Supreme Court Voids 'Right to Top' Clause in Government Asset Sale: Osmeña v. PSALM

The Supreme Court has ruled that a "right to top" provision in a government land lease agreement is void for undermining the mandatory policy of competitive public bidding. The decision, issued in Sergio R. Osmeña III v. Power Sector Assets and Liabilities Management Corporation (decided September 28, 2015), clarifies that contractual rights valid in private dealings cannot override the public interest in open, transparent competition when government assets are at stake.

The Case: Privatizing the Naga Power Plant Complex

The dispute arose from the privatization of the Naga Power Plant Complex (NPPC) by the Power Sector Assets and Liabilities Management Corporation (PSALM), the government entity tasked with managing and selling National Power Corporation assets.

SPC Power Corporation (SPC) held a "right to top" clause in its existing Land Lease Agreement (LLA) for a nearby Land-Based Gas Turbine (LBGT). When PSALM conducted a public bidding for the NPPC, Therma Power Visayas, Inc. (TPVI) emerged as the highest bidder. SPC then exercised its "right to top," matching and improving TPVI's offer to secure the contract.

Senator Sergio R. Osmeña III challenged the arrangement, arguing that the "right to top" gave SPC an unfair advantage, effectively circumventing the competitive bidding process required by law.

What Is a "Right to Top"?

A "right to top" is a contractual provision allowing a party to outbid the highest offer in a sale or lease, typically by matching or slightly exceeding the winning bid. While such clauses may be permissible in private contracts, their validity in government transactions depends on strict compliance with public policy.

The Court's Ruling: Public Interest Prevails

The Supreme Court sided with the petitioner, declaring the "right to top" provision void. The Court emphasized that competitive public bidding is a cornerstone of government contracting, designed to secure the best possible terms for the public and prevent favoritism or corruption.

Key points from the ruling:

• No legitimate interest in the property. The Court distinguished this case from earlier rulings that upheld "right of first refusal" clauses. In those cases, the holder had a valid interest in the subject property—such as a lessee in leased land or a stockholder in shares. SPC's interest was limited to the LBGT-LLA and did not extend to the NPPC, a separate and distinct asset.

• Chilling effect on competition. Allowing SPC to top any winning bid could discourage other bidders from participating, narrowing the field and preventing the government from obtaining the best value. Notably, only SPC and TPVI joined the bidding.

• Consistent with prior jurisprudence. The Court cited LTFRB v. Stronghold Insurance Company, where a "right to match" clause was invalidated for giving the winning bidder an unfair advantage. It also referenced PSALM v. Pozzolanic Philippines Incorporated, which struck down a right of first refusal that dispensed with public bidding for future sales of waste products.

When Can Such Clauses Survive?

The Court recognized a narrow exception: a right of first refusal or "right to top" may be valid when the beneficiary has an interest in the object over which the right is exercised—such as a tenant in the land occupied, a lessee in the leased property, a stockholder in the shares, or a mortgagor in the mortgaged property—and the government stands to benefit from the stipulation. Outside this limited context, such clauses are void.

Practical Takeaways

• Government contracts require open competition. Public assets must be sold or leased through transparent bidding to protect public interest.
• "Right to top" clauses are presumptively invalid in government transactions unless the holder has a legitimate interest in the specific property.
• Private contractual rights do not override public policy. Even valid private agreements cannot circumvent mandatory competitive bidding rules.
• Bidders should assess risks carefully. Participation in government bids may be deterred by clauses that allow others to top winning offers.
• Agencies must ensure compliance. Government entities should obtain clear legal guidance before honoring such clauses in privatization efforts.

The ruling reaffirms that fairness, transparency, and accountability are non-negotiable in government procurement. Contractual arrangements that undermine these principles—however beneficial they may appear—will not stand.

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