RAMON A. GONZALES, PLAINTIFF-APPELLANT, VS. HON. ANTONIO V. RAQUIZA, AS SECRETARY OF PUBLIC WORKS AND COMMUNICATIONS; BALTAZAR AQUINO, AS COMMISSIONER OF PUBLIC HIGHWAYS; THE PH…

This is an appeal from
the decision dated July 3, 1968 of the then Court of First Instance (CFI) of
Manila in Civil Case No. 69345 dismissing plaintiff’s suit to annul the One
Hundred Thirty-Six (P136) Million Peso contracts entered into by the Republic
of the Philippines with three (3) American corporations as well as the letters of
credit issued thereunder and to restrain their
enforcement.

The undisputed facts as
found by the trial court are as follows:

On January 4, 1967, the defendant Commissioner of Public Highways
in behalf of the Republic of the Philippines hereinafter referred to as
Republic, entered into two separate contracts with defendant Continental Ore
(Phil.), Inc., the latter acting as representative of Huber Corporation in the
first contract and as agent of Allis-Chalmers International and General Motors
Corporation in the second.

In the first contract, the Republic obligated itself to pay to
Huber Corporation the sum of US$13,387,170.23 in the form of irrevocable,
confirmed and divisible letters of credit in favor of Continental Ore
Corporation, 500 Fifth Avenue, New York or
its nominees, for the purchase of road construction equipment and spare
parts.  The shipment of said goods shall
begin one to twelve months after the acceptance of the letters of credit.

The second contract provided that for and in consideration of
US$21,077,314.84, which the Republic obligated itself to pay to Continental Ore
Corp. (New York) in the form of irrevocable, confirmed and divisible letters of
credit, Allis-Chalmers International and General Motors Corporation would sell,
transfer and convey to the Republic road construction equipment and spare parts
under the same terms and conditions stated in the first contract.

Both contracts were duly approved by the defendant Secretary of
Public Works and Communications and the Auditor General.

Upon prior application by the Bureau of Public Highways for the
establishment of letters of credit in the aggregate sum of US$13,387,170.23,
defendant Philippine National Bank (PNB) wrote the Bureau of Public Highways
approving said application provided that said accommodation be secured by the
guaranty of the national government to be given by the Secretary of Finance
upon written approval by the Office of the President and that said letters of
credit be opened in favor of the defendant Huber Corporation.

On February 6, 1967,
the Secretary of Finance requested the Office of the President for approval of
the guaranty of the letters of credit in
favor of Huber Corporation, which request was favorably acted upon the
following day.

On February 9, 1967, the PNB informed the Bureau of Public Highways that it had
recommended the approval by its Board of
Directors of the Bureau’s
application for the opening of another irrevocable, confirmed and divisible
letters of credit in favor of General Motors Corporation and Allis-Chalmers
International, provided that said accommodation be likewise secured by a
guaranty from the national government to be given by the Secretary of Finance
upon written approval of the Office of the President.

As in the first application, the Executive Secretary, by
authority of the President, directed the Secretary of Finance to extend the
necessary guaranty for the letters of credit in favor of General Motors
Corporation and Allis-Chalmers International in the amount of US$21,077,214.84.  Accordingly, the guaranty was extended by the
Secretary of Finance on February 15,
1967.

On April 27, 1967, plaintiff Ramon A. Gonzales, as taxpayer and
later as stockholder of the PNB, filed before the CFI of Manila Civil Case No.
69345 praying for the annulment of the contracts of sale and for the issuance of a writ of preliminary injunction to
restrain their enforcement on the
ground that these contracts of sale, accommodation
and letters of credit are illegal for being violative
of Sections 606, 607 and 608 of the Revised Administrative Code for want of
appropriation by law and certification as to the availability of funds by the
Auditor General and for being violative of the PNB
Charter since the accommodation or loan to the Republic is beyond the lending
capacity of the bank.

The Secretary of Public Works and Communications and the
Commissioner of Public Highways filed their answers admitting substantially the
factual allegations of the complaint but raising several affirmative defenses.

On May 19, 1967,
plaintiff filed a motion to declare Huber Corporation, Allis-Chalmers
International and General Motors Corporation in default for failure to file
their answers within the reglementary period.  Meanwhile, defendants Secretary of Public Works and Communication and
Commissioner of Public Highways asked the court to set for hearing their affirmative defenses as grounds
for a motion to dismiss.

PNB filed its answer,
likewise expressly admitting the principal facts of the complaint and
interposing affirmative defenses and praying that said affirmative defenses be
set for hearing.

On July 1,
1967, the motion for
preliminary injunction was denied, the motion for default was granted and the
motions to dismiss the complaint were deferred for determination until trial on
the merits.

After a full-blown trial,
the lower court dismissed the complaint together with the counter-claim with
costs on July 3, 1968.  Hence, this appeal by the plaintiff-appellant
on the following legal issues:

I

Whether the contracts of sales are covered by Sections 606, 607 and
608 of the Revised Administrative Code;

II.

Whether the said contracts are valid inspite
of the fact that the three American corporations which entered into said
contracts are not licensed to do
business in the Philippines;

III.

Whether letters of credit
arising from an invalid contract are likewise invalid;

IV.

Whether letters of credit are loans and have exceeded the statutory
limit thereof and the requirement of collateral.

Under the first assigned error, plaintiff-appellant posits that
the questioned contracts of sale, accommodations and letters of credit are
illegal:  (a) under Sections 606, 607 and
608 of the Revised Administrative Code for want of appropriation law and certification
as to the availability of funds by the Auditor General and (b) under the PNB
Charter as the accommodation or loan to the Republic is allegedly beyond the
lending capacity of the PNB.

The lower court
ruled in the negative for the reason that the contracts under consideration did
not “involve directly the expenditure of public funds for they (did) not
require the immediate payment by the government of funds out of its treasury,
but rather (for) a financing scheme or arrangement with the Philippine National
Bank under different laws.”^[1]

We are inclined to agree. 
Sections 606 and 607 of the Revised Administrative Code read as follows:

“Sec. 606.  Appropriation antecedent to making of
contract.- No contract involving the expenditure of public funds shall be made
until there is an appropriation therefor, the
unexpended balance of which, free of other obligations, is sufficient to cover
the proposed expenditure.  This provision
shall not, however, be construed to prevent the purchasing and carrying of supplies
in stock, under the regulations of the Bureau of Audits, provided that when
issued such supplies shall be charged to the proper appropriation account.

“Sec. 607.  Certificate showing appropriation to meet
contracts.- Except in the case of a contract for personal service or for
supplies to be carried in stock, no contract involving an expenditure by the
insular government of three thousand pesos or more shall be entered into or
authorized until the Insular Auditor shall have certified to the officer entering
into such obligation that funds have been duly appropriated for such purpose
and that the amount necessary to cover the proposed contract is available for
expenditure to account thereof.  x x x “

The above provisions of the Administrative Code are without
question an implementation of Art. VI, Sec. 23, Clause 2 of the 1935
Constitution then applicable, which provides that:  “No money shall be paid out of the
Treasury except in pursuance of an appropriation made by law.” Said
provision was restated in toto, in Art. VIII,
Sec. 18 of the 1973 Constitution and in Art. VI, Sec. 29 of the New
Constitution.

In a strict sense, appropriation has been defined “as
nothing more than the legislative authorization prescribed by the Constitution
that money may be paid out of the Treasury”, while appropriation made
by law refers to “the act of the legislature setting apart or
assigning to a particular use a certain sum to be used in the payment of debt
or dues from the State to its creditors.”^[2]

On the premise, therefore, that no money can be taken out of the
treasury without an appropriation,^[3]
the decisive issue in this case is what constitutes compliance with the Constitution and Sections
606, 607 and 608 of the Administrative Code where the total governmental expenditure
involves partial payments or disbursements
of funds to run for a number of years.

As early as the year 1934, this Court, under similar
circumstances, had laid this issue to rest.

A Contract between Imus Electric Co.,
Inc. and the Municipal Council of Imus for a public street lighting service to
run for a period of ten (10) years and involving a monthly payment of P202.50
was assailed on the ground that the Municipal Council of Imus
approved the same without having the necessary funds to pay for the value of
the service to be rendered by the Imus Electric Co.
for a period of ten years and without the provincial treasurer’s previous
certificate to the effect that said funds have been appropriated and were
available.  Said contract was therefore
allegedly in violation of Sections 606, 607 and 608 of the Revised
Administrative Code of 1917, particularly because the Municipality
of Imus
appropriated funds for a period of six (6) months only.

In resolving the issue, this Court ruled that while it is true
that the duration of the contract was fixed at ten (10) years, a period which
was accepted by the municipality, it is also true that under the terms of the
contract, and the law, the municipality was not bound to make advance payments
and consequently, there was no reason for it to appropriate funds for the said
public service except for a period of one month or one year at most, if it had
sufficient funds in order to comply with the provisions of Section 2296 of the Revised Administrative Code
which requires that municipalities should
at the beginning of every year, make a general appropriation containing the
probable expenses which they would have to incur.  Accordingly, it was held that the contract in
question is not in conflict with
the provisions of Sections 607 and 608 of said Code.^[4] Otherwise stated, appropriation must
be made only on amounts immediately demandable.

The above doctrine is no less applicable to the case at bar,
despite the magnitude of the government’s needs and investments.  It will be recalled that the questioned
contracts constitute a negotiated sale on credit where the Bureau of Public
Works is not required to make direct or immediate payment.

Without abandoning the constitutional and legal safeguards
against the indiscriminate disbursements
of public funds, this Court takes judicial notice of the imperatives of
national development that demand immediate implementation of programs, the
funding of which cannot be appropriated simply because there are no sufficient funds therefor.

That there was no deviation, much less a violation of Article VI,
Section 29 of the Constitution and of Sections 606, 607 and 608 of the Revised
Administrative Code, is readily apparent in the enactment of Republic Act No. 4680, which provides among
others:

“Sec. 1.  The President
of the Philippines is hereby authorized in behalf of the Republic of the
Philippines to contract such loans, credits and indebtedness with foreign
governments, agencies or instrumentalities of such foreign governments, foreign
financial institutions, or other international organizations, with whom or
belonging to countries with which the Philippines has diplomatic relations, as
may be necessary and upon such terms and conditions as may be agreed upon, to
enable the Government of the Philippines to finance, either directly or through
any government office, agency or instrumentality or any government-owned, or
controlled corporation, industrial, agricultural or other economic development
purposes or projects authorized by law x x x .”

Section 6 of said law further provides:

“Sec. 6.  The Congress
shall appropriate the necessary amount out of any funds in the National
Treasury not otherwise appropriated, to cover the payment of the principal and
interest on such loans, credits or indebtedness as and when they shall become
due.”

As correctly observed by the trial court,

“Under Republic Act 4860, the Republic is authorized to
procure foreign loans or credits from financial institutions or other
international organiza­tions, upon such terms and conditions as may be agreed
upon for the purpose of financing economic development purposes or projects
authorized by law, including the construction and improvement of highways and
bridges.  It will be noted that, precisely,
Republic Act 4860 authorizes procurement on credit when there are no available
funds or appropriation.  Section 6
thereof provides that ‘Congress shall appropriate the necessary amount to cover
the payment of the principal and interest on such credits as and when they
shall become due.’ “^[5]

Moreover, the questioned contracts are funded by various sources
authorized by law, thereby constituting a standing appropriation or antecedent
appropriation required by Section 606 of the Revised Administrative Code before
execution of contracts involving expenditure of public funds.  They are:

“1.  Under Section 6(b)
of R.A. 917, 1% of the annual accrual (about P200 million) to the Highway
Special fund.

P2 million

2.   Increase in taxes on oils
and motor fuels accruing annually into the Highway Special Fund pursuant to
R.A. 1435 representing total receipts (P17 million) less the amount (P11
million) annually earmarked for amortization of outstanding debts previously
incurred to finance public works projects.

P6 million

3.   Pursuant to Section 24
of R.A. 917 annual rentals from lease of present public works equipment and
estimated rentals on equipment to be acquired based on six months annual
utilization and proceeds from sale of obsolete or worn-out equipment, broken
down as follows:

a.  Rental chargeable against
projects financed from the contingent fund and the maintenance and improvement
portions of the Highway Special Fund under Sections 6(c), 7 and 8 of RA 917,
equivalent to 10% of P188
million.

P18.8 M.

b.  Rentals chargeable against
projects financed by bond funds (P92 M.) and general funds (P16 M.) equivalent to 10% of
P108 M.

P10.8 M.

c.  Other rentals and proceeds
of sale of wornout or obsolete equipment amounting
annually to P9 M. less P5 M. earmarked for maintenance and operations.

P  4.0 M.

P33.6 M.

T O T A L                                                                   P41.
million^[6]

Thus the annual aggregate of these funds in the amount of P41.6 million is obviously
more than sufficient to meet the diminishing yearly installments on the
contracts in question ranging from P29,847,049.32 on the first year to
P23,919,563.29 on the fifth year.^[7]

More than that,
the foregoing funding program for the repayment of the herein government’s
obligations, satisfactorily negates petitioner’s fears that private funds
deposited with the PNB will be used to liquidate subject loans.  In addition, petitioner himself declared that only the certificate of the
Auditor General can prevent the funds intended for payment of said purchase, if
any, from being diverted to other purposes.

The records show that the questioned contracts carry the approval
of the Auditor General as may be seen in Exhibits “5” and “53
PNB” and the affidavit of the Commissioner of Public Highways (Annex
“A” to defendants’ answer).^[8]

With respect to the second assigned error that the contracts are
void as the three American corporations are not licensed to do business in the Philippines, we
re-state the generally accepted rule that one single or isolated business
transaction does not constitute “doing business” within the meaning of
the law.  Transactions which are
occasional, incidental, and casual – not of a character to indicate a purpose
to engage in business –  do not constitute the doing or
engaging in business as contemplated by
law.  Where the three transactions
indicate no intent by the foreign corporation to engage in a continuity of transactions, they do not constitute doing
business in the Philippines.^[9]

Since the third assigned error is premised on the supposed
invalidity of the contracts under consideration, our ruling sustaining their
validity, renders a discussion of the third issue raised unnecessary.

Anent the fourth assigned error, which is also petitioner’s
second ground on the supposed illegality of the questioned contracts, Section 23 of R.A. 337 as approved on July 24,
1948 reads:

“Sec. 23.  Except as the
Monetary Board may otherwise prescribe, the total liabilities of any person,
company, corporation or firm, to a commercial banking corporation for money
borrowed with the exception of money borrowed
against obligations of the Central Bank, or of the Philippine Government, or borrowed
with the full guarantee by the Government of payment or principal and interest,
shall at no time exceed fifteen per cent (15%) of the unimpaired capital and
surplus of such bank.” (Underscoring supplied.)

Even assuming that the
accommodation given by the PNB was in legal contemplation a loan, the fact that
the same was fully guaranteed by the Republic of the Philippines removes said accommodation from the statutory limits set under Section 5(e) of R.A.
1300 by reason of Section 23 of R.A. 337 above-quoted which is applicable to
the PNB as a commercial bank authorized to exercise the general powers
mentioned in the General Banking Act (Sec. 2(j), R.A. 1300).

WHEREFORE, the instant appeal is hereby DENIED.  No pronouncements as to costs.

SO ORDERED.

Gutierrez, Jr., Bidin, and Cortes, JJ., concur.

Feliciano, J., on leave.

^[1]
p. 126, Record on Appeal, p. 12, Rollo.

^[2]
Martin “New Constitution of the Philippines”,
p. 399, 1987 edition.

^[3]
City of Manila v. Posadas, Jr., etc., et al., 48
Phil. 309 (1926).

^[4]
Imus Electric Co. v. Municipality
of Imus,
59 Phil. 832-833 (1934).

^[5]
pp. 130-131, Record on Appeal.

^[6]
pp. 131-132, Record on Appeal.

^[7]
p. 30, Record on Appeal.

^[8]
p. 133, Record on Appeal.

^[9]
Antam Consolidated, Inc. v. Court of Appeals,
143 SCRA 288