SC allows civil case to proceed vs Chinese firm over Northrail project

MANILA, Philippines — The Supreme Court gave the go-ahead to the Makati City regional trial court to proceed with the civil case against China’s China National Machinery & Equipment Corp. Group (CNMEG) on the $509 million Northrail project, saying it is not immune from suit.

In a 23-page decision promulgated February 27 but was released to media Thursday, the high court through Associate Justice Ma. Lourdes Sereno denied CNMEG’s petition.

It explained that the Contract Agreement was not concluded between the government of the Philippines and China but between Northrail and CNMEG, which is neither a government nor a government agency of China but a corporation duly organized and created under the laws of the People’s Republic of China.

“Since the Contract Agreement explicitly provides that Philippine Law shall be applicable, the parties have effectively conceded that their rights and obligations thereunder are not governed by international law…It is therefore clear from therefore clear from the foregoing reasons that the Contract Agreement does not partake of the nature of an executive agreement. It is merely an ordinary commercial contract that can be questioned before the local courts,” the Court held.

It added that CNMEG was engaged in a propriety activity hence was not covered by sovereign immunity.

Quoting the Memorandum of Understanding (MOU) between CNMEG and Northrail, the high court pointed out that CNMEG sought the construction of the Luzon Railways as a proprietary or commercial venture in the ordinary course of its business.

“Clearly, it was CNMEG that initiated the undertaking, and not the Chinese government,” ruled the high court.

The Supreme Court further held that based on the MOU, the Loan Agreement, and the letter of Chinese Ambassador to the Philippines Wang Chungui stating CNMEG and not the Chinese government initiated the Northrail Project, it was clear that Northrail was a purely commercial transaction.

In September 2002, CNMEG entered into an MOU with Northrail for the conduct of a feasibility study on a possible railway line from Manila to San Fernando, La Union or known as the Northrail Project.

In August 2003, the EXIM Bank and the Department of Finance (DOF) entered into a MOU, wherein China agreed to extend Preferential Buyer’s Credit to the Philippine government to finance the Northrail Project.

The Chinese government designated EXIM Bank as the lender, while the Philippine government named the DOF as the borrower.

Under the August 30 MOU, EXIM Bank agreed to extend an amount not exceeding $400,000,000 in favor of the DOF, payable in 20 years, with a five-year grace period, and at the rate of 3% per annum.

In October 2003, Ambassador Wang wrote the DOF of CNMEG’s designation as the Prime Contractor for the Northrail Project.

On Dec. 30, 2003, Northrail and CNMEG executive a Contract of Agreement for the Construction of Section 1, Phase 1 of the North Luzon Railway System from Caloocan to Malolos on a turnkey basis. The contract price for the Northrail Project was pegged at $421,050,000.

On February 26, 2004, the Philippine government and EXIM Bank entered into a counterpart financial agreement – Buyer Credit Loan Agreement No. BLA 04055, where EXIM Bank agreed to extend Preferential Buyer’s Credit in the amount of US$400M in favor of RP to finance the construction of Phase I of the Northrail Project.

Two years later Lawyers Harry. L. Roque Jr., Joel R. Butuyan, Roger R. Rayel, Romel R. Bagares and Christopher Francisco C. Bolastig and some urban poor groups affected by the project filed the case before the Makati court.

The citizens’ suit filed by Roque’s group, docketed as Civil Case No. 06-203, sought to void the contract between the Philippine government-owned Northrail and CNMEC to build a $509-million railroad from Caloocan City to Malolos and a loan agreement executed between the Philippine government and China EximBank to fund the project.

In their suit, the lawyers argued that various legal and constitutional defects hound the two deals, including, among other things, (1) that it did not comply with the twin constitutional requirements that the loan should first get a nod from the Monetary Board and that it pass through the Senate’s concurrence;  and (2) that it did not go through a public bidding as required by law.

Northrail and its Chinese counterpart CNMEG asked the lower court to dismiss the case, anchoring their principal argument on the claim that the court has no jurisdiction over the case because what is being sued is an agent of China, a sovereign state.

A May 15, 2007 omnibus order issued by the judge denied the motions to dismiss filed by Northrail, CNMEC and the government, represented by the Office of the Solicitor General. This prompted CNMEC to elevate the case to the appeals court and eventually the high court.