When a Right to Top Fails: Severability and Conditional Obligations in Share Sales

The Supreme Court’s Resolution in Osmeña III v. Power Sector Assets and Liabilities Management Corporation (G.R. No. 212686, October 5, 2016) clarifies a critical point in government asset privatization: when a bidder’s preferential right is declared void, the rest of the bidding process may still stand. The case arose from the sale of the Naga Power Plant Complex (NPPC), where a "Right to Top" granted to one bidder was nullified, and the Court had to determine what happens to the winning bidder’s award.

The Facts of the Case

In December 2013, PSALM opened the third round of bidding for the NPPC. Two companies participated: SPC Power Corporation (SPC) and Therma Power Visayas, Inc. (TPVI). TPVI submitted the higher financial bid of PHP 1,088,800,000.00, compared to SPC’s PHP 858,999,888.88. PSALM issued a Notice of Award to TPVI on April 30, 2014, but the award was conditioned on SPC not exercising its Right to Top under an earlier lease agreement.

SPC exercised its Right to Top, and PSALM executed the Asset Purchase Agreement and Land Lease Agreement in SPC’s favor, cancelling TPVI’s Notice of Award. However, the Supreme Court later declared SPC’s Right to Top null and void, along with the contracts executed pursuant to it. TPVI then asked the Court to reinstate its cancelled Notice of Award.

The Issue

The central question was whether the nullification of SPC’s Right to Top also invalidated the entire bidding process, or whether TPVI’s Notice of Award should be reinstated. PSALM and SPC argued that the voiding of the Right to Top materially altered the bidding terms and required a new round of bidding.

The Ruling: Severability Saves the Bid

The Court ruled in favor of TPVI, holding that the Notice of Award should be reinstated. The key was the severability clause in the Bidding Procedures, which stated that if any provision is held invalid, the remaining provisions remain in full force and effect. The Court found that this clause clearly intended to isolate invalid provisions so the rest of the bidding could survive.

The Court emphasized that its earlier Decision only nullified SPC’s Right to Top and the contracts in SPC’s favor—it never declared the entire third round of bidding invalid. The results of the bidding process were upheld, and the Notice of Award was reinstated.

Conditional Obligations Under the Civil Code

The Court also applied Articles 1181 and 1185 of the Civil Code on conditional obligations. PSALM’s obligation to award the contract to TPVI was conditioned on SPC’s non-exercise or invalid exercise of its Right to Top. Since the Right to Top was declared void, the condition was deemed fulfilled by operation of law, making PSALM’s obligation to execute the contracts in TPVI’s favor due and demandable.

SPC’s Acceptance Was Not Unqualified

The Court further noted that even if the Right to Top had not been voided, SPC failed to validly exercise it. PSALM’s offer was for a lease expiring on January 29, 2020, but SPC’s response demanded a 25-year lease term. This constituted a counter-offer, not an unqualified acceptance. Under the law, a contract is perfected only upon a meeting of minds, and SPC’s qualified response failed to produce consent.

Practical Takeaways

• Severability clauses matter. When a contract or set of bidding rules contains a severability clause, the invalidation of one provision does not necessarily destroy the entire agreement or process.
• Conditional obligations can ripen into demandable ones. Under Article 1185, when it becomes evident that a condition (like a right to top) cannot occur, the obligation conditioned on its non-occurrence becomes due.
• Acceptance must be unqualified. A response that varies the terms of an offer is a counter-offer, not an acceptance, and does not perfect a contract.
• Public bidding principles. As long as the three principles of public bidding—offer to the public, opportunity for competition, and basis for comparison—are met, the process remains valid.
• Finality of judgments. A decision that has become final is immutable, but courts may issue clarificatory rulings to implement the natural consequences of their judgments.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.