Philippine Supreme Court Jurisprudence > Year 2016 > July 2016 Decisions > G.R. No. 202050, July 25, 2016 - PHILIPPINE NATIONAL OIL COMPANY AND PNOC DOCKYARD & ENGINEERING CORPORATION, Petitioners, v. KEPPEL PHILIPPINES HOLDINGS, INC., Respondent.:

Before the Court is a petition for review on certiorari filed under Rule 45 of the Rules of Court, appealing the decision dated 19 December 2011¹ and resolution dated 14 May 2012² of the Court of Appeals (CA) in CA-G.R. CV No. 86830. These assailed CA rulings affirmed in toto the decision dated 12 January 2006³ of the Regional Trial Court (RTQ of Batangas City, Branch 84, in Civil Case No. 7364.

THE FACTS
The 1976 Lease Agreement and Option to Purchase

Almost 40 years ago or on 6 August 1976, the respondent Keppel Philippines Holdings, Inc.⁴ (Keppel) entered into a lease agreement⁵ (the agreement) with Luzon Stevedoring Corporation (Lusteveco) covering 11 hectares of land located in Bauan, Batangas. The lease was for a period of 25 years for a consideration of P2.1 million.⁶ At the option of Lusteveco, the rental fee could be totally or partially converted into equity shares in Keppel.⁷chanrobleslaw

At the end of the 25-year Jease period, Keppel was given the "firm and absolute option to purchase⁸the land for P4.09 million, provided that it had acquired the necessary qualification to own land under Philippine laws at the time the option is exercised.⁹ Apparently, when the lease agreement was executed, less than 60% of Keppel's shareholding was Filipino-owned, hence, it was not constitutionally qualified to acquire private lands in the country.¹⁰chanrobleslaw

If, at the end of the 25-year lease period (or in 2001), Keppel remained unqualified to own private lands, the agreement provided that the lease would be automatically renewed for another 25 years.¹¹ Keppel was further allowed to exercise the option to purchase the land up to the 30th year of the lease (or in 2006), also on the condition that, by then, it would have acquired the requisite qualification to own land in the Philippines.¹²chanrobleslaw

Together with Keppel's lease rights and option to purchase, Lusteveco warranted not to sell the land or assign its rights to the land for the duration of the lease unless with the prior written consent of Keppel.¹³ Accordingly, when the petitioner Philippine National Oil Corporation¹⁴ (PNOC) acquired the land from Lusteveco and took over the rights and obligations under the agreement, Keppel did not object to the assignment so long as the agreement was annotated on PNOC's title.¹⁵ With PNOC's consent and cooperation, the agreement was recorded as Entry No. 65340 on PNOC's Transfer of Certificate of Title No. T-50724.¹⁶chanrobleslaw

The Case and the Lower Court Rulings

On 8 December 2000, Keppel wrote PNOC informing the latter that at least 60% of its shares were now owned by Filipinos¹⁷ Consequently, Keppel expressed its readiness to exercise its option to purchase the land. Keppel reiterated its demand to purchase the land several times, but on every occasion, PNOC did not favourably respond.¹⁸chanrobleslaw

To compel PNOC to comply with the Agreement, Keppel instituted a complaint for specific performance with the RTC on 26 September 2003 against PNOC.¹⁹ PNOC countered Keppel's claims by contending that the agreement was illegal for circumventing the constitutional prohibition against aliens holding lands in the Philippines.²⁰ It further asserted that the option contract was void, as it was unsupported by a separate valuable consideration.²¹ It also claimed that it was not privy to the agreement.²²chanrobleslaw

After due proceedings, the RTC rendered a decision²³in favour of Keppel and ordered PNOC to execute a deed of absolute sale upon payment by Keppel of the purchase price of P4.09 million.²⁴chanrobleslaw

PNOC elevated the case to the CA to appeal the RTC decision.²⁵cralawred Affirming the RTC decision in toto, the CA upheld Keppel's right to acquire the land.²⁶ It found that since the option contract was embodied in the agreement - a reciprocal contract - the consideration was the obligation that each of the contracting party assumed.²⁷ Since Keppel was already a Filipino-owned corporation, it satisfied the condition that entitled it to purchase the land.²⁸chanrobleslaw

Failing to secure a reconsideration of the CA decision,²⁹ PNOC filed the present Rule 45 petition before this Court to assail the CA rulings.

THE PARTIES' ARGUMENTS and THE ISSUES
PNOC argues that the CA failed to resolve the constitutionality of the agreement. It contends that the terms of the agreement amounted to a virtual sale of the land to Keppel who, at the time of the agreement's enactment, was a foreign corporation and, thus, violated the 1973 Constitution.

Specifically, PNOC refers to (a) the 25-year duration of the lease that was automatically renewable for another 25 years³⁰; (b) the option to purchase the land for a nominal consideration of P100.00 if the option is exercised anytime between the 25th and the 30th year of the lease³¹; and (c) the prohibition imposed on Lusteveco to sell the land or assign its rights therein during the lifetime of the lease.³² Taken together, PNOC submits that these provisions amounted to a virtual transfer of ownership of the land to an alien which act the 1973 Constitution prohibited.

PNOC claims that the agreement is no different from the lease contract in Philippine Banking Corporation v. Lui She,³³ which the Court struck down as unconstitutional. In Lui She, the lease contract allowed the gradual divestment of ownership rights by the Filipino owner-lessor in favour of the foreigner-lessee.³⁴ The arrangement in Lui She was declared as a scheme designed to enable the parties to circumvent the constitutional prohibition.³⁵ PNOC posits that a similar intent is apparent from the terms of the agreement with Keppel and accordingly should also be nullified.³⁶chanrobleslaw

PNOC additionally contends the illegality of the option contract for lack of a separate consideration, as required by Article 1479 of the Civil Code.³⁷ It claims that the option contract is distinct from the main contract of lease and must be supported by a consideration other than the rental fees provided in the agreement.³⁸chanrobleslaw

On the other hand, Keppel maintains the validity of both the agreement and the option contract it contains. It opposes the claim that there was "virtual sale" of the land, noting that the option is subject to the condition that Keppel becomes qualified to own private lands in the Philippines.³⁹ This condition ripened in 2000, when at least 60% of Keppel's equity became Filipino-owned.

Keppel contends that the agreement is not a scheme designed to circumvent the constitutional prohibition. Lusteveco was not proscribed from alienating its ownership rights over the land but was simply required to secure Keppel's prior written consent.⁴⁰ Indeed, Lusteveco was able to transfer its interest to PNOC without any objection from Keppel.⁴¹chanrobleslaw

Keppel also posits that the requirement of a separate consideration for an option to purchase applies only when the option is granted in a separate contract.⁴² In the present case, the option is embodied in a reciprocal contract and, following the Court's ruling in Vda. De Quirino v. Palarca,⁴³ the option is supported by the same consideration supporting the main contract.

From the parties' arguments, the following ISSUES emerge:

chanRoblesvirtualLawlibraryFirst, the constitutionality of the Agreement, i.e., whether the terms of the Agreement amounted to a virtual sale of the land to Keppel that was designed to circumvent the constitutional prohibition on aliens owning lands in the Philippines.

Second, the validity of the option contract, i.e., whether the option to purchase the land given to Keppel is supported by a separate valuable consideration.

If these issues are resolved in favour of Keppel, a third issue emerges - one that was not considered by the lower courts, but is critical in terms of determining Keppel's right to own and acquire full title to the land, i.e., whether Keppel's equity ownership meets the 60% Filipino-owned capital requirement of trie Constitution, in accordance with the Court's ruling in Gamboa v. Teves.⁴⁴chanrobleslaw

THE COURT'S RULING
I. The constitutionality of the Agreement

The Court affirms the constitutionality of the Agreement.

Preserving the ownership of land, whether public or private, in Filipino hands is the policy consistently adopted in all three of our constitutions.⁴⁵ Under the 1935,⁴⁶ 1973,⁴⁷ and 1987⁴⁸ Constitutions, no private land shall be transferred, assigned, or conveyed except to individuals, corporations, or associations qualified to acquire or hold lands of the public domain. Consequently, only Filipino citizens, or corporations or associations whose capital is 60% owned by Filipinos citizens, are constitutionally qualified to own private lands.

Upholding this nationalization policy, the Court has voided not only outright conveyances of land to foreigners,⁴⁹: but also arrangements where the rights of ownership were gradually transferred to foreigners.⁵⁰ In Lui Shui,⁵¹ we considered a 99-year lease agreement, which gave the foreigner-lessee the option to buy the land and prohibited the Filipino owner-lessor from selling or otherwise disposing the land, amounted to -

a virtual transfer of ownership whereby the owner divests himself in stages not only of the right to enjoy the land (Jus possidendi, jus utendi, jus fruendi, and jus abutendi) but also of the right to dispose of it (jus disponendi) � rights the sum total of which make up ownership.⁵² [Emphasis supplied]

In the present case, PNOC submits that a similar scheme is apparent from the agreement's terms, but a review of the overall circumstances leads us to reject PNOC's claim.

The agreement was executed to enable Keppel to use the land for its shipbuilding and ship repair business.⁵³ The industrial/commercial purpose behind the agreement differentiates the present case from Lui She where the leased property was primarily devoted to residential use.⁵⁴ Undoubtedly, the establishment and operation of a shipyard business involve significant investments. Keppel's uncontested testimony showed that it incurred P60 million costs solely for preliminary activities to make the land suitable as a shipyard, and subsequently introduced improvements worth P177 million.⁵⁵ Taking these investments into account and the nature of the business that Keppel conducts on the land, we find it reasonable that the agreement's terms provided for an extended duration of the lease and a restriction on the rights of Lusteveco.

We observe that, unlike in Lui She,⁵⁶ Lusteveco was not completely denied its ownership rights during the course of the lease. It could dispose of the lands or assign its rights thereto, provided it secured Keppel's prior written consent.⁵⁷ That Lusteveco was able to convey the land in favour of PNOC during the pendency of the lease⁵⁸ should negate a finding that the agreement's terms amounted to a virtual transfer of ownership of the land to Keppel.

II. The validity of the option contract

II.A	An option contract must be supported by a separate consideration that is either clearly specified as such in the contract or duly proven by the offeree/promisee.

An option contract is defined in the second paragraph of Article 1479 of the Civil Code:ChanRoblesVirtualawlibrary

Article 14791 x x x An accepted promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consideration distinct from the price.

An option contract is a contract where one person (the offeror/promissor) grants to another person (the offeree/promisee) the right or privilege to buy (or to sell) a determinate thing at a fixed price, if he or she chooses to do so within an agreed period.⁵⁹chanrobleslaw

As a contract, it must necessarily have the essential elements of subject matter, consent, and consideration.⁶⁰ Although an option contract is deemed a preparatory contract to the principal contract of sale,⁶¹ it is separate and distinct therefrom,⁶² thus, its essential elements should be distinguished from those of a sale.⁶³chanrobleslaw

In an option contract, the subject matter is the right or privilege to buy (or to sell) a determinate thing for a price certain,⁶⁴ while in a sales contract, the subject matter is the determinate thing itself.⁶⁵ The consent in an option contract is the acceptance by the offeree of the offerer's promise to sell (or to buy) the determinate thing, i.e., the offeree agrees to hold the right or privilege to buy (or to sell) within a specified period. This acceptance is different from the acceptance of the offer itself whereby the offeree asserts his or her right or privilege to buy (or to sell), which constitutes as his or her consent to the sales contract. The consideration in an option contract may be anything of value, unlike in a sale where the purchase price must be in money or its equivalent.⁶⁶ There is sufficient consideration for a promise if there is any benefit to the offeree or any detriment to the offeror.⁶⁷chanrobleslaw

In the present case, PNOC claims the option contract is void for want of consideration distinct from the purchase price for the land.⁶⁸ The option is incorporated as paragraph 5 of the Agreement and reads as

5. If within the period of the first [25] years [Keppel] becomes qualified to own land under the laws of the Philippines, it has the firm and absolute option to purchase the above property for a total price of [P-4,090,000.00] at the end of the 25th year, discounted at 16% annual for every year before the end of the 25th year, which amount may be converted into equity of [Keppel] at book value prevailing at the time of sale, or paid in cash at Lusteveco's option.

However, if after the first [25] years, [Keppel] is still not qualified to own land under the laws of the Republic of the Philippines, [Keppel's] lease of the above stated property shall be automatically renewed for another [25] years, under the same terms and conditions save for the rental price which shall be for the sum of P4,090,000.00... and which sum may be totally converted into equity of [Keppel] at book value prevailing at the time of conversion, or paid in cash at Lusteveco's option.

If anytime within the second [25] years up to the [30th] year from the date of this agreement, [Keppel] becomes qualified to own land under the laws of the Republic of the Philippines, [Keppel] has the firm and absolute option to buy and Lusteveco hereby undertakes to sell the above stated property for the nominal consideration of [P100.00.00]...⁶⁹

Keppel counters that a separate consideration is not necessary to support its option to buy because the option is one of the stipulations of the lease contract. It claims that a separate consideration is required only when an option to buy is embodied in an independent contract.⁷⁰ It relies on Vda. de Quirino v. Palarca,⁷¹ where the Court declared that the option to buy the leased property is supported by the same consideration as that of the lease itself: "in reciprocal contracts [such as lease], the obligation or promise of each party is the consideration for that of the other.⁷²chanrobleslaw

In considering Keppel's submission, we note that the Court's ruling in 1969 in Vda. de Quirino v. Palarca has been taken out of context and erroneously applied in subsequent cases. In 2004, through Bible Baptist Church v. CA⁷³ we revisited Vda. de Quirino v. Palarca and observed that the option to buy given to the lessee Palarca by the lessor Quirino was in fact supported by a separate consideration: Palarca paid a higher amount of rent and, in the event that he does not exercise the option to buy the leased property, gave Quirino the option to buy the improvements he introduced thereon. These additional concessions were separate from the purchase price and deemed by the Court as sufficient consideration to support the option contract.

Vda. de Quirino v. Palarca, therefore, should not be regarded as authority that the mere inclusion of an option contract in a reciprocal lease contract provides it with the requisite separate consideration for its validity. The reciprocal contract should be closely scrutinized and assessed whether it contains additional concessions that the parties intended to constitute as a consideration for the option contract, separate from that of the purchase price.

In the present case, paragraph 5 of the agreement provided that should Keppel exercise its option to buy, Lusteveco could opt to convert the purchase price into equity in Keppel. May Lusteveco's option to convert the price for shares be deemed as a sufficient separate consideration for Keppel's option to buy?

As earlier mentioned, the consideration for an option contract does not need to be monetary and may be anything of value.⁷⁴ However, when the consideration is not monetary, the consideration must be clearly specified as such in the option contract or clause.⁷⁵chanrobleslaw

In Villamor v. CA,⁷⁶ the parties executed a deed expressly acknowledging that the purchase price of P70.00 per square meter "was greatly higher than the actual reasonable prevailing value of lands in that place at that time."⁷⁷ The difference between the purchase price and the prevailing value constituted as the consideration for the option contract. Although the actual amount of the consideration was not stated, it was ascertainable from the contract whose terms evinced the parties' intent to constitute this amount as consideration for the option contract.⁷⁸ Thus, the Court upheld the validity of the option contract.⁷⁹ In the light of the offeree's acceptance of the option, the Court further declared that a bilateral contract to sell and buy was created and that the parties' respective obligations became reciprocally demandable.⁸⁰chanrobleslaw

When the written agreement itself does not state the consideration for the option contract, the offeree or promisee bears the burden of proving the existence of a separate consideration for the option.⁸¹ The offeree cannot rely on Article 1354 of the Civil Code,⁸² which presumes the existence of consideration, since Article 1479 of the Civil Code is a specific provision on option contracts that explicitly requires the existence of a consideration distinct from the purchase price.⁸³chanrobleslaw

In the present case, none of the above rules were observed. We find nothing in paragraph 5 of the Agreement indicating that the grant to Lusteveco of the option to convert the purchase price for Keppel shares was intended by the parties as the consideration for Keppel's option to buy the land; Keppel itself as the offeree presented no evidence to support this finding. On the contrary, the option to convert the purchase price for shares should be deemed part of the consideration for the contract of sale itself, since the shares are merely an alternative to the actual cash price.

There are, however cases where, despite the absence of an express intent in the parties' agreements, the Court considered the additional concessions stipulated in an agreement to constitute a sufficient separate consideration for the option contract.

In Teodoro v. CA,⁸⁴ the sub-lessee (Teodoro) who was given the option to buy the land assumed .the obligation to pay not only her rent as sub-lessee, but also the rent of the sub-lessor (Ariola) to the primary lessor (Manila Railroad Company).⁸⁵ In other words, Teodoro paid an amount over and above the amount due for her own occupation of the property, and this amount was found by the Court as sufficient consideration for the option contract.⁸⁶chanrobleslaw

In Dijamco v. CA,⁸⁷ the spouses Dijamco failed to pay their loan with the bank, allowing the latter to foreclose the mortgage.⁸⁸ Since the spouses Dijamco did not exercise their right to redeem, the bank consolidated its ownership over the mortgaged property.⁸⁹ The spouses Dijamco later proposed to purchase the same property by paying a purchase price of P622,095.00 (equivalent to their principal loan) and a monthly amount of P13,478.00 payable for 12 months (equivalent to the interest on their principal loan). They further stated that should they fail to make a monthly payment, the proposal should be automatically revoked and all payments be treated as rentals for their continued use of the property.⁹⁰ The Court treated the spouses Dijamco's proposal to purchase the property as an option contract, and the consideration for which was the monthly interest payments.⁹¹ Interestingly, this ruling was made despite the categorical stipulation that the monthly interest payments should be treated as rent for the spouses Dijamco's continued possession and use of the foreclosed property.

At the other end of the jurisprudential spectrum are cases where the Court refused to consider the additional concessions stipulated in agreements as separate consideration for the option contract.

In Bible Baptist Church v. CA,⁹² the lessee (Bible Baptist Church) paid in advance P84,000.00 to the lessor in order to free the property from an encumbrance. The lessee claimed that the advance payment constituted as the separate consideration for its option to buy the property.⁹³ The Court, however, disagreed noting that the P84,000.00 paid in advance was eventually offset against the rent due for the first year of the lease, "such that for the entire year from 1985 to 1986 the [Bible Baptist Church] did not pay monthly rent."⁹⁴ Hence, the Court refused to recognize the existence of a valid option contract.⁹⁵chanrobleslaw

What Teodoro, Dijamco, and Bible Baptist Church show is that the determination of whether the additional concessions in agreements are sufficient to support an option contract, is fraught with danger; in ascertaining the parties' intent on this matter, a court may read too much or too little from the facts before it.

For uniformity and consistency in contract interpretation, the better rule to follow is that the consideration for the option contract should be clearly specified as such in the option contract or clause. Otherwise, the offeree must bear the burden of proving that a separate consideration for the option contract exists.

Given our finding that the Agreement did not categorically refer to any consideration to support Keppel's option to buy and for Keppel's failure to present evidence in this regard, we cannot uphold the existence of an option contract in this case.

II. B.

An option, though unsupported by a separate consideration, remains an offer that, if duly accepted, generates into a contract to sell where the parties' respective obligations become reciprocally demandable

The absence of a consideration supporting the option contract, however, does not invalidate an offer to buy (or to sell). An option unsupported by a separate consideration stands as an unaccepted offer to buy (or to sell) which, when properly accepted, ripens into a contract to sell. This is the rule established by the Court en banc as early as 1958 in Atkins v. Cua Hian Tek,⁹⁶ and upheld in 1972 in Sanchez v. Rigos.⁹⁷chanrobleslaw

Sanchez v. Rigos reconciled the apparent conflict between Articles 1324 and 1479 of the Civil Code, which are quoted below:ChanRoblesVirtualawlibrary

Article 1324. When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as something paid or promised.

Article 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.

An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consideration distinct from the price, [emphases supplied]

The Court en banc declared that there is no distinction between these two provisions because the scenario contemplated in the second paragraph of

Article 1479 is the same as that in the last clause of Article 1324.⁹⁸ Instead of finding a conflict, Sanchez v. Rigos harmonised the two provisions, consistent with the established rules of statutory construction.⁹⁹chanrobleslaw

Thus, when an offer is supported by a separate consideration, a valid option contract exists, i.e., there is a contracted offer¹⁰⁰ which the offerer cannot withdraw from without incurring liability in damages.

On the other hand, when the offer is not supported by a separate consideration, the offer stands but, in the absence of a binding contract, the offeror may withdraw it any time.¹⁰¹ In either case, once the acceptance of the offer is duly communicated before the withdrawal of the offer, a bilateral contract to buy and sell is generated which, in accordance with the first paragraph of Article 1479 of the Civil Code, becomes reciprocally demandable.¹⁰²chanrobleslaw

Sanchez v. Rigos expressly overturned the 1955 case of Southwestern Sugar v. AGPC,¹⁰³ which declared that

a unilateral promise to buy or to sell, even if accepted, is only binding if supported by a consideration... In other words, an accepted unilateral promise can only have a binding effect if supported by a consideration, which means that the option can still be withdrawn, even if accepted, if the same is not supported by any consideration.¹⁰⁴ [Emphasis supplied]

The Southwestern Sugar doctrine was based on the reasoning that Article 1479 of the Civil Code is distinct from Article 1324 of the Civil Code and is a provision that specifically governs options to buy (or to sell).¹⁰⁵ As mentioned, Sanchez v. Rigos found no conflict between these two provisions and accordingly abandoned the Southwestern Sugar doctrine.

Unfortunately, without expressly overturning or abandoning the Sanchez ruling, subsequent cases reverted back to the Southwestern Sugar doctrine.¹⁰⁶ In 2009, Eulogio v Apeles¹⁰⁷ referred to Southwestern Sugar v. AGPC as the controlling doctrine¹⁰⁸ and, due to the lack of a separate consideration, refused to recognize the option to buy as an offer that would have resulted in a sale given its timely acceptance by the offeree. In 2010, Tuazon v. Del Rosario-Suarez¹⁰⁹ referred to Sanchez v. Rigos but erroneously cited as part of its ratio decidendi that portion of the Southwestern Sugar doctrine that Sanchez had expressly abandoned.¹¹⁰chanrobleslaw

Given that! the issue raised in the present case involves the application of Article 1324 and 1479 of the Civil Code, it becomes imperative for the Court [en banc] to clarify and declare here which between Sanchez and Southwestern Sugar is the controlling doctrine.

The Constitution itself declares that "no doctrine or principle of law laid down by the court in a decision rendered en banc or in division may be modified or reversed except by the court sitting en banc.¹¹¹Sanchez v. Rigos was an en banc decision which was affirmed in 1994 in Asuncion v. CA,¹¹² also an en banc decision, while the decisions citing the Southwestern Sugar doctrine are all division cases.¹¹³ Based on the constitutional rule (as well as the inherent logic in reconciling Civil Code provisions), there should be no doubt that Sanchez v. Rigos remains as the controlling doctrine.

Accordingly, when an option to buy or to sell is not supported by a consideration separate from the purchase price, the option constitutes as an offer to buy or to sell, which may be withdrawn by the offeror at any time prior to the communication of the offeree's acceptance. When the offer is duly accepted, a mutual promise to buy and to sell under the first paragraph of Article 1479 of the Civil Code ensues and the parties' respective obligations become reciprocally demandable.

Applied to the present case, we find that the offer to buy the land was timely accepted by Keppel.

As early as 1994, Keppel expressed its desire to exercise its option to buy the land. Instead of rejecting outright Keppel's acceptance, PNOC referred the matter to the Office of the Government Corporate Counsel (OGCC). In its Opinion No. 160, series of 1994, the OGCC opined that Keppel "did not yet have the right to purchase the Bauan lands."¹¹⁴ On account of the OGCC opinion, the PNOC did not agree with Keppel's attempt to buy the land;¹¹⁵ nonetheless, the PNOC made no categorical withdrawal of the offer to sell provided under the Agreement.

By 2000, Keppel had met the required Filipino equity proportion and duly communicated its acceptance of the offer to buy to PNOC.¹¹⁶ Keppel met with the board of directors and officials of PNOC who interposed no objection to the sale.¹¹⁷ It was only when the amount of purchase price was raised that the conflict between the parties arose,¹¹⁸ with PNOC backtracking in its position and questioning the validity of the option.¹¹⁹chanrobleslaw

Thus, when Keppel communicated its acceptance, the offer to purchase the Bauan land stood, not having been withdrawn by PNOC. The offer having been duly accepted, a contract to sell the land ensued which Keppel can rightfully demand PNOC to comply with.

III.	Keppel's constitutional right to acquire full title to the land

Filipinization is the spirit that pervades the constitutional provisions on national patrimony and economy. The Constitution has reserved the ownership of public and private lands,¹²⁰ the ownership and operation of public utilities,¹²¹ and certain areas of investment¹²² to Filipino citizens, associations, and corporations. To qualify, sixty per cent (60%) of the association or corporation's capital must be owned by Filipino citizens. Although the 60% Filipino equity proportion has been adopted in our Constitution since 1935, it was only in 2011 that the Court interpreted what the term capital constituted.

In Gamboa v. Teves,¹²³ the Court declared that the "legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipino nationals." ¹²⁴ Clarifying the ruling, the Court decreed that the 60% Filipino ownership requirement applies separately to each class of shares, whether with or without voting rights,¹²⁵ thus:ChanRoblesVirtualawlibrary

Applying uniformly the 60-40 ownership requirement in favour of Filipino citizens to each class of shares, regardless of differences in voting rights, privileges and restrictions, guarantees effective Filipino control of public utilities, as mandated by the Constitution.¹²⁶

Although the ruling was made in the context of ownership and operation of public utilities, the same should be applied to the ownership of public and private lands, since the same proportion of Filipino ownership is required and the same nationalist policy pervades.

The uncontested fact is that, as of November 2000, Keppel's capital is 60% Filipino-owned.¹²⁷ However, there is nothing in the records showing the nature and composition of Keppel's shareholdings, i.e., whether its shareholdings are divided into different classes, and 60% of each share class is legally and beneficially owned by Filipinos - understandably because when Keppel exercised its option to buy the land in 2000, the Gamboa ruling had not yet been promulgated. The Court cannot deny Keppel its option to buy the land by retroactively applying the Gamboa ruling without violating Keppel's vested right. Thus, Keppel's failure to prove the nature and composition of its shareholdings in 2000 could not prevent it from validly exercising its option to buy the land.

Nonetheless, the Court cannot completely disregard the effect of the Gamboa ruling; the 60% Filipino equity proportion is a continuing requirement to hold land in the Philippines. Even in Gamboa, the Court prospectively applied its ruling, thus enabling the public utilities to meet the nationality requirement before the Securities and Exchange Commission commences administrative investigation and cases, and imposes sanctions for noncompliance on erring corporations.¹²⁸ In this case, Keppel must be allowed to prove whether it meets the required Filipino equity ownership and proportion in accordance with the Gamboa ruling before it can acquire full title to the land.

In view of the foregoing, the Court AFFIRMS the decision dated 19 December 2011 and the resolution dated 14 May 2012 of the CA in CA-G.R. CV No. 86830 insofar as these rulings uphold the respondent Keppel Philippines Holdings, Inc.'s option to buy the land, and REMANDS the case to the Regional Trial Court of Batangas City, Branch 84, for the determination of whether the respondent Keppel Philippines Holdings, Inc. meets the required Filipino equity ownership and proportion in accordance with the Court's ruling in Gamboa v. Teves, to allow it to acquire full title to the land.

SO ORDERED.chanRoblesvirtualLawlibrary

Carpio, (Chairperson), Del Castillo, and Mendoza, JJ., concur.
Leonen, J., See separate dissent.

Endnotes:

---

¹ Penned by CA Associate Justice Leoncia Real-Dimagiba, with CA Associate Justices Hakim S. Abciuiwahid and Marlene Gonzales-Sison concurring, rollo, pp. 38-63.

² Id. at 64-65.

³ Penned by RTC Presiding Judge i'aterao V. Tac-an, id. at 76 100.

⁴ Previously known as Keppel Philippines, Shipyard, Inc., id at 76.

⁵ Copy of Agreement dated 6 August 1976, id. at 101 -106.

⁶ Agreement, par. 2, id. at 103.

⁷ Ibid.

⁸ Agreement, par. 5, id. at 104.

⁹ Ibid.

¹⁰ See 1973 Constitution, Article XIV, Section 14.

¹¹ Agreement, par. 5, rollo, p. 104.

¹² Id. at 105.

¹³ Agreement, par. 6, id. at 105.

¹⁴ Lusteveco's assets, including the land subject of the agreement, were originally acquired by PNOC's subsidiary, PNOC Shipyard Corporation, in 1979. PNOC Shipyard Corporation was renamed as PNOC Dockyard and Engineering Corporation (PDEC). PDEC's assets were thereafter turned over to PNOC for winding-up and liquidation, id. at 80, 84.

¹⁵ Id. at 85

¹⁶ Ibid.

¹⁷ Id. at 77.

¹⁸ Id. at 77-78.

¹⁹ Id. at 76.

²⁰ Id. at 94.

²¹ Id. at 95.

²² Id. at 94.

²³Supra note 3.

²⁴Rollo, p. 99.

²⁵cralawred Id. at 38.

²⁶Supra note 1.

²⁷Rollo, pp. 60-61.

²⁸ Id. at 61.

²⁹ CA Resolution of 14 May 2012 denying PNOC's motion for reconsideration, supra note 2.

³⁰Rollo, pp. 22-23.

³¹ Ibid. Id.

³² Decision 4 G.Rr No. 202050

³³ 128 Phil. 53(1967).

³⁴ Id. at 66-68.

³⁵ Ibid.

³⁶Rollo, pp. 25-27.

³⁷ Article 1479 of the Civil Code states:ChanRoblesVirtualawlibrary

A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.

An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consideration distinct from the price.

³⁸Rollo., pp. 27-33

³⁹ Id. at 163.

⁴⁰ Id. at 161.

⁴¹ Id. at 161-162.

⁴² Id. at 164-165.

⁴³ 139 Phil. 488(1969).

⁴⁴ 696 Phil. 276,341(2012).

⁴⁵ See Krivenko v. Register of Deeds, 79 Phil. 461, 473 (1947).

⁴⁶ 1935 Constitution, Article XIII, Section 5.

⁴⁷ 1973 Constitution, Article XIV, Section 14.

⁴⁸ 1987 Constitution, Article XII, Section 7.

⁴⁹ Swpra note 45, at 481.

⁵⁰Supra note 33.

⁵¹ Id. at 66-68.

⁵² Id. at 68.

⁵³Rollo, p. 101.

⁵⁴Supra note 33, at 51. The leased property in Lui She was used as the home/restaurant of the lessor.

⁵⁵Rollo, pp. 140-141.

⁵⁶Supra note 33, at 67-68.

⁵⁷ Agreement, par. 6, rollo, p. 105.

⁵⁸ Id. at 80.

⁵⁹ See Equatorial v Mayfair, 332 Phil. 525 (1996) and Tuason v Del Rosario-Suarez, 652 Phil. 274, 283 (2010), both citing Beaumont v Prieto, 41 Phil 670, 686-687 (1916).

⁶⁰ CIVIL CODE, Article 1318.

⁶¹Carceller v. CA, 362 Phil. 332,338-339 (1999).

⁶²Asuncion v. CA, G.R. No. 109125, December 2, 1994, 238 SCRA 602, 613; Equatorial v. Mayfair, supra note 59.

⁶³ The essential elements of a contract of sale are enumerated in Article 1458 of the Civil Code.

⁶⁴JMA House Inc. v. Sta Monica Industrial and Development Corporation, 532 Phil. 233, 263 (2006).

⁶⁵ CIVIL CODE, Articles 1458 and 1460.

⁶⁶San Miguel Properties Philippines v. Spouses Huang, 391 Phil. 636, 645 (2000).

⁶⁷Supra note 64, at 264.

⁶⁸Rollo, pp. 27-33.

⁶⁹Rollo, pp. 194-195.

⁷⁰ Id. at 164-167.

⁷¹Supra note 43.

⁷² Ibid.

⁷³ 486 Phil. 625, 634-634 (2004).

⁷⁴Supra note 66.

⁷⁵Bible Baptist Church v. CA, supra note 73, at 635, and Navotas Industrial Corporation v. Cruz, 506 Phil. 511,530 (2005).

⁷⁶ 279 Phil. 664(1991).

⁷⁷ Id. at 668.

⁷⁸ Id. at 675-676.

⁷⁹ Ibid. However, the contract could no longer be enforced due to the unreasonable delay in enforcing the right, id. at 676.

⁸⁰ Id.

⁸¹Supra note 64, at 26.

⁸² CIVIL CODE, Article 1354, which states:ChanRoblesVirtualawlibrary

Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves the contrary.

⁸³Sanchez v. Rigos, 150-A Phil. 714, 720 (1972).

⁸⁴ 239 Phil. 533(1987).

⁸⁵ Id. at 547.

⁸⁶ Id. at 547-548.

⁸⁷ 483 Phil. 203 (2004).

⁸⁸ Id. at 208-209.

⁸⁹ Ibid.

⁹⁰ Id. at 210.

⁹¹ Id. at 213-214.

⁹²Supra note 73, at 631.

⁹³ Ibid.

⁹⁴ Id. at 632. The same rationale was adopted in Navotas Industrial Corporation v. Cruz, 506 Phil. 511,540(2005).

⁹⁵Bible Baptist Church v. CA, supra note 73, at 636-637.

⁹⁶ 102 Phil. 948(1958).

⁹⁷Supra note 83.

⁹⁸ Id. at 722-724.

⁹⁹ Ibid.

¹⁰⁰ C. Villanueva, Law on Sales (2004 ed.) at 154.

¹⁰¹Sanchez v. Rigos, supra note 97, at 723.

¹⁰²Adelfa Properties, Inc. v. CA, 310 Phil. 623, 641 (1995).

¹⁰³ 97 Phil. 249(1955).

¹⁰⁴ Id. at 251-252.'

¹⁰⁵ Id. at 252.

¹⁰⁶See Rural Bank of Parahaque v. Remolado, 220 Phil. 95, 97 (1985) and Natino v. IAC, 21A Phil. 602, 613 (1991). See also Nool v. CA, 340 Phil. 106. In contrast, Carceller v. CA, 362 Phil. 332, 338-339 (1999) adopted the ruling in Sanchez v. Rigos.

¹⁰⁷ 596 Phil. 613(2009).

¹⁰⁸ Id. at 628.

¹⁰⁹ 652 Phil. 274 (2010).

¹¹⁰ Id. at 286-287.

¹¹¹ CONSTITUTION, Article VIII, Section 4(3). See also 1973 Constitution, Article X, Section 2(3).

¹¹²Supra note 62.

¹¹³Eulogio v. Apeles was from the Third Division, while Tuazon v Del Rosario-Suarez was from the First Division.

¹¹⁴Rollo, p. 35.

¹¹⁵ Ibid.

¹¹⁶ Id. at 35-36. ,

¹¹⁷ Ibid.

¹¹⁸ Keppel claimed that PNOC demanded an additional amount on top of the purchase price stated in the agreement, id. at 36.

¹¹⁹ Ibid.

¹²⁰ CONSTITUTION, Article XII, Sections 2, 3, and 7.

¹²¹ Id., Section 11.

¹²² Id., Section 10.

¹²³ 668 Phil. 1 (2011)

¹²⁴ Id. at 57.

¹²⁵ 696 Phil. 276, 341(2012).

¹²⁶ Ibid.

¹²⁷Rollo, p. 81.

¹²⁸Supra note 124, at 360-361.

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DISSENTING OPINION

LEONEN, J:

I am unable to join the ponencia in its ruling affirming the constitutionality of the Agreement between Luzon Stevedoring Corporation (LUSTEVECO)�the rights and obligations of which were later acquired by its successor-in-interest, petitioners Philippine National Oil Company (PNOC) and PNOC Dockyard & Engineering Corporation�and respondent Keppel Philippines Holdings, Inc. (KPHI).

The Constitution has consistently adopted a policy aligned with the conservation of national patrimony. In Article XIII, Section 5 of the 1935 Constitution:ChanRoblesVirtualawlibrary

ARTICLE XIII
Conservation and Utilization of Natural Resources

Section 5. Save in cases of hereditary succession, no private agricultural land shall be transferred or assigned except to individuals, corporations, or associations qualified to acquire or hold lands of the public domain in the Philippines.

The prohibition on alien ownership of private lands was carried over in Article XIV, Section 14 of the 1973 Constitution:

chanRoblesvirtualLawlibraryARTICLE XIV
THE NATIONAL ECONOMY AND THE PATRIMONY OF THE
NATION

....

Section 14. Save in cases of hereditary succession, no private lands shall be transferred or conveyed except to individuals, corporations, or associations qualified to acquire or hold lands of the public domain.

The absolute prohibition was likewise included in the 1987 Constitution:

chanRoblesvirtualLawlibraryARTICLE XII
National Economy and Patrimony

....

SECTION 7. Save in cases of hereditary succession, no private lands shall be transferred or conveyed except to individuals, corporations, or associations qualified to acquire or hold lands of the public domain.

The law is categorical that no private land shall be transferred, assigned, or conveyed except to Filipino citizens or former natural-born citizens,¹ as well as to corporations with at least 60% of the capital owned by Filipino citizens.²chanrobleslaw

Although the sale of private land to an alien is absolutely prohibited, this is not true with the lease of private land. This Court has upheld the validity of a lease to an alien for a reasonable period of time.³ Rather, what this Court frowns upon is when the circumstances attendant to a lease contract are used as a scheme to circumvent the constitutional prohibition.⁴ In Llantino v. Co Liong Chong,⁵ this Court emphasized how seemingly innocuous acts, when put together, can have the nefarious effect of disregarding the law in place:ChanRoblesVirtualawlibrary

If an alien is given not only a lease of, but also an option to buy, a piece of land, by virtue of which the Filipino owner cannot sell or otherwise dispose of his property, this to last for 50 years, then it becomes clear that the arrangement is a virtual transfer of ownership whereby the owner divests himself in stages not only of the right to enjoy the land (jus possidendi, just utendi, jus fruendi, and just abutendi) � rights, the sum of which make up ownership. It is just as if today the possession is transferred, tomorrow the use, the next day disposition, and so on, until ultimately all the rights of which ownership is made up of are consolidated in an alien.⁶ (Citations omitted)

This echoes this Court's pronouncements in Philippine Banking Corporation v. Lui She:⁷

Taken singly, the contracts show nothing that is necessarily illegal, but considered collectively, they reveal an insidious pattern to subvert by indirection what the Constitution directly prohibits. To be sure, a lease to an alien for a reasonable period is valid. So is an option giving an alien the right to buy real property on condition that he is granted Philippine citizenship....

But if an alien is given not only a lease of, but also an option to buy, a piece of land, by virtue of which the Filipino owner cannot sell or otherwise dispose of his property, this to last for 50 years, then it becomes clear that the arrangement is a virtual transfer of ownership whereby the owner divests himself in stages not only of the right to enjoy the land (jus possidendi, jus utendi, jus fruendi and jus abutendi) but also of the right to dispose of it (jus disponendi) � rights the sum total of which make up ownership. It is just as if today the possession is transferred, tomorrow, the use, the next day, the disposition, and so on, until ultimately all the rights of which ownership is made up are consolidated in an alien. And yet this is just exactly what the parties in this case did within this pace of one year, with the result that Justina Santos' ownership of her property was reduced to a hollow concept. If this can be done, then the Constitutional ban against alien landholding in the Philippines, as announced in Krivenko v. Register of Deeds, is indeed in grave peril.⁸ (Emphasis supplied)

In this case, petitioners insist that the Lease Agreement between LUSTEVECO and respondent is a virtual sale and, thus, violates the constitutional prohibition against alien ownership of private lands.⁹chanrobleslaw

Seen individually, the rights granted to respondent under paragraphs 2, 5, and 6 of the Agreement seem like standard fare in a typical lease agreement. However, when these rights are taken collectively, it becomes clear that the Agreement is a sale masquerading as a lease. Paragraphs 2 and 5 of the Agreement read:ChanRoblesVirtualawlibrary

2. The lease shall be for a term of twenty-five (25) years from and after the execution of this agreement, for a consideration of P2.1 million, Philippine currency, for 11 hectares, subject to a proportionate adjustment on the total area leased on the basis of the final survey. The rental may be totally or partially converted into equity of KPSI at par of PI00.00 per share at such time of intervals and for such amounts as may be opted by LUSTEVECO, subject to two (2) months prior notice being given in writing to KPSI within a period of four (4) years from date of this agreement.

5. [I]f within the period of the first twenty-five (25) years KPSI becomes qualified to own land under the laws of the Philippines, it has the firm and absolute option to purchase the above property for a total price of four million and ninety thousand (P4,090,000.00) pesos, Philippine currency, at the end of the 25th year, discounted at 16% annually for every year before the end of the 25th year, which amount may be converted into equity of KPSI at the book value prevailing at the time of the sale, or paid in cash at LUSTEVECO's option.

However, if after the first twenty-five (25) years, KPSI is still not qualified to own land under the laws of the Republic of the Philippines, KPSFs lease of the above stated property shall be automatically renewed for another twenty jive (25) years, under the same terms and conditions save for the rental price which sum shall be for the sum of P4,090,000.00, Philippine Currency, and which may be totally converted into equity of KPSI at book value prevailing at the time of conversion, or paid in cash at LUSTEVECO's option.

If anytime within the second twenty five (25) years up to the thirtieth (30th) year from the date of this agreement KPSI becomes qualified to own land under the laws of the Republic of the Philippines, KPSI has the firm and absolute option to buy and LUSTEVECO hereby undertakes to sell the stated property for the nominal consideration of One Hundred Pesos (PI 00.00) Philippine Currency¹⁰ (Emphasis supplied)

Paragraph 6 of the Agreement reads:ChanRoblesVirtualawlibrary

6. LUSTEVECO warrants that it shall not sell the properties hereunder leased, nor assign its rights herein, to third parties during the lifetime of the lease, without the prior consent of KPSI.¹¹ (Emphasis supplied)

Respondent did not just lease the land for 25 years. If respondent still failed to qualify to own private land under Philippine law, its lease would be automatically renewed for another 25 years. The total purchase price of P4,090,000.00 was discounted at the rate of 16% annually for the first 25 years, and was even due to drop down to an absurd PI00.00 for the following 25 years.

Thus, this Court is led to believe that the lease amounts paid were applied to the total purchase price of P4,090,000.00, which is a peculiar feature in an agreement that purports to be a lease, but is a common practice in sales on installment basis.

Finally, LUSTEVECO had to obtain the consent of respondent before it could sell or transfer its rights to the property to third parties.

Applying Lui She, if an alien is given a 50-year lease and an option to buy, under which the Filipino owner can neither sell nor dispose of the property, then the arrangement is a virtual transfer of ownership where the owner slowly divests himself or herself not only of the right to enjoy the land but also of the right to dispose of it.

As the prohibition against alien landholding stems from the Constitution itself, that the lower courts did not deem it necessary to pass upon the issue is questionable. The Regional Trial Court of Batangas City, in its January 12, 2006 Decision,¹²summarized its findings to two paragraphs and effectively declared the constitutionality of the Agreement by calling it a "valid agreement":¹³

APPRECIATION OF EVIDENCE

The findings of the Court are:

1. The Agreement of Lease/Purchase between the plaintiff and the defendant PNOC's predecessor LUSTEVECO dated August 6, 1976, Exhibit "A" on the Bauan Lands is a valid agreement that was subject to a suspensive condition, that is, the turn-over of the real properties would be subject of the fulfillment of the condition that plaintiff would have attained the status of a 60% Filipino-owned corporation;
   
   
2. That plaintiff has substantially complied with its obligation, under which the said agreement, including the payment of Four Million Ninety Thousands [sic] pesos (P4,090,000.00) which was effected by consignation with the Clerk of Court on April 29, 2005.¹⁴ (Emphasis supplied)

The Court of Appeals likewise declared the Agreement valid in its December 19, 2011 Decision.¹⁵ However, instead of discussing the constitutionality of the lease, it chose to focus on the option contract that emanated from the lease. The Court of Appeals held:ChanRoblesVirtualawlibrary

Succinctly, this Court is of the opinion that it is with no doubt that paragraph 5 of the "Agreement" fits squarely into the definition of an option contract, nonetheless We find that the provision of Article 1479 of the Civil Code is not applicable. As the option to purchase was integrated in the agreement, the parties have reciprocal obligations to each other. Applying Consuelo Vda. De Quirino case, there is no need for a separate consideration in the aforementioned agreement between KPHI and PNOC, PDEC as their obligation to each "other constitutes the consideration.¹⁶

The ponencia puts much emphasis on the improvements that respondent made on the property for it to be suitable for its shipyard business.¹⁷ It points out that respondent incurred "P60 million costs solely for preliminary activities to make the land suitable as a shipyard, and subsequently introduced improvements worth P177 million.¹⁸ It likewise notes, with approval, that the terms of the Agreement were reasonable, in light of the nature of business conducted by respondent:ChanRoblesVirtualawlibrary

The agreement was executed to enable Keppel to use the land for its shipbuilding and ship repair business. The industrial/commercial purpose behind the agreement differentiates the present case from Lui Shei [sic] where the leased property was primarily devoted to residential use. Undoubtedly, the establishment and operation of a shipyard business involve significant investments. Keppel's uncontested testimony showed that it incurred P60 million costs solely for preliminary activities to make the land suitable as a shipyard, and subsequently introduced improvements worth PI77 million. Taking these investments into account and the nature of the business that Keppel conducts on the land, we find it reasonable that the agreement's terms provided for an extended duration of the lease and a restriction on the rights of Lusteveco.¹⁹ (Emphasis supplied)

However, no matter how reasonable its terms may be from a business perspective, the long-term lease between LUSTEVECO and respondent still is a virtual transfer of ownership to an alien and, thus, a circumvention of the constitutional prohibition on foreign ownership of private land. To allow the Agreement to stand would effectively render the ownership of property a hollow concept. It would make a mockery of our fundamental law.

As for the validity of the option contract, I concur with the ponencia's finding that no option contract was created in this case:

chanRoblesvirtualLawlibraryFor uniformity and consistency in contract interpretation, the better rule to follow is that the consideration for the option contract should be clearly specified as such in the option contract or clause. Otherwise, the offeree must bear the burden of proving that a separate consideration for the option contract exists.

Given our finding that the Agreement did not categorically refer to A

any consideration to support Keppel's option to buy and for Keppel's failure to present evidence in this regard, we cannot uphold the existence of an option contract in this case.²⁰ (Emphasis in the original)

Considering the unconstitutionality of the Agreement and the lack of an option contract, petitioners cannot be bound to sell the parcel of land to respondent.

ACCORDINGLY, I vote to REVERSE the December 19, 2011 Decision and the May 14, 2012 Resolution of the Court of Appeals in CA-G.R. CV No. 86830. The Lease Agreement between Luzon Stevedoring Corporation and respondent Keppel Philippines Holdings, Inc. must be declared void ab initio for violating the constitutional prohibition on alien landholding.

Endnotes:

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¹ CONST., art. XII, sec. 8 provides:ChanRoblesVirtualawlibrary

SECTION 8. Notwithstanding the provisions of Section 7 of this Article, a natural-born citizen of the Philippines who has lost his Philippine citizenship may be a transferee of private lands, subject to limitations provided by law.

² Const., art. XII, sec. 2.

³Krivenko v. Register of Deeds, 79 Phil. 461,480^81 (1947) [Per C.J. Moran, Second Division].

⁴Llantino v. Co Liong Chong, 266 Phil. 645, 651 (1990) [Per J. Paras, Second Division].

⁵ 266 Phil. 645 (1990) [Per J. Paras, Second Division].

⁶ Id. at 651.

⁷ 128 Phil. 53 (1967) [Per J. Castro, En Bane].

⁸ Id. at 67-68, citing Krivenko v. Register of Deeds, 79 Phil. 461, 48CM81 (1947) [Per C.J. Moran, Second Division].

⁹Rollo, pp. 21-27, Petition.

¹⁰ Id. at 40-1.

¹¹ Id. at 22.

¹² Id. at 76-100. The Decision, docketed as Civil Case No. 7364, was penned by Presiding Judge Paterno V. Tac-An of Branch 84.

¹³ Id. at 99.

¹⁴ Id.

¹⁵ Id. at 38-63. The Decision, docketed as CA-G.R. CV No. 86830, was penned by Associate Justice Leoncia Real-Dimagiba and concurred in by Associate Justices Hakim S. Abdulwahid and Marlene Gonzales-Sison of the Eighth Division, Court of Appeals, Manila.

¹⁶ Id. at 60-61.

¹⁷ Ponencia, p. 6.

¹⁸ Id.

¹⁹ Id.

²⁰ Id. at 11.