Sanctity of government contracts

If the Philippine government can renege on its contractual obligations just like that, then what message does it send to prospective investors?

While the Bases Conversion and Development Authority (BCDA) has been signing new lease contracts with former sub-lessees of CJH Development Corp. or CJHDevCo covering areas inside Camp John Hay, there are those who still believe that their lease contracts with CJHDevCo should be upheld and be allowed to continue.

Last year, the Supreme Court upheld an arbitral ruling ordering CJHDevCo to vacate a portion of the John Hay Special Economic Zone, which the latter had leased from the BCDA covering around 247 hectares. The lease agreement authorized CJHDevCo to sublease the leased property to third persons, which it did.

But due to disputes involving the parties’ respective obligations under the lease agreement, CJHDevCo filed a complaint in arbitration against BCDA with the Philippine Dispute Resolution Center Inc. (PDRCI). The arbitral tribunal found that both parties breached their obligations under the agreement and ordered mutual restitution, with the parties to revert to their original position prior to the execution of the agreement as far as practicable.

According to the High Court, CJHDevCo was specifically ordered by the said arbitral tribunal to return to BCDA the leased property together with all improvements while BCDA in turn must refund to CJH DevCo the rent, which the latter had already paid amounting to P1.42 billion.

The High Court’s ruling had become final and executory and BCDA took over the areas that were previously leased to CJHDevCo last January.

Reports say that homeowners who leased their property from CJHDevCo were either evicted or forced into new lease terms, including P1.5 million in security deposits, increased fees and interest charges, a reduced lease period of 25 years. Meanwhile, about 2,500 members of the John Hay Golf Club had their memberships revoked.

We also learned that there are still ongoing legal actions by homeowners and the golf club members against BCDA, including petitions for quieting of title to uphold their property rights until 2046 based on the original contract with CJHDevCo, a class suit filed at the Baguio Regional Trial Court by a group led by former Baguio Mayor Mauricio Domogan challenging BCDA’s actions, among others.

According to one news report, homeowners and golf club members have filed multiple cases against BCDA for alleged unlawful seizure of properties and revocation of long-standing rights. At least eight homeowners have already filed the petitions for quieting of title to assert their leasehold rights until 2046 with three more cases expected to be filed within the week also by homeowners.

The class suit led by Domogan, meanwhile, challenged BCDA’s revocation of thousands of golf club memberships.

The complainants argue that they entered into contracts and made investments in good faith under a government-sanctioned public-private partnership (PPP) but are now being unjustly stripped of their rights.

We were also told that there are no cases filed in court against CJHDevCo, contrary to some media reports and that the company has in fact offered to waive its P1.42-billion arbitral award if third-party rights are protected.

The same news report warned that the outcome of these legal proceedings is likely to have lasting implications for investor confidence, governance transparency, and how the government upholds contracts and property rights under its PPP framework.

The arbitral tribunal and the courts have recognized the fact that it was not only CJHDevCo but also BCDA which failed to comply with its obligations under the lease contract.

The conflict arose when CJHDevCo stopped paying rent in the early 2000s citing BCDA’s failure to grant tax incentives, including the setting up of a one-stop shop for investors, which have affected the private company’s ability to attract investments.

CJHDevco had also previously stated that the tribunal’s final award did not order it to return Camp John Hay to BCDA free of its lawful occupants and instead only required the company to return the leased premises as far as practicable, nor did the SC which simply upheld the arbitral findings.

And the golf club? Members claim that Camp John Hay Golf Course holds a direct and separate contractual agreement with BCDA independent of the lease agreement between the government and CJHDevCo.

Someone privy to the arbitral process explained to me that arbitral rulings are party and case specific so that third parties, such as the sub-lessees of CJHDevCo, are not bound by said rulings. And that since the contracts between CJHDevCo and BCDA and between CJHDevCo and the sub-lessees are valid at the time they were entered into, then they should have been respected by the courts.

It was also pointed out to me that the arbitral tribunal never ordered that the sub-lessees be ejected since again, as third parties to the arbitral case between BCDA and CJHDevCo, they are not parties to the case nor are they bound by its decision.

And since the arbitral process is case-specific, the ruling should limited only to the case subject of arbitration, which is that between CJHDevCo and BCDA and should not concern itself with any other case, i.e. the contracts between CJHDevCo and the sub-lessees.

The doctrine of operative facts which arbitral bodies observe also aims to prevent injustice by acknowledging that some effects of an unconstitutional law, or for this particular case the contract between BCDA and CJHDevCo, cannot be undone without causing further harm or disruption.

The contract’s interpretation should be based on the facts and circumstances existing at the time the contract was made, not on any subsequent events so that the courts should look at the parties’ understanding and intent at the time of contracting, rather than trying to impose a new interpretation based on what has happened later, especially if reliance on those effects was in good faith.

What BCDA should have done was to take over the CJHDevCo contracts with the sub-lessees and respect the contracts, which are valid at the time they were entered into, it was explained. In short, there was no legal basis for the contracts with the sub-lessees to be terminated by the BCDA or even by the courts, or for these sub-lessees to be ejected from the leased property unless of course, the lease has expired.

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