CORPORATION LAW

CASES
Bourns v. Carman
EN BANC
G.R. No. L-2880
December 4, 1906
MAPA, J.:
The plaintiff in this action seeks to recover the sum of $437.50, United Stated
currency, balance due on a contract for the sawing of lumber for the lumber yard of
Lo-Chim-Lim. the contract relating to the said work was entered into by the said LoChim-Lim, acting as in his own name with the plaintiff, and it appears that the said
Lo-Chim-Lim personally agreed to pay for the work himself. The plaintiff, however,
has brought this action against Lo-Chim-Lim and his codefendants jointly, alleging
that, at the time the contract was made, they were the joint proprietors and
operators of the said lumber yard engaged in the purchase and sale of lumber
under the name and style of Lo-Chim-Lim. Apparently the plaintiff tries to show by
the words above italicized that the other defendants were the partners of Lo-ChimLim in the said lumber-yard business.chanroblesvirtualawlibrary chanrobles virtual
law library
The court below dismissed the action as to the defendants D. M. Carman and
Fulgencio Tan-Tongco on the ground that they were not the partners of Lo-Chim-Lim,
and rendered judgment against the other defendants for the amount claimed in the
complaint with the costs of proceedings. Vicente Palanca and Go-Tauco only
excepted to the said judgment, moved for a new trial, and have brought the case to
this court by bill of exceptions.chanroblesvirtualawlibrary chanrobles virtual law
library
The evidence of record shows, according to the judgment of the court, "That LoChim-Lim had a certain lumber yard in Calle Lemery of the city of Manila, and that
he was the manager of the same, having ordered the plaintiff to do some work for
him at his sawmill in the city of Manila; and that Vicente Palanca was his partner,
and had an interest in the said business as well as in the profits and losses
thereof . . .," and that Go-Tuaco received part of the earnings of the lumber yard in
the management of which he was interested.chanroblesvirtualawlibrary chanrobles
virtual law library
The court below accordingly found that "Lo-Chim-Lim, Vicente Palanca, Go-Tuaco
had a lumber yard in Calle Lemmery of the city of Manila in the year 1904, and
participated in the profits and losses of business and that Lo-Chim-Lim was
managing partner of the said lumber yard." In other words, coparticipants with the
said Lo-Chim-Lim in the business in question.chanroblesvirtualawlibrary chanrobles
virtual law library
Although the evidence upon this point as stated by the by the however, that is
plainly and manifestly in conflict with the above finding of that court. Such finding

should therefore be sustained.chanroblesvirtualawlibrary chanrobles virtual law

library
The question thus raised is, therefore, purely one of law and reduces itself to
determining the real legal nature of the participation which the appellants had in LoChim-Lim's lumber yard, and consequently their liability toward the plaintiff, in
connection with the transaction which gave rise to the present
suit.chanroblesvirtualawlibrary chanrobles virtual law library
It seems that the alleged partnership between Lo-Chim-Lim and the appellants was
formed by verbal agreement only. At least there is no evidence tending to show that
the said agreement was reduced to writing, or that it was ever recorded in a public
instrument.chanroblesvirtualawlibrary chanrobles virtual law library
Moreover, that partnership had no corporate name. The plaintiff himself alleges in
his complaint that the partnership was engaged in business under the name and
style of Lo-Chim-Lim only, which according to the evidence was the name of one of
the defendants. On the other hand, and this is very important, it does not appear
that there was any mutual agreement, between the parties, and if there were any, it
has not been shown what the agreement was. As far as the evidence shows it
seems that the business was conducted by Lo-Chim-Lim in his own name, although
he gave to the appellants a share was has been shown with certainty. The contracts
made with the plaintiff were made by Lo-Chim-Lim individually in his own name, and
there is no evidence that the partnership over contracted in any other form. Under
such circumstances we find nothing upon which to consider this partnership other
than as a partnership of cuentas en participacion. It may be that, as a matter of
fact, it is something different, but a simple business and scant evidence introduced
by the partnership We see nothing, according to the evidence, but a simple
business conducted by Lo-Chim-Lim exclusively, in his own name, the names of
other persons interested in the profits and losses of the business nowhere
appearing. A partnership constituted in such a manner, the existence of which was
only known to those who had an interest in the same, being no mutual agreements
between the partners and without a corporate name indicating to the public in some
way that there were other people besides the one who ostensibly managed and
conducted the business, is exactly the accidental partnership of cuentas en
participacion defined in article 239 of the Code of
Commerce.chanroblesvirtualawlibrary chanrobles virtual law library
Those who contract with the person under whose name the business of such
partnership of cuentas en participacion is conducted, shall have only a right of
action against such person and not against the other persons interested, and the
latter, on the other hand, shall have no right of action against the third person who
contracted with the manager unless such manager formally transfers his right to
them. (Art 242 of the code Of Commerce.) It follows, therefore that the plaintiff has
no right to demand from the appellants the payment of the amount claimed in the
complaint, as Lo-Chim-Lim was the only one who contracted with him. the action of
the plaintiff lacks, therefore, a legal foundation and should be accordingly
dismissed.chanroblesvirtualawlibrary chanrobles virtual law library

The judgment appealed from this hereby reversed and the appellants are absolved
of the complaint without express provisions as to the costs of both instances. After
the expiration of twenty days let judgment be entered in accordance herewith, and
ten days thereafter the cause be remanded to the court below for execution. So
ordered.chanroblesvirtualawlibrary chanrobles virtual law library
Arellano, C.J., Torres, Johnson, Carson, Willard and Tracey, JJ., concur.
Harden v. Benguet Consolidated Mining
G.R. No. L-37331, March 18, 1933
STREET, J.:
This action was originally instituted in the Court of First Instance of the City of
Manila by F. M. Harden, acting in his own behalf and that of all other stockholders of
the Balatoc Mining Co. who might join in the action and contribute to the expense of
the suit. With the plaintiff Harden two others, J. D. Highsmith and John C. Hart,
subsequently associated themselves. The defendants are the Benguet Consolidated
Mining Co., the Balatoc Mining Co., H. E. Renz, John W. Haussermann, and A. W.
Beam. The principal purpose of the original action was to annul a certificate
covering 600,000 shares of the stock of the Balatoc Mining Co., which have been
issued to the Benguet Consolidated Mining Co., and to secure to the Balatoc Mining
Co., the restoration of a large sum of money alleged to have been unlawfully
collected by the Benguet Consolidated Mining Co., with legal interest, after
deduction therefrom of the amount expended by the latter company under a
contract between the two companies, bearing date of March 9, 1927. The complaint
was afterwards amended so as to include a prayer for the annulment of this
contract. Shortly prior to the institution of this lawsuit, the Benguet Consolidated
Mining Co., transferred to H. E. Renz, as trustee, the certificate for 600,000 shares of
the Balatoc Mining Co. which constitute the principal subject matter of the action.
This was done apparently to facilitate the splitting up to the shares in the course of
the sale or distribution. To prevent this the plaintiffs, upon filing their original
complaint, procured a preliminary injunction restraining the defendants, their
agents and servants, from selling, assigning or transferring the 600,000 shares of
the Balatoc Mining Co., or any part thereof, and from removing said shares from the
Philippine Islands. This explains the connection of Renz with the case. The other
individual defendants are made merely as officials of the Benguet Consolidated
Mining Co. Upon hearing the cause the trial court dismissed the complaint and
dissolved the preliminary injunction, with costs against the plaintiffs. From this
judgment the plaintiffs appealed.
The facts which have given rise this lawsuit are simple, as the financial interests
involve are immense. Briefly told these facts are as follows: The Benguet
Consolidated Mining Co. was organized in June, 1903, as a sociedad anonima in
conformity with the provisions of Spanish law; while the Balatoc Mining Co. was
organized in December 1925, as a corporation, in conformity with the provisions of
the Corporation Law (Act No. 1459). Both entities were organized for the purpose of
engaging in the mining of gold in the Philippine Islands, and their respective
properties are located only a few miles apart in the subprovince of Benguet. The

capital stock of the Balatoc Mining Co. consists of one million shares of the par
value of one peso (P1) each.
When the Balatoc Mining Co. was first organized the properties acquired by it were
largely undeveloped; and the original stockholders were unable to supply the means
needed for profitable operation. For this reason, the board of directors of the
corporation ordered a suspension of all work, effective July 31, 1926. In November
of the same year a general meeting of the company's stockholders appointed a
committee for the purpose of interesting outside capital in the mine. Under the
authority of this resolution the committee approached A. W. Beam, then president
and general manager of the Benguet Company, to secure the capital necessary to
the development of the Balatoc property. As a result of the negotiations thus begun,
a contract, formally authorized by the management of both companies, was
executed on March 9, 1927, the principal features of which were that the Benguet
Company was to proceed with the development and construct a milling plant for the
Balatoc mine, of a capacity of 100 tons of ore per day, and with an extraction of at
least 85 per cent of the gold content. The Benguet Company also agreed to erect an
appropriate power plant, with the aerial tramlines and such other surface buildings
as might be needed to operate the mine. In return for this it was agreed that the
Benguet Company should receive from the treasurer of the Balatoc Company shares
of a par value of P600,000, in payment for the first P600,000 be thus advanced to it
by the Benguet Company.
The performance of this contract was speedily begun, and by May 31, 1929, the
Benguet Company had spent upon the development the sum of P1,417,952.15. In
compensation for this work a certificate for six hundred thousand shares of the
stock of the Balatoc Company has been delivered to the Benguet Company, and the
excess value of the work in the amount of P817,952.15 has been returned to the
Benguet Company in cash. Meanwhile dividends of the Balatoc Company have been
enriching its stockholders, and at the time of the filing of the complaint the value of
its shares had increased in the market from a nominal valuation to more than
eleven pesos per share. While the Benguet Company was pouring its million and a
half into the Balatoc property, the arrangements made between the two companies
appear to have been viewed by the plaintiff Harden with complacency, he being the
owner of many thousands of the shares of the Balatoc Company. But as soon as the
success of the development had become apparent, he began this litigation in which
he has been joined by two others of the eighty shareholders of the Balatoc
Company.
Briefly, the legal point upon which the action is planted is that it is unlawful for the
Benguet Company to hold any interest in a mining corporation and that the contract
by which the interest here in question was acquired must be annulled, with the
consequent obliteration of the certificate issued to the Benguet Company and the
corresponding enrichment of the shareholders of the Balatoc Company.
When the Philippine Islands passed to the sovereignty of the United States, in the
attention of the Philippine Commission was early drawn to the fact that there is no
entity in Spanish law exactly corresponding to the notion of the corporation in
English and American law; and in the Philippine Bill, approved July 1, 1902, the
Congress of the United States inserted certain provisions, under the head of

Franchises, which were intended to control the lawmaking power in the Philippine
Islands in the matter of granting of franchises, privileges and concessions. These
provisions are found in section 74 and 75 of the Act. The provisions of section 74
have been superseded by section 28 of the Act of Congress of August 29, 1916, but
in section 75 there is a provision referring to mining corporations, which still
remains the law, as amended. This provisions, in its original form, reads as follows:
"... it shall be unlawful for any member of a corporation engaged in agriculture or
mining and for any corporation organized for any purpose except irrigation to be in
any wise interested in any other corporation engaged in agriculture or in mining."
Under the guidance of this and certain other provisions thus enacted by Congress,
the Philippine Commission entered upon the enactment of a general law authorizing
the creation of corporations in the Philippine Islands. This rather elaborate piece of
legislation is embodied in what is called our Corporation Law (Act No. 1459 of the
Philippine Commission). The evident purpose of the commission was to introduce
the American corporation into the Philippine Islands as the standard commercial
entity and to hasten the day when the sociedad anonima of the Spanish law would
be obsolete. That statute is a sort of codification of American corporate law.
For the purposes general description only, it may be stated that the sociedad
anonima is something very much like the English joint stock company, with features
resembling those of both the partnership is shown in the fact that sociedad, the
generic component of its name in Spanish, is the same word that is used in that
language to designate other forms of partnership, and in its organization it is
constructed along the same general lines as the ordinary partnership. It is therefore
not surprising that for purposes of loose translation the expression sociedad
anonima has not infrequently the other hand, the affinity of this entity to the
American corporation has not escaped notice, and the expression sociedad anonima
is now generally translated by the word corporation. But when the word corporation
is used in the sense of sociedad anonima and close discrimination is necessary, it
should be associated with the Spanish expression sociedad anonima either in a
parenthesis or connected by the word "or". This latter device was adopted in
sections 75 and 191 of the Corporation Law.
In drafting the Corporation Law the Philippine Commission inserted bodily, in
subsection (5) of section 13 of that Act (No. 1459) the words which we have already
quoted from section 75 of the Act of Congress of July 1, 1902 (Philippine Bill); and it
is of course obvious that whatever meaning originally attached to this provision in
the Act of Congress, the same significance should be attached to it in section 13 of
our Corporation Law.
As it was the intention of our lawmakers to stimulate the introduction of the
American Corporation into Philippine law in the place of the sociedad anonima, it
was necessary to make certain adjustments resulting from the continued coexistence, for a time, of the two forms of commercial entities. Accordingly, in
section 75 of the Corporation Law, a provision is found making the sociedad
anonima subject to the provisions of the Corporation Law "so far as such provisions
may be applicable", and giving to the sociedades anonimas previously created in
the Islands the option to continue business as such or to reform and organize under
the provisions of the Corporation Law. Again, in section 191 of the Corporation Law,

the Code of Commerce is repealed in so far as it relates to sociedades anonimas.

The purpose of the commission in repealing this part of the Code of Commerce was
to compel commercial entities thereafter organized to incorporate under the
Corporation Law, unless they should prefer to adopt some form or other of the
partnership. To this provision was added another to the effect that existing
sociedades anonimas, which elected to continue their business as such, instead of
reforming and reorganizing under the Corporation Law, should continue to be
governed by the laws that were in force prior to the passage of this Act "in relation
to their organization and method of transacting business and to the rights of
members thereof as between themselves, but their relations to the public and
public officials shall be governed by the provisions of this Act."
As already observed, the provision above quoted from section 75 of the Act
Congress of July 1, 1902 (Philippine Bill), generally prohibiting corporations engaged
in mining and members of such from being interested in any other corporation
engaged in mining, was amended by section 7 of Act No. 3518 of the Philippine
Legislature, approved by Congress March 1, 1929. The change in the law effected
by this amendment was in the direction of liberalization. Thus, the inhibition
contained in the original provision against members of a corporation engaged in
agriculture or mining from being interested in other corporations engaged in
agriculture or in mining was so modified as merely to prohibit any such member
from holding more than fifteen per centum of the outstanding capital stock of
another such corporation. Moreover, the explicit prohibition against the holding by
any corporation (except for irrigation) of an interest in any other corporation
engaged in agriculture or in mining was so modified as to limit the restriction to
corporations organized for the purpose of engaging in agriculture or in mining.
As originally drawn, our Corporation Law (Act No. 1459) did not contain any
appropriate clause directly penalizing the act of a corporation, a member of a
corporation , in acquiring an interest contrary to paragraph (5) of section 13 of the
Act. The Philippine Legislature undertook to remedy this situation in section 3 of Act
No. 2792 of the Philippine Legislature, approved on February 18, 1919, but this
provision was declared invalid by this court in Government of the Philippine Islands
vs. El Hogar Filipino (50 Phil., 399), for lack of an adequate title to the Act.
Subsequently the Legislature reenacted substantially the same penal provision in
section 21 of Act No. 3518, under a title sufficiently broad to comprehend the
subject matter. This part of Act No. 3518 became effective upon approval by the
Governor-General, on December 3, 1928, and it was therefore in full force when the
contract now in question was made.
This provision was inserted as a new section in the Corporation Law, forming section
1990 (A) of said Act as it now stands. Omitting the proviso, which seems not to be
pertinent to the present controversy, said provision reads as follows:
SEC. 190 (A). Penalties. The violation of any of the provisions of this Act and its
amendments not otherwise penalized therein, shall be punished by a fine of not
more than five thousand pesos and by imprisonment for not more than five years, in
the discretion of the court. If the violation is committed by a corporation, the same
shall, upon such violation being proved, be dissolved by quo warranto proceedings

instituted by the Attorney-General or by any provincial fiscal by order of said

Attorney-General: . . . .
Upon a survey of the facts sketched above it is obvious that there are two
fundamental questions involved in this controversy. The first is whether the plaintiffs
can maintain an action based upon the violation of law supposedly committed by
the Benguet Company in this case. The second is whether, assuming the first
question to be answered in the affirmative, the Benguet Company, which was
organized as a sociedad anonima, is a corporation within the meaning of the
language used by the Congress of the United States, and later by the Philippine
Legislature, prohibiting a mining corporation from becoming interested in another
mining corporation. It is obvious that, if the first question be answered in the
negative, it will be unnecessary to consider the second question in this lawsuit.
Upon the first point it is at once obvious that the provision referred to was adopted
by the lawmakers with a sole view to the public policy that should control in the
granting of mining rights. Furthermore, the penalties imposed in what is now section
190 (A) of the Corporation Law for the violation of the prohibition in question are of
such nature that they can be enforced only by a criminal prosecution or by an action
of quo warranto. But these proceedings can be maintained only by the AttorneyGeneral in representation of the Government.
What room then is left for the private action which the plaintiffs seek to assert in
this case? The defendant Benguet Company has committed no civil wrong against
the plaintiffs, and if a public wrong has been committed, the directors of the Balatoc
Company, and the plaintiff Harden himself, were the active inducers of the
commission of that wrong. The contract, supposing it to have been unlawful in fact,
has been performed on both sides, by the building of the Balatoc plant by the
Benguet Company and the delivery to the latter of the certificate of 600,000 shares
of the Balatoc Company. There is no possibility of really undoing what has been
done. Nobody would suggest the demolition of the mill. The Balatoc Company is
secure in the possession of that improvement, and talk about putting the parties in
status quo ante by restoring the consideration with interest, while the Balatoc
Company remains in possession of what it obtained by the use of that money, does
not quite meet the case. Also, to mulct the Benguet Company in many millions of
dollars in favor of individuals who have not the slightest equitable right to that
money in a proposition to which no court can give a ready assent.
The most plausible presentation of the case of the plaintiffs proceeds on the
assumption that only one of the contracting parties has been guilty of a
misdemeanor, namely, the Benguet Company, and that the other party, the Balatoc
Company, is wholly innocent to participation in that wrong. The plaintiffs would then
have us apply the second paragraph of article 1305 of the Civil Code which declares
that an innocent party to an illegal contract may recover anything he may have
given, while he is not bound to fulfill any promise he may have made. But,
supposing that the first hurdle can be safely vaulted, the general remedy supplied
in article 1305 of the Civil Code cannot be invoked where an adequate special
remedy is supplied in a special law. It has been so held by this court in Go Chioco vs.
Martinez (45 Phil., 256, 280), where we refused to apply that article to a case of
nullity arising upon a usurious loan. The reason given for the decision on this point

was that the Usury Act, as amended, contains all the provisions necessary for the
effectuation of its purposes, with the result that the remedy given in article 1305 of
the Civil Code is unnecessary. Much more is that idea applicable to the situation now
before us, where the special provisions give ample remedies for the enforcement of
the law by action in the name of the Government, and where no civil wrong has
been done to the party here seeking redress.
The view of the case presented above rest upon considerations arising upon our
own statutes; and it would seem to be unnecessary to ransack the American
decisions for analogies pertinent to the case. We may observe, however, that the
situation involved is not unlike that which has frequently arisen in the United States
under provisions of the National Bank Act prohibiting banks organized under that
law from holding real property. It has been uniformly held that a trust deed or
mortgaged conveying property of this kind to a bank, by way of security, is valid
until the transaction is assailed in a direct proceeding instituted by the Government
against the bank, and the illegality of such tenure supplies no basis for an action by
the former private owner, or his creditor, to annul the conveyance. (National Bank
vs. Matthews, 98 U. S., 621; Kerfoot vs. Farmers & M. Bank, 218 U. S., 281.) Other
analogies point in the same direction. (South & Ala. R. Ginniss vs. B. & M. Consol.
etc. Mining Co., 29 Mont., 428; Holmes & Griggs Mfg. Co. vs. Holmes & Wessell
Metal Co., 127 N. Y., 252; Oelbermann vs. N. Y. & N. R. Co., 77 Hun., 332.)
Most suggestive perhaps of all the cases in Compaia Azucarera de Carolina vs.
Registrar (19 Porto Rico, 143), for the reason that this case arose under a provision
of the Foraker Act, a law analogous to our Philippine Bill. It appears that the
registrar had refused to register two deeds in favor of the Compaia Azucarera on
the ground that the land thereby conveyed was in excess of the area permitted by
law to the company. The Porto Rican court reversed the ruling of the registrar and
ordered the registration of the deeds, saying:
Thus it may be seen that a corporation limited by the law or by its charter has until
the State acts every power and capacity that any other individual capable of
acquiring lands, possesses. The corporation may exercise every act of ownership
over such lands; it may sue in ejectment or unlawful detainer and it may demand
specific performance. It has an absolute title against all the world except the State
after a proper proceeding is begun in a court of law. ... The Attorney General is the
exclusive officer in whom is confided the right to initiate proceedings for escheat or
attack the right of a corporation to hold land.
Having shown that the plaintiffs in this case have no right of action against the
Benguet Company for the infraction of law supposed to have been committed, we
forego cny discussion of the further question whether a sociedad anonima created
under Spanish law, such as the Benguet Company, is a corporation within the
meaning of the prohibitory provision already so many times mentioned. That
important question should, in our opinion, be left until it is raised in an action
brought by the Government.
The judgment which is the subject of his appeal will therefore be affirmed, and it is
so ordered, with costs against the appellants.

Avancea, C.J., Villamor, Ostrand, Villa-Real, Abad Santos, Hull, Vickers, Imperial and
Butte, JJ., concur.
Benguet Consolidated Mining Co. vs. Mariano Pineda
G.R. No. L-7231. March 28, 1956
BENGUET CONSOLIDATED MINING CO., Petitioner, vs. MARIANO PINEDA, in his
capacity as Securities and Exchange Commissioner, Respondent. CONSOLIDATED
MINES, INC., Intervenor.
REYES, J. B. L., J.:
Appeal under Rule 43 from a decision of the Securities and Exchange Commissioner,
denying the right of a sociedad anonima to extend its corporate existence by
amendment of its original articles of association, or alternatively, to reform and
continue existing under the Corporation Law (Act 1459) beyond the original period.
The Petitioner, the Benguet Consolidated Mining Co. (hereafter termed Benguet
for short), was organized on June 24,1903, as a sociedad anonima regulated by
Articles 151 et seq., of the Spanish Code of Commerce of 1886, then in force in the
Philippines. The articles of association expressly provided that it was organized for a
term of fifty (50) years. In 1906, the governing Philippine Commission enacted Act
1459, commonly known as the Corporation Law, establishing in the islands the
American type of juridical entities known as corporation, to take effect on April 1,
1906. Of its enactment, this Court said in its decision in Harden vs. Benguet
Consolidated Mining Co., 58 Phil., 141, at pp. 145-146, and
147:chanroblesvirtuallawlibrary
When the Philippine Islands passed to the sovereignty of the United States, the
attention of the Philippine Commission was early drawn to the fact there is no entity
in Spanish law exactly corresponding to the motion of the corporation in English and
American law; chan roblesvirtualawlibraryand in the Philippine Bill, approved July 1,
1906, the Congress of the United States inserted certain provisions, under the head
of Franchises, which were intended to control the lawmaking power in the Philippine
Islands in the matter of granting of franchises, privileges and concessions. These
provisions are found in sections 74 and 75 of the Act. The provisions of section 74
have been superseded by section 28 of the Act of Congress of August 29, 1916, but
in section 75 there is a provision referring to mining corporations, which still
remains the law, as amended. This provision, in its original form, reads as
follows:chanroblesvirtuallawlibrary cralaw it shall be unlawful for any member of a
corporation engaged in agriculture or mining and for any corporation organized for
any purpose except irrigation to be in any wise interested in any other corporation
engaged in agriculture or in mining.
Under the guidance of this and certain other provisions thus enacted by Congress,
the Philippine Commission entered upon the enactment of a general law authorizing
the creation of corporations in the Philippine Islands. This rather elaborate piece of
legislation is embodied in what is called our Corporation Law (Act No. 1459 of the
Philippine Commission). The evident purpose of the commission was to introduce

the American corporation into the Philippine Islands as the standard commercial
entity and to hasten the day when the sociedad anonima of the Spanish law would
be obsolete. That statute is a sort of codification of American corporate law.
As it was the intention of our lawmakers to stimulate the introduction of the
American corporation into the Philippine law in the place of the sociedad anonima, it
was necessary to make certain adjustment resulting from the continued coexistence, for a time, of the two forms of commercial entities. Accordingly, in
section 75 of the Corporation Law, a provision is found making the sociedad
anonima subject to the provisions of the Corporation Law so far as such provisions
may be applicable and giving to the sociedades anonimas previously created in the
Islands the option to continue business as such or to reform and organize under the
provisions of the Corporation Law. Again, in section 191 of the Corporation Law, the
Code of Commerce is repealed in so far as it relates to sociedades anonimas. The
purpose of the commission in repealing this part of the Code of Commerce was to
compel commercial entities thereafter organized to incorporate under the
Corporation Law, unless they should prefer to adopt some form or other of the
partnership. To this provision was added another to the effect that existing
sociedades anonimas, which elected to continue their business as such, instead of
reforming and reorganizing under the Corporation Law, should continue to be
governed by the laws that were in force prior to the passage of this Act in relation
to their organization and method of transacting business and to the rights of
members thereof as between themselves, but their relations to the public and
public officials shall be governed by the provisions of this Act.
Specifically, the two sections of Act No. 1459 referring to sociedades anonimas then
already existing, provide as follows:chanroblesvirtuallawlibrary
SEC. 75. Any corporation or a sociedad anonima formed, organized, and existing
under the laws of the Philippines on the date of the passage of this Act, shall be
subject to the provisions hereof so far as such provisions may be applicable and
shall be entitled at its option either to continue business as such corporation or to
reform and organize under and by virtue of the provisions of this Act, transferring all
corporate interests to the new corporation which, if a stock corporation, is
authorized to issue its shares of stock at par to the stockholders or members of the
old corporation according to their interests.
SEC. 191. The Code of Commerce, in so far as it relates to corporation or
sociedades anonimas, and all other Acts or parts of Acts in conflict or inconsistent
with this Act, are hereby repealed with the exception of Act Numbered fifty-two,
entitled An Act providing for examinations of banking institutions in the Philippines,
and for reports by their officers, as amended, and Act Numbered Six hundred sixtyseven, entitled An Act prescribing the method of applying to governments of
municipalities, except the city of Manila and of provinces for franchises to contract
and operate street railway, electric light and power and telephone lines, the
conditions upon which the same may be granted, certain powers of the grantee of
said franchises, and of grantees of similar franchises under special Act of the
Commission, and for other purposes. Provided, however, That nothing in this Act
contained shall be deemed to repeal the existing law relating to those classes of
associations which are termed sociedades colectivas, and sociedades de cuentas en

participacion, as to which association the existing law shall be deemed to be still in

force; chan roblesvirtualawlibraryAnd provided, further, That existing corporations
or sociedades anonimas, lawfully organized as such, which elect to continue their
business as such sociedades anonimas instead of reforming and reorganizing under
and by virtue of the provisions of this Act, shall continue to be governed by the laws
that were in force prior to the passage of this Act in relation to their organization
and method of transacting business and to the rights of members thereof as
between themselves, but their relations to the public and public officials shall be
governed by the provisions of this Act.
As the expiration of its original 50 year term of existence approached, the Board of
Directors of Benguet adopted in 1946 a resolution to extend its life for another 50
years from July 3, 1946 and submitted it for registration to the Respondent
Securities and Exchange Commissioner. Upon advice of the Secretary of Justice (Op.
No. 45, Ser. 1917) that such extension was contrary to law, the registration was
denied. The matter was dropped, allegedly because the stockholders of Benguet did
not approve of the Directors action.
Some six years later in 1953, the shareholders of Benguet adopted a resolution
empowering the Director to effectuate the extension of the Companys business
life for not less than 20 and not more than 50 years, and this by either (1) an
amendment to the Articles of Association or Charter of this Company or (2) by
reforming and reorganizing the Company as a Philippine Corporation, or (3) by both
or (4) by any other means. Accordingly, the Board of Directors on May 27, 1953,
adopted a resolution to the following effect
Be It
Resolved, that the Company be reformed, reorganized and organized under the
provisions of section 75 and other provisions of the Philippine Corporation Law as a
Philippine corporation with a corporate life and corporate powers as set forth in the
Articles of Incorporation attached hereto as Schedule I and made a part hereof by
this reference; chan roblesvirtualawlibraryand
Be It
FURTHER RESOLVED, that any five or more of the following shareholders of the
Company be and they hereby are authorized as instructed to act for and in behalf of
the share holders of the Company and of the Company as Incorporators in the
reformation, reorganization and organization of the Company under and in
accordance with the provisions aforesaid of said Philippine Corporation Law, and in
such capacity, they are hereby authorized and instructed to execute the aforesaid
Articles of Incorporation attached to these Minutes as Schedule I hereof, with such
amendments, deletion and additions thereto as any five or more of those so acting
shall deem necessary, proper, advisable or convenient to effect prompt registration
of said Articles under Philippine Law; chan roblesvirtualawlibraryand five or more of
said Incorporators are hereby further authorized and directed to do all things
necessary, proper, advisable or convenient to effect such registration.

In pursuance of such resolution, Benguet submitted in June, 1953, to the Securities

and Exchange Commissioner, for alternative registration, two
documents:chanroblesvirtuallawlibrary (1) Certification as to the Modification of (the
articles of association of) the Benguet Consolidated Mining Company, extending the
term of its existence to another fifty years from June 15, 1953; chan
roblesvirtualawlibraryand (2) articles of incorporation, covering its reformation or
reorganization as a corporation in accordance with section 75 of the Philippine
Corporation Law.
Relying mainly upon the adverse opinion of the Secretary of Justice (Op. No. 180, s.
1953), the Securities and Exchange Commissioner denied the registration and
ruled:chanroblesvirtuallawlibrary
(1) That the Benguet, as sociedad anonima, had no right to extend the original
term of corporate existence stated in its Articles of Association, by subsequent
amendment thereof adopted after enactment of the Corporation Law (Act No.
1459); chan roblesvirtualawlibraryand
(2) That Benguet, by its conduct, had chosen to continue as sociedad anonima,
under section 75 of Act No. 1459, and could no longer exercise the option to reform
into a corporation, specially since it would indirectly produce the effect of extending
its life.
This ruling is the subject of the present appeal.
Petitioner Benguet contends:chanroblesvirtuallawlibrary
(1) That the proviso of section 18 of the Corporation Law to the effect
that the life of said corporation shall not be extended by amendment beyond the
time fixed in the original articles.
does not apply to sociedades anonimas already in existence at the passage of the
law, like Petitioner herein;
(2) That to apply the said restriction imposed by section 18 of the Corporation Law
to sociedades anonimas already functioning when the said law was enacted would
be in violation of constitutional inhibitions;
(3) That even assuming that said restriction was applicable to it, Benguet could still
exercise the option of reforming and reorganizing under section 75 of the
Corporation Law, thereby prolonging its corporate existence, since the law is silent
as to the time when such option may be exercised or availed of.
The first issue arises because the Code of Commerce of 1886 under which Benguet
was organized, contains no prohibition (to extend the period of corporate
existence), equivalent to that set forth in section 18 of the Corporation Law. Neither
does it expressly authorize the extension. But the text of Article 223,
reading:chanroblesvirtuallawlibrary

ART. 223. After the termination of the period for which commercial associations are
constituted, it shall not be understood as extended by the implied or presumed will
of the members; chan roblesvirtualawlibraryand if the members desire to continue
in association, they shall draw up new articles, subject to all the formalities
prescribed for their creation as provided in Article 119. (Code of Commerce.)
would seem to imply that the period of existence of the sociedad anonimas (or of
any other commercial association for that matter) may be extended if the partners
or members so agree before the expiration of the original period.
While the Code of Commerce, in so far as sociedades anonimas are concerned, was
repealed by Act No 1459, Benguet claims that article 223 is still operative in its
favor under the last proviso of section 191 of the Corporation law (ante, p. 4 to the
effect that existing sociedades anonimas would continue to be governed by the law
in force before Act 1459,
in relation to their organization and method of transacting business and to the
rights of members among themselves, but their relations to the public and public
officials shall be governed by the provisions of this Act.
Benguet contends that the period of corporate life relates to its organization and the
rights of its members inter se, and not to its relations to the public or public officials.
We find this contention untenable.
The term of existence of association (partnership or sociedad anonima) is
coterminous with their possession of an independent legal personality, distinct from
that of their component members. When the period expires, the sociedad anonima
loses the power to deal and enter into further legal relations with other persons;
chan roblesvirtualawlibraryit is no longer possible for it to acquire new rights or
incur new obligations, have only as may be required by the process of liquidating
and winding up its affairs. By the same token, its officers and agents can no longer
represent it after the expiration of the life term prescribed, save for settling its
business. Necessarily, therefore, third persons or strangers have an interest in
knowing the duration of the juridical personality of the sociedad anonima, since the
latter cannot be dealt with after that period; chan roblesvirtualawlibrarywherefore
its prolongation or cessation is a matter directly involving the companys relations
to the public at large.
On the importance of the term of existence set in the articles of association of
commercial companies under the Spanish Code of Commerce, D. Lorenzo Benito y
Endar, professor of mercantile law in the Universidad Central de Madrid, has this to
say:chanroblesvirtuallawlibrary
La duracion de la Sociedad. La necesidad de consignar este requisito en el
contrato social tiene un valor analogo al que dijimos tenia el mismo al tratar de las
compaias colectivas, aun cuando respecto de las anonimas no haya de tenerse en
cuenta para nada lo que dijimos entonces acerca de la trascendencia que ello tiene
para los socios; chan roblesvirtualawlibraryporque no existiendo en las anonimas la
serie de responsibilidades de caracter personal que afectan a los socios colectivos,

es claro que la duracion de la sociedad importa conocerla a los socios y los terceros,
porque ella marca al limite natural del desenvolvimiento de la empresa constituida
y el comienzo de la liquidacion de la sociedad. (3 Benito, Derecho Mercantil, 292293.)
Interesa, pues, la fijacion de la vida de la compaia, desenvolviendose con
normalidad y regularidad, tanto a los asociados como a los terceros. A aquellos,
porque su libertad economica, en cierto modo limitada por la existencia del contrato
de compaia, se recobra despues de realizada, mas o menos cumplidamente, la
finalidad comun perseguida; chan roblesvirtualawlibraryy a los terceros, porque les
advierte el momento en que, extinguida la compaia, no cabe y a la creacion con
ella de nuevas relaciones juridicas, de que nazcan reciprocamente derechos y
obligaciones, sino solo la liquidacion de los negocios hasta entonces convenidos, sin
otra excepcion que la que luego mas adelante habremos de sealar. (3 Benito,
Derecho Mercantil, p. 245.)
The State and its officers also have an obvious interest in the term of life of
associations, since the conferment of juridical capacity upon them during such
period is a privilege that is derived from statute. It is obvious that no agreement
between associates can result in giving rise to a new and distinct personality,
possessing independent rights and obligations, unless the law itself shall decree
such result. And the State is naturally interested that this privilege be enjoyed only
under the conditions and not beyond the period that it sees fit to grant; chan
roblesvirtualawlibraryand, particularly, that it be not abused in fraud and to the
detriment of other parties; chan roblesvirtualawlibraryand for this reason it has
been ruled that the limitation (of corporate existence) to a definite period is an
exercise of control in the interest of the public (Smith vs. Eastwood Wire
Manufacturing Co., 43 Atl. 568).
We cannot assent to the thesis of Benguet that its period of corporate existence has
relation to its organization. The latter term is defined in Websters International
Dictionary as:chanroblesvirtuallawlibrary
The executive structure of a business; chan roblesvirtualawlibrarythe personnel of
management, with its several duties and places in administration; chan
roblesvirtualawlibrarythe various persons who conduct a business, considered as a
unit.
The legal definitions of the term organization are concordant with that given
above:chanroblesvirtuallawlibrary
Organize or organization, as used in reference to corporations, has a wellunderstood meaning, which is the election of officers, providing for the subscription
and payment of the capital stock, the adoption of by-laws, and such other steps as
are necessary to endow the legal entity with the capacity to transact the legitimate
business for which it was created. Waltson vs. Oliver, 30 P. 172, 173, 49 Kan. 107,
33 Am. St. Rep. 355; chan roblesvirtualawlibraryTopeka Bridge Co. vs. Cummings, 3
Kan. 55, 77; chan roblesvirtualawlibraryHunt vs. Kansas & M. Bridge Co., 11 Kan.
412, 439; chan roblesvirtualawlibraryAspen Water & Light Co., vs. City of Aspen, 37

P. 728, 730, 6 Colo. App. 12; chan roblesvirtualawlibraryNemaha Coal & Mining Co.,
vs. Settle 38 P. 483, 484, 54 Kan. 424.
Under a statute providing that, until articles of incorporation should be recorded, the
corporation should transact no business except its own organization, it is held that
the term organization means simply the process of forming and arranging into
suitable disposition the parties who are to act together in, and defining the objects
of, the compound body, and that this process, even when complete in all its parts,
does not confer a franchise either valid or defective, but, on the contrary, it is only
the act of the individuals, and something else must be done to secure the corporate
franchise. Abbott vs. Omaha Smelting & Refining Co. 4 Neb. 416, 421. (30 Words
and Phrases, p. 282.)
It is apparent from the foregoing definitions that the term organization relates
merely to the systematization and orderly arrangement of the internal and
managerial affairs and organs of the Petitioner Benguet, and has nothing to do with
the prorogation of its corporate life.
From the double fact that the duration of its corporate life (and juridical personality)
has evident connection with the Petitioners relations to the public, and that it bears
none to the Petitioners organization and method of transacting business, we derive
the conclusion that the prohibition contained in section 18 of the Corporation Law
(Act No. 1459) against extension of corporate life by amendment of the original
articles was designed and intended to apply to compaias anonimas that, like
Petitioner Benguet, were already existing at the passage of said law. This conclusion
is reinforced by the avowed policy of the law to hasten the day when compaias
anonimas would be extinct, and replace them with the American type of corporation
(Harden vs. Benguet Consolidated Mining Co., supra), for the indefinite prorogation
of the corporation life of sociedades anonimas would maintain the unnecessary
duality of organizational types instead of reducing them to a single one; chan
roblesvirtualawlibraryand what is more, it would confer upon these sociedades
anonimas, whose obsolescence was sought, the advantageous privilege of
perpetual existence that the new corporation could not possess.
Of course, the retroactive application of the limitations on the terms of corporate
existence could not be made in violation of constitutional inhibitions specially those
securing equal protection of the laws and prohibiting impairment of the obligation of
contracts. It needs no argument to show that if Act No. 1459 allowed existing
compaias anonimas to be governed by the old law in respect to their organization,
methods of transacting business and the rights of the members among themselves,
it was precisely in deference to the vested rights already acquired by the entity and
its members at the time the Corporation Law was enacted. But we do not agree with
Petitioner Benguet (and here lies the second issue in this appeal) that the possibility
to extend its corporate life under the Code of Commerce constituted a right already
vested when Act No. 1459 was adopted. At that time, Benguets existence was well
within the 50 years period set in its articles of association; chan
roblesvirtualawlibraryand its members had not entered into any agreement that
such period should be extended. It is safe to say that none of the members of
Benguet anticipated in 1906 any need to reach an agreement to increase the term
of its corporate life, barely three years after it had started. The prorogation was

purely speculative; chan roblesvirtualawlibrarya mere possibility that could not be

taken for granted. It was as yet conditional, depending upon the ultimate decision of
the members and directors. They might agree to extend Benguets existence
beyond the original 50 years; chan roblesvirtualawlibraryor again they might not. It
must be remembered that in 1906, the success of Benguet in its mining ventures
was by no means so certain as to warrant continuation of its operations beyond the
50 years set in its articles. The records of this Court show that Benguet ran into
financial difficulties in the early part of its existence, to the extent that, as late as
1913, ten years after it was found, 301,100 shares of its capital stock (with a par
value of $1 per share) were being offered for sale at 25 centavos per share in order
to raise the sum of P75,000 that was needed to rehabilitate the company (Hanlon
vs. Hausermann and Beam, 40 Phil., 796). Certainly the prolongation of the
corporate existence of Benguet in 1906 was merely a possibility in futuro, a
contingency that did not fulfill the requirements of a vested right entitled to
constitutional protection, defined by this Court in Balboa vs. Farrales, 51 Phil., 498,
502, as follows:chanroblesvirtuallawlibrary
Vested right is some right or interest in the property which has become fixed and
established, and is no longer open to doubt or controversy,
A vested right is defined to be an immediate fixed right of present or future
enjoyment, and rights are vested in contradistinction to being expectant or
contingent (Pearsall vs. Great Northern R. Co., 161 U. S. 646, 40 L. Ed. 838).
In Corpus Juris Secundum we find:chanroblesvirtuallawlibrary
Rights are vested when the right to enjoyment, present or prospective, has
become the property of some particular person or persons as a present interest. The
right must be absolute, complete, and unconditional, independent of a contingency,
and a mere expectancy of future benefit, or a contingent interest in property
founded on anticipated continuance of existing laws, does not constitute a vested
right. So, inchoate rights which have not been acted on are not vested. (16 C.J. S.
214-215.)
Since there was no agreement as yet to extend the period of Benguets corporate
existence (beyond the original 50 years) when the Corporation Law was adopted in
1906, neither Benguet nor its members had any actual or vested right to such
extension at that time. Therefore, when the Corporation Law, by section 18, forbade
extensions of corporate life, neither Benguet nor its members were deprived of any
actual or fixed right constitutionally protected.
To hold, as Petitioner Benguet asks, that the legislative power could not deprive
Benguet or its members of the possibility to enter at some indefinite future time
into an agreement to extend Benguets corporate life, solely because such
agreements were authorized by the Code of Commerce, would be tantamount to
saying that the said Code was irrepealable on that point. It is a well settled rule that
no person has a vested interest in any rule of law entitling him to insist that it shall
remain unchanged for his benefit. (New York C. R. Co. vs. White, 61 L. Ed (U.S.) 667;
chan roblesvirtualawlibraryMondou vs. New York N. H. & H. R. Co., 56 L. Ed. 327;
chan roblesvirtualawlibraryRainey vs. U. S., 58 L. Ed. 617; chan

roblesvirtualawlibraryLilly Co. vs. Saunders, 125 ALR. 1308; chan

roblesvirtualawlibraryShea vs. Olson, 111 ALR. 998).
There can be no vested right in the continued existence of a statute or rule of the
common law which precludes its change or repeal, nor in any omission to legislate
on a particular matter or subject. Any right conferred by statute may be taken away
by statute before it has become vested, but after a right has vested, repeal of the
statute or ordinance which created the right does not and cannot affect much
right. (16 C.J. S. 222-223.)
It is a general rule of constitutional law that a person has no vested right in
statutory privileges and exemptions (Brearly School vs. Ward, 201 NY. 358, 40 LRA
NS. 1215; chan roblesvirtualawlibraryalso, Cooley, Constitutional Limitations, 7th
ed., p. 546).
It is not amiss to recall here that after Act No. 1459 the Legislature found it
advisable to impress further restrictions upon the power of corporations to deal in
public lands, or to hold real estate beyond a maximum area; chan
roblesvirtualawlibraryand to prohibit any corporation from endeavouring to control
or hold more than 15 per cent of the voting stock of an agricultural or mining
corporation (Act No. 3518). These prohibitions are so closely integrated with our
public policy that Commonwealth Act No. 219 sought to extend such restrictions to
associations of all kinds. It would be subversive of that policy to enable Benguet to
prolong its peculiar status of sociedad anonimas, and enable it to cast doubt and
uncertainty on whether it is, or not, subject to those restrictions on corporate power,
as it once endeavoured to do in the previous case of Harden vs. Benguet Mining
Corp. 58 Phil., 149.
Stress has been laid upon the fact that the Compaia Maritima (like Benguet, a
sociedad anonima established before the enactment of the Corporation Law) has
been twice permitted to extend its corporate existence by amendment of its articles
of association, without objection from the officers of the defunct Bureau of
Commerce and Industry, then in charge of the enforcement of the Corporation Laws,
although the exact question was never raised then. Be that as it may, it is a well
established rule in this jurisdiction that the government is never estopped by
mistake or error on the part of its agents (Pineda vs. Court of First Instance of
Tayabas, 52 Phil., 803, 807), and that estopped cannot give validity to an act that is
prohibited by law or is against public policy (Eugenio vs. Perdido, (97 Phil., 41, May
19, 1955; chan roblesvirtualawlibrary19 Am. Jur. 802); chan roblesvirtualawlibraryso
that the Respondent, Securities and Exchange Commissioner, was not bound by the
rulings of his predecessor if they be inconsistent with law. Much less could
erroneous decisions of executive officers bind this Court and induce it to sanction an
unwarranted interpretation or application of legal principles.
We now turn to the third and last issue of this appeal, concerning the exercise of the
option granted by section 75 of the Corporation Law to every sociedad anonima
formed, organized and existing under the laws of the Philippines on the date of the
passage of this Act to either continue business as such sociedad anonima or to
reform and organize under the provisions of the Corporation Law. PetitionerAppellant Benguet contends that as the law does not determine the period within

which such option may be exercised, Benguet may exercise it at any time during its
corporate existence; chan roblesvirtualawlibraryand that in fact on June 22, 1953, it
chose to reform itself into a corporation for a period of 50 years from that date,
filing the corresponding papers and by-laws with the Respondent Commissioner of
Securities and Exchange registration; chan roblesvirtualawlibrarybut the latter
refused to accept them as belatedly made.
The Petitioners argument proceeds from the unexpressed assumption that
Benguet, as sociedad anonima, had not exercised the option given by section 75 of
the Corporation Law until 1953. This we find to be incorrect. Under that section, by
continuing to do business as sociedad anonima, Benguet in fact rejected the
alternative to reform as a corporation under Act No. 1459. It will be noted from the
text of section 75 (quoted earlier in this opinion) that no special act or manifestation
is required by the law from the existing sociedades anonimas that prefer to remain
and continue as such. It is when they choose to reform and organize under the
Corporation Law that they must, in the words of the section, transfer all corporate
interests to the new corporation. Hence if they do not so transfer, the sociedades
anonimas affected are to be understood to have elected the alternative to continue
business as such corporation (sociedad anonima) 2
The election of Benguet to remain a sociedad anonima after the enactment of the
Corporation Law is evidence, not only by its failure, from 1906 to 1953, to adopt the
alternative to transfer its corporate interests to a new corporation, as required by
section 75; chan roblesvirtualawlibraryit also appears from positive acts. Thus
around 1933, Benguet claimed and defended in court its acquisition of shares of the
capital stock of the Balatoc Mining Company, on the ground that as a sociedad
anonima it (Benguet) was not a corporation within the purview of the laws
prohibiting a mining corporation from becoming interested in another mining
corporation (Harden vs. Benguet Mining Corp., 58 Phil., p. 149). Even in the present
proceedings, Benguet has urged its right to amend its original articles of association
as sociedad anonima and extend its life as such under the provisions of the
Spanish Code of Commerce. Such appeals to privileges as sociedad anonima
under the Code of 1886 necessarily imply that Benguet has rejected the alternative
of reforming under the Corporation Law. As Respondent Commissioners order, now
under appeal, has stated
A sociedad anonima could not claim the benefit of both, but must have to choose
one and discard the other. If it elected to become a corporation it could not continue
as a sociedad anonima; chan roblesvirtualawlibraryand if it choose to remain as a
sociedad anonima, it could not become a corporation.
Having thus made its choice, Benguet may not now go back and seek to change its
position and adopt the reformation that it had formerly repudiated. The election of
one of several alternatives is irrevocable once made (as now expressly recognized
in article 940 of the new Civil Code of the Philippines):chanroblesvirtuallawlibrary
such rule is inherent in the nature of the choice, its purpose being to clarify and
render definite the rights of the one exercising the option, so that other persons
may act in consequence. While successive choices may be provided there is nothing
in section 75 of the Corporation Law to show or hint that a sociedad anonima may
make more than one choice thereunder, since only one option is provided for.

While no express period of time is fixed by the law within which sociedades
anonimas may elect under section 75 of Act No. 1459 either to reform or to retain
their status quo, there are powerful reasons to conclude that the legislature
intended such choice to be made within a reasonable time from the effectivity of
the Act. To enable a sociedad anonima to choose reformation when its stipulated
period of existence is nearly ended, would be to allow it to enjoy a term of existence
far longer than that granted to corporations organized under the Corporation Law;
chan roblesvirtualawlibraryin Benguets case, 50 years as sociedad anonima, and
another 50 years as an American type of corporation under Act 1459; chan
roblesvirtualawlibrarya result incompatible with the avowed purpose of the Act to
hasten the disappearance of the sociedades anonimas. Moreover, such belated
election, if permitted, would enable sociedades anonimas to reap the full advantage
of both types of organization. Finally, it would permit sociedades anonimas to
prolong their corporate existence indirectly by belated reformation into corporations
under Act No. 1459, when they could not do so directly by amending their articles of
association.
Much stress is laid upon allegedly improper motives on the part of the intervenor,
Consolidated Mines, Inc., in supporting the orders appealed from, on the ground
that intervenor seeks to terminate Benguets operating contract and appropriate
the profits that are the result of Benguets efforts in developing the mines of the
intervenor. Suffice it to say that whatever such motives should be, they are wholly
irrelevant to the issues in this appeal, that exclusively concern the legal soundness
of the order of the Respondent Securities and Exchange Commissioner rejecting the
claims of the Benguet Consolidated Mining Company to extend its corporate life.
Neither are we impressed by the prophesies of economic chaos that would allegedly
ensure with the cessation of Benguets activities. If its mining properties are really
susceptible of profitable operation, inexorable economic laws will ensure their
exploitation; chan roblesvirtualawlibraryif, on the other hand, they can no longer be
worked at a profit, then catastrophe becomes inevitable, whether or not Petitioner
Benguet retains corporate existence.
Sustaining the opinions of the Respondent Securities and Exchange Commissioner
and of the Secretary of Justice, we rule that:chanroblesvirtuallawlibrary
(1) The prohibition contained in section 18 of Act No. 1459, against extending the
period of corporate existence by amendment of the original articles, was intended
to apply, and does apply, to sociedades anonimas already formed, organized and
existing at the time of the effectivity of the Corporation Law (Act No. 1459) in 1906;
(2) The statutory prohibition is valid and impairs no vested rights or constitutional
inhibition where no agreement to extend the original period of corporate life was
perfected before the enactment of the Corporation Law;
(3) A sociedad anonima, existing before the Corporation Law, that continues to do
business as such for a reasonable time after its enactments, is deemed to have
made its election and may not subsequently claim to reform into a corporation
under section 75 of Act No. 1459.

In view of the foregoing, the order appealed from is affirmed. Costs against
Petitioner-Appellant Benguet Consolidated Mining Company.
Padilla, Montemayor, Reyes, A. Labrador, Concepcion and Endencia, JJ., concur.

Separate Opinions
PARAS, C.J., dissenting:chanroblesvirtuallawlibrary
The Petitioner, Benguet Consolidated Mining Company, was organized as a sociedad
anonima on June 24, 1903, under the provisions of the Code of Commerce, and its
term as fixed in the articles of association was fifty years. It has been a leading
enterprise, long and widely reputed to have pioneered in and boosted the mining
industry, distributed profits among its shareholders, and given employment to
thousands. To be more approximately exact, the Petitioner has kept on its payrolls
over four thousand Filipino employees who have about twenty thousand
dependents. The taxes and other dues paid by it to the Government have been in
enormous amounts. It has always been subject to such supervision and control of
Government officials as are prescribed by law.
When, therefore, the Petitioner on June 3, 1953, presented all necessary documents
to the Respondent, the Securities and Exchange Commissioner, with a view to the
extension of its term as a sociedad anonima for a period of fifty years from June 15,
1953; chan roblesvirtualawlibrarywhen on June 22, 1953, it filed with said
Respondent the necessary articles of incorporation and other documents, with a
view to reforming itself as a corporation under the Corporation Law for a period of
fifty years from June 22, 1953, followed by the filing on July 22, 1953, of the
corresponding by-laws; chan roblesvirtualawlibraryand when on October 27, 1953,
the Respondent issued an order denying the registration of the instruments as well
for extension as for reformation, Petitioners corporate life was being snapped out
with such lightning abruptness as undoubtedly to spell damage and prejudice not so
much to its shareholders as to its beneficiaries thousands of employees and their
dependents and even to the Government which stands to lose a good source of
revenue.
The Petitioner contends (1) that the Respondent had the ministerial duty of
registering the documents presented either for extension of Petitioners term as a
sociedad anonima or for its reformation under the Corporation Law, in the absence
(as in this case) of any pretense that said documents are formally defective or that
Petitioners purposes are unlawful; chan roblesvirtualawlibraryand (2) that as the
Petitioner had organized as a sociedad anonima under the Code of Commerce, it
has acquired a vested right which cannot subsequently be affected or taken away
by the Corporation Law enacted on April 1, 1906. I would not dwell upon these
contentions, because I hold that, even under the provisions of the Corporation Law,
the Petitioner may either extend its life as a sociedad anonima or reform as a
corporation.

Section 75 of the Corporation Law provides:chanroblesvirtuallawlibrary

Any corporation or sociedad anonima formed, organized and existing under the
laws of the Philippine Islands and lawfully transacting business in the Philippine
Islands on the date of the passage of this Act, shall be subject to the provisions
hereof so far as such provisions may be applicable and shall be entitled at its option
either to continue business as such corporation or to reform and organize under,
and by virtue of the provisions of this Act, transferring all corporate interests to the
new corporation which, if a stock corporation, is authorized to issue its shares of
stock at par to the stockholders or members of the old corporation according to
their interests.
Upon the other hand, section 191 reads as follows:chanroblesvirtuallawlibrary
The Code of Commerce, in so far as it relates to corporations or sociedades
anonimas, and all other or parts of Acts in conflict or inconsistent with this Act, are
hereby repealed cralaw And provided, further, That existing corporations or
sociedades anonimas lawfully organized as such, which elect to continue their
business as such sociedades anonimas instead of reforming and reorganizing under
and by virtue of the provisions of this Act, shall continue to be governed by the laws
that were in force prior to the passage of this Act in relation to their organization
and method of transacting business and to the rights of members thereof as
between themselves, but their relations to the public and public officials shall be
governed by the provisions of this Act.
It is noteworthy that section 75 has not limited the optional continuance of a
sociedad anonima to its unexpired term, and section 191 expressly allows a
sociedad anonima which has elected to continue its business as such to be
governed by the laws in force prior to the enactment of the Corporation Law in
relation to its organization and method of transacting business and to the rights of
members as between themselves. It is admitted that the Code of Commerce, while
containing no express provision allowing it, does not prohibit a sociedad anonima
from extending its term; chan roblesvirtualawlibraryand commentators Gay de
Montella (Tratado Practico de Sociedad Marcantiles Compaias Anonimas, Tomo
II, p. 285) and Cesar Vivante (Tratado de Derecho Mercantil, pp. 254, 258) have
observed that a sociedad anonima may prolong its corporate duration by
amendment of its articles of association before the expiration of the term.
When a business or commercial association is organized, the members are naturally
interested in knowing not only their rights and obligations but also the duration of
their legal relations. While organization in a strict sense may refer to formalities
like election of officers, adoption of by-laws, and subscription and payment of
capital stock, it cannot be spoken of or conceived in a wider sense without
necessarily involving the specification of the term of the entity formed. Extension of
corporation life is thus essentially an incident of organization and, in any event, a
matter directly affecting or in relation to the rights of the shareholders as between
themselves, within the contemplation of section 191, and should accordingly be
governed by the Code of Commerce. As pointed out by the Supreme Court of
Wyoming in the case of Drew vs. Beckwith, (114 P. 2d. 98), extension merely
involves an additional privilege to carry out the business of enterprise undertaken

by the corporation, and is but an enlargement of the enterprise undertaken by the

corporation. It is true that the duration of a sociedad anonima is of some concern
to the public and public officials who ought to know the time when it will cease to
exist and its business will be wound up. Notice to the world is however served by
the registration of Petitioners articles of association as a sociedad anonima or
articles of incorporation as a reformed corporation with the Securities and Exchange
Commission.
When section 191 mentions relations to the public and public officials as being
governed by the provisions of the Corporation Law, the idea is obviously more to
enable the Government to enforce its powers of supervision, inspection and
investigation, than to restrict the freedom of the corporate entity as to
organizational or substantive rights of members as between themselves. In one of
the public hearings conducted by the Philippine Commission before the enactment
of the Corporation Law, Commissioner Ide pertinently expressed, Of course,
whether they (sociedades) come under the new law or not they would be subject to
inspection, regulations, and examination for the purpose of protecting the
community. The Attorney General in turn held that sociedades anonimas, although
governed by the Code of Commerce, are subject to the examination provided in
section 54 of the Corporation Law (5 Op. Atty. Gen. 442). In this connection, the
Petitioner has admittedly subjected itself to the provisions of the Corporation Law.
In Harden vs. Benguet Consolidated Mining Co., 58 Phil., 141, it was
remarked:chanroblesvirtuallawlibrary The purpose of the commission in repealing
this part of the Code of Commerce was to compel commercial entities thereafter
organized to incorporate under the Corporation Law, unless they should prefer to
adopt some form or other of the partnership. This Court already indicated that the
commercial entities compelled to incorporate under the Corporation Law were those
organized after its enactment.
Section 6, subsection 4, of the Corporation Law provides that the term for which
corporations shall exist shall not exceed fifty years; chan
roblesvirtualawlibrarysection 18 provides that the life of a corporation shall not be
extended by amendment beyond the time fixed in the original articles; chan
roblesvirtualawlibraryand section 11 provides that upon the issuance by the
Securities and Exchange Commissioner of the certificate of incorporation, the
persons organizing the corporation shall constitute a body politic and corporate for
the term specified in the articles of incorporation, not exceeding fifty years. The
corporations contemplated are those defined in section 22 corporations
organized under the Corporation Law. They cannot be sociedades anonimas formed
under the Code of Commerce and licensed to continue as such in virtue of sections
75 and 191. Otherwise the words or sociedad anonima would have been added to
the term corporation in section 18, as was done in sections 75 and 191. A similar
observation was made in Harden vs. Benguet Consolidated Mining Co.,
supra:chanroblesvirtuallawlibrary But when the word corporation is used in the
sense of sociedad anonima and close discrimination is necessary, it should be
associated with the Spanish expression sociedad anonima either in parenthesis or
connected by the word or. This latter device was adopted in sections 75 and 191 of
the Corporation Law.

The citation from 3 Benito, Derecho Mercantil, p. 245, invoked in the majority
decision, to the effect that the duration of a sociedad anonima is of interest both to
its members and to third persons, is clearly an authority for our conclusions that the
extension of Petitioners term is in relation to the rights of members thereof as
between themselves. Section 191 does not say that a sociedad anonima shall be
governed by the provisions of the Corporation Law when the matter involved affects
not only the rights of members thereof as between themselves but also the
public and public officials.
We are also of the opinion that alternatively, under section 75, the Petitioner may
elect to reform and organize under the Corporation Law, transferring all its
corporate interests to the new corporation. Contrary to the ruling of the
Respondent, we are convinced that, as no period was fixed within which it should
exercise the option either of continuing as a sociedad anonima or reforming and
organizing under the Corporation Law, the Petitioner was entitled to have its articles
of incorporation and by-laws presented respectively on June 22 and July 22, 1953,
registered by the Respondent. Section 75 did not take away Petitioners right to
exhaust its term as a sociedad anonima, already vested before the enactment of
the Corporation Law, but merely granted it the choice to organize as a regular
corporation, instead of extending its life as a sociedad anonima. The only limitation
imposed is that prescribed in section 191, namely, that if a sociedad anonima elects
to continue its business as such, it shall be governed by the prior law in relation to
its organization and method of transacting business and to the rights of its
members as between themselves, and by the provisions of the Corporation Law as
to its relations to the public and public officials. If the intention were to fix a period
for reformation, the law would have expressly so provided, in the same way that
section 19 fixes two years during which a corporation should formally organize and
commence the transaction of its business, otherwise its corporate powers would
cease; chan roblesvirtualawlibrarysection 77 fixes three years from the dissolution
of a corporation within which it may clear and settle its affairs; chan
roblesvirtualawlibraryand section 78 fixes the same period of three years within
which a corporation may convey its properties to a trustee for the benefit of its
stockholders and other interested persons.
It is not correct to argue that the Petitioner is not entitled to elect to continue as a
sociedad anonima and at the same time reform and organize as a regular
corporation, because when it continued as a sociedad anonima after the passage of
the Corporation Law and during its full term of fifty years, it merely exercised a right
it theretofore had; chan roblesvirtualawlibraryand the Petitioner can be said
properly to have availed itself of the other option only when in June 1953 it filed the
necessary papers of incorporation under the Corporation Law. It is likewise not
accurate to contend that, as the Respondent ruled, the Petitioner could reform as
and be a regular corporation at most only for the remainder of its term as a
sociedad anonima. Section 75, in allowing a sociedad anonima to reform and
organize under the Corporation Law, also authorizes the transfer of its corporate
interests to the new corporation. This new corporation should have the advantage
of the prescribed maximum duration, regardless of the original term of the old or
substituted entity. There is no basis for the criticism that, if the Petitioner were
allowed to exhaust its full term as a sociedad anonima, and afterwards to reform as
a regular corporation for another fifty years, it would have a span of life twice as

long as that granted to corporations organized under the Corporation Law. The
simple reason is that the Petitioner was already a corporate entity before the
enactment of the Corporation Law, with a fixed duration under its original articles of
association. It was clearly not in parity with any corporation organized under and
coming into existence after the effectivity of the Corporation Law which has no
choice on the matter and can therefore have only the prerogative granted by said
law, no more no less.
The Respondent has suggested that the Petitioner, if desirous of continuing its
business, may organize a new corporation a suggestion which need not be made
because no one would probably think of denying it that right. But we cannot see any
cogent reason or practical purpose for the suggestion. In the first place, the filing of
Petitioners articles of incorporation and by-laws in July, 1953, in effect amounted to
the formation of a new corporation. To require more is to give greater importance to
form than to substance. In the second place, the public and public officials may not
as a matter of fact be adversely affected by allowing the Petitioner to reform,
instead of requiring it technically to form a new corporation. It will acquire no
greater rights or obligations by simple reformation than by newly organizing another
corporation. Conversely, the public and public officials will acquire no greater
benefit or control by requiring the Petitioner to form a new corporation, than by
allowing it to reform. And as already stated, whatever interest the public and public
officials may have in determining the duration of a sociedad anonima or any
corporation for that matter, is amply protected by registration in the Securities and
Exchange Commission.
The Respondent and the intervenor, Consolidated Mines, Inc., have tried to show
that the Petitioner holds or owns interests in eight mining companies, in violation of
section 13, subsection 5 of the Corporation Law, in that it has operating contracts
with the intervenor and seven other mining companies, besides owning the majority
shares in Balatoc Mining Co. This matter has not merited any attention or favorable
comment in the majority decision, and rightly of course. Even so, we may observe
that the alleged violation was not the subject of any finding by the Respondent, nor
relied upon in his order of denial; chan roblesvirtualawlibrarythat the Petitioner has
denied the charge; chan roblesvirtualawlibrarythat the holding by the Petitioner of
shares of stock in Balatoc Mining Co., if really illegal, may look into only in a quo
warranto proceeding instituted by the Government; chan roblesvirtualawlibrarythat
at any rate the Petitioner has always been ready and willing to dispose of said
shares and, in a proper proceeding, it should be given reasonable time to do so, as
this Court gave the Philippine Sugar Estates a period of six months after final
decision within which to liquidate, dissolve and separate absolutely in every
respect and in all of its relations, complained of in the petition, with the Tayabas
Land Company (Government vs. Philippine Sugar Estates Co., 38 Phil., 15).
With special reference to the intervenor, it may be of some moment to know the
antecedents and nature of business relations existing between it and the Petitioner,
at least to demonstrate the righteousness of the position of one or the other even
from a factual point of view. The following excerpts from Petitioners Reply to a
portion of Intervenors Brief are in point:chanroblesvirtuallawlibrary

What has happened in our case is that prior to the execution of the Operating
Agreement of July 9, 1934, the stockholders, directors, and officers of the
intervenor, Consolidated Mines, Inc., did not want to risk one centavo of their own
funds for the development of their chrome ore mining claims in Zambales province,
and proposed to the Petitioner herein, Benguet Consolidated Mining Company, to
explore, develop and operate their mining claims, Benguet to furnish all the funds
that might be necessary, and to explore, develop, mine and concentrate and market
all the pay are found on or within paid claims or properties, the intervenor,
Consolidated Mines, Inc., and the Petitioner, Benguet Consolidated Mining Company,
after the latter had reimbursed itself for all its advances, to divide half and half the
excess of receipts over disbursements. Benguet agreed to it, and advanced
approximately three million pesos, one-half thereof before the war, and the other
half after the war (the intervenors properties having been destroyed during the
war). Paragraph XII of the intervenors complaint in the civil action instituted by it
against Benguet in the Court of First Instance of Manila, No. 18938, and to which
counsel for the intervenor refer in page 5 of their brief, makes mention of the large
sums of money that Benguet advanced, as follows:chanroblesvirtuallawlibrary
Initial advances amounting to approximately P1,500,000 made by Defendant
during the first phases of said Operating Agreement which had been fully
reimbursed to it before the war, end of the amounts likewise advanced by it
(Benguet) for rehabilitation amounting to close P1,500,000.00.
While Benguet risked and poured approximately three million pesos (P3,000,000)
into the venture, and while Benguet was looking for, and establishing, a market for
intervenors chrome ore, the intervenor, Consolidated Mines, Inc., considered the
said Operating Agreement of July 9, 1934, as valid. Now that Benguets efforts have
been crowned with success, and Benguet has established a market for intervenors
chrome ore, the intervenor claims that its said operating Agreement of July 9, 1934,
with the Petitioner, Benguet, is contrary to law because Benguet has become
interested in intervenors chrome ore mining claims (although the agreement
expressly states that Benguet has no interest therein), and objects to the
registration of the documents which Benguet filed with the Respondent Securities
and Exchange Commissioner, extending its life as a sociedad anonima, and
reforming itself s a corporation, in accordance with the provisions of section 75 of
the Corporation Law.
Under the foregoing facts, the intervenor, Consolidated Mines, Inc., cannot be
heard to complain against Benguet. No court can give now a helping hand to the
intervenor, which claims that Benguet no longer lives, and wants to keep for itself
all the products of Benguets efforts after the latter risked into the venture
approximately three million pesos (P3,000,000).
The foregoing considerations may not constitute a legal justification for ruling that
the Petitioner should be allowed either to extend its life as a sociedad anonima or to
reform and organize under the provisions of the Corporation Law, but they may aid
in resolving in Petitioners favor and doubt as to the clarity or definiteness of
sections 75 and 191 of the Corporation Law regarding its right to exercise either
option in the manner claimed by it.

The same result may be arrived at if, in addition, we bear in mind the possible
economic harm that may be brought about by the affirmance of the order
complained of. This aspect is adequately touched in Petitioners brief, as
follows:chanroblesvirtuallawlibrary
1. A loss of employment in the Baguio district by about 4,000 Filipino and a loss of
direct living from the Benguet operation supplied to 20,000, that is, the 4,000
employed and their dependents.
(a) This would be calamity to the district of the highest order which could very well
produce a snow balling depression which could react all over the Philippine Islands.
2. Losses of direct and indirect taxes to the Philippine Government in an extremely
large yearly amount.
3. No one would be able to continue the Benguet and Balatoc mines in operation
should a liquidation of Benguet take place because the net profits after labor and
material costs and taxes in the last two years or more from the gold mining
operations have not warranted their continued operation as independent units. The
profits in 1953 certainly do not warrant it. It is merely a case of taking gold out of
the ground in order to pay for labor, materials and taxes with very little return to the
stockholders and on the huge investment made in the reconstruction since 1946.
(a) The relief provided by the elimination of the 17 per cent Excise Tax, the 7 per
cent Compensating Tax and the lowering of the Extraction Tax, when counterbalanced against consistently increasing costs from month to month up to this very
month, is now nothing but an offsetting item against constantly increasing costs.
For whatever persuasive effect it may have, we cannot help calling attention to the
fact that there are only about nine sociedades anonimas in the country, foremost
among them being Compaia Maritima, which have existed for years and along with
the Petitioner figured prominently in our economic development. Compaia
Maritima, in particular, has been twice allowed to extend its life by amendment of
its articles of incorporation. It may be argued that if there was an official mistake in
acceding to the extension of the term of Compaia Maritima, the same should not
warrant the commission of another mistake. But it will go to show that sections 75
and 191 of the Corporation Law are, on the points herein involved, of doubtful
construction; chan roblesvirtualawlibraryand it is for this reason that we had to
advert hereinabove to the somewhat unequitable position of the intervenor and to
the possible adverse effect on Philippine economy of the abrupt termination of
Petitioners corporate existence.
By and large, it is my considered opinion that the Respondents order of denial
dated October 27, 1953, should be reversed and the Respondent ordered to register
at least the documents presented by the Petitioner, reforming and organizing itself
as a corporation under the provisions of the Corporation Law. This would be in line
with the policy of doing away with sociedad anonimas, at the same time saving the
goose that lays the golden egg.
Jugo and Bautista Angelo, JJ., concur.

Dante Liban et. al. v. Richard Gordon

GR. 175352, July 2009
CARPIO, J.:
This is a petition to declare Senator Richard J. Gordon (respondent) as having
forfeited his seat in the Senate.
The Facts

Petitioners Dante V. Liban, Reynaldo M. Bernardo, and Salvador M. Viari

(petitioners) filed with this Court a Petition to Declare Richard J. Gordon as Having
Forfeited His Seat in the Senate. Petitioners are officers of the Board of Directors of
the Quezon City Red Cross Chapter while respondent is Chairman of the Philippine
National Red Cross (PNRC) Board of Governors.
During respondents incumbency as a member of the Senate of the
Philippines,[1] he was elected Chairman of the PNRC during the 23 February 2006
meeting of the PNRC Board of Governors. Petitioners allege that by accepting the
chairmanship of the PNRC Board of Governors, respondent has ceased to be a
member of the Senate as provided in Section 13, Article VI of the Constitution,
which reads:
SEC. 13. No Senator or Member of the House of Representatives may hold any
other office or employment in the Government, or any subdivision, agency, or
instrumentality thereof, including government-owned or controlled corporations or
their subsidiaries, during his term without forfeiting his seat. Neither shall he be
appointed to any office which may have been created or the emoluments thereof
increased during the term for which he was elected.

Petitioners cite Camporedondo v. NLRC,[2] which held that the PNRC is a

government-owned or controlled corporation. Petitioners claim that in accepting
and holding the position of Chairman of the PNRC Board of Governors, respondent
has automatically forfeited his seat in the Senate, pursuant to Flores v. Drilon,[3]
which held that incumbent national legislators lose their elective posts upon their
appointment to another government office.
In his Comment, respondent asserts that petitioners have no standing to file
this petition which appears to be an action for quo warranto, since the petition
alleges that respondent committed an act which, by provision of law, constitutes a
ground for forfeiture of his public office. Petitioners do not claim to be entitled to the
Senate office of respondent. Under Section 5, Rule 66 of the Rules of Civil

Procedure, only a person claiming to be entitled to a public office usurped or

unlawfully held by another may bring an action for quo warranto in his own name.
If the petition is one for quo warranto, it is already barred by prescription since
under Section 11, Rule 66 of the Rules of Civil Procedure, the action should be
commenced within one year after the cause of the public officers forfeiture of
office. In this case, respondent has been working as a Red Cross volunteer for the
past 40 years. Respondent was already Chairman of the PNRC Board of Governors
when he was elected Senator in May 2004, having been elected Chairman in 2003
and re-elected in 2005.
Respondent contends that even if the present petition is treated as a
taxpayers suit, petitioners cannot be allowed to raise a constitutional question in
the absence of any claim that they suffered some actual damage or threatened
injury as a result of the allegedly illegal act of respondent. Furthermore, taxpayers
are allowed to sue only when there is a claim of illegal disbursement of public funds,
or that public money is being diverted to any improper purpose, or where
petitioners seek to restrain respondent from enforcing an invalid law that results in
wastage of public funds.
Respondent also maintains that if the petition is treated as one for
declaratory relief, this Court would have no jurisdiction since original jurisdiction for
declaratory relief lies with the Regional Trial Court.
Respondent further insists that the PNRC is not a government-owned or
controlled corporation and that the prohibition under Section 13, Article VI of the
Constitution does not apply in the present case since volunteer service to the PNRC
is neither an office nor an employment.
In their Reply, petitioners claim that their petition is neither an action for quo
warranto nor an action for declaratory relief. Petitioners maintain that the present
petition is a taxpayers suit questioning the unlawful disbursement of funds,
considering that respondent has been drawing his salaries and other compensation
as a Senator even if he is no longer entitled to his office. Petitioners point out that
this Court has jurisdiction over this petition since it involves a legal or constitutional
issue which is of transcendental importance.

The Issues
Petitioners raise the following issues:
1. Whether the Philippine National Red Cross (PNRC) is a government- owned or
controlled corporation;

2. Whether Section 13, Article VI of the Philippine Constitution applies to the case
of respondent who is Chairman of the PNRC and at the same time a Member of the
Senate;
3. Whether respondent should be automatically removed as a Senator pursuant to
Section 13, Article VI of the Philippine Constitution; and
4.

Whether petitioners may legally institute this petition against respondent.[4]

The substantial issue boils down to whether the office of the PNRC Chairman
is a government office or an office in a government-owned or controlled corporation
for purposes of the prohibition in Section 13, Article VI of the Constitution.
The Courts Ruling
We find the petition without merit.
Petitioners Have No Standing to File this Petition
A careful reading of the petition reveals that it is an action for quo warranto.
Section 1, Rule 66 of the Rules of Court provides:
Section 1. Action by Government against individuals. An action for the
usurpation of a public office, position or franchise may be commenced by a verified
petition brought in the name of the Republic of the Philippines against:
(a) A person who usurps, intrudes into, or unlawfully holds or exercises a
public office, position or franchise;
(b) A public officer who does or suffers an act which by provision of law,
constitutes a ground for the forfeiture of his office; or
(c) An association which acts as a corporation within the Philippines without
being legally incorporated or without lawful authority so to act. (Emphasis supplied)
Petitioners allege in their petition that:
4. Respondent became the Chairman of the PNRC when he was elected as
such during the First Regular Luncheon-Meeting of the Board of Governors of the
PNRC held on February 23, 2006, the minutes of which is hereto attached and made
integral part hereof as Annex A.
5. Respondent was elected as Chairman of the PNRC Board of Governors,
during his incumbency as a Member of the House of Senate of the Congress of the
Philippines, having been elected as such during the national elections last May
2004.
6. Since his election as Chairman of the PNRC Board of Governors, which
position he duly accepted, respondent has been exercising the powers and

discharging the functions and duties of said office, despite the fact that he is still a
senator.
7. It is the respectful submission of the petitioner[s] that by accepting the
chairmanship of the Board of Governors of the PNRC, respondent has ceased to be a
Member of the House of Senate as provided in Section 13, Article VI of the
Philippine Constitution, x x x
xxxx
10. It is respectfully submitted that in accepting the position of Chairman of
the Board of Governors of the PNRC on February 23, 2006, respondent has
automatically forfeited his seat in the House of Senate and, therefore, has long
ceased to be a Senator, pursuant to the ruling of this Honorable Court in the case of
FLORES, ET AL. VS. DRILON AND GORDON, G.R. No. 104732, x x x
11. Despite the fact that he is no longer a senator, respondent continues to
act as such and still performs the powers, functions and duties of a senator,
contrary to the constitution, law and jurisprudence.
12. Unless restrained, therefore, respondent will continue to falsely act and
represent himself as a senator or member of the House of Senate, collecting the
salaries, emoluments and other compensations, benefits and privileges
appertaining and due only to the legitimate senators, to the damage, great and
irreparable injury of the Government and the Filipino people.[5] (Emphasis supplied)
Thus, petitioners are alleging that by accepting the position of Chairman of
the PNRC Board of Governors, respondent has automatically forfeited his seat in the
Senate. In short, petitioners filed an action for usurpation of public office against
respondent, a public officer who allegedly committed an act which constitutes a
ground for the forfeiture of his public office. Clearly, such an action is for quo
warranto, specifically under Section 1(b), Rule 66 of the Rules of Court.
Quo warranto is generally commenced by the Government as the proper
party plaintiff. However, under Section 5, Rule 66 of the Rules of Court, an individual
may commence such an action if he claims to be entitled to the public office
allegedly usurped by another, in which case he can bring the action in his own
name. The person instituting quo warranto proceedings in his own behalf must
claim and be able to show that he is entitled to the office in dispute, otherwise the
action may be dismissed at any stage.[6] In the present case, petitioners do not
claim to be entitled to the Senate office of respondent. Clearly, petitioners have no
standing to file the present petition.
Even if the Court disregards the infirmities of the petition and treats it as a
taxpayers suit, the petition would still fail on the merits.
PNRC is a Private Organization Performing Public Functions
On 22 March 1947, President Manuel A. Roxas signed Republic Act No. 95,[7]
otherwise known as the PNRC Charter. The PNRC is a non-profit, donor-funded,
voluntary, humanitarian organization, whose mission is to bring timely, effective,
and compassionate humanitarian assistance for the most vulnerable without
consideration of nationality, race, religion, gender, social status, or political
affiliation.[8] The PNRC provides six major services: Blood Services, Disaster

Management, Safety Services, Community Health and Nursing, Social Services and
Voluntary Service.[9]
The Republic of the Philippines, adhering to the Geneva Conventions,
established the PNRC as a voluntary organization for the purpose contemplated in
the Geneva Convention of 27 July 1929.[10] The Whereas clauses of the PNRC
Charter read:
WHEREAS, there was developed at Geneva, Switzerland, on August 22,
1864, a convention by which the nations of the world were invited to join together in
diminishing, so far lies within their power, the evils inherent in war;
WHEREAS, more than sixty nations of the world have ratified or adhered to
the subsequent revision of said convention, namely the Convention of Geneva of
July 29 [sic], 1929 for the Amelioration of the Condition of the Wounded and Sick of
Armies in the Field (referred to in this Charter as the Geneva Red Cross
Convention);
WHEREAS, the Geneva Red Cross Convention envisages the establishment in
each country of a voluntary organization to assist in caring for the wounded and sick
of the armed forces and to furnish supplies for that purpose;
WHEREAS, the Republic of the Philippines became an independent nation on
July 4, 1946 and proclaimed its adherence to the Geneva Red Cross Convention on
February 14, 1947, and by that action indicated its desire to participate with the
nations of the world in mitigating the suffering caused by war and to establish in the
Philippines a voluntary organization for that purpose as contemplated by the
Geneva Red Cross Convention;
WHEREAS, there existed in the Philippines since 1917 a Charter of the
American National Red Cross which must be terminated in view of the independence
of the Philippines; and
WHEREAS, the volunteer organizations established in the other countries
which have ratified or adhered to the Geneva Red Cross Convention assist in
promoting the health and welfare of their people in peace and in war, and through
their mutual assistance and cooperation directly and through their international
organizations promote better understanding and sympathy among the peoples of
the world. (Emphasis supplied)
The PNRC is a member National Society of the International Red Cross and
Red Crescent Movement (Movement), which is composed of the International
Committee of the Red Cross (ICRC), the International Federation of Red Cross and
Red Crescent Societies (International Federation), and the National Red Cross and
Red Crescent Societies (National Societies). The Movement is united and guided by
its seven Fundamental Principles:
1. HUMANITY The International Red Cross and Red Crescent Movement, born of a
desire to bring assistance without discrimination to the wounded on the battlefield,
endeavors, in its international and national capacity, to prevent and alleviate human
suffering wherever it may be found. Its purpose is to protect life and health and to
ensure respect for the human being. It promotes mutual understanding, friendship,
cooperation and lasting peace amongst all peoples.

2. IMPARTIALITY It makes no discrimination as to nationality, race, religious

beliefs, class or political opinions. It endeavors to relieve the suffering of individuals,
being guided solely by their needs, and to give priority to the most urgent cases of
distress.
3. NEUTRALITY In order to continue to enjoy the confidence of all, the
Movement may not take sides in hostilities or engage at any time in controversies of
a political, racial, religious or ideological nature.
4. INDEPENDENCE The Movement is independent. The National Societies, while
auxiliaries in the humanitarian services of their governments and subject to the
laws of their respective countries, must always maintain their autonomy so that
they may be able at all times to act in accordance with the principles of the
Movement.
5. VOLUNTARY SERVICE It is a voluntary relief movement not prompted in any
manner by desire for gain.
6. UNITY There can be only one Red Cross or one Red Crescent Society in any
one country. It must be open to all. It must carry on its humanitarian work
throughout its territory.
7. UNIVERSALITY The International Red Cross and Red Crescent Movement, in
which all Societies have equal status and share equal responsibilities and duties in
helping each other, is worldwide. (Emphasis supplied)

The Fundamental Principles provide a universal standard of reference for all

members of the Movement. The PNRC, as a member National Society of the
Movement, has the duty to uphold the Fundamental Principles and ideals of the
Movement. In order to be recognized as a National Society, the PNRC has to be
autonomous and must operate in conformity with the Fundamental Principles of the
Movement.[11]
The reason for this autonomy is fundamental. To be accepted by warring
belligerents as neutral workers during international or internal armed conflicts, the
PNRC volunteers must not be seen as belonging to any side of the armed conflict.
In the Philippines where there is a communist insurgency and a Muslim separatist
rebellion, the PNRC cannot be seen as government-owned or controlled, and neither
can the PNRC volunteers be identified as government personnel or as instruments of
government policy. Otherwise, the insurgents or separatists will treat PNRC
volunteers as enemies when the volunteers tend to the wounded in the battlefield
or the displaced civilians in conflict areas.
Thus, the PNRC must not only be, but must also be seen to be, autonomous,
neutral and independent in order to conduct its activities in accordance with the
Fundamental Principles. The PNRC must not appear to be an instrument or agency
that implements government policy; otherwise, it cannot merit the trust of all and
cannot effectively carry out its mission as a National Red Cross Society.[12] It is
imperative that the PNRC must be autonomous, neutral, and independent in relation
to the State.
To ensure and maintain its autonomy, neutrality, and independence, the PNRC
cannot be owned or controlled by the government. Indeed, the Philippine
government does not own the PNRC. The PNRC does not have government assets

and does not receive any appropriation from the Philippine Congress.[13] The PNRC
is financed primarily by contributions from private individuals and private entities
obtained through solicitation campaigns organized by its Board of Governors, as
provided under Section 11 of the PNRC Charter:
SECTION 11. As a national voluntary organization, the Philippine National Red
Cross shall be financed primarily by contributions obtained through solicitation
campaigns throughout the year which shall be organized by the Board of Governors
and conducted by the Chapters in their respective jurisdictions. These fund raising
campaigns shall be conducted independently of other fund drives by other
organizations. (Emphasis supplied)
The government does not control the PNRC. Under the PNRC Charter, as
amended, only six of the thirty members of the PNRC Board of Governors are
appointed by the President of the Philippines. Thus, twenty-four members, or fourfifths (4/5), of the PNRC Board of Governors are not appointed by the President.
Section 6 of the PNRC Charter, as amended, provides:
SECTION 6. The governing powers and authority shall be vested in a Board
of Governors composed of thirty members, six of whom shall be appointed by the
President of the Philippines, eighteen shall be elected by chapter delegates in
biennial conventions and the remaining six shall be selected by the twenty-four
members of the Board already chosen. x x x.
Thus, of the twenty-four members of the PNRC Board, eighteen are elected by the
chapter delegates of the PNRC, and six are elected by the twenty-four members
already chosen a select group where the private sector members have threefourths majority. Clearly, an overwhelming majority of four-fifths of the PNRC Board
are elected or chosen by the private sector members of the PNRC.
The PNRC Board of Governors, which exercises all corporate powers of the
PNRC, elects the PNRC Chairman and all other officers of the PNRC. The incumbent
Chairman of PNRC, respondent Senator Gordon, was elected, as all PNRC Chairmen
are elected, by a private sector-controlled PNRC Board four-fifths of whom are
private sector members of the PNRC. The PNRC Chairman is not appointed by the
President or by any subordinate government official.
Under Section 16, Article VII of the Constitution,[14] the President appoints all
officials and employees in the Executive branch whose appointments are vested in
the President by the Constitution or by law. The President also appoints those
whose appointments are not otherwise provided by law. Under this Section 16, the
law may also authorize the heads of departments, agencies, commissions, or
boards to appoint officers lower in rank than such heads of departments, agencies,
commissions or boards.[15]
In Rufino v. Endriga,[16] the Court explained
appointments under Section 16 in this wise:
Under Section 16, Article VII of the 1987 Constitution, the President appoints
three groups of officers. The first group refers to the heads of the Executive

departments, ambassadors, other public ministers and consuls, officers of the

armed forces from the rank of colonel or naval captain, and other officers whose
appointments are vested in the President by the Constitution. The second group
refers to those whom the President may be authorized by law to appoint. The third
group refers to all other officers of the Government whose appointments are not
otherwise provided by law.
Under the same Section 16, there is a fourth group of lower-ranked officers
whose appointments Congress may by law vest in the heads of departments,
agencies, commissions, or boards. x x x
xxx
In a department in the Executive branch, the head is the Secretary. The law
may not authorize the Undersecretary, acting as such Undersecretary, to appoint
lower-ranked officers in the Executive department. In an agency, the power is
vested in the head of the agency for it would be preposterous to vest it in the
agency itself. In a commission, the head is the chairperson of the commission. In a
board, the head is also the chairperson of the board. In the last three situations, the
law may not also authorize officers other than the heads of the agency, commission,
or board to appoint lower-ranked officers.
xxx
The Constitution authorizes Congress to vest the power to appoint lowerranked officers specifically in the heads of the specified offices, and in no other
person. The word heads refers to the chairpersons of the commissions or boards
and not to their members, for several reasons.
The President does not appoint the Chairman of the PNRC. Neither does the
head of any department, agency, commission or board appoint the PNRC Chairman.
Thus, the PNRC Chairman is not an official or employee of the Executive branch
since his appointment does not fall under Section 16, Article VII of the Constitution.
Certainly, the PNRC Chairman is not an official or employee of the Judiciary or
Legislature. This leads us to the obvious conclusion that the PNRC Chairman is not
an official or employee of the Philippine Government. Not being a government
official or employee, the PNRC Chairman, as such, does not hold a government
office or employment.
Under Section 17, Article VII of the Constitution,[17] the President exercises
control over all government offices in the Executive branch. If an office is legally
not under the control of the President, then such office is not part of the Executive
branch. In Rufino v. Endriga,[18] the Court explained the Presidents power of
control over all government offices as follows:
Every government office, entity, or agency must fall under the Executive,
Legislative, or Judicial branches, or must belong to one of the independent
constitutional bodies, or must be a quasi-judicial body or local government unit.

Otherwise, such government office, entity, or agency has no legal and constitutional
basis for its existence.
The CCP does not fall under the Legislative or Judicial branches of
government. The CCP is also not one of the independent constitutional bodies.
Neither is the CCP a quasi-judicial body nor a local government unit. Thus, the CCP
must fall under the Executive branch. Under the Revised Administrative Code of
1987, any agency not placed by law or order creating them under any specific
department falls under the Office of the President.
Since the President exercises control over all the executive departments,
bureaus, and offices, the President necessarily exercises control over the CCP
which is an office in the Executive branch. In mandating that the President shall
have control of all executive . . . offices, Section 17, Article VII of the 1987
Constitution does not exempt any executive office one performing executive
functions outside of the independent constitutional bodies from the Presidents
power of control. There is no dispute that the CCP performs executive, and not
legislative, judicial, or quasi-judicial functions.
The Presidents power of control applies to the acts or decisions of all
officers in the Executive branch. This is true whether such officers are appointed by
the President or by heads of departments, agencies, commissions, or boards. The
power of control means the power to revise or reverse the acts or decisions of a
subordinate officer involving the exercise of discretion.
In short, the President sits at the apex of the Executive branch, and
exercises control of all the executive departments, bureaus, and offices. There can
be no instance under the Constitution where an officer of the Executive branch is
outside the control of the President. The Executive branch is unitary since there is
only one President vested with executive power exercising control over the entire
Executive branch. Any office in the Executive branch that is not under the control of
the President is a lost command whose existence is without any legal or
constitutional basis. (Emphasis supplied)
An overwhelming four-fifths majority of the PNRC Board are private sector
individuals elected to the PNRC Board by the private sector members of the PNRC.
The PNRC Board exercises all corporate powers of the PNRC. The PNRC is controlled
by private sector individuals. Decisions or actions of the PNRC Board are not
reviewable by the President. The President cannot reverse or modify the decisions
or actions of the PNRC Board. Neither can the President reverse or modify the
decisions or actions of the PNRC Chairman. It is the PNRC Board that can review,
reverse or modify the decisions or actions of the PNRC Chairman. This proves again
that the office of the PNRC Chairman is a private office, not a government office.
Although the State is often represented in the governing bodies of a National
Society, this can be justified by the need for proper coordination with the public
authorities, and the government representatives may take part in decision-making
within a National Society. However, the freely-elected representatives of a National

Societys active members must remain in a large majority in a National Societys

governing bodies.[19]
The PNRC is not government-owned but privately owned. The vast majority of
the thousands of PNRC members are private individuals, including students. Under
the PNRC Charter, those who contribute to the annual fund campaign of the PNRC
are entitled to membership in the PNRC for one year. Thus, any one between 6 and
65 years of age can be a PNRC member for one year upon contributing P35, P100,
P300, P500 or P1,000 for the year.[20] Even foreigners, whether residents or not,
can be members of the PNRC. Section 5 of the PNRC Charter, as amended by
Presidential Decree No. 1264,[21] reads:
SEC. 5. Membership in the Philippine National Red Cross shall be open to the
entire population in the Philippines regardless of citizenship. Any contribution to the
Philippine National Red Cross Annual Fund Campaign shall entitle the contributor to
membership for one year and said contribution shall be deductible in full for
taxation purposes.
Thus, the PNRC is a privately owned, privately funded, and privately run charitable
organization. The PNRC is not a government-owned or controlled corporation.
Petitioners anchor their petition on the 1999 case of Camporedondo v. NLRC,
[22] which ruled that the PNRC is a government-owned or controlled corporation.
In ruling that the PNRC is a government-owned or controlled corporation, the simple
test used was whether the corporation was created by its own special charter for
the exercise of a public function or by incorporation under the general corporation
law. Since the PNRC was created under a special charter, the Court then ruled that
it is a government corporation. However, the Camporedondo ruling failed to
consider the definition of a government-owned or controlled corporation as provided
under Section 2(13) of the Introductory Provisions of the Administrative Code of
1987:

SEC. 2. General Terms Defined. x x x

(13) Government-owned or controlled corporation refers to any agency
organized as a stock or non-stock corporation, vested with functions relating to
public needs whether governmental or proprietary in nature, and owned by the
Government directly or through its instrumentalities either wholly, or where
applicable as in the case of stock corporations, to the extent of at least fifty-one
(51) percent of its capital stock: Provided, That government-owned or controlled
corporations may be further categorized by the Department of the Budget, the Civil
Service Commission, and the Commission on Audit for purposes of the exercise and
discharge of their respective powers, functions and responsibilities with respect to
such corporations.(Boldfacing and underscoring supplied)
A government-owned or controlled corporation must be owned by the
government, and in the case of a stock corporation, at least a majority of its capital
stock must be owned by the government. In the case of a non-stock corporation, by

analogy at least a majority of the members must be government officials holding

such membership by appointment or designation by the government. Under this
criterion, and as discussed earlier, the government does not own or control PNRC.
The PNRC Charter is Violative of the Constitutional Proscription against the Creation
of Private Corporations by Special Law
The 1935 Constitution, as amended, was in force when the PNRC was
created by special charter on 22 March 1947. Section 7, Article XIV of the 1935
Constitution, as amended, reads:
SEC. 7. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations, unless such corporations are
owned or controlled by the Government or any subdivision or instrumentality
thereof.
The subsequent 1973 and 1987 Constitutions contain similar provisions
prohibiting Congress from creating private corporations except by general law.
Section 1 of the PNRC Charter, as amended, creates the PNRC as a body corporate
and politic, thus:
SECTION 1. There is hereby created in the Republic of the Philippines a body
corporate and politic to be the voluntary organization officially designated to assist
the Republic of the Philippines in discharging the obligations set forth in the Geneva
Conventions and to perform such other duties as are inherent upon a National Red
Cross Society. The national headquarters of this Corporation shall be located in
Metropolitan Manila. (Emphasis supplied)
In Feliciano v. Commission on Audit,[23] the Court explained the constitutional
provision prohibiting Congress from creating private corporations in this wise:
We begin by explaining the general framework under the fundamental law.
The Constitution recognizes two classes of corporations. The first refers to private
corporations created under a general law. The second refers to government-owned
or controlled corporations created by special charters. Section 16, Article XII of the
Constitution provides:
Sec. 16. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or controlled
corporations may be created or established by special charters in the interest of the
common good and subject to the test of economic viability.
The Constitution emphatically prohibits the creation of private corporations
except by general law applicable to all citizens. The purpose of this constitutional
provision is to ban private corporations created by special charters, which
historically gave certain individuals, families or groups special privileges denied to
other citizens.

In short, Congress cannot enact a law creating a private corporation with a

special charter. Such legislation would be unconstitutional. Private corporations may
exist only under a general law. If the corporation is private, it must necessarily exist
under a general law. Stated differently, only corporations created under a general
law can qualify as private corporations. Under existing laws, the general law is the
Corporation Code, except that the Cooperative Code governs the incorporation of
cooperatives.
The Constitution authorizes Congress to create government-owned or
controlled corporations through special charters. Since private corporations cannot
have special charters, it follows that Congress can create corporations with special
charters only if such corporations are government-owned or controlled.[24]
(Emphasis supplied)
In Feliciano, the Court held that the Local Water Districts are governmentowned or controlled corporations since they exist by virtue of Presidential Decree
No. 198, which constitutes their special charter. The seed capital assets of the Local
Water Districts, such as waterworks and sewerage facilities, were public property
which were managed, operated by or under the control of the city, municipality or
province before the assets were transferred to the Local Water Districts. The Local
Water Districts also receive subsidies and loans from the Local Water Utilities
Administration (LWUA). In fact, under the 2009 General Appropriations Act,[25] the
LWUA has a budget amounting to P400,000,000 for its subsidy requirements.[26]
There is no private capital invested in the Local Water Districts. The capital assets
and operating funds of the Local Water Districts all come from the government,
either through transfer of assets, loans, subsidies or the income from such assets or
funds.
The government also controls the Local Water Districts because the
municipal or city mayor, or the provincial governor, appoints all the board directors
of the Local Water Districts. Furthermore, the board directors and other personnel
of the Local Water Districts are government employees subject to civil service laws
and anti-graft laws. Clearly, the Local Water Districts are considered governmentowned or controlled corporations not only because of their creation by special
charter but also because the government in fact owns and controls the Local Water
Districts.
Just like the Local Water Districts, the PNRC was created through a special
charter. However, unlike the Local Water Districts, the elements of government
ownership and control are clearly lacking in the PNRC. Thus, although the PNRC is
created by a special charter, it cannot be considered a government-owned or
controlled corporation in the absence of the essential elements of ownership and
control by the government. In creating the PNRC as a corporate entity, Congress
was in fact creating a private corporation. However, the constitutional prohibition
against the creation of private corporations by special charters provides no
exception even for non-profit or charitable corporations. Consequently, the PNRC
Charter, insofar as it creates the PNRC as a private corporation and grants it
corporate powers,[27] is void for being unconstitutional. Thus, Sections 1,[28] 2,

[29] 3,[30] 4(a),[31] 5,[32] 6,[33] 7,[34] 8,[35] 9,[36] 10,[37] 11,[38] 12,[39] and
13[40] of the PNRC Charter, as amended, are void.
The other provisions[41] of the PNRC Charter remain valid as they can be
considered as a recognition by the State that the unincorporated PNRC is the local
National Society of the International Red Cross and Red Crescent Movement, and
thus entitled to the benefits, exemptions and privileges set forth in the PNRC
Charter. The other provisions of the PNRC Charter implement the Philippine
Governments treaty obligations under Article 4(5) of the Statutes of the
International Red Cross and Red Crescent Movement, which provides that to be
recognized as a National Society, the Society must be duly recognized by the legal
government of its country on the basis of the Geneva Conventions and of the
national legislation as a voluntary aid society, auxiliary to the public authorities in
the humanitarian field.
In sum, we hold that the office of the PNRC Chairman is not a government
office or an office in a government-owned or controlled corporation for purposes of
the prohibition in Section 13, Article VI of the 1987 Constitution. However, since the
PNRC Charter is void insofar as it creates the PNRC as a private corporation, the
PNRC should incorporate under the Corporation Code and register with the
Securities and Exchange Commission if it wants to be a private corporation.
WHEREFORE, we declare that the office of the Chairman of the Philippine
National Red Cross is not a government office or an office in a government-owned or
controlled corporation for purposes of the prohibition in Section 13, Article VI of the
1987 Constitution. We also declare that Sections 1, 2, 3, 4(a), 5, 6, 7, 8, 9, 10, 11,
12, and 13 of the Charter of the Philippine National Red Cross, or Republic Act No.
95, as amended by Presidential Decree Nos. 1264 and 1643, are VOID because they
create the PNRC as a private corporation or grant it corporate powers.
SO ORDERED.
En Banc Court Resolution, January 2011
EN BANC
[G. R. No. 175352 : January 18, 2011]
DANTE V. LIBAN, REYNALDO M. BERNARDO AND SALVADOR M. VIARI, Petitioners, v.
RICHARD J. GORDON, Respondent.chanrobleslawlibrary
PHILIPPINE NATIONAL RED CROSS, Intervenor.
RESOLUTION
LEONARDO-DE CASTRO, J.:

This resolves the Motion for Clarification and/or for Reconsideration[1] filed on
August 10, 2009 by respondent Richard J. Gordon (respondent) of the Decision
promulgated by this Court on July 15, 2009 (the Decision), the Motion for Partial
Reconsideration[2] filed on August 27, 2009 by movant-intervenor Philippine
National Red Cross (PNRC), and the latter's Manifestation and Motion to Admit
Attached Position Paper[3] filed on December 23, 2009.chanrobleslawlibrary
In the Decision,[4] the Court held that respondent did not forfeit his seat in the
Senate when he accepted the chairmanship of the PNRC Board of Governors, as "the
office of the PNRC Chairman is not a government office or an office in a
government-owned or controlled corporation for purposes of the prohibition in
Section 13, Article VI of the 1987 Constitution."[5] The Decision, however, further
declared void the PNRC Charter "insofar as it creates the PNRC as a private
corporation" and consequently ruled that "the PNRC should incorporate under the
Corporation Code and register with the Securities and Exchange Commission if it
wants to be a private corporation."[6] The dispositive portion of the Decision reads
as follows:chanroblesvirtualawlibrary
WHEREFORE, we declare that the office of the Chairman of the Philippine National
Red Cross is not a government office or an office in a government-owned or
controlled corporation for purposes of the prohibition in Section 13, Article VI of the
1987 Constitution. We also declare that Sections 1, 2, 3, 4(a), 5, 6, 7, 8, 9, 10, 11,
12, and 13 of the Charter of the Philippine National Red Cross, or Republic Act No.
95, as amended by Presidential Decree Nos. 1264 and 1643, are VOID because they
create the PNRC as a private corporation or grant it corporate powers.[7]
In his Motion for Clarification and/or for Reconsideration, respondent raises the
following grounds: (1) as the issue of constitutionality of Republic Act (R.A.) No. 95
was not raised by the parties, the Court went beyond the case in deciding such
issue; and (2) as the Court decided that Petitioners did not have standing to file the
instant Petition, the pronouncement of the Court on the validity of R.A. No. 95
should be considered obiter.[8]
Respondent argues that the validity of R.A. No. 95 was a non-issue; therefore, it was
unnecessary for the Court to decide on that question. Respondent cites Laurel v.
Garcia,[9] wherein the Court said that it "will not pass upon a constitutional question
although properly presented by the record if the case can be disposed of on some
other ground" and goes on to claim that since this Court, in the Decision, disposed
of the petition on some other ground, i.e., lack of standing of petitioners, there was
no need for it to delve into the validity of R.A. No. 95, and the rest of the judgment
should be deemed obiter.chanrobleslawlibrary
In its Motion for Partial Reconsideration, PNRC prays that the Court sustain the
constitutionality of its Charter on the following grounds:chanroblesvirtualawlibrary
THE ASSAILED DECISION DECLARING UNCONSTITUTIONAL REPUBLIC ACT NO. 95 AS
AMENDED DEPRIVED INTERVENOR PNRC OF ITS CONSTITUTIONAL RIGHT TO DUE
PROCESS.chanrobleslawlibrary

INTERVENOR PNRC WAS NEVER A PARTY TO THE INSTANT CONTROVERSY.

THE CONSTITUTIONALITY OF REPUBLIC ACT NO. 95, AS AMENDED WAS NEVER AN
ISSUE IN THIS CASE.
THE CURRENT CHARTER OF PNRC IS PRESIDENTIAL DECREE NO. 1264 AND NOT
REPUBLIC ACT NO. 95. PRESIDENTIAL DECREE NO. 1264 WAS NOT A CREATION OF
CONGRESS.chanrobleslawlibrary
PNRC'S STRUCTURE IS SUI GENERIS; IT IS A CLASS OF ITS OWN. WHILE IT IS
PERFORMING HUMANITARIAN FUNCTIONS AS AN AUXILIARY TO GOVERNMENT, IT IS
A NEUTRAL ENTITY SEPARATE AND INDEPENDENT OF GOVERNMENT CONTROL, YET
IT DOES NOT QUALIFY AS STRICTLY PRIVATE IN CHARACTER.
In his Comment and Manifestation[10] filed on November 9, 2009, respondent
manifests: (1) that he agrees with the position taken by the PNRC in its Motion for
Partial Reconsideration dated August 27, 2009; and (2) as of the writing of said
Comment and Manifestation, there was pending before the Congress of the
Philippines a proposed bill entitled "An Act Recognizing the PNRC as an
Independent, Autonomous, Non-Governmental Organization Auxiliary to the
Authorities of the Republic of the Philippines in the Humanitarian Field, to be Known
as The Philippine Red Cross."[11]
After a thorough study of the arguments and points raised by the respondent as well
as those of movant-intervenor in their respective motions, we have reconsidered
our pronouncements in our Decision dated July 15, 2009 with regard to the nature of
the PNRC and the constitutionality of some provisions of the PNRC Charter, R.A. No.
95, as amended.chanrobleslawlibrary
As correctly pointed out in respondent's Motion, the issue of constitutionality of R.A.
No. 95 was not raised by the parties, and was not among the issues defined in the
body of the Decision; thus, it was not the very lis mota of the case. We have
reiterated the rule as to when the Court will consider the issue of constitutionality in
Alvarez v. PICOP Resources, Inc.,[12]thus:chanroblesvirtualawlibrary
This Court will not touch the issue of unconstitutionality unless it is the very lis
mota. It is a well-established rule that a court should not pass upon a constitutional
question and decide a law to be unconstitutional or invalid, unless such question is
raised by the parties and that when it is raised, if the record also presents some
other ground upon which the court may [rest] its judgment, that course will be
adopted and the constitutional question will be left for consideration until such
question will be unavoidable.[13]
Under the rule quoted above, therefore, this Court should not have declared void
certain sections of R.A. No. 95, as amended by Presidential Decree (P.D.) Nos. 1264
and 1643, the PNRC Charter. Instead, the Court should have exercised judicial
restraint on this matter, especially since there was some other ground upon which
the Court could have based its judgment. Furthermore, the PNRC, the entity most
adversely affected by this declaration of unconstitutionality, which was not even
originally a party to this case, was being compelled, as a consequence of the
Decision, to suddenly reorganize and incorporate under the Corporation Code, after
more than sixty (60) years of existence in this country.chanrobleslawlibrary

Its existence as a chartered corporation remained unchallenged on ground of

unconstitutionality notwithstanding that R.A. No. 95 was enacted on March 22, 1947
during the effectivity of the 1935 Constitution, which provided for a proscription
against the creation of private corporations by special law, to
wit:chanroblesvirtualawlibrary
SEC. 7. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations, unless such corporations are
owned and controlled by the Government or any subdivision or instrumentality
thereof. (Art. XIV, 1935 Constitution.)
Similar provisions are found in Article XIV, Section 4 of the 1973 Constitution and
Article XII, Section 16 of the 1987 Constitution. The latter
reads:chanroblesvirtualawlibrary
SECTION 16. The Congress shall not, except by general law, provide for the
formation, organization, or regulation of private corporations. Government-owned or
controlled corporations may be created or established by special charters in the
interest of the common good and subject to the test of economic viability.
Since its enactment, the PNRC Charter was amended several times, particularly on
June 11, 1953, August 16, 1971, December 15, 1977, and October 1, 1979, by virtue
of R.A. No. 855, R.A. No. 6373, P.D. No. 1264, and P.D. No. 1643, respectively. The
passage of several laws relating to the PNRC's corporate existence notwithstanding
the effectivity of the constitutional proscription on the creation of private
corporations by law, is a recognition that the PNRC is not strictly in the nature of a
private corporation contemplated by the aforesaid constitutional
ban.chanrobleslawlibrary
A closer look at the nature of the PNRC would show that there is none like it not just
in terms of structure, but also in terms of history, public service and official status
accorded to it by the State and the international community. There is merit in
PNRC's contention that its structure is sui generis.chanrobleslawlibrary
The PNRC succeeded the chapter of the American Red Cross which was in existence
in the Philippines since 1917. It was created by an Act of Congress after the
Republic of the Philippines became an independent nation on July 6, 1946 and
proclaimed on February 14, 1947 its adherence to the Convention of Geneva of July
29, 1929 for the Amelioration of the Condition of the Wounded and Sick of Armies in
the Field (the "Geneva Red Cross Convention"). By that action the Philippines
indicated its desire to participate with the nations of the world in mitigating the
suffering caused by war and to establish in the Philippines a voluntary organization
for that purpose and like other volunteer organizations established in other
countries which have ratified the Geneva Conventions, to promote the health and
welfare of the people in peace and in war.[14]
The provisions of R.A. No. 95, as amended by R.A. Nos. 855 and 6373, and further
amended by P.D. Nos. 1264 and 1643, show the historical background and legal
basis of the creation of the PNRC by legislative fiat, as a voluntary organization

impressed with public interest. Pertinently R.A. No. 95, as amended by P.D. 1264,
provides:chanroblesvirtualawlibrary
WHEREAS, during the meeting in Geneva, Switzerland, on 22 August 1894, the
nations of the world unanimously agreed to diminish within their power the evils
inherent in war;
WHEREAS, more than one hundred forty nations of the world have ratified or
adhered to the Geneva Conventions of August 12, 1949 for the Amelioration of the
Condition of the Wounded and Sick of Armed Forces in the Field and at Sea, The
Prisoners of War, and The Civilian Population in Time of War referred to in this
Charter as the Geneva Conventions;
WHEREAS, the Republic of the Philippines became an independent nation on July 4,
1946, and proclaimed on February 14, 1947 its adherence to the Geneva
Conventions of 1929, and by the action, indicated its desire to participate with the
nations of the world in mitigating the suffering caused by war and to establish in the
Philippines a voluntary organization for that purpose as contemplated by the
Geneva Conventions;
WHEREAS, there existed in the Philippines since 1917 a chapter of the American
National Red Cross which was terminated in view of the independence of the
Philippines; and
WHEREAS, the volunteer organizations established in other countries which have
ratified or adhered to the Geneva Conventions assist in promoting the health and
welfare of their people in peace and in war, and through their mutual assistance and
cooperation directly and through their international organizations promote better
understanding and sympathy among the people of the world;
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue
of the powers vested in me by the Constitution as Commander-in-Chief of all the
Armed Forces of the Philippines and pursuant to Proclamation No. 1081 dated
September 21, 1972, and General Order No. 1 dated September 22, 1972, do
hereby decree and order that Republic Act No. 95, Charter of the Philippine National
Red Cross (PNRC) as amended by Republic Acts No. 855 and 6373, be further
amended as follows:chanroblesvirtualawlibrary
Section 1. There is hereby created in the Republic of the Philippines a body
corporate and politic to be the voluntary organization officially designated to assist
the Republic of the Philippines in discharging the obligations set forth in the Geneva
Conventions and to perform such other duties as are inherent upon a national Red
Cross Society. The national headquarters of this Corporation shall be located in
Metropolitan Manila. (Emphasis supplied.)
The significant public service rendered by the PNRC can be gleaned from Section 3
of its Charter, which provides:chanroblesvirtualawlibrary
Section 3. That the purposes of this Corporation shall be as
follows:chanroblesvirtualawlibrary

(a) To provide volunteer aid to the sick and wounded of armed forces in time of war,
in accordance with the spirit of and under the conditions prescribed by the Geneva
Conventions to which the Republic of the Philippines proclaimed its adherence;
(b) For the purposes mentioned in the preceding sub-section, to perform all duties
devolving upon the Corporation as a result of the adherence of the Republic of the
Philippines to the said Convention;
(c) To act in matters of voluntary relief and in accordance with the authorities of the
armed forces as a medium of communication between people of the Republic of the
Philippines and their Armed Forces, in time of peace and in time of war, and to act
in such matters between similar national societies of other governments and the
Governments and people and the Armed Forces of the Republic of the Philippines;
(d) To establish and maintain a system of national and international relief in time of
peace and in time of war and apply the same in meeting and emergency needs
caused by typhoons, flood, fires, earthquakes, and other natural disasters and to
devise and carry on measures for minimizing the suffering caused by such
disasters;
(e) To devise and promote such other services in time of peace and in time of war as
may be found desirable in improving the health, safety and welfare of the Filipino
people;
(f) To devise such means as to make every citizen and/or resident of the Philippines
a member of the Red Cross.
The PNRC is one of the National Red Cross and Red Crescent Societies, which,
together with the International Committee of the Red Cross (ICRC) and the IFRC and
RCS, make up the International Red Cross and Red Crescent Movement (the
Movement). They constitute a worldwide humanitarian movement, whose mission
is:chanroblesvirtualawlibrary
[T]o prevent and alleviate human suffering wherever it may be found, to protect life
and health and ensure respect for the human being, in particular in times of armed
conflict and other emergencies, to work for the prevention of disease and for the
promotion of health and social welfare, to encourage voluntary service and a
constant readiness to give help by the members of the Movement, and a universal
sense of solidarity towards all those in need of its protection and assistance.[15]
The PNRC works closely with the ICRC and has been involved in humanitarian
activities in the Philippines since 1982. Among others, these activities in the
country include:chanroblesvirtualawlibrary
Giving protection and assistance to civilians displaced or otherwise affected by
armed clashes between the government and armed opposition groups, primarily in
Mindanao;
Working to minimize the effects of armed hostilities and violence on the population;
Visiting detainees; and

Promoting awareness of international humanitarian law in the public and private

sectors.[16]
National Societies such as the PNRC act as auxiliaries to the public authorities of
their own countries in the humanitarian field and provide a range of services
including disaster relief and health and social programmes.chanrobleslawlibrary
The International Federation of Red Cross (IFRC) and Red Crescent Societies (RCS)
Position Paper,[17] submitted by the PNRC, is instructive with regard to the
elements of the specific nature of the National Societies such as the PNRC, to
wit:chanroblesvirtualawlibrary
National Societies, such as the Philippine National Red Cross and its sister Red Cross
and Red Crescent Societies, have certain specificities deriving from the 1949
Geneva Convention and the Statutes of the International Red Cross and Red
Crescent Movement (the Movement). They are also guided by the seven
Fundamental Principles of the Red Cross and Red Crescent Movement: Humanity,
Impartiality, Neutrality, Independence, Voluntary Service, Unity and Universality.
A National Society partakes of a sui generis character. It is a protected component
of the Red Cross movement under Articles 24 and 26 of the First Geneva
Convention, especially in times of armed conflict. These provisions require that the
staff of a National Society shall be respected and protected in all circumstances.
Such protection is not ordinarily afforded by an international treaty to ordinary
private entities or even non-governmental organisations (NGOs). This sui generis
character is also emphasized by the Fourth Geneva Convention which holds that an
Occupying Power cannot require any change in the personnel or structure of a
National Society. National societies are therefore organizations that are directly
regulated by international humanitarian law, in contrast to other ordinary private
entities, including NGOs.chanrobleslawlibrary
xxxx
In addition, National Societies are not only officially recognized by their public
authorities as voluntary aid societies, auxiliary to the public authorities in the
humanitarian field, but also benefit from recognition at the International level. This
is considered to be an element distinguishing National Societies from other
organisations (mainly NGOs) and other forms of humanitarian
response.chanrobleslawlibrary
x x x. No other organisation belongs to a world-wide Movement in which all
Societies have equal status and share equal responsibilities and duties in helping
each other. This is considered to be the essence of the Fundamental Principle of
Universality.chanrobleslawlibrary
Furthermore, the National Societies are considered to be auxiliaries to the public
authorities in the humanitarian field. x x x.chanrobleslawlibrary
The auxiliary status of [a] Red Cross Society means that it is at one and the same
time a private institution and a public service organization because the very nature

of its work implies cooperation with the authorities, a link with the State. In carrying
out their major functions, Red Cross Societies give their humanitarian support to
official bodies, in general having larger resources than the Societies, working
towards comparable ends in a given sector.chanrobleslawlibrary
x x x No other organization has a duty to be its government's humanitarian partner
while remaining independent.[18] (Emphases ours.)
It is in recognition of this sui generis character of the PNRC that R.A. No. 95 has
remained valid and effective from the time of its enactment in March 22, 1947
under the 1935 Constitution and during the effectivity of the 1973 Constitution and
the 1987 Constitution.chanrobleslawlibrary
The PNRC Charter and its amendatory laws have not been questioned or challenged
on constitutional grounds, not even in this case before the Court
now.chanrobleslawlibrary
In the Decision, the Court, citing Feliciano v. Commission on Audit,[19] explained
that the purpose of the constitutional provision prohibiting Congress from creating
private corporations was to prevent the granting of special privileges to certain
individuals, families, or groups, which were denied to other groups. Based on the
above discussion, it can be seen that the PNRC Charter does not come within the
spirit of this constitutional provision, as it does not grant special privileges to a
particular individual, family, or group, but creates an entity that strives to serve the
common good.chanrobleslawlibrary
Furthermore, a strict and mechanical interpretation of Article XII, Section 16 of the
1987 Constitution will hinder the State in adopting measures that will serve the
public good or national interest. It should be noted that a special law, R.A. No.
9520, the Philippine Cooperative Code of 2008, and not the general corporation
code, vests corporate power and capacities upon cooperatives which are private
corporations, in order to implement the State's avowed policy.chanrobleslawlibrary
In the Decision of July 15, 2009, the Court recognized the public service rendered by
the PNRC as the government's partner in the observance of its international
commitments, to wit:chanroblesvirtualawlibrary
The PNRC is a non-profit, donor-funded, voluntary, humanitarian organization,
whose mission is to bring timely, effective, and compassionate humanitarian
assistance for the most vulnerable without consideration of nationality, race,
religion, gender, social status, or political affiliation. The PNRC provides six major
services: Blood Services, Disaster Management, Safety Services, Community Health
and Nursing, Social Services and Voluntary Service.chanrobleslawlibrary
The Republic of the Philippines, adhering to the Geneva Conventions, established
the PNRC as a voluntary organization for the purpose contemplated in the Geneva
Convention of 27 July 1929. x x x.[20] (Citations omitted.)
So must this Court recognize too the country's adherence to the Geneva Convention
and respect the unique status of the PNRC in consonance with its treaty obligations.

The Geneva Convention has the force and effect of law.[21] Under the Constitution,
the Philippines adopts the generally accepted principles of international law as part
of the law of the land.[22] This constitutional provision must be reconciled and
harmonized with Article XII, Section 16 of the Constitution, instead of using the
latter to negate the former.chanrobleslawlibrary
By requiring the PNRC to organize under the Corporation Code just like any other
private corporation, the Decision of July 15, 2009 lost sight of the PNRC's special
status under international humanitarian law and as an auxiliary of the State,
designated to assist it in discharging its obligations under the Geneva Conventions.
Although the PNRC is called to be independent under its Fundamental Principles, it
interprets such independence as inclusive of its duty to be the government's
humanitarian partner. To be recognized in the International Committee, the PNRC
must have an autonomous status, and carry out its humanitarian mission in a
neutral and impartial manner.chanrobleslawlibrary
However, in accordance with the Fundamental Principle of Voluntary Service of
National Societies of the Movement, the PNRC must be distinguished from private
and profit-making entities. It is the main characteristic of National Societies that
they "are not inspired by the desire for financial gain but by individual commitment
and devotion to a humanitarian purpose freely chosen or accepted as part of the
service that National Societies through its volunteers and/or members render to the
Community."[23]
The PNRC, as a National Society of the International Red Cross and Red Crescent
Movement, can neither "be classified as an instrumentality of the State, so as not to
lose its character of neutrality" as well as its independence, nor strictly as a private
corporation since it is regulated by international humanitarian law and is treated as
an auxiliary of the State.[24]
Based on the above, the sui generis status of the PNRC is now sufficiently
established. Although it is neither a subdivision, agency, or instrumentality of the
government, nor a government-owned or -controlled corporation or a subsidiary
thereof, as succinctly explained in the Decision of July 15, 2009, so much so that
respondent, under the Decision, was correctly allowed to hold his position as
Chairman thereof concurrently while he served as a Senator, such a conclusion does
not ipso facto imply that the PNRC is a "private corporation" within the
contemplation of the provision of the Constitution, that must be organized under the
Corporation Code. As correctly mentioned by Justice Roberto A. Abad, the sui
generis character of PNRC requires us to approach controversies involving the PNRC
on a case-to-case basis.chanrobleslawlibrary
In sum, the PNRC enjoys a special status as an important ally and auxiliary of the
government in the humanitarian field in accordance with its commitments under
international law. This Court cannot all of a sudden refuse to recognize its
existence, especially since the issue of the constitutionality of the PNRC Charter was
never raised by the parties. It bears emphasizing that the PNRC has responded to
almost all national disasters since 1947, and is widely known to provide a
substantial portion of the country's blood requirements. Its humanitarian work is
unparalleled. The Court should not shake its existence to the core in an untimely

and drastic manner that would not only have negative consequences to those who
depend on it in times of disaster and armed hostilities but also have adverse effects
on the image of the Philippines in the international community. The sections of the
PNRC Charter that were declared void must therefore stay.
WHEREFORE, premises considered, respondent Richard J. Gordon's Motion for
Clarification and/or for Reconsideration and movant-intervenor PNRC's Motion for
Partial Reconsideration of the Decision in G.R. No. 175352 dated July 15, 2009 are
GRANTED. The constitutionality of R.A. No. 95, as amended, the charter of the
Philippine National Red Cross, was not raised by the parties as an issue and should
not have been passed upon by this Court. The structure of the PNRC is sui
generis being neither strictly private nor public in nature. R.A. No. 95 remains
valid and constitutional in its entirety. The dispositive portion of the Decision should
therefore be MODIFIED by deleting the second sentence, to now read as
follows:chanroblesvirtualawlibrary
WHEREFORE, we declare that the office of the Chairman of the Philippine National
Red Cross is not a government office or an office in a government-owned or
controlled corporation for purposes of the prohibition in Section 13, Article VI of the
1987 Constitution.
SO ORDERED.
Tayag v. Benguet Consolidated Inc.
G.R. No. L-23145
November 29, 1968
TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased. RENATO D. TAYAG, ancillary
administrator-appellee,
vs.
BENGUET CONSOLIDATED, INC., oppositor-appellant.
Cirilo F. Asperillo, Jr., for ancillary administrator-appellee.
Ross, Salcedo, Del Rosario, Bito and Misa for oppositor-appellant.
FERNANDO, J.:
Confronted by an obstinate and adamant refusal of the domiciliary administrator,
the County Trust Company of New York, United States of America, of the estate of
the deceased Idonah Slade Perkins, who died in New York City on March 27, 1960, to
surrender to the ancillary administrator in the Philippines the stock certificates
owned by her in a Philippine corporation, Benguet Consolidated, Inc., to satisfy the
legitimate claims of local creditors, the lower court, then presided by the Honorable
Arsenio Santos, now retired, issued on May 18, 1964, an order of this tenor: "After
considering the motion of the ancillary administrator, dated February 11, 1964, as
well as the opposition filed by the Benguet Consolidated, Inc., the Court hereby (1)
considers as lost for all purposes in connection with the administration and
liquidation of the Philippine estate of Idonah Slade Perkins the stock certificates
covering the 33,002 shares of stock standing in her name in the books of the
Benguet Consolidated, Inc., (2) orders said certificates cancelled, and (3) directs
said corporation to issue new certificates in lieu thereof, the same to be delivered

by said corporation to either the incumbent ancillary administrator or to the Probate

Division of this Court."1
From such an order, an appeal was taken to this Court not by the domiciliary
administrator, the County Trust Company of New York, but by the Philippine
corporation, the Benguet Consolidated, Inc. The appeal cannot possibly prosper. The
challenged order represents a response and expresses a policy, to paraphrase
Frankfurter, arising out of a specific problem, addressed to the attainment of
specific ends by the use of specific remedies, with full and ample support from legal
doctrines of weight and significance.
The facts will explain why. As set forth in the brief of appellant Benguet
Consolidated, Inc., Idonah Slade Perkins, who died on March 27, 1960 in New York
City, left among others, two stock certificates covering 33,002 shares of appellant,
the certificates being in the possession of the County Trust Company of New York,
which as noted, is the domiciliary administrator of the estate of the deceased.2
Then came this portion of the appellant's brief: "On August 12, 1960, Prospero
Sanidad instituted ancillary administration proceedings in the Court of First Instance
of Manila; Lazaro A. Marquez was appointed ancillary administrator, and on January
22, 1963, he was substituted by the appellee Renato D. Tayag. A dispute arose
between the domiciary administrator in New York and the ancillary administrator in
the Philippines as to which of them was entitled to the possession of the stock
certificates in question. On January 27, 1964, the Court of First Instance of Manila
ordered the domiciliary administrator, County Trust Company, to "produce and
deposit" them with the ancillary administrator or with the Clerk of Court. The
domiciliary administrator did not comply with the order, and on February 11, 1964,
the ancillary administrator petitioned the court to "issue an order declaring the
certificate or certificates of stocks covering the 33,002 shares issued in the name of
Idonah Slade Perkins by Benguet Consolidated, Inc., be declared [or] considered as
lost."3
It is to be noted further that appellant Benguet Consolidated, Inc. admits that "it is
immaterial" as far as it is concerned as to "who is entitled to the possession of the
stock certificates in question; appellant opposed the petition of the ancillary
administrator because the said stock certificates are in existence, they are today in
the possession of the domiciliary administrator, the County Trust Company, in New
York, U.S.A...."4
It is its view, therefore, that under the circumstances, the stock certificates cannot
be declared or considered as lost. Moreover, it would allege that there was a failure
to observe certain requirements of its by-laws before new stock certificates could be
issued. Hence, its appeal.
As was made clear at the outset of this opinion, the appeal lacks merit. The
challenged order constitutes an emphatic affirmation of judicial authority sought to
be emasculated by the wilful conduct of the domiciliary administrator in refusing to
accord obedience to a court decree. How, then, can this order be stigmatized as
illegal?

As is true of many problems confronting the judiciary, such a response was called
for by the realities of the situation. What cannot be ignored is that conduct
bordering on wilful defiance, if it had not actually reached it, cannot without undue
loss of judicial prestige, be condoned or tolerated. For the law is not so lacking in
flexibility and resourcefulness as to preclude such a solution, the more so as deeper
reflection would make clear its being buttressed by indisputable principles and
supported by the strongest policy considerations.
It can truly be said then that the result arrived at upheld and vindicated the honor
of the judiciary no less than that of the country. Through this challenged order, there
is thus dispelled the atmosphere of contingent frustration brought about by the
persistence of the domiciliary administrator to hold on to the stock certificates after
it had, as admitted, voluntarily submitted itself to the jurisdiction of the lower court
by entering its appearance through counsel on June 27, 1963, and filing a petition
for relief from a previous order of March 15, 1963.
Thus did the lower court, in the order now on appeal, impart vitality and
effectiveness to what was decreed. For without it, what it had been decided would
be set at naught and nullified. Unless such a blatant disregard by the domiciliary
administrator, with residence abroad, of what was previously ordained by a court
order could be thus remedied, it would have entailed, insofar as this matter was
concerned, not a partial but a well-nigh complete paralysis of judicial authority.
1.
Appellant Benguet Consolidated, Inc. did not dispute the power of the
appellee ancillary administrator to gain control and possession of all assets of the
decedent within the jurisdiction of the Philippines. Nor could it. Such a power is
inherent in his duty to settle her estate and satisfy the claims of local creditors.5 As
Justice Tuason speaking for this Court made clear, it is a "general rule universally
recognized" that administration, whether principal or ancillary, certainly "extends to
the assets of a decedent found within the state or country where it was granted,"
the corollary being "that an administrator appointed in one state or country has no
power over property in another state or country."6
It is to be noted that the scope of the power of the ancillary administrator was, in an
earlier case, set forth by Justice Malcolm. Thus: "It is often necessary to have more
than one administration of an estate. When a person dies intestate owning property
in the country of his domicile as well as in a foreign country, administration is had in
both countries. That which is granted in the jurisdiction of decedent's last domicile
is termed the principal administration, while any other administration is termed the
ancillary administration. The reason for the latter is because a grant of
administration does not ex proprio vigore have any effect beyond the limits of the
country in which it is granted. Hence, an administrator appointed in a foreign state
has no authority in the [Philippines]. The ancillary administration is proper,
whenever a person dies, leaving in a country other than that of his last domicile,
property to be administered in the nature of assets of the deceased liable for his
individual debts or to be distributed among his heirs."7
It would follow then that the authority of the probate court to require that ancillary
administrator's right to "the stock certificates covering the 33,002 shares ...
standing in her name in the books of [appellant] Benguet Consolidated, Inc...." be

respected is equally beyond question. For appellant is a Philippine corporation

owing full allegiance and subject to the unrestricted jurisdiction of local courts. Its
shares of stock cannot therefore be considered in any wise as immune from lawful
court orders.
Our holding in Wells Fargo Bank and Union v. Collector of Internal Revenue8 finds
application. "In the instant case, the actual situs of the shares of stock is in the
Philippines, the corporation being domiciled [here]." To the force of the above
undeniable proposition, not even appellant is insensible. It does not dispute it. Nor
could it successfully do so even if it were so minded.
2.
In the face of such incontrovertible doctrines that argue in a rather conclusive
fashion for the legality of the challenged order, how does appellant, Benguet
Consolidated, Inc. propose to carry the extremely heavy burden of persuasion of
precisely demonstrating the contrary? It would assign as the basic error allegedly
committed by the lower court its "considering as lost the stock certificates covering
33,002 shares of Benguet belonging to the deceased Idonah Slade Perkins, ..."9
More specifically, appellant would stress that the "lower court could not "consider as
lost" the stock certificates in question when, as a matter of fact, his Honor the trial
Judge knew, and does know, and it is admitted by the appellee, that the said stock
certificates are in existence and are today in the possession of the domiciliary
administrator in New York."10
There may be an element of fiction in the above view of the lower court. That
certainly does not suffice to call for the reversal of the appealed order. Since there is
a refusal, persistently adhered to by the domiciliary administrator in New York, to
deliver the shares of stocks of appellant corporation owned by the decedent to the
ancillary administrator in the Philippines, there was nothing unreasonable or
arbitrary in considering them as lost and requiring the appellant to issue new
certificates in lieu thereof. Thereby, the task incumbent under the law on the
ancillary administrator could be discharged and his responsibility fulfilled.
Any other view would result in the compliance to a valid judicial order being made
to depend on the uncontrolled discretion of the party or entity, in this case
domiciled abroad, which thus far has shown the utmost persistence in refusing to
yield obedience. Certainly, appellant would not be heard to contend in all
seriousness that a judicial decree could be treated as a mere scrap of paper, the
court issuing it being powerless to remedy its flagrant disregard.
It may be admitted of course that such alleged loss as found by the lower court did
not correspond exactly with the facts. To be more blunt, the quality of truth may be
lacking in such a conclusion arrived at. It is to be remembered however, again to
borrow from Frankfurter, "that fictions which the law may rely upon in the pursuit of
legitimate ends have played an important part in its development."11
Speaking of the common law in its earlier period, Cardozo could state fictions "were
devices to advance the ends of justice, [even if] clumsy and at times offensive."12
Some of them have persisted even to the present, that eminent jurist, noting "the
quasi contract, the adopted child, the constructive trust, all of flourishing vitality, to
attest the empire of "as if" today."13 He likewise noted "a class of fictions of another

order, the fiction which is a working tool of thought, but which at times hides itself
from view till reflection and analysis have brought it to the light."14
What cannot be disputed, therefore, is the at times indispensable role that fictions
as such played in the law. There should be then on the part of the appellant a
further refinement in the catholicity of its condemnation of such judicial technique.
If ever an occasion did call for the employment of a legal fiction to put an end to the
anomalous situation of a valid judicial order being disregarded with apparent
impunity, this is it. What is thus most obvious is that this particular alleged error
does not carry persuasion.
3.
Appellant Benguet Consolidated, Inc. would seek to bolster the above
contention by its invoking one of the provisions of its by-laws which would set forth
the procedure to be followed in case of a lost, stolen or destroyed stock certificate;
it would stress that in the event of a contest or the pendency of an action regarding
ownership of such certificate or certificates of stock allegedly lost, stolen or
destroyed, the issuance of a new certificate or certificates would await the "final
decision by [a] court regarding the ownership [thereof]."15
Such reliance is misplaced. In the first place, there is no such occasion to apply such
by-law. It is admitted that the foreign domiciliary administrator did not appeal from
the order now in question. Moreover, there is likewise the express admission of
appellant that as far as it is concerned, "it is immaterial ... who is entitled to the
possession of the stock certificates ..." Even if such were not the case, it would be a
legal absurdity to impart to such a provision conclusiveness and finality. Assuming
that a contrariety exists between the above by-law and the command of a court
decree, the latter is to be followed.
It is understandable, as Cardozo pointed out, that the Constitution overrides a
statute, to which, however, the judiciary must yield deference, when appropriately
invoked and deemed applicable. It would be most highly unorthodox, however, if a
corporate by-law would be accorded such a high estate in the jural order that a
court must not only take note of it but yield to its alleged controlling force.
The fear of appellant of a contingent liability with which it could be saddled unless
the appealed order be set aside for its inconsistency with one of its by-laws does not
impress us. Its obedience to a lawful court order certainly constitutes a valid
defense, assuming that such apprehension of a possible court action against it could
possibly materialize. Thus far, nothing in the circumstances as they have developed
gives substance to such a fear. Gossamer possibilities of a future prejudice to
appellant do not suffice to nullify the lawful exercise of judicial authority.
4.
What is more the view adopted by appellant Benguet Consolidated, Inc. is
fraught with implications at war with the basic postulates of corporate theory.
We start with the undeniable premise that, "a corporation is an artificial being
created by operation of law...."16 It owes its life to the state, its birth being purely
dependent on its will. As Berle so aptly stated: "Classically, a corporation was
conceived as an artificial person, owing its existence through creation by a
sovereign power."17 As a matter of fact, the statutory language employed owes

much to Chief Justice Marshall, who in the Dartmouth College decision defined a
corporation precisely as "an artificial being, invisible, intangible, and existing only in
contemplation of law."18
The well-known authority Fletcher could summarize the matter thus: "A corporation
is not in fact and in reality a person, but the law treats it as though it were a person
by process of fiction, or by regarding it as an artificial person distinct and separate
from its individual stockholders.... It owes its existence to law. It is an artificial
person created by law for certain specific purposes, the extent of whose existence,
powers and liberties is fixed by its charter."19 Dean Pound's terse summary, a
juristic person, resulting from an association of human beings granted legal
personality by the state, puts the matter neatly.20
There is thus a rejection of Gierke's genossenchaft theory, the basic theme of which
to quote from Friedmann, "is the reality of the group as a social and legal entity,
independent of state recognition and concession."21 A corporation as known to
Philippine jurisprudence is a creature without any existence until it has received the
imprimatur of the state according to law. It is logically inconceivable therefore that it
will have rights and privileges of a higher priority than that of its creator. More than
that, it cannot legitimately refuse to yield obedience to acts of its state organs,
certainly not excluding the judiciary, whenever called upon to do so.
As a matter of fact, a corporation once it comes into being, following American law
still of persuasive authority in our jurisdiction, comes more often within the ken of
the judiciary than the other two coordinate branches. It institutes the appropriate
court action to enforce its right. Correlatively, it is not immune from judicial control
in those instances, where a duty under the law as ascertained in an appropriate
legal proceeding is cast upon it.
To assert that it can choose which court order to follow and which to disregard is to
confer upon it not autonomy which may be conceded but license which cannot be
tolerated. It is to argue that it may, when so minded, overrule the state, the source
of its very existence; it is to contend that what any of its governmental organs may
lawfully require could be ignored at will. So extravagant a claim cannot possibly
merit approval.
5.
One last point. In Viloria v. Administrator of Veterans Affairs,22 it was shown
that in a guardianship proceedings then pending in a lower court, the United States
Veterans Administration filed a motion for the refund of a certain sum of money paid
to the minor under guardianship, alleging that the lower court had previously
granted its petition to consider the deceased father as not entitled to guerilla
benefits according to a determination arrived at by its main office in the United
States. The motion was denied. In seeking a reconsideration of such order, the
Administrator relied on an American federal statute making his decisions "final and
conclusive on all questions of law or fact" precluding any other American official to
examine the matter anew, "except a judge or judges of the United States court."23
Reconsideration was denied, and the Administrator appealed.
In an opinion by Justice J.B.L. Reyes, we sustained the lower court. Thus: "We are of
the opinion that the appeal should be rejected. The provisions of the U.S. Code,

invoked by the appellant, make the decisions of the U.S. Veterans' Administrator
final and conclusive when made on claims property submitted to him for resolution;
but they are not applicable to the present case, where the Administrator is not
acting as a judge but as a litigant. There is a great difference between actions
against the Administrator (which must be filed strictly in accordance with the
conditions that are imposed by the Veterans' Act, including the exclusive review by
United States courts), and those actions where the Veterans' Administrator seeks a
remedy from our courts and submits to their jurisdiction by filing actions therein.
Our attention has not been called to any law or treaty that would make the findings
of the Veterans' Administrator, in actions where he is a party, conclusive on our
courts. That, in effect, would deprive our tribunals of judicial discretion and render
them mere subordinate instrumentalities of the Veterans' Administrator."
It is bad enough as the Viloria decision made patent for our judiciary to accept as
final and conclusive, determinations made by foreign governmental agencies. It is
infinitely worse if through the absence of any coercive power by our courts over
juridical persons within our jurisdiction, the force and effectivity of their orders could
be made to depend on the whim or caprice of alien entities. It is difficult to imagine
of a situation more offensive to the dignity of the bench or the honor of the country.
Yet that would be the effect, even if unintended, of the proposition to which
appellant Benguet Consolidated seems to be firmly committed as shown by its
failure to accept the validity of the order complained of; it seeks its reversal.
Certainly we must at all pains see to it that it does not succeed. The deplorable
consequences attendant on appellant prevailing attest to the necessity of negative
response from us. That is what appellant will get.
That is all then that this case presents. It is obvious why the appeal cannot succeed.
It is always easy to conjure extreme and even oppressive possibilities. That is not
decisive. It does not settle the issue. What carries weight and conviction is the
result arrived at, the just solution obtained, grounded in the soundest of legal
doctrines and distinguished by its correspondence with what a sense of realism
requires. For through the appealed order, the imperative requirement of justice
according to law is satisfied and national dignity and honor maintained.
WHEREFORE, the appealed order of the Honorable Arsenio Santos, the Judge of the
Court of First Instance, dated May 18, 1964, is affirmed. With costs against
oppositor-appelant Benguet Consolidated, Inc.
Makalintal, Zaldivar and Capistrano, JJ., concur.
Concepcion, C.J., Reyes, J.B.L., Dizon, Sanchez and Castro, JJ., concur in the result.
Arnold v. Willets and Patterson
G.R. No. L-20214
March 17, 1923
G. C. ARNOLD, plaintiff-appellant,
vs.
WILLITS & PATTERSON, LTD., defendant-appellee.

Fisher, DeWitt, Perkins and Brady for appellant.

Ross and Lawrence for appellee.
STATEMENT
For a number of years prior to the times alleged in the complaint, the plaintiff was in
the employ of the International Banking Corporation of Manila, and it is conceded
that he is a competent and experienced business man. July 31, 1916, C. D. Willits
and I. L. Patterson were partners doing business in San Francisco, California, under
the name of Willits & Patterson. The plaintiff was then in San Francisco, and as a
result of negotiations the plaintiff and the firm entered into a written contract,
known in the record as Exhibit A, by which the plaintiff was employed as the agent
of the firm in the Philippine Islands for certain purposes for the period of five years
at a minimum salary of $200 per month and travelling expenses. The plaintiff
returned to Manila and entered on the discharge of his duties under the contract. As
a result of plaintiff's employment and the world war conditions, the business of the
firm in the Philippines very rapidly increased and grew beyond the fondest hopes of
either party. A dispute arose between the plaintiff and the firm as to the
construction of Exhibit A as to the amount which plaintiff should receive for his
services. Meanwhile Patterson retired from the firm and Willits became the sole
owner of its assets. For convenience of operation and to serve his own purpose,
Willits organized a corporation under the laws of California with its principal office at
San Francisco, in and by which he subscribed for, and became the exclusive owner
of all the capital stock except a few shares for organization purposes only, and the
name of the firm was used as the name of the corporation. A short time after that
Willits came to Manila and organized a corporation here known as Willits &
Patterson, Ltd., in and to which he again subscribed for all of the capital stock
except the nominal shares necessary to qualify the directors. In legal effect, the San
Francisco corporation took over and acquired all of the assets and liabilities of the
Manila corporation. At the time that Willits was in Manila and while to all intents and
purposes he was the sole owner of the stock of corporations, there was a
conference between him and the plaintiff over the disputed construction of Exhibit
A. As a result of which another instrument, known in the record as Exhibit B, was
prepared in the form of a letter which the plaintiff addressed to Willits at Manila on
November 10, 1919, the purpose of which was to more clearly define and specify
the compensation which the plaintiff was to receive for his services. Willits received
and confirmed this letter by signing the name of Willits & Patterson, By C.d. Willits.
At the time both corporations were legally organized, and there is nothing in the
corporate minutes to show that Exhibit B was ever formally ratified or approved by
either corporation. After its organization, the Manila corporation employed a regular
accountant whose duty it was to audit the accounts of the company and render
financial statements both for the use of the local banks and the local and parent
corporations at San Francisco. From time to time and in the ordinary course of
business such statements of account were prepared by the accountant and duly
forwarded to the home office, and among other things was a statement of July 31,
1921, showing that there was due and owing the plaintiff under Exhibit B the sum of
P106,277.50. A short time previous to that date, the San Francisco corporation
became involved in financial trouble, and all of its assets were turned over to a
"creditors' committee." When this statement was received, the "creditors'
committee" immediately protested its allowance. An attempt was made without

success to adjust the matter on a friendly basis and without litigation. January 10,
1922, the plaintiff brought this action to recover from the defendant the sum of
P106,277.50 with legal interest and costs, and written instruments known in the
record as Exhibits A and B were attached to, and made a part of, the complaint.
For answer, the defendant admits the formal parts of the complaint, the execution
of Exhibit A and denies each and every other allegation, except as specifically
admitted, and alleges that what is known as Exhibit B was signed by Willits without
the authority of the defendant corporation or the firm of Willits & Patterson, and that
it is not an agreement which was ever entered into with the plaintiff by the
defendant or the firm, and, as a separate defense and counterclaim, it alleges that
on the 30th of June, 1920, there was a balance due and owing the plaintiff from the
defendant under the contract Exhibit A of the sum of P8,741.05. That his salary
from June 30, 1920, to July 31, 1921, under Exhibit A was $400 per month, or a total
of P10,400. That about July 6, 1921, the plaintiff wrongfully took P30,000 from the
assets of the firm, and that he is now indebted to the firm in the sum of P10,858.95,
with interest and costs, from which it prays judgement.
The plaintiff admits that he withdrew the P30,000, but alleges that it was with the
consent and authority of the defendant, and denies all other new matter in the
answer.
Upon such issues a trial was had, and the lower court rendered judgment in favor of
the defendant as prayed for in its counterclaim, from which the plaintiff appeals,
contending that the trial court erred in not holding that the contract between the
parties is that which is embodied in Exhibits A and B, and that the defendant
assumed all partnership obligations, and in failing to render judgment for the
plaintiff, as prayed for, and in dismissing his complaint, and denying plaintiff's
motion for a new trial.
JOHNS, J.:
In their respective briefs opposing counsel agree that the important questions
involved are "what was the contract under which the plaintiff rendered services for
five years ending July 31, 1921," and "what is due the plaintiff under that contract."
Plaintiff contends that his services were performed under Exhibits A and B, and that
the defendant assumed all of the obligations of the original partnership under
Exhibit A, and is now seeking to deny its liability under, and repudiate, Exhibit B.
The defendant admits that Exhibit A was the original contract between Arnold and
the firm of Willits & Patterson by which he came to the Philippine Islands, and that it
was therein agreed that he was to be employed for a period of five years as the
agent of Willits & Patterson in the Philippine Islands to operate a certain oil mill, and
to do such other business as might be deemed advisable for which he was to
receive, first, the travelling expenses of his wife and self from San Francisco to
Manila, second, the minimum salary of $200 per month, third, a brokerage of 1 per
cent upon all purchases and sales of merchandise, except for the account of the
coconut oil mill, fourth, one-half of the profits on any transaction in the name of the
firm or himself not provided for in the agreement. That the agreement also provided
that if it be found that the business was operated at a loss, Arnold should receive a

monthly salary of $400 during such period. That the business was operated at a loss
from June 30, 1920, to July 31, 1921, and that for such reason, he was entitled to
nothing more than a salary of $400 per month, or for that period P10,400. Adding
this amount to the P8,741.05, which the defendant admits he owed Arnold on June
30, 1920, makes a total of P19,141.05, leaving a balance due the defendant as set
out in the counterclaim. In other words, that the plaintiff's compensation was
measured by, and limited to, the above specified provisions in the contract Exhibit
A, and that the defendant corporation is not bound by the terms or provisions of
Exhibit B, which is as follows:
WILLITS & PATTERSON, LTD.
MANILA, P. I., Nov. 10, 1919.
CHAS. D. WILLITS, Esq.,
Present.
DEAR MR. WILLITS: My understanding of the intent of my agreement with Willits &
Patterson is as under:
Commissions. Willits & Patterson, San Francisco, pay me a commission of one per
cent on all purchases made for them in the Philippines or sales made to them by
Manila and one per cent on all sales made for them in the Philippines, or purchases
made from them by Manila. If such purchases or sales are on an f. o. b. basis the
commission is on the f. o. b. price; if on a c. i. f. basis the commission is computed
on the c. i. f. price
These commissions are credited to me in San Francisco.
I do not participate in any profits on business transacted between Willits &
Patterson, San Francisco, and Willits & Patterson, Ltd., Manila.
Profits. On all business transacted between Willits & Patterson, Ltd. and others than
Willits & Patterson, San Francisco, half the profits are to be credited to my account
and half to the Profit & Loss account of Willits & Patterson, Ltd., Manila.
On all other business, such as the Cooperative Coconut Products Co. account, or any
other business we may undertake as agents or managers, half the profits are to be
credited to my account and half to the Profit & Loss account of Willits & Patterson,
Ltd., Manila.
Where Willits & Patterson, San Francisco, or Willits & Patterson, Ltd., Manila, have
their own funds invested in the capital stock or a corporation, I of course do not
participate in the earnings of such stock, any more than Willits & Patterson would
participate in the earnings of stock held by me on my account.
If the foregoing conforms to your understanding of our agreement, please confirm
below.

Yours faithfully,
(Sgd.) G. C. ARNOLD
Confirmed:
WILLITS & PATTERSON
By (Sgd.) CHAS. D. WILLITS
There is no dispute about any of the following facts: That at the inception C.D.
Willits and I. L. Patterson constituted the firm of Willits & Patterson doing business in
the City of San Francisco; that later Patterson retired from the firm, and Willits
acquired all of his interests and thereafter continued the business under the name
and style of Willits & Patterson; that the original contract Exhibit A was made
between the plaintiff and the old firm at San Francisco on July 31, 1916, to cover a
period of five years from that date; that plaintiff entered upon the discharged of his
duties and continued his services in the Philippine Islands to someone for the period
of five years; that on November 10, 1919, and as a result of conferences between
Willits and the plaintiff, Exhibit B was addressed and signed in the manner and form
above stated in the City of Manila. A short time prior to that date Willits organized a
corporation in San Francisco, in the State of California, which took over and acquired
all of the assets of the firm's business in California then being conducted under the
name and style of Willits & Patterson; that he subscribed for all of the capital stock
of the corporation, and that in truth and in fact he was the owner of all of its capital
stock. After this was done he caused a new corporation to be organized under the
laws of the Philippine Islands with principal office at Manila, which took over and
acquired all the business and assets of the firm of Willits & Patterson in the
Philippine Islands, in and to which, in legal effect, he subscribed for all of its capital
stock, and was the owner of all of its stock. After both corporations were organized
the above letter was drafted and signed. The plaintiff contends that the signing of
Exhibit B in the manner and under the conditions in which it was signed, and
through the subsequent acts and conduct of the parties, was ratified and, in legal
effect, became and is now binding upon the defendant.
It will be noted that Exhibit B was executed in Manila, and that at the time it was
signed by Willits, he was to all intents and purposes the legal owner of all the stock
in both corporations. It also appears from the evidence that the parent corporation
at San Francisco took over and acquired all of the assets and liabilities of the local
corporation at Manila. That after it was organized the Manila corporation kept
separate records and account books of its own, and that from time to time financial
statements were made and forwarded to the home office, from which it conclusively
appears that plaintiff was basing his claim for services upon Exhibit A, as it was
modified by Exhibit B. That at no time after Exhibit B was signed was there ever any
dispute between plaintiff and Willits as to the compensation for plaintiff's services.
That is to say, as between the plaintiff and Willits, Exhibit B was approved, followed
and at all times in force and effect, after it was signed November 10, 1919. It
appears from an analysis of Exhibit B that it was for the mutual interest of both
parties. From a small beginning, the business was then in a very flourishing

conditions and growing fast, and the profits were very large and were running into
big money.
Among other things, Exhibit A provided: "(a) That the net profits from said coconut
oil business shall be divided in equal shares between the said parties hereto; (b)
that Arnold should receive a brokerage of 1 per cent from all purchases and sales of
merchandise, except for the account of the coconut mills; (c) that the net profits
from all other business should be divided in equal half shares between the parties
hereto."
Under the above provisions, the plaintiff might well contend that he was entitled to
one-half of all the profits and a brokerage of 1 per cent from all purchases and sales,
except those for the account of the coconut oil mills, which under the volume of
business then existing would run into a very large sum of money. It was for such
reason and after personal conferences between them, and to settle all disputed
questions, that Exhibit B was prepared and signed.
The record recites that "the defendant admits that from July 31, 1916 to July 31,
1921, the plaintiff faithfully performed all the duties incumbent upon him under his
contract of employment, it being understood, however, that this admission does not
include an admission that the plaintiff placed a proper interpretation upon his right
to remuneration under said contract of employment."
It being admitted that the plaintiff worked "under his contract of employment" for
the period of five years, the question naturally arises, for whom was he working? His
contract was made with the original firm of Willits & Patterson, and that firm was
dissolved and it ceased to exist, and all of its assets were merged in, and taken over
by, the parent corporation at San Francisco. In the very nature of things, after the
corporation was formed, the plaintiff could not and did not continue to work for the
firm, and, yet, he continued his employment for the full period of five years. For
whom did he work after the partnership was merged in the corporation and ceased
to exist?
It is very apparent that, under the conditions then existing, the signing of Exhibit B
was for the mutual interests of both parties, and that if the contract Exhibit A was to
be enforced according to its terms, that Arnold might well contend for a much larger
sum of money for his services. In truth and in fact Willits and both corporations
recognized his employment and accepted the benefits of his services. He continued
his employment and rendered his services after the corporation were organized and
Exhibit B was signed just the same as he did before, and both corporations
recognized and accepted his services. Although the plaintiff was president of the
local corporation, the testimony is conclusive that both of them were what is known
as a one man corporation, and Willits, as the owner of all of the stock, was the force
and dominant power which controlled them. After Exhibit B was signed it was
recognized by Willits that the plaintiff's services were to be performed and
measured by its term and provisions, and there never was any dispute between
plaintiff and Willits upon that question.
The controversy first arose after the corporation was in financial trouble and the
appointment of what is known in the record as a "creditors' committee." There is no

claim or pretense that there was any fraud or collusion between plaintiff and Willits,
and it is very apparent that Exhibit B was to the mutual interest of both parties. It is
elementary law that if Exhibit B is a binding contract between the plaintiff and
Willits and the corporations, it is equally binding upon the creditors' committee. It
would not have any higher or better legal right than the corporation itself, and could
not make any defense which it could not make. It is very significant that the claim
or defense which is now interposed by the creditors' committee was never made or
asserted at any previous time by the defendant, and that it never was made by
Willits, and it is very apparent that if he had remained in control of the corporation,
it would never have made the defense which is now made by the creditors'
committee. The record is conclusive that at the time he signed Exhibit B, Willits was,
in legal effect, the owner and holder of all the stock in both corporations, and that
he approved it in their interest, and to protect them from the plaintiff having and
making a much larger claim under Exhibit A. As a matter of fact, it appears from the
statement of Mr. Larkin, the accountant, in the record that if plaintiff's cause of
action was now founded upon Exhibit A, he would have a claim for more than
P160,000.
Thompson on Corporations, 2d ed., vol. I, section 10, says:
The proposition that a corporation has an existence separate and distinct from its
membership has its limitations. It must be noted that this separate existence is for
particular purposes. It must also be remembered that there can be no corporate
existence without persons to compose it; there can be no association without
associates. This separate existence is to a certain extent a legal fiction. Whenever
necessary for the interests of the public or for the protection or enforcement of the
rights of the membership, courts will disregard this legal fiction and operate upon
both the corporation and the persons composing it.
In the same section, the author quotes from a decision in 49 Ohio State, 1371; 15 L.
R. A., 145, in which the Supreme Court of Ohio says:
"So long as a proper use is made of the fiction that a corporation is an entity apart
from its shareholders, it is harmless, and, because convenient, should not be called
in question; but where it is urged to an end subversive of its policy, or such is the
issue, the fiction must be ignored, and the question determined whether the act in
question, though done by shareholders, that is to say, by the persons uniting in
one body, was done simply as individuals, and with respect to their individual
interest as shareholders, or was done ostensibly as such, but, as a matter of fact, to
control the corporation, and affect the transaction of its business, in the same
manner as if the act had been clothed with all the formalities of a corporate act.
This must be so, because, the stockholders having a dual capacity, and capable of
acting in either, and a possible interest to conceal their character when acting in
their corporate capacity, the absence of the formal evidence of the character of the
act cannot preclude judicial inquiry on the subject. If it were otherwise, then in that
department of the law fraud would enjoy an immunity awarded to it in no other."
Where the stock of a corporation is owned by one person whereby the corporation
functions only for the benefit of such individual owner, the corporation and the

individual should be deemed to be the same. (U. S. Gypsum Co. vs. Mackay Wall
Plaster Co., 199 Pac., 249.)
Ruling Case Law, vol. 7, section 663, says:
While of course a corporation cannot ratify a contract which is strictly ultra vires,
and which it in the first instance could not have made, it may by ratification render
binding on it a contract, entered into on its behalf by its officers or agents without
authority. As a general rule such ratification need not be manifested by any voted or
formal resolution of the corporation or be authenticated by the corporate seal; no
higher degree of evidence is requisite in establishing ratification on the part of a
corporation, than is requisite in showing an antecedent authorization.
xxx

xxx

xxx

SEC. 666. The assent or approval of a corporation to acts done on its account may
be inferred in the same manner that the absent of a natural person may be, and it is
well settled that where a corporation with full knowledge of the unauthorized act of
its officer or agents acquiesces in and consents to such acts, it thereby ratifies
them, especially where the acquiescence results in prejudice to a third person.
xxx

xxx

xxx

SEC. 669. So, when, in the usual course of business of a corporation, an officer has
been allowed in his official capacity to manage its affair, his authority to represent
the corporation may be inferred from the manner in which he has been permitted
by the directors to transact its business.
SEC. 656. In accordance with a well-known rule of the law of agency, notice to
corporate officers or agents within the scope or apparent scope of their authority is
attributed to the corporation.
SEC. 667. As a general rule, if a corporation with knowledge of its agents
unauthorized act received and enjoys the benefits thereof, it impliedly ratifies the
unauthorized act if it is one capable of ratification by parol.
In its article on corporations, Corpus Juris, in section 2241 says:
Ratification by a corporation of a transaction not previously authorized is more
easily inferred where the corporation receives and retains property under it, and as
a general rule where a corporation, through its proper officers or board, takes and
retains the benefits of the unauthorized act or contract of an officer or agent, with
full knowledge of all the material facts, it thereby ratifies and becomes bound by
such act of contract, together with all the liabilities and burdens resulting therefrom,
and in some jurisdiction this rule is, in effect, declared by statute. Thus the
corporation is liable on the ground of ratification where, with knowledge of the facts,
it accepts the benefit of services rendered under an unauthorized contract of
employment . . . .
Applying the law to the facts.

Mr. Larkin, an experienced accountant, was employed by the local corporation, and
from time to time and in the ordinary course of business made and prepared
financial statements showing its assets and liabilities, true copies of which were
sent to the home office in San Francisco. It appears upon their face that plaintiff's
compensation was made and founded on Exhibit B, and that such statements were
made and prepared by the accountant on the assumption that Exhibit B was in full
force and effect as between the plaintiff and the defendant. In the course of
business in the early part of 1920, plaintiff, as manager of the defendant, sold 500
tons of oil for future delivery at P740 per ton. Due to break in the market, plaintiff
was able to purchase the oil at P380 per ton or a profit of P180,000.
It appears from Exhibit B under the heading of "Profits" that:
On all the business transacted between Willits & Patterson, Ltd. and others than
Willits & Patterson, San Francisco, half the profit are to be credited to may account
and half to the Profit & Loss account Willits & Patterson, Ltd., Manila.
The purchasers paid P105,000 on the contracts and gave their notes for P75,000,
and it was agreed that all of the oil purchased should be held as security for the full
payment of the purchase price. As a result, the defendant itself received the
P105,000 in cash, P75,000 in notes, and still holds the 500 tons of oil as security for
the balance of the purchase price. This transaction was shown in the semi-annual
financial statement for the period ending December 31, 1920. That is to say, the
business was transacted by and through the plaintiff, and the defendant received
and accepted all of the profits on the deal, and the statement which was rendered
gave him a credit for P90,737.88, or half the profit as provided in the contract
Exhibit B, with interest.
Although the previous financial statements show upon their face that the account of
plaintiff was credit with several small items on the same basis, it was not until the
23d of March, 1921, that any objection was ever made by anyone, and objection
was made for the first time by the creditors' committee in a cable of that date.
As we analyze the facts Exhibit B was, in legal effect, ratified and approved and is
now binding upon the defendant corporation, and the plaintiff is entitled to recover
for his services on that writing as it modified the original contract Exhibit A.
It appears from the statement prepared by accountant Larkin founded upon Exhibit
B that the plaintiff is entitled to recover P106,277.50. It is very apparent that his
statement was based upon the assumption that there was a net profit of P180,000
on the 500 tons of oil, of which the plaintiff was entitled to one-half.
In the absence of any other proof, we have the right to assume that the 500 tons of
oil was worth the amount which the defendant paid for them at the time of the
purchase or P380 per ton, and the record shows that the defendant took and now
has the possession of all of the oil secure the payment of the price at which it was
sold. Hence, the profit on the deal to the defendant at the time of the sale would
amount to the difference between what the defendant paid for the oil and the
amount which it received for the oil at the time it sold the oil. It appears that at the

time of the sale the defendant only received P105,000 in cash, and that it took and
accepted the promissory notes of Cruz & Tan Chong Say, the purchasers, for
P75,000 more which have been collected and may never be. Hence, it must follow
that the amount evidence by the notes cannot now be deemed or treated as profits
on the deal and cannot be until such times as the notes are paid.
The judgment of the lower court is reversed, and a money judgment will be entered
here in favor of the plaintiff and against the defendant for the sum of P68,527.50,
with thereon at the rate of 6 per cent per annum from the 10th day of January,
1922. In addition thereto, judgment will be rendered against the defendant in
substance and to the effect that the plaintiff is the owner of an undivided one-half
interest in the promissory notes for P75,000 which were executed by Cruz & Tan
Chong Say, as a part of the purchase price of the oil, and that he is entitled to have
and receive one-half of all the proceeds from the notes or either of them, and that
also he have judgment against the defendant for costs. So ordered.
Araullo, C. J., Street, Malcolm, Avancea, Ostrand, and Romualdez, JJ., concur.
Pantranco Employees Assoc. vs NLRC
GR 170705, March 2009
NACHURA, J.:

Before us are two consolidated petitions assailing the Court of Appeals (CA)
Decision[1] dated June 3, 2005 and its Resolution[2] dated December 7, 2005 in CAG.R. SP No. 80599.
In G.R. No. 170689, the Pantranco Employees Association (PEA) and Pantranco
Retrenched Employees Association (PANREA) pray that the CA decision be set aside
and a new one be entered, declaring the Philippine National Bank (PNB) and PNB
Management and Development Corporation (PNB-Madecor) jointly and solidarily
liable for the P722,727,150.22 National Labor Relations Commission (NLRC)
judgment in favor of the Pantranco North Express, Inc. (PNEI) employees;[3] while in
G.R. No. 170705, PNB prays that the auction sale of the Pantranco properties be
declared null and void.[4]
The facts of the case, as found by the CA,[5] and established in Republic of
the Phils. v. NLRC,[6] Pantranco North Express, Inc. v. NLRC,[7] and PNB MADECOR
v. Uy,[8] follow:
The Gonzales family owned two corporations, namely, the PNEI and Macris
Realty Corporation (Macris). PNEI provided transportation services to the public, and
had its bus terminal at the corner of Quezon and Roosevelt Avenues in Quezon City.
The terminal stood on four valuable pieces of real estate (known as Pantranco
properties) registered under the name of Macris.[9] The Gonzales family later
incurred huge financial losses despite attempts of rehabilitation and loan infusion.
In March 1975, their creditors took over the management of PNEI and Macris. By

1978, full ownership was transferred to one of their creditors, the National
Investment Development Corporation (NIDC), a subsidiary of the PNB.
Macris was later renamed as the National Realty Development Corporation
(Naredeco) and eventually merged with the National Warehousing Corporation
(Nawaco) to form the new PNB subsidiary, the PNB-Madecor.
In 1985, NIDC sold PNEI to North Express Transport, Inc. (NETI), a company owned
by Gregorio Araneta III. In 1986, PNEI was among the several companies placed
under sequestration by the Presidential Commission on Good Government (PCGG)
shortly after the historic events in EDSA. In January 1988, PCGG lifted the
sequestration order to pave the way for the sale of PNEI back to the private sector
through the Asset Privatization Trust (APT). APT thus took over the management of
PNEI.
In 1992, PNEI applied with the Securities and Exchange Commission (SEC) for
suspension of payments. A management committee was thereafter created which
recommended to the SEC the sale of the company through privatization. As a costsaving measure, the committee likewise suggested the retrenchment of several
PNEI employees. Eventually, PNEI ceased its operation. Along with the cessation of
business came the various labor claims commenced by the former employees of
PNEI where the latter obtained favorable decisions.
On July 5, 2002, the Labor Arbiter issued the Sixth Alias Writ of Execution[10]
commanding the NLRC Sheriffs to levy on the assets of PNEI in order to satisfy the
P722,727,150.22 due its former employees, as full and final satisfaction of the
judgment awards in the labor cases. The sheriffs were likewise instructed to
proceed against PNB, PNB-Madecor and Mega Prime.[11] In implementing the writ,
the sheriffs levied upon the four valuable pieces of real estate located at the corner
of Quezon and Roosevelt Avenues, on which the former Pantranco Bus Terminal
stood. These properties were covered by Transfer Certificate of Title (TCT) Nos.
87881-87884, registered under the name of PNB-Madecor.[12] Subsequently,
Notice of Sale of the foregoing real properties was published in the newspaper and
the sale was set on July 31, 2002. Having been notified of the auction sale, motions
to quash the writ were separately filed by PNB-Madecor and Mega Prime, and PNB.
They likewise filed their Third-Party Claims.[13] PNB-Madecor anchored its motion
on its right as the registered owner of the Pantranco properties, and Mega Prime as
the successor-in-interest. For its part, PNB sought the nullification of the writ on the
ground that it was not a party to the labor case.[14] In its Third-Party Claim, PNB
alleged that PNB-Madecor was indebted to the former and that the Pantranco
properties
would answer for such debt. As such, the scheduled auction sale of the aforesaid
properties was not legally in order.[15]
On September 10, 2002, the Labor Arbiter declared that the subject
Pantranco properties were owned by PNB-Madecor. It being a corporation with a
distinct and separate personality, its assets could not answer for the liabilities of
PNEI. Considering, however, that PNB-Madecor executed a promissory note in favor

of PNEI for P7,884,000.00, the writ of execution to the extent of the said amount
was concerned was considered valid.[16]
PNBs third-party claim to nullify the writ on the ground that it has an
interest in the Pantranco properties being a creditor of PNB-Madecor, on the other
hand, was denied because it only had an inchoate interest in the properties.[17]
The dispositive portion of the Labor Arbiters September 10, 2002 Resolution
is quoted hereunder:
WHEREFORE, the Third Party Claim of PNB Madecor and/or Mega Prime
Holdings, Inc. is hereby GRANTED and concomitantly the levies made by the sheriffs
of the NLRC on the properties of PNB Madecor should be as it (sic) is hereby LIFTED
subject to the payment by PNB Madecor to the complainants the amount of
P7,884,000.00.
The Motion to Quash and Third Party Claim of PNB is hereby DENIED.
The Motion to Quash of PNB Madecor and Mega Prime Holdings, Inc. is
hereby PARTIALLY GRANTED insofar as the amount of the writ exceeds
P7,884,000.00.
The Motion for Recomputation and Examination of Judgment Awards is
hereby DENIED for want of merit.
The Motion to Expunge from the Records claimants/complainants
Opposition dated August 3, 2002 is hereby DENIED for lack of merit.
SO ORDERED.[18]
On appeal to the NLRC, the same was denied and the Labor Arbiters
disposition was affirmed.[19] Specifically, the NLRC concluded as follows:
(1)
PNB-Madecor and Mega Prime contended that it would be impossible for
them to comply with the requirement of the labor arbiter to pay to the PNEI
employees the amount of P7.8 million as a condition to the lifting of the levy on the
properties, since the credit was already garnished by Gerardo Uy and other creditors
of PNEI. The NLRC found no evidence that Uy had satisfied his judgment from the
promissory note, and opined that even if the credit was in custodia legis, the claim
of the PNEI employees should enjoy preference under the Labor Code.
(2)
The PNEI employees contested the finding that PNB-Madecor was
indebted to the PNEI for only P7.8 million without considering the accrual of interest.
But the NLRC said that there was no evidence that demand was made as a basis for
reckoning interest.
(3)
The PNEI employees further argued that the labor arbiter may not
properly conclude from a decision of Judge Demetrio Macapagal Jr. of the RTC of

Quezon City that PNB-Madecor was the owner of the properties as his decision was
reconsidered by the next presiding judge, nor from a decision of the Supreme Court
that PNEI was a mere lessee of the properties, the fact being that the transfer of the
properties to PNB-Madecor was done to avoid satisfaction of the claims of the
employees with the NLRC and that as a result of a civil case filed by Mega Prime,
the subsequent sale of the properties by PNB to Mega Prime was rescinded. The
NLRC pointed out that while the Macapagal decision was set aside by Judge Bruselas
and hence, his findings could not be invoked by the labor arbiter, the titles of PNBMadecor are conclusive and there is no evidence that PNEI had ever been an owner.
The Supreme Court had observed in its decision that PNEI owed back rentals of P8.7
million to PNB-Madecor.
(4)
The PNEI employees faulted the labor arbiter for not finding that PNEI,
PNB, PNB-Madecor and Mega Prime were all jointly and severally liable for their
claims. The NLRC underscored the fact that PNEI and Macris were subsidiaries of
NIDC and had passed through and were under the Asset Privatization Trust (APT)
when the labor claims accrued. The labor arbiter was correct in not granting PNBs
third-party claim because at the time the causes of action accrued, the PNEI was
managed by a management committee appointed by the PNB as the new owner of
PNRI (sic) and Macris through a deed of assignment or transfer of ownership. The
NLRC says at length that the same is not true with PNB-Madecor which is now the
registered owner of the properties.[20]
The parties separate motions for reconsideration were likewise denied.[21]
Thereafter, the matter was elevated to the CA by PANREA, PEA-PTGWO and the
Pantranco Association of Concerned Employees. The latter group, however, later
withdrew its petition. The former employees petition was docketed as CA-G.R. SP
No. 80599.
PNB-Madecor and Mega Prime likewise filed their separate petition before the
CA which was docketed as CA-G.R. SP No. 80737, but the same was dismissed.[22]
In view of the P7,884,000.00 debt of PNB-Madecor to PNEI, on June 23, 2004,
an auction sale was conducted over the Pantranco properties to satisfy the claim of
the PNEI employees, wherein CPAR Realty was adjudged as the highest bidder.[23]
On June 3, 2005, the CA rendered the assailed decision affirming the NLRC
resolutions.
The appellate court pointed out that PNB, PNB-Madecor and Mega Prime are
corporations with personalities separate and distinct from PNEI. As such, there
being no cogent reason to pierce the veil of corporate fiction, the separate
personalities of the above corporations should be maintained. The CA added that
the Pantranco properties were never owned by PNEI; rather, their titles were
registered under the name of PNB-Madecor. If PNB and PNB-Madecor could not
answer for the liabilities of PNEI, with more reason should Mega Prime not be held
liable being a mere successor-in-interest of PNB-Madecor.

Unsatisfied, PEA-PTGWO and PANREA filed their motion for reconsideration;

[24] while PNB filed its Partial Motion for Reconsideration.[25] PNB pointed out that
PNB-Madecor was made to answer for P7,884,000.00 to the PNEI employees by
virtue of the promissory note it (PNB-Madecor) earlier executed in favor of PNEI.
PNB, however, questioned the June 23, 2004 auction sale as the P7.8 million debt
had already been satisfied pursuant to this Courts decision in PNB MADECOR v. Uy.
[26]
Both motions were denied by the appellate court.[27]
In two separate petitions, PNB and the former PNEI employees come up to
this Court assailing the CA decision and resolution. The former PNEI employees
raise the lone error, thus:
The Honorable Court of Appeals palpably departed from the established
rules and jurisprudence in ruling that private respondents Pantranco North Express,
Inc. (PNEI), Philippine National Bank (PNB), Philippine National Bank Management
and Development Corporation (PNB-MADECOR), Mega Prime Realty and Holdings,
Inc. (Mega Prime) are not jointly and severally answerable to the P722,727,150.22
Million NLRC money judgment awards in favor of the 4,000 individual members of
the Petitioners.[28]
They claim that PNB, through PNB-Madecor, directly benefited from the operation of
PNEI and had complete control over the funds of PNEI. Hence, they are solidarily
answerable with PNEI for the unpaid money claims of the employees.[29] Citing A.C.
Ransom Labor Union-CCLU v. NLRC,[30] the employees insist that where the
employer corporation ceases to exist and is no longer able to satisfy the judgment
awards in favor of its employees, the owner of the employer corporation should be
made jointly and severally liable.[31] They added that malice or bad faith need not
be proven to make the owners liable.
On the other hand, PNB anchors its petition on this sole assignment of error,
viz.:
THE AUCTION SALE OF THE PROPERTY COVERED BY TCT NO. 87884 INTENDED TO
PARTIALLY SATISFY THE CLAIMS OF FORMER WORKERS OF PNEI IN THE AMOUNT OF
P7,884,000.00 (THE AMOUNT OF PNB-MADECORS PROMISSORY NOTE IN FAVOR OF
PNEI) IS NOT IN ORDER AS THE SAID PROPERTY IS NOT OWNED BY PNEI. FURTHER,
THE SAID PROMISSORY NOTE HAD ALREADY BEEN GARNISHED IN FAVOR OF
GERARDO C. UY WHICH LED TO THREE (3) PROPERTIES UNDER THE NAME OF PNBMADECOR, NAMELY TCT NOS. 87881, 87882 AND 87883, BEING LEVIED AND SOLD
ON EXECUTION IN THE PNB-MADECOR VS. UY CASE (363 SCRA 128 [2001]) AND
GERARDO C. UY VS. PNEI (CIVIL CASE NO. 95-72685, RTC MANILA, BRANCH 38).
[32]
PNB insists that the Pantranco properties could no longer be levied upon
because the promissory note for which the Labor Arbiter held PNB-Madecor liable to
PNEI, and in turn to the latters former employees, had already been satisfied in

favor of Gerardo C. Uy. It added that the properties were in fact awarded to the
highest bidder. Besides, says PNB, the subject properties were not owned by PNEI,
hence, the execution sale thereof was not validly effected.[33]
Both petitions must fail.
G.R. No. 170689
Stripped of the non-essentials, the sole issue for resolution raised by the former
PNEI employees is whether they can attach the properties (specifically the
Pantranco properties) of PNB, PNB-Madecor and Mega Prime to satisfy their unpaid
labor claims against PNEI.
We answer in the negative.
First, the subject property is not owned by the judgment debtor, that is, PNEI.
Nowhere in the records was it shown that PNEI owned the Pantranco properties.
Petitioners, in fact, never alleged in any of their pleadings the fact of such
ownership. What was established, instead, in PNB MADECOR v. Uy[34] and PNB v.
Mega Prime Realty and Holdings Corporation/Mega Prime Realty and Holdings
Corporation v. PNB[35] was that the properties were owned by Macris, the
predecessor of PNB-Madecor. Hence, they cannot be pursued against by the
creditors of PNEI.
We would like to stress the settled rule that the power of the court in executing
judgments extends only to properties unquestionably belonging to the judgment
debtor alone.[36] To be sure, one mans goods shall not be sold for another mans
debts.[37] A sheriff is not authorized to attach or levy on property not belonging to
the judgment debtor, and even incurs liability if he wrongfully levies upon the
property of a third person.[38]
Second, PNB, PNB-Madecor and Mega Prime are corporations with
personalities separate and distinct from that of PNEI. PNB is sought to be held liable
because it acquired PNEI through NIDC at the time when PNEI was suffering financial
reverses. PNB-Madecor is being made to answer for petitioners labor claims as the
owner of the subject Pantranco properties and as a subsidiary of PNB. Mega Prime
is also included for having acquired PNBs shares over PNB-Madecor.
The general rule is that a corporation has a personality separate and distinct from
those of its stockholders and other corporations to which it may be connected.[39]
This is a fiction created by law for convenience and to prevent injustice.[40]
Obviously, PNB, PNB-Madecor, Mega Prime, and PNEI are corporations with their
own personalities. The separate personalities of the first three corporations had
been recognized by this Court in PNB v. Mega Prime Realty and Holdings
Corporation/Mega Prime Realty and Holdings Corporation v. PNB[41] where we
stated that PNB was only a stockholder of PNB-Madecor which later sold its shares
to Mega Prime; and that PNB-Madecor was the owner of the Pantranco properties.
Moreover, these corporations are registered as separate entities and, absent any
valid reason, we maintain their separate identities and we cannot treat them as
one.

Neither can we merge the personality of PNEI with PNB simply because the latter
acquired the former. Settled is the rule that where one corporation sells or
otherwise transfers all its assets to another corporation for value, the latter is not,
by that fact alone, liable for the debts and liabilities of the transferor.[42]
Lastly, while we recognize that there are peculiar circumstances or valid grounds
that may exist to warrant the piercing of the corporate veil, [43] none applies in the
present case whether between PNB and PNEI; or PNB and PNB-Madecor.
Under the doctrine of piercing the veil of corporate fiction, the court looks at the
corporation as a mere collection of individuals or an aggregation of persons
undertaking business as a group, disregarding the separate juridical personality of
the corporation unifying the group.[44] Another formulation of this doctrine is that
when two business enterprises are owned, conducted and controlled by the same
parties, both law and equity will, when necessary to protect the rights of third
parties, disregard the legal fiction that two corporations are distinct entities and
treat them as identical or as one and the same.[45]
Whether the separate personality of the corporation should be pierced hinges on
obtaining facts appropriately pleaded or proved. However, any piercing of the
corporate veil has to be done with caution, albeit the Court will not hesitate to
disregard the corporate veil when it is misused or when necessary in the interest of
justice. After all, the concept of corporate entity was not meant to promote unfair
objectives.[46]
As between PNB and PNEI, petitioners want us to disregard their separate
personalities, and insist that because the company, PNEI, has already ceased
operations and there is no other way by which the judgment in favor of the
employees can be satisfied, corporate officers can be held jointly and severally
liable with the company. Petitioners rely on the pronouncement of this Court in A.C.
Ransom Labor Union-CCLU v. NLRC[47] and subsequent cases.[48]
This reliance fails to persuade. We find the aforesaid decisions inapplicable to the
instant case.
For one, in the said cases, the persons made liable after the companys cessation of
operations were the officers and agents of the corporation. The rationale is that,
since the corporation is an artificial person, it must have an officer who can be
presumed to be the employer, being the person acting in the interest of the
employer. The corporation, only in the technical sense, is the employer.[49] In the
instant case, what is being made liable is another corporation (PNB) which acquired
the debtor corporation (PNEI).
Moreover, in the recent cases Carag v. National Labor Relations Commission[50] and
McLeod v. National Labor Relations Commission,[51] the Court explained the
doctrine laid down in AC Ransom relative to the personal liability of the officers and
agents of the employer for the debts of the latter. In AC Ransom, the Court imputed
liability to the officers of the corporation on the strength of the definition of an
employer in Article 212(c) (now Article 212[e]) of the Labor Code. Under the said

provision, employer includes any person acting in the interest of an employer,

directly or indirectly, but does not include any labor organization or any of its
officers or agents except when acting as employer. It was clarified in Carag and
McLeod that Article 212(e) of the Labor Code, by itself, does not make a corporate
officer personally liable for the debts of the corporation. It added that the governing
law on personal liability of directors or officers for debts of the corporation is still
Section 31[52] of the Corporation Code.
More importantly, as aptly observed by this Court in AC Ransom, it appears
that Ransom, foreseeing the possibility or probability of payment of backwages to
its employees, organized Rosario to replace Ransom, with the latter to be eventually
phased out if the strikers win their case. The execution could not be implemented
against Ransom because of the disposition posthaste of its leviable assets evidently
in order to evade its just and due obligations.[53] Hence, the Court sustained the
piercing of the corporate veil and made the officers of Ransom personally liable for
the debts of the latter.
Clearly, what can be inferred from the earlier cases is that the doctrine of piercing
the corporate veil applies only in three (3) basic areas, namely: 1) defeat of public
convenience as when the corporate fiction is used as a vehicle for the evasion of an
existing obligation; 2) fraud cases or when the corporate entity is used to justify a
wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation
is merely a farce since it is a mere alter ego or business conduit of a person, or
where the corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation.[54] In the absence of malice, bad faith, or a specific provision
of law making a corporate officer liable, such corporate officer cannot be made
personally liable for corporate liabilities.[55]
Applying the foregoing doctrine to the instant case, we quote with approval the CA
disposition in this wise:
It would not be enough, then, for the petitioners in this case, the PNEI employees, to
rest on their laurels with evidence that PNB was the owner of PNEI. Apart from
proving ownership, it is necessary to show facts that will justify us to pierce the veil
of corporate fiction and hold PNB liable for the debts of PNEI. The burden
undoubtedly falls on the petitioners to prove their affirmative allegations. In line
with the basic jurisprudential principles we have explored, they must show that PNB
was using PNEI as a mere adjunct or instrumentality or has exploited or misused the
corporate privilege of PNEI.
We do not see how the burden has been met. Lacking proof of a nexus apart from
mere ownership, the petitioners have not provided us with the legal basis to reach
the assets of corporations separate and distinct from PNEI.[56]
Assuming, for the sake of argument, that PNB may be held liable for the debts
of PNEI, petitioners still cannot proceed against the Pantranco properties, the same
being owned by PNB-Madecor, notwithstanding the fact that PNB-Madecor was a
subsidiary of PNB. The general rule remains that PNB-Madecor has a personality

separate and distinct from PNB. The mere fact that a corporation owns all of the
stocks of another corporation, taken alone, is not sufficient to justify their being
treated as one entity. If used to perform legitimate functions, a subsidiarys
separate existence shall be respected, and the liability of the parent corporation as
well as the subsidiary will be confined to those arising in their respective
businesses.[57]
In PNB v. Ritratto Group, Inc.,[58] we outlined the circumstances which are useful in
the determination of whether a subsidiary is but a mere instrumentality of the
parent-corporation, to wit:
1.
subsidiary;

The parent corporation owns all or most of the capital stock of the

2.
officers;

The parent and subsidiary corporations have common directors or

3.

The parent corporation finances the subsidiary;

4.
The parent corporation subscribes to all the capital stock of the
subsidiary or otherwise causes its incorporation;
5.

The subsidiary has grossly inadequate capital;

6.
The parent corporation pays the salaries and other expenses or losses
of the subsidiary;
7.
The subsidiary has substantially no business except with the parent
corporation or no assets except those conveyed to or by the parent corporation;
8.
In the papers of the parent corporation or in the statements of its
officers, the subsidiary is described as a department or division of the parent
corporation, or its business or financial responsibility is referred to as the parent
corporations own;
9.

The parent corporation uses the property of the subsidiary as its own;

10.
The directors or executives of the subsidiary do not act independently in
the interest of the subsidiary, but take their orders from the parent corporation;
11.

The formal legal requirements of the subsidiary are not observed.

None of the foregoing circumstances is present in the instant case. Thus, piercing
of PNB-Madecors corporate veil is not warranted. Being a mere successor-ininterest of PNB-Madecor, with more reason should no liability attach to Mega Prime.
G.R. No. 170705

In its petition before this Court, PNB seeks the annulment of the June 23,
2004 execution sale of the Pantranco properties on the ground that the judgment
debtor (PNEI) never owned said lots. It likewise contends that the levy and the
eventual sale on execution of the subject properties was null and void as the
promissory note on which PNB-Madecor was made liable had already been satisfied.
It has been repeatedly stated that the Pantranco properties which were the
subject of execution sale were owned by Macris and later, the PNB-Madecor. They
were never owned by PNEI or PNB. Following our earlier discussion on the separate
personalities of the different corporations involved in the instant case, the only
entity which has the right and interest to question the execution sale and the
eventual right to annul the same, if any, is PNB-Madecor or its successor-in-interest.
Settled is the rule that proceedings in court must be instituted by the real party in
interest.
A real party in interest is the party who stands to be benefited or injured by the
judgment in the suit, or the party entitled to the avails of the suit.[59] Interest
within the meaning of the rule means material interest, an interest in issue and to
be affected by the decree, as distinguished from mere interest in the question
involved, or a mere incidental interest.[60] The interest of the party must also be
personal and not one based on a desire to vindicate the constitutional right of some
third and unrelated party.[61] Real interest, on the other hand, means a present
substantial interest, as distinguished from a mere expectancy or a future,
contingent, subordinate, or consequential interest.[62]
Specifically, in proceedings to set aside an execution sale, the real party in interest
is the person who has an interest either in the property sold or the proceeds thereof.
Conversely, one who is not interested or is not injured by the execution sale cannot
question its validity.[63]
In justifying its claim against the Pantranco properties, PNB alleges that Mega
Prime, the buyer of its entire stockholdings in PNB-Madecor was indebted to it
(PNB). Considering that said indebtedness remains unpaid, PNB insists that it has
an interest over PNB-Madecor and Mega Primes assets.
Again, the contention is bereft of merit. While PNB has an apparent interest
in Mega Primes assets being the creditor of the latter for a substantial amount, its
interest remains inchoate and has not yet ripened into a present substantial
interest, which would give it the standing to maintain an action involving the subject
properties. As aptly observed by the Labor Arbiter, PNB only has an inchoate right
to the properties of Mega Prime in case the latter would not be able to pay its
indebtedness. This is especially true in the instant case, as the debt being claimed
by PNB is secured by the accessory contract of pledge of the entire stockholdings of
Mega Prime to PNB-Madecor.[64]
The Court further notes that the Pantranco properties (or a portion thereof )
were sold on execution to satisfy the unpaid obligation of PNB-Madecor to PNEI.
PNB-Madecor was thus made liable to the former PNEI employees as the judgment
debtor of PNEI. It has long been established in PNB-Madecor v. Uy and other similar
cases that PNB-Madecor had an unpaid obligation to PNEI amounting to more or less

P7 million which could be validly pursued by the creditors of the latter. Again, this
strengthens the proper parties right to question the validity of the execution sale,
definitely not PNB.
Besides, the issue of whether PNB has a substantial interest over the Pantranco
properties has already been laid to rest by the Labor Arbiter.[65] It is noteworthy
that in its Resolution dated September 10, 2002, the Labor Arbiter denied PNBs
Third-Party Claim primarily because PNB only has an inchoate right over the
Pantranco properties.[66] Such conclusion was later affirmed by the NLRC in its
Resolution dated June 30, 2003.[67] Notwithstanding said conclusion, PNB did not
elevate the matter to the CA via a petition for review. Hence it is presumed to be
satisfied with the adjudication therein.[68] That decision of the NLRC has become
final as against PNB and can no longer be reviewed, much less reversed, by this
Court.[69] This is in accord with the doctrine that a party who has not appealed
cannot obtain from the appellate court any affirmative relief other than the ones
granted in the appealed decision.[70]
WHEREFORE, premises considered, the petitions are hereby DENIED for lack
of merit.
SO ORDERED.
Ruperto Suldao vs. Cimech System
G.R. No. 171392
October 30, 2006
RUPERTO SULDAO, petitioner,
vs.
CIMECH SYSTEM CONSTRUCTION, INC. and ENGR. RODOLFO S. LABUCAY,
respondents.
DECISION
YNARES-SANTIAGO, J.:
This petition for review on certiorari assails the Decision1 dated June 23, 2005 of the
Court of Appeals in CA-G.R. SP No. 83963, which reversed and set aside the
February 27, 2004 Resolution2 of the National Labor Relations Commission (NLRC)
in NLRC CA No. 036963-03 and the August 5, 2003 Decision of the Labor Arbiter
finding petitioner to have been constructively dismissed. Also assailed is the January
10, 2006 Resolution3 denying petitioners motion for reconsideration.
The facts are as follows:
Respondent Cimech Systems Construction, Inc. employed the services of petitioner
Ruperto Suldao on August 31, 2001 as a machinist with a daily wage of P300.00 on
a contractual status for a period of five months. After January 31, 2002, respondent

continued to engage the services of petitioner as a machinist until he became a

permanent employee.
Petitioner alleged that owing to a dearth in projects being handled by the
respondent, he was ordered by Ms. Elsa Labocay to take a leave of absence from
November 1 to 6, 2002. He reported for work on November 7, 2002 but was again
ordered to take a leave of absence from November 7 to 14, 2002. On November 15,
2002, he was purportedly ordered to make a letter-request for field work transfer
which he complied. The following day, he failed to report back for work because he
was sick. On November 17, 2002, he reported for work but was allegedly barred
from entering by the security guard on duty. On November 21, 2002, he was again
barred from entering the premises, hence he filed the instant complaint4 for
constructive dismissal.5
Respondent alleged that due to lack of available work in the machine shop,
petitioner was temporarily transferred to its fabrication department sometime in
November 2002. Petitioner refused to accept the transfer and insisted to work as a
machinist. Because of petitioners arrogant and unruly behavior, he was led away
by a guard. When petitioner returned for work, he purportedly demanded a salary
increase and wages for the days that he did not work. Respondent considered the
actuations of petitioner tantamount to insubordination, hence, it suspended6 the
petitioner for six days.
After his suspension on November 28, 2002, petitioner accepted his transfer to the
fabrication department but worked for only one day. During the companys
Christmas party on December 21, 2002, petitioner came and asked for his 13th
month pay. On January 13, 2003, petitioner demanded to get his one day salary
deposit but was told to secure a clearance which he failed to comply. Thereafter,
petitioner filed the instant complaint for illegal dismissal.
On August 5, 2003, Labor Arbiter Melquiades Sol D. Del Rosario rendered a decision,
the dispositive portion of which reads:
CONFORMABLY WITH THE FOREGOING, judgment is hereby rendered finding
complainant to have been illegally dismissed constructively. Consequently, he
should be reinstated to his former position and paid his backwages which has
accumulated as of July 17, 2003 in the sum of P62,400.00 plus his one month
separation pay of P7,800.00.
SO ORDERED.7
The NLRC concurred with the findings of the Labor Arbiter that petitioner was
constructively dismissed.
Hence, respondent filed a petition for certiorari8 which was granted by the Court of
Appeals. In its assailed June 23, 2005 decision, the Court of Appeals reversed the
NLRC by declaring:

WHEREFORE, premises considered, the Petition is hereby given DUE COURSE, and
the February 27, 2004 Decision of the NLRC is hereby REVERSED and SET ASIDE.
The December 20, 2002 Complaint is hereby DISMISSED.
SO ORDERED.9
Hence, this petition raising the sole issue of:
WHETHER THE COURT OF APPEALS COMMITED GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN REVERSING THE DECISION OF
THE LABOR ARBITER AND THE NLRC THAT THE PETITIONER WAS CONSTRUCTIVELY
DISMISSED.
As a general rule, a petition for review on certiorari under Rule 45 of the Rules of
Court is limited to questions of law. However, this rule admits of exceptions,10 such
as in this case where the findings of the Labor Arbiter and the NLRC vary from the
findings of the Court of Appeals.
The petition is impressed with merit.
After a painstaking review of the records, we uphold the findings of the Labor
Arbiter and of the NLRC that petitioner was constructively dismissed. Constructive
dismissal or a constructive discharge has been defined as quitting because
continued employment is rendered impossible, unreasonable or unlikely, as an offer
involving a demotion in rank and a diminution in pay.11 In the instant case, there is
constructive dismissal because the continued employment of petitioner is rendered
impossible so as to foreclose any choice on his part except to resign from such
employment.12
In cases of constructive dismissal, the burden of proof is on the employer to show
that the employee was dismissed for a valid and a just cause.13 In the instant case,
respondent failed to discharge this burden. As aptly observed by the NLRC:
In essence, respondents would have it that they have not dismissed complainant,
rather it was he who did not return to his job after 13 January 2003.
To begin with, the issues raised undoubtedly was factual, the determination of which
lies within the competence of the Labor Arbiters jurisdiction, over which this
Commission will interfere only when grave abuse or serious errors were committed
by him in the interpretation of the evidence on records.
In this case however, respondents failed to show by substantial proof the veracity of
their assertion. For one, while claiming that complainant was placed on a six (6)
days suspension for an alleged infraction, they failed nonetheless to adduce
evidence showing that indeed complainant committed the offense and was placed
as such as disciplinary measure.
Relevant on this score is the observation and findings of the Labor Arbiter, to wit:

Respondents averment that complainant was arrogant, and did not want to be
transferred to another position or department is belied by complainants letter
dated November 28, 2002.
Excerpts from complainants letter reads:
"Na tinatanggap ko na utos ng kumpanyang ito na umako ng ibang gawain para sa
kabutihan ng lahat. Na ang pagtanggap ko ng ibang trabaho ay pansamantala lang
habang walang gawain sa dati ko puwesto or gawain trabaho sa kompanya.
Nang ang sulat salaysay kong ito ay aking isinagawa bilang pagtalima sa kautusan
ng atin kumpanya.
xxxx
Complainants claim that he was required to go on a leave of absence due to a
dearth of work is consistent with respondents claim that there was scarcity of work
because of the economic crisis.
By all appearances, complainant does not have a high educational attainment and
his skill is limited to being a machinist. As such, all he can do is to obey the biddings
of his superior. So when required to go on leave, he meekly obeys.
Even his claim that he failed to report for work due to indisposition is supported by a
medical certificate. As between the conflicting claims of the parties, this Arbitration
Branch has to accord more weight to complainants claim that he was no longer
allowed to work because he was barred by the security guard of the company to
enter the premises for reasons only known to respondents.
Had there been truth to respondents claim that complainant abandoned his work
because he did not want the job in the fabrication department, complainant would
not have made a letter of conformity to do the bidding of the company. Moreover,
complainant would not have taken steps to protect his rights like the institution of
the present labor suit if he had abandoned his work because rather than spend
time, effort and a little money in attending to the hearings of this case, he would
have concentrated in his new job or in finding one in order to feed his family.14
While the decision to transfer employees to other areas of its operations forms part
of the well recognized prerogatives of management, it must be stressed, however,
that the managerial prerogative to transfer personnel must not be exercised with
grave abuse of discretion, bearing in mind the basic elements of justice and fair
play. Having the right should not be confused with the manner in which that right is
exercised. Thus it cannot be used as a subterfuge by the employer to rid himself of
an undesirable worker.15
In the instant case, while petitioners transfer was valid, the manner by which
respondent unjustifiably prevented him from returning to work on several occasions
runs counter to the claim of good faith on the part of respondent corporation. By
reporting for work, petitioner manifested his willingness to comply with the
regulations of the corporation and his desire to continue working for the latter.

However, he was barred from entering the premises without any explanation. This is
a clear manifestation of disdain and insensibility on the part of an employer towards
a particular employee and a veritable hallmark of constructive dismissal.
We cannot sustain the theory of respondent that since petitioner was allowed to join
its 2002 Christmas Party, there can be no constructive dismissal. Petitioners joining
the Christmas party does not negate his illegal dismissal. Neither does it detract us
from the fact that petitioner was prevented from entering the premises of the
respondent corporation on previous occasions.
While the liability of the respondent corporation for the constructive dismissal of the
petitioner has been clearly established, the same does not hold true with the other
respondent, Engr. Rodolfo S. Labucay, President and General Manager of the
respondent corporation.16 In finding Labucay also liable, the Labor Arbiter declared
that:
The foregoing circumstances support the view that complainant was constructively
dismissed in an illegal manner. Consequently, respondents, in solidum, are ordered
to reinstate the complainant to his former position and pay complainant his
backwages x x x.
A corporation is invested by law with a personality separate from that of its
stockholders or members. It has a personality separate and distinct from those of
the persons composing it as well as from that of any other entity to which it may be
related. Mere ownership by a single stockholder or by another corporation of all or
nearly all of the capital stock of a corporation is not in itself sufficient ground for
disregarding the separate corporate personality. A corporations authority to act and
its liability for its actions are separate and apart from the individuals who own it.
The veil of corporate fiction treats as separate and distinct the affairs of a
corporation and its officers and stockholders. As a general rule, a corporation will be
looked upon as a legal entity, unless and until sufficient reason to the contrary
appears. When the notion of legal entity is used to defeat public convenience,
justify wrong, protect fraud, or defend crime, the law will regard the corporation as
an association of persons. Also, the corporate entity may be disregarded in the
interest of justice in such cases as fraud that may work inequities among members
of the corporation internally, involving no rights of the public or third persons. In
both instances, there must have been fraud and proof of it. For the separate
juridical personality of a corporation to be disregarded, the wrongdoing must be
clearly and convincingly established. It cannot be presumed.17
In the instant case, no reason exists that will justify the piercing of the veil of
corporate fiction such as to hold Labucay, as the president and general manager of
the respondent corporation, solidarily liable with it. Thus, the liability for the
constructive dismissal of the petitioner solely devolves upon the respondent
corporation. Consequently, the decision of the Labor Arbiter and of the NLRC should
be modified in that only the respondent corporation should be held liable.
WHEREFORE, the petition is GRANTED. The June 23, 2005 Decision of the Court of
Appeals in CA-G.R. SP No. 83963 and its January 10, 2006 Resolution are REVERSED

and SET ASIDE. The February 27, 2004 Resolution of the National Labor Relations
Commission in NLRC CA No. 036963-03 affirming the decision of the Labor Arbiter
finding that petitioner was constructively dismissed, is REINSTATED with
MODIFICATION that only the respondent corporation, Cimech System Construction,
Inc. is held liable.
No pronouncement as to costs.
SO ORDERED.
Mambulao Lumber Co. vs PNB
G.R. No. L-22973
January 30, 1968
MAMBULAO LUMBER COMPANY, plaintiff-appellant,
vs.
PHILIPPINE NATIONAL BANK and ANACLETO HERALDO Deputy Provincial Sheriff of
Camarines Norte, defendants-appellees.
Ernesto P. Vilar and Arthur Tordesillas for plaintiff-appellant.
Tomas Besa and Jose B. Galang for defendants-appellees.
ANGELES, J.:
An appeal from a decision, dated April 2, 1964, of the Court of First Instance of
Manila in Civil Case No. 52089, entitled "Mambulao Lumber Company, plaintiff,
versus Philippine National Bank and Anacleto Heraldo, defendants", dismissing the
complaint against both defendants and sentencing the plaintiff to pay to defendant
Philippine National Bank (PNB for short) the sum of P3,582.52 with interest thereon
at the rate of 6% per annum from December 22, 1961 until fully paid, and the costs
of suit.
In seeking the reversal of the decision, the plaintiff advances several propositions in
its brief which may be restated as follows:
1. That its total indebtedness to the PNB as of November 21, 1961, was only
P56,485.87 and not P58,213.51 as concluded by the court a quo; hence, the
proceeds of the foreclosure sale of its real property alone in the amount of
P56,908.00 on that date, added to the sum of P738.59 it remitted to the PNB
thereafter was more than sufficient to liquidate its obligation, thereby rendering the
subsequent foreclosure sale of its chattels unlawful;
2. That it is not liable to pay PNB the amount of P5,821.35 for attorney's fees and
the additional sum of P298.54 as expenses of the foreclosure sale;
3. That the subsequent foreclosure sale of its chattels is null and void, not only
because it had already settled its indebtedness to the PNB at the time the sale was
effected, but also for the reason that the said sale was not conducted in accordance
with the provisions of the Chattel Mortgage Law and the venue agreed upon by the
parties in the mortgage contract;

4. That the PNB, having illegally sold the chattels, is liable to the plaintiff for its
value; and
5. That for the acts of the PNB in proceeding with the sale of the chattels, in utter
disregard of plaintiff's vigorous opposition thereto, and in taking possession thereof
after the sale thru force, intimidation, coercion, and by detaining its "man-incharge" of said properties, the PNB is liable to plaintiff for damages and attorney's
fees.
The antecedent facts of the case, as found by the trial court, are as follows:
On May 5, 1956 the plaintiff applied for an industrial loan of P155,000 with the Naga
Branch of defendant PNB and the former offered real estate, machinery, logging and
transportation equipments as collaterals. The application, however, was approved
for a loan of P100,000 only. To secure the payment of the loan, the plaintiff
mortgaged to defendant PNB a parcel of land, together with the buildings and
improvements existing thereon, situated in the poblacion of Jose Panganiban
(formerly Mambulao), province of Camarines Norte, and covered by Transfer
Certificate of Title No. 381 of the land records of said province, as well as various
sawmill equipment, rolling unit and other fixed assets of the plaintiff, all situated in
its compound in the aforementioned municipality.
On August 2, 1956, the PNB released from the approved loan the sum of P27,500,
for which the plaintiff signed a promissory note wherein it promised to pay to the
PNB the said sum in five equal yearly installments at the rate of P6,528.40
beginning July 31, 1957, and every year thereafter, the last of which would be on
July 31, 1961.
On October 19, 1956, the PNB made another release of P15,500 as part of the
approved loan granted to the plaintiff and so on the said date, the latter executed
another promissory note wherein it agreed to pay to the former the said sum in five
equal yearly installments at the rate of P3,679.64 beginning July 31, 1957, and
ending on July 31, 1961.
The plaintiff failed to pay the amortization on the amounts released to and received
by it. Repeated demands were made upon the plaintiff to pay its obligation but it
failed or otherwise refused to do so. Upon inspection and verification made by
employees of the PNB, it was found that the plaintiff had already stopped operation
about the end of 1957 or early part of 1958.
On September 27, 1961, the PNB sent a letter to the Provincial Sheriff of Camarines
Norte requesting him to take possession of the parcel of land, together with the
improvements existing thereon, covered by Transfer Certificate of Title No. 381 of
the land records of Camarines Norte, and to sell it at public auction in accordance
with the provisions of Act No. 3135, as amended, for the satisfaction of the unpaid
obligation of the plaintiff, which as of September 22, 1961, amounted to
P57,646.59, excluding attorney's fees. In compliance with the request, on October
16, 1961, the Provincial Sheriff of Camarines Norte issued the corresponding notice
of extra-judicial sale and sent a copy thereof to the plaintiff. According to the notice,

the mortgaged property would be sold at public auction at 10:00 a.m. on November
21, 1961, at the ground floor of the Court House in Daet, Camarines Norte.
On November 6, 1961, the PNB sent a letter to the Provincial Sheriff of Camarines
Norte requesting him to take possession of the chattels mortgaged to it by the
plaintiff and sell them at public auction also on November 21, 1961, for the
satisfaction of the sum of P57,646.59, plus 6% annual interest therefore from
September 23, 1961, attorney's fees equivalent to 10% of the amount due and the
costs and expenses of the sale. On the same day, the PNB sent notice to the
plaintiff that the former was foreclosing extrajudicially the chattels mortgaged by
the latter and that the auction sale thereof would be held on November 21, 1961,
between 9:00 and 12:00 a.m., in Mambulao, Camarines Norte, where the mortgaged
chattels were situated.
On November 8, 1961, Deputy Provincial Sheriff Anacleto Heraldo took possession
of the chattels mortgaged by the plaintiff and made an inventory thereof in the
presence of a PC Sergeant and a policeman of the municipality of Jose Panganiban.
On November 9, 1961, the said Deputy Sheriff issued the corresponding notice of
public auction sale of the mortgaged chattels to be held on November 21, 1961, at
10:00 a.m., at the plaintiff's compound situated in the municipality of Jose
Panganiban, Province of Camarines Norte.
On November 19, 1961, the plaintiff sent separate letters, posted as registered air
mail matter, one to the Naga Branch of the PNB and another to the Provincial Sheriff
of Camarines Norte, protesting against the foreclosure of the real estate and chattel
mortgages on the grounds that they could not be effected unless a Court's order
was issued against it (plaintiff) for said purpose and that the foreclosure
proceedings, according to the terms of the mortgage contracts, should be made in
Manila. In said letter to the Naga Branch of the PNB, it was intimated that if the
public auction sale would be suspended and the plaintiff would be given an
extension of ninety (90) days, its obligation would be settled satisfactorily because
an important negotiation was then going on for the sale of its "whole interest" for an
amount more than sufficient to liquidate said obligation.
The letter of the plaintiff to the Naga Branch of the PNB was construed by the latter
as a request for extension of the foreclosure sale of the mortgaged chattels and so
it advised the Sheriff of Camarines Norte to defer it to December 21, 1961, at the
same time and place. A copy of said advice was sent to the plaintiff for its
information and guidance.
The foreclosure sale of the parcel of land, together with the buildings and
improvements thereon, covered by Transfer Certificate of Title No. 381, was,
however, held on November 21, 1961, and the said property was sold to the PNB for
the sum of P56,908.00, subject to the right of the plaintiff to redeem the same
within a period of one year. On the same date, Deputy Provincial Sheriff Heraldo
executed a certificate of sale in favor of the PNB and a copy thereof was sent to the
plaintiff.
In a letter dated December 14, 1961 (but apparently posted several days later), the
plaintiff sent a bank draft for P738.59 to the Naga Branch of the PNB, allegedly in

full settlement of the balance of the obligation of the plaintiff after the application
thereto of the sum of P56,908.00 representing the proceeds of the foreclosure sale
of parcel of land described in Transfer Certificate of Title No. 381. In the said letter,
the plaintiff reiterated its request that the foreclosure sale of the mortgaged
chattels be discontinued on the grounds that the mortgaged indebtedness had been
fully paid and that it could not be legally effected at a place other than the City of
Manila.
In a letter dated December 16, 1961, the plaintiff advised the Provincial Sheriff of
Camarines Norte that it had fully paid its obligation to the PNB, and enclosed
therewith a copy of its letter to the latter dated December 14, 1961.
On December 18, 1961, the Attorney of the Naga Branch of the PNB, wrote to the
plaintiff acknowledging the remittance of P738.59 with the advice, however, that as
of that date the balance of the account of the plaintiff was P9,161.76, to which
should be added the expenses of guarding the mortgaged chattels at the rate of
P4.00 a day beginning December 19, 1961. It was further explained in said letter
that the sum of P57,646.59, which was stated in the request for the foreclosure of
the real estate mortgage, did not include the 10% attorney's fees and expenses of
the sale. Accordingly, the plaintiff was advised that the foreclosure sale scheduled
on the 21st of said month would be stopped if a remittance of P9,161.76, plus
interest thereon and guarding fees, would be made.
On December 21, 1961, the foreclosure sale of the mortgaged chattels was held at
10:00 a.m. and they were awarded to the PNB for the sum of P4,200 and the
corresponding bill of sale was issued in its favor by Deputy Provincial Sheriff
Heraldo.
In a letter dated December 26, 1961, the Manager of the Naga Branch of the PNB
advised the plaintiff giving it priority to repurchase the chattels acquired by the
former at public auction. This offer was reiterated in a letter dated January 3, 1962,
of the Attorney of the Naga Branch of the PNB to the plaintiff, with the suggestion
that it exercise its right of redemption and that it apply for the condonation of the
attorney's fees. The plaintiff did not follow the advice but on the contrary it made
known of its intention to file appropriate action or actions for the protection of its
interests.
On May 24, 1962, several employees of the PNB arrived in the compound of the
plaintiff in Jose Panganiban, Camarines Norte, and they informed Luis Salgado, Chief
Security Guard of the premises, that the properties therein had been auctioned and
bought by the PNB, which in turn sold them to Mariano Bundok. Upon being advised
that the purchaser would take delivery of the things he bought, Salgado was at first
reluctant to allow any piece of property to be taken out of the compound of the
plaintiff. The employees of the PNB explained that should Salgado refuse, he would
be exposing himself to a litigation wherein he could be held liable to pay big sum of
money by way of damages. Apprehensive of the risk that he would take, Salgado
immediately sent a wire to the President of the plaintiff in Manila, asking advice as
to what he should do. In the meantime, Mariano Bundok was able to take out from
the plaintiff's compound two truckloads of equipment.

In the afternoon of the same day, Salgado received a telegram from plaintiff's
President directing him not to deliver the "chattels" without court order, with the
information that the company was then filing an action for damages against the
PNB. On the following day, May 25, 1962, two trucks and men of Mariano Bundok
arrived but Salgado did not permit them to take out any equipment from inside the
compound of the plaintiff. Thru the intervention, however, of the local police and PC
soldiers, the trucks of Mariano Bundok were able finally to haul the properties
originally mortgaged by the plaintiff to the PNB, which were bought by it at the
foreclosure sale and subsequently sold to Mariano Bundok.
Upon the foregoing facts, the trial court rendered the decision appealed from which,
as stated in the first paragraph of this opinion, sentenced the Mambulao Lumber
Company to pay to the defendant PNB the sum of P3,582.52 with interest thereon at
the rate of 6% per annum from December 22, 1961 (day following the date of the
questioned foreclosure of plaintiff's chattels) until fully paid, and the costs.
Mambulao Lumber Company interposed the instant appeal.
We shall discuss the various points raised in appellant's brief in seriatim.
The first question Mambulao Lumber Company poses is that which relates to the
amount of its indebtedness to the PNB arising out of the principal loans and the
accrued interest thereon. It is contended that its obligation under the terms of the
two promissory notes it had executed in favor of the PNB amounts only to
P56,485.87 as of November 21, 1961, when the sale of real property was effected,
and not P58,213.51 as found by the trial court.
There is merit to this claim. Examining the terms of the promissory note executed
by the appellant in favor of the PNB, we find that the agreed interest on the loan of
P43,000.00 P27,500.00 released on August 2, 1956 as per promissory note of
even date (Exhibit C-3), and P15,500.00 released on October 19, 1956, as per
promissory note of the same date (Exhibit C-4) was six per cent (6%) per annum
from the respective date of said notes "until paid". In the statement of account of
the appellant as of September 22, 1961, submitted by the PNB, it appears that in
arriving at the total indebtedness of P57,646.59 as of that date, the PNB had
compounded the principal of the loan and the accrued 6% interest thereon each
time the yearly amortizations became due, and on the basis of these compounded
amounts charged additional delinquency interest on them up to September 22,
1961; and to this erroneously computed total of P57,646.59, the trial court added
6% interest per annum from September 23, 1961 to November 21 of the same year.
In effect, the PNB has claimed, and the trial court has adjudicated to it, interest on
accrued interests from the time the various amortizations of the loan became due
until the real estate mortgage executed to secure the loan was extra-judicially
foreclosed on November 21, 1961. This is an error. Section 5 of Act No. 2655
expressly provides that in computing the interest on any obligation, promissory note
or other instrument or contract, compound interest shall not be reckoned, except by
agreement, or in default thereof, whenever the debt is judicially claimed. This is also
the clear mandate of Article 2212 of the new Civil Code which provides that interest
due shall earn legal interest only from the time it is judicially demanded, and of
Article 1959 of the same code which ordains that interest due and unpaid shall not
earn interest. Of course, the parties may, by stipulation, capitalize the interest due

and unpaid, which as added principal shall earn new interest; but such stipulation is
nowhere to be found in the terms of the promissory notes involved in this case.
Clearly therefore, the trial court fell into error when it awarded interest on accrued
interests, without any agreement to that effect and before they had been judicially
demanded.
Appellant next assails the award of attorney's fees and the expenses of the
foreclosure sale in favor of the PNB. With respect to the amount of P298.54 allowed
as expenses of the extra-judicial sale of the real property, appellant maintains that
the same has no basis, factual or legal, and should not have been awarded. It
likewise decries the award of attorney's fees which, according to the appellant,
should not be deducted from the proceeds of the sale of the real property, not only
because there is no express agreement in the real estate mortgage contract to pay
attorney's fees in case the same is extra-judicially foreclosed, but also for the
reason that the PNB neither spent nor incurred any obligation to pay attorney's fees
in connection with the said extra-judicial foreclosure under consideration.
There is reason for the appellant to assail the award of P298.54 as expenses of the
sale. In this respect, the trial court said:
The parcel of land, together with the buildings and improvements existing thereon
covered by Transfer Certificate of Title No. 381, was sold for P56,908. There was,
however, no evidence how much was the expenses of the foreclosure sale although
from the pertinent provisions of the Rules of Court, the Sheriff's fees would be P1 for
advertising the sale (par. k, Sec. 7, Rule 130 of the Old Rules) and P297.54 as his
commission for the sale (par. n, Sec. 7, Rule 130 of the Old Rules) or a total of
P298.54.
There is really no evidence of record to support the conclusion that the PNB is
entitled to the amount awarded as expenses of the extra-judicial foreclosure sale.
The court below committed error in applying the provisions of the Rules of Court for
purposes of arriving at the amount awarded. It is to be borne in mind that the fees
enumerated under paragraphs k and n, Section 7, of Rule 130 (now Rule 141) are
demandable, only by a sheriff serving processes of the court in connection with
judicial foreclosure of mortgages under Rule 68 of the new Rules, and not in cases of
extra-judicial foreclosure of mortgages under Act 3135. The law applicable is
Section 4 of Act 3135 which provides that the officer conducting the sale is entitled
to collect a fee of P5.00 for each day of actual work performed in addition to his
expenses in connection with the foreclosure sale. Admittedly, the PNB failed to
prove during the trial of the case, that it actually spent any amount in connection
with the said foreclosure sale. Neither may expenses for publication of the notice be
legally allowed in the absence of evidence on record to support it. 1 It is true, as
pointed out by the appellee bank, that courts should take judicial notice of the fees
provided for by law which need not be proved; but in the absence of evidence to
show at least the number of working days the sheriff concerned actually spent in
connection with the extra-judicial foreclosure sale, the most that he may be entitled
to, would be the amount of P10.00 as a reasonable allowance for two day's work
one for the preparation of the necessary notices of sale, and the other for
conducting the auction sale and issuance of the corresponding certificate of sale in

favor of the buyer. Obviously, therefore, the award of P298.54 as expenses of the
sale should be set aside.
But the claim of the appellant that the real estate mortgage does not provide for
attorney's fees in case the same is extra-judicially foreclosed, cannot be favorably
considered, as would readily be revealed by an examination of the pertinent
provision of the mortgage contract. The parties to the mortgage appear to have
stipulated under paragraph (c) thereof, inter alia:
. . . For the purpose of extra-judicial foreclosure, the Mortgagor hereby appoints the
Mortgagee his attorney-in-fact to sell the property mortgaged under Act 3135, as
amended, to sign all documents and to perform all acts requisite and necessary to
accomplish said purpose and to appoint its substitute as such attorney-in-fact with
the same powers as above specified. In case of judicial foreclosure, the Mortgagor
hereby consents to the appointment of the Mortgagee or any of its employees as
receiver, without any bond, to take charge of the mortgaged property at once, and
to hold possession of the same and the rents, benefits and profits derived from the
mortgaged property before the sale, less the costs and expenses of the
receivership; the Mortgagor hereby agrees further that in all cases, attorney's fees
hereby fixed at Ten Per cent (10%) of the total indebtedness then unpaid which in
no case shall be less than P100.00 exclusive of all fees allowed by law, and the
expenses of collection shall be the obligation of the Mortgagor and shall with
priority, be paid to the Mortgagee out of any sums realized as rents and profits
derived from the mortgaged property or from the proceeds realized from the sale of
the said property and this mortgage shall likewise stand as security therefor. . . .
We find the above stipulation to pay attorney's fees clear enough to cover both
cases of foreclosure sale mentioned thereunder, i.e., judicially or extra-judicially.
While the phrase "in all cases" appears to be part of the second sentence, a reading
of the whole context of the stipulation would readily show that it logically refers to
extra-judicial foreclosure found in the first sentence and to judicial foreclosure
mentioned in the next sentence. And the ambiguity in the stipulation suggested and
pointed out by the appellant by reason of the faulty sentence construction should
not be made to defeat the otherwise clear intention of the parties in the agreement.
It is suggested by the appellant, however, that even if the above stipulation to pay
attorney's fees were applicable to the extra-judicial foreclosure sale of its real
properties, still, the award of P5,821.35 for attorney's fees has no legal justification,
considering the circumstance that the PNB did not actually spend anything by way
of attorney's fees in connection with the sale. In support of this proposition,
appellant cites authorities to the effect: (1) that when the mortgagee has neither
paid nor incurred any obligation to pay an attorney in connection with the
foreclosure sale, the claim for such fees should be denied; 2 and (2) that attorney's
fees will not be allowed when the attorney conducting the foreclosure proceedings
is an officer of the corporation (mortgagee) who receives a salary for all the legal
services performed by him for the corporation. 3 These authorities are indeed
enlightening; but they should not be applied in this case. The very same authority
first cited suggests that said principle is not absolute, for there is authority to the
contrary. As to the fact that the foreclosure proceeding's were handled by an
attorney of the legal staff of the PNB, we are reluctant to exonerate herein appellant

from the payment of the stipulated attorney's fees on this ground alone, considering
the express agreement between the parties in the mortgage contract under which
appellant became liable to pay the same. At any rate, we find merit in the
contention of the appellant that the award of P5,821.35 in favor of the PNB as
attorney's fees is unconscionable and unreasonable, considering that all that the
branch attorney of the said bank did in connection with the foreclosure sale of the
real property was to file a petition with the provincial sheriff of Camarines Norte
requesting the latter to sell the same in accordance with the provisions of Act 3135.
The principle that courts should reduce stipulated attorney's fees whenever it is
found under the circumstances of the case that the same is unreasonable, is now
deeply rooted in this jurisdiction to entertain any serious objection to it. Thus, this
Court has explained:
But the principle that it may be lawfully stipulated that the legal expenses involved
in the collection of a debt shall be defrayed by the debtor does not imply that such
stipulations must be enforced in accordance with the terms, no matter how injurious
or oppressive they may be. The lawful purpose to be accomplished by such a
stipulation is to permit the creditor to receive the amount due him under his
contract without a deduction of the expenses caused by the delinquency of the
debtor. It should not be permitted for him to convert such a stipulation into a source
of speculative profit at the expense of the debtor.
Contracts for attorney's services in this jurisdiction stands upon an entirely different
footing from contracts for the payment of compensation for any other services. By
express provision of section 29 of the Code of Civil Procedure, an attorney is not
entitled in the absence of express contract to recover more than a reasonable
compensation for his services; and even when an express contract is made the
court can ignore it and limit the recovery to reasonable compensation if the amount
of the stipulated fee is found by the court to be unreasonable. This is a very
different rule from that announced in section 1091 of the Civil Code with reference
to the obligation of contracts in general, where it is said that such obligation has the
force of law between the contracting parties. Had the plaintiff herein made an
express contract to pay his attorney an uncontingent fee of P2,115.25 for the
services to be rendered in reducing the note here in suit to judgment, it would not
have been enforced against him had he seen fit to oppose it, as such a fee is
obviously far greater than is necessary to remunerate the attorney for the work
involved and is therefore unreasonable. In order to enable the court to ignore an
express contract for an attorney's fees, it is not necessary to show, as in other
contracts, that it is contrary to morality or public policy (Art. 1255, Civil Code). It is
enough that it is unreasonable or unconscionable. 4
Since then this Court has invariably fixed counsel fees on a quantum meruit basis
whenever the fees stipulated appear excessive, unconscionable, or unreasonable,
because a lawyer is primarily a court officer charged with the duty of assisting the
court in administering impartial justice between the parties, and hence, the fees
should be subject to judicial control. Nor should it be ignored that sound public
policy demands that courts disregard stipulations for counsel fees, whenever they
appear to be a source of speculative profit at the expense of the debtor or
mortgagor. 5 And it is not material that the present action is between the debtor

and the creditor, and not between attorney and client. As court have power to fix
the fee as between attorney and client, it must necessarily have the right to say
whether a stipulation like this, inserted in a mortgage contract, is valid. 6
In determining the compensation of an attorney, the following circumstances should
be considered: the amount and character of the services rendered; the
responsibility imposed; the amount of money or the value of the property affected
by the controversy, or involved in the employment; the skill and experience called
for in the performance of the service; the professional standing of the attorney; the
results secured; and whether or not the fee is contingent or absolute, it being a
recognized rule that an attorney may properly charge a much larger fee when it is
to be contingent than when it is not. 7 From the stipulation in the mortgage contract
earlier quoted, it appears that the agreed fee is 10% of the total indebtedness,
irrespective of the manner the foreclosure of the mortgage is to be effected. The
agreement is perhaps fair enough in case the foreclosure proceedings is prosecuted
judicially but, surely, it is unreasonable when, as in this case, the mortgage was
foreclosed extra-judicially, and all that the attorney did was to file a petition for
foreclosure with the sheriff concerned. It is to be assumed though, that the said
branch attorney of the PNB made a study of the case before deciding to file the
petition for foreclosure; but even with this in mind, we believe the amount of
P5,821.35 is far too excessive a fee for such services. Considering the above
circumstances mentioned, it is our considered opinion that the amount of P1,000.00
would be more than sufficient to compensate the work aforementioned.
The next issue raised deals with the claim that the proceeds of the sale of the real
properties alone together with the amount it remitted to the PNB later was more
than sufficient to liquidate its total obligation to herein appellee bank. Again, we find
merit in this claim. From the foregoing discussion of the first two errors assigned,
and for purposes of determining the total obligation of herein appellant to the PNB
as of November 21, 1961 when the real estate mortgage was foreclosed, we have
the following illustration in support of this conclusion:1wph1.t
A. I.
Principal Loan
(a) Promissory note dated August 2, 1956
P27,500.00
(1) Interest at 6% per annum from Aug. 2, 1956 to Nov. 21, 1961 8,751.78
(b) Promissory note dated October 19, 1956 P15,500.00
(1) Interest at 6% per annum from Oct.19, 1956 to Nov. 21, 19614,734.08
II.
Sheriff's fees [for two (2) day's work] 10.00
III.
Attorney's fee
1,000.00
Total obligation as of Nov. 21, 1961
P57,495.86
B. I.
Proceeds of the foreclosure sale of the real estate mortgage on Nov. 21, 1961
P56,908.00
II.
Additional amount remitted to the PNB on Dec. 18, 1961 738.59
Total amount of Payment made to PNB as of Dec. 18, 1961
P57,646.59

Deduct: Total obligation to the PNB

P57,495.86
Excess Payment to the PNB
P 150.73
========
From the foregoing illustration or computation, it is clear that there was no further
necessity to foreclose the mortgage of herein appellant's chattels on December 21,
1961; and on this ground alone, we may declare the sale of appellant's chattels on
the said date, illegal and void. But we take into consideration the fact that the PNB
must have been led to believe that the stipulated 10% of the unpaid loan for
attorney's fees in the real estate mortgage was legally maintainable, and in
accordance with such belief, herein appellee bank insisted that the proceeds of the
sale of appellant's real property was deficient to liquidate the latter's total
indebtedness. Be that as it may, however, we still find the subsequent sale of herein
appellant's chattels illegal and objectionable on other grounds.
That appellant vigorously objected to the foreclosure of its chattel mortgage after
the foreclosure of its real estate mortgage on November 21, 1961, can not be
doubted, as shown not only by its letter to the PNB on November 19, 1961, but also
in its letter to the provincial sheriff of Camarines Norte on the same date. These
letters were followed by another letter to the appellee bank on December 14, 1961,
wherein herein appellant, in no uncertain terms, reiterated its objection to the
scheduled sale of its chattels on December 21, 1961 at Jose Panganiban, Camarines
Norte for the reasons therein stated that: (1) it had settled in full its total obligation
to the PNB by the sale of the real estate and its subsequent remittance of the
amount of P738.59; and (2) that the contemplated sale at Jose Panganiban would
violate their agreement embodied under paragraph (i) in the Chattel Mortgage
which provides as follows:
(i) In case of both judicial and extra-judicial foreclosure under Act 1508, as
amended, the parties hereto agree that the corresponding complaint for foreclosure
or the petition for sale should be filed with the courts or the sheriff of the City of
Manila, as the case may be; and that the Mortgagor shall pay attorney's fees hereby
fixed at ten per cent (10%) of the total indebtedness then unpaid but in no case
shall it be less than P100.00, exclusive of all costs and fees allowed by law and of
other expenses incurred in connection with the said foreclosure. [Emphasis
supplied]
Notwithstanding the abovequoted agreement in the chattel mortgage contract, and
in utter disregard of the objection of herein appellant to the sale of its chattels at
Jose Panganiban, Camarines Norte and not in the City of Manila as agreed upon, the
PNB proceeded with the foreclosure sale of said chattels. The trial court, however,
justified said action of the PNB in the decision appealed from in the following
rationale:
While it is true that it was stipulated in the chattel mortgage contract that a petition
for the extra-judicial foreclosure thereof should be filed with the Sheriff of the City of
Manila, nevertheless, the effect thereof was merely to provide another place where
the mortgage chattel could be sold in addition to those specified in the Chattel

Mortgage Law. Indeed, a stipulation in a contract cannot abrogate much less

impliedly repeal a specific provision of the statute. Considering that Section 14 of
Act No. 1508 vests in the mortgagee the choice where the foreclosure sale should
be held, hence, in the case under consideration, the PNB had three places from
which to select, namely: (1) the place of residence of the mortgagor; (2) the place of
the mortgaged chattels were situated; and (3) the place stipulated in the contract.
The PNB selected the second and, accordingly, the foreclosure sale held in Jose
Panganiban, Camarines Norte, was legal and valid.
To the foregoing conclusion, We disagree. While the law grants power and authority
to the mortgagee to sell the mortgaged property at a public place in the
municipality where the mortgagor resides or where the property is situated, 8 this
Court has held that the sale of a mortgaged chattel may be made in a place other
than that where it is found, provided that the owner thereof consents thereto; or
that there is an agreement to this effect between the mortgagor and the
mortgagee. 9 But when, as in this case, the parties agreed to have the sale of the
mortgaged chattels in the City of Manila, which, any way, is the residence of the
mortgagor, it cannot be rightly said that mortgagee still retained the power and
authority to select from among the places provided for in the law and the place
designated in their agreement over the objection of the mortgagor. In providing that
the mortgaged chattel may be sold at the place of residence of the mortgagor or
the place where it is situated, at the option of the mortgagee, the law clearly
contemplated benefits not only to the mortgagor but to the mortgagee as well.
Their right arising thereunder, however, are personal to them; they do not affect
either public policy or the rights of third persons. They may validly be waived. So,
when herein mortgagor and mortgagee agreed in the mortgage contract that in
cases of both judicial and extra-judicial foreclosure under Act 1508, as amended,
the corresponding complaint for foreclosure or the petition for sale should be filed
with the courts or the Sheriff of Manila, as the case may be, they waived their
corresponding rights under the law. The correlative obligation arising from that
agreement have the force of law between them and should be complied with in
good faith. 10
By said agreement the parties waived the legal venue, and such waiver is valid and
legally effective, because it, was merely a personal privilege they waived, which is
not contrary, to public policy or to the prejudice of third persons. It is a general
principle that a person may renounce any right which the law gives unless such
renunciation is expressly prohibited or the right conferred is of such nature that its
renunciation would be against public policy. 11
On the other hand, if a place of sale is specified in the mortgage and statutory
requirements in regard thereto are complied with, a sale is properly conducted in
that place. Indeed, in the absence of a statute to the contrary, a sale conducted at a
place other than that stipulated for in the mortgage is invalid, unless the mortgagor
consents to such sale. 12
Moreover, Section 14 of Act 1508, as amended, provides that the officer making the
sale should make a return of his doings which shall particularly describe the articles
sold and the amount received from each article. From this, it is clear that the law
requires that sale be made article by article, otherwise, it would be impossible for

him to state the amount received for each item. This requirement was totally
disregarded by the Deputy Sheriff of Camarines Norte when he sold the chattels in
question in bulk, notwithstanding the fact that the said chattels consisted of no less
than twenty different items as shown in the bill of sale. 13 This makes the sale of
the chattels manifestly objectionable. And in the absence of any evidence to show
that the mortgagor had agreed or consented to such sale in gross, the same should
be set aside.
It is said that the mortgagee is guilty of conversion when he sells under the
mortgage but not in accordance with its terms, or where the proceedings as to the
sale of foreclosure do not comply with the statute. 14 This rule applies squarely to
the facts of this case where, as earlier shown, herein appellee bank insisted, and the
appellee deputy sheriff of Camarines Norte proceeded with the sale of the
mortgaged chattels at Jose Panganiban, Camarines Norte, in utter disregard of the
valid objection of the mortgagor thereto for the reason that it is not the place of sale
agreed upon in the mortgage contract; and the said deputy sheriff sold all the
chattels (among which were a skagit with caterpillar engine, three GMC 6 x 6 trucks,
a Herring Hall Safe, and Sawmill equipment consisting of a 150 HP Murphy Engine,
plainer, large circular saws etc.) as a single lot in violation of the requirement of the
law to sell the same article by article. The PNB has resold the chattels to another
buyer with whom it appears to have actively cooperated in subsequently taking
possession of and removing the chattels from appellant compound by force, as
shown by the circumstance that they had to take along PC soldiers and municipal
policemen of Jose Panganiban who placed the chief security officer of the premises
in jail to deprive herein appellant of its possession thereof. To exonerate itself of any
liability for the breach of peace thus committed, the PNB would want us to believe
that it was the subsequent buyer alone, who is not a party to this case, that was
responsible for the forcible taking of the property; but assuming this to be so, still
the PNB cannot escape liability for the conversion of the mortgaged chattels by
parting with its interest in the property. Neither would its claim that it afterwards
gave a chance to herein appellant to repurchase or redeem the chattels, improve its
position, for the mortgagor is not under obligation to take affirmative steps to
repossess the chattels that were converted by the mortgagee. 15 As a consequence
of the said wrongful acts of the PNB and the Deputy Sheriff of Camarines Norte,
therefore, We have to declare that herein appellant is entitled to collect from them,
jointly and severally, the full value of the chattels in question at the time they were
illegally sold by them. To this effect was the holding of this Court in a similar
situation. 16
The effect of this irregularity was, in our opinion to make the plaintiff liable to the
defendant for the full value of the truck at the time the plaintiff thus carried it off to
be sold; and of course, the burden is on the defendant to prove the damage to
which he was thus subjected. . . .
This brings us to the problem of determining the value of the mortgaged chattels at
the time of their sale in 1961. The trial court did not make any finding on the value
of the chattels in the decision appealed from and denied altogether the right of the
appellant to recover the same. We find enough evidence of record, however, which
may be used as a guide to ascertain their value. The record shows that at the time
herein appellant applied for its loan with the PNB in 1956, for which the chattels in

question were mortgaged as part of the security therefore, herein appellant

submitted a list of the chattels together with its application for the loan with a
stated value of P107,115.85. An official of the PNB made an inspection of the
chattels in the same year giving it an appraised value of P42,850.00 and a market
value of P85,700.00. 17 The same chattels with some additional equipment
acquired by herein appellant with part of the proceeds of the loan were reappraised
in a re-inspection conducted by the same official in 1958, in the report of which he
gave all the chattels an appraised value of P26,850.00 and a market value of
P48,200.00. 18 Another re-inspection report in 1959 gave the appraised value as
P19,400.00 and the market value at P25,600.00. 19 The said official of the PNB who
made the foregoing reports of inspection and re-inspections testified in court that in
giving the values appearing in the reports, he used a conservative method of
appraisal which, of course, is to be expected of an official of the appellee bank. And
it appears that the values were considerably reduced in all the re-inspection reports
for the reason that when he went to herein appellant's premises at the time, he
found the chattels no longer in use with some of the heavier equipments dismantled
with parts thereof kept in the bodega; and finding it difficult to ascertain the value
of the dismantled chattels in such condition, he did not give them anymore any
value in his reports. Noteworthy is the fact, however, that in the last re-inspection
report he made of the chattels in 1961, just a few months before the foreclosure
sale, the same inspector of the PNB reported that the heavy equipment of herein
appellant were "lying idle and rusty" but were "with a shed free from rains" 20
showing that although they were no longer in use at the time, they were kept in a
proper place and not exposed to the elements. The President of the appellant
company, on the other hand, testified that its caterpillar (tractor) alone is worth
P35,000.00 in the market, and that the value of its two trucks acquired by it with
part of the proceeds of the loan and included as additional items in the mortgaged
chattels were worth no less than P14,000.00. He likewise appraised the worth of its
Murphy engine at P16,000.00 which, according to him, when taken together with
the heavy equipments he mentioned, the sawmill itself and all other equipment
forming part of the chattels under consideration, and bearing in mind the current
cost of equipments these days which he alleged to have increased by about five (5)
times, could safely be estimated at P120,000.00. This testimony, except for the
appraised and market values appearing in the inspection and re-inspection reports
of the PNB official earlier mentioned, stand uncontroverted in the record; but We are
not inclined to accept such testimony at its par value, knowing that the equipments
of herein appellant had been idle and unused since it stopped operating its sawmill
in 1958 up to the time of the sale of the chattels in 1961. We have no doubt that the
value of chattels was depreciated after all those years of inoperation, although from
the evidence aforementioned, We may also safely conclude that the amount of
P4,200.00 for which the chattels were sold in the foreclosure sale in question was
grossly unfair to the mortgagor. Considering, however, the facts that the appraised
value of P42,850.00 and the market value of P85,700.00 originally given by the PNB
official were admittedly conservative; that two 6 x 6 trucks subsequently bought by
the appellant company had thereafter been added to the chattels; and that the real
value thereof, although depreciated after several years of inoperation, was in a way
maintained because the depreciation is off-set by the marked increase in the cost of
heavy equipment in the market, it is our opinion that the market value of the
chattels at the time of the sale should be fixed at the original appraised value of
P42,850.00.

Herein appellant's claim for moral damages, however, seems to have no legal or
factual basis. Obviously, an artificial person like herein appellant corporation cannot
experience physical sufferings, mental anguish, fright, serious anxiety, wounded
feelings, moral shock or social humiliation which are basis of moral damages. 21 A
corporation may have a good reputation which, if besmirched, may also be a ground
for the award of moral damages. The same cannot be considered under the facts of
this case, however, not only because it is admitted that herein appellant had
already ceased in its business operation at the time of the foreclosure sale of the
chattels, but also for the reason that whatever adverse effects of the foreclosure
sale of the chattels could have upon its reputation or business standing would
undoubtedly be the same whether the sale was conducted at Jose Panganiban,
Camarines Norte, or in Manila which is the place agreed upon by the parties in the
mortgage contract.
But for the wrongful acts of herein appellee bank and the deputy sheriff of
Camarines Norte in proceeding with the sale in utter disregard of the agreement to
have the chattels sold in Manila as provided for in the mortgage contract, to which
their attentions were timely called by herein appellant, and in disposing of the
chattels in gross for the miserable amount of P4,200.00, herein appellant should be
awarded exemplary damages in the sum of P10,000.00. The circumstances of the
case also warrant the award of P3,000.00 as attorney's fees for herein appellant.
WHEREFORE AND CONSIDERING ALL THE FOREGOING, the decision appealed from
should be, as hereby, it is set aside. The Philippine National Bank and the Deputy
Sheriff of the province of Camarines Norte are ordered to pay, jointly and severally,
to Mambulao Lumber Company the total amount of P56,000.73, broken as follows:
P150.73 overpaid by the latter to the PNB, P42,850.00 the value of the chattels at
the time of the sale with interest at the rate of 6% per annum from December 21,
1961, until fully paid, P10,000.00 in exemplary damages, and P3,000.00 as
attorney's fees. Costs against both appellees.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro and
Fernando, JJ., concur.
Bengzon, J.P. J., took no part.
ABS-CBN v. CA
G.R. No. 128690

January 21, 1999

ABS-CBN BROADCASTING CORPORATION, petitioner,

vs.
HONORABLE COURT OF APPEALS, REPUBLIC BROADCASTING CORP, VIVA
PRODUCTION, INC., and VICENTE DEL ROSARIO, respondents.

DAVIDE, JR., CJ.:

In this petition for review on certiorari, petitioner ABS-CBN Broadcasting Corp.

(hereafter ABS-CBN) seeks to reverse and set aside the decision 1 of 31 October
1996 and the resolution 2 of 10 March 1997 of the Court of Appeals in CA-G.R. CV
No. 44125. The former affirmed with modification the decision 3 of 28 April 1993 of
the Regional Trial Court (RTC) of Quezon City, Branch 80, in Civil Case No. Q-9212309. The latter denied the motion to reconsider the decision of 31 October 1996.
The antecedents, as found by the RTC and adopted by the Court of Appeals, are as
follows:
In 1990, ABS-CBN and Viva executed a Film Exhibition Agreement (Exh. "A")
whereby Viva gave ABS-CBN an exclusive right to exhibit some Viva films. Sometime
in December 1991, in accordance with paragraph 2.4 [sic] of said agreement stating
that .
1.4
ABS-CBN shall have the right of first refusal to the next twenty-four (24) Viva
films for TV telecast under such terms as may be agreed upon by the parties hereto,
provided, however, that such right shall be exercised by ABS-CBN from the actual
offer in writing.
Viva, through defendant Del Rosario, offered ABS-CBN, through its vice-president
Charo Santos-Concio, a list of three(3) film packages (36 title) from which ABS-CBN
may exercise its right of first refusal under the afore-said agreement (Exhs. "1" par,
2, "2," "2-A'' and "2-B"-Viva). ABS-CBN, however through Mrs. Concio, "can tick off
only ten (10) titles" (from the list) "we can purchase" (Exh. "3" - Viva) and therefore
did not accept said list (TSN, June 8, 1992, pp. 9-10). The titles ticked off by Mrs.
Concio are not the subject of the case at bar except the film ''Maging Sino Ka Man."
For further enlightenment, this rejection letter dated January 06, 1992 (Exh "3" Viva) is hereby quoted:
6 January 1992
Dear Vic,
This is not a very formal business letter I am writing to you as I would like to express
my difficulty in recommending the purchase of the three film packages you are
offering ABS-CBN.
From among the three packages I can only tick off 10 titles we can purchase. Please
see attached. I hope you will understand my position. Most of the action pictures in
the list do not have big action stars in the cast. They are not for primetime. In line
with this I wish to mention that I have not scheduled for telecast several action
pictures in out very first contract because of the cheap production value of these
movies as well as the lack of big action stars. As a film producer, I am sure you
understand what I am trying to say as Viva produces only big action pictures.
In fact, I would like to request two (2) additional runs for these movies as I can only
schedule them in our non-primetime slots. We have to cover the amount that was

paid for these movies because as you very well know that non-primetime
advertising rates are very low. These are the unaired titles in the first contract.
1.

Kontra Persa [sic].

2.

Raider Platoon.

3.

Underground guerillas

4.

Tiger Command

5.

Boy de Sabog

6.

Lady Commando

7.

Batang Matadero

8.

Rebelyon

I hope you will consider this request of mine.

The other dramatic films have been offered to us before and have been rejected
because of the ruling of MTRCB to have them aired at 9:00 p.m. due to their very
adult themes.
As for the 10 titles I have choosen [sic] from the 3 packages please consider
including all the other Viva movies produced last year. I have quite an attractive
offer to make.
Thanking you and with my warmest regards.
(Signed)
Charo Santos-Concio
On February 27, 1992, defendant Del Rosario approached ABS-CBN's Ms. Concio,
with a list consisting of 52 original movie titles (i.e. not yet aired on television)
including the 14 titles subject of the present case, as well as 104 re-runs (previously
aired on television) from which ABS-CBN may choose another 52 titles, as a total of
156 titles, proposing to sell to ABS-CBN airing rights over this package of 52
originals and 52 re-runs for P60,000,000.00 of which P30,000,000.00 will be in cash
and P30,000,000.00 worth of television spots (Exh. "4" to "4-C" Viva; "9" -Viva).
On April 2, 1992, defendant Del Rosario and ABS-CBN general manager, Eugenio
Lopez III, met at the Tamarind Grill Restaurant in Quezon City to discuss the package
proposal of Viva. What transpired in that lunch meeting is the subject of conflicting
versions. Mr. Lopez testified that he and Mr. Del Rosario allegedly agreed that ABSCRN was granted exclusive film rights to fourteen (14) films for a total consideration
of P36 million; that he allegedly put this agreement as to the price and number of
films in a "napkin'' and signed it and gave it to Mr. Del Rosario (Exh. D; TSN, pp. 24-

26, 77-78, June 8, 1992). On the other hand, Del Rosario denied having made any
agreement with Lopez regarding the 14 Viva films; denied the existence of a napkin
in which Lopez wrote something; and insisted that what he and Lopez discussed at
the lunch meeting was Viva's film package offer of 104 films (52 originals and 52 reruns) for a total price of P60 million. Mr. Lopez promising [sic]to make a counter
proposal which came in the form of a proposal contract Annex "C" of the complaint
(Exh. "1"- Viva; Exh. "C" - ABS-CBN).
On April 06, 1992, Del Rosario and Mr. Graciano Gozon of RBS Senior vice-president
for Finance discussed the terms and conditions of Viva's offer to sell the 104 films,
after the rejection of the same package by ABS-CBN.
On April 07, 1992, defendant Del Rosario received through his secretary, a
handwritten note from Ms. Concio, (Exh. "5" - Viva), which reads: "Here's the draft of
the contract. I hope you find everything in order," to which was attached a draft
exhibition agreement (Exh. "C''- ABS-CBN; Exh. "9" - Viva, p. 3) a counter-proposal
covering 53 films, 52 of which came from the list sent by defendant Del Rosario and
one film was added by Ms. Concio, for a consideration of P35 million. Exhibit "C"
provides that ABS-CBN is granted films right to 53 films and contains a right of first
refusal to "1992 Viva Films." The said counter proposal was however rejected by
Viva's Board of Directors [in the] evening of the same day, April 7, 1992, as Viva
would not sell anything less than the package of 104 films for P60 million pesos
(Exh. "9" - Viva), and such rejection was relayed to Ms. Concio.
On April 29, 1992, after the rejection of ABS-CBN and following several negotiations
and meetings defendant Del Rosario and Viva's President Teresita Cruz, in
consideration of P60 million, signed a letter of agreement dated April 24, 1992.
granting RBS the exclusive right to air 104 Viva-produced and/or acquired films
(Exh. "7-A" - RBS; Exh. "4" - RBS) including the fourteen (14) films subject of the
present case. 4
On 27 May 1992, ABS-CBN filed before the RTC a complaint for specific performance
with a prayer for a writ of preliminary injunction and/or temporary restraining order
against private respondents Republic Broadcasting Corporation 5 (hereafter RBS ),
Viva Production (hereafter VIVA), and Vicente Del Rosario. The complaint was
docketed as Civil Case No. Q-92-12309.
On 27 May 1992, RTC issued a temporary restraining order 6 enjoining private
respondents from proceeding with the airing, broadcasting, and televising of the
fourteen VIVA films subject of the controversy, starting with the film Maging Sino Ka
Man, which was scheduled to be shown on private respondents RBS' channel 7 at
seven o'clock in the evening of said date.
On 17 June 1992, after appropriate proceedings, the RTC issued an
order 7 directing the issuance of a writ of preliminary injunction upon ABS-CBN's
posting of P35 million bond. ABS-CBN moved for the reduction of the bond, 8 while
private respondents moved for reconsideration of the order and offered to put up a
counterbound. 9

In the meantime, private respondents filed separate answers with counterclaim. 10

RBS also set up a cross-claim against VIVA..
On 3 August 1992, the RTC issued an order 11 dissolving the writ of preliminary
injunction upon the posting by RBS of a P30 million counterbond to answer for
whatever damages ABS-CBN might suffer by virtue of such dissolution. However, it
reduced petitioner's injunction bond to P15 million as a condition precedent for the
reinstatement of the writ of preliminary injunction should private respondents be
unable to post a counterbond.
At the pre-trial 12 on 6 August 1992, the parties, upon suggestion of the court,
agreed to explore the possibility of an amicable settlement. In the meantime, RBS
prayed for and was granted reasonable time within which to put up a P30 million
counterbond in the event that no settlement would be reached.
As the parties failed to enter into an amicable settlement RBS posted on 1 October
1992 a counterbond, which the RTC approved in its Order of 15 October 1992. 13
On 19 October 1992, ABS-CBN filed a motion for reconsideration 14 of the 3 August
and 15 October 1992 Orders, which RBS opposed. 15
On 29 October 1992, the RTC conducted a pre-trial. 16
Pending resolution of its motion for reconsideration, ABS-CBN filed with the Court of
Appeals a petition 17 challenging the RTC's Orders of 3 August and 15 October 1992
and praying for the issuance of a writ of preliminary injunction to enjoin the RTC
from enforcing said orders. The case was docketed as CA-G.R. SP No. 29300.
On 3 November 1992, the Court of Appeals issued a temporary restraining order 18
to enjoin the airing, broadcasting, and televising of any or all of the films involved in
the controversy.
On 18 December 1992, the Court of Appeals promulgated a decision 19 dismissing
the petition in CA -G.R. No. 29300 for being premature. ABS-CBN challenged the
dismissal in a petition for review filed with this Court on 19 January 1993, which was
docketed as G.R. No. 108363.
In the meantime the RTC received the evidence for the parties in Civil Case No. Q192-1209. Thereafter, on 28 April 1993, it rendered a decision 20 in favor of RBS
and VIVA and against ABS-CBN disposing as follows:
WHEREFORE, under cool reflection and prescinding from the foregoing, judgments is
rendered in favor of defendants and against the plaintiff.
(1)

The complaint is hereby dismissed;

(2)

Plaintiff ABS-CBN is ordered to pay defendant RBS the following:

a)
P107,727.00, the amount of premium paid by RBS to the surety which issued
defendant RBS's bond to lift the injunction;

b)
P191,843.00 for the amount of print advertisement for "Maging Sino Ka Man"
in various newspapers;
c)

Attorney's fees in the amount of P1 million;

d)

P5 million as and by way of moral damages;

e)

P5 million as and by way of exemplary damages;

(3)
For defendant VIVA, plaintiff ABS-CBN is ordered to pay P212,000.00 by way
of reasonable attorney's fees.
(4)

The cross-claim of defendant RBS against defendant VIVA is dismissed.

(5)

Plaintiff to pay the costs.

According to the RTC, there was no meeting of minds on the price and terms of the
offer. The alleged agreement between Lopez III and Del Rosario was subject to the
approval of the VIVA Board of Directors, and said agreement was disapproved
during the meeting of the Board on 7 April 1992. Hence, there was no basis for ABSCBN's demand that VIVA signed the 1992 Film Exhibition Agreement. Furthermore,
the right of first refusal under the 1990 Film Exhibition Agreement had previously
been exercised per Ms. Concio's letter to Del Rosario ticking off ten titles acceptable
to them, which would have made the 1992 agreement an entirely new contract.
On 21 June 1993, this Court denied 21 ABS-CBN's petition for review in G.R. No.
108363, as no reversible error was committed by the Court of Appeals in its
challenged decision and the case had "become moot and academic in view of the
dismissal of the main action by the court a quo in its decision" of 28 April 1993.
Aggrieved by the RTC's decision, ABS-CBN appealed to the Court of Appeals
claiming that there was a perfected contract between ABS-CBN and VIVA granting
ABS-CBN the exclusive right to exhibit the subject films. Private respondents VIVA
and Del Rosario also appealed seeking moral and exemplary damages and
additional attorney's fees.
In its decision of 31 October 1996, the Court of Appeals agreed with the RTC that
the contract between ABS-CBN and VIVA had not been perfected, absent the
approval by the VIVA Board of Directors of whatever Del Rosario, it's agent, might
have agreed with Lopez III. The appellate court did not even believe ABS-CBN's
evidence that Lopez III actually wrote down such an agreement on a "napkin," as
the same was never produced in court. It likewise rejected ABS-CBN's insistence on
its right of first refusal and ratiocinated as follows:
As regards the matter of right of first refusal, it may be true that a Film Exhibition
Agreement was entered into between Appellant ABS-CBN and appellant VIVA under
Exhibit "A" in 1990, and that parag. 1.4 thereof provides:

1.4
ABS-CBN shall have the right of first refusal to the next twenty-four (24) VIVA
films for TV telecast under such terms as may be agreed upon by the parties hereto,
provided, however, that such right shall be exercised by ABS-CBN within a period of
fifteen (15) days from the actual offer in writing (Records, p. 14).
[H]owever, it is very clear that said right of first refusal in favor of ABS-CBN shall still
be subject to such terms as may be agreed upon by the parties thereto, and that
the said right shall be exercised by ABS-CBN within fifteen (15) days from the actual
offer in writing.
Said parag. 1.4 of the agreement Exhibit "A" on the right of first refusal did not fix
the price of the film right to the twenty-four (24) films, nor did it specify the terms
thereof. The same are still left to be agreed upon by the parties.
In the instant case, ABS-CBN's letter of rejection Exhibit 3 (Records, p. 89) stated
that it can only tick off ten (10) films, and the draft contract Exhibit "C" accepted
only fourteen (14) films, while parag. 1.4 of Exhibit "A'' speaks of the next twentyfour (24) films.
The offer of V1VA was sometime in December 1991 (Exhibits 2, 2-A. 2-B; Records,
pp. 86-88; Decision, p. 11, Records, p. 1150), when the first list of VIVA films was
sent by Mr. Del Rosario to ABS-CBN. The Vice President of ABS-CBN, Ms. Charo
Santos-Concio, sent a letter dated January 6, 1992 (Exhibit 3, Records, p. 89) where
ABS-CBN exercised its right of refusal by rejecting the offer of VIVA.. As aptly
observed by the trial court, with the said letter of Mrs. Concio of January 6, 1992,
ABS-CBN had lost its right of first refusal. And even if We reckon the fifteen (15) day
period from February 27, 1992 (Exhibit 4 to 4-C) when another list was sent to ABSCBN after the letter of Mrs. Concio, still the fifteen (15) day period within which ABSCBN shall exercise its right of first refusal has already expired. 22
Accordingly, respondent court sustained the award of actual damages consisting in
the cost of print advertisements and the premium payments for the counterbond,
there being adequate proof of the pecuniary loss which RBS had suffered as a result
of the filing of the complaint by ABS-CBN. As to the award of moral damages, the
Court of Appeals found reasonable basis therefor, holding that RBS's reputation was
debased by the filing of the complaint in Civil Case No. Q-92-12309 and by the nonshowing of the film "Maging Sino Ka Man." Respondent court also held that
exemplary damages were correctly imposed by way of example or correction for the
public good in view of the filing of the complaint despite petitioner's knowledge that
the contract with VIVA had not been perfected, It also upheld the award of
attorney's fees, reasoning that with ABS-CBN's act of instituting Civil Case No, Q-921209, RBS was "unnecessarily forced to litigate." The appellate court, however,
reduced the awards of moral damages to P2 million, exemplary damages to P2
million, and attorney's fees to P500, 000.00.
On the other hand, respondent Court of Appeals denied VIVA and Del Rosario's
appeal because it was "RBS and not VIVA which was actually prejudiced when the
complaint was filed by ABS-CBN."

Its motion for reconsideration having been denied, ABS-CBN filed the petition in this
case, contending that the Court of Appeals gravely erred in
I
. . . RULING THAT THERE WAS NO PERFECTED CONTRACT BETWEEN PETITIONER
AND PRIVATE RESPONDENT VIVA NOTWITHSTANDING PREPONDERANCE OF
EVIDENCE ADDUCED BY PETITIONER TO THE CONTRARY.
II
. . . IN AWARDING ACTUAL AND COMPENSATORY DAMAGES IN FAVOR OF PRIVATE
RESPONDENT RBS.
III
. . . IN AWARDING MORAL AND EXEMPLARY DAMAGES IN FAVOR OF PRIVATE
RESPONDENT RBS.
IV
. . . IN AWARDING ATTORNEY'S FEES IN FAVOR OF RBS.
ABS-CBN claims that it had yet to fully exercise its right of first refusal over twentyfour titles under the 1990 Film Exhibition Agreement, as it had chosen only ten titles
from the first list. It insists that we give credence to Lopez's testimony that he and
Del Rosario met at the Tamarind Grill Restaurant, discussed the terms and
conditions of the second list (the 1992 Film Exhibition Agreement) and upon
agreement thereon, wrote the same on a paper napkin. It also asserts that the
contract has already been effective, as the elements thereof, namely, consent,
object, and consideration were established. It then concludes that the Court of
Appeals' pronouncements were not supported by law and jurisprudence, as per our
decision of 1 December 1995 in Limketkai Sons Milling, Inc. v. Court of Appeals, 23
which cited Toyota Shaw, Inc. v. Court of Appeals, 24 Ang Yu Asuncion v. Court of
Appeals, 25 and Villonco Realty Company v. Bormaheco. Inc. 26
Anent the actual damages awarded to RBS, ABS-CBN disavows liability therefor. RBS
spent for the premium on the counterbond of its own volition in order to negate the
injunction issued by the trial court after the parties had ventilated their respective
positions during the hearings for the purpose. The filing of the counterbond was an
option available to RBS, but it can hardly be argued that ABS-CBN compelled RBS to
incur such expense. Besides, RBS had another available option, i.e., move for the
dissolution or the injunction; or if it was determined to put up a counterbond, it
could have presented a cash bond. Furthermore under Article 2203 of the Civil
Code, the party suffering loss or injury is also required to exercise the diligence of a
good father of a family to minimize the damages resulting from the act or omission.
As regards the cost of print advertisements, RBS had not convincingly established
that this was a loss attributable to the non showing "Maging Sino Ka Man"; on the
contrary, it was brought out during trial that with or without the case or the
injunction, RBS would have spent such an amount to generate interest in the film.

ABS-CBN further contends that there was no clear basis for the awards of moral and
exemplary damages. The controversy involving ABS-CBN and RBS did not in any
way originate from business transaction between them. The claims for such
damages did not arise from any contractual dealings or from specific acts
committed by ABS-CBN against RBS that may be characterized as wanton,
fraudulent, or reckless; they arose by virtue only of the filing of the complaint, An
award of moral and exemplary damages is not warranted where the record is bereft
of any proof that a party acted maliciously or in bad faith in filing an action. 27 In
any case, free resort to courts for redress of wrongs is a matter of public policy. The
law recognizes the right of every one to sue for that which he honestly believes to
be his right without fear of standing trial for damages where by lack of sufficient
evidence, legal technicalities, or a different interpretation of the laws on the matter,
the case would lose ground. 28 One who makes use of his own legal right does no
injury. 29 If damage results front the filing of the complaint, it is damnum absque
injuria. 30 Besides, moral damages are generally not awarded in favor of a juridical
person, unless it enjoys a good reputation that was debased by the offending party
resulting in social humiliation. 31
As regards the award of attorney's fees, ABS-CBN maintains that the same had no
factual, legal, or equitable justification. In sustaining the trial court's award, the
Court of Appeals acted in clear disregard of the doctrines laid down in Buan v.
Camaganacan 32 that the text of the decision should state the reason why
attorney's fees are being awarded; otherwise, the award should be disallowed.
Besides, no bad faith has been imputed on, much less proved as having been
committed by, ABS-CBN. It has been held that "where no sufficient showing of bad
faith would be reflected in a party' s persistence in a case other than an erroneous
conviction of the righteousness of his cause, attorney's fees shall not be recovered
as cost." 33
On the other hand, RBS asserts that there was no perfected contract between ABSCBN and VIVA absent any meeting of minds between them regarding the object and
consideration of the alleged contract. It affirms that the ABS-CBN's claim of a right
of first refusal was correctly rejected by the trial court. RBS insist the premium it
had paid for the counterbond constituted a pecuniary loss upon which it may
recover. It was obliged to put up the counterbound due to the injunction procured by
ABS-CBN. Since the trial court found that ABS-CBN had no cause of action or valid
claim against RBS and, therefore not entitled to the writ of injunction, RBS could
recover from ABS-CBN the premium paid on the counterbond. Contrary to the claim
of ABS-CBN, the cash bond would prove to be more expensive, as the loss would be
equivalent to the cost of money RBS would forego in case the P30 million came from
its funds or was borrowed from banks.
RBS likewise asserts that it was entitled to the cost of advertisements for the
cancelled showing of the film "Maging Sino Ka Man" because the print
advertisements were put out to announce the showing on a particular day and hour
on Channel 7, i.e., in its entirety at one time, not a series to be shown on a periodic
basis. Hence, the print advertisement were good and relevant for the particular date
showing, and since the film could not be shown on that particular date and hour
because of the injunction, the expenses for the advertisements had gone to waste.

As regards moral and exemplary damages, RBS asserts that ABS-CBN filed the case
and secured injunctions purely for the purpose of harassing and prejudicing RBS.
Pursuant then to Article 19 and 21 of the Civil Code, ABS-CBN must be held liable for
such damages. Citing Tolentino, 34 damages may be awarded in cases of abuse of
rights even if the act done is not illicit and there is abuse of rights were plaintiff
institutes and action purely for the purpose of harassing or prejudicing the
defendant.
In support of its stand that a juridical entity can recover moral and exemplary
damages, private respondents RBS cited People v. Manero, 35 where it was stated
that such entity may recover moral and exemplary damages if it has a good
reputation that is debased resulting in social humiliation. it then ratiocinates; thus:
There can be no doubt that RBS' reputation has been debased by ABS-CBN's acts in
this case. When RBS was not able to fulfill its commitment to the viewing public to
show the film "Maging Sino Ka Man" on the scheduled dates and times (and on two
occasions that RBS advertised), it suffered serious embarrassment and social
humiliation. When the showing was canceled, late viewers called up RBS' offices
and subjected RBS to verbal abuse ("Announce kayo nang announce, hindi ninyo
naman ilalabas," "nanloloko yata kayo") (Exh. 3-RBS, par. 3). This alone was not
something RBS brought upon itself. it was exactly what ABS-CBN had planned to
happen.
The amount of moral and exemplary damages cannot be said to be excessive. Two
reasons justify the amount of the award.
The first is that the humiliation suffered by RBS is national extent. RBS operations as
a broadcasting company is [sic] nationwide. Its clientele, like that of ABS-CBN,
consists of those who own and watch television. It is not an exaggeration to state,
and it is a matter of judicial notice that almost every other person in the country
watches television. The humiliation suffered by RBS is multiplied by the number of
televiewers who had anticipated the showing of the film "Maging Sino Ka Man" on
May 28 and November 3, 1992 but did not see it owing to the cancellation. Added to
this are the advertisers who had placed commercial spots for the telecast and to
whom RBS had a commitment in consideration of the placement to show the film in
the dates and times specified.
The second is that it is a competitor that caused RBS to suffer the humiliation. The
humiliation and injury are far greater in degree when caused by an entity whose
ultimate business objective is to lure customers (viewers in this case) away from the
competition. 36
For their part, VIVA and Vicente del Rosario contend that the findings of fact of the
trial court and the Court of Appeals do not support ABS-CBN's claim that there was a
perfected contract. Such factual findings can no longer be disturbed in this petition
for review under Rule 45, as only questions of law can be raised, not questions of
fact. On the issue of damages and attorneys fees, they adopted the arguments of
RBS.

The key issues for our consideration are (1) whether there was a perfected contract
between VIVA and ABS-CBN, and (2) whether RBS is entitled to damages and
attorney's fees. It may be noted that the award of attorney's fees of P212,000 in
favor of VIVA is not assigned as another error.
I.
The first issue should be resolved against ABS-CBN. A contract is a meeting of
minds between two persons whereby one binds himself to give something or to
render some service to another 37 for a consideration. there is no contract unless
the following requisites concur: (1) consent of the contracting parties; (2) object
certain which is the subject of the contract; and (3) cause of the obligation, which is
established. 38 A contract undergoes three stages:
(a)
preparation, conception, or generation, which is the period of negotiation and
bargaining, ending at the moment of agreement of the parties;
(b)
perfection or birth of the contract, which is the moment when the parties
come to agree on the terms of the contract; and
(c)
consummation or death, which is the fulfillment or performance of the terms
agreed upon in the contract. 39
Contracts that are consensual in nature are perfected upon mere meeting of the
minds, Once there is concurrence between the offer and the acceptance upon the
subject matter, consideration, and terms of payment a contract is produced. The
offer must be certain. To convert the offer into a contract, the acceptance must be
absolute and must not qualify the terms of the offer; it must be plain, unequivocal,
unconditional, and without variance of any sort from the proposal. A qualified
acceptance, or one that involves a new proposal, constitutes a counter-offer and is a
rejection of the original offer. Consequently, when something is desired which is not
exactly what is proposed in the offer, such acceptance is not sufficient to generate
consent because any modification or variation from the terms of the offer annuls the
offer. 40
When Mr. Del Rosario of VIVA met with Mr. Lopez of ABS-CBN at the Tamarind Grill
on 2 April 1992 to discuss the package of films, said package of 104 VIVA films was
VIVA's offer to ABS-CBN to enter into a new Film Exhibition Agreement. But ABSCBN, sent, through Ms. Concio, a counter-proposal in the form of a draft contract
proposing exhibition of 53 films for a consideration of P35 million. This counterproposal could be nothing less than the counter-offer of Mr. Lopez during his
conference with Del Rosario at Tamarind Grill Restaurant. Clearly, there was no
acceptance of VIVA's offer, for it was met by a counter-offer which substantially
varied the terms of the offer.
ABS-CBN's reliance in Limketkai Sons Milling, Inc. v. Court of
Appeals 41 and Villonco Realty Company v. Bormaheco, Inc., 42 is misplaced. In
these cases, it was held that an acceptance may contain a request for certain
changes in the terms of the offer and yet be a binding acceptance as long as "it is
clear that the meaning of the acceptance is positively and unequivocally to accept

the offer, whether such request is granted or not." This ruling was, however,
reversed in the resolution of 29 March 1996, 43 which ruled that the acceptance of
all offer must be unqualified and absolute, i.e., it "must be identical in all respects
with that of the offer so as to produce consent or meeting of the minds."
On the other hand, in Villonco, cited in Limketkai, the alleged changes in the revised
counter-offer were not material but merely clarificatory of what had previously been
agreed upon. It cited the statement in Stuart v. Franklin Life Insurance Co. 44 that "a
vendor's change in a phrase of the offer to purchase, which change does not
essentially change the terms of the offer, does not amount to a rejection of the offer
and the tender of a counter-offer." 45 However, when any of the elements of the
contract is modified upon acceptance, such alteration amounts to a counter-offer.
In the case at bar, ABS-CBN made no unqualified acceptance of VIVA's offer. Hence,
they underwent a period of bargaining. ABS-CBN then formalized its counterproposals or counter-offer in a draft contract, VIVA through its Board of Directors,
rejected such counter-offer, Even if it be conceded arguendo that Del Rosario had
accepted the counter-offer, the acceptance did not bind VIVA, as there was no proof
whatsoever that Del Rosario had the specific authority to do so.
Under Corporation Code, 46 unless otherwise provided by said Code, corporate
powers, such as the power; to enter into contracts; are exercised by the Board of
Directors. However, the Board may delegate such powers to either an executive
committee or officials or contracted managers. The delegation, except for the
executive committee, must be for specific purposes, 47 Delegation to officers
makes the latter agents of the corporation; accordingly, the general rules of agency
as to the bindings effects of their acts would
apply. 48 For such officers to be deemed fully clothed by the corporation to exercise
a power of the Board, the latter must specially authorize them to do so. That Del
Rosario did not have the authority to accept ABS-CBN's counter-offer was best
evidenced by his submission of the draft contract to VIVA's Board of Directors for
the latter's approval. In any event, there was between Del Rosario and Lopez III no
meeting of minds. The following findings of the trial court are instructive:
A number of considerations militate against ABS-CBN's claim that a contract was
perfected at that lunch meeting on April 02, 1992 at the Tamarind Grill.
FIRST, Mr. Lopez claimed that what was agreed upon at the Tamarind Grill referred
to the price and the number of films, which he wrote on a napkin. However, Exhibit
"C" contains numerous provisions which, were not discussed at the Tamarind Grill, if
Lopez testimony was to be believed nor could they have been physically written on
a napkin. There was even doubt as to whether it was a paper napkin or a cloth
napkin. In short what were written in Exhibit "C'' were not discussed, and therefore
could not have been agreed upon, by the parties. How then could this court compel
the parties to sign Exhibit "C" when the provisions thereof were not previously
agreed upon?
SECOND, Mr. Lopez claimed that what was agreed upon as the subject matter of the
contract was 14 films. The complaint in fact prays for delivery of 14 films. But
Exhibit "C" mentions 53 films as its subject matter. Which is which If Exhibits "C"

reflected the true intent of the parties, then ABS-CBN's claim for 14 films in its
complaint is false or if what it alleged in the complaint is true, then Exhibit "C" did
not reflect what was agreed upon by the parties. This underscores the fact that
there was no meeting of the minds as to the subject matter of the contracts, so as
to preclude perfection thereof. For settled is the rule that there can be no contract
where there is no object which is its subject matter (Art. 1318, NCC).
THIRD, Mr. Lopez [sic] answer to question 29 of his affidavit testimony (Exh. "D")
states:
We were able to reach an agreement. VIVA gave us the exclusive license to show
these fourteen (14) films, and we agreed to pay Viva the amount of P16,050,000.00
as well as grant Viva commercial slots worth P19,950,000.00. We had already
earmarked this P16, 050,000.00.
which gives a total consideration of P36 million (P19,950,000.00 plus
P16,050,000.00. equals P36,000,000.00).
On cross-examination Mr. Lopez testified:
Q.

What was written in this napkin?

A.
The total price, the breakdown the known Viva movies, the 7 blockbuster
movies and the other 7 Viva movies because the price was broken down
accordingly. The none [sic] Viva and the seven other Viva movies and the sharing
between the cash portion and the concerned spot portion in the total amount of P35
million pesos.
Now, which is which? P36 million or P35 million? This weakens ABS-CBN's claim.
FOURTH. Mrs. Concio, testifying for ABS-CBN stated that she transmitted Exhibit "C"
to Mr. Del Rosario with a handwritten note, describing said Exhibit "C" as a "draft."
(Exh. "5" - Viva; tsn pp. 23-24 June 08, 1992). The said draft has a well defined
meaning.
Since Exhibit "C" is only a draft, or a tentative, provisional or preparatory writing
prepared for discussion, the terms and conditions thereof could not have been
previously agreed upon by ABS-CBN and Viva Exhibit "C'' could not therefore legally
bind Viva, not having agreed thereto. In fact, Ms. Concio admitted that the terms
and conditions embodied in Exhibit "C" were prepared by ABS-CBN's lawyers and
there was no discussion on said terms and conditions. . . .
As the parties had not yet discussed the proposed terms and conditions in Exhibit
"C," and there was no evidence whatsoever that Viva agreed to the terms and
conditions thereof, said document cannot be a binding contract. The fact that Viva
refused to sign Exhibit "C" reveals only two [sic] well that it did not agree on its
terms and conditions, and this court has no authority to compel Viva to agree
thereto.

FIFTH. Mr. Lopez understand [sic] that what he and Mr. Del Rosario agreed upon at
the Tamarind Grill was only provisional, in the sense that it was subject to approval
by the Board of Directors of Viva. He testified:
Q.
Now, Mr. Witness, and after that Tamarind meeting ... the second meeting
wherein you claimed that you have the meeting of the minds between you and Mr.
Vic del Rosario, what happened?
A.
Vic Del Rosario was supposed to call us up and tell us specifically the result of
the discussion with the Board of Directors.
Q.
And you are referring to the so-called agreement which you wrote in [sic] a
piece of paper?
A.

Yes, sir.

Q.

So, he was going to forward that to the board of Directors for approval?

A.

Yes, sir. (Tsn, pp. 42-43, June 8, 1992)

Q.

Did Mr. Del Rosario tell you that he will submit it to his Board for approval?

A.

Yes, sir. (Tsn, p. 69, June 8, 1992).

The above testimony of Mr. Lopez shows beyond doubt that he knew Mr. Del Rosario
had no authority to bind Viva to a contract with ABS-CBN until and unless its Board
of Directors approved it. The complaint, in fact, alleges that Mr. Del Rosario "is the
Executive Producer of defendant Viva" which "is a corporation." (par. 2, complaint).
As a mere agent of Viva, Del Rosario could not bind Viva unless what he did is
ratified by its Board of Directors. (Vicente vs. Geraldez, 52 SCRA 210; Arnold vs.
Willets and Paterson, 44 Phil. 634). As a mere agent, recognized as such by plaintiff,
Del Rosario could not be held liable jointly and severally with Viva and his inclusion
as party defendant has no legal basis. (Salonga vs. Warner Barner [sic] , COLTA , 88
Phil. 125; Salmon vs. Tan, 36 Phil. 556).
The testimony of Mr. Lopez and the allegations in the complaint are clear
admissions that what was supposed to have been agreed upon at the Tamarind Grill
between Mr. Lopez and Del Rosario was not a binding agreement. It is as it should
be because corporate power to enter into a contract is lodged in the Board of
Directors. (Sec. 23, Corporation Code). Without such board approval by the Viva
board, whatever agreement Lopez and Del Rosario arrived at could not ripen into a
valid contract binding upon Viva (Yao Ka Sin Trading vs. Court of Appeals, 209 SCRA
763). The evidence adduced shows that the Board of Directors of Viva rejected
Exhibit "C" and insisted that the film package for 140 films be maintained (Exh. "71" - Viva ). 49
The contention that ABS-CBN had yet to fully exercise its right of first refusal over
twenty-four films under the 1990 Film Exhibition Agreement and that the meeting
between Lopez and Del Rosario was a continuation of said previous contract is

untenable. As observed by the trial court, ABS-CBN right of first refusal had already
been exercised when Ms. Concio wrote to VIVA ticking off ten films, Thus:
[T]he subsequent negotiation with ABS-CBN two (2) months after this letter was
sent, was for an entirely different package. Ms. Concio herself admitted on crossexamination to having used or exercised the right of first refusal. She stated that
the list was not acceptable and was indeed not accepted by ABS-CBN, (TSN, June 8,
1992, pp. 8-10). Even Mr. Lopez himself admitted that the right of the first refusal
may have been already exercised by Ms. Concio (as she had). (TSN, June 8, 1992,
pp. 71-75). Del Rosario himself knew and understand [sic] that ABS-CBN has lost its
rights of the first refusal when his list of 36 titles were rejected (Tsn, June 9, 1992,
pp. 10-11) 50
II
However, we find for ABS-CBN on the issue of damages. We shall first take up actual
damages. Chapter 2, Title XVIII, Book IV of the Civil Code is the specific law on
actual or compensatory damages. Except as provided by law or by stipulation, one
is entitled to compensation for actual damages only for such pecuniary loss suffered
by him as he has duly proved. 51 The indemnification shall comprehend not only
the value of the loss suffered, but also that of the profits that the obligee failed to
obtain. 52 In contracts and quasi-contracts the damages which may be awarded are
dependent on whether the obligor acted with good faith or otherwise, It case of
good faith, the damages recoverable are those which are the natural and probable
consequences of the breach of the obligation and which the parties have foreseen
or could have reasonably foreseen at the time of the constitution of the obligation. If
the obligor acted with fraud, bad faith, malice, or wanton attitude, he shall be
responsible for all damages which may be reasonably attributed to the nonperformance of the obligation. 53 In crimes and quasi-delicts, the defendant shall be
liable for all damages which are the natural and probable consequences of the act
or omission complained of, whether or not such damages has been foreseen or
could have reasonably been foreseen by the defendant. 54
Actual damages may likewise be recovered for loss or impairment of earning
capacity in cases of temporary or permanent personal injury, or for injury to the
plaintiff's business standing or commercial credit. 55
The claim of RBS for actual damages did not arise from contract, quasi-contract,
delict, or quasi-delict. It arose from the fact of filing of the complaint despite ABSCBN's alleged knowledge of lack of cause of action. Thus paragraph 12 of RBS's
Answer with Counterclaim and Cross-claim under the heading COUNTERCLAIM
specifically alleges:
12.
ABS-CBN filed the complaint knowing fully well that it has no cause of action
RBS. As a result thereof, RBS suffered actual damages in the amount of
P6,621,195.32. 56
Needless to state the award of actual damages cannot be comprehended under the
above law on actual damages. RBS could only probably take refuge under Articles
19, 20, and 21 of the Civil Code, which read as follows:

Art. 19.
Every person must, in the exercise of his rights and in the performance
of his duties, act with justice, give everyone his due, and observe honesty and good
faith.
Art. 20.
Every person who, contrary to law, wilfully or negligently causes
damage to another, shall indemnify the latter for tile same.
Art. 21.
Any person who wilfully causes loss or injury to another in a manner
that is contrary to morals, good customs or public policy shall compensate the latter
for the damage.
It may further be observed that in cases where a writ of preliminary injunction is
issued, the damages which the defendant may suffer by reason of the writ are
recoverable from the injunctive bond. 57 In this case, ABS-CBN had not yet filed the
required bond; as a matter of fact, it asked for reduction of the bond and even went
to the Court of Appeals to challenge the order on the matter, Clearly then, it was not
necessary for RBS to file a counterbond. Hence, ABS-CBN cannot be held
responsible for the premium RBS paid for the counterbond.
Neither could ABS-CBN be liable for the print advertisements for "Maging Sino Ka
Man" for lack of sufficient legal basis. The RTC issued a temporary restraining order
and later, a writ of preliminary injunction on the basis of its determination that there
existed sufficient ground for the issuance thereof. Notably, the RTC did not dissolve
the injunction on the ground of lack of legal and factual basis, but because of the
plea of RBS that it be allowed to put up a counterbond.
As regards attorney's fees, the law is clear that in the absence of stipulation,
attorney's fees may be recovered as actual or compensatory damages under any of
the circumstances provided for in Article 2208 of the Civil Code. 58
The general rule is that attorney's fees cannot be recovered as part of damages
because of the policy that no premium should be placed on the right to litigate. 59
They are not to be awarded every time a party wins a suit. The power of the court to
award attorney's fees under Article 2208 demands factual, legal, and equitable
justification. 60 Even when claimant is compelled to litigate with third persons or to
incur expenses to protect his rights, still attorney's fees may not be awarded where
no sufficient showing of bad faith could be reflected in a party's persistence in a
case other than erroneous conviction of the righteousness of his cause. 61
As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book IV of the Civil
Code. Article 2217 thereof defines what are included in moral damages, while
Article 2219 enumerates the cases where they may be recovered, Article 2220
provides that moral damages may be recovered in breaches of contract where the
defendant acted fraudulently or in bad faith. RBS's claim for moral damages could
possibly fall only under item (10) of Article 2219, thereof which reads:
(10)

Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.

Moral damages are in the category of an award designed to compensate the

claimant for actual injury suffered. and not to impose a penalty on the wrongdoer.
62 The award is not meant to enrich the complainant at the expense of the
defendant, but to enable the injured party to obtain means, diversion, or
amusements that will serve to obviate then moral suffering he has undergone. It is
aimed at the restoration, within the limits of the possible, of the spiritual status quo
ante, and should be proportionate to the suffering inflicted. 63 Trial courts must
then guard against the award of exorbitant damages; they should exercise balanced
restrained and measured objectivity to avoid suspicion that it was due to passion,
prejudice, or corruption on the part of the trial court. 64
The award of moral damages cannot be granted in favor of a corporation because,
being an artificial person and having existence only in legal contemplation, it has no
feelings, no emotions, no senses, It cannot, therefore, experience physical suffering
and mental anguish, which call be experienced only by one having a nervous
system. 65 The statement in People v. Manero 66 and Mambulao Lumber Co. v. PNB
67 that a corporation may recover moral damages if it "has a good reputation that
is debased, resulting in social humiliation" is an obiter dictum. On this score alone
the award for damages must be set aside, since RBS is a corporation.
The basic law on exemplary damages is Section 5, Chapter 3, Title XVIII, Book IV of
the Civil Code. These are imposed by way of example or correction for the public
good, in addition to moral, temperate, liquidated or compensatory damages. 68
They are recoverable in criminal cases as part of the civil liability when the crime
was committed with one or more aggravating circumstances; 69 in quasi-contracts,
if the defendant acted with gross negligence; 70 and in contracts and quasicontracts, if the defendant acted in a wanton, fraudulent, reckless, oppressive, or
malevolent manner. 71
It may be reiterated that the claim of RBS against ABS-CBN is not based on contract,
quasi-contract, delict, or quasi-delict, Hence, the claims for moral and exemplary
damages can only be based on Articles 19, 20, and 21 of the Civil Code.
The elements of abuse of right under Article 19 are the following: (1) the existence
of a legal right or duty, (2) which is exercised in bad faith, and (3) for the sole intent
of prejudicing or injuring another. Article 20 speaks of the general sanction for all
other provisions of law which do not especially provide for their own sanction; while
Article 21 deals with acts contra bonus mores, and has the following elements; (1)
there is an act which is legal, (2) but which is contrary to morals, good custom,
public order, or public policy, and (3) and it is done with intent to injure. 72
Verily then, malice or bad faith is at the core of Articles 19, 20, and 21. Malice or
bad faith implies a conscious and intentional design to do a wrongful act for a
dishonest purpose or moral obliquity. 73 Such must be substantiated by evidence.
74
There is no adequate proof that ABS-CBN was inspired by malice or bad faith. It was
honestly convinced of the merits of its cause after it had undergone serious
negotiations culminating in its formal submission of a draft contract. Settled is the
rule that the adverse result of an action does not per se make the action wrongful

and subject the actor to damages, for the law could not have meant to impose a
penalty on the right to litigate. If damages result from a person's exercise of a right,
it is damnum absque injuria. 75
WHEREFORE, the instant petition is GRANTED. The challenged decision of the Court
of Appeals in CA-G.R. CV No, 44125 is hereby REVERSED except as to unappealed
award of attorney's fees in favor of VIVA Productions, Inc.1wphi1.nt
No pronouncement as to costs.
SO ORDERED.
Melo, Kapunan, Martinez and Pardo JJ., concur.
National Power Corp. vs Philipp Brothers Oceanic Inc.
GR 126204 November 20, 2001
NATIONAL POWER CORPORATION, petitioner, vs. PHILIPP BROTHERS OCEANIC, INC.,
respondent.
DECISION
SANDOVAL-GUTIERREZ, J.:
Where a person merely uses a right pertaining to him, without bad faith or intent to
injure, the fact that damages are thereby suffered by another will not make him
liable.[1]
This principle finds useful application to the present case.
Before us is a petition for review of the Decision[2] dated August 27, 1996 of the
Court of Appeals affirming in toto the Decision[3] dated January 16, 1992 of the
Regional Trial Court, Branch 57, Makati City.
The facts are:
On May 14, 1987, the National Power Corporation (NAPOCOR) issued invitations to
bid for the supply and delivery of 120,000 metric tons of imported coal for its
Batangas Coal-Fired Thermal Power Plant in Calaca, Batangas. The Philipp Brothers
Oceanic, Inc. (PHIBRO) prequalified and was allowed to participate as one of the
bidders. After the public bidding was conducted, PHIBROs bid was accepted.
NAPOCORs acceptance was conveyed in a letter dated July 8, 1987, which was
received by PHIBRO on July 15, 1987.
The Bidding Terms and Specifications[4] provide for the manner of shipment of
coals, thus:
SECTION V
SHIPMENT

The winning TENDERER who then becomes the SELLER shall arrange and provide
gearless bulk carrier for the shipment of coal to arrive at discharging port on or
before thirty (30) calendar days after receipt of the Letter of Credit by the SELLER or
its nominee as per Section XIV hereof to meet the vessel arrival schedules at
Calaca, Batangas, Philippines as follows:
60,000 +/ - 10 %

July 20, 1987

60,000 +/ - 10%

September 4, 1987[5]

On July 10, 1987, PHIBRO sent word to NAPOCOR that industrial disputes might soon
plague Australia, the shipments point of origin, which could seriously hamper
PHIBROs ability to supply the needed coal.[6] From July 23 to July 31, 1987, PHIBRO
again apprised NAPOCOR of the situation in Australia, particularly informing the
latter that the ship owners therein are not willing to load cargo unless a strike-free
clause is incorporated in the charter party or the contract of carriage.[7] In order to
hasten the transfer of coal, PHIBRO proposed to NAPOCOR that they equally share
the burden of a strike-free clause. NAPOCOR refused.
On August 6, 1987, PHIBRO received from NAPOCOR a confirmed and workable
letter of credit. Instead of delivering the coal on or before the thirtieth day after
receipt of the Letter of Credit, as agreed upon by the parties in the July contract,
PHIBRO effected its first shipment only on November 17, 1987.
Consequently, in October 1987, NAPOCOR once more advertised for the delivery of
coal to its Calaca thermal plant. PHIBRO participated anew in this subsequent
bidding. On November 24, 1987, NAPOCOR disapproved PHIBROs application for
pre-qualification to bid for not meeting the minimum requirements.[8] Upon further
inquiry, PHIBRO found that the real reason for the disapproval was its purported
failure to satisfy NAPOCORs demand for damages due to the delay in the delivery
of the first coal shipment.
This prompted PHIBRO to file an action for damages with application for injunction
against NAPOCOR with the Regional Trial Court, Branch 57, Makati City.[9] In its
complaint, PHIBRO alleged that NAPOCORs act of disqualifying it in the October
1987 bidding and in all subsequent biddings was tainted with malice and bad faith.
PHIBRO prayed for actual, moral and exemplary damages and attorneys fees.
In its answer, NAPOCOR averred that the strikes in Australia could not be invoked as
reason for the delay in the delivery of coal because PHIBRO itself admitted that as
of July 28, 1987 those strikes had already ceased. And, even assuming that the
strikes were still ongoing, PHIBRO should have shouldered the burden of a strikefree clause because their contract was C and F Calaca, Batangas, Philippines,
meaning, the cost and freight from the point of origin until the point of destination
would be for the account of PHIBRO. Furthermore, NAPOCOR claimed that due to
PHIBROs failure to deliver the coal on time, it was compelled to purchase coal from
ASEA at a higher price. NAPOCOR claimed for actual damages in the amount of
P12,436,185.73, representing the increase in the price of coal, and a claim of
P500,000.00 as litigation expenses.[10]

Thereafter, trial on the merits ensued.

On January 16, 1992, the trial court rendered a decision in favor of PHIBRO, the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff Philipp Brothers
Oceanic Inc. (PHIBRO) and against the defendant National Power Corporation
(NAPOCOR) ordering the said defendant NAPOCOR:
1. To reinstate Philipp Brothers Oceanic, Inc. (PHIBRO) in the defendant National
Power Corporations list of accredited bidders and allow PHIBRO to participate in any
and all future tenders of National Power Corporation for the supply and delivery of
imported steam coal;
2 To pay Philipp Brothers Oceanic, Inc. (PHIBRO);
a.
The peso equivalent at the time of payment of $864,000 as actual
damages;
b.
The peso equivalent at the time of payment of $100,000 as moral
damages;
c.
The peso equivalent at the time of payment of $ 50,000 as exemplary
damages;
d.
The peso equivalent at the time of payment of $73,231.91 as
reimbursement for expenses, cost of litigation and attorneys fees;
3. To pay the costs of suit;
4. The counterclaims of defendant NAPOCOR are dismissed for lack of merit.
SO ORDERED.[11]
Unsatisfied, NAPOCOR, through the Solicitor General, elevated the case to the Court
of Appeals. On August 27, 1996, the Court of Appeals rendered a Decision affirming
in toto the Decision of the Regional Trial Court. It ratiocinated that:
There is ample evidence to show that although PHIBROs delivery of the shipment
of coal was delayed, the delay was in fact caused by a) Napocors own delay in
opening a workable letter of credit; and b) the strikes which plaqued the Australian
coal industry from the first week of July to the third week of September 1987.
Strikes are included in the definition of force majeure in Section XVII of the Bidding
Terms and Specifications, (supra), so Phibro is not liable for any delay caused
thereby.
Phibro was informed of the acceptance of its bid on July 8, 1987. Delivery of coal
was to be effected thirty (30) days from Napocors opening of a confirmed and
workable letter of credit. Napocor was only able to do so on August 6, 1987.

By that time, Australias coal industry was in the middle of a seething controversy
and unrest, occasioned by strikes, overtime bans, mine stoppages. The origin, the
scope and the effects of this industrial unrest are lucidly described in the
uncontroverted testimony of James Archibald, an employee of Phibro and member
of the Export Committee of the Australian Coal Association during the time these
events transpired.
xxx

xxx

The records also attest that Phibro periodically informed Napocor of these
developments as early as July 1, 1987, even before the bid was approved. Yet,
Napocor did not forthwith open the letter of credit in order to avoid delay which
might be caused by the strikes and their after-effects.
Strikes are undoubtedly included in the force majeure clause of the Bidding Terms
and Specifications (supra). The renowned civilist, Prof. Arturo Tolentino, defines
force majeure as an event which takes place by accident and could not have been
foreseen. (Civil Code of the Philippines, Volume IV, Obligations and Constracts, 126,
[1991]) He further states:
Fortuitous events may be produced by two general causes: (1) by Nature, such as
earthquakes, storms, floods, epidemics, fires, etc., and (2) by the act of man, such
as an armed invasion, attack by bandits, governmental prohibitions, robbery, etc.
Tolentino adds that the term generally applies, broadly speaking, to natural
accidents. In order that acts of man such as a strike, may constitute fortuitous
event, it is necessary that they have the force of an imposition which the debtor
could not have resisted. He cites a parallel example in the case of Philippine
National Bank v. Court of Appeals, 94 SCRA 357 (1979), wherein the Supreme Court
said that the outbreak of war which prevents performance exempts a party from
liability.
Hence, by law and by stipulation of the parties, the strikes which took place in
Australia from the first week of July to the third week of September, 1987, exempted
Phibro from the effects of delay of the delivery of the shipment of coal.[12]
Twice thwarted, NAPOCOR comes to us via a petition for review ascribing to the
Court of Appeals the following errors:
I
Respondent Court of Appeals gravely and seriously erred in concluding and so
holding that PHIBROs delay in the delivery of imported coal was due to NAPOCORs
alleged delay in opening a letter of credit and to force majeure, and not to PHIBROs
own deliberate acts and faults.[13]
II
Respondent Court of Appeals gravely and seriously erred in concluding and so
holding that NAPOCOR acted maliciously and unjustifiably in disqualifying PHIBRO

from participating in the December 8, 1987 and future biddings for the supply of
imported coal despite the existence of valid grounds therefor such as serious
impairment of its track record.[14]
III
Respondent Court of Appeals gravely and seriously erred in concluding and so
holding that PHIBRO was entitled to injunctive relief, to actual or compensatory,
moral and exemplary damages, attorneys fees and litigation expenses despite the
clear absence of legal and factual bases for such award.[15]
IV
Respondent Court of Appeals gravely and seriously erred in absolving PHIBRO from
any liability for damages to NAPOCOR for its unjustified and deliberate refusal
and/or failure to deliver the contracted imported coal within the stipulated
period.[16]
V
Respondent Court of Appeals gravely and seriously erred in dismissing NAPOCORs
counterclaims for damages and litigation expenses.[17]
It is axiomatic that only questions of law, not questions of fact, may be raised before
this Court in a petition for review under Rule 45 of the Rules of Court.[18] The
findings of facts of the Court of Appeals are conclusive and binding on this Court[19]
and they carry even more weight when the said court affirms the factual findings of
the trial court.[20] Stated differently, the findings of the Court of Appeals, by itself,
which are supported by substantial evidence, are almost beyond the power of
review by this Court.[21]
With the foregoing settled jurisprudence, we find it pointless to delve lengthily on
the factual issues raised by petitioner. The existence of strikes in Australia having
been duly established in the lower courts, we are left only with the burden of
determining whether or not NAPOCOR acted wrongfully or with bad faith in
disqualifying PHIBRO from participating in the subsequent public bidding.
Let us consider the case in its proper perspective.
The Court of Appeals is justified in sustaining the Regional Trial Courts decision
exonerating PHIBRO from any liability for damages to NAPOCOR as it was clearly
established from the evidence, testimonial and documentary, that what prevented
PHIBRO from complying with its obligation under the July 1987 contract was the
industrial disputes which besieged Australia during that time. Extant in our Civil
Code is the rule that no person shall be responsible for those events which could not
be foreseeen, or which, though foreseen, were inevitable.[22] This means that when
an obligor is unable to fulfill his obligation because of a fortuitous event or force
majeure, he cannot be held liable for damages for non-performance.[23]

In addition to the above legal precept, it is worthy to note that PHIBRO and
NAPOCOR explicitly agreed in Section XVII of the Bidding Terms and
Specifications[24] that neither seller (PHIBRO) nor buyer (NAPOCOR) shall be
liable for any delay in or failure of the performance of its obligations, other than the
payment of money due, if any such delay or failure is due to Force Majeure.
Specifically, they defined force majeure as any disabling cause beyond the control
of and without fault or negligence of the party, which causes may include but are
not restricted to Acts of God or of the public enemy; acts of the Government in
either its sovereign or contractual capacity; governmental restrictions; strikes, fires,
floods, wars, typhoons, storms, epidemics and quarantine restrictions.
The law is clear and so is the contract between NAPOCOR and PHIBRO. Therefore,
we have no reason to rule otherwise.
However, proceeding from the premise that PHIBRO was prevented by force
majeure from complying with its obligation, does it necessarily follow that NAPOCOR
acted unjustly, capriciously, and unfairly in disapproving PHIBROs application for
pre-qualification to bid?
First, it must be stressed that NAPOCOR was not bound under any contract to
approve PHIBROs pre-qualification requirements. In fact, NAPOCOR had expressly
reserved its right to reject bids. The Instruction to Bidders found in the PostQualification Documents/ Specifications for the Supply and Delivery of Coal for the
Batangas Coal-Fired Thermal Power Plant I at Calaca, Batangas Philippines,[25] is
explicit, thus:
IB-17 RESERVATION OF NAPOCOR TO REJECT BIDS
NAPOCOR reserves the right to reject any or all bids, to waive any minor informality
in the bids received. The right is also reserved to reject the bids of any bidder who
has previously failed to properly perform or complete on time any and all contracts
for delivery of coal or any supply undertaken by a bidder.[26] (Emphasis supplied)
This Court has held that where the right to reject is so reserved, the lowest bid or
any bid for that matter may be rejected on a mere technicality.[27] And where the
government as advertiser, availing itself of that right, makes its choice in rejecting
any or all bids, the losing bidder has no cause to complain nor right to dispute that
choice unless an unfairness or injustice is shown. Accordingly, a bidder has no
ground of action to compel the Government to award the contract in his favor, nor
to compel it to accept his bid. Even the lowest bid or any bid may be rejected.[28]
In Celeste v. Court of Appeals,[29] we had the occasion to rule:
Moreover, paragraph 15 of the Instructions to Bidders states that the Government
hereby reserves the right to reject any or all bids submitted. In the case of A.C.
Esguerra and Sons v. Aytona, 4 SCRA 1245, 1249 (1962), we held:
x x x [I]n the invitation to bid, there is a condition imposed upon the bidders to
the effect that the bidders shall be subject to the right of the government to reject
any and all bids subject to its discretion. Here the government has made its choice,

and unless an unfairness or injustice is shown, the losing bidders have no cause to
complain, nor right to dispute that choice.
Since there is no evidence to prove bad faith and arbitrariness on the part of the
petitioners in evaluating the bids, we rule that the private respondents are not
entitled to damages representing lost profits. (Emphasis supplied)
Verily, a reservation of the government of its right to reject any bid, generally vests
in the authorities a wide discretion as to who is the best and most advantageous
bidder. The exercise of such discretion involves inquiry, investigation, comparison,
deliberation and decision, which are quasi-judicial functions, and when honestly
exercised, may not be reviewed by the court.[30] In Bureau Veritas v. Office of the
President,[31] we decreed:
The discretion to accept or reject a bid and award contracts is vested in the
Government agencies entrusted with that function. The discretion given to the
authorities on this matter is of such wide latitude that the Courts will not interfere
therewith, unless it is apparent that it is used as a shield to a fraudulent award.
(Jalandoni v. NARRA, 108 Phil. 486 [1960]). x x x. The exercise of this discretion is
a policy decision that necessitates prior inquiry, investigation, comparison,
evaluation, and deliberation. This task can best be discharged by the Government
agencies concerned, not by the Courts. The role of the Courts is to ascertain
whether a branch or instrumentality of the Government has transgresses its
constitutional boundaries. But the Courts will not interfere with executive or
legislative discretion exercised within those boundaries. Otherwise, it strays into
the realm of policy decision-making. x x x. (Emphasis supplied)
Owing to the discretionary character of the right involved in this case, the propriety
of NAPOCORs act should therefore be judged on the basis of the general principles
regulating human relations, the forefront provision of which is Article 19 of the Civil
Code which provides that every person must, in the exercise of his rights and in
the performance of his duties, act with justice, give everyone his due, and observe
honesty and good faith.[32] Accordingly, a person will be protected only when he
acts in the legitimate exercise of his right, that is, when he acts with prudence and
in good faith; but not when he acts with negligence or abuse.[33]
Did NAPOCOR abuse its right or act unjustly in disqualifying PHIBRO from the public
bidding?
We rule in the negative.
In practice, courts, in the sound exercise of their discretion, will have to determine
under all the facts and circumstances when the exercise of a right is unjust, or when
there has been an abuse of right.[34]
We went over the record of the case with painstaking solicitude and we are
convinced that NAPOCORs act of disapproving PHIBRO's application for prequalification to bid was without any intent to injure or a purposive motive to
perpetrate damage. Apparently, NAPOCOR acted on the strong conviction that
PHIBRO had a seriously-impaired track record. NAPOCOR cannot be faulted from

believing so. At this juncture, it is worth mentioning that at the time NAPOCOR
issued its subsequent Invitation to Bid, i.e., October 1987, PHIBRO had not yet
delivered the first shipment of coal under the July 1987 contract, which was due on
or before September 5, 1987. Naturally, NAPOCOR is justified in entertaining doubts
on PHIBROs qualification or capability to assume an obligation under a new
contract.
Moreover, PHIBROs actuation in 1987 raised doubts as to the real situation of the
coal industry in Australia. It appears from the records that when NAPOCOR was
constrained to consider an offer from another coal supplier (ASEA) at a price of
US$33.44 per metric ton, PHIBRO unexpectedly offered the immediate delivery of
60,000 metric tons of Ulan steam coal at US$31.00 per metric ton for arrival at
Calaca, Batangas on September 20-21, 1987.[35] Of course, NAPOCOR had reason
to ponder-- how come PHIBRO could assure the immediate delivery of 60,000 metric
tons of coal from the same source to arrive at Calaca not later than September
20/21, 1987 but it could not deliver the coal it had undertaken under its contract?
Significantly, one characteristic of a fortuitous event, in a legal sense, and
consequently in relations to contracts, is that the concurrence must be such as to
render it impossible for the debtor to fulfill his obligation in a normal manner.[36]
Faced with the above circumstance, NAPOCOR is justified in assuming that, may be,
there was really no fortuitous event or force majeure which could render it
impossible for PHIBRO to effect the delivery of coal. Correspondingly, it is also
justified in treating PHIBROs failure to deliver a serious impairment of its track
record. That the trial court, thereafter, found PHIBROs unexpected offer actually a
result of its desire to minimize losses on the part of NAPOCOR is inconsequential. In
determining the existence of good faith, the yardstick is the frame of mind of the
actor at the time he committed the act, disregarding actualities or facts outside his
knowledge. We cannot fault NAPOCOR if it mistook PHIBROs unexpected offer a
mere attempt on the latters part to undercut ASEA or an indication of PHIBROs
inconsistency. The circumstances warrant such contemplation.
That NAPOCOR believed all along that PHIBROs failure to deliver on time was
unfounded is manifest from its letters[37] reminding PHIBRO that it was bound to
deliver the coal within 30 days from its (PHIBROs) receipt of the Letter of Credit,
otherwise it would be constrained to take legal action. The same honest belief can
be deduced from NAPOCORs Board Resolution, thus:
On the legal aspect, Management stressed that failure of PBO to deliver under the
contract makes them liable for damages, considering that the reasons invoked were
not valid. The measure of the damages will be limited to actual and compensatory
damages. However, it was reported that Philipp Brothers advised they would like to
have continuous business relation with NPC so they are willing to sit down or even
proposed that the case be submitted to the Department of Justice as to avoid a
court action or arbitration.
xxx

xxx

On the technical-economic aspect, Management claims that if PBO delivers in

November 1987 and January 1988, there are some advantages. If PBO reacts to any

legal action and fails to deliver, the options are: one, to use 100% Semirara and
second, to go into urgent coal order. The first option will result in a 75 MW derating
and oil will be needed as supplement. We will stand to lose around P30 M. On the
other hand, if NPC goes into an urgent coal order, there will be an additional
expense of $786,000 or P16.11 M, considering the price of the latest purchase with
ASEA. On both points, reliability is decreased.[38]
The very purpose of requiring a bidder to furnish the awarding authority its prequalification documents is to ensure that only those responsible and qualified
bidders could bid and be awarded with government contracts. It bears stressing
that the award of a contract is measured not solely by the smallest amount of bid
for its performance, but also by the responsibility of the bidder. Consequently, the
integrity, honesty, and trustworthiness of the bidder is to be considered. An
awarding official is justified in considering a bidder not qualified or not responsible if
he has previously defrauded the public in such contracts or if, on the evidence
before him, the official bona fide believes the bidder has committed such fraud,
despite the fact that there is yet no judicial determination to that effect.[39]
Otherwise stated, if the awarding body bona fide believes that a bidder has
seriously impaired its track record because of a particular conduct, it is justified in
disqualifying the bidder. This policy is necessary to protect the interest of the
awarding body against irresponsible bidders.
Thus, one who acted pursuant to the sincere belief that another willfully committed
an act prejudicial to the interest of the government cannot be considered to have
acted in bad faith. Bad faith has always been a question of intention. It is that
corrupt motive that operates in the mind. As understood in law, it contemplates a
state of mind affirmatively operating with furtive design or with some motive of selfinterest or ill-will or for ulterior purpose.[40] While confined in the realm of thought,
its presence may be ascertained through the partys actuation or through
circumstantial evidence.[41] The circumstances under which NAPOCOR disapproved
PHIBRO's pre-qualification to bid do not show an intention to cause damage to the
latter. The measure it adopted was one of self-protection. Consequently, we cannot
penalize NAPOCOR for the course of action it took. NAPOCOR cannot be made liable
for actual, moral and exemplary damages.
Corollarily, in awarding to PHIBRO actual damages in the amount of $864,000, the
Regional Trial Court computed what could have been the profits of PHIBRO had
NAPOCOR allowed it to participate in the subsequent public bidding. It ruled that
PHIBRO would have won the tenders for the supply of about 960,000 metric tons
out of at least 1,200,000 metric tons from the public bidding of December 1987 to
1990. We quote the trial courts ruling, thus:
x x x. PHIBRO was unjustly excluded from participating in at least five (5) tenders
beginning December 1987 to 1990, for the supply and delivery of imported coal
with a total volume of about 1,200,000 metric tons valued at no less than US$32
Million. (Exhs. AA, AA-1, to AA-2). The price of imported coal for delivery in
1988 was quoted in June 1988 by bidders at US$ 41.35 to US $ 43.95 per metric ton
(Exh. JJ); in September 1988 at US$41.50 to US$49.50 per metric ton (Exh. J-1);
in November 1988 at US$ 39.00 to US$ 48.50 per metric ton (Exh. J-2) and for the
1989 deliveries, at US$ 44.35 to US$ 47.35 per metric ton (Exh. J-3) and US$38.00

to US$48.25 per metric ton in September 1990 (Exh. JJ-6 and JJ-7). PHIBRO
would have won the tenders for the supply and delivery of about 960,000 metric
tons of coal out of at least 1,200,000 metric tons awarded during said period based
on its proven track record of 80%. The Court, therefore finds that as a result of its
disqualification, PHIBRO suffered damages equivalent to its standard 3% margin in
960,000 metric tons of coal at the most conservative price of US$ 30.000 per metric
ton, or the total of US$ 864,000 which PHIBRO would have earned had it been
allowed to participate in biddings in which it was disqualified and in subsequent
tenders for supply and delivery of imported coal.
We find this to be erroneous.
Basic is the rule that to recover actual damages, the amount of loss must not only
be capable of proof but must actually be proven with reasonable degree of
certainty, premised upon competent proof or best evidence obtainable of the actual
amount thereof.[42] A court cannot merely rely on speculations, conjectures, or
guesswork as to the fact and amount of damages. Thus, while indemnification for
damages shall comprehend not only the value of the loss suffered, but also that of
the profits which the obligee failed to obtain,[43] it is imperative that the basis of
the alleged unearned profits is not too speculative and conjectural as to show the
actual damages which may be suffered on a future period.
In Pantranco North Express, Inc. v. Court of Appeals,[44] this Court denied the
plaintiffs claim for actual damages which was premised on a contract he was about
to negotiate on the ground that there was still the requisite public bidding to be
complied with, thus:
As to the alleged contract he was about to negotiate with Minister Hipolito, there is
no showing that the same has been awarded to him. If Tandoc was about to
negotiate a contract with Minister Hipolito, there was no assurance that the former
would get it or that the latter would award the contract to him since there was the
requisite public bidding. The claimed loss of profit arising out of that alleged
contract which was still to be negotiated is a mere expectancy. Tandocs claim that
he could have earned P2 million in profits is highly speculative and no concrete
evidence was presented to prove the same. The only unearned income to which
Tandoc is entitled to from the evidence presented is that for the one-month period,
during which his business was interrupted, which is P6,125.00, considering that his
annual net income was P73, 500.00.
In Lufthansa German Airlines v. Court of Appeals,[45] this Court likewise disallowed
the trial court's award of actual damages for unrealized profits in the amount of
US$75,000.00 for being highly speculative. It was held that the realization of
profits by respondent x x x was not a certainty, but depended on a number of
factors, foremost of which was his ability to invite investors and to win the bid.
This Court went further saying that actual or compensatory damages cannot be
presumed, but must be duly proved, and proved with reasonable degree of
certainty.
And in National Power Corporation v. Court of Appeals,[46] the Court, in denying the
bidders claim for unrealized commissions, ruled that even if NAPOCOR does not

deny its (bidder's) claims for unrealized commissions, and that these claims have
been transmuted into judicial admissions, these admissions cannot prevail over the
rules and regulations governing the bidding for NAPOCOR contracts, which
necessarily and inherently include the reservation by the NAPOCOR of its right to
reject any or all bids.
The award of moral damages is likewise improper. To reiterate, NAPOCOR did not
act in bad faith. Moreover, moral damages are not, as a general rule, granted to a
corporation.[47] While it is true that besmirched reputation is included in moral
damages, it cannot cause mental anguish to a corporation, unlike in the case of a
natural person, for a corporation has no reputation in the sense that an individual
has, and besides, it is inherently impossible for a corporation to suffer mental
anguish.[48] In LBC Express, Inc. v. Court of Appeals,[49] we ruled:
Moral damages are granted in recompense for physical suffering, mental anguish,
fright, serious anxiety, besmirched reputation, wounded feelings, moral shock,
social humiliation, and similar injury. A corporation, being an artificial person and
having existence only in legal contemplation, has no feelings, no emotions, no
senses; therefore, it cannot experience physical suffering and mental anguish.
Mental suffering can be experienced only by one having a nervous system and it
flows from real ills, sorrows, and griefs of life all of which cannot be suffered by
respondent bank as an artificial person.
Neither can we award exemplary damages under Article 2234 of the Civil Code.
Before the court may consider the question of whether or not exemplary damages
should be awarded, the plaintiff must show that he is entitled to moral, temperate,
or compensatory damages.
NAPOCOR, in this petition, likewise contests the judgment of the lower courts
awarding PHIBRO the amount of $73,231.91 as reimbursement for expenses, cost of
litigation and attorneys fees.
We agree with NAPOCOR.
This Court has laid down the rule that in the absence of stipulation, a winning party
may be awarded attorney's fees only in case plaintiff's action or defendant's stand
is so untenable as to amount to gross and evident bad faith.[50] This cannot be said
of the case at bar. NAPOCOR is justified in resisting PHIBROs claim for damages. As
a matter of fact, we partially grant the prayer of NAPOCOR as we find that it did not
act in bad faith in disapproving PHIBRO's pre-qualification to bid.
Trial courts must be reminded that attorney's fees may not be awarded to a party
simply because the judgment is favorable to him, for it may amount to imposing a
premium on the right to redress grievances in court. We adopt the same policy with
respect to the expenses of litigation. A winning party may be entitled to expenses
of litigation only where he, by reason of plaintiff's clearly unjustifiable claims or
defendant's unreasonable refusal to his demands, was compelled to incur said
expenditures. Evidently, the facts of this case do not warrant the granting of such
litigation expenses to PHIBRO.

At this point, we believe that, in the interest of fairness, NAPOCOR should give
PHIBRO another opportunity to participate in future public bidding. As earlier
mentioned, the delay on its part was due to a fortuitous event.
But before we dispose of this case, we take this occasion to remind PHIBRO of the
indispensability of coal to a coal-fired thermal plant. With households and
businesses being entirely dependent on the electricity supplied by NAPOCOR, the
delivery of coal cannot be venturesome. Indeed, public interest demands that one
who offers to deliver coal at an appointed time must give a reasonable assurance
that it can carry through. With the deleterious possible consequences that may
result from failure to deliver the needed coal, we believe there is greater strain of
commitment in this kind of obligation.
WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 126204 dated
August 27, 1996 is hereby MODIFIED. The award, in favor of PHIBRO, of actual,
moral and exemplary damages, reimbursement for expenses, cost of litigation and
attorneys fees, and costs of suit, is DELETED.
SO ORDERED.
MERALCO v. TEAM Electronics Corporation
G.R. No. 131723
December 13, 2007
MANILA ELECTRIC COMPANY, petitioner,
vs.
T.E.A.M. ELECTRONICS CORPORATION, TECHNOLOGY ELECTRONICS ASSEMBLY and
MANAGEMENT PACIFIC CORPORATION; and ULTRA ELECTRONICS INSTRUMENTS,
INC., respondents.
DECISION
NACHURA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking
the reversal of the Decision1 of the Court of Appeals (CA) dated June 18, 1997 and
its Resolution2 dated December 3, 1997 in CA-G.R. CV No. 40282 denying the
appeal filed by petitioner Manila Electric Company.
The facts of the case, as culled from the records, are as follows:
Respondent T.E.A.M. Electronics Corporation (TEC) was formerly known as NS
Electronics (Philippines), Inc. before 1982 and National Semi-Conductors (Phils.)
before 1988. TEC is wholly owned by respondent Technology Electronics Assembly
and Management Pacific Corporation (TPC). On the other hand, petitioner Manila
Electric Company (Meralco) is a utility company supplying electricity in the Metro
Manila area.
Petitioner and NS Electronics (Philippines), Inc., the predecessor-in-interest of
respondent TEC, were parties to two separate contracts denominated as

Agreements for the Sale of Electric Energy under the following account numbers:
09341-1322-163 and 09341-1812-13.4 Under the aforesaid agreements, petitioner
undertook to supply TEC's building known as Dyna Craft International Manila (DCIM)
located at Electronics Avenue, Food Terminal Complex, Taguig, Metro Manila, with
electric power. Another contract was entered into for the supply of electric power to
TEC's NS Building under Account No. 19389-0900-10.
In September 1986, TEC, under its former name National Semi-Conductors (Phils.)
entered into a Contract of Lease5 with respondent Ultra Electronics Industries, Inc.
(Ultra) for the use of the former's DCIM building for a period of five years or until
September 1991. Ultra was, however, ejected from the premises on February 12,
1988 by virtue of a court order, for repeated violation of the terms and conditions of
the lease contract.
On September 28, 1987, a team of petitioner's inspectors conducted a surprise
inspection of the electric meters installed at the DCIM building, witnessed by
Ultra's6 representative, Mr. Willie Abangan. The two meters covered by account
numbers 09341-1322-16 and 09341-1812-13, were found to be allegedly tampered
with and did not register the actual power consumption in the building. The results
of the inspection were reflected in the Service Inspection Reports7 prepared by the
team.
In a letter dated November 25, 1987, petitioner informed TEC of the results of the
inspection and demanded from the latter the payment of P7,040,401.01
representing its unregistered consumption from February 10, 1986 until September
28, 1987, as a result of the alleged tampering of the meters.8 TEC received the
letters on January 7, 1988. Since Ultra was in possession of the subject building
during the covered period, TEC's Managing Director, Mr. Bobby Tan, referred the
demand letter to Ultra9 which, in turn, informed TEC that its Executive VicePresident had met with petitioner's representative. Ultra further intimated that
assuming that there was tampering of the meters, petitioner's assessment was
excessive.10 For failure of TEC to pay the differential billing, petitioner disconnected
the electricity supply to the DCIM building on April 29, 1988.
TEC demanded from petitioner the reconnection of electrical service, claiming that it
had nothing to do with the alleged tampering but the latter refused to heed the
demand. Hence, TEC filed a complaint on May 27, 1988 before the Energy
Regulatory Board (ERB) praying that electric power be restored to the DCIM
building.11 The ERB immediately ordered the reconnection of the service but
petitioner complied with it only on October 12, 1988 after TEC paid P1,000,000.00,
under protest. The complaint before the ERB was later withdrawn as the parties
deemed it best to have the issues threshed out in the regular courts. Prior to the
reconnection, or on June 7, 1988, petitioner conducted a scheduled inspection of the
questioned meters and found them to have been tampered anew.12
Meanwhile, on April 25, 1988, petitioner conducted another inspection, this time, in
TEC's NS Building. The inspection allegedly revealed that the electric meters were
not registering the correct power consumption. Petitioner, thus, sent a letter dated
June 18, 1988 demanding payment of P280,813.72 representing the differential
billing.13 TEC denied petitioner's allegations and claim in a letter dated June 29,

1988.14 Petitioner, thus, sent TEC another letter demanding payment of the
aforesaid amount, with a warning that the electric service would be disconnected in
case of continued refusal to pay the differential billing.15 To avert the impending
disconnection of electrical service, TEC paid the above amount, under protest.16
On January 13, 1989, TEC and TPC filed a complaint for damages against petitioner
and Ultra17 before the Regional Trial Court (RTC) of Pasig. The case was raffled to
Branch 162 and was docketed as Civil Case No. 56851.18 Upon the filing of the
parties' answer to the complaint, pre-trial was scheduled.
At the pre-trial, the parties agreed to limit the issues, as follows:
1. Whether or not the defendant Meralco is liable for the plaintiffs' disconnection of
electric service at DCIM Building.
2. Whether or not the plaintiff is liable for (sic) the defendant for the differential
billings in the amount of P7,040,401.01.
3. Whether or not the plaintiff is liable to defendant for exemplary damages.19
For failure of the parties to reach an amicable settlement, trial on the merits
ensued. On June 17, 1992, the trial court rendered a Decision in favor of
respondents TEC and TPC, and against respondent Ultra and petitioner. The
pertinent portion of the decision reads:
WHEREFORE, judgment is hereby rendered in this case in favor of the plaintiffs and
against the defendants as follows:
(1) Ordering both defendants Meralco and ULTRA Electronics Instruments, Inc. to
jointly and severally reimburse plaintiff TEC actual damages in the amount of ONE
MILLION PESOS with legal rate of interest from the date of the filing of this case on
January 19, 1989 until the said amount shall have been fully paid;
(2) Ordering defendant Meralco to pay to plaintiff TEC the amount of P280,813.72 as
actual damages with legal rate of interest also from January 19, 1989;
(3) Ordering defendant Meralco to pay to plaintiff TPC the amount of P150,000.00 as
actual damages with interest at legal rate from January 19, 1989;
(4) Condemning defendant Meralco to pay both plaintiffs moral damages in the
amount pf P500,000.00;
(5) Condemning defendant Meralco to pay both plaintiffs corrective and/or
exemplary damages in the amount of P200,000.00;
(6) Ordering defendant Meralco to pay attorney's fees in the amount of P200,000.00
Costs against defendant Meralco.
SO ORDERED.20

The trial court found the evidence of petitioner insufficient to prove that TEC was
guilty of tampering the meter installations. The deformed condition of the meter
seal and the existence of an opening in the wire duct leading to the transformer
vault did not, in themselves, prove the alleged tampering, especially since access to
the transformer was given only to petitioner's employees.21 The sudden drop in
TEC's (or Ultra's) electric consumption did not, per se, show meter tampering. The
delay in the sending of notice of the results of the inspection was likewise viewed by
the court as evidence of inefficiency and arbitrariness on the part of petitioner. More
importantly, petitioner's act of disconnecting the DCIM building's electric supply
constituted bad faith and thus makes it liable for damages.22 The court further
denied petitioner's claim of differential billing primarily on the ground of equitable
negligence.23 Considering that TEC and TPC paid P1,000,000.00 to avert the
disconnection of electric power; and because Ultra manifested to settle the claims
of petitioner, the court imposed solidary liability on both Ultra and petitioner for the
payment of the P1,000,000.00.
Ultra and petitioner appealed to the CA which affirmed the RTC decision, with a
modification of the amount of actual damages and interest thereon. The dispositive
portion of the CA decision dated June 18, 1997, states:
WHEREFORE, this Court renders judgment affirming in toto the Decision rendered by
the trial court with the slight modification that the interest at legal rate shall be
computed from January 13, 1989 and that Meralco shall pay plaintiff T.E.A.M.
Electronics Corporation and Technology Electronics Assembly and Management
Pacific Corporation the sum of P150,000.00 per month for five (5) months for actual
damages incurred when it was compelled to lease a generator set with interest at
the legal rate from the above-stated date.
SO ORDERED.24
The appellate court agreed with the RTC's conclusion. In addition, it considered
petitioner negligent for failing to discover the alleged defects in the electric meters;
in belatedly notifying TEC and TPC of the results of the inspection; and in
disconnecting the electric power without prior notice.
Petitioner now comes before this Court in this petition for review on certiorari
contending that:
The Court of Appeals committed grievous errors and decided matters of substance
contrary to law and the rulings of this Honorable Court:
1. In finding that the issue in the case is whether there was deliberate tampering of
the metering installations at the building owned by TEC.
2. In not finding that the issue is: whether or not, based on the tampered meters,
whether or not petitioner is entitled to differential billing, and if so, how much.

3. In declaring that petitioner ME RALCO had the burden of proof to show by clear
and convincing evidence that with respect to the tampered meters that TEC and/or
TPC authored their tampering.
4. In finding that petitioner Meralco should not have held TEC and/or TPC
responsible for the acts of Ultra.
5. In finding that TEC should not be held liable for the tampering of this electric
meter in its DCIM Building.
6. In finding that there was no notice of disconnection.
7. In finding that petitioner MERALCO was negligent in informing TEC of the alleged
tampering.
8. In making the finding that it is difficult to believe that when petitioner MERALCO
inspected on June 7, 1988 the meter installations, they were found to be tampered.
9. In declaring that petitioner MERALCO estopped from claiming any tampering of
the meters.
10. In finding that "the method employed by MERALCO to as certain (sic) the
'correct' amount of electricity consumed is questionable";
11. In declaring that MERALCO all throughout its dealings with TEC took on an
"attitude" which is oppressive, wanton and reckless.
12. In declaring that MERALCO acted arbitrarily in inspecting TEC's DCIM building
and the NS building.
13. In declaring that respondents TEC and TPC are entitled to the damages which it
awarded.
14. In not declaring that petitioner is entitled to the differential bill.
15. In not declaring that respondents are liable to petitioner for exemplary
damages, attorney's fee and expenses for litigation.25
The petition must fail.
The issues for resolution can be summarized as follows: 1) whether or not TEC
tampered with the electric meters installed at its DCIM and NS buildings; 2) If so,
whether or not it is liable for the differential billing as computed by petitioner; and
3) whether or not petitioner was justified in disconnecting the electric power supply
in TEC's DCIM building.
Petitioner insists that the tampering of the electric meters installed at the DCIM and
NS buildings owned by respondent TEC has been established by overwhelming
evidence, as specifically shown by the shorting devices found during the inspection.
Thus, says petitioner, tampering of the meter is no longer an issue.

It is obvious that petitioner wants this Court to revisit the factual findings of the
lower courts. Well-established is the doctrine that under Rule 45 of the Rules of
Court, only questions of law, not of fact, may be raised before the Court. We would
like to stress that this Court is not a trier of facts and may not re-examine and weigh
anew the respective evidence of the parties. Factual findings of the trial court,
especially those affirmed by the Court of Appeals, are binding on this Court.26
Looking at the record, we note that petitioner claims to have discovered three
incidences of meter-tampering; twice in the DCIM building on September 28, 1987
and June 7, 1988; and once in the NS building on April 24, 1988.
The first instance was supposedly discovered on September 28, 1987. The inspector
allegedly found the presence of a short circuiting device and saw that the meter
seal was deformed. In addition, petitioner, through the Supervising Engineer of its
Special Billing Analysis Department,27 claimed that there was a sudden and
unexplainable drop in TEC's electrical consumption starting February 10, 1986. On
the basis of the foregoing, petitioner concluded that the electric meters were
tampered with.
However, contrary to petitioner's claim that there was a drastic and unexplainable
drop in TEC's electric consumption during the affected period, the Pattern of TEC's
Electrical Consumption28 shows that the sudden drop is not peculiar to the said
period. Noteworthy is the observation of the RTC in this wise:
In fact, in Account No. 09341-1812-13 (heretofore referred as Account/Meter No. 2),
as evidenced by Exhibits "35" and "35-A," there was likewise a sudden drop of
electrical consumption from the year 1984 which recorded an average 141,300
kwh/month to 1985 which recorded an average kwh/month at 87,600 or a
difference-drop of 53,700 kwh/month; from 1985's 87,600 recorded consumption,
the same dropped to 18,600 kwh/month or a difference-drop of 69,000 kwh/month.
Surely, a drop of 53,700 could be equally categorized as a sudden drop amounting
to 69,000 which, incidentally, the Meralco claimed as "unexplainable. x x x.29
The witnesses for petitioner who testified on the alleged tampering of the electric
meters, declared that tampering is committed by consumers to prevent the meter
from registering the correct amount of electric consumption, and result in a reduced
monthly electric bill, while continuing to enjoy the same power supply. Only the
registration of actual electric energy consumption, not the supply of electricity, is
affected when a meter is tampered with.30 The witnesses claimed that after the
inspection, the tampered electric meters were corrected, so that they would register
the correct consumption of TEC. Logically, then, after the correction of the allegedly
tampered meters, the customer's registered consumption would go up.
In this case, the period claimed to have been affected by the tampered electric
meters is from February 1986 until September 1987. Based on petitioner's Billing
Record31 (for the DCIM building), TEC's monthly electric consumption on Account
No. 9341-1322-16 was between 4,500 and 27,000 kwh.32 Account No. 9341-181213 showed a monthly consumption between 9,600 and 34,200 kwh.33 It is
interesting to note that, after correction of the allegedly tampered meters, TEC's

monthly electric consumption from October 1987 to February 1988 (the last month
that Ultra occupied the DCIM building) was between 8,700 and 24,300 kwh in its
first account, and 16,200 to 46,800 kwh on the second account.
Even more revealing is the fact that TEC's meters registered 9,300 kwh and 19,200
kwh consumption on the first and second accounts, respectively, a month prior to
the inspection. On the first month after the meters were corrected, TEC's electric
consumption registered at 9,300 kwh and 22,200 kwh on the respective accounts.
These figures clearly show that there was no palpably drastic difference between
the consumption before and after the inspection, casting a cloud of doubt over
petitioner's claim of meter-tampering. Indeed, Ultra's explanation that the
corporation was losing; thus, it had lesser consumption of electric power appear to
be the more plausible reason for the drop in electric consumption.
Petitioner likewise claimed that when the subject meters were again inspected on
June 7, 1988, they were found to have been tampered anew. The Court notes that
prior to the inspection, TEC was informed about it; and months before the
inspection, there was an unsettled controversy between TEC and petitioner, brought
about by the disconnection of electric power and the non-payment of differential
billing. We are more disposed to accept the trial court's conclusion that it is hard to
believe that a customer previously apprehended for tampered meters and assessed
P7 million would further jeopardize itself in the eyes of petitioner.34 If it is true that
there was evidence of tampering found on September 28, 1987 and again on June
7, 1988, the better view would be that the defective meters were not actually
corrected after the first inspection. If so, then Manila Electric Company v. Macro
Textile Mills Corporation35 would apply, where we said that we cannot sanction a
situation wherein the defects in the electric meter are allowed to continue
indefinitely until suddenly, the public utilities demand payment for the unrecorded
electricity utilized when they could have remedied the situation immediately.
Petitioner's failure to do so may encourage neglect of public utilities to the
detriment of the consuming public. Corollarily, it must be underscored that
petitioner has the imperative duty to make a reasonable and proper inspection of its
apparatus and equipment to ensure that they do not malfunction, and the due
diligence to discover and repair defects therein. Failure to perform such duties
constitutes negligence.36 By reason of said negligence, public utilities run the risk
of forfeiting amounts originally due from their customers.37
As to the alleged tampering of the electric meter in TEC's NS building, suffice it to
state that the allegation was not proven, considering that the meters therein were
enclosed in a metal cabinet the metal seal of which was unbroken, with petitioner
having sole access to the said meters.38
In view of the negative finding on the alleged tampering of electric meters on TEC's
DCIM and NS buildings, petitioner's claim of differential billing was correctly denied
by the trial and appellate courts. With greater reason, therefore, could petitioner not
exercise the right of immediate disconnection.
The law in force at the time material to this controversy was Presidential Decree
(P.D.) No. 40139 issued on March 1, 1974.40 The decree penalized unauthorized
installation of water, electrical or telephone connections and such acts as the use of

tampered electrical meters. It was issued in answer to the urgent need to put an
end to illegal activities that prejudice the economic well-being of both the
companies concerned and the consuming public.41 P.D. 401 granted the electric
companies the right to conduct inspections of electric meters and the criminal
prosecution42 of erring consumers who were found to have tampered with their
electric meters. It did not expressly provide for more expedient remedies such as
the charging of differential billing and immediate disconnection against erring
consumers. Thus, electric companies found a creative way of availing themselves of
such remedies by inserting into their service contracts (or agreements for the sale
of electric energy) a provision for differential billing with the option of disconnection
upon non-payment by the erring consumer. The Court has recognized the validity of
such stipulations.43 However, recourse to differential billing with disconnection was
subject to the prior requirement of a 48-hour written notice of disconnection.44
Petitioner, in the instant case, resorted to the remedy of disconnection without prior
notice. While it is true that petitioner sent a demand letter to TEC for the payment
of differential billing, it did not include any notice that the electric supply would be
disconnected. In fine, petitioner abused the remedies granted to it under P.D. 401
and Revised General Order No. 1 by outrightly depriving TEC of electrical services
without first notifying it of the impending disconnection. Accordingly, the CA did not
err in affirming the RTC decision.
As to the damages awarded by the CA, we deem it proper to modify the same.
Actual damages are compensation for an injury that will put the injured party in the
position where it was before the injury. They pertain to such injuries or losses that
are actually sustained and susceptible of measurement. Except as provided by law
or by stipulation, a party is entitled to adequate compensation only for such
pecuniary loss as is duly proven. Basic is the rule that to recover actual damages,
not only must the amount of loss be capable of proof; it must also be actually
proven with a reasonable degree of certainty, premised upon competent proof or
the best evidence obtainable.45
Respondent TEC sufficiently established, and petitioner in fact admitted, that the
former paid P1,000,000.00 and P280,813.72 under protest, the amounts
representing a portion of the latter's claim of differential billing. With the finding
that no tampering was committed and, thus, no differential billing due, the aforesaid
amounts should be returned by petitioner, with interest, as ordered by the Court of
Appeals and pursuant to the guidelines set forth by the Court.46
However, despite the appellate court's conclusion that no tampering was
committed, it held Ultra solidarily liable with petitioner for P1,000,000.00, only
because the former, as occupant of the building, promised to settle the claims of
the latter. This ruling is erroneous. Ultra's promise was conditioned upon the finding
of defect or tampering of the meters. It did not acknowledge any culpability and
liability, and absent any tampered meter, it is absurd to make the lawful occupant
liable. It was petitioner who received the P1 million; thus, it alone should be held
liable for the return of the amount.
TEC also sufficiently established its claim for the reimbursement of the amount paid
as rentals for the generator set it was constrained to rent by reason of the illegal

disconnection of electrical service. The official receipts and purchase orders

submitted by TEC as evidence sufficiently show that such rentals were indeed
made. However, the amount of P150,000.00 per month for five months, awarded by
the CA, is excessive. Instead, a total sum of P150,000.00, as found by the RTC, is
proper.
As to the payment of exemplary damages and attorney's fees, we find no cogent
reason to disturb the same. Exemplary damages are imposed by way of example or
correction for the public good in addition to moral, temperate, liquidated, or
compensatory damages.47 In this case, to serve as an example that before a
disconnection of electrical supply can be effected by a public utility, the requisites
of law must be complied with we affirm the award of P200,000.00 as exemplary
damages. With the award of exemplary damages, the award of attorney's fees is
likewise proper, pursuant to Article 220848 of the Civil Code. It is obvious that TEC
needed the services of a lawyer to argue its cause through three levels of the
judicial hierarchy. Thus, the award of P200,000.00 is in order.49
We, however, deem it proper to delete the award of moral damages. TEC's claim
was premised allegedly on the damage to its goodwill and reputation.50 As a rule, a
corporation is not entitled to moral damages because, not being a natural person, it
cannot experience physical suffering or sentiments like wounded feelings, serious
anxiety, mental anguish and moral shock. The only exception to this rule is when
the corporation has a reputation that is debased, resulting in its humiliation in the
business realm.51 But in such a case, it is imperative for the claimant to present
proof to justify the award. It is essential to prove the existence of the factual basis
of the damage and its causal relation to petitioner's acts.52 In the present case, the
records are bereft of any evidence that the name or reputation of TEC/TPC has been
debased as a result of petitioner's acts. Besides, the trial court simply awarded
moral damages in the dispositive portion of its decision without stating the basis
thereof.
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R.
CV No. 40282 dated June 18, 1997 and its Resolution dated December 3, 1997 are
AFFIRMED with the following MODIFICATIONS: (1) the award of P150,000.00 per
month for five months as reimbursement for the rentals of the generator set is
REDUCED to P150,000.00; and (2) the award of P500,000.00 as moral damages is
hereby DELETED.
SO ORDERED.
Ynares-Santiago, Chairperson, Austria-Marinez, Chico-Nazario, Reyes, JJ., concur.
Ching vs Sec. of Justice
G. R. No. 164317
February 6, 2006
ALFREDO CHING, Petitioner,
vs.

THE SECRETARY OF JUSTICE, ASST. CITY PROSECUTOR ECILYN BURGOS-VILLAVERT,

JUDGE EDGARDO SUDIAM of the Regional Trial Court, Manila, Branch 52; RIZAL
COMMERCIAL BANKING CORP. and THE PEOPLE OF THE PHILIPPINES, Respondents.
DECISION
CALLEJO, SR., J.:
Before the Court is a petition for review on certiorari of the Decision1 of the Court of
Appeals (CA) in CA-G.R. SP No. 57169 dismissing the petition for certiorari,
prohibition and mandamus filed by petitioner Alfredo Ching, and its Resolution2
dated June 28, 2004 denying the motion for reconsideration thereof.
Petitioner was the Senior Vice-President of Philippine Blooming Mills, Inc. (PBMI).
Sometime in September to October 1980, PBMI, through petitioner, applied with the
Rizal Commercial Banking Corporation (respondent bank) for the issuance of
commercial letters of credit to finance its importation of assorted goods.3
Respondent bank approved the application, and irrevocable letters of credit were
issued in favor of petitioner. The goods were purchased and delivered in trust to
PBMI. Petitioner signed 13 trust receipts4 as surety, acknowledging delivery of the
following goods:

T/R
Nos.

Date
Granted

Maturity
Date

Principal

Description of Goods

1845

12-05-80

03-05-81

1853

12-08-80

03-06-81

P198,150.67

3,000 pcs. (15

bundles) Calorized
Lance Pipes

1824

11-28-80

02-26-81

P707,879.71

One Lot High Fired

Refractory Tundish
Bricks

1798

11-21-80

02-19-81

P835,526.25

5 cases spare parts

for CCM

1808

11-21-80

02-19-81

P370,332.52

200 pcs. ingot moulds

2042

01-30-81

04-30-81

P469,669.29

High Fired Refractory

Nozzle Bricks

1801

11-21-80

02-19-81

P1,596,470.05 79.9425 M/T "SDK"

Brand Synthetic
Graphite Electrode

P2,001,715.17 Synthetic Graphite

Electrode [with]
tapered pitch filed
nipples
1857

12-09-80

03-09-81

P197,843.61

3,000 pcs. (15

bundles calorized
lance pipes [)]

1895

12-17-80

03-17-81

P67,652.04

Spare parts for

Spectrophotometer

1911

12-22-80

03-20-81

P91,497.85

50 pcs. Ingot moulds

2041

01-30-81

04-30-81

P91,456.97

50 pcs. Ingot moulds

2099

02-10-81

05-11-81

P66,162.26

8 pcs. Kubota Rolls

for rolling mills

2100

02-10-81

05-12-81

P210,748.00

Spare parts for

Lacolaboratory
Equipment5

Under the receipts, petitioner agreed to hold the goods in trust for the said bank,
with authority to sell but not by way of conditional sale, pledge or otherwise; and in
case such goods were sold, to turn over the proceeds thereof as soon as received,
to apply against the relative acceptances and payment of other indebtedness to
respondent bank. In case the goods remained unsold within the specified period, the
goods were to be returned to respondent bank without any need of demand. Thus,
said "goods, manufactured products or proceeds thereof, whether in the form of
money or bills, receivables, or accounts separate and capable of identification" were
respondent banks property.
When the trust receipts matured, petitioner failed to return the goods to respondent
bank, or to return their value amounting to P6,940,280.66 despite demands. Thus,
the bank filed a criminal complaint for estafa6 against petitioner in the Office of the
City Prosecutor of Manila.
After the requisite preliminary investigation, the City Prosecutor found probable
cause estafa under Article 315, paragraph 1(b) of the Revised Penal Code, in
relation to Presidential Decree (P.D.) No. 115, otherwise known as the Trust Receipts
Law. Thirteen (13) Informations were filed against the petitioner before the Regional
Trial Court (RTC) of Manila. The cases were docketed as Criminal Cases No. 8642169 to 86-42181, raffled to Branch 31 of said court.
Petitioner appealed the resolution of the City Prosecutor to the then Minister of
Justice. The appeal was dismissed in a Resolution7 dated March 17, 1987, and
petitioner moved for its reconsideration. On December 23, 1987, the Minister of
Justice granted the motion, thus reversing the previous resolution finding probable

cause against petitioner.8 The City Prosecutor was ordered to move for the
withdrawal of the Informations.
This time, respondent bank filed a motion for reconsideration, which, however, was
denied on February 24, 1988.9 The RTC, for its part, granted the Motion to Quash
the Informations filed by petitioner on the ground that the material allegations
therein did not amount to estafa.10
In the meantime, the Court rendered judgment in Allied Banking Corporation v.
Ordoez,11 holding that the penal provision of P.D. No. 115 encompasses any act
violative of an obligation covered by the trust receipt; it is not limited to
transactions involving goods which are to be sold (retailed), reshipped, stored or
processed as a component of a product ultimately sold. The Court also ruled that
"the non-payment of the amount covered by a trust receipt is an act violative of the
obligation of the entrustee to pay."12
On February 27, 1995, respondent bank re-filed the criminal complaint for estafa
against petitioner before the Office of the City Prosecutor of Manila. The case was
docketed as I.S. No. 95B-07614.
Preliminary investigation ensued. On December 8, 1995, the City Prosecutor ruled
that there was no probable cause to charge petitioner with violating P.D. No. 115, as
petitioners liability was only civil, not criminal, having signed the trust receipts as
surety.13 Respondent bank appealed the resolution to the Department of Justice
(DOJ) via petition for review, alleging that the City Prosecutor erred in ruling:
1. That there is no evidence to show that respondent participated in the
misappropriation of the goods subject of the trust receipts;
2. That the respondent is a mere surety of the trust receipts; and
3. That the liability of the respondent is only civil in nature.14
On July 13, 1999, the Secretary of Justice issued Resolution No. 25015 granting the
petition and reversing the assailed resolution of the City Prosecutor. According to
the Justice Secretary, the petitioner, as Senior Vice-President of PBMI, executed the
13 trust receipts and as such, was the one responsible for the offense. Thus, the
execution of said receipts is enough to indict the petitioner as the official
responsible for violation of P.D. No. 115. The Justice Secretary also declared that
petitioner could not contend that P.D. No. 115 covers only goods ultimately destined
for sale, as this issue had already been settled in Allied Banking Corporation v.
Ordoez,16 where the Court ruled that P.D. No. 115 is "not limited to transactions in
goods which are to be sold (retailed), reshipped, stored or processed as a
component of a product ultimately sold but covers failure to turn over the proceeds
of the sale of entrusted goods, or to return said goods if unsold or not otherwise
disposed of in accordance with the terms of the trust receipts."
The Justice Secretary further stated that the respondent bound himself under the
terms of the trust receipts not only as a corporate official of PBMI but also as its
surety; hence, he could be proceeded against in two (2) ways: first, as surety as

determined by the Supreme Court in its decision in Rizal Commercial Banking

Corporation v. Court of Appeals;17 and second, as the corporate official responsible
for the offense under P.D. No. 115, via criminal prosecution. Moreover, P.D. No. 115
explicitly allows the prosecution of corporate officers "without prejudice to the civil
liabilities arising from the criminal offense." Thus, according to the Justice Secretary,
following Rizal Commercial Banking Corporation, the civil liability imposed is clearly
separate and distinct from the criminal liability of the accused under P.D. No. 115.
Conformably with the Resolution of the Secretary of Justice, the City Prosecutor filed
13 Informations against petitioner for violation of P.D. No. 115 before the RTC of
Manila. The cases were docketed as Criminal Cases No. 99-178596 to 99-178608
and consolidated for trial before Branch 52 of said court. Petitioner filed a motion for
reconsideration, which the Secretary of Justice denied in a Resolution18 dated
January 17, 2000.
Petitioner then filed a petition for certiorari, prohibition and mandamus with the CA,
assailing the resolutions of the Secretary of Justice on the following grounds:
1. THE RESPONDENTS ARE ACTING WITH AN UNEVEN HAND AND IN FACT, ARE
ACTING OPPRESSIVELY AGAINST ALFREDO CHING WHEN THEY ALLOWED HIS
PROSECUTION DESPITE THE FACT THAT NO EVIDENCE HAD BEEN PRESENTED TO
PROVE HIS PARTICIPATION IN THE ALLEGED TRANSACTIONS.
2. THE RESPONDENT SECRETARY OF JUSTICE COMMITTED AN ACT IN GRAVE ABUSE
OF DISCRETION AND IN EXCESS OF HIS JURISDICTION WHEN THEY CONTINUED
PROSECUTION OF THE PETITIONER DESPITE THE LENGTH OF TIME INCURRED IN THE
TERMINATION OF THE PRELIMINARY INVESTIGATION THAT SHOULD JUSTIFY THE
DISMISSAL OF THE INSTANT CASE.
3. THE RESPONDENT SECRETARY OF JUSTICE AND ASSISTANT CITY PROSECUTOR
ACTED IN GRAVE ABUSE OF DISCRETION AMOUNTING TO AN EXCESS OF
JURISDICTION WHEN THEY CONTINUED THE PROSECUTION OF THE PETITIONER
DESPITE LACK OF SUFFICIENT BASIS.19
In his petition, petitioner incorporated a certification stating that "as far as this
Petition is concerned, no action or proceeding in the Supreme Court, the Court of
Appeals or different divisions thereof, or any tribunal or agency. It is finally certified
that if the affiant should learn that a similar action or proceeding has been filed or is
pending before the Supreme Court, the Court of Appeals, or different divisions
thereof, of any other tribunal or agency, it hereby undertakes to notify this
Honorable Court within five (5) days from such notice."20
In its Comment on the petition, the Office of the Solicitor General alleged that A.
THE HONORABLE SECRETARY OF JUSTICE CORRECTLY RULED THAT PETITIONER
ALFREDO CHING IS THE OFFICER RESPONSIBLE FOR THE OFFENSE CHARGED AND
THAT THE ACTS OF PETITIONER FALL WITHIN THE AMBIT OF VIOLATION OF P.D. [No.]
115 IN RELATION TO ARTICLE 315, PAR. 1(B) OF THE REVISED PENAL CODE.

B.
THERE IS NO MERIT IN PETITIONERS CONTENTION THAT EXCESSIVE DELAY HAS
MARRED THE CONDUCT OF THE PRELIMINARY INVESTIGATION OF THE CASE,
JUSTIFYING ITS DISMISSAL.
C.
THE PRESENT SPECIAL CIVIL ACTION FOR CERTIORARI, PROHIBITION AND
MANDAMUS IS NOT THE PROPER MODE OF REVIEW FROM THE RESOLUTION OF THE
DEPARTMENT OF JUSTICE. THE PRESENT PETITION MUST THEREFORE BE
DISMISSED.21
On April 22, 2004, the CA rendered judgment dismissing the petition for lack of
merit, and on procedural grounds. On the procedural issue, it ruled that (a) the
certification of non-forum shopping executed by petitioner and incorporated in the
petition was defective for failure to comply with the first two of the three-fold
undertakings prescribed in Rule 7, Section 5 of the Revised Rules of Civil Procedure;
and (b) the petition for certiorari, prohibition and mandamus was not the proper
remedy of the petitioner.
On the merits of the petition, the CA ruled that the assailed resolutions of the
Secretary of Justice were correctly issued for the following reasons: (a) petitioner,
being the Senior Vice-President of PBMI and the signatory to the trust receipts, is
criminally liable for violation of P.D. No. 115; (b) the issue raised by the petitioner,
on whether he violated P.D. No. 115 by his actuations, had already been resolved
and laid to rest in Allied Bank Corporation v. Ordoez;22 and (c) petitioner was
estopped from raising the
City Prosecutors delay in the final disposition of the preliminary investigation
because he failed to do so in the DOJ.
Thus, petitioner filed the instant petition, alleging that:
I
THE COURT OF APPEALS ERRED WHEN IT DISMISSED THE PETITION ON THE
GROUND THAT THE CERTIFICATION OF NON-FORUM SHOPPING INCORPORATED
THEREIN WAS DEFECTIVE.
II
THE COURT OF APPEALS ERRED WHEN IT RULED THAT NO GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WAS COMMITTED
BY THE SECRETARY OF JUSTICE IN COMING OUT WITH THE ASSAILED
RESOLUTIONS.23
The Court will delve into and resolve the issues seriatim.

The petitioner avers that the CA erred in dismissing his petition on a mere
technicality. He claims that the rules of procedure should be used to promote, not
frustrate, substantial justice. He insists that the Rules of Court should be construed
liberally especially when, as in this case, his substantial rights are adversely
affected; hence, the deficiency in his certification of non-forum shopping should not
result in the dismissal of his petition.
The Office of the Solicitor General (OSG) takes the opposite view, and asserts that
indubitably, the certificate of non-forum shopping incorporated in the petition
before the CA is defective because it failed to disclose essential facts about pending
actions concerning similar issues and parties. It asserts that petitioners failure to
comply with the Rules of Court is fatal to his petition. The OSG cited Section 2, Rule
42, as well as the ruling of this Court in Melo v. Court of Appeals.24
We agree with the ruling of the CA that the certification of non-forum shopping
petitioner incorporated in his petition before the appellate court is defective. The
certification reads:
It is further certified that as far as this Petition is concerned, no action or proceeding
in the Supreme Court, the Court of Appeals or different divisions thereof, or any
tribunal or agency.
It is finally certified that if the affiant should learn that a similar action or proceeding
has been filed or is pending before the Supreme Court, the Court of Appeals, or
different divisions thereof, of any other tribunal or agency, it hereby undertakes to
notify this Honorable Court within five (5) days from such notice.25
Under Section 1, second paragraph of Rule 65 of the Revised Rules of Court, the
petition should be accompanied by a sworn certification of non-forum shopping, as
provided in the third paragraph of Section 3, Rule 46 of said Rules. The latter
provision reads in part:
SEC. 3. Contents and filing of petition; effect of non-compliance with requirements.
The petition shall contain the full names and actual addresses of all the
petitioners and respondents, a concise statement of the matters involved, the
factual background of the case and the grounds relied upon for the relief prayed for.
xxx
The petitioner shall also submit together with the petition a sworn certification that
he has not theretofore commenced any other action involving the same issues in
the Supreme Court, the Court of Appeals or different divisions thereof, or any other
tribunal or agency; if there is such other action or proceeding, he must state the
status of the same; and if he should thereafter learn that a similar action or
proceeding has been filed or is pending before the Supreme Court, the Court of
Appeals, or different divisions thereof, or any other tribunal or agency, he
undertakes to promptly inform the aforesaid courts and other tribunal or agency
thereof within five (5) days therefrom. xxx

Compliance with the certification against forum shopping is separate from and
independent of the avoidance of forum shopping itself. The requirement is
mandatory. The failure of the petitioner to comply with the foregoing requirement
shall be sufficient ground for the dismissal of the petition without prejudice, unless
otherwise provided.26
Indubitably, the first paragraph of petitioners certification is incomplete and
unintelligible. Petitioner failed to certify that he "had not heretofore commenced any
other action involving the same issues in the Supreme Court, the Court of Appeals
or the different divisions thereof or any other tribunal or agency" as required by
paragraph 4, Section 3, Rule 46 of the Revised Rules of Court.
We agree with petitioners contention that the certification is designed to promote
and facilitate the orderly administration of justice, and therefore, should not be
interpreted with absolute literalness. In his works on the Revised Rules of Civil
Procedure, former Supreme Court Justice Florenz Regalado states that, with respect
to the contents of the certification which the pleader may prepare, the rule of
substantial compliance may be availed of.27 However, there must be a special
circumstance or compelling reason which makes the strict application of the
requirement clearly unjustified. The instant petition has not alleged any such
extraneous circumstance. Moreover, as worded, the certification cannot even be
regarded as substantial compliance with the procedural requirement. Thus, the CA
was not informed whether, aside from the petition before it, petitioner had
commenced any other action involving the same issues in other tribunals.
On the merits of the petition, the CA ruled that the petitioner failed to establish that
the Secretary of Justice committed grave abuse of discretion in finding probable
cause against the petitioner for violation of estafa under Article 315, paragraph 1(b)
of the Revised Penal Code, in relation to P.D. No. 115. Thus, the appellate court
ratiocinated:
Be that as it may, even on the merits, the arguments advanced in support of the
petition are not persuasive enough to justify the desired conclusion that respondent
Secretary of Justice gravely abused its discretion in coming out with his assailed
Resolutions. Petitioner posits that, except for his being the Senior Vice-President of
the PBMI, there is no iota of evidence that he was a participes crimines in violating
the trust receipts sued upon; and that his liability, if at all, is purely civil because he
signed the said trust receipts merely as a xxx surety and not as the entrustee.
These assertions are, however, too dull that they cannot even just dent the findings
of the respondent Secretary, viz:
"x x x it is apropos to quote section 13 of PD 115 which states in part, viz:
xxx If the violation or offense is committed by a corporation, partnership,
association or other judicial entities, the penalty provided for in this Decree shall be
imposed upon the directors, officers, employees or other officials or persons therein
responsible for the offense, without prejudice to the civil liabilities arising from the
criminal offense.

"There is no dispute that it was the respondent, who as senior vice-president of

PBM, executed the thirteen (13) trust receipts. As such, the law points to him as the
official responsible for the offense. Since a corporation cannot be proceeded against
criminally because it cannot commit crime in which personal violence or malicious
intent is required, criminal action is limited to the corporate agents guilty of an act
amounting to a crime and never against the corporation itself (West Coast Life Ins.
Co. vs. Hurd, 27 Phil. 401; Times, [I]nc. v. Reyes, 39 SCRA 303). Thus, the execution
by respondent of said receipts is enough to indict him as the official responsible for
violation of PD 115.
"Parenthetically, respondent is estopped to still contend that PD 115 covers only
goods which are ultimately destined for sale and not goods, like those imported by
PBM, for use in manufacture. This issue has already been settled in the Allied
Banking Corporation case, supra, where he was also a party, when the Supreme
Court ruled that PD 115 is not limited to transactions in goods which are to be sold
(retailed), reshipped, stored or processed as a component or a product ultimately
sold but covers failure to turn over the proceeds of the sale of entrusted goods, or
to return said goods if unsold or disposed of in accordance with the terms of the
trust receipts.
"In regard to the other assigned errors, we note that the respondent bound himself
under the terms of the trust receipts not only as a corporate official of PBM but also
as its surety. It is evident that these are two (2) capacities which do not exclude the
other. Logically, he can be proceeded against in two (2) ways: first, as surety as
determined by the Supreme Court in its decision in RCBC vs. Court of Appeals, 178
SCRA 739; and, secondly, as the corporate official responsible for the offense under
PD 115, the present case is an appropriate remedy under our penal law.
"Moreover, PD 115 explicitly allows the prosecution of corporate officers without
prejudice to the civil liabilities arising from the criminal offense thus, the civil
liability imposed on respondent in RCBC vs. Court of Appeals case is clearly
separate and distinct from his criminal liability under PD 115."28
Petitioner asserts that the appellate courts ruling is erroneous because (a) the
transaction between PBMI and respondent bank is not a trust receipt transaction;
(b) he entered into the transaction and was sued in his capacity as PBMI Senior
Vice-President; (c) he never received the goods as an entrustee for PBMI, hence,
could not have committed any dishonesty or abused the confidence of respondent
bank; and (d) PBMI acquired the goods and used the same in operating its
machineries and equipment and not for resale.
The OSG, for its part, submits a contrary view, to wit:
34. Petitioner further claims that he is not a person responsible for the offense
allegedly because "[b]eing charged as the Senior Vice-President of Philippine
Blooming Mills (PBM), petitioner cannot be held criminally liable as the transactions
sued upon were clearly entered into in his capacity as an officer of the corporation"
and that [h]e never received the goods as an entrustee for PBM as he never had or
took possession of the goods nor did he commit dishonesty nor "abuse of
confidence in transacting with RCBC." Such argument is bereft of merit.

35. Petitioners being a Senior Vice-President of the Philippine Blooming Mills does
not exculpate him from any liability. Petitioners responsibility as the corporate
official of PBM who received the goods in trust is premised on Section 13 of P.D. No.
115, which provides:
Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of
the sale of the goods, documents or instruments covered by a trust receipt to the
extent of the amount owing to the entruster or as appears in the trust receipt or to
return said goods, documents or instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall constitute the crime of estafa,
punishable under the provisions of Article Three hundred and fifteen, paragraph one
(b) of Act Numbered Three thousand eight hundred and fifteen, as amended,
otherwise known as the Revised Penal Code. If the violation or offense is committed
by a corporation, partnership, association or other juridical entities, the penalty
provided for in this Decree shall be imposed upon the directors, officers, employees
or other officials or persons therein responsible for the offense, without prejudice to
the civil liabilities arising from the criminal offense. (Emphasis supplied)
36. Petitioner having participated in the negotiations for the trust receipts and
having received the goods for PBM, it was inevitable that the petitioner is the proper
corporate officer to be proceeded against by virtue of the PBMs violation of P.D. No.
115.29
The ruling of the CA is correct.
In Mendoza-Arce v. Office of the Ombudsman (Visayas),30 this Court held that the
acts of a quasi-judicial officer may be assailed by the aggrieved party via a petition
for certiorari and enjoined (a) when necessary to afford adequate protection to the
constitutional rights of the accused; (b) when necessary for the orderly
administration of justice; (c) when the acts of the officer are without or in excess of
authority; (d) where the charges are manifestly false and motivated by the lust for
vengeance; and (e) when there is clearly no prima facie case against the
accused.31 The Court also declared that, if the officer conducting a preliminary
investigation (in that case, the Office of the Ombudsman) acts without or in excess
of his authority and resolves to file an Information despite the absence of probable
cause, such act may be nullified by a writ of certiorari.32
Indeed, under Section 4, Rule 112 of the 2000 Rules of Criminal Procedure,33 the
Information shall be prepared by the Investigating Prosecutor against the
respondent only if he or she finds probable cause to hold such respondent for trial.
The Investigating Prosecutor acts without or in excess of his authority under the
Rule if the Information is filed against the respondent despite absence of evidence
showing probable cause therefor.34 If the Secretary of Justice reverses the
Resolution of the Investigating Prosecutor who found no probable cause to hold the
respondent for trial, and orders such prosecutor to file the Information despite the
absence of probable cause, the Secretary of Justice acts contrary to law, without
authority and/or in excess of authority. Such resolution may likewise be nullified in a
petition for certiorari under Rule 65 of the Revised Rules of Civil Procedure.35

A preliminary investigation, designed to secure the respondent against hasty,

malicious and oppressive prosecution, is an inquiry to determine whether (a) a
crime has been committed; and (b) whether there is probable cause to believe that
the accused is guilty thereof. It is a means of discovering the person or persons who
may be reasonably charged with a crime. Probable cause need not be based on
clear and convincing evidence of guilt, as the investigating officer acts upon
probable cause of reasonable belief. Probable cause implies probability of guilt and
requires more than bare suspicion but less than evidence which would justify a
conviction. A finding of probable cause needs only to rest on evidence showing that
more likely than not, a crime has been committed by the suspect.36
However, while probable cause should be determined in a summary manner, there
is a need to examine the evidence with care to prevent material damage to a
potential accuseds constitutional right to liberty and the guarantees of freedom and
fair play37 and to protect the State from the burden of unnecessary expenses in
prosecuting alleged offenses and holding trials arising from false, fraudulent or
groundless charges.38
In this case, petitioner failed to establish that the Secretary of Justice committed
grave abuse of discretion in issuing the assailed resolutions. Indeed, he acted in
accord with law and the evidence.
Section 4 of P.D. No. 115 defines a trust receipt transaction, thus:
Section 4. What constitutes a trust receipt transaction. A trust receipt transaction,
within the meaning of this Decree, is any transaction by and between a person
referred to in this Decree as the entruster, and another person referred to in this
Decree as entrustee, whereby the entruster, who owns or holds absolute title or
security interests over certain specified goods, documents or instruments, releases
the same to the possession of the entrustee upon the latters execution and delivery
to the entruster of a signed document called a "trust receipt" wherein the entrustee
binds himself to hold the designated goods, documents or instruments in trust for
the entruster and to sell or otherwise dispose of the goods, documents or
instruments with the obligation to turn over to the entruster the proceeds thereof to
the extent of the amount owing to the entruster or as appears in the trust receipt or
the goods, documents or instruments themselves if they are unsold or not otherwise
disposed of, in accordance with the terms and conditions specified in the trust
receipt, or for other purposes substantially equivalent to any of the following:
1. In case of goods or documents, (a) to sell the goods or procure their sale; or (b) to
manufacture or process the goods with the purpose of ultimate sale; Provided, That,
in the case of goods delivered under trust receipt for the purpose of manufacturing
or processing before its ultimate sale, the entruster shall retain its title over the
goods whether in its original or processed form until the entrustee has complied
fully with his obligation under the trust receipt; or (c) to load, unload, ship or
otherwise deal with them in a manner preliminary or necessary to their sale; or
2. In the case of instruments a) to sell or procure their sale or exchange; or b) to
deliver them to a principal; or c) to effect the consummation of some transactions

involving delivery to a depository or register; or d) to effect their presentation,

collection or renewal.
The sale of goods, documents or instruments by a person in the business of selling
goods, documents or instruments for profit who, at the outset of the transaction,
has, as against the buyer, general property rights in such goods, documents or
instruments, or who sells the same to the buyer on credit, retaining title or other
interest as security for the payment of the purchase price, does not constitute a
trust receipt transaction and is outside the purview and coverage of this Decree.
An entrustee is one having or taking possession of goods, documents or instruments
under a trust receipt transaction, and any successor in interest of such person for
the purpose of payment specified in the trust receipt agreement.39 The entrustee is
obliged to: (1) hold the goods, documents or instruments in trust for the entruster
and shall dispose of them strictly in accordance with the terms and conditions of the
trust receipt; (2) receive the proceeds in trust for the entruster and turn over the
same to the entruster to the extent of the amount owing to the entruster or as
appears on the trust receipt; (3) insure the goods for their total value against loss
from fire, theft, pilferage or other casualties; (4) keep said goods or proceeds
thereof whether in money or whatever form, separate and capable of identification
as property of the entruster; (5) return the goods, documents or instruments in the
event of non-sale or upon demand of the entruster; and (6) observe all other terms
and conditions of the trust receipt not contrary to the provisions of the decree.40
The entruster shall be entitled to the proceeds from the sale of the goods,
documents or instruments released under a trust receipt to the entrustee to the
extent of the amount owing to the entruster or as appears in the trust receipt, or to
the return of the goods, documents or instruments in case of non-sale, and to the
enforcement of all other rights conferred on him in the trust receipt; provided, such
are not contrary to the provisions of the document.41
In the case at bar, the transaction between petitioner and respondent bank falls
under the trust receipt transactions envisaged in P.D. No. 115. Respondent bank
imported the goods and entrusted the same to PBMI under the trust receipts signed
by petitioner, as entrustee, with the bank as entruster. The agreement was as
follows:
And in consideration thereof, I/we hereby agree to hold said goods in trust for the
said BANK as its property with liberty to sell the same within ____days from the date
of the execution of this Trust Receipt and for the Banks account, but without
authority to make any other disposition whatsoever of the said goods or any part
thereof (or the proceeds) either by way of conditional sale, pledge or otherwise.
I/we agree to keep the said goods insured to their full value against loss from fire,
theft, pilferage or other casualties as directed by the BANK, the sum insured to be
payable in case of loss to the BANK, with the understanding that the BANK is, not to
be chargeable with the storage premium or insurance or any other expenses
incurred on said goods.

In case of sale, I/we further agree to turn over the proceeds thereof as soon as
received to the BANK, to apply against the relative acceptances (as described
above) and for the payment of any other indebtedness of mine/ours to the BANK. In
case of non-sale within the period specified herein, I/we agree to return the goods
under this Trust Receipt to the BANK without any need of demand.
I/we agree to keep the said goods, manufactured products or proceeds thereof,
whether in the form of money or bills, receivables, or accounts separate and
capable of identification as property of the BANK.42
It must be stressed that P.D. No. 115 is a declaration by legislative authority that, as
a matter of public policy, the failure of person to turn over the proceeds of the sale
of the goods covered by a trust receipt or to return said goods, if not sold, is a public
nuisance to be abated by the imposition of penal sanctions.43
The Court likewise rules that the issue of whether P.D. No. 115 encompasses
transactions involving goods procured as a component of a product ultimately sold
has been resolved in the affirmative in Allied Banking Corporation v. Ordoez.44 The
law applies to goods used by the entrustee in the operation of its machineries and
equipment. The non-payment of the amount covered by the trust receipts or the
non-return of the goods covered by the receipts, if not sold or otherwise not
disposed of, violate the entrustees obligation to pay the amount or to return the
goods to the entruster.
In Colinares v. Court of Appeals,45 the Court declared that there are two possible
situations in a trust receipt transaction. The first is covered by the provision which
refers to money received under the obligation involving the duty to deliver it
(entregarla) to the owner of the merchandise sold. The second is covered by the
provision which refers to merchandise received under the obligation to return it
(devolvera) to the owner.46 Thus, failure of the entrustee to turn over the proceeds
of the sale of the goods covered by the trust receipts to the entruster or to return
said goods if they were not disposed of in accordance with the terms of the trust
receipt is a crime under P.D. No. 115, without need of proving intent to defraud. The
law punishes dishonesty and abuse of confidence in the handling of money or goods
to the prejudice of the entruster, regardless of whether the latter is the owner or
not. A mere failure to deliver the proceeds of the sale of the goods, if not sold,
constitutes a criminal offense that causes prejudice, not only to another, but more
to the public interest.47
The Court rules that although petitioner signed the trust receipts merely as Senior
Vice-President of PBMI and had no physical possession of the goods, he cannot
avoid prosecution for violation of P.D. No. 115.
The penalty clause of the law, Section 13 of P.D. No. 115 reads:
Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of
the sale of the goods, documents or instruments covered by a trust receipt to the
extent of the amount owing to the entruster or as appears in the trust receipt or to
return said goods, documents or instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall constitute the crime of estafa,

punishable under the provisions of Article Three hundred and fifteen, paragraph one
(b) of Act Numbered Three thousand eight hundred and fifteen, as amended,
otherwise known as the Revised Penal Code.1wphi1 If the violation or offense is
committed by a corporation, partnership, association or other juridical entities, the
penalty provided for in this Decree shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for the offense, without
prejudice to the civil liabilities arising from the criminal offense.
The crime defined in P.D. No. 115 is malum prohibitum but is classified as estafa
under paragraph 1(b), Article 315 of the Revised Penal Code, or estafa with abuse of
confidence. It may be committed by a corporation or other juridical entity or by
natural persons. However, the penalty for the crime is imprisonment for the periods
provided in said Article 315, which reads:
ARTICLE 315. Swindling (estafa). Any person who shall defraud another by any of
the means mentioned hereinbelow shall be punished by:
1st. The penalty of prision correccional in its maximum period to prision mayor in its
minimum period, if the amount of the fraud is over 12,000 pesos but does not
exceed 22,000 pesos; and if such amount exceeds the latter sum, the penalty
provided in this paragraph shall be imposed in its maximum period, adding one year
for each additional 10,000 pesos; but the total penalty which may be imposed shall
not exceed twenty years. In such cases, and in connection with the accessory
penalties which may be imposed and for the purpose of the other provisions of this
Code, the penalty shall be termed prision mayor or reclusion temporal, as the case
may be;
2nd. The penalty of prision correccional in its minimum and medium periods, if the
amount of the fraud is over 6,000 pesos but does not exceed 12,000 pesos;
3rd. The penalty of arresto mayor in its maximum period to prision correccional in
its minimum period, if such amount is over 200 pesos but does not exceed 6,000
pesos; and
4th. By arresto mayor in its medium and maximum periods, if such amount does not
exceed 200 pesos, provided that in the four cases mentioned, the fraud be
committed by any of the following means; xxx
Though the entrustee is a corporation, nevertheless, the law specifically makes the
officers, employees or other officers or persons responsible for the offense, without
prejudice to the civil liabilities of such corporation and/or board of directors, officers,
or other officials or employees responsible for the offense. The rationale is that such
officers or employees are vested with the authority and responsibility to devise
means necessary to ensure compliance with the law and, if they fail to do so, are
held criminally accountable; thus, they have a responsible share in the violations of
the law.48
If the crime is committed by a corporation or other juridical entity, the directors,
officers, employees or other officers thereof responsible for the offense shall be
charged and penalized for the crime, precisely because of the nature of the crime

and the penalty therefor. A corporation cannot be arrested and imprisoned; hence,
cannot be penalized for a crime punishable by imprisonment.49 However, a
corporation may be charged and prosecuted for a crime if the imposable penalty is
fine. Even if the statute prescribes both fine and imprisonment as penalty, a
corporation may be prosecuted and, if found guilty, may be fined.50
A crime is the doing of that which the penal code forbids to be done, or omitting to
do what it commands. A necessary part of the definition of every crime is the
designation of the author of the crime upon whom the penalty is to be inflicted.
When a criminal statute designates an act of a corporation or a crime and
prescribes punishment therefor, it creates a criminal offense which, otherwise,
would not exist and such can be committed only by the corporation. But when a
penal statute does not expressly apply to corporations, it does not create an offense
for which a corporation may be punished. On the other hand, if the State, by
statute, defines a crime that may be committed by a corporation but prescribes the
penalty therefor to be suffered by the officers, directors, or employees of such
corporation or other persons responsible for the offense, only such individuals will
suffer such penalty.51 Corporate officers or employees, through whose act, default
or omission the corporation commits a crime, are themselves individually guilty of
the crime.52
The principle applies whether or not the crime requires the consciousness of
wrongdoing. It applies to those corporate agents who themselves commit the crime
and to those, who, by virtue of their managerial positions or other similar relation to
the corporation, could be deemed responsible for its commission, if by virtue of
their relationship to the corporation, they had the power to prevent the act.53
Moreover, all parties active in promoting a crime, whether agents or not, are
principals.54 Whether such officers or employees are benefited by their delictual
acts is not a touchstone of their criminal liability. Benefit is not an operative fact.
In this case, petitioner signed the trust receipts in question. He cannot, thus, hide
behind the cloak of the separate corporate personality of PBMI. In the words of Chief
Justice Earl Warren, a corporate officer cannot protect himself behind a corporation
where he is the actual, present and efficient actor.55
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. Costs
against the petitioner.
SO ORDERED.
J.G. Summit Holdings Inc. v. CA
G.R. No. 124293
January 31, 2005
J.G. SUMMIT HOLDINGS, INC., petitioner,
vs.
COURT OF APPEALS; COMMITTEE ON PRIVATIZATION, its Chairman and Members;
ASSET PRIVATIZATION TRUST; and PHILYARDS HOLDINGS, INC., respondents.
RESOLUTION

PUNO, J.:
For resolution before this Court are two motions filed by the petitioner, J.G. Summit
Holdings, Inc. for reconsideration of our Resolution dated September 24, 2003 and
to elevate this case to the Court En Banc. The petitioner questions the Resolution
which reversed our Decision of November 20, 2000, which in turn reversed and set
aside a Decision of the Court of Appeals promulgated on July 18, 1995.
I. Facts
The undisputed facts of the case, as set forth in our Resolution of September 24,
2003, are as follows:
On January 27, 1997, the National Investment and Development Corporation (NIDC),
a government corporation, entered into a Joint Venture Agreement (JVA) with
Kawasaki Heavy Industries, Ltd. of Kobe, Japan (KAWASAKI) for the construction,
operation and management of the Subic National Shipyard, Inc. (SNS) which
subsequently became the Philippine Shipyard and Engineering Corporation
(PHILSECO). Under the JVA, the NIDC and KAWASAKI will contribute P330 million for
the capitalization of PHILSECO in the proportion of 60%-40% respectively. One of its
salient features is the grant to the parties of the right of first refusal should either of
them decide to sell, assign or transfer its interest in the joint venture, viz:
1.4 Neither party shall sell, transfer or assign all or any part of its interest in SNS
[PHILSECO] to any third party without giving the other under the same terms the
right of first refusal. This provision shall not apply if the transferee is a corporation
owned or controlled by the GOVERNMENT or by a KAWASAKI affiliate.
On November 25, 1986, NIDC transferred all its rights, title and interest in PHILSECO
to the Philippine National Bank (PNB). Such interests were subsequently transferred
to the National Government pursuant to Administrative Order No. 14. On December
8, 1986, President Corazon C. Aquino issued Proclamation No. 50 establishing the
Committee on Privatization (COP) and the Asset Privatization Trust (APT) to take title
to, and possession of, conserve, manage and dispose of non-performing assets of
the National Government. Thereafter, on February 27, 1987, a trust agreement was
entered into between the National Government and the APT wherein the latter was
named the trustee of the National Government's share in PHILSECO. In 1989, as a
result of a quasi-reorganization of PHILSECO to settle its huge obligations to PNB,
the National Government's shareholdings in PHILSECO increased to 97.41% thereby
reducing KAWASAKI's shareholdings to 2.59%.
In the interest of the national economy and the government, the COP and the APT
deemed it best to sell the National Government's share in PHILSECO to private
entities. After a series of negotiations between the APT and KAWASAKI, they agreed
that the latter's right of first refusal under the JVA be "exchanged" for the right to
top by five percent (5%) the highest bid for the said shares. They further agreed
that KAWASAKI would be entitled to name a company in which it was a stockholder,
which could exercise the right to top. On September 7, 1990, KAWASAKI informed
APT that Philyards Holdings, Inc. (PHI)1 would exercise its right to top.

At the pre-bidding conference held on September 18, 1993, interested bidders were
given copies of the JVA between NIDC and KAWASAKI, and of the Asset Specific
Bidding Rules (ASBR) drafted for the National Government's 87.6% equity share in
PHILSECO. The provisions of the ASBR were explained to the interested bidders who
were notified that the bidding would be held on December 2, 1993. A portion of the
ASBR reads:
1.0 The subject of this Asset Privatization Trust (APT) sale through public bidding is
the National Government's equity in PHILSECO consisting of 896,869,942 shares of
stock (representing 87.67% of PHILSECO's outstanding capital stock), which will be
sold as a whole block in accordance with the rules herein enumerated.
xxx xxx xxx
2.0 The highest bid, as well as the buyer, shall be subject to the final approval of
both the APT Board of Trustees and the Committee on Privatization (COP).
2.1 APT reserves the right in its sole discretion, to reject any or all bids.
3.0 This public bidding shall be on an Indicative Price Bidding basis. The Indicative
price set for the National Government's 87.67% equity in PHILSECO is PESOS: ONE
BILLION THREE HUNDRED MILLION (P1,300,000,000.00).
xxx xxx xxx
6.0 The highest qualified bid will be submitted to the APT Board of Trustees at its
regular meeting following the bidding, for the purpose of determining whether or
not it should be endorsed by the APT Board of Trustees to the COP, and the latter
approves the same. The APT shall advise Kawasaki Heavy Industries, Inc. and/or its
nominee, [PHILYARDS] Holdings, Inc., that the highest bid is acceptable to the
National Government. Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings,
Inc. shall then have a period of thirty (30) calendar days from the date of receipt of
such advice from APT within which to exercise their "Option to Top the Highest Bid"
by offering a bid equivalent to the highest bid plus five (5%) percent thereof.
6.1 Should Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings, Inc.
exercise their "Option to Top the Highest Bid," they shall so notify the APT about
such exercise of their option and deposit with APT the amount equivalent to ten
percent (10%) of the highest bid plus five percent (5%) thereof within the thirty
(30)-day period mentioned in paragraph 6.0 above. APT will then serve notice upon
Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings, Inc. declaring them as
the preferred bidder and they shall have a period of ninety (90) days from the
receipt of the APT's notice within which to pay the balance of their bid price.
6.2 Should Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings, Inc. fail to
exercise their "Option to Top the Highest Bid" within the thirty (30)-day period, APT
will declare the highest bidder as the winning bidder.
xxx xxx xxx

12.0 The bidder shall be solely responsible for examining with appropriate care
these rules, the official bid forms, including any addenda or amendments thereto
issued during the bidding period. The bidder shall likewise be responsible for
informing itself with respect to any and all conditions concerning the PHILSECO
Shares which may, in any manner, affect the bidder's proposal. Failure on the part of
the bidder to so examine and inform itself shall be its sole risk and no relief for error
or omission will be given by APT or COP. . . .
At the public bidding on the said date, petitioner J.G. Summit Holdings, Inc.2
submitted a bid of Two Billion and Thirty Million Pesos (P2,030,000,000.00) with an
acknowledgment of KAWASAKI/[PHILYARDS'] right to top, viz:
4. I/We understand that the Committee on Privatization (COP) has up to thirty (30)
days to act on APT's recommendation based on the result of this bidding. Should the
COP approve the highest bid, APT shall advise Kawasaki Heavy Industries, Inc.
and/or its nominee, [PHILYARDS] Holdings, Inc. that the highest bid is acceptable to
the National Government. Kawasaki Heavy Industries, Inc. and/or [PHILYARDS]
Holdings, Inc. shall then have a period of thirty (30) calendar days from the date of
receipt of such advice from APT within which to exercise their "Option to Top the
Highest Bid" by offering a bid equivalent to the highest bid plus five (5%) percent
thereof.
As petitioner was declared the highest bidder, the COP approved the sale on
December 3, 1993 "subject to the right of Kawasaki Heavy Industries, Inc./
[PHILYARDS] Holdings, Inc. to top JGSMI's bid by 5% as specified in the bidding
rules."
On December 29, 1993, petitioner informed APT that it was protesting the offer of
PHI to top its bid on the grounds that: (a) the KAWASAKI/PHI consortium composed
of KAWASAKI, [PHILYARDS], Mitsui, Keppel, SM Group, ICTSI and Insular Life violated
the ASBR because the last four (4) companies were the losing bidders thereby
circumventing the law and prejudicing the weak winning bidder; (b) only KAWASAKI
could exercise the right to top; (c) giving the same option to top to PHI constituted
unwarranted benefit to a third party; (d) no right of first refusal can be exercised in
a public bidding or auction sale; and (e) the JG Summit consortium was not
estopped from questioning the proceedings.
On February 2, 1994, petitioner was notified that PHI had fully paid the balance of
the purchase price of the subject bidding. On February 7, 1994, the APT notified
petitioner that PHI had exercised its option to top the highest bid and that the COP
had approved the same on January 6, 1994. On February 24, 1994, the APT and PHI
executed a Stock Purchase Agreement. Consequently, petitioner filed with this Court
a Petition for Mandamus under G.R. No. 114057. On May 11, 1994, said petition was
referred to the Court of Appeals. On July 18, 1995, the Court of Appeals denied the
same for lack of merit. It ruled that the petition for mandamus was not the proper
remedy to question the constitutionality or legality of the right of first refusal and
the right to top that was exercised by KAWASAKI/PHI, and that the matter must be
brought "by the proper party in the proper forum at the proper time and threshed
out in a full blown trial." The Court of Appeals further ruled that the right of first

refusal and the right to top are prima facie legal and that the petitioner, "by
participating in the public bidding, with full knowledge of the right to top granted to
KAWASAKI/[PHILYARDS] isestopped from questioning the validity of the award
given to [PHILYARDS] after the latter exercised the right to top and had paid in full
the purchase price of the subject shares, pursuant to the ASBR." Petitioner filed a
Motion for Reconsideration of said Decision which was denied on March 15, 1996.
Petitioner thus filed a Petition for Certiorari with this Court alleging grave abuse of
discretion on the part of the appellate court.
On November 20, 2000, this Court rendered x x x [a] Decision ruling among others
that the Court of Appeals erred when it dismissed the petition on the sole ground of
the impropriety of the special civil action of mandamus because the petition was
also one of certiorari. It further ruled that a shipyard like PHILSECO is a public utility
whose capitalization must be sixty percent (60%) Filipino-owned. Consequently, the
right to top granted to KAWASAKI under the Asset Specific Bidding Rules (ASBR)
drafted for the sale of the 87.67% equity of the National Government in PHILSECO is
illegal not only because it violates the rules on competitive bidding but more
so, because it allows foreign corporations to own more than 40% equity in the
shipyard. It also held that "although the petitioner had the opportunity to examine
the ASBR before it participated in the bidding, it cannot be estopped from
questioning the unconstitutional, illegal and inequitable provisions thereof." Thus,
this Court voided the transfer of the national government's 87.67% share in
PHILSECO to Philyard[s] Holdings, Inc., and upheld the right of JG Summit, as the
highest bidder, to take title to the said shares, viz:
WHEREFORE, the instant petition for review on certiorari is GRANTED. The assailed
Decision and Resolution of the Court of Appeals are REVERSED and SET ASIDE.
Petitioner is ordered to pay to APT its bid price of Two Billion Thirty Million Pesos
(P2,030,000,000.00), less its bid deposit plus interests upon the finality of this
Decision. In turn, APT is ordered to:
(a) accept the said amount of P2,030,000,000.00 less bid deposit and interests from
petitioner;
(b) execute a Stock Purchase Agreement with petitioner;
(c) cause the issuance in favor of petitioner of the certificates of stocks representing
87.6% of PHILSECO's total capitalization;
(d) return to private respondent PHGI the amount of Two Billion One Hundred ThirtyOne Million Five Hundred Thousand Pesos (P2,131,500,000.00); and
(e) cause the cancellation of the stock certificates issued to PHI.
SO ORDERED.
In separate Motions for Reconsideration, respondents submit[ted] three basic issues
for x x x resolution: (1) Whether PHILSECO is a public utility; (2) Whether under the
1977 JVA, KAWASAKI can exercise its right of first refusal only up to 40% of the total

capitalization of PHILSECO; and (3) Whether the right to top granted to KAWASAKI
violates the principles of competitive bidding.3 (citations omitted)
In a Resolution dated September 24, 2003, this Court ruled in favor of the
respondents. On the first issue, we held that Philippine Shipyard and Engineering
Corporation (PHILSECO) is not a public utility, as by nature, a shipyard is not a
public utility4 and that no law declares a shipyard to be a public utility.5 On the
second issue, we found nothing in the 1977 Joint Venture Agreement (JVA) which
prevents Kawasaki Heavy Industries, Ltd. of Kobe, Japan (KAWASAKI) from acquiring
more than 40% of PHILSECOs total capitalization.6 On the final issue, we held that
the right to top granted to KAWASAKI in exchange for its right of first refusal did not
violate the principles of competitive bidding.7
On October 20, 2003, the petitioner filed a Motion for Reconsideration8 and a
Motion to Elevate This Case to the Court En Banc.9 Public respondents Committee
on Privatization (COP) and Asset Privatization Trust (APT), and private respondent
Philyards Holdings, Inc. (PHILYARDS) filed their Comments on J.G. Summit Holdings,
Inc.s (JG Summits) Motion for Reconsideration and Motion to Elevate This Case to
the Court En Banc on January 29, 2004 and February 3, 2004, respectively.
II. Issues
Based on the foregoing, the relevant issues to resolve to end this litigation are the
following:
1. Whether there are sufficient bases to elevate the case at bar to the Court en
banc.
2. Whether the motion for reconsideration raises any new matter or cogent reason
to warrant a reconsideration of this Courts Resolution of September 24, 2003.
Motion to Elevate this Case to the
Court En Banc
The petitioner prays for the elevation of the case to the Court en banc on the
following grounds:
1. The main issue of the propriety of the bidding process involved in the present
case has been confused with the policy issue of the supposed fate of the shipping
industry which has never been an issue that is determinative of this case.10
2. The present case may be considered under the Supreme Court Resolution dated
February 23, 1984 which included among en banc cases those involving a novel
question of law and those where a doctrine or principle laid down by the Court en
banc or in division may be modified or reversed.11
3. There was clear executive interference in the judicial functions of the Court when
the Honorable Jose Isidro Camacho, Secretary of Finance, forwarded to Chief Justice
Davide, a memorandum dated November 5, 2001, attaching a copy of the Foreign

Chambers Report dated October 17, 2001, which matter was placed in the agenda
of the Court and noted by it in a formal resolution dated November 28, 2001.12
Opposing J.G. Summits motion to elevate the case en banc, PHILYARDS points out
the petitioners inconsistency in previously opposing PHILYARDS Motion to Refer the
Case to the Court En Banc. PHILYARDS contends that J.G. Summit should now be
estopped from asking that the case be referred to the Court en banc. PHILYARDS
further contends that the Supreme Court en banc is not an appellate court to which
decisions or resolutions of its divisions may be appealed citing Supreme Court
Circular No. 2-89 dated February 7, 1989.13 PHILYARDS also alleges that there is no
novel question of law involved in the present case as the assailed Resolution was
based on well-settled jurisprudence. Likewise, PHILYARDS stresses that the
Resolution was merely an outcome of the motions for reconsideration filed by it and
the COP and APT and is "consistent with the inherent power of courts to amend and
control its process and orders so as to make them conformable to law and justice.
(Rule 135, sec. 5)"14 Private respondent belittles the petitioners allegations
regarding the change in ponente and the alleged executive interference as shown
by former Secretary of Finance Jose Isidro Camachos memorandum dated
November 5, 2001 arguing that these do not justify a referral of the present case to
the Court en banc.
In insisting that its Motion to Elevate This Case to the Court En Banc should be
granted, J.G. Summit further argued that: its Opposition to the Office of the Solicitor
Generals Motion to Refer is different from its own Motion to Elevate; different
grounds are invoked by the two motions; there was unwarranted "executive
interference"; and the change in ponente is merely noted in asserting that this case
should be decided by the Court en banc.15
We find no merit in petitioners contention that the propriety of the bidding process
involved in the present case has been confused with the policy issue of the fate of
the shipping industry which, petitioner maintains, has never been an issue that is
determinative of this case. The Courts Resolution of September 24, 2003 reveals a
clear and definitive ruling on the propriety of the bidding process. In discussing
whether the right to top granted to KAWASAKI in exchange for its right of first
refusal violates the principles of competitive bidding, we made an exhaustive
discourse on the rules and principles of public bidding and whether they were
complied with in the case at bar.16 This Court categorically ruled on the petitioners
argument that PHILSECO, as a shipyard, is a public utility which should maintain a
60%-40% Filipino-foreign equity ratio, as it was a pivotal issue. In doing so, we
recognized the impact of our ruling on the shipbuilding industry which was beyond
avoidance.17
We reject petitioners argument that the present case may be considered under the
Supreme Court Resolution dated February 23, 1984 which included among en banc
cases those involving a novel question of law and those where a doctrine or
principle laid down by the court en banc or in division may be modified or reversed.
The case was resolved based on basic principles of the right of first refusal in
commercial law and estoppel in civil law. Contractual obligations arising from rights
of first refusal are not new in this jurisdiction and have been recognized in
numerous cases.18 Estoppel is too known a civil law concept to require an

elongated discussion. Fundamental principles on public bidding were likewise used

to resolve the issues raised by the petitioner. To be sure, petitioner leans on the
right to top in a public bidding in arguing that the case at bar involves a novel issue.
We are not swayed. The right to top was merely a condition or a reservation made
in the bidding rules which was fully disclosed to all bidding parties. In Bureau
Veritas, represented by Theodor H. Hunermann v. Office of the President, et al., 19
we dealt with this conditionality, viz:
x x x It must be stressed, as held in the case of A.C. Esguerra & Sons v. Aytona, et
al., (L-18751, 28 April 1962, 4 SCRA 1245), that in an "invitation to bid, there is a
condition imposed upon the bidders to the effect that the bidding shall be subject to
the right of the government to reject any and all bids subject to its discretion. In the
case at bar, the government has made its choice and unless an unfairness or
injustice is shown, the losing bidders have no cause to complain nor right to dispute
that choice. This is a well-settled doctrine in this jurisdiction and elsewhere."
The discretion to accept or reject a bid and award contracts is vested in the
Government agencies entrusted with that function. The discretion given to the
authorities on this matter is of such wide latitude that the Courts will not interfere
therewith, unless it is apparent that it is used as a shield to a fraudulent award
(Jalandoni v. NARRA, 108 Phil. 486 [1960]). x x x The exercise of this discretion is a
policy decision that necessitates prior inquiry, investigation, comparison,
evaluation, and deliberation. This task can best be discharged by the Government
agencies concerned, not by the Courts. The role of the Courts is to ascertain
whether a branch or instrumentality of the Government has transgressed its
constitutional boundaries. But the Courts will not interfere with executive or
legislative discretion exercised within those boundaries. Otherwise, it strays into the
realm of policy decision-making.
It is only upon a clear showing of grave abuse of discretion that the Courts will set
aside the award of a contract made by a government entity. Grave abuse of
discretion implies a capricious, arbitrary and whimsical exercise of power (Filinvest
Credit Corp. v. Intermediate Appellate Court, No. 65935, 30 September 1988, 166
SCRA 155). The abuse of discretion must be so patent and gross as to amount to an
evasion of positive duty or to a virtual refusal to perform a duty enjoined by law, as
to act at all in contemplation of law, where the power is exercised in an arbitrary
and despotic manner by reason of passion or hostility (Litton Mills, Inc. v. Galleon
Trader, Inc., et al[.], L-40867, 26 July 1988, 163 SCRA 489).
The facts in this case do not indicate any such grave abuse of discretion on the part
of public respondents when they awarded the CISS contract to Respondent SGS. In
the "Invitation to Prequalify and Bid" (Annex "C," supra), the CISS Committee made
an express reservation of the right of the Government to "reject any or all bids or
any part thereof or waive any defects contained thereon and accept an offer most
advantageous to the Government." It is a well-settled rule that where such
reservation is made in an Invitation to Bid, the highest or lowest bidder, as the case
may be, is not entitled to an award as a matter of right (C & C Commercial Corp. v.
Menor, L-28360, 27 January 1983, 120 SCRA 112). Even the lowest Bid or any Bid
may be rejected or, in the exercise of sound discretion, the award may be made to

another than the lowest bidder (A.C. Esguerra & Sons v. Aytona, supra, citing 43 Am.
Jur., 788). (emphases supplied)1awphi1.nt
Like the condition in the Bureau Veritas case, the right to top was a condition
imposed by the government in the bidding rules which was made known to all
parties. It was a condition imposed on all bidders equally, based on the APTs
exercise of its discretion in deciding on how best to privatize the governments
shares in PHILSECO. It was not a whimsical or arbitrary condition plucked from the
ether and inserted in the bidding rules but a condition which the APT approved as
the best way the government could comply with its contractual obligations to
KAWASAKI under the JVA and its mandate of getting the most advantageous deal for
the government. The right to top had its history in the mutual right of first refusal in
the JVA and was reached by agreement of the government and KAWASAKI.
Further, there is no "executive interference" in the functions of this Court by the
mere filing of a memorandum by Secretary of Finance Jose Isidro Camacho. The
memorandum was merely "noted" to acknowledge its filing. It had no further legal
significance. Notably too, the assailed Resolution dated September 24, 2003 was
decided unanimously by the Special First Division in favor of the respondents.
Again, we emphasize that a decision or resolution of a Division is that of the
Supreme Court20 and the Court en banc is not an appellate court to which decisions
or resolutions of a Division may be appealed.21
For all the foregoing reasons, we find no basis to elevate this case to the Court en
banc.
Motion for Reconsideration
Three principal arguments were raised in the petitioners Motion for
Reconsideration. First, that a fair resolution of the case should be based on contract
law, not on policy considerations; the contracts do not authorize the right to top to
be derived from the right of first refusal.22 Second, that neither the right of first
refusal nor the right to top can be legally exercised by the consortium which is not
the proper party granted such right under either the JVA or the Asset Specific
Bidding Rules (ASBR).23 Third, that the maintenance of the 60%-40% relationship
between the National Investment and Development Corporation (NIDC) and
KAWASAKI arises from contract and from the Constitution because PHILSECO is a
landholding corporation and need not be a public utility to be bound by the 60%40% constitutional limitation.24
On the other hand, private respondent PHILYARDS asserts that J.G. Summit has not
been able to show compelling reasons to warrant a reconsideration of the Decision
of the Court.25 PHILYARDS denies that the Decision is based mainly on policy
considerations and points out that it is premised on principles governing obligations
and contracts and corporate law such as the rule requiring respect for contractual
stipulations, upholding rights of first refusal, and recognizing the assignable nature
of contracts rights.26 Also, the ruling that shipyards are not public utilities relies on
established case law and fundamental rules of statutory construction. PHILYARDS
stresses that KAWASAKIs right of first refusal or even the right to top is not limited

to the 40% equity of the latter.27 On the landholding issue raised by J.G. Summit,
PHILYARDS emphasizes that this is a non-issue and even involves a question of fact.
Even assuming that this Court can take cognizance of such question of fact even
without the benefit of a trial, PHILYARDS opines that landholding by PHILSECO at the
time of the bidding is irrelevant because what is essential is that ultimately a
qualified entity would eventually hold PHILSECOs real estate properties.28 Further,
given the assignable nature of the right of first refusal, any applicable nationality
restrictions, including landholding limitations, would not affect the right of first
refusal itself, but only the manner of its exercise.29 Also, PHILYARDS argues that if
this Court takes cognizance of J.G. Summits allegations of fact regarding
PHILSECOs landholding, it must also recognize PHILYARDS assertions that
PHILSECOs landholdings were sold to another corporation.30 As regards the right of
first refusal, private respondent explains that KAWASAKIs reduced shareholdings
(from 40% to 2.59%) did not translate to a deprivation or loss of its contractually
granted right of first refusal.31 Also, the bidding was valid because PHILYARDS
exercised the right to top and it was of no moment that losing bidders later joined
PHILYARDS in raising the purchase price.32
In cadence with the private respondent PHILYARDS, public respondents COP and APT
contend:
1. The conversion of the right of first refusal into a right to top by 5% does not
violate any provision in the JVA between NIDC and KAWASAKI.
2. PHILSECO is not a public utility and therefore not governed by the constitutional
restriction on foreign ownership.
3. The petitioner is legally estopped from assailing the validity of the proceedings of
the public bidding as it voluntarily submitted itself to the terms of the ASBR which
included the provision on the right to top.
4. The right to top was exercised by PHILYARDS as the nominee of KAWASAKI and
the fact that PHILYARDS formed a consortium to raise the required amount to
exercise the right to top the highest bid by 5% does not violate the JVA or the ASBR.
5. The 60%-40% Filipino-foreign constitutional requirement for the acquisition of
lands does not apply to PHILSECO because as admitted by petitioner itself,
PHILSECO no longer owns real property.
6. Petitioners motion to elevate the case to the Court en banc is baseless and
would only delay the termination of this case.33
In a Consolidated Comment dated March 8, 2004, J.G. Summit countered the
arguments of the public and private respondents in this wise:
1. The award by the APT of 87.67% shares of PHILSECO to PHILYARDS with losing
bidders through the exercise of a right to top, which is contrary to law and the
constitution is null and void for being violative of substantive due process and the
abuse of right provision in the Civil Code.

a. The bidders[] right to top was actually exercised by losing bidders.

b. The right to top or the right of first refusal cannot co-exist with a genuine
competitive bidding.
c. The benefits derived from the right to top were unwarranted.
2. The landholding issue has been a legitimate issue since the start of this case but
is shamelessly ignored by the respondents.
a. The landholding issue is not a non-issue.
b. The landholding issue does not pose questions of fact.
c. That PHILSECO owned land at the time that the right of first refusal was agreed
upon and at the time of the bidding are most relevant.
d. Whether a shipyard is a public utility is not the core issue in this case.
3. Fraud and bad faith attend the alleged conversion of an inexistent right of first
refusal to the right to top.
a. The history behind the birth of the right to top shows fraud and bad faith.
b. The right of first refusal was, indeed, "effectively useless."
4. Petitioner is not legally estopped to challenge the right to top in this case.
a. Estoppel is unavailing as it would stamp validity to an act that is prohibited by
law or against public policy.
b. Deception was patent; the right to top was an attractive nuisance.
c. The 10% bid deposit was placed in escrow.
J.G. Summits insistence that the right to top cannot be sourced from the right of
first refusal is not new and we have already ruled on the issue in our Resolution of
September 24, 2003. We upheld the mutual right of first refusal in the JVA.34 We
also ruled that nothing in the JVA prevents KAWASAKI from acquiring more than 40%
of PHILSECOs total capitalization.35 Likewise, nothing in the JVA or ASBR bars the
conversion of the right of first refusal to the right to top. In sum, nothing new and of
significance in the petitioners pleading warrants a reconsideration of our ruling.
Likewise, we already disposed of the argument that neither the right of first refusal
nor the right to top can legally be exercised by the consortium which is not the
proper party granted such right under either the JVA or the ASBR. Thus, we held:
The fact that the losing bidder, Keppel Consortium (composed of Keppel, SM Group,
Insular Life Assurance, Mitsui and ICTSI), has joined PHILYARDS in the latter's effort
to raise P2.131 billion necessary in exercising the right to top is not contrary to law,

public policy or public morals. There is nothing in the ASBR that bars the losing
bidders from joining either the winning bidder (should the right to top is not
exercised) or KAWASAKI/PHI (should it exercise its right to top as it did), to raise the
purchase price. The petitioner did not allege, nor was it shown by competent
evidence, that the participation of the losing bidders in the public bidding was done
with fraudulent intent. Absent any proof of fraud, the formation by [PHILYARDS] of a
consortium is legitimate in a free enterprise system. The appellate court is thus
correct in holding the petitioner estopped from questioning the validity of the
transfer of the National Government's shares in PHILSECO to respondent.36
Further, we see no inherent illegality on PHILYARDS act in seeking funding from
parties who were losing bidders. This is a purely commercial decision over which the
State should not interfere absent any legal infirmity. It is emphasized that the case
at bar involves the disposition of shares in a corporation which the government
sought to privatize. As such, the persons with whom PHILYARDS desired to enter into
business with in order to raise funds to purchase the shares are basically its
business. This is in contrast to a case involving a contract for the operation of or
construction of a government infrastructure where the identity of the buyer/bidder
or financier constitutes an important consideration. In such cases, the government
would have to take utmost precaution to protect public interest by ensuring that the
parties with which it is contracting have the ability to satisfactorily construct or
operate the infrastructure.
On the landholding issue, J.G. Summit submits that since PHILSECO is a landholding
company, KAWASAKI could exercise its right of first refusal only up to 40% of the
shares of PHILSECO due to the constitutional prohibition on landholding by
corporations with more than 40% foreign-owned equity. It further argues that since
KAWASAKI already held at least 40% equity in PHILSECO, the right of first refusal
was inutile and as such, could not subsequently be converted into the right to top.
37 Petitioner also asserts that, at present, PHILSECO continues to violate the
constitutional provision on landholdings as its shares are more than 40% foreignowned.38 PHILYARDS admits that it may have previously held land but had already
divested such landholdings.39 It contends, however, that even if PHILSECO owned
land, this would not affect the right of first refusal but only the exercise thereof. If
the land is retained, the right of first refusal, being a property right, could be
assigned to a qualified party. In the alternative, the land could be divested before
the exercise of the right of first refusal. In the case at bar, respondents assert that
since the right of first refusal was validly converted into a right to top, which was
exercised not by KAWASAKI, but by PHILYARDS which is a Filipino corporation (i.e.,
60% of its shares are owned by Filipinos), then there is no violation of the
Constitution.40 At first, it would seem that questions of fact beyond cognizance by
this Court were involved in the issue. However, the records show that PHILYARDS
admits it had owned land up until the time of the bidding.41 Hence, the only issue is
whether KAWASAKI had a valid right of first refusal over PHILSECO shares under the
JVA considering that PHILSECO owned land until the time of the bidding and
KAWASAKI already held 40% of PHILSECOs equity.
We uphold the validity of the mutual rights of first refusal under the JVA between
KAWASAKI and NIDC. First of all, the right of first refusal is a property right of
PHILSECO shareholders, KAWASAKI and NIDC, under the terms of their JVA. This right

allows them to purchase the shares of their co-shareholder before they are offered
to a third party. The agreement of co-shareholders to mutually grant this right to
each other, by itself, does not constitute a violation of the provisions of the
Constitution limiting land ownership to Filipinos and Filipino corporations. As
PHILYARDS correctly puts it, if PHILSECO still owns land, the right of first refusal can
be validly assigned to a qualified Filipino entity in order to maintain the 60%-40%
ratio. This transfer, by itself, does not amount to a violation of the Anti-Dummy
Laws, absent proof of any fraudulent intent. The transfer could be made either to a
nominee or such other party which the holder of the right of first refusal feels it can
comfortably do business with. Alternatively, PHILSECO may divest of its
landholdings, in which case KAWASAKI, in exercising its right of first refusal, can
exceed 40% of PHILSECOs equity. In fact, it can even be said that if the foreign
shareholdings of a landholding corporation exceeds 40%, it is not the foreign
stockholders ownership of the shares which is adversely affected but the capacity
of the corporation to own land that is, the corporation becomes disqualified to own
land. This finds support under the basic corporate law principle that the corporation
and its stockholders are separate juridical entities. In this vein, the right of first
refusal over shares pertains to the shareholders whereas the capacity to own land
pertains to the corporation. Hence, the fact that PHILSECO owns land cannot
deprive stockholders of their right of first refusal. No law disqualifies a person from
purchasing shares in a landholding corporation even if the latter will exceed the
allowed foreign equity, what the law disqualifies is the corporation from owning
land. This is the clear import of the following provisions in the Constitution:
Section 2. All lands of the public domain, waters, minerals, coal, petroleum, and
other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife,
flora and fauna, and other natural resources are owned by the State. With the
exception of agricultural lands, all other natural resources shall not be alienated.
The exploration, development, and utilization of natural resources shall be under
the full control and supervision of the State. The State may directly undertake such
activities, or it may enter into co-production, joint venture, or production-sharing
agreements with Filipino citizens, or corporations or associations at least sixty per
centum of whose capital is owned by such citizens. Such agreements may be for a
period not exceeding twenty-five years, renewable for not more than twenty-five
years, and under such terms and conditions as may be provided by law. In cases of
water rights for irrigation, water supply, fisheries, or industrial uses other than the
development of water power, beneficial use may be the measure and limit of the
grant.
xxx xxx xxx
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.42 (emphases supplied)
The petitioner further argues that "an option to buy land is void in itself (Philippine
Banking Corporation v. Lui She, 21 SCRA 52 [1967]). The right of first refusal
granted to KAWASAKI, a Japanese corporation, is similarly void. Hence, the right to
top, sourced from the right of first refusal, is also void."43 Contrary to the

contention of petitioner, the case of Lui She did not that say "an option to buy land
is void in itself," for we ruled as follows:
x x x 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. As this Court said in Krivenko vs. Register of Deeds:
[A]liens are not completely excluded by the Constitution from the use of lands for
residential purposes. Since their residence in the Philippines is temporary, they may
be granted temporary rights such as a lease contract which is not forbidden by the
Constitution. Should they desire to remain here forever and share our fortunes and
misfortunes, Filipino citizenship is not impossible to acquire.
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'[s] 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 vs. Register of Deeds, is indeed in grave
peril.44 (emphases supplied; Citations omitted)
In Lui She, the option to buy was invalidated because it amounted to a virtual
transfer of ownership as the owner could not sell or dispose of his properties. The
contract in Lui She prohibited the owner of the land from selling, donating,
mortgaging, or encumbering the property during the 50-year period of the option to
buy. This is not so in the case at bar where the mutual right of first refusal in favor
of NIDC and KAWASAKI does not amount to a virtual transfer of land to a nonFilipino. In fact, the case at bar involves a right of first refusal over shares of stock
while the Lui She case involves an option to buy the land itself. As discussed earlier,
there is a distinction between the shareholders ownership of shares and the
corporations ownership of land arising from the separate juridical personalities of
the corporation and its shareholders.
We note that in its Motion for Reconsideration, J.G. Summit alleges that PHILSECO
continues to violate the Constitution as its foreign equity is above 40% and yet
owns long-term leasehold rights which are real rights.45 It cites Article 415 of the
Civil Code which includes in the definition of immovable property, "contracts for
public works, and servitudes and other real rights over immovable property."46 Any
existing landholding, however, is denied by PHILYARDS citing its recent financial
statements.47 First, these are questions of fact, the veracity of which would require
introduction of evidence. The Court needs to validate these factual allegations
based on competent and reliable evidence. As such, the Court cannot resolve the

questions they pose. Second, J.G. Summit misreads the provisions of the
Constitution cited in its own pleadings, to wit:
29.2 Petitioner has consistently pointed out in the past that private respondent is
not a 60%-40% corporation, and this violates the Constitution x x x The violation
continues to this day because under the law, it continues to own real property
xxx xxx xxx
32. To review the constitutional provisions involved, Section 14, Article XIV of the
1973 Constitution (the JVA was signed in 1977), provided:
"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."
32.1 This provision is the same as Section 7, Article XII of the 1987 Constitution.
32.2 Under the Public Land Act, corporations qualified to acquire or hold lands of the
public domain are corporations at least 60% of which is owned by Filipino citizens
(Sec. 22, Commonwealth Act 141, as amended). (emphases supplied)
As correctly observed by the public respondents, the prohibition in the Constitution
applies only to ownership of land.48 It does not extend to immovable or real
property as defined under Article 415 of the Civil Code. Otherwise, we would have a
strange situation where the ownership of immovable property such as trees, plants
and growing fruit attached to the land49 would be limited to Filipinos and Filipino
corporations only.
III.
WHEREFORE, in view of the foregoing, the petitioners Motion for Reconsideration is
DENIED WITH FINALITY and the decision appealed from is AFFIRMED. The Motion to
Elevate This Case to the Court En Banc is likewise DENIED for lack of merit.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Ynares-Santiago, Corona, and Tinga, JJ., concur.