2S PIL Case Digests

TOPIC Sovereign Immunity AUTHOR #Number_Surname

CASE TITLE China Machinery v. Santa Maria GR NO 665 SCRA

DOCTRINE There are two conflicting concepts of sovereign immunity, each widely held and firmly established.
According to the classical or absolute theory, a sovereign cannot, without its consent, be made a
respondent in the courts of another sovereign. According to the newer or restrictive theory, the
immunity of the sovereign is recognized only with regard to public acts or acts jure imperii of a state,
but not with regard to private acts or acts jure gestionis.
FACTS
Petitioner China National Machinery entered into a Memorandum of Understanding with North
Luzon Railways Corporation (North Railway) to conduct a feasibility study for the possibility of a
railway line from Manila to San Fernando, La Union. Pursuant to such project, Export Import Bank of
China (EXIM Bank) and the Department of Finance of the Philippines (DOF) entered into a
Memorandum of Understanding wherein the former extended Preferential Buyer’s Credit for the
construction of the railway project. Under the Memorandum of Understanding, EXIM Bank agreed to
extend an amount not exceeding USD400,000,000 in favor of the DOF, payable in 20 years, with a 5-
year grace period, and at the rate of 3% per annum.
The Chinese Ambassador of the Philippines would inform the DOF of the designation of China
National Machinery as the prime contractor of the railway project. Afterwards, Northrail and CNMEG
executed a Contract Agreement for the construction of Section I, Phase I of the North Luzon Railway
System from Caloocan to Malolos on a turnkey basis (the Contract Agreement). This led respondents
to institute an action before the RTC of Makati praying for the annulment of the contract agreement
and the loan agreement alleging that were void for being contrary to (a) the Constitution; (b)
Republic Act No. 9184 (R.A. No. 9184), otherwise known as the Government Procurement Reform
Act; (c) Presidential Decree No. 1445, otherwise known as the Government Auditing Code; and (d)
Executive Order No. 292, otherwise known as the Administrative Code

China National Machinery(CNM) would file a motion to dismiss alleging that it is an agent of the
Chinese Government which is why it is immune from suit. The motion to dismiss would be denied
which led CNM to appeal to the CA. The assailed trial court ruling would be affirmed. Hence, this
petition

ISSUE/S Whether or not CNMEG is entitled to immunity, precluding it from being sued before a local
court.
RULING/S NO. CNMEG is not entitled to immunity. The Supreme Court laid down the rules for the doctrine of
state immunity in ‘JUSMAG v. National Labor Relations Commission’:

“The doctrine of state immunity from suit has undergone further metamorphosis. The view evolved
that the existence of a contract does not, per se, mean that sovereign states may, at all times, be
sued in local courts. The complexity of relationships between sovereign states, brought about by
their increasing commercial activities, mothered a more restrictive application of the doctrine.

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As it stands now, the application of the doctrine of immunity from suit has been restricted to
sovereign or governmental activities (jure imperii). The mantle of state immunity cannot be
extended to commercial, private and proprietary acts (jure gestionis)”

In the case at bar, the Supreme Court found that CNMEG was engaging in proprietary functions. The
Supreme Court cited the Memorandum of Understanding(MOU) dated September 14, 2002
wherein it was stated that: “WHEREAS, CNMEG has expressed interest in the rehabilitation and/or
modernization of the MLN from Metro Manila to San Fernando, La Union passing through the
provinces of Bulacan, Pampanga, Tarlac, Pangasinan and La Union (the 'Project')” It was ruled that
the aforementioned MOU explicitly provides that it was CNMEG who initiated the project due to
business interest and not through the exercise of sovereign functions by the Chinese Government.

Furthermore, the letter of the Chinese Ambassador was also cited by the Supreme Court which
reads as follows:
“CNMEG already signed an MOU with the North Luzon Railways Corporation last September 14,
2000 during the visit of Chairman Li Peng. Such being the case, they have already established an
initial working relationship with your North Luzon Railways Corporation. This would categorize
CNMEG as the state corporation within the People's Republic of China which initiated our
Government's involvement in the Project. “

The Supreme Court stated that the use of the term “state corporation” merely served to categorize
the status of CNMEG and was not meant to indicate that it is acting as an agent of the Chinese
Government. “To imply otherwise would result in an absurd situation, in which all Chinese
corporations owned by the state would be automatically considered as performing governmental
activities, even if they are clearly engaged in commercial or proprietary pursuits.”

The Loan Agreement executed between the Chinese and Philippine Governments was invoked by
CNMEG to support its argument that it was exercising a governmental function in behalf of China.
Article 11 of the Loan agreement, however, provides otherwise:
“Article 11.. . . (j) Commercial Activity. The execution and delivery of this Agreement by the
Borrower constitute, and the Borrower's performance of and compliance with its obligations under
this Agreement will constitute, private and commercial acts done and performed for commercial
purposes under the laws of the Republic of the Philippines and neither the Borrower nor any of its
assets is entitled to any immunity or privilege (sovereign or otherwise) from suit, execution or any
other legal process with respect to its obligations under this Agreement, as the case may be, in any
jurisdiction. Notwithstanding the foregoing, the Borrower does not waive any immunity with
respect of its assets which are (i) used by a diplomatic or consular mission of the Borrower and (ii)
assets of a military character and under control of a military authority or defense agency and (iii)
located in the Philippines and dedicated to public or governmental use (as distinguished from
patrimonial assets or assets dedicated to commercial use).”

Thus, despite petitioner's claim that the EXIM Bank extended financial assistance to Northrail
because the bank was mandated by the Chinese government, and not because of any motivation to
do business in the Philippines, it is clear from the foregoing provisions that the Northrail Project was
a purely commercial transaction. The Supreme Court held that the loan agreement, letter of the
ambassador and the Memorandum Understanding clearly indicate the desire of the CNMEG to

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San Beda University – College of Law
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construct the Northrail project in pursuit of a purely commercial activity performed in the ordinary
course of its business.

Furthermore, the Supreme Court ruled that there is no evidence adduced by the CNMEG that would
entitle it to immunity from suit. It is established in this jurisdiction that a foreign entity must secure
a certification from the DFA in order to prove its immunity. No certification was presented by the
CNMEG in the instant case. CNMEG presented the certification of the OSG as proof of its immunity
from suit but the Supreme Court ruled that “this determination by the OSG, or by the OGCC for that
matter, does not inspire the same degree of confidence as a DFA certification. Even with a DFA
certification, however, it must be remembered that this Court is not precluded from making an
inquiry into the intrinsic correctness of such certification”

Lastly, in the United States, the Foreign Sovereign Immunities Act of 1976 provides for a waiver by
implication of state immunity. In the said law, the agreement to submit disputes to arbitration in a
foreign country is construed as an implicit waiver of immunity from suit. Although there is no
similar law in the Philippines, there is reason to apply the legal reasoning behind the waiver in this
case. The contract of agreement explicitly provides for a recourse through arbitration in the
settlement of disputes. This shows that CNMEG has waived its immunity from suit. Hence, the
petition is denied.

NOTES

2S [AY 2020-2021]
San Beda University – College of Law