In a significant ruling, the Supreme Court affirmed the authority of Regional Trial Courts (RTC) to hear disputes involving the Philippine Amusement and Gaming Corporation (PAGCOR) and emphasized the binding nature of contracts. The Court held that PAGCOR must honor its agreements, specifically a Memorandum of Agreement (MOA) with Fontana Development Corporation (FDC) allowing casino operations within the Clark Special Economic Zone (CSEZ). This decision underscores the principle that contracts voluntarily entered into are the law between the parties and must be respected, even when a government agency is involved.

Can PAGCOR Change the Rules? Examining Contractual Stability in Gaming Licenses

This case revolves around a dispute between PAGCOR and FDC concerning the operation of a casino within the CSEZ. In 1999, PAGCOR granted FDC (formerly RN Development Corporation) the authority to operate and maintain a casino inside the CSEZ through a Memorandum of Agreement (MOA). A key provision of the MOA stated that the license granted to FDC was co-terminus with PAGCOR’s franchise, including any extensions thereof. Subsequently, PAGCOR sought to replace the MOA with a new “Authority to Operate,” leading FDC to file a complaint for injunction before the Regional Trial Court (RTC) of Manila, seeking to prevent PAGCOR from enforcing the new terms. PAGCOR argued that the RTC lacked jurisdiction, contending that as an entity exercising powers similar to the Securities and Exchange Commission (SEC), any appeals from its decisions should be made directly to the Supreme Court.

The RTC initially issued a Temporary Restraining Order (TRO) in favor of FDC, preventing PAGCOR from implementing the new Authority to Operate. However, it later denied FDC’s application for a preliminary injunction, finding that FDC had not demonstrated a clear legal right. The trial court reconsidered its decision and granted the writ of preliminary injunction in favor of FDC. On appeal, the Court of Appeals (CA) upheld the RTC’s jurisdiction and eventually rejected PAGCOR’s petition. This prompted PAGCOR to elevate the matter to the Supreme Court, raising questions about the proper legal remedy for parties aggrieved by PAGCOR’s actions and the validity of the TRO and preliminary injunction issued by the trial court.

The Supreme Court addressed the central issue of jurisdiction, firmly establishing that the Manila RTC had jurisdiction over FDC’s complaint. The Court emphasized that jurisdiction is determined by the nature of the complaint, and FDC’s action for injunction, based on an alleged breach of contract, falls under the RTC’s original jurisdiction over civil actions where the subject matter is incapable of pecuniary estimation. Batas Pambansa Blg. 129 grants RTCs original exclusive jurisdiction over all civil actions in which the subject of the litigation is incapable of pecuniary estimation. Moreover, the RTCs shall exercise original jurisdiction “in the issuance of writs of certiorari, prohibition, mandamus, quo warranto, habeas corpus and injunction which may be enforced in any part of their respective regions” under Sec. 21 of BP 129.

PAGCOR’s reliance on its charter, Presidential Decree (PD) 1869, to assert exclusive jurisdiction of the Supreme Court was deemed flawed. While PD 1869 grants PAGCOR certain powers akin to those of the SEC, it does not explicitly provide for a specific procedure for appealing PAGCOR’s decisions directly to the Supreme Court. The Court distinguished the present case from previous instances where it had taken cognizance of cases involving PAGCOR, clarifying that those were exceptions to the principle of hierarchy of courts based on the expediency and importance of the issues involved.

Furthermore, the Supreme Court addressed the substantive issue of whether PAGCOR issued the license (MOA) to FDC under the authority of PD 1869 or under Executive Order (EO) 80, Section 5. PAGCOR argued that the MOA was based on EO 80, Section 5, which had been declared unconstitutional in Coconut Oil Refiners Association, Inc. v. Torres. The Court rejected this argument, clarifying that PAGCOR’s authority to license casinos stems from its charter, PD 1869, and not from EO 80 or Republic Act (RA) 7227. Section 13 of RA 7227 states that SBMA has no power to license or operate casinos, rather, said casinos shall continue to be licensed by PAGCOR. Hence, the source of PAGCOR’s authority lies in its basic charter, PD 1869, as amended, and neither in RA 7227 nor its extension, EO 80, for the latter merely recognizes PAGCOR’s power to license casinos.

The Court emphasized that PD 1869 empowers PAGCOR to regulate and control all games of chance within the Philippines. Thus, the unconstitutionality of Section 5 of EO 80 did not affect PAGCOR’s authority to issue the MOA to FDC. As the Supreme Court noted in Basco v. PAGCOR:

P.D. 1869 was enacted pursuant to the policy of the government to “regulate and centralize thru an appropriate institution all games of chance authorized by existing franchise or permitted by law” (1st Whereas Clause, PD 1869). As was subsequently proved, regulating and centralizing gambling operations in one corporate entity – the PAGCOR, was beneficial not just to the Government but to society in general.

The Court further held that PAGCOR’s attempt to replace the MOA with a new Authority to Operate constituted a breach of contract. The MOA, validly entered into by PAGCOR and FDC, was the law between the parties, and its terms, including the provision that the license was co-terminus with PAGCOR’s franchise, should be respected. The Court emphasized that:

As parties to the MOA, FDC and PAGCOR bound themselves to all its provisions. After all, the terms of a contract have the force of law between the parties, and courts have no choice but to enforce such contract so long as they are not contrary to law, morals, good customs, or public policy.

PAGCOR’s actions disregarded the MOA’s stipulated effectivity period, which was co-terminus with PAGCOR’s franchise, including any extensions. The Supreme Court invalidated PAGCOR’s attempt to unilaterally alter the terms of the agreement, stressing the importance of honoring contractual obligations.

FAQs

What was the central legal question in this case?	The core issue was whether the Regional Trial Court or the Supreme Court had jurisdiction over FDC’s complaint for injunction and specific performance against PAGCOR.
What did the Supreme Court decide about the RTC’s jurisdiction?	The Supreme Court ruled that the Manila RTC did have jurisdiction over FDC’s complaint, as it involved a breach of contract and an action for injunction, which falls under the RTC’s original jurisdiction.
On what basis did PAGCOR claim that the Supreme Court had exclusive jurisdiction?	PAGCOR argued that because it exercises powers similar to the Securities and Exchange Commission (SEC), appeals from its decisions should be made directly to the Supreme Court, as provided under PD 902-A.
What was the significance of the Memorandum of Agreement (MOA) in this case?	The MOA granted FDC the authority to operate a casino within the CSEZ, and its terms, including the provision that the license was co-terminus with PAGCOR’s franchise, were central to the dispute.
Did the Supreme Court find that PAGCOR had the right to unilaterally change the terms of the MOA?	No, the Court held that PAGCOR’s attempt to replace the MOA with a new Authority to Operate constituted a breach of contract, as the MOA was valid and its terms were binding on both parties.
What legal principle did the Supreme Court emphasize in its decision?	The Court emphasized the principle that contracts voluntarily entered into are the law between the parties and must be respected, so long as they are not contrary to law, morals, good customs, or public policy.
What was the effect of the earlier decision in Coconut Oil Refiners Association, Inc. v. Torres on this case?	The Court clarified that the unconstitutionality of Section 5 of EO 80, as determined in Coconut Oil Refiners Association, Inc. v. Torres, did not affect PAGCOR’s authority to issue the MOA to FDC, as PAGCOR’s authority stems from its charter, PD 1869.
What is the practical implication of this ruling for businesses operating under agreements with government agencies like PAGCOR?	This ruling reinforces the importance of honoring contractual obligations, even when a government agency is involved, and underscores the principle that contracts voluntarily entered into are the law between the parties and must be respected.

This case serves as a clear reminder that government entities, like private parties, are bound by the contracts they enter into. It reinforces the legal principle that contractual obligations must be honored and provides a framework for resolving disputes between government agencies and private entities regarding licensing and regulatory powers.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

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: PAGCOR vs. FONTANA, G.R. No. 187972, June 29, 2010