Good-bye automated elections?

Testy, costly arbitration in S’pore looms for squabbling contractors

First of two parts

THE COURT and not the boardroom looks like the next destination of the two proponents of the yet unborn joint venture project that was supposed to give the Philippines its first national automated elections in May 2010.

The parties call their differences “irreconcilable,” and by the letter of the existing Joint Venture Agreement (JVA), the conflict may be resolved only through tedious and costly arbitration in Singapore, under the commercial arbitration rules of the Singapore Chamber of Commerce.

The case may be submitted for arbitration only after 60 days from receipt of one party’s written notice that it wants out of the P7.3-billion deal.

The arbitration process – from submission of dispute to service of notice of arbitration, response by the parties to the notice, confirmation of arbitrators’ tribunal, hearings, awards and appeal – may stretch on for another six to nine months at least.

Thus, in the event foreign entity Smartmatic International Corporation and Filipino firm Total Information Management Corporation (TIM) fail to reach an amicable settlement by Friday, the deadline set by Commission on Elections (Comelec) Chairman Jose Melo, prospects for automated national elections in the next 11 months may have to be written off as dead.

As it is, Melo has already declared his willingness to drag TIM to court. After all, it was TIM President Jose Mari M. Antunez who last Monday served notice to the Comelec that his firm had lost trust and confidence in Smartmatic and wanted out of the project – and leaving the commission in serious trouble.

Fear of litigation

Comelec Commissioner Rene Sarmiento, the only one of seven poll commissioners with experience in conducting national elections (2007), told the Philippine Center for Investigative Journalism (PCIJ) that for lack of time, the Comelec had ruled out the possibility of holding a rebidding of the contract.

Instead, Sarmiento says three suggestions are now under study, including: the Comelec awarding the contract to Smartmatic alone; partial automation in some pilot areas across the country; or a return to manual processes for balloting, counting, and canvassing of the votes.

Sarmiento concedes that the first option could be challenged in court, while the two others might require support from Congress, which enacted this year a special law appropriating P11 billion for the conduct of fully automated national elections on May 10, 2010.

The threat of parties filing suit and dragging the project in extended litigation has always loomed as the greatest fear of the Melo and his six fellow commissioners. Days before the en banc released its notice of award to the Smartmatic-TIM group, Melo had announced the designation of two retired justices – Hugo Gutierrez and Angelina Gutierrez – as consultants in the review of the draft contract with the winning bidders.

The choice of Hugo Gutierrez had raised brows among legal circles. In January 1993, a PCIJ report exposed that Gutierrez, at the time the most senior Supreme Court justice, faked authorship of a decision upholding the right of telecommunications giant PLDT (Philippine Long Distance Telephone Company) to block the operation of an international gateway by its rival, Eastern Telecoms. Four days after that story’s release, Gutierrez resigned his post.

Remember Mega?

Melo’s decision to bring the retired justices into the picture was an apparent effort to ensure that the contract would not run into litigation at the high court. In January 2004, the Supreme Court en banc had thrown in a P2.5-billion election automation contract that the Comelec under Chairman Benjamin Abalos had awarded in May 2003 to the Mega Pacific Consortium.

The complainants against Mega Pacific and the Comelec commissioners were the associates of the Information Technology Foundation of the Philippines, including Augusto Lagman, former officer of the National Movement for Free Elections and now advocate of the “open election system” project.

By some curious turn of fate, the bidder that lost to Mega Pacific was none other than TIM, Smartmatic’s co-winner in the automation contract bidded by the Melo Comelec.

Apparently, however, TIM was not feeling like a winner under the conditions stipulated in the JVA it signed with Smartmatic and submitted to the Comelec on April 23, 2009.

The JVA signed by Antunez for TIM and Jose C. Villa Jr. for Smartmatic is possibly the only valid reference document for settlement of the contractors’ dispute. It would expire on September 30, 2009 yet.

A copy of the 19-page document obtained by the PCIJ shows that should the parties fail to settle any dispute or disagreement “through mutual cooperation and good faith,” their last option would be arbitration in Singapore, according to the commercial arbitration rules of the Singapore Chamber of Commerce.

TIM yielded ground

But the JVA also reveals that despite protestations by TIM that Smartmatic wants to control the project, TIM had agreed to yield broad decision-making powers to Smartmatic, even as TIM was supposed to raise 60 percent of the shares or capital contributions to the emerging joint venture company (JVC).

A TIM senior official interviewed Wednesday by PCIJ, however, argued that this is the precisely the reason why TIM wanted the terms of the JVA revised. The official said TIM truly seeks “a clearer and firmer hand in the implementation of the project” rather than “a total surrender” to Smartmatic.

Among other things, the JVA reveals a definition of roles (“Contributions of the Parties to the JVC”) that seems severely skewed in favor of Smartmatic.

For purposes of the Philippine election automation project, Article 3 of the JVA spells out that “TIM may contribute to the JVC and be responsible” only to administrative and service concerns. These include:

  • The value-added services pertaining or related to canvassing units, systems integration, transmission and such other services as required” by the Comelec’s Request for Proposal for the automation project.
  • Services pertaining or related to logistics, deployment and manpower.
  • Hardware, software, ballot paper, consumables and such other services as may be requested by Smartmatic.
  • Local support staff as may be required under the circumstances.

By comparison, the JVA assigns Smartmatic pre-eminent role and greater decision-making powers over finances and activities that will get the bulk of the project funds under the contract. The JVA states that “Smartmatic shall contribute to the JVC and be responsible for:

  • The development, manufacture and/or supply of EVMs (electronic voting machines), other machines and equipment, software, technology and systems.
  • Overall project management as required by the Automation project.
  • Any other activity not expressly written in this agreement or assigned to TIM.”

Smartmatic’s seats

Then there is Article 4 (Management of the JVC) of the agreement, which states that “at all times while this agreement is in effect… TIM shall have the right to nominate” only the president and chief executive officer, and the assistant corporate secretary of the JVC.

The JVA says that “at all times while this agreement is in effect… Smartmatic shall have the right to nominate” its representatives to the more powerful positions of JVC board chairman, treasurer and corporate secretary.

In addition, the JVA reposed in a “Board of Directors” with an unspecified number of seats the “Management of the JVC,” including “approval of any contract between the JVC and TIM or Smartmatic, involving more than P10 million, with three curious exceptions:

  • “Those contracts contemplated under this Agreement;
  • “Those contracts for the purchase, supply, lease or other kind of contract with respect to equipments(sic) or services to be provided by Smartmatic reflected in the budget approved by the Board of Directors; and
  • “Those contracts for the purchase of raw materials, supplies and spare parts required by the JVC in the ordinary course of its business.”

The only caveat offered for these exceptions is “that the terms and conditions of such contracts shall be competitive with those being offered by other suppliers.”

All board decisions

But what really got TIM’s goat, according to the TIM official, is that over and above the positions it had clinched via the JVA, Smartmatic wanted to assert even greater powers, to wit: that its JVC board chair should exercise final decision on disputes or conflicts among board members, and that Smartmatic should always be represented in all board decisions, even if three director are present at the meeting and the required quorum has been met.

The official who spoke with the PCIJ on condition of anonymity said that TIM wants to make sure it is heavily involved in project implementation, including the selection and rollout of hardware and the software. Besides, he pointed out, TIM would be as liable as much as Smartmatic would be should parties file suit against the JVC.

Melo has imposed a gag order on the quarreling contractors, hence, a PCIJ request for an interview with Smartmatic officials drew only a polite missive from Cesar Flores, the company’s international sales director.

“We are honored by your invitation for an interview (but) as much as we would like to directly address all the issues you have raised, I must communicate to you that Chairman Melo today asked us to remain silent about the current events for the next couple of days,” he wrote.

“We understand,” Flores added, “that Comelec wants us to concentrate in working together in trying to iron out any issues, in order to continue with the automation project.”

Delayed already

To be sure, this conflict between the contractors has caused undue delay in the implementation of the project. The JVA defines “date of operation” of the JVC to be “not later than seven calendar days from receipt of the Notice of Award from the Comelec that the bid jointly, severally and solidarily tendered” by Smartmatic and TIM.

The Comelec en banc had issued the Notice of Award on June 9, 2009 or three weeks ago. But the PCIJ has verified with both the Securities and Exchange Commission and the Department of Trade and Industry that up to the close of office hours last June 30, the two companies had yet to register their joint-venture corporation.

Still, what Comelec’s Sarmiento calls a “sigalot” or crisis between the winning bidders could well be blamed on the Comelec, especially if it should decide to push through with automation and award the contract only to Smartmatic, which represents just 40 percent of the joint venture that actually won the bid.

Sad commentary

The high court’s en banc ruling in January 2004 against Mega Pacific and the Abalos Comelec is thus far the established jurisprudence. As well, it reads like a sad commentary, and a portent of things to come, for the Melo Comelec.

The ruling states: “True, our country needs to transcend our slow, manual and archaic electoral process. But before it can do so, it must first have a diligent and competent electoral agency that can properly and prudently implement a well-conceived automated election system.”

“At bottom,” according to the Supreme Court, “before the country can hope to have a speedy and fraud-free automated election, it must first be able to procure the proper computerized hardware and software legally, based on a transparent and valid system of public bidding.”

After all, the tribunal continued, “as in any democratic system, the ultimate goal of automating elections must be achieved by a legal, valid and above-board process of acquiring the necessary tools and skills therefor.”

At day’s end, the justices ruled, “though the Philippines needs an automated electoral process, it cannot accept just any system shoved into its bosom through improper and illegal methods. As the saying goes, the end never justifies the means. Penumbral contracting will not produce enlightened results.” – PCIJ, July 2009