G.R. No.

L-25889 January 17, 1973

HON. GUILLERMO E. TORRES, as Presiding Judge of the Court of First Instance of
Rizal, Branch VIII, THE PROVINCIAL SHERIFF OF THE PROVINCE OF RIZAL,
JAIME E. LAICO and LUZ LOS BANOS-LAICO, petitioners-appellants, vs. HON.
COURT OF APPEALS, JOSE CHIVI and ANGELINA CHIVI as representative of the
deceased MARTA B. CHIVI, Respondents-Appellees. Ernesto J. Seva for petitionersappellants.
Ordonez, Cervo and Sanchez for respondents-appellees.
MAKALINTAL, J.:
Appeal by certiorari to review the decision of the Court of Appeals in CA-G.R. No. 35677-R,
dated 31 August 1965.
chanroblesvirtualawlibrary chanrobles virtual law library

The facts as found, by the Court of Appeals are as follows:

chanrobles virtual law library

On 1 January 1955 the spouses Isidro Sierra and Antonia Magtaas sold a parcel of land to Marta
B. Chivi, representing to her that the land was not registered either under the Land Registration
Act or under the Spanish Mortgage Law and assuring her that although the land was covered by
a pre-war free patent application, the application had not been approved and no patent had been
issued. The Sierras made that assurance because Chivi was not willing to buy the land if it was
covered by a patent, since it would then be subject to repurchase. They agreed that the purchase
price of P10,800.00 was not to be fully paid until the vendors could have the land registered
under Act 496.
chanroblesv irtualawlibrary chanrobles virtual law library

At the instance of the Sierras, Chivi filed an application for registration of the land in the Court
of First Instance of Rizal. While the application was pending Chivi, on 24 May 1958, sold her
rights and interests in the land to the herein petitioners-spouses Jaime Laico and Luz Los Banos
for P25,647.00, with the stipulation that should Chivi fail to secure and transfer title to the Laicos
she would return to them twice the amount of the aforesaid purchase price. To induce the Laicos
to buy Chivis rights and interests, the Sierras showed them a petition withdrawing their free
patent application. The Laicos thereupon continued with the registration proceeding in
substitution of Chivi, who signed a deed of transfer of her rights.
chanroblesvirtualawlibrary chanrobles virtual law library

In December, 1959 the Laicos discovered, and in January, 1960 Chivi learned, that a free patent
title had been previously issued to Isidro Sierra as early as 26 February 1932. The Laicos went to
see the Sierras, who agree to execute, as they did execute on January 17, 1960, another deed of
sale in favor of the Laicos. The Laicos then withdrew their application for registration and filed
instead a petition for the reconstitution of the title issued to Isidro Sierra.
chanroblesv irtualawlibrary chanrobles virtual law library

On 14 June 1960, however, the Sierras filed a complaint against Marta B. Chivi, assisted by her
husband, and the Laicos in the Court of First Instance of Rizal, docketed as Civil Case No. 6184,
praying that they (plaintiffs) be allowed to repurchase the land under the provisions of the Public
Land Act. The Chivis and the Laicos filed their answers to the complaint and counter-claimed for

damages by reason of the alleged bad faith, misrepresentation and fraudulent acts of the Sierras,
as herein before recounted. The Laicos filed a cross-claim against the Chivis for collection of
twice the amount of the price paid under their sales contract for the latter's failure to deliver title
to the Laicos, alleging that "the defendants Chivi are/or will be liable on these warranties and
condition should the plaintiffs finally obtain favorable judgment in their favor" (sic).
chanroblesvir tualawlibrary chanrobles virtual law library

On 12 March 1964 the Sierras and the Laicos entered into a compromise to amicably settle Civil
Case No. 6184 as between themselves, stipulating therein, among other things, that the Laicos
were now the absolute owners of the land and that the Sierras would withdraw their objection to
the reconstitution of the patent title and that said title would be transferred in the name of the
Laicos, who would pay P10,000.00 to the Sierras; that the Sierras would ask for the dismissal of
Civil Case No. 6184 insofar as the Laicos were concerned and would convert their action in the
case from one for repurchase to one for collection of the balance of the sales price and of
damages against the Chivis; that the Laicos would pursue their cross-claim against the Chivis
and in the event they obtained a favorable judgment thereon they would pay to the Sierras onehalf (1/2) of any amount awarded to them in excess of the purchase price of P25,647.00.
chanroblesvirtualawlibrary chanrobles virtual law library

The compromise, which was executed without the knowledge of or notice to the Chivis, was
approved by the trial court on 12 March 1964. On the same date the court, joint motion of the
Sierras and the Laicos, dismissed witness prejudice the complaint in Civil Case No. 6184 insofar
as the Laicos were concerned as well as the counter-claim of the Laicos against the Sierras. Chivi
was not notified of the dismissal.
chanroblesvirtualawlibrary chanrobles virtual law library

The court set the case for pre-trial on 14 July 1964. Despite notice to the Sierras and the Chivis,
only cross-claimant Jaime Laico and his counsel appeared, whereupon the court declared the
Chivis in default and allowed Laico to present evidence on the cross-claim before the deputy
clerk of court. Counsel for the Chivis filed an urgent motion for reconsideration, explaining why
he failed to appear at the pre-trial, but the motion was denied. On 5 February 1965 the court
rendered judgment for the Laicos, sentencing the cross-defendants to pay them a total amount of
P15,000.00, plus costs, and on 1 April 1965 issued a writ of execution. Pursuant to the writ the
sheriff levied upon the properties of the Chivis and issued a notice that the properties would be
sold at public auction on 14 April 1965.
chanroblesvirtualawlibrary chanrobles virtual law library

In due time the Chivis filed with the Court of Appeal a petition for certiorari and prohibition with
preliminary injunction to annul: (1) the order of the trial court authorizing the Laicos to adduce
evidence ex parte on their cross-claim against Marta B. Chivi; (2) the decision rendered on said
cross-claim; and (3) the order directing the issuance of a writ of execution, the levy on execution
and the notice of execution sale of the properties of Chivi prayed further that the therein
respondents be prohibited from conducting any further proceedings in said Civil Case No. 6184
on the ground that the trial court was without jurisdiction in the premises.
chanroblesvirtualawlibrarychanrobles virtual law library

Upon giving due course to the petition the Court of Appeals issued a writ of preliminary
injunction, restraining the therein respondents from proceedings with the execution and with the
sale at public auction set for 14 April 1965, until further order.
chanroblesvirtualawlibrary chanrobles virtual law library

On 31 August 1965 the Court of Appeals rendered decision declaring null and void all the
proceedings on the cross-claim of the spouses Laico against Chivi, as well as the orders,
decisions, writs and processes issued in connection therewith, and restraining the therein
respondent Judge and sheriff of the Court of First Instance of Rizal from further proceeding in
Civil Case No. 6184. The Laicos moved for reconsideration. Pending resolution of the motion
for reconsideration, Marta B. Chivi died was substituted by Angelina Chivi. In an order dated 16
March 1966, the motion for reconsideration was denied. Hence, the instant appeal by certiorari
brought by the Laicos.
chanroblesvir tualawlibrary chanrobles virtual law library

The principal issue in this case is: Could the cross-claim in this particular action stand after the
complaint in the same action was dismissed with prejudice?
chanrobles virtual law library

In the resolution of this issue the following considerations are pertinent:

chanrobles v irtual law library

(1) A cross-claim, as defined in Section 7 of Rule 6 is "any claim by one party against a co-party
arising out of the transaction or occurrence that is the subject matter either of the original action
or of a counterclaim therein."
chanrobles v irtual law library

(2) The cross-claim of the Laicos against the Chivis was for the recovery of the sum of
P51,294.00, upon the allegations that according to the contract of sale between them, "should the
defendants Chivi fail to transfer the title to the land in question to the VENDEE (defendant
Laico) then the former shall return to the latter (the aforesaid sum) which is double the amount of
the purchase price received by the defendants Chivi;" and that "the defendants Chivi are/or will
be liable on these warranties and conditions should the plaintiffs (Sierras) finally obtain
favorable judgment in their favor" (sic).
chanroblesv irtualawlibrary chanrobles virtual law library

(3) When Marta B. Chivi sold her "rights and interests" to the land in question to the Laicos on
24 May 1958 the latter knew that Chivi had yet no registered title, and in fact substituted her in
the registration proceeding which she had initiated.
chanroblesvirtualawlibrary chanrobles virtual law library

(4) In their counterclaim for damages against the Sierras in Civil Case No. 6184, the Laicos
alleged that the "plaintiffs, in fraudulently misrepresenting to the defendants Chivi, as well as to
the defendants Laico, that the land in question is unregistered and is not covered by a patent,
thereby inducing the latter to purchase the land in question, which they would not have done had
they known that the land is covered by a patent, should be adjudged to pay ..."
chanrobles vir tual law library

(5) The warranty undertaken by Marta B. Chivi, judging by its terms and by the surrounding
circumstances was in respect of the transfer of ownership - not of the registered title - to the
Laicos. The action filed by the Sierras was not for recovery of such ownership but for the
exercise of their alleged right of repurchase under the Public Land Act on the ground that the
land they had sold was covered by a patent title. In other words, the filing of the action did not
militate against the warranty to transfer title, for the very fact that the plaintiffs wished to enforce
their alleged right of repurchase was predicated on the assumption that the title, that is,
ownership, had been effectively transferred first to Chivi an subsequently by the latter to the
Laicos.
chanroblesvirtualawlibrary chanrobles virtual law library

(6) In any event, even viewing the situation in the light most favorable to the Laicos, their crossclaim on Chivi's warranty to deliver title to them was so inextricably linked with and so utterly
dependent upon the success of the complaint of the Sierras for the repurchase of the land that
when the complaint was dismissed the cross-claim could not possibly survive. For as the crossclaimants themselves alleged, the cross-defendants would be liable on the warranty "should the
plaintiffs finally obtain favorable judgment in their favor" (sic). The warranty became functus
oficio after the Sierras, who turned out after all to have a free patent title to the land issued way
back in 1932, agreed to transfer and did transfer said title to the Laicos - first by the deed of sale
executed directly in their favor by the Sierras on January 17, 1960, and again in the amicable
settlement of the case between them. The fact that the Laicos paid P10,000.00 to the Sierras in
that amicable settlement created no liability on the part of the Chivis: first, because the latter
neither knew nor consented to such settlement; second, because the Laicos had already acquired
the land directly, from the Sierras by virtue of the aforesaid sale of January 17, 1960; and third
because the said sum of P10,000.00 was not the subject of the cross-claim against them.
chanroblesvirtualawlibrary chanrobles virtual law library

Apropos is the following statement of the legal principle:

A cross-bill strictly speaking is one brought by a defendant in an equity suit against ... other
defendants in the same suit, touching the matters in question in the original bill. It is considered
as an auxiliary suit dependent upon the original bill, and can be sustained only on matters
growing out of the original bill. There is a well-defined distinction between a cross-bill merely
defensive in character, and one seeking affirmative relief. The dismissal of the original bill
carries with it a purely defensive cross-bill but not one seeking affirmative relief. 1
chanrobles virtual law library

The cross-claim in this case was purely defensive in nature. It arose entirely out of the complaint
and could prosper only if the plaintiffs succeeded. Hence, under the principle above enunciated,
it could not be the subject of independent adjudication once it lost the nexus upon which its life
depended.
chanroblesv irtualawlibrary chanrobles virtual law library

Under the circumstances above set forth the dismissal of the cross-claim should have followed
the dismissal of the complaint as a matter of course, without further proceeding; and in setting
the said cross-claim for pre-trial and receiving evidence thereon and then rendering judgment
against the cross-defendants the court committed such a grave abuse of discretion amounting to
lack of jurisdiction correctible by certiorari.
chanroblesvirtualawlibrary chanrobles virtual law library

Concerning the argument that the respondents here were guilty of laches because they filed their
petition for certiorari after the lapse of over 9 months from the time judgment of the Court of
First Instance was rendered, respondent Court of Appeals ruled - in our opinion correctly - as
follows:
xxx xxx xxx

chanrobles virtual law library

To the contention that the petitioners' action is barred laches, we are bound to disagree. The
judgment by default was rendered on February 5, 1965. It is not known when the petitioners
received copy of this judgment, but the fact is that on April 13, or after the lapse of only 2
months and 7 days from rendition of the judgment, the petition for certiorari was filed with this

Court. Principally, the petition assails the decision and the writ of execution thereof which was
issued on April 1. Assuming that the decision complained of was actually received by the
petitioners on the date it was rendered, the intervening period to the filing of the petition is only
2 months and 7 days, which is shorter than the shortest period of 2 months and 26 days cited in
the respondents' ex-parte motion for reconsideration in support of their theory of laches. And a
mere 12 days intervened between the issuance of the writ of execution and the filing of the
petition for certiorari.
chanroblesvirtualawlibrary chanrobles virtual law library

xxx xxx xxx

Parenthetically, this Court would like to state that Judge Guillermo Torres should not have been
made to appear as active party-petitioner in this case, his participation having become functus
oficio after the rendered judgment, and therefore his role being purely nominal in this petition.

chanroblesvirtualawlibrarychanrobles

virtual law library

In view of the foregoing considerations, the judgment of the Court of Appeals is affirmed,
without pronouncement as to costs.
Concepcion, C.J., Zaldivar, Castro, Fernando, Teehankee, Barredo, Makasiar, Antonio and
Esguerra, JJ., concur.
Endnotes:

[G.R. NO. 147402 - January 14, 2004]

ENGR. RANULFO C. FELICIANO, in his capacity as General Manager of the Leyte
Metropolitan Water District (LMWD), Tacloban City,Petitioner, v. COMMISSION ON
AUDIT, Chairman CELSO D. GANGAN, Commissioners RAUL C. FLORES and
EMMANUEL M. DALMAN, and Regional Director of COA Region VIII,Respondents.

DECISION

CARPIO, J.:
The Case
This is a Petition for Certiorari1 to annul the Commission on Audits ("COA") Resolution dated 3
January 2000 and the Decision dated 30 January 2001 denying the Motion for Reconsideration.
The COA denied petitioner Ranulfo C. Felicianos request for COA to cease all audit services,
and to stop charging auditing fees, to Leyte Metropolitan Water District ("LMWD"). The COA
also denied petitioners request for COA to refund all auditing fees previously paid by LMWD.
Antecedent Facts
A Special Audit Team from COA Regional Office No. VIII audited the accounts of LMWD.
Subsequently, LMWD received a letter from COA dated 19 July 1999 requesting payment of
auditing fees. As General Manager of LMWD, petitioner sent a reply dated 12 October 1999
informing COAs Regional Director that the water district could not pay the auditing fees.
Petitioner cited as basis for his action Sections 6 and 20 of Presidential Decree 198 ("PD 198") 2,
as well as Section 18 of Republic Act No. 6758 ("RA 6758"). The Regional Director referred
petitioners reply to the COA Chairman on 18 October 1999.
On 19 October 1999, petitioner wrote COA through the Regional Director asking for refund of
all auditing fees LMWD previously paid to COA.
On 16 March 2000, petitioner received COA Chairman Celso D. Gangans Resolution dated 3
January 2000 denying his requests. Petitioner filed a motion for reconsideration on 31 March
2000, which COA denied on 30 January 2001.
On 13 March 2001, petitioner filed this instant petition. Attached to the petition were resolutions
of the Visayas Association of Water Districts (VAWD) and the Philippine Association of Water
Districts (PAWD) supporting the petition.
The Ruling of the Commission on Audit

The COA ruled that this Court has already settled COAs audit jurisdiction over local water
districts in Davao City Water District v. Civil Service Commission and Commission on Audit,3
as follows:
The above-quoted provision [referring to Section 3(b) PD 198] definitely sets to naught
petitioners contention that they are private corporations. It is clear therefrom that the power to
appoint the members who will comprise the members of the Board of Directors belong to the
local executives of the local subdivision unit where such districts are located. In contrast, the
members of the Board of Directors or the trustees of a private corporation are elected from
among members or stockholders thereof. It would not be amiss at this point to emphasize that a
private corporation is created for the private purpose, benefit, aim and end of its members or
stockholders. Necessarily, said members or stockholders should be given a free hand to choose
who will compose the governing body of their corporation. But this is not the case here and this
clearly indicates that petitioners are not private corporations.
The COA also denied petitioners request for COA to stop charging auditing fees as well as
petitioners request for COA to refund all auditing fees already paid.
The Issues
Petitioner contends that COA committed grave abuse of discretion amounting to lack or excess
of jurisdiction by auditing LMWD and requiring it to pay auditing fees. Petitioner raises the
following issues for resolution:
1. Whether a Local Water District ("LWD") created under PD 198, as amended, is a governmentowned or controlled corporation subject to the audit jurisdiction of COA;
chanroblesvirtuallawlibrary

2. Whether Section 20 of PD 198, as amended, prohibits COAs certified public accountants from
auditing local water districts; and
cralawlibrary

3. Whether Section 18 of RA 6758 prohibits the COA from charging government-owned and
controlled corporations auditing fees.
The Ruling of the Court
The petition lacks merit.
The Constitution and existing laws4 mandate COA to audit all government agencies, including
government-owned and controlled corporations ("GOCCs") with original charters. An LWD is a
GOCC with an original charter. Section 2(1), Article IX-D of the Constitution provides for
COAs audit jurisdiction, as follows:
SECTION 2. (1) The Commission on Audit shall have the power, authority and duty to examine,
audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses
of funds and property, owned or held in trust by, or pertaining to, the Government, or any of its
subdivisions, agencies, or instrumentalities, including government-owned and controlled

corporations with original charters, and on a post-audit basis: (a) constitutional bodies,
commissions and offices that have been granted fiscal autonomy under this Constitution; (b)
autonomous state colleges and universities; (c) other government-owned or controlled
corporations and their subsidiaries; and (d) such non-governmental entities receiving subsidy or
equity, directly or indirectly, from or through the government, which are required by law or the
granting institution to submit to such audit as a condition of subsidy or equity. However, where
the internal control system of the audited agencies is inadequate, the Commission may adopt
such measures, including temporary or special pre-audit, as are necessary and appropriate to
correct the deficiencies. It shall keep the general accounts of the Government and, for such
period as may be provided by law, preserve the vouchers and other supporting papers pertaining
thereto. (Emphasis supplied)
rll brr

The COAs audit jurisdiction extends not only to government "agencies or instrumentalities," but
also to "government-owned and controlled corporations with original charters" as well as "other
government-owned or controlled corporations" without original charters.
Whether LWDs are Private or Government-Owned
and Controlled Corporations with Original Charters
Petitioner seeks to revive a well-settled issue. Petitioner asks for a re-examination of a doctrine
backed by a long line of cases culminating in Davao City Water District v. Civil Service
Commission5 and just recently reiterated in De Jesus v. Commission on Audit.6 Petitioner
maintains that LWDs are not government-owned and controlled corporations with original
charters. Petitioner even argues that LWDs are private corporations. Petitioner asks the Court to
consider certain interpretations of the applicable laws, which would give a "new perspective to
the issue of the true character of water districts."7
rll

Petitioner theorizes that what PD 198 created was the Local Waters Utilities Administration
("LWUA") and not the LWDs. Petitioner claims that LWDs are created "pursuant to" and not
created directly by PD 198. Thus, petitioner concludes that PD 198 is not an "original charter"
that would place LWDs within the audit jurisdiction of COA as defined in Section 2(1), Article
IX-D of the Constitution. Petitioner elaborates that PD 198 does not create LWDs since it does
not expressly direct the creation of such entities, but only provides for their formation on an
optional or voluntary basis.8 Petitioner adds that the operative act that creates an LWD is the
approval of the Sanggunian Resolution as specified in PD 198.
Petitioners contention deserves scant consideration.
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:
rbl r l l lbrr

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 a general
law applicable to all citizens.9 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.10
rll

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, that general law is the Corporation Code,11 except that the Cooperative Code governs the
incorporation of cooperatives.12
rll

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 governmentowned or controlled.
Obviously, LWDs are not private corporations because they are not created under the
Corporation Code. LWDs are not registered with the Securities and Exchange Commission.
Section 14 of the Corporation Code states that "[A]ll corporations organized under this code
shall file with the Securities and Exchange Commission articles of incorporation x x x." LWDs
have no articles of incorporation, no incorporators and no stockholders or members. There are no
stockholders or members to elect the board directors of LWDs as in the case of all corporations
registered with the Securities and Exchange Commission. The local mayor or the provincial
governor appoints the directors of LWDs for a fixed term of office. This Court has ruled that
LWDs are not created under the Corporation Code, thus:
From the foregoing pronouncement, it is clear that what has been excluded from the coverage of
the CSC are those corporations created pursuant to the Corporation Code. Significantly,
petitioners are not created under the said code, but on the contrary, they were created
pursuant to a special law and are governed primarily by its provision.13 (Emphasis
supplied)
rllbr r

LWDs exist by virtue of PD 198, which constitutes their special charter. Since under the
Constitution only government-owned or controlled corporations may have special charters,
LWDs can validly exist only if they are government-owned or controlled. To claim that LWDs
are private corporations with a special charter is to admit that their existence is constitutionally
infirm.
Unlike private corporations, which derive their legal existence and power from the Corporation
Code, LWDs derive their legal existence and power from PD 198. Sections 6 and 25 of PD 19814
provide:

Section 6. Formation of District. This Act is the source of authorization and power to form
and maintain a district. For purposes of this Act, a district shall be considered as a quasipublic corporation performing public service and supplying public wants. As such, a
district shall exercise the powers, rights and privileges given to private corporations under
existing laws, in addition to the powers granted in, and subject to such restrictions
imposed, under this Act.
(a) The name of the local water district, which shall include the name of the city, municipality, or
province, or region thereof, served by said system, followed by the words "Water District".
(b) A description of the boundary of the district. In the case of a city or municipality, such
boundary may include all lands within the city or municipality. A district may include one or
more municipalities, cities or provinces, or portions thereof.
(c) A statement completely transferring any and all waterworks and/or sewerage facilities
managed, operated by or under the control of such city, municipality or province to such district
upon the filing of resolution forming the district.
(d) A statement identifying the purpose for which the district is formed, which shall include
those purposes outlined in Section 5 above.
(e) The names of the initial directors of the district with the date of expiration of term of office
for each.
(f) A statement that the district may only be dissolved on the grounds and under the conditions
set forth in Section 44 of this Title.
(g) A statement acknowledging the powers, rights and obligations as set forth in Section 36 of
this Title.
Nothing in the resolution of formation shall state or infer that the local legislative body has the
power to dissolve, alter or affect the district beyond that specifically provided for in this Act.
If two or more cities, municipalities or provinces, or any combination thereof, desire to form a
single district, a similar resolution shall be adopted in each city, municipality and province.
xxx
Sec. 25. Authorization. The district may exercise all the powers which are expressly granted
by this Title or which are necessarily implied from or incidental to the powers and
purposes herein stated. For the purpose of carrying out the objectives of this Act, a district is
hereby granted the power of eminent domain, the exercise thereof shall, however, be subject to
review by the Administration. (Emphasis supplied)
rllbrr

Clearly, LWDs exist as corporations only by virtue of PD 198, which expressly confers on
LWDs corporate powers. Section 6 of PD 198 provides that LWDs "shall exercise the powers,

rights and privileges given to private corporations under existing laws." Without PD 198, LWDs
would have no corporate powers. Thus, PD 198 constitutes the special enabling charter of
LWDs. The ineluctable conclusion is that LWDs are government-owned and controlled
corporations with a special charter.
The phrase "government-owned and controlled corporations with original charters" means
GOCCs created under special laws and not under the general incorporation law. There is no
difference between the term "original charters" and "special charters." The Court clarified this in
National Service Corporation v. NLRC15 by citing the deliberations in the Constitutional
Commission, as follows:
THE PRESIDING OFFICER (Mr. Trenas). The session is resumed.
Commissioner Romulo is recognized.
MR. ROMULO. Mr. Presiding Officer, I am amending my original proposed amendment to
now read as follows: "including government-owned or controlled corporations WITH
ORIGINAL CHARTERS." The purpose of this amendment is to indicate that government
corporations such as the GSIS and SSS, which have original charters, fall within the ambit of the
civil service. However, corporations which are subsidiaries of these chartered agencies such as
the Philippine Airlines, Manila Hotel and Hyatt are excluded from the coverage of the civil
service.
THE PRESIDING OFFICER (Mr. Trenas). What does the Committee say?

chanrob lesvirtualawlibrary

MR. FOZ. Just one question, Mr. Presiding Officer. By the term "original charters," what
exactly do we mean?
cha nrobles virtualawlibrary

MR. ROMULO. We mean that they were created by law, by an act of Congress, or by special
law.
MR. FOZ. And not under the general corporation law.
MR. ROMULO. That is correct. Mr. Presiding Officer.
MR. FOZ. With that understanding and clarification, the Committee accepts the amendment.
MR. NATIVIDAD. Mr. Presiding Officer, so those created by the general corporation law are
out.
MR. ROMULO. That is correct. (Emphasis supplied)

rll brr

Again, in Davao City Water District v. Civil Service Commission,16 the Court reiterated the
meaning of the phrase "government-owned and controlled corporations with original charters" in
this wise:

By "government-owned or controlled corporation with original charter," We mean

government owned or controlled corporation created by a special law and not under the
Corporation Code of the Philippines. Thus, in the case of Lumanta v. NLRC (G.R. No. 82819,
February 8, 1989, 170 SCRA 79, 82), We held:
"The Court, in National Service Corporation (NASECO) v. National Labor Relations
Commission, G.R. No. 69870, promulgated on 29 November 1988, quoting extensively from
the deliberations of the 1986 Constitutional Commission in respect of the intent and
meaning of the new phrase with original charter, in effect held that government-owned and
controlled corporations with original charter refer to corporations chartered by special law
as distinguished from corporations organized under our general incorporation statute the
Corporation Code. In NASECO, the company involved had been organized under the general
incorporation statute and was a subsidiary of the National Investment Development Corporation
(NIDC) which in turn was a subsidiary of the Philippine National Bank, a bank chartered by a
special statute. Thus, government-owned or controlled corporations like NASECO are
effectively, excluded from the scope of the Civil Service." (Emphasis supplied)
rllbr r

Petitioners contention that the Sangguniang Bayan resolution creates the LWDs assumes that the
Sangguniang Bayan has the power to create corporations. This is a patently baseless assumption.
The Local Government Code17 does not vest in the Sangguniang Bayan the power to create
corporations.18 What the Local Government Code empowers the Sangguniang Bayan to do is to
provide for the establishment of a waterworks system "subject to existing laws." Thus, Section
447(5) (vii) of the Local Government Code provides:
SECTION 447. Powers, Duties, Functions and Compensation. (a) The sangguniang bayan, as the
legislative body of the municipality, shall enact ordinances, approve resolutions and appropriate
funds for the general welfare of the municipality and its inhabitants pursuant to Section 16 of this
Code and in the proper exercise of the corporate powers of the municipality as provided for
under Section 22 of this Code, and shall:
xxx
(vii) Subject to existing laws, provide for the establishment, operation, maintenance, and repair
of an efficient waterworks system to supply water for the inhabitants; regulate the construction,
maintenance, repair and use of hydrants, pumps, cisterns and reservoirs; protect the purity and
quantity of the water supply of the municipality and, for this purpose, extend the coverage of
appropriate ordinances over all territory within the drainage area of said water supply and within
one hundred (100) meters of the reservoir, conduit, canal, aqueduct, pumping station, or
watershed used in connection with the water service; and regulate the consumption, use or
wastage of water;
x x x. (Emphasis supplied)

rllbrr

The Sangguniang Bayan may establish a waterworks system only in accordance with the
provisions of PD 198. The Sangguniang Bayan has no power to create a corporate entity that will
operate its waterworks system. However, the Sangguniang Bayan may avail of existing enabling

laws, like PD 198, to form and incorporate a water district. Besides, even assuming for the sake
of argument that the Sangguniang Bayan has the power to create corporations, the LWDs would
remain government-owned or controlled corporations subject to COAs audit jurisdiction. The
resolution of the Sangguniang Bayan would constitute an LWDs special charter, making the
LWD a government-owned and controlled corporation with an original charter. In any event, the
Court has already ruled in Baguio Water District v. Trajano19 that the Sangguniang Bayan
resolution is not the special charter of LWDs, thus:
While it is true that a resolution of a local sanggunian is still necessary for the final creation of a
district, this Court is of the opinion that said resolution cannot be considered as its charter, the
same being intended only to implement the provisions of said decree.
Petitioner further contends that a law must create directly and explicitly a GOCC in order that it
may have an original charter. In short, petitioner argues that one special law cannot serve as
enabling law for several GOCCs but only for one GOCC. Section 16, Article XII of the
Constitution mandates that "Congress shall not, except by general law,"20 provide for the
creation of private corporations. Thus, the Constitution prohibits one special law to create one
private corporation, requiring instead a "general law" to create private corporations. In contrast,
the same Section 16 states that "Government-owned or controlled corporations may be created
or established by special charters." Thus, the Constitution permits Congress to create a GOCC
with a special charter. There is, however, no prohibition on Congress to create several GOCCs of
the same class under one special enabling charter.
The rationale behind the prohibition on private corporations having special charters does not
apply to GOCCs. There is no danger of creating special privileges to certain individuals, families
or groups if there is one special law creating each GOCC. Certainly, such danger will not exist
whether one special law creates one GOCC, or one special enabling law creates several GOCCs.
Thus, Congress may create GOCCs either by special charters specific to each GOCC, or by one
special enabling charter applicable to a class of GOCCs, like PD 198 which applies only to
LWDs.
Petitioner also contends that LWDs are private corporations because Section 6 of PD 19821
declares that LWDs "shall be considered quasi-public" in nature. Petitioners rationale is that only
private corporations may be deemed "quasi-public" and not public corporations. Put differently,
petitioner rationalizes that a public corporation cannot be deemed "quasi-public" because such
corporation is already public. Petitioner concludes that the term "quasi-public" can only apply to
private corporations. Petitioners argument is inconsequential.
Petitioner forgets that the constitutional criterion on the exercise of COAs audit jurisdiction
depends on the governments ownership or control of a corporation. The nature of the
corporation, whether it is private, quasi-public, or public is immaterial.
The Constitution vests in the COA audit jurisdiction over "government-owned and controlled
corporations with original charters," as well as "government-owned or controlled corporations"
without original charters. GOCCs with original charters are subject to COA pre-audit, while
GOCCs without original charters are subject to COA post-audit. GOCCs without original

charters refer to corporations created under the Corporation Code but are owned or controlled by
the government. The nature or purpose of the corporation is not material in determining COAs
audit jurisdiction. Neither is the manner of creation of a corporation, whether under a general or
special law.
The determining factor of COAs audit jurisdiction is government ownership or control of the
corporation. In Philippine Veterans Bank Employees Union-NUBE v. Philippine Veterans
Bank,22 the Court even ruled that the criterion of ownership and control is more important than
the issue of original charter, thus:
This point is important because the Constitution provides in its Article IX-B, Section 2(1) that
"the Civil Service embraces all branches, subdivisions, instrumentalities, and agencies of the
Government, including government-owned or controlled corporations with original charters." As
the Bank is not owned or controlled by the Government although it does have an original
charter in the form of R.A. No. 3518,23 it clearly does not fall under the Civil Service and
should be regarded as an ordinary commercial corporation. Section 28 of the said law so
provides. The consequence is that the relations of the Bank with its employees should be
governed by the labor laws, under which in fact they have already been paid some of their
claims. (Emphasis supplied)
rll brr

Certainly, the government owns and controls LWDs. The government organizes LWDs in
accordance with a specific law, PD 198. There is no private party involved as co-owner in the
creation of an LWD. Just prior to the creation of LWDs, the national or local government owns
and controls all their assets. The government controls LWDs because under PD 198 the
municipal or city mayor, or the provincial governor, appoints all the board directors of an LWD
for a fixed term of six years.24 The board directors of LWDs are not co-owners of the LWDs.
LWDs have no private stockholders or members. The board directors and other personnel of
LWDs are government employees subject to civil service laws25 and anti-graft laws.26
rll

While Section 8 of PD 198 states that "[N]o public official shall serve as director" of an LWD, it
only means that the appointees to the board of directors of LWDs shall come from the private
sector. Once such private sector representatives assume office as directors, they become public
officials governed by the civil service law and anti-graft laws. Otherwise, Section 8 of PD 198
would contravene Section 2(1), Article IX-B of the Constitution declaring that the civil service
includes "government-owned or controlled corporations with original charters."
chanroblesv irtuallawlibrary

If LWDs are neither GOCCs with original charters nor GOCCs without original charters, then
they would fall under the term "agencies or instrumentalities" of the government and thus still
subject to COAs audit jurisdiction. However, the stark and undeniable fact is that the government
owns LWDs. Section 4527 of PD 198 recognizes government ownership of LWDs when Section
45 states that the board of directors may dissolve an LWD only on the condition that "another
public entity has acquired the assets of the district and has assumed all obligations and liabilities
attached thereto." The implication is clear that an LWD is a public and not a private entity.
Petitioner does not allege that some entity other than the government owns or controls LWDs.
Instead, petitioner advances the theory that the "Water Districts owner is the District itself."28

Assuming for the sake of argument that an LWD is "self-owned,"29 as petitioner describes an
LWD, the government in any event controls all LWDs. First, government officials appoint all
LWD directors to a fixed term of office. Second, any per diem of LWD directors in excess of
P50 is subject to the approval of the Local Water Utilities Administration, and directors can
receive no other compensation for their services to the LWD.30 Third, the Local Water Utilities
Administration can require LWDs to merge or consolidate their facilities or operations.31 This
element of government control subjects LWDs to COAs audit jurisdiction.
Petitioner argues that upon the enactment of PD 198, LWDs became private entities through the
transfer of ownership of water facilities from local government units to their respective water
districts as mandated by PD 198. Petitioner is grasping at straws. Privatization involves the
transfer of government assets to a private entity. Petitioner concedes that the owner of the assets
transferred under Section 6 (c) of PD 198 is no other than the LWD itself.32 The transfer of assets
mandated by PD 198 is a transfer of the water systems facilities "managed, operated by or under
the control of such city, municipality or province to such (water) district."33 In short, the transfer
is from one government entity to another government entity. PD 198 is bereft of any indication
that the transfer is to privatize the operation and control of water systems.
Finally, petitioner claims that even on the assumption that the government owns and controls
LWDs, Section 20 of PD 198 prevents COA from auditing LWDs.34 Section 20 of PD 198
provides:
Sec. 20. System of Business Administration. The Board shall, as soon as practicable, prescribe
and define by resolution a system of business administration and accounting for the district,
which shall be patterned upon and conform to the standards established by the Administration.
Auditing shall be performed by a certified public accountant not in the government service.
The Administration may, however, conduct annual audits of the fiscal operations of the district to
be performed by an auditor retained by the Administration. Expenses incurred in connection
therewith shall be borne equally by the water district concerned and the Administration.35
(Emphasis supplied)
rllbrr

Petitioner argues that PD 198 expressly prohibits COA auditors, or any government auditor for
that matter, from auditing LWDs. Petitioner asserts that this is the import of the second sentence
of Section 20 of PD 198 when it states that "[A]uditing shall be performed by a certified public
accountant not in the government service."36
rll

PD 198 cannot prevail over the Constitution. No amount of clever legislation can exclude
GOCCs like LWDs from COAs audit jurisdiction. Section 3, Article IX-C of the Constitution
outlaws any scheme or devise to escape COAs audit jurisdiction, thus:
Sec. 3. No law shall be passed exempting any entity of the Government or its subsidiary in any
guise whatever, or any investment of public funds, from the jurisdiction of the Commission on
Audit. (Emphasis supplied)
rllbrr

The framers of the Constitution added Section 3, Article IX-D of the Constitution precisely to
annul provisions of Presidential Decrees, like that of Section 20 of PD 198, that exempt GOCCs

from COA audit. The following exchange in the deliberations of the Constitutional Commission
elucidates this intent of the framers:
MR. OPLE: I propose to add a new section on line 9, page 2 of the amended committee report
which reads: NO LAW SHALL BE PASSED EXEMPTING ANY ENTITY OF THE
GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY
INVESTMENTS OF PUBLIC FUNDS, FROM THE JURISDICTION OF THE COMMISSION
ON AUDIT.
May I explain my reasons on record.
We know that a number of entities of the government took advantage of the absence of a
legislature in the past to obtain presidential decrees exempting themselves from the
jurisdiction of the Commission on Audit, one notable example of which is the Philippine
National Oil Company which is really an empty shell. It is a holding corporation by itself, and
strictly on its own account. Its funds were not very impressive in quantity but underneath that
shell there were billions of pesos in a multiplicity of companies. The PNOC the empty shell
under a presidential decree was covered by the jurisdiction of the Commission on Audit, but the
billions of pesos invested in different corporations underneath it were exempted from the
coverage of the Commission on Audit.
Another example is the United Coconut Planters Bank. The Commission on Audit has
determined that the coconut levy is a form of taxation; and that, therefore, these funds attributed
to the shares of 1,400,000 coconut farmers are, in effect, public funds. And that was, I think, the
basis of the PCGG in undertaking that last major sequestration of up to 94 percent of all the
shares in the United Coconut Planters Bank. The charter of the UCPB, through a presidential
decree, exempted it from the jurisdiction of the Commission on Audit, it being a private
organization.
So these are the fetuses of future abuse that we are slaying right here with this additional section.
May I repeat the amendment, Madam President: NO LAW SHALL BE PASSED EXEMPTING
ANY ENTITY OF THE GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE
WHATEVER, OR ANY INVESTMENTS OF PUBLIC FUNDS, FROM THE JURISDICTION
OF THE COMMISSION ON AUDIT.
THE PRESIDENT: May we know the position of the Committee on the proposed amendment
of Commissioner Ople?
chanroblesvirtualawlibrary

MR. JAMIR: If the honorable Commissioner will change the number of the section to 4, we
will accept the amendment.
MR. OPLE: Gladly, Madam President. Thank you.
MR. DE CASTRO: Madam President, point of inquiry on the new amendment.

THE PRESIDENT: Commissioner de Castro is recognized.

MR. DE CASTRO: Thank you : May I just ask a few questions of Commissioner Ople.
Is that not included in Section 2 (1) where it states: "(c) government-owned or controlled
corporations and their subsidiaries"? So that if these government-owned and controlled
corporations and their subsidiaries are subjected to the audit of the COA, any law exempting
certain government corporations or subsidiaries will be already unconstitutional.
So I believe, Madam President, that the proposed amendment is unnecessary.
MR. MONSOD: Madam President, since this has been accepted, we would like to reply to the
point raised by Commissioner de Castro.
THE PRESIDENT: Commissioner Monsod will please proceed.
MR. MONSOD: I think the Commissioner is trying to avoid the situation that happened in the
past, because the same provision was in the 1973 Constitution and yet somehow a law or a
decree was passed where certain institutions were exempted from audit. We are just reaffirming,
emphasizing, the role of the Commission on Audit so that this problem will never arise in the
future.37
There is an irreconcilable conflict between the second sentence of Section 20 of PD 198
prohibiting COA auditors from auditing LWDs and Sections 2(1) and 3, Article IX-D of the
Constitution vesting in COA the power to audit all GOCCs. We rule that the second sentence of
Section 20 of PD 198 is unconstitutional since it violates Sections 2(1) and 3, Article IX-D of the
Constitution.
On the Legality of COAs
Practice of Charging Auditing Fees
Petitioner claims that the auditing fees COA charges LWDs for audit services violate the
prohibition in Section 18 of RA 6758,38 which states:
Sec. 18. Additional Compensation of Commission on Audit Personnel and of other Agencies. In
order to preserve the independence and integrity of the Commission on Audit (COA), its officials
and employees are prohibited from receiving salaries, honoraria, bonuses, allowances or other
emoluments from any government entity, local government unit, government-owned or
controlled corporations, and government financial institutions, except those compensation paid
directly by COA out of its appropriations and contributions.
Government entities, including government-owned or controlled corporations including financial
institutions and local government units are hereby prohibited from assessing or billing other
government entities, including government-owned or controlled corporations including financial
institutions or local government units for services rendered by its officials and employees as part

of their regular functions for purposes of paying additional compensation to said officials and
employees. (Emphasis supplied)
rllbr r

Claiming that Section 18 is "absolute and leaves no doubt,"39 petitioner asks COA to discontinue
its practice of charging auditing fees to LWDs since such practice allegedly violates the law.
Petitioners claim has no basis.
Section 18 of RA 6758 prohibits COA personnel from receiving any kind of compensation from
any government entity except "compensation paid directly by COA out of its appropriations
and contributions." Thus, RA 6758 itself recognizes an exception to the statutory ban on COA
personnel receiving compensation from GOCCs. In Tejada v. Domingo,40 the Court declared:
There can be no question that Section 18 of Republic Act No. 6758 is designed to strengthen
further the policy x x x to preserve the independence and integrity of the COA, by explicitly
PROHIBITING: (1) COA officials and employees from receiving salaries, honoraria, bonuses,
allowances or other emoluments from any government entity, local government unit, GOCCs
and government financial institutions, except such compensation paid directly by the COA
out of its appropriations and contributions, and (2) government entities, including GOCCs,
government financial institutions and local government units from assessing or billing other
government entities, GOCCs, government financial institutions or local government units for
services rendered by the latters officials and employees as part of their regular functions for
purposes of paying additional compensation to said officials and employees.
xxx
The first aspect of the strategy is directed to the COA itself, while the second aspect is addressed
directly against the GOCCs and government financial institutions. Under the first, COA
personnel assigned to auditing units of GOCCs or government financial institutions can
receive only such salaries, allowances or fringe benefits paid directly by the COA out of its
appropriations and contributions. The contributions referred to are the cost of audit
services earlier mentioned which cannot include the extra emoluments or benefits now
claimed by petitioners. The COA is further barred from assessing or billing GOCCs and
government financial institutions for services rendered by its personnel as part of their regular
audit functions for purposes of paying additional compensation to such personnel. x x x.
(Emphasis supplied)
rllbrr

In Tejada, the Court explained the meaning of the word "contributions" in Section 18 of RA
6758, which allows COA to charge GOCCs the cost of its audit services:
x x x the contributions from the GOCCs are limited to the cost of audit services which are based
on the actual cost of the audit function in the corporation concerned plus a reasonable rate to
cover overhead expenses. The actual audit cost shall include personnel services, maintenance and
other operating expenses, depreciation on capital and equipment and out-of-pocket expenses. In
respect to the allowances and fringe benefits granted by the GOCCs to the COA personnel

assigned to the formers auditing units, the same shall be directly defrayed by COA from its own
appropriations x x x.41
COA may charge GOCCs "actual audit cost" but GOCCs must pay the same directly to COA and
not to COA auditors. Petitioner has not alleged that COA charges LWDs auditing fees in excess
of COAs "actual audit cost." Neither has petitioner alleged that the auditing fees are paid by
LWDs directly to individual COA auditors. Thus, petitioners contention must fail.
WHEREFORE, the Resolution of the Commission on Audit dated 3 January 2000 and the
Decision dated 30 January 2001 denying petitioners Motion for Reconsideration are
AFFIRMED. The second sentence of Section 20 of Presidential Decree No. 198 is declared
VOID for being inconsistent with Sections 2 (1) and 3, Article IX-D of the Constitution. No
costs.
SO ORDERED.

[G.R. NO. 175048 : February 10, 2009]

EXCELLENT QUALITY APPAREL, INC., Petitioner, v. WIN MULTI RICH BUILDERS,
INC., represented by its President, WILSON G. CHUA, Respondent.
DECISION
TINGA, J.:
Before us is a Rule 45 petition1 seeking the reversal of the Decision2 and Resolution3 of the
Court of Appeals in CA-G.R. SP No. 84640. The Court of Appeals had annulled two orders4 of
the Regional Trial Court (RTC), Branch 32, of Manila in Civil Case No. 04-108940. This case
involves a claim for a sum of money which arose from a construction dispute.
On 26 March 1996, petitioner Excellent Quality Apparel, Inc. (petitioner) then represented by
Max L.F. Ying, Vice-President for Productions, and Alfiero R. Orden, Treasurer, entered into a
contract5 with Multi-Rich Builders (Multi-Rich) represented by Wilson G. Chua (Chua), its
President and General Manager, for the construction of a garment factory within the Cavite
Philippine Economic Zone Authority (CPEZ).6 The duration of the project was for a maximum
period of five (5) months or 150 consecutive calendar days. Included in the contract is an
arbitration clause which is as follows:
Article XIX : ARBITRATION CLAUSE
Should there be any dispute, controversy or difference between the parties arising out of this
Contract that may not be resolved by them to their mutual satisfaction, the matter shall be
submitted to an Arbitration Committee of three (3) members; one (1) chosen by the OWNER;
one (1) chosen by the CONTRACTOR; and the Chairman thereof to be chosen by two (2)
members. The decision of the Arbitration Committee shall be final and binding on both the
parties hereto. The Arbitration shall be governed by the Arbitration Law (R.A. [No.] 876). The
cost of arbitration shall be borned [sic] jointly by both CONTRACTOR and OWNER on 50-50
basis.7
The construction of the factory building was completed on 27 November 1996.
Respondent Win Multi-Rich Builders, Inc. (Win) was incorporated with the Securities and
Exchange Commission (SEC) on 20 February 19978 with Chua as its President and General
Manager. On 26 January 2004, Win filed a complaint for a sum of money9 against petitioner and
Mr. Ying amounting to P8,634,448.20. It also prayed for the issuance of a writ of attachment
claiming that Mr. Ying was about to abscond and that petitioner was about to close. Win
obtained a surety bond10 issued by Visayan Surety & Insurance Corporation. On 10 February
2004, the RTC issued the Writ of Attachment11 against the properties of petitioner.
On 16 February 2004, Sheriff Salvador D. Dacumos of the RTC of Manila, Branch 32, went to
the office of petitioner in CPEZ to serve the Writ of Attachment, Summons12 and the Complaint.
Petitioner issued Equitable PCIBank (PEZA Branch) Check No. 160149, dated 16 February

2004, in the amount of P8,634,448.20, to prevent the Sheriff from taking possession of its
properties.13 The check was made payable to the Office of the Clerk of Court of the RTC of
Manila as a guarantee for whatever liability there may be against petitioner.
Petitioner filed an Omnibus Motion14 claiming that it was neither about to close. It also denied
owing anything to Win, as it had already paid all its obligations to it. Lastly, it questioned the
jurisdiction of the trial court from taking cognizance of the case. Petitioner pointed to the
presence of the Arbitration Clause and it asserted that the case should be referred to the
Construction Industry Arbitration Commission (CIAC) pursuant to Executive Order (E.O.) No.
1008.
In the hearing held on 10 February 2004, the counsel of Win moved that its name in the case be
changed from "Win Multi-Rich Builders, Inc." to "Multi-Rich Builders, Inc." It was only then
that petitioner apparently became aware of the variance in the name of the plaintiff. In the
Reply15 filed by petitioner, it moved to dismiss the case since Win was not the contractor and
neither a party to the contract, thus it cannot institute the case. Petitioner obtained a Certificate of
Non-Registration of Corporation/Partnership16 from the SEC which certified that the latter did
not have any records of a "Multi-Rich Builders, Inc." Moreover, Win in its Rejoinder17 did not
oppose the allegations in the Reply. Win admitted that it was only incorporated on 20 February
1997 while the construction contract was executed on 26 March 1996. Likewise, it admitted that
at the time of execution of the contract, Multi-Rich was a registered sole proprietorship and was
issued a business permit18 by the Office of the Mayor of Manila.
In an Order19 dated 12 April 2004, the RTC denied the motion and stated that the issues can be
answered in a full-blown trial. Upon its denial, petitioner filed its Answer and prayed for the
dismissal of the case.20 Win filed a Motion21 to deposit the garnished amount to the court to
protect its legal rights. In a Manifestation,22 petitioner vehemently opposed the deposit of the
garnished amount. The RTC issued an Order23 dated 20 April 2004, which granted the motion to
deposit the garnished amount. On the same date, Win filed a motion24 to release the garnished
amount to it. Petitioner filed its opposition25 to the motion claiming that the release of the money
does not have legal and factual basis.
On 18 June 2004, petitioner filed a Petition for Review on Certiorari 26 under Rule 65 before the
Court of Appeals, which questioned the jurisdiction of the RTC and challenged the orders issued
by the lower court with a prayer for the issuance of a temporary retraining order and a writ of
preliminary injunction. Subsequently, petitioner filed a Supplemental Manifestation and
Motion27 and alleged that the money deposited with the RTC was turned over to Win. Win
admitted that the garnished amount had already been released to it. On 14 March 2006, the Court
of Appeals rendered its Decision28 annulling the 12 April and 20 April 2004 orders of the
RTC.
rbl r l l lbr r

It also ruled that the RTC had jurisdiction over the case since it is a suit for collection of sum of
money. Petitioner filed a Motion for Reconsideration29 which was subsequently denied in a
resolution.30

Hence this petition.

Petitioner raised the following issues to wit: (1) does Win have a legal personality to institute the
present case; (2) does the RTC have jurisdiction over the case notwithstanding the presence of
the arbitration clause; and (3) was the issuance of the writ of attachment and the subsequent
garnishment proper.
A suit may only be instituted by the real party in interest. Section 2, Rule 3 of the Rules of Court
defines "parties in interest" in this manner:
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. Unless otherwise authorized by law or these
Rules, every action must be prosecuted or defended in the name of the real party in interest.
Is Win a real party in interest? We answer in the negative.
Win admitted that the contract was executed between Multi-Rich and petitioner. It further
admitted that Multi-Rich was a sole proprietorship with a business permit issued by the Office of
the Mayor of Manila. A sole proprietorship is the oldest, simplest, and most prevalent form of
business enterprise.31 It is an unorganized business owned by one person. The sole proprietor is
personally liable for all the debts and obligations of the business.32 In the case of Mangila v.
Court of Appeals,33 we held that:
x x x In fact, there is no law authorizing sole proprietorships to file a suit in court.
A sole proprietorship does not possess a juridical personality separate and distinct from the
personality of the owner of the enterprise. The law merely recognizes the existence of a sole
proprietorship as a form of business organization conducted for profit by a single individual and
requires its proprietor or owner to secure licenses and permits, register its business name, and
pay taxes to the national government. The law does not vest a separate legal personality on the
sole proprietorship or empower it to file or defend an action in court.
The original petition was instituted by Win, which is a SEC-registered corporation. It filed a
collection of sum of money suit which involved a construction contract entered into by petitioner
and Multi-Rich, a sole proprietorship. The counsel of Win wanted to change the name of the
plaintiff in the suit to Multi-Rich. The change cannot be countenanced. The plaintiff in the
collection suit is a corporation. The name cannot be changed to that of a sole proprietorship.
Again, a sole proprietorship is not vested with juridical personality to file or defend an action.34
Petitioner had continuously contested the legal personality of Win to institute the case. Win was
given ample opportunity to adduce evidence to show that it had legal personality. It failed to do
so. Corpus Juris Secundum, notes:
x x x where an individual or sole trader organizes a corporation to take over his business and all
his assets, and it becomes in effect merely an alter ego of the incorporator, the corporation, either
on the grounds of implied assumption of the debts or on the grounds that the business is the same

and is merely being conducted under a new guise, is liable for the incorporator's preexisting
debts and liabilities. Clearly, where the corporation assumes or accepts the debt of its
predecessor in business it is liable and if the transfer of assets is in fraud of creditors it will be
liable to the extent of the assets transferred. The corporation is not liable on an implied
assumption of debts from the receipt of assets where the incorporator retains sufficient assets to
pay the indebtedness, or where none of his assets are transferred to the corporation, or where,
although all the assets of the incorporator have been transferred, there is a change in the persons
carrying on the business and the corporation is not merely an alter ego of the person to whose
business it succeeded.35
In order for a corporation to be able to file suit and claim the receivables of its predecessor in
business, in this case a sole proprietorship, it must show proof that the corporation had acquired
the assets and liabilities of the sole proprietorship. Win could have easily presented or attached
any document e.g., deed of assignment which will show whether the assets, liabilities and
receivables of Multi-Rich were acquired by Win. Having been given the opportunity to rebut the
allegations made by petitioner, Win failed to use that opportunity. Thus, we cannot presume that
Multi-Rich is the predecessor-in-business of Win and hold that the latter has standing to institute
the collection suit.
Assuming arguendo that Win has legal personality, the petition will still be granted.
Section 4 of E.O. No. 100836 provides for the jurisdiction of the Construction Industry
Arbitration Commission, to wit:
Section 4. Jurisdiction. The CIAC shall have original and exclusive jurisdiction over disputes
arising from, or connected with, contracts entered into by parties involved in construction in the
Philippines, whether the disputes arises before or after the completion of the contract, or after the
abandonment or breach thereof. These disputes may involve government or private contracts. For
the Board to acquire jurisdiction, the parties to a dispute must agree to submit the same to
voluntary arbitration.
The jurisdiction of the CIAC may include but is not limited to violation of specifications for
materials and workmanship; violation of the terms of agreement; interpretation and/or
application of contractual time and delays; amount of damages and penalties; commencement
time and delays; maintenance and defects; payment, default of employer or contractor and
changes in contract cost.
Excluded from the coverage of this law are disputes from employer-employee relationships
which shall continue to be covered by the Labor Code of the Philippines.
There is nothing in the law which limits the exercise of jurisdiction to complex or difficult cases.
E.O. No. 1008 does not distinguish between claims involving payment of money or not.37 The
CIAC acquires jurisdiction over a construction contract by the mere fact that the parties agreed to
submit to voluntary arbitration.38 The law does not preclude parties from stipulating a preferred
forum or arbitral body but they may not divest the CIAC of jurisdiction as provided by law.39
Arbitration is an alternative method of dispute resolution which is highly encouraged.40 The

arbitration clause is a commitment on the part of the parties to submit to arbitration the disputes
covered since that clause is binding, and they are expected to
abide by it in good faith.41 Clearly, the RTC should not have taken cognizance of the collection
suit. The presence of the arbitration clause vested jurisdiction to the CIAC over all construction
disputes between Petitioner and Multi-Rich. The RTC does not have jurisdiction.42
Based on the foregoing, there is no need to discuss the propriety of the issuance of the writ of
attachment. However, we cannot allow Win to retain the garnished amount which was turned
over by the RTC. The RTC did not have jurisdiction to issue the questioned writ of attachment
and to order the release of the garnished funds.
WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals is hereby
MODIFIED. Civil Case No. 04-108940 is DISMISSED. Win Multi-Rich Builders, Inc. is
ORDERED to return the garnished amount of EIGHT MILLION SIX HUNDRED THIRTYFOUR THOUSAND FOUR HUNDRED
FORTY-EIGHT PESOS AND FORTY CENTAVOS (P8,634,448.40),
which was turned over by the Regional Trial Court, to petitioner with legal interest of 12 percent
(12%) per annum upon finality of this Decision until payment.
SO ORDERED.