The Supreme Court clarified that the principle of freedom to contract does not override the legal requirement of public bidding in government contracts. The LRTA was not obligated to honor a “right of first refusal” granted without public bidding, even if it was part of a prior agreement. This decision reinforces the importance of transparency and fair competition in government projects, safeguarding public funds and preventing potential corruption, ultimately protecting public interest.

When a Handshake Deals Collide: Can a Promise Bypass Public Bidding for a Lucrative Redevelopment?

This case revolves around a dispute between the Light Rail Transit Authority (LRTA) and Joy Mart Consolidated Inc. (Joy Mart) and Isetann Department Store, Inc. (Isetann) concerning a “right of first refusal” for the redevelopment of a consolidated block at the Carriedo LRT Station. In 1983, as part of a deal where Joy Mart sold its property to the LRTA for the LRT project, a clause was included stating Joy Mart “should be given the first option” to redevelop the consolidated block. However, years later, the LRTA conducted a public bidding for the project, which was won by Phoenix Omega Development and Management Corporation (Phoenix), leading Joy Mart and Isetann to sue, claiming a breach of their right of first refusal. At the heart of the legal battle was whether this clause, granting Joy Mart the first option, was a binding contract that could bypass the mandatory public bidding process for government projects.

The Supreme Court ultimately sided with the LRTA and Phoenix, emphasizing the paramount importance of public bidding in government contracts. The Court acknowledged the principle of freedom to contract, which allows parties to agree on terms they deem convenient. However, this freedom is not absolute. As the Court stated, it is circumscribed by laws and public policy, specifically the need for public bidding in government contracts.

The freedom to contract, under our system of government, is not meant to be absolute. The same is understood to be subject to reasonable legislative regulation aimed at the promotion of public health, morals, safety and welfare. In other words, the constitutional guaranty of non-impairment of obligations of contract is limited by the exercise of the police power of the State, in the interest of public health, safety, morals and general welfare.

The Court found that the clause in the Deed of Absolute Sale, while mentioning the “first option,” did not constitute a binding commitment that could circumvent the requirement of public bidding. The whereas clause is merely a directive that Joy Mart and Isetann, as the language of the clause spells out, “should be given the first option in the redevelopment of the consolidated block.” This clause is not, in itself, a conferment of a first refusal option. The Court emphasized that public bidding serves several crucial purposes. It ensures economic efficiency, prevents corruption, and maintains public trust in government transactions. As the Court noted in Manila International Airport Authority v. Mabunay:

Indeed, public bidding is the accepted method for arriving at a fair and reasonable price and it ensures that overpricing and favoritism, and other anomalous practices are eliminated or minimized and we reiterate that Section 68 of the General Appropriations Act has not dispensed with such requirement for contracts for services awarded thereunder.

Building on this principle, the Court stressed that granting Joy Mart an exclusive right to redevelop the area without a competitive bidding process would undermine the very essence of public bidding, creating a potential for abuse and a lack of transparency. Therefore, the LRTA could not validly contract away its obligation to conduct public bidding for the redevelopment project. Article 1306 of the Civil Code underscores this limitation, stating that contracting parties may establish stipulations, clauses, terms, and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.

Further, even if a valid right of first refusal existed, the Court found that Joy Mart and Isetann had effectively waived this right through their actions. They entered into a sublease agreement with the Philippine General Hospital Foundation, Inc. (PGHFI), acknowledging PGHFI’s prior right to develop the area. They also failed to object to the public bidding process or participate in it. Thus, the Court concluded that Joy Mart and Isetann were estopped by laches, meaning they had delayed asserting their rights to the point where it would be unfair to allow them to do so. The Court also considered the importance of maintaining a level playing field in government contracts, highlighting that public bidding is “not an idle ceremony,” but is instead a requirement designed to protect the public interest by ensuring a method that arrives at the most fair and reasonable price for the government.

Laches is defined as the “failure or neglect for an unreasonable and unexplained length of time, to do that which, by exercising due diligence, could or should have been done earlier, it is negligence or omission to assert a right within a reasonable length of time, warranting a presumption that the party entitled to assert it either has abandoned it or declined to assert it.”

Furthermore, the Court found no evidence of bad faith on the part of Phoenix or the LRTA. Phoenix had won the public bidding and had the right to proceed with the project, while the LRTA was obligated to ensure the project was carried out according to the law. As a final point, the Court reversed the Court of Appeals’ award of damages to Joy Mart and Isetann. Because their claim to a right of first refusal was deemed invalid and unenforceable, there was no legal basis for awarding damages. The Supreme Court decision serves as a clear reminder that government entities must adhere to the principles of public bidding and cannot circumvent these requirements through private agreements. It reinforces the importance of transparency, fairness, and accountability in the use of public funds and the implementation of government projects.

FAQs

What was the key issue in this case?	The central issue was whether a “right of first refusal” granted in a private agreement could override the legal requirement of public bidding for a government project. The Court ultimately decided in favor of public bidding.
What is the principle of freedom to contract?	Freedom to contract allows parties to agree on terms they deem convenient, as long as they do not violate laws, morals, public order, or public policy. However, it is not an absolute right and can be limited by laws promoting public welfare.
What is the purpose of public bidding?	Public bidding ensures economic efficiency, prevents corruption, and maintains public trust by promoting transparency and fair competition in government contracts. The process is designed to arrive at a fair and reasonable price, eliminating overpricing and favoritism.
What is estoppel by laches?	Estoppel by laches prevents a party from asserting a right after an unreasonable delay that prejudices the other party. In this case, Joy Mart and Isetann’s delay in asserting their right of first refusal was deemed a waiver of that right.
Why were damages not awarded to Joy Mart and Isetann?	Damages were not awarded because the Court found that Joy Mart and Isetann’s claim to a right of first refusal was invalid and unenforceable. Without a valid right, there was no legal basis for awarding compensation.
What was the significance of the “whereas” clause in the Deed of Absolute Sale?	The Court ruled that the “whereas” clause, which mentioned the right of first option, did not create a binding commitment that could override the public bidding requirement. It was interpreted as a non-committal statement rather than a legally enforceable obligation.
How did Joy Mart and Isetann waive their rights?	Joy Mart and Isetann waived their rights by entering into a sublease with PGHFI (acknowledging their prior right to the property), and failing to object to the public bidding that followed.
What are the practical implications of this decision?	This decision reinforces the importance of transparency and fair competition in government projects, safeguarding public funds and preventing potential corruption, and ensures that private agreements do not undermine the public bidding process.

This case underscores the importance of adhering to established legal procedures, particularly in government contracts, and serves as a reminder that private agreements cannot circumvent the mandatory requirements of public bidding. By prioritizing transparency and accountability, the Supreme Court has reinforced the principles of good governance and protected the public interest.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: LIGHT RAIL TRANSIT AUTHORITY (LRTA) VS. JOY MART CONSOLIDATED INC., [G.R. No. 211281, February 15, 2022]