G.R. No. 183789 ; August 24, 2011
POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT CORPORATION, Petitioner, vs. POZZOLANIC PHILIPPINES INCORPORATED, Respondent.

FACTS

Petitioner Power Sector Assets and Liabilities Management Corporation (PSALM) is a government-owned and controlled corporation created under the Electric Power Industry Reform Act (EPIRA) of 2001 to manage the sale and privatization of National Power Corporation’s (NPC) assets. Respondent Pozzolanic Philippines Incorporated (Pozzolanic) is a local subsidiary of an Australian corporation. In 1987, Pozzolanic’s parent company entered into a “Contract for the Purchase of Fly Ash” with NPC. Article I of this contract granted the purchaser a right of first refusal to purchase fly ash from any new coal-fired plants NPC would put up. Respondent Pozzolanic was incorporated in 1989 and took over this business.
In 1998, the Masinloc Coal-Fired Thermal Power Plant began operations. In 1999, NPC and respondent executed an interim contract for the purchase of Masinloc’s fly ash, which recognized respondent’s right of first refusal under the 1987 contract. Later, when the Sual Coal-Fired Power Plant started operations, NPC published an invitation to bid for the purchase of fly ash from both the Masinloc and Sual plants without acknowledging respondent’s right of first refusal in the tender documents. This prompted respondent to file a complaint with the trial court to enforce its right of first refusal.
While the case was pending, Congress enacted EPIRA, creating PSALM, which was subsequently impleaded. During the proceedings, NPC and respondent entered into a Purchase Agreement for the Sual Plant’s fly ash in 2005. Furthermore, in 2007, respondent and the Provincial Government of Zambales executed an agreement awarding respondent the exclusive right to withdraw fly ash from the Masinloc Plant. Consequently, NPC moved to dismiss the complaint as moot. During the hearing on this motion, petitioner PSALM sought to challenge the validity of respondent’s right of first refusal through a position paper.

ISSUE

The core issue is the validity and enforceability of the right of first refusal granted to respondent Pozzolanic under the 1987 contract with NPC, and whether such right is binding upon petitioner PSALM, the successor-in-interest tasked with privatizing NPC’s assets.

RULING

The Supreme Court denied the petition and affirmed the trial court’s decision. The Court upheld the validity of respondent’s right of first refusal and held it binding on petitioner PSALM. The right of first refusal, as stipulated in the 1987 contract, was a valid and demandable obligation of NPC. When PSALM was created by law to take over NPC’s assets and liabilities for privatization, it stepped into the shoes of NPC. Therefore, PSALM assumed not only NPC’s assets but also its liabilities and contractual obligations, including the right of first refusal granted to respondent. The Court ruled that this contractual right must be respected by PSALM in the disposition of the affected assets. The subsequent agreements executed by respondent (with NPC for Sual and with Zambales for Masinloc) did not extinguish the underlying judicial determination of the right’s validity and its binding effect on PSALM as the entity managing the privatization.