The Supreme Court has affirmed the principle of pacta sunt servanda, holding that international law governs loan agreements executed with foreign governments. This means the Philippine government must honor its commitments under such agreements. The ruling emphasizes the importance of adhering to international obligations, even when domestic laws might suggest a different approach. This decision protects the integrity of international agreements, ensuring that the Philippines remains a reliable partner in international transactions and development projects. The case clarifies that accessory agreements, like consulting service contracts tied to these loans, are also subject to international law.
NAIA Terminal 2: Can Contingency Caps Trump International Loan Obligations?
This case arose from a Commission on Audit (COA) decision disallowing certain costs incurred during the Ninoy Aquino International Airport (NAIA) Terminal 2 Development Project. The Manila International Airport Authority (MIAA) had entered into an agreement for consulting services with the Aeroports de Paris-Japan Airport Consultants, Inc. Consortium (ADP-JAC). This agreement was financed by a loan from the Overseas Economic Cooperation Fund (OECF) of Japan. Due to project delays, MIAA and ADP-JAC executed several supplementary agreements that increased the total cost of the consulting services. The COA disallowed portions of these costs, arguing that they exceeded the 5% contingency limit prescribed by the National Economic and Development Authority (NEDA) Guidelines. MIAA challenged the COA’s decision, arguing that the loan agreement was an executive agreement governed by international law, which should take precedence over the NEDA Guidelines.
The core legal issue was whether the NEDA Guidelines, a domestic regulation, could override the provisions of an international loan agreement. MIAA contended that Loan Agreement No. PH-136, being connected to an Exchange of Notes between the Philippines and Japan, qualified as an executive agreement. Citing Abaya v. Ebdane, MIAA argued that such agreements are governed by international law, and therefore the parties’ intentions regarding contingency payments should prevail. The COA, however, maintained that the absence of an explicit stipulation referencing international law in the loan agreement meant that domestic law, specifically the NEDA Guidelines’ 5% contingency ceiling, should apply.
The Supreme Court sided with MIAA, emphasizing that Loan Agreement No. PH-136 was indeed an executive agreement, an adjunct to the Exchange of Notes between the Philippines and Japan aimed at promoting economic development and stability. Therefore, international law principles, especially pacta sunt servanda, were applicable. The Court quoted Article II, Section 2 of the 1987 Constitution, which incorporates generally accepted principles of international law into the law of the land, stating:
Sec. 2. The Philippines renounces war as an instrument of national policy, adopts the generally accepted principles of international law as part of the law of the land and adheres to the policy of peace, equality, justice, freedom, cooperation, and amity with all nations.
Building on this principle, the Court reasoned that the Agreement for Consulting Services (ACS) between MIAA and ADP-JAC, being an accessory to Loan Agreement No. PH-136, should also be treated as an executive agreement and interpreted in accordance with pacta sunt servanda. The Court referenced Land Bank of the Philippines v. Atlanta Industries, Inc. to emphasize the close relationship between the principal loan agreement and its accessory agreements, stating:
As may be palpably observed, the terms and conditions of Loan Agreement No. 4833-PH, being a project-based and government guaranteed loan facility, were incorporated and made part of the SLA that was subsequently entered into by Land Bank with the City Government of Iligan. Consequently, this means that the SLA cannot be treated as an independent and unrelated contract but as a conjunct of, or having a joint and simultaneous occurrence with, Loan Agreement No. 4833-PH. Its nature and consideration, being a mere accessory contract of Loan Agreement No. 4833-PH, are thus the same as that of its principal contract from which it receives life and without which it cannot exist as an independent contract. Indeed, the accessory follows the principal; and, concomitantly, accessory contracts should not be read independently of the main contract. Hence, as Land Bank correctly puts it, the SLA has attained indivisibility with the Loan Agreement and the Guarantee Agreement through the incorporation of each other’s terms and conditions such that the character of one has likewise become the character of the other.
This approach contrasts with the COA’s insistence on applying the NEDA Guidelines, which the Court found to be an improper attempt to negate the government’s accession to the executive agreements. The Court stressed that it is not for the Philippines to repudiate a commitment to which it had pledged its word, citing Agustin v. Edu. The supplemental agreements, according to the Court, reflected the parties’ intent to modify the original consultancy services agreement to account for project delays and adjust the total cost of services.
The Court interpreted the supplemental agreements as a revision of the original agreement, charging all additional man-months to the total cost of services, not against the contingency fund. It emphasized that parties to a contract have the right to amend their agreement by mutual consent, so long as the modification does not violate the law or public policy. Consequently, by affirming the NDs and going against the parties’ intention as to how the cost of man-months should be charged, the COA contravened the Constitution and international law, thereby gravely abusing its discretion.
In summary, the Supreme Court overturned the COA’s decision. The Court ruled that the applicable law in interpreting and construing the agreements was international law, particularly the doctrine of pacta sunt servanda. The Court further held that the COA had improperly disallowed the amounts disbursed for the additional man-months for the consulting services. As such, the Supreme Court emphasized the importance of upholding international agreements and respecting the intentions of the parties involved in such agreements.
FAQs
| What was the key issue in this case? | The key issue was whether domestic regulations (NEDA Guidelines) could override the provisions of an international loan agreement and related consulting service contract. |
| What is “pacta sunt servanda”? | Pacta sunt servanda is a fundamental principle of international law that means “agreements must be kept.” It requires states to honor their treaty obligations in good faith. |
| What is an executive agreement? | An executive agreement is an international agreement concluded by the President of the Philippines that does not require Senate concurrence. It is often used for routine agreements and adjustments. |
| What were the NEDA Guidelines? | The NEDA Guidelines are regulations issued by the National Economic and Development Authority that prescribe rules for government projects, including a 5% ceiling on contingency funds. |
| Why did the COA disallow certain costs? | The COA disallowed costs because it believed they exceeded the 5% contingency limit set by the NEDA Guidelines, which it argued should apply to the consulting services agreement. |
| How did the Supreme Court rule on the COA’s decision? | The Supreme Court reversed the COA’s decision, holding that the international loan agreement and related consulting contract were governed by international law, not the NEDA Guidelines. |
| What was the significance of the loan agreement being tied to an Exchange of Notes? | The Exchange of Notes indicated an agreement between the Philippine and Japanese governments, which made the loan agreement an executive agreement governed by international law. |
| How did the supplemental agreements affect the original contract? | The supplemental agreements modified the original contract to account for project delays and adjust the total cost of services, reflecting the parties’ intent to revise the original terms. |
| What is the practical implication of this ruling? | This ruling reinforces the Philippines’ commitment to upholding international agreements and provides clarity on the interaction between domestic regulations and international obligations. |
This Supreme Court decision provides critical guidance on the application of international law in the Philippines, especially concerning agreements with international financial institutions. The ruling serves as a reminder that the principle of pacta sunt servanda is a cornerstone of international relations and that the Philippines is committed to honoring its international obligations in good faith.
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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: MIAA vs. COA, G.R. No. 218388, October 15, 2019