficient to pay the entire prize
money.” This risk-bearing provision is unusual in a lessor-lessee
relationship, but inherent in a joint venture.

(b)       
In the event of pre-termination of the contract by the PCSO,
or its suspension of operation of the on-line lottery system in breach of the
contract and through no fault of the PGMC, the PCSO binds itself “to
promptly, and in any event not later than sixty (60) days, reimburse the LESSOR
the amount of its total investment cost associated with the On?Line
Lottery System, including but not limited to the cost of the Facilities, and
further compensate the LESSOR for loss of expected net profit after tax,
computed over the unexpired term of the lease.” If the contract were
indeed one of lease, the payment of the expected profits or rentals for the
unexpired portion of the term of the contract would be enough.

(c)  
The PGMC cannot “directly or indirectly undertake any
activity or business in competition with or adverse to the On-Line Lottery
System of PCSO unless it obtains the latter’s prior written consent.” If
the PGMC is engaged in the business of leasing equipment and technology for an
on-line lottery system, we fail to see any acceptable reason why it should
allow a restriction on the pursuit of such business.

(d)The
PGMC shall provide the PCSO the audited Annual Report sent to its stockholders,
and within two years from the effectivity of the contract, cause itself to be
listed in the local stock exchange and offer at least 25% of its equity to the
public. If the PGMC is merely a lessor,
this imposition is unreasonable and whimsical, and could only be tied up to the
fact that the PGMC will actually operate and manage the system; hence,
increasing public participation in the corporation would enhance public
interest.

(e)  
The PGMC shall put up an Escrow Deposit of P300,000,000.00
pursuant to the requirements of the RFP, which it may, at its option, maintain
as its initial performance bond required to ensure its faithful compliance with
the terms of the contract.

(f)      
The PCSO shall designate the necessary personnel to monitor
and audit the daily performance of the on-line lottery system; and promulgate procedural
and coordinating rules governing all activities relating
to the on-line lottery system. The
first further confirms that it is the PGMC which will operate the system and
the PCSO may, for the protection of its interest, monitor and audit the daily
performance of the system. The second
admits the coordinating and cooperative powers and function of
the parties.

(g)  
The PCSO may validly terminate the contract if the PGMC
becomes insolvent or bankrupt or is unable to pay its debts, or if it stops or
suspends or threatens to stop or suspend payment of all or a material part of
its debts.

All of the foregoing unmistakably confirm
the indispensable role of the PGMC in the pursuit, operation, conduct, and
management of the On-Line Lottery System. They exhibit and demonstrate the parties’ indivisible community of
interest in the conception, birth and growth of the on-line lottery, and, above
all, in its profits, with each having a right in the formulation and
implementation of policies related to the business and sharing, as well, in the
losses — with the PGMC bearing the greatest burden because of its assumption
of expenses and risks, and the PCSO the least, because of its confessed
unwillingness to bear expenses and risks. In a manner of speaking, each is wed to the other for better or for
worse. In the final analysis, however,
in the light of the PCSO’s RFP and the above highlighted provisions, as well as
the “Hold Harmless Clause” of the Contract of Lease, it is even safe to
conclude that the actual lessor in this case is the PCSO and the subject
matter thereof is Its franchise to hold and conduct lotteries since it is, in
reality, the PGMC which operates and manages the on-line lottery system for a
period of eight years.

We thus declare that the challenged Contract of Lease violates
the exception provided for in paragraph B, Section 1 of R.A. No. 1169, as
amended by B.P. Blg. 42, and is, therefore, invalid for being contrary to
law. This conclusion renders
unnecessary further discussion on the other issues raised by the petitioners.

WHEREFORE, the instant petition is hereby GRANTED and the
challenged Contract of Lease executed on 17 December 1993 by respondent
Philippine Charity Sweepstakes Office (PCSO) and respondent Philippine Gaming
Management Corporation (PGMC) is hereby DECLARED contrary to law and invalid.

The Temporary Restraining Order issued on 11 April 1994 is hereby
MADE PERMANENT.

No pronouncement as to costs.

SO ORDERED.

Regalado, Romero, and
Bellosillo, JJ., concur.

Cruz, Feliciano, and,
Padilla, JJ., separate concurring opinion.

Bidin, J., joins J.
Melo, J. Quiason, J. Puno, and J.
Kapunan, in their dissenting opinions.

Vitug, J., separate opinion.

Narvasa, C.J., no part.

---

^[1]
PGMC’s Comment, 3-4; Rollo,
181-182.

^[2]
Annex “A,” Id.; Id.,
207-220.

^[3]
Rollo, 210-211.

^[4]
Rollo, 213.

^[5]
Id., 215.

^[6]
Id., 220.

^[7]
PGMC’s Comment, 7; Rollo, 184.

^[8]
Annex “P” of Petition.

^[9]
Annexes “L” and “N”
of Petition.

^[10]
Petition, 9; Rollo, 10. The announcement also stated that G-Tech
Philippines, Inc. and the Tanjong Public Limited Company had likewise been
authorized to operate separate lotto systems.

^[11]
Id.; Id.

^[12]
Annex “C” of Petition.

^[13]
Petition, 10; Rollo, 11. The meeting was called to deliberate on the
proposed nationwide on-line lottery program.

^[14]
Id.; Id.

^[15]
Id.; Id.

^[16]
Annex “J” of Petition.

^[17]
Annex “H” of Petition.

^[18]
Rollo, 13-14.

^[19]
Rollo, 16-19.

^[20]
Id., 27-28; 30-32.

^[21]
Id., 27.

^[22]
Rollo, 35.

^[23]
Id., 180-181.

^[24]
Citing Teresa Electric & Power Co.,
Inc. vs. Public Service Commission, 21 SCRA 198 [1967].

^[25]
175 SCRA 262 [1989].

^[26]
G.R. No. 78716, 22 September 1987.

^[27]
Philippine Christian Lawyers
Fellowship, Inc., Gamaliel G. Bongco, Oscar Karaan, and Jedideoh Sincero (Rollo,
147); Catholic Lawyer’s Guild of the Philippines, Inc., Enrique Syquia, and
Pacifico Ma. Castro (Id., 154).

^[28]
Rollo, 249 et seq.

^[29]
G.R. No. L-2044 (Araneta vs.
Dinglasan); G.R. No. L-2756 (Araneta vs. Angeles); G.R. No. L-3054
(Rodriguez vs. Tesorero de Filipinas); G.R. No. L-3055 (Guerrero vs.
Commissioner of Customs); and G.R. No. L-3056 (Barredo vs. Commission on
Elections), 84 Phil. 368 [1949].

^[30]
Tan vs. Macapagal, 43 SCRA 677,
680 [1972].

^[31]
Sanidad vs. Commission on
Elections, 73 SCRA 333 [1976].

^[32]
112 SCRA 294, 314-315 [1982].

^[33]
163 SCRA 371, 378 [1988].

^[34]
197 SCRA 52, 60 [1991].

^[35]
175 SCRA 343, 364-365 [1989] (emphasis
supplied).

^[36]
180 SCRA 496, 502 [1988].

^[37]
345 US 153, L ed 918, 735 Ct 609.

^[38]
Philippine Constitution Association,
Inc. vs. Gimenez, 15 SCRA 479 [1965].

^[39]
Civil Liberties Union vs.
Executive Secretary, 194 SCRA 317 [1991].

^[40]
Guingona vs. Carague, 196 SCRA
221 [1991].

^[41]
Osmeña vs. Commission on
Elections, 199 SCRA 750 [1991].

^[42]
Basco vs. Philippine Gaming and
Amusement Corp., 197 SCRA 52 [1991].

^[43]
Carpio vs. Executive Secretary,
206 SCRA 290 [1992].

^[44]
Iloilo Palay and Corn Planters
Association, Inc. vs. Feliciano, 13 SCRA 377 [1965].

^[45]
Sanidad vs. Commission on
Elections, supra.

^[46]
Laurel vs. Garcia, 187 SCRA 797
[1990].

^[47]
Garcia vs. Board of Investments,
177 SCRA 374 [1989]; Garcia vs. Board of Investments, 191 SCRA 288
[1990].

^[48]
Maceda vs. Macaraig, 197 SCRA
771 [1991].

^[49]
Maceda vs. Energy Regulatory
Board, 199 SCRA 454 [1991].

^[50]
Garcia vs. Executive Secretary,
211 SCRA 219 [1992].

^[51]
De Guia vs. Commission on
Elections, 208 SCRA 420 [1992].

^[52]
Pasay Law and Conscience Union, Inc. vs.
Cuneta, 101 SCRA 662 [1980].

^[53]
62 SCRA 275 [1975].

^[54]
Supra.

^[55]
Record of the Batasan, vol. Two, 993.

^[56]
Id., 1006-1007.

^[57]
Record of the Batasan, vol. Two, 1007
(emphasis supplied).

^[58]
Id.

^[59]
36 AM. JUR. 2d Franchises § 26 (1968).

^[60]
36 AM. JUR. 2d Franchises § 63 (1968).

^[61]
38 AM. JUR. 2d Gambling § 18 (1968).

^[62]
Black’s Law Dictionary, Sixth Ed., 88.

^[63]
Id., 261.

^[64]
Id., 121.

^[65]
Id., 839.

^[66]
PGMC’s Comment; Rollo, 181-182.

^[67]
It declares therein that it “has
the legal authority under R.A. 1169, as amended, to hold and conduct
sweepstakes races, lotteries, and other similar activities.”

^[68] Attached to the Contract of Lease as Annex
“A” is the Master Games Plan prepared by the PGMC and approved by the
PCSO.

---

104

6 pt
6 pt
0
3

---

200

6 pt
6 pt
0
3