City Council of Cebu City v. Cuizon
REITERATIONFacts
The Antecedents: The City Council of Cebu City, through its majority members, filed a complaint against the City Mayor, Acting City Treasurer, Philippine National Bank (PNB), and Tropical Commercial Company, Inc. (Tropical). They sought to declare null and void a contract entered into by the City Mayor with Tropical for the purchase of road construction equipment. The contract was for $520,912.00 on a cash basis or $687,767.30 on a deferred payment basis. The grounds for nullity included the lack of necessary authority and approval from the City Council, and the absence of certification from the City Treasurer regarding appropriated funds as required by Section 607 of the Revised Administrative Code. The City Council had previously passed resolutions authorizing the Mayor to negotiate and contract for equipment on a deferred payment plan (Resolution No. 1648) and to use the city's time deposit with PNB as a bond guarantee for a Letter of Credit (Resolution No. 1831). However, the bidding process favored Tropical, and the Mayor signed the contract with Tropical on February 5, 1966, without the City Council's explicit ratification, despite Resolution No. 122 requesting the pertinent papers for ratification. The City Council, unaware the contract was signed, passed Resolution No. 292 reiterating its request for ratification. Subsequently, on March 10, 1966, the City Council passed Resolution No. 473, revoking Resolutions No. 1648 and 1831, and deciding to discontinue the purchase. Despite this revocation and notice to PNB, the Mayor proceeded with the transaction, opening Letters of Credit. The Acting City Treasurer refused to allow PNB to withhold funds from the city's time deposit due to the lack of appropriation. Procedural History: The Court of First Instance of Cebu dismissed the plaintiffs' complaint on the ground of their lack of legal capacity to institute the action and not being the "real party in interest." The lower court reasoned that only parties obliged by the contract could sue for annulment, and the City of Cebu, as the contracting party, should have instituted the action through the City Mayor. The plaintiffs appealed this dismissal order. The Petition: The plaintiffs-appellants argued that the lower court gravely erred in dismissing their complaint, asserting their right as city councilors and taxpayers to question the validity of the contract and prevent the unlawful disbursement of public funds. They contended that their suit was a representative suit filed on behalf of the City of Cebu, not a personal suit.
Issue(s)
Whether the majority members of a City Council, suing as such and as taxpayers, have the legal capacity and interest to maintain a representative action to declare null and void a contract entered into by the City Mayor purportedly on behalf of the city.
Ruling
The Supreme Court set aside the order of dismissal and ordered the lower court to proceed with the trial and disposition of the case on its merits. The Court ruled that the plaintiffs-appellants, as city councilors and taxpayers, have the legal capacity to file a representative suit on behalf of the City of Cebu to declare the contract and Letters of Credit null and void. The Court found that the lower court gravely erred in dismissing the complaint on the ground of lack of legal capacity and not being the real party in interest.
Ratio Decidendi
On Issue 1: The Court held that the lower court erred in applying Article 1397 of the Civil Code, which restricts contract annulment to the contracting parties. This rule is inapplicable here because the councilors are not filing a personal suit but a representative one on behalf of the City of Cebu to protect it from an allegedly ultra vires act of its executive. Relying on Gonzales v. Hechanova, the Court reaffirmed that taxpayers have sufficient interest to seek judicial intervention to restrain the unlawful disbursement of public funds derived from taxation. Furthermore, city councilors, who are exclusively empowered by the City Charter (Republic Act No. 3857) to make appropriations, possess the necessary authority and duty to file such a suit when the very source of the Mayor's authority (the Council) has revoked said authority. The Court emphasized that the narrow construction of Section 20(c) of the City Charter—which vests the Mayor with the power to sue for the city—would lead to an absurdity where no illegal executive act could ever be challenged, as the Mayor would never sue himself. Consequently, the suit is viewed as a derivative action, similar to those in corporate law where stockholders sue for the benefit of the corporation when the management is the wrongdoer. Therefore, the plaintiffs have the standing to prevent the disbursement of city funds under contracts impugned as having been entered into without lawful authority and in violation of the Revised Administrative Code.
Main Doctrine
City councilors and taxpayers have the legal capacity to file a representative suit on behalf of the city to declare a contract entered into by the city mayor as null and void, especially when the mayor's authority has been revoked and the contract is alleged to be ultra vires and prejudicial to the city's funds.