Traders Royal Bank vs. Intermediate Appellate Court

Factual Background

On April 9, 1981, Traders Royal Bank approved a credit accommodation in the amount of P2,520,000 by issuing a domestic stand-by letter of credit to guarantee payment of coverage or broadcast rights for the 1981 season of the Philippine Basketball Association. The letter of credit was extended in favor of NMPC and PSI. The contract required that the defendants deposit all collections from sponsoring companies with Traders and maintain in their current account with the bank a balance of at least P500,000 or twenty percent of the face value of the letter of credit. By July 27, 1981, the PBA had drawn P340,000 against the letter of credit. The defendants did not make further payments nor comply with the contractual conditions.

Commencement of Litigation and Attachments

Because of nonpayment and alleged disposition of assets by the defendants, Traders Royal Bank filed a complaint in the Court of First Instance of Rizal at Pasay City to collect the full amount of P2,520,000 and prayed for a writ of preliminary attachment. The trial court issued the writ after Traders posted a bond of P2,520,000. The deputy sheriff executed attachments, collecting P1,046,816.75 from PSI and later garnishing P1,391,699.57 from collections of sponsoring companies and P420,189.27 from NMPC's account with Traders, for an aggregate of P1,811,888.84.

Motions to Dismiss and Trial Court Rulings

The NMPC, through the Office of the Solicitor General and later through private counsel, moved to dismiss on the ground of lack of jurisdiction because, as a government instrumentality under the Office of the President, it could not be sued without consent. The trial court denied the initial motion on September 21, 1982, relying on the precedent Harry Lyons, Inc. vs. The United States of America that the state may be sued when it enters into a contract with a private person. The trial court thereafter accepted a manifestation treating the PSI garnishment as partial payment and set pre-trial; it also stated on January 5, 1984, that the prior denial of the motion to dismiss should be respected to maintain "the authoritative dignity" of the court.

Appellate Petition and Intermediate Appellate Court Decision

Dissatisfied, NMPC filed a petition for certiorari, prohibition and mandamus before the then Intermediate Appellate Court, contending that the trial court gravely abused its discretion in denying the motion to dismiss and in failing to dissolve the writ of attachment because government property is not subject to attachment and because the attachment bond was not renewed. The appellate court granted the petition on July 17, 1984, holding that NMPC, as an instrumentality under the supervision of the Office of the President which had not been incorporated to assume a separate juridical personality, could not be sued without its consent and that entering into a contract did not constitute a waiver of immunity when the entity lacked distinct juridical personality. The appellate court further held that certiorari was proper because jurisdictional competence was in issue.

Issues Presented to the Supreme Court

The principal issues presented were whether the NMPC waived its immunity from suit by entering into the loan agreement with Traders Royal Bank, and whether the Intermediate Appellate Court correctly annulled the trial court's order denying the motion to dismiss and ordered dissolution of the attachment. A procedural question whether the petition for certiorari, prohibition and mandamus in the Intermediate Appellate Court was proper was also pressed.

Parties' Contentions

Traders Royal Bank argued that by entering into the loan agreement for the benefit of the PBA, NMPC exercised a proprietary function and implicitly consented to suit, thereby abandoning sovereign immunity. NMPC contended that it remained immune from suit, that governmental funds could not be attached or garnished, and that if any liability existed it should have been pursued under the Commission on Audit and the Government Auditing Code. NMPC also maintained that the appellate remedy was appropriate to secure expeditious relief against garnishment of government funds.

The Court's Ruling on Procedural Properness

The Court held that NMPC properly filed the petition for certiorari, prohibition and mandamus in the Intermediate Appellate Court because it sought an adequate and expeditious remedy against garnishment of government funds. The Court therefore declined to fault the choice of appellate remedy in the circumstances.

The Court's Ruling on Suability and Waiver of Immunity

On the substantive question of suability, the Court ruled for Traders Royal Bank and reversed the Intermediate Appellate Court insofar as it considered NMPC immune from suit. The Court reaffirmed that the doctrine of state immunity from suits is constitutionally recognized and germane to sovereignty, and that such immunity may be waived by statute or by implied consent when the state, through its agents, enters into a contract in furtherance of a legitimate aim and thereby descends to the level of a private party. The Court explained the controlling test when an unincorporated government entity engages in activities that may be proprietary: if the transaction is a necessary incident to the entity's prime governmental function, immunity remains; if the transaction is beyond and not incidental to the governmental function, implied consent to suit may be found.

Application of the Test to the NMPC's Contract

Examining the records and the loan agreement, the Court found the allegations and evidence sufficient to conclude that NMPC engaged in an undertaking not incidental to disseminating governmental information. The Court noted that NMPC itself admitted that it acted "merely as guarantor" for PSI, but the loan agreement referred to PSI and NMPC collectively as "clients" and "accountees" without distinction of liability, supporting the conclusion that the transaction was a business undertaking beyond NMPC's governmental purpose. The Court cautioned that implied waivers are to be construed strictly, but held that when a government entity, through a duly authorized official, exceeds its authority, the immunity doctrine may not be invoked to perpetrate injustice.

Protection of Public Funds and Remedies after Judgment

Although the Court found implied waiver of immunity as to suit, it held that public funds deposited by NMPC could not be garnished or attached to satisfy any judgment. The Court relied on the long-standing rule that even when the State consents to suit, the power of courts ends at judgment because governmen