Republic of the Philippines

Supreme Court
Manila

EN BANC

CHINA NATIONAL MACHINERY & G.R. No. 185572

EQUIPMENT CORP. (GROUP),
Petitioner,
Present:

versus CORONA, C.J.,

CARPIO,
VELASCO, JR.,
HON. CESAR D. SANTAMARIA, in his LEONARDO-DE CASTRO,
official capacity as Presiding Judge of BRION,
Branch 145, Regional Trial Court of PERALTA,
Makati City, HERMINIO HARRY L. BERSAMIN,
ROQUE, JR., JOEL R. BUTUYAN, DEL CASTILLO,
ROGER R. RAYEL, ROMEL R. ABAD,
BAGARES, CHRISTOPHER VILLARAMA, JR.,
FRANCISCO C. BOLASTIG, LEAGUE PEREZ,
OF URBAN POOR FOR ACTION MENDOZA,
(LUPA), KILUSAN NG MARALITA SA SERENO,
MEYCAUAYAN (KMM-LUPA REYES, and
CHAPTER), DANILO M. CALDERON, PERLAS-BERNABE, JJ.
VICENTE C. ALBAN, MERLYN M.
VAAL, LOLITA S. QUINONES,
RICARDO D. LANOZO, JR.,
CONCHITA G. GOZO, MA. TERESA D.
ZEPEDA, JOSEFINA A. LANOZO, and
SERGIO C. LEGASPI, JR.,
KALIPUNAN NG DAMAYANG
MAHIHIRAP (KADAMAY), EDY
CLERIGO, RAMMIL DINGAL, Promulgated:
NELSON B. TERRADO, CARMEN
DEUNIDA, and EDUARDO LEGSON, February 7, 2012
Respondents.
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION
SERENO, J.:

This is a Petition for Review on Certiorari with Prayer for the Issuance of a
Temporary Restraining Order (TRO) and/or Preliminary Injunction assailing
the 30 September 2008 Decision and 5 December 2008 Resolution of the Court
of Appeals (CA) in CAG.R. SP No. 103351. [1]

On 14 September 2002, petitioner China National Machinery & Equipment Corp.

(Group) (CNMEG), represented by its chairperson, Ren Hongbin, entered into a
Memorandum of Understanding with the North Luzon Railways Corporation
(Northrail), represented by its president, Jose L. Cortes, Jr. for the conduct of a
feasibility study on a possible railway line from Manila to San Fernando, La
Union (the Northrail Project).[2]

On 30 August 2003, the Export Import Bank of China (EXIM Bank) and
the Department of Finance of the Philippines (DOF) entered into a Memorandum
of Understanding (Aug 30 MOU), wherein China agreed to extend Preferential
Buyers Credit to the Philippine government to finance the Northrail
Project.[3] The Chinese government designated EXIM Bank as the lender, while
the Philippine government named the DOF as the borrower.[4] Under the Aug 30
MOU, EXIM Bank agreed to extend an amount not exceeding USD 400,000,000
in favor of the DOF, payable in 20 years, with a 5-year grace period, and at the
rate of 3% per annum.[5]

On 1 October 2003, the Chinese Ambassador to the Philippines, Wang Chungui

(Amb. Wang), wrote a letter to DOF Secretary Jose Isidro Camacho (Sec.
Camacho) informing him of CNMEGs designation as the Prime Contractor for
the Northrail Project.[6]

On 30 December 2003, 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).[7] The
contract price for the Northrail Project was pegged at USD 421,050,000.[8]

On 26 February 2004, the Philippine government and EXIM Bank entered

into a counterpart financial agreement Buyer Credit Loan Agreement No. BLA
04055 (the Loan Agreement).[9] In the Loan Agreement, EXIM Bank agreed to
extend Preferential Buyers Credit in the amount of USD 400,000,000 in favor of
the Philippine government in order to finance the construction of Phase I of the
Northrail Project.[10]
 On 13 February 2006, respondents filed a Complaint for Annulment of
Contract and Injunction with Urgent Motion for Summary Hearing to Determine
the Existence of Facts and Circumstances Justifying the Issuance of Writs of
Preliminary Prohibitory and Mandatory Injunction and/or TRO against CNMEG,
the Office of the Executive Secretary, the DOF, the Department of Budget and
Management, the National Economic Development Authority and
Northrail.[11] The case was docketed as Civil Case No. 06-203 before the Regional
Trial Court, National Capital Judicial Region, Makati City, Branch 145 (RTC Br.
145). In the Complaint, respondents alleged that the Contract Agreement and the
Loan Agreement 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.[12]

RTC Br. 145 issued an Order dated 17 March 2006 setting the case for
hearing on the issuance of injunctive reliefs.[13] On 29 March 2006, CNMEG filed
an Urgent Motion for Reconsideration of this Order.[14] Before RTC Br. 145 could
rule thereon, CNMEG filed a Motion to Dismiss dated 12 April 2006, arguing
that the trial court did not have jurisdiction over (a) its person, as it was an agent
of the Chinese government, making it immune from suit, and (b) the subject
matter, as the Northrail Project was a product of an executive agreement.[15]

On 15 May 2007, RTC Br. 145 issued an Omnibus Order denying

CNMEGs Motion to Dismiss and setting the case for summary hearing to
determine whether the injunctive reliefs prayed for should be issued.[16] CNMEG
then filed a Motion for Reconsideration,[17] which was denied by the trial court in
an Order dated 10 March 2008.[18] Thus, CNMEG filed before the CA a Petition
for Certiorari with Prayer for the Issuance of TRO and/or Writ of Preliminary
Injunction dated 4 April 2008.[19]

In the assailed Decision dated 30 September 2008, the appellate court

dismissed the Petition for Certiorari.[20] Subsequently, CNMEG filed a Motion
for Reconsideration,[21] which was denied by the CA in a Resolution dated 5
December 2008.[22] Thus, CNMEG filed the instant Petition for Review on
Certiorari dated 21 January 2009, raising the following issues: [23]
Whether or not petitioner CNMEG is an agent of the sovereign
Peoples Republic of China.
 Whether or not the Northrail contracts are products of an
executive agreement between two sovereign states.

Whether or not the certification from the Department of Foreign

Affairs is necessary under the foregoing circumstances.

Whether or not the act being undertaken by petitioner CNMEG

is an act jure imperii.

Whether or not the Court of Appeals failed to avoid a procedural

limbo in the lower court.

Whether or not the Northrail Project is subject to competitive

public bidding.

Whether or not the Court of Appeals ignored the ruling of this

Honorable Court in the Neri case.

CNMEG prays for the dismissal of Civil Case No. 06-203 before RTC Br.
145 for lack of jurisdiction. It likewise requests this Court for the issuance of a
TRO and, later on, a writ of preliminary injunction to restrain public respondent
from proceeding with the disposition of Civil Case No. 06-203.

The crux of this case boils down to two main issues, namely:

1. Whether CNMEG is entitled to immunity, precluding it from being

sued before a local court.
2. Whether the Contract Agreement is an executive agreement, such
that it cannot be questioned by or before a local court.

First issue: Whether CNMEG is entitled

to immunity

This Court explained the doctrine of sovereign immunity in Holy See v.

Rosario,[24] to wit:
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. (Emphasis supplied; citations omitted.)

xxx xxx xxx

The restrictive theory came about because of the entry of

sovereign states into purely commercial activities remotely connected
with the discharge of governmental functions. This is particularly true
with respect to the Communist states which took control of
nationalized business activities and international trading.

In JUSMAG v. National Labor Relations Commission,[25] this Court

affirmed the Philippines adherence to the restrictive theory as follows:
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.

xxx xxx xxx

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).[26] (Emphasis supplied.)

Since the Philippines adheres to the restrictive theory, it is crucial to

ascertain the legal nature of the act involved whether the entity claiming immunity
performs governmental, as opposed to proprietary, functions. As held in United
States of America v. Ruiz [27]
The restrictive application of State immunity is proper only
when the proceedings arise out of commercial transactions of the
foreign sovereign, its commercial activities or economic affairs. Stated
differently, a State may be said to have descended to the level of an
individual and can thus be deemed to have tacitly given its consent to
be sued only when it enters into business contracts. It does not apply
where the contract relates to the exercise of its sovereign functions.[28]
A. CNMEG is engaged in a
proprietary activity.

A threshold question that must be answered is whether CNMEG performs

governmental or proprietary functions. A thorough examination of the basic facts
of the case would show that CNMEG is engaged in a proprietary activity.

The parties executed the Contract Agreement for the purpose of constructing
the Luzon Railways, viz:[29]
WHEREAS the Employer (Northrail) desired to construct the
railways form Caloocan to Malolos, section I, Phase I of Philippine North
Luzon Railways Project (hereinafter referred to as THE PROJECT);

AND WHEREAS the Contractor has offered to provide the Project

on Turnkey basis, including design, manufacturing, supply, construction,
commissioning, and training of the Employers personnel;

AND WHEREAS the Loan Agreement of the Preferential Buyers

Credit between Export-Import Bank of China and Department of Finance
of Republic of the Philippines;

NOW, THEREFORE, the parties agree to sign this Contract for the
Implementation of the Project.

The above-cited portion of the Contract Agreement, however, does not on

its own reveal whether the construction of the Luzon railways was meant to be a
proprietary endeavor. In order to fully understand the intention behind and the
purpose of the entire undertaking, the Contract Agreement must not be read in
isolation. Instead, it must be construed in conjunction with three other documents
executed in relation to the Northrail Project, namely: (a) the Memorandum of
Understanding dated 14 September 2002 between Northrail and CNMEG;[30] (b)
the letter of Amb. Wang dated 1 October 2003 addressed to Sec. Camacho;[31] and
(c) the Loan Agreement.[32]

1. Memorandum of Understanding dated

14 September 2002
 The Memorandum of Understanding dated 14 September 2002 shows that
CNMEG sought the construction of the Luzon Railways as a proprietary venture.
The relevant parts thereof read:
WHEREAS, CNMEG has the financial capability,
professional competence and technical expertise to assess the state of
the [Main Line North (MLN)] and recommend implementation plans
as well as undertake its rehabilitation and/or modernization;

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);

WHEREAS, the NORTHRAIL CORP. welcomes CNMEGs

proposal to undertake a Feasibility Study (the Study) at no cost to
NORTHRAIL CORP.;

WHEREAS, the NORTHRAIL CORP. also welcomes

CNMEGs interest in undertaking the Project with Suppliers
Credit and intends to employ CNMEG as the Contractor for the
Project subject to compliance with Philippine and Chinese laws,
rules and regulations for the selection of a contractor;

WHEREAS, the NORTHRAIL CORP. considers CNMEGs

proposal advantageous to the Government of the Republic of
the Philippines and has therefore agreed to assist CNMEG in the
conduct of the aforesaid Study;

xxx xxx xxx

II. APPROVAL PROCESS

2.1 As soon as possible after completion and presentation of the

Study in accordance with Paragraphs 1.3 and 1.4 above and
in compliance with necessary governmental laws, rules,
regulations and procedures required from both parties, the
parties shall commence the preparation and negotiation of the
terms and conditions of the Contract (the Contract) to be
entered into between them on the implementation of the
Project. The parties shall use their best endeavors to
formulate and finalize a Contract with a view to signing
the Contract within one hundred twenty (120) days from
 CNMEGs presentation of the Study.[33] (Emphasis
supplied)

Clearly, it was CNMEG that initiated the undertaking, and not the Chinese
government. The Feasibility Study was conducted not because of any diplomatic
gratuity from or exercise of sovereign functions by the Chinese government, but
was plainly a business strategy employed by CNMEG with a view to securing
this commercial enterprise.

2. Letter dated 1 October 2003

That CNMEG, and not the Chinese government, initiated the

Northrail Project was confirmed by Amb. Wang in his letter dated 1 October
2003, thus:
1. CNMEG has the proven competence and capability to
undertake the Project as evidenced by the ranking of 42 given by the
ENR among 225 global construction companies.

2. 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 Peoples Republic of China which
initiated our Governments involvement in the Project.

3. Among the various state corporations of the Peoples

Republic of China, only CNMEG has the advantage of being fully
familiar with the current requirements of the Northrail Project
having already accomplished a Feasibility Study which was used as
inputs by the North Luzon Railways Corporation in the approvals
(sic) process required by the Republic of
[34]
the Philippines. (Emphasis supplied.)

Thus, the desire of CNMEG to secure the Northrail Project was in the
ordinary or regular course of its business as a global construction company. The
implementation of the Northrail Project was intended to generate profit for
CNMEG, with the Contract Agreement placing a contract price of USD
421,050,000 for the venture.[35] The use of the term state corporation to refer to
CNMEG was only descriptive of its nature as a government-owned and/or -
controlled corporation, and its assignment as the Primary Contractor did not
imply that it was acting on behalf of China in the performance of the latter’s
sovereign functions. 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.

3. The Loan Agreement

CNMEG claims immunity on the ground that the Aug 30 MOU on the
financing of the Northrail Project was signed by the Philippine and Chinese
governments, and its assignment as the Primary Contractor meant that it was bound
to perform a governmental function on behalf of China. However, the Loan
Agreement, which originated from the same Aug 30 MOU, belies this
reasoning, viz:
Article 11. xxx (j) Commercial Activity The execution and
delivery of this Agreement by the Borrower constitute, and the
Borrowers 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). (Emphasis supplied.)

(k) Proceedings to Enforce Agreement In any proceeding in the

Republic of the Philippines to enforce this Agreement, the choice of the
laws of the Peoples Republic of China as the governing law hereof will
be recognized and such law will be applied. The waiver of immunity by
the Borrower, the irrevocable submissions of the Borrower to the non-
 exclusive jurisdiction of the courts of the Peoples Republic of China and
the appointment of the Borrowers Chinese Process Agent is legal, valid,
binding and enforceable and any judgment obtained in the Peoples
Republic of China will be if introduced, evidence for enforcement in any
proceedings against the Borrower and its assets in the Republic of the
Philippines provided that (a) the court rendering judgment had
jurisdiction over the subject matter of the action in accordance with its
jurisdictional rules, (b) the Republic had notice of the proceedings, (c)
the judgment of the court was not obtained through collusion or fraud,
and (d) such judgment was not based on a clear mistake of fact or law.[36]

Further, the Loan Agreement likewise contains this express waiver of

immunity:
15.5 Waiver of Immunity The Borrower irrevocably and
unconditionally waives, any immunity to which it or its property may at
any time be or become entitled, whether characterized as sovereign
immunity or otherwise, from any suit, judgment, service of process upon
it or any agent, execution on judgment, set-off, attachment prior to
judgment, attachment in aid of execution to which it or its assets may be
entitled in any legal action or proceedings with respect to this Agreement
or any of the transactions contemplated hereby or hereunder.
Notwithstanding the foregoing, the Borrower does not waive any
immunity in respect of its assets which are (i) used by a diplomatic or
consular mission of the Borrower, (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 a public or governmental use (as
distinguished from patrimonial assets or assets dedicated to commercial
use).[37]

Thus, despite petitioners 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,[38] it is clear
from the foregoing provisions that the Northrail Project was a purely commercial
transaction.

Admittedly, the Loan Agreement was entered into between EXIM Bank and
the Philippine government, while the Contract Agreement was between Northrail
and CNMEG. Although the Contract Agreement is silent on the classification of
the legal nature of the transaction, the foregoing provisions of the Loan Agreement,
which is an inextricable part of the entire undertaking, nonetheless reveal the
intention of the parties to the Northrail Project to classify the whole venture as
commercial or proprietary in character.

Thus, piecing together the content and tenor of the Contract Agreement,
the Memorandum of Understanding dated 14 September 2002, Amb. Wangs
letter dated 1 October 2003, and the Loan Agreement would reveal the desire of
CNMEG to construct the Luzon Railways in pursuit of a purely commercial
activity performed in the ordinary course of its business.

B. CNMEG failed to adduce

evidence that it is immune from suit
under Chinese law.

Even assuming arguendo that CNMEG performs governmental functions,

such claim does not automatically vest it with immunity. This view finds support
in Malong v. Philippine National Railways, in which this Court held that
(i)mmunity from suit is determined by the character of the objects for which the
entity was organized.[39]
In this regard, this Courts ruling in Deutsche Gesellschaft Fr Technische
Zusammenarbeit (GTZ) v. CA[40] must be examined. In Deutsche
Gesellschaft, Germany and the Philippines entered into a Technical Cooperation
Agreement, pursuant to which both signed an arrangement promoting the Social
Health InsuranceNetworking and Empowerment (SHINE) project. The two
governments named their respective implementing organizations: the Department
of Health (DOH) and the Philippine Health Insurance Corporation (PHIC) for
the Philippines, and GTZ for the implementation of Germanys contributions. In
ruling that GTZ was not immune from suit, this Court held:
The arguments raised by GTZ and the [Office of the Solicitor
General (OSG)] are rooted in several indisputable facts. The SHINE
project was implemented pursuant to the bilateral agreements
between the Philippine and German governments. GTZ was tasked,
under the 1991 agreement, with the implementation of the
contributions of the German government. The activities performed
by GTZ pertaining to the SHINE project are governmental in nature,
related as they are to the promotion of health insurance in
the Philippines. The fact that GTZ entered into employment contracts
with the private respondents did not disqualify it from invoking
immunity from suit, as held in cases such as Holy See v. Rosario,
Jr., which set forth what remains valid doctrine:
 Certainly, the mere entering into a contract by a
foreign state with a private party cannot be the ultimate
test. Such an act can only be the start of the inquiry. The
logical question is whether the foreign state is engaged in
the activity in the regular course of business. If the
foreign state is not engaged regularly in a business or
trade, the particular act or transaction must then be tested
by its nature. If the act is in pursuit of a sovereign activity,
or an incident thereof, then it is an act jure imperii,
especially when it is not undertaken for gain or profit.

Beyond dispute is the tenability of the comment points (sic)

raised by GTZ and the OSG that GTZ was not performing proprietary
functions notwithstanding its entry into the particular employment
contracts. Yet there is an equally fundamental premise which GTZ and
the OSG fail to address, namely: Is GTZ, by conception, able to enjoy
the Federal Republics immunity from suit?

The principle of state immunity from suit, whether a local state

or a foreign state, is reflected in Section 9, Article XVI of the
Constitution, which states that the State may not be sued without its
consent. Who or what consists of the State? For one, the doctrine is
available to foreign States insofar as they are sought to be sued in the
courts of the local State, necessary as it is to avoid unduly vexing the
peace of nations.

If the instant suit had been brought directly against the Federal
Republic of Germany, there would be no doubt that it is a suit brought
against a State, and the only necessary inquiry is whether said State had
consented to be sued. However, the present suit was brought against
GTZ. It is necessary for us to understand what precisely are the
parameters of the legal personality of GTZ.

Counsel for GTZ characterizes GTZ as the implementing

agency of the Government of the Federal Republic of Germany, a
depiction similarly adopted by the OSG. Assuming that the
characterization is correct, it does not automatically invest GTZ with
the ability to invoke State immunity from suit. The distinction lies
in whether the agency is incorporated or unincorporated.

xxx xxx xxx

State immunity from suit may be waived by general or special

law. The special law can take the form of the original charter of the
incorporated government agency. Jurisprudence is replete with
examples of incorporated government agencies which were ruled not
entitled to invoke immunity from suit, owing to provisions in their
charters manifesting their consent to be sued.

xxx xxx xxx

It is useful to note that on the part of the Philippine government, it

had designated two entities, the Department of Health and the Philippine
Health Insurance Corporation (PHIC), as the implementing agencies in
behalf of the Philippines. The PHIC was established under Republic Act
No. 7875, Section 16 (g) of which grants the corporation the power to sue
and be sued in court. Applying the previously cited jurisprudence, PHIC
would not enjoy immunity from suit even in the performance of its
functions connected with SHINE, however, (sic) governmental in nature
as (sic) they may be.

Is GTZ an incorporated agency of the German

government? There is some mystery surrounding that question.
Neither GTZ nor the OSG go beyond the claim that petitioner is
the implementing agency of the Government of the Federal
Republic of Germany. On the other hand, private respondents
asserted before the Labor Arbiter that GTZ was a private corporation
engaged in the implementation of development projects. The Labor
Arbiter accepted that claim in his Order denying the Motion to
Dismiss, though he was silent on that point in his Decision.
Nevertheless, private respondents argue in their Comment that the
finding that GTZ was a private corporation was never controverted,
and is therefore deemed admitted. In its Reply, GTZ controverts that
finding, saying that it is a matter of public knowledge that the status
of petitioner GTZ is that of the implementing agency, and not that of
a private corporation.

In truth, private respondents were unable to adduce any evidence

to substantiate their claim that GTZ was a private corporation, and the
Labor Arbiter acted rashly in accepting such claim without explanation.
But neither has GTZ supplied any evidence defining its legal nature
beyond that of the bare descriptive implementing agency. There is
no doubt that the 1991 Agreement designated GTZ as the
implementing agency in behalf of the German government. Yet the
catch is that such term has no precise definition that is responsive
to our concerns. Inherently, an agent acts in behalf of a principal,
and the GTZ can be said to act in behalf of the German state. But
that is as far as implementing agency could take us. The term by
 itself does not supply whether GTZ is incorporated or
unincorporated, whether it is owned by the German state or by
private interests, whether it has juridical personality independent
of the German government or none at all.

xxx xxx xxx

Again, we are uncertain of the corresponding legal

implications under German law surrounding a private company
owned by the Federal Republic of Germany. Yet taking the
description on face value, the apparent equivalent under Philippine
law is that of a corporation organized under the Corporation Code
but owned by the Philippine government, or a government-owned
or controlled corporation without original charter. And it bears
notice that Section 36 of the Corporate Code states that [e]very
corporation incorporated under this Code has the power and
capacity x x x to sue and be sued in its corporate name.

It is entirely possible that under German law, an entity such as

GTZ or particularly GTZ itself has not been vested or has been
specifically deprived the power and capacity to sue and/or be sued. Yet
in the proceedings below and before this Court, GTZ has failed to
establish that under German law, it has not consented to be sued
despite it being owned by the Federal Republic of Germany. We
adhere to the rule that in the absence of evidence to the contrary,
foreign laws on a particular subject are presumed to be the same
as those of the Philippines, and following the most intelligent
assumption we can gather, GTZ is akin to a governmental owned
or controlled corporation without original charter which, by virtue
of the Corporation Code, has expressly consented to be sued. At the
very least, like the Labor Arbiter and the Court of Appeals, this Court
has no basis in fact to conclude or presume that GTZ enjoys immunity
from suit.[41] (Emphasis supplied.)

Applying the foregoing ruling to the case at bar, it is readily apparent that
CNMEG cannot claim immunity from suit, even if it contends that it performs
governmental functions. Its designation as the Primary Contractor does not
automatically grant it immunity, just as the term implementing agency has no
precise definition for purposes of ascertaining whether GTZ was immune from
suit. Although CNMEG claims to be a government-owned corporation, it failed to
adduce evidence that it has not consented to be sued under Chinese law. Thus,
following this Courts ruling in Deutsche Gesellschaft, in the absence of evidence
to the contrary, CNMEG is to be presumed to be a government-owned and -
controlled corporation without an original charter. As a result, it has the capacity
to sue and be sued under Section 36 of the Corporation Code.

C. CNMEG failed to present a

certification from the Department of
Foreign Affairs.

In Holy See,[42] this Court reiterated the oft-cited doctrine that the
determination by the Executive that an entity is entitled to sovereign or diplomatic
immunity is a political question conclusive upon the courts, to wit:
In Public International Law, when a state or international agency
wishes to plead sovereign or diplomatic immunity in a foreign court,
it requests the Foreign Office of the state where it is sued to convey
to the court that said defendant is entitled to immunity.

xxx xxx xxx

In the Philippines, the practice is for the foreign government

or the international organization to first secure an executive
endorsement of its claim of sovereign or diplomatic immunity. But
how the Philippine Foreign Office conveys its endorsement to the
courts varies. In International Catholic Migration Commission v.
Calleja, 190 SCRA 130 (1990), the Secretary of Foreign Affairs just
sent a letter directly to the Secretary of Labor and Employment,
informing the latter that the respondent-employer could not be sued
because it enjoyed diplomatic immunity. In World Health
Organization v. Aquino, 48 SCRA 242 (1972), the Secretary of Foreign
Affairs sent the trial court a telegram to that effect. In Baer v. Tizon, 57
SCRA 1 (1974), the U.S. Embassy asked the Secretary of Foreign
Affairs to request the Solicitor General to make, in behalf of the
Commander of the United States Naval Base at Olongapo City,
Zambales, a suggestion to respondent Judge. The Solicitor General
embodied the suggestion in a Manifestation and Memorandum
as amicus curiae.

In the case at bench, the Department of Foreign Affairs, through

the Office of Legal Affairs moved with this Court to be allowed to
intervene on the side of petitioner. The Court allowed the said
Department to file its memorandum in support of petitioners claim of
sovereign immunity.
 In some cases, the defense of sovereign immunity was submitted
directly to the local courts by the respondents through their private
counsels (Raquiza v. Bradford, 75 Phil. 50 [1945]; Miquiabas v.
Philippine-Ryukyus Command, 80 Phil. 262 [1948]; United States of
America v. Guinto, 182 SCRA 644 [1990] and companion cases). In
cases where the foreign states bypass the Foreign Office, the courts can
inquire into the facts and make their own determination as to the nature
of the acts and transactions involved.[43] (Emphasis supplied.)

The question now is whether any agency of the Executive Branch can make a
determination of immunity from suit, which may be considered as conclusive upon
the courts. This Court, in Department of Foreign Affairs (DFA) v. National Labor
Relations Commission (NLRC),[44] emphasized the DFAs competence and authority
to provide such necessary determination, to wit:
The DFAs function includes, among its other mandates, the
determination of persons and institutions covered by diplomatic
immunities, a determination which, when challenge, (sic) entitles it
to seek relief from the court so as not to seriously impair the
conduct of the country's foreign relations. The DFA must be
allowed to plead its case whenever necessary or advisable to enable it
to help keep the credibility of the Philippine government before the
international community. When international agreements are
concluded, the parties thereto are deemed to have likewise
accepted the responsibility of seeing to it that their agreements are
duly regarded. In our country, this task falls principally of (sic) the
DFA as being the highest executive department with the
competence and authority to so act in this aspect of the
international arena.[45] (Emphasis supplied.)

Further, the fact that this authority is exclusive to the DFA was also
emphasized in this Courts ruling in Deutsche Gesellschaft:
It is to be recalled that the Labor Arbiter, in both of his rulings,
noted that it was imperative for petitioners to secure from the
Department of Foreign Affairs a certification of respondents diplomatic
status and entitlement to diplomatic privileges including immunity
from suits. The requirement might not necessarily be imperative.
However, had GTZ obtained such certification from the DFA, it
would have provided factual basis for its claim of immunity that
would, at the very least, establish a disputable evidentiary
 presumption that the foreign party is indeed immune which the
opposing party will have to overcome with its own factual evidence.
We do not see why GTZ could not have secured such certification
or endorsement from the DFA for purposes of this case. Certainly,
it would have been highly prudential for GTZ to obtain the same after
the Labor Arbiter had denied the motion to dismiss. Still, even at this
juncture, we do not see any evidence that the DFA, the office of the
executive branch in charge of our diplomatic relations, has indeed
endorsed GTZs claim of immunity. It may be possible that GTZ tried,
but failed to secure such certification, due to the same concerns that we
have discussed herein.

Would the fact that the Solicitor General has endorsed

GTZs claim of States immunity from suit before this Court
sufficiently substitute for the DFA certification? Note that the rule
in public international law quoted in Holy See referred to
endorsement by the Foreign Office of the State where the suit is
filed, such foreign office in the Philippines being the Department
of Foreign Affairs. Nowhere in the Comment of the OSG is it
manifested that the DFA has endorsed GTZs claim, or that the
OSG had solicited the DFAs views on the issue. The arguments
raised by the OSG are virtually the same as the arguments raised by
GTZ without any indication of any special and distinct perspective
maintained by the Philippine government on the issue. The Comment
filed by the OSG does not inspire the same degree of confidence
as a certification from the DFA would have elicited.[46] (Emphasis
supplied.)

In the case at bar, CNMEG offers the Certification executed by the

Economic and Commercial Office of the Embassy of the Peoples Republic of
China, stating that the Northrail Project is in pursuit of a sovereign
activity.[47] Surely, this is not the kind of certification that can establish CNMEGs
entitlement to immunity from suit, as Holy See unequivocally refers to the
determination of the Foreign Office of the state where it is sued.
Further, CNMEG also claims that its immunity from suit has the executive
endorsement of both the OSG and the Office of the Government Corporate Counsel
(OGCC), which must be respected by the courts. However, as expressly enunciated
in Deutsche Gesellschaft, 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.

D. An agreement to submit any

dispute to arbitration may be construed
as an implicit waiver of immunity from
suit.

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 Conditions of Contract,[48] which is an integral part of the Contract

Agreement,[49] states:
33. SETTLEMENT OF DISPUTES AND ARBITRATION

33.1. Amicable Settlement

Both parties shall attempt to amicably settle all disputes or

controversies arising from this Contract before the commencement of
arbitration.

33.2. Arbitration

All disputes or controversies arising from this Contract which

cannot be settled between the Employer and the Contractor shall be
submitted to arbitration in accordance with the UNCITRAL Arbitration
Rules at present in force and as may be amended by the rest of this
Clause. The appointing authority shall be Hong
Kong International Arbitration Center. The place of arbitration shall be
in Hong Kong at Hong Kong International Arbitration Center (HKIAC).

Under the above provisions, if any dispute arises between Northrail and
CNMEG, both parties are bound to submit the matter to the HKIAC for arbitration.
In case the HKIAC makes an arbitral award in favor of Northrail, its enforcement
in the Philippines would be subject to the Special Rules on Alternative Dispute
Resolution (Special Rules). Rule 13 thereof provides for the Recognition and
Enforcement of a Foreign Arbitral Award. Under Rules 13.2 and 13.3 of the
Special Rules, the party to arbitration wishing to have an arbitral award recognized
and enforced in the Philippines must petition the proper regional trial court (a)
where the assets to be attached or levied upon is located; (b) where the acts to be
enjoined are being performed; (c) in the principal place of business in the
Philippines of any of the parties; (d) if any of the parties is an individual, where
any of those individuals resides; or (e) in the National Capital Judicial Region.

From all the foregoing, it is clear that CNMEG has agreed that it will not be
afforded immunity from suit. Thus, the courts have the competence and jurisdiction
to ascertain the validity of the Contract Agreement.

Second issue: Whether the Contract

Agreement is an executive agreement

Article 2(1) of the Vienna Convention on the Law of Treaties (Vienna

Convention) defines a treaty as follows:
[A]n international agreement concluded between States in written
form and governed by international law, whether embodied in a single
instrument or in two or more related instruments and whatever its
particular designation.

In Bayan Muna v. Romulo, this Court held that an executive agreement is

similar to a treaty, except that the former (a) does not require legislative
concurrence; (b) is usually less formal; and (c) deals with a narrower range of
subject matters.[50]

Despite these differences, to be considered an executive agreement, the

following three requisites provided under the Vienna Convention must
nevertheless concur: (a) the agreement must be between states; (b) it must be
written; and (c) it must governed by international law. The first and the third
requisites do not obtain in the case at bar.

A. CNMEG is neither a government

nor a government agency.

The Contract Agreement was not concluded between

[51]
the Philippines and China, but between Northrail and CNMEG. By the terms of
the Contract Agreement, Northrail is a government-owned or -controlled
corporation, while CNMEG is a corporation duly organized and created under the
laws of the Peoples Republic of China.[52] Thus, both Northrail and CNMEG
entered into the Contract Agreement as entities with personalities distinct and
separate from the Philippine and Chinese governments, respectively.

Neither can it be said that CNMEG acted as agent of the Chinese

government. As previously discussed, the fact that Amb. Wang, in his letter dated
1 October 2003,[53] described CNMEG as a state corporation and declared its
designation as the Primary Contractor in the Northrail Project did not mean it was
to perform sovereign functions on behalf of China. That label was only descriptive
of its nature as a state-owned corporation, and did not preclude it from engaging
in purely commercial or proprietary ventures.

B. The Contract Agreement is to be

governed by Philippine law.

Article 2 of the Conditions of Contract,[54] which under Article 1.1 of the

Contract Agreement is an integral part of the latter, states:
APPLICABLE LAW AND GOVERNING LANGUAGE

The contract shall in all respects be read and construed in

accordance with the laws of the Philippines.

The contract shall be written in English language. All

correspondence and other documents pertaining to the Contract which
are exchanged by the parties shall be written in English language.

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 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.

WHEREFORE, the instant Petition is DENIED. Petitioner China National

Machinery & Equipment Corp. (Group) is not entitled to immunity from suit, and
the Contract Agreement is not an executive agreement. CNMEGs prayer for the
issuance of a TRO and/or Writ of Preliminary Injunction is DENIED for being
moot and academic. This case is REMANDED to the Regional Trial Court of
Makati, Branch 145, for further proceedings as regards the validity of the contracts
subject of Civil Case No. 06-203.

No pronouncement on costs of suit.

SO ORDERED.